Werner Enterprises, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. 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 | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Revenue | $534.6 million | $542.1 million | $1,030.3 million | $1,034.1 million |
| Operating income | $52.2 million | $42.3 million | $90.4 million | $65.8 million |
| Net income | $31.8 million | $25.6 million | $55.0 million | $40.0 million |
| Diluted EPS | $0.44 | $0.35 | $0.76 | $0.55 |
| Operating margin | 9.8% | 7.8% | 8.8% | 6.4% |
| Operating ratio | 90.2% | 92.2% | 91.2% | 93.6% |
- Q2 revenue fell 1.4%, while operating income rose 23.3% and net income rose 24.3%. First-half revenue declined 0.4%, while operating income rose 37.4% and net income rose 37.6%.
- Truckload Q2 revenue was $417.0 million, down 2.9%; its operating income rose to $47.3 million from $38.3 million. Trucking revenue excluding fuel surcharges increased 6.3%, supported by higher revenue per tractor and a larger fleet.
- VAS Q2 revenue increased 2.9% to $103.5 million. Operating income rose to $5.0 million from $2.3 million, and gross margin improved to 15.5% from 13.2%.
- Lower fuel prices reduced fuel expense and customer fuel surcharge revenue. Q2 fuel expense fell 37.7%; fuel surcharge revenue in Truckload fell 37.1%. Fuel prices averaged $1.15 per gallon lower than in Q2 2014.
- Cost pressures included higher salaries, wages and benefits (+11.0% in Q2), depreciation (+8.3%) and insurance and claims (+7.5%). Gains on equipment sales reduced other operating expenses; Q2 gains were $6.7 million versus $5.2 million.
Cash flow, balance sheet and capital
- First-half operating cash flow was $193.6 million, versus $90.5 million a year earlier. Management attributed much of the increase to working-capital movements, including timing of customer receipts and lower income tax payments, as well as higher net income.
- Cash and cash equivalents were $47.5 million at June 30, 2015, versus $22.6 million at year-end 2014. Net cash used in investing was $152.2 million; property and equipment additions were $216.2 million, partly offset by $56.8 million of equipment-sale proceeds.
- Long-term debt was $75.0 million, with no current portion shown. Stockholders’ equity was $878.2 million. Current assets were $416.1 million and current liabilities $203.8 million.
- At June 30, committed credit facilities totaled $325.0 million; $75.0 million was borrowed and $32.7 million was reserved for standby letters of credit. Werner reported compliance with debt covenants.
- Werner estimated 2015 net capital expenditures of $300–$325 million, compared with $212.3 million in 2014, to refresh its fleet and reduce the average company-truck age to under two years. It had approximately $172.5 million of equipment purchase commitments at quarter-end.
- First-half dividends were $7.2 million; the declared dividend was $0.05 per share per quarter. The company repurchased 225,000 shares for $6.4 million during the first half.
Outlook, risks and notable items
- Management said freight demand in Q2 and July was among the strongest of the prior five years, excluding the 2014 winter-weather rebound. It cited constrained truck capacity and gradually improving conditions in key customer markets. This is commentary, not formal earnings guidance.
- Management identified driver recruiting and retention, rising driver pay, equipment costs, regulatory requirements and access to third-party capacity as risks to margins and fleet size. It said matching compensation and capacity costs with customer rate increases remains important.
- Fuel surcharges generally recover a majority, but not all, of fuel-cost changes; Werner had no fuel-price hedges. Rapid fuel-price movements and unrecovered costs can affect results.
- The company is self-insured for significant portions of claims. Q2 insurance expense reflected new smaller claims; first-half expense also increased due to higher costs from large liability claims. Claims estimates are a critical accounting judgment.
- At June 30, unrecognized tax benefits were $9.1 million; Werner expected no significant changes over the next 12 months and could not determine the settlement timing. Management believed ordinary-course claims and litigation would not materially affect the financial statements.
- After quarter-end, Wells Fargo’s revolving facility was amended to $100 million and extended to July 2020; Werner also entered a new $75 million U.S. Bank facility expiring in July 2020. The filing described these July 2015 changes as subsequent events.
- The company adopted no new accounting standards in Q2. It was evaluating the revenue-recognition standard, then expected to take effect for Werner in 2018 unless adopted early.
Important facts for investors to verify
- Whether truckload pricing and VAS margin improvements continue to offset driver, insurance, equipment and regulatory cost inflation.
- How much of the first-half operating-cash-flow increase reflects sustainable earnings versus temporary working-capital and tax-payment timing.
- Whether planned $300–$325 million net capital spending is funded by operating cash flow without materially increasing borrowings.
- Developments in driver availability, fleet count, fuel prices and surcharge recovery, third-party capacity costs, and self-insured claims.
- Current credit availability and covenant headroom after the July 2015 facility amendments and new facility.