UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) |
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x |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2015
OR
o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 0-49983
Saia, Inc.
(Exact name of registrant as specified in its charter)
Delaware |
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48-1229851 |
(State of incorporation) |
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(I.R.S. Employer Identification No.) |
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11465 Johns Creek Parkway, Suite 400 |
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Johns Creek, GA |
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30097 |
(Address of principal executive offices) |
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(Zip Code) |
(770) 232-5067
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
x |
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Accelerated filer |
o |
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Non-accelerated filer |
o |
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Smaller reporting company |
o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Common Stock |
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Outstanding Shares at October 29, 2015 |
Common Stock, par value $.001 per share |
|
25,136,476 |
INDEX
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PAGE |
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PART I. FINANCIAL INFORMATION |
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ITEM 1: |
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3 |
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Condensed Consolidated Balance Sheets September 30, 2015 and December 31, 2014 |
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3 |
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4 |
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Condensed Consolidated Statements of Cash Flows Nine Months ended September 30, 2015 and 2014 |
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5 |
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6 |
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ITEM 2: |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
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10 |
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ITEM 3: |
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17 |
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ITEM 4: |
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17 |
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ITEM 1: |
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19 |
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ITEM 1A: |
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19 |
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ITEM 2: |
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19 |
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ITEM 3: |
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19 |
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ITEM 4: |
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19 |
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ITEM 5: |
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19 |
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ITEM 6: |
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20 |
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21 |
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E-1 |
2
Saia, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(unaudited)
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September 30, 2015 |
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December 31, 2014 |
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Assets |
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(in thousands, except share and per share data) |
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Current Assets: |
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Cash and cash equivalents |
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$ |
4,540 |
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$ |
4,367 |
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Accounts receivable, net |
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139,041 |
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128,367 |
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Prepaid expenses and other |
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42,156 |
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56,902 |
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Total current assets |
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185,737 |
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189,636 |
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Property and Equipment, at cost |
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975,874 |
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891,145 |
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Less-accumulated depreciation |
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443,330 |
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407,505 |
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Net property and equipment |
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532,544 |
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483,640 |
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Goodwill and Identifiable Intangibles, net |
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27,381 |
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8,174 |
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Other Noncurrent Assets |
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5,325 |
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4,995 |
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Total assets |
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$ |
750,987 |
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$ |
686,445 |
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Liabilities and Stockholders’ Equity |
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Current Liabilities: |
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Accounts payable |
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$ |
59,504 |
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$ |
42,388 |
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Wages, vacation and employees’ benefits |
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32,463 |
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28,777 |
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Other current liabilities |
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50,495 |
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50,176 |
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Current portion of long-term debt |
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12,031 |
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9,138 |
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Total current liabilities |
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154,493 |
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130,479 |
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Other Liabilities: |
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Long-term debt, less current portion |
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69,163 |
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73,897 |
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Deferred income taxes |
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77,775 |
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78,406 |
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Claims, insurance and other |
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35,728 |
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36,757 |
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Total other liabilities |
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182,666 |
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189,060 |
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Commitments and Contingencies |
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Stockholders’ Equity: |
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Preferred stock, $0.001 par value, 50,000 shares authorized, none issued and outstanding |
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— |
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— |
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Common stock, $0.001 par value, 50,000,000 shares authorized, 25,136,476 and 24,871,806 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively |
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25 |
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25 |
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Additional paid-in-capital |
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228,015 |
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223,713 |
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Deferred compensation trust, 172,266 and 193,607 shares of common stock at cost at September 30, 2015 and December 31, 2014, respectively |
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(3,198 |
) |
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(2,189 |
) |
Retained earnings |
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188,986 |
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145,357 |
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Total stockholders’ equity |
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413,828 |
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366,906 |
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Total liabilities and stockholders’ equity |
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$ |
750,987 |
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$ |
686,445 |
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See accompanying notes to condensed consolidated financial statements.
3
Condensed Consolidated Statements of Operations
For the quarters and nine months ended September 30, 2015 and 2014
(unaudited)
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Third Quarter |
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Nine Months |
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2015 |
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2014 |
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2015 |
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2014 |
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(in thousands, except per share data) |
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Operating Revenue |
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$ |
317,199 |
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$ |
332,544 |
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$ |
933,701 |
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$ |
962,673 |
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Operating Expenses: |
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Salaries, wages and employees’ benefits |
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177,623 |
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166,353 |
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505,817 |
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476,779 |
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Purchased transportation |
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19,314 |
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27,479 |
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57,212 |
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77,396 |
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Fuel, operating expenses and supplies |
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65,122 |
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80,206 |
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201,432 |
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241,441 |
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Operating taxes and licenses |
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9,258 |
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9,033 |
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27,765 |
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27,001 |
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Claims and insurance |
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9,146 |
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6,956 |
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20,344 |
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30,651 |
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Depreciation and amortization |
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16,765 |
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15,336 |
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48,525 |
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44,264 |
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Operating losses, net |
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126 |
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32 |
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|
247 |
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20 |
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Total operating expenses |
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297,354 |
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305,395 |
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861,342 |
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897,552 |
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Operating Income |
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19,845 |
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27,149 |
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72,359 |
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65,121 |
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Nonoperating Expenses: |
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Interest expense |
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1,033 |
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1,064 |
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3,126 |
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3,557 |
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Other, net |
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46 |
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16 |
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(19 |
) |
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(49 |
) |
Nonoperating expenses, net |
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1,079 |
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1,080 |
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3,107 |
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3,508 |
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Income Before Income Taxes |
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18,766 |
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26,069 |
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69,252 |
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61,613 |
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Income Tax Provision |
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6,989 |
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9,791 |
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25,623 |
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23,191 |
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Net Income |
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$ |
11,777 |
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$ |
16,278 |
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$ |
43,629 |
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$ |
38,422 |
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Weighted average common shares outstanding – basic |
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24,963 |
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24,527 |
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24,901 |
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24,465 |
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Weighted average common shares outstanding – diluted |
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25,555 |
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25,505 |
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25,525 |
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25,436 |
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Basic Earnings Per Share |
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$ |
0.47 |
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$ |
0.66 |
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$ |
1.75 |
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$ |
1.57 |
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Diluted Earnings Per Share |
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$ |
0.46 |
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$ |
0.64 |
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$ |
1.71 |
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$ |
1.51 |
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See accompanying notes to condensed consolidated financial statements.
4
Condensed Consolidated Statements of Cash Flows
For the nine months ended September 30, 2015 and 2014
(unaudited)
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Nine Months |
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2015 |
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2014 |
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(in thousands) |
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Operating Activities: |
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Net income |
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$ |
43,629 |
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$ |
38,422 |
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Noncash items included in net income: |
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Depreciation and amortization |
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48,525 |
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44,264 |
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Other, net |
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5,538 |
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6,097 |
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Changes in operating assets and liabilities, net |
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16,346 |
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3,234 |
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Net cash provided by operating activities |
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114,038 |
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92,017 |
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Investing Activities: |
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Acquisition of business |
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(22,238 |
) |
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— |
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Acquisition of property and equipment |
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(68,835 |
) |
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(79,773 |
) |
Proceeds from disposal of property and equipment |
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665 |
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2,590 |
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Net cash used in investing activities |
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(90,408 |
) |
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(77,183 |
) |
Financing Activities: |
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Repayment of revolving credit agreement |
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(217,906 |
) |
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(278,893 |
) |
Borrowing of revolving credit agreement |
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197,906 |
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270,576 |
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Proceeds from stock option exercises |
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2,816 |
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4,159 |
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Repayment of senior notes |
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(3,571 |
) |
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(3,571 |
) |
Repayment of capital lease obligations |
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(2,247 |
) |
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(20 |
) |
Payment of debt issuance costs |
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(455 |
) |
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— |
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Net cash used in financing activities |
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(23,457 |
) |
|
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(7,749 |
) |
Net Increase in Cash and Cash Equivalents |
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|
173 |
|
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|
7,085 |
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Cash and cash equivalents, beginning of period |
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|
4,367 |
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|
|
159 |
|
Cash and cash equivalents, end of period |
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$ |
4,540 |
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$ |
7,244 |
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Non Cash Investing Activities |
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Equipment financed with capital leases |
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$ |
23,979 |
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$ |
8,328 |
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See accompanying notes to condensed consolidated financial statements.
5
Notes to Condensed Consolidated Financial Statements
(unaudited)
(1) Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of Saia, Inc. and its wholly-owned subsidiaries (together, the Company or Saia). All significant intercompany accounts and transactions have been eliminated in the condensed consolidated financial statements.
The condensed consolidated financial statements have been prepared by the Company without audit by the independent registered public accounting firm. In the opinion of management, all normal recurring adjustments necessary for a fair presentation of the condensed consolidated balance sheets, statements of operations and cash flows for the interim periods included herein have been made. These interim condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information, the instructions to Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X. Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted from these statements. The accompanying condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. Operating results for the quarter and nine months ended are not necessarily indicative of the results of operations that may be expected for the year ended December 31, 2015.
Business
The Company offers customers a wide range of less-than-truckload, non-asset truckload, expedited and logistics services across the United States through its wholly-owned subsidiaries. Effective February 2, 2015, the Company’s subsidiaries were as follows: Saia Motor Freight Line, LLC, doing business as Saia LTL Freight; Saia TL Plus, LLC, formerly Robart Transportation, Inc.; Saia Sales, LLC; Saia Logistics Services, LLC, formerly The RL Services Group, LLC; Saia MetroGo, LLC, formed on January 22, 2015 and LinkEx, Inc. acquired on February 2, 2015.
Accounting Pronouncements Adopted During 2015
In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-03, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, which requires entities to retrospectively classify debt issuance costs as a deduction from the corresponding liability on the balance sheet. In August 2015, the FASB issued ASU 2015-15 to clarify that debt issuance costs related to line-of-credit arrangements could continue to be presented as an asset and be subsequently amortized over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the arrangement. The Company adopted ASU 2015-03 as of September 30, 2015, which did not have an impact on our comparative consolidated balance sheets as the Company’s unamortized debt issuance costs at the time of adoption are related to line-of-credit arrangements.
Accounting Pronouncements Not Yet Adopted
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services. The ASU will replace most existing revenue recognition guidance in U.S. generally accepted accounting principles when it becomes effective. In July 2015, the FASB updated ASU No. 2014-09 to defer the effective date by one year. The new standard is effective for the Company on January 1, 2018. Early application is permitted for the Company on January 1, 2017. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU No. 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it completed its evaluation of the effect of the standard on its ongoing financial reporting.
6
(2) Computation of Earnings Per Share
The calculation of basic earnings per common share and diluted earnings per common share was as follows (in thousands, except per share amounts):
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Third Quarter |
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Nine Months |
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2015 |
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2014 |
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2015 |
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2014 |
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Numerator: |
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Net income |
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$ |
11,777 |
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$ |
16,278 |
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$ |
43,629 |
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$ |
38,422 |
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Denominator: |
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|
|
|
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|
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|
|
|
|
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Denominator for basic earnings per share–weighted average common shares |
|
|
24,963 |
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|
|
24,527 |
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|
|
24,901 |
|
|
|
24,465 |
|
Effect of dilutive stock options |
|
|
87 |
|
|
|
242 |
|
|
|
113 |
|
|
|
240 |
|
Effect of other common stock equivalents |
|
|
505 |
|
|
|
736 |
|
|
|
511 |
|
|
|
731 |
|
Denominator for diluted earnings per share–adjusted weighted average common shares |
|
|
25,555 |
|
|
|
25,505 |
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|
|
25,525 |
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|
|
25,436 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings Per Share |
|
$ |
0.47 |
|
|
$ |
0.66 |
|
|
$ |
1.75 |
|
|
$ |
1.57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings Per Share |
|
$ |
0.46 |
|
|
$ |
0.64 |
|
|
$ |
1.71 |
|
|
$ |
1.51 |
|
For the quarter and nine months ended September 30, 2015, options to purchase 125,536 and 111,320 shares, respectively, of common stock of the Company were excluded from the calculation of diluted earnings per share because their effect was anti-dilutive. For the quarter and nine months ended September 30, 2014, options to purchase 87 and 98,385 shares, respectively, of common stock of the Company were excluded from the calculation of diluted earnings per share because their effect was anti-dilutive.
(3) Commitments and Contingencies
The Company is subject to legal proceedings that arise in the ordinary course of its business. The Company believes that adequate provisions for the resolution of all contingencies, claims and pending litigation have been made for probable losses and that the ultimate outcome of these actions will not have a material adverse effect on our consolidated financial position but could have a material adverse effect on the results of operations in a quarter or annual period.
(4) Fair Value of Financial Instruments
The carrying amounts of financial instruments including cash and cash equivalents, accounts receivable, accounts payable and other current liabilities approximated fair value as of September 30, 2015 and December 31, 2014 because of the relatively short maturity of these instruments. Based on the borrowing rates currently available to the Company for debt with similar terms and remaining maturities the estimated fair value of total debt at September 30, 2015 and December 31, 2014 was $81.9 million and $83.7 million, respectively, based upon level two in the fair value hierarchy. The carrying value of the debt was $81.2 million and $83.0 million at September 30, 2015 and December 31, 2014, respectively.
(5) Debt and Financing Arrangements
At September 30, 2015 and December 31, 2014, debt consisted of the following (in thousands):
|
|
September 30, 2015 |
|
|
December 31, 2014 |
|
||
Credit Agreement with Banks, described below |
|
$ |
25,000 |
|
|
$ |
45,000 |
|
Senior Notes under a Master Shelf Agreement, described below |
|
|
17,857 |
|
|
|
21,429 |
|
Capital Leases, described below |
|
|
38,337 |
|
|
|
16,606 |
|
Total debt |
|
|
81,194 |
|
|
|
83,035 |
|
Less: current portion of long-term debt |
|
|
12,031 |
|
|
|
9,138 |
|
Long-term debt, less current portion |
|
$ |
69,163 |
|
|
$ |
73,897 |
|
7
On March 6, 2015, the Company entered into the Fifth Amended and Restated Credit Agreement with its banking group (as amended, the Restated Credit Agreement). The amendment increased the amount of the revolver from $200 million to $250 million and extended the term until March 2020. The amendment also reduced the interest rate pricing grid and eliminated both the borrowing base and the minimum tangible net worth covenant. On the same date, the Company also entered into the Second Amended and Restated Master Shelf Agreement with its long term note holders (as amended, the Restated Master Shelf Agreement) that made changes to this agreement to conform with certain changes in the Restated Credit Agreement.
Restated Credit Agreement
The Restated Credit Agreement is a revolving credit facility for up to $250 million expiring in March 2020. The Restated Credit Agreement also has an accordion feature that allows for an additional $75 million availability, subject to lender approval. The Restated Credit Agreement provides for a LIBOR rate margin range from 112.5 basis points to 225 basis points, base rate margins from minus 12.5 basis points to plus 50 basis points, an unused portion fee from 20 basis points to 30 basis points and letter of credit fees from 112.5 basis points to 225 basis points in each case based on the Company’s leverage ratio.
Under the Restated Credit Agreement, the Company must maintain certain financial covenants including a minimum fixed charge coverage ratio and a maximum leverage ratio, among others. The Restated Credit Agreement also provides for a pledge by the Company of certain land and structures, certain tractors, trailers and other personal property and accounts receivable, as defined in the Restated Credit Agreement.
At September 30, 2015, the Company had borrowings of $25.0 million and outstanding letters of credit of $44.8 million under the Restated Credit Agreement. At December 31, 2014, the Company had borrowings of $45.0 million and outstanding letters of credit of $47.3 million under the Restated Credit Agreement. The available portion of the Restated Credit Agreement may be used for general corporate purposes, including future capital expenditures, working capital and letter of credit requirements as needed.
Restated Master Shelf Agreement
On September 20, 2002, the Company issued $100 million in Senior Notes under a $125 million (amended to $150 million in April 2005) Master Shelf Agreement with Prudential Investment Management, Inc. and certain of its affiliates. The Company issued an additional $25 million in Senior Notes on November 30, 2007 and $25 million in Senior Notes on January 31, 2008 under the same Master Shelf Agreement.
The initial $100 million Senior Notes had a fixed interest rate of 7.38 percent. Payments due under the $100 million Senior Notes were interest only until June 30, 2006 and at that time semi-annual principal payments began with the final payment made in December 2013. The November 2007 issuance of $25 million Senior Notes has a fixed interest rate of 6.14 percent. The January 2008 issuance of $25 million Senior Notes has a fixed interest rate of 6.17 percent. Payments due for both $25 million issuances were interest only until June 30, 2011 and at that time semi-annual principal payments began with the final payments due January 1, 2018. Under the terms of the Senior Notes, the Company must maintain certain financial covenants including a minimum fixed charge coverage ratio and a maximum leverage ratio, among others. The Senior Notes also provide for a pledge by the Company of certain land and structures, certain tractors, trailers and other personal property and accounts receivable, as defined in the Senior Notes.
Capital Leases
The Company is obligated under capital leases which include obligations covering revenue equipment totaling $38.3 million with seven year terms. Amortization of assets held under the capital leases is included in depreciation expense. The weighted average interest rate for the capital leases at September 30, 2015 is 2.87%.
The principal maturities of long-term debt instruments (in thousands) are as follows:
|
|
Amount |
|
|
2015 |
|
$ |
5,052 |
|
2016 |
|
|
13,066 |
|
2017 |
|
|
13,066 |
|
2018 |
|
|
5,923 |
|
2019 |
|
|
5,923 |
|
Thereafter |
|
|
42,243 |
|
Total |
|
$ |
85,273 |
|
Less: Amounts Representing Interest on Capital Leases |
|
|
4,079 |
|
Total |
|
$ |
81,194 |
|
8
(6) Acquisitions
On February 2, 2015, the Company acquired LinkEx, Inc., an asset-light third party logistics business based in Dallas, Texas. The Company believes this acquisition is a future growth opportunity for its portfolio of services in the asset-light market. This acquisition fits into the Company’s strategic goal of diversifying Saia’s portfolio of service offerings. Pursuant to the terms of the purchase agreement, the Company paid $23.1 million at the acquisition date with a potential earn-out of up to $3 million subject to meeting profit targets. The Company concluded that LinkEx, Inc. will not likely meet these profit targets and, thus, has not recorded a liability related to contingent consideration as of the acquisition date.
The accounting for this acquisition is considered preliminary, as the Company expects to finalize the valuation of identifiable intangible assets and goodwill (both on a book basis and tax basis) during the fourth quarter of 2015.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
This Management’s Discussion and Analysis should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and our 2014 audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. Those consolidated financial statements include additional information about our significant accounting policies, practices and the transactions that underlie our financial results.
Forward-Looking Statements
The Securities and Exchange Commission (the SEC) encourages companies to disclose forward-looking information so that investors can better understand the future prospects of a company and make informed investment decisions. This Quarterly Report on Form 10-Q, including "Management's Discussion and Analysis of Financial Condition and Results of Operations,” contains these types of statements, which are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “may,” “plan,” “predict,” “believe,” “should” and similar words or expressions are intended to identify forward-looking statements. Investors should not place undue reliance on forward-looking statements, and the Company undertakes no obligation to publicly update or revise any forward-looking statements. All forward-looking statements reflect the present expectation of future events of our management as of the date of this Quarterly Report on Form 10-Q and are subject to a number of important factors, risks, uncertainties and assumptions that could cause actual results to differ materially from those described in any forward-looking statements. These factors, risks, assumptions and uncertainties include, but are not limited to, general economic conditions including downturns in the business cycle; effectiveness of Company-specific performance improvement initiatives, including management of the cost structure to match shifts in customer volume levels; the creditworthiness of our customers and their ability to pay for services; failure to achieve acquisition synergies; failure to operate and grow acquired businesses in a manner that supports the value allocated to these acquired businesses, including their goodwill; competitive initiatives and pricing pressures, including in connection with fuel surcharge; loss of significant customers; the Company’s need for capital and uncertainty of the credit markets; the possibility of defaults under the Company’s debt agreements (including violation of financial covenants); possible issuance of equity which would dilute stock ownership; integration risks; the effect of litigation including class action lawsuits; cost and availability of qualified drivers, fuel, purchased transportation, real property, revenue equipment and other assets; governmental regulations, including but not limited to Hours of Service, engine emissions, the Compliance, Safety, Accountability (CSA) initiative, compliance with legislation requiring companies to evaluate their internal control over financial reporting, Homeland Security, environmental regulations and the Food and Drug Administration (FDA); changes in interpretation of accounting principles; dependence on key employees; inclement weather; labor relations, including the adverse impact should a portion of the Company’s workforce become unionized; terrorism risks; self-insurance claims and other expense volatility; increased costs as a result of healthcare reform legislation; social media risks; cyber-security risk; and other financial, operational and legal risks and uncertainties detailed from time to time in the Company’s SEC filings. These factors and risks are described in Part II, Item 1A. “Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, as updated by Part II, Item 1A. of this Quarterly Report on Form 10-Q.
As a result of these and other factors, no assurance can be given as to our future results and achievements. Accordingly, a forward-looking statement is neither a prediction nor a guarantee of future events or circumstances and those future events or circumstances may not occur. You should not place undue reliance on the forward-looking statements, which speak only as of the date of this Form 10-Q. We are under no obligation, and we expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise.
Executive Overview
The Company’s business is highly correlated to non-service sectors of the general economy. The Company’s strategy is to improve profitability by increasing yield while also increasing volumes to build density in existing geography. The Company’s business is labor intensive, capital intensive and service sensitive. The Company looks for opportunities to improve cost effectiveness, safety and asset utilization. Pricing initiatives have had a positive impact on yield and profitability. The Company continues to execute targeted sales and marketing programs along with initiatives to align costs with volumes and improve customer satisfaction. Technology continues to be an important investment that is facilitating operational efficiencies and improving Company image.
The Company’s operating revenue decreased by 4.6 percent in the third quarter of 2015 compared to the same period in 2014. The decrease resulted primarily from a decline in shipments, tonnage and fuel surcharge revenue partially offset by effective yield management.
Consolidated operating income was $19.8 million for the third quarter of 2015 compared to $27.1 million for the third quarter of 2014. In the third quarter of 2015, LTL shipments and tonnage per workday were down 4.2 and 6.7 percent, respectively, versus the prior year quarter. Diluted earnings per share were $0.46 in the third quarter of 2015, compared to diluted earnings per share of $0.64 in the prior year quarter. The operating ratio (operating expenses divided by operating revenue) was 93.7 percent in the third quarter of 2015. This compares to 91.8 percent in the third quarter of 2014.
10
The Company generated $114.0 million in cash provided by operating activities through the first nine months of 2015 compared with $92.0 million in the prior year period largely due to working capital fluctuations, an increase in operating income, along with an increase in non-cash items included in net income for the nine months ended September 30, 2015. The Company had net cash used in investing activities of $90.4 million during the first nine months of 2015 compared to $77.2 million in the first nine months of 2014 and was primarily for the purchase of revenue equipment and the acquisition of LinkEx, Inc. The Company’s cash used in financing activities was $23.4 million through the first nine months of 2015 compared to $7.7 million in the prior year period. The Company had $25.0 million in borrowings under its revolving credit agreement, outstanding letters of credit of $44.8 million and cash and cash equivalents balance of $4.5 million at September 30, 2015. The Company was in compliance with the debt covenants under its debt agreements at September 30, 2015.
General
The following Management’s Discussion and Analysis describes the principal factors affecting the results of operations, liquidity and capital resources, as well as the critical accounting policies of Saia, Inc. and Subsidiaries (also referred to as Saia or the Company).
The Company is a transportation company headquartered in Johns Creek, Georgia providing a wide range of less-than-truckload, non-asset truckload, expedited and logistics services across the United States.
Our business is highly correlated to non-service sectors of the general economy. It also is impacted by a number of other factors as discussed under “Forward Looking Statements” and Part II, Item 1A. “Risk Factors.” The key factors that affect our operating results are the volumes of shipments transported through our network, as measured by our average daily shipments and tonnage; the prices we obtain for our services, as measured by revenue per hundredweight (a measure of yield) and revenue per shipment; our ability to manage our cost structure for capital expenditures and operating expenses such as salaries, wages and benefits; purchased transportation; claims and insurance expense; fuel and maintenance; and our ability to match operating costs to shifting volume levels.
Results of Operations
Saia, Inc. and Subsidiaries
Selected Results of Operations and Operating Statistics
For the quarters ended September 30, 2015 and 2014
(unaudited)
|
|
|
|
|
|
|
|
|
|
Percent |
|
|
|
|
|
|
|
|
|
|
|
|
Variance |
|
|
|
|
2015 |
|
|
2014 |
|
|
'15 v. '14 |
|
|||
|
|
(in thousands, except ratios and revenue per hundredweight) |
|
|||||||||
Operating Revenue |
|
$ |
317,199 |
|
|
$ |
332,544 |
|
|
|
(4.6 |
) |
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages and employees’ benefits |
|
|
177,623 |
|
|
|
166,353 |
|
|
|
6.8 |
|
Purchased transportation |
|
|
19,314 |
|
|
|
27,479 |
|
|
|
(29.7 |
) |
Depreciation and amortization |
|
|
16,765 |
|
|
|
15,336 |
|
|
|
9.3 |
|
Fuel and other operating expenses |
|
|
83,652 |
|
|
|
96,227 |
|
|
|
(13.1 |
) |
Operating Income |
|
|
19,845 |
|
|
|
27,149 |
|
|
|
(26.9 |
) |
Operating Ratio |
|
|
93.7 |
% |
|
|
91.8 |
% |
|
|
(1.9 |
) |
Nonoperating Expense |
|
|
1,079 |
|
|
|
1,080 |
|
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Working Capital (as of September 30, 2015 and 2014) |
|
|
31,244 |
|
|
|
40,179 |
|
|
|
|
|
Cash Flows provided by Operations (year to date) |
|
|
114,038 |
|
|
|
92,017 |
|
|
|
|
|
Net Acquisitions of Property and Equipment (year to date) |
|
|
68,170 |
|
|
|
77,183 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Statistics: |
|
|
|
|
|
|
|
|
|
|
|
|
LTL Tonnage |
|
|
940 |
|
|
|
1,008 |
|
|
|
(6.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
LTL Shipments |
|
|
1,658 |
|
|
|
1,730 |
|
|
|
(4.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
LTL Revenue per hundredweight |
|
$ |
15.51 |
|
|
$ |
15.17 |
|
|
|
2.2 |
|
11
Quarter and nine months ended September 30, 2015 compared to Quarter and nine months ended September 30, 2014
Revenue and volume
Consolidated revenue for the quarter ended September 30, 2015 decreased 4.6 percent to $317.2 million primarily as a result of decreased tonnage, shipments and fuel surcharges which were partially offset by effective yield management. Saia’s LTL revenue per hundredweight (a measure of yield) increased 2.2 percent to $15.51 per hundredweight for the third quarter of 2015 as a result of increased rates largely offset by decreased fuel surcharges. Saia’s LTL tonnage decreased 6.7 percent to 0.9 million tons. LTL shipments decreased 4.2 percent to 1.7 million shipments. Approximately 75 percent of Saia’s operating revenue is subject to specific customer price adjustment negotiations that occur throughout the year. The remaining 25 percent of operating revenue is subject to an annual general rate increase. On January 5, 2015, Saia implemented a 4.9 percent general rate increase for customers comprising this 25 percent of operating revenue. Competitive factors, customer turnover and mix changes, impact the extent to which customer rate increases are retained over time.
Operating revenue includes fuel surcharge revenue from the Company’s fuel surcharge program. That program is designed to reduce the Company’s exposure to fluctuations in fuel prices by adjusting total freight charges to account for changes in the price of fuel. The Company’s fuel surcharge is based on the average national price for diesel fuel and is reset weekly. Fuel surcharges have remained in effect for several years, are widely accepted in the industry and are a significant component of revenue and pricing. Fuel surcharges represent only one portion of overall competitive price negotiations as customers may negotiate increases in base rates instead of increases in fuel surcharges or vice versa. Saia revised its fuel surcharge program effective February 2, 2015. Fuel surcharge revenue decreased to 11.4% of operating revenue for the quarter ended September 30, 2015 compared to 16.7% for the quarter ended September 30, 2014, as a result of lower fuel prices.
For the nine months ended September 30, 2015, operating revenues were $933.7 million, down 3.0 percent from $962.7 million for the nine months ended September 30, 2014, primarily due to decreased tonnage, shipments and fuel surcharges, partially offset by effective yield management. Fuel surcharge revenue decreased to 12.1% of operating revenue for the nine months ended September 30, 2015 compared to 16.9% for the nine months ended September 30, 2014, as a result of lower fuel prices.
Operating expenses and margin
Consolidated operating income was $19.8 million in the third quarter of 2015 compared to operating income of $27.1 million in the prior year quarter. Overall, the operations were unfavorably impacted in the third quarter 2015 by declining shipments and tonnage, salary and wage increases, and increased accident severity partially offset by higher yield and continued network optimization initiatives. The third quarter 2015 operating ratio (operating expenses divided by operating revenue) was 93.7 percent compared to 91.8 percent for the same period in 2014.
Salaries, wages and benefits increased $11.3 million in the third quarter of 2015 compared to the prior year period largely due to a 4 percent wage increase in July 2015 and increased headcount. Fuel, operating expenses and supplies decreased $15.1 million in the third quarter of 2015 compared to the prior year period largely due to lower fuel costs and improved fuel efficiency partially offset by increased costs of other operating expenses and supplies. During the third quarter of 2015, claims and insurance expense was $2.2 million higher than the previous year quarter primarily due to increased frequency and severity of accident claims during the quarter partially offset by decreased cargo claims. The Company can experience volatility in accident expense as a result of its self-insurance structure and $2.0 million retention limits per occurrence. Purchased transportation decreased $8.2 million compared to the third quarter of 2014 primarily due to a decline in fuel costs charged by carriers, favorable carrier rates and mix of transportation modes utilized, and increased utilization of the Company’s drivers.
For the nine months ended September 30, 2015 consolidated operating income was $72.4 million, up 11.1 percent compared to $65.1 million for the nine months ended September 30, 2014.
Salaries, wages and benefits increased $29.0 million during the first nine months of 2015 compared to the prior year period largely due to a 4 percent wage increase in July 2015 and increased headcount. Fuel, operating expenses and supplies decreased $40.0 million during the first nine months of 2015 compared to the prior year period largely due to lower fuel costs and improved fuel efficiency partially offset by increased costs of other operating expenses and supplies. During the first nine months of 2015, claims and insurance expense was $10.3 million lower than the prior year period primarily due to decreased frequency and severity of accident claims during the period along with decreased cargo claims. Purchased transportation decreased $20.2 million compared to the first nine months of 2014 primarily due to a decline in fuel costs charged by carriers, favorable carrier rates and mix of transportation modes utilized, and increased utilization of the Company’s drivers.
12
Substantially all non-operating expenses represent interest expense. Interest expense in third quarter 2015 was lower due to lower interest rates in 2015. The effective tax rate was 37.2 percent and 37.6 percent for the quarter ended September 30, 2015 and September 30, 2014, respectively. For the nine months ended September 30, 2015, the effective tax rate was 37.0 percent compared to 37.6 percent for the nine months ended September 30, 2014.
Net income was $11.8 million, or $0.46 per diluted share, in the third quarter of 2015 compared to net income of $16.3 million, or $0.64 per diluted share, in the third quarter of 2014. Net income was $43.6 million, or $1.71 per diluted share, for the first nine months of 2015 compared to net income of $38.4 million, or $1.51 per diluted share, for the first nine months of 2014.
Working capital/capital expenditures
Working capital at September 30, 2015 was $31.2 million which decreased from working capital at September 30, 2014 of $40.2 million.
Current assets decreased by $7.7 million as compared to September 30, 2014 and include a decrease in accounts receivable of $7.6 million. The decrease in current assets was in addition to the $1.2 million increase in current liabilities largely due to an increase in accounts payable. Cash flows provided by operating activities were $114.0 million for the nine months ended September 30, 2015 versus $92.0 million for the nine months ended September 30, 2014. For the nine months ended September 30, 2015, cash used in investing activities was $90.4 million versus $77.2 million in the prior year period. The increase in cash used in investing activities is driven by the timing of net capital expenditures for revenue equipment and the acquisition of LinkEx, Inc. For the nine months ended September 30, 2015, net cash used in financing activities was $23.4 million compared to $7.7 million in the prior year period.
Outlook
Our business remains highly correlated to the general economy and competitive pricing pressures, as well as the success of Company-specific improvement initiatives. While improved in recent years, there remains uncertainty as to the timing and strength of economic recovery. We are continuing initiatives to increase yield, to reduce costs and improve productivity. We focus on providing top quality service and improving safety performance. If significant competitors were to cease operations and their capacity leave the market, current industry conditions could improve. However, there can be no assurance that any industry consolidation will indeed happen or if such consolidation occurs that it will materially change the industry capacity. The Company continues to pursue revenue and cost initiatives to improve profitability. On January 5, 2015, Saia implemented a 4.9 percent general rate increase for customers comprising approximately 25 percent of operating revenue. Saia revised its fuel surcharge program effective February 2, 2015. The extent of the success of these revenue initiatives is impacted by what proves to be the underlying economic trends, competitor initiatives and other factors discussed under “Forward-Looking Statements” and Part II, Item 1A. “Risk Factors.”
Effective July 1, 2015, the Company implemented a market competitive salary and wage increase for all of its employees. The impact of the July 2015 compensation increase is expected to be approximately $20 million annually. The Company anticipates the impact of the July 2015 compensation increase to be partially offset by further productivity and efficiency gains.
If the Company builds market share, there are numerous operating leverage cost benefits. Conversely, should the economy soften from present levels, the Company plans to manage the cost structure to match the shifts in customer volume levels. The success of cost improvement initiatives is also impacted by the cost and availability of drivers and purchased transportation, fuel, insurance claims, regulatory changes, successful implementation of profit improvement initiatives and other factors discussed under “Forward-Looking Statements” and Part II, Item 1A. “Risk Factors.”
See “Forward-Looking Statements” and Part II, Item 1A. “Risk Factors” for a more complete discussion of potential risks and uncertainties that could materially affect our future performance.
13
New Accounting Pronouncements Adopted In 2015
In April 2015, the FASB issued ASU 2015-03, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, which requires entities to retrospectively classify debt issuance costs as a deduction from the corresponding liability on the balance sheet. In August 2015, the FASB issued ASU 2015-15 to clarify that debt issuance costs related to line-of-credit arrangements could continue to be presented as an asset and be subsequently amortized over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the arrangement. The Company adopted ASU 2015-03 as of September 30, 2015, which did not have an impact on our comparative consolidated balance sheets as the Company’s unamortized debt issuance costs at the time of adoption are related to line-of-credit arrangements.
New Accounting Pronouncements Not Yet Adopted
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services. The ASU will replace most existing revenue recognition guidance in U.S. generally accepted accounting principles when it becomes effective. In July 2015, the FASB updated ASU No. 2014-09 to defer the effective date by one year. The new standard is effective for the Company on January 1, 2018. Early application is permitted for the Company on January 1, 2017. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU No. 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it completed its evaluation of the effect of the standard on its ongoing financial reporting.
Financial Condition
The Company’s liquidity needs arise primarily from capital investment in new equipment, land and structures, information technology and letters of credit required under insurance programs, as well as funding working capital requirements.
The Company is party to a revolving credit agreement (the Restated Credit Agreement) with a group of banks. The facility provides up to $250 million in availability, and expires in March 2020. The Company is also a party to a long-term note agreement (the Restated Master Shelf Agreement). The Company has pledged certain real estate and facilities, tractors and trailers, accounts receivable and other assets to secure indebtedness under both agreements.
Restated Credit Agreement
The Restated Credit Agreement is a revolving credit facility for up to $250 million expiring in March 2020. The Restated Credit Agreement also has an accordion feature that allows for an additional $75 million availability, subject to lender approval. The Restated Credit Agreement provides for a LIBOR rate margin range from 112.5 basis points to 225 basis points, base rate margins from minus 12.5 basis points to plus 50 basis points, an unused portion fee from 20 basis points to 30 basis points and letter of credit fees from 112.5 basis points to 225 basis points, in each case based on the Company’s leverage ratio.
Under the Restated Credit Agreement, the Company must maintain certain financial covenants including a minimum fixed charge coverage ratio and a maximum leverage ratio, among others.
At September 30, 2015, the Company had borrowings of $25.0 million and outstanding letters of credit of $44.8 million under the Restated Credit Agreement. At December 31, 2014, the Company had borrowings of $45.0 million and outstanding letters of credit of $47.3 million under the Restated Credit Agreement. The available portion of the Restated Credit Agreement may be used for general corporate purposes, including future capital expenditures, working capital and letter of credit requirements as needed.
Restated Master Shelf Agreement
On September 20, 2002, the Company issued $100 million in Senior Notes under a $125 million (amended to $150 million in April 2005) Master Shelf Agreement with Prudential Investment Management, Inc. and certain of its affiliates. The Company issued an additional $25 million in Senior Notes on November 30, 2007 and $25 million in Senior Notes on January 31, 2008 under the same Master Shelf Agreement.
The initial $100 million Senior Notes had a fixed interest rate of 7.38 percent. Payments due under the $100 million Senior Notes were interest only until June 30, 2006 and at that time semi-annual principal payments began with the final payment made December 2013. The November 2007 issuance of $25 million Senior Notes has a fixed interest rate of 6.14 percent. The January 2008 issuance of $25 million Senior Notes has a fixed interest rate of 6.17 percent. Payments due for both $25 million issuances were interest only until June 30, 2011 and at that time semi-annual principal payments began with the final payments due January 1, 2018. Under the
14
terms of the Senior Notes, the Company must maintain certain financial covenants including a minimum fixed charge coverage ratio and a maximum leverage ratio, among others.
Capital Leases
The Company is obligated under capital leases which include obligations covering revenue equipment totaling $38.3 million with seven year terms. Amortization of assets held under the capital leases is included in depreciation expense. The weighted average interest rate for the capital leases at September 30, 2015 is 2.87%.
Other
Projected net capital expenditures for 2015 are approximately $125 million. This represents an approximate $13 million increase from 2014 net capital expenditures of $112 million for property and equipment. Approximately $12.6 million of the 2015 capital budget was committed as of September 30, 2015. Net capital expenditures pertain primarily to investments in revenue equipment, information technology, land and structures.
The Company has historically generated cash flows from operations that have funded its capital expenditure requirements. Cash flows from operating activities were $102.2 million for the year ended December 31, 2014, while net cash used in investing activities was $94.8 million. Cash flows provided by operating activities were $114.0 million for the nine months ended September 30, 2015; $22.0 million higher than the prior year largely due to working capital fluctuations, an increase in operating income, and an increase in non-cash items included in net income. The timing of capital expenditures can largely be managed around the seasonal working capital requirements of the Company. The Company believes it has adequate sources of capital to meet short-term liquidity needs through its operating cash flows and availability under the Restated Credit Agreement, subject to the Company’s satisfaction of existing debt covenants. Future operating cash flows are primarily dependent upon the Company’s profitability and its ability to manage its working capital requirements, primarily accounts receivable, accounts payable and wage and benefit accruals. The Company was in compliance with its debt covenants at September 30, 2015.
At September 30, 2015, YRC Worldwide Inc., formerly Yellow Corporation (Yellow), provided guarantees on behalf of Saia primarily for open workers’ compensation claims and casualty claims incurred prior to March 1, 2000. Under the Master Separation and Distribution Agreement entered into in connection with the 100 percent tax-free distribution of Saia shares to Yellow shareholders in 2002, Saia pays Yellow’s actual cost of any collateral it provides to insurance underwriters in support of these claims at cost plus 125 basis points. At September 30, 2015, the portion of collateral allocated by Yellow to Saia in support of these claims was $1.8 million.
In accordance with U.S. generally accepted accounting principles, our operating leases are not recorded in our condensed consolidated balance sheet; however, the future minimum lease payments are included in the “Contractual Obligations” table below. See the notes to our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2014 for additional information. In addition to the principal amounts disclosed in the tables below, the Company has interest obligations of approximately $1.0 million for the remainder of 2015 and decreasing for each year thereafter based on borrowings and commitments outstanding at September 30, 2015.
Contractual Obligations
The following tables set forth a summary of our contractual obligations and other commercial commitments as of September 30, 2015 (in millions):
|
|
Payments due by year |
|
|||||||||||||||||||||||||
|
|
2015 |
|
|
2016 |
|
|
2017 |
|
|
2018 |
|
|
2019 |
|
|
Thereafter |
|
|
Total |
|
|||||||
Contractual cash obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving line of credit |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
25.0 |
|
|
$ |
25.0 |
|
Long-term debt |
|
|
3.6 |
|
|
|
7.1 |
|
|
|
7.2 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
17.9 |
|
Leases: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Leases |
|
|
1.5 |
|
|
|
5.9 |
|
|
|
5.9 |
|
|
|
5.9 |
|
|
|
5.9 |
|
|
|
17.3 |
|
|
|
42.4 |
|
Operating leases |
|
|
3.7 |
|
|
|
13.4 |
|
|
|
11.7 |
|
|
|
9.1 |
|
|
|
6.6 |
|
|
|
15.0 |
|
|
|
59.5 |
|
Purchase obligations (1) |
|
|
15.0 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
15.0 |
|
Total contractual obligations |
|
$ |
23.8 |
|
|
$ |
26.4 |
|
|
$ |
24.8 |
|
|
$ |
15.0 |
|
|
$ |
12.5 |
|
|
$ |
57.3 |
|
|
$ |
159.8 |
|
(1) |
Includes commitments of $12.6 million for capital expenditures. |
15
|
|
Amount of commitment expiration by year |
|
|||||||||||||||||||||||||
|
|
2015 |
|
|
2016 |
|
|
2017 |
|
|
2018 |
|
|
2019 |
|
|
Thereafter |
|
|
Total |
|
|||||||
Other commercial commitments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available line of credit (1) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
180.2 |
|
|
$ |
180.2 |
|
Letters of credit |
|
|
— |
|
|
|
46.2 |
|
|
|
0.4 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
46.6 |
|
Surety bonds |
|
|
0.3 |
|
|
|
22.2 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
22.5 |
|
Total commercial commitments |
|
$ |
0.3 |
|
|
$ |
68.4 |
|
|
$ |
0.4 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
180.2 |
|
|
$ |
249.3 |
|
(1) |
Subject to the satisfaction of existing debt covenants. |
The Company has unrecognized tax benefits of approximately $1.2 million and accrued interest and penalties of $1.0 million related to the unrecognized tax benefits as of September 30, 2015. The Company cannot reasonably estimate the timing of cash settlement with respective taxing authorities beyond one year and accordingly has not included the amounts within the above contractual cash obligation and other commercial commitment tables.
Critical Accounting Policies and Estimates
The Company makes estimates and assumptions in preparing the consolidated financial statements that affect reported amounts and disclosures therein. In the opinion of management, the accounting policies that generally have the most significant impact on the financial position and results of operations of the Company include:
· |
Claims and Insurance Accruals. The Company has self-insured retention limits generally ranging from $250,000 to $2.0 million per claim for medical, workers’ compensation, auto liability, casualty and cargo claims. The liabilities associated with the risk retained by the Company are estimated in part based on historical experience, third-party actuarial analysis with respect to workers’ compensation claims, demographics, nature and severity, past experience and other assumptions. The liabilities for self-funded retention are included in claims and insurance reserves based on claims incurred with liabilities for unsettled claims and claims incurred but not yet reported being actuarially determined with respect to workers’ compensation claims and with respect to all other liabilities, estimated based on management’s evaluation of the nature and severity of individual claims and historical experience. However, these estimated accruals could be significantly affected if the actual costs of the Company differ from these assumptions. A significant number of these claims typically take several years to develop and even longer to ultimately settle. These estimates tend to be reasonably accurate over time; however, assumptions regarding severity of claims, medical cost inflation, as well as specific case facts can create short-term volatility in estimates. |
· |
Revenue Recognition and Related Allowances. Revenue is recognized on a percentage-of-completion basis for shipments in transit while expenses are recognized as incurred. In addition, estimates included in the recognition of revenue and accounts receivable include estimates of shipments in transit and estimates of future adjustments to revenue and accounts receivable for billing adjustments and collectability. |
|
Revenue is recognized in a systematic process whereby estimates of shipments in transit are based upon actual shipments picked up, scheduled day of delivery and current trend in average rates charged to customers. Since the cycle for pickup and delivery of shipments is generally 1-3 days, typically less than 5 percent of a total month’s revenue is in transit at the end of any month. Estimates for credit losses and billing adjustments are based upon historical experience of credit losses, adjustments processed and trends of collections. Billing adjustments are primarily made for discounts and billing corrections. These estimates are continuously evaluated and updated; however, changes in economic conditions, pricing arrangements and other factors can significantly impact these estimates. |
· |
Depreciation and Capitalization of Assets. Under the Company’s accounting policy for property and equipment, management establishes appropriate depreciable lives and salvage values for the Company’s revenue equipment (tractors and trailers) based on their estimated useful lives and estimated fair values to be received when the equipment is sold or traded in. These estimates are routinely evaluated and updated when circumstances warrant. However, actual depreciation and salvage values could differ from these assumptions based on market conditions and other factors. |
|
Long-lived assets, such as property, plant and equipment, and purchased intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, the Company compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as deemed necessary. |
16
uncertain tax positions. Income tax expense is equal to the current year’s liability for income taxes and a provision for deferred income taxes. Deferred tax assets and liabilities are recorded for the future tax effects attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. When it is more likely that all or some portion of specific deferred income tax assets will not be realized, a valuation allowance must be established for the amount of deferred income tax assets that are determined not to be realizable. A valuation allowance for deferred income tax assets has not been deemed necessary due to our profitable operations. Accordingly, if facts or financial circumstances change and consequently impact the likelihood of realizing the deferred income tax assets, we would need to apply management’s judgment to determine the amount of valuation allowance required in any given period. |
These accounting policies and others are described in further detail in the notes to our audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.
The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management to adopt accounting policies and make significant judgments and estimates to develop amounts reflected and disclosed in the consolidated financial statements. In many cases, there are alternative policies or estimation techniques that could be used. We maintain a thorough process to review the application of our accounting policies and to evaluate the appropriateness of the many estimates that are required to prepare the consolidated financial statements. However, even under optimal circumstances, estimates routinely require adjustment based on changing circumstances and the receipt of new or better information.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to a variety of market risks including the effects of interest rates and fuel prices. The detail of the Company’s debt structure is more fully described in the notes to the consolidated financial statements set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. To help mitigate our risk to rising fuel prices, the Company has implemented a fuel surcharge program. This program is well established within the industry and customer acceptance of fuel surcharges remains high. Since the amount of fuel surcharge is based on average national fuel prices and is reset weekly, exposure of the Company to fuel price volatility is significantly reduced. However, the fuel surcharge may not fully offset fuel price fluctuations during periods of rapid increases or decreases in the price of fuel and is also subject to overall competitive pricing negotiations.
The following table provides information about the Company’s third-party financial instruments as of September 30, 2015. The table presents principal cash flows (in millions) and related weighted average interest rates by contractual maturity dates. The fair value of the fixed rate debt (in millions) was estimated based upon the borrowing rates currently available to the Company for debt with similar terms and remaining maturities.
|
|
Expected maturity date |
|
|
2015 |
|
||||||||||||||||||||||||||||
|
|
2015 |
|
|
2016 |
|
|
2017 |
|
|
2018 |
|
|
2019 |
|
|
Thereafter |
|
|
Total |
|
|
|
|
Fair Value |
|
||||||||
Fixed rate debt |
|
$ |
4.8 |
|
|
$ |
12.0 |
|
|
$ |
12.2 |
|
|
$ |
5.2 |
|
|
$ |
5.4 |
|
|
$ |
16.6 |
|
|
$ |
56.2 |
|
|
|
|
$ |
56.9 |
|
Average interest rate |
|
|
3.9 |
% |
|
|
3.9 |
% |
|
|
3.9 |
% |
|
|
2.9 |
% |
|
|
2.9 |
% |
|
|
2.9 |
% |
|
|
|
|
|
|
|
|
|
|
Variable rate debt |
|
|
— |
|
|
|