Werner Enterprises, Inc. — Q2 2023 Form 10-Q
Business context and period: Unaudited results for the quarter and six months ended June 30, 2023, compared with the corresponding 2022 periods. Werner operates Truckload Transportation Services (TTS) and Werner Logistics.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $811.1 million | $836.3 million | $1,643.8 million | $1,600.9 million |
| Operating income | $47.2 million | $74.9 million | $100.6 million | $158.4 million |
| Net income attributable to Werner | $29.9 million | $72.3 million | $65.1 million | $126.0 million |
| Diluted EPS | $0.47 | $1.12 | $1.02 | $1.93 |
| Operating margin | 5.8% | 9.0% | 6.1% | 9.9% |
- Q2 revenue declined 3.0% year over year; six-month revenue rose 2.7%. Q2 operating income fell 37.0%, and Werner-attributable net income declined 58.7%.
- Q2 TTS revenue decreased 7.1% to $570.2 million and operating income fell to $45.2 million from $64.0 million. Werner Logistics revenue grew 10.1% to $224.5 million, while operating income declined to $4.4 million from $12.5 million.
- Q2 TTS operating ratio was 92.1%, versus 89.6% a year earlier; Logistics operating ratio rose to 98.1% from 93.9%.
- Cash from operations for the first six months was $281.8 million, up from $267.5 million. Investing used $280.3 million and financing used $64.2 million. Cash and equivalents were $46.5 million at June 30, down from $107.2 million at year-end.
- Total debt was $640.0 million, compared with $693.8 million at December 31, 2022. The $1.075 billion revolving facility had $476.4 million available after standby letters of credit; the company reported compliance with financial covenants. Stockholders’ equity was $1.497 billion.
Drivers of change and management commentary
- Management attributed weaker Q2 results to soft freight conditions, lower rates and pricing pressure, particularly in One-Way Truckload, plus inflationary cost pressures. Fuel expense fell substantially with lower diesel prices, but revenue fuel surcharges also declined.
- Dedicated demand remained steady. One-Way Truckload faced less freight availability and elevated spot-market exposure. Logistics revenue growth reflected ReedTMS, acquired in November 2022, but margins were pressured by a competitive freight and rate environment and purchased-transportation costs.
- For Q3 2023, management expected One-Way Truckload revenue per total mile, excluding fuel surcharge, to decline 4%–7% year over year; it expected the freight market to stabilize in Q3 and improve modestly seasonally in Q4. For 2023, Dedicated revenue per tractor per week was expected to be flat to up 3%, and year-end TTS fleet size was expected to be down 2%–4% versus year-end 2022.
- Management estimated 2023 net capital expenditures of $400–$450 million, compared with $317.6 million in 2022. Equipment purchases committed at quarter-end were approximately $247.5 million. Expected full-year gains on equipment sales were $40–$50 million; used-equipment pricing and gains had moderated.
- The quarterly dividend increased by $0.01 per share, or 8%, beginning with the July 2023 payment. No shares were repurchased in the first half; 2,311,810 shares remained under the existing authorization.
Liquidity, risks and unusual items
- After quarter-end, Werner borrowed an additional $50 million under its credit facility and entered into $130 million of additional variable-to-fixed interest-rate swaps. At June 30, $450 million of debt remained variable-rate; the filing estimates a one-percentage-point SOFR increase would add about $4.5 million to annual interest expense at that borrowing level.
- Interest expense rose materially year over year, reflecting higher variable rates and greater average debt. Q2 2022 included a $24.1 million net gain on equity investments; Q2 2023 had only a $0.1 million net gain and also recorded a $0.8 million loss from an equity-method investment.
- Werner reported a $92 million Texas jury judgment arising from a 2014 accident. The Texas Court of Appeals affirmed the judgment in May 2023; Werner petitioned the Texas Supreme Court for review. The company recorded a $36.9 million liability and a $79.2 million insurance receivable, with a corresponding insurance-related liability; its stated maximum accident liability under the applicable policy is $10 million plus interest. The outcome of further review is uncertain.
- Other risks include self-insured claims and litigation, driver and independent-contractor availability and costs, fuel-price volatility and incomplete surcharge recovery, equipment and maintenance costs, third-party capacity and freight-rate pressure, and regulatory changes. Management said existing reserves and insurance are not expected to make pending claims materially adverse, but litigation outcomes remain uncertain.
- California emissions rules may apply to 2024 model-year vehicles; approximately 4% of Werner’s 2022 truck miles were in California. Management said it was planning for compliant equipment.
Important facts for investors to verify
- Whether freight demand, One-Way pricing and Logistics margins stabilize or improve as management expects.
- Progress against the $400–$450 million net-capex estimate, committed equipment purchases and the planned fleet reduction.
- Available revolver capacity and debt levels after the July borrowing, along with interest-rate exposure and covenant compliance.
- Developments in the Texas Supreme Court petition, the related insurance recovery and the company’s other claims reserves.
- How much operating cash flow and equipment-sale gains support dividends and other capital allocation during a weaker freight market.