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 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 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 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. 19
-------------------------------------------------------------------------------- Table of Contents 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.
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
throughout
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 OPERATIONSNon-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.
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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 Nine Months Ended
September 30, 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
(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 Nine Months Ended
September 30, 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)
Adjusted income from operations
Three Months Ended Nine Months Ended
September 30, 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
(1)Costs, including interest, as a result of an adverse tax ruling inSeptember 2020 related to a dispute with theIRS 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. 21 --------------------------------------------------------------------------------
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Adjusted operating ratio
Three Months Ended Nine Months Ended
September 30, 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 %
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
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
Adjusted operating ratio 92.8 % 92.6 % 93.6 % 93.4 %
Adjusted net income
Three Months Ended Nine Months Ended
September 30, 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
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
Enterprise Results Summary
Enterprise net income increased$24.8 million , approximately 126%, in the third quarter of 2020 compared to the same quarter in 2019, primarily due to a$49.9 million decrease in net restructuring charges associated with the FTFM shutdown in 2019, an$11.5 million decrease in impairment of held for sale 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 . 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 third quarter of 2020, and an increase in income taxes related to higher taxable income.
Adjusted net income decreased
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Components of Enterprise Net Income
Enterprise Revenues
Enterprise operating revenues decreased
Factors contributing to the decrease were as follows: •a$55.4 million decrease in Truckload segment revenues (excluding fuel surcharge) resulting from an overall decrease in Truckload volume driven by driver capacity constraints, and the shutdown of our FTFM service offering inAugust 2019 which generated$14.0 million of revenues in the third quarter of 2019; and •a$41.2 million decrease in fuel surcharge revenues primarily resulting from a 19% decline in average diesel price per gallon in theU.S. as reported by theDepartment of Energy , a decline in Truckload volumes, and a$2.6 million reduction related to the FTFM shutdown.
The above factors were partially offset by a
Enterprise revenues (excluding fuel surcharge) decreased
Enterprise Income from Operations and Operating Ratio
Enterprise income from operations increased$34.3 million , approximately 118%, in the third quarter of 2020 compared to the same quarter in 2019, primarily due to a$49.9 million decrease in net restructuring charges associated with the FTFM shutdown in 2019, an$11.5 million decrease in impairment of held for sale 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 contributed to the increase in income from operations. Those factors were partially offset by a reduction in Truckload freight volumes primarily due to driver capacity constraints, a$15.7 million increase in performance-based incentive compensation, and$13.1 million of costs related to an adverse excise tax audit ruling in the third quarter of 2020.
Adjusted income from operations decreased
Enterprise operating ratio improved on a GAAP basis but weakened on an adjusted 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$10.7 million , or 2%, quarter over quarter, primarily due to reduced owner-operator and third party carrier costs within Truckload resulting from a decrease in volumes, shift in business mix, and rate compression due to market conditions, as well as a$5.3 million reduction attributable to the FTFM shutdown. Intermodal purchased transportation was also favorable quarter over quarter due to a decline in rail cost per mile resulting from mix changes and market conditions. These decreases were partially offset by an increase in third party carrier costs within Logistics due to volume growth and higher purchased transportation per order. •Salaries, wages, and benefits increased$1.9 million , or 1%, quarter over quarter, primarily due to a$15.7 million increase in performance-based incentive compensation, partially offset by the benefit associated with the FTFM shutdown, as FTFM's salaries, wages, and benefits were$7.6 million in the third quarter of 2019, reduced health insurance costs of$4.7 million driven by favorable claims experience and fewer plan participants, and headcount reductions across the organization. •Fuel and fuel taxes for company trucks decreased$21.1 million , or 30%, quarter over quarter, driven primarily by a decrease in cost per gallon and less company driver miles within our Truckload segment. A significant portion of fuel costs are recovered through our fuel surcharge programs. 23 -------------------------------------------------------------------------------- Table of Contents •Operating supplies and expenses increased$5.5 million , or 4%, quarter over quarter, driven by a$13.1 million adverse tax ruling related to a dispute with theIRS 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 of 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 impairment 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 Note 14, Restructuring, for additional details.
Total Other Expenses (Income)
Other expense increased$0.9 million , approximately 39%, in the third quarter of 2020 compared to the same quarter in 2019 due primarily to a$1.4 million decrease in interest income as interest rates have declined quarter over quarter, partially offset by a$0.4 million decrease in interest expense as a result of lower 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 endedSeptember 30, 2020 compared to 26.2% for the same quarter last year.
Revenues and Income (Loss) from Operations by Segment
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
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
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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.
Three Months Ended
September 30,
2020 2019
Dedicated
Revenues (excluding fuel surcharge) (1)
3,944 3,907
Revenue per truck per week (4) $ 3,483 $ 3,471 Network
Revenues (excluding fuel surcharge) (1)
6,108 7,012
Revenue per truck per week (4) $ 3,561 $ 3,746 Total Truckload
Revenues (excluding fuel surcharge) (5)
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.
Truckload revenues (excluding fuel surcharge) decreased $55.4 million ,
approximately 11%, in the third quarter of 2020 compared to the same quarter in
2019, driven by a 6% reduction in volumes due to capacity constraints resulting,
in part, from the impacts of COVID-19. The shutdown of our FTFM service offering
in August 2019 , which generated $14.0 million of revenues in the third quarter
of 2019, 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.
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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 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
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. 26 -------------------------------------------------------------------------------- Table of Contents Nine Months EndedSeptember 30, 2020 Compared to Nine Months EndedSeptember 30, 2019 Enterprise Results Summary Enterprise net income increased$43.7 million , approximately 48%, in the nine months endedSeptember 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
Components of Enterprise Net Income
Enterprise Revenues
Enterprise operating revenues decreased
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 inAugust 2019 which generated$77.4 million of revenues in the first nine months of 2019; •a$105.5 million decrease in fuel surcharge revenues resulting from a 15% decline in average diesel price per gallon in theU.S. as reported by theDepartment of Energy , a decline in Truckload and Intermodal volumes, and a$13.1 million reduction related to the FTFM shutdown; and •a$41.2 million decrease in Intermodal segment revenues (excluding fuel surcharge) primarily due to a decrease in both volume and price driven primarily by COVID-19 induced network disruptions, shorter length of haul, and freight mix. The above factors were partially offset by a$47.9 million increase in Logistics revenues (excluding fuel surcharge) due to volume growth, partially offset by a reduction in revenue per order. Enterprise revenues (excluding fuel surcharge) decreased$197.6 million , approximately 6%.
Enterprise Income from Operations and Operating Ratio
Enterprise income from operations increased$51.9 million , approximately 40%, in the nine months endedSeptember 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 . 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 income from operations. Those increases were partially offset by a 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$13.1 million of costs related to an adverse excise tax audit judgment in the third quarter of 2020. Adjusted income from operations decreased$20.5 million , approximately 10%. Enterprise operating ratio improved on a GAAP basis but weakened on an adjusted 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. 27 -------------------------------------------------------------------------------- Table of Contents Enterprise Operating Expenses Key operating expense fluctuations are described below. •Purchased transportation costs decreased$71.1 million , or 5%, period over period, primarily due to a decrease in Truckload and Intermodal volumes, reduced owner-operator and third party carrier costs within Truckload resulting from business mix and rate compression due to market conditions, and a$24.7 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 and higher purchased transportation per order. •Salaries, wages, and benefits decreased$85.2 million , or 10%, 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, 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$2.0 million . These decreases were partially offset by a$13.9 million increase in performance-based incentive compensation. •Fuel and fuel taxes for company trucks decreased$69.1 million , or 31%, period over period, driven by a decrease in cost per gallon, less company driver miles within our Truckload segment, and a$10.6 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$6.1 million , or 3%, period over period, driven by the FTFM shutdown. •Operating supplies and expenses decreased$22.6 million , or 5%, period over period, driven by a$12.1 million decrease in facility, utility, and other costs primarily due to temporary 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, a$5.5 million reduction in temporary worker pay due to insourcing by one of our import/export customers, and reductions in a 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 theIRS over the applicability of excise taxes on certain tractors refurbished during tax years 2011 through 2013 and no longer in service and an$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$2.6 million of net equipment gains for the same period last year. •Insurance and related expenses decreased$3.1 million , or 4%, period over period. The decrease was predominately due to a reduction in cargo and collision losses. •Other general expenses decreased$12.3 million , or 14%, period over period, as a result of reduced travel expenses resulting from Company enforced travel bans related to COVID-19, as well as a decline 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. 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 endedSeptember 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 interest expense as a result of lower 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. 28 -------------------------------------------------------------------------------- Table of Contents Income Tax Expense Our provision for income taxes increased$15.4 million , approximately 50%, in the nine months endedSeptember 30, 2020 compared to the same period in 2019 due to higher taxable income. The effective income tax rate was 25.6% for the nine months endedSeptember 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.
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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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.
Nine Months Ended
September 30,
2020 2019
Dedicated
Revenues (excluding fuel surcharge) (1)
Average trucks (2) (3) 3,912 3,938 Revenue per truck per week (4)$ 3,478 $ 3,514
Network
Revenues (excluding fuel surcharge) (1)
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. Truckload revenues (excluding fuel surcharge) decreased$201.6 million , approximately 13%, in the nine months endedSeptember 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 inAugust 2019 which generated$77.4 million of revenues in the nine months endedSeptember 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 endedSeptember 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 endedSeptember 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. 30 -------------------------------------------------------------------------------- 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.
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, 2020 compared to the
same period in 2019, primarily driven by a 3% decrease in orders due to COVID-19
induced network demand disruptions and dray capacity constraints, partially
offset by growth in the East. A 5% decrease in revenue per order, driven
primarily by a decline in length of haul, also contributed to the overall
decline in revenue within Intermodal.
Intermodal income from operations decreased $25.2 million , approximately 33%, in
the nine months ended September 30, 2020 compared to the same period in 2019.
Revenue declines, higher equipment disposition and impairment costs due to used
equipment market conditions, and increases in safety premiums and maintenance
costs drove the decline in income from operations.
Logistics
The following table presents the KPI for our Logistics segment for the periods
indicated.
Nine Months Ended
September 30,
2020 2019
Operating ratio (1) 97.2 % 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$47.9 million , approximately 7%, in the nine months endedSeptember 30, 2020 compared to the same period in 2019, primarily due to an increase in volume despite one of the Company's import/export customers insourcing their warehouse management function inApril 2019 . The increase in volume was partially offset by a decrease in revenue per order in the first half of 2020 compared to the same period in 2019 as a result of compressed rates. Logistics income from operations decreased$7.9 million , approximately 27%, in the nine months endedSeptember 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. 31 -------------------------------------------------------------------------------- Table of Contents Other Included in Other was a loss from operations of$12.9 million in the nine months endedSeptember 30, 2020 , compared to income of$6.2 million in the same period in 2019. Factors contributing to the change include$13.1 million of costs as a result of an adverse tax ruling in the third quarter of 2020 and a$9.2 million increase in performance-based incentive compensation. 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 ofSeptember 30, 2020 was$375.8 million . We anticipate that cash generated from operations, together with amounts available under our credit facilities, will be sufficient to meet our requirements for the foreseeable future. To the extent additional funds are necessary to meet our long-term liquidity needs as we continue to execute our business strategy, or because the COVID-19 crisis lasts longer than anticipated, and/or the revenue declines experienced are more severe than predicted, we anticipate that we will obtain these funds through additional indebtedness, additional equity offerings, or a combination of these potential sources of funds. Our ability to fund future operating expenses and capital expenditures, as well as our ability to meet future debt service obligations or refinance our indebtedness will depend on our future operating performance, which will be affected by general economic, financial, and other factors beyond our control.
The following table presents our cash and cash equivalents, marketable securities, and outstanding debt as of the dates shown.
September 30,
(in millions) 2020 December 31, 2019 Cash and cash equivalents$ 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
(1)Debt on the consolidated balance sheets is presented net of deferred financing costs.
Debt
AtSeptember 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.
Nine Months Ended
September 30,
(in millions) 2020 2019
Net cash provided by operating activities
(163.0) (355.6)
Net cash used in financing activities (89.2) (56.3)
32
-------------------------------------------------------------------------------- Table of Contents Nine Months EndedSeptember 30, 2020 Compared to Nine Months EndedSeptember 30, 2019 Operating Activities Cash provided by operating activities decreased$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
Capital Expenditures
The following table sets forth our net capital expenditures for the periods
indicated.
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
2020 compared to the same period in 2019. The decrease was driven by a $176.9
million decrease in expenditures for transportation equipment resulting mainly
from decreased tractor purchases due to reduced manufacturer capacity in the
beginning of 2020, combined with a $16.7 million increase in proceeds from the
sale of property and equipment primarily resulting from increased tractor sales,
including 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$32.9 million , approximately 58%, in the first nine months of 2020 compared to the same period in 2019. The main drivers of the increase in cash used were the$25.0 million and$30.0 million repayments of private placement notes in March and September of 2020, respectively, 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
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.
33
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Table of Contents
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 of October
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 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 nine months endedSeptember 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.
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