Werner Enterprises, Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing also reports unaudited fourth-quarter results. Werner provides truckload transportation and logistics services through its Truckload and Value Added Services (VAS) segments.
Financial results and key metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Operating revenue | $2,093.5 million | $2,139.3 million | Down 2.1% |
| Operating income | $200.5 million | $160.1 million | Up 25.2% |
| Net income | $123.7 million | $98.7 million | Up 25.4% |
| Diluted earnings per share | $1.71 | $1.36 | Up 25.7% |
| Operating ratio | 90.4% | 92.5% | Improved 2.1 percentage points |
| Net margin | 5.9% | 4.6% | Improved |
Operating ratio is operating expenses as a percentage of revenue; lower is generally better. The revenue decline largely reflected sharply lower fuel surcharge revenue as diesel prices fell. Trucking revenue excluding fuel surcharges rose 5.9%, supported by more tractors in service and higher revenue per tractor per week.
- Truckload: Revenue was $1,644.9 million, down 3.4%; operating income increased to $189.9 million from $153.0 million. Its operating ratio, excluding fuel surcharge revenue, improved to 86.7% from 88.7%.
- VAS: Revenue was $393.2 million, up 0.6%; operating income rose to $16.9 million from $7.5 million. Gross margin improved to 15.5% from 13.3%, following pricing, contract and operational changes.
- Fourth quarter: Revenue was $528.8 million versus $553.2 million in Q4 2014; operating income was $57.3 million versus $52.6 million; net income was $36.6 million versus $32.7 million; diluted EPS was $0.51 versus $0.45.
- Cash flow and investment: Operating cash flow was $370.4 million, up from $206.6 million. Additions to property and equipment were $454.1 million and proceeds from equipment sales were $102.6 million; net property additions were $351.5 million.
- Liquidity and debt: Cash and cash equivalents were $31.8 million; total debt was $75.0 million; stockholders’ equity was $935.7 million. The company had $325.0 million of committed credit facilities, with $75.0 million borrowed and $31.0 million supporting letters of credit, leaving $219.0 million available. Debt interest was effectively fixed at 2.5% through September 2019 under a swap.
- Shareholder returns: Cash dividends paid were $15.1 million. Werner repurchased 225,000 shares for $6.4 million during 2015.
Material changes, outlook and management commentary
- Lower diesel prices reduced Truckload fuel surcharge revenue 39.2%, to $212.5 million. Fuel expense fell 40.9%; the company said fuel surcharges recover most, but not all, fuel-cost changes.
- Operating improvement also reflected higher base trucking revenue, improved VAS margins and $23.2 million in gains on sales of assets, primarily trucks and trailers. Used-truck pricing weakened late in 2015, and management expected that trend to continue in 2016.
- Management estimated 2016 net capital expenditures, primarily revenue equipment, at $400–$450 million, with the aim of reducing average company-truck age to approximately 1.5 years. It said spending could be adjusted if freight markets weaken. At year-end, equipment purchase commitments were approximately $112 million.
- Management described early-2016 freight demand as seasonally consistent with comparable periods in 2011–2013, but weaker than in 2014 and 2015. The filing does not provide formal earnings guidance.
- Driver recruitment and retention remained difficult. Targeted company-driver and independent-contractor per-mile increases announced in late 2015 represented slightly more than $10 million annualized, with most effective in January 2016. Higher driver costs may pressure results if freight rates do not keep pace.
Risks, contingencies and unusual items
- Freight demand, pricing and capacity are sensitive to economic conditions and industry competition. Seasonal winter volume declines and weather-related costs may also affect results.
- Driver and independent-contractor shortages could constrain fleet capacity or raise pay and settlement costs. Fuel-price volatility is only partly offset by customer surcharges; Werner had no fuel-price derivatives.
- Customer concentration is meaningful: the top 10 customers generated 45% of 2015 revenue, although no single customer exceeded 10%. VAS also depends on third-party transportation capacity and its cost.
- Werner self-insures significant portions of liability, cargo, workers’ compensation and health claims. The company faces ordinary-course litigation and employment-related class actions. In one driver-pay case, a court ruled for plaintiffs on short-break and sleeper-berth theories; Werner accrued $2.0 million for the short-break matter, did not accrue for the sleeper-berth matter because management did not consider a loss probable, and said the possible loss range was undeterminable. The company intends to defend and appeal.
- 2015 salaries, wages and benefits included $3.9 million related to an employment class action and an executive separation agreement. Gains on asset sales were $23.2 million, up from $19.3 million in 2014. Foreign-currency translation losses were $3.9 million.
- The company reported an unqualified audit opinion, and management and its auditor concluded internal control over financial reporting was effective as of December 31, 2015.
Important facts for investors to verify
- Whether the 2015 operating-ratio improvement and stronger Truckload and VAS margins persist as freight demand and capacity change.
- Whether base-rate increases offset driver-pay, equipment, insurance and regulatory costs, including the targeted 2016 pay increases.
- Whether the $400–$450 million 2016 net-capex plan is funded while preserving liquidity and whether equipment resale values hold up.
- Developments and potential exposure in the driver wage class action and other litigation, as well as changes in self-insurance reserves.
- Fuel-surcharge recovery, used-truck pricing and the availability and cost of drivers and VAS third-party capacity.