Business context and reporting period
Werner Enterprises, Inc. filed this unaudited Form 10-Q for the quarter ended March 31, 2012. The company operates truckload transportation and logistics businesses, reported as Truckload Transportation Services and Value Added Services (VAS). Results are not necessarily indicative of full-year performance.
Financial and operating performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Operating revenue | $498.4 million | $469.4 million | +6.2% |
| Operating income | $35.4 million | $27.4 million | +29.0% |
| Net income | $21.2 million | $16.3 million | +30.4% |
| Diluted earnings per share | $0.29 | $0.22 | +$0.07 |
| Operating ratio | 92.9% | 94.2% | Improved 1.3 percentage points |
| Operating cash flow | $84.0 million | $53.8 million | +$30.2 million |
| Cash and cash equivalents | $12.1 million | $12.4 million at Dec. 31, 2011 | -$0.3 million |
| Stockholders’ equity | $745.2 million | $725.1 million at Dec. 31, 2011 | +$20.1 million |
Truckload revenue was $417.5 million, up 3.8%, and segment operating income was $31.4 million, up from $24.3 million; its operating ratio excluding fuel surcharges improved to 90.3% from 92.4%. VAS revenue rose 20.7% to $76.8 million and operating income increased to $4.0 million from $3.4 million. VAS gross margin percentage declined to 15.0% from 16.1%, reflecting faster growth in lower-margin Intermodal and global logistics.
Net cash used in investing was $81.9 million, including $82.5 million of net property additions, primarily revenue equipment, versus $20.1 million of net property additions a year earlier. Dividends paid were $3.6 million; declared dividends remained $0.05 per share. Total assets were $1.324 billion and total current liabilities were $201.8 million at quarter-end.
Material changes versus the prior comparable period
- Revenue growth included trucking revenue excluding fuel surcharges up 1.5%, fuel surcharge revenue up 11.9%, and non-trucking revenue including VAS up 20.6%.
- Average revenue per loaded mile, excluding fuel surcharges, increased 3.2%; average monthly miles per tractor declined 0.5%, and average tractors in service declined 0.6%. Average empty miles rose to 11.88% from 11.26%.
- Higher diesel prices increased Truckload fuel cost by 2.7 cents per total mile; fuel surcharges generally recover a majority, but not all, of fuel-cost increases. Driver compensation, insurance and claims, and equipment depreciation also increased per mile.
- Operating cash flow rose 56%, principally due to working-capital movements, including accounts receivable, and lower income-tax payments. Net property additions increased substantially as the company purchased more trucks and trailers.
Liquidity, outlook, risks and contingencies
- No bank borrowings were outstanding at March 31. The company had $225 million in credit facilities, reduced by $37.9 million of standby letters of credit, leaving $187.1 million unused. A $50 million facility matured in May 2012 and the other $175 million facility matures in November 2013. The company disclosed a $20 million borrowing in April 2012 and compliance with debt covenants at quarter-end.
- Management projected 2012 net capital expenditures of $160 million to $210 million, versus $232.2 million in 2011, funded from operating cash flow and credit facilities as needed. It intended to maintain a fleet of approximately 7,300 trucks and focus on margins and returns; no earnings or revenue guidance was provided.
- Management described seasonally improving freight trends and said April freight improved normally from March. It attributed favorable truckload demand more to capacity constraints than to stronger economic activity. Driver recruitment and retention remained challenging, with possible pay increases posing a risk if freight-rate gains do not offset them.
- Other key risks include fuel-price volatility and incomplete or delayed surcharge recovery; higher third-party carrier capacity costs; self-insured casualty claims; equipment costs; and regulatory changes. The company had no fuel-price or interest-rate derivatives at quarter-end.
- The December 2011 hours-of-service rule was being challenged in court; the company could not predict its operational impact but expected a minimal decrease in truck productivity. Ordinary-course claims and litigation were not expected by management to materially affect the financial statements.
- Committed property and equipment purchases were approximately $43.3 million. Operating lease obligations were $5.1 million. The company reported $11.1 million of gross unrecognized tax benefits, including $3.5 million of accrued interest; $10.7 million was of uncertain settlement timing.
Important facts for investors to verify
- Whether the improved operating ratio and earnings growth persist as freight demand, rates, miles per truck and empty-mile performance change.
- Whether higher fuel prices, driver and carrier costs, insurance claims, and equipment depreciation are offset by pricing and efficiency improvements.
- Actual 2012 capital expenditures, cash generation, and financing needs, including the status and terms of the facility that matured in May 2012 and the April borrowing.
- VAS growth and shipment mix, particularly the effect of lower-margin Intermodal and global logistics activity on gross margin.
- Developments in hours-of-service regulation, tax examinations and unrecognized tax benefits, and material claims or contingencies.