Werner Enterprises, Inc. — Q1 2015 Form 10-Q
Business context and reporting period: Unaudited results for the three months ended March 31, 2015, compared with Q1 2014. Werner operates Truckload Transportation Services and Value Added Services (VAS) in the truckload and logistics sectors.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 / prior balance date |
|---|---|---|
| Operating revenue | $495.7 million | $492.0 million; up 0.7% |
| Operating income / margin | $38.2 million / 7.7% | $23.4 million / 4.8% |
| Net income | $23.1 million | $14.3 million; up 61.4% |
| Diluted EPS | $0.32 | $0.20 |
| Operating cash flow | $121.0 million | $59.2 million |
| Capital expenditures, net of equipment sale proceeds | $84.9 million | $16.0 million |
| Cash and cash equivalents | $59.3 million | $22.6 million at Dec. 31, 2014 |
| Long-term debt | $75.0 million | $75.0 million at Dec. 31, 2014 |
| Stockholders’ equity | $854.8 million | $833.9 million at Dec. 31, 2014 |
Operating expenses were $457.5 million, or 92.3% of revenue, versus $468.6 million, or 95.2%, a year earlier. Net margin was 4.7%, compared with 2.9%. The effective tax rate was 39.5%, down from 40.3%. The filing does not provide a clear EBITDA value.
Q1 operating cash flow funded net property additions and dividends. Investing activities used $81.1 million; financing activities used $3.1 million. Current assets were $425.6 million and current liabilities $198.3 million. Werner reported $325.0 million of total credit facilities; $75.0 million was borrowed and $32.7 million of standby letters of credit reduced availability, leaving $217.3 million unused. The company was in compliance with debt covenants.
Material changes and operating drivers
- Truckload revenue declined 3.1% to $390.6 million, while VAS revenue grew 6.7% to $90.9 million. Truckload operating income increased to $35.8 million from $20.8 million; VAS operating income increased to $2.4 million from $1.9 million.
- Truckload revenue excluding fuel surcharge rose 5.7%; average revenue per tractor per week increased 5.5%. The segment’s operating ratio, excluding fuel surcharge revenue, improved to 89.3% from 93.4%.
- Fuel surcharge revenue fell 35.1% to $56.4 million amid lower diesel prices. Fuel expense declined 42.1%, or $38.3 million, reflecting average diesel prices $1.30 per gallon below Q1 2014.
- Higher driver and other compensation, depreciation, and insurance and claims costs partly offset fuel savings. Salaries, wages and benefits rose 12.4%; insurance and claims rose 9.1%, primarily due to large liability claims.
- VAS gross margin percentage declined to 14.3% from 14.8%, reflecting higher third-party carrier costs, but improved sequentially from 13.6% in Q4 2014.
Outlook, risks and notable items
- Management described Q1 freight demand as unusually strong for a first quarter and reported firm demand in April 2015. It attributed the favorable market to a strengthening economy and constrained truck capacity, and expected the favorable freight-demand trend to continue.
- Management estimated 2015 net capital expenditures of $275 million–$325 million, versus $212.3 million in 2014, to renew equipment and reduce average truck-fleet age to under two years. At quarter-end, equipment purchase commitments were approximately $150.8 million.
- Driver and independent-contractor recruitment and retention remain challenging. Pay increases may pressure results if corresponding customer rate increases cannot be obtained. Other risks include fuel-price volatility and incomplete surcharge recovery, higher equipment and regulatory costs, third-party capacity pricing, and self-insured claims exposure.
- The $75.0 million term debt’s interest rate was effectively fixed at 2.5% through September 2019 via a swap. The swap had a $2.0 million fair-value loss at quarter-end. Werner had no fuel-price derivatives.
- Unrecognized tax benefits totaled $8.8 million; management expected no significant change over the next 12 months and could not determine settlement timing. Ordinary-course claims and litigation were not expected by management to materially affect the financial statements.
- Equipment-sale gains were $5.5 million, recorded as a reduction of other operating expenses, versus $4.6 million in Q1 2014. The interim statements were unaudited; management cautioned that Q1 results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether freight demand, customer rate increases and truck capacity support continued improvement in Truckload margins.
- Whether driver availability, compensation and retention affect fleet size and labor costs.
- Whether planned capital spending can be funded from operating cash flow and available credit without materially increasing debt.
- Whether VAS can improve gross margin as third-party transportation costs and capacity conditions change.
- How fuel prices, surcharge recovery and large liability claims affect future earnings and cash flow.