Werner Enterprises(WERN) - 2021 Q1 - Quarterly Report

PART I – FINANCIAL INFORMATION Item 1. Financial Statements Unaudited interim consolidated financial statements, including income, balance sheets, cash flows, equity, and detailed notes, are presented - The interim consolidated financial statements are unaudited and prepared in accordance with SEC instructions to Form 10-Q, reflecting management's opinion that all necessary adjustments for a fair statement are included[11] - Operating results for the three-month period ended March 31, 2021, are not necessarily indicative of the full year's expected results[12] Consolidated Statements of Income Net income and operating income significantly increased in Q1 2021, driven by higher operating revenues and reduced expenses Consolidated Statements of Income (Three Months Ended March 31) | Metric (in thousands, except per share) | 2021 | 2020 | | :-------------------------------------- | :--- | :--- | | Operating revenues | $616,446 | $592,703 | | Total operating expenses | $553,975 | $561,637 | | Operating income | $62,471 | $31,066 | | Income before income taxes | $61,888 | $30,056 | | Net income | $46,492 | $23,058 | | Basic Earnings per share | $0.68 | $0.33 | | Diluted Earnings per share | $0.68 | $0.33 | - Net income increased by 101.6% from $23,058 thousand in Q1 2020 to $46,492 thousand in Q1 2021[16] - Operating income more than doubled, rising from $31,066 thousand in Q1 2020 to $62,471 thousand in Q1 2021[16] Consolidated Statements of Comprehensive Income Comprehensive income substantially increased in Q1 2021, driven by higher net income and reduced other comprehensive losses Consolidated Statements of Comprehensive Income (Three Months Ended March 31) | Metric (in thousands) | 2021 | 2020 | | :-------------------- | :--- | :--- | | Net income | $46,492 | $23,058 | | Other comprehensive income (loss) | $(265) | $(15,490) | | Comprehensive income | $46,227 | $7,568 | - Comprehensive income increased significantly from $7,568 thousand in Q1 2020 to $46,227 thousand in Q1 2021[19] - Foreign currency translation adjustments improved from a loss of $9,893 thousand in Q1 2020 to a loss of $1,568 thousand in Q1 2021[19] - Changes in fair value of interest rate swaps shifted from a loss of $5,597 thousand in Q1 2020 to a gain of $1,303 thousand in Q1 2021[19] Consolidated Condensed Balance Sheets Total assets and stockholders' equity increased as of March 31, 2021, driven by a substantial increase in cash and cash equivalents Consolidated Condensed Balance Sheets (as of) | Metric (in thousands) | March 31, 2021 | December 31, 2020 | | :-------------------- | :------------- | :---------------- | | Total assets | $2,229,526 | $2,156,676 | | Total liabilities | $1,001,800 | $961,636 | | Total stockholders' equity | $1,227,730 | $1,195,040 | | Cash and cash equivalents | $83,130 | $29,334 | - Cash and cash equivalents significantly increased by $53,796 thousand from $29,334 thousand at December 31, 2020, to $83,130 thousand at March 31, 2021[22] - Current portion of long-term debt decreased from $25,000 thousand at December 31, 2020, to zero at March 31, 2021[22] Consolidated Statements of Cash Flows Operating activities generated healthy cash, funding increased investing and reduced financing, resulting in a net cash increase for Q1 2021 Consolidated Statements of Cash Flows (Three Months Ended March 31) | Cash Flow Activity (in thousands) | 2021 | 2020 | | :-------------------------------- | :--- | :--- | | Net cash provided by operating activities | $135,867 | $133,376 | | Net cash used in investing activities | $(41,291) | $(16,524) | | Net cash used in financing activities | $(40,361) | $(68,960) | | Net increase (decrease) in cash, cash equivalents and restricted cash | $53,796 | $45,819 | | Cash, cash equivalents and restricted cash, end of period | $83,130 | $79,261 | - Net cash provided by operating activities increased by 1.9% to $135,867 thousand in Q1 2021[24] - Net cash used in investing activities more than doubled to $41,291 thousand in Q1 2021, primarily due to higher additions to property and equipment and an investment in equity securities[24] - Net cash used in financing activities decreased by 41.5% to $40,361 thousand in Q1 2021, mainly due to lower debt repayments[24] Consolidated Statements of Stockholders' Equity Total stockholders' equity increased in Q1 2021, driven by net income and equity compensation, offset by dividends and stock repurchases Consolidated Statements of Stockholders' Equity (Three Months Ended March 31, 2021) | Metric (in thousands) | Balance, Dec 31, 2020 | Comprehensive Income | Purchases of Common Stock | Dividends on Common Stock | Equity Compensation Activity | Non-cash Equity Compensation Expense | Balance, Mar 31, 2021 | | :-------------------- | :-------------------- | :------------------- | :------------------------ | :------------------------ | :--------------------------- | :----------------------------------- | :-------------------- | | Common Stock | $805 | — | — | — | — | — | $805 | | Paid-In Capital | $116,039 | — | — | — | $(3,953) | $2,502 | $114,588 | | Retained Earnings | $1,438,916 | $46,492 | — | $(6,792) | — | — | $1,478,616 | | Accumulated Other Comprehensive Income (Loss) | $(22,833) | $(265) | — | — | — | — | $(23,098) | | Treasury Stock | $(337,887) | — | $(5,507) | — | $213 | — | $(343,181) | | Total Stockholders' Equity | $1,195,040 | $46,227 | $(5,507) | $(6,792) | $(3,740) | $2,502 | $1,227,730 | - Total stockholders' equity increased by $32,690 thousand from $1,195,040 thousand at December 31, 2020, to $1,227,730 thousand at March 31, 2021[26] - The company repurchased 130,446 shares of common stock for $5,507 thousand during Q1 2021[26] - Dividends on common stock amounted to $6,792 thousand ($0.10 per share) in Q1 2021[26] Notes to Consolidated Financial Statements (Unaudited) Notes provide critical context and detailed disclosures for interim financial statements, covering policies, revenue, leases, investments, credit, contingencies, EPS, equity, and segment data (1) Accounting Policies ASU 2019-12 was adopted with no material effect, and ASU 2020-04 is being evaluated for LIBOR-related credit facilities and hedging - ASU 2019-12, 'Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,' was adopted on January 1, 2021, with no effect on financial statements[29] - The company is evaluating ASU 2020-04, 'Reference Rate Reform (Topic 848),' for its applicability to existing credit facilities and hedging relationships that reference LIBOR[30] (2) Revenue Revenues are recognized over time, disaggregated by source (TTS, Werner Logistics) and geography, with contract assets and liabilities detailed Revenues Disaggregated by Source (Three Months Ended March 31, in thousands) | Revenue Source | 2021 | 2020 | | :--------------- | :--- | :--- | | Truckload Transportation Services | $462,949 | $464,863 | | Werner Logistics | $137,853 | $112,164 | | Inter-segment eliminations | $(134) | $(11) | | Transportation services | $600,668 | $577,016 | | Other revenues | $15,778 | $15,687 | | Total revenues | $616,446 | $592,703 | Revenues Disaggregated by Geographic Area (Three Months Ended March 31, in thousands) | Geographic Area | 2021 | 2020 | | :---------------- | :--- | :--- | | United States | $555,239 | $530,071 | | Mexico | $38,756 | $43,421 | | Other | $22,451 | $19,211 | | Total revenues | $616,446 | $592,703 | - Contract assets increased from $6.9 million at December 31, 2020, to $8.9 million at March 31, 2021[34] - Contract liabilities increased from $1.5 million at December 31, 2020, to $1.7 million at March 31, 2021[35] (3) Leases Operating leases for real estate are primary, with lease liabilities and right-of-use assets recognized; the company also leases tractors and trailers Operating Lease Liabilities (as of March 31, 2021, in thousands) | Metric | Amount | | :-------------------------------------- | :----- | | Total undiscounted operating lease payments | $10,599 | | Present value of operating lease liabilities | $9,966 | | Right-of-use assets | $9,506 | | Current lease liabilities | $3,408 | | Long-term lease liabilities | $6,558 | | Weighted-average remaining lease term | 3.70 years | | Weighted-average discount rate | 3.30 % | - Operating lease expense increased from $2.0 million in Q1 2020 to $3.6 million in Q1 2021[44] - Revenues from lessor operating leases for tractors and trailers decreased from $3.3 million in Q1 2020 to $3.1 million in Q1 2021[45] (4) Investments Strategic equity investments in MLSI and TuSimple were made, with TuSimple's converting to Class A shares post-IPO - Invested $5.0 million in Mastery Logistics Systems, Inc. (MLSI) in 2020 for approximately 5% ownership, accounted for under ASC 321[47] - Made a $5.0 million equity investment in TuSimple in January 2021, representing less than 1% ownership, also accounted for under ASC 321[48] - TuSimple completed its IPO in April 2021, converting the company's equity investment to Class A common shares, with future value changes to be recorded in other expense (income)[49] (5) Credit Facilities Unsecured credit facilities total $500.0 million, with $175.0 million outstanding, largely fixed by interest rate swaps, and the company is covenant compliant - Total unsecured committed credit facilities amount to $500.0 million, expiring May 14, 2024[50] - Outstanding debt decreased from $200.0 million at December 31, 2020, to $175.0 million at March 31, 2021[51] - $150.0 million of the outstanding debt is effectively fixed at 2.32%-2.36% through interest rate swap agreements[51] - The company was in compliance with all financial covenants as of March 31, 2021[51] Aggregate Future Maturities of Long-Term Debt (as of March 31, 2021, in thousands) | Year | Amount | | :--- | :----- | | 2021 | $— | | 2022 | $— | | 2023 | $— | | 2024 | $175,000 | | 2025 | $— | | Total | $175,000 | (6) Commitments and Contingencies Commitments include $164.4 million in property purchases; litigation includes a $92.0 million jury verdict under appeal, with a $24.9 million liability and $79.2 million insurer receivable - Committed to approximately $164.4 million in property and equipment purchases[54] - Accrued a liability of $24.9 million as of March 31, 2021, for a $92.0 million adverse jury verdict, with a maximum liability of $10.0 million (plus interest) under insurance policies and a corresponding $79.2 million receivable from insurers[56][57] - The company is appealing the $92.0 million jury verdict[58] - A class action lawsuit for unpaid wages (FLSA) was dismissed in the trial court in June 2020, with plaintiffs' counsel filing an appeal in July 2020[59] (7) Earnings Per Share Basic and diluted EPS significantly increased in Q1 2021, reflecting higher net income and slightly fewer weighted-average common shares Earnings Per Share (Three Months Ended March 31, in thousands, except per share amounts) | Metric | 2021 | 2020 | | :---------------------------------- | :--- | :--- | | Net income | $46,492 | $23,058 | | Weighted average common shares outstanding | 67,932 | 69,253 | | Dilutive effect of stock-based awards | 291 | 356 | | Shares used in computing diluted earnings per share | 68,223 | 69,609 | | Basic earnings per share | $0.68 | $0.33 | | Diluted earnings per share | $0.68 | $0.33 | - Basic and diluted EPS both increased by $0.35, from $0.33 in Q1 2020 to $0.68 in Q1 2021[63] (8) Equity Compensation The Equity Plan grants restricted and performance awards, with $16.1 million in unrecognized compensation cost over 2.0 years, vesting by time or performance - 6,537,930 shares were available for granting additional awards under the Equity Plan as of March 31, 2021[64] - Total unrecognized compensation cost related to non-vested equity compensation awards was approximately $16.1 million, with a weighted average recognition period of 2.0 years[65] Equity Compensation Expense (Three Months Ended March 31, in thousands) | Metric | 2021 | 2020 | | :-------------------------- | :--- | :--- | | Restricted awards pre-tax compensation expense | $1,549 | $1,398 | | Performance awards pre-tax compensation expense | $946 | $1,010 | Restricted Award Activity (Three Months Ended March 31, 2021, in thousands of awards) | Activity | Number of Restricted Awards | | :------------------------ | :-------------------------- | | Nonvested at beginning of period | 367 | | Granted | 114 | | Vested | (107) | | Forfeited | (2) | | Nonvested at end of period | 372 | Performance Award Activity (Three Months Ended March 31, 2021, in thousands of awards) | Activity | Number of Performance Awards | | :------------------------ | :--------------------------- | | Nonvested at beginning of period | 262 | | Granted | 74 | | Vested | (100) | | Forfeited | — | | Nonvested at end of period | 236 | (9) Segment Information The company operates in two segments: Truckload Transportation Services (TTS) and Werner Logistics; WGL freight forwarding services were sold in Q1 2021 Segment Revenues (Three Months Ended March 31, in thousands) | Segment | 2021 | 2020 | | :-------------------------- | :--- | :--- | | Truckload Transportation Services | $462,949 | $464,863 | | Werner Logistics | $137,853 | $112,164 | | Other | $15,399 | $15,068 | | Corporate | $379 | $619 | | Inter-segment eliminations | $(134) | $(11) | | Total | $616,446 | $592,703 | Segment Operating Income (Three Months Ended March 31, in thousands) | Segment | 2021 | 2020 | | :-------------------------- | :--- | :--- | | Truckload Transportation Services | $57,628 | $29,089 | | Werner Logistics | $4,574 | $1,085 | | Other | $866 | $2,900 | | Corporate | $(597) | $(2,008) | | Total | $62,471 | $31,066 | - Werner Logistics operating income increased significantly from $1,085 thousand in Q1 2020 to $4,574 thousand in Q1 2021[79] - The sale of Werner Global Logistics (WGL) freight forwarding services was completed in Q1 2021, realizing a $1.0 million gain[77] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 2021 financial condition, operations, and liquidity, including business overview, COVID-19 impact, operating results, capital, obligations, regulations, and critical estimates Overview Operating in truckload and logistics, the company focuses on consumer nondurables, managing resources and demand; profitability is measured by TTS operating ratio and Werner Logistics gross margin - The company's two reportable segments are Truckload Transportation Services (TTS) and Werner Logistics[81] - TTS segment revenues are typically generated on a per-mile basis, with fuel surcharge revenues used to mitigate fuel price increases[82] - The operating ratio (operating expenses as a percentage of operating revenues) is a key profitability measure for the TTS segment[84] - Werner Logistics segment is less asset-intensive, relying on associates, information systems, and third-party capacity providers, with financial performance evaluated by gross margin and operating income percentages[86] COVID-19 Impact As an essential industry, the company prioritized safety and adapted operations during COVID-19, achieving strong Q1 2021 results due to freight demand and a tight driver market, maintaining a strong balance sheet and liquidity - The transportation industry was designated an essential industry during the COVID-19 pandemic, allowing the company to continue operations[87] - Q1 2021 results reflect seasonally strong freight market conditions in a strengthening economy and tight driver market, with strong demand in both One-Way Truckload and Dedicated fleets[89] - The company ended Q1 2021 with a strong balance sheet, low debt ($175 million), and available liquidity of $357 million[91] - Net capital expenditures in 2021 are expected to be in the range of $275 million to $300 million[91] Results of Operations Operating income increased by 101.1% and net income by 101.6% in Q1 2021, driven by a 4.0% rise in operating revenues and a 1.4% decrease in total operating expenses Consolidated Operating Results (Three Months Ended March 31, in thousands) | Metric | 2021 | 2020 | % Change | | :-------------------------- | :--- | :--- | :------- | | Operating revenues | $616,446 | $592,703 | 4.0% | | Total operating expenses | $553,975 | $561,637 | (1.4)% | | Operating income | $62,471 | $31,066 | 101.1% | | Net income | $46,492 | $23,058 | 101.6% | | Operating ratio | 89.9% | 94.8% | (4.9) pts | Operating Revenues Analysis Total operating revenues increased by 4.0% in Q1 2021, driven by Werner Logistics growth offsetting a slight TTS decrease, with improved pricing per tractor per week - Total operating revenues increased by 4.0% to $616.4 million in Q1 2021[101] - Werner Logistics revenues increased by $25.7 million (22.9%), while TTS segment revenues decreased by $1.9 million (0.4%)[101] - Trucking revenues, net of fuel surcharge, increased 0.4% due to a 1.3% increase in average revenues per tractor per week, partially offset by a 0.9% decrease in average tractors in service[104] - Werner Logistics revenues increased primarily due to higher pricing in Truckload Logistics (22% increase in revenues per load) and Intermodal (6% higher revenues per load, 23% volume growth)[107] Operating Expenses Analysis Total operating expenses decreased by 1.4% in Q1 2021, improving the operating ratio to 89.9%, driven by lower insurance, depreciation, and higher asset sale gains, partially offset by increased rent, purchased transportation, and driver pay - Operating ratio improved to 89.9% in Q1 2021 from 94.8% in Q1 2020[108] - Salaries, wages and benefits decreased by 0.6% due to fewer company truck miles and improved workers' compensation costs, despite increased driver pay rates (nearly 7% per company driver mile)[109] - Fuel expense increased by 4.2% due to higher average diesel fuel prices, partially offset by fewer company truck miles[113] - Insurance and claims decreased by 38.8% ($14.0 million) primarily due to lower expense for new large dollar claims, despite higher liability insurance premiums[118] - Depreciation expense decreased by 7.1% due to a prior year accounting estimate change for trucks sold in 2020[120] - Rent and purchased transportation expense increased by 15.9%, mainly driven by higher spot truckload and dray rates in the Werner Logistics segment[123] - Other operating expenses decreased by $9.8 million, primarily due to higher gains on sales of used trucks and trailers ($10.5 million in Q1 2021 vs. $2.5 million in Q1 2020) and a $1.0 million gain from the WGL sale[126] Other Expense (Income) Total other expense (income) decreased by $0.4 million in Q1 2021, primarily due to lower interest expense from reduced average outstanding debt - Interest expense decreased by $0.8 million in Q1 2021 compared to Q1 2020, attributed to lower average outstanding debt[127] Income Taxes The effective income tax rate increased to 24.9% in Q1 2021 from 23.3% in Q1 2020, mainly due to fewer favorable discrete income tax items - Effective income tax rate increased to 24.9% in Q1 2021 from 23.3% in Q1 2020[128] - The increase in tax rate was primarily due to a lower amount of favorable discrete income tax items[128] Liquidity and Capital Resources Strong operating cash flow of $135.9 million in Q1 2021 funded capital expenditures, debt repayment, dividends, and stock repurchases, maintaining a strong financial position - Cash flow from operations increased by 1.9% to $135.9 million in Q1 2021[129] - Net cash used in investing activities increased to $41.3 million, with net property additions of $37.9 million[130] - Net capital expenditures for 2021 are estimated to be in the range of $275 million to $300 million[131] - Repaid $25.0 million of debt in Q1 2021, reducing outstanding debt to $175.0 million[132] - Repurchased 130,446 shares of common stock for $5.5 million in Q1 2021, with 2,686,562 shares remaining available under authorization[132] - As of March 31, 2021, the company had $83.1 million in cash and cash equivalents and $325.0 million in available credit under its facilities[133] Contractual Obligations and Commercial Commitments No material changes occurred in contractual obligations and commercial commitments during Q1 2021 compared to the 2020 Form 10-K disclosures - No material changes in contractual obligations and commercial commitments from the 2020 Form 10-K[134] Regulations No material changes occurred in the status of proposed regulations from the 2020 Form 10-K that may affect company operations - No material changes in the status of proposed regulations from the 2020 Form 10-K[135] Critical Accounting Estimates Critical accounting estimates, particularly accrued liabilities for insurance and claims, remain unchanged from the 2020 Form 10-K, requiring significant judgment - Estimates of accrued liabilities for insurance and claims for bodily injury, property damage, and workers' compensation are critical accounting estimates[137] - No material changes to critical accounting estimates from those discussed in the 2020 Form 10-K[138] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from commodity prices, foreign currency, and interest rates, mitigating them with fuel surcharges and interest rate swaps, and preparing for LIBOR discontinuation - The company is exposed to commodity price risk from diesel fuel, recovering a majority of price increases through customer fuel surcharges[140] - Foreign currency exchange rate risk primarily relates to the Mexican Peso, with foreign currency translation losses of $1.6 million in Q1 2021[141] - Interest rate risk is managed through a mix of variable rate debt and interest rate swap agreements, with $150 million of debt effectively fixed at 2.34% through May 2024[142] - The company is communicating with banks regarding the transition from LIBOR, which is expected to cease publication by June 2023[143] Item 4. Controls and Procedures Management deemed disclosure controls effective at a reasonable assurance level, with no material changes in internal control over financial reporting, acknowledging inherent limitations - Disclosure controls and procedures were evaluated and deemed effective at a reasonable assurance level[144] - No material changes in internal control over financial reporting occurred during the most recent fiscal quarter[145] - Management acknowledges that internal control systems provide only reasonable, not absolute, assurance due to inherent limitations[146] PART II – OTHER INFORMATION Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 130,446 common shares in February 2021 under an authorized program, with 2,686,562 shares remaining available for repurchase as of March 31, 2021 - The Board of Directors authorized a stock repurchase program for up to 5,000,000 shares on May 14, 2019[148] Issuer Purchases of Equity Securities (Q1 2021) | Period | Total Number of Shares Purchased | Average Price Paid per Share ($) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs | | :----------------- | :----------------------------- | :------------------------------- | :----------------------------------------------------------------------------- | :----------------------------------------------------------------------------- | | January 1-31, 2021 | — | — | — | 2,817,008 | | February 1-28, 2021 | 130,446 | 42.22 | 130,446 | 2,686,562 | | March 1-31, 2021 | — | — | — | 2,686,562 | | Total | 130,446 | 42.22 | 130,446 | 2,686,562 | - As of March 31, 2021, 2,686,562 shares remained available for repurchase under the current authorization[148][151] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including corporate governance documents, compensation plans, officer certifications, and iXBRL financial information - Key exhibits include Restated Articles of Incorporation, Revised and Restated By-Laws, Amended and Restated Equity Plan, Change in Control Severance Plan, and CEO/CFO certifications[153] - Exhibit 101 provides the unaudited financial information from the 10-Q in iXBRL format[153]