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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 MARCH 31, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-23192
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)
ONE CELADON DRIVE
INDIANAPOLIS, IN 46235-4207
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (317) 972-7000
Indicate by check mark whether the Registrant (1) has filed all reports required
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 [ ]
The number of shares outstanding of the Common Stock ($.033 par value) of the
Registrant as of the close of business on May 7, 2003 was 7,693,313.
CELADON GROUP, INC.
INDEX TO
MARCH 31, 2003 FORM 10-Q
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of March 31, 2003
and June 30, 2002 ............................................................................ 3
Condensed Consolidated Statements of Income - For the three and nine months
period ended March 31, 2003 and 2002........................................................... 4
Condensed Consolidated Statements of Cash Flows - For the nine months
ended March 31, 2003 and 2002 ................................................................. 5
Notes to Condensed Consolidated Financial Statements .......................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .............................................................. 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk ............................. 18
Item 4. Controls and Procedures................................................................. 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................................... 19
Item 2. Changes in Securities .................................................................. 19
Item 3. Defaults upon Senior Securities......................................................... 19
Item 4. Submission of Matters to a Vote of Security Holders and Procedures...................... 19
Item 5. Other Information....................................................................... 19
Item 6. Exhibits and Reports on Form 8-K........................................................ 19
CELADON GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
March 31 June 30,
2003 2002
----------- ---------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents ................................................. $ 742 $ 299
Trade receivables, net of allowance ....................................... 46,823 54,796
Accounts receivable - other ............................................... 4,258 5,728
Prepaid expenses and other current assets ................................. 7,754 6,222
Tires in service .......................................................... 4,483 4,181
Deferred income taxes ..................................................... 1,603 1,808
--------- ---------
Total current assets .................................................. 65,663 73,034
Property and equipment ......................................................... 133,107 140,142
Less accumulated depreciation and amortization ............................ 52,263 45,164
--------- ---------
Net property and equipment ............................................ 80,844 94,978
Tires in service ............................................................... 2,106 1,982
Goodwill ....................................................................... 16,702 16,702
Other assets ................................................................... 3,440 3,335
--------- ---------
Total assets .............................................................. $ 168,755 $ 190,031
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .......................................................... $ 5,557 $ 4,184
Accrued expenses .......................................................... 9,356 9,460
Accrued salaries and benefits ............................................. 6,765 7,087
Accrued insurance and claims .............................................. 5,359 4,274
Accrued owner-operator expense ............................................ 2,567 3,599
Accrued fuel expense ...................................................... 4,407 2,823
Bank borrowings and current maturities of long-term debt .................. 7,552 7,531
Current maturities of capital lease obligations ........................... 17,628 21,120
Income tax payable ........................................................ 659 51
--------- ---------
Total current liabilities ............................................. 59,850 60,129
Long-term debt, net of current maturities ...................................... 30,018 44,178
Capital lease obligations, net of current maturities ........................... 14,408 24,193
Deferred income taxes .......................................................... 8,433 7,590
Minority interest .............................................................. 25 25
Stockholders' equity:
Preferred stock, $1.00 par value, authorized 179,985 shares; no shares
issued and outstanding ................................................ -- --
Common stock, $0.033 par value, authorized 12,000,000 shares; issued
7,789,764 shares ...................................................... 257 257
Additional paid-in capital ................................................ 60,055 60,044
Retained deficit .......................................................... (1,976) (4,349)
Accumulated other comprehensive loss ...................................... (1,924) (1,581)
Treasury stock, at cost, 96,451 and 112,115 shares at
March 31, 2003 and June 30, 2002, respectively .......................... (391) (455)
--------- ---------
Total stockholders' equity ............................................ 56,021 53,916
--------- ---------
Total liabilities and stockholders' equity ................................ $ 168,755 $ 190,031
========= =========
See accompanying notes to condensed consolidated financial statements.
3
CELADON GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
For the three months ended For the nine months ended
March 31, March 31,
2003 2002 2003 2002
--------- --------- --------- ---------
Operating revenue ........................... $ 90,686 $ 78,737 $ 275,073 $ 240,956
Operating expenses:
Salaries, wages and employee benefits ... 27,474 23,394 83,814 70,599
Fuel .................................... 13,604 7,868 35,692 25,556
Operating costs and supplies ............ 7,928 6,613 23,710 21,106
Insurance and claims .................... 3,361 2,820 9,962 8,290
Depreciation and amortization ........... 3,768 3,057 10,353 9,652
Rent and purchased transportation ....... 26,454 27,122 83,335 81,694
Costs of products and services sold ..... 812 1,023 3,342 2,789
Professional and consulting fees ........ 736 389 1,870 1,166
Communications and utilities ............ 1,068 945 3,069 2,848
Permits, licenses and taxes ............. 1,759 1,628 5,638 4,875
General, administrative and selling ..... 1,706 1,691 5,184 5,483
--------- --------- --------- ---------
Total operating expenses ........... 88,670 76,550 265,969 234,058
--------- --------- --------- ---------
Operating income ............................ 2,016 2,187 9,104 6,898
Other (income) expense:
Interest Income ......................... (29) (31) (67) (85)
Interest expense ........................ 1,211 1,721 5,147 5,666
Other (income) expense, net ............. 40 24 (25) 115
--------- --------- --------- ---------
Income before income taxes .................. 794 473 4,049 1,202
Provision for income taxes .................. 340 195 1,676 584
--------- --------- --------- ---------
Net income ......................... $ 454 $ 278 $ 2,373 $ 618
========= ========= ========= =========
Earnings per common share:
Diluted earnings per share .............. $ 0.06 $ 0.04 $ 0.30 $ 0.08
Basic earnings per share ................ $ 0.06 $ 0.04 $ 0.31 $ 0.08
Average shares outstanding:
Diluted ................................. 8,018 7,762 8,049 7,671
Basic ................................... 7,693 7,644 7,687 7,597
See accompanying notes to condensed consolidated financial statements.
4
CELADON GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
FOR THE NINE MONTHS ENDED
MARCH 31,
2003 2002
-------- --------
Cash flows from operating activities:
Net income ...................................................... $ 2,373 $ 618
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ............................... 10,353 9,652
Provision (benefit) for deferred income taxes ............... 1,048 (171)
Provision for doubtful accounts ............................. 572 695
Changes in assets and liabilities:
Trade receivables ...................................... 7,401 5,460
Accounts receivable - other ............................ 1,470 (2,219)
Income tax recoverable ................................. -- 597
Tires in service ....................................... (426) 445
Prepaid expenses and other current assets .............. (1,532) 1,525
Other assets ........................................... (175) (637)
Accounts payable and accrued expenses .................. 2,584 (2,342)
Income tax payable ..................................... 608 411
-------- --------
Net cash provided by operating activities ................... 24,276 14,034
Cash flows from investing activities:
Purchase of property and equipment .............................. (4,726) (9,566)
Proceeds on sale of property and equipment ...................... 8,234 7,310
-------- --------
Net cash provided by (used for) investing activities ........ 3,508 (2,256)
Cash flows from financing activities:
Proceeds from issuances of common stock ......................... 75 423
Proceeds from bank borrowings and debt .......................... 2,941 7,767
Payments on bank borrowings and debt ............................ (17,080) (8,429)
Principal payments under capital lease obligations .............. (13,277) (11,509)
-------- --------
Net cash used in financing activities ....................... (27,341) (11,748)
-------- --------
Increase cash and cash equivalents .............................. 443 30
Cash and cash equivalents at beginning of period ..................... 299 794
-------- --------
Cash and cash equivalents at end of period ........................... $ 742 $ 824
======== ========
Supplemental disclosure of cash flow information:
Interest paid ................................................... $ 4,145 $ 5,891
Income taxes paid ............................................... $ 200 $ 178
Supplemental disclosure of non-cash flow investing activities:
Lease obligation incurred in the purchase of equipment .......... -- $ 8,495
See accompanying notes to condensed consolidated financial statements.
5
CELADON GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial reporting and the general instructions to Form 10-Q of
Regulation S-X and includes the results of Celadon Group, Inc. and it's majority
owned subsidiaries. Accordingly, they do not include certain information and
note disclosures required by generally accepted accounting principles for annual
financial reporting and should be read in conjunction with the consolidated
financial statements and notes thereto of Celadon Group, Inc. (the "Company") as
of and for each of the three years in the period ended June 30, 2002.
The unaudited interim financial statements reflect all adjustments (all
of a normal recurring nature) which management considers 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 that may be reported for the full year.
The preparation of the financial statements in conformity with
generally accepted accounting principles 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 2001, the Financial Accounting Standards Board issued Statement No.
143 (SFAS 143), Accounting for Asset Retirement Obligations. SFAS 143 requires
companies to record the fair value of a liability for an asset retirement
obligation in the period in which it is incurred, which is adjusted to its
present value each period. In addition, companies must capitalize a
corresponding amount by increasing the carrying amount of the related long-lived
asset, which is depreciated over the useful life of the related asset. The
Company adopted SFAS 143 on July 1, 2002, and there was no impact on its
consolidated financial position or results of operations.
In 2001, the Financial Accounting Standards Board issued Statement No.
144 (SFAS 144), Accounting for the Impairment or Disposal of Long-Lived Assets.
SFAS No. 144 provides additional restrictive criteria that would have to be met
to classify an asset as held-for-sale. This statement also requires expected
future operating losses from discontinued operations to be recorded in the
period in which the losses are incurred (rather than as of the date management
commits to a formal plan to dispose of a segment, as previously required). In
addition, more dispositions will qualify for discontinued operations treatment
in the income statement. The Company adopted SFAS 144 on July 1, 2002, and there
was no impact on its consolidated financial position or results of operations.
6
CELADON GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(UNAUDITED)
In 2002, the Financial Accounting Standards Board issued Statement No.
145 (SFAS 145), Recession of SFAS No. 4, 44, and 64, Amendment of SFAS No. 13
and Technical Corrections. This SFAS addresses the recording of debt
extinguishment costs as extraordinary items and accounting for sale-lease back
transactions. Effective July 1 2002, the Company adopted the provisions of SFAS
145. Under this new standard, $0.9 million in expenses associated with the
refinancing of the Company's Credit Agreement in September 2002, which under
prior standards would have been recorded as an extraordinary item, were recorded
in interest expense in the Consolidated Statement of Income. (See Note 3)
In 2002, the Financial Accounting Standards Board issued Statement No.
146 (SFAS 146), Accounting for Costs Associated with Exit or Disposal
Activities, which addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies EITF Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS
146 requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. SFAS 146 also establishes
that fair value is the objective for initial measurement of the liability. The
provisions of this Statement are required to be applied starting with exit or
disposal activities that are initiated after December 31, 2002. Effective
December 31, 2002, the Company adopted the provisions of SFAS 146, and there was
no impact on its consolidated financial position or results of operations.
In December 2002, the Financial Accounting Standards Board (FASB)
issued SFAS 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure." The statement amends SFAS 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition to SFAS 123's fair
value method of accounting for stock-based employee compensation. In addition,
SFAS 148 requires disclosure in the Summary of Significant Accounting Policies
of the effects of the Company's accounting policy with respect to stock-based
compensation on net income and earnings per share in annual and interim
financial statement accounted for using the intrinsic value method prescribed by
Accounting Principles Board Opinions (APB) 25, "Accounting for Stock Issued to
Employees." The Company adopted the disclosure provisions of the statement as of
March 31, 2003. See Note 5 to the Consolidated Financial Statements for the
disclosures related to this statement.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." The interpretation expands on the
disclosure requirements to be made in interim and annual financial statements.
The interpretation also requires that a liability measure at fair value be
recognized for guarantees even if the probability of payment on the guarantee is
remote. The recognition provisions apply on a prospective basis for guarantees
issued or modified after December 31, 2002. The adoption of the interpretation
will not have a material effect on the Company's accounting or reporting of its
guarantees.
7
CELADON GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(UNAUDITED)
In January 2003, the FASB released Interpretation No. 46,
"Consolidation of Variable Interest Entities." This interpretation clarifies the
application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. The interpretation
established standards under which a Variable Interest Entity should be
consolidated by the primary beneficiary. The requirements are effective
immediately to Variable Interest Entities created after January 31, 2003 and to
Variable Interest Entities in which the Company obtains an interest after
January 31, 2003. A company with a variable interest in a Variable Interest
Entity created before February 1, 2003 shall apply the provisions of the
interpretation to that entity no later than the beginning of the first interim
or annual period beginning after June 15, 2003. The application is not expected
to have a material effect on the Company's financial statements.
3. CREDIT AGREEMENT
On September 26, 2002, the Company entered into a Loan and Security
Agreement ("Credit Agreement") with Fleet Capital Corporation, Fleet Capital
Canada Corporation and several other lenders named in the Loan Agreement. The
Credit Agreement provides a credit facility in the aggregate amount of $55
million. The facility consists of two revolving loan facilities, two term loan
subfacilities and a commitment to issue and guaranty letters of credit. The term
loan subfacilities consist of a domestic term loan in the aggregate principal
amount of approximately $9.4 million and a Canadian term loan in the aggregate
principal amount of approximately $0.8 million. Repayment of the amounts
outstanding under the Credit Agreement is secured by a lien on certain assets.
The Credit Agreement replaces in full the credit facility the Company entered
into with ING (U.S.) Capital, LLC, in August 1999. Proceeds of $39 million from
this Credit Agreement were used to satisfy the Company's obligations under its
previous credit facility. The Credit Agreement, which is for a term of three
years, terminates on September 26, 2005. The Company incurred a one-time
non-cash write-off of approximately $0.9 million related to unamortized debt
issuance costs from the previous credit facility.
8
CELADON GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(UNAUDITED)
4. EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators
used in computing earnings per share (in thousands except for per share
amounts):
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
MARCH 31, MARCH 31,
2003 2002 2003 2002
------ ------ ------ ------
Income available to common shareholders $ 454 $ 278 $2,373 $ 618
====== ====== ====== ======
Basic earnings per share:
Weighted - average number of common shares outstanding 7,693 7,644 7,687 7,597
Basic earnings per share $ 0.06 $ 0.04 $ 0.31 $ 0.08
====== ====== ====== ======
Diluted earnings per share:
Weighted - average number of common shares outstanding 7,693 7,644 7,687 7,597
Effect of stock options and other incremental shares 325 118 362 74
------ ------ ------ ------
Weighted - average number of common shares
Outstanding-diluted 8,018 7,762 8,049 7,671
====== ====== ====== ======
Diluted earnings per share $ 0.06 $ 0.04 $ 0.30 $ 0.08
====== ====== ====== ======
5. STOCK-BASED COMPENSATION
SFAS 123, "Accounting for Stock-Based Compensation," as amended by SFAS
148, "Accounting for Stock-Based Compensation - Transition and Disclosure,"
established accounting and disclosure requirements using a fair value-based
method of accounting for stock-based employee compensation plans. As provided
for under SFAS 123, no compensation expense has been recognized for the
Company's stock option plans.
9
CELADON GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(UNAUDITED)
The following is a reconciliation of reported income and earnings per
share to net income from net earnings per share as if the Company used the fair
value method of accounting for stock-based compensation. Fair value is
calculated using the Black-Scholes option-pricing model, a pricing model
acceptable under SFAS 123.
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
MARCH 31 MARCH 31
---------------------------- ----------------------------
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
2003 2002 2003 2002
--------- --------- --------- ---------
Net income $ 454 $ 278 $ 2,373 $ 618
Total stock-based employee compensation expense
under fair value-based method for all awards, net of tax 184 212 621 668
--------- --------- --------- ---------
Pro forma net income (loss) $ 270 $ 66 $ 1,752 $ (50)
========= ========= ========= =========
Earnings (loss) per share
As reported:
Diluted $ 0.06 $ 0.04 $ 0.30 $ 0.08
Basic $ 0.06 $ 0.04 $ 0.31 $ 0.08
Pro forma:
Diluted $ 0.03 $ 0.01 $ 0.22 $ (0.01)
Basic $ 0.04 $ 0.01 $ 0.23 $ (0.01)
6. SEGMENT INFORMATION AND SIGNIFICANT CUSTOMERS
The Company operates in two segments, transportation and e-commerce.
The Company generates revenue, in the transportation segment, providing
truckload hauling services through, Celadon Trucking Services, Inc., ("CTSI")
and various other subsidiaries. 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 its operating segments on operating income.
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
MARCH 31, 2003 MARCH 31, 2003
---------------------------------------------- ----------------------------------------------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
Transportation E-commerce Total Transportation E-commerce Total
-------------- ---------- -------- -------------- ---------- --------
Operating revenue $ 89,327 $ 1,359 $ 90,686 $269,793 $ 5,280 $275,073
Operating income $ 1,826 $ 190 $ 2,016 $ 8,259 $ 845 $ 9,104
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
MARCH 31, 2002 MARCH 31, 2002
---------------------------------------------- ----------------------------------------------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
Transportation E-commerce Total Transportation E-commerce Total
-------------- ---------- -------- -------------- ---------- --------
Operating revenue $ 77,021 $ 1,716 $ 78,737 $236,291 $ 4,665 $240,956
Operating income $ 1,908 $ 279 $ 2,187 $ 6,285 $ 613 $ 6,898
10
CELADON GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(UNAUDITED)
Information as to the Company's operating revenue by geographic area,
is allocated based primarily on country of customer origin and summarized below:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
MARCH 31 MARCH 31
-------------------------- --------------------------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
2003 2002 2003 2002
-------- -------- -------- --------
Operating revenue:
United States $ 74,042 $ 62,275 $226,520 $190,747
Canada 12,300 11,482 34,842 35,363
Mexico 4,344 4,980 13,711 14,846
-------- -------- -------- --------
Total $ 90,686 $ 78,737 $275,073 $240,956
======== ======== ======== ========
The Company's largest customer is DaimlerChrysler. 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 2003. Percentage of the total revenue derived
from DaimlerChrysler for the periods presented was as follows:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
MARCH 31 MARCH 31
-------------------------- -------------------------
2003 2002 2003 2002
---- ---- ---- ----
Percent of revenue from DaimlerChrysler 13% 20% 13% 20%
No other customer accounted for more than 10% of the Company's total
revenue during any of its three most recent fiscal years.
7. INCOME TAXES
Income tax expense varies from the amount computed by applying the
federal corporate rate of 35% to income before income taxes, primarily due to
state income taxes, permanent tax differences and Mexican taxes being based on
assets in lieu of income. The effective income tax rate for the nine months
ended March 31, 2003 and 2002 were 41% and 49%, respectively. The effective
income tax rate for the three months ended March 31, 2003 and 2002 were 43% and
41%, respectively.
8. COMPREHENSIVE INCOME
Total comprehensive income was $0.2 million and $0.4 million for the
three months ended March 31, 2003 and 2002, respectively. Total comprehensive
income was $2.0 million and $0.7 million for the nine months ended March 31,
2003 and 2002, respectively. The difference between the total comprehensive
income and net income relates to the effect of foreign currency translation
adjustments.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship of expense
items to operating revenues for the periods indicated:
PERCENTAGE OF OPERATING REVENUES
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
MARCH 31, MARCH 31,
-------------------------- --------------------------
2003 2002 2003 2002
------ ------ ------ ------
Operating Revenues ............................. 100% 100% 100% 100%
Operating expenses
Salaries, wages and employee benefits ..... 30.3% 29.7% 30.5% 29.3%
Fuel ...................................... 15.0% 10.0% 13.0% 10.6%
Operating costs and supplies .............. 8.7% 8.4% 8.6% 8.8%
Insurance and claims ...................... 3.7% 3.6% 3.6% 3.4%
Depreciation and amortization ............. 4.2% 3.9% 3.8% 4.0%
Rent and purchased transportation ......... 29.2% 34.4% 30.3% 33.9%
Communications and utilities .............. 1.2% 1.2% 1.1% 1.2%
Permits, licenses and taxes ............... 1.9% 2.1% 2.0% 2.0%
Other ..................................... 3.6% 3.9% 3.8% 3.9%
------ ------ ------ ------
Total operating expenses ....................... 97.8% 97.2% 96.7% 97.1%
------ ------ ------ ------
Operating income ............................... 2.2% 2.8% 3.3% 2.9%
====== ====== ====== ======
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2003 TO THREE MONTHS ENDED MARCH 31,
2002
Revenue increased by $11.9 million, or 15.2%, to $90.7 million for the
third quarter of fiscal 2003 from $78.7 million for the third quarter of fiscal
2002. This increase is related to a 9.0% increase in truckload volume and an
8.9% increase in rate per mile. Approximately fifty percent of the rate per mile
increase is attributed to escalating fuel surcharge rates. Non-truckload
revenues, which constitute dedicated operations and material handling, increased
$2.1 million in the third quarter of fiscal 2003. Dedicated operations, which
began March of 2002, represented approximately $1.1 million of this increase.
Revenue for TruckersB2B was approximately $1.4 million in the third quarter of
fiscal 2003 compared to $1.7 million in the third quarter of fiscal 2002. The
TruckersB2B revenue for the March 2003 quarter represents over $42.2 million in
purchases made by its member companies through the TruckersB2B network.
Consolidated operating income decreased by $0.2 million, or 7.8%, to
$2.0 million in fiscal 2003 from $2.2 million in fiscal 2002. The decrease in
operating income was primarily a result of increased fuel, increased salaries,
wages and benefits, offset by increased revenues. The Company's operating ratio,
which expresses operating expenses as a percentage of operating revenue
increased from 97.2% in fiscal 2002 to 97.8% in fiscal 2003.
12
The Company's fleet decreased to 2,559 tractors, including 430
owner-operated tractors and 134 lease-purchase owner operated tractors at March
31, 2003 from 2,625 tractors including 640 owner-operated tractors and 194
lease-purchase owner operated tractors at March 31, 2002.
Salaries, wages and benefits were $27.5 million, or 30.3% of operating
revenues for the three-month period ending March 31, 2003 compared to $23.4
million, or 29.7% of operating revenues for the same period in 2002. This
increase is primarily related to an increase in driver payroll for the
additional truckload volume.
Fuel increased to $13.6 million, or 15% of revenue in the third quarter
of fiscal 2003 compared to $7.9 million, or 10% of revenue in the third quarter
of fiscal 2002. The $5.7 million increase relates an increase in cost of
approximately $0.39 per gallon and the purchase of approximately $2 million
additional gallons for the additional dispatch miles.
Insurance and claims expense was $3.4 million, or 3.7% of revenue in
the third quarter of fiscal 2003 compared to $2.8 million, or 3.6% of revenue
for the third quarter of fiscal 2002. Insurance consists of premiums for
liability, physical damage and cargo damage. The Company's insurance program
involves self-insurance at various risk retention levels. Claims in excess of
these risk levels are covered by insurance in amounts the Company considers
adequate. The Company accrues for the uninsured portion of claims based on
historical experience.
Rent and purchased transportation decreased to $26.5 million, or 29.2%
of revenue in the third quarter of fiscal 2003 from $27.1 million, or 34.4% in
the third quarter of fiscal 2002. As a percentage of revenue, rent and purchased
transportation dropped 5.2% in fiscal 2003. The percentage of revenue for rent
and purchased transportation decreased due to a decrease in the owner-operator
fleet year over year compared to increasing the truckload revenue. The reduction
in the owner operator's fleet was approximately $2.9 million. Additional expense
was incurred for the material handling operation of approximately $1.0 million.
Also, as the Company tractor fleet has grown by approximately 200 tractors, the
monthly operating lease rent expense has increased rent and purchased
transportation by approximately $0.3 million.
Net interest expense decreased by $0.5 million, or 29.6%, to $1.2
million in the third quarter of fiscal 2003 from $1.7 million in the third
quarter of fiscal 2002. The decrease was the result of a 0.7 percentage point
decrease, or 12.3% decline in interest rates year over year and reduced capital
lease obligations resulting in reduced capital lease related interest expense.
The effective income tax rate increased to 43% for fiscal 2003 from 41%
for fiscal 2002. The increased tax rate is the effect of the permanent tax
differences, which impact the effective tax rate. In addition, taxes for Mexico
are based on assets in lieu of income, which has an impact on the effective tax
rate.
NINE MONTHS ENDED MARCH 31, 2003 COMPARED WITH THE NINE MONTHS ENDED MARCH 31,
2002
Revenue increased by $34.1 million, or 14.2%, to $275.1 million for the
nine months ended March 31, 2003 from $241.0 million for the same period in
2002. This increase is related to a 9.3% increase in truckload volume and a 4.8%
increase in rate per mile. Approximately sixty-five percent of rate per mile
increase is attributed to escalating fuel surcharge rates. Non-truckload
revenues, which constitute dedicated operations and material handling, increased
$7.7 million in fiscal 2003. New dedicated operations represented approximately
$4.0 million of this increase. Revenue for TruckersB2B was approximately $5.3
million in fiscal 2003 compared to $4.7 million in fiscal 2002. The TruckersB2B
revenue for the nine months ended March 31, 2002 represents over $128.2 million
in purchases made by its member companies through the TruckersB2B network.
13
Consolidated operating income increased by $2.2 million, or 32.0%, to
$9.1 million in fiscal 2003 from $6.9 million in fiscal 2002. The increase in
operating income was primarily a result of increased revenue offset by increased
salaries, wages and benefits, and increased fuel. The Company's operating ratio,
which expresses operating expenses as a percentage of operating revenue improved
from 97.1% in fiscal 2002 to 96.7% in fiscal 2003.
The Company's fleet decreased slightly to 2,559 tractors, including 430
owner-operated tractors and 134 lease-purchase owner operated tractors at March
31, 2003 from 2,625 tractors including 640 owner-operated tractors and 194
lease-purchase owner operated tractors at March 31, 2002.
Salaries, wages and benefits were $83.8 million, or 30.5% of operating
revenues for the nine-month period ending March 31, 2003 compared to $70.6
million, or 29.3% of operating revenues for the same period in 2002. This
increase is related to an increase in driver payroll for the additional
truckload volume.
Fuel increased to $35.7 million, or 13.0% of revenue in fiscal 2003
compared to $25.6 million, or 10.6% of revenue in fiscal 2002. The $10.1 million
increase relates to the purchase of 3.9 million additional gallons for the
additional dispatch miles and an increase of approximately $0.19 per gallon.
Insurance and claims expense was $10.0 million, or 3.6% of revenue in
fiscal 2003 compared to $8.3 million, or 3.4% of revenue for fiscal 2002.
Insurance consists of premiums for liability, physical damage and cargo damage.
The Company's insurance program involves self-insurance at various risk
retention levels. Claims in excess of these risk levels are covered by insurance
in amounts the Company considers adequate. The Company accrues for the uninsured
portion of claims based on historical experience.
Rent and purchased transportation increased to $83.3 million, or 30.3%
of revenue in the third quarter of fiscal 2003 from $81.7 million, or 33.9% in
the third quarter of fiscal 2002. As a percentage of revenue, rent and purchased
transportation dropped 3.6% in fiscal 2003. The percentage of revenue for rent
and purchased transportation decreased due to a reduction in the owner-operator
fleet year over year while increasing truckload revenue. The reduction in the
owner operator fleet was approximately $5.2 million. Additional expense was
incurred in the generation of additional revenues for the material handling
operation of approximately $3.5 million. Also, as the company tractor fleet has
grown by approximately 200 tractors, the monthly operating lease rent expense
has increased by approximately $2.4 million.
Net interest expense decreased by $0.5 million, or 9.2%, to $5.1
million in the third quarter of fiscal 2003 from $5.7 million in the third
quarter of 2002. The decrease was the result of a 2-percentage point decrease,
or 21.1% decline in interest rates year over year and reduced capital lease
obligations resulting in reduced capital lease related interest expense.
Other income and expense includes approximately $1.1 million of
commission income related to a receivables collection agreement entered into
between Foothill Capital and the Company. This agreement related to the
collection of receivables tied to the bankrupt Burlington Motor Carriers'
("BMC") business. The Company also recognized approximately $1.0 million of
other expense related to a write-down of revenue equipment acquired from
Foothill Capital for equipment, which has not been located.
14
The effective income tax rate decreased to 41% for fiscal 2003 from 49%
for fiscal 2002. The decreased tax rate is the effect of the permanent tax
differences being allocated to increased income, which impacts the effective tax
rate. In addition, taxes for Mexico are based on assets in lieu of income, which
also impact on the effective tax rate.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital requirements in fiscal 2003 will be for
the acquisition of revenue equipment. The Company has historically met its
capital investment requirements with a combination of internally generated
funds, bank financing, and equipment lease financing (both capitalized and
operating). Management believes that there are presently adequate sources of
secured equipment financing together with its existing credit facilities and
cash flow from operations to provide sufficient funds to meet the Company's
anticipated working capital requirements. Furthermore, sources available under
the Company's credit facilities are dependant upon the Company maintaining
compliance with its covenants or obtaining waivers or amendments with respect to
future covenant violations.
The Company's primary source of cash flow for fiscal 2003 was provided
by operations and the collection of receivables offset by increased prepaid
expenses and tires in service. The net cash provided by operations in fiscal
2003 was $24.3 million compared to $14.0 million in fiscal 2002.
Net cash provided by investing activities increased to $3.5 million in
fiscal 2003, compared to net cash used for investing activities of $2.3 million
in fiscal 2002. This relates to the additional proceeds from the sale versus the
purchase of revenue equipment. As of March 31, 2003, the Company had on order
revenue equipment representing a capital commitment of approximately $6.8
million.
Net cash used in financing activities was $27.3 million in fiscal 2003
compared to $11.8 million in fiscal 2002. Financing activity generally
represents bank borrowings (payment and proceeds) and payment of capital lease
obligations. As of March 31, 2003, the Company had outstanding debt of $69.6
million as compared to $94.1 million as of March 31, 2002. This debt consists
of:
MARCH 31,
---------------------------
2003 2002
------- -------
(Dollars in thousands)
Capital lease obligations .............. $32,036 $44,108
Credit agreement ....................... 26,919 36,160
Mortgage debt relating to equipment .... 6,333 9,965
Mortgage debt relating to property ..... 3,324 2,844
Other debt ............................. 994 994
------- -------
Total outstanding debt ................. $69,606 $94,071
======= =======
The Company continues to reduce obligations owed on capital leased
equipment through scheduled monthly payments and end-of-lease residual payments.
The Company has been replacing expiring capital leased equipment with operating
leased equipment.
15
As of March 31, 2003, the Company has $111.0 million in future
operating lease payments through September 2021. Approximately $33.7 million of
these payments are for end-of-lease residual payments. The Company has
guaranteed buy-back or trade-back agreements from equipment manufacturers at the
end of the leases. The manufacturer buy-back or trade-back agreement values are
equal to the end-of-lease residual payments. As of March 2002, the Company had
$104.0 in future operating lease payments, of which $30.4 million represent
residual payments.
On September 26, 2002, the Company entered into a credit facility
("Credit Agreement") with Fleet Capital Corporation, which matures in September
2005. Borrowings available under the Credit Agreement are secured based on a
formula of eligible receivables and owned properties. Borrowings under the
Credit Agreement are based on the banks' base rate and/or LIBOR with interest
rates at LIBOR plus an applicable margin that is adjusted quarterly based on the
Company's fixed charge coverage ratio. At March 31, 2003, the margin was 2.5%.
The Credit Agreement has a maximum borrowing limit of $55 million. As of March
31, 2003, the Company had borrowings under the Credit Agreement in the amount of
$26.9 million.
Standby letters of credit, not reflected in the accompanying
consolidated financial statements, aggregated approximately $8.4 million at
March 31, 2003.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make assumptions and
estimates that can have a material impact on the reported results of operations.
While management applies its judgment based on assumptions believed to be
reasonable under the circumstances, actual results could vary from those
assumptions, and it is possible that materially different amounts would be
reported using differing assumptions.
The Company is self-insured for most medical insurance claims, workers
compensation claims, and general liability and automotive liability losses.
Reported claims and related loss reserves are estimated by third party
administrators. Claims incurred but not reported are accrued based on historical
experience and industry trends, which are continually monitored, and accruals
are adjusted when warranted by changes in facts and circumstances. Insurance and
claims expense will vary from period to period based on the severity and
frequency of claims incurred in a given period.
Long-lived assets are depreciated over estimated useful lives based on
our historical experience and prevailing industry practice. Estimated useful
lives are periodically reviewed to ensure they remain appropriate. Long-lived
assets are tested for impairment whenever an event occurs that indicates
impairment may exist. Future cash flows and operating performance are used for
analyzing impairment losses. If the sum of expected undiscounted cash flows is
less than the carrying value an impairment loss is recognized. The Company
measures 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 appraised values as appropriate. Long-lived assets that are held for
sale are recorded at the lower of carrying value or the fair value less costs to
sell.
16
We seek to reduce the potential adverse effects that fuel markets may
have on operating results. All fuel derivatives and hedges are recognized on the
balance sheet at fair value in conformance with SFAS No 133, Accounting for
Derivative Instruments and Hedging Activities. Adjustments related to adjusting
to fair value on the balance sheet, which have historically and continue to be
insignificant, are recorded in fuel expense.
SEASONALITY
To date, the Company's revenues have not shown any significant seasonal
pattern. However, because the Company's primary traffic lane is between the
Midwest United States and Mexico, winter may have an unfavorable impact upon the
Company's results of operations. Also, many manufacturers close or curtail their
operations during holiday periods, and observe vacation shutdowns, which may
impact the Company's operations in any particular period.
INFLATION
Many of the Company's operating expenses, including fuel costs and
related fuel taxes, are sensitive to the effects of inflation, which could
result in higher operating costs. The effects of inflation on the Company's
business during fiscal 2003 and 2002 generally were not significant.
FORWARD-LOOKING STATEMENTS
This Report on Form 10-Q contains forward looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Such comments
are based upon information currently available to management and management's
perception thereof as of the date of this report being filed. Actual results of
the Company's operations could materially differ from those forward looking
statements. Such differences could be caused by a number of factors including,
but not limited to, potential adverse affects of regulation and litigation;
changes in competition and the effects of such changes; increased competition;
changes in fuel prices; changes in economic, political or regulatory
environments; changes in the availability of a stable labor force; ability of
the Company to hire drivers meeting company standards; changes in management
strategies; environmental or tax matters; and risks described from time to time
in reports filed by the Company with the Securities and Exchange Commission.
Readers should take these factors into account in evaluating any such
forward-looking statements.
17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to various market risks, including changes in
foreign currency exchange rates, interest rates, and fuel prices. The Company
does not enter into derivatives or other financial instruments for trading or
speculative purposes.
The Company is exposed to interest rate risk primarily from its Credit
Agreement ("Credit Agreement") in which floating rates are based, at the
Company's option, upon the bank's base rate plus a margin ranging from .5% to
3.0%. A hypothetical 10% movement in interest rates would have an impact on
income before taxes of approximately $134 thousand. In the event of a change of
such magnitude, management would likely consider actions to further mitigate its
exposure to the change.
Shortages of fuel, increases in prices or rationing of petroleum
products can have a materially adverse effect on the operations and
profitability of the Company. Fuel is subject to economic, political and market
factors that are outside of the Company's control. The Company has historically
been able to recover a portion of high fuel prices from customers in the form of
fuel surcharges. The Company from time-to-time will enter into futures contracts
and derivative financial instruments to reduce its exposure to fuel price
fluctuations. As of March 31, 2003, the Company had 9.7% of estimated fuel
purchases hedged through June 2003. The Company had no material impact to the
results of operations, for the quarter ended March 31, 2003 related to these
derivative contracts. A hypothetical 10% movement on the price of fuel futures
would have virtually no impact related to these derivative contracts.
The Company's foreign currency revenues are generally proportionate to
its foreign currency expenses and the Company does not generally engage in
currency hedging transactions. For purposes of consolidation, however, the
operating results reported by the Company's subsidiaries in foreign currencies
is converted into United States dollars. As a result, a decrease in the value of
the Mexican peso or Canadian dollar could adversely affect the Company's
consolidated results of operations and equity.
ITEM 4. CONTROLS AND PROCEDURES
As of March 31, 2003, an evaluation was performed under the supervision
and with the participation of the Company's management, including the CEO and
CFO, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based on that evaluation, the Company's
management, including the CEO and CFO, concluded that the Company's disclosure
controls and procedures were effective as of March 31, 2003. There have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect internal controls subsequent to March 31, 2003.
18
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 2. CHANGES IN SECURITIES - NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - NONE
ITEM 5. OTHER INFORMATION - NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
99.1 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
99.2 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) Report on Form 8-K dated April 30, 2003 with respect to the
Company's quarterly earnings press release, dated April 24,
2003.
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
Chief Executive Officer
/s/ Paul A. Will
------------------------
Paul A. Will
Chief Financial Officer
Date: May 7, 2003
19
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
I, Stephen Russell, certify that;
1. I have reviewed this quarterly report on Form 10-Q
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registration as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedure to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
20
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
/s/ Stephen Russell
-------------------------------------------------
Stephen Russell
Chairman of the Board and Chief Executive Officer
May 7, 2003
21
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
I, Paul A. Will, certify that;
1. I have reviewed this quarterly report on Form 10-Q
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registration as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedure to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
d) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
e) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
22
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
/s/ Paul A. Will
-----------------------
Paul A. Will
Chief Financial Officer
May 7, 2003
23