Werner Enterprises, Inc. — 2019 Q2 Form 10-Q
Business and period: Werner provides truckload transportation and logistics services through Truckload Transportation Services (TTS) and Werner Logistics. This unaudited filing covers the quarter and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods.
Financial performance
- Second quarter: Revenue was $627.5 million, up 1.4%; operating income was $58.4 million, up 15.1%; net income was $43.3 million, up 13.2%. Diluted EPS was $0.62, versus $0.53.
- First half: Revenue was $1.224 billion, up 3.5%; operating income was $106.5 million, up 23.9%; net income was $79.4 million, up 20.2%. Diluted EPS was $1.13, versus $0.91.
- Margins: Q2 operating margin was 9.3%, versus 8.2%, and the operating ratio improved to 90.7% from 91.8%. First-half operating margin was 8.7%, versus 7.3%, with the operating ratio improving to 91.3% from 92.7%.
- Segments, Q2: TTS revenue rose 2.1% to $480.0 million and operating income rose to $51.7 million from $43.4 million; its operating ratio improved to 89.2% from 90.8%. Werner Logistics revenue declined 2.3% to $130.9 million; operating income fell 7.5% to $5.2 million, while gross margin percentage improved to 16.1% from 15.7%.
- Cash flow and investment, first half: Operating cash flow was $220.3 million, up 20.8%. Investing activities used $155.8 million; net property additions were $162.4 million. The company reported $239.3 million of property and equipment additions and $76.9 million of sale proceeds.
- Balance sheet, June 30: Cash was $46.4 million; total assets were $2.129 billion and stockholders’ equity was $1.032 billion. Debt was $390.0 million, compared with $125.0 million at year-end 2018. Current assets were $453.3 million and current liabilities $228.6 million.
Material changes and capital allocation
- Revenue growth reflected a 6.6% first-half increase in TTS trucking revenue excluding fuel surcharge, while Werner Logistics revenue declined 1.3%. Q2 TTS average tractors in service increased 5.2%; Dedicated trucking revenue excluding fuel surcharge rose 12.5%, while One-Way Truckload fell 4.6%.
- Q2 costs included higher driver pay and depreciation, partly offset by lower fuel and insurance-and-claims expense. The prior-year quarter included an $11.3 million accrual related to an adverse jury verdict, versus $0.8 million of accrued interest for the matter in Q2 2019.
- The company paid a $3.75-per-share special dividend of approximately $261.1 million in June, funded primarily with additional borrowings. First-half dividends totaled $273.7 million; the company also repurchased 1.3 million shares for $42.3 million. A new authorization permits repurchases of up to 5 million shares; 4.3 million remained available at quarter-end.
- Cash and cash equivalents increased by $12.5 million during the first half to $46.4 million. The equity balance declined from $1.265 billion at year-end, principally reflecting the special dividend and share repurchases.
Outlook, risks and contingencies
- Management reported seasonally below-average One-Way Truckload demand in Q2, compared with unusually strong Q2 2018 freight. Demand remained weaker than average in the first five weeks of Q3. Management expected a normal seasonal freight pickup in Q4, but anticipated One-Way Truckload revenue per total mile to be lower in Q3 and Q4 than in 2018.
- Management expected 2019 One-Way Truckload revenue per total mile to be flat to 3% lower year over year; fleet growth from year-end 2018 at the low end of a 3%–5% range; and approximately 100 additional trucks in Q3 with no Q4 growth. Expected 2019 net capital expenditures were at the low end of $275–$300 million. Management also expected equipment-sale gains at the low end of $18–$20 million, a 25%–26% effective tax rate, and quarterly interest expense of approximately $2.7 million based on then-current debt and rates.
- Driver and independent-contractor availability, pay and retention remain risks, as do weak freight demand, spot-rate pressure, higher empty miles, border-crossing delays, fuel-price volatility and the ability to recover fuel costs through surcharges. The company is self-insured for significant portions of claims and is exposed to maintenance, safety, weather, regulatory and insurance costs. Liability insurance premiums for the policy year beginning August 2019 were 11% higher.
- Legal contingency: The company is appealing a $92 million judgment arising from a 2014 accident. It recorded a $17.1 million liability and a $79.2 million insurance receivable with a corresponding long-term claims liability. The company stated that its maximum liability under the applicable insurance policies is $10 million plus interest; the appeal outcome is uncertain.
- New five-year unsecured revolving facilities were entered into in May 2019. At June 30, borrowing capacity was $575 million, debt outstanding was $390 million, and $185 million was undrawn before $30 million of letters of credit, leaving $155 million net of those letters. The company was in compliance with its debt covenants. In early July, it entered into swaps fixing rates on $150 million of debt through May 2024; a 1-percentage-point increase in LIBOR on the remaining $315 million of variable-rate debt would increase annual interest expense by approximately $3.2 million, assuming that borrowing level.
- Lease accounting adoption on January 1, 2019 added $8.7 million of right-of-use assets and lease liabilities and did not significantly affect income. Management cautioned that interim results are not necessarily indicative of full-year results.
Key facts for investors to verify
- Whether freight demand, One-Way Truckload pricing and utilization develop in line with management’s Q3/Q4 expectations.
- Progress on driver recruitment and retention, fleet growth, and cost trends in wages, depreciation, insurance and claims.
- Operating cash generation and capital spending relative to the $275–$300 million net capex outlook, and the effect of debt-funded distributions on liquidity and interest expense.
- The appeal and insurance recovery related to the $92 million judgment, including changes in accrued interest, reserves or recoverability of the recorded receivable.
- Actual equipment-sale gains, fuel surcharge recovery, and compliance with debt covenants as market conditions change.