Schneider National, Inc. — Q2 2020 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2020. Schneider provides truckload, intermodal, and logistics services. Results were affected by COVID-19 disruption, particularly reduced Truckload and Intermodal demand beginning in April, with volumes improving as the quarter progressed.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | H1 2020 | H1 2019 |
|---|---|---|---|---|
| Operating revenue | $1,032.8m | $1,212.7m | $2,151.9m | $2,406.8m |
| Revenue excluding fuel surcharge | $964.1m | $1,088.5m | $1,980.2m | $2,170.8m |
| Operating income | $63.4m | $49.2m | $118.3m | $100.7m |
| Adjusted operating income | $63.6m | $83.8m | $117.3m | $135.3m |
| Net income | $46.5m | $34.5m | $90.3m | $71.4m |
| Adjusted net income | $46.7m | $60.3m | $89.6m | $97.2m |
| Diluted EPS | $0.26 | $0.19 | $0.51 | $0.40 |
Q2 GAAP operating ratio was 93.9% versus 95.9%; adjusted operating ratio was 93.4% versus 92.3%. For H1, GAAP operating ratio was 94.5% versus 95.8%, while adjusted operating ratio was 94.1% versus 93.8%.
H1 operating cash flow was $319.8m, compared with $302.0m. Net capital expenditures were $78.7m, down from $231.1m, and cash increased to $713.8m from $551.6m at year-end. Cash, cash equivalents, and marketable securities totaled $760.6m. Total debt including finance leases was $337.1m; $30.0m of senior notes was due in September 2020. No borrowings were outstanding under the revolving credit or receivables facilities; unused capacity was $375.8m. The company reported compliance with financial covenants.
Material changes and segment performance
- Q2 operating revenue declined 15% year over year; revenue excluding fuel surcharge declined 11%. H1 declines were 11% and 9%, respectively.
- Reported earnings rose partly because 2019 included a $34.6m goodwill impairment and losses from the discontinued First to Final Mile (FTFM) service. On an adjusted basis, Q2 net income fell 23% and H1 adjusted net income fell 8%.
- Truckload revenue excluding fuel surcharge fell 16% in Q2; segment operating income rose to $40.5m from $7.9m, reflecting the prior-year impairment and FTFM shutdown as well as cost reductions. Truckload operating ratio improved to 91.0% from 98.5%.
- Intermodal revenue excluding fuel surcharge fell 16% in Q2 and segment operating income fell to $11.0m from $30.5m. Orders declined 13%, and operating ratio worsened to 95.0% from 88.2%.
- Logistics revenue excluding fuel surcharge increased 2% in Q2, but operating income declined to $8.2m from $9.2m; rate compression weighed on results.
Outlook, risks, contingencies, and unusual items
Management estimated the largest COVID-19 impacts had occurred and expected continued improvement in the third and fourth quarters, but emphasized that limited visibility prevented a reliable forecast. Cost reductions were not expected to fully offset revenue declines. The company maintained replacement-equipment investment and accelerated technology spending, while canceling almost all discretionary and growth capital expenditures for the remainder of 2020. It said existing cash and credit capacity should meet foreseeable needs, while noting prolonged or more severe revenue declines could require additional financing.
COVID-19 risks include volatile freight demand, customer and supply-chain disruption, workforce impacts, and added costs for protective equipment, cleaning, and sick leave. Remote work also increased cybersecurity exposure. Management planned its annual goodwill impairment review for October 31, 2020.
Other notable items: a $2.7m Q2 and $8.8m H1 pretax gain from revaluing the investment in Platform Science; a $5.0m investment in Mastery Logistics Systems on July 2, 2020; and $209.5m of firm commitments to purchase transportation equipment. A former WSL owner claims $40.0m in additional acquisition-related payment; trial was scheduled for September 2020. The company stated it believed it had strong defenses, but an adverse judgment could materially affect results. The board declared a Q3 dividend of $0.065 per share, payable October 8, 2020.
Important facts for investors to verify
- Whether freight volumes and pricing continued to recover after Q2, especially in Truckload and Intermodal, and whether management’s expected second-half improvement materialized.
- Adjusted results and operating ratios alongside GAAP results, given the substantial prior-year FTFM impairment and shutdown effects.
- Liquidity after the $30.0m note maturity, capital spending, equipment purchase commitments, and any changes in credit availability or covenant compliance.
- Developments in the WSL litigation, used-equipment values and impairments, and the October 2020 goodwill review.
- Credit quality of customers and lease counterparties, and the size and adequacy of receivable, lease, and claims allowances amid pandemic uncertainty.