Business context and reporting period
Werner Enterprises, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2013. The company operates Truckload Transportation Services and Value Added Services (VAS), including brokerage, freight management, intermodal and global logistics.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Operating revenue | $506.6 million | $521.8 million | $999.5 million | $1,020.2 million |
| Operating income | $42.4 million | $51.1 million | $71.1 million | $86.5 million |
| Operating margin | 8.4% | 9.8% | 7.1% | 8.5% |
| Net income | $25.8 million | $30.7 million | $43.4 million | $51.9 million |
| Diluted EPS | $0.35 | $0.42 | $0.59 | $0.71 |
- Q2 revenue declined 2.9%, operating income 17.1% and net income 15.8% year over year. For the first half, revenue declined 2.0%, operating income 17.9% and net income 16.5%.
- Truckload revenue fell 4.6% in Q2 to $412.9 million; segment operating income fell to $34.4 million from $45.1 million. The segment operating ratio rose to 91.7% from 89.6% (excluding fuel surcharge revenue, 89.4% from 86.6%).
- VAS revenue grew 7.1% in Q2 to $91.2 million and operating income increased to $4.5 million from $4.3 million. Gross margin improved to 16.4% from 15.1%; operating margin was 4.9% versus 5.1%.
- Q2 fuel expense decreased 9.2%, but insurance and claims expense rose 14.7%, depreciation 2.1%, and rent and purchased transportation 6.0%. Companywide operating expenses declined less than revenue, pressuring margins.
- Six-month operating cash flow was $110.9 million, down from $138.8 million. Investing used $30.1 million versus $119.6 million; financing used $71.8 million versus $13.6 million. Cash increased $8.8 million to $24.2 million.
- At June 30, total assets were $1.32 billion and stockholders’ equity was $738.9 million. Debt was $40.0 million, down from $90.0 million at year-end 2012; current debt was zero. Credit facilities totaled $250 million, with $40 million drawn and $33.7 million of standby letters of credit reducing availability.
Material changes and management commentary
- Truckload demand was soft in April, partly due to weather and weaker retail volumes, then improved seasonally in May and June. Management said July demand was comparable to July 2012. Q2 average revenue per tractor per week decreased 1.0%; average loaded trip length fell 7.4%, empty miles rose to 12.93% from 12.23%, and average tractors in service declined 2.6%.
- Management cited a difficult driver market, higher driver pay, and challenges reaching its 7,300-truck fleet goal. The Truckload fleet averaged 7,134 tractors in Q2. VAS growth included higher shipment revenue and development of an Intermodal drayage fleet.
- Management expects 2013 net capital expenditures of $150–$200 million, compared with $224.9 million in 2012; the estimate increased by $50 million after used-equipment markets proved better than expected. Approximately $100.1 million of equipment purchases were committed at quarter-end.
- Management reported a strong financial position and expects to fund capital spending through operating cash flow and available credit as needed. No earnings or revenue guidance was provided.
Outlook, risks, contingencies and unusual items
- Fuel surcharges generally recover most, but not all, fuel-cost increases; recovery can lag rapid price changes. The company had no fuel derivatives. Driver and independent-contractor shortages, compensation increases, freight rates, capacity-provider costs and customer demand could affect results.
- Higher insurance and claims costs reflected increased claim severity/frequency and unfavorable development of prior-period claims. The company is substantially self-insured, making claim estimates and safety experience significant factors.
- Revised federal hours-of-service rules took effect July 1, 2013. Management said it was too early to measure productivity effects but anticipated that driving-hour restrictions would negatively affect some drivers and fleets.
- The IRS concluded in July 2013 that no federal tax deficiencies or penalties were due for 2007–2008, resolving a like-kind equipment exchange dispute with no financial-statement impact. Separately, an IRS proposed adjustment concerning the driver per diem program could result in an estimated $16.5 million additional expense for 2009–2010 if upheld. The company is contesting it, believes it will prevail, and has not accrued a liability; a pre-appeals conference was scheduled for August 2013.
- Unrecognized tax benefits totaled $12.1 million, including $3.8 million of interest; the company expected no significant changes in uncertain tax positions over the following 12 months. Ordinary-course claims and litigation were not expected by management to materially affect the financial statements.
- Q2 included a $1.1 million gain on real estate within reported asset-sale gains. Foreign-currency translation losses were $1.1 million in Q2 and recorded in other comprehensive income. Variable-rate debt was $40 million; a 1 percentage-point LIBOR increase would raise annual interest expense by approximately $0.4 million.
Important facts for investors to verify
- Whether freight demand, rate trends, tractor utilization and the driver market support fleet recovery and improved Truckload margins.
- Whether insurance and claims costs stabilize and whether prior-period claim estimates require further adjustment.
- The status and potential financial exposure of the IRS driver-per-diem dispute and other uncertain tax positions.
- Whether the $150–$200 million 2013 net-capex outlook and $100.1 million of commitments remain consistent with cash generation and equipment-market conditions.
- The productivity and cost effects of the hours-of-service rules, fuel-price changes and the company’s ability to recover fuel costs through surcharges.