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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(mark one)
ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
or
¨ 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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered |
Class A Common Stock, par value $0.01 per share | New York Stock Exchange |
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No ý
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 ¨
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 ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 | ¨ | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
As of June 30, 2016, the aggregate market value of our Class A common stock held by non-affiliates was $1,248,343,682, based on the closing price of our common stock as quoted on the NYSE as of such date.
There were 83,322,456 shares of the registrant's Class A Common Stock and 49,741,938 shares of the registrant's Class B Common Stock outstanding as of February 6, 2017.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for its 2017 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission (the "SEC") are incorporated by reference into Part III of this report.
SWIFT TRANSPORTATION COMPANY
2016 ANNUAL REPORT ON FORM 10-K |
TABLE OF CONTENTS | |
PAGE | |
1
2016 ANNUAL REPORT ON FORM 10-K | ||
GLOSSARY OF TERMS | ||
The following glossary provides definitions for certain acronyms and terms used in this Annual Report on Form 10-K. 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 Stock Plan | The Company's 2007 Omnibus Incentive Plan, as amended and restated. | |
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. | |
2012 Agreement | The Company's previous credit agreement, replaced by the 2013 Agreement. | |
2012 ESPP | Employee Stock Purchase Plan, effective beginning in 2012. | |
2013 Agreement | The Company's Second Amended and Restated Credit Agreement, replaced by the 2014 Agreement. | |
2013 RSA | Second Amended and Restated Receivables Sale Agreement, entered into in 2013 by SRCII (defined below), with unrelated financial entities, "The Purchasers." The 2013 RSA was later replaced by the 2015 RSA. | |
2014 Agreement | The Company's Third Amended and Restated Credit Agreement, replaced by the 2015 Agreement. | |
2014 Stock Plan | The Company's 2014 Omnibus Incentive Plan. | |
2015 Agreement | The Company's Fourth Amended and Restated Credit Agreement. | |
2015 RSA | Third Amendment to Amended and Restated Receivables Sale Agreement, entered into in 2015 by SRCII (defined below), with unrelated financial entities, "The Purchasers." | |
AOCI | Accumulated Other Comprehensive Income (Loss) | |
ASC | Accounting Standards Codification | |
ASU | Accounting Standards Update | |
BASICs | Behavioral Analysis and Safety Improvement Categories - part of the new enforcement and compliance model introduced by the FMCSA (defined below) | |
Board | Swift's Board of Directors | |
C-TPAT | Customs-Trade Partnership Against Terrorism | |
CDL | Commercial Drivers' License | |
Central | Central Refrigerated Transportation, LLC (formerly Central Refrigerated Transportation, Inc.) | |
Central Acquisition | Swift's acquisition of all of the outstanding capital stock of Central | |
CEO | Chief Executive Officer, Richard Stocking | |
CFO | Chief Financial Officer, Virginia Henkels | |
CMV | Commercial Motor Vehicle | |
CODM | Chief Operating Decision Makers, which includes our CEO and CFO | |
COFC | Container on Flat Car | |
CSA | Compliance Safety Accountability | |
Deadhead | Tractor movement without hauling freight (unpaid miles driven) | |
DHS | United States Department of Homeland Security | |
DOE | United States Department of Energy | |
DOT | United States Department of Transportation | |
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2016 ANNUAL REPORT ON FORM 10-K | ||
GLOSSARY OF TERMS — CONTINUED | ||
Term | Definition | |
EBITDA | Earnings Before Interest, Taxes, Depreciation, and Amortization (a non-GAAP measure) | |
ELD | Electronic Logging Device | |
EPA | United States Environmental Protection Agency | |
EPS | Earnings Per Share | |
FASB | Financial Accounting Standards Board | |
FLSA | Fair Labor Standards Act | |
FMCSA | Federal Motor Carrier Safety Administration | |
GAAP | United States Generally Accepted Accounting Principles | |
GHG | Green House Gas | |
IEL | Interstate Equipment Leasing, LLC (formerly Interstate Equipment Leasing, Inc.) | |
IPO | Initial Public Offering | |
LIBOR | London InterBank Offered Rate | |
LTL | Less-than-truckload | |
Mohave | Mohave Transportation Insurance Company, a Swift wholly-owned captive insurance subsidiary | |
Moyes Affiliates | Jerry Moyes, Vickie Moyes, The Jerry and Vickie Moyes Family Trust dated December 11, 1987, and various Moyes children's trusts | |
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 | |
NYSE | New York Stock Exchange | |
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 | |
OTR | Over-the-road | |
Red Rock | Red Rock Risk Retention Group, Inc., a Swift captive insurance subsidiary | |
Revenue xFSR | Revenue, Excluding Fuel Surcharge Revenue | |
RSU | Restricted Stock Unit: represents a right to receive a share of Class A common stock, when it vests - awarded to employees of the Company | |
SafeStat | Safety Status measurement system | |
SEC | Securities and Exchange Commission | |
Senior Notes | The Company's senior secured second priority notes | |
SRCII | Swift Receivables Company II, LLC | |
Swift Refrigerated | Swift Refrigerated Service, LLC (formerly Central Refrigerated Transportation, LLC) | |
The Purchasers | Unrelated financial entities in the 2015 and 2013 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 | |
TSA | United States Transportation Security Administration | |
VPF | Variable Prepaid Forward (contract) | |
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PART I | ||||
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS |
This report contains "forward-looking statements" within the meaning of the federal securities laws that involve risks and uncertainties. Forward-looking statements include statements we make concerning:
• | our plans, objectives, goals, strategies (including our growth strategies and the benefits and advantages to us compared to others in the trucking industry), future events, future revenues or performance, and financing needs; |
• | our compliance with, and the impact on Swift of, proposed, established or new environmental, transportation, safety, tax, accounting, labor, and other laws and regulations; |
• | the benefits of our business model, operations, and strategies in light of changing trends in the trucking industry; |
• | the benefits of our driver academies and driver development programs; |
• | our opportunities in the temperature-controlled market; |
• | the benefits of our C-TPAT status; |
• | the benefits of utilizing owner-operators; |
• | future opportunities in our Dedicated and Swift Refrigerated segments, as well as our non-asset-based freight brokerage and logistics services; |
• | that we expect to reduce our participation in the spot market; |
• | that our elimination of our TOFC service will result in efficiencies in our COFC service; |
• | our expectations to pursue acquisitions and integrate such acquisitions quickly; |
• | our compliance with environmental, transportation, and other laws and regulations; |
• | the outcome of pending claims, litigation, and actions in respect thereof; |
• | trucking industry supply, demand, pricing, and cost trends; |
• | our expectation of increasing driver wages and hiring expenses, as well as the contracted pay rates for owner-operators; |
• | trends in the age of our tractor and trailer fleet, equipment costs, and depreciation expense; |
• | the amount of intangible asset amortization in future periods; |
• | our ability to grow Adjusted EPS and return on assets and generate free cash flow to reduce debt; |
• | the benefits of a shorter tractor trade-in cycle; |
• | the benefits of our fuel surcharge program and our ability to recover increasing fuel costs through surcharges; |
• | the impact of the lag effect relating to our fuel surcharges; |
• | the sources and sufficiency of our liquidity and financial resources to pay debt, make capital expenditures, and operate our business; |
• | the value of equipment under operating leases relating to our residual value guarantees; |
• | our intentions concerning the potential use of derivative financial instruments to hedge fuel price increases; |
• | our expectations regarding the use of the NYSE's "controlled company" exemption concerning certain corporate governance requirements; |
• | our ability to alter our trade cycle and purchase agreements; |
• | the sufficiency and condition of our facilities; |
• | our intention to reinvest foreign earnings outside the United States; |
• | our intentions concerning the payment of dividends; and |
• | the timing and amount of future acquisitions of trucking equipment and other capital expenditures, as well as the use and availability of cash, cash flow from operations, leases, and debt to finance such acquisitions. |
Such statements appear under the headings entitled Risk Factors, Management's Discussion and Analysis of Financial Condition and Results of Operations, and Business. When used in this report, the words "estimates," "expects," "anticipates," "projects," "forecasts," "plans," "intends," "believes," "foresees," "seeks," "likely," "may," "will," "could," "should," "goal," "target," and variations of these words or similar expressions (or the negative versions of any such words) are intended to identify forward-looking statements. In addition, we, through our senior management, from time to time make forward-looking public statements concerning our expected future operations and performance and other developments. These forward-looking statements are subject to risks and uncertainties that may change at any time, and therefore, our actual results may differ materially from those that we expected. Accordingly, undue reliance should not be placed on our forward-looking statements. We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and of course, it is impossible for us to anticipate all factors that could affect our actual results. All forward-looking statements are based upon information available to us on the date of this report. We undertake no obligation to publicly update or revise forward-looking statements to reflect events or circumstances after the date made or to reflect the occurrence of unanticipated events, except as required by law.
Important factors that could cause actual results to differ materially from our expectations ("cautionary statements") are disclosed under "Risk Factors" and elsewhere in this report. All forward-looking statements in this report and subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements.
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ITEM 1. | BUSINESS |
Certain acronyms and terms used throughout this Annual Report on Form 10-K 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.
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. During 2016, our consolidated average operational truck count was 17,548, which along with our intermodal containers covered 2.2 billion miles for shippers throughout North America, contributing to consolidated operating revenue of $4.0 billion and consolidated operating income of $242.0 million. As of December 31, 2016, our fleet was comprised of 13,937 company tractors and 4,429 owner-operator tractors, as well as 64,066 trailers, and 9,131 intermodal containers. Our customers have the opportunity to "one-stop-shop" for their truckload transportation needs with 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.
Company Background |
The Company began operations in 1966 with only one truck, with Jerry Moyes, along with his father and brother as its founders. The founders originally conducted operations under the name of Common Market Distributing, later buying Swift Transportation Co., Inc. ("Swift Transportation"). In the 1980s, Jerry Moyes bought out his partners, becoming the sole owner of Swift Transportation. In 1990, Swift Transportation went public on the NASDAQ stock market.
• | The 2007 Transactions — In April 2007, Mr. 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 common stock to Swift Corporation in exchange for additional Swift Corporation shares. Swift Corporation then completed its acquisition of Swift Transportation through a merger on May 10, 2007, thereby acquiring the remaining outstanding shares of Swift Transportation common stock. Upon completion of the 2007 Transactions, Swift Transportation became a wholly-owned subsidiary of Swift Corporation. At the close of market on May 10, 2007, the common stock of Swift Transportation ceased trading on NASDAQ. |
• | The IPO — On May 20, 2010, Swift Corporation formed Swift Transportation Company, a Delaware corporation. Swift Transportation Company did not engage in any business or other activities except in connection with its formation and the IPO and held no assets or subsidiaries prior to such offering. Immediately prior to the consummation of the IPO, Swift Corporation merged with and into Swift Transportation Company, with Swift Transportation Company surviving as a Delaware corporation. In the merger, all of the outstanding common stock of Swift Corporation was converted into shares of Swift Transportation Company Class B common stock on a one-for-one basis, and all outstanding stock options of Swift Corporation were converted into options to purchase shares of Class A common stock of Swift Transportation Company. All outstanding Class B shares are held by Mr. Moyes and the Moyes Affiliates. Swift Transportation Company went public on the NYSE in December 2010, at an initial trading price of $11.00 per share. |
• | Central Acquisition — On August 6, 2013, Swift acquired all of the outstanding capital stock of Central in a cash transaction. Jerry Moyes, our then-CEO and controlling stockholder, was the principal owner of Central. Given Mr. Moyes' interests in the temperature-controlled truckload industry, our Board established a special committee comprised solely of disinterested, independent directors in May of 2011 to evaluate Swift's expansion of its temperature-controlled operations. The special committee evaluated alternative business opportunities, including organic growth and various acquisition targets, and negotiated the transaction contemplated by the stock purchase agreement, with the assistance of its independent financial advisors. Upon the unanimous recommendation of the special committee, the Central Acquisition was approved by the Board (with Mr. Moyes not participating in the vote). |
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Industry and Competition |
Truckload carriers represent the largest part of the transportation supply chain for most retail and manufactured goods in North America and typically transport a full trailer (or container) of freight for a single customer from origin to destination without intermediate sorting and handling. Generally, the truckload industry is compensated based on miles, whereas the LTL industry is compensated based on package size and/or weight. Overall, the United States trucking industry is large, fragmented, and highly competitive. We compete with thousands of truckload carriers, most of whom operate much smaller fleets than we do. To a lesser extent, our intermodal services, as well as our freight brokerage and logistics business, compete with railroads, LTL carriers, logistics providers, and other transportation companies.
Our industry has encountered the following major economic cycles since 2000:
Period | Economic Cycle |
2000 — 2001 | industry over-capacity and depressed freight volumes |
2002 — 2006 | economic expansion |
2007 — 2009 | freight slowdown, fuel price spike, economic recession, and credit crisis |
2010 — 2013 | moderate recovery. The industry freight data began to show positive trends for both volume and pricing. The slow, steady growth is a result of moderate increases in gross domestic product, coupled with a tighter supply of available tractors. Trends in supply of available tractors were lower due to several years of below average truck builds, an increase in truckload fleet bankruptcies in 2009 and 2010, increasing equipment prices due to stringent EPA requirements, less available credit, and less driver availability. |
2014 — present | return to pre-recession levels and relative stabilization. In 2014, total spending on transportation, which fell during the 2007 – 2009 recession, returned to pre-recession levels. Truck tonnage grew throughout 2014, followed by decelerating growth in 2015, and relative stabilization in 2016. Capacity became looser in 2015 and 2016, as inventory levels were high and large volumes of tractor purchases created a supply/demand imbalance, putting pressure on pricing. Fuel prices declined. |
The principal means of competition in our industry are customer service, capacity, and price. In times of strong freight demand, customer service, and capacity become increasingly important, and in times of weak freight demand, pricing becomes increasingly important. Most truckload contracts (other than dedicated contracts) do not guarantee truck availability or load levels. Pricing is influenced by supply and demand.
The trucking industry faces the following primary challenges, which we believe we are well-positioned to address, as discussed under "Our Competitive Strengths" and "Company Strategy," below:
• | cumulative impacts of regulatory initiatives, such as ELDs, hours-of service limitations for drivers, and the FMCSA's CSA; |
• | uncertainty in the economic environment, including changing supply chain and consumer spending patterns; |
• | pressures on volumes and pricing from excess industry capacity, excess customer inventories, and depressed shipping demand; |
• | driver shortages; |
• | driver distraction and other unfavorable safety trends; |
• | significant and rapid fluctuations in fuel prices; and |
• | increased prices for new revenue equipment, design changes of new engines, and volatility in the used equipment sales market. |
Our Mission and Vision |
O U R V I S I O N | We are an efficient and nimble world class service organization that is focused on the customer. |
We are aligned and working together at all levels to achieve our common goals. | |
Our team enjoys our work and co-workers and this enthusiasm resonates both internally and externally. | |
We are on the leading edge of service, always innovating to add value to our customers. | |
Our information and resources can easily be adapted to analyze and monitor what is most important in a changing environment. | |
Our financial health is strong, generating excess operating cash flows and growing profitability year-after-year with a culture that is cost- and environmentally-conscious. | |
We train, build, and develop our employees through perpetual learning opportunities to enhance their skill sets, allowing us to recognize our talented people. | |
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Our Competitive Strengths |
We aspire to achieve the themes of our mission and vision and believe our competitive strengths and strategies will enable us to attain our desired level of service to customers and results for our shareholders. We believe the following competitive strengths provide a solid platform for pursuing our goals and strategies:
North American Truckload Leader with Broad Terminal Network and a Modern Fleet |
Our fleet size offers wide geographic coverage, while maintaining the efficiencies associated with significant traffic density within our operating regions. Our terminals are strategically located near key population centers, driver recruiting areas, and cross-border hubs, often in close proximity to our customers. This broad network offers benefits such as in-house maintenance, more frequent equipment inspections, localized driver recruiting, rapid customer response, and personalized marketing efforts. Our size allows us to achieve substantial economies of scale in purchasing items such as tractors, trailers, containers, fuel, and tires where pricing is volume-sensitive. We believe our scale also offers additional benefits in brand awareness and access to capital. Our OTR sleeper fleet has an average age of 2.4 years for our approximately 10,200 core operating units. By maintaining a newer fleet than many of our industry competitors, we believe that we have the following advantages: • Newer tractors typically have fewer repairs and lower operating costs. • Newer tractors are available for dispatch more often. • Drivers are typically more attracted to newer tractors, which helps with driver recruiting and retention. • Many competitors that allowed their fleets to age excessively will likely face a deferred capital expenditure spike, accompanied by difficulty in replacing their tractors because while new tractor prices have increased and the value received for the old tractors has decreased. |
High Quality Customer Service and Extensive Suite of Services |
Our intense focus on customer satisfaction has helped us establish a strong platform for cross-selling our other services to our strong and diversified customer base. We believe customers continue to search for ways to better streamline their transportation management functions. We respond to this need by providing our customers with solutions that include a wide variety of shipping services, including general and specialized truckload, cross-border services, regional distribution, high-service dedicated operations, intermodal service, and surge capacity through fleet flexibility and brokerage and logistics operations. This breadth of service helps diversify our customer base and provides us with a competitive advantage, especially for customers with multiple needs and cross-border United States/Mexico and United States/Canada shipments. |
Strong Owner-operator Business |
We supplement our company tractor fleet with owner-operators, who own and operate their own tractors and are responsible for ownership and operating expenses. We believe that owner-operators provide significant advantages that primarily arise from the entrepreneurial motivation of business ownership. The owner-operators we contract with tend to be more experienced, have fewer accidents per million miles, and on average, produce higher weekly revenue per tractor than our company drivers. |
Leader in Driver Development |
Historically, driver recruiting and retention have been significant challenges for truckload carriers. To address these challenges, we employ nationwide recruiting efforts through our terminal network, operate eleven driver academies, partner with third-party driver training facilities, provide drivers with modern tractors, and promote numerous driver satisfaction initiatives. |
Regional Operating Model |
Our short- and medium-haul regional operating model contributes to higher revenue per mile and takes advantage of shipping trends toward regional distribution. We also experience less competition in our short- and medium-haul regional business from railroads. In addition, our regional terminal network allows our drivers to be home more often, which assists with driver retention. |
Experienced Management, Aligned with Corporate Success |
Our management team has a proven track record of growth and cost control. Management focuses on disciplined execution and financial performance by measuring our progress through a combination of financial metrics. We align management's priorities with our stockholders' through equity incentive awards and an annual performance-based bonus plan. |
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Company Strategy |
Our key financial goals include improving our asset utilization, controlling costs, growing Adjusted EPS (defined in "Non-GAAP Financial Measures" under Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations), improving return on net assets, as well as generating cash flow to reinvest in our business, repay debt, and return capital to our stockholders. We align our company focus to attain these goals by implementing the following strategies, which we believe also serve to minimize the impact of challenges currently faced in the trucking industry.
Profitable Revenue Growth | |
To increase freight volumes and yield, we intend to further penetrate our existing customer base, cross-sell our services, pursue new customer opportunities by leveraging our outstanding customer service and extensive suite of truckload services, and effectively price fuel surcharges. In our pursuit to be best in class, we survey our customers and identify areas where we can accelerate the capture of new freight opportunities, improve our customers' experience, and profit from enhancing the value our customers receive. We are continuously refining our freight management tools to allocate our equipment to more profitable loads and complementary shipping lanes. In addition to growth in our core OTR dry van truckload business, we are targeting expansion in the following areas: | |
Dedicated Services and Private Fleet Outsourcing | Dedicated contracts are often used by our customers with high-service and high-priority freight, sometimes to replace private fleets previously operated by them. The size and scale of our fleet and terminal network allows us to provide the equipment availability and high service levels required for dedicated contracts. We believe these opportunities will increase in times of scarce capacity in the truckload industry. |
Temperature-controlled | Beginning with the Central Acquisition, we compete in the over-the-road temperature-controlled business to complement our dedicated temperature-controlled and our OTR dry van service offerings. Growth in the temperature-controlled market has outpaced the dry van market over the past ten years, and many of our current customers have a need for this service. We believe the scale provided by the Central Acquisition and our ability to penetrate our existing customer base provides us with future opportunities in this growing market. |
Cross-border United States/Mexico and United States/Canada Freight | The combination of our United States, cross-border, customs brokerage, and Mexican operations enables us to provide efficient door-to-door service between the United States and Mexico, as well as Canada. We believe our sophisticated load security measures, as well as our DHS status as a C-TPAT carrier, allow us to offer more efficient service than most competitors and afford us substantial advantages with major cross-border United States/Mexico and United States/Canada shippers. |
Freight Brokerage and Logistics | We believe we have a substantial opportunity to continue to increase our non-asset-based freight brokerage and logistics services. We believe many customers increasingly seek transportation companies that offer both asset-based and non-asset-based services to ensure additional certainty that safe, secure, and timely truckload service will be available on demand. We intend to continue growing our transportation management and freight brokerage capability to build market share, earn marginal revenue on more loads, and preserve our assets for the most attractive lanes and loads. |
Intermodal | We have intermodal agreements with most major North American rail carriers, which have helped increase our volumes through more competitive pricing. Our intermodal presence, which expanded to service Mexico in 2013, complements our regional operating model and allows us to better serve customers in longer haul lanes and reduce our investment in fixed assets. Our intermodal fleet has more than doubled its size since its inception in 2005. Our capacity totaled 9,131 and 9,150 containers as of December 31, 2016 and 2015, respectively. |
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Increase Asset Productivity and Return on Capital | |
Because of our size and operating leverage, even small improvements in our asset productivity and yield can have a significant impact on our operating results. We believe we have substantial opportunity to improve the productivity and yield of our existing assets as follows: | |
Disciplined Tractor Fleet Growth | We will continue to focus on maintaining discipline regarding the timing and extent of company tractor fleet growth, based on availability of high-quality freight. |
Process Improvement and System Integration | Successful implementation of process improvements and effective systems integration will achieve more efficient utilization of our tractors, trailers, and drivers' available hours-of-service. For example, our entire tractor fleet is retrofitted with ELDs, which we believe can help us more efficiently utilize our drivers' available hours-of-service. |
Tractor Utilization | We use equipment pools, relays, team drivers, and similar measures to improve company tractor utilization. |
Owner-operator Trucking Capacity | On average, owner-operators produce higher weekly revenue per tractor than company drivers. As such, we generally prefer to increase the percentage of our trucking capacity provided by owner-operators, when possible. |
Elimination of Unproductive Assets | Our return on capital improves as we successfully eliminate unproductive assets. |
Continue to Focus on Efficiency and Cost Control | |
To ensure that we respond appropriately to economic change, we closely manage our costs and capital resources and continually monitor the economic environment, as well as its potential impact on our customers and end-markets. We presently have ongoing efforts in the following areas that we expect will yield benefits in future periods: | |
Tractor Capacity | In order to balance freight flows and reduce deadhead miles, we manage the flow of our tractor capacity through our network. |
Driver Satisfaction | Improving driver satisfaction typically reduces turnover costs and improves performance. We believe our driver development programs, including our driver academies and nationwide recruiting, will become increasingly advantageous to us in countering attrition effects stemming from noncompliance with internal policies and procedures, as well as recent regulatory initiatives (discussed below). In addition, we believe that the negative impact of such regulations will be partially mitigated by our average length of haul, regional terminal network, and less mileage-intensive operations, such as intermodal, dedicated, brokerage, and cross-border operations. |
Waste Reduction | Reducing waste in shop methods and procedures and in other administrative processes remains important to us. |
Pursue Selected Acquisitions | |
From time to time, we take advantage of opportunities to add complementary operations to our company by pursuing acquisitions. Acquisitions can provide us an opportunity to expand our fleet with customer revenue and drivers already in place. In our history, we have completed 13 acquisitions, including Central in 2013, most of which were immediately integrated into our existing business. Given our size in relation to most competitors, we expect most future acquisitions to be integrated quickly. | |
We believe that by achieving profitable revenue growth, improving asset utilization, continuing to control costs, and streamlining our processes, we will be able to grow our Adjusted EPS and our return on net assets, while generating free cash flow to reinvest in our business, potentially acquire complementary businesses, repay debt, reduce our leverage ratio, and return capital to our stockholders. These goals are in part dependent on continued improvement in industry-wide truckload volumes and pricing. Although we expect the economic environment and capacity constraints in our industry to support achievement of our goals, we have limited ability to affect industry volumes and pricing and cannot provide assurance that this environment will sustain. Nevertheless, we believe our competitive strengths and the expected supply and demand environment in the truckload industry are aligned to support the achievement of our goals through the strategies outlined above.
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Information by Segment and Geography |
• | Segments — Our four reportable segments are Truckload, Dedicated, Swift Refrigerated, and Intermodal. Segment information is provided in Notes 2 and 24 to the consolidated financial statements, including accounting and reporting policy, segment definitions, and financial information. Supplementary segment information is available in Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations. |
• | Geography — The required disclosures relating to revenue and long-lived assets by geography are included in Note 24 to the consolidated financial statements. Income tax information by geography is included in Note 11 to the consolidated financial statements. |
Customers and Marketing |
• | Customers — Our customers are typically large corporations in the retail (including discount and online retail), food and beverage, consumer products, paper products, transportation and logistics, housing and building, automotive, and manufacturing industries. Many of our customers have extensive operations, geographically distributed locations, and diverse shipping needs. Customer satisfaction is an important priority for us, which is demonstrated by the numerous "carrier of the year" or similar awards received from our customers over the past several years. Such achievements have helped us maintain a large and stable customer base featuring Fortune 500 and other leading companies from a number of different industries. Consistent with industry practice, our typical customer contracts (other than dedicated contracts) do not guarantee shipment volumes by our customers or truck availability by us. This affords us and our customers some flexibility to negotiate rates in response to changes in freight demand and industry-wide truck capacity. We believe our fleet capacity, terminal network, customer service and breadth of services offer a competitive advantage to major shippers, particularly in times of rising freight volumes when shippers must quickly access capacity across multiple facilities and regions. |
Customer Concentration | ||||||||||||||
(as a percentage of consolidated operating revenue) | ||||||||||||||
Largest (Wal-Mart) | Top 5 | Top 10 | Top 25 | Top 200 | ||||||||||
One customer, Wal-Mart, accounted for more than 10% of our operating revenue during 2016, 2015, and 2014.
• | Marketing — We concentrate our marketing efforts on cross-selling our extensive suite of services we provide to existing customers, as well as on establishing new customers with shipment needs that complement our terminal network and existing routes. At December 31, 2016, we had a sales staff of approximately 40 individuals across the United States, Mexico, and Canada, who work closely with management to establish and expand accounts. |
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Revenue Equipment |
We operate a modern company tractor fleet to help attract and retain drivers, promote safe operations, and reduce maintenance and repair costs. The following table shows the age of our owned and leased tractors and trailers as of December 31, 2016:
Model Year | Tractors (1) | Trailers | ||||
2017 | 1,225 | 6,696 | ||||
2016 | 3,856 | 4,521 | ||||
2015 | 3,142 | 6,664 | ||||
2014 | 4,011 | 4,593 | ||||
2013 | 675 | 4,551 | ||||
2012 | 343 | 3,753 | ||||
2011 | 83 | 3,189 | ||||
2010 | 13 | 111 | ||||
2009 | 78 | 4,392 | ||||
2008 | 150 | 1,857 | ||||
2007 | 99 | 129 | ||||
2006 and prior | 262 | 23,610 | ||||
Total | 13,937 | 64,066 | ||||
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(1) Excludes 4,429 owner-operator tractors.
We typically purchase or lease tractors and trailers manufactured to our specifications. We follow a comprehensive maintenance program designed to reduce downtime and enhance the resale value of our equipment. We have major maintenance facilities in the following locations:
• | Phoenix, Arizona |
• | Memphis, Tennessee |
• | Greer, South Carolina |
• | West Valley City, Utah |
• | Columbus, Ohio |
• | Laredo, Texas |
• | Jurupa Valley, California |
In addition to these maintenance facilities, we perform routine servicing and maintenance of our revenue equipment at most of our regional terminal facilities, in an effort to avoid costly on-road repairs and deadhead miles. The contracts governing our equipment purchases typically contain specifications of equipment, projected delivery dates, warranty terms, and trade or return conditions, and are cancelable upon 60 to 90 days' notice without penalty.
Our tractor trade-in cycle range, depending on equipment type and usage, was 42 to 48 months and 36 to 48 months, during 2016 and 2015, respectively. Our newer equipment has enhanced features, which we believe tends to lower the overall life cycle costs by reducing safety-related expenses, lowering repair and maintenance expenses, improving fuel economy, and improving driver satisfaction. In 2017 and beyond, we will continue to monitor the appropriateness of this relatively short tractor trade-in cycle against the lower capital expenditure and financing costs of a longer tractor trade-in cycle, based on current and future business needs.
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Technology |
Trucks — We equip virtually all of our trucks with certain OmniTRACStm technologies that enhance communication between the regional terminals and corporate headquarters, as well as the added benefits of ELDs, text-to-voice messaging, and turn-by-turn directions designed specifically for our industry. This allows us to alter driver routes rapidly, in case of urgent customer requests, adverse weather conditions, road closures, or other potential delays. It also enables our drivers to timely communicate route status or the need for emergency repairs. These technologies have afforded us additional productivity, improved safety, and increased customer and driver satisfaction.
We reduce costs through programs that manage equipment maintenance, select fuel purchasing locations in our nationwide network of terminals and approved truck stops, and inform us of inefficient or undesirable driving behaviors that are monitored and reported through electronic engine sensors and cameras. We believe our technologies and systems are superior to those employed by most of our smaller competitors.
Trailers and Containers — The majority of our trailers and containers are equipped with tracking devices that monitor locations of empty and loaded equipment via satellite. We also use geofencing, along with other on-site and off-site tracking capabilities to ensure we are alerted when our equipment is not located where we are expecting it to be located. These technological capabilities enable us to identify unused or stolen units, enhance our ability to charge for units detained by customers, and reduce theft.
Enterprise Resource Planning ("ERP") — In 2016, we began preliminary planning phases to replace our current ERP with a new solution, including identification of needs, request for proposal, evaluation of alternatives, and final selection of a new ERP. Beginning in 2017, the Company will be in the implementation phases of replacing its current ERP system with a new cloud-based solution. The core applications of the new ERP within finance, human resources, and payroll are expected to go live in 2018.
Employees |
The strength of our company is our people, working together with common goals. There were approximately 21,800 full-time employees in our total headcount of approximately 21,900 employees as of December 31, 2016, which was comprised of:
Company drivers (including driver trainees) | 16,600 | ||
Technicians and other equipment maintenance personnel | 1,300 | ||
Support personnel (such as corporate managers, sales, and administrative personnel) | 4,000 | ||
Total | 21,900 | ||
As of December 31, 2016, our 821 Trans-Mex drivers in Mexico were our only employees represented by a union.
Company Drivers — All of our drivers must meet specific guidelines relating primarily to safety records, driving experience, and personal evaluations, including a physical examination and mandatory drug and alcohol testing. Upon hire, drivers are trained in our policies, operations, safety techniques, and the fuel-efficient operation of the equipment. All new drivers must pass a safety test and have a current CDL. In addition, we have ongoing driver efficiency and safety programs to ensure that our drivers comply with our safety procedures.
We have established eleven driver academies across the United States. Our academies are strategically located in areas where external driver-training organizations were lacking. In other areas of the United States, we have contracted with driver-training schools, which are managed by third parties. There are certain minimum qualifications for candidates to be accepted into the academy, including passing the DOT physical examination and drug/alcohol screening. Students are required to complete three weeks of instructor-led study/training and then spend a minimum of 200 behind-the-wheel hours, driving with an experienced trainer.
In order to attract and retain qualified drivers and promote safe operations, we purchase high quality tractors equipped with optional comfort and safety features. We base our drivers at terminals and monitor each driver's location in order to schedule routing for our drivers so they can return home regularly. The majority of company drivers are compensated based on industry standard dispatched miles, loading/unloading, and number of stops or deliveries, plus bonuses. The driver's base pay per mile increases with the driver's length of experience. Our driver ranking system measures safety, compliance, customer service, and number of miles driven. Higher rankings provide drivers with additional benefits and/or privileges, such as special recognition, the ability to self-select freight, and the opportunity for increased pay.
Upon enrollment eligibility, drivers employed by us may participate in company-sponsored health, life and dental insurance plans and participate in our 401(k) and employee stock purchase plans.
Terminal Staff — Most of our large terminals are staffed with terminal leaders, fleet leaders, driver leaders, planners, safety coordinators, shop leaders, technicians, and customer service representatives. Our terminal leaders work with driver leaders, customer service representatives, and other operations personnel to coordinate the needs of both our customers and our drivers. Terminal leaders are also responsible for serving existing customers in their areas. Each fleet leader supervises approximately five
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driver leaders at our larger terminals. Each driver leader is responsible for the general operation of approximately 40 to 50 trucks and their drivers, focusing on driver retention, productivity per truck, fuel consumption, fuel efficiency (with respect to driver-controllable idle time), safety, and scheduled maintenance. Customer service representatives are assigned specific customers to ensure specialized, high-quality service, and frequent customer contact.
Owner-Operators |
In addition to Swift-employed company drivers, we enter into contractor agreements with third parties who own and operate tractors (or hire their own drivers to operate the tractors) that service our customers. We pay these owner-operators for their services, based on a contracted rate per mile. By operating safely and productively, owner-operators can improve their own profitability and ours. Owner-operators are responsible for most costs incurred for owning and operating their tractors. For convenience, we offer owner-operators maintenance services at our in-house shops and fuel at our terminals at competitive and attractive prices. As of December 31, 2016, owner-operators comprised 24.1% of our total fleet, as measured by tractor count.
We offer tractor financing to independent owner-operators through our financing subsidiaries. Our financing subsidiaries generally lease premium equipment from the original equipment manufacturers and sublease the equipment to owner-operators. The owner-operators are qualified for financing, based on their driving and safety records. In the event of default, our financing subsidiaries have the option to repossess the tractor and sublease it to a replacement owner-operator.
Safety and Insurance |
We take pride in our safety-oriented culture and maintain an active safety and loss-prevention program, which is led by regional safety management personnel at each of our terminals. We also equip our tractors with many safety features, such as roll-over stability devices and critical-event recorders, to help prevent or reduce the severity of accidents. We self-insure for a significant portion of our claims exposure and related expenses. We currently carry seven main types of insurance, which generally have the following self-insured retention amounts, maximum benefits per claim, and other limitations:
Insurance | Limits |
Automobile Liability, General Liability, and Excess Liability | $250.0 million of coverage per occurrence ($350.0 million aggregated limits through October 31, 2016), subject to a $10.0 million self-insured retention per-occurrence. |
Cargo Damage and Loss | $2.0 million limit per truck or trailer with a $10.0 million limit per occurrence; provided that there is a $1.0 million limit for tobacco loads and a $250 thousand deductible |
Property and Catastrophic Physical Damage | $150.0 million limit for property and $100.0 million limit for vehicle damage, excluding over the road exposures, subject to a $1.0 million deductible |
Workers' Compensation/Employers' Liability | Statutory coverage limits; employers' liability of $1.0 million bodily injury by accident and disease, subject to a $5.0 million self-insured retention for each accident or disease |
Employment Practices Liability | Primary policy with a $10.0 million limit subject to a $2.5 million self-insured retention |
Health Care | As of January 1, 2015, we are fully insured on our medical benefits, subject to contributed premiums. Prior to January 1, 2015, we had a $500 thousand specific deductible with an aggregating individual deductible of $150 thousand of each employee health care claim, as well as commercial insurance for the balance. |
Director and Officer Insurance | We maintain insurance that covers our directors and officers for losses and expenses arising out of claims, based on acts or omissions in their capacities as directors or officers. |
We insure certain casualty risks through our wholly-owned captive insurance subsidiaries, Mohave and Red Rock. Mohave and Red Rock provide reinsurance associated with a share of our automobile liability risk. In addition to insuring a proportionate share of our corporate casualty risk, Mohave provides reinsurance coverage to third-party insurance companies associated with our affiliated companies' owner-operators.
While under dispatch and our operating authority, the owner-operators we contract with are covered by our liability coverage and self-insurance retention limits. However, each is responsible for physical damage to his or her own equipment, occupational accident coverage, and liability exposure while the truck is used for non-company purposes. Additionally, fleet operators are responsible for any applicable workers' compensation requirements for their employees.
For safety, we electronically govern the speed of substantially all of our company tractors to a maximum of 62 miles per hour. Additionally, our owner-operator contracts include statements that owner-operators must comply with the Company's speed policy, which indicates that they must limit their speed to 67 miles per hour. These adopted speed limits are below the limits established by statute in many states. We believe our adopted speed limits for drivers reduce the frequency and severity of accidents, enhance fuel efficiency, and reduce maintenance expense, when compared to operating without our imposed speed limits.
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Fuel |
We actively manage our fuel purchasing network in an effort to maintain adequate fuel supplies and reduce our fuel costs. Additionally, we utilize a fuel surcharge program to pass a majority of increases in fuel costs to our customers. In 2016, we purchased 16.9% of our fuel in bulk at 56 Swift and dedicated customer locations across the United States and Mexico. We purchased substantially all of the remainder through a network of retail truck stops with which we have negotiated volume purchasing discounts. The volumes we purchase at terminals and through the fuel network vary based on procurement costs and other factors. We seek to reduce our fuel costs by routing our drivers to truck stops when fuel prices at such stops are cheaper than the bulk rate paid for fuel at our terminals. We store fuel in underground storage tanks at two of our bulk fueling terminals and in above-ground storage tanks at our other bulk fueling terminals. We believe that we are sufficiently in compliance with applicable environmental laws and regulations relating to the storage and dispensing of fuel.
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 and fourth quarters have historically been our strongest volume quarters. As customers reduce shipments after the winter holiday season, the first quarter has historically been a lower volume quarter for us 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, our fourth quarter 2016, 2015, and 2014 volumes did not peak early in the quarter. Instead, volumes during the fourth quarter were more evenly disbursed throughout the quarter, with a brief decrease the week of the U.S. Thanksgiving holiday and then tapering off the last week of the year. In the eastern and mid-western United States, and to a lesser extent in the western United States, during the winter season our equipment utilization typically declines and operating expenses generally increase, with fuel efficiency declining because of engine idling and severe weather sometimes creating higher accident frequency, increased claims, and more equipment repairs. Revenue may also be affected by holidays as a result of curtailed operations or vacation shutdowns, because our revenue is directly related to available working days of shippers. From time to time, we also suffer short-term impacts from severe weather and similar events, such as tornadoes, hurricanes, blizzards, ice storms, floods, fires, earthquakes, and explosions that could harm our results of operations or make our results of operations more volatile.
Environmental Regulation |
General — We have bulk fuel storage and fuel islands at many of our terminals, as well as vehicle maintenance, repair, and washing operations at some of our facilities, which exposes us to certain environmental risks. Soil and groundwater contamination have occurred at some of our facilities in prior years, for which we have been responsible for remediating the environmental contamination. Also, less than one percent of our total shipments contain hazardous materials, which are generally rated as low- to medium-risk. In the past, we have been responsible for the costs of clean-up of cargo and diesel fuel spills caused by traffic accidents or other events.
We have instituted programs to monitor and mitigate environmental risks and maintain compliance with applicable environmental laws dealing with the hauling, handling, and disposal of hazardous materials, fuel spillage or seepage, emissions from our vehicles and facilities, engine-idling, discharge and retention of storm water, and other environmental matters. As part of our safety and risk management program, we periodically perform internal environmental reviews. We are a Charter Partner in the EPA's SmartWay Transport Partnership, a voluntary program promoting energy efficiency and air quality. We believe that our operations are sufficiently in compliance with current laws and regulations and do not know of any existing environmental condition that would reasonably be expected to have a material adverse effect on our business or operating results.
If we are held responsible for the cleanup of any environmental incidents caused by our operations or business, or if we are found to be in violation of applicable laws or regulations, we could be subject to liabilities, including substantial fines or penalties or civil and criminal liability. We have paid penalties for spills and violations in the past; however, they have not been material to our financial results or position.
Greenhouse Gas Emissions and Fuel Efficiency Standards — In 2008 the State of California's Air Resources Board ("ARB") approved the Heavy-Duty Vehicle GHG Emission Reduction Regulation in efforts to reduce GHG emissions from certain long-haul tractor-trailers that operate in California by requiring them to utilize technologies that improve fuel efficiency (regardless of where the vehicle is registered). The regulation required owners of long-haul tractors and 53-foot trailers to replace or retrofit their vehicles with aerodynamic technologies and low rolling resistance tires. The regulation also contained certain emissions and registration standards for refrigerated trailers.
Thereafter, the EPA and the National Highway Traffic Safety Administration ("NHTSA") began taking coordinated steps in support of a new generation of clean vehicles and engines through reduced GHG emissions and improved fuel efficiency at a national level.
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• | Phase 1: In September 2011, the EPA finalized federal regulations for controlling GHG emissions, beginning with model-year 2014 medium- and heavy-duty engines and vehicles and increasing in stringency through model-year 2018. The federal regulations relate to efficient engines, use of auxiliary power units, mass reduction, low rolling resistance tires, improved aerodynamics, improved transmissions, and reduced accessory loads. |
In December 2013, California's ARB approved regulations to align its GHG emission standards and test procedures, as well as its tractor-trailer GHG regulation, with the federal Phase 1 GHG regulation.
• | Phase 2: In June 2015, the EPA and NHTSA, working in concert with California's ARB, formally announced a proposed national program establishing Phase 2 of the GHG emissions and fuel efficiency standards for medium- and heavy-duty vehicles for model-year 2018 and beyond. In August 2016, the EPA and NHTSA announced the final rule regarding Phase 2, which builds upon Phase 1, and would apply to certain trailer types beginning with model-year 2018 for EPA standards (voluntary for NHTSA standards through model-year 2020). Tractors and certain trailer types would be subject to the Phase 2 standards beginning with model-year 2021, increasing in stringency through model-year 2024, and phasing in completely by model-year 2027. This rule marks the first time federal mandates will be applied to trailers, with respect to aerodynamics and low-rolling resistance tires. The final rule was effective December 27, 2016. |
Current and proposed GHG regulations could impact us by increasing the cost of new tractors and trailers, impairing productivity, and increasing our operating expenses.
Climate-change Proposals — Federal and state lawmakers are considering a variety of climate-change proposals related to carbon emissions and GHG emissions. The proposals could potentially limit carbon emissions for certain states and municipalities, which continue to restrict the location and amount of time that diesel-powered tractors (like ours) may idle.
Industry Regulation |
Our operations are regulated and licensed by various federal, state, and local government agencies in North America, including the DOT, the FMCSA, and the DHS, among others. Our company, as well as our drivers and contracted owner-operators, must comply with enacted governmental regulations regarding safety, equipment, and operating methods. Examples include regulation of equipment weight, equipment dimensions, driver hours-of-service, driver eligibility requirements, on-board reporting of operations, and ergonomics. The following discussion presents recently enacted federal, state, and local regulations that have an impact on our operations.
• | Hours-of-service — In December 2011, the FMCSA released its final rule on hours-of-service, which was effective on July 1, 2013. The key provisions included: |
◦ | retaining the current 11-hour daily driving time limit; |
◦ | reducing the maximum number of hours a truck driver can work within a week from 82 hours to 70 hours; and |
◦ | limiting the number of consecutive driving hours a truck driver can work to eight hours before requiring the driver to take a 30 minute break. |
Since 2004 the hours-of-service rules allowed drivers to restart their duty-cycle clocks every 34 hours to begin a new work week. From July 2013 through December 2014, the FMCSA required that drivers include 1:00 a.m. to 5:00 a.m. on consecutive days for applying the restart, which was also capped at once per week, or 168 hours. On December 13, 2014, Congress passed the fiscal year 2015 Omnibus Appropriations bill, which temporarily suspended enforcement of the 1:00 to 5:00 am provision and the 168-hour rule until September 30, 2015. The restart provision was again suspended in December 2015, pending completion of a study regarding driver restarts, when Congress passed the fiscal year 2016 Omnibus Appropriations bill. All other provisions of the hours-of-service rules that went into effect on July 1, 2013 remained unchanged.
In December 2016, a short-term funding bill was passed by Congress, which clarified the hours-of-service rule. The provision in the bill requires the DOT to proceed with the existing 34-hour restart provision in the hours-of-service rule to ensure continuity in federal rest regulations, should the report on the study (noted above) not meet the criteria set by Congress. If the report, which was completed in December 2015, successfully addresses fatigue, then the rules would go back into effect. We are not aware of any further developments related to the hours-of-service rules.
• | BASICs — In December 2010, the FMCSA introduced a new enforcement and compliance model that ranks both fleets and individual drivers on seven categories of safety-related data, eventually replacing the current SafeStat model. The seven categories of safety-related data, known as BASICs, currently include Unsafe Driving, Fatigued Driving (hours-of-service), Driver Fitness, Controlled Substances/Alcohol, Vehicle Maintenance, Hazardous Materials Compliance, and Crash Indicator. |
Certain BASICs information was initially published and made available to carriers, as well as the general public. However, in December 2015, as part of the Fixing America's Surface Transportation ("FAST") Act, Congress mandated that the FMCSA remove all CSA scores from public view until a more comprehensive study regarding the effectiveness of BASICs improving
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truck safety could be completed. The study is currently underway and a report to Congress is expected to be published in June 2017.
Implementation and effective dates are unclear. In October 2016, the FMCSA outlined proposed changes to its safety measurement system and sought public feedback through December 2016 before deciding whether to adopt the proposed changes. SafeStat is currently the authoritative safety measurement system in effect. We currently have a satisfactory SafeStat DOT rating, which is the best available rating under the current safety rating scale.
• | Safety Fitness Determination — In January 2016, the FMCSA published a Notice of Proposed Rulemaking ("NPRM") in the Federal Register, regarding carrier safety fitness determination. The NPRM proposes new methodologies that would determine when a motor carrier is not fit to operate a commercial motor vehicle. Key proposed changes included in the NPRM are as follows: |
◦ | There would be only one safety rating of "unfit," as compared to the current rules, which have three safety ratings (satisfactory, conditional, and unsatisfactory). |
◦ | Carriers could be determined "unfit" by failing two or more BASICs, investigation results, or a combination of the two. |
◦ | Stricter standards would be used for BASICs with a higher correlation to crash risk (Unsafe Driving and Hours-of-Service Compliance). |
◦ | All investigation results would be used, not just results from comprehensive on-site reviews. |
◦ | Violations of a revised list of "critical" and "acute" safety regulations would result in failing a BASIC. |
◦ | Carriers would be assessed monthly. |
Public comments on the proposed rule were due in June 2016.
• | Moving Ahead for Progress in the 21st Century Bill — In July 2012, Congress passed the Moving Ahead for Progress in the 21st Century bill into law. Included in the highway bill was a provision that mandates electronic logging devices in commercial motor vehicles to record hours-of-service. Additionally, in response to the bill, a final rule related to entry-level driver training was passed in 2016, as well as amendments to the Drug and Alcohol Clearinghouse rules. |
◦ | Electronic Logging Devices ("ELD") — During 2012, the FMCSA published a Supplemental NPRM, announcing its plan to proceed with the ELDs and hours-of-service supporting documents rulemaking. The ELD rule became final in December 2015, as published in the Federal Register, with an effective date of February 16, 2016. The ELD rule phases in over a four-year period: |
▪ | Phase 1 (February 16, 2016 through December 18, 2017): Carriers and drivers subject to the rule may voluntarily use ELDs or use other forms of logging devices. |
▪ | Phase 2 (December 18, 2017 through December 16, 2019): Carriers and drivers subject to the rule can use Automatic On-board Recording Devices ("AOBRD") that were installed prior to December 18, 2017 or ELDs certified and registered after December 16, 2015. |
▪ | Phase 3 (after December 16, 2019): All drivers and carriers subject to the rule must use certified and registered ELDs that comply with the requirements of the ELD regulations. |
Although the final ELD rule may have a large impact on the industry as a whole, we do not expect a significant impact on Swift, as we previously installed ELDs in our operational trucks in conjunction with our efforts to improve efficiency and communications with drivers and owner-operators.
◦ | Entry-Level Driver Training ("ELDT") — In December 2016, the FMCSA established new minimum training standards for certain individuals applying for (or upgrading) a Class A or Class B commercial driver's license, or obtaining a hazardous materials, passenger, or school bus endorsement on their commercial driver's license for the first time. These individuals are subject to the ELDT requirements and must complete a prescribed program of theory and behind-the wheel instruction. The final rule requires that behind-the-wheel proficiency of an entry-level truck driver be determined solely by the instructor's evaluation of how well the driver-trainee performs the fundamental vehicle controls skills and driving procedures set forth in the curricula, but does not have a minimum training hours requirement, as proposed by the FMCSA earlier in 2016. The final rule went into effect on February 6, 2017, with a compliance date of February 7, 2020. Upon the compliance date, training schools will be required to register with the FMCSA's Training Provider Registry and certify that their program meets the classroom and driving standards. |
◦ | Commercial Driver's License Drug and Alcohol Clearinghouse — In December 2016, the FMCSA amended the Federal Motor Carrier Safety Regulations to establish requirements of the Commercial Driver's License Drug and Alcohol Clearinghouse, a database under its administration that will contain information about violations of the FMCSA's drug and alcohol testing program for holders of commercial driver's licenses. In addition to requiring employers to check the database for driver applicant drug and alcohol test failures, the final rule requires employers to check the database to determine |
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whether current employees have incurred a drug or alcohol violation that would prohibit them from performing safety-sensitive functions. The final rule is effective January 4, 2017, with a compliance date of January 6, 2020.
• | Prohibiting Coercion of Commercial Motor Vehicle Drivers — In November 2015, the Prohibiting Coercion of Commercial Motor Vehicle Drivers rule became final, as published in the Federal Register and adopted by the FMCSA. The rule explicitly prohibits motor carriers from coercing drivers to violate certain FMCSA regulations, including driver hours-of-service limits, CDL regulations, drug and alcohol testing rules, and hazardous materials regulations, among others. Under the rule, drivers can report incidents of coercion to the FMCSA, who is authorized to issue penalties against the motor carrier. |
• | Speed Limiting Devices — In September 2016, the NHTSA and FMCSA proposed regulations that would require speed limiting devices on vehicles with a gross vehicle weight rating of more than 26,000 pounds for the service life of the vehicle. The speed is expected to be limited to 62, 65, or 68, but would ultimately be set by the final rule. Based on the agencies' review of the available data, limiting the speed of these heavy vehicles would reduce the severity of crashes involving these vehicles and reduce the resulting injuries and fatalities. Public comments on the proposed rule were due in November 2016. |
For safety, we electronically govern the speed of substantially all of our company tractors to a maximum of 62 miles per hour. Additionally, our owner-operator contracts include statements that owner-operators must comply with the Company's speed policy, which indicates that they must limit their speed to 67 miles per hour.
Other Regulation |
• | The TSA — In the aftermath of the September 11, 2001 terrorist attacks, federal, state, and municipal authorities implemented and continue to implement various security measures on large trucks, including checkpoints and travel restrictions. The TSA adopted regulations that require drivers applying for or renewing a license for carrying hazardous materials to obtain a TSA determination that they are not a security threat. |
• | WOTC — In December 2014, United States President, Barack Obama, signed the Tax Increase Prevention Act of 2014 ("TIPA"). Among other things, TIPA extended 50% bonus depreciation and the Work Opportunity Tax Credit ("WOTC"). In December 2015, President Obama signed the Protecting Americans from Tax Hikes ("PATH") Act of 2015. Among other things, PATH further extended 50% bonus depreciation and WOTC. The financial impact of these regulations is discussed in Note 11 in Part II, Item 8. |
Available Information |
General information about Swift is provided, free of charge, on our website, www.swifttrans.com. This website also includes our annual reports on Form 10-K with accompanying XBRL documents, quarterly reports on Form 10-Q with accompanying XBRL documents, current reports on Form 8-K, and amendments to those reports that are filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable once the material is electronically filed or furnished to the SEC.
ITEM 1A. | RISK FACTORS |
When evaluating our company, the following risks should be considered in conjunction with the other information contained in this annual report on Form 10-K. If we are unable to mitigate and/or are exposed to any of the following risks in the future, then there could be a material, adverse effect on our business, results of operations, or financial condition.
Strategic Risk |
The truckload industry is affected by economic and business risks that are largely beyond our control.
The truckload industry is highly cyclical, and our business is dependent on a number of factors that may have a negative impact on our results of operations, many of which are beyond our control. We believe that some of the most significant of these factors are economic changes that affect supply and demand in transportation markets, such as:
• | recessionary economic cycles, such as the period from 2007 to 2009; |
• | changes in customers' inventory levels, including shrinking product/package sizes, and in the availability of funding for their working capital; |
• | excess tractor capacity in comparison with shipping demand; and |
• | downturns in customers' business cycles. |
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The risks associated with these factors are heightened when the United States economy is weakened. Some of the principal risks during such times, which we experienced during the most recent recession, are as follows:
• | low overall freight levels, which typically impair our asset utilization; |
• | customers with credit issues and cash flow problems; |
• | changing freight patterns from redesigned supply chains, resulting in imbalance between our capacity and customer demand; |
• | customers bidding out freight or selecting competitors that offer lower rates, in an attempt to lower their costs, forcing us to lower our rates or lose freight; and |
• | more deadhead miles incurred to obtain loads. |
We are also subject to cost increases outside our control (for example fuel and diesel prices) that could materially reduce our profitability if we are unable to increase our rates sufficiently.
In addition, events outside our control, such as strikes or other work stoppages at our facilities or at customer, port, border, or other shipping locations, actual or threatened armed conflicts or terrorist attacks, efforts to combat terrorism, military action against a foreign state or group located in a foreign state, or heightened security requirements could lead to reduced economic demand, reduced availability of credit, or temporary closing of shipping locations or United States borders.
The truckload industry is highly competitive and fragmented, which subjects us to competitive pressures pertaining to pricing, capacity, and service.
Our operating segments compete with many truckload carriers, and some LTL carriers, railroads, logistics, brokerage, freight forwarding, and other transportation companies. Additionally, some of our customers may utilize their own private fleets rather than outsourcing loads to us. Some of our competitors may have greater access to equipment, a wider range of services, greater capital resources, less indebtedness, or other competitive advantages. Numerous competitive factors could impair our ability to maintain or improve our profitability. These factors include the following:
• | Many of our competitors periodically reduce their freight rates to gain business, especially during times of reduced growth in the economy. This may make it difficult for us to maintain or increase freight rates, or may require us to reduce our freight rates, or lose freight. Additionally, it may limit our ability to maintain or expand our business. |
• | Since some of our customers also operate their own private trucking fleets, they may decide to transport more of their own freight. |
• | Some shippers have selected core carriers for their shipping needs, for which we may not be selected. |
• | Many customers periodically solicit bids from multiple carriers for their shipping needs, which may depress freight rates or result in a loss of business to competitors. |
• | The continuing trend toward consolidation in the trucking industry may result in more large carriers with greater financial resources and other competitive advantages, with which we may have difficulty competing. |
• | Higher fuel prices and higher fuel surcharges to our customers may cause some of our customers to consider freight transportation alternatives, including rail transportation. |
• | Competition from freight logistics and brokerage companies may negatively impact our customer relationships and freight rates. |
• | Smaller carriers may build economies of scale with procurement aggregation providers, which may improve the smaller carriers' abilities to compete with us. |
Our company strategy includes pursuing selected acquisitions; however, we may not be able to execute or integrate future acquisitions successfully.
Historically, a key component of our growth strategy has been to pursue acquisitions of complementary businesses, for example, the Central Acquisition. Although we currently do not have any additional acquisition plans, we expect to consider acquisitions in the future. Current or future acquisition and integration of target companies may negatively impact our business, financial condition, and results of operations because:
• | The business may not achieve anticipated revenue, earnings, or cash flows. |
• | We may assume liabilities beyond our estimates or what was disclosed to us. |
• | We may be unable to integrate successfully and realize the anticipated economic, operational, and other benefits in a timely manner, which could result in substantial costs and delays or other operational, technical, or financial problems. |
• | The acquisition could disrupt our ongoing business, distract our management, and divert our resources. |
• | We may have limited experience in the acquiree's market and may experience difficulties operating in its market. |
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• | There is a potential for loss of customers, employees, and drivers of the acquired company. |
• | We may incur indebtedness or issue additional shares of stock. |
Operational Risk |
Consistent with industry trends, we face challenges with attracting and retaining qualified company drivers and owner-operators.
Recent driver shortages have required, and could continue to require, us to spend more for hiring, including recruiting and advertising. Our challenge with attracting and retaining qualified drivers stems from intense market competition, which subjects us to increased payments for driver compensation and owner-operator contracted rates. In recent years, we increased these rates to better attract and retain drivers. To the extent that the economy improves, we expect that we would need to continue to increase driver compensation and owner-operator contracted rates in order to remain competitive. In addition to intense driver market conditions, proposed changes to regulations around drug and alcohol testing and corresponding compliance measures implemented by the Company may further challenge our ability to attract and retain qualified drivers.
Our high driver turnover rate (especially within 90 days of hire) requires us to continually recruit a substantial number of drivers in order to operate existing revenue equipment. If we do not attract and retain enough drivers, we could be forced to operate with fewer trucks. This would likely erode our size and profitability.
Our contractual agreements with owner-operators expose us to risks that we do not face with our company drivers.
Our financing subsidiaries offer financing to some of the owner-operators we contract with to purchase or lease tractors from us. If these owner-operators default or experience a lease termination in conjunction with these agreements and we cannot replace them, we may incur losses on amounts owed to us. Also, if liquidity constraints or other restrictions prevent us from providing financing to the owner-operators we contract with in the future, then we could experience a shortage of owner-operators. This would be detrimental to our efforts to maximize our capacity contracted from owner-operators.
Pursuant to our fuel reimbursement program with owner-operators, when fuel prices increase above a certain level, we share the cost with the owner-operators we contract with in order to mute the impact that increasing fuel prices may have on their business operations. A significant increase or rapid fluctuation in fuel prices could cause our reimbursement costs under this program to be higher than the revenue we receive from our customers under our fuel surcharge programs.
Owner-operators are third-party service providers, as compared to company drivers, who are employed by Swift. As independent business owners, the owner-operators we contract with may make business or personal decisions that conflict with the best interests of Swift. For example, if a load is unprofitable, route distance is too far from home, personal scheduling conflicts arise, or for other reasons, owner-operators may deny loads of freight from time to time. In these circumstances, Swift must be able to timely deliver the freight in order to maintain relationships with customers.
We depend on key personnel to manage our business and operations.
Our success depends on our ability to retain our executive officers, including Richard Stocking (our President and CEO) and Virginia Henkels (our CFO). Inadequate succession planning or unexpected departure of key executive officers could cause substantial disruption to our business operations, deplete our institutional knowledge base and erode our competitive advantage. We currently have severance protection agreements in place with certain members of our executive management team. We believe that the executive officers identified above possess valuable knowledge about the trucking industry and that their knowledge and relationships with our key customers and vendors would be difficult to replicate. Although we believe we could replace key personnel, we may not be able to do so without incurring substantial costs.
Our ability to offer intermodal and brokerage services could be limited if we experience performance instability from third parties we use in those businesses.
Our intermodal business utilizes railroads and some third-party drayage carriers to transport freight for our customers. In most markets, rail service is limited to a few railroads or even a single railroad. Our ability to provide intermodal services in certain traffic lanes would be reduced or eliminated if the railroads' services became unstable. The cost of our rail-based services would likely increase, and the reliability, timeliness, and overall attractiveness of these services would likely decrease. Furthermore, railroads increase shipping rates as market conditions permit. Price increases could result in higher costs to our customers and negatively impact the demand for our intermodal services. In addition, we may not be able to negotiate additional contracts with railroads to expand our capacity, add additional routes, or obtain multiple providers, which could limit our ability to provide this service.
Our brokerage business is dependent upon the services of third-party capacity providers, including other truckload carriers that are our competitors. These third-party providers seek other freight opportunities and may require increased compensation in times of improved freight demand or tight trucking capacity. Our inability to secure the services of these third parties, or increases in the prices we must pay to secure such services, could have an adverse effect on our operations and profitability.
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We are dependent on computer and communications systems; and a systems failure or data breach could cause a significant disruption to our business.
Our business depends on the efficient and uninterrupted operation of our computer and communications hardware systems and infrastructure. We currently maintain our computer system at our Phoenix, Arizona headquarters, along with computer equipment at each of our terminals. Our operations and those of our technology and communications service providers are vulnerable to interruption by fire, earthquake, natural disasters, power loss, telecommunications failure, terrorist attacks, Internet failures, computer viruses, data breaches (including cyber-attacks or cyber intrusions over the Internet, malware, and the like), and other events generally beyond our control. We mitigate the risk of business interruption by maintaining redundant computer systems, redundant networks, and backup systems at alternative locations. However, these alternative locations are subject to some of the same interruptions that may affect the Phoenix headquarters. In the event of a significant system failure, our business could experience significant disruption.
Seasonality, weather, and other catastrophic events affect our operations and profitability.
We discuss seasonality and weather events that affect our business in Part I, Item 1, under "Seasonality." These events and other catastrophic events may disrupt fuel supplies, increase fuel costs, disrupt freight shipments or routes, affect regional economies, damage or destroy our physical assets, or adversely affect the business or financial condition of our customers, any of which could harm our results or make our results more volatile.
Compliance Risk |
Since our industry is highly regulated, we may inadvertently violate existing or future regulations or be adversely affected by changes to existing regulations.
We have the authority to operate in the continental United States (as granted by the DOT), Mexico (as granted by the Secretaría de Comunicaciones y Transportes), and various Canadian provinces (as granted by the Ministries of Transportation and Communications in such provinces). Our company, as well as our drivers and contracted owner-operators, must comply with enacted governmental regulations regarding safety, equipment, environmental protection, and operating methods. Examples include regulation of equipment weight, equipment dimensions, fuel emissions, driver hours-of-service, driver eligibility requirements, on-board reporting of operations, and ergonomics. We may also become subject to new or more restrictive regulations related to safety or operating methods. We discuss several proposed and pending regulations that could impact our operations in Part I, Item 1, under "Environmental Regulation," "Industry Regulation," and "Other Regulation."
Additionally, our lease contracts with owner-operators are governed by federal leasing regulations, which impose specific requirements on us and the owner-operators. In the past, we have been the subject of lawsuits, alleging the violation of lease agreements or failure to follow the contractual terms. It is possible that we could be subjected to similar lawsuits in the future, which could result in added liability.
If current or future legislation deems that owner-operators are equivalent to employees, we would incur more employee-related expenses.
Tax, federal, and other regulatory authorities have argued that owner-operators in the trucking industry are employees, rather than independent contractors. In April 2010, federal legislation was proposed that increased the recordkeeping requirements for companies that engage independent contractors and heightened the penalties to employers that misclassified individuals and violated overtime and/or wage requirements. Some states have put initiatives in place to increase their revenues from items such as unemployment taxes, workers' compensation, and income taxes, and a reclassification of owner-operators as employees would help states achieve this objective. Further, class actions and other lawsuits have been filed against us and others in our industry seeking to reclassify owner-operators as employees for a variety of purposes, including workers' compensation and health care coverage. Taxing and other regulatory authorities and courts apply a variety of standards in their determination of independent contractor status. If the owner-operators we contract with are deemed employees, we would incur additional exposure under laws for federal and state tax, workers' compensation, unemployment benefits, labor, employment, and tort. The exposure could include prior period compensation, as well as potential liability for employee benefits and tax withholdings. In addition to that exposure, if owner-operators were deemed employees, then certain of our third-party revenue sources, including shop and insurance margins would be eliminated.
Changes in labor, wage, and other rules or legislation by the NLRB, Congress,or states, and/or organizing efforts by labor unions could result in litigation, divert management attention and have a material adverse effect on our operating results.
Although our only collective bargaining agreement exists at our Mexican subsidiary, Trans-Mex, we always face the risk that our employees will try to unionize. If the owner-operators we contract with were ever re-classified as employees, the magnitude of this risk would increase. The NLRB, Congress or states could impose rules or legislation significantly affecting our business and our relationship with our employees. On December 12, 2014, the NLRB implemented a final rule amending the agency's representation-case proceedings which govern the procedures for union representation. Pursuant to this amendment, union elections can now be held within 10-21 days after the union requests a vote. These rules make it easier for unions to successfully organize all
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employers, in all industries. Any attempt to organize by our employees could result in increased legal and other associated costs. In addition, if we entered into a collective bargaining agreement, the terms could negatively affect our costs, efficiency, and ability to generate acceptable returns on the affected operations.
In May of 2015, the Supreme Court of the United States refused to grant certiorari to appellees in the United States Court of Appeals for the Ninth Circuit case, Dilts, et al. v. Penske Logistics, LLC, et al. Consequently, the Appeals Court decision stands, holding that California state wage and hour laws are not preempted by federal law. As a result, the trucking industry has been confronted with a patchwork of laws at the state and local levels, related to employee rest and meal breaks. Further, driver piece rate compensation, which is an industry standard, has been attacked as not being compliant with state minimum wage laws. Both of these issues are adversely impacting the Company and the motor carrier industry as a whole, with respect to the practical application of the laws; thereby resulting in additional cost. In its individual capacity, as well as participating with industry trade organizations, the Company supports and is actively pursuing legislative relief through Congress. The Company believes enacting legislation clarifying the preemptive scope of federal transportation law and regulations, as originally contemplated by Congress, would eliminate much of the current wage and hour confusion along with lessening the burden on interstate commerce. The passage of federal legislation involves the political process and is uncertain. Existing state and local laws, as well as new laws adopted in the future, which are not preempted by federal law, may result in increased labor costs, driver turnover, reduced operational efficiencies, and amplified legal exposure.
CSA rulemaking could adversely affect us, including our ability to maintain or grow our fleet, as well as our customer relationships.
Under CSA, drivers and fleets are evaluated and ranked based on certain safety-related standards. The current methodology for determining a carrier's DOT safety rating has been expanded, and as a result, certain current and potential drivers may no longer be eligible to drive for us. Additionally, our safety rating could be adversely affected. We recruit and retain a substantial number of first-time drivers. These drivers may have a higher likelihood of creating adverse safety events under CSA. A reduction in eligible drivers or a poor fleet ranking may result in difficulty attracting and retaining qualified drivers. This could cause our customers, some of which require a minimum safety rating, to transition to carriers with higher fleet rankings, and away from us.
Our captive insurance companies are subject to substantial government regulation.
Our captive insurance companies are regulated by state authorities. State regulations generally provide protection to policy holders, rather than stockholders, and generally involve:
• | approval of premium rates for insurance; |
• | standards of solvency; |
• | minimum amounts of statutory capital surplus that must be maintained; |
• | limitations on types and amounts of investments; |
• | regulation of dividend payments and other transactions between affiliates; |
• | regulation of reinsurance; |
• | regulation of underwriting and marketing practices; |
• | approval of policy forms; |
• | methods of accounting; and |
• | filing of annual and other reports with respect to financial condition and other matters. |
These regulations may increase our costs of regulatory compliance, limit our ability to change premiums, restrict our ability to access cash held in our captive insurance companies, and otherwise impede our ability to take actions we deem advisable.
We are subject to certain risks arising from doing business in Mexico.
We have a growing operation in Mexico, through our wholly-owned subsidiary, Trans-Mex, which subjects us to general international business risks, including:
• | foreign currency fluctuation; |
• | changes in the economic strength of Mexico; |
• | difficulties in enforcing contractual obligations and intellectual property rights; |
• | burdens of complying with a wide variety of international and Unites States export, import, and business procurement laws; |
• | changes in trade agreements and United States-Mexico relations; and |
• | social, political, and economic instability. |
In addition, if we are unable to maintain our C-TPAT status, we may have significant border delays. This could cause our Mexican operations to be less efficient than those of competitor truckload carriers that have C-TPAT status and operate in Mexico. We also
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face additional risks associated with our foreign operations, including restrictive trade policies and imposition of duties, taxes, or government royalties imposed by the Mexican government, to the extent not preempted by the terms of the North American Free Trade Agreement.
Financial Risk |
A material portion of our revenue is concentrated in a group of major customers. As such, we would be adversely affected if we lost one or more of these major customers.
Our revenue is concentrated in a group of major customers, as discussed in Part I, Item 1, under "Customers and Marketing." Retail and discount retail customers account for a substantial portion of our freight, creating a dependency on consumer spending and retail sales for us. Given this, our results may be more susceptible to trends in unemployment and retail sales than carriers that do not have this concentration.
Economic conditions and capital markets may adversely affect our customers and their ability to remain solvent. Our customers' financial difficulties can negatively impact our results of operations and financial condition if they were to curtail their operations or delay or default on their payments to us. Aside from our Dedicated segment, we generally do not have contractual relationships that guarantee any minimum volumes with our customers, and we cannot provide assurance that our customer relationships will continue. Our Dedicated segment is generally subject to longer-term written contracts than our Truckload segment business; however, certain of these contracts contain cancellation clauses. If we lost one or more major customers, it could have a material impact on our results of operations and financial position. There is no assurance that any of our customers will continue to utilize our services, renew our existing contracts, or continue at the same volume levels.
We have significant ongoing capital requirements that necessitate sufficient cash flow from operations and/or obtaining financing on favorable terms.
The truckload industry is capital intensive. Historically, we have depended on cash from operations, borrowings from banks and finance companies, issuances of notes, and leasing activities to expand the size of our terminal network and upgrade and expand the size of our revenue equipment fleet.
Credit markets may weaken again at some point in the future, which would make it difficult for us to access our current sources of credit and difficult for our lenders to find the capital to fund us. We may need to incur additional debt, or issue debt or equity securities in the future, to refinance existing debt, fund working capital requirements, make investments, or support other business activities. Declines in consumer confidence, decreases in domestic spending, economic contractions, and other trends in the credit market may impair our future ability to secure financing on satisfactory terms, or at all.
In the future, we could face inabilities with generating sufficient cash from operations, obtaining sufficient financing on favorable terms, or maintaining compliance with financial and other covenants in our financing agreements. If any of these events occur, then we may face liquidity constraints, be forced to enter into less favorable financing arrangements, or operate our revenue equipment for longer periods of time. Additionally, such events could adversely impact our ability to provide services to our customers.
Because our operations are dependent upon diesel fuel, fluctuations in price or availability, volume and terms of purchase commitments, and surcharge collection could materially increase our costs of operation.
Although fuel prices have decreased in recent periods, fuel is one of our largest operating expenses. Diesel fuel prices greatly fluctuate due to factors entirely beyond our control, such as political events, terrorist activities, armed conflicts, and depreciation of the dollar against other currencies. Hurricanes and other natural or man-made disasters, such as the oil spill in the Gulf of Mexico in 2010, tend to lead to an increase in the cost of fuel. Rising demand, matched with falling supply of fuel, adversely impacts the price. Examples include rising demand in developing countries like China, diminishing supply from less drilling activity, and sharing supply with industries using crude oil and oil reserves for other purposes. These events may lead to fuel shortages and disruptions in the fuel supply chain.
Fuel is also subject to regional pricing differences and often costs more on the West Coast and in the Northeast, where we have significant operations. Increases in fuel costs, to the extent not offset by rate-per-mile increases or fuel surcharges, have an adverse effect on our operations and profitability. We obtain some protection against fuel cost increases by maintaining a fuel-efficient fleet and compensatory fuel surcharge programs with the vast majority of our customers. These fuel surcharge programs have historically helped us offset the majority of any negative impacts of rising fuel prices associated with loaded or billed miles. Our fuel surcharge recovery lags behind changes in fuel prices. As such, it may not capture the increased costs we pay for fuel, especially when prices are rising. This leads to fluctuation in our levels of reimbursement, which has occurred in the past. During periods of low freight volumes, shippers can use their negotiating leverage to impose less robust fuel surcharge policies. We cannot ensure that such fuel surcharges will be indefinitely maintained or sufficiently effective. Additionally, there are certain fuel costs that we cannot recover, despite our fuel surcharge programs, such as those associated with deadhead miles and engine idling time.
We have not historically used derivatives to mitigate volatility in our fuel costs, but we periodically evaluate the benefits of employing this strategy. To mitigate the impact of rising fuel costs, we contract with some of our fuel suppliers to buy fuel at a fixed price or
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within banded pricing for a specified period, usually not exceeding twelve months. However, these purchase commitments only cover a small portion of our fuel consumption. Accordingly, fuel price fluctuations may still negatively impact us.
We operate a modern fleet of tractors, some of which are leased or financed. This subjects us to costs associated with increasing equipment prices, new engine design changes, volatility in the used equipment sales market, and the failure of manufacturers to meet their sale or trade-back obligations.
Our modern fleet of tractors gives us a competitive advantage in many ways. However, there are also disadvantages we face from obtaining newer equipment. For example, engines used in tractors manufactured in 2010 and after are subject to more stringent emissions control regulations issued by the EPA. We have paid higher prices for new tractors over the past few years as a result of complying with these regulations, while the resale and residual values have not increased to the same extent. Accordingly, our equipment costs, including depreciation expense per tractor, are expected to increase in future periods. To comply with the EPA's 2010 diesel engine emissions standards, many engine manufacturers are using special equipment that needs diesel exhaust fluid. If we purchase new tractors that have this special equipment, we will be exposed to additional costs associated with price and availability of diesel exhaust fluid, the weight of the equipment, maintenance, and training our drivers to use the equipment.
We have certain revenue equipment leases and financing arrangements 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 we do not purchase new equipment that triggers the trade-back obligation, or the equipment manufacturers do not pay the contracted value at the end of the lease term, we could be exposed to losses equal to the excess of the balloon payment owed to the lease or finance company over the proceeds from selling the equipment on the open market. In addition, if we purchase equipment subject to a buy-back agreement and the manufacturer refuses to honor the agreement, or we are unable to replace equipment at a reasonable price, we may be forced to sell the equipment at a loss.
Used equipment prices are subject to substantial fluctuations based on freight demand, supply of used trucks, availability of financing, presence of buyers for export to countries such as Russia and Brazil, and commodity prices for scrap metal. These and any impacts of a depressed market for used equipment could require us to dispose of our revenue equipment below the carrying value. This leads to losses on disposal or impairments of revenue equipment, when not otherwise protected by residual value arrangements. Deteriorations of resale prices or trades at depressed values could cause more losses on disposal or impairment charges in future periods.
Our leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, and prevent us from meeting our debt obligations.
As of December 31, 2016, our total outstanding long-term debt, including outstanding borrowings on the New Revolver and 2015 RSA, but excluding capital lease obligations, was $0.9 billion. Because we are leveraged, we could be at a competitive disadvantage compared to our competitors that are less leveraged. This could have negative consequences that include:
• | increased vulnerability to adverse economic, industry, or competitive developments; |
• | cash flows from operations that are committed to payment of principal and interest, thereby reducing our ability to use cash for our operations, capital expenditures, and future business opportunities; |
• | increased interest rates that would affect our variable rate debt; |
• | noncompliance with restrictive covenants, borrowing conditions, and other debt obligations, which could result in an event of default; |
• | non-strategic divestitures or inability to make strategic acquisitions; |
• | lack of financing for working capital, capital expenditures, product development, debt service requirements, and general corporate or other purposes; and |
• | limits on our flexibility to plan for, or react to, changes in our business, market conditions, or in the economy. |
Our debt agreements contain restrictions that limit our flexibility in operating our business.
As detailed in Note 13 to the consolidated financial statements, our senior secured credit facility agreement requires compliance with various affirmative, negative, and financial covenants. A breach of any of these covenants could result in default or (when applicable) cross-default. Upon default under our senior secured credit facility, the lenders could elect to declare all outstanding amounts to be immediately due and payable, as well as terminate all commitments to extend further credit. Such actions by those lenders could cause cross defaults with our other debt agreements. If we were unable to repay those amounts, the lenders could secure the debt with the collateral granted to them. If the lenders accelerated our debt repayments, we might not have sufficient assets to repay all amounts borrowed.
In addition, our 2015 RSA includes certain restrictive covenants and cross default provisions with respect to our senior secured credit facility. Failure to comply with these covenants and provisions may jeopardize our ability to continue to sell receivables under the facility and could negatively impact our liquidity.
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Insuring risk through our captive insurance companies could adversely impact our operations.
We insure a significant portion of our risk through our captive insurance companies, Mohave and Red Rock. In addition to insuring portions of our own risk, Mohave provides reinsurance coverage to third-party insurance companies associated with our affiliated companies' owner-operators. Red Rock insures a share of our automobile liability risk. The insurance and reinsurance markets are subject to market pressures. Our captive insurance companies' abilities or needs to access the reinsurance markets may involve the retention of additional risk, which could expose us to volatility in claims expenses.
To comply with certain state insurance regulatory requirements, cash and cash equivalents must be paid to Red Rock and Mohave as capital investments and insurance premiums, to be restricted as collateral for anticipated losses. The restricted cash is used for payment of insured claims. In the future, we may continue to insure our automobile liability risk through our captive insurance subsidiaries, which will cause increases in the required amount of our restricted cash or other collateral, such as letters of credit. Significant increases in the amount of collateral required by third-party insurance carriers and regulators would reduce our liquidity.
We face risks related to self-insurance and third-party insurance that can be volatile to our earnings.
We self-insure a significant portion of our claims exposure and related expenses for cargo loss, bodily injury, workers' compensation, and property damage, and maintain insurance with insurance companies above our limits of self-insurance. Self-insurance retention and other limitations are detailed in Part I, Item 1, under "Safety and Insurance." Our large self-insured retention limits can make our insurance and claims expense higher or more volatile. Additionally, if our third-party insurance carriers or underwriters leave the trucking sector, it could materially increase our insurance costs or collateral requirements, or create difficulties in finding insurance in excess of our self-insured retention limits.
We accrue for the costs of the uninsured portion of pending claims, based on the nature and severity of individual claims and historical claims development trends. Estimating the number and severity of claims, as well as related judgment or settlement amounts is inherently difficult. This, along with legal expenses, incurred but not reported claims, and other uncertainties can cause unfavorable differences between actual self-insurance costs and our reserve estimates. We try to limit our exposure to claims that ultimately prove to be more severe than originally assessed. However, this may not be possible if carrier subcontractors under our brokerage operations are inadequately insured for any accident.
Although we believe our aggregate insurance limits are sufficient to cover reasonably expected claims, it is possible that one or more claims could exceed those limits. In this case, we would bear the excess expense, in addition to the amount of self-insurance. Our insurance and claims expense could increase, or we could find it necessary to raise our self-insured retention or decrease our aggregate coverage limits when our policies are renewed or replaced.
Our stock could decline due to the large number of outstanding shares of our common stock eligible for future sale.
Sales of substantial amounts of our common stock in the public market, or the perception that these sales could occur, could cause the market price of our Class A common stock to decline. These sales also could make it more difficult for us to sell equity or equity- related securities in the future at a time and price that we deem appropriate.
As of December 31, 2016, we have approximately 83.3 million outstanding shares of Class A common stock, assuming no exercise of options outstanding as of the date of this report, and approximately 49.7 million outstanding shares of Class B common stock that are convertible into an equal number of shares of Class A common stock. All of the Class A shares are freely tradable, except that any shares owned by "affiliates" (as that term is defined in Rule 144 under the Securities Act) may only be sold in compliance with the limitations described in Rule 144 under the Securities Act.
In addition, we have an aggregate of 4.3 million shares and 1.7 million shares of Class A common stock reserved for issuances under our 2014 Omnibus Incentive Plan and our 2012 Employee Stock Purchase Plan, respectively. Issuances of Class A common stock to our directors, executive officers, and employees through exercise of stock options under our stock plans, or purchases by our executive officers and employees through our 2012 ESPP, dilute a stockholder's interest in Swift.
We could determine that our goodwill and other indefinite-lived intangibles are impaired, thus recognizing a related loss.
As of December 31, 2016, we had goodwill of $253.3 million and indefinite-lived intangible assets of $181.0 million primarily from the 2007 Transactions. We evaluate goodwill and indefinite-lived intangible assets for impairment in accordance with the accounting policies discussed in Note 2 to the consolidated financial statements. Our evaluations in 2016, 2015, and 2014 produced no indication of impairment. We could recognize impairments in the future, and we may never realize the full value of our intangible assets. If these events occur, our profitability and financial condition will suffer.
We do not currently pay dividends on our Class A common stock or Class B common stock.
We anticipate that we will retain all of our future earnings, if any, for use in the development and expansion of our business, the repayment of debt, our repurchase of our Class A common stock, and for general corporate purposes. Any determination to pay dividends and other distributions in cash, stock, or property by Swift in the future will be at the discretion of our Board and will be dependent on then-existing conditions, including our financial condition and results of operations, contractual restrictions, such as restrictive covenants contained in our senior secured credit facility, capital requirements, legal restrictions, and other factors.
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Conflict of Interest Risk |
Our controlling shareholder and Board member, Jerry Moyes, along with the Moyes Affiliates, control a large portion of our stock and have substantial control over us, which could limit other stockholders' ability to influence the outcome of key transactions, including changes of control.
Our controlling shareholder and Board member, Mr. Moyes, and the Moyes Affiliates beneficially own 40.3% of our outstanding common stock. Mr. Moyes and the Moyes Affiliates beneficially own 100.0% of our Class B common stock and approximately 4.6% of our Class A common stock. On all matters with respect to which our stockholders have a right to vote, including the election of directors, the holders of our Class A common stock are entitled to one vote per share, and the holders of our Class B common stock are entitled to two votes per share. All outstanding shares of Class B common stock are convertible to Class A common stock on a one-for-one basis at the election of the holders thereof, or automatically upon transfer to someone other than Mr. Moyes or the Moyes Affiliates.
This voting structure gives Mr. Moyes and the Moyes Affiliates approximately 56.5% of the voting power of all of our outstanding stock as of December 31, 2016. As a result of our dual class structure, Mr. Moyes and the Moyes Affiliates are able to control all matters submitted to our stockholders for approval even though they own less than 50% of the total outstanding shares of our common stock. This significant concentration of share ownership may adversely affect the trading price for our Class A common stock because investors may perceive disadvantages in owning stock in companies with controlling stockholders. Also, these stockholders can exert significant influence over our management and affairs and matters requiring stockholder approval, including the election of directors and the approval of significant corporate transactions, such as mergers, consolidations, or the sale of substantially all of our assets. Consequently, this concentration of ownership may have the effect of delaying or preventing a change of control, including a merger, consolidation, or other business combination involving us, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control, even if other stockholders perceived that change of control to be beneficial.
Because Mr. Moyes and the Moyes Affiliates control a majority of the voting power of our common stock, we qualify as a "controlled company" as defined by the NYSE and as such, we may elect not to comply with certain corporate governance requirements of this stock exchange. We do not currently intend to utilize these exemptions, but may choose to do so in the future.
Mr. Moyes has loans and other obligations against which he and certain of his family members have pledged a portion of their Class B common stock, which may cause a conflict of interests between Mr. Moyes and our other stockholders, and adversely affect the trading price of our Class A common stock.
Amended M Capital II VPF and Cactus VPF — On October 30, 2015, M Capital II and another Moyes Affiliate, Cactus Holding I, entered into the Amended M Capital II VPF and the Cactus VPF, respectively. The purposes of these two VPF contracts were to (i) extend the maturity date of M Capital II's then-existing VPF with Citibank N.A. entered into on October 29, 2013 and maturing on November 4, 2015 through November 6, 2015 and (ii) generate cash proceeds for the repayment of certain stock-secured obligations of Cactus Holding II, a Moyes Affiliate, and thereby effect the release of certain shares of Class B common stock pledged in connection with the same.
Cactus Holding I entered into the Cactus VPF contract in respect of 3.3 million shares of the Company's Class B common stock, which were pledged by Cactus Holding I as security for its obligations under the Cactus VPF contract. Under the Cactus VPF contract, Cactus Holding I was required to deliver to Citigroup Global Markets Inc. ("CGMI") a variable amount of stock or cash during a three trading day period at the maturity of the contract on November 21, 2016 through November 24, 2016 (later extended to November 25, 2016, then extended to 2017 as described below). In connection with the Cactus VPF contract, Cactus Holding I received $48.3 million from CGMI (including the $18.5 million noted in the paragraph below).
In connection with the Amended M Capital II VPF, M Capital II paid Citibank N.A. $18.5 million. The source of these funds was a cash payment from CGMI in connection with the Cactus VPF Contract. Under the Amended M Capital II VPF contract, M Capital II was required to deliver to Citibank N.A. a variable amount of stock or cash during a three trading day period at the maturity of the contract on November 21, 2016 through November 24, 2016 (later extended to November 25, 2016, then extended to 2017 as described below). The number of shares of the Company's Class B common stock subject to the Amended M Capital II VPF remained unchanged at 13.7 million.
On May 18, 2016, M Capital II terminated its VPF covering approximately12.3 million shares of Class A common stock, and entered into a new VPF covering approximately 12.3 million shares of Class A common stock. The new VPF required M Capital II to deliver a variable amount of Class A common stock, up to a maximum of approximately 12.3 million shares, or an equivalent amount of cash, upon maturity dates occurring on May 26, 2017 through May 31, 2017. The new VPF is collateralized by approximately 12.3 million shares of Class B common stock.
Also on May 18, 2016, Cactus Holding I entered into a new VPF covering approximately 7.0 million shares of Class A common stock. The new VPF required Cactus Holding I to deliver a variable amount of Class A common stock, up to a maximum of approximately 7.0 million shares, or an equivalent amount of cash, upon maturity dates occurring on May 26, 2017 through May 31, 2017. The new VPF is collateralized by an aggregate of approximately 7.0 million shares of Class A common stock and Class B common stock which were previously pledged on margin.
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On November 18, 2016, the maturity dates of the M Capital II VPFs were extended to December 5, 2017 through January 3, 2018, and the maturity dates of the Cactus Holding I VPFs were extended to December 5, 2017 through December 7, 2017. No additional shares were pledged in connection with these extensions.
The VPF contracts allow Mr. Moyes and the Moyes Affiliates to retain the same number of shares and voting percentage as they had prior to these VPF contracts. In addition, Mr. Moyes and the Moyes Affiliates are able to participate in price appreciation of the Company's common stock within certain levels.
In connection with the VPF transactions described above, an aggregate of approximately 34.3 million shares of Class B common stock and approximately 2.0 million shares of Class A common stock are collateralized to secure M Capital II's and Cactus Holding I's respective obligations under the VPF transactions.
As these shares are not pledged to secure a loan on margin, they are not subject to the securities trading policy pledging limitation discussed below. Although M Capital II and Cactus Holding I, respectively, may settle their obligations under the VPF transactions in cash, any or all of the collateralized Class B common stock shares could be converted into Class A common stock and any of the collateralized shares delivered on such dates to settle such obligations. Such transfers of our common stock, or the perception that they may occur, may have an adverse effect on the trading price of our Class A common stock and may create conflicts of interest for Mr. Moyes. In addition, Mr. Moyes’ counter party to the VPFs hedges their position by borrowing shares of Class A common stock and subsequently selling such shares, creating a short position. This hedging activity will fluctuate from time to time, based on the current market price of the Class A common stock and the counter party's strategy for reducing risk in their position. This hedging activity may place additional pressure on the price of the Class A common stock as such short positions are being put in place and/or may create a perception that the market is questioning Swift’s performance given the large short position that can occur and be reported. Maintaining this short position may offset some of the risk associated with a full share settlement of the VPF transactions as any shares received by the counter party might be used to settle these short positions thus reducing the amount that would otherwise be introduced to the market.
Cactus II Pledging — In July 2011 and December 2011, Cactus Holding Company II, LLC ("Cactus II"), an entity controlled by Mr. Moyes, pledged approximately 12.0 million shares of Class B common stock on margin as collateral for loan arrangements entered into by Cactus II and relating to Mr. Moyes. In connection with these December 2011 transactions, Cactus II converted approximately 6.6 million of the approximately 12.0 million pledged shares of Class B common stock into shares of Class A common stock on a one-for-one basis. During 2012, the Moyes Affiliates converted an additional approximately 1.1 million shares of Class B common stock to Class A common stock and sold approximately 4.8 million of these pledged Class A shares to a counter-party pursuant to a sale and repurchase agreement with a full recourse obligation to repurchase the securities at the same price on the fourth anniversary of sale.
This sale and repurchase agreement was replaced in May 2014 with a similar sale and repurchase agreement covering approximately 6.8 million shares. On May 18, 2016 the maturity of this agreement was extended to May 30, 2017, and was extended again on November 18, 2016 to November 30, 2017. On May 18, 2016, 2.0 million shares of Class A common stock and 5.1 million shares of Class B common stock previously pledged on margin for collateral for loan arrangements were transferred to a new VPF agreement as described above. On July 20, 2016, Cactus Holding II pledged an incremental approximately 1.9 million shares as collateral for a new loan arrangement. As of August 2, 2016, the Moyes Affiliates had pledged on margin a total of approximately 4.1 million shares, of which approximately 2.2 million were Class B and approximately 1.9 million were Class A common stock.
These pledged shares could cause Mr. Moyes’ interest to conflict with the interests of our other stockholders and could result in the future sale of such shares. Such sales could adversely affect the trading price or otherwise disrupt the market for our Class A common stock.
Other Obligations — On April 20, 2016, Mr. Moyes entered into a settlement agreement with the National Hockey League ("NHL") relating to a previously disclosed lawsuit between the NHL and Mr. Moyes. As part of the settlement agreement, certain of Mr. Moyes’ adult children entered into a Non-Recourse Guaranty and Pledge Agreement with the NHL pursuant to which they guaranteed certain obligations of Mr. Moyes and certain Moyes Affiliates to the NHL. The guarantor’s obligations are collateralized by 2.0 million shares of Class B common stock owned by the guarantors.
Margin Pledging Limitations — The Company has a securities trading policy ("STP") that includes, among other things, limitations on the pledging of Company stock on margin. As disclosed at the time of our IPO, under the STP, directors, senior executive officers (including the CEO), and compliance officers were not permitted to pledge more than 20% of their family stock holdings for margin loans. In July 2013, the Nominating and Governance Committee and the Board approved revisions to the STP to further limit pledging of stock on margin, under which, effective July 1, 2014, the limitation was reduced to 15% of family stock holdings and was scheduled to be reduced to 10% of family stock holdings as of July 1, 2015.
In June 2015, our then-Chief Executive Officer, Jerry Moyes, reported to the independent chairman of the Board that he was in compliance with the limitation on pledging stock on margin and was working to reduce the amount pledged on margin to below the 10% limit scheduled to take effect, but needed until November 2015 to do so in an orderly fashion. Following Board discussion of these circumstances, the Board amended the STP so that the 15% limit would remain in effect through November 30, 2015 and the 10% limit would take effect on December 1, 2015.
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In October 2015, Mr. Moyes informed the Company that due to the drop in the stock price he had pledged additional shares of Company stock on margin in August and September 2015, in contravention of the STP, and that the percentage of family stock holdings pledged on margin was in excess of the 15% limit. He was precluded from selling shares during this time because he was in possession of material non-public information.
The independent members of the Board met and considered these events in light of competing concerns. On the one hand, the policy and limitations on pledging stock on margin were intended to avoid the risks of stock being sold to satisfy a margin call at a time when Company insiders might have material nonpublic information. On the other hand, unwinding margin positions in significant amounts in a short period could generate adverse market perceptions concerning the Company and the stock. In addition, the Board sought additional information regarding Mr. Moyes' plans to reduce the level of stock pledged on margin.
In response to these developments and the competing concerns identified, the Board directed Mr. Moyes to reduce the level of stock pledged on margin to 15% or less of family holdings no later than November 4, 2015 and determined to waive compliance with the 10% limit (but not the 15% limit) through December 31, 2016 so that the margin positions could be reduced in an orderly fashion. In addition, the Board formally reprimanded Mr. Moyes and imposed sanctions.
The Company's stock price volatility continued in December 2015 and necessitated Mr. Moyes to increase the level of Company stock pledged on margin; thereby exceeding the 15% limit. Taking into account various competing concerns, on December 18, 2015, the Board determined to waive compliance with the 15% limit (but not the 20% limit) through December 31, 2016 to allow Mr. Moyes to reduce the margin position in an orderly manner.
After giving effect to the amendments and waivers discussed above, the current STP provides that directors, senior executive officers (including the CEO), and compliance officers are not permitted to pledge more than 20% of their family stock holdings for margin loans through December 31, 2016, reducing to 15% of family stock holdings through December 31, 2017 and 10% of family stock holdings after January 1, 2018.
Mr. Moyes' consulting contract with Swift, effective December 31, 2016, contains a clause that addresses his hedging and pledging transactions. With respect to these transactions, so long as Mr. Moyes remains an officer or director of the Company, those transactions are generally required to be conducted in accordance with the Company's STP, effective as of August 31, 2016. As such, Board approval is required prior to Mr. Moyes conducting any such transactions. Pursuant to the consulting contract, the Company has agreed to take reasonable and prompt action (including Board consideration and submission of customary transfer agent and similar letters and confirmations) to permit the Moyes Affiliates to effect such transactions.
We engage in transactions with other businesses controlled by our majority shareholder and Board member, Jerry Moyes. This could create conflicts of interest between Mr. Moyes and our other stockholders.
We engage in various transactions with companies controlled by and/or affiliated with related parties. These transactions include freight services, facility leasing, air transportation, and other services provided by and/or received by Swift with entities affiliated with Mr. Moyes. Because certain entities controlled by Mr. Moyes and certain members of his family operate in the transportation industry, Mr. Moyes' ownership may create conflicts of interest or require judgments that are disadvantageous to our stockholders in the event we compete for the same freight or other business opportunities. As a result, Mr. Moyes may have interests that conflict with our stockholders.
We have a policy that requires prior approval of related party transactions. Additionally, our amended and restated certificate of incorporation contains provisions that specifically relate to prior approval of related party transactions with Mr. Moyes, the Moyes Affiliates, and any Moyes-affiliated entities. However, we cannot provide assurance that the policy or these provisions will be successful in eliminating conflicts of interest. Our amended and restated certificate of incorporation also provides that in the event that any Swift officer or director is also an officer, director, or employee of an entity owned by (or affiliated with) Mr. Moyes (or any Moyes Affiliate) and acquires knowledge of a potential transaction or other corporate opportunity not involving the transportation industry or involving refrigerated or LTL transportation, then, subject to certain exceptions, we shall not be entitled to such transaction or corporate opportunity and there should be no expectancy that such transaction or corporate opportunity will be available to us.
Mr. Moyes, our majority shareholder and Board member, has substantial ownership interests in and guarantees related to several other businesses and real estate investments, which may expose Mr. Moyes to significant lawsuits or liabilities.
In addition to being our majority shareholder and Board member, Mr. Moyes is the principal stakeholder of, and serves as chairman of the board of directors of SME Industries, Inc., a steel erection and fabrication company, Southwest Premier Properties, LLC, a real estate management company, and is involved in other business endeavors in a variety of industries and has made substantial real estate investments.
In one instance of litigation arising from another business owned by Mr. Moyes, Swift was named as a defendant even though Swift was not a party to the transactions that were the subject of the litigation. It is possible that litigation relating to other businesses owned by Mr. Moyes in the future may result in Swift being named as a defendant and, even if such claims are without merit, that we will be required to incur the expense of defending such matters. In many instances, Mr. Moyes has given personal guarantees to lenders to the various businesses and real estate investments in which he has an ownership interest and, in certain cases, the underlying loans are in default and are in the process of being restructured and/or settled. If Mr. Moyes is otherwise unable to settle
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or raise the necessary amount of proceeds to satisfy his obligations to such lenders, he may be subject to significant lawsuits, and expose his shares of stock to creditors.
ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
ITEM 2. | PROPERTIES |
Our headquarters are owned by the Company and situated on approximately 118 acres in Phoenix, Arizona. Our headquarters consist of a three-story administration building with 126,000 square feet of office space; 106,000 square feet of repair and maintenance buildings; a 20,000 square-foot drivers' center and restaurant; an 8,000 square-foot recruiting and training center; a 6,000 square-foot warehouse; a 300-space parking structure; a two-bay truck wash; and an eight-lane fueling facility.
We have over 40 locations in the United States and Mexico, including terminals, driver academies, and certain other locations. Our terminals may include customer service, marketing, fuel, and/or repair facilities. We believe that substantially all of our property and equipment is in good condition and our facilities have sufficient capacity to meet our current needs. From time to time, we invest in additional facilities to meet the needs of our business as we pursue additional growth.
Description of Activities Performed at Each Location | ||||||||||||||||
Region | Location | Owned / Leased | Customer Service | Marketing | Admin | Fuel | Repair | Driver Academy | ||||||||
W E S T E R N | Arizona – Phoenix (2) | ü | ü | ü | ü | ü | ü | ü | ||||||||
California – Fontana | ü | ü | ü | ü | ü | ü | ||||||||||
California – Fontana: Truck Sales/Leasing | ü | ü | ||||||||||||||
California – Jurupa Valley | ü | ü | ü | ü | ü | |||||||||||
California – Lathrop | ü | ü | ü | ü | ü | |||||||||||
California – Otay Mesa | ü | ü | ü | |||||||||||||
California – Willows | ü | ü | ü | ü | ||||||||||||
Colorado – Denver | ü | ü | ü | ü | ü | |||||||||||
Idaho – Lewiston | ü | ü | ü | ü | ü | ü | ü | |||||||||
Nevada – Sparks | ü | ü | ü | ü | ||||||||||||
New Mexico – Albuquerque | ü | ü | ü | ü | ||||||||||||
Oklahoma – Oklahoma City | ü | ü | ü | ü | ü | |||||||||||
Oregon – Troutdale | ü | ü | ü | ü | ||||||||||||
Texas – El Paso | ü | ü | ü | ü | ü | |||||||||||
Texas – Houston | ü | ü | ü | |||||||||||||
Texas – Lancaster | ü | ü | ü | ü | ü | |||||||||||
Texas – Laredo | ü | ü | ü | ü | ü | |||||||||||
Texas – Corsicana | ü | ü | ||||||||||||||
Utah – West Valley City (1) | ü | ü | ü | ü | ü | ü | ||||||||||
Utah – West Valley City: Body Shop | ü | ü | ||||||||||||||
Washington – Sumner | ü | ü | ü | ü | ü | |||||||||||
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Description of Activities Performed at Each Location | ||||||||||||||||
Region | Location | Owned / Leased | Customer Service | Marketing | Admin | Fuel | Repair | Driver Academy | ||||||||
E A S T E R N | Florida – Ocala | ü | ü | ü | ü | ü | ü | |||||||||
Georgia – Decatur | ü | ü | ü | ü | ü | |||||||||||
Georgia – Decatur | ü | ü | ||||||||||||||
Illinois – Manteno | ü | ü | ü | ü | ||||||||||||
Illinois – Rochelle (1)(2) | ü | ü | ü | ü | ü | |||||||||||
Indiana – Gary | ü | ü | ü | ü | ||||||||||||
Kansas – Edwardsville | ü | ü | ü | ü | ü | |||||||||||
Michigan – New Boston | ü | ü | ü | ü | ü | |||||||||||
Minnesota – Inver Grove Heights | ü | ü | ü | ü | ü | ü | ||||||||||
New Jersey – Avenel | ü | ü | ||||||||||||||
New York – Syracuse | ü | ü | ü | ü | ü | |||||||||||
Ohio – Columbus | ü | ü | ü | ü | ü | |||||||||||
Pennsylvania – Jonestown | ü | ü | ü | ü | ||||||||||||
South Carolina – Greer: Terminal | ü | ü | ü | ü | ü | |||||||||||
South Carolina – Greer: Body Shop | ü | ü | ||||||||||||||
Tennessee – Memphis: Body Shop | ü | ü | ||||||||||||||
Tennessee – Memphis: Terminal | ü | ü | ü | ü | ü | |||||||||||
Tennessee – Memphis | ü | ü | ||||||||||||||
Virginia – Richmond | ü | ü | ü | ü | ü | ü | ||||||||||
Wisconsin – Town of Menasha | ü | ü | ü | ü | ü | |||||||||||
M E X I C O | Tamaulipas – Nuevo Laredo | ü | ü | ü | ü | ü | ||||||||||
Sonora – Nogales | ü | ü | ü | ü | ||||||||||||
Nuevo Leon – Monterrey | ü | ü | ü | |||||||||||||
State of Mexico – Mexico City | ü | ü | ü | ü | ||||||||||||
____________
(1) | Acquired as part of the Central Acquisition. |
(2) | Includes a driver orientation building. |
In addition to the above, we own parcels of vacant land and several non-operating facilities in various locations around the United States. We also maintain various drop yards throughout the United States, Mexico, and Canada. As of December 31, 2016, our aggregate monthly rent for all leased properties was approximately $0.7 million with varying terms expiring through December 2053. Substantially all of our owned properties are securing our senior secured credit facility.
ITEM 3. | LEGAL PROCEEDINGS |
We are party to certain lawsuits in the ordinary course of business. Information about our legal proceedings is included in Note 17 of the notes to the consolidated financial statements, included in Part II, Item 8, in this Annual Report on Form 10-K for the year ended December 31, 2016 and is incorporated by reference herein. Aside from the amounts disclosed in Note 17, we do not believe that these proceedings, individually or in the aggregate, will have a material adverse effect on our financial position, results of operations, or cash flows.
ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
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PART II | ||||
ITEM 5. | MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Our Class A common stock trades on the NYSE under the symbol "SWFT". The following table sets forth the high and low sales prices per share of our Class A common stock as reported on the NYSE for the periods indicated.
Year Ended December 31, 2016: | High | Low | |||||
First quarter | $ | 18.66 | $ | 11.74 | |||
Second quarter | 19.12 | 14.31 | |||||
Third quarter | 22.15 | 15.19 | |||||
Fourth quarter | 27.18 | 19.51 | |||||
Year Ended December 31, 2015: | High | Low | |||||
First quarter | $ | 29.01 | $ | 24.39 | |||
Second quarter | 26.58 | 22.10 | |||||
Third quarter | 24.76 | 14.83 | |||||
Fourth quarter | 17.63 | 12.76 | |||||
On December 31, 2016, there were 21 holders of record of our Class A common stock and 10 holders of record of our Class B common stock. Because many of our shares of Class A common stock are held by brokers or other institutions on behalf of stockholders, we are unable to estimate the total number of individual stockholders represented by the record holders.
Class A Common Stock — As of December 31, 2016, we had 83,299,118 shares of Class A common stock outstanding. The Moyes Affiliates held 3,840,752 shares of our Class A common stock as of December 31, 2016, of which 1,886,860 were pledged on margin with respect to Cactus II.
Class B Common Stock — There is currently no established trading market for our Class B common stock. As of December 31, 2016, we had 49,741,938 shares of Class B common stock outstanding, all of which were owned by Mr. Moyes and the Moyes Affiliates. Of our shares of outstanding Class B common stock, 34,348,994 shares were collateralized with respect to the amended M Capital II VPF and Cactus VPF transactions, 2,000,000 were collateralized with respect to the Non-recourse Guaranty and Pledge Agreement with the NHL, and 2,243,252 were pledged on margin with respect to Cactus II.
Dividend Policy |
We anticipate that we will use our future earnings, if any, for the development and expansion of our business, the repayment of debt, and for general corporate purposes. Any determination to pay dividends and other distributions in cash, stock, or property by Swift in the future will be at the discretion of our Board. Such determinations will be dependent on then-existing conditions, including our financial condition and results of operations, contractual restrictions, including restrictive covenants contained in our debt agreements, capital requirements, and other factors. For further discussion about restrictions on our ability to pay dividends, see Management's Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Material Debt Agreements in this Annual Report on Form 10-K.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers |
The following table shows our purchases of our common stock and the remaining amounts we are authorized to repurchase for each period in the three months ended December 31, 2016:
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value That May Yet be Purchased Under the Plans or Programs (1) | |||||||||
October 1, 2016 to October 31, 2016 | — | $ | — | — | $ | 65,000,000 | |||||||
November 1, 2016 to November 30, 2016 | 90,637 | $ | 23.45 | 90,367 | $ | 62,881,000 | |||||||
December 1, 2016 to December 31, 2016 | — | $ | — | — | $ | 62,881,000 | |||||||
Total | 90,637 | $ | 23.45 | 90,367 | $ | 62,881,000 | |||||||
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________________
(1) | On February 22, 2016, the Company announced that the Board authorized the Company to repurchase up to $150.0 million of its outstanding Class A common stock. There is no expiration date associated with this share repurchase authorization. |
Stockholders Return Performance Graph |
The following graph compares the cumulative annual total return of stockholders from December 31, 2011 to December 31, 2016 of our Class A common stock relative to the cumulative total returns of the S&P 500 index and an index of other companies within the trucking industry (Dow Jones U.S. Trucking Total Stock Market Index) over the same period. The graph assumes that the value of the investment in our Class A common stock and in each of the indexes (including reinvestment of dividends) was $100 on December 31, 2011, and tracks it through December 31, 2016. The stock price performance included in this graph is not necessarily indicative of future stock price performance.
December 31, | |||||||||||||||||||||||
2011 | 2012 | 2013 | 2014 | 2015 | 2016 | ||||||||||||||||||
Swift Transportation | $ | 100.00 | $ | 110.68 | $ | 269.54 | $ | 347.45 | $ | 167.72 | $ | 295.63 | |||||||||||
S&P 500 | 100.00 | 116.00 | 153.58 | 174.60 | 177.01 | 198.18 | |||||||||||||||||
Dow Jones US Trucking | 100.00 | 105.14 | 132.20 | 170.77 | 131.36 | 174.30 | |||||||||||||||||
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ITEM 6. | SELECTED FINANCIAL DATA |
The information presented below is derived from our audited consolidated financial statements, included elsewhere in this report, except for 2012 and 2013, which were previously reported. In management's opinion, all necessary adjustments for the fair presentation of the information outlined in these financial statements have been applied. The selected financial data for 2016, 2015, and 2014 should be read alongside the consolidated financial statements and accompanying footnotes in Part II, Item 8.
Note: Factors that materially affect the comparability of the data for 2014 through 2016 are discussed in Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7. Factors that materially affect the comparability of the selected financial data for 2012 and 2013 are set forth below the table.
The following table highlights key measures of the Company's financial condition and results of operations (dollars in thousands, except per share data):
Year Ended December 31, | |||||||||||||||||||
Consolidated income statement GAAP data (1): | 2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||
Operating revenue | $ | 4,031,517 | $ | 4,229,322 | $ | 4,298,724 | $ | 4,118,195 | $ | 3,976,085 | |||||||||
Operating income | 242,012 | 370,104 | 370,070 | 356,959 | 351,816 | ||||||||||||||
Interest and derivative interest expense (2) | 30,598 | 42,322 | 86,559 | 103,386 | 127,150 | ||||||||||||||
Income before income taxes | 214,969 | 316,786 | 250,626 | 256,404 | 201,701 | ||||||||||||||
Net income | 149,267 | 197,577 | 161,152 | 155,422 | 140,087 | ||||||||||||||
Diluted earnings per share | 1.10 | 1.38 | 1.12 | 1.09 | 1.00 | ||||||||||||||
Operating Ratio | 94.0 | % | 91.2 | % | 91.4 | % | 91.3 | % | 91.2 | % | |||||||||
As of December 31, | |||||||||||||||||||
Consolidated balance sheet GAAP data (1): | 2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||
Cash and cash equivalents, excluding restricted cash | $ | 89,391 | $ | 107,590 | $ | 105,132 | $ | 59,178 | $ | 53,596 | |||||||||
Net property and equipment | 1,548,601 | 1,651,100 | 1,542,130 | 1,447,807 | 1,397,536 | ||||||||||||||
Total assets (3)(4) | 2,745,666 | 2,919,667 | 2,892,721 | 2,809,008 | 2,791,981 | ||||||||||||||
Debt: | |||||||||||||||||||
Accounts receivable securitization (4) | 279,285 | 223,927 | 334,000 | 264,000 | 204,000 | ||||||||||||||
Revolving line of credit | 130,000 | 200,000 | 57,000 | 17,000 | 2,531 | ||||||||||||||
Long-term debt and capital lease obligations (4) | 735,741 | 960,972 | 1,104,066 | 1,321,820 | 1,430,598 | ||||||||||||||
Year Ended December 31, | |||||||||||||||||||
Non-GAAP financial data (1): | 2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||
Adjusted EPS (5) | $ | 1.22 | $ | 1.49 | $ | 1.38 | $ | 1.23 | $ | 1.11 | |||||||||
Adjusted Operating Ratio (5) | 92.9 | % | 89.8 | % | 89.0 | % | 88.8 | % | 88.3 | % | |||||||||
Adjusted EBITDA (5) | $ | 533,705 | $ | 642,703 | $ | 619,825 | $ | 615,236 | $ | 598,934 | |||||||||
____________
(1) | Data for all periods includes the results of Central, which was acquired by Swift on August 6, 2013. |
(2) | Interest expense during 2013 is primarily related to outstanding balances of $229.0 million and $410.0 million of the first lien term loan B-1 and B-2 tranches of the 2013 Agreement, respectively, $493.8 million carrying value of the Senior Notes, and $264.0 million of the accounts receivable securitization. |
Interest expense during 2012 is primarily related to outstanding balances of $157.1 million and $575.6 million net carrying value of the first lien term loan B-1 and B-2 tranches of the 2012 Agreement, respectively, $492.6 million carrying value of the Senior Notes and $204.0 million of the accounts receivable securitization.
(3) | Pursuant to the Company's early adoption of ASU 2015-17, "Total assets" as of December 31, 2016, 2015, and 2014 include the impact of reclassifying current deferred income taxes into the noncurrent portion on the consolidated balance sheets. "Total assets" as of December 31, 2013, and 2012 have not been retrospectively adjusted. |
(4) | Pursuant to the Company's adoption of ASU 2015-06 and 2015-15, "Total assets," "Accounts receivable securitization," and "Long-term debt and obligations under capital leases" as of December 31, 2016 and 2015 include the impact of reclassifying debt issuance costs from "Other assets" into "Accounts receivable securitization," "Current portion of long-term debt," and "Long-term debt, less current portion" as a liability in the consolidated balance sheets. "Total assets", "Accounts receivable securitization," and "Long-term debt and obligations under capital leases" as of December 31, 2014, 2013, and 2012 have not been retrospectively adjusted. |
(5) | Adjusted EPS, Adjusted Operating Ratio, and Adjusted EBITDA are non-GAAP financial measures. These non-GAAP financial measures should not be considered alternatives to, 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 in Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations. |
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ITEM 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Certain acronyms and terms used throughout this Annual Report on Form 10-K 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.
Management's discussion and analysis of financial condition and results of operations should be read together with the description of our business in Part I, Item 1, as well as the consolidated financial statements and accompanying footnotes in Part II, Item 8, of this Annual Report on Form 10-K. This discussion contains forward-looking statements as a result of many factors, including those set forth under Part I, Item 1A. Risk Factors, Part I Cautionary Note Regarding Forward-looking Statements, and elsewhere in this report. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially from those discussed.
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.
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. In 2016, our fleet covered 2.2 billion miles for shippers throughout North America.
Revenue — In 2016, we generated consolidated operating revenue of $4.0 billion. 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 segments 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.
2016 Initiatives —The truckload freight environment in 2016 was challenging. Excess industry capacity, excess customer inventories, and depressed shipping demand pressured volumes and pricing. We implemented the following initiatives to help counter the effects of these external factors:
• | We downsized our core truckload fleet in an effort to improve asset utilization, and we continue to closely monitor and adjust our truckload fleet size to ensure proper utilization of our fleets. |
• | We selectively increased our participation in the spot market to improve network balance and help offset the lack of available freight in certain markets. Our sales team remains heavily focused on increasing freight levels with both new and existing customer contracts, with the goal of eventually reducing our spot market activity. |
• | We implemented several cost control initiatives throughout the organization, which include streamlining processes, reducing headcount, postponing non-critical system implementations, and reducing expenses in various other manners. |
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Financial Overview
Year Ended December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
GAAP Financial data: | (Dollars in thousands, except per share data) | ||||||||||
Operating revenue | $ | 4,031,517 | $ | 4,229,322 | $ | 4,298,724 | |||||
Revenue xFSR | $ | 3,722,863 | $ | 3,781,976 | $ | 3,535,391 | |||||
Net income | $ | 149,267 | $ | 197,577 | $ | 161,152 | |||||
Diluted earnings per share | $ | 1.10 | $ | 1.38 | $ | 1.12 | |||||
Operating Ratio | 94.0 | % | 91.2 | % | 91.4 | % | |||||
Non-GAAP financial data: | |||||||||||
Adjusted EPS (1) | $ | 1.22 | $ | 1.49 | $ | 1.38 | |||||
Adjusted Operating Ratio (1) | 92.9 | % | 89.8 | % | 89.0 | % | |||||
Adjusted EBITDA (1) | $ | 533,705 | $ | 642,703 | $ | 619,825 | |||||
____________
(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:
December 31, | ||||||||
2016 | 2015 | 2014 | ||||||
Tractors: | ||||||||
Company: | ||||||||
Owned | 6,735 | 7,442 | 6,083 | |||||
Leased – capital leases | 1,968 | 2,170 | 1,700 | |||||
Leased – operating leases | 5,234 | 5,599 | 6,099 | |||||
Total company tractors | 13,937 | 15,211 | 13,882 | |||||
Owner-operator: | ||||||||
Financed through the Company | 3,272 | 3,767 | 4,204 | |||||
Other | 1,157 | 886 | 750 | |||||
Total owner-operator tractors | 4,429 | 4,653 | 4,954 | |||||
Total tractors | 18,366 | 19,864 | 18,836 | |||||
Trailers | 64,066 | 65,233 | 61,652 | |||||
Containers | 9,131 | 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."
Year Ended | ||||||||
2016 | 2015 | 2014 | ||||||
Company | 13,096 | 13,316 | 12,146 | |||||
Owner-operator | 4,452 | 4,599 | 5,044 | |||||
Total (1) | 17,548 | 17,915 | 17,190 | |||||
____________
(1) | Includes trucks within our non-reportable segment. |
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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 the owner-operators we contract with in August 2014 and May 2015. These increases were tailored, and we believe successful, at improving driver retention and recruiting. However, the increases had a short-term negative impact on profitability for certain periods discussed below, given the immediate effect of driver wage and pay rate increases on expense, versus the more gradual effect of customer pricing increases on revenue. 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 Years Ended December 31, 2016 and 2015
The $48.3 million decrease in net income from $197.6 million in 2015 to $149.3 million in 2016, reflects the following:
(1) | $59.1 million decrease in Revenue xFSR — This was driven by decreases in the Truckload, Swift Refrigerated, Intermodal, and non-reportable segments, partially offset by an increase in Revenue xFSR in the Dedicated segment. |
(2) | $138.7 million decrease in fuel surcharge revenue — Fuel prices were lower overall in 2016, which had an average DOE index of $2.30, compared to $2.71 in 2015. |
(3) | $71.5 million decrease in fuel expense, primarily due to lower fuel prices. |
(4) | $63.7 million decrease in purchased transportation — The decrease in the expense was attributed to reduced fuel reimbursements to owner-operators, as a result of lower fuel prices and a 2.9% decrease in miles driven by owner-operators. Additionally, lower intermodal freight volumes resulted in a decrease in payments to rail carriers, further contributing to the decrease in the expense. This was partially offset by the impact of increasing owner-operator contracted pay rates in May 2015. |
(5) | $36.7 million increase in salaries, wages, and employee benefits, which was primarily due to the driver wage increase implemented in May 2015, an increase in group health insurance expenses, and a $7.1 million one-time expense pertaining to Jerry Moyes' retirement package. |
(6) | $14.2 million decrease in gain on disposal of property and equipment, primarily driven by lower gain on disposals of tractors, due to a soft used truck market in 2016, compared to 2015. This was partially offset by an increase in volume of trailers sold. |
(7) | $9.6 million loss on debt extinguishment in 2015, resulting from the replacement of the 2014 Agreement with the 2015 Agreement. |
(8) | $53.5 million decrease in income tax expense. The effective tax rate in 2016 was 30.6%, which was lower than our expectation of 36.5%. The difference reflects reduced taxes primarily due to a reduction of income before income taxes. Additionally, federal domestic production activities deductions, certain income tax credits received by our foreign and domestic subsidiaries, and a reduction in our uncertain tax position reserve contributed to the difference. See below for discussion related to the 2015 effective tax rate. |
(9) | $2.1 million decrease in other expenses was primarily due to the impacts from the Company's various cost control initiatives implemented during 2016. This was partially offset by a $20.4 million increase in legal settlements and reserves within operating supplies and expenses, which was primarily due to a $22.0 million accrual in 2016 related to unfavorable developments associated with certain litigation within our Swift Refrigerated segment. |
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Results of Operations — Comparison Between the Years Ended December 31, 2015 and 2014
The $36.4 million increase in net income from $161.2 million in 2014 to $197.6 million in 2015, reflects the following:
(1) | $246.6 million increase in Revenue xFSR — This was driven by increases in the Truckload, Dedicated, Intermodal, and Non-reportable segments, partially offset by a decrease in Revenue xFSR in the Swift Refrigerated segment. |
(2) | $316.0 million decrease in fuel surcharge revenue due to declining fuel prices. |
(3) | $175.1 million decrease in fuel expense, due to declining fuel prices and improved fuel efficiency, partially offset by an increase in total miles driven by company drivers. |
(4) | $140.9 million decrease in purchased transportation — This was attributed to reduced fuel reimbursements to the owner-operators we contract with and other third parties, as a result of declining fuel prices and a 5.4% decrease in miles driven by the owner-operators we contract with. This was partially offset by increases in owner-operator contracted pay rates, as well as growth in our logistics business. |
(5) | $141.3 million increase in salaries, wages, and employee benefits, which was primarily due to a 10.3% increase in total miles driven by company drivers, higher company driver wage rates, and an increase in non-driver headcount. |
(6) | $45.7 million increase in operating supplies and expenses, primarily attributed to higher equipment maintenance costs, which were due to an increase in total miles driven by company drivers, in-servicing new tractors, and processing used tractors for sale. A $5.1 million settlement of a class action lawsuit and related costs was also included here in 2015. |
(7) | $41.8 million increase in rent and depreciation expense, which was affected by additional depreciation, maintenance, and staging expenses, resulting from a backlog of trucks that were being processed for trade or sale in the latter half of 2015. |
(8) | $20.3 million increase in insurance and claims expense, primarily due to the first three quarters in 2015, when we had adverse current-year development of certain prior-year claims, higher claims severity trends and higher claims frequency trends. |
(9) | $41.7 million decrease in interest expense, primarily driven by the call of our Senior Notes in November 2014. |
(10) | $30.3 million decrease in loss on debt extinguishment — $9.6 million loss on debt extinguishment in 2015 from replacing the 2014 Agreement with the 2015 Agreement, compared to $39.9 million loss on debt extinguishment in 2014 ($34.7 million from redeeming our Senior Notes and $5.2 million from replacing the 2013 Agreement with the 2014 Agreement). |
(11) | $29.7 million increase in income tax expense driven by an increase in income before income taxes and an increase in the effective tax rate from 35.7% in 2014 to 37.6% in 2015. |
(12) | $3.4 million increase in other expenses includes a $6.0 million increase in non-operating expenses for a lawsuit that was settled in June 2015, a $1.5 million increase from a pre-tax impairment of a non-operating note receivable in 2015, partially offset by a $2.3 million decrease reflecting an impairment related to certain operations software in 2014. |
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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.
Note: In the GAAP to non-GAAP reconciliations below, 2013 and 2012 are included to support the five-year presentation in Part II, Item 6, "Selected Financial Data."
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, |
(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, and |
(vii) | severance expense, including cash and equity award impact, related to the departure of certain executive leadership. |
We subtract income taxes, at the GAAP effective tax rate as applied to adjusted income before income taxes (except for 2012 – 2013, when we used the GAAP expected 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.
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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.
Year Ended December 31, | |||||||||||||||||||
2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||||||
Diluted earnings per share | $ | 1.10 | $ | 1.38 | $ | 1.12 | $ | 1.09 | $ | 1.00 | |||||||||
Adjusted for: | |||||||||||||||||||
Income tax expense | 0.48 | 0.83 | 0.62 | 0.71 | 0.44 | ||||||||||||||
Income before income taxes | 1.59 | 2.20 | 1.75 | 1.80 | 1.44 | ||||||||||||||
Non-cash impairments (1) | 0.01 | — | 0.02 | — | 0.02 | ||||||||||||||
Non-cash impairments of non-operating assets (2) | — | 0.01 | — | — | 0.04 | ||||||||||||||
Loss on debt extinguishment (3) | — | 0.07 | 0.28 | 0.04 | 0.16 | ||||||||||||||
Acceleration of non-cash equity compensation (4) | — | — | — | 0.01 | — | ||||||||||||||
Excludable transaction costs (5) | — | — | — | 0.03 | — | ||||||||||||||
Mark-to-market adjustment of interest rate swaps (6) | — | — | — | 0.01 | — | ||||||||||||||
Amortization of unrealized losses on interest rate swaps (7) | — | — | — | — | 0.04 | ||||||||||||||
Amortization of certain intangibles (8) | 0.12 | 0.11 | 0.11 | 0.11 | 0.11 | ||||||||||||||
Moyes retirement package (9) | 0.05 | — | — | — | — | ||||||||||||||
Adjusted income before income taxes | 1.76 | 2.39 | 2.15 | 2.00 | 1.82 | ||||||||||||||
Provision for income tax expense at effective rate (10) | (0.54 | ) | (0.90 | ) | (0.77 | ) | (0.77 | ) | (0.71 | ) | |||||||||