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, 20072008
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. X
---
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 29, 2007,30, 2008, the last business day of the
Registrant's most recently completed second fiscal quarter, was
approximately $912$793 million (based on the closing sale price of
the Registrant's Common Stock on that date as reported by
Nasdaq).
As of February 15, 2008, 70,630,51117, 2009, 71,576,367 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 13, 2008,12, 2009, are incorporated
in Part III of this report.
TABLE OF CONTENTS
Page
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PART I
Item 1. Business 1
Item 1A. Risk Factors 8
Item 1B. Unresolved Staff Comments 1112
Item 2. Properties 1112
Item 3. Legal Proceedings 1213
Item 4. Submission of Matters to a Vote of Stockholders 1314
PART II
Item 5. Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of
Equity Securities 1415
Item 6. Selected Financial Data 1617
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 1718
Item 7A. Quantitative and Qualitative Disclosures about
Market Risk 3134
Item 8. Financial Statements and Supplementary Data 3335
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 5154
Item 9A. Controls and Procedures 5154
Item 9B. Other Information 5356
PART III
Item 10. Directors, Executive Officers and Corporate
Governance 5356
Item 11. Executive Compensation 5457
Item 12. Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder
Matters 5457
Item 13. Certain Relationships and Related
Transactions, and Director Independence 5457
Item 14. Principal Accounting Fees and Services 5457
PART IV
Item 15. Exhibits and Financial Statement Schedules 5458
This Annual Report on Form 10-K for the year ended December
31, 2008 ("Form 10-K") and the documents incorporated herein by
reference contain forward-looking statements based on
expectations, estimates and projections as of the date of this
filing. Actual results may differ materially from those
expressed in such forward-looking statements. For further
guidance, see Item 1A of Part I and Item 7 of Part II of this
Form 10-K.
PART I
ITEM 1. BUSINESS
General
Werner Enterprises, Inc. (the "Company") isWe are a transportation and logistics company engaged
primarily in hauling truckload shipments of general commodities
in both interstate and intrastate commerce. We also provide
logistics services through our Value Added Services ("VAS")
division. We are one of the five largest truckload carriers in
the United States (based on total operating revenues), and our
headquarters are located in Omaha, Nebraska, near the geographic
center of our truckload service area. We were founded in 1956 by
Chairman Clarence L. Werner, who started the business with one truck at
the age of 19.19 and serves as our Chairman. We were incorporated
in the State of Nebraska on September 14, 1982. We1982 and completed our
initial public offering in June 1986 with a fleet of 632 trucks
as of February 28, 1986. At the end of 2007,2008, we had a fleet of
8,2507,700 trucks, of which 7,4707,000 were owned by us and 780700 were owned
and operated by owner-operators
(independent contractors).independent owner-operator drivers.
We have two reportable segments - Truckload Transportation
Services ("Truckload") and VAS. You can find financial
information regarding these segments and the geographic areas in
which we conduct business in the Notes to Consolidated Financial
Statements under Item 8 of this Annual Report on Form 10-K10-K.
Our Truckload segment is comprised of the following six
operating fleets: (i) dedicated services ("Dedicated") provides
truckload services required by a specific customer, generally for
a distribution center or manufacturing facility; (ii) the
year ended December 31, 2007regional short-haul ("Form 10-K"Regional"). fleet provides comparable
truckload van service within five geographic regions across the
United States; (iii) the medium-to-long-haul van ("Van") fleet
transports a variety of consumer nondurable products and other
commodities in truckload quantities over irregular routes using
dry van trailers; (iv) the expedited ("Expedited") fleet provides
time-sensitive truckload services utilizing driver teams; and the
(v) flatbed ("Flatbed") and (vi) temperature-controlled
("Temperature-Controlled") fleets provide truckload services for
products with specialized trailers. Our truckloadTruckload 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. We also have authority
to operate in several provinces of Canada and to provide through-trailerthrough-
trailer service in and out of Mexico. The principal types of
freight we transport include retail store merchandise, consumer
products, manufactured products and grocery products. OurWe focus
is to transporton transporting consumer nondurable products that generally ship more
consistently throughout the year and whose volumes are generally
more stable during a slowdown in the economy.
Our VAS divisionsegment is a non-asset-based transportation and
logistics provider. OurVAS is comprised of the following four
operating units that provide non-trucking services to our
customers: (i) truck brokerage division has("Brokerage"); (ii) freight
management (single-source logistics) ("Freight Management");
(iii) intermodal ("Intermodal"); and (iv) Werner Global Logistics
("WGL" or "International"). Our Brokerage unit had
transportation services contracts with over 8,5006,400 carriers as of
December 2007. VAS includes
truck brokerage, freight management (single-source logistics),
intermodal and international freight forwarding. In July 2006,
we formed Werner Global Logistics ("WGL"), an operating division
within the VAS segment consisting of several subsidiary
companies, including a Wholly Owned Foreign Entity ("WOFE")
headquartered in Shanghai, China. The31, 2008. Through our WGL subsidiaries, obtained
business licenses to operate aswe are a
licensed U.S. Non-Vessel Operating Common Carrier ("NVOCC"), U.S.
Customs Broker, licensedClass A Freight Forwarder in China, licensed China NVOCC,
aU.S. Transportation Security Administration ("TSA") approved-approved
Indirect Air Carrier and
an International Air Transport Association
("IATA") Accredited Cargo Agent.
1
Marketing and Operations
Our business philosophy is to provide superior on-time
customer service to our customers at a competitive cost. To accomplish this, we
operate premium modern tractors and trailers. This equipment has
a lower frequency of breakdownsfewer mechanical and maintenance issues and helps attract and
retain qualified drivers. We have continually developed
technology to improve customer service and driver retention. We
focus on shippers who value the broad geographic coverage,
diversified truck and logistics service offerings,services, equipment capacity,
technology, customized services and flexibility available from a
large financially-stable carrier.
These
shippers are generally less sensitive to rate levels and prefer
to have their freight handled by core carriers with whom they can
establish service-based, long-term relationships.
We operate in the truckload sector of the trucking industry
and in the logistics sector of the transportation industry. Our
Truckload segment provides specialized services to customers
based on their (i) each customer's trailer needs (such as van, flatbed
and temperature-controlled trailers), (ii) geographic area
(including medium-to-long-haul throughout the 48 contiguous U.S. states,United
States, Mexico, Canada and regional areas), (iii) time-sensitive nature
1
ofextremely time-
sensitive shipments (expedited shipments)(expedited) or (iv) the conversion of their
private fleet to the Company (dedicated services)us (Dedicated). In 2007,2008, trucking revenues
accounted for 86% of our total revenues, and non-trucking and
other operating revenues (primarily brokerageVAS revenues) accounted for
14% of our total revenues. Our VAS segment manages the
transportation and logistics requirements for individual
customers, providing customers with additional sources of
capacity, and access to alternative modes of transportation.transportation, a global delivery
network and systems analysis to optimize transportation needs.
VAS services include (i) truck brokerage, (ii) freight
management, (iii) intermodal (iv) load/modetransport and network
optimization and (v)(iv) international.
The VAS international services include (i) site selection analysis,door-to-door freight
forwarding, (ii) vendor and purchase order management, (iii) full
container load consolidation and warehousing, (iv) door-to-door freight
forwardingcustoms
brokerage and (v) customs brokerage. Theseair freight services. Most VAS international
services are provided throughout North America Asia, Europe and South America.Asia. VAS is
a non-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 that require a significant capital
equipment investment, VAS' operating income percentage is lower
and its return on assets is substantially higher. You can find the revenues
generated by services accounting for more than 10% of our
consolidated revenues, consisting of Truckload and VAS, for the
last three years under Item 7 of this Form 10-K.
We have a diversified freight base but are dependent on a
small group of customers for a significant portion of our freight.
During 2007,2008, our largest 5, 10, 25 and 50 customers comprised
25%24%, 40%39%, 62%61% and 75% of our revenues, respectively. Our largest customer, Dollar General, accounted for 8% of our
revenues in 2007, of which approximately three-fourths is
dedicated fleet business and the remainder is primarily VAS. No
other customer
exceeded 6%10% of revenues in 2007.2008. By industry group, our top 50
customers consist of 46%44% retail and consumer products, 27%28%
grocery products, 18% manufacturing/industrial and 9%10% logistics
and other. Many of our non-dedicated customer contracts may be
terminated upon 30 days' notice, which is standard in the
trucking industry. Most dedicated customer contracts are one to
three years in length and may be terminated upon 90 days' notice
following the expiration of the contract's first year.
Virtually all of our company and owner-operator tractors are
equipped with satellite communication devices manufactured by
QualcommT.QualcommTM. These devices enable us and our drivers to conduct
two-way communication using standardized and freeform messages.
This satellite technology, installed in our trucks beginning in
1992, also allows us to plan and monitor shipment 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, we have developed advanced
application systems to improve customer and driver service.
Examples of such application systems include: (i) our proprietary
paperless log system used to electronically preplanpre-plan driver
shipment assignments based on real-time available driving hours
and to automatically monitor truck movement and drivers' hours of
service; (ii) software which preplansthat pre-plans shipments that drivers can trade
enroute to meet driver home-time needs without compromising on-timeon-
time delivery schedules; (iii) automated "possible late load"
tracking that informs the operations department of trucks
possibly operating behind schedule, allowing us to take
preventive measures to avoid late deliveries; and (iv) automated
engine diagnostics that continually monitor mechanical fault
tolerances. In June 1998, we began a successful pilot program and
subsequently became the first and only, trucking company in the United
States to receive an exemption from the DOT to use a global
positioning system-based paperless log system in place ofas an alternative
to 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 of
the DOT approved the exemption for our paperless log system and
2
moved this exemptionprogram from the FMCSA-approved pilot program to
permanent
status. The exemption is tostatus, requiring that the exemption be renewed every
two years. On September 7, 2006, the FMCSA announced in the
Federal Register its decision to renew for two additional years
our exemption from the FMCSA's requirement that drivers of
commercial motor vehicles operating in interstate commerce
prepare handwritten records of duty status (logs). In July 2008,
we again applied for the two-year renewal of our paperless log
exemption. On January 9, 2009, the FMCSA announced in the
Federal Register its determination that our paperless log system
satisfies the FMCSA's Automatic On-Board Recording Device
requirements and that an exemption is no longer required.
Seasonality
In the trucking industry, revenues generally show a seasonal
patternpattern. Peak freight demand has historically occurred in the
months of September, October and November; however, we have not
experienced this seasonal increase in demand during the last
three years. After the December holiday season and during the
remaining winter months, our freight volumes are typically lower
because some customers reduce shipments during and after
the winter holiday season.shipment levels. Our operating
expenses have historically been higher in the winter months due
primarily to 2
decreased fuel efficiency, increased cold weather-relatedweather-
related maintenance costs of revenue equipment and increased
insurance and claims costs attributed to adverse winter weather
conditions. We attempt to minimize the impact of seasonality
through our marketing program by seeking additional freight from
certain customers during traditionally slower shipping periods.
Revenue can also be affected by bad weather, holidays and the
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, 2007,2008, we employed 10,66410,667 qualified and
student drivers; 912769 mechanics and maintenance personnel; 1,726personnel for the
trucking operation; 1,386 office personnel for the trucking
operation; and 306704 personnel for VAS, international and other
non-
truckingnon-trucking operations. We also had 780700 service contracts with
owner-operators who provide both a tractor and a qualified driver
or drivers. None of our U.S., Canadian or Chinese employees areis
represented by a collective bargaining unit, and we consider
relations with all of our employees to be good.
We recognize that our professional driver workforce is one
of our most valuable assets. Most of our driver compensation is
based upon miles driven.drivers are compensated
on a per-mile basis, using a standardized mileage pay scale. For
most company-employed drivers, the rate per mile generally
increases with the drivers' length of service. Drivers may earn
additional compensation through a mileage bonus, annual
achievement bonus and for extra work associated with their job
(such as loading and unloading, extra stops and shorter mileage
trips).
At times, there are driver shortages in the trucking
industry. In past years, the numberAvailability of qualified drivers has not
kept pace with freight growth because ofcan be affected by
(i) changes in the demographic composition of the workforce; (ii)
alternative employment opportunities other than truck driving
that become available in a growingthe economy; and (iii) individual
drivers' desire to be home more often. While theThe driver recruiting and
retention market remained challenging in 2007, it was less
difficult than the driver market experiencedhas improved from a year ago. The weakness in
the first half of
2006. Weakness in the housing marketconstruction and the medium-to-long-haul
Vanautomotive industries, trucking company
failures and fleet reduction contributed favorablyreductions and a rising national unemployment
rate continue to positively affect our recruitingdriver availability and
retention efforts for much of 2007.selectivity. In addition, our strong mileage utilization and
financial strength are attractive to drivers when compared to
other carriers. We anticipate that availability of drivers will
remain high until current economic conditions improve. When
economic conditions improve, competition for qualified drivers
will remain highlikely increase and we cannot predict whether we will
experience future driver shortages. If such a shortage were to
occur and a driver pay rate increase became necessary to attract
and retain drivers, our results of operations would be negatively
impacted to the extent that we could not obtain corresponding
freight rate increases.
3
We utilize student drivers as a primary source of new
drivers. Student drivers have completed a training program at a
truck driving school and are further trained by Werner certified
trainer drivers for approximately 300 driving hours prior to that
driver becoming a solo driver with their own truck. The student
driver recruiting environment is currently good. The same
factors described above that have aided our qualified driver
recruiting efforts have also resulted in a plentiful supply of
student drivers. At the same time, some carriers are decreasing
the number of student drivers they recruit. The availability of
student drivers may be negatively impacted in the future by the
availability of financing for student loans for driving school, a
potential decrease in the number of driving schools, and proposed
rule changes regarding minimum requirements for entry-level
driver training. When economic conditions improve, competition
for student drivers will likely increase, and we cannot predict
whether we will experience future shortages in the availability
of student drivers. If such a shortage were to occur and
additional driver pay rate increases were necessary to attract
student drivers, our results of operations would be negatively
impacted to the extent that corresponding freight rate increases
were not obtained.
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.entry level driver training. Under the
proposed rule, a Commercialcommercial 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
require 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 onThe FMCSA extended the NPRM arecomment period until July
2008. On April 9, 2008, the FMCSA published another NPRM that
(i) establishes new minimum standards to be received by March 25,
2008.met before states
issue commercial learner's permits; (ii) revises the CDL
knowledge and skills testing standards; and (iii) improves anti-
fraud measures within the CDL program. If the NPRMone or both of these
proposed rules is approved as written, this rulethe final rules could
materially impact the number of potential new drivers entering
the industry. As of December 31, 2008, the FMCSA has not
published a final rule.
We also recognize that carefully selected owner-operators complement our
company-employed drivers. Owner-operators are independent
contractors who supply their own tractor and qualified driver and
are responsible for their operating expenses. Because owner-operatorsowner-
operators provide their own tractors, less financial capital is
required from us. Also, owner-operators provide us with another
source of drivers to support our fleet. We intend to maintain
our emphasis on owner-operator recruiting, in addition to company
driver recruitment. The Company andWe, along with the trucking industry,
however, continue to experience owner-operator recruitment and
retention difficulties that have persisted over the past several
years. We attribute these difficulties to
several factors,Challenging operating conditions, including inflationary
cost increases that are the responsibility of owner-operators,
higher fuel prices and tightened equipment financing standards
rising truck prices, revised hours
of service regulations issued by the FMCSAhave made it difficult to recruit and a slowing U.S.
economy in 2007.
3
retain owner-operators.
Revenue Equipment
As of December 31, 2007,2008, we operated 7,4707,000 company tractors
and had contracts for 780700 tractors owned by owner-operators. The
company-owned tractors were manufactured by Freightliner a
subsidiary of DaimlerChrysler, and by(a
Daimler company), Peterbilt and Kenworth divisions(divisions of PACCAR. This standardization of our company-owned
tractor fleet decreases downtime by simplifying maintenance.PACCAR)
and International (a Navistar company). We adhere to a
comprehensive maintenance program for both company-
ownedcompany-owned tractors
and trailers. We inspect owner-operator tractors prior to
acceptance for compliance with CompanyWerner and DOT operational and
safety requirements. We periodically inspect these tractors, in
a manner similar to company tractor inspections, to monitor
continued compliance. We also regulate the vehicle speed of
company-owned trucks to a maximum of 65 miles per hour to improve
safety and fuel efficiency.
The average age of our truck fleet was 1.3 years at December
31, 2006, 2.1 years at December 31, 2007 and 2.5 years at
December 31, 2008. The higher average age of the truck fleet
results in more maintenance that is not covered by warranty. The
average odometer miles per truck in our truck fleet has also
increased from December 31, 2006 to December 31, 2008. The
percentage increase in the average miles per truck is
significantly less than the percentage increase in the average
4
age due to the large pre-buy of new trucks in 2006. The pre-buy
delayed the purchase of more expensive trucks with 2007 engines.
The pre-buy trucks were put into service throughout 2007 as we
sold our used trucks. Based on current used truck market
conditions, we may be unable to sell enough used trucks to
maintain the current 2.5 year average age of our company tractor
fleet.
We operated 24,85524,940 trailers at December 31, 2007.2008. This
total is comprised of 23,10923,316 dry vans; 501473 flatbeds; 1,142
temperature-controlled trailers; and 1,245
temperature-controlled9 specialized trailers.
Most of our trailers were manufactured by Wabash National
Corporation. As of December 31, 2007,2008, of our dry van trailer
fleet, 98% consisted of 53-foot trailers, and 100% was comprised
of aluminum plate or composite (DuraPlate) trailers. We also
provide other trailer lengths, such as 48-foot and 57-foot
trailers, to meet the specialized needs of certain customers.
Our wholly-owned subsidiary, Fleet Truck Sales, sells our
used trucks and trailers and is believed to be one of the largest
domestic Class 8 truck sales entities in the United States.
Fleet Truck Sales has been in business since 1992 and currently
operates in 16 locations.
The U.S. Environmental Protection Agency ("EPA") mandated a
new set of more stringent engine emissionemissions standards for 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 new standards,
the trucks manufactured with the new engines have higher purchase
prices (approximately $5,000 to $10,000 more per truck), and we expect
them to be less fuel-efficient and result in increased
maintenance costs.. To
delay the cost impact of these new emissionemissions standards, in 2005
and 2006 we purchased significantly more new trucks than we
normally buy each year, and we maintained a newer truck fleet
at December 31, 2006 relative to historical company and industry standards. The average age of our truck
fleet as of December 31, 2007 is 2.1 years. Our newer
truck fleet has allowed us to delay purchases of trucks with the new
2007-standard engines until 2008.first quarter 2008, when we began to
take delivery of trucks with 2007-standard engines. In January
2010, a final set of more rigorous EPA-mandated emissions
standards will become effective for all new engines manufactured
after that date. We are currently evaluating the options
available to us to prepare for the upcoming 2010 standards.
Fuel
We purchase approximately 95%96% of our fuel from a
predetermined network of fuel stops throughout the United States.
We negotiated discounted pricing based on historical purchase
volumes with these fuel stops. Bulk fueling facilities are
maintained at seven of our terminals and three dedicatedDedicated fleet
locations.
Shortages of fuel, increases in fuel prices and rationing of
petroleum products can have a material adverse effect on our
operations and profitability. Our customer fuel surcharge
reimbursement programs have historically enabled us to recover
from our customers a significant portionmajority, but not all, of the higher fuel
prices compared to normalized average fuel prices. These fuel
surcharges, which automatically adjust depending on the U.S.
Department of Energy ("DOE") weekly retail on-highway diesel fuel
prices, enable us to recoup much of the higher cost of fuel when
prices increase. We do not generally recoup higher fuel costs
for miles not billable to customers, out-of-route miles and truck
engine idling. During 2007,2008, our fuel expense and fuel
reimbursements to owner-operators attributed toincreased by $117.2 million
because of higher fuel prices resulted in an additional cost of $23.0 million. We
collected an additional $14.9 million in fuel surcharge revenues
in 2007 to offset mostthe first half of the year,
partially offset by fuel cost increase.savings resulting from 6% fewer company-
owned tractors and the results of our initiatives to improve fuel
efficiency. We cannot predict whether fuel prices will increase
or decrease in the future or the extent to which fuel surcharges
will be collected from customers. As of December 31, 2007,2008, we
had no derivative financial instruments to reduce our exposure to
fuel price fluctuations.
During fourth quarter 2006, the trucking industry began
using ultra-low sulfur diesel ("ULSD") fuel and transitioned
industry diesel fuel consumption from low sulfur diesel to ULSD.
This change stemmed from an EPA-mandated 80% ULSD threshold by
the transition date of October 15, 2006. Since that time, this
change resulted in an approximate 2% degradation of fuel miles
per gallon ("mpg") for all trucks because of the lower energy
content (btu) of ULSD. We believe that other factors which
4
impact mpg, including increasing the percentage of aerodynamic
trucks in our company-owned truck fleet, have offset the negative
mpg impact of ULSD in 2007, compared to 2006.
We maintain aboveground and underground fuel storage tanks
at many of our terminals. Leakage or damage to these facilities
could expose us to environmental clean-up costs. The tanks are
routinely inspected to help prevent and detect such problems.
5
Regulation
We are a motor carrier regulated by the DOT, the Federalfederal and
Provincialprovincial Transportation Departments in Canada, and the Secretary of
Communication and Transportation ("SCT") in Mexico.Mexico and the
Ministry of Transportation in China. The DOT generally governs
matters such as safety requirements, registration to engage in
motor carrier operations, accounting systems, certain mergers,
consolidations and acquisitions and periodic financial reporting.
We currently have a satisfactory DOT safety rating, which is the
highest available rating, and continually take efforts to
maintain our satisfactory rating. A conditional or
unsatisfactory DOT safety rating could adversely affect us
because some of our customer contracts require a satisfactory
rating. Equipment weight and dimensions 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 issued by
the FMCSA ("2005 HOS Regulations"). The most significant change
for us from the previous regulations is that now, pursuant to the
2005 HOS regulations, drivers using the sleeper berth provision must take
at least one break of eight consecutive hours off-duty during
their ten hours off-duty. Previously, drivers using a sleeper
berth were allowed to split their ten-
hourten-hour off-duty time into two
periods, provided neither period was less than two hours. ThisThe
more restrictive sleeper berth provision isregulations are requiring some
drivers to plan their time better. The 2005 HOS Regulations also
had a negative impact on our mileage efficiency, resulting in
lower mileage productivity for those customers with multiple-stop
shipments or those shipments with pick-up or delivery delays.
The Owner-Operator Independent Drivers Association ("OOIDA")
and Public Citizen (a consumer safety organization) each filed
separate petitions for review of the 2005 HOS Regulations with
the U.S. Court of Appeals 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 2005 HOS regulations to (i) allow
drivers up to 11 hours of driving time within a 14-hour, non-extendablenon-
extendable window from the 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-
hour34-hour restart rules. The FMCSA solicited commentsrules that we have been following since the 2005
HOS Regulations became effective. In 2006 and 2007, the U.S.
Court of Appeals for the District of Columbia also considered the
2005 HOS Regulations and heard arguments on the interim
final rule until February 15, 2008, and intends to issue a final
5
rule in 2008 that addresses the issues identifiedvarious petitions
for review, one of which was submitted by the Court.Public Citizen (a
consumer safety organization). On January 23, 2008, the Court
denied Public Citizen's motion to invalidate the interim final
rule. The FMCSA solicited comments on the interim final rule
until February 15, 2008. On November 19, 2008, the FMCSA issued
a final rule which adopts the provisions of the December 2007
interim final rule. This rule became effective January 19, 2009.
On January 18, 2007, the FMCSA published a Notice of
Proposed Rulemaking ("NPRM")an NPRM in the
Federal Register on the trucking industry's use of Electronic On-BoardOn-
Board Recorders ("EOBRs") 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;
(ii) encourage EOBR use by motor carriers through incentives; and
(iii) require EOBR use by operators with serious and continuing
HOS compliance problems. Comments on the NPRM were to be
received by April 18, 2007. In 1998, we becameOn January 23, 2009, the first, and
only, trucking company inFMCSA
withdrew the United States to receive a DOT
exemption to use a global positioning system-based paperless log
system as an alternative to the paper logbooks traditionally used
by truck drivers to track their daily work activities.proposed rule for reconsideration. While we do not
believe the rule, as proposed, would have a significant effect on
our operations and profitability, we will continue to monitor
future developments.
We have unlimited authority to carry general commodities in
interstate commerce throughout the 48 contiguous U.S. states. We
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 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 the
carrier did not previously have intrastate authority, the carrier
must, in most cases, still apply for authority.authority in such state.
WGL and its subsidiaries have obtained business licenses to
operate as a U.S. NVOCC, U.S. Customs Broker, licensedClass A Freight
Forwarder in China, licensed China NVOCC, a TSA approvedTSA-approved Indirect Air
Carrier and an IATA Accredited Cargo Agent.
6
With respect to our activities in the air transportation
industry, we are subject to regulation by the TSA of the U.S.
Department of Homeland Security as an Indirect Air Carrier and by
IATA as an 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. We expect that aA majority of our air freight forwarding business will beis
conducted with airlines that are IATA members.
We 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 we conduct business. All
U.S. customs brokers are required to maintain prescribed records
and are subject to periodic audits by CBP. In other
jurisdictions in which we perform clearance services, we are
licensed by the appropriate governmental authority.
We are also registered as an Ocean Transportation
Intermediary by the U.S. Federal Maritime Commission ("FMC").
The FMC has established certain qualifications for shipping
agents, including surety bonding requirements. The FMC is also
responsible for the economic regulation of 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, and these tariffs
establish the rates to be charged for movement of specified commodities
into and out of the United States. The FMC may enforce these
regulations by assessing penalties.
Our operations are subject to various federal, state and
local environmental laws and regulations, many of which are
implemented by the EPA and similar state regulatory agencies.
These laws and regulations govern the management of hazardous
wastes, the discharge of pollutants into the air and surface and
underground waters and the disposal of certain substances. We do
not believe that compliance with these regulations has a material
effect on our capital expenditures, earnings and competitive
position.
Several U.S. states, counties and cities have enacted
legislation or ordinances restricting idling of trucks 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, which include
driver training, better scheduling and the installation and use
of auxiliary power units ("APUs"). California has also enacted
restrictions on Transport Refrigeration Unittransport refrigeration unit ("TRU") emissions
that require companies to operate compliant TRUs in California.
The California regulations apply not only to California
intrastate carriers, but also to carriers outside of California
who wish to enter the state with TRUs. On January 9, 2009 the
EPA issued California a waiver from preemption (as published in
the Federal Register on January 16, 2009), which are scheduledenables
California to be phasedphase in its regulations over several years
beginning year-end 2008. Although legal challenges may be
mounted against California's regulations, ifJuly 17, 2009. For compliance purposes, we have
started the TRU emissions
law becomes effective as scheduled, it will require companies to
operate only compliant TRUsregistration process in California. ThereCalifornia, and we are
severalcurrently evaluating our options and alternatives for meeting
these requirements which we are
currently evaluating.in 2009 and over the next several years as the
regulations gradually become effective.
Various provisions of the North American Free Trade
Agreement ("NAFTA") may alter the competitive environment for
shipping into and out of Mexico. We believe we are sufficiently
prepared to respond to the potential changes in cross-border
trucking if there was an opening ofU.S. regulations on international trade and truck
transport became less restrictive with respect to the southern border.border
shared by the United States and Mexico. We conduct a substantial
amount of business in international freight shipments to and from
the United States and Mexico (see Note 8 "Segment Information"(Segment Information) in
the Notes to Consolidated Financial Statements under Item 8 of
this Form 10-K) and continue preparing for various scenarios that
may result. We 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.
7
Competition
The trucking industry is highly competitive and includes
thousands of trucking companies. The annual revenue of domestic
trucking is estimated to be approximately $600 billion per year.
We have a small share (estimated at approximately 1%) of the
markets we target. We competeOur Truckload segment competes primarily with
other truckload carriers. Logistics companies, railroads, less-than-truckloadless-
than-truckload carriers and private carriers also provide
competition but to a
lesser degree.for both our Truckload and VAS segments.
Competition for the freight we transport is based primarily
on service, and efficiency, available capacity and, to some degree,
on freight rates alone. We believe that few other truckload
carriers have greater financial resources, own more equipment or
carry a larger volume of freight than ours. 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 January 2007 EPA emissions standards for
newly manufactured trucks contributed to excess truck capacity.
This excess capacity partially disrupted the supply and demand
balance for trucks in the second half of 2006 and in 2007. The recent softnessweakness in the housing and automotive sectors (not(each of which
is not principally served by us) caused carriers dependent on
these freight markets to aggressively compete in other freight
markets that 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) moderatingWeaker economic growthconditions in the retail sector. Since April 2007, Class 8 truck
production declined dramatically, andlast
four months of 2008 resulted in customers shipping less freight,
which we expect this will
continuebelieve increased price competition for several more months. Over time, lower new truck
production and inventory depletion of 2006 engine trucks on truck
dealer lots should help to balance the supply of trucks with the
freight market.freight. 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. In 2008, the industry experienced the highest
number of carrier failures since 2001, which we believe can
primarily be attributed to higher diesel fuel prices during the
first half of 2008. If this environment
continues, an increase inrecent weaker economic conditions and
tighter financing market conditions continue, additional trucking
company failures isare more likely, which could also help to
balance the supply of trucks relative to demand over time.
Internet Website
We maintain an Internet website where you can find
additional information regarding our business and operations.
The website address is www.werner.com. On the website, we make
certain investor information available free of charge, including
our annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, Forms 3, 4 and 5ownership reports filed on behalfunder
Section 16 of directors and executive officersthe Securities Exchange Act of 1934 as amended
("Exchange Act") and any amendments to such reports filed or
furnished pursuant to Section 13(a) or 15(d) of 7
the Securities Exchange Act of 1934, as amended ("Exchange Act").Act.
This information is included on our website as soon as reasonably
practicable after we electronically file or furnish such
materials to the U.S. Securities and Exchange Commission ("SEC").
We also provide our corporate governance materials, such as Board
committee charters and our 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 our website is not incorporated by
reference into this Form 10-K.
ITEM 1A. RISK FACTORS
The following risks and uncertainties may cause our actual
results, business, financial condition and cash flows to
materially differ from those anticipated in the forward-looking
statements included in this Form 10-K. Caution should be taken
not to place undue reliance on forward-looking statements made
herein since thebecause such statements speak only as ofto the date they arewere
made. We undertake no obligation to publicly
release any revisions torevise or update any
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. Also refer to the Cautionary Note Regarding Forward-
Looking Statements in Item 7 of Part II of this Form 10-K.
8
Our business is subject to overall economic conditions that could
have a material adverse effect on our results of operations.
We are sensitive to changes in overall economic conditions
that impact customer shipping volumes. BeginningIn 2008, the overall U.S.
economy fluctuated and weakened in 2003the last four months of the
year. We believe that our customers, and continuing throughout 2005, general economic improvements ledretailers generally,
responded to improved freight demand. Factorsthese financial market conditions by shipping less
freight. We also believe other factors that may have contributed
to lower freight demandcustomer shipping volumes and flat to lower freight
rates in the
second half of 2006 and in 2007 were (i) inventory tightening and reductions by some large retailers
and other customers, (ii) some shippers shifting to more
intermodal intact container shipments for lower value freightexcess truck capacity and (iii)
moderating economic growthweakness in the retail, sector. The
significanthousing, and manufacturing sectors. When
shipping volumes decline, pricing generally becomes more
competitive as carriers compete for loads to maintain 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.productivity. We may be negatively affected by future economic
conditions including 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.
Fuel prices climbed steadily through 2007, averaging 20in 2008 averaged 76 cents per gallon higher than
2006.2007. Prices climbed in the first half of the year and fell
during the last half of the year. When fuel prices rise rapidly,
a negative earnings lag occurs because the cost of fuel rises
immediately and the market indexes used to determine fuel
surcharges increase at a slower pace. This was the trend during
the first half of 2008. In a period of declining fuel prices, we
generally experience a temporary favorable earnings effect
because fuel costs decline at a faster pace than the market
indexes used to determine fuel surcharge collections. This was
the trend during the second half of 2008 as fuel prices decreased
and resulted in temporarily lower net fuel expense, which
partially offset uncompensated fuel costs resulting from truck
idling, empty miles not billable to customers and out-of-route
miles. If fuel prices remain stable or increase in the future,
we do not expect the temporary favorable trend to continue. Fuel
shortages, increases in fuel prices and petroleum product
rationing can have a material adverse impact on our operations
and profitability. We cannot predict whether fuel prices will
increase or decrease in the future or the extent to which fuel
surcharges will be collected from customers. To the extent that
we cannot recover the higher cost of fuel through customer fuel
surcharges, our 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 qualified and student
drivers and owner-
operatorsowner-operators could impact our results of
operations and limit growth opportunities.
At times, the trucking industry has experienced driver
shortages. The market for recruiting and retaining drivers has
become more difficult the last several years due toDriver availability may be affected by changing
workforce demographics and alternative employment opportunities
in an improvingthe economy. However, nearrecent weakness in the end of 2006construction and
continuing through 2007,automotive industries, trucking company failures and fleet
reductions and a rising national unemployment rate continue to
positively affect our driver availability and selectivity.
Consequently, the driver recruiting and retention market was less difficult than the extremely challenging market
experienced earlier in 2006 duehas
improved from a year ago. In addition, we believe our strong
mileage utilization and financial strength are attractive to
the weakness in the housing
market and the medium-to-long-haul Van fleet reduction. During
the last several years, it was more difficultdrivers when compared to recruit and
retain owner-operator drivers due to challenging operating
conditions, including high fuel prices.other carriers. We anticipate that
competition for company drivers and owner-operatoravailability of drivers will remain high until current economic
conditions improve. When economic conditions improve,
competition for qualified drivers will likely increase, and we
cannot predict whether we will experience future driver
shortages. If such a shortage of company driverswere to occur and owner-operators
occurs, it may bedriver pay rate
increases were necessary to increase driver pay ratesattract and owner-operator settlement rates in order to attract these
8
drivers. This could negatively affectretain drivers, our
results of operations would be negatively impacted to the extent
that we could not obtain corresponding freight rate increases were not
obtained.increases.
We 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. We estimate the ten largest
truckload carriers have about 9% of the approximate $180 billion
U.S. market we target. This competition could limit our growth
opportunities and reduce our profitability. We compete primarily
with other truckload carriers in our Truckload segment.
Logistics companies, railroads, less-than-truckload carriers and
private carriers also provide a lesser degree of competition in
our Truckload segment, but such carriers are more direct
competitors in our VAS segment. Competition for the freight we
transport or manage is based primarily on service and efficiency
and, to some degree, on freight rates alone.
9
We operate in a highly regulated industry. Changes in existing
regulations or violations of existing or future regulations could
adversely affect our operations and profitability.
We are regulated by the DOT, the Federalfederal and Provincialprovincial
Transportation Departments in Canada, and the SCT in Mexico and the
Ministry of Transportation in China and may become subject to new
or more comprehensive regulations mandated by these agencies. We
are also regulated by agencies in certain U.S. states. These
regulatory agencies have the authority and power to govern
transportation-related activities, such as safety, financial
reporting, authorization to conduct motor carrier operations and
other matters. In 2006, we formedThe subsidiaries of WGL an operating division within the VAS segment consisting of
several subsidiary companies, including a WOFE headquartered in
Shanghai, China. The WGL subsidiaries obtainedhave business licenses to
operate as a U.S. NVOCC, U.S. Customs Broker, licensedClass A Freight
Forwarder in China, licensed China NVOCC, a TSA approvedTSA-approved Indirect Air
Carrier and an IATA Accredited Cargo Agent. The loss of any of
these business licenses could adversely 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 for
compliance with HOS rules. Comments on the NPRM were to be
received by April 18, 2007. On January 23, 2009, the FMCSA
withdrew the proposed rule for reconsideration. We do not
believe the rule, as proposed, would significantly affect our
operations and profitability, and we will continue to monitor
future developments.
California has enacted restrictions on TRU emissions that
require companies to operate compliant TRUs in California. On
January 9, 2009 the EPA issued California a waiver from
preemption (as published in the Federal Register on January 16,
2009), which enables California to phase in its regulations over
several years beginning July 17, 2009. For compliance purposes,
we have started the TRU registration process in California, and
we are currently evaluating our options and alternatives for
meeting these requirements in 2009 and over the next several
years as the regulations gradually become effective.
As of January 2007, all newly manufactured truck engines
must comply with the EPA's more stringent engine emissionemissions
standards. EnginesTrucks manufactured with the new engines produced
under these 2007 standards have higher purchase prices, and we expect them to beare less
fuel-efficient and result in increased maintenance costs. A
final set of more rigorous EPA emissions standards will become
effective in January 2010 and apply to all new truck engines
manufactured after that time.date. We are evaluating our options to
prepare for compliance with the 2010 standards, but we are unable
to predict at this time to what extent such standards will affect
us or what the impact will be.
The seasonal pattern generally experienced in the trucking
industry may affect our periodic results during traditionally
slower shipping periods and during the winter months.
Our business is modestlyIn the trucking industry, revenues generally show a seasonal
with peakpattern. Peak freight demand occurring generallyhas historically occurred in the
months of September, October and November.November; however, we have not
experienced this seasonal increase in demand during the last
three years. After the December holiday season and during the
remaining winter months, our freight volumes are typically lower
because some customers have reducedreduce shipment levels. Our operating
expenses have historically been higher in winter months primarily
due to decreased fuel efficiency, increased cold weather-related
maintenance costs of revenue equipment and increased insurance
and claims costs due to adverse winter weather conditions. We
attempt to minimize the impact of seasonality by seeking
additional freight from certain customers during traditionally
slower shipping periods. Bad weather, holidays and the number of
business days during a quarterly period can also affect revenue
because revenue is directly related to the available working days
of shippers.
We depend on key customers, the loss or financial failure of
which may have a material adverse effect on our operations and
profitability.
A significant portion of our revenue is generated from several key
customers. During 2007,2008, our top 5, 10 and 25 customers accounted
for 25%24%, 40%39% and 62%61% of revenues, respectively. Our largestNo customer
Dollar General, accounted
for 8%exceeded 10% of our revenues in 2007.2008, and our largest customer
accounted for 6% of our revenues in 2008. We do not have
long-term contractual relationships with many of our key
non-dedicated customers. Our contractual relationships with our
dedicated customers are typically one to three years in length
and may be terminated upon 90 days' notice following the
expiration of the contract's first year. We cannot provide any
assurance that key customer relationships will continue at the
same levels. If a significant customer reduced or terminated our
services, it could 9
have a material adverse effect on our business
10
and results of operations. We review our customers' financial
condition prior
tofor granting credit, monitor changes in customers'
financial conditionconditions on an on-goingongoing basis, review individual
past-due balances and collection concerns and maintain credit
insurance for some customer accounts. However, a key customer's
financial failure may
still negatively affect our results of
operations.
We depend on the services of third-party capacity providers, the
availability of which could affect our profitability and limit
growth in our VAS division.segment.
Our VAS divisionsegment is highly dependent on the services of
third-party capacity providers, such 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
temporary increase in theincreased truck supply of trucks 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.Brokerage
operation in 2007. A large number of carrier failures in 2008
tightened capacity in the first half of 2008, making it more
difficult to obtain capacity at a comparable margin to prior
quarters. However, in recent months capacity became more readily
available due to the weakened domestic economy. If these market conditions change and we are unable
to secure the services of these third-party capacity providers,
our results of operations could be adversely affected.
Our 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.
We self-insureare self-insured for a significant portion of liability
resulting from bodily injury, property damage, cargo loss and employee
workers' compensation.compensation and health benefit claims. This is
supplemented by premiumpremium-based insurance with licensed and highly-rated insurance
companies above our self-insurance level for each type of
coverage. To the extent we experience a significant increase in
the number of claims, cost per claim or costs of insurance
premiums for coverage in excess of our retention amounts, our
operating results would be negatively affected. A portion of our
insurance coverage for the current and prior policy years is
provided by insurance companies that are subsidiaries of American
International Group, Inc. ("AIG"). These AIG insurance
subsidiaries are regulated by various state insurance
departments. We do not currently believe that financial issues
affecting AIG will impact our current or prior insurance coverage
or our ability to obtain coverage in the future.
Decreased demand for our used revenue equipment could result in
lower unit sales, resale values and gains on sales of assets.
We are sensitive to changes in used equipment prices and
demand, especially with respect to tractors. We have been in the
business of selling our company-owned trucks since 1992, when we
formed our wholly-owned subsidiary Fleet Truck Sales. We have 1716
Fleet Truck Sales locations throughout the United States.
DueCarrier failures and company fleet reductions have increased the
supply of used trucks for sale, while buyer demand for used
trucks is weak due to the weakersoft 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 halfa shortage of
2008, which will likely have a
continued negative impact on the amount of our gains on sales.
During 2007, 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.available financing. Gains on sales of assets are reflected as a
reduction of other operating expenses in our income statement and
amounted to gains of $9.9 million in 2008, $22.9 million in 2007
and $28.4 million in 20062006. If these market and $11.0 million in 2005.demand conditions
continue or deteriorate further, our gains on sales of assets
could be negatively affected.
Our operations are subject to various environmental laws and
regulations, the violation of which could result in substantial
fines or penalties.
In addition to direct regulation by the DOT, EPA 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
materiallymaterial 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.
11
We rely on the services of key personnel, the loss of which could
impact our future success.
We are highly dependent on the services of key personnel
including Clarence L. Werner, Gary L. Werner, Gregory L. Werner
and other executive officers. Although we 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 us and our future profitability.
10
Difficulty in obtaining goods and services from our vendors and
suppliers could adversely affect our business.
We are dependent on our vendors and suppliers. We believe
we have good vendor relationships and that we are generally able
to obtain attractive pricing and other terms from vendors and
suppliers. If we fail to maintain satisfactory relationships
with our vendors and suppliers or if our vendors and suppliers
experience significant financial problems, we could experience
difficulty in obtaining needed goods and services because of
production interruptions or other reasons. Consequently, our
business could be adversely affected. One of our large fuel
vendors declared bankruptcy in December 2008 and is continuing to
operate its fuel stop locations post-bankruptcy. If this vendor
were to reduce or eliminate truck stop locations in the future,
we believe we have the ability to obtain fuel from other vendors
at a comparable price.
We use our information systems extensively for day-to-day
operations, and service disruptions could have an adverse impact
on our operations.
The efficient operation of our business is highly dependent
on our information systems. Much of our software was developed
internally or by adapting purchased software applications to our
needs. We purchased redundant computer hardware systems and have
our own off-site disaster recovery facility approximately ten
miles from our officesheadquarters for use in the event of a disaster.
We took these steps to reduce the risk of disruption to our
business operation if a disaster occurred.
ITEM 1B. UNRESOLVED STAFF COMMENTS
We have not received any written comments from SEC staff
regarding our periodic or current reports that were issued 180
days or more preceding the end of our 20072008 fiscal year and that
remain unresolved.
ITEM 2. PROPERTIES
Our headquarters are located on approximately 197 acres near
U.S. Interstate 80 west of Omaha, Nebraska, on approximately 197107 acres 107 of which
are held for future expansion. Our headquarters office building
includes a computer center, drivers' lounge areas,lounges, cafeteria and
company store. The Omaha headquarters also includes a driver
training facility, and equipment maintenance and repair facilities.facilities
and a sales office for selling used trucks and trailers. These
maintenance facilities contain a central parts warehouse, frame
straightening and alignment machine, truck and trailer wash
areas, equipment safety lanes, body shops for tractors and
trailers, paint booth and reclaim center. Our headquarter
facilities have suitable space available to accommodate planned
needs for at least the next three to five years.
1112
We also have several terminals throughout the United States,
consisting of office and/or maintenance facilities. Our 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
Laredo, Texas Owned Office, maintenance, transloading Truckload, VAS
Lakeland, Florida Leased Office Truckload
Portland, Oregon Leased Office, maintenance Truckload
El Paso, Texas LeasedOwned Office, maintenance Truckload
Ardmore, Oklahoma Leased Maintenance Truckload, VAS
Indianola, Mississippi Leased Maintenance Truckload, VAS
Scottsville, Kentucky Leased Maintenance Truckload, VAS
Fulton, Missouri Leased Maintenance Truckload, VAS
Tomah, Wisconsin Leased Maintenance Truckload
Newbern, Tennessee Leased Maintenance Truckload
Chicago, Illinois Leased Maintenance Truckload
Alachua, Florida Leased Maintenance Truckload, VAS
South Boston, Virginia Leased Maintenance Truckload, VAS
Garrett, Indiana Leased Maintenance Truckload
We currently lease (i) approximately 60 small sales offices,
brokerageBrokerage offices and trailer parking yards in various locations
throughout the United States and (ii) office space in Mexico,
Canada and China. We own (i) a 96-room motel located near our
Omaha headquarters; (ii) a 71-room private driver lodging
facility at our Dallas terminal; (iii) four low-income housing
apartment complexes in the Omaha area; (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 have 50% ownership in a 125,000 square-foot
warehouse located near our headquarters in Omaha. The Fleet
Truck Sales network currently has 17 locations. Fleet
Truck Sales, a wholly-owned subsidiary, sells16 locations, of which 13 are
located in our used trucksterminals listed above and trailers and is believed to be one of the largest domestic Class
8 truck sales entities in the United States.3 are leased.
ITEM 3. LEGAL PROCEEDINGS
We are a party subject to routine litigation incidental to
our business, primarily involving claims for bodily injury,
property damage, cargo and workers' compensation incurred in the
transportation of freight. We have maintained a self-insurance
program with a qualified department of risk management
professionals since 1988. These employees manage our bodily
injury, property damage, cargo liability and workers' compensation claims.
An actuary reviews our self-insurance reserves for bodily injury,
and
property damage claims and workers' compensation claims every six
months.
1213
We were responsible for liability claims up to $500,000,
plus administrative expenses, for each occurrence involving
bodily injury or property damage since August 1, 1992. For the
policy year beginning August 1, 2004, we increased our self-
insured retention ("SIR") and deductible amount to $2.0 million
per occurrence. We are also responsible for varying annual
aggregate amounts of liability for claims in excess of the
SIR/deductible. The following table reflects the SIR/deductible
levels and aggregate amounts of liability for bodily injury and
property damage claims since August 1, 2004:2005:
Primary Coverage
Coverage Period Primary Coverage SIR/Deductible
- ------------------------------ ---------------- ----------------
August 1, 2004 - July 31, 2005 $5.0 million $2.0 million (1)
August 1, 2005 - July 31, 2006 $5.0 million $2.0 million (2)(1)
August 1, 2006 - July 31, 2007 $5.0 million $2.0 million (2)(1)
August 1, 2007 - July 31, 2008 $5.0 million $2.0 million (2)
August 1, 2008 - July 31, 2009 $5.0 million $2.0 million (3)
(1) Subject to an additional $3.0$2.0 million aggregate in the $2.0
to $3.0 million layer, no 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 $2.0$8.0 million aggregate in the $2.0
to $3.0 million layer, no 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.
(3) Subject to an additional $8.0 million aggregate in the $2.0
to $5.0 million layer and a $5.0$4.0 million aggregate in the $5.0
to $10.0 million layer.
We are responsible for workers' compensation up to $1.0
million per claim. 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 aggregate for claims
between $1.0 million and $2.0 million. We also maintain a $25.4$26.3
million bond and have insurance for individual claims above $1.0
million.
Our primary insurance covers the range of liability under
which we expect most claims to occur. If any liability claims
are substantially in excess of coverage amounts listed in the
table above, such claims are covered under premium-based policies
(issued by financially stable insurance companies) to coverage levels that our
management considers adequate. We are also responsible for
administrative expenses for each occurrence involving bodily
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 STOCKHOLDERS
During the fourth quarter of 2007,2008, no matters were submitted
to a vote of stockholders.
1314
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Price Range of Common Stock
Our Common Stockcommon stock trades on the NASDAQ Global Select MarketSM
tier of the NASDAQ Stock Market under the symbol "WERN". The
following table sets forth, for the quarters indicated from
January 1, 2007 through December 31, 2008, (i) the high and low
trade prices per share of our Common Stockcommon stock quoted on the NASDAQ
Global Select MarketSM and (ii) our dividends declared per Common share from January 1, 2006, through December 31, 2007.common
share.
Dividends
Declared Per
High Low Common Share
-------- --------------- ------- ------------
2008
Quarter ended:
March 31 $ 20.51 $ 15.26 $ .050
June 30 21.12 17.54 .050
September 30 28.78 17.72 .050
December 31 22.34 14.92 2.150
Dividends
Declared Per
High Low Common Share
------- ------- ------------
2007
Quarter ended:
March 31 $ 20.92 $ 17.58 $.045$ .045
June 30 20.40 17.99 .050
September 30 22.00 16.71 .050
December 31 19.66 16.66 .050
Dividends
Declared Per
High Low Common Share
-------- -------- ------------
2006
Quarter ended:
March 31 $ 21.84 $ 18.16 $.040
June 30 21.01 18.32 .045
September 30 20.89 17.16 .045
December 31 20.76 17.30 .045
As of February 15, 2008,17, 2009, our Common Stockcommon stock was held by 196190
stockholders of record. Because many of our shares of Common
Stockcommon
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 holders. The high and
low trade prices per share of our Common Stockcommon stock in the NASDAQ
Global Select MarketSM as of February 15, 200817, 2009 were $18.76$14.85 and
$17.85,$14.19, respectively.
Dividend Policy
We have paid cash dividends on our Common Stockcommon stock following
each fiscal quarter since the first payment in July 1987. On
December 5, 2008, we also paid a special cash dividend of $2.10
per common share payable to stockholders of record at the close
of business on November 21, 2008. As a result of the special
dividend, a total of approximately $150.3 million was paid on our
71.6 million common shares outstanding. We currently intend to
continue paying dividends on a quarterly basis and do not
currently anticipate any restrictions on our future ability to
pay such dividends. However, we cannot give any assurance that
dividends will be paid in the future because they are dependent
on our earnings, our financial condition and other factors.
15
Equity Compensation Plan Information
For information on our equity compensation plans, please
refer to Item 12 "Security(Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters."
14
Matters).
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 us under the Securities Act of 1933
or the Securities Exchange Act of 1934 except to the extent we specifically request
that such information be incorporated by reference or treated as
soliciting material.
[PERFORMANCE GRAPH APPEARS HERE]
12/31/02 12/31/03 12/31/04 12/31/05 12/31/06 12/31/07 12/31/08
-------- -------- -------- -------- -------- --------
Werner Enterprises, Inc. (WERN) $ 100.00100 $ 113.67117 $ 132.84102 $ 116.5192 $ 104.2990 $ 102.63105
Standard & Poor's 500 $ 100.00100 $ 128.68111 $ 142.69116 $ 149.70135 $ 173.34142 $ 182.8790
NASDAQ Trucking Group (SIC Code 42) $ 100.00100 $ 122.07146 $ 149.61144 $ 137.41135 $ 134.69128 $ 128.71118
Assuming the investment of $100.00 on December 31, 2002,2003 and
reinvestment of all dividends, the graph above compares the
cumulative total stockholder return on our Common Stockcommon stock for the
last five fiscal years with the cumulative total return of
Standard & Poor's 500 Market Index and an index of other
companies included in the trucking industry (NASDAQ Trucking
Group - Standard Industrial Classification Code 42) over the same
period. Our stock price was $17.03$17.34 as of December 31, 2007.2008.
This amountprice was used for purposes of calculating the total return
on our Common Stockcommon stock for the year ended December 31, 2007.2008.
Purchases of Equity Securities by the Issuer and Affiliated
Purchasers
On October 15, 2007, we announced that on October 11, 2007
our Board of Directors approved an increase in the number of
shares of our Common Stockcommon stock that the CompanyWerner Enterprises, Inc. (the
"Company") is authorized to repurchase. Under this new
authorization, the Company is permitted to repurchase an
additional 8,000,000 shares. The
previous authorization, announced on April 17, 2006, authorized
the Company to repurchase 6,000,000 shares and was completed in
fourth quarter 2007. As of December 31, 2007,2008, the
Company had purchased 791,2001,041,200 shares pursuant to the October 2007this
authorization and had 7,208,8006,958,800 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.
1516
The following table summarizes our Common Stock repurchasesNo shares of common stock were repurchased during the fourth
quarter of 2007 made pursuant to the 2006
(708,800 shares) and October 2007 (791,200) authorizations. The
Company did not purchase any shares during the fourth quarter of
2007 other than through this program. All stock repurchases were
made2008 by either the Company or on its behalf and not by any "affiliated
purchaser," as defined by Rule 10b-18 of the Exchange 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
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, 2007 265,500 $18.21 265,500 8,443,300
November 1-30, 2007 1,234,500 $17.77 1,234,500 7,208,800
December 1-31, 2007 - - - 7,208,800
-------------------- --------------------
Total 1,500,000 $17.85 1,500,000 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)
2008 2007 2006 2005 2004 2003
---------- ---------- ---------- ---------- ----------
Operating revenues $2,165,599 $2,071,187 $2,080,555 $1,971,847 $1,678,043
$1,457,766
Net income 67,580 75,357 98,643 98,534 87,310
73,727
Diluted earnings per share*share .94 1.02 1.25 1.22 1.08
0.90
Cash dividends declared per share*share 2.300 .195 .175 .155 .130 .090
Return on average stockholders' equity (1) 8.1% 8.8% 11.3% 12.1% 11.9% 10.9%
Return on average total assets (2) 5.0% 5.4% 7.1% 7.6% 7.5%
6.7%
Operating ratio (consolidated) (3) 94.8% 93.4% 92.1% 91.7% 91.6%
91.9%
Book value per share*share (4) 10.42 11.83 11.55 10.86 9.76
8.90
Total assets 1,275,318 1,321,408 1,478,173 1,385,762 1,225,775
1,121,527
Total debt 30,000 - 100,000 60,000 -
-
Stockholders' equity 745,530 832,788 870,351 862,451 773,169 709,111
*After giving retroactive effect for the September 30, 2003 five-
for-four 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 at recorded amounts and all debts were paid at the
recorded amounts.
1617
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition
and Results of Operations ("MD&A") summarizes the financial
statements from management's perspective with respect to our
financial condition, results of operations, liquidity and other
factors that may affect actual results. The MD&A is organized in
the following sections:
* Cautionary Note Regarding Forward-Looking Statements
* Overview
* Results of Operations
* Liquidity and Capital Resources
* Contractual Obligations and Commercial Commitments
* Off-Balance Sheet Arrangements
* Critical Accounting Policies
* Inflation
Cautionary Note Regarding Forward-Looking Statements:
This annual report on Form 10-K contains historical
information and forward-looking statements based on information
currently available to our management. The forward-looking
statements in this report, including those made in this Item 7,
"Management's(Management's Discussion and Analysis of Financial Condition and
Results of Operations,") are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of
1995, as amended. These safe harbor provisions encourage
reporting companies to provide prospective information to
investors. Forward-looking statements can be identified by the
use of certain words, such as "anticipate," "believe,"
"estimate," "expect," "intend," "plan," "project" and other
similar terms and language. We believe the forward-looking
statements are reasonable based on currently available
information. However, forward-looking statements involve risks,
uncertainties and assumptions, whether known or unknown, that
could cause our actual results, business, financial condition and
cash flows to differ materially from thethose anticipated results expressed in the
forward-looking statements. A discussion of important factors
relating to forward-looking statements is included in Item 1A,
"Risk Factors."(Risk Factors). Readers should not unduly rely on the forward-lookingforward-
looking statements included in this Form 10-K because such
statements speak only to the date they were made. Unless
otherwise required by applicable securities laws, we assumeundertake no
obligation or duty to update forward-
lookingor revise any forward-looking
statements contained herein to reflect subsequent events or
circumstances.circumstances or the occurrence of unanticipated events.
Overview:
We operate in the truckload sectorand logistics sectors of the
trucking industry,
with atransportation industry. In the truckload sector, we focus on
transporting consumer nondurable products that generally ship
more consistently throughout the year. In the logistics sector,
besides managing transportation requirements for individual
customers, we provide additional sources of truck capacity,
alternative modes of transportation, a global delivery network
and systems analysis to optimize transportation needs. Our
success depends on our ability to efficiently manage our
resources in the delivery of truckload transportation and
logistics services to our customers. Resource requirements vary
with customer demand, which may be subject to seasonal or general
economic conditions. Our ability to adapt to changes in customer
transportation requirements is essential to efficiently deploy
resources and make capital investments in tractors and trailers
(with respect to our Truckload segment) or obtain qualified
third-party capacity at a reasonable price (with respect to our
VAS segment). Although our business volume is not highly
concentrated, we may also be occasionally affected by our customers' financial
failures or loss of customer business.
Operating revenues consist of (i) trucking revenues
generated by the six operating fleets in the Truckload segment
(dedicated, medium-to-long-haul van, regional short-haul,
expedited, temperature-controlled(Dedicated, Regional, Van, Expedited, Temperature-Controlled and
flatbed)Flatbed) and (ii) non-
truckingnon-trucking revenues generated primarily by
the four operating units within our VAS segment.segment (Brokerage,
Freight Management, Intermodal and International). Our Truckload
segment also includes a small amount of non-trucking revenues,
18
consisting primarily of the portion of shipments delivered to or
from Mexico where the Truckload segment utilizes a third-party
capacity provider. Non-trucking revenues reported in the
operating statistics table include those revenues generated by
the VAS and Truckload segments. Trucking revenues accounted for
86% of total operating revenues in 2007,2008, 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 as stop charges,
loading/unloading charges and equipment detention charges).
Because fuel surcharge revenues fluctuate in response to changes
in 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. The non-trucking revenues in the operating statistics
table include such revenues generated by a fleet whose operations
fall within the Truckload segment. We do this so that we can
calculate the revenue statistics in the operating statistics
table using only the revenue generated by company-owned and
owner-operator trucks. The key statistics used to evaluate
trucking revenues (excluding fuel surcharges) are (i) average
revenues per tractor per week, (ii) per-mile rates charged to
customers, (iii) average monthly miles generated per tractor,
(iv) average percentage of empty miles (miles without trailer
cargo), (v) average trip length (in loaded miles) and (vi)
average number of tractors in service. General economic
conditions, seasonal trucking industry freight patterns in the trucking industry and
industry capacity are important factors that impact these
statistics.
Our most significant resource requirements are company
drivers, owner-operators, tractors, trailers and equipment
operating costs (such as fuel and related fuel taxes, driver pay,
insurance and supplies and maintenance). We have historically
been successful mitigatingTo mitigate our risk to
fuel price increases, by
recoveringwe recover additional fuel surcharges from
our customers that recoup a majority, but not all, of the
increased fuel costs; however, we cannot assure you that current
recovery levels will continue in future periods. Our financial
results are also affected by company driver and owner-operator
availability and the market for new and used revenue equipment.
We are self-insured for a significant portion of bodily injury,
property damage and cargo claims, and
for workers' compensation benefits
and health claims for our employees (supplemented by premium-basedpremium-
based insurance coverage above certain dollar levels). For that
reason, our financial results may also be affected by driver
safety, medical costs, weather, legal and regulatory environments
and insurance coverage costs to protect against catastrophic
losses.
The operating ratio is a common industry measure used to
evaluate our profitability and that of our truckingTruckload segment
operating fleets. The operating ratio consists of operating
expenses expressed as a percentage of operating revenues. The
most significant variable expenses that impact trucking operationsthe Truckload
segment 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), payments to owner-
operators (included in rent and purchased transportation
expense), supplies and maintenance and insurance and claims.
These expenses generally vary based on the number of miles
generated. As such, weWe also evaluate 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 20072008
to 2006,2007, several industry-wide issues could cause costs to
increase in 2008.2009. These issues include a softer freight market,
changing fuel prices, higher new truck purchase prices and fluctuating fuel
prices.a
weaker used equipment market. Our main fixed costs include
depreciation expense for tractors and trailers and equipment
licensing fees (included in taxes and licenses expense). Depreciation expense was
historically affected by the EPA engine emission standards that
became effective in October 2002 and applied to all new trucks
purchased after that time, resulting in increased truck purchase
costs. Depreciation expense will also be affected in the future
because in January 2007 a second set of more strict EPA engine
emissions standards became effective for all newly manufactured
truck engines. Compared to trucks with engines produced before
2007, the trucks with new engines manufactured under the 2007
standards have higher purchase prices, and we expect them to be
less fuel-efficient and result in increased maintenance costs.
The
trucking operations requireTruckload segment requires substantial cash expenditures for
tractor and trailer purchases. In 2005 and 2006, we accelerated
our normal three-year replacement cycle for company-owned
tractors. We fundedfund these purchases with net
cash from operations and financing available under our existing
credit facilities, as management deemeddeems necessary. The 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 the Truckload segment
were much higher in January 2008 compared to January 2007 due 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
significantly lower than our earnings per share for first quarter
2007.
We provide non-trucking services primarily through the four
operating units within our VAS division. These services include truck brokerage, freight
management (single-source logistics), intermodal and
international.segment. Unlike our trucking operations,Truckload
segment, the non-trucking
operations areVAS segment is less asset-intensive and areis instead
dependent upon qualified employees, information systems and
qualified third-party capacity providers. The most significantlargest expense
item related to these non-trucking servicesthe VAS segment is the cost of purchased
transportation we pay to third-party capacity providers. This
expense item is recorded as rent and purchased transportation
expense. Other operating expenses include salaries, wages and
benefits and computer hardware and software depreciation. We
evaluate our
non-trucking operationsVAS 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.19
Results of OperationsOperations:
The following table sets forth certain industry data
regarding our freight revenues and operations for the periods
indicated.
2008 2007 2006 2005 2004 2003
----------- ----------- ----------- ----------- -----------
Trucking revenues, net of
fuel surcharge (1) $ 1,430,560 $ 1,483,164 $ 1,502,827 $ 1,493,826 $ 1,378,705
$ 1,286,674
Trucking fuel surcharge
revenues (1) 442,614 301,789 286,843 235,690 114,135 61,571
Non-trucking revenues,
including VAS (1) 273,896 268,388 277,181 230,863 175,490
100,916
Other operating revenues (1) 18,529 17,846 13,704 11,468 9,713 8,605
----------- ----------- ----------- ----------- -----------
Operating revenues (1) $ 2,165,599 $ 2,071,187 $ 2,080,555 $ 1,971,847 $ 1,678,043 $ 1,457,766
=========== =========== =========== =========== ===========
Operating ratio
(consolidated) (2) 94.8% 93.4% 92.1% 91.7% 91.6% 91.9%
Average revenues per tractor
per week (3) $ 3,427 $ 3,341 $ 3,300 $ 3,286 $ 3,136
$ 2,988
Average annual miles per
tractor 121,974 118,656 117,072 120,912 121,644 121,716
Average annual trips per
tractor 197 184 175 187 185 173
Average trip length in
miles (loaded) 538 558 581 568 583 627
Total miles (loaded and
empty) (1) 979,211 1,012,964 1,025,129 1,057,062 1,028,458 1,008,024
Average revenues per total
mile (3) $ 1.461 $ 1.464 $ 1.466 $ 1.413 $ 1.341
$ 1.277
Average revenues per loaded
mile (3) $ 1.686 $ 1.692 $ 1.686 $ 1.609 $ 1.511
$ 1.431
Average percentage of empty
miles (4) 13.3% 13.5% 13.1% 12.2% 11.3%
10.8%
Average tractors in service 8,028 8,537 8,757 8,742 8,455 8,282
Total tractors (at year end):
Company 7,000 7,470 8,180 7,920 7,675
7,430
Owner-operator 700 780 820 830 925 920
----------- ----------- ----------- ----------- -----------
Total tractors 7,700 8,250 9,000 8,750 8,600 8,350
=========== =========== =========== =========== ===========
Total trailers (truck(Truckload and
intermodal,Intermodal, at year end) 24,940 24,855 25,200 25,210 23,540 22,800
=========== =========== =========== =========== ===========
(1) Amounts in thousands.
(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 revenues.
(4) Miles without trailer cargo.
19
The following table sets forth the revenues, operating
expenses and operating income for the Truckload segment.
Revenues for the Truckload segment include non-trucking revenues
of $8.6 million in 2008, $10.0 million in 2007 and $11.2 million
in 2006, and $12.2 million
in 2005, as described on page 17.18.
2008 2007 2006
2005
------------------ ------------------ ----------------------------------- ----------------- -----------------
Truckload Transportation Services (amounts in 000's) $ % $ % $ %
- ---------------------------------------------------- ------------------ ------------------ ----------------------------------- ----------------- -----------------
Revenues $ 1,795,227$1,881,803 100.0 $ 1,801,090$1,795,227 100.0 $ 1,741,828$1,801,090 100.0
Operating expenses 1,786,789 95.0 1,673,619 93.2 1,644,581 91.3
1,585,706 91.0
----------- ----------- --------------------- ---------- ----------
Operating income $ 95,014 5.0 $ 121,608 6.8 $ 156,509 8.7
$ 156,122 9.0
=========== =========== ===================== ========== ==========
20
Higher fuel prices and higher fuel surcharge collections
increase our consolidated operating ratio and the Truckload
segment's operating ratio when fuel surcharges are reported on a
gross basis as revenues versus netting against fuel expenses.
Eliminating fuel surcharge revenues, which are generally a more
volatile source of revenue, provides a more consistent basis for
comparing the results of operations from period to period. The
following table calculates the Truckload segment's operating
ratio as if fuel surcharges are excluded from revenue and instead
reported as a reduction of operating expenses.
2008 2007 2006
2005
------------------ ------------------ ----------------------------------- ----------------- -----------------
Truckload Transportation Services (amounts in 000's) $ % $ % $ %
- ---------------------------------------------------- ------------------ ------------------ ----------------------------------- ----------------- -----------------
Revenues $ 1,795,227 $ 1,801,090 $ 1,741,828$1,881,803 $1,795,227 $1,801,090
Less: trucking fuel surcharge revenues 442,614 301,789 286,843
235,690
----------- ----------- --------------------- ---------- ----------
Revenues, net of fuel surcharges 1,439,189 100.0 1,493,438 100.0 1,514,247 100.0
1,506,138 100.0
----------- ----------- --------------------- ---------- ----------
Operating expenses 1,786,789 1,673,619 1,644,581 1,585,706
Less: trucking fuel surcharge revenues 442,614 301,789 286,843
235,690
----------- ----------- --------------------- ---------- ----------
Operating expenses, net of fuel surcharges 1,344,175 93.4 1,371,830 91.9 1,357,738 89.7
1,350,016 89.6
----------- ----------- --------------------- ---------- ----------
Operating income $ 95,014 6.6 $ 121,608 8.1 $ 156,509 10.3
$ 156,122 10.4
=========== =========== ===================== ========== ==========
The following table sets forth the VAS segment's non-
trucking revenues, rent and purchased transportation expense,
other operating expenses and operating 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),
insurance, communications and utilities and other operating
expense categories.
2008 2007 2006
2005
------------------ ------------------ ----------------------------------- ----------------- -----------------
Value Added Services (amounts in 000's) $ % $ % $ %
- --------------------------------------- ------------------ ------------------ ----------------------------------- ----------------- -----------------
Revenues $ 265,262 100.0 $ 258,433 100.0 $ 265,968 100.0
$ 218,620 100.0
Rent and purchased transportation expense 225,498 85.0 224,667 86.9 240,800 90.5
196,972 90.1
----------- ----------- --------------------- ---------- ----------
Gross margin 39,764 15.0 33,766 13.1 25,168 9.5
21,648 9.9
Other operating expenses 25,194 9.5 21,348 8.3 17,747 6.7
13,203 6.0
----------- ----------- --------------------- ---------- ----------
Operating income $ 14,570 5.5 $ 12,418 4.8 $ 7,421 2.8
$ 8,445 3.9
=========== =========== ===================== ========== ==========
2008 Compared to 2007
- ---------------------
Operating Revenues
Operating revenues increased 4.6% in 2008 compared to 2007.
Excluding fuel surcharge revenues, trucking revenues decreased
3.5% due primarily to a 6.0% decrease in the average number of
tractors in service (as discussed further below), partially
offset by a 2.8% increase in average annual miles per tractor.
The truckload freight market, as measured by our overall
pre-booked percentage of loads to trucks ("pre-books"), was
softer during most of 2008 compared to 2007. Freight demand was
lower the first five months of 2008 compared to the first five
months of 2007. In June 2008, freight volumes improved and
exceeded those of June 2007 but were approximately the same in
third quarter 2008 compared to third quarter 2007. During fourth
quarter 2008, freight volumes declined and were significantly
lower than fourth quarter 2007.
The industry-wide accelerated purchase of new trucks in
advance of the 2007 EPA engine emissions standards contributed to
excess truck capacity that partially disrupted the supply and
demand balance during early 2008. These excess trucks along with
a weakening economy resulted in lower freight volumes during the
first five months of 2008 compared to 2007. Fuel prices
increased significantly beginning in late February 2008 and
peaked in July 2008, contributing to an increase in trucking
company failures. We believe these failures resulted in a more
even balance of truck supply to freight demand, which caused pre-
books in June 2008 to exceed those in June 2007 and pre-books
during third quarter 2008 to be flat compared to third quarter
2007. A very weak retail environment combined with extremely
21
soft housing and manufacturing markets resulted in fewer
available shipments during fourth quarter 2008 compared to fourth
quarter 2007. Fuel prices also decreased significantly during
fourth quarter 2008, resulting in fewer trucking company failures
during fourth quarter 2008.
Freight demand softness caused by the weak economy and
excess truck capacity made for a challenging freight market
during much of 2008. We believe these factors increased price
competition for freight in the spot market as carriers competed
for loads to maintain truck productivity. Our Van fleet has the
most exposure to the spot freight market and faced the most
operational and competitive challenges. As a result, to better
match the volume of freight with the number of trucks and improve
profitability, we reduced the size of this fleet by 750 trucks in
2008, including a reduction of 500 trucks during fourth quarter
2008. This decrease in the Van fleet was partially offset by an
increase in trucks in the more profitable Regional and Expedited
fleets, as total trucks decreased by 550 during 2008. As freight
demand deteriorated during fourth quarter 2008 and into January
2009, we reduced the Van fleet by an additional 150 trucks in
January 2009. Since March 2007, we have reduced the Van fleet
from 3,000 trucks to about 1,350 trucks (a reduction of 1,650
trucks).
To-date in 2009, the freight market remains very challenging
and demand continues to be lower than a year ago. January and
February freight demand is very depressed, and we continue to see
the freight market weaken, even after considering the significant
fleet reduction we implemented in fourth quarter 2008 and January
2009.
The average percentage of empty miles decreased to 13.3% in
2008 from 13.5% in 2007. This decrease was the result of a
decrease in the average empty miles percentage related to the
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 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." If
we excluded the Dedicated fleet, the average empty mile
percentage would be 12.4% in 2008 and 11.8% in 2007. This
increase resulted from the weaker freight market and more
regional shipments with shorter lengths of haul.
Fuel surcharge revenues represent collections from customers
for the higher cost of fuel. These revenues increased to $442.6
million in 2008 from $301.8 million in 2007 in response to higher
average fuel prices in 2008. 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 higher fuel costs from customers when fuel prices rise
and (ii) provide customers with the benefit of lower fuel costs
when fuel prices decline. Our 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.
Some customers also have their own fuel surcharge standard
program for carriers. These programs enable us to recover a
majority, but not all, of the fuel price increases. The
remaining portion 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 are generated by its four operating units:
Brokerage, Freight Management, Intermodal and International. VAS
revenues increased 3% to $265.3 million in 2008 from $258.4
million in 2007 due to an increase in Brokerage, Intermodal and
International revenues. This growth was partially offset by a
structural change to a customer's continuing third-party carrier
arrangement that became effective in July 2007. 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 change affected the reporting of VAS
revenues and purchased transportation expenses for this customer
in third quarter 2007 and subsequent periods. This reporting
change resulted in a reduction in VAS revenues and VAS rent and
purchased transportation expense of $36.3 million comparing 2008
to 2007. This reporting change had no impact on the dollar
22
amount of VAS gross margin or operating income. Excluding the
affected freight revenues for this customer from 2007 revenues,
VAS revenues grew 19% in 2008 compared to 2007. VAS gross margin
dollars increased 18% during 2008 compared to 2007 due to an
improvement in the gross margin percentage in the Intermodal and
International units offset by a decrease in the Brokerage unit
gross margin percentage.
Brokerage revenues increased 21% in 2008 compared to 2007,
but the Brokerage gross margin percentage and operating income
percentage declined. These declines were due to (i) fuel price
declines during the second half of 2008 and (ii) the tightening
of truckload capacity in the first half of 2008 due to increased
carrier failures, which made it more challenging for Brokerage to
obtain qualified third-party carriers at a comparable margin to
2007. Intermodal revenues increased by 21%, and its operating
income percentage also improved. International, formed in July
2006, revenues grew 86%, and it achieved an improved gross margin
percentage. 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.
Operating Expenses
Our operating ratio (operating expenses expressed as a
percentage of operating revenues) was 94.8% in 2008 compared to
93.4% in 2007. Expense items that impacted the overall operating
ratio are described on the following pages. As explained on page
21, the total company operating ratio for 2008 was 140 basis
points higher than 2007 due to the significant increase in fuel
expense and recording the related fuel surcharge revenues on a
gross basis. The tables on pages 20-21 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 year to year.
Increase
(Decrease)
2008 2007 per Mile
----------------------------
Salaries, wages and benefits $.574 $.571 $.003
Fuel .518 .401 .117
Supplies and maintenance .158 .150 .008
Taxes and licenses .112 .115 (.003)
Insurance and claims .106 .092 .014
Depreciation .166 .159 .007
Rent and purchased transportation .175 .160 .015
Communications and utilities .020 .020 .000
Other (.004) (.016) .012
Owner-operator costs are included in rent and purchased
transportation expense. Owner-operator miles as a percentage of
total miles were 11.9% in 2008 compared to 12.3% in 2007. 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 decrease in owner-operator miles as a
percentage of total miles shifted costs from the rent and
purchased transportation category to other expense categories.
Due to this decrease, we estimate that rent and purchased
transportation expense for the Truckload segment was lower by
approximately 0.6 cents per total mile, and other expense
categories had offsetting increases on a total-mile basis as
follows: (i) salaries, wages and benefits, 0.2 cents; (ii) fuel,
0.3 cents; and (iii) depreciation, 0.1 cent.
Salaries, wages and benefits in the Truckload segment
increased 0.3 cents per mile on a total mile basis in 2008
compared to 2007. This increase is primarily attributed to
higher student pay (average active trainer teams increased 13%),
higher workers' compensation expense and, as discussed above, the
shift from rent and purchased transportation to salaries, wages
and benefits because of the decrease in owner-operator miles as a
percentage of total miles. Within the Truckload segment, these
23
cost increases were offset partially by lower non-driver pay for
office and equipment maintenance personnel (due to efficiency and
cost control improvements) and lower group health insurance
costs. Non-driver salaries, wages and benefits increased in the
non-trucking VAS segment due to growth in the VAS segment.
The qualified and student driver recruiting and retention
markets improved in 2008 compared to 2007. The weakness in the
construction and automotive industries, trucking company failures
and fleet reductions and a rising national unemployment rate
continue to positively affect our driver availability and
selectivity. In addition, we believe our strong mileage
utilization and financial strength are attractive to drivers when
compared to other carriers. We anticipate that availability of
drivers will remain strong until current economic conditions
improve. When economic conditions improve, competition for
qualified drivers will likely increase, and we cannot predict
whether we will experience future driver shortages. If such a
shortage were to occur and 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 11.7 cents per mile for the Truckload segment
due primarily to higher average diesel fuel prices offset
partially by fuel efficiency improvements. Average fuel prices
in 2008 were 76 cents per gallon higher than in 2007, a 34%
increase. Average monthly fuel prices in 2008 were higher than
those in the comparable months of 2007 for the first ten months,
with the amount of change over 2007 increasing steadily through
June 2008 ($1.70 per gallon higher than June 2007). Fuel prices
began to fall in July 2008 and fell below the 2007 levels in the
last two months of 2008 (December 2008 prices were $1.16 per
gallon lower than December 2007). Average fuel prices to-date in
2009 have been $1.27 per gallon lower than the same period of
2008.
During 2008, we implemented numerous initiatives to improve
fuel efficiency and our fuel miles per gallon ("mpg"). These
initiatives include (i) reducing truck engine idle time, (ii)
lowering non-billable miles, (iii) increasing the percentage of
aerodynamic, more fuel efficient trucks in the company truck
fleet and (iv) installing APUs in company trucks. Truck engine
idle time percentages can be affected by seasonal weather
patterns (such as warm summer months and cold winter months) that
prompt drivers to idle the engine to provide air conditioning or
heating for comfort during non-driving periods. Thus, engine
idle time percentages for trucks without APUs may be higher (and
fuel mpg may be lower as a result) during the summer and winter
months as compared to temperate spring and fall months. APUs
provide an alternate source to power heating and air conditioning
systems when the main engine is not operating, and APUs consume
significantly less diesel fuel than idling the main engine. As
of December 31, 2008, we had installed APUs in approximately 50%
of the company-owned truck fleet. As a result of these
initiatives, we improved our company truck average mpg by 4.3% in
2008 compared to 2007. This mpg improvement resulted in the
purchase of 7.0 million fewer gallons of diesel fuel in 2008 than
in 2007. This equates to a reduction of approximately 77,000
tons of carbon dioxide emissions. As we purchase new trucks, we
intend to continue installing APUs and taking part in other
environmentally conscious initiatives, such as our active
participation in the SmartWay Transport Partnership program of
the EPA.
We have historically been successful recouping a majority,
but not all, of fuel cost increases through our fuel surcharge
program. The remaining portion not recouped is caused by the
impact of operational costs such as truck idling, empty miles,
and out-of-route miles for which we are not compensated. Each
year in the prior four years, rising fuel costs (net of fuel
surcharge collections) had a negative impact on our operating
income when compared to the previous year. The total negative
impact on our operating income due to fuel expense, net of fuel
surcharge collections, during 2004 to 2008 was approximately $72
million.
When fuel prices rise rapidly, a negative earnings lag
occurs because the cost of fuel rises immediately and the market
indexes used to determine fuel surcharges increase at a slower
pace. As a result, during these rising fuel price periods, the
negative impact of fuel on our financial results is more
significant. This was the trend during the first two quarters of
2008. In a period of declining fuel prices, we generally
experience a temporary favorable earnings effect because fuel
24
costs decline at a faster pace than the market indexes used to
determine fuel surcharge collections. This trend began during
third quarter 2008 as fuel prices began to decrease but had a
larger impact during fourth quarter 2008 when fuel prices
decreased over $1.70 per gallon from the end of third quarter
2008 to the end of fourth quarter 2008. This resulted in
temporarily lower net fuel expense that helped to offset
uncompensated fuel costs from truck idling, empty miles not
billable to customers, and out-of-route miles. If fuel prices
stabilize or increase in the future, we do not expect the
temporary favorable trend to continue.
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, 2008, we had no derivative financial
instruments to reduce our exposure to fuel price fluctuations.
Supplies and maintenance for the Truckload segment increased
0.8 cents (5%) per total mile in 2008 compared to 2007. An
increase in the average age of our company truck fleet from 2.1
years at December 31, 2007 to 2.5 years at December 31, 2008
caused an increase in maintenance cost per mile. The higher
average age of the truck fleet results in more maintenance that
is not covered by warranty. In addition to the higher average
truck age, a higher percentage of the repairs was performed over-
the-road as a result of the decrease in our equipment maintenance
personnel (see previous discussion of salaries, wages and
benefits). Over-the-road vendors also raised their labor and
parts rates during 2008, which contributed to the increase in
maintenance costs. The prices of some parts purchased from over-
the-road vendors, as well as those purchased for use in our
shops, increased in 2008 because of higher commodity prices.
Taxes and licenses for the Truckload segment decreased 0.3
cents per total mile in 2008 compared to 2007 due to a decrease
in fuel taxes per mile resulting from the improvement in the
company truck mpg. An improved mpg results in fewer gallons of
diesel fuel purchased and consequently less fuel taxes paid.
Insurance and claims for the Truckload segment increased
from 9.2 cents per total mile in 2007 to 10.6 cents per total
mile in 2008 (an increase of 1.4 cents per total mile). Of this
increase, 1.2 cents per total mile relates to unfavorable claims
development on larger claims that occurred in years prior to
2008 offset partially by lower large claims incurred in 2008.
The development of these prior year claims will limit further
negative development on other large claims in these same policy
years as we have now met our annual aggregates in some of these
older policy years. We renewed our liability insurance policies
on August 1, 2008 and continue to be responsible for the first
$2.0 million per claim with an annual $8.0 million aggregate for
claims between $2.0 million and $5.0 million. The annual
aggregate for claims between $5.0 million and $10.0 million was
lowered from $5.0 million to $4.0 million effective with the new
policy year beginning August 1, 2008. See Item 3 (Legal
Proceedings) for information on our bodily injury and property
damage coverage levels since August 1, 2005. Our liability
insurance premiums for the policy year beginning August 1, 2008
are slightly lower than the previous policy year.
Depreciation expense for the Truckload segment increased 0.7
cents per total mile in 2008 compared to 2007. This increase was
due primarily to depreciation of the APUs installed on company
trucks and, to a lesser extent, to higher costs of tractors
purchased during 2008 and a higher ratio of trailers to tractors
resulting from the reduction of our fleet. The APU depreciation
expense is offset by lower fuel costs because tractors with APUs
generally consume less fuel during periods of idle. Higher
average miles per tractor during 2008 compared to 2007 has the
effect of lowering this fixed cost when evaluated on a per-mile
basis and offset a portion of the increases discussed above.
Depreciation expense was historically affected by the engine
emissions standards imposed by the EPA that became effective in
October 2002 and applied to all new trucks purchased after that
time, resulting in increased truck purchase costs. Depreciation
expense is affected because in January 2007, a second set of more
strict EPA engine emissions standards became effective for all
newly manufactured truck engines. Compared to trucks with
engines produced before 2007, the trucks with new engines
manufactured under the 2007 standards have higher purchase
prices. We began to take delivery of trucks with these 2007-
standard engines in first quarter 2008 to replace older trucks in
our fleet. The engines in our fleet of company-owned trucks as
of December 31, 2008 consist of 78% Caterpillar, 14% Detroit
25
Diesel, 7% Mercedes Benz and 1% Cummins. In June 2008,
Caterpillar announced it will not produce on-highway engines for
use in the United States that will comply with new EPA engine
emissions standards that become effective in January 2010 but
will continue to sell on-highway engines internationally.
Caterpillar also announced it is pursuing a strategic alliance
with Navistar. Approximately one million trucks in the U.S.
domestic market have Caterpillar heavy-duty engines, and
Caterpillar has stated it will fully support these engines going
forward.
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. 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 85.0% in 2008 compared to
86.9% in 2007. As discussed on page 22, the VAS segment's rent
and purchased transportation expense was affected by a structural
change to a large VAS customer's continuing third-party carrier
arrangement that became effective in July 2007. That change
resulted in a reduction in VAS revenues and VAS rent and
purchased transportation expense of $36.3 million from 2007 to
2008. Excluding the rent and purchased transportation expense
for this customer, the dollar amount of this expense increased
for the VAS segment by 20% compared to an increase in VAS
revenues of 19%.
Rent and purchased transportation for the Truckload segment
increased 1.5 cents per total mile in 2008 due primarily to
increased fuel prices that necessitated higher reimbursements to
owner-operators for fuel during most of 2008 compared to 2007,
offset slightly by a decrease in the percentage of owner-operator
truck miles versus company truck miles. Fuel reimbursements to
owner-operators amounted to $53.0 million in 2008 compared to
$36.0 million in 2007. These higher fuel reimbursements resulted
in an increase of 1.7 cents per total mile. Our customer fuel
surcharge programs do not differentiate between miles generated
by company-owned and owner-operator trucks. 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, higher fuel prices and a shortage of financing. We
have historically been able to add company-owned tractors and
recruit additional company drivers to offset any decrease in the
number of owner-operators. 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 increased
1.2 cents per mile in 2008. 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 $9.9 million in 2008 from
$22.9 million in 2007, or a reduction of 1.2 cents per mile. We
believe Fleet Truck Sales demand softened during 2008 due to the
softer freight market and higher fuel prices. At the same time,
carrier failures and company fleet reductions increased the
supply of used trucks for sale. We expect this to continue,
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 we expect to continue
doing so in 2009, although the market for used trailers has also
softened. Our wholly-owned subsidiary and 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 and trailers.
Other Expense (Income)
We recorded $0.1 million of interest expense in 2008 versus
$3.0 million of interest expense in 2007. Our average
outstanding debt per month in 2007 was over $45 million, while in
2008 we had no outstanding debt until the end of November 2008.
We had $30.0 million of debt outstanding and cash and cash
equivalents of $48.6 million at December 31, 2008, for a net cash
position of $18.6 million. Our interest income was $4.0 million
in 2008 and 2007. Our average cash and cash equivalents balance
was higher in 2008 than in 2007, but the average interest rate
earned on these funds was lower in 2008.
26
Income Taxes
Our effective income tax rate (income taxes expressed as a
percentage of income before income taxes) was 42.3% for 2008
versus 45.1% for 2007. During fourth quarter 2007, we reached a
tentative settlement agreement with an Internal Revenue Service
("IRS") appeals officer regarding a significant tax deduction
based on a timing difference between financial reporting and tax
reporting for our 2000 to 2004 federal income tax returns.
During fourth quarter 2007, we accrued the estimated cumulative
interest charges, net of income taxes, of $4.0 million for the
anticipated settlement of this matter. The IRS finalized the
settlement during third quarter 2008, and we paid the IRS the
federal accrued interest at the beginning of October 2008. We
filed amended state returns reporting the IRS settlement changes
to the states where required during fourth quarter 2008. We are
now working with those states to settle our state interest
liabilities. Our total payments during 2008, before considering
the tax benefit from the deductibility of these payments, were
$4.9 million for federal and $0.4 million to various states. We
expect to pay about $1 million to settle the remaining state
liabilities. Our policy is to recognize interest and penalties
directly related to income taxes as additional income tax
expense. See also Note 4 of the Notes to Consolidated Financial
Statements under Item 8 of this Form 10-K.
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-Marchmid-
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 dedicatedDedicated 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 dedicatedDedicated 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),to a customer's
continuing third-party carrier arrangement, 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
27
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 aThe 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 20,21,
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 20pages 20-21 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 periodsyears
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-operatorowner-
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 dedicatedDedicated fleet truck percentage
as dedicatedDedicated 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 9.0nine 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
28
for both periods: (i) average fuel price per gallon, (ii) fuel
reimbursements paid to owner-operator drivers, (iii) miles per gallonmpg 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 ULSDultra-low sulfur diesel ("ULSD")
fuel. This transition occurred because fuel refiners were
required to meet the EPA-
mandatedEPA-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
dedicatedDedicated 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 purchasesthe purchase of new van trailers to
replace our oldest 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"(Legal Proceedings) for information on
our bodily injury and property damage coverage levels since
August 1, 2004.2005. 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 21,27, the VAS
segment's rent and purchased transportation expense decreased in
response to a structural change to a large VAS customer's
continuing arrangement.arrangement regarding third-party carriers. That
change resulted in a reduction in VAS revenues and VAS rent and
purchased transportation expense of (i) $20.0$38.5 million from third quartercomparing the
second half of 2006 to third quarter 2007
and (ii) $18.5 million from fourth quarter 2006 to fourth quarterthe second half of 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.trailers. 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.
29
Other Expense (Income)
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.
Income Taxes
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.2006. During fourth quarter 2007, we reached a
tentative settlement agreement with an Internal Revenue ServiceIRS appeals officer
regarding a significant timing difference deduction 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 sluggish during much of 2006, particularly from mid-
August through December when the normal freight volume peak
seasonal increase 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. These combined factors
resulted in the decrease in annual miles per tractor andSee 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 our freight base is under contract
with customers and provides for annual pricing increases, with
much of our 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 us to obtain base rate increases at levels
comparable to the 2005 and 2004 renewal periods.
The average percentage of empty miles increased to 13.1% in
2006 from 12.2% in 2005. This increase partially resulted from
higher percentages of dedicated trucks in the fleet and regional
shipments with a shorter length of haul. If we excluded the
dedicated fleet, the average empty mile percentage would be 10.8%
in 2006 and 10.0% in 2005.
Fuel surcharge revenues increased to $286.8 million in 2006
from $235.7 million in 2005 in response to higher average fuel
prices in 2006.
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. Most of the revenue growth came from our Brokerage
and Intermodal divisions within VAS.
Operating Expenses
Our operating ratio 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 20, the
operating ratio increased due to the significant rise in fuel
expense and recording the related fuel surcharge revenues on a
gross basis. Because the VAS operating margin is lower than that
of the trucking business, the growth in VAS business in 2006
compared to 2005 also increased our overall operating ratio. 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)
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 miles as a percentage of total miles were
11.8% in 2006 compared to 12.5% in 2005. This decrease in owner-
operator miles as a percentage of total miles shifted costs from
the rent and purchased transportation category to other expense
categories. We estimate that rent and purchased transportation
expense for the Truckload 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; (ii) fuel,
0.3 cents; (iii) supplies and maintenance, 0.1 cent; (iv) taxes
and licenses, 0.1 cent; and (v) depreciation, 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
Truckload segment is primarily attributed to higher driver pay
per mile resulting from (i) an increased percentage of company
truck miles versus owner-operator miles (see above); (ii) an
increase in the dedicated fleet truck percentage; (iii)
additional amounts paid to drivers to help offset the impact of
lower miles in a sluggish freight market; and (iv) higher group
health insurance costs, offset by a decrease in workers'
compensation expense. Non-driver salaries, wages and benefits
rose due to (i) an increase in equipment maintenance personnel
and (ii) $2.3 million of stock compensation expense related to
the our adoption of Statement of Financial Accounting Standards
("SFAS") No. 123 (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, we adopted SFAS No. 123R using a
modified version of the prospective transition method. Under
this transition method, compensation cost is recognized on or
after January 1, 2006 for (i) the portion of outstanding awards
not yet vested as of January 1, 2006, based on the grant-date
fair value of those awards calculated under SFAS No. 123,
26
Accounting for Stock-Based Compensation, for either recognition
or pro forma 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 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 remained
challenging during 2006. We had two quarters of sequential
decreases in the average number of tractors in service during the
first half of 2006. 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.
Fuel increased 5.6 cents per mile for the Truckload segment
due primarily to higher average diesel fuel prices. Average fuel
prices in 2006 were 28 cents per gallon, or 16%, higher than in
2005. Higher net fuel costs had a four (4.0) cent negative
impact on earnings per share in 2006 compared to 2005. As of
December 31, 2006, we had no derivative financial instruments to
reduce our exposure to fuel price fluctuations.
Insurance and claims for the Truckload segment increased 0.7
cents on a per-mile basis. This increase was primarily related to
higher negative development on existing liability insurance
claims and an increase in larger claims. We renewed our
liability insurance policies on August 1, 2006. 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, 2006 were slightly higher than the previous policy year.
Depreciation expense for the Truckload segment increased 0.9
cents on a per-mile basis in 2006. This increase is mainly due
to (i) higher costs of new tractors having post-October 2002
engines, (ii) the impact of fewer average miles per truck and
(iii) an increased percentage of company-owned trucks compared to
owner-operators. As of December 31, 2006, nearly 100% of the
company-owned truck fleet consisted of trucks having 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. Rent 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 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 declined because of the softer
freight market and the influence of higher fixed costs and
repositioning costs.
Rent and purchased transportation for the Truckload segment
increased 0.1 cent 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). These
higher owner-operator reimbursements resulted in an increase of
0.7 cents per total mile. We also increased the van and regional
over-the-road 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-operator miles. Payments to
third-party capacity providers related to the small amount of
non-trucking revenues recorded by the Truckload segment also
decreased by 0.1 cent per mile, partially offsetting the
Truckload segment's overall increase.
Other operating expenses for the Truckload segment decreased
0.5 cents per mile in 2006. Gains on sales of assets increased
to $28.4 million in 2006 from $11.0 million in 2005. During
2006, we began selling our oldest van trailers that 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. We spent less on
repairs per truck sold in 2006 as compared to 2005, which also
contributed to the improvement in gains on sale. Other operating
27
expenses also include bad debt expense and professional service
fees. In first quarter 2006, we recorded an additional $7.2
million related to the bankruptcy of one of our former customers.
We recorded $1.2 million of interest expense in 2006
compared to $0.7 million of interest expense in 2005. We had $100
million of debt outstanding at December 31, 2006. This debt was
incurred in the second half of 2006 for the purchase of new
trucks. In first quarter 2006, we repaid the $60 million of debt
that was outstanding at December 31, 2005. Our interest income
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.
Our effective income tax rate 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.
Liquidity and Capital ResourcesResources:
During the year ended December 31, 2007,2008, we generated cash
flow from operations of $228.0$259.1 million, a 19.7% decrease13.7% increase ($56.131.1
million), in cash flow compared to the year ended December 31,
2006.2007. This decreaseincrease is dueattributed primarily to (i) a $23.2
million change in cash flows related to accounts payable,
primarily due to the timing of revenue equipment payments, (ii) a
lower accounts receivable balance due primarily to a decrease in
the average fuel surcharge billed per trip at the end of 2008 and
(iii) the effect of $13.0 million lower gains on disposal of
operating equipment, offset by (iv) lower net income of $7.8
million. Cash flow from operations decreased $56.1 million in
2007 compared to 2006, or 19.7%. The decrease in cash flow from
operations in 2007 compared to 2006 was due primarily to a $33.8
million 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 in 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, we
wrote off a $7.2 million receivable related to the 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. 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. We made federal income tax payments of $22.5 million
related to the reversal of the tax strategies in second quarter
2005.$23.3 million. We were able to make net
capital expenditures, repay debt,
repurchase common stock and pay dividends
because of the cash flow from operations and existing cash
balances, supplemented by net borrowings under our existing
credit facilities.
Net cash used in investing activities decreased 91.5%
($216.1 million)increased by $89.3
million to $109.4 million in 2008 from $20.1 million in 2007 from $236.2 million in
2006.2007.
Net property additions (primarily revenue equipment) were $26.1$115.0
million for the year ended December 31, 20072008 compared to $241.8$26.1
million during the same period of 2006.2007. The decreaseincrease occurred
because we began to take delivery of new trucks in 2008, while we
took delivery of substantially fewer new trucks during 2007 to
delay purchases of more expensive trucks with 2007 engines. The
$58.0$216.1 million or 19.7%, decrease in investing cash flows from 2006 to 20052007
was due primarily to (i) the purchase of more tractors in 20052006 as we
began to reduce the average age of our truck fleet and (ii) purchasing fewer tractors
and selling more trailers in 2006.prior to the
2007 engine change. The average age of our truck fleet is 2.5
years at December 31, 2008 compared to 2.1 years at December 31,
2007 compared toand 1.3 years at December 31, 2006. As of December 31,
2007,2008, we were committed to property and equipment purchases of
approximately $48.7$46.6 million. We expect our estimated net capital
expenditures (primarily revenue equipment) to be in the range of
$50.0 million to $125.0 million in 2009. We intend to fund these
net capital expenditures through cash flow from operations and
financing available under our existing credit facilities, as
management deems necessary.
Net financing activities used $119.3 million in 2008, $214.4
million in 2007 usedand $52.8 million in 2006 and provided $48.9 million in 2005.2006. The changedecrease from
20062007 to 20072008 included debt repayments (net of borrowings) of
$100.0 million in 2007 compared to net borrowings of $30.0
million in 2008. We had net borrowings of $40.0 million in 2006.
We borrowed $60.0During first quarter 2009, we repaid the total $30.0 million in 2005.of
debt that was outstanding on December 31, 2008. We paid
dividends of $164.4 million in 2008, $14.0 million in 2007 and
$13.3 million in 2006
and $11.92006. The 2008 dividends included a special
dividend of $2.10 per share ($150.3 million total) paid in
2005.December 2008. We increased our regular quarterly dividend rate
by $0.005 per share beginning with the dividend paid in July 2007
and the dividend paid in July 2006. Financing activities also
included Common Stockcommon stock repurchases of $4.8 million in 2008, $113.8
million in 2007 and $85.1 million in 2006 and $1.6 million in 2005.2006. From time to 28
time,
we havethe Company has repurchased, and may continue to repurchase,
shares of our Common Stock.the Company's common stock. The timing and amount of
30
such purchases depends on market and other factors. 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 repurchase.
This new authorization permits us to repurchase an additional
8,000,000 shares. As of
December 31, 2007,2008, the Company had purchased 791,2001,041,200 shares
pursuant to thisour current Board of Directors repurchase
authorization and had 7,208,8006,958,800 shares remaining available for
repurchase.
Management believes our financial position at December 31,
20072008 is strong. As of December 31, 2007,2008, we had $25.1$48.6 million of
cash and cash equivalents and $832.8$745.5 million of stockholders'
equity. Cash is invested in government portfolio money market
funds. We do not hold any investments in auction-rate
securities. As of December 31, 2007,2008, we had a total of $225.0
million of credit pursuant to two credit facilities, of which we
had no outstanding
borrowings.borrowed $30.0 million. The $225.0remaining $195.0 million of
credit available under these facilities is further reduced by the
$33.6$43.9 million in letters of credit we maintain. These letters of
credit are primarily required as security for insurance policies.
As of December 31, 2007,2008, we did not have any non-cancelable
revenue equipment operating leases and therefore had no off-balanceoff-
balance sheet revenue equipment debt. Based on our strong
financial position, management does not foresee any significant
barriers to obtaining sufficient financing, if necessary.
Contractual Obligations and Commercial CommitmentsCommitments:
The following tables settable sets forth our contractual obligations
and commercial commitments as of December 31, 2007.2008.
Payments Due by Period
(in millions)
More
Less than Overthan 5 Period
Total 1 year 1-3 years 4-53-5 years years OtherUnknown
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Contractual Obligations
Unrecognized tax benefitsLong-term debt, including current
maturities $ 12.630.0 $ 30.0 $ - $ - $ - $ -
$ 12.6Unrecognized tax benefits 7.4 1.4 - - - 6.0
Equipment purchase commitments 48.7 48.746.6 46.6 - - - -
-------- -------- -------- -------- -------- --------
Total contractual cash obligations $ 61.384.0 $ 48.778.0 $ - $ - $ - $ 12.66.0
======== ======== ======== ======== ======== ========
Other Commercial
Commitments
Unused lines of credit $ 191.4151.1 $ -50.0 $ 191.4101.1 $ - $ - $ -
Standby letters of credit 33.6 33.643.9 43.9 - - - -
-------- -------- -------- -------- -------- --------
Total commercial commitments $ 225.0195.0 $ 33.693.9 $ 191.4101.1 $ - $ - $ -
======== ======== ======== ======== ======== ========
Total obligations $ 286.3279.0 $ 82.3171.9 $ 191.4101.1 $ - $ - $ 12.66.0
======== ======== ======== ======== ======== ========
We have committed credit facilities with two banks totaling
$225.0 million, of which we had nohave borrowed $30.0 million at
December 31, 2008. During first quarter 2009, we repaid the
total $30.0 million of debt that was outstanding borrowings.on December 31,
2008. These credit facilities bear variable interest (2.0% at
December 31, 2008) 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 under which we
are obligated. The unused lines of credit are available to us in
the event we need financing for the growthreplacement of our fleet.fleet or
for other significant capital expenditures. Given our strong
financial position, we expect that we could obtain additional
financing, if necessary,
at favorable terms.necessary. 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 FASBFinancial Accounting Standards
Board ("FASB") Interpretation No. 48, Accounting for Uncertainty
in Income Taxes-an Interpretation of FASB Statement No. 109 ("FIN
48"), and. As of December 31, 2008, we have recorded $12.6$7.4 million of
unrecognized tax benefits. We expect $1.4 million to be settled
within the next twelve months and are unable to reasonably
determine when these amountsthe $6.0 million categorized as "period unknown"
will be settled.
31
Off-Balance Sheet Arrangements
We doArrangements:
In 2008, we did not have any non-cancelable revenue
equipment operating leases or other arrangements that meet the
definition of an off-balance sheet arrangement.
29
Critical Accounting PoliciesPolicies:
We operate in the truckload sector of the trucking industry
with aand the logistics sector of the transportation industry. In the
truckload sector, we focus on transporting consumer nondurable
products that generally ship more consistently throughout the yearyear.
In the logistics sector, besides managing transportation
requirements for individual customers, we provide additional
sources of truck capacity, alternative modes of transportation, a
global delivery network and when changes occur
in the economy.systems analysis to optimize
transportation needs. Our success depends on our ability to
efficiently manage our resources in the delivery of truckload
transportation and logistics services to our customers. Resource
requirements vary with customer demand and may be subject to
seasonal or general economic conditions. Our ability to adapt to
changes in customer transportation requirements is a key element
inessential to
efficient resource deployment, and in making capital investments in
tractors and trailers.trailers or obtaining qualified third-party carrier
capacity at a reasonable price. Although our business volume is
not highly concentrated, we may also be occasionally affected by
theour customers' financial failure of customersfailures or a loss of a customer'scustomer business.
Our most significant resource requirements are qualifiedcompany
drivers, owner-operators, tractors, trailers and related
equipment operating costs (such as fuel and related fuel taxes,
driver pay, insurance and supplies and maintenance). Historically, we have successfully
mitigatedTo mitigate
our risk to fuel price increases, by recoveringwe recover additional fuel
surcharges from our customers additional fuel surcharges that recoup a majority, but not
all, 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-operatorowner-
operator availability and the new and used revenue equipment
market. Because we are self-insured for a significant portion of
bodily injury, property damage and cargo claims and for workers'
compensation benefits and health claims for our employees
(supplemented by premium-
basedpremium-based insurance coverage above certain
dollar levels), financial results may also be affected by driver
safety, medical costs, weather, legal and regulatory environments
and insurance coverage costs to protect against catastrophic
losses.
The 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 our normal
replacement cycle for tractors is three years, we
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 approximates the
continuing declining market value of the tractors) 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.
We continually monitor the adequacy of the lives and
salvage values used in calculating depreciation expense
and adjust these assumptions appropriately when warranted.
* Impairment of long-lived assets. We review our long-lived
assets for impairment whenever events or circumstances
indicate 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 the carrying amount exceeds its fair
value. For long-lived assets classified as held and used,
the carrying amount is not recoverable when the carrying
value of the long-lived asset exceeds the sum of the
32
future net cash flows. We do not separately identify
assets by operating segment because tractors and trailers
are routinely transferred from one operating fleet to
another. As a result, none of our 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 of our assets.
Long-lived
assets classified as "held for sale" 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 noncurrent) are recorded at the estimated ultimate
30
payment amounts and 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. An actuary reviews
our self-insurance reserves for 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-operators under contract with us) is utilized to
provide some or all of the service and we (i) are the
primary obligor in regard to the shipment delivery, (ii)
establish customer pricing separately from carrier rate
negotiations, (iii) generally have discretion in carrier
selection and/or (iv) have credit risk on the shipment, we
record both revenues for the dollar value of services we
bill to the customer and rent and purchased transportation
expense for transportation costs we pay to the third-party
provider upon the shipment's delivery. In the absence of
the conditions listed above, we record revenues net of
those expenses related to third-party providers.
* Accounting for income taxes. Significant management
judgment is required to determine (i) the provision for
income taxes, to determine(ii) whether deferred income taxes will be
realized in full or in part and to determine(iii) the liability for
unrecognized tax benefits in accordance with the
provisions of FIN 48 (which we adopted January
1, 2007).48. Deferred income tax assets and
liabilities are measured using enacted tax rates that are
expected to apply to taxable income in the years when
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 our profitable operations. Accordingly,
if facts or financial circumstances changedchange and
consequently impactedimpact the likelihood of realizing the
deferred income tax assets, we would need to apply
management's judgment to determine the amount of valuation
allowance required in any given period.
* Allowance for doubtful accounts. The allowance for
doubtful accounts is our estimate of the amount of
probable credit losses in our existing accounts
receivable. We review the financial condition of
customers for granting credit and monitor changes in
customers' financial conditions on an ongoing basis. We
determine the allowance based on our historical write-off
experience and national economic conditions. During
2008, numerous significant events affected the U.S.
financial markets and resulted in a significant reduction
of credit availability and liquidity. Consequently, we
believe some of our customers may be unable to obtain or
retain adequate financing to support their businesses in
the future. We anticipate that because of these combined
factors, some of our customers may also be compelled to
restructure their businesses or may be unable to pay
amounts owed to us. We have formal policies in place to
continually monitor credit extended to customers and to
manage our credit risk. We maintain credit insurance for
some customer accounts. We evaluate the adequacy of our
allowance for doubtful accounts quarterly and believe our
allowance for doubtful accounts is adequate based on
information currently available.
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 our results of operations from period-to-period.
Inflationperiod to period.
33
Inflation:
Inflation may impact our operating costs. A prolonged
inflation period could cause rises in interest rates, fuel, wages
and other costs. These inflationary increases could adversely
affect our 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
We are exposed to market risk from changes in interest
rates, commodity prices and foreign currency exchange rates.
Interest Rate Risk
We had no$30.0 million of variable rate debt outstanding at
December 31, 2007.2008. Interest rates on the variable rate debt and
our unused credit facilities are based on the LIBOR. Increases
in interest rates could impact our annual interest expense on
future borrowings. Assuming this level of borrowings, a
hypothetical one-percentage point increase in the LIBOR interest
rate would increase our annual interest expense by $300,000. As
of December 31, 2007,2008, we do not have any derivative financial
instruments to reduce our exposure to interest rate increases.
31
Commodity Price Risk
The price and availability of diesel fuel are subject to
fluctuations attributed to changes in the level of global oil
production, refining capacity, seasonality, weather and other
market factors. Historically, we have recovered a significant
portionmajority, but
not all, of fuel price increases from customers in the form of
fuel surcharges. We implemented customer fuel surcharge programs
with most of our revenue basecustomers to offset much of the higher fuel cost
per gallon. However, we do not recover all of the fuel cost
increase through these surcharge programs. We cannot predict the
extent to which higher
fuel price levelsprices will continueincrease or decrease in the
future or the extent to which fuel surcharges could be collected to offset such
increases.collected.
As of December 31, 2007,2008, we had no derivative financial
instruments to reduce our exposure to fuel price fluctuations.
Foreign Currency Exchange Rate Risk
We conduct business in several foreign countries, including
Mexico, Canada and Asia.China. Foreign currency transaction losses
were $7.0 million for 2008 and were recorded in accumulated other
comprehensive loss within stockholders' equity in the
Consolidated Balance Sheets. Amounts of gains and losses were not material to our
results of operations for
2007 and prior years.2006 were not material. To date, most foreign revenues
are denominated in U.S. Dollars, and we receive payment for
foreign freight services primarily in U.S. Dollars to reduce
direct foreign currency risk. Accordingly, weAssets and liabilities maintained
by subsidiary companies in the local currency are not
currently subject to
material risks involving anyforeign exchange gains or losses. The foreign currency
transaction losses for 2008 were primarily related to changes in
the value of revenue equipment owned by a subsidiary in Mexico,
whose functional currency is the Peso. The exchange rate between
the Mexico Peso and the effects that such exchange rate
movements would have on our future costs or future cash flows.
32U.S. Dollar was 13.54 Pesos to $1.00 at
December 31, 2008 compared to 10.87 Pesos to $1.00 at December
31, 2007.
34
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 (the Company) as of
December 31, 20072008 and 2006,2007, 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, 2007.2008. 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-yearthree-
year period ended December 31, 2007,2008, 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, 20072008 and 2006,2007, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2007,2008, in conformity with
U.S. generally accepted accounting principles. Also in our
opinion, the related financial statement schedule, 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),
Werner Enterprises, Inc.'s internal control over financial
reporting as of December 31, 2007,2008, 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 18, 200827, 2009 expressed an
unqualified opinion on the effectiveness of the Company's
internal control over financial reporting.
KPMG LLP
Omaha, Nebraska
February 18, 2008
3327, 2009
35
WERNER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Years Ended December 31,
--------------------------------------
2008 2007 2006 2005
---------- ---------- ----------
Operating revenues $2,165,599 $2,071,187 $2,080,555 $1,971,847
---------- ---------- ----------
Operating expenses:
Salaries, wages and benefits 586,035 598,837 594,783
574,893
Fuel 508,594 408,410 388,710 340,622
Supplies and maintenance 163,524 159,843 155,304 154,719
Taxes and licenses 109,443 117,170 117,570 118,853
Insurance and claims 104,349 93,769 92,580
88,595
Depreciation 167,435 166,994 167,516 162,462
Rent and purchased transportation 397,887 387,564 395,660 354,335
Communications and utilities 19,579 20,098 19,651
20,468
Other (4,182) (18,015) (15,720) (7,711)
---------- ---------- ----------
Total operating expenses 2,052,664 1,934,670 1,916,054 1,807,236
---------- ---------- ----------
Operating income 112,935 136,517 164,501 164,611
---------- ---------- ----------
Other expense (income):
Interest expense 83 2,977 1,196
672
Interest income (3,972) (3,989) (4,407)
(3,381)
Other (198) 247 319 261
---------- ---------- ----------
Total other income (4,087) (765) (2,892) (2,448)
---------- ---------- ----------
Income before income taxes 117,022 137,282 167,393
167,059
Income taxes 49,442 61,925 68,750 68,525
---------- ---------- ----------
Net income $ 67,580 $ 75,357 $ 98,643 $ 98,534
========== ========== ==========
Earnings per share:
Basic $ 0.96 $ 1.03 $ 1.27 $ 1.24
========== ========== ==========
Diluted $ 0.94 $ 1.02 $ 1.25 $ 1.22
========== ========== ==========
Weighted-average common shares outstanding:
Basic 70,752 72,858 77,653 79,393
========== ========== ==========
Diluted 71,658 74,114 79,101 80,701
========== ========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
3436
WERNER ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
December 31,
------------------------
ASSETS 2008 2007 2006
---------- ----------
Current assets:
Cash and cash equivalents $ 25,09048,624 $ 31,61325,090
Accounts receivable, trade, less allowance
of $9,555 and $9,765, and $9,417, respectively 185,936 213,496 232,794
Other receivables 18,739 14,587 17,933
Inventories and supplies 10,644 10,747 10,850
Prepaid taxes, licenses, and permits 16,493 17,045 18,457
Current deferred income taxes 30,789 26,702 25,251
Other current assets 20,659 21,500 24,143
---------- ----------
Total current assets 331,884 329,167 361,041
---------- ----------
Property and equipment, at cost:
Land 28,643 27,947 26,945
Buildings and improvements 125,631 121,788 118,910
Revenue equipment 1,281,688 1,284,418 1,372,768
Service equipment and other 177,140 171,292 168,597
---------- ----------
Total property and equipment 1,613,102 1,605,445 1,687,220
Less - accumulated depreciation 686,463 633,504 590,880
---------- ----------
Property and equipment, net 926,639 971,941 1,096,340
---------- ----------
Other non-current assets 16,795 20,300 20,792
---------- ----------
$1,275,318 $1,321,408 $1,478,173
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 46,684 $ 49,652
$ 75,821Current portion of long-term debt 30,000 -
Insurance and claims accruals 79,830 76,189 73,782
Accrued payroll 25,850 21,753 21,344
Other current liabilities 19,006 19,395 19,963
---------- ----------
Total current liabilities 201,370 166,989 190,910
---------- ----------
Long-term debt, net of current portion - 100,000
Other long-term liabilities 7,406 14,165 999
Deferred income taxes 200,512 196,966 216,413
Insurance and claims accruals, net of current
portion 120,500 110,500 99,500
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value, 200,000,000
shares authorized; 80,533,536
shares issued; 70,373,18971,576,267 and 75,339,29770,373,189
shares outstanding, respectively 805 805
Paid-in capital 93,343 101,024 105,193
Retained earnings 826,511 923,411 862,403
Accumulated other comprehensive loss (7,146) (169) (207)
Treasury stock, at cost; 10,160,3478,957,269 and
5,194,23910,160,347 shares, respectively (167,983) (192,283) (97,843)
---------- ----------
Total stockholders' equity 745,530 832,788 870,351
---------- ----------
$1,275,318 $1,321,408 $1,478,173
========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
3537
WERNER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
-------------------------------------
2008 2007 2006 2005
--------- --------- ---------
Cash flows from operating activities:
Net income $ 67,580 $ 75,357 $ 98,643 $ 98,534
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation 167,435 166,994 167,516 162,462
Deferred income taxes (5,685) (8,571) 2,234 (37,380)
Gain on disposal of operating
equipment (9,896) (22,915) (28,393) (11,026)
Stock based compensation 1,455 1,878 2,258 -
Tax benefit from exercise of
stock options - - 1,617
Other long-term assets 631 918 (1,878) (795)
Insurance and claims accruals,
net of current portion 10,000 11,000 4,500 11,000
Other long-term liabilities (194) 571 473 225
Changes in certain working
capital items:
Accounts receivable, net 27,560 19,298 7,430 (53,453)
Prepaid expenses and other
current assets (2,656) 7,504 (1,498)
(14,207)
Accounts payable (2,968) (26,169) 23,434 2,769
Accrued and other current
liabilities 5,868 2,120 9,346 12,746
liabilities
--------- --------- ---------
Net cash provided by operating
activities 259,130 227,985 284,065 172,492
--------- --------- ---------
Cash flows from investing activities:
Additions to property and equipment (206,305) (133,124) (400,548) (414,112)
Retirements of property and equipment 85,324 107,056 158,727 114,903
Decrease in notes receivable 5,615 5,962 5,574 4,957
--------- --------- ---------
Net cash used in investing
activities (115,366) (20,106) (236,247) (294,252)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of short-term
debt 30,000 - - 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 (164,420) (13,953) (13,287) (11,904)
Repurchases of common stock (4,486) (113,821) (85,132) (1,573)
Stock options exercised 13,624 8,789 3,377 2,411
Excess tax benefits from exercise
of stock options 6,026 4,545 2,202 -
--------- --------- ---------
Net cash provided by (used in)used in financing
activities (119,256) (214,440) (52,840) 48,934
--------- --------- ---------
Effect of exchange rate fluctuations
on cash (974) 38 52
602
Net decreaseincrease (decrease) in cash and
cash equivalents 23,534 (6,523) (4,970) (72,224)
Cash and cash equivalents, beginning
of year 25,090 31,613 36,583 108,807
--------- --------- ---------
Cash and cash equivalents, end of
year $ 48,624 $ 25,090 $ 31,613 $ 36,583
========= ========= =========
Supplemental disclosures of cash flow
information:
Cash paid during year for:
Interest $ 28 $ 3,717 $ 566
$ 561
Income taxes 53,562 65,111 68,941 99,170
Supplemental disclosures of non-cash
investing activities:
Notes receivable issued upon sale
of revenue equipment $ 2,741 $ 6,388 $ 8,965 $ 8,164
The accompanying notes are an integral part of these consolidated
financial statements.
3638
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, 20042005 $805 $106,695 $691,035 $(861)$105,074 $777,260 $ (24,505) $773,169
Purchases of 88,000 shares
of common stock - - - - (1,573) (1,573)
Dividends on common stock
($.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$862,451
Purchases of 4,500,000 shares
of common stock - - - - (85,132) (85,132)
Dividends on common stock
($.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
------------- -------- -------- ------------ --------- --------
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 805 101,024 923,411 (169) (192,283) 832,788
Purchases of 250,000 shares
of common stock - - - - (4,486) (4,486)
Dividends on common stock
($2.300 per share) - - (164,480) - - (164,480)
Exercise of stock options,
1,453,078 shares, including
excess tax benefits - (9,136) - - 28,786 19,650
Stock-based compensation
expense - 1,455 - - - 1,455
Comprehensive income (loss):
Net income - - 67,580 - - 67,580
Foreign currency translation
adjustments - - - (6,977) - (6,977)
------ -------- -------- ------- --------- --------
Total comprehensive
income (loss) - - 67,580 (6,977) - 60,603
------ -------- -------- ------- --------- --------
BALANCE, December 31, 2008 $805 $101,024 $923,411 $(169) $(192,283) $832,788
=======$ 93,343 $826,511 $(7,146) $(167,983) $745,530
====== ======== ======== ============ ========= ========
The accompanying notes are an integral part of these consolidated
financial statements.
3739
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
federal and provincial Transportation Departments in Canada, the
Secretary of Communication and Transportation in Mexico and
various U.S. state regulatory commissions. We maintain a
diversified freight base and are not dependent on a specific
industry for a majority of our freight, which limits
concentrations of credit risk. OneNo customer generated approximately 8%more than
10% of total revenues in 2008 and 2007, and one customer
generated 11% in 2006 and 10%
in 2005.2006.
Principles of Consolidation
The accompanying consolidated financial statements include
the accounts of Werner Enterprises, Inc. and our 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 (ii) reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents
We consider all highly liquid investments, purchased with a
maturity of three months or less, to be cash equivalents.
Trade Accounts Receivable
We record trade accounts receivable at the invoiced amounts,
net of an allowance for doubtful accounts. The allowance for
doubtful accounts is our best estimate of the amount of probable
credit losses in our existing accounts receivable. We review the
financial condition of customers prior tofor granting credit. Wecredit and
determine the allowance based on historical write-off experience
and national economic data.conditions. We evaluate the adequacy of
our 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.
We do not have any off-balance-sheet credit exposure related to
our 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. Tires
placed on new revenue equipment are capitalized as a part of the
equipment cost. Replacement tires are expensed when placed in
service.
3840
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, 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 (ii) fair
value of the new equipment.
Depreciation is calculated based on the cost of the asset,
reduced by the 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 our normal replacement cycle for tractors is three
years, we 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 approximates the continuing
declining value of the tractors) 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 our five-year life and 25%
salvage value, as compared to a three-year life and 55% salvage
value.
Long-Lived Assets
We review our long-lived assets for impairment whenever
events or circumstances indicate 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 the carrying amount exceeds its fair value. For
long-lived assets classified as held and used, the carrying
amount is not recoverable when the carrying value of the long-
lived asset exceeds the sum of the future net cash flows. We do
not separately identify assets by operating segment because
tractors and trailers are routinely transferred from one
operating fleet to another. As a result, none of our 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
of our assets.
Long-lived assets classified as "held for sale"
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 current and 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 not covered by insurance. The costs
for cargo, bodily injury and BI/PDproperty damage insurance and claims
are included in insurance and claims expense in the Consolidated
Statements of Income; the costs of group health and workers'
compensation claims are included in salaries, wages and benefits
expense. The insurance and claims accruals are recorded at the
estimated ultimate payment amounts. 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 not differed
39
materially from estimated accrued amounts for all years
presented. An actuary reviews our self-insurance reserves for
bodily injury and property damage claims and workers'
compensation claims every six months.
We were responsible for liability claims up to $500,000,
plus administrative expenses, for each occurrence involving
bodily injury or property damage since August 1, 1992. For the
policy year beginning August 1, 2004, we increased our self-
41
insured retention ("SIR") and deductible amount to $2.0 million
per occurrence. We are also responsible for varying annual
aggregate amounts of liability for claims in excess of the
SIR/deductible. The following table reflects the SIR/deductible
levels and aggregate amounts of liability for bodily injury and
property damage claims since August 1, 2004:2005:
Primary Coverage
Coverage Period Primary Coverage SIR/Deductible
- -------------------------------- ---------------- ---------------------------------- ------------------
August 1, 2004 - July 31, 2005 $5.0 million $2.0 million (1)
August 1, 2005 - July 31, 2006 $5.0 million $2.0 million (2)(1)
August 1, 2006 - July 31, 2007 $5.0 million $2.0 million (2)(1)
August 1, 2007 - July 31, 2008 $5.0 million $2.0 million (2)
August 1, 2008 - July 31, 2009 $5.0 million $2.0 million (3)
(1) Subject to an additional $3.0$2.0 million aggregate in the $2.0
to $3.0 million layer, no 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 $2.0$8.0 million aggregate in the $2.0
to $3.0 million layer, no 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.
(3) Subject to an additional $8.0 million aggregate in the $2.0
to $5.0 million layer and a $5.0$4.0 million aggregate in the $5.0
to $10.0 million layer.
Our primary insurance covers the range of liability under
which we expect most claims to occur. If any liability claims
are substantially in excess of coverage amounts listed in the
table above, such claims are covered under premium-based policies
(issued by reputable insurance companies) to coverage levels that our
management considers adequate. We are also responsible for
administrative expenses for each occurrence involving bodily
injury or property damage.
We assumed responsibility for workers' compensation up to
$1.0 million per claim. 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 aggregate for claims
between $1.0 million and $2.0 million. We also maintain a $25.4$26.3
million bond and obtained insurance for individual claims above
$1.0 million.
Under these insurance arrangements, we maintain $33.6$43.9
million in letters of credit as of December 31, 2007.2008.
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-
operators under contract with us) is utilized to provide some or
all of the service and we (i) are the primary obligor in regard
to the shipment delivery, (ii) establish customer pricing
separately from carrier rate negotiations, (iii) generally have
discretion in carrier selection and/or (iv) have credit risk on
the shipment, we record both revenues for the dollar value of
services we bill to the customer and rent and purchased
transportation expense for transportation costs we pay to the
third-party provider upon the shipment's delivery. In the
absence of the conditions listed above, we record revenues net of
those expenses related to third-party providers.
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. Most foreign revenues are denominated in
U.S. 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 foreign
operations for the years ended December 31, 2008, 2007 2006, and 2005.
The amounts of such translation adjustments2006.
Foreign currency transaction losses were $7.0 million for 2008
and are recorded in accumulated other comprehensive loss within
stockholders' equity in the Consolidated Balance Sheets. Amounts
for 2007 and 2006 were not significant
40material.
42
for all years presented (see the Consolidated Statements of
Stockholders' Equity and Comprehensive Income).
Income Taxes
We 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
We compute and present 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-weighted average number of
common shares outstanding during the period. The difference betweenDiluted earnings
per share is computed by dividing net income by the weighted
average number of common shares plus the effect of dilutive
potential common shares outstanding during the period using the
treasury stock method. Dilutive potential common shares include
outstanding stock options and stock awards. There are no
differences in the numerators of our computations of basic and
diluted earnings per share for allany periods presented is due to the Common Stock equivalents that
are assumed to be issued upon the exercise of stock options.
There are no differences in the numerator of our 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,
----------------------------------------------------------------
2008 2007 2006 2005
-------- -------- --------
Net income $ 67,580 $ 75,357 $ 98,643
$ 98,534
======== ======== ========
Weighted-averageWeighted average common
shares outstanding 70,752 72,858 77,653 79,393
Common stock equivalents 906 1,256 1,448 1,308
-------- -------- --------
Shares used in computing
diluted earnings per share 71,658 74,114 79,101 80,701
======== ======== ========
Basic earnings per share $ .96 $ 1.03 $ 1.27 $ 1.24
======== ======== ========
Diluted earnings per share $ .94 $ 1.02 $ 1.25 $ 1.22
======== ======== ========
Options to purchase shares of Common Stockcommon 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,
--------------------------------------------------------------------------------------
2008 2007 2006
2005
------------ ------------ ------------------------- -------------
Number of shares under option 23,600 29,500 24,500
19,500
OptionRanges of option purchase price $19.26-20.36prices $19.84-20.36 $ 19.8419.26-20.36 $ 19.84-20.36
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, 2008,
2007, 2006, and 2005,2006, comprehensive income consists of net income and
foreign currency translation adjustments.
41
Accounting Standards
In February 2006, the FASB issued SFAS No. 155, Accounting
for Certain Hybrid Financial Instruments-An Amendment of FASB
Statements No. 133 and 140 ("No. 155"). This Statement amends
SFAS 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 ("No. 140"). SFAS No. 155 eliminates the
exemption from applying SFAS 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 were effective for all
financial instruments acquired or issued after the beginning of
the first fiscal year that began after September 15, 2006. Upon
adoption, SFAS No. 155 had no effect on our financial position,
results of operations and cash flows.
In March 2006, the FASB issued SFAS No. 156, Accounting for
Servicing of Financial Assets-An Amendment of FASB Statement No.
140 ("No. 156"). This Statement amends SFAS No. 140 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 were effective as of the beginning
of the first fiscal year that began after September 15, 2006.
Upon adoption, SFAS No. 156 had no effect on our financial
position, results of operations and cash flows.
In July 2006, the FASB issued FIN 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, FIN
48 provides guidance on the derecognition, classification,
accounting in interim periods, and disclosure requirements for
uncertain tax positions. We adopted the provisions of FIN 48 on
January 1, 2007 and as a result, recognized an additional $0.3
million liability for unrecognized tax benefits, which was
accounted for as a reduction of retained earnings.
In September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements ("No. 157"). This Statementstatement defines fair value,
establishes a framework for measuring fair value in generally
accepted accounting principles and expands disclosures about fair
value measurements. The provisions of SFAS No. 157 aredoes not require any new fair
value measurements but rather eliminates inconsistencies in
guidance found in various prior accounting pronouncements and was
43
effective as of the beginning of the firstfor fiscal yearyears beginning after November 15, 2007. In
February 2008, the FASB issued FASB Staff Position No. 157-2
("FSP No. 157-2"). FSP No. 157-2 delays the effective date of
SFAS No. 157 for all nonfinancial assets and nonfinancial
liabilities, except those that are recognized or disclosed at
fair value in the financial statements on a recurring basis (at
least annually), until fiscal years beginning after November 15,
2008 and interim periods within those fiscal years. These
nonfinancial items include assets and liabilities such as
reporting units measured at a fair value in a goodwill impairment
test and nonfinancial assets acquired and liabilities assumed in
a business combination. Effective January 1, 2008, we adopted
SFAS No. 157 for financial assets and liabilities recognized at
fair value on a recurring basis. The partial adoption of SFAS
No. 157 for financial assets and liabilities had no effect on our
financial position, results of operations and cash flows. As of
December 31, 2007,2008, management believes that fully adopting 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 arewere effective as of the beginning of
the first fiscal year that begins after November 15, 2007. As of
December 31, 2007, management believes thatUpon
adoption, SFAS No. 159 will not
have a materialhad no effect on our financial position,
results of operations and cash flows.
In December 2007, the FASB issued SFAS No. 141 (revised
2007), Business Combinations ("No. 141R"). This statement
establishes requirements for (i) recognizing and measuring in an
acquiring company's financial statements the identifiable assets
acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree, (ii) recognizing and measuring the
goodwill acquired in the business combination or a gain from a
bargain purchase and (iii) determining what information to
disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination.
The provisions of SFAS No. 141R are effective for business
combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or
after December 15, 2008. As of December 31, 2007,2008, management
believes that SFAS No. 141R will not have a material effect on
our financial position, results of operations and cash flows.
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
ARBAccounting Research Bulletin No. 51 to establish accounting and
reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. The
provisions of SFAS No. 160 42
are effective for fiscal years, and
interim periods within those fiscal years, beginning on or after
December 15, 2008. As of December 31, 2007,2008, management believes
that SFAS No. 160 will not have a material effect on our
financial position, results of operations and cash flows.
In March 2008, the FASB issued SFAS No. 161, Disclosures
about Derivative Instruments and Hedging Activities-an amendment
of FASB Statement No. 133 ("No. 161"). This statement amends
FASB Statement No. 133 to require enhanced disclosures about an
entity's derivative and hedging activities. The provisions of
SFAS No. 161 are effective for fiscal years, and interim periods
within those fiscal years, beginning on or after November 15,
2008. As of December 31, 2008, management believes that SFAS No.
161 will not have a material effect on our financial position,
results of operations and cash flows.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of
Generally Accepted Accounting Principles ("No. 162"). This
statement identifies the sources of and framework for selecting
the accounting principles to be used in the preparation of
financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting
principles ("GAAP") in the United States ("GAAP hierarchy").
Because the current GAAP hierarchy is set forth in the American
Institute of Certified Public Accountants Statement on Auditing
Standards No. 69, it is directed to the auditor rather than to
the entity responsible for selecting accounting principles for
financial statements presented in conformity with GAAP.
Accordingly, the FASB concluded the GAAP hierarchy should reside
44
in the accounting literature established by the FASB and issued
this statement to achieve that result. The provisions of SFAS
No. 162 became effective on November 15, 2008, which was 60 days
following the U.S. Securities and Exchange Commission's approval
of the Public Company Accounting Oversight Board amendments to AU
Section 411, The Meaning of Present Fairly in Conformity with
Generally Accepted Accounting Principles. Upon adoption, SFAS
No. 162 had no effect on our current accounting practices or on
our financial position, results of operations and cash flows.
(2) LONG-TERM DEBT
Long-term debt consisted of the following at December 31 (in
thousands):
2008 2007
2006
----------------- ---------
Notes payable to banks under
committed credit facilities $ 30,000 $ -
$ 100,000-------- ---------
---------30,000 - 100,000
Less current portion 30,000 -
-
----------------- ---------
Long-term debt, net $ - $ 100,000
=========-
======== =========
As of December 31, 20072008 we have two committed credit
facilities with banks totaling $225.0 million whichthat mature in May
2009 ($50.0 million) and May 2011 ($175.0 million). Borrowings
under these credit facilities bear variable interest (2.0% at
December 31, 2008) based on the London Interbank Offered Rate
("LIBOR"). As of December 31, 2007,2008, we had no borrowings outstandingborrowed $30.0
million under these credit facilities with banks. During first
quarter 2009, we repaid the total $30.0 million on these notes.
The $225.0 million of credit available under these facilities is
further reduced by $33.6$43.9 million in letters of credit under which
we are obligated. Each of the debt agreements include,includes, among
other things, two 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 defined in theeach credit
facility). We were in compliance with these covenants at
December 31, 2007.2008.
The carrying amounts of our long-term debt approximates fair
value due to the duration of the notes and the interest rates.
(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):
2008 2007 2006
-------- --------
Owner-operator notes receivable $ 13,1779,392 $ 13,29813,177
TDR Transportes, S.A. de C.V. 3,600 3,600
Other notes receivable 5,046 5,124 4,786
-------- --------
18,038 21,901 21,684
Less current portion 4,085 5,074 5,283
-------- --------
Notes receivable - non-current $ 16,82713,953 $ 16,40116,827
======== ========
We provide financing to some independent contractors who
want to become owner-operators by purchasing a tractor from us
and leasing their truck to us. At December 31, 2008, we had 232
notes receivable from these owner-operators and at December 31,
2007, we had 307 notes receivable totaling $13,177 (in thousands) from these
owner-operators. At December 31, 2006, we had 315 such notes receivable that totaled $13,298 (in thousands).receivable. See Note 7 for
information regarding notes from related parties. We maintain a
firstprimary security interest in the tractor until the owner-operator
pays the note balance in full. We also retain recourse exposure
related to owner-operators who purchased tractors from us with
third-party financing we arranged.
45
During 2002, we loaned $3,600 (in thousands)$3.6 million 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. Such loan (i) is subject to acceleration if certain
conditions are met, (ii) bears interest at a rate of 5% per annum
(which is payable quarterly), (iii) contains certain financial
and other covenants and (iv) is collateralized by the assets of
TDR. We had a receivable for interest on this note of $31 (in thousands)$31,000 as
of December 31, 20072008 and 2006.2007. See Note 7 for information
regarding related party transactions.
43
(4) INCOME TAXES
Income tax expense consisted of the following (in
thousands):
2008 2007 2006 2005
-------- -------- --------
Current:
Federal $ 47,575 $ 62,026 $ 59,021
$ 93,715
State 7,552 8,470 7,495 12,190
-------- -------- --------
55,127 70,496 66,516 105,905
-------- -------- --------
Deferred:
Federal (3,735) (6,698) 1,149
(32,910)
State (1,950) (1,873) 1,085 (4,470)
-------- -------- --------
(5,685) (8,571) 2,234 (37,380)
-------- -------- --------
Total income tax expense $ 49,442 $ 61,925 $ 68,750 $ 68,525
======== ======== ========
The effective income tax rate differs from the federal
corporate tax rate of 35% in 2008, 2007 2006 and 20052006 as follows (in
thousands):
2008 2007 2006 2005
-------- -------- --------
Tax at statutory rate $ 40,958 $ 48,049 $ 58,588 $ 58,471
State income taxes, net of
federal tax benefits 3,641 4,288 5,577 5,018
Non-deductible meals and
entertainment 4,158 4,799 4,329
4,340
Anticipated incomeIncome tax settlement - 4,000 - -
Income tax credits (752) (790) (740)
(895)
Other, net 1,437 1,579 996 1,591
-------- -------- --------
$ 49,442 $ 61,925 $ 68,750 $ 68,525
======== ======== ========
At December 31, deferred tax assets and liabilities
consisted of the following (in thousands):
2008 2007 2006
--------- ---------
Deferred tax assets:
Insurance and claims accruals $ 73,27678,901 $ 67,43273,276
Allowance for uncollectible accounts 5,175 4,777
4,517
Other 8,280 9,226 4,041
--------- ---------
Gross deferred tax assets 92,356 87,279 75,990
--------- ---------
Deferred tax liabilities:
Property and equipment 252,609 247,133 253,192
Prepaid expenses 7,290 7,693
8,241
Other 2,180 2,717 5,719
--------- ---------
Gross deferred tax liabilities 262,079 257,543 267,152
--------- ---------
Net deferred tax liability $ 170,264169,723 $ 191,162170,264
========= =========
46
These amounts (in thousands) are presented in the
accompanying Consolidated Balance Sheets as of December 31 as
follows:
2008 2007 2006
--------- ---------
Current deferred tax asset $ 26,70230,789 $ 25,25126,702
Noncurrent deferred tax liability 200,512 196,966 216,413
--------- ---------
Net deferred tax liability $ 170,264169,723 $ 191,162170,264
========= =========
We have not recorded a valuation allowance asbecause we
believe that all deferred tax assets are more likely than not to
be realized as a result of our history ofhistorical 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 IRSInternal Revenue Service ("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 ServiceIRS appeals
officer. During fourth quarter 2007, we also accrued in income
taxestax expense in our Consolidated Statements of Income the
estimated cumulative interest charges for the anticipated
settlement of this matter, net of income taxes, which amountsamounted to
$4.0 million, or $.05$0.05 per share. During second quarter 2008,
the appeals officer received the concurrence of the Joint
Committee of Taxation with regard to the recommended basis of
settlement. The IRS finalized the settlement during third
quarter 2008, and we paid the federal accrued interest at the
beginning of October 2008. We filed amended state returns
reporting the IRS settlement changes to the states where required
during fourth quarter 2008. We are now working with those states
to settle our state interest liabilities. Our total payments
during 2008, before considering the tax benefit from the
deductibility of these payments, were $4.9 million for federal
and $0.4 million to various states. We expect to pay about $1
million to settle the remaining state liabilities.
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 iswas included in other long-term liabilities.
If recognized, $3.4 million of unrecognized tax benefits as of
the adoption date would impact our effective tax rate. Interest
of $1.4 million has been reflected as a component of the total
liability.liability as of the adoption date. It is our policy to recognize
as additional income tax expense the items of interest and
penalties directly related to income taxes.
ForWe recognized a $3.8 million decrease in 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
expensethe year ended December 31,
2008 and which increased our effective tax rate.a $4.4 million increase in the net liability for the
year ended December 31, 2007. The amount2008 decrease is due primarily to a tentativethe
settlement agreement with the IRS and related payment of interest and taxes
for tax years 1999 through 2002, as discussed above. We accrued
an interest benefit of $4.9 million during 2008 and interest
expense of $7.2 million during 2007. Our total gross liability
for unrecognized tax benefits at December 31, 2008 is $7.4
million and at December 31, 2007 iswas $12.6 million. If
recognized, $7.8$4.0 million of unrecognized tax benefits as of
December 31, 2008 and $7.8 million as of December 31, 2007 would
impact our effective tax rate. Interest of $3.7 million as of
December 31, 2008 and $8.6 million as of December 31, 2007 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.
47
The reconciliations of beginning and ending gross balances
of unrecognized tax benefits for 2008 and 2007 are shown below
(in thousands).
2008 2007
-------- --------
Unrecognized tax benefits, opening balance $ 12,594 $ 5,338
Gross increases - tax positions in prior period 635 7,256
Gross decreases - tax positions in prior period - -
Gross increases - current-period tax positions - -
Settlements (5,779) -
Lapse of statute of limitations - -
-------- --------
Unrecognized tax benefits, ending balance $ 7,450 $ 12,594
======== ========
We file U.S. federal income tax returns, as well as income
tax returns in various states and several foreign jurisdictions.
The IRS has completed its audits for tax years 2003 through 20072005, and
all resulting adjustments as discussed above have been settled.
The IRS completed its audit of our 2005 federal income tax return
and in 2008, issued a "no change letter" for tax year 2005, under
which the IRS did not propose any adjustment to the tax return.
The years 2006 through 2008 are subject toopen for examination by the IRS,
and various years are subject toopen for examination by state and foreign
tax authorities. The reconciliationState and foreign jurisdiction statutes 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
==========
limitations generally range from three to four years.
(5) EQUITY COMPENSATION AND EMPLOYEE BENEFIT PLANS
Equity Plan
Our Equity Plan provides for grants of nonqualified stock
options, restricted stock and stock appreciation rights. Options
are granted at prices equal to the market value of the Common
Stock on the date the option is granted. The
Board of Directors or the Compensation Committee willof our Board of
Directors determine the terms of each award, including type of
award, recipients, number of shares subject to each award and
vesting conditions of theeach award. OptionStock option and restricted
stock awards currently outstanding
become exercisable in installments from eighteen 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.described below. No awards of restricted stock or stock
appreciation rights have been issued.issued to date. The maximum number
of shares of Common
Stockcommon stock that may be awarded under the Equity
Plan is 20,000,000
45
shares. The maximum aggregate number of
shares that may be awarded to any one person under the Equity
Plan is 2,562,500. As of December 31, 2007,2008, there were 8,568,0078,669,682
shares available for granting additional awards.
Effective January 1, 2006, we 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 January 1,
2006 for (i) the portion of outstanding awards that were not
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 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 was $1.5 million in
2008, $1.9 million in 2007 and $2.3 million in 2006 and2006. Stock-based
employee compensation expense is included in salaries, wages and
benefits within the Consolidated Statements of Income. The total
income tax benefit recognized in the Consolidated Statements of
Income for stock-based compensation arrangements was $0.6 million
in 2008, $0.8 million in 2007 and $0.9 million in 2006. There
was no cumulative effect of initially adopting SFAS No. 123R. As
of December 31, 2008, the total unrecognized compensation cost
related to nonvested stock-based compensation awards was
approximately $2.8 million and is expected to be recognized over
a weighted average period of 1.7 years.
We do not a have a formal policy for issuing shares upon
exercise of stock options or vesting of restricted stock, so such
shares are generally issued from treasury stock. From time to
time, we repurchase shares of our common stock, the timing and
amount of which depends on market and other factors.
Historically, the shares acquired under these regular repurchase
programs have provided us with sufficient quantities of stock to
issue for stock-based compensation. Based on current treasury
48
stock levels, we do not expect to repurchase additional shares
specifically for stock-based compensation during 2009.
Stock Options
Stock options are granted at prices equal to the market
value of the common stock on the date the option award is
granted. Option awards currently outstanding become exercisable
in installments from twenty-four to seventy-two months after the
date of grant. The options are exercisable over a period not to
exceed ten years and one day from the date of grant.
The following table summarizes Stock Option Planstock option activity for the
year ended December 31, 2007:2008:
Weighted Aggregate
Number of Weighted Average Aggregate
ofIntrinsic
Options Average Remaining Intrinsic
OptionsValue
(in Exercise Contractual Value
(in
000's)thousands) Price ($) Term (Years) (in 000's)
----------------------------------------------------thousands)
------------------------------------------------------
Outstanding at beginning of period 4,565 $11.033,854 $12.23
Options granted 330 $17.18- $ -
Options exercised (1,034)(1,453) $ 8.509.38
Options forfeited (5) $17.05(132) $17.56
Options expired (2) $ 8.65
--------(5) $17.87
---------
Outstanding at end of period 3,854 $12.23 4.82 $19,594
========2,264 $13.74 4.65 $8,819
=========
Exercisable at end of period 2,825 $10.28 3.69 $19,499
========1,562 $12.05 3.49 $8,659
=========
We granted 329,500did not grant any stock options during the year ended
December 31, 2007;2008. We granted 329,500 stock options in 2007 and
5,000 in 2006; and 415,500 in 2005.2006. The fair value of granted stock options wasoption grants is
estimated using a Black-
ScholesBlack-Scholes valuation model with the
following weighted-average assumptions:
Years Ended December 31,
----------------------------------------------------------
2007 2006
2005
-------- -------- -------------------- ------------
Risk-free interest rate 4.3% 4.7% 4.1%4.3 % 4.7 %
Expected dividend yield 1.16% 0.88% 0.94%1.16 % 0.88 %
Expected volatility 34% 36% 36%34 % 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 ten-year U.S. Treasury note yields. We basedcalculated
expected volatility on (i)using historical daily price changes of our
common stock since June 2001 for the options granted in 2007period immediately preceding the grant date
and 2006 and (ii) historical monthly price changesequivalent to the expected term of ourthe stock since
January 1990 for the options granted in 2005.option grant.
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 sharestock options exercised during
20072008 was $15.8 million, $11.0 million in 2007 and $5.4 million in
20062006.
Restricted Stock
Restricted stock awards entitle the holder to shares of
common stock when the award vests. The value of these shares may
fluctuate according to market conditions and $3.9 million in
2005. Asother factors.
Restricted stock awards that have not yet vested will vest sixty
months from the grant date of the award. The restricted shares do
not confer any voting or dividend rights to recipients until such
shares fully vest and do not have any post-vesting sales
restrictions.
49
The following table summarizes restricted stock activity for
year ended December 31, 2007, the total unrecognized
compensation cost related to nonvested2008:
Number of Weighted
Restricted Average
Shares (in Grant Date
thousands) Fair Value($)
---------- -------------
Nonvested at beginning of period - $ -
Shares granted 35 $ 22.88
Shares vested - $ -
Shares forfeited - $ -
----------
Nonvested at end of period 35 $ 22.88
==========
We granted 35,000 shares of restricted stock option awards was
approximately $3.4 million and is expected to be recognized over
a weighted average period of 1.7 years.
46
In periods prior to January 1, 2006, we applied the
intrinsic value-based method of APB Opinion No. 25, Accounting
for Stock Issued to Employees, including related accounting
interpretations for our Equity Plan. No stock-based employee
compensation cost was reflected in net income because all options
granted under the Equity Plan had an exercise price equal to the
market value of the underlying Common Stock on the grant 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 forduring the year
ended December 31, 2005:2008 and did not grant any shares of
restricted stock during 2007 and 2006. We estimate the fair value
of restricted stock awards based upon the market price of the
underlying common stock on the date of grant, reduced by the
present value of estimated future dividends because the awards
are not entitled to receive dividends prior to vesting. The
present value of estimated future dividends was calculated using
the following assumptions:
Year Ended
December 31,
2008
------------
Net income, as reported $ 98,534
Less: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects 1,758
--------
Net income, pro forma $ 96,776
========
EarningsDividends per share:
Basic - as reported $ 1.24
========
Basic - pro forma $ 1.22
========
Diluted - as reported $ 1.22
========
Diluted - pro forma $ 1.20
========share (quarterly amounts) $0.05
Risk-free interest rate 3.0 %
We 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, we repurchase shares of
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 to issue upon exercises of stock
options. Based on current treasury stock levels, we do not
expect the need to repurchase additional shares specifically for
stock option exercises during 2008.
Employee Stock Purchase Plan
Employees that meet certain eligibility requirements may
participate in our 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) that is used to purchase shares of
our Common Stockcommon stock on the over-the-counter market. These purchases
are subject to the terms of the Purchase Plan. We contribute an
amount equal to 15% of each participant's contributions under the
Purchase Plan. Our contributions for the Purchase Plan (in
thousands) were
$162$139,000 for 2008, $162,000 for 2007 $170and $170,000 for 2006 and $119 for 2005.2006.
Interest accrues on Purchase Plan contributions at a rate of
5.25% 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.
401(k) Retirement Savings Plan
We have an Employees' 401(k) Retirement Savings Plan
(the
"401(k)("401(k) Plan"). Employees are eligible to participate in the
401(k) Plan if they have been continuously employed with us or
one of our subsidiaries for six months or more. We match a
portion of each employee's 401(k) Plan elective deferrals. We
may, at our discretion, make an additional annual contribution
for employees so that our total annual contribution for employees
could equal up to 2.5% of net income (exclusive of extraordinary
items). Salaries, wages and benefits expense in the accompanying
Consolidated Statements of Income includes our 401(k) Plan
contributions and administrative expenses, (in thousands)which were a total of
$1,364of $1,663,000 for 2008, $1,364,000 for 2007 $2,270and $2,270,000 for
2006 and $2,268 for 2005.
47
2006.
Nonqualified Deferred Compensation Plan
We have aThe Executive Nonqualified Excess Plan ("Excess Plan") is
our nonqualified deferred compensation plan for the benefit of
eligible key managerial employees whose 401(k) Plan contributions
are limited because of Internal Revenue Service
("IRS")IRS regulations affecting highly
compensated employees. Under the terms of the plan,Excess Plan,
participants may elect to defer compensation on a pre-tax basis
within annual dollar limits we establish. At December 31, 2007,2008,
there were 6764 participants in the nonqualified deferred compensation plan. TheExcess Plan. Through December
31, 2008, the current annual limit iswas determined so that a
50
participant's combined deferrals in both the nonqualified deferred compensation planExcess Plan and the
401(k) Plan approximate the maximum annual deferral amount
available to non-highly compensated employees in the 401(k) Plan.
Beginning January 1, 2009, certain participants will be allowed
to defer combined amounts that exceed the maximum 401(k) deferral
limits for non-highly compensated employees. Although our
current intention is not to do so, we may also make matching
credits and/or profit sharing credits to the participants' accounts
as we so determine each year. Each participant is fully vested
in all deferred compensation and earnings; however, these amounts
are subject to general creditor claims until distributed to the
participant. Under current federal tax law, we are not allowed a
current income tax deduction for the compensation deferred by
participants, but we are allowed a tax deduction when a
distribution payment is made to a participant from the plan.Excess
Plan. The accumulated benefit obligation (in thousands) was $1,270$1,076,000 as of
December 31, 20072008 and $698$1,270,000 as of December 31, 2006.2007. This
accumulated benefit obligation is included in other long-term
liabilities in the Consolidated Balance Sheets. We purchased
life insurance policies to fund the future liability. The life
insurance policies had an aggregate market value (in thousands)
of $1,223$1,049,000 as
of December 31, 20072008 and $688$1,223,000 as of December 31, 2006.2007.
These policy amounts are included in other non-current assets in
the Consolidated Balance Sheets.
(6) COMMITMENTS AND CONTINGENCIES
We have committed to property and equipment purchases of
approximately $48.7$46.6 million.
We 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 materially
affect our consolidated financial statements.
(7) RELATED PARTY TRANSACTIONS
The Company leases land from a trust in which the Company's
principal stockholder is the sole trustee. The annual rent
payments under this lease are $1.00 per year. The Company is
responsible for all real estate taxes and maintenance costs
related to the property, which were $77,000 in 2008 and are
recorded as expenses in the Consolidated Statements of Income.
The Company has made leasehold improvements to the land totaling
approximately $6.1$6.2 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 near one of the Company'sour terminals, and the
Company had committed to rent a guaranteed number of rooms from
that motel.motel to lodge company drivers. The trust assigned its one-
third interest in this entity to the Company at a nominal cost in
February 2005. The Company paid (in thousands) $264$264,000 in 2006 and
$945 in 2005 for lodging
services for company drivers at this motel. On June 30, 2005, the Company sold 0.783 acres of land to
this entity for approximately $90 (in thousands), in accordance
with 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 its two owners (who are unrelated to us)the Company) 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. The Company paid this owner-operator
(in
thousands) $7,502$7,601,000 in 2008, $7,502,000 in 2007 $7,271and $7,271,000 in 2006 and $6,291 in 2005.
This fleet is compensated using the same owner-operator pay
package as the Company's other comparable third-party owner-
operators.2006.
The Company also sells used revenue equipment to this entity.
These sales totaled (in thousands) $622$415,000 in 2008, $622,000 in 2007 $789and
$789,000 in 48
2006 and $1,019 in 2005.2006. The Company recognized gains (in
thousands) of $88$103,000 in
2008, $88,000 in 2007 $68and $68,000 in 2006 and $130 in 2005.2006. From this entity, the
Company also had notes receivable related to the revenue
equipment sales (in thousands) totaling (i) $1,374$1,237,000 at December 31, 2008 for
37 such notes and (ii) $1,374,000 at December 31, 2007 for 40
such notesnotes. This fleet is compensated using the same owner-
operator pay package as the Company's other comparable third-
party owner-operators. The Company believes the terms of the
note agreements and (ii) $1,381 at December
31, 2006 for 40 such notes.the tractor sales prices are no less
favorable to the Company than those that could be obtained from
unrelated third parties, on an arm's length basis.
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$161,000 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
51
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) $425owner-
operator $1,004,000 in 2008 and $425,000 in 2007 for purchased
transportation services. The Company also soldsells used revenue
equipment to this new entity in 2007.entity. These sales totaled (in thousands) $219,$111,000 in
2008 and the$219,000 in 2007. The Company recognized gains (in
thousands) of
$23.$19,000 in 2008 and $23,000 in 2007. 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'sour other comparable third-party owner-operators. The Company
believes the tractor sales prices are no less favorable to the
Company than those that could be obtained from unrelated third
parties, on an arm's length basis.
The Company transacts business with TDR for certain
purchased transportation needs. The Company recorded operatingtrucking
revenues (in thousands) from TDR of approximately $107$134,000 in 2008, $107,000 in
2007 $308and $308,000 in 2006 and $227 in 2005.2006. The Company recorded purchased
transportation expense (in thousands) to TDR of approximately $1,052$437,000 in 2008,
$1,052,000 in 2007 $870and $870,000 in 2006 and $521 in 2005.2006. In addition, the
Company recorded other operating revenues (in thousands) from TDR of
approximately $7,768$8,048,000 in 2008, $7,768,000 in 2007 $4,691and
$4,691,000 in 2006 and $3,582 in 2005
related primarily to primarily revenue equipment
leasing. LeasingThese leasing revenues forinclude $297,000 in 2008 and
$274,000 in 2007 include $274 (in thousands) for leasing a terminal building in Queretaro,
Mexico. The Company also sells used revenue equipment to this
entity. These sales (in thousands)
totaled $1,145$1,334,000 in 2008, $1,145,000 in
2007 $3,697and $3,697,000 in 2006, and $358 in 2005, and the Company recognized net gains
of $90,000 in 2008, net losses (in thousands) of $28$28,000 in 2007, and net gains
(in thousands) of $170$170,000 in 2006 and $19 in 2005.2006. The Company had receivables related to the
equipment leases and revenue equipment sales (in thousands) of $5,048$6,791,000 at
December 31, 20072008 and $2,853$5,048,000 at December 31, 2006.2007. See Note
3 for information regarding the note receivable from TDR.
At December 31, 2007,2008, the Company hashad a 5% ownership
interest in Transplace ("TPC"), a logistics joint venture of five
large transportation companies. The Company enters into
transactions with TPC for certain purchased transportation needs.
The Company recorded operating revenue (in thousands) from TPC of approximately
$826$1,483,000 in 2008, $826,000 in 2007 $2,300and $2,300,000 in 2006 and $4,800 in 2005.2006. The
Company did not record any purchased transportation expense to
TPC in 2008, 2007 2006, or 2005.2006.
The Company believes 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
We have two reportable segments - Truckload Transportation
Services ("Truckload") and Value Added Services ("VAS").
The Truckload segment consists of six operating fleets that
are aggregated because they have similar economic characteristics
and meet the other aggregation criteria of SFAS No. 131,
Disclosures about Segments of an Enterprise and Related
Information ("No. 131"). The Dedicated Services fleetsix operating fleets that comprise
our Truckload segment are as follows: (i) dedicated services
("Dedicated") provides truckload services required by a specific
customer, generally for a distribution center or manufacturing
facility. Thefacility; (ii) the regional short-haul ("Regional") fleet
provides comparable truckload van service within five geographic
regions across the United States; (iii) the medium-to-long-haul
Vanvan ("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
acrosstrailers; (iv) the U.S. The Expeditedexpedited
("Expedited") fleet provides time-sensitive truckload services
utilizing driver teams. The Flatbedteams; and Temperature-Controlledthe (v) flatbed ("Flatbed") and (vi)
temperature-controlled ("Temperature-Controlled") fleets provide
truckload services for products with specialized trailers.
Revenues for the Truckload segment include non-trucking revenues
of $8.6 million for 2008, $10.0 million for 2007 and $11.2
million for 2006 and $12.2 million for 2005.2006. These revenues consist primarily of the
portion of shipments delivered to or from Mexico where we utilize
a third-party capacity provider.
49
The VAS segment generates the majority of our non-trucking
revenues. Therevenues through four operating units that provide non-trucking
services provided by theto our customers. These four VAS segment includeoperating units are
(i) truck brokerage ("Brokerage"), (ii) freight management
52
(single-source logistics) ("Freight Management"), (iii)
intermodal services ("Intermodal") and (iv) Werner Global
Logistics international services.services ("International").
We generate other revenues related to third-party equipment
maintenance, equipment leasing and other business activities.
None of these operations meetmeets the quantitative threshold
reporting requirements of SFAS No. 131. As a result, these
operations are grouped in "Other" in the tabletables below.
"Corporate" includes revenues and expenses that are incidental to
our activities and are not attributable to any of our operating
segments. We do not prepare separate balance sheets by segment
and, as a result, assets are not separately identifiable by
segment. We have no significant intersegment sales or expense
transactions that would require the elimination of revenue
between our segments in the tabletables below.
The following tables summarize our segment information (in
thousands):
Revenues
-------------------
2008 2007 2006 2005
---------- ---------- ----------
Truckload Transportation Services $1,881,803 $1,795,227 $1,801,090 $1,741,828
Value Added Services 265,262 258,433 265,968
218,620
Other 15,306 15,303 10,536
7,777
Corporate 3,228 2,224 2,961 3,622
---------- ---------- ----------
Total $2,165,599 $2,071,187 $2,080,555 $1,971,847
========== ========== ==========
Operating Income
------------------------------------
2008 2007 2006 2005
---------- ---------- ----------
Truckload Transportation Services $ 95,014 $ 121,608 $ 156,509
$ 156,122
Value Added Services 14,570 12,418 7,421
8,445
Other 2,803 3,644 1,731
2,850
Corporate 548 (1,153) (1,160) (2,806)
---------- ---------- ----------
Total $ 112,935 $ 136,517 $ 164,501 $ 164,611
========== ========== ==========
Information about the geographic areas 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
------------------------
2008 2007 2006 2005
---------- ---------- ----------
United States $1,951,222 $1,855,686 $1,872,775 $1,782,501
---------- ---------- ----------
Foreign countries
Mexico 142,860 160,988 168,846
145,678
Other 71,517 54,513 38,934 43,668
---------- ---------- ----------
Total foreign countries 214,377 215,501 207,780 189,346
---------- ---------- ----------
Total $2,165,599 $2,071,187 $2,080,555 $1,971,847
========== ========== ==========
Long-lived Assets
-----------------
2008 2007 2006 2005
---------- ---------- ----------
United States $ 903,506 $ 935,883 $1,067,716 $ 990,439
---------- ---------- ----------
Foreign countries
Mexico 22,853 35,776 28,452
11,867
Other 280 282 172 301
---------- ---------- ----------
Total foreign countries 23,133 36,058 28,624 12,168
---------- ---------- ----------
Total $ 926,639 $ 971,941 $1,096,340 $1,002,607
========== ========== ==========
5053
We generate substantially all of our revenues within the
United States or from North American shipments with origins or
destinations in the United States. OneNo customer generated approximately 8%more
than 10% of our total revenues for 2008 and 2007, approximatelyand one
customer generated 11% of total revenues for 2006 and approximately 10% of total
revenues for 2005.2006.
(9) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share amounts)
First Quarter Second Quarter Third Quarter Fourth Quarter
-----------------------------------------------------------------------------------------------------------------------------
2008:
Operating revenues $ 512,787 $ 578,181 $ 584,057 $ 490,574
Operating income 13,418 30,868 38,022 30,627
Net income 8,375 18,112 22,446 18,647
Basic earnings per share .12 .26 .32 .26
Diluted earnings per share .12 .25 .31 .26
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
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
No disclosure under this item was required within the two
most recent fiscal years ended December 31, 2007,2008, 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, we
carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures,
as defined in the Securities Exchange Act of 1934 Rule 15d-15(e). Our disclosure
controls and procedures are designed to provide reasonable
assurance of achieving the desired control objectives. Based
upon that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and
procedures are effective in enabling us to record, process,
summarize and report information required to be included in our
periodic filings with the SEC filings within the required time period.
We have confidence in our internal controls and procedures.
Nevertheless, our management, including the Chief Executive
Officer and Chief Financial Officer, does not expect that the
internal controls or disclosure procedures and controls will
prevent all errors or intentional fraud. An internal control
system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of
such internal controls are met. Further, the design of an
internal control system must reflect that resource constraints
exist, and the benefits of controls must be relative to their
costs. Because of the inherent limitations in all internal
control systems, no evaluation of controls can provide absolute
assurance that all control issues, misstatements and instances of
fraud, if any, have been prevented or detected.
54
Management's Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining
adequate internal control over our financial reporting. Internal
control over financial reporting is a process designed to provide
reasonable assurance to our management and Board of Directors
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 our 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 company assets that could have
a material effect on our financial statements would be prevented
or detected on a timely basis.
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 (i) changes in conditions may occur or (ii)
the degree of compliance with the policies or procedures may
deteriorate.
Management assessed the effectiveness of our internal
control over financial reporting as of December 31, 2007.2008. 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 our internal control over financial reporting was
effective as of December 31, 2007.2008.
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 the effectiveness of our internal control over
financial reporting. KPMG's report is included herein.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Werner Enterprises, Inc.:
We have audited Werner Enterprises, Inc.'s internal control
over financial reporting as of December 31, 2007,2008, 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,
included in the accompanying Management's Report on Internal
Control over Financial Reporting. Our responsibility is to
express an opinion on 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, assessing the risk
that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based 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
55
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
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Werner Enterprises, Inc. maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 20072008 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, 20072008 and 2006,2007, 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, 2007,2008, and our report dated
February 18, 2008,27, 2009, expressed an unqualified opinion on those
consolidated financial statements.
KPMG LLP
Omaha, Nebraska
February 18, 200827, 2009
Changes in Internal Control over Financial Reporting
There wereManagement, under the supervision and with the participation
of our Chief Executive Officer and Chief Financial Officer,
concluded that no changes in our internal controlscontrol over financial
reporting that occurred during the quarter ended December 31, 2007,2008
that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
During fourth quarter 2007,2008, no information was required to
be disclosed in a report on Form 8-K, but not reported.
PART III
Certain information required by Part III is omitted from
this Form 10-K because 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 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 Corporate Conduct discussed below, is incorporated
herein by reference to our Proxy Statement.
56
Code of Corporate Conduct
We adopted a code of ethics, our Code of Corporate Conduct, which is our code
of ethics, that applies to our principal executive officer,
principal financial officer, principal accounting
officer/controller and all other officers, employees and
directors. The Code of Corporate Conduct is available on our
website, www.werner.com under "Investor Information." We intend
to post on our website any amendment to, or waiver from, any
provision of 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 our 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 our Proxy Statement.
Equity Compensation Plan Information
The following table summarizes, as of December 31, 2007,2008,
information about compensation plans under which our equity
securities 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
stockholders 3,853,656 $12.23 8,568,0072,298,903 (1) $13.74 (2) 8,669,682
(1) Includes 35,000 shares issuable upon vesting of outstanding
restricted stock awards.
(2) The weighted-average exercise price does not take into
account the shares issuable upon vesting of outstanding stock
awards, which have no exercise price.
We do not have any equity compensation plans that were not
approved by stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
The information required by this Item is incorporated herein
by reference to our Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item is incorporated herein
by reference to our Proxy Statement.
57
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 3335
Consolidated Statements of Income 3436
Consolidated Balance Sheets 3537
Consolidated Statements of Cash Flows 3638
Consolidated Statements of Stockholders' Equity and
Comprehensive Income 3739
Notes to Consolidated Financial Statements 38
54
40
(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 5760
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 Form 10-K (see Exhibit
Index on page 58)61).
5558
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 25th27th day of February, 2008.2009.
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 25, 200827, 2009
- ---------------------------------------------------
Clarence L. Werner
/s/ Gary L. Werner Vice Chairman and Director February 25, 200827, 2009
- --------------------------------------------------- Director
Gary L. Werner
/s/ Gregory L. Werner President, Chief Executive Officer February 27, 2009
- ------------------------- and Director February 25, 2008
- --------------------------
Gregory L. Werner
/s/ Gerald H. Timmerman Director February 25, 200827, 2009
- ---------------------------------------------------
Gerald H. Timmerman
/s/ Michael L. Steinbach Director February 25, 200827, 2009
- ---------------------------------------------------
Michael L. Steinbach
/s/ Kenneth M. Bird Director February 25, 200827, 2009
- ---------------------------------------------------
Kenneth M. Bird
/s/ Patrick J. Jung Director February 25, 200827, 2009
- ---------------------------------------------------
Patrick J. Jung
/s/ Duane K. Sather Director February 25, 200827, 2009
- ---------------------------------------------------
Duane K. Sather
/s/ John J. Steele Executive Vice President, February 27, 2009
- ------------------------- Treasurer and Chief Financial
John J. Steele Officer (Principal Financial Officer)
/s/ James L. Johnson Senior Vice President, Controller February 27, 2009
- ------------------------- and Corporate Secretary (Principal
James L. Johnson Accounting Officer)
5659
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, 2008:
Allowance for doubtful accounts $9,765 $ 864 $1,074 $9,555
====== ====== ====== ======
Year ended December 31, 2007:
Allowance for doubtful accounts $ 9,417$9,417 $ 552 $ 204 $ 9,765
======= ======= ======= =======$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
======= ======= ======= =======$8,357 $8,767 $7,707 $9,417
====== ====== ====== ======
See report of independent registered public accounting firm.
5760
EXHIBIT INDEX
Exhibit
Number Description Page Number or Incorporated by Reference to
------- ----------- -------------------------------------------
3(i) Restated Articles of Incorporation Exhibit 3(i) to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2007
3(ii) Revised and Restated By-Laws Exhibit 3(ii) to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2007
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 Quarterly Report on
Form 10-Q for the quarter ended September 30,
2007
10.3 The Executive Nonqualified Excess Plan Exhibit 10.310.2 to the Company's AnnualQuarterly Report on
of Werner Enterprises, Inc., as amended Form 10-K10-Q for the yearquarter ended December 31, 2006September 30,
2008
10.4 Named Executive Officer Compensation Exhibit 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, 2007Filed herewith
10.5 Lease Agreement, as amended February 8, Exhibit 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, Exhibit 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
10.8 Letter from the Company to Daniel H. Exhibit 10.1 to the Company's Quarterly Report on
Cushman, dated January 15, 2008 Form 10-Q for the quarter ended March 31, 2008
10.9 Form of Restricted Stock Award Exhibit 10.1 to the Company's Quarterly Report on
Agreement for recipients under the Werner Form 10-Q for the quarter ended September 30, 2008
Enterprises, Inc. Equity Plan
11 Statement Re: Computation of Per Share See Note 1 "Common(Common Stock and Earnings Per
Earnings Share"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
61