Knight-Swift Transportation Holdings Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. Although the request refers to 2018 Q4, this is an annual filing; selected fourth-quarter results are included below. Comparisons with 2017 are substantially affected by the September 2017 Knight-Swift merger, which means Swift is included for a full year in 2018 but only after the merger date in 2017. Abilene is included from March 16, 2018.
Business context and results
Knight-Swift is a North American truckload, intermodal, brokerage and logistics provider. In 2018, it covered approximately 1.9 billion loaded miles and operated an average of 19,156 trucking-segment tractors, plus 640 intermodal tractors.
| Metric | FY 2018 | FY 2017 | Context |
|---|---|---|---|
| Total revenue | $5.344 billion | $2.425 billion | Increase primarily reflects a full year of Swift results and Abilene; not a like-for-like comparison. |
| Revenue excluding fuel surcharge | $4.725 billion | $2.180 billion | Company-presented measure. |
| Operating income | $569.0 million | $200.6 million | 2018 benefited from full-year Swift results and stronger freight conditions. |
| Net income attributable to Knight-Swift | $419.3 million | $484.3 million | 2017 included a $364.2 million tax benefit from the Tax Cuts and Jobs Act. |
| Diluted EPS | $2.36 | $4.34 | Likewise affected by the unusually large 2017 tax benefit. |
| Operating ratio | 89.4% | 91.7% | Lower is better; 2017 merger-related and reporting-period effects limit comparison. |
| Adjusted operating ratio | 86.9% | 88.3% | Non-GAAP; excludes specified items, including amortization and certain legal and unusual costs. |
Fourth quarter 2018: Revenue was $1.395 billion, net income attributable to Knight-Swift was $151.7 million, and diluted EPS was $0.86. Fourth-quarter 2017 revenue was $1.359 billion, but that quarter and its earnings were affected by the merger-period reporting and a substantial tax benefit.
Cash flow, balance sheet and capital allocation
- Operating cash flow was $882.0 million, compared with $322.6 million in 2017. Investing activities used $647.3 million; financing activities used $255.4 million.
- Capital expenditures were $756.0 million gross, offset by $225.8 million of proceeds from equipment sales, for approximately $530.2 million net capital expenditures. The company also paid $103.3 million for Abilene.
- At year-end, cash and cash equivalents were $82.5 million; working capital was $292.7 million. Reported unrestricted liquidity was $665.0 million, including $568.4 million available under the revolver and $14.1 million under the receivables facility.
- Material debt and capital lease obligations totaled approximately $929.1 million at carrying value, including $195.0 million drawn on the $800 million revolver, $364.6 million on the term loan, $239.6 million under receivables securitization, and $129.5 million of capital leases. The company reported compliance with debt covenants.
- 2018 capital returns included $179.3 million of share repurchases and $42.8 million of dividends. The company repurchased 1.17 million shares from an entity controlled by former director Jerry Moyes for $29.3 million, at $24.98 per share.
Material changes and unusual items
- Management attributed the strong 2018 freight environment to robust demand and constrained capacity. Knight Trucking’s revenue per tractor rose 19.0%; its operating ratio improved to 81.7%. Brokerage revenue growth and higher revenue per load also improved Knight Logistics’ results.
- Swift Refrigerated’s operating ratio worsened by 120 basis points to 95.8%; management cited varied results and described new leadership and additional cost controls. The segment’s adjusted operating ratio was 95.3%.
- 2018 included $42.6 million of intangible amortization, $2.8 million of impairments (including the company airplane and replaced software), and $2.0 million of severance expense. Adjusted results exclude some of these items. In 2017, merger costs and a $16.7 million ERP-system impairment were recorded.
- Management said the 2017 tax-law benefit drove the unusual prior-year net income result. The 2018 effective tax rate was 23.8%, versus a reported negative 150.6% in 2017.
- Walmart represented 14.6% of 2018 revenue. The top five customers accounted for 27.2%; the top 25 accounted for 50.1%.
Outlook, risks and contingencies
- Management expected contract-rate improvement to continue in 2019, but at a slower pace than in 2018, and reported typical first-quarter seasonality. It anticipated slower U.S. GDP growth than in 2018.
- Expected 2019 net cash capital expenditures to maintain the fleet were $550–$575 million. Management said the range could be adjusted for market conditions and business opportunities.
- Key operating risks include driver recruitment and retention, wage inflation, freight-market and capacity cycles, fuel-price changes and incomplete or delayed fuel-surcharge recovery, used-equipment resale values, and self-insured accident and claims exposure.
- Legal and regulatory risks include wage-and-hour litigation and independent-contractor classification challenges. The company reported approximately $90.8 million accrued for outstanding legal proceedings; management did not expect pending matters to materially harm the company overall, but noted that outcomes could materially affect a particular period. A tentative settlement in the Ninth Circuit independent-contractor matter was reached in February 2019, subject to court approval.
- Goodwill was $2.9 billion and intangible assets were $1.42 billion at year-end, making impairment assumptions relevant. The company also expected the new lease standard to add approximately $270–$300 million of right-of-use assets and corresponding liabilities to its balance sheet from January 1, 2019.
- Management expected to reorganize segment reporting into Trucking, Logistics and Intermodal segments beginning in Q1 2019 and planned to recast historical results.
Important facts for investors to verify
- Use merger-adjusted or pro forma comparisons where appropriate: reported 2017 results are not directly comparable with 2018. The filing’s unaudited pro forma figures show 2018 revenue of $5.367 billion and diluted EPS of $2.36, versus $5.231 billion and $3.00 in 2017; these are not forecasts and exclude potential synergies and integration costs.
- Review the reconciliation and definitions for adjusted net income, adjusted EPS and adjusted operating ratio; these are non-GAAP measures.
- Track 2019 rate trends, driver costs and availability, Swift Refrigerated performance, and planned capital spending against management’s outlook.
- Assess debt maturities, variable-rate exposure, receivables-facility availability, equipment commitments, and the effects of lease-accounting adoption.
- Monitor customer concentration, legal accrual adequacy and settlement approvals, self-insurance claims development, and the value of goodwill and acquired intangible assets.