Schneider National, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. The company provides truckload, intermodal, and logistics services. Unless otherwise noted, financial amounts below are in U.S. dollars and millions.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Operating revenue | $1,075.2 | $994.6 | $2,081.6 | $1,922.7 |
| Operating income | $79.0 | $79.6 | $122.6 | $131.7 |
| Net income | $46.5 | $44.2 | $69.0 | $72.3 |
| Diluted EPS | $0.27 | $0.28 | $0.42 | $0.46 |
| Operating ratio | 92.7% | 92.0% | 94.1% | 93.2% |
| Adjusted operating ratio | 93.1% | 91.4% | 94.1% | 92.7% |
- Q2 operating revenue rose 8.1%; revenue excluding fuel surcharge rose 6.5%. Reported net income increased 5.2%, but adjusted net income fell 10.1% to $39.7 million. Adjusted operating income was $67.7 million, down 15.0%.
- For the first half, revenue rose 8.3% and revenue excluding fuel surcharge rose 5.8%. Net income decreased 4.5%; adjusted net income decreased 12.8% to $63.0 million. Adjusted operating income declined 14.5% to $112.6 million.
- Six-month operating cash flow was $226.7 million, versus $265.4 million. Investing cash outflow was $161.6 million, versus $307.5 million; net capital expenditures were $146.8 million. Financing provided $64.0 million, including net IPO proceeds of $340.6 million. Cash increased to $259.9 million from $130.8 million at year-end.
- At June 30, debt including capital leases totaled $449.6 million, down from $699.4 million at year-end; cash exceeded debt by approximately $189.7 million. No borrowings were outstanding under the revolving or receivables facilities. The company reported compliance with debt covenants and said cash, operating cash flow, and available facilities should fund foreseeable needs.
- Current assets were $1,046.6 million and current liabilities were $467.7 million. The company declared a $0.05-per-share quarterly dividend; the next-quarter dividend was declared in July.
Material changes and operating trends
- Schneider completed its IPO in April 2017, with an additional partial underwriter-option sale in May. It sold 20.145 million shares at $19 per share and received $340.6 million net proceeds. IPO-related changes also reclassified previously redeemable shares into shareholders’ equity.
- Truckload revenue increased, partly from the 2016 WSL acquisition, but segment operating income declined 13.7% in Q2. Driver-cost inflation and lower used-equipment sale gains weighed on results; revenue per truck per week improved 2.9% year over year.
- Intermodal revenue increased 3.8% in Q2 as order volume rose 10.6%, but revenue per order declined 6.2% amid competitive pricing and shorter average hauls. Segment operating income declined 17.7%; duplicate chassis lease costs were $1.6 million in Q2 and $2.9 million in the first half.
- Logistics revenue grew 7.2% in Q2, led by brokerage, but operating income fell as higher third-party transportation costs reduced brokerage margins. Management said brokerage gross margins improved as the quarter progressed.
- The WSL contingent consideration liability was reduced by $12.9 million in Q2, increasing reported operating income; the liability stood at $0.6 million at June 30. This adjustment materially benefited reported results and was excluded from adjusted measures. The acquisition also entailed two remaining guaranteed payments with a total present value of $38.0 million at quarter-end.
Outlook, risks, and contingencies
- The filing provides no specific earnings or revenue guidance. Management expects to complete its intermodal shift to owned chassis by year-end 2017, adding 10,000 chassis for a total of more than 15,000; existing lease commitments run through December 31, 2017.
- Management cited driver recruitment and retention, wage inflation, competitive pricing and capacity, fuel-price volatility and surcharge recovery, customer concentration or loss, seasonal demand, and the ability to execute growth and acquisition strategies as risks. Reliance on rail partners and third-party logistics capacity, regulatory changes, cybersecurity disruptions, and claims exposure were also identified.
- The electronic logging device mandate takes effect in December 2017; Schneider said it was already compliant. The filing reports approximately $168.4 million in firm transportation-equipment purchase commitments and no material change in contractual obligations other than debt repayments.
- Management stated ordinary-course legal matters were not expected to have a material impact. No off-balance-sheet arrangements were reported. The company said adoption of the new revenue standard was not expected to have a material impact; the effect of the new lease standard could not yet be reasonably estimated.
Key facts for investors to verify
- How much of revenue growth is organic versus attributable to WSL, fuel surcharges, and the leasing business.
- Whether truckload cost inflation, intermodal pricing pressure, and logistics brokerage margins improve, and the effect of the chassis transition after 2017.
- Underlying earnings and operating performance excluding the $12.9 million WSL contingent-liability benefit and duplicate chassis costs; review the company’s non-GAAP reconciliations.
- Cash generation and capital needs relative to equipment commitments, debt maturities, and the remaining WSL guaranteed payments.
- Management’s forward-looking assumptions and the identified risks, including driver availability, customer demand, fuel, regulation, and third-party capacity.