Werner Enterprises, Inc. — Q2 2016 Form 10-Q
Business context and period: U.S. truckload transportation and logistics provider; reporting period ended June 30, 2016. The unaudited filing covers the three and six months ended June 30, 2016, compared with the same 2015 periods. Truckload Transportation Services and Werner Logistics are the reportable segments.
Key financial metrics
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Operating revenue | $498.7 million | $534.6 million | $981.5 million | $1,030.3 million |
| Operating income | $29.6 million | $52.2 million | $62.0 million | $90.4 million |
| Operating margin | 5.9% | 9.8% | 6.3% | 8.8% |
| Net income | $18.3 million | $31.8 million | $38.4 million | $55.0 million |
| Diluted EPS | $0.25 | $0.44 | $0.53 | $0.76 |
| Operating cash flow | Not separately presented for the quarter | $171.0 million | $193.6 million |
Q2 operating expenses were $469.1 million, or 94.1% of revenue, versus $482.4 million, or 90.2%, a year earlier. The effective tax rate was 39.0% in Q2 and 39.0% for the first half, versus 39.2% for the first half of 2015. Q2 dividends declared were $0.06 per share, compared with $0.05.
Liquidity and debt: At June 30, cash and cash equivalents were $15.2 million, current assets $348.6 million, and current liabilities $211.9 million. Long-term debt was $145.0 million, up from $75.0 million at year-end 2015; total stockholders’ equity was $963.1 million. The company had $325.0 million of credit facilities, with $145.0 million borrowed and $31.0 million of standby letters of credit reducing available capacity. It made an additional $35.0 million of net borrowings after quarter-end. Debt covenants were met. A $75.0 million borrowing was effectively fixed at 2.5% through September 2019; the remaining $70.0 million was variable-rate debt.
Material changes versus prior period
- Revenue declined 6.7% in Q2 and 4.7% in the first half year over year; net income fell 42.5% and 30.2%, respectively. Operating margin contracted by 3.9 percentage points in Q2 and 2.5 points in the first half.
- Truckload Q2 revenue fell 9.1%, and segment operating income fell to $22.8 million from $47.3 million. Trucking revenue excluding fuel surcharge declined 5.0%; revenue per tractor per week fell 5.8%, loaded trip length declined 3.6%, and empty miles rose to 13.41% from 12.21%.
- Werner Logistics performed better: Q2 revenue rose 0.5% and operating income increased to $6.6 million from $5.0 million. Gross margin improved to 18.4% from 15.5%.
- Lower fuel prices reduced Q2 fuel expense 31.4% and fuel-surcharge revenue 34.3%. Depreciation rose 5.5% in Q2, while insurance and claims expense rose 6.4%.
- First-half operating cash flow decreased $22.6 million year over year. Net property additions rose to $260.5 million from $159.4 million, contributing to $252.2 million of net cash used in investing activities. Cash declined $16.6 million during the half.
Outlook, management commentary, risks and unusual items
- Management described Q2 freight demand as significantly softer than in the prior two years, with excess industry capacity and pressure for contractual rate reductions. July demand and spot pricing had improved versus management’s expectations, but the company said year-over-year rate-per-mile performance could be difficult to sustain or improve in coming quarters.
- The company exited some contractual business requiring significant rate cuts, shifted about 150 trucks from One-Way Truckload to Dedicated in June, and said it was not growing the truck fleet until freight and rate markets improved. Management expected lower truck orders and builds and upcoming regulatory changes could tighten capacity over the next few quarters; this is an expectation, not a guarantee.
- Management estimated 2016 net capital expenditures of $350–$400 million. Property and equipment purchase commitments were approximately $221.9 million at quarter-end. First-half net capital expenditures were funded with operating cash, existing cash and credit-facility borrowings.
- Driver recruitment, retention and pay costs; third-party capacity rates; fuel-price movements and incomplete surcharge recovery; higher equipment costs and depreciation; and self-insured claims are material operating risks. Liability insurance premiums for the policy year beginning August 1, 2016 were about $3.5 million higher than the prior year.
- The company reported a pending driver wage class action. In Q2, court rulings dismissed Nebraska wage-law claims and struck the plaintiff’s untimely damages calculations; the short-break accrual was reduced from $2.0 million to $1.2 million. No accrual was recorded for the sleeper-berth matter because management did not consider a loss probable, and the possible loss range could not be determined.
- Other notable items included a $3.4 million gain on real estate sale within Q2 gains on asset sales, and a $1.8 million first-half reduction in compensation expense related primarily to revised forfeiture estimates after an executive retirement. The interest-rate swap had a $3.0 million pretax fair-value loss at June 30.
- Regulatory matters include the proposed entry-level driver training rule and the electronic logging device mandate, which carriers were required to adopt by December 2017, subject to pending legal challenge. The filing also identifies diesel fuel, foreign currency and interest-rate exposure; a one-percentage-point LIBOR increase on the $70 million variable-rate balance would add an estimated $0.7 million to annual interest expense.
Important facts for investors to verify
- Whether freight volumes and contractual and spot rates improve, and whether Truckload utilization and operating ratio recover.
- Whether the $350–$400 million net capital expenditure outlook is achieved and how fleet investment is financed; monitor post-quarter borrowings and available credit capacity.
- Whether driver and independent-contractor availability, pay, insurance costs and claims reserves pressure margins.
- Developments and potential exposure in the driver wage litigation, including the unaccrued sleeper-berth claim and other class actions.
- Cash generation, leverage, interest-rate exposure and the effect of fuel-price changes and surcharge recovery on operating results.