Werner Enterprises, Inc. — Q2 2018 Form 10-Q
Business context and reporting period. Werner provides truckload transportation and logistics services through its Truckload Transportation Services and Werner Logistics segments. This unaudited quarterly report covers the three and six months ended June 30, 2018; comparisons are with the corresponding 2017 periods.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Operating revenue | $619.1 million | $519.5 million | $1,181.8 million | $1,020.7 million |
| Operating income | $50.8 million | $36.9 million | $85.9 million | $62.9 million |
| Operating margin | 8.2% | 7.1% | 7.3% | 6.2% |
| Net income | $38.3 million | $23.2 million | $66.1 million | $39.2 million |
| Diluted EPS | $0.53 | $0.32 | $0.91 | $0.54 |
| Operating cash flow | — | — | $182.5 million | $178.5 million |
- Q2 revenue rose 19.2%, operating income 37.6%, and net income 64.8% year over year. For the first half, revenue rose 15.8% and net income 68.4%.
- At June 30, cash and cash equivalents were $9.9 million, current assets $414.0 million, and current liabilities $228.2 million. Total assets were $1.97 billion and stockholders’ equity $1.22 billion.
- Debt was $95.0 million, up from $75.0 million at year-end 2017. Of $325.0 million in credit facilities, $230.0 million was undrawn before $28.8 million of standby letters of credit. The company was covenant-compliant. It borrowed an additional $20.0 million in July.
- First-half investing cash outflow was $166.4 million. Property and equipment additions were $256.2 million, partly offset by $81.4 million in sale proceeds; management reported net property additions of $174.8 million. Financing cash outflow was $21.3 million, including $22.9 million of share repurchases and $10.1 million of dividends.
Material changes and operating trends
- Truckload Q2 revenue increased 16.5%; segment operating income rose to $43.4 million from $36.0 million, and its operating ratio improved to 90.8% from 91.1%. Average revenue per tractor per week rose 9.5%; average tractors in service rose 3.8%.
- Werner Logistics Q2 revenue increased 32.9% to $134.0 million, with operating income of $5.6 million versus $2.3 million. Gross margin improved to 15.7% from 15.2%, and operating margin to 4.2% from 2.3%.
- Fuel expense rose 45.5% in Q2 as average diesel prices were $0.65 per gallon higher year over year; fuel surcharge revenue rose 37.5%. Surcharges recover most, but not all, fuel-cost increases.
- Insurance and claims expense increased 54.8% in Q2, chiefly due to the litigation accrual described below. Gains on asset sales included a $3.5 million real-estate gain in Q2.
- The company adopted ASC Topic 606 on January 1, 2018, using the modified retrospective method. It recorded a $2.0 million opening retained-earnings increase. The new treatment reduced Q2 revenue by $3.9 million and first-half revenue by $7.1 million for driver-training-school amounts previously treated as bad-debt expense; management said this reclassification did not affect operating income.
Outlook, risks, and unusual items
- Management reported consistently strong, broad-based Q2 freight demand and said July 2018 volumes remained strong. It expected full-year 2018 average revenue per total mile, net of fuel surcharge, to increase 9%–12% versus 2017. It estimated 2018 net capital expenditures of $325 million–$375 million, compared with $198.8 million in 2017.
- Management expected an effective income tax rate of 25%–26% going forward. The first-half 2018 rate was 23.4%, versus 37.8% in the prior-year period, primarily reflecting the lower federal tax rate and discrete tax items. No full-year earnings or revenue guidance was provided in the supplied filing text.
- Adverse jury verdict: A Texas court entered a $89.7 million judgment on July 30, 2018, arising from a 2014 accident. Werner recorded $11.3 million of Q2 pre-tax expense, including $1.3 million of interest, and recognized a $79.7 million insurance receivable with a matching long-term claims liability. The company stated its maximum liability under the applicable policies was $10.0 million plus interest, said coverage exceeded the verdict, and planned to appeal; the appeal outcome is uncertain.
- Other risks include driver and independent-contractor availability and related pay or settlement costs; fuel-price movements and incomplete surcharge recovery; third-party capacity costs; self-insured claims and litigation; and substantial equipment investment. Committed equipment purchases were approximately $236.8 million at June 30.
- Other disclosed matters include FLSA and state wage-related class actions. Management said it had accrued the short-break jury award and related fees in one case; it did not believe the other class actions were likely to materially affect financial position or results, while noting final outcomes could not be determined.
- Management stated disclosure controls were effective at a reasonable assurance level and that no material change in internal control over financial reporting occurred during the quarter.
Most important facts for investors to verify
- Developments in the appeal, insurance recovery, and ultimate cash exposure related to the $89.7 million judgment, including any interest or coverage disputes.
- Whether strong freight demand and higher pricing persist, and whether driver availability and labor costs constrain fleet growth or margins.
- Realized fuel-surcharge recovery relative to diesel costs, and the effect of fuel prices on profitability.
- Execution and funding of the $325 million–$375 million net capital expenditure plan, together with subsequent borrowing and debt maturities.
- How much of earnings growth reflects sustainable operations versus tax-rate changes, asset-sale gains, and the unusual litigation accrual; also monitor adoption-related revenue presentation.