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 June 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 (July 20, 2000).
Class A Common Stock, $.01 par value: 11,645,350 shares
Class B Common Stock, $.01 par value: 2,350,000 shares
Exhibit Index is on Page 14
<PAGE>
PART I
FINANCIAL INFORMATION
Page Number
Item 1. Financial statements
Condensed Consolidated Balance Sheets as of December 31,1999
and June 30, 2000 (Unaudited) 3
Condensed Consolidated Statements of Income for the three and
six months ended June 30, 1999 and 2000 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows for the six months
ended June 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 12
PART II
OTHER INFORMATION
Page Number
Item 1. Legal Proceedings 14
Items 2 and 3. Not applicable 14
Item 4. Submission of Matters to a vote of Security Holders 14
Item 5. Not applicable 14
Item 6. Exhibits and reports on Form 8-K 14
2
<PAGE>
<TABLE>
<CAPTION>
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
December 31,1999 June 30, 2000
(unaudited)
--------------------- -----------------
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents $1,046 $ 1,061
Accounts receivable, net of allowance of $1,040 in 1999 and
$1,112 in 2000 75,038 71,998
Drivers' advances and other receivables 9,295 9,070
Tire and parts inventory 3,046 3,189
Prepaid expenses 9,567 13,000
Deferred income taxes 1,310 1,266
----------------- -----------------
Total current assets $ 99,302 $ 99,585
Property and equipment, at cost 349,672 353,978
Less accumulated depreciation and amortization 80,638 94,339
----------------- -----------------
Net property and equipment 269,034 259,639
Other 15,638 15,612
----------------- -----------------
Total assets $ 383,974 $ 374,835
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Checks outstanding in excess of bank balances $ 3,599 $ 3,498
Current maturities of long-term debt 4,218 1,359
Accounts payable 7,260 6,685
Accrued expenses 17,136 17,907
----------------- -----------------
Total current liabilities 32,211 29,449
Long-term debt, less current maturities 140,497 135,008
Deferred income taxes 47,412 48,014
----------------- -----------------
Total liabilities 220,120 212,471
Stockholders' equity:
Class A common stock, $.01 par value; 20,000,000 shares authorized;
12,564,250 and 11,774,850 shares issued and outstanding as of 1999 and 126 118
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 78,343
Treasury stock (6,442)
Retained earnings 85,389 90,321
----------------- -----------------
Total stockholders' equity 163,852 162,364
----------------- -----------------
Total liabilities and stockholders' equity $ 383,974 $ 374,835
================= =================
</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 SIX MONTHS ENDED JUNE 30, 1999 AND 2000
(In thousands except per share data)
Three months ended June 30, Six months ended June 30,
(unaudited) (unaudited)
---------------------------------- --------------------------------
1999 2000 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue $ 113,211 $ 139,398 $ 210,975 $ 265,879
Operating expenses:
Salaries, wages, and related expenses 48,320 60,943 93,156 114,888
Fuel, oil, and road expenses 20,484 23,322 37,821 44,334
Revenue equipment rentals and
purchased transportation 10,924 19,360 19,085 38,079
Repairs 2,431 3,049 4,374 6,057
Operating taxes and licenses 2,750 3,513 5,157 6,798
Insurance 2,854 3,645 5,648 7,021
General supplies and expenses 5,776 8,199 11,361 15,638
Depreciation and amortization,
including gain on disposal of equipment 8,560 10,102 16,531 20,112
---------------- -------------- -------------- -------------
Total operating expenses 102,099 132,133 193,133 252,927
---------------- -------------- -------------- -------------
Operating income 11,112 7,265 17,842 12,952
Interest expense 1,225 2,436 2,525 4,740
---------------- -------------- -------------- -------------
Income before income taxes 9,887 4,829 15,317 8,212
Income tax expense 3,955 1,929 6,136 3,280
---------------- -------------- -------------- -------------
Net income $ 5,932 $ 2,900 $ 9,181 $ 4,932
================ ============== ============== =============
Basic earnings per share $ 0.40 $ 0.20 $ 0.62 $ 0.33
Diluted earnings per share $ 0.40 $ 0.20 $ 0.61 $ 0.33
Weighted average shares outstanding 14,912 14,785 14,912 14,851
Adjusted weighted average shares and assumed
conversions outstanding 14,966 14,790 15,015 14,869
</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 SIX MONTHS ENDED JUNE 30, 1999 AND 2000
(In thousands)
Six months ended June 30,
(unaudited)
--------------------------------------------
1999 2000
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 9,181 $ 4,932
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for losses on receivables 149 144
Depreciation and amortization 16,715 21,967
Deferred income tax expense 1,547 646
Gain on disposition of property and equipment (184) (1,855)
Changes in operating assets and liabilities:
Receivables and advances (785) 837
Prepaid expenses (2,347) (3,432)
Tire and parts inventory (578) (143)
Accounts payable and accrued expenses 4,821 2,176
------------------ -----------------
Net cash flows provided by operating activities 28,520 25,272
Cash flows from investing activities:
Acquisition of property and equipment (43,697) (39,989)
Acquisition of company stock - (6,450)
Proceeds from disposition of property and equipment 25,592 29,711
------------------ -----------------
Net cash flows used in investing activities (18,105) (16,728)
Cash flows from financing activities:
Changes in checks outstanding in excess of bank
balances 833 (101)
Deferred costs - (111)
Exercise of stock option 20 30
Proceeds from issuance of long-term debt 25,000 21,000
Repayments of long-term debt (38,431) (29,347)
------------------ -----------------
Net cash flows used in financing activities (12,578) (8,529)
------------------ -----------------
Net change in cash and cash equivalents (2,163) 15
Cash and cash equivalents at beginning of period 2,926 1,046
------------------ -----------------
Cash and cash equivalents at end of period $ 763 $ 1,061
================== =================
</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 Six months ended
June 30, June 30,
1999 2000 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Net Income $5,932 $ 2,900 $ 9,181 $4,932
Denominator:
Denominator for basic earnings
per share - weighted-average shares 14,912 14,785 14,912 14,851
Effect of dilutive securities:
Employee stock options 54 5 103 18
----------- ----------- ----------- -----------
Denominator for diluted earnings per share -
adjusted weighted-average shares and assumed 14,966 14,790 15,015 14,869
conversions
=========== =========== =========== ===========
Basic earnings per share $ .40 $ .20 $ .62 $ .33
=========== =========== =========== ===========
Diluted earnings per share $ .40 $ .20 $ .61 $ .33
=========== =========== =========== ===========
</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 June 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 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.
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, and
as of July 27, 2000 a total of 971,500 had been purchased with an average
price of $8.17. The stock repurchase program has no expiration date.
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 26.0%, to $265.9 million in the six months ended
June 30, 2000, from $211.0 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. In October 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. 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 3.1% of revenue from 7.3% of revenue,
and the Company's net income decreased approximately 46.3%, to $4.9 million for
the six months ended June 30, 2000, from $9.2 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 is continuing to grow its owner-operator fleet and finance equipment
under operating leases. As of June 30, 2000, the Company had contracted with
approximately 503 owner-operators as compared to approximately 249 at June 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 June 30, 2000, the Company had
financed approximately 771 tractors and 1,059 trailers under operating leases as
compared to 622 tractors and 69 trailers under operating leases as of June 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 a company called 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 million in net brokerage received on an annualized basis.
8
<PAGE>
The following table sets forth the percentage relationship of certain items to
revenue:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 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 42.7 43.7 44.2 43.2
Fuel, oil, and road expenses 18.1 16.7 17.9 16.7
Revenue equipment rentals and purchased
transportation 9.6 13.9 9.0 14.3
Repairs 2.1 2.2 2.1 2.3
Operating taxes and licenses 2.4 2.5 2.4 2.6
Insurance 2.5 2.6 2.7 2.6
General supplies and expenses 5.1 5.9 5.4 5.9
Depreciation and amortization 7.6 7.2 7.8 7.6
----------- ----------- ------------ -----------
Total operating expenses 90.2 94.8 91.5 95.1
----------- ----------- ------------ -----------
Operating income 9.8 5.2 8.5 4.9
Interest expense 1.1 1.7 1.2 1.8
----------- ----------- ------------ -----------
Income before income taxes 8.7 3.5 7.3 3.1
Income tax expense 3.5 1.4 2.9 1.2
----------- ----------- ------------ -----------
Net income 5.2% 2.1% 4.4% 1.9%
=========== =========== ============ ===========
</TABLE>
COMPARISON OF THREE MONTHS ENDED JUNE 30, 2000 TO THREE MONTHS ENDED JUNE 30,
1999
Revenue increased $26.2 million (23.1%), to $139.4 million in the 2000 period
from $113.2 million in the 1999 period. The revenue increase was primarily
generated by a 35.4% increase in weighted average tractors, to 3,766 during the
2000 period from 2,782 during the 1999 period. Most of the increase came from
the acquisitions of Harold Ives Trucking Co. and ATW. The Company also raised
its average revenue per loaded mile approximately $0.05 per mile versus the 1999
period. The Company's growth was partially offset by an 11.0% decrease in
revenue per tractor per week to $2,818 in the 2000 quarter from $3,167 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 $12.6 million (26.1%), to $60.9
million in the 2000 period from $48.3 million in the 1999 period. As a
percentage of revenue, salaries, wages, and related expenses increased to 43.7%
in the 2000 period from 42.7% in the 1999 period. Driver wages as a percentage
of revenue remained constant at 30.8% in the 2000 period and in the 1999 period.
A driver wage increase 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 experienced an increase in non-driving
employee payroll expense to 5.9% of revenue in the 2000 period from 5.7% 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 its logistics business into Transplace.com,
Covenant will no longer operate its own transportation logistics or brokerage
business. The Company will not bear the expense of compensating the Terminal
Truck Broker, Inc. employees in future periods.
Fuel, oil, and road expenses increased $2.8 million (13.8%), to $23.3 million in
the 2000 period from $20.5 million in the 1999 period. As a percentage of
revenue, fuel, oil, and road expenses decreased to 16.7% of revenue in the 2000
period from 18.1% in the 1999 period. Fuel costs increased approximately 29% per
gallon in the second quarter of 2000 versus the second quarter of 1999. 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 number of gallons and the price of fuel
that was hedged for the second quarter of 2000, will remain constant for the
third and fourth quarters of 2000.
Revenue equipment rentals and purchased transportation increased $8.4 million
(77.2%), to $19.4 million in the 2000 period from $10.9 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 9.6% 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 513 in the 2000 period compared to 249 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-
9
<PAGE>
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 June 30, 2000, the Company had financed
approximately 771 tractors and 1,059 trailers under operating leases as compared
to 622 tractors and 69 trailers under operating leases as of June 30, 1999.
Repairs increased approximately $0.6 million (25.4%), to $3.0 million in the
2000 period from $2.4 million in the 1999 period. As a percentage of revenue,
repairs remained essentially constant at 2.2% in the 2000 period and 2.1% in the
1999 period.
Operating taxes and licenses increased approximately $0.8 million (27.7%), to
$3.5 million in the 2000 period from $2.8 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 $0.8 million (27.7%), to $3.6
million in the 2000 period from $2.9 million in the 1999 period. As a percentage
of revenue, insurance remained essentially constant at 2.6% in the 2000 period
and 2.5% in the 1999 period.
General supplies and expenses, consisting primarily of driver recruiting,
communications, and facilities expenses, increased $2.4 million (41.9%), to $8.2
million in the 2000 period from $5.8 million in the 1999 period. As a percentage
of revenue, general supplies and expenses increased to 5.9% in the 2000 period
from 5.1% 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 $1.5 million (18.0%), to $10.1 million in the 2000 period
from $8.6 million in 1999 period. As a percentage of revenue, depreciation and
amortization decreased to 7.2% in the 2000 period from 7.6% in the 1999 period
as the result of several factors. The Company utilized more owner-operators,
leased more revenue equipment through operating leases, and entered into a sale
leaseback agreement that resulted in a $1.1 million gain on sale of equipment.
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 $1.2 million (98.9%), to $2.4 million in the 2000
period from $1.2 million in the 1999 period. As a percentage of revenue,
interest expense increased to 1.7% 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 of ATW and Harold Ives, as well as higher interest rates.
As a result of the foregoing, the Company's pretax margin decreased to 3.5% in
the 2000 periods from 8.7% in the 1999 period.
The Company's effective tax rate remained essentially constant at 39.9% in the
2000 period and 40.0% in the 1999 period.
Primarily as a result of the factors described above, net income decreased $3.0
million (51.1%), to $2.9 million in the 2000 period (2.1% of revenue) from $5.9
million in the 1999 period (5.2% of revenue).
COMPARISON OF SIX MONTHS ENDED JUNE 30, 2000 TO SIX MONTHS ENDED JUNE 30, 1999
Revenue increased $54.9 million (26.0%), to $265.9 million in the 2000 period
from $211.0 million in the 1999 period. The revenue increase was primarily
generated by a 35.2% increase in weighted average tractors, to 3,680 during the
2000 period from 2,722 during the 1999 period. Most of the increase came from
the acquisitions of Harold Ives Trucking Co. and ATW. The Company also raised
its average revenue per loaded mile by approximately $0.05 per mile versus the
1999 period. The Company's growth was partially offset by an 8.8% decrease in
revenue per tractor per week to $2,749 in the 2000 period from $3,015 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 $21.7 million (23.3%), to $114.9
million in the 2000 period from $93.2 million in the 1999 period. As a
percentage of revenue, salaries, wages, and related expenses decreased to 43.2%
in the 2000 period from 44.2% in the 1999 period. Driver wages as a percentage
of revenue decreased to 30.2% in the 2000 period from 31.7% 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 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
10
<PAGE>
to 6.3% 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 its logistics business into Transplace.com, Covenant will no longer
operate its own transportation logistics or brokerage business. The Company will
not bear the expense of compensating the Terminal Truck Broker, Inc. employees
in future periods.
Fuel, oil, and road expenses increased $6.5 million (17.2%), to $44.3 million in
the 2000 period from $37.8 million in the 1999 period. As a percentage of
revenue, fuel, oil, and road expenses decreased to 16.7% of revenue in the 2000
period from 17.9% in the 1999 period. Fuel costs increased approximately 38% per
gallon in the first half of 2000 versus the first half of 1999. This increase
was 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 number of gallons of fuel that was subject to
hedging contracts was higher in the first quarter of this period than in the
second quarter. 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 $19.0 million
(99.5%), to $38.1 million in the 2000 period from $19.1 million in the 1999
period. As a percentage of revenue, revenue equipment rentals and purchased
transportation increased to 14.3% in the 2000 period from 9.0% 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 573 in the 2000 period compared to 218 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 June 30, 2000, the Company had
financed approximately 771 tractors and 1,059 trailers under operating leases as
compared to 622 tractors and 69 trailers under operating leases as of June 30,
1999.
Repairs increased approximately $1.7 million (38.5%), to $6.1 million in the
2000 period from $4.4 million in the 1999 period. As a percentage of revenue,
repairs increased to 2.3% in the 2000 period from 2.1% in the 1999 period. The
increase was primarily the result of an increase in the number of tractors and
trailers available for routine maintenance during the first quarter of 2000.
Operating taxes and licenses increased approximately $1.6 million (31.8%), to
$6.8 million in the 2000 period from $5.2 million in the 1999 period. As a
percent of revenue, operating taxes and licenses remained essentially constant
at 2.6% 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 $1.4 million (24.3%), to $7.0
million in the 2000 period from $5.6 million in the 1999 period. As a percentage
of revenue, insurance remained essentially constant at 2.6% in the 2000 period
and 2.7% in the 1999 period.
General supplies and expenses, consisting primarily of driver recruiting,
communications, and facilities expenses, increased $4.3 million (37.6%), to
$15.6 million in the 2000 period from $11.4 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 $3.6 million (21.7%), to $20.1 million in the 2000 period
from $16.5 million in 1999 period. As a percentage of revenue, depreciation and
amortization decreased to 7.6% in the 2000 period from 7.8% in the 1999 period
as a result of several factors. The Company utilized more owner-operators,
leased more revenue equipment through operating leases, and the Company
recognized a $1.9 million gain on sale of equipment due to the sale of trailers
in the first quarter and a sale leaseback transaction in the second quarter.
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 $2.2 million (87.7%), to $4.7 million in the 2000
period from $2.5 million in the 1999 period. As a percentage of revenue,
interest expense increased to 1.8% 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 of ATW and Harold Ives, as well as higher interest rates.
As a result of the foregoing, the Company's pretax margin decreased to 3.1% in
the 2000 periods from 7.3% in the 1999 period.
The Company's effective tax rate remained essentially constant at 39.9% in the
2000 period and 40.1% in the 1999 period.
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<PAGE>
Primarily as a result of the factors described above, net income decreased $4.2
million (46.3%), to $4.9 million in the 2000 period (1.9% of revenue) from $9.2
million in the 1999 period (4.4% 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 June 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 $25.3 million in the 2000 period and $28.5 million in
the 1999 period. The decrease in the 2000 period resulted primarily from a lower
net income and accounts payable and accrued expenses.
Net cash used in investing activities was $16.7 million and $18.1 million in the
2000 and 1999 periods, respectively. Investing activity was primarily to acquire
additional revenue equipment as the Company expanded its operations and to
repurchase company stock. The Company expects to spend no more than $25.0
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 $40.0 million excluding operating leases
and the effect of any potential acquisitions.
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, and as of July 27, 2000 a total of
971,500 had been purchased with an average price of $8.17. The stock repurchase
program has no expiration date.
Net cash used in financing activities was $8.5 million and $12.6 million in the
2000 and 1999 periods, respectively. At June 30, 2000, the Company had
outstanding debt of $136.4 million, primarily consisting of approximately $104.0
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,
$3.9 million in term equipment financing, and $0.5 million in notes related to
non-compete agreements. Interest rates on this debt range from 5.9% 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 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 June 30, 2000, the margin was 0.70%.
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 June 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.
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<PAGE>
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 second
quarter of 2000, the national average price of diesel fuel as provided by the
U.S. Department of Energy was $1.432 as compared to $1.087 per gallon at the end
of the second 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 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 second quarter of 2000,
diesel fuel expenses represented 14.7% of the Company's total operating expenses
and 14.0% of total revenue. The Company uses purchase commitments through
suppliers, to reduce a portion of its exposure to fuel price fluctuations. At
June 30, 2000, the national average price of diesel fuel as provided by the U.S.
Department of Energy was $1.432 per gallon. At June 30, 2000, the notional
amount for purchased commitments for the remainder of 2000 was 4.5 million
gallons. At June 30, 2000, the price of the notional 4.5 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 June 30, 2000. At June 30,
2000, a ten percent change in the price of fuel would increase or decrease the
gain on fuel purchase commitments by approximately $0.6 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
June 30, 2000, the Company had drawn $104.0 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
$1.0 million on an annualized basis.
The remaining $32.4 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.
13
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
None
Items 2 and 3 Not applicable
Item 4 Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of Covenant Transport, Inc. was held
on May 18, 2000, for the purpose of (a) electing seven directors for one-year
terms, (b) ratification of the selection of PricewaterhouseCoopers LLP as
independent certified public accounts for the Company, and (c) approval of the
Company's Outside Director Stock Option Plan. Proxies for the meeting were
solicited pursuant to Section 14(a) of the Securities Exchange Act of 1934, and
there was no solicitation in opposition to management's nominees. Each of
management's nominees for director as listed in the Proxy Statement was elected.
The voting tabulation on the election of directors was as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Shares Voted Shares Voted Shares Voted
"FOR" "AGAINST" "ABSTAIN"
David R. Parker 9,557,317 0 79,674
Michael W. Miller 9,555,910 0 81,081
R. H. Lovin, Jr. 9,556,470 0 80,521
Mark A. Scudder 9,555,530 0 81,461
William T. Alt 9,363,598 0 273,393
Hugh O. Maclellan, Jr. 9,556,815 0 80,176
Robert E. Bosworth 9,556,798 0 80,193
</TABLE>
The voting tabulation on the selection of accountants was "FOR"
9,625,165; "AGAINST" 2,800; and "ABSTAIN" 9,026.
The voting tabulation on approving the Company's Outside Director Stock
Option Plan was "FOR" 7,854,491; "AGAINST" 1,762,008; and "ABSTAIN" 20,492.
Item 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.
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<PAGE>
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.
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.
27 (6) 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 September 30, 1999.
(4) Form 8-K for the event dated November 16, 1999.
(5) Schedule 14A, filed April 13, 2000.
(6) Filed herewith.
(b) No reports on Form 8-K have been filed during the quarter for which
this report is filed.
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: August 10, 2000 /s/ Joey B. Hogan
-----------------
Joey B. Hogan
Treasurer and Chief Financial Officer
15
