ANNUAL REPORT 2015
COVENANT TRANSPORTATION GROUP, INC.
SUMMARY OF
OPERATIONS
Total revenue
(in thousands)
Freight revenue
(in thousands)
Net income (loss)
(in thousands)
2011
2012
2013
2014
2015
$ 652,627
$ 674,254
$ 684,549
$ 718,980
$ 724,240
$ 512,026
$ 527,435
$ 538,933
$ 578,569
$ 640,120
$
(14,267) (2)
$
6,065
(3)
$
5,244
$ 17,808
(4)
$
42,085
(5) (6)
Net margin(1)
(2.8%) (2)
1.1%
(3)
1.0%
3.1% (4)
6.6%
(5) (6)
Earnings (loss) per
share (diluted)
Book value per
share (year end)
$
$
Adjusted operating
ratio(7)(9)
Adjusted ROIC(8)(9)
$
$
(0.97) (2)
5.91
98.0%
2.8%
$
$
0.41
(3)
6.41
96.4%
5.4%
0.35
$
1.15
(4)
$
2.30
(5) (6)
6.75
$
9.35
$
11.15
96.2%
5.3%
91.8%
8.9%
90.0%
11.6%
(3)
(4)
(1) Net margin is net income (loss) as a percentage of freight revenue.
(2)
Includes an $11.5 million $(0.64 per share) non-cash impairment to write off the remaining goodwill associated
with our Truckload segment.
Includes a $2.4 million pretax gain from the sale of real estate and a $4.0 million pretax benefit from commutation
of an insurance policy, of which $1.7 million was out of period.
Includes a $7.5 million pretax increase to claims reserves resulting from an adverse judgment on a 2008 cargo
claim.
Includes a $3.6 million pretax insurance policy commutation benefit.
Includes federal income tax credit of $4.7 million.
(5)
(6)
(7) Adjusted operating expenses, net of fuel surcharge revenue, as a percentage of freight revenue. Adjustments
exclude the items set forth in footnotes 2, 3, 4 and 5.
(8) Calculated as follows: (i) the sum of adjusted operating income after tax applying our effective tax rate, plus
contribution from equity investment, divided by (ii) the sum of average quarterly balance sheet debt (net of cash
and cash equivalents) plus average quarterly stockholders' equity. Adjustments exclude the items set forth in
footnotes 2, 3, 4, 5 and 6.
(9) Adjusted operating ratio and Adjusted ROIC are non-GAAP financial measures. Please see the reconciliation on
page iv of this Annual Report.
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. 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 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. Readers should review and consider
the factors discussed in the "Risk Factors" section of this Annual Report, along with various disclosures in our press
releases, stockholder reports, and other filings with the Securities and Exchange Commission. We disclaim any
obligation to update or revise any forward-looking statements to reflect actual results or changes in the factors
affecting the forward-looking information.
Covenant Transportation Group, Inc.
Dear Fellow Stockholders:
Thirty years ago, Jacqueline and I founded Covenant Transport with 25 trucks, dedication to our customers and
professional truck drivers, and a sincere commitment to building an enterprise based on honesty and integrity. In
2015, Covenant Transportation Group (CTG) operated an average of approximately 2700 tractors – over 100 times as
many as when we started – and generated the best financial results in the Company's history. Like the highways our
drivers travel every day, our path has contained detours, potholes, and roadblocks. And like our drivers, who overcome
these obstacles to deliver for our customers, the entire CTG team is driven to perform. Since outlining our strategic
plan in 2011, we have improved our safety, our service standards, our customer base, our fleet, our technology, our
talent management, and our profitability. Today, we are working smarter, more seamlessly, and more efficiently
across the enterprise than ever before. I would like to thank everyone at the CTG companies for their leadership,
sacrifices, and dedication that have contributed to our first 30 years.
2015 Review
For 2015, CTG reported record freight revenue, net income, and earnings per diluted share. Highlights of our
consolidated financial results were as follows:
● Total revenue was $724.2 million, compared with $719.0 million for 2014, and freight revenue (excludes
revenue from fuel surcharge) was $640.1 million, compared with $578.2 million for 2014.
● Net income was $42.1 million, or $2.30 per diluted share, compared with net income of $17.8 million, or
$1.15 per diluted share, for 2014. Net income for 2015 included a one-time federal income tax credit of
approximately $4.7 million, or $0.26 per diluted share, and an insurance policy commutation credit of
approximately $3.6 million, or $0.12 per diluted share. Net income for 2014 included an unfavorable charge
of $7.5 million, or $0.30 per diluted share, attributable to an adverse 2008 cargo claim judgment.
● Return on invested capital was 13.4% (adjusted ROIC of 11.6%, excluding the benefit of the federal tax credit
and insurance commutation credit – referred to above). For this purpose, we define return on invested capital
as (i) operating income after tax applying our effective tax rate, plus contribution from equity investment,
divided by (ii) the sum of average quarterly balance sheet debt (net of cash and cash equivalents) plus average
quarterly stockholders' equity.
The business environment was mixed in 2015. In the first half of the year, we experienced above-normal winter
volumes and normal spring volumes. This contributed to a continuation of the favorable environment for customer
rate increases we had experienced in 2014. During the second half of the year, our industry experienced lower volumes
due in part to slowing business investment by U.S. industry and overstocked inventories. In addition, truck drivers
and equipment that had been serving the energy industry entered certain of our markets. The rate environment became
more difficult, as contractual rate increases slowed and spot market rates (which affect a small portion of our business)
fell sharply.
The bright spot in the fourth-quarter freight market related to expedited shipments for e-commerce, omni-channel,
organic food, and other premium service shippers. These shippers have a large surge of holiday season business as
well as a growing year-round presence. Our top three consolidated customers, and four of our top ten customers for
2015, were participants directly or indirectly in these sectors. These shippers value our two-person driver teams,
which offer unparalleled service and security for time-sensitive loads. They also value the logistics capability provided
by our Solutions unit, which sourced and coordinated substantial outside capacity from other trucking companies
during the peak season and contributed a record quarter. The benefits of serving this sector include high fourth quarter
productivity, strong relationships with growing companies that can offer us loads during seasonally slower periods,
and growing expertise in niche markets. The negative aspects include extremely high service standards for our drivers,
a constantly changing and stressful supply chain as consumer purchases fluctuate, and a high concentration of our
revenue and profitability in this seasonal and consumer-dependent market. We continue to seek to grow and balance
this business, and I encourage you to remain attuned to the trends in this area.
Other major trends for the year included a very competitive market for professional truck drivers, lower diesel fuel
prices, and a sharp drop in the used equipment market during the second half of the year. Attracting and retaining
safe, service-oriented professional truck drivers is among the greatest challenges for our industry and for CTG. We
implemented meaningful driver compensation adjustments in 2015, and we expect driver compensation to continue
to increase over time. Besides improving pay, we use our continuous improvement group to crunch mountains of data
to identify drivers who statistically may have an enhanced risk of accidents or leaving the company. We then have an
opportunity to intervene to enhance driving safety and driver retention. For our second largest expense, diesel fuel,
i
the national average cost per gallon fell significantly during 2015. However, our net fuel cost per mile remained
approximately the same as in 2014 because of lower fuel surcharge revenue and approximately $14.0 million in net
fuel hedging expense. For the past several years we have hedged approximately 22% to 28% of our annual fuel
purchases to lower the volatility of this expense category. Over time we have experienced gains and losses on fuel
hedges, and in 2015 the hedging worked against us. The market for used tractors (and to a lesser extent trailers)
dropped during the last few months of 2015. This led to lower gains on sale and higher net investment in new
equipment, a trend that has continued into 2016. Despite the short-term negative impact, we are hopeful that lower
demand for used equipment indicates declining capacity entering the trucking industry from small carriers. Less
capacity entering the market could, in turn, set the stage for a stronger rate and volume environment for us.
Our strong financial performance and solid balance sheet have supported significant investments in our business. Our
tractor and trailer fleets are among the industry's newest and feature a growing number of the latest safety and
efficiency measures, such as anti-rollover technology, adaptive speed control, lane-departure warning, fuel-saving
aerodynamics, and automatic transmissions. Our trailers come with aerodynamic side blades and L.E.D. lights. These
features contribute to higher fuel mileage, fewer major accidents, and a safer more productive career for our
professional drivers. We regularly test technology advances, and we are keenly aware of the ongoing confluence of
technological, regulatory, and demographic changes that will influence the way our tractors and drivers interact, as
well as our productivity, capital investments, and cost structure.
Strategic Plan and the People Who Make it Happen
Since 2011, we have been diligently executing our strategic plan. Broadly speaking, the plan involves the following
key elements:
Investments in our personnel and intellectual property.
Enterprise-wide approach to marketing, customer service, and operating best practices.
Capital allocation to business units and customer segments we expect to generate higher returns.
Deleveraging our balance sheet.
Over the past four years, our revenue, earnings, balance sheet, and investment returns have steadily improved, as
shown in the table on the inside cover of our annual report. Our board of directors has been instrumental in assessing
and critiquing the strategic plan, probing the risks and opportunities, and insisting on excellence and transparency. I
assure you we have the right tone and substance at the top.
Within our executive leadership team, Joey Hogan has been primarily responsible for designing and executing our
plan, as well as developing our people and instilling our culture. Joey was recently elevated to President of CTG, in
recognition of his major contribution to our business model and profitability improvements. Under Richard Cribbs,
our financial and IT capability has risen to a new level of partnership with the business units to provide data, coaching,
and decision support in areas of planning, productivity, capital investment, and cost control. In addition, the leaders
of each of our business units—Expedited, Refrigerated, Dedicated, Solutions, TEL, and TFS—have taken this process
to heart and are beginning to function as a unified team under the Covenant Transportation Group brand. This unity,
and the trust our team has in each other, has been the catalyst for our recent success.
Let me give you two recent examples of the possibilities when we fully realize the enterprise-wide approach. During
the third quarter of 2015, we bid on a full service logistics contract for the internal maintenance and repair inventory
of a major U.S. industrial company. The shipment schedules are time-critical and involve single driver and team
driver loads, as well as outsourced capacity. Our Solutions team coordinated a lane redesign, as well as support from
our asset-based units and from trusted third-party carriers. The resulting plan is expected to save the shipper a
meaningful amount of its transportation spend and generate significant revenue at above average profitability, for us.
After one quarter of operation, the customer is opening up additional opportunities to coordinate other freight
transportation needs. In addition, in just the past few weeks, we signed a contract with a major produce shipper to
provide single and team driver refrigerated service, with the potential to become a top 10-sized customer. Neither of
these contracts would have been possible for us to land or service properly without buy-in and contribution from our
entire organization.
Outlook
Our outlook for 2016 as a whole reflects confidence in our ability to operate profitably, along with caution concerning
the near term freight environment. From a customer perspective, we received excellent reviews of our peak-season
service levels and have indications to expect additional freight from certain key customers during all of 2016, including
the next peak season. However, general freight levels have softened compared with the first quarter of 2015, and
ii
shipping levels may not improve until the second half of the year or even beyond. While we expect e-commerce and
omni-channel shipping growth to continue, these customers have typically re-engineered their peak season supply
chains and made capacity commitments during the summer and early fall of each year. In addition, these customers
rely to a significant extent on third party logistics companies that compete with us. Accordingly, we remain cautious
until such discussions with these customers become more advanced. On a positive note, I am able to report that our
largest peak season customer has honored its commitment to provide additional first quarter freight volumes, that we
are fielding multiple inquiries for dedicated capacity, and that our yields are about equal to the first quarter of 2015.
However, the pricing environment is difficult, many customers are accelerating bid processes in an effort to reduce
their costs, and trucking companies must offer superior service and strong value to the cusotmer to have the
opportunity to hold or increase pricing.
Outside of the general freight environment, we are working diligently on company-specific profit improvement
initiatives, and we have plans to grow Solutions' revenue and related earnings contribution in 2016. On the cost side,
we are anticipating inflationary pressure on driver compensation, capital costs (depreciation, interest, and lease
expense, net of gains and losses on disposition), and other expenses. In the near term, we expect to limit our
investments in growth capital expenditures and perhaps reduce our average fleet size slightly as we monitor external
developments. At the same time, we plan to concentrate on safety, driver retention, and controllable cost savings
efforts.
Since the end of 2015, our balance sheet has continued to improve. The equipment held for sale at December 31, 2015,
has been sold as planned and we have collected the extra peak season accounts receivables, resulting in debt paydown
of over $50 million since year end. At March 31, we expect our net debt as a percentage of total capitalization to be
approximately 50%.
Over the longer term, we believe CTG is well positioned for success in our industry. We believe our mix of expedited,
refrigerated, dedicated, and logistics business units exposes us to diversified revenue streams and margin pressures,
and that our primary services are conducted in growing niches where our size and capabilities differentiate us from
many competitors. Further, upcoming regulatory changes such as mandatory electronic logging devices, speed
limiters, and hair follicle drug testing may reduce the effective amount of industry capacity and increase the need for
certain of our services, while leading to new competition for other services. Against this backdrop, we must provide
an increasingly attractive home for the best professional truck drivers, provide a rewarding and challenging career for
our non-driving associates, constantly evolve with our customers' supply chains, closely monitor our costs, and
allocate capital to generate appropriate returns.
As we enter our fourth decade in business, I believe CTG is better positioned than ever before to succeed in the rapidly
evolving and hyper-competitive freight transportation industry. We will continue to honor our founding principles as
we strive to increase the value of your shares. Thank you for your support.
Sincerely,
David R. Parker
Chairman and Chief Executive Officer
iii
Non-GAAP Reconciliation Tables
The following tables present the calculations for non-GAAP adjusted operating ratio and non-GAAP ROIC (non-
GAAP financial measures) for the periods presented. The Company has provided non-GAAP financial measures,
which are not calculated or presented in accordance with GAAP, as information supplemental and in addition to the
financial measures presented in this Annual Report that are calculated and presented in accordance with GAAP. Such
non-GAAP financial measures should not be considered superior to, as a substitute for, or as an alternative to, and
should be considered in conjunction with, the GAAP financial measures presented. The non-GAAP financial measures
may differ from similar measures used by other companies.
2011
$ 512.0
2012
$ 527.4
2013
$ 538.9
2014
$ 578.6
2015
$ 640.1
653.7
(140.6)
(11.5)
651.0
(146.8)
664.2
(145.6)
679.3
(140.4)
2.3
2.4
656.5
(84.1)
3.6
Non-GAAP adjusted operating expenses $ 501.6
$ 508.9
$ 518.6
(7.5)
$ 531.4
$ 576.0
Non-GAAP adjusted operating ratio
98.0%
96.4%
96.2%
91.8%
90.0%
Adjusted Operating Ratio
($ in millions)
Freight Revenue
Operating expenses
Less: Fuel surcharge revenue
Less: Goodwill impairment
Add: Insurance commutation
Add: Gain on sale of real estate
Less: Increased reserves related
judgement on 2008 cargo claim
to
Adjusted ROIC calculation
($ in millions)
Operating income
Add: Equity in earnings of affiliate
Less: Income tax (benefit)/expense
NOPAT
Add: Goodwill impairment (after tax)
Less: Insurance commutation (after tax)
Less: Gain on sale of real estate (after
tax)
Add:
reserves
Increased
to
judgement on 2008 cargo claim (after
tax)
related
2011
$ (1.1)
0.7
(2.2)
$ 1.8
7.1
2012
$ 23.2
1.9
6.3
$ 18.7
2013
$ 20.4
2.8
7.5
$ 15.6
2014
$ 39.6
3.7
17.8
$ 25.6
2015
$ 67.8
4.6
21.8
$ 50.5
(1.4)
(1.5)
(4.6)
(2.2)
(4.7)
$ 43.6
Less: One time tax credit
Non-GAAP adjusted NOPAT
$ 8.9
$ 15.9
$ 15.6
$ 30.2
Average Invested Capital
Average net balance sheet debt
Average equity
Average invested capital
227.2
93.9
$ 321.1
203.4
90.9
$ 294.2
197.2
97.5
$ 294.7
203.6
134.8
$ 338.4
188.7
188.4
$ 377.2
Non-GAAP adjusted return on invested
capital (ROIC)
2.8%
5.4%
5.3%
8.9%
11.6%
iv
BUSINESS
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. In this Annual Report, statements relating to the ability of our infrastructure to
support future growth, our ability to recruit and retain qualified drivers, our ability to react to market conditions, our
ability to gain market share, future tractor and trailer count and prices, expected functioning of our information
technology systems, expected sources of working capital, liquidity and funds for meeting equipment purchase
obligations, future inflation, future third-party service provider relationships and availability, future compensation
arrangements with independent contractors and drivers, expected owner operator usage, future driver market,
planned allocation of capital, future equipment costs, expected settlement of operating lease obligations, future asset
sales, future insurance and claims, future tax expense and deductions, future fuel expense and the future effectiveness
of fuel surcharge programs and price hedges, future effectiveness of interest rate swaps, expected capital expenditures
(including the future mix of lease and purchase obligations), future asset utilization, future trucking capacity, expected
freight demand and volumes, future rates, future depreciation and amortization, and future purchased transportation
expense, among others, are forward-looking statements. 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 "Risk Factors," set forth
below. Readers should review and consider the factors discussed in "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.
References in this Annual Report to "we," "us," "our," or the "Company" or similar terms refer to Covenant
Transportation Group, Inc. and its subsidiaries.
GENERAL
Background and Strategy
We were founded in 1986 as a provider of expedited long haul freight transportation, primarily using two-person
driver teams in transcontinental lanes. Since that time, we have grown from 25 trucks to approximately 2,700 trucks
and expanded our services from predominantly long haul dry van to include refrigerated, dedicated, cross-border,
regional, brokerage, and other offerings. The expansion of our fleet and service offerings have placed us among the
nation's twenty-five largest truckload transportation companies based on 2014 revenue.
Generally, we transport full trailer loads of freight from origin to destination without intermediate stops or handling.
We provide truckload transportation services throughout the continental United States, into and out of Mexico, and
into and out of portions of Canada. Our truckload freight services utilize equipment we own or lease or equipment
owned by independent contractors for the pick-up and delivery of freight. In most of our truckload business, we
transport freight over nonroutine routes. Our dedicated freight service offering provides similar transportation
services, but does so pursuant to agreements whereby we make our equipment available to a specific customer for
shipments over particular routes at specified times. To complement our truckload operations, we provide freight
brokerage services and accounts receivable factoring services. Through our asset based and non-asset based
capabilities, we transport many types of freight for a diverse customer base.
1
We concentrate on market sectors where we believe our capacity in relation to sector size and our operating proficiency
can make a meaningful difference to customers. The primary sectors in which we operate are as follows:
● Expedited / Long haul: In our expedited / long haul business, we operate approximately 1,200 tractors,
approximately 735 of which are driven by two-person driver teams. Our expedited operations primarily
involve high service freight with delivery standards, such as 1,000 miles in 22 hours, or 15-minute delivery
windows that are difficult for competitors to satisfy with solo-driven tractors or rail-intermodal
service. Our expedited services often involve high value, high security, or time-definite loads for
integrated global freight companies, less-than-truckload carriers, manufacturers, and retailers. We believe
we are one of the five largest team expedited providers, and that growth in omni-channel, organic food,
manufacturing, and e-commerce freight make this an attractive sector.
● Temperature-Controlled: In our temperature-controlled business, we operate approximately 1,000
tractors, approximately 200 of which are driven by two-person driver teams, and also offer intermodal
service in longer haul lanes. The temperature-controlled sector includes fresh and frozen foods,
pharmaceuticals, cosmetics, and other freight where extreme heat or cold could cause damage. We believe
we are among the ten largest temperature-controlled providers, and that factors such as United States
population growth, increasing consumer preference for fresh and organic produce, and demographic trends
requiring more pharmaceuticals make this an attractive sector.
● Dedicated: In our dedicated contract business, we operate approximately 500 tractors, approximately 20
of which are driven by two-person driver teams, primarily for manufacturers located in the southeastern
United States. The dedicated sector typically involves longer-term contracts that allocate a specified
number of tractors and trailers to a specific customer, with fixed and variable compensation. Many of our
dedicated contract customers are automotive companies or tier one suppliers to the auto industry, with high
service standards. We believe this sector is growing because of an improved manufacturing environment
in the United States, particularly in the Southeast, customer concerns about trucking capacity, and a need
for dependable service at plants.
● Capacity Provider Solutions and Services / Equipment Sales and Leasing: We primarily provide
freight brokerage capacity to customers when the freight does not fit our network or profitability
requirements. In addition, we participate in the market for used equipment sales and leasing through our
49% ownership of Transport Enterprise Leasing, LLC ("TEL"), and we assist current and potential capacity
providers with improving their cash flows through secure invoice factoring services. We believe this suite
of services links our interests with those of our customers and current and potential third party capacity
providers. We intend to expand our presence in these sectors, which we believe offer attractive growth
opportunities with lower capital investment than our asset-based truckload operations.
As our fleet has grown over three decades and our service platform matured, several important trends dramatically
affected the truckload industry and our business. First, supply chain patterns became more fluid in response to
dynamic changes in labor and transportation costs, ocean freight and rail-intermodal service standards, retail
distribution center networks, governmental regulations, and other industry-wide factors. Second, the cost structure of
the truckload business, particularly equipment, driver wages, and, at times, fuel prices, rose dramatically, impacting
us and our customers' freight decisions. Third, customers used technology to constantly optimize their supply chains,
which necessitated expanding our own technological capability to optimize our asset allocation, manage yields, and
drive operational efficiency. Fourth, a confluence of regulatory constraints, safety and security demands, and scarcity
of qualified applicants, negatively impacted our asset productivity and reinforced what a precious resource
professional truck drivers are (and we believe increasingly will be) in our industry.
The key elements of our current strategic plan are:
● Organizational Excellence and Entrepreneurial Spirit. We have re-aligned our management team,
added talent, and implemented best practices in part through using Franklin Covey's Four Disciplines of
Execution® to bring a new focus to metrics, accountability, and incentive compensation. Through multiple
programs recognizing individual initiative, we have also been instilling an ownership culture throughout
our company. We also implemented a single enterprise management system across all subsidiaries to
improve visibility and coordination of customers, operations, and financial activities.
● Focus on the Driver. Drivers are the lifeblood of our company and our industry. We employ a broad
range of safety, lifestyle, compensation, equipment technology, and personal recognition methods to
convey our respect and appreciation for our drivers and to improve their careers. A portion of these
2
techniques involve sophisticated analytics to identify likely candidates, match teams, evaluate recruiting
spending, deliver training content to drivers, and design tractor specifications. Over the past three years,
our driver turnover percentage has improved toward the industry average after starting significantly higher.
● Focus on the Customer Experience. Our mission statement begins: "CTG's mission is to be a problem
solver for every customer…" We offer premium service in sectors where we can make a difference, and
we use our brokerage subsidiary, Covenant Transport Solutions, Inc. ("Solutions"), to cover loads that do
not meet our requirements. With each interaction, we seek to enhance the value we bring to the customer
relationship.
● Rigorous Capital Allocation Process and Reduce Leverage. Our senior management annually ranks
capital investment opportunities against available capital and acceptable leverage levels, and material
investments must pass return on investment and capital investment committee approval processes. In
addition, reducing our total leverage has been a primary strategic goal. We believe our disciplined
investment review has contributed to our improved results by allocating capital to more profitable business
units and downsizing other units into greater profitability.
● Risk Management-Assess and Mitigate. We consistently evaluate risk areas with significant volatility,
as well as the costs and benefits associated with mitigating the volatility. Diesel fuel prices, insurance and
claims cost, and used equipment prices are all areas where we identified significant risk and volatility for
our business. To manage these risks, we have employed fuel hedging contracts on a portion of our fuel
usage not covered by customer fuel surcharges, lowered our self-insured accident liability retention, and
expanded our ability to sell our used equipment to increase bargaining power with the tractor and trailer
manufacturers.
● Technology. We purchase and deploy technology that we believe will allow us to operate more safely,
securely, and efficiently. Our information systems are integrated into a single platform that represents a
multi-year investment to upgrade the hardware and software of our information systems. This technology
was purchased off the shelf, which minimizes our fixed cost investment, and enables us to stay current
with the latest developments.
We believe the ongoing execution of our strategic plan has contributed to the substantial improvement in operating
results and profitability we have generated over the past several years. Some of the significant successes resulting
from our strategic planning efforts include the completion of a follow-on stock offering in 2014 that helped
significantly deleverage our balance sheet; enhancements to recruiting, retention, and business intelligence; upgraded
information technology; focus on service and on time delivery; and enhanced cross-marketing opportunities between
our subsidiaries. Each of these accomplishments positively impacted the success of the key initiatives identified
above, our overarching financial goals, and ultimately, the Company.
Following an excellent 2014, our fiscal 2015 results surpassed those of 1999 for the best annual results we have
experienced in the Company’s 30 year history. Additionally, fiscal 2015 is our fourth consecutive year of profitability.
We believe the return to profitability on a consistent basis is the result of certain initiatives we put in place that are
providing positive results. However, we still have significant work ahead to achieve our goals, deliver a strong and
stable product for our customers, provide a bright future for our employees and owner-operators, and create
meaningful value for our stockholders.
3
The Company
We operate a relatively new tractor fleet and employ sophisticated truck technology that enhances our operational
efficiencies and our drivers' safety. Our company-owned tractor fleet has an average age of approximately 1.7 years,
which compares favorably to an average U.S. Class 8 tractor age of approximately 7.5 years in 2015. Some of the
technologies we employ include the following: (1) freight optimization software that can perform sophisticated
analyses of profitability and other measures on each customer, route, and load; (2) routing software that selects the
best route, identifies fuel stops, and warns of deviations from routing instructions; (3) a tracking and communications
system that permits direct communication between drivers and fleet managers, as well as constant location and
delivery updates; (4) electronic logging devices in all of our tractors; (5) aerodynamics and other fuel efficiency
systems that have significantly improved fuel mileage; and (6) safety technology, including rollover stability control,
collision mitigation, and lane-change warning. We believe our modern fleet lowers maintenance costs, improves fuel
mileage, improves safety, contributes to better customer service, and assists with driver retention.
Business Units
We have one reportable segment, our asset-based truckload services ("Truckload").
The Truckload segment consists of three asset-based operating fleets that are aggregated because they have similar
economic characteristics and meet the aggregation criteria. The three operating fleets that comprise our Truckload
segment are as follows: (i) Covenant Transport, Inc. ("Covenant Transport"), our historical flagship operation, which
provides expedited long haul, dedicated, temperature-controlled, and regional solo-driver service; (ii) Southern
Refrigerated Transport, Inc. ("SRT"), which provides primarily long haul, regional, and intermodal temperature-
controlled service; and (iii) Star Transportation, Inc. ("Star"), which provides regional solo-driver and dedicated
services, primarily in the southeastern United States.
In addition, our Solutions subsidiary has service offerings ancillary to our Truckload operations, including: freight
brokerage service directly and through freight brokerage agents, who are paid a commission for the freight they
provide, and accounts receivable factoring. These operations consist of several operating segments, which neither
individually nor in the aggregate meet the quantitative or qualitative reporting thresholds.
The following charts reflect the size of each of our operating subsidiaries measured by 2015 total revenue, net of fuel
surcharge revenue, which we refer to as "freight revenue":
2015
Star, 7%
SRT, 27%
Covenant Transport,
55%
Solutions, 11%
Distribution of Freight Revenue
Among Operating Subsidiaries
Covenant Transport
SRT
Solutions
Star
55%
27%
11%
7%
4
Our Truckload segment comprised approximately 89%, 90%, and 93% of our total freight revenue in 2015, 2014, and
2013, respectively.
In our Truckload segment, we primarily generate revenue by transporting freight for our customers. Generally, we
are paid a predetermined rate per mile for our truckload services. We enhance our truckload revenue by charging for
tractor and trailer detention, loading and unloading activities, and other specialized services, as well as through the
collection of fuel surcharges to mitigate the impact of increases in the cost of fuel. The main factors that could affect
our Truckload revenue are the revenue per mile we receive from our customers, the percentage of miles for which we
are compensated, and the number of shipments and miles we generate. These factors relate, among other things, to
the general level of economic activity in the United States, inventory levels, specific customer demand, the level of
capacity in the trucking industry, and driver availability.
The main expenses that impact the profitability of our Truckload segment are the variable costs of transporting freight
for our customers. These costs include fuel expenses, driver-related expenses, such as wages, benefits, training, and
recruitment, and purchased transportation expenses, which primarily include compensating independent contractors.
Expenses that have both fixed and variable components include maintenance and tire expense and our total cost of
insurance and claims. These expenses generally vary with the miles we travel, but also have a controllable component
based on safety, self-insured retention versus insurance premiums, fleet age, efficiency, and other factors. Historically,
our main fixed costs include rentals and depreciation of long-term assets, such as revenue equipment and terminal
facilities, and the compensation of non-driver personnel.
We measure the productivity of our Truckload segment with three key performance metrics: average freight revenue
per total mile (excluding fuel surcharges), average miles per tractor, and average freight revenue per tractor per week
(excluding fuel surcharges). A description of each follows:
Average Freight Revenue Per Total Mile. Our average freight revenue per total mile is primarily
a function of 1) the allocation of assets among our subsidiaries and 2) the macro U.S. economic
environment including supply/demand of freight and carriers. The year-over-year increase from
2011 to 2015 is a result of allocating more tractors to our niche/specialized service offerings that
provide higher rates (including expedited/critical freight, high-value/constant security, and
temperature-controlled). Also, tighter capacity in the truckload freight market, especially for
expedited/team transit, and shipper concerns about the prospect of tighter capacity considering the
regulatory and driver market, afforded an environment more conducive to rate increases over such
period.
Average Freight Revenue Per Total
Mile
surcharge
revenue)
(excludes
fuel
2011
$1.38
2012
$1.47
2013
$1.49
2014
$1.60
2015
$1.69
5
Average Miles Per Tractor
130,000
125,000
120,000
115,000
2011
2012
2013
2014
2015
Average Miles Per Tractor. Average miles per tractor reflect economic demand, driver
availability, regulatory constraints, and the allocation of tractors among the service offerings.
Utilization in 2015 declined from that of 2014 primarily due to a softer freight market especially in
the last half of the year and the nature of certain fourth quarter e-commerce freight amplified by a
3.5% increase in average number of units for the year. All years were an improvement as compared
to 2011, when we experienced issues with a system conversion.
Average Miles Per Tractor
2011
115,775
2012
118,103
2013
119,375
2014
123,275
2015
122,508
Average Freight Revenue Per Tractor Per Week
(excludes fuel surcharge revenue)
$4,000
$3,900
$3,800
$3,700
$3,600
$3,500
$3,400
$3,300
$3,200
$3,100
$3,000
2011
2012
2013
2014
2015
Average Freight Revenue Per Tractor Per Week. We use average freight revenue per tractor per
week as our main measure of asset productivity. This operating metric takes into account the effects
of freight rates, non-revenue miles, and miles per tractor. In addition, because we calculate average
freight revenue per tractor using all of our trucks, it takes into account the percentage of our fleet
that is unproductive due to lack of drivers, repairs, and other factors. The increase in average freight
revenue per tractor per week in 2015 is primarily due to increased rate and allocation of tractors to
more productive service offerings, partially offset by decreased utilization.
Average Freight Revenue Per
Tractor Per Week (excludes fuel
surcharge revenue)
2011
$3,069
2012
$3,320
2013
$3,411
2014
$3,777
2015
$3,967
Our Solutions subsidiary comprised approximately 11%, 10%, and 7% of our total operating revenue in 2015, 2014,
and 2013, respectively. Solutions derives revenue from arranging transportation services for customers directly and
through relationships with thousands of third-party carriers and integration with our Truckload segment. Solutions
provides freight brokerage services directly and through freight brokerage agents, who are paid a commission for the
freight brokerage service they provide and accounts receivable factoring. The main factors that impact profitability
in terms of expenses are the variable costs of outsourcing the transportation freight for our customers and managing
fixed costs, including salaries and selling, general, and administrative expenses. Our brokerage loads increased to
36,217 in 2015, from 34,091 in 2014, while average revenue per load increased approximately 16% to $1,820 in 2015,
from $1,575 in 2014, primarily due to additional peak-season freight opportunities during the fourth quarter of 2015,
improved coordination with our Truckload segment, and additional business from new customers added during the
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year. Additionally, revenue from Solutions' accounts receivable factoring improved by approximately 6% year-over-
year to $2.4 million in 2015 from $2.3 million in 2014.
In May 2011, we acquired a 49.0% interest in TEL. TEL is a tractor and trailer equipment leasing company and used
equipment reseller. We have accounted for our investment in TEL using the equity method of accounting and thus our
financial results include our proportionate share of TEL's net income since May 2011, or $4.6 million in 2015, $3.7
million in 2014, and $2.8 million in 2013. As a result, TEL's results and growth are significant to our current year
results and, in our estimation, to our longer-term vision.
Refer to Note 16, "Segment Information," of the accompanying consolidated financial statements for further
information about our reporting segment's operating and financial results for 2015, 2014, and 2013.
Customers and Operations
We focus on targeted markets throughout the United States where we believe our service standards can provide a
competitive advantage. We are a major carrier for transportation companies such as freight forwarders, less-than-
truckload carriers, and third-party logistics providers that require a high level of service to support their businesses,
as well as for traditional truckload customers such as manufacturers, retailers, and food and beverage shippers. All of
our asset-based subsidiaries are truckload carriers and as such we generally dedicate an entire trailer to one customer
from origin to destination. We also generate revenue through providing ancillary services, including freight brokerage
services and accounts receivable factoring.
In 2015 and 2014, one customer accounted for more than 10% of our consolidated revenue. UPS, our largest customer,
was serviced by both our Truckload segment and our Solutions subsidiary providing for $75.8 million and $82.5
million of total revenue in 2015 and 2014, respectively. No customer accounted for more than 10% of our consolidated
revenue in 2013. Our top five customers accounted for approximately 34%, 29%, and 25% of our total revenue in
2015, 2014, and 2013, respectively.
We operate tractors driven by a single driver and also tractors assigned to two-person driver teams. Our single driver
tractors generally operate in shorter lengths of haul, generate fewer miles per tractor, and experience more non-revenue
miles, but the lower productive miles are expected to be offset by generally higher revenue per loaded mile and the
reduced employee expense of compensating only one driver. In contrast, our two-person driver tractors generally
operate in longer lengths of haul, generate greater miles per tractor, and experience fewer non-revenue miles, but we
typically receive lower revenue per loaded mile and incur higher employee expenses of compensating both drivers.
We expect operating statistics and expenses to shift with the mix of single and team operations.
We operate throughout the U.S. and in parts of Canada and Mexico, with substantially all of our revenue generated
from within the U.S. All of our tractors are domiciled in the U.S., and we have generated less than two percent of our
revenue in Canada and Mexico in 2015, 2014 and 2013. We do not separately track domestic and foreign revenue
from customers, and providing such information would not be meaningful. All of our long-lived assets are, and have
been for the last three fiscal years, located within the United States.
In 2009, we began a multi-year project to upgrade the hardware and software of our information systems. The goal
upon completion of the project was to have uniform operational and financial systems across the entire Company as
we believe this provides improved customer service, utilization, and enhances our visibility into and across the
organization. All of our operating subsidiaries are now operating on the new system. We encountered difficulties
when we converted our Covenant Transport subsidiary to the new system in the third quarter of 2011, which disrupted
our operations and impacted our customer service, driver relations, and results of operations. All significant problems
associated with the Covenant Transport conversion were addressed by the end of January 2012 and efficiencies from
the new system were realized by Covenant Transport in 2012. We implemented the new operating system at SRT in
February 2014. As expected with any large conversion project, SRT experienced inefficiencies that resulted in a year-
over-year reduction in first quarter 2014 profitability; however, by the second quarter of 2014 those inefficiencies
were largely resolved. In 2015 we have begun realizing the efficiencies of having all subsidiaries on one operating
platform and expect to evaluate where we can leverage the system to add further efficiencies across the Company.
Drivers and Other Personnel
Driver recruitment, retention, and satisfaction are essential to our success, and we have made each of these factors a
primary element of our strategy. We recruit both experienced and student drivers as well as independent contractor
drivers who own and drive their own tractor and provide their services to us under contract. We conduct recruiting
and/or driver orientation efforts from five of our locations, and we offer ongoing training throughout our terminal
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network. We emphasize driver-friendly operations throughout our organization. We have implemented automated
programs to signal when a driver is scheduled to be routed toward home, and we assign fleet managers specific tractor
units, regardless of geographic region, to foster positive relationships between the drivers and their principal contact
with us.
The truckload industry has periodically experienced difficulty in attracting and retaining enough qualified truck
drivers. It is also common for the driver turnover rate of individual carriers to exceed 100% in a year. At times, there
are driver shortages in the trucking industry. In past years, when there were driver shortages, the number of qualified
drivers had not kept pace with freight growth because of (i) changes in the demographic composition of the workforce;
(ii) alternative employment opportunities other than truck driving that became available in a growing economy; (iii)
individual drivers' desire to be home more often; and (iv) regulatory requirements that limit the available pool of
drivers.
Driver retention continued to be challenging in 2015, especially April through October, as economic growth provided
more employment opportunities that attracted professional drivers. Despite these challenges our number of drivers
remained approximately flat at December 31, 2015 as compared to the 2014 year. Despite having a similar number
of drivers as of December 31, 2015, our average number of teams for 2015 increased as a percentage of our fleet to
35.3% compared to 32.1% in 2014 and our average truck count for the year was increased as compared to December
31, 2014, as a result of open trucks, including wrecked units, averaging approximately 4.6% for the year ended
December 31, 2015, compared to approximately 5.1% for the year ended December 31, 2014.
We believe having a happy, healthy, and safe driver is the key to our success, both in the short term and over a longer
period. As a result, we are actively working to enhance our drivers' experience in an effort to recruit and retain more
drivers.
Independent contractors provide a tractor and a driver and are responsible for all operating expenses in exchange for
a fixed payment per mile. We do not have the capital outlay of purchasing the tractor. The payments to independent
contractors are recorded in revenue equipment rentals and purchased transportation. When independent contractor
tractors are utilized, we avoid expenses generally associated with company-owned equipment, such as driver
compensation, fuel, interest, and depreciation. Obtaining equipment from independent contractors and under operating
leases effectively shifts financing expenses from interest to "above the line" operating expenses.
Internal education and evaluation of the Federal Motor Carrier Safety Administration ("FMCSA") Compliance Safety
Accountability program ("CSA") (formerly Comprehensive Safety Analysis 2010) are priorities as we develop plans
to keep our top talent and challenge those drivers that need improvement. Overall, we believe this regulation will
bring challenges as well as opportunities for truckload carriers. CSA, in conjunction with the new U.S. Department
of Transportation ("DOT") reductions in hours-of-service for drivers, has reduced and will likely continue to impact
effective capacity in our industry as well as negatively impact equipment utilization. Nevertheless, for carriers that
successfully manage the new environment with driver-friendly equipment, compensation, and operations, we believe
opportunities to increase market share may be available. Driver pay may increase as a result of regulation and
economic expansion, which could provide more alternative employment opportunities. If economic growth is
sustained, however, we expect the supply/demand environment to be favorable enough for us to offset expected
compensation increases with better freight pricing.
We use driver teams in a substantial portion of our tractors. Driver teams permit us to provide expedited service on
selected long haul lanes because teams are able to handle longer routes and drive more miles while remaining within
DOT hours-of-service rules. The use of teams contributes to greater equipment utilization of the tractors they drive
than obtained with single drivers. The use of teams, however, increases the accumulation of miles on tractors and
trailers as well as personnel costs as a percentage of revenue and the number of drivers we must recruit. For the years
ended December 31, 2015 and 2014, teams operated approximately 35.3% and 32.1% of our tractors, respectively.
We are not a party to any collective bargaining agreement. At December 31, 2015, we employed approximately 3,600
drivers and approximately 800 non-driver personnel. At December 31, 2015, we also contracted with approximately
223 independent contractors.
Revenue Equipment
At December 31, 2015, we operated 2,656 tractors and 6,978 trailers. Of these tractors, 2,318 were owned, 115 were
financed under operating leases, and 223 were provided by independent contractors, who own and drive their own
tractors. Of these trailers, 4,068 were owned, 2,239 were financed under operating leases, and 671 were financed
8
under capital leases. Furthermore, at December 31, 2015, approximately 64% of our trailers were dry vans and the
remaining trailers were refrigerated vans.
We believe that operating high quality, late-model equipment contributes to operating efficiency, helps us recruit and
retain drivers, and is an important part of providing excellent service to customers. We operate a modern fleet of
tractors, with the majority of units under warranty, to minimize repair and maintenance costs and reduce service
interruptions caused by breakdowns. We also order most of our equipment with uniform specifications to reduce our
parts inventory and facilitate maintenance. At December 31, 2015, our tractor fleet had an average age of
approximately 1.7 years, and our trailer fleet had an average age of approximately 4.8 years. As of December 31,
2015, 100% of our tractor fleet had engines compliant with stricter regulations regarding emissions that became
effective in 2007 and 99.8% of our tractor fleet had engines compliant with stricter regulations regarding emissions
that became effective in 2010. We equip our tractors with a satellite-based tracking and communications system that
permits direct communication between drivers and fleet managers. We believe that this system enhances our operating
efficiency and improves customer service and fleet management. This system also updates the tractor's position every
thirty minutes, which allows us and our customers to locate freight and accurately estimate pick-up and delivery times.
We also use the system to monitor engine idling time, speed, performance, and other factors that affect operating
efficiency. At December 31, 2015, 100% of our fleet was equipped with electronic on board recorders ("EOBRs,"
now referred to as electronic logging devices, or "ELDs"), which electronically monitor truck miles and enforce hours-
of-service regulations.
Over the past decade, the price of new tractors has risen dramatically and there has been significant volatility in the
used equipment market. This has substantially increased our costs of operation.
Industry and Competition
Truckload is the largest segment of the for-hire ground freight transportation market based on revenue, surpassing the
combined market size of less-than-truckload, railroad, intermodal, and parcel delivery combined. The truckload
market is further segmented into sectors such as regional dry van, temperature-controlled van, flatbed, dedicated
contract, expedited, and irregular route.
The U.S. trucking industry is highly competitive and includes thousands of "for-hire" motor carriers, none of which
dominate the market. Service and price are the principal means of competition in the trucking industry. We compete
to some extent with railroads and rail-truck intermodal service but attempt to differentiate ourselves from our
competition on the basis of service. Rail and rail-truck intermodal movements are more often subject to delays and
disruptions arising from rail yard congestion, which reduce the effectiveness of such service to customers with time-
definite pick-up and delivery schedules. Historically, in times of high fuel prices or decreased consumer demand,
however, rail-intermodal competition becomes more significant.
Our industry is subject to dynamic factors that significantly affect our operating results. These factors include the
availability of qualified truck drivers, the volume of freight in the sectors we serve, the price of diesel fuel, and
government regulations that impact productivity and costs. Recently, our industry has experienced softening freight
demand, scarcity of qualified truck drivers, decreased fuel costs, and new regulations that limit productivity. In 2015,
these factors contributed to an environment of tight trucking capacity and rising freight rates for many trucking
companies, including us. However, the freight environment softened in the second half of 2015 and continuing into
early 2016. Based on our assessment of future regulatory changes, driver demographics, and expected growth rates
of our major customers and sectors, we expect a favorable pricing environment to continue for the next several years,
offset in part by higher driver pay and other inflationary costs. We believe large and diversified companies, like
ourselves, are best positioned to capitalize on the current industry environment, because we can offer significant
capacity commitments to major customers, safe and comfortable new equipment to drivers, and optimized routing and
other business analytics to make the most of our drivers' federally limited operating hours.
We believe that the cost and complexity of operating trucking fleets are increasing and that economic and competitive
pressures are likely to force many smaller competitors and private fleets to consolidate or exit the industry. As a
result, we believe that larger, better-capitalized companies, like us, will have opportunities to increase profit margins
and gain market share. In the market for dedicated services, we believe that truckload carriers, like us, have a
competitive advantage over truck lessors, which are the other major participants in the market, because we expect to
be able to offer lower prices by utilizing back-haul freight within our network that traditional lessors may not have.
9
Regulation
Our operations are regulated and licensed by various U.S. agencies. Our Canadian business activities are subject to
similar requirements imposed by the laws and regulations of Canada, as well as its provincial laws and regulations.
We operate within Mexico by utilizing third-party carriers within that country. Our company drivers and independent
contractors also must comply with the safety and fitness regulations of the DOT, including those relating to drug and
alcohol testing and hours-of-service. Such matters as weight and equipment dimensions are also subject to U.S.
regulations. We also may become subject to new or more restrictive regulations relating to fuel emissions, drivers'
hours-of-service, ergonomics, or other matters affecting safety or operating methods. Other agencies, such as the
Environmental Protection Agency ("EPA") and the Department of Homeland Security ("DHS") also regulate our
equipment, operations, and drivers.
The DOT, through the FMCSA, imposes safety and fitness regulations on us and our drivers, including rules that
restrict driver hours-of-service. In December 2011, the FMCSA published its 2011 Hours-of-Service Final Rule (the
"2011 Rule"). The 2011 Rule requires drivers to take 30-minute breaks after eight hours of consecutive driving and
reduces the total number of hours a driver is permitted to work during each week from 82 hours to 70 hours. The
2011 Rule also provides that the 34-hour restart may only be used once per week and must include two rest periods
between one a.m. and five a.m. (together, the "2011 Restart Restrictions"). These rule changes became effective in
July 2013. We believe the 2011 Rule led to decreased productivity and caused some loss of efficiency, as drivers and
shippers have needed supplemental training, computer programming has required modifications, additional drivers
have been employed or engaged, additional equipment has been acquired, and shipping lanes have been reconfigured.
In December 2014, the 2015 Omnibus Appropriations bill was signed into law. Among other things, the legislation
provided temporary relief from the 2011 Restart Restrictions, and essentially reverted back to the more straight
forward 34-hour restart rule that was in effect before the 2011 Rule became effective. In 2016, Congress is expected
to consider a study conducted by the FMCSA related to the 2011 Restart Restrictions. Congressional action based on
the findings of the study could result in a reinstatement, continued suspension, or complete withdrawal of the 2011
Restart Restrictions. If the 2011 Restart Restrictions are reinstated, we may experience a decrease in production and
loss of efficiency similar to that experienced during 2013 and 2014 when the 2011 Restart Restrictions were in effect.
The DOT uses two methods of evaluating the safety and fitness of carriers. The first method is the application of a
safety rating that is based on an onsite investigation and affects a carrier’s ability to operate in interstate commerce.
We currently have a satisfactory DOT safety rating under this method, which is the highest available rating under the
current safety rating scale. If we received a conditional or unsatisfactory DOT safety rating, it could adversely affect
our business, as some of our existing customer contracts require a satisfactory DOT safety rating. In January 2016,
the FMCSA published a Notice of Proposed Rulemaking outlining a revised safety rating measurement system which
would replace the current methodology. Under the proposed rules, the current three safety ratings of "satisfactory,"
"conditional," and "unsatisfactory" would be replaced with a single safety rating of "unfit." Thus, a carrier with no
rating would be deemed fit. Moreover, data from roadside inspections and the results of all investigations would be
used to determine a carrier’s fitness on a monthly basis. This would replace the current methodology of determining
a carrier’s fitness based solely on infrequent comprehensive onsite reviews. The proposed rules will undergo a 90-day
public comment period, after which, a final rule could either be published or become subject to further legislative
reviews and delays. Therefore, it’s uncertain if or when these proposed rules could take effect. However, if such rules
were enacted, and we received a rating of unfit, it would adversely affect our operations.
In addition to the safety rating system, the FMCSA has adopted the Compliance Safety Accountability program
("CSA") as an additional safety enforcement and compliance model that evaluates and ranks fleets on certain safety-
related standards. The CSA program analyzes data from roadside inspections, moving violations, crash reports from
the last two years, and investigation results. The data is organized into seven categories. Carriers are grouped by
category with other carriers that have a similar number of safety events (e.g., crashes, inspections, or violations) and
carriers are ranked and assigned a rating percentile to prioritize them for interventions if they are above a certain
threshold. Currently, these scores do not have a direct impact on a carrier’s safety rating. However, the occurrence
of unfavorable scores in one or more categories may (i) affect driver recruiting and retention by causing high-quality
drivers to seek employment with other carriers, (ii) cause our customers to direct their business away from us and to
carriers with higher fleet safety rankings, (iii) subject us to an increase in compliance reviews and roadside inspections,
or (iv) cause us to incur greater than expected expenses in its attempts to improve unfavorable scores, any of which
could adversely affect our results of operations and profitability.
Under CSA, these scores were initially made available to the public in five of the seven categories. However, pursuant
to the FAST Act, which was signed into law in December 2015, the FMCSA is required to remove from public view
the previously available CSA scores while it reviews the reliability of the scoring system. During this period of review
10
by the FMCSA, we will continue to have access to our own scores and will still be subject to intervention by the
FMCSA when such scores are above the intervention thresholds. Currently, certain of our subsidiaries are exceeding
the established intervention thresholds in one or more of the seven categories of CSA, in comparison to their peer
groups; however, they all continue to maintain a satisfactory rating with the DOT. We will continue to promote
improvement of these scores in all seven categories with ongoing reviews of all safety-related policies, programs, and
procedures for their effectiveness.
In 2011, the FMCSA issued new rules that would require nearly all carriers, including us, to install and use electronic
on-board recording devices ("EOBRs," now referred to as electronic logging devices, or "ELDs") in their tractors to
electronically monitor truck miles and enforce hours-of-service. These rules, however, were vacated by the Seventh
Circuit Court of Appeals in August 2011. The final rule related to mandatory use of ELDs was published in December
2015, and requires the use of ELDs by nearly all carriers by December 10, 2017. We have proactively installed ELDs
on 100% of our tractor fleet.
In the aftermath of the September 11, 2001 terrorist attacks, the DHS and other federal, state, and municipal authorities
implemented and continue to implement various security measures, including checkpoints and travel restrictions on
large trucks. The U.S. Transportation Security Administration ("TSA") adopted regulations that require a
determination by the TSA that each driver who applies for or renews his or her license for carrying hazardous materials
is not a security threat. This could reduce the pool of qualified drivers who are permitted to transport hazardous waste,
which could require us to increase driver compensation, limit our fleet growth, or allow trucks to sit idle. These
regulations also could complicate the matching of available equipment with hazardous material shipments, thereby
increasing our response time on customer orders and our non-revenue miles. As a result, it is possible we could fail
to meet the needs of our customers or could incur increased expenses to do so.
In November 2015, the FMCSA published its final rule related to driver coercion, which took effect on January 29,
2016. Under this rule, carriers, shippers, receivers, or transportation intermediaries that are found to have coerced
drivers to violate certain FMCSA regulations (including hours-of-service rules) may be fined up to $16,000 for each
offense. The FMCSA and certain legislators have proposed other rules that may be published as early as 2016,
including (i) the use of speed limiting devices on heavy duty trucks to restrict maximum speeds, (ii) the creation of a
national clearinghouse so employers and prospective employers could query to determine if current or prospective
drivers have had any drug/alcohol positives or refusals, and (iii) an increase in the allowable length of twin trailers
from 28 feet to 33 feet. If these rules take effect, they could result in a decrease in fleet production, driver availability,
and freight tonnage available to full truckload carriers, all of which could adversely affect our business or operations.
We are subject to various environmental laws and regulations dealing with the hauling and handling of hazardous
materials, fuel storage tanks, air emissions from our vehicles and facilities, engine idling, and discharge and retention
of storm water. Our truck terminals often are located in industrial areas where groundwater or other forms of
environmental contamination could occur. Our operations involve the risks of fuel spillage or seepage, environmental
damage, and hazardous waste disposal, among others. Certain of our facilities have waste oil or fuel storage tanks
and fueling islands. A small percentage of our freight consists of low-grade hazardous substances, which subjects us
to a wide array of regulations. Additionally, increasing efforts to control emissions of greenhouse gases may have an
adverse effect on us. Although we have instituted programs to monitor and control environmental risks and promote
compliance with applicable environmental laws and regulations, if we are involved in a spill or other accident
involving hazardous substances, if there are releases of hazardous substances we transport, if soil or groundwater
contamination is found at our facilities or results from our operations, or if we are found to be in violation of applicable
laws or regulations, we could be subject to cleanup costs and liabilities, including substantial fines or penalties or civil
and criminal liability, any of which could have a materially adverse effect on our business and operating results.
EPA regulations limiting exhaust emissions became more restrictive in 2010. In 2010, an executive memorandum
was signed directing the National Highway Traffic Safety Administration ("NHTSA") and the EPA to develop new,
stricter fuel efficiency standards for heavy trucks. In 2011, the NHTSA and the EPA adopted final rules that
established the first-ever fuel economy and greenhouse gas standards for medium-and heavy-duty vehicles. These
standards apply to model years 2014 to 2018 and require the achievement of an approximate 20 percent reduction in
fuel consumption by the 2018 model year, which equates to approximately four gallons of fuel for every 100 miles
traveled. In addition, in February 2014, President Obama announced that his administration will begin developing the
next phase of tighter fuel efficiency standards for medium-and heavy-duty vehicles and directed the EPA and NHTSA
to develop new fuel efficiency and greenhouse gas standards by March 31, 2016. In response, in June 2015, the EPA
and NHTSA jointly proposed new stricter standards that would apply to trailers beginning with model year 2018 and
tractors beginning with model year 2021. After an extended comment period ending in October 2015, a final rule has
not been published. If this rule or a similar rule was enacted, we believe these requirements could result in increased
new tractor prices and additional parts and maintenance costs incurred to retrofit our tractors with technology to
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achieve compliance with such standards, which could adversely affect our operating results and profitability,
particularly if such costs are not offset by potential fuel savings. We cannot predict, however, the extent to which our
operations and productivity will be impacted.
The California Air Resources Board ("CARB") also adopted emission control regulations that will be applicable to all
heavy-duty tractors that pull 53-foot or longer box-type trailers within the state of California. The tractors and trailers
subject to these CARB regulations must be either EPA SmartWay certified or equipped with low-rolling, resistance
tires and retrofitted with SmartWay-approved aerodynamic technologies. Enforcement of these CARB regulations
for model year 2011 equipment began in January 2010 and will be phased in over several years for older equipment.
We currently purchase Smart Way certified equipment in our new tractor and trailer acquisitions. As of January 1,
2014, CARB regulations require certain drayage trucks with 2006 or older model year engines to upgrade to 2007 or
newer model year engines. We believe some industry participants may have difficulty complying with this new
requirement, which may tighten drayage freight capacity and decrease drayage competition in California. Federal and
state lawmakers also are considering a variety of other climate-change proposals. Compliance with such regulations
could increase the cost of new tractors and trailers, impair equipment productivity, and increase operating expenses.
These effects, combined with the uncertainty as to the operating results that will be produced by the newly designed
diesel engines and the residual values of these vehicles, could increase our costs or otherwise adversely affect our
business or operations.
In order to reduce exhaust emissions, some states and municipalities have begun to restrict the locations and amount
of time where diesel-powered tractors may idle. These restrictions could force us to purchase on-board power units
that do not require the engine to idle or to alter its drivers' behavior, which could result in a decrease in productivity.
Fuel Availability and Cost
The cost of fuel trended lower in 2015, compared to 2014 and 2013, as demonstrated by a decrease in the Department
of Energy ("DOE") national average for diesel of approximately $1.12 per gallon for 2015 compared to 2014. Our
fuel cost was further decreased in 2015 due to an increase in our average fuel miles per gallon during 2015 as a result
of purchasing equipment with more fuel-efficient engines.
We actively manage our fuel costs by routing our drivers through fuel centers with which we have negotiated volume
discounts and through jurisdictions with lower fuel taxes, where possible. We have also reduced the maximum speed
of many of our trucks, implemented strict idling guidelines for our drivers, purchased technology to enhance our
management and monitoring of out-of-route miles, encouraged the use of shore power units in truck stops, and
imposed standards for accepting broker freight that includes minimum rates and fuel surcharges. These initiatives have
contributed to significant improvements in fleet wide average fuel mileage. Moreover, we have a fuel surcharge
program in place with the majority of our customers, which has historically enabled us to recover some of the higher
fuel costs. However, even with the fuel surcharges, the price of fuel has affected our profitability. Our fuel surcharges
are billed on a lagging basis, 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. In addition, we incur additional costs when fuel prices
rise that cannot be fully recovered due to our engines being idled during cold or warm weather, empty or out-of-route
miles, and for fuel used by refrigerated trailer units that generally is not billed to customers. In addition, from time-
to-time customers attempt to modify their surcharge programs, some successfully, which can result in recovery of a
smaller portion of fuel price increases. Rapid increases in fuel costs or shortages of fuel could have a materially
adverse effect on our operations or future profitability.
To reduce the variability of the ultimate cash flows associated with fluctuations in diesel fuel prices, we periodically
enter into various derivative instruments, including forward futures swap contracts. Historically diesel fuel has not
been a traded commodity on the futures market so heating oil has been used as a substitute, as prices for both generally
move in similar directions. Recently, however, we have been able to enter into hedging contracts with respect to both
heating oil and ultra-low sulfur diesel ("ULSD"). Under these contracts, we pay a fixed rate per gallon of heating oil
or ULSD and receive the monthly average price of New York heating oil per the New York Mercantile Exchange
("NYMEX") and Gulf Coast ULSD, respectively. Because the fixed price is determined based on market prices at the
time we enter into the hedge, in times of increasing fuel prices the hedge contracts become more valuable, whereas in
times of decreasing fuel prices the opposite is true. At December 31, 2015, we had forward futures swap contracts on
approximately 12.1 million, 12.1 million, and 7.6 million gallons of diesel to be purchased in 2016, 2017, and 2018,
respectively, or approximately 25%, 25%, and 15% of our projected annual 2016, 2017, and 2018 fuel requirements,
respectively. Due to declining petroleum prices in 2015, the fair value of our fuel hedging contracts at December 31,
2015, represented a $27.3 million liability.
12
Seasonality
In the trucking industry, revenue has historically decreased as customers reduce shipments following the winter
holiday season and as inclement weather impedes operations. At the same time, operating expenses have generally
increased, with fuel efficiency declining because of engine idling and weather, causing more physical damage
equipment repairs. For the reasons stated, first quarter results historically have been lower than results in each of the
other three quarters of the year, excluding charges. Over the past several years, we have seen increases in demand at
varying times, specifically May through October, based primarily on restocking required to replenish inventories that
have been held significantly lower than historical averages. Additionally, we have seen surges between Thanksgiving
and Christmas resulting from holiday shopping trends toward delivery of gifts purchased over the internet, as well as
the impact of shorter holiday seasons.
Additional Information
At December 31, 2015, our corporate structure included Covenant Transportation Group, Inc., a Nevada holding
company organized in May 1994, and its wholly owned subsidiaries: Covenant Transport, Inc., a Tennessee
corporation; Southern Refrigerated Transport, Inc., an Arkansas corporation; Star Transportation, Inc., a Tennessee
corporation; Covenant Transport Solutions, Inc., a Nevada corporation; Covenant Logistics, Inc., a Nevada
corporation; Covenant Asset Management, LLC, a Nevada limited liability company; CTG Leasing Company, a
Nevada corporation; Driven Analytic Solutions, LLC, a Nevada limited liability company, Covenant Properties, LLC,
a Nevada limited liability company, and IQS Insurance Retention Group, Inc., a Vermont corporation.
Our headquarters is located at 400 Birmingham Highway, Chattanooga, Tennessee 37419, and our website address is
www.ctgcompanies.com. Our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, and all other reports we file with the SEC pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act") are available free of charge through our website. Information contained in
or available through our website is not incorporated by reference into, and you should not consider such information
to be part of, this Annual Report.
Additionally, you may read all of the materials that we file with the SEC by visiting the SEC's Public Reference Room
at 100 F Street, N.E., Washington, D.C. 20549. If you would like information about the operation of the Public
Reference Room, you may call the SEC at 1-800-SEC-0330. You may also visit the SEC's website at www.sec.gov.
This site contains reports, proxy and information statements and other information regarding the Company and other
companies that file electronically with the SEC.
RISK FACTORS
Our future results may be affected by a number of factors over which we have little or no control. The following
discussion of risk factors contains forward-looking statements as discussed above. The following issues, uncertainties,
and risks, among others, should be considered in evaluating our business and growth outlook.
Our business is subject to general economic and business factors affecting the trucking industry that are largely
out of our control, any of which could have a materially adverse effect on our operating results.
The truckload industry is highly cyclical, and our business is dependent on a number of factors that may have a
negative impact on our results of operations, many of which are beyond our control. We believe that some of the most
significant of these factors are economic changes that affect supply and demand in transportation markets, such as:
●
●
●
●
recessionary economic cycles, such as the period from 2007 through 2009, and the uncertainty surrounding
such supply and demand in 2016;
changes in customers' inventory levels and in the availability of funding for their working capital;
excess tractor capacity in comparison with shipping demand; and
downturns in customers' business cycles.
Economic conditions that decrease shipping demand or increase the supply of available tractors and trailers can exert
downward pressure on rates and equipment utilization, thereby decreasing asset productivity. The risks associated
with these factors are heightened when the U.S. economy is weakened. Some of the principal risks during such times,
which risks we experienced during prior recessionary times, are as follows:
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● we may experience a reduction in overall freight levels, which may impair our asset utilization;
●
●
●
certain of our customers may face credit issues and could experience cash flow problems that may lead to
payment delays, increased credit risk, bankruptcies, and other financial hardships that could result in even
lower freight demand and may require us to increase our allowance for doubtful accounts;
freight patterns may change as supply chains are redesigned, resulting in an imbalance between our capacity
and our customers' freight demand;
customers may solicit bids for freight from multiple trucking companies or select competitors that offer lower
rates from among existing choices in an attempt to lower their costs, and we might be forced to lower our rates
or lose freight; and
● we may be forced to accept more freight from freight brokers, where freight rates are typically lower, or may
be forced to incur more non-revenue miles to obtain loads.
We also are subject to potential increases in various costs and other events that are outside of our control that could
materially reduce our profitability if we are unable to increase our rates sufficiently. Such cost increases include, but
are not limited to, fuel and energy prices, taxes and interest rates, tolls, license and registration fees, insurance
premiums, revenue equipment and related maintenance costs, and healthcare and other benefits for our
employees. We could be affected by strikes or other work stoppages at our service centers or at customer, port, border,
or other shipping locations. Changing impacts of regulatory measures could impair our operating efficiency and
productivity, decrease our revenues and profitability, and result in higher operating costs. In addition, declines in the
resale value of revenue equipment can also affect our profitability and cash flows. From time to time, various federal,
state, or local taxes may also increase, including taxes on fuels. We cannot predict whether, or in what form, any such
cost increase or event could occur. Any such cost increase or event could adversely affect our profitability.
In addition, we cannot predict future economic conditions, fuel price fluctuations, or how consumer confidence could
be affected by actual or threatened armed conflicts or terrorist attacks, government efforts to combat terrorism, military
action against a foreign state or group located in a foreign state, or heightened security requirements. Enhanced
security measures could impair our operating efficiency and productivity and result in higher operating costs.
We may not be successful in achieving our strategic plan.
Our current strategic plan includes instilling an enterprise-wide culture, allocating our available capital toward
business units we expect to generate acceptable returns, improving the career and experience of our professional
drivers, offering our customers significant value in markets and sectors where we can make a difference, and
effectively managing the risks associated with our business. To this end, several of our initiatives include growing
our expedited dry van and temperature-controlled teams, increasing the number of tractors and trailers allocated
toward dedicated contract operations in targeted markets, effectively managing the attraction, development, and
retention of qualified drivers, capitalizing on our enterprise management system including improving the performance
at SRT, our most recent (and final) subsidiary to implement this technology, and continuing to manage our exposures
to fluctuations in fuel prices, claims, interest rates, used truck prices, and other potentially volatile expenses through
a variety of hedging, insurance, contractual, and other methods. Such initiatives will require time, management and
financial resources, changes in our operations and sales functions, and monitoring and implementation of technology.
We may be unable to effectively and successfully implement, or achieve sustainable improvement from, our strategic
plan and initiatives or achieve these objectives. In addition, our operating margins could be adversely affected by
future changes in and expansion of our business, including the expected expansion of expedited dry van and
temperature-controlled teams. Further, our operating results may be negatively affected by a failure to further penetrate
our existing customer base, cross-sell our services, pursue new customer opportunities, or manage the operations and
expenses of new or growing services. There is no assurance that we will be successful in achieving our strategic plan
and initiatives. If we are unsuccessful in implementing our strategic plan and initiatives, our financial condition,
results of operations, and cash flows could be adversely affected.
We operate in a highly competitive and fragmented industry, and numerous competitive factors could impair
our ability to improve our profitability.
These factors include:
● we compete with many other truckload carriers of varying sizes and, to a lesser extent, with less-than-truckload
carriers, railroads, intermodal companies, and other transportation companies, many of which have more
equipment and greater capital resources than we do;
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● many of our competitors periodically reduce their freight rates to gain business, especially during times of
reduced growth rates in the economy, which may limit our ability to maintain or increase freight rates or
maintain significant growth in our business;
● many of our customers, including several in our top ten, are other transportation companies, and they may
decide to transport their own freight;
● many customers reduce the number of carriers they use by selecting "core carriers" as approved service
providers, and in some instances we may not be selected;
● many customers periodically accept bids from multiple carriers for their shipping needs, and this process may
depress freight rates or result in the loss of some business to competitors;
●
●
●
the trend toward consolidation in the trucking industry may create other large carriers with greater financial
resources and other competitive advantages relating to their size;
advances in technology require increased investments to remain competitive, and our customers may not be
willing to accept higher freight rates to cover the cost of these investments; and
competition from non-asset-based logistics and freight brokerage companies may adversely affect our
customer relationships and freight rates.
We may be unsuccessful in improving our profitability.
We may not be able to sustain or increase profitability in the future. Achieving profitability depends upon numerous
factors, including our ability to effectively and successfully implement other strategic plans and initiatives, increase
our average revenue per tractor, improve driver retention, and control expenses. If we are unable to improve our
profitability, then our liquidity, financial position, and results of operations may be adversely affected.
We self-insure for a significant portion of our claims exposure, which could significantly increase the volatility
of, and decrease the amount of, our earnings.
Our future insurance and claims expense could reduce our earnings and make our earnings more volatile. We self-
insure for a significant portion of our claims exposure and related expenses. We accrue amounts for liabilities based
on our assessment of claims that arise and our insurance coverage for the periods in which the claims arise, and we
evaluate and revise these accruals from time to time based on additional information. Due to our significant self-
insured amounts, we have significant exposure to fluctuations in the number and severity of claims and the risk of
being required to accrue or pay additional amounts if our estimates are revised or the claims ultimately prove to be
more severe than originally assessed. Historically, we have had to significantly adjust our reserves on several
occasions, and future significant adjustments may occur. Further, our self-insured retention levels could change and
result in more volatility than in recent years.
We maintain insurance above the amounts for which we self-insure with licensed insurance carriers. Although we
believe our aggregate insurance limits are sufficient to cover reasonably expected claims, it is possible that one or
more claims could exceed those limits. If any claim was to exceed our coverage, we would bear the excess, in addition
to our other self-insured amounts. Our insurance and claims expense could increase, or we could find it necessary to
again raise our self-insured retention or decrease our aggregate coverage limits when our policies are renewed or
replaced. Our operating results and financial condition may be adversely affected if these expenses increase, if we
experience a claim in excess of our coverage limits, if we experience a claim for which we do not have coverage, if
we experience an increase in number of claims, or if we have to increase our reserves.
Our auto liability insurance policy contains a provision under which we have the option, on a retroactive basis, to
assume responsibility for the entire cost of covered claims during the policy period in exchange for a refund of a
portion of the premiums we paid for the policy. This is referred to as "commuting" the policy. We have elected to
commute policies in two of the past six years. We have received approximately $7.1 million in policy premiums, net
of additional reserves for claims commuted, in respect of commuting these policies. In exchange, we have assumed
the risk for all claims during the years for the policies commuted. Our subsequent payouts for the claims assumed
have been less than the refunds. We expect the total refunds to exceed the total payouts; however, not all of the claims
have been finally resolved and we cannot assure you of the result. We may continue to commute policies for certain
15
years in the future. To the extent we do so, and one or more claims result in large payouts, we will not have insurance,
and our financial condition, results of operation, and liquidity could be materially and adversely affected.
Our self-insurance for auto liability at one of our subsidiaries and our use of a captive insurance company could
adversely impact our operations.
Covenant Transport, Inc. has been approved to self-insure for auto liability by the FMCSA. We believe this status,
along with the use of a captive insurance company, allows us to post substantially lower aggregate letters of credit and
restricted cash than we would be required to post without this status or the use of a captive insurance company. Our
wholly owned captive insurance subsidiary is a regulated insurance company through which we insure a portion of
our auto liability claims in certain states. An increase in the number or severity of auto liability claims for which we
self-insure through Covenant Transport, Inc. or insure through the captive insurance company or pressure in the
insurance and reinsurance markets could adversely impact our earnings and results of operations. Further, both
arrangements increase the possibility that our expenses will be volatile.
To comply with certain state insurance regulatory requirements, cash and cash equivalents must be paid to our captive
insurance subsidiary as capital investments and insurance premiums, which are restricted as collateral for anticipated
losses. Significant future increases in the amount of collateral required by third-party insurance carriers and regulators
would reduce our liquidity and could adversely affect our results of operations and capital resources. Further,
regulations applicable to the captive insurance subsidiary may increase our costs, limit our ability to change premiums,
restrict our ability to access cash held by this subsidiary, and otherwise impede our ability to take actions we deem
advisable.
Fluctuations in the price or availability of fuel, hedging activities, the volume and terms of diesel fuel purchase
commitments, and surcharge collection and surcharge policies approved by customers may increase our costs
of operation, which could materially and adversely affect our profitability.
Fuel is one of our largest operating expenses. Diesel fuel prices fluctuate greatly due to economic, political, weather,
and other factors beyond our control, each of which may lead to an increase in the cost of fuel. Fuel also is subject to
regional pricing differences and often costs more on the West Coast, where we have significant operations.
Additionally, fuel pricing can be affected by the rising demand in developing countries and could be adversely
impacted by the use of crude oil and oil reserves for other purposes and diminished drilling activity. Such events may
lead not only to increases in fuel prices, but also to fuel shortages and disruptions in the fuel supply chain. Because
our operations are dependent upon diesel fuel, significant diesel fuel cost increases, shortages, or supply disruptions
could materially and adversely affect our results of operations and financial condition.
From time to time, we use hedging contracts and volume purchase arrangements to attempt to limit the effect of price
fluctuations. We may be forced to make cash payments under the hedging arrangements. Our hedging arrangements
effectively allow us to pay a fixed rate for fuel that is determined based on the market rate at the time we enter into
the hedge. In times of falling diesel fuel prices, including recently, our costs will not be reduced to the same extent
they would have reduced if we had not entered into the hedging contracts and we may incur significant expense in
connection with our obligation to make cash payments under such contracts. Accordingly, in times of falling diesel
fuel prices, our profitability and cash flows may be negatively impacted to a greater extent than if we had not entered
into the hedging contracts.
We use a fuel surcharge program to recapture a portion of the increases in fuel prices over a base rate negotiated with
our customers. Our fuel surcharge program does not protect us against the full effect of increases in fuel prices. The
terms of each customer's fuel surcharge program vary and certain customers have sought to modify the terms of their
fuel surcharge programs to minimize recoverability for fuel price increases. A failure to improve our fuel price
protection through these measures, increases in fuel prices, a shortage or rationing of diesel fuel, or significant
payments under hedging arrangements, could materially and adversely affect our results of operations.
We depend on the proper functioning and availability of our information systems and a system failure or
unavailability or an inability to effectively upgrade our information systems could cause a significant disruption
to our business and have a materially adverse effect on our results of operation.
We depend on the proper functioning and availability of our information systems, including financial reporting and
operating systems, in operating our business. Our operating system is critical to understanding customer demands,
accepting and planning loads, dispatching equipment and drivers, and billing and collecting for our services. Our
financial reporting system is critical to producing accurate and timely financial statements and analyzing business
information to help us manage effectively. We recently finished implementing a multi-year project to upgrade the
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hardware and software of our information systems with respect to most of our subsidiaries. We have experienced
difficulties in converting portions of our operations, including inefficiencies resulting in a reduction in average miles
per tractor and increased driver turnover. While not as significant as experienced with Covenant Transport, Inc.'s
system conversion in 2011, SRT's conversion to the new system in early 2014 provided some of the aforementioned
difficulties.
Our operations and those of our technology and communications service providers are vulnerable to interruption by
fire, earthquake, power loss, telecommunications failure, terrorist attacks, Internet failures, computer viruses, and
other events beyond our control. Although we attempt to reduce the risk of disruption to our business operations should
a disaster occur through redundant computer systems and networks and backup systems, there can be no assurance
that such measures will be effective. If any of our critical information systems fail or become otherwise unavailable,
whether as a result of the upgrade project or otherwise, we would have to perform the functions manually, which could
temporarily impact our ability to manage our fleet efficiently, to respond to customers' requests effectively, to maintain
billing and other records reliably, and to bill for services and prepare financial statements accurately or in a timely
manner. Our business interruption insurance may be inadequate to protect us in the event of an unforeseeable and
extreme catastrophe. Any significant system failure, upgrade complication, security breach, or other system disruption
could interrupt or delay our operations, damage our reputation, cause us to lose customers, or impact our ability to
manage our operations and report our financial performance, any of which could have a materially adverse effect on
our business.
Our Third Amended and Restated Credit Agreement (our "Credit Facility") and other financing arrangements
contain certain covenants, restrictions, and requirements, and we may be unable to comply with such
covenants, restrictions, and requirements. A default could result in the acceleration of all or part of our
outstanding indebtedness, which could have an adverse effect on our financial condition, liquidity, results of
operations, and the market price of our Class A common stock.
We have a $95.0 million Credit Facility with a group of banks and numerous other financing arrangements. Our
Credit Facility contains certain restrictions and covenants relating to, among other things, dividends, liens, acquisitions
and dispositions outside of the ordinary course of business, affiliate transactions, and a fixed charge coverage ratio, if
availability is below a certain threshold. We have had difficulty meeting budgeted results and have had to request
amendments or waivers in the past. If we are unable to meet budgeted results or otherwise comply with our Credit
Facility, we may be unable to obtain amendments or waivers under our Credit Facility, or we may incur fees in doing
so.
Certain other financing arrangements contain certain restrictions and non-financial covenants, in addition to those
contained in our Credit Facility. In addition, certain of our fuel hedging contracts are with lenders under our Credit
Facility and could be terminated by such lenders if the Credit Facility is terminated or replaced. If we fail to comply
with any of our financing arrangement covenants, restrictions, and requirements, we will be in default under the
relevant agreement, which could cause cross-defaults under our other financing arrangements. In the event of any
such default, if we failed to obtain replacement financing, amendments to, or waivers under the applicable financing
arrangements, our lenders could cease making further advances, declare our debt to be immediately due and payable,
fail to renew letters of credit, impose significant restrictions and requirements on our operations, institute foreclosure
procedures against their collateral, or impose significant fees and transaction costs. If acceleration occurs, economic
conditions such as the recent credit market crisis may make it difficult or expensive to refinance the accelerated debt
or we may have to issue equity securities, which would dilute stock ownership. Even if new financing is made
available to us, credit may not be available to us on acceptable terms. A default under our financing arrangements
could result in a materially adverse effect on our liquidity, financial condition, and results of operations.
Our substantial indebtedness and capital and operating lease obligations could adversely affect our ability to
respond to changes in our industry or business.
As a result of our level of debt, capital leases, operating leases, and encumbered assets, we believe:
●
our vulnerability to adverse economic conditions and competitive pressures is heightened;
● we will continue to be required to dedicate a substantial portion of our cash flows from operations to lease
payments and repayment of debt, limiting the availability of cash for other purposes;
●
●
our flexibility in planning for, or reacting to, changes in our business and industry will be limited;
our profitability is sensitive to fluctuations in interest rates because some of our debt obligations are subject
17
to variable interest rates, and future borrowings and lease financing arrangements will be affected by any such
fluctuations;
●
our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions,
or other purposes may be limited; and
● we may be required to issue additional equity securities to raise funds, which would dilute the ownership
position of our stockholders.
Our financing obligations could negatively impact our future operations, our ability to satisfy our capital needs, or our
ability to engage in other business activities. We also cannot assure you that additional financing will be available to
us when required or, if available, will be on terms satisfactory to us.
We have significant ongoing capital requirements that could affect our profitability if we are unable to generate
sufficient cash from operations and obtain financing on favorable terms.
The truckload industry is capital intensive, and our policy of operating newer equipment requires us to expend
significant amounts annually. We expect to pay for projected capital expenditures with cash flows from operations,
borrowings under our Credit Facility, proceeds from the sale of our used revenue equipment, proceeds under other
financing facilities, and leases of revenue equipment. If we are unable to generate sufficient cash from operations and
obtain financing on favorable terms in the future, we may have to limit our fleet size, enter into less favorable financing
arrangements, or operate our revenue equipment for longer periods, any of which could have a materially adverse
effect on our profitability.
We derive a significant portion of our revenue from our major customers, the loss of one or more of which
could have a materially adverse effect on our business.
A significant portion of our revenue is generated from our major customers. In 2015 and 2014, one customer accounted
for more than 10% of our consolidated revenue. This customer was serviced by both our Truckload segment and our
Solutions subsidiary. Our top five customers accounted for approximately 34%, 29%, and 25% of our total revenue
in 2015, 2014, and 2013, respectively. Generally, we do not have long-term contractual relationships with our major
customers. Accordingly, in response to economic conditions, supply and demand in our industry, our performance,
our customers' internal initiatives, or other factors, our customers may reduce or eliminate their use of our services, or
threaten to do so to gain pricing or other concessions from us.
Economic conditions and capital markets may adversely affect our customers and their ability to remain solvent. Our
customers' financial difficulties can negatively impact our results of operations and financial condition, especially if
our customers were to delay or default on payments to us. For some of our customers, we have entered into multi-
year contracts, and the rates we charge may not remain advantageous. A reduction in or termination of our services,
by one or more of our major customers, could have a materially adverse effect on our business and operating results.
We depend on third-parties, particularly in our brokerage business, and service instability from these providers
could increase our operating costs and reduce our ability to offer brokerage services, which could adversely
affect our revenue, results of operations, and customer relationships.
Our brokerage business is dependent upon the services of third-party capacity providers, including other truckload
carriers. For this business, we do not own or control the transportation assets that deliver our customers' freight, and
we do not employ the people directly involved in delivering the freight. This reliance could also cause delays in
reporting certain events, including recognizing revenue and claims. These third-party providers seek other freight
opportunities and may require increased compensation in times of improved freight demand or tight trucking capacity.
Our inability to secure the services of these third-parties could significantly limit our ability to serve our customers on
competitive terms. Additionally, if we are unable to secure sufficient equipment or other transportation services to
meet our commitments to our customers or provide our services on competitive terms, our operating results could be
materially and adversely affected. Our ability to secure sufficient equipment or other transportation services is affected
by many risks beyond our control, including equipment shortages in the transportation industry, particularly among
contracted truckload carriers, interruptions in service due to labor disputes, changes in regulations impacting
transportation, and changes in transportation rates.
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Increases in driver compensation or difficulty in attracting and retaining qualified drivers could adversely
affect our profitability.
Like many truckload carriers, we experience substantial difficulty in attracting and retaining sufficient numbers of
qualified drivers, including independent contractors. Our industry periodically experiences a shortage of qualified
drivers, particularly during periods of economic expansion, in which alternative employment opportunities are more
plentiful and freight demand increases, or during periods of economic downturns, in which unemployment benefits
might be extended and financing is limited for independent contractors who seek to purchase equipment or for students
who seek financial aid for driving school. Regulatory requirements, including CSA and hours-of-service changes,
and an improved economy could further reduce the number of eligible drivers or force us to increase driver
compensation to attract and retain drivers. We have seen evidence that stricter hours-of-service regulations adopted
by the DOT have tightened, and may continue to tighten, the market for eligible drivers. A shortage of qualified
drivers and intense competition for drivers from other trucking companies will create difficulties in maintaining or
increasing the number of our drivers, including independent contractor drivers. The compensation we offer our drivers
and independent contractors is subject to market conditions, and we may find it necessary to increase driver and
independent contractor compensation in future periods. In addition, we and our industry suffer from a high turnover
rate of drivers. The high turnover rate requires us to continually recruit a substantial number of drivers in order to
operate existing revenue equipment. Our use of team-driven tractors in our expedited business requires two drivers
per tractor, which further increases the number of drivers we must recruit and retain in comparison to operations that
require one driver per tractor. If we are unable to continue to attract and retain a sufficient number of drivers, we
could be forced to, among other things, adjust our compensation packages, increase the number of our tractors without
drivers, or operate with fewer trucks and face difficulty meeting shipper demands, any of which could adversely affect
our growth and profitability.
If our independent contractor drivers are deemed by regulators or judicial process to be employees, our
business and results of operations could be adversely affected.
Tax and other regulatory authorities have asserted that independent contractor drivers in the trucking industry are
employees rather than independent contractors. Federal legislators have introduced legislation in the past to make it
easier for tax and other authorities to reclassify independent contractor drivers as employees, including legislation to
increase the recordkeeping requirements for those that engage independent contractor drivers and to heighten the
penalties of companies who misclassify their employees and are found to have violated employees' overtime and/or
wage requirements. Additionally, federal legislators have sought to abolish the current safe harbor allowing taxpayers
meeting certain criteria to treat individuals as independent contractors if they are following a long-standing, recognized
practice, extend the Fair Labor Standards Act to independent contractors, and impose notice requirements based upon
employment or independent contractor status and fines for failure to comply. Some states have put initiatives in place
to increase their revenues from items such as unemployment, workers' compensation, and income taxes, and a
reclassification of independent contractor drivers as employees would help states with this initiative. Taxing and other
regulatory authorities and courts apply a variety of standards in their determination of independent contractor
status. Our classification of independent contractors has been the subject of audits by such authorities from time to
time. While we have been successful in continuing to classify our independent contractor drivers as independent
contractors and not employees, we may be unsuccessful in defending that position in the future. If our independent
contractor drivers are determined to be our employees, we would incur additional exposure under federal and state
tax, workers' compensation, unemployment benefits, labor, employment, and tort laws, including for prior periods, as
well as potential liability for employee benefits and tax withholdings.
We operate in a highly regulated industry, and changes in existing regulations or violations of existing or future
regulations could have a materially adverse effect on our operations and profitability.
We operate in the U.S. pursuant to operating authority granted by the DOT and in various Canadian provinces pursuant
to operating authority granted by the Ministries of Transportation and Communications in such provinces. We operate
within Mexico by utilizing third-party carriers within that country. Our company drivers and independent contractors
also must comply with the safety and fitness regulations of the DOT, including those relating to drug and alcohol
testing and hours-of-service. Such matters as weight and equipment dimensions also are subject to government
regulations. We also may become subject to new or more restrictive regulations relating to exhaust emissions, drivers'
hours-of-service, ergonomics, on-board reporting of operations, collective bargaining, security at ports, and other
matters affecting safety or operating methods. Future laws and regulations may be more stringent and require changes
in our operating practices, influence the demand for transportation services, or require us to incur significant additional
costs. Higher costs incurred by us or by our suppliers who pass the costs onto us through higher prices could adversely
affect our results of operations.
19
Safety-related evaluations and rankings under CSA could adversely affect our profitability and operations, our
ability to maintain or grow our fleet, and our customer relationships.
Under CSA, drivers and fleets are evaluated and ranked against their peers based on certain safety-related standards.
As a result, certain current and potential drivers may not be hired to drive for us and our fleet could be ranked poorly
as compared to our peer carriers. We recruit and retain first-time drivers to be part of our fleet, and these drivers may
have a higher likelihood of creating adverse safety events under CSA. The occurrence of future deficiencies could
affect driver recruitment by causing high-quality drivers to seek employment with other carriers or could cause our
customers to direct their business away from us and to carriers with higher fleet safety rankings, either of which would
adversely affect our results of operations. Additionally, competition for drivers with favorable safety ratings may
increase and thus could necessitate increases in driver-related compensation costs. Further, we may incur greater than
expected expenses in our attempts to improve our scores as a result of those scores.
Certain of our subsidiaries have exceeded the established intervention thresholds in a number of the seven CSA safety-
related categories. Based on these unfavorable ratings, we may be prioritized for an intervention action or roadside
inspection, either of which could adversely affect our results of operations. In addition, customers may be less likely
to assign loads to us. We have put new procedures in place in an attempt to address areas where we have exceeded
the thresholds. However, we cannot assure you these measures will be effective.
Receipt of an unfavorable DOT safety rating could have a material adverse effect on our operations and
profitability.
We currently have a satisfactory DOT rating, which is the highest available rating under the current safety rating scale.
If we were to receive a conditional or unsatisfactory DOT safety rating, it could adversely affect our business as
customer contracts may require a satisfactory DOT safety rating, and a conditional or unsatisfactory rating could
negatively impact or restrict our operations.
The FMCSA has proposed regulations that would modify the existing rating system and the safety labels assigned to
motor carriers evaluated by the DOT. Under the proposed regulations, the methodology for determining a carrier’s
DOT safety rating would be expanded to include the on-road safety performance of the carrier’s drivers and
equipment, as well as results obtained from investigations. Exceeding certain thresholds based on such performance
or results would cause a carrier to receive an unfit safety rating. If these proposed regulations are enacted and we
were to receive an unfit safety rating, our business would be adversely affected in the same manner as if we received
a conditional or unsatisfactory safety rating under the current regulations.
Properties with environmental problems may create liabilities for us.
Under various federal, state, and local environmental laws, statutes, ordinances, rules, and regulations, as an owner of
real property, we may be liable for the costs of removal or remediation of certain hazardous or toxic substances at, on,
in, or under our properties, as well as certain other potential costs relating to hazardous or toxic substances (including
government fines and penalties and damages for injuries to persons and adjacent property). These laws may impose
liability without regard to whether we knew of, or were responsible for, the presence or disposal of those substances.
This liability may be imposed on us in connection with the activities of an operator of, or tenant at, the property. The
cost of any required remediation, removal, fines, or personal or property damages and our liability therefore could
exceed the value of the property and/or our aggregate assets. In addition, the presence of those substances, or the
failure to properly dispose of or remove those substances, may adversely affect our ability to sell or rent that property
or to borrow using that property as collateral, which, in turn, would reduce our liquidity and adversely affect our
operations.
We are not aware of any environmental condition with respect to any of our property interests that we believe would
be reasonably likely to have a material adverse effect on us. However, in connection with the eleventh amendment to
our Credit Facility and pledging of certain properties as collateral, we commissioned Phase I environmental
inspections on certain real properties we own. A number of these inspections revealed conditions that warranted a
Phase II inspection. If we receive unfavorable results from such inspections, we may incur significant unanticipated
expenditures, which could adversely affect our financial condition and results of operations.
Increased prices, reduced productivity, and scarcity of financing for new revenue equipment may adversely
affect our earnings and cash flows.
We are subject to risk with respect to higher prices for new tractors. Prices have increased and may continue to
increase, due, in part, to government regulations applicable to newly manufactured tractors and diesel engines and
20
due, in part, to the pricing discretion of equipment manufacturers. In addition, we have recently equipped our tractors
with safety, aerodynamics, and other options that increase the price of the tractors. More restrictive U.S.
Environmental Protection Agency emissions standards have required vendors to introduce new engines. Compliance
with such regulations has increased the cost of our new tractors and could impair equipment productivity, lower fuel
mileage, and increase our operating expenses. These adverse effects, combined with the uncertainty as to the reliability
of the vehicles equipped with the newly designed diesel engines and the residual values realized from the disposition
of these vehicles, could increase our costs or otherwise adversely affect our business or operations as the regulations
become effective.
The market for used equipment is cyclical and can be volatile, and any downturn in the market could negatively impact
our earnings and cash flows. We have a combination of agreements and non-binding statements of indicative trade
values covering the terms of trade-in commitments from our primary equipment vendors for disposal of a portion of
our revenue equipment. From time to time, prices we expect to receive under these arrangements may be higher than
the prices we would receive in the open market. We may suffer a financial loss upon disposition of our equipment if
these vendors refuse or are unable to meet their financial obligations under these agreements, if we do not enter into
definitive agreements consistent with the indicative trade values, if we fail to or are unable to enter into similar
arrangements in the future, or if we do not purchase the number of replacement units from the vendors required for
such trade-ins.
If we are unable to retain our key employees, our business, financial condition, and results of operations could
be harmed.
We are highly dependent upon the services of the following key employees: David R. Parker, our Chairman of the
Board and Chief Executive Officer and Joey B. Hogan, our President. We currently do not have employment
agreements with Messrs. Parker or Hogan. The loss of any of their services could negatively impact our operations
and future profitability. We must continue to develop and retain a core group of managers and attract, develop, and
retain sufficient additional managers if we are to continue to improve our profitability and have appropriate succession
planning for key management personnel.
We may not make acquisitions in the future, or if we do, we may not be successful in our acquisition strategy.
We made ten acquisitions between 1996 and 2006. Accordingly, acquisitions have provided a substantial portion of
our growth. We may not have the financial capacity or be successful in identifying, negotiating, or consummating
any future acquisitions. If we fail to make any future acquisitions, our historical growth rate could be materially and
adversely affected. Any acquisitions we undertake could involve the dilutive issuance of equity securities and/or
incurring indebtedness. In addition, acquisitions involve numerous risks, including difficulties in assimilating or
integrating the acquired company's operations or assets into our business, the diversion of our management's attention
from other business concerns, risks of entering into markets in which we have had no or only limited direct experience,
and the potential loss of customers, key employees, and drivers of the acquired company, all of which could have a
materially adverse effect on our business and operating results.
Our 49% owned subsidiary, TEL, faces certain additional risks particular to its operations, any one of which
could adversely affect our operating results.
In May 2011, we acquired a 49% interest in TEL, a used equipment leasing company and reseller. We account for
our investment in TEL using the equity method of accounting. TEL faces several risks similar to those we face and
additional risks particular to its business and operations. The ability to secure financing and market fluctuations in
interest rates could impact TEL's ability to grow its leasing business and its margins on leases. Adverse economic
activity may restrict the number of used equipment buyers and their ability to pay prices for used equipment that we
find acceptable. In addition, TEL's leasing customers are typically small trucking companies without substantial
financial resources, and TEL is subject to risk of loss should those customers be unable to make their lease
payments. Further, we believe the used equipment market will significantly impact TEL's results of operations and
such market has been volatile in the past. There can be no assurance that TEL will experience gains on sale similar
to those it has experienced in the past and it may incur losses on sale. As regulations change, the market for used
equipment may be impacted as such regulatory changes may make used equipment costly to upgrade to comply with
such regulations or we may be forced to scrap equipment if such regulations eliminate the market for particular used
equipment. Further, there is an overlap in providers of equipment financing to TEL and our wholly owned operations
and those providers may consider the combined exposure and limit the amount of credit available to us.
Under the purchase agreement we entered into, we have an option to acquire 100% of TEL through May 2016. If we
exercise the option, our consolidated indebtedness would increase. If we fail to exercise the option, the counterparties
21
have the right to purchase our 49% ownership at a defined price. Further, the other owners of TEL and we have
discussed amending the option price formula (in each direction) to reflect changes in the business since inception of
our investment. We expect any revision to result in an increase in the amount we would have to pay to exercise the
option. There is no assurance that we will be able to agree on a revised formula or that TEL's ownership incentives
will not be changed as a result of this process.
Finally, we do not control TEL's ownership or management. Our investment in TEL is subject to the risk that TEL's
management and controlling members may make business, financial, or management decisions with which we do not
agree or that the management or controlling members may take risks or otherwise act in a manner that does not serve
our interests. If any of the foregoing were to occur, the value of our investment in TEL could decrease, and our
financial condition, results of operations, and cash flow could suffer as a result.
We are exposed to risks related to our receivables factoring arrangements.
We engage in receivables factoring arrangements pursuant to which our clients, consisting of smaller trucking
companies, factor their receivables to us for a fee to facilitate faster cash flow. We advance 85% to 95% of each
receivable factored and retain the remainder as collateral for collection issues that might arise. The retained amounts
are returned to the clients after the related receivable has been collected. We evaluate each client's customer base
under predefined criteria. These factored receivables are generally unsecured, except when personal guarantees are
received. While we have procedures to monitor and limit exposure to credit risk on these receivables, there can be no
assurance such procedures will continue to effectively limit collection risk and avoid losses. We periodically assess
the credit risk of our client's customers and regularly monitor the timeliness of payments. Slowdowns, bankruptcies,
or financial difficulties within the markets our clients serve may impair the financial condition of one or more of our
client's customers and may hinder such customers' ability to pay the factored receivables on a timely basis or at all. If
any of these difficulties are encountered, our cash flows and results of operations could be adversely impacted.
Our Chairman of the Board, Chief Executive Officer, and President and his wife control a large portion of our
stock and have substantial control over us, which could limit other stockholders' ability to influence the
outcome of key transactions, including changes of control.
Our Chairman of the Board and Chief Executive Officer, David Parker, and his wife, Jacqueline Parker, beneficially
own or have sole voting and dispositive power over approximately 21% of our outstanding Class A common stock
and 100% of our Class B common stock. On all matters with respect to which our stockholders have a right to vote,
including the election of directors, each share of Class A common stock is entitled to one vote, while each share of
Class B common stock is entitled to two votes. All outstanding shares of Class B common stock are owned by the
Parkers and are convertible to Class A common stock on a share-for-share basis at the election of the Parkers or
automatically upon transfer to someone outside of the Parker family. This voting structure gives the Parkers
approximately 39% of the voting power of all of our outstanding stock. As such, the Parkers are able to substantially
influence decisions requiring stockholder approval, including the election of our entire board of directors, the adoption
or extension of anti-takeover provisions, mergers, and other business combinations. This concentration of ownership
could limit the price that some investors might be willing to pay for the Class A common stock, and could allow the
Parkers to prevent or could discourage or delay a change of control, which other stockholders may favor. The interests
of the Parkers may conflict with the interests of other holders of Class A common stock, and they may take actions
affecting us with which other stockholders disagree.
Litigation may adversely affect our business, financial condition, and results of operations.
Our business is subject to the risk of litigation by employees, independent contractor drivers, customers, vendors,
government agencies, and other parties through private actions, class actions, administrative proceedings, regulatory
actions, and other processes. Recently, trucking companies, including us, have been subject to lawsuits, including
class action lawsuits, alleging violations of various federal and state wage and hour laws regarding, among other
things, employee meal breaks, rest periods, overtime eligibility, and failure to pay for all hours worked. A number of
these lawsuits have resulted in the payment of substantial settlements or damages by the defendants. The outcome of
litigation, particularly class action lawsuits and regulatory actions, is difficult to assess or quantify, and the magnitude
of the potential loss relating to such lawsuits may remain unknown for substantial periods of time. The cost to defend
litigation may also be significant. Not all claims are covered by our insurance, and there can be no assurance that our
coverage limits will be adequate to cover all amounts in dispute. To the extent we experience claims that are uninsured,
exceed our coverage limits, involve significant aggregate use of our self-insured retention amounts, or cause increases
in future premiums, the resulting expenses could have a material adverse effect on our business, results of operations,
financial condition, or cash flows.
22
Seasonality and the impact of weather affect our operations and profitability.
Our tractor productivity decreases during the winter season because inclement weather impedes operations, and some
customers reduce their shipments after the winter holiday season. Our expedited operations, which is a growing part
of our business, historically have experienced a greater reduction in first quarter demand than our other
operations. Revenue also can be affected by bad weather and holidays, since revenue is directly related to available
working days of shippers. At the same time, operating expenses increase due to declining fuel efficiency because of
engine idling and higher fuel prices and due to harsh weather creating higher accident frequency, increased claims,
and more equipment repairs. We also could suffer short-term impacts from weather-related events such as hurricanes,
blizzards, ice storms, and floods that could harm our results or make our results more volatile. Weather and other
seasonal events could adversely affect our operating results.
23
PROPERTIES
Our corporate headquarters and main terminal are located on approximately 180 acres of property in Chattanooga,
Tennessee. This facility includes an office building of approximately 182,000 square feet, a maintenance facility of
approximately 65,000 square feet, a body shop of approximately 60,000 square feet, and a truck wash. Our Solutions
subsidiary is also operated and managed out of the Chattanooga facility. We maintain seven terminals, which are
utilized by our Truckload segment located on our major traffic lanes in or near the cities listed below. These terminals
provide a base for drivers in proximity to their homes, a transfer location for trailer relays on transcontinental routes,
parking space for equipment dispatch, and the other uses indicated below.
Terminal Locations
Chattanooga, Tennessee
Texarkana, Arkansas
Hutchins, Texas
Pomona, California
Allentown, Pennsylvania
LaVergne, Tennessee
Orlando, Florida
Maintenance
x
x
x
Recruiting/
Orientation
x
x
x
x
Sales
x
x
x
x
x
Ownership
Owned
Owned
Owned
Owned
Owned
Owned
Owned
LEGAL PROCEEDINGS
From time-to-time, we are a party to ordinary, routine litigation arising in the ordinary course of business, most of
which involves claims for personal injury and property damage incurred in connection with the transportation of
freight.
We maintain insurance to cover liabilities arising from the transportation of freight for amounts in excess of certain
self-insured retentions. In management's opinion, our potential exposure under pending legal proceedings is
adequately provided for in the accompanying consolidated financial statements.
In August 2014, the U.S. District Court for the Southern District of Ohio issued a pre-trial decision in a lawsuit against
SRT relating to a cargo claim incurred in 2008. The court awarded the plaintiff approximately $5.9 million plus
prejudgment interest and costs and denied a cross-motion for summary judgment by SRT. Previously, the court had
ruled in favor of SRT on all but one count before overturning its earlier decision and ruling in favor of the plaintiff.
SRT filed a Notice of Appeal with the U.S. Sixth Circuit Court of Appeals on September 24, 2014. On November 5,
2015, the Sixth Circuit reversed the district court in part, finding that the plaintiff could not recover under two of its
causes of action. The Sixth Circuit remanded the proceedings to the district court for further factual determinations
relating to whether the plaintiff could recover under a third cause of action.
We are defendant in a lawsuit that was filed on August 17, 2015 in the Superior Court of the State of California, Los
Angeles County. This lawsuit arises out of the work performed by the plaintiff as a company driver for Covenant
Transport during the period of August, 2013 through October, 2014. Plaintiff is seeking class action certification
under the complaint. The case was removed from state court in September, 2015 to the U.S. District Court in the
Central District of California, and subsequently, the case was transferred to the U.S. District Court in the Eastern
District of Tennessee on October 5, 2015 where the case is now pending. The complaint asserts that the time period
covered by the lawsuit is "the four (4) years prior to the filing of this action through the trial date" and alleges claims
for failure to properly pay for rest breaks, inspection time, waiting time, fueling and paperwork time, meal periods and
other related wage and hour claims under the California Labor Code.
Based on our present knowledge of the facts and, in certain cases, advice of outside counsel, management believes the
resolution of open claims and pending litigation, taking into account existing reserves, is not likely to have a materially
adverse effect on our consolidated financial statements.
24
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Price Range of Common Stock
Our Class A common stock is traded on the NASDAQ Global Select Market, under the symbol "CVTI." The following
table sets forth, for the calendar periods indicated, the range of high and low sales price for our Class A common stock
as reported by NASDAQ from January 1, 2014, to December 31, 2015.
Period
High
Low
Calendar Year 2014:
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
$12.29
$12.96
$19.30
$29.10
$ 7.85
$ 8.88
$11.05
$15.63
Calendar Year 2015:
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
$36.82
$35.85
$27.27
$23.38
$22.69
$24.59
$17.44
$16.84
On February 26, 2016, the last reported sale price of our Class A common stock on the NASDAQ Global Select
Market was $22.18.
As of February 26, 2016, we had approximately 102 stockholders of record of our Class A common stock; however,
we estimate our actual number of stockholders is much higher because a substantial number of our shares are held of
record by brokers or dealers for their customers in street names. As of February 26, 2016, Mr. Parker, together with
certain of his family members, owned all of the outstanding Class B common stock.
Dividend Policy
We have never declared and paid a cash dividend on our Class A or Class B common stock. It is the current intention
of our Board of Directors to continue to retain earnings to finance our business and reduce our indebtedness rather
than to pay dividends. The payment of cash dividends is currently limited by our financing arrangements. Future
payments of cash dividends will depend upon our financial condition, results of operations, capital commitments,
restrictions under then-existing agreements, and other factors deemed relevant by our Board of Directors.
25
(In thousands, except per share and operating data amounts)
SELECTED FINANCIAL DATA
Statement of Operations Data:
Freight revenue
Fuel surcharge revenue
Total revenue
Operating expenses:
Salaries, wages, and related expenses
Fuel expense
Operations and maintenance
Revenue equipment rentals and purchased
transportation
Operating taxes and licenses
Insurance and claims (1)
Communications and utilities
General supplies and expenses
Depreciation and amortization, including
gains and losses on disposition of
equipment and impairment of assets
Goodwill impairment charge (2)
Total operating expenses
Operating income (loss)
Other expense (income):
Interest expense
Other
Other expenses, net
Equity in income of affiliate
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
2015
Years Ended December 31,
2012
2013
2014
2011
$ 512,026
$ 640,120 $ 578,204 $ 538,933 $ 527,435
84,120
140,601
146,819
145,616
$ 724,240 $ 718,980 $ 684,549 $ 674,254 $ 652,627
140,776
244,779
122,160
46,458
118,583
231,761
168,856
47,251
111,772
218,946
186,002
50,043
102,954
217,080
194,841
45,839
85,010
211,169
208,693
43,862
63,353
11,016
31,909
6,162
14,007
61,384
10,960
39,594
5,806
16,950
46,384
10,969
30,305
5,240
16,002
43,694
11,043
33,133
4,809
16,068
43,222
12,148
35,886
5,137
15,627
46,274
-
656,458
67,782
-
679,334
39,646
-
664,155
20,394
-
651,045
23,209
11,539
653,688
(1,061)
8,445
-
8,445
4,570
63,907
21,822
$ 42,085 $ 17,808 $ 5,244 $
10,400
(3)
10,397
2,750
12,747
7,503
10,807
(13)
10,794
3,730
32,582
14,774
16,208
12,697
(155)
(13)
16,053
12,684
675
1,875
(16,439)
12,400
(2,172)
6,335
6,065 $ (14,267)
Basic income (loss) per share
Diluted income (loss) per share
$
$
Basic weighted average common shares
2.32 $
1.17 $
0.35 $
0.41 $
(0.97)
2.30 $
1.15 $
0.35 $
0.41 $
(0.97)
outstanding
18,145
15,250
14,837
14,742
14,689
Diluted weighted average common shares
outstanding
18,311
15,517
15,039
14,808
14,689
26
Selected Balance Sheet Data:
Net property and equipment
Total assets (3)
Long-term debt and capital lease obligations,
less current maturities
Total stockholders' equity
Selected Operating Data:
Capital expenditures (proceeds), net (4)
Average freight revenue per loaded mile (5)
Average freight revenue per total mile (5)
Average freight revenue per tractor per week (5)
Average miles per tractor per year
Weighted average tractors for year (6)
Total tractors at end of period (6)
Total trailers at end of period (7)
Team-driven tractors as percentage of fleet
2015
Years Ended December 31,
2012
2013
2014
2011
$ 454,049 $ 382,491 $ 329,608 $ 279,017 $ 322,303
$ 647,423 $ 539,304 $ 461,188 $ 395,590 $ 435,442
$ 207,060 $ 172,903 $ 182,677 $ 109,217 $ 144,296
$ 202,160 $ 169,204 $ 100,360 $ 94,673 $ 87,055
1.77 $
1.60 $
1.89 $
1.69 $
1.63 $
1.47 $
1.66 $
1.49 $
$ 148,994 $ 89,455 $ 91,976 $ (15,738) $ 54,402
1.53
$
$
1.38
$ 3,967 $ 3,777 $ 3,411 $ 3,320 $ 3,069
115,775
119,375
122,508
3,029
2,777
2,700
2,978
2,688
2,656
7,361
6,861
6,978
27.3%
29.2%
35.3%
118,103
2,895
2,884
6,904
28.1%
123,275
2,609
2,665
6,722
32.1%
(1)
(2)
(3)
(4)
(5)
(6)
(7)
2014 insurance and claims expense includes $7.5 million additional reserves for 2008 cargo claim.
Represents non-cash impairment charges to write off the goodwill in our Truckload segment.
Adjusted for retrospective adoption of ASU 2015-17.
Includes equipment purchased under capital leases.
Excludes fuel surcharge revenue.
Includes monthly rental tractors and tractors provided by independent contractors.
Excludes monthly rental trailers.
The information set forth above should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's consolidated financial statements and notes thereto
included in this Annual Report.
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Cautionary Note Regarding Forward-Looking Statements
This section, 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. In this annual report, statements relating to the ability of our
infrastructure to support future growth, our ability to recruit and retain qualified drivers, our ability to react to market
conditions, our ability to gain market share, future tractor and trailer count and prices, expected functioning of our
information technology systems, expected sources of working capital, liquidity and funds for meeting equipment
purchase obligations, future inflation, future third-party service provider relationships and availability, future
compensation arrangements with independent contractors and drivers, expected owner operator usage, future driver
market, planned allocation of capital, future equipment costs, expected settlement of operating lease obligations,
future asset sales, future insurance and claims, future tax expense and deductions, future fuel expense and the future
effectiveness of fuel surcharge programs and price hedges, future effectiveness of interest rate swaps, expected capital
expenditures (including the future mix of lease and purchase obligations), future asset utilization, future trucking
capacity, expected freight demand and volumes, future rates, future depreciation and amortization, and future
purchased transportation expense, among others, are forward-looking statements. 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
"Risk Factors," set forth above. Readers should review and consider the factors discussed in "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.
EXECUTIVE OVERVIEW
For 2015, CTG reported the highest freight revenue, net income, and earnings per diluted share in our 30-year history.
Revenue and earnings improved for the fourth consecutive year, and our adjusted operating ratio, a key measure of
profitability in our industry, was sub-90% for the first time since 1999. We experienced strength across all parts of
our business, as profitability improved in every business unit. Our consolidated financial results are summarized as
follows:
● Total revenue was $724.2 million, compared with $719.0 million for 2014, and freight revenue (excludes
revenue from fuel surcharge) was $640.1 million, compared with $578.2 million for 2014;
● Operating income was $67.8 million, compared with operating income of $39.6 million for 2014;
● Net income was $42.1 million, or $2.30 per diluted share, compared with net income of $17.8 million, $1.15
per diluted share, for 2014. Net income for 2015 includes a one-time federal income tax credit of
approximately $4.7 million, or $0.26 per diluted share and a commutation credit of approximately $2.2
million, or $0.12 per diluted share, and net income for 2014 includes an unfavorable after-tax impact of
approximately $4.6 million, or $0.30 per diluted share, attributable to an adverse 2008 cargo claim judgement;
28
● Our equity investment in TEL provided $4.6 million of pre-tax earnings in 2015 compared to $3.7 million for
2014;
● Stockholders' equity at December 31, 2015, was $202.2 million and our tangible book value was $202.0
million, or $11.15 per basic share; and
● Our return on invested capital (net income over net balance sheet debt and equity) was 9.4%.
The business environment was mixed in 2015. The first half of the year was characterized by above-normal winter
volumes and normal spring volumes. This contributed to a relatively favorable environment relating to customer rate
increases, partially offset by upward pressure on driver pay. During the second half of the year, our industry
experienced lower volumes due in part to slowing business investment and overstocked inventories. The rate
environment became more difficult, as contractual rate increases slowed and spot market rates (which affect a small
portion of our business) fell sharply. The bright spot in the fourth-quarter freight market related to expedited shipments
for e-commerce, omni-channel, organic food, and other premium service shippers. These shippers have a large surge
of holiday season business as well as a growing year-round presence. Our top three consolidated customers, and four
of our top ten customers for 2015 were participants directly or indirectly in this sector, which contributed to our strong
fourth quarter results. With the growth of this business our net income has become somewhat concentrated in fourth
quarter.
Other major trends for the year included a very competitive market for professional truck drivers and falling diesel
fuel prices. Attracting and retaining safe, service-oriented professional truck drivers is among the greatest challenges
for our industry and for CTG. We have implemented meaningful driver compensation adjustments that increased our
costs in 2015, and we expect driver compensation to continue to increase over time. The national average cost per
gallon for diesel fuel fell significantly during 2015, but our net fuel cost per mile remained approximately the same as
in 2014 because of lower fuel surcharge revenue and approximately $14.0 million in net fuel hedging expense
amortized from other comprehensive income upon expiration of out-of-the-money contracts. For the past several
years we have hedged approximately 20% to 25% of our annual fuel purchases to lower the volatility of this expense
category. In 2015, the hedging worked against us.
Our strong financial performance and solid balance sheet have supported significant investments in our business.
During 2015, we invested $112.2 in net capital expenditures for new equipment as well as approximately $35.5 million
to purchase our headquarters and main terminal facility, which previously had been leased. Our tractor fleet is among
the industry's newest, with an average age of 1.7 years, affording us significant flexibility to manage our trade cycle.
At December 31, 2015, our total balance sheet debt and capital lease obligations, net of cash, were $246.2 million, our
stockholders' equity was $202.2 million, and we had approximately $60.6 million available for borrowing on our
revolving line of credit. Due primarily to the increased peak season freight revenues billed in November and
December 2015 as compared to the same months in 2014, our net accounts receivable balance increased by
approximately $16.7 million at December 31, 2015, compared to December 31, 2014. We expect to collect the
majority of these receivables in the first quarter of 2016. In addition, due to the timing of tractor deliveries and
disposals, the number of tractors recorded as "Assets held for sale" on our consolidated balance sheet increased,
representing $25.6 million at year-end 2015 compared to $4.3 million at year-end 2014. Of the 376 tractors included
in assets held for sale at December 31, 2015, we have contracted for the sale of approximately 350 of those tractors
by March 31, 2016.
Outlook
Our outlook for 2016 as a whole reflects confidence in our ability to operate profitably along with caution concerning
the near term freight environment. From a customer perspective, we received excellent reviews of our peak-season
service levels from certain key customers and have indications to expect additional freight from certain of them during
all of 2016, including the next peak season. We believe we are well positioned to capitalize on these opportunities as
they arise. However, general freight levels have softened compared with the first two months of 2015, and many of
our customers are not predicting improvement in their shipping levels until the second half of the year. While we
expect e-commerce and omni-channel shipping growth to continue, these customers have typically re-engineered their
peak season supply chains and made capacity commitments during the summer and early fall of each year.
Accordingly, we remain cautious until such discussions with these customers become more advanced.
Outside of the general freight environment, company-specific profit improvement opportunities exist in certain asset-
based operations, and we have plans to grow Solutions' revenue and related earnings contribution in 2016. These
opportunities are expected to be accompanied by continued upward pressure on driver compensation. In the near term,
we expect to limit our investments in growth-type capital expenditures and perhaps reduce our average fleet size
29
slightly in the near term as we monitor external developments. At the same time, we plan to concentrate on safety,
driver retention, and cost controls. Based on the current and expected freight environment, diesel fuel prices, and
driver market, we believe it may be challenging to meet or exceed our net income (excluding the $4.7 million one-
time federal tax credit and $2.2 million commutation credit) during 2016, with the first half of the year being
particularly challenging due to the significantly softer freight volumes we are experiencing currently compared with
the start of 2015.
Over the longer term, we believe CTG is well positioned for success in our industry. We are encouraged by several
years of improving profitability and by the growing benefits of our investments in human, technology, and capital
resources. We believe our balance of expedited, refrigerated, dedicated, and logistics business units exposes us to
diversified revenue streams and margin pressures, and that our primary services are conducted in growing niches
where our size and capabilities differentiate us from many competitors. Further, upcoming regulatory changes
involving electronic logging devices, speed limiters, and hair follicle drug testing may reduce the effective amount of
industry capacity and increase the need for certain of our services. Against this backdrop, we must provide an
increasingly attractive home for the best professional truck drivers, provide a rewarding and challenging career for
our non-driving associates, constantly evolve with our customers' supply chains, closely monitor our costs, and
allocate capital to generate appropriate returns.
RESULTS OF CONSOLIDATED OPERATIONS
The following table sets forth total revenue and freight revenue (total revenue less fuel surcharge revenue) for the
periods indicated:
Revenue
(in thousands)
Revenue:
Freight revenue
Fuel surcharge revenue
Total revenue
2015
Year ended December 31,
2014
2013
$
$
640,120
84,120
724,240
$
$
578,204
140,776
718,980
$
$
538,933
145,616
684,549
For 2015, total revenue increased $5.3 million, or 0.7%, to $724.2 million from $719.0 million in 2014. Freight
revenue increased $61.9 million, or 10.7%, to $640.1 million for 2015, from $578.2 million in 2014, while fuel
surcharge revenue decreased $56.7 million year-over-year. The increase in freight revenue resulted from a $49.6
million increase in freight revenue from our Truckload segment and a $12.3 million increase in revenues from
Solutions.
The increase in 2015 Truckload revenue relates to an increase in average freight revenue per tractor per week of 5.0%
compared to 2014 and a $4.6 million increase in freight revenue contributed by our temperature-controlled intermodal
service offering, as well as an increase in our average tractor fleet of 3.5% from 2014. The increase in average freight
revenue per tractor per week is the result of a 5.7% increase, or 9.1 cents per mile, in average rate per total mile
partially offset by a 0.6% decrease in average miles per unit when compared to 2014. Team driven units increased
approximately 13.6% to an average of approximately 950 teams in 2015 from approximately 840 teams in 2014.
The increase in Solutions' revenue is primarily the result of additional peak-season freight opportunities during the
fourth quarter of 2015, improved coordination with our Truckload segment, and additional business from new
customers added during the year.
For 2014, total revenue increased $34.4 million, or 5.0%, to $719.0 million from $684.5 million in 2013. Freight
revenue increased $39.3 million, or 7.3%, to $578.2 million for 2014, from $538.9 million in 2013, while fuel
surcharge revenue decreased $4.8 million year-over-year. The increase in freight revenue resulted from a $23.5
million increase in freight revenue from our Truckload segment and a $15.9 million increase in revenues from
Solutions.
The increase in 2014 Truckload revenue relates to an increase in average freight revenue per tractor per week of 10.7%
compared to 2013 and a $4.1 million increase in freight revenue contributed by our temperature-controlled intermodal
service offering. These improvements were partially offset by a decrease in our average tractor fleet of 6.1% from
2013. The increase in average freight revenue per tractor per week is the result of a 7.2% increase, or 10.7 cents per
mile, in average rate per total mile, as well as a 3.3% increase in average miles per unit when compared to 2013.
30
The increase in Solutions' revenue is primarily the result of additional peak-season freight opportunities during the
fourth quarter of 2014, improved coordination with our Truckload segment, and additional business from new
customers added during the year, partially offset by the discontinuation of an underperforming location in June of
2014.
If softer freight demand continues, we expect rates and utilization to moderate compared to the prior 24 months.
However, if the electronic logging device mandates are announced or if economic growth improves the resulting
impact to supply and demand could drive an increase in both rates and utilization.
For comparison purposes in the discussion below, we use total revenue and freight revenue (total revenue less fuel
surcharge revenue) when discussing changes as a percentage of revenue. As it relates to the comparison of expenses
to freight revenue, we believe removing fuel surcharge revenue, which is sometimes a volatile source of revenue,
affords a more consistent basis for comparing the results of operations from period-to-period. Nonetheless, freight
revenue represents a non-GAAP financial measure. Accordingly, undue reliance should not be placed on the
discussion of freight revenue, and discussions of freight revenue should be considered in combination with discussions
of total revenue. For each expense item discussed below, we have provided a table setting forth the relevant expense
first as a percentage of total revenue, and then as a percentage of freight revenue.
Salaries, wages, and related expenses
(dollars in thousands)
Salaries, wages, and related expenses
$
% of total revenue
% of freight revenue
2015
244,779
33.8%
38.2%
Year ended December 31,
2014
231,761
32.2%
40.1%
$
$
2013
218,946
32.0%
40.6%
Salaries, wages, and related expenses increased approximately $13.0 million, or 5.6%, for the year ended December
31, 2015, compared with 2014. As a percentage of total revenue, salaries, wages, and related expenses increased to
33.8% of total revenue for the year ended December 31, 2015, as compared to 32.2% in 2014. As a percentage of
freight revenue, salaries, wages, and related expenses declined to 38.2% of freight revenue for the year ended
December 31, 2015, from 40.1% in 2014. Salaries, wages, and related expenses increased approximately 2.1 cents per
mile primarily due to pay adjustments for both driver and non-drivers since 2014, as well as increased non-driver
incentive compensation tied to our results of operations. Additionally, group insurance costs increased approximately
$0.9 million from 2014 as a result of more participants and fees directly related to the Affordable Care Act and we
had additional costs of approximately $1.0 million due to an increase in non-driver headcount as a result of the
increased average number of units. These increases were partially offset by lower workers' compensation expense in
2015 at 1.7 cents per company mile compared to 3.4 cents in 2014 due to fewer claims with less severity. Additionally,
we had an increase in the percentage of our fleet comprised of independent contractors, whose costs are included in
the purchased transportation line item.
Salaries, wages, and related expenses increased approximately $12.8 million, or 5.9%, for the year ended December
31, 2014, compared with 2013. As a percentage of total revenue, salaries, wages, and related expenses remained
relatively even at 32.2% of total revenue for the year ended December 31, 2014, as compared to 32.0% in 2013. As
a percentage of freight revenue, salaries, wages, and related expenses declined to 40.1% of freight revenue for the year
ended December 31, 2014, from 40.6% in 2013. Salaries, wages, and related expenses increased approximately 5.7
cents per mile primarily due to pay adjustments for both driver and non-drivers since 2013, as well as increased non-
driver incentive compensation tied to our results of operations. Additionally, group insurance costs increased
approximately $1.7 million from 2013 as a result of more participants and fees directly related to the Affordable Care
Act. We also had higher workers' compensation expense in 2014 at 3.4 cents per company mile compared to 3.0 cents
in 2013 due to an increase in our DOT accidents and increased development of prior period claims. Additionally, we
had a reduction in the percentage of our fleet comprised of independent contractors, whose costs are included in the
purchased transportation line item.
Going forward, we believe salaries, wages, and related expenses will increase as a result of a tight driver market, wage
inflation, higher healthcare costs, and increased incentive compensation due to better performance. In particular, we
expect driver pay to increase as we look to reduce the number of unseated trucks in our fleet in a tight market for
drivers. As a percentage of total revenue and freight revenue, salaries, wages, and related expenses will fluctuate to
some extent based on the percentage of revenue generated by independent contractors and our Solutions business, for
which payments are reflected in the purchased transportation line item.
31
Fuel expense
(dollars in thousands)
Fuel expense
% of total revenue
Year ended December 31,
2014
2015
2013
$ 122,160
16.9%
$ 168,856
23.5%
$ 186,002
27.2%
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 we operate; 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 business relating to shipments obtained from
freight brokers does 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 changes 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 the 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. Fuel prices as
measured by the DOE averaged approximately $1.12 cents per gallon lower in 2015 compared with 2014 and 9.7 cents
per gallon lower in 2014 compared to 2013.
Additionally, $15.3 million, $3.1 million, and $0.6 million were reclassified from accumulated other comprehensive
(loss) income to our results from operations for the years ended December 31, 2015, 2014, and 2013, respectively, as
additional expense for 2015 and 2014 and as a reduction of expense in 2013, related to losses and gains on fuel hedge
contracts that expired. In addition to the amounts reclassified as a result of expired contracts, we recognized a
reduction of fuel expense of $1.4 million relating to previously recognized fuel expense as a result of the expiration
of the fuel hedge contracts for which the fuel hedging relationship was deemed to be ineffective on a prospective basis
in 2014. As a result, the changes in fair value for those contracts were recorded as expense rather than as a component
of other comprehensive loss. At December 31, 2015, all fuel hedge contracts were deemed to be effective and thus
continue to qualify as cash flow hedges. There was no material ineffectiveness recorded on the contracts that existed
at December 31, 2015. The ineffectiveness was calculated using the cumulative dollar offset method as an estimate
of the difference in the expected cash flows of the respective fuel hedge contracts compared to the changes in the all-
in cash outflows required for the diesel fuel purchases.
To measure the effectiveness of our fuel surcharge program, we subtract fuel surcharge revenue (other than the fuel
surcharge revenue we reimburse to independent contractors and other third parties, which is included in purchased
transportation) from our fuel expense. The result is referred to as net fuel expense. Our net fuel expense as a
percentage of freight revenue is affected by the cost of diesel fuel net of fuel surcharge collection, the percentage of
miles driven by company trucks, our fuel economy, and our percentage of deadhead miles, for which we do not receive
material fuel surcharge revenues. Net fuel expense is shown below:
(dollars in thousands)
Total fuel surcharge
Less: Fuel surcharge revenue reimbursed to
independent contractors and other third
parties
Company fuel surcharge revenue
Total fuel expense
Less: Company fuel surcharge revenue
Net fuel expense
% of freight revenue
Year ended December 31,
2014
2015
2013
$ 84,120
$ 140,776
$ 145,616
7,790
$ 76,330
$ 122,160
76,330
$ 45,830
7.2%
10,837
$ 129,939
$ 168,856
129,939
$ 38,917
6.7%
12,863
$ 132,753
$ 186,002
132,753
$ 53,249
9.9%
Total fuel expense decreased approximately $46.7 million, or 27.7%, for the year ended December 31, 2015, compared
with 2014. As a percentage of total revenue, total fuel expense decreased to 16.9% of total revenue for the year ended
December 31, 2015, from 23.5% in 2014. As a percentage of freight revenue, total fuel expense decreased to 19.1%
of freight revenue for year ended December 31, 2015, from 29.2% in 2014. These decreases primarily related to an
increase in our average fuel miles per gallon during 2015 as a result of purchasing equipment with more fuel-efficient
engines. The decreases were partially offset by net losses from fuel hedging transactions of $13.9 million in 2015
compared to $3.1 million in 2014. Additionally, during the second quarter of 2014 we recognized an approximately
$0.9 million fuel tax credit related to a amended fuel tax returns for the years 2010 – 2013.
32
Net fuel expense increased $6.9 million, or 17.8%, for the year ended December 31, 2015 compared to 2014. As a
percentage of freight revenue, net fuel expense increased 0.5% for the year ended December 31, 2015 compared to
2014. These increases primarily resulted from lower fuel surcharge recovery. The increases were partially offset by
improved miles per gallon due to new engine technology, internal fuel efficiency initiatives, a greater percentage of
miles driven by independent contractors, and an approximately $0.9 million fuel tax credit taken during the second
quarter of 2014 related to a amended fuel tax returns for the years 2010 – 2013.
For the year ended December 31, 2014, total fuel expense decreased approximately $17.1 million, or 9.2%, compared
with 2013. As a percentage of total revenue, total fuel expense decreased to 23.5% of total revenue for the year ended
December 31, 2014, from 27.2% in 2013. As a percentage of freight revenue, total fuel expense decreased to 29.2%
of freight revenue for year ended December 31, 2014, from 34.5% in 2013. These decreases primarily related to an
increase in our average fuel miles per gallon during 2014 as a result of purchasing equipment with more fuel-efficient
engines and internal fuel efficiency initiatives, and improved fuel pricing.
Net fuel expense decreased $14.3 million, or 26.9%, for the year ended December 31, 2014 compared to 2013. As a
percentage of freight revenue, net fuel expense decreased 3.2% for the year ended December 31, 2014 compared to
2013. These decreases primarily resulted from improved miles per gallon due to new engine technology, internal fuel
efficiency initiatives, improved fuel surcharge recovery, and improved fuel pricing, in each case, net of gains and
losses on fuel hedging contracts.
We expect to continue managing our idle time and truck speeds, investing in more fuel-efficient tractors to improve
our miles per gallon, locking in fuel hedges when deemed appropriate, and partnering with customers to adjust fuel
surcharge programs that are inadequate to recover a fair portion of 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 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 uses diesel fuel for refrigeration, but
usually does not recover fuel surcharges on refrigeration fuel), percentage of revenue generated from independent
contractors, the success of fuel efficiency initiatives, and gains and losses on fuel hedging contracts. We have focused
our efforts on increasing our ability to recover fuel surcharges under our customer contracts for fuel used in
refrigeration units. If these efforts are successful, they could give rise to an increase in fuel surcharges recovered and
a corresponding decrease in net fuel expense. Additionally, in recent months petroleum based markets have
experienced rapid declines such that current pricing has reached four-year lows and, at current prices, we would
experience fuel hedging losses over the next several years. The amount of these losses would vary depending on
market fuel prices. Finally, we believe fuel prices could increase going forward based upon the recent significant
decline in prices. As such, there has been significant volatility in our net fuel expense, and we would expect such
volatility to continue if these market conditions persist.
Operations and maintenance
(dollars in thousands)
Operations and maintenance
% of total revenue
% of freight revenue
2015
$ 46,458
6.4%
7.3%
Year ended December 31,
2014
$ 47,251
6.6%
8.2%
2013
$ 50,043
7.3%
9.3%
Operations and maintenance decreased $0.8 million, or 1.7%, for the year ended December 31, 2015, compared with
2014. As a percentage of total revenue, operations and maintenance remained relatively even at 6.4% of total revenue
in 2015, compared with 6.6% in 2014. As a percentage of freight revenue, operations and maintenance decreased to
7.3% of freight revenue for 2015, from 8.2% in 2014 due to a decrease in our average age of equipment partially offset
by increased driver recruiting costs.
For the year ended December 31, 2014, operations and maintenance decreased $2.8 million, or 5.6%, compared with
2013. As a percentage of total revenue, operations and maintenance decreased to 6.6% of total revenue in 2014, from
7.3% in 2013. As a percentage of freight revenue, operations and maintenance decreased to 8.2% of freight revenue
for 2014, from 9.3% in 2013. These decreases were primarily the result of reduced parts and vehicle maintenance
expense related to the fleet reduction, removing older, higher maintenance units from the fleet, and a decline in the
average age of our revenue equipment, partially offset by increased driver recruiting costs.
33
Revenue equipment rentals and purchased transportation
(dollars in thousands)
Revenue equipment rentals and purchased
transportation
% of total revenue
% of freight revenue
Year ended December 31,
2014
2015
2013
$ 118,583
16.4%
18.5%
$ 111,772
15.5%
19.3%
$ 102,954
15.0%
19.1%
Revenue equipment rentals and purchased transportation increased approximately $6.8 million, or 6.1%, for the year
ended December 31, 2015, compared with 2014. As a percentage of total revenue, revenue equipment rentals and
purchased transportation increased to 16.4% of total revenue for the year ended December 31, 2015, from 15.5% in
2014. As a percentage of freight revenue, revenue equipment rentals and purchased transportation decreased to 18.5%
of freight revenue for the year ended December 31, 2015, from 19.3% in 2014. These changes were primarily the
result of a $14.4 million increase in payments to third-party transportation providers related to increased revenues at
our Solutions subsidiary, growth of our temperature-controlled intermodal service offering and an increase in
payments to independent contractors, which comprised a larger percentage of our total fleet. These increases were
partially offset by a decrease in leased equipment rental payments and by lower fuel surcharge pass-through payments
to independent contractors and third party carriers. For the year ended December 31, 2015, miles run by independent
contractors increased to 9.0% of our total miles from 8.2% for 2014, and tractors under operating leases decreased to
115 units from 150 units in 2014. We expect revenue equipment rentals to decrease going forward as a result of our
increase in acquisition of revenue equipment through purchases rather than operating leases. As discussed below, this
decrease may be partially or fully offset by an increase in purchased transportation as we expect to continue to grow
our Solutions and intermodal service offerings.
For the year ended December 31, 2014, revenue equipment rentals and purchased transportation increased
approximately $8.8 million, or 8.6%, compared with 2013. As a percentage of total revenue, revenue equipment
rentals and purchased transportation increased to 15.5% of total revenue for the year ended December 31, 2014, from
15.0% in 2013. As a percentage of freight revenue, revenue equipment rentals and purchased transportation increased
to 19.3% of freight revenue for the year ended December 31, 2014, from 19.1% in 2013. These increases were
primarily the result of a $12.4 million increase in payments to third-party transportation providers related to increased
revenues at our Solutions subsidiary and growth of our temperature-controlled intermodal service offering. These
increases were partially offset by a decrease in leased equipment rental payments and a decrease in payments to
independent contractors, which comprised a smaller percentage of our total fleet in 2014. For the year ended December
31, 2014, miles run by independent contractors decreased to 8.2% of our total miles from 9.2% for 2013 and tractors
under operating leases decreased to 150 units from 650 units in 2013.
This expense category will fluctuate with the number and percentage of loads hauled by independent contractors,
loads handled by Solutions, and tractors, trailers, and other assets financed with operating leases. In addition, factors
such as the cost to obtain third party transportation services, and growth of our intermodal service offerings, and the
amount of fuel surcharge revenue passed through to the third party carriers and independent contractors will affect
this expense category. If industry-wide trucking capacity were to tighten in relation to freight demand, we may need
to increase the amounts we pay to third-party transportation providers, independent contractors, and intermodal
transportation providers, which could increase this expense category on an absolute basis and as a percentage of freight
revenue absent an offsetting increase in revenue. We continue to actively recruit independent contractors and, if we
are successful, we would expect this line item to increase as a percentage of revenue.
Operating taxes and licenses
(dollars in thousands)
Operating taxes and licenses
% of total revenue
% of freight revenue
2015
$ 11,016
1.5%
1.7%
Year ended December 31,
2014
$ 10,960
1.5%
1.9%
2013
$ 10,969
1.6%
2.0%
For the periods presented, the change in operating taxes and licenses was not significant as either a percentage of total
revenue or freight revenue.
34
Insurance and claims
(dollars in thousands)
Insurance and claims
% of total revenue
% of freight revenue
2015
$ 31,909
4.4%
5.0%
Year ended December 31,
2014
$ 39,594
5.5%
6.8%
2013
$ 30,305
4.4%
5.6%
Insurance and claims, consisting primarily of premiums and deductible amounts for liability, physical damage, and
cargo damage insurance and claims, decreased approximately $7.7 million, or 19.4%, for year ended December 31,
2015, compared to 2014. As a percentage of total revenue, insurance and claims decreased to 4.4% of total revenue
for the year ended December 31, 2015, from 5.5% in 2014. As a percentage of freight revenue, insurance and claims
decreased to 5.0% of freight revenue for the year ended December 31, 2015, from 6.8% in 2014. These decreases are
primarily related to the difference between the approximately $7.5 million of additional reserves related to the adverse
judgment in 2014 regarding a 2008 cargo claim compared with the $3.6 million benefit in the second quarter of 2015
from commutation of our auto liability policy for the period from April 1, 2013, through September 30, 2014.
Excluding the 2008 cargo claim, insurance and claims cost per mile decreased to 9.6 cents per mile in 2015 from 9.9
cents per mile in 2014.
For the year ended December 31, 2014, insurance and claims increased approximately $9.3 million, or 30.7%, for year
ended December 31, 2014, compared to 2013. As a percentage of total revenue, insurance and claims increased to
5.5% of total revenue for the year ended December 31, 2014, from 4.4% in 2013. As a percentage of freight revenue,
insurance and claims increased to 6.8% of freight revenue for the year ended December 31, 2014, from 5.6% in 2013.
These increases are primarily related to approximately $7.5 million charge relating to the 2008 cargo claim. Excluding
this cargo claim, insurance and claims cost per mile increased to 9.9 cents per mile in 2014 from 9.1 cents per mile in
2013, primarily due to a decline in safety performance, as measured by accidents per million miles, partially offset by
a reduction in loss development factors resulting from more disciplined claims management.
Our auto liability (personal injury and property damage), cargo, and general liability insurance programs include
significant self-insured retention amounts. The auto liability policy contains a feature whereby we are able to
retroactively obtain a partial refund of the premium in exchange for taking on the liability for incidents that occurred
during the period and releasing the insurers. This is referred to as "commuting" the policy or "policy commutation."
In several past periods, including the policy period from April 1, 2013, through September 30, 2014, we have
commuted the policy, which has lowered our insurance and claims expense. We are also self-insured for physical
damage to our equipment. Because of these significant self-insured exposures, insurance and claims expense may
fluctuate significantly from period-to-period. Any increase in frequency or severity of claims, or any increases to then-
existing reserves, could adversely affect our financial condition and results of operations. In relation to the 2008 cargo
claim reserve, the judgement was partially reversed and the proceedings were remanded to the district court for further
factual determinations. If these further proceedings are resolved favorably to us, any reduction of the accrual could
reduce insurance and claims expense in the period in which the claim is resolved. On the other hand, if we are not
successful in such a finding or mediation, insurance and claims expense may increase as a result of continuing
litigation expenses, including pre and post judgment interest. We periodically evaluate strategies to efficiently reduce
our insurance and claims expense, which in the past has included the commutation of our auto liability insurance
policy. We intend to evaluate our ability to commute the current policy and any such commutation could significantly
impact insurance and claims expense.
Communications and utilities
(dollars in thousands)
Communications and utilities
% of total revenue
% of freight revenue
$
Year ended December 31,
2014
2015
2013
6,162
0.9%
1.0%
$
5,806
0.8%
1.0%
$
5,240
0.8%
1.0%
For the periods presented, the change in communications and utilities was not significant as either a percentage of
total revenue or freight revenue.
35
General supplies and expenses
(dollars in thousands)
General supplies and expenses
% of total revenue
% of freight revenue
2015
$ 14,007
1.9%
2.2%
Year ended December 31,
2014
$ 16,950
2.4%
2.9%
2013
$ 16,002
2.3%
3.0%
For the year ended December 31, 2015, general supplies and expenses decreased approximately $2.9 million, or
17.4%, compared with 2014. As a percentage of total revenue, general supplies and expenses decreased to 1.9% of
total revenue for the year ended December 31, 2015, from 2.4% in 2014. As a percentage of freight revenue, general
supplies and expenses decreased to 2.2% of freight revenue for the year ended December 31, 2015, from 2.9% in
2014. These decreases are primarily the result of the approximately $1.2 million reversal of deferred rent expense and
reduced building rent expense related to the purchase of our previously leased Chattanooga headquarters property.
The change in general supplies and expenses for the year ended December 31, 2014 as compared to 2013 was not
significant as either a percentage of total revenue or freight revenue.
Depreciation and amortization
(dollars in thousands)
Depreciation and amortization
% of total revenue
% of freight revenue
2015
$ 61,384
8.5%
9.6%
Year ended December 31,
2014
$ 46,384
6.5%
8.0%
2013
$ 43,694
6.4%
8.1%
Depreciation and amortization consists primarily of depreciation of tractors, trailers and other capital assets offset or
increased, as applicable by gains or losses on dispositions of capital assets. Depreciation and amortization in 2015
increased $15.0 million, or 32.3%, compared with 2014. As a percentage of total revenue, depreciation and
amortization increased to 8.5% of total revenue for the year ended December 31, 2015 compared to 6.5% for 2014.
As a percentage of freight revenue, depreciation and amortization increased to 9.6% of freight revenue for the year
ended December 31, 2015, from 8.0% in 2014. Depreciation, consisting primarily of depreciation of revenue
equipment and excluding gains and losses, increased $13.0 million in 2015 from 2014, primarily as a result of new
equipment and an increase in owned tractors of approximately 500 due to a reduction in use of operating leases to
finance revenue equipment. Gains on the disposal of property and equipment, totaling $0.6 million in 2015, were $2.0
million lower than 2014 due to the number, type, and mileage of the equipment sold. Additionally, depreciation
increased and gains on the disposal of property and equipment decreased as a result of the softening of the used tractor
market during the latter portion of the year. We expect to see an increase in depreciation and amortization going
forward as a result of our expected increase in acquisition of revenue equipment through purchases and capital leases
rather than operating leases and as a result of our purchase of our corporate headquarters, executed in August 2015.
Additionally, if the used tractor market remains soft it could result in lower gains than we’ve experienced in the prior
years, thereby increasing our depreciation and amortization expense.
For the year ended December 31, 2014, depreciation and amortization increased $2.7 million, or 6.2%, compared with
2013. As a percentage of total revenue, depreciation and amortization remained relatively even with 2013 at 6.5% of
total revenue for the year ended December 31, 2014 compared to 6.4% for 2013. As a percentage of freight revenue,
depreciation and amortization decreased slightly to 8.0% of freight revenue for the year ended December 31, 2014,
from 8.1% in 2013. Depreciation, consisting primarily of depreciation of revenue equipment and excluding gains and
losses, increased $4.7 million in 2014 from 2013, primarily because owned tractors increased by approximately 500
due to a reduction in use of operating leases to finance revenue equipment as well the increased cost of new tractors.
Gains on the disposal of property and equipment, totaling $2.7 million in 2014, were $1.9 million higher than 2013
due to the type and mileage of the equipment sold. We expect to see an increase in depreciation and amortization
going forward as a result of our expected increase in acquisition of revenue equipment through purchases rather than
operating leases.
36
Other expense, net
(dollars in thousands)
Other expense, net
% of total revenue
% of freight revenue
$
2015
Year ended December 31,
2014
$ 10,794
1.5%
1.9%
8,445
1.2%
1.3%
2013
$ 10,397
1.5%
1.9%
Other expense, net includes interest expense, interest income, and other miscellaneous non-operating items, which
decreased approximately $2.3 million, or 21.8%, for the year ended December 31, 2015, compared with 2014. As a
percentage of total revenue, other expense, net remained relatively even with 2014 at 1.2% for the year ended
December 31, 2015 compared to 1.5% for the year ended December 31, 2014. As a percentage of freight revenue,
other expense, net decreased to 1.3% of freight revenue for the year ended December 31, 2015 from 1.9% for the year
ended December 31, 2014. These decreases are primarily the result of the repayments of debt and capital leases from
the proceeds of our late November 2014 follow-on stock offering partially offset by the increase in debt at a lower
average interest rate related to the August 2015 purchase of our corporate headquarters.
For the year ended December 31, 2014, other expense, net, decreased approximately $0.4 million, or 3.8%, for the
year ended December 31, 2014, compared with 2013. As a percentage of total revenue, other expense, net remained
even with 2013 at 1.5% for the year ended December 31, 2014. As a percentage of freight revenue, other expense,
net remained even with 2013 at 1.9% of freight revenue for the year ended December 31, 2014.
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 our ability to continue to generate profitable results and reduce our leverage.
Equity in income of affiliate
(in thousands)
Equity in income of affiliate
Year ended December 31,
2014
2015
2013
$
4,570
$
3,730
$
2,750
We have accounted for our investment in TEL using the equity method of accounting and thus our financial results
include our proportionate share of TEL's net income. For the years ended December 31, 2015 and 2014, the increase
in TEL's contributions to our results is due to their growth in both leasing and truck sales. Given TEL's growth over
the past three years and volatility in the used and leased equipment markets in which TEL operates, including the
recent softening of the used tractor market, we expect the impact on our earnings resulting from our investment and
TEL's profitability to moderate over the next twelve months. Additionally, should we exercise our option to purchase
the remaining 51% of TEL, the consolidation of TEL's results and balance sheet would provide for a significant
fluctuation to our presentation and amounts reported. The extent of such fluctuation could depend on a number of
factors, including the exercise price, the amount of TEL's debt upon exercise, how TEL is financing their fleet of
tractors and trailers (which would impact depreciation, amortization, and revenue equipment rentals), and
compensation and benefits at TEL.
Income tax expense
(dollars in thousands)
Income tax expense
% of total revenue
% of freight revenue
2015
$ 21,822
3.0%
3.4%
Year ended December 31,
2014
$ 14,774
2.1%
2.6%
$
2013
7,503
1.1%
1.4%
Income tax expense increased approximately $7.0 million, or 47.7%, for the year ended December 31, 2015, compared
with 2014. As a percentage of total revenue, income tax expense increased to 3.0% of total revenue for 2015 from
2.1% in 2014. As a percentage of freight revenue, income tax expense increased to 3.4% of freight revenue for 2015
compared to 2.6% in 2014. These increases were primarily related to the $31.3 million increase in the pre-tax income
in 2015 compared to 2014 resulting from the improvements in operating income noted above, a one-time federal
income tax credit of approximately $4.7 million, and the increase in the contribution from TEL's earnings.
For the year ended December 31, 2014, income tax expense increased approximately $7.3 million, or 96.9%, for the
year ended December 31, 2014, compared with 2013. As a percentage of total revenue, income tax expense increased
to 2.1% of total revenue for 2014 from 1.1% in 2013. As a percentage of freight revenue, income tax expense increased
37
to 2.6% of freight revenue for 2014 compared to 1.4% in 2013. These increases were primarily related to the $19.8
million increase in the pre-tax income in 2014 compared to 2013 resulting from the improvements in operating income
noted above and the increase in the contribution from TEL's earnings.
The effective tax rate is different from the expected combined tax rate due primarily to permanent differences related
to our per diem pay structure for drivers. Due to the partial nondeductible effect of the per diem payments, our tax rate
will fluctuate in future periods as income fluctuates. We are currently evaluating several tax planning opportunities
and credits that if determined to be both applicable and to meet the recognition criteria provided by ASC 740, could
reduce our future tax expense.
RESULTS OF SEGMENT OPERATIONS
We have one reportable segment, asset-based truckload services, which we refer to as Truckload. In addition, our
Solutions subsidiary has service offerings ancillary to our asset-based Truckload services, including: freight brokerage
service directly and through freight brokerage agents who are paid a commission for the freight they provide and
accounts receivable factoring. These operations consist of several operating segments, which neither individually nor
in the aggregate meet the quantitative or qualitative reporting thresholds. As a result, these operations are grouped in
"Other."
"Unallocated Corporate Overhead" includes costs that are incidental to our activities and are not specifically allocated
to one of the segments. The following table summarizes financial and operating data by segment:
(in thousands)
Revenues:
Truckload
Other
Total
Operating Income (loss):
Truckload
Other
Unallocated Corporate Overhead
Total
Year ended
December 31,
2014
2013
2015
$ 655,918 $ 663,001 $ 644,403
40,146
55,979
$ 724,240 $ 718,980 $ 684,549
68,322
$ 74,107 $ 54,151 $ 27,746
1,271
3,894
(8,623)
(18,399)
$ 67,782 $ 39,646 $ 20,394
5,768
(12,093)
Comparison of Year Ended December 31, 2015 to Year Ended December 31, 2014
Our Truckload revenue decreased $7.1 million, as freight revenue increased $49.6 million and fuel surcharge revenue
decreased $56.7 million. The increase in freight revenue relates to an increase in average freight revenue per tractor
per week of 5.0% compared to 2014 and a $4.6 million increase in freight revenue contributed by our temperature-
controlled intermodal service offering, as well as an increase in our average tractor fleet of 3.5% from 2014. The
increase in average freight revenue per tractor per week is the result of a 5.7% increase, or 9.1 cents per mile, in
average rate per total mile partially offset by a 0.6% decrease in average miles per unit when compared to 2014.
Additionally, team driven units increased approximately 13.6% to an average of approximately 950 teams in 2015
compared to approximately 840 in 2014.
Our Truckload operating income was $20.0 million higher in 2015 than 2014 due to the abovementioned increase in
freight revenue. Additionally, operating costs per mile, net of fuel surcharge revenue, decreased primarily due to
reduced workers’ compensation expense and operations and maintenance expense partially offset by increased
salaries, wages, and related expenses (which was primarily due to a higher percentage of our fleet being comprised of
team-driven tractors, as well as driver and nondriver employee pay increases since the same 2014 period), increased
net fuel expense, and increased capital costs.
Other total revenue increased $12.3 million in 2015 compared to 2014 and operating income increased $1.9 million
for the same period. These improvements are primarily the result of additional peak season freight opportunities during
the fourth quarter of 2015, improved coordination with our Truckload segment, and additional business from new
customers added during the year.
The reduction in unallocated corporate overhead primarily includes $3.6 million in return of previously expensed
insurance premiums for the commutation of our primary auto liability policy for the period of April 1, 2013, through
38
September 30, 2014, and the $1.4 million reduction in fuel expense related to the ineffective fuel hedge contracts
fulfilled in 2015 that were deemed to be ineffective on a prospective basis in 2014.
Comparison of Year Ended December 31, 2014 to Year Ended December 31, 2013
Our Truckload revenue increased $18.6 million, as freight revenue increased $23.8 million and fuel surcharge revenue
decreased $5.2 million. The increase in freight revenue resulted largely from a more favorable rate and demand
environment, reflected by an increase in average freight revenue per tractor per week of 10.7% compared to 2013, and
a $4.1 million increase of freight revenue contributed from our temperature-controlled intermodal service, partially
offset by a decrease in our average tractor fleet of 6.1% from 2013 as well as the first quarter challenges of the harsh
winter weather and the unfavorable impact of the February 2014 implementation of our enterprise management system
at our SRT subsidiary. Additionally, 5.1% of our fleet lacked drivers during 2014, compared with approximately
4.8% during 2013.
Our Truckload operating income was $26.4 million higher in 2014 than 2013 due to higher freight revenue per tractor
per week, partially offset by $7.5 million of additional reserves related to a 2008 cargo claim. Additionally, net fuel
costs were lower due to improved miles per gallon due to new engine technology, improved fuel surcharge recovery,
and improved fuel pricing, in each case, net of gains and losses on fuel hedging contracts, partially offset by an increase
in operating costs per mile net of surcharge revenue primarily due to higher wages and capital costs.
Other total revenue increased $15.8 million in 2014 compared to 2013 and operating income increased $2.6 million
for the same period. These improvements are primarily the result of additional peak season freight opportunities during
the fourth quarter of 2014, improved coordination with our Truckload segment, and additional business from new
customers added during the year, partially offset by the discontinuation of an underperforming location in June of
2014.
The fluctuation in unallocated corporate overhead is primarily the result of increased incentive compensation,
headcount, claims development above the subsidiaries' retention, and expense related to the ineffective fuel hedging
contracts.
LIQUIDITY AND CAPITAL RESOURCES
Our business requires significant capital investments over the short-term and the long-term. Recently, we have
financed our capital requirements with borrowings under our Credit Facility, cash flows from operations, long-term
operating leases, capital leases, secured installment notes with finance companies, and proceeds from the sale of our
used revenue equipment. We had working capital (total current assets less total current liabilities) of $46.4 million
and $40.9 million at December 31, 2015 and 2014, respectively. Based on our expected financial condition, net capital
expenditures, results of operations, related net cash flows, installment notes, and other sources of financing, we believe
our working capital and sources of liquidity will be adequate to meet our current and projected needs and we do not
expect to experience material liquidity constraints in the foreseeable future.
As of December 31, 2015, we had $3.0 million of borrowings outstanding, undrawn letters of credit outstanding of
approximately $31.4 million, and available borrowing capacity of $60.6 million under the Credit Facility. Fluctuations
in the outstanding balance and related availability under our Credit Facility are driven primarily by cash flows from
operations and the timing and nature of property and equipment additions that are not funded through notes payable,
as well as the nature and timing of collection of accounts receivable, payments of accrued expenses, and receipt of
proceeds from disposals of property and equipment.
With an average tractor fleet age of 1.7 years, we believe we have flexibility to manage our fleet and we plan to
regularly evaluate our tractor replacement cycle, new tractor purchase requirements, and financing options.
Cash Flows
Net cash flows provided by operating activities were $85.5 million in 2015 compared with $73.7 million in 2014
primarily due to net income of $42.1 million in 2015 compared to $17.8 million in 2014, an increase in depreciation
and amortization due to more expensive revenue equipment and having more owned units, the 2014 insurance reserves
increase of $7.5 million stemming from a cargo loss in 2008, and the 2015 return of $5.0 million which we previously
provided to certain of our derivative counterparties related to the net liability position of certain of its fuel derivative
instruments. A portion of the net income fluctuation relates to a $3.6 million pre-tax reduction in insurance and claims
expense recorded in the second quarter of 2015 associated with commuting two auto liability policies. The insurer did
not remit the premium refund directly to the Company, but instead applied a credit to the current auto liability
39
insurance policy, such that we recorded the policy release premium refund as a prepaid asset at June 30, 2015; however
there was no corresponding cash flow effect. The cash flow effects are being realized over the 36 month term of the
policy as the portion of the premiums covered by the credit would have been due absent the credit. These increases
were partially offset by an increase in accounts receivable primarily related to increased year-over-year end-of-year
seasonal freight revenue for our Truckload segment and for our Solutions subsidiary, including its accounts receivable
factoring business. The fluctuations in cash flows from accounts payable and accrued expenses primarily related to
the timing of payments on our accrued expenses in the 2015 period compared to the 2014 period as well as increased
incentive compensation accruals for achievement of 2015 performance targets and the timing of those payment.
Net cash flows used in investing activities were $147.7 million in 2015 compared with $84.6 million in 2014. The
$63.1 million increase in net investing activities was attributable primarily to the purchase of our corporate
headquarters property in Chattanooga, Tennessee during August 2015 for approximately $35.5 million, as well as a
$21.3 million increase in assets held for sale due to the timing of dispositions of used revenue equipment (most of
which relates to 350 tractors under contract to be sold in the first quarter of 2016). During 2016 we plan to take
delivery of approximately 845 new company tractors and dispose of approximately 800 used tractors in addition to
the 350 used tractors held for sale. This compares to the approximately 815 new company tractors we took delivery
of and the approximately 450 used tractors we disposed of during 2015.
Net cash flows provided by financing activities were $45.4 million in 2015 compared with $22.9 million in 2014. The
increase was attributable to increased borrowing to fund our headquarters purchase, growth of accounts receivable,
and stock repurchase as well as the impact of deferring receipt of proceeds of 350 tractors held for sale, partially offset
by the proceeds from our 2014 follow on stock offering.
Material Debt Agreements
We and substantially all of our subsidiaries (collectively, the "Borrowers") are parties to a Third Amended and
Restated Credit Facility (the "Credit Facility") with Bank of America, N.A., as agent (the "Agent") and JPMorgan
Chase Bank, N.A. ("JPM," and together with the Agent, the "Lenders").
The Credit Facility is a $95.0 million revolving credit facility, with an uncommitted accordion feature that, so long as
no event of default exists, allows us to request an increase in the revolving credit facility of up to $50.0 million, subject
to Lender acceptance of the additional funding commitment. The Credit Facility includes, within our $95.0 million
revolving credit facility, a letter of credit sub facility in an aggregate amount of $95.0 million and a swing line sub
facility in an aggregate amount equal to the greater of $10.0 million or 10% of the Lenders' aggregate commitments
under the Credit Facility from time-to-time.
In August 2015, we entered into an eleventh amendment to the Credit Facility, which, among other things, (i) amended
the "Applicable Margin" to improve the interest rate grid as set forth in the tables below, (ii) improved the unused line
fee pricing to 0.25% per annum, retroactive to July 1, 2015 (previously the fee was 0.375% per annum when
availability was less than $50.0 million and 0.5% per annum when availability was at or over such amount), (iii)
required each of Driven Analytic Solutions, LLC ("DAS") and Covenant Properties, LLC ("CPI") to be joined to the
Credit Agreement as guarantors, (iv) required each of DAS, CPI and Star Properties Exchange, LLC, a Tennessee
limited liability company, to pledge certain of its assets as security, (v) contained conditional amendments increasing
the borrowing base real estate sublimit and lowering the amortization of the real estate sublimit, (vi) made technical
amendments to a variety of sections, including without limitation, permitted investments, permitted stock repurchases,
permitted indebtedness, and permitted liens, (vii) consented to the purchase of the Company's headquarters, including
related financing, and (viii) extended the maturity date from September 2017 to September 2018. Following the
effectiveness of the eleventh amendment, the applicable margin was changed as follows:
New Pricing
Level
I
II
III
Average Pricing
Availability
> $40,000,000
≤ $40,000,000 but >
$20,000,000
≤ $20,000,000
Base Rate
Loans
.50%
LIBOR
Loans
1.50% 1.50%
L/C
Fee
.75%
1.00%
1.75% 1.75%
2.00% 2.00%
40
Prior Pricing
Level
I
II
III
IV
Average Pricing
Availability
> $75,000,000
≤ $75,000,000 but >
$50,000,000
≤ $50,000,000 but >
$25,000,000
≤ $25,000,000
Base Rate
Loans
.50%
LIBOR
Loans
1.50% 1.50%
L/C
Fee
.75%
1.75% 1.75%
1.00%
1.25%
2.00% 2.00%
2.25% 2.25%
In exchange for these amendments, we agreed to pay fees of $0.2 million. Based on availability as of December 31,
2015, there was no fixed charge coverage requirement.
The unused line fee is the product of 0.25% times the average daily amount by which the Lenders' aggregate revolving
commitments under the Credit Facility exceed the outstanding principal amount of revolver loans and the aggregate
undrawn amount of all outstanding letters of credit issued under the Credit Facility. The obligations under the Credit
Facility are guaranteed by us and secured by a pledge of substantially all of our assets, with the notable exclusion of
any real estate or revenue equipment pledged under other financing agreements, including revenue equipment
installment notes and capital leases.
Borrowings under the Credit Facility are subject to a borrowing base limited to the lesser of (A) $95.0 million, minus
the sum of the stated amount of all outstanding letters of credit; or (B) the sum of (i) 85% of eligible accounts
receivable, plus (ii) the lesser of (a) 85% of the appraised net orderly liquidation value of eligible revenue equipment,
(b) 95% of the net book value of eligible revenue equipment, or (c) 35% of the Lenders' aggregate revolving
commitments under the Credit Facility, plus (iii) the lesser of (a) $25.0 million or (b) 65% of the appraised fair market
value of eligible real estate. We had $3.0 million of borrowings outstanding under the Credit Facility as of December
31, 2015, undrawn letters of credit outstanding of approximately $31.4 million, and available borrowing capacity of
$60.6 million.
The Credit Facility includes usual and customary events of default for a facility of this nature and provides that, upon
the occurrence and continuation of an event of default, payment of all amounts payable under the Credit Facility may
be accelerated, and the Lenders' commitments may be terminated. If an event of default occurs under the Credit
Facility and the Lenders cause all of the outstanding debt obligations under the Credit Facility to become due and
payable, this could result in a default under other debt instruments that contain acceleration or cross-default provisions.
The Credit Facility contains certain restrictions and covenants relating to, among other things, debt, dividends, liens,
acquisitions and dispositions outside of the ordinary course of business, and affiliate transactions. Failure to comply
with the covenants and restrictions set forth in the Credit Facility could result in an event of default.
Capital lease obligations are utilized to finance a portion of our revenue equipment and are entered into with certain
finance companies who are not parties to our Credit Facility. The leases in effect at December 31, 2015 terminate in
January 2016 through February 2022 and contain guarantees of the residual value of the related equipment by us. As
such, the residual guarantees are included in the related debt balance as a balloon payment at the end of the related
term as well as included in the future minimum capital lease payments. These lease agreements require us to pay
personal property taxes, maintenance, and operating expenses.
Pricing for the revenue equipment installment notes is quoted by the respective financial affiliates of our primary
revenue equipment suppliers and other lenders at the funding of each group of equipment acquired and include fixed
annual rates for new equipment under retail installment contracts. The notes included in the funding are due in monthly
installments with final maturities at various dates ranging from January 2016 to January 2022. The notes contain
certain requirements regarding payment, insuring of collateral, and other matters, but do not have any financial or
other material covenants or events of default except certain notes totaling $215.5 million are cross-defaulted with the
Credit Facility. Additionally, a portion of our fuel hedging contracts totaling $27.3 million at December 31, 2015, is
cross-defaulted with the Credit Facility. Additional borrowings from the financial affiliates of our primary revenue
equipment suppliers and other lenders are expected to be available to fund new tractors expected to be delivered in
2016, while any other property and equipment purchases, including trailers, are expected to be funded with a
combination of available cash, notes, operating leases, capital leases, and/or from the Credit Facility.
In August 2015, we financed a portion of the purchase of our corporate headquarters, a maintenance facility, and
certain surrounding property in Chattanooga, Tennessee by entering into a $28.0 million variable rate note with a third
41
party lender. Concurrently with entering into the note, we entered into an interest rate swap to effectively fix the
related interest rate to 4.2%. See Note 13 for further information about the interest rate swap.
Contractual Obligations and Commercial Commitments
The following table sets forth our contractual cash obligations and commitments as of December 31, 2015:
Payments due by period:
(in thousands)
Revenue equipment and
property installment
notes, including
interest (1)
Operating leases (2)
Capital leases (3)
Lease residual value
guarantees
Purchase obligations (4)
Total contractual cash
obligations (5)
2016
(less than
1 year)
Total
2017
(1-3 years)
2018
(1-3 years)
2019
(3-5 years)
2020
(3-5 years)
More than
5 years
$ 267,633 $ 47,605 $ 46,792 $ 63,195 $ 36,725 $ 35,995 $ 37,321
-
$ 17,867 $ 8,430 $
2,896
$ 16,227 $ 4,485 $
66 $
3,878 $
5,489 $
1,656 $
2,887 $
1,656 $
995 $
1,656 $
$ 3,968 $
- $
$ 145,584 $ 145,584 $
- $
- $
- $
- $
2,961 $
- $
1,007 $
- $
-
-
$ 451,279 $ 206,104 $ 53,937 $ 67,738 $ 42,337 $ 40,946 $ 40,217
(1) Represents principal and interest payments owed at December 31, 2015. The borrowings consist of installment
notes with finance companies, with fixed borrowing amounts and fixed interest rates, except for a variable rate
real estate note, for which the interest rate is effectively fixed through an interest rate swap. The table assumes
these installment notes are held to maturity. Refer to Note 7, "Debt" of the accompanying consolidated financial
statements for further information.
(2) Represents future monthly rental payment obligations under operating leases for tractors, trailers, and terminal
properties, and computer and office equipment. Substantially all lease agreements for revenue equipment have
fixed payment terms based on the passage of time. The tractor lease agreements generally stipulate maximum
miles and provide for mileage penalties for excess miles. These leases generally run for a period of three to
five years for tractors and five to seven years for trailers. Refer to Note 8, "Leases" of the accompanying
consolidated financial statements for further information.
(3) Represents principal and interest payments owed at December 31, 2015. The borrowings consist of capital
leases with one finance company, with fixed borrowing amounts and fixed interest rates. Borrowings in 2016
and thereafter include the residual value guarantees on the related equipment as balloon payments. Refer to
Note 7, "Debt" of the accompanying consolidated financial statements for further information.
(4) Represents purchase obligations for revenue equipment totaling approximately $145.6 million in 2016. These
commitments are cancelable, subject to certain adjustments in the underlying obligations and benefits. These
purchase commitments are expected to be financed by operating leases, capital leases, long-term debt, proceeds
from sales of existing equipment, and/or cash flows from operations. Refer to Notes 7 and 8, "Debt" and
"Leases," respectively, of the accompanying consolidated financial statements for further information.
(5) Excludes any amounts accrued for unrecognized tax benefits as we are unable to reasonably predict the ultimate
amount or timing of settlement of such unrecognized tax benefits.
Off-Balance Sheet Arrangements
Operating leases are an important source of financing for our revenue equipment and certain real estate. At December
31, 2015, we had financed 115 tractors and 2,239 trailers under operating leases. Vehicles held under operating leases
are not carried on our consolidated balance sheets, and lease payments, in respect of such vehicles, are reflected in our
consolidated statements of operations in the line item "Revenue equipment rentals and purchased transportation." Our
revenue equipment rental expense was $12.4 million in 2015, compared with $21.0 million in 2014, primarily due to
repayments of debt and leases with proceeds from our follow-on stock offering in late November 2014. The total value
of remaining payments under operating leases as of December 31, 2015, was approximately $17.7 million. In
connection with various operating leases, we issued residual value guarantees, which provide that if we do not
purchase the leased equipment from the lessor at the end of the lease term, we are liable to the lessor for an amount
equal to the shortage (if any) between the proceeds from the sale of the equipment and an agreed value. The residual
guarantees expire between August 2018 and February 2019 and had an undiscounted value of approximately $4.0
million at December 31, 2015. The discounted present value of the total remaining lease payments and residual value
guarantees were approximately $18.6 million of December 31, 2015. We expect our residual guarantees to
42
approximate the market value at the end of the lease term. We believe that proceeds from the sale of equipment under
operating leases would equal or exceed the payment obligation on substantially all operating leases.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S.
requires us to make decisions based upon estimates, assumptions, and factors we consider as relevant to the
circumstances. Such decisions include the selection of applicable accounting principles and the use of judgment in
their application, the results of which impact reported amounts and disclosures. Changes in future economic conditions
or other business circumstances may affect the outcomes of our estimates and assumptions. Accordingly, actual results
could differ from those anticipated. A summary of the significant accounting policies followed in preparation of the
financial statements is contained in Note 1, "Summary of Significant Accounting Policies," of the consolidated
financial statements attached hereto. The following discussion addresses our most critical accounting policies, which
are those that are both important to the portrayal of our financial condition and results of operations and that require
significant judgment or use of complex estimates.
Revenue Recognition
Revenue, drivers' wages, and other direct operating expenses generated by our Truckload reportable segment are
recognized on the date shipments are delivered to the customer. Revenue includes transportation revenue, fuel
surcharges, loading and unloading activities, equipment detention, and other accessorial services.
Revenue generated by our Solutions subsidiary is recognized upon completion of the services provided. Revenue is
recorded on a gross basis, without deducting third party purchased transportation costs, as we act as a principal with
substantial risks as primary obligor, except for transactions whereby equipment from our Truckload segment perform
the related services, which we record on a net basis in accordance with the related authoritative guidance. Solutions
revenue includes $2.4 million, $2.3 million, and $1.7 million of revenue in 2015, 2014, and 2013, respectively, related
to an accounts receivable factoring business started in 2013 to supplement several aspects of our non-asset operations.
Revenue for this business is recognized on a net basis, given we are acting as an agent and are not the primary obligor
in these transactions.
Depreciation of Revenue Equipment
Property and equipment is stated at cost less accumulated depreciation. Depreciation for book purposes is determined
using the straight-line method over the estimated useful lives of the assets, while depreciation for tax purposes is
generally recorded using an accelerated method. Depreciation of revenue equipment is our largest item of depreciation.
We generally depreciate new tractors (excluding day cabs) over five years to salvage values of approximately 25% of
their cost and new trailers over six years for refrigerated trailers and ten years for dry van trailers to salvage values of
approximately 38% of their cost. We annually review the reasonableness of our estimates regarding useful lives and
salvage values of our revenue equipment and other long-lived assets based upon, among other things, our experience
with similar assets, conditions in the used revenue equipment market, and prevailing industry practice. Over the past
several years, the price of new tractors has risen dramatically and there has been significant volatility in the used
equipment market. Changes in the useful life or salvage value estimates, or fluctuations in market values that are not
reflected in our estimates, could have a material effect on our results of operations. Gains and losses on the disposal
of revenue equipment are included in depreciation expense in the consolidated statements of operations.
In 2015, 2014, and 2013, we generated net gains on revenue equipment, including assets held for sale, of $0.6 million,
$2.7 million, and $0.8 million, respectively. We review salvage values of our revenue equipment annually and make
adjustments periodically, based on trends in the used equipment market, to reflect updated estimates of fair value at
disposal.
We lease certain revenue equipment under capital leases with terms of approximately 60 to 84 months. Amortization
of leased assets is included in depreciation and amortization expense.
Pursuant to applicable accounting standards, revenue equipment and other long-lived assets are tested for impairment
whenever an event occurs that indicates impairment may exist. Expected future cash flows are used to analyze whether
an impairment has occurred. If the sum of expected undiscounted cash flows is less than the carrying value of the
long-lived asset, then an impairment loss is recognized. We measure the impairment loss by comparing the fair value
of the asset to its carrying value. Fair value is determined based on a discounted cash flow analysis or the appraised
value of the assets, as appropriate.
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Although a portion of our tractors are protected by non-binding indicative trade-in values or binding trade-back
agreements with the manufacturers, some tractors and substantially all of our owned trailers continue to be subject to
fluctuations in market prices for used revenue equipment. Moreover, our trade-back agreements are contingent upon
reaching acceptable terms for the purchase of new equipment. Further declines in the price of used revenue equipment
or failure to reach agreement for the purchase of new tractors with the manufacturers issuing trade-back agreements
could result in impairment of, or losses on the sale of, revenue equipment. Historically, only a de minimus percentage
of our equipment has been sold back to the dealers pursuant to the trade back agreements as we have generally found
that market prices exceeded the trade back allowances, although in recent years, trade back allowances have increased
as a result of the increasing cost of the underlying equipment.
Assets Held For Sale
Assets held for sale include property and revenue equipment no longer utilized in continuing operations which are
available and held for sale. Assets held for sale are no longer subject to depreciation, and are recorded at the lower of
depreciated book value or fair market value less selling costs. We periodically review the carrying value of these assets
for possible impairment. We expect to sell these assets within twelve months.
Goodwill and Other Intangible Assets
We classify intangible assets into two categories: (i) intangible assets with definite lives subject to amortization and
(ii) goodwill. We have no goodwill on our consolidated balance sheet for the years ended December 31, 2015 and
2014. We test intangible assets with definite lives for impairment if conditions exist that indicate the carrying value
may not be recoverable. Such conditions may include an economic downturn in a geographic market or a change in
the assessment of future operations. We record an impairment charge when the carrying value of the definite lived
intangible asset is not recoverable by the cash flows generated from the use of the asset.
We determine the useful lives of our identifiable intangible assets after considering the specific facts and
circumstances related to each intangible asset. Factors we consider when determining useful lives include the
contractual term of any agreement, the history of the asset, our long-term strategy for the use of the asset, any laws or
other local regulations which could impact the useful life of the asset, and other economic factors, including
competition and specific market conditions. Intangible assets that are deemed to have definite lives are amortized,
generally on a straight-line basis, over their useful lives, ranging from 4 to 20 years.
Insurance and Other Claims
The primary claims arising against us consist of auto liability (personal injury and property damage), workers'
compensation, cargo, commercial liability, and employee medical expenses. Our insurance program involves self-
insurance with the following risk retention levels (before giving effect to any commutation of an auto liability policy):
auto liability - $1.0 million
●
● workers' compensation - $1.3 million
●
●
●
cargo - $0.3 million
employee medical - $0.4 million
physical damage - 100%
Due to our significant self-insured retention amounts, we have exposure to fluctuations in the number and severity of
claims and to variations between our estimated and actual ultimate payouts. We accrue the estimated cost of the
uninsured portion of pending claims and an estimate for allocated loss adjustment expenses including legal and other
direct costs associated with a claim. Estimates require judgments concerning the nature and severity of the claim,
historical trends, advice from third-party administrators and insurers, the size of any potential damage award based on
factors such as the specific facts of individual cases, the jurisdictions involved, the prospect of punitive damages,
future medical costs, and inflation estimates of future claims development, and the legal and other costs to settle or
defend the claims. We have significant exposure to fluctuations in the number and severity of claims. If there is an
increase in the frequency and severity of claims, or we are required to accrue or pay additional amounts if the claims
prove to be more severe than originally assessed, or any of the claims would exceed the limits of our insurance
coverage, our profitability could be adversely affected.
In addition to estimates within our self-insured retention layers, we also must make judgments concerning claims
where we have third party insurance and for claims outside our coverage limits. Upon settling claims and expenses
associated with claims where we have third party coverage, we are generally required to initially fund payment to the
claimant and seek reimbursement from the insurer. Receivables from insurers for claims and expenses we have paid
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on behalf of insurers were $0.1 million or less at December 31, 2015 and 2014, respectively, and are included in
drivers' advances and other receivables on our consolidated balance sheet. Additionally, we accrue claims above our
self-insured retention and record a corresponding receivable for amounts we expect to collect from insurers upon
settlement of such claims. We have $0.6 million at December 31, 2015 and 2014, respectively, as a receivable in other
assets and as a corresponding accrual in the long-term portion of insurance and claims accruals on our consolidated
balance sheet for claims above our self-insured retention for which we believe it is reasonably assured that the insurers
will provide their portion of such claims. We evaluate collectability of the receivables based on the credit worthiness
and surplus of the insurers, along with our prior experience and contractual terms with each. If any claim occurrence
were to exceed our aggregate coverage limits, we would have to accrue for the excess amount. Our critical estimates
include evaluating whether a claim may exceed such limits and, if so, by how much. If one or more claims were to
exceed our then effective coverage limits, our financial condition and results of operations could be materially and
adversely affected.
We also make judgements regarding the ultimate benefit versus risk to commuting certain periods within our auto
liability policy. If we commute a policy, we assume 100% risk for covered claims in exchange for a policy refund. In
April 2015, we commuted two liability policies for the period from April 1, 2013 through September 30, 2014, such
that we are now responsible for any claim that occurred during that period up to $20.0 million, should such a claim
develop. We recorded a $3.6 million reduction in insurance and claims expense in the second quarter of 2015 related
to the commutation. The insurer did not remit the premium refund directly to the Company, but rather applied a credit
to the current auto liability insurance policy, such that we recorded the policy release premium refund as a prepaid
asset at June 30, 2015. As a result of the commutation and the Company’s improved safety statistics over the prior
policy, the Company received favorable premium pricing for the upcoming three year policy period, which we expect
will reduce the fixed portion of insurance expense going forward.
Effective April 2015, we entered into a new auto liability policies with a three-year term. The policy includes a limit
for a single loss of $9.0 million, an aggregate of $18.0 million for each policy year, and a $30.0 million aggregate for
the three-year period ended March 31, 2018. The policy includes a policy release premium refund of up to $14.7
million, less any amounts paid on claims by the insurer, from October 1, 2014 through March 31, 2018, if we were to
commute the policy for the entire three years. A decision with respect to commutation of the policy cannot be made
before April 1, 2018, unless both we and the insurance carrier agree to a commutation prior to the end of the policy
term. Management cannot predict whether or not future claims or the development of existing claims will justify a
commutation, and accordingly, no related amounts were recorded at December 31, 2015.
If claims development factors that are based upon historical experience change by 10%, our claims accrual as of
December 31, 2015, would change by approximately $3.9 million.
Lease Accounting and Off-Balance Sheet Transactions
We issue residual value guarantees in connection with the operating leases we enter into for certain of our revenue
equipment. These leases provide that if we do not purchase the leased equipment from the lessor at the end of the lease
term, then we are liable to the lessor for an amount equal to the shortage (if any) between the proceeds from the sale
of the equipment and an agreed value. To the extent the expected value at the lease termination date is lower than the
residual value guarantee, we would accrue for the difference over the remaining lease term. We believe that proceeds
from the sale of equipment under operating leases would equal or exceed the payment obligation on substantially all
operating leases. The estimated values at lease termination involve management judgments. As leases are entered into,
determination as to the classification as an operating or capital lease involves management judgments on residual
values and useful lives.
Accounting for Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that includes the enactment date. We believe the future tax
deductions will be realized principally through future reversals of existing taxable temporary differences and future
taxable income, except for when a valuation allowance has been provided.
In the ordinary course of business there is inherent uncertainty in quantifying our income tax positions. We assess our
income tax positions and record tax benefits for all years subject to examination based upon management's evaluation
of the facts, circumstances, and information available at the reporting dates. For those tax positions where it is more
45
likely than not that a tax benefit will be sustained, we have recorded the largest amount of tax benefit with a greater
than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all
relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be
sustained, no tax benefit has been recognized in the financial statements. Potential accrued interest and penalties
related to unrecognized tax benefits are recognized as a component of income tax expense.
Stock-Based Employee Compensation
We issue several types of stock-based compensation, including awards that vest based on service and performance
conditions or a combination of the conditions. Performance-based awards vest contingent upon meeting certain
performance criteria established by the Compensation Committee. All awards require future service and thus
forfeitures are estimated based on historical forfeitures and the remaining term until the related award vests. For
performance-based awards, determining the appropriate amount to expense in each period is based on likelihood and
timing of achieving the stated targets and requires judgment, including forecasting future financial results. The
estimates are revised periodically based on the probability and timing of achieving the required performance targets
and adjustments are made as appropriate. Awards that are only subject to time vesting provisions are amortized using
the straight-line method.
Fair Value of Financial Instruments
Our financial instruments consist primarily of cash and cash equivalents, accounts receivable, commodity contracts,
accounts payable, debt, and an interest rate swap. The carrying amount of cash and cash equivalents, accounts
receivable, accounts payable, and current debt approximates their fair value because of the short-term maturity of
these instruments. The carrying value of the factored receivables approximates the fair value, as the receivables are
generally repaid directly to us by the client's customer within 30-40 days due to the combination of the short-term
nature of the financing transaction and the underlying quality of the receivables. Interest rates that are currently
available to us for issuance of long-term debt with similar terms and remaining maturities are used to estimate the fair
value of our long-term debt, which primarily consists of revenue equipment installment notes. The fair value of our
revenue equipment installment notes approximated the carrying value at December 31, 2015, as the weighted average
interest rate on these notes approximates the market rate for similar debt. Borrowings under our revolving Credit
Facility approximate fair value due to the variable interest rate on the facility. Additionally, commodity contracts,
which are accounted for as hedge derivatives, as discussed in Note 13, are valued based on the forward rate of the
specific indices upon which the contract is being settled and adjusted for counterparty credit risk using available
market information and valuation methodologies. The fair value of our interest rate swap agreement is determined
using the market-standard methodology of netting the discounted future fixed-cash payments and the discounted
expected variable-cash receipts. The variable-cash receipts are based on an expectation of future interest rates (forward
curves) derived from observable market interest rate curves. These analyses reflect the contractual terms of the swap,
including the period to maturity, and use observable market-based inputs, including interest rate curves and implied
volatilities. The fair value calculation also includes an amount for risk of non-performance of our counterparties using
"significant unobservable inputs" such as estimates of current credit spreads to evaluate the likelihood of default,
which we have determined to be insignificant to the overall fair value of our interest rate swap agreement.
Derivative Instruments and Hedging Activities
We periodically utilize derivative instruments to manage exposure to changes in fuel prices and in interest rates. At
inception of a derivative contract, we document relationships between derivative instruments and hedged items, as
well as our risk-management objective and strategy for undertaking various derivative transactions, and assess hedge
effectiveness. We record derivative financial instruments in the balance sheet as either an asset or liability at fair
value. If it is determined that a derivative is not highly effective as a hedge, or if a derivative ceases to be a highly
effective hedge, we discontinue hedge accounting prospectively. The effective portion of changes in the fair value of
derivatives are recorded in other comprehensive income and reclassified into earnings in the same period during which
the hedged transaction affects earnings. The ineffective portion is recorded in other income or expense.
Recent Accounting Pronouncements
Accounting Standards adopted
On November 20, 2015, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”)
No. 2015-17. This standard requires companies to classify all deferred tax assets and liabilities as noncurrent on the
balance sheet instead of separating deferred taxes into current and noncurrent amounts. This ASU is effective for fiscal
years, and interim periods within those years, beginning on or after December 15, 2016, with early adoption permitted.
46
The Company has elected to early adopt this standard effective December 31, 2015, on a retrospective basis and
reclassified $14.7 from net current deferred income tax assets to a reduction of net deferred income tax liabilities as
of December 31, 2014.
Accounting Standards not yet adopted
On May 28, 2014, the Financial Accounting Standards Board and the International Accounting Standards Board issued
converged guidance on recognizing revenue in contracts with customers. The new guidance establishes a single core
principle in the ASU No. 2014-09, which is the recognition of revenue to depict the transfer of promised goods or
services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange
for those goods or services. This guidance will affect any reporting organization that either enters into contracts with
customers to transfer goods or services or enters into contracts for the transfer of non-financial assets. In August 2015,
ASU 2015-14 was issued which deferred the effective date of ASU 2014-09 to fiscal years, and interim periods within
those years, beginning on or after December 15, 2017, with early adoption permitted only as of annual reporting
periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The
Company is continuing to evaluate the new guidance and plans to provide additional information about its expected
financial impact at a future date.
On August 27, 2014, the Financial Accounting Standards Board issued ASU No. 2014-15. This standard provides
guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new
standard requires management to perform interim and annual assessments of an entity's ability to continue as a going
concern within one year of the date the financial statements are issued. This ASU is effective for fiscal years, and
interim periods within those years, beginning on or after December 15, 2016, with early adoption permitted. The
Company is evaluating the new guidance and plans to provide additional information about its expected impact at a
future date.
In April 2015, the Financial Accounting Standards Board issued ASU 2015-03, and, in August 2015, issued
ASU 2015-15. These ASUs require debt issuance costs related to a recognized debt liability to be presented in the
balance sheet as a direct deduction from the carrying amount of that debt consistent with debt discounts. The
presentation and subsequent measurement of debt issuance costs associated with lines of credit, may be presented as
an asset and amortized ratably over the term of the line of credit arrangement, regardless of whether there are
outstanding borrowings on the arrangement. The recognition and measurement guidance for debt issuance costs are
not affected by these ASUs. These ASUs are effective for financial statements issued for fiscal years beginning after
December 15, 2015 and interim periods within those years with early adopting permitted. The Company will adopt
this standard for the fiscal year 2016. Adoption of this standard will result in the reclassification of approximately $0.7
million from other assets to long-term notes payable as of December 31, 2015.
INFLATION, NEW EMISSIONS CONTROL REGULATIONS, AND FUEL COSTS
Most of our operating expenses are inflation-sensitive, with inflation generally producing increased costs of
operations. During the past four years, the most significant effects of inflation have been on revenue equipment prices,
health care prices, driver wages, and fuel prices. New emissions control regulations and increases in wages of
manufacturing workers and other items have resulted in higher tractor prices. The cost of fuel has been extremely
volatile over the last several years, with costs decreasing significantly in both 2015 and 2014 after trending upward in
2013, 2012, and 2010 following a reprieve in 2009 from the record high prices in 2008. We believe at least some of
this volatility reflects the fluctuations in the U.S. dollar and global demand for petroleum products, unrest in certain
oil-producing countries, improved fuel efficiency due to technological advancements, and an increase in domestic
supply. We have attempted to limit the effects of inflation through certain cost control efforts and limiting the effects
of fuel prices through fuel surcharges. Fluctuations in the price or availability of fuel, as well as hedging activities,
surcharge collection, the percentage of freight we obtain through brokers, and the volume and terms of diesel fuel
purchase commitments may increase our costs of operation, which could materially and adversely affect our
profitability. Health care prices have increased faster than general inflation and affect us through premium payments
and our self-insured retention. The nationwide shortage of qualified drivers has caused us to raise driver wages per
mile at a rate faster than general inflation for the past three years, and this trend may continue as additional government
regulations constrain industry capacity.
SEASONALITY
Over the past three years, we have experienced marked surges in business and profitability during the fourth quarter
holiday season, due to our team drivers and customer base. After this surge, revenue generally decreases as customers
reduce shipments following the holiday season and as inclement weather impedes operations. At the same time,
47
operating expenses generally increase, with fuel efficiency declining because of engine idling and weather, creating
more physical damage equipment repairs. For the reasons stated, first quarter results historically have been lower than
results in each of the other three quarters of the year, excluding charges.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We experience various market risks, including changes in interest rates and fuel prices. We do not enter into
derivatives or other financial instruments for trading or speculative purposes, or when there are no underlying related
exposures. Because our operations are mostly confined to the United States, we are not subject to a material amount
of foreign currency risk.
COMMODITY PRICE RISK
We engage in activities that expose us to market risks, including the effects of changes in fuel prices and in interest
rates. Financial exposures are evaluated as an integral part of our risk management program, which seeks, from time-
to-time, to reduce the potentially adverse effects that the volatility of fuel markets and interest rate risk may have on
operating results.
In an effort to seek to reduce the variability of the ultimate cash flows associated with fluctuations in diesel fuel prices,
we periodically enter into various derivative instruments, including forward futures swap contracts (which we refer to
as "fuel hedging contracts"). Historically diesel fuel has not been a traded commodity on the futures market so heating
oil has been used as a substitute, as prices for both generally move in similar directions. Recently, however, we have
been able to enter into hedging contracts with respect to both heating oil and ultra-low sulfur diesel ("ULSD"). Under
these contracts, we pay a fixed rate per gallon of heating oil or ULSD and receive the monthly average price of New
York heating oil per the New York Mercantile Exchange ("NYMEX") and Gulf Coast ULSD, respectively. The
retrospective and prospective regression analyses provided that changes in the prices of diesel fuel and heating oil and
diesel fuel and ULSD were each deemed to be highly effective based on the relevant authoritative guidance except for
a small portion of our hedging contracts, which we determined to be ineffective on a prospective basis. Consequently,
we recognized approximately $1.4 million reduction and $1.4 million of additional fuel expense in 2015 and 2014,
respectively to mark the related liability to market. At December 31, 2015, there were no remaining ineffective fuel
hedge contracts thus all remaining fuel hedge contracts continue to qualify as cash flow hedges. We do not engage in
speculative transactions, nor do we hold or issue financial instruments for trading purposes.
A one dollar increase or decrease in heating oil or diesel per gallon would have a de minimis impact to our net income
due to our fuel surcharge recovery and existing fuel hedging contracts. This sensitivity analysis considers that we
expect to purchase approximately 49.0 million gallons of diesel annually, with an assumed fuel surcharge recovery
rate of 77.7% of the cost (which was our fuel surcharge recovery rate during the year ended December 31, 2015).
Assuming our fuel surcharge recovery is consistent, this leaves 10.9 million gallons that are not covered by the natural
hedge created by our fuel surcharges. Because the majority of our fuel hedging contracts were established prior to the
recent decline in diesel fuel prices, we have not been able to realize the cost savings resulting from such decline to the
same extent we would have had we not entered into our hedging contracts.
INTEREST RATE RISK
In August 2015, we entered into an interest rate swap agreement with a notional amount of $28.0 million, which was
designated as a hedge against the variability in future interest payments due on the debt associated with the purchase
of our corporate headquarters. The terms of the swap agreement effectively convert the variable rate interest payments
on this note to a fixed rate of 4.2% through maturity on August 1, 2035. Because the critical terms of the swap and
hedged item coincide, in accordance with the requirements of ASC 815, the change in the fair value of the derivative
is expected to exactly offset changes in the expected cash flows due to fluctuations in the LIBOR rate over the term
of the debt instrument, and therefore no ongoing assessment of effectiveness is required. The fair value of the swap
agreement that was in effect at December, 2015, of approximately $1.1 million, is included in other liabilities in the
consolidated balance sheet, and is included in accumulated other comprehensive loss, net of tax. Additionally, $0.3
million was reclassified from accumulated other comprehensive loss into our results of operations as additional interest
expense for the year ended December 31, 2015, related to changes in interest rates during such periods. Based on the
amounts in accumulated other comprehensive loss as of December 31, 2015, we expect to reclassify losses of
approximately $0.3 million, net of tax, on derivative instruments from accumulated other comprehensive loss into our
results of operations during the next twelve months due to changes in interest rates. The amounts actually realized will
depend on the fair values as of the date of settlement.
48
Our market risk is also affected by changes in interest rates. Historically, we have used a combination of fixed-rate
and variable-rate obligations to manage our interest rate exposure. Fixed-rate obligations expose us to the risk that
interest rates might fall. Variable-rate obligations expose us to the risk that interest rates might rise. Of our total $250.7
million of debt and capital leases, we had $34.3 million of variable rate debt outstanding at December 31, 2015,
including both our Credit Facility and a real-estate note, of which $27.7 million was hedged with the aforementioned
interest rate swap agreement at 4.2%. At December 31, 2014, of our total $202.3 million of debt, we had $3.4 million
of variable rate debt outstanding, including our Credit Facility and a real-estate note. The interest rates applicable to
these agreements are based on either the prime rate or LIBOR. Our earnings would be affected by changes in these
short-term interest rates. Risk can be quantified by measuring the financial impact of a near-term adverse increase in
short-term interest rates. At our December 31, 2015 level of borrowing, a 1% increase in our applicable rate would
reduce annual net income by less than $0.1 million. Our remaining debt is fixed rate debt, and therefore changes in
market interest rates do not directly impact our interest expense.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of Covenant Transportation Group, Inc. and subsidiaries, including the
consolidated balance sheets as of December 31, 2015 and 2014, and the related statements of operations, statements
of comprehensive income, statements of stockholders' equity, and statements of cash flows for each of the years in the
three-year period ended December 31, 2015, together with the related notes, and the report of KPMG LLP, our
independent registered public accounting firm as of December 31, 2015 and 2014, and for each of the years in the
three year period ended December 31, 2015 are set forth at pages 51 through 79 elsewhere in this report.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
There has been no change in or disagreement with accountants on accounting or financial disclosure during our two
most recent fiscal years.
Evaluation of Disclosure Controls and Procedures
CONTROLS AND PROCEDURES
We have established disclosure controls and procedures to ensure that material information relating to us and our
consolidated subsidiaries is made known to the officers who certify our financial reports and to other members of
senior management and the Board of Directors.
Based on their evaluation as of December 31, 2015, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange
Act) are effective at a reasonable assurance level to ensure that the information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the
time periods specified in SEC rules and forms and that such information is accumulated and communicated to our
management, including our Chief Executive Officer, as appropriate, to allow timely decisions regarding required
disclosure.
Management's Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting.
Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Exchange
Act as a process designed by, or under the supervision of, the principal executive and principal financial officers and
effected by the board of directors, management, and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles and includes those policies and procedures that:
●
●
●
pertain to the maintenance of records, that in reasonable detail, accurately and fairly reflect the transactions and
dispositions of our assets;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that our receipts and expenditures
are being made only in accordance with authorizations of our management and directors; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of our assets that could have a material effect on our financial statements.
49
We have confidence in our internal controls and procedures. Nevertheless, our management, including our Chief
Executive Officer and Chief Financial Officer, does not expect that our disclosure procedures and controls or our
internal controls will prevent all errors or intentional fraud. An internal control system, no matter how well-conceived
and operated, can provide only reasonable, not absolute, assurance that the objectives of such internal controls are
met. Further, the design of an internal control system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. As a result of the inherent limitations in all internal
control systems, no evaluation of controls can provide absolute assurance that all our control issues and instances of
fraud, if any, have been detected.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2015.
Management based this assessment on the framework in the Internal Control- Integrated Framework (2013) issued
by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its assessment, management
believes that, as of December 31, 2015, our internal control over financial reporting is effective based on those criteria.
KPMG LLP, the independent registered public accounting firm who audited the Company's Consolidated Financial
Statements included in this Annual Report, has issued a report on the Company's internal control over financial
reporting which is included herein.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the quarter ended
December 31, 2015, that have materially affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Covenant Transportation Group, Inc.:
We have audited the accompanying consolidated balance sheets of Covenant Transportation Group, Inc. and
subsidiaries as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive
income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2015.
We also have audited Covenant Transportation Group, Inc.’s internal control over financial reporting as of
December 31, 2015, based on criteria established in Internal Control – Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Covenant Transportation Group
Inc.’s management is responsible for these consolidated financial statements, for maintaining effective internal control
over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s
internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement and whether effective internal control over financial
reporting was maintained in all material respects. Our audits of the consolidated financial statements included
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating
the design and operating effectiveness of internal control based on the assessed risk. Our audits also included
performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide
a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance
with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of Covenant Transportation Group, Inc. and subsidiaries as of December 31, 2015 and 2014, and
the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2015,
in conformity with U.S. generally accepted accounting principles. Also in our opinion, Covenant Transportation
Group, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31,
2015, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
/s/ KPMG LLP
Atlanta, Georgia
February 29, 2016
51
COVENANT TRANSPORTATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2015 AND 2014
(In thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, net of allowance of $1,857 in 2015 and $1,767 in 2014
Drivers' advances and other receivables, net of allowance of $1,005 in 2015
and $1,290 in 2014
Inventory and supplies
Prepaid expenses
Assets held for sale
Income taxes receivable
Total current assets
Property and equipment, at cost
Less: accumulated depreciation and amortization
Net property and equipment
Other assets, net
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Checks outstanding in excess of bank balances
Accounts payable
Accrued expenses
Current maturities of long-term debt
Current portion of capital lease obligations
Current portion of insurance and claims accrual
Other short-term liabilities
Total current liabilities
Long-term debt
Long-term portion of capital lease obligations
Insurance and claims accrual
Deferred income taxes
Other long-term liabilities
Total liabilities
Commitments and contingent liabilities
Stockholders' equity:
Class A common stock, $.01 par value; 20,000,000 shares authorized;
15,922,879 shares issued 15,773,381 shares outstanding as of December
31, 2015; and 15,746,609 issued and outstanding as of December 31, 2014
Class B common stock, $.01 par value; 5,000,000 shares authorized;
2,350,000 shares issued and outstanding
Additional paid-in-capital
Treasury stock at cost; 149,498 and 0 shares as of December 31, 2015 and
2014, respectively
Accumulated other comprehensive loss
Retained earnings
Total stockholders' equity
Total liabilities and stockholders' equity
2015
2014
$
4,490 $
112,669
8,779
4,004
8,678
25,626
8,591
172,837
21,330
95,943
5,770
4,402
9,028
4,268
1,309
142,050
596,071
(142,022)
454,049
505,345
(122,854)
382,491
20,537
14,763
$
647,423 $
539,304
$
4,698 $
12,272
30,143
39,645
4,031
17,134
18,549
126,472
196,513
10,547
22,300
76,981
12,450
445,263
-
170
24
139,968
(3,408)
(17,544)
82,950
202,160
647,423 $
$
-
9,623
36,542
27,824
1,606
17,565
7,999
101,159
159,531
13,372
23,173
59,004
13,861
370,100
-
168
24
141,248
-
(13,101)
40,865
169,204
539,304
The accompanying notes are an integral part of these consolidated financial statements.
52
COVENANT TRANSPORTATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2015, 2014, AND 2013
(In thousands, except per share data)
Revenues
Freight revenue
Fuel surcharge revenue
Total revenue
Operating expenses:
Salaries, wages, and related expenses
Fuel expense
Operations and maintenance
Revenue equipment rentals and purchased transportation
Operating taxes and licenses
Insurance and claims
Communications and utilities
General supplies and expenses
Depreciation and amortization, including gains and losses on
disposition of equipment
Total operating expenses
Operating income
Other expenses (income):
Interest expense
Other
Other expenses, net
Equity in income of affiliate
Income before income taxes
Income tax expense
Net income
Income per share:
Basic income per share:
Diluted income per share:
2015
2014
2013
$
$
640,120 $
84,120
724,240 $
578,204 $
140,776
718,980 $
538,933
145,616
684,549
244,779
122,160
46,458
118,583
11,016
31,909
6,162
14,007
61,384
656,458
67,782
231,761
168,856
47,251
111,772
10,960
39,594
5,806
16,950
46,384
679,334
39,646
8,445
-
8,445
4,570
63,907
21,822
42,085 $
10,807
(13)
10,794
3,730
32,582
14,774
17,808 $
218,946
186,002
50,043
102,954
10,969
30,305
5,240
16,002
43,694
664,155
20,394
10,400
(3)
10,397
2,750
12,747
7,503
5,244
2.32
2.30
$
$
1.17
1.15
$
$
0.35
0.35
$
$
$
Basic weighted average shares outstanding
18,145
15,250
14,837
Diluted weighted average shares outstanding
18,311
15,517
15,039
The accompanying notes are an integral part of these consolidated financial statements.
53
COVENANT TRANSPORTATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2015, 2014, AND 2013
(In thousands)
2015
2014
2013
Net income
$
42,085 $
17,808 $
5,244
Other comprehensive (loss) income:
Unrealized (loss) gain on effective portion of cash flow hedges,
net of tax of $8,722, $9,892, and $567 in 2015, 2014 and
2013, respectively
(14,051)
(15,869)
909
Reclassification of cash flow hedge losses (gains) into statement
of operations, net of tax of $5,964, $1,206, and $247 in 2015,
2014, and 2013, respectively
Total other comprehensive (loss) income
9,608
1,935
(396)
(4,443)
(13,934)
513
Comprehensive income
$
37,642 $
3,874 $
5,757
The accompanying notes are an integral part of these consolidated financial statements.
54
COVENANT TRANSPORTATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2015, 2014, AND 2013
(In thousands)
Common Stock
Class A
Class B
Additional
Paid-In
Capital
Treasury
Stock
Accumulated
Other
Comprehensive
(Loss) Income
Retained
Earnings
Total
Stockholders'
Equity
$
143
$
24
$
90,328
$
(13,955) $
320
$
17,813
$
94,673
-
-
-
-
2
-
-
-
-
-
-
-
-
-
-
690
(409)
(1,878)
(111)
-
-
-
1,636
-
-
513
-
-
-
-
5,244
5,244
-
-
-
-
-
513
690
(409)
(240)
(111)
$
145
$
24
$
88,620
$
(12,319) $
833
$
23,057
$
100,360
-
-
22
-
-
1
-
-
-
-
-
-
-
-
-
-
-
1
1
-
-
-
-
-
-
-
-
-
-
-
51,498
11,464
-
17,808
(13,934)
-
-
-
-
-
-
-
-
-
-
-
17,808
(13,934)
62,984
1,286
598
(732)
834
$
(13,101) $
40,865
$
169,204
-
42,085
(4,443)
-
-
-
-
-
-
-
-
-
42,085
(4,443)
(4,994)
1,296
1,092
2,080
-
408
447
-
-
-
-
(4,994)
-
-
1,286
190
(1,180)
834
-
-
-
1,295
1,091
$
170
$
24
$
139,968
$
(3,408) $
(17,544) $
82,950
$
202,160
(3,666)
1,586
$
168
$
24
$
141,248
$
Balances at
December 31, 2012
Net income
Other comprehensive income
Stock-based employee
compensation cost
Reversal of previously
recognized stock-based
employee compensation
expense
Issuance of restricted shares,
net
Income tax deficit arising from
restricted share vesting
Balances at
December 31, 2013
Net income
Other comprehensive loss
Follow-on stock offering
Stock-based employee
compensation expense
Exercise of stock options
Issuance of restricted shares,
net
Income tax benefit arising
from restricted share vesting
Balances at
December 31, 2014
Net income
Other comprehensive loss
Purchase of treasury stock
Stock-based employee
compensation expense
Exercise of stock options
Issuance of restricted shares,
net
Balances at
December 31, 2015
The accompanying notes are an integral part of these consolidated financial statements.
55
COVENANT TRANSPORTATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2015, 2014, AND 2013
(In thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by
operating activities:
2015
2014
2013
$
42,085 $
17,808 $
5,244
Provision for losses on accounts receivable
(Realized gain) deferred gain on sales of equipment to affiliate,
1,100
774
457
net
Depreciation and amortization
Amortization of deferred financing fees
Unrealized (gain) loss on ineffective portion of fuel hedges
Return of (issuance of) cash collateral on fuel hedge
Deferred income tax expense
Income tax (benefit) deficit arising from restricted share vesting
Casualty premium credit
Equity in income of affiliate
Gain on disposition of property and equipment
Stock-based compensation expense
Changes in operating assets and liabilities:
Receivables and advances
Prepaid expenses and other assets
Inventory and supplies
Insurance and claims accrual
Accounts payable and accrued expenses
Net cash flows provided by operating activities
Cash flows from investing activities:
Acquisition of property and equipment
Investment in affiliated company
Return of investment in affiliated company
Proceeds from disposition of property and equipment
Net cash flows used by investing activities
Cash flows from financing activities:
Change in checks outstanding in excess of bank balances
Debt refinancing costs
Payment of minimum tax withholdings on stock compensation
Proceeds from borrowings under revolving credit facility
Repayments of borrowings under revolving credit facility
Repayments of capital lease obligation
Proceeds from issuance of notes payable
Repayments of notes payable
Proceeds from exercise of stock options
Proceeds from issuance of stock in follow-on offering, net of
offering costs
Common stock repurchased
Income tax benefit (deficit) arising from restricted share vesting
Net cash flows provided by financing activities
(26)
62,010
261
(1,454)
5,000
20,701
-
(3,600)
(4,570)
(626)
1,496
(28,120)
2,688
398
(1,304)
(10,562)
85,477
(33)
49,043
256
1,510
(5,000)
14,681
(834)
-
(3,730)
(2,659)
1,386
(16,996)
1,680
316
9,986
5,556
73,744
81
44,457
245
(55)
-
8,217
111
-
(2,750)
(763)
381
(4,312)
(2,014)
(168)
(2,399)
(6,287)
40,445
(181,963)
-
-
34,287
(147,676)
(163,679) (135,896)
(500)
65
51,930
(84,401)
-
307
78,776
(84,596)
4,698
(242)
(2,280)
(2,918)
(49)
(832)
(5,343)
(356)
(340)
870,432 1,003,195
886,293
(867,430) (1,010,205) (879,288)
(2,186)
134,192
(86,488)
-
(1,718)
113,077
(67,276)
1,092
(11,492)
115,364
(134,560)
598
-
(4,994)
-
45,359
62,984
-
834
22,919
-
-
(111)
46,373
Net change in cash and cash equivalents
(16,840)
12,067
2,417
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
21,330
4,490 $
9,263
21,330 $
6,846
9,263
$
56
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest, net of capitalized interest
Income taxes
Equipment purchased under capital leases
$
$
$
8,371
8,112
1,318
$ 10,919 $ 10,328
320
571 $
$
8,010
4,552 $
$
The accompanying notes are an integral part of these consolidated financial statements.
57
COVENANT TRANSPORTATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014, AND 2013
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business and Segments
Covenant Transportation Group, Inc., a Nevada holding company, together with its wholly-owned subsidiaries offers
truckload transportation and brokerage services to customers throughout the continental United States.
We have one reportable segment, our asset-based truckload services ("Truckload").
The Truckload segment consists of three asset-based operating fleets that are aggregated because they have similar
economic characteristics and meet the aggregation criteria. The three operating fleets that comprise our Truckload
segment are as follows: (i) Covenant Transport, Inc. ("Covenant Transport"), our historical flagship operation, which
provides expedited long haul, dedicated, temperature-controlled, and regional solo-driver service; (ii) Southern
Refrigerated Transport, Inc. ("SRT"), which provides primarily long haul, regional, and intermodal temperature-
controlled service; and (iii) Star Transportation, Inc. ("Star"), which provides regional solo-driver and dedicated
service, primarily in the southeastern United States.
In addition, our Covenant Transport Solutions, Inc. ("Solutions") subsidiary has service offerings ancillary to our
asset-based Truckload services, including: freight brokerage service directly and through freight brokerage agents who
are paid a commission for the freight they provide and accounts receivable factoring. The operations consist of several
operating segments, which neither individually nor in the aggregate meet the quantitative or qualitative reporting
thresholds.
Principles of Consolidation
The consolidated financial statements include the accounts of Covenant Transportation Group, Inc., a holding
company incorporated in the state of Nevada in 1994, and its wholly-owned subsidiaries: Covenant Transport, Inc.,
a Tennessee corporation; Southern Refrigerated Transport, Inc., an Arkansas corporation; Star Transportation, Inc., a
Tennessee corporation; Covenant Transport Solutions, Inc., a Nevada corporation; Covenant Logistics, Inc., a Nevada
corporation; Covenant Asset Management, LLC., a Nevada limited liability corporation; CTG Leasing Company, a
Nevada corporation; IQS Insurance Retention Group, Inc., a Vermont corporation; Driven Analytic Solutions, LLC,
a Nevada limited liability company; and Covenant Properties, LLC., a Nevada limited liability corporation.
References in this report to "it," "we," "us," "our," the "Company," and similar expressions refer to Covenant
Transportation Group, Inc. and its subsidiaries. All significant intercompany balances and transactions have been
eliminated in consolidation.
Investment in Transport Enterprise Leasing, LLC
Transport Enterprise Leasing, LLC ("TEL") is a tractor and trailer equipment leasing company and used equipment
reseller. We evaluated our investment in TEL to determine whether it should be recorded on a consolidated basis. Our
percentage of ownership interest (49%), an evaluation of control, and whether a variable interest entity ("VIE") existed
were all considered in our consolidation assessment. The analysis provided that we do not control TEL and that TEL
is not deemed a VIE. We have accounted for our investment in TEL using the equity method of accounting given our
49% ownership interest and ability to exercise significant influence over operating and financial policies. Under the
equity method, the cost of our investment is adjusted for our share of equity in the earnings of TEL and reduced by
distributions received and our proportionate share of TEL's net income is included in our earnings.
On a periodic basis, we assess whether there are any indicators that the fair value of our investment in TEL may be
impaired. The investment is impaired only if the estimate of the fair value of the investment is less than the carrying
value of the investment, and such decline in value is deemed to be other than temporary. To the extent impairment has
occurred, the loss would be measured as the excess of the carrying amount of the investment over the fair value of the
investment. As a result of TEL's earnings, no impairment indicators were noted that would provide for impairment of
our investment.
58
Revenue Recognition
Revenue, drivers' wages, and other direct operating expenses generated by our Truckload reportable segment are
recognized on the date shipments are delivered to the customer. Revenue includes transportation revenue, fuel
surcharges, loading and unloading activities, equipment detention, and other accessorial services.
Revenue generated by our Solutions subsidiary is recognized upon completion of the services provided. Revenue is
recorded on a gross basis, without deducting third party purchased transportation costs, as we act as a principal with
substantial risks as primary obligor, except for transactions whereby equipment from our Truckload segment perform
the related services, which we record on a net basis in accordance with the related authoritative guidance. Solutions'
revenue includes $2.4 million, $2.3 million, and $1.7 million of revenue in 2015, 2014, and 2013, respectively, related
to an accounts receivable factoring business started in 2013 to supplement several aspects of our non-asset operations.
Revenue for this business is recognized on a net basis after giving effect to receivables payments we make to the
factoring client, given we are acting as an agent and are not the primary generator of the factored receivables in these
transactions.
Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United
States of America requires us to make decisions based upon estimates, assumptions, and factors we consider as
relevant to the circumstances. Such decisions include the selection of applicable accounting principles and the use of
judgment in their application, the results of which impact reported amounts and disclosures. Changes in future
economic conditions or other business circumstances may affect the outcomes of our estimates and assumptions.
Accordingly, actual results could differ from those anticipated.
Cash and Cash Equivalents
We consider all highly liquid investments with a maturity of three months or less at acquisition to be cash equivalents.
Additionally, we are also subject to concentrations of credit risk related to deposits in banks in excess of the Federal
Deposit Insurance Corporation limits.
Accounts Receivable and Concentration of Credit Risk
We extend credit to our customers in the normal course of business. We perform ongoing credit evaluations and
generally do not require collateral. Trade accounts receivable are recorded at their invoiced amounts, net of allowance
for doubtful accounts. We evaluate the adequacy of our allowance for doubtful accounts quarterly. Accounts
outstanding longer than contractual payment terms are considered past due and are reviewed individually for
collectability. We maintain reserves for potential credit losses based upon its loss history and specific receivables
aging analysis. Receivable balances are written off when collection is deemed unlikely.
Accounts receivable are comprised of a diversified customer base that results in a lack of concentration of credit risk.
During 2015, 2014, and 2013, our top ten customers generated 45%, 38%, and 34% of total revenue, respectively. In
2015 and 2014, one customer accounted for more than 10% of our consolidated revenue. This customer was serviced
by both our Truckload segment and our Solutions subsidiary providing for $75.8 million and $82.5 million of total
revenue in 2015 and 2014, respectively. No customer accounted for more than 10% of our consolidated revenue in
2013. The carrying amount reported in the consolidated balance sheet for accounts receivable approximates fair value
based on the fact that the receivables collection averaged approximately 35 and 36 days in 2015 and 2014, respectively.
Included in accounts receivable is $18.9 million and $15.8 million of factoring receivables at December 31, 2015 and
2014, respectively, net of a $0.2 million allowance for bad debts for each respective year. We advance approximately
85% to 95% of each receivable factored and retain the remainder as collateral for collection issues that might
arise. The retained amounts are returned to the clients after the related receivable has been collected. At December
31, 2015, the retained amounts related to factored receivables totaled $0.4 million and were included in accounts
payable in the consolidated balance sheet. Our clients are smaller trucking companies that factor their receivables to
us for a fee to facilitate faster cash flow. We evaluate each client's customer base under predefined criteria. The
carrying value of the factored receivables approximates the fair value, as the receivables are generally repaid directly
to us by the client's customer within 30-40 days due to the combination of the short-term nature of the financing
transaction and the underlying quality of the receivables.
59
The following table provides a summary (in thousands) of the activity in the allowance for doubtful accounts for 2015,
2014, and 2013:
Years ended
December 31:
Beginning
balance
January 1,
Additional
provisions to
allowance
Write-offs
and other
deductions
Ending
balance
December 31,
2015
2014
2013
$
$
$
1,767
$
1,100
$
(1,010)
$
1,857
1,736
$
774
$
(743)
$
1,767
1,729
$
457
$
(450)
$
1,736
Inventories and Supplies
Inventories and supplies consist of parts, tires, fuel, and supplies. Tires on new revenue equipment are capitalized as
a component of the related equipment cost when the tractor or trailer is placed in service and recovered through
depreciation over the life of the vehicle. Replacement tires and parts on hand at year end are recorded at the lower of
cost or market with cost determined using the first-in, first-out (FIFO) method. Replacement tires are expensed when
placed in service.
Assets Held for Sale
Assets held for sale include property and revenue equipment no longer utilized in continuing operations which are
available and held for sale. Assets held for sale are no longer subject to depreciation, and are recorded at the lower of
depreciated book value or fair market value less selling costs. We periodically review the carrying value of these assets
for possible impairment. We expect to sell these assets within twelve months.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation. Depreciation for book purposes is determined
using the straight-line method over the estimated useful lives of the assets, while depreciation for tax purposes is
generally recorded using an accelerated method. Depreciation of revenue equipment is our largest item of depreciation.
We generally depreciate new tractors (excluding day cabs) over five years to salvage values of approximately 25% of
their cost. We generally depreciate new trailers over six years for refrigerated trailers and ten years for dry van trailers
to salvage values of approximately 38% of their cost. We annually review the reasonableness of our estimates
regarding useful lives and salvage values of our revenue equipment and other long-lived assets based upon, among
other things, our experience with similar assets, conditions in the used revenue equipment market, and prevailing
industry practice. Changes in the useful life or salvage value estimates, or fluctuations in market values that are not
reflected in our estimates, could have a material effect on our results of operations. Gains and losses on the disposal
of revenue equipment are included in depreciation expense in the consolidated statements of operations.
We lease certain revenue equipment under capital leases with terms of approximately 60 to 84 months. Amortization
of leased assets is included in depreciation and amortization expense.
Although a portion of our tractors are protected by non-binding indicative trade-in values or binding trade-back
agreements with the manufacturers, substantially all of our owned trailers are subject to fluctuations in market prices
for used revenue equipment. Moreover, our trade-back agreements are contingent upon reaching acceptable terms for
the purchase of new equipment. Declines in the price of used revenue equipment or failure to reach agreement for the
purchase of new tractors with the manufacturers issuing trade-back agreements could result in impairment of, or losses
on the sale of, revenue equipment.
Impairment of Long-Lived Assets
Pursuant to applicable accounting standards, revenue equipment and other long-lived assets are tested for impairment
whenever an event occurs that indicates an impairment may exist. Expected future cash flows are used to analyze
whether an impairment has occurred. If the sum of expected undiscounted cash flows is less than the carrying value
of the long-lived asset, then an impairment loss is recognized. We measure the impairment loss by comparing the fair
value of the asset to its carrying value. Fair value is determined based on a discounted cash flow analysis or the
appraised value of the assets, as appropriate.
60
Goodwill and Other Intangible Assets
We classify intangible assets into two categories: (i) intangible assets with definite lives subject to amortization and
(ii) goodwill. We have no goodwill on our consolidated balance sheet for the years ended December 31, 2015 and
2014. We test intangible assets with definite lives for impairment if conditions exist that indicate the carrying value
may not be recoverable. Such conditions may include an economic downturn in a geographic market or a change in
the assessment of future operations. We record an impairment charge when the carrying value of the definite lived
intangible asset is not recoverable by the cash flows generated from the use of the asset.
We determine the useful lives of our identifiable intangible assets after considering the specific facts and
circumstances related to each intangible asset. Factors we consider when determining useful lives include the
contractual term of any agreement, the history of the asset, our long-term strategy for the use of the asset, any laws or
other local regulations which could impact the useful life of the asset, and other economic factors, including
competition and specific market conditions. Intangible assets that are deemed to have definite lives are amortized,
generally on a straight-line basis, over their useful lives, ranging from 4 to 20 years.
Insurance and Other Claims
The primary claims arising against us consist of auto liability (personal injury and property damage), workers'
compensation, cargo, commercial liability, and employee medical expenses. Our insurance program involves self-
insurance with the following risk retention levels (before giving effect to any commutation of an auto liability policy):
auto liability - $1.0 million
workers' compensation - $1.3 million
cargo - $0.3 million
employee medical - $0.4 million
physical damage - 100%
Due to our significant self-insured retention amounts, we have exposure to fluctuations in the number and severity of
claims and to variations between our estimated and actual ultimate payouts. We accrue the estimated cost of the
uninsured portion of pending claims and an estimate for allocated loss adjustment expenses including legal and other
direct costs associated with a claim. Estimates require judgments concerning the nature and severity of the claim,
historical trends, advice from third-party administrators and insurers, the size of any potential damage award based on
factors such as the specific facts of individual cases, the jurisdictions involved, the prospect of punitive damages,
future medical costs, and inflation estimates of future claims development, and the legal and other costs to settle or
defend the claims. We have significant exposure to fluctuations in the number and severity of claims. If there is an
increase in the frequency and severity of claims, or we are required to accrue or pay additional amounts if the claims
prove to be more severe than originally assessed, or any of the claims would exceed the limits of our insurance
coverage, our profitability could be adversely affected.
In addition to estimates within our self-insured retention layers, we also must make judgments concerning claims
where we have third party insurance and for claims outside our coverage limits. Upon settling claims and expenses
associated with claims where we have third party coverage, we are generally required to initially fund payment to the
claimant and seek reimbursement from the insurer. Receivables from insurers for claims and expenses we have paid
on behalf of insurers were $0.1 million or less at December 31, 2015 and 2014, respectively, and are included in
drivers' advances and other receivables on our consolidated balance sheet. Additionally, we accrue claims above our
self-insured retention and record a corresponding receivable for amounts we expect to collect from insurers upon
settlement of such claims. We have $0.6 million at December 31, 2015 and 2014, respectively, as a receivable in other
assets and as a corresponding accrual in the long-term portion of insurance and claims accruals on our consolidated
balance sheet for claims above our self-insured retention for which we believe it is reasonably assured that the insurers
will provide their portion of such claims. We evaluate collectability of the receivables based on the credit worthiness
and surplus of the insurers, along with our prior experience and contractual terms with each. If any claim occurrence
were to exceed our aggregate coverage limits, we would have to accrue for the excess amount. Our critical estimates
include evaluating whether a claim may exceed such limits and, if so, by how much. If one or more claims were to
exceed our then effective coverage limits, our financial condition and results of operations could be materially and
adversely affected.
We also make judgements regarding the ultimate benefit versus risk to commuting certain periods within our auto
liability policy. If we commute a policy, we assume 100% risk for covered claims in exchange for a policy refund. In
April 2015, we commuted two liability policies for the period from April 1, 2013 through September 30, 2014, such
61
that we are now responsible for any claim that occurred during that period up to $20.0 million, should such a claim
develop. We recorded a $3.6 million reduction in insurance and claims expense in the second quarter of 2015 related
to the commutation. The insurer did not remit the premium refund directly to the Company, but rather applied a credit
to the current auto liability insurance policy, such that we recorded the policy release premium refund as a prepaid
asset at June 30, 2015. As a result of the commutation and the Company’s improved safety statistics over the prior
policy, the Company received favorable premium pricing for the upcoming three year policy period, which we expect
will reduce the fixed portion of insurance expense going forward.
Effective April 2015, we entered into a new auto liability policies with a three-year term. The policy includes a limit
for a single loss of $9.0 million, an aggregate of $18.0 million for each policy year, and a $30.0 million aggregate for
the three-year period ended March 31, 2018. The policy includes a policy release premium refund of up to $14.7
million, less any amounts paid on claims by the insurer, from October 1, 2014 through March 31, 2018, if we were to
commute the policy for the entire three years. A decision with respect to commutation of the policy cannot be made
before April 1, 2018, unless both we and the insurance carrier agree to a commutation prior to the end of the policy
term. Management cannot predict whether or not future claims or the development of existing claims will justify a
commutation, and accordingly, no related amounts were recorded at December 31, 2015.
Interest
We capitalize interest on major projects during construction. Interest is capitalized based on the average interest rate
on related debt. Capitalized interest was less than $0.1 million in 2015, 2014, and 2013.
Fair Value of Financial Instruments
Our financial instruments consist primarily of cash and cash equivalents, accounts receivable, commodity contracts,
accounts payable, debt, and an interest rate swap. The carrying amount of cash and cash equivalents, accounts
receivable, accounts payable, and current debt approximates their fair value because of the short-term maturity of
these instruments. The carrying value of the factored receivables approximates the fair value, as the receivables are
generally repaid directly to us by the client's customer within 30-40 days due to the combination of the short-term
nature of the financing transaction and the underlying quality of the receivables. Interest rates that are currently
available to us for issuance of long-term debt with similar terms and remaining maturities are used to estimate the fair
value of our long-term debt, which primarily consists of revenue equipment installment notes. The fair value of our
revenue equipment installment notes approximated the carrying value at December 31, 2015, as the weighted average
interest rate on these notes approximates the market rate for similar debt. Borrowings under our revolving Credit
Facility approximate fair value due to the variable interest rate on the facility. Additionally, commodity contracts,
which are accounted for as hedge derivatives, as discussed in Note 13, are valued based on the forward rate of the
specific indices upon which the contract is being settled and adjusted for counterparty credit risk using available
market information and valuation methodologies. The fair value of our interest rate swap agreement is determined
using the market-standard methodology of netting the discounted future fixed-cash payments and the discounted
expected variable-cash receipts. The variable-cash receipts are based on an expectation of future interest rates (forward
curves) derived from observable market interest rate curves. These analyses reflect the contractual terms of the swap,
including the period to maturity, and use observable market-based inputs, including interest rate curves and implied
volatilities. The fair value calculation also includes an amount for risk of non-performance of our counterparties using
"significant unobservable inputs" such as estimates of current credit spreads to evaluate the likelihood of default,
which we have determined to be insignificant to the overall fair value of our interest rate swap agreement.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that includes the enactment date. We have reflected the net
liability after offsetting our deferred tax assets and liabilities in the deferred income taxes line in the accompanying
consolidated balance sheets in accordance with our retrospective early adoption of Financial Accounting Standards
Board ("FASB") Accounting Standards Update ("ASU") No 2015-17, Income Taxes: Balance Sheet Classification of
Deferred Taxes, as discussed below. We believe the future tax deductions will be realized principally through future
reversals of existing taxable temporary differences and future taxable income, except for when a valuation allowance
has been provided as discussed in Note 9.
62
In the ordinary course of business there is inherent uncertainty in quantifying our income tax positions. We assess our
income tax positions and record tax benefits for all years subject to examination based upon management's evaluation
of the facts, circumstances, and information available at the reporting dates. For those tax positions where it is more
likely than not that a tax benefit will be sustained, we have recorded the largest amount of tax benefit with a greater
than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all
relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be
sustained, no tax benefit has been recognized in the financial statements. Potential accrued interest and penalties
related to unrecognized tax benefits are recognized as a component of income tax expense.
Our policy is to recognize income tax benefit arising from the exercise of stock options and restricted share vesting
based on the ordering provisions of the tax law as prescribed by the Internal Revenue Code, including indirect tax
effects, if any.
Lease Accounting and Off-Balance Sheet Transactions
We issue residual value guarantees in connection with the operating leases we enter into for certain of our revenue
equipment. These leases provide that if we do not purchase the leased equipment from the lessor at the end of the lease
term, then we are liable to the lessor for an amount equal to the shortage (if any) between the proceeds from the sale
of the equipment and an agreed value. To the extent the expected value at the lease termination date is lower than the
residual value guarantee, we would accrue for the difference over the remaining lease term. We believe that proceeds
from the sale of equipment under operating leases would equal or exceed the payment obligation on substantially all
operating leases. The estimated values at lease termination involve management judgments. As leases are entered into,
determination as to the classification as an operating or capital lease involves management judgments on residual
values and useful lives.
Capital Structure
The shares of Class A and B common stock are substantially identical except that the Class B shares are entitled to
two votes per share and immediately convert to Class A shares if beneficially owned by anyone other than our Chief
Executive Officer or certain members of his immediate family, while Class A shares are entitled to one vote per share.
The terms of any future issuances of preferred shares will be set by our Board of Directors.
Comprehensive Income
Comprehensive income generally includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners. Comprehensive income for 2015, 2014, and 2013 was comprised
of the net income plus the unrealized gain or loss on the effective portion of cash flow hedges and the reclassified cash
flow hedge gains or losses into earnings.
Income Per Share
Basic income per share excludes dilution and is computed by dividing earnings available to common stockholders by
the weighted-average number of common shares outstanding for the period. Diluted income per share reflects the
dilution that could occur if securities or other contracts to issue common stock were exercised or converted into
common stock or resulted in the issuance of common stock that then shared in our earnings. The calculation of diluted
earnings per share includes all unexercised options and 0.1 million unvested shares. A de minimus number of unvested
shares have been excluded from the calculation of diluted earnings per share since the effect of any assumed exercise
of the related awards would be anti-dilutive for the years ended December 31, 2015, 2014, and 2013, respectively.
Income per share is the same for both Class A and Class B shares.
63
The following table sets forth the calculation of net income per share included in the consolidated statements of
operations for each of the three years ended December 31:
(in thousands except per share data)
Numerator:
Net income
Denominator:
2015
2014
2013
$ 42,085
$
17,808 $
5,244
Denominator for basic
weighted-average shares
Effect of dilutive securities:
income per share –
18,145
15,250
14,837
Equivalent shares issuable upon conversion of
unvested restricted shares
Equivalent shares issuable upon conversion of
161
5
266
1
202
-
unvested employee stock options
Denominator for diluted income per share adjusted
assumed
shares
and
weighted-average
conversions
Net income per share:
Basic income per share
Diluted income per share
Stock-Based Employee Compensation
18,311
15,517
15,039
$
$
2.32
2.30
$
$
1.17 $
1.15 $
0.35
0.35
We issue several types of stock-based compensation, including awards that vest based on service and performance
conditions or a combination of the conditions. Performance-based awards vest contingent upon meeting certain
performance criteria established by the Compensation Committee. All awards require future service and thus
forfeitures are estimated based on historical forfeitures and the remaining term until the related award vests.
Determining the appropriate amount to expense in each period is based on likelihood and timing of achieving the
stated targets for performance-based awards and requires judgment, including forecasting future financial results. The
estimates are revised periodically based on the probability and timing of achieving the required performance and
adjustments are made as appropriate. Awards that are only subject to time vesting provisions are amortized using the
straight-line method.
Derivative Instruments and Hedging Activities
We periodically utilize derivative instruments to manage exposure to changes in fuel prices and interest rates. At
inception of a derivative contract, we document relationships between derivative instruments and hedged items, as
well as our risk-management objective and strategy for undertaking various derivative transactions, and assess hedge
effectiveness. We record derivative financial instruments in the balance sheet as either an asset or liability at fair
value. If it is determined that a derivative is not highly effective as a hedge, or if a derivative ceases to be a highly
effective hedge, we discontinue hedge accounting prospectively. The effective portion of changes in the fair value of
derivatives are recorded in other comprehensive income, and reclassified into earnings in the same period during
which the hedged transaction affects earnings. The ineffective portion is recorded in other income or expense.
Reclassifications
The prior year proceeds and repayments of the revolving credit facility have been reclassified in the Consolidated
Statement of Cash Flows to conform to the current gross basis presentation.
Recent Accounting Pronouncements
Accounting Standards adopted
In November 2015, the FASB issued ASU No. 2015-17. This standard requires companies to classify all deferred tax
assets and liabilities as noncurrent on the balance sheet instead of separating deferred taxes into current and noncurrent
64
amounts. This ASU is effective for fiscal years, and interim periods within those years, beginning on or after December
15, 2016, with early adoption permitted. The Company has elected to early adopt this standard effective December
31, 2015, on a retrospective basis. See Note 9 for further information about the early adoption of this ASU.
Accounting Standards not yet adopted
In May 2014, the FASB and the International Accounting Standards Board issued converged guidance on recognizing
revenue in contracts with customers. The new guidance establishes a single core principle in ASU No. 2014-09, which
provides for recognition of revenue to depict the transfer of promised goods or services to customers in an amount
that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This
guidance will affect any reporting organization that either enters into contracts with customers to transfer goods or
services or enters into contracts for the transfer of non-financial assets. In August 2015, ASU 2015-14 was issued
which deferred the effective date of ASU 2014-09 to fiscal years, and interim periods within those years, beginning
on or after December 15, 2017, with early adoption permitted only as of annual reporting periods beginning after
December 15, 2016, including interim reporting periods within that reporting period. The Company is evaluating the
new guidance and plans to provide additional information about its expected impact at a future date.
In August 2014, the FASB issued ASU No. 2014-15. This standard provides guidance on determining when and how
to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform
interim and annual assessments of an entity's ability to continue as a going concern within one year of the date the
financial statements are issued. This ASU is effective for fiscal years, and interim periods within those years,
beginning on or after December 15, 2016, with early adoption permitted. The Company is evaluating the new guidance
and plans to provide additional information about its expected impact at a future date.
In April 2015, the FASB issued ASU 2015-03, and, in August 2015, the FASB issued ASU 2015-15. These ASUs
require debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct
deduction from the carrying amount of that debt, consistent with debt discounts. The presentation and subsequent
measurement of debt issuance costs associated with lines of credit, may be presented as an asset and amortized ratably
over the term of the line-of-credit arrangement, regardless of whether there are outstanding borrowings on the
arrangement. The recognition and measurement guidance for debt issuance costs are not affected by these
ASUs. These ASUs are effective for financial statements issued for fiscal years beginning after December 15, 2015
and interim periods within those years with early adopting permitted. The Company will adopt this standard for the
fiscal year 2016. Adoption of this standard will result in the reclassification of approximately $0.7 million from other
assets to long-term notes payable as of December 31, 2015.
2.
LIQUIDITY
Our business requires significant capital investments over the short-term and the long-term. Recently, we have
financed our capital requirements with borrowings under our Third Amended and Restated Credit Facility ("Credit
Facility"), cash flows from operations, long-term operating leases, capital leases, secured installment notes with
finance companies, proceeds of our November 2014 public offering of Class A common stock, and proceeds from the
sale of our used revenue equipment in 2015 and 2014. We had working capital (total current assets less total current
liabilities) of $46.4 million and $40.9 million at December 31, 2015 and 2014, respectively. Based on our expected
financial condition, net capital expenditures, and results of operations and related net cash flows, we believe our
working capital and sources of liquidity will be adequate to meet our current and projected needs for at least the next
year.
As of December 31, 2015, we had $3.0 million of borrowings outstanding, undrawn letters of credit outstanding of
approximately $31.4 million, and available borrowing capacity of $60.6 million under the Credit Facility. Fluctuations
in the outstanding balance and related availability under our Credit Facility are driven primarily by cash flows from
operations and the timing and nature of property and equipment additions that are not funded through notes payable,
as well as the nature and timing of collection of accounts receivable, payments of accrued expenses, and receipt of
proceeds from disposals of property and equipment.
3.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants. Accordingly, fair value is a market-based
measurement that is determined based on assumptions that market participants would use in pricing an asset or
liability. The fair value of the hedge derivative liability was determined based on quotes from the counterparty which
were verified by comparing them to the exchange on which the related futures are traded, adjusted for counterparty
65
credit risk. The fair value of our interest rate swap agreement is determined using the market-standard methodology
of netting the discounted future fixed-cash payments and the discounted expected variable-cash receipts. The variable-
cash receipts are based on an expectation of future interest rates (forward curves) derived from observable market
interest rate curves. These analyses reflect the contractual terms of the swap, including the period to maturity, and use
observable market-based inputs, including interest rate curves and implied volatilities. The fair value calculation also
includes an amount for risk of non-performance of our counterparties using "significant unobservable inputs" such as
estimates of current credit spreads to evaluate the likelihood of default, which we have determined to be insignificant
to the overall fair value of our interest rate swap agreement. A three-tier fair value hierarchy is used to prioritize the
inputs in measuring fair value as follows:
● Level 1. Observable inputs such as quoted prices in active markets;
● Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or
indirectly; and
● Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to
develop its own assumptions.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
(in thousands)
Hedge derivative liability
Fair Value of Derivative
Quoted Prices in Active Markets (Level 1)
December 31,
2015 (1)
2014 (1)
$ (28,434)
$ (22,720)
-
-
Significant Other Observable Inputs (Level 2)
$ (28,434)
$ (22,720)
Significant Unobservable Inputs (Level 3)
-
-
(1) No cash collateral was provided by the Company at December 31, 2015. Excludes cash collateral of $5.0
million provided by the Company to the counterparty at December 31, 2014.
4.
STOCK-BASED COMPENSATION
On February 21, 2014, the Compensation Committee of our Board of Directors approved, subject to stockholder
approval, a third amendment (the "Third Amendment") to the 2006 Omnibus Incentive Plan (the "Incentive
Plan"). The Third Amendment (i) provides that the maximum aggregate number of shares of Class A common stock
available for grant of awards under the Incentive Plan from and after May 29, 2014, shall not exceed 750,000, plus
any remaining available shares of the 800,000 shares previously made available under the second amendment to the
Incentive Plan (the "Second Amendment"), and any expirations, forfeitures, cancellations, or certain other
terminations of shares approved for grant under the Third Amendment or the Second Amendment previously reserved,
plus any remaining expirations, forfeitures, cancellations, or certain other terminations of such shares, and (ii) re-sets
the term of the Incentive Plan to expire with respect to the ability to grant new awards on March 31, 2023. The
Compensation Committee also re-approved, subject to stockholder re-approval, the material terms of the performance-
based goals under the Incentive Plan so that certain incentive awards granted thereunder would continue to qualify as
exempt "performance-based compensation" under Internal Revenue Code Section 162(m). The Company's
stockholders approved the adoption of the Third Amendment and re-approved the material terms of the performance-
based goals under the Incentive Plan at the Company's 2014 Annual Meeting held on May 29, 2014.
The Incentive Plan permits annual awards of shares of our Class A common stock to executives, other key employees,
non-employee directors, and eligible participants under various types of options, restricted share awards, or other
equity instruments. At December 31, 2015, 734,150 of the aforementioned 1,550,000 shares were available for award
under the amended Incentive Plan. No participant in the Incentive Plan may receive awards of any type of equity
instruments in any calendar-year that relates to more than 200,000 shares of our Class A common stock. No awards
may be made under the Incentive Plan after March 31, 2023. To the extent available, we have issued treasury stock to
satisfy all share-based incentive plans.
Included in salaries, wages, and related expenses within the consolidated statements of operations is stock-based
compensation expense of $1.3 million, $1.3 million, and $0.3 million in 2015, 2014, and 2013, respectively. Included
in general supplies and expenses within the consolidated statements of operations is stock-based compensation
expenses for non-employee directors of $0.2 million in 2015 and $0.1 million in 2014 and 2013. All stock
compensation expense recorded in 2015, 2014, and 2013 relates to restricted shares granted, as no options were granted
during these periods. Associated with stock compensation expense was no income tax benefit, $0.8 million income
tax benefit, and $0.1 million income tax deficit in 2015, 2014, and 2013, respectively, related to the exercise of stock
66
options and restricted share vesting, resulting in related changes in taxable income and offsetting changes to additional
paid in capital.
The Incentive Plan allows participants to pay the federal and state minimum statutory tax withholding requirements
related to awards that vest or allows the participant to deliver to us shares of Class A common stock having a fair
market value equal to the minimum amount of such required withholding taxes. To satisfy withholding requirements
for shares that vested, certain participants elected to deliver to us 84,138, 39,676, and 53,188 Class A common stock
shares, which were withheld at weighted average per share prices of $27.10, $20.97, and $6.41 based on the closing
prices of our Class A common stock on the dates the shares vested in 2015, 2014, and 2013, respectively, in lieu of
the federal and state minimum statutory tax withholding requirements. We remitted $2.3 million, $0.8 million, and
$0.3 million in 2015, 2014, and 2013, respectively, to the proper taxing authorities in satisfaction of the employees'
minimum statutory withholding requirements. The payment of minimum tax withholdings on stock compensation are
reflected within the issuances of restricted shares from treasury stock in the accompanying consolidated statement of
stockholders' equity.
The following table summarizes our restricted share award activity for the fiscal years ended December 31, 2015,
2014, and 2013:
Number of
stock
awards
(in thousands)
Weighted
average grant
date fair
value
764
$
263
$
(200) $
(50) $
$
777
136
$
(137) $
(134) $
$
642
63
$
(246) $
(129) $
$
330
6.62
5.60
8.12
5.56
5.95
12.27
7.43
7.80
6.60
28.10
4.97
5.38
12.43
Unvested at December 31, 2012
Granted
Vested
Forfeited
Unvested at December 31, 2013
Granted
Vested
Forfeited
Unvested at December 31, 2014
Granted
Vested
Forfeited
Unvested at December 31, 2015
The unvested shares at December 31, 2015 will vest based on when and if the related vesting criteria are met for each
award. All awards require continued service to vest, and 192,891of these awards vest solely based on continued
service, in varying increments between 2016 and 2018. Performance based awards account for 136,961 of the unvested
shares at December 31, 2015, of which 75,098 shares have no unrecognized compensation cost as the cost has been
fully recognized based on the performance goals having been achieved for the year ended December 31, 2015 and
61,863 shares relate to performance for the years ended December 31, 2016 and 2017 and have $1.2 million of
unrecognized compensation cost.
The fair value of restricted share awards that vested in 2015, 2014, and 2013 was approximately $6.5 million, $2.9
million, and $1.2 million, respectively. As of December 31, 2015, we had approximately $2.2 million of unrecognized
compensation expense related to 192,891 service-based and 61,863 2016 and 2017 performance-based restricted share
awards, which is probable to be recognized over a weighted average period of approximately 25 months. All restricted
shares awarded to executives and other key employees pursuant to the Incentive Plan have voting and other
stockholder-type rights, but will not be issued until the relevant restrictions are satisfied.
67
The following table summarizes our stock option activity for the fiscal years ended December 31, 2015 2014, and
2013:
Number of
options (in
thousands)
Weighted
average
exercise price
Weighted average
remaining
contractual term
Aggregate intrinsic
value
(in thousands)
Outstanding at December 31, 2012
333 $
15.67
1.5 years
$
-
-
1.0 years
$
0.5 years
$
945
Options granted
Options exercised
Options forfeited
Outstanding at December 31, 2013
Options granted
Options exercised
Options forfeited
Outstanding at December 31, 2014
Options granted
Options exercised
Options forfeited
Outstanding at December 31, 2015
Exercisable at December 31, 2015
-
-
(112) $
221 $
-
(45) $
(100) $
76 $
-
(73) $
-
3 $
3 $
-
-
17.14
14.98
-
13.64
21.71
14.73
-
14.79
-
12.79
0.4 years
12.79
0.4 years
$
$
15
15
5.
PROPERTY AND EQUIPMENT
A summary of property and equipment, at cost, as of December 31, 2015 and 2014 is as follows:
(in thousands)
Revenue equipment
Communications equipment
Land and improvements
Buildings and leasehold improvements
Construction in-progress
Other
Estimated
Useful Lives
3-10 years $
5-10 years
0-10 years
7-40 years
-
2-7 years
$
2014
2015
468,693 $ 418,574
8,248
18,820
37,217
2,976
19,510
596,071 $ 505,345
8,189
25,184
71,614
1,104
21,287
Depreciation expense was $61.9 million, $49.0 million, and $44.2 million, in 2015, 2014, and 2013, respectively. The
aforementioned depreciation expense excludes net gains on the sale of property and equipment totaling $0.6 million,
$2.7 million, and $0.8 million in 2015, 2014, and 2013, respectively, which are presented net in depreciation and
amortization expense in the consolidated statements of operations.
We lease certain revenue equipment under capital leases with terms of approximately 60 to 84 months. At December
31, 2015 and 2014, property and equipment included capitalized leases, which had capitalized costs of $19.4 million
and $33.8 million and accumulated amortization of $4.7 million and $10.6 million, respectively. Amortization of
these leased assets is included in depreciation and amortization expense in the consolidated statement of operations
and totaled $2.0 million, $3.0 million, and $2.2 million during 2015, 2014, and 2013, respectively.
68
6.
GOODWILL AND OTHER ASSETS
We have no goodwill on our consolidated balance sheet.
A summary of other assets as of December 31, 2015 and 2014 is as follows:
(in thousands)
Customer relationships
Less: accumulated amortization of intangibles
Net intangible assets
Investment in TEL
Other long-term receivables
Deposits
Deferred loan costs, net
Other, net
2015
2014
$
3,490 $
(3,321)
169
16,788
576
314
706
1,984
3,490
(3,255)
235
12,192
575
546
724
491
$ 20,537 $ 14,763
Amortization expenses of intangible assets were $0.1 million, $0.1 million, and $0.2 million for 2015, 2014, and
2013, respectively. Approximate intangible amortization expense for the next five years is as follows:
2016
2017
2018
2019
2020
Thereafter
(In thousands)
48
$
35
$
25
$
18
$
43
$
-
$
7.
DEBT
Current and long-term debt consisted of the following at December 31, 2015 and 2014:
(in thousands)
December 31, 2015
December 31, 2014
Borrowings under Credit Facility
Revenue equipment installment notes; weighted average
interest rate of 3.6% at December 31, 2015, and 3.7%
December 31, 2014, due in monthly installments with
final maturities at various dates ranging from January
2016 to January 2022, secured by related revenue
equipment
Real estate note; weighted average interest rate of 2.0%
and 2.5% at December 31, 2015 and 2014,
respectively, due in monthly installments with fixed
maturity at December 2018 and August 2035, secured
by related real-estate
Other note payable, interest rate of 3.0% at December
31, 2014
Current
$
38,461
Long-Term
Current
- $
3,002 $
- $
163,387
27,550
Long-Term
-
155,832
1,184
30,124
166
3,608
-
-
108
91
Total debt
Principal portion of capital lease obligations, secured by
39,645
4,031
196,513
10,547
27,824
1,606
159,531
13,372
related revenue equipment
Total debt and capital lease obligations
$ 43,676 $ 207,060 $ 29,430 $ 172,903
We and substantially all of our subsidiaries (collectively, the "Borrowers") are parties to a Third Amended and
Restated Credit Facility (the "Credit Facility") with Bank of America, N.A., as agent (the "Agent") and JPMorgan
Chase Bank, N.A. ("JPM," and together with the Agent, the "Lenders").
69
The Credit Facility is a $95.0 million revolving credit facility, with an uncommitted accordion feature that, so long as
no event of default exists, allows us to request an increase in the revolving credit facility of up to $50.0 million subject
to lender acceptance of the additional funding commitment. The Credit Facility included, within our $95.0 million
revolving credit facility, a letter of credit sub facility in an aggregate amount of $95.0 million and a swing line sub
facility in an aggregate amount equal to the greater of $10.0 million or 10% of the Lenders' aggregate commitments
under the Credit Facility from time-to-time.
In August 2015, we entered into an eleventh amendment to the Credit Facility, which, among other things, (i) amended
the "Applicable Margin" to improve the interest rate grid as set forth in the tables below, (ii) improved the unused line
fee pricing to 0.25% per annum, retroactive to July 1, 2015 (previously the fee was 0.375% per annum when
availability was less than $50.0 million and 0.5% per annum when availability was at or over such amount), (iii)
required each of Driven Analytic Solutions, LLC ("DAS") and Covenant Properties, LLC ("CPI") to be joined to the
Credit Agreement as guarantors, (iv) required each of DAS, CPI and Star Properties Exchange, LLC, a Tennessee
limited liability company, to pledge certain of its assets as security, (v) contained conditional amendments increasing
the borrowing base real estate sublimit and lowering the amortization of the real estate sublimit, (vi) made technical
amendments to a variety of sections, including without limitation, permitted investments, permitted stock repurchases,
permitted indebtedness, and permitted liens, (vii) consented to the purchase of the Company's headquarters, including
related financing, and (viii) extended the maturity date from September 2017 to September 2018. Following the
effectiveness of the eleventh amendment, the applicable margin was changed as follows:
New Pricing
Level
I
II
III
Level
I
II
III
IV
Average Pricing
Availability
> $40,000,000
≤ $40,000,000 but >
$20,000,000
≤ $20,000,000
Base Rate
Loans
.50%
LIBOR
Loans
1.50% 1.50%
L/C
Fee
.75%
1.00%
1.75% 1.75%
2.00% 2.00%
Prior Pricing
Average Pricing
Availability
> $75,000,000
≤ $75,000,000 but >
$50,000,000
≤ $50,000,000 but >
$25,000,000
≤ $25,000,000
Base Rate
Loans
.50%
LIBOR
Loans
1.50% 1.50%
L/C
Fee
.75%
1.75% 1.75%
1.00%
1.25%
2.00% 2.00%
2.25% 2.25%
In exchange for these amendments, we agreed to pay fees of $0.2 million. Based on availability as of December 31,
2015, there was no fixed charge coverage requirement.
The unused line fee is the product of 0.25% times the average daily amount by which the Lenders' aggregate revolving
commitments under the Credit Facility exceed the outstanding principal amount of revolver loans and the aggregate
undrawn amount of all outstanding letters of credit issued under the Credit Facility. The obligations under the Credit
Facility are guaranteed by us and secured by a pledge of substantially all of our assets, with the notable exclusion of
any real estate or revenue equipment pledged under other financing agreements, including revenue equipment
installment notes and capital leases.
Borrowings under the Credit Facility are subject to a borrowing base limited to the lesser of (A) $95.0 million, minus
the sum of the stated amount of all outstanding letters of credit; or (B) the sum of (i) 85% of eligible accounts
receivable, plus (ii) the lesser of (a) 85% of the appraised net orderly liquidation value of eligible revenue equipment,
(b) 95% of the net book value of eligible revenue equipment, or (c) 35% of the Lenders' aggregate revolving
commitments under the Credit Facility, plus (iii) the lesser of (a) $25.0 million or (b) 65% of the appraised fair market
value of eligible real estate. We had $3.0 million of borrowings outstanding under the Credit Facility as of December
31, 2015, undrawn letters of credit outstanding of approximately $31.4 million, and available borrowing capacity of
$60.6 million.
The Credit Facility includes usual and customary events of default for a facility of this nature and provides that, upon
the occurrence and continuation of an event of default, payment of all amounts payable under the Credit Facility may
70
be accelerated, and the Lenders' commitments may be terminated. If an event of default occurs under the Credit
Facility and the Lenders cause all of the outstanding debt obligations under the Credit Facility to become due and
payable, this could result in a default under other debt instruments that contain acceleration or cross-default provisions.
The Credit Facility contains certain restrictions and covenants relating to, among other things, debt, dividends, liens,
acquisitions and dispositions outside of the ordinary course of business, and affiliate transactions. Failure to comply
with the covenants and restrictions set forth in the Credit Facility could result in an event of default.
Capital lease obligations are utilized to finance a portion of our revenue equipment and are entered into with certain
finance companies who are not parties to our Credit Facility. The leases in effect at December 31, 2015 terminate in
January 2016 through February 2022 and contain guarantees of the residual value of the related equipment by us. As
such, the residual guarantees are included in the related debt balance as a balloon payment at the end of the related
term as well as included in the future minimum capital lease payments. These lease agreements require us to pay
personal property taxes, maintenance, and operating expenses.
Pricing for the revenue equipment installment notes is quoted by the respective financial affiliates of our primary
revenue equipment suppliers and other lenders at the funding of each group of equipment acquired and include fixed
annual rates for new equipment under retail installment contracts. The notes included in the funding are due in monthly
installments with final maturities at various dates ranging from January 2016 to January 2022. The notes contain
certain requirements regarding payment, insuring of collateral, and other matters, but do not have any financial or
other material covenants or events of default except certain notes totaling $215.5 million are cross-defaulted with the
Credit Facility. Additionally, a portion of the our fuel hedge contracts totaling $27.3 million at December 31, 2015, is
cross-defaulted with the Credit Facility. Additional borrowings from the financial affiliates of our primary revenue
equipment suppliers and other lenders are expected to be available to fund new tractors expected to be delivered in
2016, while any other property and equipment purchases, including trailers, are expected to be funded with a
combination of available cash, notes, operating leases, capital leases, and/or from the Credit Facility.
In August 2015, we financed a portion of the purchase of our corporate headquarters, a maintenance facility, and
certain surrounding property in Chattanooga, Tennessee by entering into a $28.0 million variable rate note with a third
party lender. Concurrently with entering into the note, we entered into an interest rate swap to effectively fix the
related interest rate to 4.2%. See Note 13 for further information about the interest rate swap.
As of December 31, 2015, the scheduled principal payments of debt, excluding capital leases for which future
payments are discussed in Note 8 are as follows:
2016
2017
2018
2019
2020
Thereafter
(in thousands)
39,645
40,253
58,735
33,846
34,479
29,200
$
$
$
$
$
$
8.
LEASES
We have operating lease commitments for office and terminal properties, revenue equipment, and computer and office
equipment, and we have capital lease commitments for revenue equipment, in each case excluding owner/operator
rentals and month-to-month equipment rentals, summarized for the following fiscal years (in thousands):
2016
2017
2018
2019
2020
Thereafter
Total minimum lease payments
Less: amount representing interest
Present value of minimum lease payments
Less: current portion
Capital lease obligations, long-term
71
Operating
Capital
$
$
8,430 $
5,489
2,887
995
66
-
17,867 $
$
4,485
1,656
1,656
1,656
3,878
2,896
16,227
(1,649)
14,578
(4,031)
10,547
A portion of our operating leases of tractors and trailers contain residual value guarantees under which we guarantee
a certain minimum cash value payment to the leasing company at the expiration of the lease. We estimate that the
undiscounted value of the residual guarantees is approximately $4.0 million at December 31, 2015 and 2014,
respectively. The residual guarantees at December 31, 2015 expire between August 2018 and February 2019. We
expect our residual guarantees to approximate the market value at the end of the lease term. Additionally, certain
leases contain cross-default provisions with other financing agreements and additional charges if the unit's mileage
exceeds certain thresholds defined in the lease agreement.
Rental expense is summarized as follows for each of the three years ended December 31:
(in thousands)
Revenue equipment rentals
Building and lot rentals
Other equipment rentals
9.
INCOME TAXES
2015
2014
2013
$ 12,611 $ 20,935 $ 22,991
4,044
362
$ 15,029 $ 24,813 $ 27,397
3,561
317
2,078
340
Income tax expense (benefit) for the years ended December 31, 2015, 2014, and 2013 is comprised of:
(in thousands)
Federal, current
Federal, deferred
State, current
State, deferred
2015
2014
2013
$
124 $
18,185
426
3,087
12,830
187
1,851
$ 21,822 $ 14,774
(94) $ (816)
7,560
102
657
$ 7,503
Income tax expense for the years ended December 31, 2015, 2014, and 2013 is summarized below:
(in thousands)
Computed "expected" income tax expense
State income taxes, net of federal income tax effect
Per diem allowances
Tax contingency accruals
Valuation allowance, net
Tax credits
Other, net
Actual income tax expense
2015
2013
2014
$ 22,368 $ 11,404 $ 4,462
421
2,422
(496)
684
(250)
260
$ 21,822 $ 14,774 $ 7,503
2,237
2,329
1,599
218
(7,151)
222
1,075
2,304
(104)
18
(112)
189
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, adjusted for
permanent differences, the most significant of which is the effect of the per diem pay structure for drivers. Drivers
who meet the requirements to receive per diem receive non-taxable per diem pay in lieu of a portion of their taxable
wages. This per diem program increases our drivers' net pay per mile, after taxes, while decreasing gross pay, before
taxes. As a result, salaries, wages, and employee benefits are slightly lower and our effective income tax rate is higher
than the statutory rate. Generally, as pre-tax income increases, the impact of the driver per diem program on our
effective tax rate decreases, because aggregate per diem pay becomes smaller in relation to pre-tax income, while in
periods where earnings are at or near breakeven, the impact of the per diem program on our effective tax rate is
significant. Due to the partially nondeductible effect of per diem pay, our tax rate will fluctuate in future periods
based on fluctuations in earnings.
Tax credits generated at December 31, 2015, consisted of both federal and state tax credits in the amounts of $7.0
million and $0.1 million, respectively. The federal tax credit included a non-recurring tax credit in the amount of $6.5
million.
72
The temporary differences and the approximate tax effects that give rise to our net deferred tax liability at December
31, 2015 and 2014 are as follows:
(in thousands)
Deferred tax assets:
Insurance and claims
Net operating loss carryovers
Tax credits
Other
Deferred fuel hedge
Valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Property and equipment
Other
Prepaid expenses
Total net deferred tax liabilities
2015
2014
$
15,495
15,348
10,585
4,730
10,947
(1,219)
55,886
(125,188)
(4,398)
(3,281)
(132,867)
$
16,153
18,347
1,477
6,086
8,144
(1,001)
49,206
(103,186)
(2,186)
(2,838)
(108,210)
Net deferred tax liability
$
(76,981)
$
(59,004)
In November 2015, the FASB issued ASU No. 2015-17, "Balance Sheet Classification of Deferred Taxes", an update
to ASC 740, Income Taxes. Current GAAP requires an entity to separate deferred income tax liabilities and assets
into current and noncurrent amounts in a classified statement of financial position. To simplify the presentation of
deferred income taxes, the amendments in this ASU require that deferred tax liabilities and assets be classified as
noncurrent in a classified statement of financial position. The current requirement that deferred tax liabilities and
assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by the
amendments in this ASU. This ASU is effective for fiscal years, and interim periods within those years, beginning on
or after December 15, 2016, with early adoption permitted. The Company has elected to early adopt this standard
effective December 31, 2015, on a retrospective basis and reclassified $14.7 million from net current deferred income
tax assets to net noncurrent deferred income tax liabilities as of December 31, 2014.
The net deferred tax liability of $77.0 million primarily relates to differences in cumulative book versus tax
depreciation of property and equipment, partially off-set by net operating loss carryovers and insurance claims that
have been reserved but not paid. The carrying value of our deferred tax assets assumes that we will be able to generate,
based on certain estimates and assumptions, sufficient future taxable income in certain tax jurisdictions to utilize these
deferred tax benefits. If these estimates and related assumptions change in the future, we may be required to establish
a valuation allowance against the carrying value of the deferred tax assets, which would result in additional income
tax expense. On a periodic basis, we assess the need for adjustment of the valuation allowance. Based on forecasted
taxable income resulting from the reversal of deferred tax liabilities, primarily generated by accelerated depreciation
for tax purposes in prior periods, and tax planning strategies available to us, no valuation allowance has been
established at December 31, 2015 or 2014, except for $1.2 million and $1.0 million, respectively, related to certain
state net operating loss carry forwards. If these estimates and related assumptions change in the future, we may be
required to modify our valuation allowance against the carrying value of the deferred tax assets.
As of December 31, 2015, we had a $3.2 million liability recorded for unrecognized tax benefits, which includes
interest and penalties of $0.9 million. We recognize interest and penalties accrued related to unrecognized tax benefits
in tax expense. As of December 31, 2014, we had a $1.6 million liability recorded for unrecognized tax benefits, which
included interest and penalties of $0.7 million. Interest and penalties recognized for uncertain tax positions provided
for a $0.2 million, $0.1 million, and a $0.3 million benefit in each of 2015, 2014, and 2013 respectively.
73
The following tables summarize the annual activity related to our gross unrecognized tax benefits (in thousands) for
the years ended December 31, 2015, 2014, and 2013:
Balance as of January 1,
Increases related to prior year tax positions
Decreases related to prior year positions
Increases related to current year tax positions
Decreases related to settlements with taxing authorities
Decreases related to lapsing of statute of limitations
Balance as of December 31,
2015
2014
2013
995
1,737
-
-
(182)
(156)
2,394
$
$
1,060
246
-
42
(126)
(227)
995
$
$
1,563
-
-
24
-
(527)
1,060
$
$
If recognized, $2.7 million and $1.1 million of unrecognized tax benefits would impact our effective tax rate as of
December 31, 2015 and 2014, respectively. Any prospective adjustments to our reserves for income taxes will be
recorded as an increase or decrease to our provision for income taxes and would impact our effective tax rate.
Our 2012 through 2015 tax years remain subject to examination by the IRS for U.S. federal tax purposes, our major
taxing jurisdiction. In the normal course of business, we are also subject to audits by state and local tax authorities.
While it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter, we
believe that our reserves reflect the more likely than not outcome of known tax contingencies. We adjust these
reserves, as well as the related interest, in light of changing facts and circumstances. Settlement of any particular issue
would usually require the use of cash. Favorable resolution would be recognized as a reduction to our annual tax rate
in the year of resolution. We do not expect any significant increases or decreases for uncertain income tax positions
during the next year.
Our federal net operating loss carryforwards of $28.6 million, along with a federal alternative minimum tax credit
carryforward of $0.3 million are available to offset future federal taxable income, if any, through 2034, while our state
net operating loss carryforwards and state tax credits of $122.9 million and $0.3 million, respectively expire over
various periods through 2034 based on jurisdiction.
10.
EQUITY METHOD INVESTMENT
In May 2011, we acquired a 49.0% interest in TEL for $1.5 million in cash. Additionally, TEL's majority owners were
eligible to receive an earn-out of up to $4.5 million for TEL's results through December 31, 2012, of which $1.0
million was earned based on TEL's 2011 results and $2.4 million was earned based on TEL's 2012 results. The earn-
out payments increased our investment balance and there are no additional earn-outs payable for future results.
TEL is a tractor and trailer equipment leasing company and used equipment reseller. We have not guaranteed any of
TEL's debt and have no obligation to provide funding, services, or assets. Under the agreement, we have an option to
acquire 100% of TEL until May 31, 2016, by purchasing the majority owners' interest based on a multiple of TEL's
average earnings before interest and taxes, adjusted for certain items including cash and debt balances as of the
acquisition date. Subsequent to May 31, 2016, TEL's majority owners have the option to acquire our interest based on
the same terms detailed above. For the years ended December 31, 2015 and 2014, we sold tractors and trailers to TEL
for $6.2 million and $14.0 million, respectively, and received $1.3 million and $1.5 million, respectively, for providing
various maintenance services, certain back-office functions, and for miscellaneous equipment. We reversed previously
deferred gains totaling less than $0.1 million for the years ending December 31, 2015 and 2014, respectively,
representing 49% of the gains on units sold to TEL less any gains previously deferred and recognized when the
equipment was sold to a third party. Deferred gains totaling $0.8 million at December 31, 2015 and December 31,
2014, respectively, are being carried as a reduction in our investment in TEL. At December 31, 2015 and 2014, we
had accounts receivable from TEL of $5.3 million and $2.2 million, respectively, related to cash disbursements made
pursuant to our performance of certain back-office and maintenance functions on TEL's behalf.
We have accounted for our investment in TEL using the equity method of accounting and thus our financial results
include our proportionate share of TEL's net income, which amounted to $4.6 million in 2015, $3.7 million in 2014,
and $2.8 million in 2013. We received no equity distribution from TEL in 2015, $0.3 million in 2014, and less than
$0.1 million in 2013, which was distributed to each member based on its respective ownership percentage in order to
satisfy estimated tax payments resulting from TEL's earnings. The distribution is the result of TEL being a limited
liability company and thus its earnings are attributed to its members for tax purposes and are taxed for federal and
certain state income on the members' respective tax returns. Our investment in TEL, totaling $16.8 million and $12.2
million at December 31, 2015 and 2014, respectively, is included in other assets in the accompanying consolidated
balance sheet. Our investment in TEL is comprised of the $4.9 million cash investment noted above and our equity
74
in TEL's earnings since our investment, partially offset by dividends received since our investment for minimum tax
withholdings as noted above and the abovementioned deferred gains on sales of equipment to TEL.
See TEL's summarized financial information below.
(in thousands)
As of the years ended December 31,
Current Assets
Non-current Assets
Current Liabilities
Non-current Liabilities
Total Equity
(in thousands)
Revenue
Operating Expenses
Operating Income
Net Income
2015
$ 14,275
125,782
29,644
84,516
$ 25,897
2014
$ 14,525
64,731
16,733
45,687
$ 16,836
As of the years ended December 31,
2014
2013
2015
$ 104,838
91,644
13,194
9,061
$
$
$
90,197
79,771
10,426
7,564
$
$
58,484
50,878
7,606
5,643
11.
DEFERRED PROFIT SHARING EMPLOYEE BENEFIT PLAN
We have a deferred profit sharing and savings plan under which all of our employees with at least six months of
service are eligible to participate. Employees may contribute a percentage of their annual compensation up to the
maximum amount allowed by the Internal Revenue Code. We may make discretionary contributions as determined
by a committee of our Board of Directors. We made contributions of $0.8 million in 2015, zero in 2014, and zero in
2013 to the profit sharing and savings plan.
12.
RELATED PARTY TRANSACTIONS
See Note 10 for discussions of the related party transactions associated with TEL.
13.
DERIVATIVE INSTRUMENTS
We engage in activities that expose us to market risks, including the effects of changes in fuel prices and in interest
rates. Financial exposures are evaluated as an integral part of our risk management program, which seeks, from time-
to-time, to reduce the potentially adverse effects that the volatility of fuel markets and interest rate risk may have on
operating results.
In an effort to seek to reduce the variability of the ultimate cash flows associated with fluctuations in diesel fuel prices,
we periodically enter into various derivative instruments, including forward futures swap contracts (which we refer to
as "fuel hedge contracts"). Historically diesel fuel has not been a traded commodity on the futures market so heating
oil has been used as a substitute, as prices for both generally move in similar directions. Recently, however, we have
been able to enter into hedging contracts with respect to both heating oil and ultra-low sulfur diesel ("ULSD"). Under
these contracts, we pay a fixed rate per gallon of heating oil or ULSD and receive the monthly average price of New
York heating oil per the New York Mercantile Exchange ("NYMEX") and Gulf Coast ULSD, respectively. The
retrospective and prospective regression analyses provided that changes in the prices of diesel fuel and heating oil and
diesel fuel and ULSD were each deemed to be highly effective based on the relevant authoritative guidance except for
a small portion of our hedge contracts, which we determined to be ineffective on a prospective basis. Consequently,
in 2014, we recognized approximately $1.4 million of additional fuel expense to mark the related liability to market
and a $1.4 million reduction of fuel expense during 2015 as the related contracts expired. At December 31, 2015,
there were no remaining ineffective fuel hedge contracts and thus the remaining contracts continue to qualify as cash
flow hedges. We do not engage in speculative transactions, nor do we hold or issue financial instruments for trading
purposes.
In August 2015, we entered into an interest rate swap agreement with a notional amount of $28.0 million, which was
designated as a hedge against the variability in future interest payments due on the debt associated with the purchase
of our corporate headquarters as described in Note 7. The terms of the swap agreement effectively convert the variable
rate interest payments on this note to a fixed rate of 4.2% through maturity on August 1, 2035. Because the critical
75
terms of the swap and hedged item coincide, in accordance with the requirements of ASC 815, the change in the fair
value of the derivative is expected to exactly offset changes in the expected cash flows due to fluctuations in the
LIBOR rate over the term of the debt instrument, and therefore no ongoing assessment of effectiveness is required.
The fair value of the swap agreement that was in effect at December 31, 2015, of approximately $1.1 million, is
included in other liabilities in the consolidated balance sheet, and is included in accumulated other comprehensive
loss, net of tax. Additionally, $0.3 million was reclassified from accumulated other comprehensive loss into our results
of operations as additional interest expense for the year ended December 31, 2015, related to changes in interest rates
during such periods. Based on the amounts in accumulated other comprehensive loss as of December 31, 2015, we
expect to reclassify losses of approximately $0.3 million, net of tax, on derivative instruments from accumulated other
comprehensive loss into our results of operations during the next twelve months due to changes in interest rates. The
amounts actually realized will depend on the fair values as of the date of settlement.
We recognize all derivative instruments at fair value on our consolidated balance sheets. Our derivative instruments
are designated as cash flow hedges, thus the effective portion of the gain or loss on the derivatives is reported as a
component of accumulated other comprehensive loss and will be reclassified into earnings in the same period during
which the hedged transaction affects earnings. The effective portion of the derivative represents the change in fair
value of the hedge that offsets the change in fair value of the hedged item. To the extent the change in the fair value
of the hedge does not perfectly offset the change in the fair value of the hedged item, the ineffective portion of the
hedge is immediately recognized in our consolidated statements of operations. Ineffectiveness is calculated using the
cumulative dollar offset method as an estimate of the difference in the expected cash flows of the respective fuel hedge
contracts (heating oil or ULSD) compared to the changes in the all-in cash outflows required for the diesel fuel
purchases.
At December 31, 2015, we had forward futures swap contracts on approximately 12.1 million, 12.1 million, and 7.6
million gallons of diesel to be purchased in 2016, 2017, and 2018, respectively, or approximately 25%, 25%, and 15%
of our projected annual 2016, 2017, and 2018 fuel requirements, respectively.
The fair value of the contracts that were in effect at December 31, 2015 and 2014, of approximately $27.3 million and
$22.7 million, respectively, are included in other liabilities in the consolidated balance sheet, are included in
accumulated other comprehensive loss, net of tax. Changes in the fair values of these instruments can vary
dramatically based on changes in the underlying commodity prices. For example, during 2015, market "spot" prices
for ultra-low sulfur diesel peaked at a high of approximately $1.98 per gallon and hit a low price of approximately
$0.98 per gallon. During 2014, market spot prices ranged from a high of $3.08 per gallon to a low of $1.58 per gallon.
Market price changes can be driven by factors such as supply and demand, inventory levels, weather events, refinery
capacity, political agendas, the value of the U.S. dollar, geopolitical events, and general economic conditions, among
other items.
Additionally, $15.3 million, $3.1 million, and $0.6 million were reclassified from accumulated other comprehensive
(loss) income to our results of operations for the years ended December 31, 2015, 2014, and 2013, respectively, as
additional expense for 2015 and 2014 and as a reduction of expense in 2013, related to losses on fuel hedge contracts
that expired in 2015 and 2014, and a gain on fuel hedge contracts that expired in 2013, respectively. In addition to
the amounts reclassified as a result of expired contracts, we recognized a reduction of fuel expense of $1.4 million
relating to previously recognized fuel expense as a result of the expiration of the fuel hedge contracts for which the
fuel hedging relationship was deemed to be ineffective on a prospective basis in 2014. As a result, the changes in fair
value for those contracts were recorded as expense rather than as a component of other comprehensive loss. At
December 31, 2015, all fuel hedge contracts were deemed to be effective.
Based on the amounts in accumulated other comprehensive loss as of December 31, 2015 and the expected timing of
the purchases of the diesel hedged, we expect to reclassify approximately $11.2 million, net of tax, on derivative
instruments from accumulated other comprehensive loss into our results of operations during the next year due to the
actual diesel fuel purchases. The amounts actually realized will be dependent on the fair values as of the date of
settlement.
We perform both a prospective and retrospective assessment of the effectiveness of our hedge contracts at inception
and quarterly, including assessing the possibility of counterparty default. If we determine that a derivative is no longer
expected to be highly effective, we discontinue hedge accounting prospectively and recognize subsequent changes in
the fair value of the hedge in earnings. As a result of our effectiveness assessment at inception, quarterly, and at
December 31, 2015 and 2014, we believe our hedge contracts have been and will continue to be highly effective in
offsetting changes in cash flows attributable to the hedged risk, with the exception of the abovementioned contracts.
76
Outstanding financial derivative instruments expose us to credit loss in the event of nonperformance by the
counterparties to the agreements. We do not expect any of the counterparties to fail to meet their obligations. Our
credit exposure related to these financial instruments is represented by the fair value of contracts reported as assets. To
manage credit risk, we review each counterparty's audited financial statements, credit ratings, and/or obtain references
as we deem necessary.
We have historically held fuel derivative instruments with a counterparty that required cash collateral when the
instruments were in a net liability position. At December 31, 2015, all instruments with that counterparty were
expired. As such, at December 31, 2015, no cash collateral deposits were required by us. At December 31, 2014, $5.0
million cash collateral deposits were provided by us in connection with our outstanding fuel derivative instruments
with the counterparty. The cash collateral amounts provided were netted against the fair value of current outstanding
derivative instruments.
14.
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
Accumulated other comprehensive (loss) income ("AOCI") is comprised of net income and other adjustments,
including changes in the fair value of certain derivative financial instruments qualifying as cash flow hedges.
The following tables summarize the change in the components of our AOCI balance for the periods presented (in
thousands; presented net of tax):
Details about AOCI
Components
(Losses) gains on cash flow
hedges
Commodity derivative
contracts
Interest rate swap contract
Amount Reclassified from AOCI for the
years ended December 31,
2014
2015
2013
Affected Line Item
in the Statement of
Operations
$
$
$
$
(15,313)
5,865
(9,448)
(259)
99
(160)
$
$
$
$
(3,141)
1,206
(1,935)
-
-
-
$
$
$
$
643
(247)
396
-
-
-
Fuel expense
Income tax expense
Net of tax
Interest expense
Income tax expense
Net of tax
For additional information about our cash flow hedges, refer to Note 13.
15.
COMMITMENTS AND CONTINGENT LIABILITIES
From time-to-time, we are a party to ordinary, routine litigation arising in the ordinary course of business, most of
which involves claims for personal injury and property damage incurred in connection with the transportation of
freight.
We maintain insurance to cover liabilities arising from the transportation of freight for amounts in excess of certain
self-insured retentions. In management's opinion, our potential exposure under pending legal proceedings is
adequately provided for in the accompanying consolidated financial statements.
In August 2014, the U.S. District Court for the Southern District of Ohio issued a pre-trial decision in a lawsuit against
our Southern Refrigerated Transport, Inc. subsidiary ("SRT") relating to a cargo claim incurred in 2008. The court
awarded the plaintiff approximately $5.9 million plus prejudgment interest and costs and denied a cross-motion for
summary judgment by SRT. Previously, the court had ruled in favor of SRT on all but one count before overturning
its earlier decision and ruling in favor of the plaintiff. SRT filed a Notice of Appeal with the U.S. Sixth Circuit Court
of Appeals on September 24, 2014. On November 5, 2015, the Sixth Circuit reversed the district court in part, finding
that the plaintiff could not recover under two of its causes of action. The Sixth Circuit remanded the proceedings to
the district court for further factual determinations relating to whether the plaintiff could recover under a third cause
of action.
We are defendant in a lawsuit that was filed on August 17, 2015 in the Superior Court of the State of California, Los
Angeles County. This lawsuit arises out of the work performed by the plaintiff as a company driver for Covenant
Transport during the period of August, 2013 through October, 2014. Plaintiff is seeking class action certification
under the complaint. The case was removed from state court in September, 2015 to the U.S. District Court in the
Central District of California, and subsequently, the case was transferred to the U.S. District Court in the Eastern
77
District of Tennessee on October 5, 2015 where the case is now pending. The complaint asserts that the time period
covered by the lawsuit is "the four (4) years prior to the filing of this action through the trial date" and alleges claims
for failure to properly pay for rest breaks, inspection time, waiting time, fueling and paperwork time, meal periods and
other related wage and hour claims under the California Labor Code.
Based on our present knowledge of the facts and, in certain cases, advice of outside counsel, management believes the
resolution of open claims and pending litigation, taking into account existing reserves, is not likely to have a materially
adverse effect on our consolidated financial statements.
We had $31.4 million and $34.3 million of outstanding and undrawn letters of credit as of December 31, 2015 and
2014, respectively. The letters of credit are maintained primarily to support our insurance programs.
We had commitments outstanding at December 31, 2015, to acquire revenue equipment totaling approximately $145.6
million in 2016 versus commitments at December 31, 2014 of approximately $116.8 million. These commitments are
cancelable upon stated notice periods, subject to certain adjustments in the underlying obligations and benefits. These
purchase commitments are expected to be financed by operating leases, capital leases, long-term debt, proceeds from
sales of existing equipment, and/or cash flows from operations.
See "Critical Accounting Policies And Estimates – Insurance and Other Claims" for additional information.
16.
SEGMENT INFORMATION
As previously discussed, we have one reportable segment, our asset-based truckload services or Truckload. Our other
operations consist of several operating segments, which neither individually nor in the aggregate meet the quantitative
or qualitative reporting thresholds. As a result, these operations are grouped in "Other" in the tables below.
The accounting policies of the segments are the same as those described in the summary of significant accounting
policies. Substantially all intersegment sales prices are market based. We evaluate performance based on operating
income of the respective business units.
"Unallocated Corporate Overhead" includes expenses that are incidental to our activities and are not specifically
allocated to one of the segments.
The following tables summarize our segment information (in thousands):
Year Ended December 31, 2015
Revenue
Intersegment revenue
Operating income (loss)
Depreciation and amortization (1)
Total assets
Capital expenditures, net (2)
Year Ended December 31, 2014
Revenue
Intersegment revenue
Operating income (loss)
Depreciation and amortization (1)
Total assets
Capital expenditures, net (2)
Year Ended December 31, 2013
Revenue
Intersegment revenue
Operating income (loss)
Depreciation and amortization (1)
Total assets
Capital expenditures net (2)
$
$
$
$
Truckload
655,918
-
74,107
60,138
581,212
147,896
$
$
663,001
-
54,151
45,669
463,900
87,871
644,403
-
27,746
42,848
402,637
90,336
(1) Includes gains and losses on disposition of equipment.
(2) Includes equipment purchased under capital leases.
78
Unallocated
Corporate
Overhead
Other
71,057 $
(2,735)
5,768
13
26,315
29
59,796 $
(3,817)
3,894
59
27,338
14
51,702 $
(5,778)
1,271
72
20,883
10
- $
-
(12,093)
1,233
39,896
1,069
Consolidated
726,975
(2,735)
67,782
61,384
647,423
148,994
- $
-
(18,399)
656
48,066
1,570
- $
-
(8,623)
775
37,668
1,630
722,797
(3,817)
39,646
46,384
539,304
89,455
690,327
(5,778)
20,394
43,694
461,188
91,976
17.
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Quarters ended
Total revenue
Operating income
Net income
Basic income per share
Diluted income per share
Quarters ended
(in thousands except per share amounts)
Mar. 31,
2015(2)
June 30,
2015(3)
Sep. 30,
2015
Dec. 31,
2015
$
167,216 $
175,451 $
173,512 $
10,043
10,227
0.56
0.56
18,774
11,001
0.60
0.60
14,629
7,627
0.42
0.42
208,061
24,336
13,230
0.74
0.72
(in thousands except per share amounts)
Mar. 31,
2014
June 30,
2014
Sep. 30,
2014 (4)
Dec. 31,
2014
Total revenue
Operating income
Net income (loss)
Basic (loss) income per share (1)
Diluted (loss) income per share (1)
$
$
160,957
354
(1,374)
(0.09)
(0.09)
173,654 $
9,056
3,780
0.25
0.25
177,581 $
5,586
1,857
0.12
0.12
206,788
24,650
13,545
0.84
0.82
(1) Quarter totals do not aggregate to annual results due to the dilution related to the follow-on stock offering.
(2)
(3)
Includes $4.7 million after tax one-time federal income tax credit.
Includes $3.6 million in return of previously expensed insurance premiums for the commutation of our
primary auto liability policy for the period of April 1, 2013, through September 30, 2014.
Includes $7.5 million increase to claims reserves for a 2008 cargo claim.
(4)
79
COVENANT TRANSPORTATION GROUP, INC.
STOCK PERFORMANCE GRAPH
The following graph compares the cumulative total stockholder return of our common stock with the cumulative total
stockholder return of the Nasdaq Composite Index and the Nasdaq Transportation Index for the period commencing
December 31, 2010, and ending December 31, 2015. The graph assumes $100 was invested on December 31, 2010,
and that all dividends were reinvested. The stock performance graph shall not be deemed to be incorporated by
reference into any filing made by us under the Securities Act of 1933 or the Exchange Act, notwithstanding any general
statement contained in any such filings incorporating the graph by reference, except to the extent we incorporate such
graph by specific reference.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Covenant Transportation Group, Inc., the NASDAQ Composite Index,
and the NASDAQ Transportation Index
$300
$250
$200
$150
$100
$50
$0
12/10
12/11
12/12
12/13
12/14
12/15
Covenant Transportation Group, Inc.
NASDAQ Composite
NASDAQ Transportation
*$100 invested on 12/31/10 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
12/10
12/11
12/12
12/13
12/14
12/15
Covenant Transportation Group, Inc.
NASDAQ Composite
NASDAQ Transportation
100.00
100.00
100.00
30.68
100.53
90.09
57.13
116.92
95.46
84.81
166.19
130.08
280.06
188.78
181.38
195.14
199.95
153.54
Prepared by Research Data Group, Inc. Used with permission. All rights reserved. Copyright 2015.
80
COVENANT TRANSPORTATION GROUP, INC. CORPORATE INFORMATION
DIRECTORS
David R. Parker
Chairman of the Board,
President & Chief Executive Officer
William T. Alt
Attorney
Bradley A. Moline
President & Chief Executive Officer,
Allo Communications, LLC, a local telecommunications
company
President, Imperial Super Foods, and NECO Grocery,
both local grocery stores
Robert E. Bosworth
Retired President & Chief Operating Officer,
Chattem, Inc., a consumer products company
Herbert J. Schmidt
Retired Executive Vice President of Con-way Inc. &
President of Con-way Truckload,
both freight transportation providers
OFFICERS
David R. Parker
Chairman of the Board &
Chief Executive Officer –
Covenant Transportation Group, Inc.
(principal executive officer)
Joey B. Hogan
President & Chief Operating Officer –
Covenant Transportation Group, Inc.
Richard B. Cribbs
Executive Vice President & Chief Financial
Officer –
Covenant Transportation Group, Inc.
(principal financial officer)
R.H. Lovin, Jr.
Executive Vice President –
Covenant Transportation Group, Inc.
Tony Smith
President – Southern Refrigerated Transport, Inc.
Justin Smith
Executive Vice President & Chief Operating Officer –
Southern Refrigerated Transport, Inc.
James "Jim" Brower, Jr.
Executive Vice President & Chief Operating Officer –
Star Transportation, Inc.
Sam Hough
Executive Vice President & Chief Operating Officer –
Covenant Transport, Inc.
M. Paul Bunn
Chief Accounting Officer –
Covenant Transportation Group, Inc.
(principal accounting officer)
INDEPENDENT AUDITORS
KPMG LLP
Atlanta, Georgia
CORPORATE COUNSEL
Scudder Law Firm, P.C., L.L.O.
Lincoln, Nebraska
TRANSFER AGENT AND REGISTRAR
Computershare
P.O. Box 30170
College Station, TX 77842-3170
ANNUAL MEETING
Covenant's Annual Meeting will be held at 10:00 a.m.
local time on May 18, 2016, at the Company's corporate
headquarters.
CORPORATE HEADQUARTERS
400 Birmingham Highway
Chattanooga, Tennessee 37419
(423) 821-1212
COMMON STOCK
NASDAQ Global Select Market – CVTI
On February 29, 2016, the Company filed its Sarbanes-Oxley Section 302 Certifications as exhibits to the
Company's Annual Report on Form 10-K for the period ended December 31, 2015.
A copy of our Annual Report on Form 10-K for the year ended December 31, 2015, as filed with the
Securities and Exchange Commission, may be obtained by stockholders of record without charge upon
written request to Richard B. Cribbs, Executive Vice President & Chief Financial Officer, at 400
Birmingham Highway, Chattanooga, Tennessee 37419.