Werner Enterprises, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Werner provides truckload transportation and logistics services through Truckload Transportation Services and Value Added Services (VAS). Financial statements are unaudited.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Operating revenues | $534.4 million | $552.0 million | $1,564.7 million | $1,586.1 million |
| Operating income | $52.8 million | $41.7 million | $143.2 million | $107.5 million |
| Operating margin | 9.9% | 7.6% | 9.2% | 6.8% |
| Net income | $32.1 million | $26.0 million | $87.1 million | $65.9 million |
| Diluted EPS | $0.44 | $0.36 | $1.20 | $0.91 |
- Q3 revenue declined 3.2%, while operating income rose 26.6% and net income rose 23.5%. For the nine months, revenue fell 1.3%, operating income rose 33.3% and net income rose 32.0%.
- Lower fuel prices reduced Q3 Truckload fuel-surcharge revenue by about $36 million and VAS revenue by an estimated $7 million; management estimated this lowered consolidated revenue by about 8%. Truckload revenue excluding fuel surcharge increased 7.7% in Q3 and 6.6% year to date.
- Truckload Q3 operating income increased to $48.7 million from $39.1 million; its operating ratio, excluding fuel surcharge revenue, improved to 86.7% from 88.5%. VAS Q3 operating income rose to $5.0 million from $1.0 million, with gross margin improving to 15.7% from 12.0%.
- Operating cash flow was $282.8 million for the first nine months, versus $165.2 million. Investing activities used $239.2 million, including $337.5 million of property and equipment additions and $86.4 million of sale proceeds; net property additions were $251.1 million.
- At September 30, cash was $45.9 million, total assets $1.572 billion and stockholders’ equity $903.2 million. Current assets were $400.8 million and current liabilities $209.9 million.
- Debt was $75.0 million, due in 2019. Credit facilities totaled $325 million; after borrowings and $31 million of standby letters of credit, $219 million remained available. The company reported compliance with debt covenants.
Changes, outlook and management commentary
- Operating expenses fell 5.6% in Q3 despite higher driver pay and fleet costs. Lower fuel expense and purchased transportation costs, improved VAS margins, and gains on equipment sales contributed; salaries, wages and benefits rose 12.1%, and depreciation rose 11.1%.
- Management cited freight demand in Q3 and October as consistent with historical standards but weaker than the unusually robust 2014 comparison. It described truck capacity as constrained and driver recruiting as challenging, while reporting 5.5% more average Truckload tractors in service year over year.
- Management estimated 2015 net capital expenditures of $300–$325 million, versus $212.3 million in 2014, mainly to renew and expand revenue equipment. It expected to fund spending through operating cash flow and, if needed, credit facilities.
- Management stated that driver shortages, pay increases, higher equipment costs, fuel-price movements, regulatory changes and the availability or cost of third-party capacity could affect results. It noted several proposed federal safety measures, including electronic logging devices, and expected an ELD final rule in Q4 2015.
- In July 2015, Werner amended its Wells Fargo facility, reducing its limit to $100 million while extending maturity to 2020, and added a $75 million U.S. Bank facility expiring in 2020.
Risks, contingencies and unusual items
- A Nebraska wage class action resulted in an August 2015 summary judgment for plaintiffs on short-break and sleeper-berth theories. Werner accrued $2.0 million for the short-break matter; it did not accrue for the sleeper-berth matter because management did not consider a loss probable and said the possible loss or range could not be determined. The company intends to defend and appeal.
- Q3 salaries and benefits included a combined $3.9 million accrual related to an employment class action and an executive separation agreement. Separately, the company recorded a $2.0 million reduction in compensation expense and a $0.8 million reduction in tax benefit from revised forfeiture estimates, primarily related to an executive resignation.
- Other operating expenses benefited from $6.7 million of Q3 gains on asset sales, including a $0.7 million real-estate gain; year-to-date gains on asset sales were $18.9 million.
- Unrecognized tax benefits totaled $8.4 million, including $1.6 million of accrued interest; the company expected no significant changes in uncertain tax positions over the next 12 months. It also had $106.9 million of equipment purchase commitments.
- A $75 million interest-rate swap effectively fixed the term debt rate at 2.5% through September 2019. The swap had a $2.5 million pretax fair-value loss at quarter-end. Werner had no fuel-price derivatives.
Key facts for investors to verify
- Whether Truckload revenue and margins can continue improving as freight demand, driver availability and customer rate increases evolve.
- How the wage litigation develops, especially the unaccrued sleeper-berth claim and any appeal or change to the short-break accrual.
- Whether planned capital expenditures, fleet growth and equipment resale gains translate into sustainable returns and cash generation.
- How fuel prices and surcharge recovery affect reported revenue and margins, and whether driver and regulatory costs can be offset by pricing.
- The amount and timing of tax, insurance and claims liabilities, including the $8.4 million uncertain-tax-position liability.