Knight-Swift Transportation Holdings Inc. - Quarter Report: 2020 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________________________________________________________________________
FORM 10-Q
___________________________________________________________________________________________________________________
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-35007
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![knx-20200930_g1.jpg](https://www.sec.gov/Archives/edgar/data/0001492691/000149269120000071/knx-20200930_g1.jpg)
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Knight-Swift Transportation Holdings Inc.
(Exact name of registrant as specified in its charter)
___________________________________________________________________________________________________________________
Delaware | 20-5589597 | |||||||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
20002 North 19th Avenue
Phoenix, Arizona 85027
(Address of principal executive offices and zip code)
(602) 269-2000
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
Common Stock $0.01 Par Value | KNX | New York Stock Exchange |
_________________________________________________________________________________________________________________________________________________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer | ☒ | Accelerated Filer | ☐ | |||||||||||||||||||||||
Non-accelerated Filer | ☐ | Smaller Reporting Company | ☐ | |||||||||||||||||||||||
Emerging Growth Company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
There were 169,831,537 shares of the registrant's common stock outstanding as of October 28, 2020.
QUARTERLY REPORT ON FORM 10-Q | |||||
TABLE OF CONTENTS | |||||
PART I FINANCIAL INFORMATION | PAGE | ||||
PART II OTHER INFORMATION | |||||
2
QUARTERLY REPORT ON FORM 10-Q | ||||||||
GLOSSARY OF TERMS | ||||||||
The following glossary defines certain acronyms and terms used in this Quarterly Report on Form 10-Q. These acronyms and terms are specific to our company, commonly used in our industry, or are otherwise frequently used throughout our document. | ||||||||
Term | Definition | |||||||
Knight-Swift/the Company/Management/We/Us/Our | Unless otherwise indicated or the context otherwise requires, these terms represent Knight-Swift Transportation Holdings Inc. and its subsidiaries. | |||||||
2017 Merger | The September 8, 2017 merger of Knight and Swift, pursuant to which we became Knight-Swift Transportation Holdings Inc. | |||||||
2017 Debt Agreement | The Company's Credit Agreement, entered into on September 29, 2017, as amended on October 2, 2020, consisting of the Revolver and Term Loan, which are defined below. | |||||||
2018 RSA | Fourth Amendment to the Amended and Restated Receivables Sales Agreement, entered into on July 11, 2018 by Swift Receivables Company II, LLC with unrelated financial entities. | |||||||
Annual Report | Annual Report on Form 10-K | |||||||
ASC | Accounting Standards Codification | |||||||
ASU | Accounting Standards Update | |||||||
Board | Knight-Swift's Board of Directors | |||||||
COVID-19 | Viral strain of a coronavirus which led the World Health Organization to declare a global pandemic in March 2020. | |||||||
DOE | United States Department of Energy | |||||||
EPS | Earnings Per Share | |||||||
ESPP | Knight-Swift Transportation Holdings Inc. Amended and Restated 2012 Employee Stock Purchase Plan | |||||||
FASB | Financial Accounting Standards Board | |||||||
GAAP | United States Generally Accepted Accounting Principles | |||||||
Knight | Unless otherwise indicated or the context otherwise requires, this term represents Knight Transportation, Inc. and its subsidiaries prior to the 2017 Merger. | |||||||
LIBOR | London InterBank Offered Rate | |||||||
Quarterly Report | Quarterly Report on Form 10-Q | |||||||
QTD | Quarter-to-date | |||||||
Revolver | Revolving line of credit under the 2017 Debt Agreement | |||||||
RSU | Restricted Stock Unit | |||||||
SEC | United States Securities and Exchange Commission | |||||||
Swift | Unless otherwise indicated or the context otherwise requires, this term represents Swift Transportation Company and its subsidiaries prior to the 2017 Merger. | |||||||
Term Loan | The Company's term loan under the 2017 Debt Agreement | |||||||
TRP | Transportation Resource Partners | |||||||
US | The United States of America | |||||||
YTD | Year-to-date |
3
PART I FINANCIAL INFORMATION |
ITEM 1. | FINANCIAL STATEMENTS |
Condensed Consolidated Balance Sheets (Unaudited) |
September 30, 2020 | December 31, 2019 | ||||||||||
(In thousands, except per share data) | |||||||||||
ASSETS | |||||||||||
Current assets: | |||||||||||
Cash and cash equivalents | $ | 240,236 | $ | 159,722 | |||||||
Cash and cash equivalents – restricted | 36,689 | 41,331 | |||||||||
Restricted investments, held-to-maturity, amortized cost | 9,052 | 8,912 | |||||||||
Trade receivables, net of allowance for doubtful accounts of $20,846 and $18,178, respectively | 559,657 | 518,547 | |||||||||
Contract balance – revenue in transit | 20,233 | 12,696 | |||||||||
Prepaid expenses | 61,686 | 62,160 | |||||||||
Assets held for sale | 38,098 | 41,786 | |||||||||
Income tax receivable | 8,358 | 17,026 | |||||||||
Other current assets | 24,544 | 27,848 | |||||||||
Total current assets | 998,553 | 890,028 | |||||||||
Gross property and equipment | 4,112,703 | 3,742,739 | |||||||||
Less: accumulated depreciation and amortization | (1,142,138) | (892,019) | |||||||||
Property and equipment, net | 2,970,565 | 2,850,720 | |||||||||
Operating lease right-of-use assets | 119,350 | 169,425 | |||||||||
Goodwill | 2,922,967 | 2,918,992 | |||||||||
Intangible assets, net | 1,400,719 | 1,379,459 | |||||||||
Other long-term assets | 89,207 | 73,108 | |||||||||
Total assets | $ | 8,501,361 | $ | 8,281,732 | |||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||
Current liabilities: | |||||||||||
Accounts payable | $ | 140,228 | $ | 99,194 | |||||||
Accrued payroll and purchased transportation | 154,025 | 110,065 | |||||||||
Accrued liabilities | 112,189 | 175,222 | |||||||||
Claims accruals – current portion | 174,136 | 150,805 | |||||||||
Finance lease liabilities and long-term debt – current portion | 422,655 | 377,651 | |||||||||
Operating lease liabilities – current portion | 57,088 | 80,101 | |||||||||
Accounts receivable securitization – current portion | 201,878 | — | |||||||||
Total current liabilities | 1,262,199 | 993,038 | |||||||||
Revolving line of credit | 170,000 | 279,000 | |||||||||
Finance lease liabilities – less current portion | 87,253 | 57,383 | |||||||||
Operating lease liabilities – less current portion | 67,067 | 96,160 | |||||||||
Accounts receivable securitization – less current portion | — | 204,762 | |||||||||
Claims accruals – less current portion | 175,915 | 196,912 | |||||||||
Deferred tax liabilities | 802,292 | 771,719 | |||||||||
Other long-term liabilities | 55,387 | 14,455 | |||||||||
Total liabilities | 2,620,113 | 2,613,429 | |||||||||
Commitments and contingencies (Notes 4, 10, and 11) | |||||||||||
Stockholders’ equity: | |||||||||||
Preferred stock, par value $0.01 per share; 10,000 shares authorized; none issued | — | — | |||||||||
Common stock, par value $0.01 per share; 500,000 shares authorized; 170,218 and 170,688 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively. | 1,702 | 1,707 | |||||||||
Additional paid-in capital | 4,294,504 | 4,269,043 | |||||||||
Retained earnings | 1,582,814 | 1,395,465 | |||||||||
Total Knight-Swift stockholders' equity | 5,879,020 | 5,666,215 | |||||||||
Noncontrolling interest | 2,228 | 2,088 | |||||||||
Total stockholders’ equity | 5,881,248 | 5,668,303 | |||||||||
Total liabilities and stockholders’ equity | $ | 8,501,361 | $ | 8,281,732 |
See accompanying notes to condensed consolidated financial statements (unaudited).
4
Condensed Consolidated Statements of Comprehensive Income (Unaudited) |
Quarter-to-Date September 30, | Year-to-Date September 30, | ||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
(In thousands, except per share data) | |||||||||||||||||||||||
Revenue: | |||||||||||||||||||||||
Revenue, excluding trucking fuel surcharge | $ | 1,137,313 | $ | 1,090,210 | $ | 3,162,005 | $ | 3,309,920 | |||||||||||||||
Trucking fuel surcharge | 73,093 | 110,312 | 233,897 | 337,220 | |||||||||||||||||||
Total revenue | 1,210,406 | 1,200,522 | 3,395,902 | 3,647,140 | |||||||||||||||||||
Operating expenses: | |||||||||||||||||||||||
Salaries, wages, and benefits | 376,923 | 375,491 | 1,097,067 | 1,119,700 | |||||||||||||||||||
Fuel | 104,703 | 148,699 | 312,939 | 438,447 | |||||||||||||||||||
Operations and maintenance | 69,964 | 85,108 | 204,435 | 247,311 | |||||||||||||||||||
Insurance and claims | 45,186 | 46,792 | 144,768 | 145,724 | |||||||||||||||||||
Operating taxes and licenses | 21,475 | 20,970 | 64,527 | 64,333 | |||||||||||||||||||
Communications | 5,069 | 4,913 | 14,845 | 14,956 | |||||||||||||||||||
Depreciation and amortization of property and equipment | 115,664 | 106,884 | 340,486 | 310,759 | |||||||||||||||||||
Amortization of intangibles | 11,473 | 10,759 | 34,421 | 32,144 | |||||||||||||||||||
Rental expense | 19,700 | 28,726 | 67,447 | 97,146 | |||||||||||||||||||
Purchased transportation | 245,102 | 251,337 | 670,485 | 781,959 | |||||||||||||||||||
Impairments | — | — | 1,255 | 2,182 | |||||||||||||||||||
Miscellaneous operating expenses | 29,686 | 17,890 | 73,480 | 64,634 | |||||||||||||||||||
Total operating expenses | 1,044,945 | 1,097,569 | 3,026,155 | 3,319,295 | |||||||||||||||||||
Operating income | 165,461 | 102,953 | 369,747 | 327,845 | |||||||||||||||||||
Other income (expenses): | |||||||||||||||||||||||
Interest income | 326 | 1,007 | 1,595 | 3,000 | |||||||||||||||||||
Interest expense | (3,232) | (7,790) | (13,360) | (22,294) | |||||||||||||||||||
Other income, net | 7,484 | 3,335 | 9,476 | 12,575 | |||||||||||||||||||
Total other income (expenses), net | 4,578 | (3,448) | (2,289) | (6,719) | |||||||||||||||||||
Income before income taxes | 170,039 | 99,505 | 367,458 | 321,126 | |||||||||||||||||||
Income tax expense | 47,835 | 24,524 | 99,204 | 78,523 | |||||||||||||||||||
Net income | 122,204 | 74,981 | 268,254 | 242,603 | |||||||||||||||||||
Net income attributable to noncontrolling interest | (146) | (362) | (581) | (841) | |||||||||||||||||||
Net income attributable to Knight-Swift | $ | 122,058 | $ | 74,619 | $ | 267,673 | $ | 241,762 | |||||||||||||||
Earnings per share: | |||||||||||||||||||||||
Basic | $ | 0.72 | $ | 0.44 | $ | 1.57 | $ | 1.41 | |||||||||||||||
Diluted | $ | 0.71 | $ | 0.44 | $ | 1.57 | $ | 1.40 | |||||||||||||||
Dividends declared per share: | $ | 0.08 | $ | 0.06 | $ | 0.24 | $ | 0.18 | |||||||||||||||
Weighted average shares outstanding: | |||||||||||||||||||||||
Basic | 170,205 | 170,504 | 170,257 | 171,841 | |||||||||||||||||||
Diluted | 171,028 | 171,290 | 171,035 | 172,524 |
See accompanying notes to the condensed consolidated financial statements (unaudited).
5
Condensed Consolidated Statements of Cash Flows (Unaudited) |
Year-to-Date September 30, | |||||||||||
2020 | 2019 | ||||||||||
(In thousands) | |||||||||||
Cash flows from operating activities: | |||||||||||
Net income | $ | 268,254 | $ | 242,603 | |||||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
Depreciation and amortization of property, equipment, and intangibles | 374,907 | 342,903 | |||||||||
Gain on sale of property and equipment | (6,468) | (27,908) | |||||||||
Impairments | 1,255 | 2,182 | |||||||||
Deferred income taxes | 32,565 | 33,102 | |||||||||
Non-cash lease expense | 64,301 | 97,307 | |||||||||
Other adjustments to reconcile net income to net cash provided by operating activities | 24,513 | (3,559) | |||||||||
(Decrease) increase in cash resulting from changes in: | |||||||||||
Trade receivables | (58,246) | 93,870 | |||||||||
Income tax receivable | 8,668 | (35,581) | |||||||||
Accounts payable | 1,946 | (7,824) | |||||||||
Accrued liabilities and claims accrual | (12,926) | (10,743) | |||||||||
Operating lease liabilities | (66,333) | (97,677) | |||||||||
Other assets and liabilities | 22,583 | (16,263) | |||||||||
Net cash provided by operating activities | 655,019 | 612,412 | |||||||||
Cash flows from investing activities: | |||||||||||
Proceeds from maturities and sales of held-to-maturity investments | 9,400 | 18,695 | |||||||||
Purchases of held-to-maturity investments | (12,644) | (11,410) | |||||||||
Proceeds from sale of property and equipment, including assets held for sale | 102,550 | 178,107 | |||||||||
Purchases of property and equipment | (378,694) | (635,957) | |||||||||
Expenditures on assets held for sale | (483) | (14,515) | |||||||||
Net cash and equivalents invested in acquisitions | (46,811) | (1,885) | |||||||||
Other cash flows from investing activities | (8,920) | (1,455) | |||||||||
Net cash used in investing activities | (335,602) | (468,420) | |||||||||
Cash flows from financing activities: | |||||||||||
Repayment of finance leases and long-term debt | (61,321) | (88,962) | |||||||||
(Repayments) borrowings on revolving line of credit, net | (109,000) | 95,000 | |||||||||
Borrowings under accounts receivable securitization | 49,000 | 150,000 | |||||||||
Repayment of accounts receivable securitization | (52,000) | (185,000) | |||||||||
Proceeds from common stock issued | 11,632 | 10,621 | |||||||||
Repurchases of the Company's common stock | (34,630) | (86,892) | |||||||||
Dividends paid | (41,297) | (31,184) | |||||||||
Other cash flows from financing activities | (5,522) | (2,739) | |||||||||
Net cash used in financing activities | (243,138) | (139,156) | |||||||||
Net increase in cash, restricted cash, and equivalents | 76,279 | 4,836 | |||||||||
Cash, restricted cash, and equivalents at beginning of period | 202,228 | 130,976 | |||||||||
Cash, restricted cash, and equivalents at end of period | $ | 278,507 | $ | 135,812 |
See accompanying notes to condensed consolidated financial statements (unaudited).
6
Condensed Consolidated Statements of Cash Flows (Unaudited) — Continued |
Year-to-Date September 30, | |||||||||||
2020 | 2019 | ||||||||||
(In thousands) | |||||||||||
Supplemental disclosures of cash flow information: | |||||||||||
Cash paid during the period for: | |||||||||||
Interest | $ | 12,921 | $ | 21,825 | |||||||
Income taxes | 35,233 | 77,386 | |||||||||
Non-cash investing and financing transactions: | |||||||||||
Equipment acquired included in accounts payable | $ | 45,430 | $ | 47,351 | |||||||
Equipment sales receivables | — | 21,570 | |||||||||
Financing provided to independent contractors for equipment sold | 4,359 | 4,565 | |||||||||
Transfers from property and equipment to assets held for sale | 59,543 | 114,011 | |||||||||
Contingent consideration associated with acquisition | 18,245 | — | |||||||||
Right-of-use assets obtained in exchange for new operating lease liabilities | 1,871 | 9,285 | |||||||||
Right-of-use assets obtained in exchange for new operating lease liabilities through acquisitions | 12,356 | — | |||||||||
Property and equipment obtained in exchange for new finance lease liabilities | 68,590 | — | |||||||||
Property and equipment obtained in exchange for finance lease liabilities reclassified from operating lease liabilities | 67,430 | 55,230 | |||||||||
Reconciliation of Cash, Restricted Cash, and Equivalents: | September 30, 2020 | December 31, 2019 | September 30, 2019 | December 31, 2018 | |||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Condensed Consolidated Balance Sheets | |||||||||||||||||||||||
Cash and cash equivalents | $ | 240,236 | $ | 159,722 | $ | 93,996 | $ | 82,486 | |||||||||||||||
Cash and cash equivalents – restricted 1 | 36,689 | 41,331 | 40,831 | 46,888 | |||||||||||||||||||
Other long-term assets 1 | 1,582 | 1,175 | 985 | 1,602 | |||||||||||||||||||
Condensed Consolidated Statements of Cash Flows | |||||||||||||||||||||||
Cash, restricted cash, and equivalents | $ | 278,507 | $ | 202,228 | $ | 135,812 | $ | 130,976 | |||||||||||||||
________
1 Reflects cash and cash equivalents that are primarily restricted for claims payments.
See accompanying notes to condensed consolidated financial statements (unaudited).
7
Condensed Consolidated Statements of Stockholders' Equity (Unaudited) |
Common Stock | Additional Paid-in Capital | Retained Earnings | Total Knight-Swift Stockholders' Equity | Noncontrolling Interest | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||
Shares | Par Value | ||||||||||||||||||||||||||||||||||||||||
(In thousands, except per share data) | |||||||||||||||||||||||||||||||||||||||||
Balances – December 31, 2019 | 170,688 | $ | 1,707 | $ | 4,269,043 | $ | 1,395,465 | $ | 5,666,215 | $ | 2,088 | $ | 5,668,303 | ||||||||||||||||||||||||||||
Common stock issued to employees | 609 | 6 | 9,474 | 9,480 | 9,480 | ||||||||||||||||||||||||||||||||||||
Common stock issued to the Board | 13 | — | 515 | 515 | 515 | ||||||||||||||||||||||||||||||||||||
Common stock issued under ESPP | 47 | — | 1,637 | 1,637 | 1,637 | ||||||||||||||||||||||||||||||||||||
Company shares repurchased | (1,139) | (11) | (34,619) | (34,630) | (34,630) | ||||||||||||||||||||||||||||||||||||
Shares withheld – RSU settlement | (4,508) | (4,508) | (4,508) | ||||||||||||||||||||||||||||||||||||||
Employee stock-based compensation expense | 13,835 | 13,835 | 13,835 | ||||||||||||||||||||||||||||||||||||||
Cash dividends paid and dividends accrued ($0.08 per share) | (41,197) | (41,197) | (41,197) | ||||||||||||||||||||||||||||||||||||||
Net income attributable to Knight-Swift | 267,673 | 267,673 | 267,673 | ||||||||||||||||||||||||||||||||||||||
Distribution to noncontrolling interest | (441) | (441) | |||||||||||||||||||||||||||||||||||||||
Net income attributable to noncontrolling interest | 581 | 581 | |||||||||||||||||||||||||||||||||||||||
Balances – September 30, 2020 | 170,218 | $ | 1,702 | $ | 4,294,504 | $ | 1,582,814 | $ | 5,879,020 | $ | 2,228 | $ | 5,881,248 |
Common Stock | Additional Paid-in Capital | Retained Earnings | Total Knight-Swift Stockholders' Equity | Noncontrolling Interest | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||
Shares | Par Value | ||||||||||||||||||||||||||||||||||||||||
(In thousands, except per share data) | |||||||||||||||||||||||||||||||||||||||||
Balances – December 31, 2018 | 172,844 | $ | 1,728 | $ | 4,242,369 | $ | 1,216,852 | $ | 5,460,949 | $ | 1,770 | $ | 5,462,719 | ||||||||||||||||||||||||||||
Common stock issued to employees | 523 | 5 | 8,368 | 8,373 | 8,373 | ||||||||||||||||||||||||||||||||||||
Common stock issued to the Board | 19 | — | 531 | 531 | 531 | ||||||||||||||||||||||||||||||||||||
Common stock issued under ESPP | 61 | 1 | 1,716 | 1,717 | 1,717 | ||||||||||||||||||||||||||||||||||||
Company shares repurchased | (2,874) | (29) | (86,863) | (86,892) | (86,892) | ||||||||||||||||||||||||||||||||||||
Shares withheld – RSU settlement | (2,304) | (2,304) | (2,304) | ||||||||||||||||||||||||||||||||||||||
Employee stock-based compensation expense | 10,055 | 10,055 | 10,055 | ||||||||||||||||||||||||||||||||||||||
Cash dividends paid and dividends accrued ($0.06 per share) | (31,073) | (31,073) | (31,073) | ||||||||||||||||||||||||||||||||||||||
Net income attributable to Knight-Swift | 241,762 | 241,762 | 241,762 | ||||||||||||||||||||||||||||||||||||||
Distribution to noncontrolling interest | (436) | (436) | |||||||||||||||||||||||||||||||||||||||
Net income attributable to noncontrolling interest | 841 | 841 | |||||||||||||||||||||||||||||||||||||||
Balances – September 30, 2019 | 170,573 | $ | 1,705 | $ | 4,263,039 | $ | 1,338,374 | $ | 5,603,118 | $ | 2,175 | $ | 5,605,293 |
See accompanying notes to condensed consolidated financial statements (unaudited).
8
Condensed Consolidated Statements of Stockholders' Equity (Unaudited) — Continued |
Common Stock | Additional Paid-in Capital | Retained Earnings | Total Knight-Swift Stockholders' Equity | Noncontrolling Interest | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||
Shares | Par Value | ||||||||||||||||||||||||||||||||||||||||
(In thousands, except per share data) | |||||||||||||||||||||||||||||||||||||||||
Balances – June 30, 2020 | 170,162 | $ | 1,701 | $ | 4,287,293 | $ | 1,474,466 | $ | 5,763,460 | $ | 2,129 | $ | 5,765,589 | ||||||||||||||||||||||||||||
Common stock issued to employees | 42 | 1 | 1,165 | 1,166 | 1,166 | ||||||||||||||||||||||||||||||||||||
Common stock issued under ESPP | 14 | — | 574 | 574 | 574 | ||||||||||||||||||||||||||||||||||||
Shares withheld – RSU settlement | (8) | (8) | (8) | ||||||||||||||||||||||||||||||||||||||
Employee stock-based compensation expense | 5,472 | 5,472 | 5,472 | ||||||||||||||||||||||||||||||||||||||
Cash dividends paid and dividends accrued ($0.08 per share) | (13,702) | (13,702) | (13,702) | ||||||||||||||||||||||||||||||||||||||
Net income attributable to Knight-Swift | 122,058 | 122,058 | 122,058 | ||||||||||||||||||||||||||||||||||||||
Distribution to noncontrolling interest | (47) | (47) | |||||||||||||||||||||||||||||||||||||||
Net income attributable to noncontrolling interest | 146 | 146 | |||||||||||||||||||||||||||||||||||||||
Balances – September 30, 2020 | 170,218 | $ | 1,702 | $ | 4,294,504 | $ | 1,582,814 | $ | 5,879,020 | $ | 2,228 | $ | 5,881,248 | ||||||||||||||||||||||||||||
Common Stock | Additional Paid-in Capital | Retained Earnings | Total Knight-Swift Stockholders' Equity | Noncontrolling Interest | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||
Shares | Par Value | ||||||||||||||||||||||||||||||||||||||||
(In thousands, except per share data) | |||||||||||||||||||||||||||||||||||||||||
Balances – June 30, 2019 | 170,378 | $ | 1,703 | $ | 4,254,297 | $ | 1,274,067 | $ | 5,530,067 | $ | 1,953 | $ | 5,532,020 | ||||||||||||||||||||||||||||
Common stock issued to employees | 176 | 2 | 4,668 | 4,670 | 4,670 | ||||||||||||||||||||||||||||||||||||
Common stock issued under ESPP | 19 | — | 588 | 588 | 588 | ||||||||||||||||||||||||||||||||||||
Employee stock-based compensation expense | 3,486 | 3,486 | 3,486 | ||||||||||||||||||||||||||||||||||||||
Cash dividends paid and dividends accrued ($0.06 per share) | (10,312) | (10,312) | (10,312) | ||||||||||||||||||||||||||||||||||||||
Net income attributable to Knight-Swift | 74,619 | 74,619 | 74,619 | ||||||||||||||||||||||||||||||||||||||
Distribution to noncontrolling interest | (140) | (140) | |||||||||||||||||||||||||||||||||||||||
Net income attributable to noncontrolling interest | 362 | 362 | |||||||||||||||||||||||||||||||||||||||
Balances – September 30, 2019 | 170,573 | $ | 1,705 | $ | 4,263,039 | $ | 1,338,374 | $ | 5,603,118 | $ | 2,175 | $ | 5,605,293 | ||||||||||||||||||||||||||||
See accompanying notes to condensed consolidated financial statements (unaudited).
9
Notes to Condensed Consolidated Financial Statements (Unaudited) |
Note 1 — Introduction and Basis of Presentation
Certain acronyms and terms used throughout this Quarterly Report are specific to the Company, commonly used in the trucking industry, or are otherwise frequently used throughout this document. Definitions for these acronyms and terms are provided in the "Glossary of Terms," available in the front of this document.
Description of Business
Knight-Swift is a transportation solutions provider, headquartered in Phoenix, Arizona. During the year-to-date period ended September 30, 2020, the Company operated an average of 18,439 tractors (comprised of 16,347 company tractors and 2,092 independent contractor tractors) and 57,716 trailers within the Trucking segment. Additionally, the Company operated an average of 573 tractors and 10,522 containers in the Intermodal segment. The Company's three reportable segments are Trucking, Logistics, and Intermodal.
Basis of Presentation
The condensed consolidated financial statements and footnotes included in this Quarterly Report include the accounts of Knight-Swift Transportation Holdings Inc. and its subsidiaries and should be read in conjunction with the consolidated financial statements and footnotes included in Knight-Swift's 2019 Annual Report. In management's opinion, these condensed consolidated financial statements were prepared in accordance with GAAP and include all adjustments necessary (consisting of normal recurring adjustments) for the fair statement of the periods presented.
With respect to transactional/durational data, references to years pertain to calendar years. Similarly, references to quarters pertain to calendar quarters.
Changes in Presentation
Changes in presentation associated with adopting accounting pronouncements are included in Note 2.
Seasonality
In the transportation industry, results of operations generally follow a seasonal pattern. Freight volumes in the first quarter are typically lower due to less consumer demand, customers reducing shipments following the holiday season, and inclement weather. At the same time, operating expenses generally increase, and tractor productivity of the Company's fleet, independent contractors, and third-party carriers decreases during the winter months due to decreased fuel efficiency, increased cold weather-related equipment maintenance and repairs, and increased insurance claims and costs attributed to higher accident frequency from harsh weather. These factors typically lead to lower operating profitability, as compared to other parts of the year. Additionally, beginning in the latter half of the third quarter and continuing into the fourth quarter, the Company typically experiences surges pertaining to holiday shopping trends toward delivery of gifts purchased over the Internet, as well as the length of the holiday season (consumer shopping days between Thanksgiving and Christmas). However, cyclical changes in the trucking industry, including imbalances in supply and demand, can override the seasonality faced in the industry.
Impact of COVID-19
COVID-19 became a global pandemic in 2020, which triggered a significant downturn in the global economy. The Company continues to operate its business through the COVID-19 pandemic and has taken additional precautions to ensure the safety of its employees, customers, vendors, and the communities in which it operates. During the year-to-date period ended September 30, 2020, the Company incurred $12.3 million of expenses (all within the first half of the year) directly attributable to the pandemic, which were incremental to those incurred prior to the outbreak. These primarily pertained to payroll premiums paid to driving associates and shop technicians, additional disinfectants and cleaning supplies, and various other pandemic-specific items. The costs are clearly separable from normal business operations and are not expected to recur once the pandemic subsides.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED
There are various uncertainties that have arisen from the COVID-19 pandemic. While management is continuing to monitor the impact of the pandemic on Knight-Swift, including its employees, customers, independent contractors, stockholders, and other business partners and stakeholders, it is difficult to predict the impact that the pandemic will have on future results of its operations, financial position, and liquidity. This has caused some uncertainties around various accounting estimates. Due to these uncertainties, the Company's accounting estimates may change, as management's assessment of the impacts of the COVID-19 pandemic continues to evolve.
Refer to Part II, Item 1A "Risk Factors" in our Quarterly Report for the quarterly period ended March 31, 2020 for more discussion about potential risks and uncertainties surrounding the COVID-19 pandemic that may impact our business, results of operations, or financial condition.
Note 2 — Recently Adopted Accounting Pronouncements
ASU 2016-13: Financial Instruments – Credit Losses (Topic 326) — Measurements of Credit Losses on Financial Instruments
Summary of the Standard — In June 2016, the FASB issued ASU 2016-13, which, in addition to several clarifying ASUs, established the new ASC Topic 326, Financial Instruments — Credit Losses ("CECL"). The new CECL standard amends the FASB's guidance on the impairment of financial instruments. Specifically, it adds the CECL impairment model to GAAP which is based on expected losses rather than incurred losses. This is intended to result in more timely recognition of such losses. Under the new CECL standard, an entity recognizes as an allowance its estimate of lifetime expected credit losses. The new CECL standard is also intended to reduce the complexity of GAAP by decreasing the number of credit impairment models that entities use to account for debt instruments. Further, the new CECL standard makes targeted changes to the impairment model for available-for-sale debt securities and moves the guidance from ASC Topic 320, Investments — Debt and Equity Securities, to ASC Subtopic 326-30. For public business entities, the new standard was effective for annual and interim reporting periods beginning after December 15, 2019. For most debt instruments, entities are required to adopt the new CECL standard using a modified retrospective approach, meaning that entities should record a cumulative-effect adjustment to equity as of the beginning of the first reporting period in which the guidance is effective.
Practical Expedient — As permitted under ASU 2016-13 (and related ASUs), management elected to apply the collateral-dependent financial asset practical expedient which allows entities to measure the expected credit losses for the financial asset by comparing the amortized cost basis with the fair value of the collateral at the reporting date, rather than using the fair value of the financial asset.
Current Period Impact of Adoption — The Company adopted ASC Topic 326 on January 1, 2020 using the modified retrospective approach. Upon adoption of the standard management assessed the potential impact of the CECL model on each type of the Company's financial assets and determined that there was no material impact on the Company's financial statements or accounting policies.
ASU 2018-15: Intangibles – Goodwill and Other – Internal Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract
Summary of the Standard — In August 2018, the FASB issued ASU 2018-15, which amended ASC Subtopic 350-40 to address a customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract ("Service CCA"). The amendments in ASU 2018-15 align the accounting for costs incurred to implement a Service CCA with previously codified guidance on capitalizing costs associated with developing or obtaining internal-use software.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED
Specifically, the ASU amends ASC Subtopic 350-40 to include in its scope implementation costs incurred with a Service CCA. This addition clarifies that a customer should apply the guidance from ASC Paragraph 350-40-25 to determine which stage the project is in before assessing whether implementation costs should be capitalized in a Service CCA that is considered a service contract. These capitalized items should be recorded within the same balance sheet line item as a prepayment for any fees.
Any capitalized costs from the Service CCA should be expensed over the term of the hosting arrangement, which includes the noncancelable period and any options to extend that are reasonably certain to be exercised and recorded in the same line item as fees associated with the hosting element of the arrangement. The amendments in this ASU were effective for public business entities for fiscal years beginning after December 15, 2019 and could be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption.
Current Period Impact of Adoption — The Company adopted the amendments in ASU 2018-15 on January 1, 2020 and elected to apply the amendments on a prospective basis to implementation costs incurred after the date of adoption. Upon review of the Service CCA's entered into subsequent to the implementation date, management has determined that adoption of the amendments has not had a material impact on the Company's financial statements and related accounting policies.
ASU 2017-04: Intangibles – Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment
Summary of the Standard — In January 2017, the FASB issued ASU 2017-04, which amends ASC Topic 350 by simplifying the goodwill impairment test. The amendments in this ASU are intended to simplify subsequent measurement of goodwill. The key amendment in the ASU eliminates Step 2 from the goodwill impairment test, in which entities measured a goodwill impairment loss by comparing the implied fair value to the carrying amount of a reporting unit's goodwill. Instead, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value with the carrying amount of a reporting unit and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. The amendments also require companies to disclose the amounts of goodwill allocated to each reporting unit with a zero or negative carrying amount of assets. The amendments were effective for public business entities for fiscal years beginning after December 15, 2019 and should be applied on a prospective basis.
Current Period Impact of Adoption — The Company adopted the amendments in ASU 2017-14 on January 1, 2020 on a prospective basis. Management has updated the Company's accounting policy to incorporate the amendments in the ASU and has included the revised disclosure requirements below.
Refer to Note 7 for disclosures about the Company's goodwill balances.
Accounting Policy Update
Goodwill — Management evaluates goodwill on an annual basis as of June 30th, or more frequently if indicators of impairment exist. The Company assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than the carrying amount. If the Company concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company conducts a quantitative goodwill impairment test. Management estimates the fair values of its reporting units using a combination of the income and market approaches. If the carrying amount of a reporting unit exceeds the fair value, then management recognizes an impairment loss of the same amount. This loss is only limited to the total amount of goodwill allocated to that reporting unit.
Other ASUs
There were various other ASUs that became effective during year-to-date September 30, 2020, which did not have a material impact on the Company's results of operations, financial position, cash flows, or disclosures.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED
Note 3 — Recently Issued Accounting Pronouncements
Date Issued | Reference | Description | Adoption Date and Method | Financial Statement Impact | ||||||||||||||||||||||
August 2020 | ASU No. 2020-06: Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40) – Accounting for Convertible Instruments and contracts in an Entity's Own Equity | The amendments in this Update add disclosure requirements to convertible debt instruments and convertible preferred stock, require convertible instruments to be disclosed at fair value, and update the calculation requirements for diluted EPS. The amendments in this ASU can be applied on a modified or fully retrospective basis and are effective for public entities for years beginning after December 15, 2021. | January 2022, Modified retrospective or fully retrospective | No material impact | ||||||||||||||||||||||
March 2020 | 2020-04: Reference Rate Reform (Topic 848) – Facilitation of the Effects of Reference Rate Reform on Financial Reporting 1 | The amendments in this Update provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this ASU apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. The amendments in this ASU are effective for any interim period after March 12, 2020 and should be applied on a prospective basis. | March 2020, Prospective | No material impact 2 | ||||||||||||||||||||||
March 2020 | 2020-03: Codification Improvements to Financial Instruments 1 | The amendments within this ASU updated several sections of the Codification and how various topics and subtopics interacted due to new guidance on financial instruments. This includes addressing issues related to fair value option disclosures, line-of-credit or revolving-debt arrangements and leases among others. The amendments should be applied prospectively and have varying effective dates, which were all in effect for public business entities prior to issuance of the ASU. | March 2020, Prospective | No material impact | ||||||||||||||||||||||
February 2020 | 2020-02: Financial Instruments – Credit Losses (Topic 326) and Leases – (Topic 842) – Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842) 1 | The amendments in this ASU incorporate discussion from SEC Staff Accounting Bulletin No. 119 about expected implementation practices related to ASC Topic 326. The amendments also codify the SEC Staff's announcement that it would not object to the FASB's update to effective dates for major updates, which were amended within ASU 2019-10. | January 2021, Adoption method varies by amendment | No material impact | ||||||||||||||||||||||
January 2020 | 2020-01: Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) – Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 (a consensus of the FASB Emerging Issues Task Force) | The amendments clarify that an entity should consider observable transactions when determining to apply or discontinue the equity method for the purposes of applying the measurement alternative. The amendments also clarify that an entity would not consider whether a purchased option would be accounted for under the equity method when applying ASC 815-10-15-141(a). | January 2021, Prospective | Currently under evaluation, but not expected to be material | ||||||||||||||||||||||
1 Adopted during the first quarter 2020.
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KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED
2 As identified within the 2018 RSA, the lender can trigger an amendment by identifying and deciding upon a replacement for LIBOR. On October 2, 2020, the 2017 Debt Agreement was amended to extend the maturity date of the Term Loan to October 3, 2022, incorporate language regarding the transition away from LIBOR, and update other regulatory and technical provisions customary for facilities of this type. Just prior to this extension, the Company paid $65.0 million on the outstanding balance of the Term Loan, leaving $300.0 million face value outstanding.
Note 4 — Acquisitions
On January 1, 2020, pursuant to a stock purchase agreement (the "SPA") the Company acquired 100.0% of the equity interests of a warehousing-related company (the "Warehousing Co.") with locations throughout the Central US.
The total purchase price consideration of $66.9 million included $48.2 million in cash to the sellers at closing, which was funded through cash-on-hand and borrowing on the Revolver on the transaction date. At closing, $6.8 million of the cash consideration was placed in escrow to secure certain of the sellers' indemnification obligations. During the third quarter of 2020, the escrow proceeds were released to the sellers pursuant to the SPA. The purchase price also included contingent consideration consisting of three additional annual payments of up to $8.1 million each (or $24.3 million in total), representing the maximum possible annual deferred payments to the sellers based on Warehousing Co.'s earnings before interest and taxes ("EBIT") for each of the calendar years ending December 31, 2020, December 31, 2021, and the annualized six-month period ending June 30, 2022. In order to estimate Warehousing Co.'s future performance, the Company utilized the Monte Carlo simulation method using certain inputs, including Warehousing Co.'s forecasted EBIT, discount rate, dividend yields, expected volatility, and expected stock returns during the above measurement periods. Based on the above inputs, the present value of the total contingent consideration, along with the estimated net working capital adjustment equaled $18.7 million as of January 1, 2020. During the measurement period, the net working capital adjustment was reduced by $0.4 million based on the actual versus estimated net working capital adjustment as of the transaction date. This adjustment resulted in the total estimated contingent consideration and net working capital adjustment decreasing to $18.3 million. The total purchase price consideration, as if adjusted at the January 1, 2020 transaction date, is identified in the table below.
The SPA included an election under the Internal Revenue Code Section 338(h)(10). Accordingly, the book and tax basis of the acquired assets and liabilities are the same as of the purchase date. The SPA contains customary representations, warranties, covenants, and indemnification provisions.
The goodwill recognized represents expected synergies from combining the operations of Warehousing Co. with the Company, including enhanced service offerings, as well as other intangible assets that did not meet the criteria for separate recognition. The goodwill is expected to be deductible for tax purposes.
The purchase price allocation for the acquisition is preliminary and has been allocated based on estimated fair values of the assets acquired and liabilities assumed at the acquisition date, pending the completion of the valuation of acquired tangible assets, an independent valuation of certain acquired intangible assets, assessment of lease agreements, assessment of certain liabilities, the calculation of deferred taxes based upon the underlying tax basis of assets acquired and liabilities assumed, and assessment of other tax related items. As the Company obtains more information, the preliminary purchase price allocation disclosed below is subject to change. Any future adjustments to the preliminary purchase price allocation, including changes within identifiable intangible assets or estimation uncertainty impacted by market conditions, may impact future net earnings. The purchase price allocation adjustments can be made through the end of the measurement period, which is not to exceed one year from the acquisition date.
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KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED
The following table summarizes the fair value of the consideration transferred as of the acquisition date:
January 1, 2020 Opening Balance Sheet as Reported at March 31, 2020 | Adjustments | January 1, 2020 Opening Balance Sheet as Reported at September 30, 2020 | |||||||||||||||
(in thousands) | |||||||||||||||||
Fair value of the consideration transferred | $ | 66,854 | $ | (410) | $ | 66,444 | |||||||||||
Cash and cash equivalents | 1,388 | — | 1,388 | ||||||||||||||
Trade and other receivables | 3,301 | — | 3,301 | ||||||||||||||
Prepaid expenses | 608 | — | 608 | ||||||||||||||
Other current assets | 78 | — | 78 | ||||||||||||||
Property and equipment | 1,938 | — | 1,938 | ||||||||||||||
Operating lease right-of-use assets | 12,356 | — | 12,356 | ||||||||||||||
Identifiable intangible assets 1 | 55,681 | — | 55,681 | ||||||||||||||
Deferred tax assets | 54 | — | 54 | ||||||||||||||
Other noncurrent assets | 404 | — | 404 | ||||||||||||||
Total assets | 75,808 | — | 75,808 | ||||||||||||||
Accounts payable | (347) | — | (347) | ||||||||||||||
Accrued liabilities | (644) | — | (644) | ||||||||||||||
Operating lease liabilities – current portion | (4,451) | — | (4,451) | ||||||||||||||
Operating lease liabilities – less current portion | (7,905) | — | (7,905) | ||||||||||||||
Total liabilities | (13,347) | — | (13,347) | ||||||||||||||
Goodwill | $ | 4,393 | $ | (410) | $ | 3,983 | |||||||||||
1 Includes $53.8 million in customer relationships, $0.7 million in noncompete agreements, $0.6 million in internally developed software, and a $0.6 million trade name.
Other
On October 1, 2020, the Company used approximately $39.6 million in cash to acquire 21.0% of the equity interests of a small company, complementary to its suite of services.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED
Note 5 — Restricted Investments, Held-to-Maturity
The following tables present the cost or amortized cost, gross unrealized gains and temporary losses, and estimated fair value of the Company's restricted investments, held-to-maturity:
September 30, 2020 | |||||||||||||||||||||||
Gross Unrealized | |||||||||||||||||||||||
Cost or Amortized Cost | Gains | Temporary Losses | Estimated Fair Value | ||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
US corporate securities | $ | 9,052 | $ | 10 | $ | (5) | $ | 9,057 | |||||||||||||||
Restricted investments, held-to-maturity | $ | 9,052 | $ | 10 | $ | (5) | $ | 9,057 | |||||||||||||||
December 31, 2019 | |||||||||||||||||||||||
Gross Unrealized | |||||||||||||||||||||||
Cost or Amortized Cost | Gains | Temporary Losses | Estimated Fair Value | ||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
US corporate securities | $ | 8,912 | $ | 4 | $ | (1) | $ | 8,915 | |||||||||||||||
Restricted investments, held-to-maturity | $ | 8,912 | $ | 4 | $ | (1) | $ | 8,915 | |||||||||||||||
As of September 30, 2020, the contractual maturities of the restricted investments, held-to-maturity, were one year or less. There were eight securities and seven securities that were in an unrealized loss position for less than twelve months as of September 30, 2020 and December 31, 2019, respectively. The Company did not recognize any impairment losses related to its held-to-maturity investments during the quarter or year-to-date periods ended September 30, 2020 or 2019.
Refer to Note 16 for additional information regarding fair value measurements of the Company's investments.
Note 6 — Assets Held for Sale
The Company expects to sell its assets held for sale, which primarily consist of revenue equipment, within the next twelve months. Revenue equipment held for sale totaled $38.1 million and $41.8 million as of September 30, 2020 and December 31, 2019, respectively. Net gains on disposals, including disposals of property and equipment classified as assets held for sale, reported in "Miscellaneous operating expenses" in the condensed consolidated statements of comprehensive income, were:
•$1.7 million and $8.6 million for the quarter-to-date periods ended September 30, 2020 and 2019, respectively.
•$6.5 million and $27.9 million for the year-to-date periods ended September 30, 2020 and 2019, respectively.
The Company did not recognize impairment losses related to assets held for sale during the quarters ended September 30, 2020 and 2019. The Company recognized impairment losses related to assets held for sale of $0.4 million during year-to-date September 30, 2020, as compared to the same period of last year when the Company did not recognize any such impairment losses.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED
Note 7 — Goodwill and Other Intangible Assets
Goodwill
The changes in the carrying amount of goodwill were as follows:
(In thousands) | |||||
Goodwill, balance at December 31, 2019 | $ | 2,918,992 | |||
Adjustments relating to deferred tax assets | (8) | ||||
Acquisition 1 | 3,983 | ||||
Goodwill, balance at September 30, 2020 | $ | 2,922,967 | |||
1The goodwill associated with the Warehousing Co. acquisition referenced in Note 4 was allocated to the non-reportable segment, and is net of purchase price accounting adjustments.
The Company did not record any goodwill impairments during the quarter or year-to-date periods ended September 30, 2020 or 2019.
Other Intangible Assets
Other intangible asset balances were as follows:
September 30, 2020 | December 31, 2019 | ||||||||||
(In thousands) | |||||||||||
Definite-lived intangible assets 1 | |||||||||||
Gross carrying amount | $ | 894,597 | $ | 839,516 | |||||||
Accumulated amortization | (134,378) | (99,957) | |||||||||
Definite-lived intangible assets, net | 760,219 | 739,559 | |||||||||
Trade names: | |||||||||||
Gross carrying amount | 640,500 | 639,900 | |||||||||
Intangible assets, net | $ | 1,400,719 | $ | 1,379,459 | |||||||
1The major categories of the Company's definite-lived intangible assets include customer relationships, non-compete agreements, internally-developed software, and others.
Identifiable intangible assets subject to amortization have been recorded at fair value. Intangible assets related to acquisitions other than the 2017 Merger are amortized over a weighted-average amortization period of 18.9 years. The Company's customer relationship intangible assets related to the 2017 Merger are being amortized over a weighted average amortization period of 19.9 years.
As of September 30, 2020, management anticipates that the composition and amount of amortization associated with intangible assets will be $11.6 million for the remainder of 2020, $46.3 million in 2021, $46.1 million in 2022, and $45.2 million for each of the years 2023 and 2024. Actual amounts of amortization expense may differ from estimated amounts due to additional intangible asset acquisitions, impairment of intangible assets, accelerated amortization of intangible assets, and other events.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED
Note 8 — Income Taxes
Effective Tax Rate — The quarter-to-date September 30, 2020 and September 30, 2019 effective tax rates were 28.1% and 24.6%, respectively. The Company recognized discrete items relating to negative impacts from certain tax-related items within its Mexico operations, which were partially offset by a release of its reserve for uncertain tax positions during the quarter ended September 30, 2020. The Company also recognized discrete items relating to the partial release of its reserve for uncertain tax positions during the quarter ended September 30, 2019.
The year-to-date September 30, 2020 and September 30, 2019 effective tax rates were 27.0% and 24.5%, respectively. The Company recognized discrete items relating to negative impacts from certain tax-related items within its Mexico operations and foreign currency fluctuations, which were offset by stock compensation deductions and a partial release of its reserve for uncertain tax positions for the year-to-date September 30, 2020. The Company also recognized a discrete item relating to the partial release of its reserve for uncertain tax positions during the year-to-date period ended September 30, 2019.
Valuation Allowance — The Company has not established a valuation allowance as it has been determined that, based upon available evidence, a valuation allowance is not required. Management believes that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets. All other deferred tax assets are expected to be realized and utilized by continued profitability in future periods.
Unrecognized Tax Benefits — During the quarter-to-date and year-to-date periods ended September 30, 2020, the Company reduced its reserve by $1.0 million for uncertain tax positions relating to various federal deductions. Management does not expect a decrease in unrecognized tax benefits relating to federal deductions to be necessary within the next twelve months.
Interest and Penalties — Accrued interest and penalties related to unrecognized tax benefits were approximately $0.3 million and $0.4 million as of September 30, 2020 and December 31, 2019, respectively.
Tax Examinations — The Company is currently under examination by the IRS for the 2012 tax year and management does not expect any adjustments that would have a material impact on the Company's effective tax rate. Certain of the Company's subsidiaries are also currently under examination by various state jurisdictions for tax years ranging from 2013 to 2018. At the completion of these examinations, management does not expect any adjustments that would have a material impact on the Company's effective tax rate. Years subsequent to 2014 remain subject to examination.
Note 9 — Accounts Receivable Securitization
The 2018 RSA is a secured borrowing that is collateralized by the Company's eligible receivables, for which the Company is the servicing agent. The Company's receivable originator subsidiaries sell, on a revolving basis, undivided interests in all of their eligible accounts receivable to Swift Receivables Company II, LLC ("SRCII") who in turn sells a variable percentage ownership in those receivables to the various purchasers. The Company's eligible receivables are included in "Trade receivables, net of allowance for doubtful accounts" in the condensed consolidated balance sheets. As of September 30, 2020, the Company's eligible receivables generally have high credit quality, as determined by the obligor's corporate credit rating.
The 2018 RSA is subject to fees, various affirmative and negative covenants, representations and warranties, and default and termination provisions customary for facilities of this type. The Company was in compliance with these covenants as of September 30, 2020. Collections on the underlying receivables by the Company are held for the benefit of SRCII and the various purchasers and are unavailable to satisfy claims of the Company and its subsidiaries.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED
The following table summarizes the key terms of the 2018 RSA (dollars in thousands):
Effective date | July 11, 2018 | ||||
Final maturity date 1 | July 9, 2021 | ||||
Borrowing capacity | $325,000 | ||||
Accordion option 2 | $175,000 | ||||
Unused commitment fee rate 3 | 20 to 40 basis points | ||||
Program fees on outstanding balances 4 | one-month LIBOR + 80 to 100 basis points | ||||
1The Company intends to refinance prior to the maturity date.
2The accordion option increases the maximum borrowing capacity, subject to participation of the purchasers.
3The 2018 RSA commitment fee rate is based on the percentage of the maximum borrowing capacity utilized.
4The 2018 RSA program fee is based on the Company's consolidated total net leverage ratio. As identified within the 2018 RSA, the lender can trigger an amendment by identifying and deciding upon a replacement for LIBOR.
Availability under the 2018 RSA is calculated as follows:
September 30, 2020 | December 31, 2019 | ||||||||||
(In thousands) | |||||||||||
Borrowing base, based on eligible receivables | $ | 285,000 | $ | 299,100 | |||||||
Less: outstanding borrowings 1 | (202,000) | (205,000) | |||||||||
Less: outstanding letters of credit | (67,281) | (70,841) | |||||||||
Availability under accounts receivable securitization facilities | $ | 15,719 | $ | 23,259 | |||||||
1Outstanding borrowings are included in the condensed consolidated balance sheets, within "Accounts receivable securitization – current portion" as of September 30, 2020 and within "Accounts receivable securitization – less current portion" as of December 31, 2019. Outstanding borrowings were offset by $0.1 million and $0.2 million of deferred loan costs as of September 30, 2020 and December 31, 2019, respectively. Interest accrued on the aggregate principal balance at a rate of 1.0% and 2.6% as of September 30, 2020 and December 31, 2019, respectively.
Program fees and unused commitment fees are recorded in "Interest expense" in the condensed consolidated statements of comprehensive income. The Company incurred accounts receivable securitization program fees of $0.7 million and $1.8 million during the quarter-to-date September 30, 2020 and 2019 periods, respectively. The Company incurred accounts receivable securitization program fees of $2.8 million and $5.6 million during the year-to-date September 30, 2020 and 2019 periods, respectively.
Refer to Note 16 for information regarding the fair value of the 2018 RSA.
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KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED
Note 10 — Commitments
Purchase Commitments
As of September 30, 2020, the Company had outstanding commitments to purchase revenue equipment of $134.5 million in the remainder of 2020 ($82.6 million of which were tractor commitments) and none thereafter. These purchases may be financed through any combination of operating leases, finance leases, debt, proceeds from sales of existing equipment, and cash flows from operations.
As of September 30, 2020, the Company had outstanding commitments to purchase facilities and non-revenue equipment of $20.4 million in the remainder of 2020, $3.0 million in the two-year period 2021 through 2022, $0.6 million in the two-year period 2023 through 2024, and $0.2 million thereafter. Factors such as costs and opportunities for future terminal expansions may change the amount of such expenditures.
As of September 30, 2020, the Company had outstanding commitments for bulk fuel purchases of $10.1 million in the remainder of 2020, $35.4 million in 2021, and none thereafter.
TRP Commitments
Since 2003, Knight has entered into partnership agreements with entities that make privately-negotiated equity investments. In these agreements, Knight committed to invest in return for an ownership percentage. During the first quarter of 2020, Knight entered into a $20.0 million commitment to invest in the newly formed TRP Capital Partners V, LP with $16.5 million outstanding as of September 30, 2020. There were no other material changes related to the previously disclosed TRP commitments during the quarter ended September 30, 2020.
Note 11 — Contingencies and Legal Proceedings
Legal Proceedings
Information is provided below regarding the nature, status, and contingent loss amounts, if any, associated with the Company's pending legal matters. There are inherent uncertainties in these legal matters, some of which are beyond management's control, making the ultimate outcomes difficult to predict. Moreover, management's views and estimates related to these matters may change in the future, as new events and circumstances arise and the matters continue to develop.
The Company has made accruals with respect to its legal matters where appropriate, which are included in "Accrued liabilities" in the condensed consolidated balance sheets. The Company has recorded an aggregate accrual of approximately $34.4 million, relating to the Company's outstanding legal proceedings as of September 30, 2020.
Based on management's present knowledge of the facts and (in certain cases) advice of outside counsel, management does not believe that loss contingencies arising from pending matters are likely to have a material adverse effect on the Company's overall financial position, operating results, or cash flows after taking into account any existing accruals. However, actual outcomes could be material to the Company's financial position, operating results, or cash flows for any particular period.
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KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED
EMPLOYEE COMPENSATION AND PAY PRACTICES MATTERS | ||||||||||||||||||||
CRST Expedited | ||||||||||||||||||||
The plaintiff alleges tortious interference with contract and unjust enrichment related to non-competition agreements entered into with certain of its drivers. | ||||||||||||||||||||
Plaintiff(s) | Defendant(s) | Date instituted | Court or agency currently pending in | |||||||||||||||||
CRST Expedited, Inc. | Swift Transportation Co. of Arizona LLC. | March 20, 2017 | United States District Court for the Northern District of Iowa | |||||||||||||||||
Recent Developments and Current Status | ||||||||||||||||||||
In July 2019, a jury issued an adverse verdict in this lawsuit. The court issued a decision granting in part and denying in part certain motions related to the jury’s verdict. Both parties have appealed the court’s decision. The likelihood that a loss has been incurred is probable and estimable, and the loss has accordingly been accrued as of September 30, 2020. | ||||||||||||||||||||
California Wage, Meal, and Rest Class Actions | ||||||||||||||||||||
The plaintiffs generally allege one or more of the following: that the Company 1) failed to pay the California minimum wage; 2) failed to provide proper meal and rest periods; 3) failed to timely pay wages upon separation from employment; 4) failed to pay for all hours worked; 5) failed to pay overtime; 6) failed to properly reimburse work-related expenses; and 7) failed to provide accurate wage statements. | ||||||||||||||||||||
Plaintiff(s) | Defendant(s) | Date instituted | Court or agency currently pending in | |||||||||||||||||
John Burnell 1 | Swift Transportation Co., Inc | March 22, 2010 | United States District Court for the Central District of California | |||||||||||||||||
James R. Rudsell 1 | Swift Transportation Co. of Arizona, LLC and Swift Transportation Company | April 5, 2012 | United States District Court for the Central District of California | |||||||||||||||||
Recent Developments and Current Status | ||||||||||||||||||||
In April 2019, the parties reached settlement of this matter. In January 2020, the court granted final approval of the settlement. Two objectors appealed the court’s decision granting final approval of the settlement. The likelihood that a loss has been incurred is probable and estimable, and the loss has accordingly been accrued as of September 30, 2020. | ||||||||||||||||||||
Arizona Minimum Wage Class Action | ||||||||||||||||||||
The plaintiffs generally allege one or more of the following: 1) failure to pay minimum wage for the first day of orientation; 2) failure to pay minimum wage for time spent studying; 3) failure to pay minimum wage for 16 hours per day; and 4) failure to pay minimum wage for the first eight hours of sleeper berth time. | ||||||||||||||||||||
Plaintiff(s) | Defendant(s) | Date instituted | Court or agency currently pending in | |||||||||||||||||
Pamela Julian 1 | Swift Transportation Co., Inc. and Swift Transportation Co. of Arizona LLC | December 29, 2015 | United States District Court for the District of Arizona | |||||||||||||||||
Recent Developments and Current Status | ||||||||||||||||||||
In December 2019, the court awarded damages for failure to pay minimum wage for 16 hours per day. In August 2020, the parties reached settlement in this matter. The likelihood that a loss has been incurred is probable and estimable, and the loss has accordingly been accrued as of September 30, 2020. |
1 Individually and on behalf of all others similarly situated.
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KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED
INDEPENDENT CONTRACTOR MATTERS | ||||||||||||||||||||
Ninth Circuit Independent Contractor Misclassification Class Action | ||||||||||||||||||||
The putative class alleges that Swift misclassified independent contractors as independent contractors, instead of employees, in violation of the Fair Labor Standards Act and various state laws. The lawsuit also raises certain related issues with respect to the lease agreements that certain independent contractors have entered into with Interstate Equipment Leasing, LLC. The putative class seeks unpaid wages, liquidated damages, interest, other costs, and attorneys' fees. | ||||||||||||||||||||
Plaintiff(s) | Defendant(s) | Date instituted | Court or agency currently pending in | |||||||||||||||||
Joseph Sheer, Virginia Van Dusen, Jose Motolinia, Vickii Schwalm, Peter Wood 1 | Swift Transportation Co., Inc., Interstate Equipment Leasing, Inc., Jerry Moyes, and Chad Killebrew | December 22, 2009 | Unites States District Court of Arizona and Ninth Circuit Court of Appeals | |||||||||||||||||
Recent Developments and Current Status | ||||||||||||||||||||
In January 2020, the court granted final approval of the settlement in this matter. In March 2020, the Company paid the settlement amount approved by the court. As of September 30, 2020, the Company has a reserve accrued for anticipated costs associated with finalizing this matter. | ||||||||||||||||||||
1 Individually and on behalf of all others similarly situated.
Self Insurance
Automobile Liability, General Liability, and Excess Liability — Effective November 1, 2019, the Company has $130.0 million in excess auto liability ("AL") coverage. For prior years, Swift and Knight separately maintained varying excess AL and general liability limits. During prior policy periods, Swift AL claims were subject to a $10.0 million self-insured retention ("SIR") per occurrence and Knight AL claims were subject to a $1.0 million to $3.0 million SIR per occurrence. Additionally, Knight carried a $2.5 million aggregate deductible for any loss or losses within the $5.0 million excess of $5.0 million layer of coverage. Effective March 1, 2020, Knight and Swift retain the same $10.0 million SIR per occurrence.
Cargo Damage and Loss — The Company is insured against cargo damage and loss with liability limits of $2.0 million per truck or trailer with a $10.0 million limit per occurrence.
Workers' Compensation and Employers' Liability — The Company is self-insured for workers' compensation coverage. Swift maintains statutory coverage limits, subject to a $5.0 million SIR for each accident or disease. Effective March 1, 2019, Knight maintains statutory coverage limits, subject to a $2.0 million SIR for each accident or disease. Prior to March 1, 2019, the Knight SIR was $1.0 million per each accident or disease.
Medical — Knight maintains primary and excess coverage for employee medical expenses, with a $0.3 million SIR per claimant. Through December 31, 2019, Swift was fully insured on its medical benefits (subject to contributed premiums). Effective January 1, 2020, Swift provides primary and excess coverage for employee medical expenses, with an SIR of $0.5 million per claimant to all employees.
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KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED
Note 12 — Share Repurchase Plan
On May 31, 2019, the Company announced that the Board approved the repurchase of up to $250.0 million worth of the Company's outstanding common stock (the "2019 Knight-Swift Share Repurchase Plan"). With the adoption of the 2019 Knight-Swift Share Repurchase Plan, the Company terminated the $250.0 million repurchase plan previously approved by the Board in June 2018 (the "2018 Knight-Swift Share Repurchase Plan"). There was approximately $0.2 million remaining under the 2018 Knight-Swift Share Repurchase Plan upon termination.
The following table presents the Company's repurchases of its common stock under the respective share repurchase plans, excluding advisory fees:
Share Repurchase Plan | Quarter-to-Date September 30, 2020 | Year-to-Date September 30, 2020 | ||||||||||||||||||||||||||||||
Board Approval Date | Authorized Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||
May 30, 2019 1 | $250,000 | — | $ | — | 1,139 | $ | 34,630 | |||||||||||||||||||||||||
— | $ | — | 1,139 | $ | 34,630 | |||||||||||||||||||||||||||
Share Repurchase Plan | Quarter-to-Date September 30, 2019 | Year-to-Date September 30, 2019 | ||||||||||||||||||||||||||||||
Board Approval Date | Authorized Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||
June 1, 2018 | $250,000 | — | $ | — | 2,315 | $ | 70,500 | |||||||||||||||||||||||||
May 30, 2019 1 | $250,000 | — | — | 559 | 16,392 | |||||||||||||||||||||||||||
— | $ | — | 2,874 | $ | 86,892 | |||||||||||||||||||||||||||
1 $199.0 million and $233.6 million remained available under the 2019 Knight-Swift Share Repurchase Plan as of September 30, 2020 and December 31, 2019, respectively.
Subsequent to September 30, 2020, the Company repurchased 1.1 million shares for $43.3 million under the 2019 Knight-Swift Share Repurchase Plan, leaving $155.7 million available as of November 2, 2020.
Note 13 — Weighted Average Shares Outstanding
Earnings per share, basic and diluted, as presented in the condensed consolidated statements of comprehensive income, are calculated by dividing net income attributable to Knight-Swift by the respective weighted average common shares outstanding during the period.
The following table reconciles basic weighted average shares outstanding to diluted weighted average shares outstanding:
Quarter-to-Date September 30, | Year-to-Date September 30, | ||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Basic weighted average common shares outstanding | 170,205 | 170,504 | 170,257 | 171,841 | |||||||||||||||||||
Dilutive effect of equity awards | 823 | 786 | 778 | 683 | |||||||||||||||||||
Diluted weighted average common shares outstanding | 171,028 | 171,290 | 171,035 | 172,524 | |||||||||||||||||||
Anti-dilutive shares excluded from diluted earnings per share 1 | 8 | 408 | 187 | 829 |
1 Shares were excluded from the dilutive-effect calculation because the outstanding awards' exercise prices were greater than the average market price of the Company's common stock for the periods presented.
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KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED
Note 14 — Related Party Transactions
The following table presents Knight-Swift's transactions with companies controlled by and/or affiliated with its related parties:
Quarter-to-Date September 30, | Year-to-Date September 30, | ||||||||||||||||||||||||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||||||||||||
Provided by Knight-Swift | Received by Knight-Swift | Provided by Knight-Swift | Received by Knight-Swift | Provided by Knight-Swift | Received by Knight-Swift | Provided by Knight-Swift | Received by Knight-Swift | ||||||||||||||||||||||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
Freight Services: | |||||||||||||||||||||||||||||||||||||||||||||||
Central Freight Lines 1 | $ | 1 | $ | — | $ | 6,830 | $ | — | $ | 7,837 | $ | — | $ | 13,789 | $ | — | |||||||||||||||||||||||||||||||
SME Industries 1 | 28 | — | 54 | — | 56 | — | 271 | — | |||||||||||||||||||||||||||||||||||||||
Total | $ | 29 | $ | — | $ | 6,884 | $ | — | $ | 7,893 | $ | — | $ | 14,060 | $ | — | |||||||||||||||||||||||||||||||
Facility and Equipment Leases: | |||||||||||||||||||||||||||||||||||||||||||||||
Central Freight Lines 1 | $ | 25 | $ | 92 | $ | — | $ | 92 | $ | 48 | $ | 277 | $ | 322 | $ | 277 | |||||||||||||||||||||||||||||||
Other Affiliates 1 | 2 | 37 | 5 | — | 11 | 146 | 14 | — | |||||||||||||||||||||||||||||||||||||||
Total | $ | 27 | $ | 129 | $ | 5 | $ | 92 | $ | 59 | $ | 423 | $ | 336 | $ | 277 | |||||||||||||||||||||||||||||||
Other Services: | |||||||||||||||||||||||||||||||||||||||||||||||
Central Freight Lines 1 | $ | 412 | $ | — | $ | 817 | $ | — | $ | 427 | $ | — | $ | 1,359 | $ | — | |||||||||||||||||||||||||||||||
DPF Mobile 1 | — | 2 | — | 50 | — | 33 | — | 148 | |||||||||||||||||||||||||||||||||||||||
Other Affiliates 1 | 13 | — | 9 | 600 | 32 | — | 31 | 1,832 | |||||||||||||||||||||||||||||||||||||||
Total | $ | 425 | $ | 2 | $ | 826 | $ | 650 | $ | 459 | $ | 33 | $ | 1,390 | $ | 1,980 | |||||||||||||||||||||||||||||||
1 Entities affiliated with former Board member Jerry Moyes include Central Freight Lines, SME Industries, Compensi Services, and DPF Mobile. "Other affiliates" includes entities that are associated with various board members and executives and require approval by the Board prior to completing transactions. Transactions with these entities generally include freight services, facility and equipment leases, equipment sales, and other services.
•Freight Services Provided by Knight-Swift — The Company charges each of these companies for transportation services.
•Freight Services Received by Knight-Swift — Transportation services received from Central Freight Lines represent less-than-truckload freight services rendered to haul parts and equipment to Company shop locations.
•Other Services Provided by Knight-Swift — Other services provided by the Company to the identified related parties include equipment sales and miscellaneous services.
•Other Services Received by Knight-Swift — Consulting fees, diesel particulate filter cleaning, sales of various parts and tractor accessories, and certain third-party payroll and employee benefits administration services from the identified related parties are included in other services received by the Company.
During the quarter ended September 30, 2020, the ownership percentage of Jerry Moyes and related affiliates fell below the threshold requiring related party disclosure. The amounts included in this Note 14 pertain to transactions that occurred prior to the date that the ownership percentage changed.
Receivables and payables pertaining to related party transactions were:
September 30, 2020 | December 31, 2019 | ||||||||||||||||||||||
Receivable | Payable | Receivable | Payable | ||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Central Freight Lines | $ | 233 | $ | — | $ | 2,872 | $ | — | |||||||||||||||
SME Industries | 2 | — | 17 | — | |||||||||||||||||||
DPF Mobile | — | — | — | 2 | |||||||||||||||||||
Other Affiliates | 1 | — | — | — | |||||||||||||||||||
Total | $ | 236 | $ | — | $ | 2,889 | $ | 2 | |||||||||||||||
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KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED
Note 15 — Information by Segment and Geography
Segment Information
The Company has three reportable segments: Trucking, Logistics, and Intermodal, as well as the non-reportable segments, discussed below. Based on how economic factors affect the nature, amount, timing, and uncertainty of revenue or cash flows, the Company disaggregates revenues by reportable segment for the purposes of applying the ASC Topic 606 guidance.
The Company's twenty operating segments are structured around the types of transportation service offerings provided to our customers, as well as the equipment utilized. In addition, the operating segments may be further distinguished by the Company’s respective brands. The Company aggregated these various operating segments into the three reportable segments discussed below based on similarities with both their qualitative and economic characteristics.
Trucking
The Trucking reportable segment is comprised of nine trucking operating segments that provide similar transportation services to our customers utilizing similar transportation equipment over both irregular (one-way movement) and/or dedicated routes. The Trucking reportable segment consists of irregular route and dedicated, refrigerated, expedited, flatbed, and cross-border operations.
Logistics
The Logistics reportable segment is comprised of five logistics operating segments that provide similar transportation services to our customers and primarily consist of brokerage and other freight management services utilizing third-party transportation providers and their equipment.
Intermodal
The Intermodal reportable segment is comprised of two intermodal operating segments that provide similar transportation services to our customers. These transportation services include arranging the movement of customers' freight through third-party intermodal rail services on the Company’s trailing equipment (trailers on flat cars and rail containers), as well as drayage services to transport loads between the railheads and customer locations.
Non-reportable
The non-reportable segments include four operating segments that consist of support services provided to the Company's customers and independent contractors (including repair and maintenance shop services, equipment leasing, warranty services, and insurance), trailer parts manufacturing, warehousing, and certain driving academy activities, as well as certain corporate expenses (such as legal settlements and accruals, certain impairments, and amortization of intangibles related to the 2017 Merger and various acquisitions).
Intersegment Eliminations
Certain operating segments provide transportation and related services for other affiliates outside of their reportable segments. For certain operating segments, such services are billed at cost, and no profit is earned. For the other operating segments, revenues for such services are based on negotiated rates, and are reflected as revenues of the billing segment. These rates are adjusted from time to time, based on market conditions. Such intersegment revenues and expenses are eliminated in Knight-Swift's consolidated results.
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KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED
The following tables present the Company's financial information by segment:
Quarter-to-Date September 30, | Year-to-Date September 30, | ||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
Revenue: | (In thousands) | ||||||||||||||||||||||
Trucking | $ | 975,881 | $ | 986,768 | $ | 2,774,311 | $ | 2,980,040 | |||||||||||||||
Logistics | 99,018 | 86,213 | 248,320 | 258,094 | |||||||||||||||||||
Intermodal | 98,859 | 108,937 | 276,410 | 343,499 | |||||||||||||||||||
Subtotal | $ | 1,173,758 | $ | 1,181,918 | $ | 3,299,041 | $ | 3,581,633 | |||||||||||||||
Non-reportable segments | 56,610 | 30,597 | 148,141 | 97,958 | |||||||||||||||||||
Intersegment eliminations | (19,962) | (11,993) | (51,280) | (32,451) | |||||||||||||||||||
Total revenue | $ | 1,210,406 | $ | 1,200,522 | $ | 3,395,902 | $ | 3,647,140 | |||||||||||||||
Quarter-to-Date September 30, | Year-to-Date September 30, | ||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
Operating income (loss): | (In thousands) | ||||||||||||||||||||||
Trucking | $ | 168,781 | $ | 109,409 | $ | 383,903 | $ | 350,356 | |||||||||||||||
Logistics | 2,478 | 3,692 | 9,235 | 15,996 | |||||||||||||||||||
Intermodal | 250 | (2,652) | (6,962) | 3,901 | |||||||||||||||||||
Subtotal | $ | 171,509 | $ | 110,449 | $ | 386,176 | $ | 370,253 | |||||||||||||||
Non-reportable segments | (6,048) | (7,496) | (16,429) | (42,408) | |||||||||||||||||||
Operating income | $ | 165,461 | $ | 102,953 | $ | 369,747 | $ | 327,845 | |||||||||||||||
Quarter-to-Date September 30, | Year-to-Date September 30, | ||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
Depreciation and amortization of property and equipment: | (In thousands) | ||||||||||||||||||||||
Trucking | $ | 97,867 | $ | 91,390 | $ | 288,970 | $ | 262,742 | |||||||||||||||
Logistics | 214 | 185 | 628 | 499 | |||||||||||||||||||
Intermodal | 3,564 | 3,355 | 10,658 | 10,018 | |||||||||||||||||||
Subtotal | $ | 101,645 | $ | 94,930 | $ | 300,256 | $ | 273,259 | |||||||||||||||
Non-reportable segments | 14,019 | 11,954 | 40,230 | 37,500 | |||||||||||||||||||
Depreciation and amortization of property and equipment | $ | 115,664 | $ | 106,884 | $ | 340,486 | $ | 310,759 | |||||||||||||||
Geographical Information
In the aggregate, total revenue from the Company's foreign operations was less than 5.0% of consolidated total revenue for the quarter and year-to-date periods ended September 30, 2020 and 2019. Additionally, long-lived assets on the Company's foreign subsidiary balance sheets were less than 5.0% of consolidated total assets as of September 30, 2020 and December 31, 2019.
26
KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED
Note 16 — Fair Value Measurement
ASC Topic 820, Fair Value Measurements and Disclosures, requires that the Company disclose estimated fair values for its financial instruments. The estimated fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or most advantageous market for the asset or liability. Fair value estimates are made at a specific point in time and are based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Changes in assumptions could significantly affect these estimates. Because the fair value is estimated as of September 30, 2020 and December 31, 2019, the amounts that will actually be realized or paid at settlement or maturity of the instruments in the future could be significantly different.
The estimated fair values of the Company's financial instruments represent management's best estimates of the amounts that would be received to sell those assets or that would be paid to transfer those liabilities in an orderly transaction between market participants at that date. The estimated fair value measurements maximize the use of observable inputs. However, in situations where there is little, if any, market activity for the asset or liability at the measurement date, the estimated fair value measurement reflects management's own judgments about the assumptions that market participants would use in pricing the asset or liability. These judgments are developed by the Company based on the best information available under the circumstances.
The following summary presents a description of the methods and assumptions used to estimate the fair value of each class of financial instrument.
Restricted Investments, Held-to-Maturity — The estimated fair value of the Company's restricted investments, held-to-maturity, is based on quoted prices in active markets that are readily and regularly obtainable. See Note 5 for additional disclosures regarding restricted investments, held-to-maturity.
Transportation Resource Partners — The estimated fair value of the Company's investments with Transportation Resource Partners are privately negotiated equity investments. The carrying amount of these investments approximates the fair value.
Equity Securities — The estimated fair value of the Company's investments in equity securities is based on quoted prices in active markets that are readily and regularly obtainable.
Debt Instruments and Leases — For notes payable under the Revolver and the Term Loan, fair value approximates the carrying value due to the variable interest rate. The carrying value of the 2018 RSA approximates fair value, as the underlying receivables are short-term in nature and only eligible receivables (such as those with high credit ratings) are qualified to secure the borrowed amounts. For finance and operating lease liabilities, the carrying value approximates the fair value, as the Company's finance and operating lease liabilities are structured to amortize in a manner similar to the depreciation of the underlying assets.
Contingent Consideration — The estimated fair value of the Company's contingent consideration owed to Warehousing Co.'s seller is calculated using a Monte Carlo simulation model based on the acquiree's earnings before interest and taxes.
Other — Cash and cash equivalents, restricted cash, net accounts receivable, income tax refund receivable, and accounts payable represent financial instruments for which the carrying amount approximates fair value, as they are short-term in nature. These instruments are accordingly excluded from the disclosures below. All remaining balance sheet amounts excluded from the below are not considered financial instruments, subject to this disclosure.
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KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED
The following table presents the carrying amounts and estimated fair values of the Company's major categories of financial assets and liabilities:
September 30, 2020 | December 31, 2019 | ||||||||||||||||||||||
Carrying Value | Estimated Fair Value | Carrying Value | Estimated Fair Value | ||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Financial Assets: | |||||||||||||||||||||||
Restricted investments, held-to-maturity 1 | $ | 9,052 | $ | 9,057 | $ | 8,912 | $ | 8,915 | |||||||||||||||
TRP Investments 2 | 37,547 | 37,547 | 30,878 | 30,878 | |||||||||||||||||||
Investments in equity securities 2 | 21,859 | 21,859 | 8,722 | 8,722 | |||||||||||||||||||
Financial Liabilities: | |||||||||||||||||||||||
Term Loan, due October 2020 3 | $ | 365,000 | $ | 365,000 | $ | 364,825 | $ | 365,000 | |||||||||||||||
2018 RSA, due July 2021 4 | 201,878 | 202,000 | 204,762 | 205,000 | |||||||||||||||||||
Revolver, due October 2022 | 170,000 | 170,000 | 279,000 | 279,000 | |||||||||||||||||||
Contingent consideration associated with acquisition 5 | 17,570 | 17,570 | — | — | |||||||||||||||||||
1Refer to Note 5 for the differences between the carrying amounts and estimated fair values of the Company's restricted investments, held-to-maturity.
2The investments are carried at fair value and are included in "Other long-term assets" on the condensed consolidated balance sheets.
3The carrying amount of the Term Loan is included in "Finance lease liabilities and long-term debt – current portion," on the condensed consolidated balance sheets and is net of $0.2 million in deferred loan costs as of December 31, 2019. On October 2, 2020, the 2017 Debt Agreement was amended to extend the maturity date of the Term Loan to October 3, 2022, incorporate language regarding the transition away from LIBOR, and update other regulatory and technical provisions customary for facilities of this type. Just prior to this extension, the Company paid $65.0 million on the outstanding balance of the Term Loan, leaving $300.0 million face value outstanding.
4The carrying amount of the 2018 RSA is included in "Accounts receivable securitization – current portion," on the condensed consolidated balance sheets as of September 30, 2020 and within "Accounts receivable securitization – less current portion" as of December 31, 2019. The carrying amount is net of $0.1 million and $0.2 million in deferred loan costs as of September 30, 2020 and December 31, 2019, respectively.
5The carrying amount of the contingent consideration associated with the acquisition is included in both the "Accrued liabilities" and "Other long-term liabilities" line items on the condensed consolidated balance sheets.
Recurring Fair Value Measurements (Assets) — The following table depicts the level in the fair value hierarchy of the inputs used to estimate the fair value of assets measured on a recurring basis as of September 30, 2020 and December 31, 2019:
Fair Value Measurements at Reporting Date Using: | |||||||||||||||||||||||||||||
Estimated Fair Value | Level 1 Inputs | Level 2 Inputs | Level 3 Inputs | Total Gain (Loss) | |||||||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||||||
As of September 30, 2020 | |||||||||||||||||||||||||||||
Investments in equity securities 1 | $ | 21,859 | $ | 21,859 | $ | — | $ | — | $ | 6,737 | |||||||||||||||||||
As of December 31, 2019 | |||||||||||||||||||||||||||||
Investments in equity securities 1 | $ | 8,722 | $ | 8,722 | $ | — | $ | — | $ | (184) | |||||||||||||||||||
1Total unrealized gains (losses) for these investments are included within "Other (expense) income, net" within the condensed consolidated statements of comprehensive income for the quarter and year-to-date periods ended September 30, 2020 and 2019. The Company did not sell any equity investments during the quarter and year-to-date periods ended September 30, 2020 or 2019 and therefore did not realize any gains (losses) on these investments.
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KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED
Recurring Fair Value Measurements (Liabilities) — The following table depicts the level in the fair value hierarchy of the inputs used to estimate the fair value of liabilities measured on a recurring basis as of September 30, 2020:
Fair Value Measurements at Reporting Date Using: | |||||||||||||||||||||||||||||
Estimated Fair Value | Level 1 Inputs | Level 2 Inputs | Level 3 Inputs | Total Gain (Loss) | |||||||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||||||
As of September 30, 2020 | |||||||||||||||||||||||||||||
Contingent consideration associated with acquisition 1 | $ | 17,570 | $ | — | $ | — | $ | 17,570 | $ | — | |||||||||||||||||||
1There were no material adjustments to the contingent consideration made during the quarter and year-to-date periods ended September 30, 2020.
As of December 31, 2019, there were no major categories of liabilities on the condensed consolidated balance sheets estimated at fair value that were measured on a recurring basis.
Nonrecurring Fair Value Measurements (Assets) — The following table depicts the level in the fair value hierarchy of the inputs used to estimate fair value of assets measured on a nonrecurring basis as of September 30, 2020 and December 31, 2019:
Fair Value Measurements at Reporting Date Using: | |||||||||||||||||||||||||||||
Estimated Fair Value | Level 1 Inputs | Level 2 Inputs | Level 3 Inputs | Total Loss | |||||||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||||||
As of September 30, 2020 | |||||||||||||||||||||||||||||
Equipment 1 | $ | 5,099 | $ | — | $ | 5,099 | $ | — | $ | (1,255) | |||||||||||||||||||
As of December 31, 2019 | |||||||||||||||||||||||||||||
Leasehold improvements 2 | $ | — | $ | — | $ | — | $ | — | $ | (2,182) | |||||||||||||||||||
Equipment 3 | 1,380 | — | 1,380 | — | (870) | ||||||||||||||||||||||||
Software 4 | — | — | — | — | (434) | ||||||||||||||||||||||||
1 Reflects the non-cash impairment of certain tractors (within the Trucking segment) and certain legacy trailers (within the non-reportable segments) as a result of a softer used equipment market during the second quarter of 2020, as well as impairment charges of trailer tracking equipment (within the Trucking segment) during the first quarter of 2020.
2 During the second quarter of 2019, the Company incurred an impairment of leasehold improvements related to the early termination of a lease on one of its operating properties. This impairment was recorded in the Trucking segment.
3 During the fourth quarter of 2019, the Company incurred impairment charges which were associated with certain revenue equipment technology, warehousing equipment no longer in use, and certain Swift legacy trailer models as a result of a softer used equipment market. These impairments were allocated between the Logistics and non-reportable segments based on each segment’s use of the assets.
4 During the fourth quarter of 2019, the Company incurred impairment charges related to discontinued use of software systems. These impairments were allocated between the Logistics and non-reportable segments based on each segment's use of the assets.
Nonrecurring Fair Value Measurements (Liabilities) — As of September 30, 2020 and December 31, 2019, the Company had no major categories of liabilities estimated at fair value that were measured on a nonrecurring basis.
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ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS |
This Quarterly Report contains certain statements that may be considered "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and Section 27A of the Securities Act of 1933, as amended. All statements, other than statements of historical or current fact, are statements that could be deemed forward-looking statements, including without limitation:
•any projections of or guidance regarding earnings, earnings per share, revenues, cash flows, dividends, capital expenditures, or other financial items,
•any statement of plans, strategies, and objectives of management for future operations,
•any statements concerning proposed acquisition plans, new services, or developments,
•any statements regarding future economic conditions or performance, and
•any statements of belief and any statements of assumptions underlying any of the foregoing.
In this Quarterly Report, forward-looking statements include, but are not limited to, statements we make concerning:
•the ability of our infrastructure to support future growth, whether we grow organically or through potential acquisitions,
•the impacts of the COVID-19 global pandemic,
•the future impact of acquisitions, including achievement of anticipated synergies,
•the flexibility of our model to adapt to market conditions,
•our ability to recruit and retain qualified driving associates,
•future safety performance,
•future performance of our segments or businesses,
•our ability to gain market share,
•the ability, desire, and effects of expanding our logistics, brokerage, and intermodal operations,
•future equipment prices, our equipment purchasing or leasing plans, and our equipment turnover (including expected tractor trade-ins),
•our ability to sublease equipment to independent contractors,
•the impact of pending legal proceedings,
•the expected freight environment, including freight demand and volumes,
•economic conditions and growth, including future inflation, consumer spending, supply chain conditions, and US Gross Domestic Product ("GDP") changes,
•future pricing terms from vendors and suppliers,
•expected liquidity and methods for achieving sufficient liquidity,
•future fuel prices and the expected impact of fuel efficiency initiatives,
•future expenses and our ability to control costs,
•future operating profitability,
•future third-party service provider relationships and availability,
•future contracted pay rates with independent contractors and compensation arrangements with driving associates,
•our expected need or desire to incur indebtedness,
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED
•future capital expenditures and expected sources of liquidity, capital allocation, capital structure, capital requirements, and growth strategies and opportunities,
•expected capital expenditures,
•future mix of owned versus leased revenue equipment,
•future asset utilization,
•future return on capital,
•future share repurchases and dividends,
•future tax rates,
•future trucking industry capacity and balance between industry demand and capacity,
•future rates,
•future depreciation and amortization,
•expected tractor and trailer fleet age,
•future investment in and deployment of new or updated technology,
•political conditions and regulations, including trade regulation, quotas, duties, or tariffs, and any future changes to the foregoing,
•future insurance claims, premiums, and retention limits,
•future purchased transportation expense, and
•others.
Such statements may be identified by their use of terms or phrases such as "believe," "may," "could," "will," "would," "should," "expects," "estimates," "designed," "likely," "foresee," "goals," "seek," "target," "forecast," "projects," "anticipates," "plans," "intends," "hopes," "strategy," "potential," "objective," "continue," "outlook," and similar terms and phrases. Forward-looking statements are based on currently available operating, financial, and competitive information. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, which could cause future events and actual results to materially differ from those set forth in, contemplated by, or underlying the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in Part I, Item 1A "Risk Factors" in our 2019 Annual Report, Part II, Item 1A "Risk Factors" in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, and various disclosures in our press releases, stockholder reports, and other filings with the SEC.
All such forward-looking statements speak only as of the date of this Quarterly Report. You are cautioned not to place undue reliance on such forward-looking statements. We expressly disclaim any obligation or undertaking to publicly release any updates or revisions to any forward-looking statements contained herein, to reflect any change in our expectations with regard thereto, or any change in the events, conditions, or circumstances on which any such statement is based.
Reference to Glossary of Terms |
Certain acronyms and terms used throughout this Quarterly Report are specific to our company, commonly used in our industry, or are otherwise frequently used throughout our document. Definitions for these acronyms and terms are provided in the "Glossary of Terms," available in the front of this document.
Reference to Annual Report |
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements (unaudited) and footnotes included in this Quarterly Report, as well as the consolidated financial statements and footnotes included in our 2019 Annual Report.
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Executive Summary |
Impact of COVID-19
During year-to-date September 30, 2020, we incurred approximately $12.3 million of expenses (all within the first half of the year) directly attributable to the pandemic, which were incremental to those incurred prior to the outbreak. These primarily pertained to payroll premiums paid to our driving associates and shop technicians, as well as additional disinfectants and cleaning supplies, and various other pandemic-specific items. The costs are clearly separable from our normal business operations and are not expected to recur once the pandemic subsides.
Refer to Note 1 in Part I, Item 1 of this Quarterly Report for further discussion around the impact of COVID-19 on our company. Refer to Part II, Item 1A "Risk Factors" in our Quarterly Report for the quarterly period ended March 31, 2020 for more discussion about potential risks and uncertainties surrounding the COVID-19 pandemic that may impact our business, results of operations, or financial condition.
Company Overview
Knight-Swift Transportation Holdings Inc. is North America's largest truckload carrier and a provider of transportation solutions, headquartered in Phoenix, Arizona. The Company provides multiple truckload transportation, intermodal, and logistics services using a nationwide network of business units and terminals in the US and Mexico to serve customers throughout North America. In addition to its truckload services, Knight-Swift also contracts with third-party capacity providers to provide a broad range of shipping solutions to its customers while creating quality driving jobs for our driving associates and successful business opportunities for independent contractors. Our three reportable segments are Trucking, Logistics, and Intermodal. Additionally, we have various non-reportable segments. Refer to Note 15 in Part I, Item 1 of this Quarterly Report for descriptions of our segments.
Our objective is to operate our business with industry-leading margins and growth while providing safe, high-quality, cost-effective solutions for our customers.
Revenue
•Our trucking services include irregular route and dedicated, refrigerated, expedited, flatbed, and cross-border transportation of various products, goods, and materials for our diverse customer base. We primarily generate revenue by transporting freight for our customers through our Trucking segment.
•Our logistics and intermodal operations provide a multitude of shipping solutions, including additional sources of truckload capacity and alternative transportation modes, by utilizing our vast network of third-party capacity providers and rail providers, as well as certain logistics and freight management services. Revenue in our logistics and intermodal operations is generated through our Logistics and Intermodal segments.
•Our non-reportable segments include support services provided to our customers and independent contractors (including repair and maintenance shop services, equipment leasing, warranty services, and insurance), trailer parts manufacturing, warehousing, and certain driving academy activities, as well as certain corporate expenses (such as legal settlements and accruals, certain impairments, and amortization of intangibles related to the 2017 Merger and various acquisitions).
•In addition to the revenues earned from our customers for the trucking and non-trucking services discussed above, we also earn fuel surcharge revenue from our customers through our fuel surcharge program, which serves to recover a majority of our fuel costs. This applies only to loaded miles and typically does not offset non-paid empty miles, idle time, and out-of-route miles driven. Fuel surcharge programs involve a computation based on the change in national or regional fuel prices. These programs may update as often as weekly, but typically require a specified minimum change in fuel cost to prompt a change in fuel surcharge revenue. Therefore, many of these programs have a time lag between when fuel costs change and when the change is reflected in fuel surcharge revenue for our Trucking segment.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED
Expenses — Our most significant expenses vary with miles traveled and include fuel, driving associate-related expenses (such as wages and benefits), and services purchased from independent contractors and other transportation providers (such as railroads, drayage providers, and other trucking companies). Maintenance and tire expenses, as well as the cost of insurance and claims generally vary with the miles we travel, but also have a controllable component based on safety improvements, fleet age, efficiency, and other factors. Our primary fixed costs are depreciation and lease expense for revenue equipment and terminals, amortization of intangible assets, interest expense, and non-driver employee compensation.
Operating Statistics — We measure our consolidated and segment results through certain operating statistics, which are discussed under "Results of Operations — Segment Review — Operating Statistics," below. Our results are affected by various economic, industry, operational, regulatory, and other factors, which are set forth in Part I, Item 1A "Risk Factors" in our 2019 Annual Report, Part II, Item 1A "Risk Factors" in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, and various disclosures in our press releases, stockholder reports, and other filings with the SEC.
Consolidated Key Financial Highlights and Operating Metrics
Quarter-to-Date September 30, | Year-to-Date September 30, | ||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
GAAP financial data: | (Dollars in thousands, except per share data) | ||||||||||||||||||||||
Total revenue | $ | 1,210,406 | $ | 1,200,522 | $ | 3,395,902 | $ | 3,647,140 | |||||||||||||||
Revenue, excluding trucking fuel surcharge | $ | 1,137,313 | $ | 1,090,210 | $ | 3,162,005 | $ | 3,309,920 | |||||||||||||||
Net income attributable to Knight-Swift | $ | 122,058 | $ | 74,619 | $ | 267,673 | $ | 241,762 | |||||||||||||||
Earnings per diluted share | $ | 0.71 | $ | 0.44 | $ | 1.57 | $ | 1.40 | |||||||||||||||
Operating ratio | 86.3 | % | 91.4 | % | 89.1 | % | 91.0 | % | |||||||||||||||
Non-GAAP financial data: | |||||||||||||||||||||||
Adjusted Net Income Attributable to Knight-Swift 1 | $ | 134,618 | $ | 82,802 | $ | 307,321 | $ | 279,610 | |||||||||||||||
Adjusted EPS 1 | $ | 0.79 | $ | 0.48 | $ | 1.80 | $ | 1.62 | |||||||||||||||
Adjusted Operating Ratio 1 | 83.9 | % | 89.6 | % | 86.6 | % | 88.6 | % | |||||||||||||||
Revenue equipment: | |||||||||||||||||||||||
Average tractors (Trucking segment only) 2 | 18,464 | 18,899 | 18,439 | 18,939 | |||||||||||||||||||
Average trailers 3 | 58,310 | 57,889 | 57,716 | 58,394 | |||||||||||||||||||
Average containers | 10,852 | 9,861 | 10,522 | 9,863 |
1 Adjusted Net Income Attributable to Knight-Swift, Adjusted EPS, and Adjusted Operating Ratio are non-GAAP financial measures and should not be considered alternatives, or superior to, the most directly comparable GAAP financial measures. However, management believes that presentation of these non-GAAP financial measures provides useful information to investors regarding the Company's results of operations. Adjusted Net Income Attributable to Knight-Swift, Adjusted EPS, and Adjusted Operating Ratio are reconciled to the most directly comparable GAAP financial measures under "Non-GAAP Financial Measures," below.
2 The average age of our company-owned tractor fleet was 2.1 years and 2.0 years as of September 30, 2020 and 2019, respectively.
3 The average age of our trailer fleet was 7.7 years and 7.4 years as of September 30, 2020 and 2019, respectively.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED
Market Trends and Company Performance
Trends and Outlook — Our operational discipline, agility, and cost-control culture enabled us to execute through the unprecedented challenges presented by the COVID-19 pandemic, which introduced a new source of volatility throughout the global market in 2020. Our diversified customer base, networks, and unique brands positioned us to navigate a disrupted freight environment of unpredictable shipping volumes, shifts in pricing, and continued challenges in driver sourcing.
The national unemployment rate declined to 7.9%1 as of September 30, 2020, after the COVID-19 pandemic and efforts to contain it caused a significant rise in unemployment during the first half of the year. Economic activities that were once curtailed during the initial surge of the pandemic began to resume during the third quarter of 2020, leading to an improved labor market. Despite the improved labor market, a reduction in trained drivers (primarily due to social distancing measures across the nation), ongoing competition for experienced hires, increased safety regulations, and various alternative sources of income to potential drivers continue to hamper driver sourcing efforts throughout the industry.
During the third quarter of 2020, the US gross domestic product, which is the broadest measure of goods and services produced across the economy, increased by 33.1%2 per preliminary third-party forecasts. This may result in an expected annualized growth rate of approximately 3.0% to 4.0% for full-year 2020, as third-party forecasts are predicting a continued economic rebound in the last quarter of this year. The third quarter 2020 US employment cost index rose 2.4%1 and 0.5%1 on a year-over-year and sequential basis, respectively.
From a freight market perspective, demand toward the beginning of the year was weak, but gradually strengthened throughout the second and third quarters of 2020. We are encouraged by the continued strength in freight demand; however, demand may be difficult to predict for the last quarter of the year. We believe supply has and will continue to exit the market as evidenced by significantly lower class 8 truck orders, a weak used equipment market, and lower transportation employment levels.
Our consolidated operating income increased by 60.7% on a year-over-year basis for the third quarter of 2020 as a result of a 4.3% increase in consolidated revenue, excluding trucking fuel surcharge and our focus on cost control. Both the strength in freight demand and constrained capacity led to earlier peak volumes, which we expect will continue into the fourth quarter.
Our Trucking segment improved its Adjusted Operating Income by 54.1%, resulting in a 620 basis point Adjusted Operating Ratio improvement to 81.3% in the third quarter of 2020 from 87.5% in the third quarter of 2019. Our Logistics segment produced an Adjusted Operating Ratio of 97.4% in the third quarter of 2020. Load volumes within our Intermodal segment increased by 16.6% sequentially and decreased by 5.7% year-over-year, contributing to an Adjusted Operating Ratio of 99.7% in the third quarter of 2020, as compared 102.4% in the third quarter of last year.
We anticipate that depreciation and amortization expense will increase and rental expense will correspondingly decrease, as a percentage of revenue excluding trucking fuel surcharge, as we intend to purchase, rather than enter into operating leases for a majority of our revenue equipment in 2020. With significant tightening in the insurance markets, we may also experience changes in premiums, retention limits, and excess coverage limits in the remainder of 2020. While fuel expense is generally offset by fuel surcharge revenue, our fuel expense, net of fuel surcharge revenue may increase in the future.
We continue to manage our leverage ratio relative to our targeted range and remain committed to a strong capital structure, which we believe will position us for long-term success and enable us to pursue further opportunities for organic growth, growth through acquisitions, and other capital allocation opportunities. We do not foresee material liquidity constraints or any issues with our ongoing ability to meet our debt covenants.
________
1Source: bls.gov
2Source: bea.gov
3Source: tradingeconomics.com
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED
Comparison Between the Quarters Ended September 30, 2020 and 2019 — The $47.4 million increase in net income attributable to Knight-Swift to $122.1 million during the quarter ended September 30, 2020 from $74.6 million during the same period last year includes the following:
•Contributor — $59.4 million increase in operating income within our Trucking segment. Average revenue per tractor increased by 5.4%, driven by a 5.1% increase in revenue per loaded mile, excluding fuel surcharge and intersegment transactions.
•Contributor — $4.6 million decrease in interest expense from lower overall interest rates, as well as lower overall debt balances.
•Contributor — $4.2 million increase in "Other income, net" primarily related to an increase in gains recognized within our portfolio of investments.
•Offset — $6.2 million charge incurred within the other non-reportable segments associated with certain class action lawsuits involving pre-merger employment-related claims that were previously disclosed by Swift.
•Offset — $23.3 million increase in consolidated income tax expense, primarily due to an increase in pre-tax earnings and negative impacts from certain tax-related items within our Mexico operations in the third quarter of 2020, as compared to the third quarter of 2019. All of these factors resulted in an effective tax rate of 28.1% for the third quarter of 2020 and 24.6% for the third quarter of 2019.
Comparison Between Year-to-Date September 30, 2020 and 2019 — The $25.9 million increase in net income attributable to Knight-Swift to $267.7 million during year-to-date September 30, 2020 from $241.8 million during the same period last year includes the following:
•Contributor — $33.5 million increase in operating income within our Trucking segment. Improved operating margins offset a $103.0 million decrease in revenue, excluding fuel surcharge and intersegment transactions.
•Contributor — $9.3 million reduction in incurred legal costs within the non-reportable segments related to pre-merger legal matters previously disclosed by Swift.
•Offset — $20.7 million increase in consolidated income tax expense, primarily due to an increase in pre-tax earnings, negative impacts from certain tax-related items within our Mexico operations, and an unfavorable foreign currency fluctuation adjustment, which were partially offset by an increase in stock compensation deductions recognized as discrete items. During year-to-date September 30, 2019, we also recognized discrete items related to a reduction in our reserve for uncertain tax positions and a decrease in stock compensation deductions. All of these factors resulted in an effective tax rate of 27.0% for year-to-date September 30, 2020 and 24.5% for year-to-date September 30, 2019.
See additional discussion of our operating results within "Results of Operations — Consolidated Operating and Other Expenses" below.
Liquidity and Capital — During year-to-date September 30, 2020, we generated $655.0 million in operating cash flows, reduced our operating lease liabilities by $66.3 million, used $276.1 million for capital expenditures (net of equipment sales proceeds), and returned $41.3 million to our stockholders in the form of quarterly dividends. We also repurchased $34.6 million worth of our common stock at an average price of $30.41 per share (all within the first quarter of 2020).
We ended the quarter with $240.2 million in unrestricted cash and cash equivalents, $170.0 million outstanding on the Revolver, $365.0 million face value outstanding on the Term Loan, and $5.9 billion of stockholders' equity.
We continue to maintain our leverage ratio within our targeted range and remain committed to a strong capital structure, which we believe will position us for long-term success and enable us to pursue further opportunities for organic growth, growth through acquisitions, and other capital allocation opportunities. We do not foresee material liquidity constraints or any issues with our ongoing ability to meet our debt covenants.
See discussion under "Liquidity and Capital Resources" and "Off-Balance Sheet Arrangements" for additional information.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED
Results of Operations — Segment Review |
The Company has three reportable segments: Trucking, Logistics, and Intermodal, as well as certain non-reportable segments. Refer to Note 15 to the condensed consolidated financial statements, included in Part I, Item 1 of this Quarterly Report for descriptions of the operations of these reportable segments.
Consolidating Tables for Total Revenue and Operating Income (Loss)
Quarter-to-Date September 30, | Year-to-Date September 30, | ||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
Revenue: | (In thousands) | ||||||||||||||||||||||
Trucking | $ | 975,881 | $ | 986,768 | $ | 2,774,311 | $ | 2,980,040 | |||||||||||||||
Logistics | 99,018 | 86,213 | 248,320 | 258,094 | |||||||||||||||||||
Intermodal | 98,859 | 108,937 | 276,410 | 343,499 | |||||||||||||||||||
Subtotal | $ | 1,173,758 | $ | 1,181,918 | $ | 3,299,041 | $ | 3,581,633 | |||||||||||||||
Non-reportable segments | 56,610 | 30,597 | 148,141 | 97,958 | |||||||||||||||||||
Intersegment eliminations | (19,962) | (11,993) | (51,280) | (32,451) | |||||||||||||||||||
Total revenue | $ | 1,210,406 | $ | 1,200,522 | $ | 3,395,902 | $ | 3,647,140 | |||||||||||||||
Quarter-to-Date September 30, | Year-to-Date September 30, | ||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
Operating income (loss): | (In thousands) | ||||||||||||||||||||||
Trucking | $ | 168,781 | $ | 109,409 | $ | 383,903 | $ | 350,356 | |||||||||||||||
Logistics | 2,478 | 3,692 | 9,235 | 15,996 | |||||||||||||||||||
Intermodal | 250 | (2,652) | (6,962) | 3,901 | |||||||||||||||||||
Subtotal | $ | 171,509 | $ | 110,449 | $ | 386,176 | $ | 370,253 | |||||||||||||||
Non-reportable segments | (6,048) | (7,496) | (16,429) | (42,408) | |||||||||||||||||||
Operating income | $ | 165,461 | $ | 102,953 | $ | 369,747 | $ | 327,845 | |||||||||||||||
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED
Operating Statistics
Our chief operating decision makers monitor the GAAP results of our reportable segments, as supplemented by certain non-GAAP information. Refer to "Non-GAAP Financial Measures" below for more details. Additionally, we use a number of primary indicators to monitor our revenue and expense performance and efficiency.
Operating Statistic | Relevant Segment(s) | Description | ||||||||||||
Average Revenue per Tractor | Trucking | Measures productivity and represents revenue (excluding fuel surcharge and intersegment transactions) divided by average tractor count | ||||||||||||
Total Miles per Tractor | Trucking | Total miles (including loaded and empty miles) a tractor travels on average | ||||||||||||
Average Length of Haul | Trucking | Average miles traveled with loaded trailer cargo per order | ||||||||||||
Non-paid Empty Miles Percentage | Trucking | Percentage of miles without trailer cargo | ||||||||||||
Average Tractors | Trucking, Intermodal | Average tractors in operation during the period including company tractors and tractors provided by independent contractors | ||||||||||||
Average Trailers | Trucking | Average trailers in operation during the period | ||||||||||||
Average Revenue per Load | Logistics, Intermodal | Total revenue (excluding intersegment transactions) divided by load count | ||||||||||||
Gross Margin Percentage | Logistics (Brokerage only) | Brokerage gross margin (revenue, excluding intersegment transactions, less purchased transportation expense, excluding intersegment transactions) as a percentage of brokerage revenue, excluding intersegment transactions | ||||||||||||
Average Containers | Intermodal | Average containers in operation during the period | ||||||||||||
GAAP Operating Ratio | Trucking, Logistics, Intermodal | Measures operating efficiency and is widely used in our industry as an assessment of management's effectiveness in controlling all categories of operating expenses. Calculated as operating expenses as a percentage of total revenue, or the inverse of operating margin. | ||||||||||||
Non-GAAP Adjusted Operating Ratio | Trucking, Logistics, Intermodal | Measures operating efficiency and is widely used in our industry as an assessment of management's effectiveness in controlling all categories of operating expenses. Consolidated and segment Adjusted Operating Ratios are reconciled to their corresponding GAAP operating ratios under "Non-GAAP Financial Measures," below. |
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED
Segment Review
Trucking Segment
We generate revenue in the Trucking segment primarily through irregular route, dedicated, refrigerated, flatbed, expedited, and cross-border service offerings with 13,446 irregular route tractors and 5,018 dedicated route tractors. Generally, we are paid a predetermined rate per mile or per load for our trucking services. Additional revenues are generated by charging for tractor and trailer detention, loading and unloading activities, dedicated services, and other specialized services, as well as through the collection of fuel surcharge revenue to mitigate the impact of increases in the cost of fuel. The main factors that affect the revenue generated by our Trucking segment are rate per mile from our customers, the percentage of miles for which we are compensated, and the number of loaded miles we generate with our equipment.
The most significant expenses in the Trucking segment are primarily variable and include fuel and fuel taxes, driving associate-related expenses (such as wages, benefits, training, and recruitment), and costs associated with independent contractors primarily included in "Purchased transportation" in the condensed consolidated statements of comprehensive income. Maintenance expense (which includes costs for replacement tires for our revenue equipment) and insurance and claims expenses have both fixed and variable components. These expenses generally vary with the miles we travel, but also have a controllable component based on safety, fleet age, efficiency, and other factors. The main fixed costs in the Trucking segment are depreciation and rent expenses from leasing and acquiring revenue equipment and terminals, as well as compensating our non-driver employees.
Quarter-to-Date September 30, | Year-to-Date September 30, | QTD 2020 vs. | YTD 2020 vs. | ||||||||||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | QTD 2019 | YTD 2019 | ||||||||||||||||||||||||||||||
(Dollars in thousands, except per tractor data) | Increase (Decrease) | ||||||||||||||||||||||||||||||||||
Total revenue | $ | 975,881 | $ | 986,768 | $ | 2,774,311 | $ | 2,980,040 | (1.1 | %) | (6.9 | %) | |||||||||||||||||||||||
Revenue, excluding fuel surcharge and intersegment transactions | $ | 902,592 | $ | 876,385 | $ | 2,539,709 | $ | 2,642,663 | 3.0 | % | (3.9 | %) | |||||||||||||||||||||||
GAAP: Operating income | $ | 168,781 | $ | 109,409 | $ | 383,903 | $ | 350,356 | 54.3 | % | 9.6 | % | |||||||||||||||||||||||
Non-GAAP: Adjusted Operating Income ¹ | $ | 169,105 | $ | 109,758 | $ | 398,076 | $ | 353,585 | 54.1 | % | 12.6 | % | |||||||||||||||||||||||
Average revenue per tractor ² | $ | 48,884 | $ | 46,372 | $ | 137,736 | $ | 139,536 | 5.4 | % | (1.3 | %) | |||||||||||||||||||||||
GAAP: Operating ratio ² | 82.7 | % | 88.9 | % | 86.2 | % | 88.2 | % | (620 bps) | (200 bps) | |||||||||||||||||||||||||
Non-GAAP: Adjusted Operating Ratio ¹ ² | 81.3 | % | 87.5 | % | 84.3 | % | 86.6 | % | (620 bps) | (230 bps) | |||||||||||||||||||||||||
Non-paid empty miles percentage ² | 12.6 | % | 12.8 | % | 13.1 | % | 12.9 | % | (20 bps) | 20 bps | |||||||||||||||||||||||||
Average length of haul (miles) ² | 436 | 431 | 427 | 429 | 1.2 | % | (0.5 | %) | |||||||||||||||||||||||||||
Total miles per tractor ² | 23,422 | 23,397 | 68,729 | 69,578 | 0.1 | % | (1.2 | %) | |||||||||||||||||||||||||||
Average tractors ² ³ | 18,464 | 18,899 | 18,439 | 18,939 | (2.3 | %) | (2.6 | %) | |||||||||||||||||||||||||||
Average trailers ² | 58,310 | 57,889 | 57,716 | 58,394 | 0.7 | % | (1.2 | %) |
1 Refer to "Non-GAAP Financial Measures" below.
2 Defined under "Operating Statistics," above.
3 Includes 16,391 and 16,564 average company-owned tractors for the third quarter of 2020 and 2019, respectively.
Includes 16,347 and 16,420 average company-owned tractors for year-to-date September 30, 2020 and 2019, respectively.
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KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED
Comparison Between the Quarters Ended September 30, 2020 and 2019 — We saw year-over-year improvement across our trucking operating segments during the third quarter. Operating ratio improved to 82.7% for the third quarter of 2020 from 88.9% for the third quarter of 2019. We improved the Adjusted Operating Ratio within this segment to 81.3% in the third quarter of 2020 from 87.5% in the third quarter of 2019. Average revenue per tractor increased by 5.4%, driven by a 5.1% increase in revenue per loaded mile, excluding fuel surcharge and intersegment transactions. We expect rate per mile to continue to improve in the coming quarters.
Comparison Between Year-to-Date September 30, 2020 and 2019 — Although revenue, excluding fuel surcharge and intersegment transactions decreased by $103.0 million, operating ratio improved by 200 basis points to 86.2% from 88.2% and Adjusted Operating Ratio improved by 230 basis points to 84.3% from 86.6%. The decrease in revenue was offset by improvements in margins, ultimately leading to a 9.6% increase in operating income and a 12.6% increase in Adjusted Operating Income on a year-to-date basis. Average revenue per tractor decreased by 1.3%, driven by a 1.2% decrease in miles per tractor, which was partially offset by a 0.2% increase in revenue per loaded mile, excluding fuel surcharge and intersegment transactions.
Logistics Segment
The Logistics segment is less asset-intensive than the Trucking segment and is dependent upon capable non-driver employees, modern and effective information technology, and third-party capacity providers. Logistics revenue is primarily generated by its brokerage operations. We generate additional revenue by offering specialized logistics solutions (including, but not limited to, trailing equipment, origin management, surge volume, disaster relief, special projects, and other logistic needs). Logistics revenue is mainly affected by the rates we obtain from customers, the freight volumes we ship through third-party capacity providers, and our ability to secure third-party capacity providers to transport customer freight.
The most significant expense in the Logistics segment is purchased transportation that we pay to third-party capacity providers, which is primarily a variable cost and is included in "Purchased transportation" in the condensed consolidated statements of comprehensive income. Variability in this expense depends on truckload capacity, availability of third-party capacity providers, rates charged to customers, current freight demand, and customer shipping needs. Fixed Logistics operating expenses primarily include non-driver employee compensation and benefits recorded in "Salaries, wages, and benefits" and depreciation and amortization expense recorded in "Depreciation and amortization of property and equipment" in the condensed consolidated statements of comprehensive income.
Quarter-to-Date September 30, | Year-to-Date September 30, | QTD 2020 vs. | YTD 2020 vs. | ||||||||||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | QTD 2019 | YTD 2019 | ||||||||||||||||||||||||||||||
(Dollars in thousands, except per load data) | Increase (Decrease) | ||||||||||||||||||||||||||||||||||
Total revenue | $ | 99,018 | $ | 86,213 | $ | 248,320 | $ | 258,094 | 14.9 | % | (3.8 | %) | |||||||||||||||||||||||
Revenue, excluding intersegment transactions | $ | 96,237 | $ | 83,631 | $ | 240,060 | $ | 251,126 | 15.1 | % | (4.4 | %) | |||||||||||||||||||||||
Operating income | $ | 2,478 | $ | 3,692 | $ | 9,235 | $ | 15,996 | (32.9 | %) | (42.3 | %) | |||||||||||||||||||||||
Revenue per load – Brokerage only ¹ | $ | 1,756 | $ | 1,368 | $ | 1,518 | $ | 1,423 | 28.4 | % | 6.7 | % | |||||||||||||||||||||||
Gross margin percentage – Brokerage only ¹ | 11.0 | % | 14.0 | % | 13.5 | % | 16.0 | % | (300 bps) | (250 bps) | |||||||||||||||||||||||||
GAAP: Operating ratio ¹ | 97.5 | % | 95.7 | % | 96.3 | % | 93.8 | % | 180 bps | 250 bps | |||||||||||||||||||||||||
Non-GAAP: Adjusted Operating Ratio ¹ ² | 97.4 | % | 95.6 | % | 96.2 | % | 93.6 | % | 180 bps | 260 bps |
1 Defined under "Operating Statistics," above.
2 Refer to "Non-GAAP Financial Measures" below.
Comparison Between the Quarters Ended September 30, 2020 and 2019 — Operating ratio was 97.5% for the third quarter of 2020 compared to 95.7% for the third quarter of 2019. Adjusted Operating Ratio in the Logistics segment increased to 97.4% in the third quarter of 2020 from 95.6% in the third quarter of 2019.
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KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED
Brokerage-only — With recent tightening of capacity, brokerage gross margin decreased to 11.0% for the third quarter of 2020 from 14.0% for the third quarter of 2019. Margins began to stabilize and subsequently improved throughout the third quarter of 2020. A 28.4% increase in brokerage revenue per load, partially offset by a 7.9% decrease in brokerage load volume contributed to an 18.2% increase in brokerage revenue, excluding intersegment transactions. Load volumes grew 87.2% year-over-year within our power-only service offering, contributing to 109.6% revenue growth within power-only and representing 30.1% of our total third quarter 2020 brokerage load volumes.
Comparison Between Year-to-Date September 30, 2020 and 2019 — Operating ratio was 96.3% for year-to-date September 30, 2020 compared to 93.8% for year-to-date September 30, 2019. Adjusted Operating Ratio in the Logistics segment increased to 96.2% for year-to-date September 30, 2020 from 93.6% for year-to-date September 30, 2019.
Brokerage-only — Brokerage gross margin decreased to 13.5% for year-to-date September 30, 2020 from 16.0% for year-to-date September 30, 2019. An 8.1% decrease in brokerage load volumes, partially offset by a 6.7% increase in brokerage revenue per load resulted in a 2.0% decrease in brokerage revenue, excluding intersegment transactions.
Intermodal Segment
The Intermodal segment complements our regional operating model, allows us to better serve customers in longer haul lanes, and reduces our investment in fixed assets. Through the Intermodal segment, we generate revenue by moving freight over the rail in our containers and other trailing equipment, combined with revenue for drayage to transport loads between railheads and customer locations. The most significant expense in the Intermodal segment is the cost of purchased transportation that we pay to third-party capacity providers (including rail providers), which is primarily variable and included in "Purchased transportation" in the condensed consolidated statements of comprehensive income. Purchased transportation varies as it relates to rail capacity, freight demand, and customer shipping needs. The main fixed costs in the Intermodal segment are depreciation of our company tractors related to drayage, containers, and chassis, as well as non-driver employee compensation and benefits.
Quarter-to-Date September 30, | Year-to-Date September 30, | QTD 2020 vs. | YTD 2020 vs. | ||||||||||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | QTD 2019 | YTD 2019 | ||||||||||||||||||||||||||||||
(Dollars in thousands, except per load data) | Increase (Decrease) | ||||||||||||||||||||||||||||||||||
Total revenue | $ | 98,859 | $ | 108,937 | $ | 276,410 | $ | 343,499 | (9.3 | %) | (19.5 | %) | |||||||||||||||||||||||
Revenue, excluding intersegment transactions | $ | 98,808 | $ | 108,758 | $ | 276,129 | $ | 342,162 | (9.1 | %) | (19.3 | %) | |||||||||||||||||||||||
GAAP: Operating income (loss) | $ | 250 | $ | (2,652) | $ | (6,962) | $ | 3,901 | (109.4 | %) | (278.5 | %) | |||||||||||||||||||||||
Non-GAAP: Adjusted Operating Income (Loss) 1 | $ | 250 | $ | (2,652) | $ | (6,849) | $ | 3,901 | (109.4 | %) | (275.6 | %) | |||||||||||||||||||||||
Average revenue per load 2 | $ | 2,305 | $ | 2,393 | $ | 2,291 | $ | 2,429 | (3.7 | %) | (5.7 | %) | |||||||||||||||||||||||
GAAP: Operating ratio 2 | 99.7 | % | 102.4 | % | 102.5 | % | 98.9 | % | (270 bps) | 360 bps | |||||||||||||||||||||||||
Non-GAAP: Adjusted Operating Ratio 1 2 | 99.7 | % | 102.4 | % | 102.5 | % | 98.9 | % | (270 bps) | 360 bps | |||||||||||||||||||||||||
Load count | 42,862 | 45,445 | 120,520 | 140,844 | (5.7 | %) | (14.4 | %) | |||||||||||||||||||||||||||
Average tractors 2 3 | 548 | 625 | 573 | 656 | (12.3 | %) | (12.7 | %) | |||||||||||||||||||||||||||
Average containers 2 | 10,852 | 9,861 | 10,522 | 9,863 | 10.0 | % | 6.7 | % |
1 Refer to "Non-GAAP Financial Measures" below.
2 Defined under "Operating Statistics," above.
3 Includes 494 and 553 company-owned tractors for the third quarter of 2020 and 2019, respectively.
Includes 513 and 579 company-owned tractors for year-to-date September 30, 2020 and 2019, respectively.
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KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED
Comparison Between the Quarters Ended September 30, 2020 and 2019 — During the third quarter of 2020, operating ratio was 99.7%, compared to 102.4% during the third quarter of 2019. Continued market pressures contributed to a 9.1% decrease in revenue, excluding intersegment transactions, as load counts decreased 5.7% and revenue per load decreased 3.7%. Excluding the impact of fuel, revenue per load increased 2.5% year-over-year. On a sequential basis, a 16.6% increase in load volumes contributed to a 560 basis point improvement in operating ratio for the third quarter of 2020, compared to the second quarter of 2020. We continue to develop our Intermodal network and cost structure and expect to continue to see improved results in the fourth quarter.
Comparison Between Year-to-Date September 30, 2020 and 2019 — Operating ratio was 102.5% for year-to-date September 30, 2020 compared to 98.9% for year-to-date September 30, 2019. Continued market pressures, including the impact of the COVID-19 pandemic on port volumes, especially in the first half of the year, contributed to a 19.3% decrease in revenue, excluding intersegment transactions, as load counts decreased 14.4% and revenue per load decreased 5.7% for year-to-date September 30, 2020 compared to the same period last year.
Non-reportable Segments
The non-reportable segments include support services provided to our customers and independent contractors (including repair and maintenance shop services, equipment leasing, warranty services, and insurance), trailer parts manufacturing, warehousing, and certain driving academy activities, as well as certain corporate expenses (such as legal settlements and accruals, certain impairments, and $11.2 million in quarterly amortization of intangibles related to the 2017 Merger and various acquisitions).
Quarter-to-Date September 30, | Year-to-Date September 30, | QTD 2020 vs. | YTD 2020 vs. | ||||||||||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | QTD 2019 | YTD 2019 | ||||||||||||||||||||||||||||||
(Dollars in thousands) | Increase (Decrease) | ||||||||||||||||||||||||||||||||||
Total revenue | $ | 56,610 | $ | 30,597 | $ | 148,141 | $ | 97,958 | 85.0 | % | 51.2 | % | |||||||||||||||||||||||
Operating loss | $ | (6,048) | $ | (7,496) | $ | (16,429) | $ | (42,408) | (19.3 | %) | (61.3 | %) |
Comparison Between the Quarters Ended September 30, 2020 and 2019 — Operating results within the non-reportable segments improved in the third quarter of 2020, which included additional income earned from warehousing activities, partially offset by a $6.2 million charge associated with certain class action lawsuits involving pre-merger employment-related claims that were previously disclosed by Swift.
Comparison Between Year-to-Date September 30, 2020 and 2019 — Operating results within the non-reportable segments improved for year-to-date September 30, 2020, which included additional income earned from warehousing activities, partially offset by a $6.2 million charge associated with certain class action lawsuits involving pre-merger employment-related claims that were previously disclosed by Swift. During year-to-date September 30, 2019, we incurred $15.5 million in costs associated with a jury verdict.
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KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED
Results of Operations — Consolidated Operating and Other Expenses |
Consolidated Operating Expenses
The following tables present certain operating expenses from our condensed consolidated statements of comprehensive income, including each operating expense as a percentage of total revenue and as a percentage of revenue, excluding trucking fuel surcharge. Trucking fuel surcharge revenue can be volatile and is primarily dependent upon the cost of fuel, rather than operating expenses unrelated to fuel. Therefore, we believe that revenue, excluding trucking fuel surcharge is a better measure for analyzing many of our expenses and operating metrics.
Quarter-to-Date September 30, | Year-to-Date September 30, | QTD 2020 vs. | YTD 2020 vs. | ||||||||||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | QTD 2019 | YTD 2019 | ||||||||||||||||||||||||||||||
(Dollars in thousands) | Increase (Decrease) | ||||||||||||||||||||||||||||||||||
Salaries, wages, and benefits | $ | 376,923 | $ | 375,491 | $ | 1,097,067 | $ | 1,119,700 | 0.4 | % | (2.0 | %) | |||||||||||||||||||||||
% of total revenue | 31.1 | % | 31.3 | % | 32.3 | % | 30.7 | % | (20 bps) | 160 bps | |||||||||||||||||||||||||
% of revenue, excluding trucking fuel surcharge | 33.1 | % | 34.4 | % | 34.7 | % | 33.8 | % | (130 bps) | 90 bps |
Salaries, wages, and benefits expense is primarily affected by the total number of miles driven by company driving associates, the rate per mile we pay our company driving associates, and employee benefits, including healthcare, workers' compensation, and other benefits. To a lesser extent, non-driver employee headcount, compensation, and benefits affect this expense. Driving associate wages represent the largest component of salaries, wages, and benefits expense.
Several ongoing market factors have reduced the pool of available driving associates, contributing to a challenging driver sourcing market, which we believe will continue. Having a sufficient number of qualified driving associates is a significant headwind, although we continue to seek ways to attract and retain qualified driving associates, including heavily investing in our recruiting efforts, our driving academies, and technology and terminals that improve the experience of driving associates. We expect driving associate pay to remain inflationary, which we expect will result in additional driving associate pay increases in the future, thereby increasing our salaries, wages, and benefits expense.
•Comparison Between the Quarters Ended September 30, 2020 and 2019 — The $1.4 million increase within consolidated salaries, wages and benefits was primarily due to an increase in driving associate pay rates, partially offset by a decrease in miles driven by company driving associates and lower medical insurance costs.
•Comparison Between Year-to-Date September 30, 2020 and 2019 — The $22.6 million decrease within consolidated salaries, wages and benefits was primarily attributed to a decrease in miles driven by company driving associates, favorable development within workers' compensation expense, as well as lower medical insurance costs. These decreases were partially offset by $9.0 million in incremental payroll premiums paid to our company driving associates and shop technicians in response to the COVID-19 pandemic during the first half of 2020. The COVID-19 expenses were clearly separable from our normal business operations and are not expected to recur once the pandemic subsides.
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KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED
Quarter-to-Date September 30, | Year-to-Date September 30, | QTD 2020 vs. | YTD 2020 vs. | ||||||||||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | QTD 2019 | YTD 2019 | ||||||||||||||||||||||||||||||
(Dollars in thousands) | Increase (Decrease) | ||||||||||||||||||||||||||||||||||
Fuel | $ | 104,703 | $ | 148,699 | $ | 312,939 | $ | 438,447 | (29.6 | %) | (28.6 | %) | |||||||||||||||||||||||
% of total revenue | 8.7 | % | 12.4 | % | 9.2 | % | 12.0 | % | (370 bps) | (280 bps) | |||||||||||||||||||||||||
% of revenue, excluding trucking fuel surcharge | 9.2 | % | 13.6 | % | 9.9 | % | 13.2 | % | (440 bps) | (330 bps) |
Fuel expense consists primarily of diesel fuel expense for our company-owned tractors and fuel taxes. The primary factors affecting our fuel expense are the cost of diesel fuel, the fuel economy of our equipment, and the miles driven by company driving associates.
Our fuel surcharge programs help to offset increases in fuel prices, but apply only to loaded miles and typically do not offset non-paid empty miles, idle time, or out-of-route miles driven. Typical fuel surcharge programs involve a computation based on the change in national or regional fuel prices. These programs may update as often as weekly, but typically require a specified minimum change in fuel cost to prompt a change in fuel surcharge revenue for our Trucking segment. Therefore, many of these programs have a time lag between when fuel costs change and when the change is reflected in fuel surcharge revenue. Due to this time lag, our fuel expense, net of fuel surcharge, negatively impacts our operating income during periods of sharply rising fuel costs and positively impacts our operating income during periods of falling fuel costs. We continue to utilize our fuel efficiency initiatives such as trailer blades, idle-control, management of tractor speeds, fleet updates for more fuel-efficient engines, management of fuel procurement, and driving associate training programs that we believe contribute to controlling our fuel expense.
•Comparison Between the Quarters Ended September 30, 2020 and 2019 — The $44.0 million decrease in consolidated fuel expense is primarily due to a decrease in average DOE fuel prices to $2.43 per gallon for the third quarter of 2020 from $3.02 per gallon for the third quarter of 2019 and a 0.4% decrease in the total miles driven by company driving associates.
•Comparison Between Year-to-Date September 30, 2020 and 2019 — The $125.5 million decrease in consolidated fuel expense is primarily due to a decrease in average DOE fuel prices to $2.59 per gallon for year-to-date September 30, 2020 from $3.05 per gallon for year-to-date September 30, 2019 and a 0.5% decrease in miles driven by company driving associates.
Quarter-to-Date September 30, | Year-to-Date September 30, | QTD 2020 vs. | YTD 2020 vs. | ||||||||||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | QTD 2019 | YTD 2019 | ||||||||||||||||||||||||||||||
(Dollars in thousands) | Increase (Decrease) | ||||||||||||||||||||||||||||||||||
Operations and maintenance | $ | 69,964 | $ | 85,108 | $ | 204,435 | $ | 247,311 | (17.8 | %) | (17.3 | %) | |||||||||||||||||||||||
% of total revenue | 5.8 | % | 7.1 | % | 6.0 | % | 6.8 | % | (130 bps) | (80 bps) | |||||||||||||||||||||||||
% of revenue, excluding trucking fuel surcharge | 6.2 | % | 7.8 | % | 6.5 | % | 7.5 | % | (160 bps) | (100 bps) |
Operations and maintenance expense consists of direct operating expenses, such as driving associate hiring and recruiting expenses, equipment maintenance, and tire expense. Operations and maintenance expenses are primarily affected by the age of our company-owned fleet of tractors and trailers and the miles driven. We expect the driver market to remain competitive throughout 2020, which could increase future driving associate development and recruiting costs and negatively affect our operations and maintenance expense. We expect to continue refreshing our tractor and trailer fleet in the coming quarters to maintain or improve the average age of our equipment.
The third quarter decrease of $15.1 million and year-to-date decrease of $42.9 million in consolidated operations and maintenance expense was attributed to reduced maintenance expense associated with refreshing our fleet with newer equipment, reduced driving associate hiring expenses, and the decreases in miles driven by company driving associates noted above.
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KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED
Quarter-to-Date September 30, | Year-to-Date September 30, | QTD 2020 vs. | YTD 2020 vs. | ||||||||||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | QTD 2019 | YTD 2019 | ||||||||||||||||||||||||||||||
(Dollars in thousands) | Increase (Decrease) | ||||||||||||||||||||||||||||||||||
Insurance and claims | $ | 45,186 | $ | 46,792 | $ | 144,768 | $ | 145,724 | (3.4 | %) | (0.7 | %) | |||||||||||||||||||||||
% of total revenue | 3.7 | % | 3.9 | % | 4.3 | % | 4.0 | % | (20 bps) | 30 bps | |||||||||||||||||||||||||
% of revenue, excluding trucking fuel surcharge | 4.0 | % | 4.3 | % | 4.6 | % | 4.4 | % | (30 bps) | 20 bps |
Insurance and claims expense consists of premiums for liability, physical damage, and cargo, and will vary based upon the frequency and severity of claims, as well as our level of self-insurance, and premium expense. In recent years, insurance carriers have raised premiums for many businesses, including transportation companies, and as a result, our insurance and claims expense could increase in the future, or we could raise our self-insured retention limits or reduce excess coverage limits when our policies are renewed or replaced. Insurance and claims expense also varies based on the number of miles driven by company driving associates and independent contractors, the frequency and severity of accidents, trends in development factors used in actuarial accruals, and developments in large, prior-year claims. In future periods, our higher self-insured retention limits, as well as a tightening of excess insurance markets, may cause our consolidated insurance and claims expense to fluctuate more.
•Comparison Between the Quarters Ended September 30, 2020 and 2019 — Consolidated insurance and claims expense decreased by $1.6 million for the third quarter of 2020, as compared to the same period last year. This decrease was primarily due to a 2.3% decrease in total miles driven year-over-year, improvements within our current year experience as a result of lower frequency and severity of claims, and positive development within certain prior year losses.
•Comparison Between Year-to-Date September 30, 2020 and 2019 — Consolidated insurance and claims expense decreased by $1.0 million for year-to-date September 30, 2020, as compared to the same period last year. This decrease was primarily due to a 3.7% decrease in total miles driven year-over-year, improvements within our current year experience as a result of lower frequency and severity of claims, and positive development within certain prior year losses.
Quarter-to-Date September 30, | Year-to-Date September 30, | QTD 2020 vs. | YTD 2020 vs. | ||||||||||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | QTD 2019 | YTD 2019 | ||||||||||||||||||||||||||||||
(Dollars in thousands) | Increase (Decrease) | ||||||||||||||||||||||||||||||||||
Operating taxes and licenses | $ | 21,475 | $ | 20,970 | $ | 64,527 | $ | 64,333 | 2.4 | % | 0.3 | % | |||||||||||||||||||||||
% of total revenue | 1.8 | % | 1.7 | % | 1.9 | % | 1.8 | % | 10 bps | 10 bps | |||||||||||||||||||||||||
% of revenue, excluding trucking fuel surcharge | 1.9 | % | 1.9 | % | 2.0 | % | 1.9 | % | — bps | 10 bps |
Operating taxes and licenses include state franchise taxes, state and federal highway use taxes, property taxes, vehicle license and registration fees, fuel and mileage taxes, among others. The expense is impacted by changes in the tax rates and registration fees associated with our tractor fleet and regional operating facilities.
Operating taxes and licenses increased by $0.5 million for the third quarter of 2020 and $0.2 million for year-to-date September 30, 2020, but remained relatively flat as a percentage of revenue, excluding trucking fuel surcharge, as compared to the same periods last year.
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KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED
Quarter-to-Date September 30, | Year-to-Date September 30, | QTD 2020 vs. | YTD 2020 vs. | ||||||||||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | QTD 2019 | YTD 2019 | ||||||||||||||||||||||||||||||
(Dollars in thousands) | Increase (Decrease) | ||||||||||||||||||||||||||||||||||
Communications | $ | 5,069 | $ | 4,913 | $ | 14,845 | $ | 14,956 | 3.2 | % | (0.7 | %) | |||||||||||||||||||||||
% of total revenue | 0.4 | % | 0.4 | % | 0.4 | % | 0.4 | % | — bps | — bps | |||||||||||||||||||||||||
% of revenue, excluding trucking fuel surcharge | 0.4 | % | 0.5 | % | 0.5 | % | 0.5 | % | (10 bps) | — bps |
Communications expense is comprised of costs associated with our tractor and trailer tracking systems, information technology systems, and phone systems.
Consolidated communications expense remained relatively flat as a percentage of revenue, excluding trucking fuel surcharge for the third quarter of 2020 and year-to-date September 30, 2020, as compared to the same periods last year.
Quarter-to-Date September 30, | Year-to-Date September 30, | QTD 2020 vs. | YTD 2020 vs. | ||||||||||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | QTD 2019 | YTD 2019 | ||||||||||||||||||||||||||||||
(Dollars in thousands) | Increase (Decrease) | ||||||||||||||||||||||||||||||||||
Depreciation and amortization of property and equipment | $ | 115,664 | $ | 106,884 | $ | 340,486 | $ | 310,759 | 8.2 | % | 9.6 | % | |||||||||||||||||||||||
% of total revenue | 9.6 | % | 8.9 | % | 10.0 | % | 8.5 | % | 70 bps | 150 bps | |||||||||||||||||||||||||
% of revenue, excluding trucking fuel surcharge | 10.2 | % | 9.8 | % | 10.8 | % | 9.4 | % | 40 bps | 140 bps |
Depreciation relates primarily to our owned tractors, trailers, buildings, electronic logging devices, other communication units, and other similar assets. Changes to this fixed cost are generally attributed to increases or decreases to company-owned equipment, the relative percentage of owned versus leased equipment, and fluctuations in new equipment purchase prices, which have historically been precipitated in part by new or proposed federal and state regulations. Depreciation can also be affected by the cost of used equipment that we sell or trade and the replacement of older used equipment. Management periodically reviews the condition, average age, and reasonableness of estimated useful lives and salvage values of our equipment and considers such factors in light of our experience with similar assets, used equipment market conditions, and prevailing industry practice.
Consolidated depreciation and amortization of property and equipment increased by $8.8 million for the third quarter of 2020 and $29.7 million for year-to-date September 30, 2020, when compared to the same periods last year. These increases were primarily related to the increase in owned versus leased equipment.
We expect consolidated depreciation and amortization of property and equipment to increase both in total and as a percentage of consolidated revenue, excluding trucking fuel surcharge, as we currently do not plan to use operating leases as a primary means of funding our equipment purchases in the remainder of 2020.
Quarter-to-Date September 30, | Year-to-Date September 30, | QTD 2020 vs. | YTD 2020 vs. | ||||||||||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | QTD 2019 | YTD 2019 | ||||||||||||||||||||||||||||||
(Dollars in thousands) | Increase (Decrease) | ||||||||||||||||||||||||||||||||||
Amortization of intangibles | $ | 11,473 | $ | 10,759 | $ | 34,421 | $ | 32,144 | 6.6 | % | 7.1 | % | |||||||||||||||||||||||
% of total revenue | 0.9 | % | 0.9 | % | 1.0 | % | 0.9 | % | — bps | 10 bps | |||||||||||||||||||||||||
% of revenue, excluding trucking fuel surcharge | 1.0 | % | 1.0 | % | 1.1 | % | 1.0 | % | — bps | 10 bps |
Amortization of intangibles relates to intangible assets identified with the 2017 Merger and other acquisitions. See Note 7 in Part I, Item 1, of this Quarterly Report for further details regarding the Company's intangible assets. The increases of $0.7 million for the third quarter and $2.3 million for year-to-date September 30, 2020, when compared to the same periods last year, were attributed to an acquisition completed on January 1, 2020. See Note 4 in Part I, Item 1, of this Quarterly Report for more details regarding details of our acquisitions.
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Quarter-to-Date September 30, | Year-to-Date September 30, | QTD 2020 vs. | YTD 2020 vs. | ||||||||||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | QTD 2019 | YTD 2019 | ||||||||||||||||||||||||||||||
(Dollars in thousands) | Increase (Decrease) | ||||||||||||||||||||||||||||||||||
Rental expense | $ | 19,700 | $ | 28,726 | $ | 67,447 | $ | 97,146 | (31.4 | %) | (30.6 | %) | |||||||||||||||||||||||
% of total revenue | 1.6 | % | 2.4 | % | 2.0 | % | 2.7 | % | (80 bps) | (70 bps) | |||||||||||||||||||||||||
% of revenue, excluding trucking fuel surcharge | 1.7 | % | 2.6 | % | 2.1 | % | 2.9 | % | (90 bps) | (80 bps) |
Rental expense consists primarily of payments for tractors and trailers financed with operating leases. The primary factors affecting the expense are the size of our revenue equipment fleet and the relative percentage of owned versus leased equipment.
Consolidated rental expense decreased by $9.0 million and $29.7 million for the third quarter and year-to-date September 30, 2020, as compared to the same periods last year. This was primarily due to increasing our ratio of owned versus leased equipment.
We expect consolidated rental expense to continue to decrease both in total and as a percentage of consolidated revenue, excluding trucking fuel surcharge, as we currently do not plan to use operating leases as a primary means of funding our equipment purchases in the remainder of 2020.
Quarter-to-Date September 30, | Year-to-Date September 30, | QTD 2020 vs. | YTD 2020 vs. | ||||||||||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | QTD 2019 | YTD 2019 | ||||||||||||||||||||||||||||||
(Dollars in thousands) | Increase (Decrease) | ||||||||||||||||||||||||||||||||||
Purchased transportation | $ | 245,102 | $ | 251,337 | $ | 670,485 | $ | 781,959 | (2.5 | %) | (14.3 | %) | |||||||||||||||||||||||
% of total revenue | 20.2 | % | 20.9 | % | 19.7 | % | 21.4 | % | (70 bps) | (170 bps) | |||||||||||||||||||||||||
% of revenue, excluding trucking fuel surcharge | 21.6 | % | 23.1 | % | 21.2 | % | 23.6 | % | (150 bps) | (240 bps) |
Purchased transportation expense is comprised of payments to independent contractors in our trucking operations, as well as payments to third-party capacity providers related to logistics, freight management, and non-trucking services in our logistics and intermodal businesses. Purchased transportation is generally affected by capacity in the market as well as changes in fuel prices. As capacity tightens, our payments to third-party capacity providers and to independent contractors tend to increase. Additionally, as fuel prices increase, payments to third-party capacity providers and independent contractors increase.
We expect purchased transportation will increase as a percentage of revenue if we grow our logistics and intermodal businesses faster than our trucking business. The increase could be partially offset if independent contractors exit the market due to regulatory changes.
Consolidated purchased transportation expense decreased by $6.2 million for the third quarter of 2020 and $111.5 million for year-to-date September 30, 2020, as compared to the same periods last year. This was primarily due to decreases in miles driven by independent contractors of 11.8% and 19.3% for the third quarter and year-to-date September 30, 2020 periods, respectively, and lower fuel reimbursement expenses to independent contractors due to fewer miles and the lower fuel prices discussed above. In addition, we experienced lower purchased transportation expense from third-party carrier activities in our Logistics and Intermodal segments.
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Quarter-to-Date September 30, | Year-to-Date September 30, | QTD 2020 vs. | YTD 2020 vs. | ||||||||||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | QTD 2019 | YTD 2019 | ||||||||||||||||||||||||||||||
(Dollars in thousands) | Increase (Decrease) | ||||||||||||||||||||||||||||||||||
Impairments | $ | — | $ | — | $ | 1,255 | $ | 2,182 | — | % | (42.5 | %) |
In 2020, we incurred impairment charges associated with revenue equipment held for sale and trailer tracking systems (within our Trucking and non-reportable segments), all within the first half of the year. In 2019, we incurred impairment charges of leasehold improvements (within the Trucking segment) from the early termination of a lease of one of our operating properties, all within the first half of the year.
Quarter-to-Date September 30, | Year-to-Date September 30, | QTD 2020 vs. | YTD 2020 vs. | ||||||||||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | QTD 2019 | YTD 2019 | ||||||||||||||||||||||||||||||
(Dollars in thousands) | Increase (Decrease) | ||||||||||||||||||||||||||||||||||
Miscellaneous operating expenses | $ | 29,686 | $ | 17,890 | $ | 73,480 | $ | 64,634 | 65.9 | % | 13.7 | % |
Miscellaneous operating expenses primarily consist of legal and professional services fees, general and administrative expenses, other costs, as well as net gain on sales of equipment.
•Comparison Between the Quarters Ended September 30, 2020 and 2019 — The $11.8 million increase in net consolidated miscellaneous operating expenses was primarily due to an increase in legal expenses as we incurred $6.2 million in incremental costs related to certain class actions lawsuits involving employment-related claims that were previously disclosed by Swift and a $6.9 million reduction in gain on sales of equipment.
•Comparison Between Year-to-Date September 30, 2020 and 2019 — The $8.8 million increase in net consolidated miscellaneous operating expenses is primarily due to a $21.4 million reduction in gain on sales of equipment and was partially offset by a $9.3 million reduction in incurred legal costs related to pre-merger legal matters previously disclosed by Swift.
Consolidated Other Expenses, net
Quarter-to-Date September 30, | Year-to-Date September 30, | QTD 2020 vs. | YTD 2020 vs. | ||||||||||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | QTD 2019 | YTD 2019 | ||||||||||||||||||||||||||||||
(Dollars in thousands) | Increase (Decrease) | ||||||||||||||||||||||||||||||||||
Interest expense | $ | 3,232 | $ | 7,790 | $ | 13,360 | $ | 22,294 | (58.5 | %) | (40.1 | %) | |||||||||||||||||||||||
Other (income), net | (7,484) | (3,335) | (9,476) | (12,575) | 124.4 | % | (24.6 | %) | |||||||||||||||||||||||||||
Income tax expense | 47,835 | 24,524 | 99,204 | 78,523 | 95.1 | % | 26.3 | % |
Interest expense — Interest expense is comprised of debt and finance lease interest expense as well as amortization of deferred loan costs. The quarter and year-to-date decreases in interest expense were primarily due to lower overall interest rates, as well as lower overall debt balances.
Other (income), net — Other (income), net is primarily comprised of unrealized (gains) and losses from our various equity investments, including our TRP investments accounted for under the equity method, as well as certain other non-operating income and expense items that may arise outside of the normal course of business.
•Comparison Between the Quarters Ended September 30, 2020 and 2019 — The $4.2 million favorable change between the third quarter of 2020 and 2019 is primarily driven by gains recognized within our portfolio of investments.
•Comparison Between Year-to-Date September 30, 2020 and 2019 — The $3.1 million unfavorable change between year-to-date September 30, 2020 and 2019 is primarily driven by losses recognized within our portfolio of investments.
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KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED
Income tax expense — In addition to the discussion below, Note 8 in Part I, Item 1 of this Quarterly Report provides further analysis related to income taxes.
•Comparison Between the Quarters Ended September 30, 2020 and 2019 — The $23.3 million increase in consolidated income tax expense was primarily due to an increase in pre-tax earnings and negative impacts from certain tax-related items within our Mexico operations in the third quarter of 2020, as compared to the third quarter of 2019. All of these factors resulted in an effective tax rate of 28.1% for the third quarter of 2020 and 24.6% for the third quarter of 2019.
•Comparison Between Year-to-Date September 30, 2020 and 2019 — The $20.7 million increase in consolidated income tax expense was primarily due to an increase in pre-tax earnings, negative impacts from certain tax-related items within our Mexico operations, and an unfavorable foreign currency fluctuation adjustment, which were partially offset by an increase in stock compensation deductions recognized as discrete items. During year-to-date September 30, 2019, we also recognized discrete items related to a reduction in our reserve for uncertain tax positions and a decrease in stock compensation deductions. All of these factors resulted in an effective tax rate of 27.0% for year-to-date September 30, 2020 and 24.5% for year-to-date September 30, 2019.
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KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED
Non-GAAP Financial Measures |
The terms "Adjusted Net Income Attributable to Knight-Swift," "Adjusted EPS," "Adjusted Operating Income," and "Adjusted Operating Ratio," as we define them, are not presented in accordance with GAAP. These financial measures supplement our GAAP results in evaluating certain aspects of our business. We believe that using these measures improves comparability in analyzing our performance because they remove the impact of items from our operating results that, in our opinion, do not reflect our core operating performance. Management and the Board focus on Adjusted Net Income Attributable to Knight-Swift, Adjusted EPS, Adjusted Operating Income, and Adjusted Operating Ratio as key measures of our performance, all of which are reconciled to the most comparable GAAP financial measures and further discussed below. We believe our presentation of these non-GAAP financial measures is useful because it provides investors and securities analysts the same information that we use internally for purposes of assessing our core operating performance.
Adjusted Net Income Attributable to Knight-Swift, Adjusted EPS, Adjusted Operating Income, and Adjusted Operating Ratio are not substitutes for their comparable GAAP financial measures, such as net income, cash flows from operating activities, operating income, or other measures prescribed by GAAP. There are limitations to using non-GAAP financial measures. Although we believe that they improve comparability in analyzing our period to period performance, they could limit comparability to other companies in our industry if those companies define these measures differently. Because of these limitations, our non-GAAP financial measures should not be considered measures of income generated by our business or discretionary cash available to us to invest in the growth of our business. Management compensates for these limitations by primarily relying on GAAP results and using non-GAAP financial measures on a supplemental basis.
Pursuant to the requirements of Regulation G, the following tables reconcile GAAP consolidated net income attributable to Knight-Swift to non-GAAP consolidated Adjusted Net Income attributable to Knight-Swift, GAAP consolidated earnings per diluted share to non-GAAP consolidated Adjusted EPS, GAAP consolidated operating ratio to non-GAAP consolidated Adjusted Operating Ratio, GAAP reportable segment operating income to non-GAAP reportable segment Adjusted Operating Income, and GAAP reportable segment operating ratio to non-GAAP reportable segment Adjusted Operating Ratio.
Non-GAAP Reconciliation:
Consolidated Adjusted Net Income Attributable to Knight-Swift and Adjusted EPS
Quarter-to-Date September 30, | Year-to-Date September 30, | ||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
GAAP: Net income attributable to Knight-Swift | $ | 122,058 | $ | 74,619 | $ | 267,673 | $ | 241,762 | |||||||||||||||
Adjusted for: | |||||||||||||||||||||||
Income tax expense attributable to Knight-Swift | 47,835 | 24,524 | 99,204 | 78,523 | |||||||||||||||||||
Income before income taxes attributable to Knight-Swift | 169,893 | 99,143 | 366,877 | 320,285 | |||||||||||||||||||
Amortization of intangibles 1 | 11,473 | 10,759 | 34,421 | 32,144 | |||||||||||||||||||
Impairments 2 | — | — | 1,255 | 2,182 | |||||||||||||||||||
Legal accruals 3 | 6,160 | — | 6,160 | 15,500 | |||||||||||||||||||
COVID-19 incremental costs 4 | — | — | 12,259 | — | |||||||||||||||||||
Adjusted income before income taxes | 187,526 | 109,902 | 420,972 | 370,111 | |||||||||||||||||||
Provision for income tax expense at effective rate | (52,908) | (27,100) | (113,651) | (90,501) | |||||||||||||||||||
Non-GAAP: Adjusted Net Income Attributable to Knight-Swift | $ | 134,618 | $ | 82,802 | $ | 307,321 | $ | 279,610 | |||||||||||||||
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Note: Since the numbers reflected in the table below are calculated on a per share basis, they may not foot due to rounding.
Quarter-to-Date September 30, | Year-to-Date September 30, | ||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
GAAP: Earnings per diluted share | $ | 0.71 | $ | 0.44 | $ | 1.57 | $ | 1.40 | |||||||||||||||
Adjusted for: | |||||||||||||||||||||||
Income tax expense attributable to Knight-Swift | 0.28 | 0.14 | 0.58 | 0.46 | |||||||||||||||||||
Income before income taxes attributable to Knight-Swift | 0.99 | 0.58 | 2.15 | 1.86 | |||||||||||||||||||
Amortization of intangibles 1 | 0.07 | 0.06 | 0.20 | 0.19 | |||||||||||||||||||
Impairments 2 | — | — | 0.01 | 0.01 | |||||||||||||||||||
Legal accruals 3 | 0.04 | — | 0.04 | 0.09 | |||||||||||||||||||
COVID-19 incremental costs 4 | — | — | 0.07 | — | |||||||||||||||||||
Adjusted income before income taxes | 1.10 | 0.64 | 2.46 | 2.15 | |||||||||||||||||||
Provision for income tax expense at effective rate | (0.31) | (0.16) | (0.66) | (0.52) | |||||||||||||||||||
Non-GAAP: Adjusted EPS | $ | 0.79 | $ | 0.48 | $ | 1.80 | $ | 1.62 | |||||||||||||||
1 "Amortization of intangibles" reflects the non-cash amortization expense relating to intangible assets identified in the 2017 Merger and other acquisitions. Refer to Note 4 in Part I, Item 1 of this Quarterly Report for additional details regarding the acquisition.
2 "Impairments" reflects the non-cash impairment of certain tractors (within the Trucking segment) and certain legacy trailers (within the non-reportable segments) as a result of a softer used equipment market during the second quarter of 2020, as well as impairment charges of trailer tracking equipment (within the Trucking segment) during the first quarter of 2020. In the second quarter of 2019, we incurred a non-cash impairment of leasehold improvements (within the Trucking segment) which were incurred during the early termination of a lease related to one of our operating properties.
3 "Legal accruals" reflects costs incurred in the third quarter of 2020 related to certain class actions lawsuits involving employment-related claims that were previously disclosed by Swift, and in the second quarter of 2019 costs incurred with an issued jury verdict. These costs are included in "Miscellaneous operating expenses" in the condensed consolidated statements of comprehensive income.
4 "COVID-19 incremental costs" reflects costs incurred during 2020 that were directly attributable to the pandemic and were incremental to those incurred prior to the outbreak. These include payroll premiums paid to our driving associates and shop technicians, additional disinfectants and cleaning supplies, and various other pandemic-specific items. The costs are clearly separable from our normal business operations and are not expected to recur once the pandemic subsides.
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KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.
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Non-GAAP Reconciliation: Consolidated Adjusted Operating Income and Adjusted Operating Ratio
Quarter-to-Date September 30, | Year-to-Date September 30, | ||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
GAAP Presentation | (Dollars in thousands) | ||||||||||||||||||||||
Total revenue | $ | 1,210,406 | $ | 1,200,522 | $ | 3,395,902 | $ | 3,647,140 | |||||||||||||||
Total operating expenses | (1,044,945) | (1,097,569) | (3,026,155) | (3,319,295) | |||||||||||||||||||
Operating income | $ | 165,461 | $ | 102,953 | $ | 369,747 | $ | 327,845 | |||||||||||||||
Operating ratio | 86.3 | % | 91.4 | % | 89.1 | % | 91.0 | % | |||||||||||||||
Non-GAAP Presentation | |||||||||||||||||||||||
Total revenue | $ | 1,210,406 | $ | 1,200,522 | $ | 3,395,902 | $ | 3,647,140 | |||||||||||||||
Trucking fuel surcharge | (73,093) | (110,312) | (233,897) | (337,220) | |||||||||||||||||||
Revenue, excluding trucking fuel surcharge | 1,137,313 | 1,090,210 | 3,162,005 | 3,309,920 | |||||||||||||||||||
Total operating expenses | 1,044,945 | 1,097,569 | 3,026,155 | 3,319,295 | |||||||||||||||||||
Adjusted for: | |||||||||||||||||||||||
Trucking fuel surcharge | (73,093) | (110,312) | (233,897) | (337,220) | |||||||||||||||||||
Amortization of intangibles 1 | (11,473) | (10,759) | (34,421) | (32,144) | |||||||||||||||||||
Impairments 2 | — | — | (1,255) | (2,182) | |||||||||||||||||||
Legal accruals 3 | (6,160) | — | (6,160) | (15,500) | |||||||||||||||||||
COVID-19 incremental costs 4 | — | — | (12,259) | — | |||||||||||||||||||
Adjusted Operating Expenses | 954,219 | 976,498 | 2,738,163 | 2,932,249 | |||||||||||||||||||
Adjusted Operating Income | $ | 183,094 | $ | 113,712 | $ | 423,842 | $ | 377,671 | |||||||||||||||
Adjusted Operating Ratio | 83.9 | % | 89.6 | % | 86.6 | % | 88.6 | % |
1 See Non-GAAP Reconciliation: Consolidated Adjusted Net Income Attributable to Knight-Swift footnote 1.
2 See Non-GAAP Reconciliation: Consolidated Adjusted Net Income Attributable to Knight-Swift footnote 2.
3 See Non-GAAP Reconciliation: Consolidated Adjusted Net Income Attributable to Knight-Swift footnote 3.
4 See Non-GAAP Reconciliation: Consolidated Adjusted Net Income Attributable to Knight-Swift footnote 4.
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Non-GAAP Reconciliation: Reportable Segment Adjusted Operating Income and Adjusted Operating Ratio
Trucking Segment
Quarter-to-Date September 30, | Year-to-Date September 30, | ||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
GAAP Presentation | (Dollars in thousands) | ||||||||||||||||||||||
Total revenue | $ | 975,881 | $ | 986,768 | $ | 2,774,311 | $ | 2,980,040 | |||||||||||||||
Total operating expenses | (807,100) | (877,359) | (2,390,408) | (2,629,684) | |||||||||||||||||||
Operating income | $ | 168,781 | $ | 109,409 | $ | 383,903 | $ | 350,356 | |||||||||||||||
Operating ratio | 82.7 | % | 88.9 | % | 86.2 | % | 88.2 | % | |||||||||||||||
Non-GAAP Presentation | |||||||||||||||||||||||
Total revenue | $ | 975,881 | $ | 986,768 | $ | 2,774,311 | $ | 2,980,040 | |||||||||||||||
Fuel surcharge | (73,093) | (110,312) | (233,897) | (337,220) | |||||||||||||||||||
Intersegment transactions | (196) | (71) | (705) | (157) | |||||||||||||||||||
Revenue, excluding fuel surcharge and intersegment transactions | 902,592 | 876,385 | 2,539,709 | 2,642,663 | |||||||||||||||||||
Total operating expenses | 807,100 | 877,359 | 2,390,408 | 2,629,684 | |||||||||||||||||||
Adjusted for: | |||||||||||||||||||||||
Fuel surcharge | (73,093) | (110,312) | (233,897) | (337,220) | |||||||||||||||||||
Intersegment transactions | (196) | (71) | (705) | (157) | |||||||||||||||||||
Amortization of intangibles 1 | (324) | (349) | (972) | (1,047) | |||||||||||||||||||
Impairments 2 | — | — | (1,055) | (2,182) | |||||||||||||||||||
COVID-19 incremental costs 3 | — | — | (12,146) | — | |||||||||||||||||||
Adjusted Operating Expenses | 733,487 | 766,627 | 2,141,633 | 2,289,078 | |||||||||||||||||||
Adjusted Operating Income | $ | 169,105 | $ | 109,758 | $ | 398,076 | $ | 353,585 | |||||||||||||||
Adjusted Operating Ratio | 81.3 | % | 87.5 | % | 84.3 | % | 86.6 | % |
1 "Amortization of intangibles" reflects the non-cash amortization expense relating to intangible assets identified in historical Knight acquisitions.
2 See Non-GAAP Reconciliation: Consolidated Adjusted Net Income Attributable to Knight-Swift footnote 2.
3 See Non-GAAP Reconciliation: Consolidated Adjusted Net Income Attributable to Knight-Swift footnote 4.
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Logistics Segment
Quarter-to-Date September 30, | Year-to-Date September 30, | ||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
GAAP Presentation | (Dollars in thousands) | ||||||||||||||||||||||
Total revenue | $ | 99,018 | $ | 86,213 | $ | 248,320 | $ | 258,094 | |||||||||||||||
Total operating expenses | (96,540) | (82,521) | (239,085) | (242,098) | |||||||||||||||||||
Operating income | $ | 2,478 | $ | 3,692 | $ | 9,235 | $ | 15,996 | |||||||||||||||
Operating ratio | 97.5 | % | 95.7 | % | 96.3 | % | 93.8 | % | |||||||||||||||
Non-GAAP Presentation | |||||||||||||||||||||||
Total revenue | $ | 99,018 | $ | 86,213 | $ | 248,320 | $ | 258,094 | |||||||||||||||
Intersegment transactions | (2,781) | (2,582) | (8,260) | (6,968) | |||||||||||||||||||
Revenue, excluding intersegment transactions | 96,237 | 83,631 | 240,060 | 251,126 | |||||||||||||||||||
Total operating expenses | 96,540 | 82,521 | 239,085 | 242,098 | |||||||||||||||||||
Adjusted for: | |||||||||||||||||||||||
Intersegment transactions | (2,781) | (2,582) | (8,260) | (6,968) | |||||||||||||||||||
Adjusted Operating Expenses | 93,759 | 79,939 | 230,825 | 235,130 | |||||||||||||||||||
Adjusted Operating Income | $ | 2,478 | $ | 3,692 | $ | 9,235 | $ | 15,996 | |||||||||||||||
Adjusted Operating Ratio | 97.4 | % | 95.6 | % | 96.2 | % | 93.6 | % |
Intermodal Segment
Quarter-to-Date September 30, | Year-to-Date September 30, | ||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
GAAP Presentation | (Dollars in thousands) | ||||||||||||||||||||||
Total revenue | $ | 98,859 | $ | 108,937 | $ | 276,410 | $ | 343,499 | |||||||||||||||
Total operating expenses | (98,609) | (111,589) | (283,372) | (339,598) | |||||||||||||||||||
Operating income (loss) | $ | 250 | $ | (2,652) | $ | (6,962) | $ | 3,901 | |||||||||||||||
Operating ratio | 99.7 | % | 102.4 | % | 102.5 | % | 98.9 | % | |||||||||||||||
Non-GAAP Presentation | |||||||||||||||||||||||
Total revenue | $ | 98,859 | $ | 108,937 | $ | 276,410 | $ | 343,499 | |||||||||||||||
Intersegment transactions | (51) | (179) | (281) | (1,337) | |||||||||||||||||||
Revenue, excluding intersegment transactions | 98,808 | 108,758 | 276,129 | 342,162 | |||||||||||||||||||
Total operating expenses | 98,609 | 111,589 | 283,372 | 339,598 | |||||||||||||||||||
Adjusted for: | |||||||||||||||||||||||
Intersegment transactions | (51) | (179) | (281) | (1,337) | |||||||||||||||||||
COVID-19 incremental costs 1 | — | — | (113) | — | |||||||||||||||||||
Adjusted Operating Expenses | 98,558 | 111,410 | 282,978 | 338,261 | |||||||||||||||||||
Adjusted Operating Income (Loss) | $ | 250 | $ | (2,652) | $ | (6,849) | $ | 3,901 | |||||||||||||||
Adjusted Operating Ratio | 99.7 | % | 102.4 | % | 102.5 | % | 98.9 | % |
1See Non-GAAP Reconciliation: Consolidated Adjusted Net Income Attributable to Knight-Swift footnote 4.
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KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED
Liquidity and Capital Resources |
Sources of Liquidity
Our primary sources of liquidity are funds provided by operations and the following:
Source | September 30, 2020 | |||||||
(In thousands) | ||||||||
Cash and cash equivalents, excluding restricted cash | $ | 240,236 | ||||||
Availability under Revolver, due October 2022 1 | 598,906 | |||||||
Availability under 2018 RSA, due July 2021 2 | 15,719 | |||||||
Total unrestricted liquidity | $ | 854,861 | ||||||
Cash and cash equivalents – restricted 3 | 38,271 | |||||||
Restricted investments, held-to-maturity, amortized cost 3 | 9,052 | |||||||
Total liquidity, including restricted cash and restricted investments | $ | 902,184 | ||||||
1 As of September 30, 2020, we had $170.0 million in borrowings under our $800.0 million Revolver. We additionally had $31.1 million in outstanding letters of credit (discussed below), leaving $598.9 million available under the Revolver.
2 Based on eligible receivables at September 30, 2020, our borrowing base for the 2018 RSA was $285.0 million, while outstanding borrowings were $202.0 million. We additionally had $67.3 million in outstanding letters of credit (discussed below), leaving $15.7 million available under the 2018 RSA. Refer to Note 9 in Part I, Item 1 of this Quarterly Report for more information regarding the 2018 RSA.
3 Restricted cash and restricted investments are primarily held by our captive insurance companies for claims payments. "Cash and cash equivalents – restricted" consists of $36.7 million, included in "Cash and cash equivalents — restricted" in the condensed consolidated balance sheet and held by Mohave and Red Rock for claims payments. The remaining $1.6 million is included in "Other long-term assets" and is held in escrow accounts to meet statutory requirements.
Uses of Liquidity
Our business requires substantial amounts of cash for operating activities, including salaries and wages paid to our employees, contract payments to independent contractors, insurance and claims payments, tax payments, and others. We also use large amounts of cash and credit for the following activities:
Capital Expenditures — When justified by customer demand, as well as our liquidity and our ability to generate acceptable returns, we make substantial cash capital expenditures to maintain a modern company tractor fleet, refresh our trailer fleet, fund replacement of our revenue equipment fleet, and, to a lesser extent, fund upgrades to our terminals and technology in our logistics service offerings. We expect that net capital expenditures from the aforementioned projects will be in the range of $380.0 – $405.0 million for the full-year 2020. We believe we have ample flexibility with our trade cycle and purchase agreements to alter our current plans if economic or other conditions warrant.
Over the long-term, we will continue to have significant capital requirements, which may require us to seek additional borrowing, lease financing, or equity capital. The availability of financing or equity capital will depend upon our financial condition and results of operations as well as prevailing market conditions. If such additional borrowing, lease financing, or equity capital is not available at the time we need it, then we may need to borrow more under the Revolver (if not then fully drawn), extend the maturity of then-outstanding debt, rely on alternative financing arrangements, engage in asset sales, limit our fleet size, or operate our revenue equipment for longer periods.
There can be no assurance that we will be able to obtain additional debt under our existing financial arrangements to satisfy our ongoing capital requirements. However, we believe the combination of our expected cash flows, financing available through operating and finance leases, available funds under the 2018 RSA, and availability under the Revolver will be sufficient to fund our expected capital expenditures for at least the next twelve months.
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KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED
Principal and Interest Payments — As of September 30, 2020, we had debt and finance lease obligations of $881.8 million, which are discussed under "Material Debt Agreements," below. Certain cash flows from operations are committed to minimum payments of principal and interest on our debt and lease obligations. Additionally, when our financial position allows, we periodically make voluntary prepayments on our outstanding debt balances.
Letters of Credit — Pursuant to the terms of the 2017 Debt Agreement and the 2018 RSA, our lenders may issue standby letters of credit on our behalf. When we have letters of credit outstanding, the availability under the Revolver or 2018 RSA is reduced accordingly. Standby letters of credit are typically issued for the benefit of regulatory authorities, insurance companies and state departments of insurance for the purpose of satisfying certain collateral requirements, primarily related to our automobile, workers' compensation, and general insurance liabilities.
Share Repurchases — From time to time, and depending on free cash flow availability, debt levels, common stock prices, general economic and market conditions, as well as Board approval, we may repurchase shares of our outstanding common stock. As of September 30, 2020, the Company had $199.0 million remaining under the 2019 Knight-Swift Share Repurchase Plan. Additional details are discussed in Note 12 in Part I, Item 1 of this Quarterly Report.
Working Capital
As of September 30, 2020, we had a working capital deficit of $263.6 million, which was primarily due to the classification of both the Term Loan, scheduled to mature on October 2, 2020, and the 2018 RSA, scheduled to mature on July 9, 2021 as current liabilities. As of December 31, 2019, we had a working capital deficit of $103.0 million, which was primarily due to the classification of the Term Loan as a current liability. On October 2, 2020, the 2017 Debt Agreement was amended to extend the maturity date of the Term Loan to October 3, 2022, incorporate language regarding the transition away from LIBOR, and update other regulatory and technical provisions customary for facilities of this type. Just prior to this extension, we paid $65.0 million on the outstanding balance of the Term Loan, leaving $300.0 million face value outstanding. We intend to refinance the 2018 RSA prior to its maturity date.
Material Debt Agreements
As of September 30, 2020, we had $881.8 million in material debt obligations at the following carrying values:
•$365.0 million: Term Loan, due October 2020
•$201.9 million: 2018 RSA outstanding borrowings, due July 2021, net of $0.1 million in deferred loan costs
•$144.9 million: Finance lease obligations
•$170.0 million: Revolver, due October 2022
As of December 31, 2019, we had $918.8 million in material debt obligations at the following carrying values:
•$364.8 million: Term Loan, due October 2020, net of $0.2 million in deferred loan costs
•$204.8 million: 2018 RSA outstanding borrowings, due July 2021, net of $0.2 million in deferred loan costs
•$70.2 million: Finance lease obligations
•$279.0 million: Revolver, due October 2022.
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KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED
Cash Flow Analysis |
Year-to-Date September 30, | Change | ||||||||||||||||
2020 | 2019 | ||||||||||||||||
(In thousands) | |||||||||||||||||
Net cash provided by operating activities | $ | 655,019 | $ | 612,412 | $ | 42,607 | |||||||||||
Net cash used in investing activities | (335,602) | (468,420) | 132,818 | ||||||||||||||
Net cash used in financing activities | (243,138) | (139,156) | (103,982) |
Net Cash Provided by Operating Activities
Comparison Between Year-to-Date September 30, 2020 and 2019 — The $42.6 million increase in net cash provided by operating activities was primarily due to a $42.2 million decrease in cash paid for income taxes, net of refunds, a $41.9 million increase in our operating income, and various changes within our working capital. This was partially offset by a $93.4 million cash settlement paid during the first quarter of 2020, associated with pre-2017 Merger legal matters that were previously accrued and disclosed by Swift.
Net Cash Used in Investing Activities
Comparison Between Year-to-Date September 30, 2020 and 2019 — The $132.8 million decrease in net cash used in investing activities was due to a $181.7 million decrease in net capital expenditures partially offset by a $44.9 million increase in net cash used for acquisitions.
Net Cash Used in Financing Activities
Comparison Between Year-to-Date September 30, 2020 and 2019 — Net cash used in financing activities increased by $104.0 million, primarily due to a $144.4 million increase in net repayments of our debt obligations This was partially offset by a $52.3 million decrease in cash used to repurchase shares of our common stock.
Contractual Obligations |
"Liquidity and Capital Resources," above, includes details regarding changes in our contractual obligations table during the year-to-date September 30, 2020 period. Aside from these items, there were no material changes to the contractual obligations table, which was included in our 2019 Annual Report.
Off Balance Sheet Arrangements |
Information about our off balance sheet arrangements is included in Note 10 of the notes to our condensed consolidated financial statements, included in Part I, Item 1 of this Quarterly Report, which is incorporated by reference herein. See also "Contractual Obligations," above.
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KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED
Seasonality |
Discussion regarding the impact of seasonality on our business is included in Note 1 in the notes to the condensed consolidated financial statements, included in Part I, Item 1 of this Quarterly Report, incorporated by reference herein.
Inflation |
Inflation can have an impact on our operating costs. A prolonged period of inflation could cause interest rates, fuel, wages, and other costs to increase, which would adversely affect our results of operations unless freight rates correspondingly increased. Consistent with trends in the trucking industry overall, we continue to experience inflationary pressures with respect to driver wages, as compared to prior years.
Recently Issued Accounting Pronouncements |
See Part I, Item 1 of this Quarterly Report, which is incorporated herein by reference, for the impact of recently issued accounting pronouncements on the Company's condensed consolidated financial statements, as follows:
•Note 2 for accounting pronouncements adopted during year-to-date September 30, 2020.
•Note 3 for accounting pronouncements issued during year-to-date September 30, 2020.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Interest Rate Risk
We have exposure from variable interest rates, primarily related to our 2017 Debt Agreement and 2018 RSA. These variable interest rates are impacted by changes in short-term interest rates. We primarily manage interest rate exposure through a mix of variable rate debt (weighted average rate of 1.1% as of September 30, 2020) and fixed rate equipment lease financing. Assuming the level of borrowings as of September 30, 2020, a hypothetical one percentage point increase in interest rates would increase our annual interest expense by $7.4 million.
Commodity Price Risk
We have commodity exposure with respect to fuel used in company-owned tractors. Increases in fuel prices would continue to raise our operating costs, even after applying fuel surcharge revenue. Historically, we have been able to recover a majority of fuel price increases from our customers in the form of fuel surcharges. The weekly average of diesel price per gallon in the US decreased to $2.43 for the third quarter of 2020 from an average of $3.02 in the third quarter of 2019. The weekly average diesel price per gallon in the US decreased to an average of $2.59 for year-to-date September 30, 2020 from an average of $3.05 for year-to-date September 30, 2019. We cannot predict the extent or speed of potential changes in fuel price levels in the future, the degree to which the lag effect of our fuel surcharge programs will impact us as a result of the timing and magnitude of such changes, or the extent to which effective fuel surcharges can be maintained and collected to offset such increases. We generally have not used derivative financial instruments to hedge our fuel price exposure in the past, but continue to evaluate this possibility. To mitigate the impact of rising fuel costs, we contract with some of our fuel suppliers to buy fuel at a fixed price or within banded pricing for a specified period, usually not exceeding twelve months. However, these purchase commitments only cover a small portion of our fuel consumption. Accordingly, fuel price fluctuations may still negatively impact us.
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ITEM 4. | CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
We have established disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) to ensure that material information relating to us, including our consolidated subsidiaries, is made known to the officers who certify our financial reports and to other members of senior management and the Board. Our management, with the participation of our principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures. Based on this evaluation, as of the end of the period covered by this Quarterly Report on Form 10-Q our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures are effective to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is (1) recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms, and (2) accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2020, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. We base our internal control over financial reporting on the criteria set forth in the 2013 COSO Internal Control: Integrated Framework.
We have confidence in our disclosure controls and procedures and internal control over financial reporting. Nevertheless, our management, including our principal executive officer and principal financial officer, does not expect that our disclosure controls and procedures and internal control over financial reporting will prevent all errors, misstatements, or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.
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PART II OTHER INFORMATION |
ITEM 1. | LEGAL PROCEEDINGS |
Information about our legal proceedings is included in Note 11 of the notes to our condensed consolidated financial statements, included in Part I, Item 1, of this Quarterly Report for the period ended September 30, 2020, and is incorporated by reference herein. Based on management's present knowledge of the facts and (in certain cases) advice of outside counsel, management does not believe that loss contingencies arising from pending matters are likely to have a material adverse effect on the Company's overall financial position, operating results, or cash flows after taking into account any existing accruals. However, actual outcomes could be material to the Company's financial position, operating results, or cash flows for any particular period.
ITEM 1A. | RISK FACTORS |
While we attempt to identify, manage, and mitigate risks and uncertainties associated with our business, some level of risk and uncertainty will always be present. Our 2019 Annual Report and our Quarterly Report for the quarterly period ended March 31, 2020, in the section entitled "Item 1A. Risk Factors," describes some of the risks and uncertainties associated with our business.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value that May Yet be Purchased Under the Plans or Programs 1 | |||||||||||||||||||
July 1, 2020 to July 31, 2020 | — | $ | — | — | $ | 198,977,224 | |||||||||||||||||
August 1, 2020 to August 31, 2020 | — | $ | — | — | $ | 198,977,224 | |||||||||||||||||
September 1, 2020 to September 30, 2020 | — | $ | — | — | $ | 198,977,224 | |||||||||||||||||
Total | — | $ | — | — | $ | 198,977,224 | |||||||||||||||||
1On May 31, 2019, the Company announced that the Board approved the $250.0 million 2019 Knight-Swift Share Repurchase Plan. There is no expiration date associated with the 2019 Knight-Swift Share Repurchase Plan.
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
Not applicable.
ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
ITEM 5. | OTHER INFORMATION |
None.
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ITEM 6. | EXHIBITS |
Exhibit Number | Description | Page or Method of Filing | ||||||||||||
101.INS | Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | |||||||||||||
101.SCH | XBRL Taxonomy Extension Schema Document | Filed herewith | ||||||||||||
101.CAL | XBRL Taxonomy Calculation Linkbase Document | Filed herewith | ||||||||||||
101.LAB | XBRL Taxonomy Label Linkbase Document | Filed herewith | ||||||||||||
101.PRE | XBRL Taxonomy Presentation Linkbase Document | Filed herewith | ||||||||||||
101.DEF | XBRL Taxonomy Extension Definition Document | Filed herewith | ||||||||||||
104 | Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101) | Filed herewith | ||||||||||||
* Schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company agrees to supplementally furnish to the SEC a copy of any omitted schedule upon request by the SEC.
** Management contract or compensatory plan, contract, or arrangement.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. | |||||||||||||||||
Date: | November 4, 2020 | /s/ David A. Jackson | |||||||||||||||
David A. Jackson | |||||||||||||||||
Chief Executive Officer and President, in his capacity as | |||||||||||||||||
such and on behalf of the registrant | |||||||||||||||||
Date: | November 4, 2020 | /s/ Adam W. Miller | |||||||||||||||
Adam W. Miller | |||||||||||||||||
Chief Financial Officer, in his capacity as such and on | |||||||||||||||||
behalf of the registrant | |||||||||||||||||
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