Business context and reporting period
This unaudited Form 10-Q covers the three and six months ended June 30, 2014. The filing is for Swift Transportation Company, not Knight-Swift Transportation Holdings Inc.; the company name in the request metadata does not match the registrant named in this historical filing. Swift operated truckload, dedicated, refrigerated, intermodal, brokerage and related services, with approximately 18,600 tractors, 57,500 trailers and 8,700 intermodal containers at quarter-end.
Financial performance and position
Amounts below are in millions of dollars except per-share figures and percentages.
| Metric | Q2 2014 | Q2 2013 | H1 2014 | H1 2013 |
|---|---|---|---|---|
| Revenue | $1,075.9 | $1,029.1 | $2,084.3 | $2,010.7 |
| Operating income | $94.0 | $100.3 | $140.2 | $170.0 |
| Net income | $40.2 | $49.9 | $52.5 | $80.2 |
| Diluted EPS | $0.28 | $0.35 | $0.37 | $0.57 |
| Adjusted EBITDA (non-GAAP) | $155.0 | $163.6 | $263.5 | $299.6 |
| Adjusted operating ratio (non-GAAP) | 88.8% | 87.5% | 91.3% | 89.0% |
Revenue increased 4.5% in Q2 and 3.7% in H1, but operating income and net income declined in both comparisons. GAAP operating margin was approximately 8.7% in Q2 (9.7% prior year) and 6.7% in H1 (8.5% prior year). The company reported a $7.0 million Q2 and $9.9 million H1 loss on debt extinguishment. Lower interest expense partly offset weaker operating results; Q2 interest expense fell $3.3 million and H1 fell $6.4 million year over year.
Operating cash flow was $183.5 million in H1, down from $245.6 million. Investing cash outflow was $45.9 million and financing cash outflow $123.3 million. Capital expenditures were $135.1 million; cash and cash equivalents ended the period at $73.5 million. Working capital was $316.1 million.
At June 30, total debt and capital leases, including the accounts-receivable securitization, were $1,520.6 million, versus $1,602.8 million at year-end. Unrestricted liquidity was $323.7 million: $73.5 million cash, $244.2 million available on the revolving facility, and $6.0 million under the receivables facility. Restricted cash and investments totaled a further $78.5 million and are not included in unrestricted liquidity.
Material changes and operating trends
- Segment mix: Q2 Dedicated revenue rose 22.1%, while Truckload revenue fell 2.2% and Central Refrigerated revenue fell 3.9%. Intermodal revenue rose 10.9%, but the segment recorded a $0.5 million operating loss. Dedicated operating income declined to $21.1 million from $24.3 million; Central Refrigerated operating income declined to $3.7 million from $5.7 million.
- Cost pressure and utilization: Driver-market challenges, higher turnover and unseated trucks constrained Truckload and Central Refrigerated. Dedicated start-up costs, equipment costs, workers’ compensation, severe winter weather and Central’s February systems conversion also weighed on results. Purchased transportation net of fuel reimbursements rose to 28.6% of revenue excluding fuel surcharge in Q2 from 27.2%.
- Refinancing: On June 9, Swift replaced its prior credit agreement with a facility comprising a $450 million revolver, a $500 million delayed-draw term A loan and a $400 million term B loan. The filing cites lower borrowing spreads and increased financing flexibility. The company had $99 million drawn on the revolver and $106.8 million of letters of credit, leaving $244.2 million available.
- Debt reduction: Swift repurchased $39.2 million face value of its 10% senior second-priority notes during H1, paying above face value. It expected to use the remaining delayed-draw term A capacity to fund most of the redemption of the remaining notes on or before December 31, 2014.
Outlook, risks and unusual items
- Management expected net cash capital expenditures of approximately $120 million to $150 million for the remainder of 2014. Outstanding purchase commitments at June 30 included $196.7 million for replacement tractors through the rest of 2014 and 2015, and $132.4 million for trailers through the rest of 2014.
- Management said it was investing in driver pay and productivity to improve retention and utilization. These costs were expected to weigh on results in the second half of 2014, while anticipated benefits would accrue over time; management described goals for 2015 and beyond but provided no specific earnings guidance.
- Key risks include driver recruitment and retention, wage inflation, fuel-price changes and surcharge recovery timing, weather, equipment costs, customer demand, debt service and covenant compliance, and owner-operator classification. A 1 percentage-point interest-rate increase was estimated to raise annual interest expense by $6.6 million at then-current borrowings.
- Numerous employment, owner-operator and wage-related class or collective actions remained pending; management said it could not meaningfully estimate potential losses in certain cases. It did not expect the overall resolution of claims and litigation to materially harm financial condition based on information then available, but outcomes could materially affect a particular period. Environmental matters included estimated remediation of $0.3–$0.5 million for a 2013 incident and approximately $0.5 million estimated aggregate liability for other current and prior-year cleanup claims.
- Unusual items included debt-extinguishment losses of $7.0 million in Q2 and $9.9 million in H1, gains on equipment disposals of $8.3 million in Q2 and $11.5 million in H1, and a $6.1 million gain on real-property sales in H1 2013 that did not recur.
Important facts for investors to verify
- Confirm the registrant and security being analyzed: this filing names Swift Transportation Company, not Knight-Swift Transportation Holdings Inc.
- Review debt terms, covenant headroom, remaining delayed-draw availability, and the planned redemption of the 10% notes; the filing reports a fixed-charge coverage ratio above 4.00:1.00 at June 30.
- Track whether driver investments improve turnover, unseated-truck levels and productivity, and whether the expected second-half cost headwinds materialize.
- Monitor Dedicated start-up economics, Central Refrigerated integration, and whether Intermodal can return to profitability.
- Assess cash conversion and liquidity, particularly the decline in operating cash flow and the receivables facility’s limited $6.0 million remaining availability.
- Follow litigation developments and claims reserves; the filing does not provide a clear potential-loss estimate for several proceedings.