Knight-Swift Transportation Holdings Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Amounts below are in U.S. dollars; financial statement amounts are presented in millions unless otherwise noted.
Business context and comparability
Knight-Swift provides truckload, dedicated, refrigerated, intermodal, brokerage and logistics services. The company reported six segments and operated 19,620 revenue tractors at quarter-end. Its results include Swift only from the September 2017 merger date and Abilene only from its March 16, 2018 acquisition. Accordingly, reported comparisons with 2017—which largely reflect Knight alone—are not directly comparable. The filing also provides unaudited pro forma combined results.
Financial performance
| Metric | Q2 2018 | Six months 2018 |
|---|---|---|
| Total revenue | $1,331.7 | $2,602.8 |
| Revenue excluding fuel surcharge | $1,169.7 | $2,293.9 |
| Operating income | $124.2 | $218.0 |
| Net income attributable to Knight-Swift | $91.3 | $161.7 |
| Diluted EPS | $0.51 | $0.90 |
| GAAP operating ratio | 90.7% | 91.6% |
| Adjusted operating ratio (non-GAAP) | 88.5% | 89.6% |
| Adjusted net income (non-GAAP) | $99.6 | $178.3 |
| Adjusted diluted EPS (non-GAAP) | $0.56 | $0.99 |
For Q2, unaudited pro forma combined revenue was $1,330.5 million and net income attributable to Knight-Swift was $91.3 million, compared with pro forma Q2 2017 revenue of $1,290.5 million and net income of $50.0 million. These pro forma figures assume the merger and Abilene acquisition had occurred at the start of the comparative periods and are not actual historical results or forecasts.
Operating cash flow for the first half was $375.9 million, versus $120.9 million in the prior-year period. Property and equipment purchases were $220.4 million; proceeds from equipment sales were $99.0 million, making net cash capital spending approximately $121.4 million. Investing cash outflow was $232.6 million, including $101.7 million for Abilene, net of acquired cash. Financing cash outflow was $126.8 million. The company paid $21.7 million in dividends.
Balance sheet, debt and liquidity
- At June 30, cash and cash equivalents were $115.5 million; restricted cash was $50.7 million. Working capital was $300.1 million.
- Material debt and capital lease obligations totaled $858.7 million: $364.5 million term loan, $215.0 million receivables securitization, $158.7 million capital leases, $120.0 million revolver borrowings and $0.5 million other debt.
- Unrestricted liquidity was $770.2 million, including $643.4 million available under the $800 million revolver and $11.4 million under the receivables facility. Restricted cash and investments added approximately $74.3 million but were primarily held for claims and other restrictions.
- The company reported $5.4 billion of stockholders’ equity. Its $250 million share repurchase authorization had no purchases through June 30; after quarter-end it repurchased 2.0 million shares for $66.1 million.
Changes, outlook and risks
- Operating environment: Management described strong freight demand and constrained trucking capacity, with improving rates and merger synergies supporting first-half results. It expected contract rates to continue increasing through 2018, while driver wages, purchased transportation and other costs remained inflationary. No specific earnings or revenue guidance was provided.
- Driver and operating pressures: Recruiting and retaining qualified drivers remained a significant industry headwind. Swift reported challenges in driver availability, wages and utilization; management identified opportunities to improve Swift Refrigerated results beginning in the second half of 2018. Rising fuel prices and the lag in fuel surcharge recovery may also pressure results.
- Capital commitments: Outstanding 2018 revenue-equipment purchase commitments were $506.6 million, including $468.9 million for tractors. Management stated that expected cash flows and available financing should fund expected capital expenditures for at least the next 12 months, but future funding needs depend on operating and market conditions.
- Legal and claims contingencies: The company had an aggregate accrual of approximately $87.9 million for pending legal proceedings. Management did not expect pending matters, after existing accruals, to materially affect the company overall, but acknowledged outcomes could be material in a particular period. A driver misclassification settlement was paid in Q2.
- Receivables facility: On July 11, 2018, after quarter-end, the company amended and extended its receivables securitization facility to July 2021. Capacity changed to $325 million, with a potential $175 million accordion, versus the prior $400 million facility maturing in January 2019.
- Accounting and tax: Adoption of revenue recognition standard ASC 606 had an immaterial impact on results and no material effect on EPS or operating cash flow. The company was still evaluating provisional Tax Cuts and Jobs Act amounts. The new lease standard was expected to have a material balance-sheet impact, but the amount was not yet reasonably estimable.
- Other items: Gains on equipment disposals were $9.1 million in Q2 and $16.6 million year to date. The company reported $21.2 million of intangible amortization year to date, mainly related to the merger and acquisitions. The 2017 merger and acquisition make reported year-over-year comparisons especially sensitive to consolidation effects.
Most important facts for investors to verify
- Use pro forma combined results, segment disclosures and the merger accounting discussion when assessing growth; reported 2017 comparisons are not like-for-like.
- Track freight rates and volumes against driver availability, wage inflation, purchased transportation costs and fuel surcharge timing.
- Assess whether the $506.6 million equipment commitment, debt service and capital leases remain supportable by operating cash flow and available facilities.
- Monitor the $87.9 million legal accrual, self-insurance and claims exposure, and outcomes of pending employee and contractor matters.
- Review subsequent share repurchases, the amended receivables facility, and the eventual quantified impact of lease accounting adoption.