form10k.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended June 30, 2011
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from _________________ to ______________
Commission file number: 001-34533
CELADON GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware
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13-3361050
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(State or other jurisdiction of
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(I.R.S. Employer
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Incorporation or organization)
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Identification Number)
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9503 East 33rd Street
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Indianapolis, IN
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46235
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(Address of principal executive offices)
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(Zip Code)
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Registrant's telephone number, including area code: (317) 972-7000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
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Name of each exchange on which registered
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Common Stock ($0.033 par value)
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New York Stock Exchange
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Series A Junior Participating Preferred Stock Purchase Rights
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
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oYes
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xNo
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Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 of Section 15(d) of the Act.
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oYes
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xNo
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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
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period that the registrant was required to file such reports), and (2) has been subject to such filing requirements the past 90 days.
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xYes
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oNo
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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405
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of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period than the registrant was required to submit and post such files).
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oYes
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oNo
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy
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or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
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Accelerated filer x
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Non-accelerated filer o (Do not check if a smaller reporting company)
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Smaller reporting company o
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
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oYes
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xNo
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On December 31, 2010, the last business day of the registrant's most recently completed second fiscal quarter, the aggregate market value of the registrant's common stock ($0.033 par value) held by non-affiliates (19,836,599 shares) was approximately $293 million based upon the reported last sale price of the common stock on that date. The exclusion from such amount of the market value of shares of common stock owned by any person shall not be deemed an admission by the registrant that such person is an affiliate of the registrant.
The number of outstanding shares of the registrant's common stock as of the close of business on August 24, 2011 was 22,522,237.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of Form 10-K - Portions of Definitive Proxy Statement for the 2011 Annual Meeting of Stockholders
CELADON GROUP, INC.
FORM 10-K
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Page
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PART I
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Item 1.
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Business
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Item 1A.
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Risk Factors
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Item 1B.
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Unresolved Staff Comments
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Item 2.
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Properties
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Item 3.
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Legal Proceedings
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Item 4.
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Submission of Matters to a Vote of Security Holders
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PART II
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Item 5.
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Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
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Item 6.
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Selected Financial Data
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Item 7.
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Management's Discussion and Analysis of Financial Condition and Results of Operation
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Item 7A.
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Quantitative and Qualitative Disclosures About Market Risk
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Item 8.
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Financial Statements and Supplementary Data
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Item 9.
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Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
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Item 9A.
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Controls and Procedures
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Item 9B.
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Other Information
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PART III
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Item 10.
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Directors, Executive Officers, and Corporate Governance
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Item 11.
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Executive Compensation
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Item 12.
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
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Item 13.
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Certain Relationships and Related Transactions
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Item 14.
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Principal Accounting Fees and Services
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PART IV
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Item 15.
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Exhibits, Financial Statement Schedules
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SIGNATURES
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Report of Independent Registered Public Accounting Firm
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Consolidated Statements of Operations
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Consolidated Balance Sheets
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Consolidated Statements of Cash Flows
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Consolidated Statements of Stockholders' Equity
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Notes to Consolidated Financial Statements
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PART I
Disclosure Regarding Forward Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Certain statements contained in this Form 10-K and those portions of the 2011 Proxy Statement incorporated by reference may be considered 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, events, performance, or achievements of the Company to be materially different from any future results, events, performance, or achievements expressed or implied by such forward-looking statements. Words such as "anticipates," "estimates," "expects," "projects," "intends," "plans," "believes," and words or terms of similar substance used in connection with any discussion of future operating results, financial performance, or business plans identify forward-looking statements. All forward-looking statements reflect our management's present expectation of future events and are subject to a number of important factors and uncertainties that could cause actual results to differ materially from those described in 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 discussed in Item 1A of this report. 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-K.
All such forward-looking statements speak only as of the date of this Form 10-K. 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.
For these statements, we claim the protection of the safe harbor for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934 ("Exchange Act"), as amended.
References to the "Company", "Celadon", "we", "us", "our" and words of similar import refer to Celadon Group, Inc. and its consolidated subsidiaries.
Introduction
We are one of North America's twenty largest truckload carriers as measured by revenue. We generated $556.7 million in operating revenue during our fiscal year ended June 30, 2011. We have grown significantly since our incorporation in 1986 through internal growth and a series of acquisitions since 1995. As a dry van truckload carrier, we generally transport full trailer loads of freight from origin to destination without intermediate stops or handling. Our customer base includes Fortune 500 shippers such as Alcoa, Carrier Corporation, General Electric, International Truck & Engine, John Deere, Kohler Company, Philip Morris, Phillips Lighting, Proctor & Gamble, and Wal-Mart.
In our international operations, we offer time-sensitive transportation in and between the United States and its two largest trading partners, Mexico and Canada. We generated approximately 44% of our revenue in fiscal 2011 from international movements, and we believe our annual border crossings make us the largest provider of international truckload movements in North America. We believe that our strategically located terminals and experience with the language, culture, and border crossing requirements of each North American country provide a competitive advantage in the international trucking marketplace.
We believe our international operations, particularly those involving Mexico, offer an attractive business niche for several reasons. The additional complexity and the need to establish cross-border business partners and to develop a strong organization and an adequate infrastructure in Mexico afford some barriers to competition that are not present in traditional U.S. truckload service. Information regarding our revenue derived from foreign customers and long-lived assets located in foreign countries is set forth in Note 10 to the consolidated financial statements filed as part of this report.
Our success is partially dependent upon the success of our operations in Mexico and Canada, and we are subject to risks of doing business internationally, including fluctuations in foreign currencies, changes in the economic strength of the countries in which we do business, difficulties in enforcing contractual obligations and intellectual property rights, burdens of complying with a wide variety of international and United States export and import laws, and social, political, and economic instability. Additional risks associated with our foreign operations, including restrictive trade policies and imposition of duties, taxes, or government royalties by foreign governments, are present but largely mitigated by the terms of NAFTA.
In addition to our international business, we offer a broad range of truckload transportation services within the United States, including long-haul, regional, dedicated, less-than-truckload, intermodal, and logistics. With a series of acquisitions, we expanded our operations and service offerings within the United States and significantly improved our lane density, freight mix, and customer diversity.
Operating and Sales Strategy
We approach our trucking operations as an integrated effort of marketing, customer service, and fleet management. We have identified as priorities: increasing our freight rates; raising our service standards; rebalancing lane flows to enhance asset utilization; and identifying and acquiring suitable acquisition candidates and successfully integrating acquired operations. To accomplish these objectives, we have sought to instill high levels of discipline, cooperation, and trust between our operations and sales departments. As a part of this integrated effort, our operations and sales departments have developed the following strategies, goals, and objectives:
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Seeking high yielding freight from targeted industries, customers, regions, and lanes that improves our overall network density and diversifies our customer and freight mix. We believe that by focusing our sales resources on targeted regions and lanes with emphasis on cross-border or international moves and a north - south direction, we can improve our lane density and equipment utilization, increase our average revenue per mile, and control our average cost per mile. Each piece of business has rate and productivity goals that are designed to improve our yield management. We believe that by increasing the business we do with less cyclical shippers, our ability to improve rate per mile increases.
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Focusing on asset productivity. Our primary productivity measure is revenue per tractor per week. Within revenue per tractor we examine rates, non-revenue miles, and loaded miles per tractor. We actively analyze customers and freight movements in an effort to enhance the revenue production of our tractors. We also attempt to concentrate our equipment in defined operating lanes to create more predictable movements, reduce non-revenue miles, and shorten turn times between loads.
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Operating a modern fleet to reduce maintenance costs and improve safety and driver retention. We believe that updating our tractor fleet has produced several benefits, including enhanced safety, driver recruitment, and retention. We have taken an important step toward modernizing our fleet. We shortened the replacement cycle for our tractors from four years to three years. This trade policy has allowed us to recognize significant benefits over the past few years because maintenance and tire expenses increase significantly for tractors beyond the third year of operation, as wear and tear increases and some warranties expire.
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Continuing our emphasis on service, safety, and technology. We offer just-in-time, time-definite, and other premium transportation services to meet the expectations of our service-oriented customers. We believe that targeting premium service freight permits us to obtain higher rates, build long-term, service-based customer relationships, and avoid competition from railroad, intermodal, and trucking companies that compete primarily on the basis of price. We believe our recent safety record has been among the best in our industry. In May 2009 we were awarded the Indiana Motor Truck Associations Large Fleet Safety Award for the fourth time in five years. We have made significant investments in technologies that are intended to reduce costs, afford a competitive advantage with service-sensitive customers, be environmentally friendly, and promote economies of scale. Examples of these technologies are Qualcomm satellite-based tracking and communications systems, our proprietary CelaTrac system that enables customers to track shipments and access other information via the Internet, and document imaging.
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Maintaining our leading position in cross-border truckload shipments while offering diversified, nationwide transportation services in the U.S. We believe our strategically located terminals and experience with the languages, cultures, and border crossing requirements of all three North American countries provide us with competitive advantages in the international trucking marketplace. As a result of these advantages, we believe we are the industry leader in cross-border movements between North American countries. These cross-border shipments, which comprised 44% of our revenue in fiscal 2011, are balanced by a strong and growing business with domestic freight from service-sensitive customers.
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Seeking strategic acquisitions to broaden our existing domestic operations. We have made twelve trucking company acquisitions since 1995 and continue to evaluate acquisition candidates. Our current acquisition strategy is focused on broadening our domestic operations through the addition of carriers that improve our lane density, customer diversity, and service offerings.
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Other Services
Celadon Dedicated Services. Through Celadon Dedicated Services, we provide warehousing and trucking services. Our warehouse facilities are located near our customers' manufacturing plants. We also transport the manufacturing component parts to our warehouses and sequence those parts for our customers. We then transport completed units from our customers' plants. In conjunction with our warehousing services, we offer less-than-truckload services to all our customers.
Industry and Competition
The full truckload market is defined by the quantity of goods, generally over 10,000 pounds, shipped by a single customer point-to-point and is divided into several segments by the type of trailer used to transport the goods. These segments include van, temperature-controlled, flatbed, and tank carriers. We participate in the North American van truckload market. The markets within the United States, Canada, and Mexico are fragmented, with thousands of competitors, none of whom dominate the market. We believe that the current economic pressures will continue to force many smaller and private fleets to exit the industry.
Transportation of goods by truck between the United States, Canada, and Mexico is subject to the provisions of NAFTA. Transportation of goods between the United States or Canada and Mexico consists of three components: (i) transportation from the point of origin to the Mexican border, (ii) transportation across the border, and (iii) transportation from the border to the final destination. United States and Canadian based carriers may operate within both countries. United States and Canadian carriers are not allowed to operate within Mexico, and Mexican carriers are not allowed to operate within the United States and Canada, in each case except for a 26-kilometer, or approximately 16 miles, band along either side of the Mexican border. Trailers may cross all borders. We are one of a limited number of trucking companies that participates in all three segments of this cross border market, providing or arranging for door-to-door transport service between points in the United States, Canada, and Mexico.
The truckload industry is highly competitive and fragmented. Although both service and price drive competition in the premium long haul, time sensitive portion of the market, we rely primarily on our high level of service to attract customers. This strategy requires us to focus on market segments that employ just-in-time inventory systems and other premium services. Our competitors for freight include other long-haul truckload carriers and, to a lesser extent, medium-haul truckload carriers and railroads. We also compete with other trucking companies for the services of drivers. Some of the truckload carriers with which we compete have greater financial resources, operate more revenue equipment, and carry a larger total volume of freight than we do.
Customers
We target large service-sensitive customers with time-definite delivery requirements throughout the United States, Canada, and Mexico. Our customers frequently ship in the north-south lanes (i.e., to and from locations in Mexico and locations in the United States and Eastern Canada). The sales personnel in our offices work to source northbound and southbound transport, in addition to other transportation solutions. We currently service approximately 1,700 customers. Our premium service to these customers is enhanced by the ability to provide significant trailer capacity where needed, state-of-the-art technology, well-maintained tractors and trailers, and 24/7 dispatch and reporting services. The principal types of freight transported include tobacco, consumer goods, automotive parts, various home products and fixtures, lawn tractors and assorted equipment, light bulbs, and various parts for engines.
No customer accounted for more than 10% of our total revenue during any of our three most recent fiscal years.
Drivers and Personnel
At June 30, 2011, we employed 3,478 persons, of whom 2,414 were drivers, 226 were truck maintenance personnel, 540 were administrative personnel, and 298 were dedicated services personnel. None of our U.S. or Canadian employees are represented by a union or a collective bargaining unit.
Driver recruitment, retention, and satisfaction are essential components of our success. Historically, competition to recruit and retain drivers has been intense in the trucking industry. In the past, there has been a shortage of qualified drivers in the industry. Although the recent recession eased this competition and minimized the shortage, as the economy slowly recovers and volumes and pricing return to historical levels, we have seen the competition for qualified drivers intensify. In addition, Federal Motor Carrier Safety Administration's ("FMCSA") new Comprehensive Safety Analysis 2010 ("CSA 2010") has caused the competition for qualified drivers to intensify. Drivers are selected in accordance with specific guidelines, relating primarily to safety records, driving experience, and personal evaluations, including a physical examination and mandatory drug testing. Our drivers attend an orientation program and ongoing driver efficiency and safety programs. An increase in driver turnover can have a negative impact on our results of operations.
Independent contractors are utilized through a contract with us to supply one or more tractors and drivers for our use. Independent contractors must pay their own tractor expenses, fuel, maintenance, and driver costs and must meet our specified guidelines with respect to safety. A lease-purchase program offered by the company provides independent contractors the opportunity to lease-to-own a tractor. As of June 30, 2011, there were 423 independent contractors providing a combined 16.1% of our tractor capacity.
Revenue Equipment
Our equipment strategy is to utilize late-model tractors and high-capacity trailers, actively manage equipment throughout its life cycle, and employ a comprehensive service and maintenance program.
We have determined that the average annual cost of maintenance and tires for tractors in our fleet rises substantially after the first three years due to a combination of greater wear and tear and the expiration of some warranty coverages. We believe these costs rise late in the trade cycle for our trailers as well. We anticipate that we will achieve ongoing savings in maintenance and tire expense by replacing tractors and trailers more often. In addition, we believe operating newer equipment will enhance our driver recruiting and retention efforts. Accordingly, we seek to manage our tractor trade cycle to approximately three years and our trailer trade cycle to approximately seven years.
The average age of our owned and leased tractors and trailers was approximately 1.9 years and 5.5 years, respectively, at June 30, 2011. We utilize a comprehensive maintenance program to minimize downtime and control maintenance costs. Centralized purchasing of spare parts and tires, and centralized control of over-the-road repairs are also used to control costs.
Fuel
We purchase the majority of our fuel through a network of over 1,924 fuel stops throughout the United States and Canada. We have negotiated discounted pricing based on certain volume commitments with these fuel stops. We maintain bulk-fueling facilities in Indianapolis, Laredo, and Kitchener, Ontario to further reduce fuel costs.
Shortages of fuel, increases in prices, or rationing of petroleum products can have a materially adverse effect on our operations and profitability. Fuel is subject to economic, political, climatic, and market factors that are outside of our control. We have historically been able to recover a majority of high fuel prices from customers in the form of fuel surcharges. However, a portion of the fuel expense increase is not recovered due to several factors, including the base fuel price levels, which determine when surcharges are collected, truck idling, empty miles between freight shipments, and out-of-route miles. We cannot predict whether high fuel price levels will occur in the future or the extent to which fuel surcharges will be collected to offset such increases.
Regulation
Our operations are regulated and licensed by various United States federal and state, Canadian provincial, and Mexican federal agencies. Interstate motor carrier operations are subject to safety requirements prescribed by the United States Department of Transportation ("DOT"). Such matters as weight and equipment dimensions are also subject to United States federal and state regulation and Canadian provincial regulations. We operate in the United States throughout the 48 contiguous states pursuant to operating authority granted by the Federal Highway Administration, in various Canadian provinces pursuant to operating authority granted by the Ministries of Transportation and Communications in such provinces, and within Mexico pursuant to operating authority granted by Secretaria de Communiciones y Transportes. To the extent that we conduct operations outside the United States, we are subject to the Foreign Corrupt Practices Act, which generally prohibits United States companies and their intermediaries from bribing foreign officials for the purpose of obtaining or retaining favorable treatment.
Our operations are subject to various federal, state, and local environmental laws and regulations, implemented principally by the Environmental Protection Agency ("EPA") and similar state regulatory agencies, governing the management of hazardous wastes, other discharge of pollutants into the air and surface and underground waters, and the disposal of certain substances. We do not believe that compliance with these regulations has a material effect on our capital expenditures, earnings, and competitive position.
In addition, the engines used in our newer tractors are subject to emissions control regulations issued by the EPA. The regulations require progressive reductions in exhaust emissions from diesel engines for 2007 through 2010. On May 21, 2010, President Obama signed an executive memorandum directing the National Highway Traffic Safety Administration and the EPA to develop new, stricter fuel efficiency standards for heavy trucks, beginning in 2014. On August 9, 2011, the EPA released standards that will require an approximately 20% improvement in fuel economy by 2018 and reduced carbon-dioxide emissions. In December 2008, California adopted new performance requirements for diesel trucks, with targets to be met between 2011 and 2023, and California also has adopted aerodynamics requirements for certain trailers. These regulations, as well as proposed regulations or legislation related to climate change that potentially impose restrictions, caps, taxes, or other controls on emissions of greenhouse gas, could adversely affect our operations and financial results. In addition, increasing efforts to control emissions of greenhouse gases are likely to have an impact on us. The EPA has announced a finding relating to greenhouse gas emissions that may result in promulgation of greenhouse gas emission limits. Compliance with such regulations has increased the cost of new tractors, could impair equipment productivity, lower fuel mileage, and increase our operating expenses. These adverse effects, combined with the uncertainty as to the reliability of the new diesel engines and the residual values of these vehicles, could materially increase our costs or otherwise adversely affect our business or operations.
On December 20, 2010, the FMCSA issued a Notice of Proposed Rulemaking that would place additional limits on the time drivers may operate a commercial motor vehicle. Among the proposed revisions is a provision that all driving time must be completed within a 14-hour period and that timeframe must include at least a one-hour break. The proposal also provides that the 34-hour restart may only be used once per week and must include two periods between midnight and six a.m. The rule also contemplates reducing the maximum driving time in a 24-hour period from 11 hours to 10 hours. The initial public comment period on the proposal closed on March 4, 2011. The FMCSA reopened the public comment period in May and extended it until June 8, 2011. A Final Rule is expected to be published in October 2011.
We are unable to predict what form the new rules may take, how a court may rule on such challenges to such rules, and to what extent the FMCSA might attempt to materially revise the rules under the current presidential administration. On the whole, however, we believe any modifications to the current rules will decrease productivity and cause some loss of efficiency, as drivers and shippers may need to be retrained, computer programming may require modifications, additional drivers may need to be employed or engaged, additional equipment may need to be acquired, and some shipping lanes may need to be reconfigured.
The FMCSA’s new CSA 2010 initiative introduced a new enforcement and compliance model, which implements driver standards in addition to the carrier standards currently in place. Under the new regulations, the methodology for determining a carrier's DOT safety rating has been expanded to include the on-road safety performance of the carrier's drivers. As a result of these new regulations, including the expanded methodology for determining a carrier's DOT safety rating, there may be an adverse effect on our DOT safety rating. A conditional or unsatisfactory DOT safety rating could adversely affect our business, because some of our customer contracts may require a satisfactory DOT safety rating. The new regulations may also result in a reduced number of eligible drivers. If current or potential drivers are eliminated due to the Comprehensive Safety Analysis 2010 initiative, we may have difficulty attracting and retaining qualified drivers.
The FMCSA also is considering revisions to the existing rating system and the safety labels assigned to motor carriers evaluated by the DOT. We currently have a satisfactory DOT rating, which is the highest available rating under the current safety rating scale. Under the revised rating system being considered by the FMCSA, our safety rating would be evaluated more regularly, and our safety rating would reflect a more in-depth assessment of safety-based violations.
Finally, the FMCSA has proposed new rules that will require nearly all carriers, including us, to install and use electronic, on-board recorders in our tractors to electronically monitor truck miles and enforce hours-of-service. We have begun the process of installing electronic on-board recorders in all of our tractors. Such installation could cause an increase in driver turnover, adverse information in litigation, and cost increases.
The Transportation Security Administration ("TSA") has adopted regulations that require determination by the TSA that each driver who applies for or renews his or her license for carrying hazardous materials is not a security threat. This could reduce the pool of qualified drivers, which could require us to increase driver compensation, limit our fleet growth, or result in trucks sitting idle. These regulations also could complicate the matching of available equipment with hazardous material shipments, thereby increasing our response time on customer orders and our non-revenue miles. As a result, it is possible we could fail to meet the needs of our customers or could incur increased expenses to do so.
Cargo Liability, Insurance, and Legal Proceedings
We are a party to routine litigation incidental to our business, primarily involving claims for bodily injury or property damage incurred in the transportation of freight. We are responsible for the safe delivery of cargo. We self-insure personal injury and property damage claims for amounts up to $1.5 million per occurrence. Management believes our uninsured exposure is reasonable for the transportation industry, based on previous history.
We are also responsible for administrative expenses, for each occurrence involving personal injury or property damage. We are also self-insured for the full amount of all our physical damage losses, for workers' compensation losses up to $1.0 million per claim, and for cargo claims generally up to $100,000 per shipment. Subject to these self-insured retention amounts, our current workers' compensation policy provides coverage up to a maximum per claim amount of $10.0 million, and our current cargo loss and damage coverage provides coverage up to $1.0 million per shipment. We maintain separate insurance in Mexico consisting of bodily injury and property damage coverage with deductibles.
There are various claims, lawsuits, and pending actions against us and our subsidiaries that arise in the normal course of business. We believe many of these proceedings are covered in whole or in part by insurance and that none of these matters will have a materially adverse effect on our consolidated financial position or results of operations in any given period.
Seasonality
In the trucking industry, revenue generally decreases as customers reduce shipments during the winter holiday season and as inclement weather impedes operations. At the same time, operating expenses generally increase, with fuel efficiency declining because of engine idling and weather, creating more equipment repairs. For the reasons stated, third fiscal quarter net income historically has been lower than net income in each of the other three quarters of the year; excluding charges. Our equipment utilization typically improves substantially between May and October of each year because of seasonal increased shipping and better weather.
Internet Website
We maintain an Internet website where additional information concerning our business can be found. The address of that website is www.celadontrucking.com. All of our reports filed with or furnished to the Securities and Exchange Commission ("SEC") pursuant to Section 13(a) or 15(d) of the Exchange Act, including our annual report on Form 10-K, quarterly reports on Form 10-Q, or current reports on Form 8-K, and amendments thereto are made available free of charge on or through our Internet website as soon as reasonably practicable after such reports are electronically filed with or furnished to the SEC. Information contained on our website is not incorporated into this Annual Report on Form 10-K, and you should not consider information contained on our website to be part of this report.
Our future results may be affected by a number of factors over which we have little or no control. The following issues, uncertainties, and risks, among others, should be considered in evaluating our business and growth outlook.
Our business is subject to general economic and business factors that are largely out of our control, any of which could have a materially adverse effect on our operating results.
Our business is dependent on a number of factors that may have a materially adverse effect on our results of operations, many of which are beyond our control. Some of the most significant of these factors include excess tractor and trailer capacity in the trucking industry, declines in the resale value of used equipment, strikes or work stoppages, or work slow downs at our facilities or at customer, port, border crossing, or other shipping related facilities, increases in interest rates, fuel taxes, tolls, and license and registration fees, rising costs of healthcare, and fluctuations in foreign exchange rates.
We are also affected by recessionary economic cycles, changes in customers' inventory levels, and downturns in customers' business cycles, particularly in market segments and industries, such as retail and manufacturing, where we have a significant concentration of customers, and regions of the country, such as Texas and the Midwest, where we have a significant amount of business. Economic conditions may adversely affect our customers and their ability to pay for our services. Customers encountering adverse economic conditions represent a greater potential for loss and we may be required to increase our allowance for doubtful accounts. These economic conditions may adversely affect our ability to execute our strategic plan.
In addition, we cannot predict the effects on the economy or consumer confidence of actual or threatened armed conflicts or terrorist attacks, efforts to combat terrorism, military action against a foreign state or group located in a foreign state, or heightened security requirements. Enhanced security measures could impair our operating efficiency and productivity and result in higher operating costs.
Ongoing insurance and claims expenses could significantly affect our earnings.
We self-insure for a significant portion of our claims exposure, which could significantly increase the volatility of, and decrease the amount of, our earnings. Our future insurance and claims expenses may exceed historical levels, which could reduce our earnings. We currently accrue amounts for liabilities based on our assessment of claims that arise and our insurance coverage for the periods in which the claims arise and we evaluate and revise these accruals from time-to-time based on additional information. Because of our significant self-insured amounts, we have significant exposure to fluctuations in the number and severity of claims and the risk of being required to accrue or pay additional amounts if our estimates are revised or the claims ultimately prove to be more severe than originally assessed.
We maintain insurance above the amounts for which we self-insure with licensed insurance carriers. If any claim were to exceed our coverage, we would bear the excess, in addition to our other self-insured amounts. Our insurance and claims expense could increase when our current coverage expires or we could raise our self-insured retention. Although we believe our aggregate insurance limits are sufficient to cover reasonably expected claims, it is possible that one or more claims could exceed those limits. If insurance carriers raise our premiums, our insurance and claims expense could increase, or we could find it necessary to again raise our self-insured retention or decrease our aggregate coverage limits when our policies are renewed or replaced. Our operating results and financial condition could be materially and adversely affected if these expenses increase, if we experience a claim in excess of our coverage limits, or if we experience a claim for which we do not have coverage.
We operate in a highly competitive and fragmented industry and our business may suffer if we are unable to adequately address downward pricing pressures and other results of competition.
Numerous competitive factors could impair our ability to maintain or improve our current profitability. These factors include the following:
·
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We compete with many other truckload carriers of varying sizes and, to a lesser extent, with less-than-truckload carriers, railroads, and other transportation companies, many of which have more equipment and greater capital resources than we do.
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·
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Many of our competitors periodically reduce their freight rates to gain business, especially during times of reduced growth rates in the economy, which may limit our ability to maintain or increase freight rates or maintain significant growth in our business.
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·
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Many customers reduce the number of carriers they use by selecting so-called "core carriers" as approved service providers, and in some instances we may not be selected.
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·
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Many customers periodically accept bids from multiple carriers for their shipping needs, and this process may depress freight rates or result in the loss of some business to competitors.
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·
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The trend toward consolidation in the trucking industry may create other large carriers with greater financial resources and other competitive advantages relating to their size.
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·
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Advances in technology require increased investments to remain competitive, and our customers may not be willing to accept higher freight rates to cover the cost of these investments.
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·
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Competition from non-asset-based logistics and freight brokerage companies may adversely affect our customer relationships and freight rates.
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·
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Economies of scale that may be passed on to smaller carriers by procurement aggregation providers may improve their ability to compete with us.
|
We derive a significant portion of our revenue from our major customers, the loss of one or more of which could have a materially adverse effect on our business.
A significant portion of our revenue is generated from our major customers. For 2011, our top 10 customers, based on revenue, accounted for approximately 22.7% of our revenue. We do not expect this percentage to change materially for 2012. Generally, we do not have long term contractual relationships with our major customers, and we cannot assure you that our customers will continue to use our services or that they will continue at the same levels. A reduction in or termination of our services by one or more of our major customers could have a materially adverse effect on our business and operating results.
Our revenue growth may not continue at historical rates, which could adversely affect our stock price.
We experienced significant growth in revenue between 2002 and 2008. In light of the weakened economy and freight environment, our revenue for 2009 was less than the previous year, but in 2010 and 2011, our revenue has begun to rebound. We have taken strategic steps to offset portions of these revenue reductions by reducing costs and concentrating on increased fuel efficiency. We can provide no assurance that our operating margins will not be further adversely affected by these changes in economic conditions. Slower or less profitable growth could adversely affect our stock price.
Increases in driver compensation or difficulty in attracting and retaining drivers could affect our profitability and ability to grow.
The trucking industry experiences substantial difficulty in attracting and retaining qualified drivers, including independent contractors. In the past, because of the shortage of qualified drivers, the availability of alternative jobs, and intense competition for drivers from other trucking companies, we have faced difficulty increasing the number of our drivers and may continue to in the future. In addition, due to the recent economic conditions, including the cost of fuel, insurance, and tractors, the available pool of independent contractor drivers has been declining. Regulatory requirements, including the CSA 2010 initiative (discussed below), proposed hours-of-service revisions (discussed below), and any improvement in the economy could reduce the number of available drivers and force us to pay more to attract and retain drivers and independent contractors. Further, the compensation we offer our drivers and independent contractors is subject to market conditions, and we may find it necessary to increase driver and independent contractor compensation in future periods. In addition, we suffer from a high turnover rate of drivers; although our turnover rate is lower than the industry average. A high turnover rate requires us to continually recruit a substantial number of drivers in order to operate existing revenue equipment. If we are unable to continue to attract and retain a sufficient number of drivers and independent contractors, we could be required to adjust our compensation packages, let trucks sit idle, or operate with fewer trucks and face difficulty meeting shipper demands, all of which would adversely affect our growth and profitability.
We operate in a highly regulated industry and increased costs of compliance with, or liability for violation of, existing or future regulations could have a materially adverse effect on our business.
Our operations are regulated and licensed by various U.S., Canadian, and Mexican agencies. Our company drivers and independent contractors also must comply with the safety and fitness regulations of the United States DOT, including those relating to drug and alcohol testing and hours-of-service. Such matters as weight and equipment dimensions are also subject to U.S. and Canadian regulations. We also may become subject to new or more restrictive regulations relating to fuel emissions, drivers' hours-of-service, ergonomics, or other matters affecting safety or operating methods. Other agencies, such as the EPA and the Department of Homeland Security also regulate our equipment, operations, and drivers. Future laws and regulations may be more stringent and require changes in our operating practices, influence the demand for transportation services, or require us to incur significant additional costs. Higher costs incurred by us or by our suppliers who pass the costs onto us through higher prices could adversely affect our results of operations.
The DOT, through the FMCSA, imposes safety and fitness regulations on us and our drivers. On July 24, 2007, a federal appeals court vacated portions of the existing rules relating to drivers' hours of service. Two of the key portions that were vacated include the expansion of the driving day from 10 hours to 11 hours, and the "34 hour restart" requirement that drivers must have a break of at least 34 consecutive hours during each week. In November 2008, following the submission of additional data by FMCSA and several appeals and court rulings, FMSCA published its final rule, retaining the 11 hour driving day and the 34-hour restart. However, advocacy groups have continued to challenge the final rule and on October 26, 2009, the FMCSA agreed pursuant to a settlement agreement with certain advocacy groups that the Final Rule on drivers' hours-of-service would not take effect pending the publication of a new Notice of Proposed Rulemaking. Under the settlement agreement, the FMCSA will submit the draft Notice of Proposed Rulemaking to the Office of Management and Budget by July 2010 and the FMCSA will issue a Final Rule by 2012. On December 20, 2010, the FMCSA issued a Notice of Proposed Rulemaking that would place additional limits on the time drivers may operate a commercial motor vehicle. Among the proposed revisions is a provision that all driving time must be completed within a 14-hour period and that timeframe must include at least a one-hour break. The proposal also provides that the 34-hour restart may only be used once per week and must include two periods between midnight and six a.m. The rule also contemplates reducing the maximum driving time in a 24-hour period from 11 hours to 10 hours. The initial public comment period on the proposal closed on March 4, 2011. The FMCSA reopened the public comment period in May and extended it until June 8, 2011. A Final Rule is expected to be published in October 2011. The current hours-of-service rules, adopted in 2005, will remain in effect during the rulemaking proceedings. We are unable to predict what form the new hours-of-service rules may take, how a court may rule on challenges to such rules, and to what extent the FMCSA might attempt to materially revise the rules. On the whole, however, we believe that any modifications to the current rules may decrease productivity and cause some loss of efficiency, as drivers and shippers may need to be retrained, computer programming may require modifications, additional drivers may need to be employed or engaged, additional equipment may need to be acquired, and some shipping lanes may need to be reconfigured. We are also unable to predict the effect of any new rules that might be proposed if the issued rule is stricken by a court, but any such proposed rules could increase costs in our industry or decrease productivity.
The FMCSA's CSA 2010 initiative introduced a new enforcement and compliance model, which implements driver standards in addition to the carrier standards currently in place. Under the new regulations, the methodology for determining a carrier's DOT safety rating will be expanded to include the on-road safety performance of the carrier's drivers. The new regulations were implemented in the second half of 2010. As a result of these new regulations, including the expanded methodology for determining a carrier's DOT safety rating, there may be an adverse effect on our DOT safety rating. We currently have a satisfactory DOT rating, which is the highest available rating. A conditional or unsatisfactory DOT safety rating could adversely affect our business because some of our customer contracts may require a satisfactory DOT safety rating, and a conditional or unsatisfactory rating could negatively impact or restrict our operations.
The FMCSA’s CSA 2010 implemented a new enforcement and compliance model that ranks both fleets and individual drivers on certain safety-related standards. As discussed more fully below, CSA 2010 may reduce the number of eligible drivers and/or negatively impact our fleet ranking.
Additionally, the FMCSA has proposed new rules that will require nearly all carriers, including us, to install and use electronic, on-board recorders in our tractors to electronically monitor truck miles and enforce hours-of-service. We have begun the process of installing electronic on-board recorders in all of our tractors. Such installation could cause an increase in driver turnover, adverse information in litigation, and cost increases.
The EPA adopted emissions control regulations that require progressive reductions in exhaust emissions from diesel engines manufactured on or after October 1, 2002. More stringent reductions became effective on January 1, 2007 for engines manufactured on or after that date, and further reductions became effective on January 1, 2010. On May 21, 2010, President Obama signed an executive memorandum directing the National Highway Traffic Safety Administration and the EPA to develop new, stricter fuel efficiency standards for heavy trucks, beginning in 2014. On August 9, 2011, the EPA released standards that will require an approximately 20% improvement in fuel economy by 2018 and reduced carbon-dioxide emissions. Compliance with such regulations will increase the cost of new tractors, could impair equipment productivity and increase our operating expenses. These adverse effects, combined with the uncertainty as to the reliability of the new diesel engines and the residual values of these vehicles, could materially increase our costs or otherwise adversely affect our business or operations.
The TSA has adopted regulations that require the TSA to determine that each driver who renews his or her hazardous materials license or applies for a new hazardous materials license is not a security threat. This could reduce our available pool of hazardous materials drivers, and cause us to incur more costs related to driver compensation. We may experience difficulty in matching available drivers and equipment with hazardous materials shipments, which could cause delivery failures or increased non-revenue miles to re-position drivers for these loads.
Federal, state, and municipal authorities have implemented and continue to implement various security measures, including checkpoints and travel restrictions on large trucks. These regulations also could complicate the matching of available equipment with hazardous materials shipments, thereby increasing our response time on customer orders and our non-revenue miles. As a result, it is possible we may fail to meet the needs of our customers or may incur increased expenses to do so. These security measures could negatively impact our operating results.
Some states and municipalities have begun to restrict the locations and amount of time where diesel-powered tractors, such as ours, may idle, in order to reduce exhaust emissions. These restrictions could force us to alter our drivers' behavior, purchase on-board power units that do not require the engine to idle, or face a decrease in productivity.
CSA 2010 could adversely affect our profitability and operations, our ability to maintain or grow our fleet, and our customer relationships.
Under CSA 2010, drivers and fleets are evaluated and ranked based on certain safety-related standards. The methodology for determining a carrier’s DOT safety rating has been expanded to include the on-road safety performance of the carrier’s drivers. As a result, certain current and potential drivers may no longer be eligible to drive for us, our fleet could be ranked poorly as compared to our peers, and our safety rating could be adversely impacted. Failure to cure such deficiencies, or the occurrence of future deficiencies could cause high-quality drivers to seek other carriers or could cause our customers to direct their business away from us and to carriers with higher fleet rankings, either of which would adversely affect our results of operations. Additionally, competition for drivers with favorable safety ratings may increase and thus provide for increases in driver related compensation costs.
We have significant ongoing capital requirements that could affect our profitability if we are unable to generate sufficient cash from operations and obtain financing on favorable terms.
The truckload industry is capital intensive, and our policy of operating newer equipment requires us to expend significant amounts annually. If we elect to expand our fleet in future periods, our capital needs would increase. We expect to pay for projected capital expenditures with operating leases of revenue equipment, cash flows from operations, and borrowings under our line of credit. If we are unable to generate sufficient cash from operations and obtain financing on favorable terms in the future, we may have to limit our growth, enter into less favorable financing arrangements, or operate our revenue equipment for longer periods, any of which could have a materially adverse effect on our profitability.
We currently have significant lease residual value guarantees, substantially all of which are not covered by trade-in or fixed residual agreements with the equipment suppliers. We are exposed to decreases in the resale value of our used equipment and we have increased exposure to issues on the significant percentage of our fleet not covered by manufacturer commitments which could have a materially adverse effect on our results of operations.
Fluctuations in the price or availability of fuel, as well as hedging activities, surcharge collection, and the volume and terms of diesel fuel purchase commitments may increase our cost of operation, which could materially and adversely affect our profitability.
Fuel is one of our largest operating expenses. Diesel fuel prices fluctuate greatly due to economic, political, climatic, and other factors beyond our control. Fuel is also subject to regional pricing differences and often costs more on the West Coast, where we have significant operations. From time-to-time we have used fuel surcharges, hedging contracts, and volume purchase arrangements to attempt to limit the effect of price fluctuations. Although we seek to recover a portion of the short-term increases in fuel prices from customers through fuel surcharges, these arrangements do not fully offset the increase in the cost of diesel fuel and also may result in us not receiving the full benefit of any fuel price decreases. We have fuel hedging contracts in place covering a small percentage of our estimated fuel purchases. We may be forced to make cash payments under the hedging arrangements. Based on current market conditions we have decided to limit our hedging and purchase commitments, but we continue to evaluate such measures. The absence of meaningful fuel price protection through these measures, fluctuations in fuel prices, or a shortage of diesel fuel, could materially and adversely affect our results of operations.
We may not make acquisitions in the future, or if we do, we may not be successful in our acquisition strategy.
We have made twelve acquisitions since 1995. Accordingly, acquisitions have provided a substantial portion of our growth. There is no assurance that we will be successful in identifying, negotiating, or consummating any future acquisitions. If we fail to make any future acquisitions, our growth rate could be materially and adversely affected.
Any acquisitions we undertake could involve the dilutive issuance of equity securities and/or incurring indebtedness. In addition, acquisitions involve numerous risks, including difficulties in assimilating the acquired company's operations, the diversion of our management's attention from other business concerns, risks of entering into markets in which we have had no or only limited direct experience, and the potential loss of customers, key employees, and drivers of the acquired company, any of which could have a materially adverse effect on our business and operating results. If we make acquisitions in the future, we cannot assure you that we will be able to successfully integrate the acquired companies or assets into our business.
If we cannot effectively manage the challenges associated with doing business internationally, our revenues and profitability may suffer.
Our success is dependent upon the success of our operations in Mexico and Canada, and we are subject to risks of doing business internationally, including fluctuations in foreign currencies, changes in the economic strength of the countries in which we do business, difficulties in enforcing contractual obligations and intellectual property rights, burdens of complying with a wide variety of international and United States export and import laws, and social, political, and economic instability. Additional risks associated with our foreign operations, including restrictive trade policies and imposition of duties, taxes, or government royalties by foreign governments, are present but largely mitigated by the terms of NAFTA. The recent agreement permitting cross border movements for both United States and Mexican based carriers into the United States and Mexico presents additional risks in the form of increased competition and the potential for increased congestion on our cross border lanes. In addition, we could be subject to additional regulatory risks related to the use of Mexican drivers through our Mexico subsidiary for shipments into the United States.
Increased prices, reduced productivity, and restricted availability of new revenue equipment may adversely affect our earnings and cash flows.
We have experienced higher prices for new tractors over the past few years, partially as a result of government regulations applicable to newly manufactured tractors and diesel engines, in addition to higher commodity prices and better pricing power among equipment manufacturers. More restrictive EPA emissions standards that went into effect in 2007 and 2010 are more stringent than prior standards and will require vendors to introduce new engines. Our business could be harmed if we are unable to continue to obtain an adequate supply of new tractors and trailers for these or other reasons. As a result, we expect to continue to pay increased prices for equipment and incur additional expenses and related financing costs for the foreseeable future. Furthermore, the new engines are expected to reduce equipment efficiency and lower fuel mileage and, therefore, increase our operating expenses.
Our operations are subject to various environmental laws and regulations, the violation of which could result in substantial fines or penalties.
In addition to direct regulation by the DOT and other agencies, we are subject to various environmental laws and regulations dealing with the hauling and handling of hazardous materials, fuel storage tanks, air emissions from our vehicles and facilities, and discharge and retention of storm water. We operate in industrial areas, where truck terminals and other industrial activities are located, and where groundwater or other forms of environmental contamination have occurred. Our operations involve the risks of fuel spillage or seepage, environmental damage, and hazardous waste disposal, among others. We also maintain underground bulk fuel storage tanks and fueling islands at two of our facilities. A small percentage of our freight consists of low-grade hazardous substances, which subjects us to a wide array of regulations. If we are involved in a spill or other accident involving hazardous substances, if there are releases of hazardous substances we transport, or if we are found to be in violation of applicable laws or regulations, we could be subject to liabilities that could have a materially adverse effect on our business and operating results. If we should fail to comply with applicable environmental regulations, we could be subject to substantial fines or penalties and to civil and criminal liability.
Regulations limiting exhaust emissions became more restrictive in 2010. Engines meeting new emissions standards generally cost more and require additional maintenance compared with earlier models. Compliance with such regulations has increased the cost of our new tractors and could impair equipment productivity, lower fuel mileage, and increase our operating expenses. These adverse effects, combined with the uncertainty as to the reliability of the newly designed diesel engines and the residual values of these vehicles, could materially increase our costs or otherwise adversely affect our business or operations.
On May 21, 2010, President Obama signed an executive memorandum directing the National Highway Traffic Safety Administration and the EPA to develop new, stricter fuel efficiency standards for heavy trucks, beginning in 2014. On August 9, 2011, the EPA released standards that will require an approximately 20% improvement in fuel economy by 2018 and reduced carbon-dioxide emissions. Compliance with such regulations will increase the cost of new tractors, could impair equipment productivity, lower fuel mileage, and increase our operating expenses. These adverse effects, combined with the uncertainty as to the reliability of the new diesel engines and the residual values of these vehicles, could materially increase our costs or otherwise adversely affect our business or operations.
Concern over climate change, including the impact of global warming, has led to significant legislative and regulatory efforts to limit greenhouse gas emissions, and some form of federal climate change legislation is possible in the relatively near future. Regulations related to climate change that potentially impose restrictions, caps, taxes, or other controls on emissions of greenhouse gases could adversely affect our operations and financial results. More specifically, legislative or regulatory actions related to climate change could adversely impact us by increasing our fuel costs and reducing fuel efficiency and could result in the creation of substantial additional capital expenditures and operating costs in the form of taxes, emissions allowances, or required equipment upgrades. Until the timing, scope, and extent of any future regulation becomes known, we cannot predict its effect on our cost structure or our operating results; however, any future regulation could impair our operating efficiency and productivity and result in higher operating costs.
If we are unable to retain our key employees, our business, financial condition, and results of operations could be adversely affected.
We are highly dependent upon the services of certain key employees, including, but not limited to: Stephen Russell, our Chairman of the Board and Chief Executive Officer; Paul Will, our Vice Chairman of the Board, President, and Chief Operating Officer; and Jonathan Russell, President of Asset Light Business Units. Although we have an employment agreement with Mr. Stephen Russell and a separation agreement with Mr. Will and Mr. Jonathan Russell, the loss of their services could negatively impact our operations and future profitability.
Seasonality and the impact of weather affect our operations and profitability.
Our tractor productivity decreases during the winter season because inclement weather impedes operations, and some shippers reduce their shipments after the winter holiday season. Revenue can also be affected by bad weather and holidays, since revenue is directly related to available working days of shippers. At the same time, operating expenses increase, with fuel efficiency declining because of engine idling and harsh weather creating higher accident frequency, increased claims, and more equipment repairs. We could also suffer short-term impacts from weather-related events such as hurricanes, blizzards, ice storms, and floods that could harm our results or make our results more volatile. Weather and other seasonal events could adversely affect our operating results.
Our business is subject to certain credit factors affecting the trucking industry that are largely out of our control and that could have a materially adverse effect on our operating results.
There continues to be some concern over the instability of the credit markets and the economy. If the economy and credit markets weaken further, our business, financial results, and results of operations could be materially and adversely affected, especially if consumer confidence declines and domestic spending decreases. Although we think it is unlikely given our current cash position, we may need to incur additional indebtedness or issue debt or equity securities in the future to fund working capital requirements, make investments, or for general corporate purposes. If the credit and equity markets erode further, our ability to do so may be constrained. Although some stability has returned to the equity markets, there still exists enough economic uncertainty that could cause the market price of our stock to be volatile.
Our primary credit agreement contains certain covenants, restrictions, and requirements, and we may be unable to comply with the covenants, restrictions, and requirements. A default could result in the acceleration of all or part of our outstanding indebtedness, which could have an adverse effect on our financial condition, liquidity, results of operations, and the price of our common stock.
We have financing arrangements that contain certain restrictions and covenants relating to, among other things, dividends, liens, acquisitions and dispositions outside of the ordinary course of business, affiliate transactions, and financial covenants. If we fail to comply with any of our financing arrangement covenants, restrictions, and requirements, we will be in default under the relevant agreement, which could cause acceleration. Deterioration in the credit markets may make it difficult or expensive to refinance accelerated debt or we may have to issue equity securities, which would dilute stock ownership. Even if new financing is made available to us, the current lack of available credit and consequent more stringent borrowing terms may mean that credit is not available to us on acceptable terms. A default under our financing arrangements could cause a materially adverse effect on our liquidity, financial condition, and results of operations. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations – Primary Credit Agreement" for additional information on our primary credit agreement.
Restrictions on travel to and from any of the three countries we operate in due to health epidemics could significantly disrupt our operations and may materially and adversely affect our ability to provide services to our customers and results.
A significant amount of our business involves freight moving from the U.S. to Mexico or Canada. Our business could be materially and adversely affected by restrictions on travel to any of our three countries of operations due to a health epidemic or outbreak. Any restrictions on travel due to an epidemic or outbreak may significantly disrupt our operations and decrease our ability to provide services to our customers. Additionally, any such epidemic or outbreak may have a materially adverse effect on demand for freight, which could severely disrupt our business operations and adversely affect our financial condition and results of operations.
We depend on the proper functioning and availability of our information systems and a system failure could cause a significant disruption to our business and have a materially adverse effect on our results of operation.
We depend on the proper functioning and availability of our information systems, including financial reporting and operating systems, in operating our business. Our operating system is critical to understanding customer demands, accepting and planning loads, dispatching equipment and drivers, and billing and collecting for our services. Our financial reporting system is critical to producing accurate and timely financial statements and analyzing business information to help us manage effectively. If any of our critical information systems fail or become otherwise unavailable, whether as a result of the upgrade project or otherwise, we would have to perform the functions manually, which could temporarily impact our ability to manage our fleet efficiently, to respond to customers' requests effectively, to maintain billing and other records reliably, and to bill for services and prepare financial statements accurately or in a timely manner. Our business interruption insurance may be inadequate to protect us in the event of an unforeseeable and extreme catastrophe. Any system failure, delays, or complications, security breach, or other system failure could interrupt or delay our operations, damage our reputation, cause us to lose customers, or impact our ability to manage our operations and report our financial performance, any of which could have a materially adverse effect on our business.
None.
We operate a network of 17 terminal locations, including facilities in Laredo and El Paso, Texas, which are the two largest inland freight gateway cities between the U.S. and Mexico. Our operating terminals currently are located in the following cities:
United States
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|
Mexico
|
|
Canada
|
Baltimore, MD (Leased)
|
|
Guadalajara (Leased)
|
|
Kitchener, ON (Leased)
|
Dallas, TX (Owned)
|
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Mexico City (Leased)
|
|
|
El Paso, TX (Owned)
|
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Monterrey (Leased)
|
|
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Greensboro, NC (Leased)
|
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Nuevo Laredo (Owned)
|
|
|
Hampton, VA (Leased)
|
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Puebla (Leased)
|
|
|
Indianapolis, IN (Leased)
|
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Queretaro (Leased)
|
|
|
Laredo, TX (Owned and Leased)
|
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San Luis Potisi (Leased)
|
|
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Little Rock, AR (Leased)
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|
|
|
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Richmond, VA (Leased)
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|
|
|
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Our executive and administrative offices occupy four buildings located on 40 acres of property in Indianapolis, Indiana. The Indianapolis, Laredo, and Kitchener terminals include administrative functions, lounge facilities for drivers, parking, fuel, maintenance, and truck washing facilities. Both of our segments use the Indianapolis facility and we have adequate space for the functions performed at our headquarters. With the exception of the warehouses listed below which are utilized exclusively by our asset light business segment, all of our other owned and leased facilities are utilized primarily by our asset-based segment. We have warehouses for our asset light business units in the following cities:
United States
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Battleboro, NC (Leased)
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Franklin, IN (Leased)
|
Janesville, WI (Leased)
|
Jonesville, IN (Owned)
|
Seymour, IN (Leased)
|
See discussion under "Cargo Liability, Insurance, and Legal Proceedings" in Item 1, and Note 8 to the consolidated financial statements, "Commitments and Contingencies."
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted for a vote of security holders, through the solicitation of proxies or otherwise, during the quarter ended June 30, 2011.
PART II
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Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
|
Price Range of Common Stock
Our common stock was listed on the NASDAQ Global Select Market under the symbol "CLDN." On November 10, 2009, our common stock began trading on the New York Stock Exchange under the symbol “CGI.” The following table sets forth, for the periods indicated, the high and low sales price per share of our common stock as reported by NASDAQ and NYSE.
Fiscal 2010
|
|
High
|
|
|
Low
|
|
Quarter ended September 30, 2009
|
|
$ |
12.49 |
|
|
$ |
7.65 |
|
Quarter ended December 31, 2009
|
|
$ |
12.20 |
|
|
$ |
8.60 |
|
Quarter ended March 31, 2010
|
|
$ |
14.38 |
|
|
$ |
9.50 |
|
Quarter ended June 30, 2010
|
|
$ |
15.99 |
|
|
$ |
12.54 |
|
|
|
|
|
|
|
|
|
|
Fiscal 2011
|
|
|
|
|
|
|
|
|
Quarter ended September 30, 2010
|
|
$ |
16.52 |
|
|
$ |
11.11 |
|
Quarter ended December 31, 2010
|
|
$ |
15.95 |
|
|
$ |
12.90 |
|
Quarter ended March 31, 2011
|
|
$ |
16.24 |
|
|
$ |
14.13 |
|
Quarter ended June 30, 2011
|
|
$ |
16.76 |
|
|
$ |
12.48 |
|
On August 11, 2011, there were 349 holders of our common stock based upon the number of record holders on that date. However, we estimate our actual number of stockholders is much higher because a substantial number of our shares are held of record by brokers or dealers for their customers in street names.
Dividend Policy
We did not declare any cash dividends for the two most recently completed fiscal years. We declared a cash dividend of $0.02 per share of common stock on August 17, 2011. The dividend is payable to our shareholders of record as of September 26, 2011, and is expected to be paid on October 7, 2011. Our ability to pay cash dividends is currently limited by restrictions contained in our revolving credit facility. Future payments of cash dividends will depend on our financial condition, results of operations, capital commitments, restrictions under our then-existing debt agreements, and other factors our Board of Directors may consider relevant.
Item 6. Selected Financial Data
The statements of operations data and balance sheet data presented below have been derived from our consolidated financial statements and related notes thereto. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and related notes thereto.
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(in thousands, except per share data and operating data)
|
|
Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freight revenue(1)
|
|
$ |
455,447 |
|
|
$ |
446,383 |
|
|
$ |
408,156 |
|
|
$ |
457,482 |
|
|
$ |
433,012 |
|
Fuel surcharge revenue
|
|
|
101,247 |
|
|
|
77,109 |
|
|
|
82,182 |
|
|
|
108,413 |
|
|
|
69,680 |
|
Total revenue
|
|
|
556,694 |
|
|
|
523,492 |
|
|
|
490,338 |
|
|
|
565,895 |
|
|
|
502,692 |
|
Operating expense
|
|
|
533,212 |
|
|
|
510,151 |
|
|
|
479,448 |
|
|
|
547,097 |
|
|
|
462,592 |
|
Operating income
|
|
|
23,482 |
|
|
|
13,341 |
|
|
|
10,890 |
|
|
|
18,798 |
|
|
|
40,100 |
|
Interest expense, net
|
|
|
1,702 |
|
|
|
2,343 |
|
|
|
3,554 |
|
|
|
4,922 |
|
|
|
3,511 |
|
Other expense (income)
|
|
|
( 4,785 |
) |
|
|
67 |
|
|
|
(227 |
) |
|
|
193 |
|
|
|
109 |
|
Income before income taxes
|
|
|
26,565 |
|
|
|
10,931 |
|
|
|
7,563 |
|
|
|
13,683 |
|
|
|
36,480 |
|
Provision for income taxes
|
|
|
11,833 |
|
|
|
6,251 |
|
|
|
5,007 |
|
|
|
7,147 |
|
|
|
14,228 |
|
Net income
|
|
$ |
14,732 |
|
|
$ |
4,680 |
|
|
$ |
2,556 |
|
|
$ |
6,536 |
|
|
$ |
22,252 |
|
Diluted earnings per share
|
|
$ |
0.65 |
|
|
$ |
0.21 |
|
|
$ |
0.12 |
|
|
$ |
0.29 |
|
|
$ |
0.94 |
|
Weighted average diluted shares outstanding
|
|
|
22,632 |
|
|
|
22,362 |
|
|
|
22,134 |
|
|
|
22,617 |
|
|
|
23,698 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data (at end of period):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net property and equipment
|
|
$ |
132,630 |
|
|
$ |
151,317 |
|
|
$ |
167,142 |
|
|
$ |
206,199 |
|
|
$ |
207,499 |
|
Total assets
|
|
|
272,182 |
|
|
|
277,100 |
|
|
|
270,999 |
|
|
|
329,335 |
|
|
|
306,913 |
|
Long-term debt, revolving lines of credit, and capital lease obligations, including current maturities
|
|
|
2,094 |
|
|
|
35,591 |
|
|
|
48,983 |
|
|
|
102,506 |
|
|
|
94,642 |
|
Stockholders' equity
|
|
|
172,701 |
|
|
|
152,173 |
|
|
|
143,667 |
|
|
|
143,852 |
|
|
|
147,320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For period(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average revenue per loaded mile(3)
|
|
$ |
1.482 |
|
|
$ |
1.407 |
|
|
$ |
1.464 |
|
|
$ |
1.503 |
|
|
$ |
1.534 |
|
Average revenue per total mile(3)
|
|
$ |
1.326 |
|
|
$ |
1.267 |
|
|
$ |
1.307 |
|
|
$ |
1.348 |
|
|
$ |
1.380 |
|
Average revenue per tractor per week(3)
|
|
$ |
2,868 |
|
|
$ |
2,843 |
|
|
$ |
2,597 |
|
|
$ |
2,956 |
|
|
$ |
3,027 |
|
Average length of haul (in miles)
|
|
|
913 |
|
|
|
889 |
|
|
|
907 |
|
|
|
935 |
|
|
|
960 |
|
At end of period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average seated line-haul tractors(4)
|
|
|
2,662 |
|
|
|
2,702 |
|
|
|
2,741 |
|
|
|
2,477 |
|
|
|
2,318 |
|
Average age of company tractors (in years)
|
|
|
1.9 |
|
|
|
1.5 |
|
|
|
1.5 |
|
|
|
1.8 |
|
|
|
1.6 |
|
Total trailers(4)
|
|
|
8,206 |
|
|
|
9,852 |
|
|
|
10,015 |
|
|
|
9,052 |
|
|
|
7,843 |
|
Average age of company trailers (in years)
|
|
|
5.5 |
|
|
|
5.7 |
|
|
|
5.0 |
|
|
|
4.1 |
|
|
|
3.8 |
|
__________________________
(1)
|
Freight revenue is total revenue less fuel surcharges.
|
(2)
|
Unless otherwise indicated, operating data and statistics presented in this table and elsewhere in this report are for our truckload revenue and operations and exclude revenue and operations of TruckersB2B, our Mexican subsidiary, Servicio de Transportation Jaguar, S.A. de C.V. ("Jaguar"), and our less-than-truckload, local trucking or "shuttle", brokerage, and logistics.
|
(3)
|
Excludes fuel surcharges.
|
(4)
|
Total fleet, including equipment operated by Jaguar.
|
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Recent Results and Fiscal Year-End Financial Condition
For the fiscal year ended June 30, 2011, total revenue increased 6.3%, to $556.7 million from $523.5 million during fiscal 2010. Freight revenue, which excludes revenue from fuel surcharges, increased 2.0%, to $455.4 million in fiscal 2011 from $446.4 million in 2010. We generated net income of $14.7 million, or $0.65 per diluted share, for fiscal 2011 compared with net income of $4.7 million, or $0.21 per diluted share, for fiscal 2010.
We believe that an improving economy and decreased industry-wide trucking capacity in fiscal 2011 compared to fiscal 2010 were the major factors that contributed to our increase in net income. Increased revenue per loaded mile due to the rebounding economy caused an increase in average revenue per tractor per week. As a result, average freight revenue per loaded mile excluding fuel surcharge for 2011 increased 5.3% to $1.482 compared with $1.407 per mile in 2010. Average freight revenue per tractor per week, our main measure of asset productivity, increased to $2,868 in 2011 compared with $2,846 for 2010. This increase was due to an increase in rates. Our operating margin, excluding the effect of fuel surcharge (which is calculated as the percentage of operating expenses net of fuel surcharge over trucking revenue), improved to 94.9% for 2011 compared with 97.1% for 2010.
At June 30, 2011, our total balance sheet debt was $2.1 million and our total stockholders' equity was $172.7 million, for a total debt to capitalization ratio of 1.2%. At June 30, 2011, we had $49.6 million of available borrowing capacity under our revolving credit facility and $25.7 million of cash on hand.
Revenue
We generate substantially all of our revenue by transporting freight for our customers. Generally, we are paid by the mile or by the load for our services. We also derive revenue from fuel surcharges, loading and unloading activities, equipment detention, other trucking related services, and from warehousing services. The main factors that affect our revenue are the revenue per mile we receive from our customers, the percentage of miles for which we are compensated, the number of tractors operating, and the number of miles we generate with our equipment. These factors relate to, among other things, the U.S. economy, inventory levels, the level of truck capacity in our markets, specific customer demand, the percentage of team-driven tractors in our fleet, driver availability, and our average length of haul.
We eliminate fuel surcharges from revenue, when calculating operating ratios and some of our operating data. We believe that eliminating the impact of this sometimes volatile source of revenue affords a more consistent basis for comparing our results of operations from period to period.
Expenses and Profitability
The main factors that impact our profitability on the expense side are the variable costs of transporting freight for our customers. These costs include fuel expense, driver-related expenses, such as wages, benefits, training, and recruitment, and independent contractor costs, which we record as purchased transportation. Expenses that have both fixed and variable components include maintenance and tire expense and our total cost of insurance and claims. These expenses generally vary with the miles we travel, but also have a controllable component based on safety, fleet age, efficiency, and other factors. Our main fixed cost is the acquisition and financing of long-term assets, primarily revenue equipment. We have other mostly fixed costs, such as our non-driver personnel and facilities expenses. In discussing our expenses as a percentage of revenue, we sometimes discuss changes as a percentage of revenue before fuel surcharges, in addition to absolute dollar changes, because we believe the high variable cost nature of our business makes a comparison of changes in expenses as a percentage of revenue more meaningful at times than absolute dollar changes.
The trucking industry has experienced significant increases in expenses over the past several years, in particular those relating to equipment costs, driver compensation, insurance, and fuel. As the United States economy slowed down, many trucking companies were forced to lower freight rates to keep their trucks moving. As the economy has started to improve, we are increasing rates as contracts expire or as the spot quote market allows. Over the long term, we expect a limited pool of qualified drivers and intense competition to recruit and retain those drivers to constrain overall industry capacity. Assuming a return to economic growth in U.S. manufacturing, retail, and other high volume shipping industries, we expect to be able to raise freight rates in line with or faster than expenses.
Revenue Equipment
We operate 2,800 tractors and 8,206 trailers. Of our tractors at June 30, 2011, 971 were owned, 1,406 were acquired under operating leases, and 423 were provided by independent contractors, who own and drive their own tractors. Of our trailers at June 30, 2011, 3,442 were owned, 4,572 were acquired under operating leases and 192 were acquired under capital leases.
We use a combination of cash and operating leases to acquire our new tractors. Most of our new trailers are acquired with operating leases. These leases generally run for a period of three years for tractors and seven years for trailers. When we finance revenue equipment acquisitions with operating leases, rather than borrowings or capital leases, the interest component of our financing activities is recorded as an "above-the-line" operating expense on our statements of operations.
Independent contractors (owner operators) provide a tractor and a driver and are responsible for all operating expenses in exchange for a fixed payment per mile. We do not have the capital outlay of purchasing the tractors. The payments to independent contractors are recorded in purchased transportation and the payments for equipment under operating leases are recorded in revenue equipment rentals. Expenses associated with independent contractors, such as interest, depreciation, driver compensation, fuel, and other expenses are not incurred by the Company. Because obtaining equipment from independent contractors and through operating leases effectively shifts these expenses from interest to "above the line" operating expenses, we evaluate our efficiency using our operating ratio as well as income before income taxes.
Outlook
Looking forward, our profitability goal is to return our operating ratio to the low 90s in the near term and subsequently achieve an operating ratio of less than 90%. We expect this to require improvements in rate per mile and miles per tractor and decreased non-revenue miles. Because a large percentage of our costs are variable, changes in revenue per mile affect our profitability to a greater extent than changes in miles per tractor. For fiscal 2012, the key factors that we expect to have the greatest effect on our profitability are our freight revenue per tractor per week (which will be affected by the general freight environment, including the balance of freight demand and industry-wide trucking capacity), our compensation of drivers, our cost of revenue equipment (particularly in light of the 2010 EPA engine requirements), our fuel costs, and our insurance and claims. To overcome cost increases and improve our margins, we will need to achieve increases in freight revenue per tractor. Operationally, we will seek improvements in safety, driver recruiting, and retention. Our success in these areas primarily will affect revenue, driver-related expenses, and insurance and claims expense. Given the slowly recovering economy, we believe achieving our near term profitability goal will be difficult to achieve.
Results of Operations
The following tables set forth the percentage relationship of revenue and expense items to operating and freight revenue for the periods indicated.
|
|
Fiscal year ended June 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
Operating revenue
|
|
|
100 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages, and employee benefits
|
|
|
27.0 |
|
|
|
29.8 |
|
|
|
31.7 |
|
Fuel
|
|
|
24.9 |
|
|
|
23.9 |
|
|
|
25.7 |
|
Purchased transportation
|
|
|
19.2 |
|
|
|
15.8 |
|
|
|
11.4 |
|
Revenue equipment rentals
|
|
|
4.5 |
|
|
|
6.8 |
|
|
|
5.9 |
|
Operations and maintenance
|
|
|
7.4 |
|
|
|
6.9 |
|
|
|
7.2 |
|
Insurance and claims
|
|
|
3.3 |
|
|
|
3.3 |
|
|
|
2.8 |
|
Depreciation and amortization
|
|
|
5.2 |
|
|
|
5.7 |
|
|
|
7.2 |
|
Cost of products and services sold
|
|
|
0.6 |
|
|
|
1.1 |
|
|
|
1.2 |
|
Communication and utilities
|
|
|
0.7 |
|
|
|
0.9 |
|
|
|
1.0 |
|
Operating taxes and licenses
|
|
|
1.8 |
|
|
|
1.9 |
|
|
|
2.0 |
|
General and other operating
|
|
|
1.3 |
|
|
|
1.4 |
|
|
|
1.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
95.9 |
|
|
|
97.5 |
|
|
|
97.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
4.1 |
|
|
|
2.5 |
|
|
|
2.2 |
|
Other expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
0.3 |
|
|
|
0.4 |
|
|
|
0.7 |
|
Other expense (income), net
|
|
|
(0.9 |
) |
|
|
--- |
|
|
|
--- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
4.7 |
|
|
|
2.1 |
|
|
|
1.5 |
|
Provision for income taxes
|
|
|
2.1 |
|
|
|
1.2 |
|
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
2.6 |
% |
|
|
0.9 |
% |
|
|
0.5 |
% |
Freight revenue(1)
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages, and employee benefits
|
|
|
33.0 |
|
|
|
35.0 |
|
|
|
38.1 |
|
Fuel
|
|
|
8.2 |
|
|
|
10.8 |
|
|
|
10.7 |
|
Purchased transportation
|
|
|
23.4 |
|
|
|
18.5 |
|
|
|
13.7 |
|
Revenue equipment rentals
|
|
|
5.5 |
|
|
|
8.0 |
|
|
|
7.1 |
|
Operations and maintenance
|
|
|
9.0 |
|
|
|
8.1 |
|
|
|
8.7 |
|
Insurance and claims
|
|
|
4.0 |
|
|
|
3.8 |
|
|
|
3.4 |
|
Depreciation and amortization
|
|
|
6.4 |
|
|
|
6.7 |
|
|
|
8.6 |
|
Cost of products and services sold
|
|
|
0.8 |
|
|
|
1.3 |
|
|
|
1.4 |
|
Communication and utilities
|
|
|
0.9 |
|
|
|
1.1 |
|
|
|
1.2 |
|
Operating taxes and licenses
|
|
|
2.2 |
|
|
|
2.2 |
|
|
|
2.4 |
|
General and other operating
|
|
|
1.5 |
|
|
|
1.6 |
|
|
|
2.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
94.9 |
|
|
|
97.1 |
|
|
|
97.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
5.1 |
|
|
|
2.9 |
|
|
|
2.7 |
|
Other expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
0.4 |
|
|
|
0.5 |
|
|
|
0.9 |
|
Other expense (income), net
|
|
|
(1.1 |
) |
|
|
--- |
|
|
|
--- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
5.8 |
|
|
|
2.4 |
|
|
|
1.8 |
|
Provision for income taxes
|
|
|
2.6 |
|
|
|
1.4 |
|
|
|
1.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
3.2 |
% |
|
|
1.0 |
% |
|
|
0.6 |
% |
____________________
(1)
|
Freight revenue is total operating revenue less fuel surcharges. In this table, fuel surcharges are eliminated from revenue and subtracted from fuel expense. The amounts were $101.2 million, $77.1 million, and $82.2 million 2011, 2010, and 2009, respectively.
|
Fiscal year ended June 30, 2011, compared with fiscal year ended June 30, 2010
Total revenue increased by $33.2 million, or 6.3%, to $556.7 million for fiscal 2011, from $523.5 million for fiscal 2010. Freight revenue increased by $9.0 million, or 2.0%, to $455.4 million for fiscal 2011, from $446.4 million for fiscal 2010. This increase was primarily attributable to an increase in freight rates, due to the slowly recovering economy and reduced capacity. Average freight revenue per total mile, excluding fuel surcharge, increased to $1.326 in fiscal 2011 from $1.267 for fiscal 2010, or 4.7%. These increases were partially offset by a decrease in billed miles to 248.5 million in fiscal 2011, compared to 263.6 million in fiscal 2010. Average freight revenue per seated tractor per week, excluding fuel surcharge, which is our primary measure of asset productivity, increased to $2,868 in fiscal 2011, from $2,846 for fiscal 2010, as a result of an increase in freight rates. Our freight rates improved throughout the fiscal 2011 year. We expect our freight rates to maintain an upward trend through the end of the year as industry capacity continues to tighten.
Fuel surcharge revenue increased to $101.2 million from $77.1 million for fiscal 2011 and 2010, respectively.
Revenue for our asset-light segment increased to $40.7 million in fiscal 2011 compared to $37.2 million in fiscal 2010, or 9.4%. Warehousing, LTL, and brokerage revenues were up in fiscal 2011. TuckersB2B decreased in fiscal 2011 as the subsidiary was sold into a joint venture in February 2011. Therefore, TruckersB2B is recorded as minority interest in Other (income) expense only for March 2011 through June 2011, which does not reflect revenue or operating expenses in the consolidated Statement of Operations.
Salaries, wages, and employee benefits were $150.2 million, or 33.0% of freight revenue, for fiscal 2011, compared to $156.0 million, or 35.0% of freight revenue, for fiscal 2010. This decrease in salaries, wages, and benefits is largely due to decreased driver payroll related to decreased company driver miles, offset by increases in recruiting expense. As the market for qualified drivers tightens, salaries, wages, and benefits may increase due to increases in driver pay. However, the timing of any increase is uncertain.
Fuel expenses, net of fuel surcharge revenue of $101.2 million and $77.1 million for fiscal 2011 and fiscal 2010, respectively, decreased to $37.3 million, or 8.2% of freight revenue, for fiscal 2011, compared to $48.1 million, or 10.8% of freight revenue, for fiscal 2010. These decreases were attributable to a decrease in gallons purchased due to decreased miles driven, offset by a 22.1% increase in average fuel prices to $3.43 per gallon for fiscal 2011, from $2.81 per gallon for fiscal 2010. We expect that our continued efforts to reduce idling, operate more fuel-efficient tractors, and implement locking in fuel hedges when appropriate will continue to have a positive impact on our miles per gallon; however, we expect this positive impact to be partially offset by increasing fuel costs per gallon.
Purchased transportation increased to $106.7 million, or 23.4% of freight revenue, for fiscal 2011, from $82.6 million, or 18.5% of freight revenue, for fiscal 2010. The majority of these increases are related to increased miles and increased fuel surcharge paid to our independent contractor fleet as part of the independent contractor fixed payment. The number of independent contractors increased to 423 at June 30, 2011, compared with 411 at June 30, 2010. Independent contractors are drivers who cover all of their operating expenses (fuel, driver salaries, maintenance, and equipment costs) for a fixed payment per mile. In addition, our brokerage and intermodal expenses are increasing year over year as we continue to develop and increase those offerings. Going forward, depending on outside factors such as the freight environment confronting our industry and the strength of the U.S. economy, in general, we may decide to increase the number of independent contractors we engage. Accordingly, to the extent we increase the number of independent contractors in our fleet and continue to increase our purchased transportation for brokerage and intermodal transportation, we expect purchased transportation to increase as well.
Revenue equipment rentals decreased to $25.2 million, or 5.5% of freight revenue, in fiscal 2011, compared to $35.7 million, or 8.0% of freight revenue, for fiscal 2010. These decreases are related to a decreased number of leased tractors and an increase in lease rentals from our lease purchase program.
Operations and maintenance consist of direct operating expense, maintenance, physical damage, and tire expense. This category increased to $41.1 million, or 9.0% of freight revenue, for fiscal 2011, from $36.3 million, or 8.1% of freight revenue, for fiscal 2010. The dollar increase in fiscal 2011 is related to an increase in costs associated with tractor maintenance from the new CSA 2010 implementation and as tractors under warranty have declined, and tire expense increased. We expect our operations and maintenance expense to be similar to the current level going forward, subject to implementation of CSA 2010 that may impact these expenses.
Insurance and claims expense increased to $18.2 million, or 4.0% of freight revenue, for fiscal 2011, compared to $17.1 million, or 3.8% of freight revenue for fiscal 2010. Insurance consists of premiums for liability, physical damage, cargo damage, and workers' compensation insurance. These increases are attributable to an increase in liability claims and cargo claims expense, due to an increase in the number and/or severity of claims reported including loss development. 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 review and revise our insurance program to maintain a balance between premium expense and the risk retention we are willing to assume. We expect our insurance and claims expense to revert to more historical dollar averages going forward.
Depreciation and amortization, consisting primarily of depreciation of revenue equipment, decreased to $29.1 million, or 6.4% of freight revenue, in fiscal 2011 from $29.7 million, or 6.7% of freight revenue, for fiscal 2009. These decreases are related to an increase in the gains recognized on the sale of equipment in fiscal 2011 compared to losses recognized on sales in fiscal 2010. These decreases are offset by an increase in the owned tractor depreciation. Revenue equipment held under operating leases is not reflected on our balance sheet and the expenses related to such equipment are reflected on our statements of operations in revenue equipment rentals, rather than in depreciation and amortization and interest expense, as is the case for revenue equipment that is financed with borrowings or capital leases.
All of our other expenses are relatively minor in amount, and there were no significant changes in these expenses. Accordingly, we have not provided a detailed discussion of such expenses.
Our pretax margin, which we believe is a useful measure of our operating performance because it is neutral with regard to the method of revenue equipment financing that a company uses, increased 340 basis points to 5.8% of freight revenue for fiscal 2011, from 2.4% for fiscal 2010.
Income from the sale of a majority interest in a subsidiary was $4.1 million in the third quarter of fiscal 2011. In February 2011, we entered into a joint venture by selling 65% of TruckersB2B to an unrelated third party.
In addition to other factors described above, Canadian exchange rate fluctuations principally impact salaries, wages, and benefits and purchased transportation and, therefore, impact our pretax margin and results of operations. The higher Canadian dollar, which increased to an average .999 relationship with the U.S. dollar for fiscal 2011, from an average .947 relationship with the U.S. dollar for fiscal 2010, negatively impacted earnings per share by approximately $.04.
Income taxes increased to $11.8 million for fiscal 2011, from $6.3 million for fiscal 2010, resulting from a higher pre-tax income. Due to the non-deductible effects of our driver per diem pay structure, our tax rate will fluctuate from the 35% standard federal rate, in future periods as net income fluctuates. Going forward, we expect our effective tax rate will be around 39% to 40%.
As a result of the factors described above, net income increased to $14.7 million for fiscal 2011, from $4.7 million for fiscal 2010.
Fiscal year ended June 30, 2010, compared with fiscal year ended June 30, 2009
Total revenue increased by $33.2 million, or 6.8%, to $523.5 million for fiscal 2010, from $490.3 million for fiscal 2009. Freight revenue excludes $77.1 million and $82.2 million of fuel surcharge revenue for fiscal 2010 and 2009, respectively.
Freight revenue increased by $38.2 million, or 9.4%, to $446.4 million for fiscal 2010, from $408.2 million for fiscal 2009. This increase was primarily attributable to an increase in freight demand, due to the slowly recovering economy. This increase was partially attributable to an increase in billed miles to 263.6 million in fiscal 2010, compared to 233.7 million in fiscal 2009, and offset slightly by a 3.1% decrease in average freight revenue per total mile, excluding fuel surcharge, to $1.267 from $1.307. Average freight revenue per tractor per week, excluding
fuel surcharge, which is our primary measure of asset productivity, increased 3.4% to $2,441 in fiscal 2010, from $2,360 for fiscal 2009, as a result of increasing general freight demand, an increase in miles, partially offset by lower rates. Our freight rates began to improve at the end of the third quarter and continued to improve throughout the fourth quarter. We expect our freight rates to maintain an upward trend through the end of the year as industry capacity continues to tighten.
Revenue for TruckersB2B remained unchanged at $8.5 million in fiscal 2009 and fiscal 2010. Revenue was flat as TruckersB2B continues to operate in a challenging environment as smaller fleets have been forced out of business by the economy and difficult operating conditions and many of those remaining have cut back on purchases. To the extent small and mid size carriers continue to be affected adversely by the weakened economy, lagging freight demand, limited financing availability, and licensing, insurance, and other costs, we anticipate the revenue for TruckersB2B to be negatively impacted as well.
Salaries, wages, and employee benefits were $156.0 million, or 35.0% of freight revenue, for fiscal 2010, compared to $155.6 million, or 38.1% of freight revenue, for fiscal 2009. This slight dollar increase in salaries, wages, and benefits is largely due to increased driver payroll related to increased miles and increases in stock appreciation rights expenses as the stock price has increased. These were offset by a reduction in administrative payroll, due to the efforts in the latter part of fiscal 2009 to eliminate or consolidate several functions, therefore reducing payroll expense. Also offsetting this increase was a reduction in driver pay per mile and a reduction in our driver recruiting costs in fiscal 2010 as compared to fiscal 2009. However, the increased freight revenue resulted in a decrease in salaries, wages, and employee benefits as a percentage of freight revenue.
Fuel expenses, net of fuel surcharge revenue of $77.1 million and $82.2 million for fiscal 2010 and fiscal 2009, respectively, increased to $48.1 million, or 10.8% of freight revenue, for fiscal 2010, compared to $43.7 million, or 10.7% of freight revenue, for fiscal 2009. These increases were attributable to an increase in gallons purchased due to increased miles driven, offset by a 4.9% decrease in average fuel prices to $2.51 per gallon for fiscal 2010, from $2.64 per gallon for fiscal 2009. We expect that our continued efforts to reduce idling and operate more fuel efficient tractors will continue to have a positive impact on our miles per gallon; however, we expect this will be partially offset by lower fuel economy on EPA-mandated new engines.
Purchased transportation increased to $82.6 million, or 18.5% of freight revenue, for fiscal 2010, from $55.8 million, or 13.7% of freight revenue, for fiscal 2009. The majority of these increases are related to increased miles by our independent contractor fleet. The number of independent contractors increased 46.8% to 411 at June 30, 2010, compared with 280 at June 30, 2009. Independent contractors are drivers who cover all their operating expenses (fuel, driver salaries, maintenance, and equipment costs) for a fixed payment per mile. In addition, our brokerage and intermodal expenses are increasing year over year as we continue to develop and increase those offerings. Going forward, depending on outside factors such as the freight environment confronting our industry and the strength of the U.S. economy, in general, we may decide to increase the number of independent contractors we engage. Accordingly, to the extent we increase the number of independent contractors in our fleet and continue to increase our purchased transportation for brokerage and intermodal transportation, we expect purchased transportation to increase as well.
Revenue equipment rentals increased to $35.7 million, or 8.0% of freight revenue, in fiscal 2010, compared to $29.1 million, or 7.1% of freight revenue, for fiscal 2009. The majority of these increases are related to an increased number of leased tractors which is partially offset by increased lease rentals from our lease purchase program.
Operations and maintenance consist of direct operating expense, maintenance, physical damage, and tire expense. This category increased to $36.3 million, or 8.1% of freight revenue, for fiscal 2010, from $35.5 million, or 8.7% of freight revenue, for fiscal 2009. The dollar increase in fiscal 2010 is primarily related to an increase in costs associated with tire and physical damage expenses. However, these factors were offset by a decrease in tractor maintenance and miscellaneous direct operating expenses.
Insurance and claims expense increased to $17.1 million, or 3.8% of freight revenue, for fiscal 2010, compared to $13.8 million, or 3.4% of freight revenue for fiscal 2009. Insurance consists of premiums for liability, physical damage, cargo damage, and workers' compensation insurance. This increase is attributable to an increase in workers' compensation claims, liability claims, and cargo claims expense, due to an increase in the number and/or severity of claims reported including loss development. 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 review and revise our insurance program to maintain a balance between premium expense and the risk retention we are willing to assume. We expect our insurance and claims expense to revert to more historical averages going forward.
Depreciation and amortization, consisting primarily of depreciation of revenue equipment, decreased to $29.7 million, or 6.7% of freight revenue, in fiscal 2010 from $35.2 million, or 8.6% of freight revenue, for fiscal 2009. These decreases are related to a decrease in the number of owned tractors. These decreases are partially offset by a slight increase in losses on sales of equipment in fiscal 2010 compared to fiscal 2009. To the extent the used equipment market remains weak going forward, we expect to face difficulty selling equipment in quantities and at prices that are satisfactory to us. Revenue equipment held under operating leases is not reflected on our balance sheet and the expenses related to such equipment are reflected on our statements of operations in revenue equipment rentals, rather than in depreciation and amortization and interest expense, as is the case for revenue equipment that is financed with borrowings or capital leases.
All of our other expenses are relatively minor in amount, and there were no significant changes in these expenses. Accordingly, we have not provided a detailed discussion of such expenses.
Our pretax margin, which we believe is a useful measure of our operating performance because it is neutral with regard to the method of revenue equipment financing that a company uses, increased 60 basis points to 2.4% of freight revenue for fiscal 2010, from 1.8% for fiscal 2009.
In addition to other factors described above, Canadian exchange rate fluctuations principally impact salaries, wages, and benefits and purchased transportation and, therefore, impact our pretax margin and results of operations. The higher Canadian dollar, which increased to an average .947 relationship with the U.S. dollar for fiscal 2010, from an average .863 relationship with the U.S. dollar for fiscal 2009, negatively impacted earnings per share by approximately $.06.
Income taxes increased to $6.3 million for fiscal 2010, from $5.0 million for fiscal 2009, resulting from a higher pre-tax income. Due to the non-deductible effects of our driver per diem pay structure, our tax rate will fluctuate from the 35% standard federal rate, in future periods as net income fluctuates. Going forward, we expect our effective tax rate will be around 39% to 40%. Income tax expense for fiscal 2009 included an adjustment of approximately $300,000 related to per diem calculations for prior years.
As a result of the factors described above, net income increased to $4.7 million for fiscal 2010, from $2.6 million for fiscal 2009.
Liquidity and Capital Resources
Trucking is a capital-intensive business. We require cash to fund our operating expenses (other than depreciation and amortization), to make capital expenditures and acquisitions, and to repay debt, including principal and interest payments. Other than ordinary operating expenses, we anticipate that capital expenditures for the acquisition of revenue equipment will constitute our primary cash requirement over the next twelve months. We frequently consider potential acquisitions, and if we were to consummate an acquisition, our cash requirements would increase and we may have to modify our expected financing sources for the purchase of tractors. Subject to any required lender approval, we may make acquisitions, although we do not have any specific acquisition plans at this time. Our principal sources of liquidity are cash generated from operations, bank borrowings, capital and operating lease financing of revenue equipment, and proceeds from the sale of used revenue equipment. At June 30, 2011, our total balance sheet debt, including capital lease obligations and current maturities, was $2.1 million, compared to $35.6 million at June 30, 2010.
As of June 30, 2011, we had on order 225 tractors for delivery through fiscal 2012. We also had on order 700 trailers for delivery through fiscal 2012. These revenue equipment orders represent a capital commitment of approximately $40.8 million, before considering the proceeds of equipment dispositions. In fiscal 2012, we expect to purchase our new tractors with both cash and off-balance sheet operating leases and our new trailers with off-balance sheet operating leases.
We believe we will be able to fund our operating expenses, as well as our current commitments for the acquisition of revenue equipment, over the next twelve months with a combination of cash generated from operations, borrowings available under secured equipment financing or our primary credit facility, equipment sales, and lease financing arrangements. We will continue to have significant capital requirements over the long term, and the availability of the needed capital will depend upon our financial condition and operating results and numerous other factors over which we have limited or no control, including prevailing market conditions and the market price of our common stock. However, based on our operating results, anticipated future cash flows, current availability under our credit facility, and sources of equipment lease financing that we expect will be available to us, we do not expect to experience significant liquidity constraints in the foreseeable future.
Cash Flows
We generated net cash from operating activities of $41.4 million in fiscal 2011, $44.6 million in fiscal 2010, and $52.7 million in fiscal 2009. The decrease in net cash provided by operations in fiscal 2011 from fiscal 2010 is due primarily to an increase in net income and trade receivables, prepaid expenses and other current assets, and tires in service, and a decrease in income taxes payable.
Net cash used in investing activities was $4.3 million for fiscal 2011, $13.2 million for fiscal 2010, and $0.1 million for fiscal 2009. The decrease in cash used for investing activities from 2010 to 2011 was primarily due to increased proceeds from sale of equipment. Capital expenditures primarily for tractors and trailers (including lease buyouts and new equipment purchases) totaled $57.0 million in fiscal 2011, $51.9 million in fiscal 2010, and $28.6 million in fiscal 2009. We generated proceeds from the sale of property and equipment of $47.7 million in fiscal 2011, $38.7 million in fiscal 2010, and $52.7 million in fiscal 2009.
Net cash used in financing activities was $33.0 million in fiscal 2011, $13.4 million in fiscal 2010, and $53.5 million in fiscal 2009. The increase in cash used for financing activities was primarily due to the increased payments on our capital leases. Financing activity represents bank borrowings (new borrowings, net of repayments) and payment of the principal component of capital lease obligations.
Off-Balance Sheet Arrangements
Operating leases have been an important source of financing for our revenue equipment. Our operating leases include some under which we do not guarantee the value of the asset at the end of the lease term ("walk-away leases") and some under which we do guarantee the value of the asset at the end of the lease term ("residual value"). Therefore, we are subject to the risk that equipment value may decline in which case we would suffer a loss upon disposition and be required to make cash payments because of the residual value guarantees. We were obligated for residual value guarantees related to operating leases of $82.2 million at June 30, 2011 compared to $84.6 million at June 30, 2010. A small portion of these amounts is covered by repurchase and/or trade agreements we have with the equipment manufacturer. We believe that any residual payment obligations that are not covered by the manufacturer will be satisfied, in the aggregate, by the value of the related equipment at the end of the lease. To the extent the expected value at the lease termination date is lower than the residual value guarantee, we would accrue for the difference over the remaining lease term. We anticipate that going forward we will use a combination of operating leases and cash generated from operations to finance tractor purchases and operating leases to finance trailer purchases.
The use of operating leases also affects our statement of cash flows. For assets subject to these operating leases, we do not record depreciation as an increase to net cash provided by operations, nor do we record any entry with respect to investing activities or financing activities.
Primary Credit Agreement
On December 7, 2010, the Company entered into a new $50 million five-year revolving credit facility agented by Bank of America, N.A. The facility refinanced the Company's existing credit facility and provides for ongoing working capital needs and general corporate purposes. Bank of America, N.A. served as the lead arranger in the facility and Wells Fargo Bank, N.A. also participated in the new facility. At June 30, 2011, we were authorized to borrow up to $50.0 million under this revolving line of credit, which expires December 7, 2015. The applicable interest rate under this agreement is based on either a base rate equal to the greater of the Bank of America, N.A.'s prime rate or LIBOR plus an applicable margin between 0.75% and 1.125% that is adjusted quarterly based on the Company's lease adjusted total debt to EBITDAR ratio. At June 30, 2011, we had no outstanding borrowings related to our credit facility and $0.4 million utilized for letters of credit. We are obligated to comply with certain financial covenants under our credit agreement and we were in compliance with these covenants at June 30, 2011.
Contractual Obligations and Commitments
As of June 30, 2011, our bank loans, capitalized leases, operating leases, other debts, and future commitments have stated maturities or minimum annual payments as follows:
|
|
Cash Requirements
as of June 30, 2011
(in thousands)
Payments Due by Period
|
|
Contractual Obligations
|
|
Total
|
|
|
Less than
One Year
|
|
|
One to
Three Years
|
|
|
Three
to Five
Years
|
|
|
More Than
Five
Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
$ |
71,476 |
|
|
$ |
38,654 |
|
|
$ |
21,318 |
|
|
$ |
7,080 |
|
|
$ |
4,424 |
|
Lease residual value guarantees
|
|
|
82,191 |
|
|
|
33,177 |
|
|
|
31,330 |
|
|
|
8,596 |
|
|
|
9,088 |
|
Capital lease obligations(1)
|
|
|
2,094 |
|
|
|
354 |
|
|
|
1,740 |
|
|
|
--- |
|
|
|
--- |
|
Long-term debt (1)
|
|
|
137 |
|
|
|
92 |
|
|
|
45 |
|
|
|
--- |
|
|
|
--- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
155,898 |
|
|
|
72,277 |
|
|
|
54,433 |
|
|
|
15,676 |
|
|
|
13,512 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future purchase of revenue equipment
|
|
|
40,793 |
|
|
|
3,424 |
|
|
|
9,131 |
|
|
|
17,788 |
|
|
|
10,450 |
|
Employment and consulting agreements(2)
|
|
|
700 |
|
|
|
700 |
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
Standby letters of credit
|
|
|
438 |
|
|
|
438 |
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual and cash obligations
|
|
$ |
197,829 |
|
|
$ |
76,839 |
|
|
$ |
63,564 |
|
|
$ |
33,464 |
|
|
$ |
23,962 |
|
____________________________
(1)
|
Includes interest.
|
(2)
|
The amounts reflected in the table do not include amounts that could become payable to our Chief Executive Officer and President and Chief Operating Officer, under certain circumstances if their employment by the Company is terminated.
|
Inflation, New Emissions Control Regulations, and Fuel Costs
Most of our operating expenses are inflation-sensitive, with inflation generally producing increased costs of operations. During the past three years, the most significant effects of inflation have been on revenue equipment prices and fuel prices. New emissions control regulations and increases in commodity prices, wages of manufacturing workers, and other items have resulted in higher tractor prices. We attempt to limit the effects of inflation through increases in freight rates, certain cost control efforts, and limiting the effects of fuel prices through fuel surcharges.
The engines used in our tractors are subject to emissions control regulations, which have substantially increased our operating expenses since additional and more stringent regulation began in 2002. As of June 30, 2011, our tractor fleet has engines compliant with stricter regulations regarding emissions that became effective in 2007. Compliance with such regulations is expected to increase the cost of new tractors and could impair equipment productivity, lower fuel mileage, and increase our operating expenses. These adverse effects combined with the uncertainty as to the reliability of the vehicles equipped with the newly designed diesel engines and the residual values that will be realized from the disposition of these vehicles could increase our costs or otherwise adversely affect our business or operations as the regulations impact our business through new tractor purchases.
Fluctuations in the price or availability of fuel, as well as hedging activities, surcharge collection, the percentage of freight we obtain through brokers, and the volume and terms of diesel fuel purchase commitments may increase our costs of operation, which could materially and adversely affect our profitability. We impose fuel surcharges on substantially all accounts. These arrangements may not fully protect us from fuel price increases and also may result in us not receiving the full benefit of any fuel price decreases. As of June 30, 2011, we had up to 14% of our estimated fuel purchases hedged through September 2011. With the use of these hedges and any additional future hedges, we may be forced to make cash payments under the hedging arrangements. Based on current market conditions, we have decided to limit our hedging and purchase commitments, but we continue to evaluate such measures. The absence of meaningful fuel price protection through these measures could adversely affect our profitability and results of operation.
Critical Accounting Policies
The preparation of our financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and assumptions that impact the amounts reported in our consolidated financial statements and accompanying notes. Therefore, the reported amounts of assets, liabilities, revenues, expenses, and associated disclosures of contingent assets and liabilities are affected by these estimates and assumptions. We evaluate these estimates and assumptions on an ongoing basis, utilizing historical experience, consultation with experts, and other methods considered reasonable in the particular circumstances. Nevertheless, actual results may differ significantly from our estimates and assumptions, and it is possible that materially different amounts would be reported using differing estimates or assumptions. We consider our critical accounting policies to be those that require us to make more significant judgments and estimates when we prepare our financial statements. Our critical accounting policies include the following:
Depreciation of Property and Equipment. We depreciate our property and equipment using the straight-line method over the estimated useful life of the asset. We generally use estimated useful lives of 2 to 7 years for new tractors and trailers, and estimated salvage values for new tractors and trailers generally range from 35% to 50% of the capitalized cost. Gains and losses on the disposal of revenue equipment are included in depreciation expense in our statements of operations.
We review the reasonableness of our estimates regarding useful lives and salvage values of our revenue equipment and other long-lived assets based upon, among other things, our experience with similar assets, conditions in the used equipment market, and prevailing industry practice. Changes in our useful life or salvage value estimates or fluctuations in market values that are not reflected in our estimates, could have a material effect on our results of operations.
Revenue equipment and other long-lived assets are tested for impairment whenever an event occurs that indicates an impairment may exist. Expected future cash flows are used to analyze whether an impairment has occurred. If the sum of expected undiscounted cash flows is less than the carrying value of the long-lived asset, then an impairment loss is recognized. We measure the impairment loss by comparing the fair value of the asset to its carrying value. Fair value is determined based on a discounted cash flow analysis or the appraised or estimated market value of the asset, as appropriate.
Operating leases. We have financed a substantial percentage of our tractors and trailers with operating leases. These leases generally contain residual value guarantees, which provide that the value of equipment returned to the lessor at the end of the lease term will be no lower than a negotiated amount. To the extent that the value of the equipment is below the negotiated amount, we are liable to the lessor for the shortage at the expiration of the lease. For all equipment, we are required to recognize additional rental expense to the extent we believe the fair market value at the lease termination will be less than our obligation to the lessor.
In accordance with Accounting Standards Codification (ASC) Topic 840, Accounting for Leases, property and equipment held under operating leases, and liabilities related thereto, are not reflected on our balance sheet. All expenses related to revenue equipment operating leases are reflected on our statements of operations in the line item entitled "Revenue equipment rentals." As such, financing revenue equipment with operating leases instead of bank borrowings or capital leases effectively moves the interest component of the financing arrangement into operating expenses on our statements of operations.
Claims Reserves and Estimates. The primary claims arising for us consist of cargo liability, personal injury, property damage, collision and comprehensive, workers' compensation, and employee medical expenses. We maintain self-insurance levels for these various areas of risk and have established reserves to cover these self-insured liabilities. We also maintain insurance to cover liabilities in excess of these self-insurance amounts. Claims reserves represent accruals for the estimated uninsured portion of reported claims, including adverse development of reported claims, as well as estimates of incurred but not reported claims. Reported claims and related loss reserves are estimated by third party administrators, and we refer to these estimates in establishing our reserves. Claims incurred but not reported are estimated based on our historical experience and industry trends, which are continually monitored, and accruals are adjusted when warranted by changes in facts and circumstances. In establishing our reserves we must take into account and estimate various factors, including, but not limited to, assumptions concerning the nature and severity of the claim, the effect of the jurisdiction on any award or settlement, the length of time until ultimate resolution, inflation rates in health care, and in general interest rates, legal expenses, and other factors. Our actual experience may be different than our estimates, sometimes significantly. Changes in assumptions as well as changes in actual experience could cause these estimates to change in the near term. Insurance and claims expense will vary from period to period based on the severity and frequency of claims incurred in a given period.
Derivative Instruments and Hedging Activity. We use derivative financial instruments to manage the economic impact of fluctuations in currency exchange rates and fuel prices. Derivative financial instruments related to currency exchange rates and heating oil (fuel prices) include forward purchase and sale agreements which generally have terms no greater than 12 months.
To account for our derivative financial instruments, we follow the provisions of ASC Topic 815, "Derivatives and Hedging." Derivative financial instruments are recognized on the Consolidated Balance Sheets as either assets or liabilities and are measured at fair value. Changes in the fair value of derivatives are recorded each period in earnings or accumulated other comprehensive income, depending on whether a derivative is designated and effective as part of a hedge transaction, and if it is, the type of hedge transaction. Gains and losses on derivative instruments reported in accumulated other comprehensive income are subsequently included in earnings in the periods in which earnings are affected by the hedged item. These activities have not had a material impact on our financial position or results of operations for the periods presented herein.
Accounting for Income Taxes. Deferred income taxes represent a substantial liability on our consolidated balance sheet. Deferred income taxes are determined in accordance with ASC Topic 740-10 Income Taxes. Deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carry-forwards. We evaluate our tax assets and liabilities on a periodic basis and adjust these balances as appropriate. We believe that we have adequately provided for our future tax consequences based upon current facts and circumstances and current tax law. However, should our tax positions be challenged and not prevail, different outcomes could result and have a significant impact on the amounts reported in our consolidated financial statements.
The carrying value of our deferred tax assets (tax benefits expected to be realized in the future) assumes that we will be able to generate, based on certain estimates and assumptions, sufficient future taxable income in certain tax jurisdictions to utilize these deferred tax benefits. If these estimates and related assumptions change in the future, we may be required to reduce the value of the deferred tax assets resulting in additional income tax expense. We believe that it is more likely than not that the deferred tax assets, net of valuation allowance, will be realized, based on forecasted income. However, there can be no assurance that we will meet our forecasts of future income. We evaluate the deferred tax assets on a periodic basis and assess the need for additional valuation allowances.
Federal income taxes are provided on that portion of the income of foreign subsidiaries that is expected to be remitted to the United States.
Recent Accounting Pronouncements
On December 17, 2010, the FASB issued ASU 2010-28, which (1) does not prescribe a specific method of calculating the carrying value of a reporting unit in the performance of step 1 of the goodwill impairment test and (2) requires entities with a zero or negative carrying value to assess, considering qualitative factors such as those listed in ASC 350-20-35-30 (these factors are not all-inclusive), whether it is more likely than not that a goodwill impairment exists (confirming this aspect of the consensus-for-exposure). If an entity concludes that it is more likely than not that a goodwill impairment exists, the entity must perform step 2 of the goodwill impairment test. This ASU is effective for impairment tests performed during entities’ fiscal years (and interim periods within those years) that begin after December 15, 2010. Early application is not permitted. It is not expected that adoption of ASU 2010-28 will have a material effect on the consolidated financial statements.
On July 21, 2010, the FASB issued ASU 2010-20, which amends ASC 310 by requiring more robust and disaggregated disclosures about the credit quality of an entity’s financing receivables and its allowance for credit losses. The purpose of the additional disclosures is to improve financial statement users’ understanding of (1) the nature of an entity’s credit risk associated with its financing receivables and (2) the entity’s assessment of that risk in estimating its allowance for credit losses as well as changes in the allowance and the reasons for those changes. The new and amended disclosures that relate to information as of the end of a reporting period will be effective for the first time (including interim periods) on or after December 15, 2010. Most of the new and amended disclosures in the ASU became effective at year-end 2010. However, the disclosures that include information for activity that occurs during a reporting period will be effective for the first time (including interim periods) beginning after December 15, 2010. Those disclosures include (1) the activity in the allowance for credit losses for each period and (2) disclosures about modifications of financing receivables. These disclosures will be effective for the first quarter of 2011 and are not expected to have a material impact on the consolidated financial statements.
In December 2009, FASB issued ASU 2009-17. This Accounting Standards Update amends FASB Accounting Standards Codification (ASC810-10) of FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R) issued June 2009. The amendments in this Accounting Standards Update replace the quantitative-based risks and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which reporting entity has the power to direct the activities of a variable interest entity that most significantly impact the entity's economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. An approach that is expected to be primarily qualitative will be more effective for identifying which reporting entity has a controlling financial interest in a variable interest entity. The amendments in this Update also require additional disclosures about a reporting entity's involvement in variable interest entities, which will enhance the information provided to readers of financial statements. The Company adopted ASC810-10 on July 1, 2010, which had no material impact on its consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We experience various market risks, including changes in interest rates, foreign currency exchange rates, and fuel prices. We do not enter into derivatives or other financial instruments for trading or speculative purposes, nor when there are no underlying related exposures.
Interest Rate Risk. We are exposed to interest rate risk principally from our primary credit facility. The credit facility carries a maximum variable interest rate based on either a base rate equal to the greater of the Bank of America, N.A.'s prime rate or LIBOR plus an applicable margin between 0.75% and 1.125% that is adjusted quarterly based on the Company's lease adjusted total debt to EBITDAR ratio. At June 30, 2011, we did not have any variable rate term loan borrowings outstanding under the credit facility. A hypothetical 10% increase in the bank's base rate and LIBOR would be immaterial to our net income.
Foreign Currency Exchange Rate Risk. We are subject to foreign currency exchange rate risk, specifically in connection with our Canadian operations. While virtually all of the expenses associated with our Canadian operations, such as independent contractor costs, company driver compensation, and administrative costs, are paid in Canadian dollars, a significant portion of our revenue generated from those operations is billed in U.S. dollars because many of our customers are U.S. shippers transporting goods to or from Canada. As a result, increases in the Canadian dollar exchange rate adversely affect the profitability of our Canadian operations. Assuming revenue and expenses for our Canadian operations identical to the year ended June 30, 2011 (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 $159,000. We currently have contracts for $0.5 million Canadian dollars through August 2011.
While virtually all of the expenses associated with our Mexican operations, such as independent contractor costs, company driver compensation, and administrative costs, are paid in Mexican pesos, 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 Mexico. As a result, a decrease in the value of the Mexican peso could adversely affect our consolidated results of operations. Assuming revenue and expenses for our Mexican operations identical to the year ended June 30, 2011 (both in terms of amount and currency mix), we estimate that a $0.01 decrease in the Mexican peso exchange rate would reduce our annual net income by approximately $157,000. We currently have contracts for 4.0 million Mexican pesos per month through May 2012, representing approximately 18% of our Mexican currency exposure. Derivative gains/(losses), initially reported as a component of other comprehensive income, are reclassified to earnings in the period when the forecasted transaction affects earnings.
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 may enter into derivative financial instruments to reduce our exposure to fuel price fluctuations. As of June 30, 2011, we had up to 14% of our estimated fuel purchases hedged through September 2011. Based on our expected fuel consumption for 2012, a 10% change in the related price of heating oil or diesel per gallon would not have a material financial impact, assuming no further changes to our fuel hedging program or our fuel surcharge recovery.
Item 8. Financial Statements and Supplementary Data
The following statements are filed with this report:
Report of Independent Registered Public Accounting Firm - KPMG LLP;
Consolidated Statements of Operations;
Consolidated Balance Sheets;
Consolidated Statements of Cash Flows;
Consolidated Statements of Stockholders' Equity; and
Notes to Consolidated Financial Statements.
The Board of Directors and Stockholders of Celadon Group, Inc.:
We have audited the accompanying consolidated balance sheets of Celadon Group, Inc. and subsidiaries (the "Company") as of June 30, 2011 and 2010, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended June 30, 2011. In connection with our audits of the consolidated financial statements, we have also audited the financial statement Schedule II. We also have audited the Company's internal control over financial reporting as of June 30, 2011, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these consolidated financial statements and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying management's report on internal control. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule and an opinion on the Company's internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Celadon Group, Inc. and subsidiaries as of June 30, 2011 and 2010, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 2011, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement Schedule II, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Also, in our opinion, Celadon Group, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of June 30, 2011, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
/s/ KPMG LLP
Indianapolis, Indiana
September 2, 2011
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended June 30, 2011, 2010, and 2009
(Dollars and shares in thousands, except per share amounts)
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Freight revenue
|
|
$ |
455,447 |
|
|
$ |
446,383 |
|
|
$ |
408,156 |
|
Fuel surcharges
|
|
|
101,247 |
|
|
|
77,109 |
|
|
|
82,182 |
|
Total revenue
|
|
|
556,694 |
|
|
|
523,492 |
|
|
|
490,338 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages, and employee benefits
|
|
|
150,156 |
|
|
|
156,025 |
|
|
|
155,554 |
|
Fuel
|
|
|
138,470 |
|
|
|
125,174 |
|
|
|
125,922 |
|
Purchased transportation
|
|
|
106,676 |
|
|
|
82,609 |
|
|
|
55,789 |
|
Revenue equipment rentals
|
|
|
25,156 |
|
|
|
35,722 |
|
|
|
29,138 |
|
Operations and maintenance
|
|
|
41,108 |
|
|
|
36,327 |
|
|
|
35,483 |
|
Insurance and claims
|
|
|
18,239 |
|
|
|
17,053 |
|
|
|
13,828 |
|
Depreciation and amortization
|
|
|
29,131 |
|
|
|
29,689 |
|
|
|
35,221 |
|
Cost of products and services sold
|
|
|
3,537 |
|
|
|
5,947 |
|
|
|
5,818 |
|
Communications and utilities
|
|
|
4,157 |
|
|
|
4,828 |
|
|
|
4,929 |
|
Operating taxes and licenses
|
|
|
9,854 |
|
|
|
9,788 |
|
|
|
9,700 |
|
General and other operating
|
|
|
6,728 |
|
|
|
6,989 |
|
|
|
8,066 |
|
Total operating expenses
|
|
|
533,212 |
|
|
|
510,151 |
|
|
|
479,448 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
23,482 |
|
|
|
13,341 |
|
|
|
10,890 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (income) expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
1,765 |
|
|
|
2,416 |
|
|
|
3,589 |
|
Interest income
|
|
|
(63 |
) |
|
|
(73 |
) |
|
|
(35 |
) |
Income from sale of majority interest in subsidiary
|
|
|
(4,142 |
) |
|
|
--- |
|
|
|
--- |
|
Other (income) expense, net
|
|
|
(643 |
) |
|
|
67 |
|
|
|
(227 |
) |
Income before income taxes
|
|
|
26,565 |
|
|
|
10,931 |
|
|
|
7,563 |
|
Provision for income taxes
|
|
|
11,833 |
|
|
|
6,251 |
|
|
|
5,007 |
|
Net income
|
|
$ |
14,732 |
|
|
$ |
4,680 |
|
|
$ |
2,556 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$ |
0.65 |
|
|
$ |
0.21 |
|
|
$ |
0.12 |
|
Basic earnings per share
|
|
$ |
0.67 |
|
|
$ |
0.21 |
|
|
$ |
0.12 |
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
22,632 |
|
|
|
22,362 |
|
|
|
22,134 |
|
Basic
|
|
|
22,099 |
|
|
|
21,888 |
|
|
|
21,727 |
|
See accompanying notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
June 30, 2011 and 2010
(Dollars in thousands)
ASSETS
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
25,673 |
|
|
$ |
21,261 |
|
Trade receivables, net of allowance for doubtful accounts of $1,045 and $1,379 in 2011 and 2010, respectively
|
|
|
64,723 |
|
|
|
63,468 |
|
Prepaid expenses and other current assets
|
|
|
14,403 |
|
|
|
12,310 |
|
Tires in service
|
|
|
6,594 |
|
|
|
5,010 |
|
Deferred income taxes
|
|
|
3,940 |
|
|
|
3,593 |
|
Total current assets
|
|
|
115,333 |
|
|
|
105,642 |
|
Property and equipment
|
|
|
213,222 |
|
|
|
226,169 |
|
Less accumulated depreciation and amortization
|
|
|
80,592 |
|
|
|
74,852 |
|
Net property and equipment
|
|
|
132,630 |
|
|
|
151,317 |
|
Tires in service
|
|
|
2,914 |
|
|
|
1,843 |
|
Goodwill
|
|
|
16,702 |
|
|
|
19,137 |
|
Investment in joint venture
|
|
|
2,902 |
|
|
|
--- |
|
Other assets
|
|
|
1,701 |
|
|
|
1,578 |
|
Total assets
|
|
$ |
272,182 |
|
|
$ |
279,517 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
10,475 |
|
|
$ |
10,150 |
|
Accrued salaries and benefits
|
|
|
13,192 |
|
|
|
11,472 |
|
Accrued insurance and claims
|
|
|
13,360 |
|
|
|
10,967 |
|
Accrued fuel expense
|
|
|
11,113 |
|
|
|
11,263 |
|
Other accrued expenses
|
|
|
15,729 |
|
|
|
12,209 |
|
Income taxes payable
|
|
|
1,778 |
|
|
|
2,950 |
|
Current maturities of long-term debt
|
|
|
--- |
|
|
|
336 |
|
Current maturities of capital lease obligations
|
|
|
354 |
|
|
|
15,350 |
|
Total current liabilities
|
|
|
66,001 |
|
|
|
74,697 |
|
Long-term debt, net of current maturities
|
|
|
--- |
|
|
|
44 |
|
Capital lease obligations, net of current maturities
|
|
|
1,740 |
|
|
|
19,861 |
|
Deferred income taxes
|
|
|
31,740 |
|
|
|
32,742 |
|
Stockholders' equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.033 par value, authorized 40,000,000 shares; issued and outstanding 23,886,601 and 23,871,663 shares at June 30, 2011 and 2010, respectively
|
|
|
788 |
|
|
|
788 |
|
Treasury stock at cost; 1,364,364 and 1,604,642 shares at June 30, 2011 and 2010, respectively
|
|
|
(9,408 |
) |
|
|
(11,064 |
) |
Additional paid-in capital
|
|
|
99,906 |
|
|
|
98,640 |
|
Retained earnings
|
|
|
82,367 |
|
|
|
67,635 |
|
Accumulated other comprehensive loss
|
|
|
(952 |
) |
|
|
(3,826 |
) |
Total stockholders' equity
|
|
|
172,701 |
|
|
|
152,173 |
|
Total liabilities and stockholders' equity
|
|
$ |
272,182 |
|
|
$ |
279,517 |
|
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30, 2011, 2010, and 2009
(Dollars in thousands)
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
14,732 |
|
|
$ |
4,680 |
|
|
$ |
2,556 |
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
30,455 |
|
|
|
29,180 |
|
|
|
35,242 |
|
(Gain) / loss on sale of equipment
|
|
|
(1,149 |
) |
|
|
590 |
|
|
|
38 |
|
Deferred income taxes
|
|
|
(1,382 |
) |
|
|
(1,047 |
) |
|
|
2,923 |
|
Provision for doubtful accounts
|
|
|
196 |
|
|
|
263 |
|
|
|
94 |
|
Stock based compensation expense
|
|
|
2,382 |
|
|
|
3,364 |
|
|
|
2,293 |
|
Gain from sale of majority interest in subsidiary
|
|
|
(4,142 |
) |
|
|
--- |
|
|
|
--- |
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade receivables
|
|
|
(3,141 |
) |
|
|
(8,249 |
) |
|
|
13,323 |
|
Income tax payable
|
|
|
(1,077 |
) |
|
|
2,096 |
|
|
|
5,351 |
|
Tires in service
|
|
|
(2,634 |
) |
|
|
(920 |
) |
|
|
(702 |
) |
Prepaid expenses and other current assets
|
|
|
(1,006 |
) |
|
|
5,828 |
|
|
|
(1,767 |
) |
Other assets
|
|
|
(440 |
) |
|
|
502 |
|
|
|
(380 |
) |
Accounts payable and accrued expenses
|
|
|
8,583 |
|
|
|
10,750 |
|
|
|
(6,238 |
) |
Net cash provided by operating activities
|
|
|
41,377 |
|
|
|
47,037 |
|
|
|
52,733 |
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(57,018 |
) |
|
|
(51,901 |
) |
|
|
(28,636 |
) |
Proceeds on sale of property and equipment
|
|
|
47,689 |
|
|
|
38,731 |
|
|
|
52,657 |
|
Proceeds from sale of majority interest in subsidiary
|
|
|
5,000 |
|
|
|
--- |
|
|
|
--- |
|
Purchase of businesses
|
|
|
--- |
|
|
|
--- |
|
|
|
(24,100 |
) |
Net cash used in investing activities
|
|
|
(4,329 |
) |
|
|
(13,170 |
) |
|
|
(79 |
) |
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
|
521 |
|
|
|
--- |
|
|
|
(28 |
) |
Payments on long-term debt
|
|
|
(380 |
) |
|
|
(6,600 |
) |
|
|
(46,920 |
) |
Principal payments on capital lease obligations
|
|
|
(33,117 |
) |
|
|
(6,792 |
) |
|
|
(6,567 |
) |
Net cash (used in) financing activities
|
|
|
(32,976 |
) |
|
|
(13,392 |
) |
|
|
(53,515 |
) |
Effect of exchange rates on cash and cash equivalents
|
|
|
340 |
|
|
|
(77 |
) |
|
|
(601 |
) |
Increase (decrease) in cash and cash equivalents
|
|
|
4,412 |
|
|
|
20,398 |
|
|
|
(1,462 |
) |
Cash and cash equivalents at beginning of year
|
|
|
21,261 |
|
|
|
863 |
|
|
|
2,325 |
|
Cash and cash equivalents at end of year
|
|
|
25,673 |
|
|
$ |
21,261 |
|
|
$ |
863 |
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$ |
1,775 |
|
|
$ |
2,468 |
|
|
$ |
3,689 |
|
Income taxes paid
|
|
$ |
14,670 |
|
|
$ |
6,648 |
|
|
$ |
349 |
|
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended June 30, 2011, 2010, and 2009
(Dollars in thousands, except share amounts)
|
|
Common
Stock
No. of Shares
Outstanding
|
|
|
Amount
|
|
|
Additional
Paid-In
Capital
|
|
|
Treasury Stock
|
|
|
Retained
Earnings
(Deficit)
|
|
|
Accumulated
Other
Comprehensive
Income/(Loss)
|
|
|
Total
Stockholders'
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2008
|
|
|
21,871,660 |
|
|
$ |
782 |
|
|
$ |
95,173 |
|
|
$ |
(12,633 |
) |
|
$ |
60,881 |
|
|
$ |
(351 |
) |
|
$ |
143,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
|
|
2,556 |
|
|
|
--- |
|
|
|
2,556 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity adjustments for foreign currency translation, net of tax
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
|
|
(5,211 |
) |
|
|
(5,211 |
) |
Comprehensive income (loss)
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
|
|
2,556 |
|
|
|
(5,211 |
) |
|
|
(2,655 |
) |
Treasury stock issued
|
|
|
--- |
|
|
|
--- |
|
|
|
(551 |
) |
|
|
553 |
|
|
|
--- |
|
|
|
--- |
|
|
|
2 |
|
Restricted stock and options expense
|
|
|
216,897 |
|
|
|
5 |
|
|
|
2,434 |
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
|
|
2,439 |
|
Exercise of incentive stock options
|
|
|
7,875 |
|
|
|
--- |
|
|
|
(26 |
) |
|
|
55 |
|
|
|
--- |
|
|
|
--- |
|
|
|
29 |
|
Balance at June 30, 2009
|
|
|
22,096,432 |
|
|
$ |
787 |
|
|
$ |
97,030 |
|
|
$ |
(12,025 |
) |
|
$ |
63,437 |
|
|
$ |
(5,562 |
) |
|
$ |
143,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
|
|
4,680 |
|
|
|
--- |
|
|
|
4,680 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity adjustments for foreign currency translation, net of tax
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
|
|
(482 |
) |
|
|
1,736 |
|
|
|
1,254 |
|
Comprehensive income
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
|
|
4,198 |
|
|
|
1,736 |
|
|
|
5,934 |
|
Treasury stock issued
|
|
|
--- |
|
|
|
--- |
|
|
|
(700 |
) |
|
|
864 |
|
|
|
--- |
|
|
|
--- |
|
|
|
164 |
|
Restricted stock and options expense
|
|
|
156,464 |
|
|
|
1 |
|
|
|
2,350 |
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
|
|
2,351 |
|
Exercise of incentive stock options
|
|
|
14,125 |
|
|
|
--- |
|
|
|
(40 |
) |
|
|
97 |
|
|
|
--- |
|
|
|
--- |
|
|
|
57 |
|
Balance at June 30, 2010
|
|
|
22,267,021 |
|
|
$ |
788 |
|
|
$ |
98,640 |
|
|
$ |
(11,064 |
) |
|
$ |
67,635 |
|
|
$ |
(3,826 |
) |
|
$ |
152,173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
|
|
14,732 |
|
|
|
--- |
|
|
|
14,732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity adjustments for foreign currency translation, net of tax
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
|
|
2,874 |
|
|
|
2,874 |
|
Comprehensive income
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
|
|
14,732 |
|
|
|
2,874 |
|
|
|
17,606 |
|
Treasury stock issued
|
|
|
--- |
|
|
|
--- |
|
|
|
(1,013 |
) |
|
|
993 |
|
|
|
--- |
|
|
|
--- |
|
|
|
(20 |
) |
Restricted stock and options expense
|
|
|
159,083 |
|
|
|
--- |
|
|
|
2,402 |
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
|
|
2,402 |
|
Exercise of incentive stock options
|
|
|
96,133 |
|
|
|
--- |
|
|
|
(123 |
) |
|
|
663 |
|
|
|
--- |
|
|
|
--- |
|
|
|
540 |
|
Balance at June 30, 2011
|
|
|
22,522,237 |
|
|
$ |
788 |
|
|
$ |
99,906 |
|
|
$ |
(9,408 |
) |
|
$ |
82,367 |
|
|
$ |
(952 |
) |
|
$ |
172,701 |
|
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2011, 2010 and 2009
(1)
|
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Organization
Celadon Group, Inc. (the "Company"), through its subsidiaries, provides transportation services between the United States, Canada, and Mexico. The Company's primary transportation subsidiaries are: Celadon Trucking Services, Inc. ("CTSI"), a U.S. based company; Celadon Logistics Services, Inc. ("CLSI"), a U.S. based company; Servicio de Transportation Jaguar, S.A. de C.V. ("Jaguar"), a Mexican based company; and Celadon Canada, Inc. ("CelCan"), a Canadian based company.
TruckersB2B, Inc. ("TruckersB2B") is an Internet based "business-to-business" membership program. In February 2011, the Company entered into a joint venture, whereby the Company sold a 65% majority interest, in its TruckersB2B subsidiary to an unrelated third party. The Company has de-consolidated the subsidiary beginning in February 2011 and will record as a 35% minority interest prospectively. The company wrote-off approximately $2.4 million of goodwill as part of the de-consolidation.
Summary of Significant Accounting Policies
Principles of Consolidation and Presentation
The consolidated financial statements include the accounts of Celadon Group, Inc. and its wholly and majority owned subsidiaries, all of which are wholly owned except for Jaguar in which the Company owns 75 % of the shares. The entity was set up to allow the Company to operate in Mexico. The minority owner of Jaguar has been refunded all initial capital contributions and is not entitled to receive any future earnings or required to fund any losses of the subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation. Unless otherwise noted, all references to annual periods refer to the respective fiscal years ended June 30.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures at the date of the financial statements and during the reporting period. Such estimates include provisions for liability claims and uncollectible accounts receivable. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid instruments with maturity of three months or less when purchased to be cash equivalents.
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of trade receivables. The Company performs ongoing credit evaluations of its customers and does not require collateral for its accounts receivable. The Company maintains reserves which management believes are adequate to provide for potential credit losses. Uncollectible accounts receivable are written off against the reserves. Concentrations of credit risk with respect to trade receivables are generally limited due to the Company's large number of customers and the diverse range of industries which they represent. Accounts receivable balances due from any single customer did not total more than 5% of the Company's gross trade receivables at June 30, 2011.
CELADON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2011, 2010 and 2009
Property and Equipment
Property and equipment are stated at cost. Property and equipment under capital leases are stated at fair value at the inception of the lease.
Depreciation of property and equipment and amortization of assets under capital leases is computed using the straight-line method and is based on the estimated useful lives of the related assets (net of salvage value) as follows:
Revenue and service equipment
|
2-7 years
|
Furniture and office equipment
|
4-5 years
|
Buildings
|
20 years
|
Leasehold improvements
|
Lesser of life of lease (including expected renewals) or useful life of improvement
|
Initial delivery costs relating to placing tractors in service are expensed as incurred. The cost of maintenance and repairs is charged to expense as incurred.
Long-lived assets are depreciated over estimated useful lives based on historical experience and prevailing industry practice. Estimated useful lives are periodically reviewed to ensure they remain appropriate. Long-lived assets are tested for impairment whenever an event occurs that indicates an impairment may exist. Future cash flows and operating performance are used for analyzing potential impairment losses. If the sum of expected undiscounted cash flows is less than the carrying value an impairment loss is recognized. The Company measures the impairment loss by comparing the fair value of the asset to its carrying value. Fair value is determined based on a discounted cash flow analysis or appraised or estimated market values as appropriate. Long-lived assets that are held for sale are recorded at the lower of carrying value or the fair value less costs to sell.
Operating leases
We have financed a portion of our tractors and trailers with operating leases. These leases generally contain residual value guarantees, which provide that the value of equipment returned to the lessor at the end of the lease term will be no lower than a negotiated amount. To the extent that the value of the equipment is below the negotiated amount, we are liable to the lessor for the shortage at the expiration of the lease. For all equipment, we are required to recognize additional rental expense to the extent we believe the fair market value at the lease termination will be less than our obligation to the lessor.
In accordance with ASC Topic 840, Accounting for Leases, property and equipment held under operating leases, and liabilities related thereto, are not reflected on our balance sheet. All expenses related to revenue equipment operating leases are reflected on our statements of operations in the line item entitled "Revenue equipment rentals." As such, financing revenue equipment with operating leases instead of bank borrowings or capital leases effectively moves the interest component of the financing arrangement into operating expenses on our statements of operations.
Tires in Service
Original and replacement tires on tractors and trailers are included in tires in service and are amortized over 18 to 36 months.
CELADON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2011, 2010 and 2009
Goodwill
The consolidated balance sheets at June 30, 2011 and 2010 included goodwill of acquired businesses of approximately $16.7 million and $19.1 million, respectively. These amounts have been recorded as a result of business acquisitions accounted for under the purchase method of accounting. Under ASC Topic 350-20, goodwill is not amortized but is tested for impairment annually (or more often, if an event or circumstance indicates that an impairment loss has been incurred). On April 1, 2011, we completed our most recent annual impairment test for that fiscal year and concluded that there was no indication of impairment.
Tests for impairment include estimating the fair value of our reporting units. As required by ASC Topic 350-20, we compare the estimated fair value of our reporting unit with its respective carrying amount including goodwill. We define a reporting unit as an operating segment. Under ASC Topic 350-20, fair value refers to the amount for which the entire reporting unit could be bought or sold. Our methods for estimating reporting unit values include market quotations and other valuation techniques, such as discounted cash flows and multiples of earnings, revenue, or other financial measures. With the exception of market quotations, all of these methods involve significant estimates and assumptions, including estimates of future financial performance and the selection of appropriate discount rates and valuation multiples.
Insurance Reserves
The primary claims arising for us consist of cargo liability, personal injury, property damage, collision and comprehensive, workers' compensation, and employee medical expenses. We maintain self-insurance levels for these various areas of risk and have established reserves to cover these self-insured liabilities. We also maintain insurance to cover liabilities in excess of these self-insurance amounts. Claims reserves represent accruals for the estimated uninsured portion of reported claims, including adverse development of reported claims, as well as estimates of incurred but not reported claims. Reported claims and related loss reserves are estimated by third party administrators, and we refer to these estimates in establishing our reserves. Claims incurred but not reported are estimated based on our historical experience and industry trends, which are continually monitored, and accruals are adjusted when warranted by changes in facts and circumstances. In establishing our reserves we must take into account and estimate various factors, including, but not limited to, assumptions concerning the nature and severity of the claim, the effect of the jurisdiction on any award or settlement, the length of time until ultimate resolution, inflation rates in health care, and in general interest rates, legal expenses, and other factors. Our actual experience may be different than our estimates, sometimes significantly. Changes in assumptions as well as changes in actual experience could cause these estimates to change. Insurance and claims expense will vary from period to period based on the severity and frequency of claims incurred in a given period. The administrative expenses associated with these reserves are expensed when paid.
Litigation
Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources, are recorded when it is probable that a liability has been incurred and the amount of the assessment and/or remediation can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred.
CELADON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2011, 2010 and 2009
Revenue Recognition
Trucking revenue and related direct costs are recognized on the date freight is delivered by the Company to the customer and collectibility is reasonably assured. Prior to commencement of shipment, the Company will negotiate an agreed upon price for services to be rendered.
Advertising
Advertising costs are expensed as incurred by the Company. Advertising expense primarily consists of recruiting for new drivers. Advertising expenses for fiscal 2011, 2010, and 2009 were $1.7 million, $1.0 million, and $1.2 million, respectively, and are included in salaries, wages, and employee benefits and other operating expenses in the Consolidated Statements of Operations.
Income Taxes
Deferred taxes are recognized for the future tax effects of temporary differences between the carrying amounts of assets and liabilities for financial and income tax reporting, based on enacted tax laws and rates. Federal income taxes are provided on the portion of the income of foreign subsidiaries that is expected to be remitted to the United States.
The Company follows ASC Topic 740-10-25 in Accounting for Uncertainty in Income Taxes. ASC 740-10-25 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
Accounting for Derivatives
The Company had derivative financial instruments in place to reduce exposure to fuel price fluctuations and currency exposure for Canadian Dollars and Mexican Pesos in fiscal 2011. In fiscal 2010 and 2009, the Company had derivatives for only Canadian Dollars and Mexican Pesos. Derivative gains/ (losses), initially reported as a component of other comprehensive income with an offset to accrued liabilities or other assets, are reclassified to earnings in the period when the forecasted transaction affects earnings. ASC Topic 815, Derivatives and Hedging, requires that all derivative instruments be recorded on the balance sheet at their respective fair values.
CELADON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2011, 2010 and 2009
Earnings per Share ("EPS")
The Company applies the provisions of ASC Topic 260, Earnings per Share, which requires companies to present basic EPS and diluted EPS. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. Dilutive common stock options are included in the diluted EPS calculation using the treasury stock method.
Stock-based Employee Compensation Plans
The Company applies the provisions of ASC Topic 718, Compensation – Stock Compensation, which requires companies to recognize the grant date fair value of stock options and other equity-based compensation issued to employees in its income statement.
Foreign Currency Translation
Foreign financial statements are translated into U.S. dollars in accordance with ASC Topic 830, Foreign Currency Matters. Assets and liabilities of the Company's foreign operations are translated into U.S. dollars at year-end exchange rates. Income statement accounts are translated at the average exchange rate prevailing during the year. Resulting translation adjustments are included in other comprehensive income.
Recent Accounting Pronouncements
On December 17, 2010, the FASB issued ASU 2010-28, which (1) does not prescribe a specific method of calculating the carrying value of a reporting unit in the performance of step 1 of the goodwill impairment test and (2) requires entities with a zero or negative carrying value to assess, considering qualitative factors such as those listed in ASC 350-20-35-30 (these factors are not all-inclusive), whether it is more likely than not that a goodwill impairment exists (confirming this aspect of the consensus-for-exposure). If an entity concludes that it is more likely than not that a goodwill impairment exists, the entity must perform step 2 of the goodwill impairment test. This ASU is effective for impairment tests performed during entities’ fiscal years (and interim periods within those years) that begin after December 15, 2010. Early application is not permitted. It is not expected that adoption of ASU 2010-28 will have a material effect on the consolidated financial statements.
On July 21, 2010, the FASB issued ASU 2010-20, which amends ASC 310 by requiring more robust and disaggregated disclosures about the credit quality of an entity’s financing receivables and its allowance for credit losses. The purpose of the additional disclosures is to improve financial statement users’ understanding of (1) the nature of an entity’s credit risk associated with its financing receivables and (2) the entity’s assessment of that risk in estimating its allowance for credit losses as well as changes in the allowance and the reasons for those changes. The new and amended disclosures that relate to information as of the end of a reporting period will be effective for the first time (including interim periods) on or after December 15, 2010. Most of the new and amended disclosures in the ASU became effective at year-end 2010. However, the disclosures that include information for activity that occurs during a reporting period will be effective for the first time (including interim periods) beginning after December 15, 2010. Those disclosures include (1) the activity in the allowance for credit losses for each period and (2) disclosures about modifications of financing receivables. These disclosures will be effective for the first quarter of 2011 and are not expected to have a material impact on the consolidated financial statements.
In December 2009, FASB issued ASU 2009-17. This Accounting Standards Update amends FASB Accounting Standards Codification (ASC810-10) of FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R) issued June 2009. The amendments in this Accounting Standards Update replace the quantitative-based risks and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which reporting entity has the power to direct the
CELADON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2011, 2010 and 2009
activities of a variable interest entity that most significantly impact the entity's economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. An approach that is expected to be primarily qualitative will be more effective for identifying which reporting entity has a controlling financial interest in a variable interest entity. The amendments in this Update also require additional disclosures about a reporting entity's involvement in variable interest entities, which will enhance the information provided to readers of financial statements. The Company adopted ASC810-10 on July 1, 2010, which had no material impact on its consolidated financial statements.
(2)
|
PROPERTY, EQUIPMENT, AND LEASES
|
Property and equipment consists of the following (in thousands):
|
|
2011
|
|
|
2010
|
|
Revenue equipment owned
|
|
$ |
184,206 |
|
|
$ |
144,011 |
|
Revenue equipment under capital leases
|
|
|
3,425 |
|
|
|
56,905 |
|
Furniture and office equipment
|
|
|
5,063 |
|
|
|
4,302 |
|
Land and buildings
|
|
|
16,207 |
|
|
|
16,821 |
|
Service equipment
|
|
|
587 |
|
|
|
743 |
|
Leasehold improvements
|
|
|
3,734 |
|
|
|
3,387 |
|
|
|
$ |
213,222 |
|
|
$ |
226,169 |
|
Included in accumulated depreciation was $1.1 million and $14.4 million in 2011 and 2010, respectively, related to revenue equipment under capital leases. Depreciation and amortization expense relating to property and equipment owned and revenue equipment under capital leases, including gains (losses) on disposition of equipment, was $29.3 million in 2011, $29.7 million in 2010, and $35.2 million in 2009.
CELADON GROUP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2011, 2010 and 2009
(3)
|
LEASE OBLIGATIONS AND LONG-TERM DEBT
|
Lease Obligations
The Company leases certain revenue and service equipment under long-term lease agreements, payable in monthly installments.
Equipment obtained under a capital lease is reflected on the Company's balance sheet as owned and the related lease bears interest at a rate of 4.75% per annum, maturing in January 2013.
Assets held under operating leases are not recorded on the Company's balance sheet. The Company leases revenue and service equipment under noncancellable operating leases expiring at various dates through July 2018.
The Company leases warehouse and office space under noncancellable operating leases expiring at various dates through September 2021. Certain real estate leases contain renewal options.
Total rental expense under operating leases was as follows for 2011, 2010, and 2009 (in thousands):
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
Revenue and service equipment
|
|
$ |
25,156 |
|
|