WERNER ENTERPRISES INC quarterly report, Q3 FY2011

Werner Enterprises, Inc. — Q3 2011 Form 10-Q

Reporting period: Three and nine months ended September 30, 2011; filed November 7, 2011. Interim financial statements are unaudited. Unless stated otherwise, amounts are in U.S. dollars.

Business context

Werner provides truckload transportation and logistics services through its Truckload Transportation Services and Value Added Services (VAS) segments. Trucking fuel surcharges and trucking revenues represented most of Q3 revenue; VAS provides brokerage, freight management, intermodal and global logistics services.

Financial results and liquidity

Metric	Q3 2011	Q3 2010	Nine months 2011	Nine months 2010
Operating revenue	$509.6M	$463.3M	$1,494.9M	$1,351.8M
Operating income	$50.1M	$40.1M	$124.3M	$94.0M
Net income	$29.6M	$24.2M	$73.4M	$55.9M
Diluted earnings per share	$0.40	$0.33	$1.00	$0.77
Operating ratio	90.2%	91.3%	91.7%	93.1%

Q3 revenue grew 10.0%, operating income 24.7% and net income 22.4% year over year. Nine-month revenue grew 10.6%, operating income 32.3% and net income 31.2%.
Q3 operating margin was approximately 9.8%, compared with 8.7% a year earlier; nine-month operating margin was approximately 8.3%, versus 6.9%.
Q3 Truckload revenue was $428.6M and operating income $45.7M; VAS revenue was $76.6M and operating income $4.1M. VAS gross margin was 15.6% of revenue, versus 14.9%.
Fuel surcharge revenue increased 49.1% in Q3 and 52.1% year to date, primarily reflecting higher fuel prices. Trucking revenue excluding surcharges rose only 0.7% in Q3 and 2.3% year to date.
Nine-month operating cash flow was $200.3M, up from $155.2M. Investing activities used $149.4M, including $208.5M of equipment additions and $54.9M of equipment retirements. The filing reports net property additions of $153.6M.
Cash and equivalents were $56.9M at September 30, up from $14.0M at year-end 2010. Current assets were $366.7M and current liabilities $176.2M.
No credit-facility borrowings were outstanding. The two facilities total $225.0M, reduced by $38.9M in standby letters of credit, leaving $186.1M unused. The facilities mature in May 2012 and November 2013; the company reported compliance with covenants.
Total assets were $1,269.3M and stockholders’ equity $735.3M. Dividends declared were $0.05 per share per quarter, unchanged from 2010.

Material changes and operating drivers

Higher revenue per mile and stronger VAS activity supported results, while average monthly miles per tractor fell 2.0% in Q3 and total miles declined 2.2%. Average tractors in service were nearly unchanged.
Truckload revenue per total mile, excluding fuel surcharge, increased 2.9% in Q3; empty miles rose to 11.94% from 11.29%. Management attributed higher rates to customer contract increases and improved freight mix.
VAS Q3 revenue increased 18.5% and gross-margin dollars 24.2%. Brokerage, Intermodal and WGL grew; Freight Management declined due to reduced project work for a customer. Nine-month VAS shipments were down 7% overall, while net shipments increased 1%.
Operating performance benefited from a lower operating ratio, more favorable gains on used-equipment sales, and lower third-party capacity costs as a percentage of VAS revenue. Equipment sale gains were $6.0M in Q3 and $16.4M for nine months, compared with $1.4M and $3.1M in 2010.
Costs remained pressured by higher fuel prices, tire and maintenance expense, depreciation on more expensive replacement trucks, and some higher payroll-related costs. Fuel-efficiency improvements partly offset higher fuel costs.

Outlook, risks and contingencies

Management expected 2011 net capital expenditures of $210M–$240M, versus $119M in 2010, and intended to fund them with cash, operating cash flow and credit facilities as needed. Approximately $100.4M of equipment purchases were committed at September 30.
Management aimed to maintain the fleet at approximately 7,300 trucks and reported October 2011 freight demand was consistent with September and slightly above October 2010. It viewed favorable freight trends as driven more by constrained industry capacity than economic demand. The filing provides no formal earnings guidance.
Key risks include fuel-price changes and incomplete or delayed fuel-surcharge recovery; driver and independent-contractor shortages or higher compensation; customer losses or financial failures; equipment prices, maintenance and tire availability; and access to qualified third-party capacity.
Potential regulatory effects include proposed hours-of-service changes and evolving electronic-recording and safety-rating requirements. Management noted possible impacts on driver availability, productivity and costs. The company said its CSA scores met the stated acceptable thresholds.
Tax authorities were examining 2007–2008 federal tax years. Gross unrecognized tax benefits were $7.8M, including $3.2M of accrued interest; management did not expect significant changes in uncertain tax positions over the next 12 months. The company was involved in ordinary-course claims and litigation and did not expect their resolution to materially affect the financial statements.
Other notable items: Q3 foreign-currency translation loss was $2.0M; the company had no fuel or interest-rate derivatives. It reported effective disclosure controls and no material quarterly change in internal control over financial reporting.

Important facts for investors to verify

Whether improved truckload pricing and VAS growth can continue as freight demand and industry capacity conditions change.
How much of elevated fuel costs can be recovered through surcharges, and whether fuel, driver, maintenance and equipment costs further pressure margins.
Execution and funding of the planned $210M–$240M capital spending program, including the effect of fleet renewal on depreciation, productivity and cash balances.
Progress on driver availability and pending hours-of-service, electronic-recording and safety regulations.
Developments in tax audits, unrecognized tax benefits, insurance claims and other contingencies.