UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[Mark one]
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2008
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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 Identification No.)
incorporation or organization)
14507 FRONTIER ROAD
POST OFFICE BOX 45308
OMAHA, NEBRASKA 68145-0308
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (402) 895-6640
_________________________________
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 whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer or a smaller reporting
company. See the definitions of "accelerated filer", "large accelerated
filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer X Accelerated filer Non-accelerated filer
--- --- ---
Smaller reporting company
---
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
--- ---
As of April 25, 2008, 70,390,163 shares of the registrant's common
stock, par value $.01 per share, were outstanding.
WERNER ENTERPRISES, INC.
INDEX
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statements of Income for the Three Months Ended
March 31, 2008 and 2007 4
Consolidated Condensed Balance Sheets as of March 31, 2008 and
December 31, 2007 5
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2008 and 2007 6
Notes to Consolidated Financial Statements (Unaudited) as of
March 31, 2008 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 26
Item 4. Controls and Procedures 26
PART II - OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 28
Item 6. Exhibits 29
2
PART I
FINANCIAL INFORMATION
Cautionary Note Regarding Forward-Looking Statements:
This Quarterly Report on Form 10-Q 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 Item 2, "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 actual results to differ materially from
the 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," of our Annual Report on Form 10-K for
the year ended December 31, 2007. Readers should not unduly rely on the
forward-looking statements included in this Form 10-Q because such
statements speak only to the date they were made. Unless otherwise
required by applicable securities laws, we assume no obligation or duty to
update or revise forward-looking statements to reflect subsequent events or
circumstances.
Item 1. Financial Statements.
The interim consolidated financial statements contained herein reflect
all adjustments which, in the opinion of management, are necessary for a
fair statement of the financial condition, results of operations and cash
flows for the periods presented. The interim consolidated financial
statements have been prepared in accordance with the instructions to Form
10-Q and were also prepared without audit. The interim consolidated
financial statements do not include all information and footnotes required
by accounting principles generally accepted in the United States of America
for complete financial statements; although in management's opinion, the
disclosures are adequate so that the information presented is not
misleading.
Operating results for the three-month period ended March 31, 2008 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2008. In the opinion of management, the information
set forth in the accompanying consolidated condensed balance sheets is
fairly stated in all material respects in relation to the consolidated
balance sheets from which it has been derived.
These interim consolidated financial statements and notes should be
read in conjunction with the financial statements and notes contained in
our Annual Report on Form 10-K for the year ended December 31, 2007.
3
WERNER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
(In thousands, except per share amounts) March 31,
---------------------------------------------------------------------------
2008 2007
---------------------------------------------------------------------------
(Unaudited)
Operating revenues $ 512,787 $ 503,913
---------------------------
Operating expenses:
Salaries, wages and benefits 143,187 150,521
Fuel 123,836 89,085
Supplies and maintenance 40,509 39,591
Taxes and licenses 28,265 30,163
Insurance and claims 24,732 24,205
Depreciation 41,796 42,557
Rent and purchased transportation 94,463 100,215
Communications and utilities 5,239 5,092
Other (2,658) (4,782)
---------------------------
Total operating expenses 499,369 476,647
---------------------------
Operating income 13,418 27,266
---------------------------
Other expense (income):
Interest expense 3 1,336
Interest income (1,073) (1,051)
Other 51 72
---------------------------
Total other expense (income) (1,019) 357
---------------------------
Income before income taxes 14,437 26,909
Income taxes 6,062 11,241
---------------------------
Net income $ 8,375 $ 15,668
===========================
Earnings per share:
Basic $ 0.12 $ 0.21
===========================
Diluted $ 0.12 $ 0.21
===========================
Dividends declared per share $ 0.050 $ 0.045
===========================
Weighted-average common shares outstanding:
Basic 70,445 74,773
===========================
Diluted 71,377 76,216
===========================
See Notes to Consolidated Financial Statements (Unaudited).
4
WERNER ENTERPRISES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except share amounts) March 31, December 31,
---------------------------------------------------------------------------
2008 2007
---------------------------------------------------------------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 77,920 $ 25,090
Accounts receivable, trade, less allowance
of $9,939 and $9,765, respectively 205,197 213,496
Other receivables 14,551 14,587
Inventories and supplies 10,248 10,747
Prepaid taxes, licenses and permits 12,576 17,045
Current deferred income taxes 29,807 26,702
Other current assets 22,707 21,500
--------------------------
Total current assets 373,006 329,167
--------------------------
Property and equipment 1,605,363 1,605,445
Less - accumulated depreciation 647,124 633,504
--------------------------
Property and equipment, net 958,239 971,941
--------------------------
Other non-current assets 19,386 20,300
--------------------------
$1,350,631 $1,321,408
==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 63,542 $ 49,652
Insurance and claims accruals 77,534 76,189
Accrued payroll 22,677 21,753
Other current liabilities 26,767 19,395
--------------------------
Total current liabilities 190,520 166,989
--------------------------
Other long-term liabilities 7,265 14,165
Insurance and claims accruals, net of current
portion 114,000 110,500
Deferred income taxes 201,088 196,966
Stockholders' equity:
Common stock, $0.01 par value, 200,000,000
shares authorized; 80,533,536 shares
issued; 70,385,013 and 70,373,189 shares
outstanding, respectively 805 805
Paid-in capital 99,711 101,024
Retained earnings 928,266 923,411
Accumulated other comprehensive loss 476 (169)
Treasury stock, at cost; 10,148,523 and
10,160,347 shares, respectively (191,500) (192,283)
--------------------------
Total stockholders' equity 837,758 832,788
--------------------------
$1,350,631 $1,321,408
==========================
See Notes to Consolidated Financial Statements (Unaudited).
5
WERNER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
(In thousands) March 31,
---------------------------------------------------------------------------
2008 2007
---------------------------------------------------------------------------
(Unaudited)
Cash flows from operating activities:
Net income $ 8,375 $ 15,668
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 41,796 42,557
Deferred income taxes 961 (2,435)
Gain on disposal of property and equipment (3,749) (6,202)
Stock-based compensation 399 417
Other long-term assets (18) 1,192
Insurance claims accruals, net of current
portion 3,500 -
Other long-term liabilities (83) 270
Changes in certain working capital items:
Accounts receivable, net 8,299 2,335
Other current assets 3,797 9,839
Accounts payable 13,890 (10,597)
Other current liabilities 2,879 15,012
--------------------------
Net cash provided by operating activities 80,046 68,056
--------------------------
Cash flows from investing activities:
Additions to property and equipment (52,857) (58,849)
Retirements of property and equipment 27,469 27,285
Decrease in notes receivable 1,975 2,120
--------------------------
Net cash used in investing activities (23,413) (29,444)
--------------------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt - 10,000
Repayments of long-term debt - (30,000)
Dividends on common stock (3,519) (3,390)
Repurchases of common stock (4,486) (29,527)
Stock options exercised 2,739 582
Excess tax benefits from exercise of stock
options 818 264
--------------------------
Net cash used in financing activities (4,448) (52,071)
--------------------------
Effect of foreign exchange rate fluctuations on
cash 645 (579)
Net increase (decrease) in cash and cash
equivalents 52,830 (14,038)
Cash and cash equivalents, beginning of period 25,090 31,613
--------------------------
Cash and cash equivalents, end of period $ 77,920 $ 17,575
==========================
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest $ 3 $ 1,691
Income taxes $ 3,587 $ 3,727
Supplemental schedule of non-cash investing
activities:
Notes receivable issued upon sale of revenue
equipment $ 1,043 $ 3,002
See Notes to Consolidated Financial Statements (Unaudited).
6
WERNER ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) Comprehensive Income
Other than our net income, our only other source of comprehensive
income (loss) is foreign currency translation adjustments. Comprehensive
income (loss) from foreign currency translation adjustments was income of
$645,000 for the three-month period ended March 31, 2008, and loss of
$579,000 for the three-month period ended March 31, 2007.
(2) Long-Term Debt
As of March 31, 2008, we have two committed credit facilities with
banks totaling $225.0 million that mature in May 2009 ($50.0 million) and
May 2011 ($175.0 million). Borrowings under these credit facilities bear
variable interest based on the London Interbank Offered Rate ("LIBOR"). As
of March 31, 2008, we had no borrowings outstanding under these credit
facilities with banks. The $225.0 million of credit available under these
facilities is further reduced by $39.5 million in letters of credit under
which we are obligated. Each of the debt agreements include, 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 each
credit facility). At March 31, 2008, we were in compliance with these
covenants.
(3) Income Taxes
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 Internal 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 IRS appeals officer. During fourth quarter 2007, we accrued in
income taxes expense in our Consolidated Statements of Income the estimated
cumulative interest charges for the anticipated settlement of this matter,
net of income taxes, which amounted to $4.0 million, or $0.05 per share.
For the three-month period ended March 31, 2008, there were no
material changes to the total amount of unrecognized tax benefits. We
reclassified $6.8 million of our total liability for unrecognized tax
benefits from long-term to current. This reclassification is due to the
tentative settlement agreement with the IRS for tax years 1999 through
2002, as discussed above. We accrued interest of $0.2 million during the
three-month period ended March 31, 2008. Our total gross liability for
unrecognized tax benefits at March 31, 2008 is $12.5 million. If
recognized, $7.8 million of unrecognized tax benefits would impact our
effective tax rate. Interest of $8.8 million has been reflected as a
component of the total liability. We do not expect any other significant
increases or decreases for uncertain tax positions during the next twelve
months.
We file U.S. federal income tax returns, as well as income tax returns
in various states and several foreign jurisdictions. The years 2003
through 2007 are open for examination by the IRS, and various years are
open for examination by state and foreign tax authorities.
7
(4) Commitments and Contingencies
As of March 31, 2008, we have committed to property and equipment
purchases of approximately $51.1 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.
(5) Earnings Per Share
We compute and present earnings per share in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 128, Earnings per Share.
Basic earnings per share is computed by dividing net income by the
weighted-average number of common shares outstanding during the period. The
difference between basic and diluted earnings per share for all periods
presented is due to the Common 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 earnings per share for
any periods presented. The computation of basic and diluted earnings per
share is shown below (in thousands, except per share amounts).
Three Months Ended
March 31,
------------------------
2008 2007
------------------------
Net income $ 8,375 $ 15,668
========================
Weighted-average common shares
outstanding 70,445 74,773
Common stock equivalents 932 1,443
Shares used in computing diluted ------------------------
earnings per share 71,377 76,216
========================
Basic earnings per share $ 0.12 $ 0.21
========================
Diluted earnings per share $ 0.12 $ 0.21
========================
Options to purchase shares of Common 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 Common shares, were:
Three Months Ended
March 31,
------------------------------------
2008 2007
------------------------------------
Number of shares under option 659,519 29,500
Range of option purchase prices $18.33 - $20.36 $19.26 - $20.36
(6) Stock-Based Compensation
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 of our
Board of Directors will determine the vesting conditions of the award.
8
Option 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. No awards of restricted stock or stock appreciation rights have
been issued to date. The maximum number of shares of Common Stock that may
be awarded under the Equity Plan is 20,000,000 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 March 31, 2008, there were 8,689,507
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 $0.4 million for both the three months ended March
31, 2008 and 2007 and 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 $0.2 million for both the three months ended
March 31, 2008 and 2007. There was no cumulative effect of initially
adopting SFAS No. 123R.
The following table summarizes Stock Option Plan activity for the
three months ended March 31, 2008:
Weighted
Average
Weighted Remaining
Number of Average Contractual Aggregate
Options Exercise Term Intrinsic Value
(in thousands) Price ($) (Years) (in thousands)
-----------------------------------------------------------
Outstanding at beginning of period 3,854 $ 12.23
Options granted - $ -
Options exercised (262) $ 10.46
Options forfeited (122) $ 17.59
Options expired - $ -
----------------
Outstanding at end of period 3,470 $ 12.17 4.55 $ 22,203
================
Exercisable at end of period 2,567 $ 10.28 3.44 $ 21,264
================
We granted no stock options during the three-month periods ended March
31, 2008 and 2007. The fair value of stock option grants are estimated
using a Black-Scholes valuation model. The total intrinsic value of share
options exercised during the three months ended March 31, 2008 was $2.3
million and March 31, 2007 was $0.6 million. As of March 31, 2008, the
total unrecognized compensation cost related to nonvested stock option
awards was approximately $3.1 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, 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.
9
(7) 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 six 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;
(ii) 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; (iii) the regional short-haul
("Regional") fleet provides comparable truckload van service within five
geographic regions across the United States; (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. Revenues for the Truckload segment
include non-trucking revenues of $1.9 million in first quarter 2008 and
$3.1 million in first quarter 2007. These revenues consist primarily of
the portion of shipments delivered to or from Mexico where we utilize a
third-party capacity provider.
The VAS segment generates the majority of our non-trucking revenues
through four operating units that provide non-trucking services to our
customers. These four VAS operating units are (i) truck brokerage
("Brokerage"), (ii) freight management (single-source logistics) ("Freight
Management"), (iii) intermodal services ("Intermodal") and (iv)
international services ("International").
We generate other revenues related to third-party equipment
maintenance, equipment leasing and other business activities. None of
these operations meet the quantitative threshold reporting requirements of
SFAS No. 131. As a result, these operations are grouped in "Other" in the
tables 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 tables
below.
The following tables summarize our segment information (in thousands):
Revenues
--------
Three Months Ended
March 31,
-------------------------
2008 2007
-------------------------
Truckload Transportation Services $ 446,169 $ 429,807
Value Added Services 62,186 69,877
Other 3,905 3,602
Corporate 527 627
-------------------------
Total $ 512,787 $ 503,913
=========================
10
Operating Income
----------------
Three Months Ended
March 31,
-------------------------
2008 2007
-------------------------
Truckload Transportation Services $ 9,235 $ 23,776
Value Added Services 3,667 2,940
Other 1,066 829
Corporate (550) (279)
-------------------------
Total $ 13,418 $ 27,266
=========================
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") summarizes the financial statements from
management's perspective with respect to our financial condition, results
of operations, liquidity and other factors that may affect actual results.
The MD&A is organized in the following sections:
* Overview
* Results of Operations
* Liquidity and Capital Resources
* Contractual Obligations and Commercial Commitments
* Off-Balance Sheet Arrangements
* Regulations
* Critical Accounting Policies
* Accounting Standards
The MD&A should be read in conjunction with our Annual Report on Form
10-K for the year ended December 31, 2007.
Overview:
We operate primarily in the truckload sector of the trucking industry,
with a focus on transporting consumer nondurable products that ship more
consistently throughout the year. 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, Van, Regional,
Expedited, Temperature-Controlled and Flatbed) and (ii) non-trucking
revenues generated primarily by our VAS segment. Our Truckload segment
also includes a small amount of non-trucking revenues, 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 87% of
11
total operating revenues in first quarter 2008, and non-trucking and other
operating revenues accounted for 13%.
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 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 mitigating our risk to
fuel price increases by recovering additional fuel surcharges from our
customers 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-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 for
our employees (supplemented by premium-based coverage above certain dollar
levels). For that reason, our financial results may also be affected by
driver safety, medical costs, weather, legal and regulatory environments
and insurance coverage costs to protect against catastrophic losses.
The operating ratio is a common industry measure used to evaluate our
profitability and that of our Truckload segment operating fleets. The
operating ratio consists of operating expenses expressed as a percentage of
operating revenues. The most significant variable expenses that impact the
Truckload segment are driver salaries and benefits, payments to owner-
operators (included in rent and purchased transportation expense), fuel,
fuel taxes (included in taxes and licenses expense), supplies and
maintenance and insurance and claims. These expenses generally vary based
on the number of miles generated. We 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 first quarter 2008 to first quarter
2007, several industry-wide issues could cause costs to increase in 2008.
These issues include a softer freight market, rising fuel prices and higher
new truck purchase prices. Our main fixed costs include depreciation
expense for tractors and trailers and equipment licensing fees (included in
taxes and licenses expense). The Truckload segment requires substantial
cash expenditures for tractor and trailer purchases. We fund these
purchases with net cash from operations and financing available under our
existing credit facilities, as management deems necessary.
We provide non-trucking services primarily through four operating
units within our VAS segment. These operating units include Brokerage,
Freight Management Intermodal and International. Unlike our Truckload
segment, the VAS segment is less asset-intensive and is instead dependent
upon qualified employees, information systems and qualified third-party
capacity providers. The largest expense item related to the VAS segment is
the cost of transportation we pay to third-party capacity providers. This
expense item is recorded as rent and purchased transportation expense.
Other expenses include salaries, wages and benefits and computer hardware
and software depreciation. We evaluate VAS by reviewing the gross margin
percentage (revenues less rent and purchased transportation expenses
12
expressed as a percentage of revenues) and the operating income percentage.
Results of Operations:
The following table sets forth certain industry data regarding the
freight revenues and operations for the periods indicated.
Three Months Ended
March 31, %
--------------------
2008 2007 Change
-----------------------------
Trucking revenues, net of fuel surcharge (1) $348,424 $366,306 -4.9%
Trucking fuel surcharge revenues (1) 95,769 60,383 58.6%
Non-trucking revenues, including VAS (1) 64,119 72,951 -12.1%
Other operating revenues (1) 4,475 4,273 4.7%
-------- --------
Total operating revenues (1) $512,787 $503,913 1.8%
======== ========
Operating ratio (consolidated) (2) 97.4% 94.6%
Average monthly miles per tractor 9,868 9,519 3.7%
Average revenues per total mile (3) $1.453 $1.444 0.6%
Average revenues per loaded mile (3) $1.684 $1.676 0.5%
Average percentage of empty miles (4) 13.72% 13.84% -0.9%
Average trip length in miles (loaded) 542 572 -5.2%
Total miles (loaded and empty) (1) 239,744 253,714 -5.5%
Average tractors in service 8,099 8,884 -8.8%
Average revenues per tractor per week (3) $3,309 $3,172 4.3%
Total tractors (at quarter end)
Company 7,315 7,976
Owner-operator 765 824
-------- --------
Total tractors 8,080 8,800
Total trailers (Truckload and Intermodal, at
quarter end) 24,950 25,160
(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.
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 $1.9 million for the three-month
period ended March 31, 2008 and $3.1 million for the three-month period
ended March 31, 2007, as described on page 10.
13
Three Months Ended
March 31,
-------------------------------------
2008 2007
----------------- -----------------
Truckload Transportation Services (amounts in thousands) $ % $ %
-------------------------------------------------------- ----------------- -----------------
Revenues $ 446,169 100.0 $ 429,807 100.0
Operating expenses 436,934 97.9 406,031 94.5
---------- ----------
Operating income $ 9,235 2.1 $ 23,776 5.5
========== ==========
Significantly higher fuel prices and 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.
Three Months Ended
March 31,
-------------------------------------
2008 2007
----------------- -----------------
Truckload Transportation Services (amounts in thousands) $ % $ %
-------------------------------------------------------- ----------------- -----------------
Revenues $ 446,169 $ 429,807
Less: trucking fuel surcharge revenues 95,769 60,383
---------- ----------
Revenues, net of fuel surcharges 350,400 100.0 369,424 100.0
---------- ----------
Operating expenses 436,934 406,031
Less: trucking fuel surcharge revenues 95,769 60,383
---------- ----------
Operating expenses, net of fuel surcharges 341,165 97.4 345,648 93.6
---------- ----------
Operating income $ 9,235 2.6 $ 23,776 6.4
========== ==========
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.
Three Months Ended
March 31,
-------------------------------------
2008 2007
----------------- -----------------
Value Added Services (amounts in thousands) $ % $ %
------------------------------------------- ----------------- -----------------
Revenues $ 62,186 100.0 $ 69,877 100.0
Rent and purchased transportation expense 52,679 84.7 61,929 88.6
--------- ---------
Gross margin 9,507 15.3 7,948 11.4
Other operating expenses 5,840 9.4 5,008 7.2
--------- ---------
Operating income $ 3,667 5.9 $ 2,940 4.2
========= =========
14
Three Months Ended March 31, 2008 Compared to Three Months Ended March 31,
---------------------------------------------------------------------------
2007
----
Operating Revenues
Operating revenues increased 1.8% for the three months ended March 31,
2008, compared to the same period of the prior year. Excluding fuel
surcharge revenues, trucking revenues decreased 4.9% due primarily to an
8.8% decrease in the average number of tractors in service (as discussed
further below), partially offset by a 3.7% increase in average monthly
miles per tractor. The continued soft conditions of the housing and
automotive markets (markets not principally served by us) caused carriers
dependent on these freight markets to compete more aggressively in the
consumer and nondurable goods freight markets in which we primarily provide
services. In addition, a slowing economy and retail inventory tightening
also contributed to lower freight demand. These factors, and the
significant increase in truck supply caused by the industry truck pre-buy
prior to the January 2007 effective date of the U.S. Environmental
Protection Agency ("EPA")-mandated engine emissions standards, led to a
very competitive market in first quarter 2008. Despite these factors, we
remained disciplined with pricing, and our revenue per total mile,
excluding fuel surcharges, increased by 0.6%, partially offsetting the
decline in tractors.
The freight demand softness was the most significant in the Van fleet,
a fleet that we reduced by approximately 850 trucks, or 28%, since mid-
March 2007. Freight demand in our Regional and Expedited fleets was about
the same on a year-over-year basis, considering the slowing economic
conditions. While overall pre-booked percentages of loads to trucks
remained lower on a year-over-year basis throughout first quarter 2008
compared to the first quarters of the previous five years, we experienced
the typical month-to-month seasonal improvement in freight demand as first
quarter 2008 developed. Pre-booked percentages for the Van fleet for April
2008 compared to April 2007 were lower than the comparison for first
quarter 2008 to first quarter 2007. Pre-booked percentages for April 2008
in our Regional and Expedited fleets continue to be at or above prior
years' levels.
Fuel surcharge revenues represent collections from customers for the
higher cost of fuel. These revenues increased 58.6% to $95.8 million in
first quarter 2008 from $60.4 million in first quarter 2007 due to an
average increase in diesel fuel costs of 99 cents per gallon in first
quarter 2008 compared to first quarter 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. These
programs have historically enabled us to recover a majority, but not all,
of the fuel price increases. The remainder 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. In the past, we negotiated higher rates with customers
to recover the fuel expense shortfall in base rates per mile. However,
given the softer freight market, we have been unable to recover the fuel
expense shortfall in base rates. As a result, increases in fuel costs are
expected to continue to impact our earnings per share until such time as
freight market conditions allow us to recover this shortfall from
customers. Also, in a rapidly rising fuel price market (such as that in
first quarter 2008), 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.
Due to the rapid increase in diesel fuel prices during first quarter 2008,
there was a lag between the timing of the fuel cost increase and the
delayed recovery of fuel surcharge revenues. This lag caused our fuel
surcharge recovery percentage to fall below the typical recovery rate
during first quarter 2008.
Diesel fuel prices reached nearly $4.00 per gallon during March 2008.
For longer haul shipments over 1,000 miles per trip, we observed a mode
shift for some shipments from truckload to rail intermodal. Even though
on-time delivery service percentages are generally significantly higher for
truckload shipments than rail intermodal shipments, the higher price of
15
diesel fuel impacts truckload carrier costs and rates more significantly
than it does rail intermodal providers. As a result, we believe that some
price-sensitive shippers have been shifting a greater portion of their
long-haul freight from truckload to rail intermodal in recent months. We
believe this has contributed to the more significant decline in freight
demand in the longer haul truckload market. We have already proactively
adapted to this mode shift by reducing the number of trucks in our Van
fleet.
VAS revenues are generated by the following VAS operating units:
Brokerage, Freight Management, Intermodal and International. VAS revenues
decreased 11.0% to $62.2 million in first quarter 2008 from $69.9 million
in first quarter 2007 due to a structural change to a certain customer
arrangement (discussed below), offset partially by an increase in Brokerage
and International revenues. VAS gross margin dollars increased 19.6% to
$9.5 million from $7.9 million for the same period due to improvements in
Brokerage, Intermodal and International. We and a large VAS customer
negotiated a structural change to such customer's continuing arrangement
related to the use of third-party carriers, effective in third quarter
2007. 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 $18.4 million from first quarter 2007 to first quarter 2008. 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 21% in first quarter 2008 compared to first
quarter 2007.
Brokerage continued to produce strong results with 19% revenue growth
and improved operating margins. Brokerage is generating an annualized
revenue run rate of $135 million with a carrier base of over 8,400
qualified carriers. There is no assurance that we can continue this rate
of revenue growth. Freight Management continues to secure new VAS business
that brings about growth across all of our business units. Intermodal
revenues were flat but showed improved operating margins. Werner Global
Logistics continues to generate solid growth and improving results.
Operating Expenses
Our operating ratio (operating expenses expressed as a percentage of
operating revenues) was 97.4% for the three months ended March 31, 2008,
compared to 94.6% for the three months ended March 31, 2007. Expense items
that impacted the overall operating ratio are described on the following
pages. The tables on page 14 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.
16
Three Months Ended Increase
March 31, (Decrease)
------------------
2008 2007 per Mile
-----------------------------
Salaries, wages and benefits $0.574 $0.574 $0.000
Fuel 0.515 0.349 0.166
Supplies and maintenance 0.160 0.148 0.012
Taxes and licenses 0.118 0.118 0.000
Insurance and claims 0.103 0.095 0.008
Depreciation 0.168 0.161 0.007
Rent and purchased transportation 0.173 0.151 0.022
Communications and utilities 0.021 0.020 0.001
Other (0.009) (0.016) 0.007
Owner-operator costs are included in rent and purchased transportation
expense. Owner-operator miles as a percentage of total miles were 12.2%
for first quarter 2008 compared to 11.8% for first quarter 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 slight increase
in owner-operator miles as a percentage of total miles shifted costs to the
rent and purchased transportation category from other expense categories.
Due to this increase, we estimate that rent and purchased transportation
expense for the Truckload segment was higher by approximately 0.5 cents per
total mile, and other expense categories had offsetting decreases on a
total-mile basis as follows: (i) salaries, wages and benefits, 0.2 cents;
(ii) fuel, 0.2 cents; and (iii) depreciation, 0.1 cent.
Salaries, wages and benefits for non-drivers were flat in first
quarter 2008 compared to first quarter 2007. Higher non-driver salaries in
the non-trucking VAS segment (attributed to the growth of VAS) were offset
by lower non-driver pay on a per-total-mile basis for office and equipment
maintenance personnel in the Truckload segment (attributed to cost control
improvements). There was a slight increase in salaries, wages and benefits
for drivers in the Truckload segment, which is primarily attributed to (i)
an increase in student driver pay as the average number of student trainer
teams was higher in first quarter 2008 compared to first quarter 2007; (ii)
additional amounts paid to drivers, such as drop/pick-up pay; and (iii)
higher workers' compensation expense. These cost increases for the
Truckload segment were partially offset by decreases in group health
insurance costs and discretionary driver pay items.
We renewed our workers' compensation insurance coverage for the policy
year beginning April 1, 2008. Our coverage levels will be the same as the
prior policy year. We continue to maintain a self-insurance retention of
$1.0 million per claim and have no annual aggregate retention amount for
claims above $1.0 million. Our workers' compensation insurance premiums
for the policy year beginning April, 2008 are slightly lower than the
previous policy year.
The driver recruiting and retention market remains challenging, but
was less difficult than one year ago. Typically during the spring season,
the driver market is difficult because more seasonal construction and
housing market-related jobs become available with improving weather
conditions. The current weakness in these industries and other factors are
helping to improve our driver availability. We anticipate that competition
for qualified drivers will remain high and cannot predict whether we will
experience future 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.
17
Fuel increased 16.6 cents per total mile for the Truckload segment due
primarily to higher average diesel fuel prices. Compared to the same month
in the prior year, diesel fuel costs were 88 cents per gallon higher in
January 2008, 92 cents per gallon higher in February 2008 and 117 cents per
gallon higher in March 2008. Fuel prices averaged 122 cents per gallon
higher in April 2008 compared to April 2007. During first quarter 2008, we
intensified our focus on the controllable aspects of fuel expense by
implementing numerous initiatives to improve fuel efficiency. These
initiatives include reducing truck idle time, lowering non-billable miles
and continuing to increase the percentage of aerodynamic, more fuel
efficient trucks in our fleet. For first quarter 2008, fuel miles per
gallon improved 1.8% compared to first quarter 2007.
Shortages of fuel, increases in fuel prices or rationing of petroleum
products 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 March 31, 2008, we had no
derivative financial instruments to reduce our exposure to fuel price
fluctuations.
Supplies and maintenance for the Truckload segment increased 1.2 cents
on a per-total-mile basis in first quarter 2008 compared to first quarter
2007. Worse than normal winter weather conditions and the increased
average age of the truck fleet contributed to higher truck maintenance
repairs. We experienced increases in tire expenses, over-the-road tractor
repairs and maintenance and pre-sale equipment repair expenses.
Insurance and claims for the Truckload segment increased 0.8 cents on
a per-total-mile basis in first quarter 2008 compared to first quarter
2007. This increase was due to the worse than normal winter weather
conditions and higher annual company aggregate retention levels in our
bodily injury and property damage coverage. 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. For claims in excess of $5.0
million and less than $10.0 million, we are responsible for the first $5.0
million of claims in the policy year, which is the same for both policy
years. We maintain liability insurance coverage with reputable insurance
carriers substantially in excess of the $10.0 million per claim. Our
liability insurance premiums for the policy year that began August 1, 2007
are slightly lower than the previous policy year.
Depreciation expense for the Truckload segment increased 0.7 cents per
total mile in first quarter 2008 compared to first quarter 2007. This
increase was due primarily to the resulting higher ratio of trailers to
tractors after we reduced the number of tractors in our Van fleet over the
last year.
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 will be 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, and we
expect they could be less fuel-efficient and could have increased
maintenance costs. We began to take delivery of trucks with these 2007-
standard engines in first quarter 2008 to replace older trucks in our
fleet, but it is too early to assess the full extent of differences in
operating costs. The engines in our fleet of company-owned trucks as of
March 31, 2008 consist of 87% Caterpillar, 7% Detroit Diesel and 6%
Mercedes Benz.
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
shown on page 14, the VAS segment's rent and purchased transportation
expense decreased in response to a structural change to a large VAS
18
customer's continuing arrangement offset partially by an increase in
Brokerage and International. 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 84.7% in first quarter 2008 compared to 88.6% in first quarter
2007.
Rent and purchased transportation for the Truckload segment increased
2.2 cents per total mile in first quarter 2008 primarily because of
increased fuel prices that necessitated higher reimbursements to owner-
operators for fuel. 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.
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 increased 0.7 cents
per total mile in first quarter 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 $3.7
million in first quarter 2008 from $6.2 million in first quarter 2007. In
first quarter 2008, we realized lower average gains on trucks and trailers
sold, and we sold fewer trailers due to the effect of the softer freight
market and high fuel prices. Based on current freight and fuel conditions,
we anticipate that gains on equipment sales for second quarter 2008 will be
lower than the gains realized in first quarter 2008 and could remain lower
in future periods if such conditions do not improve. Our wholly-owned
subsidiary, Fleet Truck Sales, is one of the largest Class 8 used truck and
equipment retail entities in the United States. Fleet Truck Sales
continues to be our resource for remarketing our used trucks.
We recorded minimal interest expense in first quarter 2008 versus $1.3
million of interest expense in first quarter 2007. We had no debt
outstanding at March 31, 2008 compared to $80.0 million debt outstanding at
March 31, 2007.
Our effective income tax rate (income taxes expressed as a percentage
of income before income taxes) increased slightly to 42.0% for first
quarter 2008 from 41.8% for first quarter 2007.
Liquidity and Capital Resources:
During the three months ended March 31, 2008, we generated cash flow
from operations of $80.0 million, a 17.6% increase ($12.0 million) in cash
flow compared to the same three-month period one year ago. The increase in
cash flow from operations is due primarily to (i) a $16.4 million
difference in accounts payable for revenue equipment caused by an $8.8
million decrease in accounts payable for revenue equipment from December
2006 to March 2007, compared to a $7.6 million increase in accounts payable
for revenue equipment from December 2007 to March 2008 and (ii) continued
improvements in our days sales in accounts receivable which declined from
41 days at March 2007 to 36 days at March 2008. This increase in cash flow
from operations was offset partially by a reduction in net income. 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 as discussed below.
Net cash used in investing activities for the three-month period ended
March 31, 2008 decreased by 20.4% ($6.0 million), from $29.4 million for
the three-month period ended March 31, 2007 to $23.4 million for the three-
19
month period ended March 31, 2008. Net property additions (primarily
revenue equipment) were $25.4 million for the three-month period ended
March 31, 2008, compared to $31.6 million during the same period of 2007.
As of March 31, 2008, we committed to property and equipment
purchases, net of trades, of approximately $51.1 million. We expect our
net capital expenditures to be higher in 2008 than in 2007, because we
expect to purchase a larger number of tractors in 2008. We intend to fund
these net capital expenditures through cash flow from operations, existing
cash balances and financing available under our existing credit facilities,
as management deems necessary.
Net financing activities used $4.4 million during the three months
ended March 31, 2008 and $52.1 million during the same period in 2007. The
change from 2007 to 2008 included debt repayments (net of borrowings) of
$20.0 million during the three-month period ended March 31, 2007, compared
to no debt repayments during the three-month period ended March 31, 2008.
We paid dividends of $3.5 million in first quarter 2008 and $3.4 million in
first quarter 2007. Financing activities also included common stock
repurchases of $4.5 million in the three-month period ended March 31, 2008
and $29.5 million in the same period of 2007. From time to time, we have
repurchased, and may continue to repurchase, shares of our common stock.
The timing and amount of such purchases depends on market and other
factors. As of March 31, 2008, we had purchased 1,041,200 shares pursuant
to our current Board of Directors repurchase authorization and had
6,958,800 shares remaining available for repurchase.
Management believes our financial position at March 31, 2008 is
strong. As of March 31, 2008, we had $77.9 million of cash and cash
equivalents and $837.8 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 March 31, 2008, we had $225.0 million of
available credit pursuant to credit facilities, of which we had no
outstanding borrowings. The credit available under these facilities is
further reduced by the $39.5 million in letters of credit we maintain.
These letters of credit are primarily required as security for insurance
policies. Based on our strong financial position, management foresees no
significant barriers to obtaining sufficient financing, if necessary.
20
Contractual Obligations and Commercial Commitments:
The following tables set forth our contractual obligations and
commercial commitments as of March 31, 2008.
Payments Due by Period
(in millions)
Less than Over 5
Total 1 year 1-3 years 4-5 years years Other
-----------------------------------------------------------------------------------------
Contractual Obligations
Unrecognized tax benefits $ 12.5 $ 6.7 $ - $ - $ - $ 5.8
Equipment purchase
commitments 51.1 51.1 - - - -
------- ------- ------- ------- ------- -------
Total contractual cash
obligations $ 63.6 $ 57.8 $ - $ - $ - $ 5.8
======= ======= ======= ======= ======= =======
Other Commercial
Commitments
Unused lines of credit $ 185.5 $ - $ 185.5 $ - $ - $ -
Standby letters of credit 39.5 39.5 - - - -
------- ------- ------- ------- ------- -------
Total commercial
commitments $ 225.0 $ 39.5 $ 185.5 $ - $ - $ -
======= ======= ======= ======= ======= =======
Total obligations $ 288.6 $ 97.3 $ 185.5 $ - $ - $ 5.8
======= ======= ======= ======= ======= =======
The equipment purchase commitments relate to committed equipment
expenditures. We have committed credit facilities with two banks totaling
$225.0 million, of which we had no outstanding borrowings. These credit
facilities bear variable interest 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 growth of our fleet. Given our strong financial
position, we expect that we could obtain additional financing, if
necessary, at favorable terms. The standby letters of credit are primarily
required for insurance policies. On January 1, 2007, we adopted Financial
Accounting Standards Board ("FASB") Interpretation No. 48, Accounting for
Uncertainty in Income Taxes-an Interpretation of FASB Statement No. 109
("FIN 48"), and have recorded $12.5 million of unrecognized tax benefits.
We expect $6.7 million to be settled within the next 12 months; however, we
are unable to reasonably determine when the remaining amounts will be
settled.
Off-Balance Sheet Arrangements:
As of March 31, 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.
Regulations:
Effective October 1, 2005, all truckload carriers became subject to
revised hours of service ("HOS") regulations issued by the Federal Motor
Carrier Safety Administration ("FMCSA") ("2005 HOS Regulations"). The most
significant change for us from the previous regulations is that drivers
using the sleeper berth provision must take at least eight consecutive
21
hours off-duty in the sleeper berth during their ten hours off-duty.
Previously, drivers using a sleeper berth were allowed to split their ten-
hour off-duty time into two periods, provided neither period was less than
two hours. This more restrictive sleeper berth provision is requiring some
drivers to plan their time better. 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.
Effective December 27, 2007, the FMCSA issued an interim final rule
that amended the HOS regulations to (i) allow drivers up to 11 hours of
driving time within a 14-hour, non-extendable window from the start of the
workday (this driving time must follow ten consecutive hours of off-duty
time) and (ii) restart calculations of the weekly on-duty time limits after
the driver has at least 34 consecutive hours off duty. This interim rule
made essentially no changes to the 11-hour driving limit and 34-hour
restart rules. 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 various petitions for review, one of which was submitted
by Public Citizen (a consumer safety organization). The FMCSA solicited
comments on the interim final rule until February 15, 2008 and intends to
issue a final rule in 2008 that addresses the issues identified by the
Court. On January 23, 2008, the Court denied Public Citizen's motion to
invalidate the interim final rule.
On January 18, 2007, the FMCSA published a Notice of Proposed
Rulemaking ("NPRM") in the Federal Register on the trucking industry's use
of Electronic On-Board Recorders ("EOBRs") 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
became the first, and only, trucking company in the United States to
receive a U.S. Department of Transportation 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. 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.
On December 26, 2007, the FMCSA published an NPRM in the Federal
Register regarding minimum requirements for entry-level driver training.
Under the proposed rule, a commercial driver's license ("CDL") applicant
would be required to present a valid driver training certificate obtained
from an accredited institution or program. Entry-level drivers applying
for a Class A CDL would be required to complete a minimum of 120 hours of
training, consisting of 76 classroom hours and 44 driving hours. The
current regulations do not 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 on the NPRM were originally scheduled to be received by
March 25, 2008; however, the FMCSA extended the comment period until May
2008. On April 9, 2008, the FMCSA published another NPRM that (i)
establishes new minimum standards to be met before states issue commercial
learner's permits ("CLPs"); (ii) revises the CDL knowledge and skills
testing standards; and (iii) improves anti-fraud measures within the CDL
program. If one or both of these proposed rules is approved as written,
these rules could materially impact the number of potential new drivers
entering the industry.
The EPA mandated a new set of more stringent engine emissions
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). To delay the cost impact of these new emissions
standards, in 2005 and 2006 we purchased significantly more new trucks than
we normally buy each year, and we maintained a newer truck fleet relative
to historical company and industry standards. Our newer truck fleet
22
allowed us to delay purchases of trucks with the new 2007-standard engines
until first quarter 2008. In January 2010, a final set of more rigorous
EPA-mandated emissions standards will become effective for all new engines
manufactured after that date.
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 conditioning and heating systems
particularly while in the sleeper berth. Many of the statutes or
ordinances recognize the need of the drivers to have a comfortable
environment in which to sleep and include exceptions for those
circumstances. California had such an exemption; however, since January 1,
2008, the California sleeper berth exemption no longer exists. We have
taken steps to address this issue in California. California has also
enacted restrictions on transport refrigeration unit ("TRU") emissions,
which are scheduled to be phased in over several years beginning year-end
2008. Although legal challenges may be mounted against California's
regulations, if the TRU emissions law becomes effective as scheduled, it
will require companies to operate only compliant TRUs in California. There
are several alternatives for meeting these requirements that we are
currently evaluating.
Critical Accounting Policies:
We operate in the truckload sector of the trucking industry, with a
focus on transporting consumer nondurable products that ship more
consistently throughout the year and when changes occur in the economy.
Our success depends on 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 essential to
efficient resource deployment, making capital investments in tractors and
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 our customers' financial failures
or loss of customer business.
Our most significant resource requirements are company 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 mitigated our risk to
fuel price increases by recovering 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-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 for our employees (supplemented by premium-based
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 five 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
23
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 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 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, (ii)
whether deferred income taxes will be realized in full or in part
and (iii) the liability for unrecognized tax benefits in accordance
with the provisions of FIN 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 necessary due to our
profitable operations. Accordingly, if facts or financial
circumstances change and consequently impact 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.
24
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.
Accounting Standards:
In September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements ("No. 157"). This statement defines fair value, establishes a
framework for measuring fair value in generally accepted accounting
principles and expands disclosures about fair value measurements. SFAS No.
157 does not require any new fair value measurements but rather eliminates
inconsistencies in guidance found in various prior accounting
pronouncements and is effective for fiscal years 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.
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 were effective as of the
beginning of the first fiscal year that begins after November 15, 2007.
Upon adoption, SFAS No. 159 had 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 March 31, 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 Accounting 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 are effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15, 2008.
As of March 31, 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
25
fiscal years, and interim periods within those fiscal years, beginning on
or after November 15, 2008. As of March 31, 2008, management believes that
SFAS No. 161 will not have a material effect on our financial position,
results of operations and cash flows.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to market risk from changes in commodity prices,
foreign currency exchange rates and interest rates.
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 portion of fuel price increases from customers
in the form of fuel surcharges. We implemented customer fuel surcharge
programs with most of our revenue base to offset much of the higher fuel
cost per gallon. However, we do not recover the entire fuel cost increase
through these surcharge programs. We cannot predict the extent to which
higher fuel price levels will continue in the future or the extent to which
fuel surcharges could be collected to offset such increases. As of March
31, 2008, we had no derivative financial instruments to reduce our exposure
to fuel price fluctuations.
Foreign Currency Exchange Rate Risk
We conduct business in Mexico, Canada and Asia. Foreign currency
transaction gains and losses were not material to our results of operations
for first quarter 2008 and prior periods. 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, we are not currently subject to material risks involving any
foreign currency exchange rate and the effects that such exchange rate
movements would have on our future costs or future cash flows.
Interest Rate Risk
We had no debt outstanding at March 31, 2008. Interest rates on our
unused credit facilities are based on the LIBOR. Increases in interest
rates could impact our annual interest expense on future borrowings. As of
March 31, 2008, we do not have any derivative financial instruments to
reduce our exposure to interest rate increases.
Item 4. 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 Rule 15d-15(e) of the Securities
Exchange Act of 1934 ("Exchange Act"). 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 U.S. Securities and Exchange Commission within the
required time period.
26
Management, under the supervision and with the participation of our
Chief Executive Officer and Chief Financial Officer, concluded that no
changes in our internal control over financial reporting occurred during
our most recent fiscal quarter that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
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 and
instances of fraud, if any, have been detected.
27
PART II
OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
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
Stock that the Company is authorized to repurchase. Under this new
authorization, the Company is permitted to repurchase an additional
8,000,000 shares. As of March 31, 2008, the Company had purchased
1,041,200 shares pursuant to this authorization and had 6,958,800 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.
The following table summarizes our Common Stock repurchases during the
first quarter of 2008 made pursuant to this authorization. The Company did
not purchase any shares during the first quarter of 2008 other than
pursuant to this authorization. All stock repurchases were made by 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 (or Units) Average Price Paid Publicly Announced Purchased Under the
Period Purchased per Share (or Unit) Plans or Programs Plans or Programs
---------------------------------------------------------------------------------------
January 1-31, 2008 - - - 7,208,800
February 1-29, 2008 110,300 $17.96 110,300 7,098,500
March 1-31, 2008 139,700 $17.93 139,700 6,958,800
----------------- --------------------
Total 250,000 $17.94 250,000 6,958,800
================= ====================
28
Item 6. Exhibits.
Exhibit No. Exhibit Incorporated by Reference to:
----------- ------- -----------------------------
3(i) Restated Articles of Incorporation of Werner Exhibit 3(i) to the Company's report
Enterprises, Inc. on Form 10-Q for the quarter ended
June 30, 2007
3(ii) Revised and Restated By-Laws of Werner Exhibit 3(ii) to the Company's
Enterprises, Inc. report on Form 10-Q for the quarter
ended June 30, 2007
10.1 Letter from the Company to Daniel H. Cushman, Filed herewith
dated January 15, 2008
31.1 Certification of the Chief Executive Officer Filed herewith
pursuant to Rules 13a-14(a) and 15d-14(a) of the
Securities Exchange Act of 1934 (Section 302 of
the Sarbanes-Oxley Act of 2002)
31.2 Certification of the Chief Financial Officer Filed herewith
pursuant to Rules 13a-14(a) and 15d-14(a) of the
Securities Exchange Act of 1934 (Section 302 of
the Sarbanes-Oxley Act of 2002)
32.1 Certification of the Chief Executive Officer Filed herewith
pursuant to 18 U.S.C. Section 1350 (Section 906
of the Sarbanes-Oxley Act of 2002)
32.2 Certification of the Chief Financial Officer Filed herewith
pursuant to 18 U.S.C. Section 1350 (Section 906
of the Sarbanes-Oxley Act of 2002)
29
SIGNATURES
Pursuant to the requirements 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.
WERNER ENTERPRISES, INC.
Date: May 5, 2008 By: /s/ John J. Steele
------------------- ---------------------------------------
John J. Steele
Executive Vice President, Treasurer and
Chief Financial Officer
Date: May 5, 2008 By: /s/ James L. Johnson
------------------- ---------------------------------------
James L. Johnson
Senior Vice President, Controller and
Corporate Secretary
30