Werner Enterprises, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. The unaudited filing covers Werner’s Truckload Transportation Services (TTS) and Werner Logistics segments. Amounts below are in U.S. dollars; financial statement amounts are in millions except per-share data.
Financial performance
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Revenue | $590.2 | $618.3 | $1,751.9 | $1,841.9 |
| Operating income | $62.1 | $53.4 | $146.0 | $159.8 |
| Operating margin | 10.5% | 8.6% | 8.3% | 8.7% |
| Net income | $46.3 | $39.0 | $108.5 | $118.4 |
| Diluted EPS | $0.67 | $0.56 | $1.56 | $1.69 |
Q3 revenue fell 4.5% year over year, while operating income rose 16.4% and net income rose 18.7%. The operating ratio improved to 89.5% from 91.4% (lower is better). For the first nine months, revenue fell 4.9%, net income fell 8.4%, and the operating ratio edged up to 91.7% from 91.3%.
- TTS: Q3 revenue was $458.3 million, down 4.6%, while operating income increased to $63.1 million from $48.9 million; operating margin improved to 13.8% from 10.2%. Trucking revenue excluding fuel surcharge was nearly flat, as 5.0% higher average revenue per tractor per week offset fewer tractors in service.
- Werner Logistics: Q3 revenue was $117.4 million, down 3.3%. A sharp increase in spot truckload rates raised purchased-capacity costs; gross margin declined to 10.8% from 15.2%, and the segment recorded an $0.9 million operating loss versus $3.0 million income a year earlier.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $346.4 million, up from $332.2 million. Net property additions were $187.3 million; investing cash outflow was $181.0 million.
- Cash and cash equivalents were $40.5 million at September 30, 2020. Total assets were $2.14 billion and stockholders’ equity was $1.18 billion.
- Debt totaled $175 million, down from $300 million at December 31, 2019 after $125 million of repayments. Management reported a 0.3x net-debt-to-LTM-EBITDA ratio. $150 million of debt was effectively fixed at approximately 2.34% through May 2024; $25 million remained variable-rate.
- Two credit facilities provide $500 million of capacity and expire in May 2024. After outstanding debt and $44.6 million of standby letters of credit, $280.4 million was available. Management reported approximately $320 million of liquidity including cash, and compliance with debt covenants.
- Nine-month dividends were $18.7 million; share repurchases were $8.8 million. No shares were repurchased during Q3. The quarterly dividend was $0.09 per share.
Material changes and management commentary
- Management attributed Q3 results to strong and improving freight demand, tight driver availability and higher pricing. Dedicated demand remained strong; One-Way Truckload demand gained momentum.
- Lower fuel prices reduced Q3 fuel expense by 36.3% and fuel surcharge revenue by 35.6%. Fuel surcharge programs generally recover most, but not all, fuel-cost increases.
- Insurance and claims expense rose 6.3% in Q3 and 29.8% for the first nine months, reflecting large claims, reserve development and higher insurance premiums. A January 2020 accident resulted in a $10 million Q1 accrual.
- Depreciation increased 7.9% for the first nine months. A change in estimated lives for certain trucks expected to be sold in 2020 increased depreciation by $9.6 million year to date due to a weak used-truck market.
- COVID-19 reduced economic activity and disrupted supply chains, but management said its essential-product customer mix and Q3 freight conditions supported performance. The 100 largest customers represented 86% of nine-month revenue; 65% of that revenue came from discount and home-improvement retail, food and beverage, and consumer packaged goods.
Outlook, risks and contingencies
- Management expected strong demand to continue in Q4 and into 2021, while cautioning that COVID-19 effects remained uncertain. It expected Q4 One-Way Truckload revenue per total mile to be 3%–5% above Q4 2019 and Werner Logistics to return to profitability in Q4.
- Expected 2020 net capital expenditures were $275–$300 million; management expected 2020 free cash flow, defined as operating cash flow less capital expenditures, to exceed $150 million. It planned to continue the quarterly dividend.
- Management expected year-end TTS truck count to be at the bottom end of a 1%–3% decline versus year-end 2019, with modest Q4 growth. Driver and independent-contractor shortages, rising pay or capacity costs, and inability to secure matching freight-rate increases could pressure results.
- COVID-19 could further affect freight volume and pricing, customers’ credit quality, suppliers’ availability and costs, and the pace of economic recovery. Fuel-price swings, incomplete surcharge recovery, liability claims, insurance costs and a weak used-equipment market are additional risks.
- A Texas jury verdict produced a $92 million judgment related to a 2014 accident. Werner reported a $22.4 million liability and a corresponding $79.2 million insurance receivable and liability; the company is appealing. The filing gives no assurance of the appeal outcome. A separate driver wage class action was dismissed in Werner’s favor, but plaintiffs appealed.
- Werner had $133.6 million of committed property and equipment purchases. It also disclosed LIBOR transition uncertainty and was discussing replacement benchmarks with its banks.
Important facts for investors to verify
- Whether freight demand, pricing and the company’s Q4/2021 outlook held up as the pandemic and economic conditions evolved.
- Whether Logistics margins recovered after the Q3 capacity-cost squeeze, and whether driver availability constrained fleet growth or increased labor costs.
- Whether insurance and claims costs, including the Texas verdict and January 2020 accident, resulted in cash losses beyond recorded reserves and insurance recoveries.
- Whether 2020 capital expenditure, free-cash-flow, debt and liquidity expectations were achieved, including the impact of deferred payroll taxes.
- Whether the used-truck market, fuel surcharge recovery and transition away from LIBOR materially affected future results.