Business context and reporting period
Knight-Swift Transportation Holdings Inc. filed this unaudited Form 10-Q for the quarter ended September 30, 2018. The company provides truckload, intermodal, brokerage, and logistics services through six reportable segments. It acquired Abilene Motor Express on March 16, 2018.
Comparisons with 2017 require caution: Knight-Swift’s merger closed on September 8, 2017, so reported 2017 results include Swift for only the final 22 days of the quarter and year-to-date period. Abilene is included only from its acquisition date in 2018.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | YTD 2018 | YTD 2017 |
|---|---|---|---|---|
| Total revenue | $1.347 billion | $521.6 million | $3.949 billion | $1.066 billion |
| Revenue excluding fuel surcharge | $1.189 billion | $469.7 million | $3.483 billion | $961.7 million |
| Operating income | $144.3 million | $5.8 million | $362.3 million | $56.9 million |
| Net income attributable to Knight-Swift | $105.9 million | $3.9 million | $267.6 million | $36.7 million |
| Diluted EPS | $0.60 | $0.04 | $1.50 | $0.41 |
| GAAP operating ratio | 89.3% | 98.9% | 90.8% | 94.7% |
Management’s non-GAAP adjusted operating ratio was 86.8% for Q3 and 88.6% YTD, versus 90.6% and 89.7%, respectively. Adjusted EPS was $0.65 for Q3 and $1.64 YTD; these measures are supplemental, not substitutes for GAAP results.
YTD operating cash flow was $580.6 million, versus $136.3 million. Investing cash flow was a $467.5 million outflow, including $502.7 million of equipment purchases and $150.6 million of property and equipment sale proceeds. Financing cash flow was a $123.5 million outflow. Net capital expenditures after equipment-sale proceeds were $352.1 million.
At September 30, 2018, cash and cash equivalents were $91.3 million (plus $48.5 million restricted cash); working capital was $291.5 million. Total debt and capital lease obligations were approximately $971.3 million, including a $235.0 million revolver balance, $364.5 million term loan, $234.6 million receivables securitization, and $136.8 million capital leases. Unrestricted liquidity was $636.8 million, including $528.8 million available under the revolver and $16.7 million under the receivables facility. Total stockholders’ equity was $5.4 billion.
Material changes and notable items
- Reported revenue and earnings increased sharply, but the merger-related reporting period makes headline year-over-year comparisons non-comparable. Management attributes performance to stronger freight demand, constrained trucking capacity, pricing improvements, and better segment results.
- All reportable segments recorded higher Q3 operating income than in the reported prior-year period. Swift’s Q3 adjusted operating ratio improved in Truckload, Dedicated, Refrigerated, and Intermodal; the Refrigerated segment remained the weakest of these at 95.6%.
- The company repurchased $100.0 million of shares YTD under a new $250.0 million authorization and paid $32.3 million in dividends. After quarter-end, it repurchased an additional $33.6 million of shares.
- The new receivables securitization facility, effective July 2018, matures in July 2021 and has a $325.0 million capacity, subject to eligible receivables and other terms.
- Adoption of ASC 606 increased Q3 revenue by $4.4 million and net income attributable to Knight-Swift by $1.2 million; management said the adoption did not materially affect EPS or operating cash flows.
Outlook, risks, and contingencies
Management said freight demand and capacity constraints remained supportive, while driver availability was a significant industry headwind. It expected contract rate increases to continue in Q4 2018 and into 2019, alongside inflation in driver wages, purchased transportation, and other costs. Management expected further improvement in Swift Refrigerated in Q4. The filing provides no specific consolidated revenue or earnings guidance.
Risks include driver recruitment and retention, wage and fuel inflation, fuel-surcharge timing, availability and cost of third-party capacity, safety and claims experience, and economic or freight-market changes. A one-percentage-point increase in interest rates would raise annual interest expense by an estimated $8.4 million at period-end borrowing levels. The company had $208.2 million of revenue-equipment purchase commitments for 2018; approximately $24.6 million of tractor deliveries were subsequently delayed to Q1 2019.
The company had accrued approximately $90.2 million for pending legal proceedings, including wage-and-hour and independent-contractor matters. Management did not expect pending matters, after accruals, to materially affect the company overall, but said outcomes could be material in an individual period. Adoption of the new lease standard in January 2019 was expected to add a material amount of right-of-use assets and lease liabilities; its impact estimates were still tentative.
Important facts for investors to verify
- Assess operating and earnings trends using pro forma or otherwise comparable periods, given the 2017 merger and Abilene acquisition effects.
- Track segment operating ratios, especially Swift Refrigerated, and whether pricing gains offset driver, purchased-transportation, fuel, and claims costs.
- Monitor cash conversion, equipment spending and sale proceeds, debt and lease obligations, and availability under the revolver and receivables facility.
- Review the development of the $90.2 million legal accrual, equipment purchase commitments, and the balance-sheet impact of lease-standard adoption.
- Distinguish GAAP results from management’s adjusted measures and review the reconciliations and assumptions used.