Werner Enterprises(WERN) - 2022 Q2 - Quarterly Report

PART I – FINANCIAL INFORMATION Cautionary Note Regarding Forward-Looking Statements This section highlights that the report contains forward-looking statements based on current management information, which are subject to various known and unknown risks, uncertainties, and assumptions - Forward-looking statements are based on currently available information but involve risks, uncertainties, and assumptions that could cause actual results to differ materially[10] - Readers should not unduly rely on these statements, which speak only to the date they were made, and the company has no obligation to update them unless required by applicable securities laws[10] Item 1. Financial Statements This chapter presents the unaudited consolidated financial statements for Werner Enterprises, Inc, including statements of income, comprehensive income, balance sheets, cash flows, stockholders' equity, and detailed notes Consolidated Statements of Income Consolidated Statements of Income (Three Months Ended June 30): | Metric | 2022 (in thousands) | 2021 (in thousands) | % Change | | :--- | :--- | :--- | :--- | | Operating revenues | $836,276 | $649,814 | 28.7% | | Total operating expenses | $761,353 | $572,951 | 32.9% | | Operating income | $74,923 | $76,863 | (2.5)% | | Net income attributable to Werner | $72,290 | $72,032 | 0.4% | | Basic EPS | $1.12 | $1.06 | 5.7% | | Diluted EPS | $1.12 | $1.06 | 5.7% | Consolidated Statements of Income (Six Months Ended June 30): | Metric | 2022 (in thousands) | 2021 (in thousands) | % Change | | :--- | :--- | :--- | :--- | | Operating revenues | $1,600,881 | $1,266,260 | 26.4% | | Total operating expenses | $1,442,447 | $1,126,926 | 28.0% | | Operating income | $158,434 | $139,334 | 13.7% | | Net income attributable to Werner | $126,039 | $118,524 | 6.3% | | Basic EPS | $1.94 | $1.74 | 11.5% | | Diluted EPS | $1.93 | $1.74 | 10.9% | Consolidated Statements of Comprehensive Income Consolidated Statements of Comprehensive Income (Three Months Ended June 30): | Metric | 2022 (in thousands) | 2021 (in thousands) | | :--- | :--- | :--- | | Net income | $73,609 | $72,032 | | Other comprehensive income (loss) | $1,236 | $2,225 | | Comprehensive income attributable to Werner | $73,526 | $74,257 | Consolidated Statements of Comprehensive Income (Six Months Ended June 30): | Metric | 2022 (in thousands) | 2021 (in thousands) | | :--- | :--- | :--- | | Net income | $128,644 | $118,524 | | Other comprehensive income (loss) | $6,020 | $1,960 | | Comprehensive income attributable to Werner | $132,059 | $120,484 | Consolidated Condensed Balance Sheets Consolidated Condensed Balance Sheets (as of June 30, 2022 and December 31, 2021): | Metric | June 30, 2022 (in thousands) | December 31, 2021 (in thousands) | | :--- | :--- | :--- | | Total current assets | $772,405 | $631,213 | | Property and equipment, net | $1,670,680 | $1,613,243 | | Total assets | $2,848,587 | $2,603,713 | | Total current liabilities | $470,980 | $268,683 | | Total liabilities | $1,466,163 | $1,240,216 | | Total stockholders' equity | $1,343,872 | $1,327,550 | Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows (Six Months Ended June 30): | Metric | 2022 (in thousands) | 2021 (in thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $267,527 | $189,464 | | Net cash used in investing activities | $(169,680) | $(104,605) | | Net cash provided by (used in) financing activities | $(97,941) | $77,847 | | Net increase in cash and cash equivalents | $228 | $162,794 | | Cash and cash equivalents, end of period | $54,424 | $192,128 | Consolidated Statements of Stockholders' Equity and Temporary Equity - Redeemable Noncontrolling Interest Stockholders' Equity Changes (Three Months Ended June 30, 2022): | Item | Amount (in thousands) | | :--- | :--- | | Balance, March 31, 2022 | $1,341,464 | | Net income attributable to Werner | $72,290 | | Other comprehensive income | $1,236 | | Purchases of common stock | $(65,933) | | Dividends on common stock | $(8,244) | | Balance, June 30, 2022 | $1,343,872 | Stockholders' Equity Changes (Six Months Ended June 30, 2022): | Item | Amount (in thousands) | | :--- | :--- | | Balance, December 31, 2021 | $1,327,550 | | Net income attributable to Werner | $126,039 | | Other comprehensive income | $6,020 | | Purchases of common stock | $(102,113) | | Dividends on common stock | $(16,051) | | Balance, June 30, 2022 | $1,343,872 | Notes to Consolidated Financial Statements (Unaudited) (1) Basis of Presentation and Recent Accounting Pronouncements - The unaudited interim consolidated financial statements are prepared in accordance with SEC instructions to Form 10-Q and U.S. GAAP, reflecting all normal recurring adjustments[28] - The adoption of ASU No 2020-04, Reference Rate Reform (Topic 848), in Q1 2022 did not have a material impact on the consolidated financial statements[31] (2) Business Acquisitions - Acquired an 80% ownership interest in ECM Associated, LLC on July 1, 2021, for $141.3 million, expanding regional truckload carrier services[32] - Acquired 100% of NEHDS Logistics, LLC on November 22, 2021, for $62.3 million, enhancing final mile residential delivery services[33] Amortization Expense on Intangible Assets: | Period | Amount (in millions) | | :--- | :--- | | Three months ended June 30, 2022 | $1.4 | | Six months ended June 30, 2022 | $2.7 | (3) Revenue - Revenues are recognized over time as control of promised services is transferred to customers, reflecting the consideration expected for those services[35] Revenues by Segment (Three Months Ended June 30): | Revenue Source | 2022 (in thousands) | 2021 (in thousands) | | :--- | :--- | :--- | | Truckload Transportation Services | $613,616 | $491,200 | | Werner Logistics | $203,861 | $141,673 | | Other revenues | $19,424 | $17,134 | | Total revenues | $836,276 | $649,814 | Revenues by Geographic Area (Six Months Ended June 30): | Geographic Area | 2022 (in thousands) | 2021 (in thousands) | | :--- | :--- | :--- | | United States | $1,481,753 | $1,157,385 | | Mexico | $94,752 | $78,081 | | Other | $24,376 | $30,794 | | Total revenues | $1,600,881 | $1,266,260 | (4) Leases - The company primarily enters into operating leases for real estate, with terms ranging from 1 to 18 years, and recognizes right-of-use assets and lease liabilities on the balance sheet[41][42] Operating Lease Information (as of June 30, 2022): | Metric | Value | | :--- | :--- | | Right-of-use assets | $34,143 thousand | | Total operating lease liabilities | $35,233 thousand | | Weighted-average remaining lease term | 7.40 years | | Weighted-average discount rate | 2.6% | Operating Lease Expense: | Period | 2022 (in millions) | 2021 (in millions) | | :--- | :--- | :--- | | Three months ended June 30 | $5.3 | $3.5 | | Six months ended June 30 | $10.4 | $7.1 | (5) Fair Value - The fair value hierarchy prioritizes observable inputs (Level 1 and 2) over unobservable inputs (Level 3) for measuring fair value[48][49][50][51] - Financial instruments not recorded at fair value, such as cash, accounts receivable, accounts payable, and long-term debt, are carried at amounts that approximate fair value (categorized as Level 2)[55][56] Fair Value of Equity Securities (Other non-current assets): | Date | Fair Value (in thousands) | Level in Hierarchy | | :--- | :--- | :--- | | June 30, 2022 | $2,818 | 1 | | December 31, 2021 | $17,166 | 1 | (6) Investments - The company invested $20.0 million in Mastery Logistics Systems, Inc (MLSI) preferred stock in June 2022, with the investment value increasing to $86.8 million as of June 30, 2022, from $38.2 million at December 31, 2021[57] - An unrealized gain of $28.6 million was recognized on the MLSI investment for the three and six months ended June 30, 2022, due to third-party investments[57] Unrealized Gains/Losses on Equity Investments with Readily Determinable Fair Values: | Period | 2022 (in millions) | 2021 (in millions) | | :--- | :--- | :--- | | Three months ended June 30 | $(4.5) (loss) | $20.2 (gain) | | Six months ended June 30 | $(14.3) (loss) | $20.2 (gain) | (7) Debt and Credit Facilities - Entered a new credit agreement with Wells Fargo for a $300.0 million unsecured revolving line of credit and a $100.0 million unsecured term loan, both expiring May 14, 2024[59] - Amended the BMO Harris credit agreement, increasing the revolving line of credit from $200.0 million to $300.0 million, expiring May 14, 2024[61][62] Outstanding Debt and Borrowing Capacity (as of June 30, 2022): | Metric | Amount (in millions) | | :--- | :--- | | Total outstanding debt | $445.0 | | Outstanding under revolving lines of credit | $250.0 | | Outstanding under Wells Term Loan | $100.0 | | Outstanding under BMO Term Loan | $95.0 | | Total available borrowing capacity (revolving) | $291.6 | (8) Commitments and Contingencies - Committed to property and equipment purchases of approximately $182.4 million as of June 30, 2022[65] - A $92.0 million adverse jury verdict from a 2014 accident is under appeal; the company recorded a $31.4 million liability and a $79.2 million receivable from insurers[67][68][69] - A $150.0 million settlement for a 2020 motor vehicle accident resulted in $9.5 million insurance and claims expense in Q2 2022, with a $140.0 million receivable from insurers[70] (9) Earnings Per Share - Basic earnings per share is computed by dividing net income attributable to Werner by the weighted average number of common shares outstanding[73] - Diluted earnings per share includes the effect of dilutive potential common shares (outstanding restricted stock awards) using the treasury stock method[73] Earnings Per Share (Three Months Ended June 30): | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Net income attributable to Werner (in thousands) | $72,290 | $72,032 | | Basic earnings per share | $1.12 | $1.06 | | Diluted earnings per share | $1.12 | $1.06 | (10) Segment Information - The company has two reportable segments: Truckload Transportation Services (TTS), comprising Dedicated and One-Way Truckload, and Werner Logistics, including Truckload Logistics, Intermodal, and Final Mile[76][77][78] Revenues by Segment (Three Months Ended June 30): | Segment | 2022 (in thousands) | 2021 (in thousands) | | :--- | :--- | :--- | | Truckload Transportation Services | $613,616 | $491,200 | | Werner Logistics | $203,861 | $141,673 | | Other | $18,946 | $16,725 | | Corporate | $478 | $409 | | Total | $836,276 | $649,814 | Operating Income (Loss) by Segment (Six Months Ended June 30): | Segment | 2022 (in thousands) | 2021 (in thousands) | | :--- | :--- | :--- | | Truckload Transportation Services | $140,097 | $130,736 | | Werner Logistics | $21,171 | $8,501 | | Other | $906 | $2,529 | | Corporate | $(3,740) | $(2,432) | | Total | $158,434 | $139,334 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This chapter provides management's perspective on the company's financial condition, results of operations, and liquidity, discussing performance across its segments and analyzing key financial trends Overview - The company operates in two reportable segments: Truckload Transportation Services (TTS), focusing on consumer nondurable products, and Werner Logistics, providing broader transportation management and alternative modes[85] - TTS segment revenues are primarily per-mile, with fuel surcharges mitigating fuel price increases, while Werner Logistics is less asset-intensive and relies on qualified third-party capacity providers[86][89] - Financial results are significantly affected by company driver and independent contractor availability, markets for new and used revenue equipment, and self-insurance costs for claims[87][88] COVID-19 - The transportation industry was designated essential during the COVID-19 pandemic, and the company's focus on essential products helped manage through the difficult economic environment[90][91] - Demand for the company's services is expected to continue to moderate during the remainder of 2022[91] Results of Operations Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021 - Trucking revenues, net of fuel surcharge, increased 13.9% due to an 8.1% increase in average tractors and a 5.4% increase in average revenues per tractor per week, partially offset by lower length of haul[101] - Average diesel fuel prices were $2.21 per gallon higher in Q2 2022 than in Q2 2021, leading to a 106.6% increase in trucking fuel surcharge revenues[103][110] Operating Revenues (Three Months Ended June 30): | Segment | 2022 (in thousands) | 2021 (in thousands) | % Change | | :--- | :--- | :--- | :--- | | Total Operating Revenues | $836,276 | $649,814 | 28.7% | | TTS segment revenues | $613,616 | $491,200 | 24.9% | | Werner Logistics revenues | $203,861 | $141,673 | 43.9% | Key Operating Expenses (Three Months Ended June 30): | Expense Category | 2022 (in thousands) | 2021 (in thousands) | % Change | | :--- | :--- | :--- | :--- | | Salaries, wages and benefits | $253,639 | $210,095 | 20.7% | | Fuel | $125,446 | $58,503 | 114.4% | | Insurance and claims | $41,071 | $20,739 | 98.0% | | Rent and purchased transportation | $197,116 | $150,920 | 30.6% | | Operating income | $74,923 | $76,863 | (2.5)% | Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021 - Average diesel fuel prices were $1.74 per gallon higher in the first six months of 2022 compared to the same period in 2021[130] - Gains on sales of assets (primarily used tractors and trailers) were $41.1 million in the first six months of 2022, up from $25.0 million in 2021, driven by significantly improved pricing in the used equipment market[135] Operating Revenues (Six Months Ended June 30): | Segment | 2022 (in thousands) | 2021 (in thousands) | % Change | | :--- | :--- | :--- | :--- | | Total Operating Revenues | $1,600,881 | $1,266,260 | 26.4% | | TTS segment revenues | $1,172,033 | $954,149 | 22.8% | | Werner Logistics revenues | $392,869 | $279,526 | 40.5% | Key Operating Expenses (Six Months Ended June 30): | Expense Category | 2022 (in thousands) | 2021 (in thousands) | % Change | | :--- | :--- | :--- | :--- | | Salaries, wages and benefits | $495,635 | $414,948 | 19.4% | | Fuel | $213,867 | $109,341 | 95.6% | | Insurance and claims | $68,563 | $42,795 | 60.2% | | Rent and purchased transportation | $382,353 | $297,413 | 28.6% | | Operating income | $158,434 | $139,334 | 13.7% | Liquidity and Capital Resources - As of June 30, 2022, the company maintained a strong financial position with $54.4 million in cash and cash equivalents and over $1.3 billion in stockholders' equity[139] - Cash flow from operations increased by 41.2% to $267.5 million for the six months ended June 30, 2022, compared to the prior year[141] - Net capital expenditures for 2022 are estimated to be in the range of $275 million to $325 million, primarily for revenue equipment, to be funded by operations and existing credit facilities[142] - The company repurchased 2,495,100 shares of common stock for $102.1 million during the six months ended June 30, 2022, with 2,527,014 shares remaining available under the current authorization[144] Regulations - There have been no material changes in the status of proposed regulations previously disclosed in the 2021 Form 10-K[145] Critical Accounting Estimates - No material changes have occurred to the critical accounting estimates, such as accrued liabilities for insurance and claims, from those discussed in the 2021 Form 10-K[147] Item 3. Quantitative and Qualitative Disclosures About Market Risk This chapter discusses the company's exposure to market risks, including commodity price risk (diesel fuel), foreign currency exchange rate risk, and interest rate risk Commodity Price Risk - The company is exposed to diesel fuel price fluctuations, with a majority of increases recovered through customer fuel surcharge programs, though not all costs are offset[149] - As of June 30, 2022, the company had no derivative financial instruments to reduce its exposure to fuel price fluctuations[149] Foreign Currency Exchange Rate Risk - Business in foreign countries, primarily Mexico, is conducted with most foreign revenues denominated in U.S. Dollars to reduce direct foreign currency risk[150] - Foreign currency translation losses were $47 thousand for Q2 2022, compared to gains of $1.9 million for Q2 2021, primarily related to changes in the value of revenue equipment in Mexico[150] Interest Rate Risk - Interest rate exposure is managed through a mix of variable interest rate debt and interest rate swap agreements[151] - $150 million of variable interest rate debt was effectively fixed at 2.31% through May 2024 with two interest rate swap agreements[151] - A hypothetical one-percentage point increase in the SOFR interest rate would increase annual interest expense by approximately $2.0 million on the remaining $200 million variable rate debt[151] Item 4. Controls and Procedures Management evaluated the effectiveness of the company's disclosure controls and procedures, concluding they are effective at a reasonable assurance level - Management, including the CEO and CFO, concluded that disclosure controls and procedures are effective at a reasonable assurance level[152] - No material changes in internal control over financial reporting occurred during the most recent fiscal quarter[153] - Internal control systems provide reasonable, not absolute, assurance and are subject to inherent limitations, meaning they may not prevent all errors or intentional fraud[154] PART II – OTHER INFORMATION Item 1. Legal Proceedings This section refers readers to Note 8 in the Notes to Consolidated Financial Statements for detailed information regarding the company's legal proceedings - Information regarding legal proceedings is provided in Note 8 of the Notes to Consolidated Financial Statements (Unaudited)[157] Item 1A. Risk Factors This chapter states that there have been no material changes from the risk factors previously disclosed in the company's 2021 Form 10-K - There have been no material changes from the risk factors disclosed in the 2021 Form 10-K[159] - Readers should consider the risk factors from the 2021 Form 10-K and additional unknown risks that may adversely affect the business[158] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This chapter details the company's stock repurchase program, authorizing the repurchase of up to 6,000,000 shares of common stock - The Board of Directors approved a new stock repurchase program on November 9, 2021, authorizing the repurchase of up to 6,000,000 shares of common stock[160] Stock Repurchases (Q2 2022): | Period | Total Number of Shares Purchased | Average Price Paid per Share | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs | | :--- | :--- | :--- | :--- | | April 1-30, 2022 | — | $— | 4,177,014 | | May 1-31, 2022 | 1,001,909 | $40.49 | 3,175,105 | | June 1-30, 2022 | 648,091 | $39.14 | 2,527,014 | | Total | 1,650,000 | $39.96 | | Item 6. Exhibits This chapter lists all exhibits filed with the Form 10-Q, including organizational documents, certifications from the CEO and CFO, and iXBRL formatted financial information - Exhibits include organizational documents (Restated Articles of Incorporation, Revised and Restated By-Laws) and certifications from the CEO and CFO (Sections 302 and 906 of Sarbanes-Oxley Act)[165] - Unaudited financial information for the quarter ended June 30, 2022, is provided in iXBRL format as Exhibit 101[165] SIGNATURES This section confirms the official signing of the Quarterly Report on Form 10-Q by authorized officers of Werner Enterprises, Inc on August 8, 2022 - The report was signed on August 8, 2022, by John J Steele (Executive Vice President, Treasurer and Chief Financial Officer) and James L Johnson (Executive Vice President, Chief Accounting Officer and Corporate Secretary)[169]