SAIA INC - Quarter Report: 2017 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2017

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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

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

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 ended March 31, 2017 and 2016

(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 quarters ended March 31, 2017 and 2016

(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, 2016.  Operating results for the quarter ended March 31, 2017 are not necessarily indicative of the results of operations that may be expected for the year ended December 31, 2017.

Business

The Company provides regional and interregional less-than-truckload (LTL) services through a single integrated organization. While more than 99% of its revenue historically has been derived from transporting LTL shipments across 34 states, the Company also offers customers a wide range of other value-added services, including non-asset truckload, expedited and logistics services across the United States.

Other Current Liabilities

Other current liabilities includes $33.4 million of claims and insurance liabilities as of March 31, 2017 and $33.0 million as of December 31, 2016.

Accounting Pronouncements Adopted in 2017

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting.  The Company adopted this new standard effective January 1, 2017.  As a result of adoption, $1.1 million of excess tax benefits related to share-based payments was recorded as an offset to income tax expense in the first quarter of 2017, as opposed to additional paid-in capital, and the windfall tax benefit was removed from the Company’s diluted shares calculation.  The Company classified the $1.1 million of excess tax benefits related to share-based payments as operating activities, instead of financing activities, on the Condensed Consolidated Statements of Cash Flows for the first quarter of 2017.  The Company elected to continue to use an estimated forfeiture rate for recording stock compensation expense and to withhold taxes at the minimum statutory rates.  The Company classified $1.2 million in shares withheld for taxes as financing activities for the first quarter of 2017. Additionally, the Company reclassified $0.7 million in shares withheld for taxes from operating activities to financing activities for the first quarter of 2016. The Company had no other items requiring retrospective treatment under the pronouncement.  

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.  While the Company has adopted a timeline for implementation and identified its revenue streams and contracts subject to the standard, the Company has not yet completed its evaluation of these. The Company is still in the process of evaluating its non-asset truckload and logistics business for gross versus net revenue presentation and the revenue recognition timing related to these services on the

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Condensed Consolidated Statements of Operations. However, the Company does not anticipate a significant change to other areas of its business.

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.  While the Company has not completed its evaluation of the effect of the standard on its ongoing financial reporting, it believes the most significant changes relate to the recognition of lease assets and liabilities on its balance sheet.

(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 ended March 31, 2017, options and restricted stock for 226,164 shares of common stock were excluded from the calculation of diluted earnings per share because their effect was anti-dilutive.  For the quarter ended March 31, 2016, options and restricted stock for 554,672 shares of common stock were excluded from the calculation of diluted earnings per share because their effect was anti-dilutive.

(3) Commitments and Contingencies

The Company pays its pro rata share of the cost of letters of credit outstanding for certain workers’ compensation claims incurred prior to March 1, 2000 that Saia’s former parent maintains for insurance programs. The Company’s pro rata share of these outstanding letters of credit was $1.8 million at March 31, 2017.

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.

(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 March 31, 2017 and December 31, 2016, 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 March 31, 2017 and December 31, 2016 was $156.6 million and $77.6 million, respectively, based upon levels one and two in the fair value hierarchy.  The carrying value of the debt was $156.9 million and $73.8 million at March 31, 2017 and December 31, 2016, respectively.

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(5) Debt and Financing Arrangements

At March 31, 2017 and December 31, 2016, 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 March 31, 2017, the Company had borrowings of $65.2 million and outstanding letters of credit of $36.1 million under the Restated Credit Agreement.  At December 31, 2016, the Company had no outstanding borrowings and outstanding letters of credit of $39.4 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

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

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 March 31, 2017 and December 31, 2016, the Company had $7.1 million in Senior Notes outstanding.

Capital Leases

The Company is obligated under capital leases with seven year terms which include obligations covering revenue equipment totaling $84.6 million and $66.7 million as of March 31, 2017 and December 31, 2016, respectively.  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 March 31, 2017 and December 31, 2016 is 2.99% and 2.82%, respectively.

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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 2016 audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.  Those consolidated financial statements include additional information about our significant accounting policies, practices and the transactions that underlie our financial results.

Forward-Looking Statements

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

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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, 2016, as updated by Part II, Item 1A. of this Quarterly Report on Form 10-Q.

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

Executive Overview

The Company’s business is highly correlated to non-service sectors of the general economy.  The Company’s strategy is to improve profitability by increasing yield while also increasing volumes to build density in existing geography and to expand our service geography into the Northeastern United States.  The Company’s business is 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 increased by 9.4 percent in the first quarter of 2017 compared to the same period in 2016.  The increase resulted primarily from increased shipments, tonnage, fuel surcharges and pricing actions.

Consolidated operating income was $17.5 million for the first quarter of 2017 compared to $17.6 million for the first quarter of 2016.  In the first quarter of 2017, LTL shipments and tonnage per workday were up 3.5 percent and 2.0 percent, respectively, versus the prior year quarter.  Diluted earnings per share were $0.44 in the first quarter of 2017, compared to diluted earnings per share of $0.42 in the prior year quarter. The operating ratio (operating expenses divided by operating revenue) was 94.5 percent in the first quarter of 2017 compared to 93.9 percent in the first quarter of 2016.

The Company had $24.1 million in net cash provided by operating activities in the first three months of 2017 compared with $17.0 million in the same period last year. The increase is due to working capital fluctuations, an increase in non-cash items included in net income and a $1.1 million excess tax benefit from share-based payments for the three months ended March 31, 2017 as a result of the adoption of the Financial Accounting Standards Board (“FASB”) Accounting Standard Update (“ASU”) 2016-09.  The Company had net cash used in investing activities of $87.8 million during the first three months of 2017 compared to $53.6 million in the first three months of 2016, primarily as a result of higher capital expenditures for revenue equipment and real estate in the first three months of 2017.  The Company’s net cash provided by financing activities was $62.8 million in the first three months of 2017 compared to $36.8 million in the same period last year, primarily due to increased borrowing to fund capital expenditures.  The Company had $65.2 million in borrowings under its revolving credit agreement, outstanding letters of credit of $37.9 million and cash and cash equivalents balance of $0.7 million at March 31, 2017.  The Company also had $7.1 million outstanding in Senior Notes and $84.6 million in obligations under capital leases at March 31, 2017.  The Company was in compliance with the debt covenants under its debt agreements at March 31, 2017.

General

The following Management’s Discussion and Analysis describes the principal factors affecting the results of operations, liquidity and capital resources, as well as the critical accounting policies of Saia, Inc. and its wholly-owned subsidiaries (together, the Company or Saia).

Saia is a transportation company headquartered in Johns Creek, Georgia that provides regional and interregional less-than-truckload (LTL) services through a single integrated organization. While more than 99% of its revenue historically has been derived from transporting LTL shipments across 34 states, the Company also offers customers a wide range of other value-added services, including non-asset truckload, expedited and logistics services across the United States.

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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.

Results of Operations

Saia, Inc. and Subsidiaries

Selected Results of Operations and Operating Statistics

For the quarters ended March 31, 2017 and 2016

(unaudited)

Quarter ended March 31, 2017 compared to Quarter ended March 31, 2016

Revenue and volume

Consolidated revenue for the quarter ended March 31, 2017 increased 9.4 percent to $317.0 million primarily as a result of increased tonnage, shipments, including the timing of Good Friday, fuel surcharges and pricing actions.  Saia’s LTL revenue per hundredweight (a measure of yield) increased 7.7 percent to $16.68 per hundredweight for the first quarter of 2017 as a result of increased rates and fuel surcharges.  Saia’s LTL tonnage increased 2.0 percent to 0.9 million tons.  LTL shipments increased 3.5 percent to 1.6 million shipments.  Approximately 75 to 80 percent of Saia’s operating revenue was subject to specific customer price negotiations that occur throughout the year.  The remaining 20 to 25 percent of operating revenue was subject to a general rate increase which is based on market conditions.  For customers subject to an annual general rate increase, on October 3, 2016, 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.  Fuel surcharges are an integral part of customer contract negotiations but represent only one portion of overall customer price negotiations as customers may negotiate increase in base rates instead of increases in fuel surcharges or vice versa. Saia revised its fuel surcharge program effective January 18, 2016 to better align with its competitors. Fuel surcharge revenue increased to 11.1% of operating

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revenue for the quarter ended March 31, 2017 compared to 8.7% for the quarter ended March 31, 2016, as a result of increases in the cost of fuel.

Operating expenses and margin

Consolidated operating income was $17.5 million in the first quarter of 2017 compared to $17.6 million in the prior year quarter.  Overall, the operations were favorably impacted in the first quarter of 2017 by higher tonnage, shipments, fuel surcharge and yield, which were offset by higher fuel and purchase transportation costs, salary and wage increases, higher claims and insurance, increased depreciation expense and $0.8 million in costs associated with expansion into the Northeastern United States.  The first quarter of 2017 operating ratio (operating expenses divided by operating revenue) was 94.5 percent compared to 93.9 percent for the same period in 2016.

Salaries, wages and benefits increased $10.6 million in the first quarter of 2017 compared to the first quarter of 2016 largely due to higher wages associated with increased headcount in the first quarter of 2017 and a wage increase in July 2016. Fuel, operating expenses and supplies increased $10.0 million in the first quarter of 2017 compared to the prior year quarter largely due to higher fuel costs and increased costs of other operating expenses and supplies, partially offset by improved fuel efficiency, lower maintenance costs from a newer fleet and increased internal maintenance asset utilization.  During the first quarter of 2017, claims and insurance expense was $1.0 million higher than the previous year quarter primarily due to higher insurance premiums, increased accident frequency and severity during the first quarter of 2017, partially offset by 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.  Purchased transportation increased $2.3 million in the first quarter of 2017 compared to the first quarter of 2016 primarily due to an increase in utilization of purchased transportation carriers to support increased shipments, tonnage and length of haul in the first quarter of 2017.

Other

Substantially all non-operating expenses represent interest expense. Interest expense in first quarter of 2017 was lower than the first quarter 2016 due to decreased average borrowings in the first quarter of 2017. The effective tax rate was 31.0 percent and 36.4 percent for the quarters ended March 31, 2017 and March 31, 2016, respectively.  The decreased tax rate is primarily a result of excess tax benefits from stock activity recognized as a result of the Company’s adoption of ASU 2016-09 effective January 1, 2017 (see “New Accounting Pronouncements Adopted in 2017” section below), partially offset by legislation surrounding alternative fuel tax credits that impacted the first quarter of 2016 but not the first quarter of 2017.

Net income was $11.4 million, or $0.44 per diluted share, in the first quarter of 2017 compared to net income of $10.6 million, or $0.42 per diluted share, in the first quarter of 2016.

Working capital/capital expenditures

Working capital at March 31, 2017 was $10.3 million, which decreased from working capital at March 31, 2016 of $24.9 million.

Current assets at March 31, 2017 increased by $9.2 million as compared to March 31, 2016 and include an increase in accounts receivable of $11.4 million partially offset by a decrease in prepaid expenses and other.  Current liabilities increased by $23.9 million at March 31, 2017 compared to March 31, 2016 largely due to increases in accounts payable, 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 $24.1 million for the three months ended March 31, 2017 versus $17.0 million for the three months ended March 31, 2016.  For the three months ended March 31, 2017, net cash used in investing activities was $87.8 million versus $53.6 million in the same period last year, a $34.2 million increase.  This increase resulted primarily from higher capital expenditures for revenue equipment and real estate.  For the three months ended March 31, 2017, net cash provided by financing activities was $62.8 million compared to $36.8 million in the same period last year, as a result of increased borrowing to fund capital expenditures.

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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.  On October 3, 2016, Saia implemented a 4.9 percent general rate increase for customers comprising approximately 20 to 25 percent of Saia’s operating revenue.  The extent of the success of these revenue initiatives is impacted by what proves to be the underlying economic trends, competitor initiatives and other factors discussed under “Forward-Looking Statements” and Part II, Item 1A. “Risk Factors.”

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. The Company also anticipates market competitive wage increases in 2017.

If the Company builds market share, including through expansion into the Northeastern United States, 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 expansion of our service geography into the Northeastern United States and other factors discussed under “Forward-Looking Statements” and Part II, Item 1A. “Risk Factors.”

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

New Accounting Pronouncements Adopted in 2017

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting.  The Company adopted this new standard effective January 1, 2017. As a result of adoption, $1.1 million of excess tax benefits related to share-based payments was recorded as an offset to income tax expense in the first quarter of 2017, as opposed to additional paid-in capital, and the windfall tax benefit was removed from the Company’s diluted shares calculation.  The Company classified the $1.1 million of excess tax benefits related to share-based payments as operating activities, instead of financing activities, on the Condensed Consolidated Statements of Cash Flows for the first quarter of 2017. The Company elected to continue to use an estimated forfeiture rate for recording stock compensation expense and to withhold taxes at the minimum statutory rates. The Company classified $1.2 million in shares withheld for taxes as financing activities for the first quarter of 2017. Additionally, the Company reclassified $0.7 million in shares withheld for taxes from operating activities to financing activities for the first quarter of 2016. The Company had no other items requiring retrospective treatment under the pronouncement.

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.  While the Company has adopted a timeline for implementation and identified its revenue streams and contracts subject to the standard, the Company has not yet completed its evaluation of these. The Company is still in the process of evaluating its non-asset truckload and logistics business for gross versus net revenue presentation and the revenue recognition timing related to these services on the Condensed Consolidated Statements of Operations. However, the Company does not anticipate a significant change to other areas of its business.

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.  While the Company has not completed its evaluation of the effect of the standard on its ongoing financial reporting, it believes the most significant changes relate to the recognition of lease assets and liabilities on its balance sheet.

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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 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 March 31, 2017, the Company had borrowings of $65.2 million and outstanding letters of credit of $36.1 million under the Restated Credit Agreement.  At December 31, 2016, the Company had no outstanding borrowings and outstanding letters of credit of $39.4 million under the Restated Credit Agreement.  The available portion of the Restated Credit Agreement may be used for general corporate purposes, including capital expenditures, working capital and letter of credit requirements as needed.

Restated Master Shelf Agreement

In September 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 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 March 31, 2017 and December 31, 2016, the Company had $7.1 million and $7.1 million, respectively, in Senior Notes outstanding.

Capital Leases

The Company is obligated under capital leases with seven year terms covering revenue equipment totaling $84.6 million and $66.7 million as of March 31, 2017 and December 31, 2016, respectively.  Amortization of assets held under the capital leases is included in depreciation and amortization expense.  The weighted average interest rates for the capital leases at March 31, 2017 and December 31, 2016 are 2.99% and 2.82%, respectively.

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Other

The Company has historically generated cash flows from operations to fund a large portion of its capital expenditure requirements.  Cash flows from operating activities were $146.4 million, as adjusted for the adoption of ASU 2016-09, for the year ended December 31, 2016, while net cash used in investing activities was $117.7 million.  Cash flows provided by operating activities were $24.1 million for the three months ended March 31, 2017, $7.1 million higher than the first three 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. At March 31, 2017, the Company had $148.7 million in availability under the Restated Credit Agreement, subject to the Company’s satisfaction of existing debt covenants.  Future operating cash flows are primarily dependent upon the Company’s profitability and its ability to manage its working capital requirements, primarily accounts receivable, accounts payable and wage and benefit accruals.  The Company was in compliance with its debt covenants at March 31, 2017.

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 2017 are approximately $220 million, inclusive of equipment acquired using capital leases. This represents an approximately $68 million increase from 2016 net capital expenditures of $152 million for property and equipment, inclusive of equipment acquired using capital leases. Projected 2017 expenditures include a normal annual level of revenue equipment replacement and continued investment in technology for our current operations, in addition to investments in land and structures, revenue equipment and technology to facilitate our geographic expansion into the Northeastern United States. Approximately $20.4 million of the 2017 remaining capital budget was committed as of March 31, 2017. Net capital expenditures were $108.2 million in the first three months of 2017, inclusive of equipment acquired using capital leases.

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, 2016 for additional information. In addition to the principal amounts disclosed in the tables below, the Company has interest obligations of approximately $3.9 million for the remainder of 2017 and decreasing for each year thereafter based on borrowings and commitments outstanding at March 31, 2017.

Contractual Obligations

The following tables set forth a summary of our contractual obligations and other commercial commitments as of March 31, 2017 (in millions):

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The Company has accrued approximately $1.2 million for uncertain tax positions and $0.5 million for interest and penalties related to the uncertain tax positions as of March 31, 2017.  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 obligations and other commercial commitment tables.

At March 31, 2017, the Company has $70.3 million in claims, insurance and other liabilities.  The Company cannot reasonably estimate the timing of cash settlement with respective adverse parties beyond one year and accordingly has not included the amounts within the above contractual cash obligations and other commercial commitment tables.

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:

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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, 2016.

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, 2016.  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 March 31, 2017.  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.

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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 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, 2016 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