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
Schneider continues to monitor the the impact of COVID-19 and take steps to mitigate risks posed by the virus. The impact 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 manage the outbreak, and the impact of the pandemic and governmental actions on our customers, which are uncertain and not fully predictable.
The Company provides an essential service to its customers and has taken additional measures to keep our associates safe and to minimize unnecessary risk of exposure to COVID-19, including precautions for our associates and owner-operators who work in the field. We have implemented work from home policies where appropriate and imposed travel limitations on employees.
The Company continues to implement and maintain strong physical and cyber-security measures to ensure our systems remain functional in order to serve our operational needs with a remote workforce and ensure uninterrupted service to our customers.
The Company’s operational and financial performance was impacted by a decrease in demand during the second quarter of 2020 resulting, in part, from government imposed stay-at-home orders and the related closure of particular customers as a result of COVID-19. In the third quarter of 2020 freight demand began to normalize, and we did not experience significant negative operational or financial impacts from COVID-19. We believe that the largest impacts of COVID-19 on our business were incurred in the second quarter, and we expect to continue to experience improvements in the fourth quarter; 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 and incremental COVID-19 and related costs that were experienced. 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 added 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 technology 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.loads to offer vast coverage through North America, including Mexico and Canada. These services are executed through either for-hirededicated or dedicatednetwork contracts. FTFM residential and retail store delivery services were also 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 September 30, | | Nine Months Ended September 30, |
(in millions, except ratios) | | 2020 | | 2019 | | 2020 | | 2019 |
Operating revenues | | $ | 1,135.7 | | | $ | 1,183.9 | | | $ | 3,287.6 | | | $ | 3,590.7 | |
Revenues (excluding fuel surcharge) (1) | | 1,062.7 | | | 1,069.7 | | | 3,042.9 | | | 3,240.5 | |
Income from operations | | 63.3 | | | 29.0 | | | 181.6 | | | 129.7 | |
Adjusted income from operations (2) | | 76.9 | | | 79.4 | | | 194.2 | | | 214.7 | |
Operating ratio | | 94.4 | % | | 97.6 | % | | 94.5 | % | | 96.4 | % |
Adjusted operating ratio (3) | | 92.8 | % | | 92.6 | % | | 93.6 | % | | 93.4 | % |
Net income | | $ | 44.5 | | | $ | 19.7 | | | $ | 134.8 | | | $ | 91.1 | |
Adjusted net income (4) | | 54.6 | | | 57.2 | | | 144.2 | | | 154.4 | |
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| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(in millions, except ratios) | | 2019 | | 2018 | | 2019 | | 2018 |
Operating revenues | | $ | 1,183.9 |
| | $ | 1,280.1 |
| | $ | 3,590.7 |
| | $ | 3,655.4 |
|
Revenues (excluding fuel surcharge) (1) | | 1,069.7 |
| | 1,145.2 |
| | 3,240.5 |
| | 3,269.6 |
|
Income from operations | | 29.0 |
| | 97.9 |
| | 129.7 |
| | 257.2 |
|
Adjusted income from operations (2) | | 79.4 |
| | 97.9 |
| | 214.7 |
| | 263.0 |
|
Operating ratio | | 97.6 | % | | 92.4 | % | | 96.4 | % | | 93.0 | % |
Adjusted operating ratio (3) | | 92.6 | % | | 91.5 | % | | 93.4 | % | | 92.0 | % |
Net income | | $ | 19.7 |
| | $ | 70.7 |
| | $ | 91.1 |
| | $ | 184.1 |
|
Adjusted net income (4) | | 57.2 |
| | 70.7 |
| | 154.4 |
| | 188.4 |
|
(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). |
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(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. |
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(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.” |
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(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 September 30, | | Nine Months Ended September 30, |
(in millions) | | 2020 | | 2019 | | 2020 | | 2019 |
Operating revenues | | $ | 1,135.7 | | | $ | 1,183.9 | | | $ | 3,287.6 | | | $ | 3,590.7 | |
Less: Fuel surcharge revenues | | 73.0 | | | 114.2 | | | 244.7 | | | 350.2 | |
Revenues (excluding fuel surcharge) | | $ | 1,062.7 | | | $ | 1,069.7 | | | $ | 3,042.9 | | | $ | 3,240.5 | |
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| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(in millions) | | 2019 | | 2018 | | 2019 | | 2018 |
Operating revenues | | $ | 1,183.9 |
| | $ | 1,280.1 |
| | $ | 3,590.7 |
| | $ | 3,655.4 |
|
Less: Fuel surcharge revenues | | 114.2 |
| | 134.9 |
| | 350.2 |
| | 385.8 |
|
Revenues (excluding fuel surcharge) | | $ | 1,069.7 |
| | $ | 1,145.2 |
| | $ | 3,240.5 |
| | $ | 3,269.6 |
|
Adjusted income from operations
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(in millions) | | 2020 | | 2019 | | 2020 | | 2019 |
Income from operations | | $ | 63.3 | | | $ | 29.0 | | | $ | 181.6 | | | $ | 129.7 | |
Litigation (1) | | 13.1 | | | — | | | 13.1 | | | — | |
Goodwill impairment (2) | | — | | | — | | | — | | | 34.6 | |
Restructuring—net (3) | | 0.5 | | | 50.4 | | | (0.5) | | | 50.4 | |
Adjusted income from operations | | $ | 76.9 | | | $ | 79.4 | | | $ | 194.2 | | | $ | 214.7 | |
(1)Costs, including interest, as a result of an adverse tax ruling in September 2020 related to a dispute with the IRS over the applicability of excise taxes on certain tractors refurbished during tax years 2011 through 2013 and no longer in service.
(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.
(3)Activity associated with the shutdown of the FTFM service offering. Refer to Note 14, Restructuring, for additional details.
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| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(in millions) | | 2019 | | 2018 | | 2019 | | 2018 |
Income from operations | | $ | 29.0 |
| | $ | 97.9 |
| | $ | 129.7 |
| | $ | 257.2 |
|
Litigation (1) | | — |
| | — |
| | — |
| | 5.8 |
|
Goodwill impairment (2) | | — |
| | — |
| | 34.6 |
| | — |
|
Restructuring charges (3) | | 50.4 |
| | — |
| | 50.4 |
| | — |
|
Adjusted income from operations | | $ | 79.4 |
| | $ | 97.9 |
| | $ | 214.7 |
| | $ | 263.0 |
|
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(1) | Costs associated with the settlement of a lawsuit that challenged Washington State labor law compliance during 2018. |
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(2) | A full impairment of FTFM's goodwill was recorded in the second quarter of 2019. |
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(3) | Costs associated with the shutdown of the FTFM service offering. Refer to Note 13, Restructuring Charges, for additional details. |
Adjusted operating ratio
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| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(in millions, except ratios) | | 2020 | | 2019 | | 2020 | | 2019 |
Total operating expenses | | $ | 1,072.4 | | | $ | 1,154.9 | | | $ | 3,106.0 | | | $ | 3,461.0 | |
Divide by: Operating revenues | | 1,135.7 | | | 1,183.9 | | | 3,287.6 | | | 3,590.7 | |
Operating ratio | | 94.4 | % | | 97.6 | % | | 94.5 | % | | 96.4 | % |
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Total operating expenses | | $ | 1,072.4 | | | $ | 1,154.9 | | | $ | 3,106.0 | | | $ | 3,461.0 | |
Adjusted for: | | | | | | | | |
Fuel surcharge revenues | | (73.0) | | | (114.2) | | | (244.7) | | | (350.2) | |
Litigation | | (13.1) | | | — | | | (13.1) | | | — | |
Goodwill impairment | | — | | | — | | | — | | | (34.6) | |
Restructuring—net | | (0.5) | | | (50.4) | | | 0.5 | | | (50.4) | |
Adjusted total operating expenses | | $ | 985.8 | | | $ | 990.3 | | | $ | 2,848.7 | | | $ | 3,025.8 | |
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Operating revenues | | $ | 1,135.7 | | | $ | 1,183.9 | | | $ | 3,287.6 | | | $ | 3,590.7 | |
Less: Fuel surcharge revenues | | 73.0 | | | 114.2 | | | 244.7 | | | 350.2 | |
Revenues (excluding fuel surcharge) | | $ | 1,062.7 | | | $ | 1,069.7 | | | $ | 3,042.9 | | | $ | 3,240.5 | |
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Adjusted operating ratio | | 92.8 | % | | 92.6 | % | | 93.6 | % | | 93.4 | % |
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| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(in millions, except ratios) | | 2019 | | 2018 | | 2019 | | 2018 |
Total operating expenses | | $ | 1,154.9 |
| | $ | 1,182.2 |
| | $ | 3,461.0 |
| | $ | 3,398.2 |
|
Divide by: Operating revenues | | 1,183.9 |
| | 1,280.1 |
| | 3,590.7 |
| | 3,655.4 |
|
Operating ratio | | 97.6 | % | | 92.4 | % | | 96.4 | % | | 93.0 | % |
| | | | | | | | |
Total operating expenses | | $ | 1,154.9 |
| | $ | 1,182.2 |
| | $ | 3,461.0 |
| | $ | 3,398.2 |
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Adjusted for: | | | | | | | | |
Fuel surcharge revenues | | (114.2 | ) | | (134.9 | ) | | (350.2 | ) | | (385.8 | ) |
Litigation | | — |
| | — |
| | — |
| | (5.8 | ) |
Goodwill impairment | | — |
| | — |
| | (34.6 | ) | | — |
|
Restructuring charges | | (50.4 | ) | | — |
| | (50.4 | ) | | — |
|
Adjusted total operating expenses | | $ | 990.3 |
| | $ | 1,047.3 |
| | $ | 3,025.8 |
| | $ | 3,006.6 |
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| | | | | | | | |
Operating revenues | | $ | 1,183.9 |
| | $ | 1,280.1 |
| | $ | 3,590.7 |
| | $ | 3,655.4 |
|
Less: Fuel surcharge revenues | | 114.2 |
| | 134.9 |
| | 350.2 |
| | 385.8 |
|
Revenues (excluding fuel surcharge) | | $ | 1,069.7 |
| | $ | 1,145.2 |
| | $ | 3,240.5 |
| | $ | 3,269.6 |
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| | | | | | | | |
Adjusted operating ratio | | 92.6 | % | | 91.5 | % | | 93.4 | % | | 92.0 | % |
Adjusted net income
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| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(in millions) | | 2019 | | 2018 | | 2019 | | 2018 |
Net income | | $ | 19.7 |
| | $ | 70.7 |
| | $ | 91.1 |
| | $ | 184.1 |
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Litigation | | — |
| | — |
| | — |
| | 5.8 |
|
Goodwill impairment | | — |
| | — |
| | 34.6 |
| | — |
|
Restructuring charges | | 50.4 |
| | — |
| | 50.4 |
| | — |
|
Income tax effect of non-GAAP adjustments(1) | | (12.9 | ) | | — |
| | (21.7 | ) | | (1.5 | ) |
Adjusted net income | | $ | 57.2 |
| | $ | 70.7 |
| | $ | 154.4 |
| | $ | 188.4 |
|
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(1) | Tax impacts are calculated using the applicable consolidated federal and state effective tax rate, modified to remove the impact of discrete tax adjustments. |
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| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(in millions) | | 2020 | | 2019 | | 2020 | | 2019 |
Net income | | $ | 44.5 | | | $ | 19.7 | | | $ | 134.8 | | | $ | 91.1 | |
Litigation | | 13.1 | | | — | | | 13.1 | | | — | |
Goodwill impairment | | — | | | — | | | — | | | 34.6 | |
Restructuring—net | | 0.5 | | | 50.4 | | | (0.5) | | | 50.4 | |
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Income tax effect of non-GAAP adjustments (1) | | (3.5) | | | (12.9) | | | (3.2) | | | (21.7) | |
Adjusted net income | | $ | 54.6 | | | $ | 57.2 | | | $ | 144.2 | | | $ | 154.4 | |
(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 September 30, 20192020 Compared to Three Months Ended September 30, 20182019
Enterprise Results Summary
Net Income
NetEnterprise net income decreased $51.0increased $24.8 million, approximately 72%126%, in the third quarter of 20192020 compared to the same quarter in 2018,2019, primarily due to pretaxa $49.9 million decrease in net restructuring charges of $50.4 million for restructuring associated with the FTFM shutdown of the Company's FTFM service offering andin 2019, an $11.5 million pretaxdecrease in impairment of held for sale assets, related to an agreement signedand the benefit associated with the FTFM shutdown, as FTFM's loss from operations in the third quarter of 2019 to sell tractorswas $8.9 million. The positive impact of these items was partially offset by a decline in Truckload freight volumes resulting primarily from driver capacity constraints, a $13.1 million adverse outcome for an excise tax audit in the fourth quarter. In addition, freight volumes declinedthird quarter of 2020, and an increase in 2019 dueincome taxes related to lower demand. higher taxable income.
Adjusted net income decreased $13.5$2.6 million, approximately 19%5%.
Components of Enterprise Net Income
Enterprise Revenues
Enterprise operating revenues decreased $96.2$48.2 million, approximately 8%4%, in the third quarter of 20192020 compared to the same quarter in 2018.2019.
Factors contributing to the decrease were as follows:
•a $51.3$55.4 million decrease in our Truckload segment revenues (excluding fuel surcharge) resulting from reducedan overall decrease in Truckload volume largely due to lower demanddriven by driver capacity constraints, and a decrease of approximately $22.0 million related to the shutdown of theour FTFM service offering (which was substantially complete asin August 2019 which generated $14.0 million of revenues in the end of August 2019), that will continue for the remainderthird quarter of 2019; and
•a $35.7 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 combined with lower revenue per order within brokerage due to a compression in rates, partially offset by an 11% increase in brokerage volumes;
a $20.7$41.2 million decrease in fuel surcharge revenues primarily resulting from a 19% decline in average diesel price per gallon in the U.S. as reported by the Department of Energy, a decline in Truckload volumes, and a $2.6 million reduction related to decreased volumes; andthe FTFM shutdown.
a $5.2 million decrease in our Intermodal segment revenues (excluding fuel surcharge) due to a decrease in order volume, partially offset by improved revenue per order.
The above factors were partially offset by a $9.6$48.3 million increase in Logistics revenues from equipment sales by our leasing business under sales-type leases.(excluding fuel surcharge) due to volume growth and an increase in revenue per order.
Enterprise revenues (excluding fuel surcharge) decreased $75.5$7.0 million, approximately 7%1%.
Enterprise Income from Operations and Operating Ratio
Enterprise income from operations decreased $68.9increased $34.3 million, approximately 70%118%, in the third quarter of 20192020 compared to the same quarter in 2018,2019, primarily due to $50.4a $49.9 million ofdecrease in net restructuring charges associated with the FTFM shutdown of the FTFM service offering andin 2019, an $11.5 million decrease in impairment of assets held for sale. Lower demandsale assets, and the benefit associated with the FTFM shutdown, as FTFM's loss from operations in the third quarter of 2019 was $8.9 million. Continued cost savings attributable to a reduction in headcount, favorability in insurance costs, and lower healthcare costs also negatively impacted profitability, but decreasescontributed to the increase in income from operations. Those factors were partially offset by reduceda reduction in Truckload freight volumes primarily due to driver capacity constraints, a $15.7 million increase in performance-based incentive compensation, driverand $13.1 million of costs related costs, and other variable costs. to an adverse excise tax audit ruling in the third quarter of 2020.
Adjusted income from operations decreased $18.5$2.5 million, approximately 19%3%.
Enterprise operating ratio improved on a GAAP basis but weakened on both a GAAP and an adjusted basis.basis when compared to third quarter of 2019. 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 decreased $9.4$10.7 million, or 2%, quarter over quarter, driven by lower ratesprimarily due to reduced owner-operator and third party carrier costs within Truckload resulting from a decrease in our Logistics segment,volumes, shift in business mix, and rate compression due to market conditions, as well as a $5.3 million reduction ofattributable to the FTFM costs given the mid-quarter shutdown of the service offering, andshutdown. Intermodal purchased transportation was also favorable quarter over quarter due to a 4% decline in Intermodal order volume. This wasrail cost per mile resulting from mix changes and market conditions. These decreases were partially offset by an increase in various Intermodal third-partythird party carrier costs including rail,within Logistics due to volume growth and increased order volume of 11% within our brokerage business.higher purchased transportation per order.
•Salaries, wages, and benefits decreased $59.9increased $1.9 million, or 19%1%, quarter over quarter, largelyprimarily due to a $15.7 million increase in performance-based incentive compensation, partially offset by the elimination ofbenefit associated with the FTFM shutdown, as FTFM's salaries, wages, and benefits associated with warehouse management operations insourcedwere $7.6 million in the third quarter of 2019, reduced health insurance costs of $4.7 million driven by an import/export customer in April 2019,favorable claims experience and fewer plan participants, and headcount reductions across the shutdown of the FTFM service offering, and other cost savings initiatives. We expect to see continued favorability year over year in salaries, wages, and benefits as a result of these changes. Lower performance-based incentive compensation, driver pay, and Company benefit costs also contributed to the decrease. Salaries, wages, and benefits decreased 3% quarter over quarter on a percentage of revenues basis.organization.
Fuel and fuel taxes for our company trucks decreased $16.8$21.1 million, or 19%30%, quarter over quarter, driven primarily by a 5% decrease in company driver miles and a decrease in cost per gallon. A portion of the decline ingallon and less company driver miles is attributable to the shutdown of the FTFM service offering. Decreased company driver miles were partially offset by increased owner-operator miles, which do not impact company fuel costs.within our Truckload segment. A significant portion of fuel costs are recovered through our fuel surcharge programs.
•Operating supplies and expenses increased $15.6$5.5 million, or 13%4%, quarter over quarter, driven by a $13.1 million adverse tax ruling related to a dispute with the IRS over the applicability of excise taxes on certain tractors refurbished during tax years 2011 through 2013 and no longer in service and an increase in maintenance costs, partially offset by an $11.5 million decrease in impairment charge recorded on assetsof held for sale assets.
•Insurance and related expenses decreased $7.0 million, or 29%, quarter over quarter, primarily due to favorability in claims severity and frequency, partially offset by an increase in insurance premiums.
•Restructuring—net was $49.9 million favorable quarter over quarter, due to higher initial costs related to an agreement signedimpairment charges, receivable write-downs, and other shut down costs recorded in the third quarter of 2019 when the FTFM business was shut down. Refer to sell tractorsNote 14, Restructuring, for additional details.
Total Other Expenses (Income)
Other expense increased $0.9 million, approximately 39%, in the fourththird quarter and growthof 2020 compared to the same quarter in equipment sales under sales-type leases by our leasing business resulting2019 due primarily to a $1.4 million decrease in higher cost of goods sold of $10.4 million. Increases in equipment losses and software subscription costs wereinterest income as interest rates have declined quarter over quarter, partially offset by a combined $11.4$0.4 million decrease in temporary worker pay due to insourcing by one of our import/export customers in April 2019 and reduced maintenance and parts spend attributable to less company driver miles, cost savings initiatives, and younger age of fleet.
Other general expenses decreased $8.3 million, or 23%, quarter over quarter primarilyinterest expense as a result of reduced driver recruitinglower outstanding debt balances quarter over quarter.
Income Tax Expense
Our provision for income taxes increased $8.6 million, approximately 123%, in the third quarter of 2020 compared to the same quarter in 2019 due to higher taxable income. The effective income tax rate was 26.0% for the three months ended September 30, 2020 compared to 26.2% for the same quarter last year.
Revenues and training costs associated with cost savings initiatives.
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• | Restructuring charges increased $50.4 million quarter over quarter due to the recording of impairment charges, write-down of receivables, and other costs associated with the shutdown of the FTFM service offering. Refer to Note 13, Restructuring Charges, for additional details.
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Income (Loss) from Operations by Segment
Segment Contributions to Results of Operations
The following tables summarize revenue and income (loss) from operations by segment:
| | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
Revenues by Segment (in millions) | | 2020 | | 2019 |
Truckload | | $ | 460.2 | | | $ | 515.6 | |
Intermodal | | 248.4 | | | 249.2 | |
Logistics | | 284.4 | | | 236.1 | |
Other | | 85.5 | | | 94.3 | |
Fuel surcharge | | 73.0 | | | 114.2 | |
Inter-segment eliminations | | (15.8) | | | (25.5) | |
Operating revenues | | $ | 1,135.7 | | | $ | 1,183.9 | |
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| | | | | | | | |
| | Three Months Ended September 30, |
Revenues by Segment (in millions) | | 2019 | | 2018 |
Truckload | | $ | 515.6 |
| | $ | 566.9 |
|
Intermodal | | 249.2 |
| | 254.4 |
|
Logistics | | 236.1 |
| | 271.8 |
|
Other | | 94.3 |
| | 83.9 |
|
Fuel surcharge | | 114.2 |
| | 134.9 |
|
Inter-segment eliminations | | (25.5 | ) | | (31.8 | ) |
Operating revenues | | $ | 1,183.9 |
| | $ | 1,280.1 |
|
| | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
Income (Loss) from Operations by Segment (in millions) | | 2020 | | 2019 |
Truckload | | $ | 45.6 | | | $ | (12.5) | |
Intermodal | | 23.0 | | | 25.1 | |
Logistics | | 9.1 | | | 9.9 | |
Other | | (14.4) | | | 6.5 | |
Income from operations | | 63.3 | | | 29.0 | |
Adjustments: | | | | |
Litigation | | 13.1 | | | — | |
| | | | |
Restructuring—net | | 0.5 | | | 50.4 | |
Adjusted income from operations | | $ | 76.9 | | | $ | 79.4 | |
24
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| | | | | | | | |
| | Three Months Ended September 30, |
Income (Loss) from Operations by Segment (in millions) | | 2019 | | 2018 |
Truckload | | $ | (12.5 | ) | | $ | 54.4 |
|
Intermodal | | 25.1 |
| | 36.1 |
|
Logistics | | 9.9 |
| | 13.0 |
|
Other | | 6.5 |
| | (5.6 | ) |
Income from operations | | 29.0 |
| | 97.9 |
|
Adjustments: | | | | |
Restructuring charges | | 50.4 |
| | — |
|
Adjusted income from operations | | $ | 79.4 |
| | $ | 97.9 |
|
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:
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• | •Dedicated - Transportation services with equipment devoted to customers under long-term contracts. •Network - Transportation services of one-way shipments, formerly called for-hire. | | | | | | | | | | | | | Three Months Ended September 30, | | 2020 | | 2019 | Dedicated | | | | Revenues (excluding fuel surcharge) (1) | $ | 177.8 | | | $ | 175.7 | | Average trucks (2) (3) | 3,944 | | | 3,907 | | Revenue per truck per week (4) | $ | 3,483 | | | $ | 3,471 | | Network | | | | Revenues (excluding fuel surcharge) (1) | $ | 281.5 | | | $ | 340.3 | | Average trucks (2) (3) | 6,108 | | | 7,012 | | Revenue per truck per week (4) | $ | 3,561 | | | $ | 3,746 | | Total Truckload | | | | Revenues (excluding fuel surcharge) (5) | $ | 460.2 | | | $ | 515.6 | | Average trucks (2) (3) | 10,052 | | | 10,919 | | Revenue per truck per week (4) | $ | 3,530 | | | $ | 3,648 | | Average company trucks (3) | 7,250 | | | 7,998 | | Average owner-operator trucks (3) | 2,802 | | | 2,921 | | Trailers | 36,672 | | | 35,612 | | Operating ratio (6) | 90.1 | % | | 102.4 | % |
(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.
Dedicated standard - Transportation services with equipment devoted to customers under long-term contracts utilizing standard dry van trailing equipment.
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• | Dedicated specialty - Transportation services with equipment devoted to customers under long-term contracts utilizing bulk, temperature controlled, flatbed, straight truck, and other specialty equipment.
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• | For-hire standard - Transportation services of one-way shipments utilizing standard dry van trailing equipment.
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• | For-hire specialty - Transportation services of one-way shipments utilizing bulk, temperature controlled, flatbed, straight truck, and other specialty equipment.
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|
| | | | | | | |
| Three Months Ended September 30, |
| 2019 | | 2018 |
Dedicated standard | | | |
Revenues (excluding fuel surcharge) (1) | $ | 82.3 |
| | $ | 81.2 |
|
Average trucks (2) (3) | 1,807 |
| | 1,671 |
|
Revenue per truck per week (4) | $ | 3,515 |
| | $ | 3,792 |
|
Dedicated specialty | | | |
Revenues (excluding fuel surcharge) (1) | $ | 93.4 |
| | $ | 95.9 |
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Average trucks (2) (3) | 2,100 |
| | 2,107 |
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Revenue per truck per week (4) | $ | 3,433 |
| | $ | 3,551 |
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For-hire standard | | | |
Revenues (excluding fuel surcharge) (1) | $ | 291.4 |
| | $ | 306.3 |
|
Average trucks (2) (3) | 6,003 |
| | 6,094 |
|
Revenue per truck per week (4) | $ | 3,746 |
| | $ | 3,921 |
|
For-hire specialty | | | |
Revenues (excluding fuel surcharge) (1) | $ | 48.9 |
| | $ | 81.6 |
|
Average trucks (2) (3) | 1,009 |
| | 1,521 |
|
Revenue per truck per week (4) | $ | 3,746 |
| | $ | 4,180 |
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Total Truckload | | | |
Revenues (excluding fuel surcharge) (6) | $ | 515.6 |
| | $ | 566.9 |
|
Average trucks (2) (3) | 10,919 |
| | 11,393 |
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Revenue per truck per week (4) | $ | 3,648 |
| | $ | 3,868 |
|
Average company trucks (3) | 7,998 |
| | 8,634 |
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Average owner-operator trucks (3) | 2,921 |
| | 2,759 |
|
Trailers | 35,612 |
| | 38,026 |
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Operating ratio (5) | 102.4 | % | | 90.4 | % |
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(1) | Revenues (excluding fuel surcharge), in millions, exclude revenue in-transit. |
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(2) | Includes company trucks and owner-operator trucks. |
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(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. |
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(4) | Calculated excluding fuel surcharge and revenue in-transit, consistent with how revenue is reported internally for segment purposes, using weighted workdays. |
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(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. |
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(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. |
Truckload revenues (excluding fuel surcharge) decreased $51.3$55.4 million, approximately 9%11%, in the third quarter of 20192020 compared to the same quarter in 2018. Both volume and price declined quarter over quarter with2019, driven by a 6% reduction in volumes due to capacity constraints resulting, in part, from the decreaseimpacts of COVID-19. The shutdown of our FTFM service offering in volume having the largest impact. Decreased volumeAugust 2019, which generated $14.0 million of 9% was the result of lower demand compared torevenues in the third quarter of 20182019, and price deterioration in the remaining dedicated and network business also contributed to the revenue decline. Price decreased 2% compared to the same quarter in 2019 due to lower contracted freight rates, partially offset by improvements in the spot market, and was the main contributor of the $118, or 3%, decrease in revenue per truck per week quarter over quarter.
Truckload income from operations increased $58.1 million in the third quarter of 2020 compared to the same quarter in 2019, due mainly to a decrease in net restructuring activity of $49.9 million, a reduction in impairment charges on assets held for sale of $11.5 million, and the benefit associated with the FTFM shutdown, as FTFM's loss from operations in the third quarter of 2019 was $8.9 million. These items were partially offset by the unfavorable earnings impact of reduced volume and price noted above, and an increase in equipment maintenance, performance-based incentive compensation, and equipment disposition costs.
Intermodal
The following table presents the KPIs for our Intermodal segment for the periods indicated.
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 September 30, |
| 2020 | | 2019 |
Orders (1) | 110,633 | | | 108,663 | |
Containers | 21,744 | | | 23,014 | |
Trucks (2) | 1,582 | | | 1,544 | |
Revenue per order (3) | $ | 2,194 | | | $ | 2,296 | |
Operating ratio (4) | 90.7 | % | | 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) decreased $0.8 million in the third quarter of 2020 compared to the same quarter in 2019 primarily attributable to a $102, or 4%, decrease in revenue per order. The decrease in revenue per order was due to continued growth of volume in the East, which has a shorter length of haul, partially offset by an increase in price. Orders increased 2%, despite network disruptions and dray capacity constraints, helping to partially offset revenue decreases from the geographical shift in volume mix noted above.
Intermodal income from operations decreased $2.1 million, approximately 8%, in the third quarter of 2020 compared to the same quarter in 2019. Factors affecting revenue discussed above and an increase in performance-based incentive compensation both contributed to the decrease in income from operations within Intermodal.
Logistics
The following table presents the KPI for our Logistics segment for the periods indicated.
| | | | | | | | | | | |
| Three Months Ended September 30, |
| 2020 | | 2019 |
Operating ratio (1) | 96.8 | % | | 95.8 | % |
| | | |
(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.
Logistics revenues (excluding fuel surcharge) increased $48.3 million, approximately 20%, in the third quarter of 2020 compared to the same quarter in 2019, primarily resulting from volume growth and an increase in revenue per order.
Logistics income from operations decreased $0.8 million, approximately 8%, in the third quarter of 2020 compared to the same quarter in 2019, primarily due to compressed net revenue resulting from higher purchased transportation costs.
Other
Included in Other was a loss from operations of $14.4 million in the third quarter of 2020, compared to income of $6.5 million in the same quarter in 2019. The change was driven by $13.1 million of costs as a result of an adverse tax ruling in the third quarter of 2020 and an $11.0 million increase in performance-based incentive compensation. Increased costs were partially offset by a $1.3 million increase in income from operations from our leasing business.
Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019
Enterprise Results Summary
Enterprise net income increased $43.7 million, approximately 48%, in the nine months ended September 30, 2020 compared to the same period in 2019 primarily due to a $50.9 million decrease in net restructuring charges associated with the FTFM shutdown in 2019, 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 first nine months of 2019 was $34.2 million. Also contributing to favorable net income period over period was an $8.8 million gain on our ownership interest in PSI. These items were partially offset by a decline in Truckload and Intermodal freight volumes, a reduction in price across all of our service offerings, an increase in income taxes related to higher taxable income, and $13.1 million of costs related to an adverse outcome for an excise tax audit in the third quarter of 2020.
Adjusted net income decreased $10.2 million, approximately 7%.
Components of Enterprise Net Income
Enterprise Revenues
Enterprise operating revenues decreased $303.1 million, approximately 8%, in the nine months ended September 30, 2020 compared to the same period in 2019.
Factors contributing to the decrease were as follows:
•a $201.6 million decrease in Truckload segment revenues (excluding fuel surcharge) resulting from a decrease in both Truckload volume and price due to the impact of COVID-19 on market conditions and constrained driver capacity, as well as the shutdown of our FTFM service offering in the third quarterAugust 2019 which generated $77.4 million of 2019. Fewer premium and promotional revenue opportunities contributed to the decline in price. Revenue per truck per week decreased $220, or 6%, quarter over quarter as a result of lower productivity.
Truckload income from operations decreased $66.9 million, approximately 123%,revenues in the third quarter of 2019 compared to the same quarter in 2018 due mainly to $50.4 million of restructuring charges related to the shutdown of our FTFM service offering and an $11.5 million non-cash charge resulting from the impairment of assets held for sale. The decline in Truckload volume noted above also contributed to the decrease in income from operations but was partially offset by a reduction in driver and maintenance costs due to less company driver miles, cost savings initiatives, and younger age of fleet compared to the third quarter of 2018.
Intermodal
The following table presents our key performance indicators for our Intermodal segment for the periods indicated:
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| | | | | | | |
| Three Months Ended September 30, |
| 2019 | | 2018 |
Orders (1) | 110,721 |
| | 115,936 |
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Containers | 23,014 |
| | 21,288 |
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Trucks (2) | 1,544 |
| | 1,482 |
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Revenue per order (3) | $ | 2,259 |
| | $ | 2,175 |
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Operating ratio (4) | 89.9 | % | | 85.8 | % |
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(1) | Based on delivered orders. |
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(2) | Includes company trucks and owner-operator trucks at the end of the period. |
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(3) | Calculated excluding fuel surcharge and revenue in-transit, consistent with how revenue is reported internally for segment purposes. |
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(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) decreased $5.2 million, approximately 2%, in the third quarter of 2019 compared to the same quarter in 2018. Revenue per order increased 4% due in part to 2018 contract carry-over, 2019 contract renewals and increased length of haul, but was offset by a decrease in orders of 4%. The decrease in orders was largely the result of lower volumes in the overall domestic intermodal freight market.
Intermodal income from operations decreased $11.0 million, approximately 30%, in the third quarter of 2019 compared to the same quarter in 2018 primarily due to reduced volume and increases in purchased transportation costs.
Logistics
The following table presents our key performance indicators for our Logistics segment for the periods indicated:
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| | | | | |
| Three Months Ended September 30, |
| 2019 | | 2018 |
Operating ratio (1) | 95.8 | % | | 95.2 | % |
Brokerage revenues as a percentage of Logistics revenues (2) | 86.9 | % | | 79.1 | % |
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(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. |
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(2) | Revenues (excluding fuel surcharge), in millions, including revenue in-transit. |
Logistics revenues (excluding fuel surcharge) decreased $35.7 million, approximately 13%, in the third quarter of 2019 compared to the same quarter in 2018. This decrease was primarily the result of warehouse management functions being insourced by one of the Company's import/export customers in April 2019. In addition, reduced revenue per order was partially offset by brokerage volume growth of 11% compared to the same quarter in 2018.
Logistics income from operations decreased $3.1 million, approximately 24%, in the third quarter of 2019 compared to the same quarter in 2018, primarily due to compressed net revenue in brokerage.
Other
Included in Other was income from operations of $6.5 million in the third quarter of 2019, compared to a loss of $5.6 million in the same quarter in 2018. The $12.1 million change was driven by a decrease in performance-based incentive compensation due to a decline in Enterprise results.
Other Income (Expense)
Other expense decreased $0.3 million, approximately 12%, in the third quarter of 2019 compared to the same quarter in 2018 due primarily to a $0.5 million increase in interest income and a $0.4 million decrease in interest expense partially offset by a $0.6 million decrease in net foreign currency gains.
Income Tax Expense
Our provision for income taxes decreased $17.6 million, approximately 72%, in the third quarter of 2019 compared to the same quarter in 2018 due to lower taxable income. The effective income tax rate was 26.2% for the three months ended September 30, 2019 compared to 25.8% for the same period last year.
Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018
Net Income
Net income decreased $93.0 million, approximately 51%, in thefirst nine months ended September 30, 2019 compared to the same period in 2018, primarily due to pretax restructuring and goodwill impairment charges associated with the FTFM service offering of $50.4 million and $34.6 million, respectively, and an $11.5 million pretax impairment of held for sale assets. In addition, Truckload freight volume declined in 2019 due to lower demand. Adjusted net income decreased $34.0 million, approximately 18%.
Revenues
Enterprise operating revenues decreased $64.7 million, approximately 2%, in the nine months ended September 30, 2019 compared to the same period in 2018.
Factors contributing to the decreases in revenues were as follows:
a $102.7 million decrease in Truckload revenues (excluding fuel surcharge) resulting from reduced Truckload volume due to lower market demand and the shutdown of the FTFM service offering (which was substantially complete as of the end of August 2019), that will continue for the remainder of 2019;
•a $35.6$105.5 million decrease in fuel surcharge revenues primarilyresulting from a 15% decline in average diesel price per gallon in the U.S. as reported by the Department of Energy, a decline in Truckload and Intermodal volumes, and a $13.1 million reduction related to decreased Truckload volumes;the FTFM shutdown; and
•a $36.7$41.2 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 combined with lower revenue per order within brokerage due to a compression in revenue per order, partially offset by a 15% increase in brokerage volumes.
The above factors were partially offset by:
a $58.6 million increase in our Intermodal segment revenues (excluding fuel surcharge) primarily due to improved revenue per ordera decrease in both volume and an increase in order volume;price driven primarily by COVID-19 induced network disruptions, shorter length of haul, and freight mix.
The above factors were partially offset by a $48.5$47.9 million increase in Logistics revenues from equipment sales(excluding fuel surcharge) due to volume growth, partially offset by our leasing business under sales-type leases.
a reduction in revenue per order.
Enterprise revenues (excluding fuel surcharge) decreased $29.1$197.6 million, approximately 1%6%.
Enterprise Income from Operations and Operating Ratio
Enterprise income from operations decreased $127.5increased $51.9 million, approximately 50%40%, in the nine months ended September 30, 20192020 compared to the same period in 2018,2019, primarily due to $50.4a $50.9 million ofdecrease in net restructuring charges associated with the FTFM shutdown ofin 2019, the FTFM service offering, a $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 nine months of 2019 was $34.2 million. Continued cost savings attributable to a reduction in headcount, lower healthcare costs, reductions in other operating expenses, and favorable driver onboarding expenses also contributed to the increase in FTFM operating losses, as operating losses exceeded prior year by $14.5 million. Additionally, an $11.5 million impairment of held for sale assets and lower demand negatively impacted profitability butincome from operations. Those increases were partially offset by reduceda reduction in Truckload and Intermodal freight volumes primarily due to COVID-19 market disruptions and driver capacity constraints, lower price across all of our service offerings, a $13.9 million increase in performance-based incentive compensation, and Company benefits, driver$13.1 million of costs related costs, and other variable costs.to an adverse excise tax audit judgment in the third quarter of 2020.
Adjusted income from operations decreased $48.3$20.5 million, approximately 18%10%.
Enterprise operating ratio weakenedimproved on both a GAAP basis andbut weakened on an adjusted basis.basis compared to the same period of 2019. 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 $57.0decreased $71.1 million, or 4%5%, period over period. An increaseperiod, primarily due to a decrease in variousTruckload and Intermodal third-partyvolumes, reduced owner-operator and third party carrier costs including rail, combined with order volume growthwithin Truckload resulting from business mix and rate compression due to market conditions, and a $24.7 million reduction in our Logistics segment of 15% resulted in higher purchased transportation.transportation costs related to the FTFM shutdown. This was partially offset by a decreasean increase in purchased transportation cost per orderthird party carrier costs within our Logistics segment based on additional carrier capacity in 2019 which leddue to the compression of carrier rates. The shutdown of the FTFM service offering, which was substantially complete as of August 2019, also contributed to the reduction ofvolume growth and higher purchased transportation.transportation per order.
•Salaries, wages, and benefits decreased $86.6$85.2 million, or 9%10%, 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, as well as headcount reductions across the shutdownorganization, a $13.0 million reduction in healthcare costs primarily due to favorable claims experience and fewer plan participants, and a decrease in workers' compensation expense of the FTFM service offering, and other cost savings initiatives. We expect to see continued favorability year over year$2.0 million. These decreases were partially offset by a $13.9 million increase in salaries, wages, and benefits as a result of these changes. Lower performance-based incentive compensation, Company benefit costs, and driver pay also contributed to the decrease. Salaries, wages, and benefits decreased 2% period over period on a percentage of revenues basis.compensation.
•Fuel and fuel taxes for our company trucks decreased $38.7$69.1 million, or 15%31%, period over period, driven by a 7% decrease in company driver miles and a decrease in cost per gallon. A portion of the decline ingallon, less company driver miles iswithin our Truckload segment, and a $10.6 million reduction in fuel and fuel taxes attributable to the shutdown of the FTFM service offering. Decreased company driver miles were partially offset by increased owner-operator miles, which do not impact company fuel costs.shutdown. A significant portion of fuel costs are recovered through our fuel surcharge programs.
•Depreciation and amortization increased $5.5decreased $6.1 million, or 3%, period over period, primarily due to replacement tractors to achieve a younger age of fleet and prior year's investment in chassis and containers to support our Intermodal segment. Continuing to invest in replacement tractors is an important part of our strategic plan as it contributes to reduced maintenance and fuel costs and improvesdriven by the overall driver experience.FTFM shutdown.
•Operating supplies and expenses increased $54.1decreased $22.6 million, or 15%5%, period over period. The increase was mainlyperiod, driven by a $12.1 million decrease in facility, utility, and other costs primarily due to an increasetemporary facility closures associated with COVID-19, reduced volumes, the FTFM shutdown, and various other cost savings initiatives, a $7.9 million decrease in impairment of held for sale assets, a $7.9 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 $44.3a $5.5 million and an $11.5 million impairment charge recorded on assets held for sale related to an agreement signed in the third quarter of 2019 to sell tractors in the fourth quarter. Software subscription costs and Intermodal rail yard ramp storage expenses also increased compared to 2018. Increases in the above costs were offset by a combined $16.2 million decreasereduction in temporary worker pay due to insourcing ofby one of our import/export customers, and reductions in April 2019a variety of other operating-related expenses that were individually immaterial. These decreases were partially offset by $13.1 million of costs for an adverse tax ruling related to a dispute with the IRS over the applicability of excise taxes on certain tractors refurbished during tax years 2011 through 2013 and reduced maintenanceno longer in service and parts spend attributablean $8.0 million change in equipment dispositions. In the first nine months of 2020, we recorded $5.4 million of net equipment losses compared to less company driver miles, cost savings initiatives, and younger age$2.6 million of fleet.net equipment gains for the same period last year.
•Insurance and related expenses increased $8.6decreased $3.1 million, or 12%4%, period over period. The increasedecrease was predominately due to an increasea reduction in the severity of auto lossescargo and related insurance premiums.collision losses.
•Other general expenses decreased $22.1$12.3 million, or 20%14%, period over period, as a result of decreasedreduced travel expenses resulting from Company enforced travel bans related to COVID-19, as well as a decline in driver recruiting and training costs associated withdue to lower company driver turnover and cost savings initiatives,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 $5.8reduced level for the remainder of 2020 as a result of COVID-19. While driver recruiting and training costs remain favorable year-to-date, driver capacity constraints have begun to put pressure on these costs in the second half of the year.
•Goodwill impairment charges decreased $34.6 million, period over period, due to the FTFM goodwill impairment charge of $34.6 million in the second quarter of 2019.
•Restructuring—net was $50.9 million favorable, period over period, due to net gains on equipment sales and bad debt recoveries in 2020 compared to impairment charges, receivable write-downs, and other costs recorded in the third quarter of 2019 when the FTFM business was shut down. Refer to Note 14, Restructuring, for additional details.
Total Other Expenses (Income)
Other expense decreased $7.2 million, approximately 94%, in the nine months ended September 30, 2020 compared to the same period in 2019, primarily from an $8.8 million pre-tax gain recognized on our ownership interest in PSI and a $2.6 million decrease in litigation costs, andinterest expense as a result of lower professional service fees of $3.1 million.
| |
• | Restructuring charges increased $50.4 million period over period due to the recording of impairment charges, write-down of receivables, and other costs associated with the shutdown of the FTFM service offering. Refer to Note 13, outstanding debt balances period over period. See Note 6, Investments, for more information on PSI. These items were partially offset by a $3.7 million decrease in interest income attributed to a decline in interest rates.Restructuring Charges, for additional details.
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Income Tax Expense
Segment Contributions
Our provision for income taxes increased $15.4 million, approximately 50%, in the nine months ended September 30, 2020 compared to Results ofthe same period in 2019 due to higher taxable income. The effective income tax rate was 25.6% for the nine months ended September 30, 2020 compared to 25.3% for the same period last year.
Revenues and Income (Loss) from Operations by Segment
The following tables summarize revenue and income (loss) from operations by segment:segment.
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
Revenues by Segment (in millions) | | 2020 | | 2019 |
Truckload | | $ | 1,380.7 | | | $ | 1,582.3 | |
Intermodal | | 705.4 | | | 746.6 | |
Logistics | | 754.9 | | | 707.0 | |
Other | | 274.7 | | | 290.0 | |
Fuel surcharge | | 244.7 | | | 350.2 | |
Inter-segment eliminations | | (72.8) | | | (85.4) | |
Operating revenues | | $ | 3,287.6 | | | $ | 3,590.7 | |
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
Income (Loss) from Operations by Segment (in millions) | | 2020 | | 2019 |
Truckload | | $ | 122.7 | | | $ | 18.6 | |
Intermodal | | 50.3 | | | 75.5 | |
Logistics | | 21.5 | | | 29.4 | |
Other | | (12.9) | | | 6.2 | |
Income from operations | | 181.6 | | | 129.7 | |
Adjustments: | | | | |
Litigation | | 13.1 | | | — | |
Goodwill impairment | | — | | | 34.6 | |
Restructuring—net | | (0.5) | | | 50.4 | |
Adjusted income from operations | | $ | 194.2 | | | $ | 214.7 | |
29
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| | | | | | | | | |
| | Nine Months Ended September 30, |
Revenues by Segment (in millions) | | 2019 | | 2018 |
Truckload | | $ | 1,582.3 |
| | $ | 1,685.0 |
|
Intermodal | | 746.6 |
| | 688.0 |
|
Logistics | | 707.0 |
| | 743.7 |
|
Other | | 290.0 |
| | 237.0 |
|
Fuel surcharge | | 350.2 |
| | 385.8 |
|
Inter-segment eliminations | | (85.4 | ) | | (84.1 | ) |
Operating revenues | | $ | 3,590.7 |
| | $ | 3,655.4 |
|
|
| | | | | | | | | |
| | Nine Months Ended September 30, |
Income (Loss) from Operations by Segment (in millions) | | 2019 | | 2018 |
Truckload | | $ | 18.6 |
| | $ | 162.2 |
|
Intermodal | | 75.5 |
| | 90.7 |
|
Logistics | | 29.4 |
| | 31.2 |
|
Other | | 6.2 |
| | (26.9 | ) |
Income from operations | | 129.7 |
| | 257.2 |
|
Adjustments: | | | | |
Litigation | | — |
| | 5.8 |
|
Goodwill impairment | | 34.6 |
| | — |
|
Restructuring charges | | 50.4 |
| | — |
|
Adjusted income from operations | | $ | 214.7 |
| | $ | 263.0 |
|
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:
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• | •Dedicated - Transportation services with equipment devoted to customers under long-term contracts. •Network - Transportation services of one-way shipments, formerly called for-hire. | | | | | | | | | | | | | Nine Months Ended September 30, | | 2020 | | 2019 | Dedicated | | | | Revenues (excluding fuel surcharge) (1) | $ | 526.1 | | | $ | 532.7 | | Average trucks (2) (3) | 3,912 | | | 3,938 | | Revenue per truck per week (4) | $ | 3,478 | | | $ | 3,514 | | Network | | | | Revenues (excluding fuel surcharge) (1) | $ | 852.6 | | | $ | 1,048.3 | | Average trucks (2) (3) | 6,242 | | | 7,383 | | Revenue per truck per week (4) | $ | 3,533 | | | $ | 3,688 | | Total Truckload | | | | Revenues (excluding fuel surcharge) (5) | $ | 1,380.7 | | | $ | 1,582.3 | | Average trucks (2) (3) | 10,154 | | | 11,321 | | Revenue per truck per week (4) | $ | 3,512 | | | $ | 3,628 | | Average company trucks (3) | 7,298 | | | 8,433 | | Average owner-operator trucks (3) | 2,856 | | | 2,888 | | Trailers | 36,672 | | | 35,612 | | Operating ratio (6) | 91.1 | % | | 98.8 | % |
(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.
Dedicated standard - Transportation services with equipment devoted to customers under long-term contracts utilizing standard dry van trailing equipment.
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• | Dedicated specialty - Transportation services with equipment devoted to customers under long-term contracts utilizing bulk, temperature controlled, flatbed, straight truck, and other specialty equipment.
|
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• | For-hire standard - Transportation services of one-way shipments utilizing standard dry van trailing equipment.
|
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• | For-hire specialty - Transportation services of one-way shipments utilizing bulk, temperature controlled, flatbed, straight truck, and other specialty equipment.
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| | | | | | | |
| Nine Months Ended September 30, |
| 2019 | | 2018 |
Dedicated standard | | | |
Revenues (excluding fuel surcharge) (1) | $ | 250.8 |
| | $ | 237.7 |
|
Average trucks (2) (3) | 1,806 |
| | 1,637 |
|
Revenue per truck per week (4) | $ | 3,607 |
| | $ | 3,780 |
|
Dedicated specialty | | | |
Revenues (excluding fuel surcharge) (1) | $ | 281.9 |
| | $ | 304.5 |
|
Average trucks (2) (3) | 2,132 |
| | 2,279 |
|
Revenue per truck per week (4) | $ | 3,435 |
| | $ | 3,478 |
|
For-hire standard | | | |
Revenues (excluding fuel surcharge) (1) | $ | 859.9 |
| | $ | 901.2 |
|
Average trucks (2) (3) | 6,079 |
| | 6,096 |
|
Revenue per truck per week (4) | $ | 3,674 |
| | $ | 3,848 |
|
For-hire specialty | | | |
Revenues (excluding fuel surcharge) (1) | $ | 188.4 |
| | $ | 241.6 |
|
Average trucks (2) (3) | 1,304 |
| | 1,551 |
|
Revenue per truck per week (4) | $ | 3,752 |
| | $ | 4,052 |
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Total Truckload | | | |
Revenues (excluding fuel surcharge) (6) | $ | 1,582.3 |
| | $ | 1,685.0 |
|
Average trucks (2) (3) | 11,321 |
| | 11,563 |
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Revenue per truck per week (4) | $ | 3,628 |
| | $ | 3,793 |
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Average company trucks (3) | 8,433 |
| | 8,833 |
|
Average owner-operator trucks (3) | 2,888 |
| | 2,730 |
|
Trailers | 35,612 |
| | 38,026 |
|
Operating ratio (5) | 98.8 | % | | 90.4 | % |
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(1) | Revenues (excluding fuel surcharge), in millions, exclude revenue in-transit. |
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(2) | Includes company trucks and owner-operator trucks. |
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(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. |
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(4) | Calculated excluding fuel surcharge and revenue in-transit, consistent with how revenue is reported internally for segment purposes, using weighted workdays. |
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(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. |
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(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. |
Truckload revenues (excluding fuel surcharge) decreased $102.7$201.6 million, approximately 13%, in the nine months ended September 30, 2020 compared to the same period in 2019, primarily due to a decline in both volume and price, and the shutdown of our FTFM service offering in August 2019 which generated $77.4 million of revenues in the nine months ended September 30, 2019. Volume and price declined 5% and 3%, respectively, from the same period in 2019, as a result of early 2020 soft market conditions being compounded by the shutdown of non-essential businesses in response to COVID-19 and capacity constraints resulting, in part, from the impacts of COVID-19. Revenue per truck per week decreased $116, or 3%, period over period as lower price was partially offset by productivity improvements.
Truckload income from operations increased $104.1 million in the nine months ended September 30, 2020 compared to the same period in 2019, due mainly to a decrease in net restructuring activity of $50.9 million, 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 nine months ended September 30, 2019 was $34.2 million, and a reduction in impairment charges on assets held for sale of $8.3 million. These items were partially offset by the unfavorable earnings impact of reduced volume and price noted above, increased equipment disposition costs resulting from used equipment market conditions in 2020, and increased performance-based incentive compensation costs.
Intermodal
The following table presents the KPIs for our Intermodal segment for the periods indicated.
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.
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2020 | | 2019 |
Orders (1) | 315,582 | | | 324,946 | |
Containers | 21,744 | | | 23,014 | |
Trucks (2) | 1,582 | | | 1,544 | |
Revenue per order (3) | $ | 2,172 | | | $ | 2,285 | |
Operating ratio (4) | 92.9 | % | | 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) decreased $41.2 million, approximately 6%, in the nine months ended September 30, 20192020 compared to the same period in 2018. A decline2019, primarily driven by a 3% decrease in volume of 8% wasorders due to COVID-19 induced network demand disruptions and dray capacity constraints, partially offset by a 2% increasegrowth in price. Decreased volume was the result of aEast. A 5% decrease in demand which drove lower productivity, as well as the shutdown of our FTFM service offering in the third quarter of 2019. Price increased period over period due to contract carry-over and 2019 rate renewals, despite fewer promotional and premium revenue opportunities. Revenue per truck per week decreased $165, or 4%, period over period as a result of lower productivityorder, driven primarily by lower freight volumes.a decline in length of haul, also contributed to the overall decline in revenue within Intermodal.
TruckloadIntermodal income from operations decreased $143.6$25.2 million, approximately 89%33%, in the nine months ended September 30, 20192020 compared to the same period in 2018. This decrease was primarily2019. Revenue declines, higher equipment disposition and impairment costs due to $50.4 million of restructuring charges related to the shutdown of our FTFM service offering, the $34.6 million FTFM goodwill impairment, an additional $14.5 millionused equipment market conditions, and increases in operating losses within FTFM through the third quarter of 2019 compared to the same period in 2018, and the $11.5 million non-cash charge resulting from the impairment of assets held for sale. Lower volumes, as discussed above, also contributed to the decrease but were partially offset by a reduction in driversafety premiums and maintenance related costs.costs drove the decline in income from operations.
IntermodalLogistics
The following table presents our key performance indicatorsthe KPI for our IntermodalLogistics segment for the periods indicated:indicated.
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2020 | | 2019 |
Operating ratio (1) | 97.2 | % | | 95.8 | % |
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| | | | | | | |
| Nine Months Ended September 30, |
| 2019 | | 2018 |
Orders (1) | 329,505 |
| | 329,014 |
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Containers | 23,014 |
| | 21,288 |
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Trucks (2) | 1,544 |
| | 1,482 |
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Revenue per order (3) | $ | 2,258 |
| | $ | 2,070 |
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Operating ratio (4) | 89.9 | % | | 86.8 | % |
(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) | Based on delivered orders. |
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(2) | Includes company trucks and owner-operator trucks at the end of the period. |
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(3) | Calculated excluding fuel surcharge and revenue in-transit, consistent with how revenue is reported internally for segment purposes. |
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(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. |
IntermodalLogistics revenues (excluding fuel surcharge) increased $58.6$47.9 million, approximately 9%7%, in the nine months ended September 30, 20192020 compared to the same period in 2018.2019, primarily due to an increase in volume despite one of the Company's import/export customers insourcing their warehouse management function in April 2019. The increase in volume was drivenpartially offset by a 9% increasedecrease in revenue per order primarily resulting from 2018 contract carry-over,in the first half of 2020 compared to the same period in 2019 contract renewals and increased lengthas a result of haul, while orders remained flat period over period.compressed rates.
IntermodalLogistics income from operations decreased $15.2$7.9 million, approximately 17%27%, in the nine months ended September 30, 20192020 compared to the same period in 2018. Revenue growth, due to the increase in revenue per order noted above, was more than offset by higher purchased transportation, equipment depreciation, and rail ramp storage costs. Asset utilization was also unfavorable compared to the same period of 2018.
Logistics
The following table presents our key performance indicators for our Logistics segment for the periods indicated:
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| | | | | |
| Nine Months Ended September 30, |
| 2019 | | 2018 |
Operating ratio (1) | 95.8 | % | | 95.8 | % |
Brokerage revenues as a percentage of Logistics revenues (2) | 83.6 | % | | 78.3 | % |
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(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. |
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(2) | Revenues (excluding fuel surcharge), in millions, including revenue in-transit. |
Logistics revenues (excluding fuel surcharge) decreased $36.7 million, approximately 5%, in the nine months ended September 30, 2019 compared to the same period in 2018, primarily due to one of the Company's import/export customers
insourcing their warehouse management function in April 2019. In addition, reduced revenue per order was partially offset by brokerage volume growth of 15%.
Logistics income from operations decreased $1.8 million, approximately 6%, in the nine months ended September 30, 2019 compared to the same period in 2018, primarily due to compressedCompressed net revenue in our brokerage and reduced volumes within our import/export business.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 incomewas a loss from operations of $6.2$12.9 million in the nine months ended September 30, 2019,2020, compared to a lossincome of $26.9$6.2 million in the same period in 2018.2019. Factors contributing to increased incomethe change include $13.1 million of costs as a reductionresult of an adverse tax ruling in the third quarter of 2020 and a $9.2 million increase in performance-based incentive compensation, the $5.8 million settlement of a lawsuit that challenged Washington State labor law compliance in 2018, and a $4.6 million increase in income from operations from our leasing business driven by increased lease activity.compensation.
Other Expense (Income)
Other expense decreased $1.4 million, approximately 15%, in the nine months ended September 30, 2019 compared to the same period in 2018, primarily from a $3.7 million increase in interest income and a $0.3 million decrease in net foreign currency losses, partially offset by the 2018 recognition of a $2.5 million pre-tax gain related to our ownership interest in PSI and a $0.1 million increase in interest expense. See Note 5, Investments, for more information on PSI.
Income Tax Expense
Our provision for income taxes decreased $33.1 million, approximately 52%, in the nine months ended September 30, 2019 compared to the same period in 2018 due to lower taxable income. The effective income tax rate was 25.3% for the nine months ended September 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 September 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 liquidityliquidity needs as we continue to execute our business strategy, or because the COVID-19 crisis lasts longer than anticipated, and/or the revenue declines experienced 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:shown.
| | | | | | | | | | | | | | |
(in millions) | | September 30, 2020 | | December 31, 2019 |
Cash and cash equivalents | | $ | 768.5 | | | $ | 551.6 | |
Marketable securities | | 45.6 | | | 48.3 | |
Total cash, cash equivalents, and marketable securities | | $ | 814.1 | | | $ | 599.9 | |
| | | | |
Debt: | | | | |
Senior notes | | $ | 305.0 | | | $ | 360.0 | |
Finance leases | | 2.0 | | | 1.7 | |
Total debt (1) | | $ | 307.0 | | | $ | 361.7 | |
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| | | | | | | | |
(in millions) | | September 30, 2019 | | December 31, 2018 |
Cash and cash equivalents | | $ | 437.1 |
| | $ | 378.7 |
|
Marketable securities | | 47.4 |
| | 51.3 |
|
Total cash, cash equivalents, and marketable securities | | $ | 484.5 |
| | $ | 430.0 |
|
| | | | |
Debt: | | | | |
Senior notes | | $ | 400.0 |
| | $ | 400.0 |
|
Equipment financing | | 1.3 |
| | 5.0 |
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Finance leases | | 5.3 |
| | 6.9 |
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Total debt (1) | | $ | 406.6 |
| | $ | 411.9 |
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(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 September 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.
| | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
(in millions) | | 2020 | | 2019 |
Net cash provided by operating activities | | $ | 469.1 | | | $ | 470.3 | |
Net cash used in investing activities | | (163.0) | | | (355.6) | |
Net cash used in financing activities | | (89.2) | | | (56.3) | |
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| | | | | | | | | |
| | Nine Months Ended September 30, |
(in millions) | | 2019 | | 2018 |
Net cash provided by operating activities | | $ | 470.3 |
| | $ | 410.1 |
|
Net cash used in investing activities | | (355.6 | ) | | (222.1 | ) |
Net cash used in financing activities | | (56.3 | ) | | (66.7 | ) |
Nine Months Ended September 30, 20192020 Compared to Nine Months Ended September 30, 20182019
Operating Activities
Cash provided by operating activities increased $60.2decreased $1.2 million in the first nine months of 2020 compared to the same period in 2019. The decrease was driven by a decrease in net income after adjustments for various noncash charges, partially offset by a net increase in cash provided by working capital. Improvements in payables, claims reserves and other receivables - net, and other liabilities of $153.0 million collectively, were partially offset by a $99.4 million reduction in accounts receivable cash flows.
Investing Activities
Cash used in investing activities decreased $192.6 million, approximately 15%54%, in the first nine months of 20192020 compared to the same period in 2018,2019. The decrease in cash used was primarily 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 thea decrease in net income ascapital expenditures.
The following table sets forth our net capital expenditures for the periods indicated.
adjusted for non-cash items. Non-cash restructuring charges related to the shutdown of the FTFM service offering were $43.3 | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
(in millions) | | 2020 | | 2019 |
Transportation equipment | | $ | 131.7 | | | $ | 308.6 | |
Other property and equipment | | 38.7 | | | 42.8 | |
Proceeds from sale of property and equipment | | (55.5) | | | (38.8) | |
Net capital expenditures | | $ | 114.9 | | | $ | 312.6 | |
Net capital expenditures decreased $197.7 million in the first nine months of 2019 and primarily included charges for the impairment of tangible and intangible assets including equipment, customer lists and other customer related assets, and software.
Investing Activities
Cash used in investing activities increased $133.5 million, approximately 60%, in the first nine months of 20192020 compared to the same period in 2018.2019. The increase in cash useddecrease was driven by the increasea $176.9 million decrease in net capital expenditures and the reclassification of proceeds from lease receipts to operating activities with the adoption of ASC 842, partially offset by increased sales of marketable securities.
Capital Expenditures
The following table sets forth, for the periods indicated, our net capital expenditures.
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| | | | | | | | | |
| | Nine Months Ended September 30, |
(in millions) | | 2019 | | 2018 |
Transportation equipment | | $ | 308.6 |
| | $ | 268.1 |
|
Other property and equipment | | 42.8 |
| | 22.3 |
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Proceeds from sale of property and equipment | | (38.8 | ) | | (74.6 | ) |
Net capital expenditures | | $ | 312.6 |
| | $ | 215.8 |
|
Expenditures for transportation equipment and other property and equipment increased $40.5 million and $20.5 million, respectively,resulting mainly from decreased tractor purchases due to reduced manufacturer capacity in the first nine monthsbeginning of 2019 compared to2020, combined with a $16.7 million increase in proceeds from the same period in 2018 driven by increased tractor purchases, land, buildings, and improvements spend, and capitalized IT costs. Proceeds from sale of property and equipment decreased $35.8 million primarily as a resultresulting from increased tractor sales, including 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 $10.4increased $32.9 million, approximately 16%58%, in the first nine months of 20192020 compared to the same period in 2018.2019. The main driverdrivers of the decreaseincrease in cash used waswere the $11.6$25.0 million decreaseand $30.0 million repayments of private placement notes in payments on debtMarch and finance lease obligations,September of 2020, respectively, 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
Despite disruptions in the financial markets due to COVID-19, we have been able to fund our liquidity needs to date. We believe we are in a strong liquidity position with a cash, cash equivalents, and marketable securities balance of $814.1 million and $375.8 million of unused credit capacity. Our outstanding debt as of the end of the quarter was $307.0 million, of which only $0.4 million related to finance leases is short-term in nature. 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.
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 second quarter of 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 September 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 nine months ended September 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 reporteddiscussed 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 Proceedings
LEGAL PROCEEDINGS
The Company is party to various lawsuits in the ordinary course of its business. 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 has adversely affected, 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; the Company's ability to hire and retain drivers; 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 September 30, 2019:2020.
Issuer Purchases of Equity Securities
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| | | | | | | | | | | | | | |
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 |
July 1 - July 31 | | — |
| | $ | — |
| | — |
| | $ | — |
|
August 1 - August 31 | | — |
| | — |
| | — |
| | — |
|
September 1 - September 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 |
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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.INS* | | XBRL 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 September 30, 2019,2020, 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. |
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Date: | October 31, 201929, 2020 | /s/ Stephen L. Bruffett |
| | Stephen L. Bruffett |
| | Executive Vice President and Chief Financial Officer |
| | (Duly Authorized Officer and Principal Financial Officer) |