Swift Transportation Company — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; filed August 2, 2016. The supplied filing is for Swift Transportation Company, not Knight-Swift Transportation Holdings Inc.; verify the issuer and filing selection before relying on this summary.
Business context and results
Swift operated truckload, dedicated, refrigerated and intermodal transportation businesses, with 19,601 tractors, 62,290 trailers and 9,150 intermodal containers at quarter-end. Management described the freight environment as challenging, citing excess industry capacity, customer inventories and depressed shipping demand.
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Operating revenue | $1,011.9m | $1,059.4m | $1,979.7m | $2,074.5m |
| Revenue excluding fuel surcharge | $935.4m | $935.9m | $1,842.3m | $1,830.8m |
| Operating income | $74.2m | $98.5m | $126.7m | $173.5m |
| Net income | $42.9m | $51.0m | $74.8m | $88.8m |
| Diluted EPS | $0.32 | $0.35 | $0.55 | $0.62 |
| Operating ratio | 92.7% | 90.7% | 93.6% | 91.6% |
| Adjusted operating ratio (non-GAAP) | 91.6% | 89.1% | 92.7% | 90.1% |
| Adjusted EBITDA (non-GAAP) | $143.3m | $159.5m | $269.1m | $297.7m |
Fuel surcharge revenue fell to $76.4m in Q2 from $123.5m, and to $137.4m for the first half from $243.8m, largely reflecting lower fuel prices. Fuel expense also declined. Operating performance weakened despite nearly flat Q2 revenue excluding surcharges; for the first half, that revenue measure rose modestly while operating income and net income fell.
Financial position, cash flow and liquidity
- Cash and cash equivalents were $118.1m at June 30, 2016; restricted cash was $55.1m and restricted investments were $22.8m. Working capital was $293.1m.
- Six-month operating cash flow was $244.0m, versus $248.2m a year earlier. Investing activities provided $5.9m, compared with $136.2m used in 2015; capital expenditures were $69.0m versus $166.7m. Financing used $239.3m, including debt and lease repayments, revolver repayments and $90.0m of share repurchases.
- Management reported $548.7m of unrestricted liquidity, including $118.1m cash, $418.0m available under the revolver and $12.5m available under the receivables facility. Total liquidity including restricted cash and investments was $626.5m.
- Material debt and capital lease obligations were approximately $1.2bn: term loan $592.7m, receivables securitization $299.1m, capital leases $250.6m, revolver $85.0m and other debt. The company had $97.0m of letters of credit under the revolver. Debt agreements include leverage and interest-coverage covenants.
Material changes and management commentary
- Truckload revenue excluding fuel surcharges declined 2.4% in Q2 and 2.6% for the first half; segment operating income fell 25.7% and 30.5%, respectively. Management cited weaker volumes and pricing, and increased spot-market participation to balance freight flows.
- Dedicated was a relative strength: revenue excluding fuel surcharges rose 6.5% in Q2 and 9.2% for the half, with improved adjusted operating ratios.
- Refrigerated revenue excluding fuel surcharges declined 7.0% in Q2 and 6.1% for the half. Intermodal revenue excluding fuel surcharges declined 3.6% and 2.8%; the segment recorded a $2.0m operating loss for the first half. Swift eliminated its TOFC service in March 2016.
- Insurance and claims expense increased 8.5% in Q2 and 8.1% for the half, including unfavorable developments in owner-operator claims. Salaries and benefits also rose, reflecting wage increases and higher health costs. Lower debt balances and interest rates reduced interest expense.
- The company repurchased $90.0m of Class A shares in the first half; $90.0m remained authorized at June 30. The board had authorized up to $150.0m of repurchases in February 2016.
Outlook, risks and unusual items
- Management expected 2016 net cash capital expenditures of $170m–$200m and said available cash flows, leases, the receivables facility and revolver were expected to fund anticipated capital needs for at least 12 months. Revenue-equipment purchase commitments were approximately $323.2m for the remainder of 2016 and $190.9m for 2017.
- Management expected the remaining 2016 quarterly GAAP effective tax rate to be approximately 36.5% before discrete items. Q2’s 34.4% and first-half 32.5% rates benefited from tax credits and other discrete items.
- Risks include weak freight demand and pricing, driver recruitment, retention and compensation costs, fuel-price and surcharge timing, insurance and claims volatility, substantial capital needs and leverage, seasonal and severe-weather effects, and regulatory or owner-operator classification issues. A one-percentage-point increase in interest rates was estimated to raise annual interest expense by $9.8m.
- Legal matters include owner-operator and wage-and-hour litigation. The company recorded a $3.0m Q2 accrual following unsuccessful mediation in the Central owner-operator arbitration matter; management could not estimate a reasonably possible loss range above that accrual. An Arizona court of appeals reversed an order decertifying a class in the Garza case. Management said other case outcomes and potential impacts could not be determined.
- The filing describes pledges and variable prepaid forward transactions involving shares held by CEO Jerry Moyes and affiliates, creating potential conflicts and possible share-sale or trading-price effects. The board had waived certain margin-pledging limits through December 2016, subject to stated policy limits.
- Revenue accounting standard Topic 606 was expected to have a material impact, not yet quantifiable, upon planned adoption in 2018. Lease accounting changes were also expected to be material, with adoption planned for 2019.
Key investor verification points
- Confirm the issuer: this filing names Swift Transportation Company, despite the request metadata naming Knight-Swift Transportation Holdings Inc.
- Review current freight volumes, pricing, truck utilization and whether the challenging market conditions continued after June 30.
- Assess the adequacy of claims and litigation reserves, particularly the Central arbitration exposure and the reinstated Arizona class action.
- Check debt-covenant headroom, availability under the receivables facility and revolver, and funding needs for equipment commitments and capital spending.
- Verify the effect of share repurchases and Moyes-affiliate pledges/forward transactions on share count, governance and potential market supply.