Werner Enterprises, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022; unaudited. Werner operates Truckload Transportation Services (TTS) and Werner Logistics.
Financial results and key metrics
- Q2 revenue: $836.3 million, up 28.7% year over year. TTS revenue rose 24.9% and Logistics revenue rose 43.9%.
- Q2 profitability: Operating income was $74.9 million, down 2.5%; operating margin was 9.0%, versus 11.8% a year earlier (operating ratio 91.0%, versus 88.2%). Net income attributable to Werner was $72.3 million, up 0.4%; diluted EPS was $1.12, versus $1.06.
- First-half results: Revenue was $1.601 billion, up 26.4%; operating income was $158.4 million, up 13.7%; net income attributable to Werner was $126.0 million, up 6.3%; diluted EPS was $1.93, versus $1.74. Operating margin was 9.9%, versus 11.0%.
- Segments: Q2 TTS operating income declined to $64.0 million from $73.1 million, with segment margin of 10.4% versus 14.9%. Logistics operating income increased to $12.5 million from $3.9 million, with margin of 6.1% versus 2.8%.
- Cash flow and investment: First-half operating cash flow was $267.5 million, up from $189.5 million. Investing cash outflow was $169.7 million; net property additions were $153.4 million. Cash was $54.4 million at quarter-end, compared with $54.2 million at year-end 2021.
- Debt and liquidity: Debt totaled $445.0 million, up from $427.5 million at year-end. The company reported $291.6 million available under its revolving facilities after letters of credit. It was in compliance with debt covenants. Total current assets were $772.4 million and current liabilities were $471.0 million.
- Margins and cost pressures: Q2 fuel expense rose 114.4% to $125.4 million as average diesel prices increased $2.21 per gallon year over year. Insurance and claims expense nearly doubled to $41.1 million. Higher revenue and pricing were partly offset by these costs and a deterioration in the consolidated operating ratio.
Changes, drivers, and unusual items
- Q2 trucking revenue excluding fuel surcharge increased 13.9%, reflecting 8.1% more average tractors in service and 5.4% higher revenue per tractor per week. TTS ended the quarter with 8,400 tractors, up 9.9% year over year.
- Management said One-Way Truckload demand moderated from strong April levels to seasonally normal levels by late June, while Dedicated demand remained strong. Logistics growth reflected higher rates and volumes, plus the NEHDS acquisition; ECM and NEHDS acquisitions also contributed to fleet and expense growth.
- Q2 earnings included a net $24.1 million gain on equity investments. The company recognized a $28.6 million unrealized gain on its MLSI investment, partly offset by a $4.5 million unrealized loss on autonomous-technology investments. Investment gains are non-operating and subject to valuation changes.
- Gains on sales of equipment reduced operating expenses by $20.7 million in Q2 and $41.1 million in the first half, driven by strong used-equipment pricing that management described as potentially temporary. A change in trailer salvage-value estimates reduced depreciation expense by $3.2 million in Q2 and $6.3 million in the first half.
- Q2 insurance and claims expense included $9.5 million related to a May 2020 accident lawsuit. A $150 million settlement was approved in July 2022; under the applicable coverage, Werner’s maximum liability is $10 million, with the remainder covered by insurers. At June 30, the company recorded a $10 million liability and a $140 million insurer receivable.
- A separate 2018 accident case has a $92 million judgment under appeal. The company reported a $31.4 million liability and a corresponding $79.2 million receivable from insurers, with no assurance on the appeal’s outcome. Other claims and employment-related class actions are also disclosed; management said it did not expect the matters, based on currently available information, to have a material adverse effect.
Outlook, risks, and capital allocation
- Management expected freight demand to continue moderating during the rest of 2022, particularly for discretionary goods; One-Way Truckload could be more exposed than Dedicated or Logistics.
- Company expectations included 2%–5% year-end tractor-count growth versus year-end 2021, subject to driver and equipment availability; 2%–5% Q3 year-over-year growth in One-Way Truckload revenue per total mile, excluding fuel surcharge; and 6%–8% growth in Dedicated revenue per tractor per week for full-year 2022.
- Estimated 2022 net capital expenditures were $275–$325 million; $182.4 million of equipment and property purchases were committed at June 30. Management said cash, operating cash flow, and borrowing capacity should fund requirements and planned shareholder returns. It planned to continue quarterly dividends.
- Key risks include driver and independent-contractor availability and pay costs, fuel-price volatility and incomplete surcharge recovery, equipment-delivery delays and maintenance costs, third-party capacity pricing, self-insured claims and liability-insurance costs, and economic or pandemic-related demand changes. A 1-percentage-point increase in SOFR was estimated to add about $2.0 million to annual interest expense at the reported borrowing level.
- During the first half, Werner repurchased 2.50 million shares for $102.1 million and paid $15.7 million in dividends. The board authorization had 2.53 million shares remaining at June 30.
Important facts for investors to verify
- How much future earnings and valuation may depend on unrealized investment gains and used-equipment sale gains.
- Whether freight demand, pricing, tractor growth, and the stated segment outlook develop as management expected.
- Whether driver availability, fuel recovery, insurance claims, and liability premiums continue to pressure operating margins.
- The status and ultimate insurance recovery for the disclosed accident litigation and settlement, including the pending appeal of the 2018 verdict.
- Capital spending, debt maturities (most reported debt matures in 2024), available revolver capacity, and the pace of share repurchases and dividends.