WERNER ENTERPRISES INC annual report, FY2011

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Werner Enterprises, Inc. — 2011 Form 10-K

Reporting period: Fiscal year ended December 31, 2011. The filing also reports fourth-quarter results. Werner operates truckload transportation and logistics businesses through its Truckload and Value Added Services (VAS) segments.

Financial results and position

  • Revenue: $2.003 billion in 2011, up 10.3% from $1.815 billion in 2010. Truckload revenue was $1.695 billion; VAS revenue was $291.1 million.
  • Profit: Operating income was $173.7 million, up 29.0%; net income was $102.8 million, up 28.4%. Diluted EPS rose to $1.40 from $1.10.
  • Margins: Consolidated operating ratio improved to 91.3% from 92.6% (lower is better). Operating margin was approximately 8.7%, versus 7.4%; net margin was approximately 5.1%, versus 4.4%.
  • Segment performance: Truckload operating income increased to $157.6 million from $122.2 million. VAS operating income increased to $17.0 million from $11.0 million; VAS gross margin rose to 16.1% from 14.9%.
  • Fourth quarter: Revenue was $507.9 million versus $463.2 million; operating income was $49.4 million versus $40.6 million; net income was $29.4 million versus $24.1 million. Diluted EPS was $0.40 versus $0.33.
  • Cash flow and investment: Operating cash flow was $264.5 million, up from $228.5 million. Net cash used in investing was $224.8 million; net property additions were $232.2 million. Cash and equivalents ended the year at $12.4 million.
  • Debt and liquidity: No debt was outstanding at year-end. Credit facilities totaled $225.0 million, reduced by $38.9 million of letters of credit; the filing describes $225.0 million as available credit before that reduction. The company borrowed $40.0 million in January 2012. Stockholders’ equity was $725.1 million; current assets were $341.3 million and current liabilities $198.8 million.
  • Dividends: 2011 declared dividends were $0.70 per share, including a $0.50 special dividend. Cash dividends paid totaled approximately $51.0 million.

Changes versus 2010

  • Higher revenue per total mile, fuel surcharge revenue, and VAS activity supported revenue growth. Trucking revenue excluding fuel surcharges increased 2%; average revenue per total mile excluding surcharges rose 3.8%.
  • VAS revenue grew 16%; gross margin dollars increased 25%. Lower third-party capacity costs improved VAS gross margin percentage.
  • Fuel costs rose materially: average diesel prices increased 37%, while fuel surcharge revenue rose to $373.4 million from $254.8 million. Surcharges generally recover most, but not all, fuel increases.
  • Equipment-sale gains increased to $21.3 million from $5.9 million, reducing reported operating expenses and contributing to improved results.
  • Capital spending increased as Werner bought more new trucks. Company-truck average age declined to 2.4 years from 2.8 years; the year-end fleet totaled 7,200 tractors.

Outlook, risks and unusual items

  • Management gave no specific earnings or revenue guidance. It estimated 2012 net capital expenditures of $160 million to $210 million, 10%–30% below 2011, and planned to maintain approximately 7,300 trucks.
  • Management said early-2012 freight trends were broadly similar to 2011, with more balanced network freight. It expected driver recruitment to become more challenging if the economy strengthened.
  • Key risks include fuel-price exposure and incomplete surcharge recovery; tight driver and independent-contractor availability and related wage or settlement increases; freight-market and customer concentration; seasonal and severe-weather effects; and higher maintenance, equipment, and regulatory costs.
  • New hours-of-service rules, proposed electronic logging requirements, and changes to driver training and safety rules could affect productivity, costs, and driver supply. The company reported satisfactory DOT safety status and acceptable CSA performance scores.
  • The five largest customers accounted for 26% of 2011 revenue and the ten largest for 40%; no single customer exceeded 10%. Many One-Way Truckload contracts can be terminated on 30 days’ notice.
  • Werner is self-insured for significant portions of liability, workers’ compensation, and health claims. It reported $10.8 million of unrecognized tax benefits and $94.7 million of committed property and equipment purchases at year-end. Management said routine litigation was not expected to materially affect the financial statements.
  • Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.

Investor verification priorities

  1. Assess how much of earnings improvement is repeatable versus attributable to higher used-equipment sale gains and changing freight conditions.
  2. Review fuel surcharge recovery relative to fuel expense, and the effect of fuel prices not recovered on empty miles, idle time, and rapid price changes.
  3. Track driver availability, pay and retention, fleet utilization, and whether the planned 2012 truck count and capital spending are achievable.
  4. Confirm liquidity and credit availability after the January 2012 borrowing, including the maturity of the $50 million facility in May 2012 and the letters of credit.
  5. Monitor customer concentration, VAS margins and third-party capacity costs, insurance-claim development, and the timing or outcome of tax contingencies.