Werner Enterprises, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparative period is Q1 2017. Werner provides truckload transportation and logistics services through its Truckload Transportation Services and Werner Logistics segments. Financial statements are unaudited.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Operating revenue | $562.7 million | $501.2 million | +12.3% |
| Operating income | $35.1 million | $26.0 million | +35.2% |
| Operating margin | 6.2% | 5.2% | +1.0 percentage point |
| Net income | $27.8 million | $16.0 million | +73.6% |
| Diluted EPS | $0.38 | $0.22 | +$0.16 |
| Operating cash flow | $99.9 million | $85.9 million | +16% |
| Net cash used in investing | $49.6 million | $7.4 million | Higher investment |
| Dividends declared per share | $0.070 | $0.060 | +16.7% |
Net margin was 4.9%, versus 3.2%. The effective tax rate declined to 21.3% from 38.5%, principally reflecting the federal corporate tax rate reduction and discrete tax benefits. The company expects a 25%–26% effective tax rate going forward.
At March 31, 2018, cash and cash equivalents were $38.8 million, total assets $1.82 billion, and stockholders’ equity $1.21 billion. Long-term debt was $75 million, with no current portion; the outstanding term debt’s rate was effectively fixed at 2.5% through September 2019. Credit facilities totaled $325 million; $75 million was borrowed and $28.8 million was reserved for letters of credit. The company reported covenant compliance.
Material changes and operating drivers
- Truckload revenue rose 12.1% to $431.6 million. Net trucking revenue (excluding fuel surcharge) increased 10.2%; average revenue per tractor per week rose 6.8%, and average tractors in service increased 3.2%. The Truckload operating ratio, net of fuel surcharge, improved to 91.0% from 93.0%.
- Werner Logistics revenue grew 17.6% to $117.4 million, but operating income fell 9.6% to $2.8 million. Gross margin declined to 14.6% from 15.6%, as tight carrier capacity increased purchased transportation costs. Truck brokerage revenue grew 36.3%.
- Fuel expense rose 30.7%, reflecting higher diesel prices, more company miles and weather-related idling. Fuel surcharge revenue rose 26.6%; management says surcharges recover a majority, but not all, of fuel increases.
- Severe winter weather increased claims, maintenance, fuel and workers’ compensation costs and reduced some revenue. Management estimated the weather reduced Q1 2018 earnings by $0.03 per diluted share compared with Q1 2017.
- Revenue recognition standard ASC 606 was adopted January 1, 2018 using the modified retrospective method. A $2.0 million cumulative adjustment increased opening retained earnings. Q1 revenue and operating expenses would each have been lower by approximately $0.3 million and $0.1 million, respectively, under the prior method; a $3.1 million driver-training-school revenue reduction reclassified what had previously been bad-debt expense, with no operating-income impact.
Cash, investment and outlook
Q1 net property additions were $55.5 million. Management estimates 2018 net capital expenditures of $300 million–$350 million, compared with $198.8 million in 2017, and expects to fund them primarily from operating cash flow, with credit facilities available if needed. Committed property and equipment purchases were approximately $239.1 million at quarter-end. The company paid $5.1 million in dividends and made no share repurchases during the quarter.
Management reported unusually strong, geographically broad One-Way Truckload demand in Q1 and said freight volumes in April remained much stronger than normal. It also cited a challenging driver-recruiting market, though Q1 driver turnover was among the lowest in 20 years. The filing does not provide full-year revenue or earnings guidance.
Risks, contingencies and unusual items
- Driver and independent-contractor shortages, wage or settlement increases, and limited ability to pass those costs through in freight rates could pressure results.
- Fuel-price volatility is only partly offset by surcharges; the company had no fuel-hedging derivatives at quarter-end. Tight third-party carrier capacity may continue to weigh on Logistics margins.
- The company self-insures significant claim exposures and increased liability retentions under policies effective August 2017. It cited higher weather-related claim frequency and severity during the quarter.
- Ordinary-course claims and litigation include wage-and-hour class actions. In one Nebraska case, a jury awarded $0.8 million on a short-break claim and found for Werner on a sleeper-berth claim; the court awarded a further $0.5 million in plaintiffs’ fees and costs, which Werner had accrued. Management said the resolution of claims, considering reserves, is not expected to materially adversely affect the financial statements, while noting outcomes remain uncertain.
- Gross unrecognized tax benefits were $2.8 million, of which $2.2 million would affect the effective tax rate if recognized. Management expected no significant changes in uncertain tax positions over the next 12 months. Final accounting for the Tax Act’s deferred-tax effects was still pending completion of the company’s 2017 tax returns.
Key investor verification points
- Assess whether unusually strong freight demand and pricing, including April conditions, persisted beyond the quarter.
- Track Truckload pricing and fleet/driver availability alongside fuel, wage, maintenance and insurance costs.
- Check whether Logistics can secure contractual rate increases to offset third-party capacity costs and restore margins.
- Monitor execution and funding of the $300 million–$350 million net capital-expenditure plan and the $239.1 million of purchase commitments.
- Review subsequent developments in wage litigation, self-insured claims and the final Tax Act accounting.
- Consider the cash-flow comparison carefully: adoption of restricted-cash guidance increased reported Q1 2017 operating cash flow by $11.0 million through retrospective presentation changes.