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SAIA > SEC Filings for SAIA > Form 10-Q on 7-Nov-2013All Recent SEC Filings

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Form 10-Q for SAIA INC


7-Nov-2013

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 2012 audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2012. 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, 2012, 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 along with 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 since then 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 5.4 percent in the third quarter of 2013 compared to the same period in 2012. The increase resulted primarily from effective yield management plus one additional workday in the third quarter of 2013.

Consolidated operating income was $21.9 million for the third quarter of 2013 compared to consolidated operating income of $16.4 million in the third quarter of 2012. In the third quarter of 2013, LTL tonnage per workday was down 0.1 percent versus the prior year quarter. Diluted earnings per share were $0.51 in the third quarter of 2013, compared to diluted earnings per share of $0.37 in the prior year quarter. The operating ratio (operating expenses divided by operating revenue) was 92.5 percent in the third quarter of 2013. This compares to 94.1 percent in the third quarter of 2012.

The Company generated $67.6 million in cash provided by operating activities through the first nine months of 2013 compared with cash provided in the amount of $77.4 million in the prior-year period largely due to working capital fluctuations. The Company had net cash used in investing activities of $97.7 million during the first nine months of 2013 compared to $86.9 million in the first nine months of 2012, which was primarily for the purchase of revenue equipment. The Company's cash provided by financing activities was $33.9 million through the first nine months of 2013 compared to $9.0 million provided by financing activities in the prior year period. The Company had $51.9 million in borrowings under its revolving credit agreement, outstanding letters of credit of $59.1 million and a cash and cash equivalents balance of $4.1 million at September 30, 2013. The Company was in compliance with the debt covenants under its debt agreements at September 30, 2013.

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, 2013 and 2012

                                  (unaudited)



                                                                                                    Percent
                                                                                                    Variance
                                                                2013                2012           '13 v. '12
                                                                 (in thousands, except ratios and revenue
                                                                            per hundredweight)
Operating Revenue                                           $    293,087        $    278,024               5.4
Operating Expenses:
Salaries, wages and employees' benefits                          147,305             138,532               6.3
Purchased transportation                                          18,914              18,810               0.6
Depreciation and amortization                                     13,745              12,315              11.6
Fuel and other operating expenses                                 91,188              91,951              (0.8 )
Operating Income                                                  21,935              16,416              33.6
Operating Ratio                                                     92.5 %              94.1 %             1.6
Nonoperating Expense                                               1,675               1,897             (11.7 )
Working Capital (as of September 30, 2013 and 2012)               25,912               7,117
Cash Flows provided by Operations (year to date)                  67,557              77,425
Net Acquisitions of Property and Equipment (year to date)         97,741              79,279
Operating Statistics:
LTL Tonnage                                                          932                 918               1.5
LTL Shipments                                                      1,608               1,574               2.2
LTL Revenue per hundredweight                               $      14.54        $      14.00               3.8

Quarter and nine months ended September 30, 2013 Compared to Quarter and nine months ended September 30, 2012

Revenue and volume

Consolidated revenue increased 5.4 percent to $293.1 million primarily as a result of effective yield management plus one additional workday in the third quarter of 2013. In the third quarter of 2013, LTL tonnage per workday was down 0.1 percent versus the prior year quarter. Saia's LTL revenue per hundredweight (a measure of yield) increased 3.8 percent to $14.54 per hundredweight for the third quarter of 2013 as a result of increased rates. 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. On July 1, 2013, Saia implemented a 5.9 percent general rate increase for customers comprising this 30 percent of operating revenue. Competitive factors, customer turnover and mix changes, among other things, impact the extent to which customer rate increases are retained over time.

Operating revenue includes fuel surcharge revenue from the Company's fuel surcharge program. That program is designed to reduce the Company's exposure to fluctuations in fuel prices by adjusting total freight charges to account for changes in the price of fuel. The Company's fuel surcharge is 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 16.7% of operating revenue for the quarter ended September 30, 2013 compared to 16.9% for the quarter ended September 30, 2012.


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For the nine months ended September 30, 2013, operating revenues were $859.4 million up 3.0 percent from $834.3 million for the nine months ended September 30, 2012, primarily due to higher yield, which reflects increases in rates and fuel surcharge, partially offset by a decrease in tonnage.

Operating expenses and margin

Consolidated operating income was $21.9 million in the third quarter of 2013 compared to operating income of $16.4 million in the prior year quarter. Overall, the operations were favorably impacted in 2013 by higher yield combined with continued cost optimization initiatives throughout our network. The third quarter 2013 operating ratio (operating expenses divided by operating revenue) was 92.5 percent compared to 94.1 percent for the same period in 2012.

Salaries, wages and benefits increased $8.8 million in the third quarter of 2013 compared to the prior year period largely due to a 3.0 percent wage increase in July 2012, increased headcount and increased healthcare cost. Maintenance costs increased $1.3 million compared to the third quarter of 2012 due to more costly routine maintenance and higher parts costs. During the third quarter of 2013, claims and insurance expense was $0.5 million higher than the previous year quarter due to increased accident expense. The Company can experience volatility in accident expense as a result of its self-insurance structure and $2.0 million retention limits per occurrence. Purchased transportation increased $0.1 million from the third quarter of 2012 primarily due to rate increases. Depreciation and amortization increased by $1.4 million as a result of capital expenditures during the first nine months of 2013.

Other

Substantially all non-operating expenses represent interest expense. Interest expense in third quarter 2013 was lower due to a lower interest rate in 2013. The effective tax rate was 36.3 percent for the quarter ended September 30, 2013 and September 30, 2012. For the nine months ended September 30, 2013, the effective tax rate was 35.3 percent compared to 37.6 percent for the nine months ended September 2012. In January 2013, Congress enacted certain tax credits related to 2012 and 2013. The 2013 tax rate year to date reflects the recognition of $1.0 million in tax credits in the first quarter of 2013 for 2012.

Net income was $12.9 million or $0.51 per diluted share in the third quarter of 2013 compared to net income of $9.3 million, or $0.37 per diluted share, in the third quarter of 2012.

Working capital/capital expenditures

Working capital at September 30, 2013 was $25.9 million which increased from working capital at September 30, 2012 of $7.1 million.

Current assets increased by $12.4 million as compared to September 30, 2012 and include an increase in accounts receivable of $2.7 million along with increases in other assets. Current liabilities decreased by $6.4 million as compared to September 30, 2012 driven primarily by a decrease in the current portion of long term debt of $7.5 million and accounts payable of $3.5 million offset by increases in other liabilities. Cash flows provided by operating activities were $67.6 million for the nine months ended September 30, 2013 versus $77.4 million provided by operating activities for the nine months ended September 30, 2012 with the impact of higher net income being more than offset by the changes in working capital. For the nine months ended September 30, 2013, cash used in investing activities was $97.7 million versus $86.9 million in the prior year period. For the nine months ended September 30, 2013, net cash provided by financing activities was $33.9 million compared to $9.0 million of cash provided by financing activities in the prior year period. A significant portion of capital expenditures for 2013 were incurred in the second quarter and third quarter of 2013 compared to 2012 when a large portion were incurred in the first quarter. Capital expenditures are primarily for revenue equipment, information technology, land and structures.

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 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 industry capacity.


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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 1, 2013, Saia implemented a 5.9 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 has announced the other half of the 401(k) match will be reinstated December 1, 2013. 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 and increased Board of Directors compensation to market levels. Effective July 1, 2013, the Company implemented an approximately three percent salary and wage increase for all of its employees. The impact of the July 2013 compensation increase is expected to be approximately $13 million annually. The Company anticipates the impact of the July 2013 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, 2013 that the Company believes would have a significant impact on its condensed consolidated financial statements.

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 $200 million in availability, subject to a borrowing base and expires in June 2018. The Company is also a party to a long-term note agreement (the Restated Master Shelf Agreement). The Company has pledged certain real estate and facilities, tractors and trailers, accounts receivable and other assets to secure indebtedness under both agreements.


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Restated Credit Agreement

The Restated Credit Agreement is a revolving credit facility for up to $200 million expiring in June 2018. 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 125 basis points to 250 basis points, base rate margins from minus 12.5 to plus 50 basis points, letter of credit fee range from 137.5 basis points to 262.5 basis points and an unused portion fee from 20 basis points to 32.5 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, 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 $200 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, 2013, the Company had borrowings of $51.9 million and outstanding letters of credit of $59.1 million under the Restated Credit Agreement. At September 30, 2012, the Company had borrowings of $19.4 million and outstanding letters of credit of $58.6 million under the Restated Credit Agreement. The available portion of the Restated Credit Agreement may be used for general corporate purposes, including future capital expenditures, working capital and letter of credit requirements as needed.

Restated Master Shelf Agreement

On September 20, 2002, the Company issued $100 million in Senior Notes under a $125 million (amended to $150 million in April 2005) Master Shelf Agreement with Prudential Investment Management, Inc. and certain of its affiliates. The Company issued 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 2013 are approximately $115 million. This represents an approximate $32 million increase from 2012 net capital expenditures of $82.8 million for property and equipment. Approximately $19 million of the remaining 2013 capital budget was committed as of September 30, 2013. Net capital expenditures pertain primarily to investments in revenue equipment, information technology, land and structures.

The Company has historically generated cash flows from operations that have funded its capital expenditure requirements. Cash flows provided by operating activities were $67.6 million for the nine months ended September 30, 2013, $9.8 million lower than the prior year largely due to working capital fluctuations, especially related to accounts receivable. The timing of capital expenditures can largely be managed around the seasonal working capital requirements of the Company. The Company believes it has adequate sources of capital to meet short-term liquidity needs through its operating cash flows and availability under the Restated Credit Agreement, subject to the Company's 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, 2013.

At September 30, 2013, 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, 2013, the portion of collateral allocated by Yellow to Saia in support of these claims was $1.6 million.


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In accordance with U.S. generally accepted accounting principles, our operating leases are not recorded in our consolidated balance sheet; however, the future minimum lease payments are included in the "Contractual Obligations" table . . .

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