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WERN > SEC Filings for WERN > Form 10-Q on 5-Nov-2013All Recent SEC Filings

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Form 10-Q for WERNER ENTERPRISES INC


5-Nov-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
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 2012 Form 10-K. Overview:
We have two reportable segments, Truckload Transportation Services ("Truckload") and Value Added Services ("VAS"), and we operate in the truckload and logistics sectors of the transportation industry. In the truckload sector, we focus on transporting consumer nondurable products that generally 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 and effectively 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 affected by our customers' financial failures or loss of customer business.
Revenues for our Truckload segment operating units (One-Way Truckload and Specialized Services) are typically generated on a per-mile basis and also include revenues such as stop charges, loading and unloading charges, equipment detention charges and equipment repositioning charges. 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. Because fuel surcharge revenues fluctuate in response to changes in fuel costs, we identify them separately 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 percentage of empty miles (miles without trailer cargo), (iii) average trip length (in loaded miles) and (iv) 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, independent contractors, tractors and trailers. Our financial results are affected by company driver and independent contractor availability and the markets for new and used revenue equipment. We are self-insured for a significant portion of bodily injury, property damage and cargo claims; workers' compensation claims; and associate health claims (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 independent contractors (included in rent and purchased transportation expense), supplies and maintenance and insurance and claims. As discussed further in the comparison of operating results for third quarter 2013 to third quarter 2012, several industry-wide issues have caused, and could continue to cause, costs to increase in future periods. These issues include shortages of drivers or independent contractors, changing fuel prices, higher new truck and trailer purchase prices


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and compliance with new or proposed regulations. 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 the four operating units within our VAS segment (Brokerage, Freight Management, Intermodal and WGL). Unlike our Truckload segment, the VAS segment is less asset-intensive and is instead dependent upon qualified associates, information systems and qualified third-party capacity providers. The largest expense item related to the VAS segment is the cost of purchased transportation we pay to third-party capacity providers. This expense item is recorded as rent and purchased transportation expense. Other operating expenses consist primarily of salaries, wages and benefits. We evaluate the VAS segment's financial performance by reviewing the gross margin percentage (revenues less rent and purchased transportation expenses expressed as a percentage of revenues) and the operating income percentage. The gross margin percentage can be impacted by the rates charged to customers and the costs of securing third-party capacity. We generally do not have contracted long-term rates for the cost of third-party capacity, and we cannot assure that our operating results will not be adversely impacted in the future if our ability to obtain qualified third-party capacity providers changes or the rates of such providers increase.

Results of Operations:
The following table sets forth the Consolidated Statements of Income in dollars
and as a percentage of total operating revenues and the percentage increase or
decrease in the dollar amounts of those items compared to the prior year.

                            Three Months Ended (3ME)                       Nine Months Ended (9ME)               Percentage Change in
                                  September 30,                                 September 30,                       Dollar Amounts
                           2013                  2012                   2013                    2012                3ME         9ME
(Amounts in
thousands)               $         %           $         %            $          %            $          %           %           %
Operating revenues  $ 511,728   100.0     $ 506,504   100.0     $ 1,511,263   100.0     $ 1,526,692   100.0       1.0  %     (1.0 )%

Operating expenses:
Salaries, wages and
benefits              137,834    26.9       134,923    26.6         406,175    26.9         407,283    26.7       2.2  %     (0.3 )%
Fuel                   92,890    18.2        98,805    19.5         279,874    18.5         301,064    19.7      (6.0 )%     (7.0 )%
Supplies and
maintenance            46,538     9.1        44,589     8.8         133,600     8.8         131,167     8.6       4.4  %      1.9  %
Taxes and licenses     21,548     4.2        22,251     4.4          64,758     4.3          67,750     4.5      (3.2 )%     (4.4 )%
Insurance and
claims                 16,714     3.3        14,469     2.8          53,835     3.6          48,796     3.2      15.5  %     10.3  %
Depreciation           42,612     8.3        41,901     8.3         127,310     8.4         124,078     8.1       1.7  %      2.6  %
Rent and purchased
transportation        117,651    23.0       107,495    21.2         339,029    22.4         316,501    20.7       9.4  %      7.1  %
Communications and
utilities               3,754     0.7         3,382     0.7          10,083     0.7          10,545     0.7      11.0  %     (4.4 )%
Other                    (396 )  (0.1 )      (3,116 )  (0.6 )        (7,038 )  (0.5 )        (8,812 )  (0.6 )    87.3  %     20.1  %
Total operating
expenses              479,145    93.6       464,699    91.7       1,407,626    93.1       1,398,372    91.6       3.1  %      0.7  %

Operating income       32,583     6.4        41,805     8.3         103,637     6.9         128,320     8.4     (22.1 )%    (19.2 )%
Total other expense
(income)                 (523 )  (0.1 )        (427 )  (0.1 )        (1,420 )  (0.1 )        (1,181 )  (0.1 )   (22.5 )%    (20.2 )%
Income before
income taxes           33,106     6.5        42,232     8.3         105,057     7.0         129,501     8.5     (21.6 )%    (18.9 )%
Income taxes           11,847     2.3        17,104     3.4          40,447     2.7          52,448     3.4     (30.7 )%    (22.9 )%
Net income          $  21,259     4.2     $  25,128     5.0     $    64,610     4.3     $    77,053     5.0     (15.4 )%    (16.1 )%


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The following tables set forth the operating revenues, operating expenses and operating income for the Truckload segment, as well as certain statistical data regarding our Truckload segment operations for the periods indicated.

                                   Three Months Ended                            Nine Months Ended
                                      September 30,                                September 30,
                               2013                  2012                   2013                   2012
Truckload
Transportation Services
(amounts in thousands)       $          %          $          %          $           %          $           %
Trucking revenues, net
of fuel surcharge       $ 321,664             $ 326,222             $  955,064             $  979,422
Trucking fuel surcharge
revenues                   87,562                90,143                267,721                280,739
Non-trucking and other
operating revenues          3,447                 3,638                 11,657                 10,220
Operating revenues        412,673     100.0     420,003     100.0    1,234,442     100.0    1,270,381     100.0
Operating expenses        385,572      93.4     383,344      91.3    1,149,284      93.1    1,157,284      91.1
Operating income        $  27,101       6.6   $  36,659       8.7   $   85,158       6.9   $  113,097       8.9



                                    Three Months Ended                     Nine Months Ended
                                      September 30,                          September 30,
Truckload Transportation
Services                             2013         2012      % Change       2013         2012      % Change
Operating ratio, net of fuel
surcharge revenues                    91.7 %       88.9 %                    91.2 %      88.6 %
Average revenues per tractor per
week (1)                         $   3,436      $ 3,475       (1.1 )%   $   3,418     $ 3,465       (1.4 )%
Average trip length in miles
(loaded)                               445          477       (6.7 )%         450         481       (6.4 )%
Average percentage of empty
miles (2)                            12.31 %      12.48 %     (1.4 )%       12.76 %     12.20 %      4.6  %
Average tractors in service          7,200        7,222       (0.3 )%       7,164       7,248       (1.2 )%
Total trailers (at quarter end)     22,055       22,620                    22,055      22,620
Total tractors (at quarter end):
   Company                           6,565        6,460                     6,565       6,460
   Independent contractor              680          650                       680         650
     Total tractors                  7,245        7,110                     7,245       7,110

(1) Net of fuel surcharge revenues.

(2) "Empty" refers to miles without trailer cargo.

The following tables set forth the VAS segment's revenues, rent and purchased transportation expense, gross margin, other operating expenses (primarily salaries, wages and benefits expense) and operating income, as well as certain statistical data regarding the VAS segment's shipments and average revenues (excluding logistics fee revenue) per shipment for the periods indicated.

                                     Three Months Ended                          Nine Months Ended
                                        September 30,                              September 30,
                                  2013                 2012                 2013                  2012
Value Added Services
(amounts in thousands)         $          %         $          %          $          %          $          %
Operating revenues         $ 96,455     100.0   $ 83,213     100.0   $ 270,150     100.0   $ 245,839     100.0
Rent and purchased
transportation expense       81,958      85.0     70,611      84.9     227,410      84.2     208,876      85.0
Gross margin                 14,497      15.0     12,602      15.1      42,740      15.8      36,963      15.0
Other operating expenses     10,304      10.7      8,823      10.6      30,445      11.2      24,896      10.1
Operating income           $  4,193       4.3   $  3,779       4.5   $  12,295       4.6   $  12,067       4.9


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                                      Three Months Ended                         Nine Months Ended
                                        September 30,                              September 30,
Value Added Services                   2013           2012      % Change         2013            2012      % Change
Total VAS shipments                  71,210          65,989        7.9  %      205,959         201,185        2.4 %
Less: Non-committed shipments to
Truckload segment                    19,196          20,473       (6.2 )%       58,553          58,438        0.2 %
Net VAS shipments                    52,014          45,516       14.3  %      147,406         142,747        3.3 %
Average revenue per shipment     $    1,645         $ 1,651       (0.4 )%   $    1,651        $  1,589        3.9 %

Average tractors in service              46              21                         44              16
Total trailers (at quarter end)       1,715             980                      1,715             980
Total tractors (at quarter end)          50              39                         50              39

Three Months Ended September 30, 2013 Compared to Three Months Ended September 30, 2012
Operating Revenues
Operating revenues increased 1.0% for the three months ended September 30, 2013, compared to the same period of the prior year. Trucking revenues, net of fuel surcharge, decreased 1.4% due to a 1.1% decrease in average revenues per tractor per week and a 0.3% decrease in the average number of tractors in service. Third quarter freight demand (as measured by the daily morning ratio of loads to trucks in our One-Way Truckload network) showed normal seasonal improvement in August and September 2013. This was better than the softer freight demand during the same period a year ago when freight demand was essentially flat throughout the entire quarter. The Company believes that better freight conditions in third quarter 2013 resulted from slightly tighter capacity due to the July 1, 2013, government-mandated hours of service changes and slightly improved customer demand. Freight trends for the first three weeks of October 2013 continued to trend better than the softer freight demand of October 2012 and were more comparable to October 2012 during the last ten days of the month when freight demand improved in October 2012.
Average revenues per tractor per week declined by 1.1% due to a 3.5% decrease in average monthly miles per truck and partially offset by a 2.4% increase in average revenue per total mile, net of fuel surcharge. The decrease in the average miles per truck in third quarter 2013 compared to third quarter 2012 was due primarily to (i) a 6.7% shorter length of haul, (ii) an estimated two to three percent decrease due to the revised hours of service rules effective July 1, 2013, and (iii) a truck mix change (more Dedicated, less One-Way Truckload). Average revenues per loaded mile, net of fuel surcharge, increased 2.2% in third quarter 2013 compared to third quarter 2012. Our average percentage of empty miles decreased from 12.48% in third quarter 2012 to 12.31% in third quarter 2013, and our empty miles decreased 7.5% when measured on a per-trip basis. The average number of tractors in service in the Truckload segment decreased 0.3%, from 7,222 in third quarter 2012 to 7,200 in third quarter 2013, a decrease of 22 tractors. We ended the quarter with 7,245 tractors in the Truckload segment, an increase of 95 trucks from the end of second quarter 2013. We cannot predict whether future driver shortages may occur, which if they did, could adversely affect our ability to maintain our fleet size or return our fleet to our goal of 7,300 trucks. If such a driver market shortage were to occur, it could result in a fleet size reduction, and our results of operations could be adversely affected.
Trucking fuel surcharge revenues represent collections from customers for the increase in fuel and fuel-related expenses, including the fuel component of our independent contractor cost (recorded as rent and purchased transportation expense) and fuel taxes (recorded in taxes and licenses expense), when diesel fuel prices rise. Conversely, when fuel prices decrease, fuel surcharge revenues decrease. These revenues decreased 2.9% from $90.1 million in third quarter 2012 to $87.6 million in third quarter 2013 because of lower average fuel prices and lower miles in third quarter 2013. To lessen the effect of fluctuating fuel prices on our margins, we collect fuel surcharge revenues from our customers for the cost of diesel fuel and taxes in excess of specified base fuel price levels according to terms in our customer contracts. Fuel surcharge rates generally adjust weekly based on an independent U.S. Department of Energy fuel price survey which is released every Monday. 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 generally 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 and out-of-route miles (which are not billable to customers) and truck idle time. Fuel prices that change rapidly in short time periods also impact our recovery because the surcharge rate in most programs only changes once per week. We continue to diversify our business model. Our goal is to attain a more balanced revenue portfolio comprised of one-way truckload, specialized and logistics (which includes the VAS segment) services by growing our logistics services revenues. Our


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Specialized Services unit, primarily Dedicated, ended third quarter 2013 with 3,555 tractors or 49% of our Truckload segment fleet (an increase of 270 from the end of third quarter 2012).
VAS revenues are generated by its four operating units and exclude revenues for full truckload shipments transferred to the Truckload segment, which are recorded as trucking revenues by the Truckload segment. VAS also recorded revenue and brokered freight expense of $1.8 million in third quarter 2013 and $0.7 million in third quarter 2012 for Intermodal drayage movements performed by the Truckload segment (also recorded as trucking revenue by the Truckload segment), and these transactions between reporting segments are eliminated in consolidation. VAS revenues increased 16% from $83.2 million in third quarter 2012 to $96.5 million in third quarter 2013, resulting from an increase in the number of VAS shipments. VAS gross margin dollars increased 15% from $12.6 million in third quarter 2012 to $14.5 million for the same period in 2013, and other operating expenses increased $1.5 million or 17%; these changes are partially attributed to Intermodal's development of its own drayage fleet, which had the effect of lowering rent and purchased transportation expense and increasing other operating expenses. The average number of tractors in service in the VAS segment (dray trucks) increased from 21 in third quarter 2012 to 46 in third quarter 2013, an increase of 25 tractors. VAS operating income increased 11% from $3.8 million in third quarter 2012 to $4.2 million in third quarter 2013.

Brokerage revenues in third quarter 2013 increased 17% compared to third quarter 2012 due to a 20% increase in shipment volume. Brokerage operating income in third quarter 2013 was higher than in third quarter 2012, despite a 71 basis point decline in gross margin percentage. Intermodal revenues increased 28%, and Intermodal operating income increased at a higher percentage rate comparing third quarter 2013 to third quarter 2012. WGL revenues and operating income decreased in third quarter 2013 compared to third quarter 2012. Operating Expenses
Our operating ratio (operating expenses expressed as a percentage of operating revenues) was 93.6% for the three months ended September 30, 2013, compared to 91.7% for the three months ended September 30, 2012. Expense items that impacted the overall operating ratio are described on the following pages. The tables on pages 14-16 show the Consolidated Statements of Income in dollars and as a percentage of total operating revenues and the percentage increase or decrease in the dollar amounts of those items compared to the same quarter of the prior year, as well as the operating ratios, operating margins, and certain statistical information for our two reportable segments, Truckload and VAS. Salaries, wages and benefits increased $2.9 million, or 2.2%, in third quarter 2013 compared to third quarter 2012 and increased 0.3% as a percentage of operating revenues. The higher dollar amount of salaries, wages and benefits expense resulted from the increasingly competitive driver market and the lower average miles per truck offset partially by a shift from this expense category to rent and purchased transportation expense because of the increase in independent contractor miles as a percentage of total miles. When evaluated on a per-mile basis, salaries wages and benefits expense increased, which we attribute to (i) higher driver pay, including discretionary pay items in a more competitive driver market, student driver pay and driver pay related to new fleet startups, (ii) higher non-driver pay, and (iii) higher health insurance costs during third quarter 2013. Non-driver salaries, wages and benefits in the non-trucking VAS segment increased 5.4%, and net VAS shipments retained by VAS increased by 14.3%.
We renewed our workers' compensation insurance coverage for the policy year beginning April 1, 2013. Our coverage levels are the same as the prior policy year. We continue to maintain a self-insurance retention of $1.0 million per claim. Our workers' compensation insurance premiums for the policy year beginning April 2013 were similar to those for the previous policy year. The driver recruiting and retention market remained challenging in third quarter 2013 and was similar to first and second quarters 2013. We believe that a declining number of, and increased competition for, driver training school graduates, a gradually declining national unemployment rate and increased job competition from strengthening housing construction and hydraulic fracturing markets were all contributing factors. We were able to hire more drivers during third quarter 2013 compared to third quarter 2012, but the difficult driver market is making it challenging to achieve our 7,300 truck goal for the Truckload segment. However, we continue to believe our position in the current driver market is better than that of many competitors because over 70% of our driving jobs are in more attractive, shorter-haul Regional and Specialized Services fleet operations that enable us to return drivers to their homes on a more frequent and consistent basis. In the event the domestic economy strengthens, we anticipate the driver market could become even more challenging. We are unable to predict whether we will experience future driver shortages. If such a shortage were to occur and driver pay rate increases became necessary to attract and retain drivers, our results of operations would be negatively impacted to the extent that we could not obtain corresponding freight rate increases.
Fuel decreased $5.9 million or 6.0% in third quarter 2013 compared to third quarter 2012 and decreased 1.3% as a percentage of operating revenues due to (i) fewer miles, (ii) slightly improved miles per gallon ("mpg"), (iii) lower average diesel fuel prices and (iv) a shift from this expense category to rent and purchased transportation expense because of the increase in independent contractor miles as a percentage of total miles. Average diesel fuel prices were 6 cents per gallon lower in third quarter 2013 than in third quarter 2012.


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We continue to employ measures to improve our fuel mpg such as (i) limiting truck engine idle time, (ii) optimizing the speed, weight and specifications of our equipment and (iii) implementing mpg-enhancing equipment changes to our fleet such as new trucks with EPA 2010 compliant engines, more aerodynamic truck features, idle reduction systems, tire inflation systems and trailer skirts to reduce our fuel gallons purchased and improve our mpg. These measures resulted in an improvement in mpg in third quarter 2013 compared to third quarter 2012. However, fuel savings from the mpg improvement is offset by higher depreciation expense and the additional cost of diesel exhaust fluid (required in certain tractors with engines that meet the 2010 EPA emission standards). Although our fuel management programs require significant capital investment and research and development, we intend to continue these and other environmentally conscious initiatives, including our active participation as a U.S. Environmental Protection Agency (the "EPA") SmartWay Transport Partner. The SmartWay Transport Partnership is a national voluntary program developed by the EPA and freight industry representatives to reduce greenhouse gases and air pollution and promote cleaner, more efficient ground freight transportation.
For October 2013, the average diesel fuel price per gallon was approximately 27 cents lower than the average diesel fuel price per gallon in the same period of 2012 and approximately 15 cents lower than in fourth quarter 2012.
Shortages of fuel, increases in fuel prices and petroleum product rationing can have a materially adverse effect on our operations and profitability. We are unable to predict whether fuel price levels will increase or decrease in the future or the extent to which fuel surcharges will be collected from customers. . . .

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