Knight-Swift Transportation Holdings Inc. — Q3 2020 Form 10-Q
Business context and reporting period. Unaudited results cover the quarter and nine months ended September 30, 2020, compared with the corresponding 2019 periods. Knight-Swift is a North American transportation provider with Trucking, Logistics and Intermodal reportable segments. Its operating environment remained affected by COVID-19, shifting freight demand and capacity, and driver-sourcing challenges.
Key financial results
Amounts are in millions of dollars, except per-share data and percentages. Revenue includes trucking fuel surcharge unless otherwise noted.
| Metric | Q3 2020 | Q3 2019 | YTD 2020 | YTD 2019 |
|---|---|---|---|---|
| Total revenue | $1,210.4 | $1,200.5 | $3,395.9 | $3,647.1 |
| Revenue excluding trucking fuel surcharge | $1,137.3 | $1,090.2 | $3,162.0 | $3,309.9 |
| Operating income | $165.5 | $103.0 | $369.7 | $327.8 |
| Net income attributable to Knight-Swift | $122.1 | $74.6 | $267.7 | $241.8 |
| Diluted EPS | $0.71 | $0.44 | $1.57 | $1.40 |
| GAAP operating ratio | 86.3% | 91.4% | 89.1% | 91.0% |
| Adjusted operating ratio | 83.9% | 89.6% | 86.6% | 88.6% |
Q3 revenue excluding fuel surcharge rose 4.3% year over year; operating income increased 60.7%. Adjusted net income was $134.6 million and adjusted EPS was $0.79, versus $82.8 million and $0.48 in Q3 2019. These adjusted measures are non-GAAP. For YTD, total revenue fell 6.9%, while net income attributable to Knight-Swift rose about 10.7%.
Cash flow and liquidity: YTD operating cash flow was $655.0 million, versus $612.4 million. Investing cash outflow was $335.6 million, compared with $468.4 million; financing cash outflow was $243.1 million, compared with $139.2 million. At quarter-end, unrestricted cash was $240.2 million and total unrestricted liquidity was $854.9 million, including $598.9 million available on the revolver and $15.7 million under the receivables securitization facility. Working capital was negative $263.6 million, mainly because debt was classified as current at September 30.
Debt and balance sheet: Material debt and finance lease obligations totaled $881.8 million: $365.0 million face value on the Term Loan, $201.9 million carrying value on the receivables securitization, $170.0 million on the revolver and $144.9 million in finance leases. Total assets were $8.50 billion, total liabilities $2.62 billion, and stockholders’ equity $5.88 billion. Cash and restricted cash totaled $278.5 million.
Material changes and segment performance
- Trucking: Q3 revenue excluding fuel surcharge and intersegment transactions increased 3.0%; operating income rose 54.3%, and the GAAP operating ratio improved to 82.7% from 88.9%. Higher revenue per tractor and improved margins drove results. YTD segment revenue on the same basis declined 3.9%, but operating income increased 9.6%.
- Logistics: Q3 revenue increased 14.9%, but operating income fell 32.9%; the operating ratio worsened to 97.5% from 95.7%. Brokerage gross margin fell to 11.0% from 14.0%, amid tighter capacity. YTD operating income decreased 42.3%.
- Intermodal: Q3 revenue declined 9.3%; the segment returned to modest operating income of $0.3 million from a $2.7 million loss. YTD revenue fell 19.5% and the segment recorded a $7.0 million operating loss, reflecting lower volumes and pandemic-related port weakness.
- The company acquired a warehousing business on January 1 for estimated consideration of $66.4 million, including contingent consideration. The purchase accounting remained preliminary. On October 1, after quarter-end, it invested approximately $39.6 million for a 21% interest in another company.
Outlook, management commentary and risks
- Management reported improving freight demand and constrained industry capacity, with stronger demand and earlier peak volumes expected to continue into Q4. It expected Trucking rates per mile to continue improving and Intermodal results to improve in Q4. The filing provides no specific consolidated earnings or revenue guidance.
- Management expected full-year 2020 net capital expenditures of $380–$405 million and said it did not foresee material liquidity constraints or debt-covenant issues. The company expected to rely less on operating leases for equipment, raising depreciation while lowering rental expense.
- On October 2, 2020, the Term Loan maturity was extended to October 3, 2022, with LIBOR-transition language added. Before the extension, the company paid down $65 million, leaving $300 million face value. The company intended to refinance the receivables securitization facility before its July 2021 maturity.
- COVID-19-related incremental costs were $12.3 million YTD, all incurred in the first half; management said these costs were not expected to recur once the pandemic subsided. The pandemic’s future effects on operations, estimates and liquidity remained uncertain.
- Risks include driver availability and wage inflation, volatile freight volumes and pricing, fuel-price and surcharge timing, tighter insurance markets and claims, interest-rate exposure, and legal contingencies. A 1 percentage-point increase in interest rates would increase annual interest expense by an estimated $7.4 million at quarter-end borrowings.
- Legal proceedings had an aggregate accrual of approximately $34.4 million. Management did not expect pending matters, after existing accruals, to materially affect overall financial position, results or cash flows, but noted outcomes could be material in an individual period. Q3 included a $6.2 million charge for employment-related class actions.
Important facts for investors to verify
- Whether the Q3 improvement in Trucking margins and freight demand persisted after September 30, and how much depended on pricing versus cost reductions.
- The effect of the October Term Loan amendment and repayment on subsequent debt balances, interest expense and working-capital presentation; also the refinancing plan for the receivables facility.
- Whether Logistics brokerage margins and Intermodal volumes recovered, and whether the company achieved its stated 2020 capital-expenditure range.
- Potential changes in legal accruals, insurance claims and self-insured exposure, as well as final purchase accounting and contingent payments for the warehousing acquisition.
- Non-GAAP adjusted results alongside GAAP results: Q3 adjustments included intangible amortization and legal accruals; YTD adjustments also included COVID-19 costs and impairments.