UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 20012004
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 numberFile Number 0-14690
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WERNER ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
NEBRASKA 47-0648386
(State or other jurisdiction of (I.R.S. employerEmployer
incorporation or organization) identification no.Identification No.)
14507 FRONTIER ROAD 68145-0308
POST OFFICE BOX 45308 (Zip code)
OMAHA, NEBRASKA
68145-0308 (402) 895-6640
(Address of (Registrant's principal executive offices)
(Zip code)Registrant's telephone number)number, including area code: (402) 895-6640
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON
STOCK, $.01 PAR VALUE
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. YesYES X No ___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 thethis Form 10-K. [ ]X
---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES X NO
--- ---
The aggregate market value of the registrant's $.01 par value common stockequity held by nonaffiliatesnon-affiliates of
the registrantRegistrant (assuming for these purposes that all executive officers and
Directors are "affiliates" of the Registrant) as of February 28, 2002,June 30, 2004, the last
business day of the Registrant's most recently completed second fiscal
quarter, was approximately $688 million$1.074 billion (based upon $17.76 per shareon the closing sale price
of the Registrant's Common Stock on that date as reported by Nasdaq, adjusted for the March 14, 2002 stock
split)Nasdaq). (Aggregate market value estimated solely for the purposes of this
report. This shall not be construed as an admission for purposes of
determining affiliate status.)
As of February 28, 2002, 63,857,36410, 2005, 79,396,187 shares of the registrant's common stock
were outstanding (adjusted for the March 14, 2002 stock split).outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement of Registrant for the Annual Meeting of
Stockholders to be held May 14, 2002,10, 2005, are incorporated in Part III of this
report.
TABLE OF CONTENTS
Page
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PART I
Item 1. Business 1
Item 2. Properties 56
Item 3. Legal Proceedings 57
Item 4. Submission of Matters to a Vote of Security Holders 68
PART II
Item 5. Market for Registrant's Common Equity, and Related Stockholder
Matters 6and Issuer Purchases of Equity Securities 8
Item 6. Selected Financial Data 710
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations and Financial Condition 710
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 1526
Item 8. Financial Statements and Supplementary Data 1627
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 3145
Item 9A. Controls and Procedures 45
Item 9B. Other Information 47
PART III
Item 10. Directors and Executive Officers of the Registrant 3147
Item 11. Executive Compensation 3147
Item 12. Security Ownership of Certain Beneficial Owners and Management 3147
Item 13. Certain Relationships and Related Transactions 3148
Item 14. Principal Accountant Fees and Services 48
PART IV
Item 14.15. Exhibits and Financial Statement Schedules and
Reports on Form 8-K 3148
PART I
ITEM 1. BUSINESS
General
Werner Enterprises, Inc. ("Werner" or the "Company") is a
transportation company engaged primarily in hauling truckload shipments of
general commodities in both interstate and intrastate commerce.commerce as well as
providing logistics services. Werner is one of the five largest truckload
carriers in the United States and maintains its headquarters in Omaha,
Nebraska, near the geographic center of its service area. Werner was
founded in 1956 by Chairman and Chief Executive Officer, Clarence L.
Werner, who started the business with one truck at the age of 19. Werner
completed its initial public offering in April 1986 with a fleet of 630
trucks. Werner ended 20012004 with a fleet of 7,775 trucks.8,600 trucks, of which 7,675 were
owned by the Company and 925 were owned and operated by owner-operators
(independent contractors).
The Company operates throughout the 48 contiguous 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 states. The Company also has authority to operate in
the ten provinces of Canada and provides through trailer service in and out
of Mexico. The principal types of freight transported by the Company
include consumer products, retail store merchandise, foodconsumer products, paper products, beverages, industrialmanufactured products,
and building materials.grocery products. The Company's emphasis is to transport consumer
non-durablenondurable products that ship more consistently throughout the year.year and
throughout changes in the economy. The Company has two reportable segments-
Truckload Transportation Services and Value Added Services. Financial
information regarding these segments can be found in the Notes to
Consolidated Financial Statements under Item 8 of this Form 10-K.
Marketing and Operations
Werner's business philosophy is to provide superior on-time service to
its customers at a lowcompetitive cost. To accomplish this, Werner operates
premium, modern tractors and trailers. This equipment has a lower
frequency of breakdowns and helps attract and retain qualified drivers.
Werner has continually invested indeveloped technology to improve service to customers
and improve retention of drivers. Werner focuses on shippers that value
the broad geographic coverage, equipment capacity, technology, customized
services, and flexibility available from a large, financially stablefinancially-stable
carrier. These shippers are generally less sensitive to rate levels,
preferring to have their freight handled by a few core carriers with whom
they can establish service-based, long-term relationships.
Werner operates in the truckload segment of the trucking industry.
Within the truckload segment, Werner provides specialized services to
customers based on their trailer needs (van, flatbed, temperature-controlled)temperature-
controlled), geographic area (medium to long haul throughout the 48
contiguous states, Mexico, and Canada; regional), or conversion of their
private fleet to Werner (dedicated). During the latter part of 2003 and
continuing through 2004, the Company expanded its brokerage and intermodal
service offerings by adding senior management and developing new computer
systems. Trucking revenues accounted for 89% of total revenues, and non-
trucking and other operating revenues, primarily brokerage revenues,
accounted for 11% of total revenues in 2004. Werner's Value Added Services
("VAS") division manages the transportation and logistics requirements for
individual customers. This includes truck brokerage, transportation
routing, transportation mode selection, intermodal, transloading, and other
services. During 2005, VAS is expanding its service offerings to include
multimodal, which is a blend of truck and rail intermodal services. Value
Added Services is a non-asset-based business that is highly dependent on
information systems and qualified employees. Compared to trucking
operations which require a significant capital equipment investment, VAS's
operating margins are generally lower and returns on assets are generally
higher. Revenues generated by services accounting for more than 10% of
consolidated revenues, consisting of Truckload Transportation Services and
1
Value Added Services, for the last three years can be found under Item 7 of
this Form 10-K.
Werner has a diversified freight base and is not dependent on a small
group of customers or a specific industry for a majority of its freight.
During 2001,2004, the Company's largest 5, 10, 25, and 2550 customers comprised
24%, 32%37%, 55%, and 46%68% of the Company's revenues, respectively. No oneThe
Company's largest customer, Dollar General, accounted for more than 9% of the
Company's revenues in 2001.2004. No other customer exceeded 5% of revenues in
2004. By industry group, the Company's top 50 customers consist of 47%
retail and consumer products, 24% manufacturing/industrial, 22% grocery
products, and 7% logistics and other. Many of our customer contracts are
cancelable on 30 days notice, which is standard in the trucking industry.
Virtually all of Werner's company and owner-operator tractors are
equipped with satellite communications devices manufactured by Qualcomm
that enable the Company and drivers to conduct two-way communication using
standardized and freeform messages. This satellite technology, installed
in all trucks beginning in 1992, also enables the Company to plan and monitor
the progress of shipments. The Company obtains specific data on the
location of all trucks in the fleet at least every hour of every day. Using
the real-time data obtained from the satellite devices, Werner has
developed advanced application systems to improve customer service and
driver service. Examples of such application systems include (1) automated engine
diagnostics to continually monitor mechanical fault tolerances, (2)
software which preplans shipments that can be swapped by drivers
enroute to meet driver home time needs, without compromising on-time
delivery requirements, (3) automated "possible late load" tracking
which informs the operations department of shipments that may be
operating behind schedule, thereby allowing the Company to take
preventive measures to avoid a late delivery, and (4) the
Company's proprietary Paperless Log System to electronically preplan the
assignment of shipments to drivers based on real-time available driving
hours and to automatically keep track of truck movement and drivers' hours
of service.service, (2) software which preplans shipments that can be swapped by
drivers enroute to meet driver home time needs, without compromising on-
time delivery schedules, (3) automated "possible late load" tracking which
informs the operations department of trucks that may be operating behind
schedule, thereby allowing the Company to take preventive measures to avoid
a late delivery, and (4) automated engine diagnostics to continually
monitor mechanical fault tolerances. In June 1998, Werner Enterprises became the
first, and only,
1
trucking company in the United States to receive
authorization from the Federal Highway Administration,DOT, under a continuing pilot program, to use a global
positioning system based paperless log system in place of the paper
logbooks traditionally used by truck drivers to track their daily work
activities. TheOn September 21, 2004, the DOT's Federal Motor Carrier Safety
Administration (FMCSA) issued a
Notice of Proposed Rulemaking (FMCSA-98-2350) on May 2, 2000,("FMCSA") agency approved the Company's exemption for its
paperless log system that proposedmoves this exemption from the FMCSA-approved
pilot program to make numerous changes to the regulations which govern
drivers' hours of service.permanent status. The comment period for filing comments to
the proposed rules was initially scheduledexemption is to be due July 31, 2000,
but the deadline was extended twice. Werner Enterprises and hundreds
of other carriers and industry groups submitted comment letters to the
FMCSA in the proceeding by the final deadline of December 15, 2000.
In late 2000, Congress instructed the FMCSA to revise the proposed
regulations. Although the FMCSA announced plans in February 2002 to
develop a new set of proposed rules by separating the controversial
sections of the original proposal from those more favored, the agency
has not determined a deadline for issuing the new proposed
regulations.
On June 30, 2000, the Company, along with four other large
transportation companies, contributed their logistics business units
into a commonly owned, Internet-based transportation logistics
company, Transplace. The Company invested $5 million in cash and has
an approximate 15% equity stake in Transplace. The Company
transferred logistics business representing about 4% of total revenues
for the six months ended June 30, 2000, to Transplace. The Company is
recording its approximate 15% investment in Transplace using the
equity method of accounting and is accruing its percentage share of
Transplace's earnings as other non-operating income. As of December
31, 2001, the Company's net investment in Transplace is $3.7 million.
The Company is not responsible for the debt of Transplace.renewed every
two years.
Seasonality
In the trucking industry, revenues generally show a seasonal pattern
as some customers reduce shipments during and after the winter holiday
season. The Company's operating expenses have historically been higher in
the winter months due primarily to decreased fuel efficiency, increased
maintenance costs of revenue equipment in colder weather, and increased
insurance and claims costs due to adverse winter weather conditions. The
Company attempts to minimize the impact of seasonality through its
marketing program that seeks additional freight from certain customers
during traditionally slower shipping periods. Revenue can also be affected
by bad weather and holidays, since revenue is directly related to available
working days of shippers.
Employees and Owner-Operator Drivers
As of December 31, 2001,2004, the Company employed 9,15711,051 drivers, 579840
mechanics and maintenance personnel, 1,3151,620 office personnel for the
trucking operation, and 166211 personnel for the VAS and other non-trucking
operations. The Company also had 1,135925 contracts with independent contractors
(owner-operators)owner-operators for
services that provide both a tractor and a qualified driver or drivers.
None of the Company's U.S. or Canadian employees isare represented by a
collective bargaining unit, and the Company considers relations with its
employees to be good.
The Company recognizes that its professional driver workforce is one
of its most valuable assets. Most of Werner's drivers are compensated
based upon miles driven. For Companycompany-employed drivers, the rate per mile
2
increases with the drivers' length of service. Additional compensation may
be earned through a fuel efficiency bonus, a mileage bonus, an annual achievement bonus, and for
extra work associated with their job (loading and unloading, extra stops,
and shorter mileage trips, for example).
At times, there are shortages of drivers in the trucking industry.
In prior years, theThe number of qualified drivers in the industry was reducedhas decreased because of the elimination of federal funding for
driving schools,
changes in the demographic composition of the workforce, alternative jobs
to truck driving which become available in an improving economy, and
individual drivers' desire to be home more often, and a
declining unemployment rate in the U.S. over the past several years.
Althoughoften. In recent months, the
market for attractingrecruiting experienced drivers improved during 2001 due to
the higher domestic unemployment rate and other factors, thehas tightened. The Company
anticipates that the competition for qualified drivers will continue to be
high and cannot predict whether it will experience shortages in the future.
2
If such a shortage were to occur and increases in driver pay rates became
necessary to attract and retain drivers, the Company's results of
operations would be negatively impacted to the extent that corresponding
freight rate increases were not obtained.
The Company also recognizes that carefully selected owner-
operatorsowner-operators
complement its company-employed drivers. Owner-operators are independent
contractors that supply their own tractor and driver and are responsible
for their operating expenses. Because owner-operators provide their own
tractors, less financial capital is required from the Company for growth.
Also, owner-operators provide the Company with another source of drivers to
support its growth. The Company intends to continue its emphasis on
recruiting owner-operators, as well as company drivers. However, it has
been morecontinued to be difficult for the Company and the industry to recruit and
retain owner-operators over the past yearfew years due to higherseveral factors
including high fuel prices, tightening of equipment financing standards,
and declining values for most of the year and a weakolder used truck pricing market.trucks.
Revenue Equipment
As of December 31, 2001,2004, Werner operated 6,6407,675 company tractors and
had contracts for 1,135925 tractors owned by owner-operators. Approximately 75%A majority of the
company tractors are manufactured by Freightliner, a subsidiary of
DaimlerChrysler. Most of the remaining company tractors are manufactured by
either Peterbilt a divisionor Kenworth, divisions of PACCAR,
Inc.PACCAR. This standardization of
the company tractor fleet decreases downtime by simplifying maintenance.
The Company adheres to a comprehensive maintenance program for both
tractors and trailers. Due
to continuous upgrading of the company tractor fleet, the average age
was 1.5 years at December 31, 2001. The Company generally adheres to
a 3-year replacement cycle for most of its tractors. Owner-operator tractors are inspected prior to
acceptance by the Company for compliance with operational and safety
requirements of the Company and the Department of Transportation.DOT. These tractors are then
periodically inspected, similar to company tractors, to monitor continued
compliance. The vehicle speed of company-owned trucks is regulated to a
maximum of 65 miles per hour to improve safety and fuel efficiency.
The Company operated 19,77523,540 trailers at December 31, 2001: 17,9702004: 21,925 dry
vans; 805622 flatbeds; 935965 temperature-controlled; and 6528 other specialized
trailers. Most of the Company's trailers are manufactured by Wabash
National Corporation. As of December 31, 2001, 97%2004, 98% of the Company's fleet
of dry van trailers consisted of 53-foot trailers, and 99%98% consisted of
aluminum plate or composite (duraplate) trailers. Other trailer lengths
such as 48-foot and 57-foot are also provided by the Company to meet the
specialized needs of certain customers.
TheEffective October 1, 2002, all newly manufactured truck engines must
comply with new engine emission standards mandated by the Environmental
Protection Agency (EPA), in a 1998 consent
decree with a group of heavy-duty diesel engine makers, mandated new
standards for production of low-emission("EPA"). All truck engines bymanufactured prior to October
1, 2002.2002 are not subject to these new standards. To delay the cost and
business risk of buying these new truck engines with inadequate testing
time prior to the October 1, 2002 effective date, the Company significantly
increased the purchase of trucks with pre-October 2002 engines. As of
December 31, 2004, approximately 47% of the company-owned truck fleet
consisted of trucks with the post-October 2002 engines. The new standards call for a 37.5%Company has
experienced an approximate 5% reduction in fuel efficiency to date, and
increased depreciation expense due to the amount of nitrogen
oxides emitted by the engines, from 4.0 grams per brake-horsepower
hour to 2.5 grams. The EPA has proposed a schedule of fines to be
levied on the manufacturers of engines that fail to comply with the
standards, ranging from $1,000 to $15,000 per unit. The major engine-
makers are beginning initial production of engines to meet the new
standards in early 2002. Little is known about the new engines'
performance, fuel economy and price, or when engines will be available
for testing. However, it is expected that fuel economy may be worse
than that of the current engines. It is also anticipated that engine
prices may increase to enable engine manufacturers to recoup thehigher cost of complying with the new emissions standards. At this time, the
amount of such price increases, if they occur, are not known, nor are
the possible increases to fuel expense, supplies and maintenance
expense, and depreciation expense with the new engines. Several large
carriers have publicly stated that they are considering modifying
their normal truck-replacement cycles to allow more time for testing the new engines.
The Company will closely monitor the developmentaverage age of
these new engines to determine the Company's coursetruck fleet at December 31, 2004 is 1.6
years. A new set of action.more stringent emissions standards mandated by the EPA
will become effective for newly manufactured trucks beginning in January
2007. The Company intends to gradually reduce the average age of its truck
3
fleet in advance of the new standards. The Company expects that the
engines produced under the 2007 standards will be less fuel-efficient and
have a higher cost than the current engines.
Fuel
The Company purchases approximately 90% of its fuel through a network
of approximately 300 fuel stops throughout the United States. The Company has negotiated
discounted pricing based on certain volume commitments with these fuel
stops. Bulk fueling facilities are maintained at 7 of the Company's
terminals.terminals and 4 dedicated locations.
Shortages of fuel, increases in fuel prices, or rationing of petroleum
products can have a materially adverse effect on the operations and
profitability of the Company. Beginning in the second
half of 1999 and continuing throughout 2000, the Company experienced
significant increases in the cost of diesel fuel. Diesel fuel prices
began to decrease in the fourth quarter of 2001. The Company's customer fuel surcharge
reimbursement programs have historically enabled the Company to recover
mostfrom its customers a significant portion of the higher fuel prices from its
3
customers compared
to normalized average fuel prices. These fuel surcharges, which
automatically adjust from week to week depending on the costDepartment of Energy ("DOE") weekly
retail on-highway diesel fuel prices, enable the Company to rapidly recoup much of
the higher cost of fuel when prices increase except for miles not billable
to customers, out-of-route miles, and truck engine idling. During 2004,
the Company's fuel expense and reimbursements to owner-operator drivers for
the higher cost of fuel resulted in an additional cost of $63.5 million,
while the Company collected an additional $52.6 million in fuel surcharge
revenues to offset the fuel cost increase. Conversely, when fuel prices
decrease, fuel surcharges decrease. The Company cannot predict whether high
fuel prices will continue to decreaseincrease or will increasedecrease in the future or the
extent to which fuel surcharges will be collected to offset such increases.
As of December 31, 2001,2004, the Company had no derivative financial
instruments to reduce its exposure to fuel price fluctuations.
The Company maintains aboveground and underground fuel storage tanks
at most of its terminals. Leakage or damage to these facilities could
expose the Company to environmental clean-up costs. The tanks are
routinely inspected to help prevent and detect such problems.
Regulation
The Company is a motor carrier regulated by the United States
Department ofDOT and the Federal
and Provincial Transportation (DOT).Departments in Canada. The DOT generally
governs matters such as safety requirements, registration to engage in
motor carrier operations, accounting systems, certain mergers,
consolidations, acquisitions, and periodic financial reporting. The
Company currently has a satisfactory DOT safety rating, which is the
highest available rating. A conditional or unsatisfactory DOT safety
rating could have an adverse effect on the Company, as some of the
Company's contracts with customers require a satisfactory rating. Such
matters as weight and dimensions of equipment are also subject to federal,
state, and international regulations.
The FMCSA issued a final rule on April 24, 2003 that made several
changes to the regulations that govern truck drivers' hours of service
("HOS"). These new federal regulations became effective on January 4,
2004. On July 16, 2004, the U.S. Circuit Court of Appeals for the District
of Columbia rejected these new hours of service rules for truck drivers
that had been in place since January 2004 because it said the FMCSA had
failed to address the impact of the rules on the health of drivers as
required by Congress. In addition, the judge's ruling noted other areas of
concern including the increase in driving hours from 10 hours to 11 hours,
the exception that allows drivers in trucks with sleeper berths to split
their required rest periods, the new rule allowing drivers to reset their
70-hour clock to 0 hours after 34 consecutive hours off duty, and the
decision by the FMCSA not to require the use of electronic onboard
recorders to monitor driver compliance. On September 30, 2004, the
extension of the Federal highway bill signed into law by the President
extended the current hours of service rules for one year or whenever the
FMCSA develops a new set of regulations, whichever comes first. On January
24, 2005, the FMCSA re-proposed its April 2003 HOS rules, adding references
to how the rules would affect driver health, but making no changes to the
regulations. The FMCSA is seeking public comments by March 10, 2005 on
what changes to the rule, if any, are necessary to respond to the concerns
raised by the court, and to provide data or studies that would support
changes to, or continued use of, the 2003 rule. The Company cannot predict
what rule changes, if any, will result from the court's ruling, nor the
4
ultimate impact of any upcoming changes to the hours of service rules. Any
changes could have an adverse effect on the operations and profitability of
the Company.
The Company has unlimited authority to carry general commodities in
interstate commerce throughout the 48 contiguous states. The Company currently has
authority to carry freight on an intrastate basis in 4443 states. The
Federal Aviation Administration Authorization Act of 1994 (the FAAA Act)"FAAA Act")
amended sections of the Interstate Commerce Act to prevent states from
regulating rates, routes, or service of motor carriers after January 1,
1995. The FAAA Act did not address state oversight of motor carrier safety
and financial responsibility or state taxation of transportation. If a
carrier wishes to operate in intrastate commerce in a state where it did
not previously have intrastate authority, it must, in most cases, still
apply for authority.
The Company's operations are subject to various federal, state, and
local environmental laws and regulations, implemented principally by the
EPA and similar state regulatory agencies, governing the management of
hazardous wastes, other discharge of pollutants into the air and surface
and underground waters, and the disposal of certain substances. The
Company believesdoes not believe that its operations are in material compliance with current lawsthese regulations has a
material effect on its capital expenditures, earnings, and regulations.
President Bush is considering implementingcompetitive
position.
The implementation of various provisions of the North American Free
Trade Agreement (NAFTA), which could result("NAFTA") may alter the competitive environment for
shipping into and out of Mexico. It is not possible at this time to
predict when and to what extent that impact will be felt by companies
transporting goods into and out of Mexico. The Company does a substantial
amount of business in increased competition between U.S.international freight shipments to and Mexicanfrom the
United States and Mexico (see Note 9 "Segment Information" in the Notes to
Consolidated Financial Statements under Item 8 of this Form 10-K) and is
continuing to prepare for the various scenarios that may finally result.
The Company believes it is one of the five largest truckload carriers for truckload
services between these two countries.in
terms of the volume of freight shipments to and from the United States and
Mexico.
Competition
The trucking industry is highly competitive and includes thousands of
trucking companies. It is estimated that the annual revenue of domestic
trucking amounts to $400approximately $600 billion per year. The Company has a
small but growing share (estimated at approximately 1%) of the markets
targeted by the Company. The Company competes primarily with other
truckload carriers. Railroads, less-than-
truckloadless-than-truckload carriers, and private
carriers also provide competition, but to a much lesser degree.
Competition for the freight transported by the Company is based
primarily on service and efficiency and, to some degree, on freight rates
alone. Few other truckload carriers have greater financial resources, own
more equipment, or carry a larger volume of freight than the Company. The
Company is one of the five largest carriers in the truckload transportation
industry.
Industry-wide truck capacity in the truckload sector is being limited
due to a number of factors. An extremely challenging driver recruiting
market is causing most large truckload carriers to limit their fleet
additions. There are continuing cost issues and concerns with the new post-
October 2002 diesel engines. Trucking company failures in the last five
years are continuing at a pace higher than the previous fifteen years.
Some truckload carriers are having difficulty obtaining adequate trucking
insurance coverage at a reasonable price. Many truckload carriers,
including Werner, slowed their fleet growth in the last four years, and
some carriers have downsized their fleets to improve their operating
margins and returns.
Internet Web Site
The Company maintains a web site where additional information
concerning its business can be found. The address of that web site is
www.werner.com. The Company makes available free of charge on its Internet
5
web site its annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as
reasonably practicable after it electronically files or furnishes such
materials to the SEC. Information on the Company's website is not
incorporated by reference into this annual report on Form 10-K.
Forward-Looking Information
The forward-looking statements in this report, which reflect
management's best judgment based on factors currently known, involve risks
and uncertainties. Actual results could differ materially from those
anticipated in the forward-looking statements included herein as a result
of a number of factors, including, but not limited to, those 4
discussed in
Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations and Financial Condition.Operations."
ITEM 2. PROPERTIES
Werner's headquarters is located alongnearby Interstate 80 just west of
Omaha, Nebraska, on approximately 197195 acres, 147111 of which are held for
future expansion. The Company's 286,000 square-foot headquarters office building includes a 5,000 square-foot
computer center, drivers' lounge areas, a drivers' orientation section, a
cafeteria, and a Company store. The Omaha headquarters also consists of 131,000 square
feet ofa
driver training facility and equipment maintenance and repair facilities
containing a central parts warehouse, frame straightening and alignment
machine, truck and trailer wash areas, equipment safety lanes, body shops
for tractors and trailers, and a paint booth including a 77,500 square-foot trailer
maintenance facility constructed in 1999. Portions of the former
trailer maintenance building were converted into a driver training
facility in 2001. The Company owns all of its corporate headquarters
facilities.booth. The Company's headquarters
facilities have suitable space available to accommodate planned expansion needs for
the next 3 to 5 years.
The Company also has several terminals throughout the United States,
consisting of office and/or maintenance facilities. The Company recently
added equipment maintenance body shops to its Dallas and its subsidiaries ownSpringfield
terminals and is currently constructing a 22,000 square-foot
terminal in Springfield, Ohio, a 33,000 square-foot facility near
Denver, an 18,000 square-foot facility near Los Angeles, a 31,000
square-foot terminal near Atlanta, a 48,000 square-foot terminal in
Dallas (including 21,000 square feet of trailer repair, parts, and body shop facilities added in 2001), and a 32,000 square-footat its Atlanta
terminal. The Company's terminal in Phoenix.locations are described below:
Location Owned or Leased Description
- -------- --------------- -----------
Omaha, Nebraska Owned Corporate headquarters,
maintenance
Omaha, Nebraska Owned Disaster recovery,
warehouse
Phoenix, Arizona Owned Office, maintenance
Fontana, California Owned Office, maintenance
Denver, Colorado Owned Office, maintenance
Atlanta, Georgia Owned Office, maintenance
Indianapolis, Indiana Leased Office, maintenance
Springfield, Ohio Owned Office, maintenance
Allentown, Pennsylvania Leased Office, maintenance
Dallas, Texas Owned Office, maintenance
Laredo, Texas Owned Office, maintenance,
transloading
Lakeland, Florida Leased Office
Portland, Oregon Leased Office
Ardmore, Oklahoma Leased Maintenance
Indianola, Mississippi Leased Maintenance
Scottsville, Kentucky Leased Maintenance
Fulton, Missouri Leased Maintenance
Tomah, Wisconsin Leased Maintenance
Newbern, Tennessee Leased Maintenance
The Company leases terminal facilitiesapproximately 60 small sales offices and trailer
parking yards in Allentown,
Pennsylvania and in Indianapolis, Indiana. All eightvarious locations include office and maintenance space. The Company opened a new 16,000
square-foot international terminal in Laredo, Texas in May of 2001.
The Company alsothroughout the country, owns a 73,000 square-foot disaster recovery and
warehouse facility96-room
motel located near the Company's headquarters, owns four low-income housing
apartment complexes in anotherthe Omaha area, of Omaha and has 50% ownership in a 125,000
square-foot warehouse located near the Company's headquarters.
Additionally,Currently, the Company leases several smallhas 16 locations in its Fleet Truck Sales network.
Fleet Truck Sales, a wholly owned subsidiary, is one of the largest
domestic class 8 truck sales officesentities in the U.S. and trailer parking yards in various locations throughoutsells the country.Company's
used trucks and trailers.
6
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to routine litigation incidental to its
business, primarily involving claims for personal injury, and property damage,
and workers' compensation incurred in the transportation of freight. The
Company has maintained a self-insurance program with a qualified department
of Risk Management professionals since 1988. These employees manage the
Company's property damage, cargo, liability, and workers' compensation
claims. The Company's self-insurance reserves are reviewed by an actuary
every six months.
The Company has assumedbeen responsible for liability for claims up to $500,000,
plus administrative expenses, for each occurrence involving personal injury
or property damage.damage since August 1, 1992. For the policy year beginning
August 1, 2004, the Company increased its self-insured retention ("SIR")
amount to $2.0 million per occurrence. The Company is also responsible for
varying annual aggregate amounts of liability for claims above
$500,000 and below $4,000,000. For the policy year ending August 1,
2002, these annual aggregate amounts total $4,500,000. The Company
maintains insurance, which covers liability in excess of thisthe
self-insured retention. The following table reflects the self-insured
retention levels and aggregate amounts of liability for personal injury and
property damage claims since August 1, 2001:
Primary Coverage
Coverage Period Primary Coverage SIR/deductible
- ------------------------------ ---------------- ------------------
August 1, 2001 - July 31, 2002 $3.0 million $500,000 (1)
August 1, 2002 - July 31, 2003 $3.0 million $500,000 (2)
August 1, 2003 - July 31, 2004 $3.0 million $500,000 (3)
August 1, 2004 - July 31, 2005 $5.0 million $2.0 million (4)
(1) Subject to an additional $1.5 million self-insured aggregate amount in
the $0.5 to $1.0 million layer, a $1.0 million aggregate in the $1.0 to
$2.0 million layer, no aggregate (i.e., fully insured) in the $2.0 to $3.0
million layer, and a $2.0 million aggregate in the $3.0 to $4.0 million
layer.
(2) Subject to an additional $1.5 million aggregate in the $0.5 to $1.0
million layer, a $1.0 million aggregate in the $1.0 to $2.0 million layer,
no aggregate (i.e., fully insured) in the $2.0 to $3.0 million layer, and
self-insured in the $3.0 to $5.0 million layer.
(3) Subject to an additional $1.5 million aggregate in the $0.5 to $1.0
million layer, a $1.0 million aggregate in the $1.0 to $2.0 million layer,
no aggregate (i.e., fully insured) in the $2.0 to $3.0 million layer, a
$6.0 million aggregate in the $3.0 to $5.0 million layer, and a $5.0
million aggregate in the $5.0 to $10.0 million layer.
(4) Subject to an additional $3.0 million aggregate in the $2.0 to $3.0
million layer, no aggregate (i.e., fully insured) in the $3.0 to $5.0
million layer, and a $5.0 million aggregate in the $5.0 to $10.0 million
layer.
The Company's primary insurance covers the range of liability where
the Company expects most claims to occur. Liability claims substantially
in excess of coverage amounts listed in the table above, if they occur, are
covered under premium-based policies with reputable insurance companies to
coverage levels that management considers adequate. The Company believes that adverse results in oneis also
responsible for administrative expenses for each occurrence involving
personal injury or more of these claims would not
have a material adverse effect on its results of operations or
financial position.property damage. See also Note (1)1 "Insurance and Claims
Accruals" and Note (7)7 "Commitments and Contingencies" in the Notes to
Consolidated Financial Statements under Item 8 of this Form 10-K.
5On July 29, 2004 and October 25, 2004, the Company was served with
complaints naming it and others as defendants in two lawsuits stemming from
a multi-vehicle accident that occurred in February 2004. The lawsuits were
filed in Superior Court of the State of California, County of San
Bernardino, Barstow District and seek an unspecified amount of compensatory
damages. The Company brokered a shipment to an independent carrier with a
satisfactory safety rating which was then involved in the accident,
resulting in four fatalities and multiple personal injuries. It is
possible that additional lawsuits may be filed by other parties involved in
the accident. The Company's Broker-Carrier Agreement with the independent
carrier provides for the carrier to indemnify and defend the Company for
any loss arising out of or in connection with the transportation of
property under the contract. The Company also has a certificate of
liability insurance from the carrier indicating that it has insurance
coverage of up to $2.0 million per occurrence. For the policy year ended
July 31, 2004, the Company's liability insurance policies for coverage
ranging up to $10.0 million per occurrence have various annual aggregate
levels of liability for all accidents totaling $9.0 million that is the
responsibility of the Company (see insurance aggregates in table above).
Amounts in excess of $10.0 million are covered under premium-based policies
to coverage levels that management considers adequate. As such, the
7
potential exposure to the Company ranges from $0 to $9.0 million. The
lawsuits are currently in the discovery phase. The Company plans to
vigorously defend the suits, and the amount of any possible loss to the
Company cannot currently be estimated. However, the Company believes an
unfavorable outcome in these lawsuits, if it were to occur, would not have
a material impact on the financial position, results of operations, and
cash flows of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 2001,2004, no matters were submitted to a vote
of security holders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, AND RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Price Range of Common Stock
The Company's common stock trades on the Nasdaq National Market tier
of The Nasdaq Stock Market under the symbol WERN."WERN". The following table
sets forth for the quarters indicated the high and low sale
pricesbid information per
share of the Company's common stock inquoted on the Nasdaq National Market
and the Company's dividends declared per common share from January 1, 2000,2003,
through December 31, 2001,2004, after giving retroactive effect for the
March 2002September 2003 stock split discussed below.
Dividends
Declared Per
High Low Common Share
------ ------ ------------
20012004
Quarter ended:
March 31 $14.91 $11.34 $.019$20.00 $17.65 $.025
June 30 18.87 11.67 .01921.11 17.76 .035
September 30 17.93 11.94 .01921.19 17.55 .035
December 31 20.48 12.07 .019
200023.24 18.68 .035
Dividends
Declared Per
High Low Common Share
------ ------ ------------
2003
Quarter ended:
March 31 $13.22 $ 9.23 $.019$17.50 $13.98 $.016
June 30 14.34 8.11 .01918.98 15.26 .024
September 30 11.11 8.58 .01921.93 16.73 .025
December 31 13.31 7.55 .01921.00 16.98 .025
As of February 27, 2002,10, 2005, the Company's common stock was held by 232227
stockholders of record and approximately 5,0007,900 stockholders through nominee
or street name accounts with brokers. The high and low bid prices per
share of the Company's common stock in the Nasdaq National Market as of
February 10, 2005 were $20.89 and $20.06, respectively.
8
Dividend Policy
The Company has been paying cash dividends on its common stock
following each of its quarters since the fiscal quarter ended May 31, 1987.
The Company does not currently intendintends to discontinuecontinue payment of dividends on a
quarterly basis and does not currently anticipate any restrictions on its
future ability to pay such dividends. However, no assurance can be given
that dividends will be paid in the future since they are dependent on
earnings, the financial condition of the Company, and other factors.
Common Stock Split
On February 11, 2002,September 2, 2003, the Company announced that its Board of
Directors declared a four-for-threefive-for-four split of the Company's common stock
effected in the form of a 33 1/325 percent stock dividend. The stock dividend
was payablepaid on March 14, 2002,September 30, 2003, to stockholders of record at the close of
business on February 25, 2002.September 16, 2003. No fractional shares of common stock were
issued in connection with the stock split. Stockholders entitled to
fractional shares received a proportional cash payment based on the closing
price of a share of common stock on February 25, 2002.September 16, 2003.
All share and per-share information included in this Form 10-K,
including in the accompanying consolidated financial statements, for all
periods presented have been adjusted to retroactively reflect the stock
split.
6Equity Compensation Plan Information
For information on the Company's equity compensation plans, please
refer to Item 12, "Security Ownership of Certain Beneficial Owners and
Management".
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
On December 29, 1997, the Company announced that its Board of
Directors had authorized the Company to repurchase up to 4,166,666 shares
of its common stock. On November 24, 2003, the Company announced that its
Board of Directors approved an increase to its authorization for common
stock repurchases of 3,965,838 shares for a total of 8,132,504 shares. As
of December 31, 2004, the Company had purchased 4,335,704 shares pursuant
to this authorization and had 3,796,800 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 until
withdrawn by the Board of Directors. The Company did not repurchase any
shares of common stock during the fourth quarter of 2004.
9
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.
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
(In thousands, except per share amounts)
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Operating revenues $1,678,043 $1,457,766 $1,341,456 $1,270,519 $1,214,628
$1,052,333 $863,417 $772,095
Net income 87,310 73,727 61,627 47,744 48,023
60,011 57,246 48,378
EarningsDiluted earnings per share (diluted)* 0.74 0.76 0.94share* 1.08 0.90 0.76 Cash flow from operations 226,920 170,147 131,977 137,940 126,0370.60 0.61
Cash dividends declared per share* .075 .075 .075 .070.130 .090 .064 .060 .060
Return on average stockholders'
equity (1) 11.9% 10.9% 10.0% 8.5% 9.3%
12.8% 13.7% 13.1%Return on average total assets (2) 7.5% 6.7% 6.1% 5.1% 5.3%
Operating ratio (consolidated) (3) 91.6% 91.9% 92.6% 93.8% 93.2% 90.3% 88.9% 89.9%
Book value per share* 9.27 8.55 7.86 6.98 6.20(4) 9.76 8.90 8.12 7.42 6.84
Total assets 1,225,775 1,121,527 1,062,878 964,014 927,207 896,879 769,196 667,638
Long-term debt 20,000 105,000 120,000 100,000 60,000
Total debt (current and long-term) - - 20,000 50,000 105,000
145,000 100,000 60,000
Stockholders' equity 773,169 709,111 647,643 590,049 536,084 494,772 440,588 395,118
- -------------
* After*After giving retroactive effect for the September 2003 five-for-four stock
split and the March 2002 four-for-three stock split (all years presented).
(1) Net income expressed as a percentage of average stockholders' equity.
Return on equity is a measure of a corporation's profitability relative to
recorded shareholder investment.
(2) Net income expressed as a percentage of average total assets. Return on
assets is a measure of a corporation's profitability relative to recorded
assets.
(3) Operating expenses expressed as a percentage of operating revenues.
Operating ratio is a common measure in the trucking industry used to
evaluate profitability.
(4) Stockholders' equity divided by common shares outstanding as of the end
of the period. Book value per share indicates the dollar value remaining
for common shareholders if all assets were liquidated and all debts were
paid at the recorded amounts.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
Critical Accounting PoliciesThis report contains historical information, as well as forward-
looking statements that are based on information currently available to the
Company's management. The forward-looking statements are made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act
of 1995. The Company believes the assumptions underlying these forward-
looking statements are reasonable based on information currently available;
however, any of the assumptions could be inaccurate, and therefore, actual
results may differ materially from those anticipated in the forward-looking
statements as a result of certain risks and uncertainties. These risks
include, but are not limited to, those discussed in the section of this
Item entitled "Forward-Looking Statements and Risk Factors". Caution
should be taken not to place undue reliance on forward-looking statements
made herein, since the statements speak only as of the date they are made.
The Company undertakes no obligation to publicly release any revisions to
any forward-looking statements contained herein to reflect events or
circumstances after the date of this report or to reflect the occurrence of
unanticipated events.
Overview:
The Company operates in the truckload sector of the trucking industry,
with a focus on transporting consumer nondurable products that ship more
consistently throughout the year. The Company's success depends on its
ability to efficiently manage its resources in the delivery of truckload
transportation and logistics services to its customers. Resource
requirements vary with customer demand, which may be subject to seasonal or
general economic conditions. The Company's ability to adapt to changes in
customer transportation requirements is a key element in efficiently
deploying resources and in making capital investments in tractors and
10
trailers. Although the Company's business volume is not highly
concentrated, the Company may also be affected by the financial failure of
its customers or a loss of a customer's business from time-to-time.
Operating revenues consist of trucking revenues generated by the five
operating fleets in the Truckload Transportation Services segment
(medium/long-haul van, dedicated, regional short-haul, flatbed, and
temperature-controlled) and non-trucking revenues generated primarily by
the Company's Value Added Services segment. The Company's Truckload
Transportation Services segment also includes a small amount of non-
trucking revenues for the portion of shipments delivered to or from Mexico
where it utilizes a third-party carrier, and for a few of its dedicated
accounts where the services of third-party carriers are used to meet
customer capacity requirements. Non-trucking revenues reported in the
operating statistics table include those revenues generated by the VAS
segment, as well as the non-trucking revenues generated by the Truckload
Transportation Services segment. Trucking revenues accounted for 89% of
total operating revenues in 2004, and non-trucking and other operating
revenues accounted for 11%.
Trucking services typically generate revenue on a per-mile basis.
Other sources of trucking revenue include fuel surcharges and accessorial
revenue such as stop charges, loading/unloading charges, and equipment
detention charges. Because fuel surcharge revenues fluctuate in response
to changes in the cost of fuel, these revenues are identified separately
within the operating statistics table and are excluded from the statistics
to provide a more meaningful comparison between periods. Non-trucking
revenues generated by a fleet whose operations are part of the Truckload
Transportation Services segment are included in non-trucking revenue in the
operating statistics table so that the revenue statistics in the table are
calculated using only the revenues generated by the Company's trucks. The
key statistics used to evaluate trucking revenues, excluding fuel
surcharges, are revenue per truck per week, the per-mile rates charged to
customers, the average monthly miles generated per tractor, the percentage
of empty miles, the average trip length, and the number of tractors in
service. General economic conditions, seasonal freight patterns in the
trucking industry, and industry capacity are key factors that impact these
statistics.
The Company's most significant resource requirements are qualified
drivers, tractors, trailers, and related costs of operating its equipment
(such as fuel and related fuel taxes, driver pay, insurance, and supplies
and maintenance). The Company has historically been successful mitigating
its risk to increases in fuel prices by recovering additional fuel
surcharges from its customers; however, there is no assurance that current
recovery levels will continue in future periods. For example, during 2004
the Company's fuel expense and reimbursements to owner-operator drivers for
the higher cost of fuel resulted in an additional cost of $63.5 million.
During 2004, the Company collected an additional $52.6 million in fuel
surcharge revenues from its customers to offset the fuel cost increase.
The Company's financial results are also affected by availability of
drivers and the market for new and used trucks. Because the Company is
self-insured for cargo, personal injury, and property damage claims on its
trucks and for workers' compensation benefits for its employees
(supplemented by premium-based coverage above certain dollar levels),
financial results may also be affected by driver safety, medical costs, the
weather, the legal and regulatory environment, and the costs of insurance
coverage to protect against catastrophic losses.
A common industry measure used to evaluate the profitability of the
Company and its trucking operating fleets is the operating ratio (operating
expenses expressed as a percentage of operating revenues). The most
significant variable expenses that impact the trucking operation 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. As
such, the Company also evaluates 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 2004 to 2003, several industry-wide issues, including
uncertainty regarding possible changes to the hours of service regulations,
a challenging driver recruiting market, and rising fuel prices, could cause
costs to increase in future periods. The Company's main fixed costs
11
include depreciation expense for tractors and trailers and equipment
licensing fees (included in taxes and licenses expense). Depreciation
expense has been affected by the new engine emission standards that became
effective in October 2002 for all newly purchased trucks, which have
increased truck purchase costs. The trucking operations require substantial
cash expenditures for tractors and trailers. The Company has maintained a
three-year replacement cycle for company-owned tractors. These purchases
are funded by net cash from operations, as the Company repaid its last
remaining debt in December 2003.
Non-trucking services provided by the Company, primarily through its
VAS division, include freight brokerage, intermodal, freight transportation
management, and other services. During 2005, VAS is expanding its service
offerings to include multimodal, which is a blend of truck and rail
intermodal services. Unlike the Company's trucking operations, the non-
trucking operations are less asset-intensive and are instead dependent upon
information systems, qualified employees, and the services of other third-
party providers. The most significant expense item related to these non-
trucking services is the cost of transportation paid by the Company to
third-party providers, which is recorded as rent and purchased
transportation expense. Other expenses include salaries, wages and
benefits and computer hardware and software depreciation. The Company
evaluates the non-trucking operations by reviewing the gross margin
percentage (revenues less rent and purchased transportation expense
expressed as a percentage of revenues) and the operating margin. The
operating margins for the non-trucking business are generally lower than
those of the trucking operations, but the returns on assets are
substantially higher.
Results of Operations
The following table sets forth certain industry data regarding the
freight revenues and operations of the Company for the periods indicated.
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Trucking revenues, net of
fuel surcharge (1) $1,378,705 $1,286,674 $1,215,266 $1,150,361 $1,097,214
Trucking fuel surcharge
revenues (1) 114,135 61,571 29,060 46,157 51,437
Non-trucking revenues,
including VAS (1) 175,490 100,916 89,450 66,739 60,047
Other operating revenues (1) 9,713 8,605 7,680 7,262 5,930
---------- ---------- ---------- ---------- ----------
Operating revenues (1) $1,678,043 $1,457,766 $1,341,456 $1,270,519 $1,214,628
========== ========== ========== ========== ==========
Operating ratio
(consolidated) (2) 91.6% 91.9% 92.6% 93.8% 93.2%
Average revenues per tractor
per week (3) $ 3,136 $ 2,988 $ 2,932 $ 2,874 $ 2,889
Average annual miles per
tractor 121,644 121,716 123,480 123,660 125,568
Average annual trips per
tractor 185 173 166 166 168
Average total miles per trip 657 703 746 744 746
Average loaded miles per trip 583 627 674 670 672
Total miles (loaded and
empty) (1) 1,028,458 1,008,024 984,305 952,003 916,971
Average revenues per total
mile (3) $ 1.341 $ 1.277 $ 1.235 $ 1.208 $ 1.197
Average revenues per loaded
mile (3) $ 1.511 $ 1.431 $ 1.366 $ 1.342 $ 1.328
Average percentage of empty
miles 11.3% 10.8% 9.6% 10.0% 9.9%
Average tractors in service 8,455 8,282 7,971 7,698 7,303
Total tractors (at year end):
Company 7,675 7,430 7,180 6,640 6,300
Owner-operator 925 920 1,020 1,135 1,175
---------- ---------- ---------- ---------- ----------
Total tractors 8,600 8,350 8,200 7,775 7,475
========== ========== ========== ========== ==========
Total trailers (at year end) 23,540 22,800 20,880 19,775 19,770
========== ========== ========== ========== ==========
(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
12
The following table sets forth the revenues, operating expenses, and
operating income for the Truckload Transportation Services segment.
2004 2003 2002
----------------- ----------------- -----------------
Truckload Transportation Services
(amounts in 000's) $ % $ % $ %
- --------------------------------- ----------------- ----------------- -----------------
Revenues $1,506,937 100.0 $1,358,428 100.0 $1,254,728 100.0
Operating expenses 1,371,109 91.0 1,240,282 91.3 1,155,890 92.1
---------- ---------- ----------
Operating income $ 135,828 9.0 $ 118,146 8.7 $ 98,838 7.9
========== ========== ==========
Higher fuel prices and higher fuel surcharge collections have the
effect of increasing the Company's consolidated operating ratio and the
Truckload Transportation Services segment's operating ratio. The following
table calculates the Truckload Transportation Services segment's operating
ratio using total operating expenses, net of fuel surcharge revenues, as a
percentage of revenues, excluding fuel surcharges. Eliminating this
sometimes volatile source of revenue provides a more consistent basis for
comparing the results of operations from period to period.
2004 2003 2002
----------------- ----------------- -----------------
Truckload Transportation Services
(amounts in 000's) $ % $ % $ %
- --------------------------------- ----------------- ----------------- -----------------
Revenues $1,506,937 $1,358,428 $1,254,728
Less: trucking fuel surcharge
revenues 114,135 61,571 29,060
---------- ---------- ----------
Revenues, net of fuel surcharge 1,392,802 100.0 1,296,857 100.0 1,225,668 100.0
---------- ---------- ----------
Operating expenses 1,371,109 1,240,282 1,155,890
Less: trucking fuel surcharge
revenues 114,135 61,571 29,060
---------- ---------- ----------
Operating expenses, net of fuel
surcharge 1,256,974 90.2 1,178,711 90.9 1,126,830 91.9
---------- ---------- ----------
Operating income $ 135,828 9.8 $ 118,146 9.1 $ 98,838 8.1
========== ========== ==========
The following table sets forth the non-trucking revenues, operating
expenses, and operating income for the VAS segment. Other operating
expenses for the VAS segment primarily consist of salaries, wages and
benefits expense. VAS also incurs smaller expense amounts in the supplies
and maintenance, depreciation, rent and purchased transportation (excluding
third-party transportation costs), communications and utilities, and other
operating expense categories.
2004 2003 2002
----------------- ----------------- -----------------
Value Added Services (amounts
in 000's) $ % $ % $ %
- --------------------------------- ----------------- ----------------- -----------------
Revenues $ 161,111 100.0 $ 89,742 100.0 $ 80,012 100.0
Rent and purchased
transportation expense 145,474 90.3 83,387 92.9 74,635 93.3
---------- ---------- ----------
Gross margin 15,637 9.7 6,355 7.1 5,377 6.7
Other operating expenses 10,006 6.2 5,901 6.6 4,046 5.0
---------- ---------- ----------
Operating income $ 5,631 3.5 $ 454 0.5 $ 1,331 1.7
========== ========== ==========
2004 Compared to 2003
- ---------------------
Operating Revenues
Operating revenues increased 15.1% in 2004 compared to 2003.
Excluding fuel surcharge revenues, trucking revenues increased 7.2% due
primarily to a 5.0% increase in revenue per total mile, excluding fuel
surcharges, and a 2.1% increase in the average number of tractors in
service. Revenue per total mile, excluding fuel surcharges, increased due
to customer rate increases, an improvement in freight selection, and a 7.0%
decrease in the average loaded trip length due to growth in the Company's
dedicated fleet. Part of the growth in the dedicated fleet was offset by a
decrease in the Company's medium-to-long-haul van fleet. Dedicated fleet
business tends to have lower miles per trip, a higher empty mile
percentage, a higher rate per loaded mile, and lower miles per truck. The
growth in dedicated business had a corresponding effect on these same
operating statistics, as reported above, for the entire Company. During
13
2004, the truckload freight environment continued to strengthen due to
ongoing truck capacity constraints and a steadily improving economy.
Beginning in August, the Company's sales and marketing team met with
customers to negotiate annual rate increases to recoup the significant cost
increases in fuel, driver pay, equipment, and insurance and to improve
margins. Much of the Company's non-dedicated contractual business renewed
in the latter part of third quarter and fourth quarter. As a result of
these efforts, revenue per total mile, net of fuel surcharges, rose seven
cents a mile, or 5.3%, sequentially from second quarter 2004 to fourth
quarter 2004.
Fuel surcharge revenues, which represent collections from customers
for the higher cost of fuel, increased to $114.1 million in 2004 from $61.6
million in 2003 due to higher average fuel prices in 2004. To lessen the
effect of fluctuating fuel prices on the Company's margins, the Company
collects fuel surcharge revenues from its customers. These surcharge
programs, which automatically adjust depending on the DOE weekly retail on-
highway diesel prices, continued in effect throughout 2004. The Company's
fuel surcharge program has historically enabled the Company to recover a
significant portion of the fuel price increases. Typical programs specify
a base price per gallon when surcharges can begin to be billed. Above this
price, the Company bills a surcharge rate per mile when the price per
gallon falls in a bracketed range of fuel prices. When fuel prices
increase, fuel surcharges recoup a lower percentage of the incrementally
higher costs due to the impact of inadequate recovery for empty miles not
billable to customers, out-of-route miles, truck idle time, and "bracket
creep". "Bracket creep" occurs when fuel prices approach the upper limit
of the bracketed range, but a higher surcharge rate per mile cannot be
billed until the fuel price per gallon reaches the next bracket. Also, the
DOE survey price used for surcharge contracts changes once a week while
fuel prices change more frequently. Because collections of fuel surcharges
typically trail fuel price changes, rapid fuel price increases cause a
temporarily unfavorable effect of fuel prices increasing more rapidly than
fuel surcharge revenues. This effect typically reverses when fuel prices
fall.
VAS revenues increased to $161.1 million in 2004 from $89.7 million in
2003, or 79.5%, and gross margin increased 146.1% for the same period.
Most of this revenue growth came from the Company's brokerage group within
VAS. VAS revenues consist primarily of freight brokerage, intermodal,
freight transportation management, and other services. During 2004, the
expansion of the Company's VAS services assisted customers by providing
needed capacity while driving cost out of their freight network. The
Company expects to continue to capitalize on the sophisticated service,
management, and technology advantages of its logistics solution in an
improving freight market. During 2005, VAS is expanding its service
offerings to include multimodal. Multimodal provides for the movement of
freight using a blending of truck and rail intermodal service solutions.
Operating Expenses
The Company's operating ratio was 91.6% in 2004 versus 91.9% in 2003.
Because the Company's VAS business operates with a lower operating margin
and a higher return on assets than the trucking business, the substantial
growth in VAS business in 2004 compared to 2003 affected the Company's
overall operating ratio. As explained on page 13, the significant increase
in fuel expense and related fuel surcharge revenues also affected the
operating ratio. The tables on page 13 show the operating ratios and
operating margins for the Company's two reportable segments, Truckload
Transportation Services and Value Added Services.
The following table sets forth the cost per total mile of operating
expense items for the Truckload Transportation Services segment for the
periods indicated. The Company evaluates operating costs for this segment
on a per-mile basis to adjust for the impact on the percentage of total
operating revenues caused by changes in fuel surcharge revenues and rate
per mile increases, which provides a more consistent basis for comparing
the results of operations from period to period.
14
Increase Increase
(Decrease) (Decrease)
2004 2003 per Mile %
------------------------------------
Salaries, wages and benefits $.519 $.502 $.017 3.4
Fuel .211 .158 .053 33.5
Supplies and maintenance .130 .117 .013 11.1
Taxes and licenses .106 .103 .003 2.9
Insurance and claims .075 .072 .003 4.2
Depreciation .138 .132 .006 4.5
Rent and purchased transportation .140 .131 .009 6.9
Communications and utilities .018 .016 .002 12.5
Other (.003) (.001) (.002) (200.0)
Owner-operator costs are included in rent and purchased transportation
expense. Owner-operator miles as a percentage of total miles were 12.7% in
2004 compared to 12.6% in 2003. Owner-operators are independent
contractors who supply their own tractor and driver and are responsible for
their operating expenses including fuel, supplies and maintenance, and fuel
taxes. Because the change in owner-operator miles as a percentage of total
miles was only minimal, there was essentially no shift in costs to the rent
and purchased transportation category from other expense categories. Over
the past year, attracting and retaining owner-operator drivers continued to
be difficult due to the challenging operating conditions.
Salaries, wages and benefits for non-drivers increased in 2004
compared to 2003 to support the growth in the VAS segment. The increase in
salaries, wages and benefits per mile of 1.7 cents for the Truckload
Transportation Services segment is primarily the result of higher driver
pay per mile. On August 1, 2004, the Company's previously announced two
cent per mile pay raise became effective for company solo drivers in its
medium-to-long-haul van division, representing approximately 25% of total
drivers. The Company recovered a substantial portion of this pay raise
through its customer rate increase negotiations. As a result of the new
hours of service regulations effective at the beginning of 2004, the
Company increased driver pay in the non-dedicated fleets for multiple stop
shipments. Additional revenue from increased rates per stop offset most of
the increased driver pay. The increase in dedicated business as a
percentage of total trucking business also contributed to the increase in
driver pay per mile as dedicated drivers are usually compensated at a
higher rate per mile due to the lower average miles per truck. The
Company's dedicated fleets also typically have higher amounts of
loading/unloading pay and minimum pay.
In recent months, the market for recruiting experienced drivers has
tightened. The Company experienced initial improvement in driver turnover
after announcing the two-cent per mile pay raise that became effective in
August 2004; however, that improvement has been difficult to sustain in
recent months. Alternative jobs with an improving economy, weak population
demographics, and competitor pay raises are expected to keep the driver
market challenging. The Company is expanding its student-driver training
program to attract more drivers to the Company and the industry. The
Company is also offering an increasing percentage of driving jobs with more
frequent home time in its dedicated, regional, and network-optimization
fleets.
The Company instituted an optional per diem reimbursement program for
eligible company drivers (approximately half of total non-student company
drivers) beginning in April 2004. This program increases a company
driver's net pay per mile, after taxes. As a result, driver pay per mile
was slightly lower before considering the factors above that increased
driver pay per mile, and the Company's effective income tax rate was higher
in 2004 compared to 2003. The Company expects the cost of the per diem
program to be neutral, because the combined driver pay rate per mile and
per diem reimbursement under the per diem program is about one cent per
mile lower than mileage pay without per diem reimbursement, which offsets
the Company's increased income taxes caused by the nondeductible portion of
the per diem. The per diem program increases driver satisfaction through
higher net pay per mile, after taxes. The Company anticipates that the
competition for qualified drivers will continue to be high and cannot
predict whether it will experience shortages in the future. If such a
shortage were to occur and additional increases in driver pay rates became
15
necessary to attract and retain drivers, the Company's results of
operations would be negatively impacted to the extent that corresponding
freight rate increases were not obtained.
Fuel increased 5.3 cents per mile for the Truckload Transportation
Services segment due primarily to higher average diesel fuel prices.
Average fuel prices in 2004 were 30 cents a gallon, or 32%, higher than in
2003. Fuel expense, after considering the amounts collected from customers
through fuel surcharge programs, net of reimbursement to owner-operators,
had an eight-cent negative impact on 2004 earnings per share compared to
2003 earnings per share. In addition to the increase in fuel prices,
company data continues to indicate that the fuel mile per gallon ("mpg")
degradation for trucks with post-October 2002 engines (47% of the company-
owned truck fleet as of December 31, 2004) is a reduction of approximately
5%. As the Company continues to replace older trucks in its fleet with
trucks with the post-October 2002 engines, fuel cost per mile is expected
to increase due to the lower mpg. Shortages of fuel, increases in fuel
prices, or rationing of petroleum products can have a materially adverse
effect on the operations and profitability of the Company. The Company is
unable to predict whether fuel price levels will continue to increase or
decrease in the future or the extent to which fuel surcharges will be
collected from customers. As of December 31, 2004, the Company had no
derivative financial instruments to reduce its exposure to fuel price
fluctuations.
Diesel fuel prices for the first six weeks of 2005 averaged 33 cents a
gallon, or 32% higher than average fuel prices for first quarter 2004.
Based on current fuel price trends for the first six weeks of 2005 and
assuming fuel prices remain at current levels for the remainder of first
quarter 2005, the Company expects that fuel will have a minimal impact on
first quarter 2005 earnings compared to first quarter 2004 earnings.
Supplies and maintenance for the Truckload Transportation Services
segment increased 1.3 cents on a per-mile basis in 2004 due primarily to
increases in the cost of over-the-road repairs and an increase in
maintenance on equipment sales related to a larger number of tractors sold
through the Company's Fleet Truck Sales subsidiary in 2004 versus 2003.
Over-the-road ("OTR") repairs increased as a result of the increase in
dedicated-fleet trucks, which typically do not have as much maintenance
performed at company terminals. The Company includes the higher cost of
OTR maintenance in its dedicated pricing models. Higher driver recruiting
costs (including driver advertising) and driver travel and lodging also
contributed to a small portion of the increase.
Insurance and claims for the Truckload Transportation Services segment
increased 0.3 cents on a per-mile basis, primarily related to liability
claims. Cargo claims expense was essentially flat on a per-mile basis
compared to 2003.
The Company renewed its liability insurance policies for coverage up
to $10.0 million per claim on August 1, 2004. Effective August 1, 2004,
the Company became responsible for the first $2.0 million per claim
(previously $500,000 per claim). See Item 3 "Legal Proceedings" for
information on the Company's coverage levels for personal injury and
property damage since August 1, 2001. The increased Company retention from
$500,000 to $2.0 million is due to changes in the trucking insurance market
and is similar to increased claim retention levels experienced by other
truckload carriers. Liability insurance premiums for the policy year
beginning August 1, 2004 decreased approximately $0.4 million due to the
higher retention level. The Company is unable to predict whether the trend
of increasing insurance and claims expense will continue in the future.
Depreciation expense for the Truckload Transportation Services segment
increased 0.6 cents on a per-mile basis in 2004 due primarily to higher
costs of new tractors with the post-October 2002 engines. As the Company
continues to replace older trucks in its fleet with trucks with the post-
October 2002 engines, depreciation expense is expected to increase.
Rent and purchased transportation consists mainly of payments to third-
party carriers in the VAS and other non-trucking operations and payments to
owner-operators in the trucking operations. Rent and purchased
transportation for the Truckload Transportation Services segment increased
0.9 cents per total mile as higher fuel prices necessitated higher
16
reimbursements to owner-operators for fuel. The Company's customer fuel
surcharge programs do not differentiate between miles generated by Company-
owned trucks and miles generated by owner-operator trucks; thus, the
increase in owner-operator fuel reimbursements is included with Company
fuel expenses in calculating the per-share impact of higher fuel prices on
earnings. The Company has experienced difficulty recruiting and retaining
owner-operators for over two years because of challenging operating
conditions. However, the Company has historically been able to add company-
owned tractors and recruit additional company drivers to offset any
decreases in owner-operators. If a shortage of owner-operators and company
drivers were to occur and increases in per mile settlement rates became
necessary to attract and retain owner-operators, the Company's results of
operations would be negatively impacted to the extent that corresponding
freight rate increases were not obtained. Payments to third-party carriers
used for portions of shipments delivered to or from Mexico and by a few
dedicated fleets in the truckload segment contributed 0.2 cents of the
total per-mile increase for the Truckload Transportation Services segment.
As shown in the VAS statistics table under the "Results of Operations"
heading on page 13, 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 decreased to 90.3% in 2004 compared to 92.9% in
2003, resulting in a higher gross margin in 2004. An improving truckload
freight environment in 2004 resulted in improved customer rates for the VAS
segment. Additionally, to support the ongoing growth within VAS, the group
has increased its number of approved third-party providers. This larger
carrier base allows VAS to more competitively match customer freight with
available capacity, resulting in improved margins.
Other operating expenses for the Truckload Transportation Services
segment decreased 0.2 cents per mile in 2004. Gains on sales of revenue
equipment, primarily trucks, are reflected as a reduction of other
operating expenses and were $9.7 million in 2004 compared to $7.6 million
in 2003. In 2004, the Company sold about three-fourths of its used trucks
to third parties and traded about one-fourth. In 2003, the Company sold
about two-thirds of its used trucks and traded about one-third. Gains
increased due to a larger number of trucks sold in 2004, with a lower
average gain per truck. In July 2004, the Company also began recording
gains on certain tractor trades in accordance with EITF 86-29. In 2002,
2003, and the first six months of 2004, the excess of the trade price over
the net book value of the trucks exchanged reduced the cost basis of new
trucks. This change did not have a material impact on the Company's results
of operations. The Company's wholly-owned used truck retail network, Fleet
Truck Sales, is one of the largest class 8 truck sales entities in the
United States, with 16 locations, and has been in operation since 1992.
Fleet Truck Sales continues to be a resource for the Company to remarket
its used trucks. Other operating expenses also include bad debt expense
and professional service fees. The Company incurred approximately $0.7
million in professional fees in 2004 in connection with the implementation
of Section 404 of the Sarbanes-Oxley Act of 2002.
The Company recorded essentially no interest expense in 2004, as it
repaid its last remaining debt in December 2003. Interest income for the
Company increased to $2.6 million in 2004 from $1.7 million in 2003 due to
higher average cash balances in 2004 compared to 2003.
The Company's effective income tax rate (income taxes expressed as a
percentage of income before income taxes) increased from 37.5% in 2003 to
39.2% in 2004, as described in Note 5 of the Notes to Consolidated
Financial Statements under Item 8 of this Form 10-K. The income tax rate
increased in 2004 because of higher non-deductible expenses for tax
purposes related to the implementation of a per diem pay program for
student drivers in fourth quarter 2003 and a per diem pay program for
eligible company drivers in April 2004. The Company expects its effective
income tax rate in 2005 to increase to 40.5% or higher.
17
2003 Compared to 2002
- ---------------------
Operating Revenues
Operating revenues increased 8.7% over 2002, due primarily to a 3.9%
increase in the average number of tractors in service. Additionally,
revenue per total mile, excluding fuel surcharges, increased 3.4% primarily
due to customer rate increases and better freight mix. A better freight
market and tightening truck capacity contributed to the improvement,
compared to the weaker freight market of 2002. Fuel surcharges, which
represent collections from customers for the higher cost of fuel, increased
from $29.1 million in 2002 to $61.6 million in 2003 due to higher average
fuel prices during 2003 (see fuel explanation below). Excluding fuel
surcharge revenues, trucking revenues increased 5.9% over 2002.
The revenue increases described above were offset by a 1.4% decline in
average miles per tractor and a shorter average length of haul due to
growth in the Company's regional and dedicated fleets from 37% of the fleet
at December 2002 to 46% of the fleet at December 2003.
VAS revenues increased $9.7 million to $89.7 million compared to 2002.
During the latter part of 2003 and continuing into 2004, the Company
expanded its brokerage and intermodal service offerings by adding senior
management and developing new computer systems. These less asset-intensive
businesses generally have a lower operating margin and a higher return on
assets than the Company's truckload business.
Freight demand began to improve in March of 2003 as compared to the
same period in 2002, and continued to be consistently better for most of
the last ten months of 2003 compared to the corresponding period in 2002.
The Company believes much of the improvement was achieved by execution of
the Company's plan of limited fleet growth, maintenance of a diversified
freight base that emphasizes consumer nondurable goods, and the shift from
non-dedicated to dedicated trucks discussed below. The Company's empty
mile percentage increased from 9.6% to 10.8%, which is due in part to a
shorter length of haul and a change in the mix of trucks to the dedicated
fleet from the medium-to-long haul van fleet.
Werner's Dedicated Services fleet provides truckload services required
for a specific company, their plants, or their distribution centers.
Werner grew its dedicated fleet from about one-quarter of its total truck
fleet at the end of 2002 to about one-third of its total truck fleet at the
end of 2003, with much of this growth occurring in the fourth quarter of
2003. Since the Company's overall truck fleet grew 150 trucks, the 800-
truck growth in the dedicated fleet was offset by a reduction in the
Company's medium-to-long-haul van fleet. Dedicated fleet business tends to
have lower miles per trip, a higher empty mile percentage, a higher rate
per loaded mile, and lower miles per truck per month. The growth in
dedicated business has had a corresponding effect on these same operating
statistics for the entire Company.
Operating Expenses
The Company's operating ratio (operating expenses expressed as a
percentage of operating revenues) improved from 92.6% in 2002 to 91.9% in
2003. Conversely, the Company's operating margin improved 9% from 7.4% in
2002 to 8.1% in 2003. Operating expenses, when expressed as a percentage
of total revenues, were lower in 2003 versus 2002 because of the higher
revenue per mile and fuel surcharge revenue per mile. Owner-operator miles
as a percentage of total miles were 12.6% in 2003 compared to 15.4% in
2002. 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. The Company estimates that rent and purchased
transportation expense for the Truckload Transportation segment was lower
by approximately 2.6 cents per total mile due to this decrease, and other
expense categories had offsetting increases on a total-mile basis, as
follows: salaries, wages and benefits (1.2 cents), fuel (0.5 cents),
supplies and maintenance (0.2 cents), taxes and licenses (0.3 cents), and
depreciation (0.4 cents). During 2003, it continued to be difficult to
attract and retain owner-operator drivers due to challenging operating
conditions.
18
The following table sets forth the cost per total mile of operating
expense items for the Truckload Transportation Services segment for the
periods indicated. The Company evaluates operating costs for this segment
on a per-mile basis to adjust for the impact on the percentage of total
operating revenues caused by changes in fuel surcharge revenues and rate
per mile increases, which provides a more consistent basis for comparing
the results of operations from period to period.
Increase Increase
(Decrease) (Decrease)
2003 2002 per Mile %
------------------------------------
Salaries, wages and benefits $.502 $.488 $.014 2.9
Fuel .158 .127 .031 24.4
Supplies and maintenance .117 .115 .002 1.7
Taxes and licenses .103 .100 .003 3.0
Insurance and claims .072 .052 .020 38.5
Depreciation .132 .128 .004 3.1
Rent and purchased transportation .131 .146 (.015) (10.3)
Communications and utilities .016 .015 .001 6.7
Other (.001) .003 (.004) (133.3)
Salaries, wages and benefits (including driver and non-driver costs)
for the Truckload Transportation Services segment increased 1.4 cents per
mile due primarily to growth in the percentage of company-owned trucks to
total trucks from 87.6% at the end of 2002 to 89.0% at the end of 2003 and
an increase in the number of salaried drivers. The market for attracting
and retaining company drivers continued to be challenging and became even
more difficult in the fourth quarter of 2003. While the market for
recruiting qualified drivers tightened, the Company continued to have
success recruiting drivers from driver training schools. Salaries, wages
and benefits includes expenses for workers' compensation benefits. The
related accrued claims for workers compensation are reflected in Insurance
and Claims Accruals in the accompanying Consolidated Balance Sheets.
Effective July 2003, the Company changed its monthly mileage bonus pay
program for Van solo company drivers, which represented approximately one-
third of the Company's total drivers. The goal was to increase driver
miles per truck by rewarding higher production from Van solo drivers with
higher pay. The monthly mileage bonus pay increased by an average of
$93,000 per month during the last six months of 2003.
Fuel increased 3.1 cents per total mile for the Truckload
Transportation Services segment due to higher fuel prices. The average
price per gallon of diesel fuel, excluding fuel taxes, was approximately
$.17 per gallon, or 23%, higher in 2003 versus 2002. The Company's
customer fuel surcharge reimbursement programs have historically enabled
the Company to recover from its customers much of the higher fuel prices
compared to normalized average fuel prices. After considering the amounts
collected from customers through fuel surcharge programs, net of Company
reimbursements to owner-operators, 2003 earnings per share were not
impacted by the higher fuel expense. Earnings per share were negatively
impacted by $.03 per share in first quarter 2003, positively impacted by
$.02 and $.01 per share in the second and third quarters 2003,
respectively, and not impacted in fourth quarter 2003. Approximately 10% of
the Company's fleet consisted of trucks with the less fuel-efficient post-
October 2002 engines as of December 31, 2003. As of December 31, 2003, the
Company had no derivative financial instruments to reduce its exposure to
fuel price fluctuations.
Supplies and maintenance for the Truckload Transportation Services
segment increased only 0.2 cents per total mile due primarily to improved
management of maintenance expenses, offset slightly by the growth in the
percentage of company-owned trucks to total trucks.
Insurance and claims increased 2.0 cents per total mile due to an
increase in the frequency and severity of claims, increased retention
levels for claims, a higher cost per claim, and higher premiums for
catastrophic liability coverage. The Company's premium rate for liability
coverage up to $3.0 million per claim was fixed through July 31, 2004,
19
while coverage levels above $3.0 million per claim were renewed effective
August 1, 2003 for a one-year period. For the policy year beginning August
2003, the Company's total premiums for liability insurance increased by
approximately $1.3 million. This increase includes premiums for terrorism
coverage. See Item 3 "Legal Proceedings" for information on the Company's
coverage levels for personal injury and property damage since August 1,
2001.
Rent and purchased transportation for the Truckload Transportation
Services segment decreased 1.5 cents per total mile in 2003 due to a
decrease in payments to owner-operators. The decrease in payments to owner-
operators resulted from the decrease in owner-operator miles as a
percentage of total Company miles as discussed previously, offset by higher
fuel surcharge reimbursements paid to owner-operators due to higher average
fuel prices. The Company has experienced difficulty recruiting and
retaining owner-operators because of challenging operating conditions.
This has resulted in a reduction in the number of owner-operator tractors
from 1,020 as of December 31, 2002, to 920 as of December 31, 2003. The
Company reimburses owner-operators for the higher cost of fuel based on
fuel surcharge reimbursements collected from customers.
The increase in rent and purchased transportation for the VAS segment
corresponded to the higher non-trucking revenues, as shown in the VAS
statistics table under the "Results of Operations" heading on page 13.
Other operating expenses decreased 0.4 cents per mile due primarily to
an increase in the resale value of the Company's used trucks. Because of
truckload carrier concerns with new truck engines and lower industry
production of new trucks, the resale value of the Company's premium used
trucks improved. In 2002, the Company traded about one-half of its used
trucks and sold about one-half of its used trucks and realized gains of
$2.3 million. In 2003, the Company traded about one-third of its used
trucks and sold about two-thirds to third parties. In 2003, due to a
higher average sales price, and gain, per truck, the Company realized gains
of $7.6 million. For trucks traded, the excess of the trade price over the
net book value of the trucks reduces the cost basis of new trucks, and
therefore results in lower depreciation expense over the life of the asset.
Other operating expenses also include bad debt expense and professional
service fees.
Interest expense for the Company decreased from $2.9 million in 2002
to $1.1 million in 2003 due to a reduction in the Company's borrowings.
Average debt outstanding in 2002 was $35.0 million. In 2003, outstanding
debt totaled $20.0 million throughout most of the year, until the Company
repaid its only remaining debt in December 2003.
The Company's effective income tax rate was 37.5% in 2003 and 2002,
respectively, as described in Note 5 of the Notes to Consolidated Financial
Statements under Item 8 of this Form 10-K.
Liquidity and Capital Resources
Net cash provided by operating activities was $226.6 million in 2004,
$207.5 million in 2003, and $226.3 million in 2002. Cash flow from
operations decreased $18.8 million in 2003 compared to 2002, or 8.3%. This
decrease was due to lower truck purchases in 2003, which caused higher tax
payments due to lower 2003 tax depreciation and resulted in a smaller
payable for tractors received at year-end. Returning to a normal tractor
replacement cycle in 2004 resulted in increased cash flow from operations
of $19.1 million in 2004 over 2003, or 9.2%. The cash flow from operations
enabled the Company to make capital expenditures and repay debt as
discussed below.
Net cash used in investing activities was $193.5 million in 2004,
$101.5 million in 2003, and $235.5 million in 2002. The 90.5% increase
($91.9 million) from 2003 to 2004 and 56.9% decrease ($134.0 million) from
2002 to 2003 were due primarily to the Company's accelerated purchases of
tractors with pre-October 2002 engines in the latter part of 2002 and
purchasing fewer tractors in 2003. The engine emission standards that
20
became effective October 1, 2002 did not allow the Company sufficient time
to test a significant sample of the new engines. This prompted the Company
to purchase a large number of trucks with engines manufactured prior to
October 2002, which are not subject to the new engine emission standards,
in addition to the normal number of new trucks required for the Company's
three-year replacement cycle. This enabled the Company to delay the impact
of using trucks with new engines in its fleet by approximately one year and
allowed additional time for testing. The pre-buy trucks were gradually
placed in service throughout 2003, with the last group of these trucks
being placed into service during the third quarter of 2003. As of December
31, 2004, approximately 47% of the company-owned truck fleet consisted of
trucks with the new engines. The Company intends to gradually reduce the
average age of the truck fleet in 2005. As such, capital expenditures are
expected to be higher in 2005 compared to 2004.
As of December 31, 2004, the Company has committed to property and
equipment purchases, net of trades, of approximately $122.0 million. The
Company intends to fund these capital expenditure commitments through
existing cash on hand and cash flow from operations.
Net financing activities used $25.7 million in 2004, $33.8 million in
2003, and $35.2 million in 2002. In 2003 and 2002, the Company made net
repayments of debt of $20.0 million and $30.0 million, respectively. The
Company repaid its last remaining debt in December 2003. The Company paid
dividends of $9.5 million in 2004, $6.5 million in 2003, and $5.0 million
in 2002. The Company increased its quarterly dividend rate by $0.01 per
share beginning with the dividend paid in July 2004. Financing activities
also included common stock repurchases of $21.6 million in 2004, $13.5
million in 2003, and $3.8 million in 2002. From time to time, the Company
has repurchased, and may continue to repurchase, shares of its common
stock. The timing and amount of such purchases depends on market and other
factors. The Company's Board of Directors has authorized the repurchase of
up to 8,132,504 shares. As of December 31, 2004, the Company had purchased
4,335,704 shares pursuant to this authorization and had 3,796,800 shares
remaining available for repurchase.
Management believes the Company's financial position at December 31,
2004 is strong. As of December 31, 2004, the Company had $108.8 million of
cash and cash equivalents, no debt, and $773.2 million of stockholders'
equity. As of December 31, 2004, the Company had no equipment operating
leases, and therefore, had no off-balance sheet equipment debt. Based on
the Company's strong financial position, management foresees no significant
barriers to obtaining sufficient financing, if necessary.
Contractual Obligations and Commercial Commitments
As of December 31, 2004, the Company had no debt outstanding. The
following table sets forth the Company's credit facilities and purchase
commitments as of December 31, 2004.
Amount of Commitment Expiration Per Period
(in millions)
Total
Other Commercial Amounts Less than 1-3 4-5 Over 5
Commitments Committed 1 year years years years
- ----------------------------------------------------------------------------
Unused lines of credit $ 39.6 $ 25.0 $14.6 $ - $ -
Standby letters of credit 35.4 35.4 - - -
Other commercial commitments 122.0 122.0 - - -
------ ------ ----- ---- ----
Total commercial commitments $197.0 $182.4 $14.6 $ - $ -
====== ====== ===== ==== ====
The Company has two credit facilities with banks totaling $75.0
million on which no borrowings were outstanding. The credit available
under these facilities is reduced by the amount of standby letters of
credit the Company maintains. The unused lines of credit are available to
the Company in the event the Company needs financing for the growth of its
fleet. With the Company's strong financial position, the Company expects it
could obtain additional financing, if necessary, at favorable terms. The
standby letters of credit are primarily required for insurance policies.
The other commercial commitments relate to committed equipment
expenditures.
21
Off-Balance Sheet Arrangements
The Company does not have any arrangements which meet the definition
of an off-balance sheet arrangement.
Critical Accounting Policies
The Company's success depends on its ability to efficiently manage its
resources in the delivery of truckload transportation and logistics
services to its customers. Resource requirements vary with customer
demand, which may be subject to seasonal or general economic conditions.
The Company's ability to adapt to changes in customer transportation
requirements is a key element in efficiently deploying resources and in
making capital investments in tractors and trailers. Although the
Company's business volume is not highly concentrated, the Company may also
be affected by the financial failure of its customers or a loss of a
customer's business from time-to-time.
The Company's greatestmost significant resource requirements includeare qualified
drivers, trucks,tractors, trailers, and related costs of operating its equipment
(such as fuel and related fuel taxes, driver pay, insurance, and supplies
and maintenance). The Company has historically been successful mitigating
its risk to increases in fuel prices by recovering additional fuel
surcharges from its customers. The Company's financial results are also
affected by availability of qualified drivers and the market for new and used trucks.
Because the Company is self-insured for cargo, personal injury, and
property damage claims on its trucks and for workers' compensation benefits
for its driversemployees (supplemented by premium-based coverage above certain
dollar levels), financial results may also be affected by driver safety,
medical costs, the weather, the legal and regulatory environment, and the
costs of insurance coverage 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 1012 years. Estimates of salvage value
at the expected date of trade-in or sale (for example, three years
for tractors) are based on the expected market values of equipment
at the time of disposal. Although the Company's current replacement
cycle for tractors is three years, the Company calculates
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,
in those instances in which a tractor is held beyond the normal
three-year age. Calculating depreciation expense using a five-year
life and 25% salvage value results in the same annual depreciation
rate (15% of cost per year) and the same net book value at the
normal three-year replacement date (55% of cost) as using a three-
year life and 55% salvage value. The Company continually monitors
the adequacy of the lives and salvage values used in calculating
depreciation expense and adjusts these assumptions appropriately
when warranted.
* The Company reviews its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount
of a long-lived asset may not be recoverable. An impairment loss
would be recognized if the carrying amount of the long-lived asset
is not recoverable, and it exceeds its fair value. For long-lived
assets classified as held and used, if the carrying value of the
long-lived asset exceeds the sum of the future net cash flows, it is
not recoverable. The Company does not separately identify assets by
operating segment, as tractors and trailers are routinely
transferred from one operating fleet to another. As a result, none
of the Company's long-lived assets have identifiable cash flows from
use that are largely independent of the cash flows of other assets
and liabilities. Thus, the asset group used to assess impairment
would include all assets and liabilities of the Company. Long-lived
assets classified as held for sale are reported at the lower of
their carrying amount or fair value less costs to sell.
22
* Estimates of accrued liabilities for insurance and claims for
liability and physical damage losses and workers' compensation. The
insurance and claims accruals (current and long-term) are recorded
at the estimated ultimate payment amounts and are 7
based upon
individual case estimates, including negative development, and
estimates of incurred-
but-not-reportedincurred-but-not-reported losses based upon past
experience. The Company's self-insurance reserves are reviewed by
an actuary 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 provider is
utilized to provide some or all of the service and the Company is
the primary obligor in regards to the delivery of the shipment,
establishes customer pricing separately from carrier rate
negotiations, generally has discretion in carrier selection, and/or
has credit risk on the shipment, the Company records both revenues
for the dollar value of services billed by the Company to the
customer and rent and purchased transportation expense for the costs
of transportation paid by the Company to the third-party provider
upon delivery of the shipment. In the absence of the conditions
listed above, the Company records revenues net of expenses related
to third-party providers.
* Accounting for income taxes. Significant management judgment is
required to determine the provision for income taxes and to
determine whether deferred income taxes will be realized in full or
in part. Deferred income tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be
recovered or settled. When it is more likely that all or some
portion of specific deferred income tax assets will not be realized,
a valuation allowance must be established for the amount of deferred
income tax assets that are determined not to be realizable. A
valuation allowance for deferred income tax assets has not been
deemed to be necessary due to the Company's profitable operations.
Accordingly, if the facts or financial circumstances were to change,
thereby impacting the likelihood of realizing the deferred income
tax assets, judgment would need to be applied to determine the
amount of valuation allowance required in any given period.
Management periodically re-evaluates these estimates as events and
circumstances change. Together with the effects of the matters discussed
above, these factors may significantly impact the Company's results of
operations from period-to-period.
Results of Operations
The following table sets forth the percentage relationship of
income and expense items to operating revenues for the years
indicated.
2001 2000 1999
------ ------ ------
Operating revenues 100.0% 100.0% 100.0%
------ ------ ------
Operating expenses
Salaries, wages and benefits 36.0 35.4 36.4
Fuel 10.3 11.3 7.5
Supplies and maintenance 9.3 8.5 8.3
Taxes and licenses 7.4 7.3 7.8
Insurance and claims 3.3 2.8 3.0
Depreciation 9.2 9.0 9.5
Rent and purchased transportation 16.9 17.9 17.6
Communications and utilities 1.1 1.2 1.3
Other 0.3 (0.2) (1.1)
------ ------ ------
Total operating expenses 93.8 93.2 90.3
------ ------ ------
Operating income 6.2 6.8 9.7
Net interest expense and other 0.2 0.4 0.5
------ ------ ------
Income before income taxes 6.0 6.4 9.2
Income taxes 2.2 2.4 3.5
------ ------ ------
Net income 3.8% 4.0% 5.7%
====== ====== ======
8
The following table sets forth certain industry data regarding
the freight revenues and operations of the Company.
2001 2000 1999 1998 1997
------ ------ ------ ------ ------
Operating ratio 93.8% 93.2% 90.3% 88.9% 89.9%
Average revenues per tractor per week (1)$ 2,874 $ 2,889 $ 2,813 $ 2,783 $ 2,755
Average annual miles per tractor 123,660 125,568 125,856 126,492 126,598
Average miles per trip 744 746 734 760 799
Average revenues per total mile (1) $ 1.208 $ 1.197 $ 1.162 $ 1.144 $ 1.132
Average revenues per loaded mile (1) $ 1.342 $ 1.328 $ 1.287 $ 1.265 $ 1.251
Non-trucking revenues (in thousands) $ 74,001 $ 65,977 $ 60,379 $ 41,821 $ 43,955
Average tractors in service 7,698 7,303 6,769 5,662 5,051
Total tractors (at year end)
Company 6,640 6,300 5,895 5,220 4,490
Owner-operator 1,135 1,175 1,230 930 860
------ ------ ------ ------ ------
Total tractors 7,775 7,475 7,125 6,150 5,350
====== ====== ====== ====== ======
Total trailers (at year end) 19,775 19,770 18,900 16,350 14,700
====== ====== ====== ====== ======
- ----------------------------
(1) Net of fuel surcharge revenues.
2001 Compared to 2000
Operating revenues increased 4.6% over 2000, due primarily to a
5.4% increase in the average number of tractors in service. Revenue
per total mile, excluding fuel surcharges, increased 0.9% primarily
due to customer rate increases, and revenue per total mile, including
fuel surcharges, increased 0.3% compared to 2000. Fuel surcharges,
which represent collections from customers for the higher cost of
fuel, decreased from $51.4 million in 2000 to $46.2 million in 2001
due to lower average fuel prices (see fuel explanation below).
Excluding fuel surcharge revenues, trucking revenues increased 4.8%
over 2000. Revenue from non-trucking transportation services
increased $8.0 million compared to 2000.
Freight demand during 2001 was soft due to a weaker U.S. economy
as compared to 2000. However, the Company developed its freight base
and utilized its proprietary technology so that it experienced only a
1.5% decrease in its average annual miles per tractor. The Company's
empty mile percentage increased slightly, by one-tenth of one
percentage point (from 9.9% to 10.0%).
The Company's operating ratio (operating expenses expressed as a
percentage of operating revenues) increased from 93.2% in 2000 to
93.8% in 2001. The decrease in owner-operator miles as a percentage
of total miles (16.6% in 2001 compared to 18.6% in 2000), contributed
to a shift in costs from the rent and purchased transportation expense
category as described on the following pages. Owner-operators are
independent contractors who supply their own tractor and driver, and
are responsible for their operating expenses including fuel, supplies
and maintenance, and fuel taxes. Over the past year, it has been more
difficult to attract and retain owner-operator drivers due to the
weaker used truck pricing market, higher fuel prices, and weaker
economy.
Salaries, wages and benefits increased from 35.4% to 36.0% of
revenues due in part to a higher percentage of company drivers as
compared to owner-operators and an increase in the number of drivers
in training. Workers' compensation and health insurance expense
increased due to rising medical costs and higher weekly state workers'
compensation payment rates. In recent years, workers' compensation
and health insurance costs have been increasing at rates higher than
inflation, and this is expected to continue. These increases were
partially offset by an improvement in the tractor to non-driver
employee ratio, which lowered non-driver labor costs per mile. The
market for attracting company drivers improved during 2001; however,
the Company anticipates that the competition for qualified drivers
will continue to be high, and cannot predict whether it will
9
experience shortages in the future. If such a shortage was to occur
and increases in driver pay rates became necessary to attract and
retain drivers, the Company's results of operations would be
negatively impacted to the extent that corresponding freight rate
increases were not obtained.
Fuel decreased from 11.3% to 10.3% of revenues due to lower fuel
prices, principally in the fourth quarter of 2001. The average price
per gallon of diesel fuel, excluding fuel taxes, was approximately
$.11 per gallon lower in 2001 versus 2000. The average price per
gallon in fourth quarter 2001 was approximately $.17 per gallon lower
than the average price for the year of 2001 and was about the same as
the average historical fuel price levels over the past ten years. The
Company's customer fuel surcharge reimbursement programs have
historically enabled the Company to recover most of the higher fuel
prices from its customers compared to normalized average fuel prices.
These fuel surcharges, which automatically adjust from week to week
depending on the cost of fuel, enable the Company to rapidly recoup
the higher cost of fuel when prices increase. Conversely, when fuel
prices decrease, fuel surcharges decrease. After considering the
amounts collected from customers through fuel surcharge programs, net
of reimbursements to owner-operators, 2001 earnings per share
increased by approximately $.07 over 2000 due to lower fuel costs.
Shortages of fuel, increases in fuel prices, or rationing of petroleum
products can have a materially adverse effect on the operations and
profitability of the Company. The Company is unable to predict
whether fuel prices will continue to decrease or will increase in the
future or the extent to which fuel surcharges will be collected from
customers. As of December 31, 2001, the Company had no derivative
financial instruments to reduce its exposure to fuel price
fluctuations.
Supplies and maintenance increased from 8.5% to 9.3% of revenues
due to a higher percentage of company drivers compared to owner-
operators during 2001 and more maintenance services performed over-the-
road than at Company facilities.
Insurance and claims increased from 2.8% to 3.3% of revenues due
to unfavorable claims experience in 2001 and higher excess insurance
premiums. Insurance premiums in the liability insurance market have
increased significantly for many truckload carriers in recent months.
For over ten years, the Company has been self-insured and managed
virtually all of its liability, cargo, and property damage claims with
qualified Risk Department professionals. As a result, higher
liability insurance rates have had a less significant effect on the
Company, impacting the Company only for catastrophic claim coverage.
The Company renewed its annual catastrophic liability insurance
coverage effective August 1, 2001, and the effect of the increase in
premiums was less than 10% of the Company's total annual insurance and
claims expense. The Company's premium rate for liability coverage up
to $3.0 million per claim is fixed through August 1, 2004, while
coverage levels above $3.0 million per claim will be renewed effective
August 1, 2002.
Rent and purchased transportation expense decreased from 17.9% to
16.9% of revenues because of a decrease in payments to owner-operators
(11.0% of revenue in 2001 compared to 12.6% in 2000), offset by an
increase in purchased transportation relating to remaining non-
trucking operations following the transfer of most of the Company's
logistics business to Transplace. The decrease in payments to owner-
operators resulted from the decrease in owner-operator miles as a
percentage of total Company miles as discussed above. The Company has
experienced difficulty recruiting and retaining owner-operators
because of high fuel prices, a weak used truck pricing market, and
other factors. This has resulted in a reduction in the number of
owner-operator tractors from 1,175 as of December 31, 2000, to 1,135
as of December 31, 2001. The Company reimburses owner-operators for
the higher cost of fuel based on fuel surcharge reimbursements
collected from customers.
Other operating expenses changed from a credit of (0.2)% to an
expense of 0.3% of revenues due in part to a weak market for the sale
of used trucks. Record levels of trucks manufactured during 1999 and
2000, an increased supply of used trucks caused in part by trucking
company business failures, and slower fleet growth by many carriers
have all contributed to a decline in the market value of used trucks.
During 2001, the Company traded about two-thirds of its used trucks
and sold about one-third to third parties. For trucks traded, the
excess of the trade price over the net book value of the trucks
reduced the cost basis of new trucks. In 2000, the Company traded
half of its used trucks and sold half of its used trucks to third
parties through its Fleet Truck Sales retail network and realized
gains of $5.1 million. In 2001, due to a lower average sale price per
10
truck, the Company realized losses of $0.7 million. The Company
renegotiated its trade agreements with its primary truck manufacturer
in June 2001 and continued to expand its nationwide retail truck sales
network in response to the weak used truck market. Other operating
expenses were also impacted by increasing the allowance for
uncollectible receivables for the Company's maximum credit exposure
related to the fourth quarter 2001 Enron bankruptcy of approximately
$1.2 million. The Company has limited credit exposure for the first
quarter 2002 Kmart bankruptcy. The Company has focused on improving
its collections of accounts receivable; as such, days sales in
accounts receivable decreased from 37 days as of December 31, 2000, to
35 days as of December 31, 2001.
Net interest expense and other decreased from 0.4% to 0.2% of
revenues due to lower interest expense, offset partially by the
Company's share of Transplace operating losses. Interest expense
decreased from 0.7% to 0.3% of revenues due to a reduction in the
Company's borrowings. Average debt outstanding in 2001 was $77.5
million versus $125.0 million in 2000. In 2001, the Company recorded
a loss of approximately $1.7 million as its percentage share of
estimated Transplace losses versus a gain of approximately $0.3
million in 2000. The Company is recording its approximate 15%
investment in Transplace using the equity method of accounting and is
accruing its percentage share of Transplace's earnings and losses as
an other non-operating item.
The Company's effective income tax rate (income taxes as a
percentage of income before income taxes) was 37.5% and 38.0% in 2001
and 2000, respectively, as described in Note 5 of the Notes to
Consolidated Financial Statements under Item 8 of this Form 10-K. The
effective income tax rate for the 2001 period decreased due to the
implementation of certain tax strategies. The Company expects the
37.5% income tax rate to be the tax rate in effect for 2002.
2000 Compared to 1999
Operating revenues increased 15% over 1999, due to an 8% increase
in the average number of tractors in service, a 3% increase in average
revenue per mile (excluding fuel surcharges), and a 5% increase in
revenues due to fuel surcharges. Customer rate increases were the
primary factor in the increase in average revenue per mile (excluding
fuel surcharges). Fuel surcharges were collected from customers in
2000 to recover a majority of the increase in fuel expense caused by
higher fuel prices.
The Company's operating ratio (operating expenses expressed as a
percentage of operating revenues) increased from 90.3% to 93.2%.
Salaries, wages and benefits decreased from 36.4% to 35.4% of
revenues by maintaining the average payroll cost per mile while at the
same time increasing average revenue per mile. Offsetting this,
workers' compensation expense increased due to rising medical costs
and higher weekly state workers' compensation payment rates.
Fuel increased from 7.5% to 11.3% of revenues due to
substantially higher fuel prices. The average price per gallon of
diesel fuel, excluding fuel taxes, was 65% higher in 2000 than 1999.
The Company implemented customer fuel surcharge programs to recover a
majority of the increased fuel cost.
Taxes and licenses decreased from 7.8% to 7.3% of revenues due to
higher revenue per mile. On a cost per mile basis, taxes and license
expenses were about the same. Insurance and claims decreased slightly
from 3.0% to 2.8% of revenues. Improved liability claims experience
was offset by increased cargo claims. Depreciation decreased from
9.5% to 9.0% of revenues due to higher revenue per mile. On a cost
per mile basis, depreciation was slightly higher.
Rent and purchased transportation expense increased from 17.6% to
17.9% of revenues due primarily to increases in rental expense on
leased tractors (0.3% of revenue in 2000 compared to 0.1% in 1999) and
payments to owner-operators (12.6% of revenue in 2000 compared to
12.4% in 1999). Payments to owner-operators increased slightly in 2000
compared to 1999 caused in part by an increase in owner-operator miles
as a percentage of total Company miles. On a per-mile basis, payments
to owner-operators increased due to amounts reimbursed by the Company
to owner-operators for the higher cost of fuel. Increases in
logistics and other non-trucking transportation services in the first
half of 2000 offset the decrease in the latter half of the year due to
11
transferring most of the Company's logistics business to Transplace on
June 30, 2000. The Company is one of five large truckload
transportation companies that contributed their logistics businesses
to this commonly owned, Internet-based logistics company. The Company
transferred logistics business representing about 4% of total revenues
for the six months ended June 30, 2000, to Transplace.
Other operating expenses changed from (1.1%) to (0.2%) of
revenues due to a weak market for the sale of used trucks. During
2000, the Company traded more of its used trucks, and the excess of
the trade price over the net book value of the trucks reduced the cost
basis of new trucks. In 1999, the Company sold most of its used trucks
to third parties through its Fleet Truck Sales retail network and
realized gains of $13.0 million. In 2000, due to a reduced number of
trucks sold to third parties and a lower average gain per truck, the
Company realized gains of $5.1 million.
The Company's effective income tax rate (income taxes as a
percentage of income before income taxes) was 38.0% in 2000 and 1999,
as described in Note 5 of the Notes to Consolidated Financial
Statements under Item 8 of this Form 10-K.
Liquidity and Capital Resources
Net cash provided by operating activities was $226.9 million in
2001, $170.1 million in 2000, and $132.0 million in 1999. The 33.4%
increase ($56.8 million) in operating cash flows from 2000 to 2001 was
due primarily to higher depreciation due to the growth of the Company
truck fleet ($6.9 million), increased deferred taxes due to the
implementation of certain tax strategies and growth of the Company
truck fleet ($23.8 million), a small loss versus gains on disposal of
operating equipment due to a weaker used truck pricing market ($5.8
million), increased long-term insurance and claims accruals ($4.5
million), decreases in other long-term assets ($3.8 million), and
working capital improvements ($8.0 million). The cash flow from
operations enabled the Company to make capital expenditures and repay
debt as discussed below.
Net cash used in investing activities was $126.9 million in 2001,
$113.2 million in 2000, and $171.0 million in 1999. The growth of the
Company's business has required significant investment in new revenue
equipment. Net capital expenditures in 2001, 2000, and 1999 were
$126.2 million, $108.5 million, and $171.0 million, respectively. The
capital expenditures in 2001 and 2000 were financed primarily with
cash provided by operations and, to a lesser extent in 1999,
borrowings. Capital expenditures were higher in 2001 due to the
Company's completion of various construction projects including the
Laredo, Texas terminal, the Dallas, Texas terminal expansion, and the
driver training facility. The Company also invested $5.0 million in
Transplace in 2000.
As of December 31, 2001, the Company has committed to
approximately $23 million of net capital expenditures, which is a
small portion of its estimated 2002 capital expenditures.
Net financing activities used $51.1 million in 2001 and $46.8
million in 2000 and generated $38.5 million in 1999. In 2001 and 2000
respectively, the Company made net repayments of $55.0 million and
$40.0 million of debt compared to net borrowings of $45.0 million in
1999. The Company paid dividends of $4.7 million in 2001, $4.7
million in 2000, and $4.7 million in 1999. Financing activities also
included common stock repurchases of $2.8 million in 2000 and $3.9
million in 1999. From time to time, the Company has and may continue
to repurchase shares of its common stock. The timing and amount of
such purchases depends on market and other factors. The Company's
board of directors has authorized the repurchase of up to 3,333,333
shares. As of December 31, 2001, the Company has purchased 1,704,701
shares pursuant to this authorization.
The Company's financial position is strong. As of December 31,
2001, the Company had $74 million of cash and cash equivalents, $50
million of debt, and $590 million of stockholders' equity. Based on
the Company's strong financial position, management foresees no
significant barriers to obtaining sufficient financing, if necessary.
12
Contractual Obligations and Commercial Commitments
The following table sets forth the Company's contractual
obligations and commercial commitments as of December 31, 2001.
Payments Due by Period
--------------------------------------------------------------
Contractual Obligations Total Less than 1 year 1-3 years 4-5 years After 5 years
- ----------------------- ------- ---------------- --------- --------- -------------
(In millions)
Long-term debt $ 50.0 $ 30.0 $ 20.0 $ - $ -
Operating leases 3.3 3.2 0.1 - -
------- ---------------- --------- --------- -------------
Total contractual
cash obligations $ 53.3 $ 33.2 $ 20.1 $ - $ -
======= ================ ========= ========= =============
Amount of Commitment Expiration Per Period
-----------------------------------------------------------------
Other Commercial Total Amounts
Commitments Committed Less than 1 year 1-3 years 4-5 years Over 5 years
- ---------------- ----------- ---------------- --------- --------- -------------
(In millions)
Unused lines of credit $ 25.0 $ 5.0 $ 20.0 $ - $ -
Standby letters of credit 12.2 12.2 - - -
Other commercial commitments 23.0 23.0 - - -
----------- ---------------- --------- --------- -------------
Total commercial commitments $ 60.2 $ 40.2 $ 20.0 $ - $ -
=========== ================ ========= ========= =============
The unused lines of credit are available to the Company in the
event the Company needs financing for the growth of its fleet. With
the Company's strong financial position, the Company expects it could
obtain additional financing, if necessary, at favorable terms. The
standby letters of credit are primarily required for insurance
policies. The other commercial commitments relate to committed
equipment expenditures, which is a small portion of planned equipment
expenditures for 2002.
Inflation
Inflation can be expected to have an impact on the Company's operating
costs. A prolonged period of inflation could cause interest rates, fuel,
wages, and other costs to increase and could adversely affect the Company's
results of operations unless freight rates could be increased
correspondingly. However, the effect of inflation has been minimal over
the past three years.
Year 2000 Issue
The impact of the Year 2000 issue on the Company's operations was
insignificant.
Forward LookingForward-Looking Statements and Risk Factors
This discussionThe following risks and analysis contains historical and forward-
looking information. The forward-looking statements are made pursuant
to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. The Company believes the assumptions underlying
these forward-looking statements are reasonable based on information
currently available, however any of the assumptions could be
inaccurate, and therefore,uncertainties may cause actual results mayto
differ materially from those anticipated in the forward-looking statements
as a result of
certain risks and uncertainties. Those risks include, but are not
limited to, the following:included in this Form 10-K:
The Company's business is modestly seasonal with peak freight demand
occurring generally in the months of September, October, and November.
During the winter months, the Company's freight volumes are typically lower
as some customers have lower shipment levels after the Christmas holiday
season. The Company's operating expenses have historically been higher in
winter months primarily due to decreased fuel efficiency, increased
maintenance costs of revenue equipment in colder weather, and increased
insurance and claims costs due to adverse winter weather conditions. The
Company attempts to minimize the impact of seasonality through its
marketing program by seeking additional freight from certain customers
during traditionally slower shipping periods. Bad weather, holidays, and
23
the number of business
13
days during the period can also affect revenue,
since revenue is directly related to available working days of shippers.
The trucking industry is highly competitive and includes thousands of
trucking companies. The Company estimates the ten largest truckload
carriers have less than ten percent of the approximate $150 billion market
targeted by the Company. This competition could limit the Company's growth
opportunities and reduce its profitability. The Company competes primarily
with other truckload carriers. Railroads, less-than-truckload carriers, and
private carriers also provide competition, but to a much lesser degree.
Competition for the freight transported by the Company is based primarily
on service and efficiency and, to some degree, on freight rates alone.
The Company is sensitive to changes in overall economic conditions
that impact customer shipping volumes. The general slowdown in the economy
duringin 2001 and 2002 had a negative effect on freight volumes for truckload
carriers, including the Company. Beginning in 2003 and continuing
throughout 2004, general economic improvements lead to improved freight
demand for the Company year over year. As the unemployment rate increased
during 2001 and 2002, driver availability improved for the Company and the
industry. Fuel prices increasedindustry but became more difficult beginning in fourth quarter 19992003 and
were highcontinuing through 20002004. Due to pending concerns in the Middle East and
2001other factors, fuel prices began to rise in the second quarter of 2002,
continued to increase throughout the second half of 2002, and increased
further in the first part of 2003. In the last nine months of 2003, prices
decreased again, ending 2003 at prices slightly higher than at the end of
2002. In 2004, fuel prices, excluding fuel taxes, climbed steadily
throughout most of the year, before decreasing in December 2004 to prices
about 40% higher than at the latter partend of 2001.2003. Shortages of fuel, increases in
fuel prices, or rationing of petroleum products can have a materially
adverse impact on the operations and profitability of the Company. To the
extent that the Company cannot recover the higher cost of fuel through
customer fuel surcharges, the Company's results would be negatively
impacted. Future economic conditions that may affect the Company include
employment levels, business conditions, fuel and energy costs, interest
rates, and tax rates.
The Company is regulated by the United States Department ofDOT and the Federal and Provincial
Transportation (DOT). ThisDepartments in Canada. These regulatory authority establishesauthorities
establish broad powers, generally governing activities such as
authorization to engage in motor carrier operations, safety, financial
reporting, and other matters. The Company may become subject to new or
more comprehensive regulations relating to fuel emissions, driver hours of
service, or other issues mandated by the DOT.DOT, EPA, or the Federal and
Provincial Transportation Departments in Canada. For example, new engine
emissions standards are to becomebecame effective for truck engine manufacturers in
October 2002. TheseThe new engineshours of service regulations that became effective
on January 4, 2004 were vacated in their entirety by the United States
Circuit Court of Appeals for the District of Columbia and remanded to the
FMCSA for reconsideration. On September 30, 2004, the extension of the
Federal highway bill signed into law by the President extended the current
hours of service rules for one year or whenever the FMCSA develops a new
set of regulations, whichever comes first. On January 24, 2005, the FMCSA
re-proposed its April 2003 HOS rules, adding references to how the rules
would affect driver health, but making no changes to the regulations. The
FMCSA is seeking public comments by March 10, 2005 on what changes to the
rule, if any, are necessary to respond to the concerns raised by the court,
and to provide data or studies that would support changes to, or continued
use of, the 2003 rule. The Company cannot predict what rule changes, if
any, will result from the court's ruling, nor the ultimate impact of any
upcoming changes to the hours of service rules. Any changes could have not yet been available for
adequate testing. These new engines may be more costlyan
adverse effect on the operations and less fuel
efficient.profitability of the Company.
At times, there have been shortages of drivers in the trucking
industry. Although theThe market for attracting companyrecruiting drivers improved
during 2001 due tobecame more difficult in
fourth quarter 2003 and continued throughout 2004. During the higher domestic unemployment rate and other
factors, the Company anticipates that the competition for company
drivers will continue to be high. During 2001,last several
years, it becamewas more difficult to recruit and retain owner-operator drivers
due to the weak
used truck pricing market and higherchallenging operating conditions, including high fuel prices for most of the year.prices. The
Company anticipates that the competition for company drivers and owner-operatorowner-
operator drivers will continue to be high and cannot predict whether it
will experience shortages in the future.
24
The Company is highly dependent on the services of key personnel
including Clarence L. Werner and other executive officers. Although the
Company believes it has an experienced and highly qualified management
group, the loss of the services of these executive officers could have a
material adverse impact on the Company and its future profitability.
The Company is dependent on its vendors and suppliers. The Company
believes it has good relationships with its vendors and that it is
generally able to obtain attractive pricing and other terms from vendors
and suppliers. If the Company fails to maintain good relationships with
its vendors and suppliers or if its vendors and suppliers experience
significant financial problems, the Company could face difficulty in
obtaining needed goods and services because of interruptions of production
or for other reasons, which could adversely affect the Company's business.
The efficient operation of the Company's business is highly dependent
on its information systems. Much of the Company's software has been
developed internally or by adapting purchased software applications to the
Company's needs. The Company has purchased redundant computer hardware
systems and has its own off-site disaster recovery facility approximately
ten miles from the Company's offices to use in the event of a disaster.
The Company has taken these steps to reduce the risk of disruption to its
business operation if a disaster were to occur.
The Company self-insures for liability resulting from cargo loss,
personal injury, and property damage as well as workers' compensation.
This is supplemented by premium insurance with licensed insurance 14
companies
above the Company's self-insurance level for each type of coverage. To the
extent that the Company waswere to experience a significant increase in the number
of claims, or the cost per claim, or the costs of insurance premiums for
coverage in excess of its retention amounts, the Company's operating
results would be negatively affected. In 2004, the Company was named a
defendant in two lawsuits related to an accident involving a third-party
carrier that was transporting a shipment arranged by the Company's VAS
division, as described under Item 3 of this Form 10-K. To the extent the
Company were to experience more of these types of claims and the Company is
held responsible for liability for these types of claims, the Company's
results of operations could be negatively impacted.
Effective October 1, 2002, all newly manufactured truck engines must
comply with the engine emission standards mandated by the EPA. As of
December 31, 2004, approximately 47% of the company-owned truck fleet
consisted of trucks with the new post-October 2002 engines. The Company
maintainshas experienced an approximate 5% reduction in fuel efficiency to date and
increased depreciation expense due to the higher cost of the new engines.
The Company anticipates continued increases in these expense categories as
regular truck replacements increase the percentage of company-owned trucks
with new post-October 2002 engines. A new set of more stringent emissions
standards mandated by the EPA will become effective for newly manufactured
trucks beginning in January 2007. The Company intends to gradually reduce
the average age of its truck fleet in advance of the new standards. The
Company expects that the engines produced under the 2007 standards will be
less fuel-efficient and have a three-year replacement cyclehigher cost than the current engines. The
Company is unable to predict the impact these new regulations will have on
its tractors.operations, financial position, results of operations, and cash flows.
The Company sells tractorsis sensitive to third parties or trades
tractors to manufacturers to maintain achanges in used equipment prices,
especially tractors. Because of truckload carrier concerns with new truck
fleet. Used truck
pricing for three-year-old tractors has declined by approximately
$12,000 to $15,000 per tractorengines and lower industry production of new trucks over the last several
years, the resale value of Werner's premium used trucks improved from 1999 to year-endthe
historically low values of 2001. In 1999,
the Company realized gainsGains on sales of tractorsequipment are reflected
as a reduction of $13.0 million or
$0.13 per share, resulting from used truck prices that wereother operating expenses in excess
of the Company's net book value for those trucks. For the last halfincome
statement and amounted to gains of 2001, used truck pricing for three-year-old tractors was
approximately the same as the Company's net book value for those
trucks. Should the used truck pricing market become significantly
worse$9.7 million in 2004, $7.6 million in
2003, and the Company decided to sell trucks at a loss rather than
extend the life of its trucks, this could have a material adverse
effect on the Company's business and operating results. Also, the
Company currently trades a portion of its three-year-old tractors to
its primary tractor manufacturer at fixed prices. There can be no
assurance that the Company will be able to continue to negotiate
comparable trade agreements$2.3 million in future years, which may require the
Company to sell more of its trucks to third parties using the
Company's retail truck sales network.2002.
Caution should be taken not to place undue reliance on forward-
lookingforward-looking
statements made herein, since the statements speak only as of the date they
are made. The Company undertakes no obligation to publicly release any
revisions to any forward-looking statements contained herein to reflect
events or circumstances after the date of this report or to reflect the
occurrence of unanticipated events.
25
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest and
exchange rates and commodity prices.
Interest Rate Risk
The Company's onlyCompany had no debt outstanding debt at December 31, 2001, was $50
million of fixed rate debt.2004. Interest
rates on the Company's unused credit facilities are based on the London
Interbank Offered Rate (LIBOR)("LIBOR"). Increases in interest rates could impact
the Company's annual interest expense on future borrowings.
Commodity Price Risk
The price and availability of diesel fuel are subject to fluctuations
due to changes in the level of global oil production, seasonality, weather,
and other market factors. Historically, the Company has been able to
recover a majority of fuel price increases from customers in the form of
fuel surcharges. The Company cannot predict the extent to which high fuel
price levels will occurcontinue in the future or the extent to which fuel
surcharges could be collected to offset such increases. As of December 31,
2001,2004, the Company had no derivative financial instruments to reduce its
exposure to fuel price fluctuations.
Foreign Currency Exchange Rate Risk
The Company conducts business in Mexico and Canada. Foreign currency
transaction gains and losses were not material to the Company's results of
operations for 20012004 and prior years. Accordingly, the Company is not
currently subject to material foreign currency exchange rate risks from the
effects that exchange rate movements of foreign currencies would have on
the Company's future costs or on future cash flows. To date, all foreign
revenues are denominated in U.S. dollars, and the Company receives payment
for freight services performed in Mexico and Canada primarily in U.S.
dollars to reduce foreign currency risk.
1526
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANTSACCOUNTING FIRM
To the Stockholders and Board of Directors
Werner Enterprises, Inc.:
We have audited the accompanying consolidated balance sheets of Werner
Enterprises, Inc. and subsidiaries as of December 31, 2001,2004 and 2000,2003, and
the related consolidated statements of income, stockholders' equity and
comprehensive income, and cash flows for each of the years in the three-yearthree-
year period ended December 31, 2001.2004. In connection with our audits of the
consolidated financial statements, we have also audited the financial
statement schedule for each of the years in the three-year period ended
December 31, 2001,2004, listed in Item 14(a)15(a)(2) of this Form 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 auditingthe standards generally accepted inof the United States of America.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, 2001,2004 and 2000,2003,
and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2001,2004, in conformity with
accounting principlesU.S. generally accepted in the United
States of America.accounting principles. In addition, in our
opinion, the financial statement schedule referred to above, when
considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly, in all material respects, the information for eachset
forth therein.
We also have audited, in accordance with the standards of the three years inPublic
Company Accounting Oversight Board (United States), the period endedeffectiveness of
Werner Enterprises, Inc.'s internal control over financial reporting as of
December 31, 2001, set forth therein.2004, 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 4, 2005
expressed an unqualified opinion on management's assessment of, and the
effective operation of, internal control over financial reporting.
KPMG LLP
Omaha, Nebraska
January 22, 2002, except as to the second paragraph of
Note 3 and Note 9 which are as of February 11, 2002
164, 2005
27
WERNER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME
2001 2000 1999
---------- ---------- ----------
(In thousands, except per share amounts)
2004 2003 2002
---------- ---------- ----------
Operating revenues $1,270,519 $1,214,628 $1,052,333$1,678,043 $1,457,766 $1,341,456
---------- ---------- ----------
Operating expenses:
Salaries, wages and benefits 457,433 429,825 382,824544,424 513,551 486,315
Fuel 131,498 137,620 79,029218,095 160,465 125,189
Supplies and maintenance 117,882 102,784 87,600138,999 123,680 119,972
Taxes and licenses 93,628 89,126 82,089109,720 104,392 98,741
Insurance and claims 41,946 34,147 31,72876,991 73,032 51,192
Depreciation 116,043 109,107 99,955144,535 135,168 121,702
Rent and purchased transportation 214,336 216,917 185,129289,186 215,463 222,571
Communications and utilities 14,365 14,454 13,44418,919 16,480 14,808
Other 4,059 (2,173) (11,666)(4,154) (1,969) 1,512
---------- ---------- ----------
Total operating expenses 1,191,190 1,131,807 950,1321,536,715 1,340,262 1,242,002
---------- ---------- ----------
Operating income 79,329 82,821 102,201141,328 117,504 99,454
---------- ---------- ----------
Other expense (income):
Interest expense 3,775 8,169 6,56513 1,099 2,857
Interest income (2,628) (2,650) (1,407)(2,580) (1,699) (2,340)
Other 1,791 (154) 245198 128 333
---------- ---------- ----------
Total other expense 2,938 5,365 5,403(income) (2,369) (472) 850
---------- ---------- ----------
Income before income taxes 76,391 77,456 96,798143,697 117,976 98,604
Income taxes 28,647 29,433 36,78756,387 44,249 36,977
---------- ---------- ----------
Net income $ 47,74487,310 $ 48,02373,727 $ 60,01161,627
========== ========== ==========
Average common shares outstanding 63,147 62,748 63,20779,224 79,828 79,705
========== ========== ==========
Basic earnings per share $ 0.761.10 $ 0.770.92 $ 0.950.77
========== ========== ==========
Diluted shares outstanding 64,147 63,010 63,50880,868 81,668 81,522
========== ========== ==========
Diluted earnings per share $ 0.741.08 $ 0.760.90 $ 0.940.76
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
1728
WERNER ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
----------------------
2001 2000
---------- ----------
(In thousands, except share amounts)
December 31
-----------------------
ASSETS 2004 2003
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 74,366108,807 $ 25,485101,409
Accounts receivable, trade, less allowance
of $4,966$8,189 and $3,994,$6,043, respectively 121,354 123,518
Receivable from unconsolidated affiliate - 5,332186,771 152,461
Other receivables 8,527 10,25711,832 8,892
Inventories and supplies 8,432 7,3299,658 9,877
Prepaid taxes, licenses, and permits 12,333 12,396
Current deferred income taxes - 11,55215,292 14,957
Other 11,055 10,908current assets 18,896 17,691
---------- ----------
Total current assets 236,067 206,777351,256 305,287
---------- ----------
Property and equipment, at cost:
Land 19,357 19,15725,008 21,423
Buildings and improvements 79,704 72,631105,493 96,787
Revenue equipment 854,603 829,5491,100,596 1,013,645
Service equipment and other 115,941 100,342143,552 129,397
---------- ----------
Total property and equipment 1,069,605 1,021,6791,374,649 1,261,252
Less - accumulated depreciation 354,122 313,881511,651 455,565
---------- ----------
Property and equipment, net 715,483 707,798862,998 805,687
---------- ----------
Notes receivable 5,408 4,420
Investment in unconsolidated affiliate 3,660 5,324
Other non-current assets 3,396 2,88811,521 10,553
---------- ----------
$ 964,014 $ 927,207$1,225,775 $1,121,527
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 33,18849,618 $ 30,710
Current portion of long-term debt 30,000 -40,903
Insurance and claims accruals 40,254 36,05755,095 55,201
Accrued payroll 15,008 12,746
Income taxes payable 1,268 7,15719,579 15,828
Current deferred income taxes 20,473 -15,569 15,151
Other current liabilities 12,066 14,74917,705 15,392
---------- ----------
Total current liabilities 152,257 101,419157,566 142,475
---------- ----------
Long-term debt,Deferred income taxes 210,739 198,640
Insurance and claims accruals, net of
current portion 20,000 105,000
Deferred income taxes 162,907 152,403
Insurance, claims and other long-term accruals 38,801 32,30184,301 71,301
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, 200,000,000
shares authorized; 64,427,78080,533,536 shares
issued; 63,636,82379,197,747 and 62,719,05379,714,271
shares outstanding, respectively 644 644805 805
Paid-in capital 106,058 105,683106,695 108,706
Retained earnings 490,942 447,943691,035 614,011
Accumulated other comprehensive loss (43) (34)(861) (837)
Treasury stock, at cost; 790,9571,335,789 and
1,708,727819,265 shares, respectively (7,552) (18,152)(24,505) (13,574)
---------- ----------
Total stockholders' equity 590,049 536,084773,169 709,111
---------- ----------
$ 964,014 $ 927,207$1,225,775 $1,121,527
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
1829
WERNER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
2001 2000 19992004 2003 2002
---------- ---------- ----------
(In thousands)
Cash flows from operating activities:
Net income $ 47,74487,310 $ 48,02373,727 $ 60,01161,627
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation 116,043 109,107 99,955144,535 135,168 121,702
Deferred income taxes 42,529 18,751 22,200
Loss (gain)12,517 (5,480) 35,891
Gain on disposal of operating
equipment 740 (5,055) (13,047)(9,735) (7,557) (2,257)
Gain on sale of unconsolidated
affiliate - - (1,809)
Equity in (income) loss of unconsolidated
affiliate 1,664 (324) - - 2,105
Tax benefit from exercise of
stock options 2,384 130 6633,225 2,863 1,450
Other long-term assets 938 (2,888) -408 1,023 248
Insurance, claims and other
long-term accruals 6,500 2,000 (500)13,000 23,500 9,000
Changes in certain working
capital items:
Accounts receivable, net 2,164 3,693 (32,882)(34,310) (20,572) (10,535)
Prepaid expenses and other
current assets 5,875 (8,474) (8,725)(4,261) 6,358 (17,428)
Accounts payable 2,478 (4,976) (12,460)8,715 (9,643) 17,358
Accrued and other current
liabilities (2,139) 10,160 16,7625,178 8,087 8,919
---------- ---------- ----------
Net cash provided by operating
activities 226,920 170,147 131,977226,582 207,474 226,271
---------- ---------- ----------
Cash flows from investing activities:
Additions to property and equipment (170,862) (169,113) (255,326)(294,288) (158,351) (309,672)
Retirements of property and equipment 44,710 60,608 84,297
Investment in98,098 54,754 71,882
Sale of unconsolidated affiliate - (5,000) - Decrease (increase)3,364
(Increase) decrease in notes
receivable (750) 287 -2,703 2,052 (1,099)
---------- ---------- ----------
Net cash used in investing
activities (126,902) (113,218) (171,029)(193,487) (101,545) (235,525)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from issuance of long-term
debt 5,000- - 10,000 30,000
Repayments of long-term debt (60,000) (25,000) - Proceeds from issuance of
short-term debt - - 30,000
Repayments of short-term debt - (25,000) (15,000)(20,000) (40,000)
Dividends on common stock (4,728) (4,710) (4,740)(9,506) (6,466) (5,019)
Payment of stock split fractional
shares - (9) (12)
Repurchases of common stock - (2,759) (3,941)(21,591) (13,476) (3,766)
Stock options exercised 8,591 657 2,1885,424 6,167 3,570
---------- ---------- ----------
Net cash provided by (used in)used in financing
activities (51,137) (46,812) 38,507(25,673) (33,784) (35,227)
---------- ---------- ----------
Effect of exchange rate fluctuations
on cash (24) (621) -
Net increase (decrease) in cash and
cash equivalents 48,881 10,117 (545)equivalents: 7,398 71,524 (44,481)
Cash and cash equivalents, beginning
of year 25,485 15,368 15,913101,409 29,885 74,366
---------- ---------- ----------
Cash and cash equivalents, end of
year $ 74,366108,807 $ 25,485101,409 $ 15,36829,885
========== ========== ==========
Supplemental disclosures of cash flow
information:
Cash paid (received) during year for:
Interest $ 4,31513 $ 7,8761,148 $ 7,3293,080
Income taxes (9,540) 3,916 13,27542,850 34,401 10,422
Supplemental disclosures of non-cash
investing activities:
Notes receivable issued upon sale
of revenue equipment $ 2384,079 $ 4,7072,566 $ -
Warehouse assets contributed to LLC 1,4462,686
Notes receivable canceled upon
return of revenue equipment - - (1,279)
The accompanying notes are an integral part of these consolidated financial
statements.
1930
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'
StockStocK Capital Earnings Loss Stock Equity
------ -------- -------- ------------- --------- ------------
(In thousands, except share amounts)------------------------------------------------------------------
BALANCE, December 31, 1998 $644 $105,177 $349,3512001 $805 $105,897 $490,942 $ - $(14,584) $440,588(43) $ (7,552) $590,049
Purchases of 403,467267,125 shares
of common stock - - - - (3,941) (3,941)(3,766) (3,766)
Dividends on common stock
($.075.064 per share) - - (4,737)(5,102) - - (4,737)(5,102)
Payment of stock split
fractional shares - (12) - - - (12)
Exercise of stock options,
264,701448,508 shares, including
tax benefits - 5461,481 - - 2,305 2,8513,539 5,020
Comprehensive income:income (loss):
Net income - - 60,01161,627 - - 60,011
------61,627
Foreign currency translation
adjustments - - - (173) - (173)
----- -------- -------- ----------------------- --------- ----------
------------Total comprehensive income - - 61,627 (173) - 61,454
----- -------- -------- ----------- --------- ----------
BALANCE, December 31, 1999 644 105,723 404,625 - (16,220) 494,7722002 805 107,366 547,467 (216) (7,779) 647,643
Purchases of 300,268764,500 shares
of common stock - - - - (2,759) (2,759)(13,476) (13,476)
Dividends on common stock
($.075.090 per share) - - (4,705)(7,183) - - (4,705)(7,183)
Payment of stock split
fractional shares - (9) - - - (9)
Exercise of stock options,
79,007752,591 shares, including
tax benefits - (40)1,349 - - 827 7877,681 9,030
Comprehensive income (loss):
Net income - - 48,02373,727 - - 48,02373,727
Foreign currency translation
adjustments - - - (34)(621) - (34)
------(621)
----- -------- -------- ----------------------- --------- ---------- ------------
Total comprehensive income - - 48,023 (34)73,727 (621) - 47,989
------73,106
----- -------- -------- ----------------------- --------- ---------- ------------
BALANCE, December 31, 2000 644 105,683 447,943 (34) (18,152) 536,0842003 805 108,706 614,011 (837) (13,574) 709,111
Purchases of 1,173,200 shares
of common stock - - - - (21,591) (21,591)
Dividends on common stock
($.075.130 per share) - - (4,745)(10,286) - - (4,745)(10,286)
Exercise of stock options,
917,770656,676 shares, including
tax benefits - 375(2,011) - - 10,600 10,97510,660 8,649
Comprehensive income (loss):
Net income - - 47,74487,310 - - 47,74487,310
Foreign currency translation
adjustments - - - (9)(24) - (9)
------(24)
----- -------- -------- ----------------------- --------- ---------- ------------
Total comprehensive income - - 47,744 (9)87,310 (24) - 47,735
------87,286
----- -------- -------- ----------------------- --------- ---------- ------------
BALANCE, December 31, 2001 $644 $106,058 $490,942 $(43) $ (7,552) $590,049
======2004 $805 $106,695 $691,035 $(861) $(24,505) $773,169
===== ======== ======== ======================= ========= ========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
2031
WERNER ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Werner Enterprises, Inc. (the Company)"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, and various state regulatory commissions. The
Company maintains a diversified freight base with no one customer or
industry making up a significant percentage of the Company's receivables or
revenues. The largest singleOne customer generated 9% of total revenues for 2001.2004, 2003, and
2002.
Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of Werner Enterprises, Inc. and its majority-owned subsidiaries.
All significant intercompany accounts and transactions relating to these
majority-owned entities have been eliminated. TheThrough December 31, 2002,
the Company recorded its investment in Transplace using the equity method
of accounting is used foruntil the Company's investment in
TransplaceCompany reduced its ownership percentage (see Note
2). On January 1, 2003, the Company began accounting for this investment
using the cost method.
Use of Management Estimates
The preparation of consolidated financial statements in conformity
with accounting principles generally accepted accounting principlesin the United States of
America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments, purchased with a
maturity of three months or less, to be cash equivalents.
Trade Accounts Receivable
Trade accounts receivable are recorded at the invoiced amounts, net of
an allowance for doubtful accounts. The allowance for doubtful accounts is
the Company's best estimate of the amount of probable credit losses in the
Company's existing accounts receivable. The financial condition of
customers is reviewed by the Company prior to granting credit. The Company
determines the allowance based on historical write-off experience and
national economic data. The Company reviews the adequacy of its allowance
for doubtful accounts quarterly. Past due balances over 90 days and over a
specified amount are reviewed individually for collectibility. Account
balances are charged off against the allowance after all means of
collection have been exhausted and the potential for recovery is considered
remote. The Company does not have any off-balance-sheet credit exposure
related to its customers.
32
Inventories and Supplies
Inventories and supplies consist primarily of revenue equipment parts,
tires, fuel, supplies, and suppliescompany store merchandise and are stated at
average cost. Tires placed on new revenue equipment are capitalized as a
part of the equipment cost. Replacement tires are expensed when placed in
service.
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. If equipment is traded rather than sold and cash
involved in the exchange is less than 25% of the fair value of the
exchange, the cost of new equipment is recorded at an amount equal to the
lower of the monetary consideration paid plus the net book value of the
traded property or the fair value of the new equipment.
Depreciation is calculated based on the cost of the asset, reduced by
its 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 overusing the following estimated useful lives
and salvage values:
Lives Salvage Values
------------ --------------
Building and improvements 30 years 0%
Tractors 5 years 25%
Trailers 12 years 0%
Service and other equipment 3-10 years 0%
Although the Company's current replacement cycle for tractors is three
years, the Company calculates 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 30 yearsthe tractors, in those
instances in which a tractor is held beyond the normal three-year age.
Calculating depreciation expense using a five-year life and 25% salvage
value results in the same annual depreciation rate (15% of cost per year)
and the same net book value at the normal three-year replacement date (55%
of cost) as using a three-year life and 55% salvage value. As a result,
there is no difference in recorded depreciation expense on a quarterly or
annual basis with the Company's five-year life, 25% salvage value as
compared to a three-year life, 55% salvage value.
Long-Lived Assets
The Company reviews its long-lived assets for buildingsimpairment whenever
events or changes in circumstances indicate that the carrying amount of a
long-lived asset may not be recoverable. An impairment loss would be
recognized if the carrying amount of the long-lived asset is not
recoverable, and improvements, 5it exceeds its fair value. For long-lived assets
classified as held and used, if the carrying value of the long-lived asset
exceeds the sum of the future net cash flows, it is not recoverable. The
Company does not separately identify assets by operating segment, as
tractors and trailers are routinely transferred from one operating fleet to
10 yearsanother. As a result, none of the Company's long-lived assets have
identifiable cash flows from use that are largely independent of the cash
flows of other assets and liabilities. Thus, the asset group used to
assess impairment would include all assets and liabilities of the Company.
Long-lived assets classified as held for revenue equipment, and 3sale are reported at the lower of
its carrying amount or fair value less costs to 10 years
for service and other equipment.sell.
33
Insurance and Claims Accruals
Insurance and claims accruals, both current and noncurrent, reflect
the estimated cost for cargo loss and damage, bodily injury and property
damage (BI/PD), group health, and workers' compensation claims, including
estimated loss development and loss adjustment expenses, not covered by
insurance. The costs for cargo and BI/PD
21
WERNER ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) insurance and claims are included
in insurance and claims expense, while the costs of group health and
workers' compensation claims are included in salaries, wages and benefits
expense in the Consolidated Statements of Income. The insurance and claims
accruals are recorded at the estimated ultimate payment amounts and are
based upon individual case estimates and estimates of incurred-but-not-reportedincurred-but-not-
reported losses based upon past experience. Actual costs related to
insurance and claims have not differed materially from estimated accrued
amounts for all years presented. The Company's insurance and claims
accruals are reviewed by an actuary every six months.
The Company has been responsible for liability claims up to $500,000,
plus administrative expenses, for each occurrence involving personal injury
or property damage since August 1, 1992. For the policy year beginning
August 1, 2004, the Company increased its self-insured retention ("SIR")
amount to $2.0 million per occurrence. The Company is also responsible for
varying annual aggregate amounts of liability for claims above $500,000 and below $4,000,000. For the policy year
ending August 1, 2002, these annual aggregate amounts total
$4,500,000. Liability in excess of these riskthe
self-insured retention. The following table reflects the self-insured
retention levels is
assumed byand aggregate amounts of liability for personal injury and
property damage claims since August 1, 2001:
Primary Coverage
Coverage Period Primary Coverage SIR/deductible
- ------------------------------ ---------------- ------------------
August 1, 2001 - July 31, 2002 $3.0 million $500,000 (1)
August 1, 2002 - July 31, 2003 $3.0 million $500,000 (2)
August 1, 2003 - July 31, 2004 $3.0 million $500,000 (3)
August 1, 2004 - July 31, 2005 $5.0 million $2.0 million (4)
(1) Subject to an additional $1.5 million self-insured aggregate amount in
the $0.5 to $1.0 million layer, a $1.0 million aggregate in the $1.0 to
$2.0 million layer, no aggregate (i.e., fully insured) in the $2.0 to $3.0
million layer, and a $2.0 million aggregate in the $3.0 to $4.0 million
layer.
(2) Subject to an additional $1.5 million aggregate in the $0.5 to $1.0
million layer, a $1.0 million aggregate in the $1.0 to $2.0 million layer,
no aggregate (i.e., fully insured) in the $2.0 to $3.0 million layer, and
self-insured in the $3.0 to $5.0 million layer.
(3) Subject to an additional $1.5 million aggregate in the $0.5 to $1.0
million layer, a $1.0 million aggregate in the $1.0 to $2.0 million layer,
no aggregate (i.e., fully insured) in the $2.0 to $3.0 million layer, a
$6.0 million aggregate in the $3.0 to $5.0 million layer, and a $5.0
million aggregate in the $5.0 to $10.0 million layer.
(4) Subject to an additional $3.0 million aggregate in the $2.0 to $3.0
million layer, no aggregate (i.e., fully insured) in the $3.0 to $5.0
million layer, and a $5.0 million aggregate in the $5.0 to $10.0 million
layer.
The Company's primary insurance carrierscovers the range of liability where
the Company expects most claims to occur. Liability claims substantially
in excess of coverage amounts whichlisted in the table above, if they occur, are
covered under premium-based policies with reputable insurance companies to
coverage levels that management considers adequate. The Company's premium rateCompany is also
responsible for liability coverage
up to $3,000,000 per claim is fixed through August 1, 2004, while
coverage levels above $3,000,000 per claim will be renewed effective
August 1, 2002.administrative expenses for each occurrence involving
personal injury or property damage. See also Note 7 "Commitments and
Contingencies".
The Company has assumed responsibility for workers' compensation,
maintains a $19,000,000$27.3 million bond, has statutory coverage, and has obtained insurance for individual
claims above $500,000.$1.0 million.
Under these insurance arrangements, the Company maintains $12,100,000$35.4
million in letters of credit as of December 31, 2001.2004.
34
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 provider is
utilized to provide some or all of the service and the Company is the
primary obligor in regards to the delivery of the shipment, establishes
customer pricing separately from carrier rate negotiations, generally has
discretion in carrier selection, and/or has credit risk on the shipment,
the Company records both revenues for the dollar value of services billed
by the Company to the customer and rent and purchased transportation
expense for the costs of transportation paid by the Company to the third-
party provider upon delivery of the shipment. In the absence of the
conditions listed above, the Company records revenues net of 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-endyear-
end exchange rates for operations in local currency environments. Income and expenseAll
foreign revenues are denominated in U.S. dollars. Expense items are
translated at average rates of exchange prevailing during the year.
Foreign currency translation adjustments reflect the changes in foreign
currency exchange rates applicable to the net assets of the Mexican and
Canadian operations for the years ended December 31, 20012004, 2003, and 2000, and of the Canadian
operations for the year ended December 31, 2001.2002.
The amounts of such translation adjustments were not significant for all
years presented (see the Consolidated Statements of Stockholders' Equity)Equity
and Comprehensive Income).
Income Taxes
The Company uses the asset and liability method of Statement of
Financial Accounting Standards (SFAS)("SFAS") No. 109 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 expected to apply
to taxable income in the years in which those temporary differences are
expected to be recovered or settled.
Common Stock and Earnings Per Share
The Company computes and presents earnings per share (EPS)("EPS") in
accordance with SFAS No. 128, Earnings per Share. The difference between
the Company's weighted average shares outstanding and diluted shares
outstanding is due to the dilutive effect of stock options for all periods
presented. There are no differences in the numerator of the Company's
computations of basic and diluted EPS for any period presented.
22Stock Based Compensation
At December 31, 2004, the Company has a nonqualified stock option
plan, as described more fully in Note 6. The Company applies the intrinsic
value based method of Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations in
accounting for its stock option plan. No stock-based employee compensation
cost is reflected in net income, as all options granted under the plan had
an exercise price equal to the market value of the underlying common stock
on the date of grant. The Company's pro forma net income and earnings per
share (in thousands, except per share amounts) would have been as indicated
below had the fair value of option grants been charged to salaries, wages,
and benefits in accordance with SFAS No. 123, Accounting for Stock-Based
Compensation:
35
WERNER ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Year Ended December 31
-----------------------------
2004 2003 2002
------- ------- -------
Net income, as reported $87,310 $73,727 $61,627
Less: Total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related
tax effects 2,006 2,516 3,456
------- ------- -------
Pro forma net income $85,304 $71,211 $58,171
======= ======= =======
Earnings per share:
Basic - as reported $ 1.10 $ 0.92 $ 0.77
======= ======= =======
Basic - pro forma $ 1.08 $ 0.89 $ 0.73
======= ======= =======
Diluted - as reported $ 1.08 $ 0.90 $ 0.76
======= ======= =======
Diluted - pro forma $ 1.05 $ 0.87 $ 0.71
======= ======= =======
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, 20012004, 2003, and 2000,2002, comprehensive income consists of net income and
foreign currency translation adjustments.
For the year ended December 31, 1999, the Company had no items of
other comprehensive income (loss), and, accordingly, comprehensive
income is the same as net income.
Accounting Standards
On July 20, 2001,In December 2003, the Financial Accounting Standards Board (FASB)("FASB")
revised FASB Interpretation ("FIN") No. 46, Consolidation of Variable
Interest Entities. FIN No. 46(R) addresses consolidation by business
enterprises of certain variable interest entities. For public entities
that are not small business issuers, the provisions of FIN No. 46(R) are
effective no later than the end of the first reporting period that ends
after March 15, 2004. If the variable interest entity is considered to be
a special-purpose entity, FIN No. 46(R) shall be applied no later than the
first reporting period that ends after December 15, 2003. Management has
determined that adoption of this interpretation did not have any material
effect on the financial position, results of operations, and cash flows of
the Company.
In December 2004, the FASB issued SFAS No. 141 (SFAS 141), Business Combinations153, Exchanges of
Nonmonetary Assets. This Statement amends the guidance in APB Opinion No.
29, Accounting for Nonmonetary Transactions. APB 29 provided an exception
to the basic measurement principle (fair value) for exchanges of similar
assets, requiring that some nonmonetary exchanges be recorded on a
carryover basis. SFAS 153 eliminates the exception to fair value for
exchanges of similar productive assets and No. 142
(SFAS 142), Goodwill and Other Intangible Assets.replaces it with a general
exception for exchange transactions that do not have commercial substance,
that is, transactions that are not expected to result in significant
changes in the cash flows of the reporting entity. The provisions of SFAS
141 requires
all business combinations initiated153 are effective for exchanges of nonmonetary assets occurring in fiscal
periods beginning after June 30, 2001, to be
accounted for using the purchase method. Business combinations
accounted for as poolings-of-interests and initiated prior to June 30,
2001, are grandfathered. SFAS 142 replaces the requirement to
amortize intangible assets with indefinite lives and goodwill with a
requirement for an impairment test. The elimination of the
requirement to amortize goodwill also applies to investments accounted
for under the equity method of accounting. SFAS 142 also requires an
evaluation of intangible assets and their useful lives and a
transitional impairment test for goodwill and certain intangible
assets upon adoption. After transition, the impairment tests will be
performed annually. SFAS 142 is effective for fiscal years beginning
after December 15, 2001, as of the beginning of the year.2005. As of December 31, 2001, the Company has no goodwill or intangible assets
recorded in its financial statements. Management2004, management
believes that SFAS 141 and SFAS 142153 will have no significant effect on the financial
position, results of operations, and cash flows of the Company.
During June 2001,In December 2004, the FASB issuedrevised SFAS No. 143 (SFAS 143)123 (revised 2004), AccountingShare-
Based Payments. SFAS 123(R) eliminates the alternative to use APB Opinion
25's intrinsic value method of accounting (generally resulting in
recognition of no compensation cost) and instead requires a company to
recognize in its financial statements the cost of employee services
received in exchange for Asset Retirement Obligations. This Statement addresses
financial accountingvaluable equity instruments issued, and
reporting for obligations associated withliabilities incurred, to employees in share-based payment transactions
(e.g., stock options). The cost will be based on the retirement of tangible long-lived assets and the associated asset
retirement costs. SFAS 143 requires an enterprise to record thegrant-date fair value
of the award and will be recognized over the period for which an asset retirement obligationemployee
36
is required to provide service in exchange for the award. For public
entities that do not file as a liabilitysmall business issuers, the provisions of the
revised statement are to be applied prospectively for awards that are
granted, modified, or settled in the first interim or annual period
in which it incurs a legal obligation associated with the retirement
of a tangible long-lived asset. SFAS 143 is effective for fiscal
years
beginning after June 15, 2002.2005. Additionally, public entities would
recognize compensation cost for any portion of awards granted or modified
after December 15, 1994, that is not yet vested at the date the standard is
adopted, based on the grant-date fair value of those awards calculated
under SFAS 123 (as originally issued) for either recognition or pro forma
disclosures. When the Company adopts the standard on July 1, 2005, it will
be required to report in its financial statements the share-based
compensation expense for the last six months of 2005 and may choose to use
the modified retrospective application method to restate results for the
two earlier interim periods. As of December 31, 2001,2004, management believes
that SFAS 143adopting the new statement will have no significant effect ona negative impact of
approximately one cent per share (two cents per share if the financial position, results of operations, and cash flows of the
Company.
On October 3, 2001, the FASB issued SFAS No. 144 (SFAS 144),
Accountingmodified
retrospective application method is used) for the Impairment or Disposal of Long-Lived Assets, which
addresses financial accounting and reportingyear ending December 31,
2005, representing the expense to be recognized from July 1, 2005 through
December 31, 2005 for the impairment or
disposalunvested portion of long-lived assets. While SFAS 144 supersedes SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assetsawards which were granted
prior to Be Disposed Of, it retains many of the fundamental
provisions of that Statement. SFAS 144 is effective for fiscal years
beginning after December 31, 2001. As of December 31, 2001,
management believes that SFAS 144 will have no significant effect on
the financial position, results of operations, and cash flows of the
Company.July 1, 2005.
(2) INVESTMENT IN UNCONSOLIDATED AFFILIATE
Effective June 30, 2000, the Company contributed its non-asset based
logistics business to Transplace (TPC)("TPC"), a joint venture of six large
transportation companies, in exchange for an equity interest in TPC of
approximately 15%. TPC is a joint venture
of five large transportation companies - Covenant Transport, Inc.;
J.B. Hunt Transport Services, Inc.; Swift Transportation Co., Inc.;
U.S. Xpress Enterprises, Inc.; and Werner Enterprises, Inc. TheThrough December 31, 2002, the Company is accountingaccounted for
its investment in TPC using the equity method. Management believes this
method iswas appropriate because the Company hashad the ability to exercise
significant influence over operating and financial policies of TPC through
its representation on the TPC boardBoard of directors. AtDirectors. On December 31, 2001,2002, the
Company sold a portion of its ownership interest in TPC, reducing the
Company's ownership stake in TPC from 15% to 5%. The Company relinquished
its seat on the TPC Board of Directors, and TPC agreed to release the
Company from certain restrictions on competition within the transportation
logistics marketplace. The Company realized net losses of less than one
cent per share during 2002, consisting of the Company's gain on sale of a
portion of its ownership in TPC in fourth quarter 2002, net of the
Company's equity in net losses of TPC during the year. These items are
recorded as non-operating expense in the Company's Consolidated Statements
of Income. Beginning January 1, 2003, the Company began accounting for its
investment in
unconsolidated affiliate (in thousands) is $3,660 (which includes a
$5,000 cashon the cost method and no longer accrues its percentage share of
TPC's earnings or losses. The Company's recorded investment in TPC less $1,340, which represents the
23
WERNER ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Company's 15% equity in the loss from operationsis $0
as of unconsolidated
affiliate since June 30, 2000).December 31, 2004 and December 31, 2003. The Company is not
responsible for the debt of Transplace.
In October 2000, the Company provided funds (in thousands) of
$3,200 to TPC in the form of a short-term note with an interest rate
of 8%. The Company recorded interest income on the note from TPC (in
thousands) of approximately $26 and $61 during 2001 and 2000,
respectively. The note was repaid in full in February 2001.
The Company and TPC enter into transactions with each other for
certain of their purchased transportation needs. The Company recorded
operating revenue (in thousands) from TPC of approximately $30,600$8,400, $16,800,
and $15,500$25,000 in 20012004, 2003, and 2000,2002, respectively, and recorded purchased
transportation expense (in thousands) to TPC of approximately $10,500$7, $711, and
$1,500$13,300 during 20012004, 2003, and 2000,2002, respectively.
TheDuring 2002, the Company also providesprovided certain administrative
functions to TPC as well as providing office space, supplies, and
communications. The allocation from the Company for these services (in
thousands) was approximately $407 and $518$123 during 2001 and 2000, respectively.2002. The allocations for rent
are recorded in the Consolidated Statements of Income as miscellaneous
revenue, and the remaining amounts are recorded as a reduction of the
respective operating expenses. The Company stopped providing these
services in 2003.
The Company believes that the transactions with TPC are on terms no
less favorable to the Company than those that could be obtained from
unaffiliated third parties, on an arm's length basis.
37
(3) LONG-TERM DEBT
Long-term debt consistsAs of the following at December 31, (in
thousands):
2001 2000
-------- --------
Notes payable to banks under committed credit facilities $ - $ 55,000
6.55% Series A Senior Notes, due November 2002 20,000 20,000
6.02% Series B Senior Notes, due November 2002 10,000 10,000
5.52% Series C Senior Notes, due December 2003 20,000 20,000
-------- --------
50,000 105,000
Less current portion 30,000 -
-------- --------
Long-term debt, net $ 20,000 $105,000
======== ========
Effective February 11, 2002,2004, the Company reduced its credit
facilities to $25 million of available credit pursuant tohas two credit facilities with
banks totaling $75.0 million which expire May 16, 2006 and October 22, 2005
and bear variable interest based on LIBOR,the London Interbank Offered Rate
("LIBOR"), on which no borrowings were outstanding at December 31, 2001.2004 or
December 31, 2003. As of December 31, 2004, the credit available pursuant
to these bank credit facilities is reduced by $35.4 million in letters of
credit the Company maintains. Each of the debt agreements require, among
other things, that the Company maintain a minimum consolidated tangible net
worth and not exceed a maximum ratio of indebtednesstotal funded debt to total capitalization. Theearnings
before interest, income taxes, depreciation, amortization and rentals
payable as defined in the credit facility. Although the Company washad no
borrowings pursuant to these credit facilities as of December 31, 2004, the
Company remained in compliance with these covenants at December 31, 2001.
The aggregate future maturities of long-term2004.
(4) NOTES RECEIVABLE
Notes receivable are included in other current assets and short-term debt
by year consist ofother non-
current assets in the following at December 31, 2001, (in thousands):
2002 $ 30,000
2003 20,000
---------
$ 50,000
=========
The carrying amount of the Company's long-term debt approximates
fair value due to the duration of the notes and their interest rates.
24
WERNER ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(4) LEASES
The Company leases certain revenue equipment under operating
leases which expire through 2003.Consolidated Balance Sheets. At December 31, 2001, the future
minimum lease payments under non-cancelable revenue equipment
operating leases are as follows (in thousands):
Rental expense under non-cancelable revenue equipment operating
leases (in thousands) was $3,237 in 2001, $3,185 in 2000, and $596 in
1999.
(5) INCOME TAXES
Income tax expense consistsnotes
receivable consisted of the following (in thousands):
2001 2000 1999
--------- --------- ---------2004 2003
------- -------
Owner-operator notes receivable $ 7,006 $ 4,866
TDR Transportes, S.A. de C.V. 3,600 3,758
Warehouse One, LLC 1,451 1,525
Other notes receivable 500 -
------- -------
12,557 10,149
Less current portion 2,753 1,722
------- -------
Notes receivable - non-current $ 9,804 $ 8,427
======= =======
The Company provides financing to some independent contractors who
want to become owner-operators by purchasing a tractor from the Company and
leasing their truck to the Company. At December 31, 2004 and 2003, the
Company had 221 and 153 notes receivable totaling $7,006 and $4,866 (in
thousands), respectively, from these owner-operators. See Note 8 for
information regarding notes from related parties. The Company maintains a
first security interest in the tractor until the owner-operator has paid
the note balance in full. The Company also retains recourse exposure
related to owner-operators who have purchased tractors from the Company
with third-party financing arranged by the Company.
During 2002, the Company loaned $3,600 (in thousands) to TDR
Transportes, S.A. de C.V. ("TDR"), a truckload carrier in the Republic of
Mexico. The loan has a nine-year term with principal payable at the end of
the term, is subject to acceleration if certain conditions are met, bears
interest at a rate of five percent per annum which is payable quarterly,
contains certain financial and other covenants, and is collateralized by
the assets of TDR. The Company had a receivable for interest on this note
of $31 (in thousands) as of December 31, 2004 and 2003. During 2003, the
Company loaned an additional $158 (in thousands) to TDR for the purchase of
revenue equipment, which was repaid in March 2004. See Note 8 for
information regarding related party transactions.
The Company has a 50% ownership interest in a 125,000 square-foot
warehouse (Warehouse One, LLC) located near the Company's headquarters.
The Company has a note receivable from the owner of the other 50% interest
in the warehouse with a principal balance (in thousands) of $1,451 and
$1,525 as of December 31, 2004 and 2003, respectively. The note bears
interest at a variable rate based on the prime rate and is adjusted
annually. The note is secured by the borrower's 50% ownership interest in
the warehouse. The Company's 50% ownership interest in the warehouse (in
thousands) of $1,337 and $1,364 as of December 31, 2004 and 2003,
respectively, is included in other non-current assets.
38
(5) INCOME TAXES
Income tax expense consisted of the following (in thousands):
2004 2003 2002
------- ------- -------
CurrentCurrent:
Federal $(12,194)$38,206 $46,072 $ 9,132 $11,787959
State (1,688) 1,550 2,800
--------- --------- ---------
(13,882) 10,682 14,587
--------- --------- ---------
Deferred5,664 3,657 127
------- ------- -------
43,870 49,729 1,086
------- ------- -------
Deferred:
Federal 37,358 16,001 19,11212,336 (6,159) 31,692
State 5,171 2,750 3,088
--------- --------- ---------
42,529 18,751 22,200
--------- --------- ---------181 679 4,199
------- ------- -------
12,517 (5,480) 35,891
------- ------- -------
Total income tax expense $ 28,647 $29,433 $36,787
========= ========= =========$56,387 $44,249 $36,977
======= ======= =======
The effective income tax rate differs from the federal corporate tax
rate of 35% in 2001, 2000,2004, 2003 and 19992002 as follows (in thousands):
2001 2000 1999
-------- --------- ---------2004 2003 2002
------- ------- -------
Tax at statutory rate $26,737 $27,110 $33,879$50,294 $41,292 $34,511
State income taxes, net of
federal tax benefits 2,264 2,795 3,8273,800 2,818 2,812
Non-deductible meals and
entertainment 2,670 172 117
Income tax credits (900) (900) (638) (638) (691)
Other, net 284 166 (228)
-------- --------- ---------
$28,647 $29,433 $36,787
========= ========= =========523 867 175
------- ------- -------
$56,387 $44,249 $36,977
======= ======= =======
25
WERNER ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
At December 31, deferred tax assets and liabilities consisted of the
following (in thousands):
2001 2000
--------- ---------2004 2003
-------- --------
Deferred tax assets:
Insurance and claims accruals $ 27,01653,994 $ 24,70648,081
Allowance for uncollectible accounts 1,752 1,4253,813 3,078
Other 3,579 3,099
--------- ---------4,584 3,743
-------- --------
Gross deferred tax assets 32,347 29,230
--------- ---------62,391 54,902
-------- --------
Deferred tax liabilities:
Property and equipment 166,818 161,338242,139 219,849
Prepaid expenses 38,286 4,43142,517 42,174
Other 10,623 4,312
--------- ---------4,043 6,670
-------- --------
Gross deferred tax liabilities 215,727 170,081
--------- ---------288,699 268,693
-------- --------
Net deferred tax liability $183,380 $140,851
========= =========$226,308 $213,791
======== ========
These amounts (in thousands) are presented in the accompanying
Consolidated Balance Sheets as of December 31 as follows:
2001 2000
--------- ---------2004 2003
-------- --------
Current deferred tax assetliability $ -15,569 $ 11,552
Current deferred tax liability 20,473 -15,151
Noncurrent deferred tax liability 162,907 152,403
--------- ---------210,739 198,640
-------- --------
Net deferred tax liability $183,380 $140,851
========= =========$226,308 $213,791
======== ========
39
The Company has not recorded a valuation allowance as it believes that
all deferred tax assets are likely to be realized as a result of the
Company's history of profitability, taxable income and reversal of deferred
tax liabilities.
(6) STOCK OPTION AND EMPLOYEE BENEFIT PLANS
Stock Option Plan
The Company's Stock Option Plan (the Stock"Stock Option Plan)Plan") is a
nonqualified plan that provides for the grant of options to management
employees. Options are granted at prices equal to the market value of the
common stock on the date the option is granted.
Options granted become exercisable in installments from six to seventy-twoseventy-
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
maximum number of shares of common stock that may be optioned under the
Stock Option Plan is 11,666,66720,000,000 shares. At the May 11, 2004 Annual Meeting
of Stockholders, the stockholders approved an amendment to increase the
maximum number of shares that may be optioned or sold under the Stock
Option Plan by 5,416,666 shares, from 14,583,334 to 20,000,000 shares. The
stockholders also approved an amendment to increase the maximum aggregate
number of options that may be granted to any one person under the Stock
Option Plan by 1,000,000, from 1,562,500 to 2,562,500 options.
At December 31, 2001, 3,129,6792004, 9,227,976 shares were available for granting
additional options. At December 31, 2001, 2000,2004, 2003, and 1999,2002, options for
828,851, 1,124,919,2,485,582, 2,183,597, and 892,2371,598,594, shares with weighted average exercise
prices of $10.31, $9.81,$8.48, $8.45, and $9.47$8.18 were exercisable, respectively.
26
WERNER ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table summarizes Stock Option Plan activity for the
three years ended December 31, 2001:2004:
Options Outstanding
----------------------------------------------------------------
Weighted-Average
Shares Exercise Price
---------- -----------------------------------------------
Balance, December 31, 1998 2,033,306 9.982001 6,714,076 $ 8.46
Options granted 1,892,680 9.398,333 13.94
Options exercised (264,701) 8.27(448,508) 7.96
Options canceled (26,668) 11.27
----------(136,441) 7.47
---------
Balance, December 31, 1999 3,634,617 9.792002 6,137,460 8.52
Options granted 1,506,667 9.65- -
Options exercised (79,007) 8.17(752,591) 8.19
Options canceled (275,693) 9.77
----------(110,022) 7.84
---------
Balance, December 31, 2000 4,786,584 9.772003 5,274,847 8.58
Options granted 1,598,000 12.22787,000 18.33
Options exercised (917,770) 9.36(656,676) 8.26
Options canceled (95,553) 9.60
----------(448,042) 8.79
---------
Balance, December 31, 2001 5,371,261 10.57
==========2004 4,957,129 10.16
=========
40
The following table summarizes information about stock options
outstanding and exercisable at December 31, 2001:2004:
Options Outstanding Options Exercisable
----------------------------------- ----------------------------
Weighted-Average Weighted-Average Weighted-Average-------------------------------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Number RemainingContractual Exercise Number Exercise
Exercise Prices Outstanding Contractual Life Price Exercisable Price
--------------- ----------- ---------------- ---------------- ----------- ----------------- --------------------------------------------------------------------------------
$ 7.856.28 to $ 9.94 3,088,113 8.07.95 2,191,695 5.3 years $ 9.37 465,7247.57 1,442,633 $ 8.87
$11.207.55
$ 8.96 to $15.38 2,283,148 8.7$ 9.77 1,933,003 6.2 years 12.20 363,127 12.15
----------- -----------
5,371,261 8.39.75 1,001,647 9.73
$10.43 to $13.94 49,431 4.5 years 10.57 828,851 10.31
=========== ============11.24 41,302 10.81
$18.33 783,000 9.4 years 18.33 0 0.00
--------- ---------
4,957,129 6.3 years 10.16 2,485,582 8.48
========= =========
The Company applies the intrinsic value based method of Accounting Principles Board (APB)APB Opinion
No. 25 and related interpretations in accounting for its Stock Option Plan.
SFAS No. 123, Accounting for Stock-Based Compensation requires pro forma
disclosure of net income and earnings per share had the estimated fair
value of option grants on their grant date been charged to salaries, wages
and benefits. The fair value of the options granted during 2001, 2000,2004 and 19992002
was estimated using the Black-Scholes option-pricing model with the
following assumptions: risk-free interest rate of 5.04.0 percent in 2001, 6.0 percent in 2000,2004 and
6.5 percent in 1999;2002; dividend yield of 0.40.66 percent in 20012004 and 0.50.40 percent in 2000 and 1999;2002;
expected life of 8.06.5 years in 2001 and 2000,2004 and 7.0 years in 1999;2002; and volatility of
37 percent in 2004 and 38 percent in 2001, 35 percent in 2000, and 30 percent in 1999.2002. The weighted-average fair value
of options granted during 2001, 2000,2004 and 19992002 was $6.13, $4.79,$7.60 and $4.17$6.28 per share,
respectively. The Company's pro formatable in Note 1 illustrates the effect on net income and
earnings per share would have been
27
WERNER ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
as indicated below had the fair value of option grants been charged to
salaries, wages, and benefits:
2001 2000 1999
---- ---- ----
Net income (in thousands)
As reported $47,744 $48,023 $60,011
Pro forma 44,589 45,735 59,170
Basic earnings per share
As reported 0.76 0.77 0.95
Pro forma 0.71 0.73 0.94
Diluted earnings per share
As reported 0.74 0.76 0.94
Pro forma 0.70 0.73 0.93
benefits expense in the Consolidated Statements of
Income.
Employee Stock Purchase Plan
Employees meeting certain eligibility requirements may participate in
the Company's Employee Stock Purchase Plan (the Purchase Plan). Eligible
participants designate the amount of regular payroll deductions and/or
single annual payment, subject to a yearly maximum amount, that is used to
purchase shares of the Company's common stock on the Over-The-Counter
Market subject to the terms of the Purchase Plan. The Company contributes
an amount equal to 15% of each participant's contributions under the
Purchase Plan. Company contributions for the Purchase Plan (in thousands)
were $108, $117,$102, and $104$106 for 2001, 2000,2004, 2003, and 1999,2002, respectively. Interest
accrues on Purchase Plan contributions at a rate of 5.25%. The broker's
commissions and administrative charges related to purchases of common stock
under the Purchase Plan are paid by the Company.
401(k) Retirement Savings Plan
The Company has an Employees' 401(k) Retirement Savings Plan (the
401(k) Plan)"401(k) Plan"). Employees are eligible to participate in the 401(k) Plan if
they have been continuously employed with the Company or its subsidiaries
for six months or more. The Company matches a portion of the amount each
employee contributes to the 401(k) Plan. It is the Company's intention, but
not its obligation, that the Company's total annual contribution for
employees will equal at least 2 1/2 percent of net income (exclusive of
extraordinary items). Salaries, wages and benefits expense in the
accompanying Consolidated Statements of Income includes Company 401(k) Plan
contributions and administrative expenses (in thousands) of $1,574, $1,528,$2,043, $1,711,
and $1,364$1,599 for 2001, 2000,2004, 2003, and 1999,2002, respectively.
(7) COMMITMENTS AND CONTINGENCIES
The Company has committed to property and equipment purchases, net of
trades, of approximately $23$122.0 million.
On July 29, 2004 and October 25, 2004, the Company was served with
complaints naming it and others as defendants in two lawsuits stemming from
a multi-vehicle accident that occurred in February 2004. The lawsuits were
41
filed in Superior Court of the State of California, County of San
Bernardino, Barstow District and seek an unspecified amount of compensatory
damages. The Company brokered a shipment to an independent carrier with a
satisfactory safety rating which was then involved in the accident,
resulting in four fatalities and multiple personal injuries. It is
possible that additional lawsuits may be filed by other parties involved in
the accident. The Company's Broker-Carrier Agreement with the independent
carrier provides for the carrier to indemnify and defend the Company for
any loss arising out of or in connection with the transportation of
property under the contract. The Company also has a certificate of
liability insurance from the carrier indicating that it has insurance
coverage of up to $2.0 million per occurrence. For the policy year ended
July 31, 2004, the Company's liability insurance policies for coverage
ranging up to $10.0 million per occurrence have various annual aggregate
levels of net
capital expenditures, whichliability for all accidents totaling $9.0 million that is the
responsibility of the Company (see Note 1 "Insurance and Claims Accruals"
for insurance aggregate information). Amounts in excess of $10.0 million
are covered under premium-based policies to coverage levels that management
considers adequate. As such, the potential exposure to the Company ranges
from $0 to $9.0 million. The lawsuits are currently in the discovery
phase. The Company plans to vigorously defend the suits, and the amount of
any possible loss to the Company cannot currently be estimated. However,
the Company believes an unfavorable outcome in these lawsuits, if it were
to occur, would not have a small portionmaterial impact on the financial position,
results of its estimated 2002
capital expenditures.
Theoperations, and cash flows of the Company.
In addition to the litigation noted above, the Company is involved in
certain claims and pending litigation arising in the normal course of
business. Management believes the ultimate resolution of these matters will
not have a material effect on the consolidated financial statements of the
Company.
(8) RELATED PARTY TRANSACTIONS
The Company leases land from a trust in which the Company's principal
stockholder is the sole trustee, with annual rent payments of $1 per year.
The Company is responsible for all real estate taxes and maintenance costs
related to the property, which are recorded as expenses in the Company's
Consolidated Statements of Income. The Company has made leasehold
improvements to the land totaling approximately $6.1 million for facilities
used for business meetings and customer promotion.
The Company's principal stockholder is the sole trustee of a trust
that owns a one-third interest in an entity that operates a motel located
nearby one of the Company's terminals with which the Company has committed
to rent a guaranteed number of rooms. During 2004, 2003, and 2002, the
Company paid (in thousands) $840, $732, and $542, respectively, for lodging
services for its drivers at this motel.
In 2003, the Company purchased 2.6 acres of land located adjacent to
the Company's disaster recovery center in Omaha, Nebraska for $500,000 from
a partnership in which the principal stockholder of the Company is the
general partner.
The brother and sister-in-law of the Company's principal stockholder
own an entity with a fleet of tractors that operates as an owner-operator
for the Company. During 2004, 2003, and 2002, the Company paid (in
thousands) $6,200, $5,888, and $3,587, respectively, to this owner-operator
for purchased transportation services. This fleet is compensated using the
same owner-operator pay package as the Company's other comparable third-
party owner-operators. The Company also sells used revenue equipment to
this entity. During 2004, 2003, and 2002, these sales (in thousands)
totaled $193, $292, and $1,328, respectively, and the Company recognized
gains (in thousands) of $18, $55, and $6 in 2004, 2003, and 2002,
respectively. The Company had 35 and 46 notes receivable from this entity
related to the revenue equipment sales (in thousands) totaling $656 and
$1,030 at December 31, 2004 and 2003, respectively.
The Company and TDR transact business with each other for certain of
their purchased transportation needs. During 2004, 2003, and 2002, the
Company recorded operating revenues (in thousands) from TDR of
approximately $168, $206, and $416, respectively, and recorded purchased
42
transportation expense (in thousands) to TDR of approximately $631, $1,099,
and $1,087, respectively. In addition, during 2004, 2003, and 2002, the
Company recorded operating revenues (in thousands) from TDR of
approximately $2,837, $1,495, and $72, respectively, related to the leasing
of revenue equipment. As of December 31, 2004 and 2003, the Company had
receivables related to the equipment leases of $1,351 and $852,
respectively. See Note 4 for information regarding notes receivable from
TDR.
The Company believes that these transactions are on terms no less
favorable to the Company than those that could be obtained from unrelated
third parties on an arm's length basis.
(9) SEGMENT INFORMATION
The Company has onetwo reportable segmentsegments - Truckload Transportation
Services and Value Added Services. ThisThe Truckload Transportation Services
segment consists of five operating fleets that have been aggregated since
they have similar economic characteristics and meet the other aggregation
criteria of SFAS No. 131. The Medium- to
Long-Haulmedium-to-long-haul Van fleet transports a
variety of consumer, non-durable
28
WERNER ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)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. The Flatbed and Temperature-Controlled fleets provide truckload services
for products with specialized trailers. The Dedicated Services fleet provides truckload
services required by a specific company, plant, or distribution center.
The Flatbed and Temperature-Controlled fleets provide truckload services
for products with specialized trailers.
The Value Added Services segment, which generates the majority of the
Company's non-trucking revenues, provides freight brokerage, intermodal
services, and freight transportation management. Value Added Services was
identified as a new reportable segment as of June 30, 2004. The 2004,
2003, and 2002 amounts shown in the following table have been reclassified
to account for the change in composition of the Company's reportable
segments.
The Company generates non-truckingother revenues related to freight
transportation management, third-party equipment
maintenance, equipment leasing, and other business activities. None of
these operations meet the quantitative threshold reporting requirements of
SFAS No. 131. As a result, these operations are grouped in "Other" in the
table below. The Company does not prepare separate balance sheets by
segmentssegment and, as a result, assets are not separately identifiable by
segment. The Company has no significant intersegment sales or expense
transactions that would result in adjustments necessary to eliminate
amounts between the Company's segments.
The following tables summarize the Company's segment information (in
thousands):
Revenues
----------------------------------
2001 2000 1999----------
2004 2003 2002
---------- ---------- ----------
Truckload Transportation Services $1,196,518 $1,148,651 $ 991,954$1,506,937 $1,358,428 $1,254,728
Value Added Services 161,111 89,742 80,012
Other 74,001 65,977 60,3796,424 5,287 4,057
Corporate 3,571 4,309 2,659
---------- ---------- ----------
Total $1,270,519 $1,214,628 $1,052,333$1,678,043 $1,457,766 $1,341,456
========== ========== ==========
Operating Income
----------------------------------
2001 2000 1999----------------
2004 2003 2002
---------- ---------- ----------
Truckload Transportation Services $ 78,807135,828 $ 83,773118,146 $ 99,41998,838
Value Added Services 5,631 454 1,331
Other 522 (952) 2,7822,587 1,236 1,059
Corporate (2,718) (2,332) (1,774)
---------- ---------- ----------
Total $ 79,329141,328 $ 82,821117,504 $ 102,20199,454
========== ========== ==========
43
Information as to the Company's operations by geographic area is
summarized below (in thousands). Operating revenues for Mexico and Canada
include revenues for shipments with an origin or destination in that country
and services provided in that country.
Operating Revenues
------------------
2004 2003 2002
---------- ---------- ----------
United States $1,537,745 $1,349,153 $1,260,957
Canada 35,364 30,886 19,725
Mexico 104,934 77,727 60,774
---------- ---------- ----------
Total $1,678,043 $1,457,766 $1,341,456
========== ========== ==========
Long-lived Assets
-----------------
2004 2003 2002
---------- ---------- ----------
United States $ 850,250 $ 796,627 $ 829,506
Canada 136 142 49
Mexico 12,612 8,918 2,712
---------- ---------- ----------
Total $ 862,998 $ 805,687 $ 832,267
========== ========== ==========
Substantially all of the Company's revenues are generated within the
United States or from North American shipments with origins or destinations
in the United States. No one customer accounts for more than 9% of the
Company's total revenues.
(9)(10) COMMON STOCK SPLITSPLITS
On September 2, 2003, the Company announced that its Board of
Directors declared a five-for-four split of the Company's common stock
effected in the form of a 25 percent stock dividend. The stock dividend
was paid on September 30, 2003, to stockholders of record at the close of
business on September 16, 2003. On February 11, 2002, the Company
announced that its Board of Directors declared a four-for-three split of
the Company's common stock effected in the form of a 33 1/3 percent stock
dividend. The stock dividend was payablepaid on March 14, 2002, to stockholders
of record at the close of business on February 25, 2002. No fractional
shares of common stock were issued in connection with the 2003 and 2002
stock split.splits. Stockholders entitled to fractional shares received a
proportional cash payment based on the closing price of a share of common
stock on February 25, 2002.the record dates.
All share and per-share information included in the accompanying
consolidated financial statements for all periods presented have been
adjusted to retroactively reflect the 2003 and 2002 stock split.
29splits.
44
WERNER ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(10)(11) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share amounts)
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
(In thousands, except per share amounts)-------------------------------------------
2001:2004:
Operating revenues $304,577 $322,777 $322,618 $320,547$386,280 $411,115 $425,409 $455,239
Operating income 16,059 19,933 20,621 22,71624,859 34,991 39,510 41,968
Net income 9,455 12,091 12,453 13,74515,568 21,620 24,299 25,823
Basic earnings per share .20 .27 .31 .33
Diluted earnings per share 0.15 0.19 0.19 0.21
2000:.19 .27 .30 .32
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------------------------------------------
2003:
Operating revenues $291,379 $307,242 $304,572 $311,435$347,208 $362,290 $368,034 $380,234
Operating income 18,535 22,418 21,043 20,82518,983 31,576 32,728 34,217
Net income 10,318 12,915 12,291 12,49911,839 19,859 20,516 21,513
Basic earnings per share .15 .25 .26 .27
Diluted earnings per share 0.16 0.20 0.20 0.20.15 .24 .25 .26
30
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No reports on Form 8-Kunder this item have been required to be filed within the
twenty-four months prior to December 31, 2001,2004, involving a change of
accountants or disagreements on accounting and financial disclosure.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, the Company
carried out an evaluation, under the supervision and with the participation
of the Company's management, including the Company's Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures, as defined
in Exchange Act Rule 15d-15(e). Based upon that evaluation, the Company's
Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures are effective in enabling the
Company to record, process, summarize and report information required to be
included in the Company's periodic SEC filings within the required time
period.
Management's Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate
internal control over financial reporting for the Company. The Company's
internal control system was designed to provide reasonable assurance to the
Company's management and board of directors regarding the preparation and
fair presentation of published financial statements.
Management has assessed the effectiveness of the Company's internal
control over financial reporting as of December 31, 2004, based on the
criteria for effective internal control described in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission. Based on its assessment, management concluded
that the Company's internal control over financial reporting was effective
as of December 31, 2004.
45
Management has engaged KPMG LLP, the independent registered public
accounting firm that audited the financial statements included in this
Annual Report on Form 10-K, to attest to and report on management's
evaluation of the Company's internal control over financial reporting. Its
report is included herein.
Report of Independent Registered Public Accounting Firm
The Stockholders and Board of Directors
Werner Enterprises, Inc.:
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting, that
Werner Enterprises, Inc. maintained effective internal control over
financial reporting as of December 31, 2004, 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. Our
responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the Company's internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained
in all material respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating management's
assessment, testing and evaluating the design and operating effectiveness
of internal control, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles. A company's internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or
disposition of the company's assets that could have a material effect on
the financial statements.
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, management's assessment that Werner Enterprises, Inc.
maintained effective internal control over financial reporting as of
December 31, 2004, is fairly stated, in all material respects, based on
COSO. Also, in our opinion, Werner Enterprises, Inc. maintained, in all
material respects, effective internal control over financial reporting as
of December 31, 2004, based on 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, 2004 and 2003, and the related consolidated statements of
46
income, stockholders' equity and comprehensive income, and cash flows for
each of the years in the three-year period ended December 31, 2004, and our
report dated February 4, 2005, expressed an unqualified opinion on those
consolidated financial statements.
KPMG LLP
Omaha, Nebraska
February 4, 2005
Changes in Internal Control over Financial Reporting
There were no changes in the Company's internal controls over
financial reporting that occurred during the quarter ended December 31,
2004, that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
During the fourth quarter of 2004, 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 report
on Form 10-K in that the Company will file a definitive proxy statement
pursuant to Regulation 14A (Proxy Statement)("Proxy Statement") not later than 120 days
after the end of the fiscal year covered by this report on Form 10-K, and
certain information included therein is incorporated herein by reference.
Only those sections of the Proxy Statement which specifically address the
items set forth herein are incorporated by reference. Such incorporation
does not include the Compensation Committee Report or the Performance Graph
included in the Proxy Statement.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item, with the exception of the Code
of Ethics discussed below, is incorporated herein by reference to the
Company's Proxy Statement.
Code of Ethics
The Company has adopted a code of ethics that applies to its principal
executive officer, principal financial officer, principal accounting
officer/controller, and all other officers, employees, and directors. The
code of ethics is available on the Company's website, www.werner.com. The
Company intends to post on its website any material changes to, or waiver
from, its code of ethics, if any, within four business days of any such
event.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by
reference to the Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item, with the exception of the
equity compensation plan information presented below, is incorporated
herein by reference to the Company's Proxy Statement.
47
Equity Compensation Plan Information
The following table summarizes, as of December 31, 2004, information
about compensation plans under which equity securities of the Company are
authorized for issuance:
Number of Securities
Remaining Available for
Future Issuance under
Number of Securities to Weighted-Average Equity Compensation
be Issued upon Exercise Exercise Price of Plans (Excluding
of Outstanding Options, Outstanding Options, Securities Reflected in
Warrants and Rights Warrants and Rights Column (a))
Plan Category (a) (b) (c)
- ------------- ----------------------- -------------------- -----------------------
Equity compensation
plans approved by
security holders 4,957,129 $10.16 9,227,976
The Company does not have any equity compensation plans that were not
approved by security holders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by
reference to the Company's Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is incorporated herein by
reference to the Company's Proxy Statement.
PART IV
ITEM 14.15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K
(a) Financial Statements and Schedules.
(1) Financial Statements: See Part II, Item 8 hereof.
Page
----
Report of Independent Registered Public Accountants 16Accounting Firm 27
Consolidated Statements of Income 1728
Consolidated Balance Sheets 1829
Consolidated Statements of Cash Flows 1930
Consolidated Statements of Stockholders' Equity 20and
Comprehensive Income 31
Notes to Consolidated Financial Statements 2132
(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 34
31
51
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.
48
(3) Exhibits: The response to this portion of Item 1415 is submitted
as a separate section of this report on Form 10-K (see Exhibit Index on
page 34)52).
(b) Reports on Form 8-K:
A report on Form 8-K, filed October 19, 2001, regarding a news
release on October 16, 2001, announcing the Company's operating
revenues and earnings for the third quarter ended September 30, 2001.
3249
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
20th15th day of March, 2002.February, 2005.
WERNER ENTERPRISES, INC.
By: /s/ John J. Steele
-------------------------------------------------------------
John J. Steele
Senior Vice President, Treasurer
and Chief Financial Officer
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 in the capacities and on the dates indicated.
Signature Position Date
--------- -------- ----
/s/ Clarence L. Werner Chairman of the Board, Chief March 20, 2002February 15, 2005
- ------------------------------------------------ Executive Officer and Director
Clarence L. Werner
/s/ Gary L. Werner Vice Chairman and March 20, 2002Director February 15, 2005
- ----------------------- Director-------------------------
Gary L. Werner
/s/ Curtis G. Werner Vice Chairman - Corporate March 20, 2002
- ----------------------- Development and Director
Curtis G. Werner
/s/ Gregory L. Werner President, Chief Operating March 20, 2002February 15, 2005
- ------------------------------------------------ Officer and Director
Gregory L. Werner
/s/ John J. Steele Senior Vice President, Treasurer and March 20, 2002February 15, 2005
- ------------------------------------------------ and Chief Financial Officer
John J. Steele
/s/ James L. Johnson Vice President, Controller March 20, 2002February 15, 2005
- ------------------------------------------------ and Corporate Secretary
James L. Johnson
/s/ Irving B. EpsteinJeffrey G. Doll Lead Outside Director March 20, 2002February 15, 2005
- -----------------------
Irving B. Epstein
/s/ Martin F. Thompson Director March 20, 2002
- -----------------------
Martin F. Thompson-------------------------
Jeffrey G. Doll
/s/ Gerald H. Timmerman Director March 20, 2002February 15, 2005
- ------------------------------------------------
Gerald H. Timmerman
/s/ Donald W. RogertMichael L. Steinbach Director March 20, 2002February 15, 2005
- -----------------------
Donald W. Rogert-------------------------
Michael L. Steinbach
/s/ Jeffrey G. DollKenneth M. Bird Director March 20, 2002February 15, 2005
- -----------------------
Jeffrey G. Doll-------------------------
Kenneth M. Bird
/s/ Patrick J. Jung Director February 15, 2005
- -------------------------
Patrick J. Jung
3350
SCHEDULE II
WERNER ENTERPRISES, INC.
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Balance at Charged to Write-OffWrite-off Balance at
Beginning of Costs and of Doubtful End of
Period Expenses Accounts Period
------ -------- -------- ------
(In thousands)------------ ---------- ----------- ----------
Year ended December 31, 2001:2004:
Allowance for doubtful accounts $3,994 $2,057 $1,085 $4,966$6,043 $2,255 $ 109 $8,189
====== ====== ====== ======
Year ended December 31, 2000:2003:
Allowance for doubtful accounts $3,236 $2,191 $1,433 $3,994$4,459 $1,914 $ 330 $6,043
====== ====== ====== ======
Year ended December 31, 1999:2002:
Allowance for doubtful accounts $2,933 $ 606 $ 303 $3,236$4,966 $1,175 $1,682 $4,459
====== ====== ====== ======
See report of independent registered public accounting firm.
51
EXHIBIT INDEX
Exhibit Page Number or Incorporated by
Number Description Reference to
------- ----------- ------------------------------
3(i)(A) Revised and Amended Exhibit 3 to Registration Statement
Articles of on Form S-1, Registration No. 33-5245
Incorporation
3(i)(B) Articles of Amendment to Exhibit 3(i) to the Company's
to Articles of report on Form 10-Q for the
Incorporation quarter
Incorporation ended May 31, 1994
3(i)(C) Articles of Amendment to Exhibit 3(i) to the Company's report
to Articles of on Form 10-K for the year ended
Incorporation ended December 31, 1998
3(ii) Revised and Amended Exhibit 3(ii) to the Company's By-Laws report
on Form 10-K for the year
ended December 31, 1994
10.1 Second Amended and Exhibit 10 to the Company's report
Restated StockBy-Laws on Form 10-Q for the quarter ended
Option Plan June 30, 2000
10.2 Initial Subscription2004
10.1 Amended and Restated Exhibit 2.110.1 to the Company's report
Agreement ofStock Option Plan on Form 8-K filed July 17, 2000
Transplace.com, LLC,
dated April 19, 2000
10.3 Operating Agreement Exhibit 2.2 to10-Q for the Company's report
of Transplace.com, LLC, on Form 8-K filed July 17, 2000
dated April 19, 2000quarter ended June
30, 2004
11 Statement Re: Computation Filed herewith
Computation of Per
Share Earnings
21 Subsidiaries of the Filed herewith
Registrant
23.1 Consent of KPMG LLP Filed herewith
Registrant
23.1 Consent of KPMG LLP31.1 Rule 13a-14(a)/15d- Filed herewith
14(a) Certification
31.2 Rule 13a-14(a)/15d- Filed herewith
14(a) Certification
32.1 Section 1350 Filed herewith
Certification
32.2 Section 1350 Filed herewith
Certification
3452