Werner Enterprises, Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. The interim financial statements are unaudited. Werner provides truckload transportation and logistics services through its Truckload Transportation Services and Value Added Services (VAS) segments.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $506.5m | $509.6m | $1,526.7m | $1,494.9m |
| Operating income | $41.8m | $50.1m | $128.3m | $124.3m |
| Net income | $25.1m | $29.6m | $77.1m | $73.4m |
| Diluted EPS | $0.34 | $0.40 | $1.05 | $1.00 |
| Consolidated operating ratio | 91.7% | 90.2% | 91.6% | 91.7% |
Q3 revenue declined 0.6%, operating income 16.5%, and net income 15.1% year over year. For the first nine months, revenue increased 2.1% and net income 5.0%. Q3’s weaker result reflected lower truckload activity and a less favorable cost mix; the nine-month operating ratio improved slightly.
- Segment trends: Q3 Truckload revenue was $420.0m versus $428.6m, and operating income was $36.7m versus $45.7m. VAS revenue grew to $82.5m from $76.6m, while operating income eased to $3.8m from $4.1m. Nine-month VAS revenue rose 15.1% to $243.3m.
- Operating measures: Q3 truckload revenue excluding fuel surcharge fell 1.5%; total miles declined 3.4%, average monthly miles per tractor 3.1%, and average revenue per total mile rose 1.9%. Empty miles increased to 12.48% from 11.94%.
- Cash flow and investment: Nine-month operating cash flow was $198.7m, versus $200.3m. Net investing cash outflow was $176.1m, including $180.2m of net property additions. Dividends paid were $10.9m.
Liquidity, debt and balance sheet
At September 30, 2012, cash and equivalents were $18.0m, total assets $1,346.3m, stockholders’ equity $796.2m, and current liabilities $177.4m. Werner had no bank credit-facility borrowings. Its two facilities totaled $250m, reduced by $33.8m of standby letters of credit; approximately $216.2m was unused. Management described the financial position as strong.
Outlook, risks and contingencies
- Management expected 2012 net capital expenditures, primarily revenue equipment, of $210m–$225m, funded mainly from operating cash flow and available financing. Equipment purchase commitments were approximately $56m at quarter-end.
- Management said freight demand did not show its usual late-summer seasonal improvement; October 2012 trends remained below the prior year but improved toward month-end. No earnings or revenue guidance was provided.
- Risks include uncertain freight demand and pricing, driver and independent-contractor recruitment and retention, fuel-price volatility and incomplete fuel-surcharge recovery, rising equipment costs and depreciation, third-party capacity pricing, and self-insured claims exposure. Werner had no fuel or interest-rate derivatives.
- The IRS proposed a tax deficiency and penalties tied to a discontinued like-kind equipment exchange program. Werner petitioned the U.S. Tax Court and said it would contest the matter; it had not accrued the proposed penalties or estimated interest, believing it would prevail. The filing reports $11.3m of gross unrecognized tax benefits and estimates approximately $2m of potential interest if the IRS position is upheld.
- Ordinary-course claims and litigation were not expected by management to materially affect the financial statements. The filing states that proposed regulations previously disclosed had no material status changes.
Important facts for investors to verify
- Whether freight demand, truck utilization and empty-mile trends improved after the quarter, and whether October’s late-month improvement continued.
- Whether driver availability, pay costs, and fuel and equipment expenses affected margins or fleet capacity.
- Progress and potential financial consequences of the IRS tax dispute, including any liability or interest recognized later.
- Actual 2012 capital expenditures and the resulting cash, liquidity and equipment-replacement position.