Swift Transportation Company — FY2014 Form 10-K
Entity and period: The filing is for Swift Transportation Company, for the fiscal year ended December 31, 2014, with comparative results for 2013 and 2012. It is not a filing by Knight-Swift Transportation Holdings Inc.; investors should verify the company and filing identity. The filing includes fourth-quarter results, but its primary reporting period is the full fiscal year.
Financial results and key metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Operating revenue | $4.299 billion | $4.118 billion | +4.4% |
| Operating income | $370.1 million | $357.0 million | +3.7% |
| Net income | $161.2 million | $155.4 million | +3.7% |
| Diluted EPS | $1.12 | $1.09 | +$0.03 |
| Operating ratio | 91.4% | 91.3% | 0.1 percentage point higher |
| Adjusted EBITDA (non-GAAP) | $619.8 million | $615.2 million | +0.7% |
| Adjusted EPS (non-GAAP) | $1.38 | $1.23 | +12.2% |
Revenue excluding fuel surcharges rose 6.3% to $3.535 billion. Fuel surcharge revenue declined to $763.3 million from $791.5 million. The GAAP operating margin was approximately 8.6%, versus 8.7% in 2013; net margin was approximately 3.7% in both years. Non-GAAP measures are management-defined and should be considered alongside, not instead of, GAAP results.
Cash flow and liquidity: Operating cash flow was $395.8 million, down from $473.5 million. Capital expenditures were $306.0 million; operating cash flow less capital expenditures was approximately $89.8 million, compared with approximately $155.2 million in 2013. Year-end cash was $105.1 million, working capital surplus was $378.2 million, and reported unrestricted liquidity was $424.5 million, including $292.7 million available under the revolver and $26.7 million under the receivables facility. Restricted cash and investments totaled $70.1 million and were primarily held for insurance claims.
Debt: At year-end, the company reported $903.1 million of long-term debt excluding the revolver, $57.0 million drawn on the revolver, $334.0 million under its receivables securitization, and $201.0 million in capital lease obligations. During 2014 it refinanced its credit facilities and redeemed all $500 million face value of 10% Senior Notes, paying an average 105.58% of face value. The refinancing reduced borrowing costs, but contributed to a $39.9 million debt-extinguishment loss. Interest and derivative interest expense together declined to $86.6 million from $103.4 million.
Business and material changes
Swift operated truckload, dedicated, Central Refrigerated, and intermodal businesses. At year-end its fleet included 18,836 tractors, 61,652 trailers, and 9,150 intermodal containers; it covered 2.1 billion miles during 2014. The 2013 Central acquisition was accounted for as a common-control transaction, and comparative results were recast accordingly. Reporting segments were reorganized in 2014 following Central’s integration.
- Truckload: Operating income increased to $258.1 million from $226.0 million, and adjusted operating ratio improved to 86.1% from 87.7%. Better pricing, productivity, and fuel expense helped; lower fleet availability, winter weather, wages, and claims were offsets.
- Dedicated: Revenue grew 20.7% to $892.1 million as average tractors available rose 29.3%, but operating income fell 9.3% to $75.8 million. Higher wages, claims, customer start-up costs, and winter weather contributed to a weaker adjusted operating ratio of 89.8%, versus 86.1%.
- Central Refrigerated: Revenue declined 7.6% to $418.0 million and operating income fell 20.6% to $14.0 million. Lower loaded miles, driver-market challenges, weather, system conversion, and increased deadhead contributed to a 95.8% adjusted operating ratio.
- Intermodal: Revenue rose 6.8% to $401.6 million and operating income improved to $8.3 million from $5.6 million. Load count increased 7.4%; the company continued shifting away from less profitable trailer-on-flatcar traffic.
In the fourth quarter, revenue was $1.140 billion versus $1.075 billion, operating income was $132.5 million versus $102.6 million, net income was $58.5 million versus $45.3 million, and diluted EPS was $0.41 versus $0.32.
Outlook, risks, contingencies, and unusual items
- Management expected 2015 net cash capital expenditures of approximately $300 million to $350 million and said it expected to meet cash needs for at least the next 12 months using operating cash flow, credit availability, receivables financing, and leases. The filing gives no numerical revenue or earnings guidance.
- Management planned to shorten the average tractor trade-in cycle to approximately 36–48 months beginning in 2015, while continuing to assess the trade-off against capital and financing costs. It anticipated elevated Dedicated-segment insurance and claims expense in 2015 based on recent claims experience.
- Key risks include driver recruitment and retention, wage and equipment-cost inflation, fuel-price volatility and surcharge recovery lags, weather and seasonality, safety and insurance claims, customer concentration, substantial debt and covenant compliance, and changes in transportation, labor, and environmental regulation. Fuel surcharges offset much, but not all, fuel-cost exposure; the company generally did not use derivatives to hedge fuel.
- Litigation includes owner-operator classification and compensation matters and employee wage-and-hour class actions. Management stated that it could not meaningfully estimate possible losses in certain cases; it did not believe currently known proceedings would materially harm financial condition, though outcomes could affect individual-period results. The filing also describes a stockholder books-and-records demand concerning the related-party Central acquisition; no lawsuit had been filed as of the report.
- Other notable items: a $2.3 million software impairment, a $3.0 million gain on disposal of Central properties, and a lower-than-expected 35.7% effective tax rate, partly due to tax credits. The company disclosed related-party transactions and CEO Jerry Moyes’ control of approximately 54% of voting power through the dual-class structure. No goodwill impairment was identified.
KPMG issued an unqualified opinion on the consolidated financial statements and on internal control over financial reporting. Management also concluded disclosure controls were effective at year-end.
Investor verification priorities
- Confirm the issuer and period: this is Swift Transportation Company’s FY2014 10-K, not a Knight-Swift Transportation Holdings filing; review the requested Q4 figures against the full-year statements.
- Assess whether operating cash generation can sustain fleet investment: compare $395.8 million operating cash flow with $306.0 million of capital expenditures and the 2015 capex outlook.
- Review debt maturities, variable-rate exposure, receivables-facility availability, and covenant headroom after the 2014 refinancing; a 1-percentage-point rate increase was estimated to add $10.9 million of annual interest expense.
- Track Dedicated and Central Refrigerated margins, driver availability and compensation, and insurance and claims development.
- Evaluate the potential financial and governance implications of pending litigation, customer concentration (Wal-Mart was 11% of revenue), related-party dealings, and the CEO’s voting control.