Swift Transportation Company — FY 2013 Form 10-K
Entity and period: The supplied filing is for Swift Transportation Company, for the fiscal year ended December 31, 2013—not Knight-Swift Transportation Holdings Inc. It reports full-year results, not standalone fourth-quarter results. 2012 and 2011 figures were recast to include Central Refrigerated as if consolidated from January 1, 2009, because the acquisition was between entities under common control.
Business context
Swift operated truckload, dedicated, temperature-controlled (Central Refrigerated), and intermodal businesses, with approximately 18,000 tractors, 57,300 trailers, and 8,700 intermodal containers at year-end. It reported record 2013 operating revenue and operating income. Central Refrigerated was acquired on August 6, 2013, in a related-party transaction valued at approximately $225 million, including assumed debt and capital leases.
Financial performance
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Operating revenue | $4,118.2 million | $3,976.1 million | +3.6% |
| Operating income | $357.0 million | $351.8 million | +1.5% |
| Net income | $155.4 million | $140.1 million | +10.9% |
| Diluted EPS | $1.09 | $1.00 | +9.0% |
| Adjusted EPS (non-GAAP) | $1.23 | $1.11 | +10.8% |
| Adjusted EBITDA (non-GAAP) | $615.2 million | $598.9 million | +2.7% |
| Adjusted operating ratio (non-GAAP) | 88.8% | 88.3% | 0.5 percentage-point deterioration |
Operating cash flow was $473.5 million, versus $447.1 million in 2012. Investing activities used $311.7 million, including the Central acquisition; financing activities used $156.2 million. Capital expenditures were $318.3 million, while proceeds from sales of property and equipment were $119.2 million.
Year-end cash was $59.2 million. Unrestricted liquidity was $370.5 million, comprising cash, $274.5 million available under the revolving credit facility, and $36.8 million available under the receivables facility. Total debt and capital leases were $1.603 billion; working capital was a $349.7 million surplus. Management reported a 2.52 leverage ratio and a fixed-charge coverage ratio above 4.00:1.00; the filing states the latter is subject to a 2.00:1.00 threshold for certain additional borrowing.
Material changes and unusual items
- Interest expense fell $22.5 million year over year, reflecting lower-cost refinanced term loans and voluntary debt repayments.
- Insurance and claims expense rose 16.9% to $142.2 million, driven by unfavorable developments in current- and prior-year claims. The filing estimates a 10% increase in claims-development factors could add $12.2 million to the claims accrual.
- Truckload operating income declined to $226.0 million from $246.0 million; its adjusted operating ratio worsened to 87.7% from 86.3%. Higher insurance, equipment, and deadhead costs contributed.
- Dedicated operating income increased to $83.5 million from $74.0 million, and its adjusted operating ratio improved to 86.1% from 87.5%.
- Central Refrigerated revenue increased 10.2%, but operating income fell to $25.8 million from $29.8 million; its adjusted operating ratio worsened to 93.8% from 92.2%.
- Intermodal returned to operating income of $6.0 million from a $6.9 million loss. Improvement reflected utilization and operating efficiencies, while a fourth-quarter settlement of an older claim added approximately $2 million of expense.
- Other notable 2013 items included a $6.9 million gain on sale of real property, $4.9 million of acquisition costs, and a $5.5 million loss on debt extinguishment. These items affect comparability and certain adjusted measures exclude selected costs.
Outlook, risks, and contingencies
Management’s stated priorities were Adjusted EPS growth, improved return on net assets, and lower leverage. It expected 2014 net cash capital expenditures of approximately $220–$250 million and anticipated substantial capital needs beyond 2014. The filing does not provide specific 2014 revenue or earnings guidance. Management said intermodal volumes could grow 10%–20% using existing containers and would consider adding containers in the latter half of 2014 if needed.
Key risks include cyclical freight demand and pricing, driver recruitment and compensation, fuel-price and surcharge timing exposure, rising equipment costs, self-insured claims volatility, regulation, and dependence on rail and third-party providers. Customer concentration is material: Wal-Mart generated about 10.8% of 2013 revenue, and the top 25 customers generated approximately 48%.
The Central acquisition involved CEO and controlling stockholder Jerry Moyes, who was Central’s majority owner. An independent special committee negotiated the transaction and the board approved it without Mr. Moyes participating. A shareholder made a books-and-records demand to investigate the transaction; the filing reported no lawsuit had been initiated at that time. Swift also disclosed multiple pending driver, wage, and owner-operator matters, with outcomes and potential losses not clearly estimable for certain cases. A 2013 environmental release was estimated to cost $300,000–$500,000 to remediate.
Swift reported effective disclosure controls and effective internal control over financial reporting, and the financial-statement audit opinion was unqualified. However, management and the auditor excluded Central’s internal controls from their year-end assessment; integration was ongoing. The filing also highlights related-party dealings, dual-class control (Moyes and affiliates held approximately 56% of voting power), and potential future share supply from shares pledged or collateralized under financing arrangements.
Important facts for investors to verify
- Confirm the issuer: this is Swift Transportation Company’s 2013 filing, not a filing for Knight-Swift Transportation Holdings Inc.; confirm the intended company and period.
- Review the recast common-control accounting and distinguish reported results from the pre-acquisition legal ownership timeline.
- Assess the Central transaction’s terms, integration progress, related-party safeguards, and status of the shareholder demand.
- Examine debt maturities, covenant headroom, receivables-facility availability, lease commitments, and the funding plan for forecast capital expenditures.
- Track claims reserves and insurance costs, as well as the identified employment, owner-operator, and environmental contingencies.
- Reconcile GAAP results with Adjusted EPS, Adjusted EBITDA, and Adjusted operating ratio; these are company-defined non-GAAP measures.