Werner Enterprises, Inc. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; filed February 25, 2013. Werner provides truckload transportation and non-asset-based logistics services through its Truckload and Value Added Services (VAS) segments.
Financial performance
| Metric | FY 2012 | FY 2011 | Change |
|---|---|---|---|
| Operating revenue | $2,036.4 million | $2,002.9 million | +1.7% |
| Operating income | $171.4 million | $173.7 million | -1.3% |
| Net income | $103.0 million | $102.8 million | +0.3% |
| Diluted EPS | $1.40 | $1.40 | Unchanged |
| Operating ratio | 91.6% | 91.3% | 0.3 percentage point increase |
| Net margin | 5.1% | 5.1% | Unchanged |
Fourth quarter: Revenue was $509.7 million versus $507.9 million in Q4 2011. Operating income was $43.1 million versus $49.4 million; net income was $26.0 million versus $29.4 million; diluted EPS was $0.35 versus $0.40.
- Truckload: Segment revenue rose 0.3% to $1,699.3 million, while operating income fell to $153.1 million from $157.6 million. Operating margin was 9.0% versus 9.3%; excluding fuel surcharges, the operating ratio was 88.4% versus 88.1%.
- VAS: Revenue increased 10.2% to $320.9 million, but operating income declined 6.1% to $16.0 million. Gross margin percentage fell to 15.5% from 16.1%, reflecting higher third-party capacity costs and a larger mix of lower-margin Intermodal and international business.
Cash flow and investment: Operating cash flow was $255.1 million, down 3.5% from $264.5 million. Net property additions were $224.9 million. The company paid $124.4 million in dividends, including a $1.50-per-share special dividend.
Balance sheet and liquidity: Cash and equivalents were $15.4 million; total assets were $1,334.9 million and stockholders’ equity was $714.9 million. Debt was $90.0 million, including $20.0 million classified as current and repaid in January 2013. The company had $250.0 million in credit facilities; after outstanding borrowings and $33.8 million in standby letters of credit, $126.2 million remained available. Debt carried variable interest, reported at 0.85% at year-end. Werner reported compliance with its financial covenants.
Material changes and management commentary
- Truckload revenue excluding fuel surcharge was nearly flat. Average revenue per tractor per week edged up, but lower tractor count and fewer miles per tractor offset the increase. Empty miles rose to 12.3% from 11.7%, and average loaded trip length declined to 481 miles from 493.
- Management described the 2012 freight market as softer than 2011, especially in the second half, when customers were cautious about shipments and inventories. Early-2013 freight trends followed typical seasonal patterns, and pre-bookings were similar to the prior-year period.
- Fuel expense declined 2.8% despite diesel prices averaging 3% higher; fleet miles per gallon improved 4%. Fuel surcharges recovered a majority, but not all, of higher fuel costs. The company had no fuel-price hedges.
- Management did not plan to grow the truck fleet beyond 7,300 until Truckload achieved an annualized operating margin of 11%. It expected 2013 net capital expenditures of $100–$150 million, lower than 2012, as fleet purchases were expected to focus on normal replacement.
- Management said driver and independent-contractor recruitment remained challenging and could become more difficult in 2013. Driver shortages, higher compensation, and regulatory changes could constrain capacity or margins.
- No specific revenue or earnings guidance is provided. Management intends to continue regular quarterly dividends but gave no assurance regarding future dividend amounts.
Risks, contingencies, and unusual items
- Tax disputes: The IRS proposed adjustments concerning the company’s discontinued equipment like-kind exchange program. If the IRS prevails, Werner estimated approximately $2.1 million of interest after considering tax deductibility; the company contested the matter and had not accrued a liability. Separately, an IRS employment-tax audit challenged driver per diem payments; the estimated additional expense for 2009–2010 was approximately $16.5 million after tax deductibility. Werner intended to protest and had not accrued a liability, citing its belief that the program complied with tax law.
- Regulation: New hours-of-service requirements scheduled to take effect in July 2013 could modestly reduce truck productivity if implemented. Potential electronic logging and entry-level driver training requirements could affect operations or driver supply.
- Operating exposures: Key risks include economic and freight-demand weakness, customer concentration, fuel costs and incomplete surcharge recovery, driver availability, third-party capacity pricing, insurance claims, used-equipment values, environmental requirements, and international operations.
- Routine transportation-related claims and litigation are ongoing; management did not expect other pending matters to materially affect the financial statements. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting.
Investor verification priorities
- Review the Q4 decline in operating income and EPS against the nearly flat quarterly revenue, and assess whether subsequent-period results confirm a recovery.
- Track Truckload margin, empty miles, driver availability, and progress toward management’s 11% margin threshold and 7,300-truck fleet objective.
- Monitor VAS gross margin and operating income as shipment growth continues, particularly third-party capacity costs and segment mix.
- Verify resolution and potential financial effects of both IRS disputes, neither of which was accrued at filing.
- Compare actual 2013 capital expenditures with the $100–$150 million estimate and assess debt repayment, credit availability, and dividend capacity.