Werner Enterprises, Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. The unaudited filing covers a truckload transportation business and logistics/value-added services (VAS). Comparisons are with the corresponding 2011 periods.
Financial performance
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Revenue | $521.8 million | $515.9 million | $1,020.2 million | $985.3 million |
| Operating income | $51.1 million | $46.8 million | $86.5 million | $74.2 million |
| Net income | $30.7 million | $27.5 million | $51.9 million | $43.8 million |
| Diluted EPS | $0.42 | $0.38 | $0.71 | $0.60 |
| Operating ratio | 90.2% | 90.9% | 91.5% | 92.5% |
Q2 revenue rose 1.1% and net income rose 11.5%; first-half revenue rose 3.5% and net income rose 18.5%. The lower operating ratio indicates improved operating profitability. Q2 effective tax rate was 40.50%, down from 41.25%; the first-half rate was also 40.5% versus 41.25%.
Business mix and operating trends: Q2 Truckload segment revenue was $432.9 million, down from $439.9 million, while segment operating income increased to $45.1 million from $44.8 million. VAS revenue grew to $84.0 million from $71.2 million and operating income to $4.3 million from $3.7 million. For the first half, VAS revenue increased to $160.8 million from $134.8 million. In Q2, trucking revenue excluding fuel surcharge decreased 0.5%; average monthly miles per tractor fell 3.4%, while revenue per total mile increased 2.6%. Higher VAS volumes and pricing, lower fuel expense, and improved Truckload margins supported results.
Cash, liquidity and capital
- First-half operating cash flow was $138.8 million, up from $117.0 million. Investing cash use was $119.6 million, including $152.4 million of property and equipment additions and $30.5 million of equipment retirements.
- Cash increased to $18.2 million from $12.4 million at year-end 2011. Stockholders’ equity was $772.8 million.
- No bank borrowings were outstanding at June 30. New revolving credit facilities total $250 million, reduced by $35.9 million of standby letters of credit; the company borrowed $20 million in July. It reported compliance with credit covenants.
- Net capital expenditures were $121.9 million in the first half. Management expected 2012 net capital expenditures of $180–$210 million, compared with $232.2 million in 2011. Equipment purchase commitments at June 30 were approximately $82.8 million.
- Dividends declared were $0.05 per share for Q2 and $0.10 per share for the first half, unchanged year over year.
Outlook, risks and significant matters
- Management described Q2 freight demand as seasonally typical, strengthening toward June, with a balanced truckload market and tightening capacity. Contractual rate increases awarded to date were similar to 2011. The company intended to maintain a fleet of approximately 7,300 trucks and focus on margins and returns. No earnings guidance was provided.
- Driver and independent-contractor availability remains a risk; shortages or higher compensation costs could reduce fleet capacity or profitability if freight rates do not offset the increases. Management noted that over 70% of driving jobs were in shorter-haul Regional and Specialized operations.
- Fuel surcharge programs recover most, but not all, fuel cost increases; the company had no fuel derivatives. Newer, more expensive equipment increased depreciation, while management expected the company truck fleet’s average age to decline to about 2.1 years by year-end 2012.
- The IRS issued a notice of deficiency and proposed penalties concerning the company’s discontinued like-kind equipment exchange program. Werner contested the deficiencies in Tax Court in July 2012, believes its position complies with tax law, and had not accrued proposed penalties or related interest. It estimated potential interest of approximately $2 million if the IRS position is upheld, after tax deductibility. The filing reports $11.4 million of total gross unrecognized tax benefits.
- The company expected the amended hours-of-service rule to cause a modest decrease in truck productivity. A federal transportation bill passed in July 2012 requires EOBR rules; management did not expect a significant operational or profitability effect.
- Ordinary-course claims and litigation were not expected by management to materially affect the financial statements. Q2 gains on sales of equipment were $5.7 million, broadly similar to $5.6 million a year earlier; such gains reduce reported operating expenses.
Important facts for investors to verify
- Whether VAS growth and improved Truckload operating ratio continue, and whether third-party capacity costs pressure VAS margins.
- Trucking volume, miles per tractor, empty miles, freight pricing, and the availability and cost of drivers and independent contractors.
- Execution and funding of planned equipment spending, including the $82.8 million purchase commitments and availability under credit facilities.
- Developments and potential financial exposure in the IRS tax dispute, including any penalties, interest, or tax refunds.
- Actual effects of fuel-price movements, surcharge recovery, emissions-related equipment costs, and regulatory changes.