Business Context and Reporting Period
Company: Swift Transportation Company (formerly Swift Corporation), the largest truckload carrier in North America.
Reporting Period: Three months ended March 31, 2011 (Q1 2011).
Operations: Operates a fleet of approximately 16,100 tractors (12,100 company-driven, 4,000 owner-operator) and 49,400 trailers across the U.S. and Mexico. The company operates as a single reportable segment.
Key Financial Metrics
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Operating Revenue | $758.9 million | $654.8 million |
| Operating Income | $46.7 million | $23.2 million |
| Net Income (Loss) | $3.2 million | ($53.0 million) |
| Diluted EPS | $0.02 | ($0.88) |
| Adjusted EBITDA | $104.7 million | $90.3 million |
| Operating Ratio | 93.8% | 96.5% |
| Adjusted Operating Ratio | 92.5% | 94.4% |
| Cash from Operations | $59.9 million | $15.1 million |
| Total Debt (Long-term + Current) | $1.69 billion | $1.77 billion |
| Unrestricted Liquidity | $312.3 million | $296.8 million |
Material Changes vs. Prior Period
- Profitability Turnaround: The company returned to profitability with $3.2 million in net income, compared to a $53.0 million loss in Q1 2010. This improvement was driven by a $25 million reduction in interest expense and a $19 million reduction in derivative interest expense following the December 2010 IPO and debt refinancing.
- Revenue Growth: Operating revenue increased 15.9% year-over-year. Trucking revenue grew 10.2% due to a 5.9% increase in loaded miles and a 4.0% increase in revenue per loaded mile. Fuel surcharge revenue surged 55.2% due to higher diesel prices (up 26.7%) and increased volume.
- Expense Management: The Operating Ratio improved by 270 basis points to 93.8%. Fuel expense increased $44.2 million due to price hikes, but net fuel expense as a percentage of revenue excluding fuel surcharge rose only slightly to 10.2%.
- Capital Structure: Total debt decreased due to the use of $60.0 million from the IPO over-allotment to pay down the first lien term loan. Interest expense dropped significantly from $62.6 million to $37.5 million.
Guidance, Outlook, and Risks
- Capital Expenditures: Management expects net cash capital expenditures of approximately $220 million to $240 million for the remainder of 2011. Outstanding purchase commitments for replacement tractors total $834.2 million through 2012.
- Liquidity: The company maintains $312.3 million in unrestricted liquidity, including $234.8 million available under its revolving credit facility and $56.0 million under its accounts receivable securitization facility.
- Debt Covenants: The company is in compliance with all debt covenants. The fixed charge coverage ratio stood at 3.47:1.00, well above the 2.00:1.00 minimum required to incur additional indebtedness.
- Risks and Contingencies:
- Legal Proceedings: Multiple class-action lawsuits are pending, including owner-operator misclassification claims (Sheer Complaint), driving academy CDL validity issues (Ham Complaint), and California employee wage claims (Burnell Complaint). Management believes these will not have a material adverse effect.
- Fuel Price Volatility: Rising fuel prices increase operating costs. While fuel surcharges mitigate this, a lag effect exists between price increases and surcharge collection.
- Driver Market: Tightening labor markets may increase hiring and wage expenses.
Investor Verification Checklist
- Debt Refinancing Impact: Verify the sustainability of the reduced interest expense following the December 2010 refinancing and the amortization of previous swap losses.
- Fuel Surcharge Lag: Monitor the "lag effect" on net fuel expense as diesel prices fluctuate, which can temporarily compress margins.
- Legal Exposure: Track the status of class certification in the owner-operator and driving academy litigation, as a certified class could increase liability exposure.
- Capital Expenditure Execution: Confirm the company's ability to fund the projected $220-$240 million in remaining 2011 capital expenditures without breaching debt covenants.
- Operating Ratio Trends: Assess whether the improved operating ratio (93.8%) can be maintained as fuel prices and driver wages potentially rise further.