Werner Enterprises, Inc. — Q2 2010 Form 10-Q
Reporting period: Three and six months ended June 30, 2010; comparative periods are 2009. The interim financial statements are unaudited. Werner provides truckload transportation and value-added logistics services.
Financial results
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Revenue | $463.5 million | $403.1 million | $888.5 million | $797.6 million |
| Operating income | $35.5 million | $22.0 million | $53.8 million | $33.3 million |
| Net income | $20.9 million | $12.7 million | $31.8 million | $19.6 million |
| Diluted EPS | $0.29 | $0.18 | $0.44 | $0.27 |
| Operating ratio | 92.3% | 94.5% | 93.9% | 95.8% |
| Operating cash flow | — | $111.4 million | $100.4 million |
Q2 revenue rose 15.0% and net income increased about 65%; first-half revenue grew 11.4% and net income about 62%. The lower operating ratio indicates improved operating profitability. First-half cash from operations increased 11.0% year over year.
Segments and operating trends
- Truckload: Q2 revenue was $394.6 million, up from $349.6 million; operating income was $32.1 million versus $18.8 million. Segment operating ratio improved to 91.9% from 94.6%. Excluding fuel surcharges from both revenue and expense, the segment operating ratio improved to 90.2% from 93.9%.
- Value Added Services (VAS): Q2 revenue grew 28.9% to $65.1 million, but operating income declined to $2.3 million from $2.8 million. Gross margin percentage fell to 13.9% from 17.1%, mainly as purchased carrier capacity became more expensive.
- Truckload revenue excluding fuel surcharge rose 5.3% in Q2, supported by 3.5% higher monthly miles per tractor, a 2.2% increase in revenue per total mile, and fewer empty miles. Fuel surcharge revenue increased 72.0% with higher fuel prices.
Financial position and cash flow
- At June 30, cash and cash equivalents were $79.2 million, compared with $18.4 million at December 31, 2009. Stockholders’ equity was $736.9 million.
- Werner had no bank borrowings outstanding. Credit facilities totaled $225.0 million, reduced by $43.2 million of letters of credit; reported unused credit was $181.8 million. Facilities mature in May 2011 and May 2012, and include financial covenants with which the company was compliant.
- First-half investing cash outflow was $50.1 million, including $82.4 million of equipment additions and $30.1 million of equipment retirements. Financing cash outflow was $0.4 million; dividends paid were $7.2 million.
- Current liabilities were $164.2 million and current assets were $348.1 million at June 30, 2010.
Outlook, risks, and unusual items
- Management expected 2010 net capital expenditures of $90 million to $120 million and intended to fund them with cash, operating cash flow, and credit facilities as needed. Equipment purchase commitments were approximately $58.2 million at quarter-end.
- Management intended to keep the fleet near 7,300 trucks. It reported improving freight conditions and expected further contractual rate increases in the second half of 2010. July freight volumes showed a normal seasonal slowdown but remained above July 2009, 2008, and 2007 levels. No full-year earnings guidance was provided.
- Risks include fuel-price movements and imperfect or delayed surcharge recovery; rising costs or shortages of drivers and independent contractors; aging equipment and higher maintenance costs; elevated third-party carrier costs in VAS; insurance and claims experience; and new safety, emissions, and health-care requirements.
- Management changed tractor depreciation estimates in Q2 to reflect a longer replacement cycle: useful life increased from 60 to 80 months and estimated salvage value decreased from 25% of cost to zero. Management said the change did not affect depreciation expense recorded in the period.
- The company reported $7.0 million of gross unrecognized tax benefits and an IRS audit beginning in May 2010 covering tax years 2007 and 2008. Management did not expect pending ordinary-course claims and litigation to materially affect the financial statements.
- There were no material subsequent events requiring disclosure. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether freight demand, pricing, and contractual rate increases sustain the improvement in Truckload revenue and operating ratio.
- Whether fuel surcharges continue to recover most fuel-cost increases, particularly during rapid price changes.
- Whether VAS can protect margins as purchased transportation costs rise, and whether international project mix remains favorable.
- How extending tractor replacement cycles affects maintenance expense, equipment availability, and future capital needs.
- Progress on the $90 million–$120 million 2010 net capital expenditure plan, equipment commitments, and credit-facility maturities.
- Effects of driver availability, regulatory changes, health-care costs, insurance claims, and the open IRS examination.