Werner Enterprises, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unaudited interim results; the company cautions they are not necessarily indicative of full-year results. Werner operates Truckload Transportation Services (TTS) and Werner Logistics.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Revenue | $569.0 million | $627.5 million | $1,161.7 million | $1,223.7 million |
| Operating income | $52.8 million | $58.4 million | $83.9 million | $106.5 million |
| Net income | $39.1 million | $43.3 million | $62.2 million | $79.4 million |
| Diluted EPS | $0.56 | $0.62 | $0.89 | $1.13 |
| Operating ratio | 90.7% | 90.7% | 92.8% | 91.3% |
| Operating cash flow | — | — | $287.3 million | $220.3 million |
- Q2 revenue fell 9.3% year over year; operating income declined 9.6% and net income 9.7%. First-half revenue decreased 5.1% and net income 21.7%.
- Q2 TTS revenue was $445.1 million and operating income $51.2 million; TTS operating margin improved to 11.5% from 10.8%. Werner Logistics revenue was $110.2 million and operating income $3.1 million; its operating margin declined to 2.8% from 4.0%.
- At June 30, cash and cash equivalents were $65.4 million. Debt was $175.0 million, down from $300.0 million at year-end 2019. Stockholders’ equity was $1.14 billion.
- First-half investing cash outflow was $103.2 million, including $170.2 million of property and equipment additions and $62.6 million of sale proceeds. Financing cash outflow was $150.2 million, including $125.0 million of debt repayments.
Material changes and drivers
- COVID-19-related customer closures and curtailed activity weakened freight volumes in April; demand improved as businesses reopened in May and June. Management said One-Way Truckload demand in July was relatively strong and above July 2019.
- Lower fuel prices sharply reduced fuel expense and fuel surcharge revenue. Q2 fuel expense fell 49.8%; surcharge revenue fell 45.3%. Lower used-equipment sale gains and higher insurance and claims costs offset some savings.
- First-half insurance and claims expense rose 41.5%, including a $10 million accrual for a serious January 2020 truck accident. Depreciation increased 11.7%; a change in estimated lives for trucks expected to be sold in 2020 increased first-half expense by $8.7 million.
- Operating cash flow increased 30.4%, aided by working-capital changes and $33.8 million from temporary deferral of federal and state income tax payments; the deferred payments were paid in Q3 2020.
Outlook, liquidity, risks and contingencies
- Management expected 2020 net capital expenditures of $260–$300 million and free cash flow above $150 million. It expected year-end truck count to be 1%–3% below year-end 2019, while anticipating Dedicated fleet growth from new business implementations in Q3. Management planned to continue the quarterly dividend of $0.09 per share.
- Management reported approximately $280.4 million available under two credit facilities expiring in May 2024, after debt and letters of credit; cash plus available borrowing capacity was described as approximately $345 million. The company said it was in compliance with debt covenants.
- Management warned that the pandemic could further affect 2020 freight volumes and pricing, and that the duration and scale of disruption were difficult to predict. Driver and independent-contractor availability, fuel recovery, used-truck values, third-party capacity costs, and liability insurance costs remain risks.
- Liability insurance renewed effective August 1, 2020, with Werner responsible for the first $10 million per claim; premiums were $7.8 million higher than the prior policy year. Workers’ compensation self-insured retention also increased from $1 million to $2 million per claim effective April 1, 2020.
- A 2018 Texas accident produced a $92 million judgment. Werner recorded a $21.2 million liability and a matching $79.2 million insurance receivable and related liability; the company is appealing, with no assurance of outcome. A separate driver wage class action was dismissed with prejudice in June 2020; plaintiffs appealed in July.
- The company had $214.7 million of committed property and equipment purchases at quarter-end. It noted new Hours of Service rules would take effect September 29, 2020, and the USMCA took effect July 1, 2020.
Important facts for investors to verify
- Whether freight demand, pricing, and Dedicated fleet implementations recovered as management anticipated, and the eventual pandemic impact on full-year results.
- Whether the $260–$300 million net capital expenditure and more than $150 million free-cash-flow expectations were achieved.
- Developments in insurance costs and claims, especially the January 2020 accident and the appeal of the $92 million judgment.
- Whether the higher self-insured retention and insurance premiums, driver availability, and used-equipment market conditions affect margins and cash needs.
- The durability of operating cash flow, noting that first-half cash generation benefited from working-capital movements and temporary tax-payment deferrals.