Werner Enterprises, Inc. — Q2 2011 Form 10-Q
Business context and period. Werner provides truckload transportation and logistics services through its Truckload Transportation Services and Value Added Services (VAS) segments. This unaudited filing covers the three and six months ended June 30, 2011, compared with the corresponding 2010 periods.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Operating revenues | $515.9 million | $463.5 million | $985.3 million | $888.5 million |
| Operating income | $46.8 million | $35.5 million | $74.2 million | $53.8 million |
| Net income | $27.5 million | $20.9 million | $43.8 million | $31.8 million |
| Diluted EPS | $0.38 | $0.29 | $0.60 | $0.44 |
| Operating margin | 9.1% | 7.7% | 7.5% | 6.1% |
| Operating ratio | 90.9% | 92.3% | 92.5% | 93.9% |
Operating revenues grew 11.3% in Q2 and 10.9% year to date; net income rose approximately 31% and 38%, respectively. Truckload revenue excluding fuel surcharge increased 2.2% in Q2, while fuel surcharge revenue rose 55.8% to $103.2 million. VAS revenue increased 9.5% in Q2, and its gross margin improved to 15.2% from 13.9%.
Cash flow and investment: Six-month operating cash flow was $117.0 million, versus $111.4 million. Net cash used in investing was $103.1 million; net property additions were $105.9 million. Cash increased to $23.5 million from $14.0 million at year-end 2010. Dividends paid were $7.3 million.
Liquidity and debt: Current assets were $334.9 million and current liabilities $169.9 million at June 30, 2011 (approximately 2.0 current ratio). The company had no bank borrowings outstanding and had $225.0 million in committed facilities, reduced by $40.1 million of standby letters of credit, leaving $184.9 million unused. It reported $710.2 million of stockholders’ equity and compliance with credit-facility covenants.
Material changes and management commentary
- Truckload operating income increased to $44.8 million in Q2 from $32.1 million; its operating margin, excluding fuel surcharges from both revenue and expenses, improved to 13.3% from 9.8%.
- Higher customer rates and improved freight mix supported revenue per total mile, up 3.1% in Q2. Average miles per tractor declined 1.6%, attributed to sluggish demand early in the quarter; freight demand strengthened in June. Management said July showed a normal seasonal slowdown.
- Fuel expense rose sharply with diesel prices. Fuel surcharge programs recover a majority, but not all, of fuel increases; rapid price changes can create a lag in recovery. The company had no fuel-price hedges.
- Used-equipment sale gains were $5.6 million in Q2 and $10.4 million for the first half, compared with $0.5 million and $1.6 million, respectively, in 2010. These gains reduced reported operating expenses and were a significant favorable comparison.
- Management intends to keep the truck fleet near 7,300 and improve returns through network redesign rather than adding trucks. It expects 2011 net capital expenditures of $210 million to $240 million, versus $119 million in 2010; $143 million of equipment purchases were committed at quarter-end.
Outlook, risks and contingencies
- No specific earnings or revenue guidance was provided. Management described driver availability as increasingly competitive and expected driver-market challenges to increase in the remainder of 2011. Higher driver pay or contractor settlements, if needed and not offset by freight-rate increases, could pressure results.
- Other identified cost and operating risks include fuel-price volatility and incomplete surcharge recovery, tire price and availability, higher equipment purchase and maintenance costs, insurance claims, and the ability to secure third-party transportation capacity.
- Proposed changes to driver hours-of-service rules and evolving federal safety and driver-qualification regulations could affect productivity, costs, and driver supply. The filing reported that the company’s then-current CSA scores met the FMCSA’s acceptable performance threshold.
- Commitments included $143.0 million of equipment purchases and $6.3 million of operating-lease payments. Unrecognized tax benefits totaled $7.7 million, including $3.1 million of accrued interest; $0.4 million was expected to be settled within twelve months, while timing for the remainder was uncertain. The IRS was auditing tax years 2007 and 2008.
- Werner reported ordinary-course claims and litigation, which management did not expect to materially affect its financial statements. Its financial statements are unaudited interim statements, and management cautioned that results for the period are not necessarily indicative of full-year results.
Key facts for investors to verify
- Whether revenue-per-mile gains and improved operating ratios continue as freight demand and seasonal conditions change.
- How much earnings benefit came from used-equipment sale gains, and whether those gains are repeatable.
- Whether fuel surcharge recovery keeps pace with fuel costs and whether driver, tire, maintenance, and equipment costs increase.
- Execution and funding of the $210–$240 million 2011 net capital-spending plan, alongside liquidity and facility maturities in May 2012 and November 2013.
- Developments in driver supply, proposed transportation regulations, tax examinations, and the $7.7 million uncertain-tax-position liability.