Saia, Inc. — 2018 Form 10-K
Business context and reporting period. This is Saia’s annual report for the fiscal year ended December 31, 2018, not a standalone fourth-quarter filing. Saia is a less-than-truckload carrier operating in 41 states, with more than 97% of revenue historically from LTL freight. The fourth quarter is included in the annual results. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting.
Financial performance
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Operating revenue | $1,653.8 million | $1,404.7 million | +17.7% |
| Operating income | $141.2 million | $94.7 million | +49.1% |
| Operating ratio | 91.5% | 93.3% | Improved 1.8 points |
| Net income | $105.0 million | $91.1 million | +15.2% |
| Diluted EPS | $3.99 | $3.49 | +14.3% |
| Cash from operations | $256.4 million | $157.8 million | +$98.6 million |
| Net cash used in investing | $222.6 million | $181.5 million | Use increased |
Operating margin was approximately 8.5%, compared with 6.7% in 2017. Net margin was approximately 6.3%, compared with 6.5%. LTL tonnage increased 6.6% per workday, shipments increased 4.4% per workday, and revenue per hundredweight rose 10.2% to $16.80. Fuel surcharges represented 13.6% of revenue, versus 11.3% in 2017.
Capital spending was significant: reported net capital expenditures were approximately $251.7 million, including equipment acquired through capital leases. Total debt was $122.9 million, including $102.9 million in capital lease obligations and $20.0 million drawn on the revolving facility. Cash was $2.2 million; unused revolving availability was $202.3 million. Working capital fell to $4.1 million from $36.3 million.
Material changes and unusual items
- Revenue growth reflected higher shipments and tonnage, fuel surcharges, pricing actions, one additional workday, Northeast expansion, and the Canadian marketing arrangement. Saia implemented a 5.9% general rate increase in May 2018.
- Operating income rose as volume, yield, and surcharges improved, partly offset by wage and benefit increases, fuel and purchased transportation costs, higher depreciation, and Northeast start-up costs.
- Reported 2017 earnings included a $34 million tax benefit from the Tax Cuts and Jobs Act. Management’s non-GAAP comparison adjusts 2017 diluted EPS from $3.49 to $2.19; 2018 diluted EPS was $3.99. The effective tax rate was 22.7% in 2018 versus negative 1.5% in 2017, so reported net income and EPS growth are affected by tax comparability.
- Saia adopted the revenue recognition standard retrospectively, changing non-asset truckload revenue from net to gross presentation and recognizing it over freight transit time. Prior-period revenue and purchased transportation were adjusted; operating income was not materially changed.
- The company said it expected to adopt lease accounting in 2019, with a material balance-sheet effect. The filing gives inconsistent estimates of additional operating lease liabilities: approximately $75–$85 million in MD&A and $70–$80 million in the notes.
Outlook, risks, and contingencies
Management forecast 2019 net capital expenditures of $275–$300 million and an effective tax rate of 23%–24%. A company-wide wage increase effective July 2018 was expected to cost approximately $16 million annually, partly offset by productivity and efficiency gains; further market-competitive wage increases were anticipated in 2019. Management planned to pursue pricing and yield initiatives, density growth, and further Northeast expansion, while adjusting resources if volumes weaken. No specific revenue or earnings guidance was provided.
Key risks include economic downturns and pricing competition; availability and cost of drivers, fuel, and purchased transportation; execution and profitability of Northeast expansion; high ongoing capital requirements; and volatile self-insured accident, workers’ compensation, cargo, and healthcare claims. The company’s auto liability retention is $2 million per occurrence; its policy also could require up to $11 million of additional premium if loss thresholds are exceeded. Environmental, safety, labor, cyber, regulatory, and customer-credit risks are also discussed. Management stated that ordinary-course legal matters were adequately provided for and were not expected to materially affect financial condition, though results in a quarter or year could be affected.
On February 5, 2019, Saia amended its credit agreement, increasing the revolver from $250 million to $300 million, extending maturity to February 2024, and reducing the pricing grid. The agreement includes financial covenants. Saia reported compliance with its debt covenants at year-end 2018.
Most important facts for investors to verify
- Underlying earnings growth after accounting for the one-time 2017 tax benefit; compare 2018 EPS of $3.99 with adjusted 2017 EPS of $2.19, not only reported 2017 EPS.
- Whether shipment growth, pricing/yield gains, and operating-ratio improvement continue as wage, fuel, insurance, and purchased-transportation costs evolve.
- Returns and costs from Northeast expansion, alongside the planned $275–$300 million of 2019 capital expenditures.
- Cash availability and debt covenant headroom, considering low year-end cash, capital lease obligations, and the expanded revolving facility.
- The final lease-liability impact upon adoption; the filing’s two estimates differ ($70–$80 million versus $75–$85 million).
- Development of self-insured claims and auto liability costs, including whether policy loss thresholds could trigger additional premiums.