Werner Enterprises, Inc. — 2013 Form 10-K Summary
Business context and reporting period
Werner is a U.S.-based truckload transportation and logistics company with two reportable segments: Truckload and Value Added Services (VAS). The filing covers the fiscal year ended December 31, 2013; it is an annual report, not a standalone fourth-quarter filing. Trucking, including fuel surcharges, represented 81% of revenue; non-trucking and other revenue, primarily VAS, represented 19%.
Financial and operating performance
| Metric | 2013 | 2012 |
|---|---|---|
| Operating revenue | $2,029.2 million | $2,036.4 million |
| Operating income | $139.7 million | $171.4 million |
| Net income | $86.8 million | $103.0 million |
| Diluted EPS | $1.18 | $1.40 |
| Operating ratio | 93.1% | 91.6% |
| Operating cash flow | $232.5 million | $255.1 million |
| Net property additions | $151.9 million | $224.9 million |
| Cash and cash equivalents, year-end | $23.7 million | $15.4 million |
| Total debt, year-end | $40.0 million | $90.0 million |
| Stockholders’ equity, year-end | $772.5 million | $714.9 million |
Truckload revenue was $1,657.9 million, down 2.4%; operating income fell to $119.6 million from $153.1 million. Its operating ratio, net of fuel surcharges, rose to 90.8% from 88.4%. VAS revenue increased 11.5% to $361.4 million, while operating income declined 8.3% to $14.7 million; gross margin remained 15.4% and operating margin decreased to 4.1% from 4.9%.
Fourth-quarter 2013 revenue was $517.9 million versus $509.7 million in fourth-quarter 2012. Operating income was $36.1 million versus $43.1 million, and net income was $22.2 million versus $26.0 million.
Material changes versus the prior year
- Revenue decreased 0.4%, but operating income fell 18.5% and net income fell 15.8%; the consolidated operating ratio worsened by 1.5 percentage points.
- Truckload net revenue per tractor per week declined 0.8%; average miles per tractor fell 2.9%, including an estimated 2–3% productivity impact from revised hours-of-service rules effective July 1, 2013. Average trip length shortened and empty miles increased to 12.5% from 12.3%.
- Fuel expense declined 7.4%, reflecting fewer miles, slightly better fuel economy, lower average diesel prices and a greater independent-contractor share of miles. Insurance and claims expense rose 8.5%; rent and purchased transportation rose 8.7%; depreciation rose 3.6%.
- VAS net shipments increased 8.2%; growth was partly offset by higher third-party carrier rates and costs associated with expanding its intermodal drayage fleet.
- Cash flow from operations decreased 8.9%. Net capital expenditures declined, and debt was reduced by $50 million during 2013. The company repurchased 821,091 shares for $20.1 million.
Outlook, commentary, risks and contingencies
- Management expected 2014 net capital expenditures of $150–$200 million and aimed to return the Truckload fleet toward 7,300 trucks; year-end 2013 Truckload tractors totaled 7,050. These are operating and spending expectations, not earnings guidance; no earnings or EPS forecast is provided.
- Management reported stronger One-Way Truckload pre-bookings in January and February 2014 versus the prior year, but severe winter weather also increased maintenance, insurance and claims, idling-related fuel costs, and fixed costs per mile. These are post-year-end observations, not 2013 results.
- Driver and independent-contractor recruitment and retention remained challenging. Higher wages or contractor settlements, without matching freight-rate increases, could pressure margins and limit fleet growth. Management cautioned that a stronger economy could intensify driver competition.
- Fuel surcharges generally recover most, but not all, fuel cost increases. Werner had no fuel or interest-rate derivatives; rapid fuel-price movements, empty miles and idling can leave costs unrecovered. A one-percentage-point increase in LIBOR would add an estimated $0.4 million to annual interest expense on the year-end debt balance.
- Credit facilities total $250 million and mature in 2016 and 2017. After $40 million drawn and $32.7 million of standby letters of credit, reported unused availability was $177.3 million. Debt covenants were met at year-end.
- Unrecognized tax benefits were $8.6 million, of which $8.5 million had an uncertain settlement period. The IRS concluded without deficiency or penalties its disputes concerning the 2007–2008 equipment exchange program and 2009–2010 driver per diem program. Other routine claims and litigation were not expected by management to materially affect the financial statements.
- Other key exposures include customer concentration (the largest 10 customers generated 40% of revenue, though no individual customer exceeded 10%), self-insured claims, used-equipment resale values, regulation and environmental compliance, third-party capacity availability, international operations, and information-system disruption. Related-party transactions included equipment leasing, transportation and used-equipment sales involving TDR in Mexico.
Most important facts for investors to verify
- Whether Truckload pricing, utilization and operating ratio improve despite shorter hauls and the continuing hours-of-service productivity impact.
- Whether driver availability and fleet size recover toward management’s 7,300-truck goal without disproportionate pay or contractor-cost increases.
- Whether VAS shipment growth translates into improved operating income as third-party capacity costs and intermodal fleet expenses evolve.
- Whether the $150–$200 million 2014 capital-spending outlook, cash generation, debt maturities and credit availability remain consistent with the company’s liquidity position.
- Developments in self-insurance reserves, the $8.6 million uncertain-tax-position liability, customer concentration and related-party transactions.
KPMG issued an unqualified opinion on the consolidated financial statements and an unqualified opinion on the effectiveness of internal control over financial reporting as of December 31, 2013.