Werner Enterprises, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Unaudited interim results; comparisons are with Q1 2018 unless otherwise noted. Werner provides Truckload Transportation Services (TTS) and Werner Logistics.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $596.1 million | $562.7 million | +5.9% |
| Operating income | $48.0 million | $35.1 million | +36.7% |
| Operating margin | 8.1% | 6.2% | +1.9 percentage points |
| Net income | $36.1 million | $27.8 million | +29.8% |
| Diluted EPS | $0.51 | $0.38 | +34.2% |
| Operating cash flow | $138.8 million | $99.9 million | +39.0% |
| Net cash used in investing | $79.9 million | $49.6 million | Higher investment |
TTS revenue rose 7.3% to $462.9 million, with operating income of $43.0 million versus $33.4 million. Werner Logistics revenue was essentially flat at $117.4 million, while operating income increased to $4.7 million from $2.8 million; gross margin improved to 17.3% from 14.6%.
Operating expenses were 91.9% of revenue versus 93.8%. Salaries, wages and benefits rose 10.9% to $202.8 million, while fuel expense declined 4.9% to $56.1 million. Depreciation increased 9.5% to $60.8 million. The effective tax rate was 25.1%, compared with 21.3%, primarily reflecting discrete tax benefits in Q1 2018.
Balance sheet, cash flow and capital
At March 31, 2019, cash and cash equivalents were $64.7 million and total assets were $2.12 billion. Total debt was $125.0 million, comprising $75.0 million current and $50.0 million long-term. The company had $325.0 million of credit facilities; $125.0 million was drawn and $30.3 million of standby letters of credit reduced available capacity. The company reported compliance with debt covenants. The $75.0 million term commitment is due September 2019; remaining debt maturities are $50.0 million in 2020.
Q1 property and equipment additions were $120.4 million, partly offset by $37.0 million in asset-sale proceeds. Management estimated 2019 net capital expenditures of $275–$300 million, versus $349.0 million in 2018, and reported $186.9 million of committed equipment purchases. The company paid $6.3 million of dividends and repurchased 600,000 shares for $20.5 million in the quarter. Quarterly dividends were $0.09 per share.
Material changes and notable items
- TTS trucking revenue, net of fuel surcharge, increased 9.2%, supported by a 6.2% increase in average tractors in service and a 2.8% rise in revenue per tractor per week. Dedicated revenue grew 16.8%; One-Way Truckload revenue, net of fuel surcharge, increased 1.2%.
- Used-equipment sale gains were $5.9 million versus $2.7 million in Q1 2018, benefiting reported operating results. Management expected 2019 equipment-sale gains to be similar to 2018.
- Adoption of the new lease standard on January 1, 2019 added $8.7 million of right-of-use assets and lease liabilities. At quarter-end operating lease liabilities were $8.3 million; management said adoption did not significantly affect income.
- Shares outstanding declined year over year; weighted-average basic shares fell to 70.3 million from 72.4 million.
Outlook, commentary and risks
- Management expected 2019 One-Way Truckload revenue-per-total-mile growth to be at the lower end of a 4%–8% range, moderating through the year. It expected the TTS truck fleet to grow 3%–5% from year-end 2018, primarily in Dedicated and during the first three quarters.
- Management expected a 2019 effective tax rate of 25%–26% and 2019 net capital expenditures of $275–$300 million. It also expected to accrue approximately $1.2 million per quarter of post-judgment interest related to the Texas case while the appeal remains unresolved.
- Management said One-Way Truckload demand in April and early May had moderated versus the unusually strong prior-year period and was recently below normal seasonal levels. Q1 freight conditions were affected by extended cold weather and one fewer business day.
- Driver and independent-contractor availability, higher pay and equipment costs, insurance claims, fuel-price volatility, and access to third-party logistics capacity may pressure results. Fuel surcharges generally recover most, but not all, fuel cost increases; the company had no fuel-hedging derivatives.
- A Texas jury verdict resulted in a $92 million judgment. Werner was appealing; it recorded a $16.3 million liability for its exposure and a $79.2 million insurance receivable with a corresponding liability. The company stated its maximum liability under the applicable policies was $10 million plus interest, but the appeal outcome was uncertain.
- The filing also discusses wage and other class-action litigation. Management did not believe the resolution of claims and pending litigation, considering reserves, would materially adversely affect the consolidated financial statements, but outcomes remain uncertain.
Important facts for investors to verify
- Progress and final outcome of the appeal of the $92 million Texas judgment, including insurance recovery and continuing interest accruals.
- Whether freight demand, driver availability and rate trends support the company’s fleet-growth and per-mile revenue expectations.
- Actual 2019 capital expenditures and equipment-sale gains compared with management’s stated expectations.
- Debt repayment and refinancing of the $75 million term commitment due in September 2019, and compliance with credit-facility covenants.
- Development of self-insured claims, wage-related litigation and other contingencies.