The multiyear decline in the financial fortunes of truckload carrier U.S. Xpress is coming to an end with the announcement Tuesday that it is being bought by Knight-Swift at a significant premium to the company’s closing stock price Monday.
In one of the largest truckload carrier sales in history, Knight-Swift (NYSE: KNX) said it is paying $808 million for U.S. Xpress (NYSE: USX). The price is $6.15 per share. U.S. Xpress stock closed Monday at $1.50.
In the joint prepared news release announcing the deal, the companies said U.S. Xpress will add about $2.2 billion in total revenue to Knight-Swift, with about $1.8 billion of that being in truckload. It will also add 7,200 tractors and 14,400 trailers to Knight-Swift.
Following the deal, Knight-Swift said its consolidated revenue run rate would be close to $10 billion and the truckload fleet will be at about 25,000 tractors and 93,000 trailers. Knight-Swift reported full-year 2022 revenue of $7.42 billion, including fuel surcharge revenue. U.S. Xpress revenue including fuel in 2022 was $2.16 billion.
Chattanooga, Tennessee-headquartered U.S. Xpress will continue to operate under that name as a division inside the company, according to the prepared statement released by the two companies.
U.S. Xpress in the last few years has struggled even in the midst of a freight market that picked up steam rapidly after the first ugly months of the pandemic in 2020 and didn’t slow down for two years. While many other truckload carriers were reporting record earnings, U.S. Xpress struggled to keep its operating ratio from rising over the red ink-dividing line of 100%.
What is notable about the recent performance of U.S. Xpress is not that it has lagged its peers, as it had done that for several years. But the company’s performance has dropped consistently over the past few years even as most of 2021 and the first half of 2022 were being described as one of the greatest trucking markets ever.
It spent more than two years investing in Variant, its truckload carrier within a truckload carrier. Variant was to be a technology-driven app-based system for providing the most efficient routing and load matching, as well as creating a wage structure that it was hoped would keep turnover — always a problem at U.S. Xpress — more moderate.
U.S. Xpress had been breaking out data on the performance of Variant. The last figures provided were in 2022’s second quarter.
Turnover at Variant, which was supposed to be reduced due to its unique pay structure, was 150% in the second quarter of the year, deteriorating by 2 percentage points from the first quarter. In the first quarter of 2021, that turnover rate was less than 60% at Variant, but it worsened from there.
The bottom line is that by the end of Variant, there were no significant metrics that signaled the “company within a company” was doing any better than the rest of U.S. Xpress and might have been doing worse.
It was at that point that CEO Eric Fuller said U.S. Xpress was returning to “blocking and tackling” and “skinnying down” Variant.
In January 2021, Morgan Stanley transportation analyst Ravi Shanker put out a report calling U.S. Xpress “the most idiosyncratic story in trucking,” citing the Variant experiment. He said the “multi-year digital transformation [was] unlike anything this industry has seen.”
At that point, Shanker declared that U.S. Xpress was “off to a strong start” but that it was still to be determined whether the company would end up as a $15 or $5 stock a year out. Ultimately, two years later, it ended up as a plus $6 stock, though it took an acquisition to get there.
About 13 months after that Morgan Stanley report came out, U.S. Xpress hit its post-Variant launch high at about $11.75 per share before beginning a two-year slide that saw the price of Variant stock drop as low as $1.335 on Feb. 23.
A comparison of some of the key operating metrics between Knight-Swift and U.S. Xpress tell the story of two companies with a huge gap in performances.
For example, Knight-Swift had an adjusted OR in 2022 of 83.5%, which actually marked a deterioration from 80.9% in 2021. U.S. Xpress had a full-year adjusted OR of 101.2% in 2022, weakening from 99.1% a year earlier.
That 2022 negative OR for U.S. Xpress came with an adjusted net loss of $32.2 million.
U.S. Xpress went public in June 2018, and that second quarter of 2018 was its first to be publicly reported. It had an adjusted OR in that quarter of 93.4%.
Even then, the performance at U.S. Xpress was considerably worse than Knight Trucking, which reported an adjusted OR that quarter of 77.7%. At that time, the results for Swift Transportation were broken out separately. Swift’s second-quarter 2018 adjusted OR was 87.4%.
What has been particularly striking of late has been the average revenue per truck statistics. In its full-year report for 2022, Knight-Swift said its average truckload revenue per tractor for the year was $210,469, up from $204,299 a year earlier.
USX does not provide a full-year average revenue, but its average revenue per week for 2022 was $3,808. Multiplied by 52, that comes out to $198,016.
When U.S. Xpress went public, one of the stated reasons was to reduce its debt load. But at the close of 2018’s second quarter, when the company went public, its balance sheet listed long-term debt and finance leases at approximately $312.8 million. At the end of 2022’s fourth quarter, that number was $360.2 million.
Among other provisions in the sale:
- Executive Chairman Max Fuller and his son, CEO Eric Fuller, will not cash out all their stock. They will convert an undisclosed portion into shares in the new subsidiary company that will hold the U.S. Xpress assets at Knight-Swift. Their holdings will be about 10% of the ownership of that subsidiary.
- The acquisition is expected to be accretive beginning next year. Knight-Swift also has ambitious goals for U.S. Xpress, targeting a high 80s adjusted OR by 2026 for the acquired business. “Although it will take time, particularly given the current freight environment, we would not have pursued the transaction unless we were confident in achieving our return thresholds within a few years,” Knight-Swift CEO Dave Jackson said in the prepared statement.
In its statement, the companies said the two Fullers and CFO Eric Peterson will transition out of their executive roles by will “remain available to ensure a smooth transition.” Swift executive Tim Harrington will become U.S. Xpress president and Josh Smith, also of Swift, will become CFO.
Deutsche Bank transportation analyst Amit Mehrotra was right out of the gate with a thumbs up for the deal, and he believes the targets are reasonable.
“USX is a money losing business and risks to integration are not zero,” he wrote in a report. “But, after the Swift integration, which was much larger and as a result more complex, in our view, we think KNX’s management should get the benefit of doubt in being able to achieve the financial targets, which is high-80s OR by 2026. We suspect there’s some prudent conservatism around this time line, but that will depend on how strong the spot market is beyond 2023 and 2024.”
Mehrotra added that the acquisition was not a surprise given Knight-Swift’s stated growth plans.
“The company’s growth ambitions have been very clear in recent years (since the successful integration of Swift), and the company has been transparent on recent earnings calls about the potential to acquire another truckload company, which is a business they know incredibly well and execute better than most,” he wrote.
He also noted that while the $6.15 price may appear rich in comparison to the Monday close of $1.50, an economic model of future gains in EBITDA from the U.S. Xpress business “makes sense on a net present value basis.”
Analysts at Evercore ISI said something similar in their report on the deal. “On the surface, paying a 300+% premium for a Truckload enterprise that lost money in one of the strongest underlying consumer demand and TL rate environments in several decades appears to be a stretch if not a misplaced use of capital as KNX’s inorganic growth focus was supposed to be centered around building out a national LTL network, but therein lies the greatest opportunity … even if the tail is very long.”
Knight-Swift was created through the $5 billion acquisition of Swift Transportation by Knight Transportation in 2017. That is believed to be the only truckload acquisition bigger than the sale of U.S. Xpress to Knight-Swift.
Disclosure: FreightWaves founder and CEO Craig Fuller retains ownership of U.S. Xpress shares through his family trust.
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