Werner Enterprises, Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. The interim financial statements are unaudited. Werner provides truckload transportation and logistics services through Truckload Transportation Services and Value Added Services (VAS).
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $552.0 million | $511.7 million | $1,586.1 million | $1,511.3 million |
| Operating income | $41.7 million | $32.6 million | $107.5 million | $103.6 million |
| Operating margin | 7.6% | 6.4% | 6.8% | 6.9% |
| Net income | $26.0 million | $21.3 million | $65.9 million | $64.6 million |
| Diluted EPS | $0.36 | $0.29 | $0.91 | $0.88 |
Q3 revenue rose 7.9%, operating income 28.0%, and net income 22.2% year over year. For the nine-month period, revenue rose 5.0%, while operating income increased 3.7% and net income 2.1%. Q3 operating expenses were 92.4% of revenue, compared with 93.6% a year earlier; the nine-month operating ratio was slightly worse year over year, at 93.2% versus 93.1%.
- Truckload: Q3 revenue increased 3.9% to $428.6 million and operating income rose to $39.1 million from $27.1 million. The segment operating ratio improved to 90.9% from 93.4%. Average revenue per tractor per week, excluding fuel surcharge, increased 7.4%; average tractors in service declined 3.1%.
- VAS: Q3 revenue increased 10.4% to $106.5 million, but operating income fell to $1.0 million from $4.2 million. Gross margin percentage declined to 12.0% from 15.0%, as third-party carrier costs rose and a large customer startup weighed on margins.
Cash flow, balance sheet and capital
- Nine-month operating cash flow was $165.2 million, down from $171.1 million. Net cash used in investing was $139.0 million, including $206.4 million of equipment additions and $59.5 million from equipment retirements.
- Cash and cash equivalents were $47.6 million at September 30, versus $23.7 million at December 31, 2013. Total assets were $1.449 billion and stockholders’ equity was $804.5 million.
- Long-term debt was $75.0 million, due in 2019. Werner had $325.0 million of total committed credit facilities; after outstanding borrowings and $32.7 million of standby letters of credit, $217.3 million was available. The company was in compliance with debt covenants.
- Nine-month financing included $30.6 million of share repurchases and $10.9 million of dividends. The quarterly dividend declared was $0.05 per share.
Changes, outlook and risks
- Management described truckload freight demand as strong amid constrained capacity, and said favorable demand relative to supply had persisted for eleven months through October 2014. The company raised pay for drivers in certain fleets in August; recruiting and retention measures improved later in Q3, though competition for drivers was expected to remain high.
- Management expected 2014 net capital expenditures, primarily revenue equipment, of $210–$230 million, versus $151.9 million in 2013. Equipment purchase commitments were approximately $155.0 million at quarter-end.
- Management expected a Q4 2014 effective tax rate of approximately 40.3%. The nine-month effective tax rate was 39.5%, compared with 38.5% in 2013; prior-period tax refunds and comparative uncertain-tax-position adjustments affected rates.
- Key operating risks include driver and independent-contractor shortages and related compensation pressure; higher equipment and regulatory costs; fuel-price volatility (fuel surcharges recover most, but not all, increases); and self-insured claims. Q3 insurance and claims expense rose 18.4%, principally reflecting higher claim costs.
- VAS profitability faced tighter third-party capacity and elevated carrier costs; management said gross margin improved sequentially from July to September. The company also noted that regional capacity issues affected the large customer startup.
- The $75 million term borrowing is effectively fixed at 2.5% through September 2019 under an interest-rate swap. The swap had a $431,000 fair-value loss recorded in other comprehensive income. The company had no derivatives to hedge fuel-price exposure.
- Other items to note: the company recorded a $1.6 million real-estate sale gain in the nine-month period; the $8.9 million gross liability for unrecognized tax benefits included $1.8 million of accrued interest. Management said ordinary-course claims and litigation were not expected to materially affect the financial statements. A proposed federal electronic-logging-device rule was expected to be finalized in early 2015; management did not expect a significant operational or profitability effect.
Important facts for investors to verify
- Whether truckload pricing and productivity improvements can continue to offset driver-pay, equipment, insurance and regulatory cost inflation.
- Whether VAS gross margins recover as capacity constraints and the large-customer startup issues are addressed.
- Actual 2014 net capital expenditures against the $210–$230 million outlook and the effect on cash, borrowing and fleet utilization.
- Claims development, fuel-surcharge recovery, tax-rate changes, and the timing or resolution of uncertain tax positions and other contingencies.