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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 DECEMBER 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 (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 February 10, 2004 (the latest practicable date), 7,758,897 shares of the
registrant's common stock, par value $0.033 per share, were outstanding.
1
CELADON GROUP, INC.
INDEX TO
DECEMBER 31, 2003 FORM 10-Q
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at December 31, 2003 (Unaudited)
and June 30, 2003........................................................................ 3
Condensed Consolidated Statements of Income for the three and six months
ended December 31, 2003 and 2002 (Unaudited)............................................. 4
Condensed Consolidated Statements of Cash Flows for the six months
ended December 31, 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........................ 22
Item 4. Controls and Procedures........................................................... 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................. 24
Items 2. and 3............................................................................... Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders............................... 24
Item 5 .................................................................................. Not Applicable
Item 6. Exhibits and Reports on Form 8-K.................................................. 24
2
CELADON GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT PAR VALUE AMOUNTS)
DECEMBER 31, JUNE 30,
2003 2003
------------ ---------
(UNAUDITED)
------------
A S S E T S
Current assets:
Cash and cash equivalents ...................................................... $ 774 $ 1,088
Trade receivables, net of allowance for doubtful accounts of
$1,273 and $1,065 in 2004 and 2003, respectively ........................... 43,259 44,182
Drivers advances and other receivables ......................................... 3,268 3,432
Prepaid expenses and other current assets ...................................... 8,143 7,101
Tires in service ............................................................... 4,798 4,714
Income tax receivable .......................................................... 242 ---
Deferred income taxes .......................................................... 5,272 2,296
--------- ---------
Total current assets ....................................................... 65,757 62,813
Property and equipment, at cost .................................................... 116,392 129,319
Less accumulated depreciation and amortization ................................. 46,011 52,352
--------- ---------
Net property and equipment ................................................. 70,381 76,967
Tires in service ................................................................... 2,304 2,207
Goodwill ........................................................................... 16,702 16,702
Other assets ....................................................................... 2,882 3,384
--------- ---------
Total assets ............................................................... $ 158,025 $ 162,073
========= =========
L I A B I L I T I E S A N D S T O C K H O L D E R S' E Q U I T Y
Current liabilities:
Accounts payable ............................................................... $ 4,303 $ 4,204
Accrued salaries and benefits .................................................. 7,930 6,748
Accrued insurance and claims ................................................... 5,039 5,163
Accrued owner-operator expense ................................................. 2,197 2,728
Accrued fuel expense ........................................................... 3,815 3,138
Other accrued expenses ......................................................... 14,266 11,074
Current maturities of long-term debt ........................................... 6,110 6,156
Current maturities of capital lease obligations ................................ 10,892 14,960
Income tax payable ............................................................. --- 299
--------- ---------
Total current liabilities .................................................. 54,552 54,470
Long-term debt, net of current maturities .......................................... 27,687 26,406
Capital lease obligations, net of current maturities ............................... 8,475 13,272
Deferred income taxes .............................................................. 14,042 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 ................................................... 60,188 60,092
Retained deficit ............................................................. (4,775) (761)
Accumulated other comprehensive loss ......................................... (2,270) (1,947)
Treasury stock, at cost, 38,533 shares and 96,001 shares at
December 31, 2003, and June 30, 2003, respectively ......................... (156) (389)
--------- ---------
Total stockholders' equity ................................................. 53,244 57,252
--------- ---------
Total liabilities and stockholders' equity ................................. $ 158,025 $ 162,073
========= =========
The accompanying notes are an integral part of these unaudited
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 SIX MONTHS ENDED
DECEMBER 31, DECEMBER, 31
2003 2002 2003 2002
---------- ---------- ---------- ----------
Operating revenue .......................................... $ 97,137 $ 90,827 $ 192,788 $ 184,387
Operating expenses:
Salaries, wages and employee benefits .................. 30,834 27,862 60,665 56,340
Fuel ................................................... 13,517 11,401 25,931 22,088
Operations and maintenance ............................. 8,038 7,818 16,221 15,782
Insurance and claims ................................... 3,686 3,132 7,608 6,601
Depreciation, amortization and impairment charge ....... 3,641 3,051 17,252(1) 6,585
Revenue equipment rentals .............................. 6,964 6,145 13,775 12,047
Purchased transportation ............................... 19,655 21,896 39,349 44,834
Costs of products and services sold .................... 1,469 1,293 3,124 2,530
Professional and consulting fees ....................... 542 584 1,070 1,134
Communications and utilities ........................... 1,054 938 2,089 2,001
Operating taxes and licenses ........................... 1,919 1,940 4,020 3,879
General and other operating ............................ 1,765 1,615 3,541 3,478
---------- ---------- ---------- ----------
Total operating expenses .......................... 93,084 87,675 194,645 177,299
---------- ---------- ---------- ----------
Operating income (loss) .................................... 4,053 3,152 (1,857) 7,088
Other (income) expense:
Interest income ........................................ (9) (14) (25) (38)
Interest expense ....................................... 1,026 1,456 2,161 3,936(2)
Other (income) expense, net ............................ 3 (25) 40 (65)
---------- ---------- ---------- ----------
Income (loss) before income taxes .......................... 3,033 1,735 (4,033) 3,255
Provision for income taxes ................................. 1,507 707 (19) 1,336
---------- ---------- ---------- ----------
Net income (loss) ................................. $ 1,526 $ 1,028 $ (4,014) $ 1,919
========== ========== ========== ==========
Earnings (loss) per common share:
Diluted earnings (loss) per share ...................... $ 0.19 $ 0.13 $ (0.52) $ 0.24
Basic earnings (loss) per share ........................ $ 0.20 $ 0.13 $ (0.52) $ 0.25
Average shares outstanding:
Diluted ................................................ 8,175 8,061 7,716 8,065
Basic .................................................. 7,727 7,687 7,716 7,683
(1) Includes a $9.8 million pretax impairment charge on trailers in the three
months ended September 30, 2003.
(2) Includes a $914,000 pretax write-off of unamortized loan origination costs
for refinancing the Company's line of credit in the three months ended
September 30, 2002.
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
4
CELADON GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
FOR THE SIX MONTHS ENDED
DECEMBER 31,
2003 2002
---------- ----------
Cash flows from operating activities:
Net (loss) income ................................................ $ (4,014) $ 1,919
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Depreciation and amortization ................................ 7,418 6,585
Impairment charge ............................................ 9,834 ---
Write-off of loan origination cost ........................... --- 914
Provision for deferred income taxes .......................... 418 859
Provision for doubtful accounts .............................. 330 327
Changes in assets and liabilities:
Trade receivables ....................................... 3,076 10,683
Accounts receivable - other ............................. 286 1,171
Income tax receivable ................................... (242) ---
Tires in service ........................................ (181) (632)
Prepaid expenses and other current assets ............... (717) (3,616)
Other assets ............................................ 371 203
Accounts payable and accrued expenses ................... 3,828 35
Income tax (receivable) payable ......................... (299) 290
---------- ----------
Net cash provided by operating activities .................... 20,108 18,738
Cash flows from investing activities:
Purchase of property and equipment ............................... (6,493) (2,349)
Proceeds on sale of property and equipment ....................... 4,406 5,467
Purchase of a business, net of cash acquired ..................... (3,594) ---
---------- ----------
Net cash (used in) provided by investing activities .......... (5,681) 3,118
Cash flows from financing activities:
Proceeds from issuances of stock ................................. 329 46
Proceeds from bank borrowings and debt ........................... 6,270 2,916
Payments on bank borrowings and debt ............................. (12,476) (13,189)
Principal payments under capital lease obligations ............... (8,865) (11,130)
---------- ----------
Net cash used in financing activities ........................ (14,742) (21,357)
---------- ----------
Increase (decrease) in cash and cash equivalents ...................... (314) 499
Cash and cash equivalents at beginning of period ...................... 1,088 299
---------- ----------
Cash and cash equivalents at end of period ............................ $ 774 $ 798
========== ==========
Supplemental disclosure of cash flow information:
Interest paid .................................................... $ 2,184 $ 2,919
Income taxes paid ................................................ $ 142 $ 178
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
5
CELADON GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include
the accounts of Celadon Group, Inc. and its majority owned subsidiaries (the
"Company"). All material intercompany balances and transactions have been
eliminated in consolidation.
The unaudited 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:
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
(In thousands except share and per share data) 2003 2002 2003 2002
----------- ----------- ----------- -----------
Net income (loss) ........................... $ 1,526 $ 1,028 $ (4,014) $ 1,919
Denominator
Weighted average number of common shares
outstanding ........................... 7,727,039 7,687,062 7,716,085 7,683,327
Equivalent shares issuable upon exercise of
stock options ......................... 447,625 374,406 --- 381,398
----------- ----------- ----------- -----------
Diluted shares ............................ 8,174,664 8,061,468 7,716,085 8,064,725
Earnings (loss) per share ...................
Basic ..................................... $ 0.20 $ 0.13 $ (0.52) $ 0.24
Diluted ................................... $ 0.19 $ 0.13 $ (0.52) $ 0.24
Diluted loss per share for the six months ended December 31, 2003 does not
include the anti-dilutive effect of 426 thousand stock options and other
incremental shares.
6
CELADON GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 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 such 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 (loss) and earnings (loss) per share
would have been:
FOR THREE MONTHS ENDED FOR SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
(In thousands except per share data) 2003 2002 2003 2002
--------- --------- --------- ---------
Net income (loss) .............................. $ 1,526 $ 1,028 $ (4,014) $ 1,919
Stock-based compensation expense (net of tax) .. 102 208 206 437
--------- --------- --------- ---------
Pro forma net income (loss) .................... $ 1,424 $ 820 $ (4,220) $ 1,482
========= ========= ========= =========
Earnings (loss) per share:
Diluted earnings (loss) per share ..............
As reported .................................. $ 0.19 $ 0.13 $ (0.52) $ 0.24
Pro forma .................................... $ 0.17 $ 0.10 $ (0.55) $ 0.18
Basic earnings (loss) per share
As reported .................................. $ 0.20 $ 0.13 $ (0.52) $ 0.25
Pro forma .................................... $ 0.18 $ 0.11 $ (0.55) $ 0.19
7
CELADON GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 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 transportation services through its subsidiaries, Celadon
Trucking Services, Inc. ("CTSI"), Servicios de Transportacion Jaguar, S.A de
C.V. ("Jaguar") and Celadon Canada, Inc. ("CelCan"). The Company provides
certain services over the Internet through its e-commerce subsidiary,
TruckersB2B, Inc. ("TruckersB2B"). The e-commerce segment generates revenue by
providing discounted fuel, tires, equipment 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).
(In thousands) TRANSPORTATION E-COMMERCE CONSOLIDATED
-------------- ---------- ------------
Three months ended December 31, 2003
Operating revenue ................ $ 94,786 $ 2,351 $ 97,137
Operating income ................. $ 3,558 $ 495 $ 4,053
Three months ended December 31, 2002
Operating revenue ................ $ 88,836 $ 1,991 $ 90,827
Operating income ................. $ 2,818 $ 334 $ 3,152
Six months ended December 31, 2003
Operating revenue ................ $ 187,895 $ 4,893 $ 192,788
Operating income (loss) .......... $ (2,782)(1) $ 925 $ (1,857)
Six months ended December 31, 2002
Operating revenue ................ $ 180,466 $ 3,921 $ 184,387
Operating income ................. $ 6,433 $ 655 $ 7,088
(1) Includes a $9.8 million pretax impairment charge on trailers in the
three months ended September 30, 2003.
Information as to the Company's operating revenue by geographic area is
allocated based primarily on the country of the customer and summarized below:
(In thousands) FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2003 2002 2003 2002
-------- -------- -------- --------
Operating revenue:
United States $ 78,931 $ 75,054 $156,495 $152,478
Canada 13,580 11,274 26,927 22,542
Mexico 4,626 4,499 9,366 9,367
-------- -------- -------- --------
Total $ 97,137 $ 90,827 $192,788 $184,387
======== ======== ======== ========
8
CELADON GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(UNAUDITED)
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 2006.
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2003 2002 2003 2002
---- ---- ---- ----
Percent of revenue from DaimlerChrysler 10% 12% 10% 13%
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 six months ended December 31, 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 was 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 and six months ended December 31, 2003 and 2002, respectively:
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2003 2002 2003 2002
(In thousands) ------- ------- ------- -------
Net income (loss) $ 1,526 $ 1,028 $(4,014) $ 1,919
Foreign currency translations adjustments (131) (56) (323) (92)
------- ------- ------- -------
Total comprehensive income (loss) $ 1,395 $ 972 $(4,337) $ 1,827
======= ======= ======= =======
9
CELADON GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(UNAUDITED)
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 and auto liability. 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. The Company also believes that none of these matters will
have a materially adverse effect on its consolidated financial position or
results of operations in any given period.
8. IMPAIRMENT OF EQUIPMENT VALUES
In September 2003, the Company initiated a plan to dispose of
approximately 1,600 trailers and recognized a pretax impairment charge of $9.8
million. Due to shipper compatibility issues, the Company plans to dispose of
all of its 48' trailers, as well as 53' trailers over 9 years old. The majority
of the Company's customers require 53' trailers, and management anticipates that
the disposal of 48' trailers will reduce logistical issues with those customers.
The Company plans to replace the approximately 1,600 trailers with 1,300 new 53'
trailers through the end of the fiscal year. This change in the trailer fleet is
expected to increase operating efficiencies and reduce out-of-route miles. The
pretax impairment charge consisted of a write-down of revenue equipment by $8.4
million (net of accumulated depreciation), a 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 $4.5 million included in property and
equipment on its December 31, 2003 consolidated balance sheet.
9. ACQUISITION
In August 2003, the Company acquired certain assets of Highway Express,
Inc. ("Highway"). The results of operations of Highway are included in the
Company's financial statements from August 1, 2003 through December 31, 2003.
The Company has preliminarily assigned values to the acquired assets of Highway
consisting primarily of $8.6 million of 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 facility to fund the cash portion of the
purchase price. Highway's revenue for fiscal 2002 was approximately $27 million.
10. RECLASSIFICATION
Certain reclassifications have been made to the December 31, 2002
financial statements to conform to the December 31, 2003 presentation.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information in 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 in 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
generally use words such as "believe", "expect", "anticipate", "project",
"forecast", "should", "estimate", "plan", "outlook", "goal" and similar
expressions. Because forward-looking statements involve risks and uncertainties,
the Company's actual results may differ materially from the results expressed in
or implied by the forward-looking statements. While it is impossible to identify
all factors that may cause actual results to differ from those expressed in or
implied by forward-looking statements, the risks and uncertainties that may
affect the Company's business, performance and results of operations include the
factors listed on Exhibit 99.1 to this report.
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 the events, conditions or circumstances on which any
such statement is based.
References to the "Company", "we", "us", "our" and words of similar
import refer to Celadon Group, Inc. and its subsidiaries.
BUSINESS OVERVIEW
We are one of North America's fifteen largest truckload carriers,
generating approximately $367.1 million in operating revenue for our fiscal year
ended June 30, 2003. We have grown significantly throughout our history through
internal growth and a series of acquisitions since 1995. As a dry van truckload
carrier, we generally transport full trailer loads of freight from origin to
destination without intermediate stops or handling. Our blue chip customer base
includes Fortune 500 shippers such as Procter & Gamble, DuPont, PPG Industries,
DaimlerChrysler, Target, and Philip Morris. At December 31, 2003, we operated
2,809 tractors and 7,610 trailers and none of our employees is subject to a
union contract.
We operate in two main market sectors. In our international operations,
we offer time-sensitive transportation in and between the NAFTA countries -
Canada, Mexico, and the United States. We generated nearly one-half of our
revenue in fiscal 2003 from international movements, and we believe our
approximately 150,000 annual border crossings make us the largest provider of
international truckload movements in North America. We believe that our
strategically located terminals and experience with the language, culture, and
border crossing requirements of each NAFTA country provide a competitive
advantage in the international trucking marketplace.
In addition to our international business, we offer a broad range of
truckload transportation services within the United States, including regional,
long-haul, dedicated, and supply chain management. With the acquisitions of Zipp
Express in 1999, certain assets of Burlington Motor Carriers in 2002, and
Highway Express in 2003, we expanded our operations and service offerings within
the United States and significantly improved our lane density, freight mix, and
customer base. We also operate TruckersB2B, Inc., a profitable purchasing
aggregation business that affords volume purchasing power for items such as
fuel, tires, and equipment to more than 16,000 member trucking fleets
representing approximately 434,000 tractors.
11
We generate substantially all of our revenue by transporting freight
for our customers. Generally, we are paid by the mile for our services. We also
derive revenue from fuel surcharges, loading and unloading activities, equipment
detention, other trucking-related services, and from TruckersB2B. The main
factors that affect our revenue are the revenue per mile we receive from our
customers, the percentage of miles for which we are compensated, and the number
of miles we generate with our equipment. These factors relate, among other
things, to the United States, Canadian, and Mexican economies, inventory levels,
the level of truck capacity, and specific customer demand. Going forward, we
believe that our revenue also may be affected to some extent by the recently
effective revised hours-of-service requirements adopted by the Department of
Transportation, which could reduce the amount of time that our drivers can spend
driving, and result in the imposition of certain fees on customers that detain
our equipment or drivers.
The main factors that impact our profitability on the expense side are
the variable costs of transporting freight for our customers. These costs
include fuel expense, driver-related expenses, such as wages, benefits,
training, and recruitment, and owner-operator costs, which are recorded under
purchased transportation. Expenses that have both fixed and variable components
include maintenance and tire expense and our total cost of insurance and claims.
These expenses generally vary with the miles we travel, but also have a
controllable component based on safety, fleet age, efficiency, and other
factors. Our main fixed cost is the acquisition and financing of long-term
assets, such as revenue equipment and operating terminals. Other mostly fixed
costs include non-driver personnel. Competitive rate pressures coupled with
significant increases in the costs of fuel, insurance, and equipment over the
last few years have created a difficult operating environment for most of the
industry.
STRATEGIC PLAN
In fiscal 2002, we began to implement a strategic plan designed to
improve our profitability. The primary objectives of our strategic plan are:
improving our freight mix by replacing lower yield freight with more profitable
freight; diversifying our customer base; upgrading our equipment fleet;
emphasizing discipline in all aspects of our operations; and successfully
integrating acquired operations. The process we have undertaken included the
following:
- We established customer guidelines that included: reducing our
exposure to the automotive industry; increasing our presence
in consumer product and non-durable freight; and seeking
freight in targeted geographic areas that would improve our
backhaul lanes and maintain compatibility with driver
domiciles and our overall traffic patterns.
- We analyzed our customers, lanes, and loads for profitability
based on revenue per mile, length of time for completion of
the movement, attractiveness of positioning for the next load,
driver friendliness, total cost, and other factors. We then
sought rate increases and implemented a continuous process of
attempting to improve our freight mix by replacing less
profitable freight with more attractive freight.
- Our operations group routed trucks to serve more profitable
lanes and customers, and maintained disciplined equipment
positioning in favorable lanes, while striving to provide
safe, dependable service to control our costs and justify a
rate structure based on service in addition to price.
- We identified our tractor and trailer fleet as an area where
we could benefit from cost savings and driver retention. We
shortened the trade cycle of our tractor fleet to obtain cost
savings in the maintenance area and decided to replace the
remaining 48' trailers and older 53' trailers in our fleet to
obtain operating efficiencies. We are approximately halfway
through the tractor and trailer upgrade and have begun to
realize the anticipated cost savings.
- We targeted acquisitions as a method of replacing freight we
discontinued as part of our yield management efforts, as well
as to grow our regional operations, balance lane flows, and
add density in selected lanes. The acquisitions of certain
Burlington Motor Carrier assets in 2002 and Highway Express in
2003 were consistent with these goals.
12
The implementation of our strategic plan still is ongoing, and we
expect significant additional improvements in our operating performance and
profitability as we continue to execute the plan. Specifically, we expect
further improvements in asset productivity, we expect the operations of Highway
Express to become more accretive to our earnings, and we expect substantial
benefits from our revenue equipment upgrade.
RECENT RESULTS OF OPERATIONS
For the quarter ended December 31, 2003, our results of operations
improved as follows versus the same quarter of the prior year:
- Operating revenue increased 6.9%, to $97.1 million from $90.8
million;
- Net income increased 48.4%, to $1.5 million from $1.0 million;
and
- Diluted earnings per share increased to $.19 from $.13.
We believe these improvements are attributable primarily to higher
average revenue per seated tractor per week (excluding fuel surcharge), our main
measure of asset productivity, which improved 6.8%, to $2,689 from $2,518, as a
result of higher rates per mile and miles per tractor. In addition, the Highway
Express operations we acquired in August 2003 have been fully integrated and
were accretive to earnings during the quarter. These improvements were partially
offset by a decline in the exchange rate of the U.S. dollar against the Canadian
dollar. See "Recent Developments Affecting Our Results of Operations."
REVENUE EQUIPMENT UPGRADE
We are in the process of undertaking a significant upgrade of our
tractor and trailer fleets, which has had and will continue to have significant
effects on our balance sheet, income statement and statement of cash flows. See
"Liquidity and Capital Resources." We recently have shortened our normal tractor
replacement cycle to four years of service from five years of service. We also
intend to replace all of our 48' trailers, as well as 53' trailers over nine
years old, with new units. We anticipate that operating a more modern fleet will
result in a decrease in our maintenance and tire expense as a percentage of
operating revenue, in addition to enhancing driver recruiting and retention. We
also believe that we will improve trailer utilization and ultimately be able to
operate a smaller trailer fleet by using a uniform fleet of 53' trailers.
We intend to finance most of the new tractors and trailers under
off-balance sheet operating leases. Financing revenue equipment acquisitions
with operating leases, rather than borrowings or capital leases, moves the
interest component of our financing activities into "above-the-line" operating
expenses on our income statement. Consequently, we believe that pretax margin
(income before income taxes as a percentage of operating revenue) is a more
useful measure of our operating performance than operating ratio (operating
expenses as a percentage of operating revenue) because it eliminates the effect
of our revenue equipment financing decisions.
RECENT DEVELOPMENTS AFFECTING OUR RESULTS OF OPERATIONS
Our financial results for the six months ended December 31, 2003, were
affected by two events that occurred during the first quarter of fiscal 2004. We
purchased certain assets of Highway Express and incurred the costs of
acquisition and integration, including some short-term disruption in freight
patterns within our system. We also recognized a $9.8 million pretax impairment
charge relating to approximately 1,600 trailers in our fleet, which were
comprised of the approximately 1,400 remaining 48' trailers in our fleet, as
well as approximately 200 53' trailers over nine years old. We initiated a plan
to dispose of those trailers during the first quarter of fiscal 2004 and expect
operational benefits from a uniform fleet of 53' trailers following their
replacement.
13
In addition, our results for the quarter and six months ended December
31, 2003, were adversely affected by an abnormally high Canadian dollar exchange
rate during the period. Historically, the exchange rate for the Canadian dollar
has been relatively stable at approximately $0.65 per U.S. dollar. However,
during the quarter ended December 31, 2003, the Canadian dollar exchange rate
averaged $0.76 per U.S. dollar, compared to an average of $0.64 per U.S. dollar
during the same period in 2002. While a significant portion of the revenue
generated by our Canadian operations is billed in U.S dollars because most
customers are U.S. shippers transporting freight to or from Canada, virtually
all of our expenses associated with these operations, such as owner-operator
costs, Company driver compensation, and administrative costs, are paid in
Canadian dollars. We expect our profitability will continue to be adversely
affected if the Canadian dollar exchange rate remains at higher than historical
levels.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship of expense
items to operating revenue for the periods indicated:
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2003 2002 2003 2002
----- ----- ----- -----
Operating revenue ................................ 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Salaries, wages, and employee benefits ......... 31.7% 30.7% 31.5% 30.6%
Fuel ........................................... 13.9% 12.6% 13.5% 12.0%
Operations and maintenance ..................... 8.3% 8.6% 8.4% 8.6%
Insurance and claims ........................... 3.8% 3.4% 4.0% 3.6%
Depreciation, amortization and impairment
charges ...................................... 3.7% 3.4% 8.9%(1) 3.6%
Revenue equipment rentals ...................... 7.2% 6.8% 7.1% 6.5%
Purchased transportation ....................... 20.2% 24.1% 20.4% 24.3%
Costs of products and services sold ............ 1.5% 1.4% 1.6% 1.4%
Professional and consulting fees ............... 0.6% 0.6% 0.6% 0.6%
Communications and utilities ................... 1.1% 1.0% 1.1% 1.1%
Operating taxes and licenses ................... 2.0% 2.1% 2.1% 2.1%
General and other operating .................... 1.8% 1.8% 1.8% 1.9%
----- ----- ----- -----
Total operating expenses ......................... 95.8% 96.5% 101.0% 96.2%
----- ----- ----- -----
Operating income (loss) .......................... 4.2% 3.5% (1.0%) 3.8%
----- ----- ----- -----
Other (income) expense:
Interest income ................................ 0.0% 0.0% 0.0% 0.0%
Interest expense ............................... 1.1% 1.1% 1.1% 2.1%(2)
Other (income) expense, net .................... 0.0% 0.0% 0.0% 0.0%
----- ----- ----- -----
Income (loss) before income taxes ................ 3.1% 1.9% (2.1%) 1.8%
Provision for income taxes ....................... 1.6% 0.8% 0.0% 0.7%
----- ----- ----- -----
Net income (loss) ................................ 1.6% 1.1% (2.1%) 1.0%
===== ===== ===== =====
(1) Includes a $9.8 million pretax impairment charge for the three months ended
September 30, 2003.
(2) Includes a $914,000 pretax write-off of unamortized loan origination costs
for refinancing the Company's line of credit for the three months ended
September 30, 2002.
14
COMPARISON OF THREE MONTHS ENDED DECEMBER 31, 2003 TO THREE MONTHS ENDED
DECEMBER 31, 2002
Operating revenue increased by $6.3 million, or 6.9%, to $97.1 million
for the second quarter of fiscal 2004, from $90.8 million for the corresponding
period in fiscal 2003. This increase was primarily attributable to a 3.8%
improvement in average revenue per total mile, excluding fuel surcharge, from
$1.167 to $1.211, a 2.9% increase in average miles per tractor per week, from
2,158 to 2,221, and a 4.2% increase in average tractors from 2,156 to 2,246. The
improvement in average revenue per total mile resulted primarily from better
overall freight rates in the fiscal 2004 period, a decrease in the percentage of
our freight comprised of automotive parts and a corresponding increase in the
percentage of our freight comprised on consumer non-durables, and to a lesser
extent a reduction in our percentage of deadhead miles. The increase in miles
per tractor per week was primarily attributable to stronger overall freight
demand in the 2004 period. Revenue per seated tractor per week, excluding fuel
surcharge, which is our primary measure of asset productivity, increased 6.8% to
$2,689 in the second quarter of fiscal 2004, from $2,518 for the same period in
fiscal 2003, as a result of increases in revenue per mile and miles per tractor.
The increase in average tractors was primarily related to our acquisition of
certain assets of Highway Express in the first quarter of fiscal 2004. Revenue
for TruckersB2B was $2.4 million in the second quarter of fiscal 2004, compared
to $2.0 million for the same period in fiscal 2003. The TruckersB2B revenue
increase was related to an increase in member usage of various programs,
including the fuel and tire discount programs.
Salaries, wages and benefits were $30.8 million, or 31.7% of operating
revenue, for the second quarter of fiscal 2004, compared to $27.9 million, or
30.7% of operating revenue, for the same period in fiscal 2003. The increase in
the overall dollar amount was primarily related to a 18.4% increase in Company
miles, which in turn increased driver wages. The 1.0% increase in this expense
category as a percentage of operating revenue was primarily attributable to an
increase in the percentage of our fleet comprised of Company trucks, an increase
in driver compensation, and an increase of approximately 148.2% in expenses
related to employer-paid health insurance.
Fuel expenses increased to $13.5 million, or 13.9% of operating
revenue, for the second quarter of fiscal 2004, compared to $11.4 million, or
12.6% of operating revenue, for the corresponding period in fiscal 2003. This
increase was primarily attributable to average fuel prices that were
approximately $0.03 per gallon, or 2.3%, higher during the fiscal 2004 period,
and a 18.4% increase in Company miles, which in turn increased fuel expense. The
increase in fuel prices was partially offset by the collection of $2.8 million
in fuel surcharge revenue in the fiscal 2004 period, compared to $2.4 million in
the fiscal 2003 period. We expect that fuel prices may 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.
Operations and maintenance increased to $8.0 million for the second
quarter of fiscal 2004, from $7.8 million for the second quarter of fiscal 2003.
As a percentage of revenue, operations and maintenance decreased to 8.3% of
revenue for the second quarter of fiscal 2004, compared to 8.6% for the same
period in fiscal 2003. Operations and maintenance consist of direct operating
expense, maintenance and tire expense. Maintenance expense increased in fiscal
2004 but we expect it to decrease in future periods as a result of several
effects of the fleet upgrade.
Insurance and claims expense was $3.7 million, or 3.8% of operating
revenue, for the second quarter of fiscal 2004, compared to $3.1 million, or
3.4% of operating revenue, for the same period in 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 premium expense and the risk
retention we are willing to assume. The primary reasons for the increase in
insurance and claims expense were an increase in our self-insurance retention
from fiscal 2003 levels and adverse loss development on claims from prior years.
Based on this loss development of prior year claims, we increased our reserves
for these claims.
15
Depreciation and amortization, consisting primarily of depreciation of
revenue equipment, increased to $3.6 million, or 3.7% of operating revenue, in
the second quarter of fiscal 2004, from $3.1 million, or 3.4% of operating
revenue, for the same period of fiscal 2003. This increase was primarily
attributable to increased depreciation resulting from owned equipment acquired
in the Highway acquisition and losses on disposition of certain tractors
acquired in the purchase of certain Burlington Motor Carrier assets.
Revenue equipment rentals were $7.0 million, or 7.2% of operating
revenue, for the second quarter of fiscal 2004, compared to $6.1 million, or
6.8% of operating revenue for the same period in fiscal 2003. This increase is
attributable to an increase in our tractor fleet and a higher percentage of our
tractor fleet financed under operating leases during the 2004 period. During the
second quarter of fiscal 2004, an average of 1,549 tractors, or 67.2% of our
average total Company tractors for the period, were held under operating leases
compared to an average of 1,321 tractors, or 66.2% of our average total
tractors, during the same period in fiscal 2003.
Purchased transportation decreased to $19.7 million, or 20.2% of
operating revenue for the second quarter of fiscal 2004, from $21.9 million, or
24.1% of operating revenue, for the same period in 2003. The decrease is
primarily related to reduced owner-operator expense, as the percentage of our
fleet comprised of owner-operators decreased. It has become difficult to recruit
and retain owner-operators due to the challenging operating environment.
Owner-operators are independent contractors who cover all their operating
expenses (fuel, driver salaries, maintenance, and equipment costs) for a fixed
payment per mile. To the extent these operating expenses continue to rise and
there is not a corresponding increase in the fixed payment per mile, we expect
the percentage of our fleet comprised of owner-operators will continue to
decrease.
All of our other operating expenses are relatively minor in amount, and
there were no significant changes in such expenses. Accordingly, we have not
provided a detailed discussion of such expenses.
Net interest expense decreased 29.5% to $1.0 million in the second
quarter of fiscal 2004, from $1.4 million for the same period in fiscal 2003.
This decrease was a result of reduced bank borrowings, which decreased to $21.7
million at December 31, 2003, from $29.4 million at December 31, 2002, and
capital lease obligations, which decreased to $19.4 million at December 31,
2003, from $34.2 million at December 31, 2002.
Our pretax margin, which we believe is a useful measure of our
operating performance because it is neutral with regard to the method of revenue
equipment financing that a company uses, improved 120 basis points to 3.1% for
the second quarter of fiscal 2004, from 1.9% for the same period in the prior
year.
Income taxes increased to $1.5 million, with an effective tax rate of
50%, for the second quarter of fiscal 2004, from $0.7 million, with an effective
tax rate of 41%, for the corresponding period in fiscal 2003. The effective tax
rate increased as a result of 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.
As a result of the factors described above, net income increased to
$1.5 million for the second quarter of fiscal 2004, from $1.0 million for the
same period in fiscal 2003.
16
COMPARISON OF SIX MONTHS ENDED DECEMBER 31, 2003 TO SIX MONTHS ENDED DECEMBER
31, 2002
Operating revenue increased by $8.4 million, or 4.6%, to $192.8 million
for the six months ended December 31, 2003, from $184.4 million for the
corresponding period in fiscal 2003. This increase was primarily attributable to
a 3.9% improvement in average revenue per total mile, excluding fuel surcharge,
from $1.157 to $1.202, an increase in average miles per tractor per week, from
2,206 to 2,214, and a 3.2% increase in average tractors from 2,168 to 2,237. The
improvement in average revenue per total mile resulted primarily from better
overall freight rates in the fiscal 2004 period, a decrease in the percentage of
our freight comprised of automotive parts and a corresponding increase in the
percentage of our freight comprised on consumer non-durables, and to a lesser
extent a reduction in our percentage of deadhead miles. The increase in miles
per tractor per week was primarily attributable to stronger overall freight
demand in the 2004 period. Revenue per seated tractor per week, excluding fuel
surcharge, which is our primary measure of asset productivity, increased 4.3% to
$2,661 in the six months ended December 31, 2003, from $2,552 for the same
period in fiscal 2003, as a result of increases in revenue per mile and miles
per tractor. The increase in average tractors was primarily related to our
acquisition of certain assets of Highway Express in August 2003. Revenue for
TruckersB2B was $4.9 million for the six months ended December 31, 2003,
compared to $3.9 million for the corresponding period in fiscal 2003. The
TruckersB2B revenue increase was related to an increase in member usage of
various programs including the fuel and tire discount programs.
Salaries, wages and benefits were $60.7 million, or 31.5% of operating
revenue, for the six months ended December 31, 2003, compared to $56.3 million,
or 30.6% of operating revenue, for the same period in fiscal 2003. The increase
in the overall dollar amount was primarily related to a 14.1% increase in
Company miles, which in turn increased driver wages. The 0.9% increase in this
expense category as a percentage of operating revenue was primarily attributable
to an increase in the percentage of our fleet comprised of Company trucks, an
increase in driver compensation, and an increase of approximately 100% in
expenses related to employer-paid health insurance.
Fuel expenses increased to $25.9 million, or 13.5% of operating
revenue, for the six months ended December 31, 2003, compared to $22.1 million,
or 12.0% of operating revenue, for the first six months of fiscal 2003. This
increase was primarily attributable to average fuel prices that were
approximately $0.05 per gallon, or 3.6%, higher during the fiscal 2004 period,
and a 14.1% increase in Company miles, which in turn increased fuel expense. The
increase in fuel prices was partially offset by the collection of $5.1 million
in fuel surcharge revenue in the fiscal 2004 period, compared to $4.2 million in
the fiscal 2003 period. We expect that fuel prices may 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.
Operations and maintenance increased to $16.2 million for first six
months of fiscal 2004, from $15.8 million for the six months ended December 31,
2002. As a percentage of revenue, operations and maintenance decreased slightly
to 8.4% of revenue for the six months ended December 31, 2003, compared to 8.6%
for the same period in fiscal 2003. Operations and maintenance consist of direct
operating expense, maintenance and tire expense. Maintenance expense increased
in fiscal 2004 but we expect it to decrease in future periods as a result of
several effects of the fleet upgrade.
Insurance and claims expense was $7.6 million, or 4.0% of operating
revenue, for the first six months of fiscal 2004, compared to $6.6 million, or
3.6% of operating revenue, for the corresponding period in 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 premium expense
and the risk retention we are willing to assume. The primary reasons for the
increase in insurance and claims expense were an increase in our self-insurance
retention from fiscal 2003 levels and adverse loss development on claims from
prior years. Based on this loss development of prior year claims, we increased
our reserves for these claims.
17
Depreciation and amortization, consisting primarily of depreciation of
revenue equipment, increased to $17.3 million, or 8.9% of operating revenue, in
the six months ended December 31, 2003, from $6.6 million, or 3.6% of operating
revenue, for the same period of fiscal 2003. This increase is primarily
attributable to the pretax impairment charge of $9.8 million, or 5.1% of
operating revenue, that we recognized in the first quarter of fiscal 2004 as a
result of our decision to dispose of all of our remaining 48' trailers, as well
as our 53' trailers that are over nine years old and increased depreciation
resulting from owned equipment acquired in the Highway acquisition and losses on
disposition of certain tractors acquired in the purchase of certain Burlington
Motor Carrier assets.
Revenue equipment rentals were $13.8 million, or 7.1% of operating
revenue, for the first six months of fiscal 2004, compared to $12.0 million, or
6.5% of operating revenue for the same period in fiscal 2003. This increase is
attributable to a higher proportion of our tractor fleet held under operating
leases during the 2004 period. During the first six months of fiscal 2004, an
average of 1,499 tractors, or 69.9% of our average total tractors for the
period, were held under operating leases compared to an average of 1,285
tractors, or 64.1% of our average total tractors, during the same period in
fiscal 2003.
Purchased transportation decreased to $39.3 million, or 20.4% of
operating revenue for the six months ended December 31, 2003, from $44.8
million, or 24.3% of operating revenue, for the same period in 2003. The
decrease is primarily related to reduced owner-operator expense, as the
percentage of our fleet comprised of owner-operators decreased. It has become
difficult to recruit and retain owner-operators due to the challenging operating
environment. Owner-operators are independent contractors who cover all their
operating expenses (fuel, driver salaries, maintenance, and equipment costs) for
a fixed payment per mile. To the extent these operating expenses continue to
rise and there is not a corresponding increase in the fixed payment per mile, we
expect the percentage of our fleet comprised of owner-operators will continue to
decrease.
All of our other operating expenses are relatively minor in amount, and
there were no significant changes in such expenses. Accordingly, we have not
provided a detailed discussion of such expenses.
Net interest expense decreased 43.6% to $2.2 million in the six months
ended December 31, 2003, from $3.9 million for the corresponding period in
fiscal 2003. This decrease was a result of reduced bank borrowings, which
decreased to $21.7 million at December 31, 2003, from $29.4 million at December
31, 2002, and capital lease obligations, which decreased to $19.4 million at
December 31, 2003, from $34.2 million at December 31, 2002, as well as the
pretax write-off of loan origination costs of approximately $914,000 in the
fiscal 2003 period.
Our pretax margin, which we believe is a useful measure of our
operating performance because it is neutral with regard to the method of revenue
equipment financing that a company uses, improved 150 basis points to 3.0% for
the first six months of fiscal 2004, from 1.5% for the same period of the prior
year. Such amounts exclude the impact of both the $9.8 million pretax impairment
charge in the fiscal 2004 period and a one-time, pretax write-off of unamortized
loan origination costs of approximately $914,000 related to the refinancing of
the Company's line of credit in the fiscal 2003 period.
Income taxes resulted in a small benefit, yielding an effective tax
rate of 0%, in the first six months of fiscal 2004, compared to income tax
expense of $1.3 million, with an effective tax rate of 39%, for the same period
in fiscal 2003. The decrease in the effective tax rate resulted from the tax
benefit associated with the $9.8 million pretax impairment charge in the fiscal
2004 period, which was partially offset by an increase in non-deductible
expenses related to per diem. As per diem is a non-deductible expense our
effective tax rate will fluctuate as net income fluctuates in the future.
As a result of the factors described above, net income (loss) decreased
by $5.9 million to a net loss of ($4.0 million) for the first six months of
fiscal 2004, from net income of $1.9 million in the corresponding period in
fiscal 2003.
18
LIQUIDITY AND CAPITAL RESOURCES
Trucking is a capital-intensive business. We require cash to fund our
operating expenses (other than depreciation and amortization), to make capital
expenditures and acquisitions, and to repay debt, including principal and
interest payments. Outside of ordinary operating expenses, we anticipate that
capital expenditures for the acquisition of revenue equipment will constitute
our primary cash requirement over the next twelve months. Our principal sources
of liquidity are cash generated from operations, bank borrowings, capital and
operating lease financing of revenue equipment, proceeds from the sale of used
revenue equipment, and to a lesser extent, the issuance of securities.
For the first six months of fiscal 2004, net cash provided by
operations was $20.1 million, compared to $18.7 million for the same period in
fiscal 2003.
Net cash used in investing activities was $5.7 million for the first
six months of fiscal 2004, compared to net cash provided by investing activities
of $3.1 million for the corresponding period in fiscal 2003. A significant
portion of the cash used in investing activities for the fiscal 2004 period was
related to our purchase of Highway Express in August of 2003. In addition, cash
used in (provided by) investing activities includes the net cash effect of
acquisitions and dispositions of revenue equipment during the period. Capital
expenditures (excluding the assets purchased from Highway Express, Inc.) totaled
$6.5 million in the first six months of fiscal 2004 and $2.3 million for the
same period in fiscal 2003. We generated proceeds from the sale of property and
equipment of $4.4 million during the first six months of fiscal 2004, compared
to $5.5 million in proceeds for the corresponding period in fiscal 2003.
Net cash used in financing activities was $14.7 million for the first
six months of fiscal 2004, compared to $21.4 million for the same period in
fiscal 2003. Financing activity generally represents bank borrowings (payment
and proceeds) and payment of capital lease obligations.
As of December 31, 2003, we had on order approximately 484 tractors and
1,800 trailers for delivery through December 2004. These revenue equipment
orders represent a capital commitment of approximately $73.6 million, before
considering the proceeds of equipment dispositions. In connection with our fleet
upgrade, we have financed most of the new tractors and new trailers we have
acquired to date under off-balance sheet operating leases. A substantial amount
of the used equipment that has been or will be replaced by these new units was
or is owned or held under capitalized leases and, therefore, carried on our
balance sheet. As a result of our increased use of operating leases to finance
acquisitions of revenue equipment, we have reduced our balance sheet debt. At
December 31, 2003, our total balance sheet debt, including capitalized lease
obligations, was $53.2 million, compared to $75.6 million at December 31, 2002.
Our debt-to-capitalization ratio (total balance sheet debt as a percentage of
total balance sheet debt plus total stockholders' equity) decreased from 57.5%
at December 31, 2002, to 50.0% at December 31, 2003. The reduction in balance
sheet debt of $22.4 million was partially offset by an increase in our
obligations under operating leases, the present value of which we estimate has
increased by $21.6 million, from $79.9 million at December 31, 2002, to $101.5
million at December 31, 2003. These amounts exclude residual payments related to
the operating leases of $36.8 million and $44.8 million at December 31, 2003 and
2002, respectively, which for the most part are covered by repurchase and/or
trade agreements between the Company and the equipment manufacturer. We believe
that any residual payment obligations that are not so covered by the
manufacturer will be satisfied, in the aggregate, by the value of the related
equipment at the end of the lease. We anticipate that our continued reliance on
operating leases, rather than bank borrowings or capitalized leases, to finance
the acquisition of revenue equipment in connection with our fleet upgrade will
allow us to use our cash flows to further reduce our balance sheet debt.
The tractors on order are not protected by a repurchase arrangement and
are not subject to a walk-away lease. With respect to such tractors, we are
subject to the risk that equipment values may decline and we would suffer a loss
upon disposition.
19
The use of operating leases also affects our statement of cash flows.
We do not record depreciation as an increase to net cash provided by operations,
nor do we record any entry with respect to investing activities or financing
activities.
On September 26, 2002, we entered into our current primary credit
facility with Fleet Capital Corporation, Fleet Capital Canada Corporation and
several other lenders. This $55.0 million facility consists of revolving loan
facilities, approximately $10.8 million in term loan subfacilities, and a
commitment to issue and guaranty letters of credit. Repayment of the amounts
outstanding under the credit facility is secured by a lien on our assets,
including the stock or other equity interests of our subsidiaries, and the
assets of certain of our subsidiaries. In addition, certain of our subsidiaries
that are not party to the credit facility have guaranteed the repayment of the
amount outstanding under the credit facility, and have granted a lien on their
respective assets to secure such repayment. The credit facility expires on
September 26, 2005.
Amounts available under the credit facility are determined based on our
accounts receivable borrowing base. The facility contains restrictive covenants,
which, among other things, limit our ability to pay cash dividends and the
amount of our annual capital expenditures and lease payments, and require us to
maintain compliance with certain financial ratios, including a minimum fixed
charge coverage ratio. We were in compliance with these covenants at December
31, 2003, and expect to remain in compliance for the foreseeable future. At
December 31, 2003, $21.7 million of our credit facility was utilized as
outstanding borrowings and $6.8 million was utilized for standby letters of
credit, and we had approximately $14.6 million in remaining availability under
the facility.
We believe we will be able to fund our operating expenses, as well as
our current commitments for the acquisition of revenue equipment in connection
with our fleet upgrade, over the next twelve months with a combination of cash
generated from operations, borrowings available under the primary credit
facility, and lease financing arrangements. Additional growth in our tractor and
trailer fleet beyond our existing orders, as well as any acquisitions involving
a significant cash component, will require additional sources of financing. We
will continue to have significant capital requirements over the long term, and
the availability of such capital will depend upon our financial condition and
operating results and numerous other factors over which we have limited or no
control, including prevailing market conditions and the market price of our
common stock. However, based on our improving operating results, anticipated
future cash flows, current availability under our credit facility, and sources
of equipment lease financing that we expect will be available to us, we do not
expect that we will experience significant liquidity constraints in the
foreseeable future.
20
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
As of December 31, 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 DECEMBER 31, 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) $146,270 $ 41,655 $ 54,124 $ 32,611 $ 17,881
Capital Leases Obligations(1) 19,367 10,892 8,198 277 ---
Long-Term Debt 33,797 6,100 24,930 333 2,424
-------- -------- -------- -------- --------
Sub-Total 199,434 58,657 87,252 33,221 20,305
Future Purchase of Revenue Equipment 73,623 5,038 20,151 29,677 18,757
Employment and Consulting Agreements(2) 1,444 796 648 --- ---
Standby Letters of Credit 6,766 6,766 --- --- ---
-------- -------- -------- -------- --------
Total $281,267 $ 71,257 $108,050 $ 62,898 $ 39,062
======== ======== ======== ======== ========
(1) Included in these balances are residual guarantees of $58.3 million in
total and $19.8 million coming due in less than one year. We believe
these balances will be satisfied by manufacturer commitments.
(2) The amounts reflected in the table do not include sums that could
become payable to our Chief Executive Officer, Chief Financial Officer,
and our Executive Vice President under certain circumstances in the
event their employment by the Company is terminated.
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 second 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
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Many of our operating expenses, including fuel costs, revenue
equipment, and driver compensation are sensitive to the effects of inflation,
which result in higher operating costs and reduced operating income. The effects
of inflation on our business during the past three years were most significant
in fuel. The effects of inflation on revenue were not material in the past three
years. We have limited the effects of inflation through increases in freight
rates and fuel surcharges.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We experience various market risks, including changes in interest
rates, foreign currency exchange rates, and fuel prices. We do not enter into
derivatives or other financial instruments for trading or speculative purposes,
nor when there are no underlying related exposures.
Interest Rate Risk. We are exposed to interest rate risk primarily from
our primary credit facility. The credit facility carries a maximum variable
interest rate of the bank's base rate plus 3.0% or LIBOR plus 3.5%. At December
31, 2003, we had variable rate borrowings of $21.7 million outstanding under the
credit facility. Assuming variable rate borrowings under the credit facility at
December 31, 2003 levels, a hypothetical 10% increase in the bank's base rate
and LIBOR would reduce our annual net income by approximately $109,000. In the
event of a change of such magnitude, management would likely consider actions to
further mitigate our exposure.
Foreign Currency Exchange Rate Risk. We are subject to foreign currency
exchange rate risk, specifically in connection with our Canadian operations.
While virtually all of the expenses associated with our Canadian operations,
such as owner-operator costs, Company driver compensation, and administrative
costs, are paid in Canadian dollars, a significant portion of our revenue
generated from those operations is billed in U.S. dollars because many of our
customers are U.S. shippers transporting goods to or from Canada. As a result,
increases in the Canadian dollar exchange rate adversely affect the
profitability of our Canadian operations. Assuming revenue and expenses for our
Canadian operations identical to that in the quarter ended December 31, 2003
(both in terms of amount and currency mix), we estimate that a $0.01 increase in
the Canadian dollar exchange rate would reduce our annual net income by
approximately $275,000. We generally do not face the same magnitude of foreign
currency exchange rate risk in connection with our intra-Mexico operations
conducted through our Mexican subsidiary, Jaguar, because our foreign currency
revenues are generally proportionate to our foreign currency expenses for those
operations. For purposes of consolidation, however, the operating results earned
by our subsidiaries, including Jaguar, in foreign currencies are converted into
United States dollars. As a result, a decrease in the value of the Mexican peso
could adversely affect our consolidated results of operations. We estimate that
a $0.01 decrease in the Mexican peso exchange rate would reduce our annual net
income by approximately $45,000. We generally do not engage in foreign currency
hedging transactions, and currently are not a party to any such transactions.
Commodity Price Risk. Shortages of fuel, increases in prices or
rationing of petroleum products can have a materially adverse effect on our
operations and profitability. Fuel is subject to economic, political and market
factors that are outside of our control. Historically, we have sought to recover
a portion of short-term increases in fuel prices from customers through the
collection of fuel surcharges. However, fuel surcharges do not always fully
offset increases in fuel prices. In addition, from time-to-time we 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 December 31, 2003, we had
2% of estimated fuel purchases hedged through February 2004. These derivative
contracts had no material impact on our results of operations for the quarter or
six months ended December 31, 2003, and we do not expect that they will have a
material impact on our third quarter results of operations prior to their
expiration.
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ITEM 4. CONTROLS AND PROCEDURES
As required by Rules 13a-15 and 15d-15 under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), the Company has carried out an
evaluation of the effectiveness of the design and operation of the Company's
disclosure controls and procedures as of the end of the period covered by this
report. This evaluation was carried out under the supervision and with the
participation of the Company's management, including our Chief Executive Officer
and our Chief Financial Officer. Based upon that evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedures were effective as of the end of the period covered by this report.
There were no changes in the Company's internal control over financial reporting
that occurred during the quarter ended December 31, 2003 that have materially
affected, or that are reasonably likely to materially affect, the Company's
internal control over financial reporting.
Disclosure controls and procedures are controls and other procedures
that are designed to ensure that information required to be disclosed in the
Company's reports filed or submitted under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
rules and forms of the Securities and Exchange Commission (the "Commission").
Disclosure controls and procedures include controls and procedures designed to
ensure that information required to be disclosed in Company reports filed under
the Exchange Act is accumulated and communicated to management, including the
Company's Chief Executive Officer and Chief Financial Officer as appropriate, to
allow timely decisions regarding disclosures.
The Company has confidence in its disclosure controls and procedures.
Nevertheless, the Company's management, including the Chief Executive Officer
and Chief Financial Officer, does not expect that our disclosure controls and
procedures will prevent all errors or intentional fraud. An internal control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of such internal controls are met.
Further, the design of an internal control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all internal
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the Company have been
detected.
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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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Celadon Group, Inc. held its regular Annual Meeting of
shareholders on November 21, 2003. At the Annual Meeting, Stephen Russell, Paul
A. Biddelman, Michael Miller, Anthony Heyworth, and John Kines were elected to
serve as directors for one-year terms. Stockholders representing 6,973,579
shares or 90% of the total outstanding shares of Common Stock were present in
person or by proxy at the Annual Meeting. A tabulation of the vote with respect
to each nominee follows:
Proposal 1 - Election of Directors
Voted For Vote Withheld
--------- -------------
Stephen Russell 5,475,495 1,498,084
Paul A. Biddelman 6,762,102 211,477
Michael Miller 5,505,862 1,467,717
Anthony Heyworth 5,509,362 1,464,217
John Kines 5,509,362 1,464,217
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
3.1 Certificate of Incorporation of the Company.
Incorporated by reference to Exhibit 3.1 to
Registration Statement on Form S-1 filed with the
Commission on January 20, 1994 (No. 33-72128).
3.2 Certificate of Amendment of Certificate of
Incorporation dated February 2, 1995 decreasing
aggregate number of authorized shares to 12,179,985.
Incorporated by reference to Exhibit 3.2 to Annual
Report on Form 10-K for the fiscal year ended June
30, 1995 filed with the Commission on November 30,
1995.
3.3 Certificate of Designation for Series A Junior
Participating Preferred Stock. Incorporated by
reference to Exhibit 3.3 to Annual Report on Form
10-K for the fiscal year ended June 30, 2000 filed
with the Commission on September 28, 2000.
3.4 By-laws of the Company. Incorporated by reference to
Exhibit 3.2 to Registration Statement on Form S-1
filed with the Commission on January 20, 1994 (No.
33-72128).
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.
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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.
99.1 Private Securities Litigation Reform Act of 1995 Safe
Harbor Compliance Statement for Forward-Looking
Statements
(b) During the quarter ended December 31, 2003, the Company filed
with, or furnished to, the Commission the following Current Reports on Form 8-K.
On October 28, 2003, the Company furnished to the Commission a Current Report
Form 8-K, dated October 27, 2003, to report information regarding the Company's
press release announcing its fiscal first quarter financial and operating
results. On November 10, 2003, the Company furnished to the Commission an
amendment to that Current Report to reflect the issuance of a corrected press
release relating to the Company's first quarter financial and operating results.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Celadon Group, Inc.
(Registrant)
/s/Stephen Russell
------------------
Stephen Russell
Chief Executive Officer
/s/Paul A. Will
---------------
Paul A. Will
Chief Financial Officer
Date: February 12, 2004
26