For comparison purposes in the table below, we use freight revenue, or total revenue less fuel surcharges, in addition to total revenue when discussing changes as a percentage of revenue. We believe excluding this sometimes volatile source of revenue affords a more consistent basis for comparing our results of operations from period to period. Freight revenue excludes $68.2 million, $158.1 million, $109.9 million, and $111.6$109.9 million of fuel surcharges in 2009, 2008, 2007, and 2006,2007, respectively.
The following table sets forth the percentage relationship of certain items to total revenue and freight revenue:
| | | 2009 | | 2008 | | 2007 | | | | 2009 | | 2008 | | 2007 |
| | | | | | | | | | | | | | | |
| Total revenue | | 100.0% | | 100.0% | | 100.0% | | Freight revenue (1) | | 100.0% | | 100.0% | | 100.0% |
| Operating expenses: | | | | | | | | Operating expenses: | | | | | | |
Salaries, wages, and related expenses | | 36.7 | | 34.1 | | 38.0 | | Salaries, wages, and related expenses | | 41.5 | | 42.8 | | 44.9 |
Fuel expense | | 24.4 | | 33.7 | | 29.6 | | Fuel expense (1) | | 14.6 | | 16.7 | | 16.8 |
Operations and maintenance | | 6.0 | | 5.5 | | 5.7 | | Operations and maintenance | | 6.8 | | 6.9 | | 6.7 |
Revenue equipment rentals and purchased transportation | | 13.0 | | 11.8 | | 9.3 | | Revenue equipment rentals and purchased transportation | | 14.7 | | 14.8 | | 11.0 |
Operating taxes and licenses | | 2.1 | | 1.7 | | 2.0 | | Operating taxes and licenses | | 2.3 | | 2.1 | | 2.3 |
Insurance and claims | | 5.4 | | 4.9 | | 5.1 | | Insurance and claims | | 6.1 | | 6.1 | | 6.0 |
Communications and utilities | | 1.0 | | 0.9 | | 1.0 | | Communications and utilities | | 1.1 | | 1.1 | | 1.2 |
General supplies and expenses | | 4.0 | | 3.2 | | 3.3 | | General supplies and expenses | | 4.5 | | 4.3 | | 3.9 |
Depreciation and amortization, including net gains on disposition of equipment (2) | | 8.2 | | 8.2 | | 7.5 | | Depreciation and amortization, including net gains on disposition of equipment (2) | | 9.3 | | 10.3 | | 8.9 |
Goodwill impairment (3) | | 0.0 | | 3.2 | | 0.0 | | Goodwill impairment (3) | | 0.0 | | 4.0 | | 0.0 |
| Total operating expenses | | 100.8 | | 107.2 | | 101.5 | | Total operating expenses | | 100.9 | | 109.1 | | 101.8 |
| Operating loss | | (0.8) | | (7.2) | | (1.5) | | Operating loss | | (0.9) | | (9.1) | | (1.8) |
| Other expense, net (4) | | 4.3 | | 1.4 | | 1.6 | | Other expense, net (4) | | 4.9 | | 1.7 | | 1.9 |
| Loss before income taxes | | (5.1) | | (8.6) | | (3.1) | | Loss before income taxes | | (5.8) | | (10.8) | | (3.7) |
| Income tax benefit | | (0.9) | | (1.7) | | (0.8) | | Income tax benefit | | (1.0) | | (2.1) | | (0.9) |
| Net loss | | (4.2)% | | (6.9)% | | (2.3)% | | Net loss | | (4.8)% | | (8.7)% | | (2.8)% |
| | | | | | | | | | | | | | | |
| | | 2008 | | 2007 | | 2006 | | | | 2008 | | 2007 | | 2006 |
| | | | | | | | | | | | | | | |
| Total revenue | | 100.0% | | 100.0% | | 100.0% | | Freight revenue (1) | | 100.0% | | 100.0% | | 100.0% |
| Operating expenses: | | | | | | | | Operating expenses: | | | | | | |
Salaries, wages, and related expenses | | 34.1 | | 38.0 | | 38.4 | | Salaries, wages, and related expenses | | 42.8 | | 44.9 | | 45.8 |
Fuel expense | | 33.7 | | 29.6 | | 28.4 | | Fuel expense (1) | | 16.7 | | 16.8 | | 14.5 |
Operations and maintenance | | 5.5 | | 5.7 | | 5.3 | | Operations and maintenance | | 6.9 | | 6.7 | | 6.3 |
Revenue equipment rentals and purchased transportation | | 11.8 | | 9.3 | | 9.3 | | Revenue equipment rentals and purchased transportation | | 14.8 | | 11.0 | | 11.1 |
Operating taxes and licenses | | 1.7 | | 2.0 | | 2.1 | | Operating taxes and licenses | | 2.1 | | 2.3 | | 2.5 |
Insurance and claims | | 4.9 | | 5.1 | | 5.0 | | Insurance and claims | | 6.1 | | 6.0 | | 6.0 |
Communications and utilities | | 0.9 | | 1.0 | | 1.0 | | Communications and utilities | | 1.1 | | 1.2 | | 1.2 |
General supplies and expenses | | 3.2 | | 3.3 | | 3.1 | | General supplies and expenses | | 4.3 | | 3.9 | | 3.7 |
Depreciation and amortization, including net gains on disposition of equipment (2) | | 8.2 | | 7.5 | | 6.0 | | Depreciation and amortization, including net gains on disposition of equipment (2) | | 10.3 | | 8.9 | | 7.2 |
| Goodwill impairment (3) | | 3.2 | | 0.0 | | 0.0 | | Goodwill impairment (3) | | 4.0 | | 0.0 | | 0.0 |
| Total operating expenses | | 107.2 | | 101.5 | | 98.6 | | Total operating expenses | | 109.1 | | 101.8 | | 98.3 |
| Operating income (loss) | | (7.2) | | (1.5) | | 1.4 | | Operating income (loss) | | (9.1) | | (1.8) | | 1.7 |
| Other expense, net | | 1.4 | | 1.6 | | 0.9 | | Other expense, net | | 1.7 | | 1.9 | | 1.1 |
| Income (loss) before income taxes | | (8.6) | | (3.1) | | 0.5 | | Income (loss) before income taxes | | (10.8) | | (3.7) | | 0.6 |
| Income tax expense (benefit) | | (1.7) | | (0.8) | | 0.7 | | Income tax expense (benefit) | | (2.1) | | (0.9) | | 0.8 |
| Net loss | | (6.9)% | | (2.3)% | | (0.2)% | | Net loss | | (8.7)% | | (2.8)% | | (0.2)% |
| (1) | Freight revenue is total revenue less fuel surcharges. In this table, fuel surcharges are eliminated from revenue and subtracted from fuel expense. The amounts were $68.2 million, $158.1 million, and $109.9 million in 2009, 2008, and $111.6 million in 2008, 2007, and 2006, respectively. |
| (2) | Includes a $9.4 million pre-tax impairment charge for held and used equipment and $6.4 million of pre-tax impairment charges for equipment held for sale in the year ended December 31, 2008, which together represent 2.0% of total revenue and 2.6% of freight revenue. Includes a $1.7 million pre-tax impairment charge for equipment held for sale in the year ended December 31, 2007. See the discussion abovebelow under "Additional Information Concerning ImpairmentNon-Cash Charges" for a more extensive description of these impairments. |
| (3) | Represents a $24.7 million non-cash impairment charge to write off the goodwill associated with the acquisition of our Star Transportation subsidiary. See the discussion abovebelow under "Additional Information Concerning ImpairmentNon-Cash Charges" for a more extensive description of this impairment. |
| (4) | Includes an $11.5 million non-cash loss on the sale of the investment in and note receivable from Transplace in 2009. See the discussion below under "Additional Information Concerning Non-Cash Charges" for a more extensive description of the loss. |
Comparison of Year Ended December 31, 2009 to Year Ended December 31, 2008
Total revenue decreased $185.2 million, or 23.9%, to $588.7 million in 2009, from $773.9 million in 2008. Freight revenue excludes $68.2 million of fuel surcharge revenue in 2009 and $158.1 million in 2008. Freight revenue (total revenue less fuel surcharges) decreased $95.3 million, or 15.5%, to $520.5 million in 2009, from $615.8 million in 2008. For comparison purposes, we use freight revenue (total revenue less fuel surcharge revenue) when discussing changes as a percentage of revenue. We believe removing this sometimes volatile source of revenue affords a more consistent basis for comparing the results of operations from period to period. As previously discussed, the rate environment was difficult in 2009, and freight volumes were significantly lower than 2008 as a result of the overall weak economic environment. The decreased level of freight revenue was primarily attributable to weak freight demand, excess tractor and trailer capacity in the truckload industry, and significant rate pressure from customers and freight brokers. Through mid-year 2009, we continued to reduce the size of our tractor fleet to achieve greater utilization of the remaining tractors in our fleet and attempt to improve profitability. With the assistance of this fleet reduction, we experienced a 0.7% increase in average miles per tractor versus the 2008 period. Average freight revenue per tractor per week, our primary measure of asset productivity, decreased 6.0% to $2,920 in 2009, from $3,105 in 2008, while total miles were down 9.3% from 2008. As the economy has begun to show signs of improvement in 2010, we expect customer demand to increase at a modest rate in the second half of the year.
Salaries, wages, and related expenses decreased $47.6 million, or 18.1%, to $216.2 million in 2009, from $263.8 million in 2008. As a percentage of freight revenue, salaries, wages, and related expenses decreased to 41.5% in 2009, from 42.8% in 2008. Driver pay decreased $33.7 million to $147.1 million in 2009, from $180.8 million in the 2008 period. The decrease was attributable to a 38.4 million reduction in truck miles, a decrease in driver pay per mile, and an increase in participation in our driver per diem pay program. Our payroll expense for employees, other than over-the-road drivers, decreased $6.1 million to $39.4 million from $45.4 million, due to a reduction in our non-driver work force. Additionally, workers' compensation and group health costs were $3.1 million and $0.9 million lower, respectively, in the 2009 period than the 2008 period, primarily as a result of reduced miles and head count along with favorable development in workers' compensation claims. If the economy continues to show signs of recovery, our ability to hold in place prior reductions in salaries and wages could be limited. Accordingly, these expenses could increase in absolute terms (and as a percentage of revenue absent an increase in revenue to offset increased costs).
Fuel expense, net of fuel surcharge revenue of $68.2 million in 2009 and $158.1 million in 2008, decreased $26.9 million to $75.6 million in 2009, from $102.6 million in 2008. As a percentage of freight revenue, net fuel expense declined to 14.6% in 2009 from 16.7% in 2008. Lower average fuel prices in 2009 versus 2008, multiple operating improvements, and the continued addition of auxiliary power units and more fuel efficient engines improved fuel efficiency and contributed to these decreases.
During 2009, fuel prices were less volatile than in 2008, contributing to the decrease in net fuel expense and the related percentage of revenue. After reaching unprecedented record fuel high fuel prices during most of 2008, diesel fuel prices started to fall in the fourth quarter of 2008 and continued through the first quarter of 2009. Significant fluctuations in fuel prices impact recovery of surcharges because we purchase fuel daily, while the U.S. Department of Energy ("DOE") index on which the surcharges are based resets weekly.
The Company receives a fuel surcharge on its loaded miles from most shippers; however, this may not cover the entire cost of high fuel prices for several reasons, including the following: surcharges cover only loaded miles, surcharges do not cover miles driven out-of-route by our drivers, and surcharges typically do not cover refrigeration unit fuel usage or fuel burned by tractors while idling. Additionally, fuel surcharges vary in the percentage of reimbursement offered, and not all surcharges fully compensate for fuel price increases even on loaded miles. The rate of fuel price increases and decreases also can have an impact. Most fuel surcharges are based on the average fuel price as published by the DOE for the week prior to the shipment. In times of decreasing fuel prices, the lag time causes under-recovery. Accordingly, volatility in fuel prices could cause volatility in our results of operations.
Operations and maintenance, consisting primarily of vehicle maintenance, repairs, and driver recruitment expenses, decreased $7.1 million to $35.4 million in 2009, from $42.5 million in 2008. As a percentage of freight revenue, operations and maintenance decreased to 6.8% in 2009, from 6.9% in 2008. The decrease resulted from decreased tractor and trailer maintenance costs, as a result of fewer tractors and less miles. Additionally, tire expense decreased due to a somewhat newer average fleet age. Finally, expenses related to tolls and unloading were less in the 2009 period than the 2008 period, due to the reduction in miles, and driver recruitment expenses were less as a result of the decreased demand for drivers. As a percentage of freight revenue, operations and maintenance remained relatively constant, as this mostly variable cost tracked our decrease in revenue, and the modest benefit from a somewhat younger tractor fleet was offset by an older trailer fleet and fixed costs. With the adverse economic environment in 2009, we had less difficulty recruiting and retaining drivers. If the economy improves, we could face more difficulty recruiting and retaining drivers, which could impact this expense category going forward. Further, the new Comprehensive Safety Analysis initiative could limit the pool of available drivers and increase these costs.
Revenue equipment rentals and purchased transportation decreased $14.5 million, or 15.9%, to $76.5 million in 2009, from $91.0 million in 2008. The decrease was a result of payments to third-party transportation providers associated with our Solutions subsidiary, which decreased to $40.0 million in 2009, from $45.3 million in 2008, primarily due to decreased loads and lower fuel costs passed on to those providers. In addition, we had a $3.8 million reduction in payments to independent contractors, which decreased to $10.3 million in 2009, from $14.1 million in 2008, mainly due to a decrease in the size of the independent contractor fleet and the reduction in fuel surcharges passed through that are a component of the related expense. Additionally, tractor and trailer equipment rental and other related expenses decreased to $25.9 million in 2009, compared with $31.2 million in 2008. We had financed approximately 236 tractors and 5,987 trailers under operating leases at December 31, 2009, compared with 646 tractors and 5,706 trailers under operating leases at December 31, 2008. As a percentage of freight revenue, revenue equipment rentals and purchased transportation expense remained relatively constant at 14.7% in 2009, and 14.8% in 2008. This expense category will fluctuate with the number of loads hauled by independent contractors and handled by Solutions and the percentage of our fleet financed with operating leases, as well as the amount of fuel surcharge revenue passed through to the independent contractors and third-party carriers. Because we anticipate adding new equipment over the next twelve months through on-balance sheet financing, the percentage of our tractor fleet financed with operating leases is expected to decrease in the near term. If the economy continues to improve, we may need to increase the amounts we pay to independent contractors and third-party transportation providers, which could increase this expense category absent an offsetting increase in revenue.
Operating taxes and licenses decreased $1.0 million, or 7.4%, to $12.1 million in 2009, from $13.1 million in 2008. As a percentage of freight revenue, operating taxes and licenses increased slightly to 2.3% in the 2009 period, from 2.1% in the 2008 period. This increase as a percentage of freight revenue resulted from increased costs per tractor as various taxing authorities increased their rates, as well as lower revenue per tractor, which less effectively covered this fixed cost.
Insurance and claims, consisting primarily of premiums and deductible amounts for liability, physical damage, and cargo damage insurance and claims, decreased $5.6 million, or 15.0%, to approximately $32.0 million in 2009, from approximately $37.6 million in 2008. The costs on a per mile basis were approximately half a cent per mile lower when comparing 2009 to 2008 because of a lower accident rate and slightly higher miles per tractor. The Company's overall safety performance has improved as our DOT reportable accidents dropped to the lowest level per million miles since 2001, giving us the best overall safety performance in at least nine years (based on DOT reportable accidents per million miles). As a percentage of freight revenue, insurance and claims remained constant at 6.1% in 2009 and 2008 because the decline in average freight revenue per mile offset the improvements in cost per mile. With our significant self-insured retention, insurance and claims expense may fluctuate significantly from period to period, and any increase in frequency or severity of claims could adversely affect our financial condition and results of operations.
Communications and utilities decreased to $5.7 million in 2009, from $6.7 million in 2008. As a percentage of freight revenue, communications and utilities remained constant at 1.1% in 2009 and 2008.
General supplies and expenses, consisting primarily of headquarters and other terminal facilities expenses, decreased $2.8 million to $23.6 million in 2009, from $26.4 million in 2008. As a percentage of freight revenue, general supplies and expenses increased slightly to 4.5% in 2009, from 4.3% in 2008. The increase as a percentage of revenue was primarily due to certain of these costs being fixed in nature, which were less efficiently spread over a reduced revenue base when comparing the 2009 period to the 2008 period.
Depreciation and amortization, consisting primarily of depreciation of revenue equipment, decreased $15.1 million or 23.9%, to $48.1 million in 2009, from $63.2 million in 2008. As a percentage of freight revenue, depreciation and amortization decreased to 9.3% in 2009, from 10.3% in 2008. The decreases were related to a $15.8 million revenue equipment impairment charge that was recorded in 2008 with no similar charge in 2009. See "Additional Information Concerning Non-Cash Charges" below for a further description of impairment charges affecting our operating results. Additionally, included in depreciation and amortization was $1.9 million of losses on the sale of property and equipment in 2008, with only $0.1 million of losses in 2009. Excluding the impairment charge and the losses on sale of equipment, depreciation and amortization increased $2.5 million in 2009 compared to 2008 as a result of having more owned tractors on our balance sheet as opposed to leased, as we owned 2,784 and 2,555 tractors at December 31, 2009 and 2008, respectively. Excluding the impairment charge and the losses on sale of equipment, as a percentage of revenue, depreciation and amortization increased to 9.2% in 2009, from 7.5% in 2008, as a result of lower revenue per tractor, which less effectively covered this fixed cost. We anticipate purchasing additional equipment through on-balance sheet financing over the next twelve months, which will likely cause an increase in depreciation and amortization in the near term.
Goodwill impairment in 2008 related to the $24.7 million write-off of all goodwill associated with our 2006 acquisition of Star Transportation, while there was no similar charge in 2009. This amount was non-cash and non-deductible for tax purposes. See "Additional Information Concerning Non-Cash Charges" below for a further description of impairment charges affecting our operating results.
The other expense category includes interest expense, interest income, and other miscellaneous non-operating items. Other expense, net, increased $14.8 million, to $25.3 million in the 2009 period, from $10.5 million in the 2008 period. The increase is primarily attributable to the loss on the sale of the investment in and note receivable from Transplace, which provided for $11.5 million of the increase. The remainder of the increase is a result of higher interest costs in the 2009 period, compared to the 2008 period, resulting from a period-over-period increase in debt and the increase in our average interest rate on our Credit Facility, as amended, compared to the average interest rates in the 2008 period.
Our income tax benefit was $5.0 million in 2009 compared to $12.8 million in 2008. The effective tax rate is different from the expected combined tax rate as a result of permanent differences primarily related to a per diem pay structure implemented in 2001. Due to the partial nondeductible effect of the per diem payments, our tax rate will fluctuate in future periods as income fluctuates. Additionally, the loss on the sale of the investment in Transplace and goodwill impairment in 2009 and 2008, respectively, were not deductible.
Primarily as a result of the factors described above, net loss was approximately $25.0 million in 2009, compared with a net loss of $53.4 million in 2008. As a result of the foregoing, our net loss as a percentage of freight revenue improved to (4.8%) in 2009, from (8.7%) in 2008.
Comparison of Year Ended December 31, 2008 to Year Ended December 31, 2007
Total revenue increased $61.4 million, or 8.6%, to $773.9 million in 2008, from $712.5 million in 2007. Freight revenue excludes $158.1 million of fuel surcharge revenue in 2008 and $109.9 million in 2007. Freight revenue (total revenue less fuel surcharges) increased $13.2 million, or 2.2%, to $615.8 million in 2008, from $602.6 million in 2007. For comparison purposes, we use freight revenue (total revenue less fuel surcharge revenue) when discussing changes as a percentage of revenue. We believe removing this sometimes volatile source of revenue affords a more consistent basis for comparing the results of operations from period to period.
Average freight revenue per tractor per week our primary measure of asset productivity, increased 0.6% to $3,105 in 2008, from $3,088 in 2007. The increase was primarily generated by a 0.7% increase in average miles per tractor. The average miles per tractor increase was attributable to a 7 percentage point increase in the percentage of our fleet operated by driver teams (which usually generate higher miles than a solo-driver truck). The increase in teams offset aoffsets deterioration in miles per truck in our solo fleets. We continued to constrain the size of our tractor fleet to achieve greater fleet utilization and attempt to improve profitability. Weighted average tractors decreased 4.6% to 3,456 in 2008, from 3,623 in 2007.
Our Solutions revenue increased approximately 176% to $54.7 million in 2008 from $19.8 million in 2007, primarily due to an increase in fuel surcharge collection, much of which is passed on to the third party carriers, and an increase in brokerage loads to 27,117 in 2008 from 10,743 loads in 2007. As a result, average revenue per load increased approximately 9.4% to $2,017 in 2008 from $1,843 per load in 2007.
Salaries, wages, and related expenses decreased $6.6 million, or 2.5%, to $263.8 million in 2008, from $270.4 million in 2007. As a percentage of freight revenue, salaries, wages, and related expenses decreased to 42.8% in 2008 from 44.9% in 2007. Driver pay decreased $7.7 million to $180.8 million in 2008, from $188.5 million in the 2007 period. The decrease was attributable to lower driver wages as more drivers have opted onto our driver per diem pay program. Our payroll expense for employees, other than over-the-road drivers, decreased $1.8 million to $45.4 million from $47.2 million, due to a reduction in non-driver work force comparable to the percentage reduction in tractor fleet. These reductions were partially offset by an increase in workers' compensation expense related to unfavorable development of some outstanding claims during 2008, as well as increases in our group health expenses and additional office salary expense related to severance payments.
Fuel expense, net of fuel surcharge revenue of $158.1 million in 2008 and $109.9 million in 2007, increased $1.5 million to $102.6 million in 2008, from $101.1 million in 2007. As a percentage of freight revenue, net fuel expense was essentially constant at 16.7% in 2008 and 16.8% in 2007. Net fuel expense was highly volatile during the year,2008, however, amounting to 19.0% of freight revenue during the second quarter and dropping to 11.5% of freight revenue in the fourth quarter. Fuel surcharges amounted to $0.384 per total mile in 2008, compared to $0.257 per total mile in 2007. We received a fuel surcharge on our loaded miles from most shippers. However, this does not cover the entire cost of high fuel prices for several reasons, including the following: surcharges cover only loaded miles, not the approximately 11% of non-revenue miles we operated in 2008; 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. In addition, fuel surcharges vary in the percentage of reimbursement offered, and not all surcharges fully compensate for fuel price increases even on loaded miles.
The rate of fuel price increases also can have an impact. Most fuel surcharges are based on the average fuel price as published by the DOE for the week prior to the shipment. In times of decreasing fuel prices, the lag time causes additional recovery. Lag time was a factor to additional recovery during the second half of 2008, as fuel prices decreased rapidly during the period.
We have established several initiatives to combat the cost of fuel. We have invested in auxiliary power units for a percentage of its fleet and is evaluating the payback on additional units where idle time is already lower. We have also reduced the maximum speed of many of our trucks, implemented strict idling guidelines for our drivers, encouraged the use of shore power units in truck stops, and imposed standards for accepting broker freight that include a minimum combined rate and assumed fuel surcharge component. This combination of initiatives contributed to a significant improvement in fleetwide average fuel mileage. We will continue to review shipper's overall freight rate and fuel surcharge program. Fuel costs may continue to be affected in the future by price fluctuations, volume purchase commitments, the terms and collectibility of fuel surcharges, the percentage of miles driven by independent contractors, and lower fuel mileage due to government mandated emissions standards that have resulted in less fuel efficient engines. At December 31, 2008, we had no derivative financial instruments to reduce our exposure to fuel price fluctuations.
Operations and maintenance, consisting primarily of vehicle maintenance, repairs, and driver recruitment expenses, increased $2.0 million to $42.5 million in 2008, from $40.4 million in 2007. The increase resulted from increased tractor and trailer maintenance costs, as well as increased tire expense associated with a somewhat older average fleet age and the associated tire replacement cycle. As a percentage of freight revenue, operations and maintenance increased to 6.9% in 2008, from 6.7% in 2007.
Revenue equipment rentals and purchased transportation increased $24.5 million, or 36.8%, to $91.0 million in 2008, from $66.5 million in 2007. As a percentage of freight revenue, revenue equipment rentals and purchased transportation expense increased to 14.8% in 2008, from 11.0% in 2007. These increases were primarily driven by increased payments to third-party transportation providers associated with Solutions, our brokerage subsidiary, which increased to $45.7 million in 2008 from $16.3 million in 2007. This was offset by a $3.7 million reduction in payments to independent contractors, which decreased to $14.1 million in 2008, from $17.8 million in 2007, mainly due to a decrease in the independent contractor fleet and a decrease in tractor and trailer equipment rental and other related expenses to $31.2 million in 2008 compared with $32.5 million in 2007. We had financed approximately 646 tractors and 5,706 trailers under operating leases at December 31, 2008, compared with 693 tractors and 6,322 trailers under operating leases at December 31, 2007. This expense category will fluctuate with the number of loads hauled by independent contractors and handled by Solutions and the percentage of our fleet financed with operating leases, as well as the amount of fuel surcharge revenue passed through to the independent contractors and third-party carriers.
Operating taxes and licenses decreased $1.0 million, or 7.3%, to $13.1 million in 2008 from $14.1 million in 2007. As a percentage of freight revenue, operating taxes and licenses remained essentially constant at 2.1% in 2008 and 2.3% in 2007.
Insurance and claims consisting primarily of premiums and deductible amounts for liability, physical damage, and cargo damage insurance and claims, increased $1.2 million, or 3.3%, to approximately $37.6 million in 2008, from approximately $36.4 million in 2007. As a percentage of freight revenue, insurance and claims remained essentially constant at 6.1% in 2008 and 6.0% in 2007.
The Company's overall safety performance has improved as our DOT reportable accidents dropped to the lowest level per million miles since 2000, giving us the best overall safety performance in at least eight years (based on DOT reportable accidents per million miles). During 2008, there werewas a small number of severe accidents late in the year that resulted in a negative impact of approximately $5.4 million. During 2007, there were unfavorable developments on two prior-period claims that increased our accrual for casualty claims in 2007 by $5.2 million. The 2007 increase was partially offset by the receipt of a $1.0 million refund from our insurance carrier related to achieving certain monetary claim targets for our casualty policy in the 2007 policy year. The insurance refund in 2008 was approximately $0.4 million. With our significant self-insured retention, insurance and claims expense may fluctuate significantly from period to period, and any increase in frequency or severity of claims could adversely affect our financial condition and results of operations.
Communications and utilities decreased to $6.7 million in 2008, from $7.4 million in 2007. As a percentage of freight revenue, communications and utilities remained essentially constant at 1.1% in 2008 and 1.2% in 2007.
General supplies and expenses, consisting primarily of headquarters and other terminal facilities expenses increased $3.0 million to $26.4 million in 2008, from $23.3 million in 2007. As a percentage of freight revenue, general supplies and expenses increased to 4.3% in 2008, from 3.9% in 2007. The increase was primarily due to increased sales agent commissions from our growing brokerage subsidiary, which increased $2.5 million to $3.8 million in 2008, compared to $1.3 million in 2007.
Depreciation and amortization, consisting primarily of depreciation of revenue equipment increased $9.7 million or 18.1%, to $63.2 million in 2008, from $53.5 million in 2007. As a percentage of freight revenue, depreciation and amortization increased to 10.3% in 2008, from 8.9% in 2007. The increase was related to a $15.8 million revenue equipment impairment charge that was recorded in 2008, as compared to a $1.7 million impairment charge recorded in 2007. Excluding the impairment charges, depreciation and amortization decreased $4.4 million in 2008 and, as a percentage of freight revenue, decreased to 7.7% in 2008, from 8.6% in 2007. These decreases were primarily the result of our efforts to eliminate excess equipment and terminals over the past year. We haveduring 2008, and we reduced theour fleet by approximately 263 tractors and 390 trailers. Depreciation and amortization expense includes any gain or loss on the disposal of equipment, which was an approximately $1.9 million loss in 2008 and a $1.7 million loss in 2007. Please seeSee "Additional Information Concerning ImpairmentNon-Cash Charges" abovebelow for a further description of impairment charges affecting our operating results.
Goodwill impairment in 2008 related to the $24.7 million write-off of all goodwill associated with our 2006 acquisition of Star Transportation. This amount is non-cash and non-deductible. Please seeSee "Additional Information Concerning ImpairmentNon-Cash Charges" abovebelow for a further description of impairment charges affecting our operating results.
Our income tax benefit was $12.8 million in 2008 compared to $5.6 million in 2007. The effective tax rate is different from the expected combined tax rate as a result of permanent differences primarily related to a per diem pay structure implemented in 2001. Due to the nondeductible effect of per diem, our tax rate will fluctuate in future periods as income fluctuates. In addition, weWe reversed a contingent tax accrual during 2007, based on the recommendation by an IRS appeals officer that the IRS concede a case in our favor. This concession resulted in recognition of approximately $0.4 million of income tax benefit for 2007.
Primarily as a result of the factors described above, net income decreased approximately $36.7 million to a net loss of $53.4 million in 2008, from a net loss of $16.7 million in 2007. As a result of the foregoing, our net loss as a percentage of freight revenue declined to (8.7%) in 2008, from (2.8%) in 2007.
Comparison of Year Ended December 31, 2007 to Year Ended December 31, 2006SEGMENT OPERATIONS
Total revenue increased $28.7 million, or 4.2%We operate two reportable business segments. Our Asset-Based Truckload Services ("Truckload") segment consists of Covenant Transport, Inc., SRT, and Star Transportation. Our Brokerage Services segment consists of Covenant Transport Solutions, Inc. ("Solutions"). The operation of each of these businesses is described in our notes to $712.5 million in 2007, from $683.8 million in 2006. Freight revenue excludes $109.9 millionthe "Business Section." Unallocated corporate overhead includes costs that are incidental to our activities and are not specifically allocated to one of fuel surcharge revenue in 2007the segments. The following tables summarize financial and $111.6 million in 2006.operating data by segment:
On September 14, 2006, we acquired 100% of the outstanding stock of Star, a short-to-medium haul dry van regional truckload carrier based in Nashville, Tennessee. The acquisition included 614 tractors and 1,719 trailers. Star's operating results have been accounted for in the Company's results of operations since the acquisition date. Star's total revenue for the year ended December 31, 2007 totaled approximately $96.2 million, which is included in our consolidated statements of operations for the year ended December 31, 2007. Star's cost structure is similar to that of our additional operating subsidiaries, and therefore has a minimal impact on expenses as a percentage of freight revenue.| | | Twelve months ended December 31, | |
| (in thousands) | | 2009 | | | 2008 | | | 2007 | |
| Revenues: | | | | | | | | | |
| | | | | | | | | | |
| Asset-Based Truckload Services | | $ | 541,325 | | | $ | 719,220 | | | $ | 692,722 | |
| Brokerage Services | | | 47,362 | | | | 54,694 | | | | 19,804 | |
| | | | | | | | | | | | | |
| Total | | $ | 588,687 | | | $ | 773,914 | | | $ | 712,526 | |
| Operating Income (Loss): | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Asset-Based Truckload Services | | $ | 10,552 | | | $ | (37,091 | ) | | $ | (7,011 | ) |
| Brokerage Services | | | 155 | | | | 466 | | | | 1,031 | |
| Unallocated Corporate Overhead | | | (15,429 | ) | | | (19,054 | ) | | | (4,701 | ) |
| | | | | | | | | | | | | |
| Total | | $ | (4,722 | ) | | $ | (55,679 | ) | | $ | (10,681 | ) |
Freight revenue (total revenue less fuel surcharges) increased $30.4 million, or 5.3%, to $602.6 million in 2007, from $572.2 million in 2006. Average freight revenue per tractor per week, our primary measure of asset productivity, increased 0.4% to $3,088 in 2007 from $3,077 in 2006. The increase was primarily generated by a 0.5% increase in average miles per tractor and a 1.1% increase in our average freight revenue per loaded mile. Excluding the acquisition of Star, we continued to constrain the size of our tractor fleet to achieve greater fleet utilization and improved profitability. In general, the changes in freight mix as a result of the realignment expanded the portions of our business with longer lengths of haul, more miles per tractor, and generally lower rate structures, while reducing the regional service offering, which had the highest rate structure but significantly lower miles per tractor. The lackluster freight environment continued to impact every subsidiary and service offering.
Salaries, wages, and related expenses increased $8.1 million, or 3.1%, to $270.4 million in 2007, from $262.3 million in 2006. As a percentage of freight revenue, salaries, wages, and related expenses decreased to 44.9% in 2007 from 45.8% in 2006. Driver pay increased $7.5 million to $188.5 million in 2007, from $181.0 million in the 2006 period, as improved driver retention resulted in higher wages for more experienced drivers. This resulted in increased driver pay on a cost per mile basis of 1.0% in the 2007 period over the 2006 period. Our employee benefits, decreased $1.9 million to $34.7 million in 2007 from $36.6 million in 2006, attributable to favorable health insurance expense of $1.3 million and reduced workers' compensation exposure resulting in a $1.3 million reduction in related expense, offset by increased payroll taxes of $0.8 million related to increased salaries and wages. These benefit expenses decreased to 5.8% of freight revenue in 2007 from 6.4% of freight revenue in 2006.
Fuel expense, net of fuel surcharge revenue of $109.9 million in 2007 and $111.6 million in 2006, increased $18.4 million to $101.1 million in 2007 from $82.8 million in 2006. As a percentage of freight revenue, net fuel expense increased to 16.8% in 2007 from 14.5% in 2006. Fuel surcharges amounted to $0.257 per total mile in 2007 compared to $0.266 per total mile in 2006. In 2007, we had a lower surcharge collection rate due primarily to three factors: 1) the increase in freight obtained through brokers, 2) less compensatory fuel surcharge programs, and 3) an increase in the percentage of non-revenue miles, due to the decrease in freight demand. Our total miles increased approximately 2.7% while our fuel surcharge revenue decreased 1.5%. The resulting net effect was that our fuel expense, net of surcharge, increased approximately $.038 per total mile. Fuel costs may be affected in the future by price fluctuations, volume purchase commitments, the terms and collectibility of fuel surcharges, the percentage of miles driven by independent contractors, and lower fuel mileage due to government mandated emissions standards that have resulted in less fuel efficient engines. At December 31, 2007, we had no derivative financial instruments to reduce our exposure to fuel price fluctuations.
Operations and maintenance, consisting primarily of vehicle maintenance, repairs, and driver recruitment expenses, increased $4.3 million to $40.4 million in 2007 from $36.1 million in 2006. As a percentage of freight revenue, operations and maintenance increased slightly to 6.7% in 2007 from 6.3% in 2006. The increase resulted in part from higher unloading costs, tractor and trailer maintenance costs, and tire expense, but was offset by reduced driver recruiting expense and tolls.
Revenue equipment rentals and purchased transportation increased $3.0 million, or 4.7%, to $66.5 million in 2007, from $63.5 million in 2006. As a percentage of freight revenue, revenue equipment rentals and purchased transportation expense remained essentially flat at 11.0% in 2007 and 11.1% in 2006. Payments to third-party transportation providers primarily from Solutions, our brokerage subsidiary, were $16.3 million in 2007, compared to $3.4 million in 2006. Tractor and trailer equipment rental and other related expenses decreased $8.5 million, to $32.5 million in 2007 compared with $41.0 million in 2006. We had financed approximately 693 tractors and 6,322 trailers under operating leases at December 31, 2007, compared with 1,116 tractors and 7,575 trailers under operating leases at December 31, 2006. Payments to independent contractors decreased $1.3 million to $17.8 million in 2007 from $19.1 million in 2006, mainly due to a decrease in the independent contractor fleet.
Operating taxes and licenses decreased $0.4 million, or 2.8%,
Comparison of Year Ended December 31, 2009 to $14.1 million in 2007 from $14.5 million in 2006. As a percentage of freight revenue, operating taxes and licenses remained essentially constant at 2.3% in 2007 and 2.5% in 2006.Year Ended December 31, 2008
Insurance and claims, consisting primarily of premiums and deductible amounts for liability, physical damage, and cargo damage insurance and claims, increased $2.3 million, or 6.7%Our asset-based truckload services segment revenue decreased 24.7%, to approximately $36.4$541.3 million for the twelve-month period ended December 31, 2009, compared to $719.2 million for the comparable period in 2008. Lower fuel prices resulted in fuel surcharge revenue of $68.2 million in 2007 from approximately $34.1the twelve months ended December 31, 2009, versus $158.1 million in 2006.the 2008 period. The increase was thedecrease in freight revenue is related to a decrease in rates and miles as a result of unfavorable developments on two separate claims occurringthe weakened economy in 20042009. In 2009, management decreased the fleet size approximately 10% in response to weak demand. Excluding unallocated corporate overhead, the segment generated an operating income of $10.6 million for the twelve months ended December 31, 2009, compared to an operating loss of $37.1 million for the same 2008 period, primarily due to certain non-cash charges in 2008 totaling $40.5 million related to the impairment of certain property and 2005,equipment and Star's goodwill, both of which were ultimately settled duringare discussed in more detail below. Excluding these charges in 2008, the second quarterTruckload segment generated operating income of 2007, increasing our accrual for casualty claims by $5.2 million. Our frequency and severity$3.4 million, representing an increase in operating income in 2009 from 2008, with the exclusion of accidents during 2007 has improved versus 2006, andthe impairments, as a percentageresult of freight revenue, insurancelower net fuel expenses and claims remained essentially constant at 6.0% in 2007 and 2006.cost savings initiatives.
In general,Our brokerage segment revenue decreased 13.4% to $47.3 million for casualty claims, we have insurance coverage upthe twelve months ended December 31, 2009, compared to $50.0$54.7 million per claim. In 2006for the same period in the prior year. The decreases were primarily attributable to a reduction in the portion of revenue attributable to fuel surcharges given fuel was at historic highs throughout much of 2008 and through February 28, 2007, we were self-insuredless volume due to the closure of a large company store in October 2008. Excluding unallocated corporate overhead, operating income for personal injury and property damage claimsour brokerage segment was $0.2 million for amounts up to $2.0 million per occurrence, subjectthe twelve-month period ended December 31, 2009, compared to an additional $2.0operating income of $0.5 million self-insured aggregate amount, whichfor the comparable 2008 period. The decreases are a result of an increase in bad debt expense of $0.3 million from the comparable 2008 period due to several large bankruptcies, an increase in purchased transportation expense per revenue dollar, and an increase in depreciation expense of approximately $0.3 million related to accelerating the depreciation of certain software that will be abandoned in 2010. These increases were partially off-set by various reductions in selling, general, and administrative expenses as a result of cost savings initiatives.
Comparison of Year Ended December 31, 2008 to Year Ended December 31, 2007
Our asset-based truckload services segment revenue increased 3.9%, to $719.2 million for the twelve-month period ended December 31, 2008, compared to $692.3 million for the comparable period in 2007. Higher fuel prices resulted in fuel surcharge revenue of $158.1 million in the twelve months ended December 31, 2008, versus $109.9 million in the 2007 period. The decrease in freight revenue is related to a decrease in rates, total self-insured retentionmiles, and fleet size, specifically in the third and fourth quarters, related to the onset of upthe recession in 2008. Excluding unallocated corporate overhead, an operating loss of $37.1 million for the twelve months ended December 31, 2008 compared to $4.0operating loss of $7.0 million untilfor the $2.0same 2007 period. The fluctuations are primarily due to certain non-cash charges in 2008 totaling $40.5 million aggregate threshold was reached. We renewed our casualty program asrelated to the impairment of February 28,certain property and equipment and Star's goodwill and a $1.7 million impairment charge related to a corporate aircraft in 2007, each of which is discussed in more detail below. Excluding these charges, the Truckload segment generated operating income of $3.4 million in 2008 and an operating loss of $5.3 million in 2007. In conjunctionThe increase in operating income from 2007 to 2008, with the renewal, we are self-insuredexclusion of the impairments, is primarily a result of a $6.6 million reduction in salaries and wages due to more drivers participating in the per diem plan and a reduction in our non-driving workforce.
Our brokerage segment revenue increased 176.3% to $54.7 million for personal injury and property damage claimsthe twelve months ended December 31, 2008, compared to $19.8 million for amounts upthe same period in the prior year, primarily due to an increase in fuel surcharge collection, much of which is passed on to the first $4.0 million. We are self-insuredthird-party carriers, and an increase in brokerage loads to 27,117 in 2008, from 10,743 loads in 2007. As a result, average revenue per load increased approximately 9.4% to $2,017 in 2008, from $1,843 per load in 2007. Excluding unallocated corporate overhead, operating income for cargo loss and damage claimsour brokerage segment was $0.5 million for amounts upthe twelve-month period ended December 31, 2008, compared to an operating income of $1.0 million per occurrence. Insurancefor the comparable 2007 period. The decrease is a result of an increase in legal expense of $0.8 million related to litigation surrounding the closure of a large Company store in 2008, partially offset by a more efficient spreading of fixed costs due to the increase in loads year-over-year.
Additional Information Concerning Non-Cash Charges
Transplace
From July 2001 to December 2009, we owned approximately 12.4% of Transplace, Inc. ("Transplace"), a global logistics provider. During the first quarter of 2005, we loaned Transplace approximately $2.6 million through a 6% interest-bearing note receivable. After receiving an offer to purchase our 12.4% equity ownership and claims expense varies basedrelated note receivable that was accepted by a majority of Transplace's shareholders, we determined, pursuant to the guidance provided by the Financial Accounting Standards Board ("FASB") Accounting Standards Codification 325, that the value of our equity investment had become completely impaired in the third quarter of 2009, and the value of the note receivable had become impaired by approximately $0.9 million. As a result, we recorded a non-cash impairment charge of $11.6 million during the third quarter of 2009.
The transaction closed in December 2009, whereby the proceeds of $1.9 million provided for a recovery of $0.1 million of the previously impaired amount in the fourth quarter of 2009 and thus an $11.5 million non-cash loss on the frequencysale of our investment and severity of claims,related note receivable. There was no tax benefit recorded in connection with the premium expense, and the level of self-insured retention, the development of claims over time, and other factors. With our significant self-insured retention, insurance and claims expense may fluctuate significantly from period to period, and any increase in frequency or severity of claims could adversely affect our financial condition and results of operations.
Communications and utilities increased to $7.4 million in 2007 from $6.7 million in 2006. As a percentage of freight revenue, communications and utilities remained constant at 1.2% in 2007 and 2006.
General supplies and expenses, consisting primarily of headquarters and other terminal facilities expenses, increased $1.9 million to $23.3 million in 2007 from $21.4 million in 2006. As a percentage of freight revenue, general supplies and expenses increased to 3.9% in 2007 from 3.7% in 2006. Of this increase, $0.7 million was for additional building rent paidloss on our headquarters building and surrounding property in Chattanooga, Tennessee for which we completed a sale leaseback transaction effective April 2006 as described more fully in the following paragraph. Sales agent commissions, primarily from our growing brokerage subsidiary, increased $1.1 million to $1.3 million in 2007, compared to $0.2 million in 2006.
In April 2006, we entered into a sale leaseback transaction involving our corporate headquarters, a maintenance facility, and approximately forty-six acres of surrounding property in Chattanooga, Tennessee (collectively, the "Headquarters Facility"). We received proceeds of approximately $29.6 million from the sale of the Headquarters Facility,investment, given a full valuation allowance was established for the related capital loss.
Goodwill
In light of changes in market conditions and the related declining market outlook for the Star Transportation operating subsidiary, which is included in our Truckload segment, noted in the fourth quarter of 2008, we engaged an independent third party to assist us in the completion of valuations used to pay down borrowings under our Credit Facilityin the impairment testing process. The completion of this work concluded that the goodwill previously recorded for the Star acquisition was fully impaired and to purchase revenue equipment. In the transaction, we entered into a twenty-year lease agreement, whereby we will lease back the Headquarters Facility at an annual rental rate of approximately $2.5 million, subject to annual rent increases of 1.0%, resulting in annual straight-line rental expense of approximately $2.7 million. The transaction resulted in a gain$24.7 million, or $1.75 per basic and diluted share, non-cash goodwill impairment charge, recorded in the fourth quarter of approximately $2.4 million, which is being amortized ratably over2008. There was no tax benefit associated with this nondeductible charge. Pursuant to applicable accounting standards, we conducted our 2009 annual impairment test for goodwill in the life of the leasesecond quarter and recorded as an offset to general supplies and expenses (specifically to building rent) on our consolidated statements of operations.did not identify any impairment.
DepreciationRevenue Equipment, including Assets Held For Sale
As a result of sharply lower economic indicators, a worsening credit market, and amortization, consisting primarilysignificantly lower prices received for disposals of depreciationour owned used revenue equipment, all of which deteriorated substantially during the fourth quarter of 2008, we recorded a $9.4 million asset impairment charge to write-down the carrying values of tractors and trailers in-use in our Truckload segment which were expected to be traded or sold in 2009 or 2010. The carrying values for revenue equipment scheduled for trade in 2011 and beyond were not adjusted because those tractors and trailers were not required to be impaired based on recoverability testing using the expected future cash flows and disposition values of such equipment.
Similarly, we recorded a $6.4 million asset impairment charge ($1.2 million was recorded in the third quarter and $5.2 million was recorded in the fourth quarter) to write down the carrying values of tractors and trailers held for sale in our Truckload segment, which were expected to be traded or sold in future periods.
Although we do not expect to be required to make any current or future cash expenditures as a result of these impairment charges, cash proceeds of future disposals of revenue equipment increased $12.4 million, or 30.1%,are anticipated to $53.5 million in 2007 from $41.2 million in 2006. As a percentagebe lower than expected prior to the impairment charges.
Our evaluation of freight revenue, depreciation and amortization increasedthe future cash flows compared to 8.9% in 2007 from 7.2% in 2006. The increase related to several factors, including an increase in the numbercarrying value of ownedthe tractors and trailers in-use in 2007; a softer market2009 has not resulted in any additional impairment charges. Additionally, there were no indicators triggering an evaluation for used equipment resulting in a lossimpairment of $1.7 million in 2007 compared to a gain of $2.1 million in 2006;assets held for sale during the 2009 period, as evidenced by our minimal gains and increased amortization expense of $1.5 million related to the identifiable intangibles acquired with our Star acquisition on September 14, 2006. Depreciation and amortization expense is net of any gain or losslosses on the disposal of tractors and trailers.revenue equipment, including assets held for sale.
TheAircraft
In addition, our 2007 asset impairment charge relateswas related to our decision to sell our corporate aircraft to reduce ongoing operating costs. We recorded an impairment charge of $1.7 million, reflecting the unfavorable fair market value of the airplane as compared to the combination of the estimated payoff of the long-term operating lease and current book value of related airplane leasehold improvements.
The other expense category includes interest expense, interest income, and pre-tax non-cash gains or losses related to the accounting for interest rate derivatives under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended ("SFAS No. 133"). Other expense, net, increased $5.2 million, to $11.6 million in 2007 from $6.4 million in 2006. The increase relates primarily to increased net interest expense of $4.9 million resulting from the additional borrowings related to the Star acquisition, along with increased average interest rates. However a portion of this increase has been offset by a reduction in overall balance sheet debt since the Star acquisition.
Our income tax benefit was $5.6 million in 2007 compared to income tax expense of $4.6 million in 2006. The effective tax rate is different from the expected combined tax rate as a result of permanent differences primarily related to a per diem pay structure implemented in 2001. Due to the nondeductible effect of per diem, our tax rate will fluctuate in future periods as income fluctuates. In addition, we received a net tax benefit in 2007, as compared with the 2006 period because we reversed a contingent tax accrual effective March 31, 2007, based on the recommendation by an IRS appeals officer that the IRS concede a case in our favor. This concession resulted in recognition of approximately $0.4 million of income tax benefit in 2007.
Primarily as a result of the factors described above, net income decreased approximately $15.3 million to a net loss of $16.7 million in 2007 from a net loss of $1.4 million in 2006. As a result of the foregoing, our net loss as a percentage of freight revenue declined to (2.8%) in 2007 from (0.2%) in 2006.
LIQUIDITY AND CAPITAL RESOURCES
Our business requires significant capital investments over the short-term and the long-term. In recent years,Recently, we have financed our capital requirements with borrowings under our credit facilities,Credit Facility, cash flows from operations, long-term operating leases, capital leases, and secured installment notes with finance companies. Our primary sources of liquidity at December 31, 2008,2009, were funds provided by operations, proceeds from the sale of used revenue equipment, borrowings under our Credit Agreement,Facility, borrowings from the Daimler Facility, other secured installment notes, (each as defined in Note 7 to our consolidated financial statements contained herein), andcapital leases, operating leases of revenue equipment. Although turmoil inequipment, and cash and cash equivalents. We had a working capital (total current assets less total current liabilities) deficit of $17.8 million at December 31, 2009, and a working capital surplus of $16.3 million at December 31, 2008. Working capital deficits are common to many trucking companies that expand by financing revenue equipment purchases through borrowing or capitalized leases. When we finance revenue equipment through borrowing or capitalized leases, the economyprincipal amortization scheduled for the next twelve months is categorized as a current liability, although the revenue equipment is classified as a long-term asset. Consequently, each purchase of revenue equipment financed with borrowing or capitalized leases decreases working capital. We believe our working capital deficit had little impact on our liquidity. Based on our expected financial condition, results of operations, net capital expenditures, a material refund of previously paid federal income taxes as a result of net operating loss carry backs pursuant to the Worker, Homeownership, and inBusiness Assistance Act of 2009, and net cash flows during the financial and credit markets has made availability of financing less certain, based upon our assumptions for 2009 described above,next twelve months, which contemplate an improvement compared with the past twelve months, we believe our working capital and sources of financing, together with additional financing we may be able to access and secure with available real estate,liquidity will be adequate to meet our current and projected needs both for at least the shortnext twelve months. On a longer-term basis, based on our anticipated financial condition, results of operations, and long term.cash flows, and continued availability of our Credit Facility, secured installment notes, and other sources of financing that we expect will be available to us, we do not expect to experience material liquidity constraints in the foreseeable future.
The Company has had significant losses from 2007 through 2009, attributable to operations, impairments, and other charges. The Company has managed its liquidity during this time through a series of cost reduction initiatives, refinancing, amendments to credit facilities, and sales of assets. We have had difficulty meeting budgeted results in the past. If we are unable to meet budgeted results or otherwise comply with our Credit Facility, we may be unable to obtain a further amendment or waiver under our Credit Facility, or we may incur additional fees.
Cash Flows
Net cash provided by operating activities was $30.9 million in 2009 and $40.3 million in 2008. Excluding the effects of $40.4 million in non-cash charges in 2008 and $33.7$11.5 million in 2007. Our2009, our cash from operating activities was higherlower in 20082009 primarily due to improved collectionan $11.5 million net change from 2009 to 2008 related to cash payments for insurance and claims accruals resulting from the payment of receivables which resulteda large volume of claims in an approximately $14.7 million increase in cash from operating activities in 2008.
Net cash used in investing activities was $62.6 million in 2008 and $11.1 million in 2007. The increase in net cash used in investing activities was primarily the2009, including several large claims. Additionally, as a result of an increase in our acquisition of revenue equipment using balance sheet debt as opposed to operating leases, accelerated depreciation for tax purposes provided for an increase in the deferred tax provision, which resulted in an $8.7 million adjustment to net loss for the related non-cash activity in 2009 versus $2.5 million in the corresponding 2008 period. The decrease in our cash from operating activities was partially offset by an increase in our collections of receivables, primarily resulting from the impact of fuel prices on revenue and accounts receivable, which resulted in a $2.9 million increase in cash from operating activities in 2009.
Net cash used in investing activities was $63.0 million in 2009 and $62.6 million in 2008. In 2009, gross capital expenditures increased approximately $24 million, consistent with proceeds from our Daimler Facility and a decreasedispositions. The increase in proceeds from the sale of revenue equipment. We currently project netgross capital expenditures for 2009 will be in the rangewas primarily due to increasing our percentage of $65 to $80 million; however, such projection is subject to a number of uncertainties, including our plans for equipment replacementowned tractors and fleet size for 2009, which are still being finalized, as well as the prices obtained for used equipment.reducing tractors under operating leases.
Net cash provided by financing activities was $38.0 million in 2009, compared to $24.1 million in 2008 compared to $23.5 million used inprovided by financing activities in 2007. In2008. The primary contributors to the differences in our net cash provided by financing activities and net borrowings in the 2009 period, as compared to the 2008 we entered intoperiod, were the new Daimler Facility. At December 31, 2008, the Company had outstandingpurchase of additional tractors in 2009 using balance sheet debt as opposed to operating leases and fluctuations in checks outstanding in excess of $167.0 million, primarily consisting of $159.8 million drawn under the Daimler Facility and approximately $3.8 millionbank balances resulting from the Credit Agreement. At December 31, 2008, interest rates on thistiming of certain payments, partially off-set by lower debt ranged from 4.0% to 6.2%. At December 31, 2008, we had approximately $38.9 million of available borrowing remaining under our Credit Agreement.refinancing costs given the Company's new credit facilities in 2008.
We havehad a stock repurchase plan for up to 1.3 million Company shares to be purchased in the open market or through negotiated transactions subject to criteria established by the Board. No shares were purchased under this plan during 2008. At December 31, 2008, there were 1,154,100 shares still available to purchase under this plan,2009, which expiresexpired on June 30, 2009. However, ourwe remitted approximately $0.1 million to the proper taxing authorities in satisfaction of the employees' minimum statutory withholding requirements related to employees' vesting in restricted share grants. The tax withholding amounts paid by the Company have been accounted for as a repurchase of shares. Our Credit AgreementFacility now prohibits the repurchase of any shares.
shares, except those purchased to off-set an employee's minimum statutory withholding requirements upon the vesting of equity awards, without obtaining approval from the lenders. Material Debt Agreements
Credit Agreement
In September 2008, Covenant Transport, Inc., a Tennessee corporation ("CTI"), CTGL, Covenant Asset Management, Inc., a Nevada corporation ("CAM"), Southern Refrigerated Transport, Inc., an Arkansas corporation ("SRT"), Covenant Transport Solutions, Inc., a Nevada corporation ("Solutions"), Star Transportation, Inc., a Tennessee corporation ("Star";the Company and collectively with CTI, CTGL, CAM, SRT, and Solutions, the "Borrowers"; and each of which is a direct or indirect wholly-owned subsidiary of Covenant Transportation Group, Inc.), and Covenant Transportation Group, Inc.substantially all its subsidiaries entered into a Third Amended and Restated Credit AgreementFacility with Bank of America, N.A., as agent (the "Agent"), JPMorgan Chase Bank, N.A. ("JPM"), and Textron Financial Corporation ("Textron"; and collectively(collectively with the Agent and JPM, the "Lenders") that matures September 2011 (the "Credit Agreement"Facility").
The Credit AgreementFacility is structured as an $85.0 million revolving credit facility, with an accordion feature that, so long as no event of default exists, allows the BorrowersCompany to request an increase in the revolving credit facility of up to $50.0 million. Borrowings under the Credit Agreement are classified as either "base rate loans" or "LIBOR loans". As of December 31, 2008, base rate loans accrued interest at a base rate equal to the Agent's prime rate plus an applicable margin that adjusted quarterly between 0.625% and 1.375% based on average pricing availability. LIBOR loans accrued interest at LIBOR plus an applicable margin that adjusted quarterly between 2.125% and 2.875% based on average pricing availability. The applicable margin was 2.625% at December 31, 2008. The Credit AgreementFacility includes, within its $85.0 million revolving credit facility, a letter of credit sub facility in an aggregate amount of $85.0 million and a swing line sub facility in an aggregate amount equal to the greater of $10.0 million or 10% of the Lenders' aggregate commitments under the Credit AgreementFacility from time to time.
Borrowings under the Credit Facility are classified as either "base rate loans" or "LIBOR loans." Base rate loans accrue interest at a base rate equal to the greater of the prime rate, the federal funds rate plus 0.5%, or LIBOR plus 1.0%, plus an applicable margin that is adjusted quarterly between 2.5% and 3.25% based on average pricing availability. LIBOR loans accrue interest at the greater of 1.5% or LIBOR, plus an applicable margin that is adjusted quarterly between 3.5% and 4.25% based on average pricing availability. The unused line fee is adjusted quarterly between 0.25%0.5% and 0.375%0.75% of the average daily amount by which the Lenders' aggregate revolving commitments under the Credit AgreementFacility exceed the outstanding principal amount of revolver loans and the aggregate undrawn amount of all outstanding letters of credit issued under the Credit Agreement.Facility. The obligations of the Borrowers under the Credit AgreementFacility are guaranteed by Covenant Transportation Group, Inc.the Company and secured by a pledge of substantially all of the Borrowers'Company's assets, with the notable exclusion of any real estate or revenue equipment financed with purchase money debt,pledged under other financing agreements, including without limitation, tractors financed through our $200.0 million line of credit from Daimler Truck Financial.revenue equipment installment notes and capital leases.
Borrowings under the Credit AgreementFacility are subject to a borrowing base limited to the lesser of (A) $85.0 million, minus the sum of the stated amount of all outstanding letters of credit; or (B) the sum of (i) 85% of eligible accounts receivable, plus (ii) the lesser of (a) 85% of the appraised net orderly liquidation value of eligible revenue equipment, (b) 95% of the net book value of eligible revenue equipment, or (c) 35% of the Lenders' aggregate revolving commitments under the Credit Agreement,Facility, plus (iii) the lesser of (a) $25.0 million or (b) 65% of the appraised fair market value of eligible real estate. The borrowing base is limited by a $15.0 million availability block, plus any other reserves as the Agent may establish in its judgment. WeThe Company had approximately $3.8$12.7 million in borrowings outstanding under the Credit AgreementFacility as of December 31, 2008, and had2009, undrawn letters of credit outstanding of approximately $40.6$42.0 million, and available borrowing capacity of $27.7 million. The weighted average interest rate on outstanding borrowings was 6.25%.
The Credit Agreement 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 Agreement may be accelerated, and the Lenders' commitments may be terminated. The Credit Agreement contains certain restrictions and covenants relating to, among other things, dividends, liens, acquisitions and dispositions outside of the ordinary course of business, and affiliate transactions. The Credit Agreement contains a single financial covenant, which requires us to maintain a consolidated fixed charge coverage ratio of at least 1.0 to 1.0. The financial covenant became effective October 31, 2008, we were in compliance at December 31, 2008, and such covenant was thereafter amended as described below.
On March 27, 2009, wethe Company obtained an amendment to ourits Credit Agreement,Facility, which among other things, (i) retroactively to January 1, 2009 amended the fixed charge coverage ratio covenant for January and February 2009 to the actual levels achieved, which cured our default of that covenant for January 2009, (ii) restarted the look back requirements of the fixed charge coverage ratio covenant beginning on March 1, 2009, (iii) increased the EBITDAR portion of the fixed charge coverage ratio definition by $3,000,000$3.0 million for all periods between March 1 to December 31, 2009, (iv) increased the base rate applicable to base rate loans to the greater of the prime rate, the federal funds rate plus 0.5%, or LIBOR plus 1.0%, (v) setsets a LIBOR floor of 1.5%, (vi) increased the applicable margin for base rate loans to a range between 2.5% and 3.25%3.25 % and for LIBOR loans to a range between 3.5% and 4.25%, with 3.0% (for base rate loans) and 4.0% (for LIBOR loans) to be used as the applicable margin through September 2009, (vii) increased ourthe Company's letter of credit facility fee by an amount corresponding to the increase in the applicable margin, (viii)(vii) increased the unused line fee to a range between 0.5% and 0.75%, and (ix) increased the maximum number of field examinations per year from three to four. In exchange for these amendments, wethe Company agreed to the increases in interest rates and fees described above and paid fees of approximately $544,000. Our$0.5 million.
The Credit Facility includes usual and customary events of default for a facility of this nature and provides that, upon the occurrence and continuation of an event of default, payment of all amounts payable under the Credit Facility may be accelerated, and the Lenders' commitments may be terminated. The Credit Facility contains certain restrictions and covenants relating to, among other things, dividends, liens, acquisitions and dispositions outside of the ordinary course of business, and affiliate transactions. The Credit Facility contains a single financial covenant, which required the Company to maintain a consolidated fixed charge coverage ratio will beof at least 1.0 to 1.0. The fixed charge coverage covenant became effective October 31, 2008, and the Company was in compliance with the covenant as follows after the amendment:of December 31, 2009.
On February 25, 2010, the Company obtained an additional amendment to its Credit Facility, which, among other things (i) amended certain defined terms in the Credit Facility, (ii) retroactively to January 1, 2010, amended the fixed charge coverage ratio covenant through June 30, 2010, to the levels set forth in the table below, which prevented a default of that covenant for January 2010, (iii) restarted the look back requirements of the fixed coverage ratio covenant beginning on January 1, 2010, and (iv) required the Company to order updated appraisals for certain real estate described in the Credit Facility. In exchange for these amendments, we agreed to pay the Agent, for the pro rata benefit of the Lenders, a fee equal to 0.125% of the Lenders' total commitments under the Credit Facility, or approximately $0.1 million. Following the effectiveness of the amendment, our fixed charge coverage ratio covenant requirement will be as follows:
One month ending March 31, 2009 | 1.00 to 1.0 |
Two months ending April 30, 2009 | 1.00 to 1.0 |
Three months ending May 31, 2009 | 1.00 to 1.0 |
Four months ending June 30, 2009 | 1.00 to 1.0 |
Five months ending July 31, 2009 | 1.00 to 1.0 |
Six months ending August 31, 2009 | 1.00 to 1.0 |
Seven months ending September 30, 2009 | 1.00 to 1.0 |
Eight months ending October 31, 2009 | 1.00 to 1.0 |
Nine months ending November 30, 2009 | 1.00 to 1.0 |
Ten months ending December 31, 2009 | 1.00 to 1.0 |
Eleven months ending January 31, 2010 | 1.00.80 to 1.01.00 |
TwelveTwo months ending February 28, 2010 | .65 to 1.00 |
| Three months ending March 31, 2010 | .72 to 1.00 |
| Four months ending April 30, 2010 | .80 to 1.00 |
| Five months ending May 31, 2010 | .85 to 1.00 |
| Six months ending June 30, 2010 | .90 to 1.00 |
| Seven months ending July 31, 2010 | 1.00 to 1.01.00 |
| Eight months ending August 31, 2010 | 1.00 to 1.00 |
| Nine months ending September 30, 2010 | 1.00 to 1.00 |
| Ten months ending October 31, 2010 | 1.00 to 1.00 |
| Eleven months ending November 30, 2010 | 1.00 to 1.00 |
| Twelve months ending December 31, 2010 | 1.00 to 1.00 |
| Each rolling twelve-month period thereafter | 1.00 to 1.01.00 |
Daimler Facility
On June 30, 2008, we securedCapital lease obligations are utilized to finance a $200.0 million lineportion of credit from Daimler Financial (the "Daimler Facility").our revenue equipment and are entered into with certain finance companies who are not parties to our Credit Facility. The Daimler Facility is securedleases terminate in January 2015 and contain guarantees of the residual value of the related equipment by both newthe Company, and used tractors and is structuredthe residual guarantees are included in the related debt balance as a combinationballoon payment at the end of retail installment contractsthe related term as well as included in the future minimum lease payments. These lease agreements require us to pay personal property taxes, maintenance, and TRAC leases.operating expenses.
Pricing for the Daimler Facility is (i)revenue equipment installment notes are quoted by Daimlerthe respective financial captives of our primary revenue equipment suppliers at the funding of each group of equipment acquired and consists ofinclude fixed annual rates for new equipment under retail installment contractscontracts. Approximately $185.6 million and (ii) a rate of 6% annually on used equipment financed on June 30, 2008. Approximately $159.8 million waswere reflected on our balance sheet under the Daimler Facilityfor these installment notes at December 31, 2008.2009 and 2008, respectively. The notes included in the Daimler funding are due in monthly installments with final maturities at various dates ranging from DecemberJanuary 2010 to December 2011.June 2013. The Daimler Facility containsnotes contain certain requirements regarding payment, insurance of collateral, and other matters, but doesdo not have any financial or other material covenants or events of default.
Additional borrowings underfrom the Daimler Facilityfinancial captives of our primary revenue equipment suppliers are available to fund new tractors expected to be delivered in 2009. Following relatively modest capital expenditures in 2007 and in the first half of 2008, we increased net capital expenditures in the last half of 2008 and we expect net capital expenditures (primarily consisting of revenue equipment) to increase significantly over the next 12 to 18 months consistent with our expected tractor replacement cycle. The Daimler Facility includes a commitment to fund most or all of the expected tractor purchases. The annual interest rate on the new equipment is approximately 200 basis points over the like-term rate for U.S. Treasury Bills, and the advance rate is 100% of the tractor cost. A leasing alternative is also available.2010.
Contractual Obligations and Commercial Commitments (1)
The following table sets forth our contractual cash obligations and commitments as of December 31, 2008:2009:
Payments due by period: (in thousands) | | Total | | | 2010 | | | 2011 | | | 2012 | | | 2013 | | | 2014 | | | There-after | |
| Credit Facility, including interest (2) | | $ | 12,686 | | | | - | | | $ | 12,686 | | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenue equipment and property installment notes, including interest (3) | | $ | 207,837 | | | $ | 77,176 | | | $ | 59,409 | | | $ | 67,450 | | | $ | 3,802 | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating leases (4) | | $ | 81,989 | | | $ | 22,898 | | | $ | 9,650 | | | $ | 7,668 | | | $ | 5,358 | | | $ | 3,216 | | | $ | 33,199 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Capital leases (5) | | $ | 18,052 | | | $ | 2,177 | | | $ | 2,177 | | | $ | 2,177 | | | $ | 2,177 | | | $ | 8,064 | | | $ | 1,280 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Lease residual value guarantees | | $ | 23,594 | | | $ | 12,714 | | | $ | 10,880 | | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Purchase obligations (6) | | $ | 98,014 | | | $ | 97,607 | | | $ | 407 | | | | - | | | | - | | | | - | | | | - | |
| Total contractual cash obligations | | $ | 442,172 | | | $ | 212,572 | | | $ | 95,209 | | | $ | 77,295 | | | $ | 11,337 | | | $ | 11,280 | | | $ | 34,479 | |
Payments due by period: (in thousands) | | Total | | | 2009 | | | 2010 | | | 2011 | | | 2012 | | | 2013 | | | There- after | |
| Credit Facility, including interest (2) | | $ | 3,940 | | | $ | 3,940 | | | | - | | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenue equipment installment notes, including interest (3) | | $ | 175,067 | | | $ | 67,217 | | | $ | 59,405 | | | $ | 36,485 | | | $ | 11,960 | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating leases (4) | | $ | 98,959 | | | $ | 23,857 | | | $ | 19,658 | | | $ | 8,572 | | | $ | 7,290 | | | $ | 4,834 | | | $ | 34,748 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Lease residual value guarantees | | $ | 26,212 | | | | - | | | $ | 9,864 | | | $ | 16,348 | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Diesel fuel and purchase obligations (5) | | $ | 67,000 | | | $ | 67,000 | | | | | | | | | | | | | | | | | | | | | |
| Total contractual cash obligations | | $ | 371,178 | | | $ | 162,014 | | | $ | 88,927 | | | $ | 61,405 | | | $ | 19,250 | | | $ | 4,834 | | | $ | 34,748 | |
| (1) | Excludes any amounts accrued for unrecognized tax benefits under FIN 48 as we are unable to reasonably predict the ultimate amount or timing of settlement of such unrecognized tax benefits. |
| (2) | Represents principal and interest payments owed at December 31, 2008.2009. The borrowings consist of draws under the Company's Credit Agreement,Facility, with fluctuating borrowing amounts and variable interest rates. In determining future contractual interest and principal obligations, for variable interest rate debt, the interest rate and principal amount in place at December 31, 20082009, was utilized. The table assumes long-term debt is held to maturity. Refer to Note 7, "Long-Term Debt and Securitization Facility"8, "Debt" of the accompanying consolidated financial statements for further information. |
| (3) | Represents principal and interest payments owed at December 31, 2008.2009. The borrowings consist of installment notes with a finance company,companies, with fixed borrowing amounts and fixed interest rates. The table assumes these installment notes are held to maturity. Refer to Note 7, "Long-Term Debt and Securitization Facility"8, "Debt" of the accompanying consolidated financial statements for further information. |
| (4) | Represents future monthly rental payment obligations under operating leases for over-the-road tractors, day-cabs, trailers, office and terminal properties, and computer and office equipment. Substantially all lease agreements for revenue equipment have fixed payment terms based on the passage of time. The tractor lease agreements generally stipulate maximum miles and provide for mileage penalties for excess miles. Lease termsThese leases generally run for a period of three to five years for tractors and trailers range from 30five to 60 months and 60 to 84 months, respectively.seven years for trailers. Refer to Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations – Off Balance Sheet Arrangements and Note 9, "Leases,""Leases" of the accompanying consolidated financial statements for further information. |
| (5) | This amount represents volumeRepresents principal and interest payments owed at December 31, 2009. The borrowings consist of capital leases with a finance company, with fixed borrowing amounts and fixed interest rates. Borrowings in 2014 and thereafter include the residual value guarantees on the related equipment as balloon payments. Refer to Note 8, "Debt" of the accompanying consolidated financial statements for further information. |
| (6) | Represents purchase obligations for revenue equipment and communications equipment totaling approximately $97.2 million in 2010. These commitments are cancelable, subject to certain adjustments in the underlying obligations and benefits. The Company also had commitments outstanding at December 31, 2009, to acquire computer software totaling $0.4 million in 2010 and 2011. These purchase commitments through our truck stop network. We estimate that these amounts represent approximately 80%are expected to be financed by operating leases, capital leases, long-term debt, proceeds from sales of our fuel needsexisting equipment, and/or cash flows from operations. Refer to Notes 8 and 9, “Debt” and "Leases", respectively, of the accompanying consolidated financial statements for 2009.further information |
Off Balance Sheet Arrangements
Operating leases have been an important source of financing for our revenue equipment, computer equipment, and certain real estate. At December 31, 2008,2009, we had financed approximately 646236 tractors and 5,7065,987 trailers under operating leases. Vehicles held under operating leases are not carried on our consolidated balance sheets, and lease payments in respect of such vehicles are reflected in our consolidated statements of operations in the line item "Revenue equipment rentals and purchased transportation." Our revenue equipment rental expense was $25.9 million in 2009, compared to $31.2 million in 2008, compared to $32.5 million in 2007.2008. The total amount of remaining payments under operating leases as of December 31, 2008,2009, was approximately $99.0$81.9 million. In connection with various operating leases, we issued residual value guarantees, which provide that if we do not purchase the leased equipment from the lessor at the end of the lease term, we are liable to the lessor for an amount equal to the shortage (if any) between the proceeds from the sale of the equipment and an agreed value. As of December 31, 2008,2009, the maximum amount of the residual value guarantees was approximately $21.4$23.6 million. To the extent the expected value at the lease termination date is lower than the residual value guarantee,guarantee; we would accrue for the difference over the remaining lease term. We believe that proceeds from the sale of equipment under operating leases would exceed the payment obligation on substantially all operating leases.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make decisions based upon estimates, assumptions, and factors we consider as relevant to the circumstances. Such decisions include the selection of applicable accounting principles and the use of judgment in their application, the results of which impact reported amounts and disclosures. Changes in future economic conditions or other business circumstances may affect the outcomes of our estimates and assumptions. Accordingly, actual results could differ from those anticipated. A summary of the significant accounting policies followed in preparation of the financial statements is contained in Note 1, "Summary of Significant Accounting Policies," of the consolidated financial statements attached hereto. The following discussion addresses our most critical accounting policies, which are those that are both important to the portrayal of our financial condition and results of operations and that require significant judgment or use of complex estimates.
Revenue Recognition
Revenue, drivers' wages, and other direct operating expenses generated by our Truckload reportable segment are recognized on the date shipments are delivered to the customer. Revenue includes transportation revenue, fuel surcharges, loading and unloading activities, equipment detention, and other accessorial services.
Revenue generated by our Solutions reportable segment is recognized upon completion of the services provided. Revenue is recorded on a gross basis, without deducting third party purchased transportation costs, as we act as a principal with substantial risks as primary obligor, except for transactions whereby equipment from our Truckload segment perform the related services, which we record on a net basis in accordance with the related authoritative guidance.
Depreciation of Revenue Equipment
Depreciation is determined using the straight-line method over the estimated useful lives of the assets. Depreciation of revenue equipment is our largest item of depreciation. We generally depreciate new tractors (excluding day cabs) over five years to salvage values of 7%5% to 26%31% and new trailers over seven to ten years to salvage values of 22%26% to 39%43%. We annually review the reasonableness of our estimates regarding useful lives and salvage values of our revenue equipment and other long-lived assets based upon, among other things, our experience with similar assets, conditions in the used revenue equipment market, and prevailing industry practice. Changes in our useful life or salvage value estimates or fluctuations in market values that are not reflected in our estimates could have a material effect on our results of operations. Gains and losses on the disposal of revenue equipment are included in depreciation expense in our consolidated statements of operations.
The Company leases certain revenue equipment under capital leases with terms of 60 months. Amortization of leased assets is included in depreciation and amortization expense.
Revenue
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. We recorded impairment charges in 2008 and in 2007. During 2008, due to the softening of the market for used equipment, we recorded a $15.8 million asset impairment charge to write down the carrying values of tractors and trailers held for sale expected to be traded or sold in 2009 and tractors that are in-use expected to be traded or sold in 2009 or 2010. During 2007, related to our decision to sell our corporate aircraft, we recorded an impairment charge of $1.7 million, reflecting the unfavorable market value of the airplane as compared to the combination of the estimated payoff of the long-term operating lease and current net book value of related airplane leasehold improvements. See the discussion above under "Additional Information Concerning Impairment Charges" for a more extensive description of these impairments.
Although a portion of our tractors are protected by non-binding indicative trade-in values or binding trade-back agreements with the manufacturers, we continue to have some tractors and substantially all of our trailers subject to fluctuations in market prices for used revenue equipment. Moreover, our trade-back agreements are contingent upon reaching acceptable terms for the purchase of new equipment. Further declines in the price of used revenue equipment or failure to reach agreement for the purchase of new tractors with the manufacturers issuing trade-back agreements could result in impairment of, or losses on the sale of, revenue equipment.
Assets Held For Sale
Assets held for sale include property and revenue equipment no longer utilized in continuing operations which isare available and held for sale. Assets held for sale are no longer subject to depreciation, and are recorded at the lower of depreciated book value plus the related costs to sell or fair market value less selling costs. We periodically review the carrying value of these assets for possible impairment. We expect to sell the majority of these assets within twelve months. During 2008, due
Goodwill and Other Intangible Assets
Pursuant to applicable accounting standards, we classify intangible assets into two categories: (i) intangible assets with definite lives subject to amortization and (ii) goodwill. We test intangible assets with definite lives for impairment if conditions exist that indicate the softeningcarrying value may not be recoverable. Such conditions may include an economic downturn in a geographic market or a change in the assessment of future operations. We record an impairment charge when the carrying value of the definite lived intangible asset is not recoverable by the cash flows generated from the use of the asset.
We test goodwill for impairment at least annually or more frequently if events or circumstances indicate that such intangible assets or goodwill might be impaired. We perform our impairment tests of goodwill at the reporting unit level. The Company's reporting units are defined as its subsidiaries because each is a legal entity that is managed separately. Such impairment tests for goodwill include comparing the fair value of the respective reporting unit with its carrying value, including goodwill. We use a variety of methodologies in conducting these impairment tests, including discounted cash flow analyses and market analyses.
We determine the useful lives of our identifiable intangible assets after considering the specific facts and circumstances related to each intangible asset. Factors we consider when determining useful lives include the contractual term of any agreement, the history of the asset, the Company's long-term strategy for used revenue equipment, we recordedthe 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 $6.4 million asset impairment charge ($1.2 million was recorded in the third quarter and $5.2 million was recorded in the fourth quarter)straight-line basis, over their useful lives, ranging from 4 to write down the carrying values of tractors and trailers held for sale expected to be traded or sold in 2009. See the discussion above under "Additional Information Concerning Impairment Charges" for a more extensive description of this impairment.20 years.
Accounting for InvestmentsTransplace
From July 2001 through December 2009, we owned approximately 12.4% of Transplace. In the formation transaction for Transplace, we contributed our logistics customer list, logistics business software and software licenses, certain intellectual property, intangible assets, and $5.0 million in cash, in exchange for our ownership. We have an investment in Transplace, Inc. ("Transplace"), a global transportation logistics service. We accountaccounted for this investment, which totaled approximately $10.7 million, using the cost method of accounting, with the investmentand it was historically included in other assets. We continue to evaluate this cost method investment in Transplace for impairment due to declines considered to be other than temporary. This impairment evaluation includes general economic and company-specific evaluations. If we determine that a decline in the cost value of this investment is other than temporary, then a charge to earnings will be recorded to other (income) expensesassets in the consolidated statements of operations for all or a portion of the unrealized loss, and a new cost basis in the investment will be established. As of December 31, 2008, no such charge had been recorded. However, we will continue to evaluate this investment for impairment on a quarterly basis.balance sheet. Also, during the first quarter of 2005, we loaned Transplace approximately $2.7 million. The 6% interest-bearing$2.6 million, which along with the related accrued interest was historically included in other receivables in the consolidated balance sheet.
Based on an offer to purchase our 12.4% equity ownership and related note receivable matures January 2011, an extensionin Transplace that was accepted by a majority of Transplace's shareholders, we determined that pursuant to the guidance provided by FASB Accounting Standards Codification 325, the value of our equity investment had become completely impaired in the third quarter of 2009, and the value of the original January 2007 maturity date. Basednote receivable had become impaired by approximately $0.9 million. As a result, we recorded a non-cash impairment charge of $11.6 million during the third quarter of 2009.
The transaction closed in December 2009, whereby the proceeds of $1.9 million provided for a recovery of $0.1 million of the previously impaired amount in the fourth quarter of 2009 and thus an $11.5 million non-cash loss on the borrowing availabilitysale of Transplace, we do not believe there is any impairment of thisour investment and related note receivable.
Accounting for Business Combinations
In accordance There was no tax benefit recorded in connection with business combination accounting, the Company allocatesloss on the purchase price of acquired companies to the tangible and intangible assets acquired, and liabilities assumed based on their estimated fair values. The Company engages third-party appraisal firms to assist management in determining the fair values of certain assets acquired. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Management makes estimates of fair value based upon historical experience, as well as information obtained from the managementsale of the acquired companies and are inherently uncertain. Unanticipated events and circumstances may occur which may affectinvestment, given a full valuation allowance was established for the accuracy or validity of such assumptions, estimates or actual results. In certain business combinations that are treated as a stock purchase for income tax purposes, the Company must record deferred taxes relating to the book versus tax basis of acquired assets and liabilities. Generally, such business combinations result in deferred tax liabilities as the book values are reflected at fair values whereas the tax basis is carried over from the acquired company. Such deferred taxes are initially estimated based on preliminary information and are subject to change as valuations and tax returns are finalized.related capital loss.
Insurance and Other Claims
The primary claims arising against the Company consist of cargo, liability, personal injury, property damage, workers' compensation, and employee medical expenses. The Company's insurance program involves self-insurance with high risk retention levels. Because of the Company's significant self-insured retention amounts, it has exposure to fluctuations in the number and severity of claims and to variations between its estimated and actual ultimate payouts. The Company accrues the estimated cost of the uninsured portion of pending claims. Its estimatesEstimates require judgments concerning the nature and severity of the claim, historical trends, advice from third-party administrators and insurers, the size of any potential damage award based on factors such as the specific facts of individual cases, the jurisdictions involved, the prospect of punitive damages, future medical costs, and inflation estimates of future claims development, and the legal and other costs to settle or defend the claims. The Company has significant exposure to fluctuations in the number and severity of claims. If there is an increase in the frequency and severity of claims, or the Company is required to accrue or pay additional amounts if the claims prove to be more severe than originally assessed, or any of the claims would exceed the limits of its insurance coverage, its profitability would be adversely affected.
In addition to estimates within the Company's self-insured retention layers, it also must make judgments concerning its aggregate coverage limits. If any claim occurrence werewas to exceed the Company's aggregate coverage limits, it would have to accrue for the excess amount. The Company's critical estimates include evaluating whether a claim may exceed such limits and, if so, by how much. Currently, the Company is not aware of any such claims. If one or more claims were to exceed the Company's then effective coverage limits, its financial condition and results of operations could be materially and adversely affected.
In general for casualty claims, we currently have insurance coverage up to $50.0 million per claim. We renewed our casualty program as of February 28, 2008. We are self-insured on an occurrence/per claim basis for personal injury and property damage claims for amounts up to the first $4.0 million, except for Star where we currently have insurance coverage up to $2.0 million per claim after the first $0.3 million for which we are self-insured. We are self-insured on an occurrence/per claim basis for workers' compensation up to the first $1.25 million. The Company is completely self-insured for physical damage to its own tractors and trailers and is generally completely self-insured for damages to the cargo we haul. The Company also maintains a self-insured group medical plan for its employees with annual per individual claimant stop-loss deductible of $0.4 million with a maximum lifetime benefit of $0.7 million.
Insurance and claims expense varies based on the frequency and severity of claims, the premium expense, the level of self-insured retention, the development of claims over time, and other factors. With our significant self-insured retention, insurance and claims expense may fluctuate significantly from period to period, and any increase in frequency or severity of claims could adversely affect our financial condition and results of operations.
Lease Accounting and Off-Balance Sheet Transactions
The Company issues residual value guarantees in connection with the operating leases it enters into for certain of its revenue equipment. These leases provide that if the Company does not purchase the leased equipment from the lessor at the end of the lease term, then it is liable to the lessor for an amount equal to the shortage (if any) between the proceeds from the sale of the equipment and an agreed value. To the extent the expected value at the lease termination date is lower than the residual value guarantee,guarantee; the Company would accrue for the difference over the remaining lease term. The Company believes that proceeds from the sale of equipment under operating leases would exceed the payment obligation on substantially all operating leases. The estimated values at lease termination involve management judgments. As leases are entered into, determination as to the classification as an operating or capital lease involves management judgments on residual values and useful lives.
Accounting for Income Taxes
We make important judgments concerning a variety of factors, including the appropriateness of tax strategies expected future tax consequences based on future Company performance, and to the extent tax strategies are challenged by taxing authorities, our likelihood of success. We utilize certain income tax planning strategies to reduce our overall cost of income taxes. It is possible that certain strategies might be disallowed, resulting in an increased liability for income taxes. Significant management judgments are involved in assessing the likelihood of sustaining the strategies and in determining the likely range of defense and settlement costs, and an ultimate result worse than our expectations could adversely affect our results of operations.
Deferred income taxes represent a substantial liability on our consolidated balance sheets and are determined in accordance with SFAS No. 109, Accounting for Income Taxes.applicable accounting standards. Deferred tax assets and liabilities (tax benefits and liabilities expected to be realized in the future) are recognized for the expected future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carry forwards.
The carrying value of ourthe Company's deferred tax assets assumes that weit 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, weit 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 assessthe Company assesses the need for adjustment of the valuation allowance. Based on forecasted taxable income and prior years' taxable income,tax planning strategies available to the Company, no valuation reserveallowance has been established at December 31, 2008,2009, except for $0.3 million related to certain state net operating loss carryforwards and $1.6 million related to the deferred tax asset associated with the Company's capital loss generated by the loss on the sale of its investment in Transplace. These valuation allowances were established because we believethe Company believes that it is more likely than not that certain state net operating loss carryforwards and the capital loss carryforward related to Transplace will not be realized. If these estimates and related assumptions change in the future, benefitit may be required to modify its valuation allowance against the carrying value of the deferred tax assets will be realized. However, there can be no assurance that we will meet our forecasts of future income.assets.
While it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter, the Company believes that its reserves reflect the probable outcome of known tax contingencies. The Company adjusts these reserves, as well as the related interest, in light of changing facts and circumstances. Settlement of any particular issue would usually require the use of cash. Favorable resolution would be recognized as a reduction to the Company's annual tax rate in the year of resolution.
Performance-BasedStock-Based Employee Stock Compensation
Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS No. 123R (revised 2004) Share-Base Payment ("SFAS No. 123R"), under which we estimate compensation expense that is recognized in our consolidated statements of operations for the fair value of employee stock-based compensation related to grants of performance-based stock options and restricted stock awards. This estimate requires various subjective assumptions, including probability of meeting the underlying performance-based earnings per share targets and estimating forfeitures. If any of these assumptions change significantly, stock-based compensation expense may differ materially in the future from the expense recorded in the current period.
The Company issues several types of share-based compensation, including awards that vest based on service, market, and performance conditions or a combination of the conditions. Performance-based awards vest contingent upon meeting certain performance criteria established by the Compensation Committee. Market-based awards vest contingent upon meeting certain stock price targets selected by the Compensation Committee. All awards require future service and thus forfeitures are estimated based on historical forfeitures and the remaining term until the related award vests. Determining the appropriate amount to expense in each period is based on likelihood and timing of achieving of the stated targets for performance and market based awards, respectively, and requires judgment, including forecasting future financial results and market performance. The estimates are revised periodically based on the probability and timing of achieving the required performance and market targets, respectively, and adjustments are made as appropriate. Awards that are only subject to time vesting provisions are amortized using the straight-line method.
New
Recent Accounting Pronouncements
Improving Disclosures About Fair Value Measurements – In May 2008,January 2010, the FASB issued SFAS No. 162, The Hierarchyauthoritative guidance to clarify certain existing disclosure requirements and require additional disclosures for recurring and nonrecurring fair value measurements. These additional disclosures include amounts and reasons for significant transfers between Level 1 and Level 2 of Generally Accepted Accounting Principles ("SFAS No. 162"), which identifies the sourcesfair value hierarchy; significant transfers in and out of Level 3 of the fair value hierarchy; and framework for selecting the accounting principles to be usedinformation about purchases, sales, issuances, and settlements on a gross basis in the preparationreconciliation of financial statementsrecurring Level 3 measurements. Further, the guidance amends employer's disclosures about post-retirement benefit plans to require that disclosures be provided by classes of nongovernmental entities thatassets instead of by major categories of assets. The requirements of this guidance are presented in conformityeffective for periods beginning after December 15, 2009, with the generally accepted accounting principles ("GAAP") hierarchy. Because the current GAAP hierarchy is set forth in the American Institute of Certified Public Accountants Statement on Auditing Standards No. 69, it is directed to the auditor rather than to the entity responsible for selecting accounting principles for financial statements presented in conformity with GAAP. Accordingly, the FASB concluded the GAAP hierarchy should reside in the accounting literature established by the FASB and issued this statement to achieve that result. The provisions of SFAS No. 162 became effective 60 days following the SEC's approvalexception of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaningrequirement of Present Fairly in Conformity with Generally Accepted Accounting Principles.information about purchases, sales, issuances, and settlements of Level 3 measurements, which becomes effective for periods ending after December 15, 2010. The Company does not believeexpect the adoption of SFAS No. 162 willthis guidance to have a material impact in theon its consolidated financial statements.
Accounting Standards Codification - In June 2009, the FASB issued authoritative guidance which establishes the FASB Accounting Standards Codification as the single source of authoritative U.S. generally accepted accounting principles recognized by the FASB to be applied by nongovernmental entities. The FASB Accounting Standards Codification is effective for interim and annual periods ending after September 15, 2009. The adoption of the FASB Accounting Standards Codification did not have a material effect on the Company's consolidated financial statements.
Fair Value Measurement of Liabilities - In August 2009, the FASB issued authoritative guidance which provides clarification regarding the required techniques for the fair value measurement of liabilities. This update applies to all entities that measure liabilities at fair value, and is effective for the first interim or annual reporting period beginning after its issuance in August 2009. The Company does not expect the adoption of this guidance to have a material effect on its consolidated financial statements.
Transfers of Financial Assets - - In June 2009, the FASB issued authoritative guidance which requires entities to provide more information regarding sales of securitized financial assets and similar transactions, particularly if the seller retains some risk with respect to the assets. This authoritative guidance is effective for fiscal years beginning after November 15, 2009. The Company does not expect the adoption of this guidance to have a material effect on its consolidated financial statements.
Variable Interest Entities - In June 2009, the FASB issued authoritative guidance designed to improve financial reporting by companies involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. This authoritative guidance is effective for fiscal years beginning after November 15, 2009. The Company does not expect the adoption of this guidance to have a material effect on its consolidated financial statements.
Subsequent Events - In May 2009, the FASB issued authoritative guidance that established general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This authoritative guidance was effective for interim or annual financial periods ending after June 15, 2009. The adoption of this guidance did not affect the Company's consolidated financial statements.
Interim Disclosures about Fair Value of Financial Instruments - In April 2009, the FASB issued authoritative guidance to require disclosures about fair values of financial instruments for interim reporting periods as well as in annual financial statements. The guidance also amends previous guidance to require those disclosures in summarized financial information at interim reporting periods. This guidance was effective for interim reporting periods ending after June 15, 2009. The adoption of this guidance did not affect the Company's consolidated financial statements.
Disclosures about Derivative Instruments and Hedging Activities - In March 2008, the FASB issued SFAS No. 161,authoritative guidance which amends and expands the previous disclosure requirements, of SFAS No. 133, to provide an enhanced understanding of an entity's use of derivative instruments, how they are accounted for, under SFAS No. 133, and their effect on the entity's financial position, financial performance, and cash flows. The provisions of SFAS No. 161 are effectiveCompany adopted the guidance as of the beginning of ourthe 2009 fiscal year. We are currently evaluatingyear and its adoption did not have a material impact to the impact of adopting SFAS No. 161 on ourCompany's consolidated financial statements.
In February 2008, the FASB issued SFAS No. 157-1, Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13 ("SFAS No. 157-1"). SFAS No. 157-1 amends the scope of FASB Statement No. 157 to exclude FASB Statement No. 13, Accounting for Leases, and other accounting standards that address fair value measurements for purposes of lease classification or measurement under FASB Statement No. 13. SFAS No. 157-1 is effective on initial adoption of FASB Statement No. 157. The scope exception does not apply to assets acquired and liabilities assumed in a business combination that are required to be measured at fair value under FASB Statement No. 141, Business Combinations, or SFAS No. 141R (as defined below), regardless of whether those assets and liabilities are related to leases.
Business Combinations - In December 2007, the FASB issued SFAS No. 141R. Business Combinations ("SFAS No. 141R"). This statementauthoritative guidance that establishes requirements for (i) recognizing and measuring in an acquiring company's financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; (ii) recognizing and measuring the goodwill acquired in the business combination or a gain from a bargain purchase; and (iii) determining what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The provisions of SFAS No. 141Rthe guidance are effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company doesadopted the guidance as of the beginning of the 2009 fiscal year and its adoption did not believe the adoption of SFAS No. 141R will have a material impact into the Company's consolidated financial statements.
Noncontrolling Interests in Consolidated Financial Statements - In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51 ("SFAS No. 160"). This statement amends ARB No. 51 to establishauthoritative guidance that modified accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The provisions of SFAS No. 160the guidance are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. The Company does not believeadopted the adoption of SFAS No. 160 will have a material impact in the consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities ("SFAS No. 159"). SFAS No. 159 permits entities to choose to measure certain financial assets and liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company adopted SFAS No. 159guidance as of the beginning of the 20082009 fiscal year and its adoption did not have a material impact to the Company's consolidated financial statements.
Fair Value Measurements - In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements ("SFAS No. 157"). This Statement definesauthoritative guidance which provides guidance on how to measure assets and liabilities at fair value. The guidance applies whenever another U.S. GAAP standard requires (or permits) assets or liabilities to be measured at fair value establishes a framework for measuringbut does not expand the use of fair value to any new circumstances. This standard also requires additional disclosures in generally accepted accounting principles ("GAAP"),both annual and expands disclosures about fair value measurements. The provisions of SFAS No. 157 are effective asquarterly reports. Portions of the beginning of the firstguidance were effective for financial statements issued for fiscal year that beginsyears beginning after November 15, 2007.2007, and the Company began applying those provisions effective January 1, 2008. The Company adopted SFAS No. 157 asadoption of the beginning of the 2008 fiscal year and its adoptionguidance did not have a materialsignificant impact toon the Company's consolidated financial statements.
36In February 2008, the FASB amended the scope of the original guidance to exclude accounting for leases, and other accounting standards that address fair value measurements for purposes of lease classification or measurement. The scope of this exception does not apply to assets acquired and liabilities assumed in a business combination that are required to be measured at fair value. Also, in February 2008, the FASB delayed the effective date of the aforementioned fair value guidance one year for all nonfinancial assets and nonfinancial liabilities, except those recognized at fair value in the financial statements on a recurring basis. The Company adopted the remaining provisions as of January 1, 2009. The adoption of the guidance did not have a significant impact on the Company's consolidated financial statements.
Uncertain Tax Positions - In JulyJune 2006, the FASB issued Interpretation No. 48, Accountingguidance for Uncertaintyaccounting for uncertainty in Income Taxes ("FIN 48").income taxes, which established a single model to address accounting for uncertain tax positions. The Company was required to adopt the provisions of FIN 48,the new guidance, effective January 1, 2007. As a result of this adoption, the Company recognized additional tax liabilities of $0.3 million with a corresponding reduction to beginning retained earnings as of January 1, 2007. As of January 1, 2007, the Company had a $2.8 million liability recorded for unrecognized tax benefits, which includes interest and penalties of $0.5 million. The Company recognizes interest and penalties accrued related to unrecognized tax benefits in tax expense.
INFLATION, NEW EMISSIONS CONTROL REGULATIONS, AND FUEL COSTS
Most of our operating expenses are inflation-sensitive, with inflation generally producing increased costs of operations. During the past three years, the most significant effects of inflation have been on revenue equipment prices and fuel prices. New emissions control regulations and increases in commodity prices, wages of manufacturing workers, and other items have resulted in higher tractor prices. The cost of fuel also has risen substantially over the past three years, though prices have eased over the last 6six months. Although we believe at least some of this increase primarily reflects world events rather than underlying inflationary pressure. We attemptpressure, we have attempted to limit the effects of inflation through increases in freight rates, certain cost control efforts and limiting the effects of fuel prices through fuel surcharges.
The engines used in our tractors are subject to emissions control regulations, which have substantially increased our operating expenses since additional and more stringent regulation began in 2002. As of December 31, 2008, 36%2009, 82% of our tractor fleet has engines compliant with stricter regulations regarding emissions that became effective in 2007. Compliance with such regulations is expected to increase the cost of new tractors and could impair equipment productivity, lower fuel mileage, and increase our operating expenses. These adverse effects combined with the uncertainty as to the reliability of the vehicles equipped with the newly designed diesel engines and the residual values that will be realized from the disposition of these vehicles could increase our costs or otherwise adversely affect our business or operations as the regulations impact our business through new tractor purchases.
Fluctuations in the price or availability of fuel, as well as hedging activities, surcharge collection, the percentage of freight we obtain through brokers, and the volume and terms of diesel fuel purchase commitments may increase our costs of operation, which could materially and adversely affect our profitability. We impose fuel surcharges on substantially all accounts. These arrangements may not fully protect us from fuel price increases and also may result in us not receiving the full benefit of any fuel price decreases. We currently do not have any fuel hedging contracts in place. If we do hedge, we may be forced to make cash payments under the hedging arrangements. A small portionThe Company did not enter into any derivatives until the third quarter of 2009. As of December 31, 2009, we entered into forward futures swap contracts, which pertain to 2.5 million gallons or approximately 4% percent of our projected January through December 2010 fuel requirements for 2008 were covered by volume purchase commitments. Based on current market conditions,requirements. Under these contracts, we have decided to limit our hedgingpay a fixed rate per gallon of heating oil and purchase commitments, but we continue to evaluate such measures.receive the monthly average price of New York heating oil. The absence of meaningful fuel price protection through these measures could adversely affect our profitability.
SEASONALITY
In the trucking industry, revenue generally decreases as customers reduce shipments during the winter holiday season and as inclement weather impedes operations. At the same time, operating expenses generally increase, with fuel efficiency declining because of engine idling and weather, creating more equipment repairs. For the reasons stated, first quarter net income historically has been lower than net income in each of the other three quarters of the year excluding charges. Our equipment utilization typically improves substantially between May and October of each year because of the trucking industry's seasonal shortage of equipment on traffic originating in California and because of general increases in shipping demand during those months. The seasonal shortage typically occurs between May and August because California produce carriers' equipment is fully utilized for produce during those months and does not compete for shipments hauled by our dry van operation. During September and October, business generally increases as a result of increased retail merchandise shipped in anticipation of the holidays.
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.
COMMODITY PRICE RISK
From time-to-time weThe Company is subject to risks associated with the availability and price of fuel, which are subject to political, economic, and market factors that are outside of the Company's control. We also may be adversely affected by the timing and degree of fluctuations in fuel prices. The Company's fuel-surcharge program mitigates the effect of rising fuel prices but does not always result in fully recovering the increase in its cost of fuel. In part, this is due to fuel costs that cannot be billed to customers, including costs such as those incurred in connection with empty and out-of-route miles or when engines are being idled during cold or warm weather and due to fluctuations in the price of fuel between the fuel surcharge's benchmark index reset.
The Company did not enter into derivative financial instrumentsany derivatives until the third quarter of 2009; however, in September 2009 we entered into forward futures swap contracts, which pertain to reduce2.5 million gallons or approximately 4% percent of our exposure toprojected January through December 2010 fuel requirements. Under these contracts, we pay a fixed rate per gallon of heating oil and receive the monthly average price fluctuations. In accordance with SFAS 133, we adjust any derivative instruments to fair value through earningsof New York heating oil. Given that the forward futures swap contracts are not significant, a one dollar change in the related price of heating oil or diesel would not have a material impact on a monthly basis. Asthe Company's results of December 31, 2008, we had no derivative financial instruments to reduce our exposure to fuel price fluctuations.operations.
INTEREST RATE RISK
Our market risk is also affected by changes in interest rates. Historically, we have used a combination of fixed-rate and variable-rate obligations to manage our interest rate exposure. Fixed-rate obligations expose us to the risk that interest rates might fall. Variable-rate obligations expose us to the risk that interest rates might rise.
Ourraise. Of our total $215.0 million of debt, we had $15.9 million of variable rate obligations consist of our Credit Agreement. Borrowings under the Credit Agreement are classified as either "base rate loans" or "LIBOR loans". Base rate loans accrued interest at a base rate equal to the Agent's prime rate plus an applicable margin that is adjusted quarterly between 0.625% and 1.375% based on average pricing availability. LIBOR loans accrued interest at LIBOR plus an applicable margin that is adjusted quarterly between 2.125% and 2.875% based on average pricing availability. The applicable margin was 2.625%debt outstanding at December 31, 2008. At December 31, 2008, we had $3.8 million in borrowings outstanding under the Credit Agreement.
On March 27, 2009, we obtained an amendment toincluding both our Credit Agreement, which, among other things, (i) retroactively to January 1, 2009 amended the fixed charge coverage ratio covenant for JanuaryFacility and February 2009 to the actual levels achieved, which cured our default of that covenant for January 2009, (ii) restarted the look back requirements of the fixed charge coverage ratio covenant beginning on March 1, 2009, (iii) increased the EBITDAR portion of the fixed charge coverage ratio definition by $3,000,000 for all periods between March 1 to December 31, 2009, (iv) increased the base ratea real-estate note. The interest rates applicable to base rate loans to the greater ofthese agreements are based on either the prime rate or LIBOR. Our earnings would be affected by changes in these short-term interest rates. Risk can be quantified by measuring the federal funds rate plus 0.5%, or LIBOR plus 1.0%, (v) setfinancial impact of a LIBOR floor of 1.5%, (vi) increased the applicable margin for base rate loans to a range between 2.5% and 3.25% and for LIBOR loans to a range between 3.5% and 4.25%, with 3.0% (for base rate loans) and 4.0% (for LIBOR loans) to be used as the applicable margin through September 2009, (vii) increased our letter of credit facility fee by an amount corresponding to thenear-term adverse increase in the applicable margin, (viii) increased the unused line fee toshort-term interest rates. At our current level of borrowing, a range between 0.5% and 0.75%, and (ix) increased the maximum number of field examinations per year from three to four. Assuming variable rate borrowings under our Credit Agreement at December 31, 2008 levels, a one percentage point1% increase in our applicable rate would reduce annual pretax earnings by approximately $0.2 million. Our remaining debt is effectively fixed rate debt, and therefore changes in market interest rates could increasedo not directly impact our annual interest expense by approximately $38,000.expense.
ITEM 8. 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of Covenant Transportation Group, Inc. and subsidiaries, as of December 31, 20082009 and 2007,2008, and the related consolidated balance sheets, statements of operations, statements of stockholders' equity and comprehensive income,loss, and statements of cash flows for each of the years in the three-year period ended December 31, 2008,2009, together with the related notes, and the report of KPMG LLP, our independent registered public accounting firm for the years ended December 31, 2009, 2008, 2007, and 20062007 are set forth at pages 4447 through 6573 elsewhere in this report.
ITEM 9. 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There has been no change in accountants during our three most recent fiscal years.
Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and procedures to ensure that material information relating to us and our consolidated subsidiaries is made known to the officers who certify our financial reports and to other members of senior management and the Board of Directors.
Based on their evaluation as of December 31, 2008,2009, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rule 13a-15 and 15d-15 under the Exchange Act) are effective to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms.
Management's Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15 promulgated under the Exchange Act as a process designed by, or under the supervision of, the principal executive and principal financial officers and effected by the board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
| • | 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. Because of the inherent limitations in all internal control systems, no evaluation of controls can provide absolute assurance that all our control issues and instances of fraud, if any, have been detected.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2008.2009. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), an Internal Control-Integrated Framework. Based on its assessment, management believes that, as of December 31, 2008,2009, our internal control over financial reporting is effective based on those criteria.
Attestation Report of Independent Registered Public Accounting Firm
This annual report does not include an attestation report of the company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management's report in this annual report.
Design and Changes in Internal Control over Financial Reporting
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. In accordance with these controls and procedures, information is accumulated and communicated to management, including our Chief Executive Officer, as appropriate, to allow timely decisions regarding disclosures. There were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2008,2009, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Not| Item 5.02 | Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers |
On March 24, 2010, the Compensation Committee of the Board of Directors (the "Committee") of the Company approved revised performance-based bonus opportunities for the Company's senior management group (the "Program") under the Company's 2006 Omnibus Incentive Plan, as amended (the "Plan").
On September 14, 2009, the Committee previously approved consolidated operating income and operating ratio targets for the Program based upon a preliminary consolidated budget for 2010. The Company's 2010 consolidated budget was finalized and the Committee reset the operating income and operating ratio targets to more difficult levels to achieve based upon the final budget. Under the Program and consistent with the objectives of the Plan, certain employees, including the Company's named executive officers, may receive bonuses upon satisfaction of the revised consolidated operating income and operating ratio targets and the satisfaction of operating income and operating ratio targets established for the Company's subsidiaries (together, the "Performance Targets"), as applicable. Each applicable Performance Target corresponds to a percentage bonus opportunity for the employee that is multiplied by the employee's base salary to determine the employee's bonus. Pursuant to the Program, the performance-based bonus opportunities for David Parker, Joey Hogan, and Richard Cribbs, as named executive officers, will remain the same as previously reported, except that their bonus opportunities depend on the achievement of the revised consolidated Performance Targets. The Company also finalized subsidiary budgets and the Committee approved the performance-based bonus opportunities for Tony Smith and James Brower, two of the Company's named executive officers. Messrs. Smith and Brower may receive between 10% and 15% of their respective base salary based on the revised Performance Targets achieved for the consolidated group, if any, and between 40% and 60% of their base salary based on Performance Targets achieved for the Company's subsidiaries, SRT and Star, respectively, if any.
On March 24, 2010, the Committee also clarified that the number of restricted shares of the Company's Class A common stock granted as part of the January 12, 2010, incentive opportunity previously described in the Company's report on Form 8-K filed with the Commission on January 15, 2010, was based on the closing price of the Company's Class A common stock on the date the blackout period lifted following the release of the Company's 2009 year-end earnings, rather than the date the blackout period lifted following the release of the Company's 2010 first quarter earnings.
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 20082010 annual meeting of stockholders, which will be filed with the Securities and Exchange Commission in accordance with Rule 14a-6 promulgated under the Securities Exchange Act of 1934, as amended (the "Proxy Statement"); provided, that the section entitled "Corporate Governance – Committees of the Board of Directors – The Audit Committee – Report of the Audit Committee" contained in the Proxy Statement are not incorporated by reference.
We incorporate by reference the information set forth under the sections entitled "Executive Compensation", "Corporate Governance – Committees of the Board of Directors – The Compensation Committee – Compensation Committee Interlocks and Insider Participation", and "Corporate Governance – Committees of the Board of Directors – The Compensation Committee –Compensation Committee Report" in our Proxy Statement for the 20082010 annual meeting of stockholders; provided, that the section entitled "Corporate Governance – Committees of the Board of Directors – The Compensation Committee – Compensation Committee Report" contained in the Proxy Statement is not incorporated by reference.
ITEM 12.12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
We incorporate by reference the information set forth under the section entitled "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement.
Summary Description of Equity Compensation Plans Not Approved by Security Holders
Summary of 1998 (1998 Non-Officer Incentive Stock PlanPlan)
In October 1998, our Board of Directors adopted the Non-Officer Plan to attract and retain executive personnel and other key employees and motivate them through incentives that were aligned with our goals of increased profitability and stockholder value. The Board of Directors authorized 200,000 shares of our Class A common stock for grants or awards pursuant to the Non-Officer Plan. Awards under the Plan could be in the form of incentive stock options, non-qualified stock options, restricted stock awards, or any other awards of stock consistent with the Non-Officer Plan's purpose. The Non-Officer Plan was to be administered by the Board of Directors or a committee that could be appointed by the Board of Directors. All non-officer employees were eligible for participation, and actual participants in the Non-Officer Plan were selected from time-to-time by the administrator. The administrator could substitute new stock options for previously granted options. In conjunction with adopting the 2003 Plan, the Board of Directors voted to terminate the Non-Officer Plan effective as of May 31, 2003. Option grants previously issued continue in effect and may be exercised on the terms and conditions under which the grants were made.
Summary of Grants Outside the Plan
On May 20, 1999, our Board of Directors approved the grant of an option to purchase 2,500 shares of our Class A common stock to each of our four outside directors. The exercise price of the stock was equal to the mean between the lowest reported bid price and the highest reported asked price on the date of the grant. The options have a term of ten years from the date of grant, and the options vested 20% on each of the first through fifth anniversaries of the grant.
ITEM 13.13.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 ACCOUNTANT 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 statement isstatements are set forth at the following pages of this report: | |
| | | ReportsReport of Independent Registered Public Accounting Firm – KPMG LLP | 47 |
| | | Consolidated Balance Sheets | 48 |
| | | Consolidated Statements of Operations | 49 |
| | | Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss)Loss | 50 |
| | | Consolidated Statements of Cash Flows | 51 |
| | | Notes to Consolidated Financial Statements | 52 |
| | | | |
| | 2. | Financial Statement Schedules. | |
| | | | |
| | | Financial statement schedules are not required because all required information is included in the financial statements. | |
| | | | |
| | 3. | Exhibits. | |
| | | | |
| | | The exhibits required to be filed by Item 601 of Regulation S-K are listed under paragraph (b) below and on the Exhibit Index appearing at the end of this report. Management contracts and compensatory plans or arrangements are indicated by an asterisk. | |
| | | | |
| (b) | | Exhibits. | |
| | | | |
| | | The following exhibits are filed with this Form 10-K or incorporated by reference to the document set forth next to the exhibit listed below. | |
| Exhibit Number | | Description |
| 3.1 | | Amended and Restated Articles of Incorporation (Incorporated by reference to Exhibit 99.2 to the Company's Report on Form 8-K, filed May 29, 2007 (SEC Commission File No. 0-24960)) |
| 3.2 | | Amended and Restated Bylaws, dated December 6, 2007 (Incorporated by reference to Exhibit 3.2 to the Company's Form 10-K, filed March 17, 2008 (SEC Commission File No. 0-24960)) |
| 4.1 | | Amended and Restated Articles of Incorporation (Incorporated by reference to Exhibit 99.2 to the Company's Report on Form 8-K, filed May 29, 2007 (SEC Commission File No. 0-24960)) |
| 4.2 | | Amended and Restated Bylaws, dated December 6, 2007 (Incorporated by reference to Exhibit 3.2 to the Company's Form 10-K, filed March 17, 2008 (SEC Commission File No. 0-24960)) |
| 10.1 | | 401(k) Plan (Incorporated by reference to Exhibit 10.10 to the Company's Form S-1, Registration No. 33-82978, effective October 28, 1994) |
| 10.2 | | Master Lease Agreement, dated April 15, 2003, between Transport International Pool, Inc. and Covenant Transport, Inc. (Incorporated by reference to Exhibit 10.4 to the Company's Form 10-Q/A, filed October 31, 2003 (SEC Commission File No. 0-24960)) |
| 10.3 | | Form of Indemnification Agreement between Covenant Transport, Inc. and each officer and director, effective May 1, 2004 (Incorporated by reference to Exhibit 10.2 to the Company's Form 10-Q, filed August 5, 2004 (SEC Commission file No. 0-24960))* |
| # | Purchase and Sale Agreement, dated April 3, 2006, between Covenant Transport, Inc., a Tennessee corporation, and CT Chattanooga TN, LLC |
| # | Lease Agreement, dated April 3, 2006, between Covenant Transport, Inc., a Tennessee corporation, and CT Chattanooga TN, LLC |
| 10.6 | | Lease Guaranty, dated April 3, 2006, by Covenant Transport, Inc., a Nevada corporation, for the benefit of CT Chattanooga TN, LLC (Incorporated by reference to Exhibit 10.20 to the Company's Report on Form 8-K, filed April 7, 2006 (SEC Commission File. No. 0-24960)) |
| 10.7 | | Form of Restricted Stock Award Notice under the Covenant Transport, Inc. 2006 Omnibus Incentive Plan (Incorporated by reference to Exhibit 10.22 to the Company's Form 10-Q, filed August 9, 2006 (SEC Commission File No. 0-24960))* |
| 10.8 | | Form of Restricted Stock Special Award Notice under the Covenant Transport, Inc. 2006 Omnibus Incentive Plan (Incorporated by reference to Exhibit 10.23 to the Company's Form 10-Q, filed August 9, 2006 (SEC Commission File No. 0-24960))* |
| 10.9 | | Form of Incentive Stock Option Award Notice under the Covenant Transport, Inc. 2006 Omnibus Incentive Plan (Incorporated by reference to Exhibit 10.24 to the Company's Form 10-Q, filed August 9, 2006 (SEC Commission File No. 0-24960))* |
Exhibit Number | Reference | Description |
| 3.1 | (1) | Amended and Restated Articles of Incorporation |
| 3.2 | (8) | Amended and Restated Bylaws dated December 6, 2007 |
| 4.1 | (1) | Amended and Restated Articles of Incorporation |
| 4.2 | (8) | Amended and Restated Bylaws dated December 6, 2007 |
| 10.1 | (2) | 401(k) Plan, filed as Exhibit 10.10 |
| 10.2 | (3) | Master Lease Agreement dated April 15, 2003, between Transport International Pool, Inc. and Covenant Transport, Inc., filed as Exhibit 10.4 |
| 10.3 | (4) | Form of Indemnification Agreement between Covenant Transport, Inc. and each officer and director effective May 1, 2004, filed as Exhibit 10.2* |
| 10.4 | (5) | Purchase and Sale Agreement dated April 3, 2006, between Covenant Transport, Inc., a Tennessee corporation, and CT Chattanooga TN, LLC, filed as Exhibit 10.18 |
| 10.5 | (5) | Lease Agreement dated April 3, 2006, between Covenant Transport, Inc., a Tennessee corporation, and CT Chattanooga TN, LLC, filed as Exhibit 10.19 |
| 10.6 | (5) | Lease Guaranty dated April 3, 2006, by Covenant Transport, Inc., a Nevada corporation, for the benefit of CT Chattanooga TN, LLC, filed as Exhibit 10.20 |
| 10.7 | (6) | Covenant Transport, Inc. 2006 Omnibus Incentive Plan* |
| 10.8 | (7) | Form of Restricted Stock Award Notice under the Covenant Transport, Inc. 2006 Omnibus Incentive Plan, filed as Exhibit 10.22* |
| 10.9 | (7) | Form of Restricted Stock Special Award Notice under the Covenant Transport, Inc. 2006 Omnibus Incentive Plan, filed as Exhibit 10.23* |
| 10.10 | (7) | Form of Incentive Stock Option Award Notice under the Covenant Transport, Inc. 2006 Omnibus Incentive Plan, filed as Exhibit 10.24* |
| 10.11 | (9) | Covenant Transport, Inc. 2008 Named Executive Bonus Program dated April 8, 2008, filed as Exhibit 10.1* |
| 10.12 | (10) | Form of Lease Agreement used in connection with Daimler Facility, filed as Exhibit 10.3. |
| 10.13 | (10) | Amendment to Lease Agreement (Open End) dated June 30, 2008, filed as Exhibit 10.4 |
| 10.14 | (10) | Form of Direct Purchase Money Loan and Security Agreement used in connection with Daimler Facility, filed as Exhibit 10.5 |
| 10.15 | (10) | Amendment to Direct Purchase Money Loan and Security Agreement dated June 30, 2008, filed as Exhibit 10.6 |
| 10.16 | (11) | 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, filed as Exhibit 10.1 |
| # | List of Subsidiaries |
| # | Consent of Independent Registered Public Accounting Firm – KPMG LLP |
| # | Certification pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by David R. Parker, the Company's Chief Executive Officer |
| # | Certification pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by Richard B. Cribbs, the Company's Chief Financial Officer |
| # | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by David R. Parker, the Company's Chief Executive Officer |
| # | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Richard B. Cribbs, the Company's Chief Financial Officer |
| 10.10 | | Form of Lease Agreement used in connection with Daimler Facility (Incorporated by reference to Exhibit 10.3 to the Company's Form 10-Q, filed August 11, 2008 (SEC Commission File No. 0-24960)) |
| 10.11 | | Amendment to Lease Agreement (Open End) (Incorporated by reference to Exhibit 10.4 to the Company's Form 10-Q, filed August 11, 2008 (SEC Commission File No. 0-24960)) |
| 10.12 | | Form of Direct Purchase Money Loan and Security Agreement used in connection with Daimler Facility (Incorporated by reference to Exhibit 10.5 to the Company's Form 10-Q, filed August 11, 2008 (SEC Commission File No. 0-24960)) |
| 10.13 | | Amendment to Direct Purchase Money Loan and Security Agreement (Incorporated by reference to Exhibit 10.6 to the Company's Form 10-Q, filed August 11, 2008 (SEC Commission File No. 0-24960)) |
| # | Third Amended and Restated Credit Agreement, dated September 23, 2008, among Covenant Transportation Group, Inc., Covenant Transport, Inc., CTG Leasing Company, Covenant Asset Management, Inc., Southern Refrigerated Transport, Inc., Covenant Transport Solutions, Inc., Star Transportation, Inc., Bank of America, N.A., JPMorgan Chase Bank, N.A., and Textron Financial Corporation |
| 10.15 | | Covenant Transportation Group, Inc. Amended and Restated 2006 Omnibus Incentive Plan (Incorporated by reference to Appendix A to the Company's Schedule 14A, filed April 10, 2009 (SEC Commission File No. 0-24960))* |
| 10.16 | | Amendment No. 1 to Third Amended and Restated Credit Agreement, dated March 27, 2009, among Covenant Transportation Group, Inc., Covenant Transport, Inc., CTG Leasing Company, Covenant Asset Management, Inc., Southern Refrigerated Transport, Inc., Covenant Transport Solutions, Inc., Star Transportation, Inc., Bank of America, N.A., JPMorgan Chase Bank, N.A., and Textron Financial Corporation (Incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q, filed May 15, 2009 (SEC Commission File No. 0-24960)) |
| 10.17 | | Description of Covenant Transportation Group, Inc. 2009 Voluntary Incentive Opportunity, dated March 31, 2009 (Incorporated by reference to Exhibit 10.2 to the Company's Form 10-Q, filed May 15, 2009 (SEC Commission File No. 0-24960))* |
| 10.18 | | Description of Covenant Transportation Group, Inc. 2009 Named Executive Officer Bonus Program, dated March 31, 2009 (Incorporated by reference to Exhibit 10.3 to the Company's Form 10-Q, filed May 15, 2009 (SEC Commission File No. 0-24960))* |
| # | List of Subsidiaries |
| # | Consent of Independent Registered Public Accounting Firm – KPMG LLP |
| # | Certification pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by David R. Parker, the Company's Chief Executive Officer |
| # | Certification pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by Richard B. Cribbs, the Company's Chief Financial Officer |
| # | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by David R. Parker, the Company's Chief Executive Officer |
| # | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Richard B. Cribbs, the Company's Chief Financial Officer |
References:
| # | Filed herewith |
| * | Management contract or compensatory plan or arrangement.arrangement |
All other footnotes indicate a document previously filed as an exhibit to and incorporated by reference from the following:
(1) | Form 8-K, filed May 29, 2007 (SEC Commission File No. 0-24960) |
(2) | Form S-1, Registration No. 33-82978, effective October 28, 1994 |
(3) | Form 10-Q/A, filed October 31, 2003 (SEC Commission File No. 0-24960) |
(4) | Form 10-Q, filed August 5, 2004 (SEC Commission File No. 0-24960) |
(5) | Form 8-K, filed April 7, 2006 (SEC Commission File No. 0-24960) |
(6) | Schedule 14A, filed April 17, 2006 (SEC Commission File No. 0-24960) |
(7) | Form 10-Q, filed August 9, 2006 (SEC Commission File No. 0-24960) |
(8) | Form 10-K, filed March 17, 2008 (SEC Commission File No. 0-24960) |
(9) | Form 10-Q, filed May 9, 2008 (SEC Commission File No. 0-24960) |
(10) | Form 10-Q, filed August 11, 2008 (SEC Commission File No. 0-24960) |
(11) | Form 10-Q, filed November 10, 2008 (SEC Commission File No. 0-24960) |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | COVENANT TRANSPORTATION GROUP, INC. |
| | |
| | |
Date: March 31, 200930, 2010 | By: | /s/ /s/Richard B. Cribbs |
| | | Richard B. Cribbs |
| | | Senior Vice President and Chief Financial Officer in his capacity as such and on behalf of the issuer. |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature and Title | | Date |
| | | |
/s/ /s/David R. Parker | | March 31, 200930, 2010 |
| David R. Parker | | |
Chairman of the Board, President, and Chief Executive Officer (principal executive officer) | | |
| | | |
/s/ /s/Richard B. Cribbs | | March 31, 200930, 2010 |
| Richard B. Cribbs | | |
Senior Vice President and Chief Financial Officer (principal financial and accounting officer) | | |
| | | |
/s/ /s/Bradley A. Moline | | March 31, 200930, 2010 |
| Bradley A. Moline | | |
| Director | | |
| | | |
/s/ /s/William T. Alt | | March 31, 200930, 2010 |
| William T. Alt | | |
| Director | | |
| | | |
/s/ /s/Robert E. Bosworth | | March 31, 200930, 2010 |
| Robert E. Bosworth | | |
| Director | | |
| | | |
/s/ /s/Niel B. Nielson | | March 31, 200930, 2010 |
| Niel B. Nielson | | |
| Director | | |
The Board of Directors and Stockholders
Covenant Transportation Group, Inc.
We have audited the accompanying consolidated balance sheets of Covenant Transportation Group, Inc. and subsidiaries as of December 31, 20082009 and 2007,2008, and the related consolidated statements of operations, stockholders' equity and comprehensive loss, and cash flows for each of the years in the three-year period ended December 31, 2008.2009. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Covenant Transportation Group, Inc. and subsidiaries as of December 31, 20082009 and 2007,2008, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2008,2009, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company adoptedchanged the provisions of FASB Interpretation No. 48, Accountingmanner in which it accounted for Uncertainty in Income Taxes,tax uncertainties as of January 1, 2007.
KPMG LLP
/s/ KPMG LLP
Atlanta, Georgia
March 31, 200930, 2010
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2008 AND 2007 (In thousands, except share data) | | |
COVENANT TRANSPORTATION GROUP, INC. AND SUBSIDIARIES DECEMBER 31, 2009 AND 2008 (In thousands, except share data) | | COVENANT TRANSPORTATION GROUP, INC. AND SUBSIDIARIES DECEMBER 31, 2009 AND 2008 (In thousands, except share data) | |
| | | 2008 | | | 2007 | | | 2009 | | | 2008 | |
| ASSETS | | | | | | | | | | | | |
| Current assets: | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 6,300 | | | $ | 4,500 | | | $ | 12,221 | | | $ | 6,300 | |
Accounts receivable, net of allowance of $1,484 in 2008 and $1,537 in 2007 | | | 72,635 | | | | 79,207 | | |
Drivers' advances and other receivables, net of allowance of $2,794 in 2008 and $2,706 in 2007 | | | 6,402 | | | | 5,479 | | |
Accounts receivable, net of allowance of $1,845 in 2009 and $1,484 in 2008 | | | | 64,857 | | | | 72,635 | |
Drivers' advances and other receivables, net of allowance of $2,608 in 2009 and $2,794 in 2008 | | | | 3,311 | | | | 4,818 | |
Inventory and supplies | | | 3,894 | | | | 4,102 | | | | 4,004 | | | | 3,894 | |
Prepaid expenses | | | 8,921 | | | | 7,030 | | | | 7,172 | | | | 8,921 | |
Assets held for sale | | | 21,292 | | | | 10,448 | | | | 9,547 | | | | 21,292 | |
Deferred income taxes | | | 7,129 | | | | 18,484 | | | | 458 | | | | 7,129 | |
Income taxes receivable | | | 717 | | | | 7,500 | | | | 257 | | | | 717 | |
| Total current assets | | | 127,290 | | | | 136,750 | | | | 101,827 | | | | 125,706 | |
| | | | | | | | | | | | | | | | | |
| Property and equipment, at cost | | | 352,857 | | | | 350,158 | | | | 399,712 | | | | 352,857 | |
| Less: accumulated depreciation and amortization | | | (116,839 | ) | | | (102,628 | ) | | | (121,377 | ) | | | (116,839 | ) |
Net property and equipment | | | 236,018 | | | | 247,530 | | | | 278,335 | | | | 236,018 | |
| | | | | | | | | | | | | | | | | |
| Goodwill | | | 11,539 | | | | 36,210 | | | | 11,539 | | | | 11,539 | |
| Other assets, net | | | 18,829 | | | | 19,304 | | | | 6,611 | | | | 20,413 | |
| | | | | | | | | | | | | | | | | |
| Total assets | | $ | 393,676 | | | $ | 439,794 | | | $ | 398,312 | | | $ | 393,676 | |
| LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | | | | | | | | | |
| Current liabilities: | | | | | | | | | | | | | | | | |
Securitization facility | | $ | - | | | $ | 47,964 | | |
Checks outstanding in excess of bank balances | | | 85 | | | | 4,572 | | | $ | 4,838 | | | $ | 85 | |
Current maturities of acquisition obligation | | | 250 | | | | 333 | | | | - | | | | 250 | |
Accounts payable | | | | 7,528 | | | | 8,235 | |
Accrued expenses | | | | 26,789 | | | | 24,979 | |
Current maturities of long-term debt | | | 59,083 | | | | 2,335 | | | | 67,365 | | | | 59,083 | |
Accounts payable and accrued expenses | | | 33,214 | | | | 35,029 | | |
Current portion of capital lease obligations | | | | 1,098 | | | | - | |
Current portion of insurance and claims accrual | | | 16,811 | | | | 19,827 | | | | 12,055 | | | | 16,811 | |
| Total current liabilities | | | 109,443 | | | | 110,060 | | | | 119,673 | | | | 109,443 | |
| | | | | | | | | | | | | | | | | |
Long-term debt | | | 107,956 | | | | 86,467 | | | | 134,084 | | | | 107,956 | |
Insurance and claims accrual, net of current portion | | | 15,869 | | | | 10,810 | | |
Long-term portion of capital lease obligations | | | | 12,472 | | | | - | |
Insurance and claims accrual | | | | 11,082 | | | | 15,869 | |
Deferred income taxes | | | 39,669 | | | | 57,902 | | | | 24,525 | | | | 39,669 | |
Other long-term liabilities | | | 1,919 | | | | 2,289 | | | | 1,801 | | | | 1,919 | |
| Total liabilities | | | 274,856 | | | | 267,528 | | | | 303,637 | | | | 274,856 | |
| | | | | | | | | | | | | | | | | |
| Commitments and contingent liabilities | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | |
| Stockholders' equity: | | | | | | | | | | | | | | | | |
Class A common stock, $.01 par value; 20,000,000 shares authorized; 13,469,090 shares issued; 11,699,182 and 11,676,298 outstanding as of December 31, 2008 and 2007, respectively | | | 135 | | | | 135 | | |
Class A common stock, $.01 par value; 20,000,000 shares authorized; 13,469,090 shares issued; 11,840,568 and 11,699,182 outstanding as of December 31, 2009 and 2008, respectively | | | | 136 | | | | 135 | |
Class B common stock, $.01 par value; 5,000,000 shares authorized; 2,350,000 shares issued and outstanding | | | 24 | | | | 24 | | | | 24 | | | | 24 | |
Additional paid-in-capital | | | 91,912 | | | | 92,238 | | | | 90,679 | | | | 91,912 | |
Treasury stock at cost; 1,769,908 and 1,792,792 shares as of December 31, 2008 and 2007, respectively | | | (21,007 | ) | | | (21,278 | ) | |
Treasury stock at cost; 1,628,522 and 1,769,908 shares as of December 31, 2009 and 2008, respectively | | | | (19,195 | ) | | | (21,007 | ) |
Accumulated other comprehensive income | | | | 305 | | | | - | |
Retained earnings | | | 47,756 | | | | 101,147 | | | | 22,726 | | | | 47,756 | |
| Total stockholders' equity | | | 118,820 | | | | 172,266 | | | | 94,675 | | | | 118,820 | |
| Total liabilities and stockholders' equity | | $ | 393,676 | | | $ | 439,794 | | | $ | 398,312 | | | $ | 393,676 | |
| | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006 (In thousands, except per share data) | | |
COVENANT TRANSPORTATION GROUP, INC. AND SUBSIDIARIES YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (In thousands, except per share data) | | COVENANT TRANSPORTATION GROUP, INC. AND SUBSIDIARIES YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 (In thousands, except per share data) | |
| | | 2008 | | | 2007 | | | 2006 | | | 2009 | | | 2008 | | | 2007 | |
| Revenues | | | | | | | | | | | | | | | | | | |
Freight revenue | | $ | 615,810 | | | $ | 602,629 | | | $ | 572,239 | | | $ | 520,495 | | | $ | 615,810 | | | $ | 602,629 | |
Fuel surcharge revenue | | | 158,104 | | | | 109,897 | | | | 111,589 | | | | 68,192 | | | | 158,104 | | | | 109,897 | |
| Total revenue | | $ | 773,914 | | | $ | 712,526 | | | $ | 683,828 | | | $ | 588,687 | | | $ | 773,914 | | | $ | 712,526 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | |
Salaries, wages, and related expenses | | | 263,793 | | | | 270,435 | | | | 262,303 | | | | 216,158 | | | | 263,793 | | | | 270,435 | |
Fuel expense | | | 260,704 | | | | 211,022 | | | | 194,355 | | | | 143,835 | | | | 260,704 | | | | 211,022 | |
Operations and maintenance | | | 42,459 | | | | 40,437 | | | | 36,112 | | | | 35,409 | | | | 42,459 | | | | 40,437 | |
Revenue equipment rentals and purchased transportation | | | 90,974 | | | | 66,515 | | | | 63,532 | | | | 76,484 | | | | 90,974 | | | | 66,515 | |
Operating taxes and licenses | | | 13,078 | | | | 14,112 | | | | 14,516 | | | | 12,113 | | | | 13,078 | | | | 14,112 | |
Insurance and claims | | | 37,578 | | | | 36,391 | | | | 34,104 | | | | 31,955 | | | | 37,578 | | | | 36,391 | |
Communications and utilities | | | 6,702 | | | | 7,377 | | | | 6,727 | | | | 5,740 | | | | 6,702 | | | | 7,377 | |
General supplies and expenses | | | 26,399 | | | | 23,377 | | | | 21,387 | | | | 23,593 | | | | 26,399 | | | | 23,377 | |
Depreciation and amortization, including gains and losses on disposition of equipment and impairment of assets (1) | | | 63,235 | | | | 53,511 | | | | 41,150 | | | | 48,122 | | | | 63,235 | | | | 53,541 | |
Goodwill impairment charge | | | 24,671 | | | | - | | | | - | | | | - | | | | 24,671 | | | | - | |
| Total operating expenses | | | 829,593 | | | | 723,207 | | | | 674,186 | | | | 593,409 | | | | 829,593 | | | | 723,207 | |
| Operating income (loss) | | | (55,679 | ) | | | (10,681 | ) | | | 9,642 | | |
| Operating loss | | | | (4,722 | ) | | | (55,679 | ) | | | (10,681 | ) |
| Other (income) expenses: | | | | | | | | | | | | | | | | | | | | | | | | |
Interest expense | | | 10,373 | | | | 12,285 | | | | 7,166 | | | | 14,184 | | | | 10,373 | | | | 12,285 | |
Interest income | | | (435 | ) | | | (477 | ) | | | (568 | ) | | | (144 | ) | | | (435 | ) | | | (477 | ) |
Loss on early extinguishment of debt | | | 726 | | | | - | | | | - | | | | - | | | | 726 | | | | - | |
Loss on sale of Transplace investment and note receivable | | | | 11,485 | | | | - | | | | - | |
Other | | | (160 | ) | | | (183 | ) | | | (157 | ) | | | (199 | ) | | | (160 | ) | | | (183 | ) |
| Other expenses, net | | | 10,504 | | | | 11,625 | | | | 6,441 | | | | 25,326 | | | | 10,504 | | | | 11,625 | |
| Income (loss) before income taxes | | | (66,183 | ) | | | (22,306 | ) | | | 3,201 | | |
| Income tax expense (benefit) | | | (12,792 | ) | | | (5,580 | ) | | | 4,582 | | |
| Loss before income taxes | | | | (30,048 | ) | | | (66,183 | ) | | | (22,306 | ) |
| Income tax benefit | | | | (5,018 | ) | | | (12,792 | ) | | | (5,580 | ) |
| Net loss | | $ | (53,391 | ) | | $ | (16,726 | ) | | $ | (1,381 | ) | | $ | (25,030 | ) | | $ | (53,391 | ) | | $ | (16,726 | ) |
