Werner Enterprises, Inc. — 2017 Form 10-K
Business context and reporting period. This filing covers the fiscal year ended December 31, 2017; it is an annual report, not a standalone fourth-quarter filing. Werner operates truckload transportation and non-asset-based logistics businesses. Truckload generated $1.635 billion of revenue, and Werner Logistics generated $418 million.
Financial performance and liquidity
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Operating revenue | $2.117 billion | $2.009 billion | +5.4% |
| Operating income | $143.8 million | $126.1 million | +14.1% |
| Net income | $202.9 million | $79.1 million | +156.4% |
| Diluted EPS | $2.80 | $1.09 | +156.9% |
| Operating ratio | 93.2% | 93.7% | Improved 0.5 percentage points |
| Cash from operations | $281.8 million | $312.4 million | -9.8% |
Profit quality and margins. The reported net-income increase was principally driven by a $110.5 million noncash income-tax benefit from revaluing deferred taxes after federal corporate tax rates were reduced. Excluding this benefit, management reported 2017 return on average equity of 9.0% and return on average assets of 5.3%. Operating margin was 6.8%, compared with 6.3% in 2016.
Segments. Truckload revenue grew 6.6% to $1.635 billion; operating income rose to $138.1 million from $107.7 million, and its operating ratio excluding fuel surcharges improved to 90.3% from 92.2%. Trucking revenue per tractor per week, excluding fuel surcharges, increased 2.9%. Werner Logistics revenue was nearly flat at $417.6 million, but operating income fell to $8.7 million from $20.7 million: tighter carrier capacity increased purchased transportation costs, reducing gross margin to 14.9% from 17.1%.
Balance sheet and funding. At year-end, cash was $13.6 million, total debt $75.0 million (down from $180.0 million), total assets $1.808 billion, and stockholders’ equity $1.185 billion. The company had $325 million of credit facilities; after debt borrowings and $39.6 million of standby letters of credit, $210.4 million remained available. Debt was effectively fixed at 2.5% through September 2019 under an interest-rate swap, with $75 million due in 2019. Operating cash flow declined mainly because of increased receivables, including late-year growth not yet collected.
Investment and shareholder returns. Net property additions were $198.8 million in 2017, following substantial fleet investment in 2015–2016. The company had $185.3 million of equipment purchase commitments and estimated 2018 net capital expenditures of $300–$350 million. Dividends declared were $0.27 per share, versus $0.24 in 2016; no shares were repurchased in 2017.
Material changes and outlook
- Freight demand strengthened during 2017, with a strong fourth quarter; management said early-2018 volumes were much stronger than normal.
- Management expected 2018 average revenue per total mile, excluding fuel surcharges, to increase 6%–10%, and estimated a 2018 effective tax rate of approximately 25%–26%.
- Truckload fleet size increased year over year, while the driver market remained challenging. Driver turnover reached its lowest level in 19 years, according to management.
- Fuel expense increased 28.2%, reflecting higher diesel prices and more company trucks and miles; surcharge programs recover most, but not all, higher fuel costs.
Risks, contingencies, and unusual items
- Tax Act: The $110.5 million deferred-tax revaluation benefit was provisional; the company expected to complete its accounting after filing 2017 tax returns.
- Capacity, labor, and pricing: Driver and independent-contractor shortages could raise compensation costs or limit fleet utilization. Higher third-party carrier costs pressured Logistics margins, and management identified rate increases as a priority.
- Insurance and claims: Effective August 2017, Werner increased its bodily-injury and property-damage self-insured retention to $3.0 million per occurrence and assumed additional claim exposure; lower premiums partly offset the added risk.
- Litigation: A driver wage class action resulted in a $0.8 million jury award and $0.5 million in attorney fees and costs, which were accrued. Other employment-related class actions remained unresolved; management did not believe their outcomes were likely to have a material adverse effect, but final dispositions were uncertain.
- Other risks: Customer concentration (top 10 customers represented 43% of revenue), fuel-price exposure, used-equipment values, severe weather, regulatory changes, cybersecurity, and international trade conditions may affect results. The company reported no fuel-price derivatives.
- Student notes: Gross student notes receivable were $48.1 million, with a $21.0 million allowance for doubtful accounts.
Most important facts for investors to verify
- How much of reported earnings growth reflects recurring operating performance versus the one-time $110.5 million tax benefit.
- Whether the projected 6%–10% 2018 per-mile revenue increase materializes and offsets driver, fuel, and equipment cost inflation.
- Whether Werner Logistics can recover higher purchased-capacity costs through customer rate increases and restore segment margins.
- How operating cash flow and receivable collections develop, and whether planned capital spending remains within the $300–$350 million estimate.
- Whether self-insured claims, employment litigation, and student-note credit losses require additional expense or reserves.
KPMG issued unqualified opinions on the financial statements and internal control over financial reporting.