SEC Company Response from COVENANT LOGISTICS GROUP, INC. (CVLG) (CIK 0000928658) (CVLG) — Aug 16, 2005
COVENANT LOGISTICS GROUP, INC. (CVLG) (CIK 0000928658)
Date: Aug. 16, 2005 · CIK: 0000928658 · Accession: 0001008886-05-000171
AI Filing Summary & Sentiment
Reasoning
Referenced dates: August 3, 2005
Letter
VIA EDGAR Securities and Exchange Commission Washington, D.C. 20549 Commission File No. 0-24960 Form 10-K: For the year ended December 31, 2004 ("Form 10-K")
Re: Covenant Transport, Inc. (the "Company")
Dear Mr. Humphrey:
This letter responds to the Staff's comments to the Company's Form 10-K, as set forth in the Staff's supplemental letter dated August 3, 2005. For your convenience, the headings and paragraph numbers in this letter correspond to the headings and paragraph numbers in the Staff's supplemental letter.
Form 10-K: For the year ended December 31, 2004
Nature of Business, page 44
1. Question:
We understand, from your response to comment 4 of our letter, that the transportation services do not constitute reportable operating segments under SFAS 131. However, your two operating subsidiaries do appear to constitute reportable operating segments and you state that you are able to analyze operating results on a subsidiary basis. If our understanding is correct, please provide additional support for your conclusion that the two operating segments should be aggregated. You state that two or more operating segments may be aggregated if the segments have similar operating characteristics and are similar in each of five areas. However, paragraph 17 also requires that “aggregation be consistent with the objectives and basic principles of the statement.” That is, you may aggregate if presenting the information separately will not provide much useful information to investors. If the information is prepared and made available to management for the purpose of analyzing operating results and key performance indicators, it would appear that a separate presentation would provide useful information to a user of financial statements as well. Please revise or advise. In addition, your response should provide numerical support for your determination that the segments have “similar economic characteristics.” We may have additional comments upon review of your response.
David R. Humphrey, Branch Chief
August 16, 2005
Page
Answer:
Within the Company, we have two operating subsidiaries - Covenant Transport ("Covenant Transport"), which generated 88% of our revenue in 2004, and Southern Refrigerated Transport ("SRT"), which generated 12% of our revenue in 2004. The Company acquired all of the outstanding stock of SRT in October 1998. SRT was originally maintained as a separate subsidiary because of an ongoing IRS audit involving the former owner of SRT. There is no operationally necessary reason for maintaining a separate subsidiary. It is administratively easier and less expensive to leave the subsidiary in place rather than amend contracts, replace licenses, and take other actions that would be required if the SRT subsidiary were to be dissolved or merged.
We do not believe that reporting SRT and Covenant Transport as two separate segments would be meaningful to investors for the following reasons:
·
Comparing the separate financial statements of Covenant Transport and SRT would be misleading to investors because the costs of administrative functions performed by Covenant Transport for the corporate group are not allocated to SRT, thus distorting SRT's stand-alone profitability.
·
Each of Covenant Transport and SRT operates temperature-controlled trailers, which means the subsidiaries do not have distinctly divided operations.
·
Each of Covenant Transport and SRT generates revenue and incurs expenses in substantially the same manner and has similar cash flow and capital expenditure characteristics, reducing the usefulness of separate disclosures.
·
While the separate information is available, upon request, our board of directors does not in fact review the separate information as part of its board materials, nor has the board made any capital allocation decisions based on the separate financial statements (at least in part because the SRT financial statements do not contain all administrative expenses and are thus not reliable).
Additional information follows.
1.
Administrative expenses are not allocated. Covenant Transport provides a substantial portion of the administration functions for SRT, and the costs of such functions are not allocated to SRT. These costs include risk management, safety, finance, tax planning, executive management, and equipment purchases and dispositions. Such costs for the entire corporate group are recorded in Covenant Transport's financial statements and not in SRT's financial statements. Accordingly, any comparison would be misleading in that Covenant Transport's expenses would be overstated and SRT's expenses would be understated.
David R. Humphrey, Branch Chief
August 16, 2005
Page
2.
SRT provides services that are substantially identical to services provided within Covenant Transport's temperature-controlled division. Covenant Transport's temperature-controlled division has approximately tractors and SRT has approximately 400 tractors providing similar services, sharing some of the same customers, and occasionally sharing equipment. As noted in our July 20th letter, we are unable to provide discrete financial information for the various services that we provide within Covenant Transport. Accordingly, to the extent investors were interested in evaluating the differences between temperature-controlled and dry operations, the financial statement would not be useful because: (a) not all temperature-controlled operations are in SRT, and (b) the lack of expense allocation discussed above would distort the comparison regardless.
3.
Covenant Transport and SRT both generate revenue primarily through transporting truckload freight. Revenue is generated as a function of miles per tractor, average revenue per mile, percentage of non-revenue miles, and tractors without drivers. For both of Covenant Transport and SRT these factors come together in the measure "average freight revenue per tractor per week," the main measure of asset productivity for each.
For both subsidiaries, most major expenses are variable with miles traveled. Fuel, driver pay, maintenance, insurance and claims, and purchased transportation are all variable expenses. Major fixed expenses include depreciation and amortization, financing costs, and non-driver personnel and administrative costs, including the headquarters cost.
We do not believe separate disclosure would be useful because a component of the difference in financial results would be in the categories of non-driver personnel and administrative expenses, and these are not allocated. The table below contains additional information concerning our revenue and expenses.
Revenue Analysis for Year Ended 2004
Covenant
Transport
SRT
Revenues
$489.6 million
$67.6 million
Average revenue per load
$1,304
$1,560
Average revenue per loaded mile
$1.403
$1.381
Average revenue per total mile
$1.276
$1.259
Average revenue per truck per week
$2,979
$3,112
Expense Analysis for Year Ended 2004
(as a percentage of total revenue)
Covenant
Transport
SRT
Driver pay
22.0%
24.7%
Fuel
20.7%
25.0%
Depreciation
7.4%
7.1%
Total operating expenses
97.8%
91.3%
David R. Humphrey, Branch Chief
August 16, 2005
Page
4.
Our Board of Directors does not use the separate financial statements for decision-making. We do not distribute separate financial statement of SRT to our board of directors nor have they used such information in making strategic or capital allocation decisions.
Based on the foregoing, we do not believe that separate presentations of SRT and Covenant Transport would help users of our financial statements to better understand our business, better assess our prospects for future net cash flows, or make more informed judgments about the Company as a whole. We believe the presentation of our operations as one segment, the transportation of goods, is appropriate and consistent with the objectives and basic principles of SFAS 131.
2. As a related matter, if operating segments have been aggregated, the filing should disclose this fact in accordance with paragraph 26a of SFAS 131.
Answer:
We agree with your comment and will make the suggested change in future filings.
OTHER COMMENTS
Pursuant to the Staff's request, the Company hereby acknowledges that:
1. The Company is responsible for the adequacy and accuracy of the disclosure in the filings reviewed by the Staff;
2. Staff comments or changes to disclosure in response to Staff comments in a filing reviewed by the Staff do not foreclose the Commission from taking any action with respect to the filing; and
3. The Company may not assert Staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States.
We hope the information contained in this letter provides the desired information in response to the Staff's comments. As noted above, we do not believe any amendment of the Form 10-K is required and respectfully request that any changes in disclosure be prospective only. If you have further questions or comments regarding the above, please contact me at 423-825-3336.
Respectfully,
/s/
Joey B. Hogan
Show Raw Text
CORRESP
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filename1.htm
SEC Response Letter - August 2005
August
16, 2005
VIA
EDGAR
David
R.
Humphrey, Branch Chief
Securities
and Exchange Commission
450
Fifth
Street, N.W.
Washington,
D.C. 20549
Re: Covenant
Transport, Inc. (the "Company")
Commission
File No. 0-24960
Form
10-K: For the year ended December 31, 2004 ("Form 10-K")
Dear
Mr.
Humphrey:
This
letter responds to the Staff's comments to the Company's Form 10-K, as set
forth
in the Staff's supplemental letter dated August 3, 2005. For your convenience,
the headings and paragraph numbers in this letter correspond to the headings
and
paragraph numbers in the Staff's supplemental letter.
Form
10-K: For the year ended December 31, 2004
Nature
of Business, page 44
1. Question:
We
understand, from your response to comment 4 of our letter, that the
transportation services do not constitute reportable operating segments under
SFAS 131. However, your two operating subsidiaries do appear to constitute
reportable operating segments and you state that you are able to analyze
operating results on a subsidiary basis. If our understanding is correct, please
provide additional support for your conclusion that the two operating segments
should be aggregated. You state that two or more operating segments may be
aggregated if the segments have similar operating characteristics and are
similar in each of five areas. However, paragraph 17 also requires that
“aggregation be consistent with the objectives and basic principles of the
statement.” That is, you may aggregate if presenting the information separately
will not provide much useful information to investors. If the information is
prepared and made available to management for the purpose of analyzing operating
results and key performance indicators, it would appear that a separate
presentation would provide useful information to a user of financial statements
as well. Please revise or advise. In addition, your response should provide
numerical support for your determination that the segments have “similar
economic characteristics.” We may have additional comments upon review of your
response.
David
R.
Humphrey, Branch Chief
August
16, 2005
Page
2
Answer:
Within
the Company, we have two operating subsidiaries - Covenant Transport ("Covenant
Transport"), which generated 88% of our revenue in 2004, and Southern
Refrigerated Transport ("SRT"), which generated 12% of our revenue in 2004.
The
Company acquired all of the outstanding stock of SRT in October 1998. SRT was
originally maintained as a separate subsidiary because of an ongoing IRS audit
involving the former owner of SRT. There is no operationally necessary reason
for maintaining a separate subsidiary. It is administratively easier and less
expensive to leave the subsidiary in place rather than amend contracts, replace
licenses, and take other actions that would be required if the SRT subsidiary
were to be dissolved or merged.
We
do not
believe that reporting SRT and Covenant Transport as two separate segments
would
be meaningful to investors for the following reasons:
·
Comparing
the separate financial statements of Covenant Transport and SRT would
be
misleading to investors because the costs of administrative functions
performed by Covenant Transport for the corporate group are not allocated
to SRT, thus distorting SRT's stand-alone
profitability.
·
Each
of Covenant Transport and SRT operates temperature-controlled trailers,
which means the subsidiaries do not have distinctly divided
operations.
·
Each
of Covenant Transport and SRT generates revenue and incurs expenses
in
substantially the same manner and has similar cash flow and capital
expenditure characteristics, reducing the usefulness of separate
disclosures.
·
While
the separate information is available, upon request, our board of
directors does not in fact review the separate information as part
of its
board materials, nor has the board made any capital allocation decisions
based on the separate financial statements (at least in part because
the
SRT financial statements do not contain all administrative expenses
and
are thus not reliable).
Additional
information follows.
1.
Administrative
expenses are not allocated.
Covenant Transport provides a substantial portion of the administration
functions for SRT, and the costs of such functions are not allocated
to
SRT. These costs include risk management, safety, finance, tax planning,
executive management, and equipment purchases and dispositions. Such
costs
for the entire corporate group are recorded in Covenant Transport's
financial statements and not in SRT's financial statements. Accordingly,
any comparison would be misleading in that Covenant Transport's expenses
would be overstated and SRT's expenses would be understated.
David
R.
Humphrey, Branch Chief
August
16, 2005
Page
3
2.
SRT
provides services that are substantially identical to services provided
within Covenant Transport's temperature-controlled
division.
Covenant Transport's temperature-controlled division has approximately
200
tractors and SRT has approximately 400 tractors providing similar
services, sharing some of the same customers, and occasionally sharing
equipment. As noted in our July 20th
letter, we are unable to provide discrete financial information for
the
various services that we provide within Covenant Transport. Accordingly,
to the extent investors were interested in evaluating the differences
between temperature-controlled and dry operations, the financial
statement
would not be useful because: (a) not all temperature-controlled operations
are in SRT, and (b) the lack of expense allocation discussed above
would
distort the comparison regardless.
3.
Covenant
Transport and SRT both generate revenue primarily through transporting
truckload freight.
Revenue is generated as a function of miles per tractor, average
revenue
per mile, percentage of non-revenue miles, and tractors without drivers.
For both of Covenant Transport and SRT these factors come together
in the
measure "average freight revenue per tractor per week," the main
measure
of asset productivity for each.
For
both
subsidiaries, most major expenses are variable with miles traveled. Fuel, driver
pay, maintenance, insurance and claims, and purchased transportation are all
variable expenses. Major fixed expenses include depreciation and amortization,
financing costs, and non-driver personnel and administrative costs, including
the headquarters cost.
We
do not
believe separate disclosure would be useful because a component of the
difference in financial results would be in the categories of non-driver
personnel and administrative expenses, and these are not allocated. The table
below contains additional information concerning our revenue and
expenses.
Revenue
Analysis for Year Ended 2004
Covenant
Transport
SRT
Revenues
$489.6
million
$67.6
million
Average
revenue per load
$1,304
$1,560
Average
revenue per loaded mile
$1.403
$1.381
Average
revenue per total mile
$1.276
$1.259
Average
revenue per truck per week
$2,979
$3,112
Expense
Analysis for Year Ended 2004
(as
a percentage of total revenue)
Covenant
Transport
SRT
Driver
pay
22.0%
24.7%
Fuel
20.7%
25.0%
Depreciation
7.4%
7.1%
Total
operating expenses
97.8%
91.3%
David
R.
Humphrey, Branch Chief
August
16, 2005
Page
4
4.
Our
Board of Directors does not use the separate financial statements
for
decision-making.
We do not distribute separate financial statement of SRT to our board
of
directors nor have they used such information in making strategic
or
capital allocation decisions.
Based
on
the foregoing, we do not believe that separate presentations of SRT and Covenant
Transport would help users of our financial statements to better understand
our
business, better assess our prospects for future net cash flows, or make more
informed judgments about the Company as a whole. We believe the presentation
of
our operations as one segment, the transportation of goods, is appropriate
and
consistent with the objectives and basic principles of SFAS 131.
2. As
a
related matter, if operating segments have been aggregated, the filing should
disclose this fact in accordance with paragraph 26a of SFAS
131.
Answer:
We
agree
with your comment and will make the suggested change in future
filings.
OTHER
COMMENTS
Pursuant
to the Staff's request, the Company hereby acknowledges that:
1. The
Company is responsible for the adequacy and accuracy of the disclosure in the
filings reviewed by the Staff;
2. Staff
comments or changes to disclosure in response to Staff comments in a filing
reviewed by the Staff do not foreclose the Commission from taking any action
with respect to the filing; and
3. The
Company may not assert Staff comments as a defense in any proceeding initiated
by the Commission or any person under the federal securities laws of the United
States.
We
hope
the information contained in this letter provides the desired information in
response to the Staff's comments. As noted above, we do not believe any
amendment of the Form 10-K is required and respectfully request that any changes
in disclosure be prospective only. If you have further questions or comments
regarding the above, please contact me at 423-825-3336.
Respectfully,
/s/
Joey B. Hogan
Joey
B. Hogan
Chief
Financial Officer
c: Joe
Reid
(KPMG LLP)
Mark
A.
Scudder (Scudder Law Firm P.C., L.L.O.)