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SWFT > SEC Filings for SWFT > Form 10-K on 17-Feb-2017All Recent SEC Filings

Show all filings for SWIFT TRANSPORTATION CO

Form 10-K for SWIFT TRANSPORTATION CO


17-Feb-2017

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Certain acronyms and terms used throughout this Annual Report on Form 10-K are specific to our company, commonly used in our industry, or are otherwise frequently used throughout our document. Definitions for these acronyms and terms are provided in the "Glossary of Terms," available in the front of this document.
Management's discussion and analysis of financial condition and results of operations should be read together with the description of our business in Part I, Item 1, as well as the consolidated financial statements and accompanying footnotes in Part II, Item 8, of this Annual Report on Form 10-K. This discussion contains forward-looking statements as a result of many factors, including those set forth under Part I, Item 1A. Risk Factors, Part I Cautionary Note Regarding Forward-looking Statements, and elsewhere in this report. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially from those discussed.
Executive Summary

Company Overview - Swift is a multi-faceted transportation services company, operating one of the largest fleets of truckload equipment in North America from over 40 terminals near key freight centers and traffic lanes. We principally operate in short- to medium-haul traffic lanes around our terminals and dedicated customer locations. 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. Since our average length of haul is relatively short, it helps reduce competition from railroads and trucking companies that lack a regional presence.
Our four reportable segments are Truckload, Dedicated, Swift Refrigerated, and Intermodal. Our extensive suite of service offerings (which includes line-haul services, dedicated customer contracts, temperature-controlled units, intermodal freight solutions, cross-border United States/Mexico and United States/Canada freight, flatbed hauling, freight brokerage and logistics, and others) provides our customers with the opportunity to "one-stop-shop" for their truckload transportation needs. In 2016, our fleet covered 2.2 billion miles for shippers throughout North America.
Revenue - In 2016, we generated consolidated operating revenue of $4.0 billion. We primarily generate revenue by transporting freight for our customers, generally at a predetermined rate per mile. We supplement this revenue by charging for fuel surcharges, stop-off pay, loading and unloading activities, tractor and trailer detention, and other ancillary services. The main factors that affect our revenue from transporting freight are the rate per mile we receive from our customers and loaded miles. The main factors that affect fuel surcharge revenue are the price of diesel fuel and the number of loaded miles. Fuel surcharges are billed on a lagging basis, meaning that we typically bill customers in the current week based on a previous week's applicable 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.
Revenue in our non-reportable segments is generated by our non-asset-based freight brokerage and logistics management service, tractor leasing revenue from our financing subsidiaries, premium revenue from our captive insurance companies, and revenue from third parties serviced by our repair and maintenance shops. Main factors affecting revenue in our non-reportable segment are demand for brokerage and logistics services, as well as the number of equipment leases by our financing subsidiaries to the owner-operators we contract with and other third parties.
Expenses - Our most significant expenses vary with miles traveled and include fuel, driver-related expenses (such as wages and benefits), and services purchased from owner-operators and other transportation providers (such as railroads, drayage providers, and other trucking companies). Maintenance and tire expenses, as well as cost of insurance and claims generally vary with the miles we travel, but also have a controllable component based on safety improvements, fleet age, efficiency, and other factors. Our primary fixed costs are depreciation and lease expense for revenue equipment and terminals, interest expense, and non-driver compensation.
Compared to changes in rate per mile and loaded miles, changes in deadhead miles percentage generally have the largest proportionate effect on our profitability because we still bear all of the expenses for each deadhead mile, but do not earn any revenue to offset those expenses. Changes in rate per mile have the next largest proportionate effect on profitability because incremental improvements in rate per mile are not offset by any additional expenses. Changes in loaded miles generally have a smaller effect on profitability because variable expenses fluctuate with changes in miles. However, changes in mileage are affected by driver satisfaction and network efficiency, which indirectly affect expenses.
2016 Initiatives -The truckload freight environment in 2016 was challenging. Excess industry capacity, excess customer inventories, and depressed shipping demand pressured volumes and pricing. We implemented the following initiatives to help counter the effects of these external factors:
We downsized our core truckload fleet in an effort to improve asset utilization, and we continue to closely monitor and adjust our truckload fleet size to ensure proper utilization of our fleets.

We selectively increased our participation in the spot market to improve network balance and help offset the lack of available freight in certain markets. Our sales team remains heavily focused on increasing freight levels with both new and existing customer contracts, with the goal of eventually reducing our spot market activity.

We implemented several cost control initiatives throughout the organization, which include streamlining processes, reducing headcount, postponing non-critical system implementations, and reducing expenses in various other manners.


Table of Contents Glossary of Terms

                          SWIFT TRANSPORTATION COMPANY
   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                             OPERATIONS - CONTINUED


Financial Overview
                                             Year Ended December 31,
                                    2016                 2015              2014
GAAP Financial data:              (Dollars in thousands, except per share data)
Operating revenue            $     4,031,517       $     4,229,322     $ 4,298,724
Revenue xFSR                 $     3,722,863       $     3,781,976     $ 3,535,391
Net income                   $       149,267       $       197,577     $   161,152
Diluted earnings per share   $          1.10       $          1.38     $      1.12
Operating Ratio                         94.0 %                91.2 %          91.4 %
Non-GAAP financial data:
Adjusted EPS (1)             $          1.22       $          1.49     $      1.38
Adjusted Operating Ratio (1)            92.9 %                89.8 %          89.0 %
Adjusted EBITDA (1)          $       533,705       $       642,703     $   619,825


____________


(1) Adjusted EPS, Adjusted Operating Ratio, and Adjusted EBITDA are non-GAAP financial measures. These non-GAAP financial measures should not be considered alternatives, or superior, to GAAP financial measures. However, management believes that presentation of these non-GAAP financial measures provides useful information to investors regarding the Company's results of operations. Adjusted EPS, Adjusted Operating Ratio, and Adjusted EBITDA are reconciled to the most directly comparable GAAP financial measures under "Non-GAAP Financial Measures," below.

Total Equipment - The following table summarizes our revenue equipment and supports the discussions and analyses, below:

                                     December 31,
                               2016      2015      2014
Tractors:
Company:
Owned                          6,735     7,442     6,083
Leased - capital leases        1,968     2,170     1,700
Leased - operating leases      5,234     5,599     6,099
Total company tractors        13,937    15,211    13,882
Owner-operator:
Financed through the Company   3,272     3,767     4,204
Other                          1,157       886       750
Total owner-operator tractors  4,429     4,653     4,954
Total tractors                18,366    19,864    18,836
Trailers                      64,066    65,233    61,652
Containers                     9,131     9,150     9,150

Average Operational Truck Count - The following table summarizes average operational truck count, which is defined under "Results of Operations - Segment

Review."
                       Year Ended
                2016      2015      2014
Company        13,096    13,316    12,146
Owner-operator  4,452     4,599     5,044
Total (1)      17,548    17,915    17,190


____________


(1) Includes trucks within our non-reportable segment.


Table of Contents Glossary of Terms

SWIFT TRANSPORTATION COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED

Factors Affecting Comparability Between Periods Driver Wages and Owner-operator Pay Rates - We implemented increases in wages for our company drivers and contracted pay rates for the owner-operators we contract with in August 2014 and May 2015. These increases were tailored, and we believe successful, at improving driver retention and recruiting. However, the increases had a short-term negative impact on profitability for certain periods discussed below, given the immediate effect of driver wage and pay rate increases on expense, versus the more gradual effect of customer pricing increases on revenue. We refer to these increases in company driver wages and owner-operator contracted pay rates throughout the segment and operating expense reviews, below.
[[Image Removed: swft-10k123_chartx04346.jpg]] Results of Operations - Comparison Between the Years Ended December 31, 2016 and 2015
The $48.3 million decrease in net income from $197.6 million in 2015 to $149.3 million in 2016, reflects the following:
(1) $59.1 million decrease in Revenue xFSR - This was driven by decreases in the Truckload, Swift Refrigerated, Intermodal, and non-reportable segments, partially offset by an increase in Revenue xFSR in the Dedicated segment.

(2) $138.7 million decrease in fuel surcharge revenue - Fuel prices were lower overall in 2016, which had an average DOE index of $2.30, compared to $2.71 in 2015.

(3) $71.5 million decrease in fuel expense, primarily due to lower fuel prices.

(4) $63.7 million decrease in purchased transportation - The decrease in the expense was attributed to reduced fuel reimbursements to owner-operators, as a result of lower fuel prices and a 2.9% decrease in miles driven by owner-operators. Additionally, lower intermodal freight volumes resulted in a decrease in payments to rail carriers, further contributing to the decrease in the expense. This was partially offset by the impact of increasing owner-operator contracted pay rates in May 2015.

(5) $36.7 million increase in salaries, wages, and employee benefits, which was primarily due to the driver wage increase implemented in May 2015, an increase in group health insurance expenses, and a $7.1 million one-time expense pertaining to Jerry Moyes' retirement package.

(6) $14.2 million decrease in gain on disposal of property and equipment, primarily driven by lower gain on disposals of tractors, due to a soft used truck market in 2016, compared to 2015. This was partially offset by an increase in volume of trailers sold.

(7) $9.6 million loss on debt extinguishment in 2015, resulting from the replacement of the 2014 Agreement with the 2015 Agreement.

(8) $53.5 million decrease in income tax expense. The effective tax rate in 2016 was 30.6%, which was lower than our expectation of 36.5%. The difference reflects reduced taxes primarily due to a reduction of income before income taxes. Additionally, federal domestic production activities deductions, certain income tax credits received by our foreign and domestic subsidiaries, and a reduction in our uncertain tax position reserve contributed to the difference. See below for discussion related to the 2015 effective tax rate.

(9) $2.1 million decrease in other expenses was primarily due to the impacts from the Company's various cost control initiatives implemented during 2016. This was partially offset by a $20.4 million increase in legal settlements and reserves within operating supplies and expenses, which was primarily due to a $22.0 million accrual in 2016 related to unfavorable developments associated with certain litigation within our Swift Refrigerated segment.


Table of Contents Glossary of Terms

SWIFT TRANSPORTATION COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED

[[Image Removed: swft-10k123_chartx05835.jpg]] Results of Operations - Comparison Between the Years Ended December 31, 2015 and 2014
The $36.4 million increase in net income from $161.2 million in 2014 to $197.6 million in 2015, reflects the following:
(1) $246.6 million increase in Revenue xFSR - This was driven by increases in the Truckload, Dedicated, Intermodal, and Non-reportable segments, partially offset by a decrease in Revenue xFSR in the Swift Refrigerated segment.

(2) $316.0 million decrease in fuel surcharge revenue due to declining fuel prices.

(3) $175.1 million decrease in fuel expense, due to declining fuel prices and improved fuel efficiency, partially offset by an increase in total miles driven by company drivers.

(4) $140.9 million decrease in purchased transportation - This was attributed to reduced fuel reimbursements to the owner-operators we contract with and other third parties, as a result of declining fuel prices and a 5.4% decrease in miles driven by the owner-operators we contract with. This was partially offset by increases in owner-operator contracted pay rates, as well as growth in our logistics business.

(5) $141.3 million increase in salaries, wages, and employee benefits, which was primarily due to a 10.3% increase in total miles driven by company drivers, higher company driver wage rates, and an increase in non-driver headcount.

(6) $45.7 million increase in operating supplies and expenses, primarily attributed to higher equipment maintenance costs, which were due to an increase in total miles driven by company drivers, in-servicing new tractors, and processing used tractors for sale. A $5.1 million settlement of a class action lawsuit and related costs was also included here in 2015.

(7) $41.8 million increase in rent and depreciation expense, which was affected by additional depreciation, maintenance, and staging expenses, resulting from a backlog of trucks that were being processed for trade or sale in the latter half of 2015.

(8) $20.3 million increase in insurance and claims expense, primarily due to the first three quarters in 2015, when we had adverse current-year development of certain prior-year claims, higher claims severity trends and higher claims frequency trends.

(9) $41.7 million decrease in interest expense, primarily driven by the call of our Senior Notes in November 2014.

(10) $30.3 million decrease in loss on debt extinguishment - $9.6 million loss on debt extinguishment in 2015 from replacing the 2014 Agreement with the 2015 Agreement, compared to $39.9 million loss on debt extinguishment in 2014 ($34.7 million from redeeming our Senior Notes and $5.2 million from replacing the 2013 Agreement with the 2014 Agreement).

(11) $29.7 million increase in income tax expense driven by an increase in income before income taxes and an increase in the effective tax rate from 35.7% in 2014 to 37.6% in 2015.

(12) $3.4 million increase in other expenses includes a $6.0 million increase in non-operating expenses for a lawsuit that was settled in June 2015, a $1.5 million increase from a pre-tax impairment of a non-operating note receivable in 2015, partially offset by a $2.3 million decrease reflecting an impairment related to certain operations software in 2014.


Table of Contents Glossary of Terms

SWIFT TRANSPORTATION COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED

Non-GAAP Financial Measures

The terms "Adjusted EPS," "Adjusted Operating Ratio," and "Adjusted EBITDA," as we define them, are not presented in accordance with GAAP. These financial measures supplement our GAAP results in evaluating certain aspects of our business. We believe that using these measures improves comparability in analyzing our performance because they remove the impact of items from our operating results that, in our opinion, do not reflect our core operating performance. Management and the Board focus on Adjusted EPS, Adjusted Operating Ratio, and Adjusted EBITDA as key measures of our performance, all of which are reconciled to the most comparable GAAP financial measures and further discussed below. We believe our presentation of these non-GAAP financial measures is useful because it provides investors and securities analysts the same information that we use internally for purposes of assessing our core operating performance and compliance with debt covenants.
Adjusted EPS, Adjusted Operating Ratio, and Adjusted EBITDA are not substitutes for their comparable GAAP financial measures, such as net income, cash flows from operating activities, operating margin, or other measures prescribed by GAAP. There are limitations to using non-GAAP financial measures. Although we believe that they improve comparability in analyzing our period to period performance, they could limit comparability to other companies in our industry if those companies define these measures differently. Because of these limitations, our non-GAAP financial measures should not be considered measures of income generated by our business or discretionary cash available to us to invest in the growth of our business. Management compensates for these limitations by primarily relying on GAAP results and using non-GAAP financial measures on a supplemental basis.
Note: In the GAAP to non-GAAP reconciliations below, 2013 and 2012 are included to support the five-year presentation in Part II, Item 6, "Selected Financial Data."
Adjusted EPS - Our definition of the non-GAAP measure, Adjusted EPS, starts with
(a) income (loss) before income taxes, the most comparable GAAP measure. We add the following items back to (a) to arrive at (b) adjusted income (loss) before income taxes:
(i) amortization of the intangibles from the 2007 Transactions,

(ii) non-cash impairments,

(iii) other special non-cash items,

(iv) excludable transaction costs,

(v) mark-to-market adjustments on our interest rate swaps, recognized in the income statement,

(vi) amortization of previous losses recorded in AOCI related to the interest rate swaps we terminated upon our IPO and refinancing transactions in December 2010, and

(vii) severance expense, including cash and equity award impact, related to the departure of certain executive leadership.

We subtract income taxes, at the GAAP effective tax rate as applied to adjusted income before income taxes (except for 2012 - 2013, when we used the GAAP expected effective tax rate) from (b) to arrive at (c) adjusted earnings. Adjusted EPS is equal to (c) divided by weighted average diluted shares outstanding.
We believe that excluding the impact of derivatives provides for more transparency and comparability since these transactions have historically been volatile. Additionally, we believe that comparability of our performance is improved by excluding impairments that are unrelated to our core operations, as well as intangibles from the 2007 Transactions and other special items that are non-comparable in nature.


Table of Contents Glossary of Terms

                          SWIFT TRANSPORTATION COMPANY
   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                             OPERATIONS - CONTINUED


The following table is a GAAP to non-GAAP reconciliation for consolidated
Adjusted EPS.
Note: Since the numbers reflected in the table below are calculated on a per
share basis, they may not foot due to rounding.
                                                 Year Ended December 31,
                             2016           2015           2014           2013           2012
Diluted earnings per
share                    $     1.10     $     1.38     $     1.12     $     1.09     $     1.00
Adjusted for:
Income tax expense             0.48           0.83           0.62           0.71           0.44
Income before income
taxes                          1.59           2.20           1.75           1.80           1.44
Non-cash impairments (1)       0.01              -           0.02              -           0.02
Non-cash impairments of
non-operating assets (2)          -           0.01              -              -           0.04
Loss on debt
extinguishment (3)                -           0.07           0.28           0.04           0.16
Acceleration of non-cash
equity compensation (4)           -              -              -           0.01              -
Excludable transaction
costs (5)                         -              -              -           0.03              -
Mark-to-market
adjustment of interest
rate swaps (6)                    -              -              -           0.01              -
Amortization of
unrealized losses on
interest rate swaps (7)           -              -              -              -           0.04
Amortization of certain
intangibles (8)                0.12           0.11           0.11           0.11           0.11
Moyes retirement package
(9)                            0.05              -              -              -              -
Adjusted income before
income taxes                   1.76           2.39           2.15           2.00           1.82
Provision for income tax
expense at effective
rate (10)                     (0.54 )        (0.90 )        (0.77 )        (0.77 )        (0.71 )
Adjusted EPS             $     1.22     $     1.49     $     1.38     $     1.23     $     1.11


____________


(1) Pre-tax non-cash impairments included:

2016 and 2014: Refer to "Impairments" under "Results of Operations - Consolidated Operating and Other Expenses," below.

2012: $2.3 million lost deposit on fuel technology and related equipment because a supplier ceased operations and $1.1 million for impaired real property.

(2) For 2015, refer to "Non-cash impairments of non-operating assets" discussion under "Results of Operations - Consolidated Operating and Other Expenses," below. In 2012, non-cash impairments of non-operating assets pertained to Swift Power Services, LLC ("SPS"), an entity in which we owned a minority interest and held a secured promissory note. SPS failed to make its first scheduled principal payment to us on the secured promissory note, as well as a quarterly interest payment on December 31, 2012. This was due to a decline in its financial performance resulting from, among other things, a legal dispute with the former owners and its primary customer. This caused us to evaluate the secured promissory note due from SPS for impairment, which resulted in a $6.0 million pre-tax adjustment that was recorded in "Impairments of non-operating assets" in the fourth quarter of 2012.

(3) For 2014 and 2015, refer to "Loss on Debt Extinguishment" discussion under "Results of Operations - Consolidated Operating and Other Expenses," below. In 2013, we incurred a $5.5 million loss on debt extinguishment resulting from the repayment in full of certain outstanding Central debt at closing of the Central Acquisition, resulting in a loss on debt extinguishment of $0.5 million, and $5.0 million from the replacement of the 2012 Agreement with the 2013 Agreement. In 2012, we incurred $20.9 million in loss on debt extinguishment from replacing the previous first lien term loan with the 2012 Agreement and $1.3 million from redeeming the remaining fixed rate notes.

(4) In 2013, Central incurred a $0.9 million one-time non-cash equity compensation charge for certain options that accelerated upon the closing of the Central Acquisition.

(5) Excludable transaction costs in 2013 were from the Central Acquisition, in which Swift and Central incurred financial advisory, severance, and other professional fees related to the transaction.

(6) Mark-to-market adjustment of interest rate swaps reflects the portion of the change in fair value of these financial instruments that was recorded in earnings in 2013 and excludes the portion recorded in AOCI under cash flow hedge accounting.


Table of Contents Glossary of Terms

SWIFT TRANSPORTATION COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED

(7) Amortization of unrealized losses on interest rate swaps reflects the non-cash amortization expense of $5.1 million in 2012 included in derivative interest expense in the consolidated income statements. Non-cash amortization expense was comprised of previous losses recorded in AOCI 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 were expensed in relation to the hedged interest payments through the original maturity of the swaps in August 2012.

(8) "Amortization of certain intangibles" specifically reflects the non-cash amortization expense relating to certain intangible assets identified in the 2007 Transactions through which Swift Corporation acquired Swift Transportation Co.

(9) Refer to the discussion "Salaries, Wages, and Employee Benefits" for the year ended December 31, 2016 under "Results of Operations - Consolidated Operating and Other Expenses," below.

(10) Provision for income tax expense at effective rate was based on the following:

2014 through 2016: GAAP effective tax rate.

Prior to 2014: GAAP expected effective tax rate:

        In 2013, we used a 38.5% rate, as there were variations in the GAAP
         effective tax rate primarily due to a new tax rate in Mexico, Central's
         conversion to a C-Corporation from an S-Corporation, fixed asset basis
. . .
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