Werner Enterprises, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited, with comparison to Q1 2022. Werner provides truckload transportation through Truckload Transportation Services (TTS) and non-asset-based logistics through Werner Logistics. Q1 results include the acquisitions of Baylor (October 2022) and ReedTMS (November 2022).
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Operating revenue | $832.7 million | $764.6 million | +8.9% |
| Operating income | $53.4 million | $83.5 million | -36.1% |
| Operating margin | 6.4% | 10.9% | -4.5 percentage points |
| Net income attributable to Werner | $35.2 million | $53.7 million | -34.5% |
| Diluted EPS | $0.55 | $0.82 | Lower |
| Cash from operating activities | $166.8 million | $155.0 million | +7.7% |
Revenue increased in both segments: TTS rose 5.4% to $588.3 million, while Werner Logistics rose 21.0% to $228.7 million, including growth from ReedTMS. TTS operating income declined to $51.0 million from $76.1 million; Logistics operating income declined to $4.9 million from $8.7 million. The consolidated effective tax rate was 24.3%, versus 24.1%.
Operating expenses rose 14.4%, faster than revenue. Salaries, wages and benefits increased 10.9%; supplies and maintenance increased 19.6%; insurance and claims increased 32.7%; and rent and purchased transportation increased 18.9%. Interest expense was $7.9 million versus $1.4 million, reflecting higher rates and average debt. Net other expense declined year over year, principally because equity-investment losses were much smaller ($0.1 million versus $9.8 million).
Cash, debt and liquidity
- Cash and cash equivalents were $129.6 million at March 31, 2023, up from $107.2 million at year-end 2022. Total debt was $691.3 million, compared with $693.8 million.
- Stockholders’ equity was $1.47 billion. Current assets were $709.8 million and current liabilities $303.3 million.
- Werner reported $414.6 million of available borrowing capacity under its $1.075 billion credit facility after $60.4 million of standby letters of credit. The company was in compliance with its financial covenants.
- Investing activities used $129.2 million, including $102.7 million of net property and equipment additions and a $25.0 million subordinated note to MLSI. Financing activities used $16.2 million; dividends paid were $8.2 million, and no shares were repurchased in the quarter.
Changes, outlook and management commentary
- Management described Dedicated demand as solid and steady, but One-Way Truckload and Logistics faced a softer-than-usual seasonal freight market and increased price competition. The market did not show its typical March improvement; April demand remained challenging.
- Dedicated revenue per tractor per week, excluding fuel surcharge, increased 4.6%. Management expects it to be flat to up 3% for full-year 2023. One-Way Truckload revenue per total mile, excluding fuel surcharge, is expected to decline 3%–6% in the first half of 2023 year over year. Management expects weak One-Way conditions in Q2 and Q3, with improvement in Q4.
- Management expects the year-end tractor fleet to range from 2% below to 1% above year-end 2022, does not plan fleet growth in Q2, and anticipates limited Dedicated fleet growth if the market improves in the second half.
- Full-year 2023 net capital expenditures are estimated at $350 million–$400 million, versus $317.6 million in 2022. Approximately $271.4 million of equipment purchases were committed at quarter-end. Management expects 2023 gains on sales of equipment to decline to $30 million–$50 million.
- Management said cash, operating cash flow and borrowing capacity should be sufficient for foreseeable requirements and planned shareholder returns, and expects to continue quarterly dividends. Fuel surcharges recover most, but not all, fuel-cost increases. A 1 percentage-point increase in SOFR, at the reported borrowing level, would increase annual interest expense by approximately $4.5 million.
Risks, contingencies and unusual items
- Inflation in labor, maintenance and insurance, driver and independent-contractor availability, weaker freight demand and pricing, fuel volatility, and lower used-equipment prices may pressure results. Self-insurance exposure and claim severity are also significant risks.
- A Texas accident lawsuit remains under appeal. The 2018 judgment was $92.0 million; Werner reported a $35.5 million liability and a corresponding $79.2 million insurance receivable and liability at March 31, 2023. The company’s stated maximum liability under the relevant policy is $10.0 million plus interest; the appeal outcome is uncertain, and interest continues to accrue.
- Other ordinary-course claims include transportation, workers’ compensation and employment-related matters. Management said resolution of claims and pending litigation, taking existing reserves into account, is not expected to have a material adverse effect, but outcomes remain uncertain.
- California received EPA authorization in March 2023 to enforce stricter emissions rules for vehicles beginning with model year 2024. Werner said it is planning for compliant equipment; about 4% of its 2022 truck miles were in California.
- ReedTMS purchase accounting remains provisional. Subsequent valuation adjustments could affect acquired asset and liability balances and potentially future earnings.
Important facts for investors to verify
- Whether weaker freight demand and pricing persist, and whether management’s One-Way, Dedicated and fleet-size expectations are met.
- Whether operating-cost inflation, insurance claims and lower used-equipment gains continue to pressure operating margins.
- Capital spending, committed equipment purchases, cash generation and debt availability relative to the $350 million–$400 million net capex outlook.
- Developments in the Texas verdict appeal, related insurance recoveries and the company’s claims reserves.
- Final purchase accounting for ReedTMS and any effect of California emissions requirements on fleet plans and costs.