Disclosure Regarding Forward-Looking Statements

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

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

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

Business Overview

We are one of North America's twenty largest truckload carriers as measured by revenue. We generated $599.0 million in operating revenue during our fiscal year ended June 30, 2012. We provide asset-based dry van truckload carrier and rail services and asset-light services including brokerage services, LTL, and warehousing services. Through our asset and asset-light services, we are able to transport or arrange for transportation throughout the United States, Canada, and Mexico.

We generated approximately 46% of our revenue in fiscal 2012 from international movements, and we believe our annual border crossings make us the largest provider of international truckload movements in North America. We believe that our strategically located terminals and experience with the language, culture, and border crossing requirements of each North American country provide a competitive advantage in the international trucking marketplace.

We believe our international operations, particularly those involving Mexico, offer an attractive business niche. The additional complexity of and need to establish cross-border business partners and to develop strong organization and adequate infrastructure in Mexico affords some barriers to competition that are not present in traditional U.S. truckload services.

Recent Results of Operations

Our results of operations for the quarter ended December 31, 2012, compared to the same period in 2011 are:

· Freight revenue increased to $116.8 million from $115.1 million;
· Net income increased to $7.4 million from $5.5 million; and
· Net income per diluted share increased to $0.32 from $0.24.

In the December 2012 quarter, average revenue per loaded mile increased 2.4% from the December 2011 quarter. This increase was offset by flat revenue per seated tractor per week and a 2.8% decline in average miles per seated tractor from the December 2011 quarter. We believe that we are making progress improving our freight mix and contract pricing.

Our average seated line haul tractors increased to 2,698 tractors in the quarter ended December 31, 2012, compared to 2,633 tractors for the same period a year ago. The net change of 65 units is comprised of a 56-unit increase in independent contractor tractors, and a 9-unit increase in company tractors. The tight driver market impacted our ability to recruit company drivers. The number of tractors operated by independent contractors increased 14.3% from a year ago.

Revenue and Expenses

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

The main factors that impact our profitability in terms of expenses are the variable costs of transporting freight for our customers. These costs include fuel expense, driver-related expenses, such as wages, benefits, training and recruitment, and independent contractor and third party carrier costs, which are recorded on the "Purchased Transportation" line of our consolidated statements of income. Expenses that have both fixed and variable components include maintenance, insurance, and claims. These expenses generally vary with the miles we travel, but also have a controllable component based on safety, fleet age, efficiency, and other factors. Our main fixed costs are the acquisition and depreciation of long-term assets, such as revenue equipment and the compensation of non-driver personnel. Effectively controlling our expenses and managing our net cost of revenue equipment acquisitions and dispositions, including any related gains or losses, are important elements of assuring our profitability. We evaluate our profitability using operating ratio, excluding the impact of fuel surcharge revenue (operating expenses, net of fuel surcharge, expressed as a percentage of revenue, before fuel surcharge), and income before income taxes, which eliminates shifting operating lease expenses "above the line" from interest expense on owned or capital leased equipment.

Results of Operations

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

                                             Three months ended          Six months ended
                                                December 31,               December 31,
                                              2012          2011         2012         2011

  Freight revenue(1)                            100.0 %      100.0 %       100.0 %     100.0 %

  Operating expenses:
  Salaries, wages, and employee benefits         35.6 %       32.6 %        34.3 %      32.7 %
  Fuel(1)                                         4.4 %        6.9 %         4.8 %       7.5 %
  Purchased transportation                       24.5 %       23.7 %        23.9 %      23.7 %
  Revenue equipment rentals                       1.4 %        0.8 %         1.5 %       0.8 %
  Operations and maintenance                      6.6 %        8.8 %         6.6 %       8.7 %
  Insurance and claims                            3.4 %        3.2 %         3.1 %       2.9 %
  Depreciation and amortization                   8.2 %       10.8 %         9.3 %      10.4 %
  Communications and utilities                    1.2 %        0.9 %         1.1 %       0.8 %
  Operating taxes and licenses                    2.1 %        2.3 %         2.1 %       2.2 %
  General and other operating                     1.8 %        1.5 %         1.7 %       1.5 %
  Total operating expenses                       89.2 %       91.5 %        88.4 %      91.2 %

  Operating income                               10.8 %        8.5 %        11.6 %       8.8 %

  Other expense (incomes)                         0.8 %        1.1 %         1.0 %       1.0 %

  Income before income taxes                     10.0 %        7.4 %        10.6 %       7.8 %
  Provision for income taxes                      3.7 %        2.7 %         4.0 %       3.0 %

  Net income                                      6.3 %        4.7 %         6.6 %       4.8 %

(1) Freight revenue is total revenue less fuel surcharges. In this table, fuel surcharges are eliminated from revenue and subtracted from fuel expense. Fuel surcharges were $31.3 million and $29.1 million for the second quarter of fiscal 2013 and 2012, respectively, and $62.5 million and $58.3 million for the six months ended December 31, 2012 and 2011, respectively.

Comparison of Three Months Ended December 31, 2012 to Three Months Ended December 31, 2011

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

Total revenue increased by $3.9 million, or 2.7%, to $148.1 million for the second quarter of fiscal 2013, from $144.2 million for the second quarter of fiscal 2012. Freight revenue increased by $1.7 million to $116.8 million for the second quarter of fiscal 2013, from $115.1 million for the second quarter of fiscal 2012. This increase was attributable to revenue per loaded mile increasing to $1.564 for the second quarter of fiscal 2013 from $1.528 for the second quarter of fiscal 2012 and a slight increase in loaded miles to 58.8 million for the second quarter of fiscal 2013 from 58.4 million in the second quarter of fiscal 2012, due to a slight increase in seated line-haul tractors. This combination of factors resulted in average revenue per tractor per week, which is our primary measure of asset productivity, being basically flat at $2,826 in the second quarter of fiscal 2013 and $2,823 for the second quarter of fiscal 2012.

Revenue for our asset-light segment increased to $10.7 million in the second quarter of fiscal 2013 from $10.3 million in the second quarter of fiscal 2012 primarily based on increases in our warehousing and LTL revenues offset by a decrease in our brokerage revenue.

Fuel surcharge revenue increased to $31.3 million in the second quarter of fiscal 2013 from $29.1 million for the second quarter of fiscal 2012 due to a slight increase in loaded miles and an increase in Department of Energy ("DOE") fuel prices on which our fuel surcharge is calculated.

Salaries, wages, and employee benefits were $41.6 million, or 35.6% of revenue, for the second quarter of fiscal 2013, compared to $37.6 million, or 32.6% of revenue, for the second quarter of fiscal 2012. These expenses increased due to increases in driver payroll related to a slight driver pay increase, increases in non-driver salaries and wages, and recruiting expenses. Also, there was an increase of approximately $1.6 million for accelerating the vesting of Mr. Steve Russell's equity compensation in conjunction with his position change from Chief Executive Officer and Chairman of the Board to solely Chairman of the Board of Directors.

Fuel expenses, net of fuel surcharge revenue, decreased to $5.1 million, or 4.4% of revenue, for the second quarter of fiscal 2013, compared to $7.9 million, or 6.9% of revenue, for the second quarter of fiscal 2012. This decrease was primarily attributable to a decrease in gallons purchased due to enhanced fuel efficiency and lower total company miles offset by the average fuel price increasing to $3.67 per gallon in the second quarter of fiscal 2013, compared to $3.59 per gallon in the second quarter of fiscal 2012. We expect that our continued efforts to reduce idling, operate more fuel-efficient tractors, and utilize aerodynamic trailer skirts will continue to have a positive impact on our miles per gallon. However, we expect this positive impact to be partially offset by lower fuel economy on EPA-mandated new engines and use of more costly ultra-low sulfur diesel fuel.

Purchased transportation increased to $28.6 million, or 24.5% of revenue, for the second quarter of fiscal 2013, from $27.3 million, or 23.7% of revenue, for the second quarter of fiscal 2012. This increase is primarily related to an increase in our independent contractors expense due to an increase in independent contractor miles to 12.3 million in the second quarter of fiscal 2013 from 11.2 million in the second quarter of fiscal 2012. We also had increases in intermodal rail expense and third party less than truckload expense offset by a decrease in broker transportation expense. Independent contractors are drivers who cover all their operating expenses (fuel, driver salaries, maintenance, and equipment costs) for a fixed payment per mile. We expect purchased transportation to increase as we increase the number of independent contractors in our fleet and continue to increase our purchased transportation for brokerage and intermodal transportation.

Operations and maintenance decreased to $7.7 million, or 6.6% of revenue, for the second quarter of fiscal 2013, from $10.2 million, or 8.8% of revenue, for the second quarter of fiscal 2012. Operations and maintenance consist of direct operating expense, maintenance, and tire expense. These decreases are primarily related to decreased costs associated with maintenance and tire expense as we have continued to reduce the average age of our tractor and trailer fleet. These decreases were offset by increased tolls and other direct driver-related expenses. We expect operations and maintenance expense to be consistent at this level in the near future and increase slowly as our equipment age increases.

Insurance and claims expense increased to $4.0 million, or 3.4% of revenue, for the second quarter of fiscal 2013, from $3.7 million, or 3.2% of revenue, for the second quarter of fiscal 2012. Insurance consists of premiums for liability, physical damage, cargo damage, and workers' compensation insurance, in addition to claims expense. Insurance expense was affected by slight increases in workers' compensation costs, cargo claims expenses and liability claims expenses. Our insurance program involves self-insurance at various risk retention levels. Claims in excess of these risk levels are covered by insurance in amounts we consider to be adequate. We accrue for the uninsured portion of claims based on known claims and historical experience. We continually revise and change our insurance program to maintain a balance between premium expense and the risk retention we are willing to assume. We believe insurance and claims expense will vary based primarily on the frequency and severity of claims, the level of self-retention, and the premium expense.

Depreciation and amortization, consisting primarily of depreciation of revenue equipment, decreased to $9.5 million, or 8.2% of revenue, for the second quarter of fiscal 2013, compared to $12.4 million, or 10.8% of revenue, for the second quarter of fiscal 2012. This decrease is primarily attributable to an increase in the gain on sale of, which includes expenses to prepare the equipment for sale. Revenue equipment held under operating leases is not reflected on our balance sheet and the expenses related to such equipment are reflected on our statements of income 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. We expect depreciation and amortization to increase in the future as gains on sale of equipment is expected to decline.

All of our other operating expenses are relatively minor in amount, and there were no significant changes in such expenses. Accordingly, we have not provided a detailed discussion of such expenses.

Income taxes increased to $4.4 million, with an effective tax rate of 37.1%, for the second quarter of fiscal 2013, from $3.1 million, with an effective tax rate of 36.2%, for the second quarter of fiscal 2012. As pre-tax net income increases, our non-deductible expenses, such as per diem expense, have a lesser impact on our effective rate.

Comparison of Six Months Ended December 31, 2012 to Six Months Ended December 31, 2011

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

Total revenue increased by $13.3 million, or 4.6%, to $301.4 million for the six months ended December 31, 2012, ("the fiscal 2013 period"), from $288.2 million for the six months ended December 31, 2011, ("the fiscal 2012 period"). Freight revenue increased by $9.1 million, to $238.9 million for the fiscal 2013 period, from $229.8 million for the fiscal 2012 period. The increase was attributable to an increase in loaded miles to 120.2 million for the fiscal 2013 period from 117.4 million in the fiscal 2012 period. We improved our seated tractors and revenue per loaded mile increased to $1.560 for the fiscal 2013 period from $1.527 for the fiscal 2012 period. These increases were slightly offset by a decrease in average miles per tractor per week. This combination of factors resulted in a slight decrease in average revenue per tractor per week, which is our primary measure of asset productivity, at $2,861 in the fiscal 2013 period, and $2,890 for the fiscal 2012 period.

Revenue for our asset-light segment increased to $21.5 million in the fiscal 2013 period from $20.3 million in the fiscal 2012 period based on increases in our warehousing and LTL revenues offset by a decrease in our brokerage revenue.

Fuel surcharge revenue increased to $62.5 million in the fiscal 2013 period from $58.3 million for the fiscal 2012 period due to an increase in loaded miles and an increase in DOE fuel prices on which our fuel surcharge is calculated.

Salaries, wages, and employee benefits were $82.0 million, or 34.3% of revenue, for the fiscal 2013 period, compared to $75.1 million, or 32.7% of revenue, for the fiscal 2012 period. These expenses increased due to an increase in driver payroll related to a slight driver pay increase and an increase in company driver miles. We also experienced an increase in non-driver salaries and wages and recruiting expenses, partially offset by a decrease in medical claims expense. In addition, there was an increase of approximately $1.6 million for accelerating the vesting of Mr. Steve Russell's equity compensation in conjunction with his service as Chairman of the Board of Directors.

Fuel expenses, net of fuel surcharge revenue, decreased to $11.4 million, or 4.8% of revenue, for the fiscal 2013 period, compared to $17.2 million, or 7.5% of revenue, for the fiscal 2012 period. This decrease was primarily attributable to a decrease in gallons purchased due to enhanced fuel efficiency and lower total company miles offset by the average fuel price increasing to $3.62 per gallon in the fiscal 2013 period, compared to $3.52 per gallon in the fiscal 2012 period. We expect that our continued efforts to reduce idling, operate more fuel-efficient tractors, and utilize aerodynamic trailer skirts will continue to have a positive impact on our miles per gallon. However, we expect this positive impact to be partially offset by lower fuel economy on EPA-mandated new engines and use of more costly ultra-low sulfur diesel fuel.

Purchased transportation increased to $57.0 million, or 23.9% of revenue, for the fiscal 2013 period, from $54.4 million, or 23.7% of revenue, for the fiscal 2012 period. This increase is primarily related to an increase in our independent contractors expense due to an increase in independent contractor miles for the fiscal 2013 period compared to the fiscal 2012 period. We also had increases in intermodal rail expense and third party less than truckload expense offset by a decrease in broker transportation expense. Independent contractors are drivers who cover all their operating expenses (fuel, driver salaries, maintenance, and equipment costs) for a fixed payment per mile. We expect purchased transportation to increase as we increase the number of independent contractors in our fleet and continue to increase our purchased transportation for brokerage and intermodal transportation.

Operations and maintenance decreased to $15.8 million, or 6.6% of revenue, for the fiscal 2013 period, from $20.0 million, or 8.7% of revenue, for the fiscal 2012 period. Operations and maintenance consist of direct operating expense, maintenance, and tire expense. These decreases are primarily related to a decrease in costs associated with maintenance and tire expense as we have continued to reduce the average age of our tractor and trailer fleet. These decreases were offset by increased tolls and other direct driver-related expenses. We expect operations and maintenance expense to be consistent at this level in the near future and increase slowly as our equipment age increases.

Insurance and claims expense increased to $7.5 million, or 3.1% of revenue, for the fiscal 2013 period, from $6.7 million, or 2.9% of revenue, for the fiscal 2012 period. Insurance consists of premiums for liability, physical damage, cargo damage, and workers' compensation insurance, in addition to claims expense. Insurance expense was affected by slight increases in workers' compensation costs, cargo claims expenses and liability claims expenses. Our insurance program involves self-insurance at various risk retention levels. Claims in excess of these risk levels are covered by insurance in amounts we consider to be adequate. We accrue for the uninsured portion of claims based on known claims and historical experience. We continually revise and change our insurance program to maintain a balance between premium expense and the risk retention we are willing to assume. We believe insurance and claims expense will vary based primarily on the frequency and severity of claims, the level of self-retention, and the premium expense.

Depreciation and amortization, consisting primarily of depreciation of revenue equipment, decreased to $22.2 million, or 9.3% of revenue, for the fiscal 2013 period, compared to $23.9 million, or 10.4% of revenue, for the fiscal 2012 period. These decreases were primarily attributable to an increase gain on sale of equipment, which included expenses to prepare the equipment for sale, offset by an increase in owned tractors. Revenue equipment held under operating leases is not reflected on our balance sheet and the expenses related to such equipment are reflected on our statements of income 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. We expect depreciation and amortization to increase in the future as gains on sale of equipment is expected to decline.

All of our other operating expenses are relatively minor in amount, and there were no significant changes in such expenses. Accordingly, we have not provided a detailed discussion of such expenses.

Income taxes increased to $9.7 million, with an effective tax rate of 38.3%, for the fiscal 2013 period, from $7.0 million, with an effective tax rate of 38.9%, for the fiscal 2012 period. As pre-tax net income increases, our non-deductible expenses, such as per diem expense, have a lesser impact on our effective tax rate.

Liquidity and Capital Resources Debt

Trucking is a capital-intensive business. We require cash to fund our operating expenses (other than depreciation and amortization), to make capital expenditures and acquisitions, and to repay debt, including principal and interest payments. Other than ordinary operating expenses, we anticipate that capital expenditures for the acquisition of revenue equipment will constitute our primary cash requirement over the next twelve months. We frequently consider potential acquisitions, and if we were to consummate an acquisition, our cash requirements would increase and we may have to modify our expected financing sources for the purchase of tractors. Subject to any required lender approval, we may make acquisitions in the future. Our principal sources of liquidity are cash generated from operations, bank borrowings, capital and operating lease financing of revenue equipment, and proceeds from the sale of used revenue equipment. At December 31, 2012, our total balance sheet debt, including capital lease obligations and long term debt, was $237.9 million, compared to $230.6 million at June 30, 2012.

As of December 31, 2012, we had a capital commitment for revenue equipment of $76.7 million for delivery through fiscal 2013. These capital commitments are amounts before considering the proceeds of equipment dispositions. In fiscal 2013, we expect to purchase our new tractors with both cash and off-balance sheet operating leases and our new trailers with off-balance sheet operating leases.

On August 29, 2011, we increased our credit facility to $100 million and reset the term on our five-year revolving credit facility agented by Bank of America, N.A. The facility refinanced the Company's existing credit facility and provides for ongoing working capital needs and general corporate purposes. Bank of America, N.A. continues to serve as the lead arranger in the facility and Wells Fargo Bank, N.A. continues to participate in this facility. At December 31, 2012, we were authorized to borrow up to $100 million under this revolving line of credit, which expires August 29, 2016. 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 0.75% and 1.125% that is adjusted quarterly based on the Company's lease adjusted total debt to EBITDAR ratio. At December 31, 2012, we had $29.3 million in outstanding borrowings related to our credit facility and $0.4 million utilized for letters of credit. The agreement is collateralized by the assets of all the U.S. 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 December 31, 2012.

We believe we will be able to fund our operating expenses, as well as our current commitments for the acquisition of revenue equipment over the next twelve months, with a combination of cash generated from operations, borrowings available under our primary credit facility, and lease financing arrangements. We will continue to have significant capital requirements over the long term, and the availability of the needed capital will depend upon our financial condition and operating results and numerous other factors over which we have limited or no control, including prevailing market conditions and the market price of our common stock. However, based on our operating results, anticipated future cash flows, current availability under our credit facility, and sources of equipment lease financing that we expect will be available to us, we do not expect to experience significant liquidity constraints in the foreseeable future. . . .