Knight-Swift Transportation Holdings Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020; comparisons are with the same 2019 periods. Knight-Swift provides truckload, logistics, and intermodal transportation services. Financial amounts below are in millions unless otherwise stated.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Total revenue | $1,060.7 | $1,242.1 | $2,185.5 | $2,446.6 |
| Revenue excluding trucking fuel surcharge | $997.6 | $1,122.8 | $2,024.7 | $2,219.7 |
| Operating income | $102.2 | $108.6 | $204.3 | $224.9 |
| Net income attributable to Knight-Swift | $80.2 | $79.2 | $145.6 | $167.1 |
| Diluted EPS | $0.47 | $0.46 | $0.85 | $0.97 |
| GAAP operating ratio | 90.4% | 91.3% | 90.7% | 90.8% |
| Adjusted operating ratio (non-GAAP) | 87.6% | 87.8% | 88.1% | 88.1% |
Cash flow: First-half operating cash flow was $383.4, versus $362.8 in 2019. Investing activities used $253.1, including $259.6 of equipment purchases and $64.5 of proceeds from equipment sales and maturities; net capital expenditures were approximately $195.2. Financing activities used $173.8. Cash, restricted cash, and equivalents ended the period at $158.8, including $117.8 of unrestricted cash.
Debt and liquidity: Debt and finance lease obligations totaled $851.8 at June 30, including a $364.9 term loan due October 2020, $235.0 drawn on the revolver, $164.8 under the receivables securitization facility, and $87.1 of finance leases. Unrestricted liquidity was $691.6, including $533.9 of revolver availability and $40.0 under the securitization facility. Working capital was negative $142.0, primarily because of the term loan’s October 2020 maturity. The company said it intended to refinance the term loan before maturity.
Material changes and segment results
- Q2 total revenue fell 14.6% year over year; revenue excluding fuel surcharge declined 11.1%. Lower fuel surcharge revenue reflected lower fuel prices.
- Q2 net income attributable to Knight-Swift increased $1.0, while first-half net income declined $21.5. Q2 results benefited from improved non-reportable segment results and investment gains, offset by lower Trucking operating income and an Intermodal loss. First-half results also reflected weaker Logistics and Intermodal performance.
- Trucking: Q2 revenue declined 13.8% and operating income declined 14.3%. Adjusted operating ratio improved to 85.5% from 85.8%, despite a 6.5% decline in average revenue per tractor. Lower miles, lower used-equipment sale gains, and $9.9 of pandemic-related costs weighed on results.
- Logistics: Q2 revenue fell 15.5% and operating income fell 39.5%. Brokerage gross margin declined to 15.7% from 16.2%; brokerage load volumes fell 10.1% and revenue per load fell 4.5%.
- Intermodal: Q2 revenue declined 29.9%, and the segment recorded a $4.5 operating loss versus $4.2 of operating income a year earlier. Load count fell 23.9% and revenue per load declined 7.8%, amid pressure on port volumes.
- First-half equipment purchases exceeded sales proceeds by approximately $195.2. The company repurchased $34.6 of shares in the first quarter; no shares were repurchased in Q2. It declared dividends of $0.08 per share in Q2.
Outlook, risks, and unusual items
- Management reported that freight demand strengthened through Q2 and remained strong in July, but said demand in the second half could be difficult to predict. It expected Trucking rate per loaded mile to turn positive year over year in Q3 and anticipated improved Intermodal results in the second half. These are management expectations, not formal earnings guidance.
- Management expected full-year 2020 net capital expenditures of $500–$525 and said equipment purchases, rather than operating leases, would be the primary funding approach for most equipment. It expected depreciation to rise and rental expense to decline. The filing does not provide full-year EPS or revenue guidance.
- COVID-19 incremental costs were $10.0 in Q2 and $12.3 in the first half, primarily driver and shop-technician premiums and cleaning supplies. Management said these costs were separable from normal operations and not expected to recur after the pandemic subsides. The pandemic’s effects on future results, financial position, and liquidity remained uncertain.
- Management cited driver sourcing challenges, possible wage inflation, tighter insurance markets and higher retention limits, fuel-price exposure, and uncertain freight demand as risks. A 1-percentage-point increase in interest rates would raise annual interest expense by an estimated $7.7 at June 30 borrowings.
- The company recorded $27.9 of aggregate accruals for outstanding legal proceedings. It stated that pending matters were not expected to materially affect its overall financial position, results, or cash flows after accruals, while noting actual outcomes could be material in a particular period. First-half operating cash flow included a $93.4 cash settlement of previously accrued pre-2017 merger legal matters.
- A warehousing-related company was acquired effective January 1 for revised purchase consideration of $66.4, including contingent consideration. The purchase-price allocation remained preliminary. The company also recorded $1.3 of first-half impairment charges, including charges related to revenue equipment and trailer-tracking equipment.
Investor facts to verify
- Progress and final terms of refinancing the $364.9 term loan due October 2020, and any effect on liquidity, interest expense, or covenants.
- Whether freight demand, pricing, and driver availability support the stated Q3 and second-half expectations, particularly for Intermodal.
- Performance of the warehousing acquisition and any changes to its preliminary valuation or contingent consideration.
- Actual 2020 capital spending versus the $500–$525 net capital expenditure expectation, and the resulting debt and cash position.
- Developments in legal proceedings, insurance claims, and COVID-19-related costs and operating impacts.
Adjusted results and ratios are non-GAAP measures; the filing cautions that they supplement, and do not replace, GAAP results.