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 March 31, 2007
or
[
]
|
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
No.)
|
|
|
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 [ ]
|
Accelerated
filer [X]
|
Non-accelerated
filer [ ]
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12-b2 of the Exchange Act).
As
of
April 24, 2007 (the latest practicable date), 23,512,495 shares of the
registrant’s common stock, par value $0.033 per share, were
outstanding.
Index
to
March
31, 2007 Form 10-Q
Part
I.
|
Financial
Information
|
|
|
|
|
|
|
Item
1.
|
Financial
Statements
|
|
|
|
|
|
|
|
Condensed
Consolidated Balance Sheets at March 31, 2007
(Unaudited)
and June 30, 2006
|
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Income for the three and nine
months
ended March 31, 2007 and 2006 (Unaudited)
|
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows for the nine
months
ended March 31, 2007 and 2006 (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
2-5.
|
Not
Applicable
|
|
|
|
|
|
Item
6.
|
Exhibits
|
|
Part
I. Financial Information
Item
I. Financial Statements
CONDENSED
CONSOLIDATED BALANCE SHEETS
March
31, 2007 and June 30, 2006
(Dollars
in thousands except per share and par value amounts)
|
|
March
31,
2007
|
|
June
30,
2006
|
|
|
|
(unaudited)
|
|
|
|
A
S S E T S
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,813
|
|
$
|
1,674
|
|
Trade
receivables, net of allowance for doubtful accounts of
$1,247
and $1,269 at March 31, 2007 and June 30, 2006
|
|
|
56,132
|
|
|
55,462
|
|
Prepaid
expenses and other current assets
|
|
|
11,892
|
|
|
10,132
|
|
Tires
in service
|
|
|
2,763
|
|
|
2,737
|
|
Equipment
held for resale
|
|
|
11,781
|
|
|
---
|
|
Income
tax receivable
|
|
|
518
|
|
|
5,216
|
|
Deferred
income taxes
|
|
|
1,351
|
|
|
1,867
|
|
Total
current assets
|
|
|
86,250
|
|
|
77,088
|
|
Property
and equipment
|
|
|
201,948
|
|
|
121,733
|
|
Less
accumulated depreciation and amortization
|
|
|
39,238
|
|
|
30,466
|
|
Net
property and equipment
|
|
|
162,710
|
|
|
91,267
|
|
Tires
in service
|
|
|
1,418
|
|
|
1,569
|
|
Goodwill
|
|
|
19,137
|
|
|
19,137
|
|
Other
assets
|
|
|
1,088
|
|
|
1,005
|
|
Total
assets
|
|
$
|
270,603
|
|
$
|
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
|
|
$
|
7,930
|
|
$
|
4,369
|
|
Accrued
salaries and benefits
|
|
|
13,564
|
|
|
16,808
|
|
Accrued
insurance and claims
|
|
|
7,464
|
|
|
7,048
|
|
Accrued
fuel expense
|
|
|
5,878
|
|
|
6,481
|
|
Other
accrued expenses
|
|
|
12,423
|
|
|
12,018
|
|
Current
maturities of long-term debt
|
|
|
10,200
|
|
|
975
|
|
Current
maturities of capital lease obligations
|
|
|
3,808
|
|
|
507
|
|
Total
current liabilities
|
|
|
61,267
|
|
|
48,206
|
|
Long-term
debt, net of current maturities
|
|
|
27,358
|
|
|
9,608
|
|
Capital
lease obligations, net of current maturities
|
|
|
25,552
|
|
|
933
|
|
Deferred
income taxes
|
|
|
15,517
|
|
|
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
23,509,308
and 23,111,367 shares at March 31, 2007 and June 30, 2006
|
|
|
776
|
|
|
763
|
|
Retained
earnings
|
|
|
49,200
|
|
|
32,092
|
|
Additional
paid-in capital
|
|
|
92,968
|
|
|
90,828
|
|
Accumulated
other comprehensive loss
|
|
|
(2,060
|
)
|
|
(2,256
|
)
|
Total
stockholders’ equity
|
|
|
140,884
|
|
|
121,427
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
270,603
|
|
$
|
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
March
31,
|
|
For
the nine months ended
March
31,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Freight
revenue
|
|
$
|
105,162
|
|
$
|
100,844
|
|
$
|
320,281
|
|
$
|
307,072
|
|
Fuel
surcharges
|
|
|
15,238
|
|
|
14,469
|
|
|
50,717
|
|
|
46,450
|
|
|
|
|
120,400
|
|
|
115,313
|
|
|
370,998
|
|
|
353,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries,
wages, and employee benefits
|
|
|
35,829
|
|
|
35,697
|
|
|
107,558
|
|
|
106,028
|
|
Fuel
|
|
|
27,547
|
|
|
25,289
|
|
|
84,921
|
|
|
79,436
|
|
Operations
and maintenance
|
|
|
8,321
|
|
|
7,087
|
|
|
23,573
|
|
|
21,811
|
|
Insurance
and claims
|
|
|
3,299
|
|
|
3,620
|
|
|
10,829
|
|
|
10,967
|
|
Depreciation
and amortization
|
|
|
6,679
|
|
|
3,199
|
|
|
14,163
|
|
|
9,283
|
|
Revenue
equipment rentals
|
|
|
7,281
|
|
|
9,718
|
|
|
25,301
|
|
|
30,344
|
|
Purchased
transportation
|
|
|
16,908
|
|
|
16,272
|
|
|
53,059
|
|
|
51,935
|
|
Costs
of products and services sold
|
|
|
1,480
|
|
|
1,349
|
|
|
5,342
|
|
|
3,990
|
|
Professional
and consulting fees
|
|
|
537
|
|
|
644
|
|
|
1,524
|
|
|
2,197
|
|
Communications
and utilities
|
|
|
1,248
|
|
|
1,007
|
|
|
3,549
|
|
|
3,050
|
|
Operating
taxes and licenses
|
|
|
2,136
|
|
|
1,891
|
|
|
6,385
|
|
|
6,104
|
|
General
and other operating
|
|
|
1,515
|
|
|
1,574
|
|
|
4,556
|
|
|
4,539
|
|
Total
operating expenses
|
|
|
112,780
|
|
|
107,347
|
|
|
340,760
|
|
|
329,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
7,620
|
|
|
7,966
|
|
|
30,238
|
|
|
23,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
(income) expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
(1
|
)
|
|
(41
|
)
|
|
(16
|
)
|
|
(119
|
)
|
Interest
expense
|
|
|
996
|
|
|
227
|
|
|
2,058
|
|
|
727
|
|
Other
(income) expense, net
|
|
|
35
|
|
|
3
|
|
|
39
|
|
|
29
|
|
Income
before income taxes
|
|
|
6,590
|
|
|
7,777
|
|
|
28,157
|
|
|
23,201
|
|
Provision
for income taxes
|
|
|
2,660
|
|
|
3,100
|
|
|
11,049
|
|
|
9,041
|
|
Net
income
|
|
$
|
3,930
|
|
$
|
4,677
|
|
$
|
17,108
|
|
$
|
14,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$
|
0.17
|
|
$
|
0.20
|
|
$
|
0.72
|
|
$
|
0.61
|
|
Basic
earnings per share
|
|
$
|
0.17
|
|
$
|
0.20
|
|
$
|
0.73
|
|
$
|
0.62
|
|
Average
shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
23,739
|
|
|
23,496
|
|
|
23,657
|
|
|
23,333
|
|
Basic
|
|
|
23,483
|
|
|
22,928
|
|
|
23,391
|
|
|
22,750
|
|
The
accompanying notes are an integral part of these unaudited consolidated
financial statements.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
For
the nine months ended March 31, 2007 and 2006
(Dollars
in thousands)
(Unaudited)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income
|
|
$
|
17,108
|
|
$
|
14,160
|
|
Adjustments
to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
14,399
|
|
|
9,452
|
|
Gain
on sale of equipment
|
|
|
(236
|
)
|
|
(169
|
)
|
Stock
based compensation
|
|
|
1,080
|
|
|
2,484
|
|
Deferred
income taxes
|
|
|
6,166
|
|
|
(1,682
|
)
|
Provision
for doubtful accounts
|
|
|
288
|
|
|
556
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
Trade
receivables
|
|
|
(959
|
)
|
|
2,620
|
|
Income
tax recoverable
|
|
|
4,698
|
|
|
(905
|
)
|
Tires
in service
|
|
|
125
|
|
|
764
|
|
Prepaid
expenses and other current assets
|
|
|
(1,761
|
)
|
|
(3,147
|
)
|
Other
assets
|
|
|
230
|
|
|
(138
|
)
|
Accounts
payable and accrued expenses
|
|
|
823
|
|
|
(3,593
|
)
|
Income
tax payable
|
|
|
----
|
|
|
(265
|
)
|
Net
cash provided by operating activities
|
|
|
41,961
|
|
|
20,137
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(50,386
|
)
|
|
(47,407
|
)
|
Proceeds
on sale of property and equipment
|
|
|
30,238
|
|
|
32,447
|
|
Purchase
of businesses, net of cash
|
|
|
(29,457
|
)
|
|
---
|
|
Net
cash used in investing activities
|
|
|
(49,605
|
)
|
|
(14,960
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from issuances of common stock
|
|
|
785
|
|
|
900
|
|
Proceeds
from bank borrowings and debt
|
|
|
10,250
|
|
|
---
|
|
Payments
on long-term debt
|
|
|
(2,113
|
)
|
|
(1,095
|
)
|
Principal
payments under capital lease obligations
|
|
|
(1,139
|
)
|
|
(773
|
)
|
Net
cash provided by (used in) provided by financing
activities
|
|
|
7,783
|
|
|
(968
|
)
|
|
|
|
|
|
|
|
|
Increase
in cash and cash equivalents
|
|
|
139
|
|
|
4,209
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
1,674
|
|
|
11,115
|
|
Cash
and cash equivalents at end of period
|
|
$
|
1,813
|
|
$
|
15,324
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
2,004
|
|
$
|
717
|
|
Income
taxes paid
|
|
$
|
899
|
|
$
|
12,215
|
|
Supplemental
disclosure of non-cash flow investing activities:
|
|
|
|
|
|
|
|
Lease
obligation/debt incurred in the purchase of equipment
|
|
$
|
47,898
|
|
$
|
1,876
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these unaudited consolidated
financial statements.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2007
(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 (“SEC”) 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
February 2007, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities
(“SFAS
159”). SFAS 159 permits entities to choose to measure certain financial assets
and liabilities at fair value. Unrealized gains and losses on items for which
the fair value option has been elected are reported in earnings. SFAS 159 is
effective for fiscal years beginning after November 15, 2007. The Company is
currently assessing the expected impact of adopting SFAS 159 on our consolidated
financial position and results of operations when it becomes
effective.
In
September 2006, the 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, FASB issued Statement of Financial Accounting Standards (“SFAS”)
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.
CELADON
GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2007
(Unaudited)
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.
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 March 31, 2007, 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
March
31,
|
|
For
nine months ended
March
31,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
3,930
|
|
$
|
4,677
|
|
$
|
17,108
|
|
$
|
14,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding
|
|
|
23,483
|
|
|
22,928
|
|
|
23,391
|
|
|
22,750
|
|
Equivalent
shares issuable upon exercise of stock options
|
|
|
256
|
|
|
568
|
|
|
266
|
|
|
583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
shares
|
|
|
23,739
|
|
|
23,496
|
|
|
23,657
|
|
|
23,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.17
|
|
$
|
0.20
|
|
$
|
0.73
|
|
$
|
0.62
|
|
Diluted
|
|
$
|
0.17
|
|
$
|
0.20
|
|
$
|
0.72
|
|
$
|
0.61
|
|
CELADON
GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2007
(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”), Servicios de Transportacion Jaguar,
S.A. de C.V., ("Jaguar"),
and
Celadon Canada, Inc. ("CelCan").
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 March 31, 2007
|
|
|
|
|
|
|
|
Operating
revenue
|
|
$
|
118,203
|
|
$
|
2,197
|
|
$
|
120,400
|
|
Operating
income
|
|
|
7,272
|
|
|
348
|
|
|
7,620
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended March 31, 2006
|
|
|
|
|
|
|
|
|
|
|
Operating
revenue
|
|
$
|
113,231
|
|
$
|
2,082
|
|
$
|
115,313
|
|
Operating
income
|
|
|
7,547
|
|
|
419
|
|
|
7,966
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
months ended March 31, 2007
|
|
|
|
|
|
|
|
|
|
|
Operating
revenue
|
|
$
|
363,330
|
|
$
|
7,668
|
|
$
|
370,998
|
|
Operating
income
|
|
|
29,034
|
|
|
1,204
|
|
|
30,238
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
months ended March 31, 2006
|
|
|
|
|
|
|
|
|
|
|
Operating
revenue
|
|
$
|
347,383
|
|
$
|
6,139
|
|
$
|
353,522
|
|
Operating
income
|
|
|
22,705
|
|
|
1,133
|
|
|
23,838
|
|
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
March
31,
|
|
For
the nine months ended
March
31,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Operating
revenue:
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
99,373
|
|
$
|
95,177
|
|
$
|
305,575
|
|
$
|
289,391
|
|
Canada
|
|
|
13,654
|
|
|
13,629
|
|
|
43,888
|
|
|
43,364
|
|
Mexico
|
|
|
7,373
|
|
|
6,507
|
|
|
21,535
|
|
|
20,767
|
|
Total
|
|
$
|
120,400
|
|
$
|
115,313
|
|
$
|
370,998
|
|
$
|
353,522
|
|
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
March
31, 2007
(Unaudited)
6. Stock
Based Compensation
On
July
1, 2005, the Company adopted 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
and
68,160 restricted shares. The Company is authorized to grant an additional
800,871 shares.
The
following table summarizes the expense components of our stock based
compensation program:
|
|
For
three months ended
March
31,
|
|
For
nine months ended
March
31,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options expense
|
|
$
|
247
|
|
$
|
282
|
|
$
|
734
|
|
$
|
282
|
|
Restricted
stock expense
|
|
|
223
|
|
|
141
|
|
|
530
|
|
|
328
|
|
Stock
appreciation rights expense
|
|
|
103
|
|
|
312
|
|
|
(1,775
|
)
|
|
1,950
|
|
Total
stock related compensation expense
|
|
$
|
573
|
|
$
|
735
|
|
$
|
(511
|
)
|
$
|
2,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 March 31, 2007 and
changes for the nine months 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
|
|
|
(329,872
|
)
|
$
|
2.68
|
|
|
---
|
|
|
---
|
|
Forfeited
or expired
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
---
|
|
Outstanding
at March 31, 2007
|
|
|
1,136,838
|
|
$
|
9.02
|
|
|
7.09
|
|
$
|
8,728,302
|
|
Exercisable
at March 31, 2007
|
|
|
620,938
|
|
$
|
5.68
|
|
|
5.66
|
|
$
|
6,841,190
|
|
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
March
31, 2007
(Unaudited)
Restricted
Shares
|
Number
of Shares
|
|
Weighted
Average
Grant
Date Fair Value
|
Unvested
at July 1, 2006
|
274,230
|
|
$8.96
|
Granted
|
68,160
|
|
16.79
|
Vested
|
---
|
|
---
|
Forfeited
|
---
|
|
---
|
Unvested
at March 31, 2007
|
342,390
|
|
$10.52
|
Restricted
shares granted to employees have been granted with a share price equal to the
market price on the grant date and vest by 25 percent per year, commencing
with
the first anniversary of the grant date. In addition, certain financial targets
must be met for these shares to vest. Restricted shares granted to non-employee
directors have been granted with an exercise price equal to the market price
on
the grant date and vest on the date of the Company’s next annual
meeting.
As
of
March 31, 2007, the Company had $2.7 million and $2.4 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 3.4 years for stock options and 2.1 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 March 31, 2007
|
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 the SARs 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.
CELADON
GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2007
(Unaudited)
7. Comprehensive
Income
Comprehensive
income consisted of the following components for the third quarter of
fiscal 2007 and 2006, respectively, and the nine months ended March 31,
2007 and 2006, respectively (in thousands):
|
|
Three
months ended
March
31,
|
|
Nine
months ended
March
31,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
3,930
|
|
$
|
4,677
|
|
$
|
17,108
|
|
$
|
14,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
(16
|
)
|
|
(509
|
)
|
|
196
|
|
|
(191
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive income
|
|
$
|
3,914
|
|
$
|
4,168
|
|
$
|
17,304
|
|
$
|
13,969
|
|
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. Lease
Obligations
In
the
third quarter of fiscal 2007, the Company declared its intent to
purchase certain trailers previously financed with operating leases at the
end
of the lease term. This resulted in approximately 2,060 trailers being
converted from operating leases to capital leases. As a result of these
conversions, fixed assets and capital lease obligations both increased $29.1
million.
10.
Acquisitions
On
February 28, 2007, the Company acquired certain assets of Warrior Services
Inc.
d/b/a Warrior Xpress ("Warrior"). Pursuant to the asset purchase agreement,
our
wholly-owned subsidiary, CTSI, acquired Warrior’s truckload business, including
82 tractors and 287 trailers for approximately $8.3 million, the entire amount
of which was allocated to equipment held for resale, of which $5.1 million
is
remaining. In connection with the acquisition, we have also offered employment
to approximately 110 qualified former Warrior drivers.
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, of which $13.0 million was allocated to equipment
held for resale and the remaining $8.2 million to tractors and trailers.
As of
March 31, 2007 we have $6.5 million of the assets remaining in equipment
held
for resale. In connection with the acquisition, we also have offered employment
to approximately 150 qualified former Digby drivers.
11.
Reclassification
Certain
reclassifications have been made to the March 31, 2006 financial statements
to
conform to the March 31, 2007 presentation.
Item
2. 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 fifteen 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 services. 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 acquisition of certain assets of Highway
Express in August 2003, CX Roberson in January 2005, Digby in October 2006,
and
Warrior in February 2007, 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
21,000 trucking fleets representing approximately 445,000 tractors. TruckersB2B
represents a separate operating segment under generally accepted accounting
principles.
Recent
Results and Financial Condition
For
the
third quarter of fiscal 2007, operating revenue increased 4.4% to $120.4
million, compared with $115.3 million for the third quarter of fiscal 2006.
Excluding fuel surcharge, operating revenue increased 4.3% to $105.2 million
for
the third quarter of fiscal 2007, compared with $100.8 million for the third
quarter of fiscal 2006. Net income decreased 17.0% to $3.9 million from $4.7
million, and diluted earnings per share decreased to $0.17 from $0.20. We
believe that a less robust freight environment and more industry-wide trucking
capacity in the third quarter of fiscal 2007 compared to the third quarter
of
fiscal 2006 contributed to our decrease in earnings.
At
March
31, 2007, our total balance sheet debt (including capital lease obligations
less
cash) was $65.1 million, and our total stockholders’ equity was $140.9 million,
for a total debt to capitalization ratio of 46.2%. At March 31, 2007, we had
$30.2 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 March 31, 2007, we had future operating
lease obligations totaling $158.5 million, including residual value guarantees
of approximately $68 million.
|
March
31, 2007
|
|
March
31, 2006
|
|
Tractors
|
|
Trailers
|
|
Tractors
|
|
Trailers
|
Owned
equipment
|
1,249
|
|
1,168
|
|
509
|
|
1,144
|
Capital
leased equipment
|
---
|
|
2,163
|
|
---
|
|
110
|
Operating
leased equipment
|
1,339
|
|
4,778
|
|
1,715
|
|
6,208
|
Independent
contractors
|
384
|
|
---
|
|
347
|
|
---
|
Total
|
2,972
|
|
8,109
|
|
2,571
|
|
7,462
|
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 March 31, 2007, there were 384 independent contractors
providing a combined 12.9% of our tractor capacity.
In
January 2007, we declared our intent to purchase approximately
2,060 trailers, in turn converting them from operating leases to capital leases.
Accordingly, capital lease debt of $29.1 million was added to our balance sheet
at March 31, 2007. We chose to convert these leases to meet a recently
established long term goal of having all equipment represented on the balance
sheet over the next few years.
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 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
March 31,
|
|
For
the nine months
ended
March 31,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Freight
revenue(1)
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries,
wages, and employee benefits
|
|
|
34.1
|
%
|
|
35.4
|
%
|
|
33.6
|
%
|
|
34.5
|
%
|
Fuel(1)
|
|
|
11.7
|
%
|
|
10.7
|
%
|
|
10.7
|
%
|
|
10.7
|
%
|
Operations
and maintenance
|
|
|
7.9
|
%
|
|
7.0
|
%
|
|
7.4
|
%
|
|
7.1
|
%
|
Insurance
and claims
|
|
|
3.1
|
%
|
|
3.6
|
%
|
|
3.4
|
%
|
|
3.6
|
%
|
Depreciation
and amortization
|
|
|
6.4
|
%
|
|
3.2
|
%
|
|
4.4
|
%
|
|
3.0
|
%
|
Revenue
equipment rentals
|
|
|
6.9
|
%
|
|
9.6
|
%
|
|
7.9
|
%
|
|
9.9
|
%
|
Purchased
transportation
|
|
|
16.1
|
%
|
|
16.1
|
%
|
|
16.6
|
%
|
|
16.9
|
%
|
Costs
of products and services sold
|
|
|
1.4
|
%
|
|
1.3
|
%
|
|
1.7
|
%
|
|
1.3
|
%
|
Professional
and consulting fees
|
|
|
0.5
|
%
|
|
0.6
|
%
|
|
0.5
|
%
|
|
0.7
|
%
|
Communications
and utilities
|
|
|
1.2
|
%
|
|
1.0
|
%
|
|
1.1
|
%
|
|
1.0
|
%
|
Operating
taxes and licenses
|
|
|
2.0
|
%
|
|
1.9
|
%
|
|
2.0
|
%
|
|
2.0
|
%
|
General
and other operating
|
|
|
1.5
|
%
|
|
1.7
|
%
|
|
1.3
|
%
|
|
1.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
92.8
|
%
|
|
92.1
|
%
|
|
90.6
|
%
|
|
92.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
7.2
|
%
|
|
7.9
|
%
|
|
9.4
|
%
|
|
7.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
0.9
|
%
|
|
0.2
|
%
|
|
0.6
|
%
|
|
0.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
6.3
|
%
|
|
7.7
|
%
|
|
8.8
|
%
|
|
7.6
|
%
|
Provision
for income taxes
|
|
|
2.6
|
%
|
|
3.1
|
%
|
|
3.5
|
%
|
|
2.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
3.7
|
%
|
|
4.6
|
%
|
|
5.3
|
%
|
|
4.7
|
%
|
(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 $15.2 million and $14.5 million for the third
quarter
of fiscal 2007 and 2006, respectively, and $50.7 million and $46.5
million
for the nine months ended March 31, 2007 and 2006,
respectively.
|
Comparison
of Three Months Ended March 31, 2007 to Three Months Ended March
31, 2006
Operating
revenue increased by $5.1 million, or 4.4%, to $120.4 million for the
third quarter of fiscal 2007, from $115.3 million for the third quarter of
fiscal 2006.
Freight
revenue increased by $4.4 million, or 4.4%, to $105.2 million for the third
quarter of fiscal 2007, from $100.8 million for the third quarter of fiscal
2006. This increase was primarily attributable to a 2.0% improvement in average
freight revenue per loaded mile to $1.52 from $1.49, offset by a decrease in
average miles per tractor per week from 2,118 miles to 1,962 miles and an
increase in non-revenue miles from 8.7% to 10.3% of total miles. The improvement
in average freight revenue per loaded 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. However, average revenue per tractor per
week, which is our primary measure of asset productivity, decreased 7.0% to
$2,682 in the third quarter of fiscal 2007, from $2,883 for the third quarter
of
fiscal 2006. This decrease was due to lower general freight demand, an increase
in fleet size to 2,972 tractors at March 31, 2007, from 2,571 tractors at March
31, 2006, and an increase in non-revenue miles. As the freight market weakened
and we ran empty miles to on-board the Warrior drivers and position equipment
for sale, our non-revenue miles increased.
Revenue
for TruckersB2B was $2.2 million in the third quarter of fiscal 2007,
compared to $2.1 million for the third quarter of fiscal 2006. The increase
was primarily related to increased use of the Truckers B2B discount tire
program.
Salaries,
wages, and employee benefits were $35.8 million, or 34.1% of freight
revenue, for the third quarter of fiscal 2007, compared to $35.7 million,
or 35.4% of freight revenue, for the third quarter of fiscal 2006. The decrease
in wages and benefits as a percentage of freight revenue is largely due to
a
decrease in bonus compensation and medical claims expense in the third quarter
of fiscal 2007 compared to the third quarter of fiscal 2006. These factors
more
than offset an increase in driver payroll related to increased company paid
miles, resulting from more company tractors and higher non-revenues miles.
Fuel
expenses, net of fuel surcharge revenue of $15.2 million and $14.5 million
for
the third quarter of fiscal 2007 and 2006, respectively, increased to
$12.3 million, or 11.7% of freight revenue, for the third quarter of fiscal
2007, compared to $10.8 million, or 10.7% of freight revenue, for the third
quarter of fiscal 2006. This increase was attributable to an increase in
non-revenue miles, for which we do not receive fuel surcharges, a 1.3% increase
in average fuel prices to $2.33 per gallon in the third quarter of fiscal 2007,
from $2.30 per gallon in the third quarter of fiscal 2006, and an increase
in
company miles as a percentage of all miles. In addition, although we were able
to recover higher fuel costs through our fuel surcharge program, there is a
lag,
which negatively impacts results when prices are increasing. Increased fuel
prices and increased non-revenue miles will increase our operating expenses
to
the extent not offset by surcharges.
Operations
and maintenance increased to $8.3 million for the third quarter of fiscal
2007, from $7.1 million for the third quarter of fiscal 2006. Operations and
maintenance increased to 7.9% of freight revenue, for the third quarter of
fiscal 2007, from 7.0% for the third quarter of fiscal 2006. Operations and
maintenance consist of direct operating expense, maintenance, and tire expense.
The increase in the third quarter of fiscal 2007 is primarily related to an
increase in costs associated with accident repair and various direct expenses
such as toll expense, cargo handling expense, and increased expenses related
to
harsh weather.
Insurance
and claims expense decreased to $3.3 million for the third quarter of fiscal
2007, from $3.6 million for the third quarter of fiscal 2006, or 3.1% of
freight revenue for the third quarter of fiscal 2007 and 3.6% for the third
quarter of 2006. Insurance consists of premiums for liability, physical damage,
cargo damage, and workers compensation insurance, in addition to claims expense.
The decreases in the overall amount and as a percentage of freight revenue
resulted from decreases in our workers compensation claims, offset by a slight
increase in our cargo insurance expense. 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 $6.7 million for the third quarter of fiscal 2007, compared to
$3.2 million for the third quarter of fiscal 2006. Depreciation and
amortization increased to 6.4% of freight revenue in the third quarter of fiscal
2007, compared to 3.2% of freight revenue for the third quarter of fiscal 2006.
The majority of this increase is related to the addition of tractors purchased
with cash and borrowings and the conversion of operating leases to capital
leases related to approximately 2,060 trailers. In the third quarter of fiscal
2007, the Company declared its intent to purchase certain trailers
previously financed with operating leases. The conversion of the trailer leases
resulted in a simultaneous decrease in our revenue equipment rentals. We
recorded an increase in net loss on sale of equipment of $0.7 million, which
primarily related to repair expense to prepare equipment for sale. 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 equipment with cash or finance with borrowings or capital leases.
Accordingly, going forward we expect depreciation and amortization will increase
as a percentage of freight revenue and revenue equipment rentals will decrease
as a percentage of freight revenue.
Revenue
equipment rentals were $7.3 million, or 6.9% of freight revenue, for the
third quarter of fiscal 2007, compared to $9.7 million or 9.6% of freight
revenue for the third quarter of fiscal 2006. These decreases were attributable
to a decrease in our tractor and trailer fleet financed under operating leases
as discussed under depreciation and amortization. At March 31, 2007, 1,339
tractors, or 51.7% of our company tractors, were held under operating leases,
compared to 1,715 tractors, or 77.1% of our company tractors, at March 31,
2006.
At March 31 2007, 4,778 trailers, or 58.9%, of our trailer fleet were held
under
operating leases, compared to 6,208, or 83.2%, at March 31, 2006. As we expect
to purchase most of our new revenue equipment with cash or borrowings, we expect
revenue equipment rentals will continue to decrease going forward.
Purchased
transportation increased slightly to $16.9 million, or 16.1% of freight
revenue, for the third quarter of fiscal 2007, from $16.3 million, or 16.1%
of freight revenue, for the third quarter of fiscal 2006. The increase is
primarily related to increased independent contractor expense due to the
increase in independent contractors to 384 at March 31, 2007, from 347 at March
31, 2006. Independent contractors are drivers who cover all their operating
expenses (fuel, driver salaries, maintenance, and equipment costs) for a fixed
payment per mile. The number of independent contractors has grown over recent
months as the Company has partnered with several financing companies that are
making it easier for drivers to purchase trucks.
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, decreased 140 basis points to 6.3% of freight revenue
for
the third quarter of fiscal 2007, from 7.7% of freight revenue for the third
quarter of fiscal 2006.
Income
taxes decreased to $2.7 million, with an effective tax rate of 40.4%, for
the third quarter of fiscal 2007, from $3.1million, with an effective tax rate
of 39.9%, for the third quarter of fiscal 2006. The effective tax rate increased
as a result of decreased earnings which increased the effect of non-deductible
expenses related to our per diem pay structure. 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 decreased to $3.9 million
for
the third quarter of fiscal 2007, from $4.7 million for the third quarter of
fiscal 2006.
Comparison
of Nine Months Ended March 31, 2007 to Nine Months Ended
March 31, 2006
Operating
revenue increased by $17.5 million, or 5.0%, to $371.0 million for the nine
months ended March 31, 2007, from $353.5 million for the nine
months ended March 31, 2006. This increase was primarily attributable to a
3.4%
improvement in average freight revenue per loaded mile, from $1.49 to $1.54,
offset by a decrease in average miles per tractor per week from 2,151 to 2,023
and an increase in non-revenue miles from 8.0% to 10.0% of total miles. The
improvement in average freight revenue per loaded mile resulted primarily from
better overall freight. 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.
However, average freight revenue per tractor per week, which
is
our primary measure of asset productivity, decreased 4.7% to $2,799 for the nine
months ended March 31, 2007, from $2,938 for the nine months ended
March 31, 2006. This decrease was due to lower general freight demand, an
increase in fleet size to 2,972 tractors at March 31, 2007 from 2,571 tractors
at March 31, 2006, and in increase in non-revenue miles. As the freight market
weakened and we ran empty miles to on-board the Warrior drivers and position
equipment for sale, our non-revenue miles increased.
Revenue
for TruckersB2B was $7.7 million for the nine months ended March 31, 2007,
compared to $6.1 million for the nine months ended March 31, 2006. The
increase was primarily related to increased use of the Truckers B2B tire
discount program.
Salaries,
wages, and employee benefits were $107.6 million, or 33.6% of freight
revenue, for the nine months ended March 31, 2007, compared to
$106.0 million, or 34.5% of freight revenue, for the nine months ended
March 31, 2006. The $1.6 million increase related to an increase in driver
payroll from increased company paid miles and an increase in recruiting expenses
relating to hiring more drivers in the nine months ended March 31, 2007 compared
to the nine months ended March 31, 2006. These increases were offset by a
decrease in bonus compensation expenses in the nine months ended March 31,
2007
compared to the nine months ended March 31, 2006.
Fuel
expenses, net of fuel surcharge revenue of $50.7 million and $46.5 million
for
the nine months ended March 31, 2007 and 2006, respectively, remained relatively
constant at $34.2 million, or 10.7% of freight revenue, for the nine months
ended March 31, 2007, compared to $33.0 million, or 10.7% of
freight revenue, for the nine months ended March 31, 2006. Although fuel
expenses as a percentage of freight revenue remained relatively constant for
the
nine months ended March 31, 2007 compared to the nine months ended March 31,
2006, overall fuel expenses increased during the nine months ended March 31,
2007, due to an increase in non-revenue miles for which we do not receive fuel
surcharge, an increase in the average price per gallon of fuel, offset by fuel
surcharges, and an increase in company miles as a percentage of all miles.
Although we were able to recover higher fuel costs through our fuel surcharge
program, there is a lag, which negatively impacts results when prices are
increasing. Increased fuel prices and increased non-revenue miles will increase
our operating expenses to the extent that they are not offset by fuel
surcharges.
Operations
and maintenance increased to $23.6 million for the nine months ended March
31, 2007, from $21.8 million for the nine months ended March 31, 2006.
As a percentage of freight revenue, operations and maintenance increased to
7.4%
for the nine months ended March 31, 2007, from 7.1% for the nine months ended
March 31, 2006. Operations and maintenance consist of direct operating expense,
maintenance, and tire expense. The increase during the nine months ended March
31, 2007, is primarily related to an increase in costs associated with accident
repair and various direct expenses such as toll expense and cargo handling
expense.
Insurance
and claims expense was $10.8 million, or 3.4% of freight revenue, for the
nine months ended March 31, 2007, compared to $11.0 million, or 3.6% of
freight revenue, for the nine months ended March 31, 2006. The primary reason
for the decrease in insurance and claims expense was a decrease in liability
insurance premiums, partially related to a refund in premiums for fiscal 2006,
offset by slight increases in liability claims expense and cargo expense.
Insurance consists of premiums for liability, physical damage, cargo damage,
and
workers compensation insurance, in addition to claims expense. 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 $14.2 million, or 4.4% of freight revenue, for the nine months
ended March 31, 2007, from $9.3 million, or 3.0% of freight
revenue, for the nine months ended March 31, 2006. The majority of this increase
is related to tractors purchased with cash and borrowings and the conversion
of
operating leases to capital leases related to approximately 2,060 trailers.
In
the third quarter of fiscal 2007, the Company declared its intent to
purchase certain trailers previously financed with operating leases. The
conversion of the trailer leases resulted in a simultaneous decrease in our
revenue equipment rentals. Because
of higher equipment prices we expect our total costs of depreciation and
amortization per unit to continue to increase for the remainder of 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 equipment with cash or finance with borrowings or capital leases.
For the remainder of fiscal 2007, we expect depreciation and amortization to
increase and revenue equipment rentals to decrease as a percentage of revenue.
Revenue
equipment rentals were $25.3 million, or 7.9% of freight revenue, for the
nine months ended March 31, 2007, compared to $30.3 million, or 9.9% of
freight revenue for the nine months ended March 31, 2006. These decreases were
attributable to a decreased percentage of our tractor and trailer fleet held
under operating leases as discussed under depreciation and amortization, for
the
nine months ended March 31, 2007. At March 31, 2007, 1,339 tractors, or 51.7%
of
our company tractors, were held under operating leases, compared to 1,715
tractors, or 77.1% of our company tractors, at March 31, 2006. At March 31,
2007, 4,778 trailers, or 58.9%, of our trailer fleet were held under operating
leases, compared to 6,208, or 83.2%, at March 31, 2006.
As
we
expect to purchase most of our new revenue equipment with cash or borrowings,
we
expect revenue equipment rentals will continue to decrease going forward.
Purchased
transportation increased to $53.1 million, or 16.6% of freight revenue, for
the nine months ended March 31, 2007, from $51.9 million, or
16.9% of freight revenue, for the nine months ended March 31, 2006. The increase
in expense is primarily related to increased independent contactor expense
due
to the increase to 384 independent contractors at March 31, 2007, from 347
at
March 31, 2006, and was offset by a decrease in our dedicated services expenses.
Independent contractors are drivers who cover all their operating expenses
(fuel, driver salaries, maintenance, and equipment costs) for a fixed payment
per mile. The number of independent contractors has grown over recent months
as
the Company has partnered with several financing companies that are making
it
easier for drivers to purchase trucks.
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 120 basis points to 8.8% of freight revenue for
the nine months ended March 31, 2007, from 7.6% of freight revenue for the
nine
months ended March 31, 2006.
Income
taxes resulted in expense of $11.0 million with an effective tax rate of 39.2%,
for the nine months ended March 31, 2007, compared to $9.0 million, with an
effective tax rate of 39.0%, for the nine months ended March 31, 2006. 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 $17.1 million
for
the nine months ended March 31, 2007, from $14.2 million for the nine months
ended March 31, 2006.
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,
acquisitions, and to repay debt. We anticipate that upgrading revenue equipment
from the Digby and Warrior acquisitions, repayment of debt incurred in
connection with the Digby and Warrior acquisitions, 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
March 31, 2007, we had on order 327 tractors for delivery through fiscal 2008.
These revenue equipment orders represent a capital commitment of approximately
$28.4 million, before considering the proceeds of equipment dispositions. In
fiscal 2007, we purchased most of our new tractors with cash or borrowings
and
acquired most of the new trailers under off-balance sheet operating leases.
We
also converted the operating leases of approximately 2,060 trailers to capital
leases during the three months ended March 31, 2007. At March 31, 2007 our
total
balance sheet debt, including capital lease obligations and current maturities,
was $66.9 million, compared to $7.4 million at March 31, 2006. Our
debt-to-capitalization ratio (total balance sheet debt (including capital lease
obligations and current maturities) as a percentage of total balance sheet
debt
plus total stockholders' equity) was 32.2% at March 31, 2007.
We
believe we will be able to fund our operating expenses, as well as our current
commitments for the acquisition of revenue equipment 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 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
nine months ended March 31, 2007, net cash provided by operations was $42.0
million, compared to cash provided by operations of $20.1 million for the nine
months ended March 31, 2006. The increase in cash provided by operations is
due
primarily to the increases in net income, depreciation and amortization, and
deferred taxes, offset by changes in operating assets and liabilities related
to
decreased current income taxes, accounts payable, and accrued expenses, offset
by increased trade receivables and prepaid assets.
Net
cash
used in investing activities was $49.6 million for the nine months ended March
31, 2007 compared to $15.0 million for the nine months ended March 31, 2006.
Cash used in investing activities includes the net cash effect of acquisitions
and dispositions of revenue equipment during each period. Capital expenditures
for equipment totaled $50.4 million for the nine months ended March 31, 2007,
and $47.4 million for the nine months ended March 31, 2006, reflecting our
recent practice of purchasing new tractors with cash on hand. We generated
proceeds from the sale of property and equipment of $30.2 million and $32.4
million for the nine months ended March 31, 2007 and March 31, 2006,
respectively. In October 2006, we used $21.2 million to purchase the assets
of
Digby. In February 2007, we used $8.3 million to purchase the assets of
Warrior.
Net
cash
provided by financing activities was $7.8 million for the nine months ended
March 31, 2007, compared to cash used of $1.0 million for the nine months ended
March 31, 2006. 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 and Warrior.
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 March 31, 2007,
we
had future operating lease obligations totaling $158.5 million, including
residual value guarantees of approximately $68.0 million. We were obligated
for
payments related to operating leases of $90.5 million and $120.6 million at
March 31, 2007 and 2006, 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 intend to use cash generated from
operations, borrowings, and capital leases to reflect all of our assets on
the
balance sheet over the next few years. We will, however, continue to use
operating leases to finance the acquisition of some trailers during this
time.
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, Inc., 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 March 31, 2007,
and
expect to remain in compliance for the foreseeable future. At March 31, 2007,
$15.0 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
March 31, 2007, our operating leases, capitalized leases, other debts,
and future commitments have stated maturities or minimum annual payments as
follows:
|
|
Annual
Cash Requirements
as
of March 31, 2007
(in
thousands)
Amounts
Due by Period
|
|
|
|
Total
|
|
Less
than
One
Year
|
|
One
to
Three
Years
|
|
Three
to Five
Years
|
|
More
than
Five
Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
leases
|
|
$
|
90,491
|
|
$
|
27,015
|
|
$
|
27,251
|
|
$
|
19,136
|
|
$
|
17,089
|
|
Lease
residual value guarantees
|
|
|
68,020
|
|
|
8,029
|
|
|
29,956
|
|
|
5,985
|
|
|
24,050
|
|
Capital
leases(1)
|
|
|
33,341
|
|
|
5,028
|
|
|
9,494
|
|
|
18,819
|
|
|
---
|
|
Long-term
debt(1)(1)
|
|
|
40,304
|
|
|
12,234
|
|
|
12,345
|
|
|
15,725
|
|
|
---
|
|
Sub-total
|
|
$
|
232,156
|
|
$
|
52,306
|
|
$
|
79,046
|
|
$
|
59.665
|
|
$
|
41,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future
purchase of revenue equipment
|
|
$
|
28,420
|
|
$
|
17,170
|
|
$
|
11,250
|
|
|
---
|
|
|
---
|
|
Employment
and consulting agreements(2)
|
|
|
828
|
|
|
717
|
|
|
111
|
|
|
---
|
|
|
---
|
|
Standby
Letters of Credit
|
|
|
4,775
|
|
|
4,775
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
266,179
|
|
$
|
74,968
|
|
$
|
90,407
|
|
$
|
59,665
|
|
$
|
41,139
|
|
(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 14% of our tractors
and 26% 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 March 31, 2007, the interest rate for
revolving borrowings under our credit facility was LIBOR plus 0.75%. At March
31, 2007, we had $15.0 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 nine months
ended March 31, 2007 (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 $330,000.
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 nine months ended
March 31, 2007 (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 $25,000.
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, the FASB issued SFAS 133,
"Accounting for Derivative Instruments and Certain Hedging Activities." In
June
2000, the 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 March 31, 2007, 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 March 31, 2007, we
had
no derivative financial instruments in place to reduce our exposure to fuel
price fluctuations.
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
third 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.
Part
II. Other Information
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 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.
In
addition to the risk factors set forth in our Form 10-K and the Form 10-Q
referenced above, we believe that the recent acquisition of certain assets
of
Warrior increases the level of risk and uncertainty present in our business.
The
risks and uncertainties, include, without limitation, the risk that integration
of the acquired operation will not proceed as planned; the risk that the Company
will lose key components of the acquired operation, including customers, key
management, and drivers, none of whom is bound to remain with the acquired
operation; the risk that we will not be able to improve the profitability of
the
acquired operation and operate it near the level of the Company’s profitability;
the risk of receiving less than expected for tractors and trailers expected
to
be disposed of and recording a loss on disposal of such equipment; the risk
of
unknown liabilities related to the acquired operation; the risk that acquired
operations will not be accretive to earnings per share on the expected schedule
or at all; and the risk that integrating and managing the acquired operation
will distract management from other operations.
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.)
|
|
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.*
|
|
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.*
|
|
|
*
Filed herewith
|
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.
|
Celadon
Group, Inc.
(Registrant)
|
|
|
|
|
|
/s/
Stephen Russell |
|
Stephen
Russell
|
|
Chairman
of the Board and
Chief
Executive Officer
|
|
|
|
|
|
/s/
Paul Will |
|
Paul
Will
|
|
Chief
Financial Officer, Executive Vice
President,
Treasurer, and Assistant Secretary
|
|
|
Date: April
30, 2007
|
|
28