What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-02 compared with 2021-10-28 · 118 added, 168 removed, 136 unchanged (68% of the section changed)

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cost and availability of qualified drivers, dock workers and other employees, purchased transportation and fuel;

inflationary increases in operating expenses and corresponding reductions of profitability;

claims expenses and other expense volatility, including for personal injury, cargo loss and damage, workers’ compensation, employment and group health plan claims;

cost and availability of insurance coverage, including the possibility the Company may be required to pay additional premiums, assume additional liability under its auto liability policy or be unable to obtain insurance coverage;

failure to successfully execute the strategy to expand our service geography;

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labor relations, including the adverse impact should a portion of our workforce become unionized;

cost and availability of real property and revenue equipment;

cost, availability and resale value of real property and revenue equipment;

supply chain disruption and delays on new equipment delivery;

capacity and highway infrastructure constraints;

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dependence on key employees;

employee turnover from changes to compensation and benefits or market factors;

increased costs of healthcare benefits;

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failure to make future acquisitions or to achieve acquisition synergies;

the effect of litigation and class action lawsuits arising from the operation of our business, including the possibility of claims or judgements in excess of our insurance coverages or that result in increases in the cost of insurance coverage or that preclude us from obtaining adequate insurance coverage in the future;

the effect of litigation and class action lawsuits arising from the operation of our business, including the possibility of claims or judgments in excess of our insurance coverages or that result in increases in the cost of insurance coverage or that preclude us from obtaining adequate insurance coverage in the future;

the potential of higher corporate taxes and new regulations, including with respect to climate change, employment and labor law, healthcare and securities regulation;

the effect of governmental regulations, including hours of service for drivers, engine emissions, the Compliance, Safety, Accountability (CSA) initiative, regulations of the Food and Drug Administration and Homeland Security, and healthcare and environmental regulations;

the effect of governmental regulations, including hours of service and licensing compliance for drivers, engine emissions, the Compliance, Safety, Accountability (CSA) initiative, regulations of the Food and Drug Administration and Homeland Security, and healthcare and environmental regulations;

unforeseen costs from new and existing data privacy laws;

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increasing investor and customer sensitivity to social and sustainability issues, including climate change;

anti-terrorism measures and terrorist events;

provisions in our governing documents and Delaware law that may have anti-takeover effects;

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other financial, operational and legal risks and uncertainties detailed from time to time in the Company’s SEC filings.

These factors and risks are described in Part II, Item 1A.

These factors and risks are described in Part I, Item 1A.

“Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, as updated by Part II, Item 1A.

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Technology continues to be an important investment that is improving customer experience, operational efficiencies and Company image.

In March 2020, the World Health Organization categorized Coronavirus Disease 2019 (“COVID-19”) as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency.

We are considered an essential and critical business by the U.S.

Department of Homeland Security’s Cyber and Infrastructure Security Agency (CISA) and will continue to operate under state of emergency and shelter in place orders issued in various jurisdictions across the country.

Management has made a variety of efforts seeking to ensure the ongoing availability of Saia’s transportation services, while instituting actions and policies to help safeguard employees and customers from COVID-19, including limiting physical employee and customer contact, implementing enhanced cleaning and hygiene protocols at Saia’s facilities, and instituting telecommuting as appropriate.

President Biden has issued a directive to OSHA to develop an Emergency Temporary Standard requiring all employers of 100 or more employees to ensure that their workforce is vaccinated or subject to weekly COVID-19 testing.

This standard, or comparable state or local requirements, could adversely affect

our ability to hire and retain employees which could lead to service disruptions and higher costs .

Through the date of this filing, the Company has not experienced significant disruptions in the Company’s LTL network operations as a result of the COVID-19 pandemic .

Beginning in the latter part of the first quarter of 2020 and through the second quarter of 2020, we experienced lower demand for our transportation services along with increased costs and other challenges related to COVID-19 that adversely affected our business.

We are continuing to monitor the progression of the COVID-19 pandemic, further government response, and development of treatments and vaccines and their potential effect on our short-term and long-term financial results and liquidity.

These events could have an impact in future periods on certain estimates used in the preparation of our 2022 financial results.

Local, state and national governments have designated transportation as an essential service.

The Company has made a variety of efforts to ensure the ongoing availability of Saia’s transportation services, while instituting actions and policies to help keep employees and customers safe.

We believe we have significant liquidity available to continue business operations in the event of future disruptions from the COVID-19 pandemic.

As discussed in the “Financial Condition” section below, the Company has a revolving credit facility (including a $100 million accordion feature that is available, subject to certain conditions and lender commitments) and other sources of borrowing in place that provides liquidity of up to $300 million in addition to its regular cash inflows from operations.

The Company was in compliance with the debt covenants under its debt agreements at September 30, 2021 .

As discussed in “Financial Condition, Liquidity and Capital Resources” below, t he Company has in place a revolving credit facility with up to $300 million in availability, plus an accordion feature that provides for an additional $100 million in availability, subject to certain conditions and lender commitments, in addition to its cash flow from operations.

The situation surrounding COVID-19 remains fluid and there may be developments outside our control requiring us to adjust our operating plan.

As such, given the dynamic nature of this situation, we are unable to predict the extent to which the pandemic and related impacts could impact our business operations, financial condition, results of operations, liquidity and cash flows.

Third Quarter Overview

The Company’s operating revenue increased by 28.0 percent in the third quarter of 2021 compared to the same period in 2020.

The increase resulted primarily from increases in revenue per shipment and tonnage.

Consolidated operating income was $106.1 million for the third quarter of 2021 compared to $55.2 million for the third quarter of 2020.

In the third quarter of 2021, LTL shipments were up 2.3 percent per workday and LTL tonnage was up 11.0 percent per workday compared to the prior year quarter.

Diluted earnings per share were $2.98 in the third quarter of 2021, compared to diluted earnings per share of $1.56 in the prior year quarter.

The operating ratio (operating expenses divided by operating revenue) was 82.8 percent in the third quarter of 2021 compared to 88.5 percent in the third quarter of 2020.

First Quarter Overview

The Company’s operating revenue increased by 36.6 percent in the first quarter of 2022 compared to the same period in 2021.

The increase resulted primarily from increases in revenue per shipment, tonnage and fuel surcharge revenue.

Consolidated operating income was $103.4 million for the first quarter of 2022 compared to $48.7 million for the first quarter of 2021.

In the first quarter of 2022, LTL shipments were up 5.7 percent per workday and LTL tonnage was up 9.5 percent per workday compared to the prior year quarter.

Diluted earnings per share were $2.98 in the first quarter of 2022, compared to diluted earnings per share of $1.40 in the prior year quarter.

The operating ratio (operating expenses divided by operating revenue) was 84.4 percent in the first quarter of 2022 compared to 89.9 percent in the first quarter of 2021.

The improved operating ratio compared to prior year is due to the Company’s continued focus on pricing initiatives, cost control and operating efficiencies.

Additionally, a real estate gain drove 70 basis points of the improvement in the operating ratio.

The Company generated $267.7 million in net cash provided by operating activities in the first nine months of 2021 compared with $239.0 million in the same period last year.

The increase is primarily due to increased profitability partially offset by a change in working capital, largely increases in accounts receivable and cash and cash equivalents, compared to prior year.

The Company’s net cash used in investing activities was $148.9 million during the first nine months of 2021 compared to $197.5 million in the first nine months of 2020, primarily as a result of decreased capital expenditures for revenue equipment in the first nine months of 2021 caused by COVID-19 related manufacturing delays for revenue equipment.

The Company’s net cash used in financing activities was $18.7 million in the first nine months of 2021 compared to $16.2 million net cash used in financing activities during the same period last year.

This change was primarily due to equity based compensation shares withheld for taxes as well as repayment of finance leases during the first nine months of 2021 .

The Company had no outstanding borrowings under its revolving credit agreement, outstanding letters of credit of $31.1 million and a cash and cash equivalents balance of $121.7 million at September 30, 2021.

The Company also had $55.2 million in obligations under finance leases at September 30, 2021.

At September 30, 2021, the Company had $270.7 million in availability under the revolving credit facility, subject to the Company’s satisfaction of existing debt covenants.

The Company generated $96.0 million in net cash provided by operating activities in the first three months of 2022 compared with $61.0 million in the same period last year.

The increase is primarily due to increased profitability partially offset by a change in working capital, largely increases in accounts receivable compared to prior year.

The Company’s net cash used in investing activities was $45.4 million during the first three months of 2022 compared to $25.4 million in the first three months of 2021, primarily as a result of increased capital expenditures related to real estate acquisitions in the first three months of 2022.

The Company’s net cash used in financing activities was $15.8 million in the first three months of 2022 compared to $7.6 million net cash used in financing activities during the same period last year.

This change was primarily due to equity based compensation shares withheld for taxes as well as increased repayment of finance leases during the first three months of 2022.

The Company had no outstanding borrowings under its revolving credit agreement, outstanding letters of credit of $33.8 million and a cash and cash equivalents balance of $141.3 million at March 31, 2022.

The Company also had $44.9 million in obligations under finance leases at March 31, 2022.

At March 31, 2022, the Company had $268.0 million in availability under the revolving credit facility.

The revolving credit facility also has an accordion feature that allows for an additional $100 million availability, subject to certain conditions and availability of lender commitments.

The Company was in compliance with the debt covenants under its revolving credit agreement at September 30, 2021.

The Company was in compliance with the debt covenants under its revolving credit agreement at March 31, 2022.

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 and estimates of Saia, Inc.

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“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;

prices we obtain for our services, as measured by revenue per hundredweight (a measure of yield) and revenue per shipment;

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;

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Selected Results of Operations and Operating Statistics

For the quarters ended September 30, 2021 and 2020

For the quarters ended March 31, 2022 and 2021

(in thousands, except ratios, workdays, revenue per hundredweight, revenue per shipment and length of haul)

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Nonoperating Expense

Working Capital (as of September 30, 2021 and 2020)

Working Capital (as of March 31, 2022 and 2021)

Cash Flows provided by Operating Activities (year to date)

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LTL Length of haul

Quarter and nine months ended September 30, 2021 compared to quarter and nine months ended September 30, 2020

Quarter ended March 31, 2022 compared to quarter ended March 31, 2021

Revenue and volume

Consolidated revenue for the quarter ended September 30, 2021 increased 28.0 percent to $616.2 million primarily as a result of increased revenue per shipment and tonnage.

Saia’s LTL revenue per hundredweight (a measure of yield) increased 14.9 percent to $21.36 per hundredweight for the third quarter of 2021 as a result of changes in business mix and pricing actions.

For the third quarter of 2021, Saia’s LTL tonnage was up 11.0 percent per workday to 1.4 million tons, and LTL shipments increased 2.3 percent per workday to 2.0 million shipments.

For the third quarter of 2021, approximately 75 to 80 percent of Saia’s operating revenue was subject to specific customer price negotiations that occur throughout the year.

Consolidated revenue for the quarter ended March 31, 2022 increased 36.6 percent to $661.2 million primarily as a result of increased revenue per shipment, tonnage and fuel surcharge revenue.

Saia’s LTL revenue per shipment increased 25.7 percent to $329.30 per shipment for the first quarter of 2022 as a result of changes in business mix and pricing actions.

For the first quarter of 2022, Saia’s LTL tonnage was up 9.5 percent per workday to 1.4 million tons, and LTL shipments increased 5.7 percent per workday to 2.0 million shipments.

For the first quarter of 2022, 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 these customers subject to a general rate increase, on January 18, 2021 and February 3, 2020, Saia implemented 5.9 percent general rate increases.

For these customers subject to a general rate increase, on January 24, 2022 and January 18, 2021, Saia implemented 7.5 and 5.9 percent general rate increases, respectively.

Competitive factors, customer turnover and mix changes, impact the extent to which customer rate increases are retained over time.

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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 increases in base rates instead of increases in fuel surcharges or vice versa.

Fuel surcharge revenue as a percentage of operating revenue increase d to 13.9 percent for the quarter ended September 30, 2021 compared to 10.4 percent for the quarter ended September 30, 2020 , as a result of in crease s in the cost of fuel.

For the nine months ended September 30, 2021 , operating revenues were $1.7 billion, up 24.2 percent from $1.3 billion for the nine months ended September 30, 2020.

This increase is primarily due to increased revenue per shipment, shipments and tonnage during the first nine months of 2021 compared to the comparable period last year.

Fuel surcharge revenue as a percentage of operating revenue increased to 13.8 percent for the nine months ended September 30, 2021 compared to 11.3 percent for the nine months ended September 30, 2020, as a result of increases in the cost of fuel.

Fuel surcharges are an integral part of customer contract negotiations but represent only one portion of overall customer price negotiations as customers may negotiate increases in base rates instead of increases in fuel surcharges or vice versa.

Fuel surcharge revenue as a percentage of operating revenue increased to 16.8 percent for the quarter ended March 31, 2022 compared to 12.9 percent for the quarter ended March 31, 2021, as a result of increases in the cost of fuel.

Operating expenses and margin

Consolidated operating income was $106.1 million in the third quarter of 2021 compared to $55.2 million in the prior year quarter.

Overall, the increase in consolidated operating income in the third quarter of 2021 compared to the third quarter of 2020 was the result of increased tonnage and improved pricing actions and business mix management during the third quarter 2021.

Consolidated operating income was $103.4 million in the first quarter of 2022 compared to $48.7 million in the prior year quarter.

Overall, the increase in consolidated operating income in the first quarter of 2022 compared to the first quarter of 2021 was the result of increased tonnage, improved pricing actions, the impact of our fuel surcharge program and business mix management during the first quarter of 2022 .

These actions in 2022 combined with the 9.5 percent increase in tonnage per day, along with continued focus on cost controls and operational efficiencies drove improvement during the quarter.

The third quarter of 2021 operating ratio (operating expenses divided by operating revenue) was 82.8 percent compared to 88.5 percent for the same period in 2020.

Additionally, a real estate gain drove 70 basis points of the improvement in the operating ratio.

Salaries, wages and benefits increased $25.0 million in the third quarter of 2021 compared to the third quarter of 2020 due to lower headcount in the third quarter of 2020.

Additionally, in January 2021 and August 2021 the Company implemented salary and wage increases, while significant growth led to higher overall compensation levels.

Fuel, operating expenses and supplies increased $24.7 million in the third quarter of 2021 compared to the prior year quarter largely due to increases in fuel cost due to volume and price per gallon increases during the quarter, in addition to increases in other operating expenses and supplies .

During the third quarter of 2021, claims and insurance expense was $3.6 million higher than the third quarter of 2020 primarily due to higher claims activity in addition to an increase in premiums compared to prior year.

Purchased transportation increased $32.1 million in the third quarter of 2021 compared to the third quarter of 2020 primarily due to increasing demand, capacity constraints in the internal network and higher rates for purchased miles during the third quarter of 2021.

Gain from property disposals increased $3.5 million in the third quarter of 2021 compared to prior year due to the gain on disposal of a previously occupied terminal.

This transaction occurred as the result of management’s efforts towards expanding door count by replacing a smaller facility with a larger facility better positioned to successfully support the Company’s overall strategy.

For the nine months ended September 30, 2021, consolidated operating income was $237.8 million, up 83.4 percent compared to $129.7 million for the nine months ended September 30, 2020.

This increase was due to the overall increase in shipments, tonnage and improved pricing actions and mix management as the company successfully returned service from the distruptive impact of the COVID-19 environment.

Salaries, wages and benefits increased $75.3 million during the first nine months of 2021 compared to the same period last year largely due to higher wages in the first nine months of 2021 .

Additionally, in January 2021 and August 2021 the Company implemented salary and wage increases, while significant growth led to higher overall compensation levels.

Fuel, operating expenses and supplies increased $51.5 million during the first nine months of 2021 compared to the same period last year largely due to increases in fuel cost due to volume and price per gallon increases during the first nine months of 2021, in addition to increases in other operating expenses and supplies.

During the first nine months of 2021 , claims and insurance expense was $3.7 million higher than the same period last year primarily due to higher premiums, largely offset by decreased claims.

Purchased transportation increased $83.2 million for the first nine months of 2021 compared to the same period last year primarily due to increasing demand, capacity constraints in the internal network and higher rates for purchased miles during the first nine months of 2021 .

Gain from property disposals increased $2.6 million for the first nine months of 2021 compared to prior year due to the gain on disposal of a previously occupied terminal.

The first quarter of 2022 operating ratio (operating expenses divided by operating revenue) was 84.4 percent compared to 89.9 percent for the same period in 2021.

Salaries, wages and employees’ benefits increased $45.0 million in the first quarter of 2022 compared to the first quarter of 2021.

This change was mostly caused by the Company having added headcount to support ongoing business growth and network expansion.

In addition, in August 2021 the Company implemented a salary and wage increase of approximately 4.7 percent.

Purchased transportation increased $33.2 million in the first quarter of 2022 compared to the first quarter of 2021 primarily due to linehaul capacity expansion to support growth and customer service requirements.

In addition, the cost of this expanded capacity increased during the first quarter of 2022.

Depreciation and amortization expense increased $4.6 million in the first quarter 2022 compared to the same period in 2021 primarily due to revenue equipment, real estate and technology investments in the second half of 2021 and the beginning of 2022.

Fuel and other operating expenses and supplies increased $37.9 million in the first quarter of 2022 compared to the prior year quarter.

This increase was driven primarily by an increase in fuel, operating expenses and supplies of $39.6 million, largely due to increasing diesel fuel costs and volume increases during the quarter.

During the first quarter of 2022, claims and insurance expense was $0.7 million lower than the first quarter of 2021 primarily due to slightly lower claims activity overall.

Substantially all non-operating expenses represent interest expense.

Interest expense in the third quarter of 2021 was lower than the same period in 2020 due to decreased borrowings in the current period as a result of delayed capital expenditures.

The effective tax rate was 24.3 percent and 23.7 percent for the quarters ended September 30, 2021 and 2020 , respectively.

The in crease in the third quarter effective tax rate in 2021 is primarily a result of higher excess tax benefits related to stock compensation activity in the prior year .

For the nine months ended September 30, 2021 and September 30, 2020 , the effective tax rates were 23.9 percent and 22.2 percent, respectively.

For the nine months ended September 30, 2021 approximately $ 58.7 million in cash tax payments were made compared to $ 6.6 million in the nine months ended September 30, 2020 .

Net income was $79.7 million, or $2.98 per diluted share, in the third quarter of 2021 compared to net income of $41.5 million, or $1.56 per diluted share, in the third quarter of 2020.

Net income was $179.5 million, or $6.72 per diluted share, for the first nine months of 2021 compared to net income of $98.1 million, or $3.69 per diluted share, for the first nine months of 2020 .

Interest expense in the first quarter of 2022 was lower than the same period in 2021 as the Company continued to pay down finance lease obligations.

The effective tax rate was 22.5 percent and 22.3 percent for the quarters ended March 31, 2022 and 2021, respectively.

The increase in the first quarter effective tax rate in 2022 is primarily due to the reduction of available tax credits related to alternative fuels compared to the prior year, as alternative fuel tax credits have not been enacted for 2022.

Net income was $79.4 million, or $2.98 per diluted share, in the first quarter of 2022 compared to net income of $37.3 million, or $1.40 per diluted share, in the first quarter of 2021.

Working capital/capital expenditures

Working capital at September 30, 2021 was $112.0 million, which increased from working capital at September 30, 2020 of $4.4 million.

Current assets at September 30, 2021 increased by $170.5 million as compared to September 30, 2020 and includes an increase in accounts receivable of $69.2 million, and an increase in cash and cash equivalents of $96.2 million.

Current liabilities increased by $62.9 million at September 30, 2021 compared to September 30, 2020 largely due to an increase in accounts payable.

Cash flows provided by operating activities were $267.7 million for the nine months ended September 30, 2021 versus $239.0 million for the nine months ended September 30, 2020.

Working capital at March 31, 2022 was $171.5 million, which increased from working capital at March 31, 2021 of $41.1 million.

Current assets at March 31, 2022 increased by $162.4 million as compared to March 31, 2021 and includes an increase in accounts receivable of $79.4 million, and an increase in cash and cash equivalents of $88.1 million.

Current liabilities increased by $31.9 million at March 31, 2022 compared to March 31, 2021 largely due to an increase in wages, vacation and employees’ benefits payable.

Cash flows provided by operating activities were $96.0 million for the three months ended March 31, 2022 versus $61.0 million for the three months ended March 31, 2021.

The increase is primarily due to increased profitability, partially offset by a change in working capital compared to prior year.

For the nine months ended September 30, 2021, net cash used in investing activities was $148.9 million versus $197.5 million in the same period last year, a $48.6 million decrease.

This decrease resulted primarily from decreased capital expenditures caused by COVID-19 related manufacturing delays for revenue equipment.

The Company currently expects that net capital expenditures in 2021 will be approximately $275 million.

For the nine months ended September 30, 2021, net cash used in financing activities was $18.7 million compared to $16.2 million net cash used in financing activities during the same period last year, as a result of equity based compensation shares withheld for taxes as well as repayment of finance leases during the first nine months of 2021 .

For the three months ended March 31, 2022, net cash used in investing activities was $45.4 million versus $25.4 million in the same period last year, a $20.0 million increase.

This increase resulted from increased capital expenditures related to real estate acquisitions as the Company continues to expand its footprint and add density in markets.

The Company currently expects that net capital expenditures in 2022 will be in excess of $500 million.

For the three months ended March 31, 2022, net cash used in financing activities was $15.8 million compared to $7.6 million net cash used in financing activities during the same period last year, as a result of equity based compensation shares withheld for taxes as well as increased repayments of finance leases during the first three months of 2022 as compared to the same period in 2021.

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.

Because the severity, magnitude and duration of the COVID-19 pandemic and its economic consequences are uncertain, rapidly changing and difficult to predict, the pandemic’s impact on our operations, financial performance and financial condition, as well as its impact on our ability to successfully execute our business strategies and initiatives, remains uncertain and difficult to predict.

We are continuing initiatives to increase yield, improve business mix, reduce costs and improve productivity while also focusing on providing top quality service and improving safety performance.

On January 18, 2021 and February 3, 2020, Saia implemented 5.9 percent general rate increases for customers comprising approximately 20 to 25 percent of Saia’s operating revenue.

Our outlook for 2022 is dependent on a number of external factors, including geopolitical developments, inflation, labor availability, fuel prices, supply chain and impact of pandemic related shut-downs.

The potential impact of these factors on our operations, financial performance and financial condition, as well as the impact on our ability to successfully execute our business strategies and initiatives, remains uncertain and difficult to predict .

We are continuing initiatives to improve and enhance customer service in an effort to support our ongoing pricing and business mix optimization, while controlling costs and improving productivity.

On January 24, 2022 and January 18, 2021, Saia implemented a 7.5 and 5.9 percent general rate increase, respectively, for customers comprising approximately 20 to 25 percent of Saia’s operating revenue.

The success of cost improvement initiatives is impacted by the cost and availability of drivers, dock workers and other employees and purchased transportation, fuel, self-insurance claims and insurance expense, regulatory changes, successful expansion of our service geography throughout the United States, the COVID-19 pandemic and other factors discussed under “Forward-Looking Statements” and Part II, Item 1A.

“Risk Factors.”

Effective mid-August 2021, the Company implemented a market competitive salary and wage increase for all employees, other than Saia executives.

The compensation increase was approximately five percent, and the Company anticipates the impact will be partially offset by productivity and efficiency gains.

Additionally, the renewal of the Company’s liability insurance policies effective March 1, 2021 is expected to result in approximately $4.3 million in cost increases for 2021 compared to 2020.

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.

Financial Condition

Financial Condition, Liquidity and Capital Resources

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 with a group of banks to fund capital investments, letters of credit and working capital needs.

The Company has pledged certain land and structures, accounts receivable and other assets to secure indebtedness under this agreement.

Credit Agreement

On February 5, 2019, the Company entered into the Sixth Amended and Restated Credit Agreement with its banking group (as amended, the Amended Credit Agreement).

The amendment increased the amount of the revolver from $250 million to $300 million and extended the term until February 2024.

T he Company is a party to a Sixth Amended and Restated Credit Agreement with its banking group (the Amended Credit Agreement), which provides up to a $300 million revolving line of credit through February 2024.

The Amended Credit Agreement also has an accordion feature that allows for an additional $100 million availability , subject to certain conditions and availability of lender commitments.

The amendment reduced the interest rate pricing.

Amended Credit Agreement provides for a LIBOR rate margin range from 100 basis points to 200 basis points, base rate margins from minus 50 basis points to plus 50 basis points, an unused portion fee from 17.5 basis points to 30 basis points and letter of credit fees from 100 basis points to 200 basis points, in each case based on the Company’s leverage ratio.

The Amended Credit Agreement provides for a LIBOR rate margin range from 100 basis points to 200 basis points, base rate margins from minus 50 basis points to plus 50 basis points, an unused portion fee from 17.5 basis points to 30 basis points and letter of credit fees from 100 basis points to 200 basis points, in each case based on the Company’s leverage ratio.

Under the Amended Credit Agreement, the Company must maintain a minimum debt service coverage ratio set at 1.25 to 1.00 and a maximum leverage ratio set at 3.25 to 1.00.

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Under the Amended Credit Agreement, if an event of default occurs, the banks will be entitled to take various actions, including the acceleration of amounts due .

At September 30, 2021, the Company had no outstanding borrowings and outstanding letters of credit of $29.3 million under the Amended Credit Agreement.

At March 31, 2022, the Company had no outstanding borrowings and outstanding letters of credit of $32.0 million under the Amended Credit Agreement.

At December 31, 2021, the Company had no outstanding borrowings and outstanding letters of credit of $29.3 million under the Amended Credit Agreement.

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The Company is obligated under finance leases with seven-year original terms covering revenue equipment.

Total liabilities recognized under finance leases were $55.2 million and $71.0 million as of September 30, 2021 and December 31, 2020, respectively.

Total liabilities recognized under finance leases were $44.9 million and $50.4 million as of March 31, 2022 and December 31, 2021, respectively.

Amortization of assets held under the finance leases is included in depreciation and amortization expense.

The weighted average interest rates for the finance leases at both September 30, 2021 and December 31, 2020 were 3.5 percent.

The weighted average interest rates for the finance leases at March 31, 2022 and December 31, 2021 were 3.6 percent and 3.6 percent, respectively.

Cash Flows and Expenditures

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 $382.6 million for the year ended December 31, 2021, while net cash used in investing activities was $277.8 million.

Cash flows provided by operating activities were $267.7 million for the nine months ended September 30, 2021;

$28.7 million higher than the first nine months of the prior year.

Cash flows provided by operating activities were $96.0 million for the three months ended March 31, 2022;

$35.0 million higher than the first three months of the prior year.

The increase in operating cash flows is primarily due to increased profitability, partially offset by a change in working capital, largely increases in accounts receivable compared to the prior year.

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The Company believes it has significant sources of capital to meet short-term liquidity needs through its operating cash flows and availability under the Amended Credit Agreement.

At September 30, 2021, the Company had $270.7 million in availability under the Amended Credit Agreement, subject to the Company’s satisfaction of existing debt covenants.

The Company was in compliance with its debt covenants at September 30, 2021.

At March 31, 2022, the Company had $268.0 million in availability under the Amended Credit Agreement.

The Company was in compliance with its debt covenants at March 31, 2022.

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.

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Thereafter, the policy provides insurance coverage for a single loss of $8.0 million, an aggregate loss limit of $24.0 million for each policy year, and a $48.0 million aggregate loss limit for the 36-month term originally ended March 1, 2021.

Under the policy, the Company may elect to commute the policy with respect to the first 12 months of the policy term and concurrently extend the policy for an additional one-year period if paid losses in the first 12 months of the policy are less than $5.2 million.

Under the policy, the Company could elect to commute the policy with respect to the first 12 months of the policy term and concurrently extend the policy for an additional one-year period if paid losses in the first 12 months of the policy were less than $5.2 million.

In August 2019, the Company elected to commute the policy for such period.

As a result, the Company received a return of $5.2 million of the premium paid (the maximum return premium available), based on the amount of claims paid and the insurer was released from all liability in connection with claims occurring in such 12-month period.

The Company is now self-insured for the first $10 million per occurrence with respect to such 12-month period and the policy has been extended for one additional year to March 1, 2022.

As a result of the return premium and policy extension, the Company recognized a $0.5 million reduction in insurance premium expense in the third quarter of 2021.

The Company will continue to recognize the remainder of the return premium as a reduction in insurance premium expense ratably over the remainder of the policy period now ending March 1, 2022.

Additionally, the Company is required to pay an additional premium of up to $11.0 million if losses paid by the insurer are greater than $15.6 million over the three-year policy period ending March 1, 2022.

Based on claims occurring since March 1, 2019, no such additional premium was accrued at September 30, 2021 .

The Company is now self-insured for the first $10 million per occurrence with respect to such 12-month period and the policy was extended for one additional year to March 1, 2022.

The Company recognized the remaining $0.3 million of the return premium as a reduction in insurance premium expense in the first quarter of 2022 .

Effective March 1, 2022, the Company extended the policy term for one additional year to March 1, 2023.

Additionally, the Company is required to pay an additional premium of up to $11.0 million if losses paid by the insurer are greater than $17.5 million over the four-year policy period ending March 1, 2023.

Based on claims occurring since March 1, 2019, no such additional premium was accrued at March 31, 2022 .

Commencing on August 30, 2023, the Company may elect to commute the policy with respect to the insurer’s entire liability under the policy in which case the Company would be entitled to a return of a portion of the premium paid, up to $17.5 million , based on the amount of claims paid and the insurer would be released from all liability under the policy ending March 1, 2023.

As a result, if the Company elects to commute the policy as to the entire policy term, the Company would be self-insured for $10 million per occurrence for the four years ended March 1, 2022.

As a result, if the Company elects to commute the policy as to the entire policy term, the Company would be self-insured for $10 million per occurrence for the five years ended March 1, 2023.

Effective March 1, 2022, the Company entered into an additional automobile liability insurance policy with a three-year term that is applicable when an occurrence exceeds $10 million.

Thereafter, the policy provides insurance coverage for a single loss of an additional $5.0 million, an aggregate loss limit of $10.0 million for each policy year, and a $20.0 million aggregate loss limit for the three-year term ending March 1, 2025.

Under the policy, the Company may elect to commute the policy for the three year term if losses incurred are less than $1.4 million and the Company does not elect to renew the policy.

In the event the Company elects to commute the policy for such period, it will be entitled to a return of a portion of the premium paid, up to $1.1 million, based on the amount of claims paid and the insurer will be released from all liability in connection with such period.

As a result, if the Company elects to commute the policy as to such period, the Company will be self-insured for the $10 million to $15 million loss layer per occurrence for the three years ended March 1, 2025.

The decision whether to commute the policy can not be made before June 1, 2024 and must be made prior to December 1, 2025, unless the insurer agrees to extend such date.

Additionally, the Company is required to pay an additional premium of up to $7.5 million if losses paid by the insurer are greater than $1.4 million over the three-year policy period ending March 1, 2025.

Based on claims occurring since March 1, 2022, no such additional premium was accrued at March 31, 2022.

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 2021 are expected to be approximately $275 million.

This would represent an increase from 2020 net capital expenditures of $219 million for property and equipment, inclusive of equipment acquired using finance leases, information technology, and land and structures.

Projected 2021 capital expenditures include a normal replacement cycle of

revenue equipment and technology investment for our operations.

Net capital expenditures were $ 148.4 million in the first nine months of 2021 .

Approximately $ 74.8 million of the 2021 remaining capital budget was committed as of September 30, 2021 .

In addition to the principal amounts disclosed in the tables below, the Company has interest obligations of approximately $2.9 million for the remainder of 2021 and decreasing for each year thereafter based on borrowings and commitments outstanding at September 30, 2021.

Projected net capital expenditures for 2022 are expected to be in excess of $500 million, which represents an increase from 2021 net capital expenditures of $277 million, inclusive of equipment acquired under finance leases, information technology, and land and structures.

Projected 2022 capital expenditures include a normal replacement cycle of revenue equipment and technology investment for our operations.

Net capital expenditures were $45.4 million in the first three months of 2022.

Approximately $271.3 million of the 2022 remaining capital budget was committed as of March 31, 2022.

Contractual Obligations

The following tables set forth a summary of our contractual cash obligations and other commercial commitments as of September 30, 2021 (in millions):

Payments due by year

Contractual cash obligations:

Long-term debt obligations:

Revolving line of credit (1)

Finance Leases (1)

Operating leases (2)

Purchase obligations (3)

Total contractual obligations

Contractual obligations for the Company are comprised of lease agreements, purchase obligations and long-term debt obligations related to any outstanding balance under the Company’s revolving line of credit.

Total contractual obligations for operating leases at March 31, 2022 totaled $123.8 million, including operating leases with original maturities of less than one year, which are not recorded in our consolidated balance sheet in accordance with U.S.

generally accepted accounting principles.

Additionally, in April 2021, the Company

committed to an additional terminal lease estimated to commence in 2023 of approximately $57 million with a lease term of 15 years with annual rent ranging from $3.1 million to $4.6 million.

A nnual rental payments under this lease are not included in the contractual obligations for operating leases at March 31, 2022 .

Contractual obligations in the form of finance leases were $47.4 million at March 31, 2022 , which include s both principal and interest components.

See Note 5 to the accompanying condensed consolidated financial statements in this Current Report on Form 10-Q.

The contractual finance lease obligation payments included in this table include both the principal and interest components.

In April 2021, the Company committed to an additional terminal lease estimated to commence in 2023 of approximately $57 million with a lease term of 15 years with annual rent ranging from $3.1 million to $4.6 million.

Includes commitments of $74.8 million for capital expenditures.

Amount of commitment expiration by year

Other commercial commitments:

Available line of credit (1)

Letters of credit

Total commercial commitments

Subject to the satisfaction of existing debt covenants.

The Company has accrued approximately $1.4 million for uncertain tax positions and $0.2 million for interest and penalties related to the uncertain tax positions as of September 30, 2021.

The Company cannot reasonably estimate the timing of cash settlements 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 September 30, 2021, the Company has accrued $99.8 million for claims and insurance liabilities.

The Company cannot reasonably estimate the timing of cash settlements 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.

The contractual finance lease obligation payments included here comprise both the principal and interest components.

Purchase obligations at March 31, 2022 were $273.2 million , including commitments of $271.3 million for capital expenditures .

As of March 31, 2022 , the revolving line of credit had no outstanding principal balance.

Other commercial commitments of the Company typically include letters of credit and surety bonds required for collateral towards insurance agreements, and the outstanding available line of credit.

As of March 31, 2022 the Company had total outstanding letters of credit of $33.8 million and $74.1 million in surety bonds.

Additionally, the Company had $268.0 million available under its revolving credit facility, subject to existing debt covenants at March 31, 2022 .

In addition to any principal amounts disclosed, the Company has interest obligations of approximately $2.6 million for the remainder of 2022, based on borrowings and commitments outstanding at March 31, 2022.

The Company has accrued approximately $3.0 million for uncertain tax positions and $0.4 million for interest and penalties related to the uncertain tax positions as of March 31, 2022.

At March 31, 2022, the Company has accrued $110.7 million for claims and insurance liabilities.

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:

Claims and Insurance Accruals .

As described in more detail in the Notes to Consolidated Financial Statements contained in Form 10-K for the year ended December 31, 2020, the Company has self-insured retention limits generally ranging from $250,000 to $1 million per occurrence for medical, workers’ compensation, casualty and cargo claims and from $2 million to $10 million for auto liability.

The liabilities are estimated in part based on historical experience, third-party actuarial analysis with respect to

workers’ compensation claims, demographics, nature and severity, and other assumptions.

The claims liabilities are included in claims and insurance reserves based on claims incurred with liabilities for unsettled claims and claims incurred but not yet reported being actuarially determined with respect to workers’ compensation claims and, with respect to all other liabilities, estimated based on management’s evaluation of the nature and severity of individual claims and historical experience.

However, these estimated accruals could be significantly affected if the actual costs of the Company differ from these assumptions.

A significant number of these claims typically take several years to develop and even longer to ultimately settle.

These estimates tend to be reasonably accurate over time;

however, assumptions regarding severity of claims, medical cost inflation, as well as specific case facts can create short-term volatility in estimates .

Revenue Recognition and Related Allowances .

Revenue is recognized over the transit time of the shipment as it moves from origin to destination while expenses are recognized as incurred.

In addition, estimates included in the recognition of revenue and accounts receivable include estimates of shipments in transit and estimates of future adjustments to revenue and accounts receivable for billing adjustments and collectability.

Revenue is recognized in a systematic process whereby estimates of shipments in transit are based upon actual shipments picked up, day of delivery and current rates charged to customers.

Since the cycle for pickup and delivery of shipments is generally 1-5 days, typically less than 5 percent of a total month’s revenue is in transit at the end of any month.

Estimates for credit losses and billing adjustments are based upon historical experience of credit losses, adjustments processed and trends of collections.

Billing adjustments are primarily made for discounts and billing corrections.

These estimates are continuously evaluated and updated;

however, changes in economic conditions, pricing arrangements and other factors can significantly impact these estimates.

Depreciation and Capitalization of Assets .

Under the Company’s accounting policy for property and equipment, management establishes appropriate depreciable lives and salvage values for the Company’s revenue equipment (tractors and trailers) based on their estimated useful lives and estimated residual values to be received when the equipment is sold or traded in.

These estimates are routinely evaluated and updated when circumstances warrant.

However, actual useful lives and residual values could differ from these assumptions based on market conditions and other factors, thereby impacting the estimated amount or timing of depreciation expense.

These accounting policies and others are described in further detail in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

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.

There have been no significant changes to the application of the critical accounting policies and estimates contained in our Form 10-K at December 31, 2021 .

The reader should refer to the Notes to our Consolidated Financial Statements in our 2021 Annual Report on Form 10-K for a full disclosure of all critical accounting policies and estimates.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis