Werner Enterprises, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Interim financial statements are unaudited. Werner provides truckload transportation and logistics services through Truckload Transportation Services and Value Added Services (VAS).
Financial performance
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Revenue | $542.1m | $506.6m | $1,034.1m | $999.5m |
| Operating income | $42.3m | $42.4m | $65.8m | $71.1m |
| Operating margin | 7.8% | 8.4% | 6.4% | 7.1% |
| Net income | $25.6m | $25.8m | $40.0m | $43.4m |
| Diluted EPS | $0.35 | $0.35 | $0.55 | $0.59 |
Q2 revenue rose 7.0%, while net income slipped 0.8%; first-half revenue increased 3.5%, but net income declined 7.8%. The consolidated operating ratio increased to 92.2% in Q2 from 91.6%, and to 93.6% for the first half from 92.9%. Dividends declared were $0.05 per share in Q2 and $0.10 for the first half, unchanged year over year.
- Truckload: Q2 revenue was $429.4m (+4.0%) and operating income $38.3m, up from $34.4m. Segment operating ratio improved to 91.1% from 91.7%. Revenue per tractor per week rose 4.9%; average tractors in service fell 1.1%, and empty miles improved to 12.14% from 12.93%.
- VAS: Q2 revenue grew 10.2% to $100.5m, but operating income fell to $2.3m from $4.5m. Gross margin percentage declined to 13.2% from 16.4%, as third-party carrier costs rose amid tighter capacity.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was $90.5m versus $110.9m a year earlier. Net investing cash use was $58.1m (versus $30.1m); financing cash use was $28.5m (versus $71.8m). Cash increased $4.0m to $27.7m.
- At June 30, cash was $27.7m, total assets $1,390.9m, and stockholders’ equity $787.0m. Current assets were $390.5m and current liabilities $194.7m.
- Debt was $40.0m, unchanged from year-end, with no principal repayments or additional borrowings during the first half. The $250m bank facilities had $40m drawn and $32.7m in standby letters of credit, leaving $177.3m in unused availability. Werner reported covenant compliance.
- First-half property and equipment additions were $100.0m, partly offset by $37.2m of retirements. The filing forecasts 2014 net capital expenditures of $210m–$230m, versus $151.9m in 2013, and reports $144.5m of equipment purchase commitments.
- Werner repurchased 1.0m shares for $25.6m during the first half and paid $7.3m in dividends. The repurchase authorization had 5,137,709 shares remaining at June 30.
Changes, outlook and risks
- Management reported strong freight demand and a tight truck-capacity market; the company was overbooked throughout Q2, and management said the favorable trend continued through July. It expected the trend to continue, citing driver constraints, trucking-company failures, regulatory costs and a gradually firming economy. No full-year earnings or revenue guidance was provided.
- Management described driver recruitment and retention as extremely difficult and expected competition for drivers to intensify. Higher driver pay, recruiting costs and health costs pressured expenses; rate increases may not fully offset these costs.
- VAS activity increased, but tighter third-party capacity raised purchased transportation costs and reduced segment margins. Fuel surcharges generally recover most, but not all, fuel-cost increases; fuel prices and surcharge recovery remain uncertain. The company had no fuel or interest-rate hedges.
- Insurance and claims expense rose 10.7% in Q2, primarily due to reserve increases on prior-period high-dollar liability claims. The business is substantially self-insured for several claim categories. Severe winter weather also contributed to first-half supplies, maintenance and claims costs.
- Higher equipment costs and replacement of older tractors and fully depreciated trailers increased depreciation; management expected depreciation to rise further as fleet replacement continued. A proposed federal electronic logging device rule was expected to have no significant operating or profitability effect, according to management.
- Unrecognized tax benefits totaled $8.9m, including $1.8m of accrued interest; management expected no significant changes over the next 12 months. Ordinary-course litigation was not expected by management to materially affect the financial statements. Revenue recognition standard ASU 2014-09 was not yet effective; the company was evaluating its impact.
Most important facts for investors to verify
- Whether strong freight demand and rate increases continue to offset driver scarcity, wage inflation, and fleet operating costs.
- Whether VAS can restore gross margins as third-party carrier capacity and pricing change.
- Whether planned capital spending can be funded while operating cash flow remains below the prior-year level.
- Future development of self-insured claims and the $8.9m uncertain-tax-position liability.
- Current borrowing availability, covenant compliance, and the timing and extent of share repurchases.