Werner Enterprises, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparative period is Q1 2012. Interim financial statements are unaudited. Werner operates Truckload Transportation Services and Value Added Services (VAS), providing truckload and logistics transportation services.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Operating revenue | $492.9 million | $498.4 million | Down 1.1% |
| Operating income | $28.7 million | $35.4 million | Down 19.0% |
| Operating margin | 5.8% | 7.1% | Down 1.3 percentage points |
| Net income | $17.5 million | $21.2 million | Down 17.6% |
| Diluted EPS | $0.24 | $0.29 | Down $0.05 |
| Operating cash flow | $76.6 million | $84.0 million | Down $7.4 million |
| Capital expenditures, additions to property and equipment | $31.9 million | $96.0 million | Down $64.0 million |
Total operating expenses rose 0.3% to $464.2 million despite lower revenue. The consolidated operating ratio increased to 94.2% from 92.9%. The effective tax rate was 39.75%, down from 40.50%. Dividends declared were $0.05 per share in both periods.
Segments and operating drivers
- Truckload: Revenue fell 2.1% to $408.9 million and operating income fell to $23.6 million from $31.4 million. Operating ratio was 94.2%, versus 92.5%; excluding fuel surcharge revenue, it was 92.6%, versus 90.3%. Trucking revenue excluding fuel surcharge declined 2.4%. Average revenue per tractor per week declined 1.9%, loaded trip length declined 5.3%, and empty miles rose to 13.03% from 11.88%. Average tractors in service declined 0.5%; quarter-end tractors were 7,090 versus 7,300.
- VAS: Revenue increased 6.4% to $82.5 million. Gross margin rose to $13.3 million from $11.5 million, and gross margin percentage improved to 16.1% from 14.8%. Operating income declined 9.4% to $3.6 million as other operating expenses rose. Net VAS shipments fell 6.8%, while average revenue per shipment rose 10.1%. Brokerage faced rising capacity costs; Intermodal operating income was lower, while WGL revenue and operating income increased.
Financial position, liquidity and debt
At March 31, 2013, cash and cash equivalents were $19.5 million, total assets $1.323 billion, stockholders’ equity $731.1 million, and debt $40.0 million, all long-term. The company repaid $50.0 million of short- and long-term debt during the quarter. Cash increased $4.1 million from year-end.
Werner had $250.0 million of committed credit facilities, with $40.0 million borrowed and $33.7 million committed to standby letters of credit; reported unused credit after those letters was $176.3 million. The facilities bear variable interest; the borrowing rate was 0.85% at quarter-end. The company reported compliance with debt covenants. Operating cash flow funded net capital expenditures, debt repayment and dividends. Net cash used in investing activities was $19.1 million, compared with $81.9 million in Q1 2012; net cash used in financing was $53.6 million, compared with $2.7 million.
Outlook, risks and contingencies
- Management expected 2013 net capital expenditures, primarily revenue equipment, of $100 million to $150 million, versus $224.9 million in 2012. The company had $37.0 million of equipment purchase commitments at quarter-end and aimed to keep average truck age near 2.4 years.
- Management reported softer freight demand in April 2013 compared with April 2012. It expected customer bid activity to remain high into Q2; truckload rate increases in Q1 were limited. No earnings guidance was provided in the filing.
- Management attributed weaker truckload productivity partly to more severe winter weather, one fewer business day, and Easter timing. Driver recruiting and retention had become more challenging; shortages or higher driver pay could hurt results if freight rates do not rise correspondingly. Independent contractor availability and costs are also risks.
- Fuel surcharge programs recover a majority, but not all, of fuel-cost increases. Fuel prices, weather, insurance and claims, maintenance, higher equipment costs, and regulatory compliance could affect profitability. The company had no fuel or interest-rate derivatives. A one-percentage-point LIBOR increase on the quarter-end debt balance would add an estimated $0.4 million to annual interest expense.
- New federal hours-of-service rules were scheduled to take effect July 1, 2013 and were under court appeal. If implemented without change, management expected lower truck productivity and potentially tighter freight capacity.
- The IRS was contesting the company’s prior like-kind equipment exchange tax treatment; estimated after-tax interest exposure if the IRS prevailed was approximately $2.1 million. The company disputed the assessment and had not accrued penalties or interest. A separate IRS employment-tax proposal concerning driver per diem could result in approximately $16.5 million of additional expense for 2009–2010 if upheld; the company disputed it and had not accrued a liability. Management stated it expected to prevail in both matters.
- Ordinary-course claims and litigation were not expected by management to materially affect the financial statements. Unrecognized tax benefits totaled $11.8 million, including interest; the timing of most potential settlement was uncertain.
Important facts for investors to verify
- Whether April softness and subsequent freight demand, customer bids, and pricing improved truckload revenue and utilization.
- Whether driver and independent contractor availability constrained fleet size, and whether related compensation or capacity costs rose.
- Whether the planned $100 million–$150 million 2013 net capital expenditure range and fleet-age objective were achieved.
- Developments in the IRS disputes, including potential tax, interest, and employment-tax exposure.
- Implementation and operational impact of the hours-of-service rules, and changes in fuel costs, surcharge recovery, insurance claims, and equipment costs.