Business context and reporting period
This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2011, compared with the same 2010 periods. The filing registrant is Swift Transportation Company; the company name in the request metadata differs. Swift was a truckload transportation provider operating in the United States and Mexico, with intermodal, brokerage, logistics, and leasing activities. At quarter-end it operated approximately 16,100 tractors, 49,900 trailers, and 5,900 intermodal containers.
Financial and operating performance
- Revenue: Third-quarter operating revenue was $863.8 million, up 13.9%; nine-month revenue was $2.473 billion, up 15.1%. Revenue excluding fuel surcharges increased 6.5% and 7.9%, respectively.
- Profit: Third-quarter net income was $31.0 million ($0.22 diluted EPS), versus a $1.0 million loss ($0.02 per share) a year earlier. Nine-month net income was $53.7 million ($0.38 diluted EPS), versus a $77.1 million loss ($1.28 per share).
- Operating performance: Operating income was $89.7 million in Q3, up from $82.1 million; nine-month operating income was $209.0 million, up from $166.5 million. Operating margin was approximately 10.4% for Q3 (10.8% in 2010) and 8.4% for nine months (7.7% in 2010). Adjusted operating ratio improved to 87.0% from 87.3% for Q3, and to 89.5% from 90.5% for nine months. These adjusted measures are non-GAAP.
- Adjusted results: Adjusted EBITDA was $146.4 million for Q3 and $382.9 million for nine months, compared with $135.7 million and $342.3 million, respectively. Adjusted EPS was $0.25 for Q3 and $0.50 for nine months, versus $0.13 and $(0.32).
- Cash flow: Nine-month operating cash flow was $217.2 million, versus $114.1 million. Investing cash outflow was $103.1 million and financing cash outflow was $121.5 million. Cash capital expenditures were $168.0 million; cash and cash equivalents ended at $40.2 million.
- Liquidity: Working capital was $242.7 million. Unrestricted liquidity totaled $353.1 million, comprising $40.2 million cash, $233.3 million available on the revolver, and $79.6 million available under the receivables facility. An additional $74.6 million was restricted, primarily for insurance claims.
- Debt: At September 30, long-term debt was $1.434 billion and capital lease obligations were $153.9 million; accounts receivable securitization borrowings were another $180.0 million. The first-lien term loan carrying value was $925.1 million and senior secured notes were $491.0 million. The company made a $75 million voluntary term-loan prepayment in September; no scheduled term-loan principal payments remained before its December 2016 maturity. It reported compliance with debt covenants.
- Margins and operating metrics: Q3 trucking revenue rose 6.8%, reflecting 2.9% more loaded miles and a 3.8% increase in average revenue per loaded mile excluding fuel surcharge. Weekly trucking revenue per tractor rose to $3,054 from $2,949. Higher fuel costs pressured results: net fuel expense was 8.0% of revenue excluding fuel surcharge, up from 7.2% in Q3, and 8.9% for nine months, up from 7.6%.
Changes versus the prior comparable periods
- Revenue and trucking productivity grew, while the nine-month adjusted operating ratio improved. Q3 reported operating ratio edged higher, to 89.6% from 89.2%.
- Profitability improved substantially, with management attributing much of the year-over-year change to lower interest and derivative interest expense following the December 2010 IPO and refinancing. Interest expense declined $27.5 million in Q3 and $78.7 million for nine months; derivative interest expense declined $13.6 million and $46.9 million, respectively.
- Nine-month operating cash flow rose by $103.1 million. Management cited lower interest and tax payments, higher operating income, and reduced claims payments as key drivers.
- Fuel expense increased with diesel prices and miles driven, while fuel surcharges only partly offset the impact. The average DOE diesel index rose to $3.87 per gallon in Q3 2011 from $2.94, and to $3.83 for the nine-month period from $2.94.
- Share issuance under the IPO over-allotment option increased Class A shares by 6.05 million and generated approximately $63.0 million net proceeds; weighted-average shares were materially higher than in 2010, affecting per-share comparisons.
Outlook, risks, contingencies, and unusual items
- Outlook and capital needs: No specific earnings guidance was provided. The company expected net cash capital expenditures of $60 million to $70 million for the remainder of 2011. Equipment purchase commitments included $851.5 million for replacement tractors through 2013, $102.6 million for trailers, and $11.8 million for intermodal containers. Approximately 20% of remaining tractor commitments were beyond the stated 60-to-90-day cancellation window.
- Funding and interest-rate exposure: Management believed available cash flows, revolver capacity, receivables financing, and lease financing would meet expected needs for at least the next twelve months, but noted substantial longer-term capital requirements and dependence on financing availability. The $400 million revolver had $166.7 million in letters of credit outstanding. A one-percentage-point increase in interest rates was estimated to increase annual interest payments by $1.8 million, excluding swaps that begin in 2013.
- Operating risks: Fuel surcharge billing lags fuel-price changes, limiting recovery when prices rise. Management also cited driver recruitment and retention challenges, rising compensation and recruiting costs, equipment and maintenance costs, seasonal weather effects, customer demand and pricing, and significant ongoing capital requirements.
- Derivatives and other unusual items: Two forward-starting swaps with $350 million notional value were entered into in April 2011, effective January 2013. Their $8.8 million fair-value liability was recorded at quarter-end. Losses from swaps terminated in 2010 continue to be amortized into expense through August 2012. A $9.7 million vacant property near the Phoenix headquarters was classified as held for sale.
- Contingencies: The company reported multiple pending employment, owner-operator, and driver-training class actions, several involving class-certification disputes. It also described a potential environmental claim related to a former property at Portland Harbor. Management did not expect the matters discussed to have a material adverse effect, but stated final outcomes and impacts could not be determined.
- Controls and taxes: Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter. The federal tax examination for specified earlier years concluded; state examinations remained ongoing. Unrecognized tax benefits were approximately $3.0 million.
Important facts for investors to verify
- Confirm the registrant and corporate lineage: this 2011 filing is for Swift Transportation Company, despite the Knight-Swift metadata.
- Review the drivers of earnings improvement, particularly lower interest costs, fuel-surcharge recovery, and the large change in weighted-average shares.
- Assess total financing obligations and liquidity availability, including capital leases, securitization borrowings, restricted cash, letters of credit, and covenant terms.
- Track the substantial equipment purchase commitments, expected capital spending, and the ability to cancel or finance those commitments.
- Monitor diesel prices, surcharge timing and recovery, driver availability and compensation, and the effect of seasonal or adverse weather.
- Follow material developments in the pending class actions and environmental matter; the filing does not provide a clear quantified exposure for these proceedings.