Knight-Swift Transportation Holdings Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter ended September 30, 2019; comparisons are with the quarter and year-to-date periods ended September 30, 2018. Dollar amounts below are in millions unless otherwise stated. The company reorganized its reportable segments in 2019 and recast prior-period segment data. 2018 results also exclude Abilene operations before its March 16, 2018 acquisition, affecting comparability.
Financial performance
| Metric | Q3 2019 | Q3 2018 | YTD 2019 | YTD 2018 |
|---|---|---|---|---|
| Total revenue | $1,200.5 | $1,346.6 | $3,647.1 | $3,949.4 |
| Operating income | $103.0 | $144.3 | $327.8 | $362.3 |
| Net income attributable to Knight-Swift | $74.6 | $105.9 | $241.8 | $267.6 |
| Diluted EPS | $0.44 | $0.60 | $1.40 | $1.50 |
| GAAP operating ratio | 91.4% | 89.3% | 91.0% | 90.8% |
| Adjusted operating ratio (non-GAAP) | 89.6% | 87.1% | 88.6% | 88.8% |
Q3 revenue fell 10.8% and operating income fell 28.6% year over year; YTD revenue declined 7.7% and operating income 9.5%. Adjusted net income attributable to Knight-Swift was $82.8 million and adjusted EPS was $0.48 in Q3, versus $115.1 million and $0.65 a year earlier. YTD adjusted net income was $279.6 million and adjusted EPS $1.62, versus $293.3 million and $1.64. These are company-defined non-GAAP measures, not substitutes for GAAP results.
Segment results
- Trucking: Q3 revenue was $986.8 million, down 7.9%; operating income was $109.4 million, down 22.2%. Revenue per loaded mile, excluding fuel surcharge and intersegment transactions, fell 2.7%, and miles per tractor fell 4.1%. YTD operating income declined 4.7%.
- Logistics: Q3 revenue declined 24.0% to $86.2 million and operating income fell 63.6% to $3.7 million. Brokerage loads fell 17.4%, revenue per load fell 9.2%, and brokerage gross margin declined to 14.0% from 17.1%.
- Intermodal: Q3 revenue declined 16.4% to $108.9 million, and the segment posted an operating loss of $2.7 million versus income of $9.7 million. Loads fell 10.3% and revenue per load fell 6.8%. YTD operating income was $3.9 million, down from $18.1 million.
Cash flow, balance sheet and liquidity
- YTD operating cash flow was $612.4 million, up from $580.6 million. Investing activities used $468.4 million; financing activities used $139.2 million. Net capital expenditures after equipment-sale proceeds were approximately $457.9 million.
- At September 30, cash and cash equivalents were $94.0 million, with $40.8 million of restricted cash. Total assets were $8.32 billion and stockholders’ equity was $5.61 billion.
- Material debt and finance-lease obligations totaled $955.3 million: $364.8 million term loan, $204.7 million receivables securitization, $95.8 million finance leases, and $290.0 million revolver borrowings. The term loan is due October 2020; the revolver is due October 2022.
- Unrestricted liquidity was reported as $573.9 million, including cash and $475.7 million available under the revolver; only $4.2 million was available under the receivables facility. Working capital was $204.2 million, down from $292.7 million at year-end 2018.
- The company repurchased $86.9 million of shares YTD and paid $31.2 million in dividends. The quarterly dividend declared was $0.06 per share. At quarter-end, $233.6 million remained under the $250 million repurchase authorization.
Changes, outlook and risks
- Management attributed weaker Q3 performance primarily to excess truckload capacity and pricing pressure, incremental costs to exit underperforming dedicated accounts, and intermodal competition. The company said Q4 seasonal demand improvement was expected, but less robust than previously anticipated; it believed capacity rationalization could support a more favorable freight environment in the second half of 2020.
- Management expected full-year 2019 net capital expenditures of $550 million to $575 million and said planned equipment purchases could be adjusted if conditions warrant. It expected depreciation to rise as the company purchased rather than leased equipment.
- Key operating pressures include driver recruitment and retention, wage and benefit inflation, freight-rate and volume competition, fuel-price movements and surcharge timing, and insurance claims. A 1 percentage-point increase in interest rates would increase annual interest expense by an estimated $8.6 million at quarter-end borrowing levels.
- YTD results included a $15.5 million accrual related to an adverse July jury verdict in the CRST lawsuit. The company was considering post-trial motions and, if necessary, an appeal. It reported approximately $102 million accrued for outstanding legal proceedings; management did not expect pending matters, after existing accruals, to materially affect overall results, though outcomes in a particular period could be material.
- ASC 842 lease adoption on January 1, 2019 added $280.5 million of operating lease right-of-use assets and corresponding lease liabilities at adoption. The reported working-capital decline was primarily attributed to the newly recognized current operating lease liability.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Track freight pricing, volumes, capacity trends, and whether management’s Q4 and second-half 2020 expectations materialize.
- Assess segment operating performance, especially Trucking margins and recovery in Logistics and Intermodal.
- Review cash generation against planned capital spending, debt maturities, and available revolver and receivables-facility capacity.
- Monitor the CRST verdict and other legal matters, including the adequacy of the reported accruals.
- Distinguish GAAP results from adjusted non-GAAP measures and account for segment recasting, Abilene comparability, and lease-accounting changes.