Werner Enterprises, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also provides unaudited fourth-quarter results. Werner is a truckload transportation and logistics provider, with Truckload and Werner Logistics reportable segments.
Financial performance and position
| Metric | 2018 | 2017 |
|---|---|---|
| Operating revenue | $2,457.9 million | $2,116.7 million |
| Operating income | $224.2 million | $143.8 million |
| Net income | $168.1 million | $202.9 million |
| Diluted earnings per share | $2.33 | $2.80 |
| Operating ratio | 90.9% | 93.2% |
| Cash from operations | $418.2 million | $282.8 million |
| Capital expenditures, net of equipment sale proceeds | $349.0 million | $198.8 million |
| Cash and cash equivalents, year-end | $33.9 million | $13.6 million |
| Total debt, year-end | $125.0 million | $75.0 million |
| Stockholders’ equity, year-end | $1,264.8 million | $1,184.8 million |
Operating margin rose to 9.1% from 6.8%; net margin was 6.8% versus 9.6%. The decline in net income primarily reflects the prior-year $110.5 million non-cash tax benefit from revaluing deferred tax liabilities after the Tax Act. Excluding that benefit, 2017 net income was approximately $92.4 million.
Truckload revenue increased 15.0% to $1,881.3 million, with operating income of $202.6 million versus $138.1 million. Werner Logistics revenue rose 24.0% to $518.1 million; operating income increased to $20.4 million from $8.7 million. Logistics gross margin improved to 15.8% from 14.9%.
Fourth-quarter 2018 revenue was $646.4 million, operating income $74.9 million, and net income $54.6 million. The comparable 2017 quarter included $141.1 million net income, unusually elevated by the tax benefit.
Cash from operations increased 47.8%. Net investing cash use was $331.4 million; management reported net property additions of $349.0 million. The resulting approximate $69.2 million of operating cash flow less net property additions is a simple calculated measure, not a company-reported free-cash-flow figure. Current assets were $456.7 million and current liabilities $310.4 million. The company had $325 million of credit facilities, with $125 million borrowed; availability after $30.3 million of letters of credit was $169.7 million. The $75 million term commitment matures in September 2019. Dividends paid were $23.0 million; the company repurchased 2.1 million shares for $72.2 million.
Material changes and unusual items
- Revenue grew 16.1%, supported by stronger freight demand, higher trucking rates, Dedicated fleet growth and 24.0% growth in Logistics. One-Way Truckload revenue per total mile rose 11.8%; average miles per truck declined 3.0%.
- Higher driver pay, fuel, maintenance and insurance costs affected expenses. Average diesel prices were 25% higher than in 2017; fuel surcharge programs recover most, but not all, fuel increases.
- Insurance and claims expense included $15.2 million of accruals, interest and legal fees related to an adverse jury verdict. A $4.9 million favorable property-tax settlement reduced taxes and licenses expense. Gains on asset sales were $24.9 million, including $5.9 million from real estate sales.
- Adoption of ASC 606 in 2018 produced a $2.0 million increase to opening retained earnings. The company recorded a $14.3 million reduction in 2018 revenue for driver-training-school amounts that previously would have been bad-debt expense.
Outlook, risks and contingencies
- Management expected 2019 One-Way Truckload revenue per total mile to increase 4%–8%, Truckload fleet size to grow 3%–5% (mostly Dedicated in the first half), and net capital expenditures to be $275–$300 million. It estimated a 2019 effective tax rate of 25%–26% and expected equipment-sale gains to be similar to 2018. These are forward-looking estimates, not assurances.
- Driver and independent-contractor recruitment and retention remain challenging; higher compensation could pressure margins if freight rates do not offset costs. Customer concentration is notable: the top 10 customers represented 45% of revenue, though no single customer exceeded 9%.
- Fuel-price volatility, seasonal and weather-related operating costs, freight-market competition, third-party capacity availability, insurance claims, used-equipment values, regulation, international trade developments and cybersecurity are identified risks.
- A Texas court entered a $92.0 million final judgment against Werner in a fatal-accident case. Werner reported $79.2 million of insurance receivable and corresponding liability, stated its maximum liability under applicable coverage was $10.0 million plus interest, and is appealing. The outcome is uncertain; post-judgment interest accrual was expected to be $1.2 million per quarter pending appeal.
- Other litigation includes wage-related class actions. Management did not believe the described claims would materially affect the company based on information available, but final outcomes could not be determined.
Important facts for investors to verify
- Whether the 2019 pricing, fleet-growth and capital-spending outlook was achieved, and how driver availability affected capacity.
- The progress and final outcome of the Texas appeal, related insurance recoveries, and continuing interest accruals.
- Whether operating cash flow continues to cover fleet investment, dividends and repurchases while debt maturities are met.
- How much of revenue growth and operating-margin improvement is sustainable versus freight-cycle conditions, fuel surcharges and asset-sale gains.
- The effects of ASC 606 on driver-training-school revenue and receivables, including the substantial allowance against student notes receivable.