10-Q 1 d510428d10q.htm FORM 10-Q FORM 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2013

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number 001-35007

 

 

 

LOGO

Swift Transportation Company

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   20-5589597

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

2200 South 75th Avenue

Phoenix, AZ 85043

(Address of principal executive offices and zip code)

(602) 269-9700

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of outstanding shares of the registrant’s Class A common stock as of April 29, 2013 was 87,362,124 and the number of outstanding shares of the registrant’s Class B common stock as of April 29, 2013 was 52,495,236.

 

 

 

 


Table of Contents
     Page  
PART I FINANCIAL INFORMATION   

Item 1. Financial Statements

  

Consolidated Balance Sheets as of March 31, 2013 (Unaudited) and December 31, 2012

     3   

Consolidated Statements of Operations (Unaudited) for the Three Month Period Ended March  31, 2013 and 2012

     4   

Consolidated Statements of Comprehensive Income (Unaudited)  for the Three Month Period Ended March 31, 2013 and 2012

     5   

Consolidated Statement of Stockholders’ Equity (Unaudited)  for the Three Month Period Ended March 31, 2013

     6   

Consolidated Statements of Cash Flows (Unaudited) for the Three Month Period Ended March  31, 2013 and 2012

     7   

Notes to Consolidated Financial Statements (Unaudited)

     9   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     26   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     40   

Item 4. Controls and Procedures

     40   
PART II OTHER INFORMATION   

Item 1. Legal Proceedings

     41   

Item 1A. Risk Factors

     41   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     41   

Item 3. Defaults Upon Senior Securities

     41   

Item 4. Mine Safety Disclosures

     41   

Item 5. Other Information

     41   

Item 6. Exhibits

     42   

Signatures

     43   

EX 10.1

  

EX 31.1

  

EX 31.2

  

EX 32.1

  

EX-101 INSTANCE DOCUMENT

  

EX-101 SCHEMA DOCUMENT

  

EX-101 CALCULATION LINKBASE DOCUMENT

  

EX-101 LABELS LINKSBASE DOCUMENT

  

EX-101 PRESENTATION LINKBASE DOCUEMNT

  

EX-101 DEFINITION LINKBASE DOCUEMNT

  

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

Swift Transportation Company and Subsidiaries

Consolidated Balance Sheets

 

     March 31,
2013
    December 31,
2012
 
     (Unaudited)        
     (In thousands, except share data)  
ASSETS   

Current assets:

    

Cash and cash equivalents

   $ 38,746      $ 53,596   

Restricted cash

     45,467        51,678   

Restricted investments, held to maturity, amortized cost

     29,328        22,275   

Accounts receivable, net

     358,306        338,724   

Equipment sales receivable

     2,629        563   

Income tax refund receivable

     12,258        10,046   

Inventories and supplies

     16,095        15,678   

Assets held for sale

     16,011        31,544   

Prepaid taxes, licenses, insurance and other

     49,034        47,241   

Deferred income taxes

     94,101        98,235   

Current portion of notes receivable

     4,926        4,957   
  

 

 

   

 

 

 

Total current assets

     666,901        674,537   
  

 

 

   

 

 

 

Property and equipment, at cost:

    

Revenue and service equipment

     1,794,258        1,740,456   

Land

     112,587        112,587   

Facilities and improvements

     235,620        234,996   

Furniture and office equipment

     46,766        43,578   
  

 

 

   

 

 

 

Total property and equipment

     2,189,231        2,131,617   

Less: accumulated depreciation and amortization

     851,026        819,803   
  

 

 

   

 

 

 

Net property and equipment

     1,338,205        1,311,814   

Other assets

     52,188        59,010   

Intangible assets, net

     329,357        333,561   

Goodwill

     253,256        253,256   
  

 

 

   

 

 

 

Total assets

   $ 2,639,907      $ 2,632,178   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY   

Current liabilities:

    

Accounts payable

   $ 123,738      $ 103,070   

Accrued liabilities

     105,022        96,439   

Current portion of claims accruals

     79,725        74,070   

Current portion of long-term debt and obligations under capital leases

     59,182        47,495   

Fair value of guarantees

     366        366   

Current portion of interest rate swaps

     2,637        1,853   
  

 

 

   

 

 

 

Total current liabilities

     370,670        323,293   
  

 

 

   

 

 

 

Long-term debt and obligations under capital leases, less current portion

     1,242,832        1,323,539   

Claims accruals, less current portion

     103,647        98,919   

Fair value of interest rate swaps, less current portion

     10,637        11,159   

Deferred income taxes

     451,411        441,157   

Securitization of accounts receivable

     204,000        204,000   
  

 

 

   

 

 

 

Total liabilities

     2,383,197        2,402,067   
  

 

 

   

 

 

 

Contingencies (note 14)

    

Stockholders’ equity:

    

Preferred stock, par value $0.01 per share; Authorized 1,000,000 shares; none issued

     —          —     

Class A common stock, par value $0.01 per share; Authorized 500,000,000 shares; 87,341,726 and 87,055,664 shares issued and outstanding as of March 31, 2013 and December 31, 2012, respectively

     873        871   

Class B common stock, par value $0.01 per share; Authorized 250,000,000 shares; 52,495,236 and 52,495,236 shares issued and outstanding as of March 31, 2013 and December 31, 2012, respectively

     525        525   

Additional paid-in capital

     899,503        896,575   

Accumulated deficit

     (636,827     (660,168

Accumulated other comprehensive loss

     (7,566     (7,894

Noncontrolling interest

     202        202   
  

 

 

   

 

 

 

Total stockholders’ equity

     256,710        230,111   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 2,639,907      $ 2,632,178   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

Swift Transportation Company and Subsidiaries

Consolidated Statements of Operations

 

     Three Months Ended March 31,  
     2013     2012  
     (Unaudited)  
    

(Amounts in thousands, except per

share data)

 

Operating revenue

   $ 856,794      $ 826,885   
  

 

 

   

 

 

 

Operating expenses:

    

Salaries, wages and employee benefits

     206,607        200,135   

Operating supplies and expenses

     60,665        55,042   

Fuel

     151,882        153,003   

Purchased transportation

     244,817        233,202   

Rental expense

     29,251        23,499   

Insurance and claims

     27,771        30,580   

Depreciation and amortization of property and equipment

     50,332        50,394   

Amortization of intangibles

     4,204        4,303   

Impairments

     —          1,065   

Gain on disposal of property and equipment

     (2,354     (4,390

Communication and utilities

     6,092        6,246   

Operating taxes and licenses

     15,540        15,904   
  

 

 

   

 

 

 

Total operating expenses

     794,807        768,983   
  

 

 

   

 

 

 

Operating income

     61,987        57,902   
  

 

 

   

 

 

 

Other (income) expenses:

    

Interest expense

     25,574        32,776   

Derivative interest expense

     562        2,545   

Interest income

     (573     (397

Loss on debt extinguishment

     5,044        20,940   

Gain on sale of real property

     (6,078     —     

Other

     (496     (602
  

 

 

   

 

 

 

Total other (income) expenses, net

     24,033        55,262   
  

 

 

   

 

 

 

Income before income taxes

     37,954        2,640   

Income tax expense (benefit)

     14,613        (3,548
  

 

 

   

 

 

 

Net income

   $ 23,341      $ 6,188   
  

 

 

   

 

 

 

Basic earnings per share

   $ 0.17      $ 0.04   
  

 

 

   

 

 

 

Diluted earnings per share

   $ 0.17      $ 0.04   
  

 

 

   

 

 

 

Shares used in per share calculations

    

Basic

     139,686        139,509   
  

 

 

   

 

 

 

Diluted

     141,259        140,392   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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Swift Transportation Company and Subsidiaries

Consolidated Statements of Comprehensive Income

 

     Three Months Ended March 31,  
     2013     2012  
     (Unaudited)  
     (In thousands)  

Net income

   $ 23,341      $ 6,188   

Other comprehensive income:

    

Accumulated losses on derivatives reclassified to income

     489        2,545   

Change in fair value of interest rate swaps, net of tax

     (161     (575
  

 

 

   

 

 

 

Comprehensive income

   $ 23,669      $ 8,158   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

Swift Transportation Company and Subsidiaries

Consolidated Statement of Stockholders’ Equity

 

    Class A
Common Stock
    Class B
Common Stock
    Additional
Paid in
    Accumulated    

Accumulated

Other

Comprehensive

    Noncontrolling     Total
Stockholders’
 
    Shares     Par Value     Shares     Par Value     Capital     Deficit     Loss     Interest     Equity  
    (Unaudited)  
    (In thousands, except per share data)  

Balances, December 31, 2012

    87,055,664      $ 871        52,495,236      $ 525      $ 896,575      $ (660,168   $ (7,894   $ 202      $ 230,111   

Exercise of stock options

    247,748        2            2,631              2,633   

Excess tax deficiency of stock options

            (489           (489

Grant of restricted Class A common stock

    10,480              15              15   

Shares issued under employee stock purchase plan

    27,834              241              241   

Other comprehensive income

                328          328   

Non-cash equity compensation

            530              530   

Net income

              23,341            23,341   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances, March 31, 2013

    87,341,726      $ 873        52,495,236      $ 525      $ 899,503      $ (636,827   $ (7,566   $ 202      $ 256,710   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

Swift Transportation Company and Subsidiaries

Consolidated Statements of Cash Flows

 

     Three Months Ended March 31,  
     2013     2012  
     (Unaudited)  
     (In thousands)  

Cash flows from operating activities:

    

Net income

   $ 23,341      $ 6,188   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization of property, equipment and intangibles

     54,536        54,697   

Amortization of debt issuance costs, original issue discount, and losses on terminated swaps

     1,228        4,260   

Gain on disposal of property and equipment less write-off of totaled tractors

     (2,253     (4,280

Gain on sale of real property

     (6,078     —     

Impairments

     —          1,065   

Equity losses of investee

     200        78   

Deferred income taxes

     14,417        (5,712 )

(Reduction of) provision for allowance for losses on accounts receivable

     (193     138   

Loss on debt extinguishment

     5,044        20,940   

Non-cash equity compensation

     545        1,267   

Income effect of mark-to-market adjustment of interest rate swaps

     189        —     

Increase (decrease) in cash resulting from changes in:

    

Accounts receivable

     (19,389     (15,293

Inventories and supplies

     (417     (5,000

Prepaid expenses and other current assets

     (2,061     (3,322

Other assets

     4,018        123   

Accounts payable, accrued and other liabilities

     23,762        15,023   
  

 

 

   

 

 

 

Net cash provided by operating activities

     96,889        70,172   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Decrease in restricted cash

     6,211        10,718   

Change in restricted investments

     (7,073     (11,086

Funding of note receivable

     —          (7,500

Proceeds from sale of property and equipment

     9,939        33,858   

Capital expenditures

     (57,636     (44,246

Payments received on notes receivable

     1,034        1,980   

Expenditures on assets held for sale

     (833     (1,719

Payments received on assets held for sale

     21,828        1,760   

Payments received on equipment sale receivables

     596        5,466   

Other investing activities

     —          (500
  

 

 

   

 

 

 

Net cash used in investing activities

     (25,934     (11,269
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Repayment of long-term debt and capital leases

     (90,133     (70,523

Proceeds from long-term debt

     3,200        —     

Payment of deferred loan costs

     (1,257     (5,932

Borrowings under accounts receivable securitization

     56,000        89,000   

Repayment of accounts receivable securitization

     (56,000     (106,000

Other financing activities

     2,385        152   
  

 

 

   

 

 

 

Net cash used in financing activities

     (85,805     (93,303
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (14,850     (34,400
  

 

 

   

 

 

 

Cash and cash equivalents at beginning of period

     53,596        82,084   

Cash and cash equivalents at end of period

   $ 38,746      $ 47,684   
  

 

 

   

 

 

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

Swift Transportation Company and Subsidiaries

Consolidated Statements of Cash Flows — (continued)

 

     Three Months Ended March 31,  
     2013      2012  
     (Unaudited)  
     (In thousands)  

Supplemental disclosure of cash flow information:

     

Cash paid during the period for:

     

Interest

   $ 14,915       $ 27,557   
  

 

 

    

 

 

 

Income taxes

   $ 2,908       $ 2,220   
  

 

 

    

 

 

 

Supplemental schedule of:

     

Non-cash investing activities:

     

Equipment sales receivables

   $ 2,661       $ 700   
  

 

 

    

 

 

 

Equipment purchase accrual

   $ 32,705       $ 18,870   
  

 

 

    

 

 

 

Notes receivable from sale of assets

   $ 1,148       $ 685   
  

 

 

    

 

 

 

Non-cash financing activities:

     

Accrued deferred loan costs

   $ 75       $ 120   
  

 

 

    

 

 

 

Capital lease additions

   $ 13,808       $ 17,099   
  

 

 

    

 

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

Swift Transportation Company and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 1. Basis of Presentation

Swift Transportation Company is the holding company for Swift Transportation Co., LLC (a Delaware limited liability company, formerly Swift Transportation Co., Inc., a Nevada corporation) and its subsidiaries (collectively, “Swift Transportation Co.”), a truckload carrier headquartered in Phoenix, Arizona, and Interstate Equipment Leasing, LLC (“IEL”) (all the foregoing being, collectively, “Swift” or the “Company”). The Company’s three reportable operating segments consist of Truckload, Dedicated and Intermodal. As of March 31, 2013, the Company operated a national terminal network and a tractor fleet of approximately 15,600 units comprised of 11,600 tractors driven by company drivers and 4,000 owner-operator tractors, a fleet of 52,700 trailers, and 8,700 intermodal containers.

In the opinion of management, the accompanying financial statements prepared in accordance with United States generally accepted accounting principles (“GAAP”) include all adjustments necessary for the fair presentation of the interim periods presented. These interim financial statements should be read in conjunction with the Company’s annual financial statements for the year ended December 31, 2012. Management has evaluated the effect on the Company’s reported financial condition and results of operations of events subsequent to March 31, 2013 through the issuance of the financial statements.

Note 2. New Accounting Standards

In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. ASU 2013-02 requires entities to present information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the financial statements or in the notes, significant amounts reclassified out of accumulated other comprehensive income (“OCI”) by the respective line items of net income, but only if the amount reclassified is required to be reclassified in its entirety in the same reporting period. For amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional details about those amounts. The ASU is effective prospectively for reporting periods beginning after December 15, 2012. The adoption did not have a material impact on the disclosures in the Company’s consolidated financial statements.

Note 3. Income Taxes

The effective tax rate for the three months ended March 31, 2013 is 38.5%, as expected. The effective tax rate for the three months ended March 31, 2012 was a benefit of 134.4%, primarily due to the deferred state tax benefit related to an internal corporate restructuring of our subsidiaries.

The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. Accrued interest and penalties as of March 31, 2013 was approximately $1.4 million. To the extent interest and penalties are not assessed with respect to uncertain tax positions, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision. The Company anticipates that the total amount of unrecognized tax benefits may decrease by approximately $0.7 million during the next twelve months, which should not have a material impact on the Company’s consolidated financial statements.

Certain of the Company’s subsidiaries are currently under examination by the state of California for the 2005, 2006 and May 10, 2007 tax years. In addition, other state jurisdictions are conducting examinations for years ranging from 2007 to 2009. The Company, during 2013, anticipates concluding its California examination for 2005, 2006 and short period ending May 10, 2007. At the completion of these examinations, management does not expect any adjustments that would have a material impact on the Company’s effective tax rate. Tax years 2008 through 2012 remain subject to examination.

Note 4. Investments

The following table presents the cost or amortized cost, gross unrealized gains and losses, and estimated fair value of the Company’s restricted investments as of March 31, 2013 and December 31, 2012 (in thousands):

 

     March 31, 2013  
     Cost or      Gross Unrealized      Estimated  
     Amortized             Temporary      Fair  
     Cost      Gains      Losses      Value  

U.S. corporate securities

   $ 21,171       $ 4       $ 4       $ 21,171   

Foreign corporate securities

     5,062         1         2         5,061   

Negotiable certificate of deposits

     3,095         —           1         3,094   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total restricted investments

   $ 29,328       $ 5       $ 7       $ 29,326   
  

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2012  
     Cost or      Gross Unrealized      Estimated  
     Amortized             Temporary      Fair  
     Cost      Gains      Losses      Value  

U.S. corporate securities

   $ 20,274       $ 3       $ 8       $ 20,269   

Foreign corporate securities

     2,001         1         —           2,002   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total restricted investments

   $ 22,275       $ 4       $ 8       $ 22,271   
  

 

 

    

 

 

    

 

 

    

 

 

 

As of March 31, 2013, the contractual maturities of the restricted investments were one year or less. There were 17 securities and seven securities that were in an unrealized loss position for less than twelve months as of March 31, 2013 and December 31, 2012, respectively.

 

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Table of Contents

Swift Transportation Company and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) – (continued)

 

The Company periodically evaluates restricted investments for impairment. The assessment of whether impairments have occurred is based on management’s case-by-case evaluation of the underlying reasons for the decline in estimated fair value.

The Company accounts for other-than-temporary impairments of debt securities using the provisions of Topic 320, Investments – Debt and equity Securities, related to the recognition of other-than-temporary impairments of debt securities. This guidance requires the Company to evaluate whether it intends to sell an impaired debt security or whether it is more likely than not that it will be required to sell an impaired debt security before recovery of the amortized cost basis. If either of these criteria is met, an impairment equal to the difference between the debt security’s amortized cost and its estimated fair value is recognized in earnings.

For impaired debt securities that do not meet this criteria, the Company determines if a credit loss exists with respect to the impaired security. If a credit loss exists, the credit loss component of the impairment (i.e., the difference between the security’s amortized cost and the present value of projected future cash flows expected to be collected) is recognized in earnings and the remaining portion of the impairment is recognized as a component of accumulated OCI. The Company did not recognize any impairment losses for the three months ended March 31, 2013 and 2012, respectively.

Note 5. Intangible Assets

Intangible assets as of March 31, 2013 and December 31, 2012 were as follows (in thousands):

 

     March 31,     December 31,  
     2013     2012  

Customer Relationship:

    

Gross carrying value

   $ 275,324      $ 275,324   

Accumulated amortization

     (127,004     (122,800

Owner-Operator Relationship:

    

Gross carrying value

     3,396        3,396   

Accumulated amortization

     (3,396     (3,396 )

Trade Name:

    

Gross carrying value

     181,037        181,037   
  

 

 

   

 

 

 

Intangible assets, net

   $ 329,357      $ 333,561   
  

 

 

   

 

 

 

For all periods ending on or after December 31, 2007, amortization of intangibles consists primarily of amortization of $261.2 million gross carrying value of definite-lived intangible assets recognized under purchase accounting in connection with Swift Transportation Co.’s 2007 going private transaction. Intangible assets acquired as a result of the 2007 going private transaction include trade name, customer relationships, and owner-operator relationships. Amortization of the customer relationship acquired in the going private transaction is calculated on the 150% declining balance method over the estimated useful life of 15 years. The customer relationship contributed to the Company at May 9, 2007 is amortized using the straight-line method over 15 years. The trade name has an indefinite useful life and is not amortized, but rather is tested for impairment at least annually, unless events occur or circumstances change between annual tests that would more likely than not reduce the fair value.

Amortization of intangibles for the three months ended March 31, 2013 and 2012 is comprised of $3.9 million and $4.0 million respectively, related to intangible assets recognized in conjunction with the 2007 going private transaction and $0.3 million in each period related to previous intangible assets existing prior to the 2007 going private transaction.

Note 6. Assets Held for Sale

Assets held for sale as of March 31, 2013 and December 31, 2012 was as follows (in thousands):

 

     March 31,      December 31,  
     2013      2012  

Land and facilities

   $ 10,465       $ 25,148   

Revenue equipment

     5,546         6,396   
  

 

 

    

 

 

 

Assets held for sale

   $ 16,011       $ 31,544   
  

 

 

    

 

 

 

As of March 31, 2013 and December 31, 2012, assets held for sale are carried at the lower of depreciated cost or estimated fair value less expected selling costs. The Company expects to sell these assets within the next twelve months.

During the three months ended March 31, 2013, the Company sold two non-operating properties classified as held for sale with a carrying value of $15.8 million. As a result, the Company recognized a pre-tax gain of $6.1 million in Gain on sale of real property in the Company’s consolidated statements of operations.

Note 7. Equity Investment and Note Receivable – Swift Power Services, LLC

In February 2012, the Company contributed approximately $500 thousand to Swift Power Services, LLC (“SPS”) in return for 49.95% ownership interest. SPS was formed in 2012 for the purpose of acquiring the assets and business of three trucking companies engaged in bulk transporting of water, oil, liquids and pipe to various oil companies drilling in the Bakken shale in northwestern North Dakota. The Company accounts for its interest in SPS using the equity method.

Additionally, in February 2012, the Company loaned $7.5 million to SPS pursuant to a secured promissory note, which is secured by substantially all of the assets of SPS. SPS failed to make its first scheduled principal payment and quarterly interest payment to the Company on December 31, 2012, which resulted in a $6.0 million pre-tax impairment charge in the fourth quarter of 2012. As a result, this note has been placed on nonaccrual status as of December 31, 2012. All outstanding interest and principal balances are due on April 30, 2015. During the three months ended March 31, 2013 and 2012, the Company recorded equity losses of $200 thousand and $78 thousand in other expense in the Company’s consolidated statements of operations related to its note receivable and investment in SPS, respectively. As a result of the accumulated equity losses and the impairment recorded during the three months ended December 31, 2012, the net carrying value of the investment in SPS is zero as of March 31, 2013 and December 31, 2012, and the net carrying value of the note receivable is $0.8 million and $1.0 million as of March 31, 2013 and December 31, 2012, respectively.

 

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Table of Contents

Swift Transportation Company and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) – (continued)

 

Note 8. Debt and Financing Transactions

Other than the Company’s accounts receivable securitization as discussed in Note 9 and its outstanding capital lease obligations as discussed in Note 10, the Company had long-term debt outstanding as of March 31, 2013 and December 31, 2012 as follows (in thousands):

 

     March 31,      December 31,  
     2013      2012  

Senior secured first lien term loan B-1 tranche due December 2016

   $ 250,000       $ —     

Senior secured first lien term loan B-2 tranche due December 2017

     410,000         —     

Senior secured first lien term loan B-1 tranche due December 2016, net of $405 OID as of December 31, 2012

     —           157,095   

Senior secured first lien term loan B-2 tranche due December 2017, net of $1,440 OID as of December 31, 2012

     —           575,560   

Senior second priority secured notes due November 15, 2018, net of $7,123 and $7,439 OID as of March 31, 2013 and December 31, 2012, respectively

     492,877         492,561   

Other

     12,099         11,126   
  

 

 

    

 

 

 

Total

     1,164,976         1,236,342   

Less: current portion

     7,141         8,120   
  

 

 

    

 

 

 

Long-term debt

   $ 1,157,835       $ 1,228,222   
  

 

 

    

 

 

 

The credit facility and senior notes are secured by substantially all of the assets of the Company and are guaranteed by Swift Transportation Company, IEL, Swift Transportation Co. and its domestic subsidiaries other than its captive insurance subsidiaries, driver training academy subsidiary, and its bankruptcy-remote special purpose subsidiary. As of March 31, 2013 and December 31, 2012, the balance of deferred loan costs was $10.3 million and $13.1 million, respectively, and is reported in other assets in the Company’s consolidated balance sheets.

Senior Secured Credit Facility

On March 7, 2013, the Company entered into a Second Amended and Restated Credit Agreement (the “2013 Agreement”) replacing its previous Amended and Restated Credit Agreement dated March 6, 2012 (the “2012 Agreement”). The 2013 Agreement replaced the previous first lien term loan B-1 and B-2 tranches with outstanding principal balances of $152.0 million and $508.0 million, respectively, with new first lien term B-1 and B-2 tranches with balances of $250.0 million and $410.0 million, respectively. In addition, the 2013 Agreement reduced the interest rate applicable to the first lien term loan B-1 tranche to the LIBOR rate plus 2.75% with no LIBOR floor, down from the LIBOR rate plus 3.75% with no LIBOR floor, and reduced the interest rate applicable to the first lien term loan B-2 tranche to the LIBOR rate plus 3.00% with a 1.00% LIBOR floor, down from the LIBOR rate plus 3.75% with a 1.25% LIBOR floor. As of March 31, 2013, interest accrues at 2.95% and 4.00% on the Company’s first lien term loan B-1 and B-2 tranches, respectively. The replacement of the 2012 Agreement resulted in a loss on debt extinguishment of $5.0 million for the three months ended March 31, 2013, representing the write-off of the unamortized original issue discount and deferred financing fees associated with the 2012 Agreement.

In addition to the pricing changes described above, the 2013 Credit Agreement increased the availability pursuant to the accordion feature up to $350.0 million in aggregate, subject to the satisfaction of certain conditions and the participation of lenders.

In the first quarter of 2012, the Company entered into the 2012 Agreement which replaced the then-existing, remaining $874 million face value first lien term loan, resulting in a loss on debt extinguishment of $20.9 million in the first quarter of 2012, representing the write-off of the unamortized original issue discount and deferred financing fees associated with the original term loan.

In April 2012, the Company entered into the First Amendment to the then existing 2012 Agreement (“Amendment”). The Amendment reduced the applicable rate on the revolving credit facility from 4.50% to a range of 3.00% to 3.25% for LIBOR based borrowings and letters of credit and from 3.50% to a range of 2.00% to 2.25% for Base Rate borrowings, depending on the Company’s consolidated leverage ratio as defined in the 2012 Agreement. Additionally, the commitment fee for the unused portion of the revolving credit facility was reduced from a range of 0.50% to 0.75% to a range of 0.25% to 0.50% depending on the Company’s consolidated leverage ratio. In addition, the maturity date of the $400.0 million revolving credit facility was extended from December 21, 2015 to September 21, 2016. On April 17, 2012, the Company entered into the Incremental Facility Amendment to the Amended and Restated Credit Agreement (“Incremental Facility Amendment”). Pursuant to the Incremental Facility Amendment, the Company received $10.0 million in proceeds from a Specified Incremental Tranche B-1 Term Loan (“Incremental Term Loan”). The terms applicable to the Incremental Term Loan are the same as those applicable to the Company’s previous first lien term loan B-1 tranche.

As of March 31, 2013, there were no borrowings under the $400.0 million revolving line of credit, while the Company had outstanding letters of credit under this facility primarily for workers’ compensation and self-insurance liability purposes totaling $148.1 million, leaving $251.9 million available under the revolving line of credit. Outstanding letters of credit incur fees of 3.00% to 3.25% per annum. As of March 31, 2013, interest accrues at 3.25% and 0.50% on the outstanding letters of credit and unused portion, respectively, on the revolving line of credit, which rates will be reduced to 3.00% and 0.44% on the outstanding letters of credit and unused portion, respectively, upon the Company’s submission to the lenders of its compliance certificate for the quarter ended March 31, 2013 substantially concurrent with the filing of the Company’s Form 10-Q for the same period.

Senior Second Priority Secured Notes

In December 2010, Swift Services Holdings, Inc., a wholly owned subsidiary, completed a private placement of senior second priority secured notes totaling $500.0 million face value which mature in November 2018 and bear interest at 10.00% (the “senior notes”). The Company received proceeds of $490.0 million, net of a $10.0 million original issue discount. Interest on the senior notes is payable on May 15 and November 15 each year, beginning May 15, 2011.

 

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Table of Contents

Swift Transportation Company and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) – (continued)

 

Note 9. Accounts Receivable Securitization

In June 2011, Swift Receivables Company II, LLC, a Delaware limited liability company (“SRCII”), a wholly-owned bankruptcy-remote special purpose subsidiary, entered into a receivables sale agreement (the “2011 RSA”) with unrelated financial entities (the “Purchasers”) to sell, on a revolving basis, undivided interests in the Company’s accounts receivable. Pursuant to the 2011 RSA, the Company’s receivable originator subsidiaries will sell all of their eligible accounts receivable to SRCII, which in turn sells a variable percentage ownership interest in its accounts receivable to the Purchasers. The 2011 RSA provides for up to $275.0 million initially in borrowing capacity, subject to eligible receivables and reserve requirements, secured by the receivables. The 2011 RSA terminates on June 8, 2014 and is subject to customary fees and contains various customary affirmative and negative covenants, representations and warranties, and default and termination provisions. Outstanding balances under the 2011 RSA accrue program fees generally at commercial paper rates plus 125 basis points, and unused capacity is subject to an unused commitment fee of 40 basis points. Pursuant to the 2011 RSA, collections on the underlying receivables by the Company are held for the benefit of SRCII and the Purchasers in the facility and are unavailable to satisfy claims of the Company and its subsidiaries. The facility qualifies for treatment as a secured borrowing under Topic 860, Transfers and Servicing, and as such, outstanding amounts are carried on the Company’s consolidated balance sheets as a liability with program fees recorded in interest expense in the Company’s consolidated statements of operations.

The Company incurred program fees of $0.8 million for the three months ended March 31, 2013 and 2012, respectively, associated with the 2011 RSA. As of March 31, 2013, the outstanding borrowing under the 2011 RSA was $204.0 million against a total available borrowing base of $262.4 million, leaving $58.4 million available. As of December 31, 2012, the outstanding borrowing under the 2011 RSA was $204.0 million against a total available borrowing base of $268.6 million.

Note 10. Capital Leases

The Company leases certain revenue equipment under capital leases. The Company’s capital leases are typically structured with balloon payments at the end of the lease term equal to the residual value the Company is contracted to receive from certain equipment manufacturers upon sale or trade back to the manufacturers. The Company is obligated to pay the balloon payments at the end of the leased term whether or not it receives the proceeds of the contracted residual values from the respective manufacturers. Certain leases contain renewal or fixed price purchase options. As of March 31, 2013 and December 31, 2012, the present value of obligations under capital leases totaled $137.1 million and $134.7 million, of which the current portion was $52.1 million and $39.4 million, respectively. The leases are collateralized by revenue equipment with a cost of $312.1 million and accumulated amortization of $138.8 million as of March 31, 2013. The amortization of the equipment under capital leases is included in depreciation and amortization expense in the Company’s consolidated statements of operations.

Note 11. Derivative Financial Instruments

In April 2011, as contemplated by the credit facility, the Company entered into two forward-starting interest rate swap agreements with a notional amount of $350.0 million. These interest rate swaps were effective in January 2013 and have a maturity date of July 2015. On April 27, 2011 (“designation date”), the Company designated and qualified these interest rate swaps as cash flow hedges. Subsequent to the designation date, the effective portion of the changes in estimated fair value of the designated swaps was recorded in accumulated OCI and is thereafter recognized to derivative interest expense as the interest on the hedged debt affects earnings, which hedged interest accruals began in January 2013. As of March 31, 2013 and December 31, 2012, changes in estimated fair value of the designated interest rate swap agreements totaling $0.1 million and $1.8 million, net-of-tax, respectively, were reflected in accumulated OCI. Refer to Note 12 below for further discussion of the Company’s estimated fair value methodology.

As discussed in Note 8—Debt and Financing Transactions, on March 7, 2013, the Company entered into the 2013 Agreement replacing its 2012 Agreement dated March 6, 2012. Due to the incorporation of a new interest rate floor provision in the 2013 Agreement, the Company concluded as of February 28, 2013, the outstanding interest rate swaps would no longer be highly effective in achieving offsetting changes in cash flows related to the hedged interest payments. As a result, the Company de-designated the hedges as of February 28, 2013 (“de-designation date”). Beginning on March 1, 2013, the effective portion of the change in fair value of interest rate swaps prior to the de-designation (i.e. amounts previously recorded in accumulated OCI) have been and will continue to be amortized as derivative interest expense over the period of the originally designated hedged interest payments through July 2015. Following the de-designation date, changes in fair value of the interest rate swaps are immediately recognized in the consolidated statements of operations as derivative interest expense.

For the three months ended March 31, 2013 and 2012, respectively, information about amounts and classification of gains and losses on the Company’s interest rate derivative contracts that were previously designated as hedging instruments under Topic 815 is as follows (in thousands):

 

     Three Months Ended March 31,  
     2013     2012  

Amount of loss recognized in OCI on derivatives, net-of-tax (effective portion)

   $ 161      $ 575   

Amount of loss reclassified from accumulated OCI into income as “Derivative interest expense” (effective portion)

   $ (489   $ (2,545

For the three months ended March 31, 2013 and 2012, respectively, information about pre-tax gains and losses recognized in earnings on the Company’s interest rate derivative contracts that were de-designated on February 28, 2013 as hedging instruments under Topic 815 is as follows (in thousands):

 

     Three Months Ended March 31,  
     2013     2012  

Amount of loss recognized into income as “Derivative interest expense”

   $ (73   $ —     

As of March 31, 2013, $2.3 million of deferred losses on derivatives in accumulated OCI is expected to be reclassified to earnings within the next 12 months.

Note 12. Fair Value Measurement

Topic 820, Fair Value Measurements and Disclosures, requires that the Company disclose estimated fair values for its financial instruments. The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or most advantageous market for the asset or liability. Fair value estimates are made at a specific point in time and are based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Changes in assumptions could significantly affect these estimates. Because the fair value is estimated as of March 31, 2013 and December 31, 2012, the amounts that will actually be realized or paid at settlement or maturity of the instruments in the future could be significantly different.

 

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Table of Contents

Swift Transportation Company and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) – (continued)

 

The tables below exclude certain financial instruments. The excluded financial instruments are as follows: cash and cash equivalents, restricted cash, accounts receivable, net, income tax refund receivable, accounts payable, and accrued liabilities. The estimated fair value of these financial instruments approximate carrying value as they are short-term in nature. The table below also excludes financial instruments reported at estimated fair value on a recurring basis. See “— Recurring Fair Value Measurements.” All remaining balance sheet amounts excluded from the table below are not considered financial instruments subject to this disclosure.

The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments as of March 31, 2013 and December 31, 2012 (in thousands):

 

    March 31, 2013     December 31, 2012  
    Carrying     Estimated     Carrying     Estimated  
    Value     Fair Value     Value     Fair Value  

Financial Assets:

       

Restricted investments

  $ 29,328      $ 29,326      $ 22,275      $ 22,271   

Financial Liabilities:

       

Senior secured first lien term loan B-1 tranche (2013 Agreement)

    250,000        251,875        —          —     

Senior secured first lien term loan B-2 tranche (2013 Agreement)

    410,000        415,371        —          —     

Senior secured first lien term loan B-1 tranche (2012 Agreement)

    —          —          157,095        157,346   

Senior secured first lien term loan B-2 tranche (2012 Agreement)

    —          —          575,560        582,236   

Senior second priority secured notes

    492,877        567,237        492,561        541,817   

Securitization of accounts receivable

    204,000        204,773        204,000        204,000   

The carrying amounts shown in the table (other than the restricted investments, and the securitization of accounts receivable) are included in the consolidated balance sheets in long-term debt and obligations under capital leases. The estimated fair values of the financial instruments shown in the above table as of March 31, 2013 and December 31, 2012, represent management’s best estimates of the amounts that would be received to sell those assets or that would be paid to transfer those liabilities in an orderly transaction between market participants at that date. The estimated fair value measurements maximize the use of observable inputs. However, in situations where there is little, if any, market activity for the asset or liability at the measurement date, the estimated fair value measurement reflects the Company’s own judgments about the assumptions that market participants would use in pricing the asset or liability. These judgments are developed by the Company based on the best information available under the circumstances.

The following summary presents a description of the methods and assumptions used to estimate the fair value of each class of financial instrument.

Restricted investments

The estimated fair value of the Company’s restricted investments is based on quoted prices in active markets that are readily and regularly obtainable.

First lien term loans and senior second priority secured notes

The estimated fair values of the first lien term loan and senior second priority secured notes were determined by bid prices in trades between qualified institutional buyers.

Securitization of Accounts Receivable

The Company’s securitization of accounts receivable consists of borrowings outstanding pursuant to the Company’s 2011 RSA, as discussed in Note 9. Its fair value is estimated by discounting future cash flows using a discount rate commensurate with the uncertainty involved.

Fair value hierarchy

Topic 820 establishes a framework for measuring fair value in accordance with GAAP and expands financial statement disclosure requirements for fair value measurements. Topic 820 further specifies a hierarchy of valuation techniques, which is based on whether the inputs into the valuation technique are observable or unobservable. The hierarchy is as follows:

 

   

Level 1 — Valuation techniques in which all significant inputs are quoted prices from active markets for assets or liabilities that are identical to the assets or liabilities being measured.

 

   

Level 2 — Valuation techniques in which significant inputs include quoted prices from active markets for assets or liabilities that are similar to the assets or liabilities being measured and/or quoted prices from markets that are not active for assets or liabilities that are identical or similar to the assets or liabilities being measured. Also, model-derived valuations in which all significant inputs and significant value drivers are observable in active markets are Level 2 valuation techniques.

 

   

Level 3 — Valuation techniques in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are valuation technique inputs that reflect the Company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

 

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Table of Contents

Swift Transportation Company and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) – (continued)

 

When available, the Company uses quoted market prices to determine the estimated fair value of an asset or liability. If quoted market prices are not available, the Company will measure estimated fair value using valuation techniques that use, when possible, current market-based or independently-sourced market parameters, such as interest rates and currency rates. The level in the fair value hierarchy within which a fair measurement in its entirety falls is based on the lowest level input that is significant to the estimated fair value measurement in its entirety. Following is a brief summary of the Company’s classification within the fair value hierarchy of each major category of assets and liabilities that it measures and reports on its consolidated balance sheets at estimated fair value on a recurring basis as of March 31, 2013:

 

   

Interest rate swaps. The Company’s interest rate swaps are not actively traded but are valued using valuation models and credit valuation adjustments, both of which use significant inputs that are observable in active markets over the terms of the instruments the Company holds, and accordingly, the Company classified these valuation techniques as Level 2 in the hierarchy. Interest rate yield curves and credit spreads derived from trading levels of the Company’s first lien term loan are the significant inputs into these valuation models. These inputs are observable in active markets over the terms of the instruments the Company holds. The Company considers the effect of its own credit standing and that of its counterparties in the valuations of its derivative financial instruments.

Recurring Fair Value Measurements

As of March 31, 2013, no assets of the Company were measured at estimated fair value on a recurring basis. As of March 31, 2013 and December 31, 2012, information about inputs into the estimated fair value measurements of each major category of the Company’s liabilities that were measured at estimated fair value on a recurring basis in periods subsequent to their initial recognition was as follows (in thousands):

 

            Fair Value Measurements at Reporting Date Using  

Description

   Total
Estimated
Fair Value
     Quoted Prices in
Active  Markets for
Identical Assets or
Liabilities
(Level 1)
     Significant
Other
Observable

Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

As of March 31, 2013:

           

Interest rate swaps

   $ 13,274       $ —         $ 13,274       $ —     

As of December 31, 2012:

           

Interest rate swaps

   $ 13,012       $ —         $ 13,012       $ —     

Nonrecurring Fair Value Measurements

As of March 31, 2013 and December 31, 2012, information about inputs into the estimated fair value measurements of the Company’s assets that were measured at estimated fair value on a nonrecurring basis in the period is as follows (in thousands):

 

            Fair Value Measurements at Reporting Date Using  
            Quoted Prices                       
            in Active      Significant                
     Total      Markets for      Other      Significant         
     Estimated      Identical Assets      Observable      Unobservable      Total Gains  

Description

   Fair Value      (Level 1)      Inputs (Level 2)      Inputs (Level 3)      (Losses)  

As of December 31, 2012:

              

Real property

   $ 665       $ —         $ —         $ 665       $ (1,065

Other assets

   $ —         $ —         $ —         $ —         $ (2,322

Note receivable

   $ 1,000       $ —         $ —         $ 1,000       $ (5,979

As of December 31, 2012, a deposit related to the purchase of certain fuel technology equipment and a related asset were written off as the supplier ceased operations, resulting in a pre-tax impairment of $2.3 million. Swift Power Services, LLC (“SPS”), an entity in which the Company owns a minority interest, failed to make its first scheduled principal payment and quarterly interest payment to the Company on December 31, 2012 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 the Company to re-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. In accordance with the provisions of ASC Topic 360, Property, Plant and Equipment, real property with a carrying amount of $1.7 million was written down to its estimated fair value of $0.6 million during the first quarter of 2012, resulting in an impairment charge of $1.1 million, which was included in Impairments in the Company’s consolidated statements of operations. The impairment of this asset was identified due to the Company’s decision to no longer use this property for its initial intended purpose. The Company estimated its fair value using significant unobservable inputs because there have been no recent sales of similar properties in the market place.

Note 13. Earnings per Share

The computation of basic and diluted earnings per share is as follows:

 

    Three Months Ended  
    March 31,  
    2013     2012  
    (In thousands, except
per share amounts)
 

Net income

  $ 23,341      $ 6,188   
 

 

 

   

 

 

 

Basic:

   

Weighted average shares Common shares outstanding

    139,686        139,509   
 

 

 

   

 

 

 

Diluted:

   

Dilutive effect of stock options

    1,573        883   
 

 

 

   

 

 

 

Total weighted average diluted shares outstanding

    141,259        140,392   
 

 

 

   

 

 

 

Anti-dilutive shares excluded from the diluted earnings per share calculation (1)

    507        281   
 

 

 

   

 

 

 

Earnings per share:

   

Basic earnings per share

  $ 0.17      $ 0.04   

Diluted earnings per share

  $ 0.17      $ 0.04   

 

(1) Impact of outstanding options to purchase shares of the Company’s Class A common stock were anti-dilutive because the options exercise price was greater than the average market price of the common shares and were excluded from the calculation of diluted earnings per share.

 

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Table of Contents

Swift Transportation Company and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) – (continued)

 

Note 14. Contingencies

The Company is involved in certain claims and pending litigation primarily arising in the normal course of business. The majority of these claims relate to workers compensation, auto collision and liability, and physical damage and cargo damage. The Company expenses legal fees as incurred and accrues for the uninsured portion of contingent losses from these and other pending claims when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Based on the knowledge of the facts and, in certain cases, advice of outside counsel, management believes the resolution of claims and pending litigation, taking into account existing reserves, will not have a material adverse effect on the Company. Moreover, the results of complex legal proceedings are difficult to predict and the Company’s view of these matters may change in the future as the litigation and events related thereto unfold.

For certain cases described below, management is unable to provide a meaningful estimate of the possible loss or range of loss because, among other reasons, (i) the proceedings are in various stages; (ii) damages have not been sought; (iii) damages are unsupported and/or exaggerated; (iv) there is uncertainty as to the outcome of pending appeals and/or (v) there are significant factual issues to be resolved. For these cases, however, management does not believe, based on currently available information, that the outcomes of these proceedings will have a material adverse effect on our financial condition, though the outcomes could be material to our operating results for any particular period, depending, in part, upon the operating results for such period.

2004 owner-operator class action litigation

On January 30, 2004, a class action lawsuit was filed by Leonel Garza on behalf of himself and all similarly situated persons against Swift Transportation: Garza vs. Swift Transportation Co., Inc., Case No. CV07-0472, or the Garza Complaint. The putative class originally involved certain owner-operators who contracted with the Company under a 2001 Contractor Agreement that was in place for one year. The putative class is alleging that the Company should have reimbursed owner-operators for actual miles driven rather than the contracted and industry standard remuneration based upon dispatched miles. The trial court denied plaintiff’s petition for class certification, the plaintiff appealed and on August 6, 2008, the Arizona Court of Appeals issued an unpublished Memorandum Decision reversing the trial court’s denial of class certification and remanding the case back to the trial court. On November 14, 2008, the Company filed a petition for review to the Arizona Supreme Court regarding the issue of class certification as a consequence of the denial of the Motion for Reconsideration by the Court of Appeals. On March 17, 2009, the Arizona Supreme Court granted the Company’s petition for review, and on July 31, 2009, the Arizona Supreme Court vacated the decision of the Court of Appeals opining that the Court of Appeals lacked automatic appellate jurisdiction to reverse the trial court’s original denial of class certification and remanded the matter back to the trial court for further evaluation and determination. Thereafter, the plaintiff renewed the motion for class certification and expanded it to include all persons who were employed by Swift as employee drivers or who contracted with Swift as owner-operators on or after January 30, 1998, in each case who were compensated by reference to miles driven. On November 4, 2010, the Maricopa County trial court entered an order certifying a class of owner-operators and expanding the class to include employees. Upon certification, the Company filed a motion to compel arbitration as well as filing numerous motions in the trial court urging dismissal on several other grounds including, but not limited to the lack of an employee as a class representative, and because the named owner-operator class representative only contracted with the Company for a three month period under a one year contract that no longer exists. In addition to these trial court motions, the Company also filed a petition for special action with the Arizona Court of Appeals arguing that the trial court erred in certifying the class because the trial court relied upon the Court of Appeals ruling that was previously overturned by the Arizona Supreme Court. On April 7, 2011, the Arizona Court of Appeals declined jurisdiction to hear this petition for special action and the Company filed a petition for review to the Arizona Supreme Court. On August 31, 2011, the Arizona Supreme Court declined to review the decision of the Arizona Court of Appeals. During the month of April 2012, the court issued the following rulings with respect to certain motions filed by Swift: (1) denied Swift’s motion to compel arbitration; (2) denied Swift’s request to decertify the class; (3) granted Swift’s motion that there is no breach of contract; and (4) granted Swift’s motion to limit class size based on statute of limitations. The Company intends to continue to pursue all available appellate relief supported by the record, which the Company believes demonstrates that the class is improperly certified and, further, that the claims raised have no merit. The Company retains all of its defenses against liability and damages. The final disposition of this case and the impact of such final disposition cannot be determined at this time.

Owner-operator misclassification class action litigation

On December 22, 2009, a class action lawsuit was filed against Swift Transportation and IEL: John Doe 1 and Joseph Sheer v. Swift Transportation Co., Inc., and Interstate Equipment Leasing, Inc ., Jerry Moyes, and Chad Killebrew, Case No. 09-CIV-10376 filed in the United States District Court for the Southern District of New York, or the Sheer Complaint. The putative class involves owner-operators alleging that Swift Transportation misclassified owner-operators as independent contractors in violation of the federal Fair Labor Standards Act, or FLSA, and various New York and California state laws and that such owner-operators should be considered employees. The lawsuit also raises certain related issues with respect to the lease agreements that certain owner-operators have entered into with IEL. At present, in addition to the named plaintiffs, approximately 200 other current or former owner-operators have joined this lawsuit. Upon Swift’s motion, the matter has been transferred from the United States District Court for the Southern District of New York to the United States District Court in Arizona. On May 10, 2010, the plaintiffs filed a motion to conditionally certify an FLSA collective action and authorize notice to the potential class members. On September 23, 2010, plaintiffs filed a motion for a preliminary injunction seeking to enjoin Swift and IEL from collecting payments from plaintiffs who are in default under their lease agreements and related relief. On September 30, 2010, the District Court granted Swift’s motion to compel arbitration and ordered that the class action be stayed pending the outcome of arbitration. The court further denied plaintiff’s motion for preliminary injunction and motion for conditional class certification. The Court also denied plaintiff’s request to arbitrate the matter as a class. The plaintiff filed a petition for a writ of mandamus asking that the District Court’s order be vacated. On July 27, 2011, the court denied the plaintiff’s petition for writ of mandamus and the plaintiff’s filed another request for interlocutory appeal. On December 9, 2011, the court permitted the plaintiffs to proceed with their interlocutory appeal. Swift intends to vigorously defend against any arbitration proceedings. The final disposition of this case and the impact of such final disposition cannot be determined at this time.

 

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Swift Transportation Company and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) – (continued)

 

California wage, meal and rest employee class action

On March 22, 2010, a class action lawsuit was filed by John Burnell, individually and on behalf of all other similarly situated persons against Swift Transportation: John Burnell and all others similarly situated v. Swift Transportation Co., Inc. , Case No. CIVDS 1004377 filed in the Superior Court of the State of California, for the County of San Bernardino, or the Burnell Complaint. On September 3, 2010, upon motion by Swift, the matter was removed to the United States District Court for the Central District of California, Case No. EDCV10-00809-VAP. The putative class includes drivers who worked for Swift during the four years preceding the date of filing alleging that Swift failed to pay the California minimum wage, failed to provide proper meal and rest periods, and failed to timely pay wages upon separation from employment. The Burnell Complaint was subject to a stay of proceedings pending determination of similar issues in a case unrelated to Swift, Brinker v Hohnbaum, which was then pending before the California Supreme Court. An opinion was entered in the Brinker matter and in August 2012 the stay in the Burnell Complaint was lifted.

On April 5, 2012, the Company was served with an additional class action complaint alleging facts similar to those as set forth in the Burnell Complaint. This new class action is James R. Rudsell, on behalf of himself and all others similarly situated v. Swift Transportation Co. of Arizona, LLC and Swift Transportation Company, Case No. CIVDS 1200255, in the Superior Court of California for the County of San Bernardino, or the Rudsell Complaint.

The Company intends to vigorously defend certification of the class in both matters as well as the merits of these matters should the classes be certified. The final disposition of both cases and the impact of such final dispositions of these cases cannot be determined at this time.

Environmental notice

On April 17, 2009, the Company received a notice from the Lower Willamette Group, or LWG, advising that there are a total of 250 potentially responsible parties, or PRPs, with respect to alleged environmental contamination of the Lower Willamette River in Portland, Oregon designated as the Portland Harbor Superfund site, or the Site, and that as a previous landowner at the Site the Company has been asked to join a group of 60 PRPs and proportionately contribute to (i) reimbursement of funds expended by LWG to investigate environmental contamination at the Site and (ii) remediation costs of the same, rather than be exposed to potential litigation. Although the Company does not believe it contributed any contaminants to the Site, the Company was at one time the owner of property at the Site and the Comprehensive Environmental Response, Compensation and Liability Act imposes a standard of strict liability on property owners with respect to environmental claims. Notwithstanding this standard of strict liability, the Company believes our potential proportionate exposure to be minimal and not material. No formal complaint has been filed in this matter. The Company’s pollution liability insurer has been notified of this potential claim. The Company does not believe the outcome of this matter is likely to have a material adverse effect on Swift. However, the final disposition of this matter and the impact of such final disposition cannot be determined at this time.

California and Oregon minimum wage class action

On July 12, 2011, a class action lawsuit was filed by Simona Montalvo on behalf of herself and all similarly situated persons against Swift Transportation: Montalvo et al. v. Swift Transportation Corporation d/b/a ST Swift Transportation Corporation in the Superior Court of California, County of San Diego, or the Montalvo Complaint. The Montalvo Complaint was removed to federal court on August 15, 2011, case number 3-11-CV-01827-L. Upon petition by plaintiffs, the matter was remanded to state court and the Company filed an appeal to this remand, which appeal has been denied. On July 11, 2011 a class action lawsuit was filed by Glen Ridderbush on behalf of himself and all similarly situated persons against Swift Transportation: Ridderbush et al. v. Swift Transportation Co. of Arizona LLC and Swift Transportation Services, LLC in the Circuit Court for the State of Oregon, Multnomah County, or the Ridderbush Complaint. The Ridderbush Complaint was removed to federal court on August 24, 2011, case number 3-11-CV-01028. Both putative classes include employees alleging that candidates for employment within the four year statutory period in California and within the three year statutory period in Oregon, were not paid the state mandated minimum wage during their orientation phase.

On July 17, 2012, the parties involved in the Ridderbush Complaint engaged in a voluntary mediation session in an attempt to resolve the matter in order to avoid litigation and mitigate legal expense. In January 2013, the parties executed a settlement agreement whereby the entire matter has settled on a claims made basis. The maximum amount to be paid by Swift shall not exceed $700,000.

The issue of class certification in the Montalvo Complaint must first be resolved before the court will address the merits of the case, and we retain all of our defenses against liability and damages pending a determination of class certification. The Company intends to vigorously defend against certification of the class as well as the merits of this matter should the class be certified.

Washington overtime class action

On September 9, 2011, a class action lawsuit was filed by Troy Slack on behalf of himself and all similarly situated persons against Swift Transportation: Troy Slack, et al v. Swift Transportation Co. of Arizona, LLC and Swift Transportation Corporation in the State Court of Washington, Pierce County, or the Slack Compliant. The Slack Compliant was removed to federal court on October 12, 2011, case number 11-2-11438-0. The putative class includes all current and former Washington State based employee drivers during the three year statutory period alleging that they were not paid overtime in accordance with Washington State law and that they were not properly paid for meals and rest periods. The Company intends to vigorously defend certification of the class as well as the merits of these matters should the class be certified. The final disposition of this case and the impact of such final disposition of this case cannot be determined at this time.

Note 15. Segment information

The Company’s three reportable operating segments consist of Truckload, Dedicated and Intermodal.

 

   

Truckload. The truckload segment consists of one-way movements over irregular routes throughout the United States, Mexico, and Canada. This service utilizes both company and owner-operator tractors with dry van, flatbed, and other specialized trailing equipment.

 

   

Dedicated. Through the dedicated segment, the Company devotes use of equipment and offers tailored solutions under long-term contracts. This dedicated segment utilizes refrigerated, dry van, flatbed and other specialized trailing equipment.

 

   

Intermodal. The intermodal segment includes revenue generated by moving freight over the rail in our containers and other trailing equipment, combined with revenue for drayage to transport loads between the railheads and customer locations.

 

   

Other businesses. Nonreportable segments are comprised of the Company’s freight brokerage and logistics management services, as well as revenue generated by the Company’s subsidiaries offering support services to its customers and owner-operators, including shop maintenance, equipment leasing, and insurance.

 

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Table of Contents

Swift Transportation Company and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) – (continued)

 

The Company uses the “management approach” to determine its reportable operating segments, as well as to determine the basis of reporting the operating segment information. The management approach focuses on financial information that the Company’s management uses to make operating decisions. The chief operating decision makers use operating revenues, operating expense categories, operating ratios, operating income and key operating statistics to evaluate performance and allocate resources to the Company’s operations.

Operating income is the measure of segment profit or loss the Company uses to evaluate segment performance and allocate resources and, consistent with GAAP accounting guidance for segment reporting, it is the Company’s measure of segment performance and is reported below. Operating income should not be viewed as a substitute for GAAP net income (loss). The Company believes the presentation of operating income enhances the understanding of its performance by highlighting the results of operations and the underlying profitability drivers of the business segments.

Operating income is defined as operating revenues less operating expenses, before tax.

Based on the unique nature of the operating structure of the Company, revenue generating assets are interchangeable between segments. Therefore the Company does not prepare separate balance sheets by segment as assets are not separately identifiable by segment. The Company allocates depreciation and amortization expense on its property and equipment to the segments based on the utilization of the asset by the segment during the period.

The Company’s foreign operations total revenue was less than 5.0% of the Company’s total revenue for the three months ended March 31, 2013 and 2012, respectively.

Set forth in the tables below is certain financial information with respect to the Company’s reportable segments (in thousands),

 

     Operating Revenues  
     Three months ended March 31,  
     2013     2012  

Truckload

   $ 559,595      $ 551,247   

Dedicated

     179,226        171,539   

Intermodal

     77,325        69,045   
  

 

 

   

 

 

 

Subtotal

     816,146        791,831   

Nonreportable segments

     55,292        52,331   

Intersegment eliminations

     (14,644     (17,277
  

 

 

   

 

 

 

Consolidated operating revenue

   $ 856,794      $ 826,885   
  

 

 

   

 

 

 

 

     Operating Income (Loss)  
     Three months ended March 31,  
     2013     2012  

Truckload

   $ 42,403      $ 46,554   

Dedicated

     18,954        14,507   

Intermodal

     (1,798     (4,027
  

 

 

   

 

 

 

Subtotal

     59,559        57,034   

Nonreportable segments

     2,428        868   
  

 

 

   

 

 

 

Consolidated operating income

   $ 61,987      $ 57,902   
  

 

 

   

 

 

 

 

     Depreciation and Amortization
Expense
 
     Three months ended March 31,  
     2013      2012  

Truckload

   $ 30,993       $ 31,138   

Dedicated

     10,505         10,919   

Intermodal

     2,367         2,007   
  

 

 

    

 

 

 

Subtotal

     43,865         44,064   

Nonreportable segments

     6,467         6,330   
  

 

 

    

 

 

 

Consolidated depreciation and amortization expense

   $ 50,332       $ 50,394   
  

 

 

    

 

 

 

Other Intersegment Transactions

Certain operating segments provide transportation and related services for other affiliates outside their reportable segment. Revenues for such services are based on negotiated rates, which we believe approximate fair value, and are reflected as revenues of the billing segment. These rates are adjusted from time to time based on market conditions. Such intersegment revenues and expenses are eliminated in our consolidated results.

Note 16. Guarantor Condensed Consolidating Financial Statements

The payment of principal and interest on the Company’s senior second priority secured notes are guaranteed by the Company’s 100% owned domestic subsidiaries (the “Guarantor Subsidiaries”) other than its driver academy subsidiary, its captive insurance subsidiaries, its special-purpose receivables securitization subsidiary, and its foreign subsidiaries (the “Non-guarantor Subsidiaries”). The separate financial statements of the Guarantor Subsidiaries are not included herein because the Guarantor Subsidiaries are the Company’s 100% owned consolidated subsidiaries and are jointly, severally, fully and unconditionally liable for the obligations represented by the senior second priority secured notes.

The condensed financial statements present condensed financial data for (i) Swift Transportation Company (on a parent only basis), (ii) Swift Services Holdings, Inc. (on an issuer only basis), (iii) the combined Guarantor Subsidiaries, (iv) the combined Non-Guarantor Subsidiaries, (v) an elimination column for adjustments to arrive at the information for the parent company and subsidiaries on a consolidated basis and (vi) the parent company and subsidiaries on a consolidated basis as of March 31, 2013 and December 31, 2012 and for the three months ended March 31, 2013 and 2012.

Investments in subsidiaries are accounted for by the respective parent company using the equity method for purposes of this presentation. Results of operations of subsidiaries are therefore reflected in the parent company’s investment accounts and earnings. The principal elimination entries set forth below eliminate investments in subsidiaries and intercompany balances and transactions.

 

17


Table of Contents

Swift Transportation Company and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) – (continued)

 

Condensed consolidating balance sheet as of March 31, 2013

 

    Swift
Transportation
Company
(Parent)
    Swift
Services
Holdings, Inc
(Issuer)
    Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Eliminations
for
Consolidation
    Consolidated  
    (In thousands)  

Cash and cash equivalents

  $ —        $ —        $ 30,694      $ 8,052      $ —        $ 38,746   

Restricted cash

    —          —          —          45,467        —          45,467   

Restricted investments, held to maturity, amortized cost

    —          —          —          29,328        —          29,328   

Accounts receivable, net

    —          —          15,419        346,223        (3,336     358,306   

Intercompany receivable (payable)

    31,988        434,847        (522,641     55,806        —          —     

Other current assets

    53,596        129        127,556        13,773        —          195,054   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    85,584        434,976        (348,972     498,649        (3,336     666,901   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Property and equipment, net

    —          —          1,302,050        36,155        —          1,338,205   

Investment in subsidiaries

    129,693        764,538        906,777        —          (1,801,008     —     

Other assets

    250        2,204        89,051        4,250        (43,567     52,188   

Intangible assets, net

    —          —          319,123        10,234        —          329,357   

Goodwill

    —          —          246,977        6,279        —          253,256   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 215,527      $ 1,201,718        2,515,006      $ 555,567      $ (1,847,911   $ 2,639,907   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Current portion of long-term debt and obligations under capital leases

  $ —        $ —        $ 56,590      $ 46,048      $ (43,456   $ 59,182   

Other current liabilities

    1,592        18,889        265,925        28,418        (3,336     311,488   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    1,592        18,889        322,515        74,466        (46,792     370,670   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Long-term debt and obligations under capital leases, less current portion

    —          492,877        744,997        5,069        (111     1,242,832   

Deferred income taxes

    (18,653     (370     466,019        4,415        —          451,411   

Securitization of accounts receivable

    —          —          —          204,000        —          204,000   

Other liabilities

    —          —          63,374        50,910        —          114,284   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    (17,061     511,396        1,596,905        338,860        (46,903     2,383,197   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

    232,588        690,322        918,101        216,707        (1,801,008     256,710   

Total liabilities and stockholders’ equity

  $ 215,527      $ 1,201,718      $ 2,515,006      $ 555,567      $ (1,847,911   $ 2,639,907   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

18


Table of Contents

Swift Transportation Company and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) – (continued)

 

Condensed consolidating balance sheet as of December 31, 2012

 

    Swift
Transportation
Company
(Parent)
    Swift
Services
Holdings, Inc
(Issuer)
    Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Eliminations
for
Consolidation
    Consolidated  
    (In thousands)  

Cash and cash equivalents

  $ —        $ —        $ 43,877      $ 9,719      $ —        $ 53,596   

Restricted cash

    —          —          —          51,678        —          51,678   

Restricted investments, held to maturity, amortized cost

          22,275          22,275   

Accounts receivable, net

    —          —          17,643        324,597        (3,516     338,724   

Intercompany receivable (payable)

    24,239        430,030        (507,934     53,665        —          —     

Other current assets

    57,914        181        136,582        13,587        —          208,264   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    82,153        430,211        (309,832     475,521        (3,516     674,537   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Property and equipment, net

    —          —          1,274,636        37,178        —          1,311,814   

Investment in subsidiaries

    106,194        757,590        904,312        —          (1,768,096     —     

Other assets

    250        2,301        81,104        4,974        (29,619     59,010   

Intangible assets, net

    —          —          323,134        10,427        —          333,561   

Goodwill

    —          —          246,977        6,279        —          253,256   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 188,597      $ 1,190,102      $ 2,520,331      $ 534,379      $ (1,801,231   $ 2,632,178   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Current portion of long-term debt and obligations under capital leases

  $ —        $ —        $ 45,703      $ 28,301      $ (26,509   $ 47,495   

Other current liabilities

    1,656        6,389        242,954        28,315        (3,516     275,798   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    1,656        6,389        288,657        56,616        (30,025     323,293   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Long-term debt and obligations under capital leases, less current portion

    —          492,561        827,972        6,116        (3,110     1,323,539   

Deferred income taxes

    (19,372     (346     455,874        5,001        —          441,157   

Securitization of accounts receivable

    —          —          —          204,000        —          204,000   

Other liabilities

    —          —          60,502        49,576        —          110,078   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    (17,716     498,604        1,633,005        321,309        (33,135     2,402,067   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

    206,313        691,498        887,326        213,070        (1,768,096     230,111   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

  $ 188,597      $ 1,190,102      $ 2,520,331      $ 534,379      $ (1,801,231   $ 2,632,178   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

19


Table of Contents

Swift Transportation Company and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) – (continued)

 

Condensed consolidating statement of operations for the three months ended March 31, 2013

 

    Swift
Transportation
Company
(Parent)
    Swift
Services
Holdings, Inc
(Issuer)
    Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Eliminations
for
Consolidation
    Consolidated  
    (In thousands)  

Operating revenue

  $ —        $ —        $ 838,532      $ 38,626      $ (20,364   $ 856,794   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

           

Salaries, wages and employee benefits

    545        —          198,843        7,219        —          206,607   

Operating supplies and expenses

    499        —          58,935        2,989        (1,758     60,665   

Fuel

    —          —          145,624        6,258        —          151,882   

Purchased transportation

    —          —          254,126        2,977        (12,286     244,817   

Rental expense

    —          —          28,497        921        (167     29,251   

Insurance and claims

    —          —          22,775        11,149        (6,153     27,771   

Depreciation and amortization of property and equipment

    —          —          49,292        1,040        —          50,332   

Amortization of intangibles

    —          —          4,011        193        —          4,204   

Gain on disposal of property and equipment

    —          —          (2,339     (15     —          (2,354

Communication and utilities

    —          —          5,895        197        —          6,092   

Operating taxes and licenses

    —          —          12,876        2,664        —          15,540   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    1,044        —          778,535        35,592        (20,364     794,807   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    (1,044     —          59,997        3,034        —          61,987   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense, net

    —          12,913        11,578        1,072        —          25,563   

Other (income) expenses, net

    (23,499     (6,947     (468     (2,366     31,750        (1,530
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    22,455        (5,966     48,887        4,328        (31,750     37,954   

Income tax expense (benefit)

    (886     (4,790     18,441        1,848        —          14,613   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 23,341      $ (1,176   $ 30,446      $ 2,480      $ (31,750   $ 23,341   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

20


Table of Contents

Swift Transportation Company and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) – (continued)

 

Condensed consolidating statement of operations for the three months ended March 31, 2012

 

    Swift
Transportation
Company
(Parent)
    Swift
Services
Holdings,
Inc

(Issuer)
    Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Eliminations
for
Consolidation
    Consolidated  
    (In thousands)  

Operating revenue

  $ —        $ —        $ 809,507      $ 34,482      $ (17,104   $ 826,885   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

           

Salaries, wages and employee benefits

    1,267        —          191,955        6,913        —          200,135   

Operating supplies and expenses

    547        2        53,715        2,780        (2,002     55,042   

Fuel

    —          —          147,571        5,432        —          153,003   

Purchased transportation

    —          —          241,865        2,206        (10,869     233,202   

Rental expense

    —          —          23,376        304        (181     23,499   

Insurance and claims

    —          —          25,862        8,770        (4,052     30,580   

Depreciation and amortization of property and equipment

    —          —          49,517        877        —          50,394   

Amortization of intangibles

    —          —          4,105        198        —          4,303   

Impairments

    —          —          1,065        —          —          1,065   

Gain on disposal of property and equipment

    —          —          (4,390     —          —          (4,390

Communication and utilities

    —          —          6,002        244        —          6,246   

Operating taxes and licenses

    —          —          13,535        2,369        —          15,904   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    1,814        2        754,178        30,093        (17,104     768,983   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss), net

    (1,814     (2     55,329        4,389        —          57,902   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense, net

    —          12,913        20,689        1,322        —          34,924   

Other (income) expenses

    (6,529     (29,000     (1,406     (2,391     59,664        20,338   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

    4,715        16,085        36,046        5,458        (59,664     2,640   

Income tax expense (benefit)

    (1,473     (4,821     519        2,227        —          (3,548
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 6,188      $ 20,906      $ 35,527      $ 3,231      $ (59,664   $ 6,188   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

21


Table of Contents

Swift Transportation Company and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) – (continued)

 

Condensed consolidating statement of comprehensive income for the three months ended March 31, 2013

 

    Swift
Transportation
Company
(Parent)
    Swift Services
Holdings, Inc.
(Issuer)
    Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Eliminations
for
Consolidation
    Consolidated  
    (In thousands)  

Net income (loss)

  $ 23,341      $ (1,176   $ 30,446      $ 2,480      $ (31,750   $ 23,341   

Other comprehensive income:

           

Accumulated losses on derivatives reclassified to income

    —          —          489        —          —          489   

Change in fair value of interest rate swaps, net of tax

    —          —          (161     —          —          (161
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income ( loss)

  $ 23,341      $ (1,176   $ 30,774      $ 2,480      $ (31,750   $ 23,669   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

22


Table of Contents

Swift Transportation Company and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) – (continued)

 

Condensed consolidating statement of comprehensive income for the three months ended March 31, 2012

 

    Swift
Transportation
Company
(Parent)
    Swift Services
Holdings, Inc.
(Issuer)
    Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Eliminations
for
Consolidation
    Consolidated  
    (In thousands)  

Net income

  $ 6,188      $ 20,906      $ 35,527      $ 3,231      $ (59,664   $ 6,188   

Other comprehensive income:

           

Accumulated losses on derivatives reclassified to income

    —          —          2,545        —          —          2,545   

Change in fair value of interest rate swaps, net of tax

    —          —          (575     —          —          (575
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

  $ 6,188      $ 20,906      $ 37,497      $ 3,231      $ (59,664   $ 8,158   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

23


Table of Contents

Swift Transportation Company and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) – (continued)

 

Condensed consolidating statement of cash flows for the three months ended March 31, 2013

 

    Swift
Transportation
Company
(Parent)
    Swift Services
Holdings, Inc.
(Issuer)
    Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Eliminations
for
Consolidation
    Consolidated  
    (In thousands)  

Net cash provided by (used in) operating activities

  $ 5,363      $ 4,817      $ 105,374      $ (18,665   $ —        $ 96,889   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

           

Decrease in restricted cash

    —          —          —          6,211        —          6,211   

Change in restricted investments

    —          —          —          (7,073     —          (7,073

Proceeds from sale of property and equipment

    —          —          9,899        40        —          9,939   

Capital expenditures

    —          —          (57,597     (39     —          (57,636

Payments received on notes receivable

    —          —          1,034        —          —          1,034   

Expenditures on assets held for sale

    —          —          (833     —          —          (833

Payments received on assets held for sale

    —          —          21,828        —          —          21,828   

Payments received on equipment sale receivables

    —          —          596        —          —          596   

Payments received on intercompany notes payable

    —          —          3,315        —          (3,315     —     

Capital contribution to subsidiary

    —          —          (1,160     —          1,160        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

    —          —          (22,918     (861     (2,155     (25,934
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

           

Proceeds from long-term debt

    —          —          —          3,200        —          3,200   

Payment of deferred loan costs

    —          —          (1,257     —          —          (1,257

Borrowings under accounts receivable securitization

    —          —          —          56,000        —          56,000   

Repayment of accounts receivable securitization

    —          —          —          (56,000     —          (56,000

Repayment of long-term debt and capital leases

    —          —          (90,000     (133     —          (90,133

Repayment of intercompany notes payable

    —          —          —          (3,315     3,315        —     

Capital contribution to subsidiary

    —          —          —          1,160        (1,160     —     

Net funding (to) from affiliates

    (7,748     (4,817     (4,382     16,947        —          —     

Other financing activities

    2,385        —          —          —          —          2,385   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by financing activities

    (5,363     (4,817     (95,639     17,859        2,155        (85,805
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net decrease in cash and cash equivalents

    —          —          (13,183     (1,667     —          (14,850
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at beginning of period

    —          —          43,877        9,719        —          53,596   

Cash and cash equivalents at end of period

  $ —        $ —        $ 30,694      $ 8,052      $ —        $ 38,746   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

24


Table of Contents

Swift Transportation Company and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) – (continued)

 

Condensed consolidating statement of cash flows for the three months ended March 31, 2012

 

    Swift
Transportation
Company
(Parent)
    Swift Services
Holdings, Inc.
(Issuer)
    Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Eliminations
for
Consolidation
    Consolidated  
    (In thousands)  

Net cash provided by (used in) operating activities

  $ 13,712      $ 14,818      $ 54,840      $ (13,198   $ —        $ 70,172   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

           

Decrease in restricted cash

    —          —          —          10,718        —          10,718   

Change in restricted investments

    —          —          —          (11,086     —          (11,086

Funding of notes receivable

    —          —          (7,500     —          —          (7,500

Proceeds from sale of property and equipment

    —          —          33,856        2        —          33,858   

Capital expenditures

    —          —          (43,506     (740     —          (44,246

Payments received on notes receivable

    —          —          1,980        —          —          1,980   

Expenditures on assets held for sale

    —          —          (1,719     —          —          (1,719

Payments received on assets held for sale

    —          —          1,760        —          —          1,760   

Payments received on equipment sale receivables

    —          —          5,466        —          —          5,466   

Payments received on intercompany notes payable

    —          —          302        —          (302     —     

Funding of intercompany notes payable

    —          —          (547     —          547        —     

Other investing activities

    —          —          (500     —          —          (500
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by investing activities

    —          —          (10,408     (1,106     245        (11,269
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

           

Payment of deferred loan costs

    —          —          (5,932     —          —          (5,932

Borrowings under accounts receivable securitization

    —          —          —          89,000        —          89,000   

Repayment of accounts receivable securitization

    —          —          —          (106,000     —          (106,000

Repayment of long-term debt and capital leases

    —          —          (70,390     (133     —          (70,523

Proceeds from intercompany notes payable

    —          —          —          547        (547     —     

Repayment of intercompany notes payable

    —          —          —          (302     302        —     

Net funding (to) from affiliates

    7,738        (14,818 )     (25,259     32,339        —          —     

Other financing activities

    152        —          —          —          —          152   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by financing activities

    7,890        (14,818 )     (101,581     15,451        (245     (93,303
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

    21,602        —          (57,149     1,147        —          (34,400
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at beginning of period

    11,132        —          64,717        6,235        —          82,084   

Cash and cash equivalents at end of period

  $ 32,734      $ —        $ 7,568      $ 7,382      $ —        $ 47,684   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

25


Table of Contents

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and the related notes included elsewhere in this report and our Annual Report on Form 10-K for the year ended December 31, 2012.

Non-GAAP Measures

In addition to disclosing financial results that are determined in accordance with United States generally accepted accounting principles, or GAAP, we also disclose certain non-GAAP financial information, such as, Adjusted Operating Ratio, Adjusted EBITDA, and Adjusted EPS, which are not recognized measures under GAAP and should not be considered alternatives to or superior to profitability and cash flow measures derived in accordance with GAAP. We use Adjusted Operating Ratio, Adjusted EBITDA, and Adjusted EPS as a supplement to our GAAP results in evaluating certain aspects of our business, as described below. We believe our presentation of Adjusted Operating Ratio, Adjusted EBITDA, and Adjusted EPS is useful because it provides investors and securities analysts the same information that we use internally for purposes of assessing our core operating performance. See below for more information on our use of Adjusted Operating Ratio, Adjusted EBITDA, and Adjusted EPS, as well as a description of the computation and reconciliation of our Operating Ratio to our Adjusted Operating Ratio, our net income to Adjusted EBITDA, and our diluted earnings per share to Adjusted EPS.

We define Adjusted Operating Ratio as (a) total operating expenses, less (i) fuel surcharges, (ii) amortization of intangibles from our 2007 going-private transaction, (iii) non-cash impairment charges, (iv) other special non-cash items, and (v) excludable transaction costs, as a percentage of (b) total revenue excluding fuel surcharge revenue (revenue xFSR). We believe fuel surcharge is sometimes volatile and eliminating the impact of this source of revenue (by netting fuel surcharge revenue against fuel expense) affords a more consistent basis for comparing our results of operations. We also believe excluding impairments, non-comparable nature of the intangibles from our going-private transaction and other special items enhances the comparability of our performance from period to period. A reconciliation of our Adjusted Operating Ratio for each of the periods indicated is as follows:

 

     Three Months Ended March 31,  
     2013     2012  
     (Unaudited)  
     (Dollars in thousands)  

Total GAAP operating revenue

   $ 856,794      $ 826,885   

Less: Fuel surcharge revenue

     170,286        162,714   
  

 

 

   

 

 

 

Revenue xFSR

     686,508        664,171   
  

 

 

   

 

 

 

Total GAAP operating expense

     794,807        768,983   

Adjusted for:

    

Fuel surcharge revenue

     (170,286     (162,714

Amortization of certain intangibles (a)

     (3,912     (4,011

Non-cash impairments (b)

     —          (1,065
  

 

 

   

 

 

 

Adjusted operating expense

     620,609        601,193   
  

 

 

   

 

 

 

Adjusted operating income

   $ 65,899      $ 62,978   
  

 

 

   

 

 

 

Adjusted Operating Ratio

     90.4     90.5

Operating Ratio

     92.8     93.0

 

(a) Amortization of certain intangibles reflects the non-cash amortization expense of $3.9 million and $4.0 million for the three months ended March 31, 2013 and 2012, respectively, relating to certain intangible assets identified in our 2007 going private transaction.
(b) Real property with a carrying amount of $1.7 million was written down to its fair value of $0.6 million, resulting in a pre-tax impairment charge of $1.1 million in the first quarter of 2012.

 

26


Table of Contents

We define Adjusted earnings before interest, taxes, depreciation and amortization (Adjusted EBITDA) as net income (loss) plus (i) depreciation and amortization, (ii) interest and derivative interest expense, including other fees and charges associated with indebtedness, net of interest income, (iii) income taxes, (iv) non-cash equity compensation expense, (v) non-cash impairments, (vi) other special non-cash items, and (vii) excludable transaction costs. We believe that Adjusted EBITDA is a relevant measure for estimating the cash generated by our operations that would be available to cover capital expenditures, taxes, interest and other investments and that it enhances an investor’s understanding of our financial performance. We use Adjusted EBITDA for business planning purposes and in measuring our performance relative to that of our competitors. Our method of computing Adjusted EBITDA is consistent with that used in our senior secured credit agreement for covenant compliance purposes and may differ from similarly titled measures of other companies. A reconciliation of GAAP net income to Adjusted EBITDA for each of the periods indicated is as follows:

 

     Three Months Ended March 31,  
     2013     2012  
     (Unaudited)  
     (Dollars in thousands)  

Net income

   $ 23,341      $ 6,188   

Adjusted for:

    

Depreciation and amortization of property and equipment

     50,332        50,394   

Amortization of intangibles

     4,204        4,303   

Interest expense

     25,574        32,776   

Derivative interest expense

     562        2,545   

Interest income

     (573     (397

Income tax (benefit) expense

     14,613        (3,548
  

 

 

   

 

 

 

EBITDA

   $ 118,053      $ 92,261   
  

 

 

   

 

 

 

Non-cash equity compensation (a)

     545        1,267   

Loss on debt extinguishment (b)

     5,044        20,940   

Non-cash impairments (c)

     —          1,065   
  

 

 

   

 

 

 

Adjusted EBITDA

   $ 123,642      $ 115,533   
  

 

 

   

 

 

 

 

(a) Represents recurring non-cash equity compensation expense on a pre-tax basis. In accordance with the terms of our senior credit agreement, this expense is added back in the calculation of Adjusted EBITDA for covenant compliance purposes.
(b) On March 7, 2013, the Company entered into a Second Amended and Restated Credit Agreement (“2013 Agreement”). The 2013 Agreement replaced the then-existing first lien term loan B-1 and B-2 tranches under the Amended and Restated Credit Agreement (“2012 Agreement”) entered into on March 6, 2012 with outstanding principal balances of $152.0 million and $508.0 million, respectively, with new first lien term loan B-1 and B-2 tranches with face values of $250.0 million and $410.0 million, respectively. The replacement of the 2012 Agreement resulted in a loss on debt extinguishment of $5.0 million in the first quarter of 2013, representing the write-off of the unamortized original issue discount and deferred financing fees associated with the then-existing first lien term loan B-1 and B-2 tranches. In the first quarter of 2012, the Company entered into the 2012 Agreement which replaced the then-existing, remaining $874 million face value first lien term loan, resulting in a loss on debt extinguishment of $20.9 million in the first quarter of 2012, representing the write-off of the unamortized original issue discount and deferred financing fees associated with the original term loan.
(c) Includes the item discussed in note (b) to the Adjusted Operating Ratio table above.

We define Adjusted EPS as (1) income (loss) before income taxes plus (i) amortization of the intangibles from our 2007 going private transaction, (ii) non-cash impairments, (iii) other special non-cash items, (iv) excludable transaction costs, (v) the mark-to-market adjustment on our interest rate swaps that is recognized in the consolidated statement of operations in a given period, and (vi) the amortization of previous losses recorded in accumulated other comprehensive income (“OCI”) related to interest rate swaps we terminated upon our IPO and refinancing transactions in December 2010; (2) reduced by income taxes; (3) divided by weighted average diluted shares outstanding. For all periods through 2012, we used a normalized tax rate of 39% in our Adjusted EPS calculation due to the amortization of deferred tax assets related to our pre-IPO interest rate swap amortization and other items that we knew would cause fluctuations in our GAAP effective tax rate. Beginning in 2013, these items should no longer result in large variations. Therefore, we will use our GAAP effective tax rate for our Adjusted EPS calculation beginning in 2013. We believe the presentation of financial results excluding the impact of the items noted above provides a consistent basis for comparing our results from period to period and to those of our peers due to the non-comparable nature of the intangibles from our going-private transaction, the historical volatility of the interest rate derivative agreements and the non-operating nature of the impairment charges, transaction costs and other adjustment items. A reconciliation of GAAP diluted earnings per share to Adjusted EPS for each of the periods indicated is as follows (the numbers reflected in the below table are calculated on a per share basis and may not foot due to rounding):

 

    Three Months Ended March 31,  
    2013     2012  
    (Unaudited)  

Diluted earnings per share

  $ 0.17      $ 0.04   

Adjusted for:

   

Income tax (benefit) expense

    0.10        (0.03
 

 

 

   

 

 

 

Income before income taxes

    0.27        0.02   
 

 

 

   

 

 

 

Non-cash impairments (a)

    —          0.01   

Loss on debt extinguishment (b)

    0.04        0.15   

Amortization of certain intangibles (c)

    0.03        0.03   

Amortization of unrealized losses on interest rate swaps (d)

    —          0.02   
 

 

 

   

 

 

 

Adjusted income before income taxes

    0.33        0.22   

Provision for income tax expense at effective rate

    0.13        0.09   
 

 

 

   

 

 

 

Adjusted EPS

  $ 0.21      $ 0.14   
 

 

 

   

 

 

 

 

(a) Includes the item discussed in note (b) to the Adjusted Operating Ratio table above.
(b) Includes the items discussed in note (b) to the Adjusted EBITDA table above.
(c) Includes the items discussed in note (a) to the Adjusted Operating Ratio table above.
(d) Amortization of unrealized losses on interest rate swaps reflects the non-cash amortization expense of $2.5 million for the three months ended March 31, 2012, comprised of previous losses recorded in accumulated OCI 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 are expensed in relation to the hedged interest payments through the original maturity of the swaps in August 2012.

 

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Overview

We are a multi-faceted transportation services company and the largest truckload carrier in North America. As of March 31, 2013, we operate a tractor fleet of approximately 15,600 units comprised of 11,600 tractors driven by company drivers and 4,000 owner-operator tractors, a fleet of 52,700 trailers, and 8,700 intermodal containers from 35 major terminals positioned near major freight centers and traffic lanes in the United States and Mexico. We offer customers the opportunity for “one-stop shopping” for their truckload transportation needs through a broad spectrum of services and equipment. Our extensive suite of services includes general, dedicated, and cross-border U.S./Mexico truckload services through dry van, temperature-controlled, flatbed, and specialized trailers, in addition to rail intermodal and non-asset based freight brokerage and logistics management services, making it an attractive choice for a broad array of customers.

We principally operate in short-to-medium-haul traffic lanes around our terminals or 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. Our relatively short average length of haul also helps reduce competition from railroads and trucking companies that lack a regional presence.

The table below reflects our total operating revenue, revenue xFSR, net income, diluted earnings per common share, Operating Ratio, Adjusted Operating Ratio, Adjusted EBITDA, and Adjusted EPS for the periods indicated.

 

     Three Months Ended March 31,  
     2013     2012  
     (Unaudited)  
     (Dollars in thousands, except per share amounts)  

Total operating revenue

   $ 856,794      $ 826,885   

Revenue xFSR

   $ 686,508      $ 664,171   

Net income

   $ 23,341      $ 6,188   

Diluted earnings per share

   $ 0.17      $ 0.04   

Operating Ratio

     92.8     93.0

Adjusted Operating Ratio

     90.4     90.5

Adjusted EBITDA

   $ 123,642      $ 115,533   

Adjusted EPS

   $ 0.21      $ 0.14   

Revenue

We primarily generate revenue by transporting freight for our customers. Generally, we are paid a predetermined rate per mile for our services. We enhance our 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 are the rate per mile we receive from our customers and the number of loaded miles we run.

Fuel surcharges are designed to compensate us for fuel costs above a certain cost per gallon base. Generally, we receive fuel surcharges on the miles for which we are compensated by customers. However, we continue to have exposure to increasing fuel costs related to deadhead miles, fuel inefficiency due to engine idle time, and other factors as well as the extent to which the surcharge paid by the customer is insufficient. The main factors that affect fuel surcharge revenue are the price of diesel fuel and the number of loaded miles. Although our surcharge programs vary by customer, we endeavor to negotiate an additional penny per mile charge for every five cent increase in the United States Department of Energy, or DOE, national average diesel fuel index over an agreed baseline price. In some instances, customers choose to incorporate the additional charge by splitting the impact between the basic rate per mile and the surcharge fee. In addition, we have moved much of our West Coast customer activity to a surcharge program that is indexed to the DOE’s West Coast average diesel fuel index as diesel fuel prices in the western United States generally are higher than the national average index. Our fuel surcharges are billed on a lagging basis, meaning 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 paying current day prices for fuel but billing based on a lagging index. In periods of declining prices, the opposite is true.

Our other businesses revenue is generated by our non-asset based freight brokerage and logistics management service, tractor leasing revenue of Interstate Equipment Leasing (“IEL”), premium revenue generated by our captive insurance companies, and other revenue generated by our repair and maintenance shops. The main factors that affect other businesses revenue are demand for brokerage and logistics services and the number of owner-operators leasing equipment from us.

Expenses

The most significant expenses in our business 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 the railroads, drayage providers, and other trucking companies (which are recorded on the “Purchased transportation” line of our consolidated statements of operations). Expenses that have both fixed and variable components include maintenance and tire expense and our total cost of insurance and claims. These expenses generally vary with the miles we travel, but also have a controllable component based on safety improvements, fleet age, efficiency, and other factors. Our main fixed costs are depreciation of long-term assets, such as tractors, trailers, containers, and terminals, interest expense, and the compensation of non-driver personnel.

Because a significant portion of our expenses are either fully or partially variable based on the number of miles traveled, changes in weekly revenue per tractor, excluding fuel surcharge revenue (“weekly revenue xFSR per tractor”) caused by increases or decreases in deadhead miles percentage, rate per mile, and loaded miles have varying effects on our profitability. In general, changes in deadhead miles percentage have the largest proportionate effect on 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 increase or decrease with changes in miles. However, items such as driver and owner-operator satisfaction and network efficiency are affected by changes in mileage and have significant indirect effects on expenses.

 

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Table of Contents

In general, our miles per tractor per week, rate per mile, and deadhead miles percentage are affected by industry-wide freight volumes, industry-wide trucking capacity, and the competitive environment, which factors are beyond our control, as well as by our service levels, planning, and discipline of our operations, over which we have significant control.

Results of Operations for the Three Months Ended March 31, 2013 and 2012

Factors Affecting Comparability between Periods

Three months ended March 31, 2013 results of operations

Net income for the three months ended March 31, 2013 was $23.3 million. Items impacting comparability between the first quarter of 2013 and the corresponding 2012 period include the following:

 

   

$6.1 million gain on the sale of two properties classified as held for sale; and

 

   

$5.0 million loss on debt extinguishment resulting from the replacement of our previous Amended and Restated Credit Agreement in the first quarter of 2013.

Three months ended March 31, 2012 results of operations

Net income for the three months ended March 31, 2012 was $6.2 million. Items impacting comparability between the first quarter of 2012 and the corresponding 2013 period include the following:

 

   

approximately $20.9 million loss on debt extinguishment resulting from the replacement of the first lien term loan;

 

   

approximately $5.2 million gain relating to a contractual settlement with the City of Los Angeles recorded in operating supplies and expenses;

 

   

approximately $4.6 million benefit reflecting the deferred state tax benefit related to an internal corporate restructuring of our subsidiaries; and

 

   

approximately $1.1 million pre-tax impairment charge for real property with a carrying value of $1.7 million written down to its estimated fair value of $0.6 million in the first quarter of 2012.

Results of Operations—Segment Review

During 2013, we operated three reportable segments: truckload, dedicated and intermodal. The descriptions of the operations of these reportable segments are described in Note 15 in our consolidated financial statements. The following tables reconcile our operating revenues and operating income by reportable segment to our consolidated operating revenue and operating income for the three months ended March 31, 2013 and 2012.

 

     Three Months Ended March 31,  
     2013     2012  
     (Unaudited)  
     (Dollars in thousands)  

Operating revenue:

    

Truckload

   $ 559,595      $ 551,247   

Dedicated

     179,226        171,539   

Intermodal

     77,325        69,045   
  

 

 

   

 

 

 

Subtotal

     816,146        791,831   

Nonreportable segments

     55,292        52,331   

Intersegment eliminations

     (14,644     (17,277
  

 

 

   

 

 

 

Consolidated operating revenue

   $ 856,794      $ 826,885   
  

 

 

   

 

 

 

Operating income (loss):

    

Truckload

   $ 42,403      $ 46,554   

Dedicated

     18,954        14,507   

Intermodal (1)

     (1,798 )     (4,027
  

 

 

   

 

 

 

Subtotal

     59,559        57,034   

Nonreportable segments

     2,428        868   
  

 

 

   

 

 

 

Consolidated operating income

   $ 61,987      $ 57,902   
  

 

 

   

 

 

 

 

(1) During the first quarter of 2012, our intermodal reportable segment incurred an increase in its insurance and claims expense primarily related to one claim associated with a drayage accident, which increased the intermodal operating ratio by approximately 450 to 480 basis points for the three months ended March 31, 2012, as compared to the first quarter of 2011 and 2013.

The results and discussions that follow are reflective of how our chief operating decision makers monitors the performance of our reporting segments. We supplement the reporting of our financial information determined under generally accepted accounting principles (“GAAP”) with certain non-GAAP financial measures. Additionally, we use a number of primary indicators to monitor our revenue and expense performance and efficiency. We believe that these adjusted measures provide meaningful information to assist investors and analysts in understanding our financial results and assessing our prospects for future performance. We believe these adjusted financial measures are important indicators of our recurring results of operations because they exclude items that may not be indicative of, or are unrelated to, our core operating results, and provide a better baseline for analyzing trends in our underlying businesses.

 

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Table of Contents

Our main measure of productivity for our truckload and dedicated reportable segments is weekly revenue xFSR per tractor. Weekly revenue xFSR per tractor is affected by our loaded miles, which only include the miles driven when hauling freight, the size of our fleet (because available loads may be spread over fewer or more tractors), and the rates received for our services. We strive to increase our revenue per tractor by improving freight rates with our customers and hauling more loads with our existing equipment, effectively moving freight within our network, keeping tractors maintained, and recruiting and retaining drivers and owner-operators.

We also strive to reduce our number of deadhead miles within our truckload segment. We measure our performance in this area by monitoring our deadhead miles percentage, which is calculated by dividing the number of unpaid miles by the total number of miles driven. By balancing our freight flows and planning consecutive loads with shorter distances between the drop-off and pick-up locations, we are able to reduce the percentage of deadhead miles driven to allow for more revenue-generating miles during our drivers’ hours-of-service. This also enables us to reduce costs associated with deadhead miles, such as wages and fuel.

For our reportable segments, average tractors available measures the average number of tractors we have available during the period for dispatch and includes tractors driven by company drivers as well as owner-operator units. This measure changes based on our ability to increase or decrease our fleet size to respond to changes in demand.

We consider our Adjusted Operating Ratio to be an important measure of our operating profitability for each of our reportable segments. Operating Ratio is operating expenses as a percentage of revenue, or the inverse of operating margin, and produces a quick indication of operating efficiency. It is widely used in our industry as an assessment of management’s effectiveness in controlling all categories of operating expenses. We net fuel surcharge revenue against fuel expense in the calculation of our Adjusted Operating Ratio, therefore excluding fuel surcharge revenue from total revenue in the denominator. We exclude fuel surcharge revenue because fuel prices and fuel surcharge revenue are often volatile and changes in fuel surcharge revenue largely offset corresponding changes in our fuel expense. Eliminating the volatility (by netting fuel surcharge revenue against fuel expense) affords a more consistent basis for comparing our results of operations between periods. We also exclude impairments and other special or non-cash items in the calculation of our Adjusted Operating Ratio because we believe this enhances the comparability of our performance between periods. Accordingly, we believe Adjusted Operating Ratio is a better indicator of our core operating profitability than Operating Ratio and provides a better basis for comparing our results between periods and against others in our industry.

Within our Intermodal reportable segment, we monitor our load count and average container count. These metrics allow us to measure our utilization of our container fleet.

We monitor weekly revenue xFSR per tractor, deadhead miles percentage, average tractors available, load count and average container count on a daily basis, and we measure Adjusted Operating Ratio on a monthly basis.

Truckload

 

    Three Months Ended March 31,  
    2013     2012  
    (Unaudited)  
    (Dollars in thousands, except per tractor amounts)  

Operating revenue

  $ 559,595      $ 551,247   

Operating income

  $ 42,403      $ 46,554   

Operating ratio

    92.4 %     91.6 %

Adjusted operating ratio

    90.4 %     89.3 %

Weekly revenue xFSR per tractor

  $ 3,182      $ 3,028   

Total loaded miles

    261,850        262,549   

Deadhead miles percentage

    11.2 %     11.3 %

Average tractors available for dispatch:

   

Company

    7,494        7,683   

Owner-Operator

    3,291        3,354   
 

 

 

   

 

 

 

Total

    10,785        11,037   
 

 

 

   

 

 

 

A reconciliation of our adjusted operating ratio for each of the periods indicated is as follows:

 

     Three Months Ended March 31,  
     2013     2012  
     (Unaudited)  
     (Dollars in thousands)  

Total GAAP operating revenue

   $ 559,595      $ 551,247   

Less: Fuel surcharge revenue

     118,339        116,866   
  

 

 

   

 

 

 

Revenue xFSR

     441,256        434,381   
  

 

 

   

 

 

 

Total GAAP operating expense

     517,192        504,693   

Adjusted for:

    

Fuel surcharge revenue

     (118,339     (116,866
  

 

 

   

 

 

 

Adjusted operating expense

     398,853        387,827   
  

 

 

   

 

 

 

Adjusted operating income

   $ 42,403      $ 46,554   
  

 

 

   

 

 

 

Adjusted operating ratio

     90.4     89.3

 

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Revenue

For three months ended March 31, 2013, our truckload segment operating revenue increased by $8.3 million, or 1.5%, compared with the same period in 2012. During the first quarter of 2013, truckload revenue xFSR increased 1.6% as compared to the first quarter of 2012. Our weekly revenue xFSR per tractor increased 5.1% primarily due to a 3.2% increase in our utilization, as measured by loaded miles per truck per week and a 1.9% increase in our revenue xFSR per loaded mile.

Operating income

Truckload operating income decreased $4.2 million, or 8.9% from the first quarter of 2012 to the first quarter of 2013. This decrease in operating income caused our adjusted operating ratio to increase to 90.4% during the three months ended March 31, 2013 compared with 89.3% in the same period in 2012, which was primarily driven by a $5.2 million benefit from the favorable contract resolution with the Port of Los Angeles in the first quarter of 2012. Excluding the year over year impact from the prior year favorable contract resolution, the margin improvement resulting from the increase in our revenue xFSR per loaded mile and utilization noted above in addition to the slight improvement in our deadhead percentage offset the negative impact in the 2013 quarter from higher equipment costs, increased expenses related to inclement weather and increases in both driver wages and owner-operator expense resulting from the change in pay structure we implemented in July of 2012.

Dedicated

 

    Three Months Ended March 31,  
    2013     2012  
    (Unaudited)  
    (Dollars in thousands, except per tractor amounts)  

Operating revenue

  $ 179,226      $ 171,539   

Operating income

  $ 18,954      $ 14,507   

Operating ratio

    89.4 %     91.5 %

Adjusted operating ratio

    86.9 %     89.7 %

Weekly revenue xFSR per tractor

  $ 3,385      $ 3,370   

Average tractors available for dispatch:

   

Company

    2,684        2,537   

Owner-Operator

    643        668   
 

 

 

   

 

 

 

Total

    3,327        3,205   
 

 

 

   

 

 

 

A reconciliation of our adjusted operating ratio for each of the periods indicated is as follows:

 

    Three Months Ended March 31,  
    2013     2012  
    (Unaudited)  
    (Dollars in thousands)  

Total GAAP operating revenue

  $ 179,226      $ 171,539   

Less: Fuel surcharge revenue

    34,433        31,131   
 

 

 

   

 

 

 

Revenue xFSR

    144,793        140,408   
 

 

 

   

 

 

 

Total GAAP operating expense

    160,272        157,032   

Adjusted for:

   

Fuel surcharge revenue

    (34,433     (31,131
 

 

 

   

 

 

 

Adjusted operating expenses

    125,839        125,901   
 

 

 

   

 

 

 

Adjusted operating income

  $ 18,954      $ 14,507   
 

 

 

   

 

 

 

Adjusted operating ratio

    86.9     89.7

Revenue

For the three months ended March 31, 2013, our dedicated segment operating revenue increased by $7.7 million, or 4.5% compared with the same period in 2012. Dedicated revenue xFSR increased 3.1% largely due to growth with our existing customers and the addition of new customer accounts partially offset by the termination of a few underperforming customer contracts during the latter half of 2012 and the first quarter of 2013.

Operating income

Our dedicated operating income increased to $19.0 million for the first quarter of 2013 from $14.5 million in the same period of 2012. Our dedicated adjusted operating ratio improved 280 basis points to 86.9% in the three months ended March 31, 2013 from 89.7% in the same period of 2012, which was the result of the change in business mix and improvement in our operational efficiencies.

 

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Table of Contents

Intermodal

 

    Three Months Ended March 31,  
    2013     2012  
    (Unaudited)  
    (Dollars in thousands, except per tractor amounts)  

Operating revenue

  $ 77,325      $ 69,045   

Operating loss

  $ (1,798 )   $ (4,027 )

Operating ratio(1)

    102.3 %     105.8 %

Adjusted operating ratio(1)

    103.0 %     107.4 %

Average tractors available for dispatch:

   

Company

    263        271   

Owner-Operator

    18        —     
 

 

 

   

 

 

 

Total

    281        271   
 

 

 

   

 

 

 

Load count

    33,695        30,710   

Average container count

    8,717        6,317   

 

(1) During the first quarter of 2012, our Intermodal reportable segment incurred an increase in its insurance and claims expense primarily related to one claim associated with a drayage accident, which increased the intermodal operating ratio by approximately 450 to 480 basis points, and increased the intermodal adjusted operating ratio by approximately 570 to 600 basis points for three months ended March 31, 2012, as compared to the first quarters of 2011 and 2013.

A reconciliation of our adjusted operating ratio for each of the periods indicated is as follows:

 

     Three Months Ended March 31,  
     2013     2012  
     (Unaudited)  
     (Dollars in thousands)  

Total GAAP operating revenue

   $ 77,325      $ 69,045   

Less: Fuel surcharge revenue

     16,740        14,467   
  

 

 

   

 

 

 

Revenue xFSR

     60,585        54,578   
  

 

 

   

 

 

 

Total GAAP operating expense

     79,123        73,072   

Adjusted for:

    

Fuel surcharge revenue

     (16,740     (14,467
  

 

 

   

 

 

 

Adjusted operating expenses

     62,383        58,605   
  

 

 

   

 

 

 

Adjusted operating loss

   $ (1,798 )   $ (4,027 )
  

 

 

   

 

 

 

Adjusted operating ratio

     103.0     107.4

Revenue

For the three months ended March 31, 2013, our intermodal operating revenue increased $8.3 million as compared to the three months ended March 31, 2012. During the first quarter of 2013, our intermodal revenue xFSR grew 11.0% over the first quarter of 2012. This increase in revenue xFSR was driven by a 9.7% increase in the number of loads hauled, combined with a 1.2% increase in revenue xFSR per load. Loads in our Container on Flat Car (COFC) business grew 20.8% and our COFC revenue xFSR per load grew 1.8%. This growth in COFC was partially offset by a 65.5% reduction in Trailer on Flat Car (TOFC) revenue.

Operating loss

Our intermodal operating loss decreased from $4.0 million in the first quarter of 2012 to $1.8 million in the first quarter of 2013. Correspondingly, our intermodal adjusted operating ratio improved to 103.0% during the three months ended March 31, 2013 from 107.4% in the same period in 2012. This improvement was primarily due to one claim associated with a dray truck accident in the first quarter of 2012. This claim increased the intermodal operating ratio by approximately 450 to 480 basis points, and the adjusted operating ratio by approximately 570 to 600 basis points in the first quarter of 2012 compared to the first quarters of 2011 and 2013. The reduction in our adjusted operating ratio associated with improved insurance and claims expense in the first quarter of 2013 was partially offset by higher expenses resulting from the larger container fleet and related chassis expenses compared to the first quarter of 2012.

Other-nonreportable segments

 

     Three Months Ended March 31,  
     2013      2012  
     (Unaudited)  
     (Dollars in thousands)  

Operating revenue

   $ 55,292       $ 52,331   

Operating income

   $ 2,428       $ 868   

 

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Revenue

Our other nonreportable segment revenue is generated primarily by our logistics and brokerage services, and revenue generated by our subsidiaries offering support services to customers and owner-operators, including shop repair and maintenance services, equipment leasing, and insurance. The main factors that impact our other nonreportable segment revenue are the demand for our brokerage and logistics services and the number of owner-operators leasing equipment and purchasing insurance coverage from us.

For the three months ended March 31, 2013, combined revenue from these services increased 5.7% compared to the same quarter in 2012, driven primarily by an increase in the services provided to owner-operators.

Consolidated Operating Expense

Salaries, Wages and Employee Benefits

 

     Three Months Ended March 31,  
     2013     2012  
     (Unaudited)  
     (Dollars in thousands)  

Salaries, wages and employee benefits

   $ 206,607      $ 200,135   

% of revenue xFSR

     30.1     30.1

% of operating revenue

     24.1