Werner Enterprises, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Interim financial statements are unaudited. Comparisons are with Q1 2013 unless noted.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Operating revenue | $492.0 million | $492.9 million | Down 0.2% |
| Operating income | $23.4 million | $28.7 million | Down 18.3% |
| Operating margin | 4.8% | 5.8% | Down 1.0 percentage point |
| Net income | $14.3 million | $17.5 million | Down 18.1% |
| Diluted EPS | $0.20 | $0.24 | Down 16.7% |
| Operating ratio | 95.2% | 94.2% | Up 1.0 percentage point |
| Cash from operations | $59.2 million | $76.6 million | Down $17.4 million, or 23% |
Truckload revenue fell 1.4% to $403.2 million, and segment operating income declined to $20.8 million from $23.6 million; its operating margin was 5.2%, versus 5.8%. Average revenue per tractor per week increased 1.6% to $3,422, while tractors in service declined 2.1% to 7,004. Value Added Services (VAS) revenue rose 3.2% to $85.2 million, but segment operating income fell 48.7% to $1.9 million. VAS gross margin declined to 14.8% from 16.1% as purchased transportation costs rose.
Operating cash flow remained the main funding source. Investing activities used $13.3 million, including $30.9 million of equipment additions and $14.8 million of proceeds from equipment retirements. Financing activities used $13.2 million, including $12.9 million of share repurchases and $3.6 million of dividends. Cash increased by $32.8 million to $56.5 million.
Balance sheet and liquidity
- At March 31, cash and cash equivalents were $56.5 million; total assets were $1.37 billion and stockholders’ equity was $775.0 million.
- Debt was $40.0 million, all long-term, with no borrowings or repayments during the quarter. The variable rate was 0.85% at quarter-end.
- Two committed credit facilities total $250 million. After $40.0 million of borrowings and $32.7 million of standby letters of credit, $177.3 million remained available. The company reported compliance with debt covenants.
- Committed property and equipment purchases were approximately $64.5 million. Management expected 2014 net capital expenditures of $150 million to $200 million, funded by operations and, if needed, credit facilities.
Material changes, outlook and risks
- Operating conditions: Management cited severe winter weather as a cause of higher repair, towing, insurance and idling costs, as well as lower miles per truck. Truckload demand was described as the strongest first-quarter performance in ten years, supported by weather-related freight backlogs, customer inventories and tighter industry capacity. April 2014 One-Way Truckload freight pre-books were better than April 2013.
- Pricing, capacity and drivers: Average revenue per total mile, excluding fuel surcharge, rose 3.1%, but lower miles and fewer tractors offset the improvement. Management said driver recruiting and retention remained extremely challenging, expected the market to become more problematic during 2014, and could not predict whether it could restore the Truckload fleet to its 7,300-truck goal. Higher driver or contractor pay could pressure results if freight rate increases do not offset the cost.
- Costs and fuel: Fuel expense declined 5.9%, partly due to fewer miles and lower average diesel prices. Supplies and maintenance rose 6.3%, and rent and purchased transportation rose 5.0%; tighter third-party capacity increased VAS carrier costs. Fuel surcharge programs recover a majority, but not all, of fuel price increases. The company had no fuel-price hedging derivatives.
- Outlook and capital allocation: The filing provides no full-year earnings or revenue guidance. Management’s stated 2014 net capital expenditure outlook was $150 million to $200 million, and its year-end target for average company truck age was 2.3 to 2.5 years. The company repurchased 500,000 shares for $12.9 million in Q1 and declared dividends of $0.05 per share.
- Other risks and contingencies: The company is substantially self-insured for claims; results may be affected by claim experience, medical costs, weather, regulation and insurance costs. Fuel prices, driver availability, third-party capacity, customer losses and new truck costs also pose risks. Management said ordinary-course claims and litigation were not expected to materially affect the financial statements. Unrecognized tax benefits totaled $8.7 million, including $1.7 million of accrued interest; management expected no significant change in uncertain tax positions over the next 12 months.
- Regulatory and interest-rate exposure: A proposed federal electronic logging device rule was issued in March 2014; management did not expect a significant operating or profitability effect. A hypothetical 1 percentage-point increase in LIBOR would increase annual interest expense by approximately $0.4 million at the reported debt balance.
Q1 net income included $4.6 million of gains on disposal of property and equipment, recorded as a reduction of operating expenses, compared with $3.5 million in Q1 2013. The effective tax rate increased to 40.25% from 39.75%, which management attributed to lower projected employment tax credits. The filing cautions that quarterly results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether Truckload pricing gains and improved freight demand can offset driver shortages, lower utilization and higher operating costs.
- Whether VAS gross margins recover as third-party carrier capacity and costs change.
- Progress against the 7,300-truck fleet goal and the $150 million to $200 million net capital expenditure outlook.
- Cash flow conversion and the sustainability of equipment-sale gains, alongside planned dividends and share repurchases.
- Developments in self-insured claims, uncertain tax positions, fuel prices, and relevant transportation regulations.