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SAIA > SEC Filings for SAIA > Form 10-Q on 7-Nov-2012All Recent SEC Filings

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Form 10-Q for SAIA INC


7-Nov-2012

Quarterly Report


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 2011 audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2011. Those consolidated financial statements include additional information about our significant accounting policies, practices and the transactions that underlie our financial results.

Forward-Looking Statements

The Securities and Exchange Commission (the SEC) encourages companies to disclose forward-looking information so that investors can better understand the future prospects of a company and make informed investment decisions. This Quarterly Report on Form 10-Q, including "Management's Discussion and Analysis of Financial Condition and Results of Operations," contains these types of statements, which are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as "anticipate," "estimate," "expect," "project," "intend," "may," "plan," "predict," "believe," "should" and similar words or expressions are intended to identify forward-looking statements. Investors should not place undue reliance on forward-looking statements, and the Company undertakes no obligation to publicly update or revise any forward-looking statements. All forward-looking statements reflect the present expectation of future events of our management as of the date of this Quarterly Report on Form 10-Q and are subject to a number of important factors, risks, uncertainties and assumptions that could cause actual results to differ materially from those described in any forward-looking statements. These factors, risks, assumptions and uncertainties include, but are not limited to, general economic conditions including downturns in the business cycle; the creditworthiness of our customers and their ability to pay for services; competitive initiatives and pricing pressures, including in connection with fuel surcharge; the Company's need for capital and uncertainty of the current 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; indemnification obligations associated with the 2006 sale of Jevic Transportation, Inc.; the effect of litigation including class action lawsuits; cost and availability of qualified drivers, fuel, purchased transportation, real property, revenue equipment and other assets; governmental regulations, including but not limited to Hours of Service, engine emissions, the Compliance, Safety, Accountability (CSA) initiative, compliance with legislation requiring companies to evaluate their internal control over financial reporting, changes in interpretation of accounting principles and Homeland Security; dependence on key employees; inclement weather; labor relations, including the adverse impact should a portion of the Company's workforce become unionized; effectiveness of Company-specific performance improvement initiatives; terrorism risks; self-insurance claims and other expense volatility; increased costs as a result of recently-enacted healthcare reform legislation 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, 2011, as updated by Part II, Item 1A. of this Quarterly Report on Form 10-Q.

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

Executive Overview

The Company's business is highly correlated to non-service sectors of the general economy. The Company's strategy is to improve profitability by increasing yield while also increasing volumes to build density in existing geography. The Company's business is labor intensive, capital intensive and service sensitive. The Company looks for opportunities to improve cost effectiveness, safety and asset utilization (primarily tractors and trailers). The pricing initiatives that were implemented in 2010 and continued through 2011 and the first nine months of 2012 have had a positive impact on yield and profitability. The Company continues to execute targeted sales and marketing programs along with initiatives to align costs with volumes and improve customer satisfaction. Technology continues to be an important investment that is facilitating operational efficiencies and improving Company image.


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The Company's operating revenue increased by 3.6 percent in the third quarter of 2012 compared to the same period in 2011. The increase resulted primarily from improved yield from pricing actions. There was one less workday in third quarter 2012 compared to third quarter 2011.

Consolidated operating income was $16.4 million for the third quarter of 2012 compared to consolidated operating income of $9.6 million in the third quarter of 2011. In the third quarter of 2012, LTL tonnage per workday was down 1.6 percent versus the prior-year quarter. Diluted earnings per share were $0.56 in the third quarter of 2012. This compares to diluted earnings per share of $0.30 in the prior-year quarter. The operating ratio (operating expenses divided by operating revenue) was 94.1 percent in the third quarter of 2012. This compares to 96.4 percent in the third quarter of 2011.

The Company generated $77.4 million in cash provided by operating activities through the first nine months of 2012 compared with cash provided in the amount of $34.7 million in the prior-year period. The Company had net cash used in investing activities of $86.9 million during the first nine months of 2012 mostly for the purchase of revenue equipment and also due for the Robart acquisition, compared to $51.8 million in the first nine months of 2011. The Company's cash provided by financing activities during the first nine months of 2012 was $9.0 million compared to cash used in financing activities in the first nine months of 2011 of $8.4 million. The Company had $19.4 million in net cash borrowings under its revolving credit agreement at September 30, 2012 and made a scheduled principal payment of Senior Notes of $11.1 million during the nine months. Outstanding letters of credit were $58.6 million and the cash and cash equivalents balance of $0.8 million as of September 30, 2012. The Company was in compliance with the debt covenants under its debt agreements at September 30, 2012.

General

The following Management's Discussion and Analysis describes the principal factors affecting the results of operations, liquidity and capital resources, as well as the critical accounting policies of Saia, Inc. and Subsidiaries (also referred to as Saia or the Company).

The Company is a transportation company headquartered in Johns Creek, Georgia providing a wide range of less-than-truckload, non-asset truckload, expedited and logistics services across the United States.

Our business is highly correlated to non-service sectors of the general economy. It also is impacted by a number of other factors as discussed under "Forward Looking Statements" and Part II, Item 1A. "Risk Factors". The key factors that affect our operating results are the volumes of shipments transported through our network, as measured by our average daily shipments and tonnage; the prices we obtain for our services, as measured by revenue per hundredweight (a measure of yield) and revenue per shipment; our ability to manage our cost structure for capital expenditures and operating expenses such as salaries, wages and benefits; purchased transportation; claims and insurance expense; fuel and maintenance; and our ability to match operating costs to shifting volume levels.


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Results of Operations

                          Saia, Inc. and Subsidiaries

            Selected Results of Operations and Operating Statistics

               For the quarters ended September 30, 2012 and 2011

                                  (unaudited)



                                                                                          Percent
                                                                                          Variance
                                                    2012                 2011            12 v. '11
                                                     (in thousands, except ratios and revenue
                                                                per hundredweight)
Operating Revenue                               $     278,024        $     268,285              3.6
Operating Expenses:
Salaries, wages and employees' benefits               138,532              133,460              3.8
Purchased transportation                               18,810               23,345            (19.4 )
Depreciation and amortization                          12,315                9,723             26.7
Fuel and other operating expenses                      91,951               92,137             (0.2 )
Operating Income                                       16,416                9,620             70.6
Operating Ratio                                          94.1 %               96.4 %            2.3
Nonoperating Expense                                    1,897                2,316            (18.1 )

Working Capital (as of September 30, 2012
and 2011)                                               7,117               27,357
Cash Flows provided by Operations (year to
date)                                                  77,425               34,653
Net Acquisitions of Property and Equipment
(year to date)                                         79,279               51,754

Operating Statistics:
LTL Tonnage                                               918                  947             (3.1 )
LTL Shipments                                           1,574                1,670             (5.7 )
LTL Revenue per hundredweight                   $       14.00        $       13.14              6.6

Quarter and nine months ended September 30, 2012 vs. Quarter and nine months ended September 30, 2011

Revenue and volume

Consolidated revenue increased 3.6 percent to $278.0 million as a result of increased yield due to measured pricing actions. There was one less workday in third quarter 2012 compared to third quarter 2011. Improvements in the economic environment that were evident during 2011 and 2012 permitted the Company to implement measured pricing actions to improve yield. Saia's LTL revenue per hundredweight (a measure of yield) increased 6.6 percent to $14.00 per hundredweight for the third quarter of 2012 as a result of increased rates. Saia's LTL tonnage per workday decreased 1.6 percent and LTL shipments per workday decreased 4.3 percent. Approximately 70 percent of Saia's operating revenue is subject to specific customer price adjustment negotiations that occur throughout the year. The remaining 30 percent of operating revenue is subject to a general rate increase which is typically taken once a year. Saia implemented two 6.9 percent general rate increases, the first on August 22, 2011 and the more recent on July 9, 2012. Competitive factors, customer turnover and mix changes, among other factors, impact the extent to which customer rate increases are retained over time.

For the nine months ended September 30, 2012, operating revenues were $834.3 million up 7.3 percent from $777.2 million for the nine months ended September 30, 2011, primarily due to higher yield, which reflects increased rates and fuel surcharge.


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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 annual customer contract renewals which blur the distinction between base price increases and recoveries under the fuel surcharge program. Fuel surcharges represent only one portion of overall competitive price negotiations as customers may negotiate increases in base rates instead of increases in fuel surcharges or vice versa. Fuel surcharge revenue decreased to 16.9% of operating revenue for the quarter ended September 30, 2012 compared to 17.0% for the quarter ended September 30, 2011. Fuel surcharge revenue increased to 17.3% of operating revenue for the nine months ended September 30, 2012 compared to 16.7% for the nine months ended September 30, 2011.

Operating expenses and margin

Consolidated operating income was $16.4 million in the third quarter of 2012, compared to operating income of $9.6 million in the prior year quarter. Overall, the operations were favorably impacted by higher yield combined with continued cost optimization initiatives throughout our network in 2012. The third quarter 2012 operating ratio (operating expenses divided by operating revenue) was 94.1 percent compared to 96.4 percent for the same period in 2011.

Salaries, wages and benefits increased $5.1 million over the third quarter of 2011 largely due to a 3.0 percent wage increase in July 2012, a 2.5 percent wage increase in December 2011 and accruals for estimated annual incentives. During the third quarter of 2012, claims and insurance expense was $0.6 million lower than the previous year quarter due to decreased cargo claims. The Company can experience volatility in accident expense as a result of its self-insurance structure and $2.0 million retention limits per occurrence. Depreciation expense increased $2.6 million in the third quarter of 2012 compared to the third quarter of 2011 largely due to revenue equipment and technology investments in late 2011 and year-to-date in 2012. Purchased transportation decreased $4.5 million from the third quarter of 2011 primarily due to network optimization and driving more in-house miles.

Other

Substantially all non-operating expenses represent interest expense. Interest expense in third quarter 2012 was lower due to lower interest rates in 2012. The effective tax rate was 36.3 percent for the quarter ended September 30, 2012 compared to 33.9 percent for the quarter ended September 30, 2011 due to the impact of state income taxes on improved results and the lower impact of expected credits. For the nine months ended September 30, 2012, the effective tax rate was 37.6 percent compared to 35.5 percent for the nine months ended September 30, 2011 reflecting the impact of state income taxes on improved results and the lower impact of expected credits.

Net income was $9.3 million or $0.56 per diluted share in the third quarter of 2012 compared to net income of $4.8 million, or $0.30 per diluted share, in the third quarter of 2011. Net income was $26.6 million or $1.61 per diluted share in the first nine months of 2012 compared to net income of $8.9 million or $0.55 per diluted share in the prior year period.

Working capital/capital expenditures

Working capital at September 30, 2012 was $7.1 million which decreased from working capital at September 30, 2011 of $27.4 million.

This decrease was primarily due to a $29.0 million increase in current liabilities partially offset by a $9.7 million increase in accounts receivable. Cash flows provided by operating activities were $77.4 million for the nine months ended September 30, 2012 versus $34.7 million provided by operating activities for the nine months ended September 30, 2011. For the nine months ended September 30, 2012, cash used in investing activities was $86.9 million versus $51.8 million in the prior-year period, due to higher equipment purchases and the Robart acquisition. For the nine months ended September 30, 2012, cash provided by financing activities was $9.0 million versus $8.4 million of cash used in financing activities for the prior-year period due to borrowings of long-term debt to fund the Robart acquisition and higher equipment purchases.


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Outlook

Our business remains highly correlated to the general economy and competitive pricing pressures, as well as the success of Company-specific improvement initiatives. While improved through 2011 and through the third quarter of 2012, there remains uncertainty as to the timing and strength of economic recovery. We are continuing initiatives to increase yield, to reduce costs and improve productivity. We focus on providing top quality service and improving safety performance. If significant competitors were to cease operations and their capacity leave the market, current industry excess capacity conditions could improve. However, there can be no assurance that any industry consolidation will indeed happen or if such consolidation occurs that it will materially improve the excess industry capacity.

The Company continues to pursue revenue and cost initiatives to improve profitability. Planned revenue initiatives include, but are not limited to, building density in our current geography, targeted marketing initiatives to grow revenue in more profitable segments, as well as pricing and yield management. On July 9, 2012, Saia implemented a 6.9 percent general rate increase for customers comprising approximately 30 percent of Saia's operating revenue. The extent of success of these revenue initiatives is impacted by what proves to be the underlying economic trends, competitor initiatives and other factors discussed under "Forward-Looking Statements" and Part II, Item 1A. "Risk Factors."

In 2009, the Company implemented certain cost reduction measures including: the suspension of the Company's 401(k) match; effective reduction in compensation equal to ten percent of salary for the Company's leadership team and a five percent wage and salary reduction for hourly, linehaul and salaried employees in operations, maintenance and administration; and a ten percent reduction in the annual retainer and meeting fees paid to the non-employee members of the Company's Board of Directors. Despite these necessary reductions, the Company's compensation philosophy remained committed to a market-based program. Based on the continued improvement in the Company's operating results and the Company's desire to attract and retain employees needed for the Company to continue to deliver best-in-class service to customers, management began taking steps in April 2011 to reinstate some or all of certain compensation programs and amounts subject to the 2009 reductions. One half of the 401(k) match suspension was reinstated effective April 1, 2011. The Company implemented a two and one-half percent wage and salary increase for hourly, linehaul and salaried employees in operations, maintenance, administration and management effective December 1, 2011. Effective July 1, 2012, the Company implemented a salary and wage increase for all its employees of approximately three percent. The impact of the July 2012 compensation increase is expected to be approximately $13 million annually. Also effective July 1, 2012, the Company increased Board of Director's compensation to market levels. The Company anticipates the impact of the July 2012 compensation increase to be partially offset by further productivity and efficiency gains.

If the Company builds market share, there are numerous operating leverage cost benefits. Conversely, should the economy soften from present levels, the Company plans to attempt 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 implementation of profit improvement initiatives and other factors discussed under "Forward-Looking Statements" and Part II, Item 1A. "Risk Factors."

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

New Accounting Pronouncements

There are no new accounting pronouncements pending adoption as of September 30, 2012 that the Company believes would have a significant impact on its consolidated financial position or results of operations.

Financial Condition

The Company's liquidity needs arise primarily from capital investment in new equipment, land and structures, information technology and letters of credit required under insurance programs, as well as funding working capital requirements.

The Company is party to a revolving credit agreement (the Restated Credit Agreement) with a group of banks to fund capital investments, letters of credit and working capital needs. The facility provides up to $150 million in availability, subject to a borrowing base and expires in November 2016. The Company is also party to a long-term


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note agreement (the Restated Master Shelf Agreement). The Company has pledged certain real estate and facilities, tractors and trailers, accounts receivable and other assets to secure indebtedness under both agreements.

Restated Credit Agreement

The Restated Credit Agreement is a revolving credit facility for up to $150 million expiring in November 2016. The Restated Credit Agreement also has an accordion feature that allows for an additional $40 million availability, subject to lender approval. The Restated Credit Agreement provides for a LIBOR rate margin range from 200 basis points to 300 basis points, base rate margins from zero to 75 basis points, letter of credit fee range from 212.5 basis points to 312.5 basis points and an unused portion fee from 25 basis points to 35 basis points 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, a maximum leverage ratio and a minimum tangible net worth, among others. The Restated Credit Agreement also provides for a pledge by the Company of certain land and structures, certain tractors, trailers and other personal property and accounts receivable, as defined in the Restated Credit Agreement. Total bank commitments under the Restated Credit Agreement are $150 million subject to a borrowing base calculated utilizing certain pledged property, equipment and accounts receivable as defined in the Restated Credit Agreement.

At September 30, 2012, the Company had borrowings of $19.4 million and $58.6 million in letters of credit outstanding under the Restated Credit Agreement. At September 30, 2011, the Company had no borrowings and $49.7 million in letters of credit outstanding under the Restated Credit Agreement. The available portion of the Restated Credit Agreement may be used for general corporate purposes, including future capital expenditures, working capital and letter of credit requirements as needed.

Restated Master Shelf Agreement

On September 20, 2002, the Company issued $100 million in Senior Notes under a $125 million (amended to $150 million in April 2005) Master Shelf Agreement with Prudential Investment Management, Inc. and certain of its affiliates. The Company issued another $25 million in Senior Notes on November 30, 2007 and $25 million in Senior Notes on January 31, 2008 under the same Master Shelf Agreement.

The initial $100 million Senior Notes have a fixed interest rate of 7.38 percent. Payments due under the $100 million Senior Notes were interest only until June 30, 2006 and at that time semi-annual principal payments began with the final payment due December 2013. The November 2007 issuance of $25 million Senior Notes has a fixed interest rate of 6.14 percent. The January 2008 issuance of $25 million Senior Notes has a fixed interest rate of 6.17 percent. Payments due for both $25 million issuances were interest only until June 30, 2011 and at that time semi-annual principal payments began with the final payments due January 1, 2018. Under the terms of the Senior Notes, the Company must maintain certain financial covenants including a minimum fixed charge coverage ratio, a maximum leverage ratio and a minimum tangible net worth, among others.

Other

Projected net capital expenditures for 2012 are now approximately $83 million. This represents an approximately $15.0 million increase from 2011 net capital expenditures of $67.8 million for property and equipment. Approximately $1.8 million of the 2012 capital budget was committed at September 30, 2012. Net capital expenditures pertain primarily to investments in revenue equipment, information technology, land and structures.

The Company had historically generated cash flows from operations that have funded its capital expenditure requirements. Cash flows from operating activities were $59.3 million for the year ended December 31, 2011, while net cash used in investing activities was $67.9 million. Cash flows provided by operating activities were $77.4 million for the nine months ended September 30, 2012 which is $42.8 million higher than the prior year period. 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 cash and cash equivalents of $0.8 million at September 30, 2012 and availability under the Restated Credit Agreement, subject to the Company's borrowing base and 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, 2012.


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At September 30, 2012, YRC Worldwide Inc., formerly Yellow Corporation (Yellow), provided guarantees on behalf of Saia primarily for open workers' compensation claims and casualty claims incurred prior to March 1, 2000. Under the Master Separation and Distribution Agreement entered into in connection with the 100 percent tax-free distribution of Saia shares to Yellow shareholders in 2002, Saia pays Yellow's actual cost of any collateral it provides to insurance underwriters in support of these claims at cost plus 125 basis points. At September 30, 2012, the portion of collateral allocated by Yellow to Saia in support of these claims was $1.7 million.

In accordance with U.S. generally accepted accounting principles, our operating . . .

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