Werner Enterprises, Inc. — Q1 2016 Form 10-Q
Business context and period: Werner provides truckload transportation and logistics services through its Truckload Transportation Services and Value Added Services (VAS) segments. This unaudited filing covers the three months ended March 31, 2016, compared with the same 2015 quarter.
Financial performance
- Revenue: $482.8 million, down 2.6% year over year. Truckload revenue fell 4.5% to $372.9 million; VAS revenue rose 6.3% to $96.6 million.
- Profit and margins: Operating income was $32.5 million, down 14.9%; operating margin was 6.7%, versus 7.7%. Net income fell 13.2% to $20.1 million; diluted EPS was $0.28, versus $0.32. Net margin was 4.2%, versus 4.7%. The overall operating ratio increased to 93.3% from 92.3%.
- Segment results: Truckload operating income declined to $32.4 million from $35.8 million, and its operating ratio, excluding fuel surcharge revenue, worsened to 90.5% from 89.3%. VAS operating income increased to $5.0 million from $2.4 million; its gross margin improved to 17.8% from 14.3%, and operating margin to 5.2% from 2.7%.
- Cash flow and investment: Operating cash flow was $91.3 million, down 25% from $121.0 million. Investing activities used $98.2 million; net property additions were $101.6 million. Financing activities used $4.8 million, including $4.3 million in dividends. Cash declined by $11.4 million to $20.4 million.
- Balance sheet and liquidity: Total assets were $1.61 billion and stockholders’ equity was $950.0 million. Debt was $75.0 million, due in 2019. At quarter-end, $219.0 million of credit remained available after accounting for $31.0 million in standby letters of credit. The company borrowed an additional $20.0 million in April 2016.
- Other metrics: Quarterly dividend declared was $0.06 per share, up from $0.05. The effective tax rate was 39.0%, versus 39.5%.
Material changes and management commentary
- Truckload trucking revenue excluding fuel surcharges rose 2.3%, supported by 4.8% growth in average tractors in service, but average revenue per tractor per week fell 2.4%. Average empty miles increased to 13.27% from 12.15%, while average loaded trip length declined to 472 miles from 482 miles.
- Management described Q1 freight demand as softer than in Q1 2015 and said April 2016 demand was sluggish. The rate market was challenging; management said year-over-year rate-per-mile increases could be difficult over the next few quarters. It expected recent lower industry truck orders and upcoming regulatory changes could tighten capacity in coming quarters, but noted customer bid trends were mixed.
- Management estimated 2016 net capital expenditures of $400 million–$450 million, compared with $351.5 million in 2015, primarily to renew and lower the average age of the company truck fleet. At quarter-end, equipment purchase commitments were approximately $163.6 million. Management expected to fund spending with operating cash flow and, as needed, credit facilities.
- Lower diesel prices reduced fuel expense: average diesel prices were 68 cents per gallon below the prior-year quarter. Fuel surcharge revenue fell 45.6% to $30.7 million. Management cautioned that surcharges recover most, but not all, fuel-cost increases and that future fuel prices and recovery levels are uncertain.
- Driver recruiting remained challenging, although driver turnover reached a 17-year low. Driver pay increases and equipment costs contributed to expense pressure; management said further driver or contractor pay increases could hurt results if not matched by freight-rate increases.
Risks, contingencies and unusual items
- A buyer withdrew from a commitment to purchase several hundred used trucks, contributing to lower equipment-sale gains: $3.4 million in Q1 2016 versus $5.5 million in Q1 2015. The company was evaluating options to resolve the matter.
- In driver wage class-action litigation, a court ruled for plaintiffs on short-break and sleeper-berth liability theories. Werner accrued $2.0 million for the short-break matter; management did not consider a loss probable for the sleeper-berth matter and said the possible loss or range could not be determined. The company intends to defend and appeal.
- Other employment-related class actions and ordinary-course claims remain pending. Management did not expect the disclosed matters, based on its current assessment, to have a material adverse effect, but noted outcomes cannot be determined with certainty.
- Unrecognized tax benefits totaled $7.7 million, including interest; the company expected no significant changes over the next 12 months. The IRS notified the company of an audit of its amended 2011 federal return.
- A proposed entry-level driver-training rule would require at least 30 hours of behind-the-wheel training for Class A CDL trainees; management said its potential effect on driver recruitment and industry capacity was uncertain.
- The $75.0 million debt was effectively fixed at 2.5% through September 2019 under an interest-rate swap. The company had no derivatives to hedge fuel-price exposure.
Key facts for investors to verify
- Whether weak freight demand and pricing persist, and whether expected capacity tightening supports improved rates.
- Whether VAS margin improvement is sustainable and Truckload productivity indicators—especially empty miles and revenue per tractor—recover.
- How the $400 million–$450 million capital-spending outlook affects cash generation, fleet deployment, and financing needs.
- Developments in the used-truck sale dispute, wage litigation (including the unquantified sleeper-berth exposure), and the IRS audit.