Werner Enterprises, Inc. — Q3 2019 Form 10-Q
Business context and period: Werner provides truckload transportation and logistics services through Truckload Transportation Services (TTS) and Werner Logistics. This unaudited quarterly filing covers the three and nine months ended September 30, 2019; comparisons are with the same 2018 periods. Results for the interim periods are not necessarily indicative of full-year results.
Financial performance
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Revenue | $618.3M | $629.7M | $1,841.9M | $1,811.5M |
| Operating income | $53.4M | $63.4M | $159.8M | $149.3M |
| Operating margin | 8.6% | 10.1% | 8.7% | 8.2% |
| Net income | $39.0M | $47.5M | $118.4M | $113.6M |
| Diluted EPS | $0.56 | $0.66 | $1.69 | $1.57 |
- Q3 revenue declined 1.8% and net income declined 17.8%; for the first nine months, revenue rose 1.7% and net income rose 4.3%.
- Q3 operating expenses were 91.4% of revenue, versus 89.9% a year earlier. Nine-month operating ratio improved to 91.3% from 91.8%.
- Q3 TTS operating income fell to $48.9M from $58.9M, with segment margin at 10.2% versus 12.1%. Werner Logistics operating income declined to $3.0M from $4.8M; margin fell to 2.5% from 3.7%.
- Cash from operations was $332.2M for 9M 2019, up from $302.5M. Net property additions were $271.7M. Cash and cash equivalents were $14.4M at quarter-end, compared with $33.9M at year-end 2018.
- Debt totaled $350.0M, up from $125.0M at year-end; $75.0M was current and $275.0M long-term. Credit facilities provided $575.0M of total capacity; after $350.0M drawn and $32.7M of letters of credit, approximately $192.3M remained available. The company reported compliance with debt covenants.
- Total assets were $2,163.5M and stockholders’ equity was $1,064.8M at September 30, 2019.
Material changes and operating drivers
- Q3 TTS revenue fell 0.9%; Werner Logistics revenue fell 6.3%. TTS trucking revenue excluding fuel surcharge increased 2.1%, while fuel surcharge revenue declined 16.4%, mainly reflecting lower fuel prices.
- One-Way Truckload faced weaker demand than the unusually strong Q3 2018 market. Its Q3 revenue per tractor per week declined 7.6%, and empty miles increased to 12.24% from 10.89%. Dedicated revenue excluding fuel surcharge grew 8.7%.
- Werner Logistics was affected by lower Intermodal volume, rate pressure, and a nearly 20% decline in transactional spot pricing for non-contract shipments. Management said technology investments were beginning to improve operating efficiencies.
- Q3 salaries, wages and benefits rose 4.0%, while depreciation rose 7.3%. These pressures were partly offset by lower fuel and purchased transportation expense. Taxes and licenses were higher partly because Q3 2018 included a $4.9M favorable property-tax settlement.
- The company paid a $3.75-per-share special dividend, approximately $261.1M, in June 2019. Total dividends paid in the first nine months were $280.0M; it also repurchased 1.3M shares for $42.3M.
Outlook, risks and contingencies
- Management expected 2019 net capital expenditures to be at the low end of $275M–$300M, versus $349.0M in 2018; Q3-end equipment purchase commitments were approximately $63.5M.
- Management expected 2019 fleet growth from year-end 2018 at the low end of its 3%–5% range, with no truck growth expected in Q4. It expected One-Way Truckload full-year 2019 revenue-per-total-mile change to range from flat to 3% lower than 2018, and expected seasonal Q4 freight improvement, with peak season solid but weaker than 2018.
- Management expected the 2019 effective tax rate at the low end of 25%–26% and Q4 interest expense slightly below Q3’s $2.4M. It expected equipment-sale gains at the low end of $18M–$20M for 2019.
- Risks include driver and independent-contractor availability and pay costs, freight demand and pricing, fuel-price volatility and imperfect surcharge recovery, higher insurance costs, and used-equipment pricing. Management noted IMO 2020 could increase diesel costs from 2020; the company had no fuel-price hedges at quarter-end.
- A Texas jury verdict resulted in a $92M judgment, including prejudgment interest, in a case the company is appealing. The company recorded a $17.7M liability for its stated maximum exposure, plus a $79.2M insurance receivable and corresponding liability; the appeal outcome is uncertain. Other claims include employment-related class actions and ordinary-course transportation litigation. Management did not expect the resolution of claims and pending litigation, taking reserves into account, to materially adversely affect the consolidated financial statements.
- The company adopted lease accounting in January 2019, recording $8.7M of right-of-use assets and lease liabilities at adoption; it said the change did not significantly affect the income statement.
Important facts for investors to verify
- Whether freight demand, One-Way pricing, empty miles and logistics margins improve or remain under pressure.
- Whether driver availability, compensation, insurance and equipment costs affect operating margins and planned fleet growth.
- The status and potential financial impact of the appealed $92M judgment, including the extent and timing of insurance recovery.
- Actual 2019 capital expenditures, equipment-sale gains, tax rate and interest expense compared with management’s stated expectations.
- Debt usage, remaining credit availability, covenant compliance, and the company’s capacity to fund investment and shareholder returns.