SAIA

Business Context and Reporting Period

Company: SCS Transportation, Inc. (SCST), operating through subsidiaries Saia Motor Freight Line, Inc. and Jevic Transportation, Inc.
Reporting Period: Quarter ended March 31, 2003.
Business Overview: SCST provides regional overnight and second-day less-than-truckload (LTL) and selected long-haul LTL and truckload (TL) transportation services. Saia contributed approximately 62% of total revenue, while Jevic contributed 38%.

Key Financial Metrics

Note: Q1 2002 Net Loss includes a non-cash charge of $75.2 million for the cumulative effect of a change in accounting for goodwill. Net income before this charge was $1.9 million.

Material Changes vs. Prior Period

• Revenue Growth: Operating revenue increased 9.0% year-over-year. Excluding fuel surcharges, revenue grew 4.9% on a per-day basis. Saia revenue grew 7.5% (4.2% excluding fuel), while Jevic revenue grew 9.9% (5.9% excluding fuel).
• Operating Income: Operating income decreased slightly to $4.5 million from $4.9 million. This decline was driven by severe winter weather in February 2003 and unusually large cargo claims totaling $0.3 million, which offset productivity gains and revenue growth.
• Cost Structure: Operating expenses increased, with rising fuel costs accounting for $5.8 million of the increase. This was largely offset by fuel surcharge revenue. Wages increased by an average of 4.2% at Saia and 2.5% at Jevic.
• Profitability: The effective tax rate decreased to 41% from 45% in the prior year. The Q1 2002 net loss was primarily due to the one-time goodwill accounting charge, making the current quarter's net income of $1.3 million a significant improvement in reported earnings.

Guidance, Outlook, and Risks

• Outlook: Management assumes no further economic deterioration in 2003. The company expects to improve earnings even in a slow-growth economy by focusing on cost management, productivity, and technology.
• Capital Expenditures: Projected net capital expenditures for 2003 are approximately $50 million, an increase from $24.8 million in 2002. This includes replacement of revenue equipment and IT investments.
• Liquidity: The company maintains a $50 million revolving credit agreement with $27.5 million available. It also has $100 million in Senior Notes outstanding. Management believes current cash balances and operating cash flows are adequate to meet requirements.
• Risks: Key risks include general economic conditions, fuel price volatility (mitigated by surcharges), competitive pricing pressures, labor relations, and the volatility of self-insured claims. Severe weather events continue to pose operational risks.
• Accounting Changes: Effective January 1, 2003, the company adopted SFAS No. 123 for stock-based compensation, recognizing expense prospectively. This is expected to have a negligible negative impact on EPS (less than $0.01) for 2003.

Investor Verification Checklist

• Goodwill Accounting: Verify the impact of the $75.2 million non-cash goodwill charge in Q1 2002 to accurately compare underlying operational profitability between periods.
• Weather Impact: Assess the specific financial impact of the February 2003 severe winter weather on operating costs and volume, as this was a primary driver of the operating income decline.
• Debt Covenants: Confirm continued compliance with financial covenants related to the $100 million Senior Notes and the $50 million Credit Agreement, specifically the debt-to-EBITDAR and interest coverage ratios.
• Capital Expenditure Plan: Monitor the execution of the $50 million capital expenditure program and its impact on future cash flows and depreciation.
• Claims Volatility: Review the trend in self-insured claims and insurance reserves, given the mention of unusually large cargo claims in the current quarter.