Celadon Group (CGIP) Risk Analysis

We currently have a satisfactory DOT rating, which is the highest available rating under the current safety rating scale.  If we were to receive a conditional or unsatisfactory DOT safety rating, it could materially adversely affect our business, financial condition, and results of operations as customer contracts may require a satisfactory DOT safety rating, and a conditional or unsatisfactory rating could materially adversely affect or restrict our operations. The FMCSA has proposed regulations that would modify the existing rating system and the safety labels assigned to motor carriers evaluated by the DOT.  Under the proposed regulations, the methodology for determining a carrier's DOT safety rating would be expanded to include the on-road safety performance of the carrier's drivers and equipment, as well as results obtained from investigations. Exceeding certain thresholds based on such performance or results would cause a carrier to receive an unfit safety rating.  If these proposed regulations are enacted and we were to receive an unfit safety rating, our business would be materially adversely affected in the same manner as if we received a conditional or unsatisfactory safety rating under the current regulations.

Pursuant to our fuel surcharge program with independent contractors, we pay independent contractors we contract with a fuel surcharge that increases with the increase in fuel prices. A significant increase or rapid fluctuation in fuel prices could cause our costs under this program to be higher than the revenue we receive under our customer fuel surcharge programs. The independent contractor agreements with the independent contractors we engage are governed by the federal leasing regulations, which impose specific requirements on us and the independent contractors. If more stringent federal leasing regulations are adopted, independent contractors could be deterred from becoming independent contractor drivers, which could materially adversely affect our goal of maintaining our current fleet levels of independent contractors. Independent contractors are third-party service providers, as compared with company drivers, who are employed by us. As independent business owners, they may make business or personal decisions that may conflict with our best interests. For example, if a load is unprofitable, route distance is too far from home, personal scheduling conflicts arise, or for other reasons, independent contractors may deny loads of freight from time to time.  In these circumstances, we must be able to deliver the freight timely in order to maintain relationships with customers, and if we fail to meet certain customer needs or incur increased expenses to do so, this could materially adversely affect our business, financial condition, and results of operations.

Numerous competitive factors present in our industry could impair our ability to maintain or improve our current profitability and could have a materially adverse effect on our results of operations.  These factors include the following:

A significant portion of our revenue is generated from our major customers. For fiscal 2016, our top 10 customers, based on revenue, accounted for approximately 17.9% of our revenue. We do not expect this percentage to change materially for fiscal 2017. Generally, we do not have long-term contractual relationships with our major customers, and we cannot provide assurance that our customers will continue to use our services or that they will continue at the same levels. A reduction in or termination of our services by one or more of our major customers could have a materially adverse effect on our business and operating results.

Under CSA, fleets are evaluated and ranked against their peers based on certain safety-related standards.  As a result, our fleet could be ranked poorly as compared to peer carriers.  We recruit and retain first-time drivers to be part of our fleet, and these drivers may have a higher likelihood of creating adverse safety events under CSA.  The occurrence of future deficiencies could affect driver recruitment by causing high-quality drivers to seek employment with other carriers or limit the pool of drivers we are comfortable hiring or could cause our customers to direct their business away from us and to carriers with higher fleet safety rankings, either of which would adversely affect our results of operations.  Additionally, competition for drivers with favorable safety backgrounds may increase and thus could necessitate increases in driver-related compensation costs.  Further, we may incur greater than expected expenses in our attempts to improve unfavorable scores. We have exceeded the established intervention thresholds in a number of the seven CSA safety-related categories.  Based on these unfavorable ratings, we may be prioritized for an intervention action or roadside inspection, either of which could adversely affect our results of operations.  In addition, customers may be less likely to assign loads to us.  We have put procedures in place in an attempt to address areas where we have exceeded the thresholds.  However, we cannot assure that these measures will be effective.

The truckload industry is highly cyclical, and our business is dependent on a number of factors that may have a negative impact on our results of operations, many of which are beyond our control. We believe that some of the most significant of these factors include: - excess tractor and trailer capacity in the trucking industry in comparison with shipping demand;     - declines in the resale value of used equipment;     - strikes, work stoppages, or work slowdowns at our facilities or at customer, port, border crossing, or other shipping-related facilities;     - increases in interest rates, fuel taxes, tolls, and license and registration fees;     - rising costs of healthcare; and     - fluctuations in foreign exchange rates. We are also affected by (i) recessionary economic cycles, such as the period from 2007 through 2009, and the 2016 freight environment, currently characterized by weak demand and pressure on rates; (ii) changes in customers' inventory levels and in the availability of funding for their working capital; and (iii) downturns in our customers' business cycles, particularly in market segments and industries, such as retail and manufacturing, where we have significant customer concentration, and regions of the country, such as Texas and the Midwest, where we have a significant amount of business. Economic conditions may adversely affect our customers and their demand for and ability to pay for our services. Customers encountering adverse economic conditions represent a greater potential for loss and we may be required to increase our allowance for doubtful accounts. These economic conditions may adversely affect our ability to execute our strategic plan. Economic conditions that decrease shipping demand or increase the supply of available tractors and trailers can exert downward pressure on rates and equipment utilization, thereby decreasing asset productivity. The risks associated with these factors are heightened when the U.S. economy is weakened. Some of the principal risks during such times, which risks we experienced during prior recessionary periods, are as follows: - we may experience low overall freight levels, which may impair our asset utilization;     - certain of our customers may face credit issues and cash flow problems that may lead to payment delays, increased credit risk, bankruptcies, and other financial hardships that could result in even lower freight demand and may require us to increase our allowance for doubtful accounts;     - freight patterns may change as supply chains are redesigned, resulting in an imbalance between our capacity and our customers' freight demand;     - customers may bid out freight or select competitors that offer lower rates in an attempt to lower their costs, and we might be forced to lower our rates or lose freight;     - we may be forced to accept more loads from freight brokers, where freight rates are typically lower, or may be forced to incur more non-revenue generating miles to obtain loads; and     - lack of access to current sources of credit or lack of lender access to capital, leading to an inability to secure financing on satisfactory terms, or at all. We are also subject to cost increases outside our control that could materially reduce our profitability if we are unable to increase our rates sufficiently. Such cost increases include, but are not limited to, increases in fuel prices, driver and office employee wages, purchased transportation costs, interest rates, taxes, tolls, license and registration fees, insurance, revenue equipment and related maintenance, tires and other components, and healthcare and other benefits for our employees. Further, we may not be able to appropriately adjust our costs to changing market demands. In order to maintain high variability in our business model, it is necessary to adjust staffing levels to changing market demands. In periods of rapid change, it is more difficult to match our staffing level to our business needs. In addition, we cannot predict future economic conditions, consumer confidence, the economic impact of actual or threatened armed conflicts or terrorist attacks, efforts to combat terrorism, military action against a foreign state or group located in a foreign state, or heightened security requirements. Enhanced security measures could lead to reduced economic demand, reduced availability of credit, increased prices for fuel, or temporary closing of shipping locations or U.S. borders.  Such events or enhanced security measures in connection with such events could impair our operating efficiency and productivity and result in higher operating costs. Changing impacts of regulatory measures could impair our operating efficiency and productivity, decrease our revenues and profitability, and result in higher operating costs. In addition, declines in the resale value of revenue equipment can also affect our profitability and cash flows. From time to time, various U.S. federal, state, or local taxes are also increased, including taxes on fuels. We cannot predict whether, or in what form, any such increase applicable to us will be enacted, but such an increase could have a materially adverse effect on our profitability.

A significant portion of our revenue is derived from our international operations, and our success is dependent upon our operations in Mexico and Canada. Our international operations are subject to a variety of risks, including fluctuations in foreign currencies, changes in the economic strength of the foreign countries in which we do business, difficulties in enforcing contractual obligations and intellectual property rights, compliance burdens associated with a wide variety of international and United States export and import laws, and social, political, and economic instability. Our international business could be adversely affected by restrictions on travel to any of our three countries of operations due to a health epidemic or outbreak, and any such epidemic or outbreak may adversely affect demand for freight. Additional risks associated with our foreign operations include restrictive trade policies, imposition of duties, taxes, or government royalties by foreign governments, and compliance with the Foreign Corrupt Practices Act and local anti-bribery law compliance. At present, cross-border movements for both United States and Mexican-based carriers into the United States and Mexico are allowed, which presents a risk in the form of the potential for increased competition in Mexico and the risk of increased congestion on our cross-border lanes. In addition, we could be subject to additional regulatory risks related to the use of Mexican drivers through our Mexico subsidiary for shipments into the United States.  Recently, President Donald Trump, certain members of the U.S. House of Representatives, and key U.S. administrative officials and policy makers have suggested the renegotiation of the North American Free Trade Agreement and the implementation of tariffs, border taxes, or other measures that could impact the level of trade between the U.S. and Mexico. Any such proposal or measure could negatively impact certain of our customers and the volume of shipments between the U.S. and Mexico, which could have a materially adverse effect on our business and operating results. We are also updating the risk factors under the heading "Risks Relating to Quality and its Financing Arrangements" by replacing them with the following: Our non-controlling investment in 19th Capital, a joint venture, poses unique financial, accounting, and governance risks. In the first quarter of fiscal 2016, we acquired a minority interest in 19th Capital, a newly formed equipment leasing company and reseller.  In the second quarter of fiscal 2017, old equity units were redeemed by 19th Capital and 19th Capital was then recapitalized as a joint venture with Element.  As part of this transaction, our existing minority interest was redeemed and we made a new investment in 19th Capital, such that we and Element each own approximately 49.99% of 19th Capital's outstanding equity interests.  We account for our investment in 19th Capital using the equity method of accounting.  Our participation in the joint venture through our ownership of 19th Capital poses several unique risks that could materially and adversely affect our results of operations and stock price. As part of the joint venture transaction, our previous obligation to make lease shortfall advance payments to Element was terminated, except with respect to lease shortfall advance payments owed to a particular third party who had been assigned approximately 2.9% of Element's portfolio.  Lease shortfall advance payment obligations to this third party were assigned to and assumed by 19th Capital.  To the extent we are required to make these payments to the third party, 19th Capital would be obligated to indemnify us.  However, any claim we would have against 19th Capital would be unsecured and in a bankruptcy or other insolvency event relating to 19th Capital, our claim would effectively be subordinate to the claims of 19th Capital's secured creditors.  In addition, we do not have the ability to unilaterally control 19th Capital and any payment of an indemnity claim by 19th Capital to us could be subject to approval by the board members of 19th Capital appointed by Element.  Further, an indemnification claim against 19th Capital could conflict with our interests as an equity holder of 19th Capital.  Accordingly, there can be no assurance that 19th Capital will be able to reimburse us for lease shortfall advance obligations if we are required to pay them. Quality provides lease collection, insurance procurement, vehicle maintenance, and other services to 19th Capital under a Service Agreement.  Quality receives certain fees for these services, the primary component of which is a fixed amount per tractor under Quality's management per month.  Element is entitled to terminate the Service Agreement without cause upon not less than 90 days' notice to Quality.  Moreover, the per-tractor fee is subject to renegotiation by us and Element after the first anniversary of the joint venture's closing.  If Element terminates the Service Agreement or we are unable to renegotiate an attractive per-tractor fee, our cash flow, earnings, and other results of operations could be materially and adversely affected. In addition, while certain of our executive officers serve as two of the managers of 19th Capital, we do not have the ability to unilaterally control 19th Capital's ownership or management.  Certain significant decisions must be approved by 19th Capital's board, which currently includes two managers appointed by us and two managers appointed by Element.   Our investment in 19th Capital is subject to the risk that 19th Capital's management and Element may seek to make business, financial, or management decisions with which we do not agree or that the management or Element may seek to take risks or otherwise act in a manner that does not serve our interests.  Moreover, because we and Element each control 50% of 19th Capital's board, an inability to agree could lead to board deadlock. Element is also a lender to 19th Capital and its interests as a creditor of 19th Capital may not align with ours as an equity holder.  For example, in a liquidation of 19th Capital, as a secured creditor Element would generally have priority over us with respect to any assets or other liquidation proceeds, up to the amount of the applicable debt.  This difference in rights could cause Element to enforce its rights as creditor, to our detriment as an equity holder.  If any of the foregoing were to occur, the value of our investment in 19th Capital could decrease, and our financial condition, results of operations, and cash flow could suffer as a result. We have recorded the value of our investment in 19th Capital at $100.0 million, based on our net book value of the assets contributed.  We may, from time-to-time, be required to revalue our investment in 19th Capital.  If we are required to mark down the recorded value of our investment, whether due to poor performance of 19th Capital or otherwise, our results of operations, earnings, and stock price could be materially and adversely affected. If a change in accounting rules or other unforeseen circumstances prevents us from using our intended accounting treatment for 19th Capital, we may be required to include the related equipment debt on our consolidated balance sheet even though we are not primarily obligated on and do not guarantee such debt.  This could cause us to violate financial covenants under our primary credit facility or otherwise materially and adversely affect our results of operations and stock price. Finally, under the equity method of accounting, we anticipate that we will recognize our proportionate share of 19th Capital's income or loss in any given period.  As a result, poor performance of 19th Capital would have a negative impact on our results of operations.  See "19th Capital faces certain additional risks particular to its operations, any one of which could adversely affect our operating results" for additional information on risks faced by 19th Capital that could have a material adverse impact on us.

Our tractor productivity decreases during the winter season because inclement weather impedes operations, and some shippers reduce their shipments after the winter holiday season. Revenue can also be affected by bad weather and holidays, since revenue is directly related to available working days of shippers. At the same time, operating expenses increase and fuel efficiency declines because of engine idling and harsh weather creating higher accident frequency, increased claims, and higher equipment expenditures. We may also suffer from weather-related or other unforeseen events such as tornadoes, hurricanes, blizzards, ice storms, floods, fires, earthquakes, and explosions.  These events may disrupt fuel supplies, increase fuel costs, disrupt freight shipments or routes, affect regional economies, destroy our assets, or adversely affect the business or financial condition of our customers, any of which could have a materially adverse effect on our results of operations or make our results of operations more volatile.

Our operations are regulated and licensed by various U.S., Canadian, and Mexican agencies. Our drivers and independent contractors also must comply with the safety and fitness regulations promulgated by the DOT and FMCSA, including those relating to drug and alcohol testing and HOS. Such matters as weight and equipment dimensions are also subject to U.S. and Canadian regulations. We also may become subject to new or more restrictive regulations relating to fuel consumption, engine emissions, drivers' HOS, ergonomics, or other matters affecting safety or operating methods. Other agencies, such as the EPA, the Department of Homeland Security, and the Food and Drug Administration also regulate our equipment, operations, and drivers. Future laws and regulations may be more stringent and require changes in our operating practices, influence the demand for transportation services, or require us to incur significant additional costs. Higher costs incurred by us or by our suppliers who pass the costs onto us through higher prices could adversely affect our results of operations. The Regulation section in Item 1 of Part I of this Annual Report on Form 10-K discusses several proposed, pending, suspended, and final regulations that could materially impact our business and operations.

In addition to direct regulation under the DOT and related agencies, we are subject to various environmental laws and regulations dealing with the hauling and handling of hazardous materials, fuel storage tanks, air emissions from our vehicles and facilities, and discharge and retention of storm water.  Our truck terminals often are located in industrial areas where groundwater or other forms of environmental contamination could occur. Our operations involve the risks of fuel spillage or seepage, environmental damage, and hazardous waste disposal, among others. Certain facilities have waste oil or fuel storage tanks and fueling islands.  A small percentage of our freight consists of low-grade hazardous substances, which subjects us to an additional array of regulations.  Although we have instituted programs to monitor and control environmental risks and promote compliance with applicable environmental laws and regulations, if we are involved in a spill or other accident involving hazardous substances, if there are releases of hazardous substances we transport, if soil or groundwater contamination is found at our facilities or results from our operations, or if we are found to be in violation of applicable laws or regulations, we could be subject to cleanup costs and liabilities, including substantial fines or penalties or civil and criminal liability, any of which could have a materially adverse effect on our business and operating results. EPA regulations limiting exhaust emissions became more restrictive in 2010 when an executive memorandum was signed directing the NHTSA and the EPA to develop new, stricter fuel efficiency standards for heavy trucks. In 2011, the NHTSA and the EPA adopted final rules that established the Phase 1 Standards.  The Phase 1 Standards apply to tractor model years 2014 to 2018, which are required to achieve an approximate 20 percent reduction in fuel consumption by 2018, and equates to approximately four gallons of fuel for every 100 miles travelled. In addition, in August 2016, the EPA and NHTSA adopted the Phase 2 Standards that will apply to trailers beginning with model year 2018 and tractors beginning with model year 2021.  The Phase 2 Standards require nine percent and 25 percent reductions in emissions and fuel consumption for trailers and tractors, respectively, by 2027.  We believe these requirements will result in additional increases in new tractor and trailer prices and additional parts and maintenance costs incurred to retrofit our tractors and trailers with technology to achieve compliance with such standards, which could adversely affect our operating results and profitability, particularly if such costs are not offset by potential fuel savings. We cannot predict, however, the extent to which our operations and productivity will be impacted.  In addition, future additional emission regulations are possible.  Any such regulations that impose restrictions, caps, taxes, or other controls on emissions of greenhouse gases could adversely affect our operations and financial results.  Until the timing, scope, and extent of any future regulation becomes known, we cannot predict its effect on our cost structure or our operating results; however, any future regulation could impair our operating efficiency and productivity and result in higher operating costs.

We depend on the proper functioning and availability of our information systems, including financial reporting and operating systems, in operating our business. Our operating system is critical to understanding customer demands, accepting and planning loads, dispatching equipment and drivers, and billing and collecting for our services. Our financial reporting system is critical to producing accurate and timely financial statements and analyzing business information to help us manage effectively. If any of our critical information systems fail or become otherwise unavailable, whether as a result of the upgrade project or otherwise, we would have to perform the functions manually, which could temporarily impact our ability to manage our fleet efficiently, to respond to customers' requests effectively, to maintain billing and other records reliably, and to bill for services and prepare financial statements accurately or in a timely manner. Our business interruption insurance may be inadequate to protect us in the event of an unforeseeable and extreme catastrophe. Any system failure, delays, or complications, security breach, or other system failure could interrupt or delay our operations, damage our reputation, cause us to lose customers, or impact our ability to manage our operations and report our financial performance, any of which could have a materially adverse effect on our business.