Knight-Swift Transportation Holdings Inc. - FORM 10-Q - May 3, 2016

Attached files

file filename
EX-32.1 - EX 32.1 CEO AND CFO CERTIFICATION PURSUANT TO 18 USC, SEC 1350 - Knight-Swift Transportation Holdings Inc.swft-ex321x3312016.htm
EX-10.4 - FIRST AMENDMENT TO AMENDED AND RESTATED DEFERRED COMPENSATION PLAN - Knight-Swift Transportation Holdings Inc.swft-ex104x3312016.htm
EX-10.3 - SWIFT AMENDED AND RESTATED DEFERRED COMPENSATION PLAN - Knight-Swift Transportation Holdings Inc.swft-ex103x3312016.htm
EX-31.1 - EX 31.1 CEO CERTIFICATION PURSUANT TO EXCHANGE ACT RULE 13A-14(A) OR 15D-14(A) - Knight-Swift Transportation Holdings Inc.swft-ex311x3312016.htm
EX-10.1 - SECOND AMENDMENT TO SWIFT DEFERRED COMPENSATION PLAN - Knight-Swift Transportation Holdings Inc.swft-ex101x3312016.htm
EX-31.2 - EX 31.2 CFO CERTIFICATION PURSUANT TO EXCHANGE ACT RULE 13A-14(A) OR 15D-14 - Knight-Swift Transportation Holdings Inc.swft-ex312x3312016.htm
EX-10.2 - THIRD AMENDMENT TO SWIFT DEFERRED COMPENSATION PLAN - Knight-Swift Transportation Holdings Inc.swft-ex102x3312016.htm
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 _____________________________________________________________________
Form 10-Q
  _____________________________________________________________________

ý    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2016
OR
o    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number 001-35007
 _____________________________________________________________________
 Swift Transportation Company
(Exact name of registrant as specified in its charter)
    _____________________________________________________________________
Delaware
 
20-5589597
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
2200 South 75th Avenue
Phoenix, AZ 85043
(Address of principal executive offices and zip code)
(602) 269-9700
(Registrant’s telephone number, including area code)
 
N/A
(Former name, former address and former fiscal year, if changed since last report)
  ______________________________________________________________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
 
 
 
 
 
 
 
Large accelerated filer
 
ý
  
Accelerated filer
 
o
 
 
 
 
Non-accelerated filer
 
o (Do not check if a smaller reporting company)
  
Smaller reporting company
 
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No  ý 
The number of outstanding shares of the registrant’s Class A common stock as of April 26, 2016 was 84,103,251 and the number of outstanding shares of the registrant’s Class B common stock as of April 26, 2016 was 50,991,938.
 
 
 
 
 



SWIFT TRANSPORTATION COMPANY


QUARTERLY REPORT ON FORM 10-Q
 
 
TABLE OF CONTENTS
 
 
PART I FINANCIAL INFORMATION
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II OTHER INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


SWIFT TRANSPORTATION COMPANY

QUARTERLY REPORT ON FORM 10-Q
 
GLOSSARY OF TERMS
The following glossary provides definitions for certain acronyms and terms used in this Quarterly Report on Form 10-Q. These acronyms and terms are specific to our company, commonly used in our industry, or are otherwise frequently used throughout our document.
 
Term
 
Definition
Swift/the Company/Management/We/Us/Our
 
Unless otherwise indicated or the context otherwise requires, these terms represent Swift Transportation Company and its subsidiaries. Swift Transportation Company is the holding company for Swift Transportation Co., LLC (a Delaware limited liability company) and Interstate Equipment Leasing, LLC.
2007 Transactions
 
In April 2007, Jerry Moyes and his wife contributed their ownership of all of the issued and outstanding shares of IEL to Swift Corporation in exchange for additional Swift Corporation shares. In May 2007, the Moyes Affiliates, contributed their shares of Swift Transportation Co., Inc. common stock to Swift Corporation in exchange for additional Swift Corporation shares. Swift Corporation then completed its acquisition of Swift Transportation Co., Inc. through a merger on May 10, 2007, thereby acquiring the remaining outstanding shares of Swift Transportation Co., Inc. common stock. Upon completion of the 2007 Transactions, Swift Transportation Co., Inc. became a wholly-owned subsidiary of Swift Corporation. At the close of the market on May 10, 2007, the common stock of Swift Transportation Co, Inc. ceased trading on NASDAQ.
2013 RSA
 
Second Amended and Restated Receivables Sale Agreement, entered into in 2013 by SRCII, with unrelated financial entities, "The Purchasers," replaced by the 2015 RSA
2015 RSA
 
Third Amendment to Amended and Restated Receivables Sale Agreement, entered into in 2015 by SRCII, with unrelated financial entities, "The Purchasers"
2014 Agreement
 
The Company's Third Amended and Restated Credit Agreement, replaced by the 2015 Agreement
2015 Agreement
 
The Company's Fourth Amended and Restated Credit Agreement
AOCI
 
Accumulated Other Comprehensive Income (Loss)
ASC
 
Accounting Standards Codification
ASU
 
Accounting Standards Update
Board
 
Swift's Board of Directors
Central
 
Central Refrigerated Transportation, LLC (formerly Central Refrigerated Transportation, Inc.)
COFC
 
Container on Flat Car
CSA
 
Compliance Safety Accountability
Deadhead
 
Tractor movement without hauling freight (unpaid miles driven)
DLC
 
Deferred Loan Costs
DOE
 
United States Department of Energy
EBITDA
 
Earnings Before Interest, Taxes, Depreciation and Amortization
EPS
 
Earnings Per Share
FASB
 
Financial Accounting Standards Board
IEL
 
Interstate Equipment Leasing, LLC (formerly Interstate Equipment Leasing, Inc.)
IPO
 
Initial Public Offering
LIBOR
 
London InterBank Offered Rate
Moyes Affiliates
 
Jerry Moyes, The Jerry and Vickie Moyes Family Trust dated December 11, 1987, and various Moyes children’s trusts

3


SWIFT TRANSPORTATION COMPANY

GLOSSARY OF TERMS — CONTINUED
The following glossary provides definitions for certain acronyms and terms used in this Quarterly Report on Form 10-Q. These acronyms and terms are specific to our company, commonly used in our industry, or are otherwise frequently used throughout our document.
 
Term
 
Definition
NASDAQ
 
National Association of Securities Dealers Automated Quotations
New Revolver
 
Revolving line of credit under the 2015 Agreement
New Term Loan A
 
The Company's first lien term loan A under the 2015 Agreement
NLRB
 
National Labor Relations Board
OID
 
Original Issue Discount
Old Revolver
 
Revolving line of credit under the 2014 Agreement
Old Term Loan A
 
The Company's first lien term loan A under the 2014 Agreement
Revenue xFSR
 
Revenue, Excluding Fuel Surcharge Revenue
SEC
 
United States Securities and Exchange Commission
SRCII
 
Swift Receivables Company II, LLC
Swift Refrigerated
 
Swift Refrigerated Service, LLC (formerly Central Refrigerated Service, LLC)
The Purchasers
 
Unrelated financial entities in the 2013 RSA and 2015 RSA, which were accounts receivable securitization agreements entered into by SRCII
Term Loan B
 
The Company's first lien term loan B under the 2014 Agreement
TOFC
 
Trailer on Flat Car
US-GAAP (or GAAP)
 
United States Generally Accepted Accounting Principles

4

SWIFT TRANSPORTATION COMPANY

PART I FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 
March 31, 2016
 
December 31, 2015
 
(In thousands, except share data)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
142,724

 
$
107,590

Restricted cash
57,356

 
55,241

Restricted investments, held to maturity, amortized cost
23,171

 
23,215

Accounts receivable, net
408,769

 
422,421

Equipment sales receivable
6,710

 
—

Income tax refund receivable
3,553

 
11,664

Inventories and supplies
18,478

 
18,426

Assets held for sale
9,692

 
9,084

Prepaid taxes, licenses, insurance and other
48,034

 
48,149

Current portion of notes receivable
9,425

 
9,817

Total current assets
727,912

 
705,607

Property and equipment, at cost:
 
 
 
Revenue and service equipment
2,229,163

 
2,278,618

Land
131,693

 
131,693

Facilities and improvements
271,408

 
269,769

Furniture and office equipment
103,424

 
99,519

Total property and equipment
2,735,688

 
2,779,599

Less: accumulated depreciation and amortization
(1,152,843
)
 
(1,128,499
)
Net property and equipment
1,582,845

 
1,651,100

Other assets
24,573

 
26,585

Intangible assets, net
278,915

 
283,119

Goodwill
253,256

 
253,256

Total assets
$
2,867,501

 
$
2,919,667

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
118,605

 
$
121,827

Accrued liabilities
111,458

 
97,313

Current portion of claims accruals
75,850

 
84,429

Current portion of long-term debt
15,543

 
35,514

Current portion of capital lease obligations
53,294

 
59,794

Total current liabilities
374,750

 
398,877

Revolving line of credit
200,000

 
200,000

Long-term debt, less current portion
631,620

 
643,663

Capital lease obligations, less current portion
210,612

 
222,001

Claims accruals, less current portion
158,889

 
149,281

Deferred income taxes
459,437

 
463,832

Accounts receivable securitization
224,017

 
223,927

Other liabilities
1,239

 
959

Total liabilities
2,260,564

 
2,302,540

Commitments and Contingencies (Notes 8 and 9)

 

Stockholders’ equity:
 
 
 
Preferred stock, par value $0.01 per share; Authorized 10,000,000 shares; none issued
—

 
—

Class A common stock, par value $0.01 per share; Authorized 500,000,000 shares; 84,911,982 and 87,808,801 shares issued and outstanding as of March 31, 2016 and December 31, 2015, respectively
849

 
878

Class B common stock, par value $0.01 per share; Authorized 250,000,000 shares; 50,991,938 shares issued and outstanding as of March 31, 2016 and December 31, 2015
510

 
510

Additional paid-in capital
725,049

 
754,589

Accumulated deficit
(119,654
)
 
(139,033
)
Accumulated other comprehensive income
81

 
81

Noncontrolling interest
102

 
102

Total stockholders’ equity
606,937

 
617,127

Total liabilities and stockholders’ equity
$
2,867,501

 
$
2,919,667

See accompanying notes to consolidated financial statements.

5



SWIFT TRANSPORTATION COMPANY




CONSOLIDATED INCOME STATEMENTS
(UNAUDITED)
 
Three Months Ended March 31,
 
2016
 
2015
 
(In thousands, except per share data)
Operating revenue:
 
 
 
Revenue, excluding fuel surcharge revenue
$
906,913

 
$
894,864

Fuel surcharge revenue
60,910

 
120,280

Operating revenue
967,823

 
1,015,144

Operating expenses:
 
 
 
Salaries, wages and employee benefits
288,633

 
261,654

Operating supplies and expenses
90,215

 
94,204

Fuel
74,987

 
106,907

Purchased transportation
267,309

 
288,811

Rental expense
56,252

 
61,975

Insurance and claims
47,710

 
44,307

Depreciation and amortization of property and equipment
66,951

 
56,927

Amortization of intangibles
4,204

 
4,204

Gain on disposal of property and equipment
(6,326
)
 
(3,932
)
Communication and utilities
6,900

 
7,499

Operating taxes and licenses
18,505

 
17,588

Total operating expenses
915,340

 
940,144

Operating income
52,483

 
75,000

Other expenses (income):
 
 
 
Interest expense
8,594

 
10,388

Derivative interest expense
—

 
2,793

Interest income
(751
)
 
(587
)
Non-cash impairments of non-operating assets
—

 
1,480

Other income, net
(776
)
 
(605
)
Total other expenses (income), net
7,067

 
13,469

Income before income taxes
45,416

 
61,531

Income tax expense
13,511

 
23,691

Net income
$
31,905

 
$
37,840

Basic earnings per share
$
0.23

 
$
0.27

Diluted earnings per share
$
0.23

 
$
0.26

Shares used in per share calculations:
 
 
 
Basic
136,519

 
142,199

Diluted
137,655

 
143,955

See accompanying notes to consolidated financial statements.


6



SWIFT TRANSPORTATION COMPANY




CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
 
Three Months Ended March 31,
 
2016
 
2015
 
(In thousands)
Net income
$
31,905

 
$
37,840

Accumulated losses on derivatives reclassified to derivative interest expense
—

 
1,848

Other comprehensive income before income taxes
—

 
1,848

Income tax effect of items within other comprehensive income
—

 
(711
)
Other comprehensive income, net of income taxes
—

 
1,137

Total comprehensive income
$
31,905

 
$
38,977

See accompanying notes to consolidated financial statements.


7



SWIFT TRANSPORTATION COMPANY




CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
 
Class A
Common Stock
 
Class B
Common Stock
 
Additional
Paid-in Capital
 
Accumulated Deficit
 
Accumulated
Other
Comprehensive Income
 
Noncontrolling Interest
 
Total
Stockholders’ Equity
 
Shares
 
Par Value
 
Shares
 
Par Value
 
 
 
 
 
 
(In thousands, except share data)
Balances, December 31, 2015
87,808,801

 
$
878

 
50,991,938

 
$
510

 
$
754,589

 
$
(139,033
)
 
$
81

 
$
102

 
$
617,127

Common stock issued under stock plans
202,005

 
2

 


 


 
1,085

 


 


 


 
1,087

Stock-based compensation expense


 


 


 


 
1,417

 


 


 


 
1,417

Excess tax benefits from stock-based compensation


 


 


 


 
77

 


 


 


 
77

Shares issued under employee stock purchase plan
24,716

 
—

 


 


 
324

 


 


 


 
324

Repurchase and cancellation of Class A common stock
(3,123,540
)
 
(31
)
 
 
 
 
 
(32,443
)
 
(12,526
)
 
 
 
 
 
(45,000
)
Net income


 


 


 


 


 
31,905

 


 


 
31,905

Other comprehensive income, net of income taxes


 


 


 


 


 


 
—

 


 
—

Balances, March 31, 2016
84,911,982

 
$
849

 
50,991,938

 
$
510

 
$
725,049

 
$
(119,654
)
 
$
81

 
$
102

 
$
606,937

See accompanying notes to consolidated financial statements.


8



SWIFT TRANSPORTATION COMPANY




CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
Three Months Ended March 31,
 
2016
 
2015
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net income
$
31,905

 
$
37,840

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization of property, equipment and intangibles
71,155

 
61,131

Amortization of debt issuance costs, original issue discount, and losses on terminated swaps
351

 
2,606

Gain on disposal of property and equipment less write-off of totaled tractors
(5,763
)
 
(3,698
)
Impairments
—

 
1,480

Deferred income taxes
(4,473
)
 
(6,346
)
Provision for losses on accounts receivable
(1,233
)
 
1,913

Stock-based compensation expense
1,417

 
1,483

Excess tax benefits from stock-based compensation
(77
)
 
(1,172
)
Income effect of mark-to-market adjustment of interest rate swaps
—

 
(119
)
Increase (decrease) in cash resulting from changes in:
 
 
 
Accounts receivable
14,885

 
24,329

Inventories and supplies
(52
)
 
918

Prepaid expenses and other current assets
8,226

 
16,789

Other assets
2,332

 
1,450

Accounts payable, accrued and other liabilities
13,058

 
(10,447
)
Net cash provided by operating activities
131,731

 
128,157

Cash flows from investing activities:
 
 
 
Increase in restricted cash
(2,115
)
 
(16,071
)
Proceeds from maturities of investments
6,386

 
14,190

Purchases of investments
(6,429
)
 
(8,016
)
Proceeds from sale of property and equipment
34,271

 
13,370

Capital expenditures
(34,450
)
 
(62,006
)
Payments received on notes receivable
1,127

 
2,065

Expenditures on assets held for sale
(6,960
)
 
(2,313
)
Payments received on assets held for sale
5,620

 
1,815

Payments received on equipment sale receivables
—

 
352

Net cash used in investing activities
(2,550
)
 
(56,614
)
Cash flows from financing activities:
 
 
 
Repayment of long-term debt and capital leases
(50,535
)
 
(19,294
)
Proceeds from long-term debt
—

 
4,504

Net repayments on revolving line of credit
—

 
(57,000
)
Borrowings under accounts receivable securitization
—

 
10,000

Repayment of accounts receivable securitization
—

 
(50,000
)
Proceeds from common stock issued
1,411

 
2,679

Repurchase of Class A common stock
(45,000
)
 
—

Excess tax benefits from stock-based compensation
77

 
1,172

Net cash used in financing activities
(94,047
)
 
(107,939
)
Net increase (decrease) in cash and cash equivalents
35,134

 
(36,396
)
Cash and cash equivalents at beginning of period
107,590

 
105,132

Cash and cash equivalents at end of period
$
142,724

 
$
68,736


 See accompanying notes to consolidated financial statements.

9



SWIFT TRANSPORTATION COMPANY




CONSOLIDATED STATEMENTS OF CASH FLOWS — CONTINUED
(UNAUDITED)
 
Three Months Ended March 31,
 
2016
 
2015
 
(In thousands)
Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
8,081

 
$
13,912

Income taxes
944

 
1,507

Non-cash investing activities:
 
 
 
Equipment purchase accrual
$
593

 
$
59,814

Notes receivable from sale of assets
520

 
1,298

Equipment sales receivables
6,710

 
753

Non-cash financing activities:
 
 
 
Capital lease additions
$
—

 
$
9,988

See accompanying notes to consolidated financial statements.


10



SWIFT TRANSPORTATION COMPANY




Notes to Consolidated Financial Statements (Unaudited)
 
Note 1 — Introduction and Basis of Presentation
Certain acronyms and terms used throughout this Quarterly Report on Form 10-Q are specific to our company, commonly used in our industry, or are otherwise frequently used throughout our document. Definitions for these acronyms and terms are provided in the "Glossary of Terms," available in the front of this document.
Description of Business
Swift is a transportation solutions provider, headquartered in Phoenix, Arizona. As of March 31, 2016, the Company's fleet of revenue equipment included 19,858 tractors (comprised of 14,986 company tractors and 4,872 owner-operator tractors), 63,891 trailers and 9,150 intermodal containers. The Company’s four reportable segments are Truckload, Dedicated, Swift Refrigerated and Intermodal.
Seasonality
In the truckload industry, results of operations generally show a seasonal pattern. As customers ramp up for the year-end holiday season, the late third quarter and the fourth quarter have historically been the Company's strongest volume periods. As customers reduce shipments after the winter holiday season, the first quarter has historically been a lower volume quarter than the other three quarters. In recent years, the macro consumer buying patterns combined with shippers’ supply chain management, which historically contributed to the fourth quarter "peak" season, continued to evolve. As a result, the Company's fourth quarter 2015, 2014 and 2013 volumes were more evenly disbursed throughout the quarter rather than peaking early in the quarter. In the eastern and mid-western United States, and to a lesser extent in the western United States, the Company's equipment utilization typically declines and operating expenses generally increase during the winter season, as fuel efficiency declines from engine idling and severe weather tends to increase accident frequency, claims, and equipment repairs. The Company's revenue is directly related to shippers' available working days. As such, curtailed operations and vacation shutdowns around the holidays may affect the Company's revenue. From time to time, the Company also suffers short-term impacts from severe weather and similar events, such as tornadoes, hurricanes, blizzards, ice storms, floods, fires, earthquakes, and explosions that could add volatility to, or harm, the Company's results of operations.
Basis of Presentation
The consolidated financial statements and footnotes included in this Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements and footnotes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2015. The consolidated financial statements include the accounts of Swift Transportation Company and its wholly-owned subsidiaries. In management's opinion, these consolidated financial statements were prepared in accordance with GAAP and include all adjustments necessary for the fair presentation of the periods presented.
Change in Presentation
In April 2015, FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, which amended ASC Subtopic 835-30, Interest – Imputation of Interest. The amendments in this ASU simplify the presentation of debt issuance costs and align the presentation with debt discounts. Entities are required to present debt issuance costs within liabilities as a direct deduction from the face amount of the related debt, rather than as a deferred charge within assets. In August 2015, FASB issued ASU 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements – Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting (SEC Update), which also amended ASC Subtopic 835-30, Interest – Imputation of Interest. The SEC determined that ASU 2015-03 (discussed above) did not address costs related to line-of-credit arrangements. The amendments in ASU 2015-15 clarify that entities may defer and present debt issuance costs as an asset, and subsequently amortize the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The amendments in these ASUs require retrospective application, with related disclosures for a change in accounting principle. For public business entities, the amendments in these ASUs are effective for financial statements issued for fiscal years beginning after December 15, 2015, and the interim periods within those fiscal years, with early adoption permitted.

11



SWIFT TRANSPORTATION COMPANY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED
The Company adopted this guidance during the three months ended March 31, 2016. Accordingly, debt issuance costs, except for those associated with the Company’s New Revolver, are presented as direct deductions from the face amount of the related debt. The Company retrospectively adjusted the December 31, 2015 consolidated balance sheet to align with the current period presentation, as follows:
 
 
December 31, 2015
Financial Statement Caption
 
Unadjusted Consolidated Balance Sheet
 
Reclassification Adjustments
 
Adjusted Consolidated Balance Sheet
ASSETS:
 
 
 
 
 
 
Other assets
 
$
29,353

 
$
(2,768
)
 
$
26,585

LIABILITIES:
 
 
 
 
 
 
Current portion of long-term debt
 
$
35,582

 
$
(68
)
 
$
35,514

Long-term debt, less current portion
 
645,290

 
(1,627
)
 
643,663

Accounts receivable securitization
 
225,000

 
(1,073
)
 
223,927

 
Note 2 — Recently Issued Accounting Pronouncements
The following table presents accounting pronouncements recently issued by FASB, but not yet adopted by the Company.
Date Issued
 
Reference
 
Description
 
Expected Adoption Date and Method
 
Financial Statement Impact
April 2016
 
2016-10: Revenue from Contracts with Customers (Topic 606) – Identifying Performance Obligations and Licensing
 
The amendments in this ASU clarify the following two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. The amendments do not change the core principle of the guidance.
 
January 2018, Modified retrospective
 
Currently under evaluation; not yet quantifiable.
March 2016
 
2016-08: Revenue from Contracts with Customers (Topic 606) – Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
 
The amendments in this ASU are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations, but do not change the core principle of the guidance.
 
January 2018, Modified retrospective
 
Currently under evaluation; not yet quantifiable.
March 2016
 
2016-09: Compensation – Stock Compensation (Topic 718) – Improvements to Employee Share-based Payment Accounting
 
The amendments in this ASU are intended to simplify various aspects of accounting for stock-based compensation, including income tax consequences, classification of awards as equity or liability, as well as classification of activities within the statement of cash flows.
 
January 2017, Adoption method varies by amendment
 
Currently under evaluation; not yet quantifiable.
February 2016
 
2016-02: Leases (Topic 842)
 
The new standard requires lessees to recognize assets and liabilities arising from both operating and financing leases on the balance sheet. Lessor accounting for leases is largely unaffected by the new guidance.
 
January 2019, Modified retrospective
 
Currently under evaluation; not yet quantifiable.
January 2016
 
2016-01: Financial Instruments – Overall (Subtopic 825-10) – Recognition and Measurement of Financial Assets and Financial Liabilities
 
The amendments in this ASU address various aspects of recognition, measurement, presentation, and disclosure of financial instruments. They additionally establish ASC Topic 321 – Investments – Equity Securities, which applies to investments in equity securities and other ownership interests in an entity, including investments in partnerships, unincorporated joint ventures and limited liability companies.
 
January 2018, Modified retrospective
 
Not expected to be material.


12


SWIFT TRANSPORTATION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED



 
Note 3 — Restricted Investments
The following table presents the cost or amortized cost, gross unrealized gains and temporary losses, and estimated fair value of the Company’s restricted investments (in thousands):

March 31, 2016
 
 
 
Gross Unrealized
 
 
 
Cost or Amortized
Cost
 
Gains
 
Temporary
Losses
 
Estimated Fair Value
United States corporate securities
$
16,867

 
$
8

 
$
(3
)
 
$
16,872

Municipal bonds
4,879

 
—

 
(1
)
 
4,878

Negotiable certificate of deposits
1,425

 
—

 
—

 
1,425

Restricted investments, held to maturity
$
23,171

 
$
8

 
$
(4
)
 
$
23,175

 
 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
Gross Unrealized
 
 
 
Cost or Amortized
Cost
 
Gains
 
Temporary
Losses
 
Estimated Fair Value
United States corporate securities
$
16,686

 
$
2

 
$
(27
)
 
$
16,661

Municipal Bonds
4,904

 
1

 
(1
)
 
4,904

Negotiable certificate of deposits
1,625

 
—

 
—

 
1,625

Restricted investments, held to maturity
$
23,215

 
$
3

 
$
(28
)
 
$
23,190

Refer to Note 14 for additional information regarding fair value measurements of restricted investments.
As of March 31, 2016, the contractual maturities of the restricted investments were one year or less. There were 33 securities and 36 securities that were in an unrealized loss position for less than twelve months as of March 31, 2016 and December 31, 2015, respectively. The Company did not recognize any impairment losses for the three months ended March 31, 2016 or 2015.
 
Note 4 — Goodwill and Other Intangible Assets
There were no goodwill impairments recorded during the three months ended March 31, 2016 or 2015. Intangible asset balances were as follows (in thousands):
 
March 31,
2016
 
December 31,
2015
Customer Relationships:
 
 
 
Gross carrying value
$
275,324

 
$
275,324

Accumulated amortization
(177,446
)
 
(173,242
)
Customer relationships, net
97,878

 
102,082

Trade Name:
 
 
 
Gross carrying value
181,037

 
181,037

Intangible assets, net
$
278,915

 
$
283,119

The following table presents amortization of intangible assets related to the 2007 Transactions and intangible assets existing prior to the 2007 Transactions (in thousands):
 
Three Months Ended March 31,
 
2016
 
2015
Amortization of intangible assets related to the 2007 Transactions
$
3,912

 
$
3,912

Amortization related to intangible assets existing prior to the 2007 Transactions
292

 
292

Amortization of intangibles
$
4,204

 
$
4,204


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SWIFT TRANSPORTATION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED



 
Note 5 — Accounts Receivable Securitization
On December 10, 2015, SRCII, a wholly-owned subsidiary of the Company, entered into the 2015 RSA, which further amends the 2013 RSA. The parties to the 2015 RSA include SRCII as the seller, Swift Transportation Services, LLC as the servicer, the various conduit purchasers, the various related committed purchasers, the various purchaser agents, the various letters of credit participants, and PNC Bank, National Association as the issuing bank of letters of credit and as administrator. Pursuant to the 2015 RSA, the Company's receivable originator subsidiaries sell, on a revolving basis, undivided interests in all of their eligible accounts receivable to SRCII. In turn, SRCII sells a variable percentage ownership interest in the eligible accounts receivable to the various purchasers. The facility qualifies for treatment as a secured borrowing under ASC Topic 860, Transfers and Servicing. As such, outstanding amounts are classified as liabilities on the Company’s consolidated balance sheets.
As of March 31, 2016 and December 31, 2015, interest accrued on the aggregate principal balance at a rate of 1.0%. Program fees and unused commitment fees are recorded in interest expense in the Company's consolidated income statements. The Company incurred program fees of $0.9 million related to the 2015 RSA during the three months ended March 31, 2016, and $1.0 million related to the 2013 RSA, during the three months ended March 31, 2015.
The 2015 RSA is subject to customary fees and contains various customary affirmative and negative covenants, representations and warranties, and default and termination provisions. Collections on the underlying receivables by the Company are held for the benefit of SRCII and the Purchasers in the facility and are unavailable to satisfy claims of the Company and its subsidiaries.
 
Note 6 — Debt and Financing
Other than the Company’s accounts receivable securitization, as discussed in Note 5, and its outstanding capital lease obligations as discussed in Note 7, the Company's long-term debt consisted of the following (in thousands):
 
March 31,
2016
 
December 31,
2015
2015 Agreement: New Term Loan A, due July 2020, net of $1,063 and $1,695 DLC as of March 31, 2016 and December 31, 2015, respectively
$
638,687

 
$
668,055

Other
8,476

 
11,122

Long-term debt
647,163

 
679,177

Less: current portion of long-term debt, net of $3 and $68 DLC as of March 31, 2016 and December 31, 2015, respectively
(15,543
)
 
(35,514
)
Long-term debt, less current portion
$
631,620

 
$
643,663

 
March 31,
2016
 
December 31,
2015
Long-term debt
$
647,163

 
$
679,177

Revolving line of credit (1)
200,000

 
200,000

Long-term debt, including revolving line of credit
$
847,163

 
$
879,177

____________
(1)
The Company had outstanding letters of credit, primarily related to workers' compensation and self-insurance liabilities of $101.0 million and $95.0 million under the New Revolver at March 31, 2016 and December 31, 2015, respectively.

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SWIFT TRANSPORTATION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED



Credit Agreement
On July 27, 2015, the Company entered into the 2015 Agreement, which replaced the 2014 Agreement, including the $450.0 million Old Revolver (zero outstanding at closing), $500.0 million Old Term Loan A ($485.0 million outstanding at closing), and $400.0 million Term Loan B ($395.0 million outstanding at closing). The 2015 Agreement includes a New Revolver and a New Term Loan A. Upon closing, the $680.0 million in proceeds from the New Term Loan A, a $200.0 million draw on the New Revolver and $4.9 million cash on hand were used to pay off the then-outstanding balances of the Old Term Loan A and Term Loan B, including accrued interest and fees under the 2014 Agreement, as well as certain transactional fees associated with the 2015 Agreement.
The following table presents the key terms of the 2015 Agreement (dollars in thousands):
Description
 
New Term Loan A
 
New Revolver (2)
Maximum borrowing capacity
 
$680,000
 
$600,000
Final maturity date
 
July 27, 2020
 
July 27, 2020
Interest rate base
 
LIBOR
 
LIBOR
LIBOR floor
 
—%
 
—%
Interest rate minimum margin (1)
 
1.50%
 
1.50%
Interest rate maximum margin (1)
 
2.25%
 
2.25%
Minimum principal payment — amount (3)
 
$6,625
 
$—
Minimum principal payment — frequency
 
Quarterly
 
Once
Minimum principal payment — commencement date (3)
 
December 31,
2015
 
July 27,
2020
____________
(1)
The interest rate margin for the New Term Loan A and New Revolver is based on the Company's consolidated leverage ratio. As of March 31, 2016, interest accrued at 1.93% on the New Term Loan A and 1.94% on the New Revolver. As of December 31, 2015, interest accrued at 2.12% on the New Term Loan A and 2.08% on the New Revolver.
(2)
The commitment fee for the unused portion of the New Revolver is based on the Company's consolidated leverage ratio, and ranges from 0.25% to 0.35%. As of March 31, 2016, commitment fees on the unused portion of the New Revolver accrued at 0.25% and outstanding letter of credit fees accrued at 1.50%. As of December 31, 2015, commitment fees on the unused portion of the New Revolver accrued at 0.25% and outstanding letter of credit fees accrued at 1.75%.
(3)
Commencing in March 2017, the minimum quarterly payment amount on the New Term Loan A is $12.3 million, at which it remains until final maturity.
The New Revolver and New Term Loan A of the 2015 Agreement contain certain financial covenants with respect to a maximum leverage ratio and a minimum consolidated interest coverage ratio. The 2015 Agreement provides flexibility regarding the use of proceeds from asset sales, payment of dividends, stock buybacks, and equipment financing. In addition to the financial covenants, the 2015 Agreement includes customary events of default, including a change in control default and certain affirmative and negative covenants, including, but not limited to, restrictions, subject to certain exceptions, on incremental indebtedness, asset sales, certain restricted payments (including dividends and stock repurchases), certain incremental investments or advances, transactions with affiliates, engaging in additional business activities, and prepayments of certain other indebtedness.
Borrowings under the 2015 Agreement are secured by substantially all of the assets of the Company and are guaranteed by Swift Transportation Company, IEL, Swift Refrigerated and its subsidiaries, Swift Transportation Co., LLC and its domestic subsidiaries other than its captive insurance subsidiaries, driver academy subsidiary, and its bankruptcy-remote special purpose subsidiary.
Deferred Loan Costs
DLCs related to the New Revolver, reported in "Other assets" in the Company's consolidated balance sheets, were $1.9 million and $1.5 million as of March 31, 2016 and December 31, 2015, respectively. As discussed in Note 1, DLCs related to the Company's Term Loan A and accounts receivable securitization are now netted against the face amount of the debt, pursuant to the amendments in ASU 2015-03.

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SWIFT TRANSPORTATION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED



 
Note 7 — Leases
The Company finances a portion of its revenue equipment under capital and operating leases and certain terminals under operating leases.
Capital Leases (as Lessee)— The Company’s capital leases are typically structured with balloon payments at the end of the lease term equal to the residual value the Company is contracted to receive from certain equipment manufacturers upon sale or trade back to the manufacturers. If the Company does not receive proceeds of the contracted residual value from the manufacturer, the Company is still obligated to make the balloon payment at the end of the lease term. Certain leases contain renewal or fixed price purchase options. The present value of obligations under capital leases is included under "Current portion of capital lease obligations" and "Capital lease obligations, less current portion" in the consolidated balance sheets. As of March 31, 2016, the leases were collateralized by revenue equipment with a cost of $328.2 million and accumulated amortization of $80.9 million. As of December 31, 2015, the leases were collateralized by revenue equipment with a cost of $357.8 million and accumulated amortization of $90.1 million. Amortization of the equipment under capital leases is included in "Depreciation and amortization of property and equipment" in the Company’s consolidated income statements.
Operating Leases (as Lessee)— Rent expense related to operating leases was $56.3 million for the three months ended March 31, 2016 and $62.0 million for the three months ended March 31, 2015.
 
Note 8 — Purchase Commitments
As of March 31, 2016, the Company had commitments outstanding to acquire revenue equipment for the remainder of 2016 of approximately $550.5 million ($395.4 million of which were tractor commitments), in 2017 for approximately $204.7 million ($190.9 million of which were tractor commitments) and no purchase commitments for revenue equipment thereafter. The Company has the option to cancel tractor purchase orders with 60 to 90 days' notice prior to the scheduled production, although the notice period has lapsed for 30.1% of the tractor commitments outstanding as of March 31, 2016. These purchases are expected to be financed by the combination of operating leases, capital leases, debt, proceeds from sales of existing equipment, and cash flows from operations.
As of March 31, 2016, the Company had outstanding purchase commitments of approximately $13.1 million for non-revenue equipment and no purchase commitments for facilities. Factors such as costs and opportunities for future terminal expansions may change the amount of such expenditures.
 
Note 9 — Contingencies and Legal Proceedings
The Company is involved in certain claims and pending litigation primarily arising in the normal course of business. The majority of these claims relate to workers' compensation, auto collision and liability, and physical damage and cargo damage. The Company expenses legal fees as incurred and accrues for the uninsured portion of contingent losses from these and other pending claims when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Based on the knowledge of the facts and, in certain cases, advice of outside counsel, management believes the resolution of claims and pending litigation, taking into account existing reserves, will not have a material adverse effect on the Company. Moreover, the results of complex legal proceedings are difficult to predict and the Company’s view of these matters may change in the future as the litigation and events related thereto unfold.
For certain cases described below, management is unable to provide a meaningful estimate of the possible loss or range of loss because, among other reasons, (1) the proceedings are in various stages; (2) damages have not been sought; (3) damages are unsupported and/or exaggerated; (4) there is uncertainty as to the outcome of pending appeals; and/or (5) there are significant factual issues to be resolved.  For these cases, however, management does not believe, based on currently available information, that the outcomes of these proceedings will have a material adverse effect on our financial condition, though the outcomes could be material to our operating results for any particular period, depending, in part, upon the operating results for such period.
Arizona Owner-operator Class Action Litigation
On January 30, 2004, a class action lawsuit was filed by Leonel Garza on behalf of himself and all similarly-situated persons against Swift Transportation: Garza v. Swift Transportation Co., Inc., Case No. CV7-472 (the "Garza Complaint"). The putative class originally involved certain owner-operators who contracted with the Company under a 2001 Contractor Agreement that was in place for one year. The putative class is alleging that the Company should have reimbursed owner-operators for actual miles driven rather than the contracted and industry standard remuneration based upon dispatched miles. The trial court denied plaintiff’s petition for class certification. The plaintiff appealed and on August 6, 2008, the Arizona Court of Appeals issued an unpublished Memorandum Decision reversing the trial court’s denial of class certification and remanding the case back to the trial court. On November 14,

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SWIFT TRANSPORTATION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED



2008, the Company filed a petition for review to the Arizona Supreme Court regarding the issue of class certification as a consequence of the denial of the Motion for Reconsideration by the Court of Appeals. On March 17, 2009, the Arizona Supreme Court granted the Company’s petition for review, and on July 31, 2009, the Arizona Supreme Court vacated the decision of the Court of Appeals, opining that the Court of Appeals lacked automatic appellate jurisdiction to reverse the trial court’s original denial of class certification and remanded the matter back to the trial court for further evaluation and determination. Thereafter, the plaintiff renewed the motion for class certification and expanded it to include all persons who were employed by Swift as employee drivers or who contracted with Swift as owner-operators on or after January 30, 1998, in each case who were compensated by reference to miles driven. On November 4, 2010, the Maricopa County trial court entered an order certifying a class of owner-operators and expanding the class to include employees. Upon certification, the Company filed a motion to compel arbitration, as well as filing numerous motions in the trial court urging dismissal on several other grounds including, but not limited to the lack of an employee as a class representative, and because the named owner-operator class representative only contracted with the Company for a three-month period under a one-year contract that no longer exists. In addition to these trial court motions, the Company also filed a petition for special action with the Arizona Court of Appeals, arguing that the trial court erred in certifying the class because the trial court relied upon the Court of Appeals ruling that was previously overturned by the Arizona Supreme Court. On April 7, 2011, the Arizona Court of Appeals declined jurisdiction to hear this petition for special action and the Company filed a petition for review to the Arizona Supreme Court. On August 31, 2011, the Arizona Supreme Court declined to review the decision of the Arizona Court of Appeals. In April 2012, the trial court issued the following rulings with respect to certain motions filed by Swift: (1) denied Swift’s motion to compel arbitration; (2) denied Swift’s request to decertify the class; (3) granted Swift’s motion that there is no breach of contract; and (4) granted Swift’s motion to limit class size based on statute of limitations. On November 13, 2014, the court denied plaintiff's motion to add new class representatives for the employee class and therefore the employee class remains without a plaintiff class representative. On March 18, 2015, the court denied Swift's two motions for summary judgment (1) to dismiss any claims related to the employee class since there is no class representative; and (2) to dismiss plaintiff's claim of breach of a duty of good faith and fair dealing. On July 14, 2015, the court granted Swift's motion to decertify the entire class. On December 23, 2015, Plaintiff filed a Petition for Special Action with the Arizona Court of Appeals. That petition has been fully briefed and argued, and a decision is pending.
Ninth Circuit Owner-operator Misclassification Class Action Litigation
On December 22, 2009, a class action lawsuit was filed against Swift Transportation and IEL: Virginia VanDusen, John Doe 1 and Joseph Sheer, individually and on behalf of all other similarly-situated persons v. Swift Transportation Co., Inc., Interstate Equipment Leasing, Inc., Jerry Moyes, and Chad Killebrew, Case No. 9-CIV-10376 filed in the United States District Court for the Southern District of New York (the "Sheer Complaint"). The putative class involves owner-operators alleging that Swift Transportation misclassified owner-operators as independent contractors in violation of the federal Fair Labor Standards Act ("FLSA"), and various New York and California state laws and that such owner-operators should be considered employees. The lawsuit also raises certain related issues with respect to the lease agreements that certain owner-operators have entered into with IEL. At present, in addition to the named plaintiffs, approximately 450 other current or former owner-operators have joined this lawsuit. Upon Swift’s motion, the matter was transferred from the United States District Court for the Southern District of New York to the United States District Court in Arizona. On May 10, 2010, the plaintiffs filed a motion to conditionally certify an FLSA collective action and authorize notice to the potential class members. On September 23, 2010, plaintiffs filed a motion for a preliminary injunction seeking to enjoin Swift and IEL from collecting payments from plaintiffs who are in default under their lease agreements and related relief. On September 30, 2010, the district court granted Swift’s motion to compel arbitration and ordered that the class action be stayed, pending the outcome of arbitration. The district court further denied plaintiff’s motion for preliminary injunction and motion for conditional class certification. The district court also denied plaintiff’s request to arbitrate the matter as a class.
The plaintiff filed a petition for a writ of mandamus to the Ninth Circuit Court of Appeals asking that the district court’s September 30, 2010 order be vacated. On July 27, 2011, the Ninth Circuit Court of Appeals denied the plaintiff’s petition for writ of mandamus and thereafter the district court denied plaintiff’s motion for reconsideration and certified its September 30, 2010 order. The plaintiffs filed an interlocutory appeal to the Ninth Circuit Court of Appeals to overturn the district court’s September 30, 2010 order to compel arbitration, alleging that the agreement to arbitrate is exempt from arbitration under Section 1 of the Federal Arbitration Act ("FAA") because the class of plaintiffs allegedly consists of employees exempt from arbitration agreements. On November 6, 2013, the Ninth Circuit Court of Appeals reversed and remanded, stating its prior published decision, "expressly held that a district court must determine whether an agreement for arbitration is exempt from arbitration under Section 1 of the FAA as a threshold matter." As a consequence of this determination by the Ninth Circuit Court of Appeals being different from a decision of the Eighth Circuit Court of Appeals on a similar issue, on February 4, 2014, the Company filed a petition for writ of certiorari to the United States Supreme Court to address whether the district court or arbitrator should determine whether the contract is an employment contract exempt from Section 1 of the Federal Arbitration Act. On June 16, 2014, the United States Supreme Court denied the Company’s petition for writ of certiorari.

17


SWIFT TRANSPORTATION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED



The matter remains pending in the district court and dispositive motion briefing will be completed in August 2016. The Company also filed a writ of mandamus and appeal from the district court's order that effectively denied the Company's motion to compel arbitration. The Ninth Circuit held oral argument on November 16, 2015 and the parties await a decision from the Court. The Company intends to vigorously defend against any proceedings. The final disposition of this case and the impact of such final disposition cannot be determined at this time.
California Wage, Meal and Rest Driver Class Actions
On March 22, 2010, a class action lawsuit was filed by John Burnell, individually and on behalf of all other similarly-situated persons against Swift Transportation: John Burnell and all others similarly-situated v. Swift Transportation Co., Inc., filed in the Superior Court of California, County of San Bernardino (the "Burnell Complaint"). On September 3, 2010, upon motion by Swift, the matter was removed to the United States District Court for the Central District of California (the "California Court"), Case No. EDCV10-809-VAP. The putative class includes drivers who worked for Swift during the four years preceding the date of filing alleges that Swift failed to pay the California minimum wage, failed to provide proper meal and rest periods and failed to timely pay wages upon separation from employment. On April 9, 2013, the Company filed a motion for judgment on the pleadings, requesting dismissal of plaintiff's claims related to alleged meal and rest break violations under the California Labor Code alleging that such claims are preempted by the Federal Aviation Administration Authorization Act.
On April 5, 2012, the Company was served with an additional class action complaint, alleging facts similar to those as set forth in the Burnell Complaint: James R. Rudsell, on behalf of himself and all others similarly-situated v. Swift Transportation Co. of Arizona, LLC and Swift Transportation Company, in the Superior Court of California, County of San Bernardino (the "Rudsell Complaint"). On May 3, 2012, upon motion by Swift, the matter was removed to the California Court, Case No. EDCV12-00692-VAP. The Rudsell Complaint was stayed on April 29, 2013, pending a resolution of the Burnell Complaint.
On September 25, 2014, a class action lawsuit was filed by Lawrence Peck on behalf of himself and all other similarly-situated persons against Swift Transportation: Peck v. Swift Transportation Co. of Arizona, LLC in the Superior Court of California, County of Riverside (the "Peck Complaint"). The putative class, which includes current and former non-exempt employee truck drivers who performed services in California within the four-year statutory period, alleges that Swift failed to pay for all hours worked (specifically that pay-per-mile fails to compensate drivers for non-driving related services), failed to pay overtime, failed to properly reimburse work-related expenses, failed to timely pay wages and failed to provide accurate wage statements. On October 24, 2014, upon motion by Swift, the matter was removed to the California Court, Case No. 14-CV-02206-VAP. The Peck Complaint was stayed on April 6, 2015, pending a resolution of the earlier filed cases.
On February 27, 2015, Sadashiv Mares filed a complaint alleging five Causes of Action arising under California state law on behalf of himself and a putative class against Swift Transportation Co. of Arizona, LLC in the Superior Court of California, County of Alameda (the "Mares Complaint").  On July 13, 2015, upon motion by Swift, the matter was removed to the United States District Court for the Northern District of California, Case No. 2:15-CV-03253-JSW. Upon the Parties stipulation, on October 17, 2015, the case was transferred to the California Court, Case No. 2:15-CV-07920-VAP. The Mares Complaint was stayed on February 24, 2016, pending a resolution of the earlier filed cases.
On or about April 15, 2015, a complaint was filed in the Superior Court of California, County of San Bernardino: Rafael McKinsty et al. v. Swift Transportation Co. of Arizona, LLC, et al., (the "McKinsty Complaint").  The McKinsty Complaint, a purported class action, alleges violation of California rest break laws and is similar to the Burnell, Rudsell, Peck and Mares Complaints.  On July 2, 2015, upon motion by Swift, the matter was removed to the California Court, Case No. 15-CV-1317-VAP. The McKinsty Complaint was stayed on August 19, 2015, pending a resolution of the earlier filed cases.
On October 15, 2015, a class action lawsuit was filed in the Superior Court of California, County of Riverside: Thor Nilsen v. Swift Transportation Co. of Arizona, LLC (the "Nilsen Complaint"). The Nilsen Complaint alleges violations of California law similar to the Burnell, Rudsell, Peck, Mares, and McKinsty Complaints. On December 9, 2015, upon motion by Swift, the matter was removed to the California Court, Case No. 15-CV-02504-VAP. The Nilsen Complaint was stayed January 29, 2016, pending resolution of the earlier filed cases.
The issue of class certification must first be resolved before the California Court will address the merits of these cases, and the Company retains all of its defenses against liability and damages, pending a determination of class certification. Class certification briefing is now complete and a class certification hearing was scheduled for April 25, 2016. The class certification hearing was held as scheduled and the parties now await a final ruling from the California Court. The final disposition of these cases as well as the impact of such final dispositions of these cases cannot be determined at this time.

18


SWIFT TRANSPORTATION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED



California Wage, Meal and Rest Maintenance & Service Employees Class Action
On January 28, 2016, a class action lawsuit was filed by Grant Fritsch, individually and on behalf of all other similarly-situated persons against Swift Transportation Services, LLC and Swift Transportation Company in the Superior Court of California, County of San Bernardino (the "Fritsch Complaint"). Mr. Fritsch worked for Swift as a yard hostler and he purports to represent a class of “all non-exempt maintenance and service employees” of Swift Transportation Services, LLC and/or Swift Transportation Company. The Fritsch Complaint alleges that Swift failed to pay overtime and doubletime wages required by California law, failed to provide proper meal and rest periods, failed to provide accurate itemized wage statements, and failed to timely pay wages upon separation from employment. The Complaint also includes a claim under the Private Attorneys General Act. The Company is evaluating its options and will be preparing a Responsive pleading shortly. The Company retains all of its defenses against liability and damages. The Company intends to vigorously defend against the merits of these claims and to challenge certification. The final disposition of this case and the impact of such final disposition of this case cannot be determined at this time.
Arizona Fair Labor Standards Act Class Action Litigation
On December 29, 2015, a class action lawsuit was filed by Pamela Julian, individually and on behalf of all other similarly-situated persons against Swift Transportation, Inc., et al. in the United States District Court for the District of Delaware, Case No. 1:15-CV-01212-UNA (the "Julian Compliant"). The Julian Complaint alleges that Swift violated the FLSA by failing to pay its trainee drivers minimum wage for all work performed and by failing to pay overtime. On February 29, 2016, upon Stipulation of the Parties, the court transferred the case to the United States District Court for the District of Arizona, Case No. 2:16-CV-00576-ROS. On March 9, 2016, Swift filed a Motion to dismiss plaintiffs' overtime claims. That Motion is currently pending before the court. The Company retains all of its defenses against liability and damages. The Company intends to vigorously defend against the merits of these claims and to challenge certification. The final disposition of this case and the impact of such final disposition of this case cannot be determined at this time.
Washington Overtime Class Actions
On September 9, 2011, a class action lawsuit was filed by Troy Slack and several other drivers on behalf of themselves, and all similarly-situated persons, against Swift Transportation: Troy Slack, et al. v. Swift Transportation Co. of Arizona, LLC and Swift Transportation Corporation in the State Court of Washington, Pierce County (the "Slack Complaint"). The Slack Complaint was removed to federal court on October 12, 2011, case number 11-2-114380. The putative class includes all current and former Washington state-based employee drivers during the three-year statutory period prior to the filing of the lawsuit, and through the present, and alleges that they were not paid minimum wage and overtime in accordance with Washington state law and that they suffered unlawful deductions from wages. On November 23, 2013, the court entered an order on plaintiffs' motion to certify the class. The court only certified the class as it pertains to "dedicated" drivers and did not certify any other class, including any class related to over-the-road drivers. On September 2, 2015, new counsel was appointed for Plaintiffs and on November 16, 2015, new legal counsel was substituted for the Company. As a result of the substitution of counsel for both parties, the court has extended all existing dates by ten months. On April 1, 2016, the Court entered an Order Approving the Plaintiffs' proposed class notice. The matter is now in discovery. The Company retains all of its defenses against liability and damages. The Company intends to vigorously defend against the merits of these claims and to challenge certification. The final disposition of this case and the impact of such final disposition of this case cannot be determined at this time.
On January 14, 2016, a class action lawsuit was filed by Julie Hedglin, individually and on behalf of all others similarly situated against Swift Transportation Co. of Arizona, LLC in the State Court of Washington, Pierce County (the “Hedglin Complaint”). The Hedglin Complaint was removed to federal court on February 18, 2016, 3:16-CV-05127-RJB. The putative class includes all current and former Washington heavy haul drivers and alleges the class was not paid for meal and rest periods, overtime, was not paid all wages due at established pay periods, and was not provided accurate wage statements. The matter is in its initial phases and is expected to move into discovery. The Company retains all of its defenses against liability and damages. The Company intends to vigorously defend against the merits of these claims and to challenge certification. The final disposition of this case and the impact of such final disposition of this case cannot be determined at this time.
Indiana Fair Credit Reporting Act Class Action Litigation
On March 18, 2015, a class action lawsuit was filed by Melvin Banks, individually and on behalf of all other similarly-situated persons against Central Refrigerated Service, Inc. in the United States District Court for the Northern District of Indiana, Case No. 2:15-CV-00105. The complaint alleges that Central Refrigerated Service, Inc. violated the Fair Credit Reporting Act by failing to provide job applicants with adverse action notices and copies of their consumer reports and statements of rights. At this time, the size of the potential class is unknown. Initial discovery regarding the potential class has begun and the Company has sought to transfer the case from Indiana to Utah. The Company retains all of its defenses against liability and damages. The Company intends to vigorously defend against the merits of these claims and to challenge certification. The final disposition of this case and the impact of such final disposition of this case cannot be determined at this time.

19


SWIFT TRANSPORTATION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED



Utah Collective and Individual Arbitration
On June 1, 2012, Gabriel Cilluffo, Kevin Shire and Bryan Ratterree filed a putative class and collective action lawsuit against Central Refrigerated Service, Inc., Central Leasing, Inc., Jon Isaacson, and Jerry Moyes (collectively referred to herein as the "Central Parties"), Case No. ED CV 12-00886 in the United States District Court for the Central District of California. Through this action, the plaintiffs alleged that the Central Parties misclassified owner-operator drivers as independent contractors and were therefore liable to these drivers for minimum wages and other employee benefits under the FLSA. The complaint also alleged a federal forced labor claim under 18 U.S.C. § 1589 and 1595, as well as fraud and other state-law claims.
Pursuant to the plaintiffs' owner-operator agreements, the district court issued an Order compelling arbitration and directed that the plaintiffs' causes of action under the FLSA should proceed to collective arbitration, while their forced labor, fraud and state law claims would proceed as separate individual arbitrations. A collective arbitration was subsequently initiated with the American Arbitration Association ("AAA"). Notice of the collective arbitration was sent to more than 3,000 owner-operators who worked for Central Refrigerated Service, Inc. and leased a vehicle from Central Leasing, Inc. on or after June 1, 2009. The parties are currently conducting discovery. No trial date has been set by the arbitrator.
In addition to the collective arbitration that is pending before the AAA, the three named plaintiffs, along with approximately 400 other owner-operators, have initiated a series of individual, bilateral proceedings against the Central Parties with the AAA. Discovery is commencing in these individual cases, which are pending before approximately 30 separate arbitrators. Actual trial dates have not yet been set by the arbitrators, but the trials are expected to commence in the fourth quarter of 2016.
Upon the acquisition of Central Refrigerated Service, Inc. by Swift Transportation Company, the plaintiffs in both the collective and individual actions were allowed to amend their complaints in June 2015 to include Swift Transportation Company as a defendant. The Company and the Central Parties intend to vigorously defend against the merits of plaintiffs' claims in both the collective and individual arbitration proceedings. The final disposition of this case and the impact cannot be determined at this time.
California Class and Collective Action for Pre-employment Physical Testing
On October 6, 2014 Robin Anderson filed a putative class and collective action against Central Refrigerated Service, Inc. Case No. 5:14-CV 02062 in the United States District Court for the Central District of California (the "Anderson Complaint"). In this action, plaintiff alleges that pre-employment tests of physical strength administered by a third party on behalf of Central Refrigerated Service, Inc. had an unlawfully discriminatory impact on female applicants and applicants over the age of 40. The suit seeks damages under Title VII of the Civil Rights Act of 1964, the Age Discrimination Act, and parallel California state law provisions, including the California Fair Employment and Housing Act.
Upon the acquisition of Central Refrigerated Service, Inc. by Swift Transportation Company, Plaintiff was allowed to amend her complaint in October 2015 to include Swift Transportation Company and Workwell Systems, Inc. as additional defendants. Workwell Systems, Inc. is the company that provided the physical testing service used by Central Refrigerated Service, Inc. The litigation is still at a very preliminary stage and plaintiff has not yet effected service on the newly added defendants. Discovery has not yet commenced in the case and no trial date has been set. There is not currently any information available regarding the number of potential members of the putative class or collective actions.
Central Refrigerated Service, Inc. and Swift intend to vigorously defend against the merits of plaintiff’s claims. The final disposition of this case and the impact cannot be determined at this time.
Demand for Inspection of Books and Records
In February 2016, the Company received several shareholder demands, requesting to inspect the Company’s books and records, pursuant to Section 220 of the Delaware General Corporation Law.  The demands relate to the shareholders’ alleged investigation pertaining to whether the Board and Jerry Moyes have breached their fiduciary duties with respect to matters that have been publicly disclosed concerning the Company's securities trading policy, limitations on the pledging of Company stock on margin and share repurchases. The Company is in the process of responding to the shareholders’ requests. Any future disposition or resolution of these matters cannot be determined at this time.
Environmental
The Company's tractors and trailers are involved in motor vehicle accidents, experience damage, mechanical failures and cargo issues as an incidental part of its normal ordinary course of operations.  From time to time, these matters result in the discharge of diesel fuel, motor oil or other hazardous materials into the environment.  Depending on local regulations and who is determined to be at fault, the Company is sometimes responsible for the clean-up costs associated with these discharges.  As of March 31, 2016, the Company's estimate for its total legal liability for all such clean-up and remediation costs was approximately $0.1 million in the aggregate for all current and prior year claims. 

20


SWIFT TRANSPORTATION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED



 
Note 10 — Derivative Financial Instruments
The final settlement of the Company's interest rate swaps occurred in July 2015. The following table presents pre-tax losses from changes in fair value of the Company's interest rate swaps, included in earnings (in thousands):
 
 
Three Months Ended March 31,
 
 
2016
 
2015
Loss reclassified from AOCI into net income from cash flow hedges (effective portion)
 
$
—

 
$
1,848

Loss recognized in income from de-designated derivative contracts
 
—

 
945

Derivative interest expense
 
$
—

 
$
2,793

Losses (benefits) on cash flow hedging, reclassified out of AOCI into the consolidated income statements were as follows (in thousands):
 
 
 
Three Months Ended March 31,
 
Reclassified to:
 
2016
 
2015
Interest rate swaps
Derivative interest expense
 
$
—

 
$
1,848

Income tax benefit
Income tax expense
 
—

 
(711
)
 
Net income
 
$
—

 
$
1,137

Activities related to AOCI, net of tax, are presented in the consolidated statement of stockholders' equity, and primarily pertain to derivative financial instruments. The tax effects are presented in the consolidated statements of comprehensive income.
Activities related to foreign currency transactions were immaterial for the three months ended March 31, 2016 and 2015.
 
Note 11 — Share Repurchase Programs
The following table presents our repurchases of our Class A common stock under the respective share repurchase programs, net of advisory fees (in thousands):
 
 
 
 
Three Months Ended March 31,
 
As of
Share Repurchase Programs
 
2016
 
March 31, 2016
Authorized Amount
 
Board Approval Date
 
Shares
 
Amount
 
Amount Remaining
$100,000
 
September 24, 2015
 
2,221

 
$
30,000

 
$
—

$150,000
 
February 22, 2016
 
903

 
$
15,000

 
$
135,000

 
 
 
 
3,124

 
$
45,000

 
$
135,000

No share repurchases were made during the three months ended March 31, 2015.


21


SWIFT TRANSPORTATION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED



 
Note 12 — Weighted Average Shares Outstanding
The following table reconciles basic weighted average shares outstanding to diluted weighted average shares outstanding (in thousands):
 
Three Months Ended March 31,
 
2016
 
2015
Basic weighted average common shares outstanding
136,519

 
142,199

Dilutive effect of stock options
1,136

 
1,756

Diluted weighted average common shares outstanding
137,655

 
143,955

Anti-dilutive shares excluded from the dilutive-effect calculation (1)
452

 
—

____________
(1)
Shares were excluded from the dilutive-effect calculation because the outstanding options' exercise prices were greater than the average market price of the Company's common shares during the period.
 
Note 13 — Income Taxes
Effective Tax Rate — The effective tax rate for the three months ended March 31, 2016 was 29.8%, which was lower than management's expectation of 38.0%, primarily due to certain income tax credits in our foreign subsidiary and a reduction in our uncertain tax position reserve realized as discrete items in the quarter. The effective tax rate for the three months ended March 31, 2015 was 38.5%, as expected.
Interest and Penalties — Accrued interest and penalties included in income tax expense as of March 31, 2016 and December 31, 2015 were approximately $0.4 million and $1.4 million, respectively. The Company does not anticipate a decrease of unrecognized tax benefits during the next twelve months.
Tax Examinations — Certain of the Company’s subsidiaries are currently under examination by the Internal Revenue Service and various state jurisdictions for tax years ranging from 2010 through 2013. At the completion of these examinations, management does not expect any adjustments that would have a material impact on the Company’s effective tax rate. Years subsequent to 2011 remain subject to examination.
 
Note 14 — Fair Value Measurement
The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments (in thousands): 
 
March 31, 2016
 
December 31, 2015
 
Carrying
Value
 
Estimated
Fair Value
 
Carrying
Value
 
Estimated
Fair Value
Financial Assets:
 
 
 
 
 
 
 
Restricted investments (1)
$
23,171

 
$
23,175

 
$
23,215

 
$
23,190

Financial Liabilities:
 
 
 
 
 
 
 
2015 Agreement: New Term Loan A, due July 2020 (2)
638,687

 
639,750

 
668,055

 
669,750

Accounts receivable securitization (3)
224,017

 
225,000

 
223,927

 
225,000

Revolving line of credit (4)
200,000

 
200,000

 
200,000

 
200,000

____________
The carrying amounts of the final instruments shown in the table are included in the consolidated balance sheets, as follows:
(1)
Restricted investments are included in "Restricted investments, held to maturity, amortized cost."
(2)
The New Term Loan A is included in "Current portion of long-term debt" and "Long-term debt, less current portion." Carrying value is net of $1.1 million and $1.7 million DLC as of March 31, 2016 and December 31, 2015, respectively.
(3)
Carrying value is net of $1.0 million and $1.1 million DLC as of March 31, 2016 and December 31, 2015, respectively.
(4)
The New Revolver (due July 2020) is included in "Revolving line of credit."

22


SWIFT TRANSPORTATION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED



Recurring Fair Value Measurements
As of March 31, 2016, and December 31, 2015, no major categories of assets or liabilities included in the Company's consolidated balance sheets at estimated fair value were measured on a recurring basis.
Nonrecurring Fair Value Measurements
As of March 31, 2016, there were no assets or liabilities on the Company's consolidated balance sheet estimated at fair value that were measured on a nonrecurring basis.
The following table depicts the level in the fair value hierarchy of the inputs used to estimate fair value of assets measured on a nonrecurring basis as of December 31, 2015 (in thousands):
 
 
 
Fair Value Measurements at Reporting Date Using:
 
 
 
Estimated
Fair Value
 
Level 1 Inputs
 
Level 2 Inputs
 
Level 3 Inputs
 
Total Gains (Losses)
As of December 31, 2015
 
 
 
 
 
 
 
 
 
Note receivable
$
—

 
$
—

 
$
—

 
$
—

 
$
(1,480
)
In September 2013, the Company agreed to advance up to $2.3 million, pursuant to an unsecured promissory note, to an independent fleet contractor that transported freight on Swift's behalf. In March 2015, management became aware that the independent contractor violated various covenants outlined in the unsecured promissory note, which created an event of default that made the principal and accrued interest immediately due and payable. As a result of this event of default, as well as an overall decline in the independent contractor's financial condition, management re-evaluated the fair value of the unsecured promissory note. At March 31, 2015, management determined that the remaining balance due from the independent contractor to the Company was not collectible, which resulted in a $1.5 million pre-tax adjustment that was recorded in "Non-cash impairments of non-operating assets" in the Company's consolidated income statement.
As of December 31, 2015, there were no liabilities on the Company's consolidated balance sheet estimated at fair value that were measured on a nonrecurring basis.
 
Note 15 — Segments and Geography
Segment Information
The Company’s four reportable operating segments are Truckload, Dedicated, Swift Refrigerated and Intermodal.
Truckload — The Truckload segment consists of one-way movements over irregular routes throughout the United States, Mexico, and Canada. This service utilizes both company and owner-operator tractors with dry van, flatbed, and other specialized trailing equipment.
Dedicated — Through the Dedicated segment, the Company devotes use of equipment to specific customers and offers tailored solutions under long-term contracts. This segment utilizes refrigerated, dry van, flatbed and other specialized trailing equipment.
Swift Refrigerated — This segment primarily consists of shipments for customers that require temperature-controlled trailers. These shipments include one-way movements over irregular routes, as well as dedicated truck operations.
Intermodal — The Intermodal segment includes revenue generated by moving freight over the rail in the Company's containers and other trailing equipment, combined with revenue for drayage to transport loads between the railheads and customer locations.
Non-reportable Segment — The non-reportable segment includes the Company's logistics and freight brokerage services, as well as support services that its subsidiaries provide to customers and owner-operators, including repair and maintenance shop services, equipment leasing, and insurance. Intangible amortization related to the 2007 Transactions is also included in this other non-reportable segment.
Intersegment Eliminations — Certain operating segments provide transportation and related services for other affiliates outside their reportable segment. Revenues for such services are based on negotiated rates, which we believe approximate fair value, and are reflected as revenues of the billing segment. These rates are adjusted from time to time, based on market conditions. Such intersegment revenues and expenses are eliminated in our consolidated results.

23


SWIFT TRANSPORTATION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED



Set forth in the tables below is certain financial information with respect to the Company’s reportable segments (in thousands):
 
 
Three Months Ended March 31,
Operating revenue:
 
2016
 
2015
Truckload
 
$
492,522

 
$
538,341

Dedicated
 
227,914

 
217,775

Swift Refrigerated
 
84,685

 
95,568

Intermodal
 
82,548

 
90,354

Subtotal
 
887,669

 
942,038

Non-reportable segment
 
99,248

 
91,622

Intersegment eliminations
 
(19,094
)
 
(18,516
)
Consolidated operating revenue
 
$
967,823

 
$
1,015,144

 
 
Three Months Ended March 31,
Operating income (loss):
 
2016
 
2015
Truckload
 
$
36,287

 
$
56,854

Dedicated
 
23,858

 
14,345

Swift Refrigerated
 
(332
)
 
4,799

Intermodal
 
(2,908
)
 
(1,243
)
Subtotal
 
56,905

 
74,755

Non-reportable segment
 
(4,422
)
 
245

Consolidated operating income
 
$
52,483

 
$
75,000

 
 
Three Months Ended March 31,
Depreciation and amortization of property and equipment:
 
2016
 
2015
Truckload
 
$
31,283

 
$
28,610

Dedicated
 
16,358

 
14,273

Swift Refrigerated
 
4,634

 
3,294

Intermodal
 
3,179

 
3,252

Subtotal
 
55,454

 
49,429

Non-reportable segment
 
11,497

 
7,498

Consolidated depreciation and amortization of property and equipment
 
$
66,951

 
$
56,927

Geographical Information
In aggregate, operating revenue from the Company's foreign operations was less than 5.0% of consolidated operating revenue for the three months ended March 31, 2016 and 2015. Additionally, long-lived assets on the Company's foreign subsidiaries' balance sheets were less than 5.0% of consolidated total assets as of March 31, 2016 and December 31, 2015.

24



SWIFT TRANSPORTATION COMPANY




ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED)
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains statements that may constitute forward-looking statements, which are based on information currently available, usually defined by words such as "anticipates," "believes," "estimates," "plans," "projects," "expects," "hopes," "intends," "will," "could," "should," "may," or similar expressions which speak only as of the date the statement was made. Such forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements include, but are not limited to, statements concerning:
•
trends, management's beliefs, and expectations relating to our operations, Revenue xFSR, expenses, other revenue, pricing, our effective tax rate, profitability and related metrics, as well as share repurchases;
•
impact and planned timing of adopting recently issued accounting pronouncements on future periods;
•
our expectation of increasing driver wages, hiring expenses and owner-operator pay rates;
•
the benefits of eliminating our TOFC service;
•
the outcome and impact of pending claims, litigation and actions in respect thereof;
•
our intentions concerning the potential use of derivative financial instruments to hedge fuel price increases;
•
the timing and amount of future acquisitions of revenue equipment and other capital expenditures, as well as the use and availability of cash, cash flows from operations, leases and debt to finance such acquisitions;
•
that we may seek additional borrowings, lease financing or equity capital;
•
the potential impact of inflation, seasonality and severe weather conditions on our results of operations; and
•
our ability to finance our cash needs from operations for the next twelve months.
Such forward-looking statements are inherently uncertain, and are based upon the current beliefs, assumptions and expectations of Company management and current market conditions, which are subject to significant risks and uncertainties, as set forth in the Risk Factors section of our Annual Report on Form 10-K for the year ended December 31, 2015. As to the Company's business and financial performance, the following factors, among others, could cause actual results to materially differ from those in forward-looking statements:
•
economic conditions, including future recessionary economic cycles and downturns in customers’ business cycles, particularly in market segments and industries in which we have a significant concentration of customers;
•
increasing competition from trucking, rail, intermodal, and brokerage competitors;
•
our ability to execute or integrate any future acquisitions successfully;
•
increases in driver compensation to the extent not offset by increases in freight rates and difficulties in driver recruitment and retention;
•
additional risks arising from our contractual agreements with owner-operators that do not exist with Company drivers;
•
our ability to retain or replace key personnel;
•
our dependence on third parties for intermodal and brokerage business;
•
potential failure in computer or communications systems;
•
seasonal factors such as severe weather conditions that increase operating costs;
•
the regulatory environment in which we operate, including existing regulations and changes in existing regulations, or violations by us of existing or future regulations;
•
the possible re-classification of owner-operators as employees;
•
changes in rules or legislation by the NLRB or Congress and/or union organizing efforts;
•
our CSA safety rating;
•
government regulation with respect to our captive insurance companies;
•
uncertainties and risks associated with our operations in Mexico;

25



SWIFT TRANSPORTATION COMPANY




MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED) — CONTINUED

•
a significant reduction in, or termination of, our trucking services by a key customer;
•
our significant ongoing capital requirements;
•
volatility in the price or availability of fuel, as well as our ability to recover fuel prices through our fuel surcharge program;
•
fluctuations in new equipment prices or replacement costs, and the potential failure of manufacturers to meet their sale and trade-back obligations;
•
the impact that our substantial leverage may have on the way we operate our business and our ability to service our debt, including compliance with our debt covenants;
•
restrictions contained in our debt agreements;
•
adverse impacts of insuring risk through our captive insurance companies, including our need to provide restricted cash and similar collateral for anticipated losses;
•
potential volatility or decrease in the amount of earnings as a result of our claims exposure through our captive insurance companies;
•
the potential impact of the significant number of shares of our common stock that is eligible for future sale;
•
goodwill impairment;
•
our intention to not pay dividends;
•
conflicts of interest or potential litigation that may arise from other businesses owned by Jerry Moyes, including pledges of Swift stock and guarantees by Jerry Moyes related to other businesses;
•
the significant amount of our stock and related control over the Company by Jerry Moyes; and
•
related-party transactions between the Company and Jerry Moyes.
Important factors, in addition to those listed above and in our filings with the SEC, could impact us financially. As a result of these and other factors, actual results may differ from those set forth in the forward-looking statements, and the prices of the Company's securities may dramatically fluctuate. The Company makes no commitment, and disclaims any duty, to update or revise any forward-looking statements to reflect future events, new information or changes in these expectations.
Reference to Glossary of Terms
Certain acronyms and terms used throughout this Quarterly Report on Form 10-Q are specific to our company, commonly used in our industry, or are otherwise frequently used throughout our document. Definitions for these acronyms and terms are provided in the "Glossary of Terms," available in the front of this document.
Reference to Annual Report on Form 10-K
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and footnotes included in this Quarterly Report on Form 10-Q, as well as the consolidated financial statements and footnotes included in our Annual Report on Form 10-K for the year ended December 31, 2015.

26


SWIFT TRANSPORTATION COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED) — CONTINUED


Executive Summary
Company Overview — Swift is a multi-faceted transportation services company, operating one of the largest fleets of truckload equipment in North America from over 40 terminals near key freight centers and traffic lanes. We principally operate in short- to medium-haul traffic lanes around our terminals and dedicated customer locations. We concentrate on this length of haul because the majority of domestic truckload freight (as measured by revenue) moves in these lanes and our extensive terminal network affords us marketing, equipment control, supply chain, customer service and driver retention advantages in local markets. Since our average length of haul is relatively short, it helps reduce competition from railroads and trucking companies that lack a regional presence.
As of March 31, 2016, our fleet of revenue equipment included 19,858 tractors (comprised of 14,986 company tractors and 4,872 owner-operator tractors), 63,891 trailers and 9,150 intermodal containers. Our four reportable segments are Truckload, Dedicated, Swift Refrigerated and Intermodal. Our extensive suite of service offerings (which includes line-haul services, dedicated customer contracts, temperature-controlled units, intermodal freight solutions, cross-border United States/Mexico and United States/Canada freight, flatbed hauling, freight brokerage and logistics, and others) provides our customers with the opportunity to "one-stop-shop" for their truckload transportation needs.
Revenue — We primarily generate revenue by transporting freight for our customers, generally at a predetermined rate per mile. We supplement this revenue by charging for fuel surcharges, stop-off pay, loading and unloading activities, tractor and trailer detention, and other ancillary services. The main factors that affect our revenue from transporting freight are the rate per mile we receive from our customers and loaded miles. The main factors that affect fuel surcharge revenue are the price of diesel fuel and the number of loaded miles. Fuel surcharges are billed on a lagging basis, meaning that we typically bill customers in the current week based on a previous week's applicable index. Therefore, in times of increasing fuel prices, we do not recover as much as we are currently paying for fuel. In periods of declining prices, the opposite is true.
Revenue in our non-reportable segment is generated by our non-asset-based freight brokerage and logistics management service, tractor leasing revenue from our financing subsidiaries, premium revenue from our captive insurance companies, and revenue from third parties serviced by our repair and maintenance shops. Main factors affecting revenue in our non-reportable segment are demand for brokerage and logistics services, as well as the number of equipment leases by our financing subsidiaries to the owner-operators we contract with and other third parties.
Expenses — Our most significant expenses vary with miles traveled and include fuel, driver-related expenses (such as wages and benefits) and services purchased from owner-operators and other transportation providers (such as railroads, drayage providers, and other trucking companies). Maintenance and tire expenses, as well as cost of insurance and claims generally vary with the miles we travel, but also have a controllable component based on safety improvements, fleet age, efficiency, and other factors. Our primary fixed costs are depreciation and lease expense for revenue equipment and terminals, interest expense, and non-driver compensation.
Compared to changes in rate per mile and loaded miles, changes in deadhead miles percentage generally have the largest proportionate effect on our profitability because we still bear all of the expenses for each deadhead mile, but do not earn any revenue to offset those expenses. Changes in rate per mile have the next largest proportionate effect on profitability because incremental improvements in rate per mile are not offset by any additional expenses. Changes in loaded miles generally have a smaller effect on profitability because variable expenses fluctuate with changes in miles. However, changes in mileage are affected by driver satisfaction and network efficiency, which indirectly affect expenses.

27


SWIFT TRANSPORTATION COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED) — CONTINUED


Financial Overview
 
Three Months Ended March 31,
 
2016
 
2015
 
(Dollars in thousands, except per share data)
Operating revenue
$
967,823

 
$
1,015,144

Revenue xFSR
$
906,913

 
$
894,864

Net income
$
31,905

 
$
37,840

Diluted earnings per share
$
0.23

 
$
0.26

Operating Ratio
94.6
%
 
92.6
%
Non-GAAP financial data:
 
 
 
Adjusted EPS (1)
$
0.25

 
$
0.29

Adjusted Operating Ratio (1)
93.8
%
 
91.2
%
Adjusted EBITDA (1)
$
125,831

 
$
138,219

____________
(1)
Adjusted EPS, Adjusted Operating Ratio and Adjusted EBITDA are non-GAAP financial measures. These non-GAAP financial measures should not be considered alternatives, or superior, to GAAP financial measures. However, management believes that presentation of these non-GAAP financial measures provides useful information to investors regarding the Company's results of operations. Adjusted EPS, Adjusted Operating Ratio and Adjusted EBITDA are reconciled to the most directly comparable GAAP financial measures under "Non-GAAP Financial Measures," below.
Total Equipment — The following table summarizes our revenue equipment and supports the discussions and analyses below:
 
March 31,
2016
 
December 31,
2015
 
March 31,
2015
Tractors
 
 
 
 
 
Company:
 
 
 
 
 
Owned
7,122

 
7,442

 
6,476

Leased — capital leases
2,009

 
2,170

 
1,655

Leased — operating leases
5,855

 
5,599

 
6,549

Total company tractors
14,986

 
15,211

 
14,680

Owner-operator:
 
 
 
 
 
Financed through the Company
3,598

 
3,767

 
3,836

Other
1,274

 
886

 
1,019

Total owner-operator tractors
4,872

 
4,653

 
4,855

Total tractors
19,858

 
19,864

 
19,535

Trailers
63,891

 
65,233

 
61,780

Containers
9,150

 
9,150

 
9,150

Average Operational Truck Count — The following table summarizes average operational truck count, which is defined under "Results of Operations — Segment Review."
 
Three Months Ended March 31,
 
2016
 
2015
Company
13,364

 
12,988

Owner-operator
4,493

 
4,756

Total (1)
17,857

 
17,744

____________
(1)
Includes trucks within our non-reportable segment.

28


SWIFT TRANSPORTATION COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED) — CONTINUED


Factors Affecting Comparability between Periods
Driver Wages and Owner-operator Pay Rates
We implemented increases in wages for our company drivers and contracted pay rates for owner-operators in May 2015, which were tailored at improving driver retention and recruiting. We refer to these increases in company driver wages and owner-operator contracted pay rates throughout the segment and operating expense reviews, below.
Results of Operations Comparison Between the Three Months Ended March 31, 2016 and March 31, 2015
Net income for the three months ended March 31, 2016 was $31.9 million, as compared to $37.8 million for the same period in 2015. In addition to the driver wages and owner-operator pay rates noted above, the following factors affected comparability between the three months ended March 31, 2016 and the three months ended March 31, 2015:
•
$10.2 million decrease in income tax expense. The effective tax rate for the three months ended March 31, 2016 was 29.8%, which was lower than our expectation of 38.0%. The difference was primarily due to certain income tax credits received by our foreign subsidiary and a reduction in our uncertain tax position reserve as discrete items.
•
$2.8 million decrease in derivative interest expense. The final settlement of our interest rate swaps occurred in July 2015.
•
$1.8 million decrease in interest expense, primarily driven by overall lower debt balances and more favorable interest rates during the three months ended March 31, 2016. This was largely the result of replacing the 2014 Agreement with the 2015 Agreement in July 2015.
•
During the three months ended March 31, 2015, the DOE index decreased by $0.39, ending at $2.82. During the three months ended March 31, 2016, the DOE index decreased by $0.12, ending at $2.12. These declining fuel prices unfavorably impacted fuel surcharge revenue, but favorably impacted fuel expense, as well as fuel reimbursements to owner-operators included in purchased transportation.
•
$1.5 million pre-tax impairment of a non-operating note receivable, during the three months ended March 31, 2015. The note was due to the Company from an independent fleet contractor, transporting freight on behalf of Swift.
Non-GAAP Financial Measures
The terms "Adjusted EPS," "Adjusted Operating Ratio," and "Adjusted EBITDA," as we define them, are not presented in accordance with GAAP. These financial measures supplement our GAAP results in evaluating certain aspects of our business. We believe that using these measures improves comparability in analyzing our performance because they remove the impact of items from our operating results that, in our opinion, do not reflect our core operating performance. Management and the Board focus on Adjusted EPS, Adjusted Operating Ratio and Adjusted EBITDA as key measures of our performance, all of which are reconciled to the most comparable GAAP financial measures and further discussed below. We believe our presentation of these non-GAAP financial measures is useful because it provides investors and securities analysts the same information that we use internally for purposes of assessing our core operating performance and compliance with debt covenants.
Adjusted EPS, Adjusted Operating Ratio and Adjusted EBITDA are not substitutes for their comparable GAAP financial measures, such as net income, cash flows from operating activities, operating margin, or other measures prescribed by GAAP. There are limitations to using non-GAAP financial measures. Although we believe that they improve comparability in analyzing our period to period performance, they could limit comparability to other companies in our industry if those companies define these measures differently. Because of these limitations, our non-GAAP financial measures should not be considered measures of income generated by our business or discretionary cash available to us to invest in the growth of our business. Management compensates for these limitations by primarily relying on GAAP results and using non-GAAP financial measures on a supplemental basis.
Adjusted EPS — Our definition of the non-GAAP measure, Adjusted EPS, starts with (a) income (loss) before income taxes, the most comparable GAAP measure. We add the following items back to (a) to arrive at (b) adjusted income (loss) before income taxes:
(i)
amortization of the intangibles from the 2007 Transactions,
(ii)
non-cash impairments,
(iii)
other special non-cash items,
(iv)
excludable transaction costs,
(v)
mark-to-market adjustments on our interest rate swaps, recognized in the income statement, and
(vi)
amortization of previous losses recorded in AOCI related to the interest rate swaps we terminated upon our IPO and refinancing transactions in December 2010.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED) — CONTINUED


We subtract income taxes, at the GAAP effective tax rate, from (b) to arrive at (c) adjusted earnings. Adjusted EPS is equal to (c) divided by weighted average diluted shares outstanding.
We believe that excluding the impact of derivatives provides for more transparency and comparability since these transactions have historically been volatile. Additionally, we believe that comparability of our performance is improved by excluding impairments that are unrelated to our core operations, as well as intangibles from the 2007 Transactions and other special items that are non-comparable in nature.
The following table is a GAAP to non-GAAP reconciliation for consolidated Adjusted EPS:
Note: Since the numbers reflected in the table below are calculated on a per share basis, they may not foot due to rounding.
 
Three Months Ended March 31,
 
2016
 
2015
Diluted earnings per share
$
0.23

 
$
0.26

Adjusted for:
 
 
 
Income tax expense
0.10

 
0.16

Income before income taxes
0.33

 
0.43

Non-cash impairments of non-operating assets (1)
—

 
0.01

Amortization of certain intangibles (2)
0.03

 
0.03

Adjusted income before income taxes
0.36

 
0.46

Provision for income tax expense at effective rate
0.11

 
0.18

Adjusted EPS
$
0.25

 
$
0.29

____________
(1)
Refer to "Non-cash Impairments of Non-operating Assets" discussion under "Results of Operations — Consolidated Operating and Other Expenses," below.
(2)
"Amortization of certain intangibles" specifically reflects the non-cash amortization expense relating to certain intangible assets identified in the 2007 Transactions through which Swift Corporation acquired Swift Transportation Co.
Adjusted Operating Ratio — Our definition of the non-GAAP measure, Adjusted Operating Ratio, starts with (a) operating expense and (b) operating revenue, which are GAAP financial measures. We subtract the following items from (a) to arrive at (c) adjusted operating expense:
(i)
fuel surcharge revenue,
(ii)
amortization of the intangibles from the 2007 Transactions,
(iii)
non-cash operating impairment charges,
(iv)
other special non-cash items, and
(v)
excludable transaction costs.
We then subtract fuel surcharge revenue from (b) to arrive at (d) Revenue xFSR. Adjusted Operating Ratio is equal to (c) adjusted operating expense as a percentage of (d) Revenue xFSR.
We net fuel surcharge revenue against fuel expense in the calculation of our Adjusted Operating Ratio, thereby excluding fuel surcharge revenue from operating revenue in the denominator. Because fuel surcharge revenue is so volatile, we believe excluding it provides for more transparency and comparability. Additionally, we believe that comparability of our performance is improved by excluding operating impairment charges, non-comparable intangibles from the 2007 Transactions and other special items.

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SWIFT TRANSPORTATION COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED) — CONTINUED


The following table is a GAAP to non-GAAP reconciliation for consolidated Adjusted Operating Ratio:
 
Three Months Ended March 31,
 
2016
 
2015
 
(Dollars in thousands)
Operating revenue
$
967,823

 
$
1,015,144

Less: Fuel surcharge revenue
(60,910
)
 
(120,280
)
Revenue xFSR
$
906,913

 
$
894,864

 
 
 
 
Operating expense
$
915,340

 
$
940,144

Adjusted for:
 
 
 
Fuel surcharge revenue
(60,910
)
 
(120,280
)
Amortization of certain intangibles (1)
(3,912
)
 
(3,912
)
Adjusted operating expense
$
850,518

 
$
815,952

Operating Ratio
94.6
%
 
92.6
%
Adjusted Operating Ratio
93.8
%
 
91.2
%
____________
(1)
Refer to footnote (2) to the Adjusted EPS reconciliation for a description of "Amortization of certain intangibles."
Adjusted EBITDA — Our definition of the non-GAAP measure, Adjusted EBITDA, starts with (a) net income (loss), the most comparable GAAP measure. We add the following items back to (a) to arrive at Adjusted EBITDA:
(i)
depreciation and amortization,
(ii)
interest and derivative interest expense, including fees and charges associated with indebtedness, net of interest income,
(iii)
income taxes,
(iv)
non-cash equity compensation expense,
(v)
non-cash impairments,
(vi)
other special non-cash items, and
(vii)
excludable transaction costs.
We believe that Adjusted EBITDA is a relevant measure for estimating the cash generated by our operations that would be available to cover capital expenditures, taxes, interest and other investments and that it enhances an investor’s understanding of our financial performance. We use Adjusted EBITDA for business planning purposes and in measuring our performance. Our method of computing Adjusted EBITDA is consistent with that used in our debt covenants, specifically in our leverage ratio, and is also routinely reviewed by management for that purpose.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED) — CONTINUED


The following table is a GAAP to non-GAAP reconciliation for consolidated Adjusted EBITDA:
 
Three Months Ended March 31,
 
2016
 
2015
 
(In thousands)
Net income
$
31,905

 
$
37,840

Adjusted for:
 
 
 
Depreciation and amortization of property and equipment
66,951

 
56,927

Amortization of intangibles
4,204

 
4,204

Interest expense
8,594

 
10,388

Derivative interest expense
—

 
2,793

Interest income
(751
)
 
(587
)
Income tax expense
13,511

 
23,691

EBITDA
124,414

 
135,256

Non-cash equity compensation (1)
1,417

 
1,483

Non-cash impairments of non-operating assets (2)
—

 
1,480

Adjusted EBITDA
$
125,831

 
$
138,219

____________
(1)
Represents recurring non-cash equity compensation expense on a pre-tax basis. In accordance with the terms of the 2015 Agreement, this expense is added back in the calculation of Adjusted EBITDA for covenant compliance purposes.
(2)
Refer to "Non-cash Impairments of Non-operating Assets" discussion under "Results of Operations — Consolidated Operating and Other Expenses," below.
Results of Operations — Segment Review
We operate four reportable segments: Truckload, Dedicated, Swift Refrigerated and Intermodal. The descriptions of the operations of these reportable segments are described in Note 15 to the consolidated financial statements, included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Consolidating tables for operating revenue and operating income are as follows:
 
Three Months Ended March 31,
 
2016
 
2015
 
(In thousands)
Operating revenue:
 
 
 
Truckload
$
492,522

 
$
538,341

Dedicated
227,914

 
217,775

Swift Refrigerated
84,685

 
95,568

Intermodal
82,548

 
90,354

Subtotal
887,669

 
942,038

Non-reportable segment
99,248

 
91,622

Intersegment eliminations
(19,094
)
 
(18,516
)
Consolidated operating revenue
$
967,823

 
$
1,015,144


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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED) — CONTINUED


 
Three Months Ended March 31,
 
2016
 
2015
 
(In thousands)
Operating income (loss):
 
 
 
Truckload
$
36,287

 
$
56,854

Dedicated
23,858

 
14,345

Swift Refrigerated
(332
)
 
4,799

Intermodal
(2,908
)
 
(1,243
)
Subtotal
56,905

 
74,755

Non-reportable segment
(4,422
)
 
245

Consolidated operating income
$
52,483

 
$
75,000

Our chief operating decision makers monitor the GAAP results of our reportable segments, as supplemented by certain non-GAAP information. Refer to "Non-GAAP Financial Measures" above for more details. Additionally, we use a number of primary indicators to monitor our revenue and expense performance and efficiency.
Weekly Revenue xFSR per Tractor (monitored monthly) — This is our primary measure of productivity for our Truckload, Dedicated and Swift Refrigerated segments. Weekly Revenue xFSR per tractor is affected by the following factors, which are typically monitored daily:
•
loaded miles (miles driven when hauling freight);
•
fleet size (because available loads are spread over available tractors);
•
rates received for our services; and
•
network balance (number of loads accepted, compared to available trucks, by market).
We strive to increase our revenue per tractor by improving freight rates with customers, hauling more loads with existing equipment, effectively moving freight and managing balance within our network, maintaining our tractors, recruiting and retaining Company drivers, and attracting and maintaining contracts with owner-operators.
Deadhead Miles Percentage (monitored daily) — This is calculated by dividing the number of unpaid miles by the total number of miles driven. We monitor deadhead miles percentage in Truckload and Swift Refrigerated, as we strive to reduce our number of deadhead miles within these segments. By balancing our freight flows and planning consecutive loads with shorter distances between the drop-off and pick-up locations, we are able to reduce the percentage of deadhead miles driven to allow for more revenue-generating miles during our drivers’ hours-of-service. This also enables us to reduce wage, fuel and other costs associated with deadhead miles.
Average Operational Truck Count (monitored daily) — We use this measure for all of our reportable segments. It includes tractors driven by company drivers as well as owner-operator units. This measure changes based on our ability to adjust our fleet size in response to changes in demand.
Load Count and Average Container Count (monitored daily) — Within Intermodal, we monitor load count and average container count. These metrics allow us to measure our utilization of our container fleet.
Adjusted Operating Ratio (monitored monthly) — We consider this ratio an important measure of our operating profitability for each of our reportable segments. We define and reconcile Adjusted Operating Ratio under "Non-GAAP Financial Measures" above. GAAP Operating Ratio is operating expenses as a percentage of revenue, or the inverse of operating margin, and produces an indication of operating efficiency. It is widely used in our industry as an assessment of management’s effectiveness in controlling all categories of operating expenses.

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The following tables are GAAP to non-GAAP reconciliations for each reportable segment's Adjusted Operating Ratio:
Truckload Segment
 
Three Months Ended March 31,
 
2016
 
2015
 
(Dollars in thousands)
Operating revenue
$
492,522

 
$
538,341

Less: Fuel surcharge revenue
(36,705
)
 
(69,561
)
Revenue xFSR
$
455,817

 
$
468,780

 
 
 
 
Operating expense
$
456,235

 
$
481,487

Adjusted for: Fuel surcharge revenue
(36,705
)
 
(69,561
)
Adjusted operating expense
$
419,530

 
$
411,926

Operating Ratio
92.6
%
 
89.4
%
Adjusted Operating Ratio
92.0
%
 
87.9
%
Dedicated Segment
 
Three Months Ended March 31,
 
2016
 
2015
 
(Dollars in thousands)
Operating revenue
$
227,914

 
$
217,775

Less: Fuel surcharge revenue
(8,119
)
 
(21,642
)
Revenue xFSR
$
219,795

 
$
196,133