Knight-Swift Transportation Holdings Inc. — 2022 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2022, with comparisons primarily to 2021. Knight-Swift is a North American freight transportation provider operating Truckload, less-than-truckload (LTL), Logistics and Intermodal businesses, plus supporting services. The company reported 1.4 billion loaded miles during 2022. Comparisons are affected by the 2021 acquisitions of ACT, MME and other businesses; 2022 includes fuller-year results for acquired operations.
Financial and operating performance
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Total revenue | $7.429 billion | $5.998 billion | +23.9% |
| Revenue excluding Truckload and LTL fuel surcharge | $6.508 billion | $5.532 billion | +17.6% |
| Operating income | $1.092 billion | $965.7 million | +13.1% |
| Net income attributable to Knight-Swift | $771.3 million | $743.4 million | +3.8% |
| Diluted EPS | $4.73 | $4.45 | +6.3% |
| GAAP operating ratio | 85.3% | 83.9% | +140 basis points |
| Adjusted operating ratio (non-GAAP) | 82.2% | 81.5% | +70 basis points |
| Cash provided by operating activities | $1.436 billion | $1.190 billion | +$245.7 million |
| Free cash flow (company-defined, non-GAAP) | $818.7 million | Not provided in the cited reconciliation | — |
Margins and segment results. A higher operating ratio indicates lower operating efficiency. Truckload revenue excluding fuel surcharge and intersegment transactions rose 3.5%, but operating income declined 4.8% to $746.6 million; its GAAP operating ratio worsened to 83.5% from 80.9%, as total miles per tractor fell 6.3%. LTL operating income increased to $126.6 million, with its GAAP operating ratio improving to 88.2% from 92.1%; growth reflects both acquisition comparability and operating improvements. Logistics operating income rose 42.6% to $133.9 million, supported by 24.0% more loads and improved gross margin. Intermodal operating income increased 14.5% to $48.2 million despite a 14.8% decline in loads, as revenue per load rose. Non-reportable segment operating income increased to $36.5 million.
Cash, debt and liquidity. Year-end unrestricted cash was $196.8 million. The company reported $1.275 billion of unrestricted liquidity, including cash and available capacity under its revolving credit and receivables facilities; a further $195.8 million of cash and restricted investments was primarily held for insurance claims. Debt, receivables securitization and finance lease obligations totaled approximately $1.9 billion at carrying values, versus approximately $2.1 billion in 2021. The company repaid $212.7 million of long-term debt, paid $62.1 million of finance lease liabilities, and reduced revolving-credit borrowings. Working capital surplus was $599.6 million, up from $339.5 million. Management said it did not foresee material liquidity constraints or covenant issues; the company reported compliance with debt covenants at year-end.
Capital returns and investment. 2022 capital spending on property and equipment was $800.6 million, partially offset by $183.4 million of sale proceeds. The company repurchased approximately $299.9 million of shares and paid $78.3 million in dividends. The Board authorized a $350 million repurchase plan in 2022, with $200 million remaining at year-end. The company declared a $0.14-per-share quarterly dividend in February 2023 and said it expected comparable quarterly dividends to continue, subject to Board considerations.
Material changes versus 2021
- Revenue grew substantially, in part because ACT and MME contributed a full year of results in 2022 versus only post-acquisition periods in 2021. Management cautions that reported period comparisons may therefore not be fully comparable.
- Consolidated operating income rose 13.1%, while attributable net income rose only 3.8%. Higher interest expense and the unfavorable change in other expenses, principally Embark investment losses versus a gain in 2021, weighed on earnings.
- Fuel expense increased 64.0%, with average DOE diesel prices rising to $5.01 per gallon from $3.29. Insurance and claims expense rose 65.6%; management cited higher reserves associated with its expanded third-party carrier insurance program, among other factors.
- Truckload utilization weakened: total miles per tractor declined 6.3%, and non-paid empty miles increased to 14.6% from 13.4%. Conversely, LTL operating ratios improved and Logistics operating income strengthened.
- The company’s Embark investment fell to a fair value of approximately $1.0 million from $54.5 million. The 2022 unrealized loss reduced earnings per diluted share and Adjusted EPS by $0.25, according to management.
Outlook, risks and unusual items
- 2023 freight outlook: Management expected soft freight demand and few non-contract opportunities through the first half of 2023, followed by improving volumes and a more typical peak season in the second half. It expected spot pricing to trough in the first quarter and build through the year. Management also anticipated a competitive driver market, pressure on LTL demand, and continued weakness in the used-equipment market.
- Spending and capacity: Expected 2023 net cash capital expenditures were $640 million to $690 million, excluding potential acquisitions. Separately, the company had $1.0 billion of revenue-equipment purchase commitments for 2023, including $772.1 million for tractors. Management said it had flexibility to adjust purchases if conditions warranted.
- Cost and market exposure: Inflation in driver compensation, maintenance, insurance, equipment and fuel may pressure results if freight rates do not keep pace. Fuel surcharges recover a majority, but not all, of fuel costs and may lag price changes. A one-percentage-point increase in interest rates was estimated to raise annual interest expense by $14.4 million, based on year-end borrowings.
- Insurance and claims: The company retains significant insurance risk. The auditor identified Swift auto-liability claims accrual as a critical audit matter because estimating claim severity and ultimate settlements involves substantial judgment. Management estimated that a 10% increase in claims-development factors could increase claims accruals by $70.1 million.
- Other material risks: Risks include economic and freight-market cyclicality, customer concentration and contracts without guaranteed volumes, driver recruitment and retention, rail-service and labor disruptions, cybersecurity, adverse used-equipment values, and regulatory changes. These include rules or litigation affecting independent-contractor classification, safety, emissions and brokerage liability. The largest customer generated 13.1% of 2022 revenue.
- Legal matters: The company had approximately $11.0 million accrued for outstanding legal proceedings at year-end. Management did not believe pending matters were likely to materially adversely affect the company overall after accruals, while noting outcomes could be material in an individual period. Environmental clean-up liability was estimated at approximately $1.3 million in aggregate.
- Audit and controls: The auditor gave unqualified opinions on the financial statements and internal control over financial reporting. Internal controls were reported effective at December 31, 2022.
Important facts for investors to verify
- Reconcile GAAP results with the company’s non-GAAP Adjusted EPS, adjusted operating ratios and free cash flow; these measures are not substitutes for GAAP results.
- Assess how much reported growth and LTL improvement reflects acquisition timing, integration and network conversion, versus comparable organic performance.
- Monitor Truckload miles per tractor, empty miles, freight rates and operating ratio as market conditions normalize.
- Review claims-reserve development, third-party carrier insurance exposure and the assumptions supporting the auto-liability accrual.
- Compare the $1.0 billion equipment commitment and planned 2023 capital spending with demand, liquidity, financing needs and used-equipment resale values.
- Track the Embark investment, customer concentration, debt maturities and variable-rate exposure, as well as legal and regulatory developments affecting contractors and emissions.