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CVTI > SEC Filings for CVTI > Form 10-K on 28-Mar-2013All Recent SEC Filings

Show all filings for COVENANT TRANSPORTATION GROUP INC | Request a Trial to NEW EDGAR Online Pro



Annual Report


Cautionary Note Regarding Forward-Looking Statements

Item 7, as well as other items of this Annual Report, contains certain
statements that may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and such statements are subject to the safe harbor created by those sections and the Private Securities Litigation Reform Act of 1995, as amended. All statements, other than statements of historical or current fact, are statements that could be deemed forward-looking statements, including without limitation: any projections of earnings, revenues, or other financial items; any statement of plans, strategies, and objectives of management for future operations; any statements concerning proposed new services or developments; any statements regarding future economic conditions or performance; and any statements of belief and any statements of assumptions underlying any of the foregoing. Such statements may be identified by their use of terms or phrases such as "believe," "may," "could," "expects," "estimates," "projects," "anticipates," "plans," "intends," and similar terms and phrases. Forward-looking statements are based on currently available operating, financial, and competitive information. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, which could cause future events and actual results to differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section entitled "Item 1A. Risk Factors," set forth above. Readers should review and consider the factors discussed in "Item 1A. Risk Factors," along with various disclosures in our press releases, stockholder reports, and other filings with the Securities and Exchange Commission.

All such forward-looking statements speak only as of the date of this Annual Report. You are cautioned not to place undue reliance on such forward-looking statements. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in the events, conditions, or circumstances on which any such statement is based.


Solid execution of our plan contributed to enhanced asset productivity and our best financial performance since 2003. Key factors in the improvement were improved network yields, a higher percentage of seated trucks, and a higher team-driven truck fleet both overall and as a percentage of the fleet. Our sales, operations, and driving personnel improved their execution of the business, and we allocated capital to maintain or grow our capacity in our expedited and refrigerated service offerings, while reducing capacity in our dedicated and regional service offerings. Also, all significant problems associated with the Covenant Transport conversion to the new enterprise management system in the third quarter of 2011 were addressed by the end of January 2012 and efficiencies from the new system began to be realized in 2012.

Compared to the year ended December 31 2011, our asset-based division's revenue, excluding fuel surcharge revenue, increased 3.7% due to an 8.3% increase in average freight revenue per tractor per week, offset by a 4.4% decrease in average tractors. Our miles per truck were up 2.0% as compared to 2011, while average freight revenue per total mile was up 8.9 cents per mile or 6.4%. These improvements more than overcame higher operating costs.

Additional items of note for the year ended December 31, 2012 include the following:

Operating income was $23.2 million, compared with an operating loss of $1.1 million for 2011. Operating income in 2012 included a $2.4 million gain on disposition of real estate, a $4.0 million benefit from commutation of an insurance policy, and a $3.1 million gain on fuel hedging. Operating loss in 2011 included an $11.5 million charge for goodwill impairment and a $1.9 million gain on fuel hedging;
Net income was $6.1 million, or $0.41 per basic and diluted share, compared with net loss of $14.3 million, or ($0.97) per basic and diluted share, for 2011. Net loss for 2011 included pre-tax non-cash goodwill impairment charges of $11.5 million, or ($0.64) per share;
Since December 31, 2011, aggregate lease-adjusted indebtedness (which includes the present value of off-balance sheet lease obligations), net of cash, decreased by approximately $54.5 million to $242.4 million;
Stockholders' equity at December 31, 2012, was $94.7 million and our tangible book value was $94.1 million, or $6.38 per basic share; and
Our equity investment in TEL provided $1.9 million of pre-tax earnings in 2012 compared to $0.7 million for the seven months ended December 31, 2011.

During 2013, we intend to continue our emphasis on (i) allocation of assets towards service offerings with better returns on invested capital, such as refrigerated and expedited/high-value team operations, (ii) increasing our use of owner-operators, (iii) coordinating efforts among all of our operating companies, (iv) reducing leverage, and (v) improving our drivers' employment experience.

While the pace of economic growth remains uncertain and the driver market is extremely tight, we believe the trucking economy's freight demand and capacity remain closely in balance. Regulatory issues, increasing costs and the tight driver market pose substantial challenges to the trucking industry. These factors also have limited trucking capacity to an extent that yield improvements have been and should continue to be available in markets with solid demand to carriers with excellent customer service. We believe a combination of these company-specific initiatives and steady improvement in the overall economic and freight environments will afford us the opportunity for continued year-over-year improvements in profitability and stockholder value. Headwinds for 2013 include a small number of significant claims incurred early in 2013, the sale of real estate in the first quarter of 2012 that provided a $2.4 million gain, and the commutation of an insurance policy in the second quarter of 2012 that provided a benefit of $4.0 million to insurance and claims, net of $0.5 million in reserves established on claims previously covered by the policy becoming our responsibility when the policy was commuted. As a result, we expect earnings comparisons in the first half of 2013 to be negative compared with 2012, then becoming positive in the second half of 2013.

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The following table sets forth the percentage relationship of certain items to total revenue and freight revenue:

                   2012          2011           2010                           2012          2011           2010

                                                          Freight revenue
Total revenue        100.0 %       100.0 %        100.0 %       (1)              100.0 %       100.0 %        100.0 %
Operating                                                 Operating
expenses:                                                 expenses:
wages, and                                                Salaries, wages,
related                                                   and related
expenses              32.2          32.3           33.2   expenses                41.0          41.2           39.6
Fuel expense          28.9          32.0           27.3   Fuel expense (1)         9.4          13.3           13.5
Operations and                                            Operations and
maintenance            6.7           6.7            6.5   maintenance              8.5           8.5            7.7
Revenue                                                   Revenue
equipment                                                 equipment
rentals and                                               rentals and
purchased                                                 purchased
transportation        12.6           9.7           11.0   transportation          16.1          12.4           13.1
taxes and                                                 Operating taxes
licenses               1.7           1.9            1.7   and licenses             2.1           2.4            2.0
Insurance and                                             Insurance and
claims                 5.0           5.5            5.0   claims                   6.4           7.1            6.0
Communications                                            Communications
and utilities          0.7           0.8            0.8   and utilities            0.9           1.0            0.9
supplies and                                              General supplies
expenses               2.4           2.4            2.5   and expenses             3.0           3.0            2.9
  amortization                                            Depreciation and
(2)                    6.4           7.1            8.0   amortization (2)         8.2           9.0            9.5
Goodwill                                                  Goodwill
impairment (3)           -           1.8              -   impairment (3)             -           2.3              -
operating                                                 Total operating
expenses              96.6         100.2           96.0   expenses                95.6         100.2           95.2
Operating                                                 Operating income
income (loss)          3.4          (0.2 )          4.0   (loss)                   4.4          (0.2 )          4.8
Other expense,                                            Other expense,
net                    1.9           2.5            2.5   net                      2.4           3.1            3.0
Equity in
income of                                                 Equity in income
affiliate              0.3           0.1              -   of affiliate             0.3           0.1              -
Income (loss)                                             Income (loss)
before income                                             before income
taxes                  1.8          (2.6 )          1.5   taxes                    2.3          (3.2 )          1.8
Income tax                                                Income tax
expense                                                   expense
(benefit)              0.9          (0.3 )          1.0   (benefit)                1.2          (0.4 )          1.2
Net income                                                Net income

(loss) 0.9 % (2.2 )% 0.5 % (loss) 1.1 % (2.8 )% 0.6 %

(1) Freight revenue is total revenue less fuel surcharges. In this table, fuel surcharges are eliminated from revenue and subtracted from fuel expense. The amounts were $145.2 million, $140.6 million, and $103.4 million in 2012, 2011, and 2010, respectively.
(2) Includes a gain on the sale of property and equipment totaling $4.9 million, $6.7 million, and $4.3 million in 2012, 2011, and 2010, respectively.
(3) Represents an $11.5 million non-cash impairment charge to write off the remaining goodwill in our truckload segment associated with several acquisitions that we made prior to 2001.

Comparison of Year Ended December 31, 2012 to Year Ended December 31, 2011

For the year ended December 31, 2012, total revenue increased $21.7 million, or 3.3%, to $674.3 million from $652.6 million in 2011. Freight revenue increased $17.1 million, or 3.3%, to $529.1 million in the year ended December 31, 2012, from $512.0 million in 2011. The increase resulted from an $18.2 million increase in freight revenue from our Truckload segment, while our Solutions segment's freight revenue decreased $1.1 million. Fuel surcharge revenue increased $4.6 million, or 3.3%, to $145.2 million at December 31, 2012, from $140.6 million at December 31, 2011.

The increase in Truckload freight revenue relates to an increase in average freight revenue per tractor per week to $3,322 during the 2012 period from $3,069 during the 2011 period. Average freight revenue per total mile increased by 8.9 cents per mile, or 6.4%, compared to the 2011 period, while average miles per unit increased by 2.0%. Rates have continued to increase as a result of increases required to offset increasing costs, including driver pay, and supply and demand dynamics. The main factors favorably impacting utilization were the percentage of our fleet which was manned, the percentage of our fleet comprised of team-driven tractors, and overcoming certain inefficiencies that resulted from the system implementation at our Covenant Transport subsidiary in the second half of 2011. These increases were partially offset by a 4.4% decrease of our average tractor fleet. Revenue and rates were positively impacted in the third and fourth quarters of 2012 as a result of project work related to hurricane Isaac and super storm Sandy. Revenue specific to these disasters was approximately $3.0 million and our rates were positively impacted by approximately 2.0 cents per mile for the second half of 2012.

The decrease in Solutions' revenue related primarily to a special project in 2011, where Solutions handled the nationwide launch of Allegra to the over-the-counter market, and the loss of a large agent in January 2012.

For comparison purposes in the discussion below, we use freight revenue (total revenue less fuel surcharge revenue) when discussing changes as a percentage of revenue. We believe removing this sometimes volatile source of revenue affords a more consistent basis for comparing the results of operations from period-to-period.

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Salaries, wages, and related expenses
Salaries, wages, and related expenses as a percentage of freight revenue declined as compared to the 2011 period. This decline is primarily related to the increase in the percentage of our fleet comprised of independent contractors, since they generate a similar amount of revenue per truck, while the payments to them are included in the purchased transportation line item. Driver pay increased approximately 2.6 cents per company tractor mile due to driver pay adjustments and the fixed nature of certain of our pay to student drivers and other driver incentives. Non-driver wages have also increased as a result of incentive compensation tied to our results of operations. Workers' compensation expense was higher in 2012 at 2.8 cents per company mile, compared to 2.6 cents in 2011, as a result of adverse claims development. We expect driver pay may further increase per company mile as we look to reduce the number of unseated trucks in our fleet and given the tight market for drivers. We are continuing our objective of growing our independent contractor fleet as a percentage of our total fleet. Increasing independent contractor capacity has shifted (and assuming all other factors remain equal, is expected to continue to shift) expenses to the purchased transportation line item with offsetting reductions in employee driver wages and related expenses, net of fuel (as independent contractors generate fuel surcharge revenue, while the related cost of their fuel is included with their compensation in purchased transportation), maintenance, and capital costs.

Fuel expense
Fuel expense as a percentage of freight revenue decreased as compared to the 2011 period. This decline is primarily related to the increase in the percentage of our fleet comprised of independent contractors, since they generate a similar amount of revenue per truck, while the cost of their fuel is included in the amounts paid to them as purchased transportation, discussed below. We receive a fuel surcharge on our loaded miles from most shippers; however, this does not cover the entire increase in fuel prices for several reasons, including the following: surcharges cover only loaded miles; surcharges do not cover miles driven out-of-route by our drivers; and surcharges typically do not cover refrigeration unit fuel usage or fuel burned by tractors while idling. Moreover, most of our shipments obtained from freight brokers did not carry a fuel surcharge. Finally, fuel surcharges vary in the percentage of reimbursement offered, and not all surcharges fully compensate for fuel price increases even on loaded miles.

The rate of fuel price increases also can have an impact on results. Most fuel surcharges are based on the average fuel price as published by the DOE for the week prior to the shipment, meaning we typically bill customers in the current week based on a previous week's applicable index. Therefore, in times of increasing fuel prices, we do not recover as much as we are currently paying for fuel. In periods of declining prices, the opposite is true. The DOE's national average cost of diesel fuel increased 13.2 cents per gallon (or 3.4%) in 2012, compared with 2011. Although fuel prices were higher in 2012, a combination of better fuel surcharge recovery, higher miles per gallon, and more gains from hedging resulted in 3.0 cents per company mile decrease in our per mile cost of fuel, net of company truck fuel surcharge compared with 2011.

Additionally, a $3.1 million gain was reclassified from accumulated other comprehensive income to results of operations, as a reduction in fuel expense, during the year ended December 31, 2012 related to gains on contracts that expired or were sold and for which we completed the transaction by purchasing the hedged diesel fuel. Our fuel hedging program provided for a $1.9 million reduction in fuel expense during 2011.

We expect to continue managing our idle time and truck speeds, investing in more fuel-efficient tractors to improve our fuel miles per gallon, locking in fuel hedges when deemed appropriate, and negotiating with customers to adjust fuel surcharge programs that are inadequate to recover a fair portion of rising fuel costs. Going forward, our net fuel expense is expected to fluctuate as a percentage of revenue based on factors such as diesel fuel prices, percentage recovered from fuel surcharge programs, percentage of uncompensated miles, percentage of revenue generated by independent contractors, percentage of revenue generated by team-driven tractors (which tend to generate higher miles and lower revenue per mile, thus proportionately more fuel cost as a percentage of revenue), percentage of revenue generated by refrigerated operation (which use diesel fuel for refrigeration but usually do not recover fuel surcharges on refrigeration fuel), and the success of fuel efficiency initiatives.

Revenue equipment rentals and purchased transportation The increase in revenue equipment rentals and purchased transportation as a percentage of freight revenue in 2012 from 2011 was a result of a $15.8 million increase in payments to independent contractors and a $4.7 million increase in tractor and trailer equipment rental expense. For the period ended December 31, 2012, miles run by independent contractors increased to 8.7% of our total miles from 5.4% for the same period of 2011. We financed approximately 607 tractors and 3,816 trailers under operating leases at December 31, 2012, compared with 350 tractors and 4,363 trailers under operating leases at December 31, 2011. In the last year, we have reduced our trailer fleet in order to better match our current number of tractors. The increase in payments to independent contractors in 2012 from 2011 is mainly due to an increase in the size of the independent contractor fleet and the increase in fuel surcharges passed through that are a component of the related expense. We expect this expense category to fluctuate with the number of loads hauled by independent contractors and handled by Solutions and the percentage of our fleet financed with operating leases, as well as the amount of fuel surcharge revenue passed through to the independent contractors and third-party carriers. If capacity remains tight, we believe we may need to increase the amounts we pay to independent contractors and third-party transportation providers, which could increase this expense category as a percentage of freight revenue absent an offsetting increase in revenue. Additionally, we are actively recruiting independent contractors, and, as such, we expect the percentage of independent contractors in our fleet to grow in 2013.

Operating taxes and licenses
Operating taxes and licenses decreased in the aggregate and as a percentage of freight revenue due to the reduction in the average tractor count by 134 units when comparing 2012 to 2011, including the addition of an average of approximately 84 additional owner operator units since the end of 2011. The combination provides for approximately 218 fewer company units on which taxes and licenses are due, while freight revenue increased 3.3% as a result of higher rates and utilization. Additionally, the fluctuation is the result of the costs having a high fixed component.

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Insurance and claims
Insurance and claims, consisting primarily of premiums and deductible amounts for liability, physical damage, and cargo damage insurance and claims, decreased in the 2012 period when compared to the 2011 period as a percentage of freight revenue. Insurance and claims per mile cost decreased to 9.8 cents per mile in the 2012 period from approximately 10.0 cents per mile in the 2011 period, primarily due to a credit of $4.0 million of previously expensed premium from our commutation of the April 1, 2011 through March 31, 2012 policy for our primary auto liability insurance. By commuting the policy, we received a credit of a portion of the premium in exchange for taking responsibility for the full amount of claims formerly covered by the policy, which exposes us to additional risk. As a result of a few large accidents during the policy that runs from April 1, 2012 to March 31, 2013, management believes the possibility of commuting the current policy to be remote and as such we expect insurance and claims cost to be higher on a per mile basis in 2013 than 2012. With our significant self-insured retention, insurance and claims expense may fluctuate significantly from period-to-period, and any increase in frequency or severity of claims could adversely affect our financial condition and results of operations.

Depreciation and amortization
Depreciation and amortization is affected by several items, such as the percentage of our fleet that is owned versus leased or obtained from independent contractors, the gain or loss on disposition of assets, and the values and useful lives of owned assets. Depreciation, consisting primarily of depreciation of revenue equipment and excluding gains and losses, decreased $4.9 million in 2012 from 2011, primarily because owned tractors decreased by 387 due to the use of operating leases and independent contractors. This was partially offset by increased cost of new tractors. Gains on the disposal of property and equipment, totaling $4.9 million in 2012, including a $2.4 million gain on the sale of a terminal, were $1.8 million lower than 2011 due to fewer units being sold and the used equipment market being less robust in 2012. While we expect continued gains on the sale of our used equipment, assuming no significant changes in the macroeconomic environment and the related supply and demand of used equipment, such gains for 2013 are expected to be lower than 2012.

Goodwill impairment
Based upon a combination of factors that occurred in the third quarter of 2011, including a significant decline in our market capitalization below our book value, a reduction in year-over-year earnings as a result of deterioration in the macro-economic environment and the market segments in which we operate, reductions in current and forecasted earnings estimates, and the need to amend our Credit Facility to remain in compliance with our financial covenants, we deemed that there had been multiple triggering events that would require an update to the Company's annual goodwill impairment analysis as of September 30, 2011. This updated analysis provided that the carrying value of both reporting units exceeded their fair values. As a result of the second step of the goodwill impairment analysis, which involves calculating the implied fair value of each reporting unit's goodwill by allocating the fair value of all of its assets and liabilities other than goodwill (including both recognized and unrecognized intangible assets), and comparing the residual amount to the carrying value of goodwill, we determined that the carrying value of both reporting units exceeded the fair value. The non-cash goodwill impairment charge amounted to $11.5 million ($9.4 million, net of a $2.1 million income tax benefit) to write off the remaining goodwill associated with several acquisitions that were made prior to 2001. Following this impairment charge, as of September 30, 2011, no goodwill remained on our balance sheet.

Other expense, net
Other expense, net includes interest expense, interest income, and other miscellaneous non-operating items. The increase in the cash flow from operations and use of leases as opposed to on-balance sheet financing in the past twelve months resulted in $70.5 million less net debt (debt less cash) at December 31, 2012, when compared to December 31, 2011, and when combined with a reduced weighted average interest rate, interest expense decreased $3.5 million period-over-period. This line item will fluctuate based on our decision with respect to purchasing revenue equipment with balance sheet debt versus operating leases as well as based on our ability to continue to generate profitable results and reduce our leverage. We expect that our weighted average interest rate will likely decrease in the next twelve months due to reductions in the pricing associated with our Credit Facility, resulting from the eighth amendment, which was effective December 31, 2012.

Equity in income of affiliate
We have accounted for our investment in TEL using the equity method of accounting and thus our financial results include our proportionate share of income or $1.9 million for the twelve months ended December 31, 2012 compared to $0.7 million for the seven months ended December 31, 2011. Given TEL's growth over the past three years and volatility in the used and leased equipment markets in which TEL operates, the impact on our earnings resulting from our investment in TEL could be significant.

Income tax expense
The difference in the tax expense recognized in the 2012 period compared to the tax benefit recognized in the 2011 period is primarily related to the $28.8 million increase in the pre-tax income in the 2012 period compared to the 2011 period, resulting from the aforementioned improvements in operating income, reduced interest expense, the goodwill impairment in 2011, and the increase in the contribution from TEL's earnings. The effective tax rate is different from the expected combined tax rate due to permanent differences related to our per diem pay structure for drivers and the impact of non-deductible portion of the aforementioned goodwill impairment. Due to the partial nondeductible effect of the per diem payments, our tax rate will fluctuate in future periods as income fluctuates.

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Comparison of Year Ended December 31, 2011 to Year Ended December 31, 2010

For the year ended December 31, 2011, total revenue increased $2.9 million, or 0.4%, to $652.6 million from $649.7 million in 2010. Freight revenue decreased $34.3 million, or 6.3%, to $512.0 million in the year ended December 31, 2011, . . .

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