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| SWFT > SEC Filings for SWFT > Form 10-Q on 8-May-2012 | All Recent SEC Filings |
8-May-2012
Quarterly Report
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and the related notes included elsewhere in this report and our Annual Report on Form 10-K for the year ended December 31, 2011.
Non-GAAP Measures
In addition to disclosing financial results that are determined in accordance with United States generally accepted accounting principles, or GAAP, we also disclose certain non-GAAP financial information, such as, Adjusted Operating Ratio, Adjusted EBITDA, and Adjusted EPS, which are not recognized measures under GAAP and should not be considered alternatives to or superior to profitability and cash flow measures derived in accordance with GAAP. We use Adjusted Operating Ratio, Adjusted EBITDA, and Adjusted EPS as a supplement to our GAAP results in evaluating certain aspects of our business, as described below. We believe our presentation of Adjusted Operating Ratio, Adjusted EBITDA, and Adjusted EPS is useful because it provides investors and securities analysts the same information that we use internally for purposes of assessing our core operating performance. See below for more information on our use of Adjusted Operating Ratio, Adjusted EBITDA, and Adjusted EPS, as well as a description of the computation and reconciliation of our Operating Ratio to our Adjusted Operating Ratio, our net income to Adjusted EBITDA, and our diluted earnings per share to Adjusted EPS.
We define Adjusted Operating Ratio as (a) total operating expenses, less
(i) fuel surcharges, (ii) amortization of intangibles from our 2007
going-private transaction, (iii) non-cash impairment charges, (iv) other special
non-cash items, and (v) excludable transaction costs, as a percentage of
(b) total revenue excluding fuel surcharge revenue. For the year ended
December 31, 2011, we revised the calculation of Adjusted Operating Ratio to
eliminate the impact of the non-cash amortization of the intangibles from our
2007 going private transaction to be consistent with the calculation of our
Adjusted EPS. The three months ended March 31, 2011 presented below has been
revised to reflect the revised definition. We believe fuel surcharge is
sometimes volatile and eliminating the impact of this source of revenue (by
netting fuel surcharge revenue against fuel expense) affords a more consistent
basis for comparing our results of operations. We also believe excluding
impairments, non-comparable nature of the intangibles from our going-private
transaction and other special items enhances the comparability of our
performance from period to period. A reconciliation of our Adjusted Operating
Ratio for each of the periods indicated is as follows:
Three Months Ended March 31,
2012 2011
(Unaudited)
(Dollars in thousands)
Total GAAP operating revenue $ 826,885 $ 758,889
Less: Fuel surcharge revenue 162,714 137,817
Operating revenue, net of fuel surcharge revenue 664,171 621,072
Total GAAP operating expenses 768,983 712,160
Adjusted for:
Fuel surcharge revenue (162,714 ) (137,817 )
Amortization of certain intangibles (a) (4,011 ) (4,435 )
Non-cash impairments (b) (1,065 ) -
Adjusted operating expenses 601,193 569,908
Adjusted operating income $ 62,978 $ 51,164
Adjusted Operating Ratio 90.5 % 91.8 %
Operating Ratio 93.0 % 93.8 %
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(a) Amortization of certain intangibles reflects the non-cash amortization expense of $4.0 million and $4.4 million for the three months ended March 31, 2012 and 2011, respectively, relating to all intangible assets identified in our 2007 going private transaction.
(b) Real property with a carrying amount of $1.7 million was written down to its fair value of $0.6 million, resulting in a pre-tax impairment charge of $1.1 million in the first quarter of 2012.
Three Months Ended March 31,
2012 2011
(Unaudited)
(Dollars in thousands)
Net income $ 6,188 $ 3,205
Adjusted for:
Depreciation and amortization of property and equipment 50,394 50,358
Amortization of intangibles 4,303 4,727
Interest expense 32,776 37,501
Derivative interest expense 2,545 4,680
Interest income (397 ) (467 )
Income tax (benefit) expense (3,548 ) 2,321
EBITDA $ 92,261 $ 102,325
Non-cash equity compensation (a) 1,267 2,424
Loss on debt extinguishment (b) 20,940 -
Non-cash impairments (c) 1,065 -
Adjusted EBITDA $ 115,533 $ 104,749
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(a) Represents recurring non-cash equity compensation expense following our IPO, on a pre-tax basis. In accordance with the terms of our senior credit agreement, this expense is added back in the calculation of Adjusted EBITDA for covenant compliance purposes.
(b) On March 6, 2012, the Company entered into an Amended and Restated Credit Agreement (the "New Agreement"). The New Agreement replaced the then-existing, remaining $874.0 million face value first lien term loan, which matured in December 2016. This resulted in a loss on debt extinguishment of $20.9 million in the first quarter of 2012, representing the write-off of the unamortized original issue discount and deferred financing fees associated with the original term loan.
(c) Includes the item discussed in note (b) to the Adjusted Operating Ratio table above.
We define Adjusted EPS as (1) income (loss) before income taxes plus
(i) amortization of the intangibles from our 2007 going private transaction,
(ii) non-cash impairments, (iii) other special non-cash items, (iv) excludable
transaction costs, (v) the mark-to-market adjustment on our interest rate swaps
that is recognized in the consolidated statement of operations in a given
period, and (vi) the amortization of previous losses recorded in accumulated
other comprehensive income ("OCI") related to interest rate swaps we terminated
upon our IPO and refinancing transactions in December 2010; (2) reduced by
income taxes at 39%, our normalized effective tax rate; (3) divided by weighted
average diluted shares outstanding. We believe the presentation of financial
results excluding the impact of the items noted above provides a consistent
basis for comparing our results from period to period and to those of our peers
due to the non-comparable nature of the intangibles from our going-private
transaction, the historical volatility of the interest rate derivative
agreements and the non-operating nature of the impairment charges, transaction
costs and other adjustment items. A reconciliation of GAAP diluted earnings per
share to Adjusted EPS for each of the periods indicated is as follows (the
numbers reflected in the below table are calculated on a per share basis and may
not foot due to rounding):
Three Months Ended March 31,
2012 2011
(Unaudited)
Diluted earnings per share $ 0.04 $ 0.02
Adjusted for:
Income tax (benefit) expense (0.03 ) 0.02
Income before income taxes 0.02 0.04
Non-cash impairments (a) 0.01 -
Loss on debt extinguishment (b) 0.15 -
Amortization of certain intangibles (c) 0.03 0.03
Amortization of unrealized losses on interest rate swaps (d) 0.02 0.03
Adjusted income before income taxes 0.22 0.10
Provision for income tax expense at normalized effective rate 0.09 0.04
Adjusted EPS $ 0.14 $ 0.06
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(a) Includes the item discussed in note (b) to the Adjusted Operating Ratio table above.
(b) Includes the item discussed in note (b) to the Adjusted EBITDA table above.
(c) Includes the items discussed in note (a) to the Adjusted Operating Ratio table above.
(d) Amortization of unrealized losses on interest rate swaps reflects the non-cash amortization expense of $2.5 million and $4.7 million for the three months ended March 31, 2012 and 2011, respectively, comprised of previous losses recorded in accumulated OCI related to the interest rate swaps we terminated upon our IPO and concurrent refinancing transactions in December 2010. Such losses were incurred in prior periods when hedge accounting applied to the swaps and are expensed in relation to the hedged interest payments through the original maturity of the swaps in August 2012.
We are a multi-faceted transportation services company and the largest truckload carrier in North America. As of March 31, 2012, we operate a tractor fleet of approximately 15,600 units comprised of 11,600 tractors driven by company drivers and 4,000 owner-operator tractors, a fleet of 51,000 trailers, and 6,400 intermodal containers from 34 major terminals positioned near major freight centers and traffic lanes in the United States and Mexico. We offer customers the opportunity for "one-stop shopping" for their truckload transportation needs through a broad spectrum of services and equipment. Our extensive suite of services includes general, dedicated, and cross-border U.S./Mexico truckload services through dry van, temperature-controlled, flatbed, and specialized trailers, in addition to rail intermodal and non-asset based freight brokerage and logistics management services, making it an attractive choice for a broad array of customers.
We principally operate in short-to-medium-haul traffic lanes around our terminals, with an average loaded length of haul of less than 500 miles. We concentrate on this length of haul because the majority of domestic truckload freight (as measured by revenue) moves in these lanes and our extensive terminal network affords us marketing, equipment control, supply chain, customer service, and driver retention advantages in local markets. Our relatively short average length of haul also helps reduce competition from railroads and trucking companies that lack a regional presence.
The tables below reflect a summary of our operating results and other key performance measures for the three months ended March 31, 2012 and 2011.
Operating Results Summary
Three Months Ended March 31,
2012 2011
(Unaudited)
(Dollars in thousands)
Total operating revenue $ 826,885 $ 758,889
Revenue excluding fuel surcharge revenue $ 664,171 $ 621,072
Net income $ 6,188 $ 3,205
Diluted earnings per common share $ 0.04 $ 0.02
Adjusted EBITDA $ 115,533 $ 104,749
Adjusted EPS $ 0.14 $ 0.06
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Key Performance Indicators
Three Months Ended March 31,
2012 2011
(Unaudited)
Weekly trucking revenue per tractor $ 3,055 $ 2,862
Deadhead miles percentage 11.9 % 12.1 %
Average tractors available for dispatch:
Company 10,524 11,105
Owner-Operator 4,022 3,972
Total 14,546 15,077
Operating Ratio 93.0 % 93.8 %
Adjusted Operating Ratio 90.5 % 91.8 %
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Factors Affecting Comparability Between Periods
Three months ended March 31, 2012 results of operations
Net income for the three months ended March 31, 2012 was $6.2 million. Items impacting comparability between the first quarter of 2012 and the corresponding prior year period include the following:
• approximately $20.9 million loss on debt extinguishment resulting from the replacement of the first lien term loan;
• approximately $5.2 million gain relating to a contractual settlement with the City of Los Angeles recorded in operating supplies and expenses;
• approximately $4.6 million benefit reflecting the deferred state tax benefit related to an internal corporate restructuring of our subsidiaries; and
• approximately $1.1 million pre-tax impairment charge for real property with a carrying value of $1.7 million was written down to its estimated fair value of $0.6 million in the first quarter of 2012.
Revenue
We record three types of revenue: trucking revenue, fuel surcharge revenue, and
other revenue. A summary of our revenue generated by type is as follows:
Three Months Ended March 31,
2012 2011
(Unaudited)
(Dollars in thousands)
Trucking revenue $ 577,616 $ 554,721
Fuel surcharge revenue 162,714 137,817
Other revenue 86,555 66,351
Operating revenue $ 826,885 $ 758,889
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Trucking revenue is generated by hauling freight for our customers using our trucks or owner-operators' equipment. Trucking revenue includes all revenue we earn from our general truckload, dedicated, cross border, and drayage services. For the three months ended March 31, 2012, our trucking revenue increased by $22.9 million, or 4.1%, compared with the same period in 2011. This increase was comprised of a 3.5% increase in average trucking revenue per loaded mile, excluding fuel surcharge, and a 0.6% growth in loaded trucking miles compared with the same period in 2011. These increases contributed to a 6.7% increase in productivity, measured by weekly trucking revenue per tractor in the first quarter of 2012 over 2011.
Fuel Surcharge Revenue
Fuel surcharges are designed to compensate us for fuel costs above a certain cost per gallon base. Generally, we receive fuel surcharges on the miles for which we are compensated by customers. The main factors that affect fuel surcharge revenue are the price of diesel fuel and the number of loaded miles. Our fuel surcharges are billed on a lagging basis, meaning we typically bill customers in the current week based on the previous week's applicable index. Therefore, in times of increasing fuel prices, this has a negative impact as we do not recover as much as we are currently paying for fuel. In periods of declining prices, the opposite is true.
For the three months ended March 31, 2012, fuel surcharge revenue increased by $24.9 million, or 18.1%, compared with the same period in 2011. The average of the United States Department of Energy, or DOE's national weekly average diesel fuel index increased 9.7% to $3.96 per gallon in 2012 compared with $3.61 per gallon in the 2011 period. A 38.1% increase in loaded intermodal miles combined with the 0.6% increase in loaded trucking miles in the first quarter of 2012 also increased fuel surcharge revenue.
Other Revenue
Other revenue is generated primarily by our rail intermodal business, non-asset based freight brokerage and logistics management service, tractor leasing revenue of Interstate Equipment Leasing ("IEL"), premium revenue generated by our wholly-owned captive insurance companies, and other revenue generated by our shops. For the three months ended March 31, 2012, other revenue increased by $20.2 million, or 30.4%, compared with the same period in 2011. This resulted primarily from the growth in our rail intermodal business, which represents approximately 60.0% of our other revenue, for the three months ended March 31, 2012. The increase in rail intermodal business was primarily related to the 38.1% increase in loaded intermodal miles noted above, driven by increasing intermodal freight demand. Additionally, other revenue increased as a result of increased tractor leasing revenue of IEL, resulting from the growth in the owner-operator fleet.
Operating Expenses
Salaries, Wages and Employee Benefits
Three Months Ended March 31,
2012 2011
(Unaudited)
(Dollars in thousands)
Salaries, wages and employee benefits $ 200,135 $ 195,476
% of revenue excluding fuel surcharge revenue 30.1 % 31.5 %
% of operating revenue 24.2 % 25.8 %
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For the three months ended March 31, 2012, salaries, wages, and employee benefits increased by $4.7 million, or 2.4%, compared with the same period in 2011. As a percentage of revenue excluding fuel surcharge revenue, salaries, wages, and employee benefits were down slightly compared with the same period in 2011. The dollar increase was primarily as a result of an increase in our healthcare costs and administrative staff to support the growing business.
The compensation paid to our drivers and other employees has increased and may increase further in future periods as the economy strengthens and other employment alternatives become more available. Furthermore, because we believe that the market for drivers has tightened, we expect hiring expenses, including recruiting and advertising, to increase in order to attract sufficient numbers of qualified drivers to operate our fleet.
Operating Supplies and Expenses
Three Months Ended March 31,
2012 2011
(Unaudited)
(Dollars in thousands)
Operating supplies and expenses $ 55,042 $ 57,104
% of revenue excluding fuel surcharge revenue 8.3 % 9.2 %
% of operating revenue 6.7 % 7.5 %
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For the three months ended March 31, 2012, operating supplies and expenses decreased by $2.1 million, or 3.6%, compared with the same period in 2011. As a percentage of revenue excluding fuel surcharge revenue, operating supplies and expenses decreased to 8.3% compared with 9.2% for the 2011 period. The decrease was primarily the result of a settlement we entered into with the City of Los Angeles associated with the Incentive Addendum to Drayage Services Concession Agreement we entered into with the City in December 2008 and as amended, in June 2009 (collectively the "Amended Addendum"). Pursuant to the Amended Addendum, in 2008 we received a one-time, early commitment incentive based on a minimum number of required drays to be completed over a five year term. We initially recorded the incentive as deferred revenue, and at the time of the Settlement, we had approximately $9.2 million remaining as deferred revenue. Concurrent with the City's and the Company's execution of the Settlement and the corresponding termination of the Amended Addendum, we refunded the City $4.0 million in full satisfaction of our obligations under the Amended Addendum and in full and final settlement of all claims for payment and damages that may be alleged by the City under the Amended Addendum. The remaining $5.2 million of deferred revenue was recognized in our consolidated statements of operations and classified as a reduction of operating supplies and expenses. The decrease in operating supplies and expenses related to the Settlement was partially offset by an increase in our maintenance expense due to the preparation of trucks for trade-in or sale.
Fuel Expense
Three Months Ended March 31,
2012 2011
(Unaudited)
(Dollars in thousands)
Fuel expense $ 153,003 $ 150,281
% of operating revenue 18.5 % 19.8 %
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Fuel expense increased primarily because fuel prices were higher in the first quarter of 2012 as the average of the DOE's national weekly average diesel fuel index increased by 9.7% compared to the first quarter of 2011.
To measure the effectiveness of our fuel surcharge program, we subtract fuel surcharge revenue (other than the fuel surcharge revenue we reimburse to owner-operators, the railroads, and other third parties which is included in purchased transportation) from our fuel expense. The result is referred to as net fuel expense. Our net fuel expense as a percentage of revenue excluding fuel surcharge revenue is affected by the cost of diesel fuel net of surcharge collection, the percentage of miles driven by company trucks, our fuel economy, and our percentage of deadhead miles, for which we do not receive fuel surcharge revenues. Net fuel expense as a percentage of revenue less fuel surcharge revenue is shown below:
Three Months Ended March 31,
2012 2011
(Unaudited)
(Dollars in thousands)
Total fuel surcharge revenue $ 162,714 $ 137,817
Less: Fuel surcharge revenue reimbursed to
owner-operators and other third parties 67,109 50,785
Company fuel surcharge revenue $ 95,605 $ 87,032
Total fuel expense $ 153,003 $ 150,281
Less: Company fuel surcharge revenue 95,605 87,032
Net fuel expense $ 57,398 $ 63,249
% of revenue excluding fuel surcharge revenue 8.6 % 10.2 %
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For the three months ended March 31, 2012, net fuel expense decreased $5.9 million, or 9.3%, compared with the same period in 2011. As a percentage of revenue excluding fuel surcharge revenue, net fuel expense decreased to 8.6%, compared with 10.2% for the 2011. Although the average fuel price was higher in the first quarter of 2012 than in the first quarter of the prior year, net fuel expense decreased because the lag effect of our fuel surcharges was less pronounced in the first quarter of 2012 given a smaller increase in fuel prices compared to the first quarter of 2011. The DOE diesel fuel index, which is the basis for our fuel surcharges, increased 18.0% within the first quarter of 2011, from $3.33 to $3.93, but only 9.5% within the first quarter of 2012, from $3.78 to $4.14. Another contributing factor to the year over year improvement in net fuel expense was improved weather during the first quarter of 2012 as compared to the same period in 2011 resulting in less engine idle time.
Purchased Transportation
Three Months Ended March 31,
2012 2011
(Unaudited)
(Dollars in thousands)
Purchased transportation expense $ 233,202 $ 194,037
% of operating revenue 28.2 % 25.6 %
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