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WERN > SEC Filings for WERN > Form 10-Q on 4-Aug-2014All Recent SEC Filings

Show all filings for WERNER ENTERPRISES INC

Form 10-Q for WERNER ENTERPRISES INC


4-Aug-2014

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 2013 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 second quarter 2014 to second quarter 2013, 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 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.


Table of Contents

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)                      Six Months Ended (6ME)               Percentage Change in
                                    June 30,                                     June 30,                         Dollar Amounts
                           2014                  2013                   2014                   2013               3ME         6ME
(Amounts in
thousands)               $         %           $         %            $          %           $         %           %           %
Operating revenues  $ 542,120   100.0     $ 506,648   100.0     $ 1,034,142   100.0     $ 999,535   100.0       7.0  %      3.5  %

Operating expenses:
Salaries, wages and
benefits              144,506    26.7       135,236    26.7         279,219    27.0       268,341    26.9       6.9  %      4.1  %
Fuel                   92,131    17.0        90,191    17.8         183,206    17.7       186,984    18.7       2.2  %     (2.0 )%
Supplies and
maintenance            45,887     8.5        43,934     8.7          91,741     8.9        87,062     8.7       4.4  %      5.4  %
Taxes and licenses     21,311     3.9        21,586     4.2          42,143     4.0        43,210     4.3      (1.3 )%     (2.5 )%
Insurance and
claims                 19,180     3.5        17,320     3.4          39,386     3.8        37,121     3.7      10.7  %      6.1  %
Depreciation           44,573     8.2        42,367     8.4          87,696     8.5        84,698     8.5       5.2  %      3.5  %
Rent and purchased
transportation        128,239    23.7       115,060    22.7         239,885    23.2       221,378    22.2      11.5  %      8.4  %
Communications and
utilities               3,409     0.6         3,187     0.6           6,908     0.7         6,329     0.6       7.0  %      9.1  %
Other                     554     0.1        (4,594 )  (0.9 )        (1,813 )  (0.2 )      (6,642 )  (0.7 )   112.1  %     72.7  %
Total operating
expenses              499,790    92.2       464,287    91.6         968,371    93.6       928,481    92.9       7.6  %      4.3  %

Operating income       42,330     7.8        42,361     8.4          65,771     6.4        71,054     7.1      (0.1 )%     (7.4 )%
Total other expense
(income)                 (569 )  (0.1 )        (526 )  (0.1 )        (1,126 )  (0.1 )        (897 )  (0.1 )    (8.2 )%    (25.5 )%
Income before
income taxes           42,899     7.9        42,887     8.5          66,897     6.5        71,951     7.2         -  %     (7.0 )%
Income taxes           17,267     3.2        17,047     3.4          26,926     2.6        28,600     2.9       1.3  %     (5.9 )%
Net income          $  25,632     4.7     $  25,840     5.1     $    39,971     3.9     $  43,351     4.3      (0.8 )%     (7.8 )%


Table of Contents

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                           Six Months Ended
                                        June 30,                                    June 30,
                               2014                  2013                  2014                  2013
Truckload
Transportation Services
(amounts in thousands)       $          %          $          %          $          %          $          %
Trucking revenues, net
of fuel surcharge       $ 332,025             $ 320,000             $ 643,547             $ 633,400
Trucking fuel surcharge
revenues                   92,737                88,574               179,758               180,159
Non-trucking and other
operating revenues          4,628                 4,295                 9,270                 8,210
Operating revenues        429,390     100.0     412,869     100.0     832,575     100.0     821,769     100.0
Operating expenses        391,070      91.1     378,427      91.7     773,475      92.9     763,712      92.9
Operating income        $  38,320       8.9   $  34,442       8.3   $  59,100       7.1   $  58,057       7.1



                                    Three Months Ended                     Six Months Ended
                                         June 30,                              June 30,
Truckload Transportation
Services                             2014         2013      % Change       2014        2013      % Change
Operating ratio, net of fuel
surcharge revenues                    88.6 %       89.4 %                   90.9 %      91.0 %
Average revenues per tractor per
week (1)                         $   3,620      $ 3,450        4.9  %   $  3,521     $ 3,409        3.3  %
Average trip length in miles
(loaded)                               466          441        5.7  %        466         453        2.9  %
Average percentage of empty
miles (2)                            12.14 %      12.93 %     (6.1 )%      12.06 %     12.98 %     (7.1 )%
Average tractors in service          7,055        7,134       (1.1 )%      7,029       7,146       (1.6 )%
Total trailers (at quarter end)     21,865       22,005                   21,865      22,005
Total tractors (at quarter end):
   Company                           6,375        6,480                    6,375       6,480
   Independent contractor              660          670                      660         670
     Total tractors                  7,035        7,150                    7,035       7,150

(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                          Six Months Ended
                                           June 30,                                   June 30,
                                  2014                  2013                 2014                  2013
Value Added Services
(amounts in thousands)          $          %         $          %          $          %          $          %
Operating revenues         $ 100,501     100.0   $ 91,185     100.0   $ 185,655     100.0   $ 173,695     100.0
Rent and purchased
transportation expense        87,209      86.8     76,255      83.6     159,763      86.1     145,452      83.7
Gross margin                  13,292      13.2     14,930      16.4      25,892      13.9      28,243      16.3
Other operating expenses      11,037      11.0     10,441      11.5      21,782      11.7      20,141      11.6
Operating income           $   2,255       2.2   $  4,489       4.9   $   4,110       2.2   $   8,102       4.7


Table of Contents

                                      Three Months Ended                        Six Months Ended
                                           June 30,                                 June 30,
Value Added Services                   2014           2013      % Change        2014          2013      % Change
Total VAS shipments                  74,660          70,383        6.1 %       136,952      134,749        1.6  %
Less: Non-committed shipments to
Truckload segment                    20,163          19,411        3.9 %        36,660       39,357       (6.9 )%
Net VAS shipments                    54,497          50,972        6.9 %       100,292       95,392        5.1  %
Average revenue per shipment     $    1,699         $ 1,632        4.1 %    $    1,707     $  1,653        3.3  %

Average tractors in service              48              45                         47           42
Total trailers (at quarter end)       1,730           1,755                      1,730        1,755
Total tractors (at quarter end)          55              43                         55           43

Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013 Operating Revenues
Operating revenues increased 7.0% for the three months ended June 30, 2014, compared to the same period of the prior year. When comparing second quarter 2014 to second quarter 2013, Truckload segment revenues increased $16.5 million, or 4.0%, and VAS revenues increased $9.3 million, or 10.2%.
Within the Truckload segment, positive freight demand trends continued from first quarter 2014 into second quarter 2014. Freight demand (as measured by our daily morning ratio of loads available to trucks available in our One-Way Truckload network) showed consistent strength, and we were overbooked (more available freight than available trucks at the start of each day) throughout second quarter 2014. A tight capacity market combined with a gradually firming economy were the primary contributing factors. This trend has continued through July 2014. Truck capacity is being constrained by an extremely challenging driver market, a larger number of trucking company failures in 2014 than 2013 and heightened regulatory cost increases for truck ownership and safety; thus, we expect this favorable freight trend will continue.
Trucking revenues, net of fuel surcharge, increased 3.8% due to an increase in average revenues per tractor per week, partially offset by a decrease in the average number of tractors in service. Average revenues per tractor per week, net of fuel surcharge, increased 4.9% in second quarter 2014 compared to second quarter 2013. This increase resulted from planned network design changes that enabled us to increase our average trip length by 5.7% which improved average miles per truck, despite operating under the more restrictive hours of service rules that became effective July 1, 2013, and reduced empty miles. The increase in average trip length also produced an expected negative impact on revenue per mile. Even after these changes, average revenues per total mile, excluding fuel surcharge, rose 2.1% in second quarter 2014 compared to second quarter 2013. We have made good progress working with our customers on sustainable rate increases during second quarter 2014. We intend to continue these efforts as we move forward and work to recoup the cost increases associated with more expensive equipment, a shrinking supply of qualified drivers and an increasingly difficult regulatory environment.
The average number of tractors in service in the Truckload segment decreased 1.1% to 7,055 in second quarter 2014 from 7,134 in second quarter 2013, a decrease of 79 tractors. We ended second quarter 2014 with 7,035 tractors in the Truckload segment, a decrease of 45 trucks from the end of first quarter 2014. We cannot predict whether future driver shortages, if any, will adversely affect our ability to maintain our fleet size. 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 increased 4.7% to $92.7 million in second quarter 2014 from $88.6 million in second quarter 2013 because of higher average fuel prices and higher miles in second quarter 2014. 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.


Table of Contents

We continue to diversify our business model with the goal of achieving a balanced portfolio of revenues comprised of one-way truckload, specialized and logistics (VAS) services by growing our logistics services revenues. Our Specialized Services unit, primarily Dedicated, ended the quarter with 3,515 trucks (or 50% of our total Truckload segment fleet).
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 $0.9 million in second quarter 2014 and $0.5 million in second quarter 2013 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 10.2% to $100.5 million in second quarter 2014 from $91.2 million in second quarter 2013, resulting from growth in Intermodal and Werner Global Logistics revenues. VAS gross margin dollars decreased 11.0% to $13.3 million in second quarter 2014 from $14.9 million for the same period in 2013, and its gross margin percentage declined to 13.2% in second quarter 2014 from 16.4% in second quarter 2013. Operating income was impacted by a lower gross margin percentage for contractual business due to rising third party carrier costs, as capacity was tighter during second quarter 2014 compared to second quarter 2013. Other operating expenses increased $0.6 million, or 5.7%, and VAS operating income decreased 49.8% to $2.3 million in second quarter 2014 from $4.5 million in second quarter 2013. The average number of tractors in service in the VAS segment (intermodal drayage trucks) increased to 48 in second quarter 2014 from 45 in second quarter 2013, an increase of 3 tractors.
Operating Expenses
Our operating ratio (operating expenses expressed as a percentage of operating revenues) was 92.2% for the three months ended June 30, 2014, compared to 91.6% for the three months ended June 30, 2013. Expense items that impacted the overall operating ratio are described on the following pages. The tables on pages 14 through 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 $9.3 million, or 6.9%, in second quarter 2014 compared to second quarter 2013 and remained at 26.7% as a percentage of operating revenues. The higher dollar amount of salaries, wages and benefits expense was due to higher driver and non-driver salaries and fringe benefits. When evaluated on a per-mile basis, driver and non-driver salaries, wages and benefits increased as well, which we attribute to (i) higher driver pay, including discretionary pay items, in a more competitive driver market, (ii) higher driver recruitment costs and (iii) higher health insurance costs during second quarter 2014. Non-driver salaries, wages and benefits in the non-trucking VAS segment decreased 2.6%, and net VAS shipments managed by VAS personnel increased by 6.9%.
We renewed our workers' compensation insurance coverage for the policy year beginning April 1, 2014. 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 2014 were similar to those for the previous policy year. The driver recruiting and retention market was extremely difficult in second quarter 2014. We believe that a declining number of, and increased competition for, driver training school graduates, a gradually declining national unemployment rate and job competition from the housing construction and hydraulic fracturing markets were all contributing factors. We expect that competition for drivers will further intensify as 2014 progresses. 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 increased $1.9 million or 2.2% in second quarter 2014 compared to second quarter 2013 but decreased 0.8% as a percentage of operating revenues due to (i) higher company miles and (ii) higher average diesel fuel prices. Average diesel fuel prices were 5 cents per gallon higher in second quarter 2014 than in second quarter 2013. These increases were partially offset by improved miles per gallon ("mpg").
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 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. However, fuel savings from 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 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.


Table of Contents

For July 2014, the average diesel fuel price per gallon was approximately 10 cents lower than the average diesel fuel price per gallon in the same period of 2013 and approximately 15 cents lower than in third quarter 2013.
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. As of June 30, 2014, we had no derivative financial instruments to reduce our exposure to fuel price fluctuations.
Supplies and maintenance increased $2.0 million or 4.4% in second quarter 2014 compared to second quarter 2013 but decreased 0.2% as a percentage of operating revenues. Increased driver advertising and other driver related expenses and higher company driver miles in second quarter 2014 compared to second quarter 2013 were primarily responsible for the increase in supplies and maintenance. The average age of our company truck fleet was 2.4 years at the end of second quarter 2014 and second quarter 2013 and was 2.5 years at the end of first quarter 2014. We plan to increase capital expenditures during the second half of 2014 to reduce the average age of our company truck fleet.
Taxes and licenses decreased $0.3 million or 1.3% in second quarter 2014 compared to second quarter 2013 and decreased 0.3% as a percentage of operating revenues. The decrease resulted from improved mpg despite driving more miles in second quarter 2014 than in second quarter 2013.
Insurance and claims increased $1.9 million or 10.7% in second quarter 2014 compared to second quarter 2013 and increased 0.1% as a percentage of operating revenues. The increase in second quarter 2014 compared to second quarter 2013 was primarily the result of a higher amount of reserve increases on high dollar . . .

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