Schneider National, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; the filing also reports fourth-quarter results. Schneider provides truckload, intermodal, and logistics services. It completed its IPO in April 2017.
Financial performance
| Metric | 2017 | 2016 |
|---|---|---|
| Operating revenue | $4,383.6 million | $4,045.7 million |
| Revenue excluding fuel surcharge (non-GAAP) | $3,997.3 million | $3,751.7 million |
| Income from operations | $280.3 million | $290.4 million |
| Net income | $389.9 million | $156.9 million |
| Adjusted net income (non-GAAP) | $161.2 million | $158.5 million |
| Diluted EPS | $2.28 | $1.00 |
| Operating ratio | 93.6% | 92.8% |
| Adjusted operating ratio (non-GAAP) | 93.0% | 92.2% |
| Cash from operations | $461.3 million | $455.3 million |
| Net capital expenditures | $351.9 million | $407.1 million |
Revenue increased 8% year over year, while revenue excluding fuel surcharge rose 7%. GAAP net income included a $229.5 million favorable, noncash deferred-tax adjustment from the Tax Cuts and Jobs Act (TCJA). Adjusted net income, which excludes that effect and specified other items, rose about 2%. The reported effective tax rate was negative 48.0%; the adjusted rate was 39.1%.
Fourth-quarter 2017 revenue was $1,191.2 million and operating income was $93.7 million. Net income of $283.9 million included the TCJA benefit; diluted EPS was $1.60. Fourth-quarter 2016 net income was $47.8 million, with diluted EPS of $0.30.
Segments and changes versus 2016
- Truckload: Revenue excluding fuel surcharge was $2,187.4 million, up about 5%; operating income fell to $196.2 million from $221.1 million. Higher driver costs, First to Final Mile network buildout, hurricane impacts, and lower equipment-sale gains weighed on results. Segment operating ratio rose to 91.0% from 89.4%.
- Intermodal: Revenue excluding fuel surcharge increased about 3%; orders rose 7%, while revenue per order fell 4%. Operating income increased to $52.3 million from $46.1 million. The chassis conversion generated $14.9 million of duplicate lease costs.
- Logistics: Revenue excluding fuel surcharge increased about 13%, with brokerage volumes up approximately 12%. Operating income increased to $34.2 million from $30.7 million; the segment operating ratio was 95.9% versus 95.8%.
Enterprise operating income declined 3%, and both GAAP and adjusted operating ratios worsened. Management cited higher driver and fuel costs, lower equipment-sale gains, and business mix, including faster growth in the higher-operating-ratio Logistics segment. Lower interest expense partially supported adjusted net income.
Cash, debt, liquidity, and capital
Cash and cash equivalents were $238.5 million at year-end, up from $130.8 million. Current marketable securities were $41.6 million. Total debt and capital lease obligations were approximately $440.6 million, down from $699.4 million; this included $400.0 million of senior notes, $29.8 million of equipment financing, and $10.8 million of capital leases. The company reported compliance with debt covenants and no borrowings under its $250 million revolving facility or accounts receivable facility at year-end.
Operating cash flow was $461.3 million. Net capital expenditures were $351.9 million. Management expected 2018 net capital expenditures of $325 million to $375 million and said operating cash flow and available credit facilities were expected to meet foreseeable needs. The company declared $0.20 per share in 2017 dividends and declared a $0.06-per-share first-quarter 2018 dividend.
Outlook, commentary, risks, and unusual items
- Management described goals of profitable growth, stronger returns on capital, organic growth through customer cross-selling, expansion in specialty freight, brokerage and e-commerce fulfillment, and continued productivity improvement through its Quest technology platform. No specific earnings or revenue guidance was provided.
- Management anticipated an ongoing effective tax rate of 25%–26%. The 2017 TCJA impact was provisional and could be revised during 2018; the company expected to complete its assessment by no later than the fourth quarter of 2018.
- In 2017 Schneider completed its transition to an owned-chassis model, adding approximately 10,000 chassis. Duplicate lease costs were $14.9 million; management said the change was intended to improve cost, reliability, and driver efficiency.
- The WSL acquisition agreement remains subject to a dispute: former owners seek accelerated contingent consideration, while Schneider says the claim is without merit and sought a declaratory judgment. The contingent consideration liability was reduced to zero in 2017, benefiting operating income by $13.5 million ($8.1 million after tax).
- The EPA alleged certain vehicles did not comply with California truck and bus rules. Schneider was discussing a proposed settlement that could include a sanction exceeding $100,000; management did not expect the sanction to be material.
- Key risks include freight-market cyclicality and pricing competition; driver availability and wage costs; fuel-price and surcharge recovery; customer concentration (Walmart contributed $460 million, slightly over 10% of revenue); reliance on railroads and third-party carriers; insurance and claims exposure; regulation and owner-operator classification; capital needs; and operational or cybersecurity disruptions.
- The Schneider family retained approximately 94% of voting power through the dual-class structure. The company qualifies as a controlled company and uses NYSE governance exemptions. The CFO announced plans to retire after a transition expected through June 30, 2018.
Important facts for investors to verify
- Separate the one-time $229.5 million TCJA deferred-tax benefit from recurring earnings; compare GAAP results with the company’s non-GAAP reconciliations.
- Track whether operating-ratio deterioration reverses and whether Truckload profitability improves as driver costs, capacity, and freight pricing change.
- Monitor 2018 capital spending, cash generation, debt maturities, and availability under the revolving and receivables facilities.
- Review the outcome of the WSL contingent-payment litigation, the EPA matter, and developments in claims reserves and insurance exposure.
- Assess execution of growth plans in brokerage, specialty freight, and e-commerce, alongside customer concentration and driver-retention risks.
The independent auditor gave an unqualified opinion on the financial statements. Because Schneider was a newly public company, the filing did not include management’s assessment or auditor attestation of internal control over financial reporting; management stated that disclosure controls were effective.