Attached files

file filename
EX-32.1 - CEO AND CFO CERTIFICATION PURSUANT TO 18 USC, SEC 1350 - Knight-Swift Transportation Holdings Inc.swft-ex321x9302016.htm
EX-31.2 - CFO CERTIFICATION PURSUANT TO EXCHANGE ACT RULE 13A-14(A) OR 15D-14 - Knight-Swift Transportation Holdings Inc.swft-ex312x9302016.htm
EX-31.1 - CEO CERTIFICATION PURSUANT TO EXCHANGE ACT RULE 13A-14(A) OR 15D-14(A) - Knight-Swift Transportation Holdings Inc.swft-ex311x9302016.htm
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 _____________________________________________________________________
FORM 10-Q
  _____________________________________________________________________

ý    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
or
o    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 001-35007
 _____________________________________________________________________
swiftfulllogonotagbwa13.jpg
 Swift Transportation Company
(Exact name of registrant as specified in its charter)
    _____________________________________________________________________
Delaware
 
20-5589597
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
2200 South 75th Avenue
Phoenix, AZ 85043
(Address of principal executive offices and zip code)
(602) 269-9700
(Registrant’s telephone number, including area code)
 
N/A
(Former name, former address and former fiscal year, if changed since last report)
  ______________________________________________________________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
 
 
 
 
 
 
 
Large accelerated filer
 
ý
  
Accelerated filer
 
o
 
 
 
 
Non-accelerated filer
 
o (Do not check if a smaller reporting company)
  
Smaller reporting company
 
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No  ý 
The number of outstanding shares of the registrant’s Class A common stock as of October 25, 2016 was 82,629,985 and the number of outstanding shares of the registrant’s Class B common stock as of October 25, 2016 was 49,741,938.
 
 
 
 
 




SWIFT TRANSPORTATION COMPANY


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

2



SWIFT TRANSPORTATION COMPANY

QUARTERLY REPORT ON FORM 10-Q
 
GLOSSARY OF TERMS
The following glossary provides definitions for certain acronyms and terms used in this Quarterly Report on Form 10-Q. These acronyms and terms are specific to our company, commonly used in our industry, or are otherwise frequently used throughout our document.
 
Term
 
Definition
Swift/the Company/Management/We/Us/Our
 
Unless otherwise indicated or the context otherwise requires, these terms represent Swift Transportation Company and its subsidiaries. Swift Transportation Company is the holding company for Swift Transportation Co., LLC (a Delaware limited liability company) and Interstate Equipment Leasing, LLC.
2007 Transactions
 
In April 2007, Jerry Moyes and his wife contributed their ownership of all of the issued and outstanding shares of IEL to Swift Corporation in exchange for additional Swift Corporation shares. In May 2007, the Moyes Affiliates (defined below), 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.
2010 METS
 
Mandatory Common Exchange Securities issued by Jerry Moyes and the Moyes Affiliates in 2010.
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.
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"
2014 Agreement
 
The Company's Third Amended and Restated Credit Agreement, replaced by the 2015 Agreement
2015 Agreement
 
The Company's Fourth Amended and Restated Credit Agreement
AOCI
 
Accumulated Other Comprehensive Income (Loss)
ASC
 
Accounting Standards Codification
ASU
 
Accounting Standards Update
Board
 
Swift's Board of Directors
COFC
 
Container on Flat Car
CSA
 
Compliance Safety Accountability
Deadhead
 
Tractor movement without hauling freight (unpaid miles driven)
DLC
 
Deferred Loan Cost
DOE
 
United States Department of Energy
EBITDA
 
Earnings Before Interest, Taxes, Depreciation, and Amortization (a non-GAAP measure)
EPS
 
Earnings Per Share
FASB
 
Financial Accounting Standards Board
FLSA
 
Fair Labor Standards Act
GAAP
 
United States Generally Accepted Accounting Principles
IEL
 
Interstate Equipment Leasing, LLC (formerly Interstate Equipment Leasing, Inc.)
IPO
 
Initial Public Offering

3



SWIFT TRANSPORTATION COMPANY

GLOSSARY OF TERMS — CONTINUED
The following glossary provides definitions for certain acronyms and terms used in this Quarterly Report on Form 10-Q. These acronyms and terms are specific to our company, commonly used in our industry, or are otherwise frequently used throughout our document.
 
Term
 
Definition
LIBOR
 
London InterBank Offered Rate
Moyes Affiliates
 
Jerry Moyes, The Jerry and Vickie Moyes Family Trust dated December 11, 1987, and various Moyes children’s trusts
NASDAQ
 
National Association of Securities Dealers Automated Quotations
New Revolver
 
Revolving line of credit under the 2015 Agreement
New Term Loan A
 
The Company's first lien term loan A under the 2015 Agreement
NLRB
 
National Labor Relations Board
OID
 
Original Issue Discount
Old Revolver
 
Revolving line of credit under the 2014 Agreement
Old Term Loan A
 
The Company's first lien term loan A under the 2014 Agreement
QTD
 
Quarter-to-date, or three months ended
Revenue xFSR
 
Revenue, Excluding Fuel Surcharge Revenue
SEC
 
United States Securities and Exchange Commission
SRCII
 
Swift Receivables Company II, LLC
The Purchasers
 
Unrelated financial entities in the 2013 RSA and 2015 RSA, which were accounts receivable securitization agreements entered into by SRCII
Term Loan B
 
The Company's first lien term loan B under the 2014 Agreement
TOFC
 
Trailer on Flat Car
VPF
 
Variable Prepaid Forward (contract)
YTD
 
Year-to-date, or nine months ended

4


SWIFT TRANSPORTATION COMPANY

PART I FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 
September 30, 2016
 
December 31, 2015
 
(In thousands, except share data)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
71,258

 
$
107,590

Cash and cash equivalents – restricted
59,487

 
55,241

Restricted investments, held to maturity, amortized cost
22,864

 
23,215

Accounts receivable, net
403,895

 
422,421

Income tax refund receivable
9,987

 
11,664

Inventories and supplies
16,264

 
18,426

Assets held for sale
11,830

 
9,084

Prepaid taxes, licenses, insurance, and other
50,669

 
48,149

Current portion of notes receivable
7,668

 
9,817

Total current assets
653,922

 
705,607

Property and equipment, at cost:
 
 
 
Revenue and service equipment
2,233,507

 
2,278,618

Land
131,693

 
131,693

Facilities and improvements
278,291

 
269,769

Furniture and office equipment
110,996

 
99,519

Total property and equipment
2,754,487

 
2,779,599

Less: accumulated depreciation and amortization
(1,200,613
)
 
(1,128,499
)
Net property and equipment
1,553,874

 
1,651,100

Other assets
22,664

 
26,585

Intangible assets, net
270,508

 
283,119

Goodwill
253,256

 
253,256

Total assets
$
2,754,224

 
$
2,919,667

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
138,087

 
$
121,827

Accrued liabilities
132,918

 
97,313

Current portion of claims accruals
78,478

 
84,429

Current portion of long-term debt
799

 
35,514

Current portion of capital lease obligations
71,988

 
59,794

Total current liabilities
422,270

 
398,877

Revolving line of credit
50,000

 
200,000

Long-term debt, less current portion
593,263

 
643,663

Capital lease obligations, less current portion
176,871

 
222,001

Claims accruals, less current portion
155,317

 
149,281

Deferred income taxes
438,369

 
463,832

Accounts receivable securitization
299,196

 
223,927

Other liabilities
6,699

 
959

Total liabilities
2,141,985

 
2,302,540

Commitments and Contingencies (Notes 9 and 10)

 

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

 

Class A common stock, par value $0.01 per share; authorized 500,000,000 shares; 82,615,248 and 87,808,801 shares issued and outstanding as of September 30, 2016 and December 31, 2015, respectively
826

 
878

Class B common stock, par value $0.01 per share; authorized 250,000,000 shares; 49,741,938 and 50,991,938 shares issued and outstanding as of September 30, 2016 and December 31, 2015, respectively
497

 
510

Additional paid-in capital
690,317

 
754,589

Accumulated deficit
(79,503
)
 
(139,033
)
Accumulated other comprehensive income

 
81

Noncontrolling interest
102

 
102

Total stockholders’ equity
612,239

 
617,127

Total liabilities and stockholders’ equity
$
2,754,224

 
$
2,919,667

See accompanying notes to consolidated financial statements.

5




SWIFT TRANSPORTATION COMPANY




CONSOLIDATED INCOME STATEMENTS
(UNAUDITED)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands, except per share data)
Operating revenue:
 
 
 
 
 
 
 
Revenue, excluding fuel surcharge revenue
$
929,732

 
$
954,974

 
$
2,772,054

 
$
2,785,737

Fuel surcharge revenue
83,494

 
109,999

 
220,849

 
353,784

Operating revenue
1,013,226

 
1,064,973

 
2,992,903

 
3,139,521

Operating expenses:
 
 
 
 
 
 
 
Salaries, wages, and employee benefits
293,098

 
283,767

 
868,831

 
821,747

Operating supplies and expenses
113,750

 
102,719

 
291,185

 
288,070

Fuel
90,464

 
103,023

 
252,822

 
326,598

Purchased transportation
280,041

 
299,866

 
830,952

 
883,354

Rental expense
57,004

 
59,088

 
170,326

 
180,909

Insurance and claims
47,372

 
52,877

 
140,888

 
139,390

Depreciation and amortization of property and equipment
67,245

 
66,852

 
198,884

 
184,194

Amortization of intangibles
4,204

 
4,204

 
12,611

 
12,611

Gain on disposal of property and equipment
(5,620
)
 
(9,825
)
 
(16,909
)
 
(23,987
)
Communication and utilities
7,130

 
8,236

 
20,977

 
23,134

Operating taxes and licenses
18,685

 
19,245

 
55,795

 
55,104

Total operating expenses
973,373

 
990,052

 
2,826,362

 
2,891,124

Operating income
39,853

 
74,921

 
166,541

 
248,397

Other expenses (income):
 
 
 
 
 
 
 
Interest expense
7,384

 
9,130

 
23,545

 
29,627

Derivative interest expense

 
68

 

 
3,972

Interest income
(624
)
 
(647
)
 
(2,011
)
 
(1,825
)
Loss on debt extinguishment

 
9,567

 

 
9,567

Non-cash impairments of non-operating assets

 

 

 
1,480

Legal settlements and reserves

 

 
3,000

 
6,000

Other income, net
(1,223
)
 
(752
)
 
(3,093
)
 
(2,341
)
Total other expenses (income), net
5,537

 
17,366

 
21,441

 
46,480

Income before income taxes
34,316

 
57,555

 
145,100

 
201,917

Income tax expense
10,292

 
21,274

 
46,275

 
76,842

Net income
$
24,024

 
$
36,281

 
$
98,825

 
$
125,075

Basic earnings per share
$
0.18

 
$
0.25

 
$
0.73

 
$
0.88

Diluted earnings per share
$
0.18

 
$
0.25

 
$
0.73

 
$
0.87

Shares used in per share calculations:
 
 
 
 
 
 
 
Basic
132,930

 
142,801

 
134,622

 
142,535

Diluted
134,462

 
144,132

 
136,227

 
144,238

See accompanying notes to consolidated financial statements.


6




SWIFT TRANSPORTATION COMPANY




CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Net income
$
24,024

 
$
36,281

 
$
98,825

 
$
125,075

Accumulated losses on derivatives reclassified to derivative interest expense

 
69

 

 
3,886

Other

 

 
(81
)
 

Other comprehensive income (loss) before income taxes

 
69

 
(81
)
 
3,886

Income tax effect of items within other comprehensive income (loss)

 

 

 
(1,469
)
Other comprehensive income (loss), net of income taxes

 
69

 
(81
)
 
2,417

Total comprehensive income
$
24,024

 
$
36,350

 
$
98,744

 
$
127,492

See accompanying notes to consolidated financial statements.


7




SWIFT TRANSPORTATION COMPANY




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

 
$
878

 
50,991,938

 
$
510

 
$
754,589

 
$
(139,033
)
 
$
81

 
$
102

 
$
617,127

Common stock issued under stock plans
785,416

 
8

 


 


 
5,167

 


 


 


 
5,175

Stock-based compensation expense


 


 


 


 
4,691

 


 


 


 
4,691

Excess tax benefit from stock-based compensation


 


 


 


 
547

 


 


 


 
547

Shares issued under employee stock purchase plan
63,941

 

 


 


 
955

 


 


 


 
955

Repurchase and cancellation of Class A common stock
(7,292,910
)
 
(73
)
 
 
 
 
 
(75,632
)
 
(39,295
)
 
 
 
 
 
(115,000
)
Conversion of Class B common stock to Class A common stock
1,250,000

 
13

 
(1,250,000
)
 
(13
)
 
 
 
 
 
 
 
 
 

Net income


 


 


 


 


 
98,825

 


 


 
98,825

Other comprehensive income (loss), net of income taxes


 


 


 


 


 


 
(81
)
 


 
(81
)
Balances, September 30, 2016
82,615,248

 
$
826

 
49,741,938

 
$
497

 
$
690,317

 
$
(79,503
)
 
$

 
$
102

 
$
612,239

See accompanying notes to consolidated financial statements.


8




SWIFT TRANSPORTATION COMPANY




CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
Nine Months Ended September 30,
 
2016
 
2015
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net income
$
98,825

 
$
125,075

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization of property, equipment, and intangibles
211,495

 
196,805

Amortization of debt issuance costs, original issue discount, and other
996

 
5,574

Gain on disposal of property and equipment, less write-off of totaled tractors
(14,797
)
 
(21,974
)
Impairments

 
1,480

Deferred income taxes
(25,670
)
 
(8,106
)
Provision for (reduction of) losses on accounts receivable
(2,626
)
 
5,348

Non-cash loss on debt extinguishment and write-offs of deferred financing costs and original issue discount

 
9,567

Stock-based compensation expense
4,691

 
4,618

Excess tax benefit from stock-based compensation
(547
)
 
(2,200
)
Income effect of mark-to-market adjustment of interest rate swaps

 
87

Increase (decrease) in cash resulting from changes in:
 
 
 
Accounts receivable
21,152

 
25,328

Inventories and supplies
2,162

 
(102
)
Prepaid expenses and other current assets
(843
)
 
(1,197
)
Other assets
2,682

 
6,583

Accounts payable, and accrued and other liabilities
31,313

 
10,336

Net cash provided by operating activities
328,833

 
357,222

Cash flows from investing activities:
 
 
 
Increase in cash and cash equivalents – restricted
(4,246
)
 
(12,832
)
Proceeds from maturities of investments
23,869

 
23,965

Purchases of investments
(23,737
)
 
(22,710
)
Proceeds from sale of property and equipment
96,228

 
76,545

Capital expenditures
(141,269
)
 
(260,858
)
Payments received on notes receivable
4,763

 
3,137

Expenditures on assets held for sale
(24,784
)
 
(19,777
)
Payments received on assets held for sale
18,459

 
8,019

Payments received on equipment sale receivables

 
293

Net cash used in investing activities
(50,717
)
 
(204,218
)
Cash flows from financing activities:
 
 
 
Repayment of long-term debt and capital leases
(131,125
)
 
(954,561
)
Proceeds from long-term debt

 
684,504

Net (repayments) borrowings on revolving line of credit
(150,000
)
 
143,000

Borrowings under accounts receivable securitization
100,000

 
65,000

Repayment of accounts receivable securitization
(25,000
)
 
(149,000
)
Payment of deferred loan costs

 
(3,240
)
Proceeds from common stock issued
6,130

 
7,667

Repurchases of Class A common stock
(115,000
)
 

Excess tax benefit from stock-based compensation
547

 
2,200

Net cash used in financing activities
(314,448
)
 
(204,430
)
Net decrease in cash and cash equivalents
(36,332
)
 
(51,426
)
Cash and cash equivalents at beginning of period
107,590

 
105,132

Cash and cash equivalents at end of period
$
71,258

 
$
53,706

 See accompanying notes to consolidated financial statements.

9




SWIFT TRANSPORTATION COMPANY




CONSOLIDATED STATEMENTS OF CASH FLOWS — CONTINUED
(UNAUDITED)
 
Nine Months Ended September 30,
 
2016
 
2015
 
(In thousands)
Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
22,818

 
$
37,254

Income taxes
67,058

 
77,335

Non-cash investing activities:
 
 
 
Equipment purchase accrual
$
29,813

 
$
11,801

Notes receivable from sale of assets
1,416

 
5,618

Equipment sales receivables

 
5

Non-cash financing activities:
 
 
 
Capital lease additions
$
12,811

 
$
142,937

Accrued deferred loan costs

 
250

See accompanying notes to consolidated financial statements.


10




SWIFT TRANSPORTATION COMPANY




Notes to Consolidated Financial Statements (Unaudited)
 
Note 1 — Introduction and Basis of Presentation
Certain acronyms and terms used throughout this Quarterly Report on Form 10-Q are specific to our company, commonly used in our industry, or are otherwise frequently used throughout our document. Definitions for these acronyms and terms are provided in the "Glossary of Terms," available in the front of this document.
Description of Business
Swift is a transportation solutions provider, headquartered in Phoenix, Arizona. As of September 30, 2016, the Company's fleet of revenue equipment included 19,157 tractors (comprised of 14,380 company tractors and 4,777 owner-operator tractors), 62,727 trailers, and 9,131 intermodal containers. The Company’s four reportable segments are Truckload, Dedicated, Swift Refrigerated, and Intermodal.
Seasonality
In the truckload industry, results of operations generally show a seasonal pattern. As customers ramp up for the year-end holiday season, the late third quarter and fourth quarter have historically been the Company's strongest volume periods. As customers reduce shipments after the winter holiday season, the first quarter has historically been a lower-volume quarter than the other three quarters. In recent years, the macro consumer buying patterns combined with shippers’ supply chain management, which historically contributed to the fourth quarter "peak" season, continued to evolve. As a result, the Company's fourth quarter 2015, 2014, and 2013 volumes were more evenly distributed throughout the quarter, rather than peaking early in the quarter. In the eastern and mid-western United States, and to a lesser extent in the western United States, the Company's equipment utilization typically declines and operating expenses generally increase during the winter season. This tends to be attributed to declines in fuel efficiency from engine idling and increases in accident frequency, claims, and equipment repairs from severe weather. The Company's revenue is directly related to shippers' available working days. As such, curtailed operations and vacation shutdowns around the holidays may affect the Company's revenue. From time to time, the Company also suffers short-term impacts from severe weather and similar events, such as tornadoes, hurricanes, blizzards, ice storms, floods, fires, earthquakes, and explosions that could add volatility to, or harm, the Company's results of operations.
Basis of Presentation
The consolidated financial statements and footnotes included in this Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements and footnotes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2015. The consolidated financial statements include the accounts of Swift Transportation Company and its wholly-owned subsidiaries. In management's opinion, these consolidated financial statements were prepared in accordance with GAAP and include all adjustments necessary for the fair presentation of the periods presented.
Change in Accounting Estimate
In August 2016, the Company decreased the estimated residual values of a certain group of its tractors, given recent trends in the used tractor market.  Management prospectively accounted for this as a change in accounting estimate.  This increased "Depreciation and amortization of property and equipment" in the consolidated income statements by approximately $3.6 million for the three and nine months ended September 30, 2016, which immaterially affected basic and diluted earnings per share.
Change in Presentation
In April 2015, FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, which amended ASC Subtopic 835-30, Interest – Imputation of Interest. The amendments in this ASU simplify the presentation of debt issuance costs and align the presentation with debt discounts. Entities are required to present debt issuance costs within liabilities as a direct deduction from the face amount of the related debt, rather than as a deferred charge within assets. In August 2015, FASB issued ASU 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements – Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting (SEC Update), which also amended ASC Subtopic 835-30, Interest – Imputation of Interest. The SEC determined that ASU 2015-03 (discussed above) did not address costs related to line-of-credit arrangements. The amendments in ASU 2015-15 clarify that entities may defer and present debt issuance costs as an asset, and subsequently amortize the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The amendments in these ASUs require retrospective application, with related disclosures for a change in accounting principle. For public business entities, the amendments in these ASUs are effective for financial statements issued for fiscal years beginning after December 15, 2015, and the interim periods within those fiscal years, with early adoption permitted.

11




SWIFT TRANSPORTATION COMPANY





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

 
$
(2,768
)
 
$
26,585

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

 
$
(68
)
 
$
35,514

Long-term debt, less current portion
 
645,290

 
(1,627
)
 
643,663

Accounts receivable securitization
 
225,000

 
(1,073
)
 
223,927

 
Note 2 — Recently Issued Accounting Pronouncements
The following table presents accounting pronouncements recently issued by FASB, but not yet adopted by the Company.
Date Issued
 
Reference
 
Description
 
Expected Adoption Date and Method
 
Financial Statement Impact
August 2016
 
2016-15: Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments
 
This ASU has several amendments, which are designed to reduce existing diversity in practice of how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The ASU addresses eight specific cash flow issues, of which the following are expected to be applicable to Swift: 1) debt prepayment and extinguishment costs, 2) proceeds from settlement of insurance claims, 3) proceeds from settlement of corporate-owned life insurance policies, 4) beneficial interests in securitization transactions, and 5) separately identifiable cash flows and application of the predominance principle.
 
January 2018, Retrospective
 
Currently under evaluation; not expected to be material.
June 2016
 
2016-13: Financial Instruments – Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments
 
The purpose of this ASU is to amend the current incurred loss impairment methodology with a new methodology that reflects expected credit losses and requires a broader range of reasonable and supportable information to inform credit loss estimates. This is the final credit accounting standard, out of a series, with detailed guidance on the new loss reserve model, Current Expected Credit Loss ("CECL"). Among other provisions, the amendments in the ASU require a financial asset (or group of assets) measured at amortized cost basis to be presented at the net amount expected to be collected. Entities are no longer required to wait until a loss is probable to record it.
 
January 2020, Adoption method varies by amendment
 
Currently under evaluation; not expected to be material.
May 2016
 
2016-12: Revenue from Contracts with Customers (Topic 606) – Narrow-scope Improvements and Practical Expedients
 
The amendments in this ASU clarify certain aspects regarding the collectibility criterion, sales taxes collected from customers, noncash consideration, contract modifications, and completed contracts at transition. It additionally clarifies that retrospective application only requires disclosure of the accounting change effect on prior periods presented, not on the period of adoption.
 
January 2018, Modified retrospective
 
Impact of ASC Topic 606 overall is currently under evaluation; may be material, but not yet quantifiable.

12



SWIFT TRANSPORTATION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED



Date Issued
 
Reference
 
Description
 
Expected Adoption Date and Method
 
Financial Statement Impact
April 2016
 
2016-10: Revenue from Contracts with Customers (Topic 606) – Identifying Performance Obligations and Licensing
 
The amendments in this ASU clarify the following two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. The amendments do not change the core principle of the guidance.
 
January 2018, Modified retrospective
 
Impact of ASC Topic 606 overall is currently under evaluation; may be material, but not yet quantifiable.
March 2016
 
2016-08: Revenue from Contracts with Customers (Topic 606) – Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
 
The amendments in this ASU are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations, but do not change the core principle of the guidance.
 
January 2018, Modified retrospective
 
Impact of ASC Topic 606 overall is currently under evaluation; may be material, but not yet quantifiable.
March 2016
 
2016-09: Compensation  Stock Compensation (Topic 718) – Improvements to Employee Share-based Payment Accounting
 
The amendments in this ASU are intended to simplify various aspects of accounting for stock-based compensation, including income tax consequences, classification of awards as equity or liability, as well as classification of activities within the statement of cash flows.
 
January 2017, Adoption method varies by amendment
 
Currently under evaluation; not yet quantifiable.
February 2016
 
2016-02: Leases (Topic 842)
 
The new standard requires lessees to recognize assets and liabilities arising from both operating and financing leases on the balance sheet. Lessor accounting for leases is largely unaffected by the new guidance.
 
January 2019, Modified retrospective
 
Currently under evaluation; expected to be material, but not yet quantifiable.
January 2016
 
2016-01: Financial Instruments  Overall (Subtopic 825-10) – Recognition and Measurement of Financial Assets and Financial Liabilities
 
The amendments in this ASU address various aspects of recognition, measurement, presentation, and disclosure of financial instruments. They additionally establish ASC Topic 321 – Investments – Equity Securities, which applies to investments in equity securities and other ownership interests in an entity, including investments in partnerships, unincorporated joint ventures, and limited liability companies.
 
January 2018, Modified retrospective
 
Not expected to be material.
 
Note 3 — Restricted Investments
The following table presents the cost or amortized cost, gross unrealized gains and temporary losses, and estimated fair value of the Company’s restricted investments:

September 30, 2016
 
 
 
Gross Unrealized
 
 
 
Cost or Amortized
Cost
 
Gains
 
Temporary
Losses
 
Estimated Fair Value
 
(In thousands)
United States corporate securities
$
16,483

 
$
1

 
$
(8
)
 
$
16,476

Municipal bonds
4,956

 

 
(6
)
 
4,950

Negotiable certificate of deposits
1,425

 

 

 
1,425

Restricted investments, held to maturity
$
22,864

 
$
1

 
$
(14
)
 
$
22,851

 
 
 
 
 
 
 
 

13



SWIFT TRANSPORTATION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED



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

 
$
2

 
$
(27
)
 
$
16,661

Municipal bonds
4,904

 
1

 
(1
)
 
4,904

Negotiable certificate of deposits
1,625

 

 

 
1,625

Restricted investments, held to maturity
$
23,215

 
$
3

 
$
(28
)
 
$
23,190

Refer to Note 15 for additional information regarding fair value measurements of restricted investments.
As of September 30, 2016, the contractual maturities of the restricted investments were one year or less. There were 44 securities and 36 securities that were in an unrealized loss position for less than twelve months as of September 30, 2016 and December 31, 2015, respectively. The Company did not recognize any impairment losses for the three or nine months ended September 30, 2016 or 2015.
 
Note 4 — Goodwill and Other Intangible Assets
There were no goodwill impairments recorded during the three or nine months ended September 30, 2016 or 2015. Other intangible asset balances were as follows:
 
September 30,
2016
 
December 31,
2015
 
(In thousands)
Customer Relationships:
 
 
 
Gross carrying value
$
275,324

 
$
275,324

Accumulated amortization
(185,853
)
 
(173,242
)
Customer relationships, net
89,471

 
102,082

Trade Name:
 
 
 
Gross carrying value
181,037

 
181,037

Intangible assets, net
$
270,508

 
$
283,119

The following table presents amortization of intangible assets related to the 2007 Transactions and intangible assets existing prior to the 2007 Transactions:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Amortization of intangible assets related to the 2007 Transactions
$
3,912

 
$
3,912

 
$
11,736

 
$
11,736

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

 
292

 
875

 
875

Amortization of intangibles
$
4,204

 
$
4,204

 
$
12,611

 
$
12,611


14



SWIFT TRANSPORTATION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED



 
Note 5 — Accounts Receivable Securitization
On December 10, 2015, SRCII, a wholly-owned subsidiary of the Company, entered into the 2015 RSA, which further amended the 2013 RSA. The parties to the 2015 RSA include SRCII as the seller, Swift Transportation Services, LLC as the servicer, the various conduit purchasers, the various related committed purchasers, the various purchaser agents, the various letters of credit participants, and PNC Bank, National Association as the issuing bank of letters of credit and as administrator. Pursuant to the 2015 RSA, the Company's receivable originator subsidiaries sell, on a revolving basis, undivided interests in all of their eligible accounts receivable to SRCII. In turn, SRCII sells a variable percentage ownership interest in the eligible accounts receivable to the various purchasers. The facility qualifies for treatment as a secured borrowing under ASC Topic 860, Transfers and Servicing. As such, outstanding amounts are classified as liabilities on the Company’s consolidated balance sheets. Refer to Note 15 for information regarding the fair value of the 2015 RSA.
As of September 30, 2016 and December 31, 2015, interest accrued on the aggregate principal balance at a rate of 1.1% and 1.0%, respectively. Program fees and unused commitment fees are recorded in interest expense in the Company's consolidated income statements. The Company incurred program fees of $1.2 million related to the 2015 RSA and $0.8 million related to the 2013 RSA, during the three months ended September 30, 2016 and 2015, respectively. The Company incurred program fees of $3.1 million related to the 2015 RSA and $2.7 million related to the 2013 RSA, during the nine months ended September 30, 2016 and 2015, respectively.
The 2015 RSA is subject to customary fees and contains various customary affirmative and negative covenants, representations and warranties, and default and termination provisions. Collections on the underlying receivables by the Company are held for the benefit of SRCII and the Purchasers in the facility and are unavailable to satisfy claims of the Company and its subsidiaries.
 
Note 6 — Debt and Financing
Other than the Company’s accounts receivable securitization, as discussed in Note 5, and its outstanding capital lease obligations as discussed in Note 8, the Company's long-term debt consisted of the following:
 
September 30,
2016
 
December 31,
2015
 
(In thousands)
2015 Agreement: New Term Loan A, due July 2020, net of $1,431 and $1,695 DLCs as of September 30, 2016 and December 31, 2015, respectively (1)
$
592,819

 
$
668,055

Other
1,243

 
11,122

Long-term debt
594,062

 
679,177

Less: current portion of long-term debt, net of $0 and $68 DLCs as of September 30, 2016 and December 31, 2015, respectively
(799
)
 
(35,514
)
Long-term debt, less current portion
$
593,263

 
$
643,663

 
September 30,
2016
 
December 31,
2015
 
(In thousands)
Long-term debt
$
594,062

 
$
679,177

Revolving line of credit, due July 2020 (1) (2)
50,000

 
200,000

Long-term debt, including revolving line of credit
$
644,062

 
$
879,177

____________
(1)
Refer to Note 15 for information regarding the fair value of long-term debt.
(2)
The Company additionally had outstanding letters of credit, primarily related to workers' compensation and self-insurance liabilities of $97.0 million and $95.0 million under the New Revolver at September 30, 2016 and December 31, 2015, respectively.

15



SWIFT TRANSPORTATION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED



Credit Agreement
On July 27, 2015, the Company entered into the 2015 Agreement, which replaced the 2014 Agreement, including the $450.0 million Old Revolver (zero outstanding at closing), $500.0 million Old Term Loan A ($485.0 million outstanding at closing), and $400.0 million Term Loan B ($395.0 million outstanding at closing). The 2015 Agreement includes a New Revolver and a New Term Loan A. Upon closing, the $680.0 million in proceeds from the New Term Loan A, a $200.0 million draw on the New Revolver, and $4.9 million cash on hand were used to pay off the then-outstanding balances of the Old Term Loan A and Term Loan B, including accrued interest and fees under the 2014 Agreement, as well as certain transactional fees associated with the 2015 Agreement.
The following table presents the key terms of the 2015 Agreement:
Description
 
New Term Loan A
 
New Revolver (2)
 
 
(Dollars in thousands)
Maximum borrowing capacity
 
$680,000
 
$600,000
Final maturity date
 
July 27, 2020
 
July 27, 2020
Interest rate base
 
LIBOR
 
LIBOR
LIBOR floor
 
—%
 
—%
Interest rate minimum margin (1)
 
1.50%
 
1.50%
Interest rate maximum margin (1)
 
2.25%
 
2.25%
Minimum principal payment – amount (3)
 
$6,625
 
$—
Minimum principal payment – frequency
 
Quarterly
 
Once
Minimum principal payment – commencement date (3)
 
December 31,
2015
 
July 27,
2020
____________
(1)
The interest rate margin for the New Term Loan A and New Revolver is based on the Company's consolidated leverage ratio. As of September 30, 2016, interest accrued at 2.03% on the New Term Loan A and 2.03% on the New Revolver. As of December 31, 2015, interest accrued at 2.12% on the New Term Loan A and 2.08% on the New Revolver.
(2)
The commitment fee for the unused portion of the New Revolver is based on the Company's consolidated leverage ratio and ranges from 0.25% to 0.35%. As of September 30, 2016, commitment fees on the unused portion of the New Revolver accrued at 0.25% and outstanding letter of credit fees accrued at 1.50%. As of December 31, 2015, commitment fees on the unused portion of the New Revolver accrued at 0.25% and outstanding letter of credit fees accrued at 1.75%.
(3)
Commencing in March 2017, the minimum quarterly payment amount on the New Term Loan A is $12.3 million, at which it remains until final maturity.
The New Revolver and New Term Loan A of the 2015 Agreement contain certain financial covenants with respect to a maximum leverage ratio and a minimum consolidated interest coverage ratio. The 2015 Agreement provides flexibility regarding the use of proceeds from asset sales, payment of dividends, stock repurchases, and equipment financing. In addition to the financial covenants, the 2015 Agreement includes customary events of default, including a change in control default and certain affirmative and negative covenants, including, but not limited to, restrictions, subject to certain exceptions, on incremental indebtedness, asset sales, certain restricted payments (including dividends and stock repurchases), certain incremental investments or advances, transactions with affiliates, engagement in additional business activities, and prepayment of certain other indebtedness.
Borrowings under the 2015 Agreement are secured by substantially all of the assets of the Company and are guaranteed by Swift Transportation Company, IEL, Central Refrigerated Transportation, LLC and its subsidiaries, Swift Transportation Co., LLC and its domestic subsidiaries (other than its captive insurance subsidiaries, driver academy subsidiary, and its bankruptcy-remote special purpose subsidiary).
Loss on Debt Extinguishment
The Company incurred no losses on debt extinguishment during the three and nine months ended September 30, 2016. During the three and nine months ended September 30, 2015, the Company incurred $9.6 million in losses on debt extinguishment reflecting the write-off of the unamortized OID and deferred financing fees related to the 2014 Agreement, which was replaced by the 2015 Agreement.

16



SWIFT TRANSPORTATION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED



 
Note 7 — Deferred Loan Costs
As discussed in Note 1, DLCs related to the Company's New Term Loan A and accounts receivable securitization are now netted against the face amount of the debt, pursuant to the amendments in ASU 2015-03. DLCs related to the New Revolver are reported in "Other assets." The following table presents the classification of DLCs in the Company's consolidated balance sheets:
 
September 30,
2016
 
December 31,
2015
 
(In thousands)
ASSETS:
 
 
 
Other assets
$
1,251

 
$
1,496

LIABILITIES:
 
 
 
Current portion of long-term debt

 
68

Long-term debt, less current portion
1,431

 
1,627

Accounts receivable securitization
804

 
1,073

Total DLCs
$
3,486

 
$
4,264

 
Note 8 — Leases
The Company finances a portion of its revenue equipment under capital and operating leases and certain terminals under operating leases.
Capital Leases (as Lessee) — The Company’s capital leases are typically structured with balloon payments at the end of the lease term equal to the residual value the Company is contracted to receive from certain equipment manufacturers upon sale or trade back to the manufacturers. If the Company does not receive proceeds of the contracted residual value from the manufacturer, the Company is still obligated to make the balloon payment at the end of the lease term. Certain leases contain renewal or fixed price purchase options. The present value of obligations under capital leases is included under "Current portion of capital lease obligations" and "Capital lease obligations, less current portion" in the consolidated balance sheets. As of September 30, 2016, the leases were collateralized by revenue equipment with a cost of $326.2 million and accumulated amortization of $91.5 million. As of December 31, 2015, the leases were collateralized by revenue equipment with a cost of $357.8 million and accumulated amortization of $90.1 million. Amortization of the equipment under capital leases is included in "Depreciation and amortization of property and equipment" in the Company’s consolidated income statements.
Operating Leases (as Lessee) — Rent expense related to operating leases was $57.0 million and $59.1 million for the three months ended September 30, 2016 and 2015, respectively. Rent expense related to operating leases was $170.3 million and $180.9 million for the nine months ended September 30, 2016 and 2015, respectively.
 
Note 9 — Purchase Commitments
As of September 30, 2016, the Company's outstanding commitments to acquire revenue equipment were as follows:
remainder of 2016: $174.3 million ($103.2 million of which were tractor commitments),
year-ended December 31, 2017: $190.9 million ($190.9 million of which were tractor commitments), and
thereafter: none.
The Company has the option to cancel tractor purchase orders with 60 to 90 days' notice prior to the scheduled production, although the notice period has lapsed for 35.1% of the tractor commitments outstanding as of September 30, 2016. These purchases are expected to be financed by the combination of operating leases, capital leases, debt, proceeds from sales of existing equipment, and cash flows from operations.

As of September 30, 2016, the Company had $0.3 million in outstanding purchase commitments for non-revenue equipment and no purchase commitments for facilities. Factors such as costs and opportunities for future terminal expansions may change the amount of such expenditures.

17



SWIFT TRANSPORTATION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED



 
Note 10 — Contingencies and Legal Proceedings
The Company is involved in certain claims and pending litigation primarily arising in the normal course of business. The majority of these claims relate to workers' compensation, auto collision and liability, physical damage, and cargo damage. The Company expenses legal fees as incurred and accrues for the uninsured portion of contingent losses from these and other pending claims when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Based on the knowledge of the facts and, in certain cases, advice of outside counsel, management believes the resolution of claims and pending litigation, taking into account existing reserves, will not have a material adverse effect on the Company. Moreover, the results of complex legal proceedings are difficult to predict and the Company’s view of these matters may change in the future as the litigation and events related thereto unfold.
For certain cases described below, management is unable to provide a meaningful estimate of the possible loss or range of loss because, among other reasons, (1) the proceedings are in various stages that do not allow for assessment; (2) damages have not been sought; (3) damages are unsupported and/or exaggerated; (4) there is uncertainty as to the outcome of pending appeals; and/or (5) there are significant factual issues to be resolved.  For these cases, however, management does not believe, based on currently available information, that the outcomes of these proceedings will have a material adverse effect on our financial condition, though the outcomes could be material to our operating results for any particular period, depending, in part, upon the operating results for such period.
Arizona Owner-operator Class Action Litigation
On January 30, 2004, a class action lawsuit was filed by Leonel Garza on behalf of himself and all similarly-situated persons against Swift Transportation: Garza v. Swift Transportation Co., Inc., Case No. CV7-472 (the "Garza Complaint"). The putative class originally involved certain owner-operators who contracted with the Company under a 2001 Contractor Agreement that was in place for one year. The putative class is alleging that the Company should have reimbursed owner-operators for actual miles driven rather than the contracted and industry standard remuneration based upon dispatched miles. The trial court denied the plaintiff’s petition for class certification. The plaintiff appealed and on August 6, 2008, the Arizona Court of Appeals issued an unpublished Memorandum Decision reversing the trial court’s denial of class certification and remanding the case back to the trial court. On November 14, 2008, the Company filed a petition for review to the Arizona Supreme Court regarding the issue of class certification as a consequence of the denial of the Motion for Reconsideration by the Court of Appeals. On March 17, 2009, the Arizona Supreme Court granted the Company’s petition for review, and on July 31, 2009, the Arizona Supreme Court vacated the decision of the Court of Appeals, opining that the Court of Appeals lacked automatic appellate jurisdiction to reverse the trial court’s original denial of class certification and remanded the matter back to the trial court for further evaluation and determination. Thereafter, the plaintiff renewed the motion for class certification and expanded it to include all persons who were employed by Swift as employee drivers or who contracted with Swift as owner-operators on or after January 30, 1998, in each case who were compensated by reference to miles driven. On November 4, 2010, the Maricopa County trial court entered an order certifying a class of owner-operators and expanding the class to include employees. Upon certification, the Company filed a motion to compel arbitration, as well as filing numerous motions in the trial court urging dismissal on several other grounds including, but not limited to the lack of an employee as a class representative, and the named owner-operator class representative only contracted with the Company for a three-month period under a one-year contract that no longer exists. In addition to these trial court motions, the Company also filed a petition for special action with the Arizona Court of Appeals, arguing that the trial court erred in certifying the class because the trial court relied upon the Court of Appeals ruling that was previously overturned by the Arizona Supreme Court. On April 7, 2011, the Arizona Court of Appeals declined jurisdiction to hear this petition for special action and the Company filed a petition for review to the Arizona Supreme Court. On August 31, 2011, the Arizona Supreme Court declined to review the decision of the Arizona Court of Appeals. In April 2012, the trial court issued the following rulings with respect to certain motions filed by Swift: (1) denied Swift’s motion to compel arbitration; (2) denied Swift’s request to decertify the class; (3) granted Swift’s motion that there is no breach of contract; and (4) granted Swift’s motion to limit class size based on statute of limitations. On November 13, 2014, the court denied the plaintiff's motion to add new class representatives for the employee class and therefore the employee class remains without a plaintiff class representative. On March 18, 2015, the court denied Swift's two motions for summary judgment (1) to dismiss any claims related to the employee class since there is no class representative; and (2) to dismiss the plaintiff's claim of breach of a duty of good faith and fair dealing. On July 14, 2015, the court granted Swift's motion to decertify the entire class. On December 23, 2015, the plaintiff filed a petition for special action with the Arizona Court of Appeals. On July 12, 2016, the Court of Appeals reversed the lower court’s order decertifying the class. Swift filed a petition for review with the Arizona Supreme Court on August 12, 2016. A decision regarding the petition for review is forthcoming. The final disposition of this case and the impact of such disposition cannot be determined at this time.
Ninth Circuit Owner-operator Misclassification Class Action Litigation
On December 22, 2009, a class action lawsuit was filed against Swift Transportation and IEL: Virginia VanDusen, John Doe 1, and Joseph Sheer, individually and on behalf of all other similarly-situated persons v. Swift Transportation Co., Inc., Interstate Equipment Leasing, Inc., Jerry Moyes, and Chad Killebrew, Case No. 9-CIV-10376 filed in the United States District Court for the Southern District of New York (the "Sheer Complaint"). The putative class involves owner-operators alleging that Swift Transportation

18



SWIFT TRANSPORTATION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED



misclassified owner-operators as independent contractors in violation of the federal FLSA, and various New York and California state laws and that such owner-operators should be considered employees. The lawsuit also raises certain related issues with respect to the lease agreements that certain owner-operators have entered into with IEL. At present, in addition to the named plaintiffs, approximately 450 other current or former owner-operators have joined this lawsuit. Upon Swift’s motion, the matter was transferred from the United States District Court for the Southern District of New York to the United States District Court in Arizona. On May 10, 2010, the plaintiffs filed a motion to conditionally certify an FLSA collective action and authorize notice to the potential class members. On September 23, 2010, the plaintiffs filed a motion for a preliminary injunction seeking to enjoin Swift and IEL from collecting payments from plaintiffs who are in default under their lease agreements and related relief. On September 30, 2010, the district court granted Swift’s motion to compel arbitration and ordered that the class action be stayed, pending the outcome of arbitration. The district court further denied the plaintiff’s motion for preliminary injunction and motion for conditional class certification. The district court also denied the plaintiff’s request to arbitrate the matter as a class.
The plaintiff filed a petition for a writ of mandamus to the Ninth Circuit Court of Appeals asking that the district court’s September 30, 2010 order be vacated. On July 27, 2011, the Ninth Circuit Court of Appeals denied the plaintiff’s petition for writ of mandamus and thereafter the district court denied the plaintiff’s motion for reconsideration and certified its September 30, 2010 order. The plaintiffs filed an interlocutory appeal to the Ninth Circuit Court of Appeals to overturn the district court’s September 30, 2010 order to compel arbitration, alleging that the agreement to arbitrate is exempt from arbitration under Section 1 of the Federal Arbitration Act ("FAA") because the class of plaintiffs allegedly consists of employees exempt from arbitration agreements. On November 6, 2013, the Ninth Circuit Court of Appeals reversed and remanded, stating its prior published decision, "expressly held that a district court must determine whether an agreement for arbitration is exempt from arbitration under Section 1 of the FAA as a threshold matter." As a consequence of this determination by the Ninth Circuit Court of Appeals being different from a decision of the Eighth Circuit Court of Appeals on a similar issue, on February 4, 2014, the Company filed a petition for writ of certiorari to the United States Supreme Court to address whether the district court or arbitrator should determine whether the contract is an employment contract exempt from Section 1 of the Federal Arbitration Act. On June 16, 2014, the United States Supreme Court denied the Company’s petition for writ of certiorari.
The matter remains pending in the district court and dispositive motion briefing was completed on September 30, 2016. The Company also filed a writ of mandamus and appeal from the district court's order that effectively denied the Company's motion to compel arbitration. The Ninth Circuit held oral argument on November 16, 2015, and after further briefing, dismissed the appeal on July 26, 2016, finding that it lacked jurisdiction. The Company has filed a motion for reconsideration of this decision. The Company intends to vigorously defend against any proceedings. The final disposition of this case and the impact of such final disposition cannot be determined at this time.
California Wage, Meal, and Rest Driver Class Actions
On March 22, 2010, a class action lawsuit was filed by John Burnell, individually and on behalf of all other similarly-situated persons against Swift Transportation: John Burnell and all others similarly-situated v. Swift Transportation Co., Inc., filed in the Superior Court of California, County of San Bernardino (the "Burnell Complaint"). On September 3, 2010, upon motion by Swift, the matter was removed to the United States District Court for the Central District of California (the "California Court"), Case No. EDCV10-809-VAP. The putative class includes drivers who worked for Swift during the four years preceding the date of filing and alleges that Swift failed to pay the California minimum wage, failed to provide proper meal and rest periods, and failed to timely pay wages upon separation from employment. On April 9, 2013, the Company filed a motion for judgment on the pleadings, requesting dismissal of the plaintiff's claims related to alleged meal and rest break violations under the California Labor Code alleging that such claims are preempted by the Federal Aviation Administration Authorization Act.
The issue of class certification must first be resolved before the California Court will address the merits of these cases, and the Company retains all of its defenses against liability and damages pending a determination of class certification. Class certification briefing is now complete and a class certification hearing was scheduled for April 25, 2016. The class certification hearing was held and argued as scheduled. In May 2016, the District Court issued an order denying class certification. The plaintiffs and petitioners sought leave from the Ninth Circuit Court of Appeals to appeal the class decertification order. On July 18, 2016, the court denied the plaintiffs' and petitioners' petition to appeal the decertification order. Therefore, at the present time and based upon the current procedural nature of the case, the final disposition and impact to the Company cannot be determined.
On April 5, 2012, the Company was served with an additional class action complaint, alleging facts similar to those as set forth in the Burnell Complaint: James R. Rudsell, on behalf of himself and all others similarly-situated v. Swift Transportation Co. of Arizona, LLC and Swift Transportation Company, in the Superior Court of California, County of San Bernardino (the "Rudsell Complaint"). On May 3, 2012, upon motion by Swift, the matter was removed to the California Court, Case No. EDCV12-00692-VAP. The Rudsell Complaint was stayed on April 29, 2013, pending a resolution of the Burnell Complaint.
On September 25, 2014, a class action lawsuit was filed by Lawrence Peck on behalf of himself and all other similarly-situated persons against Swift Transportation: Peck v. Swift Transportation Co. of Arizona, LLC in the Superior Court of California, County of Riverside (the "Peck Complaint"). The putative class, which includes current and former non-exempt employee truck drivers who performed services in California within the four-year statutory period, alleges that Swift failed to pay for all hours worked (specifically

19



SWIFT TRANSPORTATION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED



that pay-per-mile fails to compensate drivers for non-driving related services), failed to pay overtime, failed to properly reimburse work-related expenses, failed to timely pay wages, and failed to provide accurate wage statements. On October 24, 2014, upon motion by Swift, the matter was removed to the California Court, Case No. 14-CV-02206-VAP. The Peck Complaint was stayed on April 6, 2015, pending a resolution of the earlier filed cases. On November 20, 2014, the plaintiff filed a Private Attorneys General Act class action lawsuit in the Superior Court of California, County of Riverside (the "Peck PAGA Complaint"). Upon motion by Swift, the Peck PAGA Complaint was stayed on March 19, 2015. On May 24, 2016, after the Burnell Court failed to certify the petitioner’s class, the plaintiff filed a motion to lift the stay regarding the Peck PAGA Complaint. On June 22, 2016, the court lifted the stay. The matter is in its initial stages and the parties are engaging in discovery.
On February 27, 2015, Sadashiv Mares filed a complaint alleging five Causes of Action arising under California state law on behalf of himself and a putative class against Swift Transportation Co. of Arizona, LLC in the Superior Court of California, County of Alameda (the "Mares Complaint").  On July 13, 2015, upon motion by Swift, the matter was removed to the United States District Court for the Northern District of California, Case No. 2:15-CV-03253-JSW. Upon the parties' stipulation, on October 17, 2015, the case was transferred to the California Court, Case No. 2:15-CV-07920-VAP. The Mares Complaint was stayed on February 24, 2016, pending a resolution of the earlier filed cases. On October 11, 2016, the court granted a motion filed by the plaintiffs to lift the stay. The matter is in its initial phases and is expected to move into discovery.
On or about April 15, 2015, a complaint was filed in the Superior Court of California, County of San Bernardino: Rafael McKinsty et al. v. Swift Transportation Co. of Arizona, LLC, et al., (the "McKinsty Complaint").  The McKinsty Complaint, a purported class action, alleges violation of California rest break laws and is similar to the Burnell, Rudsell, Peck, and Mares Complaints.  On July 2, 2015, upon motion by Swift, the matter was removed to the California Court, Case No. 15-CV-1317-VAP. The McKinsty Complaint was stayed on August 19, 2015, pending a resolution of the earlier filed cases.
On October 15, 2015, a class action lawsuit was filed in the Superior Court of California, County of Riverside: Thor Nilsen v. Swift Transportation Co. of Arizona, LLC (the "Nilsen Complaint"). The Nilsen Complaint alleges violations of California law similar to the Burnell, Rudsell, Peck, Mares, and McKinsty Complaints. On December 9, 2015, upon motion by Swift, the matter was removed to the California Court, Case No. 15-CV-02504-VAP. The Nilsen Complaint was stayed January 29, 2016, pending resolution of the earlier filed cases.
California Private Attorney General Act Class Action
On July 8, 2016, a class action lawsuit was filed by Theron Christopher on behalf of himself and all other similarly-situated persons against Swift Transportation Co. of Arizona, LLC, in the Superior Court of California, County of Riverside (the "Christopher Complaint"). The plaintiff purports to represent all current and former employees employed by Swift in California and alleges that Swift violated California law by failing to timely pay wages and failing to reimburse employees for business expenses. The matter is in its initial phases and is expected to move into discovery. The Company retains all of its defenses against liability and damages. The Company intends to vigorously defend against the merits of these claims and to challenge certification. The final disposition of this case and the impact of such final disposition of this case cannot be determined at this time.
California Wage, Meal, and Rest: Yard Hostler Class Actions
On January 28, 2016, a class action lawsuit was filed by Grant Fritsch, individually and on behalf of all other similarly-situated persons against Swift Transportation Services, LLC and Swift Transportation Company in the Superior Court of California, County of San Bernardino (the "Fritsch Complaint"). The plaintiff worked for Swift as a yard hostler and purports to represent a class of "non-exempt maintenance and service employees" of Swift Transportation Services, LLC and/or Swift Transportation Company. The Fritsch Complaint alleges that Swift failed to pay overtime and doubletime wages required by California law, failed to provide proper meal and rest periods, failed to provide accurate itemized wage statements, and failed to timely pay wages upon separation from employment. The Fritsch Complaint also includes a claim under the Private Attorneys General Act. The Company filed a motion to dismiss based upon the wrong party being named in the lawsuit, and the plaintiff agreed to amend the complaint, which was served June 17, 2016. On August 30, 2016, the plaintiff again amended his complaint to clarify the class he was seeking to represent a class of individuals employed by Swift as yard hostlers in California. The Company retains all of its defenses against liability and damages. The Company intends to vigorously defend against the merits of these claims and to challenge certification. The final disposition of this case and the impact of such final disposition of this case cannot be determined at this time.
On April 1, 2016, a class action lawsuit was filed by Bill Barker, Tab Bachman, and William Yingling, on behalf of all other similarly-situated persons against Swift Transportation Company of Arizona, LLC, in the Superior Court of California, County of Sacramento (the "Barker Complaint"). The Barker Complaint alleges that Swift failed to pay minimum wage and overtime, failed to reimburse for business expenses, failed to provide proper meal and rest periods, failed to provide accurate itemized wage statements, and failed to timely pay wages upon separation from employment. On July 5, 2016, upon motion by Swift, the matter was removed to the United States District Court for the Eastern District of California, Case No. 2:16-CV-01532-TLN-CKD. The matter is in its initial phases and is expected to move into discovery. The Company retains all of its defenses against liability and damages. The Company intends to vigorously defend against the merits of these claims and to challenge certification. The final disposition of this case and the impact of such final disposition of this case cannot be determined at this time.

20



SWIFT TRANSPORTATION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED



National Customer Service Misclassification Class Action Litigation
On May 11, 2016, a collective and class action was filed by a former Swift customer service representative level four ("CSR IV"), Salvador Castro, individually and on behalf of herself and all similarly-situated persons against Swift Transportation Co. of Arizona, LLC in the United States District Court for the Central District of California, Case No. CV 16-3232 (the "Castro Complaint"). The operative complaint alleges failure to pay overtime under the FLSA, as well as California state law claims including failure to pay timely final wages, failure to provide meal and rest periods, failure to pay overtime, and violation of the unfair competition. So far five plaintiffs have opted in to the lawsuit. The matter is in its initial phases and the parties are conducting discovery. The Company retains all of its defenses against liability and damages. The Company intends to vigorously defend against the merits of these claims and to challenge certification. The final disposition of this case and the impact of such final disposition of this case cannot be determined at this time.
In addition to the Castro Complaint, fourteen former or current CSR IVs who signed arbitration agreements with Swift have filed individual arbitrations with the American Arbitration Association ("AAA"). The claims alleged in the individual arbitrations are the same claims asserted in the Castro Complaint.
Arizona Fair Labor Standards Act Class Action Litigation
On December 29, 2015, a class action lawsuit was filed by Pamela Julian, individually and on behalf of all other similarly-situated persons against Swift Transportation, Inc., et al. in the United States District Court for the District of Delaware, Case No. 1:15-CV-01212-UNA (the "Julian Compliant"). The Julian Complaint alleges that Swift violated the FLSA by failing to pay its trainee drivers minimum wage for all work performed and by failing to pay overtime. On February 29, 2016, upon Stipulation of the Parties, the court transferred the case to the United States District Court for the District of Arizona, Case No. 2:16-CV-00576-ROS. On March 9, 2016, Swift filed a motion to dismiss the plaintiffs' overtime claims, which was granted by the District Court on May 31, 2016. The Company retains all of its defenses against liability and damages for the remaining claims. The Company intends to vigorously defend against the merits of these claims and to challenge certification. The final disposition of this case and the impact of such final disposition of this case cannot be determined at this time.
Washington Overtime Class Actions
On September 9, 2011, a class action lawsuit was filed by Troy Slack and several other drivers on behalf of themselves, and all similarly-situated persons, against Swift Transportation: Troy Slack, et al. v. Swift Transportation Co. of Arizona, LLC and Swift Transportation Corporation in the State Court of Washington, Pierce County (the "Slack Complaint"). The Slack Complaint was removed to the United States District Court for the Western District of Washington (the "Court") on October 12, 2011, case number 11-2-114380. The putative class includes all current and former Washington state-based employee drivers during the three-year statutory period prior to the filing of the lawsuit, and through the present, and alleges that they were not paid minimum wage and overtime in accordance with Washington state law and that they suffered unlawful deductions from wages. On November 23, 2013, the court entered an order on the plaintiffs' motion to certify the class. The court only certified the class as it pertains to "dedicated" drivers and did not certify any other class, including any class related to over-the-road drivers. On September 2, 2015, new counsel was appointed for the plaintiffs and on November 16, 2015, new legal counsel was substituted for the Company. As a result of the substitution of counsel for both parties, the court extended all existing dates by ten months. On April 1, 2016, the court entered an order approving the plaintiffs' proposed class notice. The matter is now in discovery. The Company retains all of its defenses against liability and damages. The Company intends to vigorously defend against the merits of these claims and to challenge certification. The final disposition of this case and the impact of such final disposition of this case cannot be determined at this time.
On January 14, 2016, a class action lawsuit was filed by Julie Hedglin, individually and on behalf of all others similarly situated against Swift Transportation Co. of Arizona, LLC in the State Court of Washington, Pierce County (the "Hedglin Complaint"). The Hedglin Complaint was removed to the Court on February 18, 2016, 3:16-CV-05127-RJB. The putative class includes all current and former Washington heavy haul drivers and alleges the class was not paid for meal and rest periods, was not paid for overtime, was not paid all wages due at established pay periods, and was not provided accurate wage statements. The matter is in its initial phases and is expected to move into discovery. The Company retains all of its defenses against liability and damages. The Company intends to vigorously defend against the merits of these claims and to challenge certification. The final disposition of this case and the impact of such final disposition of this case cannot be determined at this time.

21



SWIFT TRANSPORTATION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED



Indiana Fair Credit Reporting Act Class Action Litigation
On March 18, 2015, a class action lawsuit was filed by Melvin Banks, individually and on behalf of all other similarly-situated persons against Central Refrigerated Service, Inc. in the United States District Court for the Northern District of Indiana, Case No. 2:15-CV-00105. The complaint alleges that Central Refrigerated Service, Inc. violated the Fair Credit Reporting Act by failing to provide job applicants with adverse action notices and copies of their consumer reports and statements of rights. At this time, the size of the potential class is unknown. The Company’s motion to have the case transferred from Indiana to the United States District Court for the District of Arizona has been granted. The first phase of discovery, regarding potential for identifying and certifying a class of affected job applicants, has been completed. The Company retains all of its defenses against liability and damages. The Company intends to vigorously defend against the merits of these claims and to challenge certification. The final disposition of this case, including the size of any affected class, and the impact of such final disposition of this case cannot be determined at this time.
Utah Collective and Individual Arbitration
On June 1, 2012, Gabriel Cilluffo, Kevin Shire, and Bryan Ratterree filed a putative class and collective action lawsuit against Central Refrigerated Service, Inc., Central Leasing, Inc., Jon Isaacson, and Jerry Moyes (collectively referred to herein as the "Central Parties"), Case No. ED CV 12-00886 in the United States District Court for the Central District of California. Through this action, the plaintiffs alleged that the Central Parties misclassified owner-operator drivers as independent contractors and were therefore liable to these drivers for minimum wages and other employee benefits under the FLSA. The complaint also alleged a federal forced labor claim under 18 U.S.C. § 1589 and 1595, as well as fraud and other state-law claims.
Pursuant to the plaintiffs' owner-operator agreements, the district court issued an order compelling arbitration and directed that the plaintiffs' causes of action under the FLSA should proceed to collective arbitration, while their forced labor, fraud, and state law claims would proceed as separate individual arbitrations. A collective arbitration was subsequently initiated with the AAA. Notice of the collective arbitration was sent to more than 3,000 owner-operators who worked for Central Refrigerated Service, Inc. and leased a vehicle from Central Leasing, Inc. on or after June 1, 2009. On October 26, 2016 the arbitrator assigned to the case ruled that approximately 1,300 Central Refrigerated drivers involved in the collective arbitration have been misclassified as independent contractors and that they should have been compensated as employees. The ruling left open the question of what damages, if any, are payable to these drivers. The arbitrator ruled that such damages could be assessed in a collective proceeding and declined to decertify the collective proceeding under the FLSA. No trial date on the claimant's damages has been set by the arbitrator.
In addition to the collective arbitration that is pending before the AAA, the three named plaintiffs, along with approximately 325 other owner-operators, have initiated a series of individual, bilateral proceedings against the Central Parties with the AAA. Discovery is commencing in these individual cases, which are pending before approximately 30 separate arbitrators. Rather than proceed simultaneously in hundreds of separate arbitration proceedings, the parties have agreed to select a small number of arbitration cases that will be litigated and proceed to hearing. The outcome in these sample cases-some of which will be selected by plaintiffs’ counsel and some by the Company’s attorneys-will not have a binding impact on the remaining cases, which will be stayed. The parties anticipate that the outcome of these sample, or bellwether cases, may illustrate potential outcomes of the other bilateral arbitration cases and facilitate resolution. Actual trial dates for these sample proceedings have not yet been finally set by the arbitrators, but trials in the limited number of bellwether-like cases are likely to occur in the second quarter of 2017.
Upon the acquisition of Central Refrigerated Service, Inc. by Swift Transportation Company (the "Company"), the plaintiffs in both the collective and individual actions were allowed to amend their complaints in June 2015 to include the Company as a defendant.
In June 2016, the parties engaged in mediation that ultimately did not result in a settlement of the matter, given the plaintiff's initial demand was $69.0 million and the Company's estimated potential liability was $3.0 million.  Based upon the information exchanged between the parties during the mediation, and in accordance with GAAP, the Company recorded an accrual of $3.0 million in the second quarter of 2016 for the estimated probable loss incurred.  Based on the October 2016 arbitration ruling, the Company recorded an additional accrual of $22.0 million as of September 30, 2016.  Our estimate of the probable loss on this matter is based on the requirements of GAAP and upon the currently available information.  The Company and the Central Parties dispute the arbitrator’s rulings to date and intend to continue to vigorously defend against the plaintiff’s claims in both the collective action and individual proceedings. 
California Class and Collective Action for Pre-employment Physical Testing
On October 6, 2014 Robin Anderson filed a putative class and collective action against Central Refrigerated Service, Inc. Case No. 5:14-CV 02062 in the United States District Court for the Central District of California (the "Anderson Complaint"). In this action, the plaintiff alleges that pre-employment tests of physical strength administered by a third party on behalf of Central Refrigerated Service, Inc. had an unlawfully discriminatory impact on female applicants and applicants over the age of 40. The suit seeks damages under Title VII of the Civil Rights Act of 1964, the Age Discrimination Act, and parallel California state law provisions, including the California Fair Employment and Housing Act.

22



SWIFT TRANSPORTATION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED



Upon the acquisition of Central Refrigerated Service, Inc. by Swift Transportation Company, the plaintiff was allowed to amend her complaint in October 2015 to include Swift Transportation Company and Workwell Systems, Inc. as additional defendants. Workwell Systems, Inc. is the company that provided the physical testing service used by Central Refrigerated Service, Inc. The litigation is still at a very preliminary stage and no trial date has been set. There is not currently any information available regarding the number of potential members of the putative class or collective actions.
Central Refrigerated Service, Inc. and Swift intend to vigorously defend against the merits of the plaintiff’s claims and to oppose certification of any class of plaintiffs. The final disposition of this case and the impact cannot be determined at this time.
Demand for Inspection of Books and Records
In February 2016, the Company received several shareholder demands, requesting to inspect the Company’s books and records, pursuant to Section 220 of the Delaware General Corporation Law.  The demands relate to the shareholders’ alleged investigation pertaining to whether the Board and Jerry Moyes have breached their fiduciary duties with respect to matters that have been publicly disclosed concerning the Company's securities trading policy, limitations on the pledging of Company stock on margin, and share repurchases. The Company responded to the shareholders’ requests. In September 2016, the Company received an additional request for records related to Board members' status as independent directors. Any future disposition or resolution of these matters cannot be determined at this time.
Environmental
The Company's tractors and trailers are involved in motor vehicle accidents, and experience damage, mechanical failures, and cargo issues as an incidental part of its normal course of operations.  From time to time, these matters result in the discharge of diesel fuel, motor oil, or other hazardous materials into the environment.  Depending on local regulations and who is determined to be at fault, the Company is sometimes responsible for the clean-up costs associated with these discharges.  As of September 30, 2016, the Company's estimate for its total legal liability for all such clean-up and remediation costs was approximately $0.4 million in the aggregate for all current and prior year claims. 
 
Note 11 — Derivative Financial Instruments
The final settlement of the Company's interest rate swaps occurred in July 2015. The following table presents pre-tax gains and losses from changes in fair value of the Company's interest rate swaps, included in earnings:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(In thousands)
Loss reclassified from AOCI into net income from cash flow hedges (effective portion)
 
$

 
$
69

 
$

 
$
3,886

(Gain) loss recognized in income from de-designated derivative contracts
 

 
(1
)
 

 
86

Derivative interest expense
 
$

 
$
68

 
$

 
$
3,972

Losses (benefits) on cash flow hedging, reclassified out of AOCI into the consolidated income statements were as follows:
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
Reclassified to:
 
2016
 
2015
 
2016
 
2015
 
 
 
(In thousands)
Interest rate swaps
Derivative interest expense
 
$

 
$
69

 
$

 
$
3,886

Income tax benefit
Income tax expense
 

 

 

 
(1,469
)
 
Net income
 
$

 
$
69

 
$

 
$
2,417


23



SWIFT TRANSPORTATION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED



 
Note 12 — Share Repurchase Programs
The following table presents our repurchases of our Class A common stock under the respective share repurchase programs, net of advisory fees:
 
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
As of
September 30,
Share Repurchase Program
 
2016
 
2016
 
2016
Authorized Amount
 
Board Approval Date
 
Shares
 
Amount
 
Shares
 
Amount
 
Amount Remaining
(In thousands)
$100,000
 
September 24, 2015
 

 
$

 
2,221

 
$
30,000

 
$

$150,000
 
February 22, 2016
 
1,341

 
$
25,000

 
5,072

 
$
85,000

 
$
65,000

 
 
 
 
1,341

 
$
25,000

 
7,293

 
$
115,000

 
$
65,000

No share repurchases were made during the three or nine months ended September 30, 2015.
 
Note 13 — Weighted Average Shares Outstanding
The following table reconciles basic weighted average shares outstanding to diluted weighted average shares outstanding:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Basic weighted average common shares outstanding
132,930

 
142,801

 
134,622

 
142,535

Dilutive effect of stock options
1,532

 
1,331

 
1,605

 
1,703

Diluted weighted average common shares outstanding
134,462

 
144,132

 
136,227

 
144,238

Anti-dilutive shares excluded from the dilutive-effect calculation (1)
154

 
350

 
156

 
195

____________
(1)
Shares were excluded from the dilutive-effect calculation because the outstanding options' exercise prices were greater than the average market price of the Company's common shares during the period.

24



SWIFT TRANSPORTATION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED



 
Note 14 — Income Taxes
Effective Tax Rate — The effective tax rate for the three months ended September 30, 2016 was 30.0%, which was lower than management's expectation of 36.5%. The difference was primarily due to Federal domestic production deductions realized as discrete items in the three months ended September 30, 2016. The effective tax rate for the three months ended September 30, 2015 was 37.0%, which was lower than management's expectation of 38.5%, primarily due to certain Federal employment tax credits realized as discrete items.
The effective tax rate for the nine months ended September 30, 2016 was 31.9%, which was lower than management's expectation of 36.5%. The difference was primarily due to a foreign subsidiary's income tax credits related to tolls paid, a domestic subsidiary's income tax credits for research and development, a reduction in the uncertain tax position reserve, and Federal domestic production deductions, all realized as discrete items. The effective tax rate for the nine months ended September 30, 2015 was 38.1%, which was lower than management's expectation of 38.5%, primarily due to certain Federal employment tax credits realized as discrete items.
Interest and Penalties — Accrued interest and penalties related to unrecognized tax benefits as of September 30, 2016 and December 31, 2015 were approximately $0.4 million and $1.4 million, respectively. The Company does not anticipate a decrease of unrecognized tax benefits during the next twelve months.
Tax Examinations — Certain of the Company’s subsidiaries are currently under examination by the Internal Revenue Service and various state jurisdictions for tax years ranging from 2010 through 2015. At the completion of these examinations, management does not expect any adjustments that would have a material impact on the Company’s effective tax rate. Years subsequent to 2011 remain subject to examination.
 
Note 15 — Fair Value Measurement
The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments: 
 
September 30, 2016
 
December 31, 2015
 
Carrying
Value
 
Estimated
Fair Value
 
Carrying
Value
 
Estimated
Fair Value
 
(In thousands)
Financial Assets:
 
 
 
 
 
 
 
Restricted investments (1)
$
22,864

 
$
22,851

 
$
23,215

 
$
23,190

Financial Liabilities:
 
 
 
 
 
 
 
2015 Agreement: New Term Loan A, due July 2020 (2)
592,819

 
594,250

 
668,055

 
669,750

Accounts receivable securitization, due January 2019 (3)
299,196

 
300,000

 
223,927

 
225,000

Revolving line of credit, due July 2020
50,000

 
50,000

 
200,000

 
200,000

____________
The carrying amounts of the financial instruments shown in the table are included in the consolidated balance sheets, as follows:
(1)
Restricted investments are included in "Restricted investments, held to maturity, amortized cost."
(2)
The New Term Loan A is included in "Current portion of long-term debt" and "Long-term debt, less current portion." Carrying value is net of $1.4 million and $1.7 million DLCs as of September 30, 2016 and December 31, 2015, respectively.
(3)
Carrying value is net of $0.8 million and $1.1 million DLCs as of September 30, 2016 and December 31, 2015, respectively.
Recurring Fair Value Measurements
As of September 30, 2016 and December 31, 2015, no major categories of assets or liabilities included in the Company's consolidated balance sheets at estimated fair value were measured on a recurring basis.

25



SWIFT TRANSPORTATION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED



Nonrecurring Fair Value Measurements
As of September 30, 2016, there were no assets or liabilities on the Company's consolidated balance sheet estimated at fair value that were measured on a nonrecurring basis.
The following table depicts the level in the fair value hierarchy of the inputs used to estimate fair value of assets measured on a nonrecurring basis as of December 31, 2015 (in thousands):
 
 
 
Fair Value Measurements at Reporting Date Using:
 
 
 
Estimated
Fair Value
 
Level 1 Inputs
 
Level 2 Inputs
 
Level 3 Inputs
 
Total Gains (Losses)
As of December 31, 2015
(In thousands)
Note receivable
$

 
$

 
$

 
$

 
$
(1,480
)
In September 2013, the Company agreed to advance up to $2.3 million, pursuant to an unsecured promissory note, to an independent fleet contractor that transported freight on Swift's behalf. In March 2015, management became aware that the independent contractor violated various covenants outlined in the unsecured promissory note, which created an event of default that made the principal and accrued interest immediately due and payable. As a result of this event of default, as well as an overall decline in the independent contractor's financial condition, management re-evaluated the fair value of the unsecured promissory note. At March 31, 2015, management determined that the remaining balance due from the independent contractor to the Company was not collectible, which resulted in a $1.5 million pre-tax adjustment that was recorded in "Non-cash impairments of non-operating assets" in the Company's consolidated income statement.
As of December 31, 2015, there were no liabilities on the Company's consolidated balance sheet estimated at fair value that were measured on a nonrecurring basis.
 
Note 16 — Segments and Geography
Segment Information
The Company’s four reportable operating segments are Truckload, Dedicated, Swift Refrigerated, and Intermodal.
TruckloadThe Truckload segment consists of one-way movements over irregular routes throughout the United States, Mexico, and Canada. This service utilizes both company and owner-operator tractors with dry van, flatbed, and other specialized trailing equipment.
DedicatedThrough the Dedicated segment, the Company devotes use of equipment to specific customers and offers tailored solutions under long-term contracts. This segment utilizes refrigerated, dry van, flatbed, and other specialized trailing equipment.
Swift RefrigeratedThis segment primarily consists of shipments for customers that require temperature-controlled trailers. These shipments include one-way movements over irregular routes, as well as dedicated truck operations.
IntermodalThe Intermodal segment includes revenue generated by moving freight over the rail in the Company's containers and other trailing equipment, combined with revenue for drayage to transport loads between the railheads and customer locations.
Non-reportable SegmentsThe non-reportable segments include the Company's logistics and freight brokerage services, as well as support services that its subsidiaries provide to customers and owner-operators, including repair and maintenance shop services, equipment leasing, and insurance. Intangible amortization related to the 2007 Transactions, certain legal settlements and reserves, and certain other corporate expenses are also included in the non-reportable segments.
Intersegment EliminationsCertain operating segments provide transportation and related services for other affiliates outside their reportable segment. Revenues for such services are based on negotiated rates, which we believe approximate fair value, and are reflected as revenues of the billing segment. These rates are adjusted from time to time, based on market conditions. Such intersegment revenues and expenses are eliminated in our consolidated results.

26



SWIFT TRANSPORTATION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED



Set forth in the tables below is certain financial information with respect to the Company’s reportable segments:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Operating revenue:
 
(In thousands)
Truckload
 
$
516,692

 
$
552,816

 
$
1,526,807

 
$
1,646,872

Dedicated
 
248,798

 
234,517

 
713,923

 
686,505

Swift Refrigerated
 
85,019

 
93,045

 
256,774

 
286,301

Intermodal
 
92,260

 
100,966

 
264,874

 
289,827

Subtotal
 
942,769

 
981,344

 
2,762,378

 
2,909,505

Non-reportable segments
 
89,740

 
104,176

 
288,303

 
289,667

Intersegment eliminations
 
(19,283
)
 
(20,547
)
 
(57,778
)
 
(59,651
)
Consolidated operating revenue
 
$
1,013,226

 
$
1,064,973

 
$
2,992,903

 
$
3,139,521

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Operating income (loss):
 
(In thousands)
Truckload
 
$
47,670

 
$
57,012

 
$
134,432

 
$
181,810

Dedicated
 
30,333

 
17,573

 
82,640

 
54,885

Swift Refrigerated
 
(20,250
)
 
2,622

 
(15,778
)
 
13,538

Intermodal
 
358

 
723

 
(1,647
)
 
1,081

Subtotal
 
58,111

 
77,930

 
199,647

 
251,314

Non-reportable segments
 
(18,258
)
 
(3,009
)
 
(33,106
)
 
(2,917
)
Consolidated operating income
 
$
39,853

 
$
74,921

 
$
166,541

 
$
248,397

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Depreciation and amortization of property and equipment:
 
(In thousands)
Truckload
 
$
31,868

 
$
31,424

 
$
93,721

 
$
89,958

Dedicated
 
17,417

 
15,992

 
49,826

 
45,885

Swift Refrigerated
 
3,975

 
4,735

 
12,752

 
11,399

Intermodal
 
2,895

 
3,535

 
8,894

 
10,231

Subtotal
 
56,155

 
55,686

 
165,193

 
157,473

Non-reportable segments
 
11,090

 
11,166

 
33,691

 
26,721

Consolidated depreciation and amortization of property and equipment
 
$
67,245

 
$
66,852

 
$
198,884

 
$
184,194

Geographical Information
In aggregate, operating revenue from the Company's foreign operations was less than 5.0% of consolidated operating revenue for the three and nine months ended September 30, 2016 and 2015. Additionally, long-lived assets on the Company's foreign subsidiaries' balance sheets were less than 5.0% of consolidated total assets as of September 30, 2016 and December 31, 2015.

27



SWIFT TRANSPORTATION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED



 
Note 17 — Jerry Moyes' Retirement
In conjunction with the Company's September 8, 2016 announcement that Jerry Moyes would retire from his position as Chief Executive Officer effective December 31, 2016, the Company entered into an agreement with Mr. Moyes to memorialize the terms of his retirement. The Company contracted with Mr. Moyes to serve as a non-employee consultant from January 1, 2017 through December 31, 2019, during which time the Company will pay Mr. Moyes a monthly consulting fee of $0.2 million in cash. Additionally, the Company modified the vesting terms and forfeiture conditions of Mr. Moyes' previously-granted equity awards. As a result of the terms of the agreement, the Company incurred a one-time expense in September 2016 of $7.1 million, consisting of $6.8 million in accrued consulting fees and $0.3 million for the impact of the equity award modifications. The amounts are included in "Salaries, wages, and employee benefits" within the non-reportable segments' income statement.
The following schedule is a rollforward of the accrued liability for the consulting fees:
 
September 30,
2016
 
(In thousands)
Balance at December 31, 2015
$

Additions to accrual
6,837

Less: payments

Balance at September 30, 2016 (1)
$
6,837

____________
(1)
The $0.3 million impact of the equity award modification is excluded from the accrual balance because it is classified as "Additional paid-in capital" in the consolidated balance sheet.

28




SWIFT TRANSPORTATION COMPANY




ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains statements that may constitute forward-looking statements, which are based on information currently available, usually defined by words such as "anticipates," "believes," "estimates," "plans," "projects," "expects," "hopes," "intends," "will," "could," "should," "may," or similar expressions which speak only as of the date the statement was made. Such forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements include, but are not limited to, statements concerning:
trends, management's beliefs, and expectations relating to our operations, Revenue xFSR, expenses, other revenue, pricing, our effective tax rate, profitability and related metrics, as well as share repurchases;
impact and planned timing of adopting recently issued accounting pronouncements on future periods;
that we will reduce our participation in the trucking spot market;
the benefits of eliminating our TOFC service;
the amount and timing of future dispositions of property and equipment;
the impact of changes in interest rates;
the outcome and impact of pending claims, litigation, and actions in respect thereof;
our intentions concerning the potential use of derivative financial instruments to hedge fuel price increases;
the timing and amount of future acquisitions of revenue equipment and other capital expenditures, as well as the use and availability of cash, cash flows from operations, leases, and debt to finance such acquisitions;
that we may seek additional borrowings, lease financing, or equity capital;
the potential impact of inflation, seasonality, and severe weather conditions on our results of operations;
that we will receive additional tax deductions during the remainder of 2016; and
our ability to finance our cash needs from operations for the next twelve months.
Such forward-looking statements are inherently uncertain, and are based upon the current beliefs, assumptions, and expectations of Company management and current market conditions, which are subject to significant risks and uncertainties, as set forth in the Risk Factors section of our Annual Report on Form 10-K for the year ended December 31, 2015. As to the Company's business and financial performance, the following factors, among others, could cause actual results to materially differ from those in forward-looking statements:
economic conditions, including future recessionary economic cycles and downturns in customers’ business cycles, particularly in market segments and industries in which we have a significant concentration of customers;
increasing competition from trucking, rail, intermodal, and brokerage competitors;
our ability to execute or integrate any future acquisitions successfully;
increases in driver compensation to the extent not offset by increases in freight rates, and difficulties in driver recruitment and retention;
additional risks arising from our contractual agreements with owner-operators that do not exist with Company drivers;
our ability to retain or replace key personnel;
our dependence on third parties for intermodal and brokerage business;
potential failure in computer or communications systems;
seasonal factors such as severe weather conditions that increase operating costs;
the regulatory environment in which we operate, including existing regulations and changes in existing regulations, or violations by us of existing or future regulations;
the possible re-classification of owner-operators as employees;
changes in rules or legislation by the NLRB or Congress and/or union organizing efforts;
our CSA safety rating;

29




SWIFT TRANSPORTATION COMPANY





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

30



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


Executive Summary
Company Overview — Swift is a multi-faceted transportation services company, operating one of the largest fleets of truckload equipment in North America from over 40 terminals near key freight centers and traffic lanes. We principally operate in short- to medium-haul traffic lanes around our terminals and dedicated customer locations. We concentrate on this length of haul because the majority of domestic truckload freight (as measured by revenue) moves in these lanes and our extensive terminal network affords us marketing, equipment control, supply chain, customer service, and driver retention advantages in local markets. Since our average length of haul is relatively short, it helps reduce competition from railroads and trucking companies that lack a regional presence.
Our four reportable segments are Truckload, Dedicated, Swift Refrigerated, and Intermodal. Our extensive suite of service offerings (which includes line-haul services, dedicated customer contracts, temperature-controlled units, intermodal freight solutions, cross-border United States/Mexico and United States/Canada freight, flatbed hauling, freight brokerage and logistics, and others) provides our customers with the opportunity to "one-stop-shop" for their truckload transportation needs.
Revenue — We primarily generate revenue by transporting freight for our customers, generally at a predetermined rate per mile. We supplement this revenue by charging for fuel surcharges, stop-off pay, loading and unloading activities, tractor and trailer detention, and other ancillary services. The main factors that affect our revenue from transporting freight are the rate per mile we receive from our customers and loaded miles. The main factors that affect fuel surcharge revenue are the price of diesel fuel and the number of loaded miles. Fuel surcharges are billed on a lagging basis, meaning that we typically bill customers in the current week based on a previous week's applicable index. Therefore, in times of increasing fuel prices, we do not recover as much as we are currently paying for fuel. In periods of declining prices, the opposite is true.
Revenue in our non-reportable 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 segments 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 the 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.
Recent Developments — The truckload freight environment in 2016 has been challenging. Excess industry capacity, excess customer inventories, and depressed shipping demand have 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.
On September 8, 2016, we announced that Jerry Moyes would retire from his position as Chief Executive Officer effective December 31, 2016. Richard Stocking (previously our President and Chief Operating Officer) and Mr. Moyes will serve as Co-Chief Executive Officers, with Mr. Stocking assuming all duties and authority of the office of Chief Executive Officer, from September 8, 2016 through December 31, 2016. Pursuant to the unanimous approval by the Board, Mr. Stocking will begin serving as our sole President and Chief Executive Officer on January 1, 2017. The Company has contracted with Mr. Moyes to serve as a consultant with the title "Founder and Chairman Emeritus" for the three-year period following his retirement date. Additionally, Mr. Moyes will continue on as a member of the Board.

31



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


Financial Overview
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(Dollars in thousands, except per share data)
GAAP financial data:
 
 
 
 
 
 
 
Operating revenue</