10-K 1 saia-10k_20171231.htm 10-K saia-10k_20171231.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

(Mark One)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2017

OR

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

 

48-1229851

(State of Incorporation)

 

(I.R.S. Employer

Identification No.)

 

 

 

11465 Johns Creek Parkway, Suite 400

Johns Creek, Georgia

 

30097

(Address of Principal Executive Offices)

 

(Zip Code)

(770) 232-5067 

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

 

Title of each class

 

 

 

Names of each exchange on which registered

 

 

Common Stock, par value $.001 per share

 

 

 

The Nasdaq Global Select Market

 

Securities registered pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes      No  

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes      No  

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      No  

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      No  

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of June 30, 2017, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $1,305,605,443 based on the last reported sales price of the common stock as reported on the National Association of Securities Dealers Automated Quotation System National Market System. The number of shares of Common Stock outstanding as of February 21, 2018 was 25,676,455.

Documents Incorporated by Reference

Portions of the definitive Proxy Statement to be filed within 120 days of December 31, 2017, pursuant to Regulation 14A under the Securities Exchange Act of 1934 for the Annual Meeting of Stockholders to be held April 26, 2018, have been incorporated by reference into Part III of this Form 10-K.

 

 

 

 


 

SAIA, INC. AND SUBSIDIARIES

INDEX

 

 

 

 

 

Page

 

 

PART I.

 

 

Item 1.

 

Business

 

3

 

 

Additional Information

 

8

 

 

Executive Officers of the Registrant

 

9

Item 1A.

 

Risk Factors

 

9

Item 1B.

 

Unresolved Staff Comments

 

20

Item 2.

 

Properties

 

21

Item 3.

 

Legal Proceedings

 

21

Item 4.

 

Mine Safety Disclosures

 

21

 

 

 

 

 

 

 

PART II.

 

 

Item 5.

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

22

Item 6.

 

Selected Financial Data

 

24

Item 7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

24

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

 

36

Item 8.

 

Financial Statements and Supplementary Data

 

37

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

60

Item 9A.

 

Controls and Procedures

 

60

Item 9B.

 

Other Information

 

61

 

 

 

 

 

 

 

PART III.

 

 

Item 10.

 

Directors, Executive Officers and Corporate Governance

 

61

Item 11.

 

Executive Compensation

 

61

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

61

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

 

62

Item 14.

 

Principal Accountant Fees and Services

 

62

 

 

 

 

 

 

 

PART IV.

 

 

Item 15.

 

Exhibits, Financial Statement Schedules

 

62

 

 

 

 

 

 

 

2


 

PART I.

Item 1.

Business

Overview

Saia, Inc., through its wholly-owned subsidiaries, is a transportation company headquartered in Johns Creek, Georgia (Saia, Inc. together with its subsidiaries, the Company or Saia). We provide regional and interregional less-than-truckload (LTL) services through a single integrated organization. While more than 99% of our revenue historically has been derived from transporting LTL shipments across 39 states, we also offer customers a wide range of other value-added services, including non-asset truckload, expedited and logistics services across North America.

None of our approximately 9,800 employees is represented by a union. In 2017, Saia generated revenue of $1.38 billion and operating income of $94.7 million. In 2016, Saia generated revenue of $1.22 billion and operating income of $79.1 million.

Saia LTL Freight

Founded in 1924, Saia Motor Freight Line, LLC (Saia LTL Freight) is a leading LTL carrier that serves 39 states in the South, Southwest, Midwest, Pacific Northwest, West and portions of the Northeast, where the Company plans to expand its footprint. Saia LTL Freight specializes in offering its customers a range of regional and interregional LTL services including time-definite and expedited options. Saia LTL Freight primarily provides its customers with solutions for shipments between 100 and 10,000 pounds, but also provides truckload services.

Saia LTL Freight has invested substantially in technology, training and business processes to enhance its ability to monitor and manage customer service, operations and profitability. These process and data capabilities enable Saia LTL Freight to provide its trademarked Customer Service Indicators® (CSI) program, allowing customers to monitor service performance on a wide array of metrics most important to them. Customers can access the information via the Company’s website (www.saia.com) to help manage their shipments. The CSIs measure the following: on-time pickup; on-time delivery; claim-free shipments; claims settled within 30 days; exception free delivery; and invoicing accuracy. The CSIs provide both Saia LTL Freight and the customer with a report card of overall service levels.

As of December 31, 2017, Saia LTL Freight operated a network comprised of 157 owned and leased facilities, including three general offices. In 2017, the average Saia LTL Freight shipment weighed approximately 1,113 pounds and traveled an average distance of approximately 811 miles.

Industry

The trucking industry consists of three segments: private fleets and two “for-hire” carrier groups. The private carrier segment consists of fleets owned and operated by shippers who move their own goods. The two “for-hire” carrier groups, truckload and LTL, are based on the typical shipment sizes handled by transportation service companies. Truckload refers to providers generally transporting shipments greater than 10,000 pounds and LTL refers to providers generally transporting shipments less than 10,000 pounds. Saia is primarily an LTL carrier.

LTL carriers typically pickup numerous shipments, generally ranging from 100 to 10,000 pounds, and consolidate them at carrier-operated service facilities within a certain radius and then transport the shipments from the origin facility to the carrier-operated destination facility and then deliver the shipments to the ultimate destination. As a result, LTL carriers require expansive networks of pickup and delivery operations around local service facilities and shipments are moved between origin and destination often through an intermediate distribution or “breakbulk” facility. Depending on the distance shipped, the LTL segment historically was classified into three subgroups:

 

Regional — Average shipment distance is typically less than 1,200 miles with a focus on one- and two-day markets. Regional transportation companies can move shipments directly from the originating

 

3


 

 

facility to their respective destination facility which increases service reliability and avoids costs associated with intermediate handling.

 

Interregional — Average shipment distance is usually between 1,200 and 1,500 miles with a focus on serving two- and three-day markets.

 

National — Average shipment distance is typically in excess of 1,500 miles with a focus on service in three- to five-day markets. National providers rely on intermediate shipment handling through hub and spoke networks, which require numerous satellite service facilities, multiple distribution facilities and a relay network. To gain service and cost advantages, national providers occasionally ship directly between service facilities reducing intermediate handling or utilize the rail system.

Throughout the years, there has been a blurring of the three subgroups as individual companies are increasingly serving multiple markets. Today, Saia LTL Freight, as well the vast majority of the LTL capacity, services all three subgroups.

The truckload segment is the largest portion of the “for-hire” truck transportation market. Truckload carriers primarily transport large shipments from origin to destination with no intermediate handling. Although a full truckload can weigh over 40,000 pounds, it is common for truckload carriers to haul two or three shipments exceeding 10,000 pounds each at one time making multiple delivery stops.

Because truckload carriers do not require an expansive network to provide point-to-point service, the overall cost structure of truckload carriers is typically lower and more variable relative to LTL carriers. However, the lack of a network subjects their drivers to extended periods away from home thus resulting in higher driver turnover and periodic driver shortages. The truckload segment is comprised of several major carriers and numerous small entrepreneurial players. At the most basic level, a truckload company can be started with capital for rolling stock (a tractor and a trailer), insurance, a driver and little else. As size becomes a factor, capital is needed for technology, infrastructure and some limited facilities. Saia LTL Freight may participate in the truckload market as a means to fill empty miles in lanes that are not at capacity. Saia’s sales representatives also sell truckload and expedited offerings of its non-asset operations.

Capital requirements are significantly higher in the traditional LTL segment versus the truckload segment. In the LTL sector, substantial amounts of capital are required for a network of service facilities, shipment handling equipment and revenue equipment (both for city pick-up, delivery and linehaul). In addition, investment in technology has become increasingly important in the LTL segment largely due to the number of transactions and number of customers served on a daily basis. Saia LTL Freight picks up approximately 27,000 shipments per day, each of which has a shipper and consignee, and sometimes a third party payor, all of whom need access to information in a timely manner. More importantly, technology plays a key role in improving customer service, operations efficiency and compliance, safety and yield management. As a result of the significant infrastructure required to operate an LTL carrier, the LTL segment is more concentrated than the truckload segment with the largest LTL players in the national and regional markets. Driver turnover in the LTL sector is low relative to the truckload sector, although LTL carriers can also face periodic driver shortages.

Business Strategy

Saia has grown historically through a combination of organic growth and geographic integration or “tuck-in” acquisitions of smaller trucking and logistics companies. Saia integrated WestEx and Action Express in 2001, Clark Bros. in 2004, The Connection in 2006 and Madison Freight Systems in 2007. In 2012, Saia acquired Robart Transportation, Inc. and its subsidiary, The RL Services Group, LLC (the Robart Companies) which provide customers with non-asset truckload and logistics solutions. In 2012, the Company rebranded Robart Transportation, Inc. as Saia TL Plus, LLC (Saia TL Plus) and The RL Services Group, LLC as Saia Logistics Services, LLC (Saia Logistics Services). In 2015, Saia acquired LinkEx, Inc. (LinkEx), a diversified, non-asset, third party logistics provider based in Dallas, Texas. The acquisition of LinkEx grew the Company’s existing portfolio of non-asset services. See Note 11 of the accompanying audited consolidated financial statements for further information on the acquisition of LinkEx.

 

4


 

Key elements of our business strategy include:

Continue to focus on operating safely.

Our most valuable resource is our employees. It is a corporate priority to continually emphasize the importance of safe operations and to reduce both the frequency and severity of injuries and accidents. This emphasis on safe operations is not only appropriate to protect our employees and our communities but with the continued escalation of commercial insurance and healthcare costs, it is important to maintain and improve stockholder returns. Management expects governmental safety regulations and related enforcement initiatives to increase in the future.

Manage yields and business mix.

This element of our business strategy involves managing both the pricing process and the mix of customers’ freight in ways that allow our network to operate more profitably. Improvements in the economy coupled with the tightening of available capacity in the industry over the last several years allowed the Company to implement numerous pricing initiatives to increase yield significantly.

Increase density in existing geographies.

We gain operating leverage by growing volume and density within existing geography. Depending on pricing and the specific lanes, we estimate that the potential incremental profitability on growth in current markets can be 20 percent or even higher. This improves margins, asset turnover and return on capital. We actively monitor opportunities to add service facilities where we have sufficient density. We see potential for future volume growth at Saia from improvements in the general economy, industry consolidation, geographic expansion and strategic acquisitions, as well as specific sales and marketing initiatives.

Continue to focus on delivering best-in-class service.

The foundation of Saia’s growth strategy is consistent delivery of high-quality service. Commitment to service quality is valued by customers and allows us to gain fair compensation for our services and positions us to improve market share.

Continue to focus on improving operating efficiencies.

Saia has operating initiatives focused on continuing to improve efficiency. These initiatives help offset a variety of structural cost increases like wages, healthcare benefits, workers compensation claims, parts and maintenance expense as well as casualty insurance. We believe Saia continues to be well positioned to manage costs and utilize assets. We believe we will continue to see new opportunities for cost savings.

Prepare the organization for future growth.

Our primary focus within organizational development is maintaining strong relationships with our employees. We invest in our employees through internal communication, training programs, recognition programs and providing competitive wages and benefits. We also invest in succession planning initiatives.

We believe it is also important to invest in technology capabilities and strategic real estate which are designed to position our Company for future growth to meet the increasing demands of the marketplace. We also believe it is important to invest in our tractor and trailer fleet to gain access to new technologies, lower maintenance expenses, achieve improved fuel economy, improve brand image and gain other operating efficiencies.

Expand portfolio of services in the non-asset market

While our immediate priority is to improve profitability in our existing portfolio of services, we may pursue additional services to complement our existing non-asset market because it promotes profitability growth and improves our customer value proposition over time.

 

5


 

Expand geographic footprint.

While our immediate priority is to improve profitability in our existing geography, we plan to further pursue geographic expansion into portions of the Northeastern United States to promote profitable growth and improve our customer value proposition over time. Not only do we plan to invest in new terminals and equipment, but we intend to invest in certain areas of our existing network so that we will be able to handle the increased freight flows we anticipate to and from the new market.

In addition to direct expansion through opening of new facilities, management may consider acquisitions from time to time to help expand geographic reach and density while gaining the business base of the acquired entity. Management believes integration of acquisitions is a core competency, and it has developed a repeatable process from its successful experience, including Saia’s integration of WestEx, Action Express, Clark Bros., the Connection and Madison Freight. Collectively, these integrations increased Saia’s footprint from 12 to 34 states.

Seasonality

Our revenues are subject to seasonal variations. Customers tend to reduce shipments after the winter holiday season and operating expenses tend to be higher as a percent of revenue in the winter months primarily due to lower capacity utilization and weather effects. Generally, the first quarter is the weakest quarter while the second and third quarters are the strongest quarters in terms of revenue and profit. Quarterly profitability is also impacted by the timing of salary and wage increases and general rate increases which have varied over the years.

Labor

Most LTL companies, including Saia, and virtually all truckload companies are not subject to collective bargaining agreements.

In recent years, due to competition for quality employees, the compensation divide between union and non-union carriers has closed dramatically. However, there are still significant differences in benefit costs and work rule flexibility. Benefit costs for union carriers remain significantly above those paid by non-union carriers and union carriers may be subject to certain contingent unfunded multi-employer pension liabilities. In addition, non-union carriers have more work rule flexibility with respect to work schedules, routes and other similar items. Work rule flexibility is a major consideration in the regional LTL sector as flexibility is important to meet the service levels required by customers.

Our employees are not represented by a collective bargaining unit. We believe this provides for better communications and employee relations, stronger future growth prospects, improved efficiencies and customer service capabilities.

Competition

Although there has been some tightening of capacity and some industry consolidation, shippers continue to have a wide range of choices. We believe that service quality, price, variety of services offered, geographic coverage, responsiveness and flexibility are the important competitive differentiators.

Saia focuses primarily on regional and interregional business and operates in a highly competitive environment against a wide range of transportation service providers. These competitors include a small number of large, national transportation service providers in the long haul and two-day markets and a larger number of shorter-haul or regional transportation companies in the two-day and overnight markets. Saia also competes in and against several modes of transportation, including LTL, truckload and private fleets. The larger the service area, the greater the barriers to entry into the LTL trucking segment due to the need for additional equipment and operational facilities associated with this coverage. The level of technology investment required and density needed to provide adequate labor and asset utilization make larger-scale entry into the LTL market difficult. Saia also competes with small package carriers, final mile delivery services, railroads and air freight carriers.

 

6


 

Regulation

Over the past 38 years, the trucking industry has been substantially deregulated and rates and services are largely free of regulatory controls. Nevertheless, the trucking industry remains subject to regulation by many federal and state governmental agencies, and these authorities have broad powers over matters ranging from the authority to engage in motor carrier operations, motor carrier registration, driver hours of service, safety and fitness of transportation equipment and drivers, insurance requirements, fuel efficiency and emissions standards, and the transportation and handling of hazardous materials.

Key areas of regulatory activity include:

Department of Homeland Security.

The trucking industry is working closely with government agencies to define and implement improved security processes. Federal, state and municipal authorities have implemented and continue to implement anti-terrorism measures, including checkpoints and travel restrictions on large trucks. The Transportation Security Administration (TSA) continues to focus on trailer security, driver identification, security clearance and border-crossing procedures. These and other safety and security measures, such as rules for transportation of hazardous materials, could increase the cost of operations, reduce the number of qualified drivers and disrupt or impede the timing of our deliveries to customers.

Department of Transportation.

Motor carrier and freight brokerage operations are subject to safety, insurance and bonding requirements prescribed by the U.S. Department of Transportation (DOT) and various state agencies.

Within the DOT, the Federal Motor Carrier Safety Administration (FMCSA) has issued rules including hours of service regulations that limit the maximum number of hours a driver may be on duty between mandatory off-duty hours.  Our operations were adjusted to comply with these rules, and while our base operations were not materially affected, we did experience deterioration in the cost, availability and reliability of purchased transportation. Revisions to these rules could further impact our operations, further tighten the market for qualified drivers and put additional pressure on driver wages and purchased transportation costs. 

Additionally, the FMCSA’s Compliance Safety Accountability Program (CSA) could adversely affect our results and ability to maintain or grow our fleet. CSA is an enforcement and compliance model that involves assessments of a motor carrier’s on-road performance and investigation results for a 24-month period using roadside stops and inspections, resulting in safety and performance ratings in the following categories: unsafe driving; hours-of-service compliance; driver fitness; controlled substances/alcohol; vehicle maintenance; hazardous material compliance; and crash indicators. The evaluations are used to rank carriers and individual drivers and to select carriers for audit and other interventions.

The FMCSA issued a final rule requiring electronic driver logs be monitored by Electronic Log Devices (ELDs) for many in-state-only drivers and most interstate commercial motor vehicle drivers by no later than December 18, 2017. Drivers who voluntarily used a compliant automatic on-board recording device by the December 18, 2017, deadline were “grandfathered” for two years to give providers time to update their systems to be compliant with the ELD standards. While such regulations could increase the cost of technology, capital equipment and maintenance expenses across our industry, we implemented ELDs company-wide in 2014 prior to the effective date of the ELD standard.

In 2016, the FMCSA and the National Highway Traffic Safety Administration (NHTSA) proposed regulations that would require vehicles of a certain size to be equipped with a speed limiting device set to a specified speed. There can be no guarantee as to whether a final rule requiring speed limiting devices will be implemented, and if implemented, no assurance as to the nature of any such rule and its impact on our fleet and operations. While such regulations could increase the cost of technology, capital equipment and maintenance expenses across our industry, we expect that all our tractors will have the necessary on-board technology systems in place to capture this data by the time the regulations take effect.

 

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Environmental Protection Agency.

The EPA has issued regulations reducing sulfur content of diesel fuel and reducing engine emissions. These regulations increased the cost of replacing and maintaining trucks. Future environmental laws in this area could further increase our costs and impact our operations.

Our operations are subject to environmental laws and regulations dealing with the handling of hazardous materials, underground fuel storage tanks and discharge and retention of storm water. We operate in industrial areas where truck terminals and other industrial activities are located and where groundwater or other forms of environmental contamination may have occurred. Our operations involve the risks of fuel spillage or seepage, environmental damage and hazardous waste disposal, among others. Although we have programs in place designed to monitor and control environmental risks and to promote compliance with applicable environmental laws and regulations, violations of applicable environmental laws or regulations or spills or other accidents involving hazardous substances can still occur and may subject us to cleanup costs, liabilities not covered by insurance, substantial fines or penalties and to civil and criminal liability, any of which could adversely affect our financial condition, results of operations, liquidity and cash flows.

Food and Drug Administration.

As a transportation provider of foodstuffs, we are subject to rules issued by the Food and Drug Administration (FDA) to provide for the security of food and foodstuffs throughout the supply chain. The Sanitary Food Transportation Act (SFTA) shifted responsibility for the regulation of food transportation from the DOT to the FDA. Effective June 6, 2016, the FDA issued a final rule to establish requirements under SFTA for vehicles and transportation equipment, transportation operations, training, recordkeeping and waivers. The rule is designed to continue the use of best practices in the industry concerning cleaning, inspection, maintenance, loading and unloading of, and operation of vehicles. Carriers are required to develop and implement written procedures subject to recordkeeping that specify its practices for cleaning, sanitizing, and inspecting vehicles and transportation equipment.  Although we already strive to adhere to such best practices, the impact of the final rule is uncertain and compliance may cause us to incur additional expenses and affect our operations.

Trademarks and Patents

We have registered several service marks and trademarks in the United States Patent and Trademark Office, including Saia Guaranteed Select®, Saia Customer Service Indicators® and Saia Xtreme Guarantee®. We believe these service marks and trademarks are important components of our marketing strategy.

Additional Information

Saia has a website that is located at www.saia.com. Saia makes available, free of charge through its website, all filings with the Securities and Exchange Commission (SEC) as soon as reasonably practicable after making such filings with the SEC.

 

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Executive Officers of the Registrant

Information regarding executive officers of Saia is as follows (included herein pursuant to Instruction 3 to Item 401(b) of Regulation S-K and General Instruction G(3) of Form 10-K):

 

Name

 

Age

 

Positions Held

Richard D. O’Dell

 

56

 

President and Chief Executive Officer of Saia, Inc. since January 1, 2007, having served as President of Saia, Inc. since July 2006. Previously, Mr. O’Dell served as President and Chief Executive Officer of Saia LTL Freight since November 1999. Mr. O’Dell has been a member of the Board of Directors of Saia, Inc. since July 2006.

 

 

 

 

 

Frederick J. Holzgrefe, III

 

50

 

Executive Vice President and Chief Financial Officer of Saia, Inc. since September 2014. Prior to joining Saia, Mr. Holzgrefe was Vice President of Business Development and Vice President and Chief Financial Officer for Golden Peanut Company.

 

 

 

 

 

Raymond R. Ramu

 

49

 

Executive Vice President and Chief Customer Officer of Saia, Inc. since May 2015. Mr. Ramu joined Saia LTL Freight in December 1997 having served as Vice President of Sales - East from April 2007 to May 2015.

 

 

 

 

 

Craig A. Thompson

 

45

 

Executive Vice President Operations of Saia, Inc. since August 2017 and Vice President of Eastern Operations for Saia LTL Freight from April 2015 until August 2017. Prior to joining Saia, Mr. Thompson was Vice President of Midwest Operations for FedEx Freight, Inc.

 

 

 

 

 

T. Michelle Richard

 

43

 

Vice President of Human Resources of Saia, Inc. since November 2014. Prior to joining Saia, Ms. Richard was Assistant General Counsel and Director of Human Resources for Wal-Mart Stores, Inc.

 

 

 

 

 

Stephanie R. Maschmeier

 

45

 

Controller of Saia, Inc. since October 2007. Mrs. Maschmeier, a certified public accountant, joined Saia, Inc. in July 2002 as Corporate Financial Reporting Manager.

 

Officers are elected by the Board of Directors of Saia, Inc. (the Board) and serve at the discretion of the Board. With the exception of Mr. O’Dell, none of the officers of the Company are subject to an employment agreement with the Company. There are no family relationships between any executive officer and any other executive officer or director of Saia or its subsidiaries.

 

 

Item 1A.

Risk Factors

Saia stockholders should be aware of certain risks, including those described below and elsewhere in this Form 10-K, which could adversely affect the value of their holdings and could cause our actual results to differ materially from those projected in any forward looking statements.

We are subject to general economic conditions that are largely out of our control, any of which could adversely affect our business.

Our business is subject to a number of general economic conditions that may have a material adverse effect on our financial condition, the results of operations, liquidity and cash flows, many of which are largely out of our control. These include recessionary economic cycles and downturns in customer business cycles, global uncertainty and instability, changes in U.S. social, political, and regulatory conditions and/or a disruption of financial markets. Economic conditions may adversely affect the business levels of our customers, the amount of transportation services they need and their ability to pay for our services.  

 

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We operate in a highly competitive industry and our business will be adversely impacted if we are unable to adequately address potential downward pricing pressures and other factors.

Numerous competitive factors could impair our ability to maintain our current profitability. These factors include the following:

 

competition with many other transportation service providers of varying types including competitor LTL carriers and non-asset based logistics and freight brokerage companies, some of which have more equipment, a broader coverage network, a wider range of services and greater capital resources than we do or have other competitive advantages;

 

transportation companies periodically reduce their prices to gain business, especially during economic recessions or times of reduced growth rates in the economy which may limit our ability to maintain or increase prices or achieve significant growth in our business;

 

many customers reduce the number of carriers they use by selecting approved transportation service providers, periodically accepting bids from multiple carriers for their shipping needs, or by developing their own or using alternative delivery mechanisms, and these practices may depress prices or result in the loss of business;

 

the trend towards consolidation in the surface transportation industry may create other large carriers with greater financial resources than us and other competitive advantages due to their size;

 

disruptive technologies, including driverless trucks, electric vehicles, alternative fuels and software applications to monitor supply and demand may significantly alter historical business models of the trucking industry, potentially leading to increased capital expenditures and emergence of new competitors, some of whom may have greater financial resources than us and other advantages due to their size;

 

the trend toward increased sales in the e-commerce sector as opposed to the traditional brick and mortar store model could adversely impact our revenues and the demand for our services; and

 

technological advances require increased investments to remain competitive, and we may not utilize enough advanced technology, select the correct technology solutions or convince our customers to accept higher prices to cover the cost of these investments.

The transportation industry is affected by business risks that are largely out of our control.

Businesses operating in the transportation industry are affected by risks that are largely out of their control, any of which could have a material adverse effect on our financial condition, results of operations, liquidity and cash flows. These risks include health of the economy, weather and other seasonal factors, excess capacity in the transportation industry, supply chain disruptions, acts of terrorism, interest rates, fuel costs, fuel taxes, license and registration fees, healthcare costs and insurance premiums. In particular, harsh weather or natural disasters, such as hurricanes, tornadoes, fires and floods and acts of terrorism can affect our operations by increasing operational costs, reducing demand, introducing infrastructure instability and disrupting advance route and load planning.

We are dependent on cost and availability of qualified drivers and purchased transportation.

There is significant competition for qualified drivers within the trucking industry and attracting and retaining drivers has become more challenging. Regulatory requirements, including the Federal Motor Carrier Safety Administration’s (FMCSA) data-driven safety and compliance enforcement initiative, Compliance, Safety, Accountability (CSA), have contributed to the reduction in the number of eligible drivers and may continue to do so in the future. We may periodically experience shortages of qualified drivers that could result in us not meeting customer demands, upward pressure on driver wages and benefits, underutilization of our truck fleet and/or use of higher cost purchased transportation which could have a material adverse effect on our financial condition, results of operations, liquidity and cash flows. There is also significant competition for quality purchased transportation within the trucking industry. We may periodically experience shortages of quality purchased transportation that could result in higher costs for these services or prevent us from meeting customer demands which could have a material adverse effect on our financial condition, results of operations, liquidity and cash flows.

 

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We are dependent on cost and availability of fuel.

Fuel is a significant operating expense and its availability is vital to daily operations. We do not hedge against the risk of fuel price increases. Global political events, acts of terrorism, federal, state and local laws and regulations, natural or man-made disasters, adverse weather conditions and other external factors could adversely affect the cost and availability of fuel. In the past, we have been able to obtain fuel from various sources and in the desired quantities, but there can be no assurance that this will continue to be the case in the future and any shortage or interruption in the supply or distribution of fuel could have a material adverse effect on our financial condition, results of operations, liquidity and cash flows. To the extent not offset by fuel surcharges or other customer price changes, volatility in fuel prices or significant increases in fuel taxes resulting from these economic or regulatory changes could have a material adverse effect on our financial condition, results of operations, liquidity and cash flows. Historically, we have been able to offset significant fuel price volatility through fuel surcharges and other pricing adjustments but we cannot be certain that we will be able to do so in the future. In recent years, given the significance of fuel surcharges, the negotiation of customer price increases has become commingled with fuel surcharges. We have experienced increases in other operating costs as a result of volatility in fuel prices; however, the total impact of volatility in fuel prices on other non-fuel related expenses is difficult to determine. Fluctuations in our fuel surcharge recovery may result in fluctuations in our revenue. Rapid and significant fluctuations in diesel fuel prices would reduce our profitability until we make the appropriate adjustments to our pricing strategy.

We may face risks related to our expansion into the Northeastern United States.

We are expanding our service geography into the Northeastern United States. In 2017, we opened six terminals in major markets in Pennsylvania, Maryland and New Jersey.  We plan to add new markets at a similar pace in 2018 targeting additional markets in Pennsylvania and New Jersey, as well as other Northeastern states. There is no assurance that we will be successful at adding new markets as planned or that such markets will be profitable. This continued expansion will require investments in purchased or leased terminals, equipment (including the purchase of new tractors and trailers), technology, employees and other related start-up costs to facilitate our growth plans. Additionally, we plan to invest in certain areas of our existing network so that we will be able to handle the increased freight flows we anticipate to and from the new markets. The Northeastern market is extremely competitive and there is no assurance that we will generate revenues sufficient to cover our costs of expanding there. Expansion into the Northeast could cause disruptions in our existing geography or require management to devote excessive time and effort to manage the expansion, which could adversely affect our business operations and profitability. Operation in the Northeast may increase the possibility of one or more union organizing efforts. In addition, harsh winter weather in the Northeast may increase our risk of weather-related expenses and disruptions. A delay between the outlay of expenditures to expand our geographic footprint and generation of new revenue or higher than anticipated costs or lower than expected revenues from the expansion could adversely affect our financial condition, results of operations, liquidity and cash flows. We may experience decreased profitability until we are able to fully realize the benefits of the investment, if ever.

Ongoing insurance and claims expenses could significantly reduce and cause volatility to our earnings.

We are regularly subject to claims resulting from cargo loss, personal injury, property damage, group healthcare and workers’ compensation and we maintain insurance deductibles for these claims in amounts ranging from $250,000 to $2 million per claim. We also maintain insurance with licensed insurance companies above these self-insured retention limits. If the number or severity of future claims increases, claim expenses might exceed historical levels or could exceed the amounts of our insurance coverage or the amount of our reserves for self-insured claims, which would adversely affect our financial condition, results of operations, liquidity and cash flows. Deterioration in safety experience could cause customers to switch business to competitors.

In recent years, several insurance companies have stopped offering coverage to trucking companies as a result of increases in the severity of automobile liability claims and higher costs of settlements and verdicts. This trend could adversely affect our ability to obtain suitable insurance coverage or could significantly increase our cost for obtaining such coverage, which would adversely affect our financial condition, results of operations, liquidity and cash flows.

Furthermore, insurance companies, as well as certain states, require collateral in the form of letters of credit or surety bonds for the estimated exposure of claims within our self-insured retentions. Their estimate of our future

 

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exposure as well as external market conditions could influence the amount and costs of additional letters of credit required under our insurance programs and thereby reduce capital available for future growth or adversely affect our financial condition, results of operations, liquidity and cash flows. In addition, insurance companies are increasingly encouraging or requiring trucking companies to increase the level of technology and safety measures used in their fleet, which could increase the costs of our fleet in order to obtain acceptable coverage or avoid rate hikes.

We face litigation risks that could have a material adverse effect on the operation of our business.

We face litigation risks regarding a variety of issues, including without limitation, accidents involving our trucks and employees, alleged violations of federal and state labor and employment laws, securities laws, environmental liability and other matters. These proceedings may be time-consuming, expensive and disruptive to normal business operations. The defense of such lawsuits could result in significant expense and the diversion of our management’s time and attention from the operation of our business. In recent years, several insurance companies have stopped offering coverage to trucking companies as a result of increases in the severity of automobile liability claims and higher costs of settlements and verdicts. This trend could adversely affect our ability to obtain suitable insurance coverage or could significantly increase our cost for obtaining such coverage, which would adversely affect our financial condition, results of operations, liquidity and cash flows. Costs we incur to defend or to satisfy a judgment or settlement of these claims may not be covered by insurance or could exceed the amount of that coverage or increase our insurance costs and could have a material adverse effect on our financial condition, results of operations, liquidity and cash flows.

Employees of Saia are non-union. The ability of Saia to compete could be impaired if operations were to become unionized.

None of our employees are currently subject to a collective bargaining agreement. We have in the past been the subject of unionization efforts which have been defeated. However, the U.S. Congress could pass labor legislation, such as the formerly proposed Employee Free Choice Act, or the National Labor Relations Board or other federal agencies could issue regulations or administrative changes, which could make it significantly easier for unionization efforts to be successful. If this bill or a variation of it is enacted in the future or if federal regulations regarding labor relations are changed, it could have an adverse impact on our financial condition, results of operations, liquidity and cash flows. Our expansion into portions of the Northeast could increase our overall risk of unionization. While Saia believes its current relationship with its employees is good, there can be no assurance that further unionization efforts will not occur in the future and that such efforts will be defeated. The non-union status of Saia is an important factor in our ability to compete in our markets, and if all or a portion of our workforce becomes unionized it could increase our costs and subject us to workplace rules, which would have an adverse impact on our financial condition, results of operations, liquidity and cash flows.

We must test our goodwill and other intangible assets for impairment at least annually, which could result in a material, non-cash write-down of goodwill and other intangible assets and could have a material adverse impact on our business.

Goodwill and indefinite-lived intangible assets are subject to impairment assessments at least annually (or more frequently when events or changes in circumstances indicate that an impairment may have occurred) by applying a fair-value based test. Our principal intangible assets are goodwill and other intangible assets. A loss of significant customers or a decrease in our market capitalization or profitability increases the risk of goodwill impairment. An impairment charge could have a material adverse impact on our financial condition and results of operations.

Demand for new and used revenue equipment and limited supply of suitable real estate may adversely affect our business.

Investment in new revenue equipment is a significant part of our annual capital expenditures. We may have difficulty in purchasing new trucks due to decreased supply, increased demand and restrictions on the availability of capital. The price of such equipment may increase as a result of regulations on newly manufactured tractors, such as the Environmental Protection Agency (EPA) and various state regulations requiring progressive reductions in

 

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exhaust emissions. These regulations have increased prices for tractors and increased maintenance costs. In addition, as we purchase new revenue equipment as part of our normal replacement cycle each year, we rely on the used equipment market to dispose of our older equipment. Oversupply in the transportation industry as well as adverse economic conditions can negatively impact the demand for used equipment and, therefore, reduce the value we can obtain for our used equipment. If we are unable to sell our older equipment at or above our salvage value, the resulting losses could have a significant impact on our financial condition, results of operations, liquidity and cash flows.

Our business model is also dependent on cost and availability of terminal facilities in key metropolitan areas. Shortages in the availability of suitable real estate or delays in construction due to difficulties in obtaining permits or approvals may result in significant additional investment in leasing, purchasing or building facilities, increase our operating expenses and/or prevent us from efficiently serving certain markets. In addition, we may not realize sufficient revenues or profits from our infrastructure investments.

The engines in our newer tractors are subject to new emissions-control regulations which could substantially increase operating expenses and future regulations concerning emissions or fuel-efficiency may have an adverse impact on our business.

Tractor engines that comply with the EPA emission-control design requirements have generally been less fuel-efficient and have increased maintenance costs compared to engines in tractors manufactured before these requirements became effective. If we are unable to offset resulting increases in fuel expenses or maintenance costs with higher freight rates or improved fuel economy, our financial condition, results of operations, liquidity and cash flows could be adversely affected.

Future strengthening of EPA or other regulatory requirements regarding fuel-efficiency of tractors could also result in increases in the cost of capital equipment and maintenance. While savings on fuel costs resulting from the use of more fuel-efficient equipment could mitigate these additional expenses in part, the impact of future regulations cannot be projected at this time.

Our Company-specific performance improvement initiatives, including management of the cost structure to match shifts in customer volume levels, may not be effective.

Operating performance improvement at Saia is dependent on the implementation and/or the continuation of various performance improvement initiatives. There can be no assurance that Saia will be successful in implementing these performance improvement initiatives or that Saia’s historical performance trend will be representative of future performance. In addition, we are capital intensive with a relatively high fixed-cost structure that is difficult to adjust to match shifting volume levels. Failure to achieve performance improvement initiatives could have a material adverse impact on our financial condition, results of operations, liquidity and cash flows.

We operate in a highly regulated and highly taxed industry. Costs of compliance with or liability for violation of existing or future regulations may adversely affect our business.

The Department of Transportation (DOT) and various state agencies exercise broad powers over our business, generally governing such activities as authorization to engage in motor carrier operations, safety and financial reporting. We may also become subject to new or more restrictive regulations imposed by the DOT, the Occupational Safety and Health Administration (OSHA) or other authorities relating to engine exhaust emissions, safety performance and measurements, driver hours of service, drug and alcohol testing, security, ergonomics, as well as other unforeseen matters. Compliance with such regulations could substantially impair equipment productivity and increase our costs. Various federal and state authorities impose significant operating taxes on the transportation industry, including fuel taxes, tolls, excise and other taxes. There can be no assurance such taxes will not substantially increase or that new forms of operating taxes will not be imposed on the industry.

The FMCSA rules on motor carrier driver hours of service limit the maximum number of hours a driver may be on duty between mandatory off-duty hours. Our operations were adjusted to comply with these rules, and while our base operations were not materially affected, we did experience deterioration in the cost, availability and

 

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reliability of purchased transportation. Revisions to these rules could further impact our operations, further tighten the market for qualified drivers and put additional pressure on driver wages and purchased transportation costs. 

The Transportation Security Administration (TSA) continues to focus on trailer security, driver identification and security clearance and border crossing procedures. These and other safety and security measures, such as rules for transportation of hazardous materials could increase the cost of operations, reduce the number of qualified drivers and disrupt or impede the timing of our deliveries for our customers.

The Food and Drug Administration (FDA) issues rules for carriers of foodstuffs like us to provide for the security of food and foodstuffs throughout the supply chain. The Sanitary Food Transportation Act (SFTA) shifted responsibility for the regulation of food transportation from the DOT to the FDA. Effective in 2016, the FDA issued a final rule to establish requirements under SFTA for vehicles and transportation equipment, transportation operations, training, recordkeeping and waivers. The rule is designed to continue the use of best practices in the industry concerning cleaning, inspection, maintenance, loading and unloading of, and operation of vehicles. Carriers are required to develop and implement written procedures subject to recordkeeping that specify its practices for cleaning, sanitizing, and inspecting vehicles and transportation equipment.  Although we already strive to adhere to such best practices, the impact of the final rule is uncertain and compliance may cause us to incur additional expenses and affect our operations.

Historically, the EPA has issued regulations that require progressive reductions in exhaust emissions from diesel engines. These regulations increased the cost of replacing and maintaining trucks and increased fuel costs by reducing miles per gallon. These regulations have the potential to reduce availability of fuel and reduce productivity which could have a material adverse effect on our financial condition, results of operations, liquidity and cash flows.

In 2015, the FMCSA issued a final rule related to mandatory use of Electronic Log Devices (ELD). The rule requires many in-state-only drivers and most interstate commercial motor vehicle drivers to be compliant by no later than December 18, 2017. Drivers who voluntarily used a compliant automatic on-board recording device by the December 18, 2017, deadline were “grandfathered” for two years to give providers time to update their systems to be compliant with the ELD standards. While such regulations could increase the cost of technology, capital equipment and maintenance expenses across our industry, we implemented ELDs company-wide in 2014 prior to the effective date of the ELD standard. Despite our current company-wide use of ELDs, there can be no guarantee that our understanding of the new regulations will be the same as that of the government in all aspects.

In 2016, the NHTSA and FMSCA proposed regulations that would require vehicles of a certain size to be equipped with a speed limiting device set to a specified speed. There can be no guarantee as to whether a final rule requiring speed limiting devices will be implemented, and if so the nature of any such rule and its impact on our fleet and operations.

Changes in the North American Free Trade Agreement could adversely affect our financial performance.

The United States, Mexico and Canada are currently re-negotiating the North American Free Trade Agreement (NAFTA), from which the U.S. government has advised it will withdraw if an agreement on revised terms is not reached. The three countries are continuing discussions to achieve revised rules. We partner with carriers in Canada and Mexico to arrange for the movement of freight into and out of those jurisdictions. If the current U.S. administration takes action to withdraw from or materially modify NAFTA, we may experience a significant decline in the demand for our services. It is unknown at this time whether and to what extent new legislation will be passed into law, international trade agreements will be negotiated, or the effect that any such action would have, either positively or negatively, on our industry, or on us. Any such regulatory changes affecting international trade may require us to adapt or modify our business operations, which may be time-consuming and expensive for us. Action by the U.S. government may result in retaliatory actions by the governments of Mexico and Canada. Any change to international rules governing the passage of freight between Canada, the U.S. and Mexico could have a material adverse effect on our financial condition, results of operations, liquidity and cash flows.

 

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We are subject to various environmental laws and regulations. Costs of compliance with or liabilities for violations of existing or future regulations could have a material adverse effect on our business. We are also subject to increasing customer sensitivity to sustainability issues.

Our operations are subject to environmental laws and regulations dealing with the handling of hazardous materials, underground fuel storage tanks and discharge and retention of storm water. We operate in industrial areas where truck terminals and other industrial activities are located and where groundwater or other forms of environmental contamination may have occurred. Our operations involve the risks of fuel spillage or seepage, environmental damage and hazardous waste disposal, among others. Although we have programs in place designed to monitor and control environmental risks and to promote compliance with applicable environmental laws and regulations, violations of applicable environmental laws or regulations or spills or other accidents involving hazardous substances can still occur and may subject us to cleanup costs, liabilities not covered by insurance, substantial fines or penalties and to civil and criminal liability, any of which could adversely affect our financial condition, results of operations, liquidity and cash flows.

In addition, as climate change concerns become more prevalent, federal, state and local governments and our customers are increasingly sensitive to these issues. This increased focus on sustainability may result in new regulations and customer requirements that could negatively affect us. This could cause us to incur additional direct costs or to make changes to our operations in order to comply with any new regulations and customer requirements. We could also lose revenue if our customers divert business from us because we have not complied with their sustainability requirements. These costs, changes and loss of revenue could have a material adverse effect on our financial condition, results of operations, liquidity and cash flows.

CSA could adversely affect our results of operations and ability to maintain or grow our business.

CSA is an enforcement and compliance model required by the FMCSA that involves assessments of a motor carrier’s on-road performance and investigation results for a 24-month period using roadside stops and inspections, resulting in safety and performance ratings in the following categories: unsafe driving; hours-of-service compliance; driver fitness; controlled substances/alcohol; vehicle maintenance; hazardous material compliance; and crash indicators.

In addition, the safety standards prescribed in CSA could change and our ability to maintain an acceptable score could be adversely impacted.

The CSA evaluations are used to rank carriers and individual drivers and to select carriers for audit and other interventions. Public disclosure of certain CSA scores was restricted through the enactment of the Fixing America’s Surface Transportation Act of 2015 (the FAST Act) in 2015; however, the FAST Act does not restrict public disclosure of all data collected by the FMSCA. If we receive unacceptable CSA scores, and this data is made available to the public, our relationships with our customers could be damaged, which could result in decreased demand for our services. The requirements of CSA could also shrink the industry’s pool of drivers as those with unfavorable scores could leave the industry. While the ultimate impact of CSA is not fully known, it is possible that future CSA rulemaking could adversely impact our ability to attract and retain drivers which would adversely affect our financial condition, results of operations, liquidity and cash flows.

We may face risks related to the geographic concentration of our customers.

We have operations throughout the South, Southwest, Midwest, Pacific Northwest, West and portions of the Northeast, in which we plan to further expand our footprint into 2019. As a result, changes in the economic climate, consumer trends, market fluctuations or supply shortages in these regions could decrease demand for our services in these regions and may adversely affect our financial condition, results of operations, liquidity and cash flows. For example, the energy sector is important to local economies in several of these regions. If oil and gas market conditions change materially, the demand for our services in these regions could be impacted significantly, which could also adversely affect our financial condition, results of operations, liquidity and cash flows.

 

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Anti-terrorism measures and terrorist events may disrupt our business.

Federal, state and municipal authorities have implemented and are continuing to implement various anti-terrorism measures, including checkpoints and travel restrictions on large trucks. If additional security measures disrupt or impede the timing of our deliveries, we may fail to meet requirements of our customers or incur increased expenses to do so. There can be no assurance that new anti-terrorism measures will not be implemented and that such measures will not have a material adverse effect on our financial condition, results of operations, liquidity and cash flows. Terrorism events that disrupt our operations or the operations of our customers could also materially impact our financial condition, results of operations, liquidity and cash flows.

Our logistics and non-asset truckload business faces risk from customer concentration and the loss of certain primary customers may have a material adverse effect on those operations.

Our non-asset operations are subject to the risk of customer concentration because of the relative importance of their largest customers and the ability of those customers to negotiate aggressive pricing and other customer-favorable terms, including termination for convenience. Although we aim to broaden and diversify the customer base of our logistics and non-asset truckload business, a significant portion of our revenue from these subsidiaries is derived from a small number of large and sophisticated customers and a loss of business from, the bankruptcy or insolvency of, or adverse performance by, these major customers may have a material adverse effect on our financial condition, results of operations, liquidity and cash flows. Similarly, the renegotiation of these customer contracts may also have an adverse effect on us.

We have significant ongoing cash requirements that could limit our growth and affect profitability if we are unable to generate sufficient cash from operations or obtain sufficient financing on favorable terms.

Our business is highly capital intensive. Our net capital expenditures for 2017 were approximately $217 million inclusive of equipment acquired with capital leases. Additionally, we anticipate net capital expenditures in 2018 of approximately $265 million. We depend on cash flows from operations, borrowings under our credit facilities and operating and capital leases. If we are unable to generate sufficient cash from operations and obtain sufficient financing on favorable terms in the future, we may have to limit our growth, enter into less favorable financing arrangements or operate our trucks and trailers for longer periods. The amount and timing of capital investments depend on various factors, including anticipated volume levels and the price and availability of appropriate-use property for service facilities and newly manufactured tractors. If anticipated service facilities and/or fleet requirements differ materially from actual usage, we may have too much or too little capacity. Any of these could have a material adverse effect on our financial condition, results of operations, liquidity and cash flows.

Under our current credit facilities, we are subject to certain debt covenants, which prohibit the payment of dividends, provide limits on our ability to repurchase our capital stock, and require maintenance of certain maximum leverage and minimum fixed charge coverage ratios, among other restrictions, that could limit availability of capital to meet our future growth.

Our ability to repay or refinance our indebtedness will depend upon our future operating performance which will be affected by general economic, financial, competitive, legislative, regulatory and other factors beyond our control.

Our credit and debt agreements contain financial and other restrictive covenants and we may be unable to comply with these covenants. A default could cause a material adverse effect on our business.

We must maintain certain financial and other restrictive covenants under our credit agreement, including among others, covenants requiring maintenance of minimum fixed charge coverage and maximum leverage ratios. If we fail to comply with any of the covenants under our credit agreement, we will be in default under the agreement which could cause cross-defaults under other financial arrangements. In the event of any such default, if we fail to obtain replacement financing, amendments to or waivers under the financing arrangement, our financing sources could cease making further advances, cease issuing letters of credit required under our insurance programs or declare our debt to be immediately due and payable. If acceleration occurs, we may have difficulty in borrowing sufficient additional funds to refinance the accelerated debt or obtain required letters of credit, or we may have to

 

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issue securities which would dilute stock ownership. Even if new financing is made available to us, it may not be available on acceptable terms. A default under our credit agreement could cause a material adverse effect on our financial condition, results of operations, liquidity and cash flows.

If we are unable to retain our key employees, our business could be adversely impacted.

We depend on the efforts and abilities of our senior management. The future success of our business will continue to depend in part on our ability to retain our current management team and to attract and retain qualified personnel in the future. Competition for senior management is intense, and, with the exception of Mr. O’Dell, members of our senior management do not have employment agreements. Certain members of senior management are subject to non-compete and non-solicitation agreements; however, there is no assurance that such agreements will be enforced as written or that they will be effective to prevent members of senior management from working for a competitor or soliciting our customers. The loss of the services of any of our senior management could have a material adverse effect on our financial condition, results of operations, liquidity and cash flows. Inadequate succession planning or the unexpected departure of a member of senior management would require our remaining executive officers to divert immediate and substantial attention to fulfilling the duties of the departing executive and to seeking a replacement. The inability to adequately fill vacancies in our senior management positions on a timely basis could negatively affect our ability to implement our business strategy and thus impact our results of operations.

Changes to our compensation and benefits could adversely affect our ability to attract and retain employees.

The compensation we offer our employees is subject to market conditions that may require increases in employee compensation, which becomes more likely as economic conditions improve. If we are unable to attract and retain a sufficient number of employees, we could be required to increase our compensation packages, or reduce our operations and face difficulty meeting customer demands, any of which could adversely affect our financial condition, results of operations, liquidity and cash flows.

An increase in the cost of healthcare benefits administration could have a negative impact on our business.

We maintain and sponsor health insurance for our employees and their dependents and offer a competitive healthcare program to attract and retain our employees. It is possible that healthcare benefits and administration costs could become increasingly cost prohibitive, either forcing us to reduce our benefits program (making it more difficult to retain qualified employees) or require us to pay the higher costs.  Either outcome could negatively impact our financial condition, results of operations, liquidity and cash flows.

The legislation on healthcare and related regulations could affect the healthcare benefits required to be provided by the Company and cause our compensation costs to increase.

Under the comprehensive U.S. healthcare reform law enacted in 2010, the Affordable Care Act (ACA), and changes that became effective in 2014, and especially the employer mandate and employer penalties that became effective in 2015, our labor costs could significantly increase in future years. In any event, implementing the requirements of the ACA has imposed additional administrative costs on us, and those costs may increase over time. The costs and other effects of these new healthcare requirements cannot be determined with certainty, particularly in light of the potential amendment or repeal of all or parts of the ACA, but they may have a material adverse effect on our financial condition, results of operations, liquidity and cash flows.

Our business may adversely be impacted by potential future changes in accounting practices.

Future changes in accounting standards or practices, and related legal and regulatory interpretations of those changes, may adversely impact public companies in general, the transportation industry or our operations specifically. New accounting standards or requirements, such as a conversion from U.S. generally accepted accounting principles to International Financial Reporting Standards, could change the way we record revenues, expenses, assets and/or liabilities or could be costly to implement. These types of regulations could have a negative impact on our financial position, results of operations, liquidity and cash flows.

 

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Weakness or a loss of confidence in financial markets could adversely impact demand for our services.

Weakness or a loss of confidence in the financial markets could cause broader economic downturns and impact the ability of our customers to access the capital or credit markets which may lead to lower demand for our services, increased incidence of customers’ inability to pay their accounts, or insolvency of our customers, any of which could adversely affect our financial condition, results of operations, liquidity and cash flows.

Disruptions in the credit markets, including in the availability and cost of short-term funds for liquidity and letter of credit requirements may adversely affect our business and our ability to meet long-term commitments.

If internal funds are not available from our operations, we may be required to rely on the capital and credit markets to meet our financial commitments and short-term liquidity needs. Disruptions in the capital and credit markets could adversely affect our ability to draw on our bank revolving credit facility and obtain letters of credit required for our insurance programs. Our access to funds and letters of credit under that credit facility is dependent on the ability of the banks that are parties to the facility to meet their funding commitments. Those banks may not be able to meet their funding commitments to us if they experience shortages of capital and liquidity or if they experience excessive volumes of borrowing requests from other borrowers within a short period of time.

Longer term disruptions in the capital and credit markets as a result of uncertainty, changing or increased regulation, reduced alternatives or failures of significant financial institutions could adversely affect our access to liquidity needed for our business. Any disruption could require us to take measures to conserve cash until the markets stabilize or until alternative credit arrangements or other funding for our business needs can be arranged.

We rely heavily on technology to operate our business and cyber-security threats or other disruptions to our technology infrastructure could harm our business.

Our ability to attract and retain customers and compete effectively depends in part upon reliability of our technology network including our ability to provide services that are important to our customers. Any disruption to our technology infrastructure (including services provided to us for use in our business by outside providers), including those impacting our computer systems and website, could adversely impact our customer service and revenues and result in increased risk of litigation or costs. While we have invested and continue to invest in technology security initiatives and disaster recovery plans, these measures cannot fully protect us from technology disruptions that could have a material adverse effect on our financial condition, results of operations, liquidity and cash flows.

Our dependence on electronic data storage, automated systems and technology gives rise to cyber-security risks. Although we and our third-party providers have preventive systems and processes in place designed to protect against the risk of system failure and cyber-attacks, a security breach of our systems or those of our third-party providers may cause a disruption of our business or expose us to a loss of information or litigation and could have a material adverse effect on our financial condition, reputation and results of operations.

Our business depends in part on our strong reputation.

We believe that Saia’s corporate reputation is a valuable asset. As use of social media becomes more prevalent, our susceptibility to risks related to adverse publicity, whether or not justified, increases. While we have implemented a social media policy to provide our employees with guidance for sharing information in a way that is beneficial to us, the immediacy of certain social media outlets precludes us from having real-time control over postings related to Saia, whether matters of fact or opinion. Information distributed via social media could result in immediate unfavorable publicity for which we, like our competitors, do not have the ability to reverse. This unfavorable publicity could result in damage to our reputation and therefore negatively impact our operations and profitability.

Certain provisions of our governing documents and Delaware law could have anti-takeover effects.

As a Delaware corporation, we are subject to certain Delaware anti-takeover provisions. Under Delaware law, a corporation may not engage in a business combination with any holder of 15% or more of its capital stock

 

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unless the holder has held the stock for three years or, among other things, the Board of Directors has approved the transaction. Our Board of Directors could rely on Delaware law to prevent or delay an acquisition of us.

Our Restated Certificate of Incorporation and By-laws contain certain provisions which may have the effect of delaying, deferring or preventing a change of control of the Company. Such provisions include, for example, provisions classifying our Board of Directors, a prohibition on stockholder action by written consent, authorization of the Board of Directors to issue preferred stock in series with the terms of each series to be fixed by the Board of Directors and an advance notice procedure for stockholder proposals and nominations to the Board of Directors. These provisions may inhibit fluctuations in the market price of our common stock that could result from takeover attempts.

We may not make future acquisitions or, if we do, we may not realize the anticipated benefits of future acquisitions and integration of these acquisitions may disrupt our business and management.

We may acquire additional businesses and operations in the future. However, there is no assurance that we will be successful in identifying, negotiating, consummating or integrating any future acquisitions. Additionally, we may not realize the anticipated benefits of any future acquisitions. Each acquisition has numerous risks including:

 

difficulty in integrating the operations and personnel of the acquired company or unanticipated costs to support new business lines or separate legal entities;

 

disruption of our ongoing business, distraction of our management and employees from other opportunities and challenges due to integration issues;

 

additional indebtedness or the issuance of additional equity to finance future acquisitions, which could be dilutive to our stockholders;

 

potential loss of key customers or employees of acquired companies along with the risk of unionization of employees;

 

temporary depression in prices we charge certain customers in order to match existing customer pricing in the acquired company’s markets;

 

inability to achieve the financial and strategic goals for the acquired and combined businesses;

 

potential impairment of tangible and intangible assets and goodwill acquired as a result of acquisitions; and

 

potential failure of the due diligence processes to identify significant issues with legal and financial contingencies, among other things.

In the event that we do not realize the anticipated benefits of an acquisition or if the acquired business is not successfully integrated, there could be a material adverse effect on our financial condition, results of operations, liquidity and cash flows.

If we raise additional capital in the future, stockholders’ ownership in us could be diluted.

Any issuance of equity we may undertake in the future to raise additional capital could cause the price of our common stock to decline, or require us to issue shares at a price that is lower than that paid by holders of our common stock in the past, which would result in those newly issued shares being dilutive. If we obtain funds through a credit facility or through the issuance of debt or preferred securities, these obligations and securities would likely have rights senior to those of common stockholders, which could impair the value of our common stock.

We face risks related to the creditworthiness of our customers or other business partners and their ability to pay for services.

If one or more of our customers experiences financial difficulties, including filing for bankruptcy, it may negatively affect our business due to the decreased demand for our services from these customers, or the potential inability of these companies to make full payment on amounts owed to us. Customer bankruptcies also

 

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entail the risk of potential recovery by the bankruptcy estate of amounts previously paid to us that are deemed a preference under bankruptcy laws. We do not carry insurance against the risk of customer default on their payment obligations to us or against bankruptcy preference claims. The risks associated with these matters will likely increase in the event of an economic downturn. The loss of revenue from these customers or payment of preference claims could have a material adverse effect on our financial condition, results of operations, liquidity and cash flows.

The Tax Cuts and Jobs Act could affect our results.

The Tax Cuts and Jobs Act was enacted on December 22, 2017. At December 31, 2017, we have not completed our accounting for the tax effects of enactment of the Act; however, in certain cases, as described below, reasonable estimates have been made of the effects on existing deferred tax balances. In other cases, we have not been able to make a reasonable estimate and continue to account for those items based on the existing accounting under ASC 740, Income Taxes, and the provisions of the tax laws that were in effect immediately prior to enactment. For the items for which we were able to make a reasonable estimate, we recognized a provisional tax benefit amount of $34 million, which is included as a component of income tax expense from continuing operations. In all cases, we will continue to make and refine our calculations as additional analysis is completed. In addition, the estimates made may also be affected as we gain a more thorough understanding of the tax law. As a consequence, it is possible that the estimate included within our 2017 fiscal results is revised in a manner that negatively effects future earnings.

The market value of our common stock may fluctuate and could be substantially affected by various factors.

The price of our common stock on the NASDAQ Global Select Market constantly changes. We expect that the market price of our common stock will continue to fluctuate and the fluctuations may be unrelated to our financial performance. Our share price may fluctuate as a result of a variety of factors, many of which are beyond our control. Factors that could cause fluctuation of our stock price include, but are not limited to, the following:

 

Actual or anticipated variations in our earnings, financial or operating performance or liquidity, or those of other companies in our industry;

 

Changes in recommendations or projections of research analysts who follow our stock or the stock of other companies in our industry;

 

Failure to meet the earnings projections of research analysts who follow our stock;

 

Changes in general economic and capital market conditions, including general market price declines or market volatility;

 

Reactions to our regulatory filings and announcements related to our business;

 

Operating and stock performance of other companies in our industry;

 

Actions by government regulators;

 

Litigation involving our company, our general industry or both;

 

News reports or trends, concerns and other issues related to us or our industry, including changes in regulations; and

 

Other factors described in this “Risk Factors” section.

Our financial condition, results of operations, liquidity and cash flows could be adversely affected by an unfavorable outcome resulting from these risks and uncertainties.

Item 1B.

Unresolved Staff Comments

None.

 

20


 

Item 2.

Properties

Saia is headquartered in Johns Creek, Georgia and has general offices in Houma, Louisiana, Boise, Idaho and Dallas, Texas. At December 31, 2017, Saia owned 66 service facilities, including the Houma, Louisiana general office and leased 95 service facilities, including the Johns Creek, Georgia corporate office and the Boise, Idaho general office. Although Saia owns only 41 percent of its service facility locations, these locations account for 59 percent of its door capacity. This follows Saia’s strategy of seeking to own strategically-located facilities that are integral to its operations and leasing service facilities in smaller markets to allow for more flexibility. As of December 31, 2017, Saia owned approximately 4,259 tractors and 13,901 trailers, inclusive of equipment acquired with capital leases.

The Company has pledged certain land and structures, tractors and trailers, accounts receivable and other assets to secure the Company’s obligations under its revolving credit agreement. All service facilities listed in the table below denoted as owned by the Company are subject to liens pursuant to the revolving credit agreement. See “Financial Condition” under Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations for more information about the revolving credit agreement.

Top 20 Saia Service Facilities by Number of Doors at December 31, 2017

 

Location

 

Own/Lease

 

Doors

Houston, TX

 

Own

 

234

Atlanta, GA

 

Own

 

224

Dallas, TX

 

Own

 

174

Fontana, CA

 

Own

 

163

Chicago, IL

 

Lease

 

154

Garland, TX

 

Own

 

145

Memphis, TN

 

Own

 

124

Nashville, TN

 

Own

 

116

Cleveland, OH

 

Lease

 

113

Charlotte, NC

 

Own

 

107

Kansas City, MO

 

Own

 

102

Grayslake, IL

 

Own

 

100

St. Louis, MO

 

Own

 

100

Toledo, OH

 

Own

 

90

New Orleans, LA

 

Own

 

86

Denver, CO

 

Own

 

81

Sacramento, CA

 

Lease

 

81

Baltimore, MD

 

Own

 

80

Jacksonville, FL

 

Own

 

80

Los Angeles, CA

 

Lease

 

80

 

Item 3.

Legal Proceedings

The Company is subject to legal proceedings that arise in the ordinary course of its business. The Company believes that adequate provisions for resolution of all contingencies, claims and pending litigation have been made for probable and estimable losses and that the ultimate outcome of these actions will not have a material adverse effect on its financial condition but could have a material adverse effect on its results of operations in a given quarter or annual period.

Item 4.

Mine Safety Disclosures

Not applicable.

 

 

 

21


 

PART II.

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Stock Price Information

Saia’s common stock is listed under the symbol “SAIA” on the NASDAQ Global Select Market (NASDAQ). The following table sets forth, for the periods indicated, the high and low sale prices per share for the common stock as reported on NASDAQ.

 

 

 

Low

 

 

High

 

Year Ended December 31, 2017

 

 

 

 

 

 

 

 

First Quarter

 

$

42.70

 

 

$

50.30

 

Second Quarter

 

$

41.60

 

 

$

52.10

 

Third Quarter

 

$

51.35

 

 

$

62.65

 

Fourth Quarter

 

$

56.65

 

 

$

71.50

 

Year Ended December 31, 2016

 

 

 

 

 

 

 

 

First Quarter

 

$

18.28

 

 

$

29.92

 

Second Quarter

 

$

23.27

 

 

$

32.65

 

Third Quarter

 

$

24.06

 

 

$

32.25

 

Fourth Quarter

 

$

27.96

 

 

$

48.85

 

 

Stockholders

As of January 31, 2018, there were 1,146 holders of record of our common stock.

Dividends

We have not paid a cash dividend on our common stock. Any payment of dividends in the future is dependent upon our financial condition, capital requirements, earnings, cash flow and other factors.

The payment of dividends is prohibited under our current credit agreement. However, there are no material restrictions on the ability of our subsidiaries to transfer funds to Saia, Inc. in the form of cash dividends, loans or advances. See Note 2 of the accompanying audited consolidated financial statements for more information on the credit agreement.

Equity Compensation Plan Information as of December 31, 2017

 

 

 

 

 

Number of securities to be issued upon exercise of outstanding options, warrants and rights

 

 

Weighted-average exercise price of outstanding options, warrants and rights

 

 

Number of securities remaining available for future issuances under equity compensation plans (excluding securities reflected in column (a))

 

 

 

 

 

 

(a)

 

 

(b)

 

 

(c)

 

 

Equity compensation plans

     approved by security holders

 

 

 

 

335,000

 

 

$

34.75

 

 

 

756,218

 

(1)

Equity compensation plans not

     approved by security holders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

335,000

 

 

$

34.75

 

 

 

756,218

 

 

 

(1)

See Note 7 to the audited consolidated financial statements for a description of the equity compensation plans for securities remaining available for future issuance.

 

22


 

Issuer Purchases of Equity Securities

 

Issuer Purchases of Equity Securities

 

Period

 

(a) Total Number of Shares (or Units) Purchased (1)

 

 

(b) Average Price Paid per Share (or Unit)

 

 

(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs

 

 

(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that may Yet be Purchased under the Plans or Programs

 

October 1, 2017 through

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

October 31, 2017

 

 

 

(2)

$

 

(2)

 

 

 

$

 

November 1, 2017 through

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

November 30, 2017

 

 

1,200

 

(3)

$

61.72

 

(3)

 

 

 

 

 

December 1, 2017 through

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

(4)

$

 

(4)

 

 

 

 

 

Total

 

 

1,200

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Shares purchased by the Saia, Inc. Executive Capital Accumulation Plan were open market purchases.  For more information on the Saia Executive Capital Accumulation Plan, see the Registration Statement on Form S-8 (No. 333-155805) filed on December 1, 2008.

(2)

The Saia, Inc. Executive Capital Accumulation Plan sold 900 shares of Saia stock at an average price of $64.57 per share on the open market during the period of October 1, 2017 through October 31, 2017.

(3)

The Saia, Inc. Executive Capital Accumulation Plan had no sales of Saia stock during the period of November 1, 2017 through November 30, 2017.

(4)

The Saia, Inc. Executive Capital Accumulation Plan sold 890 shares of Saia stock at an average price of $70.26 per share on the open market during the period of December 1, 2017 through December 31, 2017.

 

 


 

23


 

Item 6.

Selected Financial Data

The following table shows summary consolidated historical financial data of Saia and its operating subsidiaries and has been derived from, and should be read together with, the consolidated financial statements and accompanying notes and in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. The summary financial information may not be indicative of the future performance of Saia.

 

 

 

Years ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

 

 

(in thousands, except per share data and percentages)

 

Statement of operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenue

 

$

1,378,510

 

 

$

1,218,481

 

 

$

1,221,311

 

 

$

1,272,321

 

 

$

1,139,094

 

Operating income

 

 

94,737

 

 

 

79,136

 

 

 

89,975

 

 

 

85,693

 

 

 

74,418

 

Net income

 

 

91,156

 

 

 

48,024

 

 

 

55,016

 

 

 

51,991

 

 

 

43,627

 

Diluted earnings per share

 

 

3.49

 

 

 

1.87

 

 

 

2.16

 

 

 

2.04

 

 

 

1.73

 

Other financial data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities(1)

 

 

157,846

 

 

 

146,426

 

 

 

145,833

 

 

 

103,837

 

 

 

102,474

 

Net cash used in investing activities(2)

 

 

(181,524

)

 

 

(117,683

)

 

 

(107,919

)

 

 

(94,845

)

 

 

(122,020

)

Depreciation and amortization

 

 

87,102

 

 

 

76,240

 

 

 

65,020

 

 

 

59,022

 

 

 

51,564

 

Balance sheet data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

4,720

 

 

 

1,539

 

 

 

124

 

 

 

4,367

 

 

 

159

 

Net property and equipment

 

 

735,780

 

 

 

604,119

 

 

 

539,179

 

 

 

483,640

 

 

 

432,226

 

Total assets(3)

 

 

967,647

 

 

 

800,370

 

 

 

729,193

 

 

 

666,985

 

 

 

596,380

 

Total debt

 

 

132,916

 

 

 

73,804

 

 

 

68,972

 

 

 

83,035

 

 

 

76,883

 

Total stockholders’ equity

 

 

582,547

 

 

 

483,078

 

 

 

427,889

 

 

 

366,906

 

 

 

304,792

 

Measurements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating ratio(4)

 

 

93.1

%

 

 

93.5

%

 

 

92.6

%

 

 

93.3

%

 

 

93.5

%

Non-GAAP Diluted Earnings Per Share and Reconciliation to GAAP (5):

 

Diluted earnings per share

 

$

3.49

 

 

$

1.87

 

 

$

2.16

 

 

$

2.04

 

 

$

1.73

 

Less: Diluted earnings per share impact of Tax Cuts and Jobs Act

 

 

(1.30

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Adjusted diluted earnings per share

 

$

2.19

 

 

$

1.87

 

 

$

2.16

 

 

$

2.04

 

 

$

1.73

 

 

(1)

Net cash provided by operating activities for 2013-2016 have been adjusted to reflect the adoption of the Financial Accounting Standards Board (“FASB”) Accounting Standard Update (“ASU”) 2016-09. See Accounting Pronouncements Adopted in 2017 below.

(2)

Net cash used in 2015 includes $22.2 million for the acquisition of LinkEx.

(3)

Total asset balances for 2013-2014 have been adjusted for the reclassification of current deferred tax assets or liabilities to long-term as a result of the adoption of the FASB ASU 2015-17.

(4)

The operating ratio is the calculation of operating expenses divided by operating revenue.

(5)

The Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017 and lowers U.S. corporate income tax rates as of January 1, 2018, among other changes.  The estimated impact of the Tax Act was a reduction of deferred income tax liability due to the effects of the remeasurement of deferred tax assets at lower enacted corporate tax rates.  Management believes that presenting the Company’s results excluding the Tax Act is meaningful as excluding this item increases the comparability of period-to-period results.  Diluted earnings per common share excluding the impact of the Tax Act is a non-GAAP financial measure.  Non-GAAP financial measures do not have definitions under GAAP and may be defined differently by and not be comparable to similar non-GAAP measures used by other companies.

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

 

24


 

decisions. This Annual Report on Form 10-K, 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 Annual Report on Form 10-K 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, uncertainties and assumptions include, but are not limited to, the following:

 

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;

 

economic declines in the geographic regions or industries in which our customers operate;

 

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, tax law changes, potential changes to NAFTA and the 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;

 

cost and availability of insurance coverage;

 

increased costs of healthcare and prescription drugs, including as a result of healthcare legislation;

 

social media risks;

 

25


 

 

cyber security risk;

 

failure to successfully execute the strategy to expand the Company’s service geography into the Northeastern United States; 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 more completely described in Part I, Item 1A. “Risk Factors” of this Annual Report on Form 10-K.

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-K. 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 and to expand our service geography into the Northeastern United States. The Company’s business is labor intensive, capital intensive and service sensitive. The Company looks for opportunities to improve safety, cost effectiveness and asset utilization (primarily tractors and trailers). 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 increased by 13.1 percent in 2017 compared to 2016. The increase resulted primarily from increased shipments, tonnage, fuel surcharges and pricing actions, including a 4.9 percent general rate increase taken July 17, 2017, partially offset by the impacts of named hurricanes Harvey and Irma and one less workday in 2017.  Expansion into the Northeastern United States starting in 2017 and the new Canadian marketing arrangement entered into during the second quarter of 2017 were contributing factors in the increased shipments and tonnage in 2017.

Consolidated operating income was $94.7 million for 2017 compared to $79.1 million in 2016. The increase in 2017 operating income resulted primarily from shipment, tonnage, fuel surcharges and pricing action increases and a decrease in accident claims expense, partially offset by salary and wage increases, higher fuel and purchase transportation costs, increased depreciation expense and costs associated with expansion into the Northeastern United States.

The Company generated $157.8 million in net cash provided by operating activities in 2017 versus $146.4 million in 2016. The Company used $181.5 million of net cash in investing activities during 2017 compared to $117.7 million during 2016.

The Company’s Fifth Amended and Restated Credit Agreement provides a $250 million revolving credit facility and expires in March 2020. The facility also has an accordion feature that allows for an additional $75 million in availability, subject to lender approval. The facility 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.

The Company had $26.9 million of net cash provided by financing activities during 2017 compared to $27.3 million of net cash used in financing activities during 2016. The Company had a $57.5 million increase in net borrowings (net of repayments) under its revolving credit facility during 2017, fully paid off the remaining $7.1

 

26


 

million of Senior Notes and made scheduled principal payments for capital lease obligations of $12.2 million during 2017. Outstanding letters of credit were $35.7 million and the cash and cash equivalents balance was $4.7 million as of December 31, 2017. The Company had $173.1 million in remaining availability under its revolving credit facility and $89.9 million in obligations under capital leases at December 31, 2017. The Company was in compliance with the debt covenants under its debt agreements at December 31, 2017. See “Financial Condition” for a more complete discussion of these agreements.

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 its wholly-owned subsidiaries (together, the Company or Saia). This discussion should be read in conjunction with the accompanying audited consolidated financial statements which include additional information about our significant accounting policies, practices and the transactions that underlie our financial results.

Saia is a transportation company headquartered in Johns Creek, Georgia that provides regional and interregional less-than-truckload (LTL) services through a single integrated organization. While more than 99% of its revenue historically has been derived from transporting LTL shipments across 39 states, the Company also offers customers a wide range of other value-added services, including non-asset truckload, expedited and logistics services across the United States.  The Chief Operating Decision Maker is the Chief Executive Officer who manages the business, regularly reviews financial information and allocates resources. The Company has one operating segment.

Our business is highly correlated to non-service sectors of the general economy. Our business also is impacted by a number of other factors as discussed under “Forward Looking Statements” and Part I, 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.

 

 

 

27


 

Results of Operations

Saia, Inc. and Subsidiaries

Selected Results of Continuing Operations and Operating Statistics

For the years ended December 31, 2017, 2016 and 2015

(in thousands, except ratios and revenue per hundredweight)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variance

 

 

 

 

2017

 

 

2016

 

 

2015

 

 

'17 v. '16

 

 

'16 v. '15

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Revenue

 

$

1,378,510

 

 

$

1,218,481

 

 

$

1,221,311

 

 

 

13.1

 

%

 

(0.2

)

%

Operating Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries, wages and employees’ benefits

 

 

766,790

 

 

 

696,046

 

 

 

670,173

 

 

 

10.2

 

 

 

3.9

 

 

Purchased transportation

 

 

81,482

 

 

 

56,329

 

 

 

70,611

 

 

 

44.7

 

 

 

(20.2

)

 

Depreciation and amortization

 

 

87,102

 

 

 

76,240

 

 

 

65,020

 

 

 

14.2

 

 

 

17.3

 

 

Fuel and other operating expenses

 

 

348,399

 

 

 

310,730

 

 

 

325,532

 

 

 

12.1

 

 

 

(4.5

)

 

Operating Income

 

 

94,737

 

 

 

79,136

 

 

 

89,975

 

 

 

19.7

 

 

 

(12.0

)

 

Operating Ratio

 

 

93.1

%

 

 

93.5

%

 

 

92.6

%

 

 

(0.4

)

 

 

0.9

 

 

Nonoperating Expense

 

 

4,959

 

 

 

4,217

 

 

 

4,012

 

 

 

17.6

 

 

 

5.1

 

 

Working Capital (as of December 31, 2017, 2016 and 2015)

 

 

36,376

 

 

 

21,535

 

 

 

17,609

 

 

 

68.9

 

 

 

22.3

 

 

Net Acquisitions of Property and Equipment

 

 

181,524

 

 

 

117,683

 

 

 

85,681

 

 

 

54.2

 

 

 

37.4

 

 

Saia Motor Freight Operating Statistics:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LTL Tonnage

 

 

3,711

 

 

 

3,541

 

 

 

3,628

 

 

 

4.8

 

 

 

(2.4

)

 

Total Tonnage

 

 

4,485

 

 

 

4,246

 

 

 

4,369

 

 

 

5.6

 

 

 

(2.8

)

 

LTL Shipments

 

 

6,666

 

 

 

6,335

 

 

 

6,381

 

 

 

5.2

 

 

 

(0.7

)

 

Total Shipments

 

 

6,775

 

 

 

6,435

 

 

 

6,487

 

 

 

5.3

 

 

 

(0.8

)

 

LTL Revenue per hundredweight

 

$

17.20

 

 

$

15.93

 

 

$

15.44

 

 

 

8.0

 

 

 

3.2

 

 

Total Revenue per hundredweight

 

$

15.24

 

 

$

14.21

 

 

$

13.82

 

 

 

7.2

 

 

 

2.9

 

 

 

 

Continuing Operations

Year ended December 31, 2017 as compared to year ended December 31, 2016

Revenue and volume

Consolidated revenue increased 13.1 percent to $1.38 billion as a result of increased shipments, tonnage,  fuel surcharges and pricing actions, including a 4.9 percent general rate increase taken July 17, 2017, partially offset by the impacts of named hurricanes Harvey and Irma and one less workday in 2017.  Expansion into the Northeastern United States and the new Canadian marketing arrangement entered into during the second quarter of 2017 were contributing factors in the increased shipments and tonnage in 2017. The economic environment over the last couple of years permitted the Company to implement measured pricing actions to improve yield. Saia’s LTL revenue per hundredweight (a measure of yield) increased 8.0 percent to $17.20 per hundredweight for 2017 primarily as a result of increased rates along with increased length of haul. Saia’s LTL tonnage increased 5.2 percent per workday and LTL shipments increased 5.6 percent per workday for 2017. For 2017 and 2016, approximately 75 to 80 percent of Saia’s operating revenue was subject to specific customer price adjustment negotiations that occur throughout the year. The remaining 20 to 25 percent of operating revenue was subject to a general rate increase which is based on market conditions. For customers subject to  general rate increases, Saia implemented 4.9 percent general rate increases on October 3, 2016 and July 17, 2017. Competitive factors, customer turnover and mix changes, among other things, 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

 

28


 

for changes in the price of fuel. The Company’s fuel surcharge is generally 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 are an integral part of customer contract negotiations but represent only one portion of overall customer price negotiations as customers may negotiate increases in base rates instead of increases in fuel surcharges or vice versa. Fuel surcharge revenue increased to 11.5 percent of operating revenue for the year ended December 31, 2017 compared to 9.7 percent for the year ended December 31, 2016 primarily as a result of increases in the cost of fuel.

Operating expenses and margin

Consolidated operating income was $94.7 million in 2017 compared to $79.1 million in 2016. In summary, the operations were favorably impacted in 2017 by higher tonnage, shipments, fuel surcharges and yield, which were offset by salary and wage increases, higher fuel and purchase transportation costs, increased depreciation expense and costs associated with the Company’s geographic expansion. The 2017 operating ratio (operating expenses divided by operating revenue) was 93.1 percent as compared to 93.5 percent for 2016.

Salaries, wages and benefit expense increased $70.7 million in 2017 compared to 2016 largely due to higher wages associated with increased headcount in 2017, wage increases in July 2016 and 2017 and higher healthcare benefit costs. Fuel, operating expenses and supplies increased $37.7 million during 2017 compared to 2016 largely due to higher fuel costs and increased costs of other operating expenses and supplies, including increased expenses related to the geographic expansion, partially offset by improved fuel efficiency and lower maintenance costs from a newer fleet.  Claims and insurance expense in 2017 was $2.5 million lower than 2016 largely due to decreased accident severity in 2017 and decreased development on older 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. Depreciation expense increased $10.9 million in 2017 compared to 2016 primarily due to revenue equipment, real estate and technology investments in late 2016 and 2017. Purchased transportation expense increased $25.2 million in 2017 compared to 2016 primarily due to increases in purchased transportation cost per mile and utilization of purchased transportation carriers to maintain service requirements while supporting increased shipments, tonnage and length of haul throughout 2017.

Other

Substantially all non-operating expenses represent interest expense. Interest expense in 2017 was $0.7 million greater than 2016 due to increased average borrowings resulting from the $63.8 million increase in investing activities in 2017. The effective income tax rate was -1.5 percent and 35.9 percent for the years ended December 31, 2017 and 2016, respectively. The 2017 effective income tax rate included the estimated impact of the Tax Cuts and Jobs Act (the Tax Act) legislation enacted on December 22, 2017 and excess tax benefits from stock activity recognized as a result of the Company’s adoption of ASU 2016-09 effective January 1, 2017. The 2016 effective income tax rates included approximately $1.0 million in alternative fuel tax credits. See Note 9 to the Company’s audited consolidated financial statements for an analysis of the income tax provision, impacts of the Tax Act and the effective tax rate.

Working capital/capital expenditures

Working capital at December 31, 2017 was $36.4 million which increased from working capital at December 31, 2016 of $21.5 million. This increase is primarily due to an increase in accounts receivable, partially offset by increases in accounts payable and accrued wages, vacation and employees’ benefits. Cash flows from operating activities were $157.8 million for 2017 versus $146.4 million for 2016 driven by increased profitability and working capital changes. For 2017, net cash used in investing activities was $181.5 million versus $117.7 million in 2016 primarily due to higher capital expenditures for real estate, technology and revenue equipment during 2017. Net cash provided by financing activities was $26.9 million in 2017 versus $27.3 million in net cash used in financing activities for 2016 primarily driven by an increase in the net borrowings (net of repayments) of our revolving credit facility by $57.5 million from 2017 compared to 2016.

 

29


 

Year ended December 31, 2016 as compared to year ended December 31, 2015

Revenue and volume

Consolidated revenue decreased 0.2 percent to $1.22 billion as a result of decreased tonnage, shipments and fuel surcharges, partially offset by pricing actions. The economic environment permitted the Company to implement measured pricing actions to improve yield. Saia’s LTL revenue per hundredweight (a measure of yield) increased 3.2 percent to $15.93 per hundredweight for 2016 primarily as a result of increased rates. Saia’s LTL tonnage decreased 2.4 percent to 3.5 million tons and LTL shipments decreased 0.7 percent to 6.3 million shipments. For 2015 and 2016, approximately 75 to 80 percent of Saia’s operating revenue was subject to specific customer price adjustment negotiations that occur throughout the year. The remaining 20 to 25 percent of operating revenue was subject to a general rate increase which is based on market conditions. For customers subject to general rate increases, Saia implemented 4.9 percent general rate increases on December 7, 2015 and October 3, 2016. Competitive factors, customer turnover and mix changes, among other things, 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 generally 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 are an integral part of customer contract negotiations, but represent only one portion of overall customer 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 January 18, 2016 to better align with its competitors. Fuel surcharge revenue decreased to 9.7percent of operating revenue for the year ended December 31, 2016 compared to 11.7 percent for the year ended December 31, 2015 primarily as a result of reductions in the cost of fuel.

Operating expenses and margin

Consolidated operating income was $79.1 million in 2016 compared to $90.0 million in 2015. In summary, the operations were unfavorably impacted in 2016 by shipment and tonnage decreases and claims, depreciation and compensation expense increases, which were partially offset by higher yield and continued cost optimization initiatives throughout our network. The 2016 operating ratio (operating expenses divided by operating revenue) was 93.5 percent as compared to 92.6 percent for 2015.

Salaries, wages and benefit expense increased $25.9 million from 2015 to 2016 largely due to higher wages associated with increased headcount in 2016 and wage increases in July 2015 and 2016, increased internal driver utilization and higher healthcare benefit costs.  Fuel, operating expenses and supplies decreased $31.0 million during 2016 compared to 2015 largely due to lower fuel costs, improved fuel efficiency, lower maintenance costs from a newer fleet and increased internal maintenance asset utilization, and reduced costs of other operating expenses and supplies.  Claims and insurance expense in 2016 was $12.8 million higher than 2015 largely due to increased accident frequency and severity in 2016, negative development of older claims and higher insurance premiums, 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. Depreciation expense increased $11.2 million in 2016 compared to 2015 primarily due to revenue equipment and technology investments in late 2015 and 2016. Purchased transportation expense decreased $14.3 million in 2016 compared to 2015 primarily due to increased utilization of internal assets, a decline in fuel costs charged by carriers and favorable carrier rates and mix of transportation modes utilized.

Other

Substantially all non-operating expenses represent interest expense. Interest expense in 2016 was $0.3 million greater than 2015 due to increased average borrowings resulting from the $9.8 million increase in investing activities in 2016. The effective income tax rate was 35.9 and 36.0 percent for the years ended December 31, 2016 and 2015, respectively. The 2016 and 2015 effective income tax rates included approximately $1.0 million in alternative fuel tax credits. See note 9 to the Company’s audited consolidated financial statements for an analysis of the income tax provision and the effective tax rate.

 

30


 

Working capital/capital expenditures

Working capital at December 31, 2016 was $21.5 million which increased from working capital at December 31, 2015 of $17.6 million. This increase is primarily due to an increase in accounts receivable and decrease in accounts payable, partially offset by a decrease in income tax receivable and increases in claims and insurance accruals and current portion of long-term debt from capital leases used to finance certain revenue equipment. Cash flows from operating activities were $146.4 million for 2016 versus $145.8 million for 2015. For 2016, net cash used in investing activities was $117.7 million versus $107.9 million in 2015 primarily due to higher capital expenditures for revenue equipment and real estate during 2016. Net cash used in financing activities was $27.3 million in 2016 versus $42.2 million for 2015 primarily driven by a decrease in the net repayment of our revolving credit facility by $15.9 million from 2016 compared to 2015.

Outlook

Our business remains highly correlated to non-service sectors of the general economy and competitive pricing pressures, as well as the success of Company-specific improvement initiatives. There remains uncertainty as to the strength of economic conditions. We are continuing initiatives to increase yield, reduce costs and improve productivity. We focus on providing top quality service and improving safety performance. Planned revenue initiatives include, but are not limited to, building density in our current geography, targeted marketing initiatives to grow revenue in more profitable segments, further expanding our service geography into the Northeastern United States, as well as pricing and yield management. On July 17, 2017, Saia implemented a 4.9 percent general rate increase for customers comprising approximately 20 to 25 percent of Saia’s operating revenue. The extent of 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 I, Item 1A., “Risk Factors.”

With the enactment of the Tax Cuts and Jobs Act on December 22, 2017, the federal corporate income tax rate was reduced from 35 percent to 21 percent effective January 1, 2018.  The Company currently expects the effective tax rate for 2018 to be in the range of 24 percent to 26 percent.  The effective tax rate may vary from quarter to quarter due to unusual or infrequently occurring discrete items, the resolution of income tax audits, changes in tax laws or the tax impact from employee share-based payments.  For further discussion of the changes in the effective tax rate, see note 9 to the audited consolidated financial statements.  

Effective July 1, 2017, the Company implemented a salary and wage increase for all of its employees. The cost of the compensation increase is expected to be approximately $16 million annually, and the Company anticipates the impact will be partially offset by productivity and efficiency gains. The Company also anticipates market competitive wage increases in 2018.

If the Company builds market share, including through its geographic expansion, it expects there to be numerous operating leverage cost benefits. Conversely, should the economy soften from present levels, the Company plans to match resources and capacity to shifting volume levels to lessen unfavorable operating leverage. 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 expansion of our service geography into the Northeastern United States and other factors discussed under “Forward-Looking Statements” and Part I, Item 1A., “Risk Factors.”

See “Forward-Looking Statements” and Part I, Item 1A., “Risk Factors,” for a more complete discussion of potential risks and uncertainties that could materially affect our future performance.

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 for the Company on January 1, 2018.  The standard permits the use of either the retrospective or cumulative effect transition method.  Under the new standard, accessorial fees, such as after-hours pickup or delivery fees, that are directly related to freight revenue will continue to be non-distinct services and, thus, be recognized in the same manner as the freight transportation services provided. The Company has

 

31


 

completed its evaluation of its revenue streams and contracts subject to the standard and will adopt the new standard retrospectively. The Company will change its presentation of its non-asset truckload business from net revenue to gross revenue.  As a result, operating revenue and purchased transportation expense will be retroactively increased by $25.8 million, $30.9 million and $30.1 million for the years ended December 31, 2017, 2016 and 2015, respectively.  Additionally, revenue related to the Company’s non-asset truckload business will be recognized on a percentage-of-completion basis as opposed to upon commencement of the services under the current policy, which will result in a $0.2 million decrease, $0.1 million increase and $0.2 million decrease in operating revenue and a $0.1 million decrease, $0.1 million increase and $0.2 million decrease in purchased transportation for the years ended December 31, 2017, 2016 and 2015, respectively.  The Company will include expanded disclosures as prescribed under ASU 2014-09 in its 2018 consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), a leasing standard for both lessees and lessors.  Under its core principle, a lessee will recognize lease assets and liabilities on the balance sheet for all arrangements with terms longer than 12 months.  Lessor accounting remains largely consistent with existing U.S. generally accepted accounting principles.  The new standard is effective for the Company on January 1, 2019.  Early adoption is permitted.  The standard requires the use of a modified retrospective transition method. The Company is evaluating the effect that ASU No. 2016-02 will have on its consolidated financial statements and related disclosures.  While the Company has adopted a timeline for implementation and has selected a system to facilitate the adoption of the new standard, the Company has not yet completed its review of existing agreements using the new definition of a lease.  Based on the Company’s current analysis, it believes the most significant changes relate to the recognition of lease assets and liabilities on its consolidated balance sheet.

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 to fund capital investments, letters of credit and working capital needs. The Company has pledged certain land and structures, tractors and trailers, accounts receivable and other assets to secure indebtedness under this 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 in 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, to secure indebtedness under the Restated Credit Agreement.

At December 31, 2017, the Company had borrowings of $43.0 million and outstanding letters of credit of $33.9 million under the Restated Credit Agreement. At December 31, 2016, the Company had no outstanding borrowings and outstanding letters of credit of $39.4 million under the Restated Credit Agreement. The available portion of the Restated Credit Agreement may be used for general corporate purposes, including capital expenditures, working capital and letter of credit requirements as needed.

Restated Master Shelf Agreement

In 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

 

32


 

Company issued another $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 November 2007 issuance of $25 million Senior Notes had a fixed interest rate of 6.14 percent. The January 2008 issuance of $25 million Senior Notes had 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 made on December 31, 2017. Under the terms of the Senior Notes, the Company was required to maintain certain financial covenants including a minimum fixed charge coverage ratio and a maximum leverage ratio, among others.  The Senior Notes also provided for a pledge by the Company of certain land and structures, certain tractors, trailers and other personal property and accounts receivable, to secure indebtedness under the Senior Notes. At December 31, 2016, the Company had $7.1 million in Senior Notes outstanding. Upon maturity in December 2017, the Company paid off the outstanding balance of the Senior Notes.

Capital Leases

The Company is obligated under capital leases with seven year terms covering revenue equipment totaling $89.9 million and $66.7 million as of December 31, 2017 and 2016, respectively. Amortization of assets held under the capital leases is included in depreciation expense. The weighted average interest rates for the capital leases at December 31, 2017 and 2016 is 3.07% and 2.82% respectively.

Other

The Company has historically generated cash flows from operations to fund a large portion of its capital expenditure requirements. 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, which was $173.1 million at December 31, 2017, 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 December 31, 2017.

Net capital expenditures pertain primarily to investments in tractors and trailers and other revenue equipment, information technology, land and structures. Projected net capital expenditures for 2018 are approximately $265 million, inclusive of equipment acquired using capital leases. This represents an approximately $48 million increase from 2017 net capital expenditures of $217 million for property and equipment, inclusive of equipment acquired using capital leases. Projected 2018 capital expenditures include a normal replacement cycle of revenue equipment and technology investment for our operations. In addition, the Company is adding revenue equipment and real estate investments to support our growth initiatives.

See “Forward-Looking Statements” and Item 1A., “Risk Factors,” for a more complete discussion of potential risks and uncertainties that could materially affect our future performance.

Actual net capital expenditures, inclusive of equipment acquired using capital leases, are summarized in the following table (in millions):

 

 

 

 

 

 

 

 

 

 

 

Years ended

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

2016

 

 

2015

 

Land and structures:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additions

 

 

 

 

 

 

 

 

 

$

87.1

 

 

$

36.7

 

 

$

40.0

 

Sales

 

 

 

 

 

 

 

 

 

 

(1.8

)

 

 

 

 

 

 

Revenue equipment, net

 

 

 

 

 

 

 

 

 

 

112.9

 

 

 

107.1

 

 

 

63.0

 

Technology and other

 

 

 

 

 

 

 

 

 

 

18.8

 

 

 

8.6

 

 

 

9.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

$

217.0

 

 

$

152.4

 

 

$

112.7

 

 

 

33


 

In addition to the amounts disclosed in the table above, the Company had an additional $11.2 million in capital expenditures for revenue equipment that was received but not paid for prior to December 31, 2017. Included in the 2017, 2016, and 2015 revenue equipment expenditures are capital leases totaling $35.5 million, $34.7 million and $27.1 million, respectively.

Off Balance Sheet Arrangements

In accordance with U.S. generally accepted accounting principles, our operating leases are not recorded in our consolidated balance sheet; however, the future minimum lease payments are included in the “Contractual Obligations” table below. See the notes to the accompanying audited consolidated financial statements included in this Form 10-K for additional information. In addition to the principal amounts disclosed in the tables below, the Company has interest obligations of approximately $4.9 million for 2018 and decreasing for each year thereafter, based on borrowings and commitments outstanding at December 31, 2017.

Contractual Obligations

The following tables set forth a summary of our contractual obligations and other commercial commitments as of December 31, 2017 (in millions):

 

 

 

Payments due by year

 

 

 

2018

 

 

2019

 

 

2020

 

 

2021

 

 

2022

 

 

Thereafter

 

 

Total

 

Contractual cash obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revolving line of credit(1)

 

$

 

 

$

 

 

$

43.0

 

 

$

 

 

$

 

 

$

 

 

$

43.0

 

Leases:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital Leases(1)

 

 

16.7

 

 

 

16.7

 

 

 

16.7

 

 

 

17.2

 

 

 

15.7

 

 

 

15.6

 

 

 

98.6

 

Operating leases(2)

 

 

18.7

 

 

 

16.2

 

 

 

12.9

 

 

 

10.7

 

 

 

8.6

 

 

 

26.8

 

 

 

93.9

 

Purchase obligations(2)

 

 

147.7

 

 

 

0.8

 

 

 

0.8

 

 

 

 

 

 

 

 

 

 

 

 

149.3

 

Total contractual obligations

 

$

183.1

 

 

$