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 period ended December 31, 2005
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
Number)
|
|
9503
East 33
rd
Street
|
|
|
One
Celadon Drive
|
|
|
Indianapolis,
IN
|
46235-4207
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
|
(317)
972-7000
(Registrant’s
telephone number)
|
|
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.
|
Yes
[X] No [ ]
|
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).
|
Yes
[ ] No [X]
|
As
of
January 24, 2006 (the latest practicable date), 10,121,465 shares of the
registrant’s common stock, par value $0.033 per share, were
outstanding.
CELADON
GROUP, INC.
Index
to
December
31, 2005 Form 10-Q
|
Part
I.
|
Financial
Information
|
||
|
Item
1.
|
Financial
Statements
|
||
|
Condensed
Consolidated Balance Sheets at December 31, 2005 (Unaudited) and
June 30,
2005
|
3
|
||
|
Condensed
Consolidated Statements of Income for the three and six months
ended
December 31, 2005 and 2004 (Unaudited)
|
4
|
||
|
Condensed
Consolidated Statements of Cash Flows for the six months ended
December
31, 2005 and 2004 (Unaudited)
|
5
|
||
|
Notes
to Condensed Consolidated Financial Statements (Unaudited)
|
6
|
||
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and
Results
of Operations
|
11
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
21
|
|
|
Item
4.
|
Controls
and Procedures
|
22
|
|
|
Part
II.
|
Other
Information
|
||
|
Item
1.
|
Legal
Proceedings.
|
23
|
|
|
Items
2., 3., 4., and 5.
|
Not
Applicable
|
||
|
Item
6.
|
Exhibits
|
23
|
|
Part
I. Financial Information
CELADON
GROUP, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
December
31, 2005 and June 30, 2005
(Dollars
in thousands except par share and value amounts)
The
accompanying notes are an integral part of these unaudited consolidated
financial statements.
CELADON
GROUP, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(Dollars
in thousands except per share amounts)
(Unaudited)
|
For
the three months ended
December
31,
|
For
the six months ended
December
31,
|
||||||||||||
|
2005
|
2004
|
2005
|
2004
|
||||||||||
|
Revenue:
|
|||||||||||||
|
Freight
revenue
|
$
|
102,888
|
$
|
97,249
|
$
|
206,228
|
$
|
195,478
|
|||||
|
Fuel
surcharges
|
17,386
|
9,622
|
31,981
|
15,786
|
|||||||||
|
120,274
|
106,871
|
238,209
|
211,264
|
||||||||||
|
Operating
expenses:
|
|||||||||||||
|
Salaries,
wages, and employee benefits
|
35,468
|
32,395
|
70,331
|
65,569
|
|||||||||
|
Fuel
|
27,928
|
18,890
|
54,148
|
36,750
|
|||||||||
|
Operations
and maintenance
|
7,442
|
8,899
|
14,724
|
17,807
|
|||||||||
|
Insurance
and claims
|
3,961
|
3,326
|
7,347
|
6,330
|
|||||||||
|
Depreciation
and amortization
|
2,921
|
3,634
|
6,084
|
7,002
|
|||||||||
|
Revenue
equipment rentals
|
10,255
|
8,634
|
20,626
|
16,512
|
|||||||||
|
Purchased
transportation
|
17,840
|
19,504
|
35,663
|
38,044
|
|||||||||
|
Costs
of products and services sold
|
1,347
|
1,113
|
2,641
|
2,316
|
|||||||||
|
Professional
and consulting fees
|
702
|
524
|
1,553
|
1,025
|
|||||||||
|
Communications
and utilities
|
1,024
|
1,022
|
2,043
|
2,054
|
|||||||||
|
Operating
taxes and licenses
|
2,153
|
2,095
|
4,213
|
4,180
|
|||||||||
|
General
and other operating
|
1,458
|
1,565
|
2,965
|
3,086
|
|||||||||
|
Total
operating expenses
|
112,499
|
101,601
|
222,338
|
200,675
|
|||||||||
|
Operating
income
|
7,775
|
5,270
|
15,871
|
10,589
|
|||||||||
|
Other
(income) expense:
|
|||||||||||||
|
Interest
income
|
(77
|
)
|
(3
|
)
|
(78
|
)
|
(6
|
)
|
|||||
|
Interest
expense
|
197
|
338
|
499
|
688
|
|||||||||
|
Other
(income) expense, net
|
1
|
31
|
26
|
7
|
|||||||||
|
Income
before income taxes
|
7,654
|
4,904
|
15,424
|
9,900
|
|||||||||
|
Provision
for income taxes
|
2,855
|
2,130
|
5,941
|
4,375
|
|||||||||
|
Net
income
|
$
|
4,799
|
$
|
2,774
|
$
|
9,483
|
$
|
5,525
|
|||||
|
Earnings
per common share:
|
|||||||||||||
|
Diluted
earnings per share
|
$
|
0.46
|
$
|
0.27
|
$
|
0.92
|
$
|
0.54
|
|||||
|
Basic
earnings per share
|
$
|
0.48
|
$
|
0.28
|
$
|
0.94
|
$
|
0.57
|
|||||
|
Average
shares outstanding:
|
|||||||||||||
|
Diluted
|
10,354
|
10,154
|
10,334
|
10,157
|
|||||||||
|
Basic
|
10,085
|
9,801
|
10,071
|
9,781
|
|||||||||
The
accompanying notes are an integral part of these unaudited consolidated
financial statements.
CELADON
GROUP, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
For
the six months ended December 31, 2005 and 2004
(Dollars
in thousands)
(Unaudited)
|
2005
|
2004
|
||||||
|
Cash
flows from operating activities:
|
|||||||
|
Net
income
|
$
|
9,483
|
$
|
5,525
|
|||
|
Adjustments
to reconcile net income to net cash provided
by
operating activities:
|
|||||||
|
Depreciation
and amortization
|
6,084
|
7,002
|
|||||
|
Stock
based compensation
|
1,749
|
491
|
|||||
|
Benefit
for deferred income taxes
|
(1,462
|
)
|
(579
|
)
|
|||
|
Provision
for doubtful accounts
|
459
|
542
|
|||||
|
Changes
in assets and liabilities:
|
|||||||
|
Trade
receivables
|
2,240
|
4,461
|
|||||
|
Accounts
receivable - other
|
1,562
|
971
|
|||||
|
Income
tax recoverable
|
(533
|
)
|
---
|
||||
|
Tires
in service
|
280
|
(284
|
)
|
||||
|
Prepaid
expenses and other current assets
|
(4,628
|
)
|
36
|
||||
|
Other
assets
|
(220
|
)
|
(124
|
)
|
|||
|
Accounts
payable and accrued expenses
|
(7,823
|
)
|
(8,982
|
)
|
|||
|
Income
tax payable
|
(265
|
)
|
(2,315
|
)
|
|||
|
Net
cash provided by operating activities
|
6,926
|
6,744
|
|||||
|
Cash
flows from investing activities:
|
|||||||
|
Purchase
of property and equipment
|
(24,932
|
)
|
(15,845
|
)
|
|||
|
Proceeds
on sale of property and equipment
|
16,519
|
12,944
|
|||||
|
Purchase
of minority shares of subsidiary
|
---
|
(1,525
|
)
|
||||
|
Net
cash used in investing activities
|
(8,413
|
)
|
(4,426
|
)
|
|||
|
Cash
flows from financing activities:
|
|||||||
|
Proceeds
from issuances of common stock
|
286
|
1,064
|
|||||
|
Proceeds
from bank borrowings and debt
|
---
|
4,958
|
|||||
|
Payments
on long-term debt
|
(730
|
)
|
(6,456
|
)
|
|||
|
Principal
payments under capital lease obligations
|
(706
|
)
|
(1,824
|
)
|
|||
|
Net
cash used in financing activities
|
(1,150
|
)
|
(2,258
|
)
|
|||
|
Increase
(decrease) in cash and cash equivalents
|
(2,637
|
)
|
60
|
||||
|
Cash
and cash equivalents at beginning of period
|
11,115
|
356
|
|||||
|
Cash
and cash equivalents at end of period
|
$
|
8,478
|
$
|
416
|
|||
|
Supplemental
disclosure of cash flow information:
|
|||||||
|
Interest
paid
|
$
|
489
|
$
|
691
|
|||
|
Income
taxes paid
|
$
|
8,539
|
$
|
6,964
|
|||
|
Supplemental
disclosure of non-cash flow investing activities:
|
|||||||
|
Lease
obligation/debt incurred in the purchase of equipment
|
$
|
1,636
|
$
|
735
|
|||
|
Note
payable obligation incurred in purchase of minority shares
|
$ |
---
|
$
|
910
|
|||
The
accompanying notes are an integral part of these unaudited consolidated
financial statements.
CELADON
GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2005
(Unaudited)
1.
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements include
the
accounts of Celadon Group, Inc. and its majority owned subsidiaries (the
"Company"). All material intercompany balances and transactions have been
eliminated in consolidation.
The
unaudited condensed consolidated financial statements have been prepared in
accordance with generally accepted accounting principles ("GAAP") in the United
States of America pursuant to the rules and regulations of the Securities and
Exchange Commission for interim financial statements. Certain information and
footnote disclosures have been condensed or omitted pursuant to such rules
and
regulations. In the opinion of management, the accompanying unaudited financial
statements reflect all adjustments (all of a normal recurring nature), which
are
necessary for a fair presentation of the financial condition and results of
operations for these periods. The results of operations for the interim period
are not necessarily indicative of the results for a full year. These condensed
consolidated financial statements and notes thereto should be read in
conjunction with the Company’s condensed consolidated financial statements and
notes thereto, included in the Company’s Annual Report on Form 10-K for the
fiscal year ended June 30, 2005.
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.
Recent
Accounting Pronouncements
In
December 2004, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 123-R, "Share-Based Payments, an Amendment of SFAS 123 on
Accounting for Stock Based Compensation." SFAS 123-R requires companies to
recognize in the income statement the grant date fair value of stock options
and
other equity-based compensation issued to employees. SFAS 123-R is effective
for
most public companies with interim or annual periods beginning after June 15,
2005. We adopted this statement effective July 1, 2005. Our adoption of SFAS
123-R impacted our results of operations by increasing salaries, wages, and
related expenses. The amount of the impact was immaterial to the Company for
the
second quarter of fiscal 2006 and the six months ended December 31, 2005.
At
December 31, 2005, the Company had 469,020 stock options vested and outstanding
with an average exercise price of $6.13. These options have an intrinsic value
of $10.6 million based on the December 30, 2005 closing share price of $28.80.
The weighted average remaining contractual term on these options is
approximately 5.0 years.
The
Company had 360,000 stock appreciation rights ("SARs") outstanding with an
average exercise price of $16.36. These SARs vest annually over a 3 or 4 year
term based on grant dates, with grant dates ranging from June 9, 2003 to August
21, 2005. These SARs have an intrinsic value of $4.5 million based on the
December 30, 2005 closing share price of $28.80. The weighted average remaining
contractual term on these SARs is approximately 2.4 years.
CELADON
GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2005
(Unaudited)
For
purposes of pro forma disclosure, for the six months ended December 31, 2004,
the estimated fair value of the options are expensed over the vesting period.
Under the fair value method, the Company’s net income (in thousands) and
earnings per share would have been:
|
For
the three months ended
|
For
the six months ended
|
||||||
|
December
31, 2004
|
December
31, 2004
|
||||||
|
Net
income
|
$
|
2,774
|
$
|
5,525
|
|||
|
Stock-based
compensation expense (net of tax)
|
64
|
159
|
|||||
|
Pro
forma net income
|
$
|
2,710
|
$
|
5,366
|
|||
|
Income
per share:
|
|||||||
|
Diluted
earnings per share
|
|||||||
|
As
reported
|
$
|
0.27
|
$
|
0.54
|
|||
|
Pro
forma
|
$
|
0.27
|
$
|
0.53
|
|||
|
Basic
earnings per share:
|
|||||||
|
As
reported
|
$
|
0.28
|
$
|
0.57
|
|||
|
Pro
forma
|
$
|
0.28
|
$
|
0.55
|
|||
3.
Credit
Facility
On September 26, 2005, Celadon Group, Inc., a Delaware corporation (the
"Company"), Celadon Trucking Services, Inc., a New Jersey corporation and
wholly-owned subsidiary of the Company ("CTSI"), and TruckersB2B, Inc., a
Delaware corporation and wholly-owned subsidiary of the Company ("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., ("CelEComm"),
Celadon Canada, Inc., ("CelCan"), and Servicios de Transportacion Jaguar, S.A.
de C.V., ("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. The Credit Agreement includes usual and customary events of
default for a facility of this nature and provides that, upon the occurrence
and
continuation of an event of default, payment of all amounts payable under the
Credit Agreement may be accelerated and the Lenders’ commitments may be
terminated.
CELADON
GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2005
(Unaudited)
4.
Earnings
Per Share
The
difference in basic and diluted weighted average shares is due to the assumed
exercise of outstanding stock options. A reconciliation of the basic and diluted
earnings per share calculation was as follows (amounts in thousands, except
per
share amounts):
|
For
three months ended
December
31,
|
For
six months ended
December
31,
|
||||||||||||
|
2005
|
2004
|
2005
|
2004
|
||||||||||
|
Net
income
|
$
|
4,799
|
$
|
2,774
|
$
|
9,483
|
$
|
5,525
|
|||||
|
Denominator
|
|||||||||||||
|
Weighted
average number of common shares
outstanding
|
10,085
|
9,801
|
10,071
|
9,781
|
|||||||||
|
Equivalent
shares issuable upon exercise of stock
options
|
269
|
353
|
263
|
376
|
|||||||||
|
Diluted
shares
|
10,354
|
10,154
|
10,334
|
10,157
|
|||||||||
|
Earnings
per share
|
|||||||||||||
|
Basic
|
$
|
0.48
|
$
|
0.28
|
$
|
0.94
|
$
|
0.57
|
|||||
|
Diluted
|
$
|
0.46
|
$
|
0.27
|
$
|
0.92
|
$
|
0.54
|
|||||
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 CTSI, Jaguar, and CelCan. The Company provides
certain services over the Internet through its e-commerce subsidiary
TruckersB2B. The e-commerce segment generates revenue by providing
discounted fuel, tires, and other products and services to small and
medium-sized trucking companies. The Company evaluates the performance of
its
operating segments based on operating income (amounts below in thousands).
|
Transportation
|
E-commerce
|
Consolidated
|
||||||||
|
Three
months ended December 31, 2005
|
||||||||||
|
Operating
revenue
|
$
|
118,192
|
$
|
2,082
|
$
|
120,274
|
||||
|
Operating
income
|
7,416
|
359
|
7,775
|
|||||||
|
Three
months ended December 31, 2004
|
||||||||||
|
Operating
revenue
|
$
|
104,950
|
$
|
1,921
|
$
|
106,871
|
||||
|
Operating
income
|
4,839
|
431
|
5,270
|
|||||||
|
Six
months ended December 31, 2005
|
||||||||||
|
Operating
revenue
|
$
|
234,152
|
$
|
4,057
|
$
|
238,209
|
||||
|
Operating
income
|
15,157
|
714
|
15,871
|
|||||||
|
Six
months ended December 31, 2004
|
||||||||||
|
Operating
revenue
|
$
|
207,336
|
$
|
3,928
|
$
|
211,264
|
||||
|
Operating
income
|
9,738
|
851
|
10,589
|
|||||||
CELADON
GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2005
(Unaudited)
Information
as to the Company’s operating revenue by geographic area is summarized below (in
thousands). The Company allocates operating revenue based on country of origin
of the tractor hauling the freight:
|
For
the three months ended
December
31,
|
For
the six months ended
December
31,
|
||||||||||||
|
2005
|
2004
|
2005
|
2004
|
||||||||||
|
Operating
revenue:
|
|||||||||||||
|
United
States
|
$
|
97,576
|
$
|
86,532
|
$
|
194,214
|
$
|
171,390
|
|||||
|
Canada
|
14,980
|
14,902
|
29,735
|
29,223
|
|||||||||
|
Mexico
|
7,718
|
5,437
|
14,260
|
10,651
|
|||||||||
|
Total
|
$
|
120,274
|
$
|
106,871
|
$
|
238,209
|
$
|
211,264
|
|||||
The
Company’s largest customer is DaimlerChrysler, which accounted for approximately
2% and 5% of the Company’s total revenue for the second quarter of fiscal 2006
and 2005, respectively, and which accounted for approximately 3% and 5% of
the
Company’s total revenue for the six months ended December 31, 2005 and 2004,
respectively. The Company transports DaimlerChrysler original equipment
automotive parts primarily between the United States and Mexico and
DaimlerChrysler after-market replacement parts and accessories within the United
States. The Company’s agreement with DaimlerChrysler is an agreement for
international freight with the Chrysler division, which expires in October
2006.
No other customer accounted for more than 5% of the Company’s total revenue
during any of its two most recent fiscal years.
6.
Income
Taxes
Income
tax expense varies from the federal corporate income tax rate of 35% due to
state income taxes, net of the federal income tax effect, and adjustment for
permanent non-deductible differences. The permanent non-deductible differences
include primarily per diem pay for drivers, meals, entertainment, and fines.
7.
Comprehensive
Income
Comprehensive
income consisted of the following components for the second quarter of
fiscal 2006 and 2005, respectively, and the six months ended December 31,
2005 and 2004, respectively (in thousands):
|
Three
months ended
December
31,
|
Six
months ended
December
31,
|
||||||||||||
|
2005
|
2004
|
2005
|
2004
|
||||||||||
|
Net
income
|
$
|
4,799
|
$
|
2,774
|
$
|
9,483
|
$
|
5,525
|
|||||
|
Foreign
currency translation adjustments
|
271
|
49
|
318
|
165
|
|||||||||
|
Total
comprehensive income
|
$
|
5,070
|
$
|
2,823
|
$
|
9,801
|
$
|
5,690
|
|||||
CELADON
GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2005
(Unaudited)
8.
Stock
Split
On
January 18, 2006, the Board of Directors approved a three-for-two stock split,
affected in the form of a fifty percent (50%) stock dividend. The stock split
distribution date is February 15, 2006, to stockholders of record as of the
close of business on February 1, 2006. This stock split will increase the number
of outstanding shares to approximately 15,150,000 from approximately 10,092,000.
Diluted earnings per share for the second quarter of fiscal 2006 and the six
months ended December 31, 2005, would have been approximately $0.31 and $0.73
based on the post stock split share count.
9.
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.
10.
Reclassification
Certain
reclassifications have been made to the December 31, 2004 financial statements
to conform to the December 31, 2005 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, performance, and results of operations include the factors
listed on Exhibit 99.1 to this Quarterly Report on Form 10-Q.
All
such
forward-looking statements speak only as of the date of this Quarterly Report
on
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 $436.8 million in operating revenue during our fiscal
year ended June 30, 2005. 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 its two largest trading partners, Mexico and Canada.
We
generated approximately one-half of our revenue in fiscal 2005 from
international movements, and we believe our annual border crossings make us
the
largest provider of international truckload movements in North America. We
believe that our strategically located terminals and experience with the
language, culture, and border crossing requirements of each North American
country provide a competitive advantage in the international trucking
marketplace.
We
believe our international operations, particularly those involving Mexico,
offer
an attractive business niche for several reasons. The additional complexity
of
and need to establish cross-border business partners and to develop strong
organization and adequate infrastructure in Mexico affords some barriers to
competition that are not present in traditional U.S. truckload service. In
addition, the expected continued growth of Mexico’s economy, particularly
exports to the U.S., positions us to capitalize on our cross-border expertise.
Our
success is dependent upon the success of our operations in Mexico and Canada,
and we are subject to risks of doing business internationally, including
fluctuations in foreign currencies, changes in the economic strength of the
countries in which we do business, difficulties in enforcing contractual
obligations and intellectual property rights, burdens of complying with a wide
variety of international and United States export and import laws, and social,
political, and economic instability. Additional risks associated with our
foreign operations, including restrictive trade policies and imposition of
duties, taxes, or government royalties by foreign governments, are present
but
largely mitigated by the terms of NAFTA.
In
addition to our international business, we offer a broad range of truckload
transportation services within the United States, including long-haul, regional,
dedicated, and logistics. With the acquisitions of certain assets of Highway
Express in August 2003 and CX Roberson in January 2005, we expanded our
operations and service offerings within the United States and significantly
improved our lane density, freight mix, and customer diversity. The Highway
Express and CX Roberson acquisitions were particularly important to us, and
we
believe they have contributed to our recent operating improvements.
We
also
operate TruckersB2B, a profitable marketing business that affords volume
purchasing power for items such as fuel, tires, and equipment to approximately
20,000 trucking fleets representing approximately 425,000 tractors. TruckersB2B
represents a separate operating segment under generally accepted accounting
principles.
For
the
second quarter of fiscal 2006, operating revenue increased 12.5% to $120.3
million, compared with $106.9 million for the second quarter of fiscal 2005.
Net
income increased to $4.8 million from $2.8 million, and diluted earnings per
share improved to $0.46 from $0.27. We believe that a favorable relationship
between freight demand and the industry-wide supply of tractor and trailer
capacity, as well as our dedication to pricing discipline, yield management,
and
customer service, contributed to our increase in earnings for the second quarter
of fiscal 2006 compared to the second quarter of fiscal 2005.
Our
business requires substantial, ongoing capital investments, particularly for
new
tractors and trailers. At December 31, 2005, we had approximately $7.5 million
of long-term debt and capital lease obligations, including current maturities,
and $108.7 million in stockholders’ equity. The average age of our tractor fleet
remained constant at 2.1 years and 2.0 years as of December 31, 2005 and
December 31, 2004, and we lowered the average age of our trailer fleet to 3.6
years from 4.3 years as of December 31, 2005 compared to December 31, 2004.
We
expect our tractor and trailer purchases will be primarily for replacement
and
will 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 during the 2006
fiscal year. We expect that our equipment purchases will be financed using
cash
generated from operations or with off-balance sheet operating leases. At
December 31, 2005, we had future operating lease obligations totaling $201.5
million, including residual value guarantees of approximately $75.6 million.
Of
our tractors, 383 were owned, 1,847 were financed under operating leases, and
351 were provided by independent contractors, who own (or lease) and drive
their
own tractors, at December 31, 2005. Of our 7,727 trailers, 1,673 were owned
or
financed with capital leases and the remaining were financed under operating
leases at December 31, 2005.
Results
of Operations
The
following table sets forth the percentage relationship of expense items to
freight revenue for the periods indicated:
|
|
For
the three months ended
December
31,
|
For
the six months ended
December
31,
|
|||||||||||
|
2005
|
2004
|
2005
|
2004
|
||||||||||
|
Freight
revenue
(1)
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
|||||
|
Operating
expenses:
|
|||||||||||||
|
Salaries,
wages, and employee benefits
|
34.5
|
%
|
33.3
|
%
|
34.1
|
%
|
33.5
|
%
|
|||||
|
Fuel
(1)
|
10.2
|
%
|
9.6
|
%
|
10.7
|
%
|
10.7
|
%
|
|||||
|
Operations
and maintenance
|
7.2
|
%
|
9.2
|
%
|
7.1
|
%
|
9.1
|
%
|
|||||
|
Insurance
and claims
|
3.9
|
%
|
3.4
|
%
|
3.6
|
%
|
3.2
|
%
|
|||||
|
Depreciation
and amortization
|
2.8
|
%
|
3.7
|
%
|
3.0
|
%
|
3.6
|
%
|
|||||
|
Revenue
equipment rentals
|
10.0
|
%
|
8.9
|
%
|
10.0
|
%
|
8.4
|
%
|
|||||
|
Purchased
transportation
|
17.3
|
%
|
20.1
|
%
|
17.3
|
%
|
19.5
|
%
|
|||||
|
Costs
of products and services sold
|
1.3
|
%
|
1.1
|
%
|
1.3
|
%
|
1.2
|
%
|
|||||
|
Professional
and consulting fees
|
0.7
|
%
|
0.5
|
%
|
0.8
|
%
|
0.5
|
%
|
|||||
|
Communications
and utilities
|
1.0
|
%
|
1.1
|
%
|
1.0
|
%
|
1.1
|
%
|
|||||
|
Operating
taxes and licenses
|
2.1
|
%
|
2.2
|
%
|
2.0
|
%
|
2.1
|
%
|
|||||
|
General
and other operating
|
1.4
|
%
|
1.6
|
%
|
1.4
|
%
|
1.6
|
%
|
|||||
|
Total
operating expenses
|
92.4
|
%
|
94.7
|
%
|
92.3
|
%
|
94.5
|
%
|
|||||
|
Operating
income
|
7.6
|
%
|
5.3
|
%
|
7.7
|
%
|
5.5
|
%
|
|||||
|
Other
expense:
|
|||||||||||||
|
Interest
expense
|
0.1
|
%
|
0.4
|
%
|
0.2
|
%
|
0.5
|
%
|
|||||
|
Income
before income taxes
|
7.5
|
%
|
4.9
|
%
|
7.5
|
%
|
5.0
|
%
|
|||||
|
Provision
for income taxes
|
2.8
|
%
|
2.2
|
%
|
2.9
|
%
|
2.2
|
%
|
|||||
|
Net
income
|
4.7
|
%
|
2.7
|
%
|
4.6
|
%
|
2.8
|
%
|
|||||
|
(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 $17.4 million and $9.6 million for the second
quarter
of fiscal 2006 and 2005, respectively, and $32.0 million and $15.8
million
for the six months ended December 31, 2005 and 2004,
respectively.
|
Comparison
of Three Months Ended December 31, 2005 to Three Months Ended
December 31, 2004
Operating
revenue increased by $13.4 million, or 12.5%, to $120.3 million for
the second quarter of fiscal 2006, from $106.9 million for the second
quarter of fiscal 2005. Freight revenue increased by $5.6 million, or 5.8%,
to
$102.9 million for the second quarter of fiscal 2006, from $97.2 million for
the
second quarter of fiscal 2005. This increase was primarily attributable to
a
4.6% improvement in average freight revenue per total mile to $1.37 from $1.31,
with the average miles per tractor per week remaining constant at approximately
2,150 miles. The improvement in average revenue per total mile resulted
primarily from better overall freight rates driven by a favorable relationship
between freight demand and truckload capacity. As a result of the foregoing
factors, average freight revenue per seated tractor per week, which is our
primary measure of asset productivity, increased 3.6% to $3,142 in the second
quarter of fiscal 2006, from $3,032 for the second quarter of fiscal 2005.
Revenue for TruckersB2B was $2.1 million in the second quarter of fiscal
2006, compared to $1.9 million for the second quarter of fiscal 2005.
Salaries,
wages, and benefits were $35.5 million, or 34.5% of freight revenue, for
the second quarter of fiscal 2006, compared to $32.4 million, or 33.3% of
freight revenue, for the second quarter of fiscal 2005. The increase in the
overall dollar amount was primarily related to an increase in driver payroll
resulting from an increase in Company miles and adjusting the Company’s accrual
for outstanding SARs by $940,000, due to the increase in the Company’s stock
price during the quarter. The Company is required to make quarterly adjustments
to reflect changes in the stock price. Accordingly, our salaries, wages, and
benefits will fluctuate as our stock price changes.
Fuel
expenses, net of fuel surcharge revenue of $17.4 million and $9.6 million for
the second quarter of fiscal 2006 and 2005, respectively, increased to
$10.5 million, or 10.2% of freight revenue, for the second quarter of
fiscal 2006, compared to $9.3 million, or 9.6% of freight revenue, for the
second quarter of fiscal 2005. This increase was primarily attributable to
average fuel prices that were approximately $2.56 per gallon, or 33.9% higher
during the second quarter of fiscal 2006, and an increase in Company miles,
which in turn increased fuel usage. The increase in fuel prices, however, was
offset by fuel surcharge revenue.
Increased
fuel prices will increase our operating expenses to the extent they are not
offset by surcharges.
Operations
and maintenance decreased to $7.4 million for the second quarter of fiscal
2006, from $8.9 million for the second quarter of fiscal 2005. As a
percentage of freight revenue, operations and maintenance decreased to 7.2%
of
freight revenue, for the second quarter of fiscal 2006, from 9.2% for the second
quarter of fiscal 2005. Operations and maintenance consist of direct operating
expense, maintenance, and tire expense. Expenses to prepare tractors for
trade-in or sale have decreased as we have changed our trade cycle from 4 years
to 3 years and the reduction in the average age of tractors and trailers has
decreased our repairs. We expect maintenance expense to decrease as a percentage
of revenue in future periods as a result of the effects of our fleet upgrade.
Insurance
and claims expense was $4.0 million, or 3.9% of freight revenue, for the
second quarter of fiscal 2006, compared to $3.3 million, or 3.4% of freight
revenue, for the second quarter of fiscal 2005. Insurance consists of premiums
for liability, physical damage, and cargo damage insurance. The increase in
insurance and claims was primarily attributable to additional cargo claims.
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,
decreased to $2.9 million from $3.6 million for the second quarter of
fiscal 2006, compared to the second quarter of fiscal 2005. As a percentage
of
freight revenue, depreciation and amortization decreased to 2.8% of freight
revenue in the second quarter of fiscal 2006, compared to 3.7% of freight
revenue for the second quarter of fiscal 2005. Net gains on the disposition
of
revenue equipment and financing of our trailers with operating leases offset
increased depreciation on new tractors acquired in connection with our fleet
upgrade with cash generated from operations. Revenue equipment held under
operating leases is not reflected on our balance sheet and the expenses related
to such equipment are reflected on our statements of operations in revenue
equipment rentals, rather than in depreciation and amortization and interest
expense, as is the case for revenue equipment that is financed with borrowings
or capital leases. In the near term we expect to purchase new tractors with
cash
generated from operations.
Revenue
equipment rentals were $10.3 million, or 10.0% of freight revenue, for the
second quarter of fiscal 2006, compared to $8.6 million, or 8.9% of freight
revenue for the second quarter of fiscal 2005. This increase is attributable
to
an increase in our trailer fleet financed under operating leases.
At December 31, 2005, 6,054 trailers, or 78.3% of our Company trailers,
were held under operating leases compared to 4,758 trailers, or 69.5% of our
trailers, at December 31, 2004. As we expect to finance most of our new trailers
under off-balance sheet operating leases, we expect revenue equipment rentals
will continue to slightly increase going forward, but at a slower rate as we
have moved away from financing tractor acquisitions with operating
leases.
Purchased
transportation decreased to $17.8 million, or 17.3% of freight revenue, for
the second quarter of fiscal 2006, from $19.5 million, or 20.1% of freight
revenue, for the second quarter of fiscal 2005. The decrease is primarily
related to reduced owner-operator expense, as the percentage of our fleet
comprised of owner-operators decreased. It has become difficult to recruit
and
retain owner-operators due to the challenging operating environment.
Owner-operators are independent contractors who cover all their operating
expenses (fuel, driver salaries, maintenance, and equipment costs) for a fixed
payment per mile. To the extent these operating expenses continue to rise and
there is not a corresponding increase in the fixed payment per mile, we expect
the percentage of our fleet comprised of owner-operators will continue to
decrease.
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.
Net
interest expense decreased 66.7% to $0.1 million for the second quarter of
fiscal 2006, from $0.3 million for the second quarter of fiscal 2005. The
decrease in our borrowings and reduction in capital lease obligations resulted
largely from the use of cash generated by operations to purchase new
tractors.
Our
pretax margin, which we believe is a useful measure of our operating performance
because it is neutral with regard to the method of revenue equipment financing
that a company uses, improved 250 basis points to 7.5% of freight revenue for
the second quarter of fiscal 2006, from 5.0% of freight revenue for the second
quarter of fiscal 2005.
Income
taxes increased to $2.9 million, with an effective tax rate of 37.3%, for
the second quarter of fiscal 2006, from $2.1 million, with an effective tax
rate of 43.4%, for the second quarter of fiscal 2005. The effective tax rate
decreased as a result of increased earnings reducing 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 increased to $4.8 million
for
the second quarter of fiscal 2006, from $2.7 million for the second quarter
of
fiscal 2005.
Comparison
of Six Months Ended December 31, 2005 to Six Months Ended
December 31, 2004
Operating
revenue increased by $26.9 million, or 12.7%, to $238.2 million for
the six months ended December 31, 2005, from $211.3 million for
the six months ended December 31, 2004. This increase was primarily attributable
to a 5.4% improvement in average freight revenue per total mile, from $1.30
to
$1.37, with the average miles per tractor per week decreasing to 2,167 from
2,195. The improvement in average revenue per total mile resulted primarily
from
better overall freight rates driven by a favorable relationship between freight
demand and truckload capacity. As a result of the foregoing factors, average
freight revenue per seated tractor per week, which is our primary measure of
asset productivity, increased 3.6% to $3,188 for the six months ended
December 31, 2005, from $3,076 for the six months ended December 31,
2004. Revenue for TruckersB2B was $4.1 million for the six months ended
December 31, 2005, compared to $3.9 million for the six months
ended December 31, 2004.
Salaries,
wages, and benefits were $70.3 million, or 34.1% of freight revenue, for
the six months ended December 31, 2005, compared to
$65.6 million, or 33.5% of freight revenue, for the six months ended
December 31, 2004. The increase in the overall dollar amount was primarily
related to an increase in driver payroll resulting from an increase in Company
miles and adjusting the Company’s accrual for outstanding SARs due to an
increase in the Company’s stock price. The Company is required to make quarterly
adjustments to reflect changes in the stock price. Accordingly, our salaries,
wages, and benefits will fluctuate as our stock price changes.
Fuel
expenses, net of fuel surcharge revenue of $32.0 million and $15.8 million
for
the six months ended December 31, 2005 and 2004, respectively, increased to
$22.2 million, or 10.7% of freight revenue, for the six months ended
December 31, 2005, compared to $21.0 million, or 10.7% of freight
revenue, for the six months ended December 31, 2004. The increase in our costs
was primarily attributable to average fuel prices that were approximately $2.52
per gallon, or 34.7% higher during the six months ended December 31, 2005,
and
an increase in Company miles. The increase in fuel prices was offset by the
collection of fuel surcharge revenue. Increased fuel prices will increase our
operating expenses to the extent they are not offset by surcharges.
Operations
and maintenance decreased to $14.7 million for the six months ended
December 31, 2005, from $17.8 million for the six months ended
December 31, 2004. As a percentage of freight revenue, operations and
maintenance decreased to 7.1% for the six months ended December 31, 2005, from
9.1% for the six months ended December 31, 2004. Operations and maintenance
consist of direct operating expense, maintenance, and tire expense. Expenses
to
prepare tractors for trade-in or sale have decreased as we have changed our
trade cycle from 4 years to 3 years and the reduction in the average age of
tractors and trailers has decreased our repairs. We expect maintenance expense
to decrease as a percentage of revenue in future periods as a result of the
effects of our fleet upgrade.
Insurance
and claims expense was $7.3 million, or 3.6% of freight revenue, for the
six months ended December 31, 2005, compared to $6.3 million, or 3.2% of
freight revenue, for the six months ended December 31, 2004. The primary reasons
for the increase in insurance and claims were additional cargo claims and
increased legal expenses incurred in defense and settlement of various cases.
Insurance consists of premiums for liability, physical damage, and cargo damage
insurance. 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,
decreased to $6.1 million, or 3.0% of freight revenue, for the six months
ended December 31, 2005, from $7.0 million, or 3.6% of freight
revenue, for the six months ended December 31, 2004. Net gains on the
disposition of revenue equipment and financing our trailers with operating
leases offset increased depreciation on new tractors acquired in connection
with
our fleet upgrade with cash generated from operations. Revenue equipment held
under operating leases is not reflected on our balance sheet and the expenses
related to such equipment are reflected on our statements of operations in
revenue equipment rentals, rather than in depreciation and amortization and
interest expense, as is the case for revenue equipment that is financed with
borrowings or capital leases. In the near term we expect to purchase new
tractors with cash generated from operations.
Revenue
equipment rentals were $20.6 million, or 10.0% of freight revenue, for the
six months ended December 31, 2005, compared to $16.5 million, or 8.4% of
freight revenue for the six months ended December 31, 2004. This increase is
attributable to an increased percentage of our trailer fleet held under
operating leases for the six months ended December 31, 2005. At December
31, 2005, 6,054 trailers, or 78.3% of our Company trailers, were held under
operating leases compared to approximately 4,758 trailers, or 69.5% of our
trailers, at December 31, 2004. As we expect to finance most of our new trailers
under off-balance sheet operating leases, we expect revenue equipment rentals
will continue to increase going forward, but at a slower rate as we have moved
away from financing tractor acquisitions with operating leases.
Purchased
transportation decreased to $35.7 million, or 17.3% of freight revenue, for
the six months ended December 31, 2005, from $38.0 million, or
19.5% of freight revenue, for the six months ended December 31, 2004. The
decrease is primarily related to reduced owner-operator expense, as the
percentage of our fleet comprised of owner-operators decreased. It has become
difficult to recruit and retain owner-operators due to the challenging operating
environment. Owner-operators are independent contractors who cover all their
operating expenses (fuel, driver salaries, maintenance, and equipment costs)
for
a fixed payment per mile. To the extent these operating expenses continue to
rise and there is not a corresponding increase in the fixed payment per mile,
we
expect the percentage of our fleet comprised of owner-operators will continue
to
decrease.
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.
Net
interest expense decreased 42.9% to $0.4 million for the six months ended
December 31, 2005, from $0.7 million for the six months ended
December 31, 2004. The decrease in our borrowings and reduction of capital
lease
obligations resulted from the increased use of operating leases and cash
acquisitions to finance revenue equipment.
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 240 basis points to 7.5% of freight revenue for
the six months ended December 31, 2005, from 5.1% of freight revenue for the
six
months ended December 31, 2004.
Income
taxes resulted in expense of $5.9 million with an effective tax rate of 38.5%,
for the six months ended December 31, 2005, compared to $4.4 million, with
an
effective tax rate of 44.2%, for the six months ended December 31, 2004. As
per
diem is a non-deductible expense our effective tax rate will fluctuate as net
income fluctuates in the future.
As
a
result of the factors described above, net income increased by $4.0 million
to $9.5 million for the six months ended December 31, 2005, from a net income
of
$5.5 million for the six months ended December 31, 2004.
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. Our principal sources of liquidity
are
cash generated from operations, bank borrowings, capital and operating lease
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.
Cash
Flows
For
the
six months ended December 31, 2005, net cash provided by operations was $6.9
million, compared to cash provided by operations of $6.7 million for the six
months ended December 31, 2004. Prepaid expenses increased due to payment of
fiscal 2006 insurance premiums at beginning of year whereas installment payments
were made historically, prepayment of heavy vehicle use tax (historically paid
quarterly), and payment on license renewals.
Net
cash
used in investing activities was $8.4 million for the six months ended December
31, 2005, compared to $4.4 million for the six months ended December 31, 2004.
Cash used in investing activities includes the net cash effect of acquisitions
and dispositions of revenue equipment during each period. Capital expenditures
totaled $24.9 million for the six months ended December 31, 2005, and $15.9
million for the six months ended December 31, 2004, reflecting our recent
practice of purchasing new tractors with cash on hand in the 2006 period instead
of leasing tractors as in prior periods. We generated proceeds from the sale
of
property and equipment of $16.5 million for the six months ended December 31,
2005, compared to $12.9 million in proceeds for the six months ended December
31, 2004.
Net
cash
used in financing activities was $1.2 million for the six months ended December
31, 2005, compared to $2.3 million for the six months ended December 31, 2004.
Financing activity represents borrowings (new borrowings, net of repayment)
and
payments of the principal component of capital lease obligations. Although
capital expenditures increased in the 2006 period, we used cash on hand to
fund
a greater percentage, rather than borrowing.
As
of
December 31, 2005, we had on order 585 tractors and 600 trailers for delivery
through fiscal 2007. These revenue equipment orders represent a capital
commitment of approximately $63.9 million, before considering the proceeds
of
equipment dispositions and assuming all are purchased instead of financed under
operating leases. We have purchased all tractors in fiscal 2006 using cash
generated from operations.
Off-Balance
Sheet Arrangements
Prior
to
our fiscal 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. We were
obligated for residual value payments related to operating leases of $75.6
million and $46.9 million at December 31, 2005 and 2004, respectively. A portion
of these amounts is covered by repurchase and/or trade agreements we have with
the equipment manufacturer. We believe that any residual payment obligations
that are not covered by the manufacturer will be satisfied, in the aggregate,
by
the value of the related equipment at the end of the lease. We anticipate that
in the short term we will continue to use operating leases to finance the
acquisition of trailers and cash generated from operations to purchase
tractors.
The
tractors on order are not protected by manufacturers’ repurchase arrangements
and are not subject to "walk-away" leases under which we can return the
equipment without liability regardless of its market value at the time of
return. Therefore, we are subject to the risk that equipment values 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 provide to our
equipment lessors.
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 will be used
to refinance the Company’s existing credit facility and 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 CelEComm, CelCan, and Jaguar, each of which is a subsidiary of
the
Company.
The
Credit Agreement has a maximum revolving borrowing limit of $50.0 million,
and
the Company may increase the revolving borrowing limit by an additional $20.0
million, to a total of $70.0 million. Letters of credit are limited to an
aggregate commitment of $15.0 million and a swing line facility has a limit
of
$5.0 million. A commitment fee that is adjusted quarterly between 0.15% and
0.225% per annum based on cash flow coverage is due on the daily unused portion
of the Credit Agreement. The Credit Agreement contains certain restrictions
and
covenants relating to, among other things, dividends, tangible net worth, cash
flow, mergers, consolidations, acquisitions and dispositions, and total
indebtedness. We were in compliance with these covenants at December 31, 2005,
and expect to remain in compliance for the foreseeable future. At December
31,
2005, none of our credit facility was utilized as outstanding borrowings and
$6.4 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
improving operating results, anticipated future cash flows, current availability
under our credit facility, and sources of equipment lease financing that we
expect will be available to us, we do not expect to experience significant
liquidity constraints in the foreseeable future.
Contractual
Obligations and Commercial Commitments
As
of
December 31, 2005, our operating leases, capitalized leases, other
debts, and future commitments have stated maturities or minimum annual payments
as follows:
|
Annual
Cash Requirements
as
of December 31, 2005
(in
thousands)
Amounts
Due by Period
|
||||||||||||||||
|
Total
|
Less
than
One
Year
|
One
to
Three
Years
|
Three
to
Five
Years
|
Over
Five
Years
|
||||||||||||
|
Operating
leases
|
$
|
125,888
|
$
|
39,746
|
$
|
45,645
|
$
|
20,924
|
$
|
19,573
|
||||||
|
Lease
residual value guarantees
|
75,577
|
13,575
|
27,243
|
6,327
|
28,432
|
|||||||||||
|
Capital
leases
(1)
|
1,542
|
293
|
550
|
281
|
418
|
|||||||||||
|
Long-term
debt
(1)
|
7,203
|
1,423
|
4,298
|
1,482
|
---
|
|||||||||||
|
Sub-total
|
$
|
210,210
|
$
|
55,037
|
$
|
77,736
|
$
|
29,014
|
$
|
48,423
|
||||||
|
Future
purchase of revenue equipment
|
$
|
63,878
|
$
|
35,009
|
$
|
18,963
|
$
|
2,396
|
$
|
7,510
|
||||||
|
Employment
and consulting agreements
(2)
|
1,224
|
938
|
278
|
8
|
---
|
|||||||||||
|
Standby
Letters of Credit
|
6,350
|
6,350
|
---
|
---
|
---
|
|||||||||||
|
Total
|
$
|
281,662
|
$
|
97,334
|
$
|
96,977
|
$
|
31,418
|
$
|
55,933
|
||||||
|
(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 accounting principles
generally accepted in the United States 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 and 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 3
to 10 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 majority of our revenue equipment acquisitions with operating leases,
rather than with bank borrowings or capital lease arrangements. 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 36% of our tractors and 23% 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.
Consequently, we believe that pretax margin (income before income taxes as
a
percentage of operating revenue) may provide a more useful measure of our
operating performance than operating ratio (operating expenses as a percentage
of operating revenue) because it eliminates the impact of revenue equipment
financing decisions.
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, frequency, and adverse development of claims incurred in a given
period.
Accounting
for Income Taxes.
Deferred
income taxes represent a liability on our consolidated balance sheet. Deferred
income taxes are determined in accordance with SFAS No. 109, "Accounting for
Income Taxes." Deferred tax assets and liabilities are recognized for the
expected future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases, and operating loss and tax credit carry-forwards.
We
evaluate our tax assets and liabilities on a periodic basis and adjust these
balances as appropriate. We believe that we have adequately provided for our
future tax consequences based upon current facts and circumstances and current
tax law. However, should our tax positions be challenged and not prevail,
different outcomes could result and have a significant impact on the amounts
reported in our consolidated financial statements.
The
carrying value of our deferred tax assets (tax benefits expected to be realized
in the future) assumes that we will be able to generate, based on certain
estimates and assumptions, sufficient future taxable income in certain tax
jurisdictions to utilize these deferred tax benefits. If these estimates and
related assumptions change in the future, we may be required to reduce the
value
of the deferred tax assets resulting in additional income tax expense. We
believe that it is more likely than not that the deferred tax assets, net of
valuation allowance, will be realized, based on forecasted income. However,
there can be no assurance that we will meet our forecasts of future income.
We
evaluate the deferred tax assets on a periodic basis and assess the need for
additional valuation allowances.
Federal
income taxes are provided on that portion of the income of foreign subsidiaries
that is expected to be remitted to the United States.
Seasonality
We
have
substantial operations in the Midwestern and Eastern United States and Canada.
In those geographic regions, our tractor productivity may be adversely affected
during the winter season because inclement weather may impede our operations.
Moreover, some shippers reduce their shipments during holiday periods as a
result of curtailed operations or vacation shutdowns. At the same time,
operating expenses generally increase, with fuel efficiency declining because
of
engine idling and harsh weather creating higher accident frequency, increased
claims, and more equipment repairs.
Inflation
Many
of
our operating expenses, including fuel costs, revenue equipment, and driver
compensation, are sensitive to the effects of inflation, which result in higher
operating costs and reduced operating income. The effects of inflation on our
business during the past three years were most significant in fuel. The effects
of inflation on revenue were not material in the past three years. We have
limited the effects of inflation through increases in freight rates and fuel
surcharges.
Item
3.
Quantitative
and Qualitative Disclosures about Market Risk
We
experience various market risks, including changes in interest rates, foreign
currency exchange rates, and fuel prices. We do not enter into derivatives
or
other financial instruments for trading or speculative purposes, nor when there
are no underlying related exposures.
Interest
Rate Risk.
We are
exposed to interest rate risk principally from our primary credit facility.
The
credit facility carries a maximum variable interest rate of either the bank’s
base rate or LIBOR plus 1.125%. At December 31, 2005, the interest rate for
revolving borrowings under our credit facility was LIBOR plus .875%. At December
31, 2005, we had no loan borrowings outstanding under the credit facility.
Foreign
Currency Exchange Rate Risk.
We are
subject to foreign currency exchange rate risk, specifically in connection
with
our Canadian operations. While virtually all of the expenses associated with
our
Canadian operations, such as independent contractor costs, Company driver
compensation, and administrative costs, are paid in Canadian dollars, a
significant portion of our revenue generated from those operations is billed
in
U.S. dollars because many of our customers are U.S. shippers transporting goods
to or from Canada. As a result, increases in the Canadian dollar exchange rate
adversely affect the profitability of our Canadian operations. Assuming revenue
and expenses for our Canadian operations identical to that in the six months
ended December 31, 2005 (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 $235,000.
We
generally do not face the same magnitude of foreign currency exchange rate
risk
in connection with our intra-Mexico operations conducted through our Mexican
subsidiary, Jaguar, because our foreign currency revenues are generally
proportionate to our foreign currency expenses for those operations. For
purposes of consolidation, however, the operating results earned by our
subsidiaries, including Jaguar, in foreign currencies are converted into United
States dollars. As a result, a decrease in the value of the Mexican peso could
adversely affect our consolidated results of operations. Assuming revenue and
expenses for our Mexican operations identical to that in the six months ended
December 31, 2005 (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 $60,000.
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 December 31, 2005, 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, we adjust any such derivative instruments to fair
value through earnings on a monthly basis. As of December 31, 2005, we had
no
fuel derivatives in place.
Item
4.
Controls
and Procedures
As
required by Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), the Company has carried out an evaluation
of
the effectiveness of the design and operation of the Company’s disclosure
controls and procedures as of the end of the period covered by this Quarterly
Report on Form 10-Q. This evaluation was carried out under the supervision
and
with the participation of the Company’s management, including our Chief
Executive Officer and our Chief Financial Officer. Based upon that evaluation,
our Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were effective as of the end of the period
covered by this Quarterly Report on Form 10-Q. There were no changes in the
Company’s internal control over financial reporting that occurred during the
second quarter of fiscal 2006 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
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.
Item
6.
Exhibits
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:
January 30, 2006
|