Schneider National, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Schneider provides truckload, intermodal, and logistics services. Comparisons below are with Q1 2017 unless otherwise stated. Dollar amounts are in millions except per-share data.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Operating revenue | $1,139.0 | $1,006.4 | +$132.6; 13% |
| Revenue excluding fuel surcharge | $1,021.2 | $916.2 | +$105.0; 11% |
| Income from operations | $67.6 | $43.5 | +$24.1; 55% |
| Operating ratio | 94.1% | 95.7% | Improved 1.6 percentage points |
| Adjusted operating ratio | 93.4% | 95.1% | Improved 1.7 percentage points |
| Net income | $47.6 | $22.6 | +$25.0 |
| Diluted earnings per share | $0.27 | $0.14 | +$0.13 |
| Effective tax rate | 26.2% | 40.5% | Down 14.3 percentage points |
| Cash from operating activities | $100.0 | $89.2 | +$10.8 |
| Net cash used in investing activities | $(22.6) | $(38.0) | $15.4 less used |
| Net cash used in financing activities | $(15.8) | $(102.7) | $86.9 less used |
Operating expenses were $1,071.4, up from $962.9. Purchased transportation rose 16%, mainly with logistics volume growth; fuel expense rose 16%, largely due to higher fuel prices. The company said a significant portion of fuel-cost changes is recovered through surcharges.
Cash, debt, and liquidity
- Cash and cash equivalents were $300.1 at March 31, 2018, versus $238.5 at year-end 2017; marketable securities were $40.3.
- Total debt, including capital leases, was $433.6, compared with $440.6 at year-end. The balance sheet reports debt and capital lease obligations of $432.8, including current and long-term amounts. Senior notes totaled $400.0; equipment financing notes totaled $23.8.
- No borrowings were outstanding under either the $250.0 revolving facility or the $200.0 receivables-backed facility. The revolving agreement runs through November 2018. The company reported compliance with financial covenants.
- Net cash used in investing included $52.3 of purchases of transportation and other property and equipment, offset partly by $26.3 of equipment-sale proceeds. Net capital expenditures were $26.0.
- Management said operating cash generation and available credit facilities should be sufficient for foreseeable requirements.
Business and segment changes
- Truckload: Revenue excluding fuel surcharge increased 6% to $551.3; segment operating income rose 23% to $47.4. Revenue per truck per week increased 6%. Management cited improved pricing in a strong market, partly offset by weather-related productivity declines and higher driver costs. FTFM performance was unfavorable as the company invested to improve network transit times.
- Intermodal: Revenue excluding fuel surcharge increased 11% to $201.0; operating income increased to $21.8 from $6.6. Orders rose 5.5%, revenue per order rose 5%, and container productivity improved 5%. Tight capacity, pricing, volume, chassis conversion savings, and asset productivity contributed; rail velocity constrained productivity.
- Logistics: Revenue excluding fuel surcharge increased 20% to $220.8, primarily from brokerage growth, with volumes up 10%. Operating income rose to $7.7 from $5.2.
- Other: Operating loss widened to $9.3 from $6.8, reflecting higher public-company and incentive compensation costs and ASC 606 effects.
Outlook, accounting, and risks
- The filing gives no specific full-year earnings or revenue guidance. Management attributed the quarter’s improvement to strong demand and pricing amid tight capacity, plus the lower tax rate following the Tax Cuts and Jobs Act.
- Seasonality remains relevant: shipping volumes are generally strongest in late Q3 and Q4, while winter weather can raise operating costs. Management also highlighted driver recruitment and retention, wage pressure, fuel availability and pricing, customer demand, third-party capacity, rail dependence, and execution of growth initiatives as business risks.
- ASC 606 was adopted January 1, 2018 using the modified retrospective method. The adoption increased opening retained earnings by $7.3. Q1 revenue was recognized over the transportation service period, including loads in transit; the reported adoption adjustment reduced Q1 net income by $0.4 versus the prior accounting method.
- Firm commitments to purchase transportation equipment were approximately $217.4. Management reported no material expected impact from ordinary-course legal matters generally.
- In the WSL acquisition dispute, former owners claimed entitlement to accelerated contingent consideration; Schneider said the claim was meritless and sought a declaratory judgment. The filing also records $38.0 present value for two remaining guaranteed WSL payments. No contingent-earnings payments had been made, and their reported fair value was zero.
- Subsequent to quarter-end, Schneider agreed in April 2018 to pay $475,000 to settle an EPA matter concerning alleged California truck emissions regulation violations. The company said it was already compliant with the electronic logging device mandate.
- Management expected recognition of operating lease assets and liabilities upon adoption of the new lease standard, effective for the company in the quarter ending March 31, 2019; the full impact was still under evaluation.
Most important facts for investors to verify
- Whether tight capacity and pricing gains persist, and whether truckload and intermodal productivity constraints ease.
- Whether the strong quarterly profit growth is sustainable apart from the lower tax rate and the unusually favorable market conditions.
- Progress and financial exposure in the WSL dispute, including the $38.0 of remaining guaranteed payments.
- Timing and funding of the $217.4 equipment purchase commitments, and renewal or replacement of the revolving facility due in November 2018.
- Effects of ASC 606 estimates for in-transit revenue and the forthcoming lease-standard adoption.