UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- --- SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20062007
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- --- SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to __________
Commission File Number 0-14690
WERNER ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
NEBRASKA 47-0648386
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14507 FRONTIER ROAD 68145-0308
POST OFFICE BOX 45308 (Zip code)
OMAHA, NEBRASKA
(Address of principal executive offices)
Registrant's telephone number, including area code: (402) 895-6640
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
Common Stock, $.01 Par Value The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
--------------
NONE
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
YES X NO
--- ---
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act.
YES NO X
--- ---
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of the registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
---
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer (as defined in Rule 12b-2 of the Act).
Large accelerated filer X Accelerated filer Non-accelerated filer
--- --- ---
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Act). YES NO X
--- ---
The aggregate market value of the common equity held by non-
affiliates of the Registrant (assuming for these purposes that
all executive officers and Directors are "affiliates" of the
Registrant) as of June 30, 2006,29, 2007, the last business day of the
Registrant's most recently completed second fiscal quarter, was
approximately $1.025 billion$912 million (based on the closing sale price of
the Registrant's Common Stock on that date as reported by
Nasdaq).
As of February 9, 2007, 75,350,13215, 2008, 70,630,511 shares of the registrant's
common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement of Registrant for the Annual
Meeting of Stockholders to be held May 8, 2007,13, 2008, are incorporated
in Part III of this report.
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business 1
Item 1A. Risk Factors 78
Item 1B. Unresolved Staff Comments 1011
Item 2. Properties 1011
Item 3. Legal Proceedings 1112
Item 4. Submission of Matters to a Vote of Security Holders 11Stockholders 13
PART II
Item 5. Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities 1214
Item 6. Selected Financial Data 1416
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 1417
Item 7A. Quantitative and Qualitative Disclosures about
Market Risk 2931
Item 8. Financial Statements and Supplementary Data 3133
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 5051
Item 9A. Controls and Procedures 5051
Item 9B. Other Information 5253
PART III
Item 10. Directors, Executive Officers and Corporate
Governance 5453
Item 11. Executive Compensation 54
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 54
Item 13. Certain Relationships and Related Transactions, and
Director Independence 54
Item 14. Principal Accounting Fees and Services 5554
PART IV
Item 15. Exhibits and Financial Statement Schedules 5554
PART I
ITEM 1. BUSINESS
General
Werner Enterprises, Inc. ("Werner" or the(the "Company") is a transportation
and logistics company engaged primarily in hauling truckload
shipments of general commodities in both interstate and
intrastate commerce as well as providingcommerce. We also provide logistics services through
itsour Value Added Services ("VAS") division. Werner isWe are one of the
five largest truckload carriers in the United States based(based on
total operating revenuesrevenues), and maintains itsour headquarters are located in
Omaha, Nebraska, near the geographic center of itsour truckload
service area. Werner wasWe were founded in 1956 by Chairman Clarence L.
Werner, who started the business with one truck at the age of 19 and was19.
We were incorporated in the stateState of Nebraska on September 14,
1982. WernerWe completed itsour initial public offering in June 1986 with
a fleet of 632 trucks as of February 28, 1986. Werner ended 2006 withAt the end of
2007, we had a fleet of 9,0008,250 trucks, of which 8,1807,470 were owned
by the Companyus and 820780 were owned and operated by owner-operators
(independent contractors).
The Company hasWe have two reportable segments - Truckload Transportation
Services ("Truckload") and Value Added Services. FinancialVAS. You can find financial
information regarding these segments and the Company's geographic areas can be foundin
which we conduct business in the Notes to Consolidated Financial
Statements under Item 8 of this Annual Report on Form 10-K. The Company's10-K for
the year ended December 31, 2007 ("Form 10-K"). Our truckload
fleets operate throughout the 48 contiguous U.S. states pursuant
to operating authority, both common and contract, granted by the
United States Department of Transportation ("DOT") and pursuant
to intrastate authority granted by various U.S. states. The CompanyWe also
hashave authority to operate in the tenseveral provinces of Canada and provides through trailerto
provide through-trailer service in and out of Mexico. The
principal types of freight transported by the Companywe transport include retail store
merchandise, consumer products, manufactured products and grocery
products. The Company's emphasisOur focus is to transport consumer nondurable products
that ship more consistently throughout the year and throughout changeswhose volumes
are more stable during a slowdown in the economy.
The Company'sOur VAS division is a non-asset basednon-asset-based transportation and
logistics provider. Our truck brokerage division has contracts
with over 8,500 carriers as of December 2007. VAS includes
truck brokerage, freight management (single-source logistics), truck brokerage,
intermodal and international freight forwarding. In July 2006,
the Companywe formed Werner Global Logistics U.S., LLC ("WGL"), a
separate company that operatesan operating division
within the VAS segment and
through its subsidiaries established itsconsisting of several subsidiary
companies, including a Wholly Owned Foreign Entity ("WOFE")
headquartered in Shanghai, China. The WGL and its subsidiaries obtained
business licenses to operate as an Ocean
Transport Intermediary (NVOCC and Ocean Freight Forwarder)a U.S. Non-Vessel Operating
Common Carrier ("NVOCC"), U.S. Customs Broker, Class Alicensed Freight
Forwarder in China, licensed China NVOCC, a Transportation
Security Administration ("TSA") approved Indirect Air Carrier and
an IndirectInternational Air Carrier.Transport Association ("IATA") Accredited
Cargo Agent.
Marketing and Operations
Werner'sOur business philosophy is to provide superior on-time
service to itsour customers at a competitive cost. To accomplish
this, Werner operateswe operate premium modern tractors and trailers. This
equipment has a lower frequency of breakdowns and helps attract
and retain qualified drivers. Werner hasWe have continually developed
technology to improve customer service to customers and improve
retention of drivers. Werner focusesdriver retention. We
focus on shippers thatwho value the broad geographic coverage,
diversified truck and logistics service offerings, equipment
capacity, technology, customized services and flexibility
available from a large financially-
stablefinancially-stable carrier. These
shippers are generally less sensitive to rate levels preferringand prefer
to have their freight handled by a few core carriers with whom they can
establish service-based, long-
termlong-term relationships.
Werner operatesWe operate in the truckload segmentsector of the trucking industry.
Within the truckloadOur Truckload segment Werner provides specialized services to customers
based on their (i) trailer needs (van,(such as van, flatbed temperature-controlled)and
temperature-controlled trailers), (ii) geographic area (medium
to long haul(including
medium-to-long-haul throughout the 48 contiguous U.S. states,
Mexico, Canada and Canada; regional)regional areas), (iii) time-sensitive nature
1
of shipments (expedited),(expedited shipments) or (iv) conversion of their
private fleet to Werner
(dedicated)the Company (dedicated services). TruckingIn 2007,
trucking revenues accounted for 86% of our total revenues, and
non-trucking and other operating revenues primarily(primarily brokerage
revenues,revenues) accounted for 14% of our total revenues
1
in 2006. Werner'srevenues. Our VAS
divisionsegment manages the transportation and logistics requirements for
individual customers, providing customers with additional sources
of capacity and access to alternative modes of transportation.
The VAS portfolio includesservices include (i) truck brokerage, (ii) freight
management, truck brokerage,(iii) intermodal, (iv) load/mode and network
optimization transloading, and other services.(v) international. The new
product offering in China includesVAS international
services include (i) site selection analysis, (ii) vendor and
purchase order management, (iii) full container load
consolidation and warehousing, as well as(iv) door-to-door freight
forwarding and (v) customs brokerage. Value Added ServicesThese VAS international
services are provided throughout North America, Asia, Europe and
South America. VAS is a non-
asset-basednon-asset-based business that is highly
dependent on qualified employees, information systems and the
services of qualified third-party capacity providers. Compared
to trucking operations whichthat require a significant capital
equipment investment, VAS'sVAS' operating income percentage is lower
and its return on assets is substantially higher. RevenuesYou can find
revenues generated by services accounting for more than 10% of
consolidated revenues, consisting of Truckload Transportation Services and Value Added Services,VAS, for the
last three years can be found under Item 7 of this Form 10-K.
Werner hasWe have a diversified freight base but isare dependent on a
small group of customers for a significant portion of itsour
freight. During 2006, the Company's2007, our largest 5, 10, 25 and 50 customers
comprised 26%25%, 37%40%, 58%,62% and 72%75% of the Company'sour revenues, respectively.
The Company'sOur largest customer, Dollar General, accounted for 11%8% of the Company'sour
revenues in 2006,2007, of which approximately two-thirdsthree-fourths is
dedicated fleet business and the remainder is primarily VAS. No
other customer exceeded 5%6% of revenues in 2006.2007. By industry
group, the Company'sour top 50 customers consist of 46% retail and consumer
products, 25%27% grocery products, 20%18% manufacturing/industrial and
9% logistics and other. Many of our non-dedicated customer
contracts are
cancelable onmay be terminated upon 30 daysdays' notice, which is
standard in the trucking industry. Most dedicated customer
contracts are one to three years in length and are cancelable onmay be terminated
upon 90 daysdays' notice following the expiration of the initial term of the contract.contract's
first year.
Virtually all of Werner'sour company and owner-operator tractors are
equipped with satellite communicationscommunication devices manufactured by
Qualcomm thatQualcommT. These devices enable the Companyus and our drivers to conduct
two-way communication using standardized and freeform messages.
This satellite technology, installed in trucks beginning in 1992,
also enables the Companyallows us to plan and monitor the progress of shipments. The Company obtainsshipment progress. We obtain
specific data on the location of all trucks in the fleet at least
every hour of every day. Using the real-time data obtained from
the satellite devices, Werner haswe have developed advanced application
systems to improve customer service and driver service. Examples of such
application systems include (1) the Company'sinclude: (i) our proprietary Paperless Log Systempaperless log
system used to electronically preplan the
assignment of shipments to driversdriver shipment assignments
based on real-time available driving hours and to automatically
keep track ofmonitor truck movement and drivers' hours of service, (2)service; (ii)
software which preplans shipments that drivers can be swapped by driverstrade enroute
to meet driver home timehome-time needs without compromising on-time
delivery schedules,
(3)schedules; (iii) automated "possible late load" tracking
whichthat informs the operations department of trucks that may bepossibly
operating behind schedule, thereby allowing the Companyus to take preventive
measures to avoid a late delivery,deliveries; and (4)(iv) automated engine
diagnostics tothat continually monitor mechanical fault tolerances.
In June 1998, Wernerwe began a successful pilot program and
subsequently became the first, and only, trucking company in the
United States to receive authorizationan exemption from the DOT under
a pilot program, to use a
global positioning system basedsystem-based paperless log system in place of
the paper logbooks traditionally used by truck drivers to track
their daily work activities. On September 21, 2004, the DOT's
Federal Motor Carrier Safety Administration ("FMCSA") agency
approved the Company's exemption for itsour paperless log system that movesand moved
this exemption from the FMCSA-approved pilot program to permanent
status. The exemption is to be renewed every two years. On
September 7, 2006, the FMCSA announced in the Federal Register
its decision to renew for two additional years the Company'sour exemption from
the FMCSA's requirement that drivers of commercial motor vehicles
operating in interstate commerce prepare handwritten records of
duty status (logs).
Seasonality
In the trucking industry, revenues generally show a seasonal
pattern asbecause some customers reduce shipments during and after
the winter holiday season. The Company'sOur operating expenses have
historically been higher in the winter months due primarily to
2
decreased fuel efficiency, increased cold weather-related
maintenance costs of revenue equipment in colder weather, and increased insurance
and claims 2
costs dueattributed to adverse winter weather conditions.
The Company
attemptsWe attempt to minimize the impact of seasonality through itsour
marketing program that seeksby seeking additional freight from certain
customers during traditionally slower shipping periods. Revenue
can also be affected by bad weather, holidays and holidays, sincethe number of
business days during a quarterly period because revenue is
directly related to the available working days of shippers.
Employees and Owner-Operator Drivers
As of December 31, 2006, the Company2007, we employed 11,198
drivers, 1,03810,664 drivers; 912
mechanics and maintenance personnel, 1,796personnel; 1,726 office personnel for
the trucking operation,operation; and 294306 personnel for the VAS and other non-truckingnon-
trucking operations. The CompanyWe also had 820780 service contracts with
owner-operators for services thatwho provide both a tractor and a qualified driver
or drivers. None of the Company'sour U.S., Canadian or CanadianChinese employees are
represented by a collective bargaining unit, and the Company considerswe consider
relations with all of itsour employees to be good.
The Company recognizesWe recognize that itsour professional driver workforce is one
of itsour most valuable assets. Most of Werner's
drivers are compensatedour driver compensation is
based upon miles driven. For company-
employedcompany-employed drivers, the rate
per mile generally increases with the drivers' length of service.
AdditionalDrivers may earn additional compensation may be earned through a mileage bonus, an
annual achievement bonus and for extra work associated with their
job (loading(such as loading and unloading, extra stops and shorter
mileage trips, for example)trips).
At times, there are driver shortages of drivers in the trucking
industry. TheIn past years, the number of qualified drivers in the industry has not
kept pace with freight growth because of (i) changes in the
demographic composition of the workforce,workforce; (ii) alternative
jobs toemployment opportunities other than truck driving whichthat become
available in an improving economy,a growing economy; and (iii) individual drivers'
desire to be home more often. In recent
months,While the driver recruiting and
retention market remained challenging butin 2007, it was less
difficult than the extremely
challenging driver market experienced earlier in the year. The
Company anticipatesfirst half of
2006. Weakness in the housing market and the medium-to-long-haul
Van fleet reduction contributed favorably to our recruiting and
retention efforts for much of 2007. We anticipate that the
competition for qualified drivers will continue to be veryremain high and cannot
predict whether itwe will experience shortages in the future.future shortages. If such a
shortage were to occur and increases ina driver pay ratesrate increase became
necessary to attract and retain drivers, the Company'sour results of
operations would be negatively impacted to the extent that we
could not obtain corresponding freight rate increases wereincreases.
On December 26, 2007, the FMCSA published a Notice of
Proposed Rulemaking ("NPRM") in the Federal Register regarding
minimum requirements for Entry Level Driver Training. Under the
proposed rule, a Commercial driver's license ("CDL") applicant
would be required to present a valid driver training certificate
obtained from an accredited institution or program. Entry-level
drivers applying for a Class A CDL would be required to complete
a minimum of 120 hours of training, consisting of 76 classroom
hours and 44 driving hours. The current regulations do not
obtained.
The Companyrequire a minimum number of training hours and require only
classroom education. Drivers who obtain their first CDL during
the three-year period after the FMCSA issues a final rule would
be exempt. Comments on the NPRM are to be received by March 25,
2008. If the NPRM is approved as written, this rule could
materially impact the number of potential new drivers entering
the industry.
We also recognizesrecognize that carefully selected owner-
operatorsowner-operators
complement itsour company-employed drivers. Owner-
operatorsOwner-operators are
independent contractors thatwho supply their own tractor and
qualified driver and are responsible for their operating
expenses. Because owner-operators provide their own tractors,
less financial capital is required from the Company.us. Also, owner-
operatorsowner-operators
provide the Companyus with another source of drivers to support itsour fleet.
The Company intendsWe intend to continue itsmaintain our emphasis on owner-operator recruiting,
owner-operators, as well asin addition to company drivers.
However, it has continued to be difficult for thedriver recruitment. The Company and the
trucking industry, however, continue to recruitexperience owner-operator
recruitment and retain owner-operatorsretention difficulties that have persisted over
the past several years dueyears. We attribute these difficulties to
several factors, including highhigher fuel prices, tightening oftightened
equipment financing standards, rising truck prices, revised hours
of service regulations issued by the FMCSA and declining values
for older used trucks.a slowing U.S.
economy in 2007.
3
Revenue Equipment
As of December 31, 2006, Werner2007, we operated 8,1807,470 company tractors
and had contracts for 820780 tractors owned by owner-
operators.owner-operators. The
companycompany-owned tractors were manufactured by Freightliner, a
subsidiary of DaimlerChrysler, and by Peterbilt and Kenworth,
divisions of PACCAR. This standardization of the
companyour company-owned
tractor fleet decreases downtime by simplifying maintenance. The Company adheresWe
adhere to a comprehensive maintenance program for both company-
owned tractors and trailers. Owner-operatorWe inspect owner-operator tractors
are inspected
prior to acceptance by the Company for compliance with Company and DOT
operational and safety requirements of the Company and the
DOT. Theserequirements. We periodically inspect
these tractors, are then periodically inspected,in a manner similar to company tractors,tractor
inspections, to monitor continued compliance. TheWe also regulate
the vehicle speed of company-owned trucks is regulated to a maximum of 65
miles per hour to improve safety and fuel efficiency.
The CompanyWe operated 25,20024,855 trailers at December 31, 2006:
23,3402007. This
total is comprised of 23,109 dry vans; 599501 flatbeds; and 1,261 temperature-controlled.1,245
temperature-controlled trailers. Most of the Company'sour trailers were
manufactured by Wabash National Corporation. As of December 31,
2006, 98%2007, of the
3
Company's fleet ofour dry van trailerstrailer fleet, 98% consisted of 53-foot
trailers, and 99% consisted100% was comprised of aluminum plate or composite
(DuraPlate) trailers. OtherWe also provide other trailer lengths,
such as 48-foot and 57-foot are also provided by the Companytrailers, to meet the specialized
needs of certain customers.
Beginning in January 2007, all newly manufactured truck
engines must comply withThe Environmental Protection Agency ("EPA") mandated a new
set of more stringent engine emission standards mandated byfor all newly
manufactured truck engines. These standards became effective in
January 2007. Compared to trucks with engines manufactured
before 2007 and not subject to the Environmental Protection
Agency ("EPA"). Trucksnew standards, the trucks
manufactured with thesethe new engines are
expectedhave higher purchase prices
(approximately $5,000 to cost $5,000-$10,000$10,000 more per truck, have slightly
lower mpg,truck), and higherwe expect
them to be less fuel-efficient and result in increased
maintenance costs. To delay the cost impact of these new
emission standards, the Company kept itsin 2005 and 2006 we purchased significantly
more new trucks than we normally buy each year, and we maintained
a newer truck fleet newat December 31, 2006 relative to historical
company and industry standards. The average age of the Company'sour truck
fleet atas of December 31, 20062007 is 1.342.1 years. AOur newer truck
fleet has allowed us to delay purchases of trucks with the new
2007-standard engines until 2008. In January 2010, a final set
of more stringentrigorous EPA-mandated emissions standards mandated by the EPA will become
effective for newlyall new engines manufactured trucks beginning in January 2010. The
Company's capital expenditures for new trucks are expected to be
much lower in 2007.after that date.
Fuel
The Company purchasesWe purchase approximately 95% of itsour fuel throughfrom a network of
fuel stops throughout the United States. The
Company hasWe negotiated
discounted pricing based on certain volume
commitmentshistorical purchase volumes with
these fuel stops. Bulk fueling facilities are maintained at
seven of the Company'sour terminals and fourthree dedicated fleet locations.
Shortages of fuel, increases in fuel prices orand rationing of
petroleum products can have a materiallymaterial adverse effect on theour
operations and profitability of the Company. The Company'sprofitability. Our customer fuel surcharge
reimbursement programs have historically enabled the Companyus to recover
from itsour customers a significant portion of the higher fuel
prices compared to normalized average fuel prices. These fuel
surcharges, which automatically adjust depending on the
Department of Energy ("DOE") weekly retail on-
highwayon-highway diesel fuel
prices, enable the Companyus to recoup much of the higher cost of fuel when
prices increase exceptincrease. We do not generally recoup higher fuel costs
for miles not billable to customers, out-of-route miles and truck
engine idling. During 2006, the Company's2007, our fuel expense and fuel
reimbursements to owner-operator drivers for theowner-operators attributed to higher cost of
fuel
prices resulted in an additional cost of $54.2 million, while the
Company$23.0 million. We
collected an additional $51.2$14.9 million in fuel surcharge revenues
in 2007 to offset most of the fuel cost increase. The CompanyWe cannot
predict whether fuel prices will increase or will decrease in the
future or the extent to which fuel surcharges will be collected
to offset such increases.from customers. As of December 31, 2006, the
Company2007, we had no derivative
financial instruments to reduce itsour exposure to fuel price
fluctuations.
During thirdfourth quarter 2006, truckload carriersthe trucking industry began
using ultra-low sulfur diesel ("ULSD") fuel and transitioned
a
substantial portion of theirindustry diesel fuel consumption from low sulfur diesel fuel to ultra-low sulfur diesel fuel ("ULSD") fuel,
as fuel refiners were required to meet theULSD.
This change stemmed from an EPA-mandated 80% ULSD threshold by
the transition date of October 15, 2006. Preliminary estimates wereSince that ULSD would resulttime, this
change resulted in a 1-3%an approximate 2% degradation inof fuel miles
per gallon ("mpg") for all trucks due tobecause of the lower energy
content (btu) of ULSD. Based onWe believe that other factors which
4
impact mpg, including increasing the Company's
fuelpercentage of aerodynamic
trucks in our company-owned truck fleet, have offset the negative
mpg experienceimpact of ULSD in 2007, compared to date, these preliminary mpg degradation
estimates appear to be accurate.
The Company maintains2006.
We maintain aboveground and underground fuel storage tanks
at many of itsour terminals. Leakage or damage to these facilities
could expose the Companyus to environmental clean-
upclean-up costs. The tanks are
routinely inspected to help prevent and detect such problems.
Regulation
The Company isWe are a motor carrier regulated by the DOT, the Federal and
Provincial Transportation Departments in Canada and the Secretary
of Communication and Transportation ("SCT") in Mexico. The DOT
generally governs matters such as safety requirements,
registration to engage in motor carrier operations, accounting
systems, certain mergers, consolidations, acquisitions and
periodic financial reporting. The CompanyWe currently hashave a satisfactory
DOT safety rating, which is the highest available rating. A
conditional or unsatisfactory DOT safety rating could have an adverse effect on the Company, as
4
adversely
affect us because some of the Company'sour customer contracts with customers require a
satisfactory rating. Such matters asEquipment weight and dimensions of
equipment are also
subject to federal, state and international regulations.
Effective October 1, 2005, all truckload carriers became
subject to revised hours of service ("HOS") regulations.regulations issued by
the FMCSA ("2005 HOS Regulations"). The most significant change
for the Companyus from the previous regulations is that drivers using the
sleeper berth provision must take at least eight consecutive
hours in the sleeper berthoff-duty during their ten hours off-duty. Previously,
drivers using a sleeper berth were allowed to split their tenten-
hour off-duty time in the sleeper
berth into two periods, provided neither period was
less than two hours. This more restrictive sleeper berth
provision is requiring some drivers to plan their time better andbetter.
The 2005 HOS Regulations also had a negative impact on our
mileage productivity. The greatest impact of
these HOS changes wasefficiency, resulting in lower mileage productivity for
those customers with multiple-stop shipments or those shipments
with pickuppick-up or delivery delays.
The Owner-Operator Independent Drivers Association ("OOIDA")
and Public Citizen (a consumer safety organization) each filed
a petitionseparate petitions for review of the current2005 HOS regulationsRegulations with
the U.S. Court of Appeals on January
23,for the District of Columbia in August
2005 and February 2006. The OOIDA petition contested several
issues relating to the 2005 HOS Regulations, including FMCSA
justification for the eight-hour sleeper berth requirements
described above. The Public Citizen petition disputed an 11-hour
daily driving limitation and the 34-hour restart rule (which
permits drivers who are off duty for 34 consecutive hours to
reset their eight-day, 70-hour clock to zero hours).
On December 4, 2006, a three-judge panel heard arguments on
the petitions for review; and on July 24, 2007, the U.S. Court of
Appeals for the District of Columbia issued its decision on the
challenges made by OOIDA and Public Citizen regarding the 2005
HOS Regulations. The Court rejected the OOIDA claims, including
OOIDA's opposition to the eight-hour sleeper berth requirements,
but ruled in favor of Public Citizen on the 11-hour daily driving
limit and 34-hour restart rules. The Court described its
concerns as procedural and vacated only the 11-hour daily driving
limit and 34-hour restart provisions, leaving the remainder of
the 2005 HOS Regulations in place. On August 31, 2007, the
American Trucking Associations ("ATA") filed a petition for
Rulemaking before the FMCSA requesting an expedited rulemaking to
preserve the 11-hour driving limit and 34-hour restart rules. On
September 6, 2007, ATA filed a Motion for Stay of Mandate asking
the Court to delay the effective date of its July 24, 2007
decision. Subsequently, FMCSA filed a brief in support of the
ATA's motion. On September 28, 2007, the Court issued a 90-day
stay of the effective date of the Court's decision.
Effective December 27, 2007, the FMCSA issued an interim
final rule that amended the HOS regulations to (i) allow drivers
up to 11 hours of driving time within a 14-hour, non-extendable
window from the OOIDA.start of the workday (this driving time must
follow 10 consecutive hours of off-duty time) and (ii) restart
calculations of the weekly on-duty time limits after the driver
has at least 34 consecutive hours off duty. This interim rule
made essentially no changes to the 11-hour driving limit and 34-
hour restart rules. The appeals court is expectedFMCSA solicited comments on the interim
final rule until February 15, 2008, and intends to issue its rulinga final
5
rule in February or March of 2007.2008 that addresses the issues identified by the Court.
On January 23, 2008, the Court denied Public Citizen's motion to
invalidate the interim final rule.
On January 18, 2007, the FMCSA published a Notice of
Proposed Rulemaking ("NPRM") in the Federal Register on the
trucking industry's use of Electronic On-Board Recorders
("EOBRs") by the trucking
industry for compliance with HOS rules. The intent of this
proposed rule is to (i) improve highway safety by fostering
development of new EOBR technology for HOS compliance,
encouraging itscompliance; (ii)
encourage EOBR use by motor carriers through incentives,incentives; and
requiring its(iii) require EOBR use by operators with serious and continuing
HOS compliance problems. Comments on the NPRM mustwere to be
received by April 18, 2007. Over eight years ago, the CompanyIn 1998, we became the first, and
only, trucking company in the United States to receive authorization from thea DOT
exemption to use a global positioning system
basedsystem-based paperless log
system in place ofas an alternative to the paper logbooks traditionally used
by truck drivers to track their daily work activities. While the Company doeswe
do not believe the rule, as proposed, would have a significant
effect on itsour operations and profitability, itwe will continue to
monitor future developments.
The Company hasWe have unlimited authority to carry general commodities in
interstate commerce throughout the 48 contiguous U.S. states. The Company hasWe
also have authority to carry freight on an intrastate basis in 43
states. The Federal Aviation Administration Authorization Act of
1994 (the "FAAA Act") amended sections of the Interstate Commerce
Act to prevent states from regulating motor carrier rates, routes
or service of motor carriers after January 1, 1995. The FAAA Act did not address
state oversight of motor carrier safety and financial
responsibility or state taxation of transportation. If a carrier
wishes to operate in intrastate commerce in a state where itthe
carrier did not previously have intrastate authority, itthe carrier
must, in most cases, still apply for authority.
Over the course of 2006, WGL and its subsidiaries have obtained business licenses to
operate as an Ocean Transport Intermediary
(NVOCC and Ocean Freight Forwarder),a U.S. NVOCC, U.S. Customs Broker, and
Class Alicensed Freight
Forwarder in China. In addition, WGL recently
entered into the air freight forwarding business asChina, licensed China NVOCC, a Transportation Safety Administration ("TSA")TSA approved Indirect
Air Carrier.Carrier and an IATA Accredited Cargo Agent.
With respect to the Company's plannedour activities in the air transportation
industry, in the United States, it iswe are subject to regulation by the TSA of the U.S.
Department of Homeland Security as an indirect air carrier. WGL has made application for a licenseIndirect Air Carrier and by
IATA as an air freight forwarder by the International Air Transport
Association ("IATA") and each office in a foreign location will
be applying for an IATA license in their respective countries.Accredited Cargo Agent. IATA is a voluntary
association of airlines which prescribes certain operating
procedures for air freight forwarders acting as agents for its
members. TheWe expect that a majority of the Company'sour air freight forwarding
business is expected towill be conducted with airlines whichthat are IATA members.
The Company isWe are licensed as a customs broker by Customs and Border
Protection ("CBP") of the U.S. Department of Homeland Security in
each U.S. customs district in which it doeswe conduct business. All
United StatesU.S. customs brokers are required to maintain prescribed records
and are subject to periodic audits by CBP. In other
jurisdictions in which the Company performswe perform clearance services, the Company iswe are
licensed by the appropriate governmental authority.
5
The Company isWe are also registered as an Ocean Transportation
Intermediary by the Federal Maritime Commission ("FMC"). The FMC
has established certain qualifications for shipping agents,
including certain surety bonding requirements. The FMC is also is
responsible for the economic regulation of Non-vessel Operating
Common Carrier ("NVOCC")NVOCC activity
originating or terminating in the United States. To comply with
these economic regulations, vessel operators and NVOCCs are
required to electronically file tariffs, electronically whichand these tariffs
establish the rates to be charged for the movement of specified
commodities into and out of the United States. The FMC has the power tomay
enforce these regulations by assessing penalties.
The Company'sOur operations are subject to various federal, state and
local environmental laws and regulations, many of which are
implemented
principally by the EPA and similar state regulatory agencies,
governingagencies.
These laws and regulations govern the management of hazardous
wastes, otherthe discharge of pollutants into the air and surface and
underground waters and the disposal of certain substances. The Company doesWe do
not believe that compliance with these regulations has a material
effect on itsour capital expenditures, earnings, and competitive
position.
The implementationSeveral U.S. states, counties and cities have enacted
legislation or ordinances restricting idling of varioustrucks to short
periods of time. This action is significant when it impacts the
driver's ability to idle the truck for purposes of operating air
6
conditioning and heating systems particularly while in the
sleeper berth. Many of the statutes or ordinances recognize the
need of the drivers to have a comfortable environment in which to
sleep and include exceptions for those circumstances. California
had such an exemption; however, since January 1, 2008, the
California sleeper berth exemption no longer exists. We have
taken steps to address this issue in California. California has
also enacted restrictions on Transport Refrigeration Unit ("TRU")
emissions, which are scheduled to be phased in over several years
beginning year-end 2008. Although legal challenges may be
mounted against California's regulations, if the TRU emissions
law becomes effective as scheduled, it will require companies to
operate only compliant TRUs in California. There are several
alternatives for meeting these requirements which we are
currently evaluating.
Various provisions of the North American Free Trade
Agreement ("NAFTA") may alter the competitive environment for
shipping into and out of Mexico. It is not
possible at this timeWe believe we are sufficiently
prepared to predict when andrespond to what extent that
impact could be felt by companies transporting goods into and outthe potential changes in cross-border
trucking if there was an opening of Mexico. The Company doesthe southern border. We
conduct a substantial amount of business in international freight
shipments to and from the United States and Mexico (see Note 8
"Segment Information" in the Notes to Consolidated Financial
Statements under Item 8 of this Form 10-K) and is continuing to preparecontinue preparing
for the various scenarios that may finally result. The Company believes it isWe believe we are one of
the five largest truckload carriers in terms of the volume of
freight shipments to and from the United States and Mexico.
Competition
The trucking industry is highly competitive and includes
thousands of trucking companies. It is estimated that theThe annual revenue of domestic
trucking amountsis estimated to be approximately $600 billion per year.
The Company hasWe have a small but growing share (estimated at approximately 1%) of the
markets targeted by the
Company. The Company competeswe target. We compete primarily with other truckload
carriers. Logistics companies, railroads, less-than-truckload
carriers and private carriers also provide competition, but to a
lesser degree.
Competition for the freight transported by the Companywe transport is based primarily
on service and efficiency and, to some degree, on freight rates
alone. FewWe believe that few other truckload carriers have greater
financial resources, own more equipment or carry a larger volume
of freight than the Company. The Company isours. We are one of the five largest carriers in
the truckload transportation industry based on total operating
revenues.
The significant industry-wide accelerated purchase of new
trucks in advance of the newJanuary 2007 EPA emissions standards for
newly manufactured trucks contributed to excess truck capacity.
This excess capacity that partially disrupted the supply and demand
balance for trucks in the second half of 2006.2006 and in 2007. The
recent softness in the housing and automotive sectors not(not
principally served by the Companyus) caused carriers that dependdependent on these
freight markets to more aggressively compete in other freight markets
served by
the Company.we serve. Other demand-related factors that may have contributed
to lower freight demand and flat to lower freight rates in 2006
and 2007 were (i) inventory tightening by some large retailers,
(ii) some shippers shifting to more intermodal intact container
shipments for lower value freight and (iii) moderating economic
growth. The softer freight
market and the softer truck sales market are making it more
difficult for marginal carriers to remain in business. As these
marginal carriers are facing significant funding requirements for
truck licensing in first quarter 2007, some trucks may not be
licensed which would tighten capacity. As a result of these
factors, the Company currently anticipates that the recent excess
truck capacitygrowth in the marketretail sector. Since April 2007, Class 8 truck
production declined dramatically, and we expect this will
gradually reverse,continue for several more months. Over time, lower new truck
production and capacity
may begininventory depletion of 2006 engine trucks on truck
dealer lots should help to tighten as we move towardbalance the fall peak seasonsupply of 2007.
6
trucks with the
freight market. During the same period in which truckload
freight rates have been depressed, inflationary and operational
cost pressures have challenged truckload carriers, particularly
highly leveraged private carriers. If this environment
continues, an increase in trucking company failures is more
likely, which could also help to balance the supply of trucks
over time.
Internet Website
The Company maintains aWe maintain an Internet website where you can find
additional information concerning itsregarding our business can be found.and operations.
The website address of that
website is www.werner.com. The Company makesOn the website, we make
certain investor information available free of charge, on its Internet website itsincluding
our annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, Forms 3, 4 and 5 filed on behalf of
directors and executive officers and any amendments to thosesuch
reports filed or furnished pursuant to Section 13(a) or 15(d) of
7
the Securities Exchange Act of 1934, as amended ("Exchange Act").
This information is included on our website as soon as reasonably
practicable after itwe electronically filesfile or furnishesfurnish such
materials to the SEC.Securities and Exchange Commission ("SEC"). We
also provide our corporate governance materials, such as Board
committee charters and Code of Corporate Conduct, on our website
free of charge, and we may occasionally update these materials
when necessary to comply with SEC and NASDAQ rules or to promote
the effective and efficient governance of our company.
Information provided on the Company'sour website is not incorporated by
reference into this annual report on Form 10-K.
ITEM 1A. RISK FACTORS
The following risks and uncertainties may cause actual
results to materially differ materially from those anticipated in the
forward-looking statements included in this Form 10-K:
The Company's10-K. Caution
should be taken not to place undue reliance on forward-looking
statements made herein, since the statements speak only as of the
date they are made. We undertake no obligation to publicly
release any revisions to any forward-looking statements contained
herein to reflect events or circumstances after the date of this
report or to reflect the occurrence of unanticipated events.
Our business is subject to overall economic conditions that could
have a material adverse effect on theour results of operations of the Company.
The Company isoperations.
We are sensitive to changes in overall economic conditions
that impact customer shipping volumes. Beginning in 2003 and
continuing throughout 2005, general economic improvements led to
improved freight demand. Factors that may have contributed to
lower freight demand and flat to lower freight rates in the
second half of 2006 and in 2007 were (i) inventory tightening by
some large retailers, (ii) some shippers shifting to more
intermodal intact container shipments for lower value freight and
(iii) moderating economic growth. Futuregrowth in the retail sector. The
significant truck pre-buy, prompted by changes to the EPA engine
emission regulations that became effective for newly manufactured
engines beginning January 2007, added a total of approximately
170,000 more trucks (or an estimated 6% more trucks in the Class
8 for-hire market) in the years 2005 and 2006 than are normally
produced. We may be affected by future economic conditions
that may affect the Company includeincluding employment levels, business conditions, fuel and energy
costs, interest rates and tax rates.
Increases in fuel prices and shortages of fuel can have a
material adverse effect on the results of operations and
profitability of the Company.profitability.
Fuel prices climbed steadily through the first eight months
of 2006,2007, averaging 5120
cents aper gallon higher than the same period
of 2005. However, in the last four months of 2006, fuel costs
averaged 17 cents a gallon lower than the same period of 2005,
principally due to the temporary spike in fuel prices that
occurred in October 2005 after Hurricanes Katrina and Rita.2006. Fuel prices subsequently declined from these record levels in November
2005. Shortages of fuel,shortages, increases in
fuel prices, orand petroleum product rationing
of petroleum products can have a materiallymaterial
adverse impact on theour operations and profitability of the Company.profitability. To the
extent that the Companywe cannot recover the higher cost of fuel through
customer fuel surcharges, the Company'sour financial results would be
negatively impacted. For the first eight months of 2007, average
fuel prices were nearly the same as during the first eight months
of 2006. However, during the last four months of 2007, average
fuel prices increased to record levels while prices declined in
the last four months of 2006. Fuel prices averaged 65 cents more
per gallon in the last four months of 2007 versus the same period
in 2006.
Difficulty in recruiting and retaining drivers and owner-
operators could impact the Company'sour results of operations and limit growth
opportunities.
At times, there have been shortages of drivers in the trucking industry.industry has experienced driver
shortages. The market for recruiting and retaining drivers has
become more difficult over the last several years due to changing
workforce demographics and alternative jobemployment opportunities
in an improving economy. However, during fourth
quarternear the end of 2006 and
continuing through 2007, the driver recruiting and retention
market was less difficult than the extremely challenging market
experienced earlier in 2006 due to the year.weakness in the housing
market and the medium-to-long-haul Van fleet reduction. During
the last several years, it was more difficult to recruit and
retain owner-operator drivers due to challenging operating
conditions, including high fuel prices. The Company anticipatesWe anticipate that the
competition for company drivers and owner-operator drivers will
continue to beremain high and cannot predict whether itwe will experience shortages in the future.future
shortages. If a shortage of company drivers and owner-operators
wereoccurs, it may be necessary to occur and
increases inincrease driver pay rates and
owner-operator settlement rates became necessaryin order to attract drivers and owner-operators, the
Company'sthese
8
drivers. This could negatively affect our results of operations would be negatively impacted
to the extent that corresponding freight rate increases were not
obtained.
Additionally, the Company expects the tight driver
market will make it very difficult to add truck capacity in the
near future.
The Company operatesWe operate in a highly competitive industry, which may limit
growth opportunities and reduce profitability.
The trucking industry is highly competitive and includes
thousands of trucking companies. The Company estimatesWe estimate the ten largest
truckload carriers have about 11%9% of the approximate $180 billion
U.S. market targeted by the Company.we target. This competition could limit the Company'sour growth
opportunities and reduce itsour profitability. The Company competesWe compete primarily
with other 7
truckload carriers.carriers in our Truckload segment.
Logistics companies, railroads, less-than-
truckloadless-than-truckload carriers and
private carriers also provide competition, but to a lesser degree.degree of competition in
our Truckload segment, but are more direct competitors in our VAS
segment. Competition for the freight transported by the Companywe transport is based
primarily on service and efficiency and, to some degree, on
freight rates alone.
The Company operatesWe operate in a highly regulated industry. Changes in existing
regulations or violations of existing or future regulations could
have an adverse effect on theadversely affect our operations and profitability of the Company.
The Company isprofitability.
We are regulated by the DOT, the Federal and Provincial
Transportation Departments in Canada and the SCT in Mexico and
may become subject to new or more comprehensive regulations
mandated by these agencies. These regulatory authorities establish broad powers, generally governingagencies have the
authority and power to govern transportation-related activities,
such as safety, financial reporting, authorization to engage inconduct
motor carrier operations safety, financial reporting, and other matters. In July 2006, the Companywe formed
WGL, a separate company that
operatesan operating division within the VAS segment and through its subsidiaries
established itsconsisting of
several subsidiary companies, including a WOFE headquartered in
Shanghai, China. The WGL and
its subsidiaries obtained business licenses
to operate as an
Ocean Transport Intermediary (NVOCC and Ocean Freight Forwarder),a U.S. NVOCC, U.S. Customs Broker, Class Alicensed Freight
Forwarder in China, licensed China NVOCC, a TSA approved Indirect
Air Carrier and an Indirect Air Carrier. WGL has applied for status as an endorsed
IATA member and other offices in foreign locations will be
applying for status in their respective countries.Accredited Cargo Agent. The loss of any
of these business licenses could impact the operations of WGL.
On January 18, 2007, the FMCSA published an NPRM in the
Federal Register on the trucking industry's use of EOBRs by the trucking industry for
compliance with HOS rules. Comments on the NPRM mustwere to be
received by April 18, 2007. While the Company doesWe do not believe the rule, as
proposed, would have a significant effect onsignificantly affect our operations and
profitability, itand we will continue to monitor future
developments.
Beginning inAs of January 2007, all newly manufactured truck engines
must comply with a new set of morethe EPA's stringent engine emission standards mandated by the EPA. The Company expects that
the enginesstandards.
Engines produced under thethese 2007 standards willhave higher purchase
prices, and we expect them to be less fuel-
efficientfuel-efficient and have a higher cost than the current engines.result
in increased maintenance costs. A
third and final set of more stringentrigorous EPA
emissions standards
mandated by the EPA will become effective for newly manufactured
trucks beginning in January 2010.2010 and
apply to all new truck engines manufactured after that time.
The seasonal pattern generally experienced in the trucking
industry may affect the Company'sour periodic results during traditionally
slower shipping periods and during the winter months.
The Company'sOur business is modestly seasonal with peak freight demand
occurring generally in the months of September, October and
November. After the ChristmasDecember holiday season and during the
remaining winter months, the Company'sour freight volumes are typically lower
asbecause some customers have lowerreduced shipment levels. The Company'sOur
operating expenses have historically been higher in winter months
primarily due to decreased fuel efficiency, increased cold
weather-related maintenance costs of revenue equipment in colder
weather, and
increased insurance and claims costs due to adverse winter
weather conditions. The Company attemptsWe attempt to minimize the impact of
seasonality through its marketing program by seeking additional freight from certain customers
during traditionally slower shipping periods. Bad weather,
holidays and the number of business days during thea quarterly period
can also affect revenue sincebecause revenue is directly related to
available working days of shippers.
We depend on key customers, the loss of which or the financial failure of
which may have a material adverse effect on our operations and
profitability.
A significant portion of the Company'sour revenue is generated from
several key customers. During 2006, the Company's2007, our top 25,5, 10 and 525
customers accounted for 58%25%, 37%40% and 26%62% of revenues,
respectively. The Company'sOur largest customer, Dollar General, accounted
for 11%8% of the Company'sour revenues in 2006. The Company
does2007. We do not have long-term
contractual relationships with many of itsour key non-dedicated
customers. The Company'sOur contractual relationships with itsour dedicated
customers are typically one to three years in length which are cancelable onand may be
terminated upon 90 daysdays' notice following the expiration of the
initial term of the contract.
There can be nocontract's first year. We cannot provide any assurance that relationships with any key
customerscustomer relationships will continue at the same levels. A reduction inIf a
significant customer reduced or termination of the Company'sterminated our services, by a key customerit could
9
have a material adverse effect on the Company'sour business and results of
operations. The Company reviews theWe review our customers' financial condition of its customers prior
to granting credit, monitorsmonitor changes in financial condition on an
on-going basis, and reviewsreview individual past duepast-due balances and
collection concerns.concerns and maintain credit insurance for some
customer accounts. However, thea customer's financial failure of a customer may
still have a negative
effect on the Company'snegatively affect our results of operations.
8
The Company dependsWe depend on the services of third-party capacity providers, the
availability of which could affect the Company'sour profitability and limit
growth in itsour VAS division.
The Company'sOur VAS division is highly dependent on the services of
third-party capacity providers, includingsuch as other truckload carriers,
less-than-truckload carriers, railroads, ocean carriers and
airlines. Many of those providers face the same economic
challenges as us. Continued freight demand softness and the
Company. The softer freight
markettemporary increase in the second halfsupply of 2006trucks caused by the industry
truck pre-buy made it somewhat easier to find qualified truckload
capacity to meet customer freight needs for our truck brokerage
operation. The Company currently anticipates
that the recent excess truck capacity in theIf these market will
gradually reverse,conditions change and capacity may tighten as we move toward the
fall peak season of 2007. If the Company wereare unable
to secure the services of these third-party capacity providers,
itsour results of operations could be adversely affected.
IncreasesOur earnings could be reduced by increases in the number of
insurance claims, the cost per claim, the costs of insurance
premiums or the availability of insurance coverage could reduce the Company's earnings.
The Company self-insurescoverage.
We self-insure for a significant portion of liability
resulting from personalbodily injury, property damage, and
cargo loss as well asand
workers' compensation. This is supplemented by premium insurance
with licensed and highly-rated insurance companies above the Company'sour
self-insurance level for each type of coverage. To the extent the Company were towe
experience a significant increase in the number of claims, the
cost
per claim or the costs of insurance premiums for coverage in excess
of itsour retention amounts, the Company'sour operating results would be
negatively affected.
Decreased demand for the Company'sour used revenue equipment could result in
lower unit sales, lower resale values and lower gains on sales of assets.
The Company isWe are sensitive to changes in used equipment prices,
especially tractors. The Company hasWe have been in the business of selling its Company-ownedour
company-owned trucks since 1992, when itwe formed itsour wholly-owned
subsidiary Fleet Truck Sales. The
Company has 18We have 17 Fleet Truck Sales
locations throughout the United States. Due to the weaker
freight market and high fuel prices, Fleet Truck Sales demand
softened in fourth quarter 2007. This is expected to continue
for at least the first half of 2008, which will likely have a
continued negative impact on the amount of our gains on sales.
During 2006, the Company began selling its2007, we continued to sell our oldest van trailers that
had reached the end of their depreciable life.are fully depreciated and replaced them with new trailers, and we
expect to continue doing so in 2008. Gains on sales of assets
are reflected as a reduction of other operating expenses in the Company'sour
income statement and amounted to gains of $22.9 million in 2007,
$28.4 million in 2006 and $11.0 million in 2005,2005.
Our operations are subject to various environmental laws and
$9.3 millionregulations, the violation of which could result in 2004.
The Company reliessubstantial
fines or penalties.
In addition to direct regulation by the DOT and other
agencies, we are subject to various environmental laws and
regulations dealing with the handling of hazardous materials,
underground fuel storage tanks, and discharge and retention of
storm-water. We operate in industrial areas, where truck
terminals and other industrial activities are located, and where
groundwater or other forms of environmental contamination have
occurred. Our operations involve the risks of fuel spillage or
seepage, environmental damage, and hazardous waste disposal,
among others. We also maintain bulk fuel storage at several of
our facilities. If we are involved in a spill or other accident
involving hazardous substances, or if we are found to be in
violation of applicable laws or regulations, it could have a
materially adverse effect on our business and operating results.
If we should fail to comply with applicable environmental
regulations, we could be subject to substantial fines or
penalties and to civil and criminal liability.
We rely on the services of key personnel, the loss of which could
impact theour future success of the Company.
The Company issuccess.
We are highly dependent on the services of key personnel
including Clarence L. Werner, Gary L. Werner, and
Gregory L. Werner
and other executive officers. Although the
Company believes it haswe believe we have an
experienced and highly qualified management group, the loss of
the services of these executive officers could have a material
adverse impact on the Companyus and itsour future profitability.
10
Difficulty in obtaining goods and services from the Company'sour vendors and
suppliers could adversely affect the Company'sour business.
The Company isWe are dependent on itsour vendors and suppliers. The
Company believes it hasWe believe
we have good vendor relationships with its vendors and that it iswe are generally able
to obtain attractive pricing and other terms from vendors and
suppliers. If the Company failswe fail to maintain goodsatisfactory relationships
with itsour vendors and suppliers or if itsour vendors and suppliers
experience significant financial problems, the Companywe could faceexperience
difficulty in obtaining needed goods and services because of
production interruptions of production or for
other reasons, whichreasons. Consequently, our
business could be adversely affect the Company's
business.
The Company uses itsaffected.
We use our information systems extensively for day-to-
dayday-to-day
operations, and service disruptions could have an adverse impact
on the Company'sour operations.
The efficient operation of the Company'sour business is highly dependent
on itsour information systems. Much of the Company'sour software has beenwas developed
internally or by adapting purchased software applications to the Company'sour
needs. The Company hasWe purchased redundant computer hardware systems and has itshave
our own off-site disaster recovery facility approximately ten
miles from the Company'sour offices tofor use in the event of a disaster. The
Company has takenWe
took these steps to reduce the risk of disruption to itsour business
operation if a disaster were to occur.
Caution should be taken not to place undue reliance on
forward-looking statements made herein, since the statements
speak only as of the date they are made. The Company undertakes
no obligation to publicly release any revisions to any forward-
9
looking statements contained herein to reflect events or
circumstances after the date of this report or to reflect the
occurrence of unanticipated events.occurred.
ITEM 1B. UNRESOLVED STAFF COMMENTS
The Company hasWe have not received noany written comments from SEC staff
regarding itsour periodic or current reports from the staff of the Securities and
Exchange Commission that were issued 180
days or more preceding the end of its 2006our 2007 fiscal year and that
remain unresolved.
ITEM 2. PROPERTIES
Werner'sOur headquarters isare located nearbynear U.S. Interstate 80 just west of
Omaha, Nebraska, on approximately 195197 acres, 105107 of which are
held for future expansion. The Company'sOur headquarters office building
includes a computer center, drivers' lounge areas, a
drivers' orientation section, a cafeteria and
a Companycompany store. The Omaha headquarters also consists ofincludes a driver
training facility and equipment maintenance and repair
facilities. These maintenance facilities containingcontain a central parts
warehouse, frame straightening and alignment machine, truck and
trailer wash areas, equipment safety lanes, body shops for
tractors and trailers, a paint booth and a
reclaim center. The Company's headquartersOur
headquarter facilities have suitable space available to
accommodate planned needs for at least the next 3three to 5five
years.
The Company11
We also hashave several terminals throughout the United States,
consisting of office and/or maintenance facilities. The
Company'sOur terminal
locations are described below:
Location Owned or Leased Description Segment
- ----------------------- --------------- ----------------------------------------------------------------------- -------------------------
Omaha, Nebraska Owned Corporate headquarters, maintenance Truckload, VAS, Corporate
Omaha, Nebraska Owned Disaster recovery, warehouse Corporate
Phoenix, Arizona Owned Office, maintenance Truckload
Fontana, California Owned Office, maintenance Truckload
Denver, Colorado Owned Office, maintenance Truckload
Atlanta, Georgia Owned Office, maintenance Truckload, VAS
Indianapolis, Indiana Leased Office, maintenance Truckload
Springfield, Ohio Owned Office, maintenance Truckload
Allentown, Pennsylvania Leased Office, maintenance Truckload
Dallas, Texas Owned Office, maintenance Truckload, VAS
Indianapolis, IndianaLaredo, Texas Owned Office, maintenance, transloading Truckload, VAS
Lakeland, Florida Leased Office Truckload
Portland, Oregon Leased Office, maintenance Truckload
Springfield, Ohio Owned Office, maintenance Truckload
Allentown, PennsylvaniaEl Paso, Texas Leased Office, maintenance Truckload
Dallas, Texas Owned Office, maintenanceArdmore, Oklahoma Leased Maintenance Truckload, VAS
Laredo, Texas Owned Office, maintenance, transloading Truckload, VAS
Lakeland, Florida Leased Office Truckload
Portland, Oregon Leased Office, maintenance Truckload
El Paso, Texas Leased Office, maintenance Truckload
Ardmore, OklahomaIndianola, Mississippi Leased Maintenance Truckload, VAS
Indianola, MississippiScottsville, Kentucky Leased Maintenance Truckload, VAS
Scottsville, KentuckyFulton, Missouri Leased Maintenance Truckload, VAS
Fulton, MissouriTomah, Wisconsin Leased Maintenance Truckload
Newbern, Tennessee Leased Maintenance Truckload
Chicago, Illinois Leased Maintenance Truckload
Alachua, Florida Leased Maintenance Truckload, VAS
Tomah, Wisconsin Leased Maintenance Truckload
Newbern, Tennessee Leased Maintenance Truckload
Chicago, Illinois Leased Maintenance Truckload
Alachua, FloridaSouth Boston, Virginia Leased Maintenance Truckload, VAS
South Boston, VirginiaGarrett, Indiana Leased Maintenance Truckload VAS
The Company leasesWe currently lease (i) approximately 60 small sales andoffices,
brokerage offices and trailer parking yards in various locations
throughout the country; leasesUnited States and (ii) office space in Mexico,
Canada and China; ownsChina. We own (i) a 96-room motel located near the Company's
headquarters,our
Omaha headquarters; (ii) a 71-room private lodging facility at
the Company'sour Dallas terminal,terminal; (iii) four low-income housing apartment
complexes in the Omaha area, andarea; (iv) a warehouse facility in Omaha;
and (v) a terminal facility in Queretaro, Mexico, which we lease
to a related party (see Note 7 "Related Party Transactions" in
the Notes to Consolidated Financial Statements under Item 8 of
this Form 10-K). We also houses a
cargo salvage store; and hashave 50% ownership in a 125,000
square-foot warehouse located near the Company's headquarters.
Currently, the Company has 18 locationsour headquarters in itsOmaha.
The Fleet Truck Sales network.network currently has 17 locations. Fleet
Truck Sales, a wholly ownedwholly-owned subsidiary, sells our used trucks and
trailers and is believed to be one of the largest domestic classClass
8 truck sales entities in the U.S. and
sells the Company's used trucks and trailers.
10
United States.
ITEM 3. LEGAL PROCEEDINGS
The Company isWe are a party subject to routine litigation incidental to
itsour business, primarily involving claims for personalbodily injury,
property damage and workers' compensation incurred in the
transportation of freight. The Company hasWe have maintained a self-
insuranceself-insurance
program with a qualified department of Risk Managementrisk management
professionals since 1988. These employees manage the Company'sour property
damage, cargo, liability and workers' compensation claims. The Company'sAn
actuary reviews our self-insurance reserves are reviewed by an
actuaryfor bodily injury and
property damage claims and workers' compensation claims every six
months.
The Company had been12
We were responsible for liability claims up to $500,000,
plus administrative expenses, for each occurrence involving
personalbodily injury or property damage since August 1, 1992. For the
policy year beginning August 1, 2004, the Companywe increased its self-insuredour self-
insured retention ("SIR") and deductible amount to $2.0 million
per occurrence. The Company isWe are also responsible for varying annual
aggregate amounts of liability for claims in excess of the
self-insured retention.SIR/deductible. The following table reflects the self-insured retentionSIR/deductible
levels and aggregate amounts of liability for personalbodily injury and
property damage claims since August 1, 2003:2004:
Primary Coverage
Coverage Period Primary Coverage SIR/deductibleDeductible
- ------------------------------ ---------------- ----------------
August 1, 2003 - July 31, 2004 $3.0 million $0.5 million (1)
August 1, 2004 - July 31, 2005 $5.0 million $2.0 million (2)(1)
August 1, 2005 - July 31, 2006 $5.0 million $2.0 million (3)(2)
August 1, 2006 - July 31, 2007 $5.0 million $2.0 million (2)
August 1, 2007 - July 31, 2008 $5.0 million $2.0 million (3)
(1) Subject to an additional $1.5$3.0 million aggregate in the $0.5
to $1.0 million layer, a $1.0 million aggregate in the $1.0 to
$2.0 million layer, no aggregate (i.e., fully insured) in the $2.0
to $3.0 million layer, a $6.0 millionno aggregate (meaning that we were fully
insured) in the $3.0 to $5.0 million layer, and a $5.0 million
aggregate in the $5.0 to $10.0 million layer.
(2) Subject to an additional $3.0$2.0 million aggregate in the $2.0
to $3.0 million layer, no aggregate (i.e.,(meaning that we were fully
insured) in the $3.0 to $5.0 million layer, and a $5.0 million
aggregate in the $5.0 to $10.0 million layer.
(3) Subject to an additional $2.0$8.0 million aggregate in the $2.0
to $3.0 million layer, no aggregate (i.e., fully insured) in the
$3.0
to $5.0 million layer and a $5.0 million aggregate in the $5.0
to $10.0 million layer.
The Company has assumed responsibilityWe are responsible for workers' compensation up to $1.0
million per claim, subject to anclaim. Effective April 2007, we were no longer
responsible for the additional $1.0 million aggregate for claims
between $1.0 million and $2.0 million. For the years 2005 and
2006 we were responsible for a $1.0 million maintainsaggregate for claims
between $1.0 million and $2.0 million. We also maintain a $25.7$25.4
million bond and has
obtainedhave insurance for individual claims above $1.0
million.
The Company'sOur primary insurance covers the range of liability where the Company expectsunder
which we expect most claims to occur. LiabilityIf any liability claims
are substantially in excess of coverage amounts listed in the
table above, if they occur,such claims are covered under premium-based policies
with reputable(issued by financially stable insurance companiescompanies) to coverage
levels that our management considers adequate. The Company
isWe are also
responsible for administrative expenses for each occurrence
involving personalbodily injury or property damage. See also Note 1
"Insurance and Claims Accruals" and Note 6 "Commitments and
Contingencies" in the Notes to Consolidated Financial Statements
under Item 8 of this Form 10-K.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSSTOCKHOLDERS
During the fourth quarter of 2006,2007, no matters were submitted
to a vote of security holders.
11stockholders.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Price Range of Common Stock
The Company's common stockOur Common Stock trades on Thethe NASDAQ Global Select MarketMarketSM
tier of Thethe NASDAQ Stock Market under the symbol "WERN". The
following table sets forth, for the quarters indicated, (i) the
high and low trade prices per share of the Company's common
stockour Common Stock quoted on
Thethe NASDAQ Global Select MarketMarketSM and the Company's(ii) our dividends declared
per commonCommon share from January 1, 2005,2006, through December 31, 2006.2007.
Dividends
Declared Per
High Low Common Share
-------- -------- ------------
20062007
Quarter ended:
March 31 $ 21.8420.92 $ 18.16 $.04017.58 $.045
June 30 21.01 18.32 .04520.40 17.99 .050
September 30 20.89 17.16 .04522.00 16.71 .050
December 31 20.76 17.30 .04519.66 16.66 .050
Dividends
Declared Per
High Low Common Share
-------- -------- ------------
2005
2006
Quarter ended:
March 31 $ 22.9121.84 $ 19.25 $.03518.16 $.040
June 30 19.91 17.68 .04021.01 18.32 .045
September 30 20.62 15.78 .04020.89 17.16 .045
December 31 20.96 16.34 .04020.76 17.30 .045
As of February 7, 2007, the Company's common stock15, 2008, our Common Stock was held by 207196
stockholders of record. Because many of our shares of Common
Stock are held by brokers and other institutions on behalf of
stockholders, we are unable to estimate the total number of
stockholders represented by these record and approximately 6,900
stockholders through nominee or street name accounts with
brokers.holders. The high and
low trade prices per share of the
Company's common stockour Common Stock in Thethe NASDAQ
Global Select MarketMarketSM as of February 7, 200715, 2008 were $19.27$18.76 and
$19.05,$17.85, respectively.
Dividend Policy
The Company has been payingWe have paid cash dividends on its common
stockour Common Stock following
each of its quartersfiscal quarter since the first payment in July 1987. The CompanyWe
currently intendsintend to continue payment ofpaying dividends on a quarterly
basis and doesdo not currently anticipate any restrictions on itsour
future ability to pay such dividends. However, nowe cannot give
any assurance can be given that dividends will be paid in the future sincebecause
they are dependent on earnings, theour financial condition of the Company, and other
factors.
Equity Compensation Plan Information
For information on the Company'sour equity compensation plans, please
refer to Item 12, "Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters".
12Matters."
14
Performance Graph
Comparison of Five-Year Cumulative Total Return
The following graph is not deemed to be "soliciting
material" or to be "filed" with the SEC or subject to the
liabilities of Section 18 of the Securities Exchange Act of 1934,
and the report shall not be deemed to be incorporated by
reference into any prior or subsequent filing by the Companyus under the
Securities Act of 1933 or the Securities Exchange Act of 1934
except to the extent the Companywe specifically requestsrequest that such
information be incorporated by reference or treated as soliciting
material.
[PERFORMANCE GRAPH APPEARS HERE]
12/31/01 12/31/02 12/31/03 12/31/04 12/31/05 12/31/06 12/31/07
-------- -------- -------- -------- -------- --------
Werner Enterprises, Inc. (WERN) $ 100.00 $ 118.62113.67 $ 134.84132.84 $ 157.58116.51 $ 138.20104.29 $ 123.71102.63
Standard & Poor's 500 $ 100.00 $ 77.90128.68 $ 100.24142.69 $ 111.15149.70 $ 116.61173.34 $ 135.03
Nasdaq182.87
NASDAQ Trucking Group (SIC Code 42) $ 100.00 $ 119.14122.07 $ 154.43149.61 $ 213.28137.41 $ 206.72134.69 $ 200.59128.71
Assuming the investment of $100.00 on December 31, 2001,2002, and
reinvestment of all dividends, the graph above compares the
cumulative total stockholder return on the Company'sour Common Stock for the
last five fiscal years with the cumulative total return of
the Standard & Poor's 500 Market Index and an index of other
companies that areincluded in the trucking industry (Nasdaq(NASDAQ Trucking
Group - Standard Industrial Classification ("SIC") Code 42) over the same
period. The Company'sOur stock price was $17.48$17.03 as of December 29, 2006.31, 2007.
This amount was used for purposes of calculating the total return
on the Company'sour Common Stock for the year ended December 31, 2006.2007.
Purchases of Equity Securities by the Issuer and Affiliated
Purchasers
On April 14, 2006, the Company'sOctober 15, 2007, we announced that on October 11, 2007
our Board of Directors approved an increase in the number of
shares of our Common Stock that the Company is authorized to
itsrepurchase. Under this new authorization, for common stock
repurchases of 6,000,000the Company is
permitted to repurchase an additional 8,000,000 shares. The
previous authorization, announced on November 23, 2003,April 17, 2006, authorized
the Company to repurchase 3,965,8386,000,000 shares and was completed in
fourth quarter 2006.2007. As of December 31, 2006,2007, the Company had
purchased 791,200 shares pursuant to the April 2006October 2007
authorization and had 5,208,8007,208,800 shares remaining available for
repurchase. The Company may purchase shares from time to time
depending on market, economic and other factors. The
authorization will continue unless withdrawn by the Board of
Directors.
15
The following table summarizes the Company's common stockour Common Stock repurchases
during the fourth quarter of 20062007 made pursuant to this authorization. Nothe 2006
(708,800 shares) and October 2007 (791,200) authorizations. The
Company did not purchase any shares were purchased during the fourth quarter of
2007 other than through this program, and all purchasesprogram. All stock repurchases were
made by 13
the Company or on its behalf of the Company and not by any "affiliated
purchaser",purchaser," as defined by Rule 10b-18 of the Securities Exchange Act of 1934.Act.
Issuer Purchases of Equity Securities
Maximum Number
(or Approximate
Total Number of Dollar Value) of
Shares (or Units) Shares (or Units) that
Total Number of Purchased as Part of May Yet Be
Total Number of
Shares Average Price Paid Publicly Announced Purchased Under the
Period (or Units) Purchased per Share (or Unit) Plans or Programs Plans or Programs
--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
October 1-31, 2006 786,900 $18.12 786,900 5,921,9002007 265,500 $18.21 265,500 8,443,300
November 1-30, 2006 713,100 $18.90 713,100 5,208,8002007 1,234,500 $17.77 1,234,500 7,208,800
December 1-31, 20062007 - - - 5,208,800
----------------------7,208,800
-------------------- --------------------
Total 1,500,000 $18.49$17.85 1,500,000 5,208,800
======================7,208,800
==================== ====================
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in
conjunction with the consolidated financial statements and notes
under Item 8 of this Form 10-K.
(In thousands, except per share amounts)
2007 2006 2005 2004 2003 2002
---------- ---------- ---------- ---------- ----------
Operating revenues $2,071,187 $2,080,555 $1,971,847 $1,678,043 $1,457,766
$1,341,456
Net income 75,357 98,643 98,534 87,310 73,727
61,627
Diluted earnings per share* 1.02 1.25 1.22 1.08 0.90 0.76
Cash dividends declared per share* .195 .175 .155 .130 .090 .064
Return on average stockholders' equity (1) 8.8% 11.3% 12.1% 11.9% 10.9% 10.0%
Return on average total assets (2) 5.4% 7.1% 7.6% 7.5% 6.7%
6.1%
Operating ratio (consolidated) (3) 93.4% 92.1% 91.7% 91.6% 91.9% 92.6%
Book value per share* (4) 11.83 11.55 10.86 9.76 8.90
8.12
Total assets 1,321,408 1,478,173 1,385,762 1,225,775 1,121,527
1,062,878
Total debt - 100,000 60,000 - -
20,000
Stockholders' equity 832,788 870,351 862,451 773,169 709,111 647,643
*After giving retroactive effect for the September 30, 2003 five-
for-four stock split and the March 14, 2002 four-for-three stock split (all years presented).
(1) Net income expressed as a percentage of average stockholders'
equity. Return on equity is a measure of a corporation's
profitability relative to recorded shareholder investment.
(2) Net income expressed as a percentage of average total assets.
Return on assets is a measure of a corporation's profitability
relative to recorded assets.
(3) Operating expenses expressed as a percentage of operating
revenues. Operating ratio is a common measure in the trucking
industry used to evaluate profitability.
(4) Stockholders' equity divided by common shares outstanding as
of the end of the period. Book value per share indicates the
dollar value remaining for common shareholders if all assets were
liquidated and all debts were paid at the recorded amounts.
16
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 as well asand forward-looking statements that are based on information
currently available to the Company'sour management. The forward-
lookingforward-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. The Company believesThese safe harbor provisions encourage
reporting companies to provide prospective information to
investors. Forward-looking statements can be identified by the
assumptions underlying theseuse 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 information currently available; however, any
of theavailable
information. However, forward-looking statements involve risks,
uncertainties and assumptions, whether known or unknown, that
could be inaccurate, and therefore,cause actual results mayto differ materially from thosethe
anticipated results expressed in the forward-looking statements.
A discussion of important factors relating to forward-looking
statements as a result of certain risks and
uncertainties. These risks include, but are not limited to,
14
those discussedis included in Item 1A, "Risk Factors". CautionFactors." Readers
should be
taken not to place undue relianceunduly rely on the forward-looking statements made herein, since theincluded
in this Form 10-K because such statements speak only as ofto the date
they arewere made. The Company undertakesUnless otherwise required by applicable
securities laws, we assume no obligation to publicly
release any revisions to any forward-lookingupdate forward-
looking statements contained
herein to reflect subsequent events or circumstances after the date of this
report or to reflect the occurrence of unanticipated events.circumstances.
Overview:
The Company operatesWe operate in the truckload sector of the trucking industry,
with a focus on transporting consumer nondurable products that
ship more consistently throughout the year. The
Company'sOur success depends
on itsour ability to efficiently manage itsour resources in the
delivery of truckload transportation and logistics services to
itsour customers. Resource requirements vary with customer demand,
which may be subject to seasonal or general economic conditions.
The Company'sOur ability to adapt to changes in customer transportation
requirements is a key element inessential to efficiently deployingdeploy resources and
in makingmake capital investments in tractors and trailers.trailers (with respect
to our Truckload segment) or obtain qualified third-party
capacity at a reasonable price (with respect to our VAS segment).
Although the Company'sour business volume is not highly concentrated, the Companywe may
also be occasionally affected by theour customers' financial
failure of its customersfailures or a loss of a customer's
business from time-to-time.customer business.
Operating revenues consist of (i) trucking revenues
generated by the six operating fleets in the Truckload Transportation Services
segment
(dedicated, medium/long-haulmedium-to-long-haul van, regional short-haul,
expedited, flatbed,temperature-controlled and temperature-controlled)flatbed) and non-trucking(ii) non-
trucking revenues generated primarily by the Company'sour VAS segment. The
Company'sOur
Truckload Transportation Services segment ("truckload
segment") also includes a small amount of non-trucking
revenues, forconsisting primarily of the portion of shipments
delivered to or from Mexico where itthe Truckload segment utilizes
a third-party capacity provider, and for a few of its
dedicated accounts where the services of third-party capacity
providers are used to meet customer capacity requirements. Non-
truckingprovider. Non-trucking revenues reported
in the operating statistics table include those revenues
generated by the VAS segment, as well as
the non-trucking revenues generated by the truckload segment.and Truckload segments. Trucking revenues
accounted for 86% of total operating revenues in 2006,2007, and non-truckingnon-
trucking and other operating revenues accounted for 14%.
17
Trucking services typically generate revenues on a per-mile
basis. Other sources of trucking revenues include fuel
surcharges and accessorial revenues such(such as stop charges,
loading/unloading charges and equipment detention charges.charges).
Because fuel surcharge revenues fluctuate in response to changes
in the cost of fuel costs, these revenues are identified separately within
the operating statistics table and are excluded from the
statistics to provide a more meaningful comparison between
periods. Non-truckingThe non-trucking revenues in the operating statistics
table include such revenues generated by a fleet whose operations
are part offall within the truckload segment are included in non-
trucking revenuesTruckload segment. We do this so that we can
calculate the revenue statistics in the operating statistics
table so that the
revenue statistics in the table are calculated using only the revenuesrevenue generated by the company-owned and
owner-operator trucks. The key statistics used to evaluate
trucking revenues excluding(excluding fuel surcharges,surcharges) are (i) average
revenues per tractor per week, the(ii) per-mile rates charged to
customers, the(iii) average monthly miles generated per tractor,
the(iv) average percentage of empty miles the(miles without trailer
cargo), (v) average trip length and the(vi) average number of
tractors in service. General economic conditions, seasonal
freight patterns in the trucking industry and industry capacity
are keyimportant factors that impact these statistics.
The Company'sOur most significant resource requirements are company
drivers, owner-operators, tractors, trailers and relatedequipment
operating costs of operating its equipment (such as fuel and related fuel taxes, driver pay,
insurance and supplies and maintenance). The
Company hasWe have historically
been successful mitigating itsour risk to increases in fuel pricesprice increases by
recovering additional fuel surcharges from itsour customers that
recoup a majority of the increased fuel costs; however, there is no assurancewe cannot
assure that current recovery levels will continue in future
periods. The Company'sOur financial results are also affected by company
driver and owner-operator availability of drivers and the market for new and
used revenue equipment. Because the Company
isWe are self-insured for a significant
portion of personalbodily injury, property damage and cargo claims and
for workers' compensation benefits for itsour employees
(supplemented by premium-based coverage above certain dollar
levels),. For that reason, our financial results may also be
affected by driver safety, medical costs, weather, the legal and
regulatory environment,environments and the costs of insurance coverage costs to protect
against catastrophic losses.
15
AThe operating ratio is a common industry measure used to
evaluate theour profitability and that of the Company and itsour trucking operating
fleets is thefleets. The operating ratio (operatingconsists of operating expenses
expressed as a percentage of operating revenues).revenues. The most
significant variable expenses that impact the trucking operationoperations are
driver salaries and benefits, payments to owner-operators
(included in rent and purchased transportation expense), fuel,
fuel taxes (included in taxes and licenses expense), supplies and
maintenance and insurance and claims. Generally, theseThese expenses generally
vary based on the number of miles generated. As such, the Companywe also
evaluatesevaluate these costs on a per-mile basis to adjust for the impact
on the percentage of total operating revenues caused by changes
in fuel surcharge revenues, per-mile rates charged to customers
and non-trucking revenues. As discussed further in the
comparison of operating results for 20062007 to 2005,2006, several
industry-wide issues including
volatile fuel prices and a challenging driver recruiting and
retention market, could cause costs to increase in future
periods. The Company's2008.
These issues include a softer freight market and fluctuating fuel
prices. Our main fixed costs include depreciation expense for
tractors and trailers and equipment licensing fees (included in
taxes and licenses expense). Depreciation expense has beenwas
historically affected by the newEPA engine emission standards that
became effective in October 2002 forand applied to all newlynew trucks
purchased trucks,
which haveafter that time, resulting in increased truck purchase
costs. In addition,
beginningDepreciation expense will also be affected in the future
because in January 2007 a newsecond set of more stringentstrict EPA engine
emissions standards mandated by the EPA became effective for all newly manufactured
trucks. The Company expects thattruck engines. Compared to trucks with engines produced before
2007, the trucks with new engines producedmanufactured under the 2007
standards willhave higher purchase prices, and we expect them to be
less fuel-efficient and have a higher cost than the current engines.result in increased maintenance costs.
The trucking operations require substantial cash expenditures for
the purchase
of tractorstractor and trailers.trailer purchases. In 2005 and 2006, the Companywe accelerated
itsour normal three-year replacement cycle for company-
ownedcompany-owned
tractors. TheseWe funded these purchases were funded bywith net cash from
operations and financing available under the Company'sour existing credit
facilities, as management deemed necessary. Capital
expendituresThe additional
number of new trucks purchased in 2005 and 2006 has allowed us to
delay purchases of trucks with the new 2007-standard engines
until 2008.
The weak freight market is placing increasing pressure on
rates during first quarter 2008. Costs for tractorsthe Truckload segment
were much higher in January 2008 compared to January 2007 are expecteddue to:
(i) significantly higher fuel prices, (ii) much higher
maintenance due in part to worse than normal winter weather and
(iii) higher insurance. Based on January 2008 results, it is
18
likely that our earnings per share for first quarter 2008 will be
substantially lower.
Non-truckingsignificantly lower than our earnings per share for first quarter
2007.
We provide non-trucking services provided by the Company, primarily through itsour VAS
division,division. These services include truck brokerage, freight
management (single-source logistics), truck brokerage,intermodal and
intermodal, as
well as a newly expanded international product line, as discussed
further on page 19.international. Unlike the Company'sour trucking operations, the non-trucking
operations are less asset-intensive and are instead dependent
upon qualified employees, information systems and the services of qualified
third-party capacity providers. The most significant expense item
related to these non-trucking services is the cost of
transportation paid by the Companywe pay to third-party capacity providers, whichproviders. This
expense item is recorded as rent and purchased transportation
expense. Other expenses include salaries, wages and benefits and
computer hardware and software depreciation. The Company evaluates theWe evaluate our
non-trucking operations 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 operating income percentage for the non-trucking
business is lower than those of the trucking operations, but the
return on assets is substantially higher.
16
Results of Operations
The following table sets forth certain industry data
regarding theour freight revenues and operations of the Company for the periods
indicated.
2007 2006 2005 2004 2003 2002
----------- ----------- ----------- ----------- -----------
Trucking revenues, net of
fuel surcharge (1) $ 1,483,164 $ 1,502,827 $ 1,493,826 $ 1,378,705 $ 1,286,674
$ 1,215,266
Trucking fuel surcharge
revenues (1) 301,789 286,843 235,690 114,135 61,571 29,060
Non-trucking revenues,
including VAS (1) 268,388 277,181 230,863 175,490 100,916
89,450
Other operating revenues (1) 17,846 13,704 11,468 9,713 8,605 7,680
----------- ----------- ----------- ----------- -----------
Operating revenues (1) $ 2,071,187 $ 2,080,555 $ 1,971,847 $ 1,678,043 $ 1,457,766 $ 1,341,456
=========== =========== =========== =========== ===========
Operating ratio
(consolidated) (2) 93.4% 92.1% 91.7% 91.6% 91.9% 92.6%
Average revenues per tractor
per week (3) $ 3,341 $ 3,300 $ 3,286 $ 3,136 $ 2,988
$ 2,932
Average annual miles per
tractor 118,656 117,072 120,912 121,644 121,716 123,480
Average annual trips per
tractor 184 175 187 185 173 166
Average trip length in
miles (total) 668 647 657 703 746
Average trip length in
miles (loaded) 558 581 568 583 627 674
Total miles (loaded and
empty) (1) 1,012,964 1,025,129 1,057,062 1,028,458 1,008,024 984,305
Average revenues per total
mile (3) $ 1.464 $ 1.466 $ 1.413 $ 1.341 $ 1.277
$ 1.235
Average revenues per loaded
mile (3) $ 1.692 $ 1.686 $ 1.609 $ 1.511 $ 1.431
$ 1.366
Average percentage of empty
miles (4) 13.5% 13.1% 12.2% 11.3% 10.8%
9.6%
Average tractors in service 8,537 8,757 8,742 8,455 8,282 7,971
Total tractors (at year end):
Company 7,470 8,180 7,920 7,675 7,430
7,180
Owner-operator 780 820 830 925 920 1,020
----------- ----------- ----------- ----------- -----------
Total tractors 8,250 9,000 8,750 8,600 8,350 8,200
=========== =========== =========== =========== ===========
Total trailers (at(truck and
intermodal, at year end) 24,855 25,200 25,210 23,540 22,800 20,880
=========== =========== =========== =========== ===========
(1) Amounts in thousandsthousands.
(2) Operating expenses expressed as a percentage of operating
revenues. Operating ratio is a common measure in the trucking
industry used to evaluate profitability.
(3) Net of fuel surcharge revenuesrevenues.
(4) Miles without trailer cargo.
Dedicated fleets have a higher
empty mile percentage, and empty miles are generally priced in
the dedicated business.19
The following table sets forth the revenues, operating
expenses and operating income for the truckloadTruckload segment.
Revenues for the truckloadTruckload segment include non-trucking revenues
of $10.0 million in 2007, $11.2 million in 2006 and $12.2 million
and $14.4 million for 2006,in 2005, and 2004, respectively, as described on page 15.17.
2007 2006 2005 2004
------------------ ------------------ ------------------
Truckload Transportation Services (amounts in 000's) $ % $ % $ %
- ---------------------------------------------------- ------------------ ------------------ ------------------
Revenues $ 1,795,227 100.0 $ 1,801,090 100.0 $ 1,741,828 100.0
$ 1,506,937 100.0
Operating expenses 1,673,619 93.2 1,644,581 91.3 1,585,706 91.0 1,371,109 91.0
----------- ----------- -----------
Operating income $ 121,608 6.8 $ 156,509 8.7 $ 156,122 9.0
$ 135,828 9.0
=========== =========== ===========
17
Higher fuel prices and higher fuel surcharge collections
have the effect of increasing the Company'sincrease our consolidated operating ratio and the truckloadTruckload
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
following table calculates the truckloadTruckload segment's operating
ratio as if fuel surcharges are excluded from revenue and instead
reported as a reduction of operating expenses.
2007 2006 2005 2004
------------------ ------------------ ------------------
Truckload Transportation Services (amounts in 000's) $ % $ % $ %
- ---------------------------------------------------- ------------------ ------------------ ------------------
Revenues $ 1,795,227 $ 1,801,090 $ 1,741,828 $ 1,506,937
Less: trucking fuel surcharge revenues 301,789 286,843 235,690 114,135
----------- ----------- -----------
Revenues, net of fuel surcharges 1,493,438 100.0 1,514,247 100.0 1,506,138 100.0 1,392,802 100.0
----------- ----------- -----------
Operating expenses 1,673,619 1,644,581 1,585,706 1,371,109
Less: trucking fuel surcharge revenues 301,789 286,843 235,690 114,135
----------- ----------- -----------
Operating expenses, net of fuel surcharges 1,371,830 91.9 1,357,738 89.7 1,350,016 89.6 1,256,974 90.2
----------- ----------- -----------
Operating income $ 121,608 8.1 $ 156,509 10.3 $ 156,122 10.4 $ 135,828 9.8
=========== =========== ===========
The following table sets forth the non-truckingVAS segment's non-
trucking revenues, rent and purchased transportation, and other
operating expenses and operating income for the VAS segment.income. Other operating
expenses for the VAS segment primarily consist of salaries, wages
and benefits expense. VAS also incurs smaller expense amounts in
the supplies and maintenance, depreciation, rent and purchased
transportation (excluding third-party transportation costs),
communications and utilities and other operating expense
categories.
2007 2006 2005 2004
------------------ ------------------ ------------------
Value Added Services (amounts in 000's) $ % $ % $ %
- --------------------------------------- ------------------ ------------------ ------------------
Revenues $ 258,433 100.0 $ 265,968 100.0 $ 218,620 100.0 $ 161,111 100.0
Rent and purchased transportation expense 224,667 86.9 240,800 90.5 196,972 90.1 145,474 90.3
----------- ----------- -----------
Gross margin 33,766 13.1 25,168 9.5 21,648 9.9
15,637 9.7
Other operating expenses 21,348 8.3 17,747 6.7 13,203 6.0 10,006 6.2
----------- ----------- -----------
Operating income $ 12,418 4.8 $ 7,421 2.8 $ 8,445 3.9
$ 5,631 3.5
=========== =========== ===========
2007 Compared to 2006
- ---------------------
Operating Revenues
Operating revenues decreased 0.5% in 2007 compared to 2006.
Excluding fuel surcharge revenues, trucking revenues decreased
1.3% due primarily to a 2.5% decrease in the average number of
tractors in service (as discussed further below), offset
partially by a 1.4% increase in average annual miles per tractor.
The truckload freight market was softer during most of 2007
compared to 2006. Additionally, the significant industry-wide
accelerated purchase of new trucks in advance of the new 2007 EPA
engine emissions standards contributed to excess truck capacity
that partially disrupted the supply and demand balance during
2007. These combined factors negatively affected revenues per
total mile, which decreased 0.1% in 2007 compared to 2006.
20
Freight demand softness and the temporary increase in the
supply of trucks caused by the industry truck pre-buy made for
challenging freight market conditions during 2007. In mid-March
2007, we began reducing our medium-to-long-haul Van fleet by a
total of 250 trucks to better match the volume of freight with
the capacity of trucks and to improve profitability. This fleet
has the greatest exposure to the spot freight market and faced
the most operational and competitive challenges. By the latter
part of April 2007, this initial medium-to-long-haul Van fleet
reduction goal was achieved, but we had not yet achieved the
desired balance of trucks and freight. As a result, we decided
to further reduce our medium-to-long-haul Van fleet by an
additional 400 trucks, which we completed by the end of June
2007. We were able to transfer a portion of our medium-to-long-
haul Van fleet trucks to other more profitable fleets. The net
impact to our total fleet was an approximate 500-truck reduction
from mid-March 2007 to the end of June 2007. Beginning in the
second week of November 2007, we reduced our medium-to-long-haul
Van fleet by an additional 100 trucks due to further weakness in
the Van market. This resulted in a cumulative 750-truck
reduction of our medium-to-long-haul Van fleet from mid-March
2007 to December 2007. After experiencing disappointing load
counts during the first three weeks of January 2008, we reduced
our medium-to-long-haul Van fleet by another 200 trucks in order
to achieve the operational efficiencies and profitability
expectations for this fleet.
Load volumes were lower for the medium-to-long-haul Van
fleet during the first eight weeks of 2008 compared to the same
period of 2007. Prebook percentages of loads to trucks for the
medium-to-long-haul Van fleet were lower in January 2008 compared
to January 2007. After the 200 truck medium-to-long-haul Van
fleet reduction in January 2008, prebook percentages of loads to
trucks in the first three weeks of February 2008 were still lower
than the first three weeks of February 2007.
The average percentage of empty miles increased to 13.5% in
2007 from 13.1% in 2006. This increase resulted from the weaker
freight market, a higher percentage of dedicated trucks in the
total fleet and more regional shipments with shorter lengths of
haul. Over the past few years, we have grown our dedicated
fleets. These fleets generally operate according to arrangements
under which we provide trucks and/or trailers for a specific
customer's exclusive use. Under nearly all of these arrangements,
dedicated customers pay us on an all-mile basis (regardless of
whether trailers or trucks are loaded or empty) to obtain
guaranteed truck and/or trailer capacity. For freight management
and statistical reporting purposes, we classify a mile without
cargo in the trailer as an "empty mile" or "deadhead mile." The
growth of our dedicated fleet business and the higher percentage
of miles without cargo in the trailer attributed to dedicated
fleets have each contributed to an increase in our reported
average empty miles percentage. If we excluded the dedicated
fleet, the average empty mile percentage would be 11.8% in 2007
and 10.8% in 2006.
Fuel surcharge revenues represent collections from customers
for the higher cost of fuel. These revenues increased to $301.8
million in 2007 from $286.8 million in 2006 in response to higher
average fuel prices in 2007. To lessen the effect of fluctuating
fuel prices on our margins, we collect fuel surcharge revenues
from our customers. Our fuel surcharge programs are designed to
(i) recoup high fuel costs from customers when fuel prices rise
and (ii) provide customers with the benefit of lower costs when
fuel prices decline. The Company's fuel surcharge standard is a
one (1.0) cent per mile rate increase for every five (5.0) cent
per gallon increase in the DOE weekly retail on-highway diesel
prices. This standard is used for many fuel surcharge programs.
These programs have historically enabled us to recover
approximately 70-90% of the fuel price increases. The remaining
10-30% is generally not recoverable because of empty miles not
billable to customers, out-of-route miles, truck idle time and
the volatility of fuel prices when prices change rapidly in short
time periods. Also, in a rapidly rising fuel price market, there
is generally a several week delay between the payment of higher
fuel prices and surcharge recovery. In a rapidly declining fuel
price market, the opposite generally occurs, and there is a
temporary higher surcharge recovery compared to the price paid
for fuel.
VAS revenues decreased 2.8% to $258.4 million in 2007 from
$266.0 million in 2006 due to a customer structural change
(discussed below), offset partially by an increase in Brokerage
and International revenues. VAS gross margin dollars increased
34.2% for the same period due to an improvement in the gross
margin percentage in the Brokerage and Intermodal divisions. VAS
revenues are generated by the following VAS operating divisions:
Brokerage, Freight Management (single-source logistics),
Intermodal and International. Beginning in third quarter 2007,
21
we negotiated with a large VAS customer a structural change to
their continuing arrangement related to the use of third-party
carriers. This change affects the reporting of VAS revenues and
purchased transportation expenses for this customer in third
quarter 2007 and future periods; and consequently, we began
reporting VAS revenues for this customer on a net basis (revenues
net of purchased transportation expense) rather than on a gross
basis. This reporting change resulted in a reduction in VAS
revenues and VAS rent and purchased transportation expense of
$38.5 million comparing the second half of 2006 to the second
half of 2007. This reporting change had no impact on the dollar
amount of VAS gross margin or operating income. Excluding the
affected freight revenues for this customer, VAS revenues grew
13% in 2007 compared to 2006.
Brokerage continued to produce strong results with 26%
revenue growth and improved operating income as a percentage of
revenues. Freight Management successfully distributed freight to
other operating divisions and continues to secure new customer
business awards that generate additional freight opportunities
across all company business units. Intermodal revenues declined
by design, yet produced significant operating income improvement
as we benefited from intermodal strategy changes that management
began implementing during the latter part of 2006.
Werner Global Logistics ("WGL"), formed in July 2006, is
actively assisting customers with innovative global supply chain
solutions. Customer development efforts are progressing, and WGL
continues to secure several new and meaningful customer business
awards. We are, through our subsidiaries and affiliates, a
licensed U.S. NVOCC, U.S. Customs Broker, licensed Freight
Forwarder in China, licensed China NVOCC, a TSA approved Indirect
Air Carrier, and an IATA Accredited Cargo Agent.
Operating Expenses
Our operating ratio (operating expenses expressed as a
percentage of operating revenues) was 93.4% in 2007 compared to
92.1% in 2006. Expense items that impacted the overall operating
ratio are described on the following pages. As explained on page
20, the total company 2007 operating ratio was 110 basis points
higher due to the significant increase in fuel expense and
recording the related fuel surcharge revenues on a gross basis.
The tables on page 20 show the operating ratios and operating
margins for our two reportable segments, Truckload and VAS.
The following table sets forth the cost per total mile of
operating expense items for the Truckload segment for the periods
indicated. We evaluate operating costs for this segment on a
per-mile basis, which is a better measurement tool for comparing
the results of operations from period to period.
Increase
(Decrease)
2007 2006 per Mile
------------------------------
Salaries, wages and benefits $.571 $.564 $.007
Fuel .401 .377 .024
Supplies and maintenance .150 .145 .005
Taxes and licenses .115 .114 .001
Insurance and claims .092 .090 .002
Depreciation .159 .158 .001
Rent and purchased transportation .160 .150 .010
Communications and utilities .020 .019 .001
Other (.016) (.013) (.003)
Owner-operator costs are included in rent and purchased
transportation expense. Owner-operator miles as a percentage of
total miles were 12.3% in 2007 compared to 11.8% in 2006. Owner-
operators are independent contractors who supply their own
tractor and driver and are responsible for their operating
expenses (including driver pay, fuel, supplies and maintenance
and fuel taxes). This increase in owner-operator miles as a
percentage of total miles shifted costs to the rent and purchased
transportation category from other expense categories. We
estimate that rent and purchased transportation expense for the
Truckload segment was higher by approximately 0.7 cents per total
22
mile due to this increase, and other expense categories had
offsetting decreases on a total-mile basis as follows: (i)
salaries, wages and benefits, 0.3 cents; (ii) fuel, 0.2 cents;
(iii) taxes and licenses, 0.1 cent; and (iv) depreciation, 0.1
cent.
Salaries, wages and benefits for non-drivers increased in
2007 compared to 2006 due to a larger number of employees
required to support the growth in the non-trucking VAS segment.
Non-driver salaries for the Truckload segment were flat in 2007
compared to 2006. The increase in salaries, wages and benefits
per mile of 0.7 cents for the Truckload segment is primarily
attributed to (i) an increase in student driver pay as the
average number of student trainer teams was higher in 2007 than
in 2006; (ii) an increase in the dedicated fleet truck percentage
as dedicated drivers typically earn a higher rate per mile than
drivers in our other truck fleets; and (iii) higher group health
insurance costs. These cost increases for the Truckload segment
were partially offset by a decrease in workers' compensation
expense, lower state unemployment tax expense and a decrease in
equipment maintenance personnel.
The driver recruiting and retention market remains
challenging, but was less difficult in 2007 than in the 2006 due
to improved driver availability. The weakness in the housing
market and the medium-to-long-haul Van fleet reduction
contributed favorably to our driver recruiting and retention
efforts. We anticipate that competition for qualified drivers
will remain high and cannot predict whether we will experience
future shortages. If such a shortage did occur and additional
driver pay rate increases were necessary to attract and retain
drivers, our results of operations would be negatively impacted
to the extent that corresponding freight rate increases were not
obtained.
Fuel increased 2.4 cents per mile for the Truckload segment
due primarily to higher average diesel fuel prices. Average fuel
prices in 2007 were 20 cents per gallon, or 10%, higher than in
2006. For the first eight months of 2007, average fuel prices
were nearly the same as they were during the first eight months
of 2006. However, during the last four months of 2007, average
fuel prices continued to increase to record levels, while prices
declined in the last four months of 2006. Fuel prices averaged
65 cents more per gallon in the last four months of 2007 versus
the same period in 2006. Higher net fuel costs had a 9.0 cent
negative impact on earnings per share in 2007 compared to 2006.
Fuel prices have remained high to date in 2008. As of today,
diesel fuel prices are 98 cents per gallon higher than on the
same date a year ago, and average prices to date in 2008 are 88
cents per gallon higher than in the same period of 2007. We
include all of the following items when calculating fuel's impact
on earnings for both periods: (i) average fuel price per gallon,
(ii) fuel reimbursements paid to owner-operator drivers, (iii)
miles per gallon and (iv) offsetting fuel surcharge revenues from
customers.
During third quarter 2006, truckload carriers transitioned a
gradually increasing portion of their diesel fuel consumption
from low sulfur diesel fuel to ULSD fuel. This transition
occurred because fuel refiners were required to meet the EPA-
mandated 80% ULSD threshold by October 15, 2006. Preliminary
estimates indicated that ULSD would result in a 1-3% degradation
in mpg for all trucks due to the lower energy content (btu) of
ULSD. Since the transition occurred, the result is an
approximate 2% degradation of mpg. We believe that other factors
which impact mpg, including increasing the percentage of
aerodynamic trucks in our company truck fleet, have offset the
negative mpg impact of ULSD.
We have historically been successful recouping approximately
70-90% of fuel cost increases through our fuel surcharge program.
The remaining 10-30% difference is caused by the impact of
operational costs such as truck idling, empty miles, out-of-route
miles, and the government mandated conversion to ULSD. In the
past, we met with our customers to obtain recovery for this
shortfall in base rates per mile. However, because of the
current softer freight market, we have been unable to recover
this shortfall in base rates. As a result, increases in the cost
of fuel are expected to continue impacting our earnings per share
until freight market conditions may allow us to recover this
shortfall from customers. We are continuing to take actions to
aggressively manage the controllable aspects of our fuel costs.
23
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 December 31, 2007, we had no derivative financial
instruments to reduce our exposure to fuel price fluctuations.
Supplies and maintenance for the Truckload segment increased
0.5 cents (3%) per total mile in 2007 compared to 2006. Higher
over-the-road tractor repairs and maintenance were the primary
cause of this increase because the increased percentage of
dedicated fleet trucks requires more repairs to be performed off-
site rather than at our terminals. In addition, the average age
of our company-owned truck fleet increased to 2.1 years at
December 31, 2007 compared to 1.3 years at December 31, 2006. A
portion of this increase was offset by lower non-driver salaries,
wages and benefits from a decrease in maintenance personnel, as
previously noted. Our trailer repair costs were slightly lower
in 2007 than in 2006 because our ongoing purchases of new van
trailers lowered the average age of our trailer fleet.
Insurance and claims for the Truckload segment did not
change significantly from 2006 to 2007, increasing just 0.2 cents
(2%) on a per-mile basis. We renewed our liability insurance
policies on August 1, 2007 and became responsible for an annual
$8.0 million aggregate for claims between $2.0 million and $5.0
million. During the policy year that ended July 31, 2007, we
were responsible for a lower $2.0 million aggregate for claims
between $2.0 million and $3.0 million and no aggregate (meaning
that we were fully insured) for claims between $3.0 million and
$5.0 million. See Item 3 "Legal Proceedings" for information on
our bodily injury and property damage coverage levels since
August 1, 2004. Our liability insurance premiums for the policy
year beginning August 1, 2007 are slightly lower than the
previous policy year.
Rent and purchased transportation expense consists mainly of
payments to third-party capacity providers in the VAS segment and
other non-trucking operations and payments to owner-operators in
the Truckload segment. As discussed on page 21, the VAS
segment's rent and purchased transportation expense decreased in
response to a structural change to a large VAS customer's
continuing arrangement. That change resulted in a reduction in
VAS revenues and VAS rent and purchased transportation expense of
(i) $20.0 million from third quarter 2006 to third quarter 2007
and (ii) $18.5 million from fourth quarter 2006 to fourth quarter
2007. Excluding the rent and purchased transportation expense
for this customer, the dollar amount of this expense increased
for the VAS segment, similar to VAS revenues. These expenses
generally vary depending on changes in the volume of services
generated by the segment. As a percentage of VAS revenues, VAS
rent and purchased transportation expense decreased to 86.9% in
2007 compared to 90.5% in 2006.
Rent and purchased transportation for the Truckload segment
increased 1.0 cent per total mile in 2007 due primarily to the
increase in the percentage of owner-operator truck miles versus
company truck miles. Increased fuel prices also necessitated
higher reimbursements to owner-operators for fuel ($36.0 million
in 2007 compared to $32.7 million in 2006). These reimbursements
resulted in an increase of 0.3 cents per total mile. Our
customer fuel surcharge programs do not differentiate between
miles generated by company-owned and owner-operator trucks.
Rather, we include the increase in owner-operator fuel
reimbursements with our fuel expenses in calculating the per-
share impact of higher fuel costs on earnings. Challenging
operating conditions continue to make owner-operator recruitment
and retention difficult for us. Such conditions include
inflationary cost increases that are the responsibility of owner-
operators. We have historically been able to add company-owned
tractors and recruit additional company drivers to offset any
owner-operator decreases. If a shortage of owner-operators and
company drivers occurs, increases in per mile settlement rates
(for owner-operators) and driver pay rates (for company drivers)
may become necessary to attract and retain these drivers. This
could negatively affect our results of operations to the extent
that we did not obtain corresponding freight rate increases.
Other operating expenses for the Truckload segment decreased
0.3 cents per mile in 2007. Gains on sales of assets (primarily
trucks and trailers) are reflected as a reduction of other
operating expenses and are reported net of sales-related
expenses, including costs to prepare the equipment for sale.
Gains on sales of assets decreased to $22.9 million in 2007 from
24
$28.4 million in 2006. Due to the softer freight market and
higher fuel prices, Fleet Truck Sales demand softened in fourth
quarter 2007. We expect this to continue for at least the first
half of 2008, which will likely have a continued negative impact
on the amount of our gains on sales. We continued to sell our
oldest van trailers that are fully depreciated and replaced them
with new trailers, and we expect to continue doing so in 2008.
Our wholly-owned used truck retail network, Fleet Truck Sales, is
one of the largest Class 8 truck sales entities in the United
States. Fleet Truck Sales continues to be our resource for
remarketing our used trucks. Other operating expenses also
include bad debt expense. In 2006, we recorded an additional
$7.2 million related to the bankruptcy of one of our former
customers.
We recorded $3.0 million of interest expense in 2007 versus
$1.2 million of interest expense in 2006 because our average debt
levels were higher in 2007. We had no debt outstanding at
December 31, 2007. Our interest income decreased to $4.0 million
in 2007 from $4.4 million in 2006.
Our effective income tax rate (income taxes expressed as a
percentage of income before income taxes) was 45.1% for 2007
versus 41.1% for 2006, as described in Note 4 of the Notes to
Consolidated Financial Statements under Item 8 of this Form 10-K.
During fourth quarter 2007, we reached a tentative settlement
agreement with an Internal Revenue Service appeals officer
regarding a significant timing difference between financial
reporting and tax reporting for our 2000 to 2004 federal income
tax returns. We accrued the estimated cumulative interest
charges, net of income taxes, of $4.0 million for the anticipated
settlement of this matter. Our policy is to recognize interest
and penalties directly related to income taxes as additional
income tax expense.
2006 Compared to 2005
- ---------------------
Operating Revenues
Operating revenues increased 5.5% in 2006 compared to 2005.
Excluding fuel surcharge revenues, trucking revenues increased
0.6% due primarily to a 3.8% increase in average revenues per
total mile, excluding fuel surcharges, offset by a 3.2% decrease
in average annual miles per tractor. The truckload freight
market was softersluggish during much of 2006, particularly from mid-
August through December when the normal freight volume peak
seasonal increase in
freight volume did not occur. Additionally, the significant
industry-wide accelerated purchase of new trucks in advance of
the new 2007 engine emissions standards contributed to excess
truck capacity that partially disrupted the supply and demand
balance in the second half of 2006. The combination of theseThese combined factors
resulted in the decrease in annual miles per tractor and also
negatively affected revenues per total mile. While revenues per
total mile increased 3.8% year-over-year, the percentage increase
over the comparable 2005 periods was lower in the last two
quarters of 2006 than in the first two quarters of 2006. Most of
the revenues per total mile increase is due to base rate
increases negotiated with customers, offset by an increase in the
empty mile percentage.
A substantial portion of the Company'sour freight base is under contract
with customers and provides for annual pricing increases, with
much of the Company'sour non-dedicated contractual business renewing in the
latter part of third quarter and fourth quarter. The challenging
freight market in the second half of 2006 made it much more
difficult for the Companyus to obtain base rate increases at levels
comparable to the 2005 and 2004 renewal periods.
There continue to be several inflationary cost
pressures that are impacting truckload carriers. They include:
driver pay and other driver-related costs, volatile diesel fuel
18
prices, conversion from low sulfur diesel fuel to ULSD, and new
engine emission requirements for newly manufactured trucks
beginning in January 2007 that are increasing the truck purchase
costs and lowering the mpg.
The average percentage of empty miles increased to 13.1% in
2006 from 12.2% in 2005. TheThis increase in the empty mile
percentage is partially the result of aresulted from
higher percentagepercentages of dedicated trucks in the fleet and a higher percentage of regional
shipments with a shorter length of haul. Over the past few
years, Werner has grown its dedicated fleets, arrangements in
which the Company provides trucks and/or trailers for the
exclusive use of a specific customer. For almost all the
Company's dedicated fleet arrangements, dedicated customers pay
the Company on an all-miles basis (loaded or empty) to obtain
guaranteed truck and/or trailer capacity. For freight management
and statistical reporting purposes, Werner classifies a mile
without cargo in the trailer as an empty mile (i.e., deadhead
mile). Since dedicated fleets generally have a higher percentage
of miles without cargo in the trailer and since the Company has
been growing its dedicated fleet business, this contributed to an
increase in the Company's reported average empty mile percentage.
ExcludingIf we excluded the
dedicated fleet, the average empty mile percentage would be 10.8%
in 2006 and 10.0% in 2005.
Fuel surcharge revenues which represent collections from
customers for the higher cost of fuel, increased to $286.8 million in 2006
from $235.7 million in 2005 in response to higher average fuel
prices in 2006.
To lessen the effect of fluctuating
fuel prices on the Company's margins, the Company collects fuel
surcharge revenues from its customers. The Company's fuel
surcharge programs are designed to recoup the higher cost of fuel
from customers when fuel prices rise and provide customers with
the benefit of lower costs when fuel prices decline. The
truckload industry's fuel surcharge standard is a one-cent per
mile increase in rate for every five-cent per gallon increase in
the DOE weekly retail on-highway diesel prices that are used for
most fuel surcharge programs. These programs have historically
enabled the Company to recover approximately 70% to 90% of the
fuel price increases. The remaining 10% to 30% is generally not
recoverable, due to empty miles not billable to customers,
out-of-route miles, truck idle time, and the volatility in fuel
prices as prices change rapidly in short periods of time.25
VAS revenues increased 21.7% to $266.0 million in 2006 from
$218.6 million in 2005, and gross margin increased 16.3% for the
same period. VAS revenues consist primarily of truck brokerage,
intermodal, freight management (single-source logistics), as well
as the newly expanded international product line described below.
Most of the revenue growth came from the Company's brokerageour Brokerage
and intermodalIntermodal divisions within VAS.
Brokerage continued to grow
rapidly, achieving nearly $100 million of revenues in 2006.
Freight Management recently attracted several new single-source
customers that are being added during first quarter 2007. The
Company continues to focus on growing the volume of business in
this segment, which provides customers with additional sources of
capacity.
In July 2006, the Company formed WGL, a separate company
that operates within the VAS segment, and through its
subsidiaries established its WOFE headquartered in Shanghai,
China. Werner is one of the first U.S. companies to receive a
combined approval to conduct comprehensive forwarding and
logistics business, nationwide import/export, and wholesale and
commission agency business. WGL and its subsidiaries obtained
business licenses to operate as an Ocean Transport Intermediary
(NVOCC and Ocean Freight Forwarder), U.S. Customs Broker, and
Class A Freight Forwarder in China. In addition, in first
quarter 2007 WGL entered into the air freight forwarding
business. Analysis and optimization work prepared for key
partner customers has resulted in multiple door-to-door business
awards being managed by the Company, primarily in the
Trans-Pacific trade lanes. Current service offerings within
China include site selection analysis, purchase order and vendor
management, origin consolidation, warehousing, freight forwarding
and customs brokerage. These services are being provided through
a combination of strategic alliances with best in class providers
and company-owned assets. The Company expects WGL to be a more
meaningful revenue contributor in 2007.
19
Operating Expenses
The Company'sOur operating ratio (operating expenses expressed
as a percentage of operating revenues) was 92.1% in 2006 versus 91.7% in 2005.
Expense items that impacted the overall operating ratio are
described on the following pages. As explained on page 18,20, the
operating ratio increased due to the significant increaserise in fuel
expense and recording the related fuel surcharge revenues on a
gross basis had the effect of increasing the operating
ratio.basis. Because the Company's VAS business operates with a lower operating margin is lower than that
of the trucking business, the growth in VAS business in 2006
compared to 2005 also increased the Company'sour overall operating ratio. The
tables on pages 17 and 18page 20 show the operating ratios and operating margins
for the Company'sour two reportable segments, Truckload Transportation Services and Value
Added Services.VAS.
The following table sets forth the cost per total mile of
operating expense items for the truckloadTruckload segment for the periods
indicated. The Company evaluatesWe evaluate operating costs for this segment on a per-mileper-
mile basis, to adjust for the impact on the
percentage of total operating revenues caused by changes in fuel
surcharge revenues and rate per mile increases, which providesis a more consistent basisbetter measurement tool for comparing the
results of operations from period to period.
Increase
(Decrease)
2006 2005 per Mile
---------------------------------------------------------
Salaries, wages and benefits $.564 $.532 $.032
Fuel .377 .321 .056
Supplies and maintenance .145 .143 .002
Taxes and licenses .114 .112 .002
Insurance and claims .090 .083 .007
Depreciation .158 .149 .009
Rent and purchased transportation .150 .149 .001
Communications and utilities .019 .019 .000
Other (.013) (.008) (.005)
Owner-operator costs are included in rent and purchased
transportation expense. Owner-operator miles as a percentage of total miles were
11.8% in 2006 compared to 12.5% in 2005. Owner-
operators are independent contractors who supply their own
tractor and driver and are responsible for their operating
expenses including fuel, supplies and maintenance, and fuel
taxes. This decrease in owner-operatorowner-
operator miles as a percentage of total miles shifted costs determined on a total mile basis from
the rent and purchased transportation category to other expense
categories. The Company estimatesWe estimate that rent and purchased transportation
expense for the truckloadTruckload segment was lower by approximately 1.0
cent per total mile due to this decrease, and other expense
categories had offsetting increases on a total-mile basis, as
follows: (i) salaries, wages and benefits, (0.4 cents),0.4 cents; (ii) fuel,
(0.3 cents),0.3 cents; (iii) supplies and maintenance, (0.1 cent),0.1 cent; (iv) taxes
and licenses, (0.1 cent),0.1 cent; and (v) depreciation, (0.1 cent).0.1 cent.
Salaries, wages and benefits for non-drivers increased in
2006 compared to 2005 due to a larger number of employees
required to support the growth in the VAS segment. The increase
in salaries, wages and benefits per mile of 3.2 cents for the
truckloadTruckload segment is primarily dueattributed to higher driver pay
per mile resulting from (i) an increase in theincreased percentage of company
truck miles versus owner-operator miles (see above),; (ii) an
increase in the percentage of dedicated fleet trucks,truck percentage; (iii)
additional amounts paid to drivers to help offset the impact of
lower miles in a softersluggish freight market,market; and (iv) higher group
health insurance costs, offset by a decrease in workers'
compensation expense. Non-driver salaries, wages and benefits
increasedrose due to (i) an increase in the
number of equipment maintenance personnel
and as described
further below,(ii) $2.3 million of stock compensation expense related to
the Company'sour adoption of Statement of Financial Accounting Standards
("SFAS") No. 123R123 (Revised 2004), Share-Based Payment ("No.
123R"), on January 1, 2006. See Note 5 to the Notes to
Consolidated Financial Statements for more explanation of SFAS
No. 123R.
Effective January 1, 2006, the Companywe adopted SFAS No. 123
(revised 2004), Share-Based Payment ("No. 123R"),123R using a
modified version of the prospective transition method. Under
this transition method, compensation cost is recognized on or
after the required effective dateJanuary 1, 2006 for (i) the portion of outstanding awards
for which the requisite service has not yet been rendered,vested as of January 1, 2006, based on the grant-date
fair value of those awards calculated under SFAS No. 123,
(as originally issued)26
Accounting for Stock-Based Compensation, for either recognition
20
or pro forma disclosures. Stock-baseddisclosures and (ii) all share-based payments
granted on or after January 1, 2006, based on the grant-date fair
value of those awards calculated under SFAS No. 123R. Stock-
based employee compensation expense for the year ended December
31, 2006 was $2.3 million, or 1.7 cents per share net of taxes.
There was no cumulative effect of initially adopting SFAS No.
123R.
The driver recruiting and retention market remains
challenging. Afterremained
challenging during 2006. We had two quarters of sequential
decreases in the average number of tractors in service during the
first half of 2006, the
Company's2006. Following these decreases, our ongoing focus
to lower driver turnover yielded positive results in the second
half of the year. The improvements in the latter part of the
year offset the decreases experienced during the first half of
the year, resulting in essentially no change in average tractors
in 2006 compared to 2005.
The Company
anticipates that the competition for drivers will continue to be
high and cannot predict whether it will experience shortages in
the future. If such a shortage were to occur and additional
increases in driver pay rates were necessary to attract and
retain drivers, the Company's results of operations would be
negatively impacted to the extent that corresponding freight rate
increases were not obtained.
Fuel increased 5.6 cents per mile for the truckloadTruckload segment
due primarily to higher average diesel fuel prices. Average fuel
prices in 2006 were 28 cents aper gallon, or 16%, higher than in
2005. Higher net fuel costs had a four-centfour (4.0) cent negative
impact on earnings per share in 2006 compared to 2005. The Company
includes all of the following items in the calculation of the
impact of fuel on earnings for both periods: (1) average fuel
price per gallon, (2) fuel reimbursements paid to owner-operator
drivers, (3) lower mpg due to the year-over-year increase in the
percentage of the company-owned truck fleet with post-October
2002 engines and the mpg impact of ultra-low sulfur diesel fuel,
and (4) offsetting fuel surcharge revenues from customers.
During third quarter 2006, truckload carriers transitioned a
gradually increasing portion of their diesel fuel consumption
from low sulfur diesel fuel to ULSD fuel, as fuel refiners were
required to meet the EPA-mandated 80% ULSD threshold by the
transition date of October 15, 2006. Preliminary estimates were
that ULSD would result in a 1-3% degradation in mpg for all
trucks, due to the lower energy content (btu) of ULSD. Based on
the Company's fuel mpg experience to date, these preliminary mpg
degradation estimates appear to be accurate.
Shortages of fuel, increases in fuel prices, or rationing of
petroleum products can have a materially adverse effect on the
operations and profitability of the Company. The Company is
unable to predict whether fuel price levels will continue to
increase or decrease in the future or the extent to which fuel
surcharges will be collected from customers. As of
December 31, 2006, the Companywe had no derivative financial instruments to
reduce itsour exposure to fuel price fluctuations.
Insurance and claims for the truckloadTruckload segment increased 0.7
cents on a per-mile basis,basis. This increase was primarily related to
higher negative development on existing liability insurance
claims and an increase in larger claims. The CompanyWe renewed itsour
liability insurance policies on August 1, 2006. See Item 3
"Legal Proceedings" for information on the Company's coverage levels for
personalour bodily injury and
property damage coverage levels since August 1, 2003. The
Company's2004. Our
liability insurance premiums for the policy year beginning August
1, 2006 were slightly higher than the previous policy year.
The Company is unable to predict whether the trend
of increasing insurance and claims expense will continue in the
future.
Depreciation expense for the truckloadTruckload segment increased 0.9
cents on a per-mile basis in 20062006. This increase is mainly due
primarily to (i) higher costs of new tractors with thehaving post-October 2002
engines, (ii) the impact of fewer average miles per truck and
a higher(iii) an increased percentage of company-owned trucks versuscompared to
owner-operators. As of December 31, 2006, nearly 100% of the
company-owned truck fleet consisted of trucks with thehaving post-October
2002 engines, compared to 89% at December 31, 2005.
Rent and purchased transportation consists mainly of
payments to third-party capacity providers in the VAS and other
non-trucking operations and payments to owner-operators in the
trucking operations. As shown in the VAS statistics table under
the "Results of Operations" heading on page 18, rentRent and purchased transportation expense
for the VAS segment increased in response to higher VAS revenues.
These expenses generally vary depending on changes in the volume
of services generated by the 21
segment. As a percentage of VAS
revenues, VAS rent and purchased transportation expense increased
to 90.5% in 2006 compared to 90.1% in 2005. Intermodal's gross
profits and operating income were lower due to adeclined because of the softer
freight market and the impactinfluence of higher fixed costs and
repositioning costs.
Several significant
changes to the intermodal operating strategy have been
implemented and are expected to help Intermodal achieve improved
results in 2007 compared to 2006.
Rent and purchased transportation for the truckloadTruckload segment
increased 0.1 centscent per total mile in 2006. Higher fuel prices
necessitated higher reimbursements to owner-operators for fuel
($32.7 million in 2006 compared to $26.6 million in 2005), which. These
higher owner-operator reimbursements resulted in an increase of
0.7 cents per total mile. The CompanyWe also increased the van and regional
over-the-road owner-
operators'owner-operators' settlement rate by two (2.0) cents
per mile effective May 1, 2006. These increases were offset by
the decrease in the number of owner-operator trucks and the
corresponding decrease in owner-
operatorowner-operator miles. The Company's customer fuel surcharge programs
do not differentiate between miles generated by Company-owned
trucks and miles generated by owner-operator trucks; thus, the
increase in owner-operator fuel reimbursements is included with
Company fuel expenses in calculating the per-share impact of
higher fuel costs on earnings. The Company continues to
experience difficulty recruiting and retaining owner-operator
drivers because of challenging operating conditions including
inflationary cost increases that are the responsibility of the
owner-operators. The Company has historically been able to add
company-owned tractors and recruit additional company drivers to
offset any decreases in owner-operators. If a shortage of owner-
operators and company drivers were to occur and increases in per
mile settlement rates became necessary to attract and retain
owner-operators, the Company's results of operations would be
negatively impacted to the extent that corresponding freight rate
increases were not obtained. Payments to
third-party capacity providers used for portionsrelated to the small amount of
shipments delivered to or from
Mexico andnon-trucking revenues recorded by a few dedicated fleets in the truckloadTruckload segment also
decreased by 0.1 centscent per mile, partially offsetting the
Truckload segment's overall increase for the truckload segment.increase.
Other operating expenses for the truckloadTruckload segment decreased
0.5 cents per mile in 2006. Gains on sales of assets, primarily
trucks and trailers, are reflected as a reduction of other
operating expenses and are reported net of sales-related
expenses, including costs to prepare the equipment for sale. Gains on sales of assets increased
to $28.4 million in 2006 from $11.0 million in 2005. During
2006, the Companywe began selling itsour oldest van trailers that had reached the
end of their depreciable life, which increased gains in 2006.
The number of trucks sold in 2006 and the average gain per truck
sold (before costs to prepare the equipment for sale) both
decreased slightly in comparison to 2005. The CompanyWe spent less on
repairs per truck sold in 2006 as compared to 2005, which also
contributed to the improvement in gains on sale. The Company's wholly-owned used
truck retail network, Fleet Truck Sales, is one of the largest
class 8 truck sales entities in the United States, with 18
locations, and has been in operation since 1992. Fleet Truck
Sales continues to be a resource for the Company to remarket its
used trucks. The Company expects gains on sales will be lower in
2007 compared to 2006 due to fewer trucks available for sale by
the Company. However, the Company expects to continue to realize
gains on the sale of its fully depreciated trailers in 2007.
Other operating
27
expenses also include bad debt expense which
includedand professional service
fees. In first quarter 2006, we recorded an additional $7.2
million of bad debt expense recorded
in first quarter 2006 related to the bankruptcy of one of the
Company's customers, APX Logistics, Inc., and professional
service fees.
The Companyour former customers.
We recorded $1.2 million of interest expense in 2006
versuscompared to $0.7 million of interest expense in 2005. The
CompanyWe had $100.0$100
million of debt outstanding at December 31, 2006, which2006. This debt was
incurred in the second half of 2006 for the purchase of new
trucks, and had $60.0trucks. In first quarter 2006, we repaid the $60 million of debt
that was outstanding at December 31, 2005. The Company repaid the $60.0 million of
debt in first quarter 2006. InterestOur interest income for the Company
increased to $4.4 million in 2006 from $3.4 million in 2005 due
to improved interest rates, partially offset by a declining cash
balance throughout 2006.
The Company'sOur effective income tax rate (income taxes
expressed as a percentage of income before income taxes) was 41.1% for 2006 versus
41.0% for 2005, as described in Note 4 of the Notes to
Consolidated Financial Statements under Item 8 of this Form 10-K.
22
2005 Compared to 2004
- ---------------------
Operating Revenues
Operating revenues increased 17.5% in 2005 compared to 2004.
Excluding fuel surcharge revenues, trucking revenues increased
8.3% due primarily to a 5.4% increase in average revenues per
total mile, excluding fuel surcharges, and a 3.4% increase in the
average number of tractors in service, offset by a 0.6% decrease
in average annual miles per tractor. Average revenues per total
mile, excluding fuel surcharges, increased due to customer rate
increases, and, to a lesser extent, a 2.6% decrease in the
average loaded trip length. The truckload freight environment
was solid during 2005 due to ongoing truck capacity constraints.
In comparison to 2004, demand in the months of March to August
2005 was not as strong as the strong freight market of 2004, but
freight demand for the remaining months of the year was
comparable to the demand in the same periods of 2004.
The average percentage of empty miles increased to 12.2% in
2005 from 11.3% in 2004. The increase in the empty mile
percentage was partially the result of a higher percentage of
dedicated trucks in the fleet and a higher percentage of regional
shipments with a shorter length of haul. Over the past few
years, Werner has grown its dedicated fleets, arrangements in
which the Company provides trucks and/or trailers for the
exclusive use of a specific customer. Excluding the dedicated
fleet, the average empty mile percentage would have been
substantially lower for 2005 and 2004.
Fuel surcharge revenues increased to $235.7 million in 2005
from $114.1 million in 2004 in response to higher average fuel
prices in 2005, which enabled the Company to recover a
significant portion of the fuel price increases.
VAS revenues increased 35.7% to $218.6 million in 2005 from
$161.1 million in 2004, and gross margin increased 38.4% for the
same period. Most of the revenue growth came from the Company's
brokerage and intermodal divisions within VAS.
Operating Expenses
The Company's operating ratio was 91.7% in 2005 versus 91.6%
in 2004. As explained on page 18, the significant increase in
fuel expense and related fuel surcharge revenues had the effect
of increasing the operating ratio. Because the Company's VAS
business operates with a lower operating margin than the trucking
business, the growth in VAS business in 2005 compared to 2004
also increased the Company's overall operating ratio. The tables
on pages 17 and 18 show the operating ratios and operating
margins for the Company's two reportable segments, Truckload
Transportation Services and Value Added Services.
23
The following table sets forth the cost per total mile of
operating expense items for the truckload segment for the periods
indicated. The Company evaluates operating costs for this
segment on a per-mile basis to adjust for the impact on the
percentage of total operating revenues caused by changes in fuel
surcharge revenues and rate per mile increases, which provides a
more consistent basis for comparing the results of operations
from period to period.
Increase
(Decrease)
2005 2004 per Mile
---------------------------
Salaries, wages and benefits $.532 $.519 $.013
Fuel .321 .211 .110
Supplies and maintenance .143 .130 .013
Taxes and licenses .112 .106 .006
Insurance and claims .083 .075 .008
Depreciation .149 .138 .011
Rent and purchased transportation .149 .140 .009
Communications and utilities .019 .018 .001
Other (.008) (.003) (.005)
Owner-operator miles as a percentage of total miles were
12.5% in 2005 compared to 12.7% in 2004. Because the change in
owner-operator miles as a percentage of total miles was only
minimal, there was essentially no shift in costs from the rent
and purchased transportation category to other expense
categories. During 2005, attracting and retaining owner-operator
drivers was very difficult due to high fuel prices and other
factors.
Salaries, wages and benefits for non-drivers increased in
2005 compared to 2004 to support the growth in the VAS segment.
The increase in salaries, wages and benefits per mile of 1.3
cents for the truckload segment is primarily the result of
increased student driver pay, higher driver pay per mile, and an
increase in the number of maintenance employees. Because of the
challenging driver recruiting and retention market, discussed
below, the Company trained more student drivers as an alternative
source of drivers. On August 1, 2004, the Company's previously
announced two cent per mile pay raise became effective for
company solo drivers in its medium-to-long-haul van division,
representing approximately 25% of total company drivers. The
Company recovered this pay raise through its customer rate
increase negotiations, which occurred in third and fourth quarter
2004.
The driver recruiting and retention market remained
extremely challenging during 2005. The supply of truck drivers
continued to be constrained due to alternative jobs to truck
driving and inadequate demographic growth for the industry's
targeted driver base over the next several years. The Company
continued to focus on driver quality of life issues such as
developing more driving jobs with more frequent home time,
providing drivers with newer trucks, and maximizing mileage
productivity within the federal hours of service regulations.
The Company also placed more emphasis on training drivers.
Improved driver recruiting has offset higher driver turnover.
The Company instituted an optional per diem reimbursement
program for eligible company drivers beginning in April 2004.
This program increases a company driver's net pay per mile, after
taxes. As a result of more drivers electing to participate in
the per diem program, driver pay per mile was slightly lower
before considering the factors above that increased driver pay
per mile, and the Company's effective income tax rate was higher
in 2005 compared to 2004. The program was designed to be cost-
neutral, because the combined driver pay rate per mile and per
diem reimbursement under the per diem program is about one cent
per mile lower than mileage pay without per diem reimbursement,
which offsets the Company's increased income taxes caused by the
nondeductible portion of the per diem. The per diem program
increases a company driver's net pay per mile, after taxes.
Fuel increased 11.0 cents per mile for the truckload segment
due primarily to higher average diesel fuel prices. Average fuel
prices in 2005 were 56 cents a gallon, or 47%, higher than in
2004. Higher fuel costs, after considering the amounts collected
from customers through fuel surcharge programs and the cost
impact of owner-operator fuel reimbursements and lower fuel mpg
due to truck engine emissions changes, had a ten-cent negative
impact on earnings per share in 2005 compared to 2004. As of
24
December 31, 2005, the Company had no derivative financial
instruments to reduce its exposure to fuel price fluctuations.
Supplies and maintenance for the truckload segment increased
1.3 cents on a per-mile basis in 2005 due primarily to increases
in repair expenses for an increased number of trucks sold by the
Company's Fleet Truck Sales subsidiary and higher costs to
maintain the Company's trailer fleet. Higher driver recruiting
costs (including driver advertising, transportation and lodging)
and higher toll expense related to state toll rate increases also
contributed to a smaller portion of the increase.
Taxes and licenses for the truckload segment increased 0.6
cents per total mile due primarily to the effect of the fuel mpg
degradation for company-owned trucks with post-October 2002
engines on the per-mile cost of federal and state diesel fuel
taxes, as well as increases in some state tax rates.
Insurance and claims for the truckload segment increased 0.8
cents on a per-mile basis, primarily related to higher negative
development on existing liability insurance claims. Cargo claims
expense was essentially flat on a per-mile basis compared to
2004. The Company renewed its liability insurance policies on
August 1, 2005. See Item 3 "Legal Proceedings" for information on
the Company's coverage levels for personal injury and property
damage since August 1, 2003. Liability insurance premiums for
the policy year beginning August 1, 2005 were approximately the
same as the previous policy year.
Depreciation expense for the truckload segment increased 1.1
cents on a per-mile basis in 2005 due primarily to higher costs
of new tractors with the post-October 2002 engines. As of
December 31, 2005, approximately 89% of the company-owned truck
fleet consisted of trucks with the post-October 2002 engines,
compared to 47% at December 31, 2004.
Rent and purchased transportation consists mainly of
payments to third-party capacity providers in the VAS and other
non-trucking operations and payments to owner-operators in the
trucking operations. As shown in the VAS statistics table under
the "Results of Operations" heading on page 18, rent and
purchased transportation expense for the VAS segment increased in
response to higher VAS revenues. As a percentage of VAS
revenues, VAS rent and purchased transportation expense decreased
to 90.1% in 2005 compared to 90.3% in 2004, resulting in a higher
gross margin in 2005. As the truck capacity market tightened
during 2005, it became more difficult to find qualified truckload
capacity to meet VAS customer freight needs, especially in the
latter part of the year. However, the Company's marketing
efforts continued to successfully expand its VAS qualified
carrier base in a constrained capacity market, ending the year
with 3,600 qualified broker carriers. During fourth quarter
2005, VAS expanded its small, but growing, intermodal presence by
agreeing to manage a fleet of Union Pacific-owned containers for
intermodal freight shipments. The Company pays a daily fee per
container to Union Pacific ("UP") for any days that the
containers are not in transit in the UP network. As of December
2005, VAS Intermodal managed 400 UP containers.
Rent and purchased transportation for the truckload segment
increased 0.9 cents per total mile in 2005. Higher fuel prices
necessitated higher reimbursements to owner-operators for fuel,
which resulted in an increase of 1.1 cents per total mile. The
Company has experienced difficulty recruiting and retaining
owner-operators for over three years because of challenging
operating conditions. This resulted in a reduction in the number
of owner-operator tractors to 830 as of December 31, 2005 from
925 as of December 31, 2004. Payments to third-party capacity
providers used for portions of shipments delivered to or from
Mexico and by a few dedicated fleets in the truckload segment
decreased by 0.2 cents per mile, partially offsetting the overall
increase for the truckload segment.
Other operating expenses for the truckload segment decreased
0.5 cents per mile in 2005. Gains on sales of assets, primarily
trucks, increased to $11.0 million in 2005 from $9.3 million in
2004, due to increased unit sales, partially offset by an
increased ratio of traded trucks to sold trucks. Other operating
expenses also include bad debt expense and professional service
fees. The remaining decrease in other operating expenses in 2005
was due primarily to a reduction in computer consulting fees as
25
consultants were hired by the Company, resulting in a reduction
in other operating expense, but an increase in salaries, wages
and benefits expense.
The Company recorded $0.7 million of interest expense in
2005 versus virtually no interest expense in 2004. The Company
incurred debt of $60.0 million during the fourth quarter of 2005
and had no debt outstanding throughout 2004. Interest income for
the Company increased to $3.4 million in 2005 from $2.6 million
in 2004 due to improved interest rates, partially offset by a
declining cash balance throughout 2005.
The Company's effective income tax rate increased to 41.0%
in 2005 from 39.2% in 2004, as described in Note 4 of the Notes
to Consolidated Financial Statements under Item 8 of this Form
10-K. The income tax rate increased in 2005 because of higher
non-deductible expenses for tax purposes related to the
implementation of a per diem pay program for student drivers in
fourth quarter 2003 and a per diem pay program for eligible
company drivers in April 2004.
Liquidity and Capital Resources
During the year ended December 31, 2006, the Company2007, we generated cash
flow from operations of $284.1$228.0 million, a 64.7%
increase19.7% decrease ($111.656.1
million), in cash flow compared to the year ended December 31,
2005.2006. This decrease is due primarily to (i) a $33.8 change in
accounts payable for revenue equipment caused by a $16.1 million
increase in accounts payable for revenue equipment from December
2005 to December 2006 (compared to a $17.7 million decrease in
accounts payable for revenue equipment from December 2006 to
December 2007) as we delayed the purchase of trucks with 2007
engines during 2007 and (ii) lower net income in 2007. These
cash flow decreases were offset partially by working capital
improvements in accounts receivable. Cash flow from operations
increased $111.6 million in 2006 compared to 2005, or 64.7%. The
increase in cash flow from operations isin 2006 compared to 2005
was due primarily to lower income tax payments during 2006,
higher payables for revenue equipment of $17.1 million and
improved collections of accounts receivable. In addition, the
Companywe
wrote off a $7.2 million receivable related to the APX
Logistics, Inc. bankruptcy of
a former customer during 2006, resulting in a decrease in net
accounts receivable. Income taxes paid during 2006 totaled $68.9
million compared to $99.2 million in 2005 and $42.9
million in 2004.2005. The higher tax
payments in 2005 were related to tax law changes that resulted in
the reversal of certain tax strategies implemented in 2001 and
the effect of lower income tax depreciation in 2005 due to the
bonus tax depreciation provision that expired on December 31,
2004. The CompanyWe made federal income tax payments of $22.5 million
related to the reversal of the tax strategies in second quarter
2005. Cash flow from
operations decreased $54.1 million in 2005 comparedWe were able to 2004, or
23.9%, due to the larger federal income tax payments in 2005make net capital expenditures, repay debt,
repurchase stock and an increase in days sales in accounts receivable, offset by
higher depreciation expense for financial reporting purposes
related to the higher costpay dividends because of the post-October 2002 engines and
higher net income. The cash flow from
operations and existing cash balances, supplemented by net
borrowings under itsour existing credit facilities, enabled the Company to make net capital
expenditures, repurchase stock, and pay dividends as discussed
below.facilities.
Net cash used in investing activities decreased 19.7%91.5%
($58.0216.1 million) to $20.1 million in 2007 from $236.2 million in
2006 from $294.3 million in 2005.2006. Net property additions primarily(primarily revenue equipment,equipment) were
$241.8$26.1 million for the year ended December 31, 2006 versus $299.22007 compared to
$241.8 million during the same period of 2005.2006. The decrease
occurred because we took delivery of substantially fewer new
trucks during 2007 to delay purchases of more expensive trucks
with 2007 engines. The $58.0 million, or 19.7%, decrease in
investing cash flows from 2006 to 2005 was due primarily to (i)
the Company purchasingpurchase of more tractors in 2005 as itwe began to reduce the
average age of itsour truck fleet and (ii) purchasing fewer tractors
and selling more trailers in 2006. The $100.8
million, or 52.1%, increase in investing cash flows from 2004 to
2005 was also due to the larger number of tractors purchased.
The average age of the Company'sour truck
fleet is 1.342.1 years at December 31, 2007 compared to 1.3 years at
December 31, 2006. The Company brought down the ageAs of its truck
fleetDecember 31, 2007, we committed to
delay the cost impactproperty and equipment purchases of the federally-mandated engine
emission standards that became effective in January 2007. The
Company's net capital expenditures are expected to be much lower
in 2007, or between $50 million and $100approximately $48.7 million.
The Company
intendsWe intend to fund these net capital expenditures through cash
flow from operations and financing available under the Company'sour existing
credit facilities, as management deems necessary.
As of
December 31, 2006, the Company has committed to property and
equipment purchases of approximately $57.1 million.
Net financing activities used $214.4 million in 2007, used
$52.8 million in 2006 and provided $48.9 million and used $25.7 million in 2006, 2005, and 2004,
respectively.2005. The
change from 20052006 to 20062007 included repayment in
the first quarterdebt repayments (net of
2006 of the $60.0 million of debt incurred
during fourth quarter 2005, followed by borrowingsborrowings) of $100.0 million in the latter part2007 compared to net borrowings
of 2006 to fund a portion of the
Company's net capital expenditures. Through the date of this
report, the Company has repaid $10.0$40.0 million of the total $100.0
26
in 2006. We borrowed $60.0 million of debt outstanding at December 31, 2006. The Companyin 2005. We
paid dividends of $14.0 million in 2007, $13.3 million in 2006
and $11.9 million in 2005,
and $9.5 million in 2004. The Company2005. We increased itsour quarterly dividend
rate by $.005$0.005 per share beginning with the dividend paid in July
20062007 and the dividend paid in July 2005.2006. Financing activities
also included common stockCommon Stock repurchases of $113.8 million in 2007,
$85.1 million in 2006 and $1.6 million in 2005, and $21.6 million in 2004.2005. From time to
28
time, the Company haswe have repurchased, and may continue to repurchase, shares
of its common stock.our Common Stock. The timing and amount of such purchases
depends on market and other factors. On April
14, 2006, the Company'sOctober 11, 2007, our
Board of Directors approved its currentan increase in the number of shares
of our Common Stock that the Company is authorized to repurchase.
This new authorization for common stock repurchases of 6,000,000permits us to repurchase an additional
8,000,000 shares. As of December 31, 2006,2007, the Company had
purchased 791,200 shares pursuant to this authorization and had
5,208,8007,208,800 shares remaining available for repurchase.
Management believes the Company'sour financial position at December 31,
20062007 is strong. As of December 31, 2006, the
Company2007, we had $31.6$25.1 million of
cash and cash equivalents and $870.4$832.8 million of stockholders'
equity. As of December 31, 2006, the
Company2007, we had $275.0$225.0 million of credit
pursuant to credit facilities, of which itwe had borrowed $100.0 million.no outstanding
borrowings. The remaining $175.0$225.0 million of credit available under these
facilities is further reduced by the $39.2$33.6 million in letters of
credit the Company maintains.we maintain. These letters of credit are primarily
required as security for insurance policies. As of December 31,
2006, the Company had no2007, we did not have any non-cancelable revenue equipment
operating leases and therefore had no off-balance sheet revenue
equipment debt. Based on the Company'sour strong financial position,
management foresees nodoes not foresee any significant barriers to obtaining
sufficient financing, if necessary.
Contractual Obligations and Commercial Commitments
The following tables set forth the Company'sour contractual obligations
and commercial commitments as of December 31, 2006.2007.
Payments Due by Period
(in millions)
Less than Over 5
Total Less than 1 year 1-3 years 4-5 years years Other
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Contractual Obligations
Long-term debt, including current
maturitiesUnrecognized tax benefits $ 100.012.6 $ - $ 50.0- $ 50.0- $ - $ 12.6
Equipment purchase commitments 57.1 57.148.7 48.7 - - - -
-------- -------- -------- -------- -------- --------
Total contractual cash obligations $ 157.161.3 $ 57.148.7 $ 50.0- $ 50.0- $ - $ 12.6
======== ======== ======== ======== ======== ========
Other FinancingCommercial
Commitments
Unused lines of credit $ 135.8 $ 50.0191.4 $ - $ 85.8191.4 $ - $ - $ -
Standby letters of credit 39.2 39.233.6 33.6 - - - -
-------- -------- -------- -------- -------- --------
Total financingcommercial commitments $ 175.0225.0 $ 89.233.6 $ 191.4 $ - $ 85.8- $ -
======== ======== ======== ======== ======== ========
Total obligations $ 332.1286.3 $ 146.382.3 $ 50.0191.4 $ 135.8- $ - $ 12.6
======== ======== ======== ======== ======== ========
The Company hasWe have committed credit facilities with two banks totaling
$275.0$225.0 million, of which itwe had borrowed $100.0 million.no outstanding borrowings. These
credit facilities bear variable interest (5.8% at December
31, 2006) based on the London
Interbank Offered Rate ("LIBOR"). The credit available under
these facilities is further reduced by the amount of standby
letters of credit the Company maintains.under which we are obligated. The unused lines
of credit are available to the Companyus in the event the Company needswe need financing for
the growth of itsour fleet. With the Company'sGiven our strong financial position, the Company expects
itwe
expect that we could obtain additional financing, if necessary,
at favorable terms. The standby letters of credit are primarily
required for insurance policies. The equipment purchase
commitments relate to committed equipment expenditures. On
January 1, 2007, we adopted FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes-an Interpretation of
FASB Statement No. 109 ("FIN 48"), and have recorded $12.6
million of unrecognized tax benefits. We are unable to
reasonably determine when these amounts will be settled.
Off-Balance Sheet Arrangements
The Company doesWe do not have arrangements that meet the definition of an
off-balance sheet arrangement.
2729
Critical Accounting Policies
The Company'sWe operate in the truckload sector of the trucking industry,
with a focus on transporting consumer nondurable products that
ship more consistently throughout the year and when changes occur
in the economy. Our success depends on itsour ability to
efficiently manage itsour resources in the delivery of truckload
transportation and logistics services to itsour customers. Resource
requirements vary with customer demand whichand may be subject to
seasonal or general economic conditions. The Company'sOur ability to adapt to
changes in customer transportation requirements is a key element
in efficiently deploying resourcesefficient resource deployment and in making capital
investments in tractors and trailers. Although the Company'sour business
volume is not highly concentrated, the Companywe may also be affected by the
financial failure of its customers or a loss of a customer's
business from time-to-time.
The Company'sbusiness.
Our most significant resource requirements are qualified
drivers, tractors, trailers and related costs ofequipment operating its equipmentcosts
(such as fuel and related fuel taxes, driver pay, insurance and
supplies and maintenance). The Company
has historically been successful mitigating itsHistorically, we have successfully
mitigated our risk to increases
in fuel pricesprice increases by recovering from our
customers additional fuel surcharges from its
customers. The Company'sthat recoup a majority of
the increased fuel costs; however, we cannot assure that current
recovery levels will continue in future periods. Our financial
results are also affected by company driver and owner-operator
availability of drivers and the market for new and used trucks.revenue equipment market.
Because the Company iswe are self-insured for a significant portion of its personalbodily
injury, property damage and cargo claims and for workers'
compensation benefits for itsour employees (supplemented by premium-basedpremium-
based coverage above certain dollar levels), financial results
may also be affected by driver safety, medical costs, weather,
the legal and regulatory environment,environments and the costs of
insurance coverage costs to
protect against catastrophic losses.
The most significant accounting policies and estimates that
affect our financial statements include the following:
* Selections of estimated useful lives and salvage values
for purposes of depreciating tractors and trailers.
Depreciable lives of tractors and trailers range from 5 to
12 years. Estimates of salvage value at the expected date
of trade-in or sale (for example, three years for
tractors) are based on the expected market values of
equipment at the time of disposal. Although the Company'sour normal
replacement cycle for tractors is three years, the
Company calculateswe
calculate depreciation expense for financial reporting
purposes using a five-year life and 25% salvage value.
Depreciation expense calculated in this manner continues
at the same straight-line rate which(which approximates the
continuing declining market value of the tractors, in those instances in whichtractors) when a
tractor is held beyond the normal three-year age.
Calculating depreciation expense using a five-year life
and 25% salvage value results in the same annual
depreciation rate (15% of cost per year) and the same net
book value at the normal three-year replacement date (55%
of cost) as using a three-year life and 55% salvage value.
The CompanyWe continually monitorsmonitor the adequacy of the lives and
salvage values used in calculating depreciation expense
and adjustsadjust these assumptions appropriately when warranted.
* Impairment of long-lived assets. The Company reviews itsWe review our long-lived
assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of a long-lived asset may not
be recoverable. An impairment loss would be recognized if
the carrying amount of the long-lived asset is not
recoverable and itthe carrying amount exceeds its fair
value. For long-lived assets classified as held and used,
ifthe carrying amount is not recoverable when the carrying
value of the long-lived asset exceeds the sum of the
future net cash flows, it is not
recoverable. The Company doesflows. We do not separately identify
assets by operating segment asbecause tractors and trailers
are routinely transferred from one operating fleet to
another. As a result, none of the Company'sour long-lived assets have
identifiable cash flows from use that are largely
independent of the cash flows of other assets and
liabilities. Thus, the asset group used to assess
impairment would include all assets of the Company.our assets. Long-lived
assets classified as held"held for salesale" are reported at the
lower of their carrying amount or fair value less costs
to sell.
* Estimates of accrued liabilities for insurance and claims
for liability and physical damage losses and workers'
compensation. The insurance and claims accruals (current
and long-term)noncurrent) are recorded at the estimated ultimate
30
payment amounts and are based upon individual case
estimates including(including negative development,development) and estimates
28
of incurred-but-not-reported losses using loss
development factors based upon past experience. The Company'sAn
actuary reviews our self-insurance reserves are
reviewed by an actuaryfor bodily
injury and property damage claims and workers'
compensation claims every six months.
* Policies for revenue recognition. Operating revenues
(including fuel surcharge revenues) and related direct
costs are recorded when the shipment is delivered. For
shipments where a third-party capacity provider
(including owner-operator driversowner-operators under contract with the Company)us) is
utilized to provide some or all of the service and the
Company iswe (i)
are the primary obligor in regardsregard to the shipment
delivery, of the shipment, establishes(ii) establish customer pricing separately from
carrier rate negotiations, (iii) generally hashave
discretion in carrier selection and/or has(iv) have credit
risk on the shipment, the Company recordswe record both revenues for the
dollar value of services billed by the Companywe bill to the customer and rent
and purchased transportation expense for thetransportation
costs of transportation paid by the Companywe pay to the third-party provider upon delivery of the
shipment.shipment's delivery. In the absence of the conditions
listed above, the Company
recordswe record revenues net of those expenses
related to third-party providers.
* Accounting for income taxes. Significant management
judgment is required to determine the provision for
income taxes, and to determine whether deferred income taxes
will be realized in full or in part.part and to determine the
liability for unrecognized tax benefits in accordance
with the provisions of FIN 48 (which we adopted January
1, 2007). Deferred income tax assets and liabilities are
measured using enacted tax rates that are expected to
apply to taxable income in the years in whichwhen those temporary
differences are expected to be recovered or settled.
When it is more likely that all or some portion of
specific deferred income tax assets will not be realized,
a valuation allowance must be established for the amount
of deferred income tax assets that are determined not to
be realizable. A valuation allowance for deferred income
tax assets has not been deemed to be necessary due to the Company'sour
profitable operations. Accordingly, if the facts or
financial circumstances were
to change, thereby impactingchanged and consequently impacted
the likelihood of realizing the deferred income tax
assets, judgmentwe would need to be
appliedapply management's judgment to
determine the amount of valuation allowance required in
any given period.
Management periodically re-evaluates these estimates as
events and circumstances change. Together with the effects of
the matters discussed above, these factors may significantly
impact the Company'sour results of operations from period-to-period.
Inflation
Inflation can be expected to have anmay impact on the Company'sour operating costs. A prolonged
inflation period of inflation could cause rises in interest rates, fuel, wages
and other costs to increase andcosts. These inflationary increases could adversely
affect the Company'sour results of operations unless freight rates could be
increased correspondingly. However, the effect of inflation has
been minimal over the past three years.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The Company isWe are exposed to market risk from changes in interest
rates, commodity prices and foreign currency exchange rates.
Interest Rate Risk
The CompanyWe had $100.0 million of variable rateno debt outstanding at December 31, 2006. The interest2007. Interest
rates on the
variable rate debtour unused credit facilities are based on the LIBOR.
Assuming this level of
borrowings, a hypothetical one-percentage point increaseIncreases in the
LIBOR interest rate would increase the Company'srates could impact our annual interest
expense by $1,000,000.on future borrowings. As of December 31, 2006, the Company has
no2007, we do not
have any derivative financial instruments to reduce itsour exposure
to interest rate increases.
2931
Commodity Price Risk
The price and availability of diesel fuel are subject to
fluctuations dueattributed to changes in the level of global oil
production, refining capacity, seasonality, weather and other
market factors. Historically, the Company has been able to
recoverwe have recovered a significant
portion of fuel price increases from customers in the form of
fuel surcharges. The Company hasWe implemented customer fuel surcharge programs
with most of itsour revenue base to offset much of the higher fuel
cost per gallon. The CompanyWe cannot predict the extent to which higher
fuel price levels will continue in the future or the extent to
which fuel surcharges could be collected to offset such
increases. As of December 31, 2006, the Company2007, we had no derivative
financial instruments to reduce itsour exposure to fuel price
fluctuations.
Foreign Currency Exchange Rate Risk
The Company conductsWe conduct business in Mexico, and Canada and is
beginning operations in Asia. Foreign
currency transaction gains and losses were not material to the Company'sour
results of operations for 20062007 and prior years. To date, virtually allmost
foreign revenues are denominated in U.S. dollars,Dollars, and the Company
receiveswe receive
payment for foreign freight services primarily in U.S. dollarsDollars to
reduce direct foreign currency risk. Accordingly, the
Company iswe are not
currently subject to material risks involving any foreign
currency exchange rate risks fromand the effects that such exchange rate
movements of foreign currencies would have on the Company'sour future costs or on future cash flows.
3032
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Werner Enterprises, Inc.:
We have audited the accompanying consolidated balance sheets
of Werner Enterprises, Inc. and subsidiaries as of December 31,
20062007 and 2005,2006, and the related consolidated statements of income,
stockholders' equity and comprehensive income, and cash flows for
each of the years in the three-year period ended December 31,
2006.2007. In connection with our audits of the consolidated
financial statements, we have also audited the financial
statement schedule for each of the years in the three-year period
ended December 31, 2006,2007, listed in Item 15(a)(2) of this Form 10-K.10-
K. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with the standards of
the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the
financial position of Werner Enterprises, Inc. and subsidiaries
as of December 31, 20062007 and 2005,2006, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2006,2007, in conformity with
U.S. generally accepted accounting principles. In addition,Also in our
opinion, the related financial statement schedule, referred to above, when
considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
We also have audited, in accordance with the standards of
the Public Company Accounting Oversight Board (United States),
the effectiveness of Werner Enterprises, Inc.'s internal control over financial
reporting as of December 31, 2006,2007, based on criteria established
in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO), and our report dated February 8, 200718, 2008 expressed an
unqualified opinion on management's assessmentthe effectiveness of and the effective operation of,Company's
internal control over financial reporting.
KPMG LLP
Omaha, Nebraska
February 8, 2007
3118, 2008
33
WERNER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Years Ended December 31,
------------------------------------------------------------------------------
2007 2006 2005 2004
---------- ---------- ----------
Operating revenues $2,071,187 $2,080,555 $1,971,847 $1,678,043
---------- ---------- ----------
Operating expenses:
Salaries, wages and benefits 598,837 594,783 574,893
544,424
Fuel 408,410 388,710 340,622 218,095
Supplies and maintenance 159,843 155,304 154,719 138,999
Taxes and licenses 117,170 117,570 118,853 109,720
Insurance and claims 93,769 92,580 88,595
76,991
Depreciation 166,994 167,516 162,462 144,535
Rent and purchased transportation 387,564 395,660 354,335 289,186
Communications and utilities 20,098 19,651 20,468
18,919
Other (18,015) (15,720) (7,711) (4,154)
---------- ---------- ----------
Total operating expenses 1,934,670 1,916,054 1,807,236 1,536,715
---------- ---------- ----------
Operating income 136,517 164,501 164,611 141,328
---------- ---------- ----------
Other expense (income):
Interest expense 2,977 1,196 672
13
Interest income (3,989) (4,407) (3,381)
(2,580)
Other 247 319 261 198
---------- ---------- ----------
Total other income (765) (2,892) (2,448) (2,369)
---------- ---------- ----------
Income before income taxes 137,282 167,393 167,059
143,697
Income taxes 61,925 68,750 68,525 56,387
---------- ---------- ----------
Net income $98,643 $98,534 $87,310$ 75,357 $ 98,643 $ 98,534
========== ========== ==========
Earnings per share:
Basic $1.27 $1.24 $1.10$ 1.03 $ 1.27 $ 1.24
========== ========== ==========
Diluted $1.25 $1.22 $1.08$ 1.02 $ 1.25 $ 1.22
========== ========== ==========
Weighted-average common shares outstanding:
Basic 72,858 77,653 79,393 79,224
========== ========== ==========
Diluted 74,114 79,101 80,701 80,868
========== ========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
3234
WERNER ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
December 31,
-------------------------------------------------
ASSETS 2007 2006 2005
---------- ----------
Current assets:
Cash and cash equivalents $ 31,61325,090 $ 36,58331,613
Accounts receivable, trade, less allowance
of $9,765 and $9,417, and $8,357, respectively 213,496 232,794 240,224
Other receivables 14,587 17,933 19,914
Inventories and supplies 10,747 10,850 10,951
Prepaid taxes, licenses, and permits 17,045 18,457 18,054
Current deferred income taxes 26,702 25,251 20,940
Other current assets 21,500 24,143 20,966
---------- ----------
Total current assets 329,167 361,041 367,632
---------- ----------
Property and equipment, at cost:
Land 27,947 26,945 26,279
Buildings and improvements 121,788 118,910 110,275
Revenue equipment 1,284,418 1,372,768 1,262,112
Service equipment and other 171,292 168,597 157,098
---------- ----------
Total property and equipment 1,605,445 1,687,220 1,555,764
Less - accumulated depreciation 633,504 590,880 553,157
---------- ----------
Property and equipment, net 971,941 1,096,340 1,002,607
---------- ----------
Other non-current assets 20,300 20,792 15,523
---------- ----------
$1,321,408 $1,478,173 $1,385,762
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 75,82149,652 $ 52,387
Current portion of long-term debt - 60,00075,821
Insurance and claims accruals 76,189 73,782 62,418
Accrued payroll 21,753 21,344 21,274
Other current liabilities 19,395 19,963 21,838
---------- ----------
Total current liabilities 166,989 190,910 217,917
---------- ----------
Long-term debt, net of current portion - 100,000 -
Other long-term liabilities 14,165 999 526
Deferred income taxes 196,966 216,413 209,868
Insurance and claims accruals, net of current
portion 110,500 99,500 95,000
Commitments and contingencies
Stockholders' equity:
Common stock, $.01$0.01 par value, 200,000,000
shares authorized; 80,533,536
shares issued; 75,339,29770,373,189 and 79,420,44375,339,297
shares outstanding, respectively 805 805
Paid-in capital 101,024 105,193 105,074
Retained earnings 923,411 862,403 777,260
Accumulated other comprehensive loss (169) (207) (259)
Treasury stock, at cost; 5,194,23910,160,347 and
1,113,0935,194,239 shares, respectively (192,283) (97,843) (20,429)
---------- ----------
Total stockholders' equity 832,788 870,351 862,451
---------- ----------
$1,321,408 $1,478,173 $1,385,762
========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
3335
WERNER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
-------------------------------------
2007 2006 2005 2004
--------- --------- ---------
Cash flows from operating activities:
Net income $ 75,357 $ 98,643 $ 98,534 $ 87,310
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation 166,994 167,516 162,462 144,535
Deferred income taxes (8,571) 2,234 (37,380) 12,517
Gain on disposal of operating
equipment (22,915) (28,393) (11,026) (9,735)
Stock based compensation 1,878 2,258 - -
Tax benefit from exercise of
stock options - - 1,617 3,225
Other long-term assets 918 (1,878) (795) 408
Insurance and claims accruals,
net of current portion 11,000 4,500 11,000 13,000
Other long-term liabilities 571 473 225 -
Changes in certain working
capital items:
Accounts receivable, net 19,298 7,430 (53,453) (34,310)
Prepaid expenses and other
current assets 7,504 (1,498) (14,207)
(4,261)
Accounts payable (26,169) 23,434 2,769 8,715
Accrued and other current liabilities2,120 9,346 12,746
5,178liabilities --------- --------- ---------
Net cash provided by operating
activities 227,985 284,065 172,492 226,582
--------- --------- ---------
Cash flows from investing activities:
Additions to property and equipment (133,124) (400,548) (414,112) (294,288)
Retirements of property and equipment 107,056 158,727 114,903 98,098
Decrease in notes receivable 5,962 5,574 4,957 2,703
--------- --------- ---------
Net cash used in investing
activities (20,106) (236,247) (294,252) (193,487)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of short-term
debt - - 60,000 -
Proceeds from issuance of long-term
debt 10,000 100,000 - -
Repayments of short-term debt (30,000) (60,000) -
Repayments of long-term debt (80,000) - -
Dividends on common stock (13,953) (13,287) (11,904) (9,506)
Repurchases of common stock (113,821) (85,132) (1,573) (21,591)
Stock options exercised 8,789 3,377 2,411 5,424
Excess tax benefits from exercise
of stock options 4,545 2,202 - -
--------- --------- ---------
Net cash provided by (used in)
financing activities (214,440) (52,840) 48,934 (25,673)
--------- --------- ---------
Effect of exchange rate fluctuations
on cash 38 52 602
(24)
Net increase (decrease)decrease in cash and cash
equivalents (6,523) (4,970) (72,224) 7,398
Cash and cash equivalents, beginning
of year 31,613 36,583 108,807 101,409
--------- --------- ---------
Cash and cash equivalents, end of year $ 25,090 $ 31,613 $ 36,583 $ 108,807
========= ========= =========
Supplemental disclosures of cash flow
information:
Cash paid during year for:
Interest $ 3,717 $ 566 $ 561
$ 13
Income taxes 65,111 68,941 99,170 42,850
Supplemental disclosures of non-cash
investing activities:
Notes receivable issued upon sale
of revenue equipment $ 6,388 $ 8,965 $ 8,164 $ 4,079
The accompanying notes are an integral part of these consolidated
financial statements.
3436
WERNER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE
INCOME
(In thousands, except share and per share amounts)
Accumulated
Other Total
Common Paid-In Retained Comprehensive Treasury Stockholders'
Stock Capital Earnings Income (Loss) Stock Equity
--------------------------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 20032004 $805 $108,706 $614,011 $(837) $(13,574) $709,111
Purchases of 1,173,200 shares
of common stock - - - - (21,591) (21,591)
Dividends on common stock
($.130 per share) - - (10,286) - - (10,286)
Exercise of stock options,
656,676 shares, including
tax benefits - (2,011) - - 10,660 8,649
Comprehensive income (loss):
Net income - - 87,310 - - 87,310
Foreign currency translation
adjustments - - - (24) - (24)
------- -------- -------- ----- -------- --------
Total comprehensive
income (loss) - - 87,310 (24) - 87,286
------- -------- -------- ----- -------- --------
BALANCE, December 31, 2004 805 106,695 691,035 (861)$106,695 $691,035 $(861) $ (24,505) 773,169$773,169
Purchases of 88,000 shares
of common stock - - - - (1,573) (1,573)
Dividends on common stock
($.155 per share) - - (12,309) - - (12,309)
Exercise of stock options,
310,696 shares,
including tax benefits - (1,621) - - 5,649 4,028
Comprehensive income (loss):
Net income - - 98,534 - - 98,534
Foreign currency
translation adjustments - - - 602 - 602
------- -------- -------- ----- ----------------- --------
Total comprehensive
income (loss) - - 98,534 602 - 99,136
------- -------- -------- ----- ----------------- --------
BALANCE, December 31, 2005 805 105,074 777,260 (259) (20,429) 862,451
Purchases of 4,500,000 shares
of common stock - - - - (85,132) (85,132)
Dividends on common stock
($.175 per share) - - (13,500) - - (13,500)
Exercise of stock options,
418,854 shares, including
excess tax benefits - (2,139) - - 7,718 5,579
Stock-based compensation
expense - 2,258 - - - 2,258
Comprehensive income (loss):
Net income - - 98,643 - - 98,643
Foreign currency
translation adjustments - - - 52 - 52
------- -------- -------- ----- ----------------- --------
Total comprehensive
income (loss) - - 98,643 52 - 98,695
income (loss) ------- -------- -------- ----- ----------------- --------
BALANCE, December 31, 2006 805 105,193 862,403 (207) (97,843) 870,351
Purchases of 6,000,000 shares
of common stock - - - - (113,821) (113,821)
Dividends on common stock
($.195 per share) - - (14,081) - - (14,081)
Exercise of stock options,
1,033,892 shares, including
excess tax benefits - (6,047) - - 19,381 13,334
Stock-based compensation
expense - 1,878 - - - 1,878
Adoption of FIN 48 - - (268) - - (268)
Comprehensive income (loss):
Net income - - 75,357 - - 75,357
Foreign currency
translation adjustments - - - 38 - 38
------- -------- -------- ----- --------- --------
Total comprehensive
income (loss) - - 75,357 38 - 75,395
------- -------- -------- ----- --------- --------
BALANCE, December 31, 2007 $805 $105,193 $862,403 $(207) $(97,843) $870,351$101,024 $923,411 $(169) $(192,283) $832,788
======= ======== ======== ===== ================= ========
The accompanying notes are an integral part of these consolidated
financial statements.
3537
WERNER ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Werner Enterprises, Inc. (the "Company") is a truckload
transportation and logistics company operating under the
jurisdiction of the U.S. Department of Transportation, the
Federalfederal and Provincialprovincial Transportation Departments in Canada, the
Secretary of Communication and Transportation in Mexico and
various U.S. state regulatory commissions. The Company maintainsWe maintain a
diversified freight base and isare not dependent on a specific
industry for a majority of itsour freight, which limits
concentrations of credit risk. One customer generated
approximately 11%, 10%, and 9%8% of total revenues forin 2007, 11% in 2006 2005,
and 2004, respectively.10%
in 2005.
Principles of Consolidation
The accompanying consolidated financial statements include
the accounts of Werner Enterprises, Inc. and itsour majority-owned
subsidiaries. All significant intercompany accounts and
transactions relating to these majority-owned entities have been
eliminated.
Use of Management Estimates
The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates
and assumptions that affect the (i) reported amounts of assets
and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements
and the(ii) reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents
The Company considersWe consider all highly liquid investments, purchased with a
maturity of three months or less, to be cash equivalents.
Trade Accounts Receivable
TradeWe record trade accounts receivable are recorded at the invoiced amounts,
net of an allowance for doubtful accounts. The allowance for
doubtful accounts is the Company'sour best estimate of the amount of probable
credit losses in the Company'sour existing accounts receivable. TheWe review the
financial condition of customers is
reviewed by the Company prior to granting credit. The Company
determinesWe
determine the allowance based on historical write-off experience
and national economic data. The Company evaluatesWe evaluate the adequacy of itsour
allowance for doubtful accounts quarterly. Past due balances
over 90 days and exceeding a specified amount are reviewed
individually for collectibility. Account balances are charged
off against the allowance after all means of collection have been
exhausted and the potential for recovery is considered remote.
The Company doesWe do not have any off-balance-sheet credit exposure related to
itsour customers.
Inventories and Supplies
Inventories and supplies are stated at the lower of average
cost or market and consist primarily of revenue equipment parts,
tires, fuel, supplies and company store merchandise and are stated at average cost.merchandise. Tires
placed on new revenue equipment are capitalized as a part of the
equipment cost. Replacement tires are expensed when placed in
service.
3638
Property, Equipment, and Depreciation
Additions and improvements to property and equipment are
capitalized at cost, while maintenance and repair expenditures
are charged to operations as incurred. Gains and losses on the
sale or exchange of equipment are recorded in other operating
expenses. Prior to July 1, 2005, if equipment was traded rather
than sold and cash involved in the exchange was less than 25% of
the exchange's fair value, of the exchange, the cost of new equipment was recorded
at an amount equal to the lower of the (i) monetary consideration
paid plus the net book value of the traded property or the(ii) fair
value of the new equipment.
Depreciation is calculated based on the cost of the asset,
reduced by itsthe asset's estimated salvage value, using the
straight-line method. Accelerated depreciation methods are used
for income tax purposes. The lives and salvage values assigned
to certain assets for financial reporting purposes are different
than for income tax purposes. For financial reporting purposes,
assets are depreciated using the following estimated useful lives
and salvage values:
Lives Salvage Values
---------- --------------------------- ------------------
Building and improvements 30 years 0%
Tractors 5 years 25%
Trailers 12 years $1,000
Service and other equipment 3-10 years 0%
Although the Company'sour normal replacement cycle for tractors is three
years, the Company calculateswe calculate depreciation expense for financial reporting
purposes using a five-year life and 25% salvage value.
Depreciation expense calculated in this manner continues at the
same straight-line rate which(which approximates the continuing
declining value of the tractors, in those instances in
whichtractors) when a tractor is held beyond
the normal three-year age. Calculating depreciation expense
using a five-year life and 25% salvage value results in the same
annual depreciation rate (15% of cost per year) and the same net
book value at the normal three-year replacement date (55% of
cost) as using a three-year life and 55% salvage value. As a
result, there is no difference in recorded depreciation expense
on a quarterly or annual basis with the Company'sour five-year life and 25%
salvage value, as compared to a three-year life and 55% salvage
value.
Long-Lived Assets
The Company reviews itsWe review our long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of a long-livedlong-
lived asset may not be recoverable. An impairment loss would be
recognized if the carrying amount of the long-lived asset is not
recoverable and itthe carrying amount exceeds its fair value. For
long-lived assets classified as held and used, ifthe carrying
amount is not recoverable when the carrying value of the long-livedlong-
lived asset exceeds the sum of the future net cash flows, it is not recoverable. The Company doesflows. We do
not separately identify assets by operating segment asbecause
tractors and trailers are routinely transferred from one
operating fleet to another. As a result, none of the Company'sour long-lived
assets have identifiable cash flows from use that are largely
independent of the cash flows of other assets and liabilities.
Thus, the asset group used to assess impairment would include all
assets of the Company.our assets. Long-lived assets classified as held"held for salesale"
are reported at the lower of their carrying amount or fair value
less costs to sell.
Insurance and Claims Accruals
Insurance and claims accruals both(both current and noncurrent,noncurrent)
reflect the estimated cost (including estimated loss development
and loss adjustment expenses) for (i) cargo loss and damage, (ii)
bodily injury and property damage ("BI/PD"), (iii) group health
and (iv) workers' compensation claims including estimated loss development and
loss adjustment expenses, not covered by insurance.
The costs for cargo and BI/PD insurance and claims are included
in insurance and claims expense whilein the Consolidated Statements of
Income; the costs of group health and workers' compensation
claims are included in salaries, wages and benefits expense in the Consolidated Statements of Income.expense. The
insurance and claims accruals are recorded at the estimated
ultimate payment amountsamounts. Such insurance and claims accruals are
based upon individual case estimates (including negative
development) and estimates of incurred-but-not-reported losses
using loss development factors based upon past experience.
Actual costs related to insurance and claims have 37
not differed
39
materially from estimated accrued amounts for all years
presented. The Company's insuranceAn actuary reviews our self-insurance reserves for
bodily injury and property damage claims accruals are
reviewed by an actuaryand workers'
compensation claims every six months.
The Company had beenWe were responsible for liability claims up to $500,000,
plus administrative expenses, for each occurrence involving
personalbodily injury or property damage since August 1, 1992. For the
policy year beginning August 1, 2004, the Companywe increased its self-insuredour self-
insured retention ("SIR") and deductible amount to $2.0 million
per occurrence. The Company isWe are also responsible for varying annual
aggregate amounts of liability for claims in excess of the
self-insured retention.SIR/deductible. The following table reflects the self-insured retentionSIR/deductible
levels and aggregate amounts of liability for personalbodily injury and
property damage claims since August 1, 2003:2004:
Primary Coverage
Coverage Period Primary Coverage SIR/deductibleDeductible
- -------------------------------------------------------------- ---------------- ----------------
August 1, 2003 - July 31, 2004 $3.0 million $0.5 million (1)
August 1, 2004 - July 31, 2005 $5.0 million $2.0 million (2)(1)
August 1, 2005 - July 31, 2006 $5.0 million $2.0 million (3)(2)
August 1, 2006 - July 31, 2007 $5.0 million $2.0 million (2)
August 1, 2007 - July 31, 2008 $5.0 million $2.0 million (3)
(1) Subject to an additional $1.5$3.0 million aggregate in the $0.5
to $1.0 million layer, a $1.0 million aggregate in the $1.0 to
$2.0 million layer, no aggregate (i.e., fully insured) in the $2.0
to $3.0 million layer, a $6.0 millionno aggregate (meaning that we were fully
insured) in the $3.0 to $5.0 million layer, and a $5.0 million
aggregate in the $5.0 to $10.0 million layer.
(2) Subject to an additional $3.0$2.0 million aggregate in the $2.0
to $3.0 million layer, no aggregate (i.e.,(meaning that we were fully
insured) in the $3.0 to $5.0 million layer, and a $5.0 million
aggregate in the $5.0 to $10.0 million layer.
(3) Subject to an additional $2.0$8.0 million aggregate in the $2.0
to $3.0 million layer, no aggregate (i.e., fully insured) in the
$3.0
to $5.0 million layer and a $5.0 million aggregate in the $5.0
to $10.0 million layer.
The Company'sOur primary insurance covers the range of liability where the Company expectsunder
which we expect most claims to occur. LiabilityIf any liability claims
are substantially in excess of coverage amounts listed in the
table above, if they occur,such claims are covered under premium-based policies
with(issued by reputable insurance companiescompanies) to coverage levels that
our management considers adequate. The Company
isWe are also responsible for
administrative expenses for each occurrence involving personalbodily
injury or property damage.
The Company hasWe assumed responsibility for workers' compensation up to
$1.0 million per claim, subject to anclaim. Effective April 2007, we were no longer
responsible for the additional $1.0 million aggregate for claims
between $1.0 million and $2.0 million. For the years 2005 and
2006 we were responsible for a $1.0 million maintainsaggregate for claims
between $1.0 million and $2.0 million. We also maintain a $25.7$25.4
million bond and has obtained insurance for individual claims above
$1.0 million.
Under these insurance arrangements, the Company maintains
$39.2we maintain $33.6
million in letters of credit as of December 31, 2006.2007.
Revenue Recognition
The Consolidated Statements of Income reflect recognition of
operating revenues (including fuel surcharge revenues) and
related direct costs when the shipment is delivered. For
shipments where a third-party capacity provider (including owner-operator
driversowner-
operators under contract with the Company)us) is utilized to provide some or
all of the service and the Company iswe (i) are the primary obligor in regardsregard
to the shipment delivery, of the shipment, establishes(ii) establish customer pricing
separately from carrier rate negotiations, (iii) generally hashave
discretion in carrier selection and/or has(iv) have credit risk on
the shipment, the Company recordswe record both revenues for the dollar value of
services billed by the Companywe bill to the customer and rent and purchased
transportation expense for thetransportation costs of transportation
paid by the Companywe pay to the
third-party provider upon delivery of
the shipment.shipment's delivery. In the
absence of the conditions listed above, the
Company recordswe record revenues net of
those expenses related to third-party providers.
38
Foreign Currency Translation
Local currencies are generally considered the functional
currencies outside the United States. Assets and liabilities are
translated at year-end exchange rates for operations in local
currency environments. Virtually allMost foreign revenues are denominated in
U.S. dollars.Dollars. Expense items are translated at the average rates
of exchange prevailing during the year. Foreign currency
translation adjustments reflect the changes in foreign currency
exchange rates applicable to the net assets of the Mexican and Canadianforeign
operations for the years ended December 31, 2007, 2006, 2005, and 2004.2005.
The amounts of such translation adjustments were not significant
40
for all years presented (see the Consolidated Statements of
Stockholders' Equity and Comprehensive Income).
Income Taxes
The Company usesWe use the asset and liability method of Statement of
Financial Accounting Standards ("SFAS") No. 109, Accounting for
Income Taxes, in accounting for income taxes. Under this method,
deferred tax assets and liabilities are recognized for the future
tax consequences attributable to temporary differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using the enacted tax rates that are
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
Common Stock and Earnings Per Share
The Company computesWe compute and presentspresent earnings per share ("EPS") in
accordance with SFAS No. 128, Earnings per Share. Basic earnings
per share is computed by dividing net income by the weighted-averageweighted-
average number of common shares outstanding during the period.
The difference between basic and diluted earnings per share for
all periods presented is due to the common stockCommon Stock equivalents that
are assumed to be issued upon the exercise of stock options.
There are no differences in the numerator of the
Company'sour computations of
basic and diluted EPS for any period presented. The computation
of basic and diluted earnings per share is shown below (in
thousands, except per share amounts).
Years Ended December 31,
----------------------------------
2007 2006 2005 2004
-------- -------- --------
Net income $ 75,357 $ 98,643 $ 98,534 $ 87,310
======== ======== ========
Weighted-average common shares
outstanding 72,858 77,653 79,393 79,224
Common stock equivalents 1,256 1,448 1,308 1,644
-------- -------- --------
Shares used in computing
diluted earnings per share 74,114 79,101 80,701 80,868
======== ======== ========
Basic earnings per share $ 1.03 $ 1.27 $ 1.24 $ 1.10
======== ======== ========
Diluted earnings per share $ 1.02 $ 1.25 $ 1.22 $ 1.08
======== ======== ========
Options to purchase shares of common stock whichCommon Stock that were
outstanding during the periods indicated above, but were excluded
from the computation of diluted earnings per share because the
option purchase price was greater than the average market price
of the commonCommon shares, were:
Years Ended December 31,
--------------------------------------------------------------------------------
2007 2006 2005 2004
------------ ------------ ------------
Number of shares under option 29,500 24,500 19,500 -
Option purchase price $19.26-20.36 $19.84-20.36 $ 19.84 -
39
Comprehensive Income
Comprehensive income consists of net income and other
comprehensive income (loss). Other comprehensive income (loss)
refers to revenues, expenses, gains and losses that are not
included in net income, but rather are recorded directly in
stockholders' equity. For the years ended December 31, 2007,
2006, 2005, and 2004,2005, comprehensive income consists of net income and
foreign currency translation adjustments.
41
Accounting Standards
Effective January 1, 2006, the Company adopted SFAS No. 123
(revised 2004), Share-Based Payment ("No. 123R"), using a
modified version of the prospective transition method. Under
this transition method, compensation cost is recognized on or
after the required effective date for the portion of outstanding
awards for which the requisite service has not yet been rendered,
based on the grant-date fair value of those awards calculated
under SFAS No. 123 (as originally issued) for either recognition
or pro forma disclosures. Stock-based employee compensation
expense for the year ended December 31, 2006 was $2.3 million,
and is included in salaries, wages and benefits within the
consolidated statements of income. There was no cumulative
effect of initially adopting SFAS No. 123R.
In May 2005, the FASB issued SFAS No. 154, Accounting
Changes and Error Corrections. This Statement replaces APB
Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting
Accounting Changes in Interim Financial Statements, and changes
the requirements for the accounting for and reporting of all
voluntary changes in accounting principle and changes required by
an accounting pronouncement when the pronouncement does not
include specific transition provisions. This Statement requires
retrospective application to prior periods' financial statements
of changes in accounting principle, unless it is impracticable to
do so. The provisions of SFAS No. 154 are effective for
accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. Upon adoption, SFAS No. 154
had no effect on the financial position, results of operations,
and cash flows of the Company, but will affect future changes in
accounting principles.
In February 2006, the Financial Accounting Standards Board
("FASB")FASB issued SFAS No. 155, Accounting
for Certain Hybrid Financial Instruments-An Amendment of FASB
Statements No. 133 and 140.140 ("No. 155"). This Statement amends
FASB StatementsSFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities ("No. 133"), and SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities and("No. 140"). SFAS No. 155 eliminates the
exemption from applying StatementSFAS No. 133 to interests in securitized
financial assets so that similar items are accounted for in the
same way. The provisions of SFAS No. 155 arewere effective for all
financial instruments acquired or issued after the beginning of
the first fiscal year that beginsbegan after September 15, 2006. As of December
31, 2006, management believes thatUpon
adoption, SFAS No. 155 will havehad no effect on theour financial position,
results of operations and cash flows of the Company.flows.
In March 2006, the FASB issued SFAS No. 156, Accounting for
Servicing of Financial Assets-An Amendment of FASB Statement No.
140.140 ("No. 156"). This Statement amends FASB StatementSFAS No. 140 Accounting
for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities and requires
that all separately recognized servicing assets and servicing
liabilities be initially measured at fair value, if practicable.
The provisions of SFAS No. 156 arewere effective as of the beginning
of the first fiscal year that beginsbegan after September 15, 2006.
As of December
31, 2006, management believes thatUpon adoption, SFAS No. 156 will havehad no effect on theour financial
position, results of operations and cash flows of the Company.flows.
In July 2006, the FASB issued FASB Interpretation No. 48
("FIN 48"), Accounting for Uncertainty in Income Taxes-an
Interpretation of FASB Statement No. 109.48. This interpretation
prescribes a recognition threshold and measurement process for
recording in the financial statements uncertain tax positions
taken or expected to be taken in a tax return. Additionally, this interpretationFIN
48 provides guidance on the derecognition, classification,
accounting in interim periods, and disclosure requirements for
uncertain tax positions. TheWe adopted the provisions of FIN 48 are effective on
January 1, 2007. As2007 and as a result, recognized an additional $0.3
million liability for unrecognized tax benefits, which was
accounted for as a reduction of December 31, 2006,
40
management believes that FIN 48 will not have a material effect
on the financial position, results of operations, and cash flows
of the Company.retained earnings.
In September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements.Measurements ("No. 157"). This Statement defines fair value,
establishes a framework for measuring fair value in generally
accepted accounting principles, ("GAAP"), and expands disclosures about
fair value measurements. The provisions of SFAS No. 157 are
effective as of the beginning of the first fiscal year beginning
after November 15, 2007. As of December 31, 2007, management
believes that SFAS No. 157 will not have a material effect on our
financial position, results of operations and cash flows.
In February 2007, the FASB issued SFAS No. 159, The Fair
Value Option for Financial Assets and Financial Liabilities-
Including an amendment of FASB Statement No. 115 ("No. 159").
This statement permits entities to choose to measure many
financial instruments and certain other items at fair value. The
provisions of SFAS No. 159 are effective as of the beginning of
the first fiscal year that begins after November 15, 2007. As of
December 31, 2006,2007, management believes that SFAS No. 157159 will not
have noa material effect on theour financial position, results of
operations and cash flows of the
Company.flows.
In September 2006,December 2007, the FASB issued SFAS No. 158, Employers'
Accounting for Defined Benefit Pension and Other Postretirement
Plans-an amendment of FASB Statements 141 (revised
2007), Business Combinations ("No. 87, 88, 106, and
132(R)141R"). This Statement requiresstatement
establishes requirements for (i) recognizing and measuring in an
employer to recognizeacquiring company's financial statements the overfunded or underfunded status of a defined benefit
postretirement plan (other than a multiemployer plan) as an asset
or liability in its statement of financial positionidentifiable assets
acquired, the liabilities assumed, and to
recognize changes in that funded statusany noncontrolling
interest in the yearacquiree, (ii) recognizing and measuring the
goodwill acquired in which the changes occur through comprehensive income ofbusiness combination or a business entity.
This Statement also requires an employergain from a
bargain purchase, and (iii) determining what information to
measure the funded
status of a plan asdisclose to enable users of the datefinancial statements to evaluate
the nature and financial effects of its year-end statement of
financial position, with limited exceptions.the business combination.
The provisions of SFAS No. 158141R are effective asfor business
combinations for which the acquisition date is on or after the
beginning of the end of the fiscal year
endingfirst annual reporting period beginning on or
after December 15, 2006. Upon adoption,2008. As of December 31, 2007, management
believes that SFAS No. 158 had
no141R will not have a material effect on
theour financial position, results of operations and cash flowsflows.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial Statements-an
amendment of ARB No. 51 ("No. 160"). This statement amends ARB
No. 51 to establish accounting and reporting standards for the
Company.
In September 2006, the Securities and Exchange Commission
published Staff Accounting Bulletin ("SAB") No. 108 (Topic 1N),
Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements.
SAB No. 108 requires registrants to quantify misstatements using
both the balance-sheet and income-statement approaches, with
adjustment required if either method resultsnoncontrolling interest in a material error.subsidiary and for the
deconsolidation of a subsidiary. The provisions of SABSFAS No. 108160
42
are effective for annual financial
statements for the first fiscal year endingyears, and interim periods within those
fiscal years, beginning on or after NovemberDecember 15, 2006. Upon adoption, SAB2008. As of
December 31, 2007, management believes that SFAS No. 108 had no160 will not
have a material effect on theour financial position, results of
operations and cash flows of the Company.flows.
(2) LONG-TERM DEBT
Long-term debt consisted of the following at December 31 (in
thousands):
2007 2006
2005
-------- ----------------- ---------
Notes payable to banks under
committed credit facilities $100,000 $ 60,000
-------- --------- $ 100,000
60,000--------- ---------
- 100,000
Less current portion - 60,000
-------- ---------
--------- ---------
Long-term debt, net $100,000 $ - ======== ========$ 100,000
========= =========
The notes payable toAs of December 31, 2007 we have two credit facilities with
banks totaling $225.0 million which mature in May 2009 ($50.0
million) and May 2011 ($175.0 million). Borrowings under committedthese
credit facilities bear variable interest (5.8% at December 31, 2006) based on the London
Interbank Offered Rate ("LIBOR"), and these credit
facilities mature at various dates from May 2008 to May 2011.
During 2007, the Company repaid $10.0 million on these notes.. As of December 31, 2006, the Company has an additional $175.0
million of available credit2007, we
had no borrowings outstanding under these credit facilities with
banks, whichbanks. The $225.0 million of credit available under these
facilities is further reduced by $39.2$33.6 million in letters of
credit the Company maintains.under which we are obligated. Each of the debt agreements
require,include, among other things, that the Companytwo financial covenants requiring us
(i) not to exceed a maximum ratio of total debt to total
capitalization and (ii) not to exceed a maximum ratio of total
funded debt to earnings before interest, income taxes,
depreciation, amortization and rentals payable as(as defined in the
credit facility. The Company wasfacility). We were in compliance with these covenants at
December 31, 2006.
41
The aggregate future maturities of long-term debt by year
consist of the following at December 31, 2006 (in thousands):
2007 $ -
2008 50,000
2009 -
2010 -
2011 50,000
--------
$100,000
========
The carrying amount of the Company's long-term debt
approximates fair value due to the duration of the notes and the
interest rates.2007.
(3) NOTES RECEIVABLE
Notes receivable are included in other current assets and
other non-current assets in the Consolidated Balance Sheets. At
December 31, notes receivable consisted of the following (in
thousands):
2007 2006 2005
-------- --------
Owner-operator notes receivable $ 13,29813,177 $ 9,62713,298
TDR Transportes, S.A. de C.V. 3,600 3,600
Other notes receivable 5,124 4,786 3,746
-------- --------
21,901 21,684 16,973
Less current portion 5,074 5,283 3,962
-------- --------
Notes receivable - non-current $ 16,40116,827 $ 13,01116,401
======== ========
The Company providesWe provide financing to some independent contractors who
want to become owner-operators by purchasing a tractor from the Companyus
and leasing their truck to the Company.us. At December 31, 2007, we had 307
notes receivable totaling $13,177 (in thousands) from these
owner-operators. At December 31, 2006, and 2005, the Companywe had 315 and 246such notes
receivable totalingthat totaled $13,298 and $9,627 (in thousands),
respectively, from these owner-operators.. See Note 7 for
information regarding notes from related parties. The Company
maintainsWe maintain a
first security interest in the tractor until the owner-operator
has paidpays the note balance in full. The CompanyWe also retainsretain recourse exposure
related to owner-operators who have purchased tractors from the Companyus with
third-party financing arranged by the Company.we arranged.
During 2002, the Companywe loaned $3,600 (in thousands) to TDR
Transportes, S.A. de C.V. ("TDR"), a truckload carrier in the
Republic of Mexico. The loan has a nine-year term with principal
payable at the end of the term,term. Such loan (i) is subject to
acceleration if certain conditions are met, (ii) bears interest
at a rate of five
percent5% per annum which(which is payable quarterly,quarterly), (iii)
contains certain financial and other covenants and (iv) is
collateralized by the assets of TDR. The CompanyWe had a receivable for
interest on this note of $31 (in thousands) as of December 31,
20062007 and 2005.2006. See Note 7 for information regarding related
party transactions.
4243
(4) INCOME TAXES
Income tax expense consisted of the following (in
thousands):
2007 2006 2005 2004
-------- -------- --------
Current:
Federal $ 62,026 $ 59,021 $ 93,715
$ 38,206
State 8,470 7,495 12,190 5,664
-------- -------- --------
70,496 66,516 105,905 43,870
-------- -------- --------
Deferred:
Federal (6,698) 1,149 (32,910)
12,336
State (1,873) 1,085 (4,470) 181
-------- -------- --------
(8,571) 2,234 (37,380) 12,517
-------- -------- --------
Total income tax expense $ 61,925 $ 68,750 $ 68,525 $ 56,387
======== ======== ========
The effective income tax rate differs from the federal
corporate tax rate of 35% in 2007, 2006 2005 and 20042005 as follows (in
thousands):
2007 2006 2005 2004
-------- -------- --------
Tax at statutory rate $ 48,049 $ 58,588 $ 58,471 $ 50,294
State income taxes, net of
federal tax benefits 4,288 5,577 5,018 3,800
Non-deductible meals and
entertainment 4,799 4,329 4,340
2,670Anticipated income tax
settlement 4,000 - -
Income tax credits (790) (740) (895)
(900)
Other, net 1,579 996 1,591 523
-------- -------- --------
$ 61,925 $ 68,750 $ 68,525 $ 56,387
======== ======== ========
At December 31, deferred tax assets and liabilities
consisted of the following (in thousands):
2007 2006
2005
-------- ----------------- ---------
Deferred tax assets:
Insurance and claims accruals $ 67,43273,276 $ 59,87067,432
Allowance for uncollectible accounts 4,777 4,517
4,216
Other 9,226 4,041
4,588
-------- ----------------- ---------
Gross deferred tax assets 87,279 75,990
68,674
-------- ----------------- ---------
Deferred tax liabilities:
Property and equipment 247,133 253,192 244,128
Prepaid expenses 7,693 8,241
7,915
Other 2,717 5,719
5,559
-------- ----------------- ---------
Gross deferred tax liabilities 257,543 267,152
257,602
-------- ----------------- ---------
Net deferred tax liability $191,162 $188,928
======== ========$ 170,264 $ 191,162
========= =========
These amounts (in thousands) are presented in the
accompanying Consolidated Balance Sheets as of December 31 as
follows:
2007 2006
2005
-------- ----------------- ---------
Current deferred tax asset $ 25,25126,702 $ 20,94025,251
Noncurrent deferred tax liability 196,966 216,413
209,868
-------- ----------------- ---------
Net deferred tax liability $191,162 $188,928
======== ========$ 170,264 $ 191,162
========= =========
43
The Company hasWe have not recorded a valuation allowance as it
believeswe believe
that all deferred tax assets are more likely than not to be
realized as a result of the Company'sour history of profitability, taxable
income and reversal of deferred tax liabilities.
44
During first quarter 2006, in connection with an audit of
our federal income tax returns for the years 1999 to 2002, we
received a notice from the IRS proposing to disallow a
significant tax deduction. This deduction was based on a timing
difference between financial reporting and tax reporting, and
would result in interest charges, which we record as a component
of income tax expense in the Consolidated Statements of Income.
This timing difference deduction reversed in our 2004 income tax
return. We formally protested this matter in April 2006. During
fourth quarter 2007, we reached a tentative settlement agreement
with an Internal Revenue Service appeals officer. During fourth
quarter 2007, we accrued in income taxes expense in our
Consolidated Statements of Income the estimated cumulative
interest charges for the anticipated settlement of this matter,
net of income taxes, which amounts to $4.0 million, or $.05 per
share.
We adopted the provisions of FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes-an Interpretation of
FASB Statement No. 109 ("FIN 48"), on January 1, 2007. As a
result of the adoption of FIN 48, we recognized an additional
$0.3 million net liability for unrecognized tax benefits, which
was accounted for as a reduction of retained earnings. After
recognizing the additional liability, we had a total gross
liability for unrecognized tax benefits of $5.3 million as of the
adoption date, which is included in other long-term liabilities.
If recognized, $3.4 million of unrecognized tax benefits would
impact our effective tax rate. Interest of $1.4 million has been
reflected as a component of the total liability. It is our
policy to recognize as additional income tax expense the items of
interest and penalties directly related to income taxes.
For the twelve-month period ended December 31, 2007, we
recognized an additional $4.4 million net liability for
unrecognized tax benefits, which was accounted for as income tax
expense and which increased our effective tax rate. The amount is
due primarily to a tentative settlement agreement with the IRS
for tax years 1999 through 2002, as discussed above. We accrued
interest of $7.2 million during 2007. Our total gross liability
for unrecognized tax benefits at December 31, 2007 is $12.6
million. If recognized, $7.8 million of unrecognized tax
benefits would impact our effective tax rate. Interest of $8.6
million has been reflected as a component of the total liability.
We do not expect any other significant increases or decreases for
uncertain tax positions during the next twelve months.
We file U.S. federal income tax returns, as well as income
tax returns in various states and several foreign jurisdictions.
The years 2003 through 2007 are subject to examination by the
IRS, and various years are subject to examination by state and
foreign tax authorities. The reconciliation of beginning and
ending gross balances of unrecognized tax benefits for the year
ended December 31, 2007 is shown below (in thousands).
Unrecognized tax benefits, opening balance $ 5,338
Gross increases - tax positions in prior period 7,256
Gross decreases - tax positions in prior period -
Gross increases - current-period tax positions -
Settlements -
Lapse of statute of limitations -
----------
Unrecognized tax benefits, ending balance $ 12,594
==========
(5) STOCK OPTIONEQUITY COMPENSATION AND EMPLOYEE BENEFIT PLANS
Stock OptionEquity Plan
The Company's Stock OptionOur Equity Plan (the "Stock Option Plan") is
a nonqualified plan that provides for the grantgrants of nonqualified stock
options, to
management employees.restricted stock and stock appreciation rights. Options
are granted at prices equal to the market value of the common stockCommon
Stock on the date the option is granted. Options grantedThe Board of Directors
or the Compensation Committee will determine the vesting
conditions of the award. Option awards currently outstanding
become exercisable in installments from sixeighteen to seventy-two
months after the date of grant. The options are exercisable over
a period not to exceed ten years and one day from the date of
grant. No awards of restricted stock or stock appreciation
rights have been issued. The maximum number of shares of common
stockCommon
Stock that may be optionedawarded under the Stock OptionEquity Plan is 20,000,000
45
shares. The maximum aggregate number of optionsshares that may be
grantedawarded to any one person under the Stock OptionEquity Plan is 2,562,500 options. At2,562,500. As
of December 31, 2006, 8,890,5512007, there were 8,568,007 shares were available for
granting additional options.awards.
Effective January 1, 2006, the Companywe adopted SFAS No. 123R123 (Revised
2004), Share-Based Payment ("No. 123R"), using a modified version
of the prospective transition method. Under this transition
method, compensation cost is recognized on or after the required effective dateJanuary 1,
2006 for (i) the portion of outstanding awards for which the requisite service hasthat were not
yet
been rendered,vested as of January 1, 2006, based on the grant-date fair value
of those awards calculated under SFAS No. 123, Accounting for
Stock-Based Compensation, (as originally issued) for either
recognition or pro forma disclosures.disclosures and (ii) all share-based
payments granted on or after January 1, 2006, based on the grant-
date fair value of those awards calculated under SFAS No. 123R.
Stock-based employee compensation expense for the year 2006 was $1.9 million in
2007 and $2.3 million in 2006 and is included in salaries, wages
and benefits within the consolidated
statementsConsolidated Statements of income.Income. The
total income tax benefit recognized in the income statementConsolidated
Statements of Income for stock-based compensation arrangements
was $0.8 million in 2007 and $0.9 million in 2006. There was no
cumulative effect of initially adopting SFAS No. 123R.
The Company granted 5,000, 415,500, and 787,000 stock
options during the years ended December 31, 2006, 2005, and 2004,
respectively. The fair value of stock options granted was
estimated using a Black-Scholes valuation model with the
following weighted-average assumptions:
Years Ended December 31,
------------------------------
2006 2005 2004
-------- -------- --------
Risk-free interest rate 4.7% 4.1% 4.0%
Expected dividend yield 0.88% 0.94% 0.66%
Expected volatility 36% 36% 37%
Expected term (in years) 4.9 4.8 6.5
The risk-free interest rate assumptions were based on
average 5-year and 10-year U.S. Treasury note yields. The
expected volatility was based on historical daily price changes
of the Company's stock since June 2001 for the options granted in
2006 and on historical monthly price changes of the Company's
stock since January 1990 for the options granted in 2005 and
2004. The expected term was the average number of years that the
Company estimated these options will be outstanding. The Company
considered groups of employees that have similar historical
exercise behavior separately for valuation purposes.
44
The following table summarizes Stock Option Plan activity
for the year ended December 31, 2006:2007:
Weighted
Number Weighted Average Aggregate
of Average Remaining Intrinsic
Options Exercise Contractual Value
(in 000's) Price ($) Term (Years) (in 000's)
--------------------------------------------------------------------------------------------------------------
Outstanding at beginning of period 5,029 $ 10.834,565 $11.03
Options granted 5 $ 20.36330 $17.18
Options exercised (419)(1,034) $ 8.068.50
Options forfeited (49) $ 17.48(5) $17.05
Options expired (1)(2) $ 7.35
----------8.65
--------
Outstanding at end of period 4,565 $ 11.03 4.88 $ 30,144
==========3,854 $12.23 4.82 $19,594
========
Exercisable at end of period 3,362 $ 9.23 4.02 $ 27,899
==========2,825 $10.28 3.69 $19,499
========
We granted 329,500 stock options during the year ended
December 31, 2007; 5,000 in 2006; and 415,500 in 2005. The weighted-average grant date fair
value of granted stock options granted duringwas estimated using a Black-
Scholes valuation model with the years ended December 31, 2006, 2005, and 2004
wasfollowing weighted-average
assumptions:
Years Ended December 31,
------------------------------
2007 2006 2005
-------- -------- --------
Risk-free interest rate 4.3% 4.7% 4.1%
Expected dividend yield 1.16% 0.88% 0.94%
Expected volatility 34% 36% 36%
Expected term (in years) 6.5 4.9 4.8
Grant-date fair value $6.44 $7.37 $5.86
The risk-free interest rate assumptions were based on
average five-year and $7.60 per share, respectively.ten-year U.S. Treasury note yields. We
based expected volatility on (i) historical daily price changes
of our stock since June 2001 for the options granted in 2007 and
2006 and (ii) historical monthly price changes of our stock since
January 1990 for the options granted in 2005. The expected term
was the average number of years we estimated these options will
be outstanding. We considered groups of employees having similar
historical exercise behavior separately for valuation purposes.
The total intrinsic value of share options exercised during
the years ended
December 31, 2006, 2005, and 20042007 was $11.0 million, $5.4 million in 2006 and $3.9 million and $8.2 million, respectively.in
2005. As of December 31, 2006,2007, the total unrecognized
compensation cost related to nonvested stock option awards was
approximately $2.6$3.4 million and is expected to be recognized over
a weighted average period of 1.31.7 years.
46
In periods prior to January 1, 2006, the Companywe applied the
intrinsic value basedvalue-based method of Accounting Principles Board
("APB")APB Opinion No. 25, Accounting
for Stock Issued to Employees, andincluding related accounting
interpretations in accounting for its Stock Optionour Equity Plan. No stock-based employee
compensation cost was reflected in net income asbecause all options
granted under the planEquity Plan had an exercise price equal to the
market value of the underlying common stockCommon Stock on the date of grant. The Company'sgrant date.
Our pro forma net income and earnings per share (in thousands,
except per share amounts) would have been as indicated below had
the estimated fair value of all option grants on their grant date
been charged to salaries, wages and benefits expense in
accordance with SFAS No. 123, Accounting for Stock-Based
Compensation.Compensation for the year ended December 31, 2005:
Years Ended December 31,
------------------------------------
2005 2004
------------ ------------
Net income, as reported $ 98,534 $ 87,310
Less: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects 1,758
2,006
--------- -----------------
Net income, pro forma $ 96,776
$ 85,304
========= =================
Earnings per share:
Basic - as reported $ 1.24
$ 1.10
========= =================
Basic - pro forma $ 1.22
$ 1.08
========= =================
Diluted - as reported $ 1.22
$ 1.08
========= =================
Diluted - pro forma $ 1.20
$ 1.05
========= =================
Although the Company doesWe do not a have a formal policy for issuing shares upon
exercise of stock options, so such shares are generally issued
from treasury stock. From time to time, the
Company has repurchasedwe repurchase shares of
its common stock,our Common Stock, the timing and amount of which depends on
market and other factors. Historically, the shares acquired
under these regular repurchase programs have provided us with
sufficient quantities of stock for
issuanceto issue upon exerciseexercises of stock
options. Based on current treasury stock levels, the Company doeswe do not
expect the need to repurchase additional shares specifically for
stock option exercises during 2007.
45
2008.
Employee Stock Purchase Plan
Employees meetingthat meet certain eligibility requirements may
participate in the Company'sour Employee Stock Purchase Plan (the "Purchase
Plan"). Eligible participants designate the amount of regular
payroll deductions and/or a single annual payment (each subject
to a yearly maximum amount,amount) that is used to purchase shares of
the Company's common stockour Common Stock on the Over-The-Counter Marketover-the-counter market. These purchases
are subject to the terms of the Purchase Plan. The Company contributesWe contribute an
amount equal to 15% of each participant's contributions under the
Purchase Plan. CompanyOur contributions for the Purchase Plan (in
thousands) were $162 for 2007, $170 $119, and $108 for 2006 2005, and 2004,
respectively.$119 for 2005.
Interest accrues on Purchase Plan contributions at a rate of
5.25%. The until the purchase is made. We pay the broker's
commissions and administrative charges related to purchases of
common stockCommon Stock under the Purchase Plan are paid by the Company.Plan.
401(k) Retirement Savings Plan
The Company hasWe have an Employees' 401(k) Retirement Savings Plan (the
"401(k) Plan"). Employees are eligible to participate in the
401(k) Plan if they have been continuously employed with the
Companyus or
itsone of our subsidiaries for six months or more. The Company
matchesWe match a
portion of the amount each employee contributes to theemployee's 401(k) Plan. It is the Company's intention, but not its
obligation,Plan elective deferrals. We
may, at our discretion, make an additional annual contribution
for employees so that the Company'sour total annual contribution for employees
willcould equal at least 2 1/2 percentup to 2.5% of net income (exclusive of extraordinary
items). Salaries, wages and benefits expense in the accompanying
Consolidated Statements of Income includes Companyour 401(k) Plan
contributions and administrative expenses (in thousands) of
$1,364 for 2007, $2,270 $2,268, and $2,043 for 2006 2005, and 2004, respectively.$2,268 for 2005.
47
Nonqualified Deferred Compensation Plan
The Company hasWe have a nonqualified deferred compensation plan for the
benefit of eligible key managerial employees whose 401(k) planPlan
contributions are limited due to IRSbecause of Internal Revenue Service
("IRS") regulations affecting highly compensated employees.
Under the terms of the plan, participants may elect to defer
compensation on a pre-tax basis within annual dollar limits established bywe
establish. At December 31, 2007, there were 67 participants in
the Company.nonqualified deferred compensation plan. The current annual
limit is established suchdetermined so that a participant's combined deferrals in
both the nonqualified deferred compensation plan and the 401(k)
planPlan approximate the maximum annual deferral amount available to
non-highly compensated employees in the 401(k) plan.Plan. Although
itour current intention is not the Company's current intention to do so, the Companywe may also make matching
credits and/or profit sharing credits to the participants'
accounts as determinedwe so determine each year byyear. Each participant is fully
vested in all deferred compensation and earnings; however, these
amounts are subject to general creditor claims until distributed
to the Company.participant. Under current tax law, the
Company iswe are not allowed a
current income tax deduction for the compensation deferred by
participants, but iswe are allowed a tax deduction when a
distribution payment is made to a participant from the plan. The
accumulated benefit obligation (in thousands) was $698 and $225$1,270 as of
December 31, 20062007 and 2005, respectively,
and$698 as of December 31, 2006. This
accumulated benefit obligation is included in other long-term
liabilities in the consolidated balance sheets. The Company hasConsolidated Balance Sheets. We purchased
life insurance policies to fund the future liability. The life
insurance policies had an aggregate market value (in thousands)
of $688 and $222$1,223 as of December 31, 20062007 and 2005, respectively,
and$688 as of December 31,
2006. These policy amounts are included in other non-current
assets in the consolidated
balance sheets.Consolidated Balance Sheets.
(6) COMMITMENTS AND CONTINGENCIES
The Company hasWe have committed to property and equipment purchases of
approximately $57.1$48.7 million.
During first quarter 2006, in connection with an audit of
the Company's federal income tax returns for the years 1999 to
2002, the Company received a notice from the Internal Revenue
Service ("IRS") proposing to disallow a significant tax
deduction. This deduction is a timing difference between
financial reporting and tax reporting and would not result in
additional income tax expense in the Company's financial
statements. This timing difference deduction reversed in the
Company's 2004 income tax return. The Company filed a protest in
this matter in April 2006, which is currently under review by an
IRS appeals officer. The initial conference with the appeals
officer is scheduled to occur in March 2007. The Company and its
tax advisors believe the Company has a strong position and,
therefore, at this time the Company has not recorded an accrual
for interest for this issue in the financial statements. It is
possible the Company may not ultimately prevail in its position,
which may have a material impact on the Company's financial
46
condition. The Company estimates the accrued interest, net of
taxes, if the Company would not prevail in its position with the
IRS to be approximately $6.5 million as of December 31, 2006.
The Company isWe are involved in certain claims and pending litigation
arising in the normal course of business. Management believes
the ultimate resolution of these matters will not have a
material effect on thematerially
affect our consolidated financial statements of the
Company.statements.
(7) RELATED PARTY TRANSACTIONS
The Company leases land from a trust in which the Company's
principal stockholder is the sole trustee, withtrustee. The annual rent
payments of $1under this lease are $1.00 per year. The Company is
responsible for all real estate taxes and maintenance costs
related to the property, which are recorded as expenses in the Company's
Consolidated Statements of Income. The Company has made
leasehold improvements to the land totaling approximately $6.1
million for facilities used for business meetings and customer
promotion.
The Company's principal stockholder was the sole trustee of
a trust that previously owned a one-third interest in an entity
that operates a motel located nearbynear one of the Company's
terminals, with whichand the Company had committed to rent a guaranteed
number of rooms.rooms from that motel. The trust assigned its one-thirdone-
third interest in this entity to the Company at a nominal cost in
February 2005. During 2006, 2005, and 2004, theThe Company paid (in thousands) $264 in 2006 and
$945 and $840, respectively,in 2005 for lodging services for itscompany drivers at this
motel. On June 30, 2005, the Company sold .7830.783 acres of land to
this entity for approximately $90 (in thousands), in accordance
with the exercise of a purchase option clause contained in a separate agreement
entered into by the Company and the entity in April 2000. The
Company realized a gain of approximately $35 (in thousands) on
the transaction. On April 10, 2006, the Company purchased the
remaining two-thirds interest in the entity from theits two owners
(who are unrelated to the
Companyus) for $3.0 million. The purchase price
was based on an appraisal of the property by an independent
appraiser. The Company continues to use this property as a
private lodging facility for company drivers.
The brother and sister-in-law of the Company's principal
stockholder own an entity with a fleet of tractors that operates
as an owner-operator for the Company. During 2006, 2005, and
2004, theowner-operator. The Company paid this owner-operator (in
thousands) $7,502 in 2007, $7,271 $6,291, and $6,200,
respectively, to this owner-operator for purchased transportation
services. This fleet is compensated using the same owner-
operator pay package as the Company's other comparable third-
party owner-operators. The Company also sells used revenue
equipment to this entity. During 2006, 2005, and 2004, these
sales (in thousands) totaled $789, $1,019, and $193,
respectively, and the Company recognized gains (in thousands) of
$68, $130, and $18 in 2006 2005, and 2004, respectively. The
Company had 40 and 32 notes receivable from this entity related
to the revenue equipment sales (in thousands) totaling $1,381 and
$1,105 at December 31, 2006 and 2005, respectively.
The brother of the Company's principal stockholder has a 50%
ownership interest$6,291 in an entity with a fleet of tractors that
operates as an owner-operator for the Company. During 2006,
2005, and 2004, the Company paid (in thousands) $161, $476, and
$453, respectively, to this owner-operator for purchased
transportation services.2005.
This fleet is compensated using the same owner-operator pay
package as the Company's other comparable third-party owner-
operators. The Company also sells used revenue equipment to this
entity. These sales totaled (in thousands) $622 in 2007, $789 in
48
2006 and $1,019 in 2005. The Company recognized gains (in
thousands) of $88 in 2007, $68 in 2006 and $130 in 2005. From
this entity, the Company also had notes receivable related to the
revenue equipment sales (in thousands) totaling (i) $1,374 at
December 31, 2007 for 40 such notes and (ii) $1,381 at December
31, 2006 for 40 such notes.
The brother of the Company's principal stockholder had a 50%
ownership interest in an entity with a fleet of tractors that
operated as an owner-operator. The Company paid this owner-
operator (in thousands) $161 in 2006 and $476 in 2005 for
purchased transportation services. This fleet ceased operations
during 2006. During 2007, the brother of the Company's principal
stockholder formed a new entity (of which he is the sole owner)
with a fleet of tractors that operates as an owner-operator. The
Company paid this owner-operator (in thousands) $425 in 2007 for
purchased transportation services. The Company also sold used
revenue equipment to this new entity in 2007. These sales
totaled (in thousands) $219, and the Company recognized gains (in
thousands) of $23. The Company has no notes receivable related
to these revenue equipment sales. These fleets are compensated
using the same owner-operator pay package as the Company's other
comparable third-party owner-operators.
The Company and TDR transacttransacts business with each otherTDR for certain of their
purchased transportation needs. DuringThe Company recorded operating
revenues (in thousands) from TDR of approximately $107 in 2007,
$308 in 2006 2005, and 2004,$227 in 2005. The Company recorded purchased
transportation expense (in thousands) to TDR of approximately
$1,052 in 2007, $870 in 2006 and $521 in 2005. In addition, the
Company recorded operating revenues (in thousands) from TDR of
approximately $308, $227,$7,768 in 2007, $4,691 in 2006 and $168,
respectively, and recorded purchased transportation expense$3,582 in 2005
related to primarily revenue equipment leasing. Leasing revenues
for 2007 include $274 (in thousands) to TDR of approximately $870, $521, and $631,
respectively. In addition, during 2006, 2005, and 2004, the
Company recorded operating revenues (in thousands) from TDR of
approximately $4,691, $3,582, and $2,837, respectively, related
to thefor leasing of revenue equipment.a terminal
building in Queretaro, Mexico. The Company also sells used
revenue equipment to this entity. During 2006 and 2005, theseThese sales (in thousands)
totaled $1,145 in 2007, $3,697 in 2006 and $358 respectively,in 2005, and the
Company recognized net losses (in thousands) of $28 in 2007, and
net gains (in thousands) of $170 in 2006 and $19 in 2005. As of December 31, 2006 and 2005, theThe
Company had receivables related to the equipment leases and
revenue equipment 47
sales (in thousands) of $5,048 at December 31,
2007 and $2,853 and $2,389, respectively.at December 31, 2006. See Note 3 for information
regarding the note receivable from TDR.
TheAt December 31, 2007, the Company has a 5% ownership
interest in Transplace ("TPC"), a logistics joint venture of five
large transportation companies. The Company and TPC enterenters into
transactions with each
otherTPC for certain of their purchased transportation needs.
The Company recorded operating revenue (in thousands) from TPC of
approximately $826 in 2007, $2,300 $4,800, and $8,400 in 2006 2005, and 2004,
respectively, and recorded$4,800 in 2005.
The Company did not record any purchased transportation expense
(in
thousands) to TPC of approximately $0, $0, and $7 duringin 2007, 2006, 2005, and 2004, respectively.or 2005.
The Company believes that these transactions are on terms no less
favorable to the Company than those that could be obtained from
unrelated third parties on an arm's length basis.
(8) SEGMENT INFORMATION
The Company hasWe have two reportable segments - Truckload Transportation
Services ("Truckload") and Value Added Services.Services ("VAS"). The
Truckload
Transportation Services segment consists of six operating fleets that have beenare
aggregated sincebecause they have similar economic characteristics and
meet the other aggregation criteria of SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information.Information ("No.
131"). The Dedicated Services fleet provides truckload services
required by a specific customer, generally for a distribution
center or manufacturing facility. The medium-to-long-haul Van
fleet transports a variety of consumer, nondurable products and
other commodities in truckload quantities over irregular routes
using dry van trailers. The Regional short-haul fleet provides
comparable truckload van service within five geographic regions.regions
across the U.S. The Dedicated ServicesExpedited fleet provides time-sensitive
truckload services required by
a specific company, plant, or distribution center.utilizing driver teams. The Flatbed and
Temperature-Controlled fleets provide truckload services for
products with specialized trailers. The Expedited fleet
provides time-sensitive truckload services utilizing driver
teams. Revenues for the Truckload Transportation Services
segment include non-trucking revenues of $11.2$10.0 million $12.2
million, and $14.4for 2007,
$11.2 million for 2006 2005, and 2004,
respectively, representing$12.2 million for 2005. These
revenues consist primarily of the portion of shipments delivered
to or from Mexico where the Company utilizeswe utilize a third-party capacity
provider and revenues generated in a few dedicated accounts where
the services of third-party capacity providers are used to meet
customer capacity requirements.provider.
49
The Value Added ServicesVAS segment which generates the majority of our non-trucking
revenues. The services provided by the Company's non-trucking revenues, providesVAS segment include truck
brokerage, freight management (single-source logistics),
truck brokerage,intermodal and intermodal services, as well as a newly expanded international product line.
The Company generatesservices.
We generate other revenues related to third-party equipment
maintenance, equipment leasing and other business activities.
None of these operations meet the quantitative threshold
reporting requirements of SFAS No. 131. As a result, these
operations are grouped in "Other" in the table below.
"Corporate" includes revenues and expenses that are incidental to
theour activities of the Company and are not attributable to any of itsour operating
segments. The Company doesWe do not prepare separate balance sheets by segment
and, as a result, assets are not separately identifiable by
segment. The Company hasWe have no significant intersegment sales or expense
transactions that would resultrequire the elimination of revenue
between our segments in adjustments necessary to eliminate amounts between the Company's segments.
48
table below.
The following tables summarize the Company'sour segment information (in
thousands):
Revenues
-------------------
2007 2006 2005 2004
---------- ---------- ----------
Truckload Transportation Services $1,795,227 $1,801,090 $1,741,828 $1,506,937
Value Added Services 258,433 265,968 218,620
161,111
Other 15,303 10,536 7,777
6,424
Corporate 2,224 2,961 3,622 3,571
---------- ---------- ----------
Total $2,071,187 $2,080,555 $1,971,847 $1,678,043
========== ========== ==========
Operating Income
--------------------------------------
2007 2006 2005 2004
---------- ---------- ----------
Truckload Transportation Services $ 121,608 $ 156,509 $ 156,122
$ 135,828
Value Added Services 12,418 7,421 8,445
5,631
Other 3,644 1,731 2,850
2,587
Corporate (1,153) (1,160) (2,806) (2,718)
---------- ---------- ----------
Total $ 136,517 $ 164,501 $ 164,611 $ 141,328
========== ========== ==========
Information as toabout the Company's operations by geographic areaareas in which we conduct
business is summarized below (in thousands). Operating revenues
for foreign countries include revenues for (i) shipments with an
origin or destination in that country and (ii) other services
provided in that country. If both the origin and destination are
in a foreign country, the revenues are attributed to the country
of origin.
Revenues
--------------------------
2007 2006 2005 2004
---------- ---------- ----------
United States $1,855,686 $1,872,775 $1,782,501 $1,537,745
---------- ---------- ----------
Foreign countries
Mexico 160,988 168,846 145,678
104,934
Other 54,513 38,934 43,668 35,364
---------- ---------- ----------
Total foreign countries 215,501 207,780 189,346 140,298
---------- ---------- ----------
Total $2,071,187 $2,080,555 $1,971,847 $1,678,043
========== ========== ==========
Long-lived Assets
------------------------------------
2007 2006 2005 2004
---------- ---------- ----------
United States $ 935,883 $1,067,716 $ 990,439 $ 850,250
---------- ---------- ----------
Foreign countries
Mexico 35,776 28,452 11,867
12,612
Other 282 172 301 136
---------- ---------- ----------
Total foreign countries 36,058 28,624 12,168 12,748
---------- ---------- ----------
Total $ 971,941 $1,096,340 $1,002,607 $ 862,998
========== ========== ==========
Substantially50
We generate substantially all of the Company'sour revenues are generated within the
United States or from North American shipments with origins or
destinations in the United States. One customer generated
approximately 11%8% of the Company'sour total revenues for 2007, approximately
11% of total revenues for 2006 and approximately 10% of total
revenues for 2005, and
approximately 9% of total revenues for 2004.
49
2005.
(9) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share amounts)
First Quarter Second Quarter Third Quarter Fourth Quarter
----------------------------------------------------------------------------------------------------------------------------------
2007:
Operating revenues $ 503,913 $ 531,286 $ 510,260 $ 525,728
Operating income 27,266 38,386 37,064 33,801
Net income 15,668 22,254 21,850 15,585
Basic earnings per share .21 .30 .30 .22
Diluted earnings per share .21 .30 .30 .22
First Quarter Second Quarter Third Quarter Fourth Quarter
---------------------------------------------------------------
2006:
Operating revenues $ 491,922 $ 528,889 $ 541,297 $ 518,447
Operating income 36,822 46,351 40,686 40,642
Net income 22,029 28,021 24,551 24,042
Basic earnings per share .28 .36 .32 .32
Diluted earnings per share .27 .35 .31 .31
First Quarter Second Quarter Third Quarter Fourth Quarter
-------------------------------------------------------------------
2005:
Operating revenues $ 455,262 $ 485,789 $ 504,520 $ 526,276
Operating income 32,837 42,128 41,138 48,508
Net income 19,921 25,295 24,491 28,827
Basic earnings per share .25 .32 .31 .36
Diluted earnings per share .25 .31 .30 .36
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
No disclosure under this item has beenwas required within the two
most recent fiscal years ended December 31, 2006,2007, or any
subsequent period, involving a change of accountants or
disagreements on accounting and financial disclosure.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, the
Companywe
carried out an evaluation, under the supervision and with the
participation of the Company'sour management, including the
Company'sour Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company'sour disclosure controls and procedures,
as defined in the Securities Exchange Act of 1934 Rule 15d-15(e).
Based upon that evaluation, the Company'sour Chief Executive Officer and Chief
Financial Officer concluded that the
Company'sour disclosure controls and
procedures are effective in enabling the Companyus to record, process,
summarize and report information required to be included in the Company'sour
periodic SEC filings within the required time period.
Management's Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining
adequate internal control over our financial reporting for the
Company.reporting. Internal
control over financial reporting is a process designed to provide
reasonable assurance to the Company'sour management and boardBoard of directorsDirectors
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with U.S. generally accepted accounting principles.
Internal control over financial reporting includes (i)
maintaining records that in reasonable detail accurately and
fairly reflect the Company'sour transactions; (ii) providing reasonable
assurance that transactions are recorded as necessary for
preparation of our financial statements; (iii) providing
reasonable assurance that receipts and expenditures of company
assets are made in accordance with management authorization; and
51
(iv) providing reasonable assurance that unauthorized
acquisition, use or disposition of the company assets that could have
a material effect on the Company'sour financial statements would be prevented
or detected on a timely basis.
50
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of(i) changes in conditions may occur or that(ii)
the degree of compliance with the policies or procedures may
deteriorate.
Management has assessed the effectiveness of the Company'sour internal
control over financial reporting as of December 31, 2006,2007. This
assessment is based on the criteria for effective internal
control described in Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on its assessment, management
concluded that the Company'sour internal control over financial reporting was
effective as of December 31, 2006.2007.
Management has engaged KPMG LLP ("KPMG"), the independent
registered public accounting firm that audited the consolidated
financial statements included in this Annual Report on Form 10-K,
to attest to and report on management's evaluationthe effectiveness of the Company'sour internal
control over financial reporting. ItsKPMG's report is included
herein.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Werner Enterprises, Inc.:
We have audited management's assessment, included in the
accompanying Management's Report on Internal Control over
Financial Reporting, that Werner Enterprises, Inc. maintained
effective's internal control
over financial reporting as of December 31, 2006,2007, based on
criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Werner Enterprises, Inc.'s
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting.reporting,
included in the accompanying Management's Report on Internal
Control over Financial Reporting. Our responsibility is to
express an opinion on management's assessment and an opinion on the
effectiveness of the Company's internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of
the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
management's assessment,assessing the risk
that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control andbased on
the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that,
in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and
that receipts and expenditures of the company are being made only
in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use,
or disposition of the company's assets that could have a material
effect on the financial statements.
52
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
51
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that Werner
Enterprises, Inc. maintained effective internal control over
financial reporting as of December 31, 2006, is fairly stated, in
all material respects, based on COSO. Also, in our opinion,
Werner Enterprises, Inc. maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2006,2007 based on criteria established
in Internal Control - Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of
the Public Company Accounting Oversight Board (United States),
the consolidated balance sheets of Werner Enterprises, Inc. and
subsidiaries as of December 31, 20062007 and 2005,2006, and the related
consolidated statements of income, stockholders' equity and
comprehensive income, and cash flows for each of the years in the
three-year period ended December 31, 2006,2007, and our report dated
February 8, 2007,18, 2008, expressed an unqualified opinion on those
consolidated financial statements.
KPMG LLP
Omaha, Nebraska
February 8, 200718, 2008
Changes in Internal Control over Financial Reporting
There were no changes in the Company'sour internal controls over
financial reporting that occurred during the quarter ended
December 31, 2006,2007, that have materially affected, or are
reasonably likely to materially affect, the Company'sour internal control over
financial reporting.
ITEM 9B. OTHER INFORMATION
The following disclosures are provided pursuantDuring fourth quarter 2007, no information was required to
Items
1.01 and 5.03 of Form 8-K.
On February 8, 2007, Werner Enterprises, Inc. (the
"Company") entered into a revised Lease Agreement, effective as
of the 21st day of May 2002 (the "Lease Agreement"), and a
License Agreement (the "License Agreement") with Clarence L.
Werner, Trustee of the Clarence L. Werner Revocable Trust (the
"Trust"). Clarence L. Werner, Chairman of the Board of the
Company, is the sole trustee of the Trust. The Lease Agreement
and License Agreement were approved by the disinterested members
of the Board of Directors at the Board's February 8, 2007
meeting. The Lease Agreement was originally entered into between
the parties as of May 21, 2002 with a 10-year lease term
commencing June 1, 2002 (the "2002 Lease Agreement").
The Lease Agreement covers the lease of land comprising
approximately 35 acres (referred to as the "Lodge Premises"),
with improvements consisting of lodging facilities and a sporting
clay range which are used by the Company for business meetings
and customer promotion. The 2002 Lease Agreement provided for a
non-exclusive license to use for hunting purposes a contiguous
portion of farmland comprising approximately 580 acres (referred
to as the "Farmland Premises"), which license rights were
deleted from the Lease Agreement and separated into the License
Agreement.
The Lease Agreement's current 10-year term expires May 31,
2012, and provides the Company the option to extend the lease for
two additional 5-year periods, through 2017 and 2022,
respectively. Under the Lease Agreement, the Company makes
annual rental payments of One Dollar ($1.00) per year, and is
responsible for the real estate taxes and maintenance costs on
the Lodge Premises, which totaled approximately $44 (in
thousands) for 2006.
Option to Purchase Rights: Under the Lease Agreement, at
any time during the lease or any extension thereof, the Company
has the option to purchase the Lodge Premises from the Trust at
its current market value, excluding the value of all leasehold
52
improvements made by the Company. The Company also has a right
of first refusal to purchase the Lodge Premises, or any part
thereof, if the Trust has an offer from an unrelated third party
to purchase the Lodge Premises. The Trust has the option at any
time during the lease to demand that the Company exercise its
option to purchase the Lodge Premises at its current market
value, excluding the value of all leasehold improvements made by
the Company. If the Company elects not to purchase the Lodge
Premises as demanded by the Trust, then the Company's option to
purchase at any time during the lease is forfeited; however, the
Company will still have the right of first refusal with respect
to a purchase offer from an unrelated third party. If the
Company terminates the Lease Agreement prior to the expiration of
the initial 10-year term and elects not to purchase the Lodge
Premises from the Trust, then the Trust agrees to pay the Company
the cost of all leasehold improvements, less accumulated
depreciation calculated on a straight-line basis over the term of
the Lease Agreement (10 years). If at the termination of the
initial 10-year lease term, or any of the two 5-year renewal
periods, the Company has not exercised its option to purchase the
Lodge Premises at its current market value, the leasehold
improvements become the property of the Trust. However, it is
the Company's current intention to exercise its option to
purchase the Lodge Premises at its current market value prior to
the completion of the initial 10-year lease period or any of the
two 5-year renewal periods. The Company has made leasehold
improvements to the Lodge Premises of approximately $6.1 million
since the inception of leasehold arrangements commencing in 1994.
The revisions to the Lease Agreement removed the provisions
relating to the Farmland Premises, as of the effective date of
the 2002 Lease Agreement, including the description of option to
purchase rights described above, from the agreement, and the
Company and the Trust entered into the separate License Agreement
defining their respective rights with respect to the Farmland
Premises. Under the License Agreement, the Company and its
invitees are granted a non-exclusive right to hunt and fish on
the Farmland Premises, for a term of one-year, which is
automatically renewable unless either party terminates not less
than 30 days prior to the end of the current annual term. The
Trust agrees to use its best efforts to maintain a Controlled
Shooting Area Permit on the Farmland Premises while the License
Agreement is in effect, and to maintain the landbe disclosed in a manner to
maximize hunting cover for game birds. In consideration of the
license to hunt and fishreport on the Farmland Premises, the Company
agrees to pay the Trust an amount equal to the real property
taxes and special assessments levied on the land, and the cost of
all fertilizer and seed used to maintain the hunting cover and
crops located on the land. Such costs were approximately $29 (in
thousands) for 2006.
Copies of the Lease Agreement and License Agreement are
filed as exhibits to this 10-K.
On February 8, 2007, the Board of Directors amended the
Company's by-laws, effective as of that date. A description of
the changes is set forth below.
* Section 7 of Article II was amended to reduce the notice
period for special meetings of the Board of Directors and
its committees from five (5) days to one (1) day and to
update the permitted methods used to provide notice to
directors of special meetings of the Board of Directors
and its committees. These methods include personal
delivery, mail, electronic mail, private carrier,
facsimile, and telephone.
* Sections 5 and 7 of Article III were amended to change the
definitions of the roles of "Chairman of the Board" and
"President", such that the President (andForm 8-K, but not the Chairman)
will be the Company's Chief Executive Officer.
* Sections 1 and 4 of Article V were amended to allow shares
of the Company to be either certificated or uncertificated
(book-entry) and to clarify that for transfers of
certificated shares only, the certificate for such shares
must be surrendered for cancellation.
The Revised and Restated By-laws are filed as an exhibit to
this 10-K.
53
reported.
PART III
Certain information required by Part III is omitted from
this report on Form 10-K in that the Companybecause we will file a definitive proxy statement
pursuant to Regulation 14A ("Proxy Statement") not later than 120
days after the end of the fiscal year covered by this report on Form 10-K,
and certain information included therein is incorporated herein
by reference. Only those sections of the Proxy Statement which
specifically address the items set forth herein are incorporated
by reference.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item, with the exception of
the Code of EthicsCorporate Conduct discussed below, is incorporated
herein by reference to the Company'sour Proxy Statement.
Code of Ethics
The Company hasCorporate Conduct
We adopted a code of ethics, our Code of Corporate Conduct,
that applies to itsour principal executive officer, principal
financial officer, principal accounting officer/controller and
all other officers, employees and directors. The codeCode of
ethicsCorporate Conduct is available on the
Company'sour website, www.werner.com. The Company intendswww.werner.com,
under "Investor Information." We intend to post on itsour website
any material changesamendment to, or waiver from, its codeany provision of ethics, if any,our Code of
Corporate Conduct (if any) within four business days of any such
event.
53
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein
by reference to the Company'sour Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this Item, with the exception of
the equity compensation plan information presented below, is
incorporated herein by reference to the Company'sour Proxy Statement.
Equity Compensation Plan Information
The following table summarizes, as of December 31, 2006,2007,
information about compensation plans under which our equity
securities of the Company are authorized for issuance:
Number of Securities
Remaining Available for
Future Issuance under
Number of Securities to Weighted-Average Equity Compensation
be Issued upon Exercise Exercise Price of Plans (Excluding
of Outstanding Options, Outstanding Options, Securities Reflected in
Warrants and Rights Warrants and Rights Column (a))
Plan Category (a) (b) (c)
------------- ----------------------- -------------------- -----------------------
Equity compensation
plans approved by
security holders 4,565,004 $11.03 8,890,551stockholders 3,853,656 $12.23 8,568,007
The Company doesWe do not have any equity compensation plans that were not
approved by security holders.stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
The information required by this Item is incorporated herein
by reference to the Company'sour Proxy Statement.
54
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item is incorporated herein
by reference to the Company'sour Proxy Statement.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Financial Statements and Schedules.
(1) Financial Statements: See Part II, Item 8 hereof.
Page
----
Report of Independent Registered Public Accounting Firm 3133
Consolidated Statements of Income 3234
Consolidated Balance Sheets 3335
Consolidated Statements of Cash Flows 3436
Consolidated Statements of Stockholders' Equity and
Comprehensive Income 3537
Notes to Consolidated Financial Statements 3638
54
(2) Financial Statement Schedules: The consolidated
financial statement schedule set forth under the following
caption is included herein. The page reference is to the
consecutively numbered pages of this report on Form 10-K.
Page
----
Schedule II - Valuation and Qualifying Accounts 57
Schedules not listed above have been omitted because
they are not applicable or are not required or the information
required to be set forth therein is included in the Consolidated
Financial Statements or Notes thereto.
(3) Exhibits: The response to this portion of Item 15 is
submitted as a separate section of this report on Form 10-K (see Exhibit
Index on page 58).
55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on the 13th25th day of February, 2007.2008.
WERNER ENTERPRISES, INC.
By: /s/ Gregory L. Werner
------------------------------
Gregory L. Werner
President and Chief Executive Officer
By: /s/ John J. Steele
------------------------------
John J. Steele
Executive Vice President, Treasurer
and Chief Financial Officer
By: /s/ James L. Johnson
------------------------------
James L. Johnson
Senior Vice President, Controller
and Corporate Secretary
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signature Position Date
--------- -------- ----
/s/ Clarence L. Werner Chairman of the Board February 13, 200725, 2008
- --------------------------
Clarence L. Werner
/s/ Gary L. Werner Vice Chairman and Director February 13, 200725, 2008
- --------------------------
Gary L. Werner Director
/s/ Gregory L. Werner President, Chief Executive Officer and Director February 13, 200725, 2008
- --------------------------
Gregory L. Werner and Director
/s/ Gerald H. Timmerman Director February 13, 200725, 2008
- --------------------------
Gerald H. Timmerman
/s/ Michael L. Steinbach Director February 13, 200725, 2008
- --------------------------
Michael L. Steinbach
/s/ Kenneth M. Bird Director February 13, 200725, 2008
- --------------------------
Kenneth M. Bird
/s/ Patrick J. Jung Director February 13, 200725, 2008
- --------------------------
Patrick J. Jung
/s/ Duane K. Sather Director February 13, 200725, 2008
- --------------------------
Duane K. Sather
56
SCHEDULE II
WERNER ENTERPRISES, INC.
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Balance at Charged to Write-off Balance at
Beginning of Costs and of Doubtful End of
Period Expenses Accounts Period
------------ ---------- ----------- ----------
Year ended December 31, 2007:
Allowance for doubtful accounts $ 9,417 $ 552 $ 204 $ 9,765
======= ======= ======= =======
Year ended December 31, 2006:
Allowance for doubtful accounts $ 8,357 $ 8,767 $ 7,707 $ 9,417
======= ======= ======= =======
Year ended December 31, 2005:
Allowance for doubtful accounts $ 8,189 $ 962 $ 794 $ 8,357
======= ======= ======= =======
Year ended December 31, 2004:
Allowance for doubtful accounts $ 6,043 $ 2,255 $ 109 $ 8,189
======= ======= ======= =======
See report of independent registered public accounting firm.
57
EXHIBIT INDEX
Exhibit
Number Description Page Number or Incorporated by Reference to
------- ----------- -------------------------------------------
3(i)(A) Revised and Amended Restated Articles of Exhibit 3(i)(A) to the Company's report on Form
Incorporation 10-K for the year ended December 31, 2005
3(i)(B) Articles of Amendment to Articles of Filed herewith
Incorporation
3(i)(C) Articles of Amendment to Articles of Exhibit 3(i) to the Company's reportQuarterly Report on
Form 10-
Incorporation Q for the quarter ended May 31, 1994
3(i)(D) Articles of Amendment to Articles of Exhibit 3(i)(C) to the Company's report on Form
Incorporation 10-K for the year ended December 31, 1998
3(i)(E) Articles of Amendment to Articles of Exhibit 3(i)(D) to the Company's report on Form
Incorporation 10-Q for the quarter ended June 30, 20052007
3(ii) Revised and Restated By-Laws Filed herewith
10.1 Amended and Restated Stock Option Plan Exhibit 10.13(ii) to the Company's reportQuarterly Report on
Form 10-
Q10-Q for the quarter ended June 30, 20042007
10.1 Werner Enterprises, Inc. Equity Plan Exhibit 99.1 to the Company's Current Report on
Form 8-K dated May 8, 2007
10.2 Non-Employee Director Compensation Exhibit 10.1 to the Company's reportQuarterly Report on
Form 10-
Q10-Q for the quarter ended JuneSeptember 30, 20052007
10.3 The Executive Nonqualified Excess Plan Filed herewithExhibit 10.3 to the Company's Annual Report on
of Werner Enterprises, Inc., as amended Form 10-K for the year ended December 31, 2006
10.4 Named Executive Officer Compensation Filed herewithExhibit 10.4 to the Company's Annual Report on
Form 10-K for the year ended December 31, 2006
and Exhibit 10.3 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March
31, 2007 and Item 5.02 of the Company's Current
Report on Form 8-K dated November 29, 2007
10.5 Lease Agreement, as amended February 8, Filed herewithExhibit 10.5 to the Company's Annual Report on
2007, between the Company and Clarence Form 10-K for the year ended December 31, 2006
L. Werner, Trustee of the Clarence L.
Werner Revocable Trust
10.6 License Agreement, dated February 8, Filed herewithExhibit 10.6 to the Company's Annual Report on
2007 between the Company and Clarence Form 10-K for the year ended December 31, 2006
L. Werner, Trustee of the Clarence L.
Werner Revocable Trust
10.7 Form of Notice of Grant of Nonqualified Exhibit 10.1 to the Company's Current Report on
Stock Option Form 8-K dated November 29, 2007
11 Statement Re: Computation of Per Share See Note 1 "Common Stock and Earnings Per
Earnings Share" in the Notes to Consolidated Financial
Statements under Item 8
21 Subsidiaries of the Registrant Filed herewith
23.1 Consent of KPMG LLP Filed herewith
31.1 Rule 13a-14(a)/15d-14(a) Certification Filed herewith
31.2 Rule 13a-14(a)/15d-14(a) Certification Filed herewith
32.1 Section 1350 Certification Filed herewith
32.2 Section 1350 Certification Filed herewith
58