form10q.htm
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 September 30, 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
October 29, 2007 (the latest practicable date), 23,764,843 shares of the
registrant’s common stock, par value $0.033 per share, were
outstanding.
Index
to
September
30, 2007 Form 10-Q
Part
I.
|
Financial
Information
|
|
|
|
|
|
|
Item
1.
|
Financial
Statements
|
|
|
|
|
|
|
|
Condensed
Consolidated Balance Sheets at September 30, 2007 (Unaudited) and
June 30,
2007
|
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Operations for the three months ended
September
30, 2007 and 2006 (Unaudited)
|
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows for the three months ended
September
30, 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
September
30, 2007 and June 30, 2007
(Dollars
in thousands except per share and par value amounts)
|
|
September
30,
2007
|
|
|
June
30,
2007
|
|
|
|
(unaudited)
|
|
|
|
|
A
S S E T S
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash
equivalents
|
|
$ |
41
|
|
|
$ |
1,190
|
|
Trade
receivables, net of
allowance for doubtful accounts of
$1,059
and $1,176 at September
30, 2007 and June 30, 2007
|
|
|
61,170
|
|
|
|
59,387
|
|
Prepaid
expenses and other
current
assets
|
|
|
14,857
|
|
|
|
10,616
|
|
Tires
in
service
|
|
|
3,338
|
|
|
|
3,012
|
|
Equipment
held for
resale
|
|
|
15,204
|
|
|
|
11,154
|
|
Income
tax
receivable
|
|
|
600
|
|
|
|
1,526
|
|
Deferred
income
taxes
|
|
|
1,712
|
|
|
|
2,021
|
|
Total
current
assets
|
|
|
96,922
|
|
|
|
88,906
|
|
Property
and
equipment
|
|
|
231,226
|
|
|
|
240,898
|
|
Less
accumulated depreciation
and
amortization
|
|
|
51,179
|
|
|
|
44,553
|
|
Net
property and
equipment
|
|
|
180,047
|
|
|
|
196,345
|
|
Tires
in
service
|
|
|
1,261
|
|
|
|
1,449
|
|
Goodwill
|
|
|
19,137
|
|
|
|
19,137
|
|
Other
assets
|
|
|
1,428
|
|
|
|
1,076
|
|
Total
assets
|
|
$ |
298,795
|
|
|
$ |
306,913
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$ |
12,366
|
|
|
$ |
7,959
|
|
Accrued
salaries and
benefits
|
|
|
11,028
|
|
|
|
11,779
|
|
Accrued
insurance and
claims
|
|
|
6,954
|
|
|
|
6,274
|
|
Accrued
fuel
expense
|
|
|
6,526
|
|
|
|
6,425
|
|
Other
accrued
expenses
|
|
|
11,559
|
|
|
|
12,157
|
|
Current
maturities of long-term
debt
|
|
|
10,764
|
|
|
|
10,736
|
|
Current
maturities of capital
lease
obligations
|
|
|
6,291
|
|
|
|
6,228
|
|
Total
current
liabilities
|
|
|
65,488
|
|
|
|
61,558
|
|
Long-term
debt, net of current
maturities
|
|
|
13,223
|
|
|
|
28,886
|
|
Capital
lease obligations, net of current
maturities
|
|
|
47,125
|
|
|
|
48,792
|
|
Deferred
income
taxes
|
|
|
21,568
|
|
|
|
20,332
|
|
Minority
interest
|
|
|
25
|
|
|
|
25
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Preferred
stock, $1.00 par
value, authorized 404,966 shares; no
shares
issued and
outstanding
|
|
|
---
|
|
|
|
---
|
|
Common
stock, $0.033 par value,
authorized 40,000,000 shares; issued
23,764,843
and 23,581,245
shares at September 30, 2007 and June 30, 2007
|
|
|
784
|
|
|
|
778
|
|
Retained
earnings
|
|
|
56,846
|
|
|
|
54,345
|
|
Additional
paid-in
capital
|
|
|
94,753
|
|
|
|
93,582
|
|
Accumulated
other comprehensive
loss
|
|
|
(1,017 |
) |
|
|
(1,385 |
) |
Total
stockholders’
equity
|
|
|
151,366
|
|
|
|
147,320
|
|
Total
liabilities and
stockholders’
equity
|
|
$ |
298,795
|
|
|
$ |
306,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these unaudited consolidated
financial statements.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
For
the three months ended September 30, 2007 and 2006
(Dollars
in thousands, except per share amounts)
(Unaudited)
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
Freight
revenue
|
|
$ |
113,854
|
|
|
$ |
107,665
|
|
Fuel
surcharges
|
|
|
19,925
|
|
|
|
20,063
|
|
Total
revenue |
|
$ |
133,779 |
|
|
$ |
127,728 |
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Salaries,
wages, and employee
benefits
|
|
|
38,327
|
|
|
|
35,289
|
|
Fuel
|
|
|
33,522
|
|
|
|
30,674
|
|
Operations
and
maintenance
|
|
|
8,436
|
|
|
|
7,634
|
|
Insurance
and
claims
|
|
|
3,541
|
|
|
|
4,231
|
|
Depreciation
and
amortization
|
|
|
7,865
|
|
|
|
3,466
|
|
Revenue
equipment
rentals
|
|
|
6,972
|
|
|
|
9,333
|
|
Purchased
transportation
|
|
|
21,970
|
|
|
|
18,340
|
|
Cost
of products and services
sold
|
|
|
1,723
|
|
|
|
1,867
|
|
Communications
and
utilities
|
|
|
1,231
|
|
|
|
1,094
|
|
Operating
taxes and
licenses
|
|
|
2,161
|
|
|
|
2,089
|
|
General
and other
operating
|
|
|
2,080
|
|
|
|
2,070
|
|
Total
operating
expenses
|
|
|
127,828
|
|
|
|
116,087
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
5,951
|
|
|
|
11,641
|
|
|
|
|
|
|
|
|
|
|
Other
(income) expense:
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
(19 |
) |
|
|
(7 |
) |
Interest
expense
|
|
|
1,314
|
|
|
|
301
|
|
Other
(income) expense,
net
|
|
|
44
|
|
|
|
(15 |
) |
Income
before income taxes
|
|
|
4,612
|
|
|
|
11,362
|
|
Provision
for income taxes
|
|
|
2,111
|
|
|
|
4,249
|
|
Net
income
|
|
$ |
2,501
|
|
|
$ |
7,113
|
|
|
|
|
|
|
|
|
|
|
Earnings
per common share:
|
|
|
|
|
|
|
|
|
Diluted
earnings per
share
|
|
$ |
0.11
|
|
|
$ |
0.30
|
|
Basic
earnings per
share
|
|
$ |
0.11
|
|
|
$ |
0.31
|
|
Average
shares outstanding:
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
23,753
|
|
|
|
23,542
|
|
Basic
|
|
|
23,465
|
|
|
|
23,272
|
|
The
accompanying notes are an integral part of these unaudited consolidated
financial statements.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
For
the three months ended September 30, 2007 and 2006
(Dollars
in thousands)
(Unaudited)
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
2,501
|
|
|
$ |
7,113
|
|
Adjustments
to reconcile net
income to net cash provided
by
operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and
amortization
|
|
|
7,705
|
|
|
|
3,914
|
|
(Gain)\Loss
on sale of
equipment
|
|
|
160
|
|
|
|
(448 |
) |
Stock
based
compensation
|
|
|
211
|
|
|
|
(1,160 |
) |
Deferred
income
taxes
|
|
|
1,545
|
|
|
|
1,714
|
|
Provision
for doubtful
accounts
|
|
|
9
|
|
|
|
204
|
|
Changes
in assets and
liabilities:
|
|
|
|
|
|
|
|
|
Trade
receivables
|
|
|
(1,793 |
) |
|
|
(2,284 |
) |
Income
tax
recoverable
|
|
|
926
|
|
|
|
2,586
|
|
Tires
in
service
|
|
|
(305 |
) |
|
|
(175 |
) |
Prepaid
expenses and other
current assets
|
|
|
(4,240 |
) |
|
|
(3,153 |
) |
Other
assets
|
|
|
(56 |
) |
|
|
147
|
|
Accounts
payable and accrued
expenses
|
|
|
3,922
|
|
|
|
2,115
|
|
Net
cash provided by operating
activities
|
|
|
10,585
|
|
|
|
10,573
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase
of property and
equipment
|
|
|
(3,193 |
) |
|
|
(18,872 |
) |
Proceeds
on sale of property and
equipment
|
|
|
7,815
|
|
|
|
9,034
|
|
Net
cash provided by/(used in)
investing activities
|
|
|
4,622
|
|
|
|
(9,838 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from issuances of common
stock
|
|
|
883
|
|
|
|
782
|
|
Payments
on long-term
debt
|
|
|
(15,635 |
) |
|
|
(2,034 |
) |
Principal
payments under capital
lease obligations
|
|
|
(1,604 |
) |
|
(76
|
) |
Net
cash used in financing
activities
|
|
|
(16,356 |
) |
|
(1,328
|
) |
|
|
|
|
|
|
|
|
|
Decrease
in cash and cash
equivalents
|
|
|
(1,149 |
) |
|
|
(593 |
) |
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of
year
|
|
|
1,190
|
|
|
1,674
|
|
Cash
and cash equivalents at end of
year
|
|
$ |
41
|
|
|
$ |
1,081
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$ |
1,275
|
|
|
$ |
239
|
|
Income
taxes
paid
|
|
$ |
151
|
|
|
$ |
121
|
|
Supplemental
disclosure of non-cash flow investing activities:
|
|
|
|
|
|
|
|
|
Lease
obligation/debt incurred in
the purchase of equipment
|
|
$ |
---
|
|
|
$ |
1,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these unaudited consolidated
financial statements.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 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, 2007.
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 (“SFAS”) 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, FASB issued 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 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 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
September
30, 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
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. FIN 48 is
effective for fiscal years beginning after December 15, 2006. The
company adopted the provisions of FIN 48 as of July 1, 2007 (See note
3).
3. Income
Taxes
Income
tax expense varies from the
federal corporate income tax rate of 35%, primarily due to state income taxes,
net of federal income tax effect and permanent differences related to our per
diem pay structure.
Effective
July 1, 2007, we adopted 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. As of
September 30, 2007, the Company recorded a $0.8 million liability for
unrecognized tax benefits, a portion of which represents penalties and
interest.
As
of September 30, 2007, we are
subject to U.S. Federal income tax examinations for the tax years 2005 through
2007. We file tax returns in numerous state jurisdictions with
varying statutes of limitations.
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
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
2,501
|
|
|
$ |
7,113
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding
|
|
|
23,465
|
|
|
|
23,272
|
|
Equivalent
shares issuable upon exercise of stock options
|
|
|
288
|
|
|
|
270
|
|
|
|
|
|
|
|
|
|
|
Diluted
shares
|
|
|
23,753
|
|
|
|
23,542
|
|
|
|
|
|
|
|
|
|
|
Earnings
per
share
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.11
|
|
|
$ |
0.31
|
|
Diluted
|
|
$ |
0.11
|
|
|
$ |
0.30
|
|
CELADON
GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 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 September 30, 2007
|
|
|
|
|
|
|
|
|
|
Operating
revenue
|
|
$ |
131,294
|
|
|
$ |
2,485
|
|
|
$ |
133,779
|
|
Operating
income
|
|
|
5,566
|
|
|
|
385
|
|
|
|
5,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenue
|
|
$ |
125,052
|
|
|
$ |
2,676
|
|
|
$ |
127,728
|
|
Operating
income
|
|
|
11,228
|
|
|
|
413
|
|
|
|
11,641
|
|
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:
|
|
United
States
|
|
|
Canada
|
|
|
Mexico
|
|
|
Consolidated
|
|
Three
months ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenue
|
|
$ |
110,905
|
|
|
$ |
14,336
|
|
|
$ |
8,538
|
|
|
$ |
133,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenue
|
|
$ |
104,829
|
|
|
$ |
15,964
|
|
|
$ |
6,935
|
|
|
$ |
127,728
|
|
No
customer
accounted for more than 10% of the Company’s total revenue during any of its two
most recent fiscal years or the interim periods presented above.
CELADON
GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2007
(Unaudited)
6. Stock
Based Compensation
On
July
1, 2005, the Company adopted SFAS 123(R) which requires that 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, stockholders approved the Company’s 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
2008, the Company granted 105,000 stock options pursuant to the 2006
Plan. The Company is authorized to grant an additional 789,864 shares
pursuant to the 2006 Plan.
The
following table summarizes the expense components of our stock based
compensation program:
|
|
For
three months ended
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Stock
options expense
|
|
$ |
82
|
|
|
$ |
243
|
|
Restricted
stock expense
|
|
|
212
|
|
|
|
154
|
|
Stock
appreciation rights expense
|
|
|
(577 |
) |
|
|
(2,031 |
) |
Total
stock related
compensation expense
|
|
|
$(283 |
) |
|
$ |
$(1,634 |
) |
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 September 30, 2007
and
changes during the period then ended is presented below:
Options
|
|
Shares
|
|
|
Weighted-Average
Exercise
Price
|
|
|
Weighted-Average
Remaining Contractual
Term
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at July 1, 2007
|
|
|
1,064,992
|
|
|
$ |
9.54
|
|
|
|
7.06
|
|
|
|
6,879,503
|
|
Granted
|
|
|
105,000
|
|
|
$ |
17.46
|
|
|
|
---
|
|
|
|
---
|
|
Exercised
|
|
|
(199,628 |
) |
|
$ |
4.42
|
|
|
|
---
|
|
|
|
---
|
|
Forfeited
or
expired
|
|
|
(77,964 |
) |
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
Outstanding
at September 30, 2007
|
|
|
892,400
|
|
|
$ |
11.33
|
|
|
|
7.59
|
|
|
$ |
1,723,231
|
|
Exercisable
at September 30, 2007
|
|
|
354,373
|
|
|
$ |
7.45
|
|
|
|
6.04
|
|
|
$ |
1,723,231
|
|
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
2008
|
|
Fiscal
2007
|
Weighted
average grant date fair value
|
$9.78
|
|
$9.97
|
Dividend
yield
|
0
|
|
0
|
Expected
volatility
|
48.8%
|
|
64.2%
|
Risk-free
interest rate
|
4.71%
|
|
4.92%
|
Expected
lives
|
7
years
|
|
4
years
|
CELADON
GROUP,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2007
(Unaudited)
Restricted
Shares
|
|
Number
of Shares
|
|
|
Weighted
Average
Grant
Date Fair Value
|
|
Unvested
at July 1, 2007
|
|
|
203,182
|
|
|
$ |
12.73
|
|
Granted
|
|
|
---
|
|
|
|
---
|
|
Vested
|
|
|
---
|
|
|
|
---
|
|
Forfeited
|
|
|
(16,030 |
) |
|
$ |
13.10
|
|
Unvested
at September 30, 2007
|
|
|
187,152
|
|
|
$ |
12.69
|
|
Restricted
shares granted to employees have been granted with a fair value 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 a fair value equal
to the market price on the grant date and vest on the date of the Company’s next
annual meeting.
As
of
September 30, 2007, the Company had $2.9 million and $1.7 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 5.9 years for stock options and 3.3 years for restricted
stock.
Stock
Appreciation Rights
|
|
Number
of Shares
|
|
|
Weighted
Average
Grant
Date Fair Value
|
|
Unvested
at July 1, 2007
|
|
|
254,390
|
|
|
$ |
8.59
|
|
Granted
|
|
|
---
|
|
|
|
---
|
|
Paid
|
|
|
(38,250 |
) |
|
$ |
8.53
|
|
Forfeited
|
|
|
(33,750 |
) |
|
$ |
8.64
|
|
Unvested
at September 30, 2007
|
|
|
182,390
|
|
|
$ |
8.60
|
|
SARs
granted to employees vest on a three or four 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. These fixed
payments will be accrued quarterly from July 1, 2006 to March 31, 2009. The
Company offered this alternative arrangement to mitigate the volatility to
earnings from stock price variance on the SARs.
7. Comprehensive
Income
Comprehensive
income consisted of the following components for the first quarter of
fiscal 2008 and 2007, respectively (in thousands):
|
|
Three
months ended
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
2,501
|
|
|
$ |
7,113
|
|
Foreign
currency translation adjustments
|
|
|
368
|
|
|
|
147
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive income
|
|
$ |
2,869
|
|
|
$ |
7,260
|
|
CELADON
GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2007
(Unaudited)
8. Commitments
and Contingencies
There
are various claims, lawsuits, and
pending actions against the Company and its subsidiaries in the normal course
of
the operations of its businesses with respect to cargo, auto liability, or
income taxes. The Company believes many of these proceedings are covered in
whole or in part by insurance.
On
August
8, 2007, the 384th District Court of the State of Texas situated in El Paso,
Texas, rendered a judgment against CTSI, for approximately $3.4 million in
the
case of Martinez v. Celadon Trucking Services, Inc., which was originally filed
on September 4, 2002. The case involves a workers’ compensation claim of a
former employee of CTSI who suffered a back injury as a result of a traffic
accident. CTSI and the Company believe all actions taken were proper and legal
and contend that the proper and exclusive place for resolution of this dispute
was before the Indiana Workers Compensation Board. While there can be no
certainty as to the outcome, the Company believes that the ultimate resolution
of this dispute will not have a materially adverse effect on its consolidated
financial position or results of operations. CTSI intends to vigorously appeal
the decision.
9. Lease
Obligations
In
the third quarter and fourth
quarters 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 3,700 trailers being converted
from operating leases to capital leases. As a result of these
conversions, fixed assets and capital lease obligations both increased $56.5
million.
10. Acquisitions
On
June
5, 2007, the Company acquired certain assets of Air Road Express Inc. (“Air
Road”). Pursuant to the asset purchase agreement, our wholly-owned subsidiary,
CTSI, acquired Air Road’s truckload business, including 53 tractors and 102
trailers for approximately $2.9 million, of which $2.0 million remains, with
$1.6 million allocated to trailers and the remaining balance in equipment held
for resale. In connection with the acquisition, we offered employment to
approximately 80 qualified, former Air Road drivers.
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, of which $3.9
million remains. Approximately $3.3 million is allocated to tractors
and trailers. In connection with the acquisition, we 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 $9.9 million remains. Approximately
$3.1 million is allocated to tractors and trailers. In connection with the
acquisition, we offered employment to approximately 150 qualified, former Digby
drivers.
11. Reclassification
Certain
reclassifications have been
made to the September 30, 2006 financial statements to conform to the September
30, 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 twenty
largest truckload carriers as measured by revenue. We generated
$502.7 million in operating revenue during our fiscal year ended June 30,
2007. 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 2007 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
five different asset-based acquisitions from 2003 to 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
first quarter of fiscal 2008, operating revenue increased 4.8% to $133.8
million, compared with $127.7 million for the first quarter of fiscal
2007. Excluding fuel surcharge, operating revenue increased 5.8% to
$113.9 million for the first quarter of fiscal 2008, compared with $107.7
million for the first quarter of fiscal 2007. Net income decreased 64.8% to
$2.5
million from $7.1 million, and diluted earnings per share decreased to $0.11
from $0.30. We believe that a weakened freight market and increased
industry-wide trucking capacity in the first quarter of fiscal 2008 compared
to
the first quarter of fiscal 2007 resulted in our need to take on additional
lower rated broker freight and increased non-revenue miles from repositioning
tractors to meet freight, both of which contributed to our decrease in
earnings.
At
September 30, 2007, our total balance sheet debt (including capital lease
obligations less cash) was $77.4 million, and our total stockholders’ equity was
$151.4 million, for a total debt to capitalization ratio of 51.1%. At
September 30, 2007, we had $40.6 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. 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. 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.
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. Until recently many trucking companies had
been able to raise freight rates to cover the increased costs based primarily
on
an industry-wide tight capacity of drivers. As freight demand has softened,
carriers have been willing to accept rate decreases to utilize assets in
service.
Revenue
Equipment and Related Financing
For
the
remainder of fiscal 2008, we expect to obtain tractors and trailers primarily
for replacement, and we expect to maintain the average age of our tractor fleet
at approximately 1.8 years and the average age of our trailer fleet at
approximately 4.0 years. At September 30, 2007, we had future operating
lease obligations totaling $128.4 million, including residual value guarantees
of approximately $62.7 million.
|
|
September
30, 2007
|
|
|
September
30, 2006
|
|
|
|
Tractors
|
|
|
Trailers
|
|
|
Tractors
|
|
|
Trailers
|
|
Owned
equipment
|
|
|
1,198
|
|
|
|
2,470
|
|
|
|
981
|
|
|
|
687
|
|
Capital
leased equipment
|
|
|
---
|
|
|
|
3,742
|
|
|
|
---
|
|
|
|
110
|
|
Operating
leased equipment
|
|
|
1,405
|
|
|
|
1,922
|
|
|
|
1,424
|
|
|
|
6,433
|
|
Independent
contractors
|
|
385
|
|
|
---
|
|
|
363
|
|
|
---
|
|
Total
|
|
|
2,988
|
|
|
|
8,134
|
|
|
|
2,768
|
|
|
|
7,230
|
|
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 September 30, 2007, there were 385
independent contractors providing a combined 12.9% of our tractor
capacity.
In
fiscal
2007, we declared our intent to purchase approximately 3,700 trailers, in turn
converting them from operating leases to capital leases. Accordingly,
capital lease debt of $56.5 million was added to our balance sheet in
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 2008, 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 freight 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.
Subsequent
Event
On October
24, 2007, the
Company's Board of Directors authorized a stock repurchase program pursuant
to
which the Company may purchase up to 2,000,000 shares of the Company's common
stock through October 31, 2008.
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
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
Freight
revenue(1)
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Salaries,
wages, and employee
benefits
|
|
|
33.7 |
% |
|
|
32.8 |
% |
Fuel(1)
|
|
|
11.9 |
% |
|
|
9.9 |
% |
Operations
and
maintenance
|
|
|
7.4 |
% |
|
|
7.1 |
% |
Insurance
and
claims
|
|
|
3.1 |
% |
|
|
3.9 |
% |
Depreciation
and
amortization
|
|
|
6.9 |
% |
|
|
3.2 |
% |
Revenue
equipment
rentals
|
|
|
6.1 |
% |
|
|
8.7 |
% |
Purchased
transportation
|
|
|
19.3 |
% |
|
|
17.0 |
% |
Costs
of products and services
sold
|
|
|
1.5 |
% |
|
|
1.7 |
% |
Communications
and
utilities
|
|
|
1.1 |
% |
|
|
1.0 |
% |
Operating
taxes and
licenses
|
|
|
1.9 |
% |
|
|
1.9 |
% |
General
and other
operating
|
|
|
1.9 |
% |
|
|
2.0 |
% |
|
|
|
|
|
|
|
|
|
Total
operating
expenses
|
|
|
94.8 |
% |
|
|
89.2 |
% |
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
5.2 |
% |
|
|
10.8 |
% |
|
|
|
|
|
|
|
|
|
Other
expense:
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
1.1 |
% |
|
|
0.3 |
% |
|
|
|
|
|
|
|
|
|
Income
before income
taxes
|
|
|
4.1 |
% |
|
|
10.5 |
% |
Provision
for income
taxes
|
|
|
1.9 |
% |
|
|
3.9 |
% |
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
2.2 |
% |
|
|
6.6 |
% |
(1)
|
Freight
revenue is total revenue less fuel surcharges. In this table, fuel
surcharges are eliminated from revenue and subtracted from fuel
expense. Fuel surcharges were $19.9 million and $20.1 million
for the first quarter of fiscal 2008 and 2007,
respectively.
|
Comparison
of Three Months Ended September 30, 2007 to Three Months Ended September
30, 2006
Operating
revenue increased by
$6.1 million, or 4.8%, to $133.8 million for the first quarter of
fiscal 2008, from $127.7 million for the first quarter of fiscal
2007.
Freight
revenue increased by $6.2
million, or 5.8%, to $113.9 million for the first quarter of fiscal 2008, from
$107.7 million for the first quarter of fiscal 2007. This increase
was primarily attributable to an increase of billed miles to 62.6 million for
the first quarter of fiscal 2008, from 59.3 million for the first quarter of
fiscal 2007, primarily due to three acquisitions since the 2006 period, offset
by a decrease in average miles per tractor per week from 2,064 miles to 1,992
miles, an increase in non-revenue miles from 9.7% to 10.6% of total miles,
and a
1.9% reduction in average freight revenue per loaded mile to $1.51 from $1.54
for the first quarters of fiscal 2008 and 2007, respectively. As the
freight market weakened, we took on additional low-rated broker freight to
fill
the resulting void. This led to an increase in non-revenue miles as
we repositioned tractors for the next load. Average revenue per
tractor per week, which is our primary measure of asset productivity, decreased
6.6% to $2,682 in the first quarter of fiscal 2008, from $2,870 for the first
quarter of fiscal 2007. This decrease was due to lower general
freight demand, an increase in fleet size to 2,988 tractors at September 30,
2007, from 2,768 tractors at September 30, 2006, an increase in non-revenue
miles, and a decrease in average freight revenue per mile.
Revenue
for TruckersB2B was
$2.5 million in the first quarter of fiscal 2008, compared to
$2.7 million for the first quarter of fiscal 2007. The decrease
was primarily related to a decrease in tractor and trailer revenue, partially
due to the discontinuance of the trailer incentive program.
Salaries,
wages, and employee benefits
were $38.3 million, or 33.7% of freight revenue, for the first quarter of
fiscal 2008, compared to $35.3 million, or 32.8% of freight revenue, for
the first quarter of fiscal 2007. These increases in salaries, wages,
and benefits are largely due to increased driver payroll related to increased
company paid miles, resulting from an increase in the number of company tractors
and increased non-revenue miles. A portion of the increases are also
attributable to the reduced benefit of SARS compensation related to alternative
fixed compensation arrangements offered to certain SARS recipients in the first
quarter of fiscal 2007. The alternative fixed compensation
arrangements resulted in a benefit, net of normal SARS vesting, to the Company
of $1.6 million in the first quarter of fiscal 2007, compared to a benefit
of
$0.1 million in the first quarter of fiscal 2008. In addition, in the
first quarter of 2007, the Company expensed $1.4 million for fiscal 2007 bonus,
compared to $0 in the current quarter.
Fuel
expenses, net of fuel surcharge
revenue of $19.9 million and $20.1 million for the first quarter of fiscal
2008
and 2007, respectively, increased to $13.6 million, or 11.9% of freight
revenue, for the first quarter of fiscal 2008, compared to $10.6 million,
or 9.9% of freight revenue, for the first quarter of fiscal
2007. These increases were attributable to an increase in non-revenue
miles, for which we do not receive fuel surcharges, a 1.8% increase in average
fuel prices to $2.77 per gallon in the first quarter of fiscal 2008, from $2.72
per gallon in the first quarter of fiscal 2007, and an increase in company
and
non-revenue miles as a percentage of all miles. Although we were able
to recover some higher fuel costs through our fuel surcharge program, there
is a
lag that prevents us from adjusting fuel surcharges to accommodate short term
fuel price fluctuations which, in turn, can negatively impact operating
results. 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
$8.4 million, or 7.4% of freight revenue, for the first quarter of fiscal
2008, from $7.6 million, or 7.1% of freight revenue, for the first quarter
of
fiscal 2007. Operations and maintenance consist of direct operating
expense, maintenance, and tire expense. These increases in the first
quarter of fiscal 2008 are primarily related to an increase in costs associated
with various direct expenses such as tolls expense, border drayage expense,
and
load/unload expense and an increase in the size of our fleet for the first
quarter of fiscal 2008 compared to the first quarter of fiscal
2007.
Insurance
and claims expense decreased
to $3.5 million, or 3.1% of freight revenue, for the first quarter of fiscal
2008, from $4.2 million, or 3.9% of freight revenue, for the first quarter
of fiscal 2007. Insurance consists of premiums for liability,
physical damage, cargo damage, and workers compensation insurance, in addition
to claims expense. These decreases resulted primarily from decreases in our
cargo insurance 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. Insurance and claims
expense will vary based primarily on the frequency and severity of claims,
the
level of self-retention, and the premium expense.
Depreciation
and amortization,
consisting primarily of depreciation of revenue equipment, increased to $7.9
million, or 6.9% of freight revenue, for the first quarter of fiscal 2008,
compared to $3.5 million, or 3.2% of freight revenue, for the first quarter
of fiscal 2007. The majority of these increases is related to the net
addition of approximately 200 owned tractors and the conversion of operating
leases to capital leases related to approximately 3,700 trailers. In the third
and fourth quarters 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. 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 new trailers with
operating 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 as increased depreciation expense associated
with
tractors and trailers acquired with cash or borrowings will more than offset
decreased depreciation resulting from financing new trailer acquisitions with
operating leases.
Revenue
equipment rentals decreased to $7.0 million, or 6.1% of freight revenue,
for the first quarter of fiscal 2008, compared to $9.3 million or 8.7% of
freight revenue for the first quarter of fiscal 2007. These decreases
were attributable to a decrease in our tractor and trailer fleet financed under
operating leases as discussed under depreciation and amortization. At
September 30, 2007, 1,405 tractors, or 54.0% of our company tractors, were
held
under operating leases, compared to 1,424 tractors, or 59.2% of our company
tractors, at September 30, 2006. At September 30, 2007, 1,922
trailers, or 23.6%, of our trailer fleet were held under operating leases,
compared to 6,433, or 89.0% of our trailer fleet, at September 30,
2006. Given the level of new tractors expected to be purchased with
cash or borrowings and new trailers expected to be financed under operating
leases, we expect revenue equipment rentals will continue to decrease going
forward.
Purchased
transportation increased to
$22.0 million, or 19.3% of freight revenue, for the first quarter of fiscal
2008, from $18.3 million, or 17.0% of freight revenue, for the first
quarter of fiscal 2007. These increases are primarily related to
increased independent contractor fuel surcharge reimbursement and increased
independent contractor expense due to the 6.0% increase in independent
contractors to 385 at September 30, 2007, from 363 at September 30, 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
640
basis points to 4.1% of freight revenue for the first quarter of fiscal 2008,
from 10.5% of freight revenue for the first quarter of fiscal 2007.
In
addition to other factors described
above, Canadian exchange rate fluctuations principally impact salaries, wages,
and benefits and purchased transportation and, therefore, impact our pretax
margin and results of operations.
Income
taxes decreased to
$2.1 million, with an effective tax rate of 45.8%, for the first quarter of
fiscal 2008, from $4.2 million, with an effective tax rate of 37.4%, for the
first quarter of fiscal 2007. 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 $2.5 million for the first quarter of fiscal
2008, from $7.1 million for the first quarter of fiscal 2007.
Liquidity
and Capital Resources
Trucking
is a capital-intensive business. We require cash to fund our operating expenses
(other than depreciation and amortization), to make capital expenditures and
acquisitions, and to repay debt, including principal and interest payments.
Other than ordinary operating expenses, we anticipate that capital expenditures
for the acquisition of revenue equipment will constitute our primary cash
requirement over the next twelve months. We frequently consider potential
acquisitions, and if we were to consummate an acquisition, our cash requirements
would increase and we may have to modify our expected financing sources for
the
purchase of tractors. Subject to any required lender approval, we may make
acquisitions in the future. Our principal sources of liquidity are cash
generated from operations, bank borrowings, capital and operating lease
financing of revenue equipment, and proceeds from the sale of used revenue
equipment.
As
of
September 30, 2007, we had on order 2,162 tractors and 1,500 trailers for
delivery through fiscal 2010. These revenue equipment orders represent a
capital commitment of approximately $237.2 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. In the third and fourth quarters
of fiscal 2007, we also declared our intent to purchase approximately 3,700
trailers at the end of the respective lease term, resulting in a change from
operating lease to capital lease classification. At September 30, 2007, our
total balance sheet debt, including capital lease obligations and current
maturities, was $77.4 million, compared to $11.7 million at September 30, 2006.
Our debt-to-capitalization ratio (total balance sheet debt as a percentage
of
total balance sheet debt plus total stockholders’ equity) was 51.1% at September
30, 2007, and 8.3% at September 30, 2006.
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 three months ended September
30, 2007, net cash provided by operations was $10.6 million, compared to cash
provided by operations of $10.6 million for the three months ended September
30,
2006. Cash provided by operations stayed constant despite the
increase of depreciation and amortization and
an
increase in accounts payable as such increases were offset by a decrease in
income tax recoverable and an increase in prepaid expenses.
Net
cash
provided by investing activities was $4.6 million for the three months ended
September 30, 2007, compared to net cash used of $9.8 million for the three
months ended September 30, 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 $3.2 million for the three months ended September 30, 2007, and $18.9
million for the three months ended September 30, 2006, a portion of which was
attributable to the October 2006 Digby acquisition. We generated
proceeds from the sale of property and equipment of $7.8 million and $9.0
million for the three months ended September 30, 2007, and September 30, 2006,
respectively.
Net
cash used in financing activities
was $16.4 million for the three months ended September 30, 2007, compared to
$1.3 million for the three months ended September 30, 2006. Financing
activity represents borrowings (new borrowings, net of repayment) and payments
of the principal component of capital lease obligations.
Off-Balance
Sheet Arrangements
Operating
leases have been an important source of financing for our revenue equipment.
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. We were obligated for
residual value guarantees related to operating leases of $62.7 million at
September 30, 2007 compared to $107.1 million at September 30, 2006. A
small 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. 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 anticipate that going forward we will use cash generated from
operations to finance tractor purchases and operating leases to finance trailer
purchases.
Prior
to
fiscal 2006, we financed most of our new tractors and trailers under operating
leases, which are not reflected on our balance sheet. In fiscal 2006, we began
purchasing most of our new tractors using cash and borrowings under our credit
facility, while still financing our new trailers with operating leases. The
use
of operating leases also affects our statement 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.
PrimaryCredit
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 September 30, 2007, and expect to remain in compliance for
the foreseeable future. At September 30, 2007, $4.5 million of our
credit facility was utilized as outstanding borrowings and $4.3 million was
utilized for standby letters of credit.
We
believe we will be able to fund our operating expenses, as well as our current
commitments for the acquisition of revenue equipment in connection with our
fleet upgrade over the next twelve months with a combination of cash generated
from operations, borrowings available under our primary credit facility, and
lease financing arrangements. We will continue to have significant capital
requirements over the long term, and the availability of the needed capital
will
depend upon our financial condition and operating results and numerous other
factors over which we have limited or no control, including prevailing market
conditions and the market price of our common stock. However, based on our
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.
Contractual
Obligations
As
of September 30, 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 September 30, 2007
(in
thousands)
Payments
Due by Period
|
|
|
|
Total
|
|
|
Less
than
1
year
|
|
|
1-3
Years
|
|
|
3-5
Years
|
|
|
More
than
5
years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
leases
|
|
$ |
65,692
|
|
|
$ |
21,589
|
|
|
$ |
18,700
|
|
|
$ |
11,646
|
|
|
$ |
13,757
|
|
Lease
residual value guarantees
|
|
|
62,736
|
|
|
|
18,701
|
|
|
|
26,983
|
|
|
|
---
|
|
|
|
17,052
|
|
Capital
leases(1)
|
|
|
61,121
|
|
|
|
8,618
|
|
|
|
17,090
|
|
|
|
33,704
|
|
|
|
1,709
|
|
Long-term
debt(1)
|
|
25,310
|
|
|
11,698
|
|
|
8,853
|
|
|
4,759
|
|
|
---
|
|
Sub-total
|
|
$ |
214,859
|
|
|
$ |
60,606
|
|
|
$ |
71,626
|
|
|
$ |
50,109
|
|
|
$ |
32,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future
purchase of revenue equipment
|
|
$ |
237,187
|
|
|
$ |
65,425
|
|
|
$ |
145,126
|
|
|
$ |
5,812
|
|
|
$ |
20,824
|
|
Employment
and consulting agreements(2)
|
|
|
759
|
|
|
|
717
|
|
|
|
42
|
|
|
|
---
|
|
|
|
---
|
|
Standby
Letters of Credit
|
|
4,310
|
|
|
4,310
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
457,115
|
|
|
$ |
131,058
|
|
|
$ |
216,794
|
|
|
$ |
55,921
|
|
|
$ |
53,342
|
|
(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 8%
of
our tractors 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 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.
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 September 30, 2007 the interest rate for revolving
borrowings under our credit facility was LIBOR plus 0.875%. At
September 30, 2007, we had $4.5 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 first quarter of fiscal 2008 (both in terms of amount
and currency mix), we estimate that a $0.01 decrease in the Canadian dollar
exchange rate would reduce our annual net income by approximately
$52,000.
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 first quarter
of
fiscal 2008 (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 $61,000.
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, climatic, 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
September 30, 2007, we had no derivative financial instruments in place to
reduce our exposure to fuel price fluctuations.
Item
4. Controls
and
Procedures
As
required by Rules 13a-15 and 15d-15
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
the
Company has carried out an evaluation of the effectiveness of the design and
operation of the Company’s disclosure controls and procedures as of the end of
the period covered by this Quarterly Report on Form 10-Q. This evaluation was
carried out under the supervision and with the participation of the Company’s
management, including our Chief Executive Officer and our Chief Financial
Officer. Based upon that evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures
were effective as of the end of the period covered by this Quarterly Report
on
Form 10-Q. There were no changes in the Company’s internal control
over financial reporting that occurred during the first quarter of fiscal 2008
that have materially affected, or that are reasonably likely to materially
affect, the Company’s internal control over financial reporting.
Disclosure
controls and procedures are
controls and other procedures that are designed to ensure that information
required to be disclosed in the Company’s reports filed or submitted under the
Exchange Act is recorded, processed, summarized, and reported within the time
periods specified in the rules and forms of the Securities and Exchange
Commission. Disclosure controls and procedures include controls and procedures
designed to ensure that information required to be disclosed in Company reports
filed under the Exchange Act is accumulated and communicated to management,
including the Company’s Chief Executive Officer and Chief Financial Officer as
appropriate, to allow timely decisions regarding disclosures.
The
Company has confidence in its
disclosure controls and procedures. Nevertheless, the Company’s management,
including the Chief Executive Officer and Chief Financial Officer, does not
expect that our disclosure controls and procedures will prevent all errors
or
intentional fraud. An internal control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of such internal controls are met. Further, the
design of an internal control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all internal control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the Company have been
detected.
Item
1. Legal
Proceedings
There
are various claims, lawsuits, and
pending actions against the Company and its subsidiaries which arose in the
normal course of the operations of its business. The Company believes
many of these proceedings are covered in whole or in part by insurance and
that
none of these matters will have a material adverse effect on its consolidated
financial position or results of operations in any given period.
On
August
8, 2007, the 384th District Court of the State of Texas situated in El Paso,
Texas, rendered a judgment against CTSI, for approximately $3.4 million in
the
case of Martinez v. Celadon Trucking Services, Inc., which was originally filed
on September 4, 2002. The case involves a workers’ compensation claim of a
former employee of CTSI who suffered a back injury as a result of a traffic
accident. CTSI and the Company believe all actions taken were proper and legal
and contend that the proper and exclusive place for resolution of this dispute
was before the Indiana Workers Compensation Board. While there can be no
certainty as to the outcome, the Company believes that the ultimate resolution
of this dispute will not have a materially adverse effect on its consolidated
financial position or results of operations. CTSI intends to vigorously appeal
the decision.
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, 2007, in the section entitled Item 1A. Risk Factors,
describes some of the risks and uncertainties associated with our business.
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 From 10-K referenced above, we believe that the recent changes
to
the hours-of-service rules and our stock repurchase program increase the level
of risk and uncertainty present in our business, as set forth
below.
We
operate in a highly regulated industry and changes in regulations could have
a
materially adverse effect on our business.
Our
operations are regulated and licensed by various government agencies, including
the Department of Transportation ("DOT"). The DOT, through the
Federal Motor Carrier Safety Administration, or FMCSA, imposes safety and
fitness regulations on us and our drivers. New rules that limit
driver hours-of-service were adopted effective January 4, 2004, and then
modified effective October 1, 2005 (the "2005 Rules"). On July 24,
2007, a federal appeals court vacated portions of the 2005 Rules. Two
of the key portions that were vacated include the expansion of the driving
day
from 10 to 11 hours, and the "34 hour restart" requirement that drivers must
have a break of at least 34 consecutive hours during each week. On
September 28, 2007, the court, in response to a request by the FMCSA for a
12-month extension of the vacated rules, ruled that the vacated rules may remain
in effect for 90 days. At the end of the 90 day period, the 11 hour
driving limit and the 34 hour restart provisions of the 2005 Rules will be
eliminated. We understand that the FMCSA is currently evaluating its
options in light of the court's ruling and it is unclear whether the FMCSA
will
issue any interim regulations at this time.
The
court's decision may have varying effects, in that reducing driving time to
10
hours daily may reduce productivity in certain instances, while eliminating
the
34-hour restart may enhance productivity in certain instances. We
would expect that these new rules, if adopted, would cause some loss of
efficiency as our drivers are retrained and some shipping lanes may need to
be
reconfigured. Additionally, we are unable to predict the effect of
any new rules that might be proposed, but any such proposed rules could increase
costs in our industry or decrease productivity.
Our
Board of Directors recently authorized a stock repurchase
program. The number of shares repurchased and the effects of
repurchasing the shares may have an adverse effect on debt, equity, and
liquidity of the Company.
On
October 24, 2007, our Board of Directors authorized the Company to repurchase
up
to 2,000,000 shares of the Company’s common stock on the open market or in
privately negotiated transactions at any time until October 31,
2008. As any repurchases would likely be funded from cash flow from
operations and/or possible borrowings under the Company’s Credit Agreement, such
repurchasing of shares could reduce the amount of cash on hand or increase
debt, and reduce the Company’s liquidity.
Item
6. Exhibits
3.1
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Amended
and Restated Certificate of Incorporation of the Company, effective
January 12, 2006. (Incorporated by reference to Exhibit 3.1 to the
Company's Quarterly Report on Form 10-Q for the quarterly period
ending
December 31, 2005, filed with the SEC on January 30,
2006.)
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3.2
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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.)
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3.3
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Amended
and Restated By-laws of the Company. (Incorporated by reference
to Exhibit 3 to the Company’s Current Report on Form 8-K filed with the
SEC on July 3, 2006.)
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4.1
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Amended
and Restated Certificate of Incorporation of the Company, effective
January 12, 2006. (Incorporated by reference to Exhibit 3.1 to
the Company's Quarterly Report on Form 10-Q for the quarterly period
ending December 31, 2005, filed with the SEC on January 30,
2006.)
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4.2
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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.)
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4.3
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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.)
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4.4
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Amended
and Restated By-laws of the Company. (Incorporated by reference
to Exhibit 3 to the Company’s Current Report on Form 8-K filed with the
SEC on July 3, 2006.)
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Separation
Agreement, General Release, Consulting Agreement, and Noncompetition,
Non-disclosure, and Non-solicitation Agreement by and between Celadon
Trucking Services, Inc. and Thomas Glaser, dated July 25,
2007.*
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Employment
Letter by and between Celadon Group, Inc. and Chris Hines, dated
August 8,
2007.*
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Certification
pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant
to
Section 302 of the Sarbanes-Oxley Act of 2002, by Stephen Russell,
the
Company’s Chief Executive Officer.*
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Certification
pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant
to
Section 302 of the Sarbanes-Oxley Act of 2002, by Paul Will, the
Company’s
Chief Financial Officer.*
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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.*
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Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002, by Paul Will, the Company’s Chief
Financial Officer.*
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* Filed
herewith
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SIGNATURES
Pursuant
to the requirements of the
Securities Exchange Act of 1934, the Registrant has duly caused this report
to
be signed on its behalf by the undersigned thereunto duly
authorized.
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Celadon
Group, Inc.
(Registrant)
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/s/
Stephen Russell |
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Stephen
Russell
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Chief
Executive Officer
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|
|
|
|
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/s/
Paul Will |
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Paul
Will
|
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Chief
Financial Officer, Executive Vice
President,
Treasurer, and Assistant Secretary
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Date: October
30, 2007
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