Werner Enterprises, Inc. — Q3 2017 Form 10-Q
Business context and period: Unaudited results cover the three and nine months ended September 30, 2017, compared with the same 2016 periods. Werner operates Truckload Transportation Services and Werner Logistics.
Financial performance
| Metric | Q3 2017 | Q3 2016 | First 9 months 2017 | First 9 months 2016 |
|---|---|---|---|---|
| Revenue | $528.6m | $508.7m | $1,549.4m | $1,490.2m |
| Operating income | $35.9m | $29.1m | $98.8m | $91.1m |
| Operating margin | 6.8% | 5.7% | 6.4% | 6.1% |
| Net income | $22.5m | $18.9m | $61.8m | $57.3m |
| Diluted EPS | $0.31 | $0.26 | $0.85 | $0.79 |
| Operating cash flow | — | — | $216.9m | $201.2m |
- Q3 revenue grew 3.9%; operating income increased 23.4% and net income 19.0%. Nine-month revenue rose 4.0% and net income 7.7%.
- Consolidated operating ratio improved to 93.2% from 94.3% in Q3 and to 93.6% from 93.9% year to date. Net margin was 4.3% in Q3 versus 3.7%, and 4.0% versus 3.8% year to date.
- Truckload: Q3 revenue rose 6.1% to $407.6m and operating income rose to $34.0m from $19.8m. Its operating ratio, excluding fuel surcharge revenue, improved to 90.5% from 94.2%. Net-of-surcharge revenue per tractor per week increased 2.9%.
- Werner Logistics: Q3 revenue declined 4.5% to $104.6m; operating income fell to $1.3m from $4.9m. Gross margin contracted to 14.4% from 16.2%, primarily as tighter carrier capacity raised purchased-transportation costs.
- Q3 fuel expense rose 23.7%, reflecting higher diesel prices and more company miles; fuel surcharge revenue increased 19.5%. The company said surcharges recover a majority, but not all, of fuel-cost increases.
Financial position and cash flow
- At September 30, cash and cash equivalents were $10.7m, total assets $1,762.9m and stockholders’ equity $1,050.9m.
- Debt was $75.0m, down from $180.0m at December 31, 2016, after $105.0m of debt repayments during the first nine months. The remaining term debt is due in 2019; its interest rate is effectively fixed at 2.5% through September 2019 using a swap.
- Credit facilities total $325.0m. After $28.7m in standby letters of credit, reported available credit was $221.3m. The company was in compliance with debt covenants.
- Operating cash flow was $216.9m. Investing activities used $110.5m, including $205.9m of equipment additions and $84.8m of equipment-sale proceeds. Net property additions were $121.1m, versus $294.0m in the prior-year period.
- Management estimated 2017 net capital expenditures of $175m–$225m and reported $95.2m of purchase commitments. Dividends paid in the period were $13.7m; the quarterly dividend rate increased 17% beginning with the July 2017 payment.
Outlook, risks and notable items
- Management reported improving freight conditions and said it had increasing confidence that contractual rates would strengthen over the next few quarters. October freight volumes were seasonally better than normal. The company expected the December 18, 2017 electronic logging device mandate to tighten industry capacity. These are expectations, not earnings guidance; no numerical earnings forecast was provided.
- Hurricanes in Texas and Florida disrupted September operations, raising costs for out-of-route miles, fuel, equipment and driver logistics, and interrupting driver-school activity. Management said the events also strengthened spot-market pricing and widened the demand-capacity gap.
- Driver and independent-contractor availability, rising pay and fuel costs, incomplete fuel-cost recovery, and higher purchased-transportation rates could pressure results. Liability insurance renewals increased the company’s self-insured exposure, while reducing annual premiums by about $3.7m.
- Ordinary-course litigation includes wage and break-time class actions. A May 2017 jury awarded plaintiffs $0.8m on a short-break claim; Werner accrued the award and prevailed on a separate sleeper-berth claim. Management said other pending claims were not currently expected to have a material adverse effect, but outcomes remain uncertain.
- Unrecognized tax benefits totaled $4.1m, including interest; the company expected no significant change in uncertain tax positions over the next 12 months. It also disclosed a $0.4m pretax fair-value loss on its interest-rate swap.
- Werner said the new revenue-recognition standard, effective for it in 2018, was expected to change the timing of revenue recognition; the quantitative impact was not yet determined. Management identified depreciation and equipment impairment, insurance and claims accruals, and income taxes as key estimates.
Key facts for investors to verify
- Whether stronger freight demand and the ELD mandate translate into contractual rate increases and sustained Truckload margin improvement.
- Whether Werner Logistics can recover margins as third-party carrier capacity tightens.
- Actual 2017 net capital expenditures versus the $175m–$225m estimate, and the impact on cash and available credit.
- Developments in driver availability, fuel-cost recovery, self-insured claims exposure and wage-related litigation.
- The eventual revenue-recognition impact and timing under the standard effective January 1, 2018.