Werner Enterprises(WERN) - 2021 Q2 - Quarterly Report

PART I – FINANCIAL INFORMATION Item 1. Financial Statements This section presents the company's unaudited interim consolidated financial statements and accompanying notes Consolidated Statements of Income The company reports significant year-over-year growth in revenues, operating income, and net income Consolidated Statements of Income (3 Months Ended June 30) | Metric | 2021 (in thousands) | 2020 (in thousands) | % Change | | :-------------------------- | :------------------ | :------------------ | :------- | | Operating revenues | $649,814 | $568,959 | 14.2% | | Operating income | $76,863 | $52,818 | 45.5% | | Net income | $72,032 | $39,132 | 84.1% | | Basic EPS | $1.06 | $0.57 | 86.0% | | Diluted EPS | $1.06 | $0.56 | 89.3% | Consolidated Statements of Income (6 Months Ended June 30) | Metric | 2021 (in thousands) | 2020 (in thousands) | % Change | | :-------------------------- | :------------------ | :------------------ | :------- | | Operating revenues | $1,266,260 | $1,161,662 | 9.0% | | Operating income | $139,334 | $83,884 | 66.1% | | Net income | $118,524 | $62,190 | 90.6% | | Basic EPS | $1.74 | $0.90 | 93.3% | | Diluted EPS | $1.74 | $0.89 | 95.5% | - Other expense (income) decreased by $20.6 million for the three months and $21.0 million for the six months ended June 30, 2021, primarily due to a $20.2 million unrealized gain on an equity investment[16][129][141] Consolidated Statements of Comprehensive Income Comprehensive income grew substantially, driven by higher net income and favorable currency and interest rate adjustments Consolidated Statements of Comprehensive Income | Metric | Three Months Ended June 30, 2021 (in thousands) | Three Months Ended June 30, 2020 (in thousands) | Six Months Ended June 30, 2021 (in thousands) | Six Months Ended June 30, 2020 (in thousands) | | :------------------------------------ | :---------------------------------------------- | :---------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Net income | $72,032 | $39,132 | $118,524 | $62,190 | | Foreign currency translation adjustments | 1,865 | 929 | 297 | (8,964) | | Change in fair value of interest rate swaps, net of tax | 360 | (623) | 1,663 | (6,220) | | Other comprehensive income (loss) | 2,225 | 306 | 1,960 | (15,184) | | Comprehensive income | $74,257 | $39,438 | $120,484 | $47,006 | Consolidated Condensed Balance Sheets The balance sheet reflects growth in total assets and stockholders' equity, funded partly by increased long-term debt Key Balance Sheet Items (June 30, 2021 vs December 31, 2020) | Metric | June 30, 2021 (in thousands) | December 31, 2020 (in thousands) | % Change | | :----------------------------------- | :----------------------------- | :----------------------------- | :------- | | Cash and cash equivalents | $192,128 | $29,334 | 554.9% | | Total current assets | $666,511 | $456,916 | 45.9% | | Total assets | $2,382,867 | $2,156,676 | 10.5% | | Total current liabilities | $259,187 | $274,014 | (5.5)% | | Long-term debt, net of current portion | $295,000 | $175,000 | 68.6% | | Total stockholders' equity | $1,296,583 | $1,195,040 | 8.5% | - The significant increase in long-term debt is primarily due to new borrowings to finance the acquisition of ECM Transport Group[22][145] Consolidated Statements of Cash Flows Operating cash flow decreased due to working capital changes, while financing activities provided cash for acquisitions Cash Flow Summary (Six Months Ended June 30, 2021 vs 2020) | Metric | 2021 (in thousands) | 2020 (in thousands) | % Change | | :------------------------------------ | :------------------ | :------------------ | :------- | | Net cash provided by operating activities | $189,464 | $287,342 | (34.1)% | | Net cash used in investing activities | $(104,605) | $(103,217) | (1.3)% | | Net cash provided by (used in) financing activities | $77,847 | $(150,183) | 151.8% | | Net increase (decrease) in cash, cash equivalents and restricted cash | $162,794 | $31,947 | 409.6% | | Cash, cash equivalents and restricted cash, end of period | $192,128 | $65,389 | 193.8% | - The decrease in net cash provided by operating activities was primarily due to working capital changes resulting from the timing of federal and state estimated income tax payments and changes in accounts receivable, partially offset by higher net income[143] - Net cash provided by financing activities in 2021 was driven by net borrowings of $100.0 million, including proceeds from the issuance of $120.0 million in long-term debt, primarily to finance the ECM acquisition[24][145] Consolidated Statements of Stockholders' Equity Stockholders' equity increased due to strong comprehensive income, partially offset by dividends and share repurchases Total Stockholders' Equity | Date | Amount (in thousands) | | :---------------- | :-------------------- | | June 30, 2021 | $1,296,583 | | December 31, 2020 | $1,195,040 | | % Change | 8.5% | - Key changes contributing to the increase in stockholders' equity from December 31, 2020, to June 30, 2021, include comprehensive income of $120.5 million and non-cash equity compensation expense of $5.2 million, partially offset by dividends of $14.9 million and common stock repurchases of $5.5 million[26] Notes to Consolidated Financial Statements (Unaudited) These notes provide detailed explanations of accounting policies, revenue sources, leases, investments, and other key items (1) Accounting Policies The company adopted a new income tax accounting standard and is evaluating the impact of reference rate reform - The company adopted ASU 2019-12, 'Simplifying the Accounting for Income Taxes,' as of January 1, 2021, with no effect on its financial position, results of operations, or cash flows[29] - The company is evaluating the impact of ASU 2020-04, 'Reference Rate Reform,' on its existing credit facilities and hedging relationships that reference LIBOR[30] (2) Revenue Revenue growth was driven by both the Truckload Transportation Services and Werner Logistics segments Total Revenues by Period | Period | 2021 (in thousands) | 2020 (in thousands) | % Change | | :-------------------------- | :------------------ | :------------------ | :------- | | Three Months Ended June 30, | $649,814 | $568,959 | 14.2% | | Six Months Ended June 30, | $1,266,260 | $1,161,662 | 9.0% | Revenue by Source (6 Months Ended June 30) | Revenue Source | 2021 (in thousands) | 2020 (in thousands) | | :-------------------------- | :------------------ | :------------------ | | Truckload Transportation Services | $954,149 | $909,916 | | Werner Logistics | $279,526 | $222,327 | - Accounts receivable, trade, net, increased to $391.1 million at June 30, 2021, from $341.1 million at December 31, 2020[34][35] (3) Leases The company details its operating lease liabilities and expenses, primarily for terminals and office facilities Operating Lease Liabilities (June 30, 2021) | Metric | Amount (in thousands) | | :---------------------------------------- | :-------------------- | | Total undiscounted operating lease payments | $11,136 | | Present value of operating lease liabilities | $10,480 | | Weighted-average remaining lease term | 3.85 years | | Weighted-average discount rate | 3.18% | Operating Lease Expense | Period | 2021 (in thousands) | 2020 (in thousands) | | :-------------------------- | :------------------ | :------------------ | | Three Months Ended June 30, | $3,500 | $2,100 | | Six Months Ended June 30, | $7,100 | $4,100 | - Revenues from lessor operating leases (tractors and trailers) were $3.0 million for the three months ended June 30, 2021, and $6.1 million for the six months ended June 30, 2021[46] (4) Investments An equity investment in TuSimple generated a significant unrealized gain following its initial public offering - The company made a $5.0 million equity investment in TuSimple on January 8, 2021, which resulted in a $20.2 million unrealized gain in the three and six months ended June 30, 2021, following its IPO[49] - A $5.0 million investment in Mastery Logistics Systems, Inc (MLSI) in 2020 represents approximately 5% ownership and is accounted for under ASC 321[48] (5) Credit Facilities The company amended its credit agreement, increasing borrowing capacity and adding a new term loan - On June 30, 2021, the company amended its credit agreement, adding a $100.0 million unsecured fixed-rate term loan (1.28% interest) and increasing its borrowing capacity with BMO Harris Bank N.A. from $200.0 million to $300.0 million[50][51][52] - Total outstanding debt increased to $300.0 million as of June 30, 2021, from $200.0 million at December 31, 2020[52] Aggregate Future Maturities of Long-Term Debt (June 30, 2021) | Year | Amount (in thousands) | | :--- | :-------------------- | | 2021 | $2,500 | | 2022 | $5,000 | | 2023 | $5,000 | | 2024 | $287,500 | | 2025 | — | | Total | $300,000 | (6) Commitments and Contingencies The company has significant equipment purchase commitments and is appealing a large adverse jury verdict - The company has committed to property and equipment purchases of approximately $269.8 million as of June 30, 2021[56] - The company is appealing a $92.0 million adverse jury verdict from 2018, with its maximum liability limited to $10.0 million plus interest due to insurance coverage[58][59][60] - Accrued interest related to the adverse jury verdict was $1.3 million for the three months ended June 30, 2021, accruing at $0.4 million per month[120] (7) Earnings Per Share Both basic and diluted earnings per share showed substantial growth compared to the prior year Basic and Diluted Earnings Per Share | Period | Basic EPS (2021) | Basic EPS (2020) | Diluted EPS (2021) | Diluted EPS (2020) | | :-------------------------- | :--------------- | :--------------- | :----------------- | :----------------- | | Three Months Ended June 30, | $1.06 | $0.57 | $1.06 | $0.56 | | Six Months Ended June 30, | $1.74 | $0.90 | $1.74 | $0.89 | (8) Equity Compensation The company details its equity compensation plan, including available shares and recognized expenses - As of June 30, 2021, there were 6,534,087 shares available for granting additional awards under the Equity Plan, with total unrecognized compensation cost of approximately $15.7 million[67][68] - The total fair value of previously granted restricted awards vested during the six-month periods ended June 30, 2021 and 2020 was $5.1 million and $3.4 million, respectively[73][77] Pre-tax Equity Compensation Expense (in thousands) | Award Type | 3 Months Ended June 30, 2021 | 3 Months Ended June 30, 2020 | 6 Months Ended June 30, 2021 | 6 Months Ended June 30, 2020 | | :---------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Restricted awards | $1,538 | $1,090 | $3,087 | $2,488 | | Performance awards | $1,209 | $53 | $2,155 | $1,063 | (9) Segment Information Both the Truckload Transportation Services and Werner Logistics segments reported strong growth in revenues and operating income - The company operates in two reportable segments: Truckload Transportation Services (TTS) and Werner Logistics[78][79][80] Revenues by Segment (in thousands) | Segment | 3 Months Ended June 30, 2021 | 3 Months Ended June 30, 2020 | 6 Months Ended June 30, 2021 | 6 Months Ended June 30, 2020 | | :-------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Truckload Transportation Services | $491,200 | $445,053 | $954,149 | $909,916 | | Werner Logistics | $141,673 | $110,163 | $279,526 | $222,327 | Operating Income by Segment (in thousands) | Segment | 3 Months Ended June 30, 2021 | 3 Months Ended June 30, 2020 | 6 Months Ended June 30, 2021 | 6 Months Ended June 30, 2020 | | :-------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Truckload Transportation Services | $73,108 | $51,225 | $130,736 | $80,314 | | Werner Logistics | $3,927 | $3,139 | $8,501 | $4,224 | (10) Subsequent Event The company acquired an 80% equity interest in ECM Transport Group immediately after the quarter ended - On July 1, 2021, the company acquired an 80% equity ownership interest in ECM Transport Group for a cash purchase price of $142.4 million, with an exclusive option to purchase the remaining 20% after five years[82] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's strong financial performance, the strategic ECM acquisition, and ongoing market dynamics ECM Acquisition The company acquired a majority stake in ECM Transport Group to expand its regional truckload services - Werner acquired an 80% equity ownership interest in ECM Transport Group on July 1, 2021, for $142.4 million, with an exclusive option to buy the remaining 20% after five years[85][86] - ECM generated $108 million in revenues in 2020 with a 19.8% operating margin, and its future revenues will be reported in the One-Way Truckload unit within the TTS segment[85] - The acquisition was financed through a combination of cash on hand, existing credit facilities, and a new $100.0 million fixed-rate term loan[86] Overview The company operates through its TTS and Werner Logistics segments, with profitability measured by its operating ratio - The company operates in two reportable segments: Truckload Transportation Services (TTS) and Werner Logistics, focusing on transporting consumer nondurable products and providing logistics services[87] - TTS segment revenues are typically generated on a per-mile basis, supplemented by fuel surcharge revenues designed to recover a majority of increased fuel costs[88][108] - The operating ratio (operating expenses as a percentage of operating revenues) is a key profitability measure for the TTS segment[91] COVID-19 The company's focus on transporting essential products has enabled effective management through the pandemic environment - The transportation industry has been designated an essential industry during the COVID-19 pandemic, and Werner's freight base, heavily weighted toward essential products, has enabled effective management[93][94] - Demand for the company's services is expected to remain strong through the remainder of 2021[93][94] Results of Operations The company achieved significant growth in revenues and operating income, driven by strong freight market conditions Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020 Quarterly revenue and income surged due to strong performance in both TTS and Logistics segments - Operating revenues increased 14.2% to $649.8 million, with TTS segment revenues up 10.4% and Werner Logistics revenues up 28.6%[98][103][104] - Operating income surged 45.5% to $76.9 million, and net income increased 84.1% to $72.0 million, with the operating ratio improving to 88.2% from 90.7%[98][110] - Key expense changes include a 90.7% increase in fuel costs, a 7.8% increase in salaries, and a 19.6% decrease in insurance and claims[111][114][120][128] Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020 Half-year results show robust growth in revenue and profitability, with an improved operating ratio - Operating revenues increased 9.0% to $1,266.3 million, with TTS segment revenues up 4.9% and Werner Logistics revenues up 25.7%[98][131] - Operating income increased 66.1% to $139.3 million, and net income increased 90.6% to $118.5 million, with the operating ratio improving to 89.0% from 92.8%[98][132] - Key expense changes include a 37.6% increase in fuel costs, a 3.5% increase in salaries, and a 30.8% decrease in insurance and claims[134][135][137][140] Liquidity and Capital Resources The company maintains a strong liquidity position with substantial cash, equity, and available credit - Cash flow from operations decreased by 34.1% ($97.9 million) to $189.5 million for the six months ended June 30, 2021, primarily due to working capital changes[143] - Net financing activities provided $77.8 million, a significant increase from using $150.2 million in the prior year, driven by $100.0 million in net borrowings to finance the ECM acquisition[145] - As of June 30, 2021, the company had a strong financial position with $192.1 million in cash, nearly $1.3 billion in stockholders' equity, and $300.0 million in available credit[146] Contractual Obligations and Commercial Commitments No material changes occurred in contractual obligations, aside from new debt agreements for the ECM acquisition - There were no material changes in contractual obligations and commercial commitments as of June 30, 2021, compared to December 31, 2020, except for new borrowings as disclosed in Note 5[147] Regulations There have been no material changes in the status of previously disclosed proposed regulations - There have been no material changes in the status of proposed regulations previously disclosed in the 2020 Form 10-K[148] Critical Accounting Estimates The company's critical accounting estimates, particularly for insurance and claims liabilities, remain unchanged - The company's critical accounting estimates, particularly for accrued liabilities for insurance and claims, remain unchanged from those discussed in the 2020 Form 10-K[150][151] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company actively manages market risks from commodity prices, foreign currency, and interest rates Commodity Price Risk Diesel fuel price fluctuations are the primary commodity risk, largely mitigated through customer fuel surcharges - The company is exposed to fluctuations in diesel fuel prices, which it largely mitigates through customer fuel surcharge programs[108][153] - As of June 30, 2021, the company had no derivative financial instruments to reduce its exposure to fuel price fluctuations[118] Foreign Currency Exchange Rate Risk Foreign currency risk is primarily related to the Mexican Peso, with most foreign revenues denominated in U.S. Dollars - The company conducts business primarily in Mexico, with most foreign revenues denominated in U.S. Dollars to reduce direct foreign currency risk[154] - Foreign currency translation gains were $1.9 million for the second quarter of 2021 and $0.9 million for the second quarter of 2020[154] Interest Rate Risk Interest rate risk is managed through a mix of fixed and variable rate debt and interest rate swaps - The company manages interest rate exposure through a mix of variable rate debt and interest rate swap agreements, with $150 million of debt effectively fixed at 2.34% and $100 million at a fixed rate of 1.28%[155] - A hypothetical one-percentage point increase in the LIBOR interest rate would increase annual interest expense by approximately $500,000[155] - The company is evaluating the impact of the discontinuation of LIBOR, which is referenced by its unsecured credit facilities[156] Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of the quarter-end - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level as of June 30, 2021[157][158] - No changes in internal control over financial reporting occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, internal controls[159] - Management acknowledges that internal control systems provide only reasonable, not absolute, assurance that objectives are met[160] PART II – OTHER INFORMATION Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company has an ongoing stock repurchase program with shares remaining available for purchase - The Board of Directors approved a stock repurchase program for up to 5,000,000 shares, with 2,686,562 shares remaining available as of June 30, 2021[163] - No shares of common stock were repurchased during the second quarter of 2021[164] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including corporate and financial documents - Exhibits include Restated Articles of Incorporation, By-Laws, credit agreements, CEO and CFO certifications, and iXBRL financial information[166][167]