Werner Enterprises, Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports fourth-quarter results. Werner is a truckload transportation and logistics company; Truckload Transportation Services (TTS) generated 77% of 2019 revenue and Werner Logistics 20%.
Financial results and key metrics
| Metric | FY 2019 | FY 2018 | Change |
|---|---|---|---|
| Operating revenue | $2,463.7 million | $2,457.9 million | +0.2% |
| Operating income | $225.5 million | $224.2 million | +0.6% |
| Operating margin | 9.2% | 9.1% | +0.1 percentage point |
| Net income | $166.9 million | $168.1 million | -0.7% |
| Diluted EPS | $2.38 | $2.33 | +2.1% |
| Operating ratio | 90.8% | 90.9% | Improved 0.1 point |
| Cash from operations | $426.6 million | $418.2 million | +$8.5 million |
- Fourth quarter: Revenue was $621.8 million, operating income $65.7 million, net income $48.5 million and diluted EPS $0.70. In Q4 2018, the corresponding figures were $646.4 million, $74.9 million, $54.6 million and $0.77.
- Segments: TTS revenue rose 1.5% to $1,909.8 million; operating income was essentially flat at $202.7 million, with a 10.6% margin versus 10.8%. Werner Logistics revenue fell 5.5% to $489.7 million; operating income declined 20.1% to $16.3 million, and its operating margin fell to 3.3% from 3.9%.
- TTS operating trends: Trucking revenue excluding fuel surcharges rose 4.1%, while average revenue per tractor per week declined 0.5%. Dedicated revenue excluding fuel surcharges increased 11.9%; One-Way Truckload declined 4.2%.
- Costs and profitability: Salaries, wages and benefits increased 4.8%, and depreciation increased 8.4%; fuel expense fell 7.3%. The lower 2019 insurance and claims expense partly reflected a $15.2 million charge in 2018 related to an adverse jury verdict. Gains on asset sales were $21.6 million in 2019 versus $24.9 million in 2018.
- Cash flow, capital spending and distributions: Investing activities used $272.3 million; cash additions to property and equipment were $420.7 million and proceeds from equipment sales were $136.9 million. The company paid $286.2 million in dividends, including a $3.75-per-share special dividend, and repurchased 1.3 million shares for $42.3 million.
- Liquidity and debt: Year-end cash and cash equivalents were $26.4 million; cash, cash equivalents and restricted cash totaled $33.4 million. Total debt was $300.0 million, up from $125.0 million. Credit facilities provided $575.0 million of capacity, reduced by $32.7 million of standby letters of credit. The company reported compliance with debt covenants and repaid $50.0 million of debt in February 2020.
- Balance sheet: Total assets were $2,143.9 million and stockholders’ equity was $1,111.0 million, compared with $2,083.5 million and $1,264.8 million, respectively, in 2018.
Material changes versus 2018
- Management described 2019 as a more difficult freight and pricing environment, with slower domestic economic growth and greater truckload capacity. One-Way Truckload had weaker demand and less attractive pricing than in 2018.
- TTS growth was led by Dedicated, while Werner Logistics revenue and operating income contracted amid softer freight markets and competition.
- Company driver pay, payroll-related costs and depreciation rose; average diesel prices fell, reducing fuel expense and fuel-surcharge revenue. A satellite communications provider failure over four weeks in Q4, along with extended winter weather early in the year, weighed on truck miles.
- Debt increased by $175.0 million year over year, while substantial cash was returned through the special dividend, regular dividends and buybacks. The special dividend accounts for most of the large year-over-year increase in dividends per share.
Outlook, risks and unusual items
- Management outlook: For the first half of 2020, One-Way Truckload revenue per total mile was expected to decrease 5%–7% versus the first half of 2019. The year-end 2020 truck count was projected at 3% below to 1% above year-end 2019. Estimated 2020 net capital expenditures were $260–$300 million; expected gains on equipment sales were $6–$12 million; and the estimated effective tax rate was 25%–26%.
- Coronavirus-related uncertainty: The filing anticipated possible lower U.S. port shipment volumes in late Q1 2020 due to factory disruptions in China, with a potential Q2 recovery contingent on swift containment. Management said the impact was uncertain.
- Accident after year-end: A company truck was involved in a serious accident in January 2020. Management said it was still investigating and that an adverse effect on Q1 2020 earnings was probable. The company self-insures the first $10 million of liability for the applicable policy period and has excess coverage.
- Litigation: A 2018 jury verdict resulted in a $92.0 million judgment, including prejudgment interest, arising from a 2014 accident. At year-end 2019, Werner recorded an $18.8 million liability and a $79.2 million insurance receivable with a corresponding insurance-related liability. Werner was appealing; the outcome was not assured. Interest accrued at approximately $0.4 million per month, subject to the stated exceptions.
- Insurance estimates: Insurance and claims accruals totaled $298.0 million at year-end and were identified by the auditor as a critical audit matter because estimating incurred-but-not-reported claims depends on complex actuarial assumptions.
- Key ongoing risks: Driver and independent-contractor recruitment and retention; freight demand, rates and customer concentration; fuel prices and incomplete surcharge recovery; insurance severity and claims; used-equipment values; third-party capacity availability; regulation; cybersecurity and systems dependence; and international trade and currency risks. The largest five customers represented 30% of revenue, although no single customer exceeded 9%.
- Accounting and controls: The company adopted lease accounting in 2019, recording $8.7 million of lease assets and liabilities at adoption. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management reported effective controls.
Investor facts to verify
- Whether One-Way Truckload pricing, truck utilization and fleet levels followed management’s 2020 expectations.
- The final financial and insurance impact of the January 2020 accident and the outcome of the appeal of the $92.0 million judgment.
- Whether insurance and claims accruals, including the $298.0 million reserve, developed in line with estimates.
- Debt repayment, remaining borrowing capacity, capital spending and the sustainability of dividends and repurchases after the 2019 special dividend.
- Whether lower used-truck values, driver costs, customer concentration or coronavirus-related supply-chain disruption materially affected subsequent results.