Knight-Swift Transportation Holdings Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Knight-Swift is a North American transportation provider with Trucking, Logistics, and Intermodal reportable segments. Results reflect the onset of the COVID-19 pandemic and typical first-quarter freight seasonality.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $1,124.8 million | $1,204.5 million | Down 6.6% |
| Revenue excluding Trucking fuel surcharge | $1,027.1 million | $1,097.0 million | Down 6.4% |
| Operating income | $102.1 million | $116.3 million | Down 12.2% |
| Operating ratio | 90.9% | 90.3% | Worsened 60 bps |
| Adjusted operating ratio (non-GAAP) | 88.6% | 88.4% | Worsened 20 bps |
| Net income attributable to Knight-Swift | $65.4 million | $87.9 million | Down 25.6% |
| Diluted EPS | $0.38 | $0.51 | Down $0.13 |
| Adjusted EPS (non-GAAP) | $0.44 | $0.55 | Down $0.11 |
| Operating cash flow | $155.3 million | $243.5 million | Down $88.1 million |
Operating expenses totaled $1,022.7 million. The effective tax rate rose to 27.2% from 24.0%. The $11.8 million of net other expense compared with $0.2 million of net expense in Q1 2019, primarily reflecting unrealized losses on equity investments, including TRP investments, and unfavorable foreign-currency movements.
Segments and material changes
- Trucking: Revenue was $919.1 million, down 5.6%; operating income was $107.3 million, down 6.8%. Adjusted operating ratio improved to 86.5% from 86.7%, despite an $8.8 million year-over-year reduction in equipment-sale gains. Operating expenses per total mile fell 3.2%.
- Logistics: Revenue was $79.2 million, down 11.0%; operating income fell 48.9% to $3.7 million. Brokerage gross margin declined to 14.7% from 17.8%, amid lower load volume and revenue per load.
- Intermodal: Revenue declined 18.6% to $94.7 million, and the segment recorded a $2.7 million operating loss versus $2.4 million of operating income. Load count fell 13.2% and revenue per load fell 5.8%.
- Lower fuel, maintenance, and purchased-transportation costs partly offset weaker revenue. Insurance and claims expense increased 8.3%; depreciation and amortization of property and equipment increased 9.2%, while rental expense fell 28.6% as the company shifted toward owned equipment.
Cash, debt, and liquidity
At March 31, 2020, cash and cash equivalents were $119.1 million, total assets were $8.29 billion, and stockholders’ equity was $5.69 billion. Working capital was negative $140.8 million, primarily because the $364.9 million Term Loan was classified as current and matures October 2, 2020.
Management reported $621.7 million of unrestricted liquidity, comprising cash and available capacity under the Revolver and accounts-receivable securitization facility. Revolver borrowings were $294.0 million, with $474.9 million available; securitization borrowings were $180.0 million, with $27.7 million available. Material debt and finance lease obligations totaled $906.7 million, including the Term Loan, securitization borrowings, Revolver, and finance leases. The company said it intends to refinance the Term Loan before maturity and does not foresee material liquidity constraints or covenant issues.
Operating cash flow was $155.3 million; investing cash outflow was $125.6 million and financing cash outflow was $71.9 million. The operating cash-flow decline was primarily attributed to a $93.4 million cash settlement of previously accrued pre-2017 merger legal matters. The company repurchased $34.6 million of shares and paid $14.0 million in dividends. Net capital expenditures were $75.7 million in Q1.
Outlook, risks, and unusual items
- Management said freight demand and the economic environment remained uncertain and expected that uncertainty to continue through a large portion of 2020. It cited COVID-19 effects, capacity rationalization, weaker used-equipment values, and driver-sourcing challenges.
- Full-year 2020 net capital expenditures were forecast at $515–$540 million. Management expected to buy rather than primarily lease revenue equipment, raising depreciation expense while reducing rental expense. It said purchase plans could be adjusted if conditions warranted.
- COVID-19 generated $2.3 million of incremental Q1 costs; management expected costs of a similar nature in Q2. The filing states the pandemic’s future effects on results, financial position, and liquidity were difficult to predict.
- Management said falling fuel prices could reduce fuel expense but might also reduce fuel-surcharge revenue. It also warned of potential insurance-premium and retention changes amid tightening insurance markets.
- The company acquired a warehousing business on January 1 for $66.9 million of stated consideration, including $48.2 million cash at closing and contingent payments of up to $24.3 million. The purchase-price allocation remained preliminary; recognized goodwill was $4.4 million.
- Legal proceedings had an aggregate accrual of approximately $27.7 million at quarter-end. Management did not expect pending matters, after accruals, to have a material adverse effect overall, but noted outcomes could be material in a particular period.
- Other notable items included $0.9 million of impairment charges and a $20.0 million commitment to invest in TRP Capital Partners V, LP.
Important facts for investors to verify
- Whether the October 2020 Term Loan was refinanced on acceptable terms and how refinancing affects interest expense and liquidity.
- COVID-19’s subsequent effect on freight volumes, segment margins, customer credit, operating costs, and Q2 and full-year cash generation.
- Progress against the $515–$540 million net capital-expenditure forecast and the resulting owned-versus-leased fleet mix.
- Changes in available Revolver and receivables-facility capacity, borrowing-base eligibility, and letters of credit.
- Developments in material litigation and self-insurance claims, including any additional cash settlements or accruals.
- Final purchase accounting and performance-linked contingent payments for the warehousing acquisition.
- Interpretation of non-GAAP adjusted results alongside GAAP results; the filing notes these measures are supplemental and not substitutes for GAAP measures.