UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-18605
SWIFT TRANSPORTATION CO., INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Nevada 86-0666860
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
2200 South 75th Avenue
Phoenix, AZ 85043
(602) 269-9700
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE)
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 the
filing requirements for at least the past 90 days. YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date (November 12, 2002)
Common stock, $.001 par value: 83,639,051 shares
PART I
PAGE
FINANCIAL INFORMATION NUMBER
------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 2002 (unaudited) and December 31, 2001 3-4
Condensed Consolidated Statements of Earnings (unaudited) for
the Three and Nine Month Periods Ended September 30, 2002 and
2001 5
Condensed Consolidated Statements of Cash Flows (unaudited)
for the Nine Month Periods Ended September 30, 2002 and 2001 6-7
Notes to Condensed Consolidated Financial Statements 8-10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11-16
Item 3. Quantitative and Qualitative Disclosures about Market Risk 17
Item 4. Controls and Procedures 17
PART II
OTHER INFORMATION
Items 1, 2,
3, 4 and 5. Not applicable
Item 6. Exhibits and Reports on Form 8-K 18
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SWIFT TRANSPORTATION CO., INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash $ 20,790 $ 14,151
Accounts receivable, net 272,753 248,725
Equipment sales receivable 14,788 2,107
Account receivable, related party 5,261
Inventories and supplies 14,049 11,682
Prepaid taxes, licenses and insurance 10,908 26,881
Deferred income taxes 17,932 13,932
----------- -----------
Total current assets 356,481 317,478
----------- -----------
Property and equipment, at cost:
Revenue and service equipment 1,449,583 1,401,646
Land 42,758 42,852
Facilities and improvements 222,124 197,681
Furniture and office equipment 69,185 66,319
----------- -----------
Total property and equipment 1,783,650 1,708,498
Less accumulated depreciation and amortization 532,393 501,853
----------- -----------
Net property and equipment 1,251,257 1,206,645
----------- -----------
Investment in Transplace 5,467 7,517
Notes receivable from Trans-Mex 6,082 3,475
Deferred legal fees 19,011
Other assets 14,367 12,081
Goodwill 8,900 8,900
----------- -----------
$ 1,661,565 $ 1,556,096
=========== ===========
See accompanying notes to condensed consolidated financial statements.
CONTINUED
3
SWIFT TRANSPORTATION CO., INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 66,938 $ 57,229
Accrued liabilities 66,863 58,925
Current portion of claims accruals 66,072 48,416
Current portion of long-term debt 3,420 3,546
Current portion of obligations under capital leases 69,047 57,661
Borrowings under line of credit 113,000
Securitization of accounts receivable 171,000 116,000
----------- -----------
Total current liabilities 556,340 341,777
----------- -----------
Borrowings under line of credit 117,000
Long-term debt, less current portion 9,502 16,340
Obligations under capital leases 44,421 90,146
Claims accruals, less current portion 64,563 55,975
Deferred income taxes 224,345 195,605
Fair value of interest rate swaps 9,952 4,050
Stockholders' equity:
Preferred stock, par value $.001 per share
Authorized 1,000,000 shares; none issued
Common stock, par value $.001 per share
Authorized 200,000,000 shares; 89,868,777 and 89,049,519 shares
issued at September 30, 2002 and December 31, 2001, respectively 90 89
Additional paid-in capital 259,900 249,410
Retained earnings 567,324 523,892
----------- -----------
827,314 773,391
Less:
Treasury stock, at cost (5,277,252 and 3,157,850 shares, at
September 30, 2002 and December 31, 2001, respectively) 74,872 37,935
Other equity items 253
----------- -----------
Total stockholders' equity 752,442 735,203
----------- -----------
Commitments and contingencies
$ 1,661,565 $ 1,556,096
=========== ===========
See accompanying notes to condensed consolidated financial statements.
4
SWIFT TRANSPORTATION CO., INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Operating revenue $ 536,955 $ 536,379 $ 1,541,330 $ 1,581,528
Operating expenses:
Salaries, wages and employee benefits 201,911 193,990 574,385 584,786
Operating supplies and expenses 49,678 49,450 141,377 137,116
Fuel 67,576 70,188 184,885 214,386
Purchased transportation 91,457 92,141 264,532 276,462
Rental expense 20,329 24,850 63,679 74,029
Insurance and claims 17,280 24,161 56,374 66,075
Depreciation and amortization 35,985 36,123 110,885 105,430
Communication and utilities 6,938 7,360 20,675 21,348
Operating taxes and licenses 12,200 12,913 37,419 38,893
------------ ------------ ------------ ------------
Total operating expenses 503,354 511,176 1,454,211 1,518,525
------------ ------------ ------------ ------------
Operating income 33,601 25,203 87,119 63,003
Other (income) expenses:
Interest expense 8,894 10,377 17,971 29,464
Interest income (1,064) (388) (1,715) (939)
Other (159) 8,983 811 9,568
------------ ------------ ------------ ------------
Other (income) expenses, net 7,671 18,972 17,067 38,093
------------ ------------ ------------ ------------
Earnings before income taxes 25,930 6,231 70,052 24,910
Income taxes 9,590 3,444 26,620 10,733
------------ ------------ ------------ ------------
Net earnings $ 16,340 $ 2,787 $ 43,432 $ 14,177
============ ============ ============ ============
Basic earnings per share $ .19 $ .03 $ .50 $ .17
============ ============ ============ ============
Diluted earnings per share $ .19 $ .03 $ .50 $ .17
============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements.
5
SWIFT TRANSPORTATION CO., INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
2002 2001
---------- ----------
Cash flows from operating activities:
Net earnings $ 43,432 $ 14,177
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 104,732 106,027
Deferred income taxes 24,740 407
Provision for losses on accounts receivable 4,729 1,125
Amortization of deferred compensation 803 516
Fair market value of interest rate swaps 5,902 3,652
EASO impairment adjustment 10,447
Impairment of property 3,100
Amortization of deferred legal fees 2,119
Increase (decrease) in cash resulting from changes in:
Accounts receivable (17,979) (36,407)
Inventories and supplies (2,367) (2,393)
Prepaid expenses 15,973 13,720
Other assets (15,085) (2,039)
Accounts payable, accrued liabilities and claims accruals 42,837 38,915
---------- ----------
Net cash provided by operating activities 212,936 148,147
---------- ----------
Cash flows from investing activities:
Proceeds from sale of property and equipment 73,520 41,050
Capital expenditures (254,644) (156,281)
Repayment of note receivable 1,000 3,200
Notes receivable (10,727) 851
Payments received on equipment sale receivables 2,107 5,799
---------- ----------
Net cash used in investing activities (188,744) (105,381)
---------- ----------
See accompanying notes to condensed consolidated financial statements.
CONTINUED
6
SWIFT TRANSPORTATION CO., INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
2002 2001
---------- ----------
Cash flows from financing activities:
Repayments of long-term debt (41,304) (81,432)
Borrowings under line of credit 163,500 125,000
Repayment of borrowings under line of credit (167,500) (131,000)
Change in borrowings under accounts receivable securitization 55,000 (1,000)
Purchases of treasury stock (36,937)
Proceeds from public offering 20,064
Proceeds from issuance of common stock under stock option
and stock purchase plans 9,688 17,858
---------- ----------
Net cash used in financing activities (17,553) (50,510)
---------- ----------
Net increase (decrease) in cash 6,639 (7,744)
Cash at beginning of period 14,151 19,638
---------- ----------
Cash at end of period $ 20,790 $ 11,894
========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 10,589 $ 26,137
Income taxes $ 2,318
Supplemental schedule of noncash investing and financing activities:
Equipment sales receivables $ 27,796 $ 1,959
Note receivable from property sale $ 1,715
See accompanying notes to condensed consolidated financial statements.
7
SWIFT TRANSPORTATION CO., INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Basis of Presentation
The condensed consolidated financial statements include the accounts
of Swift Transportation Co., Inc., a Nevada holding company, and its
wholly-owned subsidiaries (the Company). All significant intercompany
balances and transactions have been eliminated.
These consolidated financial statements include the accounts of M.S.
Carriers, Inc. ("M.S. Carriers"), which merged with a subsidiary of
the Company on June 29, 2001 (the "Merger"). Upon completion of the
Merger, M.S. Carriers became a wholly owned subsidiary of the Company.
The Merger was accounted for as a pooling of interests.
The financial statements have been prepared in accordance with
generally accepted accounting principles, pursuant to rules and
regulations of the Securities and Exchange Commission. In the opinion
of management, the accompanying financial statements include all
adjustments which are necessary for a fair presentation of the results
for the interim periods presented. Certain information and footnote
disclosures have been condensed or omitted pursuant to such rules and
regulations. These condensed consolidated financial statements and
notes thereto should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2001.
Results of operations in interim periods are not necessarily
indicative of results to be expected for a full year.
Note 2. Contingencies
The Company is involved in certain claims and pending litigation
arising from the normal course of business. Based on the knowledge of
the facts and, in certain cases, opinions of outside counsel,
management believes the resolution of claims and pending litigation
will not have a material adverse effect on the financial condition of
the Company.
Note 3. Receivable - Trans-Mex
The Company has advanced $6.1 million to Trans-Mex, Inc. S.A. de C.
V., a Mexican corporation of which the Company owns 49%. These loans,
which are secured by equipment, bear interest at prime plus 2% with
monthly payments of interest plus amortization of the principal over
five years.
8
SWIFT TRANSPORTATION CO., INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 4. Earnings Per Share
The computation of basic and diluted earnings per share is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2002 2001 2002 2001
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net earnings ................................................ $ 16,340 $ 2,787 $ 43,432 $ 14,177
======== ======== ======== ========
Weighted average shares:
Common shares outstanding for basic earnings per share ...... 85,796 84,799 86,107 83,249
Equivalent shares issuable upon exercise of stock options ... 1,227 1,944 1,528 1,990
-------- -------- -------- --------
Diluted shares .............................................. 87,023 86,743 87,635 85,239
======== ======== ======== ========
Basic earnings per share .................................... $ .19 $ .03 $ .50 $ .17
======== ======== ======== ========
Diluted earnings per share .................................. $ .19 $ .03 $ .50 $ .17
======== ======== ======== ========
Note 5. Accounting Standards Adopted by the Company
The Company adopted Statement of Financial Standards No. 142 "Goodwill
and Other Intangible Assets" on January 1, 2002. This standard
eliminates amortization of goodwill and replaces it with a test for
impairment. The Company has $8.9 million of goodwill. The Company
amortized $359,000 and $1,077,000 of goodwill for the three and nine
months ended September 30, 2001, respectively. Basic earnings per
share would have been $.04 and $.18 per share for the three months and
nine months ended September 30, 2001 and diluted earnings per share
would have been $.04 and $.18 per share for the three months and nine
months ended September 30, 2001 without goodwill amortization.
Note 6. Settlement of Litigation
In June 2002, the Company entered into a settlement agreement with an
insurance company. Pursuant to this settlement, the insurance company
agreed to provide certain insurance coverage, at no cost to the
Company, through December 2004 in exchange for the Company releasing
all claims that were the subject of the litigation. The Company will
recognize this settlement amount as a reduction of insurance expense
as the insurance coverage is provided during the period from July 1,
2002 through December 31, 2004. In addition, the Company deferred the
$21.1 million of legal expenses, which were earned pursuant to a
contingent fee arrangement based upon the Company's estimated
valuation of the insurance provided of between $65 million and $74
million. These legal expenses are being amortized on a
9
SWIFT TRANSPORTATION CO., INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
straight-line basis over the thirty-month period beginning July 1,
2002. In the event that the Company does not receive the future
insurance coverage due to the liquidation, rehabilitation, bankruptcy
or other similar insolvency of the insurers, the Company will receive
a reimbursement of its legal expenses on a declining basis ranging
from $15.8 million through December 15, 2002 to $3.9 million through
July 1, 2004.
Note 7. Fixed Asset Impairment
The Company has recorded a $3.1 million expense in 2002 for the
estimated excess of carrying value over the fair value of an office
building in Memphis, Tennessee, which formerly was the corporate
office of M.S. Carriers. Although the Company is currently utilizing
some of the building, a sale of this property is anticipated in the
near term. This expense, which was included in depreciation expense,
was based upon a fair value determined by the Company using sale and
asking prices of comparable properties and an independent appraisal.
Note 8. Stock Repurchase Program
In July 2002, the Company announced that its Board of Directors
authorized the Company to repurchase up to 3,000,000 shares of its
common stock. The stock may be purchased on the open market or in
privately negotiated transactions at any time until December 31, 2002,
unless the period is extended by the Board. Any purchases would be at
management's discretion based upon prevailing prices, liquidity and
other factors. During the nine months ended September 30, 2002, the
Company repurchased 2,119,402 shares of its common stock for a total
cost of $36.9 million. In October 2002, the Company completed the
authorized repurchase of the 3,000,000 shares and announced that the
Board of Directors authorized the Company to repurchase up to an
additional 3,000,000 shares of its common stock. The first 1,000,000
shares of stock may be purchased in the open market or in privately
negotiated transactions at price levels set by the Board of Directors.
The Board of Directors expects to establish criteria for the
repurchase of the remaining 2,000,000 shares of stock in the near
future.
10
SWIFT TRANSPORTATION CO., INC. & SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Report on Form 10-Q contains forward-looking statements. The words
"believe," "expect," "anticipate," and "project," and similar expressions
identify forward-looking statements, which speak only as of the date the
statement was made. Such forward-looking statements are within the meaning of
that term in Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Such statements may
include, but are not limited to, projections of revenues, operating expenses
(including insurance and claims expense), income or loss, capital expenditures,
plans for future operations, financing needs or plans, the impact of inflation,
future repurchases of common stock and plans relating to the foregoing.
Statements in Exhibit 99.1 to this Quarterly Report on Form 10-Q and in the
Company's Annual Report on Form 10-K, including Notes to the Consolidated
Financial Statements and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," describe factors, among others, that could
cause actual results or events to differ materially from those expressed in
forward-looking statements. Additional factors that could contribute to or cause
such differences are set forth in "Business" and "Market for the Registrant's
Common Stock and Related Stockholder Matters" in the Company's Annual Report on
Form 10-K.
OVERVIEW
See Note 5 to the financial statements for discussion of accounting
standards adopted by the Company.
Although the trend in the truckload segment of the motor carrier industry
over the past several years has been towards consolidation, the truckload
industry remains highly fragmented. Management believes the industry trend
towards financially stable "core carriers" will continue and result in continued
industry consolidation. The Company expanded its fleet with an increase of 423
tractors to 16,151 tractors as of September 30, 2002 up from 15,728 tractors as
of September 30, 2001. The owner operator portion of the Company's fleet
decreased to 3,223 as of September 30, 2002 from 3,290 as of September 30, 2001.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The Company is self-insured for some portion of its liability, property
damage and cargo damage risk. This self-insurance results from the Company
buying insurance coverage with deductible amounts. Each reporting period the
Company accrues the cost of the uninsured portion of pending claims. These
accruals are estimated based on management's evaluation of the nature and
severity of individual claims and an estimate of future claims development based
upon historical claims development trends. Insurance and claims expense will
vary as a percentage of operating revenue from period to period based on the
frequency and severity of claims incurred in a given period as well as changes
in claims development trends.
Management has discussed the development and selection of this accounting
estimate with the audit committee of the Board of Directors and the audit
committee has reviewed the company's disclosure relating to it in this Quarterly
Report on Form 10-Q.
11
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2001
Operating revenue increased $0.6 million to $537.0 million for the three
months ended September 30, 2002 from $536.4 million for the corresponding period
of 2001. The third quarter of 2002 included $10.5 million of fuel surcharge
revenue versus $15.4 million in 2001. Excluding this fuel surcharge revenue,
operating revenue increased $5.5 million.
The Company's operating ratio (operating expenses expressed as a percentage
of operating revenue) for the third quarter of 2002 was 93.7% compared to 95.3%
in the comparable period of 2001. The Company's operating ratio for the three
months ended September 30, 2002 improved as a result of decreases in certain
components of operating expenses as a percentage of operating revenue as
discussed below. The Company's empty mile factor for linehaul operations was
13.68% and 14.58%, in the third quarter of 2002 and 2001, respectively. Average
loaded linehaul revenue per mile (excluding fuel surcharge) for the three months
ended September 30, 2002 was $1.4095, compared to $1.4038, for the same period
in 2001.
Salaries, wages and employee benefits represented 37.6% of operating
revenue for the three months ended September 30, 2002, compared with 36.2% for
the same period in 2001. This increase was due to an increase in workers'
compensation cost offset by a reduction in certain administrative positions, and
an increase in the portion of Company drivers on the Swift pay scale versus the
higher M.S. Carriers pay scale.
From time to time the industry has experienced shortages of qualified
drivers. If such a shortage were to occur over a prolonged period and increases
in driver pay rates were needed in order to attract and retain drivers, the
Company's results of operations would be negatively impacted to the extent that
corresponding freight rate increases were not obtained.
Fuel as a percentage of operating revenue was 12.6% for the third quarter
of 2002, compared to 13.1% for the corresponding period in 2001. The decrease
was primarily due to actual fuel cost per gallon decreasing by approximately
four cents per gallon (3.3%) in the third quarter of 2002 versus the third
quarter of 2001.
Increases in fuel costs, to the extent not offset by rate increases or fuel
surcharges, would have an adverse effect on the operations and profitability of
the Company. Management believes the most effective protection against fuel cost
increases is to maintain a fuel efficient fleet and to implement fuel surcharges
when such option is necessary and available. The Company currently does not use
derivative-type hedging products as a means to limit exposure to fuel price
volatility.
Purchased transportation as a percentage of operating revenue was 17.0% for
the three months ended September 30, 2002, compared to 17.2% for the same period
in 2001. The decrease was primarily due to a reduction in the owner operator
portion of the Company's fleet.
Rental expense as a percentage of operating revenue was 3.8% for the third
quarter of 2002 versus 4.6% for the corresponding period in 2001. At September
30, 2002 and 2001, leased tractors represented 47% and 50%, respectively, of the
total fleet of Company tractors. When it is economically advantageous to do so,
the Company will purchase then sell tractors that it currently leases by
exercising the purchase option contained in the lease. Gains on these activities
are recorded as a reduction of rental expense. The Company recorded gains of
$471,000 in the third quarter of 2002 and $15,000 during the third quarter of
2001 from the sale of leased tractors.
12
Depreciation and amortization expense as a percentage of operating revenue
was 6.7% in the third quarter of 2002 and 2001. The Company includes gains and
losses from the sale of owned revenue equipment in depreciation and amortization
expense. During the three month period ended September 30, 2002, net gains from
the sale of revenue equipment reduced depreciation and amortization expense by
approximately $1.9 million compared to approximately $588,000 in the third
quarter of 2001. Exclusive of gains, which reduced this expense, depreciation
and amortization expense, as a percentage of operating revenue was 7.1% and 6.8%
in the third quarter of 2002 and 2001, respectively. The increase in
depreciation and amortization expense as a percentage of operating revenue was a
result of an increase in the owned portion of the Company's fleet.
Insurance and claims expense represented 3.2% and 4.5% of operating revenue
in the third quarter of 2002 and 2001, respectively. These expenses represent
claims paid by the Company, reserves for claims within the Company's self
insured retention limits and the cost of premiums for insurance coverage. As
described in Note 6 to the financial statements, the Company estimated the
valuation of the insurance coverage provided as a result of the settlement of
litigation with an insurance company to be between $65 million and $74 million.
This benefit will be reflected as a reduction of insurance and claims expense in
the financial statements beginning July 1, 2002 through December 31, 2004. As a
result, the insurance and claims expense will reflect no cost for certain
insurance coverage which is being provided by the insurance company as part of
this settlement. In connection with this settlement, the Company also will
amortize $2.1 million of deferred legal fees into operating supplies and
expenses in each of the next ten quarters ending December 31, 2004. As a result,
the Company expects the insurance and claims percentage will range between 3.5%
and 4% of operating revenue through December 31, 2002.
The Company's insurance program for liability, physical damage and cargo
damage involves self-insurance with varying risk retention levels. Claims in
excess of these risk retention levels are covered by insurance in amounts which
management considers adequate. The Company accrues the estimated cost of the
uninsured portion of pending claims. Beginning in 2003, the Company's self
insured retention for liability coverage will increase from $250,000 to
$1,000,000 per occurrence. These accruals are estimated based on management's
evaluation of the nature and severity of individual claims and an estimate of
future claims development based on historical claims development trends.
Insurance and claims expense will vary as a percentage of operating revenue from
period to period based on the frequency and severity of claims incurred in a
given period as well as changes in claims development trends.
Interest expense decreased to $8.9 million for the three months ended
September 30, 2002, from $10.4 million for the same period in 2001. Interest
expense for the third quarter of 2002 and 2001 included a $4.5 million and $3.6
million expense, respectively, for the increase in the market value of the
interest rate derivative agreements of M.S. Carriers. Excluding the impact of
the interest rate derivative agreements, interest expense would have decreased
from $6.8 million to $4.4 million. The third quarter of 2002 benefited from
lower interest rates, a shift in borrowings from more costly M.S. Carriers debt
to less costly Swift debt, and decreased borrowings under long term debt and
capital lease obligations.
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2001
Operating revenue decreased $40.2 million or 2.5% to $1.541 billion for the
nine months ended September 30, 2002 from $1.582 billion for the corresponding
period of 2001. The nine months ended September 30, 2002 included $21.3 million
of fuel surcharge revenue versus $50.0 million in 2001. Excluding this fuel
surcharge revenue, the decrease in revenues would have been less than 1%. This
decrease was primarily due to the tractors without drivers of 650 to start the
year dropping to 319 at the end of the third quarter and a slight decrease in
loaded rate per mile.
13
The Company's operating ratio (operating expenses expressed as a percentage
of operating revenue) for the first nine months of 2002 was 94.3% compared to
96.0% in the comparable period of 2001. The Company's operating ratio for the
nine months ended September 30, 2002 improved as a result of decreases in
certain components of operating expenses as a percentage of operating revenue as
discussed below. The Company's empty mile factor for linehaul operations was
14.26% and 15.12%, in the first nine months of 2002 and 2001, respectively.
Average loaded linehaul revenue per mile (excluding fuel surcharge) for the nine
months ended September 30, 2002 was $1.4113, compared to $1.4121 for the same
period in 2001.
Salaries, wages and employee benefits represented 37.3% of operating
revenue for the nine months ended September 30, 2002 compared with 37.0% for the
same period in 2001. This increase was due to an increase in workers'
compensation cost, offset by a reduction in certain administrative positions,
and an increase in the portion of Company drivers on the Swift pay scale versus
the higher M.S. Carriers pay scale.
Fuel as a percentage of operating revenue was 12.0% for the first nine
months of 2002, compared to 13.6% for the corresponding period in 2001. The
decrease was primarily due to actual fuel cost per gallon decreasing by
approximately 17 cents per gallon (12.7%) for the nine months ended September
30, 2002 versus the nine months ended September 30, 2001.
Purchased transportation as a percentage of operating revenue was 17.2% for
the nine months ended September 30, 2002 compared to 17.5% in 2001. The decrease
was primarily due to a reduction in the owner operator portion of the Company's
fleet.
Rental expense as a percentage of operating revenue was 4.1% for the first
nine months of 2002 versus 4.7% for the same period in 2001. When it is
economically advantageous to do so, the Company will purchase then sell tractors
that it currently leases by exercising the purchase option contained in the
lease. Gains on these activities are recorded as a reduction of rental expense.
The Company recorded gains of $1.4 million and $267,000 in the first nine months
of 2002 and 2001, respectively, from the sale of leased tractors.
Depreciation and amortization expense as a percentage of operating revenue
was 7.2% and 6.7% in the first nine months of 2002 and 2001, respectively. The
Company includes gains and losses from the sale of owned revenue equipment in
depreciation and amortization expense. During the nine month period ended
September 30, 2002, net gains from the sale of revenue equipment reduced
depreciation and amortization expense by approximately $5.3 million compared to
approximately $2.6 million in the first nine months of 2001. Exclusive of gains,
which reduced this expense, depreciation and amortization expense as a
percentage of operating revenue was 7.5% and 6.8% in the first nine months of
2002 and 2001, respectively. The increase in depreciation and amortization
expense as a percentage of operating revenue was a result of an increase in the
owned portion of the Company's fleet as well as a $3.1 million adjustment to
reduce the recorded value of the former corporate office building of M.S.
Carriers to its estimated fair value. The Company has relocated the majority of
employees from this building and expects to begin marketing this office building
for sale in the near future.
Insurance and claims expense represented 3.7% and 4.2% of operating revenue
in the first nine months of 2002 and 2001, respectively. These expenses
represent claims paid by the Company, reserves for claims within the Company's
self insured retention limits and the cost of premiums for insurance coverage.
Included in the second quarter of 2001 is an adjustment of approximately $7
million to the M.S. Carriers insurance and claims reserves.
Interest expense decreased to $18.0 million in first nine months of 2002
from $29.5 million in the same period in 2001. Interest expense for the first
nine months of 2002 and 2001 included a $5.9 million and $5.6 million expense,
14
respectively, for the increase in the market value of the interest rate
derivative agreements of M.S. Carriers. Excluding the impact of the interest
rate derivative agreements, interest expense would have decreased from $23.9
million to $12.1 million. The first nine months of 2002 benefited from lower
interest rates, a shift in borrowings from more costly M.S. Carriers debt to
less costly Swift debt, and decreased borrowings under long term debt and
capital lease obligations.
LIQUIDITY AND CAPITAL RESOURCES
The continued growth in the Company's business requires significant
investment in new revenue equipment, upgraded and expanded facilities, and
enhanced computer hardware and software. The funding for this expansion has been
from cash provided by operating activities, proceeds from the sale of revenue
equipment, long-term debt, borrowings on the Company's line of credit, proceeds
from the accounts receivable securitization, the use of operating leases to
finance the acquisition of revenue equipment and from periodic public offerings
of common stock.
Net cash provided by operating activities was $212.9 million in the first
nine months of 2002 compared to $148.1 million in 2001. The increase is
primarily attributable to an increase in net earnings, deferred income taxes,
and a smaller increase in accounts receivable, offset by an increase in deferred
legal fees. In addition, the third quarter of 2001 was negatively impacted by
the $10.5 million adjustment to recognize the impairment of the EASO investment.
Net cash used in investing activities increased to $188.7 million in the
first nine months of 2002 from $105.4 million in 2001. The increase is primarily
due to increased capital expenditures and issuance of notes receivables, offset
by increased proceeds from the sale of property and equipment.
As of September 30, 2002, the Company had commitments outstanding to
acquire replacement and additional revenue equipment for approximately $47.7
million. The Company has the option to cancel such commitments upon 60 days
notice. Based upon its cancellation rights, the Company exercised its right to
cancel truck orders scheduled for production in the fourth quarter of 2002,
which were equipped with the 2002 EPA engine. The Company will continue to
evaluate future purchases in 2003 after securing additional data regarding cost,
reliability, fuel economy and durability of its new EPA engine. The Company
expects to change from its current three year replacement cycle to a replacement
cycle of either four or five years. The Company believes it has the ability to
obtain debt and lease financing and generate sufficient cash flows from
operating activities to support these acquisitions of revenue equipment.
During the first nine months of 2002, the Company incurred approximately
$29.3 million of non-revenue equipment capital expenditures. These expenditures
were primarily for facilities and equipment.
The Company anticipates that it will expend approximately $5.8 million
during the remainder of the year for various facilities upgrades and acquisition
and development of terminal facilities. Factors such as costs and opportunities
for future terminal expansions may change the amount of such expenditures.
The funding for capital expenditures has been and is anticipated to
continue to be from a combination of cash provided by operating activities,
amounts available under the Company's line of credit, accounts receivable
securitization and debt and lease financing. The availability of capital for
revenue equipment and other capital expenditures will be affected by prevailing
market conditions and the Company's financial condition and results of
operations.
Net cash used in financing activities amounted to $17.6 million in the
first nine months of 2002 compared to $50.5 million in 2001. This decrease is
15
primarily due to reduced repayments of long-term debt and an increase in
proceeds from the accounts receivable securitization, offset by proceeds from
the Company's public stock offering in 2001 and purchases of treasury stock in
2002.
The Company expects to refinance its line of credit in the fourth quarter
of 2002.
Management believes it will be able to finance its needs for working
capital, facilities improvements and expansion, as well as anticipated fleet
growth, with cash flows from future operations, borrowings available under the
line of credit, accounts receivable securitization and with long-term debt and
operating lease financing believed to be available to finance revenue equipment
purchases. Over the long term, the Company will continue to have significant
capital requirements, which may require the Company to seek additional
borrowings or equity capital. The availability of debt financing or equity
capital will depend upon the Company's financial condition and results of
operations, as well as prevailing market conditions, the market price of the
Company's common stock and other factors over which the Company has little or no
control.
INFLATION
Inflation can be expected to have an impact on the Company's operating
costs. A prolonged period of inflation would cause interest rates, fuel, wages
and other costs to increase and would adversely affect the Company's results of
operations unless freight rates could be increased correspondingly. However, the
effect of inflation has been minimal over the past three years.
SEASONALITY
In the transportation industry, results of operations generally show a
seasonal pattern as customers reduce shipments after the winter holiday season.
The Company's operating expenses also tend to be higher in the winter months
primarily due to colder weather, which causes higher fuel consumption from
increased idle time.
16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has interest rate exposure arising from the Company's line of
credit, revolving notes, equipment loan, approximately $63 million of capital
lease obligations and accounts receivable securitization, all of which have
variable interest rates. These variable interest rates are impacted by changes
in short-term interest rates. The Company manages interest rate exposure through
its mix of variable rate debt, fixed rate lease financing and $70 million
notional amount of interest rate swaps. The fair value of the Company's
long-term debt approximates carrying values. Assuming the current level of
borrowings, a hypothetical one-percentage point increase in interest rates would
increase the Company's interest expense by $2.8 million.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Within the 90 days prior to the date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiaries) required to be
included in the Company's periodic SEC filings.
(b) Changes in internal controls.
There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect internal controls subsequent
to the date on which the Company carried out this evaluation.
17
SWIFT TRANSPORTATION CO., INC. & SUBSIDIARIES
PART II. OTHER INFORMATION
ITEMS 1, 2, 3, 4 AND 5. Not applicable
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 3.1 - Amended and Restated Articles of Incorporation of
the Registrant (Incorporated by reference to Annex
A of the Registrant's Notice and Proxy Statement
for its 2002 Annual Meeting of Stockholders filed
with the Securities and Exchange Commission on
April 30, 2002)
Exhibit 3.2 - Bylaws of the Registrant (Incorporated by
reference to Exhibit 3.2 of the Registrant's
Registration Statement No. 33-66034 on Form S-3)
Exhibit 10.19 - Offer of Employment Letter to Gary Enzor
Exhibit 99.1 - Private Securities Litigation Reform Act of 1995
Safe Harbor Compliance Statement for
Forward-Looking Statements
Exhibit 99.2 - Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 - Jerry Moyes
Exhibit 99.3 - Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 - Gary Enzor
(b) On August 13, 2002, the Company filed a Current Report on Form 8-K
regarding the sworn statements of its Chief Executive Officer and
Chief Financial Officer delivered to the Securities and Exchange
Commission pursuant to Order No. 4-460.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SWIFT TRANSPORTATION CO., INC.
Date: November 13, 2002 /s/ Jerry Moyes
----------------------------------------
(Signature)
Jerry Moyes
Chairman, President and CEO
Date: November 13, 2002 /s/ Gary Enzor
----------------------------------------
(Signature)
Gary Enzor
Chief Financial Officer
18
CERTIFICATIONS
I, Jerry Moyes, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Swift Transportation
Co., Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/ Jerry Moyes
----------------------------------------
Jerry Moyes
President and Chief Executive Officer
(Principal Executive Officer)
19
I, Gary Enzor, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Swift Transportation
Co., Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/ Gary Enzor
----------------------------------------
Gary Enzor
Chief Financial Officer
(Principal Financial Officer)
20