Summary of SCS TRANSPORTATION INC

Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Executive Overview
The Company's business is highly correlated to the general economy and, in particular, the industrial economy. The Company's priorities are focused on increasing volume within existing geographies while managing both the mix and yield of business to achieve increased profitability. The Company's business is labor intensive, capital intensive and service sensitive. The Company looks for opportunities to improve cost effectiveness, safety and asset utilization (primarily tractors and trailers). Technology is important to supporting both customer service and operating management. The Company grew year over year revenue by 12 percent in 2005. Revenue growth at Saia was attributable to both improvement in yield (revenue per hundred weight) and growth in less-than-truckload (LTL) tonnage. Management believes Saia's volume growth reflects continued high quality service to its customers, market share gains into and out of the Midwest markets, recent industry consolidation in Saia's market segments, sales initiatives in specific market segments and general economic growth. While the LTL pricing environment remained competitive, a good economy, increases in fuel surcharge and industry capacity constraints contributed to the Company's meaningful improvement during 2005 in LTL revenue per hundredweight, one measure of yield. Jevic contributed only modestly to the Company's revenue growth due to increased yield, primarily from fuel surcharges, which offset tonnage declines.
Results in 2005 include a $7.0 million pre-tax gain recognized from the sale of a Saia facility with excess capacity in Jacksonville, Florida. Excluding the real estate gain, incremental margins from increased tonnage volume and yield improvement in 2005 resulted in a 34 percent increase in operating income. The prior-year operating income was burdened with a $2.1 million pre-tax charge related to the integration of Clark Bros. into Saia in May 2004 and a $4.4 million pre-tax charge at Jevic to reflect the actuarially estimated increase in workers' compensation liability related to claims in prior years. Excluding the impact of these items, the operating income improvement at Saia was largely offset by margin decline at Jevic. The Company's operating ratio (operating expenses divided by operating revenue) improved year over year by 80 basis points to 95.0 percent in 2005. However, excluding the real estate gain the Company's operating ratio was 95.7 percent.
The Company generated cash flows from operations of $83.4 million in 2005. The Company funded all of its net property and equipment additions from cash flow from operations as well as funding $12.9 million in treasury stock repurchases under a $20 million authorized program. The Company's outstanding indebtedness decreased $7.9 million and its cash balance increased by $9.4 million during 2005. The Company improved its debt to total capital ratio to 33.5 percent at December 31, 2005 and had $70 million of availability under its revolving credit facility at December 31, 2005.
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 SCS Transportation, Inc. (also referred to as "SCST"). 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.
SCST is a leading transportation company providing regional and interregional LTL and selected national LTL, truckload (TL) and time-definite service solutions to more than 85,000 customers across the United States. Our operating subsidiaries are Saia Motor Freight Line, Inc. (Saia), based in Duluth, Georgia, and Jevic Transportation, Inc. (Jevic), based in Delanco, New Jersey. Our business is highly correlated to the industrial economy and is impacted by a number of other external factors including the price and availability of fuel, equipment, real estate and drivers, weather and government regulation. The key factors that affect our operating results are the volumes of shipments transported through our networks, as measured by our average daily shipments and tonnage; the prices we obtain for our services, as measured by revenue per hundredweight (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.

Table of Contents

Results of Operations

                   SCS Transportation, Inc. and Subsidiaries
            Selected Results of Operations and Operating Statistics
              For the years ended December 31, 2005, 2004 and 2003
          (in thousands, except ratios and revenue per hundredweight)

                                                                                                          Percent Variance
                                           2005                2004               2003             '05 v. '04          '04 v. '03
Operating Revenue                      $ 1,098,031          $ 982,270          $ 827,359                11.8 %              18.7 %
Operating Expenses:
Salaries, wages and employees'
benefits                                   594,644            549,511            465,714                 8.2                18.0
Purchased transportation                    99,134             92,099             81,551                 7.6                12.9
Depreciation and amortization               48,204             47,968             44,039                 0.5                 8.9
Other operating expenses                   301,407            251,858            203,173                19.7                24.0
Operating Income                            54,642             40,834             32,882                33.8                24.2
Nonoperating Expenses                        9,254              9,423              8,970                (1.8 )               5.1
Operating Ratio                               95.0 %             95.8 %             96.0 %              (0.8 )              (0.2 )
Working Capital                             37,658             54,066             65,638               (30.3 )             (17.6 )
Cash Flow from Operations                   83,353             54,894             58,270                51.8                (5.8 )
Cash Used in Investing
Activities                                  53,701             79,992             49,830               (32.9 )              60.5
Operating Statistics:
LTL Tonnage
Saia                                         3,144              2,909              2,422                 8.1                20.1
Jevic                                        1,007              1,066              1,053                (5.2 )               0.9
Total Tonnage
Saia                                         3,802              3,526              2,977                 7.8                18.4
Jevic                                        2,209              2,283              2,209                (2.9 )               3.0
LTL Shipments
Saia                                         5,637              5,290              4,504                 6.6                17.5
Jevic                                          847                886                877                (4.1 )               0.7
Total Shipments
Saia                                         5,727              5,372              4,575                 6.6                17.4
Jevic                                          986              1,030              1,012                (3.8 )               1.3
LTL Revenue Per Hundredweight
Saia                                         11.10              10.28               9.91                 8.0                 3.7
Jevic                                        10.89              10.23               9.55                 6.4                 7.1
Saia (excluding fuel surcharge)               9.94               9.64               9.54                 3.1                 1.1
Jevic (excluding fuel surcharge)              9.72               9.59               9.19                 1.4                 4.4
Total Revenue Per Hundredweight
Saia                                          9.92               9.16               8.75                 8.3                 4.7
Jevic                                         7.51               7.11               6.70                 5.6                 6.2
Saia (excluding fuel surcharge)               8.95               8.63               8.44                 3.7                 2.3
Jevic (excluding fuel surcharge)              6.70               6.67               6.44                 0.5                 3.5

Year ended December 31, 2005 vs. year ended December 31, 2004 Revenue and volume
Consolidated revenue increased 11.8 percent to $1,098 million as a result of improved pricing at both operating subsidiaries and increased volumes as both shipments and LTL tonnage were up significantly at Saia over the prior year. Volume gains were attributable to improved market share gains into and out of Saia's newer Midwest markets, favorable economic conditions across Saia's network, industry consolidation and company specific initiatives. Fuel surcharge revenue, which was 10 percent of total revenue in 2005, was up significantly from 2004 when fuel surcharge revenue was 5.9 percent of total revenue. The fuel surcharge program is intended to reduce the

Table of Contents

Company's exposure to rising diesel prices and other costs affected by increased fuel prices, such as purchased transportation. While fuel costs increased significantly during 2005, higher fuel surcharge revenues have more than offset higher diesel fuel costs. However, in recent years, given the significance of fuel surcharges, the negotiation of customer price increases have become commingled with fuel surcharges. As such it now represents more than a pass through of increased fuel costs. A rapid and significant decline in diesel fuel prices would reduce the Company's revenue and yield.
Saia had operating revenue of $754.0 million in 2005, an increase of 16.8 percent over 2004 operating revenue of $645.4 million. Saia's operating revenue excluding fuel surcharge was $679.9 million in 2005, up 11.9 percent from $607.8 million in 2004. Saia's LTL revenue per hundredweight (a measure of yield) increased 8.0 percent to $11.10 per hundredweight for 2005 and LTL revenue per hundredweight excluding fuel surcharge increased 3.1 percent. Saia experienced stronger price increases in 2005 over 2004, largely due to the continuation of a more favorable pricing environment that began in the second half of 2004. This pricing environment allowed Saia to achieve better contract renewal rates with customers than in the 2003 and the first half of 2004. However, pricing remains competitive in regional markets. Saia LTL tonnage was up 8.1 percent to 3.1 million tons and LTL shipments were up 6.6 percent to 5.6 million shipments. Management believes that Saia continues to grow volume by providing high quality service for its customers, continued market share gains from its 2004 Midwest expansion, recent industry consolidation in Saia's market segments, sales initiatives in specific market segments and general economic growth. Approximately 75 percent of Saia's revenue is subject to individual customer price adjustment negotiations that occur intermittently throughout the year. The remaining 25 percent of revenue is subject to an annual general rate increase. On May 2, 2005, Saia implemented a 5.9 percent general rate increase for customers comprising this 25 percent of revenue. Competitive factors, customer turnover and mix changes impact the extent to which customer rate increases are retained over time.
Jevic had operating revenue of $345.3 million in 2005, a 2.5 percent increase over $336.9 million in 2004. Jevic's operating revenue excluding fuel surcharge was $309.8 million in 2005, down 2.2 percent from $316.7 million in 2004. Jevic's total revenue per hundredweight increased 5.6 percent to $7.51, while revenue per hundredweight excluding fuel surcharge increased only 0.5 percent. Jevic's tonnage was down 2.9 percent to 2.2 million tons and shipments were down 3.8 percent to 1.0 million shipments. Jevic's year over year tonnage decline was most pronounced in the second and third quarters of 2005. Management believes the decline in tonnage was in part due to a loss of business resulting from service challenges experienced in the latter third of 2004 as well as other competitive and customer specific effects. In the fourth quarter of 2005, Jevic's year over year tonnage comparison improved compared to second and third quarters, which management believes was due in part to capacity constraints in the truckload market that increased Jevic's truckload revenue. Approximately 60 percent of Jevic's revenue is subject to individual customer price adjustment negotiations that occur intermittently throughout the year. The remaining 40 percent of revenue is subject to an annual general rate increase. On June 6, 2005, Jevic implemented a 5.6 percent general rate increase for customers comprising this 40 percent of revenue. Competitive factors, customer turnover and mix changes impact the extent to which customer rate increases are retained over time.
Operating expenses and margin
Consolidated 2005 operating income improved significantly to $54.6 million, including a pre-tax real estate gain of $7.0 million, compared to 2004 operating income of $40.8 million which included $2.1 million in integration charges at Saia related to the Clark Bros. acquisition and $4.4 million in charges at Jevic to reflect actuarially estimated increases in the workers' compensation liability related to claims in prior years. Exclusive of these items, Saia showed operating income improvement in excess of $10 million, reflecting higher margin contribution on year over year volume increases and yield improvement partially offset by structural cost increases. This operating income improvement was offset by a significant margin decline at Jevic. Jevic's decreased margin was largely due to the impact of revenue declines, which created diseconomies of scale with regard to fixed costs in their operating model. The consolidated 2005 operating ratio (operating expenses divided by operating revenue) was 95.0 compared to 95.8 in 2004. However, excluding the real estate gain, the consolidated 2005 operating ratio was 95.7. Saia continued initiatives to manage productivity and control variable costs as monthly volumes fluctuated. The impact of higher margin and volume increases at Saia were partially offset by structural cost increases in wage rates, purchased transportation, healthcare costs and other operating expenses. In August, Jevic named a new president to lead the evaluation and implementation of a series of initiatives designed to improve operations and profitability with a focus on growing LTL tonnage, improving cost effectiveness and enhancing revenue quality. Higher fuel prices (exclusive of taxes), in conjunction with volume changes, caused $39.6 million of the increase in operating expenses and supplies. Purchased transportation costs increased 7.6 percent as decreased utilization was more than

Table of Contents

offset by increased costs per mile largely driven by fuel price increases and capacity constraints, including a tight driver market and impacts of hours of service regulations. Increased revenues from the fuel surcharge program more than offset the effect of these fuel price increases.
Saia had operating income of $55.3 million in 2005, which included a $7.0 million real estate gain, compared to $35.8 million in 2004 which included a $2.1 million integration charge. Also during 2005, several hurricanes caused property damage to some of Saia's Gulf Coast and Florida terminals and disrupted operations, which adversely impacted their operating results. In addition to lost revenue due to these storms, service recovery efforts at Saia resulted in significant incremental wage and other operating and administrative expense primarily in the third and fourth quarters. In the fourth quarter, the Company recorded a partial insurance recovery of $1.0 million for losses attributable to Hurricane Katrina. This amount approximates management's estimate of actual fourth quarter effects of the hurricanes. The remaining insurance recovery, which management expects to be in excess of this amount, will be recognized upon reaching a negotiated settlement for the remaining claims. The operating ratio at Saia was 92.7 in 2005 compared to 94.4 in 2004. Saia's operating ratio was 93.6 excluding the $7.0 million real estate gain in 2005 compared to 94.1 in 2004, excluding the $2.1 million integration charge. Saia improved its operating income through yield improvement, increased volume as well as continued strong cost controls. The higher volumes, improved yields and cost controls allowed Saia to leverage its fixed cost network and offset higher cargo and bodily injury and property damage claims costs, a general wage increase in August 2005 and other wage adjustments during the year. As of the fourth quarter 2005, Saia's wage rates were approximately 2.8 percent higher than the fourth quarter of 2004.
Jevic operating income was $3.1 million in 2005, versus $8.9 million in 2004. Jevic's 2004 results include approximately $4.4 million charge to workers' compensation expense related to an increase in the actuarially estimated liability for claims from prior years. Jevic's volume decline and very modest yield improvement hurt fixed cost coverage and contributed to variable diseconomies that were only partially offset by salary and other general and administrative expense reductions and other operating expense savings. However, in 2005, Jevic's service execution was consistently high, an improvement over 2004 service performance. In August, Jevic named a new president to lead the evaluation and implementation of a series of initiatives designed to improve operations and profitability with a focus on growing LTL tonnage, improving cost effectiveness and enhancing revenue quality. The operating ratio at Jevic was 99.1 in 2005, compared to 97.4 in 2004, which includes the higher workers' compensation expense discussed above. Jevic implemented planned wage increases in September 2005. As of the fourth quarter 2005, Jevic's wage rates were approximately 2.7 percent higher than the fourth quarter of 2004. Net holding company operating expenses in excess of costs allocated to the operating companies were $3.8 million in 2005 compared to $3.9 million in 2004. Total holding company costs were $9.5 million in 2005 compared to $9.0 million in 2004. Holding company costs in 2005 include approximately $0.8 million in severance costs associated with the change in management at Jevic in August 2005 and a $0.3 million increase in other operating expenses. This cost increase was offset by a decrease in equity based compensation charges which were about $1.0 million lower in 2005 compared to 2004. Other
Substantially all SCST non-operating expenses represent interest expense. Interest costs were $9.8 million in 2005 versus $9.7 million in 2004. Average outstanding indebtedness did not change significantly between 2005 and 2004 while interest rates rose in 2005 on the smaller variable rate portion of the Company's debt. The Company's capital structure consists predominantly of longer-term, fixed rate instruments. The consolidated effective tax rate was 39.5 percent in 2005 compared to 38.7 percent in 2004. The 2005 effective tax rate included approximately $0.4 million in tax benefit related to prior tax years. The 2004 effective tax rate was lower due to a $0.6 million tax benefit related to the favorable settlement of various tax issues. The notes to the consolidated financial statements provide an analysis of the income tax provision and the effective tax rate.
Working capital/capital expenditures
The decrease in working capital is predominantly the result of higher accounts payable at December 31, 2005 due to approximately $8.9 million in trailer purchases delivered late in 2005 and higher wage and employee benefit accruals that more than offset an increase in accounts receivable. The increase in accounts receivable reflects the higher revenues (both volume and yield) in December 2005 versus December 2004. The 2005 capital investments were $67.6 million on a gross basis and $53.7 million on a net basis. Proceeds from the disposition of assets included $8.8 million for the disposition of a Saia terminal in Jacksonville, Florida with excess capacity. Net capital expenditures of $53.7 million include approximately $2.1 million investment in real estate and $51.6 million for

Table of Contents

replacement of revenue equipment and investment in technology equipment and software. By subsidiary, Saia net capital expenditures were $34 million consisting of $45 million in additions and $11 million in dispositions and Jevic net capital expenditures were $20 million, consisting of $23 million in additions and $3 million in dispositions.
Year ended December 31, 2004 vs. year ended December 31, 2003 Revenue and volume
Consolidated revenue increased 18.7 percent to $982.3 million as a result of improved pricing and increased volumes as both shipments and LTL tonnage were up over the prior year. Volume gains were attributable to improved economic conditions, company specific initiatives and the February 16, 2004 acquisition of Clark Bros., which was subsequently merged into Saia on May 1, 2004. On a pro forma basis, including Clark Bros. revenue in the prior-year comparison, consolidated revenues were up 10.8 percent. Fuel surcharge revenue, which was 5.9 percent of total revenue in 2004, was up significantly from 2003 when fuel surcharge revenue was 3.6 percent of total revenue and is intended to reduce the Company's exposure to rising diesel prices.
Saia had operating revenue of $645.4 million in 2004, an increase of 24.0 percent over 2003 operating revenue of $520.7 million. Saia's operating revenue excluding fuel surcharge was $607.8 million in 2004, up 21.0 percent from $502.3 million in 2003. On a pro forma basis, including Clark Bros. revenue in the prior-year comparison, Saia revenue was up 11.4 percent over 2003. Saia LTL revenue per hundredweight excluding fuel surcharge (a measure of yield) increased 1.1 percent to $9.64 per hundredweight for 2004. Saia experienced stronger price increases in the second half of 2004. Saia LTL tonnage was up 20.1 percent to 2.9 million tons and LTL shipments were up 17.5 percent to 5.3 million shipments. On a pro forma basis including Clark Bros. in the prior year comparisons, LTL tonnage was up 6.7 percent and LTL shipments were up 3.0 percent. Yield improvement during the second half of 2004 is attributable to a better pricing environment that allowed Saia to achieve better contract renewal rates with customers than in the past two years. However, pricing remained competitive in regional markets. Management believes that Saia continued to grow volume by providing high quality service for its customers and from sales initiatives in specific market segments. Approximately 75 percent of Saia's revenue is subject to individual customer price adjustment negotiations that occur intermittently throughout the year. The remaining 25 percent of revenue is subject to the annual general rate increase. On June 1, 2004, Saia implemented a 6.2 percent general rate increase for this smaller group of customers. Competitive factors, customer turnover and mix changes impact the extent to which customer rate increases are retained over time.
Jevic had operating revenue of $336.9 million in 2004, a 9.8 percent increase over $306.7 million in 2003. Jevic's operating revenue excluding fuel surcharge was $316.7 million in 2004, up 7.2 percent from $295.5 million in 2003. Jevic total revenue per hundredweight excluding fuel surcharge increased 3.5 percent to $6.67 per hundredweight, tonnage was up 3.0 percent to 2.3 million tons and shipments were up 1.3 percent to 1.0 million shipments. Jevic's revenue increase was due to increased truckload volume, improved yields and increased brokerage revenue. The increase in yield was primarily a result of an improved pricing environment for both LTL and truckload business. Approximately 60 percent of Jevic's revenue is subject to individual customer price adjustment negotiations that occur intermittently throughout the year. The remaining 40 percent of revenue is subject to the annual general rate increase. On June 21, 2004, Jevic implemented a 6.0 percent general rate increase on LTL business and a 5.0 percent increase on truckload business for this smaller group of customers. Competitive factors, customer turnover and mix changes impact the extent to which customer rate increases are retained over time. Operating expenses and margin
The 24.2 percent increase in consolidated operating income reflects higher margin contribution on year over year volume increases; yield improvement and cost and productivity improvements partially offset by structural cost increases. Operating income in 2004 also includes $2.1 million in integration charges at Saia related to the Clark Bros. acquisition and $4.4 million in charges at Jevic to reflect actuarially estimated increases in the workers' compensation liability related to claims in prior years. Operating income in 2004 benefited from net operating gains of $2.5 million from the sale of revenue equipment and gains of $0.6 million from the sale of one real estate facility. The 2004 operating ratio (operating expenses divided by operating revenue) was 95.8 compared to 96.0 in 2003. Excluding the integration charges, workers' compensation charges and property gains described above, the consolidated operating ratio in 2004 was 95.5. In February 2004 Saia acquired Clark Bros., a Midwestern less than truckload operation serving 11 states. During the first half of the year, Saia recorded $2.1 million in charges related to the May 2004 integration of this company into Saia. During the third quarter, Saia incurred additional costs to enhance its service primarily in new geography resulting from the first quarter acquisition of Clark Bros. Also in the

Table of Contents

third quarter and in the fourth quarter Jevic recorded $6.0 million in higher than anticipated workers' compensation expense based on the results of an actuarial valuation of their workers' compensation liability completed in the fourth quarter 2004. Approximately $4.4 million related to increases in the liability for claims from prior years and the remaining $1.6 million represented an increase in estimated 2004 claims expense. Both Saia and Jevic continued initiatives to improve productivity and control variable costs as monthly volumes fluctuated. These costs and productivity initiatives were partially offset by structural cost increases in wage rates, purchased transportation, healthcare costs and other operating expenses. Higher fuel prices (exclusive of taxes), in conjunction with volume changes, caused $25.1 million of the increase in operating expenses and supplies. These fuel price increases were more than offset by increased revenues from the fuel surcharge program.
Saia had operating income of $35.8 million in 2004, compared to $27.7 million in 2003. The operating ratio at Saia was 94.4 in 2004 compared to 94.7 in 2003. Saia's operating ratio was 94.1 excluding the $2.1 million integration charge in 2004. Saia improved its operating income through yield improvement, increased volume due in part to the Clark Bros. acquisition and continued strong cost controls. The higher volumes, improved yields and cost controls allowed Saia to . . .