Knight-Swift Transportation Holdings Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter ended June 30, 2023; comparisons are with the quarter and first half of 2022. Knight-Swift provides truckload, less-than-truckload (LTL), logistics, intermodal, and related services.
Financial performance
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Total revenue | $1.553 billion | $1.961 billion | $3.190 billion | $3.788 billion |
| Operating income | $94.0 million | $325.8 million | $238.8 million | $623.9 million |
| Net income attributable to Knight-Swift | $63.3 million | $219.5 million | $167.6 million | $427.8 million |
| Diluted EPS | $0.39 | $1.35 | $1.04 | $2.60 |
| GAAP operating ratio | 93.9% | 83.4% | 92.5% | 83.5% |
| Operating cash flow | Not stated separately | Not stated separately | $722.2 million | $720.0 million |
Revenue excluding truckload and LTL fuel surcharge was $1.390 billion in Q2 and $2.841 billion in the first half, down 18.0% and 15.0%, respectively. Adjusted EPS, a non-GAAP measure, was $0.49 for Q2 and $1.22 year to date, versus $1.41 and $2.76. Adjusted operating ratio was 91.8% for Q2 and 90.2% for the first half, versus 79.9% and 80.3%.
Q2 operating margin was approximately 6.1%, compared with 16.6% a year earlier; first-half operating margin was approximately 7.5%, versus 16.5%. The filing reports an effective tax rate of 25.9% for Q2 and 24.7% year to date.
Segments and changes versus prior periods
- Truckload: Q2 revenue fell 19.8% and operating income fell 67.1%; first-half revenue fell 13.4% and operating income fell 55.3%. Lower demand, pricing pressure, and reduced miles and revenue per tractor weighed on results.
- LTL: Q2 revenue declined 5.9%, while operating income declined 30.9%; shipments per day fell 3.9%. Ex-fuel-surcharge revenue increased, but softer volumes and higher wages pressured margins.
- Logistics: Revenue declined 51.8% in Q2 and 51.3% year to date; operating income declined 78.1% and 73.1%. Load count and revenue per load were sharply lower amid weak brokerage demand.
- Intermodal: Q2 operating loss was $6.6 million, versus $14.2 million operating income a year earlier. First-half operating loss was $1.5 million. Higher load counts did not offset lower revenue per load.
- Non-reportable segments: First-half operating loss was $22.7 million, including a $37.8 million loss in the Iron Insurance business, attributed to claim frequency, unfavorable claim development, and premium collection issues.
Cash flow, debt, and liquidity
First-half operating cash flow was $722.2 million. Capital expenditures were $517.9 million, and management-defined free cash flow was $303.1 million; this non-GAAP measure includes proceeds from equipment sales. Cash, restricted cash, and equivalents totaled $928.2 million, including $444.7 million held in acquisition escrow and other restricted amounts. Unrestricted liquidity was $1.150 billion, including $229.0 million of cash and $878.8 million available under the revolver.
At June 30, long-term debt including the revolver was $1.488 billion; accounts-receivable securitization borrowings were $338.6 million and finance lease obligations were approximately $393.6 million. Total material debt and lease obligations were approximately $2.2 billion. The company reported compliance with debt covenants. First-half interest expense rose to $47.4 million from $16.0 million.
Outlook, risks, and unusual items
- The U.S. Xpress acquisition closed July 1, 2023, after the reporting period; its results are expected to be consolidated beginning in Q3. Purchase accounting remained preliminary in this filing. Management described integration planning as underway.
- Management anticipated continued freight softness through Q3, with modest seasonal improvement in Q4. Its 2023 outlook included full-year net cash capital expenditures of $700–$750 million, an expected tax rate of 25%–26%, and approximately $20 million more interest expense in the second half than in the first half. Management also expected quarterly equipment gains of $10–$15 million.
- Management expected insurance losses to moderate and non-reportable segments to contribute positively in the second half, while noting insurance market tightening, claims volatility, premium collection risk, labor costs, fuel-price exposure, and ongoing pressure on freight rates and volumes.
- As of June 30, the company had commitments for $533.2 million of revenue equipment purchases in the remainder of 2023, plus $47.4 million of facility and non-revenue equipment commitments. The 2023 net cash capex outlook was raised to include expected U.S. Xpress expenditures.
- Legal proceedings included an aggregate accrual of approximately $11 million. A previously accrued California employment settlement was paid July 10, 2023. Management cautioned that legal outcomes may materially affect results in a particular period.
- Other notable items: insurance and claims expense increased 37.5% in the first half; the prior-year comparison included substantial unrealized losses on the Embark investment; and Q2 2023 included $5.3 million of U.S. Xpress transaction fees.
Investor verification points
- Review post-close U.S. Xpress results, integration costs, purchase-price allocation, and the resulting debt and interest burden.
- Track truckload pricing, miles per tractor, logistics volumes and margins, and intermodal revenue per load against management’s recovery expectations.
- Monitor Iron Insurance claims development, premium collections, and the effect of insurance retention and coverage changes.
- Reconcile projected capital expenditures and equipment commitments with cash generation, debt levels, and reported free cash flow.
- Assess management’s non-GAAP adjustments alongside GAAP results; adjusted measures exclude selected items and are not substitutes for GAAP measures.