Business context and reporting period
This is Swift Transportation Company’s Form 10-K for the fiscal year ended December 31, 2012, filed February 26, 2013. The filing is by Swift Transportation Company, not Knight-Swift Transportation Holdings Inc.; the supplied filing does not identify Knight-Swift as the registrant.
Swift operated truckload, dedicated, and intermodal transportation businesses across North America. At year-end, it reported approximately 15,300 tractors, 52,800 trailers, and 8,700 intermodal containers. Truckload, Dedicated, and Intermodal generated approximately 65%, 21%, and 10% of 2012 operating revenue, respectively.
Financial results and key metrics
| Metric | 2012 | 2011 |
|---|---|---|
| Operating revenue | $3.493 billion | $3.334 billion |
| Operating income | $322.0 million | $306.0 million |
| Net income | $114.6 million | $90.6 million |
| Diluted EPS | $0.82 | $0.65 |
| Adjusted EBITDA, non-GAAP | $549.7 million | $537.2 million |
| Adjusted EPS, non-GAAP | $1.00 | $0.79 |
| Operating ratio | 90.8% | 90.8% |
| Adjusted operating ratio, non-GAAP | 87.8% | 87.9% |
| Cash from operating activities | $406.6 million | $323.9 million |
Revenue increased 4.8%, operating income 5.2%, and net income 26.6%. GAAP operating margin was approximately 9.2% in both years; the filing’s adjusted operating ratio is a non-GAAP measure and excludes specified items and fuel surcharge revenue.
Year-end cash and cash equivalents were $53.6 million, down from $82.1 million. Unrestricted liquidity, including undrawn facilities, was $359.1 million; working capital surplus was $351.2 million. Restricted cash and investments totaled approximately $74.0 million and were primarily held for insurance claims.
Total debt and capital lease obligations were $1.575 billion, versus $1.769 billion a year earlier; this includes $204.0 million outstanding under the accounts-receivable securitization facility. The company reported no revolver borrowings, with $240.9 million available under its revolver and $64.6 million available under the receivables facility. Gross capital expenditures were $293.2 million. Management expected approximately $250 million of net cash capital expenditures in 2013.
Material changes versus the prior comparable period
- Truckload revenue declined 2.3%, while operating income rose to $246.0 million and its adjusted operating ratio improved to 86.3% from 87.9%. Average operational trucks fell 4.0% company-wide; weekly trucking revenue per tractor, excluding fuel surcharges, increased 5.5% on a consolidated basis.
- Dedicated revenue increased 15.9% to $724.4 million, but its adjusted operating ratio worsened to 87.5% from 86.4%, mainly amid higher insurance and workers’ compensation claims.
- Intermodal revenue grew 40.4% to $333.9 million, but the segment moved from $3.1 million of operating income to a $6.9 million operating loss. A drayage accident claim materially increased its insurance expense; management estimated the claim raised its adjusted operating ratio by about 400–440 basis points.
- Interest expense declined to $118.1 million from $146.0 million, aided by the March 2012 refinancing and voluntary debt repayments. The company recorded a $22.2 million loss on debt extinguishment related to refinancing and note redemption.
- Net cash from operations increased by $82.7 million. Investing cash outflow was $172.5 million and financing cash outflow was $262.5 million, reflecting capital spending and substantial debt and lease repayments.
Outlook, risks, contingencies, and unusual items
- Management cited below-expectation economic and freight-market conditions, but said productivity, asset utilization, and cost-control initiatives supported record annual revenue and operating income. It intended to pursue profitable growth, expand dedicated, intermodal, brokerage, and logistics services, and reduce leverage. No quantified earnings or revenue guidance was provided.
- Key operating risks include cyclical freight demand and pricing, driver availability and wage pressure, fuel-price volatility and surcharge recovery lags, higher equipment costs, and regulation. The company expected driver hiring costs and equipment depreciation costs to rise.
- Fuel surcharges offset much, but not necessarily all, fuel-cost increases; recovery can lag price changes and does not cover all deadhead or idle fuel consumption. The company generally did not use fuel derivatives.
- Swift self-insured significant claims exposures, including a $10 million per-occurrence retention for specified liability claims. Claims accruals were $173.0 million; management estimated a 10% increase in claims-development factors could raise the accrual by $9.0 million.
- Contingencies included owner-operator compensation and classification cases, wage-and-hour class actions, and an environmental notice concerning the Portland Harbor Superfund site. Management said it could not meaningfully estimate possible losses in certain cases, but did not expect the matters, based on current information, to materially affect financial condition. A separate Oregon wage case settled in January 2013 for no more than $700,000; an Arizona background-check class action was dismissed in February 2013.
- Unusual 2012 items included a $6.0 million impairment of a secured note to Swift Power Services after it missed a payment, $3.4 million of property and equipment-related impairments, and a $5.2 million benefit from settlement of a City of Los Angeles drayage agreement, partially offset by a $4.0 million refund to the City.
- The company reported a $250 million face-value senior second-priority note issue bearing 10% interest, alongside variable-rate secured term loans. It was in compliance with debt covenants at year-end; additional debt capacity and liquidity remain subject to covenant, facility, and receivables eligibility conditions.
- The filing disclosed a correction to prior-period tax accounting deemed immaterial by management, including a $21.4 million reduction in previously reported 2009 net loss. The 2012 financial statements received an unqualified audit opinion, and the auditor also gave an unqualified opinion on internal control over financial reporting.
Important facts for investors to verify
- Confirm the issuer and period: this filing is Swift Transportation Company’s FY 2012 10-K, not a filing under the stated Knight-Swift company name.
- Assess whether intermodal growth can return to profitability and whether the drayage claim and other insurance costs are fully reflected in reserves.
- Review debt maturities, variable-rate exposure, covenant headroom, and the availability and terms of the revolver and receivables facility.
- Compare management’s 2013 net-capex expectation with the $439 million of equipment purchase commitments disclosed at year-end; a significant portion was cancelable, but about 44% was already non-cancelable.
- Evaluate customer concentration: Wal-Mart accounted for approximately 12.5% of 2012 operating revenue, and the top 25 customers accounted for about 52%.
- Review the owner-operator and employment litigation, self-insurance estimates, and the recoverability of the Swift Power Services note.
- Interpret Adjusted EBITDA, Adjusted EPS, and adjusted operating ratio alongside GAAP measures; the filing cautions that these non-GAAP measures are not substitutes for GAAP results or operating cash flow.