Business context and reporting period
Swift Transportation Company’s unaudited Form 10-Q covers the quarter and nine months ended September 30, 2016, compared with the same 2015 periods. The company operated Truckload, Dedicated, Swift Refrigerated, and Intermodal segments. The filing is by Swift Transportation Company, the predecessor name; it does not report results under the Knight-Swift Transportation Holdings name.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Operating revenue | $1,013.2 million | $1,065.0 million | $2,992.9 million | $3,139.5 million |
| Revenue excluding fuel surcharge | $929.7 million | $955.0 million | $2,772.1 million | $2,785.7 million |
| Operating income | $39.9 million | $74.9 million | $166.5 million | $248.4 million |
| Net income | $24.0 million | $36.3 million | $98.8 million | $125.1 million |
| Diluted EPS | $0.18 | $0.25 | $0.73 | $0.87 |
| Operating ratio | 96.1% | 93.0% | 94.4% | 92.1% |
| Adjusted operating ratio (non-GAAP) | 94.5% | 91.7% | 93.3% | 90.7% |
| Adjusted EBITDA (non-GAAP) | $113.7 million | $148.5 million | $382.8 million | $446.2 million |
Operating cash flow for the nine months was $328.8 million, versus $357.2 million in 2015. Investing activities used $50.7 million, including $141.3 million of capital expenditures; financing activities used $314.4 million. Cash and cash equivalents were $71.3 million at September 30, excluding $59.5 million of restricted cash.
At September 30, total debt and capital lease obligations were approximately $1.2 billion: $592.8 million term loan, $50.0 million revolver, $299.2 million receivables securitization, $248.9 million capital leases, and $1.2 million other debt. Unrestricted liquidity was $530.6 million, including $453.0 million available under the revolver and $6.3 million under the receivables facility. Working capital was $231.7 million, down from $306.7 million at year-end 2015.
Material changes and segment trends
- Q3 revenue declined 4.9% and net income declined 33.8% year over year; nine-month revenue fell 4.7% and net income fell 21.0%. Lower fuel prices reduced fuel-surcharge revenue, while core revenue excluding surcharges also weakened.
- Truckload revenue excluding surcharges fell 4.1% in Q3 and 3.1% year to date, amid excess industry capacity, customer inventories, and soft demand. The company cited lower loaded miles and pricing pressure; increased spot-market activity supported network balance but pressured rates.
- Dedicated was the strongest segment: revenue excluding surcharges rose 8.9% in Q3 and 9.1% year to date, with improved pricing and freight mix. Q3 operating income increased to $30.3 million from $17.6 million.
- Swift Refrigerated deteriorated to a Q3 operating loss of $20.3 million, from $2.6 million of income, and a nine-month loss of $15.8 million, versus $13.5 million of income. Lower revenue and a $22 million legal reserve were key factors.
- Intermodal revenue excluding surcharges declined 5.8% in Q3 and 3.8% year to date; nine-month operating results shifted to a $1.6 million loss from $1.1 million of income. Swift discontinued its TOFC service in March 2016.
- The company reduced its fleet and emphasized utilization and cost controls. Average operational truck count was 17,480 in Q3, down from 18,061 a year earlier.
Outlook, risks, and unusual items
- Management described the 2016 freight environment as challenging, citing excess capacity, customer inventories, depressed shipping demand, and pricing pressure. It planned to monitor fleet size, pursue customer freight, control costs, and reduce spot-market participation when conditions allow.
- Management expected 2016 net cash capital expenditures of $125–$135 million. It expected equipment-sale gains to remain soft, in the range of $3–$4 million for Q4. Dedicated truck-count growth was expected in Q4, excluding approximately 20–30 trucks of seasonal surge support.
- Management expected a 2017 quarterly GAAP effective tax rate of 36.0%–37.5% before discrete items. It anticipated further 2016 federal domestic production deductions, but the amount was not specified.
- A change in estimated residual values for certain tractors increased depreciation by approximately $3.6 million in both Q3 and the nine-month period. The weak used-truck market also reduced gains on equipment disposals.
- The CEO retirement agreement generated a one-time Q3 expense of $7.1 million, including $6.8 million accrued consulting fees. Jerry Moyes was to retire as CEO effective December 31, 2016, and consult through 2019 for $0.2 million per month.
- In an owner-operator arbitration, a ruling dated October 26, 2016 found approximately 1,300 Central Refrigerated drivers had been misclassified; damages remained undecided. The company recorded a $22 million additional accrual as of September 30, following a $3 million accrual in Q2. The ultimate exposure remains uncertain.
- Other material risks include multiple driver wage, classification, and employment-related claims; variable-rate debt and fuel-price exposure; seasonal and severe-weather effects; and the substantial capital needs of the fleet. A one-percentage-point interest-rate increase was estimated to raise annual interest expense by $9.4 million.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether freight demand, pricing, and Truckload performance improve, and whether management reduces spot-market exposure as intended.
- The amount and timing of damages in the Central Refrigerated arbitration and the adequacy of the $25 million recorded accrual.
- Whether the Refrigerated segment can return to profitability after the legal reserve and ongoing market pressures.
- Liquidity, debt-covenant headroom, planned equipment commitments, and the funding mix for capital expenditures; the filing lists $365.2 million of revenue-equipment purchase commitments through 2017.
- How share repurchases and shares pledged or subject to variable prepaid forward contracts by Moyes affiliates affect capital allocation, governance, and potential share supply.
- The comparability limits of the company’s non-GAAP adjusted measures, which exclude selected items and are not substitutes for GAAP results.