Knight-Swift Crushes Q3 Expectations; All Segments' Revenue, Margins Up

Knight-Swift Transportation posted a big third-quarter result Wednesday before the market opened, beating analysts' forecasts handily and raising its full-year 2021 guidance.

The stock was up 5.8% by midday on the news compared to the S&P 500, which was up 0.4%.

Adjusted earnings per share of $1.30 significantly outpaced consensus of $1.07, the year-ago period of 79 cents and the second quarter's 98 cents. Of note, increased gains on equipment sales contributed to the outperformance.

Table: Knight-Swift's key performance indicators – consolidated

Knight-Swift KNX also raised its full-year adjusted EPS guidance to a range of $4.50 to $4.55, from $3.90 to $4.05, which is 13% higher than the current consensus estimate at the midpoint of the range.

"We continue to invest in the diversification of our business through our Truckload, Logistics, Intermodal, LTL, and other developing businesses, including our warehousing activities and expanded services to third-party carriers," said CEO Dave Jackson. "This diversification has allowed us to grow revenue and earnings across multiple segments and we expect will lead to earnings growth in 2022."

The new guide calls for "recent rate trends to continue" as well as "strong opportunities for project business" in the fourth quarter.

Each of Knight-Swift's segments grew revenue and improved margins.

Rate strength apparent in TL

Truckload revenue was up slightly year-over-year at $933 million even as utilization sagged (loaded miles per tractor down 15%), and the average number of tractors operating in the period dipped 3%. Revenue per loaded mile excluding fuel surcharges, a proxy for rates, was up 25%, to $2.98.

"Shipping demand remains strong throughout all markets," the press release read. "We have experienced more opportunities in shorter length of haul lanes, which have resulted in higher revenue per mile but fewer miles per tractor."

Revenue per tractor for the quarter increased 7% year-over-year to more than $52,000.

The division's operating ratio improved 350 basis points to 77.8%. Gains on sale accounted for 180 bps of the improvement if normalized to the recent historical average of $5 million per quarter. Gains on sale in the quarter were $22.1 million compared to $1.7 million last year and $15.1 million last quarter.

The gains are not surprising given a red-hot secondary market for used equipment in an industry that is capacity-starved as manufacturers deal with semiconductor, parts and labor shortages.

Table: Knight-Swift's key performance indicators – TL

Brokerage and intermodal see big improvement

The logistics segment saw revenue more than double year-over-year to $221 million. Loads were up 61% and brokerage revenue per load increased 43% as the cost of truck transportation, both spot and contractual, stepped higher. The segment's gross margin was up 710 bps to 18.1% with the adjusted OR improving 980 bps to 87.6%.

Knight-Swift's brokerage unit has more than 60,000 trailers in a power-only service offering, which accounted for 35% of total loads in the quarter.

The intermodal unit recorded a 14% year-over-year increase in revenue at $113 million. Loads were off 9% as the nation's rail network continues to navigate delays at the ports and at warehouses, which are taking longer to unload containers. Cost inflation throughout the intermodal complex was more than offset by a 26% increase in revenue per load, which drove 820 bps of OR improvement at 91.5%.

"Intermodal is exhibiting strong momentum, and we expect operational improvements in cost structure and network design as we transition to a new western rail partner in the coming quarters," the release stated.

The company plans to add 1,000 containers to its fleet of nearly 11,000 over the next two quarters. Knight-Swift will begin to use Union Pacific UNP to move its intermodal containers at the beginning of the year.

Table: Knight-Swift's key performance indicators – logistics and intermodal

First look at LTL metrics

Knight-Swift provided a look at recently acquired AAA Cooper's operating metrics for the quarter, but most year-over-year comps were not provided.

Revenue totaled $168 million alongside an 87.5% OR. The goal is to reach an 85% adjusted OR over time.

AAA Cooper operates a regional LTL network with 70 terminals and 3,400 doors across the Southeast and Midwest. Knight-Swift announced Monday it plans to open a new LTL terminal in St. Louis this fall. Already covering the Chicago market, the new facility will give AAA Cooper access to 80% of the Illinois market.

This is the first service center expansion since AAA Cooper was acquired by Knight-Swift in July.

"We are pleased with the results of ACT and we are encouraged with the synergy opportunities the teams have identified and expect to improve the cost structure as well as capitalize on network and revenue opportunities," the release stated.

Table: Knight-Swift's key performance indicators – LTL

EPS tailwinds and headwinds

The $1.30 adjusted EPS recorded in the quarter had some help and some harm.

Normalizing gains on sale shows the line contributed roughly 8 cents per share in the quarter. Also, the tax rate of 22.8% benefited from a reduction in deferred taxes due to the acquisition (3 cents per share on the unadjusted number assuming the full-year expected tax rate of 25%).

However, interest expense was a headwind in the period at $7.2 million, more than double the prior-year quarter. The company partially funded its $1.35 billion acquisition of AAA Cooper with debt. The elevated interest expense is unlikely to linger given Knight-Swift's ability to generate significant free cash flow ($622 million year to date), which it will use to pay down debt assuming other significant acquisitions aren't in the works. The other income line had some noise as well related to costs associated with replacing its debt instruments.

"We continue to generate meaningful free cash flow that we plan to invest in both organic and inorganic growth into the future that will support our expansion into LTL as well as third-party carrier services," the press release stated.

Click for more FreightWaves articles by Todd Maiden.

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