Knight-Swift Transportation Holdings Inc. — Q1 2019 Form 10-Q
Business context and period. The company provides truckload transportation, logistics, and intermodal services. This unaudited report covers the quarter ended March 31, 2019. In Q1, Knight-Swift reorganized its reportable segments into Trucking, Logistics, and Intermodal; prior-period segment figures were recast. Q1 2018 consolidated results exclude Abilene before its March 16, 2018 acquisition, so the comparison is not fully like-for-like.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $1,204.5 million | $1,271.1 million | Down 5.2% |
| Revenue excluding fuel surcharge | $1,078.1 million | $1,124.2 million | Down 4.1% |
| Operating income | $116.3 million | $93.7 million | Up 24.1% |
| Net income attributable to Knight-Swift | $87.9 million | $70.4 million | Up 25.0% |
| Diluted EPS | $0.51 | $0.39 | Up $0.12 |
| GAAP operating ratio | 90.3% | 92.6% | Improved 230 bps |
| Adjusted operating ratio (non-GAAP) | 88.4% | 90.9% | Improved 250 bps |
| Operating cash flow | $243.5 million | $208.9 million | Up $34.6 million |
Operating income benefited from Trucking and Logistics performance, investment income, and cost control. Higher income taxes partly offset earnings growth: tax expense was $27.9 million versus $19.0 million, and the effective tax rate was 24.0% versus 21.2%. Adjusted earnings and adjusted operating ratios are non-GAAP measures; the filing cautions they are supplemental, not substitutes for GAAP results.
Segments
- Trucking: Revenue fell 6.2% to $973.2 million, while operating income rose 14.9% to $115.2 million. Adjusted operating ratio improved to 86.7% from 88.9%. Revenue per loaded mile, excluding fuel surcharge and intersegment transactions, increased 9.4%; lower miles per tractor and fewer average tractors constrained revenue.
- Logistics: Revenue was nearly flat at $89.0 million; operating income rose 84.0% to $7.3 million. Brokerage gross margin increased to 17.8% from 13.1%, as load volume grew 20.7% but revenue per load declined 12.0%.
- Intermodal: Revenue increased 5.5% to $116.4 million, but operating income declined 40.2% to $2.4 million. Load count fell 5.8%; weather, rail service and capacity issues, and added capacity costs weighed on results.
Financial position, debt, and liquidity
- At March 31, cash and cash equivalents were $60.2 million; restricted cash was $50.7 million. Total assets were $8.08 billion and stockholders’ equity was $5.54 billion.
- Material debt and finance lease obligations totaled $720.3 million: $364.6 million term loan, $174.6 million accounts-receivable securitization, $121.1 million finance leases, and $60.0 million revolver borrowings. Revolver availability was $706.6 million and securitization availability was $35.1 million. Reported unrestricted liquidity was $801.9 million.
- Working capital surplus was $51.5 million, down from $292.7 million at year-end. The company attributed much of the decline to adopting lease accounting, including recognition of $109.2 million of current operating lease liabilities, and to seasonal receivables changes.
- Operating cash flow was $243.5 million; investing activities used $44.7 million and financing activities used $217.8 million. Net capital expenditures, after equipment sale proceeds, were $49.1 million. The company paid $10.7 million in dividends.
Outlook, risks, and notable items
- Outlook: No specific earnings or revenue guidance is provided. Management expected full-year 2019 net capital expenditures of $550–$575 million and said it believed available cash flows, lease financing, securitization availability, and revolver capacity would fund expected capital expenditures for at least 12 months. Management anticipated sequential Intermodal improvement later in 2019, subject to fewer weather issues, higher loads, and continued revenue-per-load strength.
- Freight and labor: Management described a more balanced freight market after strong 2018 conditions, with seasonal volume declines and tariff-related shipment timing affecting Q1. It flagged possible excess supply-chain inventories, driver recruitment and retention challenges, wage and benefit inflation, and competition for drivers.
- Costs and operations: The company cited potential fuel-price exposure despite fuel surcharges, insurance and claims volatility, maintenance and equipment costs, and risks from third-party capacity availability. A 1 percentage-point increase in interest rates would add an estimated $6.0 million to annual interest expense at quarter-end borrowings.
- Capital commitments: Revenue-equipment purchase commitments were $593.7 million for 2019; facilities and non-revenue equipment commitments were $7.1 million for the remainder of 2019 and $0.6 million for 2020. Management said purchases could be financed through several sources and plans to favor equipment purchases over leases.
- Leases: Adoption of ASC 842 on January 1, 2019 added operating lease right-of-use assets and liabilities. At March 31, operating lease liabilities were $260.8 million, in addition to $121.1 million of finance lease liabilities.
- Legal matters: The company had accrued approximately $87.9 million for outstanding legal proceedings. Management did not expect pending matters, after existing accruals, to have a material adverse effect overall, but acknowledged outcomes could be material in an individual period. Settlements in wage and independent-contractor cases were developing around the quarter-end reporting date.
- Other items: The company recognized $6.1 million of other income, largely from Transportation Resource Partners investments. It made no repurchases under its $250 million authorization during Q1; $70.7 million remained authorized.
Important facts for investors to verify
- Assess the year-over-year revenue comparison in light of Abilene’s partial inclusion in Q1 2018 and the freight-market conditions described by management.
- Review whether improved Trucking and Logistics margins persist, and whether Intermodal recovers as expected.
- Track driver availability, compensation inflation, safety performance, insurance claims, and the impact of fuel-price changes.
- Monitor the $550–$575 million capital expenditure outlook, equipment purchase commitments, and resulting cash generation and leverage.
- Follow the legal proceedings and related accruals, along with lease obligations, receivables-securitization availability, and revolver usage.