Werner Enterprises, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Interim financial statements are unaudited. Amounts below are in millions except per-share data and where noted.
Business context
Werner provides truckload transportation and logistics services through Truckload Transportation Services and Value Added Services (VAS). Truckload is the larger, asset-intensive segment; VAS includes brokerage, freight management, intermodal and global logistics.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $511.7 | $506.5 | $1,511.3 | $1,526.7 |
| Operating income | $32.6 | $41.8 | $103.6 | $128.3 |
| Net income | $21.3 | $25.1 | $64.6 | $77.1 |
| Diluted EPS | $0.29 | $0.34 | $0.88 | $1.05 |
| Operating ratio | 93.6% | 91.7% | 93.1% | 91.6% |
| Net margin | 4.2% | 5.0% | 4.3% | 5.0% |
Q3 revenue rose 1.0%, but operating income fell 22.1% and net income fell 15.4%. For the first nine months, revenue declined 1.0%, operating income declined 19.2%, and net income declined 16.1%. Lower fuel expense helped, but higher insurance and claims, purchased transportation, and other operating costs pressured results.
- Truckload: Q3 revenue was $412.7 million, down 1.7%; operating income was $27.1 million, down 26.1%. Segment operating ratio increased to 93.4% from 91.3%. Average revenue per tractor per week declined 1.1%; average loaded trip length declined 6.7%. Revised hours-of-service rules were estimated to reduce miles per truck by 2%–3%.
- VAS: Q3 revenue increased 15.9% to $96.5 million; operating income rose 11% to $4.2 million. Net shipments increased 14.3%. Gross margin was 15.0%, versus 15.1%.
- Costs: Q3 insurance and claims expense rose 15.5%; rent and purchased transportation rose 9.4%. Fuel expense fell 6.0%, partly reflecting lower miles and lower average diesel prices. Gains on equipment sales were $2.7 million in Q3, versus $5.4 million a year earlier.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $171.1 million, down from $198.7 million. Investing cash outflow was $98.4 million; financing cash outflow was $70.6 million. Cash increased $1.9 million to $17.4 million.
- At September 30, total assets were $1.351 billion, stockholders’ equity was $752.7 million, and debt was $50 million, all long-term. The company had $250 million in committed credit facilities; $50 million was drawn and $34 million was committed to standby letters of credit, leaving $166 million of unused lines.
- Nine-month net capital expenditures were $106.5 million. The company expected 2013 net capital expenditures of $150–$175 million and had $58.8 million of equipment purchase commitments at quarter-end.
- Nine-month dividends were $11.0 million. The company repurchased 821,091 shares for $20.1 million during the period; 212,300 shares were repurchased in Q3.
Outlook, risks and contingencies
- Management expected a Q4 2013 effective tax rate of approximately 40.5% and equipment-sale gains at or below Q3 levels. The filing provides no earnings or revenue guidance.
- Management described freight demand as improving seasonally in Q3 and said early October trends were better than the prior-year period, while noting driver recruiting and retention remained challenging. The company’s goal was a 7,300-truck Truckload fleet; it ended Q3 with 7,245 trucks.
- Key risks include driver and independent-contractor availability and pay costs, fuel-price changes and incomplete surcharge recovery, insurance claims, equipment costs, third-party capacity pricing, and regulatory limits on driving hours. The company had no fuel or interest-rate hedging derivatives.
- An IRS employment-tax dispute over driver per diem payments could result in an estimated $16.5 million of additional expense for tax years 2009–2010 if the IRS position prevails. No liability was accrued; an appeals opinion was pending. Separately, the company reported $8.6 million of gross unrecognized tax benefits.
- The IRS concluded there were no deficiencies or penalties for the company’s 2007–2008 federal returns concerning its like-kind equipment exchanges. Ordinary-course litigation was not expected by management to materially affect the financial statements.
- Variable-rate debt was $50 million; the filing estimates a 1 percentage-point LIBOR increase would raise annual interest expense by $0.5 million. The company reported compliance with debt covenants.
Important facts for investors to verify
- Whether truckload productivity, freight rates and fleet levels improve enough to offset driver, insurance and equipment-cost pressures.
- Whether VAS growth translates into sustained operating-income and margin improvement as capacity costs and its owned drayage fleet evolve.
- The status and potential financial effect of the IRS per diem dispute, and the timing of settlement of uncertain tax positions.
- Actual 2013 capital spending, cash generation, debt usage, share repurchases and equipment-sale gains compared with management’s stated expectations.