Werner Enterprises, Inc. — Q3 2016 Form 10-Q
Business and period: Werner provides truckload transportation and logistics services. This unaudited quarterly report covers the three and nine months ended September 30, 2016, compared with the same periods in 2015.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $508.7m | $534.4m | $1,490.2m | $1,564.7m |
| Operating income | $29.1m | $52.8m | $91.1m | $143.2m |
| Operating margin | 5.7% | 9.9% | 6.1% | 9.2% |
| Net income | $18.9m | $32.1m | $57.3m | $87.1m |
| Diluted EPS | $0.26 | $0.44 | $0.79 | $1.20 |
Consolidated operating ratios (operating expenses as a percentage of revenue) deteriorated to 94.3% in Q3 from 90.1%, and to 93.9% for the nine-month period from 90.8%. The effective tax rate was 35.5% in Q3 and 37.9% year to date, below prior-year rates, primarily due to favorable tax adjustments and, year to date, employment tax credits.
Segments and operating drivers
- Truckload: Q3 revenue was $384.3m, down 8.0%; operating income fell to $19.8m from $48.7m, and segment operating margin declined to 5.2% from 11.7%. Net-of-fuel-surcharge revenue per tractor per week fell 4.7%, average tractors in service fell 1.9%, and loaded trip length declined 3.1%.
- Werner Logistics: Q3 revenue rose 7.2% to $109.5m. Operating income was $4.9m versus $5.0m; gross margin improved to 16.2% from 15.7%, while operating margin eased to 4.5% from 4.9%.
- Management reported freight demand improved gradually from the weak second quarter; spot-market conditions strengthened during Q3, while contractual rates were flat to slightly lower. The company shifted trucks from One-Way Truckload to Dedicated and said it was not growing its truck fleet pending meaningful freight and rate improvement.
Cash flow, balance sheet, and liquidity
- Nine-month operating cash flow was $201.2m, down from $282.8m, reflecting weaker earnings and less favorable working-capital movements. Investing cash outflow was $280.0m; financing provided $61.2m.
- Property and equipment additions were $388.4m, with $94.4m of sale proceeds; management reported net property additions of approximately $294.0m. Cash declined to $13.7m from $31.8m at year-end 2015.
- At September 30, 2016, total assets were $1,726.4m, stockholders’ equity $978.5m, and long-term debt $150.0m, up from $75.0m at December 31, 2015. Current assets were $377.9m and current liabilities $194.3m.
- Credit facilities totaled $325.0m; $150.0m was borrowed and $25.8m was reserved for standby letters of credit, leaving $149.2m unused. Debt was variable-rate, except $75.0m effectively fixed at 2.5% through September 2019 via an interest-rate swap. The company reported covenant compliance.
- Dividends paid during the first nine months were $13.0m. The quarterly dividend was $0.06 per share. No shares were repurchased during Q3.
Outlook, risks, and notable items
- Management estimated 2016 net capital expenditures, primarily revenue equipment, of $350m–$400m and expected to fund them with operating cash flow and available credit as needed. Equipment purchase commitments were approximately $133.3m at quarter-end.
- Management cited sluggish freight demand, pricing pressure, driver and independent-contractor recruitment challenges, and potential wage or contractor-rate increases as risks to margins. Insurance and claims costs also face pressure: liability premiums for the policy year beginning August 2016 were about $3.5m higher than the prior year.
- Used-truck pricing weakened amid elevated supply and low demand; management expected difficult conditions to persist in the near term. Q3 asset-sale gains were $3.1m, including a $6.5m real-estate gain partly offset by equipment-sale losses.
- The company recorded an estimated $1.2m liability for the short-break portion of a driver wage class action. It did not accrue for the sleeper-berth claim, for which management said loss was not currently considered probable and the possible loss range could not be determined. Other employment-related class actions remain pending.
- Management described its financial position as strong. A one-percentage-point increase in LIBOR, assuming current borrowings, would increase annual interest expense by approximately $0.75m. Fuel surcharges recover most, but not all, fuel-cost increases; the company had no fuel-price hedges.
- The report notes upcoming regulatory and accounting changes, including the electronic logging device mandate scheduled for December 2017 and revenue recognition guidance expected to take effect for Werner in 2018 absent early adoption. Management had not yet selected a transition method for the revenue standard.
Most important facts for investors to verify
- Whether freight volumes and pricing continued to improve after Q3, and how the fleet shift toward Dedicated affected utilization and margins.
- Whether earnings and operating cash flow stabilized as capital spending remained high, and whether the $350m–$400m 2016 net capital expenditure estimate was achieved.
- How driver availability, pay rates, contractor costs, insurance premiums, and used-equipment values affected subsequent operating costs and asset-sale proceeds.
- Developments and potential exposure in the driver wage litigation and other claims, including the unaccrued sleeper-berth matter.
- Debt balances, unused facility availability, covenant compliance, and the effect of variable interest rates.