KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. 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 future impact of acquisitions, including achievement of anticipated synergies and the anticipated risks regarding our acquisitions of ACT and MME,
•the future performance of our LTL business, including revenue and margins,
•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, LTL, and intermodal operations, whether organically or inorganically,
•future equipment prices, our equipment purchasing or leasing plans (including containers in our Intermodal segment), and our equipment turnover (including expected tractor trade-ins),
•our ability to sublease equipment to independent contractors,
•the impact of pending legal proceedings,
•future insurance claims, coverage, coverage limits, premiums, and retention limits,
•the expected freight environment, including freight demand, capacity, 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 cost structure and our ability to control costs,
•future operating profitability and margin,
•future third-party service provider relationships and availability,
•future contracted pay rates with independent contractors and compensation arrangements with driving associates,
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Table of Contents Glossary of Terms
KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED
•our expected need or desire to incur indebtedness and our ability to comply with debt covenants,
•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 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," "mission," "continue," "outlook," "feel," 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 2021 Annual Report, and various disclosures in our press releases, stockholder reports, and other filings with theSEC . 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 2021 Annual Report.
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Table of Contents Glossary of Terms
KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED
Executive Summary
Company Overview
Knight-Swift Transportation Holdings Inc. is one of North America's largest and
most diversified freight transportation companies, providing multiple full
truckload, LTL, intermodal, and other complementary services. Our objective is
to operate our business with industry-leading margins and continued organic
growth and growth through acquisitions while providing safe, high-quality,
cost-effective solutions for our customers. Knight-Swift uses a nationwide
network of business units and terminals in the US and Mexico to serve customers
throughout North America . In addition to operating the country's largest
truckload fleet, Knight-Swift also contracts with third-party equipment
providers to provide a broad range of transportation services to our customers
while creating quality driving jobs for our driving associates and successful
business opportunities for independent contractors. Our four reportable segments
are Truckload, LTL, Logistics, and Intermodal. Additionally, we have various
non-reportable segments.
Key Financial Highlights - First Half of 2022
During the first half of 2022, each reportable segment achieved meaningful revenue growth while improving margins, leading to consolidated revenue growth of 42.5%, excluding truckload and LTL fuel surcharge. Consolidated operating income improved 76.5% to$623.9 million in the first half of 2022, as compared to the same period last year. Net income attributable to Knight-Swift increased by 51.4% to$427.8 million . •Truckload - 81.9% operating ratio during the first half of 2022. The Adjusted Operating Ratio1 improved by 270 basis points to 78.6% for the first half of 2022, supported by a 9.6% increase in revenue, excluding fuel surcharge and intersegment transactions, compared to the same period last year. •LTL - 87.0% operating ratio during the first half of 2022. Yield remains strong and we continue to capture both revenue and cost synergies, leading to an 82.2% Adjusted Operating Ratio1. •Logistics - 84.3% operating ratio during the first half of 2022. The Adjusted Operating Ratio1 was 84.1%, with operating income improvement of 280.0%. Load count grew by 60.9%, leading to an 89.8% increase in revenue, excluding intersegment transactions. •Intermodal - 87.9% operating ratio during the first half of 2022, a 790 basis point improvement compared to this time last year, leading to a 216.6% increase in operating income with revenue growth of 8.9%, excluding intersegment transactions. •Non-reportable Segments - Revenue growth of 109.2% was supported by the activities within our operating segments of insurance, equipment maintenance, equipment leasing, and warehousing, leading to a$34.4 million improvement in operating income during the first half of 2022, compared to the same period last year. •Embark - The value of our 2021 initial investment in Embark declined, resulting in an unrealized loss that negatively impacted earnings per diluted share and Adjusted EPS1 by$0.23 during the first half of 2022. •Liquidity and Capital - During the first half of 2022, we generated$720.0 million in operating cash flows. Our Free Cash Flow1 was$528.7 million . We paid down$38.8 million in long-term debt,$27.6 million in finance lease liabilities, and$19.8 million in cash on our operating lease liabilities. We also repurchased$299.9 million worth of our shares and issued$39.7 million in dividends to our stockholders. Gain on sale of revenue equipment increased to$57.8 million in the first half of 2022, compared to$25.6 million in the first half of 2021. We ended the first half of 2022 with$198.0 million in unrestricted cash and cash equivalents,$129.0 million outstanding on the 2021 Revolver,$1.2 billion face value outstanding on the 2021 Term Loans, and$6.6 billion of stockholders' equity. 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" for additional information.
________
1Refer to "Non-GAAP Financial Measures" below.
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Table of Contents Glossary of Terms
KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED
Key Financial Data and Operating Metrics
Quarter-to-Date June 30, Year-to-Date June 30,
2022 2021 2022 2021
GAAP financial data: (Dollars in thousands, except per share data)
Total revenue $ 1,961,131 $ 1,315,701 $ 3,788,120 $ 2,538,715
Revenue, excluding truckload and LTL fuel $ 1,694,531 $ 1,212,872 $ 3,342,409 $ 2,345,977
surcharge
Net income attributable to Knight-Swift $ 219,492 $ 152,804 $ 427,829 $ 282,594
Earnings per diluted share $ 1.35 $ 0.92 $ 2.60 $ 1.69
Operating ratio 83.4 % 85.5 % 83.5 % 86.1 %
Non-GAAP financial data:
Adjusted Net Income Attributable to $ 230,189 $ 162,998 $ 455,052 $ 302,431
Knight-Swift 1
Adjusted EPS 1 $ 1.41 $ 0.98 $ 2.76 $ 1.81
Adjusted Operating Ratio 1 79.9 % 83.1 % 80.3 % 83.8 %
Revenue equipment statistics by segment:
Truckload
Average tractors 2 18,055 18,034 18,010 18,129
Average trailers 3 73,010 60,858 72,111 60,382
LTL
Average tractors 4 3,129 N/A 3,110 N/A
Average trailers 5 8,402 N/A 8,352 N/A
Intermodal
Average tractors 623 611 603 605
Average containers 11,491 10,842 11,259 10,844
1Adjusted 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.
2Our tractor fleet within the Truckload segment had a weighted average age of
2.7 years and 2.4 years as of
3Second quarter 2022 includes 6,014 trailers related to leasing activities recorded within our non-reportable operating segments. Second quarter 2021 does not include 5,201 trailers related to leasing activities recorded within our non-reportable operating segments. Our trailer fleet within the Truckload segment had a weighted average age of 8.6 years and 8.3 years as ofJune 30, 2022 and 2021, respectively. The year-to-date period endingJune 30, 2022 includes 6,783 trailers related to leasing activities recorded within our non-reportable operating segments. The year-to-date period endingJune 30, 2021 does not include 5,481 trailers related to leasing activities recorded within our non-reportable operating segments. 4Our LTL tractor fleet had a weighted average age of 4.6 years as ofJune 30, 2022 , and includes 700 and 698 tractors from ACT's and MME's dedicated and other businesses for the quarter and year-to-date periods endedJune 30, 2022 . 5Our LTL trailer fleet had a weighted average age of 8.0 years as ofJune 30, 2022 , and includes 962 and 935 trailers from ACT's and MME's dedicated and other businesses for the quarter and year-to-date periods endedJune 30, 2022 . 28
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Table of Contents Glossary of Terms
KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED
Market Trends and Outlook
The national unemployment rate remained at 3.6%1 from March 31, 2022 to June 30,
2022 , as compared to 5.9%1 as of June 30, 2021 . The US gross domestic product,
which is the broadest measure of goods and services produced across the economy,
decreased by 0.9%2 on a year-over-year basis, per preliminary third-party
forecasts. The decrease, compared to 2021, reflected decreases in private
inventory investment, residential fixed investment, federal government spending,
state and local government spending, and nonresidential fixed investment that
were partly offset by increases in exports and personal consumption
expenditures. Early estimates of the second quarter 2022 US employment cost
index indicate a year-over-year increase of 5.1%1 and a sequential increase of
1.3%1.
The freight market outlook for the second half of 2022 includes the following:
•Overall consumer demand moderates
•Continued decline in non-contract opportunities
•Less visibility on peak season surge
•Strong demand for trailer pools continues
•Depressed spot rates combined with higher fuel, maintenance, and equipment
costs disincentivize new entrants and pressure highly leveraged carriers
•LTL demand remains strong with increases in revenue per hundredweight remaining
in the double digits year-over-year
•Sourcing and retaining drivers improves but remains challenging
•Inflationary pressure on equipment, maintenance, labor, and other cost items
continues
•Used equipment market normalizes as the year progresses
Based on the above market factors, our Company outlook on the second half of
2022 includes the following:
•Rates inflect negatively year-over-year late in the third quarter and into the
fourth quarter as the moderating spot market yields less non-contract
opportunities
•Stable truck count with a modest sequential improvement in miles per tractor
•Year-over-year increases in LTL revenue with improved margins
•Increased Logistics load volumes offset by a reduced revenue per load with an
operating ratio in the high 80s
•Intermodal margins to remain in the double digits with volumes improving
year-over-year
•Continued growth in revenue and operating income within the non-reportable
segments
•Inflationary pressure in most cost areas including maintenance, equipment, and
non-driving labor
•Equipment gains to be approximately $20 - $25 million in total for the rest of
the year
•Increased interest rates expected to negatively impact earnings in the back
half of the year
•Net cash capital expenditures expected range of $550 - $600 million for the
full year 2022, excluding potential acquisitions
•Approximate tax rate of 25% for the full year 2022
In addition to the above, we expect the Truckload segment will remain resilient
and continue to operate efficiently and the Logistics segment will continue to
provide value to our customers through our power-only and traditional brokerage
service offerings. Our ACT and MME teams are working together to further build
out a super-regional network that we expect will provide additional yield and
revenue opportunities. The Intermodal segment continues to build out its network
that aligns with our new rail partners. Our non-reportable segments are further
expanding to complement our other service offerings.
We anticipate that depreciation and amortization expense will increase and
rental expense will correspondingly decrease, as a percentage of revenue,
excluding truckload and LTL fuel surcharge, as we intend to purchase, rather
than enter into operating leases, for a majority of our revenue equipment in the
remainder of 2022. With significant tightening in the insurance markets, we may
also experience changes in premiums, retention limits, and excess coverage
limits in the remainder of 2022. While fuel expense is generally offset by fuel
surcharge revenue, our fuel expense, net of truckload and LTL fuel surcharge
revenue, may increase in the future, particularly during periods of sharply
rising fuel prices.
________
1Source: bls.gov
2Source: bea.gov
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Table of Contents Glossary of Terms
KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED
Results of Operations - Summary
Note: In accordance with the accounting treatment applicable to each of our 2021 acquisitions, Knight-Swift's reported results do not include the operating results of the acquired entities prior to the respective acquisition dates. Accordingly, comparisons between the Company's second quarter and first half 2022 results and prior periods may not be meaningful. Operating Results: Second Quarter 2022 Compared to Second Quarter 2021 The$66.7 million increase in net income attributable to Knight-Swift to$219.5 million during the second quarter of 2022 from$152.8 million during the same period last year includes the following: •Contributor -$37.8 million increase in operating income within our Truckload segment, driven by an 11.2% increase in revenue, excluding fuel surcharge and intersegment transactions.
•Contributor -
•Contributor -$29.4 million increase in operating income within our Logistics segment. Revenue, excluding intersegment transactions, increased by 52.5%, as we grew load count by 48.2% while increasing revenue per load by 2.9%.
•Contributor -
•Contributor -$15.3 million increase in operating income within the non-reportable segments, supported by revenue growth of$61.3 million from the insurance, equipment maintenance, equipment leasing, and warehousing operating segments. •Offset -$42.4 million reduction in "Other (expenses) income, net," primarily driven by an unrealized loss from the mark-to-market adjustment of our investment in Embark in the second quarter of 2022 compared to a gain in the same quarter of last year. •Offset -$20.3 million increase in consolidated income tax expense primarily due to an increase in income before income taxes. This resulted in an effective tax rate of 24.7% for the second quarter of 2022 and 25.3% for the second quarter of 2021. Operating Results: First Half of 2022 Compared to First Half of 2021 The$145.2 million increase in net income attributable to Knight-Swift to$427.8 million during the first half of 2022 from$282.6 million during the same period last year includes the following: •Contributor -$84.5 million increase in operating income within our Truckload segment, driven by a 9.6% increase in revenue, excluding fuel surcharge and intersegment transactions.
•Contributor -
•Contributor -$61.4 million increase in operating income within our Logistics segment. Revenue, excluding intersegment transactions, increased by 89.8%, as load volumes grew by 60.9% while revenue per load increased by 18.0%.
•Contributor -
•Contributor -$34.4 million increase in operating income within the non-reportable segments, supported by revenue growth of$128.3 million from the insurance, equipment maintenance, equipment leasing, and warehousing operating segments.
•Offset -
•Offset -$44.2 million increase in consolidated income tax expense primarily due to an increase in income before income taxes. This resulted in an effective tax rate of 24.8% for the first half of 2022 and 25.5% for the first half of 2021.
Our results are further discussed in "Results of Operations - Consolidated Operating and Other Expenses".
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Table of Contents Glossary of Terms
KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED
Results of Operations - Segment Review
The Company has four reportable segments: Truckload, LTL, Logistics, and Intermodal, as well as certain non-reportable segments.
Consolidating Tables for Total Revenue and Operating Income (Loss)
Quarter-to-Date June 30, Year-to-Date June 30,
2022 2021 2022 2021
Revenue: (In thousands)
Truckload $ 1,188,809 $ 985,858 $ 2,269,340 $ 1,948,805
LTL 283,847 - 538,972 -
Logistics 248,662 166,737 530,701 285,624
Intermodal 132,871 115,378 242,093 222,444
Subtotal $ 1,854,189 $ 1,267,973 $ 3,581,106 $ 2,456,873
Non-reportable segments 128,112 66,795 245,751 117,464
Intersegment eliminations (21,170) (19,067) (38,737) (35,622)
Total revenue $ 1,961,131 $ 1,315,701 $ 3,788,120 $ 2,538,715
Quarter-to-Date June 30, Year-to-Date June 30,
2022 2021 2022 2021
Operating income (loss): (In thousands)
Truckload $ 206,296 $ 168,457 $ 411,413 $ 326,940
LTL 43,767 - 70,144 -
Logistics 43,749 14,356 83,350 21,933
Intermodal 14,172 5,812 29,342 9,269
Subtotal $ 307,984 $ 188,625 $ 594,249 $ 358,142
Non-reportable segments 17,794 2,490 29,615 (4,768)
Operating income $ 325,778 $ 191,115 $ 623,864 $ 353,374
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Table of Contents Glossary of Terms
KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED
Revenue
•Our truckload services include irregular route and dedicated, refrigerated,
expedited, flatbed, and cross-border transportation of various products, goods,
and materials for our diverse customer base with 13,342 irregular route and
4,713 dedicated tractors.
•Our LTL business, which was initially established in 2021 through the ACT and
later the MME acquisition, provides our customers with regional LTL
transportation service through our growing network of approximately 100
facilities and a door count of 4,300. Our LTL segment operates approximately
3,100 tractors and 8,400 trailers and also provides national coverage to our
customers by utilizing partner carriers for areas outside of our direct network.
•Our Logistics and Intermodal segments 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. We continue to offer power-only services through our Logistics segment leveraging our fleet of over 73,000 trailers.
•Our non-reportable segments include support services provided to our customers and third-party carriers including insurance, equipment maintenance, equipment leasing, warehousing, trailer parts manufacturing, and warranty services. Our non-reportable segments also include 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 programs, which serve to recover a majority of our fuel costs. This applies only to loaded miles for our Truckload segment 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 Truckload and LTL segments.
Expenses
Our most significant expenses typically vary with miles traveled and include
fuel, driving associate-related expenses (such as wages and benefits), and
services purchased from third-party service providers (including other trucking
companies, railroad and drayage providers, and independent contractors).
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 performance, fleet age, operating efficiency, and other factors.
Our primary fixed costs are depreciation and lease expense for revenue equipment
and terminals, non-driver employee compensation, amortization of intangible
assets, and interest expenses.
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Table of Contents Glossary of Terms
KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED
Operating Statistics
We measure our consolidated and segment results through the operating statistics
listed in the table below. Our chief operating decision makers monitor the GAAP
results of our reportable segments, supplemented by certain non-GAAP
information. Refer to "Non-GAAP Financial Measures" 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 Truckload
Measures productivity and represents revenue
(excluding fuel surcharge and intersegment
transactions) divided by average tractor count
Total Miles per Tractor Truckload Total miles (including loaded and empty miles) a
tractor travels on average
Average Length of Haul Truckload, LTL Average miles traveled with loaded trailer cargo
per order/shipment
Non-paid Empty Miles Percentage Truckload Percentage of miles without trailer cargo
Shipments per Day LTL Average number of shipments completed each
business day
Weight per Shipment LTL Total weight (in pounds) divided by total
shipments
Revenue per shipment LTL Total revenue divided by total shipments Revenue xFSR per shipment LTL
Total revenue, excluding fuel surcharge, divided
by total shipments
Revenue per hundredweight LTL Measures yield and is calculated as total revenue
divided by total weight (in pounds) times 100
Revenue xFSR per hundredweight LTL Total revenue, excluding fuel surcharge, divided
by total weight (in pounds) times 100
Average Tractors Truckload, LTL, Intermodal Average tractors in operation during the period
including company tractors and tractors provided
by independent contractors
Average Trailers Truckload, LTL 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 Logistics gross margin (revenue, excluding
intersegment transactions, less purchased
transportation expense, excluding intersegment
transactions) as a percentage of logistics
revenue, excluding intersegment transactions
Average Containers Intermodal Average containers in operation during the period
GAAP Operating Ratio Truckload, Measures operating efficiency and is widely used
Logistics, LTL, Intermodal 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 Truckload, Measures operating efficiency and is widely used
Ratio Logistics, LTL, Intermodal 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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Table of Contents Glossary of Terms
KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED
Segment Review
Truckload Segment
We generate revenue in the Truckload segment primarily through irregular route,
dedicated, refrigerated, expedited, flatbed, and cross-border service operations
across our brands. We operated 13,342 irregular route tractors and 4,713
dedicated route tractors in use during the quarter-to-date period ended June 30,
2022 . Generally, we are paid a predetermined rate per mile or per load for our
truckload 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 Truckload 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 Truckload 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 Truckload segment are depreciation and rent expense from
tractors, trailers, and terminals, as well as compensating our non-driver
employees.
Quarter-to-Date June 30, Year-to-Date June 30, QTD 2022 vs. YTD 2022 vs.
2022 2021 2022 2021 QTD 2021 YTD 2021
(Dollars in thousands, except per tractor data) Increase (Decrease)
Total revenue $ 1,188,809 $ 985,858 $ 2,269,340 $ 1,948,805 20.6 % 16.4 %
Revenue, excluding fuel
surcharge and intersegment $ 981,479 $ 882,560 $ 1,923,013 $ 1,755,374 11.2 % 9.6 %
transactions
GAAP: Operating income $ 206,296 $ 168,457 $ 411,413 $ 326,940 22.5 % 25.8 %
Non-GAAP: Adjusted Operating $ 206,619 $ 168,781 $ 412,060 $ 327,588 22.4 % 25.8 %
Income 1
Average revenue per tractor 2 $ 54,361 $ 48,939 $ 106,775 $ 96,827 11.1 % 10.3 %
GAAP: Operating ratio 2 82.6 % 82.9 % 81.9 % 83.2 % (30 bps) (130 bps)
Non-GAAP: Adjusted Operating 78.9 % 80.9 % 78.6 % 81.3 % (200 bps) (270 bps)
Ratio 1 2
Non-paid empty miles percentage 14.6 % 13.0 % 14.4 % 12.9 % 160 bps 150 bps
2
Average length of haul (miles) 392 408 393 410 (3.9 %) (4.1 %)
2
Total miles per tractor 2 19,542 20,913 38,460 41,841 (6.6 %) (8.1 %)
Average tractors 2 3 18,055 18,034 18,010 18,129 0.1 % (0.7 %)
Average trailers 2 4 73,010 60,858 72,111 60,382 20.0 % 19.4 %
1 Refer to "Non-GAAP Financial Measures" below.
2 Defined under "Operating Statistics," above.
3 Includes 16,172 and 16,144 average company-owned tractors for the second quarter of 2022 and 2021, respectively.
Includes 16,165 and 16,225 average company-owned tractors for year-to-date
periods ended
4 Second quarter 2022 includes 6,014 trailers related to leasing activities recorded within our non-reportable operating segments. Second quarter 2021 does not include 5,201 trailers related to leasing activities recorded within our non-reportable operating segments. The year-to-date period endingJune 30, 2022 includes 6,783 trailers related to leasing activities recorded within our non-reportable operating segments. The year-to-date period endingJune 30, 2021 does not include 5,481 trailers related to leasing activities recorded within our non-reportable operating segments. 34
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Table of Contents Glossary of Terms
KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED
Comparison Between the Quarters Ended June 30, 2022 and 2021 - Our Truckload
segment operated at a 78.9% Adjusted Operating Ratio, which improved by 200
basis points year-over-year. This, along with 11.2% growth in revenue, excluding
fuel surcharge and intersegment transactions, led to a 22.4% improvement in
Adjusted Operating Income.
Revenue per loaded mile, excluding fuel surcharge and intersegment transactions
increased 21.2%. Miles per tractor decreased by 6.6%, which is an improvement
from the year-over-year decrease of 9.6% for the first quarter of 2022. These
factors ultimately led to an 11.1% increase in average revenue per tractor and
improved margins.
We are making modest progress with seating our tractors, leading to improved
utilization. We continue to add scale by increasing our trailer count which has
grown to approximately 73,000 trailers as of the second quarter of 2022.
Comparison Between Year-to-Date June 30, 2022 and 2021 - Our Truckload segment
operated at a 78.6% Adjusted Operating Ratio, which improved by 270 basis points
when compared to the first half of 2021. This, along with 9.6% growth in
revenue, excluding fuel surcharge and intersegment transactions, led to a 25.8%
improvement in Adjusted Operating Income.
Revenue per loaded mile, excluding fuel surcharge and intersegment transactions
increased 21.8% while miles per tractor decreased by 8.1%. These factors
ultimately led to a 10.3% increase in average revenue per tractor and improved
margins.
LTL Segment
Dothan, Alabama -based ACT and Bismarck, North Dakota -based MME, both acquired in
2021, comprise our LTL segment. We provide regional direct service and serve our
customers' national transportation needs by utilizing key partner carriers for
coverage areas outside of our network. We primarily generate revenue by
transporting freight for our customers through our core LTL services.
Our revenues are impacted by shipment volume and tonnage levels that flow
through our network. Additional revenues are generated through fuel surcharges
and accessorial services provided during transit from shipment origin to
destination. We focus on the following multiple revenue generation factors when
reviewing revenue yield: revenue per hundredweight, revenue per shipment, weight
per shipment, and length of haul. Fluctuation within each of these metrics is
analyzed when determining the revenue quality of our customers' shipment
density.
Our most significant expense is related to direct costs associated with the
transportation of our freight moves including; direct salary, wage and benefit
costs, fuel expense, and depreciation expense associated with revenue equipment
costs. Other expenses associated with revenue generation that can fluctuate and
impact operating results are insurance and claims expenses as well as
maintenance costs of our revenue equipment. These expenses can be influenced by
multiple factors including our safety performance, equipment age, and other
factors. A key component of lowering our operating costs is labor efficiency
within our network. We continue to focus on technological advances to improve
the customer experience and reduce our operating costs.
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OPERATIONS - CONTINUED
Note: In accordance with the accounting treatment applicable to the ACT and MME
acquisitions, the LTL segment's reported results do not include the comparative
operating results of the acquired entities prior to the respective acquisition
dates.
Quarter-to-Date Year-to-Date June 30,
June 30,
2022 2022
(Dollars in thousands, except per tractor
data)
Total revenue $ 283,847 $ 538,972
Revenue, excluding fuel surcharge and intersegment
$ 438,853
transactions
GAAP: Operating income $ 43,767$ 70,144 Non-GAAP: Adjusted Operating Income 1 $ 47,762$ 78,084 GAAP: Operating ratio 2 84.6 % 87.0 % Non-GAAP: Adjusted Operating Ratio 1 2 78.7 % 82.2 % LTL shipments per day 2 19,65719,220 LTL weight per shipment 2 1,0681,083 LTL average length of haul (miles) 2 522522 LTL revenue per shipment 2 $ 191.30$ 185.01 LTL revenue xFSR per shipment 2 $ 151.64$ 151.18 LTL revenue per hundredweight 2 $ 17.91$ 17.09 LTL revenue xFSR per hundredweight 2 $ 14.20$ 13.97 LTL average tractors 2 3 3,1293,110 LTL average trailers 2 4 8,402 8,352
1Refer to "Non-GAAP Financial Measures" below.
2Defined under "Operating Statistics," above.
3Includes 700 and 698 tractors from ACT's and MME's dedicated and other
businesses for the quarter and year-to-date periods ended
4Includes 962 and 935 trailers from ACT's and MME's dedicated and other
businesses for the quarter and year-to-date periods ended
Our LTL segment made significant strides in improving margins, operating at a 78.7% Adjusted Operating Ratio during the second quarter of 2022. Revenue, excluding fuel surcharge, per hundredweight was$14.20 , while revenue per shipment, excluding fuel surcharge was$151.64 . The ACT and MME teams continue to achieve both customer and cost synergies as they connect their network of approximately 100 facilities and 4,300 doors. Our LTL segment operated at an 82.2% Adjusted Operating Ratio during the first half of 2022. Revenue, excluding fuel surcharge, per hundredweight was$13.97 , while revenue per shipment, excluding fuel surcharge was$151.18 . During the back half of this year we expect door capacity will grow by 300 doors across 9 new or expanded locations. We continue to look for both organic and inorganic opportunities to geographically expand our footprint within the LTL market. 36
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OPERATIONS - CONTINUED
Logistics Segment
The Logistics segment is less asset-intensive than the Truckload and LTL
segments and is dependent upon capable non-driver employees, modern and
effective information technology, and third-party capacity providers. Logistics
revenue is 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 June 30, Year-to-Date June 30, QTD 2022 vs. YTD 2022 vs.
2022 2021 2022 2021 QTD 2021 YTD 2021
(Dollars in thousands, except per load data) Increase (Decrease)
Total revenue $ 248,662 $ 166,737 $ 530,701 $ 285,624 49.1 % 85.8 %
Revenue, excluding $ 247,319 $ 162,167 $ 527,490 $ 277,889 52.5 % 89.8 %
intersegment transactions
GAAP: Operating income $ 43,749 $ 14,356 $ 83,350 $ 21,933 204.7 % 280.0 %
Non-GAAP: Adjusted $ 44,083 $ 14,453 $ 84,018 $ 22,030 205.0 % 281.4 %
Operating Income 1 2
Revenue per load 2 $ 2,257 $ 2,193 $ 2,471 $ 2,094 2.9 % 18.0 %
Gross margin percentage 2 24.4 % 15.7 % 22.2 % 15.2 % 870 bps 700 bps
GAAP: Operating ratio 2 82.4 % 91.4 % 84.3 % 92.3 % (900 bps) (800
bps)
Non-GAAP: Adjusted 82.2 % 91.1 % 84.1 % 92.1 % (890 bps) (800
bps)
Operating
1 Refer to "Non-GAAP Financial Measures" below. 2 Defined under "Operating Statistics," above. Comparison Between the Quarters EndedJune 30, 2022 and 2021 - Demand for our logistics service offering remains strong. We continue to leverage our fleet of approximately 73,000 trailers to support our power-only service offering. Logistics revenue, excluding intersegment transactions, increased 52.5% as we grew load count by 48.2% while increasing revenue per load by 2.9%. The Adjusted Operating Ratio improved to 82.2%, resulting in a 205.0% increase in Adjusted Operating Income. Logistics gross margin was 24.4% in the second quarter of 2022, compared to 15.7% in the second quarter of 2021. Comparison Between Year-to-DateJune 30, 2022 and 2021 - Logistics revenue, excluding intersegment transactions, increased 89.8% as we grew load count by 60.9% while increasing revenue per load by 18.0%. The Adjusted Operating Ratio improved to 84.1%, resulting in a 281.4% increase in Adjusted Operating Income. Logistics gross margin was 22.2% in the first half of 2022, compared to 15.2% in the first half of 2021. 37
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OPERATIONS - CONTINUED
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 June 30, Year-to-Date June 30, QTD 2022 vs. YTD 2022 vs.
2022 2021 2022 2021 QTD 2021 YTD 2021
(Dollars in thousands, except per load data) Increase (Decrease)
Total revenue $ 132,871 $ 115,378 $ 242,093 $ 222,444 15.2 % 8.8 %
Revenue, excluding $ 132,854 $ 115,294 $ 242,046 $ 222,265 15.2 % 8.9 %
intersegment transactions
GAAP: Operating income $ 14,172 $ 5,812 $ 29,342 $ 9,269 143.8 % 216.6 %
Average revenue per load 1 $ 3,642 $ 2,616 $ 3,560 $ 2,583 39.2 % 37.8 %
GAAP: Operating ratio 1 89.3 % 95.0 % 87.9 % 95.8 % (570 bps) (790 bps)
Load count 36,474 44,073 67,989 86,041 (17.2 %) (21.0 %)
Average tractors 1 2 623 611 603 605 2.0 % (0.3 %)
Average containers 1 11,491 10,842 11,259 10,844 6.0 % 3.8 %
1 Defined under "Operating Statistics," above.
2 Includes 558 and 555 company-owned tractors for the second quarter of 2022 and 2021, respectively.
Includes 546 and 549 company-owned tractors for the year-to-date periods ended
Comparison Between the Quarters EndedJune 30, 2022 and 2021 - Operating income increased by 143.8%, as operating ratio improved from 95.0% to 89.3%. We saw meaningful improvements in street and rail velocity in many corridors after volumes in the beginning of the quarter were negatively impacted by longer container and chassis dwell times, as well as inconsistent rail network speeds. These factors contributed to a 39.2% increase in revenue per load, partially offset by a 17.2% decrease in load count. Labor challenges within the rail network appear to be softening, leading to improved notification times and more consistency for our customers. Network fluidity continues to be a rail market challenge. As a result of our new network and improved service offering, we expect load volumes to inflect positive year-over-year beginning in the third quarter as we grow by adding new customers and expanding with existing customers. To position Intermodal for continued growth, we increased our container count by over 600 during the first half of the year and we anticipate further growth during the second half. Intermodal continues to provide value to our customers and is complementary to the many services we offer.
Comparison Between Year-to-Date
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Table of Contents Glossary of Terms
KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED
Non-reportable Segments
Our non-reportable segments include support services provided to our customers
and third-party carriers including insurance, equipment maintenance, equipment
leasing, warehousing, trailer parts manufacturing, and warranty services. Our
non-reportable segments also include certain corporate expenses (such as legal
settlements and accruals, certain impairments, and $11.6 million in quarterly
amortization of intangibles related to the 2017 Merger and various
acquisitions).
Quarter-to-Date June 30, Year-to-Date June 30, QTD 2022 vs. YTD 2022 vs.
2022 2021 2022 2021 QTD 2021 YTD 2021
(Dollars in thousands) Increase (Decrease)
Total revenue $ 128,112 $ 66,795 $ 245,751 $ 117,464 91.8 % 109.2 %
Operating income (loss) $ 17,794 $ 2,490 $ 29,615 $ (4,768) 614.6 % 721.1 %
Strong demand for our insurance, equipment maintenance, equipment leasing, and
warehousing services led to year-over-year operating income improvements of
614.6% for the second quarter and 721.1% for the first half of 2022. This was
supported by year-over-year revenue growth of 91.8% for the second quarter and
109.2% for the first half of 2022. We expect continued growth and income
improvement from these segments moving forward.
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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 truckload and LTL fuel surcharge. Truckload and LTL 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 truckload and LTL fuel surcharge is a better measure for analyzing
many of our expenses and operating metrics.
Note: In accordance with the accounting treatment applicable to each of our
recent acquisitions, Knight-Swift's reported results do not include the
comparative operating results of the acquired entities prior to the respective
acquisition date. Accordingly, comparisons between the second quarter and first
half 2022 results and prior periods may not be meaningful.
Quarter-to-Date June 30, Year-to-Date June 30, QTD 2022 vs. YTD 2022 vs.
2022 2021 2022 2021 QTD 2021 YTD 2021
(Dollars in thousands) Increase (Decrease)
Salaries, wages, and $ 549,956 $ 377,613 $ 1,086,012 $ 747,983 45.6 % 45.2 %
benefits
% of total revenue 28.0 % 28.7 % 28.7 % 29.5 % (70 bps) (80 bps)
% of revenue, excluding
truckload and LTL fuel 32.5 % 31.1 % 32.5 % 31.9 % 140 bps 60 bps
surcharge
Salaries, wages, and benefits expense is primarily affected by the total number
of miles driven by and rates we pay to 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, technology, our equipment, and
terminals that improve the experience of driving associates. We expect labor
costs (related to both driving associates and non-driver employees) to remain
inflationary, which we expect will result in additional pay increases in the
future, thereby increasing our salaries, wages, and benefits expense.
•Comparison Between the Quarters Ended June 30, 2022 and 2021 - Consolidated
salaries, wages, and benefits increased by $172.3 million for the second quarter
of 2022, as compared to the second quarter of 2021. This increase includes
$140.3 million from the second quarter 2022 results of ACT and MME. The
remaining increase pertained to driving associate pay rates and non-driver
salaries and wages, and a 6.0% increase in miles driven by company driving
associates, excluding ACT and MME.
•Comparison Between Year-to-Date June 30, 2022 and 2021 - Consolidated salaries,
wages, and benefits increased by $338.0 million for the first half of 2022, as
compared to the first half of 2021. This increase includes $275.6 million from
the first half of 2022 results of ACT and MME. The remaining increase pertained
to driving associate pay rates, non-driver salaries and wages, higher benefit
costs, and a 4.5% increase in miles driven by company driving associates,
excluding ACT and MME.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED
Quarter-to-Date June 30, Year-to-Date June 30, QTD 2022 vs. YTD 2022 vs.
2022 2021 2022 2021 QTD 2021 YTD 2021
(Dollars in thousands) Increase (Decrease)
Fuel $ 257,146 $ 126,055 $ 447,635 $ 244,291 104.0 % 83.2 %
% of total revenue 13.1 % 9.6 % 11.8 % 9.6 % 350 bps 220 bps
% of revenue, excluding
truckload and LTL fuel 15.2 % 10.4 % 13.4 % 10.4 % 480 bps 300 bps
surcharge
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 for our Truckload and LTL segments 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 Truckload and LTL segments. 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 Quarters Ended June 30, 2022 and 2021 - The $131.1 million
increase in consolidated fuel expense for the second quarter, includes $36.0
million of fuel expense from ACT's and MME's second quarter 2022 results. The
remaining year-over-year increase is attributable to higher average DOE fuel
prices and an increase in total miles driven by company driving associates,
excluding ACT and MME. Average DOE fuel prices were $5.53 per gallon for the
second quarter of 2022 and $3.21 per gallon for the second quarter of 2021.
•Comparison Between Year-to-Date June 30, 2022 and 2021 - The $203.3 million
increase in consolidated fuel expense for the first half of 2022, includes $63.0
million of fuel expense from ACT's and MME's first half 2022 results. The
remaining year-over-year increase is attributable to higher average DOE fuel
prices and the increase in total miles driven by company driving associates,
excluding ACT and MME, discussed above. Average DOE fuel prices were $4.95 per
gallon for the first half of 2022 and $3.06 per gallon for the first half of
2021.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED
Quarter-to-Date June 30, Year-to-Date June 30, QTD 2022 vs. YTD 2022 vs.
2022 2021 2022 2021 QTD 2021 YTD 2021
(Dollars in thousands) Increase (Decrease)
Operations and maintenance $ 106,724 $ 71,313 $ 202,607 $ 139,383 49.7 % 45.4 %
% of total revenue 5.4 % 5.4 % 5.3 % 5.5 % - bps (20 bps)
% of revenue, excluding
truckload and LTL fuel 6.3 % 5.9 % 6.1 % 5.9 % 40 bps 20 bps
surcharge
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 2022, 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, subject to
availability of new revenue equipment, to maintain or improve the average age of
our equipment.
•Comparison Between the Quarters Ended June 30, 2022 and 2021 - The increase of
$35.4 million for the second quarter of 2022 includes $13.4 million in
operations and maintenance expense from ACT's and MME's second quarter 2022
results. The remaining increase was attributed to higher maintenance expenses
due to inflation, higher port per diem expenses as we navigate a backlog of
shipping containers at ports, and increased hiring expenses as we work to
improve our seated truck count.
•Comparison Between Year-to-Date June 30, 2022 and 2021 - The increase of $63.2
million for the first half of 2022 includes $25.7 million in operations and
maintenance expense from ACT's and MME's first half 2022 results. The remaining
increase was attributed to the factors listed above.
Quarter-to-Date June 30, Year-to-Date June 30, QTD 2022 vs. YTD 2022 vs.
2022 2021 2022 2021 QTD 2021 YTD 2021
(Dollars in thousands) Increase (Decrease)
Insurance and claims $ 102,084 $ 58,776 $ 200,276 $ 114,419 73.7 % 75.0 %
% of total revenue 5.2 % 4.5 % 5.3 % 4.5 % 70 bps 80 bps
% of revenue, excluding
truckload and LTL fuel 6.0 % 4.8 % 6.0 % 4.9 % 120 bps 110 bps
surcharge
Insurance and claims expense consists of premiums for liability, physical
damage, and cargo, and will vary based upon the frequency and severity of
claims, 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. In 2021, we expanded our insurance offerings to third-party carriers,
earning additional premium revenues, which were partially offset by increased
insurance reserves. 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 or lower excess coverage
limits may cause increased volatility in our consolidated insurance and claims
expense.
•Comparison Between the Quarters Ended June 30, 2022 and 2021 - Consolidated
insurance and claims expense increased by $43.3 million for the second quarter
of 2022, as compared to the second quarter of 2021. The increase was primarily
due to an increase of insurance reserves incurred through our third-party
carrier insurance program. The remaining increase is primarily due to the
inclusion of $7.5 million of insurance and claims expense from ACT's and MME's
second quarter 2022 results.
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•Comparison Between Year-to-Date June 30, 2022 and 2021 - Consolidated insurance
and claims expense increased by $85.9 million for the first half of 2022, as
compared to the first half of 2021. The increase was primarily due to an
increase of insurance reserves incurred through our third-party carrier
insurance program. The remaining increase is primarily due to the inclusion of
$16.6 million of insurance and claims expense from ACT's and MME's first half
2022 results.
Quarter-to-Date June 30, Year-to-Date June 30, QTD 2022 vs. YTD 2022 vs.
2022 2021 2022 2021 QTD 2021 YTD 2021
(Dollars in thousands) Increase (Decrease)
Operating taxes and $ 30,204 $ 21,717 $ 59,241 $ 43,765 39.1 % 35.4 %
licenses
% of total revenue 1.5 % 1.7 % 1.6 % 1.7 % (20 bps) (10 bps)
% of revenue, excluding
truckload and LTL fuel 1.8 % 1.8 % 1.8 % 1.9 % - bps (10 bps)
surcharge
Operating taxes and licenses include state franchise taxes, state and federal
highway use taxes, property taxes, vehicle license and registration fees, and
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.
The year-over-year increases in operating taxes and licenses expenses of $8.5
million for the second quarter of 2022 and $15.5 million for the first half of
2022 were primarily composed of ACT's and MME's 2022 results.
Quarter-to-Date June 30, Year-to-Date June 30, QTD 2022 vs. YTD 2022 vs.
2022 2021 2022 2021 QTD 2021 YTD 2021
(Dollars in thousands) Increase (Decrease)
Communications $ 5,744 $ 4,635 $ 11,614 $ 9,672 23.9 % 20.1 %
% of total revenue 0.3 % 0.4 % 0.3 % 0.4 % (10 bps) (10 bps)
% of revenue, excluding
truckload and LTL fuel 0.3 % 0.4 % 0.3 % 0.4 % (10 bps) (10 bps)
surcharge
Communications expense is comprised of costs associated with our tractor and trailer tracking systems, information technology systems, and phone systems.
The year-over-year increases in communications expense of
Quarter-to-Date June 30, Year-to-Date June 30, QTD 2022 vs. YTD 2022 vs.
2022 2021 2022 2021 QTD 2021 YTD 2021
(Dollars in thousands) Increase (Decrease)
Depreciation and amortization $ 147,482 $ 123,606 $ 292,526 $ 243,521 19.3 % 20.1 %
of property and equipment
% of total revenue 7.5 % 9.4 % 7.7 % 9.6 % (190 bps) (190 bps)
% of revenue, excluding
truckload and LTL fuel 8.7 % 10.2 % 8.8 % 10.4 % (150 bps) (160 bps)
surcharge
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. 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
practices.
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OPERATIONS - CONTINUED
Consolidated depreciation and amortization of property and equipment increased
by $23.9 million for the second quarter of 2022 and $49.0 million for the first
half of 2022, as compared to the same periods last year. These increases include
ACT's and MME's results of $15.3 million from the second quarter of 2022 and
$30.6 million from the first half of 2022. The remaining increase was primarily
related to an increase in owned versus leased equipment.
We expect consolidated depreciation and amortization of property and equipment
to increase in total and as a percentage of consolidated revenue, excluding
truckload and LTL 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
2022.
Quarter-to-Date June 30, Year-to-Date June 30, QTD 2022 vs. YTD 2022 vs.
2022 2021 2022 2021 QTD 2021 YTD 2021
(Dollars in thousands) Increase (Decrease)
Amortization of intangibles $ 16,215 $ 11,984 $ 32,381 $ 23,733 35.3 % 36.4 %
% of total revenue 0.8 % 0.9 % 0.9 % 0.9 % (10 bps) - bps
% of revenue, excluding
truckload and LTL fuel 1.0 % 1.0 % 1.0 % 1.0 % - bps - bps
surcharge
Amortization of intangibles relates to intangible assets identified with the 2017 Merger and various acquisitions. See Note 3 in Part I, Item 1, of this Quarterly Report for more details regarding details of our acquisitions.
The increases of
Quarter-to-Date June 30, Year-to-Date June 30, QTD 2022 vs. YTD 2022 vs.
2022 2021 2022 2021 QTD 2021 YTD 2021
(Dollars in thousands) Increase (Decrease)
Rental expense $ 13,492 $ 13,399 $ 26,893 $ 30,263 0.7 % (11.1 %)
% of total revenue 0.7 % 1.0 % 0.7 % 1.2 % (30 bps) (50 bps)
% of revenue, excluding
truckload and LTL fuel 0.8 % 1.1 % 0.8 % 1.3 % (30 bps) (50 bps)
surcharge
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.
•Comparison Between the Quarters Ended June 30, 2022 and 2021 - The quarter over
quarter increase of $0.1 million includes $1.7 million of additional expense in
2022 from ACT's and MME's operating results. This was partially offset by a
decrease in the number of leased units, excluding ACT's and MME's 2022 results.
•Comparison Between Year-to-Date June 30, 2022 and 2021 - The $3.4 million
decrease in consolidated rental expenses for the first half of 2022, compared to
the first half of 2021, is primarily due to an increase in our owned versus
leased equipment. This was partially offset by $3.4 million of additional
expense from ACT's and MME's operating results included during the first half of
2022.
We expect consolidated rental expense to continue to decrease both in total and as a percentage of consolidated revenue, excluding truckload and LTL fuel surcharge, as we currently do not plan to use operating leases as a primary means of funding our equipment purchases for the remainder of 2022.
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Quarter-to-Date June 30, Year-to-Date June 30, QTD 2022 vs. YTD 2022 vs.
2022 2021 2022 2021 QTD 2021 YTD 2021
(Dollars in thousands) Increase (Decrease)
Purchased transportation $ 384,910 $ 304,157 $ 771,356 $ 562,387 26.5 % 37.2 %
% of total revenue 19.6 % 23.1 % 20.4 % 22.2 % (350 bps) (180 bps)
% of revenue, excluding
truckload and LTL fuel 22.7 % 25.1 % 23.1 % 24.0 % (240 bps) (90 bps)
surcharge
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.
Consolidated purchased transportation expense increased by $80.8 million for the
second quarter of 2022 and $209.0 million for the first half of 2022, as
compared to the same periods last year, primarily due to increased load volumes
within our logistics business. Purchased transportation expense also includes
ACT's and MME's results of $2.1 million for the second quarter of 2022 and $6.8
million for the first half of 2022.
We expect purchased transportation will increase as a percentage of revenue if
we grow our logistics and intermodal businesses faster than our full truckload
and LTL businesses. The increase could be partially offset if independent
contractors exit the market due to regulatory changes.
Quarter-to-Date June 30, Year-to-Date June 30, QTD 2022 vs. YTD 2022 vs.
2022 2021 2022 2021 QTD 2021 YTD 2021
(Dollars in thousands) Increase (Decrease)
Impairments $ - $ - $ 810 $ - - % 100.0 %
In 2022, we incurred impairment charges associated with building improvements (within our non-reportable segments).
Quarter-to-Date June 30, Year-to-Date June 30, QTD 2022 vs. YTD 2022 vs.
2022 2021 2022 2021 QTD 2021 YTD 2021
(Dollars in thousands) Increase (Decrease)
Miscellaneous operating $ 21,396 $ 11,331 $ 32,905 $ 25,924 88.8 % 26.9 %
expenses
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
•Comparison Between Year-to-DateJune 30, 2022 and 2021 - The$7.0 million increase in net consolidated miscellaneous operating expenses includes$20.7 million of additional expense from ACT's and MME's operating results in the first half of 2022, a net increase in legal settlements expense of$3.1 million , and higher operating expenses associated with increased travel time and return to work programs. This was offset by a$30.8 million increase in gain on sales of equipment, excluding ACT and MME. 45
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KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
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