Swift Transportation Company — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2013. The filing is by Swift Transportation Company, not Knight-Swift Transportation Holdings Inc. The 2012 comparative results were recast to include Central Refrigerated as though consolidated from January 1, 2012, because the August 2013 acquisition involved entities under common control.
Business context
Swift operated truckload, Dedicated, Central Refrigerated and Intermodal segments, plus nonreportable brokerage and support businesses. At quarter-end its fleet included approximately 18,400 tractors, 57,500 trailers and 8,700 intermodal containers. On August 6, 2013, Swift acquired all of Central Refrigerated for approximately $225 million, including assumed debt and capital leases.
Financial performance and liquidity
- Third quarter: Revenue was $1.032 billion, up 4.0% year over year. Operating income rose 9.4% to $84.4 million; net income fell 11.0% to $30.0 million. Diluted EPS was $0.21 versus $0.24.
- Nine months: Revenue was $3.043 billion, up 3.9%. Operating income increased 7.9% to $254.4 million and net income rose 28.9% to $110.1 million. Diluted EPS was $0.78 versus $0.61.
- Margins: GAAP operating margin was approximately 8.2% for Q3 (7.8% prior year) and 8.4% for the nine months (8.1% prior year). Net margin was approximately 2.9% for Q3 (3.4% prior year) and 3.6% for the nine months (2.9% prior year). Adjusted operating ratios, a company-defined non-GAAP measure, were 89.3% and 89.1%, respectively, improving from 89.8% and 89.4%.
- Cash flow: Nine-month operating cash flow was $355.9 million, versus $284.6 million. Capital expenditures were $237.0 million; investing cash outflow was $275.6 million, including $147.8 million for the Central acquisition. Financing cash outflow was $82.4 million. Cash ended at $51.4 million.
- Debt and liquidity: Total debt and capital leases, including receivables securitization, were $1.671 billion at September 30. Unrestricted liquidity was $315.4 million: $51.4 million cash, $219.2 million available on the revolver and $44.8 million available under the receivables facility. Working capital was $295.2 million, down from $358.6 million at year-end 2012.
Changes and operating trends
- Q3 operating improvement included lower net fuel expense and improved Truckload, Dedicated and Intermodal results. Fuel surcharge timing was more favorable than in 2012 as fuel prices were more stable.
- Central Refrigerated revenue grew 11.9% in Q3, but operating income declined to $4.2 million from $6.8 million; its adjusted operating ratio worsened to 95.4% from 92.9%, reflecting start-up costs, higher health and insurance costs, and increased deadhead miles.
- Dedicated operating income increased to $20.5 million from $17.1 million. Intermodal moved from a $2.5 million operating loss to $2.0 million income, partly reflecting the absence of a significant prior-year accident claim.
- Insurance and claims expense rose 19.1% in Q3, primarily from adverse development in prior-year loss layers. Equipment rental plus depreciation also increased, reflecting fleet growth and higher equipment costs.
Outlook, risks and unusual items
- Management expected net cash capital expenditures of approximately $64–$89 million for the remainder of 2013 and described longer-term capital needs as substantial. Tractor and trailer purchase commitments at quarter-end were $133.7 million and $13.9 million, respectively.
- Management cited driver recruitment and compensation, fuel-price and surcharge timing, claims and insurance costs, equipment prices, seasonal weather, customer demand and competition as significant operating risks. It stated that financing availability and covenant compliance could affect future funding capacity.
- Q3 included $4.3 million of acquisition-related expense, a $0.5 million debt-extinguishment loss and a $0.9 million noncash equity-compensation charge. The nine-month period also included a $6.9 million gain on real-property sales and a $5.0 million loss from refinancing. Q3’s 46.6% effective tax rate was elevated by acquisition-related and other discrete tax items.
- Claims and litigation included multiple driver classification, wage-and-hour and employment-related matters; management said certain potential losses could not be meaningfully estimated. A 2013 fuel release was expected to cost $0.3–$0.5 million to remediate. Management did not expect the disclosed matters to materially affect financial condition, while acknowledging possible period-specific effects.
- Swift reported disclosure controls effective at quarter-end. Integration of Central’s operations and internal controls was ongoing, with completion anticipated during 2014.
Investor verification priorities
- Confirm the acquisition’s post-close contribution and integration costs, noting that prior periods were recast and Q3 included Central only from its acquisition date in the reported 2013 results.
- Track Central’s margins, deadhead miles, start-up costs and retention of customers, employees and drivers.
- Assess debt service and liquidity alongside equipment commitments, lease obligations, receivables-facility availability and covenant requirements.
- Monitor adverse claims development, pending litigation and the uncertain exposure from the environmental matters.
- Distinguish GAAP results from adjusted operating ratio, adjusted EBITDA and adjusted EPS, which are company-defined non-GAAP measures.