Business context and reporting period
This is Swift Transportation Company’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2015. The filing identifies Swift Transportation Company as the registrant; it does not report under the later Knight-Swift name. Swift operated truckload, dedicated, refrigerated, intermodal, logistics and related services, with 20,836 tractors, 64,528 trailers and 9,150 intermodal containers at quarter-end.
Financial performance
Amounts below are in millions of dollars except per-share data and ratios.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Operating revenue | $1,065.0 | $1,074.9 | $3,139.5 | $3,159.2 |
| Revenue excluding fuel surcharge | $955.0 | $881.8 | $2,785.7 | $2,575.2 |
| Operating income | $74.9 | $97.4 | $248.4 | $237.6 |
| Net income | $36.3 | $50.2 | $125.1 | $102.7 |
| Diluted EPS | $0.25 | $0.35 | $0.87 | $0.72 |
| Operating ratio | 93.0% | 90.9% | 92.1% | 92.5% |
| Adjusted operating ratio, non-GAAP | 91.7% | 88.2% | 90.7% | 90.2% |
| Adjusted EBITDA, non-GAAP | $148.5 | $160.7 | $446.2 | $424.2 |
Q3 total revenue fell 0.9%, while revenue excluding fuel surcharge rose 8.3%; net income declined 27.7%. For the nine months, total revenue decreased 0.6%, but revenue excluding fuel surcharge increased 8.2% and net income rose 21.8%. Lower fuel surcharge revenue reflected lower fuel prices, while underlying revenue growth was supported by pricing and activity. Non-GAAP measures are management-defined and are not substitutes for GAAP results.
Cash flow, debt and liquidity
- Operating cash flow was $357.2 million for the first nine months, versus $292.8 million in 2014. Investing used $204.2 million, including $260.9 million of capital expenditures; financing used $204.4 million. Cash and cash equivalents declined $51.4 million to $53.7 million.
- At September 30, unrestricted liquidity was $433.1 million: $53.7 million cash, $304.5 million available on the $600 million revolver and $74.9 million available under the receivables securitization. Restricted cash and investments added $81.6 million but are principally held for captive-insurance claims.
- Reported working capital was $61.4 million, down from $378.2 million at year-end, primarily because $250 million of receivables securitization borrowings became current as maturity approached.
- Material debt obligations totaled approximately $1.4 billion, including $676.4 million term loan, $200 million revolver borrowings, $250 million receivables securitization and $295.6 million capital leases. The July refinancing replaced prior credit facilities; management expected approximately $7 million in annualized interest savings at current borrowing levels. The company reported covenant compliance at quarter-end.
- Variable-rate financing creates exposure: management estimated a one-percentage-point rate increase would add $11.3 million to annual interest expense at then-current borrowing levels.
Material changes and segment trends
- Q3 Truckload revenue excluding fuel surcharge rose 6.4%, but operating income fell 19.9%; adjusted operating ratio worsened to 88.4% from 84.5%. Driver pay, claims development and tractor processing costs weighed on results.
- Q3 Dedicated revenue excluding fuel surcharge rose 8.9%, while operating income fell 25.8%; adjusted operating ratio worsened to 91.8% from 88.0%, reflecting driver wages, claims and depreciation.
- Q3 Swift Refrigerated revenue excluding fuel surcharge was nearly flat (+0.5%) and operating income fell 19.0%. For the nine months, segment operating income increased 45.3%, with improved fuel efficiency and lower deadhead partly offsetting lost business from a large specialty account.
- Q3 Intermodal revenue excluding fuel surcharge increased 9.9%, but operating income fell 62.6% amid driver costs and relocation expenses. Nine-month operating income improved to $1.1 million from $0.5 million, but the segment remained near break-even.
- Insurance and claims expense rose $15.2 million in Q3 and $25.9 million year to date, due to adverse development of prior-year claims and higher severity; management also cited higher claim frequency related to severe weather in the year-to-date period.
- Interest expense fell substantially year over year following the November 2014 Senior Notes repayment. The Q3 results nevertheless included a $9.6 million refinancing loss, a $5.1 million class-action settlement charge, and $15.2 million higher insurance and claims expense. Year-to-date results also included a separate $6 million non-operating legal settlement and a $1.5 million impairment of a note receivable.
Outlook, risks and unusual items
- Management reduced expected 2015 net capital expenditures from $350–$375 million to $275–$300 million, following cancellation of approximately 450 tractor purchases/trades. It said it would not further grow the tractor fleet for the remainder of 2015 or in 2016; remaining purchases were intended to replace older tractors.
- The board authorized a potential $100 million share repurchase plan. Management stated expected cash flows, leases, the receivables facility and revolver should fund expected capital expenditures for at least the next 12 months, while noting longer-term capital needs could require additional financing.
- Management expected lower gains on equipment disposals in Q4 because of a softer used-truck market, estimating Q4 gains of $2.5–$4.5 million. It also anticipated continued pressure from driver wages and recruiting costs. No quantified earnings or revenue guidance was provided.
- Key risks include fuel-price and surcharge timing, driver recruitment and retention, owner-operator classification, safety and claims costs, weather and seasonality, used-equipment prices, customer concentration, competition, debt and covenant obligations, and significant capital requirements.
- Numerous employment, owner-operator, wage and other legal matters remained pending; management said certain potential losses could not be meaningfully estimated. It did not expect the matters, based on then-available information and reserves, to materially harm financial condition, though outcomes could materially affect an individual period.
- In October 2015, CEO Jerry Moyes disclosed that he had pledged additional company shares on margin in August and September, exceeding the applicable 15% family-holdings limit. The board required reduction to the limit by November 4, reprimanded him and imposed salary and bonus sanctions; it waived the scheduled 10% limit through December 2016 to permit an orderly reduction. A related-party variable prepaid forward transaction involving affiliates was also disclosed as a subsequent event.
- 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 operating performance improves as pricing offsets driver compensation, maintenance, depreciation and elevated claims costs, particularly in Truckload and Dedicated.
- Whether claims reserves and insurance expense stabilize, and whether reported safety improvements reduce future claim severity and frequency.
- Execution of the lower capital-spending and no-fleet-growth plan, including remaining tractor commitments, cancellation costs and realized used-truck sale proceeds.
- Refinancing of the receivables securitization facility before its July 2016 maturity, continued covenant compliance, and liquidity after restricted insurance collateral.
- Outcomes and potential financial exposure from pending litigation, including matters for which management could not estimate a loss range.
- Resolution of the CEO’s margin-pledge policy violation and any market or governance implications of related-party stock transactions.
- Actual results versus management’s stated 12-month funding expectations and the potential $100 million repurchase authorization.