form10q.htm  



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.20549


FORM 10-Q

[ X ]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010

or

[    ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934


Commission file number: 001-34533


Celadon Logo

 
CELADON GROUP, INC.
(Exact name of registrant as specified in its charter)

Delaware
13-3361050
(State or other jurisdiction of
(IRS Employer
incorporation or organization)
Identification No.)
   
9503 East 33rd Street
 
One Celadon Drive
 
Indianapolis, IN
46235-4207
(Address of principal executive offices)
(Zip Code)
   
(317) 972-7000
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X]  No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [  ]  No [  ]

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 [  ]
Accelerated filer [X]
Non-accelerated filer [  ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-b2 of the Exchange Act).
Yes [  ]  No [X]

As of October 30, 2010 (the latest practicable date), 22,303,688 shares of the registrant's common stock, par value $0.033 per share, were outstanding.

 
 

 

CELADON GROUP, INC.

Index to

September 30, 2010 Form 10-Q

Part I.
Financial Information
 
       
 
Item 1.
Financial Statements
 
       
   
Condensed Consolidated Statements of Income for the three months ended September 30, 2010 and 2009 (Unaudited)
       
   
Condensed Consolidated Balance Sheets at September 30, 2010 (Unaudited) and June 30, 2010
       
   
Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 2010 and 2009 (Unaudited)
       
   
Notes to Condensed Consolidated Financial Statements (Unaudited)
       
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
       
 
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
       
 
Item 4.
Controls and Procedures
       
Part II.
Other Information
 
       
 
Item 1.
Legal Proceedings
       
 
Item 1A.
Risk Factors
       
 
Item 6.
Exhibits
 

 
 
2


PART I.             FINANCIAL INFORMATION

 
Item I.                Financial Statements

CELADON GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 (Dollars in thousands except per share amounts)
(Unaudited)

   
Three months ended
 
   
September 30,
 
             
   
2010
   
2009
 
             
REVENUE:
           
Revenue, before fuel surcharge
  $ 119,470     $ 110,686  
Fuel surcharge revenue
    20,819       17,151  
Total revenue
    140,289       127,837  
                 
OPERATING EXPENSES:
               
Salaries, wages, and employee benefits
    38,127       40,005  
Fuel
    32,271       29,737  
Purchased transportation
    25,875       18,128  
Revenue equipment rentals
    7,453       9,376  
Operations and maintenance
    10,190       8,682  
Insurance and claims
    4,125       3,945  
Depreciation and amortization
    7,527       7,997  
Cost of products and services sold
    1,398       1,632  
Communications and utilities
    1,108       1,238  
Operating taxes and licenses
    2,393       2,362  
General and other operating
    1,741       2,018  
Total operating expenses
    132,208       125,120  
                 
Operating Income
    8,081       2,717  
                 
Interest expense
    463       663  
Interest income
    (16 )     (21 )
Other (income) expense, net
    (67 )     91  
Income before income taxes
    7,701       1,984  
Income tax expense
    3,280       1,419  
Net income
  $ 4,421     $ 565  
                 
Income per common share:
               
Diluted
  $ 0.20     $ 0.03  
Basic
  $ 0.20     $ 0.03  
                 
Diluted weighted average shares outstanding
    22,556       22,190  
Basic weighted average shares outstanding
    22,056       21,847  

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 
3



CELADON GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2010 and June 30, 2010
(Dollars in thousands except par value amounts)

   
(unaudited)
       
   
September 30,
   
June 30,
 
ASSETS
 
2010
   
2010
 
             
Current assets:
           
Cash and cash equivalents
  $ 10,937     $ 18,844  
Trade receivables, net of allowance for doubtful accounts of $1,133 and $1,307 at September 30, 2010 and June 30, 2010, respectively
    62,470       63,468  
Prepaid expenses and other current assets
    18,624       12,310  
Tires in service
    5,612       5,010  
Deferred income taxes
    3,443       3,593  
Total current assets
    101,086       103,225  
Property and equipment
    229,859       226,169  
Less accumulated depreciation and amortization
    77,505       74,852  
Net property and equipment
    152,354       151,317  
Tires in service
    2,295       1,843  
Goodwill
    19,137       19,137  
Other assets
    1,704       1,578  
Total assets
  $ 276,576     $ 277,100  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
Current liabilities:
               
Accounts payable
  $ 6,579     $ 7,733  
Accrued salaries and benefits
    11,245       11,472  
Accrued insurance and claims
    11,170       10,967  
Accrued fuel expense
    8,394       11,263  
Other accrued expenses
    15,064       12,209  
Current maturities of long-term debt
    257       336  
Current maturities of capital lease obligations
    12,913       15,350  
Income taxes payable
    4,730       2,950  
Total current liabilities
    70,352       72,280  
Long-term debt, net of current maturities
    ---       44  
Capital lease obligations, net of current maturities
    14,522       19,861  
Deferred income taxes
    32,704       32,742  
Total liabilities
    117,578       124,927  
Stockholders' equity:
               
Common stock, $0.033 par value, authorized 40,000 shares; issued 23,799 and 23,872 shares at September 30, 2010 and June 30, 2010, respectively
    785       788  
Treasury stock at cost; 1,495 and 1,604 shares at September 30, 2010 and June 30, 2010, respectively
    (10,307 )     (11,064 )
Additional paid-in capital
    98,581       98,640  
Retained earnings
    72,055       67,635  
Accumulated other comprehensive loss
    (2,116 )     (3,826 )
Total stockholders' equity
    158,998       152,173  
Total liabilities and stockholders' equity
  $ 276,576     $ 277,100  

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 
4



CELADON GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands)
(Unaudited)

   
Three months ended
 
   
September 30,
 
   
2010
   
2009
 
             
Cash flows from operating activities:
           
Net income
  $ 4,421     $ 565  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    7,529       7,561  
(Gain)\Loss on sale of equipment
    25       436  
Stock based compensation
    557       1,061  
Deferred income taxes
    (491 )     (1,143 )
Provision for doubtful accounts
    95       133  
Changes in assets and liabilities:
               
Trade receivables
    977       (5,072 )
Income tax receivable/payable
    1,763       1,246  
Tires in service
    (1,047 )     (639 )
Prepaid expenses and other current assets
    (6,241 )     1,648  
Other assets
    (104 )     221  
Accounts payable and accrued expenses
    1,338       2,937  
Net cash provided by operating activities
    8,822       8,954  
                 
Cash flows from investing activities:
               
Purchase of property and equipment
    (16,285 )     (11,718 )
Proceeds on sale of property and equipment
    8,170       4,256  
Net cash used in investing activities
    (8,115 )     (7,462 )
                 
Cash flows from financing activities:
               
(Payments)Borrowings on long-term debt
    (122 )     1,071  
Principal payments under capital lease obligations
    (7,776 )     (1,667 )
Proceeds from issuance of common stock
    90       ---  
Net cash used in financing activities
    (7,808 )     (596 )
Effect of exchange rates on cash and cash equivalents
    (806 )     158  
Increase (decrease) in cash and cash equivalents
    (7,907 )     1,054  
Cash and cash equivalents at beginning of period
    18,844       863  
Cash and cash equivalents at end of period
  $ 10,937     $ 1,917  
Supplemental disclosure of cash flow information:
               
Interest paid
  $ 499     $ 740  
Income taxes paid
  $ 1,917     $ 1,355  
                 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 
5



CELADON GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)

1.           Basis of Presentation

References in this Report on Form 10-Q to “we,” “us,” “our,” “Celadon,” or the “Company” or similar terms refer to Celadon Group, Inc. and its consolidated subsidiaries. All inter-company balances and transactions have been eliminated in consolidation.

The accompanying condensed consolidated unaudited financial statements of Celadon Group, Inc. and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America and Regulation S-X, instructions to Form 10-Q, and other relevant rules and regulations of the Securities and Exchange Commission (the “SEC”), as applicable to the preparation and presentation of interim financial information. Certain information and footnote disclosures have been omitted or condensed pursuant to such rules and regulations. We believe all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Results of operations in interim periods are not necessarily indicative of results for a full year. These condensed consolidated unaudited financial statements and notes thereto should be read in conjunction with our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended June 30, 2010.

The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  Actual results could differ from those estimates.

2.           Earnings Per Share (in thousands, except per share data)

A reconciliation of the basic and diluted earnings per share is as follows:

   
Three months ended
 
   
September 30,
 
   
2010
   
2009
 
             
Weighted average common shares outstanding – basic
    22,056       21,847  
Dilutive effect of stock options and unvested restricted stock units
    500       343  
Weighted Average common shares outstanding – diluted
    22,556       22,190  
                 
Net income attributable to Celadon
  $ 4,421     $ 565  
Earnings per common share
               
Basic
  $ 0.20     $ 0.03  
Diluted
  $ 0.20     $ 0.03  
                 
Certain shares of common stock were excluded from the computation of diluted earnings per share because the options exercise prices were greater than the average market price of the common shares, and therefore, the effect would be anti-dilutive. A summary of those options follows:

   
Three months ended
 
   
September 30,
 
   
2010
   
2009
 
             
Number of anti-dilutive shares
    245       536  
                 


 
6



CELADON GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)

3.           Stock Based Compensation

The following table summarizes the components of our share based compensation program expense (in thousands):

   
For three months ended
 
   
September 30,
 
   
2010
   
2009
 
             
Stock compensation expense for options, net of forfeitures
    215       320  
Stock compensation for restricted stock, net of forfeitures
    390       342  
Stock compensation (income) expense for stock appreciation rights, net of forfeitures
    (48 )     399  
Total stock compensation expense
  $ 557     $ 1,061  

As of September 30, 2010, we have approximately $1.6 million of unrecognized compensation cost related to unvested options granted under the 2006 Plan. This cost is expected to be recognized over a weighted-average period of 1.3 years and a total period of 3.3 years. We also have approximately $3.0 million of unrecognized compensation expense related to restricted stock awards, which is anticipated to be recognized over a weighted-average period of 2.9 years and a total period of 3.3 years.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option valuation model that uses the following assumptions:

 
Dividend yield – the dividend yield is based on our historical experience and future expectation of dividend payouts.
 
Expected volatility – we analyzed the volatility of our stock using historical data for three or four years through the end of the most recent period to estimate the expected volatility, as the historical data mirrors the vesting terms of the respective option.
 
Risk-free interest rate – the risk-free interest rate assumption is based on U.S. Treasury securities at a constant maturity with a maturity period that most closely resembles the expected term of the stock option award.
 
Expected terms – the expected terms of employee stock options represents the weighted-average period the stock options are expected to remain outstanding and has been determined based on an analysis of historical exercise behavior from 1995 through the end of the most recent period.

No grants were issued in the three months ended September 30, 2010 or 2009.


 
7


CELADON GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)

A summary of the award activity of the Company’s stock option plans as of September 30, 2010, and changes during the period then ended is presented below:

Options
 
Option Totals
   
Weighted-Average Exercise
Price per Share
 
             
Outstanding at July 1, 2010
    1,506,967     $ 9.91  
Granted
    ---       ---  
Exercised
    (37,000 )   $ 2.45  
Forfeited or expired
    (1,500 )   $ 10.90  
Outstanding at September 30, 2010
    1,468,467     $ 10.10  
Exercisable at September 30, 2010
    913,969     $ 10.65  
 
A summary of the restricted stock award activity under the 2006 Plan as of September 30, 2010, and changes during the three-month period is presented below:

   
Number of Restricted Stock Awards
   
Weighted-Average Grant Date Fair Value
 
             
Unvested at July 1, 2010
    340,692     $ 10.80  
Granted
    ---       ---  
Vested and Issued
    (72,764 )   $ 11.75  
Forfeited
    (333 )   $ 11.89  
Outstanding at September 30, 2010
    267,595     $ 9.85  
                 

The fair value of each restricted stock award is based on the closing market price on the date of grant.

The company had 144,844 outstanding stock appreciation rights as of June 30, 2010 and September 30, 2010, respectively. These stock appreciation rights were granted at a fair value market price of $8.64 based on the closing market price on the date of the grant.



 
8


CELADON GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)

4.           Segment Information

We have two reportable segments comprised of an asset-based segment and an asset-light-based segment. Our asset-based segment includes our asset based dry van carrier and rail services, which are geographically diversified but have similar economic and other relevant characteristics, as they all provide truckload carrier services of general commodities to a similar class of customers. Our asset-light based segment consists of our TruckersB2B, warehousing, brokerage, and less-than-load (“LTL”) operations, which we have determined qualifies as a reportable segment under ASC 280-10 Segment Reporting.  In prior reporting periods we had two reportable segments comprised of a transportation segment, consisting of revenue from all truckload-hauling services, and an ecommerce segment, consisting of revenues from our subsidiary TruckersB2B.
 
   
Operating Revenues
 
   
Three Months Ended
 
   
September 30,
 
   
2010
   
2009
 
             
Asset Based
  $ 129,461     $ 119,018  
Asset-light Based
    10,828       8,819  
Total
  $ 140,289     $ 127,837  
                 

   
Operating Income
 
   
Three Months Ended
 
   
September 30,
 
   
2010
   
2009
 
             
Asset Based
  $ 7,269     $ 2,013  
Asset-light Based
    812       704  
Total
  $ 8,081     $ 2,717  
                 

Information as to the Company's operating revenue by geographic area is summarized below (in thousands).The Company allocates operating revenue based on country of origin of the tractor hauling the freight:

 
   
Operating Revenue
 
   
Three Months Ended
 
   
September 30,
 
   
2010
   
2009
 
             
United States
  $ 123,098     $ 111,856  
Canada
  $ 10,161     $ 9,960  
Mexico
  $ 7,030     $ 6,021  
Consolidated
  $ 140,289     $ 127,837  
 
 



CELADON GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)

5.           Comprehensive Income

Comprehensive income includes changes in fair value on foreign currency and fuel derivatives, which qualified for hedge accounting. A reconciliation of net income and comprehensive income follows (in thousands):
 
   
Three months ended
 
   
September 30,
 
   
2010
   
2009
 
             
Net income
  $ 4,421     $ 565  
Unrealized gain on fuel derivative instruments
    860       ---  
Unrealized gain on currency derivative instruments
    306       ---  
Foreign currency translation adjustments
    543       664  
                 
Comprehensive income
  $ 6,130     $ 1,229  

6.           Income Taxes

Our effective income tax rate was 42.6% for the three-month period ended September 30, 2010, compared with 71.5% for the three-month period ended September 30, 2009. In determining our quarterly provision for income taxes, we use an estimated annual effective tax rate, which is based on our expected annual income, statutory tax rates, best estimate of nontaxable and nondeductible items of income and expense and the ultimate outcome of tax audits. The fiscal 2011 effective income tax rate reflects changes in estimates of state income taxes and nontaxable and nondeductible items as they relate to expected annual income.

The Company follows ASC Topic 740-10-25 in Accounting for Uncertainty in Income Taxes. Topic 740 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. As of September 30, 2010, the Company recorded a $0.7 million liability for unrecognized tax benefits, a portion of which represents penalties and interest.

As of September 30, 2010, we are subject to U.S. Federal income tax examinations for the tax years 2007 through 2009. We file tax returns in numerous state jurisdictions with varying statutes of limitations.

7.           Commitments and Contingencies

We are involved in certain claims and pending litigation arising from the normal conduct of business. Based on our present knowledge of the facts and, in certain cases, opinions of outside counsel, we believe the resolution of these claims and pending litigation will not have a material adverse effect on our financial condition, results of operations or our liquidity.

 
10



CELADON GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)

On August 8, 2007, the 384th District Court of the State of Texas situated in El Paso, Texas, rendered a judgment against CTSI, for approximately $3.4 million in the case of Martinez v. Celadon Trucking Services, Inc., which was originally filed on September 4, 2002. The case involves a workers' compensation claim of a former employee of CTSI who suffered a back injury as a result of a traffic accident. CTSI and the Company believe all actions taken were proper and legal and contend that the proper and exclusive place for resolution of this dispute was before the Indiana Workers' Compensation Board. In October 2007, CTSI posted an appeal bond and filed an appeal of this decision to the Texas Court of Appeals. The ATA Litigation Center filed an amicus brief in support of our position with the Texas Court of Appeals. Oral arguments on this case were held February 18, 2010. Celadon argued its case before the Texas Court of Appeals and on March 24, 2010, the Texas Court of Appeals reversed the judgment and dismissed Martinez’ suit in its entirety finding that the Indiana Workers Compensation Board had exclusive jurisdiction over this dispute.  The Plaintiff filed a petition to appeal with the Texas Supreme Court in an attempt to reverse the Texas Court of Appeals’ decision by the extended deadline to file an appeal granted to them of October 15, 2010.  The Texas Supreme Court has not yet made a decision on whether they will accept the appeal or dismiss it.

8.           Fair Value Measurements

Effective January 1, 2009, we adopted ASC 820-10 Fair Value Measurements and Disclosure for non-recurring fair value measurements of non-financial assets and liabilities. This standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This standard establishes a three-level hierarchy for fair value measurements based upon the significant inputs used to determine fair value. Observable inputs are those which are obtained from marked participants external to the Company while unobservable inputs are generally developed internally, utilizing management’s estimates assumptions, and specific knowledge of the nature of the assets or liabilities and related markets. The three levels are defined as follows:

Level 1 – Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. An active market is defined as a market in which transactions for the assets or liabilities occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2 – Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active (markets with few transactions), inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc), and inputs that are derived principally from or corroborated by observable market data correlation or other means (market corroborated inputs).

Level 3 – Unobservable inputs, only used to the extent that observable inputs are not available, reflect the Company’s assumptions about the pricing of an asset or liability.

 
11


CELADON GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)

In accordance with the fair value hierarchy described above, the following table shows the fair value of the Company’s financial assets and liabilities that are required to be measured at fair value as of September 30, 2010 and June 30, 2010.

               
Level 1
   
Level 2
   
Level 3
 
   
Balance
   
Balance
   
Balance
   
Balance
   
Balance
   
Balance
   
Balance
   
Balance
 
   
at
   
at
   
at
   
at
   
at
   
at
   
at
   
at
 
   
September
   
June
   
September
   
June
   
September
   
June
   
September
   
June
 
     30,     30,     30,     30,      30,     30,      30,     30,  
    2010     2010     2010     2010     2010     2010     2010     2010  
                                                                 
Foreign currency derivatives
      184       (192 )       ---         ---         184       (192 )       ---         ---  
                                                                 
Fuel derivatives
    1,382       ---       ---       ---       1,382       ---       ---       ---  
 
9.           Company Share Repurchase Programs

On August 25, 2010, our Board of Directors unanimously authorized the repurchase of up to 2,000,000 shares of our common stock. The repurchase authorization is intended to afford us the flexibility to acquire shares opportunistically in future periods and does not indicate any intention to repurchase any particular number of shares within a definite timeframe. Any repurchases would be effected based upon share prices and market conditions. Under our share repurchase program, repurchased shares are constructively retired and returned to unissued status. As of September 30, 2010, we have not made any repurchases under this authorization.

10.           Fuel Derivatives
 
In the Company’s day to day business activities we are exposed to certain market risks, including the effects of changes in fuel prices.  The company continually reviews new ways to reduce the potentially adverse effects that the volatility of fuel markets may have on operating results.  In an effort to reduce the variability of the ultimate cash flows associated with fluctuations in diesel fuel prices, the company has begun to enter into futures contracts.  These instruments will be heating oil futures contracts as the related index, New York Mercantile Exchange ("NYMEX"), generally exhibits high correlation with the changes in the dollars of the forecasted purchase of diesel fuel. The Company does not engage in speculative transactions, nor does it hold or issue financial instruments for trading purposes.

In July 2010, we entered into futures contracts, which pertain to 4.5 million gallons (350,000 gallons per month) or approximately 10% of our monthly projected fuel requirements thru July 2011.  Additionally, in August 2010 the Company entered into additional contracts to hedge approximately 3.2 million gallons (276,000 gallons per month) thru September 2011 or approximately 8% of our monthly projected 2011 fuel requirements. Under these contracts, we pay a fixed rate per gallon of heating oil and receive the monthly average price of New York heating oil per the NYMEX. The Company has done retrospective and prospective regression analyses that showed the changes in the prices of diesel fuel and heating oil were deemed to be highly effective based on the relevant authoritative guidance.  Accordingly, we have designated the respective hedges as cash flow hedges.
 
We perform both a prospective and retrospective assessment of the effectiveness of our hedge contracts at inception and quarterly.  If our analysis shows that the derivatives are not highly effective as hedges, we will discontinue hedge accounting for the period and prospectively recognize changes in the fair value of the derivative being recognized through earnings.  As a result of our effectiveness assessment at inception and at September 30, 2010, we believe our hedge contracts have been and will continue to be highly effective in offsetting changes in cash flows attributable to the hedged risk.
 
 
12

 
We recognize all derivative instruments at fair value on our consolidated condensed balance sheets in other assets or other accrued expenses.  The Company's derivative instruments are designated as cash flow hedges, thus the effective portion of the gain or loss on the derivative is reported as a component of accumulated other comprehensive income and will be reclassified into earnings in the same period during which the hedged transactions affect earnings.  The effective portion of the derivative represents the change in fair value of the hedge that offsets the change in fair value of the hedged item.  To the extent the change in the fair value of the hedge does not perfectly offset the change in the fair value of the hedged item, the ineffective portion of the hedge is immediately recognized in other  income or expense on our consolidated condensed statements of operations.  The ineffective portion of the hedge was immaterial and therefore not recognized through earnings.

Based on the amounts in accumulated other comprehensive income as of September 30, 2010 and the expected timing of the purchases of the diesel hedged, we expect to reclassify $1.4 million of gains on derivative instruments from accumulated other comprehensive income to the statement of income, as an offset to fuel expense, during the next twelve months due to the actual diesel fuel purchases.  The amounts actually realized will be dependent on the fair values as of the date of settlement.

Outstanding financial derivative instruments expose us to credit loss in the event of nonperformance by the companies with which we have these agreements.  Our credit exposure related to these financial instruments is represented by the fair value of contracts reported as assets.  To evaluate credit risk, we review each counterparty's audited financial statements and credit ratings and obtain references.  Any credit valuation adjustments deemed necessary have been reflected in the fair value of the instrument.

11.           Recent Accounting Pronouncements

On January 21, 2010, FASB issued ASU 2010-06, which amends Accounting Standards Codification (“ASC”) ASC 820 to add new requirements for disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. The Accounting Standards Update (“ASU”) also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. Further, the ASU amends guidance on employers’ disclosures about post-retirement benefit plan assets under ASC 715 to require that disclosures be provided by classes of assets instead of by major categories of assets. The ASU is effective for the first reporting period (including interim periods) beginning after December 15, 2009, except for the requirement to provide the Level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which will be effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The partial adoption of this ASU had no material impact on our fair value measurement disclosure as of September 30, 2010. We do not believe that the full adoption of ASU 2010-06, with respect to the Level 3 roll forward, will have a material impact on our fair value measurement disclosures.

In December 2009, FASB issued ASU 2009-17. This ASU 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 ASU replace the quantitative-based risk 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 ASU 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. We adopted ASC810-10 on July 1, 2010. The adoption of this ASC has no material impact on our consolidated financial statements.


 
13


Item 2.             Management's Discussion and Analysis of Financial Condition and Results of Operations

Disclosure Regarding Forward Looking Statements

This Quarterly Report contains certain statements that may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended.  These forward-looking statements 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 in or implied by such forward-looking statements.  Such statements may be identified by the fact that they do not relate strictly to historical or current facts.  These statements generally use words such as "believe," "expect," "anticipate," "project," "forecast," "should," "estimate," "plan," "outlook," "goal," and similar expressions.  While it is impossible to identify all factors that may cause actual results to differ from those expressed in or implied by forward-looking statements, the risks and uncertainties that may affect the Company's business, include, but are not limited to, those discussed in the section entitled Item 1A. Risk Factors set forth below.

All such forward-looking statements speak only as of the date of this Form 10-Q.  You are cautioned not to place undue reliance on such forward-looking statements.  The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the Company's expectations with regard thereto or any change in the events, conditions, or circumstances on which any such statement is based.

References to the "Company," "we," "us," "our," and words of similar import refer to Celadon Group, Inc. and its consolidated subsidiaries.

Business Overview

We are one of North America's twenty largest truckload carriers as measured by revenue. We generated $523.5 million in operating revenue during our fiscal year ended June 30, 2010. We provide asset-based dry van truckload carrier and rail services and asset-light based services including brokerage services, less-than-truckload (LTL), warehousing, and TruckersB2B (a marketing business that affords fleets volume purchasing power). Through our asset and asset-light services, we are able to transport or arrange for transportation throughout the United States, Canada, and Mexico.

We generated approximately one-half of our revenue in fiscal 2010 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. The additional complexity of and need to establish cross-border business partners and to develop strong organization and adequate infrastructure in Mexico affords some barriers to competition that are not present in traditional U.S. truckload services.

Recent Results of Operations

Our results of operations for the quarter ended September 30, 2010, compared to the same period in 2009 are:
 
 
Revenue, before fuel surcharge, increased 8.0% to $119.5 million from $110.7 million;
 
Net income increased to $4.4 million from $0.6 million; and
 
Net income per diluted share increased to $0.20 from $0.03.
 
Our key performance indicators have been improving since the December 2009 quarter. In the September 2010 quarter, average revenue per tractor per week increased 7.7% and average miles per tractor improved 1.2% from the September 2009 quarter. Average revenue per total mile increased 6.5% and average revenue per loaded mile increased 7.5% from the September 2009 quarter. The average length of haul increased 6.0% to 913 miles from 861 miles in the same period last year. We believe that we are making progress improving our freight mix and contract pricing.
 

 
 
14

 
Our fleet size decreased slightly to 3,062 tractors in the quarter ended September 30, 2010, compared to 3,221 tractors for the same period a year ago. The net change of 159 units is comprised of a 115-unit increase in independent contractor tractors, offset by a 274-unit decrease in company tractors. The number of tractors operated by independent contractors increased 36.3% from a year ago, and now represents 14.1% of our total fleet.

Cost controls continued to positively impact results. Our consolidated operating ratio, net of fuel surcharge (operating expenses, net of fuel surcharge, expressed as a percentage of revenue, before fuel surcharge), was 93.2% for the quarter ended September 30, 2010, compared to 97.5% for the same period a year ago. In the quarter, salaries, wages and employee benefit expense and fuel expense (net of fuel surcharge) were lower compared to the September 30, 2009 quarter. Those decreases were partially offset by higher purchased transportation primarily associated with growth in our independent contractor fleet.

Revenue and Expenses

We primarily generate revenue by transporting freight for our customers. Generally, we are paid a predetermined rate per mile or per load for our services. We enhance our revenue by charging for tractor and trailer detention, loading and unloading activities, brokerage operations, and other specialized services, as well as through the collection of fuel surcharges to mitigate the impact of increases in the cost of fuel. The main factors that affect our revenue are the revenue per mile we receive from our customers, the percentage of miles for which we are compensated, and the number of miles we generate with our equipment. These factors relate to, among other things, the general level of economic activity in the United States, inventory levels, specific customer demand, the level of capacity in the trucking industry, and driver availability.

The main factors that impact our profitability in terms of expenses 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 and third party carrier costs, which are recorded on the “Purchased Transportation” line of our consolidated statements of income. Expenses that have both fixed and variable components include maintenance, 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 costs are the acquisition and depreciation of long-term assets, such as revenue equipment and the compensation of non-driver personnel. Effectively controlling our expenses and managing our net cost of revenue equipment acquisitions and dispositions, including any related gains or losses, are important elements of assuring our profitability. We evaluate our profitability using operating ratio, excluding the impact of fuel surcharge revenue (operating expenses, net of fuel surcharge, expressed as a percentage of revenue, before fuel surcharge), and income before income taxes, which eliminates shifting operating lease expenses “above the line” from interest expense on owned or capital leased equipment.



 
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Results of Operations

The following table sets forth the percentage relationship of expense items to revenue before fuel surcharge for the periods indicated:

             
   
For the three months ended
 
   
September 30,
 
   
2010
   
2009
 
Revenue before fuel surcharge(1)
    100.0 %     100.0 %
                 
Operating expenses:
               
Salaries, wages, and employee benefits
    31.9 %     36.1 %
Fuel(1)
    9.6 %     11.4 %
Purchased transportation
    21.7 %     16.4 %
Revenue equipment rentals
    6.2 %     8.5 %
Operations and maintenance
    8.5 %     7.8 %
Insurance and claims
    3.5 %     3.6 %
Depreciation and amortization
    6.3 %     7.2 %
Cost of products and services sold
    1.2 %     1.5 %
Communications and utilities
    0.9 %     1.1 %
Operating taxes and licenses
    2.0 %     2.1 %
General and other operating
    1.4 %     1.8 %
Total operating expenses
    93.2 %     97.5 %
                 
Operating income
    6.8 %     2.5 %
                 
Other expense:
               
Interest expense
    0.4 %     0.7 %
                 
Income before income taxes
    6.4 %     1.8 %
Provision for income taxes
    2.7 %     1.3 %
                 
Net income
    3.7 %     0.5 %

(1)
Revenue before fuel surcharge is total revenue less fuel surcharges. In this table, fuel surcharges are eliminated from revenue and subtracted from fuel expense. Fuel surcharges were $20.8 million and $17.2 million for the first quarter of fiscal 2011 and 2010, respectively.

Comparison of Three Months Ended September 30, 2010 to Three Months Ended September 30, 2009

Total revenue increased by $12.5 million, or 9.8%, to $140.3 million for the first quarter of fiscal 2011, from $127.8 million for the first quarter of fiscal 2010. Revenue before fuel surcharge increased by $8.8 million, or 8.0%, to $119.5 million for the first quarter of fiscal 2011, from $110.7 million for the first quarter of fiscal 2010. This increase was primarily attributable to revenue per loaded mile increasing to $1.471 for the first quarter of fiscal 2011 from $1.407 for the first quarter of fiscal 2010 offset by a slight decrease in loaded miles to 65.3 million for the first quarter of fiscal 2011 from 66.1 million in the first quarter of fiscal 2010. This increase in revenue was the result of a shortage of capacity in our industry and rate increases we were able to implement given the favorable switch in capacity and demand in the industry. This combination of factors resulted in a market increase in average revenue per tractor per week, which is our primary measure of asset productivity, to $2,637 in the first quarter of fiscal 2011, from $2,495 for the first quarter of fiscal 2010.

Fuel surcharge revenue increased to $20.8 million in the first quarter of fiscal 2011 from $17.2 million for the first quarter of fiscal 2010.

In discussing our results of operations, we use revenue before fuel surcharge and fuel, net of fuel surcharge, because we believe that eliminating the impact of the sometimes volatile source of revenue affords more consistent basis for comparing our results of operations from period to period.
 

 
 
16

 
Salaries, wages, and employee benefits were $38.1 million, or 31.9% of revenue before fuel surcharge (“revenue”), for the first quarter of fiscal 2011, compared to $40.0 million, or 36.1% of revenue, for the first quarter of fiscal 2010.  These decreases were the result of a decrease in driver payroll related to a decrease in company miles, a decrease in stock compensation related expenses, and a decrease in medical benefits expense.

Fuel expenses decreased to $11.5 million, or 9.6% of revenue, for the first quarter of fiscal 2011, compared to $12.6 million, or 11.4% of revenue, for the first quarter of fiscal 2010. These decreases were primarily attributable to a decrease in total miles offset by the average fuel price increasing to $2.55 per gallon in the first quarter of fiscal 2011, compared to $2.32 per gallon in the first quarter of fiscal 2010. 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 positive impact to be partially offset by lower fuel economy on EPA-mandated new engines and use of more costly ultra-low sulfur diesel fuel.

Purchased transportation increased to $25.9 million, or 21.7% of revenue, for the first quarter of fiscal 2011, from $18.1 million, or 16.4% of revenue, for the first quarter of fiscal 2010. These increases are primarily related to an increase in independent contractor miles to 13.1 million in the first quarter of fiscal 2011 compared to 8.3 million miles in the first quarter of fiscal 2010. Independent contractors are drivers who cover all their operating expenses (fuel, driver salaries, maintenance, and equipment costs) for a fixed payment per mile. We expect purchased transportation to increase as we increase the number of independent contractors in our fleet and continue to increase our purchased transportation for brokerage and intermodal transportation.

Revenue equipment rentals decreased to $7.5 million, or 6.2% of revenue, for the first quarter of fiscal 2011, compared to $9.4 million, or 8.5% of revenue, for the first quarter of fiscal 2010. These decreases were attributable to a decrease in the number of tractors and trailers financed under operating leases. At September 30, 2010, 1,668 tractors, or 63.5% of our company tractors, were held under operating leases, compared to 1,824 tractors, or 62.8% of our company tractors, at September 30, 2009. We expect our revenue equipment rental to decrease as a percentage of freight revenue going forward.

Operations and maintenance increased to $10.2 million, or 8.5% of revenue, for the first quarter of fiscal 2011, from $8.7 million, or 7.8% of revenue, for the first quarter of fiscal 2010. Operations and maintenance consist of direct operating expense, maintenance, and tire expense. These increases in the first quarter of fiscal 2011 are primarily related to increases in costs associated with tire expense, tractor maintenance, decreased warranty recovery and physical damage expenses compared to the first quarter of fiscal 2010.  We expect our operations and maintenance expense to trend back down towards historical levels going forward, subject to winter weather conditions that may impact these expenses.

Insurance and claims expense increased to $4.1 million, or 3.5% of revenue, for the first quarter of fiscal 2011, from $3.9 million, or 3.6% of revenue, for the first quarter of fiscal 2010. Insurance consists of premiums for liability, physical damage, cargo damage, and workers' compensation insurance, in addition to claims expense. These increases resulted primarily from increases in liability and workers' compensation claims expense offset by a decrease in cargo claims expense. Our insurance program involves self-insurance at various risk retention levels. Claims in excess of these risk levels are covered by insurance in amounts we consider to be adequate. We accrue for the uninsured portion of claims based on known claims and historical experience. We continually revise and change our insurance program to maintain a balance between premium expense and the risk retention we are willing to assume. Insurance and claims expense will vary based primarily on the frequency and severity of claims, the level of self-retention, and the premium expense.

Depreciation and amortization, consisting primarily of depreciation of revenue equipment, decreased to $7.5 million, or 6.3% of revenue, for the first quarter of fiscal 2011, compared to $8.0 million, or 7.2% of revenue, for the first quarter of fiscal 2010. These decreases were primarily attributable to decreased tractor depreciation, related to a net decrease of tractors in our owned fleet as compared to the first quarter of fiscal 2010. This decrease included a reduction in losses on sale of equipment, which include expenses to prepare the equipment for sale, whereas there were no gains or losses in the 2011 fiscal quarter. 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 operating expenses are relatively minor in amount, and there were no significant changes in such expenses. Accordingly, we have not provided a detailed discussion of such expenses.
 

 
 
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Income taxes increased to $3.3 million, with an effective tax rate of 42.6%, for the first quarter of fiscal 2011, from $1.4 million, with an effective tax rate of 71.5%, for the first quarter of fiscal 2010. As pre-tax net income increases, our non-deductible expenses, such as per diem expense, have a lesser impact on our effective rate.

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 in the future. 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 September 30, 2010, we were authorized to borrow up to $40.0 million under a revolving line of credit, which is supported by a credit agreement with a group of banks and expires January 23, 2013. The applicable interest rate under this agreement is based on either a base rate equal to the greater of the federal funds rate plus an applicable margin between 0.75% and 1.50% and the administrative agent’s prime rate or LIBOR plus an applicable margin between 2.25% and 3.00% that is adjusted quarterly on cash flow coverage.  At September 30, 2010, we had no outstanding borrowings related to our credit facility and $0.5 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 September 30, 2010.

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 our primary credit facility, 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

Net cash provided by operations for the three months ended September 30, 2010 was $8.8 million, compared to cash provided by operations of $9.0 million for the three months ended September 30, 2009. Cash provided by operations decreased due to an increase in prepaid expenses offset by an increase in net income and a decrease in trade receivables.

Net cash used in investing activities was $8.1 million for the three months ended September 30, 2010, compared to net cash used in investing activities of $7.5 million for the three months ended September 30, 2009. Cash used in investing activities includes the net cash effect of acquisitions and dispositions of revenue equipment during each period. Capital expenditures for equipment totaled $16.3 million for the three months ended September 30, 2010, and $11.7 million for the three months ended September 30, 2009. We generated proceeds from the sale of property and equipment of $8.2 million and $4.3 million for the three months ended September 30, 2010, and September 30, 2009, respectively.

Net cash used in financing activities was $7.8 million for the three months ended September 30, 2010, compared to $0.6 million for the three months ended September 30, 2009. The increase in cash used for financing activities was primarily due to an increase in payments of capital lease obligations. Financing activity represents borrowings (new borrowings, net of repayment) and payments of the principal component of capital lease obligations.
 

 
 
18

 
Contractual Obligations

As of September 30, 2010, our operating leases, capitalized leases, other debts, and future commitments have stated maturities or minimum annual payments as follows:

   
Annual Cash Requirements
 
   
As of September 30, 2010
 
   
(in thousands)
 
   
Payments Due by Period
 
          Less                
More
 
          than      1-3      3-5    
than
 
   
Total
    1 year    
years
   
Years
   
5 years
 
                                   
Operating leases
  $ 82,282     $ 33,227     $ 36,329     $ 7,286     $ 5,440  
Lease residual value guarantees
    82,515       13,106       53,645       14,463       1,301  
Capital leases(1)
    28,754       13,871       14,883       ---       ---  
Long-term debt(1)
    267       267       ---       ---       ---  
Sub total
  $ 193,818     $ 60,471     $ 104,857     $ 21,749     $ 6,741  
                                         
Employment and consulting agreements(2)
  $ 700     $ 700       ---       ---       ---  
Standby letters of credit
    513       513       ---       ---       ---  
                                         
Total
  $ 195,031     $ 61,684     $ 104,857     $ 21,749     $ 6,741  
 
(1)
Includes interest
(2)
The amounts reflected in the table do not include amounts that could become payable to our Chief Executive Officer and Chief Operating Officer under certain circumstances if their employment by the Company is terminated.
 
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 $82.5 million at September 30, 2010, compared to $78.6 million at September 30, 2009. We believe that any residual payment obligations will be satisfied 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 cash generated from operations and operating leases to finance tractor purchases and operating leases to finance trailer purchases.

Critical Accounting Policies

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America require that management make a number of assumptions and estimates that affect the reported amounts of assets, liabilities, revenue, and expenses in our consolidated financial statements and accompanying notes. Management bases it estimates on historical experience and various other assumptions believed to be reasonable. Although these estimates are based on management’s best knowledge of current events and actions that affect, or could affect our financial statements materially and involve a significant level of judgment by management. The accounting policies we deem most critical to use include revenue recognition, allowance for doubtful accounts, depreciation, claims accrual, and accounting for income taxes. There have been no significant changes to our critical accounting policies and estimates during the three months ended September 30, 2010, compared to those disclosed in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operation,” included in our 2010 Annual Report on Form 10-K.
 

 
 
19

 
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 inclement weather.  We have substantial operations in the Midwestern and Eastern United States and Canada.  For the reasons stated, in those geographic regions in particular, third 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.  Also, during September and October, business generally increases as a result of increased retail merchandise shipped in anticipation of the holidays.

Item 3.                 Quantitative and Qualitative Disclosures about Market Risk

We experience various market risks, including fluctuations in interest rates, variability in currency exchange rates, and fuel prices. We have established policies, procedures and internal processes governing our management of market risks and the use of financial instruments to manage our exposure to such risks.

Interest Rate Risk. We are exposed to interest rate risk principally from our primary credit facility. At September 30, 2010, we did not have any debt outstanding related to our credit facility and therefore had no market risk related to debt.

Currency Exchange Rate Risk. We are subject to variability in foreign currency exchange rates in our international operations. Exposure to this variability is periodically managed primarily through the use of natural hedges, whereby funding obligations and assets are both managed in the local currency. We, from time-to-time, enter into currency exchange agreements to manage our exposure arising from fluctuating exchange rates related to specific and forecasted transactions. We operate this program pursuant to documented corporate risk management policies and do not enter into derivative transactions for speculative purposes.

Our currency risk consists primarily of foreign currency denominated firm commitments and forecasted foreign currency denominated intercompany and third party transactions. At September 30, 2010, we had outstanding foreign exchange derivative contracts in notional amounts of $12.1 million with a fair value of these contracts approximately $0.2 million more than the original contract value. 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.

Assuming revenue and expenses for our Canadian operations identical to that in the first quarter of fiscal 2011 (both in terms of amount and currency mix), we estimate that a $0.01 decrease in the Canadian dollar exchange rate would reduce our annual net income by approximately $39,000. Also, we estimate that a $0.01 decrease in the Mexican peso exchange rate would reduce our annual net income by approximately $34,000.

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. We believe fuel surcharges are effective at mitigating most, but not all, of the risk of high fuel price because we do not recover the full amount of fuel price increases. In July 2010, we entered into contracts to hedge up to 0.6 million gallons per month for up to one year. At September 30, 2010, we had outstanding contracts in place for a notional amount of $13.6 million with a fair value of these contracts approximately $1.4 million more than the original contract value. 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.

 
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Item 4.                      Controls and Procedures

As required by Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Company has carried out an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. This evaluation was carried out under the supervision and with the participation of the Company's management, including our principal executive officer and our principal financial officer. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q. There were no changes in the Company's internal control over financial reporting that occurred during the first quarter of fiscal 2011 that have materially affected, or that are reasonably likely to materially affect, the Company's internal control over financial reporting.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in the Company's reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in Company reports filed under the Exchange Act is accumulated and communicated to management, including the Company's principal executive and principal financial officer as appropriate, to allow timely decisions regarding disclosures.

The Company has confidence in its disclosure controls and procedures. Nevertheless, the Company's management, including the principal executive officer and principal financial officer, does not expect that our disclosure controls and procedures will prevent all errors or intentional fraud. An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of such internal controls are met. Further, the design of an internal control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all internal control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.


 
21


Part II.                 Other Information

Item 1.                 Legal Proceedings

There are various claims, lawsuits, and pending actions against the Company and its subsidiaries which arose in the normal course of the operations of its business. The Company believes many of these proceedings are covered in whole or in part by insurance and that none of these matters will have a material adverse effect on its consolidated financial position or results of operations in any given period.

On August 8, 2007, the 384th District Court of the State of Texas situated in El Paso, Texas, rendered a judgment against CTSI, for approximately $3.4 million in the case of Martinez v. Celadon Trucking Services, Inc., which was originally filed on September 4, 2002. The case involves a workers' compensation claim of a former employee of CTSI who suffered a back injury as a result of a traffic accident. CTSI and the Company believe all actions taken were proper and legal and contend that the proper and exclusive place for resolution of this dispute was before the Indiana Workers' Compensation Board. In October 2007, CTSI posted an appeal bond and filed an appeal of this decision to the Texas Court of Appeals. The ATA Litigation Center filed an amicus brief in support of our position with the Texas Court of Appeals. Oral arguments on this case were held February 18, 2010. Celadon argued its case before the Texas Court of Appeals and on March 24, 2010, the Texas Court of Appeals reversed the judgment and dismissed Martinez’ suit in its entirety finding that the Indiana Workers Compensation Board had exclusive jurisdiction over this dispute.  The Plaintiff filed a petition to appeal with the Texas Supreme Court in an attempt to reverse the Texas Court of Appeals’ decision by the extended deadline to file granted to them of October 15, 2010.  The Texas Supreme Court has not yet made a decision on whether they will accept the appeal or dismiss it.

Item 1A.                 Risk Factors

While we attempt to identify, manage, and mitigate risks and uncertainties associated with our business, some level of risk and uncertainty will always be present. Our Annual Report on Form 10-K for the year ended June 30, 2010, in the section entitled Item 1A. Risk Factors, describes some of the risks and uncertainties associated with our business. These risks and uncertainties have the potential to materially affect our business, financial condition, results of operations, cash flows, projected results, and future prospects.

 
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Item 6.                     Exhibits

3.1
Amended and Restated Certificate of Incorporation of the Company, effective January 12, 2006. (Incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ending December 31, 2005, filed with the SEC on January 30, 2006.)
3.2
Certificate of Designation for Series A Junior Participating Preferred Stock. (Incorporated by reference to Exhibit 3.3 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2000, filed with the SEC on September 28, 2000.)
3.3
Amended and Restated By-laws of the Company. (Incorporated by reference to Exhibit 3 to the Company's Current Report on Form 8-K filed with the SEC on July 3, 2006.)
4.1
Amended and Restated Certificate of Incorporation of the Company, effective January 12, 2006. (Incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ending December 31, 2005, filed with the SEC on January 30, 2006.)
4.2
Amended and Restated By-laws of the Company. (Incorporated by reference to Exhibit 3 to the Company's Current Report on Form 8-K filed with the SEC on July 3, 2006.)
Certification pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by Stephen Russell, the Company's Chief Executive Officer.*
Certification pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by William Meek, the Company's Principal Financial Officer.*
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes–Oxley Act of 2002, by Stephen Russell, the Company's Chief Executive Officer.*
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by William Meek, the Company's Principal Financial Officer.*

*  Filed herewith
 

 
23


SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


 
Celadon Group, Inc.
(Registrant)
   
   
  /s/ Stephen Russell
 
Stephen Russell
 
Chief Executive Officer
   
   
  /s/ William E. Meek
 
William E. Meek
 
Principal Financial Officer, Vice President, and Treasurer
   
   
 
/s/ Bart Middleton
 
Bart Middleton
 
Principal Accounting Officer and Vice President
   
Date:           November 9, 2010
 

 
 

 
 



EXHIBIT INDEX
 
Exhibit Number
Description
3.1
Amended and Restated Certificate of Incorporation of the Company, effective January 12, 2006. (Incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ending December 31, 2005, filed with the SEC on January 30, 2006.)
3.2
Certificate of Designation for Series A Junior Participating Preferred Stock. (Incorporated by reference to Exhibit 3.3 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2000, filed with the SEC on September 28, 2000.)
3.3
Amended and Restated By-laws of the Company. (Incorporated by reference to Exhibit 3 to the Company's Current Report on Form 8-K filed with the SEC on July 3, 2006.)
4.1
Amended and Restated Certificate of Incorporation of the Company, effective January 12, 2006. (Incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ending December 31, 2005, filed with the SEC on January 30, 2006.)
4.2
Amended and Restated By-laws of the Company. (Incorporated by reference to Exhibit 3 to the Company's Current Report on Form 8-K filed with the SEC on July 3, 2006.)
Certification pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by Stephen Russell, the Company's Chief Executive Officer.*
Certification pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by William Meek, the Company's Principal Financial Officer.*
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes–Oxley Act of 2002, by Stephen Russell, the Company's Chief Executive Officer.*
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by William Meek, the Company's Principal Financial Officer.*
   
*  Filed herewith