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SWFT > SEC Filings for SWFT > Form 10-Q on 7-Nov-2012All Recent SEC Filings

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Form 10-Q for SWIFT TRANSPORTATION CO


7-Nov-2012

Quarterly Report


ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read together 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 and nine months ended September 30, 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 September 30,                Nine Months Ended September 30,
                                           2012                      2011                    2012                   2011
                                                                           (Unaudited)
                                                                     (Amounts in thousands)
Total GAAP operating revenue         $        871,094          $        863,826        $      2,570,563         $  2,473,185
Less: Fuel surcharge revenue                  168,738                   172,537                 507,469              488,670

Operating revenue, net of fuel
surcharge revenue                             702,356                   691,289               2,063,094            1,984,515

Total GAAP operating expenses                 800,737                   774,129               2,355,627            2,264,192
Adjusted for:
Fuel surcharge revenue                       (168,738 )                (172,537 )              (507,469 )           (488,670 )
Amortization of certain
intangibles (a)                                (3,912 )                  (4,218 )               (11,846 )            (12,979 )
Non-cash impairments (b)                           -                         -                   (1,065 )                 -

Adjusted operating expense                    628,087                   597,374               1,835,247            1,762,543

Adjusted operating income            $         74,269          $         93,915        $        227,847         $    221,972

Adjusted Operating Ratio                         89.4 %                    86.4 %                  89.0 %               88.8 %
Operating Ratio                                  91.9 %                    89.6 %                  91.6 %               91.5 %

(a) Amortization of certain intangibles reflects the non-cash amortization expense of $3.9 million and $4.3 million for the three months ended September 30, 2012 and 2011, respectively, and $11.8 million and $13.0 million for the nine months ended September 30, 2012 and 2011, respectively, relating to certain intangible assets identified in our 2007 going private transaction through which Swift Corporation acquired Swift Transportation Co.

(b) In the first quarter of 2012, 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.

We define Adjusted earnings before interest, taxes, depreciation and amortization (Adjusted EBITDA) as net income (loss) plus (i) depreciation and amortization, (ii) interest and derivative interest expense, including other fees and charges associated with indebtedness, net of interest income,
(iii) income taxes, (iv) non-cash equity compensation expense, (v) non-cash impairments, (vi) other special non-cash items, and (vii) excludable transaction costs. We believe that Adjusted EBITDA is a relevant measure for estimating the cash generated by our operations that would be available to cover capital expenditures, taxes, interest and other investments and that it enhances an investor's understanding of our financial performance. We use Adjusted EBITDA for business planning purposes and in measuring our performance relative to that of our competitors. Our method of computing Adjusted EBITDA is consistent with that used in our senior secured credit agreement for covenant compliance purposes and may differ from similarly titled measures of other companies. A reconciliation of GAAP net income (loss) to Adjusted EBITDA for each of the periods indicated is as follows:


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                                           Three Months Ended September 30,              Nine Months Ended September 30,
                                             2012                    2011                 2012                    2011
                                                                            (Unaudited)
                                                                       (Amounts in thousands)
Net income                              $        27,852         $        30,950      $        67,739         $        53,738

Adjusted for:
Depreciation and amortization of
property and equipment                           49,288                  51,058              150,071                 152,969
Amortization of intangibles                       4,203                   4,509               12,721                  13,853
Interest expense                                 28,149                  36,629               90,478                 110,761
Derivative interest expense                         448                   3,384                5,101                  12,067
Interest income                                    (667 )                  (562 )             (1,503 )                (1,500 )
Income tax expense                               14,960                  19,676               33,188                  35,482

EBITDA                                  $       124,233         $       145,644      $       357,795         $       377,370

Non-cash equity compensation (a)                  1,398                     781                4,131                   5,524
Loss on debt extinguishment (b)                      -                       -                22,219                      -
Non-cash impairments (c)                             -                       -                 1,065                      -

Adjusted EBITDA                         $       125,631         $       146,425      $       385,210         $       382,894

(a) Represents non-cash equity compensation expense following our IPO, on a pre-tax basis. In accordance with the terms of our senior secured credit agreement, this expense is added back in the calculation of Adjusted EBITDA for covenant compliance purposes.

(b) On May 21, 2012, the Company completed the call of its remaining $15.2 million face value 12.50% fixed rate notes due May 15, 2017, at a price of 106.25% of face value pursuant to the terms of the indenture governing the notes, resulting in a loss on debt extinguishment of $1.3 million, representing the call premium and write-off of the then-existing unamortized deferred financing fees. 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 September 30,                Nine Months Ended September 30,
                                         2012                     2011                   2012                     2011
                                                                          (Unaudited)
Diluted earnings per share          $          0.20          $          0.22        $          0.49          $          0.38

Adjusted for:
Income tax expense                             0.11                     0.14                   0.24                     0.25

Income before income taxes                     0.31                     0.36                   0.72                     0.64

Non-cash impairments (a)                         -                        -                    0.01                       -
Loss on debt extinguishment
(b)                                              -                        -                    0.16                       -
Amortization of certain
intangibles (c)                                0.03                     0.03                   0.08                     0.09

Amortization of unrealized
losses on interest rate swaps
(d)                                              -                      0.02                   0.04                     0.09
Adjusted income before income
taxes                                          0.34                     0.42                   1.01                     0.82
Provision for income
tax expense at normalized
effective rate                                 0.13                     0.16                   0.39                     0.32

Adjusted EPS                        $          0.21          $          0.25        $          0.62          $          0.50

(a) Includes the item discussed in note (b) to the Adjusted Operating Ratio table above.

(b) Includes the items discussed in note (b) to the Adjusted EBITDA table above.


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(c) Includes the item 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 $0.4 million and $3.4 million for the three months ended September 30, 2012 and 2011, respectively and $5.1 million and $12.1 million for the nine months ended September 30, 2012 and 2011, respectively, included in derivative interest expense in the consolidated statements of operations and is 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.

Overview

We are a multi-faceted transportation services company and the largest truckload carrier in North America. As of September 30, 2012, we operate a tractor fleet of approximately 15,700 units comprised of 11,600 company tractors and 4,100 owner-operator tractors, a fleet of 51,900 trailers, and 8,300 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 and nine months ended September 30, 2012 and 2011.

Operating Results Summary



                                      Three Months Ended September 30,             Nine Months Ended September 30,
                                         2012                   2011                 2012                   2011
                                                                       (Unaudited)
                                                          (In thousands, except per share data)
Total operating revenue            $        871,094       $        863,826     $      2,570,563       $      2,473,185
Revenue excluding fuel surcharge
revenue                            $        702,356       $        691,289     $      2,063,094       $      1,984,515
Net income                         $         27,852       $         30,950     $         67,739       $         53,738
Diluted earnings per common
share                              $           0.20       $           0.22     $           0.49       $           0.38
Adjusted EBITDA                    $        125,631       $        146,425     $        385,210       $        382,894
Adjusted EPS                       $           0.21       $           0.25     $           0.62       $           0.50

Key Performance Indicators



                                           Three Months Ended September 30,               Nine Months Ended September 30,
                                            2012                     2011                   2012                    2011
                                                                            (Unaudited)
Weekly trucking revenue per
tractor                                $         3,165          $         3,054        $        3,128          $        2,990
Deadhead miles percentage                        11.43 %                  11.49 %               11.64 %                 11.79 %
Average tractors available for
dispatch:
Company                                         10,394                   10,980                10,510                  11,079
Owner-operator                                   4,047                    4,200                 4,028                   4,068

Total                                           14,442                   15,180                14,538                  15,147
Operating Ratio                                   91.9 %                   89.6 %                91.6 %                  91.5 %
Adjusted Operating Ratio                          89.4 %                   86.4 %                89.0 %                  88.8 %

Results of Operations for the Three and Nine Months Ended September 30, 2012 and 2011

Factors Affecting Comparability between Periods

Nine months ended September 30, 2012 results of operations

Net income for the nine months ended September 30, 2012 was $67.7 million compared to $53.7 million in the 2011 period. Items impacting comparability between the nine months ended September 30, 2012 and the corresponding prior year period include the following:

$22.2 million loss on debt extinguishment resulting from the call of its remaining $15.2 million face value 12.50% fixed rate notes due May 15, 2017 and the replacement of the first term loan;

$5.2 million gain relating to a contractual settlement with the City of Los Angeles recorded in Operating supplies and expenses;

$4.6 million benefit reflecting the deferred state tax benefit related to an internal corporate restructuring of our subsidiaries; and

$1.1 million pre-tax impairment charge for real property with a carrying amount of $1.7 million was written down to its fair value of $0.6 million in the first quarter of 2012.


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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 September 30,             Nine Months Ended September 30,
                                         2012                   2011                 2012                   2011
                                                                       (Unaudited)
                                                                 (Dollars in thousands)
Trucking revenue                   $        600,725       $        609,226     $      1,780,310       $      1,766,215
Fuel surcharge revenue                      168,738                172,537              507,469                488,670
Other revenue                               101,631                 82,063              282,784                218,300
Operating revenue                  $        871,094       $        863,826     $      2,570,563       $      2,473,185

Trucking Revenue

Trucking revenue is generated by hauling freight for our customers using our trucks or owner-operators' equipment and includes all revenue we earn from our general truckload, dedicated, cross border, and drayage services. For the three months ended September 30, 2012, our trucking revenue decreased 1.4% compared with the same period in 2011 due to a 4.9% reduction in the size of our average operational fleet and a 3.0% decrease in loaded trucking miles. We were able to maintain relatively consistent trucking revenue year over year as a result of the 3.6% increase in our weekly trucking revenue per tractor, which improved from $3,054 in the third quarter of 2011 to $3,165 in the third quarter of 2012. Our weekly trucking revenue per tractor is a combination of our average revenue per loaded mile, excluding fuel surcharge and our loaded miles per truck per week (loaded utilization). Our loaded utilization improvement of 2.0% was the result of our over-the-road linehaul services improving 73 miles per truck per week in the third quarter of 2012 compared to the third quarter of 2011. Our average revenue per loaded mile excluding fuel surcharge increased by 1.6% from the three months ended September 30, 2011 compared to the three months ended September 30, 2012, which was negatively impacted by the continued shift in business mix from our over-the-road linehaul service to our other service offerings.

For the nine months ended September 30, 2012, our trucking revenue increased by $14.1 million, or 0.8%, compared with the same period in 2011. This increase reflects a 2.5% increase in our average trucking revenue per loaded mile, excluding fuel surcharge, compared with the same period in 2011 offset by a 1.7% decrease in loaded trucking miles. This increase in our average trucking revenue per loaded mile, excluding fuel surcharge as well as year over year improvements in our utilization contributed to a 4.6% increase in productivity, measured by weekly trucking revenue per tractor for the nine months ended September 30, 2012 over the 2011 period.

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 as represented by the United States Department of Energy, or D.O.E.'s national weekly average diesel fuel index ("DOE Index") 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 a previous week's applicable DOE Index. Therefore, in times of increasing fuel prices, 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 September 30, 2012, fuel surcharge revenue decreased by $3.8 million, or 2.2%, compared with the same period in 2011 as a result of the 3.0% decrease in loaded trucking miles offset by the average of the DOE Index for the period increased 1.5% to $3.924 per gallon in 2012 compared with $3.867 per gallon in the 2011 period.

For the nine months ended September 30, 2012, fuel surcharge revenue increased by $18.8 million, or 3.8%, compared with the same period in 2011. This was driven by an increase in diesel prices and a 39.8% increase in loaded rail intermodal miles offset by a 1.7% decrease in loaded trucking miles during the first nine months of 2012. The average of the DOE Index for the first nine months increased 3.1% to $3.950 per gallon in 2012 compared with $3.830 per gallon in the 2011 period.

Other Revenue

Our other revenue is generated primarily by our rail intermodal business, non-asset based freight brokerage and logistics management service, tractor leasing revenue of IEL, premium revenue generated by our captive insurance companies, and other revenue generated by our shops. For the three months ended September 30, 2012, other revenue increased by $19.6 million, or 23.8%, compared with the 2011 period. This resulted primarily from the growth in our rail intermodal business, which represents approximately 60% of our other revenue. The increase in rail intermodal business was driven by a 37.4% increase in loaded rail intermodal miles and a 6.3% increase in the additional ancillary services provided to our customers and owner-operators for the three months ended September 30, 2011 to the three months ended September 30, 2012.

For the nine months ended September 30, 2012, other revenue increased by $64.5 million, or 29.5%, compared with the 2011 period. This increase was primarily the result of our rail intermodal business, specifically as a result of a 39.8% increase in our loaded rail intermodal miles. Additionally, other revenue increased as a result of the 21.8% increase in other ancillary services offered to owner-operators.


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Operating Expenses

Salaries, Wages and Employee Benefits



                                        Three Months Ended September 30,               Nine Months Ended September 30,
                                          2012                    2011                  2012                    2011
                                                                          (Unaudited)
                                                                    (Dollars in thousands)
Salaries, wages and employee
benefits                             $       199,965         $       197,046       $       598,718         $       595,078
% of revenue excluding fuel
surcharge revenue                               28.5 %                  28.5 %                29.0 %                  30.0 %
% of operating revenue                          23.0 %                  22.8 %                23.3 %                  24.1 %

For the three months ended September 30, 2012, salaries, wages, and employee benefits increased by $2.9 million, or 1.5%, compared with the same period in 2011. The dollar increase was primarily due to company driver pay changes and an increase in the number of non-driving employees, partially offset by a 4.1% decrease in the total miles driven by company drivers in the third quarter of 2012 compared to the third quarter of 2011. In July 2012, we implemented a driver incentive bonus program that enables our drivers to earn a bonus if they met certain performance criteria. This bonus program as well as a wage increase for certain drivers increased driver wages by approximately $3.5 million during the third quarter of 2012. As a percentage of revenue excluding fuel surcharge revenue, salaries, wages, and employee benefits remained flat compared with the same period in 2011.

For the nine months ended September 30, 2012, salaries, wages, and employee benefits increased by $3.6 million, or 0.6%, compared with the same period in 2011. This dollar increase was primarily the result of the driver incentive program mentioned above, an increase in our employee health care benefits cost and an increase in our administrative staff to support our growing business, offset by the 4.2% decrease in total miles driven by company drivers. As a percentage of revenue excluding fuel surcharge revenue, salaries, wages, and employee benefits decreased 100 basis points from the nine months ended . . .

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