Schneider National, Inc. — Q2 2019 Form 10-Q
Business and period: Schneider provides truckload, intermodal, and logistics services. This unaudited report covers the quarter and six months ended June 30, 2019, compared with the same periods in 2018. Amounts below are in millions except per-share data and ratios.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Operating revenue | $1,212.7 | $1,236.3 | $2,406.8 | $2,375.3 |
| Income from operations | $49.2 | $91.7 | $100.7 | $159.3 |
| Net income | $34.5 | $65.8 | $71.4 | $113.4 |
| Diluted EPS | $0.19 | $0.37 | $0.40 | $0.64 |
| GAAP operating ratio | 95.9% | 92.6% | 95.8% | 93.3% |
| Adjusted operating ratio | 92.3% | 91.2% | 93.8% | 92.2% |
| Adjusted net income | $60.3 | $70.1 | $97.2 | $117.7 |
Q2 revenue declined 2%; six-month revenue increased 1%. Q2 net income fell about 48%, and six-month net income fell about 37%, primarily reflecting a $34.6 goodwill impairment in the First to Final Mile (FTFM) business and weaker Truckload results. Adjusted measures exclude the impairment in 2019 and a $5.8 litigation cost in 2018; they are non-GAAP measures and should be considered alongside GAAP results.
- Segments, Q2: Truckload revenue was $534.9 and operating income $7.9, versus $567.6 and $61.2 a year earlier. Intermodal revenue rose to $259.8 from $231.7, but operating income declined to $30.5 from $32.4. Logistics revenue declined to $227.0 from $250.7 and operating income to $9.2 from $10.4. Other reported operating income of $1.6 versus a $12.3 loss.
- Margins and operating conditions: Truckload revenue excluding fuel surcharge declined 6% in Q2, with volume down 7%; management cited soft demand and lower productivity. Intermodal revenue excluding fuel surcharge rose 12%, while higher rail and other purchased-transportation costs pressured earnings. Logistics revenue excluding fuel surcharge fell 9%, primarily after a customer insourced warehouse management; brokerage volume grew but rate compression limited revenue gains.
- Cash flow: Six-month operating cash flow was $302.0, versus $255.0. Investing cash outflow was $259.4, versus $105.9; financing cash outflow was $43.6, versus $53.9. Net capital expenditures were $231.1, compared with $109.9, mainly due to higher equipment and IT spending. Lease-receipt cash flows were reclassified from investing to operating activities upon adoption of the new lease standard, affecting period comparisons.
- Liquidity and debt: At June 30, cash and marketable securities totaled $425.2; reported total debt, including finance leases, was $408.6. Cash and securities therefore exceeded this debt measure by approximately $16.6. The company had no borrowings under its $250.0 revolving facility or $200.0 receivables facility and reported compliance with debt covenants. Management expected operating cash flow and available facilities to meet foreseeable requirements.
- Other balance-sheet items: Total assets were $3,892.7 and shareholders’ equity $2,185.4. Current liabilities were $721.9. Adoption of ASC 842 added operating lease right-of-use assets and liabilities; at June 30 these were $92.4 and $97.0, respectively.
Material changes, outlook, and risks
- FTFM impairment and shutdown: The company recorded a $34.6 impairment, eliminating all goodwill attributed to FTFM, after results remained below projections. On July 29, 2019, the board approved a structured shutdown of the FTFM service offering, expected to be substantially complete by December 31, 2019. Schneider estimated $50–$75 of pre-tax restructuring charges, including $35–$45 of non-cash impairments and $15–$30 of future cash costs, primarily leases and severance. Estimates may change.
- Capital and dividends: Firm commitments to purchase transportation equipment were approximately $69.0. The board declared a $0.06-per-share quarterly dividend in July, payable October 9, 2019 to shareholders of record September 13.
- Contingency: Former owners of WSL seek an accelerated contingent acquisition payment, up to $40.0, alleging breach of post-closing obligations. Schneider says the claim is meritless and seeks a declaratory judgment; the former owners counterclaimed for the full amount. The filing does not quantify a probable loss.
- Principal risks and commentary: Management highlighted soft freight demand, driver recruitment and retention, pricing and capacity competition, fuel costs and surcharge recovery, severe weather and claims severity, reliance on rail and third-party capacity, and execution of growth and cost initiatives. The company cited increased auto-loss severity and higher intermodal rail and storage costs. It provided no specific earnings or revenue guidance in the supplied filing text.
Key facts for investors to verify
- Progress, final charges, cash costs, and operational effects of the FTFM shutdown.
- Whether Truckload demand and productivity stabilize and whether Intermodal growth translates into improved segment profitability.
- Brokerage rate compression and the ongoing revenue impact of the customer’s warehouse-management insourcing.
- Capital spending, equipment commitments, lease-related obligations, and cash generation relative to dividends and debt service.
- Developments in the WSL dispute, claims costs, and any further goodwill impairment indicators.