Werner Enterprises, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless noted. Financial statements are unaudited. Amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $616.4 | $592.7 | +4.0% |
| Operating income | $62.5 | $31.1 | +101.1% |
| Operating margin | 10.1% | 5.2% | +4.9 percentage points |
| Net income | $46.5 | $23.1 | +101.6% |
| Diluted EPS | $0.68 | $0.33 | +$0.35 |
| Operating cash flow | $135.9 | $133.4 | +$2.5 |
Operating expenses were $554.0 million, down 1.4%; the consolidated operating ratio improved to 89.9% from 94.8%. The effective tax rate was 24.9%, versus 23.3%.
- Truckload Transportation Services (TTS): Revenue was $462.9 million, down 0.4%; operating income rose to $57.6 million from $29.1 million, and operating margin improved to 12.4% from 6.3%. Average tractors in service fell 0.9%; average revenue per tractor per week increased 1.3%.
- Werner Logistics: Revenue increased 22.9% to $137.9 million. Operating income rose to $4.6 million from $1.1 million; operating margin was 3.3% versus 1.0%. Gross margin percentage declined to 12.6% from 14.5%, reflecting higher purchased-capacity rates.
Balance sheet, cash flow and capital
- Cash and cash equivalents were $83.1 million at March 31, 2021, compared with $29.3 million at year-end 2020. Stockholders’ equity was $1.23 billion.
- Total debt was $175.0 million, down from $200.0 million at year-end after $25.0 million of repayments. Net debt ratio was 0.2x trailing-twelve-month EBITDA, per management.
- The company had $325.0 million of undrawn committed facilities, reduced by $50.9 million in letters of credit, leaving approximately $274.1 million available; cash plus available facilities totaled approximately $357 million. It was in compliance with debt covenants.
- Investing cash outflow was $41.3 million, including $82.6 million of equipment additions and $44.7 million of sale proceeds. Financing cash outflow was $40.4 million, including debt repayment, $6.1 million in dividends, and $5.5 million in share repurchases.
- Net capital expenditures for 2021 were forecast at $275 million to $300 million. Committed equipment purchases were approximately $164.4 million as of March 31.
Material changes and unusual items
- Profitability benefited from lower insurance and claims expense (down $14.0 million), higher gains on used-equipment sales ($10.5 million versus $2.5 million), and a $1.0 million gain on the sale of Werner Global Logistics freight-forwarding services. Q1 2020 included $10.0 million of expense related to a separate serious accident and $5.0 million of additional depreciation from a change in estimated truck residual values.
- Logistics revenue growth was partly offset by higher spot truckload and drayage costs, which compressed gross margin percentage. The WGL sale closed February 26, 2021; the company stated WGL had 2020 annual revenue of $53 million.
- Severe winter weather disrupted operations in February and March, reducing miles and increasing weather-related maintenance and driver costs. Management said its safety-first response coincided with a decline in its chargeable DOT-reportable accident rate.
- TuSimple investment: Werner invested $5.0 million in January for less than 1% ownership. TuSimple completed its IPO in April; Werner said it would subsequently recognize fair-value changes in other expense or income. Werner also holds an approximately 5% preferred interest in Mastery Logistics Systems.
Outlook, risks and contingencies
- Management reported strong, seasonally favorable freight demand and a tight driver market, and expected demand to remain strong through the rest of 2021. It forecast Q2 2021 One-Way Truckload revenue per total mile growth of 13%–16% year over year, Dedicated average revenue per truck per week growth of 3%–5% for 2021, and year-end truck-count growth of 1%–3% versus year-end 2020.
- The company planned to continue its quarterly dividend; the quarterly rate was increased by $0.01 per share, or 11%, beginning with the May 2021 payment. Management said liquidity was sufficient for foreseeable operating and capital needs.
- Key operating exposures include driver and independent-contractor shortages, wage and capacity-cost inflation, fuel-price volatility and incomplete fuel-surcharge recovery, insurance costs, severe weather, and customer financial health. The company is self-insured for significant portions of claims.
- Werner is appealing a 2018 adverse jury verdict with a $92.0 million judgment. At March 31, it recorded a $24.9 million liability for its stated maximum policy-period exposure, plus interest, and a $79.2 million insurance receivable with a corresponding liability. The outcome of the appeal is uncertain.
- Other pending bodily injury, cargo, workers’ compensation and employment-related litigation was described as ordinary-course; management did not expect existing claims and reserves to materially adversely affect the financial statements, while noting outcomes are uncertain. The filing also identifies the planned transition from LIBOR and says it was discussing alternatives with its banks.
Important facts for investors to verify
- Whether strong freight demand and the stated pricing and fleet-growth outlook persist, particularly amid driver availability and pay pressures.
- Whether Logistics can restore gross margin percentage as third-party capacity costs change.
- Used-equipment sale gains, insurance claims expense, and the prior-year comparison items’ effect on reported earnings.
- The outcome and accounting treatment of the $92.0 million jury verdict appeal and related insurance recovery.
- Execution and funding of the $275–$300 million net capital expenditure plan, and future cash needs for debt, dividends and repurchases.
- TuSimple’s post-IPO valuation changes and the eventual LIBOR replacement for credit facilities and hedges.