Watch Now

Knight-Swift sees big Q4, expects hypergrowth to moderate in 2022

Sub-75% operating ratio in truckload segment

Growth rates to moderate in 2022 (Photo: Jim Allen/FreightWaves)

Knight-Swift Transportation saw financial results improve across all four of its segments during the fourth quarter. Most notable may be the sub-75% adjusted operating ratio it recorded in its truckload segment. Significantly higher rates and gains on equipment sales were the drivers.

Knight-Swift (NYSE: KNX) reported a big headline earnings beat Wednesday. Adjusted earnings per share for the fourth quarter were $1.61, well ahead of the $1.43 consensus estimate and more than 70% higher year-over-year. The result benefited as gains on sale jumped to $27.1 million compared to just $3.2 million in the year-ago period. Normalized to the longer-term average of roughly $5 million, the incremental gains added approximately a dime to earnings.

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

Large gains on sale, recorded as an offset to operating expenses, are being booked by many carriers as production delays at the manufacturers have sent used truck values higher. The entry is a recurring line item for carriers that regularly replace aging equipment. However, the historic rise in gains seen in recent quarters will likely recede materially if truck production increases.

The EPS number also benefited by a nickel from a lower tax rate, in part due to recent acquisitions. However, an equal EPS headwind was recorded as it booked $8.1 million of other expenses related to fair value adjustments in its portfolio of investments.

The company provided 2022 adjusted earnings guidance of $5.10 to $5.30 per share. The expectation implies 10% earnings growth from 2021 and sits 4% higher than the current consensus estimate at the midpoint of the range. However, the company’s guidance shows margin expectations for some of its segments have already seen the highs for the current cycle and are likely to retreat.

TL sees all-star performance; cost inflation to be offset with additional rate increases

The TL unit saw revenue (excluding fuel surcharges) increase 6% year-over-year to $993 million. Revenue per loaded mile (ex-fuel), a proxy for rates, surged 25% higher to $3.31. Loaded miles per tractor sagged 14% as length of haul was 9% lower and deadhead was 120 basis points higher. Even with the decline in utilization, revenue per tractor increased 9% in the quarter to more than $55,000.

Rate increases and gains on sale drove the OR improvement: 460 bps year-over-year to 74.7%.

Management is guiding to double-digit contractual rate increases in 2022 with spot rates remaining high through the first half of the year. The truck count is not expected to meaningfully change, but miles per truck should see “modest sequential improvement.”

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

Brokerage sees huge growth, intermodal margins jump on higher rates … hypergrowth to cool in 2022

The logistics segment saw revenue more than double to nearly $300 million in the quarter. Loads were up 84% year-over-year, with revenue per load moving 30% higher. Gross margin improved 430 bps to 20.7%, with the division’s OR coming in at 84.9%, 630 bps better.

Power-only brokerage recorded revenue growth of more than four times year-over-year with loads up 130%. The change appears to be largely driven by the favorable rate environment. The company now has 70,000 trailers able to be deployed into power-only service, up roughly 10,000 units from the third quarter. Power-only accounted for 39% of total brokerage volumes in the quarter compared to 35% a quarter ago.

Looking forward, management expects revenue growth in the logistics segment to moderate to 20% in 2022 with ORs reverting back to the high-80% to low-90% range.

Table: Knight-Swift’s key performance indicators – brokerage and intermodal

Intermodal loads fell 23% year-over-year as container turns worsened to 3.3x. The declines were attributed to “continued rail congestion and rail allocations.” However, a 39% increase in revenue per load pushed revenue 8% higher in the quarter. Higher costs and rail bottlenecks didn’t crimp profitability. The division posted an 81.2% OR in the period, 1,360 bps better year-over-year.

Knight-Swift is in the process of swapping out Western rail partners, moving away from BNSF (NYSE: BRK.B). It started to use Union Pacific (NYSE: UNP) to move its intermodal containers at the beginning of the year. “We anticipate operational improvements in cost structure and network design as we continue to transition to a new western rail partner in the first quarter of 2022,” the press release stated.

Management sees “strong Intermodal margins in the first half but normalizing in the high 80s to low 90s by the end of the year.” Load volumes are expected to inflect positively by the second half of 2022. Knight-Swift plans to add 2,000 containers to the fleet this year.

LTL nearly a $1B franchise

Knight-Swift acquired less-than-truckload carrier AAA Cooper Transportation in a $1.35 billion deal in July and Midwest Motor Express (MME) for $150 million in cash in December. The deals fill in two parts of what will become a national LTL network. AAA Cooper operates 70 terminals from Texas to the southern East Coast, with locations in the Midwest, while MME runs a network of 33 facilities in the Upper Midwest and Northwest.

“We believe our pattern of preserving local culture and relationships while leveraging the network, scale and technology of Knight-Swift will continue to be successful in growing LTL as it has been in full truckload,” CEO Dave Jackson said regarding the company’s M&A strategy.

Many of the metrics provided for the division didn’t include year-over-year changes. However, revenue per hundredweight (ex-fuel) was up 8.4% versus the comparable 2021 period. The division posted a 90.3% adjusted OR. The result only includes the last 25 days of MME’s December performance.

“We are pleased with the results of ACT and MME and we are encouraged with the synergy opportunities the teams have identified and expect to improve the cost structure,” the press release continued. “We anticipate a sequential increase in volume and profitability in the first quarter of 2022 from new awards identified through our combined networks, and we expect to continue to capitalize on network and revenue opportunities in the future.”

The unit now accounts for $927 million and 14% of total revenue on an annualized basis. The goal is to reach an 85% adjusted OR over time.

Shares of KNX were off 2.5% in midday trading compared to the S&P 500, which was up 1.6%.

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

The FREIGHTWAVES TOP 500 For-Hire Carriers list includes Knight-Swift (No. 3) and Midwest Motor Express (No. 206). 

Click for more FreightWaves articles by Todd Maiden.

Watch: Carrier Update – January 26 2022

Todd Maiden

Based in Richmond, VA, Todd is the finance editor at FreightWaves. Prior to joining FreightWaves, he covered the TLs, LTLs, railroads and brokers for RBC Capital Markets and BB&T Capital Markets. Todd began his career in banking and finance before moving over to transportation equity research where he provided stock recommendations for publicly traded transportation companies.