Werner Enterprises' Q2 net income up 31% year-over-year to US$27.5M on strengthening freight volumes, revenues up 11% to US$515.9M; company says better performance due to tight capacity more than economic recovery

OMAHA, Nebraska , July 20, 2011 (press release) – Werner Enterprises, Inc. (NASDAQ:WERN - News) one of the nation’s largest transportation and logistics companies, reported revenues and earnings for the second quarter ended June 30, 2011.

Summarized financial results for second quarter and year-to-date 2011 compared to the same periods of 2010 are as follows (dollars in thousands, except per share data):

    2Q11   2Q10   % Change   YTD11   YTD10   % Change
Total revenues
  $515,897   $463,469   11 %   $985,326   $888,544   11 %
Trucking revenues, net of fuel
 surcharge
 
$333,709
 
$326,518
 
2
%
 
$650,156
 
$630,186
 
3
%
Value Added Services (“VAS”)
 revenues
 
$71,227
 
$65,066
 
9
%
 
$134,800
 
$126,466
 
7
%
Operating income   $46,767   $35,546   32 %   $74,209   $53,810   38 %
Net income   $27,518   $20,930   31 %   $43,811   $31,766   38 %
Earnings per diluted share   $0.38   $0.29   31 %   $0.60   $0.44   37 %
                             
Werner produced continued strong earnings growth of 31% in second quarter 2011 compared to second quarter 2010 despite sluggish freight demand in the first two months of second quarter 2011 compared to strong freight demand throughout second quarter 2010. Freight volumes strengthened in June 2011 from April and May. We continue to believe that favorable truckload trends are caused to a greater degree by industry capacity constraints than economic recovery.

Our average revenues per total mile increased 3.1% in second quarter 2011 compared to second quarter 2010. Contractual rate increases and a better freight mix were the principal reasons for the rate improvement. We continue to be successful in this tightening capacity environment by working jointly with our customers to secure sustainable transportation solutions across all modes. We remain committed to maintaining our fleet size at approximately 7,300 trucks. We will continue to strengthen and redesign our truckload freight network to optimize and maximize increasing freight opportunities without adding trucks. As a result, we are focused on expanding our operating margin percentage to raise our returns on assets, equity and invested capital, while staying true to our broad transportation services portfolio for our customers.

Capacity in our industry remains constrained by both economic and safety regulatory factors. From 2007 to 2010, the number of new trucks purchased was well below historical replacement levels for our industry. This led to the oldest average industry truck age in 40 years by the end of 2010. Carriers were compelled to upgrade their aging truck fleets which led to increased replacement purchases of new and later-model used trucks in 2011. However, we do not believe that industry fleet growth is occurring, as some carriers are already struggling to finance the replacement truck upgrade due to the large pricing gap between the significantly increased costs of EPA-complaint new trucks compared to the low value of record-old trucks.

The most significant safety regulatory changes in our 55-year history are occurring over the next three years. The Compliance Safety Accountability program, proposed changes to the hours of service regulations for commercial truck drivers and the proposed required use of electronic on-board recorders on virtually all trucks are expected to reduce, or have the effect of reducing, industry capacity.

We continue to diversify our business model with the goal of a balanced portfolio of revenues comprised of One-Way Truckload (which includes the Regional, medium-to-long-haul Van and Expedited fleets), Specialized Services and Logistics (VAS). Our Specialized Services unit, primarily Dedicated, ended the quarter with 3,600 trucks (49% of our total fleet).

Average diesel fuel prices were $0.97 per gallon higher in second quarter 2011 than in second quarter 2010 and were $0.30 higher than in first quarter 2011. For the first 20 days of July 2011, the average diesel fuel price per gallon was $1.05 higher than the average diesel fuel price per gallon in the same period of 2010 and $0.98 higher than in third quarter 2010. Diesel fuel prices rose rapidly in first quarter 2011 and April 2011 and then began to decline in May 2011. Diesel fuel prices declined in the second half of second quarter 2010 and remained relatively constant during third quarter 2010. When fuel prices rise rapidly, a negative earnings lag occurs because the cost of fuel rises immediately and the market indexes used to determine fuel surcharges increase at a slower pace. In a period of declining fuel prices, we generally experience a temporary favorable earnings effect because the fuel costs decline at a faster pace than the market indexes used to determine fuel surcharges.

We continued to effectively manage the impact of higher fuel costs by improving our fuel miles per gallon (“mpg”) by controlling truck idling and implementing fuel enhancing equipment changes to our fleet. We continue to invest in environmentally friendly and fuel-saving equipment solutions such as aerodynamic trucks, idling reduction systems, tire inflation systems and trailer skirts (including the development of and EPA approval for our own designed “Arrow Shield” trailer skirt) to reduce our fuel gallons purchased and improve our mpg.

The driver market is increasingly more competitive compared to 2010 and to first quarter 2011. An improving freight market, changing industry safety regulations and reduced financing options for driving school candidates continue to tighten qualified and student driver supply. We expect driver market challenges to increase for the remainder of 2011. We continue to believe our position in the driver market is better than that of many competitors because over 70% of our driving jobs are in more attractive Regional and Dedicated fleet operations that enable us to return these drivers to their homes on a more frequent and consistent basis.

Gains of sales of equipment were $5.6 million in second quarter 2011 compared to $0.5 million in second quarter 2010 and compared to $4.8 million in first quarter 2011. Our premium used trucks are increasingly more attractive to fleets that want to upgrade their older trucks without incurring the higher cost of new trucks. Gains on sales are reflected as a reduction of Other Operating Expenses in our income statement.

In 2011, we are increasing our purchases of new trucks and new trailers to replace older equipment that we sell or trade. However, we are not growing our fleet. Our net capital expenditures for 2011 are estimated to be $210 to $240 million, compared to net capital expenditures for 2010 of $119 million. During the six months ended June 30, 2011, we reduced the average age of our company truck fleet from 2.8 years to 2.6 years. We remain committed to the ongoing investment required to maintain a best-in-class fleet while focusing on the lowest-cost operating model for our customers.

To provide shippers with additional sources of managed capacity and network analysis, we continue to develop the non-asset-based VAS segment. VAS includes Brokerage, Freight Management, Intermodal and Werner Global Logistics (International).

 

Value Added Services (amounts in 000’s)   2Q11   2Q10
Revenues   $71,227   100.0 %   $65,066   100.0 %
Rent and purchased transportation expense   60,385   84.8     56,033   86.1  
Gross margin   10,842   15.2     9,033   13.9  
Other operating expenses   7,123   10.0     6,687   10.3  
Operating income   $3,719   5.2     $2,346   3.6  
                     


 
  2Q11   2Q10   Difference     % Change
Total VAS shipments   63,671   69,978   (6,307 )   (9 )%
Less: Non-committed shipments to
 Truckload segment
  20,247  
26,514
  (6,267 )   (24 )%
Net VAS shipments   43,424   43,464   (40 )   (0 )%
                   
Average revenue per shipment   $1,531   $1,332   $199     15 %
                     

Brokerage revenues in second quarter 2011 increased 22% compared to second quarter 2010 due to a 12% increase in shipment volume and a 9% increase in the average revenue per shipment. Brokerage gross margin dollars increased 26% as the gross margin percentage improved 44 basis points year-over-year, and operating income increased 47%. Sequentially, the Brokerage gross margin percentage declined to 12.8% in second quarter 2011 from 13.7% in first quarter 2011. Intermodal revenues increased 37% while intermodal gross margins and operating income increased at a higher percentage rate, comparing second quarter 2011 to second quarter 2010. Werner Global Logistics (WGL) revenues declined 8% while operating results improved in second quarter 2011 compared to second quarter 2010. WGL revenues increased 22% sequentially while gross margins and operating income also improved sequentially over first quarter 2011. Several international projects ended during the latter part of second quarter 2010 which caused the year over year revenue decline. Freight Management revenues and the number of shipments declined significantly due to a reduction in customer project business with a specific customer, however the gross margin dollars declined only slightly and operating income dollars increased slightly.

Comparisons of the operating ratios (net of fuel surcharge revenues) for the Truckload segment and VAS segment for second quarters 2011 and 2010 and year-to-date 2011 and 2010 are shown below.

Fluctuating fuel prices and fuel surcharge collections impact the total company operating ratio and the Truckload segment’s operating ratio when fuel surcharges are reported on a gross basis as revenues versus netting against fuel expenses. Eliminating fuel surcharge revenues, which are generally a more volatile source of revenue, provides a more consistent basis for comparing the results of operations from period to period. The Truckload segment’s operating ratios for second quarter 2011 and second quarter 2010 are 89.8% and 91.9%, respectively, and for year-to-date 2011 and 2010 are 91.8% and 93.8%, respectively, when fuel surcharge revenues are reported as revenues instead of a reduction of operating expenses.

Our financial position remains strong. We ended the quarter with no debt and $23.5 million of cash.

    INCOME STATEMENT DATA  
    (Unaudited)  
    (In thousands, except per share amounts)  
         
    Quarter     % of     Quarter     % of  
    Ended     Operating     Ended     Operating  
    6/30/11     Revenues     6/30/10     Revenues  
 
                       
Operating revenues   $515,897     100.0     $463,469     100.0  
                         
Operating expenses:                        
Salaries, wages and benefits   135,265     26.2     134,303     29.0  
Fuel   110,502     21.4     78,452     16.9  
Supplies and maintenance   43,085     8.4     39,012     8.4  
Taxes and licenses   23,414     4.5     23,560     5.1  
Insurance and claims   16,531     3.2     18,869     4.1  
Depreciation   39,246     7.6     37,471     8.1  
Rent and purchased transportation   98,605     19.1     91,881     19.8  
Communications and utilities   3,843     0.8     3,494     0.7  
Other   (1,361 )   (0.3 )   881     0.2  
Total operating expenses   469,130     90.9     427,923     92.3  
Operating income   46,767     9.1     35,546     7.7  
         
Other expense (income):        
Interest expense   10     0.0     3     0.0  
Interest income   (345 )   (0.1 )   (355 )   (0.0 )
Other   263     0.1     (33 )   (0.0 )
Total other expense (income)   (72 )   (0.0 )   (385 )   (0.0 )
                         
Income before income taxes   46,839     9.1     35,931     7.7  
Income taxes   19,321     3.8     15,001     3.2  
Net income   $27,518     5.3     $20,930     4.5  
                         
Diluted shares outstanding   73,239           72,767        
Diluted earnings per share   $0.38           $0.29        
     

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