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, 2000
( ) 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 (October 23, 2000).
Class A Common Stock, $.01 par value: 11,595,350 shares
Class B Common Stock, $.01 par value: 2,350,000 shares
Exhibit Index is on Page 15
<PAGE>
PART I
FINANCIAL INFORMATION
Page Number
Item 1. Financial statements
Condensed Consolidated Balance Sheets as of December 31,1999
and September 30, 2000 (Unaudited) 3
Condensed Consolidated Statements of Income for the three
and nine months ended September 30, 1999 and 2000 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 1999 and 2000 (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
Page Number
Item 1. Legal Proceedings 15
Items 2, 3, 4, and 5 Not applicable 15
Item 6. Exhibits and reports on Form 8-K 15
2
<PAGE>
<TABLE>
<CAPTION>
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
December 31, 1999 September 30, 2000
(unaudited)
--------------------- ---------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,046 $ 383
Accounts receivable, net of allowance of $1,040 in 1999 and
$1,303 in 2000 75,038 70,756
Drivers' advances and other receivables 9,295 14,034
Tire and parts inventory 3,046 3,139
Prepaid expenses 9,567 12,601
Deferred income taxes 1,310 1,816
----------------- -----------------
Total current assets $ 99,302 $ 102,729
Property and equipment, at cost 349,672 357,788
Less accumulated depreciation and amortization 80,638 100,026
----------------- -----------------
Net property and equipment 269,034 257,762
Other 15,638 25,752
----------------- -----------------
Total assets $ 383,974 $ 386,243
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Checks outstanding in excess of bank balances $ 3,599 $ 208
Current maturities of long-term debt 4,218 1,398
Accounts payable 7,260 8,792
Accrued expenses 17,136 21,526
----------------- -----------------
Total current liabilities 32,213 31,924
Long-term debt, less current maturities 140,497 141,605
Deferred income taxes 47,412 48,757
----------------- -----------------
Total liabilities 220,122 222,286
Stockholders' equity:
Class A common stock, $.01 par value; 20,000,000 shares authorized;
12,564,250 and 12,566,850 shares issued and 12,564,250 and 11,595,350 126 116
shares outstanding as of 1999 and 2000, respectively
Class B common stock, $.01 par value; 5,000,000 shares authorized;
2,350,000 shares issued and outstanding as of 1999 and 2000 24 24
Additional paid-in-capital 78,313 78,352
Treasury stock, at cost; 971,500 shares as of 2000 (7,935)
Retained earnings 85,389 93,400
----------------- -----------------
Total stockholders' equity 163,852 163,957
----------------- -----------------
Total liabilities and stockholders' equity $ 383,974 $ 386,243
================= =================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
<TABLE>
<CAPTION>
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
(In thousands except per share data)
Three months ended September 30, Nine months ended September 30,
(unaudited) (unaudited)
---------------------------------- --------------------------------
1999 2000 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue $ 120,104 $ 141,667 $ 331,079 $ 407,546
Operating expenses:
Salaries, wages, and related expenses 50,126 61,176 143,283 176,065
Fuel, oil, and road expenses 21,865 25,036 59,686 69,370
Revenue equipment rentals and
purchased transportation 12,468 18,548 31,553 56,627
Repairs 2,185 3,374 6,559 9,430
Operating taxes and licenses 2,718 3,560 7,875 10,359
Insurance 3,196 4,271 8,844 11,291
General supplies and expenses 6,357 8,242 17,716 23,880
Depreciation and amortization,
including gain on disposal of equipment 8,721 10,025 25,252 30,136
---------------- -------------- -------------- -------------
Total operating expenses 107,636 134,232 300,768 387,158
---------------- -------------- -------------- -------------
Operating income 12,468 7,435 30,311 20,388
Interest expense 1,280 2,304 3,806 7,044
---------------- -------------- -------------- -------------
Income before income taxes 11,188 5,131 26,505 13,344
Income tax expense 4,486 2,053 10,622 5,334
---------------- -------------- -------------- -------------
Net income $ 6,702 $ 3,078 $ 15,883 $ 8,010
================ ============== ============== =============
Basic earnings per share $ 0.45 $ 0.22 $ 1.07 $ 0.55
Diluted earnings per share $ 0.45 $ 0.22 $ 1.06 $ 0.54
Weighted average shares outstanding 14,912 13,960 14,912 14,557
Adjusted weighted average shares and assumed
conversions outstanding 15,058 14,025 15,030 14,708
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
(In thousands)
Nine months ended September 30,
(unaudited)
--------------------------------------------
1999 2000
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 15,883 $ 8,010
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for losses on receivables 185 361
Depreciation and amortization 25,350 30,778
Deferred income tax expense 3,247 2,136
Gain on disposition of property and equipment (98) (642)
Changes in operating assets and liabilities:
Receivables and advances (4,522) (5,664)
Prepaid expenses (2,049) (3,045)
Tire and parts inventory (792) (92)
Accounts payable and accrued expenses 448 5,641
------------------ -----------------
Net cash flows provided by operating activities 37,652 37,482
Cash flows from investing activities:
Acquisition of property and equipment (70,106) (46,624)
Acquisition of company stock - (7,935)
Acquisition of business (10,775) (7,288)
Investment in Transplace.com (5,294)
Proceeds from disposition of property and equipment 38,290 34,234
------------------ -----------------
Net cash flows used in investing activities (42,591) (32,907)
Cash flows from financing activities:
Changes in checks outstanding in excess of bank
balances 3,541 (3,391)
Deferred costs (12) (167)
Exercise of stock option 31 30
Proceeds from issuance of long-term debt 50,500 46,000
Repayments of long-term debt (51,386) (47,711)
------------------ -----------------
Net cash flows provided by or (used in) financing activities 2,674 (5,239)
------------------ -----------------
Net change in cash and cash equivalents (2,265) (663)
Cash and cash equivalents at beginning of period 2,926 1,046
------------------ -----------------
Cash and cash equivalents at end of period $ 661 $ 383
================== =================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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, 1999
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, 1999.
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:
<TABLE>
<CAPTION>
(in thousands except per share data) Three months ended Nine months ended
September 30, September 30,
1999 2000 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Net Income $6,702 $ 3,078 $ 15,883 $8,010
Denominator:
Denominator for basic earnings
per share - weighted-average shares 14,912 13,960 14,912 14,557
Effect of dilutive securities:
Employee stock options 146 65 118 151
----------- ----------- ----------- -----------
Denominator for diluted earnings per share -
adjusted weighted-average shares and assumed 15,058 14,025 15,030 14,708
conversions
=========== =========== =========== ===========
Basic earnings per share $ .45 $ .22 $ 1.07 $ .55
=========== =========== =========== ===========
Diluted earnings per share $ .45 $ .22 $ 1.06 $ .54
=========== =========== =========== ===========
</TABLE>
Note 3. Income Taxes
Income tax expense varies from the amount computed by applying the federal
corporate income tax rate of 35% to income before income taxes primarily
due to state income taxes, net of federal income tax effect, plus the
effect of nondeductible amortization of goodwill. Effective income tax
expense approximates 40% in the quarters ended September 30, 2000, and
1999.
6
<PAGE>
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 will be required to adopt the standard in 2001 and does not
expect there to be any material adverse impact on its results of
operations or financial position resulting from the adoption of SFAS No.
133.
Note 5. Stock Repurchase Plan
In June 2000, the Company authorized a stock repurchase plan for up to
1.0 million company shares to be purchased in the open market or through
negotiated transactions. In July 2000, the Company authorized an
additional 0.5 million shares to be repurchased. During the second
quarter, 792,000 shares were purchased at an average price of $8.14.
During the third quarter, 179,500 shares were purchased at an average
price of $8.27. As of October 23, 2000, a total of 971,500 had been
purchased with an average price of $8.17. The stock repurchase program
has no expiration date.
Note 6. Investment in Transplace.com
Effective July 1, 2000, the Company merged its logistics business with
five other transportation companies into Transplace.com, L.L.C.
("Transplace.com"). Transplace.com operates an Internet-based global
transportation logistics service and is developing programs for the
cooperative purchasing of products, supplies, and services. In the
transaction, Covenant contributed its customer list, logistics business
software and software license, certain intellectual property, and $5.0
million in cash for the initial funding of the venture. In exchange,
Covenant received 13% ownership in Transplace.com, which is being
accounted for using the equity method of accounting. Upon completion of
the transaction, Covenant ceased operating its own transportation
logistics and brokerage business, which consisted primarily of the
Terminal Truck Broker, Inc. business acquired in November 1999. The
contributed operation generated approximately $5.0 million in net
brokerage revenue (gross revenue less purchased transportation expense)
received on an annualized basis.
Note 7. Con-Way Truckload Services, Inc. acquisition
In August 2000, the Company purchased certain trucking assets of Con-Way
Truckload Services, Inc. ("CWT"), an $80 million annual revenue truckload
carrier headquartered in Fort Worth, Texas. The Company acquired CWT's
customer list and driver files. The acquisition has been accounted for
under the purchase method of accounting with the excess of the purchase
price over the estimated fair value of the net assets acquired of
approximately $2.6 million allocated to intangible assets. CWT was owned
by Con-Way Transportation Services of Ann Arbor, Michigan, a subsidiary
of CNF Inc., a $5.6 billion global supply chain management services
company.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except for the historical information contained herein, the discussion in this
quarterly report contains forward-looking statements that involve risk,
assumptions, and uncertainties that are difficult to predict. Words such as
"believe," "may," "could," "expects," "likely," variations of these words, and
similar expressions, are intended to identify such forward-looking statements.
The Company's actual results could differ materially from those discussed
herein. 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.
The Company grew its revenue 23.1%, to $407.5 million in the nine months ended
September 30, 2000, from $331.1 million during the same period of 1999. 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.
Most of the revenue growth was generated by three acquisitions acquired during
the fourth quarter of 1999 and the acquisition of certain assets of Con-Way
Truckload Services, Inc. ("CWT") in late August 2000. In September 1999, the
Company purchased the trucking assets of ATW, Inc. ("ATW"), a $40 million annual
revenue carrier located in North Carolina. In November 1999, the Company
purchased all of the outstanding capital stock of both Harold Ives Trucking Co.
and Terminal Truck Broker, Inc., which generated a combined $65 million of
annual trucking and brokerage revenue. In August 2000, the Company purchased
certain trucking assets of CWT, an $80 million annual revenue truckload carrier
headquartered in Fort Worth, Texas. 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's pretax margin decreased to 3.3% of revenue from 8.0% of revenue,
and the Company's net income decreased approximately 49.6%, to $8.0 million for
the nine months ended September 30, 2000, from $15.9 million during the same
period of 1999. Several factors contributed to the decrease, including increased
fuel costs, lower utilization of equipment, and a soft freight environment as
compared to the previous year. The Company merged the operations of Bud Meyer
and Harold Ives Trucking Co. into the Chattanooga headquarters during the first
quarter of 2000, which impacted utilization of equipment because a large number
of drivers were lost in the process.
The Company continues to obtain revenue equipment through its owner-operator
fleet and finance equipment under operating leases. As of September 30, 2000,
the Company had contracted with approximately 496 owner-operators as compared to
approximately 288 at 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, 2000, the Company had financed approximately 922 tractors and
1,359 trailers under operating leases as compared to 636 tractors and 179
trailers under operating leases as of September 30, 1999. The payments to
owner-operators and the financing of equipment under operating leases are
recorded in revenue equipment rentals and purchased transportation. Expenses
associated with owned equipment, such as interest and depreciation, are not
incurred, and for 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.
Effective July 1, 2000, the Company merged its logistics business with five
other transportation companies into Transplace.com, L.L.C. ("Transplace.com").
Transplace.com operates an Internet-based global transportation logistics
service and is developing programs for the cooperative purchasing of products,
supplies, and services. In the transaction, Covenant contributed its customer
list, logistics business software and software license, certain intellectual
property, and $5.0 million in cash for the initial funding of the venture. In
exchange, Covenant received 13% ownership in Transplace.com. Upon completion of
the transaction, Covenant ceased operating its own transportation logistics and
brokerage business, which consisted primarily of the Terminal Truck Broker, Inc.
business acquired in November 1999. The contributed operation generated
approximately $5.0 million in net brokerage revenue (gross revenue less
purchased transportation expense) received on an annualized basis. The Company
did not recognize any earnings or losses related to Transplace.com during the
third quarter or the year to date periods.
8
<PAGE>
The following table sets forth the percentage relationship of certain items to
revenue:
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 2000 1999 2000
----------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Revenue 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Salaries, wages, and related expenses 41.7 43.2 43.3 43.2
Fuel, oil, and road expenses 18.2 17.7 18.0 17.0
Revenue equipment rentals and purchased
transportation 10.4 13.1 9.5 13.9
Repairs 1.8 2.4 2.0 2.3
Operating taxes and licenses 2.3 2.5 2.4 2.5
Insurance 2.7 3.0 2.7 2.8
General supplies and expenses 5.3 5.8 5.4 5.9
Depreciation and amortization 7.3 7.1 7.6 7.4
----------- ----------- ------------ -----------
Total operating expenses 89.6 94.8 90.9 95.0
----------- ----------- ------------ -----------
Operating income 10.4 5.2 9.2 5.0
Interest expense 1.1 1.6 1.2 1.7
----------- ----------- ------------ -----------
Income before income taxes 9.3 3.6 8.0 3.3
Income tax expense 3.7 1.4 3.2 1.3
----------- ----------- ------------ -----------
Net income 5.6% 2.2% 4.8% 2.0%
=========== =========== ============ ===========
</TABLE>
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2000 TO THREE MONTHS ENDED
SEPTEMBER 30, 1999
Revenue increased $21.6 million (18.0%), to $141.7 million in the 2000 period
from $120.1 million in the 1999 period. The revenue increase was primarily
generated by a 32.9% increase in weighted average tractors, to 3,787 during the
2000 period from 2,850 during the 1999 period. Most of the increase came from
the acquisitions of the stock of Harold Ives Trucking Co. and the asset
acquisitions from ATW, and CWT. The Company also raised its average revenue per
loaded mile approximately $0.01 per mile compared to the 1999 period. The
Company's growth was partially offset by a 13.4% decrease in revenue per tractor
per week to $2,839 in the 2000 quarter from $3,278 in the 1999 quarter. Revenue
per tractor per week was reduced because of fewer miles per tractor due to a
less robust freight environment than in 1999 and the acquisition of Harold Ives
Trucking Co., which operated single-driver tractors that generate fewer miles
than team-driven tractors.
Salaries, wages, and related expenses increased $11.1 million (22.0%), to $61.2
million in the 2000 period from $50.1 million in the 1999 period. As a
percentage of revenue, salaries, wages, and related expenses increased to 43.2%
in the 2000 period from 41.7% in the 1999 period. Driver wages as a percentage
of revenue increased to 31.1% in the 2000 period from 30.2% in the 1999 period.
The increase was primarily related to a driver wage increase that went into
effect April 1, 2000, and was offset by the Company utilizing more
owner-operators and a larger percentage of single-driver tractors from the
operations of Harold Ives Trucking Co., which have only one driver to be
compensated. The Company's non-driving employee payroll expense remained
constant at 5.9% of revenue in the 2000 and 1999 periods.
Fuel, oil, and road expenses increased $3.2 million (14.5%), to $25.0 million in
the 2000 period from $21.9 million in the 1999 period. As a percentage of
revenue, fuel, oil, and road expenses decreased to 17.7% of revenue in the 2000
period from 18.2% in the 1999 period. Fuel costs increased approximately 37% per
gallon in the third quarter of 2000 versus the third quarter of 1999. This
increase was partially offset by fuel surcharges, fuel hedges in the form of
fixed price purchase commitments, 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 number of gallons and the price of fuel that was hedged for the
third quarter of 2000, will remain constant in the fourth quarter of 2000.
Revenue equipment rentals and purchased transportation increased $6.1 million
(48.8%), to $18.5 million in the 2000 period from $12.5 million in the 1999
period. As a percentage of revenue, revenue equipment rentals and purchased
transportation increased to 13.1% in the 2000 period from 10.4% in the 1999
period. The majority of the increase is due to growth in the owner-operator
fleet. The Company increased the number of owner-operators in its fleet to an
average of 487 in the 2000 period compared to 264 in the 1999 period.
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
9
<PAGE>
Company also entered into additional operating leases. As of September 30, 2000,
the Company had financed approximately 922 tractors and 1,359 trailers under
operating leases as compared to 636 tractors and 179 trailers under operating
leases as of September 30, 1999.
Repairs increased approximately $1.2 million (54.4%), to $3.4 million in the
2000 period from $2.2 million in the 1999 period. As a percentage of revenue,
repairs increased to 2.4% in the 2000 period from 1.8% in the 1999 period. The
increase was primarily the result of an increase in the number of tractors and
trailers damaged in accidents. Management expects an increase in the repairs
category during the fourth quarter 2000, due to the repair requirements
associated with the trade-in of a large number of tractors.
Operating taxes and licenses increased approximately $0.8 million (31.0%), to
$3.6 million in the 2000 period from $2.7 million in the 1999 period. As a
percent of revenue, operating taxes and licenses increased to 2.5% in the 2000
period from 2.3% in the 1999 period as lower revenue per tractor less
effectively covered this largely fixed cost.
Insurance, consisting primarily of premiums for liability, physical damage, and
cargo damage insurance, and claims, increased $1.1 million (33.6%), to $4.3
million in the 2000 period from $3.2 million in the 1999 period. As a percentage
of revenue, insurance increased to 3.0% in the 2000 period from 2.7% in the 1999
period. The increase is primarily due to the Company experiencing an increase in
one of its insurance coverages in July 2000. The Company has other insurance
lines that will be coming up for renewal in the first quarter 2001. Management
expects an increase in insurance premiums that will cause this expense category
to be higher in future periods.
General supplies and expenses, consisting primarily of driver recruiting,
communications, and facilities expenses, increased $1.9 million (29.7%), to $8.2
million in the 2000 period from $6.4 million in the 1999 period. As a percentage
of revenue, general supplies and expenses increased to 5.8% in the 2000 period
from 5.3% in the 1999 period. The 2000 increase is primarily the result of
expenses incurred from the acquisitions related to ATW and Harold Ives Trucking
Co., as well as the addition of a driving school located in Arkansas.
Depreciation and amortization, consisting primarily of depreciation of revenue
equipment, increased $1.3 million (15.0%), to $10.0 million in the 2000 period
from $8.7 million in 1999 period. As a percentage of revenue, depreciation and
amortization decreased to 7.1% in the 2000 period from 7.3% in the 1999 period
as the result of several factors. The Company utilized more owner-operators,
leased more revenue equipment through operating leases, and extended the
depreciable life of the Company's trailers from seven years to eight years to
conform with the Company's actual experience of equipment life. These factors
more than offset lower revenue per tractor. Amortization expense primarily
relates to covenants not to compete and goodwill from acquisitions.
Interest expense increased $1.0 million (80.0%), to $2.3 million in the 2000
period from $1.3 million in the 1999 period. As a percentage of revenue,
interest expense increased to 1.6% in the 2000 period from 1.1% in the 1999
period. The increase was primarily the result of higher debt balances related to
the acquisitions, the investment in Transplace.com, and the stock repurchase
program as well as higher interest rates.
As a result of the foregoing, the Company's pretax margin decreased to 3.6% in
the 2000 period from 9.3% in the 1999 period.
The Company's effective tax rate remained essentially constant at 40.0% in the
2000 period and 40.1% in the 1999 period.
Primarily as a result of the factors described above, net income decreased $3.6
million (54.1%), to $3.1 million in the 2000 period (2.2% of revenue) from $6.7
million in the 1999 period (5.6% of revenue).
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2000 TO NINE MONTHS ENDED
SEPTEMBER 30, 1999
Revenue increased $76.5 million (23.1%), to $407.5 million in the 2000 period
from $331.1 million in the 1999 period. The revenue increase was primarily
generated by a 34.4% increase in weighted average tractors, to 3,716 during the
2000 period from 2,765 during the 1999 period. Most of the increase came from
the acquisitions of the stock of Harold Ives Trucking Co. and the asset
acquisitions from ATW and CWT. The Company also raised its average revenue per
loaded mile by approximately $0.03 per mile compared to the 1999 period. The
Company's growth was partially offset by a 9.5% decrease in revenue per tractor
per week to $2,780 in the 2000 period from $3,072 in the 1999 period. Revenue
per tractor per week was reduced because of fewer miles per tractor due to a
less robust freight environment than in 1999 and the acquisition of Harold Ives
Trucking Co., which operated single-driver tractors that generate fewer miles
than team-driven tractors. Also, the Company experienced a large number of
tractors without drivers during the first quarter, primarily caused by the
merger of the operations of Bud Meyer Truck Lines, Inc. and Harold Ives Trucking
Co. into the Chattanooga facility. The Company has corrected the driver problem
with currently all tractors being fully manned.
Salaries, wages, and related expenses increased $32.8 million (22.9%), to $176.1
million in the 2000 period from $143.3 million in the 1999 period. As a
percentage of revenue, salaries, wages, and related expenses remained
essentially constant at 43.2% in the 2000
10
<PAGE>
period and 43.3% in the 1999 period. Driver wages as a percentage of revenue
decreased to 30.5% in the 2000 period from 31.2% in the 1999 period as the
Company utilized more owner-operators and a larger percentage of single-driver
tractors from the operations of Harold Ives, which have only one driver to be
compensated. On April 1, 2000, a driver wage increase went into effect that
increased driver wages as a percentage of revenue. The Company experienced a
temporary increase in non-driving employee payroll expense to 6.2% of revenue in
the 2000 period from 5.9% of revenue in the 1999 period due to the acquisition
of Terminal Truck Broker, Inc., which paid out a significant percentage of its
net revenue in salaries. With the July 1, 2000, merger of the former Terminal
Truck Broker, Inc. logistics business into Transplace.com, Covenant will no
longer operate its own transportation logistics or brokerage business or bear
the expense of compensating the Terminal Truck Broker, Inc. employees in future
periods.
Fuel, oil, and road expenses increased $9.7 million (16.2%), to $69.4 million in
the 2000 period from $59.7 million in the 1999 period. As a percentage of
revenue, fuel, oil, and road expenses decreased to 17.0% of revenue in the 2000
period from 18.0% in the 1999 period. Fuel costs per gallon increased
approximately 35% in 2000 versus 1999. This increase was offset by fuel
surcharges, fuel hedges in the form of fixed price purchase commitments, 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 number of gallons of fuel that was
subject to hedging contracts was higher in the first quarter of this period than
in the second and third quarters of 2000. The number of gallons of fuel at a
fixed price that was subject to hedging contracts is constant for the second
through fourth quarters of 2000.
Revenue equipment rentals and purchased transportation increased $25.1 million
(79.5%), to $56.6 million in the 2000 period from $31.6 million in the 1999
period. As a percentage of revenue, revenue equipment rentals and purchased
transportation increased to 13.9% in the 2000 period from 9.5% in the 1999
period. The majority of the increase is due to growth in the owner-operator
fleet. The Company increased the number of owner-operators in its fleet to an
average of 539 in the 2000 period compared to 236 in the 1999 period.
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. As of September 30, 2000, the Company
had financed approximately 922 tractors and 1,359 trailers under operating
leases as compared to 636 tractors and 179 trailers under operating leases as of
September 30, 1999.
Repairs increased approximately $2.9 million (43.8%), to $9.4 million in the
2000 period from $6.6 million in the 1999 period. As a percentage of revenue,
repairs increased to 2.3% in the 2000 period from 2.0% in the 1999 period. The
increase was primarily the result of an increase in the number of tractors and
trailers damaged in accidents as well as an increase in the number of tractors
and trailers available for routine maintenance during the first quarter of 2000.
Management expects an increase in the repairs category during the fourth quarter
2000, due to the repair requirements associated with the trade-in of a large
number of tractors.
Operating taxes and licenses increased approximately $2.5 million (31.5%), to
$10.4 million in the 2000 period from $7.9 million in the 1999 period. As a
percent of revenue, operating taxes and licenses remained essentially constant
at 2.5% in the 2000 period and 2.4% in the 1999 period.
Insurance, consisting primarily of premiums for liability, physical damage, and
cargo damage insurance, and claims, increased $2.4 million (27.7%), to $11.3
million in the 2000 period from $8.8 million in the 1999 period. As a percentage
of revenue, insurance increased to 2.8% in the 2000 period from 2.7% in the 1999
period. The Company experienced an increase in one of its insurance lines in
July 2000. The Company has other insurance lines that will be coming up for
renewal in the first quarter of 2001. Management expects an increase in the
insurance premiums that will cause this expense category to be higher in future
periods.
General supplies and expenses, consisting primarily of driver recruiting,
communications, and facilities expenses, increased $6.2 million (34.8%), to
$23.9 million in the 2000 period from $17.7 million in the 1999 period. As a
percentage of revenue, general supplies and expenses increased to 5.9% in the
2000 period from 5.4% in the 1999 period. The 2000 increase is primarily the
result of expenses incurred from the acquisitions of ATW and Harold Ives
Trucking Co., as well as the addition of a driving school located in Arkansas.
Depreciation and amortization, consisting primarily of depreciation of revenue
equipment, increased $4.9 million (19.3%), to $30.1 million in the 2000 period
from $25.3 million in 1999 period. As a percentage of revenue, depreciation and
amortization decreased to 7.4% in the 2000 period from 7.6% in the 1999 period
as a result of several factors. The Company utilized more owner-operators,
leased more revenue equipment through operating leases, recognized a $0.6
million gain on sale of equipment primarily due to the sale of trailers in the
first quarter, and extended the depreciable life of the Company's trailers from
seven years to eight years to conform with the Company's actual experience of
equipment life. These factors more than offset lower revenue per tractor.
Amortization expense primarily relates to covenants not to compete and goodwill
from acquisitions.
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Interest expense increased $3.2 million (85.1%), to $7.0 million in the 2000
period from $3.8 million in the 1999 period. As a percentage of revenue,
interest expense increased to 1.7% in the 2000 period from 1.2% in the 1999
period. The increase was primarily the result of higher debt balances related to
the acquisitions, the investment in Transplace.com, and the stock repurchase
program as well as higher interest rates.
As a result of the foregoing, the Company's pretax margin decreased to 3.3% in
the 2000 period from 8.0% in the 1999 period.
The Company's effective tax rate remained essentially constant at 40.0% in the
2000 period and 40.1% in the 1999 period.
Primarily as a result of the factors described above, net income decreased $7.9
million (49.6%), to $8.0 million in the 2000 period (2.0% of revenue) from $15.9
million in the 1999 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 borrowings under installment notes payable to commercial
lending institutions and equipment manufacturers. The Company's primary sources
of liquidity at September 30, 2000, were funds provided by cash flow from
operating activities, line of credit, and operating leases. 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 2000 period
were net income increased by depreciation and amortization. Net cash provided by
operating activities was $37.5 million in the 2000 period and $37.7 million in
the 1999 period. The decrease in the 2000 period resulted primarily from a lower
net income.
Net cash used in investing activities was $32.9 million and $42.6 million in the
2000 and 1999 periods, respectively. Investing activity was primarily to acquire
additional revenue equipment as the Company expanded its operations. The Company
expects to spend no more than $15.0 million on capital expenditures during the
remainder of 2000 (excluding planned operating leases of equipment). Total
projected net capital expenditures for 2000 are expected to be approximately
$35.0 million (excluding operating leases of equipment and the effect of any
potential acquisitions). In the 2000 period, the investing activity increased
primarily to repurchase company stock, to invest in Transplace.com, and to
acquire the assets of CWT.
In June 2000, the Company authorized a stock repurchase plan for up to 1.0
million company shares to be purchased in the open market or through negotiated
transactions. In July 2000, the Company authorized an additional 0.5 million
shares to be repurchased. Through the third quarter, a total of 971,500 had been
purchased with an average price of $8.17. The stock repurchase program has no
expiration date.
During the third quarter of 2000, the Company merged its logistics business with
five other transportation companies into Transplace.com and purchased the assets
and business of CWT. In the transaction, Covenant contributed its customer list,
logistics business software and software license, certain intellectual property,
and $5.0 million in cash for the initial funding of the venture. In exchange,
Covenant received 13% ownership in Transplace.com. In August 2000, the Company
purchased the assets and business of CWT. The purchase price was approximately
$7.3 million, with the excess of the purchase price over the estimated fair
value of the net assets acquired of approximately $2.6 million allocated to
intangible assets.
Net cash used in financing activities was $5.2 million in the 2000 period,
approximately $2.7 million provided by financing activities in the 1999 period.
At September 30, 2000, the Company had outstanding debt of $143.0 million,
primarily consisting of approximately $111.0 million drawn under the Company's
primary credit agreement (the "Credit Agreement"), $25.0 million in 10-year
senior notes, $3.0 million in an interest bearing note to the former primary
stockholder of Southern Refrigerated Transportation, Inc. ("SRT") related to the
acquisition of SRT in October 1998, $3.6 million in term equipment financing,
and $0.4 million in notes related to non-compete agreements. Interest rates on
this debt range from 6.5% to 9.0%.
The Credit Agreement is with a group of banks and has a maximum borrowing limit
of $130.0 million. Letters of credit are limited to an aggregate commitment of
$10.0 million. 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 amended the Credit Agreement in June 2000. 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
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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, 2000, the margin was 0.70%. The
Company is presently in the final stages of completing a new credit agreement
that is expected to be finalized prior to year end.
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 borrowing under the Credit Agreement. The notes were amended
in May 2000.
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, 2000, the Company was in compliance with
the agreements. The Credit Agreement and the senior notes are secured by a
pledge of the stock of all of the Company's subsidiaries. In addition, the
Credit Agreement provides that virtually all of the Company's assets become
collateral in the event of a covenant violation.
INFLATION AND FUEL COSTS
Most of the Company's operating expenses are inflation-sensitive, with inflation
generally producing increased costs of operations. During the past three years,
the most significant effects of inflation have been on revenue equipment prices
and the compensation paid to the drivers. Innovations in equipment technology
and comfort have resulted in higher tractor prices, and there has been an
industry-wide increase in wages paid to attract and retain qualified drivers.
The Company attempts to limit the effects of inflation through increases in
freight rates and certain cost control efforts.
In addition to inflation, fluctuations in fuel prices can affect profitability.
Fuel expense comprises a larger percentage of revenue for Covenant than many
other carriers because of Covenant's long average length of haul. Most of the
Company's contracts with customers contain fuel surcharge provisions. Although
the Company historically has been able to pass through most long-term increases
in fuel prices and taxes to customers in the form of surcharges and higher
rates, increases usually are not fully recovered. At the end of the third
quarter of 2000, the national average price of diesel fuel as provided by the
U.S. Department of Energy was $1.657 as compared to $1.226 per gallon at the end
of the third quarter of 1999. This has increased the Company's cost of
operating.
SEASONALITY
In the trucking industry, revenue generally decreases as customers reduce
shipments during the winter post-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.
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 third quarter of 2000,
diesel fuel expenses represented 15.7% of the Company's total operating expenses
and 14.9% of total revenue. The Company uses purchase commitments through
suppliers, to reduce a portion of its exposure to fuel price fluctuations. At
September 30, 2000, the national average price of diesel fuel as provided by the
U.S. Department of Energy was $1.657 per gallon. At September 30, 2000, the
notional amount for purchased commitments for the remainder of 2000 was 2.3
million gallons. At September 30, 2000,
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the price of the notional 2.3 million gallons would have produced approximately
$1.0 million of income to offset increased fuel prices if the price of fuel
remained the same as of September 30, 2000. At September 30, 2000, a ten percent
change in the price of fuel would increase or decrease the gain on fuel purchase
commitments by approximately $0.4 million.
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, 2000, the Company had drawn $111.0 million under the Credit
Agreement, which is subject to variable rates. This exposes the Company to the
risk that interest rates might rise. Considering the current level of debt
outstanding, each one-percentage point increase or decrease in LIBOR would
affect the Company's pretax interest expense under the Credit Agreement by
approximately $1.1 million on an annualized basis.
The remaining $32.0 million of the Company's debt has fixed interest rates. This
exposes the Company to the risk that interest rates might fall.
The Company does not trade in 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 Reference Description
3.1 (1) Restated Articles of Incorporation.
3.2 (1) Amended By-Laws dated September 27, 1994.
4.1 (1) Restated Articles of Incorporation.
4.2 (1) Amended By-Laws dated September 27, 1994.
10.1 (1) Incentive Stock Plan filed as Exhibit 10.9.
10.2 (1) 401(k) Plan filed as Exhibit 10.10.
10.3 (2) Stock Purchase Agreement made and entered into as of
October 5, 1998, by and among Covenant Transport,
Inc., a Nevada corporation; Smith Charitable
Remainder Trust; Southern Refrigerated Transport,
Inc., an Arkansas corporation; Tony Smith Trucking,
Inc., an Arkansas corporation; and Tony and Kathy
Smith, husband and wife and residents of Arkansas,
filed as Exhibit 10.22.
10.4 (3) Amendment No. 2 to the Incentive Stock Plan, filed
as Exhibit 10.10.
10.5 (3) Amended and Restated Credit Agreement dated June 18,
1999, filed as Exhibit 10.11.
10.6 (4) Stock Purchase Agreement made and entered into as of
November 15, 1999, by and among Covenant Transport,
Inc., a Tennessee corporation; Harold Ives; Marilu
Ives, Tommy Ives, Garry Ives, Larry Ives, Sharon Ann
Dickson, and the Tommy Denver Ives Irrevocable
Trust; Harold Ives Trucking Co.; and Terminal Truck
Broker, Inc.
10.7 (5) Outside Director Stock Option Plan, filed as Exhibit
A.
10.8 (6) Amendment to Amended and Restated Credit Agreement
among Covenant Transport, Inc., a Tennessee
corporation and Covenant Asset Management, Inc., as
borrowers, the banks named therein, the Letter of
Credit Banks, named therein, and ABN AMRO Bank,
N.V., as agent, dated June 6, 2000, filed as Exhibit
10.8.
10.9 (6) Note Purchase Agreement dated May 15, 2000, among
Covenant Asset Management, Inc., a Nevada
corporation, Covenant Transport, Inc., a Nevada
corporation, and CIG & Co., filed as Exhibit 10.9.
10.10 (7) Amendment No. 3 to the Incentive Stock Plan.
10.11 (7) Amendment No. 1 to the Outside Director Stock Option
Plan.
27 (7) Financial Data Schedule.
--------------------------------------------------------------------------------
References:
Previously filed as an exhibit to and incorporated by reference from:
(1) Form S-1, Registration No. 33-82978, effective October 28, 1994.
(2) Form 10-K for the year ended December 31, 1998.
(3) Form 10-Q for the quarter ended June 30, 1999.
(4) Form 8-K for the event dated November 16, 1999.
(5) Schedule 14A, filed April 13, 2000.
(6) Form 10-Q for the quarter ended June 30, 2000.
(7) Filed herewith.
(b) One Form 8-K was filed on August 9, 2000, with respect to the
completion of the acquisition of a 10% membership interest in Transplace.com,
L.L.C.
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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, 2000 /s/ Joey B. Hogan
-----------------
Joey B. Hogan
Treasurer and Chief Financial Officer
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