Business context and reporting period
Swift Transportation Company’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2017. Swift provides truckload, dedicated, refrigerated and intermodal transportation, alongside logistics and related services. The filing predates the proposed combination with Knight Transportation; the combined company was expected to be named Knight-Swift Transportation Holdings Inc.
Financial performance
Amounts below are in millions of dollars, except per-share data and ratios.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Operating revenue | $993.1 | $1,011.9 | $1,956.9 | $1,979.7 |
| Revenue excluding fuel surcharge | $898.9 | $935.4 | $1,770.0 | $1,842.3 |
| Operating income | $52.2 | $74.2 | $67.7 | $126.7 |
| Net income | $26.3 | $42.9 | $31.5 | $74.8 |
| Diluted EPS | $0.20 | $0.32 | $0.23 | $0.55 |
| GAAP operating ratio | 94.7% | 92.7% | 96.5% | 93.6% |
| Adjusted operating ratio (non-GAAP) | 93.4% | 91.6% | 95.6% | 92.7% |
| Adjusted EBITDA (non-GAAP) | $125.0 | $143.3 | $216.4 | $269.1 |
Q2 revenue declined 1.9%, while revenue excluding fuel surcharge fell 3.9%; net income decreased 38.7%. For the first half, revenue excluding fuel surcharge fell 3.9% and net income fell 57.9%. The higher operating ratios indicate weaker operating efficiency. Adjusted measures exclude specified items and are not GAAP substitutes.
Cash flow, liquidity and debt
- First-half operating cash flow was $183.0 million, down from $244.0 million. Investing activities used $25.6 million, compared with $5.9 million provided in the prior-year period; capital expenditures were $86.9 million.
- Cash and cash equivalents were $42.9 million at June 30, versus $89.4 million at year-end 2016. Working capital surplus was $186.3 million, down from $246.0 million.
- Unrestricted liquidity was $565.0 million, including $510.6 million available under the revolver and $11.5 million under the receivables facility. The company also reported $59.0 million of restricted cash and $22.0 million of restricted investments, primarily held for captive-insurance claims.
- Material debt and capital lease obligations were approximately $0.9 billion: $448.8 million Term Loan A, $294.5 million receivables securitization, $188.8 million capital leases and $3.8 million other debt; revolver borrowings were zero. Reported leverage ratio was 1.86.
Material changes and management commentary
- Management attributed weaker results mainly to lower revenue excluding fuel surcharge, led by Truckload and non-reportable operations. Higher fuel prices lifted surcharge revenue but also increased fuel costs. The average DOE diesel index was $2.55 per gallon in Q2 versus $2.30, and $2.56 for the first half versus $2.18.
- Truckload Q2 revenue excluding fuel surcharge declined 7.2%, and segment operating income fell 42.0%. Dedicated revenue excluding fuel surcharge grew 6.4%, but operating income decreased. Refrigerated operating income declined 34.9%; first-half results included an $11.7 million increase in legal accruals. Intermodal operating income improved to $1.5 million in Q2 from $0.9 million.
- Insurance and claims expense increased $6.3 million in Q2 and $8.7 million for the first half, due to unfavorable development in current- and prior-year claims. Management also cited maintenance costs, driver-related costs, reduced gains on equipment disposals and a soft used-truck market.
- Cash from operations fell by $61.0 million year over year for the first half, reflecting lower operating income and $19.1 million more income-tax payments, partly offset by timing-related increases in payables and accrued liabilities. Cash used in financing included $94.4 million of debt and lease repayments and net repayments of $130.0 million on the revolver; the company also had $15.0 million of net borrowings under the receivables facility.
Outlook, contingencies and notable items
- The all-stock Knight merger was expected to close in Q3 2017, subject to shareholder and regulatory approvals. Each Swift share was to convert into 0.72 combined-company shares; Swift shareholders were expected to own approximately 54% of the combined company. Swift reported $7.3 million of merger transaction costs for the first half. The merger agreement provides for termination fees of up to $89.1 million payable by Swift or $75.3 million by Knight in specified circumstances, and possible expense reimbursement up to $10.0 million in certain failed-vote circumstances.
- Management expected 2017 net cash capital expenditures of $200–$250 million and a remaining-2017 GAAP effective tax rate of 36% before discrete items. The filing does not provide earnings or revenue guidance. Outstanding revenue-equipment purchase commitments were $276.0 million for the remainder of 2017, including $208.2 million of tractor commitments; most tractor orders were no longer cancellable without penalty.
- Management said expected cash flows and financing availability should fund expected capital expenditures for at least the next 12 months, while noting substantial ongoing capital needs and potential reliance on additional borrowing, leases, equity or asset sales. A one-percentage-point increase in interest rates was estimated to increase annual interest expense by $7.4 million. Fuel-surcharge recovery may lag fuel-price changes.
- Legal exposures include owner-operator classification and pay disputes, wage-and-hour cases, and lawsuits challenging the proposed merger. A tentative settlement in the Utah owner-operator matter was finalized subject to court approval; the filing reports a $36.7 million aggregate accrual for owner-operator matters. Merger-related shareholder suits were described as probable losses but not yet estimable. Management stated that some case outcomes cannot be estimated and that actual outcomes could materially affect results or liquidity in a particular period.
- Seasonality, severe weather, driver recruitment and retention, competition, customer demand, safety and regulation, insurance claims, leverage and merger execution were identified as risks. The company reported effective disclosure controls as of June 30, 2017.
Important facts for investors to verify
- Whether the Knight merger closed on the anticipated terms and timing, and the final transaction and integration costs, approvals and synergies.
- Whether weaker Truckload volumes, pricing and operating ratios improve, and whether growth in Dedicated and Intermodal can offset softness elsewhere.
- Developments in claims and litigation accruals, especially the owner-operator settlement and merger-related shareholder suits.
- Capital spending, equipment commitments, cash generation, debt reduction and availability under the revolver and receivables facility.
- Fuel-price recovery, insurance claims development and driver costs, which materially affect margins and cash flow.