Knight-Swift Transportation warned Wednesday that second-quarter results are more likely to disappoint in a news release also confirming it has closed on the previously announced acquisition of truckload carrier U.S. Xpress.
The transportation and logistics provider said a weaker than expected operating environment within the truckload sector would likely end in consolidated operating margin deterioration of 1,100 to 1,200 basis points 12 months over 12 months (y/y) within the second quarter and that its full-year guidance can be updated when it reports results on July 20.
“Persistently soft demand” has volumes and pricing “under greater pressure than originally anticipated,” the statement said. It noted that operating costs within the quarter were stable sequentially from the primary quarter.
By comparison, Knight-Swift (NYSE: KNX) reported an 88.7% consolidated adjusted operating ratio (inverse of operating margin) in the primary quarter, which was 810 bps worse y/y. The updated guide implies a companywide OR of barely greater than 90% within the second quarter, a far cry from the low-80% range the carrier operated at for the majority of 2022.
Following a rough first quarter, the corporate lowered its full-year 2023 earnings-per-share outlook to $3.35 to $3.55, which was a 17% reduction from the midpoint of its initial outlook. It appears analysts were expecting the negative revision because the consensus estimate on the time of Wednesday’s print was just $3.26.
The corporate’s guidance excludes any impact from the U.S. Xpress (NYSE: USX) deal, which Knight-Swift originally said can be accretive to earnings in 2024, adding greater than $1 to adjusted EPS in 2026.
“As we’ve got engaged with more of the U.S. Xpress organization for the reason that announcement, we’ve got much more confidence that our combined efforts will result in achievement of the profitability targets we communicated,” Knight-Swift CEO Dave Jackson said in a news release.
The acquisition was approved by U.S. Xpress shareholders on Thursday, with an efficient closing date of Saturday.
Original deal terms showed a purchase order price of $808 million, $324 million in equity with the rest coming from the belief of debt.
Acquisition price | $808M enterprise value |
Combined value | ~$11B enterprise value |
U.S. Xpress revenue run rate | $2.2B |
Knight-Swift revenue run rate | $7.4B |
Expected cost synergies | TBA |
Earnings accretion | accretive to EPS starting in 2024, $1-plus in EPS by 2026 |
Recent acquisitions by Knight-Swift | Midwest Motor Express, AAA Cooper, UTXL, Eleos, Abilene Motor Express, Swift Transportation |
Financing | debt and money |
Knight-Swift’s TL unit will now account for 63% of its total revenue in comparison with 58% before the deal. The transaction adds roughly $2.2 billion in revenue and a fleet of greater than 7,000 tractors that operate in irregular route, over-the-road fleets and dedicated configurations.
“Against the present backdrop of a very difficult business environment, the possibility so as to add one in every of the most important brands in our industry, with significant opportunity to enhance earnings, gain customers and reach more skilled drivers, is a compelling a part of our plan to drive higher highs and better lows across successive truckload freight cycles,” Jackson continued.
U.S. Xpress was booking operating and net losses in periods leading as much as the deal announcement. It recorded an adjusted net lack of $32 million last 12 months and had net income of just $8 million in 2021. Its consolidated adjusted OR was 101.2% last 12 months with its TL fleet operating at a 102.4% OR.
Knight-Swift expects to lower U.S. Xpress’ consolidated OR to a high-80% range by 2026, with margins at its different fleets improving to a low-80% range over time. Knight’s management team has performed similar turnarounds prior to now.
Its $6 billion acquisition of Swift Transportation in 2017 created the most important TL carrier within the nation but in addition brought on a struggling fleet with an enormous debt burden. Through integration, utilization and other initiatives, the Swift side of Knight-Swift has seen ORs improve from low- to mid-90s to sub-80s at times. In some quarters, Swift’s OR outperforms the legacy Knight operations.
Swift executives Tim Harrington and Josh Smith, who played key roles after the merger, will lead U.S. Xpress as president and CFO, respectively.
U.S. Xpress went public at $16 per share in 2018 and registered its last trade on Friday at $6.14.
The deal brings Knight-Swift to roughly $10 billion in annual revenue with a TL fleet of 25,000 tractors and 93,000 trailers.
Further, the most recent deal for the nation’s largest TL carrier isn’t expected to impede its ambitions to piece together a national less-than-truckload unit.
Knight-Swift acquired two LTL carriers in 2021, AAA Cooper Transportation in a $1.35 billion deal and Midwest Motor Express for $150 million. Knight-Swift’s newly formed LTL unit generated greater than $1 billion in revenue last 12 months, including fuel surcharges. The Northeast and Southwest remain goal geographies for the corporate to construct out a national map.
“While the truckload a part of the organization focuses on achieving the goals we’ve got laid out for U.S. Xpress, our LTL and M&A teams remain focused on our strategic priority of continuous to construct out a nationwide LTL network,” Jackson said.
Shares of KNX were down 2.4% Wednesday at 10:41 a.m. in comparison with the S&P 500, which was off 0.1%.