Schneider National, Inc. — Q3 2017 Form 10-Q
Business context and reporting period. Schneider provides truckload, intermodal, and logistics services. This unaudited quarterly report covers the three and nine months ended September 30, 2017, compared with the same 2016 periods; balance-sheet comparisons are with December 31, 2016. The company completed its IPO in April 2017.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Operating revenue | $1,110.8 million | $1,053.2 million | $3,192.4 million | $2,975.8 million |
| Operating income | $64.1 million | $70.8 million | $186.6 million | $202.5 million |
| Net income | $36.9 million | $36.8 million | $106.0 million | $109.1 million |
| Diluted EPS | $0.21 | $0.24 | $0.63 | $0.70 |
| GAAP operating ratio | 94.2% | 93.3% | 94.2% | 93.2% |
| Adjusted operating ratio | 93.2% | 92.6% | 93.8% | 92.6% |
| Adjusted net income | $40.0 million | $37.8 million | $103.0 million | $110.1 million |
Adjusted measures are non-GAAP and exclude specified items. Adjusted enterprise revenue, excluding fuel surcharges, rose 5% to $1,016.9 million in Q3 and 5% to $2,915.6 million year to date.
- Q3 segment results: Truckload revenue was $551.7 million and operating income $41.1 million, versus $540.8 million and $53.6 million. Intermodal revenue was $196.0 million and operating income $12.2 million, versus $187.6 million and $10.9 million. Logistics revenue was $209.1 million and operating income $9.1 million, versus $194.3 million and $8.4 million.
- Cash flow: Nine-month operating cash flow was $315.7 million, compared with $317.5 million. Investing used $295.3 million, compared with $442.0 million; financing provided $51.0 million, compared with $48.8 million. Cash increased $71.4 million to $202.2 million.
- Liquidity and debt: At September 30, cash was $202.2 million and marketable securities $44.0 million. Total debt, including capital leases, was $445.9 million, down from $699.4 million at year-end 2016. No revolving-credit borrowings were outstanding; the company reported compliance with debt covenants. It had a $250 million revolving facility and a $200 million receivables facility.
- Capital spending: Nine-month net capital expenditures were $249.6 million. Firm transportation-equipment purchase commitments were approximately $68.2 million.
- Dividends: The company declared $0.05 per share for each of the first three post-IPO quarterly dividends; an additional $0.05-per-share fourth-quarter dividend was declared in October, payable in January 2018.
Material changes and management commentary
- Q3 revenue increased 5%, but operating income declined 9%; net income was essentially unchanged. Diluted EPS fell partly amid an increase in weighted-average shares following the IPO.
- Management cited stronger demand, tighter capacity, improved pricing and freight selection, and higher volumes. Q3 revenue growth included increases across the core segments and higher leasing-business revenue. Fuel surcharge revenue also increased.
- Truckload operating income fell 23% in Q3, primarily due to higher driver costs, hurricane effects, lower equipment-sale gains, start-up costs, and First to Final Mile costs. Average truck count was down 2.3%, while revenue per truck per week rose 4.9%.
- Intermodal orders increased 8.3% in Q3, while revenue per order was down 3.6% year over year amid competitive pricing and shorter hauls. Logistics revenue grew 8%, primarily from brokerage growth.
- For the first nine months, revenue rose 7%, while operating income declined 8% and net income declined 3%. Growth included WSL, acquired in June 2016, brokerage, leasing, and fuel surcharges; higher driver costs, hurricane impacts, and lower equipment-sale gains weighed on operating results.
Outlook, risks, contingencies, and unusual items
- No numerical earnings or revenue guidance is provided. Management expects operating cash flow and available credit, together with IPO proceeds, to meet requirements for the foreseeable future.
- The intermodal chassis transition generated $5.4 million of duplicate rental costs in Q3 and $8.3 million year to date. Management expected conversion to owned chassis to be complete by year-end 2017 and said the full operating-cost benefit would not be realized until 2018.
- Management estimated the two Q3 hurricanes had a net negative earnings impact of $3.0 million, reflecting lost revenue and productivity and higher costs, partly offset by improved pricing.
- A $13.2 million year-to-date reduction in the estimated WSL contingent-consideration liability increased operating income; the Q3 adjustment was $0.3 million. Separately, former WSL owners claim an accelerated contingent payment is owed. Schneider disputes the claim and sought a declaratory judgment; potential payment is capped at $40 million, and no contingent payments had been made through September 30.
- The EPA indicated it intended to seek a settlement over alleged California truck-and-bus regulation violations that may include a monetary sanction exceeding $100,000. Schneider said it did not expect the sanction to be material. The company also reported ordinary-course legal matters and said their outcomes were not expected to materially affect its business or financial statements.
- Key disclosed risks include driver recruitment and wage pressure, fuel costs and surcharge recovery, customer loss, pricing and capacity competition, seasonality and severe weather, regulation, cybersecurity disruptions, insurance claims, acquisition execution, and reliance on railroads and third-party carriers.
- Revenue-recognition guidance effective in 2018 was expected to change transportation-service recognition from delivery to recognition over time; management did not expect an overall material financial-statement impact, but evaluation was ongoing. The expected impact of the new lease standard had not been estimated.
Important facts for investors to verify
- Whether stronger freight demand and pricing persist, and whether higher driver costs continue to offset productivity gains.
- Progress and realized savings from the chassis conversion, including the timing and size of benefits expected in 2018.
- The outcome and potential financial exposure of the WSL seller dispute, including the contingent-payment terms and assumptions used to value the liability.
- Whether the stated hurricane impact, segment trends, and non-GAAP adjustments reconcile to subsequent reported results.
- Cash generation, capital spending commitments, debt repayment, and compliance with credit-facility covenants.
- The EPA matter’s resolution and the effects of revenue-recognition and lease-accounting adoption.