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WERN > SEC Filings for WERN > Form 10-K on 25-Feb-2014All Recent SEC Filings

Show all filings for WERNER ENTERPRISES INC

Form 10-K for WERNER ENTERPRISES INC


25-Feb-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management's Discussion and Analysis of Financial Condition and Results of Operations ("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:
Cautionary Note Regarding Forward-Looking Statements

Overview

Results of Operations

Liquidity and Capital Resources

Contractual Obligations and Commercial Commitments

Off-Balance Sheet Arrangements

Critical Accounting Policies

Inflation

Cautionary Note Regarding Forward-Looking Statements:
This Annual Report on Form 10-K contains historical information and forward-looking statements based on information currently available to our management. The forward-looking statements in this report, including those made in this Item 7 (Management's Discussion and Analysis of Financial Condition and Results of Operations), are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended. These safe harbor provisions encourage reporting companies to provide prospective information to investors. Forward-looking statements can be identified by the use of certain words, such as "anticipate," "believe," "estimate," "expect," "intend," "plan," "project" and other similar terms and language. We believe the forward-looking statements are reasonable based on currently available information. However, forward-looking statements involve risks, uncertainties and assumptions, whether known or unknown, that could cause our actual results, business, financial condition and cash flows to differ materially from those anticipated in the forward-looking statements. A discussion of important factors relating to forward-looking statements is included in Item 1A (Risk Factors) of Part I of this Form 10-K. Readers should not unduly rely on the forward-looking statements included in this Form 10-K because such statements speak only to the date they were made. Unless otherwise required by applicable securities laws, we undertake no obligation or duty to update or


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revise any forward-looking statements contained herein to reflect subsequent events or circumstances or the occurrence of unanticipated events. Overview:
We have two reportable segments, Truckload and 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 2013 to 2012, several industry-wide issues have caused, and could 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 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.


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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.

                                                                                                  Percentage Change in
                             2013                      2012                      2011                Dollar Amounts
                                                                                                                2012 to
(Amounts in                                                                                        2013 to       2011
thousands)                $            %            $            %            $            %      2012 (%)        (%)
Operating revenues  $ 2,029,183     100.0     $ 2,036,386     100.0     $ 2,002,850     100.0      (0.4 )         1.7

Operating expenses:
Salaries, wages and
benefits                545,419      26.9         544,322      26.7         536,509      26.8       0.2           1.5
Fuel                    371,789      18.3         401,417      19.7         412,905      20.6      (7.4 )        (2.8 )
Supplies and
maintenance             179,172       8.8         172,505       8.5         169,386       8.5       3.9           1.8
Taxes and licenses       86,686       4.3          90,002       4.4          92,917       4.6      (3.7 )        (3.1 )
Insurance and
claims                   71,177       3.5          65,593       3.2          67,523       3.4       8.5          (2.9 )
Depreciation            173,019       8.5         166,957       8.2         158,634       7.9       3.6           5.2
Rent and purchased
transportation          456,885      22.5         420,480      20.7         387,472      19.3       8.7           8.5
Communications and
utilities                13,506       0.7          13,745       0.7          15,181       0.8      (1.7 )        (9.5 )
Other                    (8,196 )    (0.4 )       (10,079 )    (0.5 )       (11,351 )    (0.6 )    18.7          11.2
Total operating
expenses              1,889,457      93.1       1,864,942      91.6       1,829,176      91.3       1.3           2.0

Operating income        139,726       6.9         171,444       8.4         173,674       8.7     (18.5 )        (1.3 )
Total other expense
(income)                 (1,985 )    (0.1 )        (1,722 )    (0.1 )        (1,232 )     0.0     (15.3 )       (39.8 )
Income before
income taxes            141,711       7.0         173,166       8.5         174,906       8.7     (18.2 )        (1.0 )
Income taxes             54,926       2.7          70,132       3.4          72,149       3.6     (21.7 )        (2.8 )
Net income          $    86,785       4.3     $   103,034       5.1     $   102,757       5.1     (15.8 )         0.3


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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.

                                     2013                     2012                     2011
Truckload Transportation
Services (amounts in
thousands)                         $           %           $           %            $           %
Trucking revenues, net of
fuel surcharge               $ 1,287,656             $ 1,309,503              $ 1,310,612
Trucking fuel surcharge
revenues                         354,616                 376,104                  373,384
Non-trucking and other
operating revenues                15,582                  13,742                   10,969
Operating revenues             1,657,854     100.0     1,699,349      100.0     1,694,965      100.0
Operating expenses             1,538,257      92.8     1,546,207       91.0     1,537,361       90.7
Operating income                 119,597       7.2       153,142        9.0       157,604        9.3



Truckload Transportation Services                 2013        2012        2011
Operating ratio, net of fuel surcharge revenues    90.8 %      88.4 %      88.1 %
Average revenues per tractor per week (1)       $ 3,457     $ 3,486     $ 3,480
Average trip length in miles (loaded)               453         481         493
Average percentage of empty miles (2)              12.5 %      12.3 %      11.7 %
Average tractors in service                       7,162       7,225       7,242
Total trailers (at year end)                     21,980      22,415      22,095
Total tractors (at year end):
Company                                           6,380       6,505       6,600
Independent contractor                              670         645         600
Total tractors                                    7,050       7,150       7,200

(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.

2013 2012 2011
Value Added Services (amounts
in thousands)                       $           %            $           %            $           %
Operating revenues             $ 361,384      100.0     $ 324,155      100.0     $ 292,813      100.0
Rent and purchased
transportation expense           305,582       84.6       274,326       84.6       245,898       84.0
Gross margin                      55,802       15.4        49,829       15.4        46,915       16.0
Other operating expenses          41,138       11.3        33,830       10.5        29,879       10.2
Operating income               $  14,664        4.1     $  15,999        4.9     $  17,036        5.8


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                                                                                    Percentage Change
Value Added Services              2013          2012          2011           2013 to 2012      2012 to 20111
Total VAS shipments              277,430       265,411       256,116              4.5  %             3.6 %
Less: Non-committed shipments
to Truckload segment              75,852        79,025        78,842             (4.0 )%             0.2 %
Net VAS shipments                201,578       186,386       177,274              8.2  %             5.1 %
Average revenue per shipment   $   1,627     $   1,602     $   1,529              1.6  %             4.8 %

Average tractors in service           45            22             3
Total trailers (at year end)       1,725           965           950
Total tractors (at year end)          49            39             8


2013 Compared to 2012
Operating Revenues

Operating revenues decreased 0.4% in 2013 compared to 2012 due to lower revenues in the Truckload segment, partially offset by higher VAS revenues.
Truckload segment revenues declined $41.5 million, or 2.4%, in 2013 compared to 2012. The truckload freight market during 2013 was comparable to 2012. The average weekly pre-booked percentage of loads to trucks ("pre-books") for the One-Way Truckload fleets in 2013 was slightly higher than 2012. In the first half of 2013, we saw similar freight demand and typical seasonal trends. The second half of 2013 also demonstrated normal season improvement with periods of stronger freight demand when compared with the same periods of 2012. We attribute this to slightly tighter industry capacity resulting from the July 1, 2013, HOS rule changes, slightly improved customer demand in comparison to economic uncertainty in the second half of 2012, and the compressed retail holiday selling period in 2013. Freight pre-books in our One-Way Truckload fleets in January and February 2014 were better than the same periods in 2013. Severe weather in January and February 2014 contributed to the freight improvement due to freight backlogs created by weather delays. Severe snow, ice and cold weather in multiple geographic regions, including the southeastern United States, has also caused a significant increase in costs in January and February 2014 in the areas of operating supplies and maintenance, insurance and claims, fuel (due to increased truck idling) and the impact of higher fixed costs per mile due to lower miles per truck.
Trucking revenues, net of fuel surcharge, decreased 1.7%, due to a 0.8% decrease in average revenues per tractor per week and a 0.9% decrease in the average number of tractors in service. Average revenues per tractor per week reflect the combined effects of average revenues per total mile, net of fuel surcharge, and average monthly miles per tractor. Average revenues per total mile, net of fuel surcharge, increased 2.1% in 2013 compared to 2012. Average monthly miles per tractor decreased 2.9% in 2013 compared to 2012, resulting from (i) a 5.8% shorter length of haul, (ii) an estimated two to three percent decrease due to the revised HOS rules effective July 1, 2013, and (iii) a truck mix change (more Dedicated, less One-Way Truckload).
The average number of tractors in service in the Truckload segment decreased to 7,162 in 2013 from 7,225 in 2012, a decrease of 63 tractors. We ended 2013 with 7,050 tractors, a decrease of 100 tractors from the end of 2012. We cannot predict whether future driver shortages, if any, will 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 5.7% to $354.6 million in 2013 from $376.1 million in 2012 because of lower average fuel prices and lower miles in 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 DOE 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.


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We continue to diversify our business model. Our goal is to attain a more balanced revenue portfolio comprised of one-way truckload, specialized services and logistics (which includes the VAS segment) by growing our logistics services revenues.
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 $4.5 million in 2013 and $3.2 million in 2012 for Intermodal drayage movements performed by the Truckload segment (also recorded as trucking revenues by the Truckload segment), and these transactions between reporting segments are eliminated in consolidation. VAS revenues increased 11.5% to $361.4 million in 2013 from $324.2 million in 2012, resulting from an increase in Brokerage and Intermodal shipments and a 1.6% increase in the average revenue per shipment. VAS gross margin dollars increased 12.0% to $55.8 million in 2013 from $49.8 million in 2012, and other operating expenses increased $7.3 million or 21.6%; 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 (intermodal drayage trucks) increased by 23, from 22 in 2012 to 45 in 2013. The VAS gross margin percentage remained flat at 15.4% in 2013 and 2012 and was negatively impacted by higher third party carrier rates as capacity tightened and competition increased in the second half of 2013. As a result, VAS operating income decreased 8.3% to $14.7 million in 2013 from $16.0 million in 2012. Operating Expenses
Our operating ratio (operating expenses expressed as a percentage of operating revenues) was 93.1% in 2013 compared to 91.6% in 2012. Expense items that impacted the overall operating ratio are described on the following pages. The tables on pages 15 through 17 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 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 $1.1 million or 0.2% in 2013 compared to 2012 and increased 0.2% as a percentage of operating revenues. The higher dollar amount of salaries, wages and benefits expense was due primarily to higher non-driver and student driver salaries. These increases were partially offset by lower workers' compensation expense and a lower dollar amount of driver salaries because of fewer total miles driven, including the shift from this expense category to rent and purchased transportation expense that occurred because of the increase in independent contractor miles as a percentage of total miles. However, when evaluated on a per-mile basis, salaries, wages and benefits increased, which we attribute primarily to higher driver pay, including discretionary and incentive performance pay items in a more competitive driver market, student driver pay as noted above, and higher driver pay during the startup of new Dedicated fleets. Non-driver salaries, wages and benefits in the non-trucking VAS segment increased 7.5% in 2013 compared to 2012. VAS handled 4.5% more shipments in 2013 compared to 2012, including those transferred to the Truckload segment, and the net shipments retained by VAS increased 8.2%. 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 was more challenging in 2013 compared to 2012. We believe that a declining number of, and increased competition for, driver training school graduates, a declining national unemployment rate and increased job competition from the strengthening housing construction and hydraulic fracturing industries were all contributing factors. We hired 0.2% fewer drivers in 2013 compared to 2012, and 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 market is better than that of many competitors because over 70% of our driving jobs are in more attractive, shorter-haul Regional and Dedicated 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 in 2014, we anticipate the driver market could become even more challenging in 2014. 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 $29.6 million or 7.4% in 2013 compared to 2012 and decreased 1.4% as a percentage of operating revenues due to (i) fewer miles, (ii) slightly improved miles per gallon ("mpg"), (iii) 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 and (iv) lower average diesel fuel prices. Average diesel fuel prices in 2013 were 7 cents per gallon lower than in 2012, a 2% decrease.
We continue to employ measures to improve our fuel mpg, including (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 including new trucks with U.S. Environmental Protection Agency (the "EPA") 2010 compliant engines, more aerodynamic truck features, idle reduction systems, tire inflation systems and trailer skirts to reduce our fuel gallons purchased. These measures resulted in an


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improvement in mpg in 2013 compared to 2012. However, fuel savings from the mpg improvement is partially 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 an 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 the first eight weeks of 2014, the average diesel fuel price per gallon was approximately 8 cents lower than the average diesel fuel price per gallon in the same period of 2013 and approximately 6 cents lower than the average for first quarter 2013.
Shortages of fuel, increases in fuel prices and petroleum product rationing can have a material 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. As of December 31, 2013, we had no derivative financial instruments to reduce our exposure to fuel price fluctuations. . . .

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