Knight-Swift Transportation Holdings Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. The filing is unaudited. Knight-Swift operates Truckload, LTL, Logistics, Intermodal, and non-reportable businesses. Comparisons are affected by acquisitions completed in 2021, whose results are included only from their respective acquisition dates.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $1.897 billion | $1.642 billion | $5.685 billion | $4.181 billion |
| Revenue excluding Truckload and LTL fuel surcharge | $1.650 billion | $1.511 billion | $4.992 billion | $3.857 billion |
| Operating income | $265.4 million | $270.1 million | $889.3 million | $623.5 million |
| Net income attributable to Knight-Swift | $194.8 million | $206.2 million | $622.6 million | $488.8 million |
| Diluted EPS | $1.21 | $1.23 | $3.80 | $2.93 |
| GAAP operating ratio | 86.0% | 83.6% | 84.4% | 85.1% |
| Adjusted operating ratio (non-GAAP) | 83.1% | 81.3% | 81.2% | 82.8% |
Q3 total revenue grew 15.5%, but operating income declined 1.7% and attributable net income fell 5.5%. Revenue excluding fuel surcharge increased about 9.2%. For the nine-month period, revenue excluding fuel surcharge rose 29.5%, operating income increased 42.6%, and attributable net income increased 27.4%. Adjusted measures are non-GAAP and should be considered alongside GAAP results.
- Segment performance: Q3 Truckload operating income declined to $175.8 million from $206.5 million; its operating ratio worsened to 84.9% from 80.2%. LTL operating income rose to $30.9 million from $17.5 million, with its ratio improving to 88.9% from 90.9%. Logistics operating income was broadly flat at $27.5 million; revenue per load declined 21.0%, while gross margin improved. Intermodal operating income increased to $12.8 million from $9.5 million, despite a 9.0% decline in load count.
- Cash flow and investment: Nine-month operating cash flow was $1.099 billion, versus $817.5 million. Capital expenditures were $496.2 million; reported Free Cash Flow, a non-GAAP measure, was $742.5 million after including $139.5 million of equipment-sale proceeds. The company repurchased $299.9 million of shares and paid $59.0 million in dividends.
- Liquidity and debt: September 30 unrestricted cash was $194.1 million and reported unrestricted liquidity was $1.262 billion, including available credit facilities. Working capital was $562.0 million. The filing reports approximately $1.9 billion in material debt, receivables-securitization, and finance-lease obligations. Revolver borrowings were $146.0 million; term loans outstanding had a $1.0 billion face value. The company reported covenant compliance.
- Margins and costs: Q3 fuel expense increased 57.9% year over year, and insurance and claims expense increased 57.9%, in part from higher reserves associated with the third-party carrier insurance program. Management cited inflation in driver pay, maintenance, equipment, labor, and insurance.
Material changes, outlook, and risks
- Q3 earnings were pressured principally by a $30.7 million decline in Truckload operating income, higher interest expense, and higher taxes; improvements in LTL, Intermodal, Logistics, and non-reportable segments partly offset those items. Interest expense more than doubled to $14.7 million, which management attributed to higher rates and debt balances.
- Nine-month other expense included a $51.0 million loss on equity securities, primarily unrealized mark-to-market losses on the Embark investment. Management estimated the Embark decline reduced year-to-date diluted EPS and Adjusted EPS by $0.24.
- For Q4 2022, management anticipated year-over-year negative rate comparisons as spot-market opportunities moderated, stable Truckload tractor count with typical sequentially lower miles per tractor, year-over-year LTL revenue and margin growth but typical sequential declines, and Logistics operating ratio in the mid-to-high 80s. It expected Intermodal margins in the high single digits and year-over-year volume improvement.
- Full-year 2022 outlook included net cash capital expenditures of $525–$575 million, excluding potential acquisitions; an approximately 25% tax rate; and $10–$15 million of equipment gains in Q4. Management expected sequentially higher interest expense and continued cost inflation. It stated it did not foresee material liquidity constraints and expected funding capacity to cover planned capital expenditures for at least the next 12 months.
- Risks include weaker freight demand and a muted peak season, reduced spot opportunities, inflation, driver availability and compensation, fuel-price and surcharge timing, insurance claims and coverage costs, rail-network disruption, and variable interest rates. A one-percentage-point rate increase was estimated to raise annual interest expense by $14.7 million at September 30 borrowings.
- Legal proceedings included an aggregate accrual of approximately $13.2 million. Management did not expect pending matters, after accruals, to materially affect the company overall, but noted actual outcomes could be material in a particular period. Revenue-equipment purchase commitments totaled $199.2 million for the remainder of 2022 and $297.4 million for 2023.
- After quarter-end, the company amended its receivables facility, extending maturity to October 2025, increasing capacity to $475 million, and replacing LIBOR with SOFR. It also entered an October 3 asset purchase agreement for $30 million of equipment and certain intangibles.
Important facts for investors to verify
- Whether Truckload’s Q3 margin deterioration and lower miles per tractor persist, and whether management’s Q4 rate and volume expectations materialize.
- How much reported earnings and cash generation depend on non-GAAP adjustments, equipment-sale gains, and fuel surcharge revenue.
- The magnitude and future volatility of insurance reserves, claims costs, and self-insured retention exposure.
- The value and earnings impact of the Embark investment and other equity securities.
- Capital spending, share repurchases, and debt and lease obligations relative to operating cash flow and liquidity.
- Integration progress and comparability effects from ACT and MME, including anticipated LTL network synergies.