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● | Our equity investment in TEL provided $4.6$3.0 million of pre-tax earnings in 20152016 compared to $3.7$4.6 million for 2014;2015; and |
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● | Stockholders' equity and tangible book value at December 31, 2015, was $202.2 million and our tangible book value was $202.02016, were $236.4 million, or $11.15$12.95 per basic share; and |
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● | Our return on invested capital (net income over net balance sheet debt and equity) was 9.4%.share. |
Although 2016 was not what we had hoped, we are still encouraged by the trend line over the last several years. Our turnaround efforts at SRT were fully engaged in 2016, including a new management team, and we have established a roadmap that we believe will be successful in returning SRT’s results to levels where they produce an acceptable return. We continue to focus on deleveraging the balance sheet resulting in total indebtedness, net of cash and including the present value of off-balance sheet lease obligations decreasing by approximately $37.5 million to $226.7 million, since December 31, 2015. Additionally, earnings and the reduced impact of fuel hedges have increased tangible book value per basic share 16.1% to $12.95 from $11.15 at December 31, 2015.
In addition to operating ratio, we use "adjusted operating ratio" as a key measure of profitability. Adjusted operating ratio is not a substitute for operating ratio measured in accordance with GAAP. There are limitations to using non-GAAP financial measures. Adjusted operating ratio means operating expenses, net of fuel surcharge revenue, expressed as a percentage of revenue, excluding fuel surcharge revenue. We believe the use of adjusted operating ratio allows us to more effectively compare periods, while excluding the potentially volatile effect of changes in fuel prices. Our Board and management focus on our adjusted operating ratio as an indicator of our performance from period to period. We believe our presentation of adjusted operating ratio is useful because it provides investors and securities analysts the same information that we use internally to assess our core operating performance. Although we believe that adjusted operating ratio improves comparability in analyzing our period-to-period performance, it could limit comparability to other companies in our industry, if those companies define adjusted operating ratio differently. Because of these limitations, adjusted operating ratio should not be considered a measure of income generated by our business or discretionary cash available to us to invest in the growth of our business. Management compensates for these limitations by primarily relying on GAAP results and using non-GAAP financial measures on a supplemental basis.
Operating Ratio
Operating Ratio (“OR”) From 2014 to 2016 | |
| | | | | | | | | | | | | | | | | | |
GAAP Operating Ratio: | | 2016 | | | OR % | | | 2015 | | | OR % | | | 2014 | | | OR % | |
Total revenue | | $ | 670,651 | | | | | | $ | 724,240 | | | | | | $ | 718,980 | | | | |
Total operating expenses | | | 638,204 | | | | 95.2 | % | | | 656,458 | | | | 90.6 | % | | | 679,334 | | | | 94.5 | % |
Operating income | | $ | 32,447 | | | | | | | $ | 67,782 | | | | | | | $ | 39,646 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Adjusted Operating Ratio: | | | 2016 | | | Adj. OR % | | | | 2015 | | | Adj. OR % | | | | 2014 | | | Adj. OR % | |
Total revenue | | $ | 670,651 | | | | | | | $ | 724,240 | | | | | | | $ | 718,980 | | | | | |
Less: Fuel surcharge revenue: | | | 59,806 | | | | | | | | 84,120 | | | | | | | | 140,776 | | | | | |
Revenue (excluding fuel surcharge revenue) | | | 610,845 | | | | | | | | 640,120 | | | | | | | | 578,204 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total operating expenses | | | 638,204 | | | | | | | | 656,458 | | | | | | | | 679,334 | | | | | |
Less: Fuel surcharge revenue | | | 59,806 | | | | | | | | 84,120 | | | | | | | | 140,776 | | | | | |
Total operating expenses (net of fuel surcharge revenue) | | | 578,398 | | | | 94.7 | % | | | 572,338 | | | | 89.4 | % | | | 538,558 | | | | 93.1 | % |
Operating income | | $ | 32,447 | | | | | | | $ | 67,782 | | | | | | | $ | 39,646 | | | | | |
37
The business environment was mixed in 2015. The
Outlook
We are forecasting sequential improvement for 2017. In the first half of 2017 we do not expect to match the year was characterized by above-normal winter volumesearnings per share levels we generated for the first and normal spring volumes. This contributed to a relatively favorable environment relating to customer rate increases, partially offset by upward pressure on driver pay. Duringsecond quarters of 2016. However, we believe the combination of an improving economy, growth of time-sensitive e-commerce freight, industry regulatory changes, retail inventory declines, year-over-year net fuel expense savings from our improved fuel hedge positions, and operational progress at SRT should deliver earnings improvement that result in higher earnings for the second half and potentially the full year of 2017. The largest variable we foresee is the year,pace and magnitude of improvement at SRT, which we believe could contribute up to $10.0 million of pre-tax income in improved results as compared with 2016. The pace and amount of change will depend, in large part, on our industry experienced lower volumes due in partability to slowing business investmentenhance the freight network, which depends on internally re-engineering lanes and overstocked inventories. The rate environment became more difficult, as contractual rate increases slowed and spot market rates (which affect a small portion of our business) fell sharply. The bright spot in the fourth-quarterstronger refrigerated freight market related to expedited shipments for e-commerce, omni-channel, organic food, and other premium service shippers. These shippers have a large surge of holiday season business as well as a growing year-round presence. Our top three consolidated customers, and four of our top ten customers for 2015 were participants directly or indirectly in this sector, which contributed to our strong fourth quarter results.market. With the growth of this business our net income has become somewhat concentrated in fourth quarter.
Other major trends for the year included a very competitive market for professional truck drivers and falling diesel fuel prices. Attracting and retaining safe, service-oriented professional truck drivers is among the greatest challenges for our industry and for CTG. We have implemented meaningful driver compensation adjustments that increased our costs in 2015, and we expect driver compensation to continue to increase over time. The national average cost per gallon for diesel fuel fell significantly during 2015, but our net fuel cost per mile remained approximately the same as in 2014 because of lower fuel surcharge revenue and approximately $14.0 million in net fuel hedging expense amortized from other comprehensive income upon expiration of out-of-the-money contracts. For the past several years we have hedged approximately 20% to 25% of our annual fuel purchases to lower the volatility of this expense category. In 2015, the hedging worked against us.
Our strong financial performance and solid balance sheet have supported significant investments in our business. During 2015, we invested $112.2 in net capital expenditures for new equipment as well as approximately $35.5 millionscheduled to purchase our headquarters and main terminal facility, which previously had been leased. Our tractor fleet is among the industry's newest, with an average age of 1.7 years, affording us significant flexibility to manage our trade cycle. At December 31, 2015, our total balance sheet debt and capital lease obligations, net of cash, were $246.2 million, our stockholders' equity was $202.2 million, and we had approximately $60.6 million available for borrowing on our revolving line of credit. Due primarily to the increased peak season freight revenues billed in November and December 2015 as compared to the same months in 2014, our net accounts receivable balance increased by approximately $16.7 million at December 31, 2015, compared to December 31, 2014. We expect to collect the majority of these receivables in the first quarter of 2016. In addition,be below normal due to the timing of tractor deliveries and disposals, the number of tractors recorded as "Assets held for sale" on our consolidated balance sheet increased, representing $25.6 million at year-end 2015 compared to $4.3 million at year-end 2014. Of the 376 tractors included in assets held for sale at December 31, 2015, we have contracted for the sale of approximately 350 of those tractors by March 31, 2016.
Outlook
Our outlook for 2016 as a whole reflects confidence in our ability to operate profitablyexpected replacement cycle, along with caution concerning the near term freight environment. From a customer perspective, we received excellent reviews of our peak-season service levels from certain key customers and have indications to expect additional freight from certain of them during all of 2016, including the next peak season. We believe we are well positioned to capitalize on these opportunities as they arise. However, general freight levels have softened compared with the first two months of 2015, and many of our customers are not predicting improvement in their shipping levels until the second half of the year. While we expect e-commerce and omni-channel shipping growth to continue, these customers have typically re-engineered their peak season supply chains and made capacity commitments during the summer and early fall of each year. Accordingly, we remain cautious until such discussions with these customers become more advanced.
Outside of the general freight environment, company-specific profit improvement opportunities exist in certain asset-based operations, and we have plans to grow Solutions' revenue and related earnings contribution in 2016. These opportunities are expected to be accompanied by continued upward pressure on driver compensation. In the near term,anticipated positive operating cash flows, we expect to limitfurther reduce balance sheet and off-balance sheet debt over the course of fiscal 2017. Our 2017 plans also include growing our investmentsdedicated service line and investing in growth-type capital expenditurespersonnel and perhaps reduce our average fleet size slightly in the near term as we monitor external developments. At the same time, we plan to concentrate on safety, driver retention, and cost controls. Based on the current and expectedtrailer tracking equipment that will allow more cross-border freight environment, diesel fuel prices, and driver market, we believe it may be challenging to meet or exceed our net income (excluding the $4.7 million one-time federal tax credit and $2.2 million commutation credit) during 2016, with the first half of the year being particularly challenging due to the significantly softer freight volumes we are experiencing currently compared with the start of 2015.opportunities.
Over the longer term, we believe CTG is well positioned for success in our industry. We are encouraged by several years of improving profitability and by the growing benefits of our investments in human, technology, and capital resources. We believe our balance of expedited, refrigerated, dedicated, and logistics business units exposes us to diversified revenue streams and margin pressures, and that our primary services are conducted in growing niches where our size and capabilities differentiate us from many competitors. Further, upcoming regulatory changes involving electronic logging devices, speed limiters, and hair follicle drug testing may reduce the effective amount of industry capacity and increase the need for certain of our services. Against this backdrop, we must provide an increasingly attractive home for the best professional truck drivers, provide a rewarding and challenging career for our non-driving associates, constantly evolve with our customers' supply chains, closely monitor our costs, and allocate capital to generate appropriate returns.
RESULTS OF CONSOLIDATED OPERATIONS
The following table sets forth total revenue and freight revenue (total revenue less fuel surcharge revenue) for the periods indicated:
Revenue
| | Year ended December 31, | |
(in thousands) | | 2016 | | | 2015 | | | 2014 | |
Revenue: | | | | | | | | | |
Freight revenue | | $ | 610,845 | | | $ | 640,120 | | | $ | 578,204 | |
Fuel surcharge revenue | | | 59,806 | | | | 84,120 | | | | 140,776 | |
Total revenue | | $ | 670,651 | | | $ | 724,240 | | | $ | 718,980 | |
For 2016, total revenue decreased $53.6 million, or 7.4%, to $670.7 million from $724.2 million in 2015. Freight revenue decreased $29.3 million, or 4.6%, to $610.8 million for 2016, from $640.1 million in 2015, while fuel surcharge revenue decreased $24.3 million year-over-year. The decrease in freight revenue resulted from a $30.4 million decrease in freight revenue from our Truckload segment and a $1.1 million increase in revenues from Solutions.
| | Year ended December 31, | |
(in thousands) | | 2015 | | | 2014 | | | 2013 | |
Revenue: | | | | | | | | | |
Freight revenue | | $ | 640,120 | | | $ | 578,204 | | | $ | 538,933 | |
Fuel surcharge revenue | | | 84,120 | | | | 140,776 | | | | 145,616 | |
Total revenue | | $ | 724,240 | | | $ | 718,980 | | | $ | 684,549 | |
The decrease in 2016 Truckload revenue relates to a decrease in average freight revenue per tractor per week of 2.2% compared to 2015 and a decrease in our average tractor fleet of 3.9% from 2015, partially offset by a $1.7 million increase in freight revenue contributed by our temperature-controlled intermodal service offering. The decrease in average freight revenue per tractor per week is the result of a 1.3% decrease, or 2.2 cents per mile, in average rate per total mile and a 0.6% decrease in average miles per unit when compared to 2015. Team driven units increased approximately 5.3% to an average of approximately 1,000 teams in 2016 from approximately 950 teams in 2015.
The increase in Solutions' revenue is primarily the result of improved coordination with our Truckload segment, additional business from new customers added during the year, and the full year effect of a large customer added in 2015.
For 2015, total revenue increased $5.3 million, or 0.7%, to $724.2 million from $719.0 million in 2014. Freight revenue increased $61.9 million, or 10.7%, to $640.1 million for 2015, from $578.2 million in 2014, while fuel surcharge revenue decreased $56.7 million year-over-year. The increase in freight revenue resulted from a $49.6 million increase in freight revenue from our Truckload segment and a $12.3 million increase in revenues from Solutions.
The increase in 2015 Truckload revenue relates to an increase in average freight revenue per tractor per week of 5.0% compared to 2014 and a $4.6 million increase in freight revenue contributed by our temperature-controlled intermodal service offering, as well as an increase in our average tractor fleet of 3.5% from 2014. The increase in average freight revenue per tractor per week is the result of a 5.7% increase, or 9.1 cents per mile, in average rate per total mile partially offset by a 0.6% decrease in average miles per unit when compared to 2014. Team driven units increased approximately 13.6% to an average of approximately 950 teams in 2015 from approximately 840 teams in 2014.
The increase in Solutions' revenue is primarily the result of additional peak-season freight opportunities during the fourth quarter of 2015, improved coordination with our Truckload segment, and additional business from new customers added during the year.
For 2014, total revenue increased $34.4 million, or 5.0%, to $719.0 million from $684.5 million in 2013. Freight revenue increased $39.3 million, or 7.3%, to $578.2 million for 2014, from $538.9 million in 2013, while fuel surcharge revenue decreased $4.8 million year-over-year. The increase in freight revenue resulted fromIf capacity tightens as a $23.5 million increase in freight revenue from our Truckload segment and a $15.9 million increase in revenues from Solutions.
The increase in 2014 Truckload revenue relates to an increase in average freight revenue per tractor per week of 10.7% compared to 2013 and a $4.1 million increase in freight revenue contributed by our temperature-controlled intermodal service offering. These improvements were partially offset by a decrease in our average tractor fleet of 6.1% from 2013. The increase in average freight revenue per tractor per week is the result of a 7.2% increase,regulations impacting the industry or 10.7 cents per mile, in average rate per total mile, as well as a 3.3% increase in average miles per unit when compared to 2013.
The increase in Solutions' revenue is primarily the result of additional peak-season freight opportunities during the fourth quarter of 2014, improved coordination with our Truckload segment, and additional business from new customers added during the year, partially offset by the discontinuation of an underperforming location in June of 2014.
If softer freight demand continues,economic growth, we expect ratesthe pricing environment to improve in the latter half of 2017 and utilization to moderate compared to the prior 24 months. However, if the electronic logging device mandates are announced or if economic growth improves the resulting impact to supplyinto 2018 and demand could drive an increase2019, offset in both ratespart by higher driver pay and utilization.other inflationary costs.
For comparison purposes in the discussion below, we use total revenue and freight revenue (total revenue less fuel surcharge revenue) when discussing changes as a percentage of revenue. As it relates to the comparison of expenses to freight revenue, we believe removing fuel surcharge revenue, which is sometimes a volatile source of revenue, affords a more consistent basis for comparing the results of operations from period-to-period. Nonetheless, freight revenue representsis a non-GAAP financial measure. Accordingly, undue reliancemeasure and is not a substitute for revenue measured in accordance with GAAP. There are limitations to using non-GAAP financial measures. Our Board and management focus on our freight revenue as an indicator of our performance from period to period. We believe our presentation of freight revenue is useful because it provides investors and securities analysts the same information that we use internally to assess our core operating performance. Although we believe that freight revenue improves comparability in analyzing our period-to-period performance, it could limit comparability to other companies in our industry, if those companies define freight revenue differently. Because of these limitations, freight revenue should not be placed on the discussion of freight revenue, and discussions of freight revenue should be considered in combination with discussions of total revenue. For each expense item discussed below, we have provided a table setting forth the relevant expense first as a percentagemeasure of total revenue generated by or available to our business. Management compensates for these limitations by primarily relying on GAAP results and then asusing non-GAAP financial measures on a percentage of freight revenue.supplemental basis.
Salaries, wages, and related expenses
| | Year ended December 31, | |
(dollars in thousands) | | 2016 | | | 2015 | | | 2014 | |
Salaries, wages, and related expenses | | $ | 234,526 | | | $ | 244,779 | | | $ | 231,761 | |
% of total revenue | | | 35.0 | % | | | 33.8 | % | | | 32.2 | % |
% of freight revenue | | | 38.4 | % | | | 38.2 | % | | | 40.1 | % |
Salaries, wages, and related expenses
| | Year ended December 31, | |
(dollars in thousands) | | 2015 | | | 2014 | | | 2013 | |
Salaries, wages, and related expenses | | $ | 244,779 | | | $ | 231,761 | | | $ | 218,946 | |
% of total revenue | | | 33.8 | % | | | 32.2 | % | | | 32.0 | % |
% of freight revenue | | | 38.2 | % | | | 40.1 | % | | | 40.6 | % |
decreased approximately $10.3 million, or 4.2%, for the year ended December 31, 2016, compared with 2015. As a percentage of total revenue, salaries, wages, and related expenses increased to 35.0% of total revenue for the year ended December 31, 2016, as compared to 33.8% in 2015. As a percentage of freight revenue, salaries, wages, and related expenses increased slightly to 38.4% of freight revenue for the year ended December 31, 2016, from 38.2% in 2015. Salaries, wages, and related expenses decreased significantly on an overall dollar basis as a result of a 3.9% decrease in average tractors, but were relatively flat as a percentage of freight revenue, primarily due to pay adjustments for both driver and non-drivers since 2015, partially offset by a decrease in non-driver incentive compensation as a result of reduced profitability in 2016 versus 2015. Additionally, group insurance costs decreased approximately $2.3 million from 2015 as a result of better claims experience.
Salaries, wages, and related expenses increased approximately $13.0 million, or 5.6%, for the year ended December 31, 2015, compared with 2014. As a percentage of total revenue, salaries, wages, and related expenses increased to 33.8% of total revenue for the year ended December 31, 2015, as compared to 32.2% in 2014. As a percentage of freight revenue, salaries, wages, and related expenses declined to 38.2% of freight revenue for the year ended December 31, 2015, from 40.1% in 2014. Salaries, wages, and related expenses increased approximately 2.1 cents per mile primarily due to pay adjustments for both driver and non-drivers since 2014, as well as increased non-driver incentive compensation tied to our results of operations. Additionally, group insurance costs increased approximately $0.9 million from 2014 as a result of more participants and fees directly related to the Affordable Care Act and we had additional costs of approximately $1.0 million due to an increase in non-driver headcount as a result of the increased average number of units. These increases were partially offset by lower workers' compensation expense in 2015 at 1.7 cents per company mile compared to 3.4 cents in 2014 due to fewer claims with less severity. Additionally, we had an increase in the percentage of our fleet comprised of independent contractors, whose costs are included in the purchased transportation line item.
Salaries, wages, and related expenses increased approximately $12.8 million, or 5.9%, for the year ended December 31, 2014, compared with 2013. As a percentage of total revenue, salaries, wages, and related expenses remained relatively even at 32.2% of total revenue for the year ended December 31, 2014, as compared to 32.0% in 2013. As a percentage of freight revenue, salaries, wages, and related expenses declined to 40.1% of freight revenue for the year ended December 31, 2014, from 40.6% in 2013. Salaries, wages, and related expenses increased approximately 5.7 cents per mile primarily due to pay adjustments for both driver and non-drivers since 2013, as well as increased non-driver incentive compensation tied to our results of operations. Additionally, group insurance costs increased approximately $1.7 million from 2013 as a result of more participants and fees directly related to the Affordable Care Act. We also had higher workers' compensation expense in 2014 at 3.4 cents per company mile compared to 3.0 cents in 2013 due to an increase in our DOT accidents and increased development of prior period claims. Additionally, we had a reduction in the percentage of our fleet comprised of independent contractors, whose costs are included in the purchased transportation line item.
Going forward, we believe salaries, wages, and related expenses will increase as a result of a tight driver market, wage inflation, higher healthcare costs, and, in certain periods, increased incentive compensation due to better performance. In particular, we expect driver pay to increase as we look to reduce the number of unseated truckstractors in our fleet in a tight market for drivers. AsAdditionally, when the freight market allows for an increase in rates we would expect to, as we have historically, pass a percentageportion of total revenue and freight revenue, salaries,those rate increases on to our professional drivers. Salaries, wages, and related expenses will fluctuate to some extent based on the percentage of revenue generated by independent contractors and our Solutions business, for which payments are reflected in the purchased transportation line item.
Fuel expense
| | Year ended December 31, | | | Year ended December 31, | |
(dollars in thousands) | | 2015 | | | 2014 | | | 2013 | | | 2016 | | | 2015 | | | 2014 | |
Fuel expense | | $ | 122,160 | | | $ | 168,856 | | | $ | 186,002 | | | $ | 103,108 | | | $ | 122,160 | | | $ | 168,856 | |
% of total revenue | | | 16.9 | % | | | 23.5 | % | | | 27.2 | % | | | 15.4 | % | | | 16.9 | % | | | 23.5 | % |
We receive a fuel surcharge on our loaded miles from most shippers; however, this does not cover the entire increase in fuel prices for several reasons, including the following: surcharges cover only loaded miles we operate; surcharges do not cover miles driven out-of-route by our drivers; and surcharges typically do not cover refrigeration unit fuel usage or fuel burned by tractors while idling. Moreover, most of our business relating to shipments obtained from freight brokers does not carry a fuel surcharge. Finally, fuel surcharges vary in the percentage of reimbursement offered, and not all surcharges fully compensate for fuel price increases even on loaded miles.
The rate of fuel price changes also can have an impact on results. Most fuel surcharges are based on the average fuel price as published by the DOE for the week prior to the shipment, meaning we typically bill customers in the current week based on the previous week's applicable index. Therefore, in times of increasing fuel prices, we do not recover as much as we are currently paying for fuel. In periods of declining prices, the opposite is true. Fuel prices as measured by the DOE averaged approximately $0.40 cents per gallon lower in 2016 compared with 2015 and $1.12 cents per gallon lower in 2015 compared with 2014 and 9.7 cents per gallon lower in 2014 compared to 2013.2014.
Additionally, $16.7 million, $15.3 million, $3.1 million, and $0.6$3.1 million were reclassified from accumulated other comprehensive (loss) income to our results from operations for the years ended December 31, 2016, 2015, 2014, and 2013,2014, respectively, as additional fuel expense for 2016, 2015 and 2014, and as a reduction of expense in 2013, related to losses and gains on fuel hedge contracts that expired. We evaluate these contracts for "hedge effectiveness," which is the extent to which the hedge contract effectively offsets changes in cash flows that the contract was intended to offset. In addition to the amounts reclassified as a result of expired contracts, we recognized a reduction of fuel expense of $1.4 million relating to previously recognized fuel expense as a result of the expiration of the fuel hedge contracts for which the fuel hedging relationship was deemed to be ineffective on a prospective basis in 2014. As a result, the changes in fair value for those contracts were recorded as expense rather than as a component of other comprehensive loss. At December 31, 2015,2016, all fuel hedge contracts were deemed to be effective and thus continue to qualify as cash flow hedges. There was no material ineffectiveness recorded on the contracts that existed at December 31, 2015.2016. The ineffectiveness was calculated using the cumulative dollar offset method as an estimate of the difference in the expected cash flows of the respective fuel hedge contracts compared to the changes in the all-in cash outflows required for the diesel fuel purchases.
To measure the effectiveness of our fuel surcharge program, we subtract fuel surcharge revenue (other than the fuel surcharge revenue we reimburse to independent contractors and other third parties, which is included in purchased transportation) from our fuel expense. The result is referred to as net fuel expense. Our net fuel expense as a percentage of freight revenue is affected by the cost of diesel fuel net of fuel surcharge collection, the percentage of miles driven by company trucks,tractors, our fuel economy, and our percentage of deadhead miles, for which we do not receive material fuel surcharge revenues. Net fuel expense is shown below:
| | Year ended December 31, | |
(dollars in thousands) | | 2016 | | | 2015 | | | 2014 | |
Total fuel surcharge | | $ | 59,806 | | | $ | 84,120 | | | $ | 140,776 | |
Less: Fuel surcharge revenue reimbursed to independent contractors and other third parties | | | 6,250 | | | | 7,790 | | | | 10,837 | |
Company fuel surcharge revenue | | $ | 53,556 | | | $ | 76,330 | | | $ | 129,939 | |
Total fuel expense | | $ | 103,108 | | | $ | 122,160 | | | $ | 168,856 | |
Less: Company fuel surcharge revenue | | | 53,556 | | | | 76,330 | | | | 129,939 | |
Net fuel expense | | $ | 49,552 | | | $ | 45,830 | | | $ | 38,917 | |
% of freight revenue | | | 8.1 | % | | | 7.2 | % | | | 6.7 | % |
| | Year ended December 31, | |
(dollars in thousands) | | 2015 | | | 2014 | | | 2013 | |
Total fuel surcharge | | $ | 84,120 | | | $ | 140,776 | | | $ | 145,616 | |
Less: Fuel surcharge revenue reimbursed to independent contractors and other third parties | | | 7,790 | | | | 10,837 | | | | 12,863 | |
Company fuel surcharge revenue | | $ | 76,330 | | | $ | 129,939 | | | $ | 132,753 | |
Total fuel expense | | $ | 122,160 | | | $ | 168,856 | | | $ | 186,002 | |
Less: Company fuel surcharge revenue | | | 76,330 | | | | 129,939 | | | | 132,753 | |
Net fuel expense | | $ | 45,830 | | | $ | 38,917 | | | $ | 53,249 | |
% of freight revenue | | | 7.2 | % | | | 6.7 | % | | | 9.9 | % |
Total fuel expense decreased approximately $19.1 million, or 15.6%, for the year ended December 31, 2016, compared with 2015.�� As a percentage of total revenue, total fuel expense decreased to 15.4% of total revenue for the year ended December 31, 2016, from 16.9% in 2015. As a percentage of freight revenue, total fuel expense decreased to 16.9% of freight revenue for the year ended December 31, 2016, from 19.1% in 2015. These decreases primarily related to lower fuel prices and an increase in our average fuel miles per gallon during 2016 as a result of purchasing equipment with more fuel-efficient engines. The decreases were partially offset by increased net losses from fuel hedging transactions of $16.7 million in 2016 compared to $13.9 million in 2015.
Net fuel expense increased $3.7 million, or 8.1%, for the year ended December 31, 2016 compared to 2015. As a percentage of freight revenue, net fuel expense increased 0.9% for the year ended December 31, 2016 compared to 2015. These increases primarily resulted from lower fuel surcharge recovery as a result of increased broker freight and the tiered reimbursement structure of certain fuel surcharge agreements. The increases were partially offset by improved miles per gallon due to new engine technology, internal fuel efficiency initiatives, and a greater percentage of miles driven by independent contractors.
TotalFor the year ended December 31, 2015, total fuel expense decreased approximately $46.7 million, or 27.7%, for the year ended December 31, 2015, compared with 2014. As a percentage of total revenue, total fuel expense decreased to 16.9% of total revenue for the year ended December 31, 2015, from 23.5% in 2014. As a percentage of freight revenue, total fuel expense decreased to 19.1% of freight revenue for the year ended December 31, 2015, from 29.2% in 2014. These decreases primarily related to an increase in our average fuel miles per gallon during 2015 as a result of purchasing equipment with more fuel-efficient engines. The decreases were partially offset by net losses from fuel hedging transactions of $13.9 million in 2015 compared to $3.1 million in 2014. Additionally, during the second quarter of 2014 we recognized an approximately $0.9 million fuel tax credit related to a amended fuel tax returns for the years 2010 – 2013.
Net fuel expense increased $6.9 million, or 17.8%, for the year ended December 31, 2015 compared to 2014. As a percentage of freight revenue, net fuel expense increased 0.5% for the year ended December 31, 2015 compared to 2014. These increases primarily resulted from lower fuel surcharge recovery. The increases were partially offset by improved miles per gallon due to new engine technology, internal fuel efficiency initiatives, a greater percentage of miles driven by independent contractors, and an approximately $0.9 million fuel tax credit taken during the second quarter of 2014 related to a amended fuel tax returns for the years 2010 – 2013.
For the year ended December 31, 2014, total fuel expense decreased approximately $17.1 million, or 9.2%, compared with 2013. As a percentage of total revenue, total fuel expense decreased to 23.5% of total revenue for the year ended December 31, 2014, from 27.2% in 2013. As a percentage of freight revenue, total fuel expense decreased to 29.2% of freight revenue for year ended December 31, 2014, from 34.5% in 2013. These decreases primarily related to an increase in our average fuel miles per gallon during 2014 as a result of purchasing equipment with more fuel-efficient engines and internal fuel efficiency initiatives, and improved fuel pricing.
Net fuel expense decreased $14.3 million, or 26.9%, for the year ended December 31, 2014 compared to 2013. As a percentage of freight revenue, net fuel expense decreased 3.2% for the year ended December 31, 2014 compared to 2013. These decreases primarily resulted from improved miles per gallon due to new engine technology, internal fuel efficiency initiatives, improved fuel surcharge recovery, and improved fuel pricing, in each case, net of gains and losses on fuel hedging contracts.
We expect to continue managing our idle time and trucktractor speeds, investing in more fuel-efficient tractors to improve our miles per gallon, locking in fuel hedges when deemed appropriate, and partnering with customers to adjust fuel surcharge programs that are inadequate to recover a fair portion of fuel costs. Going forward, our net fuel expense is expected to fluctuate as a percentage of revenue based on factors such as diesel fuel prices, percentage recovered from fuel surcharge programs, percentage of uncompensated miles, percentage of revenue generated by team-driven tractors (which tend to generate higher miles and lower revenue per mile, thus proportionately more fuel cost as a percentage of revenue), percentage of revenue generated by refrigerated operation (which uses diesel fuel for refrigeration, but usually does not recover fuel surcharges on refrigeration fuel), percentage of revenue generated from independent contractors, the success of fuel efficiency initiatives, and gains and losses on fuel hedging contracts. We have focused
Given recent historical lows, we would expect diesel fuel prices to remain flat or increase over the next few years. However, due to hedging contracts being locked in at a lower rate on a portion of our efforts on increasing our abilityexpected gallons compared to recover2016 and 2015, we expect net fuel surcharges under our customer contractscost to significantly decline in 2017 and 2018.
Operations and maintenance
| | Year ended December 31, | |
(dollars in thousands) | | 2016 | | | 2015 | | | 2014 | |
Operations and maintenance | | $ | 45,864 | | | $ | 46,458 | | | $ | 47,251 | |
% of total revenue | | | 6.8 | % | | | 6.4 | % | | | 6.6 | % |
% of freight revenue | | | 7.5 | % | | | 7.3 | % | | | 8.2 | % |
Operations and maintenance decreased $0.6 million, or 1.3%, for fuel usedthe year ended December 31, 2016, compared with 2015. As a percentage of total revenue, operations and maintenance remained relatively even at 6.8% of total revenue in refrigeration units. If these efforts are successful, they could give rise2016, compared with 6.4% in 2015. As a percentage of freight revenue, operations and maintenance increased to 7.5% of freight revenue for 2016, from 7.3% in 2015 due to an increase in fuel surcharges recoveredunloading and a corresponding decreaseother operational costs associated with our increase in net fuel expense. Additionally, in recent months petroleum based markets have experienced rapid declines such that current pricing has reached four-year lows and, at current prices, we would experience fuel hedging losses over the next several years. The amount of these losses would vary dependingdedicated freight, partially offset by lower maintenance cost on market fuel prices. Finally, we believe fuel prices could increase going forward based upon the recent significant decline in prices. As such, there has been significant volatility in our net fuel expense, and we would expect such volatility to continue if these market conditions persist.revenue equipment.
Operations and maintenance
| | Year ended December 31, | |
(dollars in thousands) | | 2015 | | | 2014 | | | 2013 | |
Operations and maintenance | | $ | 46,458 | | | $ | 47,251 | | | $ | 50,043 | |
% of total revenue | | | 6.4 | % | | | 6.6 | % | | | 7.3 | % |
% of freight revenue | | | 7.3 | % | | | 8.2 | % | | | 9.3 | % |
OperationsFor the year ended December 31, 2015, operations and maintenance decreased $0.8 million, or 1.7%, for the year ended December 31, 2015, compared with 2014. As a percentage of total revenue, operations and maintenance remained relatively even at 6.4% of total revenue in 2015, compared with 6.6% in 2014. As a percentage of freight revenue, operations and maintenance decreased to 7.3% of freight revenue for 2015, from 8.2% in 2014 due to a decrease in our average age of equipment partially offset by increased driver recruiting costs.
Going forward, we believe this category will fluctuate based on several factors, including our continued ability to maintain a relatively young fleet, accident severity and frequency, weather, and the reliability of new and untested revenue equipment models.
Revenue equipment rentals and purchased transportation
| | Year ended December 31, | |
(dollars in thousands) | | 2016 | | | 2015 | | | 2014 | |
Revenue equipment rentals and purchased transportation | | $ | 117,472 | | | $ | 118,583 | | | $ | 111,772 | |
% of total revenue | | | 17.5 | % | | | 16.4 | % | | | 15.5 | % |
% of freight revenue | | | 19.2 | % | | | 18.5 | % | | | 19.3 | % |
Revenue equipment rentals and purchased transportation decreased approximately $1.1 million, or 0.9%, for the year ended December 31, 2016, compared with 2015. As a percentage of total revenue, revenue equipment rentals and purchased transportation increased to 17.5% of total revenue for the year ended December 31, 2016, from 16.4% in 2015. As a percentage of freight revenue, revenue equipment rentals and purchased transportation increased to 19.2% of freight revenue for the year ended December 31, 2016, from 18.5% in 2015. These changes were primarily the result of a $0.7 million increase in payments to third-party transportation providers related to increased revenues at our Solutions subsidiary and growth of our temperature-controlled intermodal service offering. These increases were partially offset by a decrease in leased equipment rental payments due to a reduction in our trailers under operating leases from 2,239 at December 31, 2105 to 1,695 at December 31, 2016.
For the year ended December 31, 2014, operations and maintenance decreased $2.8 million, or 5.6%, compared with 2013. As a percentage of total2015, revenue operations and maintenance decreased to 6.6% of total revenue in 2014, from 7.3% in 2013. As a percentage of freight revenue, operations and maintenance decreased to 8.2% of freight revenue for 2014, from 9.3% in 2013. These decreases were primarily the result of reduced parts and vehicle maintenance expense related to the fleet reduction, removing older, higher maintenance units from the fleet, and a decline in the average age of our revenue equipment, partially offset by increased driver recruiting costs.
Revenue equipment rentals and purchased transportation
| | Year ended December 31, | |
(dollars in thousands) | | 2015 | | | 2014 | | | 2013 | |
Revenue equipment rentals and purchased transportation | | $ | 118,583 | | | $ | 111,772 | | | $ | 102,954 | |
% of total revenue | | | 16.4 | % | | | 15.5 | % | | | 15.0 | % |
% of freight revenue | | | 18.5 | % | | | 19.3 | % | | | 19.1 | % |
Revenue equipment rentals and purchased transportation increased approximately $6.8 million, or 6.1%, for the year ended December 31, 2015, compared with 2014. As a percentage of total revenue, revenue equipment rentals and purchased transportation increased to 16.4% of total revenue for the year ended December 31, 2015, from 15.5% in 2014. As a percentage of freight revenue, revenue equipment rentals and purchased transportation decreased to 18.5% of freight revenue for the year ended December 31, 2015, from 19.3% in 2014. These changes were primarily the result of a $14.4 million increase in payments to third-party transportation providers related to increased revenues at our Solutions subsidiary, growth of our temperature-controlled intermodal service offering and an increase in payments to independent contractors, which comprised a larger percentage of our total fleet. These increases were partially offset by a decrease in leased equipment rental payments and by lower fuel surcharge pass-through payments to independent contractors and third party carriers. For the year ended December 31, 2015, miles run by independent contractors increased to 9.0% of our total miles from 8.2% for 2014, and tractors under operating leases decreased to 115 units from 150 units in 2014. We expect revenue equipment rentals to decrease going forward as a result of our increase in acquisition of revenue equipment through financed purchases or capital leases rather than operating leases. As discussed below, this decrease may be partially or fully offset by an increase in purchased transportation as we expect to continue to grow our Solutions and intermodal service offerings.
For the year ended December 31, 2014, revenue equipment rentals andWe expect purchased transportation increased approximately $8.8 million, or 8.6%, compared with 2013. As a percentage of total revenue, revenue equipment rentals and purchased transportation increased to 15.5% of total revenue for the year ended December 31, 2014, from 15.0% in 2013. As a percentage of freight revenue, revenue equipment rentals and purchased transportation increasedincrease as we seek to 19.3% of freight revenue for the year ended December 31, 2014, from 19.1% in 2013. These increases were primarily the result of a $12.4 million increase in payments to third-party transportation providers related to increased revenues atgrow our Solutions subsidiary and growth of our temperature-controlled intermodal service offering. These increases were partially offset by a decreaseif fuel prices continue to increase, which would result in leased equipment rental paymentsan increase in what we pay third party carriers and a decrease in payments to independent contractors, which comprised a smaller percentage of our total fleet in 2014. For the year ended December 31, 2014, miles run by independent contractors decreased to 8.2% of our total miles from 9.2% for 2013 and tractors under operating leases decreased to 150 units from 650 units in 2013.
Thiscontractors. However, this expense category will fluctuate with the number and percentage of loads hauled by independent contractors, loads handled by Solutions, and tractors, trailers, and other assets financed with operating leases. In addition, factors such as the cost to obtain third party transportation services, and growth of our intermodal service offerings, and the amount of fuel surcharge revenue passed through to the third party carriers and independent contractors will affect this expense category. If industry-wide trucking capacity were to tighten in relation to freight demand, we may need to increase the amounts we pay to third-party transportation providers, independent contractors, and intermodal transportation providers, which could increase this expense category on an absolute basis and as a percentage of freight revenue absent an offsetting increase in revenue. We continue to actively recruit independent contractors and, if we are successful, we would expect this line item to increase as a percentage of revenue.
Operating taxes and licenses
| | Year ended December 31, | |
(dollars in thousands) | | 2016 | | | 2015 | | | 2014 | |
Operating taxes and licenses | | $ | 11,712 | | | $ | 11,016 | | | $ | 10,960 | |
% of total revenue | | | 1.7 | % | | | 1.5 | % | | | 1.5 | % |
% of freight revenue | | | 1.9 | % | | | 1.7 | % | | | 1.9 | % |
| | Year ended December 31, | |
(dollars in thousands) | | 2015 | | | 2014 | | | 2013 | |
Operating taxes and licenses | | $ | 11,016 | | | $ | 10,960 | | | $ | 10,969 | |
% of total revenue | | | 1.5 | % | | | 1.5 | % | | | 1.6 | % |
% of freight revenue | | | 1.7 | % | | | 1.9 | % | | | 2.0 | % |
For the periods presented, the change in operating taxes and licenses was not significant as either a percentage of total revenue or freight revenue.
Insurance and claims
| | Year ended December 31, | | | Year ended December 31, | |
(dollars in thousands) | | 2015 | | | 2014 | | | 2013 | | | 2016 | | | 2015 | | | 2014 | |
Insurance and claims | | $ | 31,909 | | | $ | 39,594 | | | $ | 30,305 | | | $ | 32,596 | | | $ | 31,909 | | | $ | 39,594 | |
% of total revenue | | | 4.4 | % | | | 5.5 | % | | | 4.4 | % | | | 4.9 | % | | | 4.4 | % | | | 5.5 | % |
% of freight revenue | | | 5.0 | % | | | 6.8 | % | | | 5.6 | % | | | 5.3 | % | | | 5.0 | % | | | 6.8 | % |
Insurance and claims, consisting primarily of premiums and deductible amounts for liability, physical damage, and cargo damage insurance and claims, increased approximately $0.7 million, or 2.2%, for year ended December 31, 2016, compared to 2015. As a percentage of total revenue, insurance and claims increased to 4.9% of total revenue for the year ended December 31, 2016, from 4.4% in 2015. As a percentage of freight revenue, insurance and claims increased to 5.3% of freight revenue for the year ended December 31, 2016, from 5.0% in 2015. These increases are primarily related to the non-recurring $3.6 million benefit in the second quarter of 2015 from commutation of our auto liability policy for the period from April 1, 2013, through September 30, 2014. These increases also resulted from increased accident severity, resulting in total insurance cost increasing to 10.3 cents per mile for 2016 from 9.6 cents per mile in 2015. These increases were partially offset by decreased accident rates in 2016, as measured by a 6.8% improvement in DOT reportable accidents per million miles driven at 0.82% – the second lowest in the last ten years.
Insurance and claims decreased approximately $7.7 million, or 19.4%, for year ended December 31, 2015, compared to 2014. As a percentage of total revenue, insurance and claims decreased to 4.4% of total revenue for the year ended December 31, 2015, from 5.5% in 2014. As a percentage of freight revenue, insurance and claims decreased to 5.0% of freight revenue for the year ended December 31, 2015, from 6.8% in 2014. These decreases are primarily related to the difference between the approximately $7.5 million of additional reserves related to the adverse judgment in 2014 regarding a 2008 cargo claim compared with the $3.6 million benefit in the second quarter of 2015 from commutation of our auto liability policy for the period from April 1, 2013, through September 30, 2014. Excluding the 2008 cargo claim, insurance and claims cost per mile decreased to 9.6 cents per mile in 2015 from 9.9 cents per mile in 2014.
For the year ended December 31, 2014, insurance and claims increased approximately $9.3 million, or 30.7%, for year ended December 31, 2014, compared to 2013. As a percentage of total revenue, insurance and claims increased to 5.5% of total revenue for the year ended December 31, 2014, from 4.4% in 2013. As a percentage of freight revenue, insurance and claims increased to 6.8% of freight revenue for the year ended December 31, 2014, from 5.6% in 2013. These increases are primarily related to approximately $7.5 million charge relating to the 2008 cargo claim. Excluding this cargo claim, insurance and claims cost per mile increased to 9.9 cents per mile in 2014 from 9.1 cents per mile in 2013, primarily due to a decline in safety performance, as measured by accidents per million miles, partially offset by a reduction in loss development factors resulting from more disciplined claims management.
Our auto liability (personal injury and property damage), cargo, and general liability insurance programs include significant self-insured retention amounts. The auto liability policy contains a feature whereby we are able to retroactively obtain a partial refund of the premium in exchange for taking on the liability for incidents that occurred during the period and releasing the insurers. This is referred to as "commuting" the policy or "policy commutation." In several past periods, including the policy period from April 1, 2013, through September 30, 2014, we have commuted the policy, which has lowered our insurance and claims expense. We are also self-insured for physical damage to our equipment. Because of these significant self-insured exposures, insurance and claims expense may fluctuate significantly from period-to-period. Any increase in frequency or severity of claims, or any increases to then-existing reserves, could adversely affect our financial condition and results of operations. In relation to the 2008 cargo claim reserve, the judgementjudgment was partially reversed and the proceedings were remanded to the district court for further factual determinations. If these further proceedings are resolved favorably to us, any reduction of the accrual could reduce insurance and claims expense in the period in which the claim is resolved. On the other hand, if we are not successful in such a finding or mediation, insurance and claims expense may increase as a result of continuing litigation expenses, including pre and post judgment interest. We periodically evaluate strategies to efficiently reduce our insurance and claims expense, which in the past has included the commutation of our auto liability insurance policy. We intend to evaluate our ability to commute the current policy and any such commutation could significantly impact insurance and claims expense.
Communications and utilities
| | Year ended December 31, | |
(dollars in thousands) | | 2016 | | | 2015 | | | 2014 | |
Communications and utilities | | $ | 6,057 | | | $ | 6,162 | | | $ | 5,806 | |
% of total revenue | | | 0.9 | % | | | 0.9 | % | | | 0.8 | % |
% of freight revenue | | | 1.0 | % | | | 1.0 | % | | | 1.0 | % |
| | Year ended December 31, | |
(dollars in thousands) | | 2015 | | | 2014 | | | 2013 | |
Communications and utilities | | $ | 6,162 | | | $ | 5,806 | | | $ | 5,240 | |
% of total revenue | | | 0.9 | % | | | 0.8 | % | | | 0.8 | % |
% of freight revenue | | | 1.0 | % | | | 1.0 | % | | | 1.0 | % |
For the periods presented, the changechanges in communications and utilities waswere not significant as either a percentage of total revenue or freight revenue.
General supplies and expenses
| | Year ended December 31, | |
(dollars in thousands) | | 2016 | | | 2015 | | | 2014 | |
General supplies and expenses | | $ | 14,413 | | | $ | 14,007 | | | $ | 16,950 | |
% of total revenue | | | 2.1 | % | | | 1.9 | % | | | 2.4 | % |
% of freight revenue | | | 2.4 | % | | | 2.2 | % | | | 2.9 | % |
| | Year ended December 31, | |
(dollars in thousands) | | 2015 | | | 2014 | | | 2013 | |
General supplies and expenses | | $ | 14,007 | | | $ | 16,950 | | | $ | 16,002 | |
% of total revenue | | | 1.9 | % | | | 2.4 | % | | | 2.3 | % |
% of freight revenue | | | 2.2 | % | | | 2.9 | % | | | 3.0 | % |
For the year ended December 31, 2016, general supplies and expenses increased approximately $0.4 million, or 2.9%, compared with 2015. As a percentage of total revenue, general supplies and expenses increased to 2.1% of total revenue for the year ended December 31, 2016, from 1.9% in 2015. As a percentage of freight revenue, general supplies and expenses increased to 2.4% of freight revenue for the year ended December 31, 2016, from 2.2% in 2015. These increases are primarily the result of increases in legal costs related to several large cases and an increase in travel due to the turnaround efforts at SRT.
For the year ended December 31, 2015, general supplies and expenses decreased approximately $2.9 million, or 17.4%, compared with 2014. As a percentage of total revenue, general supplies and expenses decreased to 1.9% of total revenue for the year ended December 31, 2015, from 2.4% in 2014. As a percentage of freight revenue, general supplies and expenses decreased to 2.2% of freight revenue for the year ended December 31, 2015, from 2.9% in 2014. These decreases are primarily the result of the approximately $1.2 million reversal of deferred rent expense and reduced building rent expense related to the purchase of our previously leased Chattanooga headquarters property.
The change in general supplies and expenses for the year ended December 31, 2014 as compared to 2013 was not significant as either a percentage of total revenue or freight revenue.
Depreciation and amortization
| | Year ended December 31, | | | Year ended December 31, | |
(dollars in thousands) | | 2015 | | | 2014 | | | 2013 | | | 2016 | | | 2015 | | | 2014 | |
Depreciation and amortization | | $ | 61,384 | | | $ | 46,384 | | | $ | 43,694 | | | $ | 72,456 | | | $ | 61,384 | | | $ | 46,384 | |
% of total revenue | | | 8.5 | % | | | 6.5 | % | | | 6.4 | % | | | 10.8 | % | | | 8.5 | % | | | 6.5 | % |
% of freight revenue | | | 9.6 | % | | | 8.0 | % | | | 8.1 | % | | | 11.9 | % | | | 9.6 | % | | | 8.0 | % |
Depreciation and amortization consists primarily of depreciation of tractors, trailers and other capital assets offset or increased, as applicable, by gains or losses on dispositions of capital assets. Depreciation and amortization in 2016 increased $11.1 million, or 18.0%, compared with 2015. As a percentage of total revenue, depreciation and amortization increased to 10.8% of total revenue for the year ended December 31, 2016 compared to 8.5% for 2015. As a percentage of freight revenue, depreciation and amortization increased to 11.9% of freight revenue for the year ended December 31, 2016, from 9.6% in 2015. Depreciation, consisting primarily of depreciation of revenue equipment and excluding gains and losses, increased $9.6 million in 2016 from 2015, primarily as a result of more owned equipment and a significant reduction on the value of used tractors resulting in a change to residual values. Losses on the disposal of property and equipment, totaled $0.8 million in 2016, compared to gains of $0.6 million in 2015.
For the year ended December 31, 2015, depreciation and amortization increased $15.0 million, or 32.3%, compared with 2014. As a percentage of total revenue, depreciation and amortization increased to 8.5% of total revenue for the year ended December 31, 2015 compared to 6.5% for 2014. As a percentage of freight revenue, depreciation and amortization increased to 9.6% of freight revenue for the year ended December 31, 2015, from 8.0% in 2014. Depreciation, consisting primarily of depreciation of revenue equipment and excluding gains and losses, increased $13.0 million in 2015 from 2014, primarily as a result of new equipment and an increase in owned tractors of approximately 500 due to a reduction in use of operating leases to finance revenue equipment. Gains on the disposal of property and equipment, totaling $0.6 million in 2015, were $2.0 million lower than 2014 due to the number, type, and mileage of the equipment sold. Additionally, depreciation increased and gains on the disposal of property and equipment decreased as a result of the softening of the used tractor market during the latter portion of the year.
We expect to see an increase in depreciation and amortization going forward, specifically as compared to the first and second quarters of 2016, as we continue to recognize the impact of the significant reductions in residual values, which should lessen on a resultcomparative basis in the third quarter of our expected increase in acquisition of revenue equipment through purchases and capital leases rather than operating leases and as a result of our purchase of our corporate headquarters, executed in August 2015.2017. Additionally, if the used tractor market remains soft itwere to decline further, we could result in lower gains than we’ve experienced in the prior years, thereby increasing ourhave to adjust residual values again and increase depreciation and amortization expense.
For the year ended December 31, 2014, depreciation and amortizationor experience increased $2.7 million, or 6.2%, compared with 2013. As a percentage of total revenue, depreciation and amortization remained relatively even with 2013 at 6.5% of total revenue for the year ended December 31, 2014 compared to 6.4% for 2013. As a percentage of freight revenue, depreciation and amortization decreased slightly to 8.0% of freight revenue for the year ended December 31, 2014, from 8.1% in 2013. Depreciation, consisting primarily of depreciation of revenue equipment and excluding gains and losses increased $4.7 million in 2014 from 2013, primarily because owned tractors increased by approximately 500 due to a reduction in use of operating leases to finance revenue equipment as well the increased cost of new tractors. Gains on the disposal of property and equipment, totaling $2.7 million in 2014, were $1.9 million higher than 2013 due to the type and mileage of the equipment sold. We expect to see an increase in depreciation and amortization going forward as a result of our expected increase in acquisition of revenue equipment through purchases rather than operating leases.sale.
OtherInterest expense, net
| | Year ended December 31, | | | Year ended December 31, | |
(dollars in thousands) | | 2015 | | | 2014 | | | 2013 | | | 2016 | | | 2015 | | | 2014 | |
Other expense, net | | $ | 8,445 | | | $ | 10,794 | | | $ | 10,397 | | | $ | 8,226 | | | $ | 8,445 | | | $ | 10,794 | |
% of total revenue | | | 1.2 | % | | | 1.5 | % | | | 1.5 | % | | | 1.2 | % | | | 1.2 | % | | | 1.5 | % |
% of freight revenue | | | 1.3 | % | | | 1.9 | % | | | 1.9 | % | | | 1.3 | % | | | 1.3 | % | | | 1.9 | % |
OtherInterest expense, net includes interest expense, interest income, and other miscellaneous non-operating items, which decreased approximately $0.2 million, or 2.6%, for the year ended December 31, 2016, compared with 2015. As a percentage of total revenue, other expense, net remained flat with 2015 at 1.2% for the years ended December 31, 2016 and 2015. As a percentage of freight revenue, other expense, net remained flat at 1.3% of freight revenue for the years ended December 31, 2016 and 2015. The dollar decrease is primarily the result of the decrease in debt at a lower average interest rate.
Interest expense, net, decreased approximately $2.3 million, or 21.8%, for the year ended December 31, 2015, compared with 2014. As a percentage of total revenue, other expense, net remained relatively even with 2014 at 1.2% for the year ended December 31, 2015 compared to 1.5% for the year ended December 31, 2014. As a percentage of freight revenue, other expense, net decreased to 1.3% of freight revenue for the year ended December 31, 2015 from 1.9% for the year ended December 31, 2014. These decreases are primarily the result of the repayments of debt and capital leases from the proceeds of our late November 2014 follow-on stock offering partially offset by the increase in debt at a lower average interest rate related to the August 2015 purchase of our corporate headquarters.
For the year ended December 31, 2014, other expense, net, decreased approximately $0.4 million, or 3.8%, for the year ended December 31, 2014, compared with 2013. As a percentage of total revenue, other expense, net remained even with 2013 at 1.5% for the year ended December 31, 2014. As a percentage of freight revenue, other expense, net remained even with 2013 at 1.9% of freight revenue for the year ended December 31, 2014.
This line item will fluctuate based on our decision with respect to purchasing revenue equipment with balance sheet debt versus operating leases as well as our ability to continue to generate profitable results and reduce our leverage.
Equity in income of affiliate
| | Year ended December 31, | | | Year ended December 31, | |
(in thousands) | | 2015 | | | 2014 | | | 2013 | | | 2016 | | | 2015 | | | 2014 | |
Equity in income of affiliate | | $ | 4,570 | | | $ | 3,730 | | | $ | 2,750 | | | $ | 3,000 | | | $ | 4,570 | | | $ | 3,730 | |
We have accounted for our investment in TEL using the equity method of accounting and thus our financial results include our proportionate share of TEL's net income. For the yearsyear ended December 31, 2015, and 2014, the increase in TEL's contributions to our results iswas due to their growth in both leasing and trucktractor sales. Given TEL's growth overduring the past three years preceding 2015 and volatility in the used and leased equipment markets in which TEL operates, including the recent softening of the used tractor market, we expect the impact on our earnings resulting from our investment and TEL's profitability was more moderate in 2016. Given the decline in the used and leased equipment markets in which TEL operates, we expect the impact on our earnings resulting from our investment in TEL to moderate over the next twelve months. Additionally, should we exercise our option to purchase the remaining 51% of TEL, the consolidation of TEL's results and balance sheet would provide for a significant fluctuation to our presentation and amounts reported. The extent of such fluctuation could depend on a number of factors, including the exercise price, the amount of TEL's debt upon exercise, how TEL is financing their fleet of tractors and trailers (which would impact depreciation, amortization, and revenue equipment rentals), and compensation and benefits at TEL.
Income tax expense
| | Year ended December 31, | |
(dollars in thousands) | | 2016 | | | 2015 | | | 2014 | |
Income tax expense | | $ | 10,386 | | | $ | 21,822 | | | $ | 14,774 | |
% of total revenue | | | 1.5 | % | | | 3.0 | % | | | 2.1 | % |
% of freight revenue | | | 1.7 | % | | | 3.4 | % | | | 2.6 | % |
Income tax expense
| | Year ended December 31, | |
(dollars in thousands) | | 2015 | | | 2014 | | | 2013 | |
Income tax expense | | $ | 21,822 | | | $ | 14,774 | | | $ | 7,503 | |
% of total revenue | | | 3.0 | % | | | 2.1 | % | | | 1.1 | % |
% of freight revenue | | | 3.4 | % | | | 2.6 | % | | | 1.4 | % |
decreased approximately $11.4 million, or 52.4%, for the year ended December 31, 2016, compared with 2015. As a percentage of total revenue, income tax expense decreased to 1.5% of total revenue for 2016 from 3.0% in 2015. As a percentage of freight revenue, income tax expense decreased to 1.7% of freight revenue for 2016 compared to 3.4% in 2015. These decreases were primarily related to the $36.7 million decrease in pre-tax income in 2016 compared to 2015 resulting from the declines in operating income noted above, the decrease in the contribution from TEL's earnings, and the large non-recurring tax credit in fiscal year 2015.
Income tax expense increased approximately $7.0 million, or 47.7%, for the year ended December 31, 2015, compared with 2014. As a percentage of total revenue, income tax expense increased to 3.0% of total revenue for 2015 from 2.1% in 2014. As a percentage of freight revenue, income tax expense increased to 3.4% of freight revenue for 2015 compared to 2.6% in 2014. These increases were primarily related to the $31.3 million increase in the pre-tax income in 2015 compared to 2014 resulting from the improvements in operating income noted above, a one-time federal income tax credit of approximately $4.7 million, and the increase in the contribution from TEL's earnings.
For the year ended December 31, 2014, income tax expense increased approximately $7.3 million, or 96.9%, for the year ended December 31, 2014, compared with 2013. As a percentage of total revenue, income tax expense increased to 2.1% of total revenue for 2014 from 1.1% in 2013. As a percentage of freight revenue, income tax expense increased to 2.6% of freight revenue for 2014 compared to 1.4% in 2013. These increases were primarily related to the $19.8 million increase in the pre-tax income in 2014 compared to 2013 resulting from the improvements in operating income noted above and the increase in the contribution from TEL's earnings.
The effective tax rate is different from the expected combined tax rate due primarily to permanent differences related to our per diem pay structure for drivers. Due to the partial nondeductible effect of the per diem payments, our tax rate will fluctuate in future periods as income fluctuates. We are currently evaluating several tax planning opportunities and credits that if determined to be both applicable and to meet the recognition criteria provided by ASC 740, could reduce our future tax expense.
RESULTS OF SEGMENT OPERATIONS
We have one reportable segment, asset-based truckload services, which we refer to as Truckload. In addition, our Solutions subsidiary has service offerings ancillary to our asset-based Truckload services, including: freight brokerage and logistics service directly and through freight brokerage agents who are paid a commission for the freight they provide and accounts receivable factoring. These operations consist of several operating segments, which neither individually nor in the aggregate meet the quantitative or qualitative reporting thresholds. As a result, these operations are grouped in "Other." The operation of each of these businesses is described in our notes to Item 1 of Part 1 of this Annual Report on Form 10-K.
"Unallocated Corporate Overhead" includes costs that are incidental to our activities and are not specifically allocated to one of the segments. The following table summarizes financial and operating data by segment:
| | Year ended December 31, | |
(in thousands) | | 2016 | | | 2015 | | | 2014 | |
Revenues: | | | | | | | | | |
Truckload | | $ | 601,226 | | | $ | 655,918 | | | $ | 663,001 | |
Other | | | 69,425 | | | | 68,322 | | | | 55,979 | |
Total | | $ | 670,651 | | | $ | 724,240 | | | $ | 718,980 | |
Operating Income (loss): | | | | | | | | | | | | |
Truckload | | $ | 37,031 | | | $ | 74,107 | | | $ | 54,151 | |
Other | | | 7,631 | | | | 5,768 | | | | 3,894 | |
Unallocated Corporate Overhead | | | (12,215 | ) | | | (12,093 | ) | | | (18,399 | ) |
Total | | $ | 32,447 | | | $ | 67,782 | | | $ | 39,646 | |
| | Year ended | |
(in thousands) | | | | | | | | | |
Revenues: | | | | | | | | | |
Truckload | | $ | 655,918 | | | $ | 663,001 | | | $ | 644,403 | |
Other | | | 68,322 | | | | 55,979 | | | | 40,146 | |
Total | | $ | 724,240 | | | $ | 718,980 | | | $ | 684,549 | |
Operating Income (loss): | | | | | | | | | | | | |
Truckload | | $ | 74,107 | | | $ | 54,151 | | | $ | 27,746 | |
Other | | | 5,768 | | | | 3,894 | | | | 1,271 | |
Unallocated Corporate Overhead | | | (12,093 | ) | | | (18,399 | ) | | | (8,623 | ) |
Total | | $ | 67,782 | | | $ | 39,646 | | | $ | 20,394 | |
Comparison of Year Ended December 31, 2016 to Year Ended December 31, 2015
Our Truckload revenue decreased $54.7 million, as freight revenue decreased $30.4 million and fuel surcharge revenue decreased $24.3 million. The decrease in freight revenue relates to a decrease in average freight revenue per tractor per week of 2.2% compared to 2016, partially offset by a $1.7 million increase in freight revenue contributed by our temperature-controlled intermodal service offering, as well as a decrease in our average tractor fleet of 3.9% from 2015. The decrease in average freight revenue per tractor per week is the result of a 1.3% decrease, or 2.2 cents per mile, in average rate per total mile and a 0.6% decrease in average miles per unit when compared to 2015. Additionally, team driven units increased approximately 5.3% to an average of approximately 1,000 teams in 2016 compared to approximately 950 in 2015.
Our Truckload operating income was $37.1 million less in 2016 than 2015 due to the abovementioned decrease in freight revenue. Additionally, operating costs per mile, net of fuel surcharge revenue, increased primarily due to increased salaries, wages, and related expenses (which was primarily due to a higher percentage of our fleet being comprised of team-driven tractors, as well as driver and non-driver employee pay increases since the same 2015 period), increased net fuel expense, and increased capital costs, partially offset by reduced workers’ compensation expense and operations and maintenance expense.
Other total revenue increased $1.1 million in 2016 compared to 2015 and operating income increased $1.9 million for the same period. These improvements are primarily the result of improved coordination with our Truckload segment, additional business from new customers added during the year, and the full year effect of a large customer added in 2015.
Unallocated corporate overhead remained relatively flat as a result of a $3.2 million reduction in incentive compensation in 2016, primarily as a result of decreased profitability, partially offset by the 2015 period including the $3.6 million in return of previously expensed insurance premiums for the commutation of our primary auto liability policy for the period of April 1, 2013, through September 30, 2014.
Comparison of Year Ended December 31, 2015 to Year Ended December 31, 2014
Our Truckload revenue decreased $7.1 million, as freight revenue increased $49.6 million and fuel surcharge revenue decreased $56.7 million. The increase in freight revenue relates to an increase in average freight revenue per tractor per week of 5.0% compared to 2014 and a $4.6 million increase in freight revenue contributed by our temperature-controlled intermodal service offering, as well as an increase in our average tractor fleet of 3.5% from 2014. The increase in average freight revenue per tractor per week is the result of a 5.7% increase, or 9.1 cents per mile, in average rate per total mile partially offset by a 0.6% decrease in average miles per unit when compared to 2014. Additionally, team driven units increased approximately 13.6% to an average of approximately 950 teams in 2015 compared to approximately 840 in 2014.
Our Truckload operating income was $20.0 million higher in 2015 than 2014 due to the abovementioned increase in freight revenue. Additionally, operating costs per mile, net of fuel surcharge revenue, decreased primarily due to reduced workers’ compensation expense and operations and maintenance expense partially offset by increased salaries, wages, and related expenses (which was primarily due to a higher percentage of our fleet being comprised of team-driven tractors, as well as driver and nondriver employee pay increases since the same 2014 period), increased net fuel expense, and increased capital costs.
Other total revenue increased $12.3 million in 2015 compared to 2014 and operating income increased $1.9 million for the same period. These improvements are primarily the result of additional peak season freight opportunities during the fourth quarter of 2015, improved coordination with our Truckload segment, and additional business from new customers added during the year.
The reduction in unallocated corporate overhead primarily includes $3.6 million in return of previously expensed insurance premiums for the commutation of our primary auto liability policy for the period of April 1, 2013, through September 30, 2014, and the $1.4 million reduction in fuel expense related to the ineffective fuel hedge contracts fulfilled in 2015 that were deemed to be ineffective on a prospective basis in 2014.
Comparison of Year Ended December 31, 2014 to Year Ended December 31, 2013
Our Truckload revenue increased $18.6 million, as freight revenue increased $23.8 million and fuel surcharge revenue decreased $5.2 million. The increase in freight revenue resulted largely from a more favorable rate and demand environment, reflected by an increase in average freight revenue per tractor per week of 10.7% compared to 2013, and a $4.1 million increase of freight revenue contributed from our temperature-controlled intermodal service, partially offset by a decrease in our average tractor fleet of 6.1% from 2013 as well as the first quarter challenges of the harsh winter weather and the unfavorable impact of the February 2014 implementation of our enterprise management system at our SRT subsidiary. Additionally, 5.1% of our fleet lacked drivers during 2014, compared with approximately 4.8% during 2013.
Our Truckload operating income was $26.4 million higher in 2014 than 2013 due to higher freight revenue per tractor per week, partially offset by $7.5 million of additional reserves related to a 2008 cargo claim. Additionally, net fuel costs were lower due to improved miles per gallon due to new engine technology, improved fuel surcharge recovery, and improved fuel pricing, in each case, net of gains and losses on fuel hedging contracts, partially offset by an increase in operating costs per mile net of surcharge revenue primarily due to higher wages and capital costs.
Other total revenue increased $15.8 million in 2014 compared to 2013 and operating income increased $2.6 million for the same period. These improvements are primarily the result of additional peak season freight opportunities during the fourth quarter of 2014, improved coordination with our Truckload segment, and additional business from new customers added during the year, partially offset by the discontinuation of an underperforming location in June of 2014.
The fluctuation in unallocated corporate overhead is primarily the result of increased incentive compensation, headcount, claims development above the subsidiaries' retention, and expense related to the ineffective fuel hedging contracts.
LIQUIDITY AND CAPITAL RESOURCES
Our business requires significant capital investments over the short-term and the long-term. Recently, we have financed our capital requirements with borrowings under our Credit Facility, cash flows from operations, long-term operating leases, capital leases, secured installment notes with finance companies, and proceeds from the sale of our used revenue equipment. We had working capital (total current assets less total current liabilities) of $46.4$47.9 million and $40.9$46.6 million at December 31, 20152016 and 2014,2015, respectively. Based on our expected financial condition, net capital expenditures, results of operations, related net cash flows, installment notes, and other sources of financing, we believe our working capital and sources of liquidity will be adequate to meet our current and projected needs and we do not expect to experience material liquidity constraints in the foreseeable future.
As of December 31, 2015,2016, we had $3.0$12.2 million of borrowings outstanding, undrawn letters of credit outstanding of approximately $31.4$27.2 million, and available borrowing capacity of $60.6$55.6 million under the Credit Facility. Fluctuations in the outstanding balance and related availability under our Credit Facility are driven primarily by cash flows from operations and the timing and nature of property and equipment additions that are not funded through notes payable, as well as the nature and timing of collection of accounts receivable, payments of accrued expenses, and receipt of proceeds from disposals of property and equipment.
With an average tractor fleet age of 1.71.8 years, we believe we have flexibility to manage our fleet and we plan to regularly evaluate our tractor replacement cycle, new tractor purchase requirements, and financing options.
Cash Flows
Net cash flows provided by operating activities were $102.4 million in 2016 compared with $85.5 million in 2015 compared with $73.7primarily due to the change in receivables and advances as a result of increased cash collected during 2016 related to increased 2015 year-end revenues, and the fluctuation in tax benefit/expense due to the reversal of deferred tax effects on amounts in other comprehensive income. This improvement is partially offset by net income of $16.8 million in 2014 primarily due2016 compared to net income of $42.1 million in 2015, compared to $17.8 million in 2014, an increase in depreciation and amortization increasing $9.6 million in 2016, primarily as the result of the reduced residual revenue equipment value projections due to more expensive revenuethe softened used equipment market and having more owned units, the 2014 insurance reserves increase2015 purchase of $7.5 million stemming from a cargo loss in 2008,our previously leased Chattanooga headquarters property, and the 2015 return of $5.0 million which wewas previously provided by us to certain of our derivative counterparties related to the net liability position of certain of itsour fuel derivative instruments. A portion of the net income fluctuation relates to a $3.6 million pre-tax reduction in insurance and claims expense recorded in the second quarter of 2015 associated with commuting two auto liability policies. The insurer did not remit the premium refund directly to the Company, but instead applied a credit to the current auto liability insurance policy, such that we recorded the policy release premium refund as a prepaid asset at June 30, 2015; however there was no corresponding cash flow effect. The cash flow effects are being realized over the 36 month term of the policy as the portion of the premiums covered by the credit would have been due absent the credit. These increases were partially offset by an increase in accounts receivable primarily related to increased year-over-year end-of-year seasonal freight revenue for our Truckload segment and for our Solutions subsidiary, including its accounts receivable factoring business. The fluctuations in cash flows from accounts payable and accrued expenses primarily related to the timing of payments on our accrued expenses and trade accounts in the 20152016 period compared to the 2014 period as well as increased incentive compensation accruals for achievement2015 period.
Net cash flows used inby investing activities were $47.3 million in 2016 compared with $147.7 million in 2015 compared with $84.62015. The $100.4 million in 2014. The $63.1 million increasedecrease in net investing activities was attributable primarily to the purchase of our corporate headquarters property in Chattanooga, Tennessee during August 2015 for approximately $35.5 million, as well as a $21.3$22.9 million increasedecrease in assets held for sale due to the timing of dispositions of used revenue equipment (most of which relates to 350 tractors under contract to be sold in the first quarter of 2016).equipment. During 20162017 we plan to take delivery of approximately 845485 new company tractors and dispose of approximately 800460 used tractors in addition to the 350 used tractors held for sale.tractors. This compares to the approximately 815650 new company tractors we took delivery of and the approximately 4501,074 used tractors we disposed of during 2016, including 365 recorded as assets held for sale at December 31, 2015. Going forward, cash flows from disposals of equipment could be more volatile given the weakness in the used tractor market.
Net cash flows used in financing activities were $51.9 million in 2016, compared with net cash flows provided by financing activities wereof $45.4 million in 2015 compared with $22.9 million2015. The change in 2014. The increasenet cash flows used in financing activities was attributableprimarily a function of net repayments of notes payable and the balance under our Credit Facility. These changes primarily relate to increased borrowing to fundthe trade cycle of our headquarters purchase, growth of accounts receivable, and stock repurchase as well asrevenue equipment, including the impact of deferring receipt of proceeds of 350 tractors held for sale partially offset bythat were under contract to be sold in the proceedsfirst quarter of 2016, and cash flows from investing and operating activities discussed above. Going forward, our 2014 followcash flows may fluctuate depending on the resolution of the 2008 cargo claim, future stock offering.repurchases, and the extent of future income tax obligations.
Material Debt Agreements
We and substantially all of our subsidiaries (collectively, the "Borrowers") are parties to a Third Amended and Restated Credit Facility (the "Credit Facility") with Bank of America, N.A., as agent (the "Agent") and JPMorgan Chase Bank, N.A. ("JPM," and together with the Agent, the "Lenders").
The Credit Facility is a $95.0 million revolving credit facility, with an uncommitted accordion feature that, so long as no event of default exists, allows us to request an increase in the revolving credit facility of up to $50.0 million, subject to Lender acceptance of the additional funding commitment. The Credit Facility includes, within our $95.0 million revolving credit facility, a letter of credit sub facility in an aggregate amount of $95.0 million and a swing line sub facility in an aggregate amount equal to the greater of $10.0 million or 10% of the Lenders' aggregate commitments under the Credit Facility from time-to-time.
In August 2015, we entered into an eleventh amendment to the Credit Facility, which, among other things, (i) amended the "Applicable Margin" to improve the interest rate grid, as set forth in the tables below, (ii) improved the unused line fee pricing to 0.25% per annum, retroactive to July 1, 2015 (previously the fee was 0.375% per annum when availability was less than $50.0 million and 0.5% per annum when availability was at or over such amount), (iii) required each of Driven Analytic Solutions, LLC ("DAS") and Covenant Properties, LLC ("CPI") to be joined to the Credit Agreement as guarantors, (iv) required each of DAS, CPI and Star Properties Exchange, LLC, a Tennessee limited liability company, to pledge certain of its assets as security, (v) contained conditional amendments increasing the borrowing base real estate sublimit and lowering the amortization of the real estate sublimit, (vi) made technical amendments to a variety of sections, including without limitation, permitted investments, permitted stock repurchases, permitted indebtedness, and permitted liens, (vii) consented to theour purchase of the Company'sour headquarters, including related financing, and (viii) extended the maturity date from September 2017 to September 2018. Following the effectiveness of the eleventh amendment, the applicable margin was changed as follows:
Level | Average Pricing Availability | Base Rate Loans | LIBOR Loans | L/C Fee |
I | > $40,000,000 | .50% | 1.50% | 1.50% |
II | ≤ $40,000,000 but > $20,000,000 | .75% | 1.75% | 1.75% |
III | ≤ $20,000,000 | 1.00% | 2.00% | 2.00% |
Level | Average Pricing Availability | Base Rate Loans | LIBOR Loans | L/C Fee |
I | > $75,000,000 | .50% | 1.50% | 1.50% |
II | ≤ $75,000,000 but > $50,000,000 | .75% | 1.75% | 1.75% |
III | ≤ $50,000,000 but > $25,000,000 | 1.00% | 2.00% | 2.00% |
IV | ≤ $25,000,000 | 1.25% | 2.25% | 2.25% |
In exchange for these amendments, we agreed to pay fees of $0.2 million. BasedIn 2016, we entered into the twelfth and thirteenth amendments to the Credit Facility, which among other things (i) increases the approved amount for share repurchases to $45.0 million, subject to certain limitations based on availability asthe available borrowing capacity under the Credit Facility, and (ii) permitted the formation of December 31, 2015, there was no fixed charge coverage requirement.Heritage Insurance, Inc., and substituted certain language to ensure the federal funds rate or LIBOR would not be less than zero.
Borrowings under the Credit Facility are classified as either "base rate loans" or "LIBOR loans." Base rate loans accrue interest at a base rate equal to the greater of the Agent’s prime rate, the federal funds rate plus 0.5%, or LIBOR plus 1.0%, plus an applicable margin ranging from 0.5% to 1.0%; while LIBOR loans accrue interest at LIBOR, plus an applicable margin ranging from 1.5% to 2.0%. The applicable rates are adjusted quarterly based on average pricing availability. The unused line fee is the product of 0.25% times the average daily amount by which the Lenders' aggregate revolving commitments under the Credit Facility exceed the outstanding principal amount of revolver loans and the aggregate undrawn amount of all outstanding letters of credit issued under the Credit Facility. The obligations under the Credit Facility are guaranteed by us and secured by a pledge of substantially all of our assets, with the notable exclusion of any real estate or revenue equipment pledged under other financing agreements, including revenue equipment installment notes and capital leases.
Borrowings under the Credit Facility are subject to a borrowing base limited to the lesser of (A) $95.0 million, minus the sum of the stated amount of all outstanding letters of credit; or (B) the sum of (i) 85% of eligible accounts receivable, plus (ii) the lesser of (a) 85% of the appraised net orderly liquidation value of eligible revenue equipment, (b) 95% of the net book value of eligible revenue equipment, or (c) 35% of the Lenders' aggregate revolving commitments under the Credit Facility, plus (iii) the lesser of (a) $25.0 million or (b) 65% of the appraised fair market value of eligible real estate. We had $3.0$12.2 million of borrowings outstanding under the Credit Facility as of December 31, 2015,2016, undrawn letters of credit outstanding of approximately $31.4$27.2 million, and available borrowing capacity of $60.6$55.6 million. The interest rate on outstanding borrowings as of December 31, 2016, was 2.3% on $9.0 million of base rate loans and 4.3% on $3.2 million of LIBOR loans. Based on availability as of December 31, 2016 and 2015, there was no fixed charge coverage requirement.
The Credit Facility includes usual and customary events of default for a facility of this nature and provides that, upon the occurrence and continuation of an event of default, payment of all amounts payable under the Credit Facility may be accelerated, and the Lenders' commitments may be terminated. If an event of default occurs under the Credit Facility and the Lenders cause all of the outstanding debt obligations under the Credit Facility to become due and payable, this could result in a default under other debt instruments that contain acceleration or cross-default provisions. The Credit Facility contains certain restrictions and covenants relating to, among other things, debt, dividends, liens, acquisitions and dispositions outside of the ordinary course of business, and affiliate transactions. Failure to comply with the covenants and restrictions set forth in the Credit Facility could result in an event of default.
Capital lease obligations are utilized to finance a portion of our revenue equipment and are entered into with certain finance companies who are not parties to our Credit Facility. The leases in effect at December 31, 20152016 terminate in January 20162017 through FebruaryDecember 2022 and contain guarantees of the residual value of the related equipment by us. As such, the residual guarantees are included in the related debt balance as a balloon payment at the end of the related term as well as included in the future minimum capital lease payments. These lease agreements require us to pay personal property taxes, maintenance, and operating expenses.
Pricing for the revenue equipment installment notes is quoted by the respective financial affiliates of our primary revenue equipment suppliers and other lenders at the funding of each group of equipment acquired and include fixed annual rates for new equipment under retail installment contracts. The notes included in the funding are due in monthly installments with final maturities at various dates ranging from January 20162017 to January 2022. The notes contain certain requirements regarding payment, insuring of collateral, and other matters, but do not have any financial or other material covenants or events of default except certain notes totaling $215.5$166.1 million are cross-defaulted with the Credit Facility. Additionally, a portioncertain of our fuel hedginghedge contracts totaling $27.3$3.6 million at December 31, 2015, is2016, are cross-defaulted with the Credit Facility. Additional borrowings from the financial affiliates of our primary revenue equipment suppliers and other lenders are expected to be available to fund new tractors expected to be delivered in 2016,2017, while any other property and equipment purchases, including trailers, are expected to be funded with a combination of available cash, notes, operating leases, capital leases, and/or from the Credit Facility.
In August 2015, we financed a portion of the purchase of our corporate headquarters, a maintenance facility, and certain surrounding property in Chattanooga, Tennessee by entering into a $28.0 million variable rate note with a third party lender. Concurrently with entering into the note, we entered into an interest rate swap to effectively fix the related interest rate to 4.2%. See Note 13 for further information about the interest rate swap.
Contractual Obligations and Commercial Commitments
The following table sets forth our contractual cash obligations and commitments as of December 31, 2015:2016:
Payments due by period: (in thousands) | | | | | | | | | | | | | | | | | | | | | | | Total | | | | | | | | | | | | | | | | | | | |
Revenue equipment and property installment notes, including interest (1) | | $ | 267,633 | | | $ | 47,605 | | | $ | 46,792 | | | $ | 63,195 | | | $ | 36,725 | | | $ | 35,995 | | | $ | 37,321 | | | $ | 207,687 | | | $ | 31,087 | | | $ | 32,643 | | | $ | 33,010 | | | $ | 60,892 | | | $ | 15,352 | | | $ | 34,703 | |
Operating leases (2) | | $ | 17,867 | | | $ | 8,430 | | | $ | 5,489 | | | $ | 2,887 | | | $ | 995 | | | $ | 66 | | | $ | - | | | $ | 17,456 | | | $ | 7,135 | | | $ | 6,047 | | | $ | 3,844 | | | $ | 430 | | | $ | - | | | $ | - | |
Capital leases (3) | | $ | 16,227 | | | $ | 4,485 | | | $ | 1,656 | | | $ | 1,656 | | | $ | 1,656 | | | $ | 3,878 | | | $ | 2,896 | | | $ | 24,526 | | | $ | 3,062 | | | $ | 3,062 | | | $ | 3,062 | | | $ | 5,284 | | | $ | 6,508 | | | $ | 3,548 | |
Lease residual value guarantees | | $ | 3,968 | | | $ | - | | | $ | - | | | $ | - | | | $ | 2,961 | | | $ | 1,007 | | | $ | - | | | $ | 3,968 | | | $ | - | | | $ | 2,961 | | | $ | 1,007 | | | $ | - | | | $ | - | | | $ | - | |
Purchase obligations (4) | | $ | 145,584 | | | $ | 145,584 | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 86,549 | | | $ | 86,549 | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
Total contractual cash obligations (5) | | $ | 451,279 | | | $ | 206,104 | | | $ | 53,937 | | | $ | 67,738 | | | $ | 42,337 | | | $ | 40,946 | | | $ | 40,217 | | | $ | 340,186 | | | $ | 127,833 | | | $ | 44,713 | | | $ | 40,923 | | | $ | 66,606 | | | $ | 21,860 | | | $ | 38,251 | |
(1) | Represents principal and interest payments owed at December 31, 2015.2016. The borrowings consist of installment notes with finance companies, with fixed borrowing amounts and fixed interest rates, except for a variable rate real estate note, for which the interest rate is effectively fixed through an interest rate swap. The table assumes these installment notes are held to maturity. Refer to Note 7, "Debt" of the accompanying consolidated financial statements for further information. |
(2) | Represents future monthly rental payment obligations under operating leases for tractors, trailers, and terminal properties, and computer and office equipment. Substantially all lease agreements for revenue equipment have fixed payment terms based on the passage of time. The tractor lease agreements generally stipulate maximum miles and provide for mileage penalties for excess miles. These leases generally run for a period of three to five years for tractors and five to seven years for trailers. Refer to Note 8, "Leases" of the accompanying consolidated financial statements for further information. |
(3) | Represents principal and interest payments owed at December 31, 2015.2016. The borrowings consist of capital leases with one finance company, with fixed borrowing amounts and fixed interest rates. Borrowings in 20162017 and thereafter include the residual value guarantees on the related equipment as balloon payments. Refer to Note 7, "Debt" of the accompanying consolidated financial statements for further information. |
(4) | Represents purchase obligations for revenue equipment totaling approximately $145.6$86.5 million in 2016. These commitments are cancelable, subject to certain adjustments in the underlying obligations and benefits. These purchase commitments are expected to be financed by operating leases, capital leases, long-term debt, proceeds from sales of existing equipment, and/or cash flows from operations. Refer to Notes 7 and 8, "Debt" and "Leases," respectively, of the accompanying consolidated financial statements for further information. |
(5) | Excludes any amounts accrued for unrecognized tax benefits as we are unable to reasonably predict the ultimate amount or timing of settlement of such unrecognized tax benefits. |
Off-Balance Sheet Arrangements
Operating leases are an important source of financing for our revenue equipment and certain real estate. At December 31, 2015,2016, we had financed 115135 tractors and 2,2391,695 trailers under operating leases. Vehicles held under operating leases are not carried on our consolidated balance sheets, and lease payments, in respect of such vehicles, are reflected in our consolidated statements of operations in the line item "Revenue equipment rentals and purchased transportation." Our revenue equipment rental expense was $10.6 million in 2016, compared with $12.4 million in 2015, compared with $21.0 million in 2014, primarily due to repayments of debt and leases with proceeds from our follow-on stock offering in late November 2014.2015. The total value of remaining payments under operating leases as of December 31, 2015,2016, was approximately $17.7$17.5 million. In connection with various operating leases, we issued residual value guarantees, which provide that if we do not purchase the leased equipment from the lessor at the end of the lease term, we are liable to the lessor for an amount equal to the shortage (if any) between the proceeds from the sale of the equipment and an agreed value. The residual guarantees expire between August 2018 and February 2019 and had an undiscounted value of approximately $4.0 million at December 31, 2015.2016. The discounted present value of the total remaining lease payments and residual value guarantees were approximately $18.6$18.7 million ofat December 31, 2015.2016. We expect our residual guarantees to approximate the market value at the end of the lease term. We believe that proceeds from the sale of equipment under operating leases would equal or 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 U.S. requires us to make decisions based upon estimates, assumptions, and factors we consider as relevant to the circumstances. Such decisions include the selection of applicable accounting principles and the use of judgment in their application, the results of which impact reported amounts and disclosures. Changes in future economic conditions or other business circumstances may affect the outcomes of our estimates and assumptions. Accordingly, actual results could differ from those anticipated. A summary of the significant accounting policies followed in preparation of the financial statements is contained in Note 1, "Summary of Significant Accounting Policies," of the consolidated financial statements attached hereto. The following discussion addresses our most critical accounting policies, which are those that are both important to the portrayal of our financial condition and results of operations and that require significant judgment or use of complex estimates.
Revenue Recognition
Revenue, drivers' wages, and other direct operating expenses generated by our Truckload reportable segment are recognized on the date shipments are delivered to the customer. Revenue includes transportation revenue, fuel surcharges, loading and unloading activities, equipment detention, and other accessorial services.
Revenue generated by our Solutions subsidiary is recognized upon completion of the services provided. Revenue is recorded on a gross basis, without deducting third party purchased transportation costs, as we act as a principal with substantial risks as primary obligor, except for transactions whereby equipment from our Truckload segment perform the related services, which we record on a net basis in accordance with the related authoritative guidance. Solutions revenue includes $2.6 million, $2.4 million, $2.3 million, and $1.7$2.3 million of revenue in 2016, 2015, 2014, and 2013,2014, respectively, related to an accounts receivable factoring business started in 2013 to supplement several aspects of our non-asset operations.business. Revenue for this business is recognized on a net basis, given we are acting as an agent and are not the primary obligor in these transactions.
Depreciation of Revenue Equipment
Property and equipment is stated at cost less accumulated depreciation. Depreciation for book purposes is determined using the straight-line method over the estimated useful lives of the assets, while depreciation for tax purposes is generally recorded using an accelerated method. Depreciation of revenue equipment is our largest item of depreciation. We generally depreciate new tractors (excluding day cabs) over five years to salvage values of approximately 25%15% of their cost and new trailers over sixseven years for refrigerated trailers and ten years for dry van trailers to salvage values of approximately 38%25% of their cost. We annually review the reasonableness of our estimates regarding useful lives and salvage values of our revenue equipment and other long-lived assets based upon, among other things, our experience with similar assets, conditions in the used revenue equipment market, and prevailing industry practice. Over the past several years, the price of new tractors has risen dramatically and there has been significant volatility in the used equipment market. As a result of the progressive decline in the market value of used tractors and our expectations that used tractor prices will not rebound in the near term, effective July 1, 2016 we reduced the salvage values on our tractors and, thus, prospectively increased depreciation expense. Estimates around the salvage values and useful lives for trailers remain unchanged. The impact in the third and fourth quarters of 2016 is approximately $2.0 million of additional depreciation expense per quarter or approximately $1.2 million per quarter net of tax, which represents approximately $0.06 per common or diluted share. Based on the prospective nature of this change, we expect depreciation and expense, including gains and losses, to approximate those levels of the third and fourth quarters of 2016. Changes in the useful life or salvage value estimates, or fluctuations in market values that are not reflected in our estimates, could have a material effect on our results of operations. Gains and losses on the disposal of revenue equipment are included in depreciation expense in the consolidated statements of operations.
In 2016 we had a net loss on revenue equipment of $0.8 million, and in 2015 2014, and 2013,2014 we generated net gains on revenue equipment, including assets held for sale, of $0.6 million $2.7 million, and $0.8$2.7 million, respectively. We review salvage values of our revenue equipment annually and make adjustments periodically, based on trends in the used equipment market, to reflect updated estimates of fair value at disposal.
We lease certain revenue equipment under capital leases with terms of approximately 60 to 84 months. Amortization of leased assets is included in depreciation and amortization expense.
Pursuant to applicable accounting standards, revenue equipment and other long-lived assets are tested for impairment whenever an event occurs that indicates impairment may exist. Expected future cash flows are used to analyze whether an impairment has occurred. If the sum of expected undiscounted cash flows is less than the carrying value of the long-lived asset, then an impairment loss is recognized. We measure the impairment loss by comparing the fair value of the asset to its carrying value. Fair value is determined based on a discounted cash flow analysis or the appraised value of the assets, as appropriate.
Although a portion of our tractors are protected by non-binding indicative trade-in values or binding trade-back agreements with the manufacturers, some tractors and substantially all of our owned trailers continue to be subject to fluctuations in market prices for used revenue equipment. Moreover, our trade-back agreements are contingent upon reaching acceptable terms for the purchase of new equipment. Further declines in the price of used revenue equipment or failure to reach agreement for the purchase of new tractors with the manufacturers issuing trade-back agreements could result in impairment of, or losses on the sale of, revenue equipment. Historically, only a de minimus percentage of our equipment has been sold back to the dealers pursuant to the trade back agreements as we have generally found that market prices exceeded the trade back allowances, although in recent years, trade back allowances have increased as a result of the increasing cost of the underlying equipment.
Assets Held For Sale
Assets held for sale include property and revenue equipment no longer utilized in continuing operations which are available and held for sale. Assets held for sale are no longer subject to depreciation, and are recorded at the lower of depreciated book value or fair market value less selling costs. We periodically review the carrying value of these assets for possible impairment. We expect to sell these assets within twelve months.
Goodwill and Other Intangible Assets
We classify intangible assets into two categories: (i) intangible assets with definite lives subject to amortization and (ii) goodwill. We have no goodwill on our consolidated balance sheet for the years ended December 31, 20152016 and 2014.2015. We test intangible assets with definite lives for impairment if conditions exist that indicate the carrying value may not be recoverable. Such conditions may include an economic downturn in a geographic market or a change in the assessment of future operations. We record an impairment charge when the carrying value of the definite lived intangible asset is not recoverable by the cash flows generated from the use of the asset.
We determine the useful lives of our identifiable intangible assets after considering the specific facts and circumstances related to each intangible asset. Factors we consider when determining useful lives include the contractual term of any agreement, the history of the asset, our long-term strategy for the use of the asset, any laws or other local regulations which could impact the useful life of the asset, and other economic factors, including competition and specific market conditions. Intangible assets that are deemed to have definite lives are amortized, generally on a straight-line basis, over their useful lives, ranging from 4 to 20 years. We have no identifiable intangible assets on our consolidated balance sheet at December 31, 2016, and $0.2 million at December 31, 2015, which was recorded in other assets.
Insurance and Other Claims
The primary claims arising against us consist of auto liability (personal injury and property damage), workers' compensation, cargo, commercial liability, and employee medical expenses. Our insurance program involves self-insurance with the following risk retention levels (before giving effect to any commutation of an auto liability policy):
| ● | auto liability - $1.0 million |
| ● | workers' compensation - $1.3 million |
| ● | cargo - $0.3 million |
| ● | employee medical - $0.4 million |
| ● | physical damage - 100% |
Due to our significant self-insured retention amounts, we have exposure to fluctuations in the number and severity of claims and to variations between our estimated and actual ultimate payouts. We accrue the estimated cost of the uninsured portion of pending claims and an estimate for allocated loss adjustment expenses including legal and other direct costs associated with a claim. Estimates require judgments concerning the nature and severity of the claim, historical trends, advice from third-party administrators and insurers, the size of any potential damage award based on factors such as the specific facts of individual cases, the jurisdictions involved, the prospect of punitive damages, future medical costs, and inflation estimates of future claims development, and the legal and other costs to settle or defend the claims. We have significant exposure to fluctuations in the number and severity of claims. If there is an increase in the frequency and severity of claims, or we are required to accrue or pay additional amounts if the claims prove to be more severe than originally assessed, or any of the claims would exceed the limits of our insurance coverage, our profitability could be adversely affected.
In addition to estimates within our self-insured retention layers, we also must make judgments concerning claims where we have third party insurance and for claims outside our coverage limits. Upon settling claims and expenses associated with claims where we have third party coverage, we are generally required to initially fund payment to the claimant and seek reimbursement from the insurer. Receivables from insurers for claims and expenses we have paid on behalf of insurers were $0.7 million and $0.1 million or less at December 31, 20152016 and 2014,2015, respectively, and are included in drivers' advances and other receivables on our consolidated balance sheet. Additionally, we accrue claims above our self-insured retention and record a corresponding receivable for amounts we expect to collect from insurers upon settlement of such claims. We have less than $0.1 million and $0.6 million at December 31, 20152016 and 2014,2015, respectively, as a receivable in other assets and as a corresponding accrual in the long-term portion of insurance and claims accruals on our consolidated balance sheet for claims above our self-insured retention for which we believe it is reasonably assured that the insurers will provide their portion of such claims. We evaluate collectability of the receivables based on the credit worthiness and surplus of the insurers, along with our prior experience and contractual terms with each. If any claim occurrence were to exceed our aggregate coverage limits, we would have to accrue for the excess amount. Our critical estimates include evaluating whether a claim may exceed such limits and, if so, by how much. If one or more claims were to exceed our then effective coverage limits, our financial condition and results of operations could be materially and adversely affected.
We also make judgementsjudgments regarding the ultimate benefit versus risk to commuting certain periods within our auto liability policy. If we commute a policy, we assume 100% risk for covered claims in exchange for a policy refund. In April 2015, we commuted two liability policies for the period from April 1, 2013 through September 30, 2014, such that we are now responsible for any claim that occurred during that period up to $20.0 million, should such a claim develop. We recorded a $3.6 million reduction in insurance and claims expense in the second quarter of 2015 related to the commutation. The insurer did not remit the premium refund directly to the Company, but rather applied a credit to the current auto liability insurance policy, such that we recorded the policy release premium refund as a prepaid asset at June 30, 2015.
Effective April 2015, we entered into new auto liability policies with a three-year term. As a result of the commutation and the Company’s improved safety statistics over the prior policy, the Company received favorable premium pricing for the upcoming three year policy period, which we expect will reduce the fixed portion of insurance expense going forward.
Effective April 2015, we entered into a new auto liability policies with a three-year term.during such period. The policy includes a limit for a single loss of $9.0 million, an aggregate of $18.0 million for each policy year, and a $30.0 million aggregate for the three-year period ended March 31, 2018. The policy includes a policy release premium refund of up to $14.7$13.6 million, less any future amounts paid on claims by the insurer, from October 1, 2014 through March 31, 2018, if we were to commute the policy for the entire three years. A decision with respect to commutation of the policy cannot be made before April 1, 2018, unless both we and the insurance carrier agree to a commutation prior to the end of the policy term. Management cannot predict whether or not future claims or the development of existing claims will justify a commutation, and accordingly, no related amounts were recorded at December 31, 2015.2016.
If claims development factors that are based upon historical experience change by 10%, our claims accrual as of December 31, 2015,2016, would change by approximately $3.9$1.1 million.
Lease Accounting and Off-Balance Sheet Transactions
We issue residual value guarantees in connection with the operating leases we enter into for certain of our revenue equipment. These leases provide that if we do not purchase the leased equipment from the lessor at the end of the lease term, then we are liable to the lessor for an amount equal to the shortage (if any) between the proceeds from the sale of the equipment and an agreed value. To the extent the expected value at the lease termination date is lower than the residual value guarantee, we would accrue for the difference over the remaining lease term. We believe that proceeds from the sale of equipment under operating leases would equal or exceed the payment obligation on substantially all operating leases. The estimated values at lease termination involve management judgments. As leases are entered into, determination as to the classification as an operating or capital lease involves management judgments on residual values and useful lives.
Accounting for Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We believe the future tax deductions will be realized principally through future reversals of existing taxable temporary differences and future taxable income, except for when a valuation allowance has been provided.
In the ordinary course of business there is inherent uncertainty in quantifying our income tax positions. We assess our income tax positions and record tax benefits for all years subject to examination based upon management's evaluation of the facts, circumstances, and information available at the reporting dates. For those tax positions where it is more likely than not that a tax benefit will be sustained, we have recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. Potential accrued interest and penalties related to unrecognized tax benefits are recognized as a component of income tax expense.
Stock-Based Employee Compensation
We issue several types of stock-based compensation, including awards that vest based on service and performance conditions or a combination of the conditions. Performance-based awards vest contingent upon meeting certain performance criteria established by the Compensation Committee. All awards require future service and thus forfeitures are estimated based on historical forfeitures and the remaining term until the related award vests. For performance-based awards, determining the appropriate amount to expense in each period is based on likelihood and timing of achieving the stated targets and requires judgment, including forecasting future financial results. The estimates are revised periodically based on the probability and timing of achieving the required performance targets and adjustments are made as appropriate. Awards that are only subject to time vesting provisions are amortized using the straight-line method.
Fair Value of Financial Instruments
Our financial instruments consist primarily of cash and cash equivalents, accounts receivable, commodity contracts, accounts payable, debt, and an interest rate swap.swaps. The carrying amount of cash and cash equivalents, accounts receivable, accounts payable, and current debt approximates their fair value because of the short-term maturity of these instruments. The carrying value of the factored receivables approximates the fair value, as the receivables are generally repaid directly to us by the client's customer within 30-40 days due to the combination of the short-term nature of the financing transaction and the underlying quality of the receivables. Interest rates that are currently available to us for issuance of long-term debt with similar terms and remaining maturities are used to estimate the fair value of our long-term debt, which primarily consists of revenue equipment installment notes. The fair value of our revenue equipment installment notes approximated the carrying value at December 31, 2015,2016, as the weighted average interest rate on these notes approximates the market rate for similar debt. Borrowings under our revolving Credit Facility approximate fair value due to the variable interest rate on the facility. Additionally, commodity contracts, which are accounted for as hedge derivatives, as discussed in Note 13, are valued based on the forward rate of the specific indices upon which the contract is being settled and adjusted for counterparty credit risk using available market information and valuation methodologies.methodologies. The fair value of our interest rate swap agreementagreements is determined using the market-standard methodology of netting the discounted future fixed-cash payments and the discounted expected variable-cash receipts. The variable-cash receipts are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. These analyses reflect the contractual terms of the swap, including the period to maturity, and use observable market-based inputs, including interest rate curves and implied volatilities. The fair value calculation also includes an amount for risk of non-performance of our counterparties using "significant unobservable inputs" such as estimates of current credit spreads to evaluate the likelihood of default, which we have determined to be insignificant to the overall fair value of our interest rate swap agreement.agreements.
Derivative Instruments and Hedging Activities
We periodically utilize derivative instruments to manage exposure to changes in fuel prices and in interest rates. At inception of a derivative contract, we document relationships between derivative instruments and hedged items, as well as our risk-management objective and strategy for undertaking various derivative transactions, and assess hedge effectiveness. We record derivative financial instruments in the balance sheet as either an asset or liability at fair value. If it is determined that a derivative is not highly effective as a hedge, or if a derivative ceases to be a highly effective hedge, we discontinue hedge accounting prospectively. The effective portion of changes in the fair value of derivatives are recorded in other comprehensive income and reclassified into earnings in the same period during which the hedged transaction affects earnings. The ineffective portion is recorded in other income or expense.
Recent Accounting Pronouncements
Accounting Standards adopted
On November 20, 2015, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2015-17. This standard requires companies to classify all deferred tax assets and liabilities as noncurrent on the balance sheet instead of separating deferred taxes into current and noncurrent amounts. This ASU is effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2016, with early adoption permitted. The Company has elected to early adopt this standard effective December 31, 2015, on a retrospective basis and reclassified $14.7 from net current deferred income tax assets to a reduction of net deferred income tax liabilities as of December 31, 2014.
Accounting Standards not yet adopted
On May 28, 2014, the Financial Accounting Standards Board and the International Accounting Standards Board issued converged guidance on recognizing revenue in contracts with customers. The new guidance establishes a single core principle in the ASU No. 2014-09, which is the recognition of revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance will affect any reporting organization that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial assets. In August 2015, ASU 2015-14 was issued which deferred the effective date of ASU 2014-09 to fiscal years, and interim periods within those years, beginning on or after December 15, 2017, with early adoption permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is continuing to evaluate the new guidance and plans to provide additional information about its expected financial impact at a future date.
On August 27, 2014, the Financial Accounting Standards Board issued ASU No. 2014-15. This standard provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity's ability to continue as a going concern within one year of the date the financial statements are issued. This ASU is effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2016, with early adoption permitted. The Company is evaluating the new guidance and plans to provide additional information about its expected impact at a future date.
In April 2015, the Financial Accounting Standards Board ("FASB") issued ASU 2015-03, and in August 2015, issued ASU 2015-15. 2015-15. These ASUs require debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt consistent with debt discounts. The presentation and subsequent measurement of debt issuance costs associated with lines of credit, may be presented as an asset and amortized ratably over the term of the line of credit arrangement, regardless of whether there are outstanding borrowings on the arrangement. The recognition and measurement guidance for debt issuance costs are not affected by these ASUs. These ASUs are effective for financial statements issued for fiscal years beginning after December 15, 2015 and interim periods within those years with early adoptingadoption permitted. The Company will adoptWe have adopted this standard for the fiscal year 2016. Adoption
In March 2016, the FASB issued ASU 2016-09, which changes the accounting for certain aspects of share-based payments to employees. The guidance requires the recognition of the income tax effects of awards in the income statement when the awards vest or are settled, thus eliminating additional paid-in-capital pools. The guidance also allows for the employer to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting. In addition, the guidance is effective in 2017 with early adoption permitted. We have adopted this standard effective for the fiscal year 2016 resulting in the recording of $2.2 million to retained earnings as of the beginning of 2016, and $1.1 million of additional income tax benefit in 2016 as a result of previously unrecognized tax benefits resulting from our net operating loss carryovers. The statement of cash flows has not been adjusted for prior periods, as we have adopted the statement of cash flow guidance prospectively.
Accounting Standards not yet adopted
In April 2015, the FASB issued ASU 2015-14, which defers the effective date of ASU 2014-09. The new standard introduces a five-step model to determine when and how revenue is recognized. The premise of the new model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard will be effective for the Company for its annual reporting period beginning January 1, 2018, including interim periods within that reporting period. Early application is permitted for annual periods beginning January 1, 2017. Entities are allowed to transition to the new standard by either recasting prior periods or recognizing the cumulative effect. We are in the process of evaluating the new standard, but we believe our revenue recognized under the new standard will generally approximate revenue under current standards and, while we expect an impact to both revenue and certain variable expenses as a result of the adoption, we expect that the net impact to equity or earnings on a prospective basis will not be material. We plan to complete our evaluation in 2017, including an assessment of the new expanded disclosure requirements and a final determination of the transition method we will use to adopt the new standard.
In February 2016, the FASB issued ASU 2016-02, which requires lessees to recognize a right-to-use asset and a lease obligation for all leases. Lessees are permitted to make an accounting policy election to not recognize an asset and liability for leases with a term of twelve months or less. Lessor accounting under the new standard is substantially unchanged. Additional qualitative and quantitative disclosures, including significant judgments made by management, will be required. This new standard will become effective for us in our annual reporting period beginning January 1, 2019, including interim periods within that reporting period and requires a modified retrospective transition approach. We are currently evaluating the impacts the adoption of this standard will result inhave on the reclassification of approximately $0.7 million from other assets to long-term notes payable as of December 31, 2015.consolidated financial statements.
INFLATION, NEW EMISSIONS CONTROL REGULATIONS, AND FUEL COSTS
Most of our operating expenses are inflation-sensitive, with inflation generally producing increased costs of operations. During the past fourfive years, the most significant effects of inflation have been on revenue equipment prices and the related depreciation, health care, prices,and driver wages, and fuel prices.non-driver wages. New emissions control regulations and increases in wages of manufacturing workers and other items have resulted in higher tractor prices.prices, while the decline in the market value of used equipment significantly reduced the residual values of units in fiscal 2015 and 2016. The cost of fuel has been extremely volatile over the last several years, with costs decreasing significantly in both 20152016 and 20142015 after trending upward in 2013, 2012, and 2010 following a reprieve in 2009 from the record high prices in 2008.through 2014. We believe at least some of this volatility reflects the fluctuations in the U.S. dollar and global demand for petroleum products, unrest in certain oil-producing countries, improved fuel efficiency due to technological advancements, and an increase in domestic supply. We have attempted to limit the effects of inflation through certain cost control efforts and limiting the effects of fuel prices through fuel surcharges. Fluctuations in the price or availability of fuel, as well as hedging activities, surcharge collection, the percentage of freight we obtain through brokers, and the volume and terms of diesel fuel purchase commitments may increase our costs of operation, which could materially and adversely affect our profitability. Health care prices have increased faster than general inflation, primarily due to the rapid increase in prescription drug costs and affect us through premium payments andmore people on our self-insured retention.health plan in order to comply with the individual healthcare mandate. The nationwide shortage of qualified drivers has caused us to raise driver wages per mile at a rate faster than general inflation for the past threefour years, and this trend may continue as additional government regulations constrain industry capacity. Additionally, competition and the related cost to employ non-drivers have increased, especially for the more skilled or technical positions, including mechanics, those with information technology related skills, and degreed professionals.
SEASONALITY
Over the past three years, we have experienced marked surges in business and profitability during the fourth quarter holiday season, due to our team drivers and customer base. After this surge, revenue generally decreases as customers reduce shipments following the 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 physical damage equipment repairs. For the reasons stated, first quarter results historically have been lower than results in each of the other three quarters of the year, excluding charges.
In recent years, we have seen the duration of the fourth quarter holiday "peak" season become compressed as consumers have come to expect shorter and shorter shipping times and our customers’ networks have adjusted accordingly. If this trend continues, our ability to take advantage of this surge in business and our fourth quarter profitability could be negatively affected. ITEM 7A. 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We experience various market risks, including changes in interest rates and fuel prices. We do not enter into derivatives or other financial instruments for trading or speculative purposes, or when there are no underlying related exposures. Because our operations are mostly confined to the United States, we are not subject to a material amount of foreign currency risk.
COMMODITY PRICE RISK
We engage in activities that expose us to market risks, including the effects of changes in fuel prices and in interest rates. Financial exposures are evaluated as an integral part of our risk management program, which seeks, from time-to-time, to reduce the potentially adverse effects that the volatility of fuel markets and interest rate risk may have on operating results.
In an effort to seek to reduce the variability of the ultimate cash flows associated with fluctuations in diesel fuel prices, we periodically enter into various derivative instruments, including forward futures swap contracts (which we refer to as "fuel hedging contracts"). Historically diesel fuel has not been a traded commodity on the futures market so heating oil has been used as a substitute, as prices for both generally move in similar directions. Recently, however, we have been able to enter into hedging contracts with respect to both heating oil and ultra-low sulfur diesel ("ULSD").ULSD. Under these contracts, we pay a fixed rate per gallon of heating oil or ULSD and receive the monthly average price of New York heating oil per the New York Mercantile Exchange ("NYMEX")NYMEX and Gulf Coast ULSD, respectively. The retrospective and prospective regression analyses provided that changes in the prices of diesel fuel and heating oil and diesel fuel and ULSD were each deemed to be highly effective based on the relevant authoritative guidance except for a small portion of our hedging contracts, which we determined to be ineffective on a prospective basis.basis in 2014 and 2015. Consequently, we recognized approximatelya reduction in fuel expense of $1.4 million reduction and $1.4 million of additional fuel expense in 2015 and 2014, respectively to mark the related liability to market. At December 31, 2016 and 2015, there were no remaining ineffective fuel hedge contracts and, thus, all remaining fuel hedge contracts continue to qualify as cash flow hedges. We do not engage in speculative transactions, nor do we hold or issue financial instruments for trading purposes.
A one dollar increase or decrease in the price of heating oil or diesel per gallon would have a de minimis impact todecrease our net income due to our fuel surcharge recovery and existing fuel hedging contracts.by $1.3 million. This sensitivity analysis considers that we expect to purchase approximately 49.045.6 million gallons of diesel annually, with an assumed fuel surcharge recovery rate of 77.7%68.8% of the cost (which was our fuel surcharge recovery rate during the year ended December 31, 2015)2016). Assuming our fuel surcharge recovery is consistent, this leaves 10.914.2 million gallons that are not covered by the natural hedge created by our fuel surcharges. Because the majority of our fuel hedging contracts were established prior to the recent decline in diesel fuel prices, we have not been able to realize the cost savings resulting from such decline to the same extent we would have had we not entered into our hedging contracts.
INTEREST RATE RISK
In August 2015, we entered into an interest rate swap agreement with a notional amount of $28.0 million, which was designated as a hedge against the variability in future interest payments due on the debt associated with the purchase of our corporate headquarters. The terms of the swap agreement effectively convert the variable rate interest payments on this note to a fixed rate of 4.2% through maturity on August 1, 2035. In 2016, we also entered into several other interest rate swaps, which were designated to hedge against the variability in future interest rate payments due on rent associated with the purchase of certain trailers. Because the critical terms of the swap and hedged item coincide, in accordance with the requirements of ASC 815, the change in the fair value of the derivative is expected to exactly offset changes in the expected cash flows due to fluctuations in the LIBOR rate over the term of the debt instrument, and therefore no ongoing assessment of effectiveness is required. The fair value of the swap agreementagreements that waswere in effect at December 31, 2016 and 2015, of approximately $0.7 million and $1.1 million, respectively, is included in other liabilities in the consolidated balance sheet, and is included in accumulated other comprehensive loss, net of tax. Additionally, $0.6 million and $0.3 million was reclassified from accumulated other comprehensive loss into our results of operations as additional interest expense for the year ended December 31, 2016 and 2015, respectively, related to changes in interest rates during such periods. Based on the amounts in accumulated other comprehensive loss as of December 31, 2015,2016, we expect to reclassify losses of approximately $0.3 million, net of tax, on derivative instruments from accumulated other comprehensive loss into our results of operations during the next twelve months due to changes in interest rates. The amounts actually realized will depend on the fair values as of the date of settlement.
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. Of our total $250.7$215.8 million of debt and capital leases, we had $34.3$48.7 million of variable rate debt outstanding at December 31, 2015,2016, including both our Credit Facility, and a real-estate note and certain equipment notes, of which $27.7the real-estate note of $26.8 million was hedged with the aforementioned interest rate swap agreement noted above at 4.2%. At December 31, 2014, and certain of our total $202.3equipment notes totaling $6.4 million were hedged at a weighted average interest rate of debt, we had $3.4 million of variable rate debt outstanding, including our Credit Facility and a real-estate note. The interest rates applicable to these agreements are based on either the prime rate or LIBOR.1.7%. Our earnings would be affected by changes in these short-term interest rates. Risk can be quantified by measuring the financial impact of a near-term adverse increase in short-term interest rates. At our December 31, 20152016 level of borrowing, a 1% increase in our applicable rate would reduce annual net income by less than $0.1 million. Our remaining debt is fixed rate debt, and therefore changes in market interest rates do not directly impact our interest expense.
ITEM 8. 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of Covenant Transportation Group, Inc. and subsidiaries, including the consolidated balance sheets as of December 31, 20152016 and 2014,2015, and the related statements of operations, statements of comprehensive income, statements of stockholders' equity, and statements of cash flows for each of the years in the three-year period ended December 31, 2015,2016, together with the related notes, and the report of KPMG LLP, our independent registered public accounting firm as of December 31, 20152016 and 2014,2015, and for each of the years in the three year period ended December 31, 20152016 are set forth at pages 6165 through 8992 elsewhere in this report.
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There has been no change in or disagreement with accountants on accounting or financial disclosure during our two most recent fiscal years.
ITEM 9A. 9A.CONTROLS AND PROCEDURES
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, 2015,2016, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) are effective at a reasonable assurance level 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 and that such information is accumulated and communicated to our management, including our Chief Executive Officer, as appropriate, to allow timely decisions regarding required disclosure.
Management's Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(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. |
We have confidence in our internal controls and procedures. Nevertheless, our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure procedures and controls or our internal controls will prevent all errors or intentional fraud. An internal control system, no matter how well-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of such internal controls are met. Further, the design of an internal control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. As a result of the inherent limitations in all internal control systems, no evaluation of controls can provide absolute assurance that all our control issues and instances of fraud, if any, have been detected.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2015.2016. Management based this assessment on the framework in the Internal Control- Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the TreadwayTread way Commission. Based on its assessment, management believes that, as of December 31, 2015,2016, our internal control over financial reporting is effective based on those criteria.
KPMG LLP, the independent registered public accounting firm who audited the Company's Consolidated Financial Statements included in this From 10-K, has issued a report on the Company's internal control over financial reporting which is included herein.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2015,2016, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. 9B.OTHER INFORMATION
On February 25, 2016, the Company ("Parent") and its direct and indirect wholly owned subsidiaries, Covenant Transport, Inc., a Tennessee corporation ("CTI"), CTG Leasing Company, a Nevada corporation ("CTGL"), Southern Refrigerated Transport, Inc., an Arkansas corporation ("SRT"), Covenant Asset Management, LLC, a Nevada limited liability company ("CAM"), Covenant Transport Solutions, Inc., a Nevada corporation ("CTS"), and Star Transportation, Inc., a Tennessee corporation ("ST", collectively with CAM, CTI, CTGL, SRT, and CTS, the "Borrowers" and individually a "Borrower"), Driven Analytic Solutions, LLC, a Nevada limited liability company ("DAS"), and Covenant Properties, LLC, a Nevada limited liability company ("CPI", collectively with Parent and DAS the "Guarantors" and individually a "Guarantor") entered into the Twelfth Amendment to Third Amended and Restated Credit Agreement (the "Twelfth Amendment") with Bank of America, N.A., as agent for the Lenders (in such capacity, the "Agent"), and JPMorgan Chase Bank, N.A. (together with the Agent, the "Lenders"), which amended that certain Third Amended and Restated Credit Agreement, dated September 23, 2008, by and among the Company, the Borrowers, the Agent, and the Lenders, as amended from time to time (the "Credit Agreement"). The Twelfth Amendment amended the Credit Agreement to permit up to $45.0 million of repurchases of our common stock between September 2008 and the September 2018 maturity of the Credit Agreement, provided that, after giving effect to the availability block and repurchases, availability at both of the repurchase date and for the average of the preceding 60 days is greater than the greater of 25% of the revolver commitment or $23.75 million.
The foregoing summary of the terms and conditions of the Twelfth Amendment does not purport to be complete and is qualified in its entirety by reference to the complete text of the Twelfth Amendment, a copy of which will be filed as an exhibit to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 2016.
None.
PART III
ITEM 10. 10.DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
We incorporate by reference the information respecting executive officers and directors set forth under the captions "Proposal 1 - Election of Directors", "Corporate Governance – Section 16(a) Beneficial Ownership Reporting Compliance", "Corporate Governance – Our Executive Officers", "Corporate Governance – Code of Conduct and Ethics", and "Corporate Governance – Committees of the Board of Directors – The Audit Committee" in our Proxy Statement for the 20162017 annual meeting of stockholders, which will be filed with the Securities and Exchange Commission in accordance with Rule 14a-6 promulgated under the Securities Exchange Act of 1934, as amended (the "Proxy Statement"); provided, that the section entitled "Corporate Governance – Committees of the Board of Directors – The Audit Committee – Report of the Audit Committee" contained in the Proxy Statement is not incorporated by reference.
ITEM 11. 11.EXECUTIVE COMPENSATION
We incorporate by reference the information set forth under the sections entitled "Executive Compensation", "Corporate Governance – Committees of the Board of Directors – The Compensation Committee – Compensation Committee Interlocks and Insider Participation", and "Corporate Governance – Committees of the Board of Directors – The Compensation Committee – Report of the Compensation Committee" in the Proxy Statement; provided, that the section entitled "Corporate Governance – Committees of the Board of Directors – The Compensation Committee – Report of the Compensation Committee" contained in the Proxy Statement is not incorporated by reference.
ITEM 12. 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table provides certain information, as of December 31, 2015,2016, 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
| | 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 eligible for future issuance under equity compensation plans (excluding securities reflected in column (a)) | | | 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 eligible for future issuance under equity compensation plans (excluding securities reflected in column (a)) | |
| | | | | | | | | | | (a) | | | (b) | | | (c) | |
Equity compensation plans approved by security holders | | | 2,500(1) 329,852 (2) | | | $ $ | 12.79 - | | | | - 734,150 | | | | 265,468 | (1) | | $ | - | | | | 619,427 | |
Equity compensation plans not approved by security holders | | | - | | | | - | | | | - | | | | | | | | | | | | | |
Total | | | 332,352 | | | $ | 12.79 | | | | 734,150 | | | | 265,468 | | | $ | - | | | | 619,427 | |
(1) | Stock options granted under our 2003 Incentive Plan. |
(2) | RestrictedRepresents unvested restricted shares granted under the 2006 Omnibus Incentive Plan, as amended. The weighted average stock price on the date of grant for outstanding restricted stock awards was $18.63, which is not reflected in column (b), because restricted stock awards do not have an exercise price. |
We incorporate by reference the information set forth under the section entitled "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement.
ITEM 13. 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
We incorporate by reference the information set forth under the sections entitled "Corporate Governance – Board of Directors and Its Committees" and "Certain Relationships and Related Transactions" in the Proxy Statement.
ITEM 14. 14.PRINCIPAL ACCOUNTING FEES AND SERVICES
We incorporate by reference the information set forth under the section entitled "Relationships with Independent Registered Public Accounting Firm – Principal Accountant Fees and Services" in the Proxy Statement.
PART IV
ITEM 15. 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) | 1. | Financial Statements. | |
| | | |
| | Our audited consolidated financial statements are set forth at the following pages of this report: | |
| | | 61 |
| | | 62 |
| | | 63 |
| | | 64 |
| | | 65 |
| | | 66 |
| | | 67 |
| | | 68 |
| | | 69 |
| | | 70 |
| | | 6771 |
| | | |
| 2. | Financial Statement Schedules. | |
| | | |
| | Financial statement schedules are not required because all required information is included in the financial statements or is not applicable. | |
| | | |
| 3. | Exhibits. | |
| | | |
| | The exhibits required to be filed by Item 601 of Regulation S-K are listed under paragraph (b) below and on the Exhibit Index appearing at the end of this report. Management contracts and compensatory plans or arrangements are indicated by an asterisk. |
| | | |
(b) | | Exhibits. | |
| | | |
| | The following exhibits are filed with this Form 10-K or incorporated by reference to the document set forth next to the exhibit listed below. | |
Exhibit Number | Reference | Description |
3.1 | | Amended and Restated Articles of Incorporation (Incorporated by reference to Exhibit 99.2 to the Company's Report on Form 8-K, filed May 29, 2007) |
3.2 | | Second Amended and Restated Bylaws (Incorporated by reference to Exhibit 3.2 to the Company's Form 10-Q, filed May 13, 2011) |
4.1 | | Amended and Restated Articles of Incorporation (Incorporated by reference to Exhibit 99.2 to the Company's Report on Form 8-K, filed May 29, 2007) |
4.2 | | Second Amended and Restated Bylaws (Incorporated by reference to Exhibit 3.2 to the Company's Form 10-Q, filed May 13, 2011) |
10.1 | * | Form of Indemnification Agreement between Covenant Transport, Inc. and each officer and director, effective May 1, 2004 (Incorporated by reference to Exhibit 10.2 to the Company's Form 10-Q, filed August 5, 2004) |
10.2 | * | Form of Restricted Stock Award Notice under the 2006 Omnibus Incentive Plan (Incorporated by reference to Exhibit 10.22 to the Company's Form 10-Q, filed August 9, 2006) |
10.3 | * | Form of Restricted Stock Special Award Notice under the 2006 Omnibus Incentive Plan (Incorporated by reference to Exhibit 10.23 to the Company's Form 10-Q, filed August 9, 2006) |
10.4 | * | Form of Incentive Stock Option Award Notice under the 2006 Omnibus Incentive Plan (Incorporated by reference to Exhibit 10.24 to the Company's Form 10-Q, filed August 9, 2006) |
10.5 | | Form of Lease Agreement (Open End) used in connection with Daimler Facility (Incorporated by reference to Exhibit 10.3 to the Company's Form 10-Q, filed August 11, 2008) |
10.6 | | Amendment to Lease Agreement (Open End) used in connection with Daimler Facility (Incorporated by reference to Exhibit 10.4 to the Company's Form 10-Q, filed August 11, 2008) |
10.7 | | Form of Direct Purchase Money Loan and Security Agreement used in connection with Daimler Facility (Incorporated by reference to Exhibit 10.5 to the Company's Form 10-Q, filed August 11, 2008) |
10.8 | | Amendment to Direct Purchase Money Loan and Security Agreement used in connection with Daimler Facility (Incorporated by reference to Exhibit 10.6 to the Company's Form 10-Q, filed August 11, 2008) |
10.9 | | Third Amended and Restated Credit Agreement, dated September 23, 2008, among Covenant Transportation Group, Inc., Covenant Transport, Inc., CTG Leasing Company, Covenant Asset Management, Inc., Southern Refrigerated Transport, Inc., Covenant Transport Solutions, Inc., Star Transportation, Inc., Bank of America, N.A., JPMorgan Chase Bank, N.A., and Textron Financial Corporation (Incorporated by reference to Exhibit 10.14 to the Company's Form 10-K, filed March 30, 2010) |
10.10 | * | Covenant Transportation Group, Inc. Third Amended and Restated 2006 Omnibus Incentive Plan (Incorporated by reference to Appendix A to the Company's Schedule 14A, filed April 19, 2013) |
10.11 | | Amendment No. 1 to Third Amended and Restated Credit Agreement, dated March 27, 2009, among Covenant Transportation Group, Inc., Covenant Transport, Inc., CTG Leasing Company, Covenant Asset Management, Inc., Southern Refrigerated Transport, Inc., Covenant Transport Solutions, Inc., Star Transportation, Inc., Bank of America, N.A., JPMorgan Chase Bank, N.A., and Textron Financial Corporation (Incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q, filed May 15, 2009) |
10.12 | | Second Amendment to Third Amended and Restated Credit Agreement, dated February 25, 2010, among Covenant Transportation Group, Inc., Covenant Transport, Inc., CTG Leasing Company, Covenant Asset Management, Inc., Southern Refrigerated Transport, Inc., Covenant Transport Solutions, Inc., Star Transportation, Inc., Bank of America, N.A., JPMorgan Chase Bank, N.A., and Textron Financial Corporation (Incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q, filed May 17, 2010) |
10.13 | | Third Amendment to Third Amended and Restated Credit Agreement, dated July 30, 2010, among Covenant Transportation Group, Inc., Covenant Transport, Inc., CTG Leasing Company, Covenant Asset Management, Inc., Southern Refrigerated Transport, Inc., Covenant Transport Solutions, Inc., Star Transportation, Inc., Bank of America, N.A., and JP Morgan Chase Bank, N.A. (Incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q, filed November 9, 2010) |
10.14 | | Fourth Amendment to Third Amended and Restated Credit Agreement, dated August 31, 2010, among Covenant Transportation Group, Inc., Covenant Transport, Inc., CTG Leasing Company, Covenant Asset Management, Inc., Southern Refrigerated Transport, Inc., Covenant Transport Solutions, Inc., Star Transportation, Inc., Bank of America, N.A., and JP Morgan Chase Bank, N.A. (Incorporated by reference to Exhibit 10.2 to the Company's Form 10-Q, filed November 9, 2010) |
10.15 | | Fifth Amendment to Third Amended and Restated Credit Agreement, dated September 1, 2011, among Covenant Transportation Group, Inc., Covenant Transport, Inc., CTG Leasing Company, Covenant Asset Management, Inc., Southern Refrigerated Transport, Inc., Covenant Transport Solutions, Inc., Star Transportation, Inc., Bank of America, N.A., and JP Morgan Chase Bank, N.A. (Incorporated by reference to Exhibit 10.1 to the Company's Report on Form 8-K, filed October 28, 2011) |
10.16 | | Sixth Amendment to Third Amended and Restated Credit Agreement, dated effective as of October 24, 2011, among Covenant Transportation Group, Inc., Covenant Transport, Inc., CTG Leasing Company, Covenant Asset Management, Inc., Southern Refrigerated Transport, Inc., Covenant Transport Solutions, Inc., Star Transportation, Inc., Bank of America, N.A., and JP Morgan Chase Bank, N.A. (Incorporated by reference to Exhibit 10.2 to the Company's Report on Form 8-K, filed October 28, 2011) |
10.17 | | Seventh Amendment to Third Amended and Restated Credit Agreement, dated effective as of March 29, 2012, among Covenant Transportation Group, Inc., Covenant Transport, Inc., CTG Leasing Company, Covenant Asset Management, Inc., Southern Refrigerated Transport, Inc., Covenant Transport Solutions, Inc., Star Transportation, Inc., Bank of America, N.A., and JP Morgan Chase Bank, N.A. (Incorporated by reference to Exhibit 10.1 to the Company's Report on Form 8-K, filed April 2, 2012) |
10.18 | | Eighth Amendment to Third Amended and Restated Credit Agreement, dated effective as of December 31, 2012, among Covenant Transportation Group, Inc., Covenant Transport, Inc., CTG Leasing Company, Covenant Asset Management, Inc., Southern Refrigerated Transport, Inc., Covenant Transport Solutions, Inc., Star Transportation, Inc., Bank of America, N.A., and JP Morgan Chase Bank, N.A. (Incorporated by reference to Exhibit 10.1 to the Company's Report on Form 8-K, filed January 31, 2013) |
10.19 | | Ninth Amendment to Third Amended and Restated Credit Agreement and Related Security Documents, dated effective as of August 6, 2014, among Covenant Transportation Group, Inc., Covenant Transport, Inc., CTG Leasing Company, Covenant Asset Management, Inc., Southern Refrigerated Transport, Inc., Covenant Transport Solutions, Inc., Star Transportation, Inc., Bank of America, N.A., and JPMorgan Chase Bank, N.A. (Incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q, filed November 13, 2014) |
10.20 | | Tenth Amendment to Third Amended and Restated Credit Agreement and Related Security Documents, dated effective as of September 8, 2014, among Covenant Transportation Group, Inc., Covenant Transport, Inc., CTG Leasing Company, Covenant Asset Management, Inc., Southern Refrigerated Transport, Inc., Covenant Transport Solutions, Inc., Star Transportation, Inc., Bank of America, N.A., and JPMorgan Chase Bank, N.A. (Incorporated by reference to Exhibit 10.2 to the Company's Form 10-Q, filed November 13, 2014) |
10.21 | * | Description of 2015 Bonus PlanConsulting Agreement (Incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q, filed May 8, 2015)November 9, 2016) |
10.22 | * | Description of Director Compensation Program (Incorporated by reference to Exhibit 10.2 to the Company's Form 10-Q, filed May 8, 2015) |
10.23 | | Joinder, Supplement and Eleventh Amendment to Third Amended and Restated Credit Agreement, dated effective as of August 6, 2015, among Covenant Transportation Group, Inc., Covenant Transport, Inc., CTG Leasing Company, Covenant Asset Management, LLC, Southern Refrigerated Transport, Inc., Covenant Transport Solutions, Inc., Star Transportation, Inc., Driven Analytic Solutions, LLC, Covenant Properties, LLC, Bank of America, N.A., and JPMorgan Chase Bank, N.A. (Incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q, filed November 9, 2015) |
10.24 | * | Description of 2016 Cash Bonus Plan (Incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q, filed May 10, 2016) |
10.25 | | Twelfth Amendment to Third Amended and Restated Credit Agreement, dated effective as of February 25, 2016, among Covenant Transportation Group, Inc., Covenant Transport, Inc., CTG Leasing Company, Covenant Asset Management, LLC, Southern Refrigerated Transport, Inc., Covenant Transport Solutions, Inc., Star Transportation, Inc., Driven Analytic Solutions, LLC, Covenant Properties, LLC, Bank of America, N.A., and JPMorgan Chase Bank, N.A. (Incorporated by reference to Exhibit 10.2 to the Company's Form 10-Q, filed May 10, 2016) |
| # | Thirteenth Amendment to Third Amended and Restated Credit Agreement, dated effective as of December 16, 2016, among Covenant Transportation Group, Inc., Covenant Transport, Inc., CTG Leasing Company, Covenant Asset Management, LLC, Southern Refrigerated Transport, Inc., Covenant Transport Solutions, Inc., Star Transportation, Inc., Driven Analytic Solutions, LLC, Bank of America, N.A., and JPMorgan Chase Bank, N.A. |
| # | First Amendment to Consulting Agreement |
| # | List of Subsidiaries |
| # | Consent of Independent Registered Public Accounting Firm – KPMG LLP |
| # | Consent of Independent Auditor – Lattimore Black Morgan & Cain, PC |
| # | 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 Principal Executive Officer |
| # | Certification pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by Richard B. Cribbs, the Company's Principal Financial Officer |
| # | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by David R. Parker, the Company's Chief Executive Officer |
| # | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Richard B. Cribbs, the Company's Chief Financial Officer |
| # | Financial Statements of Transport Enterprise Leasing, LLC |
101.INS | ** | XBRL Instance Document |
101.SCH | ** | XBRL Taxonomy Extension Schema Document |
101.CAL | ** | XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | ** | XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | ** | XBRL Taxonomy Extension Labels Linkbase Document |
101.PRE | ** | XBRL Taxonomy Extension Presentation Linkbase Document |
References:
# | Filed herewith. |
* | Management contract or compensatory plan or arrangement. |
** | In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to this Annual Report on Form 10-K shall be deemed to be "furnished" and not "filed." |
ITEM 16.FORM 10-K SUMMARY
None.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| COVENANT TRANSPORTATION GROUP, INC. |
| |
| |
Date: February 29, 2016March 13, 2017 | By: | /s/ Richard B. Cribbs |
| | Richard B. Cribbs |
| | Executive Vice President and Chief Financial Officer in his capacity as such and on behalf of the issuer. |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature and Title | | Date |
| | |
/s/ David R. Parker | | February 29, 2016March 13, 2017 |
David R. Parker | | |
Chairman of the Board and Chief Executive Officer (principal executive officer) | | |
| | |
/s/ Richard B. Cribbs | | February 29, 2016March 13, 2017 |
Richard B. Cribbs | | |
Executive Vice President and Chief Financial Officer (principal financial officer) | | |
| | |
/s/ M. Paul Bunn | | February 29, 2016March 13, 2017 |
M. Paul Bunn | | |
Chief Accounting Officer (principal accounting officer) | | |
| | |
/s/ Bradley A. Moline | | February 29, 2016March 13, 2017 |
Bradley A. Moline | | |
Director | | |
| | |
/s/ William T. Alt | | February 29, 2016March 13, 2017 |
William T. Alt | | |
Director | | |
| | |
/s/ Robert E. Bosworth | | February 29, 2016March 13, 2017 |
Robert E. Bosworth | | |
Director | | |
| | |
/s/ Herbert J. Schmidt | | February 29, 2016March 13, 2017 |
Herbert J. Schmidt | | |
Director | | |
Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders
Covenant Transportation Group, Inc.:
We have audited the accompanying consolidated balance sheets of Covenant Transportation Group, Inc. and subsidiaries as of December 31, 20152016 and 2014,2015, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2015.2016. We also have audited Covenant Transportation Group, Inc.’s internal control over financial reporting as of December 31, 2015,2016, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Covenant Transportation Group Inc.’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over financial reporting 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
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, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Covenant Transportation Group, Inc. and subsidiaries as of December 31, 20152016 and 2014,2015, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2015,2016, in conformity with U.S. generally accepted accounting principles. Also in our opinion, Covenant Transportation Group, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015,2016, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
/s/ KPMG LLP
Atlanta, GeorgiaNashville, Tennessee
February 29, 2016
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2015 AND 2014 (In thousands, except share data) | | |
COVENANT TRANSPORTATION GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2016 AND 2015 (In thousands, except share data) | | COVENANT TRANSPORTATION GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2016 AND 2015 (In thousands, except share data) | |
| | | | | | | | | | | | |
| | | | | | | | 2016 | | | 2015 | |
ASSETS | | | | | | | | | | | | |
Current assets: | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 4,490 | | | $ | 21,330 | | | $ | 7,750 | | | $ | 4,490 | |
Accounts receivable, net of allowance of $1,857 in 2015 and $1,767 in 2014 | | | 112,669 | | | | 95,943 | | |
Drivers' advances and other receivables, net of allowance of $1,005 in 2015 and $1,290 in 2014 | | | 8,779 | | | | 5,770 | | |
Accounts receivable, net of allowance of $1,345 in 2016 and $1,857 in 2015 | | | | 96,636 | | | | 112,669 | |
Drivers' advances and other receivables, net of allowance of $519 in 2016 and $1,005 in 2015 | | | | 8,757 | | | | 8,779 | |
Inventory and supplies | | | 4,004 | | | | 4,402 | | | | 3,980 | | | | 4,004 | |
Prepaid expenses | | | 8,678 | | | | 9,028 | | | | 10,889 | | | | 8,678 | |
Assets held for sale | | | 25,626 | | | | 4,268 | | | | 2,695 | | | | 25,626 | |
Income taxes receivable | | | 8,591 | | | | 1,309 | | | | 4,256 | | | | 8,591 | |
Total current assets | | | 172,837 | | | | 142,050 | | | | 134,963 | | | | 172,837 | |
| | | | | | | | | | | | | | | | |
Property and equipment, at cost | | | 596,071 | | | | 505,345 | | | | 631,076 | | | | 596,071 | |
Less: accumulated depreciation and amortization | | | (142,022 | ) | | | (122,854 | ) | | | (165,605 | ) | | | (142,022 | ) |
Net property and equipment | | | 454,049 | | | | 382,491 | | | | 465,471 | | | | 454,049 | |
| | | | | | | | | | | | | | | | |
Other assets, net | | | 20,537 | | | | 14,763 | | | | 20,104 | | | | 19,831 | |
| | | | | | | | | | | | | | | | |
Total assets | | $ | 647,423 | | | $ | 539,304 | | | $ | 620,538 | | | $ | 646,717 | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | | | | | | | | | |
Current liabilities: | | | | | | | | | | | | | | | | |
Checks outstanding in excess of bank balances | | $ | 4,698 | | | $ | - | | | $ | 189 | | | $ | 4,698 | |
Accounts payable | | | 12,272 | | | | 9,623 | | | | 13,032 | | | | 12,272 | |
Accrued expenses | | | 30,143 | | | | 36,542 | | | | 26,607 | | | | 30,143 | |
Current maturities of long-term debt | | | 39,645 | | | | 27,824 | | | | 24,947 | | | | 39,395 | |
Current portion of capital lease obligations | | | 4,031 | | | | 1,606 | | | | 2,441 | | | | 4,031 | |
Current portion of insurance and claims accrual | | | 17,134 | | | | 17,565 | | | | 17,177 | | | | 17,134 | |
Other short-term liabilities | | | 18,549 | | | | 7,999 | | | | 3,388 | | | | 18,549 | |
Total current liabilities | | | 126,472 | | | | 101,159 | | | | 87,781 | | | | 126,222 | |
| | | | | | | | | | | | | | | | |
Long-term debt | | | 196,513 | | | | 159,531 | | | | 168,676 | | | | 196,057 | |
Long-term portion of capital lease obligations | | | 10,547 | | | | 13,372 | | | | 19,761 | | | | 10,547 | |
Insurance and claims accrual | | | 22,300 | | | | 23,173 | | | | 20,866 | | | | 22,300 | |
Deferred income taxes | | | 76,981 | | | | 59,004 | | | | 84,157 | | | | 76,981 | |
Other long-term liabilities | | | 12,450 | | | | 13,861 | | | | 2,883 | | | | 12,450 | |
Total liabilities | | | 445,263 | | | | 370,100 | | | | 384,124 | | | | 444,557 | |
Commitments and contingent liabilities | | | - | | | | - | | | | - | | | | - | |
Stockholders' equity: | | | | | | | | | | | | | | | | |
Class A common stock, $.01 par value; 20,000,000 shares authorized; 15,922,879 shares issued 15,773,381 shares outstanding as of December 31, 2015; and 15,746,609 issued and outstanding as of December 31, 2014 | | | 170 | | | | 168 | | |
Class A common stock, $.01 par value; 20,000,000 shares authorized; 15,922,879 shares issued and 15,899,223 shares outstanding as of December 31, 2016; and 15,922,879 issued and 15,773,381 outstanding as of December 31, 2015 | | | | 170 | | | | 170 | |
Class B common stock, $.01 par value; 5,000,000 shares authorized; 2,350,000 shares issued and outstanding | | | 24 | | | | 24 | | | | 24 | | | | 24 | |
Additional paid-in-capital | | | 139,968 | | | | 141,248 | | | | 137,912 | | | | 139,968 | |
Treasury stock at cost; 149,498 and 0 shares as of December 31, 2015 and 2014, respectively | | | (3,408 | ) | | | - | | |
Treasury stock at cost; 23,656 and 149,498 shares as of December 31, 2016 and 2015, respectively | | | | (1,084 | ) | | | (3,408 | ) |
Accumulated other comprehensive loss | | | (17,544 | ) | | | (13,101 | ) | | | (2,640 | ) | | | (17,544 | ) |
Retained earnings | | | 82,950 | | | | 40,865 | | | | 102,032 | | | | 82,950 | |
Total stockholders' equity | | | 202,160 | | | | 169,204 | | | | 236,414 | | | | 202,160 | |
Total liabilities and stockholders' equity | | $ | 647,423 | | | $ | 539,304 | | | $ | 620,538 | | | $ | 646,717 | |
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2016, 2015, 2014, AND 20132014
(In thousands, except per share data) |
| | | | | | | | | |
| | | | | | | | | |
Revenues | | | | | | | | | |
Freight revenue | | $ | 640,120 | | | $ | 578,204 | | | $ | 538,933 | |
Fuel surcharge revenue | | | 84,120 | | | | 140,776 | | | | 145,616 | |
Total revenue | | $ | 724,240 | | | $ | 718,980 | | | $ | 684,549 | |
| | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | |
Salaries, wages, and related expenses | | | 244,779 | | | | 231,761 | | | | 218,946 | |
Fuel expense | | | 122,160 | | | | 168,856 | | | | 186,002 | |
Operations and maintenance | | | 46,458 | | | | 47,251 | | | | 50,043 | |
Revenue equipment rentals and purchased transportation | | | 118,583 | | | | 111,772 | | | | 102,954 | |
Operating taxes and licenses | | | 11,016 | | | | 10,960 | | | | 10,969 | |
Insurance and claims | | | 31,909 | | | | 39,594 | | | | 30,305 | |
Communications and utilities | | | 6,162 | | | | 5,806 | | | | 5,240 | |
General supplies and expenses | | | 14,007 | | | | 16,950 | | | | 16,002 | |
Depreciation and amortization, including gains and losses on disposition of equipment | | | 61,384 | | | | 46,384 | | | | 43,694 | |
Total operating expenses | | | 656,458 | | | | 679,334 | | | | 664,155 | |
Operating income | | | 67,782 | | | | 39,646 | | | | 20,394 | |
Other expenses (income): | | | | | | | | | | | | |
Interest expense | | | 8,445 | | | | 10,807 | | | | 10,400 | |
Other | | | - | | | | (13 | ) | | | (3 | ) |
Other expenses, net | | | 8,445 | | | | 10,794 | | | | 10,397 | |
Equity in income of affiliate | | | 4,570 | | | | 3,730 | | | | 2,750 | |
Income before income taxes | | | 63,907 | | | | 32,582 | | | | 12,747 | |
Income tax expense | | | 21,822 | | | | 14,774 | | | | 7,503 | |
Net income | | $ | 42,085 | | | $ | 17,808 | | | $ | 5,244 | |
| | | | | | | | | | |
| | | 2016 | | | 2015 | | | 2014 | |
Revenues | | | | | | | | | | |
Freight revenue | | | $ | 610,845 | | | $ | 640,120 | | | $ | 578,204 | |
Fuel surcharge revenue | | | | 59,806 | | | | 84,120 | | | | 140,776 | |
Total revenue | | | $ | 670,651 | | | $ | 724,240 | | | $ | 718,980 | |
| | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | |
Salaries, wages, and related expenses | | | | 234,526 | | | | 244,779 | | | | 231,761 | |
Fuel expense | | | | 103,108 | | | | 122,160 | | | | 168,856 | |
Operations and maintenance | | | | 45,864 | | | | 46,458 | | | | 47,251 | |
Revenue equipment rentals and purchased transportation | | | | 117,472 | | | | 118,583 | | | | 111,772 | |
Operating taxes and licenses | | | | 11,712 | | | | 11,016 | | | | 10,960 | |
Insurance and claims | | | | 32,596 | | | | 31,909 | | | | 39,594 | |
Communications and utilities | | | | 6,057 | | | | 6,162 | | | | 5,806 | |
General supplies and expenses | | | | 14,413 | | | | 14,007 | | | | 16,950 | |
Depreciation and amortization, including gains and losses on disposition of equipment | | | | 72,456 | | | | 61,384 | | | | 46,384 | |
Total operating expenses | | | | 638,204 | | | | 656,458 | | | | 679,334 | |
Operating income | | | | 32,447 | | | | 67,782 | | | | 39,646 | |
Interest expense, net | | | | 8,226 | | | | 8,445 | | | | 10,794 | |
Equity in income of affiliate | | | | 3,000 | | | | 4,570 | | | | 3,730 | |
Income before income taxes | | | | 27,221 | | | | 63,907 | | | | 32,582 | |
Income tax expense | | | | 10,386 | | | | 21,822 | | | | 14,774 | |
Net income | | | $ | 16,835 | | | $ | 42,085 | | | $ | 17,808 | |
| | | | | | | | | | | | | |
Income per share: | | | | | | | | | | | | | | | | | | | | | |
Basic income per share: | | $ | 2.32 | | | $ | 1.17 | | | $ | 0.35 | | | $ | 0.93 | | | $ | 2.32 | | | $ | 1.17 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Diluted income per share: | | $ | 2.30 | | | $ | 1.15 | | | $ | 0.35 | | | $ | 0.92 | | | $ | 2.30 | | | $ | 1.15 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Basic weighted average shares outstanding | | | 18,145 | | | | 15,250 | | | | 14,837 | | | | 18,182 | | | | 18,145 | | | | 15,250 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Diluted weighted average shares outstanding | | | 18,311 | | | | 15,517 | | | | 15,039 | | | | 18,266 | | | | 18,311 | | | | 15,517 | |
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2016, 2015, 2014, AND 20132014
(In thousands)
| | | | | | | | | | | 2016 | | | 2015 | | | 2014 | |
| | | | | | | | | | | | | | | | | | |
Net income | | $ | 42,085 | | | $ | 17,808 | | | $ | 5,244 | | | $ | 16,835 | | | $ | 42,085 | | | $ | 17,808 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Other comprehensive (loss) income: | | | | | | | | | | | | | | | | | | | | | | | | |
Unrealized (loss) gain on effective portion of cash flow hedges, net of tax of $8,722, $9,892, and $567 in 2015, 2014 and 2013, respectively | | | (14,051 | ) | | | (15,869 | ) | | | 909 | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Reclassification of cash flow hedge losses (gains) into statement of operations, net of tax of $5,964, $1,206, and $247 in 2015, 2014, and 2013, respectively | | | 9,608 | | | | 1,935 | | | | (396 | ) | |
Unrealized (loss) gain on effective portion of cash flow hedges, net of tax of $2,696, $8,722, and $9,892 in 2016, 2015 and 2014, respectively | | | | 4,307 | | | | (14,051 | ) | | | (15,869 | ) |
| | | | | | | | | | | | | |
Reclassification of cash flow hedge losses into statement of operations, net of tax of $6,634, $5,964, and $1,206 in 2016, 2015, and 2014, respectively | | | | 10,597 | | | | 9,608 | | | | 1,935 | |
Total other comprehensive (loss) income | | | (4,443 | ) | | | (13,934 | ) | | | 513 | | | | 14,904 | | | | (4,443 | ) | | | (13,934 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Comprehensive income | | $ | 37,642 | | | $ | 3,874 | | | $ | 5,757 | | | $ | 31,739 | | | $ | 37,642 | | | $ | 3,874 | |
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2016, 2015, 2014, AND 20132014
(In thousands)
| | | | | | | | | | | Accumulated | | | | | | | | | Common Stock | | | | | | Treasury | | | Accumulated Other Comprehensive | | | Retained | | | Total Stockholders' | |
| | | | | Additional | | | | | | Other | | | | | | Total | | | Class A | | | Class B | | | Capital | | | Stock | | | (Loss) Income | | | Earnings | | | Equity | |
| | Common Stock | | | Paid-In | | | Treasury | | | Comprehensive | | | Retained | | | Stockholders' | | | | | | | | | | | | | | | | | | | | | | |
| | Class A | | | Class B | | | Capital | | | Stock | | | (Loss) Income | | | Earnings | | | Equity | | |
| | | | | | | | | | | | | | | | | | | | | | |
Balances at December 31, 2012 | | $ | 143 | | | $ | 24 | | | $ | 90,328 | | | $ | (13,955 | ) | | $ | 320 | | | $ | 17,813 | | | $ | 94,673 | | |
Net income | | | - | | | | - | | | | - | | | | - | | | | - | | | | 5,244 | | | | 5,244 | | |
Other comprehensive income | | | - | | | | - | | | | - | | | | - | | | | 513 | | | | - | | | | 513 | | |
Stock-based employee compensation cost | | | - | | | | - | | | | 690 | | | | - | | | | - | | | | - | | | | 690 | | |
Reversal of previously recognized stock-based employee compensation expense | | | - | | | | - | | | | (409 | ) | | | - | | | | - | | | | - | | | | (409 | ) | |
Issuance of restricted shares, net | | | 2 | | | | - | | | | (1,878 | ) | | | 1,636 | | | | - | | | | - | | | | (240 | ) | |
Income tax deficit arising from restricted share vesting | | | - | | | | - | | | | (111 | ) | | | - | | | | - | | | | - | | | | (111 | ) | |
Balances at December 31, 2013 | | $ | 145 | | | $ | 24 | | | $ | 88,620 | | | $ | (12,319 | ) | | $ | 833 | | | $ | 23,057 | | | $ | 100,360 | | | $ | 145 | | | $ | 24 | | | $ | 88,620 | | | $ | (12,319 | ) | | $ | 833 | | | $ | 23,057 | | | $ | 100,360 | |
Net income | | | - | | | | - | | | | - | | | | - | | | | - | | | | 17,808 | | | | 17,808 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 17,808 | | | | 17,808 | |
Other comprehensive loss | | | - | | | | - | | | | - | | | | - | | | | (13,934 | ) | | | - | | | | (13,934 | ) | | | - | | | | - | | | | - | | | | - | | | | (13,934 | ) | | | - | | | | (13,934 | ) |
Follow-on stock offering | | | 22 | | | | - | | | | 51,498 | | | | 11,464 | | | | - | | | | - | | | | 62,984 | | | | 22 | | | | - | | | | 51,498 | | | | 11,464 | | | | - | | | | - | | | | 62,984 | |
Stock-based employee compensation expense | | | - | | | | - | | | | 1,286 | | | | - | | | | - | | | | - | | | | 1,286 | | | | - | | | | - | | | | 1,286 | | | | - | | | | - | | | | - | | | | 1,286 | |
Exercise of stock options | | | - | | | | - | | | | 190 | | | | 408 | | | | - | | | | - | | | | 598 | | | | - | | | | - | | | | 190 | | | | 408 | | | | - | | | | - | | | | 598 | |
Issuance of restricted shares, net | | | 1 | | | | - | | | | (1,180 | ) | | | 447 | | | | - | | | | - | | | | (732 | ) | | | 1 | | | | - | | | | (1,180 | ) | | | 447 | | | | - | | | | - | | | | (732 | ) |
Income tax benefit arising from restricted share vesting | | | - | | | | - | | | | 834 | | | | - | | | | - | | | | - | | | | 834 | | |
Income tax deficit arising from restricted share vesting | | | | - | | | | - | | | | 834 | | | | - | | | | - | | | | - | | | | 834 | |
Balances at December 31, 2014 | | $ | 168 | | | $ | 24 | | | $ | 141,248 | | | $ | - | | | $ | (13,101 | ) | | $ | 40,865 | | | $ | 169,204 | | | $ | 168 | | | $ | 24 | | | $ | 141,248 | | | $ | - | | | $ | (13,101 | ) | | $ | 40,865 | | | $ | 169,204 | |
Net income | | | - | | | | - | | | | - | | | | - | | | | - | | | | 42,085 | | | | 42,085 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 42,085 | | | | 42,085 | |
Other comprehensive loss | | | - | | | | - | | | | - | | | | - | | | | (4,443 | ) | | | - | | | | (4,443 | ) | | | - | | | | - | | | | - | | | | - | | | | (4,443 | ) | | | - | | | | (4,443 | ) |
Purchase of treasury stock | | | - | | | | - | | | | - | | | | (4,994 | ) | | | - | | | | - | | | | (4,994 | ) | | | - | | | | - | | | | - | | | | (4,994 | ) | | | - | | | | - | | | | (4,994 | ) |
Stock-based employee compensation expense | | | 1 | | | | - | | | | 1,295 | | | | - | | | | - | | | | - | | | | 1,296 | | | | 1 | | | | - | | | | 1,295 | | | | - | | | | - | | | | - | | | | 1,296 | |
Exercise of stock options | | | 1 | | | | - | | | | 1,091 | | | | - | | | | - | | | | - | | | | 1,092 | | | | 1 | | | | - | | | | 1,091 | | | | - | | | | - | | | | - | | | | 1,092 | |
Issuance of restricted shares, net | | | - | | | | - | | | | (3,666 | ) | | | 1,586 | | | | - | | | | - | | | | 2,080 | | | | - | | | | - | | | | (3,666 | ) | | | 1,586 | | | | - | | | | - | | | | (2,080 | ) |
Balances at December 31, 2015 | | $ | 170 | | | $ | 24 | | | $ | 139,968 | | | $ | (3,408 | ) | | $ | (17,544 | ) | | $ | 82,950 | | | $ | 202,160 | | | $ | 170 | | | $ | 24 | | | $ | 139,968 | | | $ | (3,408 | ) | | $ | (17,544 | ) | | $ | 82,950 | | | $ | 202,160 | |
Net income | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 16,835 | | | | 16,835 | |
Other comprehensive income | | | | - | | | | - | | | | - | | | | - | | | | 14,904 | | | | - | | | | 14,904 | |
Effect of adoption of ASU 2016-09 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 2,247 | | | | 2,247 | |
Stock-based employee compensation expense | | | | - | | | | - | | | | 1,178 | | | | - | | | | - | | | | - | | | | 1,178 | |
Exercise of stock options | | | | - | | | | - | | | | (27 | ) | | | 59 | | | | - | | | | - | | | | 32 | |
Issuance of restricted shares, net | | | | - | | | | - | | | | (3,207 | ) | | | 2,265 | | | | - | | | | - | | | | (942 | ) |
Balances at December 31, 2016 | | | $ | 170 | | | $ | 24 | | | $ | 137,912 | | | $ | (1,084 | ) | | $ | (2,640 | ) | | $ | 102,032 | | | $ | 236,414 | |
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2016, 2015, 2014, AND 20132014
(In thousands)
| | 2016 | | | 2015 | | | 2014 | |
Cash flows from operating activities: | | | | | | | | | |
Net income | | $ | 16,835 | | | $ | 42,085 | | | $ | 17,808 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | |
Provision (reversal) for losses on accounts receivable | | | (241 | ) | | | 1,100 | | | | 774 | |
(Realized gain) deferred gain on sales of equipment to affiliate, net | | | (207 | ) | | | (26 | ) | | | (33 | ) |
Depreciation and amortization | | | 71,647 | | | | 62,010 | | | | 49,043 | |
Amortization of deferred financing fees | | | 293 | | | | 261 | | | | 256 | |
Unrealized (gain) loss on ineffective portion of fuel hedges | | | - | | | | (1,454 | ) | | | 1,510 | |
Return of (issuance of) cash collateral on fuel hedge | | | - | | | | 5,000 | | | | (5,000 | ) |
Deferred income tax (benefit) expense | | | (922 | ) | | | 20,701 | | | | 14,681 | |
Income tax benefit arising from restricted share vesting and stock options exercised | | | 1,108 | | | | - | | | | (834 | ) |
Casualty premium credit | | | - | | | | (3,600 | ) | | | - | |
Equity in income of affiliate | | | (3,000 | ) | | | (4,570 | ) | | | (3,730 | ) |
Return on investment in affiliated company | | | 1,470 | | | | - | | | | - | |
Loss (gain) on disposition of property and equipment | | | 808 | | | | (626 | ) | | | (2,659 | ) |
Stock-based compensation expense | | | 1,378 | | | | 1,496 | | | | 1,386 | |
Changes in operating assets and liabilities: | | | | | | | | | | | | |
Receivables and advances | | | 21,207 | | | | (28,120 | ) | | | (16,996 | ) |
Prepaid expenses and other assets | | | (1,464 | ) | | | 2,688 | | | | 1,680 | |
Inventory and supplies | | | 24 | | | | 398 | | | | 316 | |
Insurance and claims accrual | | | (1,390 | ) | | | (1,304 | ) | | | 9,986 | |
Accounts payable and accrued expenses | | | (5,116 | ) | | | (10,562 | ) | | | 5,556 | |
Net cash flows provided by operating activities | | | 102,430 | | | | 85,477 | | | | 73,744 | |
| | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | |
Acquisition of property and equipment | | | (112,794 | ) | | | (181,963 | ) | | | (163,679 | ) |
Return of investment in affiliated company | | | - | | | | - | | | | 307 | |
Proceeds from disposition of property and equipment | | | 65,507 | | | | 34,287 | | | | 78,776 | |
Net cash flows used by investing activities | | | (47,287 | ) | | | (147,676 | ) | | | (84,596 | ) |
| | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | |
Change in checks outstanding in excess of bank balances | | | (4,509 | ) | | | 4,698 | | | | (2,918 | ) |
Debt refinancing costs | | | (108 | ) | | | (242 | ) | | | (49 | ) |
Payment of minimum tax withholdings on stock compensation | | | (1,142 | ) | | | (2,280 | ) | | | (832 | ) |
Proceeds from borrowings under revolving credit facility | | | 1,023,978 | | | | 870,432 | | | | 1,003,195 | |
Repayments of borrowings under revolving credit facility | | | (1,014,796 | ) | | | (867,430 | ) | | | (1,010,205 | ) |
Repayments of capital lease obligation | | | (4,140 | ) | | | (1,718 | ) | | | (11,492 | ) |
Proceeds from issuance of notes payable | | | 69,432 | | | | 113,077 | | | | 115,364 | |
Repayments of notes payable | | | (120,630 | ) | | | (67,276 | ) | | | (134,560 | ) |
Proceeds from exercise of stock options | | | 32 | | | | 1,092 | | | | 598 | |
Proceeds from issuance of stock in follow-on offering, net of offering costs | | | - | | | | - | | | | 62,984 | |
Common stock repurchased | | | - | | | | (4,994 | ) | | | - | |
Income tax benefit arising from restricted share vesting and stock options exercised | | | - | | | | - | | | | 834 | |
Net cash flows (used in) provided by financing activities | | | (51,883 | ) | | | 45,359 | | | | 22,919 | |
| | | | | | | | | | | | |
Net change in cash and cash equivalents | | | 3,260 | | | | (16,840 | ) | | | 12,067 | |
| | | | | | | | | | | | |
Cash and cash equivalents at beginning of year | | | 4,490 | | | | 21,330 | | | | 9,263 | |
Cash and cash equivalents at end of year | | $ | 7,750 | | | $ | 4,490 | | | $ | 21,330 | |
| | | | | | | | | |
Cash flows from operating activities: | | | | | | | | | |
Net income | | $ | 42,085 | | | $ | 17,808 | | | $ | 5,244 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | |
Provision for losses on accounts receivable | | | 1,100 | | | | 774 | | | | 457 | |
(Realized gain) deferred gain on sales of equipment to affiliate, net | | | (26 | ) | | | (33 | ) | | | 81 | |
Depreciation and amortization | | | 62,010 | | | | 49,043 | | | | 44,457 | |
Amortization of deferred financing fees | | | 261 | | | | 256 | | | | 245 | |
Unrealized (gain) loss on ineffective portion of fuel hedges | | | (1,454 | ) | | | 1,510 | | | | (55 | ) |
Return of (issuance of) cash collateral on fuel hedge | | | 5,000 | | | | (5,000 | ) | | | - | |
Deferred income tax expense | | | 20,701 | | | | 14,681 | | | | 8,217 | |
Income tax (benefit) deficit arising from restricted share vesting | | | - | | | | (834 | ) | | | 111 | |
Casualty premium credit | | | (3,600 | ) | | | - | | | | - | |
Equity in income of affiliate | | | (4,570 | ) | | | (3,730 | ) | | | (2,750 | ) |
Gain on disposition of property and equipment | | | (626 | ) | | | (2,659 | ) | | | (763 | ) |
Stock-based compensation expense | | | 1,496 | | | | 1,386 | | | | 381 | |
Changes in operating assets and liabilities: | | | | | | | | | | | | |
Receivables and advances | | | (28,120 | ) | | | (16,996 | ) | | | (4,312 | ) |
Prepaid expenses and other assets | | | 2,688 | | | | 1,680 | | | | (2,014 | ) |
Inventory and supplies | | | 398 | | | | 316 | | | | (168 | ) |
Insurance and claims accrual | | | (1,304 | ) | | | 9,986 | | | | (2,399 | ) |
Accounts payable and accrued expenses | | | (10,562 | ) | | | 5,556 | | | | (6,287 | ) |
Net cash flows provided by operating activities | | | 85,477 | | | | 73,744 | | | | 40,445 | |
| | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | |
Acquisition of property and equipment | | | (181,963 | ) | | | (163,679 | ) | | | (135,896 | ) |
Investment in affiliated company | | | - | | | | - | | | | (500 | ) |
Return of investment in affiliated company | | | - | | | | 307 | | | | 65 | |
Proceeds from disposition of property and equipment | | | 34,287 | | | | 78,776 | | | | 51,930 | |
Net cash flows used by investing activities | | | (147,676 | ) | | | (84,596 | ) | | | (84,401 | ) |
| | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | |
Change in checks outstanding in excess of bank balances | | | 4,698 | | | | (2,918 | ) | | | (5,343 | ) |
Debt refinancing costs | | | (242 | ) | | | (49 | ) | | | (356 | ) |
Payment of minimum tax withholdings on stock compensation | | | (2,280 | ) | | | (832 | ) | | | (340 | ) |
Proceeds from borrowings under revolving credit facility | | | 870,432 | | | | 1,003,195 | | | | 886,293 | |
Repayments of borrowings under revolving credit facility | | | (867,430 | ) | | | (1,010,205 | ) | | | (879,288 | ) |
Repayments of capital lease obligation | | | (1,718 | ) | | | (11,492 | ) | | | (2,186 | ) |
Proceeds from issuance of notes payable | | | 113,077 | | | | 115,364 | | | | 134,192 | |
Repayments of notes payable | | | (67,276 | ) | | | (134,560 | ) | | | (86,488 | ) |
Proceeds from exercise of stock options | | | 1,092 | | | | 598 | | | | - | |
Proceeds from issuance of stock in follow-on offering, net of offering costs | | | - | | | | 62,984 | | | | - | |
Common stock repurchased | | | (4,994 | ) | | | - | | | | - | |
Income tax benefit (deficit) arising from restricted share vesting | | | - | | | | 834 | | | | (111 | ) |
Net cash flows provided by financing activities | | | 45,359 | | | | 22,919 | | | | 46,373 | |
| | | | | | | | | | | | |
Net change in cash and cash equivalents | | | (16,840 | ) | | | 12,067 | | | | 2,417 | |
| | | | | | | | | | | | |
Cash and cash equivalents at beginning of year | | | 21,330 | | | | 9,263 | | | | 6,846 | |
Cash and cash equivalents at end of year | | $ | 4,490 | | | $ | 21,330 | | | $ | 9,263 | |
Supplemental disclosure of cash flow information: | | | | | | | | | |
Cash paid during the year for: | | | | | | | | | |
Interest, net of capitalized interest | | $ | 8,453 | | | $ | 8,371 | | | $ | 10,919 | |
Income taxes | | $ | 6,412 | | | $ | 8,112 | | | $ | 571 | |
Equipment purchased under capital leases | | $ | 11,765 | | | $ | 1,318 | | | $ | 4,552 | |
Supplemental disclosure of cash flow information: | | | | | | | | | |
Cash paid during the year for: | | | | | | | | | |
Interest, net of capitalized interest | | $ | 8,371 | | | $ | 10,919 | | | $ | 10,328 | |
Income taxes | | $ | 8,112 | | | $ | 571 | | | $ | 320 | |
Equipment purchased under capital leases | | $ | 1,318 | | | $ | 4,552 | | | $ | 8,010 | |
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016, 2015, 2014, AND 20132014
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business and Segments
Covenant Transportation Group, Inc., a Nevada holding company, together with its wholly-ownedwholly owned subsidiaries offers truckload transportation and brokerage services to customers throughout the continental United States.
We have one reportable segment, our asset-based truckload services ("Truckload").
The Truckload segment consists of three asset-based operating fleets that are aggregated because they have similar economic characteristics and meet the aggregation criteria. The three operating fleets that comprise our Truckload segment are as follows: (i) Covenant Transport, Inc. ("Covenant Transport"), our historical flagship operation, which provides expedited long haul, dedicated, temperature-controlled, and regional solo-driver service; (ii) Southern Refrigerated Transport, Inc. ("SRT"), which provides primarily long haul, regional, dedicated, and intermodal temperature-controlled service; and (iii) Star Transportation, Inc. ("Star"), which provides regional solo-driver and dedicated service, primarily in the southeastern United States.
In addition, our Covenant Transport Solutions, Inc. ("Solutions") subsidiary has service offerings ancillary to our asset-based Truckload services, including: freight brokerage service directly and through freight brokerage agents who are paid a commission for the freight they provide and accounts receivable factoring. The operations consist of several operating segments, which neither individually nor in the aggregate meet the quantitative or qualitative reporting thresholds.
Principles of Consolidation
The consolidated financial statements include the accounts of Covenant Transportation Group, Inc., a holding company incorporated in the state of Nevada in 1994, and its wholly-ownedwholly owned subsidiaries: Covenant Transport, Inc., a Tennessee corporation; Southern Refrigerated Transport, Inc., an Arkansas corporation; Star Transportation, Inc., a Tennessee corporation; Covenant Transport Solutions, Inc., a Nevada corporation; Covenant Logistics, Inc., a Nevada corporation; Covenant Asset Management, LLC., a Nevada limited liability corporation; CTG Leasing Company, a Nevada corporation; IQS Insurance Retention Group, Inc., a Vermont corporation; Driven Analytic Solutions, LLC, a Nevada limited liability company; and Covenant Properties, LLC.Heritage Insurance, Inc., a Nevada limited liabilityTennessee corporation.
References in this report to "it," "we," "us," "our," the "Company," and similar expressions refer to Covenant Transportation Group, Inc. and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Investment in Transport Enterprise Leasing, LLC
Transport Enterprise Leasing, LLC ("TEL") is a tractor and trailer equipment leasing company and used equipment reseller. We evaluated our investment in TEL to determine whether it should be recorded on a consolidated basis. Our percentage of ownership interest (49%), an evaluation of control, and whether a variable interest entity ("VIE") existed were all considered in our consolidation assessment. The analysis provided that we do not control TEL and that TEL is not deemed a VIE. We have accounted for our investment in TEL using the equity method of accounting given our 49% ownership interest and ability to exercise significant influence over operating and financial policies. Under the equity method, the cost of our investment is adjusted for our share of equity in the earnings of TEL and reduced by distributions received and our proportionate share of TEL's net income is included in our earnings.
On a periodic basis, we assess whether there are any indicators that the fair value of our investment in TEL may be impaired. The investment is impaired only if the estimate of the fair value of the investment is less than the carrying value of the investment, and such decline in value is deemed to be other than temporary. To the extent impairment has occurred, the loss would be measured as the excess of the carrying amount of the investment over the fair value of the investment. As a result of TEL's earnings, no impairment indicators were noted that would provide for impairment of our investment.
Revenue Recognition
Revenue, drivers' wages, and other direct operating expenses generated by our Truckload reportable segment are recognized on the date shipments are delivered to the customer. Revenue includes transportation revenue, fuel surcharges, loading and unloading activities, equipment detention, and other accessorial services.
Revenue generated by our Solutions subsidiary is recognized upon completion of the services provided. Revenue is recorded on a gross basis, without deducting third party purchased transportation costs, as we act as a principal with substantial risks as primary obligor, except for transactions whereby equipment from our Truckload segment perform the related services, which we record on a net basis in accordance with the related authoritative guidance. Solutions' revenue includes $2.6 million, $2.4 million, $2.3 million, and $1.7$2.3 million of revenue in 2016, 2015, 2014, and 2013,2014, respectively, related to an accounts receivable factoring business started in 2013 to supplement several aspects of our non-asset operations. Revenue for this business is recognized on a net basis after giving effect to receivables payments we make to the factoring client, given we are acting as an agent and are not the primary generator of the factored receivables in these transactions.
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.
Cash and Cash Equivalents
We consider all highly liquid investments with a maturity of three months or less at acquisition to be cash equivalents. Additionally, we are also subject to concentrations of credit risk related to deposits in banks in excess of the Federal Deposit Insurance Corporation limits.
Accounts Receivable and Concentration of Credit Risk
We extend credit to our customers in the normal course of business. We perform ongoing credit evaluations and generally do not require collateral. Trade accounts receivable are recorded at their invoiced amounts, net of allowance for doubtful accounts. We evaluate the adequacy of our allowance for doubtful accounts quarterly. Accounts outstanding longer than contractual payment terms are considered past due and are reviewed individually for collectability. We maintain reserves for potential credit losses based upon its loss history and specific receivables aging analysis. Receivable balances are written off when collection is deemed unlikely.
Accounts receivable are comprised of a diversified customer base that results in a lack of concentration of credit risk. During 2016, 2015, 2014, and 2013,2014, our top ten customers generated 45%53%, 38%45%, and 34%38% of total revenue, respectively. In 20152016 and 2014,2015, one customer in each year accounted for more than 10% of our consolidated revenue. This customer wasWal-Mart accounted for $69.4 million of total revenue in 2016, while UPS accounted for $75.8 million and $82.6 million of revenue in 2015 and 2014, respectively. Both customers were serviced by both our Truckload segment and our Solutions subsidiary providing for $75.8 million and $82.5 million of total revenue in 2015 and 2014, respectively. No customer accounted for more than 10% of our consolidated revenue in 2013. subsidiary. The carrying amount reported in the consolidated balance sheet for accounts receivable approximates fair value based on the fact that the receivables collection averaged approximately 3534 and 3635 days in 20152016 and 2014,2015, respectively.
Included in accounts receivable is $18.9$25.8 million and $15.8$18.9 million of factoring receivables at December 31, 20152016 and 2014,2015, respectively, net of a $0.2 million allowance for bad debts for each respective year. We advance approximately 85% to 95% of each receivable factored and retain the remainder as collateral for collection issues that might arise. The retained amounts are returned to the clients after the related receivable has been collected. At December 31, 2015,2016, the retained amounts related to factored receivables totaled $0.4$0.3 million and were included in accounts payable in the consolidated balance sheet. Our clients are smaller trucking companies that factor their receivables to us for a fee to facilitate faster cash flow. We evaluate each client's customer base under predefined criteria. The carrying value of the factored receivables approximates the fair value, as the receivables are generally repaid directly to us by the client's customer within 30-40 days due to the combination of the short-term nature of the financing transaction and the underlying quality of the receivables.
The following table provides a summary (in thousands) of the activity in the allowance for doubtful accounts for 2016, 2015, 2014, and 2013:2014:
Years ended December 31: | | Beginning balance January 1, | | | Additional provisions to allowance | | | Write-offs and other deductions | | | Ending balance December 31, | | | Beginning balance January 1, | | | Additional provisions to (reversal of) allowance | | | Write-offs and other deductions | | | Ending balance December 31, | |
| | | | | | | | | | | | | |
2016 | | | $ | 1,857 | | | $ | (241 | ) | | $ | (271 | ) | | $ | 1,345 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2015 | | $ | 1,767 | | | $ | 1,100 | | | $ | (1,010 | ) | | $ | 1,857 | | | $ | 1,767 | | | $ | 1,100 | | | $ | (1,010 | ) | | $ | 1,857 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2014 | | $ | 1,736 | | | $ | 774 | | | $ | (743 | ) | | $ | 1,767 | | | $ | 1,736 | | | $ | 774 | | | $ | (743 | ) | | $ | 1,767 | |
| | | | | | | | | | | | | | | | | |
2013 | | $ | 1,729 | | | $ | 457 | | | $ | (450 | ) | | $ | 1,736 | | |
Inventories and Supplies
Inventories and supplies consist of parts, tires, fuel, and supplies. Tires on new revenue equipment are capitalized as a component of the related equipment cost when the tractor or trailer is placed in service and recovered through depreciation over the life of the vehicle. Replacement tires and parts on hand at year end are recorded at the lower of cost or market with cost determined using the first-in, first-out (FIFO) method. Replacement tires are expensed when placed in service.
Assets Held for Sale
Assets held for sale include property and revenue equipment no longer utilized in continuing operations which are available and held for sale. Assets held for sale are no longer subject to depreciation, and are recorded at the lower of depreciated book value or fair market value less selling costs. We periodically review the carrying value of these assets for possible impairment. We expect to sell these assets within twelve months.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation. Depreciation for book purposes is determined using the straight-line method over the estimated useful lives of the assets, while depreciation for tax purposes is generally recorded using an accelerated method. Depreciation of revenue equipment is our largest item of depreciation. We generally depreciate new tractors (excluding day cabs) over five years to salvage values of approximately 25%15% of their cost. We generally depreciate new trailers over sixseven years for refrigerated trailers and ten years for dry van trailers to salvage values of approximately 38%25% of their cost. As a result of the progressive decline in the value of used tractors and our expectations that used tractor prices will not rebound in the near term, effective July 1, 2016 we reduced the salvage values on our tractors and, thus, prospectively increased depreciation expense. Estimates around the salvage values and useful lives for trailers remain unchanged. The depreciation schedules described above reflect the reduction in salvage values. The impact in the third and fourth quarters of 2016 and in future quarters is approximately $2.0 million of additional depreciation expense per quarter or approximately $1.2 million per quarter net of tax, which represents approximately $0.06 per common or diluted share. We annually review the reasonableness of our estimates regarding useful lives and salvage values of our revenue equipment and other long-lived assets based upon, among other things, our experience with similar assets, conditions in the used revenue equipment market, and prevailing industry practice. Changes in the useful life or salvage value estimates, or fluctuations in market values that are not reflected in our estimates, could have a material effect on our results of operations. Gains and losses on the disposal of revenue equipment are included in depreciation expense in the consolidated statements of operations.
We lease certain revenue equipment under capital leases with terms of approximately 60 to 84 months. Amortization of leased assets is included in depreciation and amortization expense.
Although a portion of our tractors are protected by non-binding indicative trade-in values or binding trade-back agreements with the manufacturers, substantially all of our owned trailers are subject to fluctuations in market prices for used revenue equipment. Moreover, our trade-back agreements are contingent upon reaching acceptable terms for the purchase of new equipment. Declines in the price of used revenue equipment or failure to reach agreement for the purchase of new tractors with the manufacturers issuing trade-back agreements could result in impairment of, or losses on the sale of, revenue equipment.
Impairment of Long-Lived Assets
Pursuant to applicable accounting standards, revenue equipment and other long-lived assets are tested for impairment whenever an event occurs that indicates an impairment may exist. Expected future cash flows are used to analyze whether an impairment has occurred. If the sum of expected undiscounted cash flows is less than the carrying value of the long-lived asset, then an impairment loss is recognized. We measure the impairment loss by comparing the fair value of the asset to its carrying value. Fair value is determined based on a discounted cash flow analysis or the appraised value of the assets, as appropriate.
Goodwill and Other Intangible Assets
We classify intangible assets into two categories: (i) intangible assets with definite lives subject to amortization and (ii) goodwill. We have no goodwill on our consolidated balance sheet for the years ended December 31, 20152016 and 2014.2015. We test intangible assets with definite lives for impairment if conditions exist that indicate the carrying value may not be recoverable. Such conditions may include an economic downturn in a geographic market or a change in the assessment of future operations. We record an impairment charge when the carrying value of the definite lived intangible asset is not recoverable by the cash flows generated from the use of the asset.
We determine the useful lives of our identifiable intangible assets after considering the specific facts and circumstances related to each intangible asset. Factors we consider when determining useful lives include the contractual term of any agreement, the history of the asset, our long-term strategy for the use of the asset, any laws or other local regulations which could impact the useful life of the asset, and other economic factors, including competition and specific market conditions. Intangible assets that are deemed to have definite lives are amortized, generally on a straight-line basis, over their useful lives, ranging from 4 to 20 years. We have no identifiable intangible assets on our consolidated balance sheet at December 31, 2016, and $0.2 million of intangible assets, which was recorded in other assets, at December 31, 2015.
Insurance and Other Claims
The primary claims arising against us consist of auto liability (personal injury and property damage), workers' compensation, cargo, commercial liability, and employee medical expenses. Our insurance program involves self-insurance with the following risk retention levels (before giving effect to any commutation of an auto liability policy):
| ·● | auto liability - $1.0 million |
| ·● | workers' compensation - $1.3 million |
| ·● | employee medical - $0.4 million |
Due to our significant self-insured retention amounts, we have exposure to fluctuations in the number and severity of claims and to variations between our estimated and actual ultimate payouts. We accrue the estimated cost of the uninsured portion of pending claims and an estimate for allocated loss adjustment expenses including legal and other direct costs associated with a claim. Estimates require judgments concerning the nature and severity of the claim, historical trends, advice from third-party administrators and insurers, the size of any potential damage award based on factors such as the specific facts of individual cases, the jurisdictions involved, the prospect of punitive damages, future medical costs, and inflation estimates of future claims development, and the legal and other costs to settle or defend the claims. We have significant exposure to fluctuations in the number and severity of claims. If there is an increase in the frequency and severity of claims, or we are required to accrue or pay additional amounts if the claims prove to be more severe than originally assessed, or any of the claims would exceed the limits of our insurance coverage, our profitability could be adversely affected.
In addition to estimates within our self-insured retention layers, we also must make judgments concerning claims where we have third party insurance and for claims outside our coverage limits. Upon settling claims and expenses associated with claims where we have third party coverage, we are generally required to initially fund payment to the claimant and seek reimbursement from the insurer. Receivables from insurers for claims and expenses we have paid on behalf of insurers were $0.7 million and $0.1 million or less at December 31, 20152016 and 2014,2015, respectively, and are included in drivers' advances and other receivables on our consolidated balance sheet. Additionally, we accrue claims above our self-insured retention and record a corresponding receivable for amounts we expect to collect from insurers upon settlement of such claims. We have less than $0.1 million and $0.6 million at December 31, 20152016 and 2014,2015, respectively, as a receivable in other assets and as a corresponding accrual in the long-term portion of insurance and claims accruals on our consolidated balance sheet for claims above our self-insured retention for which we believe it is reasonably assured that the insurers will provide their portion of such claims. We evaluate collectability of the receivables based on the credit worthiness and surplus of the insurers, along with our prior experience and contractual terms with each. If any claim occurrence were to exceed our aggregate coverage limits, we would have to accrue for the excess amount. Our critical estimates include evaluating whether a claim may exceed such limits and, if so, by how much. If one or more claims were to exceed our then effective coverage limits, our financial condition and results of operations could be materially and adversely affected.
We also make judgementsjudgments regarding the ultimate benefit versus risk toof commuting certain periods within our auto liability policy. If we commute a policy, we assume 100% risk for covered claims in exchange for a policy refund. In April 2015, we commuted two liability policies for the period from April 1, 2013 through September 30, 2014, such that we are now responsible for any claim that occurred during that period up to $20.0 million, should such a claim develop. We recorded a $3.6 million reduction in insurance and claims expense in the second quarter of 2015 related to the commutation. The insurer did not remit the premium refund directly to the Company, but rather applied a credit to the current auto liability insurance policy, such that we recorded the policy release premium refund as a prepaid asset at June 30, 2015.
Effective April 2015, we entered into new auto liability policies with a three-year term. As a result of the commutation and the Company’s improved safety statistics over the prior policy, the Company received favorable premium pricing for the upcoming three year policy period, which we expect will reduce the fixed portion of insurance expense going forward.
Effective April 2015, we entered into a new auto liability policies with a three-year term.during such period. The policy includes a limit for a single loss of $9.0 million, an aggregate of $18.0 million for each policy year, and a $30.0 million aggregate for the three-year period ended March 31, 2018. The policy includes a policy release premium refund of up to $14.7$13.6 million, less any future amounts paid on claims by the insurer, from October 1, 2014 through March 31, 2018, if we were to commute the policy for the entire three years. A decision with respect to commutation of the policy cannot be made before April 1, 2018, unless both we and the insurance carrier agree to a commutation prior to the end of the policy term. Management cannot predict whether or not future claims or the development of existing claims will justify a commutation, and accordingly, no related amounts were recorded at December 31, 2015.2016.
Interest
We capitalize interest on major projects during construction. Interest is capitalized based on the average interest rate on related debt. Capitalized interest was less than $0.1 million in 2016, 2015, 2014, and 2013.2014.
Fair Value of Financial Instruments
Our financial instruments consist primarily of cash and cash equivalents, accounts receivable, commodity contracts, accounts payable, debt, and an interest rate swap.swaps. The carrying amount of cash and cash equivalents, accounts receivable, accounts payable, and current debt approximates their fair value because of the short-term maturity of these instruments. The carrying value of the factored receivables approximates the fair value, as the receivables are generally repaid directly to us by the client's customer within 30-40 days due to the combination of the short-term nature of the financing transaction and the underlying quality of the receivables. Interest rates that are currently available to us for issuance of long-term debt with similar terms and remaining maturities are used to estimate the fair value of our long-term debt, which primarily consists of revenue equipment installment notes. The fair value of our revenue equipment installment notes approximated the carrying value at December 31, 2015,2016, as the weighted average interest rate on these notes approximates the market rate for similar debt. Borrowings under our revolving Credit Facility approximate fair value due to the variable interest rate on the facility. Additionally, commodity contracts, which are accounted for as hedge derivatives, as discussed in Note 13, are valued based on the forward rate of the specific indices upon which the contract is being settled and adjusted for counterparty credit risk using available market information and valuation methodologies.methodologies. The fair value of our interest rate swap agreementagreements is determined using the market-standard methodology of netting the discounted future fixed-cash payments and the discounted expected variable-cash receipts. The variable-cash receipts are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. These analyses reflect the contractual terms of the swap, including the period to maturity, and use observable market-based inputs, including interest rate curves and implied volatilities. The fair value calculation also includes an amount for risk of non-performance of our counterparties using "significant unobservable inputs" such as estimates of current credit spreads to evaluate the likelihood of default, which we have determined to be insignificant to the overall fair value of our interest rate swap agreement.agreements.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We have reflected the net liability after offsetting our deferred tax assets and liabilities in the deferred income taxes line in the accompanying consolidated balance sheets in accordance with our retrospective early adoption of Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") NoNo. 2015-17, Income Taxes: Balance Sheet Classification of Deferred Taxes, as discussed below. We believe the future tax deductions will be realized principally through future reversals of existing taxable temporary differences and future taxable income, except for when a valuation allowance has been provided as discussed in Note 9.
In the ordinary course of business there is inherent uncertainty in quantifying our income tax positions. We assess our income tax positions and record tax benefits for all years subject to examination based upon management's evaluation of the facts, circumstances, and information available at the reporting dates. For those tax positions where it is more likely than not that a tax benefit will be sustained, we have recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. Potential accrued interest and penalties related to unrecognized tax benefits are recognized as a component of income tax expense.
Our policy is to recognize income tax benefit arising from the exercise of stock options and restricted share vesting based on the ordering provisions of the tax law as prescribed by the Internal Revenue Code, including indirect tax effects, if any.
Lease Accounting and Off-Balance Sheet Transactions
We issue residual value guarantees in connection with the operating leases we enter into for certain of our revenue equipment. These leases provide that if we do not purchase the leased equipment from the lessor at the end of the lease term, then we are liable to the lessor for an amount equal to the shortage (if any) between the proceeds from the sale of the equipment and an agreed value. To the extent the expected value at the lease termination date is lower than the residual value guarantee, we would accrue for the difference over the remaining lease term. We believe that proceeds from the sale of equipment under operating leases would equal or exceed the payment obligation on substantially all operating leases. The estimated values at lease termination involve management judgments. As leases are entered into, determination as to the classification as an operating or capital lease involves management judgments on residual values and useful lives.
Capital Structure
The shares of Class A and B common stock are substantially identical except that the Class B shares are entitled to two votes per share and immediately convert to Class A shares if beneficially owned by anyone other than our Chief Executive Officer or certain members of his immediate family, while Class A shares are entitled to one vote per share. The terms of any future issuances of preferred shares will be set by our Board of Directors.
Comprehensive Income
Comprehensive income generally includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. Comprehensive income for 2016, 2015, 2014, and 20132014 was comprised of the net income plus the unrealized gain or loss on the effective portion of cash flow hedges and the reclassified cash flow hedge gains or losses into earnings.
Income Per Share
Basic income per share excludes dilution and is computed by dividing earnings available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted income per share 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 our earnings. The calculation of diluted earnings per share includes all unexercised options and 0.1 million unvested shares. A de minimus number of unvested shares have been excluded from the calculation of diluted earnings per share since the effect of any assumed exercise of the related awards would be anti-dilutive for the years ended December 31, 2016, 2015, 2014, and 2013,2014, respectively. Income per share is the same for both Class A and Class B shares.
The following table sets forth the calculation of net income per share included in the consolidated statements of operations for each of the three years ended December 31:
(in thousands except per share data) | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | 2016 | | | 2015 | | | 2014 | |
Numerator: | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Net income | | $ | 42,085 | | | $ | 17,808 | | | $ | 5,244 | | | $ | 16,835 | | | $ | 42,085 | | | $ | 17,808 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Denominator: | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Denominator for basic income per share – weighted-average shares | | | 18,145 | | | | 15,250 | | | | 14,837 | | | | 18,182 | | | | 18,145 | | | | 15,250 | |
Effect of dilutive securities: | | | | | | | | | | | | | | | | | | | | | | | | |
Equivalent shares issuable upon conversion of unvested restricted shares | | | 161 | | | | 266 | | | | 202 | | | | 84 | | | | 161 | | | | 266 | |
Equivalent shares issuable upon conversion of unvested employee stock options | | | 5 | | | | 1 | | | | - | | | | - | | | | 5 | | | | 1 | |
Denominator for diluted income per share adjusted weighted-average shares and assumed conversions | | | 18,311 | | | | 15,517 | | | | 15,039 | | | $ | 18,266 | | | $ | 18,311 | | | $ | 15,517 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net income per share: | | | | | | | | | | | | | | | | | | | | | | | | |
Basic income per share | | $ | 2.32 | | | $ | 1.17 | | | $ | 0.35 | | | $ | 0.93 | | | $ | 2.32 | | | $ | 1.17 | |
Diluted income per share | | $ | 2.30 | | | $ | 1.15 | | | $ | 0.35 | | | $ | 0.92 | | | $ | 2.30 | | | $ | 1.15 | |
Stock-Based Employee Compensation
We issue several types of stock-based compensation, including awards that vest based on service and performance conditions or a combination of the conditions. Performance-based awards vest contingent upon meeting certain performance criteria established by the Compensation Committee. All awards require future service and thus forfeitures are estimated based on historical forfeitures and the remaining term until the related award vests. DeterminingFor performance-based awards, determining the appropriate amount to expense in each period is based on likelihood and timing of achieving the stated targets for performance-based awards and requires judgment, including forecasting future financial results. The estimates are revised periodically based on the probability and timing of achieving the required performance and adjustments are made as appropriate. Awards that are only subject to time vesting provisions are amortized using the straight-line method.
Derivative Instruments and Hedging Activities
We periodically utilize derivative instruments to manage exposure to changes in fuel prices and interest rates. At inception of a derivative contract, we document relationships between derivative instruments and hedged items, as well as our risk-management objective and strategy for undertaking various derivative transactions, and assess hedge effectiveness. We record derivative financial instruments in the balance sheet as either an asset or liability at fair value. If it is determined that a derivative is not highly effective as a hedge, or if a derivative ceases to be a highly effective hedge, we discontinue hedge accounting prospectively. The effective portion of changes in the fair value of derivatives are recorded in other comprehensive income, and reclassified into earnings in the same period during which the hedged transaction affects earnings. The ineffective portion is recorded in other income or expense.
Reclassifications
The prior year proceeds and repaymentsAs a result of adopting ASU 2015-15, discussed more below, $0.7 million was reclassified from other assets to notes payable as of December 31, 2015 to present debt issuance as a direct deduction from the carrying amount of the revolving credit facility have been reclassified in the Consolidated Statementdebt.
Recent Accounting Pronouncements
Accounting Standards adopted
In NovemberApril 2015, the FASB issued ASU No. 2015-17. This standard requires companies to classify all deferred tax assets and liabilities as noncurrent on the balance sheet instead of separating deferred taxes into current and noncurrent amounts. This ASU is effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2016, with early adoption permitted. The Company has elected to early adopt this standard effective December 31, 2015, on a retrospective basis. See Note 9 for further information about the early adoption of this ASU.
Accounting Standards not yet adopted
In May 2014, the FASB and the InternationalFinancial Accounting Standards Board issued converged guidance on recognizing revenue in contracts with customers. The new guidance establishes a single core principle in ASU No. 2014-09, which provides for recognition of revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance will affect any reporting organization that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial assets. In August 2015, ASU 2015-14 was issued which deferred the effective date of ASU 2014-09 to fiscal years, and interim periods within those years, beginning on or after December 15, 2017, with early adoption permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is evaluating the new guidance and plans to provide additional information about its expected impact at a future date.
In August 2014, the FASB issued ASU No. 2014-15. This standard provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity's ability to continue as a going concern within one year of the date the financial statements are issued. This ASU is effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2016, with early adoption permitted. The Company is evaluating the new guidance and plans to provide additional information about its expected impact at a future date.
In April 2015, the FASB("FASB") issued ASU 2015-03, and in August 2015, the FASB issued ASU 2015-15. 2015-15. These ASUs require debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt consistent with debt discounts. The presentation and subsequent measurement of debt issuance costs associated with lines of credit, may be presented as an asset and amortized ratably over the term of the line-of-creditline of credit arrangement, regardless of whether there are outstanding borrowings on the arrangement. The recognition and measurement guidance for debt issuance costs are not affected by these ASUs. These ASUs are effective for financial statements issued for fiscal years beginning after December 15, 2015 and interim periods within those years with early adoptingadoption permitted. The Company will adoptWe have adopted this standard for the fiscal year 2016. Adoption
In March 2016, the FASB issued ASU 2016-09, which changes the accounting for certain aspects of share-based payments to employees. The guidance requires the recognition of the income tax effects of awards in the income statement when the awards vest or are settled, thus eliminating additional paid-in-capital pools. The guidance also allows for the employer to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting. In addition, the guidance is effective in 2017 with early adoption permitted. We have adopted this standard effective for the fiscal year 2016 resulting in the recording of $2.2 million to retained earnings as of the beginning of 2016, and $1.1 million of additional income tax benefit in 2016 as a result of previously unrecognized tax benefits resulting from our net operating loss carryovers. The statement of cash flows has not been adjusted for prior periods, as we have adopted the statement of cash flow guidance prospectively.
Accounting Standards not yet adopted
In April 2015, the FASB issued ASU 2015-14, which defers the effective date of ASU 2014-09. The new standard introduces a five-step model to determine when and how revenue is recognized. The premise of the new model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard will be effective for the Company for its annual reporting period beginning January 1, 2018, including interim periods within that reporting period. Early application is permitted for annual periods beginning January 1, 2017. Entities are allowed to transition to the new standard by either recasting prior periods or recognizing the cumulative effect. We are in the process of evaluating the new standard, but we believe our revenue recognized under the new standard will generally approximate revenue under current standards and, while we expect an impact to both revenue and certain variable expenses as a result of the adoption, we expect that the net impact to equity or earnings on a prospective basis will not be material. We plan to complete our evaluation in 2017, including an assessment of the new expanded disclosure requirements and a final determination of the transition method we will use to adopt the new standard.
In February 2016, the FASB issued ASU 2016-02, which requires lessees to recognize a right-to-use asset and a lease obligation for all leases. Lessees are permitted to make an accounting policy election to not recognize an asset and liability for leases with a term of twelve months or less. Lessor accounting under the new standard is substantially unchanged. Additional qualitative and quantitative disclosures, including significant judgments made by management, will be required. This new standard will become effective for us in our annual reporting period beginning January 1, 2019, including interim periods within that reporting period and requires a modified retrospective transition approach. We are currently evaluating the impacts the adoption of this standard will result inhave on the reclassification of approximately $0.7 million from other assets to long-term notes payable as of December 31, 2015.consolidated financial statements.
2. LIQUIDITY
Our business requires significant capital investments over the short-term and the long-term. Recently, we have financedWe generally finance our capital requirements with borrowings under our Third Amended and Restated Credit Facility ("Credit Facility"), cash flows from operations, long-term operating leases, capital leases, secured installment notes with finance companies, proceeds of our November 2014 public offering of Class A common stock, and proceeds from the sale of our used revenue equipment in 20152016 and 2014.2015. We had working capital (total current assets less total current liabilities) of $46.4$47.9 million and $40.9$46.6 million at December 31, 20152016 and 2014,2015, respectively. Based on our expected financial condition, net capital expenditures, and results of operations and related net cash flows, we believe our working capital and sources of liquidity will be adequate to meet our current and projected needs for at least the next year.
As of December 31, 2015,2016, we had $3.0$12.2 million of borrowings outstanding, undrawn letters of credit outstanding of approximately $31.4$27.2 million, and available borrowing capacity of $60.6$55.6 million under the Credit Facility. Fluctuations in the outstanding balance and related availability under our Credit Facility are driven primarily by cash flows from operations and the timing and nature of property and equipment additions that are not funded through notes payable, as well as the nature and timing of collection of accounts receivable, payments of accrued expenses, and receipt of proceeds from disposals of property and equipment.
3. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Accordingly, fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or liability. The fair value of the hedge derivative liability was determined based on quotes from the counterparty which were verified by comparing them to the exchange on which the related futures are traded, adjusted for counterparty credit risk. The fair value of our interest rate swap agreement is determined using the market-standard methodology of netting the discounted future fixed-cash payments and the discounted expected variable-cash receipts. The variable-cash receipts are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. These analyses reflect the contractual terms of the swap, including the period to maturity, and use observable market-based inputs, including interest rate curves and implied volatilities. The fair value calculation also includes an amount for risk of non-performance of our counterparties using "significant unobservable inputs" such as estimates of current credit spreads to evaluate the likelihood of default, which we have determined to be insignificant to the overall fair value of our interest rate swap agreement. A three-tier fair value hierarchy is used to prioritize the inputs in measuring fair value as follows:
● | Level 1. Observable inputs such as quoted prices in active markets; |
● | Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and |
● | Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. |
Liabilities Measured at Fair Value on a Recurring Basis
Derivatives Measured at Fair Value on a Recurring Basis | | Derivatives Measured at Fair Value on a Recurring Basis | |
(in thousands) | | December 31, | | | December 31, | |
Hedge derivative liability | | | | | | | |
Fair Value of Derivative | | $ | (28,434 | ) | | $ | (22,720 | ) | |
Hedge derivatives | | | 2016 (1) | | | 2015 (1) | |
Net Fair Value of Derivative(2) | | | $ | (4,293 | ) | | $ | (28,434 | ) |
Quoted Prices in Active Markets (Level 1) | | | - | | | | - | | | | - | | | | - | |
Significant Other Observable Inputs (Level 2) | | $ | (28,434 | ) | | $ | (22,720 | ) | | $ | (4,293 | ) | | $ | (28,434 | ) |
Significant Unobservable Inputs (Level 3) | | | - | | | | - | | | | - | | | | - | |
| (1) | No cash collateral was provided by the Company at December 31, 2016 and 2015. Excludes cash collateral |
(2) | Includes derivative assets of $5.0 million provided by the Company to the counterparty$26 at December 31, 2014.2016. |
4. STOCK-BASED COMPENSATION
On February 21, 2014, the Compensation Committee of our Board of Directors approved, subject to stockholder approval, a third amendment (the "Third Amendment") to the 2006 Omnibus Incentive Plan (the "Incentive Plan"). The Third Amendment (i) provides that the maximum aggregate number of shares of Class A common stock available for grant of awards under the Incentive Plan from and after May 29, 2014, shall not exceed 750,000, plus any remaining available shares of the 800,000 shares previously made available under the second amendment to the Incentive Plan (the "Second Amendment"), and any expirations, forfeitures, cancellations, or certain other terminations of shares approved for grant under the Third Amendment or the Second Amendment previously reserved, plus any remaining expirations, forfeitures, cancellations, or certain other terminations of such shares, and (ii) re-sets the term of the Incentive Plan to expire with respect to the ability to grant new awards on March 31, 2023. The Compensation Committee also re-approved, subject to stockholder re-approval, the material terms of the performance-based goals under the Incentive Plan so that certain incentive awards granted thereunder would continue to qualify as exempt "performance-based compensation" under Internal Revenue Code Section 162(m). The Company's stockholders approved the adoption of the Third Amendment and re-approved the material terms of the performance-based goals under the Incentive Plan at the Company's 2014 Annual Meeting held on May 29, 2014.
The Incentive Plan permits annual awards of shares of our Class A common stock to executives, other key employees, non-employee directors, and eligible participants under various types of options, restricted share awards, or other equity instruments. At December 31, 2015, 734,1502016, 619,427 of the aforementioned 1,550,000 shares noted above were available for award under the amended Incentive Plan. No participant in the Incentive Plan may receive awards of any type of equity instruments in any calendar-year that relates to more than 200,000 shares of our Class A common stock. No awards may be made under the Incentive Plan after March 31, 2023. To the extent available, we have issued treasury stock to satisfy all share-based incentive plans.
Included in salaries, wages, and related expenses within the consolidated statements of operations is stock-based compensation expense of $1.3$1.2 million, $1.3 million, and $0.3$1.3 million in 2016, 2015, 2014, and 2013,2014, respectively. Included in general supplies and expenses within the consolidated statements of operations is stock-based compensation expenses for non-employee directors of $0.2 million in 2016, $0.2 million in 2015 and $0.1 million in 2014 and 2013.2014. All stock compensation expense recorded in 2016, 2015, 2014, and 20132014 relates to restricted shares granted, as no options were granted during these periods. Associated with stock compensation expense was no income tax benefit in 2016 and 2015 and $0.8 million income tax benefit and $0.1 million income tax deficit in 2015, 2014, and 2013, respectively, related to the exercise of stock options and restricted share vesting, resulting in related changes in taxable income and offsetting changes to additional paid in capital.
The Incentive Plan allows participants to pay the federal and state minimum statutory tax withholding requirements related to awards that vest or allows the participant to deliver to us shares of Class A common stock having a fair market value equal to the minimum amount of such required withholding taxes. To satisfy withholding requirements for shares that vested, certain participants elected to deliver to us 55,429, 84,138, 39,676, and 53,18839,676 Class A common stock shares, which were withheld at weighted average per share prices of $20.61, $27.10, $20.97, and $6.41$20.97 based on the closing prices of our Class A common stock on the dates the shares vested in 2016, 2015, 2014, and 2013,2014, respectively, in lieu of the federal and state minimum statutory tax withholding requirements. We remitted $1.1 million, $2.3 million, and $0.8 million in 2016, 2015, and $0.3 million in 2015, 2014, and 2013, respectively, to the proper taxing authorities in satisfaction of the employees' minimum statutory withholding requirements. The payment of minimum tax withholdings on stock compensation are reflected within the issuances of restricted shares from treasury stock in the accompanying consolidated statement of stockholders' equity.
The following table summarizes our restricted share award activity for the fiscal years ended December 31, 2016, 2015, 2014, and 2013:2014:
| | Number of stock awards (in thousands) | | | Weighted average grant date fair value | | | Number of stock awards (in thousands) | | | Weighted average grant date fair value | |
| | | | | | | | | | | | |
Unvested at December 31, 2012 | | | 764 | | | $ | 6.62 | | |
| | | | | | | | | |
Granted | | | 263 | | | $ | 5.60 | | |
Vested | | | (200 | ) | | $ | 8.12 | | |
Forfeited | | | (50 | ) | | $ | 5.56 | | |
Unvested at December 31, 2013 | | | 777 | | | $ | 5.95 | | | | 777 | | | $ | 5.95 | |
| | | | | | | | | | | | | | | | |
Granted | | | 136 | | | $ | 12.27 | | | | 136 | | | $ | 12.27 | |
Vested | | | (137 | ) | | $ | 7.43 | | | | (137 | ) | | $ | 7.43 | |
Forfeited | | | (134 | ) | | $ | 7.80 | | | | (134 | ) | | $ | 7.80 | |
Unvested at December 31, 2014 | | | 642 | | | $ | 6.60 | | | | 642 | | | $ | 6.60 | |
| | | | | | | | | | | | | | | | |
Granted | | | 63 | | | $ | 28.10 | | | | 63 | | | $ | 28.10 | |
Vested | | | (246 | ) | | $ | 4.97 | | | | (246 | ) | | $ | 4.97 | |
Forfeited | | | (129 | ) | | $ | 5.38 | | | | (129 | ) | | $ | 5.38 | |
Unvested at December 31, 2015 | | | 330 | | | $ | 12.43 | | | | 330 | | | $ | 12.43 | |
| | | | | | | | | |
Granted | | | | 120 | | | $ | 18.92 | |
Vested | | | | (169 | ) | | $ | 5.28 | |
Forfeited | | | | (16 | ) | | $ | 16.53 | |
Unvested at December 31, 2016 | | | | 265 | | | $ | 18.63 | |
The unvested shares at December 31, 20152016 will vest based on when and if the related vesting criteria are met for each award. All awards require continued service to vest, and 192,891of158,015 of these awards vest solely based on continued service, in varying increments between 20162017 and 2018.2019. Performance based awards account for 136,961107,453 of the unvested shares at December 31, 2015,2016, of which 75,09829,959 shares have no unrecognized compensation cost as the cost has been fully recognized based on the performance goals having been achieved for the year ended December 31, 20152016 and 61,86377,494 shares relate to performance for the years ended December 31, 2016 and 2017 and 2018 and have $1.2 million ofno unrecognized compensation cost.cost as vesting is not probable.
The fair value of restricted share awards that vested in 2016, 2015, 2014, and 20132014 was approximately $3.5 million, $6.5 million, $2.9 million, and $1.2$2.9 million, respectively. As of December 31, 2015,2016, we had approximately $2.2$3.6 million of unrecognized compensation expense related to 192,891158,015 service-based and 61,863 2016 and 2017 performance-based restricted share awards,shares, which is probable to be recognized over a weighted average period of approximately 25 months. All restricted shares awarded to executives and other key employees pursuant to the Incentive Plan haveprovide the holder with voting and other stockholder-type rights, but will not be issued until the relevant restrictions are satisfied.
The following table summarizes our stock option activity for the fiscal years ended December 31, 2014, 2013,2016, 2015, and 2012:2014:
| | Number of options (in thousands) | | | Weighted average exercise price | | Weighted average remaining contractual term | | Aggregate intrinsic value (in thousands) | | | Number of options (in thousands) | | | Weighted average exercise price | | | Weighted average remaining contractual term | | | Aggregate intrinsic value (in thousands) | |
| | | | | | | | | | | | | | | | | | | | | | |
Outstanding at December 31, 2012 | | | 333 | | | $ | 15.67 | | 1.5 years | | $ | - | | |
| | | | | | | | | | | | | | |
Options granted | | | - | | | | - | | | | | | | |
Options exercised | | | - | | | | - | | | | | | | |
Options forfeited | | | (112 | ) | | $ | 17.14 | | | | | | | |
Outstanding at December 31, 2013 | | | 221 | | | $ | 14.98 | | 1.0 years | | $ | - | | | | 221 | | | $ | 14.98 | | | 1.0 years | | | $ | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Options granted | | | - | | | | - | | | | | | | | | - | | | | - | | | | | | | | |
Options exercised | | | (45 | ) | | $ | 13.64 | | | | | | | | | (45 | ) | | $ | 13.64 | | | | | | | | |
Options forfeited | | | (100 | ) | | $ | 21.71 | | | | | | | | | (100 | ) | | $ | 21.71 | | | | | | | | |
Outstanding at December 31, 2014 | | | 76 | | | $ | 14.73 | | 0.5 years | | $ | 945 | | | | 76 | | | $ | 14.73 | | | 0.5 years | | | $ | 945 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Options granted | | | - | | | | - | | | | | | | | | - | | | | - | | | | | | | | |
Options exercised | | | (73 | ) | | $ | 14.79 | | | | | | | | | (73 | ) | | $ | 14.79 | | | | | | | | |
Options forfeited | | | - | | | | - | | | | | | | | | - | | | | - | | | | | | | | |
Outstanding at December 31, 2015 | | | 3 | | | $ | 12.79 | | 0.4 years | | $ | 15 | | | | 3 | | | $ | 12.79 | | | 0.4 years | | | $ | 15 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Exercisable at December 31, 2015 | | | 3 | | | $ | 12.79 | | 0.4 years | | $ | 15 | | |
Options granted | | | | - | | | | - | | | | | | | | |
Options exercised | | | | (3 | ) | | $ | 12.79 | | | | - | | | | - | |
Options forfeited | | | | - | | | | - | | | | | | | | | |
Outstanding at December 31, 2016 | | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | |
Exercisable at December 31, 2016 | | | | - | | | | - | | | | - | | | | - | |
5. PROPERTY AND EQUIPMENT
A summary of property and equipment, at cost, as of December 31, 20152016 and 20142015 is as follows:
(in thousands) | | | | | | | | | | | Estimated Useful Lives | | | 2016 | | | 2015 | |
Revenue equipment | | 3-10 years | | | $ | 468,693 | | | $ | 418,574 | | | 3-10 years | | | $ | 499,809 | | | $ | 468,693 | |
Communications equipment | | 5-10 years | | | | 8,189 | | | | 8,248 | | | 5-10 years | | | | 8,192 | | | | 8,189 | |
Land and improvements | | 0-10 years | | | | 25,184 | | | | 18,820 | | | 0-10 years | | | | 25,482 | | | | 25,184 | |
Buildings and leasehold improvements | | 7-40 years | | | | 71,614 | | | | 37,217 | | | 7-40 years | | | | 71,324 | | | | 71,614 | |
Construction in-progress | | | - | | | | 1,104 | | | | 2,976 | | | | - | | | | 3,176 | | | | 1,104 | |
Other | | 2-7 years | | | | 21,287 | | | | 19,510 | | | 2-7 years | | | | 23,093 | | | | 21,287 | |
| | | | | | $ | 596,071 | | | $ | 505,345 | | | | | | | $ | 631,076 | | | $ | 596,071 | |
Depreciation expense was $71.4 million, $61.9 million, and $49.0 million, in 2016, 2015, and $44.2 million, in 2015, 2014, and 2013, respectively. The aforementionedThis depreciation expense excludes net losses on the sale of property and equipment totaling $0.8 million in 2016, and net gains on the sale of property and equipment totaling $0.6 million $2.7 million, and $0.8$2.7 million in 2015 2014, and 2013,2014, respectively, which are presented net in depreciation and amortization expense in the consolidated statements of operations.
We lease certain revenue equipment under capital leases with terms of approximately 60 to 84 months. At December 31, 20152016 and 2014,2015, property and equipment included capitalized leases, which had capitalized costs of $19.4$26.6 million and $33.8$19.4 million and accumulated amortization of $4.7$4.2 million and $10.6$4.7 million, respectively. Amortization of these leased assets is included in depreciation and amortization expense in the consolidated statement of operations and totaled $1.6 million, $2.0 million, and $3.0 million during 2016, 2015, and $2.2 million during 2015, 2014, and 2013, respectively.
6. GOODWILL AND OTHER ASSETS
We have no goodwill or identifiable intangible assets on our consolidated balance sheet.sheet at December 31, 2016.
A summary of other assets as of December 31, 20152016 and 20142015 is as follows:
(in thousands) | | | | | | | | 2016 | | | 2015 | |
Customer relationships | | | 3,490 | | | | 3,490 | | | $ | - | | | $ | 3,490 | |
Less: accumulated amortization of intangibles | | | (3,321 | ) | | | (3,255 | ) | | | - | | | | (3,321 | ) |
Net intangible assets | | | 169 | | | | 235 | | | | - | | | | 169 | |
Investment in TEL | | | 16,788 | | | | 12,192 | | | | 18,526 | | | | 16,788 | |
Other long-term receivables | | | 576 | | | | 575 | | | | 1 | | | | 576 | |
Deposits | | | 314 | | | | 546 | | | | 481 | | | | 314 | |
Deferred loan costs, net | | | 706 | | | | 724 | | |
Interest rate swap | | | | 26 | | | | - | |
Other, net | | | 1,984 | | | | 491 | | | | 1,070 | | | | 1,984 | |
| | $ | 20,537 | | | $ | 14,763 | | | $ | 20,104 | | | $ | 19,831 | |
Amortization expenses of intangible assets were $0.1$0.2 million, $0.1 million, and $0.2$0.1 million for 2016, 2015, and 2014, and 2013, respectively. Approximate intangible amortization expense for the next five years is as follows:
| | (In thousands) | |
2016 | | | 48 | |
2017 | | | 35 | |
2018 | | | 25 | |
2019 | | | 18 | |
2020 | | | 43 | |
Thereafter | | $ | - | |
7. DEBT
Current and long-term debt consisted of the following at December 31, 20152016 and 2014:2015:
(in thousands) | | | | | | | | December 31, 2016 | | | December 31, 2015 | |
| | | | | | | | | | | | | | Current | | | Long-Term | | | Current | | | Long-Term | |
Borrowings under Credit Facility | | $ | - | | | $ | 3,002 | | | $ | - | | | $ | - | | | $ | - | | | $ | 12,185 | | | $ | - | | | $ | 3,002 | |
Revenue equipment installment notes; weighted average interest rate of 3.6% at December 31, 2015, and 3.7% December 31, 2014, due in monthly installments with final maturities at various dates ranging from January 2016 to January 2022, secured by related revenue equipment | | | 38,461 | | | | 163,387 | | | | 27,550 | | | | 155,832 | | |
Real estate note; weighted average interest rate of 2.0% and 2.5% at December 31, 2015 and 2014, respectively, due in monthly installments with fixed maturity at December 2018 and August 2035, secured by related real-estate | | | 1,184 | | | | 30,124 | | | | 166 | | | | 3,608 | | |
Other note payable, interest rate of 3.0% at December 31, 2014 | | | - | | | | - | | | | 108 | | | | 91 | | |
Revenue equipment installment notes; weighted average interest rate of 3.3% at December 31, 2016, and 3.6% December 31, 2015, due in monthly installments with final maturities at various dates ranging from January 2017 to December 2022, secured by related revenue equipment | | | | 23,986 | | | | 127,840 | | | | 38,461 | | | | 163,387 | |
Real estate notes; weighted average interest rate of 2.4% and 2.0% at December 31, 2016 and 2015, respectively, due in monthly installments with fixed maturities at December 2018 and August 2035, secured by related real-estate | | | | 1,224 | | | | 28,907 | | | | 1,184 | | | | 30,124 | |
Deferred loan costs | | | | (263 | ) | | | (256 | ) | | | (250 | ) | | | (456 | ) |
Total debt | | | 39,645 | | | | 196,513 | | | | 27,824 | | | | 159,531 | | | | 24,947 | | | | 168,676 | | | | 39,395 | | | | 196,057 | |
Principal portion of capital lease obligations, secured by related revenue equipment | | | 4,031 | | | | 10,547 | | | | 1,606 | | | | 13,372 | | | | 2,441 | | | | 19,761 | | | | 4,031 | | | | 10,547 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total debt and capital lease obligations | | $ | 43,676 | | | $ | 207,060 | | | $ | 29,430 | | | $ | 172,903 | | | $ | 27,388 | | | $ | 188,437 | | | $ | 43,426 | | | $ | 206,604 | |
We and substantially all of our subsidiaries (collectively, the "Borrowers") are parties to a Third Amended and Restated Credit Facility (the "Credit Facility") with Bank of America, N.A., as agent (the "Agent") and JPMorgan Chase Bank, N.A. ("JPM," and together with the Agent, the "Lenders").
The Credit Facility is a $95.0 million revolving credit facility, with an uncommitted accordion feature that, so long as no event of default exists, allows us to request an increase in the revolving credit facility of up to $50.0 million subject to lenderLender acceptance of the additional funding commitment. The Credit Facility included,includes, within our $95.0 million revolving credit facility, a letter of credit sub facility in an aggregate amount of $95.0 million and a swing line sub facility in an aggregate amount equal to the greater of $10.0 million or 10% of the Lenders' aggregate commitments under the Credit Facility from time-to-time.
In August 2015, we entered into an eleventh amendment to the Credit Facility, which, among other things, (i) amended the "Applicable Margin" to improve the interest rate grid, as set forth in the tables below, (ii) improved the unused line fee pricing to 0.25% per annum, retroactive to July 1, 2015 (previously the fee was 0.375% per annum when availability was less than $50.0 million and 0.5% per annum when availability was at or over such amount), (iii) required each of Driven Analytic Solutions, LLC ("DAS") and Covenant Properties, LLC ("CPI") to be joined to the Credit Agreement as guarantors, (iv) required each of DAS, CPI and Star Properties Exchange, LLC, a Tennessee limited liability company, to pledge certain of its assets as security, (v) contained conditional amendments increasing the borrowing base real estate sublimit and lowering the amortization of the real estate sublimit, (vi) made technical amendments to a variety of sections, including without limitation, permitted investments, permitted stock repurchases, permitted indebtedness, and permitted liens, (vii) consented to theour purchase of the Company'sour headquarters, including related financing, and (viii) extended the maturity date from September 2017 to September 2018. Following the effectiveness of the eleventh amendment, the applicable margin was changed as follows:
Level | | Average Pricing Availability | | Base Rate Loans | | | LIBOR Loans | | | L/C Fee | |
I | | > $40,000,000 | | | .50 | % | | | 1.50 | % | | | 1.50 | % |
II | | ≤ $40,000,000 but > $20,000,000 | | | .75 | % | | | 1.75 | % | | | 1.75 | % |
III | | ≤ $20,000,000 | | | 1.00 | % | | | 2.00 | % | | | 2.00 | % |
Level | | Average Pricing Availability | | Base Rate Loans | | | LIBOR Loans | | | L/C Fee | |
I | | > $75,000,000 | | | .50 | % | | | 1.50 | % | | | 1.50 | % |
II | | ≤ $75,000,000 but > $50,000,000 | | | .75 | % | | | 1.75 | % | | | 1.75 | % |
III | | ≤ $50,000,000 but > $25,000,000 | | | 1.00 | % | | | 2.00 | % | | | 2.00 | % |
IV | | ≤ $25,000,000 | | | 1.25 | % | | | 2.25 | % | | | 2.25 | % |
In exchange for these amendments, we agreed to pay fees of $0.2 million. BasedIn 2016, we entered into the twelfth and thirteenth amendments to the Credit Facility, which among other things (i) increases the approved amount for share repurchases to $45.0 million, subject to certain limitations based on availability asthe available borrowing capacity under the Credit Facility, and (ii) permitted the formation of December 31, 2015, there was no fixed charge coverage requirement.Heritage Insurance, Inc., and substituted certain language to ensure the federal funds rate or LIBOR would not be less than zero.
Borrowings under the Credit Facility are classified as either "base rate loans" or "LIBOR loans." Base rate loans accrue interest at a base rate equal to the greater of the Agent’s prime rate, the federal funds rate plus 0.5%, or LIBOR plus 1.0%, plus an applicable margin ranging from 0.5% to 1.0%; while LIBOR loans accrue interest at LIBOR, plus an applicable margin ranging from 1.5% to 2.0%. The applicable rates are adjusted quarterly based on average pricing availability. The unused line fee is the product of 0.25% times the average daily amount by which the Lenders' aggregate revolving commitments under the Credit Facility exceed the outstanding principal amount of revolver loans and the aggregate undrawn amount of all outstanding letters of credit issued under the Credit Facility. The obligations under the Credit Facility are guaranteed by us and secured by a pledge of substantially all of our assets, with the notable exclusion of any real estate or revenue equipment pledged under other financing agreements, including revenue equipment installment notes and capital leases.
Borrowings under the Credit Facility are subject to a borrowing base limited to the lesser of (A) $95.0 million, minus the sum of the stated amount of all outstanding letters of credit; or (B) the sum of (i) 85% of eligible accounts receivable, plus (ii) the lesser of (a) 85% of the appraised net orderly liquidation value of eligible revenue equipment, (b) 95% of the net book value of eligible revenue equipment, or (c) 35% of the Lenders' aggregate revolving commitments under the Credit Facility, plus (iii) the lesser of (a) $25.0 million or (b) 65% of the appraised fair market value of eligible real estate. We had $3.0$12.2 million of borrowings outstanding under the Credit Facility as of December 31, 2015,2016, undrawn letters of credit outstanding of approximately $31.4$27.2 million, and available borrowing capacity of $60.6$55.6 million. The interest rate on outstanding borrowings as of December 31, 2016, was 2.3% on $9.0 million of base rate loans and 4.3% on $3.2 million of LIBOR loans. Based on availability as of December 31, 2016 and 2015, there was no fixed charge coverage requirement.
The Credit Facility includes usual and customary events of default for a facility of this nature and provides that, upon the occurrence and continuation of an event of default, payment of all amounts payable under the Credit Facility may be accelerated, and the Lenders' commitments may be terminated. If an event of default occurs under the Credit Facility and the Lenders cause all of the outstanding debt obligations under the Credit Facility to become due and payable, this could result in a default under other debt instruments that contain acceleration or cross-default provisions. The Credit Facility contains certain restrictions and covenants relating to, among other things, debt, dividends, liens, acquisitions and dispositions outside of the ordinary course of business, and affiliate transactions. Failure to comply with the covenants and restrictions set forth in the Credit Facility could result in an event of default.
Capital lease obligations are utilized to finance a portion of our revenue equipment and are entered into with certain finance companies who are not parties to our Credit Facility. The leases in effect at December 31, 20152016 terminate in January 20162017 through FebruaryDecember 2022 and contain guarantees of the residual value of the related equipment by us. As such, the residual guarantees are included in the related debt balance as a balloon payment at the end of the related term as well as included in the future minimum capital lease payments. These lease agreements require us to pay personal property taxes, maintenance, and operating expenses.
Pricing for the revenue equipment installment notes is quoted by the respective financial affiliates of our primary revenue equipment suppliers and other lenders at the funding of each group of equipment acquired and include fixed annual rates for new equipment under retail installment contracts. The notes included in the funding are due in monthly installments with final maturities at various dates ranging from January 20162017 to January 2022. The notes contain certain requirements regarding payment, insuring of collateral, and other matters, but do not have any financial or other material covenants or events of default except certain notes totaling $215.5$166.1 million are cross-defaulted with the Credit Facility. Additionally, a portion of the our fuel hedge contracts totaling $27.3$3.6 million at December 31, 2015,2016, is cross-defaulted with the Credit Facility. Additional borrowings from the financial affiliates of our primary revenue equipment suppliers and other lenders are expected to be available to fund new tractors expected to be delivered in 2016,2017, while any other property and equipment purchases, including trailers, are expected to be funded with a combination of available cash, notes, operating leases, capital leases, and/or from the Credit Facility.
In August 2015, we financed a portion of the purchase of our corporate headquarters, a maintenance facility, and certain surrounding property in Chattanooga, Tennessee by entering into a $28.0 million variable rate note with a third party lender. Concurrently with entering into the note, we entered into an interest rate swap to effectively fix the related interest rate to 4.2%. See Note 13 for further information about the interest rate swap.
As of December 31, 2015,2016, the scheduled principal payments of debt, excluding capital leases for which future payments are discussed in Note 8 are as follows:
| | (in thousands) | |
2017 | | $ | 25,210 | |
2018 | | | 39,783 | |
2019 | | | 29,014 | |
2020 | | | 58,424 | |
2021 | | | 14,136 | |
Thereafter | | $ | 27,575 | |
| | | |
2016 | | $ | 39,645 | |
2017 | | | 40,253 | |
2018 | | | 58,735 | |
2019 | | | 33,846 | |
2020 | | | 34,479 | |
Thereafter | | $ | 29,200 | |
8. LEASES
We have operating lease commitments for office and terminal properties, revenue equipment, and computer and office equipment, and we have capital lease commitments for revenue equipment, in each case excluding owner/operator rentals and month-to-month equipment rentals, summarized for the following fiscal years (in thousands):
| | | | | | | | Operating | | | Capital | |
2016 | | $ | 8,430 | | | $ | 4,485 | | |
2017 | | | 5,489 | | | | 1,656 | | | $ | 7,135 | | | $ | 3,062 | |
2018 | | | 2,887 | | | | 1,656 | | | | 6,047 | | | | 3,062 | |
2019 | | | 995 | | | | 1,656 | | | | 3,844 | | | | 3,062 | |
2020 | | | 66 | | | | 3,878 | | | | 430 | | | | 5,284 | |
2021 | | | | - | | | | 6,508 | |
Thereafter | | | - | | | | 2,896 | | | | - | | | | 3,548 | |
Total minimum lease payments | | $ | 17,867 | | | $ | 16,227 | | | $ | 17,456 | | | $ | 24,526 | |
Less: amount representing interest | | | | | | | (1,649 | ) | | | | | | | (2,324 | ) |
Present value of minimum lease payments | | | | | | | 14,578 | | | | | | | | 22,202 | |
Less: current portion | | | | | | | (4,031 | ) | | | | | | | (2,441 | ) |
Capital lease obligations, long-term | | | | | | $ | 10,547 | | | | | | | $ | 19,761 | |
A portion of our operating leases of tractors and trailers contain residual value guarantees under which we guarantee a certain minimum cash value payment to the leasing company at the expiration of the lease. We estimate that the undiscounted value of the residual guarantees is approximately $4.0 million at December 31, 20152016 and 2014,2015, respectively. The residual guarantees at December 31, 20152016 expire between August 2018 and February 2019. We expect our residual guarantees to approximate the market value at the end of the lease term. Additionally, certain leases contain cross-default provisions with other financing agreements and additional charges if the unit's mileage exceeds certain thresholds defined in the lease agreement.
Rental expense is summarized as follows for each of the three years ended December 31:
(in thousands) | | 2015 | | | 2014 | | | 2013 | |
Revenue equipment rentals | | $ | 12,611 | | | $ | 20,935 | | | $ | 22,991 | |
Building and lot rentals | | | 2,078 | | | | 3,561 | | | | 4,044 | |
Other equipment rentals | | | 340 | | | | 317 | | | | 362 | |
| | $ | 15,029 | | | $ | 24,813 | | | $ | 27,397 | |
(in thousands) | | 2016 | | | 2015 | | | 2014 | |
Revenue equipment rentals | | $ | 10,773 | | | $ | 12,611 | | | $ | 20,935 | |
Building and lot rentals | | | 708 | | | | 2,078 | | | | 3,561 | |
Other equipment rentals | | | 254 | | | | 340 | | | | 317 | |
| | $ | 11,735 | | | $ | 15,029 | | | $ | 24,813 | |
9. INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 2016, 2015, 2014, and 20132014 is comprised of:
(in thousands) | | | | | | | | | | | 2016 | | | 2015 | | | 2014 | |
Federal, current | | $ | 124 | | | $ | (94 | ) | | $ | (816 | ) | | $ | 11,951 | | | $ | 124 | | | $ | (94 | ) |
Federal, deferred | | | 18,185 | | | | 12,830 | | | | 7,560 | | | | (2,925 | ) | | | 18,185 | | | | 12,830 | |
State, current | | | 426 | | | | 187 | | | | 102 | | | | 1,811 | | | | 426 | | | | 187 | |
State, deferred | | | 3,087 | | | | 1,851 | | | | 657 | | | | (451 | ) | | | 3,087 | | | | 1,851 | |
| | $ | 21,822 | | | $ | 14,774 | | | $ | 7,503 | | | $ | 10,386 | | | $ | 21,822 | | | $ | 14,774 | |
Income tax expense for the years ended December 31, 2016, 2015, 2014, and 20132014 is summarized below:
(in thousands) | | 2016 | | | 2015 | | | 2014 | |
Computed "expected" income tax expense | | $ | 9,527 | | | $ | 22,368 | | | $ | 11,404 | |
State income taxes, net of federal income tax effect | | | 953 | | | | 2,237 | | | | 1,075 | |
Per diem allowances | | | 2,205 | | | | 2,329 | | | | 2,304 | |
Tax contingency accruals | | | (273 | ) | | | 1,599 | | | | (104 | ) |
Valuation allowance, net | | | - | | | | 218 | | | | 18 | |
Tax credits | | | (694 | ) | | | (7,151 | ) | | | (112 | ) |
Other, net | | | (1,332 | ) | | | 222 | | | | 189 | |
Actual income tax expense | | $ | 10,386 | | | $ | 21,822 | | | $ | 14,774 | |
(in thousands) | | | | | | | | | |
Computed "expected" income tax expense | | $ | 22,368 | | | $ | 11,404 | | | $ | 4,462 | |
State income taxes, net of federal income tax effect | | | 2,237 | | | | 1,075 | | | | 421 | |
Per diem allowances | | | 2,329 | | | | 2,304 | | | | 2,422 | |
Tax contingency accruals | | | 1,599 | | | | (104 | ) | | | (496 | ) |
Valuation allowance, net | | | 218 | | | | 18 | | | | 684 | |
Tax credits | | | (7,151 | ) | | | (112 | ) | | | (250 | ) |
Other, net | | | 222 | | | | 189 | | | | 260 | |
Actual income tax expense | | $ | 21,822 | | | $ | 14,774 | | | $ | 7,503 | |
Income tax expense varies from the amount computed by applying the federal corporate income tax rate of 35% to income before income taxes primarily due to state income taxes, net of federal income tax effect, adjusted for permanent differences, the most significant of which is the effect of the per diem pay structure for drivers. Drivers who meet the requirements to receive per diem receive non-taxable per diem pay in lieu of a portion of their taxable wages. This per diem program increases our drivers' net pay per mile, after taxes, while decreasing gross pay, before taxes. As a result, salaries, wages, and employee benefits are slightly lower and our effective income tax rate is higher than the statutory rate. Generally, as pre-tax income increases, the impact of the driver per diem program on our effective tax rate decreases, because aggregate per diem pay becomes smaller in relation to pre-tax income, while in periods where earnings are at or near breakeven, the impact of the per diem program on our effective tax rate is significant. Due to the partially nondeductible effect of per diem pay, our tax rate will fluctuate in future periods based on fluctuations in earnings.
Tax credits generated at December 31, 2015, consisted of both federal and state tax credits in the amounts of $7.0 million and $0.1 million, respectively. The federal tax credit included a non-recurring tax credit in the amount of $6.5 million.
The temporary differences and the approximate tax effects that give rise to our net deferred tax liability at December 31, 20152016 and 20142015 are as follows:
(in thousands) | | 2015 | | | 2014 | | | 2016 | | | 2015 | |
Deferred tax assets: | | | | | | | | | | | | |
Insurance and claims | | $ | 15,495 | | | $ | 16,153 | | | $ | 15,147 | | | $ | 15,495 | |
Net operating loss carryovers | | | 15,348 | | | | 18,347 | | | | 3,326 | | | | 15,348 | |
Tax credits | | | 10,585 | | | | 1,477 | | | | 6,409 | | | | 10,585 | |
Other | | | 4,730 | | | | 6,086 | | | | 5,113 | | | | 4,730 | |
Deferred fuel hedge | | | 10,947 | | | | 8,144 | | | | 1,653 | | | | 10,947 | |
Valuation allowance | | | (1,219 | ) | | | (1,001 | ) | | | (1,219 | ) | | | (1,219 | ) |
Total deferred tax assets | | | 55,886 | | | | 49,206 | | | | 30,429 | | | | 55,886 | |
| | | | | | | | | | | | | | | | |
Deferred tax liabilities: | | | | | | | | | | | | | | | | |
Property and equipment | | | (125,188 | ) | | | (103,186 | ) | | | (98,679 | ) | | | (125,188 | ) |
Other | | | (4,398 | ) | | | (2,186 | ) | | | (11,121 | ) | | | (4,398 | ) |
Prepaid expenses | | | (3,281 | ) | | | (2,838 | ) | | | (4,786 | ) | | | (3,281 | ) |
Total net deferred tax liabilities | | | (132,867 | ) | | | (108,210 | ) | | | (114,586 | ) | | | (132,867 | ) |
| | | | | | | | | | | | | | | | |
Net deferred tax liability | | $ | (76,981 | ) | | $ | (59,004 | ) | | $ | (84,157 | ) | | $ | (76,981 | ) |
In November 2015, the FASB issued ASU No. 2015-17, "Balance Sheet Classification of Deferred Taxes", an update to ASC 740, Income Taxes. Current GAAP requires an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. To simplify the presentation of deferred income taxes, the amendments in this ASU require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by the amendments in this ASU. This ASU is effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2016, with early adoption permitted. The Company has elected to early adopt this standard effective December 31, 2015, on a retrospective basis and reclassified $14.7 million from net current deferred income tax assets to net noncurrent deferred income tax liabilities as of December 31, 2014.
The net deferred tax liability of $77.0$84.2 million primarily relates to differences in cumulative book versus tax depreciation of property and equipment, partially off-set by net operating loss carryovers and insurance claims that have been reserved but not paid. The carrying value of our deferred tax assets assumes that we will be able to generate, based on certain estimates and assumptions, sufficient future taxable income in certain tax jurisdictions to utilize these deferred tax benefits. If these estimates and related assumptions change in the future, we may be required to establish a valuation allowance against the carrying value of the deferred tax assets, which would result in additional income tax expense. On a periodic basis, we assess the need for adjustment of the valuation allowance. Based on forecasted taxable income resulting from the reversal of deferred tax liabilities, primarily generated by accelerated depreciation for tax purposes in prior periods, and tax planning strategies available to us, no valuation allowance has been established at December 31, 20152016 or 2014,2015, except for $1.2 million at December 31, 2016 and $1.0 million,2015, respectively, related to certain state net operating loss carry forwards. If these estimates and related assumptions change in the future, we may be required to modify our valuation allowance against the carrying value of the deferred tax assets.
As of December 31, 2015,2016, we had a $3.2$2.8 million liability recorded for unrecognized tax benefits, which includes interest and penalties of $0.9$0.8 million. We recognize interest and penalties accrued related to unrecognized tax benefits in tax expense. As of December 31, 2014,2015, we had a $1.6$3.2 million liability recorded for unrecognized tax benefits, which included interest and penalties of $0.7$0.9 million. Interest and penalties recognized for uncertain tax positions provided for a $0.2$0.1 million, $0.1$0.2 million, and a $0.3$0.1 million benefit in each of 2016, 2015, 2014, and 20132014 respectively.
The following tables summarize the annual activity related to our gross unrecognized tax benefits (in thousands) for the years ended December 31, 2016, 2015, 2014, and 2013:2014:
| | | | | | | | | | | 2016 | | | 2015 | | | 2014 | |
Balance as of January 1, | | $ | 995 | | | $ | 1,060 | | | $ | 1,563 | | | $ | 2,394 | | | $ | 995 | | | $ | 1,060 | |
Increases related to prior year tax positions | | | 1,737 | | | | 246 | | | | - | | | | - | | | | 1,737 | | | | 246 | |
Decreases related to prior year positions | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Increases related to current year tax positions | | | - | | | | 42 | | | | 24 | | | | - | | | | - | | | | 42 | |
Decreases related to settlements with taxing authorities | | | (182 | ) | | | (126 | ) | | | - | | | | (88 | ) | | | (182 | ) | | | (126 | ) |
Decreases related to lapsing of statute of limitations | | | (156 | ) | | | (227 | ) | | | (527 | ) | | | (255 | ) | | | (156 | ) | | | (227 | ) |
Balance as of December 31, | | $ | 2,394 | | | $ | 995 | | | $ | 1,060 | | | $ | 2,051 | | | $ | 2,394 | | | $ | 995 | |
If recognized, $2.7$2.4 million and $1.1$2.7 million of unrecognized tax benefits would impact our effective tax rate as of December 31, 20152016 and 2014,2015, respectively. Any prospective adjustments to our reserves for income taxes will be recorded as an increase or decrease to our provision for income taxes and would impact our effective tax rate.
Our 20122013 through 20152016 tax years remain subject to examination by the IRS for U.S. federal tax purposes, our major taxing jurisdiction. In the normal course of business, we are also subject to audits by state and local tax authorities. While it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter, we believe that our reserves reflect the more likely than not outcome of known tax contingencies. We adjust these reserves, as well as the related interest, in light of changing facts and circumstances. Settlement of any particular issue would usually require the use of cash. Favorable resolution would be recognized as a reduction to our annual tax rate in the year of resolution. We do not expect any significant increases or decreases for uncertain income tax positions during the next year.
Our existing federal net operating loss carryforwards were used to offset our taxable income during 2016. Our federal tax credits of $28.6$7.6 million, along with a federal alternative minimum tax credit carryforward of $0.3 million are available to offset future federal taxable income, if any, through 2034,2035, while our state net operating loss carryforwards and state tax credits of $122.9$78.1 million and $0.3 million, respectively expire over various periods through 20342035 based on jurisdiction.
10. EQUITY METHOD INVESTMENT
In May 2011, we acquired a 49.0% interest in TEL for $1.5 million in cash. Additionally, TEL's majority owners were eligible to receive an earn-out of up to $4.5 million for TEL's results through December 31, 2012, of which $1.0 million was earned based on TEL's 2011 results and $2.4 million was earned based on TEL's 2012 results. The earn-out payments increased our investment balance and there are no additional earn-outs payable for future results.
TEL is a tractor and trailer equipment leasing company and used equipment reseller. We have not guaranteed any of TEL's debt and have no obligation to provide funding, services, or assets. UnderIn May 2016, the operating agreement we have anwith TEL was amended to, among other things, remove the previously agreed to fixed date purchase options. Our option to acquire 100%up to the remaining 51% of TEL untilwould have expired May 31, 2016, by purchasing the majority owners' interest based on a multiple of TEL's average earnings before interest and taxes, adjusted for certain items including cash and debt balances as of the acquisition date. Subsequent to May 31, 2016, TEL'sTEL’s majority owners would have received the option to acquirepurchase our interest based on the same terms detailed above.ownership in TEL. The options previously in effect were eliminated, and we are discussing with TEL’s owners a replacement option structure and other alternatives. TEL’s majority owners are generally restricted from transferring their interests in TEL, other than to certain permitted transferees, without our consent. For the years ended December 31, 20152016 and 2014,2015, we sold tractors and trailers to TEL for $6.2$0.4 million and $14.0$6.2 million, respectively, and received $1.3$5.0 million and $1.5$1.3 million, respectively, for providing various maintenance services, certain back-office functions, and for miscellaneous equipment. We reversed previously deferred gains totalingof $0.2 million and less than $0.1 million for the years ending December 31, 20152016 and 2014,2015, respectively, representing 49% of the gains on units sold to TEL less any gains previously deferred and recognized when the equipment was sold to a third party. Deferred gains totaling $0.6 million and $0.8 million at December 31, 20152016 and December 31, 2014,2015, respectively, are being carried as a reduction in our investment in TEL. At December 31, 20152016 and 2014,2015, we had accounts receivable from TEL of $5.3$3.7 million and $2.2$5.3 million, respectively, related to cash disbursements made pursuant to our performance of certain back-office and maintenance functions on TEL's behalf.
We have accounted for our investment in TEL using the equity method of accounting and thus our financial results include our proportionate share of TEL's net income, which amounted to $3.0 million in 2016, $4.6 million in 2015, and $3.7 million in 2014, and $2.8 million in 2013.2014. We received noan equity distribution from TEL for $1.5 million in 2016, no equity distribution in 2015, and $0.3 million in 2014, and less than $0.1 million in 2013, which was distributed to each member based on its respective ownership percentage in order to satisfy estimated tax payments resulting from TEL's earnings. The distribution is the result of TEL being a limited liability company and thus its earnings are attributed to its members for tax purposes and are taxed for federal and certain state income on the members' respective tax returns.percentage. Our investment in TEL, totaling $16.8$18.5 million and $12.2$16.8 million at December 31, 20152016 and 2014,2015, respectively, is included in other assets in the accompanying consolidated balance sheet. Our investment in TEL is comprised of the $4.9 million cash investment noted above and our equity in TEL's earnings since our investment, partially offset by dividends received since our investment for minimum tax withholdings as noted above and the abovementioned deferred gains on sales of equipment to TEL.
See TEL's summarized financial information below.
(in thousands) | | As of the years ended December 31, | | | As of the years ended December 31, | |
| | | | | | | | 2016 | | | 2015 | |
Current Assets | | $ | 14,275 | | | $ | 14,525 | | | $ | 14,320 | | | $ | 14,275 | |
Non-current Assets | | | 125,782 | | | | 64,731 | | | | 146,081 | | | | 125,782 | |
Current Liabilities | | | 29,644 | | | | 16,733 | | | | 34,766 | | | | 29,644 | |
Non-current Liabilities | | | 84,516 | | | | 45,687 | | | | 96,140 | | | | 84,516 | |
Total Equity | | $ | 25,897 | | | $ | 16,836 | | | $ | 29,495 | | | $ | 25,897 | |
(in thousands) | | As of the years ended December 31, | | | As of the years ended December 31, | |
| | | | | | | | | | | 2016 | | | 2015 | | | 2014 | |
Revenue | | $ | 104,838 | | | $ | 90,197 | | | $ | 58,484 | | | $ | 94,432 | | | $ | 104,838 | | | $ | 90,197 | |
Operating Expenses | | | 91,644 | | | | 79,771 | | | | 50,878 | | | | 83,475 | | | | 91,644 | | | | 79,771 | |
Operating Income | | | 13,194 | | | | 10,426 | | | | 7,606 | | | | 10,957 | | | | 13,194 | | | | 10,426 | |
Net Income | | $ | 9,061 | | | $ | 7,564 | | | $ | 5,643 | | | $ | 6,598 | | | $ | 9,061 | | | $ | 7,564 | |
11. DEFERRED PROFIT SHARING EMPLOYEE BENEFIT PLAN
We have a deferred profit sharing and savings plan under which all of our employees with at least six months of service are eligible to participate. Employees may contribute a percentage of their annual compensation up to the maximum amount allowed by the Internal Revenue Code. We may make discretionary contributions as determined by a committee of our Board of Directors. We made contributions of $0.7 million in 2016, $0.8 million in 2015, zero in 2014, and zero in 20132014 to the profit sharing and savings plan.
12. RELATED PARTY TRANSACTIONS
See Note 10 for discussions of the related party transactions associated with TEL.
13. DERIVATIVE INSTRUMENTS
We engage in activities that expose us to market risks, including the effects of changes in fuel prices and in interest rates. Financial exposures are evaluated as an integral part of our risk management program, which seeks, from time-to-time, to reduce the potentially adverse effects that the volatility of fuel markets and interest rate risk may have on operating results.
In an effort to seek to reduce the variability of the ultimate cash flows associated with fluctuations in diesel fuel prices, we periodically enter into various derivative instruments, including forward futures swap contracts (which we refer to as "fuel hedgehedging contracts"). Historically diesel fuel has not been a traded commodity on the futures market so heating oil has been used as a substitute, as prices for both generally move in similar directions. Recently, however, we have been able to enter into hedging contracts with respect to both heating oil and ultra-low sulfur diesel ("ULSD"). Under these contracts, we pay a fixed rate per gallon of heating oil or ULSD and receive the monthly average price of New York heating oil per the New York Mercantile Exchange ("NYMEX") and Gulf Coast ULSD, respectively. The retrospective and prospective regression analyses provided that changes in the prices of diesel fuel and heating oil and diesel fuel and ULSD were each deemed to be highly effective based on the relevant authoritative guidance except for a small portion of our hedgehedging contracts, which we determined to be ineffective on a prospective basis. Consequently,basis in 2014 and 2015. Consequently, we recognized approximatelya reduction in fuel expense of $1.4 million of additional fuel expensein 2015 to mark the related liability to market and a $1.4 million reduction of fuel expense during 2015 as the related contracts expired.market. At December 31, 2016 and 2015, there were no remaining ineffective fuel hedge contracts and, thus, theall remaining fuel hedge contracts continue to qualify as cash flow hedges. We do not engage in speculative transactions, nor do we hold or issue financial instruments for trading purposes.
In August 2015, we entered into an interest rate swap agreement with a notional amount of $28.0 million, which was designated as a hedge against the variability in future interest payments due on the debt associated with the purchase of our corporate headquarters as described in Note 7.headquarters. The terms of the swap agreement effectively convert the variable rate interest payments on this note to a fixed rate of 4.2% through maturity on August 1, 2035. In 2016, we also entered into several interest rate swaps, which were designated to hedge against the variability in future interest rate payments due on rent associated with the purchase of certain trailers. Because the critical terms of the swap and hedged item coincide, in accordance with the requirements of ASC 815, the change in the fair value of the derivative is expected to exactly offset changes in the expected cash flows due to fluctuations in the LIBOR rate over the term of the debt instrument, and therefore no ongoing assessment of effectiveness is required. The fair value of the swap agreementagreements that waswere in effect at December 31, 2016 and 2015, of approximately $0.7 million and $1.1 million, respectively, is included in other liabilities in the consolidated balance sheet, and is included in accumulated other comprehensive loss, net of tax. Additionally, $0.6 million and $0.3 million was reclassified from accumulated other comprehensive loss into our results of operations as additional interest expense for the year ended December 31, 2016 and 2015, respectively, related to changes in interest rates during such periods. Based on the amounts in accumulated other comprehensive loss as of December 31, 2015,2016, we expect to reclassify losses of approximately $0.3 million, net of tax, on derivative instruments from accumulated other comprehensive loss into our results of operations during the next twelve months due to changes in interest rates. The amounts actually realized will depend on the fair values as of the date of settlement.
We recognize all derivative instruments at fair value on our consolidated balance sheets. Our derivative instruments are designated as cash flow hedges, thus the effective portion of the gain or loss on the derivatives is reported as a component of accumulated other comprehensive loss and will be reclassified into earnings in the same period during which the hedged transaction affects earnings. The effective portion of the derivative represents the change in fair value of the hedge that offsets the change in fair value of the hedged item. To the extent the change in the fair value of the hedge does not perfectly offset the change in the fair value of the hedged item, the ineffective portion of the hedge is immediately recognized in our consolidated statements of operations. Ineffectiveness is calculated using the cumulative dollar offset method as an estimate of the difference in the expected cash flows of the respective fuel hedge contracts (heating oil or ULSD) compared to the changes in the all-in cash outflows required for the diesel fuel purchases.
At December 31, 2015,2016, we had forward futures swapfuel hedge contracts on approximately 12.1 million, 12.1 million and 7.6 million gallons of diesel to be purchased in 2016, 2017 and 2018, respectively, or approximately 25%, 25%,27% and 15%17% of our projected annual 2016, 2017 and 2018 fuel requirements, respectively.
The fair value of the fuel hedge contracts that were in effect at December 31, 20152016 and 2014,2015, of approximately $27.3$3.6 million and $22.7$27.3 million, respectively, are included in other liabilities in the consolidated balance sheet, are included in accumulated other comprehensive loss, net of tax. Changes in the fair values of these instruments can vary dramatically based on changes in the underlying commodity prices. For example, during 2015,2016, market "spot" prices for ultra-low sulfur diesel peaked at a high of approximately $1.98$1.66 per gallon and hit a low price of approximately $0.98$0.83 per gallon. During 2014,2015, market spot prices ranged from a high of $3.08$1.98 per gallon to a low of $1.58$0.98 per gallon. Market price changes can be driven by factors such as supply and demand, inventory levels, weather events, refinery capacity, political agendas, the value of the U.S. dollar, geopolitical events, and general economic conditions, among other items.
Additionally, $16.7 million, $15.3 million, $3.1 million, and $0.6$3.1 million were reclassified from accumulated other comprehensive (loss) income toloss into our results of operations for the years ended December 31, 2016, 2015, 2014, and 2013,2014, respectively, as additional fuel expense for 2016, 2015, and 2014, and as a reduction of expense in 2013, related to losses on fuel hedge contracts that expired. In addition to the amounts reclassified as a result of expired contracts, in 2105 we recognized a reduction of fuel expense of $1.4 million relating to previously recognized fuel expense as a result of the expiration of the fuel hedge contracts for which the fuel hedging relationship was deemed to be ineffective on a prospective basis in 2014. As a result, the changes in fair value for those contracts were recorded as expense rather than as a component of other comprehensive loss. At December 31, 2015,2016, all fuel hedge contracts were deemeddetermined to be effective.
Based on the amounts in accumulated other comprehensive loss as of December 31, 20152016 and the expected timing of the purchases of the diesel hedged, we expect to reclassify approximately $11.2$1.8 million, net of tax, on derivative instruments from accumulated other comprehensive loss into our results of operations during the next year due to the actual diesel fuel purchases. The amounts actually realized will be dependent on the fair values as of the date of settlement.
We perform both a prospective and retrospective assessment of the effectiveness of our hedge contracts at inception and quarterly, including assessing the possibility of counterparty default. If we determine that a derivative is no longer expected to be highly effective, we discontinue hedge accounting prospectively and recognize subsequent changes in the fair value of the hedge in earnings. As a result of our effectiveness assessment at inception, quarterly, and at December 31, 20152016 and 2014,2015, we believe our hedge contracts have been and will continue to be highly effective in offsetting changes in cash flows attributable to the hedged risk, with the exception of the abovementioned contracts.
Outstanding financial derivative instruments expose us to credit loss in the event of nonperformance by the counterparties to the agreements. We do not expect any of the counterparties to fail to meet their obligations. Our credit exposure related to these financial instruments is represented by the fair value of contracts reported as assets. To manage credit risk, we review each counterparty's audited financial statements, credit ratings, and/or obtain references as we deem necessary.
We have historically held fuel derivative instruments with a counterparty that required cash collateral when the instruments were in a net liability position. At December 31, 2015, all instruments with that counterparty were expired. As such, at December 31, 2015, no cash collateral deposits were required by us. At December 31, 2014, $5.0 million cash collateral deposits were provided by us in connection with our outstanding fuel derivative instruments with the counterparty. The cash collateral amounts provided were netted against the fair value of current outstanding derivative instruments.14. OTHER COMPREHENSIVE INCOME ("OCI")
14. ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
Accumulated other comprehensive (loss) income ("AOCI")OCI is comprised of net income and other adjustments, including changes in the fair value of certain derivative financial instruments qualifying as cash flow hedges.
The following tables summarize the change in the components of our AOCIOCI balance for the periods presented (in thousands; presented net of tax):
Details about AOCI Components | | Amount Reclassified from AOCI for the years ended December 31, | | Affected Line Item in the Statement of Operations | |
| | 2015 | | | 2014 | | | 2013 | | |
(Losses) gains on cash flow hedges | | | | | | | | | | |
Commodity derivative contracts | | $ | (15,313 | ) | | $ | (3,141 | ) | | $ | 643 | | Fuel expense |
| | | 5,865 | | | | 1,206 | | | | (247 | ) | Income tax expense |
| | $ | (9,448 | ) | | $ | (1,935 | ) | | $ | 396 | | Net of tax |
Interest rate swap contract | | $ | (259 | ) | | $ | - | | | $ | - | | Interest expense |
| | | 99 | | | | - | | | | - | | Income tax expense |
| | $ | (160 | ) | | $ | - | | | $ | - | | Net of tax |
Details about OCI Components | | Amount Reclassified from OCI for the years ended December 31, | | Affected Line Item in the Statement of Operations |
| | 2016 | | | 2015 | | | 2014 | | |
(Losses) gains on cash flow hedges | | | | | | | | | | |
Commodity derivative contracts | | $ | (16,674 | ) | | $ | (15,313 | ) | | $ | (3,141 | ) | Fuel expense |
| | | 6,419 | | | | 5,865 | | | | 1,206 | | Income tax expense |
| | $ | (10,255 | ) | | $ | (9,448 | ) | | $ | (1,935 | ) | Net of tax |
Interest rate swap contracts | | $ | (557 | ) | | $ | (259 | ) | | $ | - | | Interest expense |
| | | 215 | | | | 99 | | | | - | | Income tax expense |
| | $ | (342 | ) | | $ | (160 | ) | | $ | - | | Net of tax |
For additional information about our cash flow hedges, refer to Note 13.
15. COMMITMENTS AND CONTINGENT LIABILITIES
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. In management's opinion, our potential exposure under pending legal proceedings is adequately provided for in the accompanying consolidated financial statements.
In August 2014, the U.S. District Court for the Southern District of Ohio issued a pre-trial decision in a lawsuit against our Southern Refrigerated Transport, Inc.SRT subsidiary ("SRT") relating to a cargo claim incurred in 2008. The court awarded the plaintiff approximately $5.9 million plus prejudgment interest and costs and denied a cross-motion for summary judgment by SRT. Previously, the court had ruled in favor of SRT on all but one count before overturning its earlier decision and ruling in favor of the plaintiff. SRT filed a Notice of Appeal with the U.S. Sixth Circuit Court of Appeals on September 24, 2014. On November 5, 2015, the Sixth Circuit reversed the district court in part, finding that the plaintiff could not recover under two of its causes of action. The Sixth Circuit remanded the proceedings to the district court for further factual determinations relating to whether the plaintiff could recover under a third cause of action. The case is currently pending resolution for summary judgment.
We areOur Covenant Transport subsidiary is a defendant in a lawsuit that was filed on August 17, 2015 in the Superior Court of the State of California, Los Angeles County. This lawsuit arises out of the work performed by the plaintiff as a company driver for Covenant Transport during the period of August, 2013 through October, 2014. PlaintiffThe plaintiff is seeking class action certification under the complaint. The case was removed from state court in September, 2015 to the U.S. District Court in the Central District of California, and subsequently, the case was transferred to the U.S. District Court in the Eastern District of Tennessee on October 5, 2015 where the case is now pending. The complaint asserts that the time period covered by the lawsuit is "the four (4) years prior to the filing of this action through the trial date" and alleges claims for failure to properly pay for rest breaks, inspection time, waiting time, fueling and paperwork time, meal periods and other related wage and hour claims under the California Labor Code. The parties engaged in mediation of the dispute which resulted in a comprehensive settlement of all class member claims upon payment of $500,000 by Covenant Transport. The settlement received preliminary approval of the court in December, 2016 and is now pending final approval.
Our SRT subsidiary is a defendant in a lawsuit filed on December 16, 2016 in the Superior Court of San Bernardino County, California. The lawsuit was filed on behalf of David Bass (a California resident and former driver), who is seeking to have the lawsuit certified as a class action case wherein he alleges violation of multiple California wage and hour statutes over a four year period of time, including failure to pay wages for all hours worked, failure to provide meal periods and paid rest breaks, failure to pay for rest and recovery periods, failure to reimburse certain business expenses, failure to pay vested vacation, unlawful deduction of wages, failure to timely pay final wages, failure to provide accurate itemized wage statements, and unfair and unlawful competition.
Based on our present knowledge of the facts and, in certain cases, advice of outside counsel, management believes the resolution of open claims and pending litigation, taking into account existing reserves, is not likely to have a materially adverse effect on our consolidated financial statements.
We had $31.4$27.2 million and $34.3$31.4 million of outstanding and undrawn letters of credit as of December 31, 20152016 and 2014,2015, respectively. The letters of credit are maintained primarily to support our insurance programs.
We had commitments outstanding at December 31, 2015,2016, to acquire revenue equipment totaling approximately $145.6$86.5 million in 20162017 versus commitments at December 31, 20142015 of approximately $116.8$145.6 million. These commitments are cancelable upon stated notice periods, subject to certain adjustments in the underlying obligations and benefits. These purchase commitments are expected to be financed by operating leases, capital leases, long-term debt, proceeds from sales of existing equipment, and/or cash flows from operations.
See "Critical Accounting Policies And Estimates – Insurance and Other Claims" under Item 7 of Part II of this Annual Report on Form 10-K for additional information.
16. SEGMENT INFORMATION
As previously discussed, we have one reportable segment, our asset-based truckload services or Truckload. Our other operations consist of several operating segments, which neither individually nor in the aggregate meet the quantitative or qualitative reporting thresholds. As a result, these operations are grouped in "Other" in the tables below.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Substantially all intersegment sales prices are market based. We evaluate performance based on operating income of the respective business units.
"Unallocated Corporate Overhead" includes expenses that are incidental to our activities and are not specifically allocated to one of the segments.
The following tables summarize our segment information:
| | (in thousands) | |
Year Ended December 31, 2016 | | Truckload | | | Other | | | Unallocated Corporate Overhead | | | Consolidated | |
Revenue | | $ | 601,226 | | | $ | 73,602 | | | $ | - | | | $ | 674,828 | |
Intersegment revenue | | | - | | | | (4,177 | ) | | | - | | | | (4,177 | ) |
Operating income (loss) | | | 37,031 | | | | 7,631 | | | | (12,215 | ) | | | 32,447 | |
Depreciation and amortization (1) | | | 71,173 | | | | 22 | | | | 1,261 | | | | 72,456 | |
Total assets | | | 548,882 | | | | 31,289 | | | | 40,367 | | | | 620,538 | |
Capital expenditures, net (2) | | | 57,242 | | | | 43 | | | | 1,767 | | | | 59,052 | |
| | | | | | | | | | | | | | | | |
Year Ended December 31, 2015 | | | | | | | | | | | | | | | | |
Revenue | | $ | 655,918 | | | $ | 71,057 | | | $ | - | | | $ | 726,975 | |
Intersegment revenue | | | - | | | | (2,735 | ) | | | - | | | | (2,735 | ) |
Operating income (loss) | | | 74,107 | | | | 5,768 | | | | (12,093 | ) | | | 67,782 | |
Depreciation and amortization (1) | | | 60,138 | | | | 13 | | | | 1,233 | | | | 61,384 | |
Total assets | | | 580,506 | | | | 26,315 | | | | 39,896 | | | | 646,717 | |
Capital expenditures, net (2) | | | 147,896 | | | | 29 | | | | 1,069 | | | | 148,994 | |
| | | | | | | | | | | | | | | | |
Year Ended December 31, 2014 | | | | | | | | | | | | | | | | |
Revenue | | $ | 663,001 | | | $ | 59,796 | | | $ | - | | | $ | 722,797 | |
Intersegment revenue | | | - | | | | (3,817 | ) | | | - | | | | (3,817 | ) |
Operating income (loss) | | | 54,151 | | | | 3,894 | | | | (18,399 | ) | | | 39,646 | |
Depreciation and amortization (1) | | | 45,669 | | | | 59 | | | | 656 | | | | 46,384 | |
Total assets | | | 463,900 | | | | 27,338 | | | | 48,066 | | | | 539,304 | |
Capital expenditures net (2) | | | 87,871 | | | | 14 | | | | 1,570 | | | | 89,455 | |
Year Ended December 31, 2015 | | | | | | | | Unallocated Corporate Overhead | | | | |
Revenue | | $ | 655,918 | | | $ | 71,057 | | | $ | - | | | $ | 726,975 | |
Intersegment revenue | | | - | | | | (2,735 | ) | | | - | | | | (2,735 | ) |
Operating income (loss) | | | 74,107 | | | | 5,768 | | | | (12,093 | ) | | | 67,782 | |
Depreciation and amortization (1) | | | 60,138 | | | | 13 | | | | 1,233 | | | | 61,384 | |
Total assets | | | 581,212 | | | | 26,315 | | | | 39,896 | | | | 647,423 | |
Capital expenditures, net (2) | | | 147,896 | | | | 29 | | | | 1,069 | | | | 148,994 | |
| | | | | | | | | | | | | | | | |
Year Ended December 31, 2014 | | | | | | | | | | | | | | | | |
Revenue | | $ | 663,001 | | | $ | 59,796 | | | $ | - | | | $ | 722,797 | |
Intersegment revenue | | | - | | | | (3,817 | ) | | | - | | | | (3,817 | ) |
Operating income (loss) | | | 54,151 | | | | 3,894 | | | | (18,399 | ) | | | 39,646 | |
Depreciation and amortization (1) | | | 45,669 | | | | 59 | | | | 656 | | | | 46,384 | |
Total assets | | | 463,900 | | | | 27,338 | | | | 48,066 | | | | 539,304 | |
Capital expenditures, net (2) | | | 87,871 | | | | 14 | | | | 1,570 | | | | 89,455 | |
| | | | | | | | | | | | | | | | |
Year Ended December 31, 2013 | | | | | | | | | | | | | | | | |
Revenue | | $ | 644,403 | | | $ | 51,702 | | | $ | - | | | $ | 690,327 | |
Intersegment revenue | | | - | | | | (5,778 | ) | | | - | | | | (5,778 | ) |
Operating income (loss) | | | 27,746 | | | | 1,271 | | | | (8,623 | ) | | | 20,394 | |
Depreciation and amortization (1) | | | 42,848 | | | | 72 | | | | 775 | | | | 43,694 | |
Total assets | | | 402,637 | | | | 20,883 | | | | 37,668 | | | | 461,188 | |
Capital expenditures net (2) | | | 90,336 | | | | 10 | | | | 1,630 | | | | 91,976 | |
| (1) | Includes gains and losses on disposition of equipment .equipment. |
| (2) | Includes equipment purchased under capital leases. |
17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
| | (in thousands except per share amounts) | | | (in thousands except per share amounts) | |
Quarters ended | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total revenue | | $ | 167,216 | | | $ | 175,451 | | | $ | 173,512 | | | $ | 208,061 | | | $ | 156,341 | | | $ | 158,832 | | | $ | 164,500 | | | $ | 190,978 | |
Operating income | | | 10,043 | | | | 18,774 | | | | 14,629 | | | | 24,336 | | | | 7,418 | | | | 7,316 | | | | 5,446 | | | | 12,267 | |
Net income | | | 10,227 | | | | 11,001 | | | | 7,627 | | | | 13,230 | | | | 4,352 | | | | 3,632 | | | | 2,869 | | | | 5,982 | |
Basic income per share | | | 0.56 | | | | 0.60 | | | | 0.42 | | | | 0.74 | | | | 0.21 | | | | 0.20 | | | | 0.16 | | | | 0.33 | |
Diluted income per share | | | 0.56 | | | | 0.60 | | | | 0.42 | | | | 0.72 | | | | 0.21 | | | | 0.20 | | | | 0.16 | | | | 0.33 | |
| | (in thousands except per share amounts) | | | (in thousands except per share amounts) | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Quarters ended | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total revenue | | $ | 160,957 | | | $ | 173,654 | | | $ | 177,581 | | | $ | 206,788 | | | $ | 167,216 | | | $ | 175,451 | | | $ | 173,512 | | | $ | 208,061 | |
Operating income | | | 354 | | | | 9,056 | | | | 5,586 | | | | 24,650 | | | | 10,043 | | | | 18,774 | | | | 14,629 | | | | 24,336 | |
Net income (loss) | | | (1,374 | ) | | | 3,780 | | | | 1,857 | | | | 13,545 | | |
Basic (loss) income per share (1) | | | (0.09 | ) | | | 0.25 | | | | 0.12 | | | | 0.84 | | |
Diluted (loss) income per share (1) | | | (0.09 | ) | | | 0.25 | | | | 0.12 | | | | 0.82 | | |
Net income | | | | 10,227 | | | | 11,001 | | | | 7,627 | | | | 13,230 | |
Basic income per share | | | | 0.56 | | | | 0.60 | | | | 0.42 | | | | 0.74 | |
Diluted income per share | | | | 0.56 | | | | 0.60 | | | | 0.42 | | | | 0.72 | |
(1) | Quarter totals do not aggregate to annual resultsAdjusted from 10-Q as filed due to the dilution related to the follow-on stock offering.implementation of ASU 2016-09. |
(2) | Includes $4.7 million after tax one-time federal income tax credit. |
(3) | Includes $3.6 million in return of previously expensed insurance premiums for the commutation of our primary auto liability policy for the period of April 1, 2013, through September 30, 2014. |
(4) | Includes $7.5 million increase to claims reserves for a 2008 cargo claim. |
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