Knight-Swift Transportation Holdings Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Financial statements are unaudited. Unless otherwise noted, amounts are in U.S. dollars.
Business context and reporting period
Knight-Swift provides truckload, logistics, and intermodal transportation services. Its reportable segments are Trucking, Logistics, and Intermodal. The quarter’s results reflect continued strong freight demand and constrained industry capacity, alongside difficulty recruiting and retaining drivers.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Total revenue | $1.316 billion | $1.061 billion | $2.539 billion | $2.185 billion |
| Revenue excluding trucking fuel surcharge | $1.213 billion | $997.6 million | $2.346 billion | $2.025 billion |
| Operating income | $191.1 million | $102.2 million | $353.4 million | $204.3 million |
| Operating ratio | 85.5% | 90.4% | 86.1% | 90.7% |
| Net income attributable to Knight-Swift | $152.8 million | $80.2 million | $282.6 million | $145.6 million |
| Diluted EPS | $0.92 | $0.47 | $1.69 | $0.85 |
| Operating cash flow | — | $459.5 million | $383.4 million |
Management’s non-GAAP adjusted operating ratio was 83.1% for Q2 and 83.8% for the first half, versus 87.6% and 88.1%, respectively, in 2020. Adjusted diluted EPS was $0.98 for Q2 and $1.81 for the first half. These measures exclude specified items and are not GAAP substitutes.
At June 30, cash and cash equivalents were $179.0 million, plus $51.6 million of restricted cash. Unrestricted liquidity was $943.2 million, including $708.4 million available under the revolver and $55.7 million under the receivables facility. Working capital was $369.3 million. Material debt and finance lease obligations totaled $870.7 million: $299.2 million term loan, $278.4 million receivables securitization, $238.1 million finance leases, and $55.0 million revolver borrowings. Stockholders’ equity was $6.1 billion.
Material changes versus the prior comparable period
- Q2 total revenue increased about 24% year over year; first-half revenue increased about 16%. Revenue excluding fuel surcharge grew 21.6% in Q2 and 15.9% in the first half.
- Net income attributable to Knight-Swift rose $72.6 million in Q2 and $137.0 million in the first half. Higher Trucking and Logistics earnings, improved Intermodal results, and gains on investments were key contributors.
- Trucking’s Q2 revenue excluding fuel surcharge and intersegment transactions increased 8.2%; average revenue per tractor rose 10.3%. Its adjusted operating ratio improved to 80.9% from 85.5%.
- Logistics Q2 revenue excluding intersegment transactions rose 141.8%, with higher brokerage volumes and revenue per load; results include UTXL from June 1. Its adjusted operating ratio improved to 91.1% from 95.5%.
- Intermodal Q2 revenue excluding intersegment transactions grew 39.4%; load count increased 19.9% and revenue per load 16.3%. The adjusted operating ratio improved to 95.0% from 105.3%.
- Operating cash flow increased $76.1 million year over year. The company spent $247.5 million on property and equipment and received $127.1 million from equipment sales, for net capital expenditures of about $120.5 million.
Outlook, management commentary, risks, and unusual items
- Outlook: Management expected strong over-the-road truckload demand to continue through 2022, with limited capacity expansion and a favorable rate environment. Driver recruitment and retention challenges and wage inflation were expected to persist. Management anticipated continued Intermodal improvement.
- Capital spending: Full-year 2021 net capital expenditures were expected to be $500 million to $550 million, including anticipated ACT spending and excluding potential acquisitions. The company expected to buy rather than primarily lease revenue equipment, raising depreciation while reducing rental expense.
- ACT acquisition after quarter-end: On July 5, Knight-Swift acquired 100% of AAA Cooper Transportation for $1.31 billion of consideration, including $1.30 billion cash and $10 million in shares, and assumed $36.7 million of debt, net of cash. Results were expected to be included from Q3 2021. A $1.2 billion term loan was funded July 6; it matures in October 2022 and has no scheduled principal payments before maturity. Management cited integration, LTL operating experience, labor needs, workers’ compensation, and possible unionization as risks.
- Unusual items: Other income included a $12.6 million unrealized gain on an Embark convertible note, following Embark’s announced proposed SPAC transaction; the investment’s recorded fair value was $37.6 million. Gains on used-equipment sales were $25.6 million in the first half, reflecting a stronger used-equipment market. Investment gains and equipment-sale gains contributed to reported earnings and may not recur at similar levels.
- Costs and market risks: Driver scarcity, wage inflation, higher fuel prices, insurance market tightening, claims development, and rising purchased-transportation costs could pressure margins. Fuel surcharges recover much, but not all, fuel costs and may lag fuel-price changes. A 1 percentage-point increase in interest rates was estimated to add $6.3 million to annual interest expense based on June 30 borrowings.
- Liquidity and contingencies: Management reported no anticipated material liquidity constraints or debt-covenant issues. Legal proceedings had approximately $23.9 million accrued; management did not expect pending matters, after accruals, to materially harm overall financial position, results, or cash flows, but outcomes in a particular period could be material. COVID-19 effects and related estimation uncertainty remained difficult to predict.
- Other: The company declared dividends of $0.10 per share for Q2, versus $0.08 in Q2 2020. First-half share repurchases totaled $53.7 million. No formal full-year earnings or EPS guidance is stated in the provided filing text.
Important facts for investors to verify
- ACT’s integration, purchase-price allocation, realized operating performance, and the effect of the $1.2 billion term loan on leverage, interest expense, and liquidity.
- Whether strong freight rates and demand can offset driver shortages, wage inflation, insurance costs, and purchased-transportation expense.
- How much reported earnings depend on equipment-sale and investment gains, including Embark’s valuation and transaction outcome.
- Execution of the $500 million to $550 million 2021 net capital expenditure plan and its effect on cash flow and fleet ownership costs.
- Developments in legal proceedings, self-insurance claims, and ACT-related labor and unionization risks.