Knight-Swift Transportation Holdings Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Amounts are in U.S. dollars. Comparisons are affected by the July 1, 2023 acquisition of U.S. Xpress; its results are included only from the acquisition date, so reported year-over-year comparisons are not fully comparable.
Financial results
| Metric | Q3 2023 | Q3 2022 | Year to date 2023 | Year to date 2022 |
|---|---|---|---|---|
| Total revenue | $2.020 billion | $1.897 billion | $5.210 billion | $5.685 billion |
| Operating income | $81.1 million | $265.4 million | $319.9 million | $889.3 million |
| Net income attributable to Knight-Swift | $60.2 million | $194.8 million | $227.8 million | $622.6 million |
| Diluted EPS | $0.37 | $1.21 | $1.41 | $3.80 |
| Operating ratio | 96.0% | 86.0% | 93.9% | 84.4% |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $873.5 million | $1.099 billion |
Q3 revenue rose 6.5%, while operating income and attributable net income fell sharply. For the first nine months, revenue declined 8.4% and attributable net income fell 63.4%. Management’s non-GAAP adjusted EPS was $0.41 for Q3 and $1.63 year to date, versus $1.27 and $4.03, respectively, in 2022; these measures exclude specified items and are not GAAP substitutes.
Year-to-date free cash flow, as defined by the company (operating cash flow plus equipment-sale proceeds less property and equipment purchases), was $235.1 million. Capital expenditures were $852.7 million and equipment-sale proceeds were $214.2 million. The company paid $68.6 million in dividends and made no share repurchases during the period.
Liquidity, debt and financial position
At September 30, unrestricted cash was $193.4 million and reported unrestricted liquidity was $974.0 million, including $778.8 million available on the revolver and $1.8 million under the receivables facility. An additional $263.5 million of balance-sheet restricted cash was primarily held for insurance claims. Working capital surplus was $30.8 million, down from $599.6 million at year-end 2022.
Material debt, receivables-securitization and finance-lease obligations totaled approximately $2.7 billion. This included $300.0 million drawn on the revolver, $362.0 million of receivables-facility borrowings, and $249.1 million outstanding on the new $250 million 2023 term loan. The company reported covenant compliance and said it did not foresee material liquidity constraints. Variable-rate debt exposure was material: a hypothetical one-percentage-point rate increase would raise annual interest expense by $22.5 million, based on period-end borrowings.
Business changes and segment performance
- U.S. Xpress acquisition: Completed July 1 for reported purchase consideration of about $630 million, including $454.4 million cash and $174.1 million contingent consideration. Preliminary purchase accounting recorded $317.8 million of goodwill and $348 million of identifiable intangibles. U.S. Xpress contributed $461.6 million of revenue and a $19.9 million net loss during the reported period. The allocation remains preliminary.
- Truckload: Q3 revenue increased 19.0%, largely reflecting U.S. Xpress, but operating income fell 72.5% to $48.4 million. The adjusted operating ratio was 94.9%; management said the acquired operation adversely affected it by 340 basis points.
- LTL: Q3 revenue increased 2.0% and operating income rose 4.6% to $32.3 million. Year-to-date adjusted operating ratio deteriorated 220 basis points to 85.2%, amid softer volumes, higher wages and earlier network-transition disruption.
- Logistics: Q3 revenue declined 24.3% and operating income fell 62.3% to $10.4 million, as load count and revenue per load weakened.
- Intermodal: Q3 revenue declined 22.6%; the segment recorded a $4.5 million operating loss and a 104.5% operating ratio as revenue per load dropped 26.6% despite higher load count.
- Non-reportable businesses: Recorded a $5.4 million Q3 operating loss. Iron Insurance had a $53.8 million operating loss year to date, attributed primarily to higher claim frequency, unfavorable claim development and premium collection issues involving small carriers.
Cash provided by operations declined $225.7 million year to date. Investing cash use increased, principally due to the U.S. Xpress acquisition and higher capital expenditures. Interest expense rose to $86.8 million year to date from $30.7 million, reflecting higher debt balances and rates.
Outlook, risks and unusual items
- For Q4, management expected truckload rates to stabilize, truckload tractor count to decline modestly, and LTL revenue excluding fuel surcharge to increase in the mid-teens year over year. It projected U.S. Xpress to dilute Q4 adjusted EPS by about $0.05, Logistics to operate at a low-90s operating ratio, and Intermodal to be slightly profitable.
- Management forecast Q4 non-reportable operating income to decline $10 million to $15 million sequentially, including expected third-party insurance losses of $10 million to $15 million. Full-year 2023 net cash capital expenditures were expected to be $700 million to $750 million; Q4 tax rate was expected to be about 26%. These are management expectations, not guarantees.
- Key exposures include weak freight demand and pricing, labor and cost inflation, insurance claims and self-insurance volatility, fuel-price changes and surcharge timing, higher interest rates, and acquisition integration and execution. Management was evaluating strategic alternatives for the insurance business, including possible reinsurance strategies.
- U.S. Xpress acquisition-related expenses were $31.8 million year to date. Q3’s 2.1% negative effective tax rate reflected discrete tax items, including a $14.6 million partial release of a valuation allowance. U.S. Xpress was excluded from the company’s internal-control assessment while integration and evaluation continued; management reported disclosure controls as effective.
- Revenue-equipment purchase commitments were $284.2 million for the remainder of 2023, plus $49.8 million for facilities and non-revenue equipment. The company also reported approximately $9.2 million accrued for pending legal proceedings.
Investor verification priorities
- Track U.S. Xpress integration, operating performance, the final purchase-price allocation, and contingent consideration terms and valuation.
- Assess whether insurance losses, claim development and premium collections improve, and whether reinsurance or other strategic actions are implemented.
- Compare subsequent results with Q4 outlook, especially segment margins, U.S. Xpress dilution, capital spending and the expected tax rate.
- Monitor debt maturities, variable-rate exposure, receivables-facility availability, covenant headroom and the gap between unrestricted and restricted cash.
- Evaluate whether operating cash flow and free cash flow can support equipment investment, dividends and debt obligations in a weak freight market.