Form 10-Q
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
|
For
the quarterly period ended December 31, 2006
or
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
|
Commission
file number: 000-23192
CELADON
GROUP, INC.
(Exact
name of Registrant as specified in its charter)
Delaware
|
13-3361050
|
(State
or other jurisdiction of
|
(IRS
Employer
|
incorporation
or organization)
|
Identification
Number)
|
|
|
9503
East 33rd
Street
|
|
One
Celadon Drive
|
|
Indianapolis,
IN
|
46235-4207
|
(Address
of principal executive offices)
|
(Zip
Code)
|
|
|
(317)
972-7000
(Registrant’s
telephone number, including area
code)
|
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer o
|
Accelerated
filer x
|
Non-accelerated
filer o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12-b2 of the Exchange Act).
As
of
January 24, 2007 (the latest practicable date), 23,441,148 shares of the
registrant’s common stock, par value $0.033 per share, were
outstanding.
CELADON
GROUP, INC.
Index
to
December
31, 2006 Form 10-Q
Part
I.
|
Financial
Information
|
|
|
|
|
|
|
Item
1.
|
Financial
Statements
|
|
|
|
|
|
|
|
Condensed
Consolidated Balance Sheets at December 31, 2006
(Unaudited)
and June 30, 2006
|
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Income for the three and six
months
ended December 31, 2006 and 2005 (Unaudited)
|
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows for the six
months
ended December 31, 2006 and 2005 (Unaudited)
|
|
|
|
|
|
|
|
Notes
to Condensed Consolidated Financial Statements (Unaudited)
|
|
|
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and
Results
of Operations
|
|
|
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
|
|
|
|
|
|
Item
4.
|
Controls
and Procedures
|
|
|
|
|
|
Part
II.
|
Other
Information
|
|
|
|
|
|
|
Item
1.
|
Legal
Proceedings.
|
|
|
|
|
|
|
Item
1A.
|
Risk
Factors.
|
|
|
|
|
|
|
Items
2. and 3.
|
Not
Applicable
|
|
|
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
|
|
|
|
|
|
Item
5.
|
|
Not
Applicable
|
|
|
|
|
|
Item
6.
|
Exhibits
|
|
CELADON
GROUP, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
December
31, 2006 and June 30, 2006
(Dollars
in thousands except per share amounts)
|
|
December
31,
2006
|
|
June
30,
2006
|
|
|
|
(unaudited)
|
|
|
|
A
S S E T S
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
112
|
|
$
|
1,674
|
|
Trade
receivables, net of allowance for doubtful accounts of
$1,237
and $1,269 at December 31, 2006 and June 30, 2006
|
|
|
52,357
|
|
|
55,462
|
|
Prepaid
expenses and other current assets
|
|
|
13,733
|
|
|
10,132
|
|
Tires
in service
|
|
|
2,881
|
|
|
2,737
|
|
Equipment
held for resale
|
|
|
12,991
|
|
|
---
|
|
Income
tax receivable
|
|
|
---
|
|
|
5,216
|
|
Deferred
income taxes
|
|
|
1,304
|
|
|
1,867
|
|
Total
current assets
|
|
|
83,378
|
|
|
77,088
|
|
Property
and equipment
|
|
|
153,734
|
|
|
121,733
|
|
Less
accumulated depreciation and amortization
|
|
|
34,469
|
|
|
30,466
|
|
Net
property and equipment
|
|
|
119,265
|
|
|
91,267
|
|
Tires
in service
|
|
|
1,540
|
|
|
1,569
|
|
Goodwill
|
|
|
19,137
|
|
|
19,137
|
|
Other
assets
|
|
|
1,008
|
|
|
1,005
|
|
Total
assets
|
|
$
|
224,328
|
|
$
|
190,066
|
|
|
|
|
|
|
|
|
|
L
I A B I L I T I E S A N D S T O C K H O L D E R
S' E Q U I T Y
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
5,666
|
|
$
|
4,369
|
|
Accrued
salaries and benefits
|
|
|
8,184
|
|
|
16,808
|
|
Accrued
insurance and claims
|
|
|
7,424
|
|
|
7,048
|
|
Accrued
fuel expense
|
|
|
1,612
|
|
|
6,481
|
|
Other
accrued expenses
|
|
|
11,007
|
|
|
12,018
|
|
Current
maturities of long-term debt
|
|
|
4,312
|
|
|
975
|
|
Current
maturities of capital lease obligations
|
|
|
447
|
|
|
507
|
|
Income
taxes payable
|
|
|
89
|
|
|
---
|
|
Total
current liabilities
|
|
|
38,741
|
|
|
48,206
|
|
Long-term
debt, net of current maturities
|
|
|
35,785
|
|
|
9,608
|
|
Capital
lease obligations, net of current maturities
|
|
|
839
|
|
|
933
|
|
Deferred
income taxes
|
|
|
12,541
|
|
|
9,867
|
|
Minority
interest
|
|
|
25
|
|
|
25
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
Preferred
stock, $1.00 par value, authorized 179,985 shares; no
shares
issued and outstanding
|
|
|
---
|
|
|
---
|
|
Common
stock, $0.033 par value, authorized 40,000,000 shares;
Issued
23,418,648 and 23,111,367 shares at December 31, 2006
and
June 30, 2006
|
|
|
773
|
|
|
763
|
|
Additional
paid-in capital
|
|
|
92,398
|
|
|
90,828
|
|
Retained
earnings
|
|
|
45,270
|
|
|
32,092
|
|
Accumulated
other comprehensive loss
|
|
|
(2,044
|
)
|
|
(2,256
|
)
|
Total
stockholders' equity
|
|
|
136,397
|
|
|
121,427
|
|
Total
liabilities and stockholders' equity
|
|
$
|
224,328
|
|
$
|
190,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these unaudited consolidated
financial statements.
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(Dollars
in thousands except per share amounts)
(Unaudited)
|
|
For
the three months ended
December
31,
|
|
For
the six months ended
December
31,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Freight
revenue
|
|
$
|
107,454
|
|
$
|
102,888
|
|
$
|
215,118
|
|
|
206,228
|
|
Fuel
surcharges
|
|
|
15,416
|
|
|
17,386
|
|
|
35,480
|
|
|
31,981
|
|
|
|
|
122,870
|
|
|
120,274
|
|
|
250,598
|
|
|
238,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries,
wages, and employee benefits
|
|
|
36,440
|
|
|
35,468
|
|
|
71,729
|
|
|
70,331
|
|
Fuel
|
|
|
26,700
|
|
|
27,928
|
|
|
57,374
|
|
|
54,148
|
|
Operations
and maintenance
|
|
|
7,618
|
|
|
7,442
|
|
|
15,252
|
|
|
14,724
|
|
Insurance
and claims
|
|
|
3,299
|
|
|
3,961
|
|
|
7,530
|
|
|
7,347
|
|
Depreciation
and amortization
|
|
|
4,018
|
|
|
2,921
|
|
|
7,484
|
|
|
6,084
|
|
Revenue
equipment rentals
|
|
|
8,687
|
|
|
10,255
|
|
|
18,020
|
|
|
20,626
|
|
Purchased
transportation
|
|
|
17,811
|
|
|
17,840
|
|
|
36,151
|
|
|
35,663
|
|
Costs
of products and services sold
|
|
|
1,995
|
|
|
1,347
|
|
|
3,862
|
|
|
2,641
|
|
Professional
and consulting fees
|
|
|
465
|
|
|
702
|
|
|
987
|
|
|
1,553
|
|
Communications
and utilities
|
|
|
1,207
|
|
|
1,024
|
|
|
2,301
|
|
|
2,043
|
|
Operating
taxes and licenses
|
|
|
2,160
|
|
|
2,153
|
|
|
4,249
|
|
|
4,213
|
|
General
and other operating
|
|
|
1,493
|
|
|
1,458
|
|
|
3,041
|
|
|
2,965
|
|
Total
operating expenses
|
|
|
111,893
|
|
|
112,499
|
|
|
227,980
|
|
|
222,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
10,977
|
|
|
7,775
|
|
|
22,618
|
|
|
15,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
(income) expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
(7
|
)
|
|
(77
|
)
|
|
(15
|
)
|
|
(78
|
)
|
Interest
expense
|
|
|
761
|
|
|
197
|
|
|
1,062
|
|
|
499
|
|
Other
(income) expense, net
|
|
|
19
|
|
|
1
|
|
|
4
|
|
|
26
|
|
Income
before income taxes
|
|
|
10,204
|
|
|
7,654
|
|
|
21,567
|
|
|
15,424
|
|
Provision
for income taxes
|
|
|
4,139
|
|
|
2,855
|
|
|
8,389
|
|
|
5,941
|
|
Net
income
|
|
$
|
6,065
|
|
$
|
4,799
|
|
$
|
13,178
|
|
$
|
9,483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$
|
0.26
|
|
$
|
0.21
|
|
$
|
0.56
|
|
$
|
0.41
|
|
Basic
earnings per share
|
|
$
|
0.26
|
|
$
|
0.21
|
|
$
|
0.56
|
|
$
|
0.42
|
|
Average
shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
23,690
|
|
|
23,297
|
|
|
23,616
|
|
|
23,252
|
|
Basic
|
|
|
23,419
|
|
|
22,691
|
|
|
23,345
|
|
|
22,661
|
|
The
accompanying notes are an integral part of these unaudited consolidated
financial statements.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
For
the six months ended December 31, 2006 and 2005
(Dollars
in thousands)
(Unaudited)
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income
|
|
$
|
13,178
|
|
$
|
9,483
|
|
Adjustments
to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
8,559
|
|
|
6,353
|
|
Gain
on sale of equipment
|
|
|
(1,075
|
)
|
|
(269
|
)
|
Stock
based compensation
|
|
|
(1,085
|
)
|
|
1,825
|
|
Deferred
income taxes
|
|
|
3,236
|
|
|
(1,462
|
)
|
Provision
for doubtful accounts
|
|
|
181
|
|
|
459
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
Trade
receivables
|
|
|
2,925
|
|
|
2,240
|
|
Income
tax recoverable
|
|
|
5,216
|
|
|
(533
|
)
|
Tires
in service
|
|
|
(115
|
)
|
|
280
|
|
Prepaid
expenses and other current assets
|
|
|
(3,602
|
)
|
|
(3,066
|
)
|
Other
assets
|
|
|
189
|
|
|
(220
|
)
|
Accounts
payable and accrued expenses
|
|
|
(10,949
|
)
|
|
(7,899
|
)
|
Income
tax payable
|
|
|
89
|
|
|
(265
|
)
|
Net
cash provided by operating activities
|
|
|
16,747
|
|
|
6,926
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(38,451
|
)
|
|
(24,932
|
)
|
Proceeds
on sale of property and equipment
|
|
|
20,242
|
|
|
16,519
|
|
Purchase
of business, net of cash
|
|
|
(21,200
|
)
|
|
|
|
Net
cash used in investing activities
|
|
|
(39,409
|
)
|
|
(8,413
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from issuances of common stock
|
|
|
782
|
|
|
286
|
|
Proceeds
from bank borrowings and debt
|
|
|
21,370
|
|
|
---
|
|
Payments
on long-term debt
|
|
|
(899
|
)
|
|
(730
|
)
|
Principal
payments under capital lease obligations
|
|
|
(153
|
)
|
|
(706
|
)
|
Net
cash provided by (used in) financing activities
|
|
|
21,100
|
|
|
(1,150
|
)
|
|
|
|
|
|
|
|
|
Decrease
in cash and cash equivalents
|
|
|
(1,562
|
)
|
|
(2,637
|
)
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
1,674
|
|
|
11,115
|
|
Cash
and cash equivalents at end of period
|
|
$
|
112
|
|
$
|
8,478
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
1,038
|
|
$
|
489
|
|
Income
taxes paid
|
|
$
|
429
|
|
$
|
8,539
|
|
Supplemental
disclosure of non-cash flow investing activities:
|
|
|
|
|
|
|
|
Lease
obligation/debt incurred in the purchase of equipment
|
|
$
|
9,043
|
|
$
|
1,636
|
|
The
accompanying notes are an integral part of these unaudited consolidated
financial statements.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2006
(Unaudited)
1. Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements include
the
accounts of Celadon Group, Inc. and its majority owned subsidiaries (the
“Company”). All material intercompany balances and transactions have been
eliminated in consolidation.
The
unaudited condensed consolidated financial statements have been prepared in
accordance with generally accepted accounting principles (“GAAP”) in the United
States of America pursuant to the rules and regulations of the Securities and
Exchange Commission for interim financial statements. Certain information and
footnote disclosures have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management, the accompanying unaudited financial
statements reflect all adjustments (all of a normal recurring nature), which
are
necessary for a fair presentation of the financial condition and results of
operations for these periods. The results of operations for the interim period
are not necessarily indicative of the results for a full year. These condensed
consolidated financial statements and notes thereto should be read in
conjunction with the Company’s condensed consolidated financial statements and
notes thereto, included in the Company’s Annual Report on Form 10-K for the
fiscal year ended June 30, 2006.
The
preparation of the financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the amounts reported
in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
2. New
Accounting Pronouncements
In
September 2006, the Securities and Exchange Commission (“SEC”) issued Staff
Accounting Bulletin 108 Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements (“SAB
108”). SAB 108 provides interpretive guidance on how the effects of the
carryover or reversal of prior year misstatements should be considered in
quantifying a current year misstatement. The SEC staff believes that registrants
should quantify errors using both a balance sheet and an income statement
approach and evaluate whether either approach results in quantifying a
misstatement that, when all relevant quantitative and qualitative factors are
considered, is material. The guidance in SAB 108 must be applied to annual
financial statements for fiscal years ending after November 15, 2006. The
Company is currently assessing the impact of adopting SAB 108 but does not
expect that it will have a material effect on our consolidated financial
position or results of operations.
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards No. 157, Fair
Value Measurements (“SFAS
157”). SFAS 157 defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles (“GAAP”) and expands
disclosures about fair value measurements. This statement was published due
to
the different definitions of fair value and the limited guidance for applying
those definitions in GAAP that are among the many accounting pronouncements
that
require fair value measurements. SFAS 157 defines fair value as the price that
would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. This statement
is effective for financial statements issued for fiscal years beginning after
November 15, 2007. Additionally, prospective application of this statement
is
required as of the beginning of the fiscal year in which it is initially
applied. SFAS 157 is not expected to have a material impact upon our financial
position, results of operations and cash flows.
In
June
2006, FASB issued Interpretation No. 48, Accounting
for Uncertainty in Income Taxes, an interpretation of FASB Statement No.
109
(“FIN
48”). FIN 48 prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken
or
expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. Our effective date of this interpretation
is July 1, 2007, the first fiscal year beginning after December 15, 2006. We
are
continuing to evaluate the impact of the adoption of FIN 48 on our consolidated
financial statements.
CELADON
GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2006
(Unaudited)
In
September 2006, FASB issued SFAS No. 158, Employers' Accounting for Defined
Benefit Pension and Other Postretirement Plans-an amendment of FASB Statements
No. 87, 88, 106, and 132(R). This statement requires an employer to
recognize the overfunded or underfunded status of a defined benefit
postretirement plan (other than a multiemployer plan) as an asset or liability
in its statement of financial position and to recognize changes in that funded
status in the year in which the changes occur through comprehensive income
of a
business entity. This statement also requires an employer to measure the funded
status of a plan as of the date of its year-end statement of financial position,
with limited exceptions. The provisions of SFAS No. 158 are effective as of
the
end of the fiscal year ending after December 15, 2006. As of December 31, 2006,
management believes that SFAS No. 158 will have no effect on the financial
position, results of operations, and cash flows of the Company.
3. Stock
Splits
In
fiscal
2006, the Board of Directors approved two three-for-two stock splits, effected
in the form of a fifty percent (50%) stock dividend. The stock split
distribution dates were February 15, 2006 and
June 15,
2006 to stockholders of record as of the close of business on February 1, 2006
and June 1, 2006. Unless
otherwise indicated, all share and per share amounts have been adjusted to
give
retroactive effect to these stock splits.
4. Earnings
Per
Share
The
difference in basic and diluted weighted average shares is due to the assumed
exercise of outstanding stock options. A reconciliation of the basic and diluted
earnings per share calculation was as follows (amounts in thousands, except
per
share amounts):
|
|
For
three months ended
December
31,
|
|
For
six months ended
December
31,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
6,065
|
|
$
|
4,799
|
|
$
|
13,178
|
|
$
|
9,483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding
|
|
|
23,419
|
|
|
22,691
|
|
|
23,345
|
|
|
22,661
|
|
Equivalent
shares issuable upon exercise of stock options
|
|
|
271
|
|
|
606
|
|
|
271
|
|
|
591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
shares
|
|
|
23,690
|
|
|
23,297
|
|
|
23,616
|
|
|
23,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.26
|
|
$
|
0.21
|
|
$
|
0.56
|
|
$
|
0.42
|
|
Diluted
|
|
$
|
0.26
|
|
$
|
0.21
|
|
$
|
0.56
|
|
$
|
0.41
|
|
Diluted income per share for the three months and six months ended December
31,
2006 does not include the anti-dilutive effect of 693 thousand stock options
and
other incremental shares.
CELADON
GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2006
(Unaudited)
5. Segment
Information and Significant Customers
The
Company operates in two segments, transportation and e-commerce. The Company
generates revenue in the transportation segment, primarily by providing
truckload-hauling services through its subsidiaries Celadon Trucking Services,
Inc. (“CTSI”), Celadon Logistics Services, Inc. (“CLSI”), Celadon Canada, Inc.
(“CelCan”), and Servicios de Transportacion Jaguar, S.A de C.V. (“Jaguar”). The
Company provides certain services over the Internet through its e-commerce
subsidiary, TruckersB2B, Inc. (“TruckersB2B”) The e-commerce segment generates
revenue by providing discounted fuel, tires, and other products and services
to
small and medium-sized trucking companies. The Company evaluates the performance
of its operating segments based on operating income (amounts below in
thousands).
|
|
Transportation
|
|
E-commerce
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
Three
months ended December 31, 2006
|
|
|
|
|
|
|
|
Operating
revenue
|
|
$
|
120,075
|
|
$
|
2,795
|
|
$
|
122,870
|
|
Operating
income
|
|
|
10,534
|
|
|
443
|
|
|
10,977
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
Operating
revenue
|
|
$
|
118,192
|
|
$
|
2,082
|
|
$
|
120,274
|
|
Operating
income
|
|
|
7,416
|
|
|
359
|
|
|
7,775
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
months ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
Operating
revenue
|
|
$
|
245,127
|
|
$
|
5,471
|
|
$
|
250,598
|
|
Operating
income
|
|
|
21,762
|
|
|
856
|
|
|
22,618
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
months ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
Operating
revenue
|
|
$
|
234,152
|
|
$
|
4,057
|
|
$
|
238,209
|
|
Operating
income
|
|
|
15,157
|
|
|
714
|
|
|
15,871
|
|
Information
as to the Company’s operating revenue by geographic area is summarized below (in
thousands). The Company allocates operating revenue based on country of origin
of the tractor hauling the freight:
|
|
For
the three months ended
December
31,
|
|
For
the six months ended
December
31,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Operating
revenue:
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
101,372
|
|
$
|
97,576
|
|
$
|
206,201
|
|
$
|
194,214
|
|
Canada
|
|
|
14,270
|
|
|
14,980
|
|
|
30,234
|
|
|
29,735
|
|
Mexico
|
|
|
7,228
|
|
|
7,718
|
|
|
14,163
|
|
|
14,260
|
|
Total
|
|
$
|
122,870
|
|
$
|
120,274
|
|
$
|
250,598
|
|
$
|
238,209
|
|
No
customer accounted for more than 10% of the Company’s total revenue during any
of its two most recent fiscal years or interim periods presented
above.
CELADON
GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2006
(Unaudited)
6. Stock
Based
Compensation
On
July
1, 2005, the Company adopted Statement of Financial Accounting Standards
(“SFAS”) 123(R) which requires all share-based payments to employees, including
grants of employee stock options, be recognized in the financial statements
based upon a grant-date fair value of an award. In January 2006, shareholders
approved the 2006 Omnibus Plan (“2006 Plan”), that provides various vehicles to
compensate the Company's key employees. The 2006 Plan utilizes such vehicles
as
stock options, restricted stock grants, and stock appreciation rights (“SARs”).
The 2006 Plan authorized the Company to grant 1,687,500 shares. In fiscal 2007,
the Company granted 20,000 stock options. The Company is authorized to grant
an
additional 869,031 shares.
The
following table summarizes the components of our stock based compensation
program expense:
|
|
For
three months ended
December
31,
|
|
For
six months ended
December
31,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options expense
|
|
$
|
247
|
|
$
|
---
|
|
$
|
486
|
|
$
|
---
|
|
Restricted
stock expense
|
|
|
154
|
|
|
(46
|
)
|
|
307
|
|
|
188
|
|
Stock
appreciation rights expense
|
|
|
153
|
|
|
1,050
|
|
|
(1,878
|
)
|
|
1,637
|
|
Total
stock related compensation expense
|
|
$
|
554
|
|
$
|
1,004
|
|
$
|
(1,085
|
)
|
$
|
1,825
|
|
The
Company has granted a number of stock options under various plans. Options
granted to employees have been granted with an exercise price equal to the
market price on the grant date and expire on the tenth anniversary of the grant
date. The majority of options granted to employees vest 25 percent per year,
commencing with the first anniversary of the grant date. Options granted to
non-employee directors have been granted with an exercise price equal to the
market price on the grant date, vest over three or four years, commencing with
the first anniversary of the grant date, and expire on the tenth anniversary
of
the grant date.
A
summary
of the activity of the Company's stock option plans as of December 31, 2006
and
changes during the period then ended is presented below:
Options
|
|
Shares
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Remaining Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at July 1, 2006
|
|
|
1,446,710
|
|
$
|
7.44
|
|
|
---
|
|
|
---
|
|
Granted
|
|
|
20,000
|
|
$
|
18.84
|
|
|
---
|
|
|
---
|
|
Exercised
|
|
|
(307,282
|
)
|
$
|
2.55
|
|
|
---
|
|
|
---
|
|
Forfeited
or expired
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
---
|
|
Outstanding
at December 31, 2006
|
|
|
1,159,428
|
|
$
|
8.94
|
|
|
7.23
|
|
$
|
9,059,524
|
|
Exercisable
at December 31, 2006
|
|
|
475,296
|
|
$
|
3.11
|
|
|
4.61
|
|
$
|
6,483,945
|
|
The
fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
|
Fiscal
2007
|
|
Fiscal
2006
|
Weighted
average grant date fair value
|
$9.97
|
|
$12.58
|
Dividend
yield
|
0
|
|
0
|
Expected
volatility
|
64.2%
|
|
50.1%
|
Risk-free
interest rate
|
4.92%
|
|
4.35%
|
Expected
lives
|
4
years
|
|
4
years
|
CELADON
GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2006
(Unaudited)
Restricted
Shares
|
Number
of Shares
|
|
Weighted
Average
Grant
Date Fair Value
|
Unvested
at July 1, 2006
|
274,230
|
|
$8.96
|
Granted
|
---
|
|
---
|
Vested
|
---
|
|
---
|
Forfeited
|
---
|
|
---
|
Unvested
at December 31, 2006
|
274,230
|
|
$8.96
|
Restricted
shares granted to employees have been granted with a share price equal to the
market price on the grant date and vesting at 25 percent per year, commencing
with the first anniversary of the grant date. In addition, there are certain
financial targets which must be met for these shares to vest.
As
of
December 31, 2006, the Company had $3.0 million and $1.5 million of total
unrecognized compensation expense related to stock options and restricted stock,
respectively, that is expected to be recognized over the remaining period of
approximately 3.1 years for stock options and 3.4 years for restricted stock.
Stock
Appreciation Rights
|
Number
of Shares
|
|
Weighted
Average
Grant
Date Fair Value
|
Unvested
at July 1, 2006
|
571,437
|
|
$7.73
|
Granted
|
---
|
|
---
|
Paid
|
(7,871)
|
|
$4.48
|
Forfeited
|
(309,176)
|
|
$7.10
|
Unvested
at December 31, 2006
|
254,390
|
|
$8.59
|
SARs
granted to employees vest on a 3 or 4 year vesting schedule; in addition,
certain financial targets must be met for these rights to vest. During the
first
quarter of fiscal 2007, the Company gave SARs grantees the opportunity to enter
into an alternative fixed compensation arrangement whereby the grantee would
forfeit all rights to SARs compensation in exchange for a guaranteed quarterly
payment for the remainder of the underlying SARs term. This alternative
arrangement is subject to continued service to the Company or one of its
subsidiaries. The number of forfeited SARs reported above reflects entry into
this alternative arrangement. These fixed payments will be accrued quarterly
from July 1, 2006 to March 31, 2009. The Company offered this alternative
arrangement to mitigate the volatility to earnings from stock price variance
on
the SARs.
7. Comprehensive
Income
Comprehensive
income consisted of the following components for the second quarter of
fiscal 2007 and 2006, respectively, and the six months ended December 31,
2006 and 2005, respectively (in thousands):
|
|
Three
months ended
December
31,
|
|
Six
months ended
December
31,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
6,065
|
|
$
|
4,799
|
|
$
|
13,178
|
|
$
|
9,483
|
|
Foreign
currency translation adjustments
|
|
|
65
|
|
|
271
|
|
|
212
|
|
|
318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive income
|
|
$
|
6,130
|
|
$
|
5,070
|
|
$
|
13,390
|
|
$
|
9,801
|
|
CELADON
GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2006
(Unaudited)
8. Commitments
and Contingencies
There
are
various claims, lawsuits, and pending actions against the Company and its
subsidiaries in the normal course of the operations of its businesses with
respect to cargo, auto liability, or income taxes. The Company believes many
of
these proceedings are covered in whole or in part by insurance and that none
of
these matters will have a material adverse effect on its consolidated financial
position or results of operations in any given period.
9. Acquisition
On
October 6, 2006, the Company acquired certain assets of Erin Truckways Ltd.,
d/b/a Digby Truck Line, Inc. (“Digby”). Pursuant to the asset purchase
agreement, our wholly-owned subsidiary, CTSI, acquired Digby's truckload
business, including approximately 270 tractors and 590 trailers for
approximately $21.2 million, which was allocated $13.0 million to equipment
held
for resale and the remaining $9.2 million to tractors and trailers. In
connection with the acquisition, we also have offered employment to
approximately 150 qualified
former Digby drivers. According to Digby's unaudited financial statements,
the
Nashville, Tennessee-based transportation company generated approximately $48
million in gross revenue in 2005.
10. Reclassification
Certain
reclassifications have been made to the December 31, 2005 financial statements
to conform to the December 31, 2006 presentation.
|
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
Disclosure
Regarding Forward Looking Statements
This
Quarterly 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. These forward-looking statements involve known and unknown risks,
uncertainties, and other factors which may cause the actual results, events,
performance, or achievements of the Company to be materially different from
any
future results, events, performance, or achievements expressed in or implied
by
such forward-looking statements. Such statements may be identified by the fact
that they do not relate strictly to historical or current facts. These
statements generally use words such as “believe,” “expect,” “anticipate,”
“project,” “forecast,” “should,” “estimate,” “plan,” “outlook,” “goal,” and
similar expressions. While it is impossible to identify all factors that may
cause actual results to differ from those expressed in or implied by
forward-looking statements, the risks and uncertainties that may affect the
Company’s business, include, but are not limited to, those discussed in the
section entitled Item 1A. Risk Factors set forth below.
All
such
forward-looking statements speak only as of the date of this Form 10-Q. You
are
cautioned not to place undue reliance on such forward-looking statements. The
Company expressly disclaims any obligation or undertaking to release publicly
any updates or revisions to any forward-looking statements contained herein
to
reflect any change in the Company’s expectations with regard thereto or any
change in the events, conditions, or circumstances on which any such statement
is based.
References
to the “Company,” “we,” “us,” “our,” and words of similar import refer to
Celadon Group, Inc. and its consolidated subsidiaries.
Business
Overview
We
are
one of North America’s twenty largest truckload carriers as measured by revenue.
We generated $480.2 million in operating revenue during our fiscal year
ended June 30, 2006. We have grown significantly since our incorporation in
1986
through internal growth and a series of acquisitions since 1995. As a dry van
truckload carrier, we generally transport full trailer loads of freight from
origin to destination without intermediate stops or handling. Our customer
base
includes many Fortune 500 shippers.
In
our
international operations, we offer time-sensitive transportation in and between
the United States and two of its largest trading partners, Mexico and Canada.
We
generated approximately one-half of our revenue in fiscal 2006 from
international movements, and we believe our annual border crossings make us
the
largest provider of international truckload movements in North America. We
believe that our strategically located terminals and experience with the
language, culture, and border crossing requirements of each North American
country provide a competitive advantage in the international trucking
marketplace.
We
believe our international operations, particularly those involving Mexico,
offer
an attractive business niche for several reasons. The additional complexity
of
and need to establish cross-border business partners and to develop strong
organization and adequate infrastructure in Mexico affords some barriers to
competition that are not present in traditional U.S. truckload service. In
addition, the expected continued growth of Mexico’s economy, particularly
exports to the U.S., positions us to capitalize on our cross-border expertise.
Our
success is dependent upon the success of our operations in Mexico and Canada,
and we are subject to risks of doing business internationally, including
fluctuations in foreign currencies, changes in the economic strength of the
countries in which we do business, 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.
In
addition to our international business, we offer a broad range of truckload
transportation services within the United States, including long-haul, regional,
dedicated, and logistics. With the acquisitions of certain assets of Highway
Express in August 2003, CX Roberson in January 2005, and Digby in October 2006,
we expanded our operations and service offerings within the United States and
significantly improved our lane density, freight mix, and customer diversity.
We
also
operate TruckersB2B, a profitable marketing business that affords volume
purchasing power for items such as fuel, tires, and equipment to approximately
20,000 trucking fleets representing approximately 415,000 tractors. TruckersB2B
represents a separate operating segment under generally accepted accounting
principles.
Recent
Results and Financial Condition
For
the
second quarter of fiscal 2007, operating revenue increased 2.2% to $122.9
million, compared with $120.3 million for the second quarter of fiscal 2006.
Excluding fuel surcharge, operating revenue increased 4.5% to $107.5 million
for
the second quarter of fiscal 2007, compared with $102.9 million for the second
quarter of fiscal 2006. Net income increased 27.1% to $6.1 million from $4.8
million, and diluted earnings per share improved to $0.26 from $0.21. We believe
that our dedication to pricing discipline, yield management, and customer
service contributed to our increase in earnings, despite a less robust freight
environment and more industry-wide trucking capacity in the second quarter
of
fiscal 2007 compared to the second quarter of fiscal 2006.
At
December 31, 2006, our total balance sheet debt (including capital lease
obligations) was $41.4 million, and our total stockholders' equity was $136.4
million, for a total debt to capitalization ratio of 23.3%. At December 31,
2006, we had $19.1 million of available borrowing capacity under our revolving
credit facility.
Revenue
We
generate substantially all of our revenue by transporting freight for our
customers. Generally, we are paid by the mile or by the load for our services.
We also derive revenue from fuel surcharges, loading and unloading activities,
equipment detention, other trucking related services, and from TruckersB2B.
The
main factors that affect our revenue are the revenue per mile we receive from
our customers, the percentage of miles for which we are compensated, the number
of tractors operating, and the number of miles we generate with our equipment.
These factors relate to, among other things, the U.S. economy, inventory levels,
the level of truck capacity in our markets, specific customer demand, the
percentage of team-driven tractors in our fleet, driver availability, and our
average length of haul.
We
also
derive revenue from fuel surcharges, loading and unloading activities, equipment
detention, and other accessorial services. We believe that eliminating the
impact of the sometimes volatile fuel surcharge revenue affords a more
consistent basis for comparing our results of operations from period to
period.
Expenses
and Profitability
The
main
factors that impact our profitability on the expense side are the variable
costs
of transporting freight for our customers. These costs include fuel expense,
driver-related expenses, such as wages, benefits, training, and recruitment,
and
independent contractor costs, which we record as purchased transportation.
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, fleet age, efficiency, and other factors. Our main fixed cost
is the acquisition and financing of long-term assets, primarily revenue
equipment. We have other mostly fixed costs, such as our non-driver personnel
and facilities expenses. In discussing our expenses as a percentage of revenue,
we sometimes discuss changes as a percentage of revenue before fuel surcharges,
in addition to absolute dollar changes, because we believe the high variable
cost nature of our business makes a comparison of changes in expenses as a
percentage of revenue more meaningful at times than absolute dollar
changes.
The
trucking industry has experienced significant increases in expenses over the
past three years, in particular those relating to equipment costs, driver
compensation, insurance, and fuel. As the United States economy has expanded,
many trucking companies have been able to raise freight rates to cover the
increased costs. This is primarily due to industry-wide tight capacity of
drivers. Competition for drivers has become increasingly intense, as the
expanding economy has provided alternative jobs at the same time as increasing
freight demand. To obtain capacity, shippers have been willing to accept rate
increases. As freight demand has softened, we expect increases in driver pay
by
many carriers, including us, and freight rates to remain relatively
unchanged
Revenue
Equipment and Related Financing
For
the
remainder of our 2007 fiscal year, we expect to obtain tractors and trailers
primarily for replacement, and we expect to maintain the average age of our
tractor fleet at approximately 2.0 years and the average age of our trailer
fleet at 4.0 years or less. At December 31, 2006, we had future operating
lease obligations totaling $201.8 million, including residual value guarantees
of approximately $83.3 million.
|
|
December
31, 2006
|
|
December
31, 2005
|
|
|
|
Tractors
|
|
Trailers
|
|
Tractors
|
|
Trailers
|
|
Owned
equipment
|
|
|
1,211
|
|
|
1,460
|
|
|
383
|
|
|
1,563
|
|
Capital
leased equipment
|
|
|
—
|
|
|
110
|
|
|
—
|
|
|
110
|
|
Operating
leased equipment
|
|
|
1,392
|
|
|
6,848
|
|
|
1,847
|
|
|
6,054
|
|
Independent
contractors
|
|
|
359
|
|
|
—
|
|
|
351
|
|
|
—
|
|
Total
|
|
|
2,962
|
|
|
8,418
|
|
|
2,581
|
|
|
7,727
|
|
Independent
contractors are utilized through a contract with us to supply one or more
tractors and drivers for our use. Independent contractors must pay their own
tractor expenses, fuel, maintenance, and driver costs and must meet our
specified guidelines with respect to safety. A lease-purchase program that
we
offer provides independent contractors the opportunity to lease-to-own a tractor
from a third party. As
of
December 31, 2006, there were 359 independent contractors providing a combined
12.1% of our tractor capacity.
Outlook
Looking
forward, our profitability goal is to achieve an operating ratio of
approximately 88%. We expect this to require additional improvements in rate
per
mile and decreased non-revenue miles, to overcome expected additional cost
increases. Because a large percentage of our costs are variable, changes in
revenue per mile affect our profitability to a greater extent than changes
in
miles per tractor. For the remainder of fiscal 2007, the key factors that we
expect to have the greatest effect on our profitability are our freight revenue
per tractor per week (which will be affected by the general freight environment,
including the balance of shipping demand and industry-wide trucking capacity),
our compensation of drivers, our cost of revenue equipment (particularly in
light of the 2007 EPA engine requirements), our fuel costs, and our insurance
and claims. To overcome cost increases and improve our margins, we will need
to
achieve increases in freight revenue per tractor, particularly in revenue per
mile, which we intend to achieve by increasing rates and continuing to shift
to
more profitable freight. Operationally, we will seek improvements in safety,
driver recruiting, and retention. Our success in these areas primarily will
affect revenue, driver-related expenses, and insurance and claims
expense.
Results
of Operations
The
following table sets forth the percentage relationship of expense items to
freight revenue for the periods indicated:
|
|
For
the three months ended
December
31,
|
|
For
the six months ended
December
31,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Freight
revenue(1)
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries,
wages, and employee benefits
|
|
|
33.9
|
%
|
|
34.5
|
%
|
|
33.3
|
%
|
|
34.1
|
%
|
Fuel(1)
|
|
|
10.5
|
%
|
|
10.2
|
%
|
|
10.2
|
%
|
|
10.7
|
%
|
Operations
and maintenance
|
|
|
7.1
|
%
|
|
7.2
|
%
|
|
7.1
|
%
|
|
7.1
|
%
|
Insurance
and claims
|
|
|
3.1
|
%
|
|
3.9
|
%
|
|
3.5
|
%
|
|
3.6
|
%
|
Depreciation
and amortization
|
|
|
3.7
|
%
|
|
2.8
|
%
|
|
3.5
|
%
|
|
3.0
|
%
|
Revenue
equipment rentals
|
|
|
8.1
|
%
|
|
10.0
|
%
|
|
8.4
|
%
|
|
10.0
|
%
|
Purchased
transportation
|
|
|
16.6
|
%
|
|
17.3
|
%
|
|
16.8
|
%
|
|
17.3
|
%
|
Costs
of products and services sold
|
|
|
1.9
|
%
|
|
1.3
|
%
|
|
1.8
|
%
|
|
1.3
|
%
|
Professional
and consulting fees
|
|
|
0.4
|
%
|
|
0.7
|
%
|
|
0.5
|
%
|
|
0.8
|
%
|
Communications
and utilities
|
|
|
1.1
|
%
|
|
1.0
|
%
|
|
1.1
|
%
|
|
1.0
|
%
|
Operating
taxes and licenses
|
|
|
2.0
|
%
|
|
2.1
|
%
|
|
2.0
|
%
|
|
2.0
|
%
|
General
and other operating
|
|
|
1.4
|
%
|
|
1.4
|
%
|
|
1.3
|
%
|
|
1.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
89.8
|
%
|
|
92.4
|
%
|
|
89.5
|
%
|
|
92.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
10.2
|
%
|
|
7.6
|
%
|
|
10.5
|
%
|
|
7.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
0.7
|
%
|
|
0.1
|
%
|
|
0.5
|
%
|
|
0.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
9.5
|
%
|
|
7.5
|
%
|
|
10.0
|
%
|
|
7.5
|
%
|
Provision
for income taxes
|
|
|
3.9
|
%
|
|
2.8
|
%
|
|
3.9
|
%
|
|
2.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
5.6
|
%
|
|
4.7
|
%
|
|
6.1
|
%
|
|
4.6
|
%
|
(1)
|
Freight
revenue is total revenue less fuel surcharges. In this table, fuel
surcharges are eliminated from revenue and subtracted from fuel expense.
Fuel surcharges were $15.4 million and $17.4 million for the second
quarter of fiscal 2007 and 2006, respectively, and $35.5 million
and $32.0
million for the six months ended December 31, 2006 and 2005,
respectively.
|
Comparison
of Three Months Ended December 31, 2006 to Three Months Ended
December 31, 2005
Operating
revenue increased by $2.6 million, or 2.2%, to $122.9 million for the
second quarter of fiscal 2007, from $120.3 million for the second quarter
of fiscal 2006.
Freight
revenue increased by $4.6 million, or 4.5%, to $107.5 million for the second
quarter of fiscal 2007, from $102.9 million for the second quarter of fiscal
2006. This increase was primarily attributable to a 4.0% improvement in average
freight revenue per total mile to $1.55 from $1.49, offset by a decrease in
the
average miles per tractor per week from 2,153 miles to 2,047 miles and an
increase in non-revenue miles. Reduced miles per truck per week and increased
non-revenue miles were both a result of the decline in freight levels during
the
latter part of the quarter. The improvement in average freight revenue per
total
mile resulted from better overall freight rates driven by a
decrease
in the percentage of our freight comprised of automotive parts, and a
corresponding increase in the percentage of our freight comprised of consumer
non-durables.
As a
result of the foregoing factors, average freight revenue per tractor per week,
which is our primary measure of asset productivity, decreased 3.5% to $3,031
in
the second quarter of fiscal 2007, from $3,142 for the second quarter of fiscal
2006. With total miles remaining flat compared to fiscal 2006, the average
number of seated tractors increased to 2,298 for the second quarter in fiscal
2007 from 2,122 for the second quarter in fiscal 2006.
Revenue
for TruckersB2B was $2.8 million in the second quarter of fiscal 2007, compared
to $2.1 million for the second quarter of fiscal 2006. The increase was
primarily related to increased use of the Truckers B2B tire discount
program.
Salaries,
wages, and employee benefits were $36.4 million,
or 33.9%
of
freight revenue, for fiscal 2007, compared to $35.5 million, or 34.5% of
freight revenue, for the second fiscal quarter of fiscal 2006. As a percentage
of freight revenue, a decrease in bonus compensation expenses in the second
quarter of fiscal 2007 compared to the second quarter of fiscal 2006 more than
offset an increase in paid driver miles partially due to increased deadhead
miles and medical claims expense.
Fuel
expenses, net of fuel surcharge revenue of $15.4 million and $17.4 million
for
the second quarter of fiscal 2007 and 2006, respectively, increased to
$11.3 million, or 10.5% of freight revenue, for the second quarter of
fiscal 2007, compared to $10.5 million, or 10.2% of freight revenue, for
the second quarter of fiscal 2006. These increases were primarily attributable
to an increase in company miles partially due to increased deadhead miles,
which
in turn increased fuel usage, offset by decreases in fuel prices, which
decreased fuel surcharge revenue. Increased fuel prices will increase our
operating expenses to the extent they are not offset by surcharges.
Operations
and maintenance increased to $7.6 million for the second quarter of fiscal
2007, from $7.4 million for the second quarter of fiscal 2006. Operations
and maintenance decreased slightly at 7.1% of freight revenue for the second
quarter of fiscal 2007, from 7.2% for the second quarter of fiscal 2006.
Operations and maintenance consist of direct operating expense, maintenance,
and
tire expense. We expect maintenance expense to remain relatively constant as
a
percentage of freight revenue in future periods as a result of the effects
of
our fleet upgrade keeping the average age of tractors at approximately 2.0
years.
Insurance
and claims expense decreased to $3.3 million, or 3.1% of freight revenue,
for the second quarter of fiscal 2007, compared to $4.0 million, or 3.9% of
freight revenue, for the second quarter of fiscal 2006. Insurance consists
of
premiums for liability, physical damage, cargo damage, and workers compensation
insurance, in addition to claims expense. The decreases in the dollar amount
and
as a percentage of freight revenue resulted from decreases in our cargo claims
expense and liability premiums in the 2007 quarter. Our insurance program
involves self-insurance at various risk retention levels. Claims in excess
of
these risk levels are covered by insurance in amounts we consider to be
adequate. We accrue for the uninsured portion of claims based on known claims
and historical experience. We continually revise and change our insurance
program to maintain a balance between premium expense and the risk retention
we
are willing to assume.
Depreciation
and amortization, consisting primarily of depreciation of revenue equipment,
increased to $4.0 million for the second quarter of fiscal 2007 from $2.9
million in the second quarter of fiscal 2006. Depreciation and amortization
increased to 3.7% of freight revenue in the second quarter of fiscal 2007,
compared to 2.8% of freight revenue for the second quarter of fiscal 2006,
as a
result of our increased use of cash and borrowings to acquire tractors, offset
by gains on the disposition of revenue equipment of
$0.6
million in the second quarter of fiscal 2007 and $0.3 million in the second
quarter of fiscal 2006. For
the
remainder of fiscal 2007, we expect depreciation to increase and revenue
equipment rentals to decrease as a percentage of revenue. Because of higher
equipment prices, we expect our total costs of depreciation and amortization
per
unit to increase in fiscal 2007. Revenue equipment held under operating
leases is not reflected on our balance sheet and the expenses related to such
equipment are reflected on our statements of operations in revenue equipment
rentals, rather than in depreciation and amortization and interest expense,
as
is the case for revenue equipment that is financed with borrowings or capital
leases. In the near term, we expect to purchase new tractors, excluding tractors
acquired in acquisitions, with cash generated from operations.
Revenue
equipment rentals were $8.7 million, or 8.1% of freight revenue, for the
second quarter of fiscal 2007, compared to $10.3 million, or 10.0% of freight
revenue, for the second quarter of fiscal 2006. These decreases were
attributable to a decrease in our tractor fleet financed under operating leases.
At December 31, 2006, 1,392 tractors, or 47.0% of our company tractors, were
held under operating leases, compared to 1,847 tractors, or 71.6% of our company
tractors, at December 31, 2005. As we expect to purchase most of our new
tractors, excluding tractors acquired in acquisitions, with cash generated
from
operations, we expect revenue equipment rentals will continue to decrease going
forward, offset somewhat by our acquisitions of new trailers with operating
leases.
Purchased
transportation remained constant at $17.8 million, or 16.6% of freight
revenue, for the second quarter of fiscal 2007, compared to $17.8 million,
or 17.3% of freight revenue, for the second quarter of fiscal 2006. The overall
dollar amount remained relatively constant as our number of independent
contractors was 359 at December 31, 2006, as compared to 351 at December 31,
2005. Although our total number of independent contractors remained relatively
constant, purchased transportation decreased as a percentage of freight revenue
because freight revenue increased over the prior period and tractors supplied
by
independent contractors comprised a smaller portion of our total fleet.
Independent
contractors are drivers who cover all their operating expenses (fuel, driver
salaries, maintenance, and equipment costs) for a fixed payment per mile. We
expect the majority of our equipment additions to come in our Company-operated
fleet. As a result, the percentage of our fleet comprised of independent
contractors may continue to decline, with a corresponding decrease in this
expense category. It has become difficult to recruit and retain independent
contractors.
All
of
our other operating expenses are relatively minor in amount, and there were
no
significant changes in such expenses. Accordingly, we have not provided a
detailed discussion of such expenses.
Our
pretax margin, which we believe is a useful measure of our operating performance
because it is neutral with regard to the method of revenue equipment financing
that a company uses, improved 200 basis points to 9.5% of freight revenue for
the second quarter of fiscal 2007, from 7.5% of freight revenue for the second
quarter of fiscal 2006.
Income
taxes increased to $4.1 million, with an effective tax rate of 40.6%, for
the second quarter of fiscal 2007, from $2.9 million, with an effective tax
rate of 37.3%, for the second quarter of fiscal 2006. The effective tax rate
increased primarily as a result of our Mexican subsidiary effective rate
increase due to decrease in net operating loss carry-forwards. Also, as per
diem
is a non-deductible expense our effective tax rate will fluctuate as net income
fluctuates in the future.
As
a
result of the factors described above, net income increased to $6.1 million
for
the second quarter of fiscal 2007, from $4.8 million for the second quarter
of
fiscal 2006.
Comparison
of Six Months Ended December 31, 2006 to Six Months Ended
December 31, 2005
Operating
revenue increased by $12.4 million, or 5.2%, to $250.6 million for the
six months ended December 31, 2006, from $238.2 million for the
six months ended December 31, 2005. This increase was primarily attributable
to
a 3.4% improvement in average freight revenue per total mile, from $1.48 to
$1.53, offset by a decrease in the average miles per tractor per week from
2,167
to 2,055, and an increase in non-revenue miles. Reduced miles per truck per
week
and increased non-revenue miles were both a result of the decline in freight
levels, particularly late in the six months ended December 31, 2006. The
improvement in average freight revenue per total mile resulted from better
overall freight rates driven by a
decrease
in the percentage of our freight comprised of automotive parts, and a
corresponding increase in the percentage of our freight comprised of consumer
non-durables.
As a
result of the foregoing factors, average freight revenue per seated tractor
per
week, which is our primary measure of asset productivity, decreased 4.9% to
$3,033 for the six months ended December 31, 2006, from $3,188 for the
six months ended December 31, 2005.
Revenue
for TruckersB2B was $5.5 million for the six months ended
December 31, 2006, compared to $4.1 million for the six months
ended December 31, 2005. The increase was primarily related to increased use
of
the Truckers B2B tire discount program.
Salaries,
wages, and benefits were $71.7 million, or 33.3% of freight revenue, for
the six months ended December 31, 2006, compared to $70.3 million, or
34.1% of freight revenue, for the six months ended December 31, 2005. As a
percentage of freight revenue, a decrease in bonus compensation expenses in
the
six months ended December 31, 2006 compared to the six months ended December
31,
2005, more than offset an increase in paid driver miles and medical claims
expense.
Fuel
expenses, net of fuel surcharge revenue of $35.5 million and $32.0 million
for
the six months ended December 31, 2006 and 2005 respectively, decreased to
$21.9 million, or 10.2% of freight revenue, for the six months ended
December 31, 2006, compared to $22.2 million, or 10.7% of freight
revenue, for the six months ended December 31, 2005. These decreases were
primarily attributable to improved fuel surcharge collection associated with
changes in our customer base, which more than offset an increase in fuel prices.
Increased fuel prices will increase our operating expenses to the extent they
are not offset by surcharges.
Operations
and maintenance increased to $15.3 million for the six months ended
December 31, 2006, from $14.7 million for the six months ended
December 31, 2005. As a percentage of freight revenue, operations and
maintenance remained flat at 7.1% for the six months ended December 31, 2005
and
2006. Operations and maintenance consist of direct operating expense,
maintenance, and tire expense. This dollar increase is attributed to an increase
in various direct operating expenses. We expect maintenance expense to remain
relatively constant as a percentage of freight revenue in future periods as
a
result of the effects of our fleet upgrade keeping the average age of tractors
at approximately 2.0 years.
Insurance
and claims expense was $7.5 million, or 3.5% of freight revenue, for the
six months ended December 31, 2006, compared to $7.3 million, or 3.6% of
freight revenue, for the six months ended December 31, 2005. Insurance consists
of premiums for liability, physical damage, cargo damage, and workers
compensation insurance. As a percentage of freight revenue, the category was
essentially flat. Our insurance program involves self-insurance at various
risk
retention levels. Claims in excess of these risk levels are covered by insurance
in amounts we consider to be adequate. We accrue for the uninsured portion
of
claims based on known claims and historical experience. We continually revise
and change our insurance program to maintain a balance between premium expense
and the risk retention we are willing to assume.
Depreciation
and amortization, consisting primarily of depreciation of revenue equipment,
increased to $7.5 million, or 3.5% of freight revenue, for the six months
ended December 31, 2006, from $6.1 million, or 3.0% of freight
revenue, for the six months ended December 31, 2005, as a result of our
increased use of cash and borrowings to acquire tractors, offset by gains on
the
disposition of revenue equipment of $1.1 million for the six months ended
December 31, 2006 and $0.3 million for the six months ended December 31,
2005. For
the
remainder of fiscal 2007, we expect depreciation to increase and revenue
equipment rentals to decrease as a percentage of revenue. Because of higher
equipment prices we expect our total costs of depreciation and amortization
per
unit to increase in fiscal 2007. Revenue equipment held under operating leases
is not reflected on our balance sheet and the expenses related to such equipment
are reflected on our statements of operations in revenue equipment rentals,
rather than in depreciation and amortization and interest expense, as is the
case for revenue equipment that is financed with borrowings or capital leases.
In the near term, we expect to purchase new tractors, excluding tractors
acquired in acquisitions, primarily with cash generated from operations.
Revenue
equipment rentals were $18.0 million, or 8.4% of freight revenue, for the
six months ended December 31, 2006, compared to $20.6 million, or 10.0% of
freight revenue for the six months ended December 31, 2005. These decreases
were
attributable to a decreased percentage of our tractor fleet held under operating
leases, for the six months ended December 31, 2006. At December 31, 2006, 1,392
tractors, or 47.0% of our company tractors, were held under operating leases,
compared to 1,847 tractors, or 71.6% of our company tractors, at December 31,
2005. As we expect to purchase most of our new tractors, excluding tractors
acquired in acquisitions, with cash generated from operations, we expect revenue
equipment rentals will continue to decrease going forward, offset somewhat
by
our acquisitions of new trailers with operating leases.
Purchased
transportation increased to $36.2 million, or 16.8% of freight revenue, for
the six months ended December 31, 2006, from $35.7 million, or
17.3% of freight revenue, for the six months ended December 31, 2005. The
increase in the overall dollar amount is primarily related to increased
independent contractor fuel surcharge reimbursement. Although our total number
of independent contractors remained relatively constant, purchased
transportation decreased as a percentage of freight revenue because freight
revenue increased over the prior period and tractors supplied by independent
contractors comprised a smaller portion of our total fleet. It has become
difficult to recruit and retain independent contractors due to the challenging
operating environment. Independent contractors are drivers who cover all their
operating expenses (fuel, driver salaries, maintenance, and equipment costs)
for
a fixed payment per mile.
All
of
our other operating expenses are relatively minor in amount, and there were
no
significant changes in such expenses. Accordingly, we have not provided a
detailed discussion of such expenses.
Our
pretax margin, which we believe is a useful measure of our operating performance
because it is neutral with regard to the method of revenue equipment financing
that a company uses, improved 250 basis points to 10.0% of freight revenue
for
the six months ended December 31, 2006, from 7.5% of freight revenue for the
six
months ended December 31, 2005.
Income
taxes increased to $8.4 million with an effective tax rate of 38.9%, for the
six
months ended December 31, 2006, compared to $5.9 million, with an effective
tax
rate of 38.5%, for the six months ended December 31, 2005. The effective tax
rate increased primarily as a result of our Mexican subsidiary effective rate
increase due to decrease in net operating loss carry-forwards. Also, as per
diem
is a non-deductible expense our effective tax rate will fluctuate as net income
fluctuates in the future.
As
a
result of the factors described above, net income increased by $3.7 million
to $13.2 million for the six months ended December 31, 2006, from a net income
of $9.5 million for the six months ended December 31, 2005.
Liquidity
and Capital Resources
Trucking
is a capital-intensive business. We require cash to fund our operating expenses
(other than depreciation and amortization), to make capital expenditures and
acquisitions, and to repay debt. We anticipate that upgrading revenue equipment
from the Digby acquisition, repayment of debt incurred in connection with the
Digby acquisition, capital expenditures for replacement tractors and trailers,
and ordinary operating expenses will constitute our primary cash requirements
over the next twelve months. Our principal sources of liquidity are cash
generated from operations, bank borrowings, financing of revenue equipment,
proceeds from the sale of used revenue equipment, and, to a lesser extent,
the
sale of shares of our common stock.
As
of
December 31, 2006, we had on order 562 tractors for delivery through
fiscal 2008.
These revenue equipment orders represent a capital commitment of approximately
$49.0 million, before considering the proceeds of equipment dispositions. In
fiscal 2006, we purchased most of our new tractors and we acquired most of
the
new trailers under off-balance sheet operating leases. At December 31, 2006,
our
total balance sheet debt, including capital lease obligations and current
maturities, was $41.4 million, compared to $12.0 million at December 31,
2005. Our debt-to-capitalization ratio (total balance sheet debt (including
capital lease obligations) as a percentage of total balance sheet debt plus
total stockholders' equity) was 23.3% at December 31, 2006.
We
believe we will be able to fund our operating expenses, as well as our current
commitments for the acquisition of revenue equipment in connection with our
fleet upgrade over the next twelve months with a combination of cash generated
from operations, borrowings available under our primary credit facility, and
lease financing arrangements. We will continue to have significant capital
requirements over the long term, and the availability of the needed capital
will
depend upon our financial condition and operating results and numerous other
factors over which we have limited or no control, including prevailing market
conditions and the market price of our common stock. However, based on our
improving operating results, anticipated future cash flows, current availability
under our credit facility, and sources of equipment lease financing that we
expect will be available to us, we do not expect to experience significant
liquidity constraints in the foreseeable future.
Cash
Flows
For
the
six months ended December 31, 2006, net cash provided by operations was $16.7
million, compared to cash provided by operations of $6.9 million for the six
months ended December 31, 2005. The increase in cash provided by operations
is
due primarily to the increase in net income offset by changes in operating
assets and liabilities related to decreased trade receivables, current income
taxes, accounts payable and accrued expenses, offset by increased prepaid
assets.
Net
cash
used in investing activities was $39.4 million for the six months ended December
31, 2006, compared to $8.4 million for the six months ended December 31, 2005.
Cash used in investing activities includes the net cash effect of acquisitions
and dispositions of revenue equipment during each period. Capital expenditures
for new equipment totaled $38.5 million for the six months ended December 31,
2006, and $24.9 million for the six months ended December 31, 2005, reflecting
our recent practice of purchasing new tractors with cash on hand. We generated
proceeds from the sale of property and equipment of $20.2 million for the six
months ended December 31, 2006, compared to $16.5 million in proceeds for the
six months ended December 31, 2005. In October 2006, we used $21.2 million
to
purchase the assets of Digby.
Net
cash
provided by financing activities was $21.1 million for the six months ended
December 31, 2006, compared to net cash used of $1.2 million for the six months
ended December 31, 2005. Financing activity represents borrowings (new
borrowings, net of repayment) and payments of the principal component of capital
lease obligations. Increased borrowings primarily resulted from the purchase
of
Digby.
Off-Balance
Sheet Arrangements
Operating
leases have been an important source of financing for our revenue equipment.
We
lease a significant portion of our tractor and trailer fleet using operating
leases. In connection with substantially all of our operating leases, we have
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, 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. With respect to
a
small portion of our equipment held under operating leases, we have obtained
from the manufacturers residual value guarantees that meet or exceed the amount
of our guarantee to the lessor. 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 currently believe that proceeds
from the sale of equipment held under operating leases would exceed the amount
of our residual obligation on all operating leases.
Prior
to
our fiscal 2007 and 2006 purchase of new tractors with cash generated from
operations, we historically have financed many of our new tractors and trailers
under operating leases, which are not reflected on our balance sheet. The use
of
operating leases also affects our statements of cash flows. For assets subject
to these operating leases, we do not record depreciation as an increase to
net
cash provided by operations, nor do we record any entry with respect to
investing activities or financing activities.
Our
operating leases include some under which we do not guarantee the value of
the
asset at the end of the lease term (“walk-away leases”) and some under which we
do guarantee the value of the asset at the end of the lease term (“residual
value”). Therefore, we are subject to the risk that equipment value may decline
in which case we would suffer a loss upon disposition and be required to make
cash payments because of the residual value guarantees. At December 31, 2006,
we
had future operating lease obligations totaling $201.8 million, including
residual value guarantees of approximately $83.3 million. We were obligated
for
payments related to operating leases of $118.4 million and $125.9 million at
December 31, 2006 and 2005, respectively. A portion of these amounts is covered
by repurchase and/or trade agreements we have with the equipment manufacturer.
We believe that any residual payment obligations that are not covered by the
manufacturer will be satisfied, in the aggregate, by the value of the related
equipment at the end of the lease. We anticipate that in the short term we
will
continue to use operating leases to finance the acquisition of trailers and
we
will use cash generated from operations to purchase tractors.
Primary Credit
Agreement
On
September 26, 2005, the Company, CTSI, and TruckersB2B entered into an unsecured
Credit Agreement with LaSalle Bank National Association, as administrative
agent, and LaSalle Bank National Association, Fifth Third Bank (Central
Indiana), and JPMorgan Chase Bank, N.A., as lenders, which matures on September
24, 2010 (the “Credit Agreement”). The Credit Agreement was used to refinance
the Company’s existing credit facility and is intended to provide for ongoing
working capital needs and general corporate purposes. Borrowings under the
Credit Agreement are based, at the option of the Company, on a base rate equal
to the greater of the federal funds rate plus 0.5% and the administrative
agent’s prime rate or LIBOR plus an applicable margin between 0.75% and 1.125%
that is adjusted quarterly based on cash flow coverage. The Credit Agreement
is
guaranteed by Celadon E-Commerce, CelCan, and Jaguar, each of which is a
subsidiary of the Company.
The
Credit Agreement has a maximum revolving borrowing limit of $50.0 million,
and
the Company may increase the revolving borrowing limit by an additional $20.0
million, to a total of $70.0 million. Letters of credit are limited to an
aggregate commitment of $15.0 million and a swing line facility has a limit
of
$5.0 million. A commitment fee that is adjusted quarterly between 0.15% and
0.225% per annum based on cash flow coverage is due on the daily unused portion
of the Credit Agreement. The Credit Agreement contains certain restrictions
and
covenants relating to, among other things, dividends, tangible net worth, cash
flow, mergers, consolidations, acquisitions and dispositions, and total
indebtedness. We were in compliance with these covenants at December 31, 2006,
and expect to remain in compliance for the foreseeable future. At December
31,
2006, $26.1 million of our credit facility was utilized as outstanding
borrowings and $4.8 million was utilized for standby letters of credit.
Contractual
Obligations and Commercial Commitments
As
of
December 31, 2006, our operating leases, capitalized leases, other
debts, and future commitments have stated maturities or minimum annual payments
as follows:
|
|
Annual
Cash Requirements
as
of December 31, 2006
(in
thousands)
Amounts
Due by Period
|
|
|
|
Total
|
|
Less
than
One
Year
|
|
One
to
Three
Years
|
|
Three
to
Five
Years
|
|
Over
Five
Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
leases
|
|
$
|
118,433
|
|
$
|
33,104
|
|
$
|
40,045
|
|
$
|
25,812
|
|
$
|
19,472
|
|
Lease
residual value guarantees
|
|
|
83,320
|
|
|
2,079
|
|
|
38,016
|
|
|
12,555
|
|
|
30,670
|
|
Capital
leases(1)
|
|
|
1,428
|
|
|
500
|
|
|
380
|
|
|
548
|
|
|
0
|
|
Long-term
debt(1)
|
|
|
42,456
|
|
|
6,086
|
|
|
9,291
|
|
|
27,079
|
|
|
---
|
|
Sub-total
|
|
$
|
245,637
|
|
$
|
41,769
|
|
$
|
87,732
|
|
$
|
65,994
|
|
$
|
50,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future
purchase of revenue equipment
|
|
$
|
49,036
|
|
$
|
37,786
|
|
$
|
11,250
|
|
|
0
|
|
|
0
|
|
Employment
and consulting agreements(2)
|
|
|
864
|
|
|
717
|
|
|
139
|
|
|
8
|
|
|
---
|
|
Standby
Letters of Credit
|
|
|
4,775
|
|
|
4,775
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
300,312
|
|
$
|
85,047
|
|
$
|
99,121
|
|
$
|
66,002
|
|
$
|
50,142
|
|
(1)
|
Includes
interest.
|
(2)
|
The
amounts reflected in the table do not include amounts that could
become
payable to our Chief Executive Officer and Chief Financial Officer
under certain circumstances if their employment by the Company is
terminated.
|
Critical
Accounting Policies
The
preparation of our financial statements in conformity with U.S. generally
accepted accounting principles requires us to make estimates and assumptions
that impact the amounts reported in our consolidated financial statements and
accompanying notes. Therefore, the reported amounts of assets, liabilities,
revenues, expenses, and associated disclosures of contingent assets and
liabilities are affected by these estimates and assumptions. We evaluate these
estimates and assumptions on an ongoing basis, utilizing historical experience,
consultation with experts, and other methods considered reasonable in the
particular circumstances. Nevertheless, actual results may differ significantly
from our estimates and assumptions, and it is possible that materially different
amounts would be reported using differing estimates or assumptions. We consider
our critical accounting policies to be those that require us to make more
significant judgments and estimates when we prepare our financial statements.
Our critical accounting policies include the following:
Depreciation
of Property and Equipment.
We
depreciate our property and equipment using the straight-line method over the
estimated useful life of the asset. We generally use estimated useful lives
of 2
to 7 years for tractors and trailers, and estimated salvage values for tractors
and trailers generally range from 35% to 50% of the capitalized cost. Gains
and
losses on the disposal of revenue equipment are included in depreciation expense
in our statements of operations.
We
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 equipment
market, and prevailing industry practice. Changes in our 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.
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 or
estimated market value of the asset, as appropriate.
Operating
leases.
We have
financed a substantial percentage of our tractors and trailers with operating
leases. These leases generally contain residual value guarantees, which provide
that the value of equipment returned to the lessor at the end of the lease
term
will be no lower than a negotiated amount. To the extent that the value of
the
equipment is below the negotiated amount, we are liable to the lessor for the
shortage at the expiration of the lease. For approximately 16% of our tractors
and 22% of our trailers under operating lease, we have residual value guarantees
from the manufacturer at amounts equal to our residual obligation to the
lessors. For all other equipment (or to the extent we believe any manufacturer
will refuse or be unable to meet its obligation), we are required to recognize
additional rental expense to the extent we believe the fair market value at
the
lease termination will be less than our obligation to the lessor.
In
accordance with Statement of Financial Accounting Standards (“SFAS”) 13,
“Accounting for Leases,” property and equipment held under operating leases, and
liabilities related thereto, are not reflected on our balance sheet. All
expenses related to revenue equipment operating leases are reflected on our
statements of operations in the line item entitled "Revenue equipment rentals."
As such, financing revenue equipment with operating leases instead of bank
borrowings or capital leases effectively moves the interest component of the
financing arrangement into operating expenses on our statements of
operations.
Claims
Reserves and Estimates.
The
primary claims arising for us consist of cargo liability, personal injury,
property damage, collision and comprehensive, workers' compensation, and
employee medical expenses. We maintain self-insurance levels for these various
areas of risk and have established reserves to cover these self-insured
liabilities. We also maintain insurance to cover liabilities in excess of these
self-insurance amounts. Claims reserves represent accruals for the estimated
uninsured portion of reported claims, including adverse development of reported
claims, as well as estimates of incurred but not reported claims. Reported
claims and related loss reserves are estimated by third party administrators,
and we refer to these estimates in establishing our reserves. Claims incurred
but not reported are estimated based on our historical experience and industry
trends, which are continually monitored, and accruals are adjusted when
warranted by changes in facts and circumstances. In establishing our reserves
we
must take into account and estimate various factors, including, but not limited
to, assumptions concerning the nature and severity of the claim, the effect
of
the jurisdiction on any award or settlement, the length of time until ultimate
resolution, inflation rates in health care, and in general interest rates,
legal
expenses, and other factors. Our actual experience may be different than our
estimates, sometimes significantly. Changes in assumptions as well as changes
in
actual experience could cause these estimates to change in the near term.
Insurance and claims expense will vary from period to period based on the
severity and frequency of claims incurred in a given period.
Accounting
for Income Taxes.
Deferred
income taxes represent a substantial liability on our consolidated balance
sheet. Deferred income taxes are determined in accordance with SFAS No. 109,
“Accounting for Income Taxes.” Deferred tax assets and liabilities are
recognized for the expected future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases, and operating loss and tax credit
carry-forwards. We evaluate our tax assets and liabilities on a periodic basis
and adjust these balances as appropriate. We believe that we have adequately
provided for our future tax consequences based upon current facts and
circumstances and current tax law. However, should our tax positions be
challenged and not prevail, different outcomes could result and have a
significant impact on the amounts reported in our consolidated financial
statements.
The
carrying value of our deferred tax assets (tax benefits expected to be realized
in the future) assumes that we will be able to generate, based on certain
estimates and assumptions, sufficient future taxable income in certain tax
jurisdictions to utilize these deferred tax benefits. If these estimates and
related assumptions change in the future, we may be required to reduce the
value
of the deferred tax assets resulting in additional income tax expense. We
believe that it is more likely than not that the deferred tax assets, net of
valuation allowance, will be realized, based on forecasted income. However,
there can be no assurance that we will meet our forecasts of future income.
We
evaluate the deferred tax assets on a periodic basis and assess the need for
additional valuation allowances.
Federal
income taxes are provided on that portion of the income of foreign subsidiaries
that is expected to be remitted to the United States.
Seasonality
We
have
substantial operations in the Midwestern and Eastern United States and Canada.
In those geographic regions, our tractor productivity may be adversely affected
during the winter season because inclement weather may impede our operations.
Moreover, some shippers reduce their shipments during holiday periods as a
result of curtailed operations or vacation shutdowns. At the same time,
operating expenses generally increase, with fuel efficiency declining because
of
engine idling and harsh weather creating higher accident frequency, increased
claims, and more equipment repairs.
Inflation
Many
of
our operating expenses, including fuel costs, revenue equipment, and driver
compensation, are sensitive to the effects of inflation, which result in higher
operating costs and reduced operating income. The effects of inflation on our
business during the past three years were most significant in fuel. The effects
of inflation on revenue were not material in the past three years. We have
limited the effects of inflation through increases in freight rates and fuel
surcharges.
Item
3. Quantitative
and Qualitative Disclosures about Market Risk
We
experience various market risks, including changes in interest rates, foreign
currency exchange rates, and fuel prices. We do not enter into derivatives
or
other financial instruments for trading or speculative purposes, nor when there
are no underlying related exposures.
Interest
Rate Risk.
We are
exposed to interest rate risk principally from our primary credit facility.
The
credit facility carries a maximum variable interest rate of either the bank's
base rate or LIBOR plus 1.125%. At December 31, 2006, the interest rate for
revolving borrowings under our credit facility was LIBOR plus 0.75%. At December
31, 2006, we had $26.1 million variable rate term loan borrowings outstanding
under the credit facility. A hypothetical 10% increase in the bank's base rate
and LIBOR would be immaterial to our net income.
Foreign
Currency Exchange Rate Risk.
We are
subject to foreign currency exchange rate risk, specifically in connection
with
our Canadian operations. While virtually all of the expenses associated with
our
Canadian operations, such as independent contractor costs, Company driver
compensation, and administrative costs, are paid in Canadian dollars, a
significant portion of our revenue generated from those operations is billed
in
U.S. dollars because many of our customers are U.S. shippers transporting goods
to or from Canada. As a result, increases in the Canadian dollar exchange rate
adversely affect the profitability of our Canadian operations. Assuming revenue
and expenses for our Canadian operations identical to that in the six months
ended December 31, 2006 (both in terms of amount and currency mix), we estimate
that a $0.01 increase in the Canadian dollar exchange rate would reduce our
annual net income by approximately $320,000.
We
generally do not face the same magnitude of foreign currency exchange rate
risk
in connection with our intra-Mexico operations conducted through our Mexican
subsidiary, Jaguar, because our foreign currency revenues are generally
proportionate to our foreign currency expenses for those operations. For
purposes of consolidation, however, the operating results earned by our
subsidiaries, including Jaguar, in foreign currencies are converted into United
States dollars. As a result, a decrease in the value of the Mexican peso could
adversely affect our consolidated results of operations. Assuming revenue and
expenses for our Mexican operations identical to that in the six months ended
December 31, 2006 (both in terms of amount and currency mix), we estimate that
a
$0.01 decrease in the Mexican peso exchange rate would reduce our annual net
income by approximately $70,000.
In
response to increases in Canadian dollar exchange rates, we have from
time-to-time entered into derivative financial instruments to reduce our
exposure to currency fluctuations. In June 1998, FASB issued SFAS 133,
“Accounting for Derivative Instruments and Certain Hedging Activities.” In June
2000, FASB issued SFAS 138, “Accounting for Certain Derivative Instruments and
Certain Hedging Activity, an Amendment of SFAS 133.” SFAS 133 and SFAS 138
require that all derivative instruments be recorded on the balance sheet at
their respective fair values. Derivatives that are not hedges must be adjusted
to fair value through earnings. As of December 31, 2006, we had no currency
derivatives in place.
Commodity
Price Risk.
Shortages of fuel, increases in prices, or rationing of petroleum products
can
have a materially adverse effect on our operations and profitability. Fuel
is
subject to economic, political, market, and climatic factors that are outside
of
our control. Historically, we have sought to recover a portion of short-term
increases in fuel prices from customers through the collection of fuel
surcharges. However, fuel surcharges do not always fully offset increases in
fuel prices. In addition, from time-to-time we may enter into derivative
financial instruments to reduce our exposure to fuel price fluctuations. In
accordance with SFAS 133 and SFAS 138, we adjust any such derivative instruments
to fair value through earnings on a monthly basis. As of December 31, 2006,
we
had no derivative financial instruments in place to reduce our exposure to
fuel
price fluctuations.
Item
4. Controls
and Procedures
As
required by Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934,
as amended (the “Exchange Act”), the Company has carried out an evaluation of
the effectiveness of the design and operation of the Company’s disclosure
controls and procedures as of the end of the period covered by this Quarterly
Report on Form 10-Q. This evaluation was carried out under the supervision
and
with the participation of the Company’s management, including our Chief
Executive Officer and our Chief Financial Officer. Based upon that evaluation,
our Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were effective as of the end of the period
covered by this Quarterly Report on Form 10-Q. There were no changes in the
Company’s internal control over financial reporting that occurred during the
second quarter of fiscal 2007 that have materially affected, or that are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
Disclosure
controls and procedures are controls and other procedures that are designed
to
ensure that information required to be disclosed in the Company’s reports filed
or submitted under the Exchange Act is recorded, processed, summarized, and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission. Disclosure controls and procedures include
controls and procedures designed to ensure that information required to be
disclosed in Company reports filed under the Exchange Act is accumulated and
communicated to management, including the Company’s Chief Executive Officer and
Chief Financial Officer as appropriate, to allow timely decisions regarding
disclosures.
The
Company has confidence in its disclosure controls and procedures. Nevertheless,
the Company’s management, including the Chief Executive Officer and Chief
Financial Officer, does not expect that our disclosure controls and procedures
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. Because of the inherent limitations in all internal
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the Company have
been
detected.
Item
1. Legal
Proceedings
There
are
various claims, lawsuits, and pending actions against the Company and its
subsidiaries which arose in the normal course of the operations of its business.
The Company believes many of these proceedings are covered in whole or in part
by insurance and that none of these matters will have a material adverse effect
on its consolidated financial position or results of operations in any given
period.
While
we
attempt to identify, manage, and mitigate risks and uncertainties associated
with our business, some level of risk and uncertainty will always be present.
Our Form 10-K for the year ended June 30, 2006, in the section entitled Item
1A.
Risk Factors, describes some of the risks and uncertainties associated with
our
business. Please also see our Quarterly Report on Form 10-Q filed with the
SEC
on October 31, 2006, for a description of the risks and uncertainties associated
with our recent acquisition of Digby. These risks and uncertainties have the
potential to materially affect our business, financial condition, results of
operations, cash flows, projected results, and future prospects.
Item
4. Submission
of Matters to a Vote of Security Holders.
The
Company held its regular Annual Meeting of Stockholders (the “Annual Meeting”)
on November 3, 2006. Stockholders representing 21,567,042 shares, or 92.1%,
of the total outstanding shares were present in person or by proxy. At the
Annual Meeting, Stephen Russell, Michael Miller, Anthony Heyworth, and Chris
Hines were elected to serve as directors for one-year terms. A tabulation of
the
vote with respect to each nominee follows:
|
Voted
For
|
|
Vote
Withheld
|
|
|
|
|
Stephen
Russell
|
19,527,925
|
|
2,039,117
|
Michael
Miller
|
18,678,924
|
|
2,888,118
|
Anthony
Heyworth
|
18,678,972
|
|
2,888,070
|
Chris
Hines
|
19,160,779
|
|
2,406,263
|
3.1
|
Amended
and Restated Certificate of Incorporation of the Company, effective
January 12, 2006.
|
3.2
|
Certificate
of Designation for Series A Junior Participating Preferred Stock.
(Incorporated by reference to Exhibit 3.3 to the Company’s Annual Report
on Form 10-K for the fiscal year ended June 30, 2000, filed with
the SEC on September 28, 2000.)
|
3.3
|
By-laws.
(Incorporated by reference to Exhibit 3.2 to the Company’s Registration
Statement on Form S-1, Registration No. 33-72128, filed with the
SEC on
November 24, 1993.)
|
4.1
|
Amended
and Restated Certificate of Incorporation of the Company, effective
January 12, 2006.
|
4.2
|
Certificate
of Designation for Series A Junior Participating Preferred Stock.
(Incorporated by reference to Exhibit 3.3 to the Company’s Annual Report
on Form 10-K for the fiscal year ended June 30, 2000, filed with
the SEC on September 28, 2000.)
|
4.3
|
Rights
Agreement, dated as of July 20, 2000, between Celadon Group, Inc.
and
Fleet National Bank, as Rights Agent. (Incorporated by reference
to
Exhibit 4.1 to the Company’s Registration Statement on Form 8-A, filed
with the SEC on July 20, 2000.)
|
4.4
|
By-laws.
(Incorporated by reference to Exhibit 3.2 to the Company’s Registration
Statement on Form S-1, Registration No. 33-72128, filed with the
SEC on
November 24, 1993.)
|
|
Asset
Purchase Agreement dated October 6, 2006, between Erin Truckways,
Ltd.
d/b/a Digby Truck Line, Inc., Cynthia Bedore, and Celadon Trucking
Services, Inc.*
|
|
Certification
pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant
to
Section 302 of the Sarbanes-Oxley Act of 2002, by Stephen Russell,
the
Company’s Chief Executive Officer.*
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|
Certification
pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant
to
Section 302 of the Sarbanes-Oxley Act of 2002, by Paul Will, the
Company’s
Chief Financial Officer.*
|
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002, by Stephen Russell, the Company’s Chief
Executive Officer.*
|
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002, by Paul Will, the Company’s Chief
Financial Officer.*
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_________________________ |
*
Filed herewith
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SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
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Celadon
Group, Inc.
(Registrant)
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/s/
Stephen Russell
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Stephen
Russell
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Chairman
of the Board and
Chief
Executive Officer
|
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|
|
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/s/
Paul Will
|
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Paul
Will
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Chief
Financial Officer, Executive Vice
President,
Treasurer, and Assistant Secretary
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Date: February
2, 2007
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