Werner Enterprises, Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; the filing also reports fourth-quarter results. Werner is a truckload transportation and logistics company with Truckload and Werner Logistics segments.
Financial performance
- Revenue: $2.009 billion, down 4.0% from $2.094 billion in 2015. Truckload revenue fell 6.7% to $1.534 billion; Werner Logistics revenue increased 6.1% to $417.2 million.
- Profitability: Operating income was $126.1 million, down 37.1%; net income was $79.1 million, down 36.0%. Diluted EPS was $1.09 versus $1.71. Operating margin declined to 6.3% from 9.6%; net margin was 3.9% versus 5.9%. Consolidated operating ratio worsened to 93.7% from 90.4%.
- Segments: Truckload operating income decreased to $107.7 million from $189.9 million, with its operating ratio (net of fuel surcharge revenue) worsening to 92.2% from 86.7%. Werner Logistics operating income rose to $20.7 million from $16.9 million; gross margin improved to 17.1% from 15.5%.
- Cash flow and investment: Operating cash flow was $312.4 million, down 15.7%. Net cash used in investing was $410.3 million. Net property additions were $429.6 million; year-end equipment purchase commitments were $83.8 million.
- Liquidity and debt: Cash and equivalents were $17.0 million. Total debt was $180.0 million, up from $75.0 million; stockholders’ equity was $994.8 million. Credit facilities totaled $325.0 million, with $145.0 million available after borrowings and standby letters of credit. Werner repaid $20.0 million of debt in January 2017.
- Other metrics: Average revenues per truck per week, net of fuel surcharge, declined 3.8%; average miles per truck fell 3.2%. The quarterly dividend was $0.06 per share, or $0.24 for the year.
- Fourth quarter: Revenue was $518.8 million, operating income $35.0 million, net income $21.8 million and diluted EPS $0.30. Fourth-quarter 2015 comparables were $528.8 million, $57.3 million, $36.6 million and $0.51, respectively.
Changes, outlook and notable items
- Management described 2016 as a challenging freight-demand and pricing year. Softer demand and excess industry truck capacity pressured contractual rates, particularly in the first half; conditions improved sequentially in the second half. Management said early-2017 One-Way Truckload demand was softer than the comparable 2016 period.
- Werner shifted 250 trucks from One-Way Truckload into Dedicated during 2016. Dedicated represented 53% of Truckload fleet at year-end, compared with 49% a year earlier.
- Management cited possible 2017 pricing improvement, supported by a more positive economic outlook, industry capacity rationalization and the December 2017 ELD mandate, but cautioned these developments are not assured. Estimated 2017 net capital expenditures are $225 million to $275 million.
- In fourth quarter, weaker used-truck values led Werner to shorten the estimated lives of certain trucks. This increased 2016 depreciation by $4.1 million and reduced net income by $2.6 million, or about $0.04 per diluted share; the higher depreciation was expected to continue into first-quarter 2017.
- Used-truck market weakness, higher insurance premiums and unfavorable development on prior-period large claims pressured results. Fuel expense fell with lower average diesel prices, but fuel surcharges recover only a majority of fuel cost changes and Werner had no fuel-price hedges.
- A large Werner Logistics Freight Management customer was acquired in 2015 and was expected to move to the acquirer’s platform in first-quarter 2017, slowing near-term segment revenue growth.
- Risks include driver and independent-contractor recruitment and retention, freight-rate and volume volatility, customer concentration (the top 10 customers generated 43% of revenue), third-party capacity costs, fuel prices, regulation, insurance claims, used-equipment values and international trade. The company reported routine litigation and a driver wage class action; it recorded a $1.2 million liability for one short-break claim, while it did not accrue for the sleeper-berth matter because management did not consider a loss probable.
- Management reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether freight demand and contractual pricing improved after year-end, and the extent to which the ELD mandate affected industry capacity and Werner’s productivity.
- Whether 2017 capital spending, cash generation and debt repayment remained within management’s plans.
- How used-truck resale values, depreciation and insurance-claim costs affected subsequent results.
- The realized revenue impact of the Freight Management customer transition and any further customer or capacity-provider concentration changes.
- Developments in the driver wage litigation, driver availability and associated recruiting and compensation costs.