UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 20192020
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-38054
Schneider National, Inc.
(Exact Name of Registrant as Specified in Its Charter)
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Wisconsin | | | | | | 39-1258315 |
(State of Incorporation) | | | | | | (IRS Employer Identification No.) |
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Wisconsin | | 39-1258315 |
(State or Other Jurisdiction of
Incorporation or Organization)
| | (I.R.S. Employer
Identification Number)
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3101 South Packerland Drive | | | | |
| | Green Bay | Wisconsin | 54313 | 54313 | |
| | (Address of Registrant’s Principal Executive Offices) | | (Offices and Zip Code) | | | | |
(920)592-2000
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | | Trading symbol | | Name of each exchange on which registered |
Class B common stock, no par value | | SNDR | | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | | ☒ | | Accelerated filer | | ☐ |
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Large accelerated filer | | ☒ | | Accelerated filer | | ☐ |
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Non-accelerated filer | | ☐ (Do not check if a smaller reporting company) | | Smaller reporting company | | ☐ |
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| | | | Emerging growth company | | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
As of July 26, 2019,24, 2020, the registrant had 83,029,500 shares of Class A Common Stock,common stock, no par value, outstanding and 94,085,00594,309,795 shares of Class B Common Stock,common stock, no par value, outstanding.
SCHNEIDER NATIONAL, INC.
QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended June 30, 20192020
TABLE OF CONTENTS
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ITEM 1. | | | | |
ITEM 1. | | | |
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| Note 1 | | | |
| Note 2 | | | |
| Note 3 | | | |
| Note 4 | | | |
| Note 5 | | | |
| Note 6 | | | |
| Note 7 | | | |
| Note 8 | | | |
| Note 89 | | | |
| Note 910 | | | |
| Note 1011 | | | |
| Note 1112 | | | |
| Note 1213 | | | |
| Note 1314 | | | |
ITEM 2. | | | | |
ITEM 3. | | | | |
ITEM 4. | | | | |
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ITEM 1. | | | | |
ITEM 1.1A. | | | | |
ITEM 1A.2. | | | |
ITEM 2. | | | | |
ITEM 3. | | | | |
ITEM 4. | | | | |
ITEM 5. | | | | |
ITEM 6. | | | | |
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GLOSSARY OF TERMS
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3PL | Provider of outsourced logistics services. In logistics and supply chain management, it means a company’s use of third-party businesses, the 3PL(s), to outsource elements of the company’s distribution, fulfillment, and supply chain management services. |
ASC | Accounting Standards Codification |
ASU | Accounting Standards Update |
CODMCARES | Coronavirus Aid, Relief, and Economic Security |
CODM | Chief Operating Decision Maker |
FASBCOVID-19 | Coronavirus pandemic |
FASB | Financial Accounting Standards Board |
FTFM | First to Final Mile operating segment |
GAAP | United States Generally Accepted Accounting Principles |
LIBORKPI | Key Performance Indicator |
LIBOR | London InterBank Offered Rate |
SECPSI | Platform Science, Inc. |
SaaS | Software as a Service |
SEC | United States Securities and Exchange Commission |
WSLU.S. | United States |
WSL | Watkins and Shepard Trucking, Inc. and Lodeso, Inc. These businesses were acquired simultaneously in June 2016. |
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995, which are intended to come within the safe harbor protection provided by such Act.1995. These forward-looking statements reflect ourthe Company's current expectations, beliefs, plans, or forecasts with respect to, among other things, future events and financial performance and trends in ourthe business and industry. Forward-looking statements are often characterized byThe words or phrases such as “may,” “will,” “could,” “should,” “would,” “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “target,” “prospects,” “potential,” “budget,” “forecast,” “continue,” “predict,” “seek,” “objective,” “goal,” “guidance,” “outlook,” “effort,” “target,” and othersimilar words, expressions, terms, and phrases among others, generally identify forward-looking statements, which speak only as of similar meaning.the date the statements were made. Forward-looking statements involve estimates, expectations, projections, goals, forecasts, assumptions, risks, and uncertainties. We caution readersReaders are cautioned that a forward-looking statement is not a guarantee of future performance and that actual results could differ materially from those contained in the forward-looking statement.
Risks, uncertainties, and other factors that could cause actual results to differ, or contribute to actual results differing materially from those expressed or implied by the forward-looking statements include, but are not limited to, the following:
•Economic and business risks inherent in the truckload and transportation industry, including competitive pressures pertaining to pricing, capacity, and service;
•Our ability to successfully manage the demand, supply, and operational challenges and disruptions (including the impact of reduced freight volumes) associated with the ongoing COVID-19 pandemic and the associated responses of federal, state and local governments and businesses;
•Our ability to maintain key customer and supply arrangements (including Dedicated arrangements) and to manage disruption of our business due to factors outside of our control, such as natural disasters, acts of war or terrorism, disease outbreaks, or pandemics;
•Our ability to manage and implement effectively our growth and diversification strategies and cost saving initiatives;
•Our dependence on our reputation and the Schneider brand and the potential for adverse publicity, damage to our reputation, and the loss of brand equity;
•Risks related to demand for our service offerings;
•Risks associated with the loss of a significant customer or customers;
•Capital investments that fail to match customer demand or for which we cannot obtain adequate funding;
•Fluctuations in the price or availability of fuel, the volume and terms of diesel fuel purchase commitments, and our ability to recover fuel costs through our fuel surcharge programs;
•Our ability to attract and retain qualified drivers and owner-operators;
•Our reliance on owner-operators to provide a portion of our truck fleet;
•Our dependence on railroads in the operation of our intermodal business;
•Service instability from third-party capacity providers used by our logistics brokerage business;
•Changes in the outsourcing practices of our third-party logistics customers;
•Difficulty in obtaining material, equipment, goods, and services from our vendors and suppliers;
Our ability to recruit, develop, and retain our key associates;
Labor relations;
•Variability in insurance and claims expenses and the risks of insuring claims through our captive insurance company;
•The impact of laws and regulations that apply to our business, including those that relate to the environment, taxes, employees,associates, owner-operators, and our captive insurance company; changes to those laws and regulations; and the increased costs of compliance with existing or future federal, state, and local regulations;
•Political, economic, and other risks from cross-border operations and operations in multiple countries;
•Risks associated with financial, credit, and equity markets, including our ability to service indebtedness and fund capital expenditures and strategic initiatives;
•Negative seasonal patterns generally experienced in the trucking industry during traditionally slower shipping periods and winter months;
•Risks associated with severe weather and similar events;
•Significant systems disruptions, including those caused by cybersecurity events;
•The potential that we will not successfully identify, negotiate, consummate, or integrate acquisitions;
•Exposure to claims and lawsuits in the ordinary course of our business;
•Our ability to adapt to new technologies and new participants in the truckload and transportation industry; and
Those risks and uncertainties discussed in Part I, Item 1A, “Risk Factors,” of our most recently filed Annual Report on Form 10-K, as such may be amended or supplemented in Part II, Item 1A, “Risk Factors,” of this report or other Quarterly Reports on Form 10-Q filed after such Annual Report on Form 10-K, as well as those discussed in our consolidated financial statements, related notes, and the other information appearing elsewhere in this report and our other filings with the SEC.
We do not intend,The Company disclaims any intention and undertakeundertakes no obligation to update or revise any of ourits forward-looking statements after the date of this report to reflect actual results or future events or circumstances.circumstances whether as a result of new information, future events, or otherwise, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
PART I. FINANCIAL INFORMATION
ItemITEM 1. Financial StatementsFINANCIAL STATEMENTS
SCHNEIDER NATIONAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(in millions, except per share data)
| | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
Operating revenues | $ | 1,212.7 |
| | $ | 1,236.3 |
| | $ | 2,406.8 |
| | $ | 2,375.3 |
| Operating revenues | $ | 1,032.8 | | | $ | 1,212.7 | | | $ | 2,151.9 | | | $ | 2,406.8 | |
Operating expenses: | | | | | | | | Operating expenses: | | | | | | | |
Purchased transportation | 503.8 |
| | 485.7 |
| | 977.1 |
| | 910.7 |
| Purchased transportation | 437.1 | | | 503.8 | | | 916.7 | | | 977.1 | |
Salaries, wages, and benefits | 286.3 |
| | 314.7 |
| | 599.3 |
| | 626.0 |
| Salaries, wages, and benefits | 247.8 | | | 286.3 | | | 512.2 | | | 599.3 | |
Fuel and fuel taxes | 76.2 |
| | 88.2 |
| | 151.0 |
| | 172.9 |
| Fuel and fuel taxes | 42.1 | | | 76.2 | | | 103.0 | | | 151.0 | |
Depreciation and amortization | 74.9 |
| | 71.9 |
| | 148.3 |
| | 143.6 |
| Depreciation and amortization | 72.3 | | | 74.9 | | | 142.1 | | | 148.3 | |
Operating supplies and expenses | 134.1 |
| | 121.6 |
| | 279.2 |
| | 240.7 |
| Operating supplies and expenses | 119.1 | | | 134.1 | | | 251.1 | | | 279.2 | |
Insurance and related expenses | 25.4 |
| | 22.2 |
| | 53.6 |
| | 45.3 |
| Insurance and related expenses | 28.3 | | | 25.4 | | | 57.5 | | | 53.6 | |
Other general expenses | 28.2 |
| | 40.3 |
| | 63.0 |
| | 76.8 |
| Other general expenses | 22.5 | | | 28.2 | | | 52.0 | | | 63.0 | |
Goodwill impairment charge | 34.6 |
| | — |
| | 34.6 |
| | — |
| Goodwill impairment charge | — | | | 34.6 | | | — | | | 34.6 | |
Restructuring—net | | Restructuring—net | 0.2 | | | — | | | (1.0) | | | — | |
Total operating expenses | 1,163.5 |
| | 1,144.6 |
| | 2,306.1 |
| | 2,216.0 |
| Total operating expenses | 969.4 | | | 1,163.5 | | | 2,033.6 | | | 2,306.1 | |
Income from operations | 49.2 |
| | 91.7 |
| | 100.7 |
| | 159.3 |
| Income from operations | 63.4 | | | 49.2 | | | 118.3 | | | 100.7 | |
Other expenses (income): | | | | | | | | Other expenses (income): | | | | | | | |
Interest income | (2.4 | ) | | (0.7 | ) | | (4.6 | ) | | (1.4 | ) | Interest income | (0.5) | | | (2.4) | | | (2.3) | | | (4.6) | |
Interest expense | 5.4 |
| | 4.6 |
| | 9.3 |
| | 8.8 |
| Interest expense | 3.3 | | | 5.4 | | | 7.1 | | | 9.3 | |
Other expenses (income)—net | 0.3 |
| | (0.5 | ) | | 0.7 |
| | (0.9 | ) | Other expenses (income)—net | (2.1) | | | 0.3 | | | (7.5) | | | 0.7 | |
Total other expense | 3.3 |
| | 3.4 |
| | 5.4 |
| | 6.5 |
| |
Total other expenses (income) | | Total other expenses (income) | 0.7 | | | 3.3 | | | (2.7) | | | 5.4 | |
Income before income taxes | 45.9 |
| | 88.3 |
| | 95.3 |
| | 152.8 |
| Income before income taxes | 62.7 | | | 45.9 | | | 121.0 | | | 95.3 | |
Provision for income taxes | 11.4 |
| | 22.5 |
| | 23.9 |
| | 39.4 |
| Provision for income taxes | 16.2 | | | 11.4 | | | 30.7 | | | 23.9 | |
Net income | 34.5 |
| | 65.8 |
| | 71.4 |
| | 113.4 |
| Net income | 46.5 | | | 34.5 | | | 90.3 | | | 71.4 | |
Other comprehensive income (loss): | | | | | | | | Other comprehensive income (loss): | |
Foreign currency translation adjustments | (0.2 | ) | | 0.5 |
| | 0.1 |
| | 0.1 |
| |
Unrealized income (loss) on marketable securities—net of tax | 0.3 |
| | (0.1 | ) | | 0.7 |
| | (0.3 | ) | |
Foreign currency translation gain (loss) | | Foreign currency translation gain (loss) | 0.1 | | | (0.2) | | | (0.7) | | | 0.1 | |
Net unrealized gain on marketable securities—net of tax | | Net unrealized gain on marketable securities—net of tax | 0.5 | | | 0.3 | | | 0.2 | | | 0.7 | |
Total other comprehensive income (loss) | 0.1 |
| | 0.4 |
| | 0.8 |
| | (0.2 | ) | Total other comprehensive income (loss) | 0.6 | | | 0.1 | | | (0.5) | | | 0.8 | |
Comprehensive income | $ | 34.6 |
| | $ | 66.2 |
| | $ | 72.2 |
| | $ | 113.2 |
| Comprehensive income | $ | 47.1 | | | $ | 34.6 | | | $ | 89.8 | | | $ | 72.2 | |
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Weighted average common shares outstanding | 177.1 |
| | 177.0 |
| | 177.1 |
| | 177.0 |
| Weighted average common shares outstanding | 177.2 | | | 177.1 | | | 177.2 | | | 177.1 | |
Basic earnings per share | $ | 0.19 |
| | $ | 0.37 |
| | $ | 0.40 |
| | $ | 0.64 |
| Basic earnings per share | $ | 0.26 | | | $ | 0.19 | | | $ | 0.51 | | | $ | 0.40 | |
| | | | | | | | | | | | | | | |
Weighted average diluted shares outstanding | 177.4 |
| | 177.2 |
| | 177.4 |
| | 177.2 |
| Weighted average diluted shares outstanding | 177.5 | | | 177.4 | | | 177.4 | | | 177.4 | |
Diluted earnings per share | $ | 0.19 |
| | $ | 0.37 |
| | $ | 0.40 |
| | $ | 0.64 |
| Diluted earnings per share | $ | 0.26 | | | $ | 0.19 | | | $ | 0.51 | | | $ | 0.40 | |
See notes to consolidated financial statements (unaudited).
SCHNEIDER NATIONAL, INC.
CONSOLIDATED BALANCE SHEETS (Unaudited)
(in millions, except share data) | | | June 30, | | December 31, | | June 30, | | December 31, |
| 2019 | | 2018 | | 2020 | | 2019 |
Assets | | | | Assets | | | |
Current Assets: | | | | Current Assets: | |
Cash and cash equivalents | $ | 377.7 |
| | $ | 378.7 |
| Cash and cash equivalents | $ | 713.8 | | | $ | 551.6 | |
Marketable securities | 47.5 |
| | 51.3 |
| Marketable securities | 46.8 | | | 48.3 | |
Trade accounts receivable—net of allowance of $6.6 million and $6.8 million, respectively | 525.0 |
| | 593.1 |
| |
Trade accounts receivable—net of allowance of $3.7 million and $3.4 million, respectively | | Trade accounts receivable—net of allowance of $3.7 million and $3.4 million, respectively | 434.9 | | | 465.8 | |
Other receivables | 151.2 |
| | 31.8 |
| Other receivables | 31.6 | | | 28.9 | |
Current portion of lease receivables—net of allowance of $0.5 million | 122.9 |
| | 129.1 |
| |
Current portion of lease receivables—net of allowance of $0.8 million and $0.6 million, respectively | | Current portion of lease receivables—net of allowance of $0.8 million and $0.6 million, respectively | 109.5 | | | 121.5 | |
Inventories | 57.6 |
| | 60.8 |
| Inventories | 56.5 | | | 71.9 | |
Prepaid expenses and other current assets | 147.0 |
| | 79.5 |
| Prepaid expenses and other current assets | 125.1 | | | 117.7 | |
Total current assets | 1,428.9 |
| | 1,324.3 |
| Total current assets | 1,518.2 | | | 1,405.7 | |
Noncurrent Assets: | | | | Noncurrent Assets: | | | |
Property and equipment: | | | | Property and equipment: | |
Transportation equipment | 2,990.5 |
| | 2,900.2 |
| Transportation equipment | 2,841.2 | | | 2,790.1 | |
Land, buildings, and improvements | 182.0 |
| | 177.2 |
| Land, buildings, and improvements | 201.4 | | | 199.3 | |
Other property and equipment | 162.0 |
| | 157.6 |
| Other property and equipment | 165.0 | | | 162.7 | |
Total property and equipment | 3,334.5 |
| | 3,235.0 |
| Total property and equipment | 3,207.6 | | | 3,152.1 | |
Accumulated depreciation | 1,318.9 |
| | 1,312.8 |
| Accumulated depreciation | 1,382.1 | | | 1,300.5 | |
Net property and equipment | 2,015.6 |
| | 1,922.2 |
| Net property and equipment | 1,825.5 | | | 1,851.6 | |
Lease receivables | 133.7 |
| | 133.2 |
| Lease receivables | 109.5 | | | 109.4 | |
Capitalized software and other noncurrent assets | 186.9 |
| | 82.6 |
| Capitalized software and other noncurrent assets | 197.2 | | | 165.9 | |
Goodwill | 127.6 |
| | 162.2 |
| Goodwill | 127.3 | | | 127.5 | |
Total noncurrent assets | 2,463.8 |
| | 2,300.2 |
| Total noncurrent assets | 2,259.5 | | | 2,254.4 | |
Total Assets | $ | 3,892.7 |
| | $ | 3,624.5 |
| Total Assets | $ | 3,777.7 | | | $ | 3,660.1 | |
Liabilities and Shareholders' Equity | | | | Liabilities and Shareholders' Equity | | | |
Current Liabilities: | | | | Current Liabilities: | |
Trade accounts payable | $ | 268.0 |
| | $ | 226.0 |
| Trade accounts payable | $ | 221.6 | | | $ | 207.7 | |
Accrued salaries, wages, and benefits | 67.6 |
| | 94.8 |
| Accrued salaries, wages, and benefits | 66.7 | | | 63.8 | |
Claims accruals—current | 195.9 |
| | 58.3 |
| Claims accruals—current | 42.8 | | | 42.0 | |
Current maturities of debt and finance lease obligations | 73.6 |
| | 51.7 |
| Current maturities of debt and finance lease obligations | 30.4 | | | 55.5 | |
Dividends payable | 11.0 |
| | 10.6 |
| Dividends payable | 11.8 | | | 10.8 | |
Other current liabilities | 105.8 |
| | 81.2 |
| Other current liabilities | 108.9 | | | 85.4 | |
Total current liabilities | 721.9 |
| | 522.6 |
| Total current liabilities | 482.2 | | | 465.2 | |
Noncurrent Liabilities: | | | | Noncurrent Liabilities: | | | |
Long-term debt and finance lease obligations | 334.5 |
| | 359.6 |
| Long-term debt and finance lease obligations | 306.4 | | | 305.8 | |
Claims accruals—noncurrent | 101.6 |
| | 113.3 |
| Claims accruals—noncurrent | 138.0 | | | 118.7 | |
Deferred income taxes | 448.9 |
| | 450.6 |
| Deferred income taxes | 451.8 | | | 449.0 | |
Other | 100.4 |
| | 46.1 |
| |
Other noncurrent liabilities | | Other noncurrent liabilities | 93.5 | | | 85.0 | |
Total noncurrent liabilities | 985.4 |
| | 969.6 |
| Total noncurrent liabilities | 989.7 | | | 958.5 | |
Total Liabilities | 1,707.3 |
| | 1,492.2 |
| Total Liabilities | 1,471.9 | | | 1,423.7 | |
Commitments and Contingencies (Note 11) | | | | |
Commitments and Contingencies (Note 12) | | Commitments and Contingencies (Note 12) | | | |
Shareholders' Equity: | | | | Shareholders' Equity: | |
Class A common shares, no par value, 250,000,000 shares authorized, 83,029,500 shares issued and outstanding | — |
| | — |
| Class A common shares, no par value, 250,000,000 shares authorized, 83,029,500 shares issued and outstanding | — | | | — | |
Class B common shares, no par value, 750,000,000 shares authorized, 94,804,861 and 94,593,588 shares issued, and 94,081,867 and 93,969,268 shares outstanding, respectively | — |
| | — |
| |
Class B common shares, no par value, 750,000,000 shares authorized, 95,090,677 and 94,837,673 shares issued, and 94,242,695 and 94,088,025 shares outstanding, respectively | | Class B common shares, no par value, 750,000,000 shares authorized, 95,090,677 and 94,837,673 shares issued, and 94,242,695 and 94,088,025 shares outstanding, respectively | — | | | — | |
Additional paid-in capital | 1,546.6 |
| | 1,544.0 |
| Additional paid-in capital | 1,545.4 | | | 1,542.7 | |
Retained earnings | 639.0 |
| | 589.3 |
| Retained earnings | 760.8 | | | 693.6 | |
Accumulated other comprehensive loss | (0.2 | ) | | (1.0 | ) | |
Total shareholders' equity | 2,185.4 |
| | 2,132.3 |
| |
Accumulated other comprehensive income (loss) | | Accumulated other comprehensive income (loss) | (0.4) | | | 0.1 | |
Total Shareholders' Equity | | Total Shareholders' Equity | 2,305.8 | | | 2,236.4 | |
Total Liabilities and Shareholders' Equity | $ | 3,892.7 |
| | $ | 3,624.5 |
| Total Liabilities and Shareholders' Equity | $ | 3,777.7 | | | $ | 3,660.1 | |
See notes to consolidated financial statements (unaudited).
SCHNEIDER NATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
| | | Six Months Ended June 30, | | Six Months Ended June 30, | |
| 2019 | | 2018 | | 2020 | | 2019 |
Operating Activities: | | | | Operating Activities: | | | |
Net income | $ | 71.4 |
| | $ | 113.4 |
| Net income | $ | 90.3 | | | $ | 71.4 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | Adjustments to reconcile net income to net cash provided by operating activities: | |
Depreciation and amortization | 148.3 |
| | 143.6 |
| Depreciation and amortization | 142.1 | | | 148.3 | |
Goodwill impairment | 34.6 |
| | — |
| Goodwill impairment | — | | | 34.6 | |
Gains on sales of property and equipment | (2.7 | ) | | (1.7 | ) | |
Losses (gains) on sales of property and equipment—net | | Losses (gains) on sales of property and equipment—net | 3.8 | | | (3.0) | |
Impairment on assets held for sale | | Impairment on assets held for sale | 3.9 | | | 0.3 | |
Proceeds from lease receipts | 40.1 |
| | — |
| Proceeds from lease receipts | 35.7 | | | 40.1 | |
Deferred income taxes | (1.9 | ) | | 27.7 |
| Deferred income taxes | 2.8 | | | (1.9) | |
Long-term incentive and share-based compensation expense | 6.0 |
| | 10.4 |
| Long-term incentive and share-based compensation expense | 3.4 | | | 6.0 | |
Noncash restructuring—net | | Noncash restructuring—net | (0.8) | | | — | |
Other noncash items | 1.8 |
| | (3.2 | ) | Other noncash items | (7.0) | | | 1.8 | |
Changes in operating assets and liabilities: | | | | Changes in operating assets and liabilities: | |
Receivables | 66.2 |
| | (38.9 | ) | Receivables | 34.7 | | | 66.2 | |
Other assets | (38.7 | ) | | (17.9 | ) | Other assets | (36.5) | | | (38.7) | |
Payables | (2.5 | ) | | 36.9 |
| Payables | 12.1 | | | (2.5) | |
Claims reserves and other receivables, net | 3.9 |
| | 11.1 |
| |
Claims reserves and other receivables—net | | Claims reserves and other receivables—net | 8.6 | | | 3.9 | |
Other liabilities | (24.5 | ) | | (26.4 | ) | Other liabilities | 26.7 | | | (24.5) | |
Net cash provided by operating activities | 302.0 |
| | 255.0 |
| Net cash provided by operating activities | 319.8 | | | 302.0 | |
Investing Activities: | | | | Investing Activities: | | | |
Purchases of transportation equipment | (231.4 | ) | | (143.1 | ) | Purchases of transportation equipment | (83.3) | | | (231.4) | |
Purchases of other property and equipment | (25.7 | ) | | (14.4 | ) | Purchases of other property and equipment | (25.0) | | | (25.7) | |
Proceeds from sale of property and equipment | 26.0 |
| | 47.6 |
| Proceeds from sale of property and equipment | 29.6 | | | 26.0 | |
Proceeds from lease receipts | — |
| | 29.0 |
| |
Proceeds from sale of off-lease inventory | 10.0 |
| | 7.8 |
| Proceeds from sale of off-lease inventory | 9.0 | | | 10.0 | |
Purchases of lease equipment | (42.9 | ) | | (34.7 | ) | Purchases of lease equipment | (41.7) | | | (42.9) | |
Sales of marketable securities | 11.0 |
| | 1.9 |
| |
Proceeds from marketable securities | | Proceeds from marketable securities | 10.2 | | | 11.0 | |
Purchases of marketable securities | (6.4 | ) | | — |
| Purchases of marketable securities | (8.9) | | | (6.4) | |
Net cash used in investing activities | (259.4 | ) | | (105.9 | ) | Net cash used in investing activities | (110.1) | | | (259.4) | |
Financing Activities: | | | | Financing Activities: | | | |
Payments of debt and finance lease obligations | (3.6 | ) | | (15.1 | ) | Payments of debt and finance lease obligations | (25.3) | | | (3.6) | |
Payments of deferred consideration related to acquisition | (18.7 | ) | | (19.3 | ) | Payments of deferred consideration related to acquisition | — | | | (18.7) | |
Dividends paid | (21.3 | ) | | (19.5 | ) | Dividends paid | (22.2) | | | (21.3) | |
Net cash used in financing activities | (43.6 | ) | | (53.9 | ) | Net cash used in financing activities | (47.5) | | | (43.6) | |
| | | | |
Net increase (decrease) in cash and cash equivalents | (1.0 | ) | | 95.2 |
| Net increase (decrease) in cash and cash equivalents | 162.2 | | | (1.0) | |
Cash and Cash Equivalents: | | | | Cash and Cash Equivalents: | |
Beginning of period | 378.7 |
| | 238.5 |
| Beginning of period | 551.6 | | | 378.7 | |
End of period | $ | 377.7 |
| | $ | 333.7 |
| End of period | $ | 713.8 | | | $ | 377.7 | |
Additional Cash Flow Information: | | | | Additional Cash Flow Information: | | | |
Noncash investing and financing activity: | | | | Noncash investing and financing activity: | |
Equipment purchases in accounts payable | $ | 46.7 |
| | $ | 31.5 |
| |
Equipment and inventory purchases in accounts payable | | Equipment and inventory purchases in accounts payable | $ | 20.9 | | | $ | 46.7 | |
Dividends declared but not yet paid | 11.0 |
| | 10.7 |
| Dividends declared but not yet paid | 11.8 | | | 11.0 | |
Ownership interest in Platform Science, Inc. | — |
| | 2.5 |
| |
Cash paid during the period for: | | | | |
| Cash Paid During the Period For: | | Cash Paid During the Period For: | |
Interest | 7.3 |
| | 7.8 |
| Interest | 6.6 | | | 7.3 | |
Income taxes—net of refunds | 20.5 |
| | 19.7 |
| Income taxes—net of refunds | 2.6 | | | 20.5 | |
See notes to consolidated financial statements (unaudited).
SCHNEIDER NATIONAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)
(in millions, except per share data)
|
| | | | | | | | | | | | | | | | | | | | | |
| | | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total |
|
| Balance—December 31, 2017 | | $ | — |
| | $ | 1,534.6 |
| | $ | 355.6 |
| | $ | — |
| | $ | 1,890.2 |
|
| Net income | | — |
| | — |
| | 47.6 |
| | — |
| | 47.6 |
|
| Other comprehensive loss | | — |
| | — |
| | — |
| | (0.6 | ) | | (0.6 | ) |
| Share-based compensation expense | | — |
| | 2.0 |
| | — |
| | — |
| | 2.0 |
|
| Dividends declared at $0.06 per share of Class A and Class B common shares | | — |
| | — |
| | (10.7 | ) | | — |
| | (10.7 | ) |
| Share issuances | | — |
| | 0.2 |
| | — |
| | — |
| | 0.2 |
|
| Shares withheld for employee taxes | | — |
| | (1.8 | ) | | — |
| | — |
| | (1.8 | ) |
| Cumulative-effect adjustment of ASU 2014-09 adoption | | — |
| | — |
| | 7.3 |
| | — |
| | 7.3 |
|
| Other | | — |
| | 0.2 |
| | — |
| | — |
| | 0.2 |
|
| Balance—March 31, 2018 | | — |
| | 1,535.2 |
| | 399.8 |
| | (0.6 | ) | | 1,934.4 |
|
| Net income | | — |
| | — |
| | 65.8 |
| | — |
| | 65.8 |
|
| Other comprehensive gain | | — |
| | — |
| | — |
| | 0.4 |
| | 0.4 |
|
| Share-based compensation expense | | — |
| | 2.1 |
| | — |
| | — |
| | 2.1 |
|
| Dividends declared at $0.06 per share of Class A and Class B common shares | | — |
| | — |
| | (10.5 | ) | | — |
| | (10.5 | ) |
| Share issuances | | — |
| | 0.3 |
| | — |
| | — |
| | 0.3 |
|
| Shares withheld for employee taxes | | — |
| | (0.1 | ) | | — |
| | — |
| | (0.1 | ) |
| Exercise of employee stock options | |
|
| | 0.2 |
| | — |
| | — |
| | 0.2 |
|
| Other | | — |
| | (0.1 | ) | | — |
| | — |
| | (0.1 | ) |
| Balance—June 30, 2018 | | $ | — |
| | $ | 1,537.6 |
| | $ | 455.1 |
| | $ | (0.2 | ) | | $ | 1,992.5 |
|
| | | | | | | | | | | |
| Balance—December 31, 2018 | | $ | — |
| | $ | 1,544.0 |
| | $ | 589.3 |
| | $ | (1.0 | ) | | $ | 2,132.3 |
|
| Net income | | — |
| | — |
| | 36.9 |
| | — |
| | 36.9 |
|
| Other comprehensive gain | | — |
| | — |
| | — |
| | 0.7 |
| | 0.7 |
|
| Share-based compensation expense | | — |
| | 2.0 |
| | — |
| | — |
| | 2.0 |
|
| Dividends declared at $0.06 per share of Class A and Class B common shares
| | — |
| | — |
| | (10.7 | ) | | — |
| | (10.7 | ) |
| Shares withheld for employee taxes | | — |
| | (1.2 | ) | | — |
| | — |
| | (1.2 | ) |
| Balance—March 31, 2019 | | — |
| | 1,544.8 |
| | 615.5 |
| | (0.3 | ) | | 2,160.0 |
|
| Net income | | — |
| | — |
| | 34.5 |
| | — |
| | 34.5 |
|
| Other comprehensive gain | | — |
| | — |
| | — |
| | 0.1 |
| | 0.1 |
|
| Share-based compensation expense | | — |
| | 1.6 |
| | — |
| | — |
| | 1.6 |
|
| Dividends declared at $0.06 per share of Class A and Class B common shares
| | — |
| | — |
| | (11.0 | ) | | — |
| | (11.0 | ) |
| Share issuances | | — |
| | 0.2 |
| | — |
| | — |
| | 0.2 |
|
| Balance—June 30, 2019 | | $ | — |
| | $ | 1,546.6 |
| | $ | 639.0 |
| | $ | (0.2 | ) | | $ | 2,185.4 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total |
| | | | | | | | | | |
Balance—December 31, 2018 | | $ | — | | | $ | 1,544.0 | | | $ | 589.3 | | | $ | (1.0) | | | $ | 2,132.3 | |
Net income | | — | | | — | | | 36.9 | | | — | | | 36.9 | |
Other comprehensive income | | — | | | — | | | — | | | 0.7 | | | 0.7 | |
Share-based compensation expense | | — | | | 2.0 | | | — | | | — | | | 2.0 | |
Dividends declared at $0.06 per share of Class A and Class B common shares | | — | | | — | | | (10.7) | | | — | | | (10.7) | |
| | | | | | | | | | |
Shares withheld for employee taxes | | — | | | (1.2) | | | — | | | — | | | (1.2) | |
| | | | | | | | | | |
Balance—March 31, 2019 | | — | | | 1,544.8 | | | 615.5 | | | (0.3) | | | 2,160.0 | |
Net income | | — | | | — | | | 34.5 | | | — | | | 34.5 | |
Other comprehensive income | | — | | | — | | | — | | | 0.1 | | | 0.1 | |
Share-based compensation expense | | — | | | 1.6 | | | — | | | — | | | 1.6 | |
Dividends declared at $0.06 per share of Class A and Class B common shares | | — | | | — | | | (11.0) | | | — | | | (11.0) | |
Share issuances | | — | | | 0.2 | | | — | | | — | | | 0.2 | |
Balance—June 30, 2019 | | $ | — | | | $ | 1,546.6 | | | $ | 639.0 | | | $ | (0.2) | | | $ | 2,185.4 | |
| | | | | | | | | | |
Balance—December 31, 2019 | | $ | — | | | $ | 1,542.7 | | | $ | 693.6 | | | $ | 0.1 | | | $ | 2,236.4 | |
Net income | | — | | | — | | | 43.8 | | | — | | | 43.8 | |
Other comprehensive loss | | — | | | — | | | — | | | (1.1) | | | (1.1) | |
Share-based compensation expense | | — | | | 1.9 | | | — | | | — | | | 1.9 | |
Dividends declared at $0.065 per share of Class A and Class B common shares | | — | | | — | | | (11.7) | | | — | | | (11.7) | |
Share issuances | | — | | | 0.1 | | | — | | | — | | | 0.1 | |
Shares withheld for employee taxes | | — | | | (0.9) | | | — | | | — | | | (0.9) | |
Balance—March 31, 2020 | | — | | | 1,543.8 | | | 725.7 | | | (1.0) | | | 2,268.5 | |
Net income | | — | | | — | | | 46.5 | | | — | | | 46.5 | |
Other comprehensive income | | — | | | — | | | — | | | 0.6 | | | 0.6 | |
Share-based compensation expense | | — | | | 1.1 | | | — | | | — | | | 1.1 | |
Dividends declared at $0.065 per share of Class A and Class B common shares | | — | | | — | | | (11.4) | | | — | | | (11.4) | |
Share issuances | | — | | | 0.1 | | | — | | | — | | | 0.1 | |
Exercise of employee stock options | | — | | | 0.4 | | | — | | | — | | | 0.4 | |
Balance—June 30, 2020 | | $ | — | | | $ | 1,545.4 | | | $ | 760.8 | | | $ | (0.4) | | | $ | 2,305.8 | |
See notes to consolidated financial statements (unaudited).
SCHNEIDER NATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 2019
1. GENERAL
DescriptionNature of BusinessOperations
In this report, when we refer to “the Company,” “us,” “we,” “our,” “ours,” or “Schneider,” we are referring to Schneider National, Inc. and its subsidiaries. We areSchneider is a leading transportation servicesservice organization headquartered in Green Bay, Wisconsin. We provide a broad portfolio of premierWisconsin and has three reportable segments focused on providing truckload, intermodal, and logistics solutionssolutions.
Principles of Consolidation and operate one of the largest trucking fleets in North America.
Basis of Presentation
The accompanying unaudited interim consolidated financial statements have been prepared in accordanceconformity with GAAP and the rules and regulations of the SEC applicable to quarterly reports on Form 10-Q. Therefore, these consolidated financial statements and footnotes do not include all disclosures required by GAAP for annual financial statements. These consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2018.2019. Financial results for an interim period are not necessarily indicative of the results for a full year.
All intercompany transactions have been eliminated in consolidation.
In the opinion of management, these statements reflect all adjustments (consisting only of normal recurring adjustments) necessary for the fair presentation of our financial results for the interim periods presented.
COVID-19
With the uncertainties of COVID-19, the Company continues to monitor the impact of the pandemic on all aspects of its business, including the impact to its customers, associates, owner-operators, and business partners. The Company's operational and financial performance was negatively impacted by a reduction in volumes across our Truckload and Intermodal segments beginning in April 2020, however there was improvement as the second quarter progressed. A number of cost reduction initiatives implemented by the Company helped lessen the impact of reduced volumes, however those initiatives were unable to fully offset the loss of revenue. Due to our limited visibility into freight demand in the months to come, we are unable to predict the impact COVID-19 will have on our future financial position and operating results due to ongoing uncertainties.
Accounting Standards Issued but Not Yet Adopted
In August 2018,December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, which reduces complexity in accounting for income taxes by eliminating certain exceptions to the general principles in Topic 740 and clarifying and amending existing guidance to improve consistent application among reporting entities. ASU 2019-12 is effective for us as of January 1, 2021 with early adoption permitted. We do not believe the adoption of this ASU will have a material impact on our consolidated financial statements and related disclosures and plan to adopt as of January 1, 2021.
Accounting Standards Recently Adopted
We adopted ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which was effective as of March 12, 2020 through December 31, 2022, when the reference rate replacement activity is expected to be complete. This guidance offers optional expedients and exceptions for applying GAAP to transactions, including contract modifications, hedging relationships, and the sale or transfer of debt securities classified as held-to-maturity affected by reference rate reform, if certain criteria are met. The adoption of this ASU did not have a material impact on our consolidated financial statements and related disclosures.
We adopted ASU 2018-15, Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract,which alignsamends ASC 350, as of January 1, 2020 on a prospective basis. This standard aligned the capitalization requirements for implementation costs incurred in a hosting arrangement that is a service contract with the existing capitalization requirements for implementation costs incurred to develop or obtain internal-use software. ASU 2018-15 is effective for us as of January 1, 2020 with earlyThe adoption permitted. We are currently evaluating the impact the adoption of this ASU will have on our consolidated financial statements and dodid not believe the impact will be material. We expect to adopt this standard on a prospective basis.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement - Disclosure Requirements, which removes, modifies, and adds certain disclosure requirements for fair value measurements. These changes include removing the disclosure requirements related to the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy and adding disclosure requirements about the range and weighted-average of significant unobservable inputs used to develop Level 3 fair value measurements. Additionally, the amendments remove the phrase “at a minimum” from the codification clarifying that materiality should be considered when evaluating disclosure requirements. ASU 2018-13 is effective for us January 1, 2020 with early adoption permitted. We do not believe the adoption of this ASU will have a material impact on our disclosures and plan to early adopt this standard during the fourth quarter of 2019.consolidated financial statements or disclosures.
In June 2016, the FASB issuedWe adopted ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, which requires companies to use a forward-looking, expected loss model to estimate credit losses on various types of financial assets and net investments in leases. It also requires additional disclosures related to credit quality of trade and other receivables, including information related to management’s estimate of credit allowances. In November 2018, this was further updated with the issuance of ASU 2018-19, which excludes receivables from operating leases from the scope. ASU 2016-13 is effective for us January 1, 2020. We currently cannot reasonably estimate the impact the adoption of this ASU will have on our consolidated financial statements.
2. LEASES
We adopted ASU 2016-02, Leases, whichis codified in ASC 842,326, as of January 1, 2019 using2020. The guidance replaced the optional transition method. The FASB’s authoritative guidance provided companiesincurred loss model with the option to apply this ASU to new and existing leases within the scope of the guidance as of the beginning of the period of adoption. We elected this transition method of applying the new lease standard and have recognized right-of-use assets and lease liabilities as of January 1, 2019. Prior period amounts were not adjusted and will continue to be reported under the accounting standards in effect for those periods.
Adoption of the new standard resulted in the initial recording of right-of-use lease assets and related lease liabilities of $80.6 million and $85.2 million, respectively. As of June 30, 2019, right-of-use lease assets and related lease liabilities were $92.4 million and $97.0 million, respectively. Operating lease right-of-use assets and operating lease liabilities are recognized based on the present value of the future lease paymentsa methodology that reflects expected credit losses over the term. Schneider's incremental borrowing rates are used as the discount rates for leases and are determined based on U. S. Treasury rates plus an applicable margin to arrive at all-in rates. Schneider uses multiple discount rates based on lease terms and other economic factors. The operating lease right-of-use asset also includes accrued lease expense resulting from the straight-line accounting under prior accounting methods, which is now being amortized over the remaining life of the lease.financial assets held at the reporting date based on historical experience, as
well as considerations of current conditions and reasonable and supportable forecasts. This new model for estimating our expected credit losses was implemented for our trade accounts receivable (Note 2, Trade Accounts Receivable and Allowance), net investment in leases (Note 3, Leases), and available-for-sale debt securities (Note 6, Investments) and did not result in a material impact to our consolidated financial statements or disclosures upon adoption.
2. TRADE ACCOUNTS RECEIVABLE AND ALLOWANCE
Our trade accounts receivable is recorded net of an allowance for doubtful accounts and revenue adjustments. The allowance is based on an aging analysis using historical experience, as well as any known and expected trends or uncertainties related to customer billing and account collectability. The adequacy of our allowance is reviewed at least quarterly, and reserves for receivables not expected to be collected are established. In addition,circumstances where we electedare aware of a customer's inability to meet its financial obligations, a specific reserve is recorded to reduce the packagenet receivable to the amount we reasonably expect to collect. Bad debt expense is included in other general expenses in the consolidated statements of practical expedients provided undercomprehensive income.
The following table shows changes to our allowance for doubtful accounts for the guidance. The practical expedient package applies to leases that commenced prior to adoptionthree and six months ended June 30, 2020. Excluded from the amounts below is the portion of the new standard and permits companiesallowance recorded for revenue adjustments, as that portion is not credit-related nor due to reassess whether existing or expired contracts are or contain a lease, the lease classification, and any initial direct costs for any existing leases. We also elected the practical expedient relatedcustomer’s inability to land easements, allowing us to carry forward the accounting treatment of our existing agreements for land easements, none of which were material as of January 1, 2019meet its financial obligations.
| | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
(in millions) | | June 30, 2020 | | |
Balance at beginning of period | | $ | 1.0 | | | $ | 0.9 | |
Charges to expense | | 0.8 | | | 1.1 | |
Write-offs | | (0.4) | | | (0.7) | |
Recoveries | | — | | | 0.1 | |
Balance at end of period | | $ | 1.4 | | | $ | 1.4 | |
.
3. LEASES
As lesseeLessee
We lease real estate, transportation equipment, and office equipment under operating and finance leases. Our real estate operating leases include operating centers, distribution warehouses, offices, and drop yards. Our finance leases relate almost entirely to transportation equipment. Ainclude office equipment and truck washes. The majority of our leases include an option to extend the lease, and a small number of our leases include an option to early terminate the lease early, which may include a termination payment. If we are reasonably certain to exercise an option to extend a lease, the extension period is included as part of the right-of-use asset and lease liability.
For our real estate leases, we have elected to apply the recognition requirement to leases of twelve months or less, therefore, an operating lease right-of-use asset and liability will be recognized for all these leases. For our equipment leases, we have elected to not apply the recognition requirements to leases of twelve months or less. These leases will be expensed on a straight-line basis and no operating lease right-of-use asset or liability will be recorded.
We have also elected to not separate the different components within the contract for our leases; therefore, all fixed costs associated with the lease are included in the right-of-use asset and the operating lease liability. This often relates to the requirement for us to pay a proportionate share of real estate taxes, insurance, common area maintenance, and other operating costs in addition to a base or fixed rent. Some of our leases have variable payment amounts, and the variable portions of those payments are excluded from the right-of-use asset and the lease liability.
At the inception of our contracts we determine if the contract is or contains a lease. A contract is or contains a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration.
A small number of our leased real estate assets contains subleases. The lease income related to subleases is shown in the lease cost table below.
Certain equipment leases contain residual value guarantees. These are guarantees made to the lessor that the value of the underlying asset returned to the lessor at the end of the lease will be at least a specified amount.
None of our leases contain restrictions or covenants that restrict us from incurring other financial obligations.
The following table presents our net lease costs for the three and six months ended June 30, 2019:
|
| | | | | | | | | | |
| | Financial Statement Classification | | Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions) | | | 2019 | | 2019 |
Operating lease cost | | | | | | |
Operating lease cost | | Operating supplies and expenses
| | $ | 8.9 |
| | $ | 17.8 |
|
Short-term lease cost (1) | | Operating supplies and expenses
| | 1.7 |
| | 3.5 |
|
Finance lease cost | | | | | | |
Amortization of right-of-use assets | | Depreciation and amortization
| | 0.8 |
| | 1.6 |
|
Interest on lease liabilities | | Interest expense
| | 0.1 |
| | 0.2 |
|
Variable lease cost | | Operating supplies and expenses
| | 0.7 |
| | 1.4 |
|
Sublease income | | Operating revenues
| | (1.3 | ) | | (2.6 | ) |
Total net lease cost | | | | $ | 10.9 |
| | $ | 21.9 |
|
(1) Includes short-term lease costs for leases twelve months or less, including those with a duration of one month or less.
As of June 30, 2019, remaining lease terms and discount rates under operating and finance leases were as follows:
|
| | | |
| | June 30, 2019 |
Weighted-average remaining lease term | | |
Operating leases | | 4.8 years |
|
Finance leases | | 0.6 years |
|
| | |
Weighted-average discount rate | | |
Operating leases | | 4.2 | % |
Finance leases | | 3.8 | % |
OtherAdditional information related to our leases is as follows:
| | | | Six Months Ended June 30, | | Six Months Ended June 30, | |
(in millions) | | 2019 | (in millions) | | 2020 | | 2019 |
Cash paid for amounts included in the measurement of lease liabilities | | | Cash paid for amounts included in the measurement of lease liabilities | | | | |
Operating cash flows from operating leases | | $ | 17.7 |
| Operating cash flows from operating leases | | $ | 17.3 | | | $ | 17.7 | |
Operating cash flows from finance leases | | 0.1 |
| Operating cash flows from finance leases | | — | | | 0.1 | |
Financing cash flows from finance leases | | 1.3 |
| Financing cash flows from finance leases | | 0.3 | | | 1.3 | |
| | | |
Right-of-use assets obtained in exchange for new lease liabilities | | | Right-of-use assets obtained in exchange for new lease liabilities | |
Operating leases | | $ | 28.7 |
| Operating leases | | $ | 21.6 | | | $ | 28.7 | |
Finance leases | | — |
| Finance leases | | 0.7 | | | — | |
As Lessor
Operating lease right-of-use assets, current operating lease liabilities, and noncurrent operating lease liabilities are included in capitalized software and other noncurrent assets, other current liabilities, and other, respectively, in the consolidated balance sheet as of June 30, 2019.
At June 30, 2019, future lease payments under operating and finance leases were as follows:
|
| | | | | | | | |
(in millions) | | Operating Leases | | Finance Leases |
Remaining 2019 | | $ | 17.0 |
| | $ | 5.6 |
|
2020 | | 27.1 |
| | 0.4 |
|
2021 | | 19.5 |
| | — |
|
2022 | | 13.4 |
| | — |
|
2023 | | 10.7 |
| | — |
|
2024 and thereafter | | 19.3 |
| | — |
|
Total | | 107.0 |
| | 6.0 |
|
Amount representing interest | | (10.0 | ) | | (0.1 | ) |
Present value of lease payments | | 97.0 |
| | 5.9 |
|
Current maturities | | (28.4 | ) | | (5.9 | ) |
Long-term lease obligations | | $ | 68.6 |
| | $ | — |
|
For certain of our real estate leases, there are options contained within the lease agreement to extend beyond the initial lease term. The Company recognizes options as right-of-use assets and lease liabilities when deemed reasonably certain to be exercised. Future operating lease payments at June 30, 2019 include $20.8 million related to options to extend lease terms that we are reasonably certain to exercise.
Under ASC 840, future minimum lease payments as of December 31, 2018 were as follows:
|
| | | | | | | | |
(in millions) | | Operating Leases | | Capital Leases |
2019 | | $ | 35.8 |
| | $ | 6.9 |
|
2020 | | 25.7 |
| | 0.2 |
|
2021 | | 14.9 |
| | — |
|
2022 | | 8.4 |
| | — |
|
2023 | | 6.8 |
| | — |
|
2024 and thereafter | | 12.7 |
| | — |
|
Total | | $ | 104.3 |
| | 7.1 |
|
Amount representing interest | | | | (0.2 | ) |
Present value of minimum lease payments | | | | 6.9 |
|
Current maturities | | | | (6.7 | ) |
Long-term capital lease obligations | | | | $ | 0.2 |
|
As of June 30, 2019, we had additional operating leases that had not yet commenced of $0.9 million. These leases will commence during the remainder of 2019 and have lease terms of four months to three years.
The consolidated balance sheets include right-of-use assets acquired under finance leases as components of property and equipment as of June 30, 2019 and January 1, 2019, as follows:
|
| | | | | | | | |
(in millions) | | June 30, 2019 | | January 1, 2019 |
Transportation equipment | | $ | 19.9 |
| | $ | 19.9 |
|
Real property | | 0.8 |
| | 0.8 |
|
Other property | | 1.5 |
| | 0.6 |
|
Accumulated amortization | | (12.7 | ) | | (11.2 | ) |
Total | | $ | 9.5 |
| | $ | 10.1 |
|
Transportation equipment is being amortized to the estimated residual value by the end of the lease. Real and other property under finance leases are being amortized to a zero net book value over the initial lease term.
As lessor
We finance various types of transportation-related equipment for independent third parties under lease contracts which are generally for one year to five years and are accounted for as sales-type leases with fully guaranteed residual values. AtOur leases contain an option for the inceptionlessee to return, extend, or purchase the equipment at the end of the contracts, we determine iflease term for the guaranteed
contract residual amount. This contract residual amount is or contains a lease. A contract is or contains a lease if it conveysestimated to approximate the right to controlfair value of the use of an identified asset for a period of time in exchange for consideration.equipment. Lease payments primarily include base rentals and guaranteed residual values.
With the adoption of ASC 842, all leases for which we are the lessor meet the definition of sales-type leases. In addition, as required under ASC 842, all cash flows from lease receipts are classified as operating activities on the consolidated statement of cash flows beginning January 1, 2019. We previously presented all cash flows from lease receipts as investing activities.
As of June 30, 20192020 and January 1,December 31, 2019, the investmentinvestments in lease receivables waswere as follows:
| | | | | | | | | | | | | | |
(in millions) | | June 30, 2020 | | December 31, 2019 |
Future minimum payments to be received on leases | | $ | 138.4 | | | $ | 135.0 | |
Guaranteed residual lease values | | 113.6 | | | 126.6 | |
Total minimum lease payments to be received | | 252.0 | | | 261.6 | |
Unearned income | | (33.0) | | | (30.7) | |
Net investment in leases | | 219.0 | | | 230.9 | |
| | | | |
Current maturities of lease receivables | | 110.3 | | | 122.1 | |
Allowance for doubtful accounts | | (0.8) | | | (0.6) | |
Current portion of lease receivables—net of allowance | | 109.5 | | | 121.5 | |
| | | | |
Lease receivables—noncurrent | | $ | 109.5 | | | $ | 109.4 | |
|
| | | | | | | | |
| | June 30, 2019 | | January 1, 2019 |
Future minimum payments to be received on leases | | $ | 145.0 |
| | $ | 140.0 |
|
Guaranteed residual lease values | | 143.8 |
| | 151.0 |
|
Total minimum lease payments to be received | | 288.8 |
| | 291.0 |
|
Unearned income | | (32.2 | ) | | (28.7 | ) |
Net investment in leases | | 256.6 |
| | 262.3 |
|
| | | | |
Current maturities of lease receivables | | 123.4 |
| | 129.6 |
|
Less—allowance for doubtful accounts | | (0.5 | ) | | (0.5 | ) |
Current portion of lease receivables—net of allowance | | 122.9 |
| | 129.1 |
|
| | | | |
Lease receivables—noncurrent | | $ | 133.7 |
| | $ | 133.2 |
|
Before entering into a lease contract, we assess the credit quality of the potential lessee through the use of credit checks and other relevant factors, ensuring that their inherent credit risk is consistent with our existing lease portfolio. We monitor the credit quality of our lease portfolio weekly by tracking amounts past due, days past due, and outstanding maintenance account balances, including running subsequent credit checks as needed. The amounts to be received onfollowing table presents our net investment in leases, which includes both current and future lease receivablespayments, as of June 30, 2019 were as follows:2020 by amounts past due, our primary ongoing credit quality indicator, and lease origination year.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Net Investment in Leases by Lease Origination Year (in millions) | | | | | | | | | | | | |
Amounts Past Due (in ones) | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Prior | | Total |
Greater than $3,000 | | $ | 4.5 | | | $ | 4.6 | | | $ | 1.6 | | | $ | 2.3 | | | $ | 0.1 | | | $ | 0.1 | | | $ | 13.2 | |
Between $2,999 and $1,500 | | 6.9 | | | 4.0 | | | 1.9 | | | 0.1 | | | 0.2 | | | — | | | 13.1 | |
Less than $1,499 | | 11.1 | | | 10.9 | | | 5.9 | | | 1.7 | | | 0.5 | | | — | | | 30.1 | |
Total | | $ | 22.5 | | | $ | 19.5 | | | $ | 9.4 | | | $ | 4.1 | | | $ | 0.8 | | | $ | 0.1 | | | $ | 56.4 | |
|
| | | | |
(in millions) | | June 30, 2019 |
Remaining 2019 | | $ | 74.4 |
|
2020 | | 133.2 |
|
2021 | | 63.6 |
|
2022 | | 17.4 |
|
2023 | | 0.2 |
|
2024 and thereafter | | — |
|
Total undiscounted lease cash flows | | 288.8 |
|
Amount representing interest | | (32.2 | ) |
Present value of lease receivables | | 256.6 |
|
Current lease receivables, net of allowance | | (122.9 | ) |
Long-term lease receivable | | $ | 133.7 |
|
LeasesLease payments are generally placeddue on nonaccrual status (nonaccrual of interesta weekly basis and other fees) when a payment becomes 90 daysare classified as past due or upon receipt of notification of bankruptcy, upon the death of a customer, or in other instances in which management concludes collectabilitywhen payment is not reasonably assured.received by the due date. The accrual of interest and other fees is resumed when all payments are less than 60 days past due. At June 30, 2019, there were $0.3 millionfollowing table presents an aging analysis of lease payments greater than 90 daysowed to us and classified as past due.due as of June 30, 2020.
| | | | | | | | |
(in millions) | | June 30, 2020 |
1-29 days | | $ | 1.7 | |
30-59 days | | 0.6 | |
60-89 days | | 0.4 | |
90 days or greater | | 0.4 | |
Total past due | | $ | 3.1 | |
Our lease receivables are recorded net of an allowance for doubtful accounts based on an aging analysis to reserve amounts expected to be uncollectible. The terms of the lease agreements generally give us the ability to take possession of the underlying asset in the event of default. We may incur credit losses in excess of recorded allowances if the full amount of any anticipated proceeds from the sale or re-lease of the asset supporting the third party’s financial obligation, which can be impacted by economic conditions, is not realized. Repossession and estimated reconditioning costs are recorded in
Accrued interest on leases is included within lease receivables on the consolidated statementsbalance sheets and was not material as of comprehensive incomeJune 30, 2020 and December 31, 2019. Leases are generally placed on nonaccrual status (nonaccrual of interest and other fees) when a payment becomes 90 days past due or upon notification of bankruptcy, death, or other instances management concludes collectability is not reasonably assured. The accrual of interest and other fees resumes when all payments are less than 60 days past due. At both June 30, 2020 and December 31, 2019, our net investment in the period incurred.
Our lease payments primarily include base rentals and guaranteed residual values. In addition, we also collect one-time administrative fees and heavy vehicle use taxleases on our leases. We have elected to not separate the different components within the contract as the administrative feesnonaccrual status were not material for the three and six months ended June 30, 2019. We have also elected to
material.
exclude all taxes assessed by a governmental authority from the consideration (e.g., heavy vehicle use tax). All of our leases require fixed payments, therefore we have no variable payment provisions.
Our leases contain an option for the lessee to return, extend, or purchase the equipment at the end of the lease term for the guaranteed contract residual amount. This is estimated to approximate the fair value of the equipment. Equipment is leased under sales-type leases where the lessees guarantee the residual value of the equipment. The table below provides additional information on our sales-type leases.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
(in millions) | | 2020 | | 2019 | | 2020 | | 2019 |
Revenue | | $ | 44.7 | | | $ | 52.7 | | | $ | 99.4 | | | $ | 108.9 | |
Cost of goods sold | | (40.8) | | | (47.3) | | | (89.7) | | | (97.2) | |
Operating profit | | $ | 3.9 | | | $ | 5.4 | | | $ | 9.7 | | | $ | 11.7 | |
| | | | | | | | |
Interest income on lease receivable | | $ | 6.7 | | | $ | 6.8 | | | $ | 13.2 | | | $ | 13.4 | |
| | | | | | | | |
|
| | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions) | | 2019 | | 2019 |
Revenue | | $ | 52.7 |
| | $ | 108.9 |
|
Cost of goods sold | | (47.3 | ) | | (97.2 | ) |
Operating profit | | $ | 5.4 |
| | $ | 11.7 |
|
| | | | |
Interest income on lease receivable | | $ | 6.8 |
| | $ | 13.4 |
|
Initial direct cost incurred | | — |
| | — |
|
The amounts to be received on lease receivables as of December 31, 2018 under ASC 840 were as follows:
|
| | | | |
(in millions) | | December 31, 2018 |
2019 | | $ | 149.0 |
|
2020 | | 112.7 |
|
2021 | | 29.0 |
|
2022 | | 0.3 |
|
2023 | | — |
|
2024 and thereafter | | — |
|
Total | | $ | 291.0 |
|
3.4. REVENUE RECOGNITION
Disaggregated Revenues
The majority of our revenues are related to transportation and have similar characteristics. The following table summarizes our revenues by type of service, and each type of service is further described below.service.
| | | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
Disaggregated Revenues (in millions) | | 2019 | | 2018 | | 2019 | | 2018 | Disaggregated Revenues (in millions) | | 2020 | | 2019 | | 2020 | | 2019 |
Transportation | | $ | 1,126.6 |
| | $ | 1,138.0 |
| | $ | 2,203.9 |
| | $ | 2,187.9 |
| Transportation | | $ | 951.1 | | | $ | 1,126.6 | | | $ | 1,979.4 | | | $ | 2,203.9 | |
Logistics management | | 29.7 |
| | 53.9 |
| | 87.8 |
| | 106.0 |
| Logistics management | | 29.8 | | | 29.7 | | | 60.9 | | | 87.8 | |
Other | | 56.4 |
| | 44.4 |
| | 115.1 |
| | 81.4 |
| Other | | 51.9 | | | 56.4 | | | 111.6 | | | 115.1 | |
Total operating revenues | | $ | 1,212.7 |
| | $ | 1,236.3 |
| | $ | 2,406.8 |
| | $ | 2,375.3 |
| Total operating revenues | | $ | 1,032.8 | | | $ | 1,212.7 | | | $ | 2,151.9 | | | $ | 2,406.8 | |
TransportationQuantitative Disclosures
Transportation revenues relate to the Truckload and Intermodal reportable segments, as well as to our brokerage business, which is included in the Logistics reportable segment.
In the Transportation portfolio, our service obligation to customers is satisfied over time. We do not believe there is a significant impact on the nature, amount, timing, and uncertainty of revenue or cash flows based on the mode of transportation. The economic factors that impact our transportation revenue are generally consistent across these modes given the relatively short-term nature of each contract. For the majority of our transportation business, the “contract with a customer” is identified as an individual order under a negotiated agreement. Some consideration is variable in that a final transaction price is uncertain and is susceptible to factors outside of Schneider's influence, such as the weather or the accumulation of accessorial charges. Pricing information is supplied by rate schedules that accompany negotiated contracts.
Logistics Management
Logistics Management revenues relate to our Supply Chain Management and Import/Export Services operating segments, both of which are included in our Logistics reportable segment. Within this portfolio, the key service we provide to the customer is management of freight shipping and/or storage.
Other
Other revenues relate to activities that are out of scope for purposes of ASC 606, including our leasing and captive insurance businesses.
Quantitative Disclosure
The following table provides information related tofor transactions and expected timing of revenue recognition related to performance obligations that are fixed in nature and relatepertain to contracts with terms greater than one year as of date shown:shown.
| | | | | | | | |
Remaining Performance Obligations (in millions) | | June 30, 2020 |
Expected to be recognized within one year | | |
Transportation | | $ | 1.3 | |
Logistics management | | 11.9 | |
Expected to be recognized after one year | | |
Transportation | | 0.3 | |
Logistics management | | 14.6 | |
Total | | $ | 28.1 | |
|
| | | | |
Remaining Performance Obligations (in millions) | | June 30, 2019 |
Expected to be recognized within one year | | |
Transportation | | $ | 14.6 |
|
Logistics Management | | 10.4 |
|
Expected to be recognized after one year | | |
Transportation | | 1.7 |
|
Logistics Management | | 7.3 |
|
Total | | $ | 34.0 |
|
This disclosureThe information provided in the above table does not include revenue related to performance obligations that are part of a contract whose original expected duration is one year or less. In addition, this disclosure does not include expected consideration related to performance obligations for which the Company elects to recognize revenue in the amount it has a right to invoice (e.g., usage-based pricing terms).
The following table provides information related to contract balances associated with our contracts with customers as of the dates shown.
| | Contract Balances (in millions) | | June 30, 2019 | | December 31, 2018 | |
Contract Balances (in millions) | | Contract Balances (in millions) | | June 30, 2020 | | December 31, 2019 | |
Other current assets - Contract assets | | $ | 28.8 |
| | $ | 21.7 |
| Other current assets - Contract assets | | $ | 22.2 | | | $ | 17.6 | | |
Other current liabilities - Contract liabilities | | — |
| | — |
| Other current liabilities - Contract liabilities | | — | | | — | | |
We generally receive payment within 40 days of completion ofcompleting our performance obligations. Contract assets in the table above relate to revenue in-transitin transit at the end of the reporting period. Contract liabilities relate to amounts that customers paid in advance of the associated service.
4.5. FAIR VALUE
Fair value focuses onis the estimated price that would be received to sell an asset or paid to transfer a liability, which is referred to as the exit price. Inputs to valuation techniques used to measure fair value fall into three broad levels (Levels 1, 2, and 3) as follows:
Level 1—Observable inputs that reflect quoted prices for identical assets or liabilities in active markets that we have the ability to access at the measurement date.
Level 2—Observable inputs, other than quoted prices included in Level 1, for the asset or liability or prices for similar assets and liabilities.
Level 3—Unobservable inputs reflecting the reporting entity’s estimates of the assumptions that market participants would use in pricing the asset or liability (including assumptions about risk).
Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. All marketable
The table below sets forth the Company’s financial assets that are measured at fair value on a recurring basis in accordance with ASC 820.
| | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value | | |
(in millions) | | Level in Fair Value Hierarchy | | June 30, 2020 | | December 31, 2019 |
Marketable securities (1) | | 2 | | $ | 46.8 | | | $ | 48.3 | |
(1) Marketable securities wereare valued based on quoted prices for similar assets in active markets or quoted prices for identical or similar assets in markets that are not active (Leveland are, therefore, classified as Level 2 in the fair value hierarchy).hierarchy. We measure our marketable securities on a recurring, monthly basis. See Note 5,6, Investments, for additional information on the fair value of our marketable securities.
In connection withThe fair value of the June 1, 2016 acquisition of WSL, a contingent payment arrangement based on the achievement of specified earnings targetsCompany's debt was in place for three consecutive 12-month periods after the closing, with the aggregate payment total not to exceed $40.0 million. No payments were made under the agreement which is now expired,$345.3 million and the balance$368.5 million as of June 30, 2020 and December 31, 2018 was zero.
Our ownership interest in Platform Science, Inc. discussed in Note 5, Investments, was valued based on Level 3 inputs.
There were no transfers between levels for the periods shown.
Fair Value of Other Financial Instruments
2019, respectively. The recordedcarrying value of cash, trade accounts receivable,the Company's debt was $335.0 million and trade accounts payable approximates$360.0 million as of June 30, 2020 and December 31, 2019, respectively. The fair value.
The table below presents the carrying value of our debt portfolio along with the fair value ofwas calculated using a fixed-rate debt portfolio with similar terms and maturities, which is based on the borrowing rates available to us in the applicable year. This valuation used Level 2 inputs.
|
| | | | | | | | | | | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
(in millions) | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Fixed-rate debt portfolio | | $ | 402.7 |
| | $ | 412.4 |
| | $ | 405.0 |
| | $ | 398.4 |
|
The recorded value of cash, trade accounts receivable, lease receivables, and trade accounts payable approximates fair value.
5.Our ownership interest in PSI discussed in Note 6, Investments, does not have a readily determinable fair value and is accounted for using the measurement alternative in ASC 321-10-35-2.
6. INVESTMENTS
Marketable Securities
Our marketable securities are classified as available for saleavailable-for-sale and carried at fair value in current assets on the consolidated balance sheets. Our portfolio of securities has maturities ranging from 6 to 81 months. While our intent is to hold our securities to maturity, sudden changes in the market or to our liquidity needs may cause us to sell certain securities in advance of their maturity date.
AnyWith the adoption of ASU 2016-13, the guidance on reporting credit losses for available-for-sale debt securities was amended. Under this new guidance, credit losses are to be recorded through an allowance for credit losses rather than as a direct write-down to the security. As a result, any unrealized gains and losses, net of tax, are included as a component of accumulated other comprehensive lossincome on ourthe consolidated balance sheets, unless we determine that an unrealized lossthe amortized cost basis is other-than-temporary.not recoverable. If we determine that an unrealized lossthe amortized cost basis of the impaired security is other-than-temporary,not recoverable, we recognize the credit loss in earnings. We did not have any other-than-temporary impairmentsby increasing the allowance for either of the periods ended June 30, 2019 and 2018.those losses. Cost basis is determined using the specific identification method.
When adopting this standard, we elected to continue to present the accrued interest receivable balance associated with our investments in marketable securities separate from the marketable securities line in the consolidated balance sheets. As of June 30, 2020, accrued interest receivable associated with our investments in marketable securities was not material and is included within other receivables on the consolidated balance sheets. We have elected the practical expedient provided under the guidance to exclude the applicable accrued interest from the amortized cost basis disclosure of our marketable securities. We have also elected not to measure an allowance for credit losses on our accrued interest receivable and to write off accrued interest receivable by reversing interest income when it is not considered collectible.
The following table presents the maturities and values of our marketable securities as of the dates shown:shown.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2020 | | | | | | December 31, 2019 | | |
(in millions, except maturities in months) | | Maturities | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
U.S. treasury and government agencies | | 9 to 76 | | $ | 12.7 | | | $ | 12.8 | | | $ | 16.5 | | | $ | 17.0 | |
Asset-backed securities | | 7 | | — | | | — | | | 0.1 | | | 0.1 | |
Corporate debt securities | | 13 to 64 | | 17.3 | | | 18.1 | | | 15.1 | | | 15.4 | |
State and municipal bonds | | 1 to 69 | | 11.5 | | | 11.9 | | | 11.6 | | | 11.8 | |
Other U.S. and non-U.S. government bonds | | 1 to 51 | | 4.0 | | | 4.0 | | | 4.0 | | | 4.0 | |
Total marketable securities | | | | $ | 45.5 | | | $ | 46.8 | | | $ | 47.3 | | | $ | 48.3 | |
|
| | | | | | | | | | | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
(in millions) | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
Zero coupon bonds | | $ | 2.0 |
| | $ | 2.0 |
| | $ | 3.9 |
| | $ | 3.9 |
|
U.S. treasury and government agencies | | 18.9 |
| | 19.0 |
| | 20.0 |
| | 19.8 |
|
Asset-backed securities | | 0.1 |
| | 0.1 |
| | 0.1 |
| | 0.1 |
|
Corporate debt securities | | 14.1 |
| | 14.4 |
| | 15.1 |
| | 15.0 |
|
State and municipal bonds | | 11.8 |
| | 12.0 |
| | 12.5 |
| | 12.5 |
|
Total marketable securities | | $ | 46.9 |
| | $ | 47.5 |
| | $ | 51.6 |
| | $ | 51.3 |
|
Gross realized gains and losses and net unrealized gains and losses, net of tax, on marketable securities were not material for the three and six months ended June 30, 2020 and 2019. Additionally, we did not have an allowance for credit losses on our marketable securities as of June 30, 2020 or any other-than-temporary impairments as of December 31, 2019, and 2018. Grossour total unrealized gains and losses on marketable securities were not material for the periods endedas of June 30, 2019,2020 and December 31, 2018.2019.
Ownership Interest in Platform Science, Inc.
In 2018, we receivedthe Company made a 30%strategic decision to invest in PSI and acquired an ownership interest in Platform Science, Inc. in exchange for our contribution ofgranting them a non-exclusive license forto our proprietary telematics mobile software that was developed to enable enhanced driver productivity and ensure regulatory compliance. Our ownership interest in Platform Science, Inc. is being accounted for under ASC 321, Investments - Equity Securities using the measurement alternative and is recorded at fair value in other noncurrent assets on the consolidated balance sheets. The fair value ofDuring 2020, remeasurement events occurred which required the ownershipCompany to revalue its interest as of December 31, 2018 was determined to be $3.5 million through an independent valuation. As ofin PSI. In the three and six months ended June 30, 2019, there have been no transactions that would indicate that2020, the Company recognized pre-tax gains of $2.7 million and $8.8 million, respectively, on its investment in PSI, which were recorded within other income on the consolidated statements of comprehensive income. The fair value of our ownership interest in Platform Science, Inc. has changed.as of June 30, 2020 and December 31, 2019 was $12.3 million and $3.5 million, respectively, and our ownership percentage was 12.6% as of June 30, 2020.
Subsequent Event - Investment in Mastery Logistics Systems, Inc. 6.
On July 2, 2020, Schneider entered into a strategic partnership with Mastery Logistics Systems, Inc. ("Mastery"), a transportation technology development company. We paid Mastery $5.0 million for a non-controlling interest and will collaborate with Mastery to develop a Transportation Management System using Mastery's SaaS technology which Schneider has agreed to license. The investment will be accounted for under ASC 321, Investments - Equity Securities.
7. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of the purchase price of our acquisitions over the fair value of the identifiable net assets acquired. Changes inThe following table shows changes to our goodwill balances by reportable segment during the carrying amount of goodwill were as follows:period ended June 30, 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | Truckload | | Logistics | | Other | | Total |
Balance at December 31, 2019 | | $ | 103.6 | | | $ | 14.2 | | | $ | 9.7 | | | $ | 127.5 | |
| | | | | | | | |
Foreign currency translation loss | | — | | | — | | | (0.2) | | | (0.2) | |
Balance at June 30, 2020 | | $ | 103.6 | | | $ | 14.2 | | | $ | 9.5 | | | $ | 127.3 | |
|
| | | | | | | | | | | | | | | | |
(in millions) | | Truckload | | Logistics | | Other | | Total |
Balance at December 31, 2018 | | $ | 138.2 |
| | $ | 14.2 |
| | $ | 9.8 |
| | $ | 162.2 |
|
Goodwill impairment charge | | (34.6 | ) | | — |
| | — |
| | (34.6 | ) |
Foreign currency translation | | — |
| | — |
| | — |
| | — |
|
Balance at June 30, 2019 | | $ | 103.6 |
| | $ | 14.2 |
| | $ | 9.8 |
| | $ | 127.6 |
|
At June 30, 20192020 and December 31, 2018,2019, we had accumulated goodwill impairment charges of $42.6 million and $8.0 million, respectively.million.
Goodwill is tested for impairment at least annually using both the discounted cash flow method and the guideline public company method in calculating the fair values of our reporting units. Key inputs used in the discounted cash flow approach include growth rates for sales and operating profit, perpetuity growth assumptions, and discount rates. As interest rates rise, the calculated fair values of our reporting units will decrease, which could impact the results of our goodwill impairment tests.
A triggering event occurred during the quarter ended June 30, 2019 as results from our FTFM reporting unit continued to be less than projected, despite sustained investments and operational changes designed to improve efficiencies. Because of this triggering event, an impairment test was performed for the FTFM reporting unit. As a result of the testing performed, an impairment loss of $34.6 million was recorded for our FTFM reporting unit as the discounted cash flows expected to be generated by this reporting unit were not sufficient to recover its carrying value. This represents all of the goodwill related to the FTFM reporting unit. In conjunction with testing goodwill for impairment, the Company tested the other identifiable tangible and intangible assets related to the FTFM reporting unit for impairment. Based on the results of that testing, it was determined that there was no additional impairment of those assets.
The identifiable intangible assets other than goodwill listed below are included in capitalized software and other noncurrent assets on the consolidated balance sheets. |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
(in millions) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Customer lists | | $ | 10.5 |
| | $ | 3.9 |
| | $ | 6.6 |
| | $ | 10.5 |
| | $ | 3.5 |
| | $ | 7.0 |
|
Trade names | | 1.4 |
| | 1.4 |
| | — |
| | 1.4 |
| | 1.2 |
| | 0.2 |
|
Total intangible assets | | $ | 11.9 |
| | $ | 5.3 |
| | $ | 6.6 |
| | $ | 11.9 |
| | $ | 4.7 |
| | $ | 7.2 |
|
Amortization expense for intangible assets was $0.3 million and $0.4 million for the three months ended June 30, 2019 and 2018, respectively, and $0.6 million and $0.7 million for the six months ended June 30, 2019 and 2018, respectively. Accumulated amortization in the table above includes foreign currency translation related to a customer list.
Estimated future amortization expense related to intangible assets is as follows:
|
| | | | |
(in millions) | | |
Remaining 2019 | | $ | 0.5 |
|
2020 | | 1.0 |
|
2021 | | 1.0 |
|
2022 | | 1.0 |
|
2023 | | 1.0 |
|
2024 and thereafter | | 2.1 |
|
| | $ | 6.6 |
|
7.8. DEBT AND CREDIT FACILITIES
As of June 30, 20192020 and December 31, 2018,2019, debt included the following:
| | | | | | | | | | | | | | |
(in millions) | | June 30, 2020 | | December 31, 2019 |
Unsecured senior notes: principal payable at maturities ranging from 2020 through 2025; interest payable in semiannual installments through the same timeframe; weighted-average interest rate of 3.54% and 3.42% for 2020 and 2019, respectively. | | $ | 335.0 | | | $ | 360.0 | |
| | | | |
| | | | |
Current maturities | | (30.0) | | | (55.0) | |
Debt issuance costs | | (0.3) | | | (0.4) | |
Long-term debt | | $ | 304.7 | | | $ | 304.6 | |
|
| | | | | | | | |
(in millions) | | June 30, 2019 | | December 31, 2018 |
Unsecured senior notes: principal payable at maturities ranging from 2019 through 2025; interest payable in semiannual installments through the same timeframe; weighted-average interest rate of 3.36% for both 2019 and 2018 | | $ | 400.0 |
| | $ | 400.0 |
|
Equipment financing notes: principal and interest payable in monthly installments through 2019; weighted average interest rate of 3.98% and 3.72% for 2019 and 2018, respectively | | 2.7 |
| | 5.0 |
|
Total principal outstanding | | 402.7 |
| | 405.0 |
|
Current maturities | | (67.7 | ) | | (45.0 | ) |
Debt issuance costs | | (0.5 | ) | | (0.6 | ) |
Long-term debt | | $ | 334.5 |
| | $ | 359.4 |
|
Our Credit Agreement (the “2018 Credit Facility”) provides borrowing capacity of $250.0 million and allows us to request an increase in total commitment byof up to $150.0 million, for a total potential commitment of $400.0 million through August 2023. The agreement also provides a sublimit of $100.0 million to be used for the issuance of letters of credit. We had no outstanding borrowings under this agreement as of June 30, 20192020 or December 31, 2018.2019. Standby letters of credit under this agreement amounted to $3.9 million and $3.8 million at June 30, 20192020 and December 31, 20182019, respectively, and were primarily related to the requirements of certain of our real estate leases.
We also have a Receivables Purchase Agreement (the “2018 Receivables Purchase Agreement”) that allows us to borrow funds against qualifying trade receivables at rates based on one-month LIBOR up to $200.0 million and provides for the issuance of standby letters of credit through September 2021. We had no outstanding borrowings under this facility at June 30, 20192020 or December 31, 2018.2019. At June 30, 20192020 and December 31, 2018,2019, standby letters of credit under this agreement amounted to $70.3 million and $65.3 million, respectively, and were primarily related to the requirements of certain of our insurance obligations.
8.9. INCOME TAXES
Our effective income tax rate was 24.8%25.8% and 25.5%24.8% for the three months ended June 30, 20192020 and 2018,2019, respectively, and 25.1%25.4% and 25.8%25.1% for the six months ended June 30, 20192020 and 2018,2019, respectively. In determining the quarterly provision for income taxes, we use an estimated annual effective tax rate adjusted for discrete items. This rate is based on our expected annual income, statutory tax rates, and best estimateestimates of nontaxable and nondeductible items of income and expense.
On March 27, 2020, President Trump signed into U.S. federal law the CARES Act aimed at providing emergency assistance and health care for individuals, families, and businesses affected by COVID-19 and generally supporting the U.S. economy. The CARES Act, among other things, includes provisions related to refundable payroll tax credits, deferment of the employer portion of social security payments, net operating loss carryback periods, modifications to the net interest deduction limitations, and technical corrections to tax depreciation methods for qualified improvement property. The Company is currently taking advantage of the cash deferral programs available for payment of employer social security taxes and federal and state income taxes.
9.10. COMMON EQUITY
Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share for the three and six months ended June 30, 20192020 and 2018:2019.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
(in millions, except per share data) | | 2020 | | 2019 | | 2020 | | 2019 |
Numerator: | | | | | | | | |
Net income available to common shareholders | | $ | 46.5 | | | $ | 34.5 | | | $ | 90.3 | | | $ | 71.4 | |
| | | | | | | | |
Denominator: | | | | | | | | |
Weighted average common shares outstanding | | 177.2 | | | 177.1 | | | 177.2 | | | 177.1 | |
Effect of dilutive restricted share units | | 0.2 | | | 0.3 | | | 0.2 | | | 0.3 | |
Weighted average diluted common shares outstanding (1) | | 177.5 | | | 177.4 | | | 177.4 | | | 177.4 | |
| | | | | | | | |
Basic earnings per common share | | $ | 0.26 | | | $ | 0.19 | | | $ | 0.51 | | | $ | 0.40 | |
Diluted earnings per common share | | 0.26 | | | 0.19 | | | 0.51 | | | 0.40 | |
|
| | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions, except per share data) | | 2019 | | 2018 | | 2019 | | 2018 |
Numerator: | | | | | | | | |
Net income available to common shareholders | | $ | 34.5 |
| | $ | 65.8 |
| | $ | 71.4 |
| | $ | 113.4 |
|
| | | | | | | | |
Denominator: | | | | | | | | |
Weighted average common shares outstanding | | 177.1 |
| | 177.0 |
| | 177.1 |
| | 177.0 |
|
Effect of dilutive restricted share units | | 0.3 |
| | 0.2 |
| | 0.3 |
| | 0.2 |
|
Weighted average diluted common shares outstanding | | 177.4 |
| | 177.2 |
| | 177.4 |
| | 177.2 |
|
| | | | | | | | |
Basic earnings per common share | | $ | 0.19 |
| | $ | 0.37 |
| | $ | 0.40 |
| | $ | 0.64 |
|
Diluted earnings per common share | | 0.19 |
| | 0.37 |
| | 0.40 |
| | 0.64 |
|
(1) Weighted average diluted common shares outstanding may not sum due to rounding.
The calculation of diluted earnings per share for the three and six months ended June 30, 2020 and 2019 excluded an immaterial amount of share-based compensation awards that had an anti-dilutive effect.
Subsequent Event - Dividends Declared
In July of 2019,2020, our Board of Directors declared a quarterly cash dividend for the third fiscal quarter of 20192020 in the amount of $0.06$0.065 per share to holders of our Class A and Class B common stock. The dividend is payable to shareholders of record at the close of business on September 13, 201911, 2020 and is expected to be paid on October 9, 2019.8, 2020.
10.11. SHARE-BASED COMPENSATION
We grant various equity-based awards relating to Class B Common Stock under our 2017 Omnibus Incentive Plan (“the Plan”). These awards consist of the following: restricted shares, restricted stock units (“RSUs”), performance-based restricted shares (“Performance Shares”), performance-based restricted stock units (“PSUs”), and non-qualified stock options.
Share-based compensation expense was $0.3 million and $2.1 million for the three months ended June 30, 2019 and 2018, respectively, and $2.4 million and $4.2 million for the six months ended June 30, 2019 and 2018, respectively. We recognize share-based compensation expense over the awards' vesting period. As of June 30, 2019, we had $17.3 million of pre-tax unrecognized compensation cost related to outstanding share-based compensation awards that is expected to be recognized over a weighted-average period of 2.7 years.
The Black-Scholes valuation model is used by the Company to determine the grant date fair value of option awards. The Company uses its stock price on the grant date as the fair value assigned to the restricted shares, RSUs, performance shares, and PSUs. Performance shares and PSUs are earned based on attainment of threshold performance of return on capital and earnings or net income targets.
Share-based compensation expense was $0.8 million and $0.3 million for the three months ended June 30, 2020 and 2019, respectively, and $2.5 million and $2.4 million for the six months ended June 30, 2020 and 2019, respectively. We recognize share-based compensation expense over the awards' vesting period. As of June 30, 2020, we had $17.2 million of pre-tax unrecognized compensation cost related to outstanding share-based compensation awards expected to be recognized over a weighted-average period of 2.8 years. 11.
12. COMMITMENTS AND CONTINGENCIES
In the ordinary course of conducting our business we become involved in certain legal matters and investigations including liability claims, taxes other than income taxes, contract disputes, employment, and other litigation matters. We accrue for anticipated costs to defend and resolve matters that are probable and estimable. We believe the outcomes of these matters will not have a material impact on our business or our consolidated financial statements.
We record liabilities for claims accrualsagainst the Company based on our best estimate of expected losses. The primary claims arising for the Company through its trucking, intermodal, and logistics operations consist of accident-related claims for personal injury, collision, and comprehensive compensation, in addition to workers' compensation, property damage, cargo, and cargo liabilitywage and benefit claims. We maintain excess liability insurance with licensed insurance carriers abovefor liability in excess of amounts we self-
insure which serves to largely offset the amounts inCompany’s liability associated with these claims, with the exception of wage and benefit claims for which we self-insure. We review our accruals periodically to ensure that the aggregate amounts of our accruals are appropriate at any period after consideration of available insurance coverage. Although it is possiblewe expect that our claims accruals will changecontinue to vary based on future developments, assuming that we are able to continue to obtain and maintain excess liability insurance coverage for such claims, we do not believe these changesanticipate that such accruals will, be material toin any period, materially impact our results of operations considering our insurance coverage and other factors.operations.
At June 30, 2019,2020, our firm commitments to purchase transportation equipment totaled approximately $69.0$209.5 million.
TheIn October 2017, the representative of the former owners of WSL has claimedfiled a lawsuit in the Delaware Court of Chancery which alleges that we have not fulfilled certain obligations under the purchase and sale agreement relating to the post-closing operations of the business, and as a result, the former owners claim they are entitled to an acceleratedadditional payment of the contingent amount described in Note 4, Fair Value, without regard to whether the specified earnings targets are met.$40.0 million. A trial date has been set for September 2020. We believe this claim is meritless and have filed an action in the Delaware Court of Chancery seeking a declaratory judgment that we have complied withstrong defenses to this claim. A judgment by the Court against us could have a material adverse effect on our obligations under the agreement and that no accelerated payment is owed. The representativeresults of the former owners has filed a counterclaim seeking the full amount of the accelerated payment.operations.
12.13. SEGMENT REPORTING
We have three3 reportable segments – Truckload, Intermodal, and Logistics – which are based primarily on the services each segment provides.
The chief operating decision maker (CODM)CODM reviews revenues for each operating segment without the inclusionexclusive of fuel surcharge revenues. For segment purposes, any fuel surcharge revenues earned are recorded as a reduction of the segment’s fuel expenses. Income from operations at athe segment level reflects the measuresmeasure presented to the CODM for each segment.
Separate balance sheets are not prepared by segment, and, as a result, assets are not separately identifiable by segment. All transactions between reportingreportable segments are eliminated in consolidation.
Substantially all of our revenues and assets were generated or located within the U.S.
The following tables summarize our segment information. Intersegment revenues were immaterial for all segments, with the exception of Other, which includes revenues from insurance premiums charged to other segments for workers’ compensation, auto, and other types of insurance. Intersegment revenues included in Other revenues below were $22.5 million and $22.4 million for the three months ended June 30, 2020 and $20.72019, respectively, and $47.2 million and $46.0 million for the six months ended June 30, 2020 and 2019, respectively.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenues by Segment | | Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
(in millions) | | 2020 | | 2019 | | 2020 | | 2019 |
Truckload | | $ | 451.1 | | | $ | 534.9 | | | $ | 920.5 | | | $ | 1,066.7 | |
Intermodal | | 219.0 | | | 259.8 | | | 457.0 | | | 497.4 | |
Logistics | | 230.9 | | | 227.0 | | | 470.5 | | | 470.9 | |
Other | | 89.8 | | | 95.8 | | | 189.2 | | | 195.7 | |
Fuel surcharge | | 68.7 | | | 124.2 | | | 171.7 | | | 236.0 | |
Inter-segment eliminations | | (26.7) | | | (29.0) | | | (57.0) | | | (59.9) | |
Operating revenues | | $ | 1,032.8 | | | $ | 1,212.7 | | | $ | 2,151.9 | | | $ | 2,406.8 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Income (Loss) from Operations by Segment | | Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
(in millions) | | 2020 | | 2019 | | 2020 | | 2019 |
Truckload | | $ | 40.5 | | | $ | 7.9 | | | $ | 77.1 | | | $ | 31.1 | |
Intermodal | | 11.0 | | | 30.5 | | | 27.3 | | | 50.4 | |
Logistics | | 8.2 | | | 9.2 | | | 12.4 | | | 19.5 | |
Other | | 3.7 | | | 1.6 | | | 1.5 | | | (0.3) | |
Income from operations | | $ | 63.4 | | | $ | 49.2 | | | $ | 118.3 | | | $ | 100.7 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Depreciation and Amortization Expense by Segment | | Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
(in millions) | | 2020 | | 2019 | | 2020 | | 2019 |
Truckload | | $ | 52.5 | | | $ | 54.9 | | | $ | 103.5 | | | $ | 108.3 | |
Intermodal | | 11.7 | | | 11.0 | | | 22.5 | | | 21.9 | |
Logistics | | — | | | 0.2 | | | — | | | 0.3 | |
Other | | 8.1 | | | 8.8 | | | 16.1 | | | 17.8 | |
Depreciation and amortization expense | | $ | 72.3 | | | $ | 74.9 | | | $ | 142.1 | | | $ | 148.3 | |
14. RESTRUCTURING
On July 29, 2019, the Company’s Board of Directors approved a structured shutdown of its FTFM service offering within its Truckload reportable segment which was substantially complete as of August 31, 2019. The restructuring activity was recorded within our Truckload reportable segment. Pre-tax losses of our FTFM service offering were $13.1 million for the three months ended June 30, 2019 and 2018, respectively, and $46.0 million and $41.4$25.2 million for the six months ended June 30, 2019 and 2018, respectively.2019.
|
| | | | | | | | | | | | | | | | |
Revenues by Segment | | Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions) | | 2019 | | 2018 | | 2019 | | 2018 |
Truckload | | $ | 534.9 |
| | $ | 567.6 |
| | $ | 1,066.7 |
| | $ | 1,118.1 |
|
Intermodal | | 259.8 |
| | 231.7 |
| | 497.4 |
| | 433.6 |
|
Logistics | | 227.0 |
| | 250.7 |
| | 470.9 |
| | 471.9 |
|
Other | | 95.8 |
| | 79.0 |
| | 195.7 |
| | 153.1 |
|
Fuel surcharge | | 124.2 |
| | 133.1 |
| | 236.0 |
| | 250.9 |
|
Inter-segment eliminations | | (29.0 | ) | | (25.8 | ) | | (59.9 | ) | | (52.3 | ) |
Operating revenues | | $ | 1,212.7 |
| | $ | 1,236.3 |
| | $ | 2,406.8 |
| | $ | 2,375.3 |
|
|
| | | | | | | | | | | | | | | | |
Income (Loss) from Operations by Segment | | Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions) | | 2019 | | 2018 | | 2019 | | 2018 |
Truckload | | $ | 7.9 |
| | $ | 61.2 |
| | $ | 31.1 |
| | $ | 107.8 |
|
Intermodal | | 30.5 |
| | 32.4 |
| | 50.4 |
| | 54.6 |
|
Logistics | | 9.2 |
| | 10.4 |
| | 19.5 |
| | 18.2 |
|
Other | | 1.6 |
| | (12.3 | ) | | (0.3 | ) | | (21.3 | ) |
Income from operations | | $ | 49.2 |
| | $ | 91.7 |
| | $ | 100.7 |
| | $ | 159.3 |
|
The activity associated with the shutdown is presented separately on the consolidated statements of comprehensive income within restructuring—net and is summarized below on a cumulative basis since July 29, 2019. Restructuring activity for the three and six months ended June 30, 2020 was not material.
18 | | | | | | | | |
(in millions) | | Cumulative |
Impairment charges and losses on asset disposals—net | | $ | 45.3 | |
Receivable write-downs—net | | 3.1 | |
Other costs | | 14.3 | |
Total restructuring—net | | $ | 62.7 | |
|
| | | | | | | | | | | | | | | | |
Depreciation and Amortization Expense by Segment | | Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions) | | 2019 | | 2018 | | 2019 | | 2018 |
Truckload | | $ | 54.9 |
| | $ | 52.2 |
| | $ | 108.3 |
| | $ | 104.7 |
|
Intermodal | | 11.0 |
| | 9.5 |
| | 21.9 |
| | 18.7 |
|
Logistics | | 0.2 |
| | 0.1 |
| | 0.3 |
| | 0.2 |
|
Other | | 8.8 |
| | 10.1 |
| | 17.8 |
| | 20.0 |
|
Depreciation and amortization expense | | $ | 74.9 |
| | $ | 71.9 |
| | $ | 148.3 |
| | $ | 143.6 |
|
As of June 30, 2020 and December 31, 2019, FTFM restructuring liabilities were classified as current liabilities on the consolidated balance sheets as follows:
Substantially all of our revenues and assets were generated or located within the United States. | | | | | | | | |
(in millions) | | Restructuring Liabilities |
Balance at December 31, 2018 | | $ | — | |
Restructuring—net | | 13.7 | |
Cash payments | | (8.6) | |
Balance at December 31, 2019 | | 5.1 | |
Restructuring—net | | 0.6 | |
Cash payments | | (1.2) | |
Balance at June 30, 2020 | | $ | 4.5 | |
In 2019, we began recognizing in-transit revenues and related expenses at the reporting segment level for all operating segments to better align revenues and costs within our reporting segments. Prior to 2019, revenues at the operating segment level reflected revenue recognized upon delivery, and in-transit revenue was recorded within Other, except for FTFM. For consistency, we have restated the 2018 revenue and income (loss) from operations by segment in the tables above to reflect this new measure of revenue and segment profit. The tables below reflect the impact of this change by reporting segment on revenues (excluding fuel surcharge) and income (loss) from operations.
|
| | | | | | | | |
Increase (Decrease) in Revenues (excluding fuel surcharge) by Segment | | Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions) | | 2018 | | 2018 |
Truckload | | $ | (1.1 | ) | | $ | (1.9 | ) |
Intermodal | | 3.8 |
| | 4.7 |
|
Logistics | | 1.0 |
| | 1.4 |
|
Other | | (3.7 | ) | | (4.2 | ) |
|
| | | | | | | | |
Increase (Decrease) in Income (Loss) from Operations by Segment | | Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions) | | 2018 | | 2018 |
Truckload | | $ | (1.1 | ) | | $ | (1.9 | ) |
Intermodal | | 1.6 |
| | 2.0 |
|
Logistics | | 0.2 |
| | 0.3 |
|
Other | | (0.7 | ) | | (0.4 | ) |
13. SUBSEQUENT EVENT
OnThe required criteria, as defined by ASC 360, July 29, 2019Property, Plant and Equipment, was satisfied as part of the Company’s Boardshutdown of Directors approved a structured shut down of itsour FTFM service offering for reclassification of related transportation equipment into assets held for sale. As of June 30, 2020 and December 31, 2019, assets held for sale, net of impairment, within itsour Truckload reporting segment. Schneider expectssegment were $40.2 million and $63.5 million, respectively, of which $23.0 million and $33.4 million related to the shutdown to be substantially complete by December 31, 2019 and expects to incur pre-tax restructuring charges, primarily during that timeframe, of between $50.0 million to $75.0 million. Such restructuring charges include approximately: (i) $35.0 million to $45.0 millionour FTFM service offering, respectively. Assets held for sale, net of non-cash charges, consisting of impairments of various tangible and intangible assets including equipment, customer listsimpairment, are included in prepaid expenses and other customer relatedcurrent assets and software; as well as (ii) $15.0 million to $30.0 million of charges that will result in future cash expenditures, consisting primarily of net facility lease obligations and severance costs. All estimates are subject to change until finalized.the consolidated balance sheets.
ItemITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of OperationsMANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and related notes and our Annual Report on Form 10-K for the year ended December 31, 2018.2019.
INTRODUCTION
Recent Events
COVID-19 Pandemic
COVID-19 was declared a pandemic by the World Health Organization and a national emergency by the President of the U.S. The extent the impact of COVID-19 will have on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, the efforts of governments at the national, state, and local levels to combat the outbreak, and the impact of the pandemic and these governmental actions on our customers, which are uncertain and cannot be fully predicted at this time.
The Company’s operational and financial performance was impacted by a decrease in demand during the second quarter of 2020 resulting in part from imposed stay-at-home orders and the related closure of certain customers as a result of COVID-19. The impact was primarily within our truckload and intermodal operations during the month of April, however sequential volume improvements were experienced during the second quarter. Many drivers were redeployed to areas within our portfolio where there was need, but we saw an overall reduction in revenues in the second quarter. We currently estimate the largest impacts of COVID-19 on our business have been incurred to date and that we will experience continued improvement in the third and fourth quarters; however, we are unable to predict with any certainty the impact that COVID-19 may continue to have on our operational and financial performance.
We have implemented cost reduction efforts to help mitigate the impact reduced revenues have had, and may continue to have, on our full-year 2020 income from operations; however, these reductions have not, and are not expected to, fully offset the decline in revenues. We are reducing expenses through decreased discretionary spending including travel and entertainment, hiring and headcount, and various other expenses. While we are working diligently to manage costs throughout the organization, we have incurred additional expenses related to the safe onboarding of company drivers, the purchase of personal protective equipment, emergency sick leave benefits, and additional cleaning services. We anticipate these additional costs will continue to be incurred as the year progresses in order to ensure the safety of our associates, owner-operators, and customers.
We continue to actively monitor the situation and take further actions that alter our business operations as may be required by federal, state, or local governmental authorities, or that we determine are in the best interests of our associates, customers, and shareholders. In this time of uncertainty resulting from COVID-19, we are continuing to serve our customers while taking precautions to provide a safe work environment for our associates, owner-operators, and customers.
Business Overview
We are a leading transportation and logistics services company providing a broad portfolio of premier truckload, intermodal, and logistics solutions and operating one of the largest for-hire trucking fleets in North America. Our highly flexible and balanced business combines asset-based truckload services with asset-light intermodal and non-asset logistics offerings, enabling us to serve our customers’ diverse transportation needs. Our broad portfolio of services provides us with a greater opportunity to allocate capital within our portfolio of services in a manner designed to maximize returns across all market cycles and economic conditions. We continually monitor our performance and market conditions to ensure appropriate allocation of capital and resources to grow our businesses and to optimize returns across reportable segments. Our strong balance sheet enables us to carry out an acquisition strategy that strengthens our overall portfolio. We are positioned to leverage our scalable platform and experienced operations team to acquire high-quality businesses that meet our disciplined selection criteria to broaden our service offerings and customer base.
Our truckload services include standard long-haul and regional shipping services primarily using dry van, equipment, bulk, temperature-controlled, and flat-bed equipment, as well as customized solutions for high-value and time-sensitive loads to offer vast coverage through North America, including Mexico and Canada. These services are executed through either dedicated or network contracts. FTFM residential and retail store delivery and customized solutions for high-value, time-sensitive loads. These services are executed through either for-hire or dedicated contracts.were provided into the third quarter of 2019, when that service offering was shut down.
Our intermodal service consists of door-to-door container on flat car (“COFC”) service by a combination of rail and over-the-road transportation, in association with our rail carrier partners. Our intermodal service uses company-owned containers, chassis, and trucks usingwith primarily company dray drivers, augmented by third-party dray capacity to offer vast coverage throughout North America, including cross border.
Our logistics offerings consist of non-asset freight brokerage, services, supply chain services (including 3PL), and import/export services. Our logistics business typically provides value-added services using third-party capacity, augmented by our trailing assets, to manage and move our customers’ freight.
Our success depends on our ability to balance our transportation network and efficiently and effectively manage our resources in the delivery of truckload, intermodal, and logistics services to our customers. Resource requirements vary with customer demand, which may be subject to seasonal or general economic conditions. We believe that our ability to properly select freight and adapt to changes in customer transportation needs allows us to efficiently deploy resources and make capital investments in trucks, trailers, containers, and chassis or obtain qualified third-party capacity at a reasonable price for our logistics segment.
Consistent with the transportation industry, our results of operations generally show a seasonal pattern. The strongest volumes are typically in the late third and fourth quarters. Operating expenses tend to be higher in the winter months primarily due to colder weather, which causes higher maintenance expense and higher fuel consumption from increased idle time.
RESULTS OF OPERATIONS
Non-GAAP Financial Measures
In this section of our report, we present the following non-GAAP financial measures: (1) revenues (excluding fuel surcharge), (2) adjusted income from operations, (3) adjusted operating ratio, and (4) adjusted net income. We also provide reconciliations of these measures to the most directly comparable financial measures calculated and presented in accordance with GAAP.
Management believes the use of each of these non-GAAP measures assists investors in understanding our business by (a)(1) removing the impact of items from our operating results that, in our opinion, do not reflect our core operating performance, (b)(2) providing investors with the same information our management uses internally to assess our core operating performance, and (c)(3) presenting comparable financial results between periods. In addition, in the case of revenues (excluding fuel surcharge), we believe the measure is useful to investors because it isolates volume, price, and cost changes directly related to industry demand and the way we operate our business from the external factor of fluctuating fuel prices and the programs we have in place to manage fuel price fluctuations. Fuel-related costs and their impact on our industry are important to our results of operations, but they are often independent of other, more relevant factors affecting our results of operations and our industry.
Although we believe these non-GAAP measures are useful to investors, they have limitations as analytical tools and may not be comparable to similar measures disclosed by other companies. You should not consider the non-GAAP measures in this report
in isolation or as substitutes for, or alternatives to, analysis of our results as reported under GAAP. The exclusion of unusual or infrequent items or other adjustments reflected in the non-GAAP measures should not be construed as an inference that our future results will not be affected by unusual or infrequent items or by other items similar to such adjustments. Our management compensates for these limitations by relying primarily on our GAAP results in addition to using the non-GAAP measures.
Enterprise Summary
The following table includes key GAAP and non-GAAP financial measures for the consolidated enterprise. Adjustments to arrive at non-GAAP measures are made at the enterprise level, with the exception of fuel surcharge revenues, which are not included in segment revenues.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
(in millions, except ratios) | | 2020 | | 2019 | | 2020 | | 2019 |
Operating revenues | | $ | 1,032.8 | | | $ | 1,212.7 | | | $ | 2,151.9 | | | $ | 2,406.8 | |
Revenues (excluding fuel surcharge) (1) | | 964.1 | | | 1,088.5 | | | 1,980.2 | | | 2,170.8 | |
Income from operations | | 63.4 | | | 49.2 | | | 118.3 | | | 100.7 | |
Adjusted income from operations (2) | | 63.6 | | | 83.8 | | | 117.3 | | | 135.3 | |
Operating ratio | | 93.9 | % | | 95.9 | % | | 94.5 | % | | 95.8 | % |
Adjusted operating ratio (3) | | 93.4 | % | | 92.3 | % | | 94.1 | % | | 93.8 | % |
Net income | | $ | 46.5 | | | $ | 34.5 | | | $ | 90.3 | | | $ | 71.4 | |
Adjusted net income (4) | | 46.7 | | | 60.3 | | | 89.6 | | | 97.2 | |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions, except ratios) | | 2019 | | 2018 | | 2019 | | 2018 |
Operating revenues | | $ | 1,212.7 |
| | $ | 1,236.3 |
| | $ | 2,406.8 |
| | $ | 2,375.3 |
|
Revenues (excluding fuel surcharge) (1) | | 1,088.5 |
| | 1,103.2 |
| | 2,170.8 |
| | 2,124.4 |
|
Income from operations | | 49.2 |
| | 91.7 |
| | 100.7 |
| | 159.3 |
|
Adjusted income from operations (2) | | 83.8 |
| | 97.5 |
| | 135.3 |
| | 165.1 |
|
Operating ratio | | 95.9 | % | | 92.6 | % | | 95.8 | % | | 93.3 | % |
Adjusted operating ratio (3) | | 92.3 | % | | 91.2 | % | | 93.8 | % | | 92.2 | % |
Net income | | $ | 34.5 |
| | $ | 65.8 |
| | $ | 71.4 |
| | $ | 113.4 |
|
Adjusted net income (4) | | 60.3 |
| | 70.1 |
| | 97.2 |
| | 117.7 |
|
(1) We define “revenues (excluding fuel surcharge)” as operating revenues less fuel surcharge revenues, which are excluded from revenues at the segment level. Included below is a reconciliation of operating revenues, the most closely comparable GAAP financial measure, to revenues (excluding fuel surcharge). | |
(1) | We define “revenues (excluding fuel surcharge)” as operating revenues less fuel surcharge revenues, which are excluded from revenues at the segment level. Included below is a reconciliation of operating revenues, the most closely comparable GAAP financial measure, to revenues (excluding fuel surcharge). |
| |
(2) | We define “adjusted income from operations” as income from operations, adjusted to exclude material items that do not reflect our core operating performance. Included below is a reconciliation of income from operations, which is the most directly comparable GAAP measure, to adjusted income from operations. Excluded items for the periods shown are explained in the table and notes below. |
| |
(3) | We define “adjusted operating ratio” as operating expenses, adjusted to exclude material items that do not reflect our core operating performance, divided by revenues (excluding fuel surcharge). Included below is a reconciliation of operating ratio, which is the most directly comparable GAAP measure, to adjusted operating ratio. |
| |
(4) | We define “adjusted net income” as net income, adjusted to exclude material items that do not reflect our core operating performance. Included below is a reconciliation of net income, which is the most directly comparable GAAP measure, to adjusted net income. Excluded items for the periods shown are explained below under our explanation of “adjusted income from operations.” |
(2) We define “adjusted income from operations” as income from operations, adjusted to exclude material items that do not reflect our core operating performance. Included below is a reconciliation of income from operations, which is the most directly comparable GAAP measure, to adjusted income from operations. Excluded items for the periods shown are explained in the table and notes below.
(3) We define “adjusted operating ratio” as operating expenses, adjusted to exclude material items that do not reflect our core operating performance, divided by revenues (excluding fuel surcharge). Included below is a reconciliation of operating ratio, which is the most directly comparable GAAP measure, to adjusted operating ratio. Excluded items for the periods shown are explained below under our explanation of “adjusted income from operations.”
(4) We define “adjusted net income” as net income, adjusted to exclude material items that do not reflect our core operating performance. Included below is a reconciliation of net income, which is the most directly comparable GAAP measure, to adjusted net income. Excluded items for the periods shown are explained below under our explanation of “adjusted income from operations.”
Revenues (excluding fuel surcharge)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
(in millions) | | 2020 | | 2019 | | 2020 | | 2019 |
Operating revenues | | $ | 1,032.8 | | | $ | 1,212.7 | | | $ | 2,151.9 | | | $ | 2,406.8 | |
Less: Fuel surcharge revenues | | 68.7 | | | 124.2 | | | 171.7 | | | 236.0 | |
Revenues (excluding fuel surcharge) | | $ | 964.1 | | | $ | 1,088.5 | | | $ | 1,980.2 | | | $ | 2,170.8 | |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions) | | 2019 | | 2018 | | 2019 | | 2018 |
Operating revenues | | $ | 1,212.7 |
| | $ | 1,236.3 |
| | $ | 2,406.8 |
| | $ | 2,375.3 |
|
Less: Fuel surcharge revenues | | 124.2 |
| | 133.1 |
| | 236.0 |
| | 250.9 |
|
Revenues (excluding fuel surcharge) | | $ | 1,088.5 |
| | $ | 1,103.2 |
| | $ | 2,170.8 |
| | $ | 2,124.4 |
|
Adjusted income from operations
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
(in millions) | | 2020 | | 2019 | | 2020 | | 2019 |
Income from operations | | $ | 63.4 | | | $ | 49.2 | | | $ | 118.3 | | | $ | 100.7 | |
Goodwill impairment (1) | | — | | | 34.6 | | | — | | | 34.6 | |
Restructuring—net (2) | | 0.2 | | | — | | | (1.0) | | | — | |
Adjusted income from operations | | $ | 63.6 | | | $ | 83.8 | | | $ | 117.3 | | | $ | 135.3 | |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions) | | 2019 | | 2018 | | 2019 | | 2018 |
Income from operations | | $ | 49.2 |
| | $ | 91.7 |
| | $ | 100.7 |
| | $ | 159.3 |
|
Litigation (1) | | — |
| | 5.8 |
| | — |
| | 5.8 |
|
Goodwill impairment (2) | | 34.6 |
| | — |
| | 34.6 |
| | — |
|
Adjusted income from operations | | $ | 83.8 |
| | $ | 97.5 |
| | $ | 135.3 |
| | $ | 165.1 |
|
(1)A triggering event occurred during the second quarter of 2019, as results from our FTFM reporting unit were considerably less than projected, resulting in full impairment of FTFM's goodwill. | |
(1) | Costs associated with the settlement of a lawsuit that challenged Washington State labor law compliance during 2018. |
| |
(2) | A triggering event occurred during the second quarter of 2019, as results from our FTFM reporting unit were considerably less than projected, resulting in full impairment of FTFM's goodwill. |
(2)Activity associated with the shutdown of the FTFM service offering. Refer to Note 14, Restructuring, for additional details.
Adjusted operating ratio
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
(in millions, except ratios) | | 2020 | | 2019 | | 2020 | | 2019 |
Total operating expenses | | $ | 969.4 | | | $ | 1,163.5 | | | $ | 2,033.6 | | | $ | 2,306.1 | |
Divide by: Operating revenues | | 1,032.8 | | | 1,212.7 | | | 2,151.9 | | | 2,406.8 | |
Operating ratio | | 93.9 | % | | 95.9 | % | | 94.5 | % | | 95.8 | % |
| | | | | | | | |
Total operating expenses | | $ | 969.4 | | | $ | 1,163.5 | | | $ | 2,033.6 | | | $ | 2,306.1 | |
Adjusted for: | | | | | | | | |
Fuel surcharge revenues | | (68.7) | | | (124.2) | | | (171.7) | | | (236.0) | |
Goodwill impairment | | — | | | (34.6) | | | — | | | (34.6) | |
Restructuring—net | | (0.2) | | | — | | | 1.0 | | | — | |
Adjusted total operating expenses | | $ | 900.5 | | | $ | 1,004.7 | | | $ | 1,862.9 | | | $ | 2,035.5 | |
| | | | | | | | |
Operating revenues | | $ | 1,032.8 | | | $ | 1,212.7 | | | $ | 2,151.9 | | | $ | 2,406.8 | |
Less: Fuel surcharge revenues | | 68.7 | | | 124.2 | | | 171.7 | | | 236.0 | |
Revenues (excluding fuel surcharge) | | $ | 964.1 | | | $ | 1,088.5 | | | $ | 1,980.2 | | | $ | 2,170.8 | |
| | | | | | | | |
Adjusted operating ratio | | 93.4 | % | | 92.3 | % | | 94.1 | % | | 93.8 | % |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions, except ratios) | | 2019 | | 2018 | | 2019 | | 2018 |
Total operating expenses | | $ | 1,163.5 |
| | $ | 1,144.6 |
| | $ | 2,306.1 |
| | $ | 2,216.0 |
|
Divide by: Operating revenues | | 1,212.7 |
| | 1,236.3 |
| | 2,406.8 |
| | 2,375.3 |
|
Operating ratio | | 95.9 | % | | 92.6 | % | | 95.8 | % | | 93.3 | % |
| | | | | | | | |
Total operating expenses | | $ | 1,163.5 |
| | $ | 1,144.6 |
| | $ | 2,306.1 |
| | $ | 2,216.0 |
|
Adjusted for: | | | | | | | | |
Fuel surcharge revenues | | (124.2 | ) | | (133.1 | ) | | (236.0 | ) | | (250.9 | ) |
Litigation | | — |
| | (5.8 | ) | | — |
| | (5.8 | ) |
Goodwill impairment | | (34.6 | ) | | — |
| | (34.6 | ) | | — |
|
Adjusted total operating expense | | $ | 1,004.7 |
| | $ | 1,005.7 |
| | $ | 2,035.5 |
| | $ | 1,959.3 |
|
| | | | | | | | |
Operating revenues | | $ | 1,212.7 |
| | $ | 1,236.3 |
| | $ | 2,406.8 |
| | $ | 2,375.3 |
|
Less: Fuel surcharge revenues | | 124.2 |
| | 133.1 |
| | 236.0 |
| | 250.9 |
|
Revenues (excluding fuel surcharge) | | $ | 1,088.5 |
| | $ | 1,103.2 |
| | $ | 2,170.8 |
| | $ | 2,124.4 |
|
| | | | | | | | |
Adjusted operating ratio | | 92.3 | % | | 91.2 | % | | 93.8 | % | | 92.2 | % |
Adjusted net income
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
(in millions) | | 2020 | | 2019 | | 2020 | | 2019 |
Net income | | $ | 46.5 | | | $ | 34.5 | | | $ | 90.3 | | | $ | 71.4 | |
Goodwill impairment | | — | | | 34.6 | | | — | | | 34.6 | |
Restructuring—net | | 0.2 | | | — | | | (1.0) | | | — | |
Income tax effect of non-GAAP adjustments (1) | | — | | | (8.8) | | | 0.3 | | | (8.8) | |
Adjusted net income | | $ | 46.7 | | | $ | 60.3 | | | $ | 89.6 | | | $ | 97.2 | |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions) | | 2019 | | 2018 | | 2019 | | 2018 |
Net income | | $ | 34.5 |
| | $ | 65.8 |
| | $ | 71.4 |
| | $ | 113.4 |
|
Litigation | | — |
| | 5.8 |
| | — |
| | 5.8 |
|
Goodwill impairment | | 34.6 |
| | — |
| | 34.6 |
| | — |
|
Income tax effect of non-GAAP adjustments(1) | | (8.8 | ) | | (1.5 | ) | | (8.8 | ) | | (1.5 | ) |
Adjusted net income | | $ | 60.3 |
| | $ | 70.1 |
| | $ | 97.2 |
| | $ | 117.7 |
|
| |
(1) | Tax impacts are calculated using the applicable consolidated federal and state effective tax rate, modified to remove the impact of discrete tax adjustments. |
(1) Our estimated tax rate on non-GAAP items is determined annually using the applicable consolidated federal and state effective tax rate, modified to remove the impact of tax credits and adjustments that are not applicable to the specific items. Due to differences in the tax treatment of items excluded from non-GAAP income, as well as the methodology applied to our estimated annual tax rates as described above, our estimated tax rate on non-GAAP items may differ from our GAAP tax rate and from our actual tax liabilities.
Three Months Ended June 30, 20192020 Compared to Three Months Ended June 30, 20182019
Enterprise Results Summary
Net Income
NetEnterprise net income decreased $31.3increased $12.0 million, approximately 48%35%, in the second quarter of 20192020 compared to the same quarter in 2018,2019, primarily due to the $34.6 million FTFM goodwill impairment recorded in 2019 of $34.6 million before taxes. In addition,2019; the Truckload segment's freight volume declinedbenefit associated with the FTFM shutdown, as FTFM's loss from operations in the second quarter of 2019 duewas $13.1 million; and a $2.7 million gain on our ownership interest in PSI. This was partially offset by a decline in Intermodal and Truckload freight volumes, primarily a result of COVID-19 market disruptions; a reduction in price across all of our service offerings; and an increase in income taxes related to soft market demand. higher taxable income.
Adjusted net income decreased $9.8$13.6 million, approximately 14.0%23%.
Components of Enterprise Net Income
Enterprise Revenues
Enterprise operating revenues decreased $23.6$179.9 million, approximately 2%15%, in the second quarter of 20192020 compared to the same quarter in 2018.2019.
Factors contributing to the decrease were as follows:
a $32.7•an $83.8 million decrease in our Truckload segment revenues (excluding fuel surcharge) resulting from reducedthe shutdown of our FTFM service offering in August 2019 which generated $31.8 million of revenues in the second quarter of 2019, as well as an overall decrease in Truckload volume and price largely dueattributed to lower market demand,the impact of COVID-19;
•a $23.7 million decrease in our Logistics segment revenues (excluding fuel surcharge) primarily due to one of the Company's import/export customers insourcing their warehouse management function in April 2019, and
an $8.9$55.5 million decrease in fuel surcharge revenues primarily resulting from a 22% decline in average diesel price per gallon in the U.S. as reported by the Department of Energy, a decline in Intermodal and Truckload volumes, and a $5.5 million reduction related to decreased Truckload volumes.the FTFM shutdown; and
The above factors were partially offset by:
a $28.1$40.8 million increasedecrease in our Intermodal segment revenues (excluding fuel surcharge) primarily due to improved revenue per ordera decrease in both volume and an increase in order volumeprice resulting primarily from COVID-19 induced network disruptions, shorter length of haul, and freight mix.
a $16.2 million increase in revenues from equipment sales by our leasing business under sales-type leases.
Enterprise revenues (excluding fuel surcharge) decreased $14.7$124.4 million, approximately 1%11%.
Enterprise Income from Operations and Operating Ratio
Enterprise income from operations decreased $42.5increased $14.2 million, approximately 46%29%, in the second quarter of 20192020 compared to the same quarter in 2018,2019 primarily due to the $34.6 million FTFM goodwill impairment recorded in 2019 and the benefit associated with the FTFM shutdown, as FTFM's loss from operations in the second quarter of 2019 was $13.1 million. A decrease in fuel costs, continued cost savings attributable to a reduction in headcount, lower healthcare costs, and favorable driver onboarding expenses also contributed to the increase in operating losses, as FTFM operating losses exceeded prior year by $9.9 million. Lower market demand negatively impacted Truckload profitability, but decreasesincome from operations. Those increases were partially offset by reduced performance-based incentive compensation, Company benefits,a reduction in Intermodal and driver related costs. Truckload freight volumes primarily due to COVID-19 market disruptions, lower price across all of our service offerings, incremental costs associated with facility deep cleaning, personal protective equipment purchases, and other proactive measures taken as a result of COVID-19, and $2.8 million from the combination of equipment dispositions and impairments due to used equipment market conditions.
Adjusted income from operations decreased $13.7$20.2 million, approximately 14%24%.
Enterprise operating ratio weakenedimproved on both a GAAP andbasis but weakened on an adjusted basis. Among other factors, our operating ratio can be negatively impacted by changes in portfolio mix when our higher operating ratio, less asset-focused Logistics segment grows faster than our lower operating ratio, capital-intensive Truckload segment.
Enterprise Operating Expenses
Key operating expense fluctuations are described below.
•Purchased transportation costs increased $18.1decreased $66.7 million, or 4%13%, quarter over quarter. Order volume growthquarter, primarily due to a decrease in our Intermodal segment of 2% combined withand Truckload volumes, reduced owner-operator pay and third party carrier costs within Truckload resulting from business mix and rate compression due to market conditions, as well as an increase in various Intermodal third-party costs, including rail, resulted in higher purchased transportation. While our brokerage business in our Logistics segment experienced volume growth of 15%, lower purchased transportation rates resulted in a nominal change$11.6 million reduction in purchased transportation costs quarter over quarter.attributable to the FTFM shutdown.
•Salaries, wages, and benefits decreased $28.4$38.5 million, or 9%13%, quarter over quarter, largely due to the elimination ofbenefit associated with the FTFM shutdown, as FTFM's salaries, wages, and benefits associated with warehouse management operations insourced by an import/export customerwere $16.3 million in Aprilthe second quarter of 2019, which will continue forand headcount reductions across the remainder of the year. Lower performance-based incentive compensationorganization. A $7.0 million reduction in healthcare costs primarily resulting from favorable claims experience and Company benefit costs, as well as various cost savings initiatives,fewer plan participants also contributed to the decrease. Salaries, wages, and benefits decreased 2% quarter over quarter on a percentage of revenues basis.
•Fuel and fuel taxes for our company trucks decreased $12.0$34.1 million, or 14%45%, quarter over quarter, driven by a 6% decrease in company driver miles and a decrease in cost per gallon. The decrease ingallon, less company driver miles was partially offset by increased owner-operator miles, which do not impact companywithin our Truckload segment, and a $4.3 million reduction in fuel costs.and fuel taxes attributable to the FTFM shutdown. A significant portion of fuel costs are recovered through our fuel surcharge programs.
•Depreciation and amortization increased $3.0decreased $2.6 million, or 4%3%, quarter over quarter, primarily duerelated to replacement tractors to achieve a younger age of fleet and our investment in chassis and containers to support growth in our Intermodal segment.the FTFM shutdown.
•Operating supplies and expenses increased $12.5decreased $15.0 million, or 10%11%, quarter over quarter, driven by growtha $6.6 million decline in cost of goods sold due to fewer equipment sales under sales-type leases by our leasing business and a $4.3 million reduction in facility, utility, and other costs resulting from temporary facility closures associated with COVID-19 and other cost savings initiatives. We experienced a reduction in higher costa variety of goods soldother operating-related
expenses, including facility rents related to the FTFM shutdown and increased software subscription costs, and Intermodal rail yard ramp storage expenses.that were individually immaterial. These increasesdecreases were partially offset by incremental cleaning and equipment costs related to COVID-19, along with a combined $6.2$1.6 million decreaseincrease in temporary worker pay dueimpairment on assets held for sale and a $1.2 million change in equipment dispositions resulting from used equipment market conditions in 2020. In the second quarter of 2020, we recorded $1.0 million of net equipment losses compared to insourcing by one$0.2 million of our import/export customersnet equipment gains in April 2019 and reduced maintenance and parts spend attributable to less company driver miles and younger agethe second quarter of fleet.2019.
•Insurance and related expenses increased $3.2$2.9 million, or 14%11%, quarter over quarter. The increase was predominatelyquarter, primarily due to an increase in the severity of auto losses.insurance premiums, partially offset by a reduction in cargo and collision costs.
•Other general expenses decreased $12.1$5.7 million, or 30%20%, quarter over quarter. Decreased other generalquarter, primarily due to a reduction in travel expenses were the result ofresulting from Company enforced travel bans related to COVID-19 and a $5.8 million decrease in litigation costs and reduced driver recruiting and training costs.costs due to lower company driver turnover and cost savings initiatives. Additional costs were incurred in the driver recruiting and training space to safely onboard new drivers during COVID-19; however, these costs were more than offset by savings from lower company driver turnover and fewer hires. We expect our travel expenses to continue to be incurred at a reduced level for the remainder of 2020 as a result of COVID-19.
•Goodwill impairment charges decreased $34.6 million, quarter over quarter, due to the FTFM goodwill impairment charge of $34.6 million in the second quarter of 2019.
•Restructuring—net was $0.2 million unfavorable quarter over quarter, due primarily to net losses on equipment sales. Refer to Note 14, Restructuring, for additional details.
23
Total Other Expenses (Income)
Investments, for more information on PSI. These items were partially offset by a $1.9 million decrease in interest income as interest rates have declined quarter over quarter.
Segment ContributionsIncome Tax Expense
Our provision for income taxes increased $4.8 million, approximately 42%, in the second quarter of 2020 compared to Results ofthe same quarter in 2019 due to higher taxable income. The effective income tax rate was 25.8% for the three months ended June 30, 2020 compared to 24.8% for the same quarter last year.
Revenues and Income from Operations by Segment
The following tables summarize revenue and earningsincome from operations by segment:
| | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | |
Revenues by Segment (in millions) | | 2020 | | 2019 |
Truckload | | $ | 451.1 | | | $ | 534.9 | |
Intermodal | | 219.0 | | | 259.8 | |
Logistics | | 230.9 | | | 227.0 | |
Other | | 89.8 | | | 95.8 | |
Fuel surcharge | | 68.7 | | | 124.2 | |
Inter-segment eliminations | | (26.7) | | | (29.0) | |
Operating revenues | | $ | 1,032.8 | | | $ | 1,212.7 | |
| | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | |
Income from Operations by Segment (in millions) | | 2020 | | 2019 |
Truckload | | $ | 40.5 | | | $ | 7.9 | |
Intermodal | | 11.0 | | | 30.5 | |
Logistics | | 8.2 | | | 9.2 | |
Other | | 3.7 | | | 1.6 | |
Income from operations | | 63.4 | | | 49.2 | |
Adjustments: | | | | |
Goodwill impairment | | — | | | 34.6 | |
Restructuring—net | | 0.2 | | | — | |
Adjusted income from operations | | $ | 63.6 | | | $ | 83.8 | |
We monitor and analyze a number of KPIs in order to manage our business and evaluate our financial and operating performance. Below are our KPIs by segment.
|
| | | | | | | | |
| | Three Months Ended June 30, |
Revenues by Segment (in millions) | | 2019 | | 2018 |
Truckload | | $ | 534.9 |
| | $ | 567.6 |
|
Intermodal | | 259.8 |
| | 231.7 |
|
Logistics | | 227.0 |
| | 250.7 |
|
Other | | 95.8 |
| | 79.0 |
|
Fuel surcharge | | 124.2 |
| | 133.1 |
|
Inter-segment eliminations | | (29.0 | ) | | (25.8 | ) |
Operating revenues | | $ | 1,212.7 |
| | $ | 1,236.3 |
|
|
| | | | | | | | |
| | Three Months Ended June 30, |
Income (Loss) from Operations by Segment (in millions) | | 2019 | | 2018 |
Truckload | | $ | 7.9 |
| | $ | 61.2 |
|
Intermodal | | 30.5 |
| | 32.4 |
|
Logistics | | 9.2 |
| | 10.4 |
|
Other | | 1.6 |
| | (12.3 | ) |
Income from operations | | 49.2 |
| | 91.7 |
|
Adjustments: | | | | |
Litigation | | — |
| | 5.8 |
|
Goodwill impairment | | 34.6 |
| | — |
|
Adjusted income from operations | | $ | 83.8 |
| | $ | 97.5 |
|
Truckload
The following table presents our key performance indicatorsthe KPIs for our Truckload segment for the periods indicated, consistent with how revenues and expenses are reported internally for segment purposes. Prior to 2020, we reported KPIs within our Truckload segment by quadrant. Going forward, KPIs will be reported for our dedicated and network operations only. This presentation change does not impact KPIs at the segment level. Descriptions of the four quadrantstwo operations that make up our Truckload segment are as follows:
| |
• | Dedicated standard•Dedicated - Transportation services with equipment devoted to customers under long-term contracts. •Network - Transportation services with equipment devoted to customers under long-term contracts utilizing standard dry van trailing equipment. |
| |
• | Dedicated specialty - Transportation services with devoted equipment to customers under long-term contracts utilizing bulk, temperature controlled, flatbed, straight truck and other specialty equipment.
|
| |
• | For-hire standard - Transportation services of one-way shipments utilizing standard dry van trailing equipment.
|
| |
• | For-hire specialty - Transportation services of one-way shipments utilizing bulk, temperature controlled, flatbed, straight truck and other specialty equipment.
|
|
| | | | | | | |
| Three Months Ended June 30, |
| 2019 | | 2018 |
Dedicated standard | | | |
Revenues (excluding fuel surcharge) (1) | $ | 84.2 |
| | $ | 80.0 |
|
Average trucks (2) (3) | 1,818 |
| | 1,597 |
|
Revenue per truck per week (4) | $ | 3,609 |
| | $ | 3,897 |
|
Dedicated specialty (7) | | | |
Revenues (excluding fuel surcharge) (1) | $ | 93.4 |
| | $ | 102.2 |
|
Average trucks (2) (3) | 2,173 |
| | 2,308 |
|
Revenue per truck per week (4) | $ | 3,347 |
| | $ | 3,443 |
|
For-hire standard | | | |
Revenues (excluding fuel surcharge) (1) | $ | 287.6 |
| | $ | 303.9 |
|
Average trucks (2) (3) | 6,154 |
| | 6,034 |
|
Revenue per truck per week (4) | $ | 3,640 |
| | $ | 3,917 |
|
For-hire specialty (7) | | | |
Revenues (excluding fuel surcharge) (1) | $ | 69.7 |
| | $ | 82.6 |
|
Average trucks (2) (3) | 1,461 |
| | 1,557 |
|
Revenue per truck per week (4) | $ | 3,716 |
| | $ | 4,125 |
|
Total Truckload | | | |
Revenues (excluding fuel surcharge) (6) | $ | 534.9 |
| | $ | 567.6 |
|
Average trucks (2) (3) | 11,606 |
| | 11,496 |
|
Revenue per truck per week (4) | $ | 3,590 |
| | $ | 3,847 |
|
Average company trucks (3) | 8,728 |
| | 8,789 |
|
Average owner-operator trucks (3) | 2,878 |
| | 2,707 |
|
Trailers | 37,409 |
| | 38,089 |
|
Operating ratio (5) | 98.5 | % | | 89.2 | % |
- Transportation services of one-way shipments, formerly called for-hire. | |
(1) | Revenues (excluding fuel surcharge), in millions, exclude revenue in-transit. |
| |
(2) | Includes company trucks and owner-operator trucks. |
| |
(3) | Calculated based on beginning and end of month counts and represents the average number of trucks available to haul freight over the specified timeframe. |
| |
(4) | Calculated excluding fuel surcharge and revenue in-transit, consistent with how revenue is reported internally for segment purposes, using weighted workdays. |
| |
(5) | Calculated as segment operating expenses divided by segment revenues (excluding fuel surcharge) including revenue in-transit and related expenses at the operating segment level. |
| |
(6) | Revenues (excluding fuel surcharge), in millions, include revenue in-transit at the operating segment level, and therefore does not sum with amounts presented above. |
| |
(7) | 2018 key performance indicators for dedicated specialty and for-hire specialty differ from those previously reported for the three months ended June 30, 2018 due to the reclassification of a customer between quadrants. |
| | | | | | | | | | | |
| Three Months Ended June 30, | | |
| 2020 | | 2019 |
Dedicated | | | |
Revenues (excluding fuel surcharge) (1) | $ | 172.2 | | | $ | 177.7 | |
Average trucks (2) (3) | 3,891 | | | 3,991 | |
Revenue per truck per week (4) | $ | 3,448 | | | $ | 3,467 | |
Network | | | |
Revenues (excluding fuel surcharge) (1) | $ | 279.3 | | | $ | 357.3 | |
Average trucks (2) (3) | 6,350 | | | 7,615 | |
Revenue per truck per week (4) | $ | 3,426 | | | $ | 3,654 | |
Total Truckload | | | |
Revenues (excluding fuel surcharge) (5) | $ | 451.1 | | | $ | 534.9 | |
Average trucks (2) (3) | 10,241 | | | 11,606 | |
Revenue per truck per week (4) | $ | 3,434 | | | $ | 3,590 | |
Average company trucks (3) | 7,366 | | | 8,728 | |
Average owner-operator trucks (3) | 2,875 | | | 2,878 | |
Trailers | 36,141 | | | 37,409 | |
Operating ratio (6) | 91.0 | % | | 98.5 | % |
(1)Revenues (excluding fuel surcharge), in millions, exclude revenue in transit.
(2)Includes company trucks and owner-operator trucks.
(3)Calculated based on beginning and end of month counts and represents the average number of trucks available to haul freight over the specified timeframe.
(4)Calculated excluding fuel surcharge and revenue in transit, consistent with how revenue is reported internally for segment purposes, using weighted workdays.
(5)Revenues (excluding fuel surcharge), in millions, include revenue in transit at the operating segment level, and therefore does not sum with amounts presented above.
(6)Calculated as segment operating expenses divided by segment revenues (excluding fuel surcharge) including revenue in transit and related expenses at the operating segment level.
Truckload revenues (excluding fuel surcharge) decreased $32.7$83.8 million, approximately 6%16%, in the second quarter of 20192020 compared to the same quarter in 2018. A2019 primarily a result of the shutdown of our FTFM service offering in August 2019 which generated $31.8 million of revenues in the second quarter of 2019, as well as a decline in both volume and price in the remaining dedicated and network business. The decline in volume of 7% was partially offset by a 1% increase in price. Decreased volume was the result of a difficult demand environment and drove lower productivity. The increase in price compared to the second quarter of 20182019 was duedriven by degradation in market conditions at the beginning of the quarter as non-essential retail customers shut down but improved as the quarter progressed. A softer freight market compared to rate renewals, partially offset by fewer premium and promotionalthe second quarter of 2019 drove a decline in price of 3% which also was the main contributor of the $156, or 4%, decrease in revenue opportunities. Revenue per truck per week decreased $257, or 7%, quarter over quarter as a result of lower productivity driven primarily by replacement trucks exceeding related dispositions, as well as the timing of dedicated start-ups.quarter.
Truckload income from operations decreased $53.3increased $32.6 million approximately 87%,in the second quarter of 2020 compared to the same quarter in 2019, due mainly to the $34.6 million FTFM goodwill impairment recorded in 2019 and the benefit associated with the FTFM shutdown, as FTFM's loss from operations in the second quarter of 2019 compared to the same quarter in 2018 due mostly to the $34.6 million goodwill impairment and lower operating results within FTFM. FTFM's operating losses exceeded the second quarter of 2018 by $9.9was $13.1 million. A decline in Truckload volume of 7% also contributed toWhile revenue decreased period over period as cited above, the decrease in income from operations but was partiallymore than offset by a reductionlower fuel and purchased transportation costs, in addition to improved cost management related to driver related costs compared to the second quarter of 2018.recruiting and maintenance.
Intermodal
The following table presents our key performance indicatorsthe KPIs for our Intermodal segment for the periods indicated.
|
| | | | | | | |
| Three Months Ended June 30, |
| 2019 | | 2018 |
Orders (1) | 114,272 |
| | 111,700 |
|
Containers | 22,788 |
| | 19,484 |
|
Trucks (2) | 1,539 |
| | 1,371 |
|
Revenue per order (3) | $ | 2,266 |
| | $ | 2,041 |
|
Operating ratio (4) | 88.2 | % | | 86.0 | % |
| |
(1) | Based on delivered orders. |
| |
(2) | Includes company trucks and owner-operator trucks at the end of the period. |
| |
(3) | Calculated excluding fuel surcharge and revenue in-transit, consistent with how revenue is reported internally for segment purposes. |
| |
(4) | Calculated as segment operating expenses divided by segment revenues (excluding fuel surcharge) including revenue in-transit and related expenses at the operating segment level. |
In support of a few key customers, we provide dray-only service utilizing our drivers and chassis. The length of haul and revenue characteristics of dray-only service are much different than rail. Prior to 2020, we reported orders and revenue per order inclusive of dray-only activity. Due to increased dray-only activity, orders and revenue per order presented below for both 2020 and 2019 exclude dray-only shipments to not distort period over period comparisons in our core-rail KPIs.
| | | | | | | | | | | |
| Three Months Ended June 30, | | |
| 2020 | | 2019 |
Orders (1) | 98,362 | | | 113,007 | |
Containers | 21,172 | | | 22,788 | |
Trucks (2) | 1,508 | | | 1,539 | |
Revenue per order (3) | $ | 2,145 | | | $ | 2,288 | |
Operating ratio (4) | 95.0 | % | | 88.2 | % |
(1)Based on delivered rail orders.
(2)Includes company trucks and owner-operator trucks at the end of the period.
(3)Calculated using rail revenues excluding fuel surcharge and revenue in transit, consistent with how revenue is reported internally for segment purposes.
(4)Calculated as segment operating expenses divided by segment revenues (excluding fuel surcharge) including revenue in transit and related expenses at the operating segment level.
Intermodal revenues (excluding fuel surcharge) increased $28.1decreased $40.8 million, approximately 12%16%, in the second quarter of 20192020 compared to the same quarter in 2018. This increase was2019. Network demand disruption, due to a 11% increase inweakened Asia import volumes, combined with the prolonged shutdown of non-essential retail customers impacted both orders and revenue per order within our Intermodal segment. Orders decreased 13% while revenue per order decreased $143, or 6%, due in part to 2018 contract carry-overlower trans-continental volume and 2019 contract renewals, increasedhigher mix of shorter length of haul andvolumes within the East, as well as a 2% increasedecline in orders.price.
Intermodal income from operations decreased $1.9$19.5 million, approximately 6%64%, in the second quarter of 20192020 compared to the same quarter in 2018. Volume2019. Contributing to this decrease was the revenue reduction, as explained above, as well as increased rail costs and revenue per order improvements were offset by increases in purchased transportationhigher equipment dispositions and rail ramp storage costs. Asset utilization was also unfavorable comparedimpairments due to the same quarter in 2018.used equipment market conditions.
Logistics
The following table presents our key performance indicatorsthe KPI for our Logistics segment for the periods indicated.
| | | | | | | | | | | |
| Three Months Ended June 30, | | |
| 2020 | | 2019 |
Operating ratio (1) | 96.4 | % | | 96.0 | % |
| | | |
|
| | | | | |
| Three Months Ended June 30, |
| 2019 | | 2018 |
Operating ratio (1) | 96.0 | % | | 95.9 | % |
Brokerage revenues as a percentage of Logistics revenues (2) | 87.5 | % | | 78.9 | % |
(1)Calculated as segment operating expenses divided by segment revenues (excluding fuel surcharge) including revenue in transit and related expenses at the operating segment level. | |
(1) | Calculated as segment operating expenses divided by segment revenues (excluding fuel surcharge) including revenue in-transit and related expenses at the operating segment level. |
| |
(2) | Revenues (excluding fuel surcharge), in millions, including revenue in-transit. |
Logistics revenues (excluding fuel surcharge) decreased $23.7increased $3.9 million, approximately 9%2%, in the second quarter of 20192020 compared to the same quarter in 2018. This decrease was2019, primarily due to oneas a result of the Company's import/export customers insourcing their warehouse management function in April 2019. Despite volume growth, partially offset by a decrease in revenue per order related to rate compression.
Logistics income from operations decreased $1.0 million, approximately 11%, in the second quarter of 15%2020 compared to the same quarter in 2018, brokerage revenues increased only modestly due to a compression in rates, particularly in the spot market.
Logistics income from operations decreased $1.2 million, approximately 12%, in the second quarter of 2019, compared to the same quarter in 2018, primarily due to compressed net revenue in brokerage, as well as reduced volumes within our import/export and supply chain management businesses.revenue.
Other
Included in
Income from operations within Other was income from operations of $1.6$3.7 million in the second quarter of 2019,2020, compared to a lossincome of $12.3$1.6 million in the same quarter in 2018.2019. The $13.9 million change resulted from the $5.8 million settlement of a lawsuit that challenged Washington State labor law compliance in 2018, a decrease in performance-based incentive compensation, and a $2.1 million increase resulted primarily from a $2.3 million reduction in healthcare costs, partially offset by a decrease in income from operations from our leasing business driven by increasedlower lease activity.
Other Income (Expense)
Other expense decreased $0.1 million, approximately 3%, in the second quarter of 2019 compared to the same quarter in 2018 due primarily to a $1.7 million increase in interest income and a $1.7 million decrease in net foreign currency losses, offset by the 2018 recognition of a $2.5 million pre-tax gain related to our ownership interest in Platform Science, Inc. and a $0.8 million increase in interest expense. See Note 5, Investments, for more information on Platform Science.
Income Tax Expense
Our provision for income taxes decreased $11.1 million, approximately 49%, in the second quarter of 2019 compared to the same quarter in 2018 due to lower taxable income. The effective income tax rate was 24.8% for the three months ended June 30, 2019 compared to 25.5% for the same period last year.
Six Months Ended June 30, 20192020 Compared to Six Months Ended June 30, 20182019
Enterprise Results Summary
Net Income
NetEnterprise net income decreased $42.0increased $18.9 million, approximately 37%26%, in the six months ended June 30, 20192020 compared to the same period in 2018,2019, primarily due to the $34.6 million FTFM goodwill impairment recorded in 2019; the benefit associated with the FTFM shutdown, as FTFM's loss from operations in the first half of 2019 for $34.6was $25.2 million; and an $8.8 million before taxes. In addition, thegain on our ownership interest in PSI. This was partially offset by a decline in Intermodal and Truckload segment's freight volume declinedvolumes, primarily a result of COVID-19 market disruptions; a reduction in 2019price across all of our service offerings; $10.4 million related to equipment dispositions and impairments due to softerused equipment market demand. conditions; and an increase in income taxes related to higher taxable income. In the first half of 2020, we recognized $7.7 million of net equipment losses and impairment charges compared to $2.7 million of net equipment gains and impairment charges in the first half of 2019.
Adjusted net income decreased $20.5$7.6 million, approximately 17%8%.
Components of Enterprise Net Income
Enterprise Revenues
Enterprise operating revenues increased $31.5decreased $254.9 million, approximately 1%11%, in the six months ended June 30, 20192020 compared to the same period in 2018.2019.
Factors contributing to the increase in revenuesdecrease were as follows:
•a $63.8$146.2 million increasedecrease in Truckload segment revenues (excluding fuel surcharge) resulting from the shutdown of our FTFM service offering in August 2019 which generated $63.4 million of revenues in the first half of 2019, as well as a decrease in both Truckload volume and price largely attributed to the impact of COVID-19 on market conditions;
•a $64.3 million decrease in fuel surcharge revenues primarily resulting from a 13% decline in average diesel price per gallon in the U.S. as reported by the Department of Energy, a decline in Intermodal and Truckload volumes, and a $10.5 million reduction related to the FTFM shutdown; and
•a $40.4 million decrease in Intermodal segment revenues (excluding fuel surcharge) primarily due to improved revenue per order and an increase in order volume and
a $38.9 million increase in revenues from equipment sales by our leasing business under sales-type leases.
The above factors were partially offset by:
a $51.4 million decrease in Truckload revenues (excluding fuel surcharge)both volume and price resulting primarily from reduced Truckload volume due to lower market demand,COVID-19 induced network disruptions, shorter length of haul, and freight mix.
a $14.9 million decrease in fuel surcharge revenues primarily related to decreased Truckload volumes, and
a $1.0 million decrease in Logistics revenues (excluding fuel surcharge) primarily due to one of the Company's import/export customers insourcing their warehouse management function in April 2019, partially offset by a 17% increase in brokerage volumes.
Enterprise revenues (excluding fuel surcharge) increased $46.4decreased $190.6 million, approximately 2%9%.
Enterprise Income from Operations and Operating Ratio
Enterprise income from operations decreased $58.6increased $17.6 million, approximately 37%17%, in the six months ended June 30, 20192020 compared to the same period in 2018,2019, primarily due to the $34.6 million FTFM goodwill impairment recorded in 2019 and anthe benefit associated with the FTFM shutdown, as FTFM's loss from operations in the first half of 2019 was $25.2 million. A decrease in fuel costs and continued cost savings attributable to a reduction in headcount, lower healthcare costs, and favorable driver onboarding and maintenance expenses also contributed to the increase in operating losses, as FTFM operating losses exceeded prior year by $15.6 million. Lower market demand negatively impacted Truckload profitability, but decreasesincome from operations. Those increases were partially offset by reduced performance-based incentive compensationa reduction in Intermodal and Company benefits.Truckload freight volumes primarily due to COVID-19 market disruptions, lower price across all of our service offerings, $10.4 million from the combination of equipment dispositions and impairments
due to used equipment market conditions, and incremental costs associated with facility deep cleaning, personal protective equipment purchases, and other proactive measures taken as a result of COVID-19.
Adjusted income from operations decreased $29.8$18.0 million, approximately 18%13%.
Enterprise operating ratio weakenedimproved on both a GAAP basis andbut weakened on an adjusted basis. Our operating ratio can be negatively impacted when our higher operating ratio, less asset-focused Logistics segment grows faster than our lower operating ratio, capital-intensive Truckload segment.
Enterprise Operating Expenses
Key operating expense fluctuations are described below.
•Purchased transportation costs increased $66.4decreased $60.4 million, or 7%6%, period over period. Order volume growthperiod, primarily due to a decrease in our Intermodal and Logistics segments of 3%Truckload volumes, reduced owner-operator pay and 17%, respectively, combined withthird party carrier costs within Truckload resulting from business mix and rate compression due to market conditions, and a $19.4 million reduction in purchased transportation costs related to the FTFM shutdown. This was partially offset by an increase in various Intermodal third-partythird party carrier costs including rail, resulted in higher purchased transportation. This was offset by a decrease in purchased transportation per order within our Logistics segment based on additional carrier capacity in 2019 which leddue to the compression of carrier rates.volume growth.
•Salaries, wages, and benefits decreased $26.7$87.1 million, or 4%15%, period over period, largely due to the elimination of salaries, wages, and benefitsbenefit associated with the FTFM shutdown and warehouse management operations insourced by an import/export customer in April 2019, which will continue for the remainder of the year. Lower performance-based incentive compensation and Company benefit costs, as well as various cost savings initiatives,headcount reductions across the organization. An $8.3 million reduction in healthcare costs primarily due to favorable claims experience and fewer plan participants, as well as a decrease in workers' compensation expense of $2.8 million, also contributed to the decrease. Salaries, wages, and benefits decreased 1% period over period on a percentage of revenues basis.
•Fuel and fuel taxes for our company trucks decreased $21.9$48.0 million, or 13%32%, period over period, driven by a 7% decrease in company driver miles and a decrease in cost per gallon. The decrease ingallon, less company driver miles was partially offset by increased owner-operator miles, which do not impact companywithin our Truckload segment, and an $8.8 million reduction in fuel costs.and fuel taxes attributable to the FTFM shutdown. A significant portion of fuel costs are recovered through our fuel surcharge programs.
•Depreciation and amortization increased $4.7decreased $6.2 million, or 3%4%, period over period, primarily due to replacement tractors to achieve a younger age of fleet and our investment in chassis and containers to support growth in our Intermodal segment.driven by the FTFM shutdown.
•Operating supplies and expenses increased $38.5decreased $28.1 million, or 16%10%, period over period. The increase was mainlyperiod, driven by a $7.7 million decrease in facility, utility, and other costs primarily due to an increasetemporary facility closures associated with COVID-19 and other cost savings initiatives, a $6.5 million reduction in temporary worker pay due to insourcing by one of our import/export customers, a $6.2 million decline in cost of goods sold due to a decrease in equipment sales under sales-type leases by our leasing business, resulting in higher cost of goods sold of $34.0 million and increased software subscription costs and Intermodal rail yard ramp storage expenses. Increases in the above costs were offset by a combined $4.9 million decrease in temporary worker pay due to insourcing of one of our import/export customers in April 2019 and reducedlower maintenance and parts spend attributable to lessmilder weather conditions, fewer company driver miles, and younger agebetter cost management. We experienced a reduction in a variety of fleet.other operating-related expenses, including equipment rentals, facility expenses, and operating taxes and licenses, that were individually immaterial. These decreases were partially offset by a $6.8 million change in equipment dispositions and a $3.6 million increase in impairment on assets held for sale due to used equipment market conditions. In the first half of 2020, we recorded $3.8 million of net equipment losses compared to $3.0 million of net equipment gains in the first half of 2019.
•Insurance and related expenses increased $8.3$3.9 million, or 18%7%, period over period. The increase was predominately due to an increase in the severity of auto losses, as well as additionalinsurance premiums, partially offset by a reduction in cargo and collision expense associated with weather related accidents.losses.
•Other general expenses decreased $13.8$11.0 million, or 18%17%, period over period, as a result of a $5.8 million decrease in litigation costs, decreasedreduced driver recruiting and training costs due to lower company driver turnover and cost savings initiatives, as well as a reduction in travel expenses resulting from Company enforced travel bans related to COVID-19. Additional costs were incurred in the driver recruiting and training space to safely onboard new drivers during COVID-19; however, these costs were more than offset by savings from lower professional service feescompany driver turnover and fewer hires. We expect our travel expenses to continue to be incurred at a reduced level for the remainder of $3.52020 as a result of COVID-19.
•Goodwill impairment charges decreased $34.6 million, drivenperiod over period, due to the FTFM goodwill impairment charge of $34.6 million in the second quarter of 2019.
•Restructuring—net was $1.0 million favorable, period over period, due to net gains on equipment sales and bad debt recoveries, partially offset by higher capitalization of IT costsimpairment charges associated with the FTFM shutdown in 2019. Refer to Note 14, Restructuring, for additional details.
Total Other Expenses (Income)
Other income increased $8.1 million, approximately 150%, in the six months ended June 30, 2020 compared to the same period in 2019, primarily from a $8.8 million pre-tax gain recognized on our ownership interest in PSI. See Note 6, Investments, for more information on PSI. Interest activity remained fairly constant period over period as a $2.3 million decrease in interest income, attributed to a decline in interest rates, was partially offset by a $2.2 million decrease in interest expense.
Income Tax Expense
Segment Contributions
Our provision for income taxes increased $6.8 million, approximately 28%, in the six months ended June 30, 2020 compared to Results ofthe same period in 2019 due to higher taxable income. The effective income tax rate was 25.4% for the six months ended June 30, 2020 compared to 25.1% for the same period last year.
Revenues and Income (Loss) from Operations by Segment
The following tables summarize revenue and earningsincome (loss) from operations by segment:segment.
| | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | |
Revenues by Segment (in millions) | | 2020 | | 2019 |
Truckload | | $ | 920.5 | | | $ | 1,066.7 | |
Intermodal | | 457.0 | | | 497.4 | |
Logistics | | 470.5 | | | 470.9 | |
Other | | 189.2 | | | 195.7 | |
Fuel surcharge | | 171.7 | | | 236.0 | |
Inter-segment eliminations | | (57.0) | | | (59.9) | |
Operating revenues | | $ | 2,151.9 | | | $ | 2,406.8 | |
| | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | |
Income (Loss) from Operations by Segment (in millions) | | 2020 | | 2019 |
Truckload | | $ | 77.1 | | | $ | 31.1 | |
Intermodal | | 27.3 | | | 50.4 | |
Logistics | | 12.4 | | | 19.5 | |
Other | | 1.5 | | | (0.3) | |
Income from operations | | 118.3 | | | 100.7 | |
Adjustments: | | | | |
Goodwill impairment | | — | | | 34.6 | |
Restructuring—net | | (1.0) | | | — | |
Adjusted income from operations | | $ | 117.3 | | | $ | 135.3 | |
27
|
| | | | | | | | | |
| | Six Months Ended June 30, |
Revenues by Segment (in millions) | | 2019 | | 2018 |
Truckload | | $ | 1,066.7 |
| | $ | 1,118.1 |
|
Intermodal | | 497.4 |
| | 433.6 |
|
Logistics | | 470.9 |
| | 471.9 |
|
Other | | 195.7 |
| | 153.1 |
|
Fuel surcharge | | 236.0 |
| | 250.9 |
|
Inter-segment eliminations | | (59.9 | ) | | (52.3 | ) |
Operating revenues | | $ | 2,406.8 |
| | $ | 2,375.3 |
|
|
| | | | | | | | | |
| | Six Months Ended June 30, |
Income (Loss) from Operations by Segment (in millions) | | 2019 | | 2018 |
Truckload | | $ | 31.1 |
| | $ | 107.8 |
|
Intermodal | | 50.4 |
| | 54.6 |
|
Logistics | | 19.5 |
| | 18.2 |
|
Other | | (0.3 | ) | | (21.3 | ) |
Income from operations | | 100.7 |
| | 159.3 |
|
Adjustments: | | | | |
Litigation | | — |
| | 5.8 |
|
Goodwill impairment | | 34.6 |
| | — |
|
Adjusted income from operations | | $ | 135.3 |
| | $ | 165.1 |
|
We monitor and analyze a number of KPIs in order to manage our business and evaluate our financial and operating performance. Below are our KPIs by segment.
Truckload
The following table presents our key performance indicatorsthe KPIs for our Truckload segment for the periods indicated, consistent with how revenues and expenses are reported internally for segment purposes. Prior to 2020, we reported KPIs within our Truckload segment by quadrant. Going forward, KPIs will be reported for our dedicated and network operations only. This presentation change does not impact KPIs at the segment level. Descriptions of the four quadrantstwo operations that make up our Truckload segment are as follows:
| |
• | Dedicated standard•Dedicated - Transportation services with equipment devoted to customers under long-term contracts. •Network - Transportation services with equipment devoted to customers under long-term contracts utilizing standard dry van trailing equipment. |
| |
• | Dedicated specialty - Transportation services with devoted equipment to customers under long-term contracts utilizing bulk, temperature controlled, flatbed, straight truck and other specialty equipment.
|
| |
• | For-hire standard - Transportation services of one-way shipments utilizing standard dry van trailing equipment.
|
| |
• | For-hire specialty - Transportation services of one-way shipments utilizing bulk, temperature controlled, flatbed, straight truck and other specialty equipment.
|
|
| | | | | | | |
| Six Months Ended June 30, |
| 2019 | | 2018 |
Dedicated standard | | | |
Revenues (excluding fuel surcharge) (1) | $ | 168.5 |
| | $ | 156.5 |
|
Average trucks (2) (3) | 1,808 |
| | 1,613 |
|
Revenue per truck per week (4) | $ | 3,648 |
| | $ | 3,790 |
|
Dedicated specialty (7) | | | |
Revenues (excluding fuel surcharge) (1) | $ | 188.5 |
| | $ | 208.6 |
|
Average trucks (2) (3) | 2,152 |
| | 2,359 |
|
Revenue per truck per week (4) | $ | 3,430 |
| | $ | 3,454 |
|
For-hire standard | | | |
Revenues (excluding fuel surcharge) (1) | $ | 568.5 |
| | $ | 594.9 |
|
Average trucks (2) (3) | 6,125 |
| | 6,090 |
|
Revenue per truck per week (4) | $ | 3,634 |
| | $ | 3,816 |
|
For-hire specialty (7) | | | |
Revenues (excluding fuel surcharge) (1) | $ | 139.5 |
| | $ | 160.0 |
|
Average trucks (2) (3) | 1,488 |
| | 1,564 |
|
Revenue per truck per week (4) | $ | 3,669 |
| | $ | 3,998 |
|
Total Truckload | | | |
Revenues (excluding fuel surcharge) (6) | $ | 1,066.7 |
| | $ | 1,118.1 |
|
Average trucks (2) (3) | 11,573 |
| | 11,626 |
|
Revenue per truck per week (4) | $ | 3,603 |
| | $ | 3,763 |
|
Average company trucks (3) | 8,706 |
| | 8,911 |
|
Average owner-operator trucks (3) | 2,867 |
| | 2,715 |
|
Trailers | 37,409 |
| | 38,089 |
|
Operating ratio (5) | 97.1 | % | | 90.4 | % |
- Transportation services of one-way shipments, formerly called for-hire. | |
(1) | Revenues (excluding fuel surcharge), in millions, exclude revenue in-transit. |
| |
(2) | Includes company trucks and owner-operator trucks. |
| |
(3) | Calculated based on beginning and end of month counts and represents the average number of trucks available to haul freight over the specified timeframe. |
| |
(4) | Calculated excluding fuel surcharge and revenue in-transit, consistent with how revenue is reported internally for segment purposes, using weighted workdays. |
| |
(5) | Calculated as segment operating expenses divided by segment revenues (excluding fuel surcharge) including revenue in-transit and related expenses at the operating segment level. |
| |
(6) | Revenues (excluding fuel surcharge), in millions, include revenue in-transit at the operating segment level, and therefore does not sum with amounts presented above. |
| |
(7) | 2018 key performance indicators for dedicated specialty and for-hire specialty differ from those previously reported for the six months ended June 30, 2018 due to the reclassification of a customer between quadrants. |
| | | | | | | | | | | |
| Six Months Ended June 30, | | |
| 2020 | | 2019 |
Dedicated | | | |
Revenues (excluding fuel surcharge) (1) | $ | 348.3 | | | $ | 357.0 | |
Average trucks (2) (3) | 3,898 | | | 3,960 | |
Revenue per truck per week (4) | $ | 3,475 | | | $ | 3,529 | |
Network | | | |
Revenues (excluding fuel surcharge) (1) | $ | 571.1 | | | $ | 708.0 | |
Average trucks (2) (3) | 6,325 | | | 7,613 | |
Revenue per truck per week (4) | $ | 3,511 | | | $ | 3,641 | |
Total Truckload | | | |
Revenues (excluding fuel surcharge) (5) | $ | 920.5 | | | $ | 1,066.7 | |
Average trucks (2) (3) | 10,223 | | | 11,573 | |
Revenue per truck per week (4) | $ | 3,497 | | | $ | 3,603 | |
Average company trucks (3) | 7,339 | | | 8,706 | |
Average owner-operator trucks (3) | 2,884 | | | 2,867 | |
Trailers | 36,141 | | | 37,409 | |
Operating ratio (6) | 91.6 | % | | 97.1 | % |
(1)Revenues (excluding fuel surcharge), in millions, exclude revenue in transit.
30(2)Includes company trucks and owner-operator trucks.
(4)Calculated excluding fuel surcharge and revenue in transit, consistent with how revenue is reported internally for segment purposes, using weighted workdays.
(5)Revenues (excluding fuel surcharge), in millions, include revenue in transit at the operating segment level, and therefore does not sum with amounts presented above.
(6)Calculated as segment operating expenses divided by segment revenues (excluding fuel surcharge) including revenue in transit and related expenses at the operating segment level.
Truckload revenues (excluding fuel surcharge) decreased $51.4$146.2 million, approximately 5%14%, in the six months ended June 30, 20192020 compared to the same period in 2018. A decline2019, primarily due to the shutdown of our FTFM service offering in August 2019 which generated $63.4 million of revenues in the first half of 2019. Both volume of 8% was partially offset byand price declined 4% from the same period in 2019 as a 3% increase in price. Decreased volume was the result of a difficult demand environment and drove lower productivity. The increaseearly 2020 soft market conditions being compounded by the shutdown of non-essential businesses in price period over period was dueresponse to contract carry-over and 2019 rate renewals, partially offset by fewer promotional and premium revenue opportunities.COVID-19. Revenue per truck per week decreased $160,$106, or 4%3%, period over period as a result of lower price was partially offset by productivity driven primarily by replacement trucks exceeding related dispositions, as well as lower freight volumes.improvements.
Truckload income from operations decreased $76.7increased $46.0 million, approximately 71%148%, in the six months ended June 30, 20192020 compared to the same period in 2018, primarily2019, due mainly to the $34.6 million FTFM goodwill impairment recorded in 2019 and an additional $15.6 millionthe benefit associated with the FTFM shutdown, as FTFM's loss from operations in operating losses within FTFM. Lower volumes, as discussed above, also contributedthe first half of 2019 was $25.2 million. Also contributing to the increase in income from operations were lower fuel costs and improved cost management related to driver recruiting, maintenance, and safety, which more than offset the revenue decrease but were partially offset by a reduction in driver related costs.noted above.
Intermodal
The following table presents our key performance indicatorsthe KPIs for our intermodalIntermodal segment for the periods indicated.
|
| | | | | | | |
| Six Months Ended June 30, |
| 2019 | | 2018 |
Orders (1) | 218,784 |
| | 213,078 |
|
Containers | 22,788 |
| | 19,484 |
|
Trucks (2) | 1,539 |
| | 1,371 |
|
Revenue per order (3) | $ | 2,257 |
| | $ | 2,013 |
|
Operating ratio (4) | 89.9 | % | | 87.4 | % |
| |
(1) | Based on delivered orders. |
| |
(2) | Includes company trucks and owner-operator trucks at the end of the period. |
| |
(3) | Calculated excluding fuel surcharge and revenue in-transit, consistent with how revenue is reported internally for segment purposes. |
| |
(4) | Calculated as segment operating expenses divided by segment revenues (excluding fuel surcharge) including revenue in-transit and related expenses at the operating segment level. |
In support of a few key customers, we provide dray-only service utilizing our drivers and chassis. The length of haul and revenue characteristics of dray-only service are much different than rail. Prior to 2020, we reported orders and revenue per order inclusive of dray-only activity. Due to an increase in dray-only activity, orders and revenue per order presented below for both 2020 and 2019 exclude dray-only shipments to not distort period over period comparisons in our core-rail KPIs.
| | | | | | | | | | | |
| Six Months Ended June 30, | | |
| 2020 | | 2019 |
Orders (1) | 204,949 | | | 216,283 | |
Containers | 21,172 | | | 22,788 | |
Trucks (2) | 1,508 | | | 1,539 | |
Revenue per order (3) | $ | 2,160 | | | $ | 2,280 | |
Operating ratio (4) | 94.0 | % | | 89.9 | % |
(1)Based on delivered rail orders.
(2)Includes company trucks and owner-operator trucks at the end of the period.
(3)Calculated using rail revenues excluding fuel surcharge and revenue in transit, consistent with how revenue is reported internally for segment purposes.
(4)Calculated as segment operating expenses divided by segment revenues (excluding fuel surcharge) including revenue in transit and related expenses at the operating segment level.
Intermodal revenues (excluding fuel surcharge) increased $63.8 million, approximately 15%, in the six months ended June 30, 2019 compared to the same period in 2018. The increase was driven by a 12% increase in revenue per order, increased length of haul, and a 3% increase in orders.
Intermodal income from operations decreased $4.2$40.4 million, approximately 8%, in the six months ended June 30, 20192020 compared to the same period in 2018. Increased volume2019. The decrease was driven by a 5% decrease in orders due to network demand disruptions related to COVID-19, partially offset by growth in the East and revenueMexico. Revenue per order noted above were more than offsetdecreased 5% driven primarily by higher purchased transportation, equipment depreciation, and rail ramp storage costs. Asset utilization was also unfavorablea decline in length of haul.
Intermodal income from operations decreased $23.1 million, approximately 46%, in the six months ended June 30, 2020 compared to the same period of 2018.in 2019. Revenue declines coupled with increased rail costs and higher equipment dispositions and impairments due to used equipment market conditions, drove the decline in income from operations.
Logistics
The following table presents our key performance indicatorsthe KPI for our logisticsLogistics segment for the periods indicated.
| | | | | | | | | | | |
| Six Months Ended June 30, | | |
| 2020 | | 2019 |
Operating ratio (1) | 97.4 | % | | 95.9 | % |
|
| | | | | |
| Six Months Ended June 30, |
| 2019 | | 2018 |
Operating ratio (1) | 95.9 | % | | 96.2 | % |
Brokerage revenues as a percentage of Logistics revenues (2) | 81.9 | % | | 78.0 | % |
(1)Calculated as segment operating expenses divided by segment revenues (excluding fuel surcharge) including revenue in transit and related expenses at the operating segment level. | |
(1) | Calculated as segment operating expenses divided by segment revenues (excluding fuel surcharge) including revenue in-transit and related expenses at the operating segment level. |
| |
(2) | Revenues (excluding fuel surcharge), in millions, including revenue in-transit. |
Logistics revenues (excluding fuel surcharge) decreased $1.0$0.4 million in the six months ended June 30, 20192020 compared to the same period in 2018,2019, primarily due to compression in rates, which was partially offset by an increase in volume despite one of the Company's import/export customers insourcing their warehouse management function in April 2019. Increased brokerage volumes of 17% were offset by a decrease in revenue per order related to compression in rates, particularly in the spot market.
Logistics income from operations increased $1.3decreased $7.1 million, approximately 7%36%, in the six months ended June 30, 20192020 compared to the same period in 2018, primarily due to the brokerage volume growth noted above, offset by compression of2019. Compressed net revenue higher commissions in our brokerage business, and reduced volumes within our import/export business.in addition to the customer insourcing noted above, both contributed to the decline in income from operations.
Other
Our
Included in Other segment recorded a losswas income from operations of $0.3$1.5 million in the six months ended June 30, 2019,2020, compared to a loss of $21.3$0.3 million in the same period in 2018.2019. Factors contributing to decreased lossesthe change include lower workers' compensation expense and a reduction in performance-based incentive compensation, the $5.8partially offset by a $2.6 million settlement of a lawsuit that challenged Washington State labor law compliance in 2018, a $5.1 million increasedecrease in income from operations from our leasing business driven by increaseddecreased lease activity, and a decrease in Company benefit costs.activity.
Other Expense (Income)
29
Other expense decreased $1.1 million, approximately 18%, in the six months ended June 30, 2019 compared to the same period in 2018, primarily from a $3.2 million increase in interest income and a $0.9 million decrease in net foreign currency losses, offset by the 2018 recognition
Income Tax Expense
Our provision for income taxes decreased $15.5 million, approximately 39%, in the six months ended June 30, 2019 compared to the same period in 2018 due to lower taxable income. The effective income tax rate was 25.1% for the six months ended June 30, 2019 compared to 25.8% for the same period last year.
LIQUIDITY AND CAPITAL RESOURCES
Our primary uses of cash are working capital requirements, capital expenditures, dividend payments, and debt service requirements. Additionally, we may use cash for acquisitions and other investing and financing activities. Working capital is required principally to ensure we are able to run the business and have sufficient funds to satisfy maturing short-term debt and operational expenses. Our capital expenditures consist primarily of transportation equipment and information technology.
Historically, our primary source of liquidity has been cash flow from operations. In addition, we have a $250.0 million revolving credit facility and a $200.0 million accounts receivable facility.facility, for which our available capacity as of June 30, 2020 was $375.8 million. We anticipate that cash generated from operations, together with amounts available under our credit facilities, will be sufficient to meet our requirements for the foreseeable future. To the extent additional funds are necessary to meet our long-term liquidity needs as we continue to execute our business strategy, or because the COVID-19 crisis lasts longer than anticipated, and/or the revenue declines we expect to experience are more severe than predicted, we anticipate that we will obtain these funds will be obtained through additional indebtedness, additional equity offerings, or a combination of these potential sources of funds. Our ability to fund future operating expenses and capital expenditures, as well as our ability to meet future debt service obligations or refinance our indebtedness will depend on our future operating performance, which will be affected by general economic, financial, and other factors beyond our control.
The following table presents our cash and cash equivalents, marketable securities, and outstanding debt outstanding as of the dates shown.
| | | | | | | | | | | | | | |
(in millions) | | June 30, 2020 | | December 31, 2019 |
Cash and cash equivalents | | $ | 713.8 | | | $ | 551.6 | |
Marketable securities | | 46.8 | | | 48.3 | |
Total cash, cash equivalents, and marketable securities | | $ | 760.6 | | | $ | 599.9 | |
| | | | |
Debt: | | | | |
Senior notes | | $ | 335.0 | | | $ | 360.0 | |
| | | | |
Finance leases | | 2.1 | | | 1.7 | |
Total debt (1) | | $ | 337.1 | | | $ | 361.7 | |
|
| | | | | | | | |
(in millions) | | June 30, 2019 | | December 31, 2018 |
Cash and cash equivalents | | $ | 377.7 |
| | $ | 378.7 |
|
Marketable securities | | 47.5 |
| | 51.3 |
|
Total cash, cash equivalents, and marketable securities | | $ | 425.2 |
| | $ | 430.0 |
|
| | | | |
Debt: | | | | |
Senior notes | | $ | 400.0 |
| | $ | 400.0 |
|
Equipment financing | | 2.7 |
| | 5.0 |
|
Finance leases | | 5.9 |
| | 6.9 |
|
Total debt (1) | | $ | 408.6 |
| | $ | 411.9 |
|
(1)Debt on the consolidated balance sheets is presented net of deferred financing costs. | |
(1) | Debt on our consolidated balance sheets is presented net of deferred financing costs. |
Debt
At June 30, 2019,2020, we were in compliance with all financial covenants and financial ratios under our credit agreements and the indentures governing our senior notes. See Note 7,8, Debt and Credit Facilities, for information about our short-term and long-term financing arrangements.
Cash Flows
The following table summarizes, for the periods indicated, the changes to our cash flows provided by (used in) operating, investing, and financing activities.
|
| | | | | | | | | |
| | Six Months Ended June 30, |
(in millions) | | 2019 | | 2018 |
Net cash provided by operating activities | | $ | 302.0 |
| | $ | 255.0 |
|
Net cash used in investing activities | | (259.4 | ) | | (105.9 | ) |
Net cash used in financing activities | | (43.6 | ) | | (53.9 | ) |
| | | | | | | | | | | | | | | | | |
| | | Six Months Ended June 30, | | |
(in millions) | | | 2020 | | 2019 |
Net cash provided by operating activities | | | $ | 319.8 | | | $ | 302.0 | |
Net cash used in investing activities | | | (110.1) | | | (259.4) | |
Net cash used in financing activities | | | (47.5) | | | (43.6) | |
Six Months Ended June 30, 20192020 Compared to Six Months Ended June 30, 20182019
Operating Activities
Cash provided by operating activities increased $47.0$17.8 million, approximately 18%6%, in the first six months of 20192020 compared to the same period in 2018,2019, driven primarily by the reclassification of proceeds from lease receipts from investing activities with the adoption of ASC 842 and the net change in working capital balances, partially offset by the decreasean increase in net income as adjusted for non-cash items.various noncash charges, deferred income taxes, and proceeds from lease receipts.
Investing Activities
Cash used in investing activities increased $153.5decreased $149.3 million, approximately 145%58%, in the first six months of 20192020 compared to the same period in 2018.2019. The increasedecrease in cash used was primarily driven by the increasea decrease in net capital expenditures and the reclassification of proceeds from lease receipts to operating activities with the adoption of ASC 842, offset by increased sales of marketable securities.expenditures.
Capital Expenditures
The following table sets forth our net capital expenditures for the periods indicated, our netindicated.
| | | | | | | | | | | | | | | | | |
| | | Six Months Ended June 30, | | |
(in millions) | | | 2020 | | 2019 |
Transportation equipment | | | $ | 83.3 | | | $ | 231.4 | |
Other property and equipment | | | 25.0 | | | 25.7 | |
Proceeds from sale of property and equipment | | | (29.6) | | | (26.0) | |
Net capital expenditures | | | $ | 78.7 | | | $ | 231.1 | |
Net capital expenditures.
|
| | | | | | | | | |
| | Six Months Ended June 30, |
(in millions) | | 2019 | | 2018 |
Transportation equipment | | $ | 231.4 |
| | $ | 143.1 |
|
Other property and equipment | | 25.7 |
| | 14.4 |
|
Proceeds from sale of property and equipment | | (26.0 | ) | | (47.6 | ) |
Net capital expenditures | | $ | 231.1 |
| | $ | 109.9 |
|
Expenditures for transportation equipment and other property and equipment increased $88.3expenditures decreased $152.4 million and $11.3 million, respectively, in the first six months of 20192020 compared to the same period in 20182019. The decrease was driven by increaseda $148.1 million decrease in expenditures for transportation equipment resulting mainly from decreased tractor spend and capitalized IT costs. Proceedspurchases combined with a $3.6 million increase in proceeds from the sale of property and equipment decreased $21.6 million primarily as a resultresulting from increased tractor sales, largely related to units that were part of reduced tractor sales.the 2019 shutdown of the FTFM service offering. See Note 11,12, Commitments and Contingencies, for information on our firm commitments to purchase transportation equipment.
Financing Activities
Cash used in financing activities decreased $10.3increased $3.9 million, approximately 19%9%, in the first six months of 20192020 compared to the same period in 2018.2019. The main driver of the decreaseincrease in cash used was the $11.5$25.0 million decreaserepayment of a private placement note in payments on debt and finance lease obligations,2020, partially offset by a $1.8 million increasethe final guaranteed payment associated with the 2016 WSL acquisition in dividends paid in 2019 compared to 2018.2019.
Other Considerations that Could Affect Our Results, Liquidity, or Capital Resources
COVID-19
We believe we are in a strong liquidity position with a cash, cash equivalents, and marketable securities balance of $760.6 million and $375.8 million of unused credit capacity. Our outstanding debt as of the end of the quarter was $337.1 million, of which $30.0 million is short-term in nature and will be at maturity in September 2020. We are compliant with all financial covenants under our credit agreements and do not anticipate the need to seek additional capital as a result of COVID-19. As part of our business continuity plan, we are maintaining our planned investments in replacement equipment and accelerating our technology spend but have canceled almost all discretionary and growth capital expenditures for the remainder of the year.
Driver Capacity and Wage Cost
Our professional driver workforce is one of our most valuable assets. Recruiting and retaining sufficient numbers of qualified drivers is challenging in an increasingly competitive driver market and has a significant impact on our operating costs and ability to serve our customers. Changes in the demographic composition of the workforce, alternative employment opportunities that become available in the economy, and individual drivers’ desire to be home more frequently can affect availability of drivers and increase the wages our drivers require.
Factors that Could Result in a Goodwill Impairment
Goodwill is tested for impairment at least annually using both the discounted cash flow, method and the guideline public company, methodand guideline merged and acquired company methods in calculating the fair values of our reporting units. Key inputs used in the discounted cash flow approach include growth rates for sales and operating profit, perpetuity growth assumptions, and discount rates. As interest rates rise, the calculated fair values of our reporting units will decrease, which could impact the results of our goodwill impairment tests.
We will perform our annual evaluation of goodwill for impairment as of October 31, 2019,2020, with such analysis expected to be finalized during the fourth quarter. As part of our annual process of updating our goodwill impairment evaluation, we will
assess the impact of current operating results and our resulting management actions to determine whether they have an impact on the long-term valuation of reporting units and the related recoverability of our goodwill. A triggering event occurred during the quarter ended June 30, 2019 that resulted in impairment of all goodwill related to our FTFM reporting unit. See further discussion in Note 6,7, Goodwill and Other Intangible Assets.
Off-Balance Sheet Arrangements
We haveAs of June 30, 2020 we had no off-balance sheet arrangements that meet the definitionhave, or are reasonably likely to have, a current or future material effect on our consolidated financial condition, results of off-balance sheet arrangements.operations, liquidity, capital expenditures, or capital resources.
Contractual Obligations
See the disclosure under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Contractual Obligations” in the Annual Report on Form 10-K for the year ended December 31, 20182019 for our contractual obligations as of December 31, 2018.2019. There were no material changes to our contractual obligations during the six months ended June 30, 2019.2020.
CRITICAL ACCOUNTING POLICIESESTIMATES
We have reviewed our critical accounting policies and considered whether any new critical accounting estimates or other significant changes to our accounting policies require any additional disclosures. We have found the disclosures made in our Annual Report on Form 10-K for the year ended December 31, 20182019 are still current other than goodwill related to our FTFM reporting unit which has nowand that there have been fully impaired. See Note 6, no significant changes.
Goodwill and Other Intangible Assets for additional discussion.
ItemITEM 3. Quantitative and Qualitative Disclosures about Market RiskQUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our market risks have not changed significantly from the market risks reported in the disclosures discussed in the section entitled “Quantitative and Qualitative Disclosures about Market Risk” in Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.2019 as filed with the SEC on February 19, 2020.
ItemITEM 4. Controls and ProceduresCONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended), as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
Changes in Internal Control
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) during the fiscal quarter covered by this report, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ItemITEM 1. Legal ProceedingsLEGAL PROCEEDINGS
For information relating to legal proceedings, see Note 11,12, Commitments and Contingencies, which is incorporated herein by reference.
ItemITEM 1A. Risk FactorsRISK FACTORS
There have beenare no material changes from the risk factors disclosed in the Annual Report on Form 10-K for the year ended December 31, 2018.2019, other than the risks described below.
COVID-19 is adversely affecting, and is expected to continue to adversely affect, our operations, supply chains, and workforce, and we have experienced, and expect to continue to experience, volatility in freight volumes and demand for certain of our service offerings.
COVID-19 has spread rapidly throughout the U.S., prompting state and local governments and businesses to take unprecedented measures in response. Such measures have included restrictions on travel and business operations, temporary closures of businesses, and quarantines and shelter-in-place orders. COVID-19 has significantly curtailed global economic activity and caused significant volatility and disruption in global financial markets.
There is uncertainty around the duration, breadth, and economic impacts of COVID-19, and, as a result, the ultimate impact on our business, operations, or operating results cannot be reasonably estimated at this time. Government and public health officials have recommended and mandated precautions to mitigate the spread of COVID-19, including prohibitions on congregating in large groups, the closing of businesses and operations to the extent such businesses or operations are not considered an “essential service”, and shelter-in-place orders or similar measures. Consequently, our customers, suppliers, third-party business partners, and contractors have been and will be disrupted in multiple ways, including worker absenteeism, quarantines and other restrictions on associates’ ability to work, office and factory closures, disruptions to ports and other shipping infrastructure, border closures, or other travel or health-related restrictions.
The Company is continuing to monitor the situation and take appropriate actions in accordance with the recommendations and requirements of relevant authorities. The full extent of the impact of COVID-19 on the Company’s operational and financial performance is currently uncertain and will depend on many factors outside the Company’s control, including, without limitation, the timing, extent, trajectory and duration of the pandemic, the development and availability of effective treatments and vaccines, the imposition of protective public safety measures, and the impact of the pandemic on the global economy and demand for consumer products. Additional future impacts on the Company may include, but are not limited to, material adverse effects on demand for the Company’s services; the Company’s supply chain and sales and distribution channels; the Company’s ability to execute its strategic plans; and the Company’s profitability and cost structure. To the extent COVID-19 adversely affects the Company’s business, results of operations, financial condition, and stock price, it may also have the effect of heightening many of the other risks described in Part I, Item 1A of the 2019 Form 10-K under the heading “Risk Factors.”
COVID-19 and the measures taken by the U.S. government, as well as state and local governments, in response to the pandemic have adversely affected and could in the future materially adversely impact the Company’s business, results of operations, financial condition, and stock price. To date, the Company has experienced a decrease in demand in varying degrees across its portfolio of services. The mandated precautions to mitigate the spread of COVID-19 and other related disruptions have had, and may continue to have, an impact on the Company’s freight volumes, adversely affecting our revenues and earnings. We have experienced declines in freight volumes in our Truckload and Intermodal segments and certain of our customers have closed portions of their operations and/or deferred decisions to award freight. Additionally, we have expanded our paid time off policy and are covering the cost of health insurance premiums to help alleviate some of the challenges our associates may be facing as a result of COVID-19. While no one can predict with any certainty the scale or length of disruption from COVID-19, it is possible that our results of operations could be negatively affected by the impact of the virus on global economic, health, or market conditions. The many unknowns regarding the impact of COVID-19 on our results of operations include the impact to the Company’s associates, customers, and suppliers of further governmental, regulatory, fiscal, and public health responses.
The COVID-19 outbreak and the resulting impact on our operating performance has also affected, and may continue to affect, the estimates and assumptions made by management. Such estimates and assumptions include among other things, the Company’s goodwill, long-lived, and held for sale asset valuations; current expected credit losses; healthcare reserves; and measurement of compensation cost for certain share-based awards and annual incentive plans. While we expect the impacts of COVID-19 to have an adverse effect on our business, financial condition, and results of operations, we are unable to predict the extent of these impacts at this time.
We have transitioned a significant subset of our employee population to remote work environments in an effort to mitigate the spread of COVID-19 which may exacerbate the cybersecurity risks to our business, including an increased demand for information technology resources, increased risk of phishing, and other cybersecurity attacks.
In response to COVID-19, we have been temporarily allowing a significant portion of our workforce which can work from home to work from home and have provided associates with expanded remote network access options which enable them to work outside of our corporate infrastructure and, in some cases, use their own personal devices, which exposes the Company to additional cybersecurity risks. The United States Department of Homeland Security’s Cybersecurity and Infrastructure Security Agency (“CISA”) has warned that cybercriminals will take advantage of the uncertainty created by COVID-19 and federal and state mandated quarantines to launch attacks which will further disrupt operations. Specifically, our associates working remotely expose the Company to cybersecurity risks in the following ways: (1) unauthorized access to sensitive information as a result of increased remote access, including associates use of company-owned and personal devices and videoconferencing functions and applications to remotely handle, access, discuss, or transmit confidential financial data, (2) increased exposure to phishing and other scams as cybercriminals use the fear and uncertainty surrounding the international COVID-19 outbreak to further manipulate associates through phishing schemes to, among other things, install malicious software on Company systems and equipment and surrender sensitive information, and (3) violation of international, federal, or state-specific privacy laws. We believe that the increased number of associates working remotely as a result of the COVID-19 outbreak has incrementally increased our cyber risk profile, but we are unable to predict the extent or impacts of those risks at this time. A significant disruption of our information technology systems, unauthorized access to or loss of confidential information, or legal claims resulting from our violation of privacy laws could each have a material adverse effect on our business.
ItemITEM 2. Unregistered Sales of Equity Securities and Use of ProceedsUNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table sets forth information regarding the purchases of ourCompany does not have a share repurchase program and did not repurchase any equity securities made by or on behalf of us or any affiliated purchaser (as defined in Exchange Act Rule 10b-18) during the three months ended June 30, 2019:2020.
Issuer Purchases of Equity Securities
|
| | | | | | | | | | | | | | |
2019 | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs |
April 1 - April 30 | | — |
| | $ | — |
| | — |
| | $ | — |
|
May 1 - May 31 | | — |
| | — |
| | — |
| | — |
|
June 1 - June 30 | | — |
| | — |
| | — |
| | — |
|
Total | | — |
| | $ | — |
| | — |
| | $ | — |
|
Limitation Upon Payment of Dividends
The 2018 Credit Facility includes covenants limiting our ability to pay dividends or make distributions on our capital stock if a default exists under the 2018 Credit Facility or would be caused by giving effect to such dividend.
ItemITEM 3. Defaults Upon Senior SecuritiesDEFAULTS UPON SENIOR SECURITIES
Not applicable.None.
ItemITEM 4. Mine Safety DisclosuresMINE SAFETY DISCLOSURES
Not applicable.
ItemITEM 5. Other InformationOTHER INFORMATION
None.
ItemITEM 6. Exhibits
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Exhibit Number | | Exhibit Description |
| | |
31.1* | | |
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31.2* | | |
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32.1** | | |
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32.2** | | |
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101*101.INS* | | Interactive Data FileXBRL Instance Document - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document. |
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101.SCH* | | XBRL Taxonomy Extension Schema Document |
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101.CAL* | | XBRL Taxonomy Calculation Linkbase Document |
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101.DEF* | | XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB* | | XBRL Taxonomy Extension Labels Linkbase Document |
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101.PRE* | | XBRL Taxonomy Extension Presentation Linkbase Document |
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104* | | The cover page from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, formatted in Inline XBRL |
* Filed herewith.
** Furnished herewith.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant, Schneider National, Inc., has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | |
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| | |
| | SCHNEIDER NATIONAL, INC. |
| | |
Date: | August 1, 2019July 30, 2020 | /s/ Stephen L. Bruffett |
| | Stephen L. Bruffett |
| | Executive Vice President and Chief Financial Officer |
| | (Duly Authorized Officer and Principal Financial Officer) |