| SCS TRANSPORTATION INC Item 1A Risk Factors SCST shareholders should be aware of certain risks, including those described below and elsewhere in this Form 10-K, which could adversely affect the value of their holdings and could cause our actual results to differ materially from those projected in any forward looking statements |
| We are subject to general economic factors that are largely out of our control, any of which could have a material adverse effect on the results of our operations |
| Our business is subject to a number of general economic factors that may have a material adverse effect on the results of our operations, many of which are largely out of our control |
| These include recessionary economic cycles and downturns in customer business cycles, particularly in market segments and industries, such as retail, manufacturing and chemical, where we have a significant concentration of customers |
| Economic conditions may adversely affect the business levels of our customers, the amount of transportation services they need and their ability to pay for our services |
| It is not possible to predict the long-term effects of terrorist attacks and subsequent events on the economy or on customer confidence in the United States, or the impact, if any, on our future results of operations |
| We are dependent on cost and availability of qualified drivers and purchased transportation |
| There is significant competition for qualified drivers within the trucking industry and attracting and retaining drivers has become more challenging |
| We may periodically experience shortages of qualified drivers that could result in us not meeting customer demands, upward pressure on driver wages, under utilization of our truck fleet and/or use of higher cost purchased transportation, which could have a material adverse effect on our operating results |
| There is also significant competition for quality purchased transportation within the trucking industry |
| We may periodically experience shortages of quality purchased transportation that could result in us not meeting customer demands, which could have a material adverse effect on our operating results |
| We are dependent on cost and availability of fuel |
| Fuel is a significant operating expense |
| We do not hedge against the risk of fuel price increases |
| Global political events, federal, state and local regulations, natural disasters and other external factors could influence the cost and availability of fuel |
| Increases in fuel prices to the extent not offset by fuel surcharges or other customer price increases or any fuel shortages or interruption in the supply or distribution of fuel could have a material adverse effect on operating results |
| Historically we have been able to offset significant fuel price increases through fuel surcharges to our customers, but we cannot be certain that we will be able to do so in the future |
| In addition, in recent years, given the significance of fuel surcharges, the negotiation of customer price increases have become commingled with fuel surcharges |
| As such it now represents more than a pass through of increased fuel costs |
| A rapid and significant decline in diesel fuel prices would reduce the Company’s revenue and yield |
| Limited supply of new revenue equipment and real estate may adversely impact financial results and cash flows |
| Investment in new revenue equipment is a significant part of our annual capital expenditures |
| We may have difficulty in purchasing new trucks due to decreased supply and the price of such equipment may be adversely impacted by future regulations on newly manufactured diesel engines |
| The Company’s business model is also dependent on cost and availability of terminal facilities in key metropolitan areas |
| Shortages in the availability of real estate may require significant additional investment in leasing, purchasing or building facilities, increase our operating expenses and/or prevent us from efficiently serving certain markets |
| In addition, we may not realize sufficient revenues or profits from our infrastructure investments |
| Effectiveness of Company-specific performance improvement initiatives |
| Operating performance improvement at both Saia and Jevic is dependent on the implementation and/or the continuation of various performance improvement initiatives |
| Profitability at Saia has improved consistently over the past several years, but their operating margin is still below several “best-in-class” competitors |
| There can be no 9 _________________________________________________________________ [42]Table of Contents assurance that Saia’s historical performance trend will be representative of future performance |
| Profitability at Jevic has not been acceptable for several years and there can be no assurance that future performance improvement initiatives will be successful |
| Failure to achieve performance improvement initiatives could have a material adverse impact on our operating results |
| We operate in a highly regulated and highly taxed industry, and costs of compliance with, or liability for violation of, existing or future regulations could have a material adverse effect on our business |
| The US Department of Transportation and various state agencies exercise broad powers over our business, generally governing such activities as authorization to engage in motor carrier operations, safety and financial reporting |
| We may also become subject to new or more restrictive regulations imposed by the Department of Transportation, the Occupational Safety and Health Administration or other authorities relating to engine exhaust emissions, driver hours of service, security, ergonomics, as well as other unforeseen matters |
| Compliance with such regulations could substantially impair equipment productivity and increase our costs |
| Various federal and state authorities impose significant operating taxes on the transportation industry, including fuel taxes, tolls, excise and other taxes |
| There can be no assurance such taxes will not substantially increase or that new forms of operating taxes will not be imposed on the industry |
| Within the Department of Transportation, the Federal Motor Carrier Safety Administration (the FMCSA) issued in August 2005, amended rules on motor carrier driver hours of service, which limit the maximum number of hours a driver may be on duty between mandatory off-duty hours |
| These amended rules replaced those vacated by the courts in July 2004 |
| The Company’s operations were adjusted to comply with these new rules, and while Saia’s base operations were not materially affected, Jevic’s cost of doing business did increase and both subsidiaries experienced deterioration in the cost, availability and reliability of purchased transportation |
| Revisions to these new rules, as a result of pending or future legal challenges, or any future requirements for on-board recorders, could further impact our operations, further tighten the market for qualified drivers, and put additional pressure on driver wages and purchased transportation costs |
| The Transportation Security Administration continues to focus on trailer security, driver identification and security clearance, and border crossing procedures |
| These and other safety and security measures such as rules for transportation of hazardous materials could increase the cost of operations, reduce the number of qualified drivers and disrupt or impede the timing of our deliveries for our customers |
| The Environmental Protection Agency has issued regulations that require progressive reductions in exhaust emissions from diesel engines through 2010 |
| A significant reduction in emissions is scheduled for 2006 and 2007, which includes both reductions in sulfur content of diesel fuel and further reductions in engine emissions |
| These regulations have the potential to increase the cost of replacing and maintaining trucks, increase fuel costs, reduce availability of fuel and reduce productivity |
| We are subject to various environmental laws and regulations, and costs of compliance with, or liabilities for violations of, existing or future regulations could have a material adverse effect on our business |
| Our operations are subject to environmental laws and regulations dealing with the handling of hazardous materials, underground fuel storage tanks, and discharge and retention of storm water |
| We operate in industrial areas, where truck terminals and other industrial activities are located, and where groundwater or other forms of environmental contamination may have occurred |
| Our operations involve the risks of fuel spillage or seepage, environmental damage, and hazardous waste disposal, among others |
| If we are involved in a spill or other accident involving hazardous substances, or if we are found to be in violation of applicable laws or regulations, it could have a material adverse effect on our business and operating results |
| If we fail to comply with applicable environmental regulations, we could be subject to substantial fines or penalties and to civil and criminal liability |
| We operate in a highly competitive industry, and our business will suffer if we are unable to adequately address potential downward pricing pressures and other factors that may adversely affect our operations and profitability |
| Numerous competitive factors could impair our ability to maintain our current profitability |
| These factors include the following: • competition with many other transportation service providers of varying types including non-asset based logistics and freight brokerage companies, some of which have greater capital resources than we do or have other competitive advantages; 10 _________________________________________________________________ [43]Table of Contents • transportation companies periodically reduce their prices to gain business, especially during times of reduced growth rates in the economy, which may limit our ability to maintain or increase prices or achieve significant growth in our business; and • advances in technology require increased investments to remain competitive, and our customers may not be willing to accept higher prices to cover the cost of these investments |
| The transportation industry is affected by business risks that are largely out of our control, any of which could have a material adverse effect on the results of our operations |
| Businesses operating in the transportation industry are affected by risks that are largely out of our control, any of which could have a material adverse effect on the results of our operations |
| These factors include weather, excess capacity in the transportation industry, interest rates, fuel taxes, license and registration fees, and insurance premiums |
| Our results of operations may also be affected by seasonal factors |
| We are a holding company without material assets other than the common stock of our subsidiaries |
| We are a holding company and do not have any material assets other than the common stock of our subsidiaries |
| Accordingly, our ability to pay dividends, if any, on our common stock, to service our indebtedness and meet our other cash needs will continue to be substantially dependent upon the results of operations of our subsidiaries and the cash flow, if any, generated by such subsidiaries |
| We have significant ongoing cash requirements that could limit our growth and affect profitability if we are unable to obtain sufficient financing |
| Our business is highly capital intensive |
| Our net capital expenditures for 2005 were approximately dlra54 million and we anticipate net capital expenditures in 2006 of approximately dlra85 million with up to an additional dlra25 million for strategic real estate projects at Saia |
| We depend on cash flow from operations, borrowings under our credit facilities and operating leases |
| If we are unable in the future to raise sufficient capital or borrow sufficient funds to make these purchases, we would limit our growth and potentially result in operating trucks and trailers for longer periods of time, which could have a material adverse effect on operations |
| In addition, under our current unsecured credit facilities, we are subject to certain debt covenants and prepayment penalties |
| Those debt covenants limit our ability to pay dividends and require maintenance of certain maximum leverage, minimum interest coverage and minimum tangible net worth ratios, among other restrictions, that could limit availability of capital to meet our future growth |
| Our ability to repay or refinance our indebtedness will depend upon our future operating performance, which will be affected by general economic, financial, competitive, legislative, regulatory and other factors beyond our control |
| Ongoing insurance and claims expenses could significantly reduce and cause volatility to our earnings |
| We are exposed to claims resulting from cargo loss, personal injury, property damage, group health care and workers’ compensation in amounts ranging from dlra250cmam000 to dlra2dtta0 million per claim |
| We also maintain insurance with licensed insurance companies above these large deductible amounts |
| If the number or severity of future claims increases, insurance claim expenses might exceed historical levels, which could significantly reduce our earnings |
| Significant increases in insurance premiums could also impact financial results or cause us to raise our self-insured retentions |
| Furthermore, insurance companies as well as certain states require collateral in the form of letters of credit or surety bonds for the estimated exposure of claims within our self-insured retentions |
| Their estimate of our future exposure as well as external market conditions could influence the amount and cost of additional letters of credit required under our insurance programs and thereby reduce capital available for future growth |
| Employees of SCST’s operating subsidiaries, Saia and Jevic, are non-union |
| The ability of either Saia or Jevic to compete would be substantially impaired if either subsidiary’s operations were to become unionized |
| None of our employees are currently represented by a collective bargaining agreement |
| Both Saia and Jevic have in the past been the subject of unionization efforts, which have been defeated |
| While both Saia and Jevic believe their current relationship with their employees is good, there can be no assurance that further unionization efforts will not occur in the future |
| The non-union status of both Saia and Jevic is a critical factor in the ability of both to compete in their respective markets |
| 11 _________________________________________________________________ [44]Table of Contents If we are unable to retain our key employees, our business, financial condition and results of operation could be adversely impacted |
| The future success of our business will continue to depend on our executive officers and certain other key employees, who with the principal exception of Mr |
| Trucksess and Mr |
| O’Dell, do not have employment agreements |
| The loss of services of any of our key personnel could have a material adverse effect on us |
| Certain provisions of our governing documents and Delaware law could have anti-takeover effects |
| Our Restated Certificate of Incorporation and By-laws contain certain provisions, which may have the effect of delaying, deferring or preventing a change of control of our company |
| Such provisions include, for example, provisions classifying our Board of Directors, a prohibition on shareholder action by written consent, authorization of the Board of Directors to issue preferred stock in series, with the terms of each series to be fixed by the Board of Directors, and the provision of an advance notice procedure for shareholder proposals and nominations to the Board of Directors |
| These provisions could diminish the opportunities for a shareholder of SCST to participate in certain tender offers, including tender offers at prices above the then-current fair market value, and may also inhibit fluctuations in the market price of our common stock that could result from takeover attempts |
| In addition, SCST has a shareholder rights plan that allows the Board of Directors, without further shareholder approval, to issue common stock and preferred stock that could have the effect of delaying, deferring or preventing a change of control of our company |
| The issuance of common stock and preferred stock could also adversely affect the voting power of the holders of common stock, including resulting in the loss of voting control to others |
| We have no current plans to issue any such common or preferred stock |
| There can be no assurance that the exploration of strategic alternatives will result in a transaction |
| We have announced that our Board of Directors has retained an investment-banking firm and decided to explore a range of strategic alternatives to enhance shareholder value |
| There can be no assurance that the exploration of strategic alternatives will result in a transaction |
| We do not intend to disclose developments with respect to the exploration of strategic alternatives unless and until the Board of Directors has approved a specific transaction or course of action |