| CELADON GROUP INC Item 1A Risk Factors 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 |
| Ongoing insurance and claims expenses could significantly affect our earnings |
| Our future insurance and claims expenses may exceed historical levels, which could reduce 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 expense could reduce our earnings and make our earnings more volatile |
| We currently self-insure for a portion of our claims exposure and accrue amounts for liabilities based on our assessment of claims that arise and our insurance coverage for the periods in which the claims arise |
| In general, for casualty claims for fiscal 2006, we are self-insured for the first dlra2dtta5 million of each personal injury and property damage claim and the first dlra100cmam000 of each cargo claim |
| We are also responsible for a pro rata portion of legal expenses relating to such claims |
| We maintain a workers’ compensation plan and group medical plan for our employees with a deductible amount of dlra1dtta5 million for each workers’ compensation claim and stop loss amount of dlra275cmam000 for each group medical plan |
| Because of our significant self-insured retention amounts, we have significant exposure to fluctuations in the number and severity of claims |
| We maintain insurance above the amounts for which we self-insure with licensed insurance carriers |
| 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 |
| 9 _________________________________________________________________ [34]TABLE OF CONTENTS Ongoing insurance requirements could constrain our borrowing capacity |
| At June 30, 2006, our revolving line of credit had a maximum borrowing limit of dlra50dtta0 million, outstanding borrowings of dlra4dtta8 million, and outstanding letters of credit of dlra4dtta7 million |
| However, our borrowings may increase if we do acquisitions, finance more of our equipment under the revolving line of credit, and we do expect outstanding letters of credit to increase in the future |
| Outstanding letters of credit reduce the available borrowings under our credit agreement |
| These factors could negatively affect our liquidity should we need to increase our borrowings in the future |
| 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: · 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 |
| · 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 |
| · 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 |
| · 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 |
| · 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 |
| · 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 |
| · Competition from non-asset-based logistics and freight brokerage companies may adversely affect our customer relationships and freight rates |
| · 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 2006, our top 25 customers, based on revenue, accounted for approximately 37prca of our revenue, and our top 10 customers, approximately 21prca of our revenue |
| We do not expect these percentages to change materially for 2007 |
| 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 |
| For some of our customers, we have entered into multi-year contracts and we cannot be assured that the rates will remain advantageous |
| 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 |
| 10 _________________________________________________________________ [35]TABLE OF CONTENTS 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 |
| Our ability to attract and retain drivers could be adversely affected by increased availability of alternative employment opportunities and by the potential need for more drivers due to more restrictive driver hours-of-service requirements imposed by the United States Department of Transportation, or DOT, effective January 2004 and modified October 2005 |
| If we are unable to continue to attract drivers and contract with independent contractors, we could be required to adjust our driver compensation package, let trucks sit idle, or operate with fewer independent contractors and face difficulty meeting shipper demands, all of which could adversely affect our growth and profitability |
| 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 2006 |
| There can be no assurance that our revenue growth rate will continue at historical levels or that we can effectively adapt our management, administrative, and operational systems to respond to any future growth |
| We can provide no assurance that our operating margins will not be adversely affected by future changes in and expansion of our business or by changes in economic conditions |
| Slower or less profitable growth could adversely affect our stock price |
| 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 US, 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 US and Canadian regulations |
| We also may become subject to new or more restrictive regulations relating to fuel emissions, drivers &apos hours-of-service, ergonomics, or other matters affecting safety or operating methods |
| Other agencies, such as the Environmental Protection Agency, or EPA, and the Department of Homeland Security, or DHS, 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 Federal Motor Carrier Safety Administration Act, or FMCSA, imposes safety and fitness regulations on us and our drivers |
| New rules that limit driver hours-of-service were adopted effective January 4, 2004, and then modified effective October 1, 2005 |
| The rules effective October 1, 2005, did not substantially change the existing rules but are likely to create a moderate reduction in the amount of time available to drivers in longer lengths of haul, which could reduce equipment productivity in those lanes |
| The FMCSA is studying rules relating to braking distance and on-board data recorders that could result in new rules being proposed |
| We are unable to predict the effect of any rules that might be proposed, but we expect that any such proposed rules would increase costs in our industry, and the on-board recorders potentially could decrease productivity and the number of people interested in being drivers |
| In the aftermath of the September 11, 2001 terrorist attacks, federal, state, and municipal authorities have implemented and continue to implement various security measures, including checkpoints and travel restrictions on large trucks |
| The Transportation Security Administration, or TSA, of the DHS has adopted regulations that require determination by the TSA that each driver who applies for or renews his 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 let trucks sit 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 |
| 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 |
| 11 _________________________________________________________________ [36]TABLE OF CONTENTS 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 |
| For the past few years, we have depended on operating leases, cash from operations, and our line of credit to fund our revenue equipment |
| 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 lease residual value guarantees of approximately dlra78dtta7 million, substantially all of which are not covered by trade-in or fixed residual agreements with the equipment supplier |
| We are exposed to decreases in the resale value of our used equipment and we have increased exposure to issues on the growing 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 |
| Diesel fuel prices fluctuate greatly due to economic, political, and other factors beyond our control |
| For example, our average price for diesel fuel was dlra2dtta48 per gallon in 2006, as compared to dlra1dtta91 per gallon in 2005 |
| 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 impose fuel surcharges on substantially all accounts, these arrangements do not protect us from fuel price increases and also may result in us not receiving the full benefit of any fuel price decreases |
| We currently do not have any fuel hedging contracts in place |
| If we do hedge, 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 |
| Emission standards require reductions in the sulfur content of diesel fuel beginning in 2006 |
| Management expects that a 2prca power loss caused by ultra-low sulfur diesel fuel could lead to a loss of six cents per gallon fuel economy |
| We may not make acquisitions in the future, or if we do, we may not be successful in our acquisition strategy |
| We have made eight acquisitions, including two between 2004 and 2005 |
| 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, all 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 |
| 12 _________________________________________________________________ [37]TABLE OF CONTENTS 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 Environmental Protection Agency, or EPA, emissions standards for 2007 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 productivity 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 |
| Such laws and regulations deal 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 |
| 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 following key employees: Stephen Russell, our Chairman of the Board and Chief Executive Officer; Thomas Glaser, our President and Chief Operating Officer; and Paul Will, our Executive Vice President and Chief Financial Officer |
| Although we have employment agreements with Messrs |
| Russell and Will, the loss of any 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 can 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 |