Business context and reporting period
Saia, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2018. The company provides regional and interregional less-than-truckload (LTL) services across 40 states; LTL shipments generated 97.6% of revenue in 2018. Dollar amounts below are in millions unless otherwise noted.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Operating revenue | $425.6 | $357.0 | $1,247.1 | $1,044.5 |
| Operating income | $38.7 | $24.6 | $107.8 | $71.8 |
| Net income | $28.2 | $14.4 | $79.6 | $43.3 |
| Diluted EPS | $1.07 | $0.55 | $3.02 | $1.67 |
| Operating ratio | 90.9% | 93.1% | Not stated | Not stated |
Q3 revenue increased 19.2%; operating income rose 57.5%. LTL shipments increased 5.4%, tonnage 7.3%, and revenue per hundredweight 11.9% to $17.20. The Q3 operating margin was approximately 9.1%, versus 6.9% a year earlier. For the first nine months, revenue grew 19.4% and operating income 50.2%.
Operating cash flow for the first nine months was $187.1, versus $127.7 a year earlier. Investing cash outflow was $154.4, mainly for property and equipment, and financing cash outflow was $36.9. Cash declined to $0.5 at September 30, 2018. Working capital was $14.9, down from $17.0 at September 30, 2017.
Total debt was $121.3, comprising $15.0 of revolver borrowings and $106.3 of capital lease obligations; senior notes had been paid off in December 2017. The $250.0 revolving facility had $207.3 available, subject to covenants. Saia reported covenant compliance. Total assets were $1,088.1 and stockholders’ equity was $669.3 at quarter-end.
Material changes and management commentary
- Management attributed growth to increased shipments and tonnage, fuel surcharges, pricing actions, and expansion in the Northeast; the Canadian marketing arrangement also contributed to shipment and tonnage growth.
- Higher wages and headcount, fuel and purchased-transportation costs, depreciation, insurance premiums, and geographic-expansion costs weighed on expenses. Management cited improved fuel efficiency from a newer fleet as a partial offset.
- Fuel surcharge revenue rose to 13.8% of Q3 revenue from 11.1% a year earlier, reflecting higher fuel prices. The surcharge program reduces, but may not fully offset, fuel-price exposure.
- The 2018 effective tax rate was 24.7% for Q3 and 23.6% year to date, compared with 38.5% and 36.2%, respectively, in 2017. The decrease primarily reflected the Tax Cuts and Jobs Act; the company expected a 2018 rate of 24%–25%.
- Saia expected 2018 net capital expenditures of approximately $265 million or more, including equipment acquired through capital leases; approximately $69 million of the remaining capital budget was committed at September 30. A July 2018 wage increase was expected to cost about $19 million annually, partly offset by productivity and efficiency gains.
Outlook, risks, and unusual items
Management continued to focus on yield, cost reduction, productivity, service, and expansion into the Northeast. It described results as sensitive to economic conditions, competitive pricing, customer volumes, and the ability to match capacity and costs to demand; it gave no specific revenue or earnings forecast. Adoption of the lease standard on January 1, 2019 was expected to materially increase balance-sheet assets and liabilities through recognition of right-of-use assets and lease liabilities, particularly for real estate operating leases.
Key risks include economic downturns, pricing pressure, driver and fuel availability and cost, customer credit and retention, execution of geographic expansion, regulation, technology or cybersecurity disruption, and volatility in self-insured claims. Claims and insurance liabilities totaled $78.1 million. Under a new three-year auto-liability policy, the company could owe up to $11.0 million in additional premium if paid losses exceed $15.6 million; no such premium was accrued at quarter-end. Management said ordinary-course litigation was adequately provided for and was not expected to materially affect financial condition, though it could materially affect a quarter or year’s results. The company also had $1.0 million accrued for uncertain tax positions and $0.1 million for related interest and penalties.
The company adopted revenue-recognition guidance retrospectively in 2018, changing non-asset truckload revenue from net to gross presentation and recognizing it over shipment transit time. Prior periods shown have been adjusted; the adoption increased reported revenue but had only a small effect on operating income and net income.
Most important facts for investors to verify
- Whether volume growth, yield increases, and Northeast expansion continue, and how much growth reflects fuel surcharges versus underlying pricing and shipments.
- Whether higher wages, fuel, purchased transportation, insurance, and expansion costs are offset by productivity and operating leverage.
- Actual 2018 capital spending and funding needs, given very low quarter-end cash and substantial lease-financed equipment obligations.
- Available revolver capacity and covenant headroom, plus the timing and scale of lease liabilities recognized under the new lease standard.
- Development of claims and insurance reserves, potential auto-policy premiums, and final effects of tax-law implementation.