Werner Enterprises, Inc. — Q2 2017 Form 10-Q
Business context and reporting period. Werner is a U.S. truckload transportation and logistics company with Truckload Transportation Services and Werner Logistics reportable segments. This unaudited filing covers the three and six months ended June 30, 2017, compared with the corresponding 2016 periods.
Financial performance and position
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $519.5 | $498.7 | $1,020.7 | $981.5 |
| Operating income | $36.9 | $29.6 | $62.9 | $62.0 |
| Operating margin | 7.1% | 5.9% | 6.2% | 6.3% |
| Net income | $23.2 | $18.3 | $39.2 | $38.4 |
| Diluted EPS | $0.32 | $0.25 | $0.54 | $0.53 |
| Operating cash flow | — | — | $172.5 | $171.0 |
Q2 net margin was 4.5%, versus 3.7% a year earlier; first-half net margin was 3.8%, versus 3.9%. The Q2 effective tax rate was 37.3% (39.0% prior year); the first-half rate was 37.8% (39.0%).
At June 30, cash was $22.6 million, total assets $1.73 billion, and stockholders’ equity $1.03 billion. Debt was $75 million, due in 2019; the company had $325 million of credit facilities, with $224.9 million available after outstanding borrowings and letters of credit. The $75 million variable-rate term borrowing was effectively fixed at 2.5% through September 2019 using an interest-rate swap. The company reported compliance with debt covenants.
First-half investing cash use was $54.5 million, including $126.1 million of equipment additions and $60.1 million of sale proceeds. Net capital expenditures were $66.0 million. Financing used $113.0 million, including $105 million of debt repayments and $8.7 million of dividends. The declared dividend was $0.07 per share for Q2, up from $0.06.
Material changes versus the prior comparable periods
- Q2 revenue rose 4.2% and net income rose 26.8%; first-half revenue rose 4.0%, while net income increased 2.2%.
- Truckload Q2 revenue increased 6.4% to $403.5 million and operating income rose to $36.0 million from $22.8 million. Its operating ratio, excluding fuel-surcharge revenue, improved to 89.8% from 93.3%.
- Truckload Q2 revenue per tractor per week increased 4.1%; empty miles declined to 12.30% from 13.41%. Average tractors in service were slightly lower.
- Werner Logistics Q2 revenue fell 3.0% to $100.8 million, while operating income fell to $2.3 million from $6.6 million. Gross margin declined to 15.2% from 18.4%, reflecting higher purchased-carrier costs amid tighter capacity. Brokerage revenue grew more than 22%, while intermodal and international revenues were weaker.
- Fuel expense increased 14.7% in Q2 and 26.5% year to date, primarily due to higher diesel prices. Fuel surcharges partly offset higher fuel costs, but do not recover all increases.
- First-half capital spending was substantially below 2016 as the company said its major fleet reinvestment was largely complete. Debt declined from $180 million at year-end 2016 to $75 million.
Outlook, risks, contingencies, and unusual items
- Management said freight demand improved through Q2 and July 2017 was stronger than July 2016. If the trend continues, management expects contractual rates to begin improving over the next few quarters, citing anticipated capacity tightening associated with the December 2017 electronic logging device mandate. This is an expectation, not a quantified earnings forecast.
- Management estimated 2017 net capital expenditures of $175 million to $225 million, funded primarily through operating cash flow and, if needed, available credit. Equipment purchase commitments totaled approximately $121.4 million at quarter-end.
- Driver and independent-contractor availability, higher pay requirements, fuel-price volatility, carrier-capacity costs, used-truck values, safety and regulatory requirements, and self-insured claims could pressure results. The August 1, 2017 liability insurance renewal increased the company’s retained exposure; management reported premiums about $3.7 million lower than under the prior policy.
- A jury awarded plaintiffs $0.8 million in a driver wage class action concerning short breaks; Werner accrued the award and prevailed on the sleeper-berth claim. Other employment-related class actions remain pending. Management did not expect the disclosed claims and litigation, based on current information and reserves, to materially adversely affect the financial statements, but outcomes remain uncertain.
- The company had a $5.0 million gross liability for unrecognized tax benefits, including interest; it expected no significant change over the next 12 months and could not determine settlement timing.
- Q2 gains on equipment and other asset sales were $2.5 million, versus $6.8 million in Q2 2016, which included a $3.4 million real-estate gain. Management expected minimal equipment-sale gains in Q3 because of higher book values on trucks to be sold.
- Werner adopted the revised stock-compensation accounting guidance in 2017; the forfeiture-policy change reduced retained earnings by $0.3 million. The company also said the upcoming revenue-recognition standard was expected to change revenue timing, from recognition at delivery to recognition over time; quantitative impact was still under evaluation.
Important facts for investors to verify
- Whether stronger freight volumes and spot pricing translated into the expected improvement in contractual rates, and whether the ELD mandate affected industry capacity as anticipated.
- Whether Werner Logistics gross margins recover as purchased-carrier costs and capacity conditions change.
- Whether the $175–$225 million 2017 net-capex estimate, equipment commitments, and debt repayment remain consistent with cash generation and fleet needs.
- How increased liability self-retentions affect claim expense and cash requirements, and the eventual outcomes of the wage and other class-action cases.
- The eventual financial-statement impact of the new revenue-recognition standard and developments in uncertain tax positions.