Werner Enterprises, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with Q1 2016 unless noted. Unaudited consolidated interim results. Dollar figures below are in U.S. dollars.
Business context and key financial metrics
Werner operates two reportable segments: Truckload Transportation Services and Werner Logistics. The company provides truckload and non-trucking transportation and logistics services.
- Revenue: $501.2 million, up 3.8%. Truckload revenue was $385.0 million (+3.2%); Werner Logistics revenue was $99.9 million (+3.4%).
- Profitability: Operating income was $26.0 million, down 20.1%; operating margin fell to 5.2% from 6.7%. Net income was $16.0 million, down 20.3%; diluted EPS was $0.22 versus $0.28. The effective tax rate was 38.5% versus 39.0%.
- Operating ratios and segment margins: Consolidated operating expenses were 94.8% of revenue versus 93.3%. Truckload operating income was $23.5 million, with a 6.1% margin versus 8.7%; its operating ratio, excluding fuel surcharge revenue, was 93.0% versus 90.5%. Werner Logistics operating income was $3.0 million, with a 3.1% margin versus 5.2%; gross margin was 15.6% versus 17.8%.
- Cash flow: Operating cash flow was $74.9 million versus $91.3 million. Investing activities used $7.4 million versus $98.2 million, reflecting lower fleet investment; financing activities used $54.1 million, including $50.0 million of debt repayment and $4.3 million of dividends. Cash increased $13.8 million to $30.8 million.
- Liquidity and debt: Current assets were $369.8 million and current liabilities $207.1 million. Debt totaled $130.0 million at quarter-end, down from $180.0 million at year-end. Credit facilities totaled $325.0 million; $195.0 million was unused before $25.8 million in standby letters of credit. The company repaid another $25.0 million in April 2017. It reported compliance with debt covenants.
- Capital and equity: Stockholders’ equity was $1.01 billion. Capital-expenditure commitments were approximately $99.9 million. The quarterly dividend declared was $0.06 per share.
Material changes versus Q1 2016
- Revenue growth did not translate into higher earnings: operating expenses rose 5.5%, faster than revenue. Fuel expense increased 40.8% amid higher diesel prices; depreciation rose 10.3%, and rent and purchased transportation rose 7.2%.
- Lower supplies and maintenance expense (down 18.9%) partly offset those increases. Management cited fewer company truck miles and a younger fleet.
- Truckload trucking revenue excluding fuel surcharges decreased 1.8%, reflecting a 2.1% decline in average tractors in service; average revenue per tractor per week increased 0.2%. Empty miles improved to 12.39% from 13.27%.
- Werner Logistics revenue increased, but operating income fell 39.4%; management attributed weaker margins to competitive customer pricing and higher third-party capacity costs.
- Operating cash flow fell 18%, with management citing a $20.1 million decrease from general working-capital activities. Net property additions were $14.6 million versus $101.6 million.
Outlook, management commentary, risks and unusual items
- Capital spending: Management estimated 2017 net capital expenditures of $200–$250 million, compared with $429.6 million in 2016, as the two-year fleet reinvestment neared completion. Funding was expected from operating cash flow and, if needed, available credit.
- Business trends: Management reported seasonally softer One-Way Truckload demand in January and late February, improvement toward normal seasonal levels in March, and April 2017 volume above April 2016. These are management observations, not full-year guidance.
- Costs and capacity: Driver and independent-contractor availability, pay and retention may pressure results. Driver turnover reached its lowest first-quarter level in 18 years, but management said future shortages could not be predicted. Fuel surcharge programs recover most, but not all, fuel increases; the company had no fuel-price derivatives.
- Fleet and used equipment: A weak used-truck market contributed to a Q4 2016 change in estimated useful lives for certain trucks, adding $2.6 million to Q1 2017 depreciation. Management expected this added depreciation to decline in Q2 as remaining trucks were sold. Used-truck pricing remained difficult.
- Customer and segment risks: A large Werner Logistics Freight Management customer transitioned to its parent company’s transportation platform during Q1; management expected this to slow near-term segment revenue and operating-income growth. Intermodal faced challenging market conditions.
- Claims and litigation: The company reported an estimated $1.2 million liability for the short-break portion of a driver wage class action. In February 2017, the court denied plaintiffs’ summary judgment on the sleeper-berth issue and dismissed related liquidated damages; the company did not accrue for that matter and could not estimate a possible loss. Other ordinary-course claims and employment-related class actions were also disclosed; management did not expect them to have a material adverse effect based on information then available.
- Other exposures: Liability insurance premiums for the policy year beginning August 2016 were approximately $3.5 million higher than the previous year. A 1 percentage-point increase in LIBOR, assuming quarter-end borrowings, would increase annual interest expense by approximately $550,000. The $75 million term debt was effectively fixed at 2.5% through September 2019 by an interest-rate swap; the swap had a $0.6 million pretax fair-value loss.
- Regulatory and accounting matters: The FMCSA withdrew its proposed Safety Fitness Determination rule in March 2017; the ELD compliance deadline was December 2017, while a legal challenge was appealed to the U.S. Supreme Court. The new revenue-recognition standard was expected to become effective for Werner January 1, 2018; the company was evaluating its impact and expected a change in recognition timing. Adoption of the stock-compensation standard reduced retained earnings by $0.3 million in Q1.
- Controls: Management concluded disclosure controls were effective at a reasonable-assurance level and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether truckload demand, fleet utilization and pricing trends after quarter-end persisted, and whether April’s improvement continued.
- Whether Werner Logistics margins stabilized after the customer transition and amid competitive pricing and higher purchased-capacity costs.
- Actual fuel-price recovery, driver and contractor availability, insurance and claims costs, and used-equipment resale values.
- Actual 2017 net capital expenditures versus the $200–$250 million estimate, and resulting cash flow and debt levels.
- Developments in the driver wage litigation and other claims, including any change in estimated liability or potential loss.
- The eventual quantitative effect and transition method for the revenue-recognition standard, and the effects of other pending accounting standards.