Werner Enterprises, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. The interim financial statements are unaudited. Werner provides truckload transportation services and logistics through its Truckload Transportation Services (TTS) and Werner Logistics segments.
Financial results
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Operating revenue | $592.7 million | $596.1 million | Down 0.6% |
| Operating income | $31.1 million | $48.0 million | Down 35.3% |
| Operating margin | 5.2% | 8.1% | Down 2.9 percentage points |
| Net income | $23.1 million | $36.1 million | Down 36.1% |
| Diluted EPS | $0.33 | $0.51 | Down 35.3% |
| Operating ratio | 94.8% | 91.9% | Higher by 2.9 percentage points |
| Operating cash flow | $133.4 million | $138.8 million | Down 3.9% |
Margins and segments: TTS revenue was $464.9 million, up 0.4%, while operating income fell to $29.1 million from $43.0 million; its operating margin declined to 6.3% from 9.3%. Werner Logistics revenue fell 4.4% to $112.2 million, and operating income dropped to $1.1 million from $4.7 million. Logistics gross margin contracted to 14.5% from 17.3%.
Cash, debt and liquidity: At March 31, cash and cash equivalents were $72.2 million; cash, cash equivalents and restricted cash totaled $79.3 million. Total debt was $250.0 million, down $50.0 million from year-end 2019. Cash flow from operations less net cash used for capital expenditures was approximately $114.6 million. The company reported $280.4 million available under credit facilities after borrowings and letters of credit, and stated it had $352 million of available liquidity considering cash and available facilities. It was in compliance with debt covenants. Current debt included $75 million due in 2020; the company intended to repay the $75 million facility maturing in July with financing under its other facilities.
Material changes and drivers
- Operating expenses rose 2.5% despite slightly lower revenue. Insurance and claims expense increased 58.8% to $36.1 million, including a $10.0 million accrual for a serious January 2020 truck accident. Depreciation rose 13.3%, including a $5.0 million increase from shortening the estimated lives of certain trucks expected to be sold in 2020 amid a weak used-truck market.
- Lower fuel prices reduced fuel expense by $7.4 million and fuel surcharge revenue by $7.1 million. Gains on equipment sales fell to $2.5 million from $5.9 million, reflecting weaker used-equipment pricing and fewer truck and trailer sales.
- Q1 freight demand was slightly below the prior-year period overall, with stronger demand in the final two to three weeks of March. TTS trucking revenue excluding fuel surcharge rose 2.9%; average revenue per tractor per week increased 3.2%. One-Way Truckload pricing was down 3.7%, while Dedicated revenue excluding fuel surcharge rose 6.3%.
- Werner Logistics faced fewer transactional freight opportunities and a competitive market. Contractual shipments increased 8%, but Truckload Logistics revenue per load declined 10%; customer bankruptcies contributed $0.5 million of bad-debt expense.
- Comprehensive income was $7.6 million, versus $36.6 million in Q1 2019, largely reflecting a $9.9 million foreign-currency translation loss and a $5.6 million after-tax decrease in the fair value of interest-rate swaps.
Outlook, risks and contingencies
- Management expected COVID-19 to further affect Q2 and full-year 2020 results, with the extent and duration difficult to predict. April One-Way Truckload demand was below April 2019, while Dedicated volumes were mostly steady. Management described Q2 as potentially extremely challenging.
- The company did not plan to grow its truck fleet until market conditions improved; year-end 2020 truck count was expected to range from 5% below to flat versus year-end 2019. Management expected first-half One-Way Truckload revenue per total mile to decline 5%–7% year over year.
- Management forecast 2020 net capital expenditures of $260 million–$300 million and expected free cash flow to exceed $100 million. It intended to continue the quarterly $0.09 dividend, but temporarily suspended share repurchases pending greater clarity on COVID-19.
- COVID-19 risks include weaker freight volumes and pricing, customer bad debts, supply-chain disruption and uncertainty about economic recovery. Other risks include driver and independent-contractor availability and costs, fuel price volatility, insurance claims, and weakness in used-equipment markets.
- A Texas jury verdict resulted in a $92.0 million judgment against Werner. The company recorded a $20.0 million liability and a corresponding $79.2 million insurance receivable and liability; it is appealing, and the outcome is uncertain. Separately, an appellate court vacated a judgment for plaintiffs in an FLSA wage case and remanded it for further trial-court proceedings.
- The company reported $187.9 million of committed equipment purchases. It also disclosed a $1.0 million hypothetical annual interest-cost increase from a 1-percentage-point rise in LIBOR on its variable-rate debt.
Important facts for investors to verify
- Whether COVID-19 freight demand and pricing tracked management’s stated expectations, and whether the projected fleet, capital-spending and free-cash-flow ranges were achieved.
- Developments in the serious January accident claim and the appeal of the $92.0 million Texas verdict, including the adequacy and collectability of insurance coverage.
- Used-truck and trailer resale values, related depreciation estimates, and the effect on equipment-sale gains and capital requirements.
- Liquidity and refinancing plans for the $75 million facility maturing in July 2020, covenant compliance, and the transition from LIBOR.
- Whether insurance and claims costs, driver availability and compensation, customer credit losses, and logistics margins remain under pressure.