Item 7
. Management's Discussion and Analysis of Financial Condition and Results of Operations
Recent Results and Fiscal Year-End Financial Condition
For the fiscal year ended June 30, 2016, total revenue increased 18.3%, to $1.07 billion from $900.8 million during fiscal 2015. Freight revenue, which excludes revenue from fuel surcharges, increased 25.8%, to $968.7 million in fiscal 2016 from $770.0 million in 2015. We generated net income of $24.8 million, or $0.88 per diluted share, for fiscal 2016 compared with net income of $37.2 million, or $1.52 per diluted share, for fiscal 2015.
Average freight revenue per loaded mile for fiscal 2016, excluding fuel surcharge, increased 6.8% to $1.884 compared with $1.764 per mile in 2015. Average freight revenue per tractor per week increased by 5.7% to $3,229 in fiscal 2016 compared with $3,056 for fiscal 2015. Our operating margin, excluding the effect of fuel surcharge (which is calculated as the percentage of operating expenses net of fuel surcharge over freight revenue), decreased to 94.6% for fiscal 2016 compared with 91.5% for fiscal 2015.
At June 30, 2016, our total balance sheet debt was $450.8 million and our total stockholders' equity was $381.0 million, for a total debt to capitalization ratio of 54.2%. At June 30, 2016, we had $145.4 million of available borrowing capacity under our revolving credit facility.
Quality Companies Memorandum of Understanding
On September 13, 2016, we signed a Memorandum of Understanding (the “MOU”) with Quality's main third party financing provider, under which substantially all of Quality's tractors under management owned by such third party financing provider, 19
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Capital, and Quality would be combined into 19
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Capital as a joint venture. Under the MOU, the joint venture would own all or substantially all of the 11,300 tractors under management by Quality that are currently owned by a combination of Quality, 19
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Capital, and the financing provider. The existing agreements with the third party financing provider would be terminated and replaced with definitive agreements contemplated by the MOU, as discussed below. We believe the transactions contemplated by the MOU would be consistent with our goals of lowering the amount of capital we have invested in leasing assets, converting Quality into an asset-light servicing entity, and eliminating the cash flow risk of the Lease Shortfall Advance. Our goal is to complete the joint venture during our second quarter of fiscal 2017.
Under the joint venture, we would contribute (i) approximately $20 million in cash (which would be paid by the third party financing provider on behalf of us at closing by settling the approximately $20 million receivable related to reimbursement of existing Lease Shortfall Advances), and (ii) certain tractors we own that have an aggregate net book value of approximately $75 million free and clear of any debt, for a net contribution valued by the joint venture at $95 million. In exchange, we would receive a 50% interest in the joint venture. At the same time, we would sell approximately $72 million of tractors to the joint venture in exchange for $50 million in cash plus receipt of $22 million of trailers currently held by such third party financing provider, and we would use the cash to reduce our revolver balance. The third party financing provider would contribute its existing leasing portfolio and associated debt as well as cash in exchange for its 50% interest in the joint venture. In addition, it is anticipated that Quality would enter into servicing arrangements with the joint venture providing for a monthly servicing fee per tractor. The servicing arrangement would not include the obligation to make Lease Shortfall Advances or any similar arrangement.
We anticipate that the third party financing provider and we would jointly control the joint venture, with substantially all decisions requiring joint approval. We would not have any financial obligation for the debt of the joint venture, and we would expect to record our interest in the joint venture under the equity method of accounting.
The MOU only provides a preliminary outline with respect to this potential transaction, and the consummation of the transaction is subject to negotiation and execution of definitive agreements, due diligence, board approval of both parties, certain consent requirements, and successful redemption of the other existing owners of 19
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Capital. Accordingly, the joint venture may not be consummated. If it is not consummated, we anticipate that Quality’s financing arrangements would, at least initially, continue as currently structured.
See "Risk Factors – Risks Relating to Quality and its Financing Arrangements."
If the joint venture is consummated, our investment in the joint venture would be subject to significant risks, including the risk that the owners of the joint venture cannot agree on significant decisions or that Quality is terminated as servicer and we lose the servicing income and incur downsizing expenses. Additional risks associated with the joint venture will be identified if the transactions contemplated by the MOU are completed.
Revenue
We primarily generate revenue by transporting freight for our customers or by arranging for transportation of their freight. Generally, we are paid by the mile or by the load for our freight services. We also derive revenue from fuel surcharges, loading and unloading activities, equipment detention, other trucking related services, warehousing services, and revenue equipment leasing and lease servicing by our Quality Equipment Leasing, LLC subsidiary. The main factors that affect our revenue are the revenue per mile we receive from our customers, the percentage of miles for which we are compensated, the number of tractors operating, and the number of miles we generate with our equipment. These factors relate to, among other things, the U.S. economy, inventory levels, the level of truck capacity in our markets, specific customer demand, the percentage of team-driven tractors in our fleet, driver and independent contractor availability, and our average length of haul.
We remove fuel surcharges from revenue to obtain what we refer to as "freight revenue" when calculating operating ratios and some of our operating data. We believe that evaluating our operations without considering the impact of fuel surcharges, which generally correlate with fuel prices and are sometimes a volatile source of revenue, affords a more consistent basis for comparing our results of operations from period to period. Freight revenue is a financial measure that is not in accordance with generally accepted accounting principles ("GAAP"). This measure is a supplemental non-GAAP financial measure that is used by management and external users of our financial statements, such as industry analysts, investors, and lenders. While we believe such measure is useful for investors, it should not be used as a replacement for financial measures that are in accordance with GAAP.
Expenses and Profitability
The main expenses impacting our profitability are attributable to the variable costs of transporting freight for our customers. These costs include fuel expense, driver-related expenses, such as wages, benefits, training, and recruitment, and independent contractor costs, which we record as purchased transportation. Expenses that have both fixed and variable components include maintenance and tire expense and our total cost of insurance and claims. These expenses generally vary with the miles we travel, but also have a controllable component based on safety, fleet age, efficiency, and other factors. Our main fixed cost is the acquisition and financing of long-term assets, primarily revenue equipment. We have other mostly fixed costs, such as our non-driver personnel and facilities expenses.
The trucking industry has experienced significant increases in expenses over the past several years, which include those relating to equipment costs, driver compensation, insurance, and, at times, fuel. As the economy continues to grow and capacity in the trucking industry tightens due to impending federal regulation, we believe that rates will begin to increase. We expect the limited pool of qualified drivers and intense competition to recruit and retain those drivers will constrain overall industry capacity for the foreseeable future. However, we expect our recent recruiting and retention efforts, which include the introduction of our driving school and reduction of our fleet age, to aid our competitiveness in this area.
Revenue Equipment
As of June 30, 2016, we operated 5,547 tractors and 15,369 trailers. Of our tractors at June 30, 2016, 1,665 were owned, 812 were acquired under operating leases, 1,574 were acquired under capital leases, and 1,496 were provided by independent contractors. Of our trailers at June 30, 2016, 4,661 were owned, 6,351 were acquired under operating leases, and 4,357 were acquired under capital leases.
We use a combination of cash and leases to acquire new tractors, while most of our new trailers are acquired with leases. These leases generally run for a period of three years for tractors and seven years for trailers. When we finance revenue equipment acquisitions with operating leases, rather than borrowings or capital leases, the interest component of our financing activities is recorded as an "above-the-line" operating expense on our statements of operations.
Independent contractors who operate for us provide a tractor and a driver and are responsible for all operating expenses in exchange for a fixed payment per mile. When utilizing independent contractors, we do not have the capital outlay of purchasing the tractors. The payments to independent contractors are recorded in purchased transportation and the payments for equipment under operating leases are recorded in revenue equipment rentals. Expenses associated with independent contractors, such as interest, depreciation, driver compensation, fuel, and other expenses are not incurred by the Company. Based on these factors, we evaluate our efficiency using our operating ratio, as well as income before income taxes.
Other Assets
We have recorded in our assets on our consolidated balance sheet an amount that represents advances made to our main third party financing party relating to our Lease Shortfall Advance arrangement. These advances are for shortfalls between the required lease payments and the amount actually collected from the independent contractor or fleet. Our main third party financing party is required to reimburse us for Lease Shortfall Advance payments and, accordingly, we have accounted for the related receivable under other assets on our consolidated balance sheet, in the amount of $31.9 million as of June 30, 2016.
Leased Assets
We have recorded leased equipment on our consolidated balance sheet of $99.3 million. Our leasing and services segment leases this equipment out to independent contractors and fleets. Included in this balance is approximately $37.0 million of assets for which we received $30.0 million in proceeds from 19
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Capital. Although we transferred title of these assets, we retained certain risks of ownership through a deferred payment stream associated with the ultimate disposition of the equipment at the end of the lease period. We deemed that this transaction did not qualify for sales treatment under ASC 840-20-40-3. As a result, these assets were not removed from our balance sheet. The remainder of the assets are currently under lease with an independent contractor or fleet or are open to be leased to an independent contractor or fleet.
Fourth Quarter Overview and Outlook
The trucking environment during the fourth quarter of fiscal 2016 was characterized by lackluster freight volumes, plentiful industry-wide capacity in most markets, and significant rate pressure from customers during contractual negotiations. These factors negatively impacted our average revenue per total mile by approximately 1.0% compared with the 2015 quarter, and average miles per seated tractor declined by approximately 2.4%. With the imbalance between demand and industry-wide truck capacity, the freight we obtained from the spot market to maintain adequate truck utilization was less compensatory. Spot market freight comprised approximately 4.7% of trucking revenue in fourth quarter of fiscal 2016, compared with 7.7% in the same quarter last year, but spot market rates declined approximately 20%. We anticipate seeing a similar trend in our average revenue per mile for the current quarter, and believe we will see flat to slightly down rates for the remainder of the calendar year.
Due to the challenging environment, during the fourth quarter of fiscal 2016 we continued to take measures to improve equipment utilization sequentially. Compared with the same quarter of 2015, our average seated tractor count grew nearly 7.0% due to transactions during calendar 2015. However, we downsized the fleet during the fourth fiscal quarter of 2016, reducing average seated tractor count by 274 trucks, or 5.4%, compared with the third quarter of fiscal 2016. Operating fewer tractors contributed to a 102 mile, or 5.8%, increase in average miles per seated tractor compared with the third quarter of fiscal 2016. For the near term, we intend to manage our fleet size based on available freight in more profitable lanes. In addition, we intend to focus on contract renewals and new business for our dedicated operations, which consisted of 1,774 trucks at June 30, 2016, and allocating freight that does not fit our core network and pricing needs to our asset light division, which has seen approximately 15% growth in revenue compared with the fourth quarter of fiscal 2015. Average revenue per tractor per week declined approximately 3.3% compared with the fourth quarter of fiscal 2015. However, this metric improved for the third consecutive quarter, and we believe our efforts are showing progress.
Results of Operations
The following tables set forth the percentage relationship of revenue and expense items to operating and freight revenue for the periods indicated.
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Fiscal year ended June 30,
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Operating revenue
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100.0
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%
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100.0
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%
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100.0
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%
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Operating expenses:
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Salaries, wages, and employee benefits
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30.4
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29.0
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27.7
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Fuel
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9.7
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16.1
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22.6
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Purchased transportation
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33.2
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27.2
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22.9
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Revenue equipment rentals
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1.6
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0.8
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0.9
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Operations and maintenance
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6.7
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6.3
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6.5
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Insurance and claims
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3.4
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3.2
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2.5
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Depreciation and amortization
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7.5
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8.4
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8.5
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Communication and utilities
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1.0
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0.9
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0.8
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Operating taxes and licenses
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1.9
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1.8
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1.8
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General and other operating
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1.7
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1.6
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1.5
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Gain on disposition of equipment
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(2.0
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)
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(2.6
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)
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(0.9
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)
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Total operating expenses
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95.1
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92.7
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94.8
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Operating income
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4.9
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7.3
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5.2
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Interest expense
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1.3
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0.9
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0.7
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Other expense (income), net
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0.0
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0.0
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(2.1
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)
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Income before income taxes
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3.6
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6.4
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6.6
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Provision for income taxes
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1.3
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2.3
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2.6
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Net income
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2.3
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%
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4.1
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%
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4.0
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%
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Freight revenue
(1)
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100.0
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%
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100.0
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%
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100.0
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%
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Operating expenses:
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Salaries, wages, and employee benefits
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33.4
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33.9
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34.1
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Fuel
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0.7
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1.8
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4.5
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Purchased transportation
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36.5
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31.9
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28.3
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Revenue equipment rentals
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1.8
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1.0
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1.1
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Operations and maintenance
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7.4
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7.3
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8.1
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Insurance and claims
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3.8
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3.8
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3.1
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Depreciation and amortization
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8.2
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9.8
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10.5
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Communication and utilities
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1.0
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1.1
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1.0
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Operating taxes and licenses
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2.1
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2.1
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2.2
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General and other operating
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1.9
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1.9
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1.8
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Gain on disposition of equipment
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(2.2
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)
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(3.1
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)
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(1.1
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)
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Total operating expenses
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94.6
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91.5
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93.6
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Operating income
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5.4
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8.5
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6.4
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Interest expense
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1.4
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1.0
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0.8
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Other expense (income), net
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0.0
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0.0
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(2.6
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)
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Income before income taxes
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4.0
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7.5
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8.2
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Provision for income taxes
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1.4
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2.7
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3.2
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Net income
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2.6
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%
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4.8
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%
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5.0
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%
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(1)
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Freight revenue is equal to total operating revenue less fuel surcharges. In this table, fuel surcharges are eliminated from revenue and subtracted from fuel expense. The amounts were $96.7 million, $130.8 million, and $143.9 million in fiscal 2016, 2015, and 2014, respectively. Freight revenue is not a recognized measure under GAAP and should not be considered an alternative to or superior to other measures derived in accordance with GAAP. We believe our presentation of freight revenue and our discussion of various expenses as a percentage of freight revenue is a useful way to evaluate our core operating performance.
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Fiscal year ended June 30, 2016, compared with fiscal year ended June 30, 2015
Total revenue increased by $164.6 million, or 18.3%, to $1.07 billion for fiscal 2016, from $900.8 million for fiscal 2015. Freight revenue increased by $198.7 million, or 25.8%, to $968.7 million for fiscal 2016, from $770.0 million for fiscal 2015. These increases were primarily attributable to an increase in freight rates due to growth in our dedicated fleet, growth in our seated tractor count, and an increase in loaded miles. Average freight revenue per loaded mile, excluding fuel surcharge, increased to $1.884 in fiscal 2016 from $1.764 for fiscal 2015, or 6.8%. We anticipate seeing a similar trend in our average freight revenue per loaded mile for the first quarter of fiscal 2017, and believe we will see flat to slightly down rates for the remainder of the calendar year. Loaded miles increased to 400.3 million in fiscal 2016, compared to 350.1 million in fiscal 2015. Average seated tractor count increased substantially between fiscal 2015 and fiscal 2016 primarily as a result of our acquisitions.
Slightly offsetting these increases was a decrease in miles per seated truck of 8.6% versus fiscal 2015, which resulted primarily from acquired fleets having shorter average length-of-hauls and the rise in our seated count outpacing freight demand. As a result of the foregoing, average revenue per seated tractor per week, our primary productivity measure for our asset-based segment, decreased to $2,956 in fiscal 2016 from $3,058 in fiscal 2015, or 3.5%, due to industry overcapacity and sluggish freight volumes. This decrease compressed our variable and fixed cost margins. Going forward, our primary focus is improving average revenue per seated tractor per week.
Revenue for our asset-light segment increased to $126.4 million in fiscal 2016 compared to $90.5 million in fiscal 2015, or 39.7%. The increase is primarily related to increased revenues in both the LTL/brokerage business and warehousing business that make-up our asset-light segment. We expect our asset-light business to experience moderate revenue growth going forward as we continue to take advantage of synergies created through our acquisitions and leverage specialized service capabilities of acquired businesses.
Revenue from our newly established equipment leasing and services segment was $27.9 million in the fiscal 2016 period. Our equipment leasing and services segment consists of tractor and trailer leasing and also includes revenue from insurance, maintenance, and other ancillary services that we provide for, or make available to, independent contractors and fleets. Recently, the focus of our equipment leasing and services segment has shifted from the sale of leased tractors and trailers to providing services. These services include sales, leasing, business services, maintenance, and insurance. We expect this shift to provide a more stable revenue stream and to reduce the potentially volatile impact of gains from sales of leased tractors and trailers. We anticipate revenue related to these service offerings to see some growth in the future as we continue to expand.
Fuel surcharge revenue decreased to $96.7 million from $130.8 million for fiscal 2016 and 2015, respectively. Fuel surcharge revenue decreased despite an increase in loaded miles which was more than offset by a significant decrease in United States Department of Energy ("DOE") national average diesel fuel prices from which our fuel surcharge is calculated.
Salaries, wages, and employee benefits were $323.9 million, or 30.4% of operating revenue and 33.4% of freight revenue, for fiscal 2016, compared to $261.2 million, or 29.0% of operating revenue and 33.9% of freight revenue, for fiscal 2015. Increased salaries, wages, and employee benefits expenses were largely due to increases in administrative salaries due to increased headcount, driver salaries due to increased miles, recruiting expenses due to expanded recruiting efforts, and medical benefits expense. Recruiting expenses increased due to our focus on increasing the number of seated tractors and higher recruiting costs resulting from a competitive driver market. Administrative payroll has increased in connection with the integration of acquired operations. We have continued investing in expanding our driving school, which has produced a significant number of drivers for our fleet. Although we expect the market for drivers to remain competitive and to place ongoing pressure on these expenses, we believe our increased focus on eliminating recruiting redundancies and generating back office efficiencies, as well as expected growth in our independent contractor fleet, will cause these expenses to remain flat as a percentage of revenue.
Fuel expenses, without reduction for fuel surcharge revenue, decreased to $103.0 million, or 9.7% of operating revenue, for fiscal 2016, compared to $144.7 million, or 16.1% of operating revenue, for fiscal 2015. Fuel expenses, net of fuel surcharge revenue of $96.7 million and $130.8 million for fiscal 2016 and fiscal 2015, respectively, decreased to $6.3 million, or 0.7% of freight revenue, for fiscal 2016, compared to $13.9 million, or 1.8% of freight revenue, for fiscal 2015. These decreases were due to a 28.3% decrease in average DOE fuel prices to $2.36 per gallon for fiscal 2016, from $3.29 per gallon for fiscal 2015 and an increase in miles per gallon. These decreases were also caused by an increase in independent contractors as a percentage of the total fleet, as independent contractors incur their own fuel costs, which are in purchased transportation. Integration of new equipment, coupled with the replacement of older units acquired in business combinations, contributed to the increase in miles per gallon to 7.73 for the fiscal 2016 period from 7.10 for the fiscal 2015 period. We expect that our continued efforts to reduce idling and operate more fuel-efficient tractors and aerodynamic trailers will continue to have a positive impact on our miles per gallon. However, we expect this positive impact to be partially offset by increasing fuel costs per gallon and the use of more costly ultra-low sulfur diesel fuel.
Purchased transportation increased to $354.1 million, or 33.2% of operating revenue and 36.5% of freight revenue, for fiscal 2016, from $245.4 million, or 27.2% of operating revenue and 31.9% of freight revenue, for fiscal 2015. These increases are primarily related to independent contractor expenses, with slight increases to intermodal transportation expenses and LTL/brokerage expenses. We believe our increased utilization of independent contractors and increased focus on these areas of our business has led to increased revenue as well as the costs associated with generating that revenue. We expect purchased transportation to increase as we continue our efforts to increase our LTL/brokerage and intermodal transportation businesses, as well as grow our number of independent contractors as a percentage of our total fleet.
Revenue equipment rental increased to $17.6 million, or 1.6% of operating revenue and 1.8% of freight revenue, for fiscal 2016, from $7.4 million, or 0.8% of operating revenue and 1.0% of freight revenue, for fiscal 2015. Operating leases have become an increasingly important source of financing for our revenue equipment and certain real estate. Our revenue equipment rental expense increased primarily due to additional trailer units held under operating leases.
Operations and maintenance consist of direct operating expense, maintenance, physical damage, and tire expense. This category increased to $71.3 million, or 6.7% of operating revenue and 7.4% of freight revenue, for fiscal 2016, from $56.2 million, or 6.3% of operating revenue and 7.3% of freight revenue, for fiscal 2015. These increases were primarily related to the maintenance requirements of equipment added due to acquisitions and increased maintenance costs due to emission reduction systems on our newer tractors. We believe that maintenance costs will remain consistent as we have substantially completed replacement of older equipment. Additionally, newer equipment repairs are more likely to be covered by warranty, creating further reductions to our maintenance expense.
Insurance and claims expense increased to $36.7 million, or 3.4% of operating revenue and 3.8% of freight revenue, for fiscal 2016, compared to $29.1 million, or 3.2% of operating revenue and 3.8% of freight revenue, for fiscal 2015. Insurance consists of premiums for liability, physical damage, cargo, and workers' compensation insurance. These increases are attributable to an increase in liability claims and workers' compensation claims due to an increase in the number and/or severity of claims reported, including adverse loss development of approximately $1.0 million. Also included in insurance and claims expense for fiscal 2016 was the one-time expense related to an unfavorable outcome on a class action lawsuit previously disclosed in note 9 to the consolidated financial statements. The total expense incurred for this lawsuit during fiscal 2016 was $2.5 million. 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 periodically review and adjust our insurance program to maintain a balance between premium expense and the risk retention we are willing to assume. We expect our insurance and claims expense to be consistent with historical average amounts going forward. However, this category will vary based upon the frequency and severity of claims, the level of self-insurance, and premium expense.
Depreciation and amortization, consisting primarily of depreciation of revenue equipment, increased to $79.6 million, or 7.5% of operating revenue and 8.2% of freight revenue, in fiscal 2016 from $75.3 million, or 8.4% of operating revenue and 9.8% of freight revenue, for fiscal 2015. The increase in absolute dollars was primarily attributable to an increase in owned tractors and trailers as a result of acquisitions in fiscal 2016. Offsetting these increases was the change in estimated useful lives and salvage value of certain tractors and trailers. This change had a total impact of $7.0 million to depreciation expense for the current fiscal period.
Gain on sale of revenue equipment decreased from $23.6 million in fiscal 2015 to $22.4 million in fiscal 2016. We expect gain on sale to decrease as we shift the focus of our equipment leasing and services segment to a more recurring revenue stream and to focus on ancillary services rather than sales of leased equipment. As we shift to a more recurring revenue stream we expect to reduce the potentially volatile impact of gains from sales of leased tractors and trailer. However, gain on sale can vary significantly due to a variety of factors, including availability of replacement equipment and conditions in the new and used equipment markets.
All of our other expenses are relatively minor in amount, and there were no significant changes in these expenses during fiscal 2016. Accordingly, we have not provided a detailed discussion of such expenses.
Our pretax margin, which we believe is a useful measure of our operating performance because it is neutral with regard to the method of revenue equipment financing that a company uses, decreased to 3.6% of operating revenue and to 4.0% of freight revenue for fiscal 2016, from 6.4% of total revenue and 7.5% of freight revenue for fiscal 2015.
Income taxes decreased to $13.6 million, with an effective tax rate of 35.3%, for the fiscal 2016 period, from $20.6 million, with an effective tax rate of 35.7%, for the fiscal 2015 period. We expect our effective tax rate to continue in the range of 35% to 37% in subsequent quarters.
As a result of the factors described above, net income decreased to $24.8 million for fiscal 2016, from $37.2 million for fiscal 2015.
Fiscal year ended June 30, 2015, compared with fiscal year ended June 30, 2014
Total revenue increased by $141.5 million, or 18.6%, to $900.8 million for fiscal 2015, from $759.3 million for fiscal 2014. Freight revenue increased by $154.6 million, or 25.1%, to $770.0 million for fiscal 2015, from $615.4 million for fiscal 2014. This increase was primarily attributable to an increase in freight rates due to the increasing demand for freight services and reduced capacity, as well as an increase in loaded miles. Average freight revenue per loaded mile, excluding fuel surcharge, increased to $1.764 in fiscal 2015 from $1.613 for fiscal 2014, or 9.4%. Loaded miles increased to 350.1 million in fiscal 2015, compared to 303.9 million in fiscal 2014. Average seated tractor count increased substantially between fiscal 2014 and fiscal 2015 primarily as a result of our acquisitions.
Fuel surcharge revenue decreased to $130.8 million from $143.9 million for fiscal 2015 and 2014, respectively. Fuel surcharge revenue decreased despite an increase in loaded miles which was more than offset by a large decrease in United States Department of Energy ("DOE") diesel fuel prices from which our fuel surcharge is calculated.
Revenue for our asset-light segment increased to $90.5 million in fiscal 2015 compared to $52.6 million in fiscal 2014, or 72.1%. The increase is primarily related to increased revenues in both the LTL/brokerage business and warehousing business that make-up our asset-light segment.
Salaries, wages, and employee benefits were $261.2 million, or 29.0% of operating revenue and 33.9% of freight revenue, for fiscal 2015, compared to $209.9 million, or 27.7% of operating revenue and 34.1% of freight revenue, for fiscal 2014. Increased salaries, wages, and benefits were largely due to increased administrative salaries due to increased headcount, driver salaries due to increased miles, recruiting expenses due to expanded recruiting efforts, and medical benefits expense. The increased class sizes and growth of our driving school has increased our recruiting expense. The increase in salaries, wages, and employee benefits was partially offset by the increase in independent contractors as a percentage of our total fleet, which shifted expenses to the purchased transportation line item with offsetting reductions in employee driver wages and related expenses.
Fuel expenses, without reduction for fuel surcharge revenue, decreased to $144.7 million, or 16.1% of operating revenue, for fiscal 2015, compared to $171.7 million, or 22.6% of operating revenue, for fiscal 2014. Fuel expenses, net of fuel surcharge revenue of $130.8 million and $143.9 million for fiscal 2015 and fiscal 2014, respectively, decreased to $13.9 million, or 1.8% of freight revenue, for fiscal 2015, compared to $27.8 million, or 4.5% of freight revenue, for fiscal 2014. These decreases were due to an increase in miles per gallon and a 27.6% decrease in average DOE fuel prices to $2.84 per gallon for fiscal 2015, from $3.92 per gallon for fiscal 2014.
Purchased transportation increased to $245.4 million, or 27.2% of operating revenue and 31.9% of freight revenue, for fiscal 2015, from $173.9 million, or 22.9% of operating revenue and 28.3% of freight revenue, for fiscal 2014. This expense increase is primarily related to the expansion of our service offering mainly related to the acquisition of A&S Kinard and an increase in our independent contractor expense. Our independent contractor expense increased due to an increase in independent contractor miles for fiscal 2015 compared to fiscal 2014. Independent contractors, as a percentage of our seated tractor count, are up from 13.6% as of the end of fiscal 2014 to 21.3% as of the end of fiscal 2015. Independent contractors are drivers who cover all their operating expenses (fuel, driver salaries, maintenance, and equipment costs) for a fixed payment per mile. We also had increases in our LTL/brokerage expense due to increased focus on these areas of our business.
Operations and maintenance consist of direct operating expense, maintenance, physical damage, and tire expense. This category increased to $56.2 million, or 6.3% of operating revenue and 7.3% of freight revenue, for fiscal 2015, from $49.7 million, or 6.5% of operating revenue and 8.1% of freight revenue, for fiscal 2014. The expense increase in fiscal 2015 is primarily related to the increased number of company-owned tractors and trailers as well as an increase in average trailer age to 4.7 years. Acquisitions during the current fiscal year contributed to the increased operation and maintenance cost as well as increased the amount of equipment that is not covered under warranty as the acquired operations utilized older revenue equipment.
Insurance and claims expense increased to $29.1 million, or 3.2% of operating revenue and 3.8% of freight revenue, for fiscal 2015, compared to $19.3 million, or 2.5% of operating revenue and 3.1% of freight revenue, for fiscal 2014. Insurance consists of premiums for liability, physical damage, cargo, and workers' compensation insurance. These increases are attributable to an increase in liability claims and workers' compensation claims due to an increase in the number and/or severity of claims reported including adverse loss development. Our insurance program involves self-insurance at various risk retention levels. Claims in excess of these risk levels are covered by insurance in amounts we consider to be adequate. We accrue for the uninsured portion of claims based on known claims and historical experience. We periodically review and adjust our insurance program to maintain a balance between premium expense and the risk retention we are willing to assume.
Depreciation and amortization, consisting primarily of depreciation of revenue equipment, increased to $75.3 million, or 8.4% of operating revenue and 9.8% of freight revenue, in fiscal 2015 from $64.5 million, or 8.5% of operating revenue and 10.5% of freight revenue, for fiscal 2014. The increased cost is primarily related to the increased number of tractors and trailers owned during the fiscal 2015 period compared to fiscal 2014. Revenue equipment held under operating leases is not reflected on our consolidated balance sheet and the expenses related to such equipment are reflected on our consolidated 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.
Gain on sale of revenue equipment increased from $6.6 million in fiscal 2014 to $23.6 million in fiscal 2015. This increase is due primarily to the equipment that we sold to our third party financing provider.
All of our other expenses are relatively minor in amount, and there were no significant changes in these expenses during fiscal 2015. Accordingly, we have not provided a detailed discussion of such expenses.
Our pretax margin, which we believe is a useful measure of our operating performance because it is neutral with regard to the method of revenue equipment financing that a company uses, decreased to 6.4% of operating revenue and 7.5% of freight revenue for fiscal 2015, from 6.6% of operating revenue and 8.2% of freight revenue for fiscal 2014.
Income taxes increased to $20.6 million for fiscal 2015, from to $19.7 million for fiscal 2014, resulting from higher pre-tax income. Due to the non-deductible effects of our driver per diem pay structure, our tax rate will fluctuate from the 35% standard federal rate in future periods as net income fluctuates.
As a result of the factors described above, net income increased to $37.2 million for fiscal 2015, from $30.7 million for fiscal 2014.
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, to fund our Lease Shortfall Advance obligations to our third party financing provider, and to repay debt, including principal, interest, and lease 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 additional acquisitions. Our principal sources of liquidity are cash generated from operations, bank borrowings, capital and operating lease financing of revenue equipment, and proceeds from the sale of used revenue equipment. At June 30, 2016, our total balance sheet debt, including capital lease obligations, and current maturities, was $450.8 million, compared $563.6 million at June 30, 2015.
As of June 30, 2016, we have planned commitments to add $24 million of tractor operating leases over the next twelve months. Generally, our purchase orders do not become firm commitment orders for which we are irrevocably obligated until shortly before purchase. We may also choose to adjust the timing of our purchases based on performance of existing equipment throughout the year. Our plans to purchase equipment are reevaluated on a quarter-by-quarter basis. These tractor orders represent capital commitments before considering the proceeds of equipment dispositions. Given that we recently completed our equipment refresh cycle and have curtailed equipment sales at Quality, we expect capital expenditures for revenue equipment to be more limited in the near term.
We intend to fund our operating expenses and our limited acquisition of revenue equipment over the next twelve months with a combination of cash generated from operations, borrowings available under secured equipment financing or our primary credit facility, equipment sales, and lease financing arrangements. We will continue to have significant capital requirements over the long term, and the availability of the needed capital will depend upon our financial condition and operating results and numerous other factors over which we have limited or no control, including prevailing market conditions and the market price of our common stock. Recently, our Lease Shortfall Advance to our third party financing provider and a depressed market for freight and used equipment have decreased our liquidity. The extent to which the Lease Shortfall Advance impacts our liquidity in the future will depend largely on utilization and collections with respect to the underlying lease portfolio, which have been volatile and cannot be precisely predicted. If we are unable to improve utilization and collections, we believe the Lease Shortfall Advance could present significant liquidity constraints. We have finalized the MOU and will be addressing definitive agreements with our third party financing provider to restructure our arrangement, which would likely include an elimination of the Lease Shortfall Advance. These discussions may not be successful. However, if we are successful in eliminating the Lease Shortfall Advance, then based on our operating results, anticipated future cash flows, current availability under our credit facility, expected capital expenditures, and sources of equipment lease financing that we expect will be available to us, we do not expect to experience significant liquidity constraints in the foreseeable future.
Cash Flows
We had net cash used in operating activities of $5.2 million in fiscal 2016, compared to net cash provided by operating activities of $44.6 million in fiscal 2015, and $70.3 million in fiscal 2014. The decrease in net cash provided by operations in fiscal 2016 from fiscal 2015 is mainly due to our Lease Shortfall Advance obligations to our third party financing provider, which began in the latter half of fiscal 2016, and an increase in the corresponding receivable. This caused a decrease in net cash provided by operations and a corresponding increase in other assets. Included in net cash provided by operating activities is the change in leased and revenue equipment held for sale. The change in the account is made up of the net purchases and sales of equipment purchased only for the benefit of our equipment leasing and services segment. The decrease of $60.7 million in fiscal 2016 is made up of $240.0 million of sales less $300.7 million of purchases. The decrease of $85.3 million in fiscal 2015 is made up of $289.0 million of sales less $374.3 million of purchases. The purchases and sales of used Celadon fleet equipment are included within the net cash provided by investing activities.
Net cash provided by investing activities was $35.8 million for fiscal 2016, compared to net cash used in investing activities of $60.8 million for fiscal 2015 and net cash provided by investing activities of $5.5 million for fiscal 2014. The inflows of investing cash flow are a result of cash provided by disposal and sale of equipment, offset by cash used for acquisitions and purchasing equipment. Cash paid for acquisitions was $18.3 million in fiscal 2016, $114.7 million in fiscal 2015, and $36.6 million in fiscal 2014. Capital expenditures, primarily for tractors and trailers, totaled $87.6 million in fiscal 2016, $118.4 million in fiscal 2015, and $82.8 million in fiscal 2014. We generated proceeds from the sale of property and equipment of $143.7 million in fiscal 2016, $172.4 million in fiscal 2015, and $103.9 million in fiscal 2014. Also included in fiscal 2016 was a $2 million investment in 19
th
Capital, our unconsolidated equity method investment.
Net cash used in financing activities was $46.4 million in fiscal 2016, compared to net cash provided by financing activities of $27.3 million in fiscal 2015, and net cash used in financing activities of $61.0 million in fiscal 2014. Financing activity consists primarily of bank borrowings, bank payments, and payment of the principal component of capital lease obligations and, in 2015, issuance of capital stock.
Cash dividends paid for the year ended June 30, 2016, were $2.2 million, or approximately $0.08 per share. We currently expect to continue to pay quarterly cash dividends in the future. Future payment of cash dividends, and the amount of any such dividends, will depend upon our financial condition, results of operations, cash requirements, tax treatment, restrictions under our primary credit agreement, and certain corporate law requirements, as well as other factors deemed relevant by our Board of Directors.
Primary
Credit Agreement
In December 2010, we entered into a new $50 million five-year revolving credit facility agented by Bank of America, N.A. The facility refinanced our previous credit facility and provides for our ongoing working capital needs and other general corporate purposes. Bank of America, N.A. serves as the lead agent in the facility and Wells Fargo Bank, N.A. also participates in the new facility. In December 2014, we increased our credit facility and extended the maturity. The facility permits borrowings up to a maximum of $300.0 million and expires December 2019. The applicable interest rate under this agreement is based on either a base rate, equal to Bank of America, N.A.'s prime rate or LIBOR, plus an applicable margin between 0.825% and 1.45% that is adjusted quarterly based on our lease adjusted total debt to EBITDAR ratio. At June 30, 2016, the credit facility had an outstanding balance of $151.4 million and $3.2 million utilized for letters of credit. The facility is collateralized by the assets of all the U.S. and Canadian subsidiaries of the Company. We are obligated to comply with certain financial covenants under our credit agreement and we were in compliance with these covenants at June 30, 2016.
Contractual Obligations and Commitments
As of June 30, 2016, our bank loans, capitalized leases, operating leases, other debts, and future commitments have stated maturities or minimum annual payments as follows:
|
|
Future Cash Requirements as of June 30, 2016
(in thousands)
Payments Due by Period
|
|
Contractual Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
$
|
74,906
|
|
|
$
|
25,788
|
|
|
$
|
27,224
|
|
|
$
|
12,822
|
|
|
$
|
9,072
|
|
Lease residual value guarantees
|
|
|
62,037
|
|
|
|
---
|
|
|
|
29,660
|
|
|
|
6,383
|
|
|
|
25,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations
(1)
|
|
|
319,628
|
|
|
|
58,163
|
|
|
|
168,769
|
|
|
|
26,882
|
|
|
|
65,814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
456,571
|
|
|
|
83,951
|
|
|
|
225,653
|
|
|
|
46,087
|
|
|
|
100,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future purchase of revenue equipment
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
Standby letters of credit
|
|
|
3,245
|
|
|
|
3,245
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual and cash obligations
|
|
$
|
459,816
|
|
|
$
|
87,196
|
|
|
$
|
225,653
|
|
|
$
|
46,087
|
|
|
$
|
100,880
|
|
Inflation and Fuel Costs
Most of our operating expenses are inflation-sensitive, with inflation generally producing increased costs of operations. During the past three years, the most significant effects of inflation have been on revenue equipment prices and fuel prices, although diesel fuel prices have decreased significantly over the last twelve months. New emissions control regulations and increases in commodity prices, wages of manufacturing workers, and other items have resulted in higher tractor prices. We attempt to limit the effects of inflation through increases in freight rates, certain cost control efforts, and limiting the effects of fuel prices through fuel surcharges and measures intended to reduce our consumption of fuel.
Fluctuations in the price or availability of fuel, as well as hedging activities, increased fuel consumption due to adverse weather, surcharge collection, the percentage of freight we obtain through brokers, and the volume and terms of diesel fuel purchase commitments may increase our costs of operation, which could materially and adversely affect our profitability. We impose fuel surcharges on substantially all accounts. These arrangements may not fully protect us from fuel price increases and also may result in us not receiving the full benefit of any fuel price decreases. In fiscal 2016, we entered into contracts to hedge up to 0.5 million gallons per month for the period ending on July 31, 2017. These hedging contracts relate to Gulf Coast Diesel, the price of which has generally correlated to the price of diesel fuel we use. This represents approximately 8.9% of our monthly projected fuel requirements through July 2017. At June 30, 2016, we had outstanding contracts in place for a notional amount of $5.9 million with the fair value of these contracts approximately $0.1 million less than the original contract value. Derivative gains or losses, initially reported as a component of other comprehensive income, are reclassified to earnings in the period when the forecasted transaction affects earnings.
Off-Balance Sheet Arrangements
Operating leases have become an increasingly important source of financing for our revenue equipment and certain real estate. At June 30, 2016, we had 204 tractors and 6,351 trailers, as well as certain office facilities and terminals, under operating leases. Vehicles held under operating leases are not carried on our consolidated balance sheets, and lease payments, in respect of such vehicles, are reflected in our consolidated statements of operations in the line item "revenue equipment rentals." Our revenue equipment rental expense was $17.6 million in fiscal 2016, compared with $7.4 million in fiscal 2015, primarily due to additional trailer units held under operating leases. Nearly all trailers held under operating leases were added within the current fiscal year. Total remaining payments under operating leases as of June 30, 2016, was approximately $74.9 million. In connection with various operating leases, we issue residual value guarantees, which provide that if we do not purchase the leased equipment from the lessor at the end of the lease term, we are liable to the lessor for an amount equal to the shortage (if any) between the proceeds from the sale of the equipment and an agreed value. The residual guarantees expire between August 2016 and May 2023 and had an undiscounted value of approximately $62.0 million at June 30, 2016. We expect our residual guarantees to approximate the market value of the related equipment at the end of the lease term. We believe that proceeds from the sale of equipment under operating leases would equal or exceed the payment obligation on substantially all operating leases. We also believe operating leases will continue to be available as a source of financing for revenue equipment. However, we expect to continue to rely on capital leases as our primary source of revenue equipment financing for the foreseeable future.
During the fourth quarter of fiscal 2016, we completed a sale-leaseback transaction of approximately 4,700 trailers, which reduced our debt obligations by $69.2 million and resulted in a deferred gain of $1.2 million. The purpose of the arrangement was to dispose of the units while providing enough time to turn in the units to the purchaser and minimally disrupt our operations. Of these trailers, we expect to refresh approximately 2,700, starting in the second half of calendar year 2017. The base lease term is twelve months and we are to pay a rental fee on each unit until turned in to the purchaser. Once the unit is turned in, we have no further obligation on the unit. Our future minimum lease payments relating to this agreement are $5.7 million and included in the amounts discussed above.
Critical Accounting Policies
The preparation of our consolidated financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and assumptions that impact the amounts reported in our consolidated financial statements and accompanying notes. Therefore, the reported amounts of assets, liabilities, revenues, expenses, and associated disclosures of contingent assets and liabilities are affected by these estimates and assumptions. We evaluate these estimates and assumptions on an ongoing basis, utilizing historical experience, consultation with experts, and other methods considered reasonable in the particular circumstances. Nevertheless, actual results may differ significantly from our estimates and assumptions, and it is possible that materially different amounts would be reported using differing estimates or assumptions. We consider our critical accounting policies to be those that require us to make more significant judgments and estimates when we prepare our consolidated financial statements. Our critical accounting policies include the following:
Depreciation of Property and Equipment.
We depreciate our property and equipment using the straight-line method over the estimated useful life of the asset. We generally use estimated useful lives of 4 to 10 years for new tractors and trailers, and estimated salvage values for new tractors and trailers generally range from 40% to 60% of the capitalized cost.
We review the reasonableness of our estimates regarding useful lives and salvage values of our revenue equipment and other long-lived assets based upon, among other things, our experience with similar assets, conditions in the used equipment market, and prevailing industry practice. Changes in our useful life or salvage value estimates or fluctuations in market values that are not reflected in our estimates, could have a material effect on our results of operations.
Effective October 1, 2015, the Company changed its estimates of the useful lives and salvage value of certain tractors and trailers to better reflect the estimated periods during which these assets will remain in service. The estimated useful lives of the tractors and trailers that previously were 3 years for tractors and 7 years for trailers were increased to 4 years for tractors and 10 years for trailers. The current year impact of these changes is disclosed in note 2 to the consolidated financial statements. There were no other changes to our critical accounting policies and estimates.
Revenue equipment and other long-lived assets are tested for impairment whenever an event occurs that indicates an impairment may exist. Expected future cash flows are used to analyze whether an impairment has occurred. If the sum of expected undiscounted cash flows is less than the carrying value of the long-lived asset, then an impairment loss is recognized. We measure the impairment loss by comparing the fair value of the asset to its carrying value. Fair value is determined based on a discounted cash flow analysis or the appraised or estimated market value of the asset, as appropriate.
Claims Reserves and Estimates.
The primary claims arising for us consist of cargo liability, personal injury, property damage, collision and comprehensive, workers' compensation, and employee medical expenses. We maintain self-insurance levels for these various areas of risk and have established reserves to cover these self-insured liabilities. We also maintain insurance to cover liabilities in excess of these self-insurance amounts. Claims reserves represent accruals for the estimated uninsured portion of reported claims, including adverse development of reported claims, as well as estimates of incurred but unreported claims. Reported claims and related loss reserves are estimated by third party administrators, and we refer to these estimates in establishing our reserves. Claims incurred but not reported are estimated based on our historical experience and industry trends, which are continually monitored, and accruals are adjusted when warranted by changes in facts and circumstances. In establishing our reserves with respect to individual claims, we take into account various factors, including, but not limited to, assumptions concerning the nature and severity of the claim, the expected effect of the jurisdiction on any potential award or settlement, and the length of time until ultimate resolution of the claim is likely. In addition, we account for anticipated health care cost inflation, interest rates, and legal expenses, as well as other factors in estimating the general adequacy of our reserves. Since these estimates require us to make a number of assumptions, and due to the difficulty in accurately assessing the final costs of certain claims, the actual expense of our claims may be significantly higher than the amounts we have accrued for them. Insurance and claims expense will vary from period to period based on the severity and frequency of claims incurred in a given period.
Derivative Instruments and Hedging Activity.
We use derivative financial instruments to manage the economic impact of fluctuations in currency exchange rates and fuel prices. Derivative financial instruments related to currency exchange rates and heating oil (fuel prices) include forward purchase and sale agreements which generally have terms no greater than 18 months.
To account for our derivative financial instruments, we follow the provisions of ASC Topic 815, "Derivatives and Hedging." Derivative financial instruments are recognized on the consolidated balance sheets as either assets or liabilities and are measured at fair value. Changes in the fair value of derivatives are recorded each period in earnings or accumulated other comprehensive income, depending on whether a derivative is designated and effective as part of a hedge transaction, and if it is, the type of hedge transaction. Gains and losses on derivative instruments reported in accumulated other comprehensive income are subsequently included in earnings in the periods in which earnings are affected by the hedged item. These activities have not had a material impact on our financial position or results of operations for the periods presented herein.
Accounting for Income Taxes.
Deferred income taxes represent a substantial liability on our consolidated balance sheet. Deferred income taxes are determined in accordance with ASC Topic 740-10 Income Taxes. Deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards. We evaluate our tax assets and liabilities on a periodic basis and adjust these balances as appropriate. We believe that we have adequately provided for our future tax consequences based upon current facts and circumstances and current tax law. However, should our tax positions be challenged and not prevail, different outcomes could result and have a significant impact on the amounts reported in our consolidated financial statements.
The carrying value of our deferred tax assets (tax benefits expected to be realized in the future) assumes that we will be able to generate, based on certain estimates and assumptions, sufficient future taxable income in certain tax jurisdictions to utilize these deferred tax benefits. If these estimates and related assumptions change in the future, we may be required to reduce the value of the deferred tax assets resulting in additional income tax expense. We believe that it is more likely than not that the deferred tax assets, net of valuation allowance, will be realized, based on forecasted income. However, there can be no assurance that we will meet our forecasts of future income. We evaluate the deferred tax assets on a periodic basis and assess the need for additional valuation allowances.
Federal income taxes are provided on that portion of the income of foreign subsidiaries that is expected to be remitted to the United States.
Business Combinations
. Assets acquired and liabilities assumed as part of a business acquisition are generally recorded at their fair value at the date of acquisition in accordance with ASC Topic 805 Business Combinations. The excess of purchase price over the fair value of assets acquired and liabilities assumed is recorded as goodwill. Determining fair value of identifiable assets, particularly intangibles, and liabilities assumed also requires us to make estimates, which are based on all available information and in some cases assumptions with respect to the timing and amount of future revenues and expenses associated with an asset.
Recent Accounting Pronouncements
In August 2015, the Financial Accounting Standards Board ("FASB") issued ASU No. 2015-14 deferring the effective date of ASU No. 2014-09, "Revenue from Contracts with Customers" (ASC Topic 606): ("ASU 2014-09"), which requires the recognition of revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance will affect any organization that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial assets. This ASU is effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2017, and early adoption is permitted. The Company is continuing to evaluate the new guidance and plans to provide additional information about its expected financial impact at a future date.
In November 2015, the FASB issued ASU No. 2015-17 "Income Taxes"(ASC Topic 740), to simplify the presentation of deferred income taxes. The guidance in this Update require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. This guidance will affect any entity that presents a classified statement of financial position. This ASU is effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2016, and early adoption is permitted. The Company has early adopted this update. Adoption of this update impacted our consolidated balance sheet by reclassifying current deferred tax assets of approximately $5 million and $7 million to offset our long term deferred tax liabilities for the fiscal 2016 and fiscal 2015 periods respectively.
In February 2016, the FASB issued ASU No. 2016-02 "Leases"(ASC Topic 842), to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This guidance will affect any entity that enters into a lease. This ASU is effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2018, and early adoption is permitted. The Company is continuing to evaluate the new guidance and plans to provide additional information about its expected financial impact at a future date.
In March 2016, the FASB issued ASU No. 2016-09 "Compensation - Stock Compensation"(ASC Topic 718), to simplify various aspects of accounting for stock-based compensation, including income tax consequences, classification of awards as equity or liability, as well as classification of activities within the statement of cash flows. This guidance will affect any entity that issues share-based payment awards to their employees. This ASU is effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2016, and early adoption will be permitted. The Company is continuing to evaluate the new guidance and plans to provide additional information about its expected financial impact at a future date.
Item 8
. Financial Statements and Supplementary Data
The following statements are filed with this report:
Report of Independent Registered Public Accounting Firm;
Consolidated Statements of Operations;
Consolidated Statements of Comprehensive Income;
Consolidated Balance Sheets;
Consolidated Statements of Cash Flows;
Consolidated Statements of Stockholders' Equity; and
Notes to Consolidated Financial Statements.
Audit Committee, Board of Directors and Stockholders
Celadon Group, Inc.
Indianapolis, Indiana
We have audited the accompanying consolidated balance sheets of Celadon Group, Inc. as of June 30, 2016, and 2015, and the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for each of the years in the three year period ended June 30, 2016. In connection with our audit of the consolidated financial statements, we also have audited the financial statement schedule II for each of the years in the three year period ended June 30, 2016. The Company’s management is responsible for these financial statements and financial statement schedule. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. Our audits included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Celadon Group, Inc. as of June 30, 2016, and 2015, and the results of its operations and its cash flows for each of the years in the three year period ended June 30, 2016, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule II for each of the years in the three year period ended June 30, 2016, which considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Celadon Group, Inc.’s internal control over financial reporting as of June, 30, 2016, based on criteria established in
Internal Control-Integrated Framework (1992 edition) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
and our report dated September 13, 2016, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ BKD, LLP
Indianapolis, Indiana
September 13, 2016
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Audit Committee, Board of Directors and Stockholders
Celadon Group, Inc.
Indianapolis, Indiana
We have audited Celadon Group Inc.’s internal control over financial reporting as of June 30, 2016, based on criteria established in
Internal Control - Integrated Framework (1992 edition) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Management’s Report on Internal Control over Financial Reporting
. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.In our opinion, Celadon Group, Inc. maintained, in all material respects, effective internal control over financial reporting as of June 30, 2016, based on criteria established in
Internal Control - Integrated Framework (1992 edition) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of Celadon Group, Inc. and our report dated September 13, 2016, expressed an unqualified opinion thereon.
/s/ BKD, LLP
Indianapolis, Indiana
September 13, 2016
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended June 30, 2016, 2015, and 2014
(Dollars and shares in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
Operating Revenue:
|
|
|
|
|
|
|
|
|
|
Freight revenue
|
|
$
|
968,668
|
|
|
$
|
769,950
|
|
|
$
|
615,411
|
|
Fuel surcharge revenue
|
|
|
96,688
|
|
|
|
130,806
|
|
|
|
143,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
1,065,356
|
|
|
|
900,756
|
|
|
|
759,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages, and employee benefits
|
|
|
323,864
|
|
|
|
261,216
|
|
|
|
209,938
|
|
Fuel
|
|
|
103,017
|
|
|
|
144,687
|
|
|
|
171,695
|
|
Purchased transportation
|
|
|
354,143
|
|
|
|
245,352
|
|
|
|
173,940
|
|
Revenue equipment rentals
|
|
|
17,574
|
|
|
|
7,429
|
|
|
|
6,621
|
|
Operations and maintenance
|
|
|
71,294
|
|
|
|
56,237
|
|
|
|
49,709
|
|
Insurance and claims
|
|
|
36,670
|
|
|
|
29,091
|
|
|
|
19,252
|
|
Depreciation and amortization
|
|
|
79,555
|
|
|
|
75,317
|
|
|
|
64,579
|
|
Communications and utilities
|
|
|
10,145
|
|
|
|
8,361
|
|
|
|
6,409
|
|
Operating taxes and licenses
|
|
|
20,718
|
|
|
|
16,443
|
|
|
|
13,275
|
|
General and other operating
|
|
|
18,565
|
|
|
|
14,457
|
|
|
|
11,195
|
|
Gain on disposition of equipment
|
|
|
(22,395
|
)
|
|
|
(23,619
|
)
|
|
|
(6,736
|
)
|
Total operating expenses
|
|
|
1,013,150
|
|
|
|
834,971
|
|
|
|
719,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
52,206
|
|
|
|
65,785
|
|
|
|
39,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
13,794
|
|
|
|
7,776
|
|
|
|
5,071
|
|
Interest income
|
|
|
---
|
|
|
|
(7
|
)
|
|
|
(12
|
)
|
Other (income) expenses, net
|
|
|
257
|
|
|
|
154
|
|
|
|
(15,996
|
)
|
Income from equity method investment
|
|
|
(253
|
)
|
|
|
---
|
|
|
|
---
|
|
Income before income taxes
|
|
|
38,408
|
|
|
|
57,862
|
|
|
|
50,371
|
|
Income tax expense
|
|
|
13,564
|
|
|
|
20,645
|
|
|
|
19,690
|
|
Net income
|
|
$
|
24,844
|
|
|
$
|
37,217
|
|
|
$
|
30,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.88
|
|
|
$
|
1.52
|
|
|
$
|
1.29
|
|
Basic earnings per share
|
|
$
|
0.90
|
|
|
$
|
1.56
|
|
|
$
|
1.33
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
28,081
|
|
|
|
24,471
|
|
|
|
23,755
|
|
Basic
|
|
|
27,507
|
|
|
|
23,844
|
|
|
|
23,014
|
|
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended June 30, 2016, 2015, and 2014
(Dollars in thousands)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
24,844
|
|
|
$
|
37,217
|
|
|
$
|
30,681
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on fuel derivative instruments, net of tax
|
|
|
(29
|
)
|
|
|
---
|
|
|
|
(45
|
)
|
Unrealized gain (loss) on currency derivative instruments, net of tax
|
|
|
---
|
|
|
|
(36
|
)
|
|
|
105
|
|
Foreign currency translation adjustments
|
|
|
(10,850
|
)
|
|
|
(16,212
|
)
|
|
|
(784
|
)
|
Total other comprehensive loss
|
|
|
(10,879
|
)
|
|
|
(16,248
|
)
|
|
|
(724
|
)
|
Comprehensive income
|
|
$
|
13,965
|
|
|
$
|
20,969
|
|
|
$
|
29,957
|
|
See accompanying notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
June 30, 2016 and 2015
(Dollars and shares in thousands except par value amounts)
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
9,077
|
|
|
$
|
24,699
|
|
Trade receivables, net of allowance for doubtful accounts of $1,588 and $1,002 at June 30, 2016 and June 30, 2015, respectively
|
|
|
134,572
|
|
|
|
130,892
|
|
Prepaid expenses and other current assets
|
|
|
38,498
|
|
|
|
33,267
|
|
Tires in service
|
|
|
3,175
|
|
|
|
1,857
|
|
Leased revenue equipment held for sale
|
|
|
24,937
|
|
|
|
52,591
|
|
Revenue equipment held for sale
|
|
|
44,876
|
|
|
|
49,856
|
|
Income tax receivable
|
|
|
473
|
|
|
|
17,926
|
|
Total current assets
|
|
|
255,608
|
|
|
|
311,088
|
|
Property and equipment, net of accumulated depreciation and amortization of $142,423 and $147,446 at June 30, 2016 and June 30, 2015, respectively
|
|
|
636,733
|
|
|
|
788,530
|
|
Leased assets, net of accumulated depreciation and amortization of $9,717 at June 30, 2016
|
|
|
99,300
|
|
|
|
---
|
|
Tires in service
|
|
|
3,603
|
|
|
|
2,173
|
|
Goodwill
|
|
|
62,451
|
|
|
|
55,357
|
|
Investment in unconsolidated companies
|
|
|
2,253
|
|
|
|
---
|
|
Other assets
|
|
|
43,342
|
|
|
|
11,458
|
|
Total assets
|
|
$
|
1,103,290
|
|
|
$
|
1,168,606
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
26,499
|
|
|
$
|
13,699
|
|
Accrued salaries and benefits
|
|
|
17,090
|
|
|
|
16,329
|
|
Accrued insurance and claims
|
|
|
20,727
|
|
|
|
14,808
|
|
Accrued fuel expense
|
|
|
8,258
|
|
|
|
10,979
|
|
Accrued purchase transportation
|
|
|
22,046
|
|
|
|
16,259
|
|
Accrued equipment purchases
|
|
|
---
|
|
|
|
775
|
|
Deferred leasing revenue
|
|
|
15,918
|
|
|
|
31,872
|
|
Other accrued expenses
|
|
|
29,560
|
|
|
|
31,835
|
|
Current maturities of long-term debt
|
|
|
---
|
|
|
|
948
|
|
Current maturities of capital lease obligations
|
|
|
51,397
|
|
|
|
62,992
|
|
Total current liabilities
|
|
|
191,495
|
|
|
|
200,496
|
|
Long term debt, net of current maturities
|
|
|
152,032
|
|
|
|
133,199
|
|
Capital lease obligations, net of current maturities
|
|
|
247,383
|
|
|
|
366,452
|
|
Other long term liabilities
|
|
|
22,227
|
|
|
|
953
|
|
Deferred income taxes
|
|
|
109,138
|
|
|
|
101,163
|
|
Stockholders' equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.033 par value, authorized 40,000 shares; issued and outstanding 28,715 and 28,342 shares at June 30, 2016 and 2015, respectively
|
|
|
948
|
|
|
|
935
|
|
Treasury stock at cost; 500 shares at June 30, 2016 and 2015, respectively
|
|
|
(3,453
|
)
|
|
|
(3,453
|
)
|
Additional paid-in capital
|
|
|
198,576
|
|
|
|
195,682
|
|
Retained earnings
|
|
|
218,056
|
|
|
|
195,412
|
|
Accumulated other comprehensive loss
|
|
|
(33,112
|
)
|
|
|
(22,233
|
)
|
Total stockholders' equity
|
|
|
381,015
|
|
|
|
366,343
|
|
Total liabilities and stockholders' equity
|
|
$
|
1,103,290
|
|
|
$
|
1,168,606
|
|
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30, 2016, 2015, and 2014
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
24,844
|
|
|
$
|
37,217
|
|
|
$
|
30,681
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
79,606
|
|
|
|
75,624
|
|
|
|
64,800
|
|
Gain on disposition of equipment
|
|
|
(22,395
|
)
|
|
|
(23,619
|
)
|
|
|
(6,736
|
)
|
Gain from sale of minority investment
|
|
|
---
|
|
|
|
---
|
|
|
|
(17,143
|
)
|
Deferred income taxes
|
|
|
8,259
|
|
|
|
32,391
|
|
|
|
5,210
|
|
Provision for doubtful accounts
|
|
|
825
|
|
|
|
240
|
|
|
|
100
|
|
Stock based compensation expense
|
|
|
2,855
|
|
|
|
2,772
|
|
|
|
2,077
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade receivables
|
|
|
165
|
|
|
|
(6,198
|
)
|
|
|
(17,125
|
)
|
Income tax receivable and payable
|
|
|
17,589
|
|
|
|
(11,426
|
)
|
|
|
7,905
|
|
Tires in service
|
|
|
(2,771
|
)
|
|
|
860
|
|
|
|
(1,917
|
)
|
Prepaid expenses and other current assets
|
|
|
(5,461
|
)
|
|
|
(4,538
|
)
|
|
|
(10,409
|
)
|
Other assets
|
|
|
(34,944
|
)
|
|
|
240
|
|
|
|
886
|
|
Leased and revenue equipment held for sale
|
|
|
(60,707
|
)
|
|
|
(85,331
|
)
|
|
|
---
|
|
Accounts payable and accrued expenses
|
|
|
(13,076
|
)
|
|
|
26,333
|
|
|
|
11,988
|
|
Net cash provided by (used in) operating activities
|
|
|
(5,211
|
)
|
|
|
44,565
|
|
|
|
70,317
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(87,597
|
)
|
|
|
(118,422
|
)
|
|
|
(82,826
|
)
|
Proceeds on sale of property and equipment
|
|
|
143,688
|
|
|
|
172,354
|
|
|
|
103,926
|
|
Proceeds from sale of minority interest
|
|
|
---
|
|
|
|
---
|
|
|
|
21,000
|
|
Investment in unconsolidated companies
|
|
|
(2,000
|
)
|
|
|
---
|
|
|
|
---
|
|
Purchase of businesses, net of cash acquired
|
|
|
(18,264
|
)
|
|
|
(114,682
|
)
|
|
|
(36,602
|
)
|
Net cash provided by (used in) investing activities
|
|
|
35,827
|
|
|
|
(60,750
|
)
|
|
|
5,498
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
|
51
|
|
|
|
85,353
|
|
|
|
2,985
|
|
Borrowings on long-term debt
|
|
|
824,750
|
|
|
|
847,285
|
|
|
|
325,520
|
|
Payments on long-term debt
|
|
|
(807,762
|
)
|
|
|
(789,847
|
)
|
|
|
(358,466
|
)
|
Borrowings on other long-term liabilities
|
|
|
29,980
|
|
|
|
---
|
|
|
|
---
|
|
Payments on other long-term liabilities
|
|
|
(597
|
)
|
|
|
---
|
|
|
|
---
|
|
Dividends paid
|
|
|
(2,200
|
)
|
|
|
(1,873
|
)
|
|
|
(1,837
|
)
|
Principal payments on capital lease obligations
|
|
|
(90,638
|
)
|
|
|
(113,624
|
)
|
|
|
(29,190
|
)
|
Net cash provided by (used in) financing activities
|
|
|
(46,416
|
)
|
|
|
27,294
|
|
|
|
(60,988
|
)
|
Effect of exchange rates on cash and cash equivalents
|
|
|
178
|
|
|
|
(1,918
|
)
|
|
|
(634
|
)
|
Increase (decrease) in cash and cash equivalents
|
|
|
(15,622
|
)
|
|
|
9,191
|
|
|
|
14,193
|
|
Cash and cash equivalents at beginning of year
|
|
|
24,699
|
|
|
|
15,508
|
|
|
|
1,315
|
|
Cash and cash equivalents at end of year
|
|
$
|
9,077
|
|
|
$
|
24,699
|
|
|
$
|
15,508
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
13,794
|
|
|
$
|
7,776
|
|
|
$
|
4,802
|
|
Income taxes paid
|
|
$
|
259
|
|
|
$
|
5,627
|
|
|
$
|
9,901
|
|
Obligations incurred under capital leases
|
|
$
|
90,415
|
|
|
$
|
304,261
|
|
|
$
|
---
|
|
Conversion of capital leases to operating leases
|
|
$
|
130,440
|
|
|
$
|
---
|
|
|
$
|
---
|
|
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended June 30, 2016, 2015, and 2014
(Dollars in thousands, except share amounts)
|
|
Common
Stock
No. of Shares
Outstanding
Net of
Treasury
|
|
|
|
|
|
Additional
Paid-In
|
|
|
|
|
|
Retained
|
|
|
Accumulated
Other
Comprehensive
|
|
|
Total
Stockholders'
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2013
|
|
|
23,190,736
|
|
|
$
|
788
|
|
|
$
|
103,749
|
|
|
$
|
(4,811
|
)
|
|
$
|
131,224
|
|
|
$
|
(5,261
|
)
|
|
$
|
225,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
30,681
|
|
|
|
---
|
|
|
|
30,681
|
|
Other comprehensive income (loss)
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
(724
|
)
|
|
|
(724
|
)
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,681
|
|
|
|
(724
|
)
|
|
|
29,957
|
|
Treasury stock issued
|
|
|
---
|
|
|
|
---
|
|
|
|
(634
|
)
|
|
|
634
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
Restricted stock and options expense
|
|
|
132,400
|
|
|
|
2
|
|
|
|
2,075
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
2,077
|
|
Dividends paid
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
(1,837
|
)
|
|
|
---
|
|
|
|
(1,837
|
)
|
Exercise of stock options
|
|
|
236,742
|
|
|
|
4
|
|
|
|
2,389
|
|
|
|
724
|
|
|
|
---
|
|
|
|
---
|
|
|
|
3,117
|
|
Balance at June 30, 2014
|
|
|
23,559,878
|
|
|
$
|
794
|
|
|
$
|
107,579
|
|
|
$
|
(3,453
|
)
|
|
$
|
160,068
|
|
|
$
|
(5,985
|
)
|
|
$
|
259,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
37,217
|
|
|
|
---
|
|
|
|
37,217
|
|
Other comprehensive income (loss)
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
(16,248
|
)
|
|
|
(16,248
|
)
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,217
|
|
|
|
(16,248
|
)
|
|
|
20,969
|
|
Restricted stock and options expense
|
|
|
176,465
|
|
|
|
5
|
|
|
|
2,767
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
2,772
|
|
Dividends paid
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
(1,873
|
)
|
|
|
---
|
|
|
|
(1,873
|
)
|
Exercise of stock options
|
|
|
605,954
|
|
|
|
20
|
|
|
|
6,576
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
6,596
|
|
Issuance of common stock
|
|
|
3,500,000
|
|
|
|
116
|
|
|
|
78,760
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
78,876
|
|
Balance at June 30, 2015
|
|
|
27,842,297
|
|
|
$
|
935
|
|
|
$
|
195,682
|
|
|
$
|
(3,453
|
)
|
|
$
|
195,412
|
|
|
$
|
(22,233
|
)
|
|
$
|
366,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
24,844
|
|
|
|
---
|
|
|
|
24,844
|
|
Other comprehensive income (loss)
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
(10,879
|
)
|
|
|
(10,879
|
)
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,844
|
|
|
|
(10,879
|
)
|
|
|
13,965
|
|
Restricted stock and options expense
|
|
|
357,893
|
|
|
|
12
|
|
|
|
2,843
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
2,855
|
|
Dividends paid
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
(2,200
|
)
|
|
|
---
|
|
|
|
(2,200
|
)
|
Exercise of stock options
|
|
|
14,950
|
|
|
|
1
|
|
|
|
169
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
170
|
|
Issuance of common stock
|
|
|
---
|
|
|
|
---
|
|
|
|
(118
|
)
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
(118
|
)
|
Balance at June 30, 2016
|
|
|
28,215,140
|
|
|
$
|
948
|
|
|
$
|
198,576
|
|
|
$
|
(3,453
|
)
|
|
$
|
218,056
|
|
|
$
|
(33,112
|
)
|
|
$
|
381,015
|
|
See accompanying notes to consolidated financial statements.
CELADON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016, 2015, and 2014
|
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Organization
Celadon Group, Inc. (the "Company"), through its subsidiaries, provides transportation services between the United States, Canada, and Mexico. The Company's primary transportation subsidiaries are: Celadon Trucking Services, Inc. ("CTSI"), a U.S. based company; Celadon Logistics Services, Inc. ("CLSI"), a U.S. based company; Servicio de Transportation Jaguar, S.A. de C.V. ("Jaguar"), a Mexican based company; and Celadon Canada, Inc. ("CelCan"), a Canadian based company.
Summary of Significant Accounting Policies
Principles of Consolidation and Presentation
The consolidated financial statements include the accounts of the Company and its wholly and majority owned subsidiaries, all of which are wholly owned except for Jaguar in which the Company owns 75% of the shares. The entity was set up to allow the Company to operate in Mexico. The minority owner of Jaguar has been refunded all initial capital contributions and is not entitled to receive any future earnings or required to fund any losses of the subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation. Unless otherwise noted, all references to annual periods refer to the respective fiscal years ended June 30.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures at the date of the financial statements and during the reporting period. Such estimates include provisions for liability claims and uncollectible accounts receivable. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid instruments with a maturity of three months or less when purchased to be cash equivalents.
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of trade receivables. The Company performs ongoing credit evaluations of its customers and does not require collateral for its accounts receivable. The Company maintains reserves which management believes are adequate to provide for potential credit losses. Uncollectible accounts receivable are written off against the reserves. Concentrations of credit risk with respect to trade receivables are generally limited due to the Company's large number of customers and the diverse range of industries which they represent. Accounts receivable balances due from any single customer did not total more than 5% of the Company's gross trade receivables at June 30, 2016.
Property and Equipment
Property and equipment are stated at cost. Property and equipment under capital leases are stated at fair value at the inception of the lease.
Depreciation of property and equipment and amortization of assets under capital leases are computed using the straight-line method and are based on the lesser of the life of the lease or the estimated useful lives of the related assets (net of salvage value) as follows:
|
Revenue and service equipment
|
4-10 years
|
|
Furniture and office equipment
|
4-5 years
|
|
Buildings
|
20 years
|
|
Leasehold improvements
|
Lesser of life of lease (including expected renewals) or useful life of improvement
|
CELADON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016, 2015, and 2014
The cost of maintenance and repairs is charged to expense as incurred.
Long-lived assets are depreciated over estimated useful lives based on historical experience and prevailing industry practice. Estimated useful lives are periodically reviewed to ensure they remain appropriate. Long-lived assets are tested for impairment whenever an event occurs that indicates an impairment may exist. Future cash flows and operating performance are used for analyzing potential impairment losses. If the sum of expected undiscounted cash flows is less than the carrying value an impairment loss is recognized. The Company measures the impairment loss by comparing the fair value of the asset to its carrying value. Fair value is determined based on a discounted cash flow analysis or appraised or estimated market values as appropriate. Long-lived assets that are held for sale are recorded at the lower of carrying value or the fair value less costs to sell.
Leased revenue equipment held for sale
Leased revenue equipment held for sale is recorded at the lower of carrying value and fair market value less costs to sell. Leased revenue equipment held for sale is depreciated during months the assets are under leases. The majority of the assets included in leased revenue equipment held for sale were acquired to be sold and those assets have been recorded at cost. Management has a plan to sell these leased assets in their current condition to third party financing parties and is currently marketing these units at a reasonable price compared to their fair value. The sale is probable within one year.
Revenue equipment held for sale
Revenue equipment held for sale is recorded at the lower of carrying value and fair market value less costs to sell. The Company also ceases the depreciation on these assets. The majority of the assets included in revenue equipment held for sale were acquired to be resold and those assets have been recorded at cost. As of June 30, 2016, 33% of the units held for sale was comprised of old Celadon fleet equipment no longer in service versus newly purchased equipment. Newly purchased equipment is defined as equipment purchased for the sole purpose of being leased to a third party fleet or an independent contractor and then sold to a third party financing company. The newly purchased equipment has not operated in Celadon’s fleet. Management has a plan to sell these assets in their current condition to third party purchasers and is currently marketing these units at a reasonable price compared to their fair value. The sale is probable within one year.
Leased Assets
Leased assets consist of assets leased to independent contractors or third party fleets within our Equipment Leasing and Services segment. These assets are depreciated over their estimated useful lives or the remaining lease term during months that the units are under lease. Leased assets are tested for impairment whenever an event occurs that indicates impairment may exist. The Company measures the impairment loss by comparing the fair value of the asset to its carrying value. Fair value is determined based on a discounted cash flow analysis or appraised or estimated market values as appropriate.
Also included in leased assets are assets for which we received proceeds and transferred title to 19
th
Capital. Although we transferred title of these assets, we retained certain risks of ownership through a deferred payment stream associated with the ultimate disposition of the equipment at the end of the lease period. We deemed that this transaction did not qualify for sales treatment under ASC 840-20-40-3. As a result, these assets were not removed from our balance sheet. These assets are depreciated over the remainder of the lease or obligation to 19
th
Capital, whichever is shorter. These units are evaluated for collectability of the remaining outstanding balance owed by 19
th
Capital.
Tires in Service
Replacement tires on tractors and trailers are included in tires in service and are amortized over 18 to 36 months.
CELADON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016, 2015, and 2014
Goodwill
The consolidated balance sheets at June 30, 2016 and 2015 included goodwill of acquired businesses of approximately $62.5 million and $55.4 million respectively. Under ASC Topic 350-20
Intangibles – Goodwill and Other,
goodwill is not amortized but is tested for impairment annually (or more often, if an event or circumstance indicates that an impairment loss has been incurred). On April 1, 2016, we completed our most recent impairment test for the fiscal year and concluded that there was no indication of impairment.
Insurance Reserves
The primary claims arising for us consist of cargo liability, personal injury, property damage, collision and comprehensive, workers' compensation, and employee medical expenses. We maintain self-insurance levels for these various areas of risk and have established reserves to cover these self-insured liabilities. We also maintain insurance to cover exposures in excess of these self-insurance amounts. Claims reserves represent accruals for the estimated uninsured portion of reported claims, including adverse development of reported claims, as well as estimates of incurred but not reported claims. Reported claims and related loss reserves are estimated by third party administrators, and we refer to these estimates in establishing our reserves. Claims incurred but not reported are estimated based on our historical experience and industry trends, which are continually monitored, and accruals are adjusted when warranted by changes in facts and circumstances. In establishing our reserves we take into account and estimate various factors, including, but not limited to, assumptions concerning the nature and severity of the claim, the effect of the jurisdiction on any award or settlement, the length of time until ultimate resolution, inflation rates in health care, and in general interest rates, legal expenses, and other factors. Our actual experience may be different than our estimates, sometimes significantly. Changes in assumptions as well as changes in actual experience could cause these estimates to change. Insurance and claims expense will vary from period to period based on the severity and frequency of claims incurred in a given period. The administrative expenses associated with these reserves are expensed when incurred.
Litigation
Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources, are recorded when it is probable that a liability has been incurred and the amount of the assessment, loss and/or remediation can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred.
Revenue Recognition
Freight revenue, fuel surcharge and related direct costs are recognized on the date freight is delivered to the customer and collectability is reasonably assured. Prior to commencement of shipment, the Company's subsidiaries will negotiate an agreed upon price for services to be rendered.
Driver wages and other direct operating expenses are recognized when freight is delivered.
The Company recognizes operating lease revenue from leasing tractors and related equipment to independent contractors as a component of freight revenue in the consolidated statements of operations. Operating lease revenue from rental operations is recognized as payments come due and collectability of the minimum lease payments is reasonably assured. Revenue from our asset-light segment is recognized upon completion of the services provided. Rent and purchased transportation expense for transportation costs we pay to the third-party provider are recognized upon completion of services provided.
Advertising
Advertising costs are expensed as incurred by the Company. Advertising expense primarily consists of recruiting for new drivers. Advertising expenses for fiscal 2016, 2015, and 2014 were $6.6 million, $5.2 million, and $3.2 million, respectively, and are included in salaries, wages, and employee benefits and other operating expenses in the consolidated statements of operations.
CELADON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016, 2015, and 2014
Income Taxes
Deferred income taxes are recognized for tax loss and credit carryforwards and the future tax effects of temporary differences between the carrying amounts of assets and liabilities for financial and income tax reporting, based on enacted tax laws and rates. Federal income taxes are provided on the portion of the income of foreign subsidiaries that is expected to be remitted to the United States.
The Company follows ASC Topic 740-10-25
Income Taxes
, in accounting for uncertainty in income taxes. ASC 740-10-25 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company recognizes the financial statement effects of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination.
Accounting for Derivatives
In previous years, the Company has had derivative financial instruments in place to reduce currency exposure for the Mexican peso and the Canadian dollar and currently has derivative financial instruments in place to reduce exposure to fuel price fluctuations. Derivative gains/(losses), initially reported as a component of other comprehensive income with an offset to accrued liabilities or other assets, are reclassified to earnings in the period when the forecasted transaction affects earnings. ASC Topic 815,
Derivatives and Hedging,
requires that all derivative instruments be recorded on the balance sheet at their respective fair values.
Earnings per Share ("EPS")
The Company applies the provisions of ASC Topic 260,
Earnings per Share
, which requires companies to present basic EPS and diluted EPS. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. Dilutive common stock options are included in the diluted EPS calculation using the treasury stock method.
Stock-based Employee Compensation Plans
The Company applies the provisions of ASC Topic 718,
Compensation – Stock Compensation
, which requires companies to recognize the grant date fair value of stock options and other equity-based compensation issued to employees in its consolidated statement of operations.
Foreign Currency Translation
Foreign financial statements are translated into U.S. dollars in accordance with ASC Topic 830,
Foreign Currency Matters
. Assets and liabilities of the Company's foreign operations are translated into U.S. dollars at year-end exchange rates. Statement of operations accounts are translated at the average exchange rate prevailing during the year. Resulting translation adjustments are included in other comprehensive income.
Business Combinations
Assets acquired and liabilities assumed as part of a business acquisition are generally recorded at their fair value at the date of acquisition in accordance with ASC Topic 805 Business Combinations. The excess of purchase price over the fair value of assets acquired and liabilities assumed is recorded as goodwill. Determining fair value of identifiable assets, particularly intangibles, and liabilities acquired also requires us to make estimates, which are based on all available information and in some cases assumptions with respect to the timing and amount of future revenues and expenses associated with an asset.
Recent Accounting Pronouncements
In August 2015, the Financial Accounting Standards Board ("the FASB") issued ASU No. 2015-14 deferring the effective date of ASU No. 2014-09, "Revenue from Contracts with Customers" (ASC Topic 606): ("ASU 2014-09"), which requires the recognition of revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance will affect any organization that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial assets. This ASU is effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2017, and early adoption is permitted. The Company is continuing to evaluate the new guidance and plans to provide additional information about its expected financial impact at a future date.
CELADON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016, 2015, and 2014
In November 2015, the FASB issued ASU No. 2015-17 "Income Taxes"(ASC Topic 740), to simplify the presentation of deferred income taxes. The guidance in this Update require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. This guidance will affect any entity that presents a classified statement of financial position. This ASU is effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2016, and early adoption is permitted. The Company has early adopted this update. Adoption of this update impacted our consolidated balance sheet by reclassifying current deferred tax assets of approximately $5 million and $7 million to offset our long term deferred tax liabilities for the fiscal 2016 and fiscal 2015 periods respectively.
In February 2016, the FASB issued ASU No. 2016-02 "Leases"(ASC Topic 842), to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This guidance will affect any entity that enters into a lease. This ASU is effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2018, and early adoption is permitted. The Company is continuing to evaluate the new guidance and plans to provide additional information about its expected financial impact at a future date.
In March 2016, the FASB issued ASU No. 2016-09 "Compensation - Stock Compensation"(ASC Topic 718), to simplify various aspects of accounting for stock-based compensation, including income tax consequences, classification of awards as equity or liability, as well as classification of activities within the statement of cash flows. This guidance will affect any entity that issues share-based payment awards to their employees. This ASU is effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2016, and early adoption is permitted. The Company is continuing to evaluate the new guidance and plans to provide additional information about its expected financial impact at a future date.
(2)
|
PROPERTY, EQUIPMENT, AND LEASES
|
Property and equipment as of June 30, 2016 and 2015, respectively, consists of the following (in thousands):
|
|
|
|
|
|
|
Revenue equipment owned
|
|
$
|
257,782
|
|
|
$
|
325,859
|
|
Revenue equipment under capital leases
|
|
|
352,910
|
|
|
|
478,606
|
|
Furniture and office equipment
|
|
|
17,648
|
|
|
|
12,516
|
|
Land and buildings
|
|
|
142,586
|
|
|
|
112,533
|
|
Service equipment
|
|
|
4,144
|
|
|
|
2,345
|
|
Leasehold improvements
|
|
|
4,086
|
|
|
|
4,117
|
|
|
|
|
779,156
|
|
|
|
935,976
|
|
Accumulated depreciation and amortization
|
|
|
142,423
|
|
|
|
147,446
|
|
|
|
$
|
636,733
|
|
|
$
|
788,530
|
|
Included in accumulated depreciation and amortization was $50.9 million and $54.8 million in 2016 and 2015, respectively, related to revenue equipment under capital leases.
In accordance with its policy, the Company reviews the estimated useful lives of its fixed assets on an ongoing basis. This review indicated that the actual lives of certain tractors and trailers were longer than the estimated useful lives used for depreciation purposes in the Company’s financial statements. As a result, effective October 1, 2015, the Company changed its estimates of the useful lives and salvage value of certain tractors and trailers to better reflect the estimated periods during which these assets will remain in service. The estimated useful lives of the tractors and trailers that previously were 3 years for tractors and 7 years for trailers were increased to 4 years for tractors and 10 years for trailers. The effect of this change in estimate was to reduce depreciation expense for the year ended June 30, 2016 by $7.0 million, increase net income by $4.5 million, and increase basic and diluted earnings per share by $0.16.
CELADON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016, 2015, and 2014
Leased revenue equipment as of June 30, 2016 consists of the following (in thousands):
|
|
|
|
Tractors
|
|
|
92,378
|
|
Trailers
|
|
|
16,639
|
|
|
|
|
109,017
|
|
Accumulated depreciation
|
|
|
9,717
|
|
|
|
$
|
99,300
|
|
Included in this balance is approximately $37 million of assets for which we received $30.0 million in proceeds from 19
th
Capital. Although we transferred title of these assets, we retained certain risks of ownership through a deferred payment stream associated with the ultimate disposition of the equipment at the end of the lease period. We deemed that this transaction did not qualify for sales treatment under ASC 840-20-40-3. As a result, these assets were not removed from our balance sheet.
The majority of our leased assets would qualify for capital lease treatment under ASC 840, however due to the collectability of the minimum lease payments not being reasonably predictable we treat our leased assets as operating leases and record revenue upon collection of payment. Due to the unpredictability of collections we are not able to reasonably estimate lease payment collections over the next five years. Our tractor leases generally are up to 60 month term leases ranging from $2,000 to $4,000 in monthly payments with $0 to $70,000 residuals. Upon default we may choose to re-lease the assets at new terms or dispose of the unit.
At June 30, 2016 this account consisted of approximately 1,300 tractors and 900 trailers.
(4) LEASE OBLIGATIONS AND LONG-TERM DEBT
Lease Obligations
The Company leases certain revenue and service equipment under long-term lease agreements, payable in monthly installments.
Equipment obtained under a capital lease is reflected on the Company's consolidated balance sheet and the related leases bears interest at rates ranging from 1.6% to 3.6% per annum, maturing at various dates through 2022.
Assets held under operating leases are not recorded on the Company's consolidated balance sheet. The Company leases revenue and service equipment under non-cancellable operating leases expiring at various dates through 2023.
The Company leases warehouse and office space under non-cancellable operating leases expiring at various dates through 2019. Certain real estate leases contain renewal options.
Total rental expense under operating leases was as follows for 2016, 2015, and 2014 (in thousands):
|
|
|
|
|
|
|
|
|
|
Revenue and service equipment
|
|
$
|
19,481
|
|
|
$
|
9,109
|
|
|
$
|
6,351
|
|
Office facilities and terminals
|
|
|
6,741
|
|
|
|
5,041
|
|
|
|
3,353
|
|
|
|
$
|
26,222
|
|
|
$
|
14,150
|
|
|
$
|
9,704
|
|
Future minimum lease payments relating to capital leases and to operating leases with initial or remaining terms in excess of one year are as follows (in thousands):
CELADON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016, 2015, and 2014
Year ended June 30,
|
|
|
|
|
|
|
2017
|
|
$
|
58,163
|
|
|
$
|
25,788
|
|
2018
|
|
|
128,879
|
|
|
|
19,145
|
|
2019
|
|
|
39,891
|
|
|
|
8,079
|
|
2020
|
|
|
16,997
|
|
|
|
7,654
|
|
2021
|
|
|
9,885
|
|
|
|
5,168
|
|
Thereafter
|
|
|
65,813
|
|
|
|
9,072
|
|
Total minimum lease payments
|
|
$
|
319,628
|
|
|
$
|
74,906
|
|
Less amounts representing interest
|
|
|
20,848
|
|
|
|
|
|
Present value of minimum lease payments
|
|
$
|
298,780
|
|
|
|
|
|
Less current maturities
|
|
|
51,397
|
|
|
|
|
|
Non-current portion
|
|
$
|
247,383
|
|
|
|
|
|
The Company is obligated for lease residual value guarantees of $62.0 million, with $0 due in fiscal 2017. The guarantees are not included in the future minimum lease payments above. To the extent the expected equipment value at lease termination date is lower than the residual value guarantee; we would accrue for the difference over the remaining lease term. As of June 30, 2016, the Company believes the expected equipment value at lease termination date is greater than the residual value guarantee.
During the second quarter of fiscal 2016, we converted capital leases pertaining to approximately 530 tractors to operating leases, which reduced our on balance sheet debt by $61.2 million. Our future minimum lease payments relating to this agreement are $21.9 million and are included in the table above and go through June 2018.
During the fourth quarter of fiscal 2016, we completed a sale-leaseback transaction of approximately 4,700 trailers, which reduced our debt obligations by $69.2 million and resulted in a deferred gain of $1.2 million. The purpose of the arrangement was to dispose of the units while providing enough time to turn in the units to the purchaser and minimally disrupt our operations. Of these trailers, we expect to refresh approximately 2,700, starting in the second half of calendar year 2017. The base lease term is twelve months and we are to pay a rental fee on each unit until turned in to the purchaser. Once the unit is turned in, we have no further obligation on the unit. Our future minimum lease payments relating to this agreement are $5.7 million and included in the table above.
Debt
The Company had debt, excluding its line of credit, of $0.7 million at June 30, 2016, of which $0 is classified as current, compared to $1.8 million at June 30, 2015, of which $0.9 million was classified as current. Debt includes revenue equipment installment notes of $0.7 million with an average interest rate of 6.2 percent at June 30, 2016 due in monthly installments with final maturities at various dates through June 2019.
Line of Credit
In December 2010, the Company entered into a five-year revolving credit facility agented by Bank of America, N.A. The facility refinanced our previous credit facility and provides for our ongoing working capital needs and other general corporate purposes. Bank of America, N.A. serves as the lead agent in the facility and Wells Fargo Bank, N.A. also participates in the new facility. In December 2014, we increased our credit facility and extended the maturity. The facility permits borrowings up to a maximum of $300.0 million and expires December 2019. The applicable interest rate under this agreement is based on either a base rate, equal to Bank of America, N.A.'s prime rate or LIBOR, plus an applicable margin between 0.825% and 1.45% that is adjusted quarterly based on our lease adjusted total debt to EBITDAR ratio. At June 30, 2016, the credit facility had an outstanding balance of $151.4 million and $3.2 million utilized for letters of credit compared to an outstanding balance of $132.4 million and $1.7 million utilized for letters of credit as of June 30, 2015. The facility is collateralized by the assets of all the U.S. and Canadian subsidiaries of the Company. The Company is obligated to comply with certain financial covenants under the credit agreement and the Company was in compliance with these covenants at June 30, 2016.
CELADON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016, 2015, and 2014
(5) EMPLOYEE BENEFIT PLANS
401(k) Profit Sharing Plan
The Company has a 401(k) profit sharing plan, which permits U.S. employees of the Company to contribute up to 50% of their annual compensation, up to certain Internal Revenue Service limits, on a pretax basis. The contributions made by each employee are fully vested immediately and are not subject to forfeiture. The Company makes a discretionary matching contribution of up to 50% of the employee's contribution up to 5% of their annual compensation. Employees vest in the Company's contribution to the plan at the rate of 20% per year from the date of employment anniversary. Contributions made by the Company during fiscal 2016, 2015, and 2014 amounted to $415,000, $358,000, and $278,000, respectively.
All share-based payments to employees, including grants of employee stock options, are recognized in the financial statements based upon the grant-date fair value of the awards.
In January 2006, stockholders approved the 2006 Omnibus Incentive Plan ("2006 Plan") that provides various alternatives to compensate the Company's key employees. The 2006 Plan utilizes stock options, restricted stock grants, and stock appreciation rights. The 2006 Plan through its November 2008 and December 2013 amendments has authorized a total of 3,437,500 shares for grant. The Company granted restricted stock grants covering 441,642 shares in fiscal 2016, 181,894 shares in fiscal 2015, and 148,500 shares in fiscal 2014. As of June 30, 2016, the Company is authorized to grant an additional 200,629 shares.
The total compensation cost that has been recorded for such stock-based awards was an expense of $2.9 million in fiscal 2016, $2.8 million in fiscal 2015, and $2.1 million in fiscal 2014. The total income tax benefit recognized in the statement of operations for share-based compensation arrangements was $0.9 million in fiscal 2016, $1.9 million in fiscal 2015, and $1.1 million in fiscal 2014.
A summary of the activity of the Company's stock option plans as of June 30, 2016, 2015, and 2014 and changes during the fiscal years then ended is presented below:
|
|
|
|
|
Weighted-Average
Exercise Price
|
|
|
Weighted-Average Remaining Contractual Term
|
|
|
Aggregate
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2013
|
|
|
1,148,790
|
|
|
$
|
10.76
|
|
|
|
4.1
|
|
|
$
|
8,606,841
|
|
Granted
|
|
|
---
|
|
|
|
---
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(8,500
|
)
|
|
$
|
13.88
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(235,192
|
)
|
|
$
|
12.60
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2014
|
|
|
905,098
|
|
|
$
|
10.25
|
|
|
|
3.5
|
|
|
$
|
10,018,958
|
|
Granted
|
|
|
---
|
|
|
|
---
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
---
|
|
|
|
---
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(609,309
|
)
|
|
$
|
10.63
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2015
|
|
|
295,789
|
|
|
$
|
9.47
|
|
|
|
2.6
|
|
|
$
|
3,316,030
|
|
Granted
|
|
|
---
|
|
|
|
---
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(5,670
|
)
|
|
$
|
12.81
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(14,950
|
)
|
|
$
|
11.33
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2016
|
|
|
275,169
|
|
|
$
|
9.30
|
|
|
|
1.7
|
|
|
$
|
(310,740
|
)
|
Exercisable at June 30, 2016
|
|
|
275,169
|
|
|
$
|
9.30
|
|
|
|
1.7
|
|
|
$
|
(310,740
|
)
|
The total intrinsic value of options exercised during fiscal 2016, 2015, and 2014 was $0.1 million, $8.4 million, and $1.9 million, respectively.
CELADON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016, 2015, and 2014
Restricted Shares
|
|
|
|
|
Weighted-Average Grant Date Fair Value
|
|
Unvested at June 30, 2013
|
|
|
355,963
|
|
|
$
|
15.75
|
|
Granted
|
|
|
148,500
|
|
|
$
|
22.13
|
|
Forfeited
|
|
|
(16,975
|
)
|
|
$
|
13.49
|
|
Vested
|
|
|
(130,783
|
)
|
|
$
|
14.75
|
|
Unvested at June 30, 2014
|
|
|
356,705
|
|
|
$
|
18.88
|
|
Granted
|
|
|
181,894
|
|
|
$
|
22.75
|
|
Forfeited
|
|
|
(8,784
|
)
|
|
$
|
18.85
|
|
Vested
|
|
|
(133,449
|
)
|
|
$
|
17.53
|
|
Unvested at June 30, 2015
|
|
|
396,366
|
|
|
$
|
21.13
|
|
Granted
|
|
|
441,642
|
|
|
$
|
8.03
|
|
Forfeited
|
|
|
(83,749
|
)
|
|
$
|
21.14
|
|
Vested
|
|
|
(152,465
|
)
|
|
$
|
17.14
|
|
Unvested at June 30, 2016
|
|
|
601,794
|
|
|
$
|
11.92
|
|
Restricted shares have been granted to employees subject to achievement of certain time-based targets and vest evenly over a four or five-year period, commencing with the first anniversary of the grant date.
As of June 30, 2016, we had $5.9 million of total unrecognized compensation expense related to restricted shares that is expected to be recognized over the remaining weighted average period of approximately 3.1 years.
(7)
|
STOCK REPURCHASE PROGRAMS
|
On August 25, 2010, the Company's Board of Directors authorized a stock repurchase program pursuant to which the Company is authorized to repurchase up to 2,000,000 shares of our common stock. The Company has not repurchased any shares of the Company's common stock under this program.
(8) EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators used in computing earnings per share (in thousands except per share amounts):
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
24,844
|
|
|
$
|
37,217
|
|
|
$
|
30,681
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted - average number of common shares outstanding
|
|
|
27,507
|
|
|
|
23,844
|
|
|
|
23,014
|
|
Basic earnings per share
|
|
$
|
0.90
|
|
|
$
|
1.56
|
|
|
$
|
1.33
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted - average number of common shares outstanding
|
|
|
27,507
|
|
|
|
23,844
|
|
|
|
23,014
|
|
Effect of stock options and other incremental shares
|
|
|
574
|
|
|
|
627
|
|
|
|
741
|
|
Weighted-average number of common shares outstanding – diluted
|
|
|
28,081
|
|
|
|
24,471
|
|
|
|
23,755
|
|
Diluted earnings per share
|
|
$
|
0.88
|
|
|
$
|
1.52
|
|
|
$
|
1.29
|
|
(9) COMMITMENTS AND CONTINGENCIES
The Company is party to certain lawsuits in the ordinary course of business. We are not currently party to any proceedings which we believe will have a material adverse effect on our consolidated financial position or operations. The Company's subsidiary has been named as the defendant in Wilmoth et al. v. Celadon Trucking Services, Inc., a class action proceeding. A summary judgment was granted in favor of the plaintiffs. We have appealed this judgment. We believe that we will be successful on appeal, but it is also reasonably possible the judgment will be upheld. We estimate the possible range of financial exposure associated with this claim to be between $0 and approximately $5.9 million. We currently do not have a contingency reserved for this claim, but will continue to monitor its progress to determine if a reserve is necessary in the future.
CELADON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016, 2015, and 2014
We had also been named as the defendant in in Day et al. v. Celadon Trucking Services, Inc., a second class action proceeding. A judgment was granted in favor of the plaintiffs. We appealed this judgment, but the judgment was subsequently upheld. The estimated damages of $2.4 million were fully reserved at June 30, 2016.
We have planned commitments to add $24 million of tractor operating leases over the next twelve months as of June 30, 2016. Generally, our purchase orders do not become firm commitment orders for which we are irrevocably obligated until shortly before purchase. We may also choose to adjust the timing of our purchases based on performance of existing equipment throughout the year. Our plans to purchase equipment are reevaluated on a quarter-by-quarter basis. As of June 30, 2016, the Company had outstanding planned purchase commitments of approximately $41 million to $44 million for facilities and land. Factors such as costs and opportunities for future terminal expansions may change the amount of such expenditures.
Standby letters of credit, not reflected in the accompanying consolidated financial statements, aggregated approximately $3.2 million at June 30, 2016. In addition, at June 30, 2016, 500,000 treasury shares were held in a trust as collateral for self-insurance reserves.
(10) INCOME TAXES
The income tax provision for operations in fiscal 2016, 2015, and 2014, consisted of the following (in thousands):
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Current:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
2,692
|
|
|
$
|
(7,476
|
)
|
|
$
|
12,958
|
|
State and local
|
|
|
123
|
|
|
|
(2,634
|
)
|
|
|
1,013
|
|
Foreign
|
|
|
2,490
|
|
|
|
(1,636
|
)
|
|
|
509
|
|
Total current
|
|
$
|
5,305
|
|
|
$
|
(11,746
|
)
|
|
$
|
14,480
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
6,892
|
|
|
|
21,869
|
|
|
|
3,703
|
|
State and local
|
|
|
601
|
|
|
|
3,807
|
|
|
|
576
|
|
Foreign
|
|
|
766
|
|
|
|
6,715
|
|
|
|
931
|
|
Total deferred
|
|
|
8,259
|
|
|
|
32,391
|
|
|
|
5,210
|
|
Total
|
|
$
|
13,564
|
|
|
$
|
20,645
|
|
|
$
|
19,690
|
|
No benefit or expense has been recognized for U.S. federal income taxes on current undistributed earnings of foreign subsidiaries of approximately $8.6 million, $10.9 million, and $3.8 million at June 30, 2016, 2015, and 2014, respectively. This exception is allowable under ASC 740-30-50-2.
The Company's income tax expense in fiscal 2016, 2015, and 2014 varies from the statutory federal tax rate of 35% applied to income before income taxes as follows (in thousands):
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
Computed "expected" income tax expense
|
|
$
|
13,443
|
|
|
$
|
20,255
|
|
|
$
|
17,630
|
|
State taxes, net of federal benefit
|
|
|
391
|
|
|
|
763
|
|
|
|
1,033
|
|
Non-deductible expenses
|
|
|
1,002
|
|
|
|
818
|
|
|
|
1,705
|
|
Foreign tax rate differential
|
|
|
(861
|
)
|
|
|
(479
|
)
|
|
|
(383
|
)
|
Other, net
|
|
|
(411
|
)
|
|
|
(712
|
)
|
|
|
(295
|
)
|
Actual income tax expense
|
|
$
|
13,564
|
|
|
$
|
20,645
|
|
|
$
|
19,690
|
|
CELADON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016, 2015, and 2014
The tax effect of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at June 30, 2016 and 2015 consisted of the following (in thousands):
|
|
2016
|
|
|
2015
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Net Operating Loss Carry Forwards
|
|
$
|
39,111
|
|
|
$
|
0
|
|
Insurance reserves
|
|
|
5,446
|
|
|
|
4,328
|
|
Accrued Expenses Not Deductible Until Paid
|
|
|
4,028
|
|
|
|
0
|
|
Deferred equity compensation
|
|
|
891
|
|
|
|
862
|
|
Other
|
|
|
228
|
|
|
|
5,195
|
|
Total deferred tax assets
|
|
$
|
49,704
|
|
|
$
|
10,385
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
$
|
(149,339
|
)
|
|
$
|
(104,186
|
)
|
Goodwill
|
|
|
(6,357
|
)
|
|
|
(4,442
|
)
|
Other
|
|
|
(3,146
|
)
|
|
|
(2,920
|
)
|
Total deferred tax liabilities
|
|
$
|
(158,842
|
)
|
|
$
|
(111,548
|
)
|
|
|
|
|
|
|
|
|
|
Total net deferred tax liabilities
|
|
$
|
(109,138
|
)
|
|
$
|
(101,163
|
)
|
As of June 30, 2016, the Company had operating loss carryforwards for income tax purposes of approximately $120 million, which have expiration dates in 2034 and after.
As of June 30, 2016 and June 30, 2015, the Company recorded a $0.5 million income tax liability for unrecognized tax benefits, a portion of which represents penalties and interest. The only periods subject to examination for our federal returns are the 2012, 2013, and 2014 tax years.
(11)
|
SEGMENT INFORMATION AND SIGNIFICANT CUSTOMERS
|
We have three reportable segments comprised of an asset-based segment, an asset-light based segment, and an equipment leasing and services 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 warehousing, brokerage, and less-than-truckload ("LTL") operations. Our third segment is being presented separately for the first time in the June 30, 2016 fiscal year due to increased focus by management on this segment as a major focal point of our business. Our equipment leasing and services segment consists primarily of leasing activities with independent contractors and other trucking fleets. This segment also includes revenues from insurance, maintenance, and other ancillary services that we provide for, or make available to, independent contractors. In previous fiscal years our equipment leasing and services segment was included within our asset-based segment. Results of the equipment leasing and services segment prior to the current fiscal year are impracticable to determine due to the way we had costs integrated with our asset-based segment. We have determined that these segments qualify as reportable segments under ASC 280-10,
Segment Reporting
. Information regarding our reportable segments is summarized below (in thousands):
CELADON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016, 2015, and 2014
|
|
Fiscal Year Ended
June 30,
(Dollars in thousands)
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
|
|
|
|
|
|
|
Asset-based
|
|
$
|
910,569
|
|
|
$
|
810,208
|
|
|
$
|
706,726
|
|
Asset-light
|
|
|
126,900
|
|
|
|
90,548
|
|
|
|
52,585
|
|
Equipment leasing and services
|
|
|
27,887
|
|
|
|
---
|
|
|
|
---
|
|
|
|
|
1,065,356
|
|
|
|
900,756
|
|
|
|
759,311
|
|
Operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-based
|
|
|
31,235
|
|
|
|
54,824
|
|
|
|
34,179
|
|
Asset-light
|
|
|
12,782
|
|
|
|
10,961
|
|
|
|
5,255
|
|
Equipment leasing and services
|
|
|
8,189
|
|
|
|
---
|
|
|
|
---
|
|
|
|
|
52,206
|
|
|
|
65,785
|
|
|
|
39,434
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-based
|
|
|
73,797
|
|
|
|
75,317
|
|
|
|
64,579
|
|
Asset-light
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
Equipment leasing and services
|
|
|
5,758
|
|
|
|
---
|
|
|
|
---
|
|
|
|
|
79,555
|
|
|
|
75,317
|
|
|
|
64,579
|
|
Gain on disposition of equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-based
|
|
|
---
|
|
|
|
(23,619
|
)
|
|
|
(6,736
|
)
|
Equipment leasing and services
|
|
|
(22,395
|
)
|
|
|
---
|
|
|
|
---
|
|
|
|
|
(22,395
|
)
|
|
|
(23,619
|
)
|
|
|
(6,736
|
)
|
Income before taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-based
|
|
|
18,402
|
|
|
|
51,474
|
|
|
|
29,121
|
|
Asset-light
|
|
|
12,525
|
|
|
|
6,388
|
|
|
|
21,250
|
|
Equipment leasing and services
|
|
|
7,481
|
|
|
|
---
|
|
|
|
---
|
|
|
|
|
38,408
|
|
|
|
57,862
|
|
|
|
50,371
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-based
|
|
|
61,083
|
|
|
|
53,989
|
|
|
|
21,442
|
|
Asset-light
|
|
|
1,368
|
|
|
|
1,368
|
|
|
|
1,368
|
|
Equipment leasing and services
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
|
62,451
|
|
|
|
55,357
|
|
|
|
22,810
|
|
Total assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-based
|
|
|
935,234
|
|
|
|
1,160,550
|
|
|
|
684,548
|
|
Asset-light
|
|
|
10,977
|
|
|
|
8,056
|
|
|
|
6,267
|
|
Equipment leasing and services
|
|
|
157,079
|
|
|
|
---
|
|
|
|
---
|
|
|
|
|
1,103,290
|
|
|
|
1,168,606
|
|
|
|
690,815
|
|
The Company allocates total revenue based on the country of origin of the tractor hauling the freight. Information as to the Company's operations by geographic area for fiscal years 2016, 2015, and 2014 is summarized below (in thousands):
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Total revenue:
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
941,115
|
|
|
$
|
753,208
|
|
|
$
|
609,512
|
|
Canada
|
|
|
82,918
|
|
|
|
102,106
|
|
|
|
115,678
|
|
Mexico
|
|
|
41,323
|
|
|
|
45,442
|
|
|
|
34,121
|
|
Total
|
|
$
|
1,065,356
|
|
|
$
|
900,756
|
|
|
$
|
759,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
757,198
|
|
|
$
|
756,393
|
|
|
$
|
439,043
|
|
Canada
|
|
|
58,414
|
|
|
|
76,025
|
|
|
|
65,719
|
|
Mexico
|
|
|
32,070
|
|
|
|
25,100
|
|
|
|
18,868
|
|
Total
|
|
$
|
847,682
|
|
|
$
|
857,518
|
|
|
$
|
523,630
|
|
No customer accounted for more than 10% of the Company's total revenue during its three most recent fiscal years.
(12) FAIR VALUE MEASUREMENTS
ASC 820-10
Fair Value Measurement
defines fair value, establishes a framework for measuring fair value, 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 market 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:
CELADON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016, 2015, and 2014
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.
In accordance with the fair value hierarchy described above, the following table shows the fair value of our financial assets and liabilities that are required to be measured at fair value as of June 30, 2016 and June 30, 2015 (in thousands).
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
Balance
at
June
30,
2016
|
|
|
Balance
at
June
30,
2015
|
|
|
Balance
at
June
30,
2016
|
|
|
Balance
at
June
30,
2015
|
|
|
Balance
at
June
30,
2016
|
|
|
Balance
at
June
30,
2015
|
|
|
Balance
at
June
30,
2016
|
|
|
Balance
at
June
30,
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel derivatives
|
|
|
(95
|
)
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
(95
|
)
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
Our other financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable, long term debt, and capital lease obligations. At June 30, 2016, the fair values of these instruments were approximated by their carrying values.
(13) FUEL DERIVATIVES
In our day-to-day business activities we are exposed to certain market risks, including the effects of changes in fuel prices. We review 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, we may enter into futures contracts. These instruments will be Gulf Coast Diesel 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. We do not engage in speculative transactions, nor do we hold or issue financial instruments for trading purposes.
We have entered into futures contracts relating to 3,906,000 total gallons of diesel fuel, or 300,000 gallons per month for July 2016 through July 2017, approximately 8.9% of our monthly projected fuel requirements through July 2017. Under these contracts, we pay a fixed rate per gallon of Gulf Coast Diesel and receive the monthly average price of New York Gulf Coast Diesel per the NYMEX. We have done retrospective and prospective regression analyses that showed the changes in the prices of diesel fuel and Gulf Coast Diesel 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 June 30, 2016, 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.
We recognize all derivative instruments at fair value on our consolidated balance sheets in other assets or other accrued expenses. Our 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 statements of income.
CELADON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016, 2015, and 2014
The amount recorded in accumulated other comprehensive income as of June 30, 2016 is $0.1 million of loss. The accumulated other comprehensive income loss will fluctuate with changes in fuel prices. Amounts ultimately recognized in the consolidated statements of income as fuel expense, due to the actual diesel fuel purchases, will depend on the fair value as of the date of settlement.
Outstanding financial derivative instruments expose us to credit loss in the event of nonperformance by the counterparties 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 would be reflected in the fair value of the instrument. As of June 30, 2016, we have not made any such adjustments.
(14) SELECTED QUARTERLY DATA (Unaudited)
Summarized quarterly data for fiscal 2016 and 2015 follows (in thousands except per share amounts):
|
|
Fiscal Year 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
266,121
|
|
|
$
|
275,399
|
|
|
$
|
259,574
|
|
|
$
|
264,262
|
|
Operating expenses
|
|
|
244,949
|
|
|
|
261,320
|
|
|
|
248,043
|
|
|
|
258,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
21,172
|
|
|
|
14,079
|
|
|
|
11,531
|
|
|
|
5,424
|
|
Other expense, net
|
|
|
3,252
|
|
|
|
3,779
|
|
|
|
3,632
|
|
|
|
3,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
|
17,920
|
|
|
|
10,300
|
|
|
|
7,899
|
|
|
|
2,289
|
|
Income tax expense
|
|
|
6,553
|
|
|
|
3,685
|
|
|
|
2,660
|
|
|
|
666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
11,367
|
|
|
|
6,615
|
|
|
$
|
5,239
|
|
|
$
|
1,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per share
|
|
$
|
0.41
|
|
|
$
|
0.24
|
|
|
$
|
0.19
|
|
|
$
|
0.06
|
|
Diluted income per share
|
|
$
|
0.41
|
|
|
$
|
0.24
|
|
|
$
|
0.19
|
|
|
$
|
0.06
|
|
|
|
Fiscal Year 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
193,416
|
|
|
$
|
222,371
|
|
|
$
|
231,702
|
|
|
$
|
253,267
|
|
Operating expenses
|
|
|
179,948
|
|
|
|
206,802
|
|
|
|
216,374
|
|
|
|
231,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
13,468
|
|
|
|
15,569
|
|
|
|
15,328
|
|
|
|
21,421
|
|
Other expense (income), net
|
|
|
1,092
|
|
|
|
1,969
|
|
|
|
2,066
|
|
|
|
2,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
|
12,376
|
|
|
|
13,600
|
|
|
|
13,262
|
|
|
|
18,624
|
|
Income tax expense
|
|
|
4,329
|
|
|
|
5,057
|
|
|
|
4,670
|
|
|
|
6,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
8,047
|
|
|
$
|
8,543
|
|
|
$
|
8,592
|
|
|
$
|
12,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per share
|
|
$
|
0.35
|
|
|
$
|
0.37
|
|
|
$
|
0.37
|
|
|
$
|
0.48
|
|
Diluted income per share
|
|
$
|
0.34
|
|
|
$
|
0.36
|
|
|
$
|
0.36
|
|
|
$
|
0.47
|
|
CELADON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016, 2015, and 2014
(15) ACQUISITIONS
Immaterial acquisitions for the year ended June 30, 2016
In July 2015, we acquired certain assets of Buckler Transport, Inc. ("Buckler") in Roulette, PA, for $15.4 million. The assets acquired include tractors and trailers that we intend to operate in the short term. We used borrowings under our existing credit facility to fund the purchase price. The purposes of the acquisition were to continue service to Buckler customers and to diversify into the hot asphalt and fracking industry.
In November 2015, we acquired certain assets of Distribution, Inc. dba FTL, Inc. ("FTL") in Clackamas, OR, for $5.4 million. The assets acquired include tractors and trailers that we intend to operate in the short term. We used borrowings under our existing credit facility to fund the purchase price. The purpose of the acquisition was to continue dry-van service for the FTL customers.
The two acquisitions above were determined to be immaterial individually and in the aggregate.
Material acquisitions for the year ended June 30, 2015
In October 2014, we acquired the outstanding membership interests of A&S Services Group, LLC ("A&S") in New Freedom, PA for $55.0 million. We acquired trade receivables and other current assets of $19.3 million, property and equipment of $79.2 million, identifiable intangible assets of $4.5 million, and goodwill of $10.2 million and assumed $52.2 million in debt including capital leases and $6.0 million of various other liabilities. The property and equipment includes tractors, trailers, buildings, and land that we intend to operate for the foreseeable future. We used borrowings under our existing credit facility to fund the purchase price. The purposes of the acquisition were to offer employment opportunities to A&S drivers and continue dry-van, warehouse, and brokerage services for the A&S customers.
Results of the acquired business have been included in our consolidated financial statements since the date of acquisition. The amount of revenue and earnings generated by A&S is impracticable to discern due to the way we integrated the acquired company since acquisition.
The following unaudited pro forma consolidated results of operations for the fiscal years ended June 30, 2016, 2015, and 2014 assume that the acquisition of A&S occurred as of July 1, 2013 (in thousands).
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
1,065,356
|
|
|
$
|
944,511
|
|
|
$
|
868,537
|
|
Net income
|
|
$
|
24,844
|
|
|
$
|
37,650
|
|
|
$
|
32,706
|
|
The supplemental unaudited pro forma financial information above is presented for information purposes only. It is not necessarily indicative of what the Company's financial position or results of operations actually would have been had the Company completed the acquisitions at the dates indicated, nor is it intended to project the future financial position or operating results of the combined company.
Immaterial acquisitions for the year ended June 30, 2015
In September 2014, we acquired certain assets of Furniture Row Express, LLC ("FRE") in Denver, CO for $10.0 million. We used borrowings under our existing credit facility to fund the purchase price. The purposes of the acquisition were to offer employment opportunities to FRE drivers and continue dry-van and temperature-controlled services for the FRE customers.
CELADON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016, 2015, and 2014
In December 2014, we acquired the stock of Bee Line, Inc. ("Bee Line") in Ottoville, OH for $4.5 million. We used borrowings under our existing credit facility to fund the purchase price. The purposes of the acquisition were to offer employment opportunities to Bee Line drivers and continue dry-van services for the Bee Line customers.
In January 2015, we acquired the stock of Taylor Express, Inc. ("Taylor") in Hope Mills, NC for $50.6 million. The purposes of the acquisition were to offer employment opportunities to Taylor drivers and continue dry-van and dry bulk services for the Taylor customers. The recorded amounts of assets acquired in this transaction are subject to change upon the finalization of our determination of acquisition date fair values.
The three acquisitions above were determined to be immaterial individually and in the aggregate.
The assets and liabilities acquired were recorded at fair value at the time of acquisition. The goodwill recorded for each acquisition relates to anticipated future cash flows and operating efficiencies.
(16) GOODWILL AND OTHER INTANGIBLE ASSETS
The intangible assets relate to customer relations and trade names acquired through acquisitions in fiscal 2015. All acquired intangible assets relate to our asset-based business. The intangible assets acquired will be amortized on a straight-line basis through 2041 (dollar amounts below in thousands).
|
|
|
|
|
Intangibles
|
|
|
|
|
|
|
June 30, 2015
|
|
|
Current year Additions
|
|
|
June 30, 2016
|
|
Gross carrying amount
|
|
$
|
8,096
|
|
|
|
---
|
|
|
$
|
8,096
|
|
Amortization
|
|
|
1,048
|
|
|
$
|
162
|
|
|
|
1,210
|
|
Net carrying amount
|
|
$
|
7,048
|
|
|
$
|
162
|
|
|
$
|
6,886
|
|
The following table summarizes goodwill (in thousands):
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
June 30, 2015
|
|
|
Current year additions
|
|
|
June 30, 2016
|
|
Asset-based
|
|
$
|
53,989
|
|
|
$
|
7,094
|
|
|
$
|
61,083
|
|
Asset-light
|
|
|
1,368
|
|
|
|
---
|
|
|
|
1,368
|
|
Total Goodwill
|
|
$
|
55,357
|
|
|
$
|
7,094
|
|
|
$
|
62,451
|
|
The additions to goodwill mostly relate to the Buckler and FTL acquisitions of $3.4 million and $3.0 million, respectively. Another $0.7 million of additions are goodwill adjustments related to previously disclosed acquisitions. The Buckler and FTL related goodwill are tax deductible.
(17) UNCONSOLIDATED RELATED-PARTY INVESTMENTS
19th Capital was established with capital contributions from us (33.33%) and Tiger ELS, LLC ("Tiger") (66.67%), an entity controlled by Larsen MacColl Partners, an unaffiliated investment firm, in exchange for Class A Interests. We account for our investment in 19
th
Capital under the equity method of accounting. As of June 30, 2016, we had invested $2.0 million of the total capital contributions and recorded $0.3 million of investment income. In addition to the Company’s ownership, certain members of Celadon’s management own a membership interest in 19
th
Capital, issued in the form of Class B Interests, which begin to participate in equity value after 100% of the capital invested in 19th Capital, plus a preferred return of 12% per annum, has been returned to the holders of the Class A Interests. Celadon and Celadon’s management, on a combined basis, have a minority interest in 19
th
Capital.
In late September 2015, the Quality Companies entered into a Portfolio Purchase and Sale Agreement, a Fleet Program Agreement, a Service Agreement, and a Program Agreement with 19th Capital. Under the Portfolio Purchase and Sale Agreement, 19th Capital purchased portfolios of Quality's independent contractor leases and associated assets. The net sales proceeds of units total $58.8 million for the year ended June 30, 2016. The net gain as a result of these transactions was $2.3 million.
CELADON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016, 2015, and 2014
Under the Program Agreement, 19
th
Capital will finance the renewal and expansion of transportation assets operated by independent lessees. Under related agreements, Quality will provide administrative and servicing support for 19th Capital’s lease and financing portfolio, certain driver recruiting, lease payment remittance, maintenance, and insurance services. The Company records deferred leasing revenue related to its servicing of the lease payments and driver recruiting services in the liabilities section of the balance sheet and amortizes the deferred leasing revenue over the expected life of the lease or until 19th Capital disposes of the asset. The Company has $2.2 million of deferred leasing revenue related to these transactions on the consolidated balance sheet as of June 30, 2016. The Company has a receivable from 19
th
Capital of $0.8 million for the servicing of 19
th
Capital owned assets under lease. Additionally we have collected $2.6 million of lease payments as of June 30, 2016 that we owe to 19
th
Capital and are recorded on our consolidated balance sheet as an accrual.
In a separate transaction we received $30.0 million in net proceeds from the disposition of leased equipment, with a book value of approximately $37.7 million. Although we transferred title of these assets, we retained certain risks of ownership through a deferred payment stream associated with the ultimate disposition of the equipment at the end of the lease period. We deemed that this transaction did not qualify for sales treatment under ASC 840-20-40-3. As a result, these assets were not removed from our balance sheet, but were reclassified to leased assets, as we retain approximately 20% of the net asset value. We recorded a liability of $30.0 million with the current portion in other accrued liabilities and the long term portion under other liabilities that will pay down over an estimated period of 49 months as lease payments from owner operators are collected and remitted to 19
th
Capital.
(18) EQUIPMENT LEASING AND SERVICES SEGMENT
We routinely enter into leases with independent contractors which we classify and record as operating leases. From time to time we will assign these leases and sell the underlying assets to third party financing companies. Total net proceeds and net gain as a result of these transactions during the year ended June 30, 2016 was $328.6 million and $22.4 million, respectively, compared to $329.0 million and $21.5 million during the year ended June 30, 2015. Total net proceeds and net gains are inclusive of the amounts recorded from 19
th
Capital as mentioned in note 17. The majority of the net proceeds and net gains are from the equipment we routinely sell to Element Financial Corp. ("Element") under our agreement with Element for use by independent contractors. The $8.2 million of net operating income reported under the equipment leasing and services segment for the year ended June 30, 2016 includes $22.4 million in gains recorded on a net basis for such period, less operating expenses associated with this segment.
We have recorded leased revenue equipment held for resale on our consolidated balance sheet of $24.9 million. These assets are current under lease with and independent contractor or fleet and our equipment leasing and services segment has a plan to sell these leased assets in their current condition to a third party financing part and are currently marketing these units at a reasonable price compared to their fair value. The sale of these units is probable within one year.
We have recorded equipment held for resale of $44.9 million on our consolidated balance sheet. These units are not currently operating in the Celadon fleet, nor are they under a current lease with an independent contractor or fleet. Our equipment leasing and services segment plans to sell these assets in their current condition to a third party purchaser and is currently marketing these units at a reasonable price compared to their fair value. The sale is probable within one year.
We have recorded leased equipment on our consolidated balance sheet of $99.3 million. Our leasing and services segment leases this equipment to independent contractors and fleets. Assets in this balance that were previously classified as a current asset have changed classification due to a change in relationships with our third party leasing providers. We have reevaluated this equipment and no longer believe it is probable that those assets will be sold within the next year. Included in this balance is approximately $37 million of assets for which we received $30.0 million in proceeds from 19
th
Capital. Although we transferred title of these assets, we retained certain risks of ownership through a deferred payment stream associated with the ultimate disposition of the equipment at the end of the lease period. We deemed that this transaction did not qualify for sales treatment under ASC 840-20-40-3. As a result, these assets were not removed from our balance sheet. The remainder of the assets are currently under lease with an independent contractor or fleet or are open to be leased to an independent contractor or fleet.
We have recorded in our assets on our consolidated balance sheet an amount that represents advances made to Element relating to our Lease Shortfall Advance arrangement. These advances are for shortfalls between the required lease payments and the amount actually collected from the independent contractor or fleet. Element is required to reimburse us for Lease Shortfall Advance payments and, accordingly, we have accounted for the related receivable under other assets on our consolidated balance sheet, in the amount of $31.9 million as of June 30, 2016.
CELADON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016, 2015, and 2014
We entered into a Letter Agreement Regarding Additional Reserve Account Contributions on December 29, 2015 with Element which makes us responsible for an additional $2.5 million of reserve funds to the extent that we are unable to recoup this amount from the reseating of trucks and sale proceeds for trucks pursuant to our agreements with Element. We have evaluated this contingency under ASC 450 – Contingencies and determined that it is not probable that we will incur this amount at this time and therefore have not reserved this amount.
(19) RECLASSIFICATION AND ADJUSTMENTS
Certain items in the fiscal 2015 and fiscal 2014 consolidated financial statements have been reclassified to conform to the current presentation. The reclassifications had no impact on earnings.
(20) SUBSEQUENT EVENT
On September 13, 2016, we signed an MOU with Quality's main third party financing provider, under which substantially all of Quality's tractors under management owned by such third party financing provider, 19
th
Capital, and Quality would be combined into 19
th
Capital as a joint venture. Under the MOU, the joint venture would own all or substantially all of the 11,300 tractors under management by Quality that are currently owned by a combination of Quality, 19
th
Capital, and the financing provider. The existing agreements with the third party financing provider would be terminated and replaced with definitive agreements contemplated by the MOU.