WERNER ENTERPRISES, INC. 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
• COVID-19 • Results of Operations
• Liquidity and Capital Resources
• Contractual Obligations and Commercial Commitments
• Regulations
• Critical Accounting Estimates
The MD&A should be read in conjunction with our 2019 Form 10-K.
Overview:
We have two reportable segments,
Revenues for our TTS segment operating units (Dedicated and One-Way Truckload)
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 surcharge revenues 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 TTS segment also generates a small amount of revenues
categorized as non-trucking revenues, which consist primarily of the
intra-
Our most significant resource requirements are company drivers, independent contractors, tractors and trailers. Independent contractors supply their own tractors and drivers and are responsible for their operating expenses. 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 TTS 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 TTS 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 first quarter 2020 to first quarter 2019, 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, compliance with new or proposed regulations and a weakening 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 TTS segment requires substantial cash expenditures for tractor and trailer purchases. We fund
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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 Werner Logistics segment (Truckload Logistics, Intermodal, WGL and Final Mile). Unlike our TTS segment, the Werner Logistics 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 Werner Logistics 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 Werner Logistics 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 have a mix of contracted long-term rates and variable 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.
COVID-19:
The COVID-19 pandemic, declared
Over the past several years, we have repositioned Werner to increase our ability to execute through different macroeconomic environments. We believe our freight base, which is heavily weighted toward customers delivering essential products that are continually being restocked in today's economy, will enable us to more effectively manage through the difficult economic environment created by the pandemic. Our results for first quarter 2020 reflect freight demand that was slightly below the same period a year ago, with above normal demand the last two to three weeks of March as consumers purchased essential products for their homes. 62% of first quarter 2020 revenues from our top 100 customers (85% of revenues in first quarter 2020) came from the discount retail, home improvement retail, food and beverage, and consumer packaged goods verticals.
Our second quarter and 2020 results will likely be further impacted by the
disruptive effect of COVID-19, although the degree of disruption is difficult to
predict. Freight demand in our One-Way Truckload unit in
At the end of first quarter 2020, we believe we are well positioned with a
strong balance sheet and sufficient liquidity. Our debt is low at
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We don't currently expect the Coronavirus Aid, Relief, and Economic Security Act
(the "CARES Act"), enacted in
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
Three Months Ended (3ME) Change in Dollar
March 31, Amounts
2020 2019 3ME
(Amounts in thousands) $ % $ % %
Operating revenues $ 592,703 100.0 $ 596,117 100.0 (0.6 )
Operating expenses:
Salaries, wages and benefits 205,997 34.8 202,799 34.0 1.6
Fuel 48,771 8.2 56,138 9.4 (13.1 )
Supplies and maintenance 45,721 7.7 45,685 7.7 0.1
Taxes and licenses 22,850 3.9 22,901 3.8 (0.2 )
Insurance and claims 36,064 6.1 22,709 3.8 58.8
Depreciation 68,837 11.6 60,759 10.2 13.3
Rent and purchased transportation 126,442 21.3 132,836 22.3 (4.8 )
Communications and utilities 3,808 0.7 4,011 0.7 (5.1 )
Other 3,147 0.5 260 - 1,110.4
Total operating expenses 561,637 94.8 548,098 91.9 2.5
Operating income 31,066 5.2 48,019 8.1 (35.3 )
Total other expense (income) 1,010 0.1 (161 ) - 727.3
Income before income taxes 30,056 5.1 48,180 8.1 (37.6 )
Income taxes 6,998 1.2 12,094 2.0 (42.1 )
Net income $ 23,058 3.9 $ 36,086 6.1 (36.1 )
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The following tables set forth the operating revenues, operating expenses and operating income for the TTS segment, as well as certain statistical data regarding our TTS segment operations for the periods indicated.
Three Months Ended
March 31,
2020 2019
$ % $ %
Trucking revenues, net of fuel surcharge $ 409,098 $ 397,691
Trucking fuel surcharge revenues 51,041 58,177
Non-trucking and other operating revenues 4,724 7,023
Operating revenues 464,863 100.0 462,891 100.0
Operating expenses 435,774 93.7 419,938 90.7
Operating income $ 29,089 6.3 $ 42,953 9.3
Three Months Ended
March 31,
Truckload Transportation Services segment 2020 2019 % Change
Average tractors in service 7,862 7,887 (0.3 )%
Average revenues per tractor per week (1) $ 4,003 $ 3,879 3.2 %
Total tractors (at quarter end)
Company 7,350 7,355 (0.1 )% Independent contractor 485 590 (17.8 )% Total tractors 7,835 7,945 (1.4 )% Total trailers (at quarter end) 21,910 23,235 (5.7 )%
3,271 3,357 (2.6 )%
Total tractors (at quarter end) 3,150 3,385 (6.9 )%
Average percentage of empty miles 11.83 % 11.60 % 2.0 %
Average revenues per tractor per week (1) $ 4,182 $ 4,127 1.3 %
Average % change in revenues per total mile (1) (3.7 )% 6.5 %
Average % change in total miles per tractor per week 5.1 % (3.5 )% Average completed trip length in miles (loaded)
863 854 1.1 %
Dedicated
Trucking revenues, net of fuel surcharge (in 000's)
4,591 4,530 1.3 %
Total tractors (at quarter end) 4,685 4,560 2.7 %
Average revenues per tractor per week (1) $ 3,874 $ 3,694 4.9 %
(1) Net of fuel surcharge revenues.
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The following tables set forth the Werner Logistics 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 Werner Logistics segment.
Three Months Ended
March 31,
2020 2019
Werner Logistics segment (amounts in thousands) $ % $ % Operating revenues
$ 112,164 100.0$ 117,370 100.0 Rent and purchased transportation expense 95,932 85.5 97,020 82.7 Gross margin 16,232 14.5 20,350 17.3 Other operating expenses 15,147 13.5 15,639 13.3 Operating income$ 1,085 1.0$ 4,711 4.0 Three Months Ended March 31, Werner Logistics segment 2020 2019 % Change Average tractors in service 32 38 (15.8 )% Total tractors (at quarter end) 30 40 (25.0 )% Total trailers (at quarter end) 1,625 1,745 (6.9 )%
Three Months Ended
During first quarter 2020, freight demand in our One-Way Truckload fleet in
January and February was seasonally normal and slightly below the same period a
year ago. Following the pandemic declaration on
Trucking revenues, net of fuel surcharge, increased 2.9% in first quarter 2020
compared to first quarter 2019 due to a 3.2% increase in average revenues per
tractor per week, net of fuel surcharge, which was due primarily to an increase
in average miles per tractor and to a lesser extent an increase in average
revenues per total mile, partially offset by a 0.3% decrease in the average
number of tractors in service. The increase in average revenues per total mile
was due primarily to relative strength in Dedicated pricing, mostly offset by a
3.7% decrease in One-Way Truckload pricing. We currently expect average revenues
per total mile for the One-Way Truckload fleet for the first half of 2020 to
decrease in a range of 5% to 7% when compared to the first half of 2019,
resulting from what we believe will be a very difficult freight market in May
and
The average number of tractors in service in the TTS segment decreased 0.3% to 7,862 in first quarter 2020 from 7,887 in first quarter 2019. We ended first quarter 2020 with 7,835 trucks in the TTS segment, a year-over-year decrease of 110 trucks compared to the end of first quarter 2019, and a sequential decrease of 165 trucks compared to the end of fourth quarter 2019. We currently expect our truck count at the end of 2020 to be in a range of 5% lower to flat when compared to the fleet size at year-end 2019. Our fleet count may decline more in second quarter depending on the freight market and the pace and timing of recovery. We cannot predict whether future driver shortages, if any, will adversely affect our ability to maintain our fleet size. If such a driver shortage were to occur, it could result in a fleet size reduction, and our results of operations could be adversely affected.
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Trucking fuel surcharge revenues decreased 12.3% to
Werner Logistics revenues are generated by its four operating units and exclude
revenues for full truckload shipments transferred to the TTS segment, which are
recorded as trucking revenues by the TTS segment. Werner Logistics also recorded
revenue and brokered freight expense of
Operating Expenses
Our operating ratio (operating expenses expressed as a percentage of operating
revenues) was 94.8% for the three months ended
Salaries, wages and benefits increased
We renewed our workers' compensation insurance coverage on
The driver recruiting market is extremely competitive. Several ongoing market factors persisted including a declining number of, and increased competition for, driver training school graduates, aging truck driver demographics and increased truck safety regulations including the regulation changes for electronic logging devices. We continue to take significant actions to strengthen our driver recruiting and retention to make Werner a preferred choice for the best drivers, including raising driver pay, maintaining a new truck and trailer fleet, purchasing best-in-class safety features for all new trucks, investing in our driver training school network and collaborating with customers to improve or eliminate unproductive freight. These efforts continue to have positive results on our driver retention. We are unable to predict whether we will experience future driver shortages or continue to maintain our current driver retention rates. If such a driver shortage were to occur and additional 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.
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Fuel decreased
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, more aerodynamic truck features, idle reduction
systems, trailer tire inflation systems, trailer skirts and automated manual
transmissions to reduce our fuel gallons purchased. However, fuel savings from
mpg improvement is partially offset by higher depreciation expense and the
additional cost of diesel exhaust fluid. 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
For
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
Supplies and maintenance remained flat in first quarter 2020 compared to first quarter 2019. The increased expense resulting from higher company truck miles in 2020 was offset by lower driver recruiting and other driver-related costs, as well as lower non-driver travel expenses.
Insurance and claims increased
We renewed our liability insurance policies on
Depreciation expense increased
The average age of our truck fleet remains low by industry standards and was 2.0
years as of
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Rent and purchased transportation expense decreased
Rent and purchased transportation expense for the TTS segment decreased
Challenging operating conditions continue to make independent contractor recruitment and retention difficult. Such conditions include inflationary cost increases that are the responsibility of independent contractors and a shortage of financing available to independent contractors for equipment purchases. Historically we have been able to add company tractors and recruit additional company drivers to offset any decrease in the number of independent contractors. If a shortage of independent contractors and company drivers occurs, further increases in per-mile settlement rates (for independent contractors) and driver pay rates (for company drivers) may become necessary to attract and retain these drivers. These rate increases could negatively affect our results of operations to the extent that we would not be able to obtain corresponding freight rate increases.
Other operating expenses increased
Other Expense (Income)
Other expense (income) increased
Income Taxes Our effective income tax rate (income taxes expressed as a percentage of income before income taxes) was 23.3% in first quarter 2020 compared to 25.1% in first quarter 2019. The lower income tax rate in first quarter 2020 was attributed primarily a favorable discrete income tax item in first quarter 2020.
Liquidity and Capital Resources:
During the three months ended
Net cash used in investing activities decreased to
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Net financing activities used
Management believes our financial position at
Contractual Obligations and Commercial Commitments:
Item 7 of Part II of our 2019 Form 10-K includes our disclosure of contractual
obligations and commercial commitments as of
Regulations:
Item 1 of Part I of our 2019 Form 10-K includes a discussion of pending proposed regulations that may have an effect on our operations if they become adopted and effective as proposed. There have been no material changes in the status of these proposed regulations previously disclosed in the 2019 Form 10-K.
Critical Accounting Estimates:
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in
Information regarding our Critical Accounting Estimates can be found in our 2019 Form 10-K. Estimates of accrued liabilities for insurance and claims for bodily injury, property damage and workers' compensation is a critical accounting estimate that requires us to make significant judgments and estimates and affects our financial statements.
There have been no material changes to this critical accounting estimate from that discussed in our 2019 Form 10-K.
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