SAIA, INC. This Management's Discussion and Analysis should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and our 2019 audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2019 . Those consolidated financial statements include additional information about our significant accounting policies, practices and the transactions that underlie our financial results. Forward-Looking StatementsThe Securities and Exchange Commission (theSEC ) 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:
• general economic conditions including downturns in the business cycle;
• effectiveness of Company-specific performance improvement initiatives,
including management of the cost structure to match shifts in customer
volume levels;
• the creditworthiness of our customers and their ability to pay for services;
• widespread outbreak of an illness or any other communicable disease,
including the COVID-19 pandemic, or any other public health crisis, or
business disruptions that may arise from the COVID-19 pandemic in the
future;
• failure to achieve acquisition synergies;
• failure to operate and grow acquired businesses in a manner that supports
the value allocated to these acquired businesses;
• economic declines in the geographic regions or industries in which our
customers operate;
• competitive initiatives and pricing pressures, including in connection with
fuel surcharge;
• loss of significant customers;
• the Company's need for capital and uncertainty of the credit markets;
• the possibility of defaults under the Company's debt agreements (including
violation of financial covenants);
• possible issuance of equity which would dilute stock ownership;
• integration risks;
• the effect of litigation including class action lawsuits;
• cost and availability of qualified drivers, fuel, purchased transportation,
real property, revenue equipment, technology and other assets;
• the effect of governmental regulations, including but not limited to Hours
of Service, engine emissions, the Compliance, Safety, Accountability (CSA)
initiative, the
requiring companies to evaluate their internal control over financial
reporting, Homeland Security, environmental regulations, tax law changes and
changes to international trade agreements and tariffs;
• changes in interpretation of accounting principles;
• dependence on key employees;
• inclement weather;
• labor relations, including the adverse impact should a portion of the
Company's workforce become unionized;
• terrorism risks;
12
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• self-insurance claims and other expense volatility;
• risks arising from international business operations and relationships;
• recent increases in the severity of auto liability claims against trucking
companies and sharply higher costs of settlements and verdicts;
• cost and availability of insurance coverage, including the possibility the
Company may be required to pay additional premiums, may be required to
assume additional liability under its auto policy or be unable to obtain
coverage;
• increased costs of healthcare and prescription drugs, including as a result
of healthcare reform legislation;
• social media risks;
• disruption in or failure of the Company's technology or equipment including
services essential to operations of the Company and/or cyber-security risk;
• failure to successfully execute the strategy to expand the Company's service
geography into the
• other financial, operational and legal risks and uncertainties detailed from
time to time in the Company's
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 endedDecember 31, 2019 , 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 theNortheastern United States . While the Company's business is labor intensive, capital intensive and service sensitive, management continues to look for opportunities to improve safety, cost effectiveness and asset utilization (primarily tractors and trailers). Additionally, pricing initiatives have had a positive impact on yield and profitability and 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 improving customer experience, operational efficiencies and Company image. COVID-19 InMarch 2020 , theWorld Health Organization categorized Coronavirus Disease 2019 ("COVID-19") as a pandemic, and the President ofthe United States declared the COVID-19 outbreak a national emergency. We are considered an essential and critical business by theU.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 ofSaia 's transportation services, while instituting a variety of 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 atSaia 's facilities, and instituting telecommuting where possible. Through the date of this filing, as a result of these efforts, the Company has not experienced significant disruptions in the Company's LTL network operations. Beginning in the latter part of the first quarter of 2020, we experienced lower demand for our transportation services along with increased costs and other challenges related to COVID-19 that has adversely affected our business. We believe we have significant liquidity available to continue business operations during this volatile period. As discussed in the Financial Condition section, 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 atJune 30, 2020 . 13
-------------------------------------------------------------------------------- The Company began to see the impacts of COVID-19 on customer demand in late March and continued to see declines during the second quarter of 2020. The situation surrounding COVID-19 remains fluid and we believe the adverse impact on the Company increases the longer the virus affects the level of economic activity inthe United States . In these circumstances, 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 will continue to adversely impact our business operations, financial condition, results of operations, liquidity and cash flows. See Part II, Item 1A - "Risk Factors" for further discussion concerning COVID-19.
Second Quarter Overview
The Company's operating revenue decreased by 9.9 percent in the second quarter of 2020 compared to the same period in 2019. The decrease resulted primarily from decreases in shipments and tonnage due to the economic impact of COVID-19. Consolidated operating income was$35.7 million for the second quarter of 2020 compared to$51.2 million for the second quarter of 2019. In the second quarter of 2020, LTL shipments were down 9.7 percent per workday and LTL tonnage was down 8.9 percent per workday versus the prior year quarter. The decrease in shipments and tonnage was most significant in April with improvements in average shipments per day and monthly revenue in May and June. Diluted earnings per share were$1.07 in the second quarter of 2020, compared to diluted earnings per share of$1.40 in the prior year quarter. The operating ratio (operating expenses divided by operating revenue) was 91.5 percent in the second quarter of 2020 compared to 89.0 percent in the second quarter of 2019. The Company generated$148.2 million in net cash provided by operating activities in the first six months of 2020 compared with$113.6 million in the same period last year. The increase is primarily due to a change in working capital compared to the same period last year. The Company's net cash used in investing activities was$142.7 million during the first six months of 2020 compared to$166.1 million in the first six months of 2019, primarily as a result of decreased capital expenditures for revenue equipment and real estate in the first six months of 2020. The Company's net cash provided by financing activities was$23.5 million in the first six months of 2020 compared to$50.8 million net cash provided by financing activities during the same period last year. This change was primarily due to reduced borrowing (net of repayments) to fund capital expenditures. The Company had$80.0 million in outstanding borrowings under its revolving credit agreement, outstanding letters of credit of$29.8 million and a cash and cash equivalents balance of$29.3 million atJune 30, 2020 . The Company also had$80.8 million in obligations under finance leases atJune 30, 2020 . AtJune 30, 2020 , the Company had$192.0 million in availability under the revolving credit facility, subject to the Company's satisfaction of existing debt covenants. 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 atJune 30, 2020 . 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 is a transportation company headquartered inJohns Creek ,Georgia that provides less-than-truckload (LTL) services through a single integrated organization. While historically more than 97 percent of its revenue has been derived from transporting LTL shipments across 44 states, the Company also offers customers a wide range of other value-added services, including non-asset truckload, expedited and logistics services acrossNorth America . Our business is highly correlated to non-service sectors of the general economy. Our business 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. 14 -------------------------------------------------------------------------------- Results of OperationsSaia, Inc. and Subsidiaries Selected Results of Operations and Operating Statistics For the quarters ended June 30, 2020 and 2019 (unaudited) Percent Variance 2020 2019 '20 v. '19 (in
thousands, except ratios, workdays and revenue per
hundredweight)
Operating Revenue$ 418,114 $ 464,195 (9.9 ) % Operating Expenses: Salaries, wages and employees' benefits 224,277 237,689 (5.6 ) Purchased transportation 26,406 34,154 (22.7 ) Depreciation and amortization 33,664 29,143 15.5 Fuel and other operating expenses 98,086 112,043 (12.5 ) Operating Income 35,681 51,166 (30.3 ) Operating Ratio 91.5 % 89.0 % (2.8 ) Nonoperating Expense 843 1,763 (52.2 ) Working Capital (as of June 30, 2020 and 2019) 21,549 24,199
Cash Flows provided by Operating Activities (year to date) 148,233
113,574
Net Acquisitions of Property and Equipment (year to date) 142,722 166,054
Saia Motor Freight Operating Statistics:
Workdays 64 64 -
LTL Tonnage 1,142 1,254 (8.9 )
LTL Shipments 1,745 1,933 (9.7 )
LTL Revenue per hundredweight $ 17.95 $ 18.05 (0.6 )
Quarter and six months ended
Revenue and volume Consolidated revenue for the quarter endedJune 30, 2020 decreased 9.9 percent to$418.1 million primarily as a result of decreased shipments and tonnage, due to a downturn in business volumes across our network caused by the impact of COVID-19.Saia 's LTL revenue per hundredweight (a measure of yield) decreased 0.6 percent to$17.95 per hundredweight for the second quarter of 2020 as a result of changes in business mix, in addition to a 27.6 percent decrease in fuel surcharge revenue due to lower fuel prices. For the second quarter of 2020,Saia 's LTL tonnage decreased 8.9 percent per workday to 1.1 million tons, and LTL shipments decreased 9.7 percent per workday to 1.7 million shipments. For the second quarter of 2020, approximately 75 to 80 percent ofSaia '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, onFebruary 3, 2020 ,Saia implemented a 5.9 percent general rate increase. 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 increases in base rates instead of increases in fuel surcharges or vice versa. Fuel surcharge revenue as a percentage of operating revenue decreased to 10.6 percent for the quarter endedJune 30, 2020 compared to 13.2 percent for the quarter endedJune 30, 2019 , as a result of decreases in the cost of fuel. 15 -------------------------------------------------------------------------------- For the six months endedJune 30, 2020 , operating revenues were$864.5 million , down 1.2 percent from$874.8 million for the six months endedJune 30, 2019 , primarily due to decreased volumes as a result of the COVID-19 economic impact. Fuel surcharge revenue as a percentage of operating revenue decreased to 11.8 percent for the six months endedJune 30, 2020 , compared to 13.0 percent for the six months endedJune 30, 2019 , as a result of decreases in the cost of fuel.
Operating expenses and margin
Consolidated operating income was$35.7 million in the second quarter of 2020 compared to$51.2 million in the prior year quarter. Overall, the operations were negatively impacted in the second quarter of 2020 by the economic impact of the COVID-19 pandemic which caused lower shipments and tonnage, partially offset by corresponding reductions in fuel and operating expenses, a decrease in salary and wage expense, and a decrease in purchased transportation expense. The second quarter of 2020 operating ratio (operating expenses divided by operating revenue) was 91.5 percent compared to 89.0 percent for the same period in 2019. Salaries, wages and benefits decreased$13.4 million in the second quarter of 2020 compared to the second quarter of 2019 largely due to lower headcount in the second quarter of 2020 in response to impacts from the COVID-19 pandemic. Fuel, operating expenses and supplies decreased$19.4 million in the second quarter of 2020 compared to the prior year quarter largely due to decreases in fuel expense during the quarter, partially offset by an increase in building rent expense. During the second quarter of 2020, claims and insurance expense was$5.1 million higher than the second quarter of 2019 primarily due to increased severity of claims, an increase in total claims and higher cost of insurance, partially offset by the benefit from the commutation of the bodily injury and property damage liability policy. Purchased transportation decreased$7.7 million in the second quarter of 2020 compared to the second quarter of 2019 primarily due to overall volume decreases during the second quarter of 2020 as a result of the economic impact of COVID-19. For the six months endedJune 30, 2020 , consolidated operating income was$74.5 million , down 6.7 percent compared to$79.8 million for the six months endedJune 30, 2019 . This decrease was largely due to the economic impact of COVID-19 in the second quarter of 2020. Salaries, wages and benefits increased$4.9 million during the first six months of 2020 compared to the same period last year largely due to higher wages in the first six months of 2020, a wage increase inJuly 2019 and higher healthcare benefit costs. Fuel, operating expenses and supplies decreased$20.1 million during the first six months of 2020 compared to the same period last year largely due to decreases in fuel expenses and other operating expenses and supplies, partially offset by an increase in building rent expense compared to the first six months of 2019. During the first six months of 2020, claims and insurance expense was$6.0 million higher than the same period last year primarily due to increased severity of claims, an increase in total claims and higher cost of insurance, partially offset by the benefit from the commutation of the bodily injury and property damage liability policy. Purchased transportation decreased$6.1 million for the first six months of 2020 compared to the same period last year primarily due to overall volume decreases during the first six months of 2020 as a result of the economic impact of COVID-19.
Other
Substantially all non-operating expenses represent interest expense. Interest expense in the second quarter of 2020 was lower than the second quarter of 2019 due to decreased average interest rates and decreased borrowings in the second quarter of 2020. Interest expense in the first six months of 2020 was$0.3 million lower than the first six months of 2019 due to decreased average interest rates and decreased average borrowings in the first six months of 2020. The effective tax rate was 18.3 percent and 25.0 percent for the quarters endedJune 30, 2020 and 2019, respectively. The decrease in the second quarter tax rate in 2020 is primarily a result of increased excess tax benefits related to stock activity. For the six months endedJune 30, 2020 andJune 30, 2019 , the effective tax rates were 21.1 percent and 22.9 percent, respectively. Net income was$28.5 million , or$1.07 per diluted share, in the second quarter of 2020 compared to net income of$37.1 million , or$1.40 per diluted share, in the second quarter of 2019. Net income was$56.6 million , or$2.13 per diluted share, for the first six months of 2020 compared to net income of$59.3 million , or$2.25 per diluted share, for the first six months of 2019. 16 --------------------------------------------------------------------------------
Working capital/capital expenditures
Working capital at
Current assets atJune 30, 2020 increased by$8.3 million as compared toJune 30, 2019 and includes a decrease in accounts receivable of$21.9 million , and an increase of cash and cash equivalents of$28.8 million . Current liabilities increased by$10.9 million atJune 30, 2020 compared toJune 30, 2019 largely due to an increase in wages, vacation and employees' benefits. Cash flows provided by operating activities were$148.2 million for the six months endedJune 30, 2020 versus$113.6 million for the six months endedJune 30, 2019 . The increase is primarily due to a change in working capital compared to the same period last year. For the six months endedJune 30, 2020 , net cash used in investing activities was$142.7 million versus$166.1 million in the same period last year, a$23.4 million decrease. This decrease resulted primarily from decreased capital expenditures for revenue equipment and real estate. The Company currently expects that net capital expenditures in 2020 will be less than the$250 million previously planned as a result of management continuing to evaluate the impact of COVID-19. For the six months endedJune 30, 2020 , net cash provided by financing activities was$23.5 million compared to$50.8 million net cash provided by financing activities during the same period last year, as a result of reduced borrowings (net of repayments) to fund capital expenditures.
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. 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, reduce costs and improve productivity while also focusing on providing top quality service and improving safety performance. OnFebruary 3, 2020 ,Saia implemented a 5.9 percent general rate increase for customers comprising approximately 20 to 25 percent ofSaia 's operating revenue. The Company anticipates there will be no salary or wage increases in 2020. Effective inApril 2020 , the Company temporarily suspended its 401(k) match and temporarily furloughed certain employees in response to COVID-19's impact on the Company's operations. OnApril 1, 2020 , we offered all hourly full-time workers an additional five days of paid time off and offered one additional paid day off for our part-time workers in light of COVID-19. This action was an effort to provide employees time off for health issues or those of family and friends. We believe this action will result in approximately$10 million of additional benefit costs for the year. InJuly 2020 , the Company paid virtually all employees a$250 bonus to compensate for working through the difficult conditions created by the pandemic, which costs approximately$2.6 million and is included in the second quarter 2020 results. EffectiveJuly 2019 , 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$32 million annually, and the Company anticipates the impact will be partially offset by productivity and efficiency gains. If the Company continues to build market share, including through its geographic expansion, it expects numerous operating leverage cost benefits. Conversely, throughout the duration of the COVID-19 pandemic and the period of economic disruption, the Company plans to match resources and capacity to shifting volume levels to lessen any unfavorable operating leverage. Additionally, the Company's renewal of insurance policies effectiveMarch 1, 2020 resulted in$6.2 million of anticipated cost increases for 2020 compared to 2019. The success of cost improvement initiatives is impacted by the cost and availability of drivers and purchased transportation, fuel, self-insurance claims and insurance expense, regulatory changes, successful expansion of our service geography into theNortheastern United States , the COVID-19 pandemic 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.
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.
Credit Agreement
OnFebruary 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 untilFebruary 2024 . The Amended Credit Agreement also has an accordion feature that allows for an 17 -------------------------------------------------------------------------------- additional$100 million availability, subject to certain conditions and availability of lender commitments. The amendment reduced the interest rate pricing grid compared to the prior agreement. 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. The Amended Credit Agreement provides for a pledge by the Company of certain land and structures, accounts receivable and other assets to secure indebtedness under this agreement. The Amended Credit Agreement contains certain customary representations and warranties, affirmative and negative covenants and provisions relating to events of default. 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. AtJune 30, 2020 , the Company had borrowings of$80.0 million and outstanding letters of credit of$28.0 million under the Amended Credit Agreement. AtDecember 31, 2019 , the Company had borrowings of$45.9 million and outstanding letters of credit of$26.1 million under the Amended Credit Agreement. The available portion of the Amended Credit Agreement may be used for general corporate purposes, including capital expenditures, working capital and letter of credit requirements as needed.
Finance Leases
The Company is obligated under finance leases with seven-year terms covering revenue equipment totaling$80.8 million and$90.5 million as ofJune 30, 2020 andDecember 31, 2019 , 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 atJune 30, 2020 andDecember 31, 2019 were 3.5 percent.
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$272.9 million for the year endedDecember 31, 2019 , while net cash used in investing activities was$281.0 million . Cash flows provided by operating activities were$148.2 million for the six months endedJune 30, 2020 ,$34.6 million higher than the first six months of the prior year. The increase is primarily due to a change in working capital compared to the prior year. The timing of capital expenditures can largely be managed around the seasonal working capital requirements of the Company. 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. AtJune 30, 2020 , the Company had$192.0 million in availability under the Amended 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 atJune 30, 2020 . EffectiveMarch 1, 2018 , the Company entered into a new bodily injury and property damage liability policy with a three-year term. Generally, the Company is responsible for the risk retention amount per occurrence of$2.0 million under the new policy. 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 endedMarch 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 . InAugust 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 toMarch 1, 2022 . As a result of the return premium and policy extension, the Company recognized a$0.4 million reduction in insurance premium expense in the second quarter of 2020. 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 endingMarch 1, 2022 . In addition, commencing onAugust 30, 2021 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$15.6 million , based on the amount of claims paid and the insurer would be released from all liability under the policy endingMarch 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 such period. Additionally, the Company may be 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 endingMarch 1, 2022 . Based on claims experience since inception of the policy, no such additional premium was accrued atJune 30, 2020 . 18 -------------------------------------------------------------------------------- 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 2020 are expected to be less than the$250 million previously planned as a result of management continuing to evaluate the impact of COVID-19. This would represent a decrease from 2019 net capital expenditures of$287 million for property and equipment, inclusive of equipment acquired using finance leases, information technology, and land and structures. Projected 2020 capital expenditures include a normal replacement cycle of revenue equipment and technology investment for our operations. Net capital expenditures were$142.7 million in the first six months of 2020. Approximately$40.9 million of the 2020 remaining capital budget was committed as ofJune 30, 2020 . In addition to the principal amounts disclosed in the tables below, the Company has interest obligations of approximately$4.3 million for the remainder of 2020 and decreasing for each year thereafter based on borrowings and commitments outstanding atJune 30, 2020 .
Contractual Obligations
The following tables set forth a summary of our contractual cash obligations and
other commercial commitments as of
Payments due by year
2020 2021 2022 2023 2024 Thereafter Total
Contractual cash obligations:
Long-term debt obligations:
Revolving line of credit (1) $ - $ - $ - $ - $ 80.0 $ - $ 80.0
Leases:
Finance Leases (1) 11.1 22.8 21.0 15.4 10.7 6.3 87.3
Operating leases 20.8 25.5 22.5 19.2 16.1 54.2 158.3
Purchase obligations (2) 41.6 - - - - - 41.6
Total contractual obligations $ 73.5 $ 48.3 $ 43.5 $ 34.6 $ 106.8 $ 60.5 $ 367.2 (1) 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.
(2) Includes commitments of
Amount of commitment expiration by year
2020 2021 2022 2023 2024 Thereafter Total
Other commercial commitments:
Available line of credit (1) $ - $ - $ - $ - $ 192.0 $ - $ 192.0
Letters of credit - 29.8 - - - - 29.8
Surety bonds 0.8 58.5 - - - - 59.3
Total commercial commitments $ 0.8 $ 88.3 $ - $ - $ 192.0 $ - $ 281.1 (1) Subject to the satisfaction of existing debt covenants.
The Company has accrued approximately$1.1 million for uncertain tax positions and$0.1 million for interest and penalties related to the uncertain tax positions as ofJune 30, 2020 . 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. AtJune 30, 2020 , the Company has$88.3 million in 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.
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
ranging from
19
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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 otherassumptions. The liabilities for self-funded retention 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
The preparation of financial statements in accordance withU.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.
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