Executive Summary / Key Takeaways

• Knight-Swift Transportation Holdings Inc. is strategically leveraging its scale and diversified service portfolio, particularly through significant expansion in its Less-Than-Truckload (LTL) segment and integration of U.S. Xpress, to position for margin expansion amidst a volatile freight market.
• First Quarter 2025 results showed a substantial increase in consolidated operating income and net income year-over-year, driven by improvements in Truckload (including U.S. Xpress achieving quarterly operating profit), Logistics, and the All Other Segments (benefiting from exiting the third-party insurance business), despite LTL facing near-term margin pressure from network expansion costs.
• The company is intensely focused on cost control and operational efficiency across all segments, evidenced by improved Truckload Adjusted Operating Ratio and decreased Adjusted Operating Expenses per mile, alongside initiatives like fleet tightening and technology adoption.
• Near-term outlook is clouded by macroeconomic uncertainty, particularly related to fluid trade policy and potential volume disruptions, leading management to provide a wider, more conservative Q2 2025 Adjusted EPS guidance range ($0.30-$0.38) and withhold Q3 guidance.
• Despite near-term headwinds, the strategic investments in LTL network density and U.S. Xpress integration are expected to drive revenue and margin expansion in 2025 and beyond, positioning KNX for outsized performance when the freight market ultimately recovers.

Setting the Scene: A Diversified Giant in a Challenging Market

Knight-Swift Transportation Holdings Inc. stands as one of North America's largest and most diversified freight transportation companies. Formed by the significant 2017 merger of Knight Transportation and Swift Transportation, the company is headquartered in Phoenix, Arizona, and operates a vast network across the US and Mexico. Its core business spans multiple service lines, including full truckload (irregular route, dedicated, refrigerated, expedited, flatbed, cross-border), less-than-truckload (LTL), logistics (brokerage, power-only), and intermodal. This multi-faceted approach is central to its strategy, aiming to provide comprehensive solutions to customers and capture a broader range of freight opportunities.

The company's strategic journey has been marked by significant acquisitions aimed at expanding its capabilities and market reach. The 2021 acquisitions of AAA Cooper Transportation (ACT) and MME, Inc. (MME) established a foothold in the LTL market, a segment known for more stable margins than traditional truckload. This LTL expansion accelerated dramatically in 2024 through both organic growth and the key acquisition of Dependable Highway Express (DHE), adding critical density and access to the Southwest, including California. Further diversification came with the 2023 acquisition of U.S. Xpress, aimed at bolstering the Truckload segment and capturing synergies. This history of strategic inorganic growth, coupled with organic initiatives, defines KNX's approach to building scale and service breadth.

The transportation industry has recently endured a prolonged down-cycle characterized by excess capacity, declining freight rates, and inflationary cost pressures. While the market showed signs of approaching balance in the latter half of 2024 with some stabilization in pricing and a return of seasonal patterns, the environment remains volatile. Macroeconomic factors, including fluid trade policy and potential recession risks, continue to create uncertainty for shippers, impacting demand and rate negotiations. This challenging backdrop underscores the importance of operational efficiency, cost control, and strategic positioning for companies like KNX.

Technological Edge and Operational Efficiency

Technology plays a crucial role in Knight-Swift's strategy to enhance efficiency, safety, and competitive positioning. The company has invested in advanced systems across its operations. A notable recent initiative is the implementation of Netradyne's advanced AI (Driver•i D-450 and D-215 fleet safety dash cameras) in 15,500 Knight and Swift trucks. This technology is aimed at enhancing fleet safety, a critical factor in controlling insurance and claims costs. While specific quantifiable benefits across the entire fleet from this recent implementation are not yet detailed, management noted that the U.S. Xpress business, which has also focused on safety culture, saw its CSA crash rating improve by 20% since acquisition, indicating the potential impact of such initiatives on key operational metrics and associated costs.

Within its Logistics segment, KNX has focused on harmonizing its technology platform across brands. This effort is designed to improve efficiency in key areas such as procuring third-party capacity, engaging with carriers, and executing transactions. A more unified and effective platform allows for better load matching and potentially improved gross margins by optimizing the cost of purchased transportation.

Furthermore, the company employs various fuel efficiency initiatives across its fleet, including trailer blades, idle-control technology, speed management, and updates to more fuel-efficient engines. These technologies, combined with strategic fuel procurement and driver training, contribute to controlling fuel expense, a significant variable cost, and help mitigate the impact of fuel price volatility. While fuel surcharge programs aim to recover costs, they typically only apply to loaded miles and have a time lag, making fuel efficiency technologies vital for managing net fuel expense and protecting operating income, particularly during periods of rising prices.

These technological investments are not merely operational tools; they are strategic enablers. By improving safety, optimizing logistics processes, and controlling fuel costs, technology directly contributes to KNX's goal of achieving industry-leading margins and enhancing its competitive moat. These capabilities support disciplined pricing and operational excellence, positioning the company to better navigate market fluctuations and capitalize on opportunities as conditions improve.

The Competitive Arena: Leveraging Scale and Diversification

Knight-Swift operates in a highly competitive landscape, facing off against major players across its various segments. In the full truckload space, key rivals include J.B. Hunt (JBHT) and Werner Enterprises (WERN). While JBHT holds a larger market share and excels in intermodal integration and operational efficiency, KNX leverages its combined scale and diversified brands (Knight, Swift, U.S. Xpress) to offer flexibility and service breadth. KNX's strategic focus on cross-border operations provides a differentiated value proposition in US-Mexico routes.

In the LTL segment, Old Dominion Freight Line (ODFL) and Saia (SAIA) are dominant players known for superior operational efficiency, network density, and high margins. KNX's aggressive LTL network expansion in 2024, including the DHE acquisition and numerous organic terminal openings, is a direct challenge to these incumbents. While these investments initially pressure KNX's LTL margins due to startup costs and early-stage inefficiencies, the strategy aims to build the necessary density and reach to compete more effectively, capture market share, and drive future margin expansion. KNX's ability to offer integrated LTL and Truckload solutions also provides a unique cross-selling opportunity not available to pure-play LTL carriers.

The Logistics segment sees competition from both asset-based providers and non-asset brokers like XPO Logistics (XPO). XPO is known for its technology-driven approach, offering advanced digital platforms. KNX counters with its own technology harmonization efforts and leverages its asset base, particularly its extensive trailer network for power-only services. This asset-backed logistics capability allows KNX to divert volume to support its truckload business in soft markets and receive overflow freight in strong markets, creating volatility but also significant upside potential. The increasing concern around cargo security in the industry also benefits larger asset-based carriers like KNX, which possess robust security measures that smaller brokers or carriers may lack, becoming a differentiator for shippers prioritizing freight safety.

Overall, KNX's competitive positioning is defined by its vast scale, diversified service offerings, and strategic use of acquisitions and technology to build density and efficiency. While it may lag behind some peers in specific segment margins or technological niches, its integrated approach and focus on cost control are designed to enhance its resilience in downturns and amplify its profitability in upturns. The company's strategy involves intentionally driving collaboration across its brands to create distinctive solutions, aiming to capture and retain more volumes internally than any single brand could achieve alone.

Strategic Execution and Financial Performance

Knight-Swift's recent financial performance reflects its strategic initiatives and the prevailing market conditions. For the quarter ended March 31, 2025, the company reported total revenue of $1.82 billion, comparable to the prior year. However, revenue excluding truckload and LTL fuel surcharge increased slightly to $1.63 billion, up from $1.61 billion in Q1 2024.

Consolidated operating income saw a significant increase, rising to $66.663 million in Q1 2025 from $20.555 million in Q1 2024. This translated to a consolidated operating ratio of 96.3%, a notable improvement from 98.9% in the prior year period. Net income attributable to Knight-Swift also improved substantially, reaching $30.639 million ($0.19 per diluted share) compared to a net loss of $2.635 million ($0.02 per diluted share) in Q1 2024. On an adjusted basis, Adjusted Net Income Attributable to Knight-Swift was $45.372 million ($0.28 per adjusted diluted share), up from $19.774 million ($0.12 per adjusted diluted share) in Q1 2024. The consolidated Adjusted Operating Ratio improved to 94.7% from 96.8%.

Segment performance highlights in Q1 2025 included:

• Truckload: Adjusted Operating Ratio improved to 95.6% from 97.3%. Revenue per loaded mile, excluding fuel surcharge, increased 1.5% year-over-year, the first such increase in 10 quarters. The U.S. Xpress trucking business achieved a quarterly operating profit for the first time since acquisition, contributing to the segment's improvement. Adjusted Operating Expenses per mile decreased 0.9% year-over-year, reflecting cost control efforts.
• LTL: Revenue, excluding fuel surcharge, grew 26.7% year-over-year, driven by a 24.2% increase in shipments per day (including DHE). Revenue per hundredweight, excluding fuel surcharge, increased 9.3%. However, the Adjusted Operating Ratio deteriorated to 94.2% from 90.0%, and Adjusted Operating Income decreased 26.8% year-over-year. This was primarily attributed to startup costs and early-stage operations at the seven new facilities opened in Q1, as well as lingering costs from the DHE integration. Management noted that operating margins and year-over-year volume growth improved each month of the quarter, with March reaching 30% growth in daily average shipments and a 90.6% Adjusted Operating Ratio.
• Logistics: Adjusted Operating Ratio improved to 95.5% from 97.1%. Revenue increased 11.8% year-over-year, driven by an 11.7% increase in revenue per load while load count was flat. Gross margin percentage improved to 18.1% from 16.8%.
• Intermodal: Operating Ratio improved to 102.0% from 105.6%. Revenue increased 3.5% year-over-year, driven by a 4.6% increase in load count, partially offset by a 1.1% decline in revenue per load.
• All Other Segments: Reported operating income of $6.038 million, a significant improvement from a $20.444 million operating loss in Q1 2024. This improvement was largely due to winding down the third-party carrier insurance business, which had contributed a $19.5 million operating loss in the prior year period, and contributions from warehousing and leasing businesses.

The increase in salaries, wages, and benefits expense was mainly due to LTL expansion, while fuel expense decreased due to lower Truckload miles and fuel prices. Insurance and claims expense saw a substantial decrease due to exiting the third-party insurance business. Operating taxes and licenses increased due to LTL network expansion. Depreciation and amortization decreased slightly due to lower Truckload equipment counts, partially offset by LTL increases. Miscellaneous operating expenses decreased, benefiting from higher gains on equipment sales ($15.5 million in Q1 2025 vs. $6.7 million in Q1 2024).

Liquidity and Capital Allocation

Knight-Swift maintains a solid financial position. As of March 31, 2025, the company held $209.480 million in unrestricted cash and cash equivalents. Total unrestricted liquidity, including availability under its revolving credit facility and accounts receivable securitization, stood at $1.02 billion. The company's total debt (face value) net of unrestricted cash was $2.6 billion, with stockholders equity at $7.1 billion. Management expressed confidence in meeting debt covenants and not foreseeing material liquidity constraints.

Operating cash flow generation remained strong, with $109.429 million provided by operating activities in Q1 2025. Free Cash Flow for the quarter was $70.0 million. The company used cash to pay down $30.6 million in finance lease liabilities and $35.5 million in operating lease liabilities, while experiencing $23.0 million in net borrowings on its revolving credit facilities and securitization.

As of March 31, 2025, the company had $2.8 billion in material debt obligations. A working capital deficit of $193.8 million was primarily attributed to the classification of the $434.056 million accounts receivable securitization as a current liability, which the company intends to refinance before its October 2025 maturity.

Capital expenditures remain a key use of cash. For the full year 2025, net cash capital expenditures are expected to be in the range of $575 million to $625 million, primarily allocated to replacing existing equipment and investing in the terminal network, driver amenities, and technology, excluding acquisitions. The company has flexibility in its trade cycle and purchase agreements to adjust plans based on market conditions. While significant capital requirements are expected long-term, management believes current liquidity and expected cash flows are sufficient for at least the next twelve months. The company also has $200 million remaining under its 2022 share repurchase plan, though no repurchases were made in Q1 2025.

Outlook, Risks, and the Path Forward

Knight-Swift's near-term outlook is heavily influenced by the uncertain macroeconomic environment. Citing fluid trade policy and its potential implications for demand, inflation, and consumer spending, management updated guidance only for the second quarter of 2025, providing a wider range ($0.30 to $0.38 Adjusted EPS) and adopting a more conservative stance with risk skewed to the downside. Guidance for the third quarter was withheld pending greater clarity.

Key assumptions for the Q2 2025 outlook (mid-range) include:

• Truckload: Low single-digit sequential revenue increase, relatively stable operating margins sequentially. Revenue per loaded mile expected to be fairly flat sequentially, with contract rate improvements offset by spot market weakness. Tractor count projected to decrease low single-digit percent sequentially, offset by improved miles per tractor.
• LTL: Year-over-year revenue growth (excluding fuel surcharge) of 25-30%, driven by shipment growth from the expanded network (including DHE) and yield improvement. Adjusted Operating Ratio expected to improve modestly sequentially to the low 90s as increased shipment volume enhances optimization and cost absorption.
• Logistics: Low single-digit sequential revenue decrease, with Adjusted Operating Ratio remaining fairly stable.
• Intermodal: Load count and operating margin expected to be fairly stable sequentially.
• All Other Segments: Operating income (before intangible amortization) projected between $8 million and $12 million.

Additional outlook points include expected gains on equipment sales between $18 million and $23 million in Q2 2025, fairly stable sequential net interest expense, and a full-year 2025 adjusted effective tax rate of 24.5% to 25.5%.

The path forward involves executing on key strategic priorities. For Truckload, this means leveraging the decentralized U.S. Xpress model and continuing cost control. In LTL, the focus shifts from aggressive network expansion (pace expected lower in 2025) to driving revenue and margin expansion by growing into the expanded footprint and capitalizing on bid opportunities. Intermodal aims to gain market share and improve network alignment with rail partners. All segments are focused on efficiency and cost discipline.

However, significant risks persist. Market volatility driven by trade policy and potential recession could disrupt volumes and pressure rates. While LTL expansion is strategic, the associated startup costs and integration challenges could continue to weigh on margins if volume growth doesn't keep pace. The tightening insurance market could lead to increased costs. Labor costs are expected to remain inflationary in the challenging driver market. Legal proceedings inherent to the business also carry potential financial risk.

Conclusion

Knight-Swift Transportation is navigating a complex freight market by strategically leveraging its scale, diversified service offerings, and recent significant investments in LTL and U.S. Xpress. The first quarter of 2025 demonstrated the earnings power of its core Truckload and Logistics segments and the benefit of shedding the third-party insurance business, despite the near-term margin headwinds in the rapidly expanding LTL segment.

The core investment thesis centers on KNX's ability to execute its strategy of driving operational efficiency through cost control and technology, integrating acquisitions to unlock synergies, and capitalizing on its expanded LTL network to capture market share and improve margins. While the immediate future is marked by macroeconomic uncertainty, leading to cautious guidance, the company's focus on disciplined pricing, asset utilization, and strategic growth initiatives positions it for significant margin expansion and improved free cash flow generation when the freight cycle inevitably turns upward. Investors should monitor the pace of LTL volume growth and margin improvement, the continued integration and performance of U.S. Xpress, and the broader market's trajectory for signs of the anticipated recovery.