SCHNEIDER NATIONAL, INC. 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 endedDecember 31, 2019 . INTRODUCTION Recent Events COVID-19 Pandemic COVID-19 was declared a pandemic by theWorld Health Organization and a national emergency by the President of theU.S. The extent the impact of COVID-19 will have on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, the efforts of governments at the national, state, and local levels to combat the outbreak, and the impact of the pandemic and these governmental actions on our customers, which are uncertain and cannot be fully predicted at this time. The Company's operational and financial performance was impacted by a decrease in demand during the second quarter of 2020 resulting in part from imposed stay-at-home orders and the related closure of certain customers as a result of COVID-19. The impact was primarily within our truckload and intermodal operations during the month of April, however sequential volume improvements were experienced during the second quarter. Many drivers were redeployed to areas within our portfolio where there was need, but we saw an overall reduction in revenues in the second quarter. We currently estimate the largest impacts of COVID-19 on our business have been incurred to date and that we will experience continued improvement in the third and fourth quarters; however, we are unable to predict with any certainty the impact that COVID-19 may continue to have on our operational and financial performance. We have implemented cost reduction efforts to help mitigate the impact reduced revenues have had, and may continue to have, on our full-year 2020 income from operations; however, these reductions have not, and are not expected to, fully offset the decline in revenues. We are reducing expenses through decreased discretionary spending including travel and entertainment, hiring and headcount, and various other expenses. While we are working diligently to manage costs throughout the organization, we have incurred additional expenses related to the safe onboarding of company drivers, the purchase of personal protective equipment, emergency sick leave benefits, and additional cleaning services. We anticipate these additional costs will continue to be incurred as the year progresses in order to ensure the safety of our associates, owner-operators, and customers. We continue to actively monitor the situation and take further actions that alter our business operations as may be required by federal, state, or local governmental authorities, or that we determine are in the best interests of our associates, customers, and shareholders. In this time of uncertainty resulting from COVID-19, we are continuing to serve our customers while taking precautions to provide a safe work environment for our associates, owner-operators, and customers.
Business Overview
We are a leading transportation and logistics services company providing a broad portfolio of premier truckload, intermodal, and logistics solutions and operating one of the largest for-hire trucking fleets inNorth America . Our highly flexible and balanced business combines asset-based truckload services with asset-light intermodal and non-asset logistics offerings, enabling us to serve our customers' diverse transportation needs. Our broad portfolio of services provides us with a greater opportunity to allocate capital within our portfolio of services in a manner designed to maximize returns across all market cycles and economic conditions. We continually monitor our performance and market conditions to ensure appropriate allocation of capital and resources to grow our businesses and to optimize returns across reportable segments. Our strong balance sheet enables us to carry out an acquisition strategy that strengthens our overall portfolio. We are positioned to leverage our scalable platform and experienced operations team to acquire high-quality businesses that meet our disciplined selection criteria to broaden our service offerings and customer base. Our truckload services include standard long-haul and regional shipping services primarily using dry van, bulk, temperature-controlled, and flat-bed equipment, as well as customized solutions for high-value and time-sensitive loads to offer vast coverage throughNorth America , includingMexico andCanada . These services are executed through either dedicated or network contracts. FTFM residential and retail store delivery services were provided into the third quarter of 2019, when that service offering was shut down. 17 -------------------------------------------------------------------------------- Table of Contents 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 with primarily company dray drivers, augmented by third-party dray capacity to offer vast coverage throughoutNorth America , including cross border. Our logistics offerings consist of non-asset freight brokerage, supply chain (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 (1) removing the impact of items from our
operating results that, in our opinion, do not reflect our core operating
performance, (2) providing investors with the same information our management
uses internally to assess our core operating performance, and (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.
18
--------------------------------------------------------------------------------
Table of Contents
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 Six Months Ended
June 30, June 30,
(in millions, except ratios) 2020 2019 2020 2019
Operating revenues $ 1,032.8 $ 1,212.7 $ 2,151.9 $ 2,406.8
Revenues (excluding fuel surcharge)
(1) 964.1 1,088.5 1,980.2 2,170.8
Income from operations 63.4 49.2 118.3 100.7
Adjusted income from operations (2) 63.6 83.8 117.3 135.3
Operating ratio 93.9 % 95.9 % 94.5 % 95.8 %
Adjusted operating ratio (3) 93.4 % 92.3 % 94.1 % 93.8 %
Net income $ 46.5 $ 34.5 $ 90.3 $ 71.4
Adjusted net income (4) 46.7 60.3 89.6 97.2
(1) We define "revenues (excluding fuel surcharge)" as operating revenues less
fuel surcharge revenues, which are excluded from revenues at the segment level.
Included below is a reconciliation of operating revenues, the most closely
comparable GAAP financial measure, to revenues (excluding fuel surcharge).
(2) We define "adjusted income from operations" as income from operations,
adjusted to exclude material items that do not reflect our core operating
performance. Included below is a reconciliation of income from operations, which
is the most directly comparable GAAP measure, to adjusted income from
operations. Excluded items for the periods shown are explained in the table and
notes below.
(3) We define "adjusted operating ratio" as operating expenses, adjusted to
exclude material items that do not reflect our core operating performance,
divided by revenues (excluding fuel surcharge). Included below is a
reconciliation of operating ratio, which is the most directly comparable GAAP
measure, to adjusted operating ratio. 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 Six Months Ended
June 30, June 30,
(in millions) 2020 2019 2020 2019
Operating revenues $ 1,032.8 $ 1,212.7 $ 2,151.9 $ 2,406.8
Less: Fuel surcharge revenues 68.7 124.2 171.7 236.0
Revenues (excluding fuel surcharge)
Adjusted income from operations
Three Months Ended Six Months Ended
June 30, June 30,
(in millions) 2020 2019 2020 2019
Income from operations $ 63.4 $ 49.2 $ 118.3 $ 100.7
Goodwill impairment (1) - 34.6 - 34.6
Restructuring-net (2) 0.2 - (1.0) -
Adjusted income from operations
(1)A triggering event occurred during the second quarter of 2019, as results
from our FTFM reporting unit were considerably less than projected, resulting in
full impairment of FTFM's goodwill.
(2)Activity associated with the shutdown of the FTFM service offering. Refer to
Note 14, Restructuring, for additional details.
19
--------------------------------------------------------------------------------
Table of Contents
Adjusted operating ratio
Three Months Ended Six Months Ended
June 30, June 30,
(in millions, except ratios) 2020 2019 2020 2019
Total operating expenses $ 969.4
1,032.8 1,212.7 2,151.9 2,406.8
Operating ratio 93.9 % 95.9 % 94.5 % 95.8 %
Total operating expenses $ 969.4
(68.7) (124.2) (171.7) (236.0)
Goodwill impairment - (34.6) - (34.6)
Restructuring-net (0.2) - 1.0 -
Adjusted total operating expenses $ 900.5 Operating revenues$ 1,032.8
68.7 124.2 171.7 236.0
Revenues (excluding fuel surcharge) $ 964.1
Adjusted operating ratio 93.4 % 92.3 % 94.1 % 93.8 %
Adjusted net income
Three Months Ended Six Months Ended
June 30, June 30,
(in millions) 2020 2019 2020 2019
Net income $ 46.5 $ 34.5 $ 90.3 $ 71.4
Goodwill impairment - 34.6 - 34.6
Restructuring-net 0.2 - (1.0) -
Income tax effect of non-GAAP adjustments
(1) - (8.8) 0.3 (8.8)
Adjusted net income $ 46.7 $
60.3
(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
Enterprise Results Summary
Enterprise net income increased$12.0 million , approximately 35%, in the second quarter of 2020 compared to the same quarter in 2019, primarily due to the$34.6 million FTFM goodwill impairment recorded in 2019; the benefit associated with the FTFM shutdown, as FTFM's loss from operations in the second quarter of 2019 was$13.1 million ; and a$2.7 million gain on our ownership interest in PSI. This was partially offset by a decline in Intermodal and Truckload freight volumes, primarily a result of COVID-19 market disruptions; a reduction in price across all of our service offerings; and an increase in income taxes related to higher taxable income.
Adjusted net income decreased
20
--------------------------------------------------------------------------------
Table of Contents
Components of Enterprise Net Income
Enterprise Revenues
Enterprise operating revenues decreased
Factors contributing to the decrease were as follows: •an$83.8 million decrease in Truckload segment revenues (excluding fuel surcharge) resulting from the shutdown of our FTFM service offering inAugust 2019 which generated$31.8 million of revenues in the second quarter of 2019, as well as an overall decrease in Truckload volume and price largely attributed to the impact of COVID-19; •a$55.5 million decrease in fuel surcharge revenues primarily resulting from a 22% decline in average diesel price per gallon in theU.S. as reported by theDepartment of Energy , a decline in Intermodal and Truckload volumes, and a$5.5 million reduction related to the FTFM shutdown; and •a$40.8 million decrease in Intermodal segment revenues (excluding fuel surcharge) due to a decrease in both volume and price resulting primarily from COVID-19 induced network disruptions, shorter length of haul, and freight mix.
Enterprise revenues (excluding fuel surcharge) decreased
Enterprise Income from Operations and Operating Ratio
Enterprise income from operations increased$14.2 million , approximately 29%, in the second quarter of 2020 compared to the same quarter in 2019 primarily due to the$34.6 million FTFM goodwill impairment recorded in 2019 and the benefit associated with the FTFM shutdown, as FTFM's loss from operations in the second quarter of 2019 was$13.1 million . A decrease in fuel costs, continued cost savings attributable to a reduction in headcount, lower healthcare costs, and favorable driver onboarding expenses also contributed to the increase in income from operations. Those increases were partially offset by a reduction in Intermodal and Truckload freight volumes primarily due to COVID-19 market disruptions, lower price across all of our service offerings, incremental costs associated with facility deep cleaning, personal protective equipment purchases, and other proactive measures taken as a result of COVID-19, and$2.8 million from the combination of equipment dispositions and impairments due to used equipment market conditions.
Adjusted income from operations decreased
Enterprise operating ratio improved on a GAAP basis but weakened on an adjusted basis. Among other factors, our operating ratio can be negatively impacted by changes in portfolio mix when our higher operating ratio, less asset-focused Logistics segment grows faster than our lower operating ratio, capital-intensive Truckload segment.
Enterprise Operating Expenses
Key operating expense fluctuations are described below. •Purchased transportation costs decreased$66.7 million , or 13%, quarter over quarter, primarily due to a decrease in Intermodal and Truckload volumes, reduced owner-operator pay and third party carrier costs within Truckload resulting from business mix and rate compression due to market conditions, as well as an$11.6 million reduction in purchased transportation costs attributable to the FTFM shutdown. •Salaries, wages, and benefits decreased$38.5 million , or 13%, quarter over quarter, largely due to the benefit associated with the FTFM shutdown, as FTFM's salaries, wages, and benefits were$16.3 million in the second quarter of 2019, and headcount reductions across the organization. A$7.0 million reduction in healthcare costs primarily resulting from favorable claims experience and fewer plan participants also contributed to the decrease. •Fuel and fuel taxes for company trucks decreased$34.1 million , or 45%, quarter over quarter, driven by a decrease in cost per gallon, less company driver miles within our Truckload segment, and a$4.3 million reduction in fuel and fuel taxes attributable to the FTFM shutdown. A significant portion of fuel costs are recovered through our fuel surcharge programs. •Depreciation and amortization decreased$2.6 million , or 3%, quarter over quarter, primarily related to the FTFM shutdown. •Operating supplies and expenses decreased$15.0 million , or 11%, quarter over quarter, driven by a$6.6 million decline in cost of goods sold due to fewer equipment sales under sales-type leases by our leasing business and a$4.3 million reduction in facility, utility, and other costs resulting from temporary facility closures associated with COVID-19 and other cost savings initiatives. We experienced a reduction in a variety of other operating-related 21 -------------------------------------------------------------------------------- Table of Contents expenses, including facility rents related to the FTFM shutdown and software subscription costs, that were individually immaterial. These decreases were partially offset by incremental cleaning and equipment costs related to COVID-19, along with a$1.6 million increase in impairment on assets held for sale and a$1.2 million change in equipment dispositions resulting from used equipment market conditions in 2020. In the second quarter of 2020, we recorded$1.0 million of net equipment losses compared to$0.2 million of net equipment gains in the second quarter of 2019. •Insurance and related expenses increased$2.9 million , or 11%, quarter over quarter, primarily due to an increase in insurance premiums, partially offset by a reduction in cargo and collision costs. •Other general expenses decreased$5.7 million , or 20%, quarter over quarter, primarily due to a reduction in travel expenses resulting from Company enforced travel bans related to COVID-19 and a decrease in driver recruiting and training costs due to lower company driver turnover and cost savings initiatives. Additional costs were incurred in the driver recruiting and training space to safely onboard new drivers during COVID-19; however, these costs were more than offset by savings from lower company driver turnover and fewer hires. We expect our travel expenses to continue to be incurred at a reduced level for the remainder of 2020 as a result of COVID-19. •Goodwill impairment charges decreased$34.6 million , quarter over quarter, due to the FTFM goodwill impairment charge of$34.6 million in the second quarter of 2019. •Restructuring-net was$0.2 million unfavorable quarter over quarter, due primarily to net losses on equipment sales. Refer to Note 14, Restructuring, for additional details. Total Other Expenses (Income) Other expense decreased$2.6 million , approximately 79%, in the second quarter of 2020 compared to the same quarter in 2019 due primarily to the recognition of a$2.7 million pre-tax gain on our ownership interest in PSI and a$2.1 million decrease in interest expense. See Note 6, Investments, for more information on PSI. These items were partially offset by a$1.9 million decrease in interest income as interest rates have declined quarter over quarter.
Income Tax Expense
Our provision for income taxes increased$4.8 million , approximately 42%, in the second quarter of 2020 compared to the same quarter in 2019 due to higher taxable income. The effective income tax rate was 25.8% for the three months endedJune 30, 2020 compared to 24.8% for the same quarter last year.
Revenues and Income from Operations by Segment
The following tables summarize revenue and income from operations by segment:
Three Months Ended
June 30,
Revenues by Segment (in millions) 2020 2019
Truckload $ 451.1 $ 534.9
Intermodal 219.0 259.8
Logistics 230.9 227.0
Other 89.8 95.8
Fuel surcharge 68.7 124.2
Inter-segment eliminations (26.7) (29.0)
Operating revenues $ 1,032.8 $ 1,212.7
22
--------------------------------------------------------------------------------
Table of Contents
Three Months Ended
June 30,
Income from Operations by Segment (in millions) 2020 2019
Truckload $ 40.5 $ 7.9
Intermodal 11.0 30.5
Logistics 8.2 9.2
Other 3.7 1.6
Income from operations 63.4 49.2
Adjustments:
Goodwill impairment - 34.6
Restructuring-net 0.2 -
Adjusted income from operations $ 63.6 $ 83.8
We monitor and analyze a number of KPIs in order to manage our business and evaluate our financial and operating performance. Below are our KPIs by segment.
Truckload
The following table presents the 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 two operations that make up our Truckload segment are
as follows:
•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
June 30,
2020 2019
Dedicated
Revenues (excluding fuel surcharge) (1)
3,891 3,991
Revenue per truck per week (4) $ 3,448 $ 3,467 Network
Revenues (excluding fuel surcharge) (1)
6,350 7,615
Revenue per truck per week (4) $ 3,426 $ 3,654 Total Truckload
Revenues (excluding fuel surcharge) (5)
10,241 11,606
Revenue per truck per week (4) $ 3,434 $ 3,590
Average company trucks (3) 7,366 8,728
Average owner-operator trucks (3) 2,875 2,878
Trailers 36,141 37,409
Operating ratio (6) 91.0 % 98.5 %
(1)Revenues (excluding fuel surcharge), in millions, exclude revenue in transit.
(2)Includes company trucks and owner-operator trucks.
(3)Calculated based on beginning and end of month counts and represents the
average number of trucks available to haul freight over the specified timeframe.
(4)Calculated excluding fuel surcharge and revenue in transit, consistent with
how revenue is reported internally for segment purposes, using weighted
workdays.
(5)Revenues (excluding fuel surcharge), in millions, include revenue in transit
at the operating segment level, and therefore does not sum with amounts
presented above.
(6)Calculated as segment operating expenses divided by segment revenues
(excluding fuel surcharge) including revenue in transit and related expenses at
the operating segment level.
23
--------------------------------------------------------------------------------
Table of Contents
Truckload revenues (excluding fuel surcharge) decreased $83.8 million ,
approximately 16%, in the second quarter of 2020 compared to the same quarter in
2019 primarily a result of the shutdown of our FTFM service offering in August
2019 which generated $31.8 million of revenues in the second quarter of 2019, as
well as a decline in both volume and price in the remaining dedicated and
network business. The decline in volume of 7% compared to the second quarter of
2019 was driven by degradation in market conditions at the beginning of the
quarter as non-essential retail customers shut down but improved as the quarter
progressed. A softer freight market compared to the second quarter of 2019 drove
a decline in price of 3% which also was the main contributor of the $156 , or 4%,
decrease in revenue per truck per week quarter over quarter.
Truckload income from operations increased $32.6 million in the second quarter
of 2020 compared to the same quarter in 2019, due mainly to the $34.6 million
FTFM goodwill impairment recorded in 2019 and the benefit associated with the
FTFM shutdown, as FTFM's loss from operations in the second quarter of 2019 was
$13.1 million . While revenue decreased period over period as cited above, the
decrease was more than offset by lower fuel and purchased transportation costs,
in addition to improved cost management related to driver recruiting and
maintenance.
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
June 30,
2020 2019
Orders (1) 98,362 113,007
Containers 21,172 22,788
Trucks (2) 1,508 1,539
Revenue per order (3) $ 2,145 $ 2,288
Operating ratio (4) 95.0 % 88.2 %
(1)Based on delivered rail orders.
(2)Includes company trucks and owner-operator trucks at the end of the period.
(3)Calculated using rail revenues excluding fuel surcharge and revenue in
transit, consistent with how revenue is reported internally for segment
purposes.
(4)Calculated as segment operating expenses divided by segment revenues
(excluding fuel surcharge) including revenue in transit and related expenses at
the operating segment level.
Intermodal revenues (excluding fuel surcharge) decreased $40.8 million ,
approximately 16%, in the second quarter of 2020 compared to the same quarter in
2019. Network demand disruption, due to weakened Asia import volumes, combined
with the prolonged shutdown of non-essential retail customers impacted both
orders and revenue per order within our Intermodal segment. Orders decreased 13%
while revenue per order decreased $143 , or 6%, due to lower trans-continental
volume and higher mix of shorter length of haul volumes within the East, as well
as a decline in price.
Intermodal income from operations decreased $19.5 million , approximately 64%, in
the second quarter of 2020 compared to the same quarter in 2019. Contributing to
this decrease was the revenue reduction, as explained above, as well as
increased rail costs and higher equipment dispositions and impairments due to
used equipment market conditions.
Logistics
The following table presents the KPI for our Logistics segment for the periods
indicated.
Three Months Ended
June 30,
2020 2019
Operating ratio (1) 96.4 % 96.0 %
(1)Calculated as segment operating expenses divided by segment revenues (excluding fuel surcharge) including revenue in transit and related expenses at the operating segment level.
24
--------------------------------------------------------------------------------
Table of Contents
Logistics revenues (excluding fuel surcharge) increased $3.9 million ,
approximately 2%, in the second quarter of 2020 compared to the same quarter in
2019, primarily as a result of volume growth, partially offset by a decrease in
revenue per order related to rate compression.
Logistics income from operations decreased $1.0 million , approximately 11%, in
the second quarter of 2020 compared to the same quarter in 2019, primarily due
to compressed net revenue.
Other
Income from operations within Other was $3.7 million in the second quarter of
2020, compared to income of $1.6 million in the same quarter in 2019. The $2.1
million increase resulted primarily from a $2.3 million reduction in healthcare
costs, partially offset by a decrease in income from operations from our leasing
business driven by lower lease activity.
Six Months Ended
Enterprise Results Summary
Enterprise net income increased$18.9 million , approximately 26%, in the six months endedJune 30, 2020 compared to the same period in 2019, primarily due to the$34.6 million FTFM goodwill impairment recorded in 2019; the benefit associated with the FTFM shutdown, as FTFM's loss from operations in the first half of 2019 was$25.2 million ; and an$8.8 million gain on our ownership interest in PSI. This was partially offset by a decline in Intermodal and Truckload freight volumes, primarily a result of COVID-19 market disruptions; a reduction in price across all of our service offerings;$10.4 million related to equipment dispositions and impairments due to used equipment market conditions; and an increase in income taxes related to higher taxable income. In the first half of 2020, we recognized$7.7 million of net equipment losses and impairment charges compared to$2.7 million of net equipment gains and impairment charges in the first half of 2019.
Adjusted net income decreased
Components of Enterprise Net Income
Enterprise Revenues
Enterprise operating revenues decreased
Factors contributing to the decrease were as follows: •a$146.2 million decrease in Truckload segment revenues (excluding fuel surcharge) resulting from the shutdown of our FTFM service offering inAugust 2019 which generated$63.4 million of revenues in the first half of 2019, as well as a decrease in both Truckload volume and price largely attributed to the impact of COVID-19 on market conditions; •a$64.3 million decrease in fuel surcharge revenues primarily resulting from a 13% decline in average diesel price per gallon in theU.S. as reported by theDepartment of Energy , a decline in Intermodal and Truckload volumes, and a$10.5 million reduction related to the FTFM shutdown; and •a$40.4 million decrease in Intermodal segment revenues (excluding fuel surcharge) primarily due to a decrease in both volume and price resulting primarily from COVID-19 induced network disruptions, shorter length of haul, and freight mix.
Enterprise revenues (excluding fuel surcharge) decreased
Enterprise Income from Operations and Operating Ratio
Enterprise income from operations increased$17.6 million , approximately 17%, in the six months endedJune 30, 2020 compared to the same period in 2019, primarily due to the$34.6 million FTFM goodwill impairment recorded in 2019 and the benefit associated with the FTFM shutdown, as FTFM's loss from operations in the first half of 2019 was$25.2 million . A decrease in fuel costs and continued cost savings attributable to a reduction in headcount, lower healthcare costs, and favorable driver onboarding and maintenance expenses also contributed to the increase in income from operations. Those increases were partially offset by a reduction in Intermodal and Truckload freight volumes primarily due to COVID-19 market disruptions, lower price across all of our service offerings,$10.4 million from the combination of equipment dispositions and impairments 25 -------------------------------------------------------------------------------- Table of Contents due to used equipment market conditions, and incremental costs associated with facility deep cleaning, personal protective equipment purchases, and other proactive measures taken as a result of COVID-19.
Adjusted income from operations decreased
Enterprise operating ratio improved on a GAAP basis but weakened on an adjusted basis. Our operating ratio can be negatively impacted when our higher operating ratio, less asset-focused Logistics segment grows faster than our lower operating ratio, capital-intensive Truckload segment.
Enterprise Operating Expenses
Key operating expense fluctuations are described below. •Purchased transportation costs decreased$60.4 million , or 6%, period over period, primarily due to a decrease in Intermodal and Truckload volumes, reduced owner-operator pay and third party carrier costs within Truckload resulting from business mix and rate compression due to market conditions, and a$19.4 million reduction in purchased transportation costs related to the FTFM shutdown. This was partially offset by an increase in third party carrier costs within our Logistics segment due to volume growth. •Salaries, wages, and benefits decreased$87.1 million , or 15%, period over period, largely due to the benefit associated with the FTFM shutdown and warehouse management operations insourced by an import/export customer inApril 2019 , as well as headcount reductions across the organization. An$8.3 million reduction in healthcare costs primarily due to favorable claims experience and fewer plan participants, as well as a decrease in workers' compensation expense of$2.8 million , also contributed to the decrease. •Fuel and fuel taxes for company trucks decreased$48.0 million , or 32%, period over period, driven by a decrease in cost per gallon, less company driver miles within our Truckload segment, and an$8.8 million reduction in fuel and fuel taxes attributable to the FTFM shutdown. A significant portion of fuel costs are recovered through our fuel surcharge programs. •Depreciation and amortization decreased$6.2 million , or 4%, period over period, driven by the FTFM shutdown. •Operating supplies and expenses decreased$28.1 million , or 10%, period over period, driven by a$7.7 million decrease in facility, utility, and other costs primarily due to temporary facility closures associated with COVID-19 and other cost savings initiatives, a$6.5 million reduction in temporary worker pay due to insourcing by one of our import/export customers, a$6.2 million decline in cost of goods sold due to a decrease in equipment sales under sales-type leases by our leasing business, and lower maintenance and parts spend attributable to milder weather conditions, fewer company driver miles, and better cost management. We experienced a reduction in a variety of other operating-related expenses, including equipment rentals, facility expenses, and operating taxes and licenses, that were individually immaterial. These decreases were partially offset by a$6.8 million change in equipment dispositions and a$3.6 million increase in impairment on assets held for sale due to used equipment market conditions. In the first half of 2020, we recorded$3.8 million of net equipment losses compared to$3.0 million of net equipment gains in the first half of 2019. •Insurance and related expenses increased$3.9 million , or 7%, period over period. The increase was predominately due to an increase in insurance premiums, partially offset by a reduction in cargo and collision losses. •Other general expenses decreased$11.0 million , or 17%, period over period, as a result of reduced driver recruiting and training costs due to lower company driver turnover and cost savings initiatives, as well as a reduction in travel expenses resulting from Company enforced travel bans related to COVID-19. Additional costs were incurred in the driver recruiting and training space to safely onboard new drivers during COVID-19; however, these costs were more than offset by savings from lower company driver turnover and fewer hires. We expect our travel expenses to continue to be incurred at a reduced level for the remainder of 2020 as a result of COVID-19. •Goodwill impairment charges decreased$34.6 million , period over period, due to the FTFM goodwill impairment charge of$34.6 million in the second quarter of 2019. •Restructuring-net was$1.0 million favorable, period over period, due to net gains on equipment sales and bad debt recoveries, partially offset by impairment charges associated with the FTFM shutdown in 2019. Refer to Note 14, Restructuring, for additional details.
Total Other Expenses (Income)
Other income increased$8.1 million , approximately 150%, in the six months endedJune 30, 2020 compared to the same period in 2019, primarily from a$8.8 million pre-tax gain recognized on our ownership interest in PSI. See Note 6, Investments, for more information on PSI. Interest activity remained fairly constant period over period as a$2.3 million decrease in interest income, attributed to a decline in interest rates, was partially offset by a$2.2 million decrease in interest expense. 26 -------------------------------------------------------------------------------- Table of Contents Income Tax Expense Our provision for income taxes increased$6.8 million , approximately 28%, in the six months endedJune 30, 2020 compared to the same period in 2019 due to higher taxable income. The effective income tax rate was 25.4% for the six months endedJune 30, 2020 compared to 25.1% for the same period last year.
Revenues and Income (Loss) from Operations by Segment
The following tables summarize revenue and income (loss) from operations by segment.
Six Months Ended
June 30,
Revenues by Segment (in millions) 2020 2019
Truckload $ 920.5 $ 1,066.7
Intermodal 457.0 497.4
Logistics 470.5 470.9
Other 189.2 195.7
Fuel surcharge 171.7 236.0
Inter-segment eliminations (57.0) (59.9)
Operating revenues $ 2,151.9 $ 2,406.8
Six Months Ended
June 30,Income (Loss) from Operations by Segment (in millions) 2020
2019 Truckload$ 77.1 $ 31.1 Intermodal 27.3 50.4 Logistics 12.4 19.5 Other 1.5 (0.3) Income from operations 118.3 100.7 Adjustments: Goodwill impairment - 34.6 Restructuring-net (1.0) - Adjusted income from operations$ 117.3 $ 135.3 27
--------------------------------------------------------------------------------
Table of Contents 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 the 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 two operations that make up our Truckload segment are
as follows:
•Dedicated - Transportation services with equipment devoted to customers under
long-term contracts.
•Network - Transportation services of one-way shipments, formerly called
for-hire.
Six Months Ended
June 30,
2020 2019
Dedicated
Revenues (excluding fuel surcharge) (1)
Average trucks (2) (3) 3,898 3,960 Revenue per truck per week (4)$ 3,475 $ 3,529
Network
Revenues (excluding fuel surcharge) (1)
Average trucks (2) (3) 6,325 7,613 Revenue per truck per week (4)$ 3,511 $ 3,641
Total Truckload
Revenues (excluding fuel surcharge) (5)$ 920.5 $ 1,066.7 Average trucks (2) (3) 10,223 11,573 Revenue per truck per week (4)$ 3,497 $ 3,603 Average company trucks (3) 7,339 8,706 Average owner-operator trucks (3) 2,884 2,867 Trailers 36,141 37,409 Operating ratio (6) 91.6 % 97.1 % (1)Revenues (excluding fuel surcharge), in millions, exclude revenue in transit. (2)Includes company trucks and owner-operator trucks. (3)Calculated based on beginning and end of month counts and represents the average number of trucks available to haul freight over the specified timeframe. (4)Calculated excluding fuel surcharge and revenue in transit, consistent with how revenue is reported internally for segment purposes, using weighted workdays. (5)Revenues (excluding fuel surcharge), in millions, include revenue in transit at the operating segment level, and therefore does not sum with amounts presented above. (6)Calculated as segment operating expenses divided by segment revenues (excluding fuel surcharge) including revenue in transit and related expenses at the operating segment level. Truckload revenues (excluding fuel surcharge) decreased$146.2 million , approximately 14%, in the six months endedJune 30, 2020 compared to the same period in 2019, primarily due to the shutdown of our FTFM service offering inAugust 2019 which generated$63.4 million of revenues in the first half of 2019. Both volume and price declined 4% 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. Revenue per truck per week decreased$106 , or 3%, period over period as lower price was partially offset by productivity improvements. Truckload income from operations increased$46.0 million , approximately 148%, in the six months endedJune 30, 2020 compared to the same period in 2019, due mainly to the$34.6 million FTFM goodwill impairment recorded in 2019 and the benefit associated with the FTFM shutdown, as FTFM's loss from operations in the first half of 2019 was$25.2 million . Also contributing to the increase in income from operations were lower fuel costs and improved cost management related to driver recruiting, maintenance, and safety, which more than offset the revenue decrease noted above. 28 -------------------------------------------------------------------------------- Table of Contents 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.
Six Months Ended
June 30,
2020 2019
Orders (1) 204,949 216,283
Containers 21,172 22,788
Trucks (2) 1,508 1,539
Revenue per order (3) $ 2,160 $ 2,280
Operating ratio (4) 94.0 % 89.9 %
(1)Based on delivered rail orders.
(2)Includes company trucks and owner-operator trucks at the end of the period.
(3)Calculated using rail revenues excluding fuel surcharge and revenue in
transit, consistent with how revenue is reported internally for segment
purposes.
(4)Calculated as segment operating expenses divided by segment revenues
(excluding fuel surcharge) including revenue in transit and related expenses at
the operating segment level.
Intermodal revenues (excluding fuel surcharge) decreased $40.4 million ,
approximately 8%, in the six months ended June 30, 2020 compared to the same
period in 2019. The decrease was driven by a 5% decrease in orders due to
network demand disruptions related to COVID-19, partially offset by growth in
the East and Mexico . Revenue per order decreased 5% driven primarily by a
decline in length of haul.
Intermodal income from operations decreased $23.1 million , approximately 46%, in
the six months ended June 30, 2020 compared to the same period in 2019. Revenue
declines coupled with increased rail costs and higher equipment dispositions and
impairments due to used equipment market conditions, drove the decline in income
from operations.
Logistics
The following table presents the KPI for our Logistics segment for the periods
indicated.
Six Months Ended
June 30,
2020 2019
Operating ratio (1) 97.4 % 95.9 %
(1)Calculated as segment operating expenses divided by segment revenues (excluding fuel surcharge) including revenue in transit and related expenses at the operating segment level.
Logistics revenues (excluding fuel surcharge) decreased$0.4 million in the six months endedJune 30, 2020 compared to the same period in 2019, primarily due to compression in rates, which was partially offset by an increase in volume despite one of the Company's import/export customers insourcing their warehouse management function inApril 2019 . Logistics income from operations decreased$7.1 million , approximately 36%, in the six months endedJune 30, 2020 compared to the same period in 2019. Compressed net revenue in our brokerage business, in addition to the customer insourcing noted above, both contributed to the decline in income from operations.
Other
Included in Other was income from operations of$1.5 million in the six months endedJune 30, 2020 , compared to a loss of$0.3 million in the same period in 2019. Factors contributing to the change include lower workers' compensation expense and a reduction in performance-based incentive compensation, partially offset by a$2.6 million decrease in income from operations from our leasing business driven by decreased lease activity. 29
--------------------------------------------------------------------------------
Table of Contents
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, for which our available capacity
as of June 30, 2020 was $375.8 million . We anticipate that cash generated from
operations, together with amounts available under our credit facilities, will be
sufficient to meet our requirements for the foreseeable future. To the extent
additional funds are necessary to meet our long-term liquidity needs as we
continue to execute our business strategy, or because the COVID-19 crisis lasts
longer than anticipated, and/or the revenue declines we expect to experience are
more severe than predicted, we anticipate that we will obtain these funds
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 as of the dates shown. (in millions)
June 30, 2020 December 31, 2019
Cash and cash equivalents $ 713.8 $ 551.6
Marketable securities 46.8 48.3
Total cash, cash equivalents, and marketable securities $ 760.6 $ 599.9
Debt:
Senior notes $ 335.0 $ 360.0
Finance leases 2.1 1.7
Total debt (1) $ 337.1 $ 361.7
(1)Debt on the consolidated balance sheets is presented net of deferred financing costs.
Debt
AtJune 30, 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 8, Debt and Credit Facilities, for information about our short-term and long-term financing arrangements.
Cash Flows
The following table summarizes, for the periods indicated, the changes to our cash flows provided by (used in) operating, investing, and financing activities.
Six Months Ended
June 30,
(in millions) 2020 2019
Net cash provided by operating activities $ 319.8 $ 302.0
Net cash used in investing activities (110.1) (259.4)
Net cash used in financing activities (47.5) (43.6)
Six Months Ended
Operating Activities
Cash provided by operating activities increased$17.8 million , approximately 6%, in the first six months of 2020 compared to the same period in 2019, driven by the net change in working capital balances, partially offset by an increase in net income adjusted for various noncash charges, deferred income taxes, and proceeds from lease receipts. 30 -------------------------------------------------------------------------------- Table of Contents Investing Activities
Cash used in investing activities decreased
Capital Expenditures
The following table sets forth our net capital expenditures for the periods
indicated.
Six Months Ended
June 30,
(in millions) 2020 2019
Transportation equipment $ 83.3 $ 231.4
Other property and equipment 25.0 25.7
Proceeds from sale of property and equipment (29.6) (26.0)
Net capital expenditures $ 78.7 $ 231.1
Net capital expenditures decreased $152.4 million in the first six months of
2020 compared to the same period in 2019. The decrease was driven by a $148.1
million decrease in expenditures for transportation equipment resulting mainly
from decreased tractor purchases combined with a $3.6 million increase in
proceeds from the sale of property and equipment primarily resulting from
increased tractor sales, largely related to units that were part of the 2019
shutdown of the FTFM service offering. See Note 12, Commitments and
Contingencies, for information on our firm commitments to purchase
transportation equipment.
Financing Activities
Cash used in financing activities increased$3.9 million , approximately 9%, in the first six months of 2020 compared to the same period in 2019. The main driver of the increase in cash used was the$25.0 million repayment of a private placement note in 2020, partially offset by the final guaranteed payment associated with the 2016 WSL acquisition in 2019.
Other Considerations that Could Affect Our Results, Liquidity, or Capital Resources
COVID-19
We believe we are in a strong liquidity position with a cash, cash equivalents, and marketable securities balance of$760.6 million and$375.8 million of unused credit capacity. Our outstanding debt as of the end of the quarter was$337.1 million , of which$30.0 million is short-term in nature and will be at maturity inSeptember 2020 . We are compliant with all financial covenants under our credit agreements and do not anticipate the need to seek additional capital as a result of COVID-19. As part of our business continuity plan, we are maintaining our planned investments in replacement equipment and accelerating our technology spend but have canceled almost all discretionary and growth capital expenditures for the remainder of the year.
Driver Capacity and Wage Cost
Our professional driver workforce is one of our most valuable assets. Recruiting and retaining sufficient numbers of qualified drivers is challenging in an increasingly competitive driver market and has a significant impact on our operating costs and ability to serve our customers. Changes in the demographic composition of the workforce, alternative employment opportunities that become available in the economy, and individual drivers' desire to be home more frequently can affect availability of drivers and increase the wages our drivers require.
Factors that Could Result in a Goodwill Impairment
Goodwill is tested for impairment at least annually using the discounted cash flow, guideline public company, and 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 ofOctober 31, 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 31 -------------------------------------------------------------------------------- Table of Contents 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. See further discussion in Note 7,Goodwill .
Off-Balance Sheet Arrangements
As of
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 endedDecember 31, 2019 for our contractual obligations as ofDecember 31, 2019 . There were no material changes to our contractual obligations during the six months endedJune 30, 2020 . CRITICAL ACCOUNTING ESTIMATES 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 endedDecember 31, 2019 are still current and that there have been no significant changes.
© Edgar Online, source
