Business context and reporting period
Werner Enterprises, Inc. filed this Form 10-K for the fiscal year ended December 31, 2020. The company is a U.S. truckload transportation and logistics provider, with Truckload Transportation Services (TTS) and Werner Logistics as its reportable segments. TTS generated 78% of 2020 operating revenue and Werner Logistics 20%.
The year included weaker freight demand in the first half amid COVID-19 disruptions, followed by strong demand and a tight driver market in the second half. The fourth-quarter figures below are unaudited.
Financial performance and key metrics
| Metric | FY 2020 | FY 2019 |
|---|---|---|
| Operating revenue | $2,372.2 million | $2,463.7 million |
| Operating income | $227.4 million | $225.5 million |
| Net income | $169.1 million | $166.9 million |
| Diluted EPS | $2.44 | $2.38 |
| Operating ratio | 90.4% | 90.8% |
| Cash from operations | $445.9 million | $426.6 million |
| Net property additions | $266.2 million | $283.9 million |
Revenue declined 3.7%, while operating income rose 0.9% and net income rose 1.3%. Lower fuel expense helped offset weaker revenue: fuel expense fell 33.4%, while insurance and claims expense increased 23.5% to $109.8 million. The effective tax rate was 24.8% in both years.
TTS revenue declined 3.5% to $1,843.2 million, but segment operating income increased 9.5% to $222.0 million and its operating ratio improved to 88.0% from 89.4%. TTS trucking revenue excluding fuel surcharge rose 0.9%; average revenue per tractor per week increased 3.7%, partly offset by fewer tractors in service. Werner Logistics revenue fell 4.1% to $469.8 million; gross margin declined to 13.3% from 16.0%, and operating income fell 63.1% to $6.0 million.
In Q4 2020, revenue was $620.3 million versus $621.8 million in Q4 2019; operating income was $81.5 million versus $65.7 million, net income was $60.6 million versus $48.5 million, and diluted EPS was $0.88 versus $0.70.
At year-end, cash and cash equivalents were $29.3 million, total debt was $200.0 million, and stockholders’ equity was $1,195.0 million. Of $500.0 million in committed credit facilities, $249.1 million remained available after borrowings and standby letters of credit; cash plus available credit was approximately $278 million. Debt was 0.3 times 2020 EBITDA on a net-debt basis, and the company reported compliance with its debt covenants. The company paid $24.9 million in dividends and repurchased $56.5 million of stock during 2020.
Changes, outlook, risks, and unusual items
- Management reported stronger freight demand in the second half and expected demand to be strong in 2021. It expected year-end 2021 fleet size to be 1%–3% above year-end 2020.
- For the first half of 2021, management expected One-Way Truckload average revenue per total mile to increase 7%–10% year over year and Dedicated average revenue per truck per week to increase 3%–5%. These are management expectations, not full-year revenue or EPS guidance.
- Management expected 2021 net capital expenditures of $275 million–$300 million and equipment-sale gains of $12 million–$15 million. It expected TTS driver pay increases to total $16 million–$18 million in 2021 and estimated a 2021 effective tax rate of 24.5%–25.5%.
- Werner announced the sale of its international ocean and air freight-forwarding services to Scan Global Logistics, expected to close February 26, 2021. Werner Logistics intended to continue North American brokerage, freight management, intermodal, and final-mile services.
- COVID-19, driver and independent-contractor recruitment and retention, fuel prices, freight rates, customer concentration, and third-party capacity costs remain key risks. The largest customer, Dollar General, accounted for 12% of 2020 revenue; the top 10 customers accounted for 49%.
- Insurance and claims expense included $10.0 million for a serious 2020 truck accident. The company also continued to accrue interest related to a separate adverse jury verdict; it was appealing that verdict. The filing states that the company had recorded a $23.6 million liability and a corresponding $79.2 million receivable from insurers, with the outcome of the appeal uncertain.
- The company increased its liability self-insured retention to $10.0 million per claim for the policy year beginning August 2020; liability premiums for that policy year were $7.8 million higher. Insurance reserve estimates were identified as a critical audit matter. Management and the auditor reported effective internal controls and unqualified financial-statement and internal-control opinions.
- Operating cash flow benefited from deferring approximately $29.3 million of 2020 employer payroll taxes under the CARES Act; half was due in 2021 and half in 2022. The company reported $131.3 million of property and equipment purchase commitments at year-end.
Important facts for investors to verify
- Whether freight pricing, demand, and fleet utilization sustain the improvement anticipated for 2021, and whether driver availability constrains planned fleet growth.
- Whether Werner Logistics can restore gross margins after the rapid rise in spot capacity costs and the deterioration in 2020 profitability.
- The outcome and financial implications of the accident-related appeal, insurance recovery, and the company’s elevated self-insured exposure and claims reserves.
- Completion and financial effects of the international freight-forwarding business sale, and the company’s planned capital spending and payroll-tax repayments.
- Ongoing customer concentration and the effects of fuel-price changes, fuel-surcharge recovery, and third-party capacity pricing on margins and cash generation.