UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2016

OR

Commission file number: 0-49983

 

Saia, Inc.

(Exact name of registrant as specified in its charter)

 

 

(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 and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  ☒    No  ☐

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

 

 

 

 

 

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SAIA, INC. AND SUBSIDIARIES

INDEX

 

 

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Item 1. Financial Statements

Saia, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(unaudited)

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

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Saia, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

For the quarters and nine months ended September 30, 2016 and 2015

(unaudited)

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

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Saia, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

For the nine months ended September 30, 2016 and 2015

(unaudited)

 

 

See accompanying notes to condensed consolidated financial statements.

 

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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, 2015.  Operating results for the quarter and nine months ended September 30, 2016 are not necessarily indicative of the results of operations that may be expected for the year ended December 31, 2016.

Business

The Company offers customers a wide range of less-than-truckload, non-asset truckload, expedited and logistics services across the United States through its wholly-owned subsidiaries.  The Company has one operating segment.

Accounting Pronouncements Not Yet Adopted

In May 2014, the Financial Accounting Standards Board (“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 will replace most existing revenue recognition guidance in U.S. generally accepted accounting principles when it becomes effective.  In July 2015, the FASB updated ASU No. 2014-09 to defer the effective date by one year.  The new standard is effective for the Company on January 1, 2018, at which point the Company plans to adopt this standard.  The standard permits the use of either the retrospective or cumulative effect transition method.  The Company is evaluating the effect that ASU No. 2014-09 will have on its consolidated financial statements and related disclosures.  The Company has not yet selected a transition method nor has it completed its evaluation of the effect of the standard on its ongoing financial reporting.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), a leasing standard for both lessees and lessors. Under its core principle, a lessee will recognize lease assets and liabilities on the balance sheet for all arrangements with terms longer than 12 months. Lessor accounting remains largely consistent with existing U.S. generally accepted accounting principles. The new standard is effective for the Company on January 1, 2019. Early adoption is permitted. The standard requires the use of a modified retrospective transition method. The Company is evaluating the effect that ASU No. 2016-02 will have on its consolidated financial statements and related disclosures.  The Company has not completed its evaluation of the effect of the standard on its ongoing financial reporting.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which requires entities to recognize the income tax effects of stock awards in the income statement when the awards vest or are settled.  Further, the ASU allows entities to withhold up to the maximum individual statutory tax rate without classifying the stock awards as a liability and to account for forfeitures either upon occurrence or by estimating forfeitures.  The new standard is effective for the Company on January 1, 2017, at which point the Company plans to adopt this standard. The Company is evaluating the effect that ASU No. 2016-09 will have on its consolidated financial statements and related disclosures.  The Company has not yet selected a transition method nor has it completed its evaluation of the effect of the standard on its ongoing financial reporting.

 

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(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):

 

 

For the quarter and nine months ended  September 30, 2016, options and restricted stock for 402,770 and 516,312 shares of common stock, respectively, 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, 2015, options and restricted stock for 125,536 and 111,320 shares of common stock, respectively, were excluded from the calculation of diluted earnings per share because their effect was anti-dilutive.

 

 

(3) Commitments and Contingencies

The Company is subject to legal proceedings that arise in the ordinary course of its business. The Company 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.

The Company pays its pro rata share of the cost in connection with letters of credit outstanding for certain workers’ compensation and casualty claims incurred prior to March 31, 2000 that another carrier must maintain for insurance programs.  The pro rata share of these outstanding letters of credit was $1.8 million at September 30, 2016.

 

 

(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, 2016 and December 31, 2015, 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, 2016 and December 31, 2015 was $94.6 million and $73.1 million, respectively, based upon levels one and two in the fair value hierarchy.  The carrying value of the debt was $94.2 million and $69.0 million at September 30, 2016 and December 31, 2015, respectively.

 

 

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(5) Debt and Financing Arrangements

At September 30, 2016 and December 31, 2015, debt consisted of the following (in thousands):

 

 

On March 6, 2015, the Company entered into the Fifth Amended and Restated Credit Agreement with its banking group (as amended, the Restated Credit Agreement).  The amendment increased the amount of the revolver from $200 million to $250 million and extended the term until March 2020.  The amendment also reduced the interest rate pricing grid and eliminated both the borrowing base and the minimum tangible net worth covenant.  On the same date, the Company also entered into the Second Amended and Restated Master Shelf Agreement with its long term note holders (as amended, the Restated Master Shelf Agreement) that made changes to this agreement to conform with certain changes in the Restated Credit Agreement.

Restated Credit Agreement

The Restated Credit Agreement is a revolving credit facility for up to $250 million expiring in March 2020. The Restated Credit Agreement also has an accordion feature that allows for an additional $75 million 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, as defined in the Restated Credit Agreement.

At September 30, 2016, the Company had borrowings of $14.5 million and outstanding letters of credit of $39.7 million under the Restated Credit Agreement.  At December 31, 2015, the Company had borrowings of $14.5 million and outstanding letters of credit of $44.8 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 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.

The initial $100 million Senior Notes had 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 made in 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 and a maximum leverage ratio, among others.  The Senior Notes also provide 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 Senior Notes.  At September 30, 2016 and December 31, 2015, the Company had $10.7 million and $14.3 million, respectively, in Senior Notes outstanding.

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Capital Leases

The Company is obligated under capital leases with seven year terms covering revenue equipment totaling $69.0 million at September 30, 2016 compared to $40.2 million at December 31, 2015.  Amortization of assets held under the capital leases is included in depreciation and amortization expense.  The weighted average interest rate for the capital leases at September 30, 2016 and December 31, 2015 is 2.82% and 2.85%, respectively.

Principal Maturities of Long-Term Debt

The principal maturities of long-term debt instruments (in thousands) are as follows:

 

 

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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 2015 audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.  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, the following:

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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, 2015, 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.  Pricing initiatives have had a positive impact on yield and profitability.  The Company continues to execute targeted sales and marketing programs along with initiatives to align costs with volumes and improve customer satisfaction. Technology continues to be an important investment that is facilitating operational efficiencies and improving Company image.

The Company’s operating revenue decreased by 0.2 percent in the third quarter of 2016 compared to the same period in 2015.  The decrease resulted primarily from decreased shipments, tonnage and fuel surcharges, partially offset by yield management.

Consolidated operating income was $22.6 million for the third quarter of 2016 compared to $19.8 million for the third quarter of 2015.  In the third quarter of 2016, LTL shipments and tonnage per workday were down 1.2 and 2.9 percent, respectively, versus the prior year quarter.  Diluted earnings per share were $0.54 in the third quarter of 2016, compared to diluted earnings per share of $0.46 in the prior year quarter. The operating ratio (operating expenses divided by operating revenue) was 92.8 percent in the third quarter of 2016 compared to 93.7 percent in the third quarter of 2015.

The Company had $117.7 million in cash provided by operating activities through the first nine months of 2016 compared with $114.0 million in the same period last year. The increase is due to working capital fluctuations and an increase in non-cash items included in net income largely offset by a decrease in operating income for the nine months ended September 30, 2016.  The Company had net cash used in investing activities of $107.8 million during the first nine months of 2016 compared to $90.4 million in the first nine months of 2015, primarily as a result of the purchase of revenue equipment and real estate this year.  The Company’s cash used in financing activities was $9.2 million through the first nine months of 2016 compared to $23.4 million in the same period last year.  The Company had $14.5 million in borrowings under its revolving credit agreement, outstanding letters of credit of $41.5 million and cash and cash equivalents balance of $0.8 million at September 30, 2016.  The Company also had $10.7 million outstanding in Senior Notes and $69.0 million in obligations under capital leases at September 30, 2016.  The Company was in compliance with the debt covenants under its debt agreements at September 30, 2016.

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).

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.  The Company has one operating segment.

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, 2016 and 2015

(unaudited)

 

 

Quarter and nine months ended September 30, 2016 compared to Quarter and nine months ended September 30, 2015

Revenue and volume

Consolidated revenue for the quarter ended September 30, 2016 decreased 0.2 percent to $316.4 million primarily as a result of decreased tonnage, shipments and fuel surcharges which were partially offset by yield management.  Saia’s LTL revenue per hundredweight (a measure of yield) increased 3.7 percent to $16.08 per hundredweight for the third quarter of 2016 as a result of increased rates offset by decreased fuel surcharges.  Saia’s LTL tonnage decreased 2.9 percent to 0.9 million tons.  LTL shipments decreased 1.2 percent to 1.6 million shipments.  Approximately 75 to 80 percent of Saia’s operating revenue is subject to specific customer price negotiations that occur throughout the year.  The remaining 20 to 25 percent of operating revenue is subject to an annual general rate increase.  On December 7, 2015, Saia implemented a 4.9 percent general rate increase for customers comprising this 20 to 25 percent of operating revenue.  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.  They are an integral part of annual customer contract renewals but 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.  Saia revised its fuel surcharge program effective January 18, 2016.  Fuel surcharge revenue decreased to 10.2% of operating revenue for the quarter ended September 30, 2016 compared to 11.4% for the quarter ended September 30, 2015, as a result of lower fuel prices.

For the nine months ended September 30, 2016, operating revenues were $918.3 million, down 1.7 percent from $933.7 million for the nine months ended September 30, 2015, primarily due to decreased tonnage, shipments and fuel surcharges, partially offset by yield management and an additional workday in the current year period.  Fuel surcharge revenue decreased to 9.5% of operating revenue for the nine months ended September 30, 2016 compared to 12.1% for the nine months ended September 30, 2015, as a result of lower fuel prices.

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Operating expenses and margin

Consolidated operating income was $22.6 million in the third quarter of 2016 compared to $19.8 million in the prior year quarter.  Overall, the operations were favorably impacted in the third quarter of 2016 by higher yield, lower fuel and purchase transportation costs, and continued network optimization initiatives, which were partially offset by declining tonnage and shipments, salary and wage increases, and increased accident costs.  The third quarter 2016 operating ratio (operating expenses divided by operating revenue) was 92.8 percent compared to 93.7 percent for the same period in 2015.

Salaries, wages and benefits increased $1.1 million in the third quarter of 2016 compared to the prior year quarter largely due to a wage increase in July 2016 and increased internal driver utilization, largely offset by lower headcount and improved productivity. Fuel, operating expenses and supplies decreased $5.8 million in the third quarter of 2016 compared to the prior year quarter largely due to lower fuel costs, improved fuel efficiency, lower maintenance costs from a newer fleet and increased internal maintenance asset utilization, and reduced costs of other operating expenses and supplies.  During the third quarter of 2016, claims and insurance expense was $0.8 million higher than the previous year quarter primarily due to increased insurance premiums. 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 decreased $3.7 million compared to the third quarter of 2015 primarily due to a decline in fuel costs charged by carriers, favorable carrier rates and mix of transportation modes utilized, and increased utilization of internal assets.

For the nine months ended September 30, 2016 consolidated operating income was $61.9 million, down 14.4 percent compared to $72.4 million for the nine months ended September 30, 2015.

Salaries, wages and benefits increased $19.1 million during the first nine months of 2016 compared to the same period last year largely due to increased wages associated with an additional workday in the first nine months of 2016 and wage increases in July 2015 and 2016, increased internal driver utilization and higher healthcare benefit costs. Fuel, operating expenses and supplies decreased $29.0 million during the first nine months of 2016 compared to the same period last year largely due to lower fuel costs, improved fuel efficiency, lower maintenance costs from a newer fleet and increased internal maintenance asset utilization, and reduced costs of other operating expenses and supplies.  During the first nine months of 2016, claims and insurance expense was $8.6 million higher than the same period last year primarily due to increased accident frequency and severity in the current period, negative development on older claims and higher insurance premiums, partially offset by decreased cargo claims. Purchased transportation decreased $14.8 million compared to the first nine months of 2015 primarily due to a decline in fuel costs charged by carriers, favorable carrier rates and mix of transportation modes utilized, and increased utilization of internal assets.

Other

Substantially all non-operating expenses represent interest expense. Interest expense in third quarter 2016 was higher than third quarter 2015 due to increased average borrowings resulting from the $17.4 million increase in investing activities. The effective tax rate was 35.9 percent and 37.2 percent for the quarters ended September 30, 2016 and September 30, 2015, respectively.  For the nine months ended September 30, 2016, the effective tax rate was 35.8 percent compared to 37.0 percent for the nine months ended September 30, 2015.  The decreased tax rate is primarily a result of legislation enacted in December 2015 to extend alternative fuel tax credits for 2015 and 2016.

Net income was $13.8 million, or $0.54 per diluted share, in the third quarter of 2016 compared to net income of $11.8 million, or $0.46 per diluted share, in the third quarter of 2015.  Net income was $37.7 million, or $1.47 per diluted share, for the first nine months of 2016 compared to net income of $43.6 million, or $1.71 per diluted share, for the first nine months of 2015.

Working capital/capital expenditures

Working capital at September 30, 2016 was $13.0 million, which increased from working capital at September 30, 2015 of $11.8 million.

Current assets at September 30, 2016 increased by $0.1 million as compared to September 30, 2015 and include an increase in accounts receivable of $4.4 million largely offset by a decrease in cash and cash equivalents.  Current liabilities decreased by $1.1 million at September 30, 2016 compared to September 30, 2015 largely due to a decrease in accounts payable partially offset by increases in accrued wages, vacation and employee benefits and the current portion of long-term debt from capital leases used to finance certain revenue equipment.  Cash flows provided by operating activities were $117.7 million for the nine months ended September 30, 2016 versus $114.0 million for the nine months ended September 30, 2015.  For the nine months ended September 30, 2016, cash used in investing activities was $107.8 million versus $90.4 million in the same period last year, a $17.4 million increase.  This increase resulted primarily from higher capital expenditures for revenue equipment, despite the acquisition of a logistics business in the first quarter of 2015.  For the nine months ended September 30, 2016, net cash used in financing activities was $9.2 million compared to $23.4 million in the same period last year.

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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.  If significant competitors were to cease operations and their capacity leave the market, current industry conditions would likely 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.  On December 7, 2015 and October 3, 2016, Saia implemented 4.9 percent general rate increases for customers comprising approximately 20 to 25 percent of operating revenue.  Saia revised its fuel surcharge program effective January 18, 2016.  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.”

Effective July 1, 2016, 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 $16 million annually, and the Company anticipates the impact will be partially offset by continued 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 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 Not Yet Adopted

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services.  The ASU will replace most existing revenue recognition guidance in U.S. generally accepted accounting principles when it becomes effective.  In July 2015, the FASB updated ASU No. 2014-09 to defer the effective date by one year.  The new standard is effective for the Company on January 1, 2018, at which point the Company plans to adopt this standard.  The standard permits the use of either the retrospective or cumulative effect transition method.  The Company is evaluating the effect that ASU No. 2014-09 will have on its consolidated financial statements and related disclosures.  The Company has not yet selected a transition method nor has it completed its evaluation of the effect of the standard on its ongoing financial reporting.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), a leasing standard for both lessees and lessors. Under its core principle, a lessee will recognize lease assets and liabilities on the balance sheet for all arrangements with terms longer than 12 months. Lessor accounting remains largely consistent with existing U.S. generally accepted accounting principles. The new standard is effective for the Company on January 1, 2019. Early adoption is permitted. The standard requires the use of a modified retrospective transition method. The Company is evaluating the effect that ASU No. 2016-02 will have on its consolidated financial statements and related disclosures.  The Company has not completed its evaluation of the effect of the standard on its ongoing financial reporting.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which requires entities to recognize the income tax effects of stock awards in the income statement when the awards vest or are settled.  Further, the ASU allows entities to withhold up to the maximum individual statutory tax rate without classifying the stock awards as a liability and to account for forfeitures either upon occurrence or by estimating the number of forfeitures.  The new standard is effective for the Company on January 1, 2017, at which point the Company plans to adopt this standard. The Company is evaluating the effect that ASU No. 2016-09 will have on its consolidated financial statements and related disclosures.  The Company has not yet selected a transition method nor has it completed its evaluation of the effect of the standard on its ongoing financial reporting.

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.

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The Company is party to a revolving credit agreement (the Restated Credit Agreement) with a group of banks to fund capital investments, letters of credit and working capital needs.  The Company is also a party to a long-term note agreement (the Restated Master Shelf Agreement).  The Company has pledged certain land and structures, 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 $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, as defined in the Restated Credit Agreement.

At September 30, 2016, the Company had borrowings of $14.5 million and outstanding letters of credit of $39.7 million under the Restated Credit Agreement.  At December 31, 2015, the Company had borrowings of $14.5 million and outstanding letters of credit of $44.8 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 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.

The initial $100 million Senior Notes had 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 made 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 and a maximum leverage ratio, among others.  The Senior Notes also provide 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 Senior Notes.  At September 30, 2016 and December 31, 2015, the Company had $10.7 million and $14.3 million, respectively, in Senior Notes outstanding.

Capital Leases

The Company is obligated under capital leases with seven year terms covering revenue equipment totaling $69.0 million as of September 30, 2016, compared to $40.2 million at December 31, 2015.  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, 2016 and December 31, 2015 are 2.82% and 2.85%, respectively.

Other

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 2016 are approximately $145 million compared to $113 million in 2015, inclusive of equipment acquired using capital leases.  Approximately $1.7 million of the 2016 remaining capital budget was committed as of September 30, 2016.  Net capital expenditures were $142.5 million in the first nine months of 2016, inclusive of equipment acquired using capital leases.

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The Company has historically generated cash flows from operations that have funded its capital expenditure requirements.  Cash flows from operating activities were $142.7 million for the year ended December 31, 2015, while net cash used in investing activities was $107.9 million.  Cash flows provided by operating activities were $117.7 million for the nine months ended September 30, 2016, $3.7 million higher than the first nine months of the prior year. The increase is due to working capital fluctuations and an increase in non-cash items included in net income largely offset by a decrease in operating income.  The timing of capital expenditures can largely be managed around the seasonal working capital requirements of the Company.  The Company believes it has adequate sources of capital to meet short-term liquidity needs through its operating cash flows and availability under the Restated Credit Agreement, which was $195.8 million at September 30, 2016, 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, 2016.

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, 2015 for additional information.  In addition to the principal amounts disclosed in the tables below, the Company has interest obligations of approximately $1.1 million for the remainder of 2016 and decreasing for each year thereafter based on borrowings and commitments outstanding at September 30, 2016.

Contractual Obligations

The following tables set forth a summary of our contractual obligations and other commercial commitments as of September 30, 2016 (in millions):

 

 

 

 

The Company has accrued approximately $1.0 million for uncertain tax positions and $0.6 million for interest and penalties related to the uncertain tax positions as of September 30, 2016.  The Company cannot reasonably estimate the timing of cash settlement with respective taxing authorities beyond one year and accordingly has not included the amounts within the above contractual cash obligation and other commercial commitment tables.

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Critical Accounting Policies and Estimates

The Company makes estimates and assumptions in preparing the condensed consolidated financial statements that affect reported amounts and disclosures therein.  In the opinion of management, the accounting policies that generally have the most significant impact on the financial position and results of operations of the Company include:

These accounting policies and others are described in further detail in the notes to our audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

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The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management to adopt accounting policies and make significant judgments and estimates to develop amounts reflected and disclosed in the consolidated financial statements. In many cases, there are alternative policies or estimation techniques that could be used. We maintain a thorough process to review the application of our accounting policies and to evaluate the appropriateness of the many estimates that are required to prepare the consolidated financial statements. However, even under optimal circumstances, estimates routinely require adjustment based on changing circumstances and the receipt of new or better information.

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to a variety of market risks including the effects of interest rates and fuel prices.  The detail of the Company’s debt structure is more fully described in the notes to the consolidated financial statements set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.  To help mitigate our risk to rising fuel prices, the Company has implemented a fuel surcharge program.  This program is well established within the industry and customer acceptance of fuel surcharges remains high.  Since the amount of fuel surcharge is based on average national fuel prices and is reset weekly, exposure of the Company to fuel price volatility is significantly reduced. However, the fuel surcharge may not fully offset fuel price fluctuations during periods of rapid increases or decreases in the price of fuel and is also subject to overall competitive pricing negotiations.

The following table provides information about the Company’s third-party financial instruments as of September 30, 2016.  The table presents principal cash flows (in millions) and related weighted average interest rates by contractual maturity dates.  The fair value of the variable and fixed rate debt (in millions) was estimated based upon levels one and two in the fair value hierarchy, respectively.  The fair value of the Senior Notes is based on undiscounted cash flows at market interest rates for similar issuances of private debt.  The fair value of capital leases is based on current market interest rates for similar types of financial instruments.

 

 

 

Item 4. Controls and Procedures

Quarterly Controls Evaluation and Related CEO and CFO Certifications

As of the end of the period covered by this Quarterly Report on Form 10-Q, the Company conducted an evaluation of the effectiveness of the design and operation of its “disclosure controls and procedures” (Disclosure Controls). The Disclosure Controls evaluation was performed under the supervision and with the participation of management, including the Company’s Chief Executive Officer (CEO) and Chief Financial Officer (CFO).

Based upon the controls evaluation, the Company’s CEO and CFO have concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, the Company’s Disclosure Controls are effective to ensure that information the Company is required to disclose in reports that the Company files or submits under the Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

During the period covered by this Quarterly Report on Form 10-Q, there were no changes in internal control over financial reporting that materially affected, or that are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Attached as Exhibits 31.1 and 31.2 to this Quarterly Report on Form 10-Q are certifications of the CEO and the CFO, which are required in accordance with Rule 13a-14 of the Exchange Act. This Controls and Procedures section includes the information concerning the controls evaluation referred to in the certifications and it should be read in conjunction with the certifications.

Definition of Disclosure Controls

Disclosure Controls are controls and procedures designed to ensure that information required to be disclosed in the Company’s reports filed under the Exchange Act is recorded, processed, summarized and reported timely. Disclosure Controls are also designed to ensure that such information is accumulated and communicated to the Company’s management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. The Company’s Disclosure Controls include components of its internal control over financial reporting which consists of control processes designed to provide reasonable assurance regarding the reliability

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of the Company’s financial reporting and the preparation of financial statements in accordance with U.S. generally accepted accounting principles.

Limitations on the Effectiveness of Controls

The Company’s management, including the CEO and CFO, does not expect that its Disclosure Controls or its internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

 

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings — For a description of all material pending legal proceedings, see Note 3 “Commitments and Contingencies” of the accompanying unaudited condensed consolidated financial statements.

Item 1A. Risk Factors — Risk Factors are described in Item 1A.  “Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 and there have been no material changes.

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds —

 

 

 

 

Item 3. Defaults Upon Senior Securities—None

 

 

Item 4. Mine Safety Disclosures—None

 

 

Item 5. Other Information—None

 

 

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Item 6. Exhibits

 

 

 

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

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EXHIBIT INDEX

 

 

 

E-1