Swift Transportation Company — Q2 2012 Form 10-Q
Entity and period: The supplied filing is for Swift Transportation Company, not Knight-Swift Transportation Holdings Inc. It reports the three and six months ended June 30, 2012; financial statements are unaudited. Amounts below are in U.S. dollars, millions, unless noted.
Business context and reporting period
Swift was a truckload carrier operating primarily in the United States and Mexico, with one reportable segment. At June 30, 2012, it reported approximately 15,800 tractors, 51,600 trailers and 6,800 intermodal containers. The company also provided intermodal, brokerage, logistics, leasing and related services.
Financial performance and liquidity
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Operating revenue | $872.6 | $850.5 | $1,699.5 | $1,609.4 |
| Operating income | $86.7 | $72.6 | $144.6 | $119.3 |
| Net income | $33.7 | $19.6 | $39.9 | $22.8 |
| Diluted EPS | $0.24 | $0.14 | $0.29 | $0.16 |
| Adjusted EBITDA (non-GAAP) | $144.0 | $131.7 | $259.6 | $236.5 |
| Adjusted EPS (non-GAAP) | $0.27 | $0.18 | $0.41 | $0.24 |
- Q2 operating margin was approximately 9.9%, up from 8.5%; six-month operating margin was 8.5%, up from 7.4%. Net margin was approximately 3.9% versus 2.3% for Q2, and 2.3% versus 1.4% for the six-month periods.
- Operating ratio improved to 90.1% from 91.5% in Q2 and to 91.5% from 92.6% for the six-month period. Adjusted operating ratio, a company-defined non-GAAP measure, improved to 87.0% from 88.6% and to 88.7% from 90.1%, respectively.
- Six-month operating cash flow was $165.9, compared with $122.2. Investing cash outflow was $65.1 (including $131.1 of capital expenditures); financing cash outflow was $147.3. Cash declined to $35.5 from $82.1 at year-end 2011.
- At June 30, unrestricted liquidity was reported as $337.1: $35.5 cash, $239.5 available on the revolver and $62.1 available under the receivables facility. Restricted cash and securities totaled $71.8. Working capital surplus was $286.1, down from $349.3.
- Total debt and capital leases, including the $203.0 receivables securitization, were $1,658.0, versus $1,769.4 at December 31, 2011. The balance sheet separately reports $1,408.1 of debt and lease obligations, including current amounts; this excludes the separately presented securitization liability. A $400.0 revolving facility had no borrowings, but $160.5 of letters of credit outstanding. The company reported compliance with debt covenants.
Material changes versus prior comparable periods
- Q2 revenue grew 2.6%; six-month revenue grew 5.6%. Q2 trucking revenue was nearly flat, while other revenue increased 35.4%, primarily with intermodal growth. Six-month other revenue rose 33.0%; loaded rail intermodal miles increased 41.3%.
- Q2 weekly trucking revenue per tractor increased 3.8% to $3,166; six-month productivity rose 5.2% to $3,110. Average tractors available for dispatch declined year over year.
- Fuel expense fell 13.5% in Q2 and 6.3% for six months. Net fuel expense as a share of revenue excluding fuel surcharge revenue improved to 6.1% from 8.5% in Q2 and to 7.3% from 9.3% year to date. In contrast, purchased transportation net of fuel surcharge reimbursements increased as owner-operator and intermodal activity grew.
- Interest expense decreased year over year, following debt prepayments and a March refinancing that reduced the stated first-lien term-loan margin. Total debt and leases declined, although receivables securitization borrowings rose to $203.0 from $180.0.
Outlook, commentary, risks and unusual items
- Management expected net cash capital expenditures of $116–$146 for the remainder of 2012. At June 30, equipment purchase commitments included $524.1 for replacement tractors through 2012 and 2013, plus $39.8 for trailers and $23.5 for intermodal containers through year-end. Some tractor orders were no longer within the stated cancellation window.
- Management cited driver recruitment and retention as challenges, expected hiring costs to rise and introduced a driver incentive bonus in July 2012. It also noted potential pressure from wages, equipment costs, fuel-price volatility, seasonal weather, customer demand and competition. Fuel surcharge billing lags fuel prices, so recovery may not be immediate.
- Q2 included a $1.3 debt-extinguishment loss. Six-month results included a $22.2 debt-extinguishment loss related mainly to refinancing, a $5.2 benefit from the Los Angeles settlement recorded as a reduction of operating supplies expense, a $4.6 deferred state tax benefit from internal restructuring, and a $1.1 property impairment. The tax benefit lowered the six-month effective tax rate to 31%; management said it would have been 39% excluding first-quarter discrete items.
- A proposed settlement of the driving-academy class actions, subject to court approval, contemplated $2.0–$2.5 in claims-based payments and relinquishment of tuition receivables that had already been fully reserved. The company said no additional material charge was expected. Other disclosed litigation includes owner-operator compensation and classification disputes and employee wage-and-hour claims; management could not meaningfully estimate possible losses for certain cases.
- Interest-rate sensitivity: management estimated that a one-percentage-point rate increase would add $5.4 of annual interest expense at current borrowing levels, excluding swaps that were not due to take effect until January 2013. A $350.0 notional amount of forward-starting swaps was in place. A further $25.0 voluntary term-loan prepayment occurred July 27, 2012.
- Management described liquidity sources as sufficient for expected near-term needs, while noting substantial ongoing capital requirements and that future financing availability depends on financial performance and market conditions. No specific earnings or revenue guidance was provided.
Most important facts for investors to verify
- Confirm the filing entity: this document names Swift Transportation Company, whereas the request identifies Knight-Swift Transportation Holdings Inc.
- Reconcile the filing’s revenue figures: the financial statements and revenue breakdown show six-month 2012 revenue of $1,699.5; one MD&A summary line appears to state $1,669.5.
- Assess the sustainability of improved operating ratios and earnings, including the effects of fuel recovery, intermodal growth, driver availability, purchased transportation and the one-time Los Angeles settlement benefit.
- Review debt maturities, covenant headroom, available revolver and receivables-facility capacity, lease obligations, letters of credit, and the funding plan for equipment commitments and expected capital expenditures.
- Track litigation developments and court approval of the driving-academy settlement, along with insurance-claim reserves and the potential effect of unresolved cases.
- Distinguish GAAP results from company-defined non-GAAP measures and examine the reconciliation adjustments, especially debt-extinguishment costs and tax effects.