Werner Enterprises(WERN) - 2023 Q3 - Quarterly Report

PART I – FINANCIAL INFORMATION Item 1. Financial Statements Werner's Q3 and 9M 2023 financial statements show significant net income decline, increased assets, and decreased cash Consolidated Statements of Income Consolidated statements of income for Q3 and 9M 2023 show significant declines in operating and net income Consolidated Statements of Income (Q3 & 9M 2023 vs 2022) | Metric (In thousands, except per share) | Q3 2023 | Q3 2022 | YoY Change | 9M 2023 | 9M 2022 | YoY Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Operating Revenues | $817,744 | $827,606 | -1.2% | $2,461,554 | $2,428,487 | +1.4% | | Operating Income | $37,900 | $76,261 | -50.3% | $138,484 | $234,695 | -41.0% | | Net Income Attributable to Werner | $23,704 | $55,051 | -56.9% | $88,809 | $181,090 | -51.0% | | Diluted EPS | $0.37 | $0.86 | -57.0% | $1.39 | $2.79 | -50.2% | - Operating expenses increased to $779.8 million in Q3 2023 from $751.3 million in Q3 2022, driven primarily by a 19.8% rise in Rent and purchased transportation costs, leading to a significant drop in operating income[12] Consolidated Condensed Balance Sheets Condensed balance sheets show increased total assets and liabilities, with a significant decrease in cash and cash equivalents Condensed Balance Sheet Comparison | Metric (In thousands) | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Current Assets | $644,808 | $762,615 | | Property and Equipment, net | $1,986,890 | $1,825,276 | | Total Assets | $3,194,462 | $3,097,255 | | Total Current Liabilities | $329,664 | $309,520 | | Long-term Debt | $686,250 | $687,500 | | Total Liabilities | $1,643,299 | $1,614,921 | | Total Stockholders' Equity | $1,512,215 | $1,443,635 | - Cash and cash equivalents decreased significantly to $42.8 million as of September 30, 2023, from $107.2 million at the end of 2022, while property and equipment, net, increased due to continued fleet investment[18] Consolidated Statements of Cash Flows Cash flow statements show increased operating cash but higher investing usage, leading to a net decrease in cash and equivalents Cash Flow Summary (Nine Months Ended Sep 30) | Cash Flow Activity (In thousands) | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $356,019 | $332,716 | | Net cash used in investing activities | ($402,050) | ($268,747) | | Net cash provided by (used in) financing activities | ($19,978) | $7,450 | | Net (decrease) increase in cash | ($64,486) | $71,487 | - Investing activities were significantly higher in the first nine months of 2023, primarily due to a $150.2 million increase in additions to property and equipment compared to the prior year period[20] Notes to Consolidated Financial Statements (Unaudited) Notes detail accounting policies, acquisition allocations, segment performance, debt, and a significant $92.0 million legal contingency - The company finalized the purchase price allocation for the ReedTMS acquisition at $108.6 million, resulting in $49.2 million of goodwill[30][33] - The company is appealing an adverse jury verdict from 2018 with a final judgment of $92.0 million, with maximum liability stated at $10.0 million plus interest due to insurance coverage, and a recorded liability of $38.3 million as of September 30, 2023[77][78][79] Segment Operating Income (Q3 & 9M 2023 vs 2022) | Segment (In thousands) | Q3 2023 Operating Income | Q3 2022 Operating Income | 9M 2023 Operating Income | 9M 2022 Operating Income | | :--- | :--- | :--- | :--- | :--- | | Truckload Transportation Services | $38,846 | $74,117 | $134,991 | $214,214 | | Werner Logistics | $2,012 | $5,145 | $11,304 | $26,316 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes Q3 2023 operating income drop to challenging freight, lower equipment gains, and inflation Results of Operations Operating results show challenging freight impacting TTS, Logistics revenue growth with declining income, and reduced equipment sale gains - The freight market remained challenging in Q3 2023, negatively impacting One-Way Truckload due to less available freight, high spot rate exposure, and pricing pressure, while Dedicated freight demand remained steady and Logistics volumes performed well[104] TTS Segment Key Metrics (Q3 2023 vs Q3 2022) | Metric | Q3 2023 | Q3 2022 | % Change | | :--- | :--- | :--- | :--- | | Operating Revenues (in thousands) | $572,195 | $621,866 | -8.0% | | Operating Income (in thousands) | $38,846 | $74,117 | -47.6% | | Operating Ratio | 93.2% | 88.1% | +5.1 pts | | Average Tractors in Service | 8,226 | 8,513 | -3.4% | Werner Logistics Segment Key Metrics (Q3 2023 vs Q3 2022) | Metric | Q3 2023 | Q3 2022 | % Change | | :--- | :--- | :--- | :--- | | Operating Revenues (in thousands) | $230,252 | $187,138 | +23.0% | | Operating Income (in thousands) | $2,012 | $5,145 | -60.9% | | Operating Margin | 0.9% | 2.7% | -1.8 pts | - Gains on sales of property and equipment decreased significantly to $9.1 million in Q3 2023 from $21.5 million in Q3 2022, contributing to the decline in profitability, with full-year 2023 gains expected to be between $42 million and $47 million[128] Liquidity and Capital Resources Liquidity and capital resources detail cash, credit facility, operating cash flow, capital expenditures, and stock repurchases - As of September 30, 2023, the company had $42.8 million in cash and cash equivalents and $424.0 million available for borrowing under its $1.075 billion credit facility[144] - Net cash from operations for the first nine months of 2023 was $356.0 million, a 7.0% increase from the prior year, driven by working capital improvements[146] - Net capital expenditures for 2023 are estimated to be in the range of $425 million to $450 million, a significant increase from $317.6 million in 2022[147] - The company did not repurchase any common stock in the first nine months of 2023, compared to repurchasing $110.4 million in the same period of 2022, with 2,311,810 shares remaining available for repurchase under the current authorization[150][168] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from commodity prices, foreign currency, and interest rates, managed via surcharges and debt - Commodity Price Risk: The company recovers a majority, but not all, of fuel price increases through customer surcharges, and as of September 30, 2023, no derivative financial instruments were used to hedge against fuel price fluctuations[157] - Interest Rate Risk: The company had $320.0 million of unhedged variable interest rate debt outstanding at September 30, 2023, where a hypothetical one-percentage point increase in the SOFR interest rate would increase interest expense by approximately $4.1 million over a 12-month period[160] Item 4. Controls and Procedures Management concluded disclosure controls were effective, with no material changes to internal control over financial reporting - The CEO and CFO concluded that the company's disclosure controls and procedures are effective at a reasonable assurance level[161] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, internal controls[162] PART II – OTHER INFORMATION Item 1. Legal Proceedings The company refers to Note 10 for legal proceedings, including a $92.0 million adverse verdict under appeal - For details on legal proceedings, the report directs readers to Note 10 in the Notes to Consolidated Financial Statements[165] Item 1A. Risk Factors No material changes to risk factors were disclosed from the company's 2022 Form 10-K - There have been no material changes to the risk factors disclosed in the company's 2022 Form 10-K[167] Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities The company did not repurchase common stock in Q3 2023, with 2,311,810 shares remaining for repurchase - No shares of common stock were repurchased during the third quarter of 2023[169] - As of September 30, 2023, the company had 2,311,810 shares remaining available for repurchase under its current stock repurchase program[168] Item 5. Other Information No director or officer adopted or terminated trading arrangements during Q3 2023 - No director or officer adopted or terminated a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement during Q3 2023[170] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including corporate documents and CEO/CFO certifications