Schneider National, Inc. — Q2 2018 Form 10-Q
Business and period: Transportation and logistics provider reporting the quarter and six months ended June 30, 2018. Its reportable segments are Truckload, Intermodal, and Logistics. Comparative figures are for 2017 unless noted.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Operating revenue | $1,236.3 million | $1,075.2 million | $2,375.3 million | $2,081.6 million |
| Revenue excluding fuel surcharge | $1,103.2 million | $982.6 million | $2,124.4 million | $1,898.8 million |
| Operating income | $91.7 million | $79.0 million | $159.3 million | $122.5 million |
| Net income | $65.8 million | $46.5 million | $113.4 million | $69.1 million |
| Diluted EPS | $0.37 | $0.27 | $0.64 | $0.42 |
| GAAP operating ratio | 92.6% | 92.7% | 93.3% | 94.1% |
| Adjusted operating ratio | 91.2% | 93.1% | 92.2% | 94.1% |
Cash flow and liquidity: Six-month operating cash flow was $255.0 million, versus $226.7 million. Investing cash outflow was $105.9 million, compared with $161.6 million; net capital expenditures were $109.9 million. Financing cash outflow was $53.9 million, versus $64.0 million of inflow in 2017, which included IPO proceeds. Cash was $333.7 million at June 30, compared with $238.5 million at year-end 2017.
Debt: Total debt, including capital leases, was $425.5 million, down from $440.6 million at year-end. There were no borrowings under either the $250 million revolving facility or the $200 million receivables facility. The company reported compliance with debt covenants.
Other balance-sheet figures: Current assets were $1,261.4 million and current liabilities $523.6 million at June 30. The filing reports $213.5 million of firm transportation-equipment purchase commitments.
Changes and drivers
- Q2 revenue rose 15%; revenue excluding fuel surcharge rose 12%. Management attributed growth mainly to strong pricing and demand amid tight driver capacity; fuel surcharge revenue added $40.5 million to the year-over-year increase.
- Q2 net income increased 42%; management cited stronger pricing and demand and a lower effective tax rate following the Tax Cuts and Jobs Act. The effective tax rate fell to 25.5% from 37.7% in Q2 and to 25.8% from 38.6% for the half-year.
- Intermodal posted the largest reported segment operating-income improvement: Q2 operating income was $30.8 million versus $11.2 million, supported by higher price and volume and lower chassis-related costs. Logistics revenue grew 30% in Q2, with brokerage volumes up 19%.
- Truckload Q2 revenue excluding fuel surcharge increased 5%; revenue per truck per week rose 7%. Management said the segment’s results included an approximately $4 million FTFM operating loss.
- Purchased transportation expense increased 25% in Q2, with brokerage growth and higher carrier prices among the drivers. Fuel expense also increased with fuel prices; the company said a significant portion is recovered through surcharges.
Outlook, risks, and unusual items
- No specific earnings or revenue guidance is provided. Management expects operating cash flow and available credit facilities to meet requirements for the foreseeable future.
- The company identifies driver availability and wage costs, fuel price and recovery, demand and pricing, customer concentration, third-party capacity, rail reliance, insurance and claims, regulation, severe weather, cybersecurity, and acquisition execution among relevant risks. It also notes seasonal strength typically in late Q3 and Q4 and higher winter operating costs.
- Q2 includes $5.8 million of litigation costs associated with settlement of a Washington State labor-law lawsuit; adjusted results exclude this item. The company also settled an EPA matter for $475,000 during Q2.
- A dispute with former WSL owners concerns alleged post-acquisition obligations and a claimed accelerated contingent payment. Schneider calls the claim meritless and has sought a declaratory judgment. The remaining guaranteed WSL payment had a present value of $18.7 million at June 30.
- ASC 606 adoption increased retained earnings by $7.3 million at January 1, 2018. For Q2, the standard increased reported revenue by $5.0 million and net income by $0.8 million versus the prior accounting basis. Management expects adoption of the new lease standard in 2019 to increase recognized assets and liabilities; its impact was still under assessment.
- Management reported no goodwill impairment after reorganizing Truckload reporting units. It warned that weaker performance, forecast changes, or higher cost of capital could reduce fair values and lead to impairment.
Key facts for investors to verify
- Whether pricing and demand remain strong and whether driver capacity and wage pressures affect margins.
- Whether Logistics brokerage growth remains profitable as purchased-transportation costs and carrier pricing rise.
- FTFM’s operating performance and the effect of its losses on Truckload results.
- Resolution and potential financial impact of the WSL dispute, litigation, and claims exposure.
- Capital spending and equipment commitments, liquidity needs, and the impact of adopting ASC 842.
- Comparability of adjusted measures: these are non-GAAP measures and exclude specified items; GAAP results are reported separately.