Schneider National, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless noted. Schneider provides truckload, intermodal, and logistics services. Financial statements are unaudited.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Operating revenues | $1,194.1 million | $1,139.0 million | Up 5% |
| Revenues excluding fuel surcharge | $1,082.3 million | $1,021.2 million | Up 6% |
| Income from operations | $51.5 million | $67.6 million | Down $16.1 million (24%) |
| Net income | $36.9 million | $47.6 million | Down $10.7 million (22%) |
| Diluted EPS | $0.21 | $0.27 | Down $0.06 |
| Operating ratio / adjusted operating ratio | 95.7% / 95.2% | 94.1% / 93.4% | Both worsened |
| Operating cash flow | $133.2 million | $100.0 million | Up $33.2 million |
Operating margin was approximately 4.3%, versus 5.9% in Q1 2018, based on reported operating income and revenue. Effective tax rate was 25.4%, compared with 26.2%.
Segments and operating drivers
- Truckload: Revenue excluding fuel surcharge fell 3% to $531.8 million; operating income dropped to $23.2 million from $46.6 million. Volume declined 7%, partly offset by 4% higher pricing. Segment operating ratio rose to 95.6% from 91.5%.
- Intermodal: Revenue excluding fuel surcharge grew 18% to $237.6 million, supported by 13% higher revenue per order and 3% more orders. Operating income declined to $19.9 million from $22.2 million; operating ratio worsened to 91.6% from 89.0%.
- Logistics: Revenue excluding fuel surcharge increased 10% to $243.9 million, primarily from 20% brokerage volume growth. Operating income rose to $10.3 million from $7.8 million; operating ratio improved to 95.8% from 96.5%.
- Other: Operating loss narrowed to $1.9 million from $9.0 million, reflecting lower benefit costs and improved leasing results.
Cash, debt, and liquidity
- Cash and cash equivalents were $441.0 million at March 31, 2019, with marketable securities of $47.1 million; combined liquidity from these balances was $488.1 million.
- Total debt, including finance leases, was $411.2 million. Cash and marketable securities exceeded this amount by approximately $76.9 million. The company reported $400.0 million of senior notes and $4.6 million of equipment financing.
- No borrowings were outstanding under the $250 million revolving facility or the $200 million receivables facility. The company reported compliance with financial covenants.
- Investing cash outflow was $59.2 million; financing cash outflow was $11.7 million. Net capital expenditures were $50.1 million, up from $26.0 million, largely because of lower equipment-sale proceeds and higher spending.
- Operating cash flow benefited from working-capital movements and the ASC 842 reclassification of lease receipts from investing to operating activities; the year-over-year increase should not be read solely as improvement in underlying earnings.
Material changes, outlook, and risks
- Management attributed lower earnings to weaker freight volumes, increased driver and equipment costs, reduced productivity, unfavorable freight mix, and adverse winter weather. Higher Intermodal and Logistics activity and leasing equipment sales supported revenue growth, while lower Truckload volume partly offset it.
- Management said cash generated from operations and available credit facilities should be sufficient for foreseeable requirements. The filing provides no specific earnings or revenue guidance.
- Schneider adopted ASC 842 on January 1, 2019, recognizing $80.6 million of right-of-use assets and $85.2 million of lease liabilities at adoption. Prior periods were not restated. Lease receipts were reclassified from investing to operating cash flows.
- Firm commitments to purchase transportation equipment totaled approximately $182.5 million at quarter-end.
- A goodwill impairment trigger arose for the First to Final Mile (FTFM) reporting unit. Management found no impairment, but its estimated fair-value cushion over carrying value narrowed to 4% from 10% reported in the 2018 Form 10-K. Further deterioration could lead to impairment.
- Former owners of Watkins and Shepard Trucking and Lodeso allege entitlement to an accelerated contingent payment, potentially up to $40 million. Schneider disputes the claim and has sought a declaratory judgment; the former owners counterclaimed for the full accelerated amount. No contingent consideration had been paid through March 31, 2019.
- Management cited ongoing risks including driver recruitment and retention, demand and pricing, fuel costs, weather, insurance and claims, third-party capacity, competition, regulation, and cybersecurity. It stated there were no material changes to the risk factors in the 2018 Form 10-K.
Important facts for investors to verify
- Whether Truckload volumes, utilization, productivity, and segment operating ratio improve after the Q1 decline.
- Whether the narrow FTFM goodwill valuation cushion changes or results in an impairment charge.
- The status and potential financial exposure of the WSL contingent-payment litigation.
- How much of the increase in operating cash flow reflects sustainable operating performance versus working-capital changes and the lease-accounting reclassification.
- Execution of the $182.5 million equipment purchase commitments and the related capital spending and fleet utilization.