SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1999
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-24960
Covenant Transport, Inc.
(Exact name of registrant as specified in its charter)
Nevada 88-0320154
(State or other jurisdiction of (I.R.S. employer identification number)
incorporation or organization)
400 Birmingham Hwy.
Chattanooga, TN 37419
(423) 821-1212
(Address, including zip code, and telephone number,
including area code, of registrant's
principal executive office)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for at least the past 90 days.
YES X NO __
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date (September 30, 1999).
Class A Common Stock, $.01 par value: 12,562,250 shares
Class B Common Stock, $.01 par value: 2,350,000 shares
Exhibit Index is on Page 14
1
PART I
FINANCIAL INFORMATION
Page
Number
Item 1. Financial statements
Condensed Consolidated Balance Sheets as of December 31, 1998
and September 30, 1999 (Unaudited) 3
Condensed Consolidated Statements of Income for the three and
nine months ended SEptember 30, 1998 and 1999 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 29, 1998 and 1999 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk 13
PART II
OTHER INFORMATION
Item 1. Legal Proceedings 14
Items 2, 3, 4 and 5. Not applicable 14
Item 6. Exhibits and reports on Form 8-K 14
2
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
December 31, September 30,
1998 1999
---------------- -----------------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 2,926 $ 661
Accounts receivable, net of allowance of $1,065 in 1998 and
$1060 in 1999 51,789 55,749
Drivers' advances and other receivables 2,476 2,796
Tire and parts inventory 1,929 2,820
Prepaid expenses 5,325 7,374
Deferred income taxes 1,674 1,301
---------------- -----------------
Total current assets 66,119 70,701
Property and equipment, at cost 282,358 292,333
Less accumulated depreciation and amortization 81,821 75,627
---------------- -----------------
Net property and equipment 200,537 216,706
Other 6,303 7,443
---------------- -----------------
Total assets $ 272,959 $ 294,850
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Checks outstanding in excess of bank balances $ - $ 3,541
Current maturities of long-term debt 1,943 585
Accounts payable 3,486 4,735
Accrued expenses 14,318 13,516
---------------- -----------------
Total current liabilities 19,747 22,377
Long-term debt, less current maturities 84,331 84,804
Deferred income taxes 27,359 30,233
---------------- -----------------
Total liabilities 131,437 137,414
Stockholders' equity:
Class A common stock, $.01 par value; 20,000,000 shares authorized;
12,560,250 and 12,562,250 shares issued and outstanding as of 1998
and 1999, respectively 126 126
Class B common stock, $.01 par value; 5,000,000 shares authorized;
2,350,000 shares issued and outstanding as of 1998 and 1999 24 24
Additional paid-in-capital 78,261 78,292
Retained earnings 63,111 78,994
---------------- -----------------
Total stockholders' equity 141,522 157,436
---------------- -----------------
Total liabilities and stockholders' equity $ 272,959 $ 294,850
================ =================
The accompanying notes are an integral part of these consolidated financial
statements.
3
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
(In thousands except per share data)
Three months ended Nine months ended
September 30, September 30,
(unaudited) (unaudited)
---------------------------------- --------------------------------
1998 1999 1998 1999
---- ---- ---- ----
Revenue $ 95,566 $ 120,104 $ 264,400 $ 331,079
Operating expenses:
Salaries, wages, and related expenses 42,534 50,126 117,683 143,283
Fuel, oil, and road expenses 16,869 21,865 49,125 59,686
Revenue equipment rentals and purchased
transportation 6,250 12,468 16,682 31,553
Repairs 2,222 2,185 5,866 6,559
Operating taxes and licenses 2,427 2,718 6,805 7,875
Insurance 2,530 3,196 7,348 8,844
General supplies and expenses 4,540 6,357 13,980 17,716
Depreciation and amortization, including gain
disposal of equipment 7,901 8,721 21,937 25,252
---------------- ------------- --------------- --------------
Total operating expenses 85,273 107,636 239,426 300,768
---------------- ------------- --------------- --------------
Operating income 10,293 12,468 24,974 30,311
Interest expense 1,383 1,280 4,387 3,806
---------------- ------------- --------------- --------------
Income before income taxes 8,910 11,188 20,587 26,505
Income tax expense 3,463 4,486 7,907 10,622
---------------- ------------- --------------- --------------
Net income $ 5,447 $ 6,702 $ 12,680 $ 15,883
================ ============= =============== ==============
Basic earnings per share $ 0.37 $ 0.45 $ 0.89 $ 1.07
Diluted earnings per share $ 0.37 $ 0.45 $ 0.89 $ 1.06
Weighted average shares outstanding 14,909 14,912 14,220 14,912
Adjusted weighted average shares and assumed
conversions outstanding 14,909 15,058 14,231 15,030
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
(In thousands)
Nine months ended Nine months ended
September 30, September 30,
1998 1999
----------------- -----------------
(unaudited) (unaudited)
Cash flows from operating activities:
Net income $ 12,680 $ 15,883
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for losses on receivables 298 185
Depreciation and amortization 23,646 25,350
Deferred income tax expense 1,966 3,247
Gain on disposition of property and equipment (1,709) (98)
Changes in operating assets and liabilities:
Receivables and advances (8,869) (4,522)
Prepaid expenses (3,918) (2,049)
Tire and parts inventory (476) (792)
Accounts payable and accrued expenses 6,769 448
-------------------- -------------------
Net cash flows provided by operating activities 30,387 37,652
Cash flows from investing activities:
Acquisition of property and equipment (64,422) (70,106)
Acquisition of intangibles (200) -
Acquisition of business - (10,775)
Proceeds from disposition of property and equipment 19,686 38,290
-------------------- -------------------
Net cash flows used in investing activities (44,936) (42,591)
Cash flows from financing activities:
Changes in checks outstanding in excess of bank
balances - 3,541
Deferred debt issuance costs - (12)
Exercise of stock option 134 31
Proceeds from issuance of long-term debt 54,000 50,500
Repayments of long-term debt (69,230) (51,386)
Proceeds from equity offering 27,485 -
-------------------- -------------------
Net cash flows provided by financing activities 12,389 2,674
-------------------- -------------------
Net change in cash and cash equivalents (2,160) (2,265)
Cash and cash equivalents at beginning of period 2,610 2,926
-------------------- -------------------
Cash and cash equivalents at end of period $ 450 $ 661
==================== ===================
The accompanying notes are an integral part of these consolidated financial
statements.
5
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except per share data)
Note 1. Basis of Presentation
The condensed consolidated financial statements include the accounts of
Covenant Transport, Inc., a Nevada holding company, and its wholly-owned
subsidiaries (the Company). All significant intercompany balances and
transactions have been eliminated in consolidation.
The financial statements have been prepared, without audit, in accordance
with generally accepted accounting principles, pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion of
management, the accompanying financial statements include all adjustments
which are necessary for a fair presentation of the results for the interim
periods presented, such adjustments being of a normal recurring nature.
Certain information and footnote disclosures have been condensed or
omitted pursuant to such rules and regulations. The December 31, 1998
Condensed Consolidated Balance Sheet was derived from the audited balance
sheet of the Company for the year then ended. It is suggested that these
condensed consolidated financial statements and notes thereto be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Form 10-K for the year ended December 31, 1998.
Results of operations in interim periods are not necessarily indicative of
results to be expected for a full year.
Note 2. Basic and Diluted Earnings Per Share
The following table sets forth for the periods indicated the calculation
of net earnings per share included in the Company's Condensed Consolidated
Statements of Income:
Three months ended Nine months ended
September 30, September 30,
1998 1999 1998 1999
---- ---- ---- ----
Numerator:
Net Income $ 5,447 $ 6,702 $ 12,680 $ 15,883
Denominator:
Denominator for basic earnings
per share - weighted-average shares 14,909 14,912 14,220 14,912
Effect of dilutive securities:
Employee stock options - 146 11 118
---------- ---------- --------- ---------
Denominator for diluted earnings per share - adjusted
weighted-average shares and assumed conversions 14,909 15,058 14, 231 15,030
========== ========== ========= =========
Basic earnings per share $ .37 $ .45 $ .89 $ 1.07
========== ========== ========= =========
Diluted earnings per share $ .37 $ .45 $ .89 $ 1.06
========== ========== ========= =========
Note 3. Income Taxes
Income tax expense varies from the amount computed by applying the federal
corporate income tax rate of 37% to income before income taxes primarily
due to state income taxes, net of federal income tax effect, which were
approximately 1.2% higher in the quarter ended September 30, 1999, as
compared with the quarter ended September 30, 1998.
6
Note 4. Recent Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities. The statement established accounting
and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded on the balance sheet as either an asset or liability measured at
its fair value. SFAS No. 133 requires that changes in the derivative's
fair value be recognized currently in earnings unless specific hedge
accounting criteria are met. The Company may engage in hedging activities
using futures, forward contracts, options, and swaps to hedge the impact
of market fluctuations on energy commodity prices and interest rates. The
Company is currently assessing the effect, if any, on its financial
statements of implementing SFAS No. 133. The Company will be required to
adopt the standard in 2001.
FORWARD LOOKING STATEMENTS
This document contains forward-looking statements in paragraphs that are
marked with an asterisk. Statements by the Company in press releases,
public filings, and stockholder reports, as well as oral public statements
by Company representatives, also may contain certain forward-looking
information. Forward-looking information is subject to certain risks and
uncertainties that could cause actual results to differ materially from
those projected. Without limitation, these risks and uncertainties include
economic factors such as recessions, downturns in customers' business
cycles, surplus inventories, inflation, fuel price increases, and higher
interest rates; the resale value of the Company's used revenue equipment;
the availability and compensation of qualified drivers; competition from
trucking, rail, and intermodal competitors; and the ability to identify
acceptable acquisition targets and negotiate, finance, and consummate
acquisitions and integrate acquired companies. Readers should review and
consider the various disclosures made by the Company in its press
releases, stockholder reports, and public filings, as well as the factors
explained in greater detail in the Company's annual report on Form 10-K.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company grew its revenue 25.2%, to $331.1 million in the nine months ended
September 30, 1999, from $264.4 million during the same period of 1998. The
Company's pretax margin increased to 8.0% of revenue from 7.8% of revenue. A
significant increase in fleet size to meet customer demand as well as an
increase in the freight rates contributed to revenue growth over this period. In
addition to internal growth, the Company completed one acquisition in 1999 and
two acquisitions during 1998. In September 1999, the Company acquired certain
assets of ATW, Inc., a $40 million annual revenue carrier located in North
Carolina. In August 1998, the Company acquired certain assets of Gouge Trucking,
Inc., a $4 million annual revenue carrier located in North Carolina. In October
1998, the Company purchased all of the outstanding capital stock of Southern
Refrigerated Transportation, Inc., ("SRT"), a $23 million annual revenue carrier
based in southwest Arkansas. Additionally, the Company formed a new division,
Covenant Transport Logistics, in October 1998. The Company intends to continue
to grow both internally and through acquisitions, with the main constraint on
internal growth being the ability to recruit and retain sufficient numbers of
qualified drivers. (*)
The Company has increased net income approximately 25.3%, to $15.9 million in
the nine months ended September 30, 1999, from $12.7 million during the same
period of 1998. Several factors contributed to the increase, including
negotiating higher freight rates from customers and improved utilization of
equipment.
Changes in several operating statistics and expense categories are expected to
result from actions the Company took in 1997 and 1998. The operations of Bud
Meyer Truck Lines, acquired in 1997, and SRT use predominately single-driver
tractors, as opposed to the primarily team-driver tractor fleet operated by
Covenant's long-haul, dry van operation. The single driver fleets operate fewer
miles per tractor and experience more empty miles. In addition, Bud Meyer and
SRT's operations must bear additional expenses of fuel for refrigeration units,
pallets, and depreciation and interest expense of more expensive trailers
associated with temperature-controlled service. The additional expenses and
lower productive miles are offset by generally higher revenue per loaded mile
and the reduced employee expense of compensating only one driver. The Company's
operating statistics and expenses are expected to shift in future periods with
the mix of single, team, and temperature-controlled operations. (*)
The Company initiated the use of owner-operators of tractors in 1997 and had
contracted with approximately 288 owner-operators as of September 30, 1999.
Owner-operators provide a tractor and a driver and bear all operating expenses
in exchange for a fixed payment per mile. The Company does not have the capital
outlay of purchasing the tractor. As of September 30, 1999, the Company had
financed approximately 636 tractors under operating leases as compared to 390
tractors under operating leases as of September 30, 1998. The payments to
owner-operators and the financing of tractors under operating leases are
recorded in revenue equipment rentals and purchased transportation. Expenses
associated with owned equipment, such as interest and depreciation, are not
incurred, and for owner-operator tractors, driver compensation, fuel, and other
expenses are not incurred. Because obtaining equipment from owner-operators and
under operating leases effectively shifts financing expenses from interest to
"above the line" operating expenses, the Company evaluates its efficiency using
pretax margin and net margin rather than operating ratio. The following table
sets forth the percentage relationship of certain items to revenue:
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1999 1998 1999
---------- --------- --------- ---------
Revenue 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Salaries, wages, and related expenses 44.5 41.7 44.5 43.3
Fuel, oil, and road expenses 17.7 18.2 18.6 18.0
Revenue equipment rentals and purchased
transportation 6.5 10.4 6.3 9.5
Repairs 2.3 1.8 2.2 2.0
Operating taxes and licenses 2.5 2.3 2.6 2.4
Insurance 2.6 2.7 2.8 2.7
General supplies and expenses 4.8 5.3 5.3 5.4
Depreciation and amortization 8.3 7.3 8.3 7.6
---------- --------- --------- ---------
Total operating expenses 89.2 89.6 90.6 90.9
---------- --------- --------- ---------
Operating income 10.8 10.4 9.4 9.2
Interest expense 1.5 1.1 1.6 1.2
---------- --------- --------- ---------
Income before income taxes 9.3 9.3 7.8 8.0
Income tax expense 3.6 3.7 3.0 3.2
---------- --------- --------- ---------
Net income 5.7% 5.6% 4.8% 4.8%
========== ========= ========= =========
8
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1999 TO THREE MONTHS ENDED
SEPTEMBER 30, 1998
Revenue increased $24.5 million (25.7%), to $120.1 million in the 1999 period
from $95.6 million in the 1998 period. The revenue increase was primarily
generated by a 20.9% increase in weighted average tractors, to 2,850 during the
1999 period from 2,358 during the 1998 period, as the Company expanded
internally to meet demand from new customers and higher volumes from existing
customers, as well as externally through the acquisitions of Gouge Trucking,
Inc. and SRT during August and October of 1998, respectively. The ATW
acquisition was completed late in the third quarter, therefore the related
revenue growth is not reflected in the third quarter revenues. The Company
should benefit from the additional customer base and the additional tractor
fleet in the fourth quarter revenue figures. The Company's revenue per tractor
per week increased 6.3%, to $3,278 in the 1999 quarter from $3,083 in the 1998
quarter as a result of improved equipment utilization and a slight increase in
revenue per total mile.
Salaries, wages, and related expenses increased $7.6 million (17.9%), to $50.1
million in the 1999 period from $42.5 million in the 1998 period. As a
percentage of revenue, salaries, wages, and related expenses decreased to 41.7%
in the 1999 period from 44.5% in the 1998 period. Driver wages as a percentage
of revenue decreased to 30.2% in the 1999 period from 32.7% in the 1998 period
as the Company utilized more owner-operators and a larger percentage of
single-driver tractors from the operations of SRT, which only have one driver to
be compensated. A driver wage increase, effective October 1,1999, is expected to
increase driver wages as a percentage of revenue in future periods. The Company
experienced an increase in non-driving employee payroll expense to 5.9% of
revenue in the 1999 period from 5.5% of revenue in the 1998 period due to the
start up of Covenant Transport Logistics and the acquisition of SRT.(*)
Fuel, oil, and road expenses increased $5.0 million (29.6%), to $21.9 million in
the 1999 period from $16.9 million in the 1998 period. As a percentage of
revenue, fuel, oil, and road expenses increased to 18.2% of revenue in the 1999
period from 17.7% in the 1998 period. Fuel costs increased approximately 17
cents per gallon in the third quarter versus the third quarter of 1998. This
increase was partially offset by fuel surcharges, fuel hedges and by the
increased usage of owner-operators who pay for their own fuel purchases. The
expense for owner-operators is reflected in the revenue equipment rentals and
purchased transportation category. The Company's percentage of fuel purchases
that are hedged drops from approximately 18% during the third quarter to
approximately 13% by the end of the fourth quarter of 2000. (*)
Revenue equipment rentals and purchased transportation increased $6.2 million
(99.5%), to $12.5 million in the 1999 period from $6.3 million in the 1998
period. As a percentage of revenue, revenue equipment rentals and purchased
transportation increased to 10.4% in the 1999 period from 6.5% in the 1998
period. The majority of the increase is due to growth in the owner-operator
fleet. The Company increased the fleet size of owner-operators during the 1999
period (averaged 264 in the 1999 period compared to 159 in the 1998 period, a
increase of 66.0%). Owner-operators provide a tractor and driver and cover all
of their operating expenses in exchange for a fixed payment per mile.
Accordingly, expenses such as driver salaries, fuel, repairs, depreciation, and
interest normally associated with Company-owned equipment are consolidated in
revenue equipment rentals and purchased transportation when owner-operators are
utilized. The Company also entered into additional operating leases. During the
1999 period, an average of approximately 635 tractors was leased compared to an
average of approximately 353 leased tractors during the 1998 period.
Repairs remained essentially constant at approximately $2.2 million in 1999 and
1998. As a percentage of revenue, repairs decreased to 1.8% in the 1999 period
from 2.3% in the 1998 period. The decrease was primarily the result of the
increased owner-operator fleet, who are responsible for their own repairs and in
the 1998 period, there was an unusually high concentration of repairs to
tractors and trailers from damage caused by accidents.
Operating taxes and licenses increased approximately $0.3 million (12.0%), to
$2.7 million in the 1999 period from $2.4 million in the 1998 period. As a
percent of revenue, operating taxes and licenses decreased to 2.3% in the 1999
period from 2.5% in the 1998 period, because increased revenue per tractor more
efficiently spread this largely fixed cost.
Insurance, consisting primarily of premiums for liability, physical damage, and
cargo damage insurance, and claims, increased $0.7 million (26.3%), to $3.2
million in the 1999 period from $2.5 million in the 1998 period. As a percentage
of revenue, insurance remained essentially constant at 2.7% in the 1999 period
and 2.6% in the 1998 period.
General supplies and expenses, consisting primarily of driver recruiting,
communications expenses, and facilities expenses, increased $1.8 million
(40.0%), to $6.4 million in the 1999 period from $4.5 million in the 1998
period. As a percentage of revenue, general supplies and expenses increased to
5.3% in the 1999 period from 4.8% in the 1998 period. The 1999 increase is
primarily related to increase in advertising efforts to recruit qualified
drivers.
9
Depreciation and amortization, consisting primarily of depreciation of revenue
equipment, increased $0.8 million (10.4%), to $8.7 million in the 1999 period
from $7.9 million in 1998 period. As a percentage of revenue, depreciation and
amortization decreased to 7.3% in the 1999 period from 8.3% in the 1998 period
as the Company utilized more owner-operators and leased more revenue equipment
through operating leases as well as increased revenue per tractor more
efficiently spread this largely fixed cost. Amortization expense relates to
covenants not to compete and goodwill from acquisitions.
Interest expense decreased $0.1 million (7.5%), to $1.3 million in the 1999
period from $1.4 million in the 1998 period. As a percentage of revenue,
interest expense decreased to 1.1% in the 1999 period from 1.5% in the 1998
period, as the Company financed more equipment under operating leases,
contracted with more owner-operators during the 1999 period, and benefited from
an improvement in cash from operations.
As a result of the foregoing, the Company's pretax margin remained constant at
9.3% in the 1999 and 1998 periods.
The Company's effective tax rate was 40.1% in the 1999 period compared with
38.9% in the 1998 period reflecting increased state income taxes in the 1999
period.
Primarily as a result of the factors described above, net income increased $1.3
million (23.0%), to $6.7 million in the 1999 period (5.6% of revenue) from $5.4
million in the 1998 period (5.7% of revenue).
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1999 TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
Revenue increased $66.7 million (25.2%), to $331.1 million in the 1999 period
from $264.4 million in the 1998 period. The revenue increase was primarily
generated by a 22.8% increase in weighted average tractors, to 2,765 during the
1999 period from 2,252 during the 1998 period, as the Company expanded
internally to meet demand from new customers and higher volume from existing
customers, as well as externally through the acquisitions of Gouge Trucking,
Inc. and SRT during August and October of 1998, respectively. The Company's
revenue per tractor per week increased 2.0%, to $3,072 in the 1999 period from
$3,012 in the 1998 period, as a result of a two cent per total mile increase in
freight rates and improved equipment utilization.
Salaries, wages, and related expenses increased $25.6 million (21.8%), to $143.3
million in the 1999 period from $117.7 million in the 1998 period. As a
percentage of revenue, salaries, wages, and related expenses decreased to 43.3%
in the 1999 period from 44.5% in the 1998 period. Driver wages as a percentage
of revenue decreased to 31.2% in the 1999 period from 32.4% in the 1998 period
as the Company utilized more owner-operators and a larger percentage of
single-driver tractors from the operations of SRT. A driver wage increase,
effective October 1,1999, is expected to increase driver wages as a percentage
of revenue in future periods. The Company experienced an increase in non-driving
employee payroll expense to 5.9% of revenue in the 1999 period from 5.4% of
revenue in the 1998 period due to the start up of Covenant Transport Logistics
and the acquisition of SRT.
Fuel, oil, and road expenses increased $10.6 million (21.5%), to $59.7 million
in the 1999 period from $49.1 million in the 1998 period. As a percentage of
revenue, fuel, oil, and road expenses decreased to 18.0% of revenue in the 1999
period from 18.6% in the 1998 period. Fuel costs increased approximately 4 cents
per gallon for the nine-month period of 1999 versus the same period of 1998.
This increase was partially offset by fuel surcharges, fuel contracts and by the
increased usage of owner-operators who pay for their own fuel purchases. The
expense for owner-operators is reflected in the revenue equipment rentals and
purchased transportation category. The Company's percentage of fuel purchases
that are hedged drops from approximately 18% during the third quarter to
approximately 13% by the end of the fourth quarter of 2000. (*)
Revenue equipment rentals and purchased transportation increased $14.9 million
(89.1%), to $31.6 million in the 1999 period from $16.7 million in the 1998
period. As a percentage of revenue, revenue equipment rentals and purchased
transportation increased to 9.5% in the 1999 period from 6.3% in the 1998
period. During 1997, the Company began using owner-operators of revenue
equipment, who provide a tractor and driver and cover all of their operating
expenses in exchange for a fixed payment per mile. Accordingly, expenses such as
driver salaries, fuel, repairs, depreciation, and interest normally associated
with Company-owned equipment are consolidated in revenue equipment rentals and
purchased transportation when owner-operator-operators are utilized. The Company
increased the fleet size of owner-operators during the 1999 period (averaged 236
in the 1999 period compared to 121 in the 1998 period, a increase of 95.0%). The
Company also entered into additional operating leases. During the 1999 period,
an average of approximately 600 tractors was leased compared to an average of
approximately 331 leased tractors during the 1998 period.
Repairs increased $0.7 million (11.8%), to $6.6 million in the 1999 period from
$5.9 million in the 1998 period. As a percentage of revenue, repairs decreased
to 2.0% in the 1999 period from 2.2% in the 1998 period because increased
revenue per tractor more efficiently spread this largely fixed cost.
10
Operating taxes and licenses increased approximately $1.1 million (15.7%), to
$7.9 million in the 1999 period from $6.8 million in the 1998 period. As a
percent of revenue, operating taxes and licenses decreased to 2.4% in the 1999
period from 2.6% in the 1998 period due to increased revenue per tractor more
efficiently spreading this largely fixed cost.
Insurance, consisting primarily of premiums for liability, physical damage, and
cargo damage insurance, and claims, increased $1.5 million (20.4%), to $8.8
million in the 1999 period from $7.3 million in the 1998 period. As a percentage
of revenue, insurance remained essentially constant at 2.7% in the 1999 period
and 2.8% in the 1998 period.
General supplies and expenses, consisting primarily of driver recruiting,
communications expenses, and facilities expenses, increased $3.7 million
(26.7%), to $17.7 million in the 1999 period from $14.0 million in the 1998
period. As a percentage of revenue, general supplies and expenses remained
essentially constant at 5.4% in the 1999 period and 5.3% in the 1998 period.
Depreciation and amortization, consisting primarily of depreciation of revenue
equipment, increased $3.3 million (15.1%), to $25.3 million in the 1999 period
from $21.9 million in 1998 period. As a percentage of revenue, depreciation and
amortization decreased to 7.6% in the 1999 period from 8.3% in the 1998 period
as the Company utilized more owner-operators and leased more revenue equipment
through operating leases, as well as increased revenue per tractor more
efficiently spreading this largely fixed cost. Amortization expense relates to
covenants not to compete and goodwill from acquisitions.
Interest expense decreased $0.6 million (13.3%), to $3.8 million in the 1999
period from $4.4 million in the 1998 period. As a percentage of revenue,
interest expense decreased to 1.1% in the 1999 period from 1.6% in the 1998
period, as the Company financed more equipment under operating leases,
contracted with more owner-operators during the 1999 period, and benefited from
an improvement in cash from operations.
As a result of the foregoing, the Company's pretax margin improved to 8.0% in
the 1999 period versus 7.8% in the 1998 period.
The Company's effective tax rate was 40.1% in the 1999 period compared with
38.4% in the 1998 period reflecting increased state income taxes in the 1999
period.
Primarily as a result of the factors described above, net income increased $3.2
million (25.3%), to $15.9 million in the 1999 period (4.8% of revenue) from
$12.7 million in the 1998 period (4.8% of revenue).
LIQUIDITY AND CAPITAL RESOURCES
The growth of the Company's business has required significant investments in new
revenue equipment. The Company has financed its revenue equipment requirements
with borrowings under a line of credit, cash flows from operations, long-term
operating leases, and a small portion with borrowings under installment notes
payable to commercial lending institutions and equipment manufacturers. The
Company's primary sources of liquidity at September 30, 1999, were funds
provided by operations and borrowings under its primary credit agreement,
amended June 18, 1999, which had maximum available borrowing of $130.0 million
at September 30, 1999 (the "Credit Agreement"). The Company believes its sources
of liquidity are adequate to meet its current and projected needs. (*)
The Company's primary sources of cash flow from operations in the 1999 period
were net income increased by depreciation and amortization. Net cash provided by
operating activities was $37.7 million in the 1999 period and $30.4 million in
the 1998 period. The increase in the 1999 period resulted primarily from an
improvement in the cash flow of receivables and higher net income.
Net cash used in investing activities was $42.6 million and $44.9 million in the
1999 and 1998 periods, respectively. These investments were primarily to acquire
additional revenue equipment as the Company expanded its operations.
Approximately $10.8 million in the 1999 period represented the purchase price
for the assets and business of ATW, Inc., of which approximately $1.5 million
was allocated to goodwill. The decrease in the 1999 period as compared to the
1998 period resulted from the Company's entering into more operating leases and
increasing its fleet through the use of owner-operators who provide a tractor.
The Company expects to expend approximately an additional $13.0 million on
capital expenditures during the remainder of 1999 (excluding planned operating
leases of equipment). Total projected net capital expenditures for 1999 are
expected to be approximately $45.0 million excluding operating leases and the
effect of any potential acquisitions. (*)
Net cash provided by financing activities of $2.7 million and $12.4 million in
the 1999 and 1998 periods, respectively. The 1998 proceeds were primarily the
result of a Company stock offering that was completed in May 1998. These
proceeds were offset by borrowings under the Credit Agreement. At September 30,
1999, the Company had outstanding debt of $85.4 million, primarily consisting of
approximately $56.0 million drawn under the Credit Agreement, $25.0 million in
10-year senior notes, $3.0 million in
11
an interest bearing note to the former primary stockholder of SRT related to the
SRT acquisition, $0.8 million in term equipment financing, and $0.6 million in
notes related to non-compete agreements. Interest rates on this debt range from
5.7% to 9.0%.
The Credit Agreement is with a group of banks and has a maximum borrowing limit
of $130.0 million. Borrowings related to revenue equipment are limited to the
lesser of 90% of the net book value of revenue equipment or $130 million.
Working capital borrowings are limited to 85% of eligible accounts receivable.
Letters of credit are limited to an aggregate commitment of $10.0 million. The
Credit Agreement includes a "security agreement" such that the Credit Agreement
may be collateralized by virtually all assets of the Company if a covenant
violation occurs. A commitment fee, that is adjusted quarterly between 0.125%
and 0.275% per annum based on cash flow coverage, is due on the daily unused
portion of the Credit Agreement. The Company, including all subsidiaries, are
parties to the Credit Agreement and related documents.
The Company renewed the loan in June 1999. The Credit Agreement revolves through
December 31, 2000 and then has a three-year term out if not renewed. Payments
for interest are due quarterly in arrears with principal payments due in twelve
equal quarterly installments beginning in 2001 if not renewed. Borrowings under
the Credit Agreement are based on the banks' base rate or LIBOR and accrue
interest based on one, two, or three month LIBOR rates plus an applicable margin
that is adjusted quarterly between 0.55% and 0.925% based on cash flow coverage.
At September 30, 1999, the margin was 0.60%. The Company has an interest rate
swap agreement that fixes the interest rate on $10 million of borrowing under
the Credit Agreement at a rate of 5.95% plus applicable margin. The $10 million
swap agreement will expire October 29, 1999.
In October 1995, the Company placed $25 million in 10-year senior notes with an
insurance company. The notes bear interest at 7.39%, payable semi-annually, and
mature on October 1, 2005. Principal payments are due in equal annual
installments beginning in the seventh year of the notes. Proceeds of the notes
were used to reduce borrowings under the Credit Agreement.
The Credit Agreement, senior notes, and the headquarters and terminal lease
agreement entered into in 1996, contain certain restrictions and covenants
relating to, among other things, dividends, tangible net worth, cash flows,
acquisitions and dispositions, and total indebtedness. All of these instruments
are cross-defaulted. At September 30, 1999, the Company was in compliance with
the agreements.
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. First quarter net income historically has been lower than net
income in each of the other three-quarters of the year because of the weather.
The Company's 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 the Company's ability to
satisfy some of that requirement. 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 the
Company's dry van operation. During September and October, business increases as
a result of increased retail merchandise shipped in anticipation of the
holidays. (*)
YEAR 2000
The Year 2000 ("Y2K") issue concerns the inability of computer systems to
recognize and process date-sensitive information after 1999 due to the use of
only the last two digits to refer to a year. This problem could affect both
information systems (software and hardware) and other equipment that relies on
microprocessors. Management has completed a Company-wide evaluation of this
impact on its computer systems, applications, and other date-sensitive equipment
and has hired a nationally-recognized consulting firm to perform a status study
of the Company's processes and activities related to the Company's Y2K project.
All known remediation efforts and testing of mission critical systems/equipment
were completed by July 31, 1999. The cost of the assessment and remediation
efforts for the modifications and updates to existing software is estimated to
be approximately $250,000.
The Company is also in the process of monitoring the progress of material third
parties, including shippers and suppliers, in their efforts to become Y2K
compliant and expects this phase to be ongoing throughout the rest of the year.
The Company's primary information technology systems ("IT Systems") include
hardware and software for billing, dispatch, electronic data interchange
("EDI"), fueling, payroll, telephone, vehicle maintenance, inventory, and
satellite communications systems. The majority of the Company's IT Systems are
purchased from and maintained by third parties. A primary IT System designed by
a third party is the satellite tracking system, which tracks equipment
locations, provides dispatch and routing information, and allows in-cab
communications with drivers. The Company's operating system that manages
payroll, billing, and dispatch was purchased from the supplier in March 1999 on
a long term lease. Another significant IT System provided by a third party
transmits payroll funds to
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drivers and allows drivers to purchase fuel and other items outside the
Company's terminal locations. The Company's financial reporting system also is
provided by a third party. In addition to our own completed testing, the Company
has been informed by the providers of these systems that they are Y2K compliant.
The Company believes it is Y2K compliant in its EDI applications. As customers
will allow, the Company will be performing Y2K testing of EDI transmissions with
its customers throughout the remainder of the year. (*)
The Company has reviewed its risks associated with microprocessors embedded in
facilities and equipment ("Non-IT Systems"). The primary Non-IT Systems includes
microprocessors in tractor engines and other components, terminal facilities,
satellite communications units, and telecommunications and other office
equipment. The Company's assessment of its revenue equipment, satellite
communications units, and office equipment Non-IT Systems has revealed low risk
of material replacement requirements. Such equipment is relatively new and was
designed to be Y2K compliant. The Company is continuing to assess its Non-IT
Systems in its terminal facilities but believes that the risk of a
service-interrupting failure in these systems is low. (*)
The Company could be faced with severe consequences if Y2K issues are not
identified and resolved in a timely manner by the Company and material third
parties. The Company's primary risk relating to Y2K compliance is the
possibility of service disruption from third-party suppliers of satellite
communications, telephone, fueling, and financial services. A worst-case
scenario would result in the short term inability of the Company to deliver
freight for its shippers. This would result in lost revenues; however, the
amount would be dependent on the length and nature of the disruption, which
cannot be predicted or estimated. The Company has developed contingency plans in
case business interruptions do occur. (*)
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company is exposed to market risks from changes in (i) certain commodity
prices and (ii) certain interest rates on its debt.
COMMODITY PRICE RISK
Prices and availability of all petroleum products are subject to political,
economic, and market factors that are generally outside the Company's control.
Because the Company's operations are dependent upon diesel fuel, significant
increases in diesel fuel costs could materially and adversely affect the
Company's results of operations and financial condition. Historically, the
Company has been able to recover a portion of short-term fuel price increases
from customers in the form of fuel surcharges. The price and availability of
diesel fuel can be unpredictable as well as the extent to which fuel surcharges
could be collected to offset such increases. For the first nine months of 1999,
diesel fuel expenses represented 16.8% of the Company's total operating expenses
and 15.3% of total revenue. The Company uses purchase commitments through
suppliers, to reduce a portion of its exposure to fuel price fluctuations. At
September 30, 1999, the national average price of diesel fuel as provided by the
U.S. Department of Energy was $1.226 per gallon. At September 30, 1999, the
notional amount for purchased commitments for the remainder of 1999 was 3.0
million gallons. At September 30, 1999, these 3.0 million gallons are already in
the money, producing approximately $350,000 of income to offset increased fuel
prices. At September 30, 1999, a ten percent change in the price of fuel would
cause an additional $780,000 gain on fuel purchase commitments.
INTEREST RATE RISK
The Credit Agreement, provided there has been no default, carries a maximum
variable interest rate of LIBOR for the corresponding period plus 0.925%. At
September 30, 1999, the Company had drawn $56.0 million under the Credit
Agreement. Approximately $46.0 million was subject to variable rates and the
remaining $10.0 million was subject to an interest rate swap that fixed the
interest rate at 5.95% plus applicable margin per annum. The swap expires
October 29, 1999. Considering the effect of the interest rate swap and all debt
outstanding, each one-percentage point increase in LIBOR would increase the
Company's pretax interest expense by $555,500 on an annualized basis.
The Company does not trade in these derivatives with the objective of earning
financial gains on price fluctuations, nor does it trade in these instruments
when there are no underlying related exposures.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings.
None
Items 2, 3, 4 and 5. Not applicable
Item 6. Exhibits and reports on Form 8-K.
(a) Exhibits
Exhibit
Number Description
3.1+ Restated Articles of Incorporation.
3.2+ Amended By-Laws dated September 27, 1994.
4.1+ Restated Articles of Incorporation.
4.2+ Amended By-Laws dated September 27, 1994.
10.1+ Incentive Stock Plan, filed as Exhibit 10.9.
10.2+ 401(k) Plan, filed as Exhibit 10.10.
10.3++ Note Purchase Agreement dated October 15, 1995, among Covenant
Transport, Inc., a Tennessee corporation and CIG & Co., filed as
Exhibit 10.12.
10.4+++ Participation Agreement dated March 29, 1996, among Covenant
Transport, Inc., a Tennessee corporation, Lease Plan USA, Inc., and
ABN-AMRO Bank, N.V., Atlanta Agency, filed as Exhibit 10.14.
10.5+++ First Amendment to Note Purchase Agreement and Waiver dated April 1,
1996, filed as Exhibit 10.16.
10.6++++ Waiver to Note Purchase Agreement dated March 31, 1997, filed as
Exhibit 10.12.
10.7+++++ Second Amendment to Note Purchase Agreement dated December 30, 1997,
filed as Exhibit 10.19.
10.8+++++ Stock Purchase Agreement made and entered into as of October 10,
1997, by and among Covenant Transport, Inc., a Nevada corporation;
Russell Meyer; and Bud Meyer Truck Lines, Inc., a Minnesota
Corporation, filed as Exhibit 10.21.
10.9# Stock Purchase Agreement made and entered into as of October 15,
1998, by and among Covenant Transport, Inc., a Nevada corporation;
Smith Charitable Remainder Trust, Southern Refrigerated
Transportation, Inc.,
an Arkansas corporation, and Tony and Kathy Smith, husband
and wife and residents of Arkansas, filed as Exhibit 10.22.
10.10## Amendment No. 2 to the Incentive Stock Plan, filed as exhibit 10.10.
10.11## Amended and Restated Credit Agreement dated June 18, 1999, filed as
exhibit 10.11.
27 Financial Data Schedule.
+ Filed as an exhibit to the registrant's Registration Statement on
Form S-1, Registration No. 33-82978, effective October 28, 1994, and
incorporated herein by reference.
++ Filed as an exhibit to the registrant's Form 10-K for the
year ended December 31, 1995, and incorporated herein by
reference.
+++ Filed as an exhibit to the registrant's Form 10-Q for the quarter
ended March 31, 1996, and incorporated herein by reference.
++++ Filed as an exhibit to the registrant's Form 10-Q for the quarter
ended March 31, 1997, and incorporated herein by reference.
+++++ Filed as an exhibit to the registrant's Annual Report on Form 10-K
for the period ended December 31, 1997, and incorporated herein by
reference.
# Filed as an exhibit to the registrant's Annual Report on Form 10-K
for the period ended December 31, 1998, and incorporated herein by
reference.
## Filed as an exhibit to the registrant's 10Q for the quarter ended
June 30, 1999 and incorporated herein by reference.
(b) No reports on Form 8-K have been filed during the quarter for
which this report is filed.
14
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COVENANT TRANSPORT, INC.
Date: November 10, 1999 //s// Joey B. Hogan
-------------------
Joey B. Hogan
Treasurer and Chief Financial Officer
15