Werner Enterprises, Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; comparative figures are for Q1 2010 unless stated otherwise. The interim financial statements are unaudited. Werner operates truckload transportation and value-added logistics services.
Financial results
Amounts are in millions of dollars except per-share data and ratios.
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Operating revenue | $469.4 | $425.1 | +10.4% |
| Operating income | $27.4 | $18.3 | +50.3% |
| Net income | $16.3 | $10.8 | +50.4% |
| Diluted EPS | $0.22 | $0.15 | Up $0.07 |
| Operating ratio | 94.2% | 95.7% | Improved 1.5 percentage points |
| Cash from operating activities | $53.8 | $65.0 | Down 17.2% |
- Trucking revenue excluding fuel surcharge rose 4.2%; trucking fuel-surcharge revenue increased 51.2% to $83.3 million, reflecting higher fuel prices. Revenue per total mile, excluding surcharge, rose 4.5%, while monthly miles per tractor declined 0.7%.
- Truckload segment revenue was $402.3 million and operating income was $24.3 million; its operating margin improved to 6.0% from 4.0%. Excluding fuel surcharges from both revenue and expenses, the segment operating ratio improved to 92.4% from 95.2%.
- Value Added Services (VAS) revenue increased 3.5% to $63.6 million; operating income rose 10.6% to $3.4 million. Gross margin improved to 16.1% from 15.4%. Net VAS shipments declined 2%, while average revenue per shipment rose 15%.
- Fuel expense increased to $97.9 million from $73.9 million. Management cited diesel prices 78 cents per gallon higher year over year; surcharge programs recover most, but not all, fuel increases and may lag when prices rise rapidly.
Liquidity, cash flow and capital
- Cash and cash equivalents were $47.6 million at March 31, 2011, versus $14.0 million at December 31, 2010. Current assets were $350.9 million and current liabilities $177.7 million.
- Operating cash flow fell to $53.8 million, primarily due to a larger accounts-receivable cash use amid shipment growth, higher rates and fuel surcharges; higher net income partly offset the decline.
- Investing activities used $18.8 million. Property and equipment additions were $37.6 million and retirements generated $17.6 million.
- No credit-facility borrowings were outstanding at quarter end. Two facilities total $225.0 million, reduced by $41.1 million of standby letters of credit; available capacity was $183.9 million. The company was in compliance with financial covenants.
- Quarterly dividends were $0.05 per share; cash dividends paid totaled $3.6 million. No shares were repurchased during the quarter.
Material changes, outlook and risks
- Management said truckload freight trends improved significantly from the second week of February and strengthened further in March; April trends remained strong but were slightly below April 2010. Management attributed improvement more to industry capacity constraints than economic recovery.
- Management intends to maintain the fleet at approximately 7,300 trucks and focus on expanding operating margin. It forecast 2011 net capital expenditures of $150–$200 million, compared with $119 million in 2010; $114.9 million of equipment purchases were committed at quarter end. This is capital-spending guidance, not earnings guidance.
- Key cost and operating risks include driver and independent-contractor availability, higher fuel and equipment costs, maintenance and tire-price pressures, insurance and claims experience, and the ability to recover costs through freight rates and fuel surcharges. Severe winter storms reduced first-quarter miles per tractor.
- Potential regulatory developments include FMCSA’s CSA 2010 safety initiative and proposed changes to safety ratings and entry-level driver training. The company reported that its publicly available scores met the agency’s acceptable performance threshold at the time of filing.
- Unrecognized tax-benefit liability was $7.5 million, including $3.0 million of accrued interest; $4.8 million would affect the effective tax rate if recognized. The IRS was auditing tax years 2007 and 2008. Management did not expect a material effect from ordinary-course claims and litigation.
- Other unusual items included $4.8 million of gains on equipment sales, compared with $1.1 million in Q1 2010, which reduced operating expenses. The effective tax rate was 41.25%, versus 41.75%.
Most important facts for investors to verify
- Whether stronger freight demand and improved truckload pricing persist, and whether gains reflect sustainable operating trends or capacity tightness.
- How fuel-price movements, surcharge timing and recovery affect margins and cash flow.
- Whether planned capital spending, fleet replacement and equipment commitments remain consistent with operating cash generation and liquidity.
- Whether driver availability, labor costs, maintenance, tire prices and insurance claims pressure results.
- Updates on the IRS audit, tax exposures and proposed transportation safety and driver-training rules.