Werner Enterprises, Inc. — Q3 2010 Form 10-Q
Business context and period: Unaudited results for the three and nine months ended September 30, 2010, compared with the corresponding 2009 periods. Werner provides truckload transportation and logistics services through Truckload Transportation Services and Value Added Services (VAS).
Financial performance
Amounts are in millions, except per-share data and percentages.
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Operating revenues | $463.3 | $429.3 | $1,351.8 | $1,226.8 |
| Operating income | $40.1 | $32.8 | $94.0 | $66.1 |
| Net income | $24.2 | $19.0 | $55.9 | $38.6 |
| Diluted EPS | $0.33 | $0.26 | $0.77 | $0.54 |
| Consolidated operating ratio | 91.3% | 92.4% | 93.1% | 94.6% |
- Revenue and earnings: Revenue rose 7.9% in Q3 and 10.2% year to date; net income increased 27.2% and 45.0%, respectively. Q3 improvement reflected higher trucking revenue per mile and stronger Truckload operating results.
- Truckload: Segment revenue grew 7.0% in Q3 and 8.2% year to date. Operating income was $37.3 million in Q3 versus $30.3 million, and $83.9 million year to date versus $58.0 million. Lower empty-mile rates and higher revenue per mile supported results.
- VAS: Q3 revenue increased 12.1% to $64.7 million, but operating income declined to $2.8 million from $3.8 million. Gross margin percentage fell to 14.9% from 17.1%, as third-party carrier costs rose. Year-to-date segment operating income was nearly flat at $8.2 million.
- Cost and margin factors: Fuel expense rose with higher diesel prices; Q3 average diesel was 31 cents per gallon above the prior year. Lower insurance and claims expense partly offset higher fuel, maintenance, and purchased transportation costs. Effective tax rates declined to 40.6% in Q3 and 41.3% year to date, from 43.0% in both comparable periods.
- Cash flow and investment: Nine-month operating cash flow was $155.2 million, down from $169.3 million. Investing activities used $79.8 million, including $119.7 million of equipment additions and $36.6 million of equipment retirements. Dividends paid were $10.8 million.
- Liquidity and debt: At September 30, cash was $94.8 million and working capital was $227.7 million. No credit-facility borrowings were outstanding. Two facilities total $225.0 million, reduced by $41.2 million of letters of credit, leaving $183.8 million available; the $175 million facility matures in May 2011 and the $50 million facility in May 2012. The company reported covenant compliance.
Changes, outlook, and risks
- Management said freight trends remained favorable compared with Q3 2009 but were weaker than Q2 2010; October freight demand had softened. Werner planned to maintain approximately 7,300 trucks and emphasized margin and asset-return improvement. It reported no earnings guidance.
- Management expected 2010 net capital expenditures, primarily revenue equipment, of $110–$130 million. Equipment purchase commitments were $56.5 million at quarter end.
- Werner extended estimated tractor useful lives from 60 to 80 months and reduced estimated salvage value from 25% to zero, reflecting a longer replacement cycle. The filing says the change did not affect depreciation expense in the periods reported. Longer use may raise maintenance costs; management reported company-truck odometer miles up 5.2% year over year.
- Risks discussed include fuel-price exposure and incomplete or delayed surcharge recovery; driver and independent-contractor availability and wage pressure; higher third-party capacity costs; self-insured claims; and proposed safety and hours-of-service regulations. The company had no fuel or interest-rate hedges.
- CSA 2010 implementation was expected to begin in part on November 30, 2010, with full implementation anticipated in 2011. Potential changes to hours-of-service rules were under consideration; details and effects were uncertain.
- The IRS began an audit of federal tax years 2007 and 2008. Unrecognized tax benefits totaled $7.1 million, including $2.9 million of accrued interest; management did not expect significant changes in uncertain tax positions over the next 12 months. Normal-course claims and litigation were not expected by management to materially affect the financial statements.
Investor verification priorities
- Check whether freight demand and pricing recover or continue to soften after the October 2010 trends described by management.
- Track VAS gross margins and third-party carrier costs, alongside Truckload revenue-per-mile gains and operating ratios.
- Compare actual capital spending and fleet replacement decisions with the $110–$130 million forecast and assess maintenance costs from the extended tractor cycle.
- Monitor driver availability, fuel surcharge recovery, insurance-claim development, and the effects of prospective safety and hours-of-service rules.
- Review the May 2011 facility maturity, covenant compliance, and outcomes of the IRS audit and other tax uncertainties.