Werner Enterprises, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Unaudited interim results; they are not necessarily indicative of full-year results. Amounts below are in U.S. dollars.
Business context
Werner operates Truckload Transportation Services (TTS) and Werner Logistics. On July 1, it acquired an 80% interest in regional carrier ECM for $141.3 million net of cash acquired; ECM’s results are included from that date. Werner sold its international freight-forwarding business, Werner Global Logistics, in February 2021.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $702.9 million | $590.2 million | $1,969.2 million | $1,751.9 million |
| Operating income | $71.3 million | $62.1 million | $210.7 million | $146.0 million |
| Operating margin | 10.1% | 10.5% | 10.7% | 8.3% |
| Net income attributable to Werner | $63.8 million | $46.3 million | $182.3 million | $108.5 million |
| Diluted EPS | $0.94 | $0.67 | $2.68 | $1.56 |
| Operating cash flow | Not presented for quarter | Not presented for quarter | $253.3 million | $346.4 million |
Q3 revenue rose 19.1% and Werner-attributable net income rose 37.6% year over year. Nine-month revenue increased 12.4% and attributable net income increased 68.0%. The Q3 consolidated operating ratio was 89.9%, versus 89.5% a year earlier; for the nine-month period it improved to 89.3% from 91.7%.
Growth reflected strong freight demand, higher pricing and increased fleet capacity. TTS revenue increased 15.2% in Q3, while Logistics revenue increased 34.6%; Logistics returned to operating income of $7.7 million from a $0.9 million loss. TTS operating income was nearly flat at $62.9 million, and its operating margin declined to 11.9% from 13.8%.
Higher driver pay, fuel, maintenance and purchased transportation costs pressured results. Q3 fuel expense rose 70.5%, with average diesel prices 96 cents per gallon above the prior-year quarter. Gains on equipment sales reduced operating expenses by $15.3 million in Q3 and $40.3 million year to date, versus $3.9 million and $7.3 million in the comparable 2020 periods.
Balance sheet, cash flow and capital
- Cash was $45.4 million at September 30, versus $29.3 million at year-end 2020. Current assets were $569.8 million and current liabilities $261.2 million.
- Total debt was $350.0 million, up from $200.0 million at year-end, primarily reflecting financing for the ECM acquisition. The company reported $600.0 million of total credit capacity; $50.9 million was reserved for standby letters of credit. It borrowed a further $50.0 million after quarter-end in October.
- Nine-month operating cash flow declined $93.1 million year over year, mainly due to working-capital movements, including accounts receivable, and higher income tax payments. Investing cash outflow was $308.9 million, including the ECM acquisition; net property additions were $162.7 million.
- Management estimated 2021 net capital expenditures of $250–$275 million and reported $109.7 million of committed equipment purchases at quarter-end. Stockholders’ equity was $1.31 billion.
- Werner paid $21.1 million in dividends and repurchased $53.3 million of stock in the first nine months. It had 1,637,442 shares remaining under its repurchase authorization at September 30.
Outlook, risks and unusual items
- Management cited strong demand and expected it to remain strong through the rest of 2021 and into 2022. Q4 expectations included 17–19% growth in One-Way Truckload revenue per total mile and 1–2% growth in Dedicated revenue per tractor per week, year over year. Werner expected a flat to slightly lower Q4 truck count, but a year-end 2021 fleet 3–5% larger than at year-end 2020.
- Management expected Q4 gains on used-equipment sales of $10–$12 million, lower than Q3, and warned that production delays could constrain new truck and trailer deliveries. Driver shortages, higher driver compensation, fuel costs, third-party capacity prices and insurance costs could pressure margins.
- Q3 results included a $16.1 million net unrealized investment gain; the nine-month gain was $36.3 million. The Q3 amount reflected a $28.2 million gain on MLSI and a $12.1 million loss on TuSimple. These non-operating gains materially boosted reported pretax income.
- Werner recorded a $27.5 million liability related to an adverse $92.0 million accident verdict under appeal, and a corresponding $79.2 million receivable from insurers with an equal long-term liability. The company is the primary obligor under the policies; appeal outcome is uncertain. Management said resolution of ordinary-course claims and litigation, considering reserves, was not expected to materially adversely affect the financial statements.
- The filing identified uncertainty around the OSHA COVID-19 vaccination/testing rule and potential effects on driver availability, costs and operations. It also cited supply constraints, including semiconductor and component shortages affecting truck and trailer production. The credit facilities referenced LIBOR; Werner was discussing the transition to a replacement benchmark.
Key facts for investors to verify
- How much of earnings growth is supported by recurring transport operations versus investment remeasurement and equipment-sale gains.
- Whether driver availability, wage inflation and equipment shortages affect fleet size, mileage productivity and the stated Q4 expectations.
- Realized capital spending versus the $250–$275 million 2021 estimate, and the impact of the ECM acquisition on cash generation and debt.
- Developments in the accident-verdict appeal, insurance recoverability and other self-insured claims.
- Changes to OSHA requirements, LIBOR replacement terms, and usable borrowing capacity after the October borrowing and standby letters of credit.