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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 SEPTEMBER 30, 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 (317) 972-7000
(Address of principal executive offices) (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 an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
As of November 7, 2003 (the latest practicable date), 7,738,231 shares of the
registrant's common stock, par value $0.033 per share, were outstanding.
CELADON GROUP, INC.
INDEX TO
SEPTEMBER 30, 2003 FORM 10-Q
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at September 30, 2003 (Unaudited)
and June 30, 2003......................................................................................3
Condensed Consolidated Statements of Operations for the three months
ended September 30, 2003 and 2002 (Unaudited)..........................................................4
Condensed Consolidated Statements of Cash Flows for the three months
ended September 30, 2003 and 2002 (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.....................................16
Item 4. Controls and Procedures........................................................................16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..............................................................................18
Item 2, 3, 4, and 5 ..........................................................................Not Applicable
Item 6. Exhibits and Reports on Form 8-K...............................................................18
2
CELADON GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
SEPTEMBER 30, JUNE 30,
2003 2003
---- ----
ASSETS (UNAUDITED)
-----------
Current assets:
Cash and cash equivalents ..................................... $ 863 $ 1,088
Trade receivables, net of allowance for doubtful accounts of
$1,201 and $1,065 in 2004 and 2003, respectively .......... 48,257 44,182
Drivers advances and other receivables ........................ 4,040 3,432
Prepaid expenses and other current assets ..................... 8,417 7,101
Tires in service .............................................. 4,125 4,714
Income tax receivable ......................................... 160 ---
Deferred income taxes ......................................... 5,248 2,296
--------- ---------
Total current assets ...................................... 71,110 62,813
Property and equipment, at cost ................................... 118,393 129,319
Less accumulated depreciation and amortization ................ 43,947 52,352
--------- ---------
Net property and equipment ................................ 74,446 76,967
Tires in service .................................................. 2,403 2,207
Goodwill .......................................................... 16,702 16,702
Other assets ...................................................... 4,119 3,384
--------- ---------
Total assets .............................................. $ 168,780 $ 162,073
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .............................................. $ 6,673 $ 4,204
Accrued salaries and benefits ................................. 7,272 6,748
Accrued insurance and claims .................................. 5,168 5,163
Accrued owner-operator expense ................................ 3,137 2,728
Accrued fuel expense .......................................... 3,148 3,138
Other accrued expenses ........................................ 11,795 11,074
Current maturities of long-term debt .......................... 8,217 6,156
Current maturities of capital lease obligations ............... 13,227 14,960
Income tax payable ............................................ --- 299
--------- ---------
Total current liabilities ................................. 58,637 54,470
Long-term debt, net of current maturities ......................... 35,036 26,406
Capital lease obligations, net of current maturities .............. 11,032 13,272
Deferred income taxes ............................................. 12,438 10,648
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 in 2004 and 2003 .................. 257 257
Additional paid-in capital .................................. 60,121 60,092
Retained deficit ............................................ (6,301) (761)
Accumulated other comprehensive loss ........................ (2,139) (1,947)
Treasury stock, at cost, 80,370 shares and 96,001 shares at
September 30, 2003, and June 30, 2003, respectively ....... (326) (389)
--------- ---------
Total stockholders' equity ................................ 51,612 57,252
--------- ---------
Total liabilities and stockholders' equity ................ $ 168,780 $ 162,073
========= =========
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
3
CELADON GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
2003 2002
---- ----
Operating revenue ............................................... $ 95,651 $ 93,560
Operating expenses:
Salaries, wages and employee benefits ...................... 29,831 28,478
Fuel ....................................................... 12,414 10,687
Operations and maintenance ................................. 8,183 7,964
Insurance and claims ....................................... 3,922 3,469
Depreciation, amortization and impairment charge (1) ....... 13,611 3,534
Revenue equipment rentals .................................. 6,811 5,902
Purchased transportation ................................... 19,694 22,938
Cost of products and services sold ......................... 1,655 1,237
Professional and consulting fees ........................... 528 550
Communications and utilities ............................... 1,035 1,063
Operating taxes and licenses ............................... 2,101 1,939
General and other operating ................................ 1,776 1,863
--------- ---------
Total operating expenses ............................... 101,561 89,624
--------- ---------
Operating income (loss) ......................................... (5,910) 3,936
--------- ---------
Other (income) expense:
Interest income ............................................ (16) (24)
Interest expense ........................................... 1,135 2,480
Other (income) expense, net ................................ 37 (40)
--------- ---------
Income (loss) before income taxes ............................... (7,066) 1,520
Income tax expense (benefit) .................................... (1,526) 629
--------- ---------
Net income (loss) .......................................... $ (5,540) $ 891
========= =========
Earnings (loss) per common share:
Diluted earnings (loss) per share .......................... $ (0.72) $ 0.11
Basic earnings (loss) per share ............................ $ (0.72) $ 0.12
Average shares outstanding:
Diluted .................................................... 7,705 8,068
Basic ...................................................... 7,705 7,680
1) Includes a $9.8 million pre-tax impairment charge on trailers in the three
months ended September 30, 2003, see Footnote 8.
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
4
CELADON GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
2003 2002
---- ----
Cash flows from operating activities:
Net income (loss) ................................................ $ (5,540) $ 891
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization ................................ 3,777 3,534
Impairment charge ............................................ 9,834 ---
Write-off of loan origination cost ........................... --- 914
Provision (benefit) for deferred income taxes ................ (1,162) 400
Provision for doubtful accounts .............................. 188 238
Changes in assets and liabilities:
Trade receivables ....................................... (1,780) 4,236
Accounts receivable - other ............................. (486) 847
Income tax receivable ................................... (160) ---
Tires in service ........................................ 393 (467)
Prepaid expenses and other current assets ............... (981) (4,385)
Other assets ............................................ (657) 49
Accounts payable and accrued expenses ................... 3,471 (725)
Income tax payable ...................................... (299) 136
-------- --------
Net cash provided by operating activities .................... 6,598 5,668
Cash flows from investing activities:
Purchase of property and equipment ............................... (3,584) (1,468)
Proceeds on sale of property and equipment ....................... 986 3,792
Purchase of a business, net of cash acquired ..................... (3,594) ---
-------- --------
Net cash (used in) provided by investing activities .......... (6,192) 2,324
Cash flows from financing activities:
Proceeds from issuances of stock ................................. 92 27
Proceeds of long-term debt ....................................... 5,242 39,487
Payments on long-term debt ....................................... (1,992) (42,573)
Principal payments on capital lease obligations .................. (3,973) (3,994)
-------- --------
Net cash used in financing activities ........................ (631) (7,053)
-------- --------
Increase (decrease) in cash and cash equivalents ................. (225) 939
Cash and cash equivalents at beginning of period ...................... 1,088 299
-------- --------
Cash and cash equivalents at end of period ............................ $ 863 $ 1,238
======== ========
Supplemental disclosure of cash flow information:
Interest paid .................................................... $ 1,082 $ 1,568
Income taxes paid ................................................ $ 90 $ 47
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
5
CELADON GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include
the accounts of Celadon Group, Inc. and it's majority owned subsidiaries (the
"Company"). All material intercompany balances and transactions have been
eliminated in consolidation.
The unaudited 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. 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 consolidated financial
statements and notes thereto should be read in conjunction with the Company's
consolidated financial statements and notes thereto, included in the Company's
Annual Report on Form 10-K for the year ended June 30, 2003.
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. EARNINGS PER SHARE
The difference in basic and diluted weighted average shares is due to
the assumed conversion of outstanding stock options. A reconciliation of the
basic and diluted earnings per share calculation was as follows (in thousands
except for per share amounts):
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
2003 2002
---- ----
Net income (loss) $ (5,540) $ 891
======== ======
Denominator
Weighted average number of common shares outstanding 7,705 7,680
Equivalent shares issuable upon exercise of stock options --- 388
-------- ------
Diluted shares 7,705 8,068
======== ======
Earnings (loss) per share
Basic $ (0.72) $ 0.12
======== ======
Diluted $ (0.72) $ 0.11
======== ======
Diluted loss per share for the three months ended September 30, 2003 does not
include the anti-dilutive effect of 405 thousand stock options and other
incremental shares.
6
CELADON GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)
3. STOCK BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion
(APB) No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its stock options. Under APB 25, because the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of grant, no compensation expense is
recognized for the Celadon options.
Statements of Financial Accounting Standards ("SFAS") 123, "Accounting
for Stock-Based Compensation," and SFAS 148 "Accounting for Stock-Based
Compensation - Transition and Disclosure" requires presentation of pro forma net
income and earnings per share if the Company had accounted for its employee
stock options granted subsequent to June 30, 1995 under the fair value method of
that statement. For purposes of pro forma disclosure, the estimated fair value
of the options is amortized to expense 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
SEPTEMBER 30,
2003 2002
---- ----
Net income (loss)......................................... $(5,540) $ 891
Stock-based compensation expense (net of tax)............. 105 229
------- -----
Pro-forma net income (loss)............................... $(5,645) $ 662
======= =====
Income (loss) per share:
Diluted earnings (loss) per share
As reported.......................................... $ (0.72) $0.11
Pro-forma............................................ $ (0.73) $0.08
Basic Earnings (Loss) per share:
As reported.......................................... $ (0.72) $0.12
Pro-forma............................................ $ (0.73) $0.09
7
CELADON GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)
4. SEGMENT INFORMATION AND SIGNIFICANT CUSTOMERS
The Company operates in two segments, transportation and e-commerce.
The Company generates revenue, in the transportation segment, primarily by
providing truckload-hauling services through its subsidiaries, Celadon Trucking
Services, Inc., ("CTSI"), Jaguar and Celadon Canada, Inc. ("CelCan"). The
Company began providing certain services over the Internet through its
e-commerce subsidiary, TruckersB2B, ("TruckersB2B") in the last half of fiscal
year 2000. 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 (loss).
Transportation E-commerce Consolidated
-------------- ---------- ------------
Three months ended September 30, 2003
Operating revenue $93,109 $2,542 $95,651
Operating income (loss) (6,340) 430 (5,910)
Three months ended September 30, 2002
Operating revenue $91,360 $1,930 $93,560
Operating income 3,615 321 3,936
Information as to the Company's operating revenue by geographic area, is
allocated based primarily on country of customer origin and summarized below:
United States Canada Mexico Consolidated
------------- ------ ------ ------------
Three months ended September 30, 2003
Operating revenue $77,564 $13,347 $4,740 $95,651
Three months ended September 30, 2002
Operating revenue $77,424 $11,268 $4,868 $93,560
The Company's largest customer is DaimlerChrysler, which accounted for
approximately 11% and 14% of the Company's total revenue for the three months
ended September 30, 2003 and 2002, 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 10% of the Company's total revenue during any of its three most recent
fiscal years.
8
CELADON GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)
5. INCOME TAXES
Income tax expense varies from the federal corporate income tax rate of
34% 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 and
entertainment, and fines. For the three months ended September 30, 2003, the
Company recorded an income tax benefit as a result of the impairment charge
recognized on the planned disposal of trailers (Note 8). The income tax benefit
recorded is partially offset by amounts accrued for certain income tax
exposures.
6. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) consisted of the following components for
the three months ended September 30, 2003 and 2002, respectively:
THREE MONTHS ENDED
SEPTEMBER 30,
2003 2002
---- ----
Net income (loss) $(5,540) $ 891
Foreign currency translations adjustments (192) (36)
------- -------
Total comprehensive income (loss) $(5,732) $ 855
======= =======
7. 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 accrued amounts on the Company's balance sheet for the self-insured
retention amount of outstanding claims and income taxes. The Company also
believes that none of these matters will have a material adverse effect on its
consolidated financial position or results of operations in any given period.
8. IMPAIRMENT OF EQUIPMENT
In September 2003, the Company initiated a plan to dispose of certain
trailers and recognized a pre-tax impairment charge of $9.8 million. The Company
plans to dispose of approximately 1,600 trailers including all 48-foot trailers
in addition to 53-foot trailers over 9 years old due to shipper compatibility
issues. The majority of our customers require 53-foot trailers. The disposal of
48-foot trailers from the Company fleet will reduce logistical issues with
customers requiring a 53-foot trailer. The Company plans to replace the
approximately 1,600 trailers with 1,300 new 53-foot trailers over the next year.
This change in the fleet will increase operating efficiencies and reduce
out-of-route miles. The pre-tax impairment charge consisted of a write-down of
revenue equipment by $8.4 million (net of accumulated depreciation), write-off
of tires in-service of $0.9 million and an accrual for costs of disposal of $0.5
million. As a result, the Company has equipment held for sale of $4.7 million
included in property and equipment on September 30, 2003 consolidated balance
sheet.
9
9. ACQUISITION
In August 2003, the Company acquired certain assets of Highway Express,
Inc. ("Highway"). Highway results of operations are included in the Company's
financial statements from August 1, 2003 through September 30, 2003. The Company
has preliminarily assigned values to the acquired assets of Highway consisting
primarily of $8.6 million property and equipment, $2.4 million of trade
receivables and $0.4 million of cash. The purchase price of approximately $11.4
million consisted of $4.0 million of cash and a $7.4 million thirty-six month
note payable. The Company will finalize the allocation of the purchase price
upon the valuation of intangible assets acquired. The Company used borrowings
under its existing Credit Agreement to fund the cash portion of the acquisition.
This acquisition will strengthen the Company's regional presence and lane
density in the southeast, enhance our consumer non-durable customer base, and
should increase our rate per mile. Highway's revenue for fiscal 2002 was
approximately $27 million.
10. RECLASSIFICATION
Certain reclassifications have been made to the September 30, 2002
financial statements to conform to the September 30, 2003 presentation.
10
CELADON GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information in Items 1, 3, 7, 7A
and 8 of this Form 10-Q constitutes forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 and, as such,
involve known and unknown risks, uncertainties and other factors which may cause
the actual results, performance or achievements of the Company to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. You can identify such statements by
the fact that they do not relate strictly to historical or current facts. These
statements use words such as "believe", "expect", "should", "estimates",
"planned", "outlook", "goal" and "anticipate." Because forward-looking
statements involve risks and uncertainties, the Company's actual results may
differ materially from the results expressed or implied by the forward-looking
statements. While it is impossible to identify all factors that may cause actual
results to differ, the risks and uncertainties that may affect the Company's
business, performance and results of operations include the factors listed on
Exhibit 99.3 to this report, which is incorporated herein by reference.
Subsequent written and oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by the cautionary statements in this paragraph and elsewhere in this
Form 10-Q.
All such forward-looking statements speak only as of the date of this
Form 10-Q. 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 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 subsidiaries.
RECENT DEVELOPMENTS
In August 2003, the Company purchased certain assets of Highway
Express, Inc. ("Highway"). The assets of Highway consisted of approximately 190
tractors, 500 trailers, trade receivables and other assets. The purchase price
of approximately $11.4 million consisted of $4.0 million of cash and a $7.4
million thirty-six month note payable. The Company used borrowings under its
existing Credit Agreement to fund the cash portion of the acquisition. This
acquisition will strengthen the Company's regional presence and lane density in
the southeast, enhance our consumer non-durable customer base, and should
increase our rate per mile. Highway's revenue for fiscal 2002 was approximately
$27 million.
11
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
SEPTEMBER 30,
-------------
2003 2002
---- ----
Operating Revenues 100% 100%
Operating expenses
Salaries, wages and employee benefits........................ 31.2% 30.4%
Fuel 13.0% 11.4%
Operations and maintenance................................... 8.6% 8.5%
Insurance and claims......................................... 4.1% 3.7%
Depreciation, amortization and impairment charge (1)......... 14.2% 3.8%
Revenue equipment rentals.................................... 7.1% 6.3%
Purchased transportation..................................... 20.6% 24.5%
Cost of products and services sold........................... 1.7% 1.3%
Communications and utilities................................. 1.1% 1.1%
Operating taxes and licenses................................. 2.2% 2.1%
Other........................................................ 2.4% 2.7%
------ ------
Total operating expenses.......................................... 106.2% 95.8%
------ ------
Operating income.................................................. (6.2)% 4.2%
====== ======
(1) Includes a $9.8 million pre-tax impairment charge or 10.3% of revenue for
the three-months ended September 30, 2003.
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2003 TO THREE MONTHS ENDED
SEPTEMBER 2002
Operating revenue increased by $2.1 million, to $95.7 million for first
quarter 2004 from $93.6 million for first quarter 2003. This increase is related
to a 3.0% increase in rate per mile from $1.35 to $1.39 including accessorial
and fuel surcharges. Revenue per tractor per week increased to $2,727 in the
2004 period from $2,696 in fiscal 2003. Revenue for TruckersB2B was $2.5 million
in fiscal 2004 compared to $1.9 million in fiscal 2003. The TruckersB2B revenue
increase is related to an increase in member usage of various programs including
the tire discount program.
Salaries, wages and benefits were $29.8 million, or 31.2% of operating
revenues, for first quarter 2004 compared to 30.4% for the same period in 2003.
This increase is primarily related to a 10.0% increase in company miles, which
in turn increased driver paid miles. The employer-paid health insurance
increased approximately 15% for fiscal 2004.
Fuel expenses increased to 13.0% of revenue for fiscal 2004 compared to
11.4% in fiscal 2003. Fuel prices have increased approximately $0.06 per gallon,
or 4.9% for fiscal 2004 compared to fiscal 2003. Fuel prices continue to
increase due to low inventory and unrest in the Middle East. Increased fuel
prices will increase our operating expenses to the extent they are not offset by
surcharges.
12
Operations and maintenance increased to 8.6% of revenue for fiscal 2004
compared to 8.5% in fiscal 2003. Operations and maintenance consist of direct
operating expense, maintenance and tire expense. Maintenance expenses increased
in fiscal 2004, as the average age per tractor increased to 2.8 years from 2.5
years and trailers increased to 6.4 years from 5.2 years. As the age of our
equipment has increased the cost to maintain the fleet has increased. We expect
our maintenance costs to decrease in conjunction with the reduction in the
average age of the fleet in fiscal 2004.
Insurance and claims expense was 4.1% of revenue in fiscal 2004
compared to 3.7% of revenue for fiscal 2003. 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 the increased rates industry-wide and the
risk retention we are willing to assume.
Depreciation and amortization, consisting primarily of depreciation of
revenue equipment, increased to 14.2% of revenue in fiscal 2004 from 3.8% of
revenue in fiscal 2003. In the September 2003 quarter, we recognized an
impairment charge of $9.8 million or 10.3% of revenue related to a plan to
dispose of 48-foot trailers in addition to 53-foot trailers over nine years old
from our fleet. We intend to dispose of approximately 1,600 1994-1998 model year
trailers and replace them with 1,300 2004 model year trailers. The majority of
our customers now request or require 53-foot trailers, thus it is operationally
inefficient to continue to have 15% of the trailer fleet not available for the
majority of our customers. We expect the monthly expense of future lease
payments to be higher than the current cost of depreciation and interest
expense.
Revenue and equipment rentals were 7.1% of revenue for fiscal 2004
compared to 6.3% of revenue for fiscal 2003. This increase is due to a 12.5%
increase in the average number of tractors leased under operating leases in
fiscal 2004. There are 1,452 tractors leased under operating leases in fiscal
2004 compared to 1,291 tractors leased under operating lease in fiscal 2003.
Since May 2002, we have leased all tractors under operating leases, which has
resulted in a shift from owned revenue equipment, which has affected our
operating ratio to above the line operating expenses from interest. The
Company's fleet increased slightly to 2,695 tractors, including 443 owner
operated tractors and 87 lease purchase owner operated tractors at September 30,
2003 from 2,668 tractors including 552 owner operated tractors and 150 lease
purchase owner operated tractors at September 30, 2002.
Purchased transportation decreased to 20.6% of revenue for fiscal 2004
from 24.5% for the same period in 2003. The decrease in fiscal 2004 is primarily
related to reduced owner-operator expense, as the Company reduced the
owner-operator fleet by 172 trucks for the year. It has become difficult to
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.
Operating income remained constant at $3.9 million, excluding a
one-time impairment charge of $9.8 million, in fiscal 2004. The increase in
revenue was offset by increased salaries, wages and employee benefits, fuel, and
insurance expense. Truckload operating income decreased by $0.1 million,
excluding an impairment charge of $9.8, to $3.5 million in fiscal 2004, from
$3.6 million in fiscal 2003. Our operating ratio, which expresses operating
expenses as a percentage of operating revenue, increased to 95.9% in fiscal 2004
from 95.8% in fiscal 2003, excluding a one-time impairment charge of 10.3% of
revenue in fiscal 2004.
Net interest expense decreased by $1.4 million, or 56.0%, to $1.1
million in fiscal 2004 from $2.5 million in fiscal 2003. The decrease was a
result of reduced bank borrowings to $27.9 million for fiscal 2004 from $37.8
million for fiscal 2003 offset by a one-time non-cash write-off of loan
origination costs of approximately $900 thousand in fiscal 2003, related to the
Company's previous credit facility.
13
Income taxes resulted in a benefit of $1.5 million in fiscal 2004, with
an effective tax rate of 22%, compared to expense of $0.6 million, with an
effective tax rate of 41%, in fiscal 2003. The effective tax rate decreased as a
result of a benefit for the one-time impairment charge offset by an increase in
non-deductible expenses related to a per diem pay structure change. As per diem
is a non-deductible expense our effective tax rate will fluctuate as net income
fluctuates in the future.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital requirements in fiscal 2004 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, equipment lease financing (both capital and operating)
and the issuance of common stock. 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 the three months ended
September 30, 2003 was provided by operations, excluding the one-time impairment
charge of $9.8 million, and the increase of accounts payable and accrued expense
offset by increased trade receivables and prepaid expenses. The net cash
provided by operations in the first quarter of fiscal 2004 was $6.6 million
compared to $5.7 million in the first quarter of fiscal 2003.
Net cash used in investing activities increased to $6.2 million in the
first quarter of fiscal 2004 from cash provided by investing activities of $2.3
million in the first quarter of fiscal 2003. This cash was used to purchase
Highway Express, Inc. in August of 2003. In addition, cash used in investing
activities relates to the sale of revenue equipment as the Company continues to
trade older equipment for new equipment. As of September 30, 2003, the Company
had on order revenue equipment representing a capital commitment of
approximately $87.4 million.
Net cash used in financing activities was $0.6 million in the first
quarter of fiscal 2004 compared to $7.1 million in the first quarter of fiscal
2003. Financing activity generally represents bank borrowings (payment and
proceeds) and payment of capital lease obligations. Current maturities of
capital lease obligations at September 30, 2003 of $13.2 million includes $6.3
million of residual payments related to leases of revenue equipment which is
generally covered by repurchase and/or trade agreements between the Company and
the equipment manufacturer. As of September 30, 2003, the Company had
outstanding debt of $67.5 million as compared to $89.9 million as of September
30, 2002.
Our primary capital requirements over the last three years have been
funding the acquisition of equipment. Capital expenditures (excluding the assets
purchased from Highway Express, Inc.) totaled $3.6 million and $1.5 million in
the quarter ended September 30, 2003 and 2002, respectively. We have
historically and anticipate meeting our capital investment requirements with a
combination of internally generated funds, bank financing, equipment lease
financing (both capitalized and operating) and, to a lesser extent, the issuance
of common stock. This financing will depend on prevailing market conditions and
other factors over which we have limited control, as well as our financial
condition and results of operations.
14
On September 26, 2002, we entered into a Loan and Security Agreement
("Credit Agreement") with Fleet Capital Corporation, Fleet Capital Canada
Corporation and several other lenders named in the Credit Agreement. The Credit
Agreement provides to us, our Canadian subsidiary and certain of our United
States subsidiaries 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 $10 million and a Canadian term loan in the aggregate
principal amount of approximately $800 thousand. Repayment of the amounts
outstanding under the Credit Agreement is secured by a lien on our assets and
the assets of certain of our subsidiaries, including the stock or other equity
interests of various subsidiaries. In addition, certain of our subsidiaries that
are not party to the Credit Agreement have guaranteed the repayment of the
amount outstanding under the Credit Agreement, and have granted a lien on their
respective assets to secure such repayment. The Credit Agreement replaced in
full the credit facility the Company entered into with ING (U.S.) Capital, LLC,
in August 1999. The Credit Agreement, which is for a term of three years,
terminates on September 26, 2005.
Amounts available under the Credit Agreement are determined based upon
the Company's borrowing base, as defined. In addition, there are certain
covenants, which restrict, among other things, the payment of cash dividends
annual capital expenditures, annual lease payments, and requires the Company to
maintain a minimum fixed charge coverage ratio along with certain financial
ratios and certain other financial conditions. Such borrowings are secured by a
significant portion of the Company's assets, primarily trade receivables.
At September 30, 2003, $27.9 million of our credit facility was
utilized as outstanding borrowings and $5.5 million was utilized for standby
letters of credit. At September 30, 2003, we also had cash payments of $25.5
million for capital lease financing including interest rates ranging from 6.7%
to 8.6%, maturing at various dates through 2007.
As of September 30, 2003, our bank loans, capitalized leases, operating
leases, other debts and future commitments have stated maturities or minimum
annual payments as follows:
ANNUAL CASH REQUIREMENTS
AS OF SEPTEMBER 30, 2003
(IN THOUSANDS)
AMOUNTS DUE BY PERIOD
LESS THAN ONE TO THREE TO OVER
TOTAL ONE YEAR THREE YEARS FIVE YEARS FIVE YEARS
----- -------- ----------- ---------- ----------
Operating Leases (1) $118,397 $ 37,550 $ 43,996 $ 21,847 $ 15,004
Capital Leases Obligations(1) 24,259 13,227 11,032 --- ---
Long-Term Debt 43,253 8,217 32,236 367 2,433
-------- -------- -------- -------- --------
Sub-Total 185,909 58,994 87,264 22,214 17,437
Future Purchase of Revenue Equipment 87,422 7,273 31,595 37,348 11,206
Employment and Consulting Agreements 1,674 796 878 --- ---
Standby Letters of Credit 5,466 5,466 --- --- ---
-------- -------- -------- -------- --------
Total $280,471 $ 72,529 $119,737 $ 59,562 $ 28,643
======== ======== ======== ======== ========
(1) Included in these balances are residual guarantees of $49.4 million in
total and $21.0 million coming due in less than one year. We believe these
balances will be satisfied by manufacturer commitments.
15
As of September 30, 2003, we had 616 tractors and 700 trailers on order
for delivery in fiscal 2004. A commitment for lease financing on these tractors
has been obtained. Management believes that there are presently adequate sources
of secured equipment financing together with our existing credit facilities and
cash flow from operations to provide sufficient funds to meet our anticipated
working capital requirements. Additional growth in the tractor and trailer fleet
beyond our existing orders will require additional sources of financing.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires that
management make a number of assumptions and estimates that affect the reported
amounts of assets, liabilities, revenue and expenses in our consolidated
financial statements and accompanying notes. Our critical accounting policies
are those that affect our financial statements materially and involve a
significant level of judgment by management. For additional information, please
refer to the discussion of Critical Accounting Policies contained in our most
recent annual report on Form 10-K under "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Critical Accounting Policies"
and in the footnotes to our consolidated financial statements, particularly note
1. There were no significant changes in our critical accounting policies during
the first quarter of fiscal 2004.
SEASONALITY
To date, our revenues have not shown any significant seasonal pattern.
However, because our primary traffic lane is between the Midwest United States
and Mexico, winter generally may have an unfavorable impact upon our results of
operations. Also, many manufacturers close or curtail their operations during
holiday periods and observe vacation shutdowns, which may impact our operations
in any particular period.
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.
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.
16
CELADON GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)
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.
We are exposed to interest rate risk primarily from our Credit
Agreement as of September 30, 2003. The Credit Agreement carries a maximum
variable interest rate of the bank's base rate plus 3.0% or LIBOR plus 3.5%. A
hypothetical 10% movement in this interest rate would have an impact on net
income of approximately $136 thousand. In the event of a change of such
magnitude, management would likely consider actions to further mitigate our
exposure.
Our foreign currency revenues are generally proportionate to our
foreign currency expenses, and we do not generally engage in currency hedging
transactions. For purposes of consolidation, however, the operating results
earned by our subsidiaries in foreign currencies are converted into United
States dollars. As a result, a decrease in the value of the Mexican peso or
Canadian dollar could adversely affect our consolidated results of operations
and equity.
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 and market factors that
are outside of our control. From time-to-time we will enter into derivative
financial instruments to reduce our exposure to fuel price 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. In accordance
with SFAS 133, we adjust our derivative instruments to fair value through
earnings on a monthly basis. As of September 30, 2003, we had 8% of estimated
fuel purchases hedged through December 2003. We have recognized approximately
$47 thousand of expense associated with derivative contracts for the quarter
ended September 30, 2003 and income of $100 thousand in the September 30, 2002
period. A hypothetical 10% movement in the price of fuel future quantities would
have an impact on net income of approximately $37 thousand.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed with the participation of our management,
including our Chief Executive Officer and our Chief Financial Officer,
concerning the effectiveness of the design and operation of our disclosure
controls and procedures as of June 30, 2003. Based on that evaluation, our
management, including our Chief Executive Officer and Chief Financial Officer,
concluded that our disclosure controls and procedures were effective as of June
30, 2003.
17
CELADON GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)
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.
The Company is a defendant in a lawsuit filed by Reliance National
Indemnity Company ("Reliance") relating to one trucker's liability insurance
policy. The Company disagrees with Reliance and has vigorously defended this
lawsuit. The Company has been advised that Reliance has decided to dismiss its
cause of action against the Company and it is in the process of closing this
litigation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) The Company did not file any reports on form 8-K during the three
months ended September 30, 2003.
18
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: November 10, 2003
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