Schneider National, Inc. — Q3 2018 Form 10-Q
Business context and period: Schneider provides truckload, intermodal, and logistics services. This unaudited report covers the quarter and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods. Dollar amounts are in millions unless noted.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Operating revenue | $1,280.1 | $1,110.8 | $3,655.4 | $3,192.4 |
| Revenue excluding fuel surcharge | $1,145.2 | $1,016.9 | $3,269.6 | $2,915.6 |
| Income from operations | $97.9 | $64.1 | $257.2 | $186.6 |
| Net income | $70.7 | $36.9 | $184.1 | $106.0 |
| Diluted EPS | $0.40 | $0.21 | $1.04 | $0.63 |
| GAAP operating ratio | 92.4% | 94.2% | 93.0% | 94.2% |
| Adjusted operating ratio | 91.5% | 93.2% | 92.0% | 93.8% |
Q3 revenue rose 15% and net income increased about 92%. Management attributed earnings growth primarily to stronger pricing across segments, higher Intermodal and Logistics volumes, and the lower tax rate. The effective tax rate fell to 25.8% from 39.2% in Q3 and to 25.8% from 38.8% for the nine-month period, principally reflecting the Tax Cuts and Jobs Act. Adjusted measures are non-GAAP.
Cash, debt, and liquidity
- Nine-month operating cash flow was $410.1, versus $315.7 in 2017. Investing cash outflow was $222.1, versus $295.3; financing cash outflow was $66.7, compared with $51.0 of inflow in 2017.
- Net capital expenditures were $215.8, down from $249.6. Cash and cash equivalents were $359.8 at September 30; marketable securities were $45.0.
- Total debt, including capital leases, was $423.3, compared with $440.6 at year-end 2017. The company reported no borrowings under its revolving credit or receivables facilities and was in compliance with debt covenants.
- The new revolving credit facility provides $250.0 of capacity, maturing August 2023, with a potential increase of up to $150.0. The $200.0 receivables facility matures in September 2021. Management stated operating cash flow and available facilities should meet foreseeable needs.
Material changes and operating drivers
- Q3 revenue excluding fuel surcharge increased 13%. Intermodal and Logistics each grew 29%, supported by pricing and volume; Truckload grew 2%, primarily from pricing. Nine-month growth was led by Logistics (+26%) and Intermodal (+19%).
- Intermodal’s Q3 operating income rose to $36.1 from $12.2, with its operating ratio improving to 85.7% from 93.8%. Benefits included higher rates and volumes and lower costs following the conversion from leased to owned chassis.
- Truckload Q3 operating income increased to $53.1 from $41.1; its operating ratio improved to 90.6% from 92.6%. Average truck count declined, while revenue per truck per week increased 7%.
- Logistics Q3 operating income increased to $12.5 from $9.1, reflecting brokerage growth and net revenue management. Higher purchased transportation costs and carrier prices pressured costs amid driver-capacity constraints.
- FTFM recorded a Q3 operating loss of $9.5 and a nine-month loss of approximately $20.3, attributed to reduced volume, a bankruptcy write-off, and operational inefficiencies. The Truckload segment was reorganized in Q2, with FTFM established as a separate operating segment.
Outlook, risks, and unusual items
- No specific financial guidance was provided. Management cited driver recruitment and retention, rising driver and carrier costs, fuel-price fluctuations and recovery through surcharges, customer demand, seasonality, weather, and dependence on rail and third-party capacity as important risks.
- The company had $131.6 of firm transportation-equipment purchase commitments. It expected adoption of the lease accounting standard on January 1, 2019 to materially increase balance-sheet right-of-use assets and lease liabilities, with no expected material income-statement or cash-flow effect.
- A dispute with former WSL owners concerns alleged post-acquisition obligations and a claimed accelerated contingent payment. Schneider considers the claim meritless and is seeking a declaratory judgment; the remaining guaranteed WSL payment liability was $18.7 at September 30. The potential contingent consideration had a reported fair value of zero.
- Nine-month Other segment results included a $5.8 litigation settlement expense and the absence of a $13.2 WSL contingent-liability adjustment recorded in 2017. The EPA resolved a previously disclosed vehicle-compliance matter for $475,000 in Q2 2018.
- ASC 606 adoption increased nine-month reported revenue by $12.5 and net income by $3.4 versus the former method, mainly because transportation revenue is now recognized over time, including for loads in transit. Comparisons should account for this change.
Important facts for investors to verify
- Whether pricing and volume gains can offset elevated purchased-transportation, driver, recruiting, and insurance costs.
- Whether FTFM can improve from its reported losses and resolve operational inefficiencies.
- The status and potential financial consequences of the WSL dispute and contingent-payment claim.
- The timing and balance-sheet impact of lease-standard adoption, and future capital spending against equipment commitments.
- Whether the reported improvement in earnings and operating ratios is sustained, considering tax-rate effects, ASC 606 timing effects, and non-GAAP adjustments.