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| WERN > SEC Filings for WERN > Form 10-Q on 2-Nov-2009 | All Recent SEC Filings |
2-Nov-2009
Quarterly Report
Management's Discussion and Analysis of Financial Condition and Results of Operations (the "MD&A") summarizes the financial statements from management's perspective with respect to our financial condition, results of operations, liquidity and other factors that may affect actual results. The MD&A is organized in the following sections:
* Overview
* Results of Operations
* Liquidity and Capital Resources
* Contractual Obligations and Commercial Commitments
* Off-Balance Sheet Arrangements
* Regulations
* Critical Accounting Policies
* Accounting Standards
The MD&A should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2008.
Overview:
We operate in the truckload and logistics sectors of the transportation industry. In the truckload sector, we focus on transporting consumer nondurable products that ship more consistently throughout the year. In the logistics sector, besides managing transportation requirements for individual customers, we provide additional sources of truck capacity, alternative modes of transportation, a global delivery network and systems analysis to optimize transportation needs. Our success depends on our ability to efficiently manage our resources in the delivery of truckload transportation and logistics services to our customers. Resource requirements vary with customer demand, which may be subject to seasonal or general economic conditions. Our ability to adapt to changes in customer transportation requirements is essential to efficiently deploy resources and make capital investments in tractors and trailers (with respect to our Truckload segment) or obtain qualified third-party capacity at a reasonable price (with respect to our VAS segment). Although our business volume is not highly concentrated, we may also be occasionally affected by our customers' financial failures or loss of customer business.
Operating revenues reported in our operating statistics table under "Results of Operations" are categorized as (i) trucking revenues, net of fuel surcharge, (ii) trucking fuel surcharge revenues, (iii) non-trucking revenues, including VAS, and (iv) other operating revenues. Trucking revenues, net of fuel surcharge, and trucking fuel surcharge revenues are generated by the six operating fleets in the Truckload segment (Dedicated, Regional, Van, Expedited, Temperature-Controlled and Flatbed). Non-trucking revenues, including VAS, are generated primarily by the four operating units in our VAS segment (Brokerage, Freight Management, Intermodal and International), and a small amount is generated by the Truckload segment. Other operating revenues are generated from other business activities such as third-party equipment maintenance and equipment leasing. In third quarter 2009, trucking (net of fuel surcharge) and trucking fuel surcharge revenues accounted for 86% of total operating revenues, and non-trucking and other operating revenues accounted for 14% of total operating revenues.
Trucking revenues, net of fuel surcharge, are typically generated on a per-mile basis and also include revenues such as stop charges, loading/unloading charges and equipment detention charges. Because fuel surcharge revenues fluctuate in response to changes in fuel costs, we identify them separately in the operating statistics table and exclude them from the statistical calculations to provide a more meaningful comparison
between periods. The key statistics used to evaluate trucking revenues, net of fuel surcharge, are (i) average revenues per tractor per week, (ii) average revenues per mile (total and loaded), (iii) average monthly miles per tractor, (iv) average percentage of empty miles (miles without trailer cargo), (v) average trip length (in loaded miles) and (vi) average number of tractors in service. General economic conditions, seasonal trucking industry freight patterns and industry capacity are important factors that impact these statistics. Our Truckload segment also generates a small amount of revenues categorized as non-trucking revenues, related to shipments delivered to or from Mexico where the Truckload segment utilizes a third-party capacity provider. We exclude such revenues from the statistical calculations.
Our most significant resource requirements are company drivers, owner- operators, tractors, trailers and equipment operating costs (such as fuel and related fuel taxes, driver pay, insurance and supplies and maintenance). To mitigate our risk to fuel price increases, we recover from our customers additional fuel surcharges that generally recoup a majority of the increased fuel costs; however, we cannot assure that current recovery levels will continue in future periods. Our financial results are also affected by company driver and owner-operator availability and the market for new and used revenue equipment. We are self-insured for a significant portion of bodily injury, property damage and cargo claims, workers' compensation benefits and health claims for our employees (supplemented by premium-based insurance coverage above certain dollar levels). For that reason, our financial results may also be affected by driver safety, medical costs, weather, legal and regulatory environments and insurance coverage costs to protect against catastrophic losses.
The operating ratio is a common industry measure used to evaluate our profitability and that of our Truckload segment operating fleets. The operating ratio consists of operating expenses expressed as a percentage of operating revenues. The most significant variable expenses that impact the Truckload segment are driver salaries and benefits, fuel, fuel taxes (included in taxes and licenses expense), payments to owner-operators (included in rent and purchased transportation expense), supplies and maintenance and insurance and claims. These expenses generally vary based on the number of miles generated. We also evaluate these costs on a per- mile basis to adjust for the impact on the percentage of total operating revenues caused by changes in fuel surcharge revenues, per-mile rates charged to customers and non-trucking revenues. As discussed further in the comparison of operating results for third quarter 2009 to third quarter 2008, several industry-wide issues may cause costs to increase in future periods. These issues include a softer freight market, changing fuel prices, more stringent federal and state regulations governing engine emissions and fuel efficiency, higher new truck and trailer purchase prices and a weaker used equipment market. Our main fixed costs include depreciation expense for tractors and trailers and equipment licensing fees (included in taxes and licenses expense). The Truckload segment requires substantial cash expenditures for tractor and trailer purchases. We fund these purchases with net cash from operations and financing available under our existing credit facilities, as management deems necessary.
We provide non-trucking services primarily through four operating units within our VAS segment. Unlike our Truckload segment, the VAS segment is less asset-intensive and is instead dependent upon qualified employees, information systems and qualified third-party capacity providers. The largest expense item related to the VAS segment is the cost of transportation we pay to third-party capacity providers. This expense item is recorded as rent and purchased transportation expense. Other operating expenses include salaries, wages and benefits and computer hardware and software depreciation. We evaluate VAS by reviewing the gross margin percentage (revenues less rent and purchased transportation expenses expressed as a percentage of revenues) and the operating income percentage.
Results of Operations:
The following operating statistics table sets forth certain industry
data regarding the freight revenues and operations for the periods
indicated.
Three Months Ended Nine Months Ended
September 30, % September 30, %
------------------- -----------------------
2009 2008 Change 2009 2008 Change
-------- -------- ------ ---------- ---------- ------
Trucking revenues, net of
fuel surcharge (1) $319,291 $367,401 -13.1% $937,333 $1,084,402 -13.6%
Trucking fuel surcharge
revenues (1) 49,477 135,525 -63.5% 122,636 366,223 -66.5%
Non-trucking revenues,
including VAS (1) 58,499 76,070 -23.1% 158,614 209,699 -24.4%
Other operating revenues (1) 2,006 5,061 -60.4% 8,249 14,701 -43.9%
-------- -------- ---------- ----------
Total operating revenues (1) $429,273 $584,057 -26.5% $1,226,832 $1,675,025 -26.8%
======== ======== ========== ==========
Operating ratio
(consolidated) (2) 92.4% 93.5% 94.6% 95.1%
Average monthly miles per
tractor 10,184 10,306 -1.2% 9,866 10,189 -3.2%
Average revenues per
total mile (3) $1.440 $1.480 -2.7% $1.439 $1.466 -1.8%
Average revenues per
loaded mile (3) $1.637 $1.699 -3.6% $1.650 $1.691 -2.4%
Average percentage of
empty miles (4) 12.01% 12.88% -6.8% 12.76% 13.31% -4.1%
Average trip length in
miles (loaded) 463 539 -14.1% 463 540 -14.3%
Total miles (loaded and
empty) (1) 221,675 248,197 -10.7% 651,257 739,571 -11.9%
Average tractors in service 7,256 8,028 -9.6% 7,334 8,065 -9.1%
Average revenues per tractor
per week (3) $3,385 $3,521 -3.9% $3,277 $3,448 -5.0%
Total tractors (at quarter end)
Company 6,635 7,335 6,635 7,335
Owner-operator 690 705 690 705
-------- -------- ---------- ----------
Total tractors 7,325 8,040 7,325 8,040
Total trailers (Truckload and
Intermodal, at quarter end) 24,310 24,140 24,310 24,140
(1) Amounts in thousands.
(2) Operating expenses expressed as a percentage of operating revenues.
Operating ratio is a common measure in the trucking industry used to
evaluate profitability.
(3) Net of fuel surcharge revenues.
(4) Empty refers to miles without trailer cargo.
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The following table sets forth the total revenues, operating expenses and operating income for the Truckload segment. Revenues for the Truckload segment include non-trucking revenues of $0.8 million and $2.5 million for the three-month periods ended September 30, 2009 and September 30, 2008 and $3.0 million and $6.3 million for the nine-month periods ended September 30, 2009 and September 30, 2008, as described on page 12.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ----------------------------------
Truckload Transportation Services 2009 2008 2009 2008
-------------- -------------- ---------------- ----------------
(amounts in thousands) $ % $ % $ % $ %
-------------------------- -------------- -------------- ---------------- ----------------
Revenues $369,610 100.0 $505,489 100.0 $1,063,047 100.0 $1,456,872 100.0
Operating expenses 339,311 91.8 472,376 93.4 1,005,041 94.5 1,388,746 95.3
-------- -------- ---------- ----------
Operating income $ 30,299 8.2 $ 33,113 6.6 $ 58,006 5.5 $ 68,126 4.7
======== ======== ========== ==========
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Higher fuel prices and higher fuel surcharge revenues increase our consolidated operating ratio and the Truckload segment's operating ratio when fuel surcharges are reported on a gross basis as revenues versus netting against fuel expenses. Eliminating fuel surcharge revenues, which are generally a more volatile source of revenue, provides a more consistent basis for comparing the results of operations from period to period. The following table calculates the Truckload segment's operating ratio as if fuel surcharges are excluded from total revenues and instead reported as a reduction of operating expenses.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ----------------------------------
Truckload Transportation Services 2009 2008 2009 2008
-------------- -------------- ---------------- ----------------
(amounts in thousands) $ % $ % $ % $ %
-------------------------- -------------- -------------- ---------------- ----------------
Revenues $369,610 $505,489 $1,063,047 $1,456,872
Less: trucking fuel surcharge
revenues 49,477 135,525 122,636 366,223
-------- -------- ---------- ----------
Revenues, net of fuel surcharges 320,133 100.0 369,964 100.0 940,411 100.0 1,090,649 100.0
-------- -------- ---------- ----------
Operating expenses 339,311 472,376 1,005,041 1,388,746
Less: trucking fuel surcharge
revenues 49,477 135,525 122,636 366,223
-------- -------- ---------- ----------
Operating expenses, net of
fuel surcharges 289,834 90.5 336,851 91.0 882,405 93.8 1,022,523 93.8
-------- -------- ---------- ----------
Operating income $ 30,299 9.5 $ 33,113 9.0 $ 58,006 6.2 $ 68,126 6.2
======== ======== ========== ==========
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The following table sets forth the VAS segment's non-trucking revenues, rent and purchased transportation expense, gross margin, other operating expenses and operating income. Other operating expenses for the VAS segment primarily consist of salaries, wages and benefits expense. VAS also incurs smaller expense amounts in the supplies and maintenance, depreciation, rent and purchased transportation (excluding third-party transportation costs), insurance, communications and utilities and other operating expense categories.
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ------------------------------
Value Added Services 2009 2008 2009 2008
------------- ------------- -------------- --------------
(amounts in thousands) $ % $ % $ % $ %
----------------------- ------------- ------------- -------------- --------------
Revenues $57,685 100.0 $73,586 100.0 $155,627 100.0 $203,401 100.0
Rent and purchased
transportation expense 47,840 82.9 62,838 85.4 129,119 83.0 173,358 85.2
------- ------- -------- --------
Gross margin 9,845 17.1 10,748 14.6 26,508 17.0 30,043 14.8
Other operating expenses 6,040 10.5 6,429 8.7 18,179 11.7 18,373 9.1
------- ------- -------- --------
Operating income $ 3,805 6.6 $ 4,319 5.9 $ 8,329 5.3 $ 11,670 5.7
======= ======= ======== ========
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Three Months Ended September 30, 2009 Compared to Three Months Ended
September 30, 2008
Operating Revenues
Operating revenues decreased 26.5% for the three months ended September 30, 2009, compared to the same period of the prior year. Excluding fuel surcharge revenues, trucking revenues decreased 13.1% due primarily to a 9.6% decrease in the average number of tractors in service. With respect to pricing and rates, revenue per total mile, excluding fuel surcharges, decreased by 2.7%. Productivity, as measured by average monthly miles per tractor, declined by 1.2%.
The freight market continued to be challenging in third quarter 2009; however, we experienced some seasonal improvement in freight volumes as the quarter progressed. Shipper destocking of inventory that occurred earlier this year has slowed, which stabilized inventory levels and had a sequentially positive impact on our freight shipments. The freight market in October 2009 returned to lower levels more consistent with the freight demand levels prior to the end-of-quarter increase in September 2009; however, we continued to experience a year-over-year improvement in freight shipments due to the large decline in freight demand during fourth quarter 2008. Freight shipment trends for the remainder of fourth quarter 2009 will depend on the strength of consumer demand during the holiday season.
We adapted to these challenging market conditions by reducing our fleet size. Fewer trucks and lower miles per truck reduced our total miles by 10.7% over this same period. Having fewer trucks in service also lowered our freight requirements and thereby reduced our need to book freight that is less profitable to keep our trucks and drivers productive. Based on current market conditions, we do not plan to make further significant reductions to our fleet, unless there is a significant decline in the freight market or a loss of customer business.
The softer freight market during third quarter 2009, combined with the excess truck capacity in the market and a high level of customer bid activity in the first half of 2009, caused continued pressure on freight rates. These factors resulted in a 3.6% decrease in revenue per loaded mile, excluding fuel surcharge. Revenue per total mile decreased only 2.7%, as our average percentage of empty miles improved to 12.01% in third quarter 2009 from 12.88% in third quarter 2008. On a per trip basis, empty miles per trip declined 21% from 80 miles per trip in third quarter 2008 to 63 miles per trip in third quarter 2009. We expect the pressure on freight rates to continue until freight demand improves.
Fuel surcharge revenues represent collections from customers for the higher cost of fuel. These revenues decreased 63.5% to $49.5 million in third quarter 2009 from $135.5 million in third quarter 2008 due to a decrease in average diesel fuel prices of $1.62 per gallon in third quarter 2009 compared to third quarter 2008. To lessen the effect of fluctuating fuel prices on our margins, we collect fuel surcharge revenues from our customers. Our fuel surcharge programs are designed to (i) recoup higher fuel costs from customers when fuel prices rise and (ii) provide customers with the benefit of lower fuel costs when fuel prices decline. These programs enable us to recover a majority, but not all, of the fuel price increases. The remaining portion is generally not recoverable because it results from empty miles (which are not billable to customers), out-of-route miles and truck idle time. Fuel prices that change rapidly in short time periods also impact our recovery because the surcharge rate in most fuel surcharge programs only changes once per week. In a rapidly rising fuel price market, there is generally a several week delay between the payment of higher fuel prices and surcharge recovery. In a rapidly declining fuel price market, the opposite generally occurs, and there is a temporary higher surcharge recovery compared to the price paid for fuel.
We continue to diversify our business from the Van fleet to the Dedicated, Regional and Expedited fleets and North America cross-border service provided by the Truckload segment and the four operating units of the VAS segment. Our goal is to attain a more balanced portfolio comprised of one-way truckload (which includes Regional, Van and Expedited), dedicated
and logistics (which includes the VAS segment) services. This diversification should help soften the impact of a weaker freight market and enables us to provide expanded services to our customers.
VAS revenues are generated by its four operating units and exclude revenues for VAS shipments transferred to the Truckload segment, which are recorded as trucking revenues by the Truckload segment. VAS revenues declined 21.6% to $57.7 million in third quarter 2009 from $73.6 million in third quarter 2008 due to three factors: (i) a 19% reduction in the average revenue per shipment due to lower fuel prices and customer rates; (ii) shifting significantly more shipments not committed to third-party capacity providers to our Truckload segment to help cushion the impact of a soft freight market; and (iii) a reduction in the number of industry freight shipments because of the weaker freight market and recessionary economy. VAS gross margin dollars decreased 8.4% to $9.8 million in third quarter 2009 from $10.7 million for the same period in 2008 on the lower revenue because of the reasons noted above. However, the VAS gross margin percentage improved from 14.6% in third quarter 2008 to 17.1% in third quarter 2009 due to a decline in fuel prices and a lower cost of carrier capacity. The following table shows the changes that are described above in shipment volume and average revenue (excluding logistics fee revenue) per shipment for all VAS shipments:
Three Months Ended
September 30
------------------- ---------- --------
2009 2008 Difference % Change
-------- -------- ---------- --------
Total VAS shipments 64,679 60,950 3,729 6%
Less: Non-committed shipments to
Truckload segment (25,290) (17,655) (7,635) 43%
------- ------- -------
Net VAS shipments 39,389 43,295 (3,906) (9%)
======= ======= =======
Average revenue per shipment $1,325 $1,642 ($317) (19%)
======= ======= =======
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Compared to third quarter 2008, Brokerage revenues declined due to the factors described in the paragraph above; however, the Brokerage gross margin percentage improved by 160 basis points due to a decline in fuel prices and a lower cost of carrier capacity. Freight Management revenues declined due to reduced shipments with existing customers resulting from a decline in certain customers' overall shipment levels. Intermodal revenues and gross margins declined because of a weak and competitive intermodal market in third quarter 2009. International achieved meaningful revenue and profit improvement resulting from increased shipment volumes.
Operating Expenses
Our operating ratio (operating expenses expressed as a percentage of operating revenues) was 92.4% for the three months ended September 30, 2009, compared to 93.5% for the three months ended September 30, 2008. Expense items that impacted the overall operating ratio are described on the following pages. The tables on page 17 show the operating ratios and operating margins for our two reportable segments, Truckload and VAS.
The following table sets forth the cost per total mile of operating expense items for the Truckload segment for the periods indicated. We evaluate operating costs for this segment on a per-mile basis, which is a better measurement tool for comparing the results of operations from period to period.
Three Months Ended Increase Nine Months Ended Increase
September 30, (Decrease) September 30, (Decrease)
------------------ -----------------
2009 2008 per Mile 2009 2008 per Mile
-----------------------------------------------------------
Salaries, wages and benefits $0.564 $0.582 $(0.018) $0.579 $0.575 $0.004
Fuel 0.297 0.584 (0.287) 0.267 0.571 (0.304)
Supplies and maintenance 0.144 0.158 (0.014) 0.153 0.158 (0.005)
Taxes and licenses 0.107 0.109 (0.002) 0.110 0.112 (0.002)
Insurance and claims 0.090 0.115 (0.025) 0.098 0.104 (0.006)
Depreciation 0.166 0.163 0.003 0.177 0.164 0.013
Rent and purchased transportation 0.144 0.181 (0.037) 0.139 0.181 (0.042)
Communications and utilities 0.017 0.019 (0.002) 0.018 0.020 (0.002)
Other 0.002 (0.008) 0.010 0.002 (0.007) 0.009
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Owner-operator costs are included in rent and purchased transportation expense. Owner-operators are independent contractors who supply their own tractor and driver and are responsible for their operating expenses (including driver pay, fuel, supplies and maintenance and fuel taxes). Owner-operator miles as a percentage of total miles were 11.6% for both third quarter 2009 and third quarter 2008. Because owner-operator miles as a percentage of total miles were the same in both periods, essentially no shifting of costs occurred between the rent and purchased transportation category and other expense categories.
Beginning in the latter months of 2008, we took steps to manage and reduce a variety of controllable costs and adapt to a smaller fleet. We continued by implementing numerous cost-saving programs throughout the first nine months of 2009. Examples of these cost-saving measures included improving our ratio of tractors to non-driver employees, reducing driver advertising, reducing driver lodging costs, restructuring discretionary . . .
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