Business context and reporting period
This is Swift Transportation Company’s unaudited Form 10-Q for the quarter and six months ended June 30, 2015. The filing identifies Swift Transportation Company—not Knight-Swift Transportation Holdings Inc.—as the registrant. Swift operated Truckload, Dedicated, Central Refrigerated and Intermodal segments, with 20,667 tractors at quarter-end.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Operating revenue | $1.059 billion | $1.076 billion | $2.075 billion | $2.084 billion |
| Revenue excluding fuel surcharge | $935.9 million | $876.3 million | $1.831 billion | $1.693 billion |
| Operating income | $98.5 million | $94.0 million | $173.5 million | $140.2 million |
| Net income | $51.0 million | $40.2 million | $88.8 million | $52.5 million |
| Diluted EPS | $0.35 | $0.28 | $0.62 | $0.37 |
| GAAP operating ratio | 90.7% | 91.3% | 91.6% | 93.3% |
| Adjusted operating ratio | 89.1% | 88.8% | 90.1% | 91.3% |
| Adjusted EBITDA | $159.5 million | $155.0 million | $297.7 million | $263.5 million |
Q2 total revenue declined 1.5%, while revenue excluding fuel surcharges rose about 6.8%; lower fuel surcharges reflected lower fuel prices. Net income increased about 27% in Q2 and 69% for the six months. Adjusted operating ratio worsened 30 basis points in Q2 but improved 120 basis points for the six-month period. Adjusted EBITDA and adjusted operating ratio are non-GAAP measures; the company cautions they are not substitutes for GAAP results.
Cash flow, debt and liquidity
- Six-month operating cash flow was $248.2 million, versus $183.5 million in 2014. Investing activities used $136.2 million, including $166.7 million in capital expenditures; financing activities used $163.5 million. Cash and cash equivalents ended June at $53.7 million, down from $105.1 million at year-end 2014.
- Unrestricted liquidity was $470.6 million: cash of $53.7 million, $349.7 million available under the revolver and $67.2 million available under the receivables securitization. An additional $82.6 million was restricted, primarily for insurance claims.
- Material debt obligations totaled about $1.4 billion, including term loans, $264.0 million of receivables securitization borrowings and $255.9 million of capital leases. Working capital surplus was $317.1 million.
- On July 27, 2015, after quarter-end, Swift refinanced its credit agreement with a $680 million term loan and a $600 million revolver, of which $200 million was drawn at closing. The company expected approximately $7 million in annualized interest savings at current borrowing levels; the facilities mature in July 2020.
Material changes and operating trends
- Truckload revenue excluding fuel surcharges increased 5.7% in Q2 and 6.0% for six months, supported by pricing. Q2 operating income declined 2.4%, with higher driver compensation and fleet-transition disruption weighing on results; six-month operating income increased 23%.
- Dedicated revenue excluding fuel surcharges increased 15.1% in Q2 and 19.6% for six months, driven by new customer contracts and fleet growth. Higher wages and insurance/claims costs pressured adjusted operating ratios.
- Central Refrigerated revenue excluding fuel surcharges fell 3.1% in both periods. Operating income increased as Swift exited an unprofitable specialty dedicated account and benefited from lower fuel costs and operational improvements.
- Intermodal revenue excluding fuel surcharges rose 5.0% in Q2 and 5.4% for six months. The segment returned to operating profitability, aided by higher loads, container turns and drayage efficiencies; lower-priced West Coast spot business and a shift in freight mix were offsets.
- Six-month interest expense fell $24.2 million year over year, mainly reflecting the November 2014 Senior Notes redemption, lower debt and more favorable financing terms.
Outlook, risks and unusual items
- Management expected 2015 net cash capital expenditures of $350–$375 million, with significant equipment spending beyond 2015. Revenue-equipment purchase commitments were $437.2 million for the remainder of 2015 and $380.5 million for 2016–2017; some tractor orders remained cancellable, but the cancellation window had lapsed for 36.1% of outstanding tractor commitments.
- Management believed cash flows, revolver and receivables-facility availability, and lease financing would cover expected needs for at least 12 months, while noting longer-term capital needs could require additional borrowing, leasing or equity financing. No specific earnings or revenue guidance is provided.
- Driver wage and owner-operator pay increases were implemented in August 2014 and May 2015 to support recruitment and retention; management said the near-term cost impact precedes customer pricing recovery and expected recruiting costs to continue rising.
- Q2 included a $6.0 million expense for settlement of a supplier contract dispute, paid after quarter-end. Six-month results also included a $1.5 million non-cash impairment of a note receivable from an independent contractor. A major Arizona owner-operator/employee class was decertified on July 14, 2015; other wage, classification and employment-related cases remained pending, with potential losses not clearly estimable in several matters.
- Key risks include driver availability and compensation, insurance and claims severity, fuel-price and surcharge timing, substantial equipment investment, variable-rate debt and covenant compliance, weather and seasonality, regulation, and litigation involving driver classification and wages. A 1 percentage-point rise in interest rates was estimated to increase annual interest expense by $9.6 million at then-current borrowings.
Important facts for investors to verify
- Confirm the intended issuer: this 2015 filing is for Swift Transportation Company; the filing text does not identify Knight-Swift Transportation Holdings Inc. as the registrant.
- Review the July 27 refinancing terms, actual borrowing costs and whether the anticipated annual interest savings are realized.
- Assess whether pricing and productivity gains can offset driver pay, recruiting, insurance and claims costs.
- Check cash generation and financing capacity against the stated capital-expenditure outlook and equipment commitments.
- Monitor developments in pending employment and owner-operator litigation, including any appeals following class decertification.