Wednesday, 4 February 2015

Swift Transportation (SWFT) ... a touch of the chocolate orange?

Wednesday 4th February 2015

London’s AIM has witnessed its share of odd dealings over the past year. Senior controllers of a few AIM quoted companies have dabbled in somewhat esoteric and certainly slightly crafty, sale and repurchase arrangements. The arch practitioner of this scheme was, Mr Rob Terry, former Chairman of Quindell Plc (QPP LN). He initially led market participants to believe that he’d pledged some of his Quindell stock as collateral to an outfit called Equities First Holdings (EFH) in exchange for a wodge of cash that he intended to use to buy further Quindell shares. 

In the event, Mr Terry bought a few shares but nowhere near as much in value as the cash amount which was realised in the lending of collateral bit. Mr Terry then withdrew on any further dealings with EFH and as soon as he stepped down from QPP’s board, dumped sold a load more of his stock into the market.

By all accounts, Optimal Payments (OPAY LN), IGAS Energy (IGAS LN), IQE (IQE LN) and Cloudbuy (CBUY LN) have also reported board members as having had dealings with Equities First Holdings during 2014.

Dealings of this nature are not exactly straightforward and their unorthodoxy may be employed for a reason; you may like two guesses as to what that reason may be. So I looked further afield for other practitioners of the EFH arrangement. This search threw out Swift Transportation (SWFT US), which is currently capitalised at $3.7 billion. 


Swift Transportation (SWFT US) share price, $
Source: Bloomberg

Swift Transportation

I have sold short Swift. 

Swift is a North American trucking company and describes itself in the opening of its overview section from its 2013 10-K as below:
Overview 
We are a multi-faceted transportation services company and operate the largest fleet of truckload equipment in North America. As of December 31, 2013, we operated a tractor fleet of approximately 18,000 units comprised of 12,800 tractors driven by company drivers and 5,200 owner-operator tractors, a fleet of 57,300 trailers, and 8,700 intermodal containers from 40 major terminals positioned near major freight centers and traffic lanes in the United States and Mexico. During 2013, our tractors covered 2.1 billion miles for shippers throughout North America. 2013 was our most profitable year with record operating revenue of $4.1 billion and operating income of $357.0 million. We use sophisticated technologies and systems that contribute to asset productivity, operating efficiency, customer satisfaction, and safety. We believe the depth of our fleet capacity, the breadth of our terminal network, our commitment to customer service, and our extensive suite of services provide us and our customers with significant advantages.
Swift was founded by Mr Jerry Moyes and his family in 1966. The company went public in 1990 and back to being private in May 2007, through a management buyout, reportedly for $2,137 million. Its private life didn't last long. It came back to the public market in 2010. Mr Jerry Moyes remains Swift's long standing CEO. 

At the time of the 2010 float, Mr Moyes and the Moyes Affiliates, entered into a private placement of $262.3 million of mandatory common exchange securities (METS), by way of a newly set-up and unaffiliated trust, usefully called the "Trust". This is highlighted from Swift's S1A form ahead of its 2010 IPO below: 
Stockholder Offering 
Concurrently with our initial public offering, Jerry Moyes and the Moyes Affiliates (as defined herein) will be involved in a private placement by a newly formed, unaffiliated trust, or the Trust, of $300 million of its mandatory common exchange securities (or $345 million of its mandatory common exchange securities if the initial purchasers exercise their option to purchase additional securities in full), herein referred to as the “Stockholder Offering.” Subject to certain exceptions, the Trust’s securities will be exchangeable into shares of our Class A common stock or alternatively settled in cash equal to the value of those shares of Class A common stock three years following the closing date of the Stockholder Offering. We will not receive any proceeds from the Stockholder Offering, and this offering of Class A common stock by us is not conditioned upon the completion of the Stockholder Offering, although the completion of the Stockholder Offering is conditioned on the satisfaction of all conditions to closing this offering. Nothing in this prospectus should be construed as an offer to sell or a solicitation of an offer to buy any of the Trust’s securities in the Stockholder Offering.
What became of this arrangement is further elaborated upon towards the back of Swift's 2013 10 K within Note 22. Related party transactions section: 
Concurrently with the Company’s IPO in December 2010, Mr. Moyes and certain Moyes Affiliates completed a private placement by an unaffiliated special purpose trust (the “2010 Trust”) of $262.3 million of Trust Issued Mandatory Common Exchange Securities (“2010 METS”) which was required to be settled with up to 23,846,364 shares of the Company’s Class A common stock, or cash, on December 31, 2013. 
On December 31, 2013, Mr. Moyes and his Affiliates chose to deliver 19.5 million shares of Class A common stock to settle the 2010 METS facility which were obtained by entering into a variable prepaid forward (“VPF”) contract on October 29, 2013 with Citibank, N.A. (“Citibank”). 
To fulfill the VPF contract, Citibank borrowed 19.5 million shares of Class A common stock from the public market. These shares were sold to Mr. Moyes and certain of his affiliates, through their ownership of M Capital II, and were held as collateral by Citibank for a new loan that facilitated the purchase of the shares. On December 31, 2013, Citibank delivered the 19.5 million Class A shares to the 2010 Trust in exchange for the 23.8 million shares of Class B common stock held by the 2010 Trust as collateral. The holders of the 2010 METS received their respective portion of 19.5 million shares of Class A common stock as settlement of the facility. Citibank now holds the 23.8 million shares of Class B common stock transferred from the 2010 Trust and an additional 2.15 million shares of Class B common stock contributed directly by Mr. Moyes and his Affiliates as collateral for VPF contract. 
Under the VPF contract, M Capital II is obligated to deliver to Citibank a variable amount of stock or cash during two twenty trading day periods beginning on January 4, 2016, and July 5, 2016, respectively. Although M Capital II may settle its obligations to Citibank in cash, any or all of the collateralized shares could be converted into Class A common stock and delivered on such dates to settle such obligations. If settled in cash, we believe Citibank would likely purchase Class A shares on the open market to settle its short position. If settled in shares, we believe Citibank would likely use the shares to settle its position. The 2013 VPF contract allows Mr. Moyes and his Affiliates to retain the same number of shares and voting percentage as they had prior to the inception of the 2013 VPF contract and the settlement of the 2010 METS facility. In addition, Mr. Moyesand his Affiliates are able to participate in future price appreciation of the Company’s common stock.
Rather than a straightforward private placement, whereby the Trust purchased its securities in exchange for cash, this appears to me to have been closer to some sort of sale and repurchase agreement. The terms appear to indicate that cash was received by Mr Moyes and his affiliates and in return, Class B common stock was pledged as collateral. Three years later, the cash was not returned but instead Class A common stock was delivered in settlement.   

As of December 2013, Swift had 88,402,991 shares of Class A common stock and 52,441,938 shares of Class B common stock outstanding, of which the Moyes Affiliates held 3,069,699 shares of Class A and all the shares of Class B common stock. Further, the holders of the Class A common stock are entitled to one vote per share, while the holders of the Class B common stock are entitled to two votes per share. The Class B common stock may be converted into Class A common stock on a one-for-one basis at the election of the holders or automatically upon transfer to another party. 

Following the private placement with the Trust, the Class B common stock was then used as collateral again, this time within a variable prepaid forward (VFP) contract in 2013 (see below). 

A VPF is traditionally an agreement whereby the owner of shares pledges transfer of title at a future date, and in return receives a high proportion of the value (typically 75% to 90%) of the shares in cash at the time of entering the VPF. The VPF is usually entered into with a brokerage firm or investment bank, in this case Citibank. If the stock has risen in value by the time the ownership of the stock is due to be officially transferred from the former owner (in this case M Capital II) to the new owner (in this case Citibank), then the former owner receives a portion of the gains. If the stock declines, then the brokerage firm or investment bank wears the loss. However, one would presume that the counterparty has sold short the stock to offset any risk of loss.    
In addition to the shares that are allowed to be pledged on margin pursuant to our second amended and restated securities trading policy, on October 29, 2013, an affiliate of Mr. Moyes (“M Capital II”) entered into a variable prepaid forward contract (the “VPF Contract”) with Citibank, N.A. (“Citibank”) that was intended to facilitate settlement of the mandatory common exchange securities (“2010 METS”) issued in 2010 by an unaffiliated trust concurrently with the Company’s IPO, which was required to be settled with shares of the Company’s Class A common stock, or cash, on December 31, 2013. This transaction (the “VPF Transaction”) effectively replaced the 2010 METS with the VPF Contract and allowed the parties to the 2010 METS transaction to satisfy their obligations under the 2010 METS (as contemplated by their terms) without reducing the number of shares owned by these parties. The VPF Transaction will also allow Mr. Moyes and certain of his affiliates, through their ownership of M Capital II, to participate in future price appreciation of the Company’s Common Stock, and retain the voting power of the shares collateralized to secure the VPF Contract as described below.
Under the VPF Contract, M Capital II is obligated to deliver to Citibank a variable amount of stock or cash during two twenty trading day periods beginning on January 4, 2016, and July 5, 2016, respectively. In connection with the VPF Transaction, 25,994,016 shares of Class B Common Stock are collateralized by Citibank to secure M Capital II’s obligations under the VPF Contract. As these shares are not pledged to secure a loan on margin, they are not subject to the current 20% limitation discussed above. Although M Capital II may settle its obligations to Citibank in cash, any or all of the collateralized shares could be converted into Class A common stock and 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 interests for Mr. Moyes.   
So thus far, it would seem that Mr Moyes and his affiliates have pledged 25,994,016 shares of his Class B common stock, or 49.6% of his holding, as collateral as at 31 December 2013. 

And then there appears to be more. 

Swift also highlights (see below) that Mr Moyes had already pledged a portion of his Class B common stock, seemingly having borrowed against and pledged 12,023,343 shares of Class B common stock in 2011, as collateral for a personal loan. 

This represented 22.9% of the Class B common stock outstanding (all reportedly held by Moyes Affiliates) or 21.7% of Mr Moyes and Affiliates total holding (Class A and B) as at 31 December 2013. 

Presumably this then means that 72.5% of Mr Moyes and Affiliates holdings of Class B common stock had been pledged as collateral; 49.6% from above and 22.9%? 

Then during 2012, Moyes Affiliates converted an additional 1,068,224 (or 2.0% of outstanding at the time) Class B common stock into Class A common stock and sold this, along with 3,763,654 of existing Class A common stock (an additional 4,831,878 in total), to a counter-party pursuant to a Sale and Repurchase agreement.
Mr. Moyes has borrowed against and pledged a portion of his Class B common stock, which may cause his interests to conflict with the interests of our other stockholders and may adversely affect the trading price of our Class A Common Stock.Pursuant to our second amended and restated securities trading policy, our board of directors have limited the right of employees or directors, including Mr. Moyes and the Moyes Affiliates, to pledge more than 20% of their family holdings to secure margin loans through June 30, 2014. Effective July 1, 2014, the limitation on margin pledging is reduced to 15% of their family holdings and effective July 1, 2015, the limitation on margin pledging is reduced to 10% of holdings. In July 2011 and December 2011, Cactus Holding Company II, LLC, an entity controlled by Mr. Moyes, pledged on margin 12,023,343 shares of Class B common stock as collateral for personal loan arrangements entered into by Cactus Holding Company II, LLC and relating to Mr. Moyes. In connection with the December 2011 loan and margin pledge of Class B shares as collateral, Cactus Holding Company II, LLC converted 6,553,253 of the 12,023,343 pledged shares of Class B common stock into shares of Class A common stock on a one-for-one basis. Throughout 2012, the Moyes Affiliates converted an additional 1,068,224 shares of Class B common stock to Class A common stock and sold 4,831,878 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.
 These margin pledges 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.
A few years later in May 2014, Cactus Holding II (which is reportedly a business for "aiding in Mr and Mrs Moyes' asset management needs"), advised the counterparty to the 2012 Sale and Repurchase agreement, that it wished to exercise its right to repurchase the 4,831,878 shares of Class A common stock, as detailed in Swift's schedule 13D notice from May 2013. Concurrently a new Sale and Repurchase agreement was seemingly entered with Citigroup:
On May 30, 2014, Cactus Holding II delivered irrevocable notice to the counterparty in the Sale and Repurchase Agreement that Cactus Holding II was exercising its right to repurchase the 4,831,878 shares of Class A Common Stock sold pursuant to such agreement. Cactus Holding II simultaneously delivered $34,076,274.63 to the counterparty in satisfaction of the repurchase price (the “Repurchase Amount”). Cactus Holding II obtained the Repurchase Amount by entering into the New Sale and Repurchase Agreement with Citigroup Global Markets Limited (“CGML”), represented by Citigroup Global Markets Inc. as its agent (“CGMI”), pursuant to which Cactus Holding II sold 5,311,400 shares of Class A Common Stock and 1,450,000 shares of Class B Common Stock to CGML (the “Sold Shares”). The Repurchase Amount was paid in partial satisfaction of the purchase price under the New Sale and Repurchase Agreement. The balance of the purchase price, which is $50,407,418.37 (together, with the Repurchase Amount, the “Purchase Price”), will be delivered to Cactus Holding II following the delivery of the 4,831,878 shares of Class A Common Stock from the counterparty in the Sale and Repurchase Agreement to CGML. Cactus Holding II has an obligation to repurchase the Sold Shares for an amount equal to the Purchase Price on the second anniversary of the transaction. Cactus Holding II is further obligated to pay an annual interest-equivalent of 3.4% for the first year of the transaction’s term and 3.0% thereafter. Cactus Holding II has the option to repurchase the Sold Shares at any time during the two year term for an amount equal to the Purchase Price. This transaction is intended to be treated as a loan for tax purposes pursuant to Section 1058 of the Internal Revenue Code.    
The purposes given in Swift's schedule 13D notice from May 2014 for - on the face of it, what appears to me to be a lot of jiggery pokery Sale and Repurchase type agreements, range from estate planning, to financial planning, to achieving greater liquidity and to secure the VPF contract. 

One would imagine that greater liquidity would come about only if the shares which were pledged had been sold on, or the anticipated receipt were sold short, into the market by the counterparty in the VPF or Sale and Repurchase agreements. 

So by now, assuming you have managed to keep up with all this, it would seem that a large portion of Mr Moyes and his affiliates holdings in Swift have been pledged as collateral. 


Equities First Holdings (EFH)

And Equities First Holdings (EFH) seems to crop up amongst all this, as a counterparty.  


Exhibit 9 to May 2014's Schedule 13D notice indicates that the underlying counterparty to the 2012 Sale and Repurchase agreement would appear to be Equities First Holdings. I say appears when, it is actually quite clear to me that it is the underlying counterparty as it says "FBO: Equities First Holdings", i.e. For Benefit Of: Equities First Holdings.    
Page 4 of Exhibit 9 Securities and Repurchase Agreement dated May 30, 2014
between Cactus Holding Company II, LLC, and Citigroup Global Markets Limited,
represented by Citigroup Global Markets Inc. as its agent
Source: Swift Transportation
Who the underlying counterparty to the new Sale and Repurchase agreement from May 2014 was, is as far as I can tell unknown. Citigroup just states "Account to be provided". Perhaps it was EFH again?   
Page 5 of Exhibit 9 Securities and Repurchase Agreement dated May 30, 2014
between Cactus Holding Company II, LLC, and Citigroup Global Markets Limited,
represented by Citigroup Global Markets Inc. as its agent
Source: Swift Transportation
Whether any of these Sale and Repurchase agreements or Variable Prepaid Forward Contracts matter in the grand scheme of things I do not know. I reckon the use of them shows a remarkably cavalier attitude to one's shareholding, especially for one in a position of control. And while the practice of Sale and Repurchase has been frowned upon on London's AIM, it may well be de rigueur over in the US.  


Ownership, control, but no formal contract?

What is somewhat odd, is that despite Mr Moyes, bearing the title of CEO, retaining c. 54.4% of the voting power of outstanding stock as at 30 May 2014, and entering into VPF and Sale and Repurchase agreements, is that he does not actually appear to be formerly employed by Swift. Indeed, none of the senior management appear to be: 
We are dependent on certain personnel that are of key importance to the management of our business and operations. 
Our success depends on the continuing services of our founder, and Chief Executive Officer, Mr. Moyes. We currently do not have an employment agreement with Mr. Moyes. We believe that Mr. Moyes possesses valuable knowledge about the trucking industry and that his knowledge and relationships with our key customers and vendors would be very difficult to replicate.  
In addition, many of our other executive officers are of key importance to the management of our business and operations, including our President, Richard Stocking, and our Chief Financial Officer, Virginia Henkels. We currently do not have employment agreements with any of our management. Our future success depends on our ability to retain our executive officers and other capable managers. Any unplanned turnover or our failure to develop an adequate succession plan for our leadership positions could deplete our institutional knowledge base and erode our competitive advantage. Although we believe we could replace key personnel given adequate prior notice, the unexpected departure of key executive officers could cause substantial disruption to our business and operations. In addition, even if we are able to continue to retain and recruit talented personnel, we may not be able to do so without incurring substantial costs.

Past events

All that aside, a bit more digging and it turns out there's history to Swift and Mr Jerry Moyes.

It would appear that the United Food and Commercial Workers (UFCW) Local 1262 Pension Fund, as an investor in Swift Transportation in Q4 2003 to Q3 2004, brought a "Consolidated Amended Class Action Complaint" against Mr Jerry Moyes, Swift's Chairman and CEO in 2004. I should stress that this complaint was dismissed in 2006. Nonetheless, in my mind, the complaint (although it was more complaints than complaint) is still noteworthy.

2004 Class Action Complaint by
United Food and Commercial Workers Local 1262 Pension Fund
against Mr Jerry Moyes
Source: Stanford Law School Securities Class Action Clearinghouse
The plaintiff complains about all sorts, such as:
Unbeknownst to investors, Swift's results had primarily been achieved by employing under-qualified drivers without sufficient training and by allowing the Company's drivers to violate applicable federal regulations regarding the maximum hours that could be spent driving. 
Swift under-reported its accident rates and engaged in a widespread campaign of instructing its drivers to falsify their log books (these books contained the information regarding hours driven by the drivers each day).
It also alleged:
False Financial Statements Issued During The Class Period 
During the Class Period, Swift and the Individual Defendants represented that the Company's quarterly and year-end financial statements were prepared in accordance with generally accepted accounting principles ("GAAP"), which are recognized by the accounting profession and the SEC as the uniform rules, conventions and procedures necessary to define accepted accounting practice at a pa rticular time. In fact, the Company used improper accounting practices in violation of GAAP and SEC reporting requirements to falsely inflate its assets, stockholders' equity and earnings during the Class Period. 
Swift's materially false and misleading statements resulted from a series of deliberate senior management decisions designed to conceal the truth regarding the Company's actual operating results. Specifically, as discussed in 72-85 below, defendants caused the Company to violate GAAP by understating its insurance and claims expense and improperly depreciating its service equipment.
And further:
While Moyes could have liquidated his stock holdings in Swift to cover his obligations to the Westgate complex and the Coyotes, any diminution in his control over the Company would have greatly impacted his financial position, as many of his other companies did a great deal of business with Swift. According to Swift's proxy statement filed April 13, 2004, "[t]he largest single fleet operator with whom Swift does business is Interstate Equipment Leasing, Inc . ("IEL") a corporation wholly-owned by Jerry Moyes." 
Swift's proxy statement also describes Swift's relationships with Central Freight Lines, Inc ., a company 40% owned by Moyes, and with Central Refrigerated Services Inc ., SME Industries, Inc ., Swift Aviation Services, Inc ., and Swift Air, Inc ., all private companies in which Moyes was the principal stockholder. Swift's dealings with Moyes's companies were so pervasive that on May 22, 2003, the International Brotherhood of Teamsters published a report that listed all of the companies owned by Moyes and asked whether Swift was "run for the benefit of the shareholders or related outside parties. " 
There was more, that also included a complaint that Swift's Board of Directors instructed its management to buy back stock and the allegation that this was to protect Mr Jerry Moyes from facing margin calls on pledged shares. 

I would remind the reader again that this complaint was entirely dismissed in 2006. And that was the end of that. 

However, any rest from the axe grinders appears short lived. A new complaint seemingly began again in September 2005, this time raised by no less than the SEC. Although this was subsequently settled. 

Indeed Swift's 2010 S1A notice highlights in its Management section on page 121 that: 
In September 2005, the SEC filed a complaint in federal court in Arizona alleging that Mr. Moyes purchased an aggregate of 187,000 shares of Swift Transportation stock in May 2004 while he was aware of material non-public information. Mr. Moyes timely filed the required reports of such trades with the SEC, and voluntarily escrowed funds equal to his putative profits into a trust established by the company. After conducting an independent investigation of such purchases and certain other repurchases made by Swift Transportation that year at Mr. Moyes’ direction under its repurchase program, Swift instituted a stricter insider trading policy and a pre-clearance process for all trades made by insiders. Mr. Moyes stepped down as President in November 2004 and as Chief Executive Officer in October 2005. Mr. Moyes agreed, without admitting or denying any claims, to settle the SEC investigation and to the entry of a decree permanently enjoining him from violating securities laws, and paid approximately $1.5 million in disgorgement, prejudgment interest, and penalties.   
And so again, that was that. 

All the jiggery pokery of VPF and Sale and Repurchase agreements, and past complaints aside, what has been going on with the business in recent times?

More recent events

Yours for $225 million ...
In August 2013, Swift acquired a refrigerated transport company called, Central Refrigerated Transportation, or Central. Central was purchased in a cash transaction valued at $225.0 million. Of this, Swift paid approximately $189.0 million in cash to the stockholders of Central and assumed approximately $36.0 million in capital lease obligations:
Acquisition of Central Refrigerated
On August 6, 2013, we entered into a Stock Purchase Agreement, or SPA, with the stockholders of Central Refrigerated Transportation, Inc., or Central, pursuant to which we acquired all of the outstanding capital stock of Central, or the Acquisition, in a cash transaction valued at $225.0 million. We paid approximately $189.0 million in cash to the stockholders of Central and assumed approximately $36.0 million of capital lease obligations and other debt. Cash consideration was primarily funded from borrowings under our existing credit facilities. As of December 31, 2013, we have repaid approximately $68.0 million of these borrowings. Pursuant to the SPA, within 90 days after the closing date, the Company prepared a final closing statement setting forth the finalestimate of the purchase price. As a result of this process and calculation, the purchase price was increased by $2.4 million.
Central is a premium service truckload carrier specializing in temperature-controlled freight transportation and was the fifth-largest provider of temperature-controlled truckload services in the U.S. With the addition of Central to our dedicated temperature- controlled business, Swift is now the second largest temperature-controlled truckload provider in the U.S.
Jerry Moyes, our Chief Executive Officer and controlling stockholder, was the principal owner of Central. Given Mr. Moyes’ interests in the temperature-controlled truckload industry, our board of directors established a Special Committee comprised solely of independent and disinterested 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 SPA, with the assistance of its independent financial advisors. Upon the unanimous recommendation of the Special Committee, the Acquisition was approved by our board of directors (with Mr. Moyes not participating in the vote).
Given Mr. Moyes' controlling interest in both Swift and Central, the Acquisition was accounted for using the guidance for transactions between entities under common control as described in Accounting Standard Codification, or ASC, Topic 805 - "Business Combinations", in which we recognized the assets and liabilities of Central at their carrying amounts at the date of acquisition. Additionally, as a result of the common control accounting, the historical results of Central have been combined with our historical results and our financial statements have been recast to reflect the accounts of Central as if it had been consolidated for all previous periods presented.
What you may also notice is that Mr Moyes, the Chief Executive and controlling stockholder of Swift, was also the principal owner of Central; hence no doubt the main recipient of the $189.0 million in cash.     

As one would expect, the transaction was not approved by Mr Moyes himself, but instead a “Special Committee” was established comprised solely of independent and disinterested directors. This Special Committee unanimously recommended the transaction and so Swift’s board (ex Mr Moyes) approved it.

Of course, while through the sale of Central, Mr Moyes, took receipt of a cheque in the tens of millions, by default, he as the controlling shareholder of Swift, ex-post remained also that of Central. 

As highlighted above, Central is a trucking company. I would imagine that trucking companies are relatively capital intensive. And so outlays on capex are probably reasonably large. In any given year, you probably sell a few trucks for a residual value, but you buy a few more to replace those sold. And if you're growing, then you probably buy more than you sold. This would appear to be the case for Swift. 

As highlighted below, in 2013, Swift spent $318 million on capex, and received $119 million in proceeds from the sale of property, plant and equipment. 

Its net expenditure on these two lines was $199 million. 

This was up from $171 million in 2012, and $172 million in 2011.  


Swift Transportation Statement of operating and investing cash flows
Source: Swift 2013 10K
Further down in Swift's 2013 10K we see that by contrast, Central Refrigerated had net positive cash inflows from investing activities in 2012. 

Central's cash flows are only provided at a headline number, but nonetheless, while Swift reported net investing cash outflows of $172 million in 2012 and $150 million in 2011, Central achieved a net investing cash inflow of $3 million in 2012 and broadly flat in 2011. 

I find that to be a peculiar out turn for a capital intensive business, especially one where operating income grew by 86% in the year.    
Headline P&L and cash flow figures for 2011-12 by Swift and Central Refrigerated
Source: Swift 2013K
In the run up to Central's acquisition its revenue was rocking along, growing at high single to low double digit rates. More recently, not so much. 

Central Refrigerated Segment (CRS) reported a 12.8% YOY decline in revenue x fuel surcharge revenue (FSR) in Q4 2014, when Swift updated the market with its Q4 2014 performance last week.

Central's revenue drop was attributed in part to:
Despite these many accomplishments, we did experience some disappointments in 2014, including severe winter weather throughout the first quarter, a challenging driver market and our slow reaction to address driver pay, underestimating the cultural and operational differences between Swift and Central Refrigerated and the disruption caused by the systems integration, growing pains and start-up costs in our Dedicated segment, and discouraging claims trends. As discussed previously, we are not sitting idly by and letting these disappointments continue without action. We have implemented plans to improve these situations and will continue to do so in 2015.
However, one would have imagined that as Central's former owner and subsequent controller had such intimate knowledge of both Swift and Central, that cultural and operational differences would have been relatively well understood.  

That unravelled quicker than expected ...

In early 2012, Swift purchased an equity stake in Swift Power Services (SPS) for $500,000 and loaned SPS $7.5 million. Seemingly, SPS didn't even manage to make it through a year before it defaulted on its loan. 
Note 6. Equity Investment and Note Receivable – Swift Power Services, LLC 
In February 2012, the Company contributed approximately $500 thousand to Swift Power Services, LLC (“SPS”) in return for 49.95% ownership interest. SPS was formed in 2012 for the purpose of acquiring the assets and business of three trucking companies engaged in bulk transporting of water, oil, liquids and pipe to various oil companies drilling in the Bakken shale in northwestern North Dakota. The Company accounts for its interest in SPS using the equity method. 
Additionally, in February 2012, the Company loaned $7.5 million to SPS pursuant to a secured promissory note, which is secured by substantially all of the assets of SPS. SPS failed to make its first scheduled principal payment and quarterly interest payment to the Company on December 31, 2012, which resulted in a $6.0 million pre-tax impairment charge in the fourth quarter of 2012. As a result, this note had been placed on nonaccrual status since December 31, 2012. During the years ended December 31, 2013 and 2012, the Company recorded equity losses of $277 thousand and $1.0 million, respectively, in other expense in the Company’s consolidated statements of operations related to its note receivable and investment in SPS, respectively. As a result of the accumulated equity losses and the impairment recorded during the year ended December 31, 2012, the net carrying value of the investment in SPS is zero as of December 31, 2013 and 2012, and the net carrying value of the note receivable is zero and $1.0 million as of December 31, 2013 and 2012, respectively.   
SPS was subsequently disclosed to have defaulted due to: 
Swift Power Services, LLC ("SPS"), an entity in which we own a minority interest and hold a secured promissory note, failed to make its first scheduled principal payment and quarterly interest payment to us on December 31, 2012 due to a decline in its financial performance resulting from a legal dispute with the former owners and its primary customer. This caused us to evaluate the secured promissory note due from SPS for impairment, which resulted in a $6.0 million pre-tax adjustment that was recorded in Impairments of non-operational assets in the fourth quarter of 2012.
This is by no means a huge loss but does seem somewhat odd that the loss occurred in such a short order. 

And another thing ...

Swift utilises a facility whereby it securitizes a portion of its accounts receivables. While this practice is not altogether unusual, I couldn't help notice that the amount securitized has been rising over recent years as a percentage of the outright net accounts receivable balance. 

In 2013, the group appeared to have securitized $264,000 of its net accounts receivable balance of $481,436; or 63.1%. 

In 2014, the group appears to have securitized $334,000 of its net accounts receivable balance of $478,999; or 69.7%. 

I would mind your eye on that. 


Note 10. Accounts Receivable Securitization
Source: Swift 2013 10 K




Swift Transportation - Net accounts receivable balance and balance securitized, $m, %
Source: Swift Transportation 10 K's and Q4 2014 letter to shareholders
Swift Transportation - Net accounts receivable balance and balance securitized, $m, %
Source: Swift Transportation 10 K's and Q4 2014 letter to shareholders

I have sold short Swift.

Disclaimer: The information, discussions or topics referred to on this blog should in no way be considered “advice” to buy or sell anything. The information which may be referred to is freely available in the public domain and where required the source of information is referenced to for verification. While every effort has been made to ensure the veracity of any information contained within this blog, the author accepts no responsibility for the accuracy of any information contained within this blog or for the sources of information which may be referred to. Readers are responsible for their own actions and interpretation of the information contained within this blog. 

2 comments:

  1. Great in-depth analysis. You mentioned OPAY LN as the CEO also did a transaction with EFH. Have you looked deeper into the case? Today they are announcing a HUGE acquisition with a large rights issue of 450 GBP...

    ReplyDelete
  2. Nice Website...
    Hey JOIN now fblikesbot.com and Increase Facebook Likes your profile and websites.
    Increase Facebook Likes and check your website worth worth my websites
    FB Likes and check your website worth Website Value Calculator
    Hot Wallpapers seo tools website
    its may be very beneficial for you also really

    ReplyDelete