10-Q 1 saia-10q_20180930.htm 10-Q saia-10q_20180930.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2018

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, GA

 

30097

(Address of principal executive offices)

 

(Zip Code)

(770) 232-5067

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).     Yes      No  

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

 

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  

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

 

Common Stock

 

Outstanding Shares at October 31, 2018

Common Stock, par value $.001 per share

 

25,693,651

 

 

 


 

SAIA, INC. AND SUBSIDIARIES

INDEX

 

 

 

 

PAGE

 

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

ITEM 1:

Financial Statements

 

3

 

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017

 

3

 

 

 

 

 

Condensed Consolidated Statements of Operations for the Quarters and Nine Months ended September 30, 2018 and 2017

 

4

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2018 and 2017

 

5

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

6

 

 

 

 

ITEM 2:

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

 

12

 

 

 

 

ITEM 3:

Quantitative and Qualitative Disclosures About Market Risk

 

20

 

 

 

 

ITEM 4:

Controls and Procedures

 

21

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

ITEM 1:

Legal Proceedings

 

22

 

 

 

 

ITEM 1A:

Risk Factors

 

22

 

 

 

 

ITEM 2:

Unregistered Sales of Equity Securities and Use of Proceeds

 

22

 

 

 

 

ITEM 3:

Defaults Upon Senior Securities

 

22

 

 

 

 

ITEM 4:

Mine Safety Disclosures

 

22

 

 

 

 

ITEM 5:

Other Information

 

22

 

 

 

 

ITEM 6:

Exhibits

 

23

 

 

 

 

Signature

 

24

 

 

 

 

 

2


 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

Saia, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(unaudited)

 

 

 

September 30, 2018

 

 

December 31, 2017 As Adjusted

(Note 1)

 

Assets

 

(in thousands, except share and per share data)

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

529

 

 

$

4,720

 

Accounts receivable, net

 

 

197,973

 

 

 

170,278

 

Prepaid expenses and other

 

 

26,155

 

 

 

28,251

 

Total current assets

 

 

224,657

 

 

 

203,249

 

Property and Equipment, at cost

 

 

1,445,049

 

 

 

1,289,994

 

Less-accumulated depreciation

 

 

609,324

 

 

 

554,214

 

Net property and equipment

 

 

835,725

 

 

 

735,780

 

Goodwill and Identifiable Intangibles, net

 

 

23,005

 

 

 

24,027

 

Other Noncurrent Assets

 

 

4,705

 

 

 

4,259

 

Total assets

 

$

1,088,092

 

 

$

967,315

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

62,025

 

 

$

57,438

 

Wages, vacation and employees’ benefits

 

 

53,175

 

 

 

39,748

 

Claims and insurance accruals

 

 

39,846

 

 

 

35,850

 

Other current liabilities

 

 

37,083

 

 

 

19,807

 

Current portion of long-term debt

 

 

17,622

 

 

 

14,083

 

Total current liabilities

 

 

209,751

 

 

 

166,926

 

Other Liabilities:

 

 

 

 

 

 

 

 

Long-term debt, less current portion

 

 

103,715

 

 

 

118,833

 

Deferred income taxes

 

 

65,895

 

 

 

59,423

 

Claims, insurance and other

 

 

39,440

 

 

 

39,639

 

Total other liabilities

 

 

209,050

 

 

 

217,895

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value, 50,000 shares authorized,

     none issued and outstanding

 

 

 

 

 

 

Common stock, $0.001 par value, 50,000,000 shares authorized,

     25,693,651 and 25,551,617 shares issued and outstanding at

     September 30, 2018 and December 31, 2017, respectively

 

 

26

 

 

 

26

 

Additional paid-in-capital

 

 

253,366

 

 

 

246,454

 

Deferred compensation trust, 140,882 and 170,310 shares of common

     stock at cost at September 30, 2018 and December 31, 2017, respectively

 

 

(3,202

)

 

 

(3,486

)

Retained earnings

 

 

419,101

 

 

 

339,500

 

Total stockholders’ equity

 

 

669,291

 

 

 

582,494

 

Total liabilities and stockholders’ equity

 

$

1,088,092

 

 

$

967,315

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

3


 

Saia, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

For the quarters and nine months ended September 30, 2018 and 2017

(unaudited)

 

 

 

Third Quarter

 

 

Nine Months

 

 

 

2018

 

 

2017 As Adjusted

(Note 1)

 

 

2018

 

 

2017 As Adjusted

(Note 1)

 

 

 

(in thousands, except per share data)

 

Operating Revenue

 

$

425,562

 

 

$

357,010

 

 

$

1,247,099

 

 

$

1,044,505

 

Operating Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries, wages and employees’ benefits

 

 

224,635

 

 

 

194,920

 

 

 

656,165

 

 

 

572,211

 

Purchased transportation

 

 

31,216

 

 

 

30,056

 

 

 

95,245

 

 

 

79,516

 

Fuel, operating expenses and supplies

 

 

81,643

 

 

 

66,679

 

 

 

245,182

 

 

 

196,761

 

Operating taxes and licenses

 

 

12,366

 

 

 

10,631

 

 

 

37,310

 

 

 

32,088

 

Claims and insurance

 

 

9,985

 

 

 

8,535

 

 

 

30,086

 

 

 

28,010

 

Depreciation and amortization

 

 

26,694

 

 

 

22,338

 

 

 

74,965

 

 

 

64,607

 

Loss (gain) from property disposals, net

 

 

326

 

 

 

(717

)

 

 

305

 

 

 

(469

)

Total operating expenses

 

 

386,865

 

 

 

332,442

 

 

 

1,139,258

 

 

 

972,724

 

Operating Income

 

 

38,697

 

 

 

24,568

 

 

 

107,841

 

 

 

71,781

 

Nonoperating Expenses (Income):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

1,410

 

 

 

1,313

 

 

 

4,090

 

 

 

3,762

 

Other, net

 

 

(139

)

 

 

(131

)

 

 

(384

)

 

 

57

 

Nonoperating expenses, net

 

 

1,271

 

 

 

1,182

 

 

 

3,706

 

 

 

3,819

 

Income Before Income Taxes

 

 

37,426

 

 

 

23,386

 

 

 

104,135

 

 

 

67,962

 

Income Tax Provision

 

 

9,231

 

 

 

9,013

 

 

 

24,534

 

 

 

24,623

 

Net Income

 

$

28,195

 

 

$

14,373

 

 

$

79,601

 

 

$

43,339

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding – basic

 

 

25,792

 

 

 

25,527

 

 

 

25,752

 

 

 

25,494

 

Weighted average common shares outstanding – diluted

 

 

26,354

 

 

 

26,113

 

 

 

26,328

 

 

 

26,050

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic Earnings Per Share

 

$

1.09

 

 

$

0.56

 

 

$

3.09

 

 

$

1.70

 

Diluted Earnings Per Share

 

$

1.07

 

 

$

0.55

 

 

$

3.02

 

 

$

1.67

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

4


 

Saia, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

For the nine months ended September 30, 2018 and 2017

(unaudited)

 

 

 

Nine Months

 

 

 

2018

 

 

2017 As Adjusted

(Note 1)

 

 

 

(in thousands)

 

Operating Activities:

 

 

 

 

 

 

 

 

Net income

 

$

79,601

 

 

$

43,339

 

Noncash items included in net  income:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

74,965

 

 

 

64,607

 

Other, net

 

 

14,826

 

 

 

18,812

 

Changes in operating assets and liabilities, net

 

 

17,718

 

 

 

979

 

Net cash provided by operating activities

 

 

187,110

 

 

 

127,737

 

Investing Activities:

 

 

 

 

 

 

 

 

Acquisition of property and equipment

 

 

(155,217

)

 

 

(155,676

)

Proceeds from disposal of property and equipment

 

 

778

 

 

 

3,090

 

Net cash used in investing activities

 

 

(154,439

)

 

 

(152,586

)

Financing Activities:

 

 

 

 

 

 

 

 

Repayment of revolving credit agreement

 

 

(170,733

)

 

 

(159,102

)

Borrowing of revolving credit agreement

 

 

142,733

 

 

 

193,601

 

Proceeds from stock option exercises

 

 

4,165

 

 

 

2,531

 

Shares withheld for taxes

 

 

(1,396

)

 

 

(1,249

)

Repayment of senior notes

 

 

 

 

 

(3,571

)

Repayment of capital leases

 

 

(11,631

)

 

 

(8,819

)

Net cash provided by (used in) financing activities

 

 

(36,862

)

 

 

23,391

 

Net Decrease in Cash and Cash Equivalents

 

 

(4,191

)

 

 

(1,458

)

Cash and cash equivalents, beginning of period

 

 

4,720

 

 

 

1,539

 

Cash and cash equivalents, end of period

 

$

529

 

 

$

81

 

 

 

 

 

 

 

 

 

 

Non Cash Investing Activities

 

 

 

 

 

 

 

 

Equipment financed with capital leases

 

$

28,052

 

 

$

31,320

 

 

See accompanying notes to condensed consolidated financial statements.

 

5


 

Saia, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

 

(1) Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of Saia, Inc. and its wholly-owned subsidiaries (together, the Company or Saia).  All significant intercompany accounts and transactions have been eliminated in the condensed consolidated financial statements.

The condensed consolidated financial statements have been prepared by the Company without audit by the independent registered public accounting firm.  In the opinion of management, all normal recurring adjustments necessary for a fair presentation of the condensed consolidated balance sheets, statements of operations and cash flows for the interim periods included herein have been made.  These interim condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information, the instructions to Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X.  Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted from these statements.  The accompanying condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.  Operating results for the quarter and nine months ended September 30, 2018 are not necessarily indicative of the results of operations that may be expected for the year ended December 31, 2018.

Business

The Company provides regional and interregional less-than-truckload (LTL) services across 40 states through a single integrated organization.  For the quarter and nine months ended September 30, 2018, 97.6% of revenue was derived from transporting LTL shipments.  For the quarter and nine months ended September 30, 2017, 97.2% and 97.3% of revenue, respectively, was derived from transporting LTL shipments.  The Company also offers customers a wide range of other value-added services, including non-asset truckload, expedited and logistics services throughout North America.  The Company’s customer base is diversified across numerous industries.

Revenue Recognition

The Company’s revenues are derived primarily from the transportation of freight as it satisfies performance obligations that arise from contracts with its customers, when collectability is considered probable.  The Company’s performance obligations arise when it receives a bill of lading (“BOL”) to transport a customer's commodities at negotiated prices contained in either a transportation services agreement or a publicly disclosed tariff rate.  Once a BOL is received, a legally-enforceable contract is formed whereby the parties are committed to perform and the rights of the parties, shipping terms and conditions, and payment terms have been identified. A customer may submit many BOLs for transportation services at various times throughout a service agreement term but each shipment represents a distinct service that is a separately identified performance obligation.

The average transit time to complete a shipment is between 1 to 5 days.  Payments for transportation services are normally billed after completion of the service and are generally due within 30 days after the invoice date.  The Company recognizes revenue related to the Company’s LTL, non-asset truckload and expedited services over the transit time of the shipment as it moves from origin to destination. Revenue for services started but not completed at the reporting date is allocated based on the relative transit time in each reporting period, with the portion allocated for services subsequent to the reporting date considered remaining performance obligations.

Key estimates included in the recognition and measurement of revenue and related accounts receivable are as follows:

 

Revenue associated with shipments in transit is recognized ratably over transit time and is based on average cycle times to move shipments from their origin to their final destination or interchange; and

 

Adjustments to revenue for billing adjustments and collectability.

Revenue related to interline transportation services that involve the services of another party, such as another LTL service provider, is reported on a net basis. The portion of the gross amount billed to customers that is remitted by the Company to another party is not reflected as revenue.  Revenue from logistics services is recognized as the services are provided.

Remaining performance obligations represent the transaction price allocated to future reporting periods for freight services started but not completed at the reporting date. This includes the unearned portion of billed and unbilled amounts for cancellable freight shipments in transit that the Company expects to recognize as revenue in the period subsequent to the reporting date, which is on average less than one week.  The Company has elected to apply the optional exemption in accordance with the Financial Accounting

6


 

Standards Board (FASB) Accounting Standards Codification (ASC) 606 as it pertains to additional quantitative disclosures pertaining to remaining performance obligations.  

Claims and Insurance Accruals

Claims and insurance accruals, both current and long-term, reflect the estimated cost of claims for workers’ compensation (discounted to present value), cargo loss and damage, and bodily injury and property damage not covered by insurance. These costs are included in claims and insurance expense, except for workers’ compensation, which is included in employees’ benefits expense. The liabilities are included in claims and insurance reserves based on estimates of claims incurred. Liabilities for unsettled claims and claims incurred but not yet reported are actuarially determined with respect to workers’ compensation claims and with respect to all other liabilities, estimated based on management’s evaluation of the nature and severity of individual claims and past experience.

Risk retention amounts per occurrence are as follows:

 

Workers’ compensation

 

 

 

$

1,000,000

 

Bodily injury and property damage (auto liability)

 

 

 

 

2,000,000

 

Employee medical and hospitalization

 

 

 

 

400,000

 

Cargo loss and damage

 

 

 

 

250,000

 

 

Effective March 1, 2018, the Company entered into a new auto liability policy with a three-year term. The risk retention amount per occurrence remains at $2.0 million under the new policy. The policy includes a limit for a single loss of $8.0 million, an aggregate loss limit of $24.0 million for each policy year, and a $48.0 million aggregate loss limit for the 36 month term ended March 1, 2021. The policy includes a returnable premium of up to $5.2 million, to be adjusted by the insurer for changes in claims, and a provision to extend the term of the policy for one additional 12 month period, if management and the insurer mutually agree to commute the policy for the first 12 months of the policy term. A decision with respect to commutation of the first 12 months of the policy cannot be made before March 1, 2019. The policy also includes a returnable premium of up to $15.6 million, to be adjusted by the insurer for changes in claims, if management and the insurer mutually agree to commute the policy for the entire 36 months. A decision with respect to commutation of the entire policy cannot be made before August 30, 2021, unless both the Company and the insurance carrier agree to a commutation prior to the end of the policy term. Additionally, the Company may be required to pay an additional premium of up to $11.0 million if paid losses are greater than $15.6 million over the three year policy period. No such additional premium was accrued at September 30, 2018.  Management cannot predict whether or not future claims or the development of existing claims will justify a commutation, and accordingly, no related amounts were recorded at September 30, 2018.

Accounting Pronouncements Adopted in 2018

In May 2014, the FASB issued Accounting Standards Update (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 replaced most existing revenue recognition guidance in U.S. generally accepted accounting principles when it became effective for the Company on January 1, 2018. In-depth reviews of contracts were completed and changes to processes and internal controls to meet the standard’s reporting and disclosure requirements were implemented.  The Company adopted the standard using the full retrospective transition method.

As a result of the adoption of this standard, the Company changed the presentation of its non-asset truckload business from net revenue to gross revenue and changed the method of recognizing that revenue from upon commencement of the services to over the transit time of the freight as it moves from origin to destination.

The Company has consistently applied the accounting policies to all periods presented in these condensed consolidated financial statements.  The below tables reflect the effect of the adoption of this standard on the previously reported financial data.

 

7


 

Condensed Consolidated Balance Sheet impact:

 

As of December 31, 2017

 

 

As adjusted

 

 

As originally reported

 

 

Effect of change

 

 

 

(in thousands)

Accounts receivable

 

$

170,278

 

 

$

170,610

 

 

$

(332

)

 

Total current assets

 

 

203,249

 

 

 

203,581

 

 

 

(332

)

 

Total assets

 

 

967,315

 

 

 

967,647

 

 

 

(332

)

 

Accounts payable

 

 

57,438

 

 

 

57,717

 

 

 

(279

)

 

Total current liabilities

 

 

166,926

 

 

 

167,205

 

 

 

(279

)

 

Retained earnings

 

 

339,500

 

 

 

339,553

 

 

 

(53

)

 

Total stockholders’ equity

 

 

582,494

 

 

 

582,547

 

 

 

(53

)

 

Total liabilities and stockholders’ equity

 

 

967,315

 

 

 

967,647

 

 

 

(332

)

 

 

Condensed Consolidated Statement of Operations impact:

 

For the quarter ended September 30, 2017

 

For the nine months ended September 30, 2017

 

 

As adjusted

 

 

As originally reported

 

 

Effect of change

 

 

 

 

As adjusted

 

 

As originally reported

 

 

Effect of change

 

 

 

(in thousands, except per share data)

Operating revenue

 

$

357,010

 

 

$

350,062

 

 

$

6,948

 

 

 

 

$

1,044,505

 

 

$

1,025,259

 

 

$

19,246

 

 

Purchased transportation

 

 

30,056

 

 

 

23,074

 

 

 

6,982

 

 

 

 

 

79,516

 

 

 

60,212

 

 

 

19,304

 

 

Total operating expenses

 

 

332,442

 

 

 

325,460

 

 

 

6,982

 

 

 

 

 

972,724

 

 

 

953,420

 

 

 

19,304

 

 

Operating income

 

 

24,568

 

 

 

24,602

 

 

 

(34

)

 

 

 

 

71,781

 

 

 

71,839

 

 

 

(58

)

 

Net income

 

 

14,373

 

 

 

14,407

 

 

 

(34

)

 

 

 

 

43,339

 

 

 

43,397

 

 

 

(58

)

 

Basic Earnings Per Share

 

 

0.56

 

 

 

0.56

 

 

 

 

 

 

 

 

1.70

 

 

 

1.70

 

 

 

 

 

Diluted Earnings Per Share

 

 

0.55

 

 

 

0.55

 

 

 

 

 

 

 

 

1.67

 

 

 

1.67

 

 

 

 

 

 

Condensed Consolidated Statement of Cash Flows impact:

 

For the nine months ended September 30, 2017

 

 

As adjusted

 

 

As originally reported

 

 

Effect of change

 

 

 

(in thousands)

Net income

 

$

43,339

 

 

$

43,397

 

 

$

(58

)

 

Changes in operating assets and liabilities, net

 

 

979

 

 

 

921

 

 

 

58

 

 

Net cash provided by operating activities

 

 

127,737

 

 

 

127,737

 

 

 

 

 

Net decrease in cash and cash equivalents

 

 

(1,458

)

 

 

(1,458

)

 

 

 

 

 

Accounting Pronouncements Not Yet Adopted

In February 2016, the FASB established Topic 842, Leases, by issuing Accounting Standards Update (ASU) No. 2016-02, which requires lessees to recognize leases on the balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.

The new standard is effective for the Company on January 1, 2019, with early adoption permitted. The Company expects to adopt the new standard on its effective date. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. If an entity chooses the second option, the transition requirements for existing leases also apply to leases entered into between the date of initial application and the effective date. The entity must also recast its comparative period financial statements and provide the disclosures required by the new standard for the comparative periods. The Company expects to adopt the new standard on January 1, 2019 and use the effective date as its date

8


 

of initial application. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019.

The new standard provides a number of optional practical expedients in transition. The Company expects to elect the ‘package of practical expedients’, which permits it not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. The Company does not expect to elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter not being applicable to it.

The Company expects that this standard will have a material effect on its financial statements. While the Company continues to assess all of the effects of adoption, it currently believes the most significant effects relate to (1) the recognition of new ROU assets and lease liabilities on its balance sheet for its real estate operating leases and (2) providing significant new disclosures about its leasing activities. The Company does not expect a significant change in its leasing activities between now and adoption.

The new standard also provides practical expedients for an entity’s ongoing accounting. The Company currently expects to elect the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, the Company will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. The Company also currently expects to elect the practical expedient to not separate lease and non-lease components for all of its leases other than leases of real estate.

 

 

(2) Computation of Earnings Per Share

The calculation of basic earnings per common share and diluted earnings per common share was as follows (in thousands, except per share amounts):

 

 

 

Third Quarter

 

 

Nine Months

 

 

 

2018

 

 

2017 As Adjusted

(Note 1)

 

 

2018

 

 

2017 As Adjusted

(Note 1)

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

28,195

 

 

$

14,373

 

 

$

79,601

 

 

$

43,339

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator for basic  earnings per share–weighted

     average common shares

 

 

25,792

 

 

 

25,527

 

 

 

25,752

 

 

 

25,494

 

Effect of dilutive stock options

 

 

167

 

 

 

152

 

 

 

168

 

 

 

124

 

Effect of other common stock equivalents

 

 

395

 

 

 

434

 

 

 

408

 

 

 

432

 

Denominator for diluted earnings per share–adjusted

     weighted average common shares

 

 

26,354

 

 

 

26,113

 

 

 

26,328

 

 

 

26,050

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic Earnings Per Share

 

$

1.09

 

 

$

0.56

 

 

$

3.09

 

 

$

1.70

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted Earnings Per Share

 

$

1.07

 

 

$

0.55

 

 

$

3.02

 

 

$

1.67

 

 

For the quarter and nine months ended September 30, 2018, options and restricted stock for 45,150 shares of common stock were excluded from the calculation of diluted earnings per share because their effect was anti-dilutive.  For the quarter and nine months ended September 30, 2017, options and restricted stock for 63,104 shares of common stock were excluded from the calculation of diluted earnings per share because their effect was anti-dilutive.

 

 

(3) Commitments and Contingencies

The Company pays its pro rata share of the cost of letters of credit outstanding for certain workers’ compensation claims incurred prior to March 1, 2000 that Saia’s former parent maintains for insurance programs. The Company’s pro rata share of these outstanding letters of credit was $1.8 million at September 30, 2018.

The Company is subject to legal proceedings that arise in the ordinary course of its business. Management believes that adequate provisions for the 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 the results of operations in a given quarter or annual period.

 

 

9


 

(4) Fair Value of Financial Instruments

The carrying amounts of financial instruments including cash and cash equivalents, accounts receivable, accounts payable and short-term debt approximated fair value as of September 30, 2018 and December 31, 2017, because of the relatively short maturity of these instruments.  Based on the borrowing rates currently available to the Company for debt with similar terms and remaining maturities, the estimated fair value of total debt at September 30, 2018 and December 31, 2017 was $120.3 million and $132.3 million, respectively, based upon levels one and two in the fair value hierarchy.  The carrying value of the debt was $121.3 million and $132.9 million at September 30, 2018 and December 31, 2017, respectively.

 

 

(5) Debt and Financing Arrangements

At September 30, 2018 and December 31, 2017, debt consisted of the following (in thousands):

 

 

 

September 30, 2018

 

 

December 31, 2017

 

Credit Agreement with Banks, described below

 

$

15,000

 

 

$

43,000

 

Capital Leases, described below

 

 

106,337

 

 

 

89,916

 

Total debt

 

 

121,337

 

 

 

132,916

 

Less: current portion of long-term debt

 

 

17,622

 

 

 

14,083

 

Long-term debt, less current portion

 

$

103,715

 

 

$

118,833

 

 

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 with a group of banks to fund capital investments, letters of credit and working capital needs.

Restated Credit Agreement

The Fifth Amended and Restated Credit Agreement dated March 6, 2015 (the Restated Credit Agreement) is a revolving credit facility for up to $250 million expiring in March 2020. The Restated Credit Agreement also has an accordion feature that allows for an additional $75 million availability, subject to lender approval.  The Restated Credit Agreement provides for a LIBOR rate margin range from 112.5 basis points to 225 basis points, base rate margins from minus 12.5 basis points to plus 50 basis points, an unused portion fee from 20 basis points to 30 basis points and letter of credit fees from 112.5 basis points to 225 basis points, in each case based on the Company’s leverage ratio.

Under the Restated Credit Agreement, the Company must maintain certain financial covenants including a minimum fixed charge coverage ratio and a maximum leverage ratio, among others.  The Restated Credit Agreement also provides for a pledge by the Company of certain land and structures, certain tractors, trailers and other personal property and accounts receivable, to secure indebtedness under the Restated Credit Agreement.

At September 30, 2018, the Company had borrowings of $15.0 million and outstanding letters of credit of $27.7 million 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.  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 Company issued an additional $25 million in Senior Notes on November 30, 2007 and $25 million in Senior Notes on January 31, 2008 under the same Master Shelf Agreement.  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 $106.3 million and $89.9 million as of September 30, 2018 and December 31, 2017, respectively.  Amortization of assets held under the capital leases is included in depreciation and amortization expense.  The weighted average interest rates for the capital leases at September 30, 2018 and December 31, 2017 were 3.4 percent and 3.1 percent, respectively.

10


 

Principal Maturities of Long-Term Debt

The principal maturities of long-term debt, including interest on capital leases, for the next five years (in thousands) are as follows:

 

 

 

Amount

 

2018

 

$

5,240

 

2019

 

 

20,959

 

2020

 

 

35,959

 

2021

 

 

21,537

 

2022

 

 

20,101

 

Thereafter

 

 

28,968

 

Total

 

 

132,764

 

Less: Amounts Representing Interest on Capital Leases

 

 

11,427

 

Total

 

$

121,337

 

 

11


 

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

This Management’s Discussion and Analysis should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and our 2017 audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.  Those consolidated financial statements include additional information about our significant accounting policies, practices and the transactions that underlie our financial results.

Forward-Looking Statements

The Securities and Exchange Commission (the SEC) encourages companies to disclose forward-looking information so that investors can better understand the future prospects of a company and make informed investment decisions.  This Quarterly Report on Form 10-Q, including "Management's Discussion and Analysis of Financial Condition and Results of Operations,” contains these types of statements, which are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “may,” “plan,” “predict,” “believe,” “should” and similar words or expressions are intended to identify forward-looking statements.  Investors should not place undue reliance on forward-looking statements, and the Company undertakes no obligation to publicly update or revise any forward-looking statements.  All forward-looking statements reflect the present expectation of future events of our management as of the date of this Quarterly Report on Form 10-Q and are subject to a number of important factors, risks, uncertainties and assumptions that could cause actual results to differ materially from those described in any forward-looking statements.  These factors, risks, 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, technology and other assets;

 

the effect of governmental regulations, including but not limited to Hours of Service, engine emissions, the Compliance, Safety, Accountability (CSA) initiative, the Food and Drug Administration, compliance with legislation requiring companies to evaluate their internal control over financial reporting, Homeland Security, environmental regulations and tax law changes;

 

potential changes to the North American Free Trade Agreement and to certain international tariffs;

 

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;

12


 

 

cost and availability of insurance coverage, including the possibility the Company may be required to pay additional premiums under its auto liability policy;

 

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

 

social media risks;

 

disruption in or failure of the Company’s technology including services essential to operations of the Company and/or 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 described in Part II, Item 1A. “Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, as updated by Part II, Item 1A. of this Quarterly Report on Form 10-Q.

As a result of these and other factors, no assurance can be given as to our future results and achievements.  Accordingly, a forward-looking statement is neither a prediction nor a guarantee of future events or circumstances and those future events or circumstances may not occur.  You should not place undue reliance on the forward-looking statements, which speak only as of the date of this Form 10-Q.  We are under no obligation, and we expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise.

Executive Overview

The Company’s business is highly correlated to non-service sectors of the general economy.  The Company’s strategy is to improve profitability by increasing yield while also increasing volumes to build density in existing geography and to expand our service geography into the Northeastern United States.  The Company’s business is both labor and capital intensive.  The Company maintains competitive compensation, benefits and training programs to minimize turnover while supporting its value proposition.  The Company’s business requires continual investment in safe, reliable and efficient equipment and the acquisition of terminal assets. These investments along with on-going investments in technology and analytics are designed to optimize the network while meeting and exceeding customers’ standards of service.  These investments coupled with targeted sales and marketing efforts provide the Company with a framework to improve profitability through pricing initiatives, effective cost management and volume growth.

The Company’s operating revenue increased by 19.2 percent in the third quarter of 2018 compared to the same period in 2017.  The increase resulted primarily from increased shipments, tonnage, fuel surcharges, and pricing actions.  Expansion into the Northeastern United States and the new Canadian marketing arrangement which began in the second quarter of 2017 were contributing factors in the increased shipments and tonnage in the third quarter of 2018.

Consolidated operating income was $38.7 million for the third quarter of 2018 compared to $24.6 million for the third quarter of 2017.  In the third quarter of 2018, LTL shipments and tonnage per workday were up 5.4 percent and 7.3 percent, respectively, versus the prior year quarter.  Diluted earnings per share were $1.07 in the third quarter of 2018, compared to diluted earnings per share of $0.55 in the prior year quarter, which was partially driven by the fact that the Tax Cuts and Jobs Act, as discussed further in the Outlook section below, was not enacted until December 2017. The operating ratio (operating expenses divided by operating revenue) was 90.9 percent in the third quarter of 2018 compared to 93.1 percent in the third quarter of 2017.

The Company had $187.1 million in net cash provided by operating activities in the first nine months of 2018 compared with $127.7 million in the same period last year.  The increase is primarily due to an increase in operating income, decreased income tax expense and working capital fluctuations.  The Company had net cash used in investing activities of $154.4 million during the first nine months of 2018 compared to $152.6 million in the first nine months of 2017, primarily as a result of the timing of capital expenditures for revenue equipment and real estate in the first nine months of 2018.  The Company’s net cash used in financing activities was $36.9 million in the first nine months of 2018 compared to $23.4 million net cash provided by financing activities during the same period last year, primarily due to reduced borrowing (net of repayments) to fund capital expenditures.  The Company had $15.0 million in outstanding borrowings under its revolving credit agreement, outstanding letters of credit of $29.5 million and a cash and cash equivalents balance of $0.5 million at September 30, 2018.  The Company also had $106.3 million in obligations under capital leases at September 30, 2018.  The Company was in compliance with the debt covenants under its credit agreement at September 30, 2018.

13


 

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).

Saia is a transportation company headquartered in Johns Creek, Georgia that provides regional and interregional less-than-truckload (LTL) services across 40 states through a single integrated organization. While approximately 97 percent of its revenue is derived from transporting LTL shipments, the Company also offers customers a wide range of other value-added services, including non-asset truckload, expedited and logistics services throughout North America.

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 II, Item 1A. “Risk Factors.” The key factors that affect our operating results are the volumes of shipments transported through our network, as measured by our average daily shipments and tonnage; the prices we obtain for our services, as measured by revenue per hundredweight (a measure of yield) and revenue per shipment; our ability to manage our cost structure for capital expenditures and operating expenses such as salaries, wages and benefits; purchased transportation; claims and insurance expense; fuel and maintenance; and our ability to match operating costs to shifting volume levels.

Results of Operations

Saia, Inc. and Subsidiaries

Selected Results of Operations and Operating Statistics

For the quarters ended September 30, 2018 and 2017

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Percent

 

 

 

 

 

 

 

 

 

 

 

 

Variance

 

 

 

 

2018

 

 

2017 As Adjusted (1)

 

 

'18 v. '17

 

 

 

 

(in thousands, except ratios and revenue per 

hundredweight)

Operating Revenue

 

$

425,562

 

 

$

357,010

 

 

 

19.2

 

%

Operating Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries, wages and employees’ benefits

 

 

224,635

 

 

 

194,920

 

 

 

15.2

 

 

Purchased transportation

 

 

31,216

 

 

 

30,056

 

 

 

3.9

 

 

Depreciation and amortization

 

 

26,694

 

 

 

22,338

 

 

 

19.5

 

 

Fuel and other operating expenses

 

 

104,320

 

 

 

85,128

 

 

 

22.5

 

 

Operating Income

 

 

38,697

 

 

 

24,568

 

 

 

57.5

 

 

Operating Ratio

 

 

90.9

%

 

 

93.1

%

 

 

2.4

 

 

Nonoperating Expense

 

 

1,271

 

 

 

1,182

 

 

 

7.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Working Capital (as of September 30, 2018 and 2017)

 

 

14,906

 

 

 

17,017

 

 

 

 

 

 

Cash Flows provided by Operations (year to date)

 

 

187,110

 

 

 

127,737

 

 

 

 

 

 

Net Acquisitions of Property and Equipment (year to date)

 

 

154,439

 

 

 

152,586

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Saia Motor Freight Operating Statistics:

 

 

 

 

 

 

 

 

 

 

 

 

 

LTL Tonnage

 

 

1,208

 

 

 

1,126

 

 

 

7.3

 

 

LTL Shipments

 

 

1,780

 

 

 

1,690

 

 

 

5.4

 

 

LTL Revenue per hundredweight

 

$

17.20

 

 

$

15.38

 

 

 

11.9

 

 

 

 

(1)

Reflects the adoption of the Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2014-09. See Note 1 to the Condensed Consolidated Financial Statements for further details.

Quarter and nine months ended September 30, 2018 compared to Quarter and nine months ended September 30, 2017

Revenue and volume

Consolidated revenue for the quarter ended September 30, 2018 increased 19.2 percent to $425.6 million primarily as a result of increased tonnage, shipments, fuel surcharges, and pricing actions.  Continued expansion into the Northeastern United States was a contributing factor in the continued increased shipments and tonnage in the third quarter of 2018.  Saia’s LTL revenue per

14


 

hundredweight (a measure of yield) increased 11.9 percent to $17.20 per hundredweight for the third quarter of 2018 as a result of increased rates, changes in business mix, fuel surcharges and length of haul.  For the third quarter of 2018, Saia’s LTL tonnage increased 7.3 percent to 1.2 million tons, and LTL shipments increased 5.4 percent to 1.8 million shipments.  For the third quarter of 2018, approximately 75 to 80 percent of Saia’s operating revenue was subject to specific customer price 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 these customers subject to a general rate increase, on July 17, 2017 and May 21, 2018, Saia implemented a 4.9 percent and 5.9 percent general rate increase, respectively.  Competitive factors, customer turnover and mix changes, impact the extent to which customer rate increases are retained over time.

Operating revenue includes fuel surcharge revenue from the Company’s fuel surcharge program.  That program is designed to reduce the Company’s exposure to fluctuations in fuel prices by adjusting total freight charges to account for changes in the price of fuel.  The Company’s fuel surcharge is based on the average national price for diesel fuel and is reset weekly.  Fuel surcharges have remained in effect for several years, are widely accepted in the industry and are a significant component of revenue and pricing.  Fuel surcharges 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 13.8 percent of operating revenue for the quarter ended September 30, 2018 compared to 11.1 percent for the quarter ended September 30, 2017, as a result of increases in the cost of fuel.

For the nine months ended September 30, 2018, operating revenues were $1,247.1 million, up 19.4 percent from $1,044.5 million for the nine months ended September 30, 2017, primarily due to increased tonnage, shipments, fuel surcharges and pricing actions.  Fuel surcharge revenue increased to 13.5 percent of operating revenue for the nine months ended September 30, 2018 compared to 11.0 percent for the nine months ended September 30, 2017, as a result of increased fuel prices.

Operating expenses and margin

Consolidated operating income was $38.7 million in the third quarter of 2018 compared to $24.6 million in the prior year quarter.  Overall, the operations were favorably impacted in the third quarter of 2018 by higher tonnage, shipments, fuel surcharge and pricing actions, which were offset by salary and wage increases, higher fuel and purchased transportation costs, increased depreciation expense and costs associated with the Company’s geographic expansion.  The third quarter of 2018 operating ratio (operating expenses divided by operating revenue) was 90.9 percent compared to 93.1 percent for the same period in 2017.

Salaries, wages and benefits increased $29.7 million in the third quarter of 2018 compared to the third quarter of 2017 largely due to higher wages associated with increased headcount in the third quarter of 2018, a wage increase in July 2018 and higher healthcare benefit costs.  Fuel, operating expenses and supplies increased $15.0 million in the third quarter of 2018 compared to the prior year quarter largely due to higher fuel costs, increases in other operating expenses and supplies, including increased expenses related to the geographic expansion, partially offset by improved fuel efficiency resulting from a newer fleet.  During the third quarter of 2018, claims and insurance expense was $1.5 million higher than the previous year quarter primarily due to increased insurance premiums, as well as by increased cargo claims. Purchased transportation increased $1.2 million in the third quarter of 2018 compared to the third quarter of 2017 primarily due to increases in purchased transportation cost per mile and higher utilization of purchased transportation carriers to maintain service requirements while supporting increased shipments, tonnage and length of haul during the third quarter of 2018.

For the nine months ended September 30, 2018, consolidated operating income was $107.8 million, up 50.2 percent compared to $71.8 million for the nine months ended September 30, 2017.

Salaries, wages and benefits increased $84.0 million during the first nine months of 2018 compared to the same period last year largely due to increased wages associated with increased headcount in the first nine months of 2018, a wage increase in July 2017 as well as July 2018 and higher healthcare benefit costs. Fuel, operating expenses and supplies increased $48.4 million during the first nine months of 2018 compared to the same period last year largely due to higher fuel costs, increases in other operating expenses and supplies, including increased expenses related to the geographic expansion.  During the first nine months of 2018, claims and insurance expense was $2.1 million higher than the same period last year primarily due to increased cargo claims and higher insurance premiums partially offset by decreased accident frequency and severity. Purchased transportation increased $15.7 million compared to the first nine months of 2017 primarily due to increases in purchased transportation cost per mile and higher utilization of purchased transportation carriers to maintain service requirements while supporting increased shipments, tonnage and length of haul during the first nine months of 2018.

15


 

Other

Substantially all non-operating expenses represent interest expense. Interest expense in the third quarter of 2018 was $0.1 million higher than the third quarter of 2017 due to increased average interest rates, partially offset by decreased average borrowings in the third quarter of 2018.  Interest expense in the first nine months of 2018 was $0.3 million higher than the first nine months of 2017 due to increased average interest rates, partially offset by decreased average borrowings in the first nine months of 2018.

The effective tax rate was 24.7 percent and 38.5 percent for the quarters ended September 30, 2018 and 2017, respectively.  The decrease in the third quarter tax rate in 2018 is primarily a result of the Tax Cuts and Jobs Act, which reduced corporate tax rates effective January 1, 2018, as discussed further in the Outlook section below. 

For the nine months ended September 30, 2018, the effective tax rate was 23.6 percent compared to 36.2 percent for the nine months ended September 30, 2017.  The decrease in the nine month tax rate in 2018 is primarily a result of the Tax Cuts and Jobs Act, as discussed further in the Outlook section below.  Additionally, the effective tax rate for the first nine months of 2018 was also lower due to discrete impacts of legislation surrounding alternative fuel tax credits enacted in the first quarter of 2018 for the entire year of 2017, partially offset by reduced excess tax benefits from stock activity in the first nine months of 2018 as compared to the first nine months of 2017.  Alternative fuel tax credits have not been enacted for 2018.

Net income was $28.2 million, or $1.07 per diluted share, in the third quarter of 2018 compared to net income of $14.4 million, or $0.55 per diluted share, in the third quarter of 2017.  Net income was $79.6 million, or $3.02 per diluted share, for the first nine months of 2018 compared to net income of $43.3 million, or $1.67 per diluted share, for the first nine months of 2017.

Working capital/capital expenditures

Working capital at September 30, 2018 was $14.9 million, which decreased from working capital at September 30, 2017 of $17.0 million.

Current assets at September 30, 2018 increased by $24.4 million as compared to September 30, 2017 and includes an increase in accounts receivable of $26.2 million.  Current liabilities increased by $26.5 million at September 30, 2018 compared to September 30, 2017 largely due to increases in accrued taxes, accrued wages, vacation and employee benefits and claims and insurance accruals partially offset by a decrease in accounts payable.  Cash flows provided by operating activities were $187.1 million for the nine months ended September 30, 2018 versus $127.7 million for the nine months ended September 30, 2017.  For the nine months ended September 30, 2018, net cash used in investing activities was $154.4 million versus $152.6 million in the same period last year, a $1.8 million increase.  This increase resulted primarily from lower proceeds from sales of assets.  The Company currently plans net capital expenditures in 2018 of approximately $265 million.  For the nine months ended September 30, 2018, net cash used in financing activities was $36.9 million compared to $23.4 million net cash provided by financing activities during the same period last year, as a result of reduced borrowing (net of repayments) to fund capital expenditures.

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.  On May 21, 2018, Saia implemented a 5.9 percent general rate increase for customers comprising approximately 20 to 25 percent of Saia’s operating revenue.  The extent of the success of these revenue initiatives is impacted by what proves to be the underlying economic trends, competitor initiatives and other factors discussed under “Forward-Looking Statements” and Part II, Item 1A. “Risk Factors.”

With the enactment of the Tax Cuts and Jobs Act (the “Act”) in December 2017, the federal corporate income tax rate was reduced from 35 percent to 21 percent effective January 1, 2018.  The Company is uncertain how these federal income tax changes will affect state and local taxation, which often uses federal taxable income as a starting point for computing state and local tax liabilities. Accordingly, the Company has not yet finalized its estimate of the impact of certain items and generally continues to account for those items based on the tax laws in effect prior to the Act. As further interpretations, clarifications and amendments to the applicable tax laws and regulations are made, the Company's future financial statements could be impacted.  In all cases, the Company has continued to refine its calculations and expects completion during the fourth quarter financial reporting period.

The Company currently expects the effective tax rate for 2018 to be in the range of 24 percent to 25 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, including alternative fuel tax credits, or the tax impact from employee share-based payments.  

16


 

Effective July 1, 2018, the Company implemented a market competitive salary and wage increase for all of its employees.  The cost of the compensation increase is expected to be approximately $19 million annually, and the Company anticipates the impact will be partially offset by productivity and efficiency gains.

If the Company builds market share, including through its geographic expansion, it expects 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 II, Item 1A. “Risk Factors.”

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

Accounting Pronouncements Adopted in 2018

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 replaced most existing revenue recognition guidance in U.S. generally accepted accounting principles when it became effective for the Company on January 1, 2018. The Company adopted the standard using the retrospective transition method.

As a result of the adoption of this standard, the Company changed the presentation of its non-asset truckload business from net revenue to gross revenue and changed the method of recognizing that revenue from upon commencement of the services to over the transit time of the freight as it moves from origin to destination.  

The Company has consistently applied the accounting policies to all periods presented in these condensed consolidated financial statements.  Refer to Note 1 of the Condensed Consolidated Financial Statements for details as to the impact of the adoption of this standard on previously issued financial information.

Accounting Pronouncements Not Yet Adopted

In February 2016, the FASB established Topic 842, Leases, by issuing Accounting Standards Update (ASU) No. 2016-02, which requires lessees to recognize leases on the balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.

The new standard is effective for the Company on January 1, 2019, with early adoption permitted. The Company expects to adopt the new standard on its effective date. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. If an entity chooses the second option, the transition requirements for existing leases also apply to leases entered into between the date of initial application and the effective date. The entity must also recast its comparative period financial statements and provide the disclosures required by the new standard for the comparative periods. The Company expects to adopt the new standard on January 1, 2019 and use the effective date as its date of initial application. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019.

The new standard provides a number of optional practical expedients in transition. The Company expects to elect the ‘package of practical expedients’, which permits it not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. The Company does not expect to elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter not being applicable to it.

The Company expects that this standard will have a material effect on its financial statements. While the Company continues to assess all of the effects of adoption, it currently believes the most significant effects relate to (1) the recognition of new ROU assets and lease liabilities on its balance sheet for its real estate operating leases and (2) providing significant new disclosures about its leasing activities. The Company does not expect a significant change in its leasing activities between now and adoption.

The new standard also provides practical expedients for an entity’s ongoing accounting. The Company currently expects to elect the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, the Company will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. The Company also currently expects to elect the practical expedient to not separate lease and non-lease components for all of its leases other than leases of real estate.

17


 

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.

Restated Credit Agreement

The Company is party to a Restated Credit Agreement with a group of banks to fund capital investments, letters of credit and working capital needs.  The Restated Credit Agreement is a revolving credit facility for up to $250 million expiring in March 2020. The Restated Credit Agreement also has an accordion feature that allows for an additional $75 million availability, subject to lender approval.  The Restated Credit Agreement provides for a LIBOR rate margin range from 112.5 basis points to 225 basis points, base rate margins from minus 12.5 basis points to plus 50 basis points, an unused portion fee from 20 basis points to 30 basis points and letter of credit fees from 112.5 basis points to 225 basis points, in each case based on the Company’s leverage ratio.

Under the Restated Credit Agreement, the Company must maintain certain financial covenants including a minimum fixed charge coverage ratio and a maximum leverage ratio, among others.  The Restated Credit Agreement also provides for a pledge by the Company of certain land and structures, certain tractors, trailers and other personal property and accounts receivable, to secure indebtedness under the Restated Credit Agreement.

At September 30, 2018, the Company had borrowings of $15.0 million and outstanding letters of credit of $27.7 million 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.  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 Company issued an additional $25 million in Senior Notes on November 30, 2007 and $25 million in Senior Notes on January 31, 2008 under the same Master Shelf Agreement. 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 $106.3 million and $89.9 million as of September 30, 2018 and December 31, 2017, respectively.  Amortization of assets held under the capital leases is included in depreciation and amortization expense.  The weighted average interest rates for the capital leases at September 30, 2018 and December 31, 2017 were 3.4 percent and 3.1 percent, respectively.

Other

The Company has historically generated cash flows from operations to fund a large portion of its capital expenditure requirements.  Cash flows from operating activities were $157.8 million for the year ended December 31, 2017, while net cash used in investing activities was $181.5 million.  Cash flows provided by operating activities were $187.1 million for the nine months ended September 30, 2018, $59.4 million higher than the first nine months of the prior year. The increase is due to an increase in operating income, a decrease in income tax expense and working capital fluctuations.  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. At September 30, 2018, the Company had $207.3 million in availability under the Restated Credit Agreement, subject to the Company’s satisfaction of existing debt covenants.  Future operating cash flows are primarily dependent upon the Company’s profitability and its ability to manage its working capital requirements, primarily accounts receivable, accounts payable and wage and benefit accruals.  The Company was in compliance with its debt covenants at September 30, 2018.

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 in excess of $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. Net capital expenditures were $182.5 million in the first nine months of 2018, inclusive of equipment acquired using capital leases. Approximately $69.0 million of the 2018 remaining capital budget was committed as of September 30, 2018.

18


 

In accordance with U.S. generally accepted accounting principles, our operating leases are not recorded in our condensed consolidated balance sheet; however, the future minimum lease payments are included in the “Contractual Obligations” table below. See the notes to our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2017 for additional information. In addition to the principal amounts disclosed in the tables below, the Company has interest obligations of approximately $1.3 million for the remainder of 2018 and decreasing for each year thereafter based on borrowings and commitments outstanding at September 30, 2018.

Contractual Obligations

The following tables set forth a summary of our contractual cash obligations and other commercial commitments as of September 30, 2018 (in millions):

 

 

 

Payments due by year

 

 

 

2018

 

 

2019

 

 

2020

 

 

2021

 

 

2022

 

 

Thereafter

 

 

Total

 

Contractual cash obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt obligations: