ANNUAL REPORT 2016
COVENANT TRANSPORTATION GROUP, INC.
SUMMARY OF
OPERATIONS
Total revenue
(in thousands)
Freight revenue
(in thousands)
Net income (loss)
(in thousands)
2012
2013
2014
2015
2016
$ 674,254
$ 684,549
$ 718,980
$ 724,240
$ 670,651
$ 527,435
$ 538,933
$ 578,569
$ 640,120
$ 610,845
$
6,065
(2)
$
5,244
$
17,808
(3)
$ 42,085
(4) (5) $
16,835
Net margin(1)
1.1%
(2)
1.0%
3.1%
(3)
6.6%
(4) (5)
2.8%
Earnings (loss) per
share (diluted)
Book value per
share (year end)
$
$
Adjusted operating
ratio(6)(8)
Adjusted ROIC(7)(8)
0.41
(2)
6.41
96.4%
5.4%
$
$
0.35
6.75
$
$
1.15
(3)
$
2.30
(4) (5) $
0.92
9.35
$
11.15
$
12.95
96.2%
5.3%
91.8%
8.9%
90.0%
11.6%
94.7%
6.0%
(3)
(1) Net margin is net income (loss) as a percentage of freight revenue.
(2)
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.
(4)
(5)
(6) Adjusted operating expenses, net of fuel surcharge revenue, as a percentage of freight revenue. Adjustments
exclude the items set forth in footnotes 2, 3 and 4.
(7) 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 and 5.
(8) 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:
After five consecutive years of improving results and record financial performance in 2015, our earnings took a step
back in 2016. Fundamentally, we believe our overall strategy is sound and the company is on the right track. We are
highly engaged in addressing the controllable items and countering the market forces that impacted our 2016 results.
Like our peers, we battled a difficult freight market, a compressed holiday shipping season, and low used truck prices.
Unlike most of our peers, we faced additional headwinds from adverse fuel hedging losses and the outsized earnings
decline at our refrigerated subsidiary. Some of these items are already correcting and others will continue to present
challenges during 2017. Rest assured that we are striving every day to improve our performance and optimize the
allocation of resources to build long-term success.
2016 Review
In last year's outlook, I highlighted our confidence in operating profitably while noting near-term caution. Our caution
then was based on negative trends in the supply-demand environment, ongoing re-engineering of e-commerce supply
chains, and upward cost pressure on driver pay, equipment costs (depreciation, interest, and lease expense, net of gains
and losses on disposition), and other expenses. I also noted that improving the results of SRT, our solo-driven
refrigerated subsidiary, offered us the opportunity to outperform peers if we were successful.
As 2016 unfolded, moderate freight volumes, industry overcapacity, and a combination of supply chain/distribution
changes and aggressive lane bidding by shippers resulted in lower productivity as well as a year-over-year decline in
freight revenue per total mile for only the second time in the last 20 years. In addition, the impact of e-commerce
continued to compress the holiday peak shipping season, which also reduced our utilization and profits. The weak
used truck market and our growing team fleet caused us to accelerate our depreciation expense meaningfully, and we
also incurred higher driver pay and greater fuel hedging losses. Finally, SRT's deep structural problems became more
apparent under the weight of the deteriorating industry conditions, and its results worsened.
Because of the mix of market and non-market forces that impacted 2016, I will offer a little more detail than usual
concerning our financial results. On a reported basis, our operating income declined 52% to $32.4 million. The
following table reflects the way we think about the differences between 2015 and 2016 in round numbers:
2015 Operating Income
Equipment costs (depr., leases, net of gain/loss)
Net fuel cost (fuel, net of surcharge and hedging)
SRT deterioration in performance (excl. equip/fuel)
No insurance commutation in 2016
Subtotal of discrete items
Freight market and other, net of cost savings
2016 Operating Income
(millions)
$67.8
(9.2)
(5.3)
(12.4)
(3.6)
$37.3
(4.9)
$32.4
The used equipment market had the most significant impact on our financial results for the year and will continue to
impact us for the foreseeable future. The difference between recognized gain/loss on disposition of equipment for
2016 versus 2015 was only $1.5 million. The larger factor was our adjustment to tractor depreciation lives and their
expected salvage values, which were implemented in July 2016 at a quarterly impact of approximately $2.0 million.
Two factors impacted our assessment – the currently depressed market for used tractors, which caused us to lower
expected disposition values, and the growing percentage of our fleet operated by driver teams, which accumulate miles
faster and therefore lose value more rapidly. Higher depreciation expense will continue to be a year-over-year
headwind until the second half of 2017. We believe the change was prudent to maintain the flexibility to dispose of
these assets during most cycles.
In addition, our net fuel expenses (fuel expense, net of company tractor fuel surcharge collection and fuel hedging
expense) increased meaningfully despite overall lower diesel fuel prices per gallon in 2016 compared with 2015. In
2016, the national average fuel price fell 40 cents per gallon, which would have been expected to benefit us by
approximately $4.5 million. Instead, our hedging positions prevented us from capturing the benefit of lower prices
and resulted in hedging expense of $16.7 million in 2016 compared with $15.3 million in 2015. We adopted a policy
of hedging approximately one-fourth of our total gallons in 2011, at a time when fuel prices were highly volatile, our
capital structure was more highly leveraged, and fewer sources of liquidity were available to us. Having added
approximately $150 million of stockholders' equity since 2011 and generated six consecutive years of profits, our
i
hedging policy is under review. Our current expectation is for fuel hedging expense to decrease by approximately
75% in 2017, based on hedging positions and prevailing diesel prices during the first quarter of 2017.
The 2016 financial performance of SRT was disappointing as it swung to an operating loss for the first time since we
acquired the company in 1998. However, even excluding the impact of equipment and fuel, the drop in productivity
and increase in costs during 2016 cost us approximately $12.4 million, or approximately 900 basis points on SRT's
freight revenue compared with 2015. SRT now has a substantially new management team (more on that later).
In 2015, we recorded a $3.6 million benefit from the optional commutation of an insurance policy, which we did not
have the option to do in 2016 and also do not expect in 2017.
Outside of the items discussed above, our operating income slipped by approximately $4.9 million, or approximately
100 basis points on the roughly $477 million of freight revenue excluding SRT. This decline related primarily to
lower revenue per tractor, higher driver pay and recruiting expense, and higher maintenance and road costs, partially
offset by cost controls. In a difficult environment, with significant pressure on yields, strong competition for the best
professional truck drivers, and a more compressed peak shipping season, we battled for freight, cut costs, and added
a few key accounts to maintain margins.
Business Units
During 2016 and through the present, we have continued to execute the key components of our strategic plan, including
the following:
(cid:120)
(cid:120)
(cid:120)
Investing in personnel and intellectual property. Key moves in this area included new leadership at SRT and
Solutions and rolling out our Driven Analytics Solutions services, which assist us and participating carriers
with safety and driver retention.
Enterprise-wide approach to best practices across all functional areas. We continue to implement best
practices across all units and coordinate activities to increase revenue and reduce costs. Recent actions
include consolidating sales accountability, establishing an enterprise-wide dedicated contract function, and
establishing single points of contact for certain high volume customers.
Capital allocation to business units and customer segments we expect to generate more favorable risk-
adjusted returns. Additional capital has been allocated to expedited team operations, Solutions, and Star
(dedicated), while shrinking the capital allocated to SRT.
(cid:120) Deleveraging our balance sheet. From year-end 2015 to year-end 2016, total on and off-balance sheet
financing, net of cash and including the present value of operating lease payments, decreased by $37.5 million
while stockholders’ equity grew $34.3 million. Balance sheet debt to total capitalization improved to 47.7%
at year-end 2016 from 55.3% at year-end 2015.
For 2017, our key business focus areas will be continuing to refine the position of our expedited team business in the
marketplace, growing our dedicated business, ramping up Solutions’ asset-light brokerage and logistics business, and
improving the operating performance at SRT. Let me say a few words about each.
Expedited Team. The expedited team operation has been the foundation of our business and the largest component of
our profitability over the past three years. We have reached 1,000 teams and serve as a critical portion of the supply
chain for time-critical and high-security shipments, including the e-commerce world and produce market. While
highly lucrative in many periods, this business can be seasonal and cyclical, and it requires significantly more driver
recruiting and capital investment per tractor than solo operations due to the number of professional drivers needed and
the number of miles operated per year. Our goal is to align with customers who will provide a base of consistent
demand and allow us to supplement peak capacity with Solutions' third party capacity. In addition, we are seeking to
grow solo dedicated opportunities to allow our team drivers and trainers an option to drive solo periodically and to
balance the more volatile team business with contracted volume.
Dedicated. Star Transportation has been the leader of our dedicated business and continues to perform well.
Dedicated operations involve contracted volumes from customers and capacity guarantees from us. These
arrangements are popular with professional drivers and allow us to allocate a certain amount of capacity at known
revenues. They also provide a counterbalance to our more cyclical non-dedicated expedited team operations. Tractors
committed to dedicated contracts recently approached 30% of our total tractor capacity across Star, Covenant
ii
Transport, and SRT. We recently consolidated accountability for the growth and oversight of dedicated operations
under a single enterprise-wide team and expect to grow this business over time.
Solutions. Solutions functions as a critical component of our customer service effort by affording incremental capacity
(for loads outside our desired network and peak fluctuations), lowering our capital intensity (particularly important to
offset the capital intense team operations), and embedding us in our customers’ supply chains (through managed
logistics contracts). Solutions grew in 2016, and with the addition of Paul Newbourne as Chief Operating Officer last
October we expect to grow even faster.
SRT. During the second half of 2016, we replaced substantially all of the senior leadership at SRT and began
rebuilding people, processes, and culture from the ground up. I am pleased to report that customer service has
improved dramatically, unseated truck count has been cut in half, the freight network has been tightened, and a culture
of excellence is growing. It will take some time for these improvements to reverse the loss of volume and rates that
our prior performance caused, and to result in profitable operations. In the meantime, we have reduced the fleet size
to conserve capital and concentrate the better freight over fewer trucks. We could not have accomplished this without
the leadership of Herb Schmidt, one of our board members who came out of retirement to lead the effort. We all owe
Herb a huge debt of gratitude.
Outlook
Our outlook for 2017 is mixed. The first half of 2017 will remain challenged by negative comparisons in freight
revenue per tractor, accelerated depreciation, and higher professional driver wages. In addition, SRT will start the
year at a deficit due to last year's positive first quarter performance. As the year progresses, the negative impact of
depreciation is expected to reverse and to flatten. To the extent mandatory ELD implementation and lower truck
numbers in our industry decrease effective capacity, and economic growth spurs volumes, we expect the supply-
demand environment to improve later in 2017 and into 2018. However, the timing and magnitude of these changes
are difficult to predict and may be different in each of our markets. At SRT, we are seeing early progress and have
confidence in our plan and team, and we expect progress versus 2016. While I expect CTG to be better positioned
coming out of 2017, our full-year financial results may not fully reflect the improvement. As we have previously
disclosed, we expect operating cash flow in excess of net capital expenditures and to continue to pay down debt in
2017.
Over the longer term, I am optimistic. We have the best, deepest management team in our history, a diversified
portfolio of services, and a unified spirit guiding our people. We provide unmatched service to our customers and a
caring and productive home for our professional truck drivers. And we will continue to honor our founding principles
of quality and integrity – that is our covenant.
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.
Adjusted Operating Ratio
($ in millions)
Freight Revenue
Operating expenses
Less: Fuel surcharge revenue
Add: Insurance commutation
Add: Gain on sale of real estate
Less: Increased reserves related
judgement on 2008 cargo claim
2012
$ 527.4
2013
$ 538.9
2014
$ 578.6
2015
$ 640.1
2016
$ 610.8
651.0
(146.8)
2.3
2.4
664.2
(145.6)
-
-
679.3
(140.4)
-
-
656.5
(84.1)
3.6
-
638.2
59.8
-
-
to
-
Non-GAAP adjusted operating expenses $ 508.9
-
$ 518.6
(7.5)
$ 531.4
-
$ 576.0
-
$ 578.4
Non-GAAP adjusted operating ratio
96.4%
96.2%
91.8%
90.0%
94.7%
Adjusted ROIC calculation
($ in millions)
Operating income
Add: Equity in earnings of affiliate
Less: Income tax expense
NOPAT
Less: Insurance commutation (after tax)
Less: Gain on sale of real estate (after
2012
$ 23.2
1.9
6.3
$ 18.8
(1.4)
2013
$ 20.4
2.8
7.5
$ 15.7
-
2014
$ 39.6
3.7
17.8
$ 25.5
-
2015
$ 67.8
4.6
21.8
$ 50.6
(2.2)
2016
$ 32.4
3.0
10.4
$ 25.0
-
tax)
(1.5)
-
-
-
-
Add:
reserves
Increased
to
judgement on 2008 cargo claim (after
tax)
related
Less: One time tax credit
Non-GAAP adjusted NOPAT
Average Invested Capital
Average net balance sheet debt
Average equity
Average invested capital
-
-
$ 15.9
-
-
$ 15.7
4.6
-
$ 30.1
-
(4.7)
$ 43.7
-
-
$ 25.0
203.4
90.9
$ 294.2
197.2
97.5
$ 294.7
203.6
134.8
$ 338.4
188.7
188.4
$ 377.2
197.8
218.2
$ 416.0
Non-GAAP adjusted return on invested
capital (ROIC)
5.4%
5.3%
8.9%
11.6%
6.0%
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 our ability to achieve our strategic plan,
our ability to recruit and retain qualified independent contractors and qualified driver and non-driver employees, our
ability to react to market conditions, our ability to gain market share, future demand for and supply of new and used
tractors and trailers (including expected prices of such equipment), expected functioning and effectiveness of our
information systems and other technology we implement, expected sources and adequacy of working capital and
liquidity, future relationships, use, classification, compensation, and availability with respect to third-party service
providers, future driver market conditions, future allocation of capital, expected settlement of operating lease
obligations, future asset sales and acquisitions, future insurance, litigation, and claims levels and expenses, future tax
expense and deductions, future fuel management, expense, and the future effectiveness of fuel surcharge programs
and price hedges, future interest rates and effectiveness of interest rate swaps, expected capital expenditures
(including the future mix of lease and purchase obligations), future asset utilization and efficiency, future trucking
capacity, expected freight demand and volumes, future rates, future depreciation and amortization, future compliance
with and impact of existing and proposed federal and state laws and regulations, future salaries, wages, and other
employee benefit expenses, future earnings from and value of our investments, future customer relationships, future
defaults under debt agreements, future unforeseen events such as strikes, work stoppages, and weather catastrophes,
future acquisitions, future credit availability, future performance of our subsidiaries, and future operating and
maintenance expenses, 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 tractors to approximately 2,550 tractors
and expanded our services from predominantly long haul dry van to include refrigerated, dedicated, cross-border,
regional, and brokerage. The expansion of our fleet and service offerings have placed us among the nation's twenty-
five largest truckload transportation companies based on 2015 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
1
shipments over particular routes at specified times. To complement our truckload operations, we provide freight
brokerage/logistics 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.
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:
(cid:404) Expedited / Long haul: In our expedited / long haul business, we operate approximately 1,000 tractors,
approximately 700 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.
(cid:404) Temperature-Controlled: In our temperature-controlled business, operated through our SRT subsidiary,
we operate approximately 850 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. Improving results of
operations at SRT is one of our primary goals for 2017.
(cid:404) Dedicated: In our dedicated contract business, we operate approximately 700 tractors, approximately 150
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 shippers of produce, where the nature of the
product we ship requires high service standards. We believe these sectors are growing because of an
improved manufacturing environment in the United States, particularly in the Southeast, growth in organic
produce, customer concerns about trucking capacity, and a need for dependable service.
(cid:404) Capacity Provider Solutions and Logistics Services / Equipment Sales and Leasing: We primarily
provide freight brokerage and logistics 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 secured 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 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 rose dramatically, particularly equipment, driver wages, and, at times, fuel prices, 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 driver 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.
While the results for 2016 were not as robust as those achieved in 2015, which provided the highest annual earnings
in the Company’s 31-year history, we are proud of earning a profit for the fifth consecutive year after only producing
a profit in one calendar year from 2006-2011. We believe our return to profitability on a consistent basis is the result
of redefining and retooling our business model, and as the result of our strategic planning process, whereby we
annually focus on five initiatives that fall under the following key tenets:
2
(cid:404) 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.
(cid:404) 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
techniques involve sophisticated analytics to identify likely candidates, match teams, evaluate recruiting
spending, deliver training content to drivers, and design tractor specifications.
(cid:404) 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
cannot be as efficiently serviced through our Truckload segment. With each interaction, we seek to
enhance the value we bring to the customer relationship.
(cid:404) 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. Our leverage decreased in 2016
over 2015, as we remain focused on investing capital when we can obtain acceptable returns and reducing
our leverage. 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.
(cid:404) 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.
(cid:404) 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. However, some of our key metrics and our
profitability were negatively impacted in 2016 compared to 2015, and, accordingly, 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.
The Company
We operate a relatively new tractor fleet and employ sophisticated tractor technology that enhances our operational
efficiencies and our drivers' safety. Our company-owned tractor fleet has an average age of approximately 1.8 years,
which compares favorably to an average U.S. Class 8 tractor age of approximately 8 years in 2016. 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
3
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 truckload services ("Truckload").
The Truckload segment consists of three 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, dedicated, 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 2016 total revenue, net of fuel
surcharge revenue, which we refer to as "freight revenue":
2016
Star,(cid:3)8%
SRT,(cid:3)25%
Covenant(cid:3)Transport,(cid:3)
56%
Solutions,(cid:3)11%
Distribution of Freight Revenue
Among Operating Subsidiaries
Covenant Transport
SRT
Solutions
Star
56%
25%
11%
8%
Our Truckload segment comprised approximately 89%, 89%, and 90% of our total freight revenue in 2016, 2015, and
2014, 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
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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
(excludes fuel surcharge revenue)
$1.70
$1.65
$1.60
$1.55
$1.50
$1.45
$1.40
$1.35
$1.30
$1.25
$1.20
2012
2013
2014
2015
2016
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
2012 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). A weaker pricing environment and condensed peak season during 2016
resulted in the slight decrease from the previous year.
Average
Freight
Revenue Per Total
Mile (excludes fuel
surcharge revenue)
2012
$1.47
2013
$1.49
2014
$1.60
2015
$1.69
2016
$1.67
Average Miles Per Tractor
130,000
125,000
120,000
115,000
2012
2013
2014
2015
2016
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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 2016 and 2015 declined from that of 2014 primarily due to a softer freight market and
the increase in certain e-commerce freight that has a shorter length of haul, partially offset by the
increase in the portion of tractors operated by teams.
Average Miles Per
Tractor
2012
118,103
2013
119,375
2014
123,275
2015
122,508
2016
121,782
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
2012
2013
2014
2015
2016
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 tractors, it takes into account the percentage of our fleet
that is unproductive due to lack of drivers, repairs, and other factors. The decrease in average freight
revenue per tractor per week in 2016 is primarily due to an increase in our unseated tractors,
specifically at SRT, and a softer freight market both in terms of utilization and rates.
Average
Freight
Revenue Per Tractor
Per Week
(excludes
fuel surcharge revenue)
2012
$3,320
2013
$3,411
2014
$3,777
2015
$3,967
2016
$3,881
Our Solutions subsidiary comprised approximately 11%, 11%, and 10% of our total operating revenue in 2016, 2015,
and 2014, respectively. Solutions derives revenue from providing brokerage and logistics services, particularly
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 62,614 in 2016, from 36,217 in 2015, while
average revenue per load decreased approximately 41% to $1,068 in 2016, from $1,820 in 2015, primarily due to the
full year impact of a new customer added in 2015 and reduced peak-season freight opportunities during the fourth
quarter of 2016. Additionally, revenue from Solutions' accounts receivable factoring improved by approximately 6%
year-over-year to $2.6 million in 2016 from $2.4 million in 2015.
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 $3.0 million in 2016, $4.6
million in 2015, and $3.7 million in 2014. 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 2016, 2015, and 2014.
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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 parcel 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. Our three operating fleets within the Truckload segment 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 2016 and 2015, one customer accounted for more than 10% of our consolidated revenue. Wal-Mart accounted for
$69.4 million of total revenue in 2016, while UPS accounted for $75.8 million and $82.6 million of revenue in 2015
and 2014, respectively. Both customers were serviced by both our Truckload segment and our Solutions subsidiary.
Our top five customers accounted for approximately 39%, 34%, and 29% of our total revenue in 2016, 2015, and
2014, 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 2016, 2015 and 2014. We do not separately track domestic and foreign revenue
from customers, and providing such information would not be meaningful. Excluding a de minimus number of
trailers, 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 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 and in 2015, we began realizing the efficiencies of having
all subsidiaries on one operating platform. We expect to continue 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
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 2016, as economic growth provided more employment opportunities
that attracted professional drivers. Despite these challenges our number of drivers decreased only slightly at December
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31, 2016 as compared to the 2015 year. Despite having a similar number of drivers as of December 31, 2016, our
average number of teams for 2016 increased as a percentage of our fleet to 38.7% compared to 35.3% in 2015 and our
average tractor count for the year decreased as compared to December 31, 2015. Open tractors, including wrecked
units, averaged approximately 5.4% for the year ended December 31, 2016, compared to approximately 4.6% for the
year ended December 31, 2015, primarily as a result of an increase in turnover at SRT.
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.
We continue to educate our drivers and non-driver personnel regarding the Federal Motor Carrier Safety
Administration ("FMCSA") Compliance Safety Accountability program ("CSA") to ensure we keep our top talent and
challenge those drivers that need improvement. We believe CSA, in conjunction with other U.S. Department of
Transportation ("DOT") regulations, including those related to hours-of-service, has reduced and will likely continue
to impact effective capacity in our industry as well as negatively impact equipment utilization. Nevertheless, for
carriers that are able to successfully manage this regulation-laden 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.
We are not a party to any collective bargaining agreement. At December 31, 2016, we employed approximately 3,600
drivers and approximately 800 non-driver personnel. At December 31, 2016, we had active contracts with
approximately 219 independent contractor drivers.
Revenue Equipment
At December 31, 2016, we operated 2,535 tractors and 7,389 trailers. Of these tractors, 2,181 were owned, 135 were
financed under operating leases, and 219 were provided by independent contractors, who own and drive their own
tractors. Of these trailers, 4,759 were owned, 1,695 were financed under operating leases, and 935 were financed
under capital leases. Furthermore, at December 31, 2016, approximately 61.4% 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, 2016, our tractor fleet had an average age of
approximately 1.8 years, and our trailer fleet had an average age of approximately 4.3 years. As of December 31,
2016, 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
approximately every fifteen 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, 2016, 100% of our fleet was equipped with electronic on board
8
recorders ("EOBRs," now referred to as electronic logging devices, or "ELDs"), which electronically monitor tractor
miles and facilitate enforcement of 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 has been 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 softened freight
demand, scarcity of qualified truck drivers, decreased fuel costs, a depressed used tractor market, and regulations that
limit productivity. In 2016, these factors contributed to an environment of challenging freight volumes, rate pressure,
and increased costs, particularly around tractor depreciation expense and gains and losses on used tractors, for many
trucking companies, including us. Based on our assessment of future regulatory changes, driver demographics, and
expected growth rates of our major customers and sectors, we expect the pricing environment to improve in the latter
half of 2017 and into 2018 and 2019, 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.
Regulation
Our operations are regulated and licensed by various U.S. agencies. Our limited 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
9
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 while the FMCSA conducted a study to determine
whether such restrictions had a positive result on driver safety (the "Study"), and essentially reverted to the more
straightforward 34-hour restart rule that was in effect before the 2011 Rule became effective. In December 2016, a
short-term funding bill was signed into law that directly tied the reinstatement of the 2011 Restart Restrictions to the
outcome of the Study and requires the Study to demonstrate that the 2011 Restart Restrictions offer a "statistically
significant improvement" in safety related matters in order for the 2011 Restart Restrictions to be reinstated. In March
2017, the results of the Study were released, and they did not show the necessary improvement needed to reinstate the
2011 Restart Restrictions. Based on these results, the FMCSA is expected to issue a formal notice permanently
removing the 2011 Restart Restrictions from the hours-of-service regulations.
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 rule, 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 rule underwent a public
comment period that ended in June 2016 and several industry groups and lawmakers expressed their disagreement
with the proposed rule, arguing that it violates the requirements of the FAST Act and that the FMCSA must first
finalize its review of the CSA scoring system, described in further detail below. Based on this feedback, in January
2017, the FMCSA announced that a Supplemental Notice of Proposed Rulemaking outlining certain changes to the
proposed rule would be released in the future. Therefore, it is uncertain if, when, or under what form this proposed
rule could take effect. However, if this rule or a similar rule was enacted, and we received a rating of "unfit," it could
materially adversely affect our operations.
In addition to the safety rating system, the FMCSA has adopted the CSA program 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 our 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
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 ELDs in
their tractors to electronically monitor truck miles and facilitate enforcement of hours-of-service regulations. These
rules, however, were vacated by the Seventh Circuit Court of Appeals in August 2011. In response, Congress passed
legislation in July 2012 renewing the mandate, subject to new regulations to be promulgated by the DOT. Pursuant to
its rulemaking authority, the FMCSA published a new final rule in December 2015 which requires the use of ELDs
10
by nearly all carriers by December 2017 (the "2015 ELD Rule"). We have proactively installed ELDs on 100% of our
tractor fleet, so we don’t believe the 2015 ELD Rule will impact our operations or profitability or our use of ELDs.
Furthermore, we believe that more effective hours-of-service enforcement after the 2015 ELD Rule takes effect may
improve our competitive position by causing all carriers to adhere more closely to hours-of-service requirements.
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 in January 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. In
addition, other rules have been recently proposed or made final by the FMCSA, including (i) a rule requiring the use
of speed limiting devices on heavy duty trucks to restrict maximum speeds, which was proposed in 2016 but not yet
made final, (ii) a rule mandating the creation of a national clearinghouse that employers and prospective employers
must query to determine if current or prospective drivers have had any drug/alcohol positives or refusals, which was
made final in December 2016, with a compliance date in January 2020, and (iii) a rule setting forth minimum driver-
training standards for new drivers applying for commercial driver licenses for the first time and to experienced drivers
upgrading their licenses or seeking a hazmat endorsement, which was made final in December 2016, with a compliance
date in February 2020. The effect of these recently proposed or finalized rules could result in a decrease in fleet
production and driver availability, either of which could adversely affect our business or operations.
In March 2014, the Ninth Circuit Court of Appeals held that California state wage and hour laws are not preempted
by federal law. The case was appealed to the Supreme Court of the United States, which in May 2015 refused to
review the case, and accordingly, the Ninth Circuit Court of Appeals decision stands. Current and future state and
local wage and hour laws, including laws related to employee meal breaks and rest periods, may vary significantly
from federal law. As a result, we, along with other companies in the industry, could become subject to an uneven
patchwork of wage and hour laws throughout the United States. There is proposed federal legislation to preempt state
and local wage and hour laws; however, passage of such legislation is uncertain. If federal legislation is not passed,
we will either need to comply with the most restrictive state and local laws across our entire network, or overhaul our
management systems to comply with varying state and local laws. Either solution could result in increased compliance
and labor costs, driver turnover, and decreased efficiency.
Tax and other regulatory authorities, as well as independent contractors themselves, have increasingly asserted that
independent contractor drivers in the trucking industry are employees rather than independent contractors, for a variety
of purposes, including income tax withholding, workers' compensation, wage and hour compensation, unemployment,
and other issues. 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. Further, class
actions and other lawsuits have been filed against certain members of our industry seeking to reclassify independent
contractors as employees for a variety of purposes, including workers' compensation and health care coverage. 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.
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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 August 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 (the "Phase
1 Standards"). The Phase 1 Standards apply to tractor 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 would begin developing the next phase of tighter fuel efficiency and greenhouse gas standards for
medium-and heavy-duty trucks and trailers (the "Phase 2 Standards"). In October 2016, the EPA and NHTSA
published the final rule mandating that the Phase 2 Standards will apply to trailers beginning with model year 2018
and tractors beginning with model year 2021. The Phase 2 Standards require nine percent and 25 percent reductions
in emissions and fuel consumption for trailers and tractors, respectively, by 2027. We believe these requirements will
result in additional increases in new tractor and trailer prices and additional parts and maintenance costs incurred to
retrofit our tractors and trailers with technology to 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. In addition, in
February 2017 CARB proposed California Phase 2 standards that generally align with the federal Phase 2 Standards,
with some minor additional requirements, and as proposed would stay in place even if the federal Phase 2 Standards
are affected by action from the Trump administration. Federal and state lawmakers also have proposed a variety of
other regulatory limits on carbon emissions and fuel consumption. Compliance with these 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 our drivers' behavior, which could result in a decrease in productivity
or increase in driver turnover.
In April 2016, the Food and Drug Administration published a final rule establishing requirements for shippers, loaders,
carriers by motor vehicle and rail vehicle, and receivers engaged in the transportation of food, to use sanitary
transportation practices to ensure the safety of the food they transport as part of the Food Safety Modernization Act
of 2011 (the "FSMA"). This rule sets forth requirements related to (i) the design and maintenance of equipment used
to transport food, (ii) the measures taken during food transportation to ensure food safety, (iii) the training of carrier
personnel in sanitary food transportation practices, and (iv) maintenance and retention of records of written
procedures, agreements, and training related to the foregoing items. These requirements will take effect for larger
carriers such as us in April 2017 and are applicable when we perform as a carrier or as a broker. We believe that our
current food shipping practices are already in compliance with the majority of these requirements and we do not expect
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any issues with compliance. If we are found to be in violation of applicable laws or regulations related to the FSMA,
we could be subject to substantial fines, penalties and/or criminal liability, any of which could have a material adverse
effect on our business, financial condition, and results of operations.
The regulatory environment has recently changed under the administration of President Trump. In January 2017, the
President’s office issued a temporary moratorium on proposed and recently published regulations, which will delay
the effectiveness of such regulations for at least 60 days. Additionally, in January 2017, the President signed an
executive order requiring federal agencies to repeal two regulations for each new one they propose and imposing a
regulatory budget, which would limit the amount of new regulatory costs federal agencies can impose on individuals
and businesses each year. The impact of these actions by the Trump administration may inhibit future new regulations
and/or lead to the repeal or delayed effectiveness of existing regulations. Therefore, it is uncertain how we may be
impacted in the future by existing or proposed regulations.
Fuel Availability and Cost
The cost of fuel trended lower in 2016, compared to 2015 and 2014, as demonstrated by a decrease in the Department
of Energy ("DOE") national average for diesel to approximately $2.30 per gallon for 2016 compared to $2.71 per
gallon for 2015. Our fuel cost was further decreased in 2016 due to an increase in our average fuel miles per gallon
during 2016 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 can affect 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, 2016, we had forward futures swap contracts on
approximately 12.1 million and 7.6 million gallons of diesel to be purchased in 2017 and 2018, respectively, or
approximately 27% and 17% of our projected annual 2017 and 2018 fuel requirements, respectively. Due to the
relative stability of petroleum prices in 2016, and the completion of multiple contracts that were entered into during
periods of higher heating oil and ULSD prices, the fair value of our fuel hedging contracts at December 31, 2016,
represented a $3.6 million liability compared to a $27.3 million liability at December 31, 2015.
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 equipment repairs
resulting from physical damage. 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, primarily related to restocking required to replenish inventories that have been held
significantly lower than historical averages. Additionally, we have seen surges between Thanksgiving and Christmas
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resulting from holiday shopping trends toward delivery of gifts purchased over the internet. In recent years, we have
seen the duration of this holiday "peak" season become compressed as consumers have come to expect shorter and
shorter shipping times and our customers’ networks have adjusted accordingly.
Additional Information
At December 31, 2016, 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, Heritage Insurance, Inc., a
Tennessee corporation, 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 or furnish 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, credit, business, and regulatory factors affecting the truckload
industry that are largely beyond 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
materially adverse effect on our results of operations, many of which are beyond our control. We believe that some
of the most significant of these factors include (i) excess tractor and trailer capacity in the trucking industry in
comparison with shipping demand; (ii) declines in the resale value of used equipment; (iii) strikes, work stoppages,
or work slowdowns at our facilities or at customer, port, border crossing, or other shipping-related facilities; (iv)
increases in interest rates, fuel taxes, tolls, and license and registration fees; (v) rising costs of healthcare; and (vi)
fluctuations in foreign exchange rates.
We are also affected by (i) recessionary economic cycles, such as the period from 2007 through 2009 freight
environment, which was characterized by weak demand and downward pressure on rates; (ii) changes in customers’
inventory levels and in the availability of funding for their working capital; (iii) changes in the way our customers
choose to utilize our services; and (iv) downturns in our customers’ business cycles, particularly in market segments
and industries, such as retail and manufacturing, where we have significant customer concentration. Economic
conditions may adversely affect our customers and their demand for and ability to pay for our services.
Economic conditions that decrease shipping demand and 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 United States economy is weakened. Some of the principal risks during
such times, which risks we have experienced during prior recessionary periods, are as follows:
(cid:404) we may experience a reduction in overall freight levels, which may impair our asset utilization;
(cid:404)
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
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lower freight demand and may require us to increase our allowance for doubtful accounts;
(cid:404)
(cid:404)
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;
(cid:404) 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; and
(cid:404)
lack of access to current sources of credit or lack of lender access to capital, leading to an inability to secure
credit financing on satisfactory terms, or at all.
We are subject to cost increases that are outside 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, increases in fuel and
energy prices, driver and office employee wages, purchased transportation costs, taxes, interest rates, tolls, license and
registration fees, insurance premiums and claims, revenue equipment and related maintenance, tires and other
components, 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. Further, we may not be able
to appropriately adjust our costs and staffing levels to changing market demands. In periods of rapid change, it is more
difficult to match our staffing level to our business needs.
Changing impacts of regulatory measures could impair our operating efficiency and productivity, decrease our
operating 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 U.S. federal, state, or
local taxes are also increased, including taxes on fuels. We cannot predict whether, or in what form, any such increase
applicable to us will be enacted, but such an increase could adversely affect our results of operations and 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 in connection with such events 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 tractor 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.
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We operate in a highly competitive and fragmented industry, and numerous competitive factors could impair
our ability to improve our profitability and could have a materially adverse effect on our results of operations.
Numerous competitive factors present in our industry could impair our ability to maintain or improve our current
profitability and could have a materially adverse effect on our results of operations. These factors include the
following:
(cid:404) 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 and logistics companies, many of which
have access to more equipment and greater capital resources than we do;
(cid:404) 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;
(cid:404) many of our customers, including several in our top ten, are other transportation companies or also operate
their own private trucking fleets, and they may decide to transport more of their own freight;
(cid:404)
a significant portion of our business is in the retail industry, which continues to undergo a shift away from the
traditional brick and mortar model towards e-commerce, and this shift could impact the manner in which our
customers source or utilize our services;
(cid:404) many customers reduce the number of carriers they use by selecting so-called "core carriers" as approved
service providers or by engaging dedicated providers, and in some instances we may not be selected;
(cid:404) 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 of our business to competitors;
(cid:404)
(cid:404)
(cid:404)
(cid:404)
(cid:404)
(cid:404)
(cid:404)
the trend toward consolidation in the trucking industry may create large carriers with greater financial resources
and other competitive advantages relating to their size, and we may have difficulty competing with these larger
carriers;
the market for qualified drivers is increasingly competitive, and our inability to attract and retain drivers could
reduce our equipment utilization or cause us to increase compensation, both of which would adversely affect
our profitability;
competition from non-asset-based and other logistics and freight brokerage companies may adversely affect
our customer relationships and freight rates;
economies of scale that may be passed on to smaller carriers by procurement aggregation providers may
improve their ability to compete with us;
some of our smaller competitors may not yet be fully compliant with pending regulations, such as regulations
requiring the use of ELDs, which may allow such competitors to take advantage of additional driver
productivity;
advances in technology may require us to increase investments in order to remain competitive, and our
customers may not be willing to accept higher freight rates to cover the cost of these investments; and
higher fuel prices and, in turn, higher fuel surcharges to our customers may cause some of our customers to
consider freight transportation alternatives, including rail transportation.
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.
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Our business is subject to certain credit factors affecting the trucking industry that are largely out of our
control and that could have a materially adverse effect on our results of operations.
If the economy and/or the credit markets weaken, or we are unable to enter into capital or operating leases to acquire
revenue equipment on terms favorable to us, our business, financial results, and results of operations could be
materially adversely affected, especially if consumer confidence declines and domestic spending decreases. We may
need to incur additional indebtedness or issue additional debt or equity securities in the future to fund working capital
requirements, make investments, or for general corporate purposes. If the credit and equity markets erode, our ability
to do so may be constrained. A decline in the credit or equity markets or any increase in volatility could make it more
difficult for us to obtain financing and may lead to an adverse impact on our profitability and operations.
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 business results in a substantial number of claims and litigation related to personal injuries, property damage,
workers’ compensation, employment issues, health care, and other issues. We self-insure a significant portion of our
claims exposure, which could increase the volatility of, and decrease the amount of, our earnings, and could have a
materially adverse effect on our results of operations. Our future insurance and claims expenses may exceed historical
levels, which could reduce our earnings. We currently 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 for most risks above the amounts for which we self-insure with licensed insurance carriers. If
any claim were to exceed our coverage, or fall outside the aggregate coverage limit, we would bear the excess or
uncovered amount, in addition to our other self-insured amounts. 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.
Insurance carriers have recently raised premiums for our industry. Our insurance and claims expense could increase
if we have a similar experience at renewal, or we could find it necessary to raise our self-insured retention or decrease
our aggregate coverage limits when our policies are renewed or replaced. Should these expenses increase, we become
unable to find excess coverage in amounts we deem sufficient, we experience a claim in excess of our coverage limits,
we experience a claim for which we do not have coverage, or we have to increase our reserves, there could be a
materially adverse effect on our results of operations and financial condition.
Healthcare legislation and inflationary cost increases also could negatively impact financial results by increasing
annual employee healthcare costs going forward. We cannot presently determine the extent of the impact healthcare
costs will have on our financial performance. In addition, rising healthcare costs could force us to make changes to
existing benefits program, which could negatively impact our ability to attract and retain employees.
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
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 captive insurance companies 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 captive insurance companies, 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 captive insurance companies. We
have two wholly owned captive insurance subsidiaries which are regulated insurance companies through which we
17
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 companies
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 subsidiaries 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 subsidiaries may increase our costs, limit our ability to change
premiums, restrict our ability to access cash held by these subsidiaries, and otherwise impede our ability to take actions
we deem advisable.
Fluctuations in the price or availability of fuel, the volume and terms of diesel fuel purchase commitments,
surcharge collection, and hedging activities may increase our costs of operation, which could have a materially
adverse effect on our profitability.
Fuel is one of our largest operating expenses. Diesel fuel prices fluctuate greatly due to factors beyond our control,
such as political events, terrorist activities, armed conflicts, commodity futures trading, devaluation of the dollar
against other currencies, and hurricanes and other natural or man-made disasters, each of which may lead to an increase
in the cost of fuel. Fuel prices also are affected by the rising demand for fuel in developing countries, and could be
materially adversely affected by the use of crude oil and oil reserves for purposes other than fuel production and by
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 business, financial condition
and results of operations.
Fuel also is subject to regional pricing differences and is often more expensive in certain areas where we operate.
Increases in fuel costs, to the extent not offset by rate per mile increases or fuel surcharges, have a materially adverse
effect on our operations and profitability. While we have fuel surcharge programs in place with a majority of our
customers, which historically have helped us offset the majority of the negative impact of rising fuel prices associated
with loaded or billed miles, we also incur fuel costs that cannot be recovered even with respect to customers with
which we maintain fuel surcharge programs, such as those associated with non-revenue generating miles, time when
our engines are idling, or fuel for refrigeration units on certain of our trailers. Moreover, 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. In addition, because our fuel surcharge recovery lags behind
changes in fuel prices, our fuel surcharge recovery may not capture the increased costs we pay for fuel, especially
when prices are rising. This could lead to fluctuations in our levels of reimbursement, which have occurred in the past.
There can be no assurance that such fuel surcharges can be maintained indefinitely or will be sufficiently effective.
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 on gallons hedged that is determined based on the market rate at the
time we enter into the hedge. In times of falling diesel fuel prices, 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 negatively impacted to a greater extent than if we had not entered
into the hedging contracts.
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 operations.
We depend heavily on the proper functioning, availability, and security of our information and communication
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 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.
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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.
We receive and transmit confidential data with and among our customers, drivers, vendors, employees, and service
providers in the normal course of business. Despite our implementation of secure transmission techniques, internal
data security measures, and monitoring tools, our information and communication systems are vulnerable to disruption
of communications with our customers, drivers, vendors, employees, and service providers and access, viewing,
misappropriation, altering, or deleting information in our systems, including customer, driver, vendor, employee, and
service provider information and our proprietary business information. A security breach could damage our business
operations and reputation and could cause us to incur costs associated with repairing our systems, increased security,
customer notifications, lost operating revenue, litigation, regulatory action, and reputational damage.
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.
Our level of indebtedness and lease obligations has increased in recent periods. As a result of our level of debt, capital
leases, operating leases, and encumbered assets, we believe:
(cid:404)
our vulnerability to adverse economic and industry conditions and competitive pressures is heightened;
(cid:404) we will continue to be required to dedicate a substantial portion of our cash flows from operations to lease
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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
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
(cid:404)
(cid:404)
(cid:404)
(cid:404) 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, ability to satisfy our capital needs, or 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 a prior history of net losses and may be unsuccessful in maintaining or increasing profitability.
We have generated a profit in each of the last five years. Maintaining and improving profitability depends upon
numerous factors, including the ability to increase average revenue per tractor, increase velocity, improve driver
retention, and control operating expenses. We may not be able to improve profitability in the future, which could
negatively impact our liquidity, financial position, and results of operations.
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.
Our engagement of independent contractors to provide a portion of our capacity exposes us to different risks
than we face with our tractors driven by company drivers.
Pursuant to our fuel surcharge program with independent contractors, we pay independent contractors we contract
with a fuel surcharge that increases with the increase in fuel prices. A significant increase or rapid fluctuation in fuel
prices could cause our costs under this program to be higher than the revenue we receive under our customer fuel
surcharge programs.
Our agreements with the independent contractors we engage are governed by the federal leasing regulations, which
impose specific requirements on us and the independent contractors. If more stringent federal leasing regulations are
adopted, independent contractors could be deterred from becoming independent contractor drivers, which could
materially adversely affect our goal of growing our current fleet levels of independent contractors.
Independent contractors are third-party service providers, as compared with company drivers, who are employed by
us. As independent business owners, they may make business or personal decisions that may conflict with our best
interests. For example, if a load is unprofitable, route distance is too far from home, personal scheduling conflicts
arise, or for other reasons, independent contractors may deny loads of freight from time to time. In these
circumstances, we must be able to deliver the freight timely in order to maintain relationships with customers, and if
we fail to meet certain customer needs or incur increased expenses to do so, this could materially adversely affect our
business, financial condition, and results of operations.
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Developments in labor and employment law and any unionizing efforts by employees could have a materially
adverse effect on our results of operations.
We face the risk that Congress, federal agencies, or one or more states could approve legislation or regulations
significantly affecting our businesses and our relationship with our employees. None of our domestic employees are
currently covered by a collective bargaining agreement, but any attempt by our employees to organize a labor union
could result in increased legal and other associated costs. Additionally, given the National Labor Relations Board’s
new "speedy election" rule, our ability to timely and effectively address any unionizing efforts would be difficult. If
we entered into a collective bargaining agreement with our domestic employees, the terms could materially adversely
affect our costs, efficiency, and ability to generate acceptable returns on the affected operations.
Additionally, the Department of Labor recently issued a final rule raising the minimum salary basis for executive,
administrative and professional exemptions from overtime payment. The rule increases the minimum salary from the
current amount of $23,660 to $47,476 and non-discretionary bonus, commission and other incentive payments can be
counted towards the minimum salary requirement. The rule was scheduled to go into effect on December 1, 2016, but
was enjoined by a federal district court in November 2016. If this injunction is lifted, these changes could impact the
way we classify certain positions and increase our payment of overtime wages, which may have a materially adverse
impact on our financial and operational results.
We derive a significant portion of our revenues from our major customers, the loss of one or more of which
could have a materially adverse effect on our business.
We generate a significant portion of our operating revenue from our major customers. In 2016, 2015, and 2014, one
customer accounted for more than 10% of our consolidated revenue. Our top five customers accounted for
approximately 39%, 34%, and 29% of our total revenue in 2016, 2015, and 2014, respectively. Generally, we do not
have long-term contracts with our major customers. Accordingly, in response to economic conditions, supply and
demand in the 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
these customers were to delay or default on payments to us. For certain 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.
Increases in driver compensation or difficulties attracting and retaining qualified drivers could have a
materially adverse effect on our profitability and the ability to maintain or grow our fleet.
Like many truckload carriers, we experience substantial difficulty in attracting and retaining sufficient numbers of
qualified drivers, which includes the engagement of independent contractors. The truckload 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
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those related to safety ratings, ELDs 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, and the required implementation of ELDs in December 2017 may further tighten the
market. We believe the shortage of qualified drivers and intense competition for drivers from other trucking
companies will create difficulties in maintaining or increasing the number of drivers and may restrain our ability to
engage a sufficient number of drivers and independent contractors, and our inability to do so may negatively impact
our operations. Further, the compensation we offer our drivers and independent contractor expenses are subject to
market conditions, and we may find it necessary to increase driver and independent contractor compensation in future
periods.
In addition, we and many other truckload carriers suffer from a high turnover rate of drivers and independent
contractors. This high turnover rate requires us to continually recruit a substantial number of drivers and independent
contractors in order to operate existing revenue equipment and maintain our independent contractor fleet. 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, financial condition and results of operations could be adversely affected.
found
their employees and are
Tax and other regulatory authorities, as well as independent contractors themselves, have increasingly asserted that
independent contractor drivers in the trucking industry are employees rather than independent contractors, for a variety
of purposes, including income tax withholding, workers' compensation, wage and hour compensation, unemployment,
and other issues. 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
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. Further, class
actions and other lawsuits have been filed against certain members of our industry seeking to reclassify independent
contractors as employees for a variety of purposes, including workers' compensation and health care coverage. 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 United States 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, driver safety performance, and hours-of-service. Matters such as weight, equipment
dimensions, exhaust emissions, and fuel efficiency are also subject to government regulations. We also may become
subject to new or more restrictive regulations relating to fuel efficiency, exhaust emissions, hours-of-service,
ergonomics, on-board reporting of operations, collective bargaining, security at ports, speed limiters, driver training,
and other matters affecting safety or operating methods. Future laws and regulations may be more stringent, require
changes in our operating practices, influence the demand for transportation services, or require us to incur significant
additional costs. Higher costs we incur, or higher costs incurred by suppliers who pass the costs on to us, could
adversely affect our results of operations. In addition, the Trump administration has indicated a desire to reduce
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regulatory burdens that constrain growth and productivity, and also to introduce legislation such as infrastructure
spending, that could improve growth and productivity. Changes in regulations, such as those related to trailer size
limits, hours-of-service, and mandating ELDs, could increase capacity in the industry or improve the position of
certain competitors, either of which could negatively impact pricing and volumes, or require additional investments
by us. The short and long term impacts of changes in legislation or regulations are difficult to predict and could
materially adversely affect our operations. The Regulation section in this Annual Report discusses several proposed,
pending, suspended, and final regulations that could materially impact our business and operations.
The CSA program adopted by the FMCSA could adversely affect our profitability and operations, our ability
to maintain or grow our fleet, and our customer relationships.
Under CSA, fleets are evaluated and ranked against their peers based on certain safety-related standards. As a result,
our fleet could be ranked poorly as compared to 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 backgrounds 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 unfavorable 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 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 materially 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 materially adversely affect our
business, financial condition, and results of operations as customer contracts may require a satisfactory DOT safety
rating, and a conditional or unsatisfactory rating could materially adversely affect 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 materially 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
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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 for new revenue equipment, design changes of new engines, decreased availability of new
revenue equipment, and the failure of manufacturers to meet their sale or trade-back obligations to us could
have a materially adverse effect on our business, financial condition, results of operations, and profitability.
We are subject to risk with respect to higher prices for new tractors. We have experienced an increase in prices for
new tractors over the past few years, and the resale value of the tractors has not increased to the same extent. Prices
have increased and may continue to increase, due, in part, to government regulations applicable to newly manufactured
tractors and diesel engines, higher commodity prices, and the pricing discretion of equipment manufacturers. In
addition, we have recently equipped our tractors with safety, aerodynamic, and other options that increase the price of
new equipment. More restrictive regulations related to emissions and fuel efficiency standards have required vendors
to introduce new engines and will require more fuel-efficient trailers. Compliance with such regulations has increased
the cost of our new tractors, may increase the cost of new trailers, could impair equipment productivity, in some cases,
result in lower fuel mileage, and increase our operating expenses. Our business could be harmed if we are unable to
continue to obtain an adequate supply of new tractors and trailers for these or other reasons. As a result, we expect to
continue to pay increased prices for equipment and incur additional expenses and related financing costs for the
foreseeable future. Furthermore, reduced equipment efficiency may result from new engines designed to reduce
emissions, thereby increasing our operating expenses.
Tractor and trailer vendors may reduce their manufacturing output in response to lower demand for their products in
economic downturns or shortages of component parts. A decrease in vendor output may have a materially adverse
effect on our ability to purchase a quantity of new revenue equipment that is sufficient to sustain our desired growth
rate and to maintain a late-model fleet. Moreover, an inability to obtain an adequate supply of new tractors or trailers
could have a materially adverse effect on our business, financial condition, and results of operation.
Volatility in the used equipment market could have a materially adverse effect on our business, financial
condition, results of operations, and profitability.
A decreased demand for used revenue equipment could adversely affect us and our operating results. As we
continually replace our equipment, we rely on the used equipment market to extract remaining value out of our used
equipment. The market for used equipment is impacted by several factors, including the demand for freight, the supply
of used equipment, the availability of financing, the presence of buyers for export to foreign countries, and commodity
prices for scrap metal. A depressed market for used equipment could require us to trade our revenue equipment at
depressed values or to record losses on disposal or impairments of the carrying values of our revenue equipment that
is not protected by residual value arrangements. If there is a deterioration of resale prices, it could have a materially
adverse effect on our business, financial condition, and results of operations. Trades at depressed values, decreases
in proceeds for equipment disposals, and impairments of the carrying values of our revenue equipment could have a
materially adverse effect on our business, financial condition, and results of operations. A deterioration of demand for
used equipment could make it more difficult to dispose of and replace older equipment and may reduce our ability to
refresh our fleet and dispose of less fuel efficient equipment, both of which could negatively impact our profitability.
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 and Chief Operating Officer. 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
24
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.
In May 2016, the operating agreement with TEL was amended to, among other things, remove the previously agreed
to fixed date purchase options. Our option to acquire up to the remaining 51% of TEL would have expired May 31,
2016, and TEL's majority owners would have received the option to purchase our ownership in TEL. The options
previously in effect were eliminated, and we are discussing with TEL's other owners a replacement option structure
and alternatives. TEL's majority owners are generally restricted from transferring their interests in TEL, other than to
certain permitted transferees, without our consent. 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 and Chief Executive Officer 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
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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.
Compliance with various environmental laws and regulations upon which our operations are subject may
increase our costs of operations and non-compliance with such laws and regulations could result in substantial
fines or penalties.
In addition to direct regulation under the DOT and related agencies, 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, and discharge and retention of storm water. Our tractor terminals often are located in industrial
areas where groundwater or other forms of environmental contamination may have occurred or could occur. Our
operations involve the risks of fuel spillage or seepage, environmental damage, and hazardous waste disposal, among
others. We also maintain above-ground bulk fuel storage tanks and fueling islands at several of our facilities and one
leased facility has below-ground bulk fuel storage tanks. A small percentage of our freight consists of low-grade
hazardous substances, which subjects us to a wide array of regulations. 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 when an executive memorandum was
signed directing the NHTSA and the EPA to develop new, stricter fuel efficiency standards for heavy tractors. In 2011,
the NHTSA and the EPA adopted final rules that established the Phase 1 Standards. The Phase 1 Standards apply to
tractor model years 2014 to 2018, which are required to achieve an approximate 20 percent reduction in fuel
consumption by 2018, and equates to approximately four gallons of fuel for every 100 miles traveled. In addition, in
October 2016, the EPA and NHTSA published the final rule establishing the Phase 2 Standards that will apply to
trailers beginning with model year 2018 and tractors beginning with model year 2021. The Phase 2 Standards require
nine percent and 25 percent reductions in emissions and fuel consumption for trailers and tractors, respectively, by
2027. We believe these requirements will result in additional increases in new tractor and trailer prices and additional
parts and maintenance costs incurred to retrofit our tractors and trailers with technology to 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. In addition, future additional emission regulations are possible. Any such regulations that impose
restrictions, caps, taxes, or other controls on emissions of greenhouse gases could adversely affect our operations and
financial results. Until the timing, scope, and extent of any future regulation becomes known, we cannot predict its
effect on our cost structure or our operating results; however, any future regulation could impair our operating
efficiency and productivity and result in higher operating costs.
If we cannot effectively manage the challenges associated with doing business internationally, our operating
revenue and profitability may suffer.
A component of our operations is the business we conduct in Mexico, and to a lesser extent Canada, and we are subject
to risks of doing business internationally, including fluctuations in foreign currencies, changes in the economic
strength of Mexico and Canada, difficulties in enforcing contractual obligations and intellectual property rights,
burdens of complying with a wide variety of international and United States export and import laws, and social,
political, and economic instability. Additional risks associated with our foreign operations, including restrictive trade
policies and imposition of duties, taxes, or government royalties by foreign governments, are present but largely
mitigated by the terms of NAFTA.
Litigation may adversely affect our business, financial condition, and results of operations.
Our business is subject to the risk of litigation by employees, independent contractors, customers, vendors,
government agencies, stockholders, and other parties through private actions, class actions, administrative
proceedings, regulatory actions, and other processes. Recently, trucking companies, including us, have been subject
26
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 materially adverse effect on our business,
results of operations, financial condition, or cash flows.
Seasonality and the impact of weather and other catastrophic events affect our operations and profitability.
Our tractor productivity decreases during the winter season because inclement weather impedes operations, and some
shippers 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 and fuel efficiency declines because of
engine idling and harsh weather creating higher accident frequency, increased claims, and more equipment repairs. In
addition, many of our customers, particularly those in the retail industry where we have a large presence, demand
additional capacity during the fourth quarter, which limits our ability to take advantage of more attractive spot market
rates that generally exist during such periods. Further, despite our efforts to meet such demands, we may fail to do
so, which may result in lost future business opportunities with such customers, which could have a materially adverse
effect on our operations. Recently, the duration of this increased period of demand in the fourth quarter has shortened,
with certain customers requiring the same volume of shipments over a more condensed timeframe, resulting in
increased stress and demand on our network, people, and systems. If this trend continues, it could make satisfying
our customers and maintaining the quality of our service during the fourth quarter increasingly difficult. We may also
suffer from weather-related or other unforeseen events such as tornadoes, hurricanes, blizzards, ice storms, floods,
fires, earthquakes, and explosions. These events may disrupt fuel supplies, increase fuel costs, disrupt freight
shipments or routes, affect regional economies, destroy our assets, or adversely affect the business or financial
condition of our customers, any of which could have a materially adverse effect on our results of operations or make
our results of operations more volatile. Weather and other seasonal events could adversely affect our operating results.
27
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 tractor 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. All of the properties noted below are subject
to mortgages or deeds of trust under our Credit Facility, with the exception of our Chattanooga headquarters, which
is subject to a deed of trust under a separate financing.
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. The case is currently pending resolution
of motions for summary judgment.
Our Covenant Transport subsidiary is a 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. The 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. The parties
engaged in mediation of the dispute, which resulted in a comprehensive settlement of all class member claims upon
payment of $500,000 by Covenant Transport. The settlement received preliminary approval of the court in December,
2016 and is now pending final approval.
Our SRT subsidiary is a defendant in a lawsuit filed on December 16, 2016 in the Superior Court of San Bernardino
County, California. The lawsuit was filed on behalf of David Bass (a California resident and former driver), who is
seeking to have the lawsuit certified as a class action case, wherein he alleges violation of multiple California wage
and hour statutes over a four year period of time, including failure to pay wages for all hours worked, failure to provide
meal periods and paid rest breaks, failure to pay for rest and recovery periods, failure to reimburse certain business
28
expenses, failure to pay vested vacation, unlawful deduction of wages, failure to timely pay final wages, failure to
provide accurate itemized wage statements, and unfair and unlawful competition.
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.
29
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, 2015, to December 31, 2016.
Period
High
Low
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
Calendar Year 2016:
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
$25.77
$25.22
$23.51
$22.61
$13.60
$16.31
$16.50
$14.26
On March 10, 2017, the last reported sale price of our Class A common stock on the NASDAQ Global Select Market
was $18.86.
As of March 10, 2017, we had approximately 117 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 March 10, 2017, 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.
See "Equity Compensation Plan Information" of this Annual Report for certain information concerning shares of our
Class A common stock authorized for issuance under our equity compensation plans.
30
(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
Total operating expenses
Operating income
Interest expense, net
Equity in income of affiliate
Income before income taxes
Income tax expense
Net income
Basic income per share
Diluted income per share
2016
Years Ended December 31,
2014
2015
2013
2012
$ 610,845
59,806
$ 670,651
$ 640,120
84,120
$ 724,240
$ 578,204
140,776
$ 718,980
$ 538,933 $ 527,435
145,616
146,819
$ 684,549 $ 674,254
234,526
103,108
45,864
117,472
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
11,712
32,596
6,057
14,413
72,456
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
638,204
32,447
8,226
3,000
27,221
10,386
$ 16,835
656,458
67,782
8,445
4,570
63,907
21,822
$ 42,085
679,334
39,646
10,794
3,730
32,582
14,774
$ 17,808
664,155
20,394
10,397
2,750
12,747
7,503
651,045
23,209
12,684
1,875
12,400
6,335
$ 5,244 $ 6,065
$
$
0.93
$
2.32
$
1.17
0.92
$
2.30
$
1.15
$
$
0.35 $
0.41
0.35 $
0.41
Basic weighted average common shares
outstanding
18,182
18,145
15,250
14,837
14,742
Diluted weighted average common shares
outstanding
18,266
18,311
15,517
15,039
14,808
31
Selected Balance Sheet Data:
Net property and equipment
Total assets (2)
Long-term debt and capital lease obligations,
less current maturities
Total stockholders' equity
Selected Operating Data:
Capital expenditures (proceeds), net (3)
Average freight revenue per loaded mile (4)
Average freight revenue per total mile (4)
Average freight revenue per tractor per week (4)
Average miles per tractor per year
Weighted average tractors for year (5)
Total tractors at end of period (5)
Total trailers at end of period (6)
Team-driven tractors as percentage of fleet
2016
Years Ended December 31,
2013
2014
2015
2012
$ 465,471 $ 454,049 $ 382,491 $ 329,608 $ 279,017
$ 620,538 $ 646,717 $ 539,304 $ 461,188 $ 395,590
$ 188,437 $ 206,604 $ 172,903 $ 182,677 $ 109,217
$ 236,414 $ 202,160 $ 169,204 $ 100,360 $ 94,673
1.89 $
1.69 $
1.86 $
1.67 $
1.66 $
1.49 $
1.77 $
1.60 $
$ 59,052 $ 148,994 $ 89,455 $ 91,976 $ (15,738)
1.63
$
$
1.47
$ 3,881 $ 3,967 $ 3,777 $ 3,411 $ 3,320
118,103
123,275
121,782
2,895
2,609
2,593
2,884
2,665
2,535
6,904
6,722
7,389
28.1%
32.1%
38.7%
119,375
2,777
2,688
6,861
29.2%
122,508
2,700
2,656
6,978
35.3%
(1)
(2)
(3)
(4)
(5)
(6)
2014 insurance and claims expense includes $7.5 million additional reserves for 2008 cargo claim.
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.
32
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 section, statements relating to future demand for and supply
of new and used tractors and trailers (including expected prices of such equipment), expected sources and adequacy
of working capital and liquidity, future relationships, use, compensation, and availability with respect to third-party
service providers, future driver market conditions, future allocation of capital, expected settlement of operating lease
obligations, future asset sales and acquisitions, future insurance, litigation, and claims levels and expenses, future tax
expense and deductions, future fuel management, expense, and the future effectiveness of fuel surcharge programs
and price hedges, future interest rates and effectiveness of interest rate swaps, expected capital expenditures
(including the future mix of lease and purchase obligations), future trucking capacity, expected freight demand and
volumes, future rates, future depreciation and amortization, future compliance with and impact of existing and
proposed federal and state laws and regulations, future salaries, wages, and other employee benefit expenses, future
earnings from and value of our investments, future customer relationships, future defaults under debt agreements,
future performance of our subsidiaries, and future operating and maintenance expenses, 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
Results for 2016 were not as robust as the record earnings achieved in 2015, where 2015 was the best annual results
experienced in the Company’s 31 year history. Our operating ratio declined 460 basis points to 95.2%. Our adjusted
operating ratio (as defined below), a key measure of profitability in our industry, contracted 530 basis points to a
94.7%. These declines were the result of overall softness in freight within the Truckload segment, resulting in a slight
decline in miles per tractor per week and a 3.9% decrease in the average tractor count, even considering a 5.3%
increase in the number of team tractors, and average rates per total mile declining 2.2 cents per mile. Cost in the
Truckload segment increased 8.3 cents per mile, primarily as a result of increased capital cost, resulting from the
significant decline in used equipment values and related increase in depreciation. On the contrary, our non-Truckload
operations experienced growth in both revenue and profitability as we were able to take advantage of the market
dynamics and realize the full year effect of several business model changes and new customers added in 2015. Our
consolidated financial results are summarized as follows:
(cid:404) Total revenue was $670.7 million, compared with $724.2 million for 2015, and freight revenue (excludes
revenue from fuel surcharge) was $610.8 million, compared with $640.1 million for 2015;
(cid:404) Operating income was $32.4 million, compared with operating income of $67.8 million for 2015;
33
(cid:404) Net income was $16.8 million, or $0.92 per diluted share, compared with net income of $42.1 million, or
$2.30 per diluted share, for 2015. Net income for 2015 includes 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 $2.2 million, or $0.12 per diluted share;
(cid:404) Our equity investment in TEL provided $3.0 million of pre-tax earnings in 2016 compared to $4.6 million for
2015; and
(cid:404) Stockholders' equity and tangible book value at December 31, 2016, were $236.4 million, or $12.95 per basic
share.
Although 2016 was not what we had hoped, we are still encouraged by the trend line over the last several years. Our
turnaround efforts at SRT were fully engaged in 2016, including a new management team, and we have established a
roadmap that we believe will be successful in returning SRT’s results to levels where they produce an acceptable
return. We continue to focus on deleveraging the balance sheet resulting in total indebtedness, net of cash and
including the present value of off-balance sheet lease obligations decreasing by approximately $37.5 million to $226.7
million, since December 31, 2015. Additionally, earnings and the reduced impact of fuel hedges have increased
tangible book value per basic share 16.1% to $12.95 from $11.15 at December 31, 2015.
In addition to operating ratio, we use "adjusted operating ratio" as a key measure of profitability. Adjusted operating
ratio is not a substitute for operating ratio measured in accordance with GAAP. There are limitations to using non-
GAAP financial measures. Adjusted operating ratio means operating expenses, net of fuel surcharge revenue,
expressed as a percentage of revenue, excluding fuel surcharge revenue. We believe the use of adjusted operating ratio
allows us to more effectively compare periods, while excluding the potentially volatile effect of changes in fuel prices.
Our Board and management focus on our adjusted operating ratio as an indicator of our performance from period to
period. We believe our presentation of adjusted operating ratio is useful because it provides investors and securities
analysts the same information that we use internally to assess our core operating performance. Although we believe
that adjusted operating ratio improves comparability in analyzing our period-to-period performance, it could limit
comparability to other companies in our industry, if those companies define adjusted operating ratio differently.
Because of these limitations, adjusted operating ratio should not be considered a measure of income generated by our
business or discretionary cash available to us to invest in the growth of our business. Management compensates for
these limitations by primarily relying on GAAP results and using non-GAAP financial measures on a supplemental
basis.
Operating Ratio
Operating Ratio ("OR") From 2014 to 2016
GAAP Operating Ratio:
Total revenue
Total operating expenses
Operating income
Adjusted Operating Ratio:
Total revenue
Less: Fuel surcharge revenue:
Revenue (excluding fuel surcharge
revenue)
Total operating expenses
Less: Fuel surcharge revenue
Total operating expenses (net of fuel
surcharge revenue)
Operating income
2016
OR %
2015
OR %
2014
OR %
$ 670,651
638,204
$
32,447
2016
$ 670,651
59,806
95.2%
Adj.
OR %
$ 724,240
656,458
$
67,782
2015
$ 724,240
84,120
90.6%
Adj.
OR %
$ 718,980
679,334
$ 39,646
2014
$ 718,980
140,776
94.5%
Adj.
OR %
610,845
640,120
578,204
638,204
59,806
656,458
84,120
679,334
140,776
578,398
94.7%
$
32,447
572,338
67,782
$
89.4%
538,558
$ 39,646
93.1%
34
Outlook
We are forecasting sequential improvement for 2017. In the first half of 2017 we do not expect to match the earnings
per share levels we generated for the first and second quarters of 2016. However, we believe the combination of an
improving economy, growth of time-sensitive e-commerce freight, industry regulatory changes, retail inventory
declines, year-over-year net fuel expense savings from our improved fuel hedge positions, and operational progress at
SRT should deliver earnings improvement that result in higher earnings for the second half and potentially the full
year of 2017. The largest variable we foresee is the pace and magnitude of improvement at SRT, which we believe
could contribute up to $10.0 million of pre-tax income in improved results as compared with 2016. The pace and
amount of change will depend, in large part, on our ability to enhance the freight network, which depends on internally
re-engineering lanes and a stronger refrigerated freight market. With net capital expenditures scheduled to be below
normal due to the timing of our expected replacement cycle, along with anticipated positive operating cash flows, we
expect to further reduce balance sheet and off-balance sheet debt over the course of fiscal 2017. Our 2017 plans also
include growing our dedicated service line and investing in personnel and trailer tracking equipment that will allow
more cross-border freight opportunities.
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
2016
Year ended December 31,
2015
2014
$
$
610,845
59,806
670,651
$
$
640,120
84,120
724,240
$
$
578,204
140,776
718,980
For 2016, total revenue decreased $53.6 million, or 7.4%, to $670.7 million from $724.2 million in 2015. Freight
revenue decreased $29.3 million, or 4.6%, to $610.8 million for 2016, from $640.1 million in 2015, while fuel
surcharge revenue decreased $24.3 million year-over-year. The decrease in freight revenue resulted from a $30.4
million decrease in freight revenue from our Truckload segment and a $1.1 million increase in revenues from
Solutions.
The decrease in 2016 Truckload revenue relates to a decrease in average freight revenue per tractor per week of 2.2%
compared to 2015 and a decrease in our average tractor fleet of 3.9% from 2015, partially offset by a $1.7 million
increase in freight revenue contributed by our temperature-controlled intermodal service offering. The decrease in
average freight revenue per tractor per week is the result of a 1.3% decrease, or 2.2 cents per mile, in average rate per
total mile and a 0.6% decrease in average miles per unit when compared to 2015. Team driven units increased
approximately 5.3% to an average of approximately 1,000 teams in 2016 from approximately 950 teams in 2015.
The increase in Solutions' revenue is primarily the result of improved coordination with our Truckload segment,
additional business from new customers added during the year, and the full year effect of a large customer added in
2015.
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.
35
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.
If capacity tightens as a result of regulations impacting the industry or economic growth, we expect the pricing
environment to improve in the latter half of 2017 and into 2018 and 2019, offset in part by higher driver pay and other
inflationary costs.
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 is a non-GAAP financial measure and is not a substitute for revenue measured in accordance with GAAP.
There are limitations to using non-GAAP financial measures. Our Board and management focus on our freight
revenue as an indicator of our performance from period to period. We believe our presentation of freight revenue is
useful because it provides investors and securities analysts the same information that we use internally to assess our
core operating performance. Although we believe that freight revenue improves comparability in analyzing our period-
to-period performance, it could limit comparability to other companies in our industry, if those companies define
freight revenue differently. Because of these limitations, freight revenue should not be considered a measure of total
revenue generated by or available to our business. Management compensates for these limitations by primarily relying
on GAAP results and using non-GAAP financial measures on a supplemental basis.
Salaries, wages, and related expenses
(dollars in thousands)
Salaries, wages, and related expenses
$
% of total revenue
% of freight revenue
2016
234,526
35.0%
38.4%
Year ended December 31,
2015
244,779
33.8%
38.2%
$
$
2014
231,761
32.2%
40.1%
Salaries, wages, and related expenses decreased approximately $10.3 million, or 4.2%, for the year ended December
31, 2016, compared with 2015. As a percentage of total revenue, salaries, wages, and related expenses increased to
35.0% of total revenue for the year ended December 31, 2016, as compared to 33.8% in 2015. As a percentage of
freight revenue, salaries, wages, and related expenses increased slightly to 38.4% of freight revenue for the year ended
December 31, 2016, from 38.2% in 2015. Salaries, wages, and related expenses decreased significantly on an overall
dollar basis as a result of a 3.9% decrease in average tractors, but were relatively flat as a percentage of freight revenue,
primarily due to pay adjustments for both driver and non-drivers since 2015, partially offset by a decrease in non-
driver incentive compensation as a result of reduced profitability in 2016 versus 2015. Additionally, group insurance
costs decreased approximately $2.3 million from 2015 as a result of better claims experience.
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.
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, in certain periods, increased incentive compensation due to better performance.
In particular, we expect driver pay to increase as we look to reduce the number of unseated tractors in our fleet in a
tight market for drivers. Additionally, when the freight market allows for an increase in rates we would expect to, as
we have historically, pass a portion of those rate increases on to our professional drivers. 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.
36
Fuel expense
(dollars in thousands)
Fuel expense
% of total revenue
2016
$ 103,108
15.4%
Year ended December 31,
2015
$ 122,160
16.9%
2014
$ 168,856
23.5%
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 $0.40 cents per gallon lower in 2016 compared with 2015 and $1.12
per gallon lower in 2015 compared to 2014.
Additionally, $16.7 million, $15.3 million, and $3.1 million were reclassified from accumulated other comprehensive
(loss) income to our results from operations for the years ended December 31, 2016, 2015, and 2014, respectively, as
additional fuel expense for 2016, 2015 and 2014, related to losses on fuel hedge contracts that expired. We evaluate
these contracts for "hedge effectiveness," which is the extent to which the hedge contract effectively offsets changes
in cash flows that the contract was intended to offset. 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, 2016, 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, 2016. 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 tractors, 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
2016
$ 59,806
Year ended December 31,
2015
$ 84,120
2014
$ 140,776
6,250
$ 53,556
$ 103,108
53,556
$ 49,552
8.1%
7,790
$ 76,330
$ 122,160
76,330
$ 45,830
7.2%
10,837
$ 129,939
$ 168,856
129,939
$ 38,917
6.7%
Total fuel expense decreased approximately $19.1 million, or 15.6%, for the year ended December 31, 2016, compared
with 2015. As a percentage of total revenue, total fuel expense decreased to 15.4% of total revenue for the year ended
December 31, 2016, from 16.9% in 2015. As a percentage of freight revenue, total fuel expense decreased to 16.9%
of freight revenue for the year ended December 31, 2016, from 19.1% in 2015. These decreases primarily related to
lower fuel prices and an increase in our average fuel miles per gallon during 2016 as a result of purchasing equipment
37
with more fuel-efficient engines. The decreases were partially offset by increased net losses from fuel hedging
transactions of $16.7 million in 2016 compared to $13.9 million in 2015.
Net fuel expense increased $3.7 million, or 8.1%, for the year ended December 31, 2016 compared to 2015. As a
percentage of freight revenue, net fuel expense increased 0.9% for the year ended December 31, 2016 compared to
2015. These increases primarily resulted from lower fuel surcharge recovery as a result of increased broker freight
and the tiered reimbursement structure of certain fuel surcharge agreements. The increases were partially offset by
improved miles per gallon due to new engine technology, internal fuel efficiency initiatives, and a greater percentage
of miles driven by independent contractors.
For the year ended December 31, 2015, total fuel expense decreased approximately $46.7 million, or 27.7%, 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 the 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 amended fuel tax returns for the years 2010 – 2013.
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 amended fuel tax returns for the years 2010 – 2013.
We expect to continue managing our idle time and tractor 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.
Given recent historical lows, we would expect diesel fuel prices to remain flat or increase over the next few years.
However, due to hedging contracts being locked in at a lower rate on a portion of our expected gallons compared to
2016 and 2015, we expect net fuel cost to significantly decline in 2017 and 2018.
Operations and maintenance
(dollars in thousands)
Operations and maintenance
% of total revenue
% of freight revenue
2016
$ 45,864
6.8%
7.5%
Year ended December 31,
2015
$ 46,458
6.4%
7.3%
2014
$ 47,251
6.6%
8.2%
Operations and maintenance decreased $0.6 million, or 1.3%, for the year ended December 31, 2016, compared with
2015. As a percentage of total revenue, operations and maintenance remained relatively even at 6.8% of total revenue
in 2016, compared with 6.4% in 2015. As a percentage of freight revenue, operations and maintenance increased to
7.5% of freight revenue for 2016, from 7.3% in 2015 due to an increase in unloading and other operational costs
associated with our increase in dedicated freight, partially offset by lower maintenance cost on our revenue equipment.
For the year ended December 31, 2015, operations and maintenance decreased $0.8 million, or 1.7%, 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.
38
Going forward, we believe this category will fluctuate based on several factors, including our continued ability to
maintain a relatively young fleet, accident severity and frequency, weather, and the reliability of new and untested
revenue equipment models.
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,
2015
2016
2014
$ 117,472
17.5%
19.2%
$ 118,583
16.4%
18.5%
$ 111,772
15.5%
19.3%
Revenue equipment rentals and purchased transportation decreased approximately $1.1 million, or 0.9%, for the year
ended December 31, 2016, compared with 2015. As a percentage of total revenue, revenue equipment rentals and
purchased transportation increased to 17.5% of total revenue for the year ended December 31, 2016, from 16.4% in
2015. As a percentage of freight revenue, revenue equipment rentals and purchased transportation increased to 19.2%
of freight revenue for the year ended December 31, 2016, from 18.5% in 2015. These changes were primarily the
result of a $0.7 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 due to a reduction in our trailers under operating
leases from 2,239 at December 31, 2105 to 1,695 at December 31, 2016.
For the year ended December 31, 2015, 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
financed purchases or capital leases 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.
We expect purchased transportation to increase as we seek to grow our Solutions subsidiary and if fuel prices continue
to increase, which would result in an increase in what we pay third party carriers and independent contractors.
However, 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
39
2016
$ 11,712
1.7%
1.9%
Year ended December 31,
2015
$ 11,016
1.5%
1.7%
2014
$ 10,960
1.5%
1.9%
For the periods presented, the change in operating taxes and licenses was not significant as either a percentage of total
revenue or freight revenue.
Insurance and claims
(dollars in thousands)
Insurance and claims
% of total revenue
% of freight revenue
2016
$ 32,596
4.9%
5.3%
Year ended December 31,
2015
$ 31,909
4.4%
5.0%
2014
$ 39,594
5.5%
6.8%
Insurance and claims, consisting primarily of premiums and deductible amounts for liability, physical damage, and
cargo damage insurance and claims, increased approximately $0.7 million, or 2.2%, for year ended December 31,
2016, compared to 2015. As a percentage of total revenue, insurance and claims increased to 4.9% of total revenue
for the year ended December 31, 2016, from 4.4% in 2015. As a percentage of freight revenue, insurance and claims
increased to 5.3% of freight revenue for the year ended December 31, 2016, from 5.0% in 2015. These increases are
primarily related to the non-recurring $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. These increases also resulted from
increased accident severity, resulting in total insurance cost increasing to 10.3 cents per mile for 2016 from 9.6 cents
per mile in 2015. These increases were partially offset by decreased accident rates in 2016, as measured by a 6.8%
improvement in DOT reportable accidents per million miles driven at 0.82% – the second lowest in the last ten years.
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.
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 judgment 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,
2015
2016
2014
6,057
0.9%
1.0%
$
6,162
0.9%
1.0%
$
5,806
0.8%
1.0%
For the periods presented, the changes in communications and utilities were not significant as either a percentage of
total revenue or freight revenue.
40
General supplies and expenses
(dollars in thousands)
General supplies and expenses
% of total revenue
% of freight revenue
2016
$ 14,413
2.1%
2.4%
Year ended December 31,
2015
$ 14,007
1.9%
2.2%
2014
$ 16,950
2.4%
2.9%
For the year ended December 31, 2016, general supplies and expenses increased approximately $0.4 million, or 2.9%,
compared with 2015. As a percentage of total revenue, general supplies and expenses increased to 2.1% of total
revenue for the year ended December 31, 2016, from 1.9% in 2015. As a percentage of freight revenue, general
supplies and expenses increased to 2.4% of freight revenue for the year ended December 31, 2016, from 2.2% in 2015.
These increases are primarily the result of increases in legal costs related to several large cases and an increase in
travel due to the turnaround efforts at SRT.
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.
Depreciation and amortization
(dollars in thousands)
Depreciation and amortization
% of total revenue
% of freight revenue
2016
$ 72,456
10.8%
11.9%
Year ended December 31,
2015
$ 61,384
8.5%
9.6%
2014
$ 46,384
6.5%
8.0%
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 2016
increased $11.1 million, or 18.0%, compared with 2015. As a percentage of total revenue, depreciation and
amortization increased to 10.8% of total revenue for the year ended December 31, 2016 compared to 8.5% for 2015.
As a percentage of freight revenue, depreciation and amortization increased to 11.9% of freight revenue for the year
ended December 31, 2016, from 9.6% in 2015. Depreciation, consisting primarily of depreciation of revenue
equipment and excluding gains and losses, increased $9.6 million in 2016 from 2015, primarily as a result of more
owned equipment and a significant reduction on the value of used tractors resulting in a change to residual values.
Losses on the disposal of property and equipment, totaled $0.8 million in 2016, compared to gains of $0.6 million in
2015.
For the year ended December 31, 2015, depreciation and amortization 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, specifically as compared to the first and
second quarters of 2016, as we continue to recognize the impact of the significant reductions in residual values, which
should lessen on a comparative basis in the third quarter of 2017. Additionally, if the used tractor market were to
decline further, we could have to adjust residual values again and increase depreciation or experience increased losses
on sale.
41
Interest expense, net
(dollars in thousands)
Other expense, net
% of total revenue
% of freight revenue
Year ended December 31,
2015
2016
$
8,226
1.2%
1.3%
$
8,445
1.2%
1.3%
2014
$ 10,794
1.5%
1.9%
Interest expense, net includes interest expense, interest income, and other miscellaneous non-operating items, which
decreased approximately $0.2 million, or 2.6%, for the year ended December 31, 2016, compared with 2015. As a
percentage of total revenue, other expense, net remained flat with 2015 at 1.2% for the years ended December 31,
2016 and 2015. As a percentage of freight revenue, other expense, net remained flat at 1.3% of freight revenue for
the years ended December 31, 2016 and 2015. The dollar decrease is primarily the result of the decrease in debt at a
lower average interest rate.
Interest expense, net, 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.
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,
2015
2016
2014
$
3,000
$
4,570
$
3,730
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 year ended December 31, 2015, the increase in TEL's
contributions to our results was due to their growth in both leasing and tractor sales. Given TEL's growth during the
three years preceding 2015 and volatility in the used and leased equipment markets in which TEL operates, including
the recent softening of the used tractor market, the impact on our earnings resulting from our investment and TEL's
profitability was more moderate in 2016. Given the decline in the used and leased equipment markets in which TEL
operates, we expect the impact on our earnings resulting from our investment in TEL to moderate over the next twelve
months.
Income tax expense
(dollars in thousands)
Income tax expense
% of total revenue
% of freight revenue
2016
$ 10,386
1.5%
1.7%
Year ended December 31,
2015
$ 21,822
3.0%
3.4%
2014
$ 14,774
2.1%
2.6%
Income tax expense decreased approximately $11.4 million, or 52.4%, for the year ended December 31, 2016,
compared with 2015. As a percentage of total revenue, income tax expense decreased to 1.5% of total revenue for
2016 from 3.0% in 2015. As a percentage of freight revenue, income tax expense decreased to 1.7% of freight revenue
for 2016 compared to 3.4% in 2015. These decreases were primarily related to the $36.7 million decrease in pre-tax
income in 2016 compared to 2015 resulting from the declines in operating income noted above, the decrease in the
contribution from TEL's earnings, and the large non-recurring tax credit in fiscal year 2015.
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
42
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.
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.
RESULTS OF SEGMENT OPERATIONS
We have one reportable segment, truckload services, which we refer to as Truckload. In addition, our Solutions
subsidiary has service offerings ancillary to our Truckload services, including: freight brokerage and logistics 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."
The operation of each of these businesses is described in our notes to the "Business" section.
"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,
2015
2016
2014
$ 601,226
69,425
$ 670,651
$ 655,918
68,322
$ 724,240
$ 663,001
55,979
$ 718,980
$ 37,031
7,631
(12,215)
$ 74,107
5,768
(12,093)
$ 54,151
3,894
(18,399)
$ 32,447
$ 67,782
$ 39,646
Comparison of Year Ended December 31, 2016 to Year Ended December 31, 2015
Our Truckload revenue decreased $54.7 million, as freight revenue decreased $30.4 million and fuel surcharge revenue
decreased $24.3 million. The decrease in freight revenue relates to a decrease in average freight revenue per tractor
per week of 2.2% compared to 2016, partially offset by a $1.7 million increase in freight revenue contributed by our
temperature-controlled intermodal service offering, as well as a decrease in our average tractor fleet of 3.9% from
2015. The decrease in average freight revenue per tractor per week is the result of a 1.3% decrease, or 2.2 cents per
mile, in average rate per total mile and a 0.6% decrease in average miles per unit when compared to 2015.
Additionally, team driven units increased approximately 5.3% to an average of approximately 1,000 teams in 2016
compared to approximately 950 in 2015.
Our Truckload operating income was $37.1 million less in 2016 than 2015 due to the abovementioned decrease in
freight revenue. Additionally, operating costs per mile, net of fuel surcharge revenue, increased primarily due to
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 non-driver employee pay increases since the same 2015
period), increased net fuel expense, and increased capital costs, partially offset by reduced workers’ compensation
expense and operations and maintenance expense.
Other total revenue increased $1.1 million in 2016 compared to 2015 and operating income increased $1.9 million for
the same period. These improvements are primarily the result of improved coordination with our Truckload segment,
additional business from new customers added during the year, and the full year effect of a large customer added in
2015.
Unallocated corporate overhead remained relatively flat as a result of a $3.2 million reduction in incentive
compensation in 2016, primarily as a result of decreased profitability, partially offset by the 2015 period including the
43
$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.
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
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.
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 $47.9 million
and $46.6 million at December 31, 2016 and 2015, 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, 2016, we had $12.2 million of borrowings outstanding, undrawn letters of credit outstanding of
approximately $27.2 million, and available borrowing capacity of $55.6 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 1.8 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 $102.4 million in 2016 compared with $85.5 million in 2015
primarily due to the change in receivables and advances as a result of increased cash collected during 2016 related to
increased 2015 year-end revenues, and the fluctuation in tax benefit/expense due to the reversal of deferred tax effects
on amounts in other comprehensive income. This improvement is partially offset by net income of $16.8 million in
2016 compared to net income of $42.1 million in 2015, depreciation and amortization increasing $9.6 million in 2016,
primarily as the result of the reduced residual revenue equipment value projections due to the softened used equipment
market and the 2015 purchase of our previously leased Chattanooga headquarters property, and the 2015 return of
44
$5.0 million which was previously provided by us to certain of our derivative counterparties related to the net liability
position of certain of our fuel derivative instruments. The fluctuations in cash flows from accounts payable and
accrued expenses primarily related to the timing of payments on our accrued expenses and trade accounts in the 2016
period compared to the 2015 period.
Net cash flows used by investing activities were $47.3 million in 2016 compared with $147.7 million in 2015. The
$100.4 million decrease in net investing activities was attributable primarily to the purchase of our corporate
headquarters property in Chattanooga, Tennessee during 2015 for approximately $35.5 million, as well as a $22.9
million decrease in assets held for sale due to the timing of dispositions of used revenue equipment. During 2017 we
plan to take delivery of approximately 485 new company tractors and dispose of approximately 460 used tractors.
This compares to the approximately 650 new company tractors we took delivery of and the approximately 1,074 used
tractors we disposed of during 2016, including 365 recorded as assets held for sale at December 31, 2015. Going
forward, cash flows from disposals of equipment could be more volatile given the weakness in the used tractor market.
Net cash flows used in financing activities were $51.9 million in 2016, compared with net cash flows provided by
financing activities of $45.4 million in 2015. The change in net cash flows used in financing activities was primarily
a function of net repayments of notes payable and the balance under our Credit Facility. These changes primarily
relate to the trade cycle of our revenue equipment, including the impact of deferring receipt of proceeds of 350 tractors
held for sale that were under contract to be sold in the first quarter of 2016, and cash flows from investing and operating
activities discussed above. Going forward, our cash flows may fluctuate depending on the resolution of the 2008
cargo claim, future stock repurchases, and the extent of future income tax obligations.
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 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, (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 our purchase of our headquarters, including related financing, and (viii) extended the maturity date
from September 2017 to September 2018. In exchange for these amendments, we agreed to pay fees of $0.2 million.
In 2016, we entered into the twelfth and thirteenth amendments to the Credit Facility, which among other things (i)
increases the approved amount for share repurchases to $45.0 million, subject to certain limitations based on the
available borrowing capacity under the Credit Facility, and (ii) permitted the formation of Heritage Insurance, Inc.,
and substituted certain language to ensure the federal funds rate or LIBOR would not be less than zero.
Borrowings under the Credit Facility are classified as either "base rate loans" or "LIBOR loans." Base rate loans
accrue interest at a base rate equal to the greater of the Agent’s prime rate, the federal funds rate plus 0.5%, or LIBOR
plus 1.0%, plus an applicable margin ranging from 0.5% to 1.0%; while LIBOR loans accrue interest at LIBOR, plus
an applicable margin ranging from 1.5% to 2.0%. The applicable rates are adjusted quarterly based on average pricing
availability. 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.
45
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 $12.2 million of borrowings outstanding under the Credit Facility as of December
31, 2016, undrawn letters of credit outstanding of approximately $27.2 million, and available borrowing capacity of
$55.6 million. The interest rate on outstanding borrowings as of December 31, 2016, was 2.3% on $9.0 million of
base rate loans and 4.3% on $3.2 million of LIBOR loans. Based on availability as of December 31, 2016 and 2015,
there was no fixed charge coverage requirement.
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, 2016 terminate in
January 2017 through December 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 2017 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 $166.1 million are cross-defaulted with the
Credit Facility. Additionally, certain of our fuel hedge contracts totaling $3.6 million at December 31, 2016, are 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
2017, 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.
46
Contractual Obligations and Commercial Commitments
The following table sets forth our contractual cash obligations and commitments as of December 31, 2016:
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)
2017
(less than
1 year)
Total
2018
(1-3 years)
2019
(1-3 years)
2020
(3-5 years)
2021
(3-5 years)
More than
5 years
$ 207,687 $ 31,087 $
$ 17,456 $ 7,135 $
$ 24,526 $ 3,062 $
32,643 $
6,047 $
3,062 $
33,010 $
3,844 $
3,062 $
60,892 $
430 $
5,284 $
15,352 $ 34,703
-
3,548
- $
6,508 $
$ 3,968 $
- $
$ 86,549 $ 86,549 $
2,961 $
- $
1,007 $
- $
- $
- $
- $
- $
-
-
$ 340,186 $ 127,833 $
44,713 $
40,923 $
66,606 $
21,860 $ 38,251
(1) Represents principal and interest payments owed at December 31, 2016. 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, 2016. The borrowings consist of capital
leases with one finance company, with fixed borrowing amounts and fixed interest rates. Borrowings in 2017
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 $86.5 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, 2016, we had financed 135 tractors and 1,695 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 $10.6 million in 2016, compared with $12.4 million in 2015. The total value
of remaining payments under operating leases as of December 31, 2016, was approximately $17.5 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, 2016. The discounted present value of the total remaining lease payments and residual value
guarantees were approximately $18.7 million at December 31, 2016. We expect our residual guarantees to
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.
47
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 $2.6 million, $2.4 million, and $2.3 million of revenue in 2016, 2015, and 2014, respectively, related
to an accounts receivable factoring business. 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 15% of
their cost and new trailers over seven years for refrigerated trailers and ten years for dry van trailers to salvage values
of approximately 25% 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. As a result of the progressive decline in the market value of used tractors and our
expectations that used tractor prices will not rebound in the near term, effective July 1, 2016 we reduced the salvage
values on our tractors and, thus, prospectively increased depreciation expense. Estimates around the salvage values
and useful lives for trailers remain unchanged. The impact in the third and fourth quarters of 2016 is approximately
$2.0 million of additional depreciation expense per quarter or approximately $1.2 million per quarter net of tax, which
represents approximately $0.06 per common or diluted share. Based on the prospective nature of this change, we
expect depreciation and expense, including gains and losses, to approximate those levels of the third and fourth
quarters of 2016. 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 2016 we had a net loss on revenue equipment of $0.8 million, and in 2015 and 2014 we generated net gains on
revenue equipment, including assets held for sale, of $0.6 million and $2.7 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
48
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.
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, 2016 and
2015. 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. We have no identifiable intangible
assets on our consolidated balance sheet at December 31, 2016, and $0.2 million at December 31, 2015, which was
recorded in other assets.
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
(cid:404)
(cid:404) workers' compensation - $1.3 million
(cid:404)
(cid:404)
(cid:404)
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.
49
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 $0.7 million and $0.1 million at December 31, 2016 and 2015, 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 less than $0.1 million and $0.6 million at December 31, 2016 and 2015,
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 judgments 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.
Effective April 2015, we entered into new auto liability policies with a three-year term. 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 policy period, which we expect will reduce the fixed portion of insurance expense during such period. 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 $13.6 million, less any future 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, 2016.
If claims development factors that are based upon historical experience change by 10%, our claims accrual as of
December 31, 2016, would change by approximately $1.1 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
50
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
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 interest rate swaps. 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, 2016, 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 agreements 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 agreements.
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.
51
Recent Accounting Pronouncements
Accounting Standards adopted
In April 2015, the Financial Accounting Standards Board ("FASB") 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 adoption permitted. We have adopted this
standard for the fiscal year 2016.
In March 2016, the FASB issued ASU 2016-09, which changes the accounting for certain aspects of share-based
payments to employees. The guidance requires the recognition of the income tax effects of awards in the income
statement when the awards vest or are settled, thus eliminating additional paid-in-capital pools. The guidance also
allows for the employer to repurchase more of an employee’s shares for tax withholding purposes without triggering
liability accounting. In addition, the guidance is effective in 2017 with early adoption permitted. We have adopted
this standard effective for the fiscal year 2016 resulting in the recording of $2.2 million to retained earnings as of the
beginning of 2016, and $1.1 million of additional income tax benefit in 2016 as a result of previously unrecognized
tax benefits resulting from our net operating loss carryovers. The statement of cash flows has not been adjusted for
prior periods, as we have adopted the statement of cash flow guidance prospectively.
Accounting Standards not yet adopted
In April 2015, the FASB issued ASU 2015-14, which defers the effective date of ASU 2014-09. The new standard
introduces a five-step model to determine when and how revenue is recognized. The premise of the new model is that
an entity recognizes 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. The new standard
will be effective for the Company for its annual reporting period beginning January 1, 2018, including interim periods
within that reporting period. Early application is permitted for annual periods beginning January 1, 2017. Entities are
allowed to transition to the new standard by either recasting prior periods or recognizing the cumulative effect. We
are in the process of evaluating the new standard, but we believe our revenue recognized under the new standard will
generally approximate revenue under current standards and, while we expect an impact to both revenue and certain
variable expenses as a result of the adoption, we expect that the net impact to equity or earnings on a prospective basis
will not be material. We plan to complete our evaluation in 2017, including an assessment of the new expanded
disclosure requirements and a final determination of the transition method we will use to adopt the new standard.
In February 2016, the FASB issued ASU 2016-02, which requires lessees to recognize a right-to-use asset and a lease
obligation for all leases. Lessees are permitted to make an accounting policy election to not recognize an asset and
liability for leases with a term of twelve months or less. Lessor accounting under the new standard is substantially
unchanged. Additional qualitative and quantitative disclosures, including significant judgments made by
management, will be required. This new standard will become effective for us in our annual reporting period
beginning January 1, 2019, including interim periods within that reporting period and requires a modified retrospective
transition approach. We are currently evaluating the impacts the adoption of this standard will have on the
consolidated financial statements.
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 five years, the most significant effects of inflation have been on revenue equipment prices
and the related depreciation, health care, and driver and non-driver wages. New emissions control regulations and
increases in wages of manufacturing workers and other items have resulted in higher tractor prices, while the decline
in the market value of used equipment significantly reduced the residual values of units in fiscal 2015 and 2016. The
cost of fuel has been extremely volatile over the last several years, with costs decreasing significantly in both 2016
and 2015 after trending upward in 2010 through 2014. 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. Health care prices
have increased faster than general inflation, primarily due to the rapid increase in prescription drug costs and more
people on our health plan in order to comply with the individual healthcare mandate. The nationwide shortage of
52
qualified drivers has caused us to raise driver wages per mile at a rate faster than general inflation for the past four
years, and this trend may continue as additional government regulations constrain industry capacity. Additionally,
competition and the related cost to employ non-drivers have increased, especially for the more skilled or technical
positions, including mechanics, those with information technology related skills, and degreed professionals.
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,
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. In recent years, we have seen the duration
of the fourth quarter holiday "peak" season become compressed as consumers have come to expect shorter and shorter
shipping times and our customers’ networks have adjusted accordingly. If this trend continues, our ability to take
advantage of this surge in business and our fourth quarter profitability could be negatively affected.
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 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
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 in 2014 and 2015. Consequently, we recognized a reduction in fuel expense
of $1.4 million in 2015 to mark the related liability to market. At December 31, 2016 and 2015, there were no
remaining ineffective fuel hedge contracts and, 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 in the price of heating oil or diesel per gallon would decrease our net income by $1.3 million.
This sensitivity analysis considers that we expect to purchase approximately 45.6 million gallons of diesel annually,
with an assumed fuel surcharge recovery rate of 68.8% of the cost (which was our fuel surcharge recovery rate during
the year ended December 31, 2016). Assuming our fuel surcharge recovery is consistent, this leaves 14.2 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. In 2016, we also entered into several other
53
interest rate swaps, which were designated to hedge against the variability in future interest rate payments due on rent
associated with the purchase of certain trailers. 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 agreements that were in
effect at December 31, 2016 and 2015, of approximately $0.7 million and $1.1 million, respectively, is included in
other liabilities in the consolidated balance sheet, and is included in accumulated other comprehensive loss, net of tax.
Additionally, $0.6 million and $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, 2016 and 2015, respectively,
related to changes in interest rates during such periods. Based on the amounts in accumulated other comprehensive
loss as of December 31, 2016, 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.
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 $215.8
million of debt and capital leases, we had $48.7 million of variable rate debt outstanding at December 31, 2016,
including our Credit Facility, a real-estate note and certain equipment notes, of which the real-estate note of $26.8
million was hedged with the interest rate swap agreement noted above at 4.2% and certain of our equipment notes
totaling $6.4 million were hedged at a weighted average interest rate of 1.7%. 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, 2016 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, 2016 and 2015, 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, 2016, together with the related notes, and the report of KPMG LLP, our
independent registered public accounting firm as of December 31, 2016 and 2015, and for each of the years in the
three year period ended December 31, 2016 are set forth at pages 56 through 84 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, 2016, 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.
54
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:
(cid:404)
(cid:404)
(cid:404)
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.
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, 2016.
Management based this assessment on the framework in the Internal Control- Integrated Framework (2013) issued
by the Committee of Sponsoring Organizations of the Tread way Commission. Based on its assessment, management
believes that, as of December 31, 2016, 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, 2016, that have materially affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
55
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, 2016 and 2015, 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, 2016.
We also have audited Covenant Transportation Group, Inc.’s internal control over financial reporting as of
December 31, 2016, 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, 2016 and 2015, and
the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2016,
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,
2016, 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
Nashville, Tennessee
March 14, 2017
56
COVENANT TRANSPORTATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2016 AND 2015
(In thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, net of allowance of $1,345 in 2016 and $1,857 in 2015
Drivers' advances and other receivables, net of allowance of $519 in 2016
and $1,005 in 2015
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 and 15,899,223 shares outstanding as of
December 31, 2016; and 15,922,879 issued and 15,773,381 outstanding as
of December 31, 2015
Class B common stock, $.01 par value; 5,000,000 shares authorized;
2,350,000 shares issued and outstanding
2016
2015
$
7,750 $
96,636
8,757
3,980
10,889
2,695
4,256
134,963
4,490
112,669
8,779
4,004
8,678
25,626
8,591
172,837
$
$
631,076
(165,605)
465,471
596,071
(142,022)
454,049
20,104
19,831
620,538 $
646,717
189 $
13,032
26,607
24,947
2,441
17,177
3,388
87,781
168,676
19,761
20,866
84,157
2,883
384,124
-
4,698
12,272
30,143
39,395
4,031
17,134
18,549
126,222
196,057
10,547
22,300
76,981
12,450
444,557
-
170
170
24
24
Additional paid-in-capital
Treasury stock at cost; 23,656 and 149,498 shares as of December 31, 2016
137,912
(1,084)
and 2015, respectively
Accumulated other comprehensive loss
Retained earnings
Total stockholders' equity
Total liabilities and stockholders' equity
(2,640)
102,032
236,414
620,538 $
$
139,968
(3,408)
(17,544)
82,950
202,160
646,717
The accompanying notes are an integral part of these consolidated financial statements.
57
COVENANT TRANSPORTATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2016, 2015, AND 2014
(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
Interest expense, 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:
Basic weighted average shares outstanding
Diluted weighted average shares outstanding
2016
2015
2014
$
$
610,845 $
640,120 $
59,806
84,120
670,651 $
724,240 $
578,204
140,776
718,980
234,526
103,108
45,864
117,472
11,712
32,596
6,057
14,413
72,456
244,779
122,160
46,458
118,583
11,016
31,909
6,162
14,007
61,384
638,204
32,447
8,226
3,000
27,221
10,386
16,835 $
656,458
67,782
8,445
4,570
63,907
21,822
42,085 $
0.93 $
2.32 $
0.92 $
2.30 $
18,182
18,145
18,266
18,311
231,761
168,856
47,251
111,772
10,960
39,594
5,806
16,950
46,384
679,334
39,646
10,794
3,730
32,582
14,774
17,808
1.17
1.15
15,250
15,517
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
58
COVENANT TRANSPORTATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2016, 2015, AND 2014
(In thousands)
2016
2015
2014
Net income
$
16,835 $
42,085 $
17,808
Other comprehensive (loss) income:
Unrealized (loss) gain on effective portion of cash flow hedges,
net of tax of $2,696, $8,722, and $9,892 in 2016, 2015 and
2014, respectively
Reclassification of cash flow hedge losses into statement of
operations, net of tax of $6,634, $5,964, and $1,206 in 2016,
2015, and 2014, respectively
Total other comprehensive (loss) income
4,307
(14,051)
(15,869)
10,597
14,904
9,608
(4,443)
1,935
(13,934)
Comprehensive income
$
31,739 $
37,642 $
3,874
The accompanying notes are an integral part of these consolidated financial statements.
59
COVENANT TRANSPORTATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2016, 2015, AND 2014
(In thousands)
Common Stock
Class A
Class B
Additional
Paid-In
Capital
Treasury
Stock
Accumulated
Other
Comprehensive
(Loss) Income
Retained
Earnings
Total
Stockholders'
Equity
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 deficit
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
Net income
Other comprehensive
income
Effect of adoption of
ASU 2016-09
Stock-based employee
compensation expense
Exercise of stock options
Issuance of restricted
shares, net
Balances at
December 31, 2016
$
(12,319)
-
$
$
833
-
$
23,057
17,808
100,360
17,808
$
145
-
-
22
-
-
1
-
$
$
24
-
-
-
-
-
-
-
88,620
-
-
51,498
1,286
190
(1,180)
834
$
$
168
-
$
24
-
141,248
-
$
-
-
1
1
-
-
-
-
-
-
-
-
1,295
1,091
(3,666)
1,586
$
$
170
-
$
24
-
139,968
-
$
(3,408)
-
-
-
-
-
-
-
-
-
-
-
-
-
1,178
(27)
-
-
-
59
(3,207)
2,265
-
11,464
-
408
447
-
-
-
-
(4,994)
-
-
(13,934)
-
-
-
-
-
$
(13,101)
$
-
(4,443)
-
-
-
-
$
(17,544)
$
-
14,904
-
-
-
-
-
-
-
-
-
-
(13,934)
62,984
1,286
598
(732)
834
$
40,865
42,085
169,204
42,085
-
-
-
-
-
(4,443)
(4,994)
1,296
1,092
(2,080)
$
82,950
16,835
202,160
16,835
-
14,904
2,247
-
-
-
2,247
1,178
32
(942)
$
170
$
24
$
137,912
$
(1,084)
$
(2,640)
$
102,032
$
236,414
The accompanying notes are an integral part of these consolidated financial statements.
60
COVENANT TRANSPORTATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2016, 2015, AND 2014
(In thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision (reversal) for losses on accounts receivable
(Realized gain) deferred gain on sales of equipment to affiliate,
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 (benefit) expense
Income tax benefit arising from restricted share vesting and
stock options exercised
Casualty premium credit
Equity in income of affiliate
Return on investment in affiliated company
Loss (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
Return of investment in affiliated company
Proceeds from disposition of property and equipment
Net cash flows used by investing activities
2016
2015
2014
$ 16,835 $
42,085 $
17,808
(241)
1,100
774
(207)
71,647
293
-
-
(922)
1,108
-
(3,000)
1,470
808
1,378
21,207
(1,464)
24
(1,390)
(5,116)
102,430
(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
(112,794)
-
65,507
(47,287)
(181,963)
-
34,287
(147,676)
(163,679)
307
78,776
(84,596)
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
(4,509)
(108)
(1,142)
1,023,978
(1,014,796)
(4,140)
69,432
(120,630)
32
4,698
(242)
(2,280)
(2,918)
(49)
(832)
870,432
1,003,195
(867,430) (1,010,205)
(11,492)
115,364
(134,560)
598
113,077
(67,276)
1,092
(1,718)
offering costs
Common stock repurchased
Income tax benefit arising from restricted share vesting and
stock options exercised
Net cash flows (used in) provided by financing activities
-
-
-
(4,994)
62,984
-
-
(51,883)
-
45,359
834
22,919
Net change in cash and cash equivalents
3,260
(16,840)
12,067
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
4,490
7,750 $
21,330
4,490 $
9,263
21,330
$
61
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest, net of capitalized interest
Income taxes
Equipment purchased under capital leases
$
$
$
8,453 $
6,412 $
11,765 $
8,371 $ 10,919
571
8,112 $
4,552
1,318 $
The accompanying notes are an integral part of these consolidated financial statements.
62
COVENANT TRANSPORTATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016, 2015, AND 2014
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 truckload services ("Truckload").
The Truckload segment consists of three 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, dedicated, 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
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 Heritage Insurance, Inc., a Tennessee 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.
63
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 $2.6 million, $2.4 million, and $2.3 million of revenue in 2016, 2015, and 2014, 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 2016, 2015, and 2014, our top ten customers generated 53%, 45%, and 38% of total revenue, respectively. In
2016 and 2015, one customer in each year accounted for more than 10% of our consolidated revenue. Wal-Mart
accounted for $69.4 million of total revenue in 2016, while UPS accounted for $75.8 million and $82.6 million of
revenue in 2015 and 2014, respectively. Both customers were serviced by both our Truckload segment and our
Solutions subsidiary. 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 34 and 35 days in
2016 and 2015, respectively.
Included in accounts receivable is $25.8 million and $18.9 million of factoring receivables at December 31, 2016 and
2015, 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, 2016, the retained amounts related to factored receivables totaled $0.3 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.
64
The following table provides a summary (in thousands) of the activity in the accounts for 2016, 2015, and 2014:
Years ended
December 31:(cid:3)
(cid:3)
(cid:3)
(cid:3)
2016(cid:3)
2015(cid:3)
2014(cid:3)
Beginning
balance
January 1,(cid:3)
Additional
provisions to
(reversal of)
allowance(cid:3)
Write-offs
and other
deductions(cid:3)
Ending
balance
December 31,(cid:3)
(cid:3)
$
(cid:3)
$
(cid:3)
$
1,857
1,767
1,736
$
$
$
(241) $
(271) $
1,345
1,100 $
(1,010) $
1,857
774 $
(743) $
1,767
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 15% of
their cost. We generally depreciate new trailers over seven years for refrigerated trailers and ten years for dry van
trailers to salvage values of approximately 25% of their cost. As a result of the progressive decline in the value of
used tractors and our expectations that used tractor prices will not rebound in the near term, effective July 1, 2016 we
reduced the salvage values on our tractors and, thus, prospectively increased depreciation expense. Estimates around
the salvage values and useful lives for trailers remain unchanged. The depreciation schedules described above reflect
the reduction in salvage values. The impact in the third and fourth quarters of 2016 and in future quarters is
approximately $2.0 million of additional depreciation expense per quarter or approximately $1.2 million per quarter
net of tax, which represents approximately $0.06 per common or diluted share. 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.
65
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.
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, 2016 and
2015. 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. We have no identifiable intangible
assets on our consolidated balance sheet at December 31, 2016, and $0.2 million of intangible assets, which was
recorded in other assets, at December 31, 2015.
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
(cid:404)
(cid:404) workers' compensation - $1.3 million
(cid:404)
(cid:404)
(cid:404)
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 $0.7 million and $0.1 million at December 31, 2016 and 2015, 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 less than $0.1 million and $0.6 million at December 31, 2016 and 2015,
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
66
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 judgments regarding the ultimate benefit versus risk of 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.
Effective April 2015, we entered into new auto liability policies with a three-year term. 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 policy period, which we expect will reduce the fixed portion of insurance expense during such period. 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 $13.6 million, less any future 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, 2016.
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 2016, 2015, and 2014.
Fair Value of Financial Instruments
Our financial instruments consist primarily of cash and cash equivalents, accounts receivable, commodity contracts,
accounts payable, debt, and interest rate swaps. 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, 2016, 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 agreements 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 agreements.
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
67
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.
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 2016, 2015, and 2014 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 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, 2016, 2015, and 2014, respectively. Income per share is the same
for both Class A and Class B shares.
68
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:
2016
2015
2014
$ 16,835
$
42,085 $
17,808
Denominator for basic
weighted-average shares
Effect of dilutive securities:
income per share –
18,182
18,145
15,250
Equivalent shares issuable upon conversion of
84
161
266
unvested restricted shares
Equivalent shares issuable upon conversion of
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
-
$ 18,266
$
5
18,311 $
1
15,517
$
$
0.93
0.92
$
$
2.32 $
2.30 $
1.17
1.15
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 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
As a result of adopting ASU 2015-15, discussed more below, $0.7 million was reclassified from other assets to notes
payable as of December 31, 2015 to present debt issuance as a direct deduction from the carrying amount of the debt.
Recent Accounting Pronouncements
Accounting Standards adopted
In April 2015, the Financial Accounting Standards Board ("FASB") 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
69
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 adoption permitted. We have adopted this
standard for the fiscal year 2016.
In March 2016, the FASB issued ASU 2016-09, which changes the accounting for certain aspects of share-based
payments to employees. The guidance requires the recognition of the income tax effects of awards in the income
statement when the awards vest or are settled, thus eliminating additional paid-in-capital pools. The guidance also
allows for the employer to repurchase more of an employee’s shares for tax withholding purposes without triggering
liability accounting. In addition, the guidance is effective in 2017 with early adoption permitted. We have adopted
this standard effective for the fiscal year 2016 resulting in the recording of $2.2 million to retained earnings as of the
beginning of 2016, and $1.1 million of additional income tax benefit in 2016 as a result of previously unrecognized
tax benefits resulting from our net operating loss carryovers. The statement of cash flows has not been adjusted for
prior periods, as we have adopted the statement of cash flow guidance prospectively.
Accounting Standards not yet adopted
In April 2015, the FASB issued ASU 2015-14, which defers the effective date of ASU 2014-09. The new standard
introduces a five-step model to determine when and how revenue is recognized. The premise of the new model is that
an entity recognizes 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. The new standard
will be effective for the Company for its annual reporting period beginning January 1, 2018, including interim periods
within that reporting period. Early application is permitted for annual periods beginning January 1, 2017. Entities are
allowed to transition to the new standard by either recasting prior periods or recognizing the cumulative effect. We
are in the process of evaluating the new standard, but we believe our revenue recognized under the new standard will
generally approximate revenue under current standards and, while we expect an impact to both revenue and certain
variable expenses as a result of the adoption, we expect that the net impact to equity or earnings on a prospective basis
will not be material. We plan to complete our evaluation in 2017, including an assessment of the new expanded
disclosure requirements and a final determination of the transition method we will use to adopt the new standard.
In February 2016, the FASB issued ASU 2016-02, which requires lessees to recognize a right-to-use asset and a lease
obligation for all leases. Lessees are permitted to make an accounting policy election to not recognize an asset and
liability for leases with a term of twelve months or less. Lessor accounting under the new standard is substantially
unchanged. Additional qualitative and quantitative disclosures, including significant judgments made by
management, will be required. This new standard will become effective for us in our annual reporting period
beginning January 1, 2019, including interim periods within that reporting period and requires a modified retrospective
transition approach. We are currently evaluating the impacts the adoption of this standard will have on the
consolidated financial statements.
2.
LIQUIDITY
Our business requires significant capital investments over the short-term and the long-term. We generally finance 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,
and proceeds from the sale of our used revenue equipment in 2016 and 2015. We had working capital (total current
assets less total current liabilities) of $47.9 million and $46.6 million at December 31, 2016 and 2015, 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, 2016, we had $12.2 million of borrowings outstanding, undrawn letters of credit outstanding of
approximately $27.2 million, and available borrowing capacity of $55.6 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.
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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
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:
(cid:404) Level 1. Observable inputs such as quoted prices in active markets;
(cid:404) Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or
indirectly; and
(cid:404) Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to
develop its own assumptions.
Derivatives Measured at Fair Value on a Recurring Basis
(in thousands)
Hedge derivatives
Net Fair Value of Derivative(2)
Quoted Prices in Active Markets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
December 31,
2016 (1)
2015 (1)
$
$
(4,293)
$
(28,434)
-
-
(4,293)
$
(28,434)
-
-
(1) No cash collateral was provided by the Company at December 31, 2016 and 2015.
(2) Includes derivative assets of $26 at December 31, 2016.
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, 2016, 619,427 of the 1,550,000 shares noted above 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.
71
Included in salaries, wages, and related expenses within the consolidated statements of operations is stock-based
compensation expense of $1.2 million, $1.3 million, and $1.3 million in 2016, 2015, and 2014, 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 2016, $0.2 million in 2015 and $0.1 million in 2014. All stock
compensation expense recorded in 2016, 2015, and 2014 relates to restricted shares granted, as no options were granted
during these periods. Associated with stock compensation expense was no income tax benefit in 2016 and 2015 and
$0.8 million income tax benefit in 2014, related to the exercise of stock 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 55,429, 84,138, and 39,676 Class A common stock
shares, which were withheld at weighted average per share prices of $20.61, $27.10, and $20.97 based on the closing
prices of our Class A common stock on the dates the shares vested in 2016, 2015, and 2014, respectively, in lieu of
the federal and state minimum statutory tax withholding requirements. We remitted $1.1 million, $2.3 million, and
$0.8 million in 2016, 2015, and 2014, 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, 2016,
2015, and 2014:
Number of
stock
awards
(in thousands)
Weighted
average grant
date fair
value
Unvested at December 31, 2013
777
$
5.95
Granted
Vested
Forfeited
Unvested at December 31, 2014
Granted
Vested
Forfeited
Unvested at December 31, 2015
Granted
Vested
Forfeited
Unvested at December 31, 2016
136
$
(137) $
(134) $
$
642
63
$
(246) $
(129) $
$
330
$
120
(169) $
(16) $
$
265
12.27
7.43
7.80
6.60
28.10
4.97
5.38
12.43
18.92
5.28
16.53
18.63
The unvested shares at December 31, 2016 will vest based on when and if the related vesting criteria are met for each
award. All awards require continued service to vest, and 158,015 of these awards vest solely based on continued
service, in varying increments between 2017 and 2019. Performance based awards account for 107,453 of the unvested
shares at December 31, 2016, of which 29,959 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, 2016 and
77,494 shares relate to performance for the years ended December 31, 2017 and 2018 and have no unrecognized
compensation cost as vesting is not probable.
The fair value of restricted share awards that vested in 2016, 2015, and 2014 was approximately $3.5 million, $6.5
million, and $2.9 million, respectively. As of December 31, 2016, we had approximately $3.6 million of unrecognized
compensation expense related to 158,015 service-based shares, 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 provide the holder with voting and other stockholder-type rights, but will not be issued
until the relevant restrictions are satisfied.
72
The following table summarizes our stock option activity for the fiscal years ended December 31, 2016, 2015, and
2014:
Number of
options
(in thousands)
Weighted
average
exercise price
Weighted average
remaining
contractual term
Aggregate
intrinsic
value
(in thousands)
Outstanding at December 31, 2013
221
$
14.98
1.0 years
$
-
Options granted
Options exercised
Options forfeited
Outstanding at December 31, 2014
Options granted
Options exercised
Options forfeited
Outstanding at December 31, 2015
Options granted
Options exercised
Options forfeited
Outstanding at December 31, 2016
Exercisable at December 31, 2016
-
(45) $
(100) $
$
76
-
(73) $
-
3
$
-
(3) $
-
-
-
-
13.64
21.71
14.73
-
14.79
-
12.79
-
12.79
-
-
-
0.5 years
$
945
0.4 years
$
15
-
-
-
-
-
-
5.
PROPERTY AND EQUIPMENT
A summary of property and equipment, at cost, as of December 31, 2016 and 2015 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
2016
499,809 $
8,192
25,482
71,324
3,176
23,093
$
631,076 $
2015
468,693
8,189
25,184
71,614
1,104
21,287
596,071
Depreciation expense was $71.4 million, $61.9 million, and $49.0 million, in 2016, 2015, and 2014, respectively.
This depreciation expense excludes net losses on the sale of property and equipment totaling $0.8 million in 2016, and
net gains on the sale of property and equipment totaling $0.6 million and $2.7 million in 2015 and 2014, 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, 2016 and 2015, property and equipment included capitalized leases, which had capitalized costs of $26.6 million
and $19.4 million and accumulated amortization of $4.2 million and $4.7 million, respectively. Amortization of these
leased assets is included in depreciation and amortization expense in the consolidated statement of operations and
totaled $1.6 million, $2.0 million, and $3.0 million during 2016, 2015, and 2014, respectively.
73
6.
GOODWILL AND OTHER ASSETS
We have no goodwill or identifiable intangible assets on our consolidated balance sheet at December 31, 2016.
A summary of other assets as of December 31, 2016 and 2015 is as follows:
(in thousands)
Customer relationships
Less: accumulated amortization of intangibles
Net intangible assets
Investment in TEL
Other long-term receivables
Deposits
Interest rate swap
Other, net
2016
2015
$
- $
-
-
18,526
1
481
26
1,070
3,490
(3,321)
169
16,788
576
314
-
1,984
$ 20,104 $ 19,831
Amortization expenses of intangible assets were $0.2 million, $0.1 million, and $0.1 million for 2016, 2015, and 2014,
respectively.
7.
DEBT
Current and long-term debt consisted of the following at December 31, 2016 and 2015:
(in thousands)
December 31, 2016
December 31, 2015
Borrowings under Credit Facility
Revenue equipment installment notes; weighted average
interest rate of 3.3% at December 31, 2016, and 3.6%
December 31, 2015, due in monthly installments with
final maturities at various dates ranging from January
2017 to December 2022, secured by related revenue
equipment
Real estate notes; weighted average interest rate of 2.4%
and 2.0% at December 31, 2016 and 2015,
respectively, due in monthly installments with fixed
maturities at December 2018 and August 2035,
secured by related real-estate
Current
$
23,986
- $
Long-Term
Current
12,185 $
127,840
38,461
- $
Long-Term
3,002
163,387
1,224
28,907
1,184
30,124
Deferred loan costs
Total debt
Principal portion of capital lease obligations, secured by
(263)
24,947
2,441
(256)
168,676
19,761
(250)
39,395
4,031
(456)
196,057
10,547
related revenue equipment
Total debt and capital lease obligations
$ 27,388 $ 188,437 $ 43,426 $ 206,604
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 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, (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,
74
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 our purchase of our headquarters, including related financing, and (viii) extended the maturity date
from September 2017 to September 2018. In exchange for these amendments, we agreed to pay fees of $0.2 million.
In 2016, we entered into the twelfth and thirteenth amendments to the Credit Facility, which among other things (i)
increases the approved amount for share repurchases to $45.0 million, subject to certain limitations based on the
available borrowing capacity under the Credit Facility, and (ii) permitted the formation of Heritage Insurance, Inc.,
and substituted certain language to ensure the federal funds rate or LIBOR would not be less than zero.
Borrowings under the Credit Facility are classified as either "base rate loans" or "LIBOR loans." Base rate loans
accrue interest at a base rate equal to the greater of the Agent’s prime rate, the federal funds rate plus 0.5%, or LIBOR
plus 1.0%, plus an applicable margin ranging from 0.5% to 1.0%; while LIBOR loans accrue interest at LIBOR, plus
an applicable margin ranging from 1.5% to 2.0%. The applicable rates are adjusted quarterly based on average pricing
availability. 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 $12.2 million of borrowings outstanding under the Credit Facility as of December
31, 2016, undrawn letters of credit outstanding of approximately $27.2 million, and available borrowing capacity of
$55.6 million. The interest rate on outstanding borrowings as of December 31, 2016, was 2.3% on $9.0 million of
base rate loans and 4.3% on $3.2 million of LIBOR loans. Based on availability as of December 31, 2016 and 2015,
there was no fixed charge coverage requirement.
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, 2016 terminate in
January 2017 through December 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 2017 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 $166.1 million are cross-defaulted with the
Credit Facility. Additionally, a portion of the our fuel hedge contracts totaling $3.6 million at December 31, 2016, 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
2017, 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.
75
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, 2016, the scheduled principal payments of debt, excluding capital leases for which future
payments are discussed in Note 8 are as follows:
2017 $
2018
2019
2020
2021
Thereafter $
(in thousands)
25,210
39,783
29,014
58,424
14,136
27,575
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):
2017
2018
2019
2020
2021
Thereafter
Total minimum lease payments
Less: amount representing interest
Present value of minimum lease payments
Less: current portion
Capital lease obligations, long-term
Operating
Capital
$
$
7,135 $
6,047
3,844
430
-
-
17,456 $
$
3,062
3,062
3,062
5,284
6,508
3,548
24,526
(2,324)
22,202
(2,441)
19,761
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, 2016 and 2015,
respectively. The residual guarantees at December 31, 2016 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
2016
2014
2015
$ 10,773 $ 12,611 $ 20,935
3,561
317
$ 11,735 $ 15,029 $ 24,813
2,078
340
708
254
76
9.
INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 2016, 2015, and 2014 is comprised of:
(in thousands)
Federal, current
Federal, deferred
State, current
State, deferred
2016
2015
2014
124 $
$ 11,951 $
(2,925)
1,811
(451)
(94)
12,830
187
1,851
$ 10,386 $ 21,822 $ 14,774
18,185
426
3,087
Income tax expense for the years ended December 31, 2016, 2015, and 2014 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
2016
2015
2014
$
9,527 $ 22,368 $ 11,404
1,075
2,237
2,304
2,329
(104)
1,599
18
218
(112)
(7,151)
189
222
$ 10,386 $ 21,822 $ 14,774
953
2,205
(273)
-
(694)
(1,332)
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.
The temporary differences and the approximate tax effects that give rise to our net deferred tax liability at December
31, 2016 and 2015 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
2016
2015
$
$
15,147
3,326
6,409
5,113
1,653
(1,219)
30,429
15,495
15,348
10,585
4,730
10,947
(1,219)
55,886
(98,679)
(11,121)
(4,786)
(114,586)
(125,188)
(4,398)
(3,281)
(132,867)
Net deferred tax liability
$
(84,157)
$
(76,981)
The net deferred tax liability of $84.2 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
77
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, 2016 or 2015, except for $1.2 million at December 31, 2016 and 2015, 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, 2016, we had a $2.8 million liability recorded for unrecognized tax benefits, which includes
interest and penalties of $0.8 million. We recognize interest and penalties accrued related to unrecognized tax benefits
in tax expense. As of December 31, 2015, we had a $3.2 million liability recorded for unrecognized tax benefits, which
included interest and penalties of $0.9 million. Interest and penalties recognized for uncertain tax positions provided
for a $0.1 million, $0.2 million, and a $0.1 million benefit in each of 2016, 2015, and 2014 respectively.
The following tables summarize the annual activity related to our gross unrecognized tax benefits (in thousands) for
the years ended December 31, 2016, 2015, and 2014:
2016
2015
2014
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,
$
$
2,394
-
-
-
(88)
(255)
2,051
$
$
995
1,737
-
-
(182)
(156)
2,394
$
$
1,060
246
-
42
(126)
(227)
995
If recognized, $2.4 million and $2.7 million of unrecognized tax benefits would impact our effective tax rate as of
December 31, 2016 and 2015, 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 2013 through 2016 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 existing federal net operating loss carryforwards were used to offset our taxable income during 2016. Our federal
tax credits of $7.6 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 2035, while our state net operating loss carryforwards
and state tax credits of $78.1 million and $0.3 million, respectively expire over various periods through 2035 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. In May 2016, the operating agreement with
TEL was amended to, among other things, remove the previously agreed to fixed date purchase options. Our option
to acquire up to the remaining 51% of TEL would have expired May 31, 2016, and TEL’s majority owners would
have received the option to purchase our ownership in TEL. The options previously in effect were eliminated, and
we are discussing with TEL’s owners a replacement option structure and other alternatives. TEL’s majority owners
are generally restricted from transferring their interests in TEL, other than to certain permitted transferees, without
our consent. For the years ended December 31, 2016 and 2015, we sold tractors and trailers to TEL for $0.4 million
78
and $6.2 million, respectively, and received $5.0 million and $1.3 million, respectively, for providing various
maintenance services, certain back-office functions, and for miscellaneous equipment. We reversed previously
deferred gains of $0.2 million and less than $0.1 million for the years ending December 31, 2016 and 2015,
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 $0.6 million and $0.8 million at December 31,
2016 and December 31, 2015, respectively, are being carried as a reduction in our investment in TEL. At December
31, 2016 and 2015, we had accounts receivable from TEL of $3.7 million and $5.3 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 $3.0 million in 2016, $4.6 million in 2015,
and $3.7 million in 2014. We received an equity distribution from TEL for $1.5 million in 2016, no equity distribution
in 2015, and $0.3 million in 2014, which was distributed to each member based on its respective ownership percentage.
Our investment in TEL, totaling $18.5 million and $16.8 million at December 31, 2016 and 2015, 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 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)
Current Assets
Non-current Assets
Current Liabilities
Non-current Liabilities
Total Equity
As of the years ended December 31,
2016
2015
$
$
14,320 $
146,081
34,766
96,140
29,495 $
14,275
125,782
29,644
84,516
25,897
(in thousands)
Revenue
Operating Expenses
Operating Income
Net Income
As of the years ended December 31,
2015
2016
2014
$
$
94,432 $
83,475
10,957
6,598 $
104,838 $
91,644
13,194
9,061 $
90,197
79,771
10,426
7,564
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 $0.7 million in 2016, $0.8 million in 2015, and
zero in 2014 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 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
79
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 in 2014 and
2015. Consequently, we recognized a reduction in fuel expense of $1.4 million in 2015 to mark the related liability
to market. At December 31, 2016 and 2015, there were no remaining ineffective fuel hedge contracts and, 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.
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. In 2016, we also entered into several interest
rate swaps, which were designated to hedge against the variability in future interest rate payments due on rent
associated with the purchase of certain trailers. 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 agreements that were in
effect at December 31, 2016 and 2015, of approximately $0.7 million and $1.1 million, respectively, is included in
other liabilities in the consolidated balance sheet, and is included in accumulated other comprehensive loss, net of tax.
Additionally, $0.6 million and $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, 2016 and 2015, respectively,
related to changes in interest rates during such periods. Based on the amounts in accumulated other comprehensive
loss as of December 31, 2016, 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, 2016, we had fuel hedge contracts on approximately 12.1 million and 7.6 million gallons of diesel
to be purchased in 2017 and 2018, respectively, or approximately 27% and 17% of our projected annual 2017 and
2018 fuel requirements, respectively.
The fair value of the fuel hedge contracts that were in effect at December 31, 2016 and 2015, of approximately $3.6
million and $27.3 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 2016, market "spot" prices
for ultra-low sulfur diesel peaked at a high of approximately $1.66 per gallon and hit a low price of approximately
$0.83 per gallon. During 2015, market spot prices ranged from a high of $1.98 per gallon to a low of $0.98 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, $16.7 million, $15.3 million, and $3.1 million were reclassified from accumulated other comprehensive
loss into our results of operations for the years ended December 31, 2016, 2015, and 2014, respectively, as additional
fuel expense for 2016, 2015, and 2014, related to losses on fuel hedge contracts that expired. In addition to the
amounts reclassified as a result of expired contracts, in 2105 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
80
value for those contracts were recorded as expense rather than as a component of other comprehensive loss. At
December 31, 2016, all fuel hedge contracts were determined to be effective.
Based on the amounts in accumulated other comprehensive loss as of December 31, 2016 and the expected timing of
the purchases of the diesel hedged, we expect to reclassify approximately $1.8 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, 2016 and 2015, 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.
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.
14.
OTHER COMPREHENSIVE INCOME ("OCI")
OCI 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 OCI balance for the periods presented (in
thousands; presented net of tax):
Details about OCI Components
(Losses) gains on cash flow
hedges
Commodity derivative
contracts
Interest rate swap contracts
Amount Reclassified from OCI for the
years ended December 31,
2015
2014
2016
Affected Line Item
in the Statement of
Operations
$ (16,674)
6,419
$ (10,255)
(557)
$
215
(342)
$
$
$
$
$
(15,313)
5,865
(9,448)
(259)
99
(160)
$
$
$
$
(3,141)
1,206
(1,935)
-
-
-
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 SRT subsidiary 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
81
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. The case is currently
pending resolution for summary judgment.
Our Covenant Transport subsidiary is a 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. The 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. The parties
engaged in mediation of the dispute which resulted in a comprehensive settlement of all class member claims upon
payment of $500,000 by Covenant Transport. The settlement received preliminary approval of the court in December,
2016 and is now pending final approval.
Our SRT subsidiary is a defendant in a lawsuit filed on December 16, 2016 in the Superior Court of San Bernardino
County, California. The lawsuit was filed on behalf of David Bass (a California resident and former driver), who is
seeking to have the lawsuit certified as a class action case wherein he alleges violation of multiple California wage
and hour statutes over a four year period of time, including failure to pay wages for all hours worked, failure to provide
meal periods and paid rest breaks, failure to pay for rest and recovery periods, failure to reimburse certain business
expenses, failure to pay vested vacation, unlawful deduction of wages, failure to timely pay final wages, failure to
provide accurate itemized wage statements, and unfair and unlawful competition.
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 $27.2 million and $31.4 million of outstanding and undrawn letters of credit as of December 31, 2016 and
2015, respectively. The letters of credit are maintained primarily to support our insurance programs.
We had commitments outstanding at December 31, 2016, to acquire revenue equipment totaling approximately $86.5
million in 2017 versus commitments at December 31, 2015 of approximately $145.6 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 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.
82
The following tables summarize our segment information:
(in thousands)
Other
Unallocated
Corporate
Overhead
-
-
(12,215)
1,261
40,367
1,767
73,602 $
(4,177)
7,631
22
31,289
43
Consolidated
674,828
$
(4,177)
32,447
72,456
620,538
59,052
$
$
71,057 $
(2,735)
5,768
13
26,315
29
-
-
(12,093)
1,233
39,896
1,069
59,796 $
(3,817)
3,894
59
27,338
14
-
-
(18,399)
656
48,066
1,570
726,975
(2,735)
67,782
61,384
646,717
148,994
722,797
(3,817)
39,646
46,384
539,304
89,455
Year Ended December 31, 2016
Revenue
Intersegment revenue
Operating income (loss)
Depreciation and amortization (1)
Total assets
Capital expenditures, net (2)
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)
$
$
$
Truckload
$ 601,226
-
37,031
71,173
548,882
57,242
$ 655,918
-
74,107
60,138
580,506
147,896
$ 663,001
-
54,151
45,669
463,900
87,871
(1) Includes gains and losses on disposition of equipment.
(2) Includes equipment purchased under capital leases.
83
17.
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Quarters ended
Total revenue
Operating income
Net income
Basic income per share
Diluted income per share
Quarters ended
Total revenue
Operating income
Net income
Basic income per share
Diluted income per share
(in thousands except per share amounts)
Mar. 31,
2016(1)
June 30,
2016
Sep. 30,
2016
Dec. 31,
2016
$
156,341 $
7,418
4,352
0.21
0.21
158,832 $
7,316
3,632
0.20
0.20
164,500 $
5,446
2,869
0.16
0.16
190,978
12,267
5,982
0.33
0.33
(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
(1) Adjusted from 10-Q as filed due to implementation of ASU 2016-09.
Includes $4.7 million after tax one-time federal income tax credit.
(2)
Includes $3.6 million in return of previously expensed insurance premiums for the commutation of our
(3)
primary auto liability policy for the period of April 1, 2013, through September 30, 2014.
84
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, 2011, and ending December 31, 2016. The graph assumes $100 was invested on December 31, 2011,
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
$1,000
$900
$800
$700
$600
$500
$400
$300
$200
$100
$0
12/11
12/12
12/13
12/14
12/15
12/16
Covenant Transportation Group, Inc.
NASDAQ Composite
NASDAQ Transportation
*$100 invested on 12/31/11 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
12/11
12/12
12/13
12/14
12/15
12/16
Covenant Transportation Group, Inc.
NASDAQ Composite
NASDAQ Transportation
100.00
100.00
100.00
186.20
116.41
106.01
276.43
165.47
143.98
912.79
188.69
202.99
636.03
200.32
173.16
651.18
216.54
207.87
Prepared by Research Data Group, Inc. Used with permission. All rights reserved. Copyright 2016.
85
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COVENANT TRANSPORTATION GROUP, INC. CORPORATE INFORMATION
DIRECTORS
David R. Parker
Chairman of the Board,
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.
James "Jim" Brower, Jr.
Executive Vice President & Chief Operating Officer –
Star Transportation, Inc.
Samuel “Sam” F. Hough
Executive Vice President & Chief Operating Officer –
Covenant Transport, Inc.
M. Paul Bunn
Chief Accounting Officer –
Covenant Transportation Group, Inc.
(principal accounting officer)
Paul T. Newbourne
Executive Vice President & Chief Operating Officer –
Covenant Transport Solutions, Inc.
James "Jamie" Heartfield
General Counsel & Chief Human Resources Officer
INDEPENDENT AUDITORS
KPMG LLP
Nashville, Tennessee
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 16, 2017, 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 March 14, 2017, 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, 2016.
A copy of our Annual Report on Form 10-K for the year ended December 31, 2016, 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.