COVENANT
TRANSPORT ACQUIRES REGIONAL TRUCKLOAD CARRIER STAR TRANSPORTATION; PROVIDES
UPDATE ON THIRD QUARTER OPERATIONS
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Nashville-based
Star generated $89.6 million in revenue and operating ratio of 90.9%
for twelve months ended June 30, 2006.
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Management
sees jump start for improvement of regional
operations.
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CHATTANOOGA,
TENNESSEE
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September 14,
2006 - Covenant Transport, Inc. (Nasdaq/NMS:CVTI) announced today its
acquisition of 100% of the outstanding stock of Star Transportation, Inc.,
of
Nashville, Tennessee. Covenant also commented on its expectations for third
and
fourth quarter operating results.
About
the Transaction and Star Transportation
Effective
today, Covenant purchased 100% of Star's outstanding stock from the prior
owners
in exchange for approximately $40 million in cash. Covenant funded the
purchase price for the stock from available borrowings under its revolving
line
of credit. In addition, Star had an estimated $42 million in existing debt
that became part of Covenant's
consolidated obligations as a result of the transaction. Star's lenders are
members of Covenant's bank group and will remain in place following the
transaction. Beth Franklin, Star's Chief Executive Officer, has agreed to
consult with Covenant on transition issues for one year, and all stockholders
have agreed not to compete with Covenant or Star. Jim Brower, a 20-year veteran
of Star and its current president, along with his staff, will remain in place
to
run Star.
Star
Transportation is a short-to-medium haul dry van regional truckload carrier
based in Nashville, Tennessee. Star operates primarily in the southeastern
United States, with shipments concentrated from Texas across the Southeast
to
Virginia, and an average length of haul of approximately 470 miles. Star
has an excellent safety record and its annualized driver turnover recently
has
been about 90%. Star operates a well-maintained fleet of tractors and trailers
with an average fleet age of 25 months for tractors and 48 months for
trailers.
Star
provides a high level of service to a diversified shipping base. Only one
customer accounted for more than 10% of revenue in 2005. The major industries
served include consumer products, manufacturing, and automotive. Approximately
10% of Star's revenue is generated from dedicated operations. In general,
Star's
operations are characterized by good equipment utilization, low non-revenue
miles, and a moderate rate structure.
Star
was
founded in 1980 and has had a long history of profitable operations and is
ISO 9000 certified. Star generated $89.6 million in revenue and
$7.1 million in net income for the twelve months ended June 30, 2006,
and its total stockholders' equity at that date was $27.5 million. Prior to
the acquisition, Star was an S corporation; accordingly, its financial
statements did not reflect any provision for federal income taxes.
After
giving effect to the conversion of Star to a C corporation as a result of
the transaction and recording Star's assets at fair market value, Covenant
expects to record goodwill and other intangible assets of approximately
$23 million in connection with the transaction. Giving effect to the
transaction as of June 30, 2006, Covenant expects its consolidated balance
sheet
to reflect approximately $188.7 million in total stockholders' equity and
$153.8 million of total borrowings, for a debt-to-capitalization ratio of
45%. As discussed below, Covenant's consolidated debt is expected to decrease
significantly, with a corresponding increase in borrowing capacity, as a
result
of downsizing Covenant's own regional operation in the months following the
transaction.
David R.
Parker, Covenant's Chairman, President, and Chief Executive Officer, offered
the
following comments on the acquisition: "For the past year our management
team
has been internally focused as we have implemented a business realignment
and
attempted to improve the operating results of each of our service offerings.
Covenant is strongly committed to a significant regional presence because
of the
large freight volumes that move in regional lanes. Although the regional
service
offering is only nine months old, and we have always considered it the most
difficult to fix, by this summer we began to expand our thinking in terms
of
strategies for offering our customers the solid regional service they desire
while producing acceptable profitability. When we became aware that Star
was
potentially available, we acted decisively and had the major terms agreed
to
within a couple of weeks.
"We
are
very pleased to welcome the entire Star team to the Covenant family. We sought
out Star because of their proven record of growth and profitability in regional
markets, their talented management team led by Jim Brower, the quality and
integrity of the founding family, and their reputation for safe, on-time
customer service. Our comfort with the fit only increased because our former
Treasurer, David Hughes, had become Star's Chief Financial Officer during
July.
"We
believe the addition of Star to our corporate group will offer us a prime
opportunity to jump-start the turnaround of our regional service offering.
Our
entire management team has been diligently planning for the addition of Star
and
the changes we expect to implement at Covenant. As these changes are implemented
over the next several months, we expect to see a combined regional operation
larger in size than Covenant operated alone during the second quarter of
2006,
but with approximately 450 unprofitable trucks removed from Covenant's
fleet and the addition of Star's approximately 600 quite profitable trucks.
Based on Star's historical operating ratio of about 90%, we expect a significant
improvement in our regional operations in 2007.
"In
closing, I would like to reiterate my confidence in this strategy and my
welcome
to everyone at Star. I'd also like to thank Beth Franklin and her family
for
affording us this opportunity to continue the great company they started.
We are
looking forward to Ms. Franklin's advice and counsel as she provides
transition services and passes on her knowledge of Star and its market over
the
next year."
Beth
Franklin, Chief Executive Officer of Star Transportation, commented as follows:
"We couldn't be more pleased to be joining Covenant Transport. From the culture,
to the geographic proximity, to Covenant's reputation for customer service
and
integrity, everyone at Star believed Covenant offered the best fit of any
alternative. My family has every confidence that Jim Brower and his team
at Star
will continue to produce great results, and that under the Covenant umbrella,
Star will achieve even greater success. I am personally looking forward to
making sure the first year transition goes as smoothly as
possible."
Star
Transportation’s financial advisors were Morgan Keegan and Company, Inc. and
Miller Welborn, of Transport Capital Partners,
and its
legal advisor was Waller Lansden Dortch & Davis, LLP.
Post-Closing
Operations of Star
Star
Transportation is expected to operate as a separate subsidiary. Star's
president, Jim Brower, is expected to remain in place, along with the rest
of
Star's day-to-day management team. Operationally, Star is expected to continue
with substantially the same personnel, customers, lanes, and terminals as
it had
prior to the transaction. Much like it did following its 1998 acquisition
of
Southern Refrigerated Transport, Covenant expects to provide support in areas
such as volume purchasing, finance and accounting, and cross-marketing. A
general integration of operations is not expected. In addition, Star's
management anticipates sharing best practices in regional operations with
Covenant, which may assist Covenant in the turnaround of its own regional
service offering.
Post-Acquisition
Plan for Covenant Regional Service Offering
During
the third quarter of 2006, Covenant's regional service offering is expected
to
operate approximately 900 average tractors. Of those tractors, between 350
and 400 generally have been producing average freight revenue per tractor
at a
level consistent with Covenant's interim goals. The remainder has significantly
hindered operating results and management’s time. Covenant plans to reduce its
regional service offering by approximately 450 tractors and 1,000 trailers
by the second quarter of 2007. Downsizing the Covenant regional fleet is
expected to allow Covenant's operations and sales personnel to focus on
optimizing the portion of the fleet that is operating near the interim goals.
The fleet reduction will occur over time as tractors finish their service
life
and are not replaced. The fleet reduction is expected to eliminate approximately
$35 million in equipment financing. This compares with approximately
$42 million in existing Star debt that became a consolidated obligation of
Covenant after this acquisition.
Strategic
Rationale for the Star Acquisition
Covenant
is strongly committed to operating a meaningful regional service offering
as
part of its overall customer service package. With over 80% of all freight
moving in regional lanes, the preference of many drivers to concentrate in
certain regions, and the desire of many customers to deal with carriers who
can
offer capacity in many diverse lanes, regional service is considered an
important component of Covenant's business. Star is one of the largest providers
of regional truckload service in the Southeast, and with the geographic
proximity, the opportunity was too attractive to pass up. In addition to
its
standalone appeal, Star also afforded the opportunity to accelerate the process
of improving Covenant's regional service offering. In summary, the acquisition
allowed Covenant the opportunity to:
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acquire
capacity in a key truckload service offering where Covenant's current
regional service was operating below expectations;
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facilitate
a more rapid downsizing and eventual turnaround in Covenant's regional
service offering; and
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replace
over time approximately $75 million in annual revenue that has been
unprofitable with approximately $90 million of revenue that has
operated quite profitably.
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Financial
and Operating Outlook for the Remainder of 2006
The
Company no longer expects net income for 2006 to exceed net income for 2005
and
retracts all prior statements and guidance concerning goals and expectations
for
2006. For the remainder of 2006, Covenant's financial results are expected
to
show modest sequential improvement. For the third quarter, the Company expects
earnings per share to be breakeven or slightly less. For the fourth quarter,
the
Company expects sequential earnings improvement over the third quarter of
2006.
The
ongoing business realignment has been slower in producing results than expected.
A slowdown in shipping demand and higher fuel prices in July and August have
contributed to slower than expected improvements in profitability. These
issues
are especially pronounced in the regional service offering, which faced the
largest challenge, and in the Covenant temperature-controlled service offering
(not SRT), which accepted a larger-than-planned number of trucks that were
removed from the regional fleet and struggled to find sufficient volume of
quality freight for the additional units. On a consolidated basis, average
freight revenue per tractor per week is expected to be similar to the second
quarter, with freight rates and miles per truck coming in lower than budgeted.
On the positive side, driver turnover continues to improve and the Company's
safety record continues to show commendable performance.
Although
the Star acquisition is expected to be immediately accretive to Covenant’s
earnings, the Company is not prepared to address the level of near-term
contribution or provide guidance on consolidated results until more information
becomes available concerning the pace of equipment removals from the Covenant
regional operation, the operating results of the remaining equipment in the
Covenant regional operation, and the allocation of intangibles and determination
of the magnitude of non-cash amortization associated with the acquisition.
In
addition, results of each service offering and on a consolidated basis may
be
affected by shipping volumes and other general economic factors, fuel prices,
driver availability, and the other risks identified in the Company’s filings
with the Securities and Exchange Commission.
The
Company will be hosting a conference call on Friday, September 15 at
11:00 a.m. Eastern Time to discuss the Star acquisition and provide an
update on expected operating results for the third and fourth quarters of
2006.
Individuals may access the call by dialing 800-603-1780 (U.S./Canada) and
706-643-0889 (International), access code 6575147. An audio replay will be
available for one week following the call at 800-642-1687, access code
6575147.
Covenant
Transport, Inc. is a publicly traded truckload carrier that offers just-in-time
service and other premium transportation services for customers throughout
the
United States. Covenant operates one of the ten largest fleets in North America,
measured by revenue. The Company's Class A common stock is traded on the
Nasdaq
National Market under the symbol, "CVTI."
This
press release 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. Such statements may be
identified by their use of terms or phrases such as "expects," "estimates,"
"projects," "believes," "anticipates," "plans," "intends," and similar terms
and
phrases. Forward-looking statements are
based upon the current beliefs and expectations of our management and
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. Actual
results may differ from those set forth in the forward-looking statements.
In
this press release, forward-looking statements include, without limitation,
statements relating to the acquisition's impact on our financial statements,
operating statistics, debt levels, and regional service offering; the expected
size and operating results of our regional service offering post-acquisition
and
post-downsizing; the continued production and improvement of results at the
acquired operation; the corporate, management, and operational structure
of the
acquired operation post-closing; expected financial results for the remainder
of
2006; and expected accretion to earnings from the acquisition. The expected
financial results following the acquisition and for the remainder of 2006
have
not been subjected to all of the review procedures associated with the release
of actual financial results and are premised on assumptions regarding our
consolidated performance, including at the acquired operation. With respect
to
the acquisition and the associated downsizing of our regional operation,
the
risks and uncertainties include, but are not limited to, the risk that
integration of the acquired operation will not proceed as planned; the risk
of
adverse information or developments regarding the acquired operation and
our
integration that could impact financial and operating results; the risk that
we
will lose key components of the acquired operation, including customers,
drivers, other employees, and owner-operators, none of whom are bound to
remain
with the acquired operation; the risk that we will be unable to continue
and
improve upon the profitability of the acquired operation; the risk that expected
synergies from the acquisition, including, without limitation, the impact
on our
regional service offering, will not come to fruition; and the risk that
integrating and managing the acquired operation will distract management
from
other operations, including our business realignment. With respect to general
business operations and our business realignment, the following factors,
among
others, could cause actual results to differ materially from those in
forward-looking statements: our ability to dispose of equipment in our
downsizing and do so at acceptable prices and without hindering our operations,
customer service, and driver turn-over; our ability to manage our debt levels
and maintain adequate liquidity following the acquisition and through the
downsizing process; our success in the realignment of the company’s operations
around the identified service offerings; excess tractor or trailer capacity
in
the trucking industry; decreased demand for our services or loss of one or
more
of our major customers; tractor and trailer build and delivery schedules;
surplus inventories; recessionary economic cycles and downturns in customers'
business cycles; decreased freight volumes; strikes, work slow downs, or
work
stoppages at the Company, customers, ports, or other shipping related
facilities; increases or rapid fluctuations in fuel prices, as well as
fluctuations in hedging activities and surcharge collection; the volume and
terms of diesel purchase commitments; interest rates, fuel taxes, tolls,
and
license and registration fees; increases in the prices paid for new revenue
equipment and changes in the resale value of our used equipment; increases
in
compensation for and difficulty in attracting and retaining qualified drivers
and independent contractors; elevated experience in the frequency and severity
of claims relating to accident, cargo, workers' compensation, health, and
other
claims; increased insurance premiums; fluctuations in claims expenses that
result from high self-insured retention amounts and differences between
estimates used in establishing and adjusting claims reserves and actual results
over time; adverse changes in claims experience and loss development factors;
additional changes in management's estimates of liability based upon such
experience and development factors; seasonal factors such as harsh weather
conditions that increase operating costs; competition from trucking, rail,
and
intermodal competitors; regulatory requirements that increase costs or decrease
efficiency, including revised hours-of-service requirements for drivers;
the
ability to successfully execute the Company's initiative of improving the
profitability of single-driver freight movements; and the ability to control
increases in operating costs. Readers should review and consider these factors
along with the various disclosures by the Company in its press releases,
stockholder reports, and filings with the Securities 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.
For
further information contact:
Joey
B.
Hogan, Executive VP and Chief Financial
Officer (423)
825-3336
hogjoe@covenanttransport.com
For
copies of Company information contact:
Kim
Perry, Administrative Assistant (423)
825-3357
perkim@covenanttransport.com