Werner Enterprises, Inc. — FY 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010; filed March 1, 2011. The filing reports annual results and unaudited quarterly results, including fourth-quarter figures. Werner is a truckload transportation and logistics company with Truckload and Value Added Services (VAS) segments.
Financial performance and position
| Metric | FY 2010 | FY 2009 | Change |
|---|---|---|---|
| Operating revenue | $1,815.0 million | $1,666.5 million | Up 9% |
| Operating income | $134.6 million | $96.7 million | Up 39% |
| Net income | $80.0 million | $56.6 million | Up 41% |
| Diluted EPS | $1.10 | $0.79 | Up 39% |
| Consolidated operating ratio | 92.6% | 94.2% | Improved 1.6 percentage points |
| Cash from operations | $228.5 million | $194.4 million | Up 17.5% |
- Truckload revenue was $1,550.6 million and operating income was $122.2 million; segment operating margin improved to 7.9% from 5.9%. Excluding fuel surcharges from both revenue and expenses, the Truckload operating ratio improved to 90.6% from 93.3%.
- VAS revenue rose 15% to $251.0 million, but operating income declined to $11.0 million from $12.4 million. Gross margin percentage fell to 14.9% from 16.9%, mainly because third-party carrier capacity became more expensive.
- At year-end, cash and cash equivalents were $14.0 million, total assets $1,151.6 million, and stockholders’ equity $669.0 million. The company reported no debt outstanding and had $225.0 million in credit facilities, reduced by $41.2 million of letters of credit.
- Net property additions were $119.0 million. Cash dividends paid were $130.7 million, including a $1.60-per-share special dividend; declared dividends totaled $1.80 per share for the year.
- Fourth-quarter 2010 revenue was $463.2 million, operating income $40.6 million, net income $24.1 million, and diluted EPS $0.33, versus $439.6 million, $30.6 million, $18.0 million, and $0.25, respectively, in fourth-quarter 2009.
Material changes versus 2009
- Truckload freight conditions improved, supporting a 2.6% increase in average revenue per total mile and a reduction in empty miles to 11.4% from 12.5%. Average tractors in service declined slightly to 7,252.
- Higher diesel prices increased Truckload fuel cost by 7.6 cents per total mile; fuel surcharge revenue rose to $254.8 million from $176.7 million. Surcharges recover most, but not all, higher fuel costs and may lag rapid price increases.
- Insurance and claims costs per mile declined, while maintenance costs increased as the company-owned truck fleet aged. Average truck age was 2.8 years at year-end, versus 2.6 years in 2009.
- VAS shipment volumes increased, but margins were pressured by higher purchased transportation costs. WGL international revenue increased, while its margin and operating results declined after several higher-margin projects ended.
Outlook, risks, contingencies and unusual items
- Management expected to maintain the fleet at approximately 7,300 trucks until annual Truckload operating income reaches at least 10%. It estimated 2011 net capital expenditures of $150 million to $200 million and cited rate reviews for substantial committed business during the first half of 2011. The filing provides no formal earnings or EPS guidance.
- Management reported freight trends improved in February 2011 versus February 2010, while severe winter storms in January and early February reduced truck mileage productivity. It also noted that driver recruiting had become more competitive and expected further difficulty in 2011.
- Key risks include economic and freight-cycle weakness, fuel-price volatility and incomplete or delayed surcharge recovery, driver and independent-contractor shortages, competition, customer concentration, availability and cost of VAS capacity, insurance claims, and changing safety, hours-of-service and environmental regulations. The top 10 customers represented 40% of 2010 revenue; no single customer exceeded 10%.
- The company is substantially self-insured for certain liability, workers’ compensation and health claims. Management said routine litigation was not expected to materially affect the consolidated financial statements. Unrecognized tax benefits totaled $7.5 million; the timing of settlement for $7.2 million was undetermined.
- Werner extended the estimated tractor useful life from 60 to 80 months and reduced estimated salvage value from 25% of cost to zero in 2010 to reflect a longer replacement cycle. The change did not affect 2010 depreciation expense. The company also paid a $1.60-per-share special dividend in December 2010.
- The independent auditor gave an unqualified opinion on the financial statements and internal control over financial reporting; management and the auditor concluded internal control was effective as of year-end.
Important facts for investors to verify
- Whether freight demand, contract rate increases and fleet utilization continued to improve after year-end, and whether the stated 10% Truckload operating-income target was achieved.
- Whether 2011 capital spending and the older fleet’s maintenance requirements affected cash generation, costs and equipment replacement.
- How much of fuel-cost inflation was recovered through surcharges, particularly during rapid price changes, and the effect on operating margins.
- Whether VAS could sustain shipment growth while restoring gross margin amid higher third-party capacity costs.
- Developments in driver availability, customer concentration, self-insurance reserves, pending regulatory changes and the $7.5 million unrecognized tax-benefit liability.