Knight-Swift Transportation Holdings Inc. — Q1 2018 Form 10-Q
Reporting period: Quarter ended March 31, 2018. The company provides truckload, dedicated, refrigerated, intermodal, brokerage, and logistics services. Results include Swift following the September 2017 merger and Abilene from its March 16, 2018 acquisition. Accordingly, reported comparisons with Q1 2017 are not like-for-like.
Financial performance and liquidity
| Metric | Q1 2018 | Prior period / context |
|---|---|---|
| Total revenue | $1,271.1 million | $271.2 million reported in Q1 2017; comparison is distorted by the merger. Pro forma combined revenue was $1,290.8 million versus $1,256.6 million. |
| Net income attributable to Knight-Swift | $70.4 million | $14.9 million reported in Q1 2017; pro forma combined net income was $70.9 million versus $17.6 million. |
| Diluted EPS | $0.39 GAAP; $0.44 adjusted | $0.18 GAAP and adjusted in Q1 2017; pro forma combined diluted EPS was $0.40 versus $0.10. |
| Operating ratio | 92.6% GAAP; 90.7% adjusted | 91.7% GAAP; 90.8% adjusted in Q1 2017. Adjusted measures exclude specified items and are non-GAAP. |
| Operating cash flow | $208.9 million | $65.5 million in Q1 2017. |
| Cash and liquidity at quarter-end | $79.2 million unrestricted cash; $710.9 million unrestricted liquidity | Liquidity includes $629.8 million available under the revolver and $1.9 million under the receivables facility. |
| Debt and lease obligations | $866.9 million total material obligations | Includes $364.4 million term loan, $280.0 million receivables securitization, $167.0 million capital leases, and $55.0 million revolver borrowings; total was $970.9 million at year-end 2017. |
Working capital surplus was $277.1 million, down from $313.7 million at December 31, 2017. Investing cash outflow was $110.7 million, including $101.6 million net cash paid for Abilene. Financing cash outflow was $113.5 million, including revolver and securitization repayments and $11.0 million in dividends. Property and equipment purchases were $56.5 million and sale proceeds were $49.4 million.
The effective tax rate was 21.2%, compared with 35.3% in Q1 2017, primarily reflecting the Tax Cuts and Jobs Act. The company reported $93.7 million of operating income and $89.7 million of pretax income.
Material changes and unusual items
- The September 2017 Knight-Swift merger is the principal reason reported revenue, expenses, and earnings are much higher than Q1 2017. Pro forma figures offer additional context but are illustrative, not actual historical combined results.
- Abilene was acquired for approximately $103.2 million in total consideration, including cash paid to sellers and debt payoffs. Its results contributed 0.3% of consolidated revenue and 0.1% of net income for the quarter. The purchase-price allocation remains preliminary.
- Q1 2018 adjusted net income excludes $10.3 million of noncash amortization of merger-related intangible assets. GAAP net income also reflects the broader post-merger cost and asset base.
- Adoption of ASC 606 added a $5.3 million cumulative-effect adjustment to opening retained earnings. The estimated impact on Q1 net income was $0.2 million and management said adoption did not materially affect EPS or operating cash flow.
- Gains on equipment sales were $7.1 million, versus $0.8 million in Q1 2017. Revenue equipment held for sale was $30.4 million at quarter-end.
Outlook, risks, and contingencies
- Management described freight demand and capacity conditions as favorable and said the strong freight market continued into 2018. It expected contract rate increases during 2018, while noting that driver wages, purchased transportation, and other costs were inflationary. No specific earnings or revenue guidance was provided.
- Driver recruitment and retention remain significant constraints, potentially limiting capacity and utilization and increasing wages and recruiting costs. Management also cited the ELD mandate as affecting industry capacity.
- Fuel surcharge programs recover a majority, but not all, of fuel cost increases and may lag fuel-price changes. Average diesel prices cited rose to $3.02 per gallon from $2.57. A one-percentage-point rise in interest rates would increase annual interest expense by an estimated $7.0 million.
- The company had $669.7 million of 2018 revenue-equipment purchase commitments, primarily tractors, plus $9.1 million of facility and non-revenue equipment commitments for the rest of 2018. Management said expected cash flows and available financing should fund expected capital expenditures for at least the next 12 months.
- Accrued legal liabilities for outstanding proceedings totaled approximately $120.4 million. Management did not expect pending matters, after accruals, to have a material adverse effect overall, but acknowledged outcomes could be material in a particular period.
- Management cited possible tariff and trade-policy changes as risks that could raise equipment or fuel costs. First-quarter seasonality typically weighs on freight volumes and profitability. The company reported disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Use the pro forma combined results, alongside reported GAAP results, when assessing year-over-year performance given the merger-related comparability limitation.
- Track whether favorable freight pricing and demand offset driver shortages, wage inflation, higher purchased transportation costs, and fuel-price volatility.
- Review the final Abilene purchase-price allocation, integration costs, and whether anticipated acquisition and merger synergies are realized.
- Assess equipment spending commitments, lease obligations, and the January 2019 maturity of the receivables securitization against cash generation and borrowing availability.
- Monitor legal-case developments and changes in self-insurance and claims accruals, as well as updates to tax estimates and the impact of trade measures.