Werner Enterprises, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. The interim financial statements are unaudited. Werner provides truckload transportation and logistics services through its Truckload and Werner Logistics segments.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $629.7 million | $528.6 million | $1,811.5 million | $1,549.4 million |
| Operating income | $63.4 million | $35.9 million | $149.3 million | $98.8 million |
| Net income | $47.5 million | $22.5 million | $113.6 million | $61.8 million |
| Diluted EPS | $0.66 | $0.31 | $1.57 | $0.85 |
| Operating margin | 10.1% | 6.8% | 8.2% | 6.4% |
| Net margin | 7.5% | 4.3% | 6.3% | 4.0% |
- Year-over-year revenue increased 19.1% in Q3 and 16.9% year to date; net income rose 111.0% and 83.9%, respectively.
- Truckload revenue was $484.8 million in Q3, up 18.9%; Logistics revenue was $129.4 million, up 23.8%. Truckload operating ratio improved to 87.9% from 91.7%; Logistics operating margin rose to 3.7% from 1.3%.
- Q3 Truckload revenue per tractor per week increased 10.3% to $4,074; average tractors in service increased 5.7%. Higher rates, stronger freight demand, and fleet growth contributed. Fuel surcharges rose 36.4% amid higher fuel prices.
- Q3 operating expenses were 89.9% of revenue versus 93.2% a year earlier. Higher driver pay, fuel, and maintenance costs were partly offset by revenue growth, a $4.9 million favorable property-tax settlement, and stronger gains on equipment sales.
- The effective tax rate was 24.7% in Q3 and 23.9% year to date, versus 37.6% and 37.7% in the comparable 2017 periods, primarily reflecting the lower federal corporate tax rate under the Tax Act.
Cash flow, capital spending, debt, and liquidity
- Nine-month operating cash flow was $302.5 million, up from $223.2 million. Investing activities used $276.7 million; financing activities used $31.5 million.
- Property and equipment additions were $412.6 million and sale proceeds were $123.3 million, yielding $289.3 million of net property additions. Cash and cash equivalents were $9.7 million at September 30.
- Total debt was $125.0 million, including $75.0 million due in 2019 and $50.0 million due in 2020. Of $325.0 million in credit facilities, $125.0 million was borrowed; $31.3 million of standby letters of credit reduced availability. The company reported compliance with debt covenants.
- Stockholders’ equity was $1.24 billion. The company repurchased 1.28 million shares for $46.4 million during the first nine months and paid $16.6 million in dividends. The quarterly dividend was increased by $0.02 per share, or 29%, beginning with the July 2018 payment.
Outlook, management commentary, and material risks
- Management expected 2018 net capital expenditures of $350–$375 million and 2019 net capital expenditures below $300 million. Approximately $100.4 million of equipment purchases were committed at September 30.
- Management said freight demand was stronger than normal in July, August, and September, and remained stronger than normal in October. Its full-year 2018 expectation for Truckload revenue per total mile, net of fuel surcharge, was at the high end of its previously stated 9%–12% growth range.
- Management expected an effective tax rate of 25%–26% going forward. No broader earnings or revenue guidance is provided in the filing.
- Driver recruiting remains difficult amid industry competition and regulatory changes. Higher driver pay or independent-contractor settlement rates could pressure results if not matched by freight-rate increases. Fuel surcharges recover most, but not all, fuel-cost increases; the company had no fuel-price hedging derivatives.
- A jury awarded $92 million in a fatal-accident lawsuit; final judgment was entered July 30. Werner is appealing. It accrued $14.0 million of 2018 pretax expense and recorded a $79.2 million insurance receivable with a matching long-term liability. The company states its maximum liability under the applicable policies is $10.0 million plus interest; it expects to accrue about $1.2 million of post-judgment interest expense per quarter pending the appeal. Appeal outcome is uncertain.
- Werner adopted ASC 606 in 2018 using the modified retrospective method, recording a $2.0 million increase to opening retained earnings. The filing says Q3 and year-to-date revenue would have been lower by approximately $2.2 million and $3.2 million, respectively, under the prior recognition approach; driver-school revenue reductions of $3.6 million and $10.7 million had no operating-income effect.
Important facts for investors to verify
- Progress and potential financial exposure in the adverse verdict appeal, including insurance recovery, interest accruals, and the carrying amounts of the related receivable and liability.
- Whether elevated freight demand, rate growth, and improved operating ratios persist, particularly if fuel, driver, and other operating costs rise.
- Execution of planned fleet investment and the expected reduction in net capital expenditures in 2019, alongside driver availability and equipment resale values.
- Actual fuel-surcharge recovery relative to fuel-price changes and the effect of higher fuel prices on margins.
- Finalization of the Tax Act provisional accounting and the effect of the new lease standard, which Werner planned to adopt beginning January 1, 2019.