Business context and reporting period
This unaudited Form 10-Q covers the quarter and six months ended June 30, 2011. The filing identifies the registrant as Swift Transportation Company, a truckload carrier operating primarily in the United States and Mexico; it does not identify Knight-Swift Transportation Holdings Inc. as the registrant. Swift reported one operating segment and a fleet of approximately 16,900 tractors, 49,300 trailers, and 5,700 intermodal containers.
Financial performance and position
Amounts are in millions of dollars except per-share data, percentages, and operating indicators.
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Operating revenue | $850.5 | $736.2 | $1,609.4 | $1,391.0 |
| Operating income | $72.6 | $61.2 | $119.3 | $84.4 |
| Net income (loss) | $19.6 | $(23.1) | $22.8 | $(76.1) |
| Diluted EPS | $0.14 | $(0.38) | $0.16 | $(1.27) |
| Adjusted EBITDA (non-GAAP) | $131.7 | $116.3 | $236.5 | $206.6 |
| Adjusted EPS (non-GAAP) | $0.18 | $(0.08) | $0.24 | $(0.46) |
| Operating ratio | 91.5% | 91.7% | 92.6% | 93.9% |
| Adjusted operating ratio (non-GAAP) | 89.2% | 90.2% | 90.8% | 92.2% |
- Q2 operating revenue rose 15.5%; revenue excluding fuel surcharges increased 7.7% to $672.2 million. Six-month revenue excluding fuel surcharges was $1,293.2 million, up from $1,190.1 million.
- Q2 trucking revenue grew 9.2%, reflecting 4.3% more loaded miles and a 4.7% increase in average revenue per loaded mile excluding fuel surcharge. Weekly trucking revenue per tractor increased to $3,051 from $2,910.
- Fuel surcharges increased substantially with diesel prices, but net fuel expense as a share of revenue excluding surcharges worsened to 8.5% from 7.1% in Q2 and to 9.3% from 7.9% for the half-year.
- Six-month operating cash flow was $122.2 million, versus $33.3 million; investing cash use was $101.5 million, including $111.2 million of capital expenditures. Financing cash use was $23.6 million. Cash and cash equivalents declined $2.8 million to $44.7 million; restricted cash was $96.3 million.
- At June 30, total current assets were $594.6 million and current liabilities $335.5 million; reported working capital surplus was $259.1 million. Unrestricted liquidity, including available credit and receivables-facility capacity, was $357.7 million.
- Long-term debt and capital lease obligations totaled $1,688.5 million, including $55.7 million current and $1,632.7 million long-term. Separately, the balance sheet reported $176.0 million of receivables securitization. Total liabilities were $2,577.3 million; stockholders’ equity was $14.3 million, compared with a deficit of $83.2 million at year-end 2010.
Material changes versus prior period
- Net income improved from losses in 2010, with management attributing much of the comparison to the December 2010 IPO and refinancing: interest expense declined approximately $26 million in Q2 and $51 million for the six-month period; derivative interest expense declined approximately $14 million and $33 million, respectively.
- The 2011 over-allotment stock issuance raised $63.0 million net. The company used $60.0 million to reduce the first-lien term loan and $3.2 million to pay down the receivables facility. Class A shares outstanding increased from 73.3 million at year-end to 79.4 million at June 30.
- The company replaced its receivables facility in June. The new facility provides up to $275 million subject to eligible receivables and reserves; $176.0 million was drawn and $80.9 million remained available at quarter-end. Management cited increased capacity and lower borrowing cost than the prior facility.
- For comparison, 2010 six-month results included a $1.3 million trailer impairment and $7.4 million of incremental depreciation related to trailers scheduled for scrapping. No impairment was recorded in the first half of 2011.
Outlook, risks, contingencies, and unusual items
- Management expected approximately $130 million of net cash capital expenditures for the remainder of 2011 and described future capital needs as substantial. Outstanding commitments included $769.8 million for replacement tractors through 2013, $46.6 million for trailers, and $14.1 million for intermodal containers. Some tractor orders could be canceled with notice, but the cancellation window had lapsed for about 30% of remaining commitments.
- Management said expected cash flows, revolver capacity, receivables financing, and lease financing should fund near-term needs, while noting that longer-term funding could depend on additional borrowing, leases, equity, or asset sales. Fixed-charge coverage was 3.58:1.00; the notes’ specified threshold for additional indebtedness was 2.00:1.00. The company reported compliance with its debt covenants at June 30.
- The $400 million revolving line had no borrowings but $167.9 million of letters of credit outstanding, leaving $232.1 million available. The first-lien term loan carried a 6.00% rate; $500 million face value of second-priority notes carried 10.00% interest. In July, the company initiated a call of $11 million of floating-rate notes, scheduled to close August 15, 2011.
- In April, the company entered into $350 million of forward-starting interest-rate swaps effective January 2013. Management estimated that a one-percentage-point rate increase would add $1.9 million to annual interest payments, excluding the swaps’ future effect. Fuel surcharge billing lags fuel prices; incomplete or delayed recovery of fuel costs could pressure results.
- Management cited driver recruitment and compensation costs, maintenance and fleet age, seasonality and severe weather, fuel-price volatility, customer and freight demand, substantial equipment investment, and debt-service and covenant risks. It also warned that claims exposure through captive insurers and owner-operator classification issues could affect results.
- Claims and litigation include owner-operator and employee classification/pay disputes, driving-academy licensing suits, wage-and-hour class actions, and an environmental notice concerning the Portland Harbor Superfund site. Management stated that it did not expect these matters to have a material adverse effect, but outcomes and potential effects could not be determined. A Tennessee driving-academy class was certified in July 2011; the company sought reconsideration.
- Other items include $11.0 million of terminated-swap losses in accumulated other comprehensive income expected to be recognized in earnings within 12 months, approximately $5.3 million of unrecognized tax benefits, and an estimated $3.0 million of additional 2011 depreciation from revised useful lives for certain Qualcomm units.
- The filing provides no specific revenue or earnings guidance. Adjusted EBITDA, Adjusted EPS, and Adjusted Operating Ratio are company-defined non-GAAP measures and should be considered alongside GAAP results.
Important facts for investors to verify
- Confirm the issuer identity: the supplied filing is for Swift Transportation Company, not Knight-Swift Transportation Holdings Inc.
- Review the underlying filing and non-GAAP reconciliations, including the impact of fuel surcharges and refinancing-related interest and derivative expenses on comparisons.
- Assess the scale and financing of equipment commitments, capital spending, leases, restricted cash, and receivables-facility availability.
- Monitor fuel recovery timing, driver availability and costs, operating efficiency, debt covenants, and the company’s ability to maintain liquidity.
- Track subsequent developments in material class actions, claims reserves, tax examinations, and the July 2011 floating-rate note call.