Knight-Swift Transportation Holdings Inc. — Q3 2021 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2021. Knight-Swift operates Truckload, Logistics, Intermodal and LTL businesses, plus non-reportable activities. Results include AAA Cooper Transportation (ACT) from its July 5, 2021 acquisition date; therefore, comparisons with 2020 are not fully comparable.
Key financial results
| Metric | Q3 2021 | Q3 2020 | YTD 2021 | YTD 2020 |
|---|---|---|---|---|
| Total revenue | $1.642 billion | $1.210 billion | $4.181 billion | $3.396 billion |
| Revenue excluding truckload fuel surcharge | $1.511 billion | $1.137 billion | $3.857 billion | $3.162 billion |
| Operating income | $270.1 million | $165.5 million | $623.5 million | $369.7 million |
| Net income attributable to Knight-Swift | $206.2 million | $122.1 million | $488.8 million | $267.7 million |
| Diluted EPS | $1.23 | $0.71 | $2.93 | $1.57 |
| GAAP operating ratio | 83.6% | 86.3% | 85.1% | 89.1% |
| Adjusted operating ratio (non-GAAP) | 81.3% | 83.9% | 82.8% | 86.6% |
For Q3, revenue excluding fuel surcharge rose 32.8% and operating income rose 63.2% year over year; the ACT acquisition contributed to reported growth. Management reported YTD adjusted EPS of $3.11 versus $1.80 a year earlier. The non-GAAP measures are supplemental and are not substitutes for GAAP results.
Cash flow and liquidity. YTD operating cash flow was $817.5 million, compared with $655.0 million in 2020. Investing cash outflow was $1.549 billion, including $1.342 billion of net cash invested in acquisitions; financing cash inflow was $873.3 million. Cash, restricted cash and equivalents totaled $339.4 million at period end, including $269.7 million unrestricted cash. Management reported $1.062 billion of unrestricted liquidity, including available revolver and receivables-facility capacity, and a $551.9 million working-capital surplus.
At September 30, the company reported $1.551 billion of long-term debt and revolver borrowings, $278.4 million of receivables securitization borrowings, and $274.1 million of finance lease obligations. Management described material debt obligations, including finance leases, as approximately $2.1 billion. The company was in compliance with debt covenants and stated it did not foresee material liquidity constraints. A 1 percentage-point rise in interest rates would increase annual interest expense by an estimated $18.3 million at period-end borrowings.
Material changes and notable items
- ACT was acquired for approximately $1.31 billion in consideration, plus $36.5 million of assumed debt net of cash. Its post-acquisition results contributed $191.9 million of revenue and $13.4 million of net income through September 30. ACT added the LTL segment.
- Truckload YTD adjusted operating ratio improved to 80.1% from 84.3%; Logistics improved to 90.1% from 96.2%; Intermodal improved to 94.4% from 102.5%. ACT’s LTL segment reported an 87.5% adjusted operating ratio for the post-acquisition period.
- YTD other income included a $12.6 million fair-value gain on an Embark convertible note and gains on other equity investments. Net gains on equipment disposals were $47.7 million, versus $6.5 million in 2020, amid a stronger used-equipment market.
- Debt was refinanced in September through a new $2.3 billion unsecured credit agreement, replacing prior facilities and the July acquisition term loan. Period-end borrowings included $300 million on the new revolver and $1.2 billion face value of term loans.
- YTD capital expenditures net of disposal proceeds were $196.1 million. The company reduced its full-year 2021 net cash capital expenditure outlook to $450–$470 million from $500–$550 million, citing receipt of fewer revenue vehicles than ordered.
- Management prospectively changed the estimated useful life for certain trailers; the change increased Q3 and YTD depreciation by approximately $0.6 million and was immaterial to EPS.
Outlook, commentary and risks
Management cited strong freight demand and expected unprecedented Q4 2021 demand, with similar strength in truckload services through 2022. Limited equipment production due to parts constraints and labor shortages was expected to restrict capacity and support favorable pricing, including likely double-digit contract rate increases. These are management expectations, not formal earnings guidance. Management also expects driver wage inflation and higher costs for equipment, maintenance and labor. It anticipates depreciation expense to rise and rental expense to decline as more equipment is purchased rather than leased.
Key risks include difficulty recruiting and retaining drivers; inflation and higher fuel, equipment and maintenance costs; tractor and trailer supply constraints; rail congestion and allocations; insurance-market tightening and potentially higher claims costs; and uncertain COVID-19 effects. The filing also identified a proposed federal vaccination-or-testing requirement as a potential operational and cost risk, while noting its scope for professional drivers was unclear. Legal matters carried an aggregate accrual of approximately $18.4 million; management did not expect pending matters, after accruals, to materially affect the company overall, but individual-period outcomes could be material. A favorable appellate ruling led to reversal of the CRST-related accrual.
Important facts for investors to verify
- How ACT integration, synergies and LTL performance progress; reported comparisons include ACT only after July 5, 2021.
- Whether freight demand, pricing and capacity conditions support management’s expectations, and whether driver and equipment shortages constrain growth.
- Whether the $450–$470 million full-year net capital expenditure outlook and available liquidity remain adequate as equipment commitments are fulfilled.
- How variable-rate debt, insurance and claims costs, and inflation affect margins and cash flow.
- The sustainability of earnings contributions from used-equipment sale gains and fair-value investment gains, which are not necessarily recurring.
- Developments in legal contingencies, the Embark investment, and the integration of ACT into internal controls; ACT was excluded from the period-end internal-control assessment while integration work continued.