UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES - --- EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20042005
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
- --- EXCHANGE ACT OF 1934
For the transition period from ___________ to __________
Commission File Number 0-14690
WERNER ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
NEBRASKA 47-0648386
(State or other jurisdiction of (I.R.S. Employer
of
incorporation or organization) Identification No.)
organization)
14507 FRONTIER ROAD 68145-0308
POST OFFICE BOX 45308 (Zip code)
OMAHA, NEBRASKA
(Address of principal
executive offices)
Registrant's telephone number, including area code: (402) 895-6640895-
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 if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. YES NO
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act. YES
NO
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of the registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
X
---
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer (as defined in Rule 12b-2 of the Act).
Large accelerated filer Accelerated filer
Non-accelerated filer
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Act). YES X NO
--- ---
The aggregate market value of the common equity held by non-affiliatesnon-
affiliates of the Registrant (assuming for these purposes that
all executive officers and Directors are "affiliates" of the
Registrant) as of June 30, 2004,2005, the last business day of the
Registrant's most recently completed second fiscal quarter, was
approximately $1.074$_____ $1.004 billion (based on the closing sale
price of the Registrant's Common Stock on that date as reported
by Nasdaq).
As of February 10, 2005, 79,396,187109, 2006, __________ 79,764,809 shares of the
registrant's common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement of Registrant for the Annual
Meeting of Stockholders to be held May 10, 2005,9, 2006, are incorporated
in Part III of this report.
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business 1
Item 1A. Risk Factors 6
Item 1B. Unresolved Staff Comments 8
Item 2. Properties 68
Item 3. Legal Proceedings 79
Item 4. Submission of Matters to a Vote of Security Holders 810
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities 811
Item 6. Selected Financial Data 1012
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 1012
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 26
Item 8. Financial Statements and Supplementary Data 2728
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 45
Item 9A. Controls and Procedures 45
Item 9B. Other Information 47
PART III
Item 10. Directors and Executive Officers of the Registrant 47
Item 11. Executive Compensation 4748
Item 12. Security Ownership of Certain Beneficial Owners and
Management 4748
Item 13. Certain Relationships and Related Transactions 48
Item 14. Principal Accountant Fees and Services 48
PART IV
Item 15. Exhibits and Financial Statement Schedules 4849
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 as well as providing logistics services.
Werner is one of the five largest truckload carriers in the
United States based on total operating revenues 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 19.19 and was incorporated in
the state of Nebraska on September 14, 1982. Werner completed its
initial public offering in AprilJune 1986 with a fleet of 630
trucks.632 trucks
as of February 28, 1986. Werner ended 20042005 with a fleet of 8,6008,750
trucks, of which 7,6757,920 were owned by the Company and 925830 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
retail store merchandise, consumer products, manufactured
products, and grocery products. The Company's emphasis is to
transport consumer nondurable products that ship more
consistently throughout the year and throughout changes in the
economy. The Company has two reportable segments-segments - Truckload
Transportation Services and Value Added Services. Financial
information regarding these segments and the Company's geographic
areas 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 competitive 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
developed 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-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), time-sensitive nature of shipments
(expedited), or conversion of their private fleet to Werner
(dedicated). DuringBeginning the latter part of 2003, and
continuing through 2004, the Company
expanded its brokerage, intermodal, and intermodalmultimodal service
offerings by adding senior management and developing new computer
systems. Trucking revenues accounted for 89%88% of total revenues,
and non-
truckingnon-trucking and other operating revenues, primarily
brokerage revenues, accounted for 11%12% of total revenues in 2004.2005.
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, multimodal,
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, qualified employees, and qualified employees.the services of third-party
capacity providers. Compared to trucking operations which
require a significant capital equipment investment, VAS's
operating margins are generallymargin is lower and returnsreturn on assets are generallyis substantially
higher. Revenues generated by services accounting for more than
10% of consolidated revenues,
1
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 2004,2005, the Company's largest 5,
10, 25, and 50 customers comprised 24%, 37%36%, 55%54%, and 68%69% of the
Company's revenues, respectively. The Company's largest
customer, Dollar General, accounted for 9%10% of the Company's
revenues in 2004.2005, of which approximately two-thirds is dedicated
fleet business and the remainder is primarily VAS. No other
customer exceeded 5% of revenues in 2004.2005. By industry group, the
Company's top 50 customers consist of 47%45% retail and consumer
products, 24%23% grocery products, 22% manufacturing/industrial, 22% grocery
products, and
7%10% logistics and other. Many of our non-dedicated customer
contracts are cancelable on 30 days notice, which is standard in
the trucking industry. Most dedicated customer contracts are
cancelable on 90 days notice following the expiration of the
initial term of the contract.
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 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) 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, (2) software which preplans shipments that can
be swapped by drivers enroute to meet driver home time needs,
without compromising on-
timeon-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 became the first, and only, trucking company in the United
States to receive authorization from the DOT, under a 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. On September 21,
2004, the DOT's Federal Motor Carrier Safety Administration
("FMCSA") agency approved the Company's exemption for its
paperless log system that moves this exemption from the FMCSA-approvedFMCSA-
approved pilot program to permanent status. The exemption is to
be 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, 2004,2005, the Company employed 11,05110,792
drivers, 840986 mechanics and maintenance personnel, 1,6201,687 office
personnel for the trucking operation, and 211257 personnel for the
VAS and other non-trucking operations. The Company also had 925830
contracts with 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 are represented by a collective
bargaining unit, and the Company considers relations with all of
its employees to be good.
2
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 company-employedcompany-
employed drivers, the rate per mile 2
generally increases with the
drivers' length of service. Additional compensation may be earned
through 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. The number of qualified drivers in the industry has
decreasednot kept pace with freight growth because of 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. In recent
months, the already challenging market for recruiting experiencedand
retaining drivers has tightened.become even more difficult. The Company
anticipates that the competition for qualified drivers will continue to be
very high and cannot predict whether it will experience shortages
in the future. 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-operatorsOwner-
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.Company. Also,
owner-operators provide the Company with another source of
drivers to support its growth.fleet. The Company intends to continue
its emphasis on recruiting owner-operators, as well as company
drivers. However, it has continued to be difficult for the
Company and the industry to recruit and retain owner-operators
over the past few years due to several factors including high
fuel prices, tightening of equipment financing standards, and
declining values for older used trucks.
Revenue Equipment
As of December 31, 2004,2005, Werner operated 7,6757,920 company
tractors and had contracts for 925830 tractors owned by owner-operators. A majority of theowner-
operators. The company tractors arewere manufactured by
Freightliner, a subsidiary of DaimlerChrysler. Most of the remaining company tractors are manufactured by
eitherDaimlerChrysler, and Peterbilt orand
Kenworth, divisions of 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. Owner-operator tractors
are inspected prior to acceptance by the Company for compliance
with operational and safety requirements of the Company and the
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 23,54025,210 trailers at December 31, 2004: 21,9252005:
23,320 dry vans; 622621 flatbeds; 965 temperature-controlled; and 28 other specialized
trailers.1,269 temperature-controlled.
Most of the Company's trailers arewere manufactured by Wabash
National Corporation. As of December 31, 2004,2005, 98% of the
Company's fleet of dry van trailers consisted of 53-foot
trailers, and 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.
Effective October 1, 2002, all newly manufactured truck
engines must comply with phase 1 of the new engine emission
standards mandated by the Environmental Protection Agency
("EPA"). All truck engines manufactured prior to October 1, 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-Octoberpre-
October 2002 engines. As of December 31, 2004,2005, approximately 47%89%
of the company-owned truck fleet consisted of trucks with the
post-October 2002 engines. The Company has experienced an
approximate 5% reduction in fuel efficiency to date, and
increased depreciation expense due to the higher cost of the new
engines. The average age of the Company's truck fleet at
December 31, 20042005 is 1.61.23 years. 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 truck2007 (phase 2) and
3
fleet in advance of the new standards.January 2010 (phase 3). 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. During 2005, the
Company purchased significantly more trucks than normal to reduce
the average age of its fleet. The Company's goal is to keep its
fleet as new as possible during 2006.
Fuel
The Company purchases approximately 90%95% of its fuel through
a network of 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 7seven of the Company's terminals and 4four dedicated
fleet 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. The Company's
customer fuel surcharge reimbursement programs have historically
enabled the Company to recover from its customers a significant
portion of the higher fuel prices compared to normalized average
fuel prices. These fuel surcharges, which automatically adjust
depending on the Department of Energy ("DOE") weekly retail on-highwayon-
highway diesel fuel prices, enable the Company to 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 2004,2005, 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$137.1 million, while the
Company collected an additional $52.6$121.6 million in fuel surcharge
revenues to offset the fuel cost increase. Conversely, when fuel
prices decrease, fuel surcharges decrease. In addition, the two
September 2005 hurricanes in the Gulf Coast region caused a
shortage of refined product that escalated diesel fuel prices at
the same time that crude oil prices did not increase
significantly. The Company cannot predict whether high fuel
prices will continue to increase or will decrease in the future
or the extent to which fuel surcharges will be collected to
offset such increases. As of December 31, 2004,2005, 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-upclean-
up costs. The tanks are routinely inspected to help prevent and
detect such problems.
Regulation
The Company is a motor carrier regulated by the DOT, and the
Federal and Provincial Transportation Departments in Canada.Canada, and
the Secretary of Communication and Transportation ("SCT") in
Mexico. The DOT generally governs matters such as safety
requirements, registration to engage in motor carrier operations,
accounting systems, certain mergers, consolidations,
acquisitions, and periodic financial reporting. The 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,until October 1,
2005, the FMCSA re-proposed its April 2003when all truckload carriers became subject to revised 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 resultonly significant change from the court's ruling, norprevious
regulations is that a driver using the sleeper berth provision
4
ultimate impact of any upcoming changesmust take at least eight consecutive hours in the sleeper berth
during their ten hours off-duty. Previously, drivers were
allowed to split their ten hour off-duty time in the hours of service rules. Any
changessleeper
berth into two periods, provided neither period was less than two
hours. This more restrictive sleeper berth provision is
requiring some drivers to plan their time better and could have an adverse effecta
negative impact on the operations and profitability of
the Company.mileage productivity. The greatest impact
will be for those customers with multiple-stop shipments or those
shipments with pickup or delivery delays.
The Company has unlimited authority to carry general
commodities in interstate commerce throughout the 48 contiguous
states. The Company has authority to carry freight on an
intrastate basis in 43 states. The Federal Aviation
Administration Authorization Act of 1994 (the "FAAA Act") amended
sections of the Interstate Commerce Act to prevent states from
regulating 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 does not believe
that compliance with these regulations has a material effect on
its capital expenditures, earnings, and competitive position.
The implementation of various provisions of the North
American Free Trade Agreement ("NAFTA") may alter the competitive
environment for shipping into and out of Mexico. It is not
possible at this 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
international freight shipments to and from the United States and
Mexico (see Note 98 "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 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 approximately $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,Logistics companies, 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. 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 based
on total operating revenues.
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.engine emission changes and
uncertainties regarding the engines that will be required for
newly manufactured trucks beginning in January 2007. Trucking
company failures in the last fivesix 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 foursix
years, and some carriers have downsized their fleets to improve
their operating margins and returns.
5
Internet Web SiteWebsite
The Company maintains a web sitewebsite where additional information
concerning its business can be found. The address of that
web sitewebsite is www.werner.com. The Company makes available free of
charge on its Internet 5
web sitewebsite 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 Information10-
K.
ITEM 1A. RISK FACTORS
The forward-looking statements in this report, which reflect
management's best judgment based on factors currently known, involvefollowing risks and uncertainties. Actualuncertainties may cause actual
results couldto differ materially from those anticipated in the
forward-looking statements included hereinin this Form 10-K:
The Company's business is subject to overall economic conditions
that could have a material adverse effect on the results of
operations of the Company.
The Company is sensitive to changes in overall economic
conditions that impact customer shipping volumes. The general
slowdown in the economy in 2001 and 2002 had a negative effect on
freight volumes for truckload carriers, including the Company.
Beginning in 2003 and continuing throughout 2005, general
economic improvements lead to improved freight demand. As the
unemployment rate increased during 2001 and 2002, driver
availability improved for the Company and the industry but became
more difficult beginning in fourth quarter 2003 and continuing
through 2005. Future economic conditions that may affect the
Company include employment levels, business conditions, fuel and
energy costs, interest rates, and tax rates.
Increases in fuel prices and shortages of fuel can have a
material adverse effect on the results of operations and
profitability of the Company.
Fuel prices climbed steadily throughout most of 2005,
spiking in September and October 2005 due to the two hurricanes
that struck the Gulf Coast region in September 2005. Prices
declined in November 2005 from the record high price levels in
October, but the end-of-year prices, excluding fuel taxes, were
still about 47% higher in 2005 than in 2004. 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 financial results would be negatively
impacted.
Difficulty in recruiting and retaining drivers and owner-
operators could impact the Company's results of operations and
limit growth opportunities.
At times, there have been shortages of drivers in the
trucking industry. The market for recruiting and retaining
drivers became more difficult in fourth quarter 2003 and
continued throughout 2005. During the last several years, it was
more difficult to recruit and retain owner-operator drivers due
to challenging operating conditions, including high fuel prices.
The Company anticipates that the competition for company drivers
and owner-operator drivers will continue to be high and cannot
predict whether it will experience shortages in the future. If a
shortage of company drivers and owner-operators were to occur and
increases in driver pay rates and owner-operator settlement rates
became necessary to attract drivers and owner-operators, the
Company's results of operations would be negatively impacted to
the extent that corresponding freight rate increases were not
obtained. Additionally, the Company expects the tight driver
market will make it very difficult to add truck capacity in the
near future.
The Company operates in a highly competitive industry, which may
limit growth opportunities and reduce profitability.
The trucking industry is highly competitive and includes
thousands of trucking companies. The Company estimates the ten
largest truckload carriers have about 12% 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. Logistics companies, railroads, less-than-
truckload carriers, and private carriers also provide
6
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 operates in a highly regulated industry. Changes in
existing regulations or violations of existing or future
regulations could have an adverse effect on the operations and
profitability of the Company.
The Company is regulated by the DOT, the Federal and
Provincial Transportation Departments in Canada, and the
SCT in Mexico. These regulatory authorities 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, EPA, the
Federal and Provincial Transportation Departments in Canada, or
the SCT in Mexico.
New hours of service regulations became effective October 1,
2005, with only one significant change from the previous
regulations. The Company cannot predict what rule changes, if
any, might result in the future. Any changes could have an
adverse effect on the operations and profitability of the
Company.
Effective October 1, 2002, all newly manufactured truck
engines must comply with the engine emission standards mandated
by the EPA. As of December 31, 2005, approximately 89% of the
company-owned truck fleet consisted of trucks with the new post-
October 2002 engines. The Company has experienced an approximate
5% reduction in fuel efficiency to date and increased
depreciation expense due to the higher cost of the new 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 has already reduced the average age
of its truck fleet to 1.23 years in advance of these 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. The Company is unable to predict
the impact these new regulations will have on its operations,
financial position, results of operations, and cash flows.
The seasonal pattern generally experienced in the trucking
industry may affect the Company's periodic results during
traditionally slower shipping periods and during the winter
months.
The Company's business is modestly seasonal with peak
freight demand occurring generally in the months of September,
October, and November. After the Christmas holiday season,
during the remaining winter months, the Company's freight volumes
are typically lower as some customers have lower shipment levels.
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 the number
of business days during the period can also affect revenue, since
revenue is directly related to available working days of
shippers.
The Company depends on the services of third-party capacity
providers, the availability of which could affect the Company's
profitability and limit growth in its VAS division.
The Company's VAS division is highly dependent on the
services of third-party capacity providers, including other
truckload carriers and railroads. Many of those providers face
the same economic challenges as the Company. As the truck
capacity market tightened during 2005, it became more difficult
to find qualified truckload capacity to meet customer freight
needs. The Company expects a tight truckload capacity market in
2006 with the extremely challenging driver market and
historically high fuel prices. If the Company were unable to
secure the services of these third-party capacity providers, its
results of operations could be adversely affected.
Increases in the number of insurance claims, the cost per claim,
or the costs of insurance premiums could reduce the Company's
earnings.
The Company self-insures for a significant portion of
liability resulting from cargo loss, personal injury, and
property damage as well as workers' compensation. This is
supplemented by premium insurance with licensed insurance
companies above the Company's self-insurance level for each type
of coverage. To the extent the Company were to experience a
significant increase in the number of claims, the cost per claim,
or the costs of insurance premiums for coverage in excess of its
7
retention amounts, the Company's operating results would be
negatively affected.
Decreased demand for the Company's used revenue equipment could
result in lower unit sales, lower resale values, and lower gains
on sales of assets.
The Company is sensitive to changes in used equipment
prices, especially tractors. Because of truckload carrier
concerns with new truck engines and lower industry production of
new trucks over the last several years, the resale value of
Werner's premium used trucks improved from the historically low
values of 2001. The Company has been in the business of selling
its Company-owned trucks since 1992, when it formed its wholly-
owned subsidiary Fleet Truck Sales. The Company currently has 17
Fleet Truck Sales locations throughout the United States. Gains
on sales of assets are reflected as a resultreduction of other
operating expenses in the Company's income statement and amounted
to gains of $11.0 million in 2005, $9.3 million in 2004, and $6.9
million in 2003.
The Company relies on the services of key personnel, the loss of
which could impact the future success of the Company.
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.
Difficulty in obtaining goods and services from the Company's
vendors and suppliers could adversely affect the Company's
business.
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 Company uses its information systems extensively for day-to-
day operations, and service disruptions could have an adverse
impact on the Company's operations.
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 numberdisaster. The
Company has taken these steps to reduce the risk of factors, including, butdisruption to
its business operation if a disaster were to occur.
Caution should be taken not limited to those discussed in
Item 7, "Management's Discussionplace 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.
ITEM 1B. UNRESOLVED STAFF COMMENTS
The Company has received no written comments regarding its
periodic or current reports from the staff of the Securities and
AnalysisExchange Commission that were issued 180 days or more preceding
the end of Financial Conditionits 2005 fiscal year and Results of Operations."that remain unresolved.
ITEM 2. PROPERTIES
Werner's headquarters is located nearby Interstate 80 just
west of Omaha, Nebraska, on approximately 195 acres, 111105 of which
are held for future expansion. The Company's headquarters office
building includes a computer center, drivers' lounge areas, a
drivers' orientation section, a cafeteria, a cargo salvage store,
and a Company store. The Omaha headquarters also consists of a
driver training facility and equipment maintenance and repair
facilities containing a central parts warehouse, frame
8
straightening and alignment machine, truck and trailer wash
areas, equipment safety lanes, body shops for tractors and
trailers, a paint booth, and a paint booth.reclaim center. The Company's
headquarters facilities have suitable space available to
accommodate planned 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 Springfield
terminals and is currently constructing a body shop at its Atlanta
terminal. The
Company's terminal 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, maintenance
Ardmore, Oklahoma Leased Maintenance
Indianola, Mississippi Leased Maintenance
Scottsville, Kentucky Leased Maintenance
Fulton, Missouri Leased Maintenance
Tomah, Wisconsin Leased Maintenance
Newbern, Tennessee Leased Maintenance
Chicago, Illinois Leased Maintenance
The Company leases approximately 60 small sales offices and
trailer parking yards in various locations throughout the
country, owns a 96-room motel located near the Company's
headquarters, owns four low-income housing apartment complexes in
the Omaha area, and has 50% ownership in a 125,000 square-foot
warehouse located near the Company's headquarters.headquarters, and has one-
third ownership in a 71-room motel near the Company's Dallas
terminal. Currently, the Company has 1617 locations in its Fleet
Truck Sales network. Fleet Truck Sales, a wholly owned
subsidiary, is one of the largest domestic class 8 truck sales
entities in the U.S. and sells the 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,
property damage, and workers' compensation incurred in the
transportation of freight. The Company has maintained a self-insuranceself-
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.
9
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 in
excess of the 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, 2001:2002:
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)(1)
August 1, 2003 - July 31, 2004 $3.0 million $500,000 (3)(2)
August 1, 2004 - July 31, 2005 $5.0 million $2.0 million (3)
August 1, 2005 - July 31, 2006 $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)(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, 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)(3) 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.
(4) Subject to an additional $2.0 million aggregate in the $2.0
to $3.0 million layer, no aggregate (i.e., fully insured) in the
$3.0 to $5.0 million layer, and a $5.0 million aggregate in the
$5.0 to $10.0 million layer.
The Company has assumed responsibility for workers'
compensation up to $1.0 million per claim, subject to an
additional $1.0 million aggregate for claims between $1.0 million
and $2.0 million, maintains a $27.5 million bond, and has
obtained insurance for individual claims above $1.0 million.
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
is also responsible for administrative expenses for each
occurrence involving personal injury or property damage. See
also Note 1 "Insurance and Claims Accruals" and Note 76
"Commitments and Contingencies" in the Notes to Consolidated
Financial Statements under Item 8 of this Form 10-K.
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
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 2004,2005, no matters were submitted
to a vote of security holders.
10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Price Range of Common Stock
The Company's common stock trades on the Nasdaq National
Market tier of The Nasdaq Stock Market under the symbol "WERN".
The following table sets forth for the quarters indicated the
high and low bid information per share of the Company's common
stock quoted on the Nasdaq National Market and the Company's
dividends declared per common share from January 1, 2003,2004, through
December 31, 2004, after giving retroactive effect for the
September 2003 stock split discussed below.2005.
Dividends
Declared Per
High Low Common Share
------ ------ ------------
20042005
Quarter ended:
March 31 $20.00 $17.65 $.025$22.91 $19.25 $.035
June 30 21.11 17.76 .03519.91 17.68 .040
September 30 21.19 17.55 .03520.62 15.78 .040
December 31 23.24 18.68 .03520.96 16.34 .040
Dividends
Declared Per
High Low Common Share
------ ------ ------------
20032004
Quarter ended:
March 31 $17.50 $13.98 $.016$20.00 $17.65 $.025
June 30 18.98 15.26 .02421.11 17.76 .035
September 30 21.93 16.73 .02521.19 17.55 .035
December 31 21.00 16.98 .02523.24 18.68 .035
As of February 10, 2005,9, 2006, the Company's common stock was held
by 227 stockholders of record and approximately 7,9008,200
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, 20059, 2006
were $20.89$21.17 and $20.06,$20.72, 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 currently intends to continue
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 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. 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 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.
Equity 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".
11
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, 2004,2005, the
Company had purchased 4,335,704257,038 shares pursuant to this
authorization and had 3,796,8003,708,800 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
2005.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in
conjunction with the consolidated financial statements and notes
under Item 8 of this Form 10-K.
(In thousands, except per share amounts)
2005 2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Operating revenues $1,971,847 $1,678,043 $1,457,766 $1,341,456 $1,270,519
$1,214,628
Net income 98,534 87,310 73,727 61,627 47,744
48,023
Diluted earnings per share* 1.22 1.08 0.90 0.76 0.60 0.61
Cash dividends declared per share* .155 .130 .090 .064 .060 .060
Return on average stockholders'
equity (1) 12.1% 11.9% 10.9% 10.0% 8.5% 9.3%
Return on average total assets (2) 7.6% 7.5% 6.7% 6.1% 5.1%
5.3%
Operating ratio (consolidated) (3) 91.7% 91.6% 91.9% 92.6% 93.8% 93.2%
Book value per share* (4) 10.86 9.76 8.90 8.12 7.42
6.84
Total assets 1,385,762 1,225,775 1,121,527 1,062,878 964,014
927,207
Total debt (current and long-term)60,000 - - 20,000 50,000
105,000
Stockholders' equity 862,451 773,169 709,111 647,643 590,049 536,084
*After giving retroactive effect for the September 30, 2003 five-for-fourfive-
for-four stock split and the March 14, 2002 four-for-three stock
split (all years presented).
(1) Net income expressed as a percentage of average stockholders'
equity. Return on equity is a measure of a corporation's
profitability relative to recorded shareholder investment.
(2) Net income expressed as a percentage of average total assets.
Return on assets is a measure of a corporation's profitability
relative to recorded assets.
(3) Operating expenses expressed as a percentage of operating
revenues. Operating ratio is a common measure in the trucking
industry used to evaluate profitability.
(4) Stockholders' equity divided by common shares outstanding as
of the end of the period. Book value per share indicates the
dollar value remaining for common shareholders if all assets were
liquidated and all debts were paid at the recorded amounts.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This report contains historical information, as well as
forward-
lookingforward-looking statements that are based on information
currently available to the Company's management. The forward-lookingforward-
looking statements in this report, including those made in Item
7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations," are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of
1995. The Company believes the assumptions underlying these
forward-
lookingforward-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 Risk1A "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-lookingforward-
looking statements contained herein to reflect events or
circumstances after the date of this report or to reflect the
occurrence of unanticipated events.
12
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 fivesix operating fleets in the Truckload Transportation Services
segment (medium/(dedicated, medium/long-haul van, dedicated, regional short-haul,
expedited, flatbed, and temperature-controlled) and non-trucking
revenues generated primarily by the Company's Value Added ServicesVAS segment. The
Company's Truckload Transportation Services segment ("truckload
segment") also includes a small amount of non-
truckingnon-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 Servicestruckload segment. Trucking revenues
accounted for 89%88% of total operating revenues in 2004,2005, and non-truckingnon-
trucking and other operating revenues accounted for 11%12%.
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 Servicestruckload 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'scompany-owned and owner-operator trucks. The key statistics used
to evaluate trucking revenues, excluding fuel surcharges, are
revenueaverage revenues per trucktractor 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
average 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;customers that recoup a majority of the increased fuel
costs; 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-insuredself-
insured for a significant portion of cargo, personal injury, and
property damage claims on its trucksrevenue equipment and for workers'
compensation benefits for its employees (supplemented by premium-basedpremium-
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
13
expense), supplies and maintenance, and insurance and claims.
TheseGenerally, 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 20042005 to 2003,2004, several industry-wide issues, including
uncertainty regarding possible changes to the hours of service regulations,high fuel prices and a challenging driver recruiting market, and
rising fuel prices,retention market, 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 aaccelerated its normal three-year
replacement cycle for company-owned tractors. These purchases are
funded by net cash from operations and financing available under
the Company's existing credit facilities, as the Company repaid its last
remaining debt in December 2003.management deems
necessary.
Non-trucking services provided by the Company, primarily
through its VAS division, include freight brokerage, intermodal,
multimodal, 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-
partythird-party capacity providers. The most
significant expense item related to these non-
truckingnon-trucking services
is the cost of transportation paid by the Company to third-party
capacity 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 marginsmargin for the non-trucking
business are generallyis lower than those of the trucking operations, but the
returnsreturn on assets areis 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.
2005 2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Trucking revenues, net of
fuel surcharge (1) $1,493,826 $1,378,705 $1,286,674 $1,215,266 $1,150,361 $1,097,214
Trucking fuel surcharge
revenues (1) 235,690 114,135 61,571 29,060 46,157 51,437
Non-trucking revenues,
including VAS (1) 230,863 175,490 100,916 89,450 66,739
60,047
Other operating revenues (1) 11,468 9,713 8,605 7,680 7,262 5,930
---------- ---------- ---------- ---------- ----------
Operating revenues (1) $1,971,847 $1,678,043 $1,457,766 $1,341,456 $1,270,519 $1,214,628
========== ========== ========== ========== ==========
Operating ratio
(consolidated) (2) 91.7% 91.6% 91.9% 92.6% 93.8% 93.2%
Average revenues per tractor
per week (3) $ 3,286 $ 3,136 $ 2,988 $ 2,932 $ 2,874
$ 2,889
Average annual miles per
tractor 120,912 121,644 121,716 123,480 123,660 125,568
Average annual trips per
tractor 187 185 173 166 166 168
Average total miles per trip 647 657 703 746 744 746
Average loaded miles per trip 568 583 627 674 670 672
Total miles (loaded and
empty) (1) 1,057,062 1,028,458 1,008,024 984,305 952,003 916,971
Average revenues per total
mile (3) $ 1.413 $ 1.341 $ 1.277 $ 1.235 $ 1.208
$ 1.197
Average revenues per loaded
mile (3) $ 1.609 $ 1.511 $ 1.431 $ 1.366 $ 1.342
$ 1.328
Average percentage of empty
miles 12.2% 11.3% 10.8% 9.6% 10.0%
9.9%
Average tractors in service 8,742 8,455 8,282 7,971 7,698 7,303
Total tractors (at year end):
Company 7,920 7,675 7,430 7,180 6,640
6,300
Owner-operator 830 925 920 1,020 1,135 1,175
---------- ---------- ---------- ---------- ----------
Total tractors 8,750 8,600 8,350 8,200 7,775 7,475
========== ========== ========== ========== ==========
Total trailers (at year end) 25,210 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
1214
The following table sets forth the revenues, operating
expenses, and operating income for the Truckload Transportation Servicestruckload segment.
Revenues for the truckload segment include non-trucking revenues
of $12.2 million, $14.4 million, and $11.2 million for 2005,
2004, and 2003, respectively, as described on page 13.
2005 2004 2003 2002
----------------- ----------------- -----------------
Truckload Transportation Services
(amounts in 000's) $ % $ % $ %
- --------------------------------- ----------------- ----------------- -----------------
Revenues $1,741,828 100.0 $1,506,937 100.0 $1,358,428 100.0
$1,254,728 100.0
Operating expenses 1,585,706 91.0 1,371,109 91.0 1,240,282 91.3 1,155,890 92.1
---------- ---------- ----------
Operating income $ 156,122 9.0 $ 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 Servicestruckload segment's operating ratio. The
following table calculates the Truckload Transportation Servicestruckload 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.
2005 2004 2003 2002
----------------- ----------------- -----------------
Truckload Transportation Services
(amounts in 000's) $ % $ % $ %
- --------------------------------- ----------------- ----------------- -----------------
Revenues $1,741,828 $1,506,937 $1,358,428 $1,254,728
Less: trucking fuel surcharge
revenues 235,690 114,135 61,571 29,060
---------- ---------- ----------
Revenues, net of fuel surcharge 1,506,138 100.0 1,392,802 100.0 1,296,857 100.0 1,225,668 100.0
---------- ---------- ----------
Operating expenses 1,585,706 1,371,109 1,240,282 1,155,890
Less: trucking fuel surcharge
revenues 235,690 114,135 61,571 29,060
---------- ---------- ----------
Operating expenses, net of
fuel surcharge 1,350,016 89.6 1,256,974 90.2 1,178,711 90.9 1,126,830 91.9
---------- ---------- ----------
Operating income $ 156,122 10.4 $ 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.
2005 2004 2003 2002
----------------- ----------------- -----------------
Value Added Services (amounts
in 000's) $ % $ % $ %
- --------------------------------- ----------------- ----------------- -----------------
Revenues $ 218,620 100.0 $ 161,111 100.0 $ 89,742 100.0 $ 80,012 100.0
Rent and purchased transportation
expense 196,972 90.1 145,474 90.3 83,387 92.9 74,635 93.3
---------- ---------- ----------
Gross margin 21,648 9.9 15,637 9.7 6,355 7.1
5,377 6.7
Other operating expenses 13,203 6.0 10,006 6.2 5,901 6.6 4,046 5.0
---------- ---------- ----------
Operating income $ 8,445 3.9 $ 5,631 3.5 $ 454 0.5
$ 1,331 1.7
========== ========== ==========
2005 Compared to 2004
- ---------------------
Operating Revenues
Operating revenues increased 17.5% in 2005 compared to 2004.
Excluding fuel surcharge revenues, trucking revenues increased
8.3% due primarily to a 5.4% increase in average revenues per
total mile, excluding fuel surcharges, and a 3.4% increase in the
average number of tractors in service, offset by a 0.6% decrease
in average annual miles per tractor. Average revenues per total
mile, excluding fuel surcharges, increased due to customer rate
increases, and, to a lesser extent, a 2.6% decrease in the
average loaded trip length. The truckload freight environment
was solid during 2005 due to ongoing truck capacity constraints.
In comparison to 2004, demand in the months of March to August
2005 was not as strong as the strong freight market of 2004, but
15
freight demand for the remaining months of the year was
comparable to the demand in the same periods of 2004.
The average percentage of empty miles increased to 12.2% in
2005 from 11.3% in 2004. The increase in the empty mile
percentage is partially the result of a higher percentage of
dedicated trucks in the fleet and a higher percentage of regional
shipments with a shorter length of haul. Over the past few
years, Werner has grown its dedicated fleets, arrangements in
which the Company provides trucks and/or trailers for the
exclusive use of a specific customer. For almost all the
Company's dedicated fleet arrangements, dedicated customers pay
the Company on an all-miles basis (loaded or empty) to obtain
guaranteed truck and/or trailer capacity. For freight management
and statistical reporting purposes, Werner classifies a mile
without cargo in the trailer as an empty mile (i.e., deadhead
mile). Since dedicated fleets generally have a higher percentage
of miles without cargo in the trailer and since the Company has
been growing its dedicated fleet business, this has contributed
to an increase in the Company's reported average empty mile
percentage. Excluding the dedicated fleet, the average empty
mile percentage would be substantially lower for 2005 and 2004.
During third and fourth quarter 2005, the Company's sales
and marketing team renewed customer contracts and obtained annual
base rate increases for a substantial portion of the Company's
non-dedicated fleet business that renewed in the second half of
2005. Although the Company has taken steps to minimize or delay
certain controllable cost increases, base rate increases continue
to be necessary to recoup several inflationary cost increases
including driver pay and benefits, truck engine emissions costs,
and tolls and to improve the Company's return on assets. The
Company met its goals for these base rate increases in the 2005
renewal period.
Fuel surcharge revenues, which represent collections from
customers for the higher cost of fuel, increased to $235.7
million in 2005 from $114.1 million in 2004 in response to higher
average fuel prices in 2005. To lessen the effect of fluctuating
fuel prices on the Company's margins, the Company collects fuel
surcharge revenues from its customers. The Company's fuel
surcharge programs are designed to recoup the higher cost of fuel
from customers when fuel prices rise and provide customers with
the benefit of lower costs when fuel prices decline. The
truckload industry's fuel surcharge standard is a one-cent per
mile increase in rate for every five-cent per gallon increase in
the Department of Energy ("DOE") weekly retail on-highway diesel
prices that are used for most fuel surcharge programs. These
programs have historically enabled the Company to recover a
significant portion of the fuel price increases. However, the
five-cent per gallon brackets only recoup about 80% to 85% of the
actual increase in the cost of fuel, due to empty miles not
billable to customers, out-of-route miles, truck idle time, and
the volatility in fuel prices as prices change rapidly in short
periods of time.
VAS revenues increased 35.7% to $218.6 million in 2005 from
$161.1 million in 2004, and gross margin increased 38.4% for the
same period. VAS revenues consist primarily of freight
brokerage, intermodal, multimodal, freight transportation
management, and other services. Most of the revenue growth came
from the Company's brokerage and intermodal divisions within VAS.
The Company continues to focus on growing the volume of business
in this segment, which provides customers with additional sources
of capacity.
Operating Expenses
The Company's operating ratio (operating expenses expressed
as a percentage of operating revenues) was 91.7% in 2005 versus
91.6% in 2004. As explained on page 15, the significant increase
in fuel expense and related fuel surcharge revenues had the
effect of increasing the operating ratio. Because the Company's
VAS business operates with a lower operating margin and a
significantly higher return on assets than the trucking business,
the growth in VAS business in 2005 compared to 2004 also
increased the Company's overall operating ratio. The tables on
page 15 show the operating ratios and operating margins for the
Company's two reportable segments, Truckload Transportation
Services and Value Added Services.
16
The following table sets forth the cost per total mile of
operating expense items for the truckload segment for the periods
indicated. The Company evaluates operating costs for this
segment on a per-mile basis to adjust for the impact on the
percentage of total operating revenues caused by changes in fuel
surcharge revenues and rate per mile increases, which provides a
more consistent basis for comparing the results of operations
from period to period.
Increase
(Decrease)
2005 2004 per Mile % Change
------------------------------------
Salaries, wages and benefits $.532 $.519 $.013 2.5
Fuel .321 .211 .110 52.1
Supplies and maintenance .143 .130 .013 10.0
Taxes and licenses .112 .106 .006 5.7
Insurance and claims .083 .075 .008 10.7
Depreciation .149 .138 .011 8.0
Rent and purchased transportation .149 .140 .009 6.4
Communications and utilities .019 .018 .001 5.6
Other (.008) (.003) (.005) 166.7
Owner-operator costs are included in rent and purchased
transportation expense. Owner-operator miles as a percentage of
total miles were 12.5% in 2005 compared to 12.7% in 2004. 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 from the rent and purchased transportation
category to other expense categories. Over the past year,
attracting and retaining owner-operator drivers continued to be
very difficult due to high fuel prices and other factors.
Salaries, wages and benefits for non-drivers increased in
2005 compared to 2004 to support the growth in the VAS segment.
The increase in salaries, wages and benefits per mile of 1.3
cents for the truckload segment is primarily the result of
increased student driver pay, higher driver pay per mile, and an
increase in the number of maintenance employees. Because of the
challenging driver recruiting and retention market, discussed
below, the Company is training more student drivers as an
alternative source of drivers. On August 1, 2004, the Company's
previously announced two cent per mile pay raise became effective
for company solo drivers in its medium-to-long-haul van division,
representing approximately 25% of total company drivers. The
Company recovered this pay raise through its customer rate
increase negotiations, which occurred in third and fourth quarter
2004.
The driver recruiting and retention market remains extremely
challenging. The supply of truck drivers continues to be
constrained due to alternative jobs to truck driving that are
available in today's economy and inadequate demographic growth
for the industry's targeted driver base over the next several
years. The Company continues to focus on driver quality of life
issues such as developing more driving jobs with more frequent
home time, providing drivers with newer trucks, and maximizing
mileage productivity within the federal hours of service
regulations. The Company has also placed more emphasis on
training drivers. Improved driver recruiting has offset higher
driver turnover; however, the Company expects the tight driver
market will make it very difficult to add meaningful truck
capacity in the near future.
The Company instituted an optional per diem reimbursement
program for eligible company drivers beginning in April 2004.
This program increases a company driver's net pay per mile, after
taxes. As a result of more drivers electing to participate in
the per diem program, driver pay per mile was slightly lower
before considering the factors above that increased driver pay
per mile, and the Company's effective income tax rate was higher
in 2005 compared to 2004. The 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. The Company anticipates that the competition
17
for drivers will continue to be high and cannot predict whether
it will experience shortages in the future. If such a shortage
were to occur and additional increases in driver pay rates were
necessary to attract and retain drivers, the Company's results of
operations would be negatively impacted to the extent that
corresponding freight rate increases were not obtained.
On January 1, 2006, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 123(R), and it will
now report in its financial statements the share-based
compensation expense for reporting periods beginning in 2006. As
of the date of this filing, management believes that adopting the
new statement will have a negative impact of approximately two
cents per share for the year ending December 31, 2006,
representing the expense to be recognized for the unvested
portion of awards granted to date, and cannot predict the
earnings impact of awards that may be granted in the future.
Fuel increased 11.0 cents per mile for the truckload segment
due primarily to higher average diesel fuel prices. Average fuel
prices in 2005 were 56 cents a gallon, or 47%, higher than in
2004. Higher fuel costs, after considering the amounts collected
from customers through fuel surcharge programs and the cost
impact of owner-operator fuel reimbursements (which is included
in rent and purchased transportation expense) and lower fuel mile
per gallon ("mpg") due to truck engine emissions changes, had a
ten-cent negative impact on earnings per share in 2005 compared
to 2004. Company data continues to indicate an approximate 5%
fuel mpg degradation for trucks with post-October 2002 engines
(89% of the company-owned truck fleet as of December 31, 2005
compared to 47% as of December 31, 2004). As the Company
replaces the remaining 11% of the trucks in its fleet that have
the pre-October 2002 engines with trucks with the post-October
2002 engines, fuel cost per mile is expected to increase further
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, 2005, the Company had no derivative financial
instruments to reduce its exposure to fuel price fluctuations.
Diesel fuel prices for the first six weeks of 2006 averaged
38 cents a gallon, or 26%, higher than average fuel prices for
first quarter 2005. If diesel fuel prices remain at the average
price for the first six weeks of 2006, the Company estimates that
fuel will have a negative impact on first quarter 2006 earnings
compared to first quarter 2005 earnings of three cents to four
cents per share. The Company includes the following items in the
calculation of the estimated impact of higher fuel costs on
earnings: fuel pricing, fuel reimbursement to owner-operator
drivers, lower fuel mpg due to the increasing percentage of
company-owned trucks with post-October 2002 engines, and
anticipated fuel surcharge reimbursement. It is difficult to
estimate the impact of higher fuel costs on earnings because of
changing fuel pricing trends, the temporary lag effect of rapidly
changing fuel prices on fuel surcharge revenues, and other
factors. The actual impact of fuel costs on earnings could be
higher or lower than estimated due to these factors.
Supplies and maintenance for the truckload segment increased
1.3 cents on a per-mile basis in 2005 due primarily to increases
in repair expenses for an increased number of trucks sold by the
Company's Fleet Truck Sales subsidiary and higher costs to
maintain the Company's trailer fleet. Higher driver recruiting
costs (including driver advertising, transportation and lodging)
and higher toll expense related to state toll rate increases also
contributed to a smaller portion of the increase.
Taxes and licenses for the truckload segment increased 0.6
cents per total mile due primarily to the effect of the fuel mpg
degradation for company-owned trucks with post-October 2002
engines on the per-mile cost of federal and state diesel fuel
taxes, as well as increases in some state tax rates.
Insurance and claims for the truckload segment increased 0.8
cents on a per-mile basis, primarily related to higher negative
development on existing liability insurance claims. Cargo claims
expense was essentially flat on a per-mile basis compared to
2004. The Company renewed its liability insurance policies on
August 1, 2005. See Item 3 "Legal Proceedings" for information
on the Company's coverage levels for personal injury and property
damage since August 1, 2002. Liability insurance premiums for
the policy year beginning August 1, 2005 were approximately the
18
same as the previous policy year. The Company is unable to
predict whether the trend of increasing insurance and claims
expense will continue in the future.
Depreciation expense for the truckload segment increased 1.1
cents on a per-mile basis in 2005 due primarily to higher costs
of new tractors with the post-October 2002 engines. As of
December 31, 2005, approximately 89% of the company-owned truck
fleet consisted of trucks with the post-October 2002 engines,
compared to 47% at December 31, 2004. As the Company replaces
the remaining 11% of the trucks in its fleet that have the pre-
October 2002 engines 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 capacity providers in the VAS and other
non-trucking operations and payments to owner-operators in the
trucking operations. As shown in the VAS statistics table under
the "Results of Operations" heading on page 15, 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 90.1% in 2005 compared to
90.3% in 2004, resulting in a higher gross margin in 2005. As
the truck capacity market tightened during 2005, it became more
difficult to find qualified truckload capacity to meet VAS
customer freight needs, especially in the latter part of the
year. However, the Company's marketing efforts continued to
successfully expand its VAS qualified carrier base in a
constrained capacity market, ending the year with 3,600 qualified
broker carriers. The Company expects a tight truckload capacity
market in 2006 with the extremely challenging driver market and
historically high fuel prices. During fourth quarter 2005, VAS
expanded its small, but growing, intermodal presence by agreeing
to manage a fleet of Union Pacific-owned containers for
intermodal freight shipments. The Company pays a daily fee per
container to Union Pacific ("UP") for any days that the
containers are not in transit in the UP network. As of December
2005, VAS Intermodal was managing 400 UP containers. VAS
Intermodal has the option to, and expects to, increase the
number of the UP containers in 2006 as it further develops its
intermodal freight program.
Rent and purchased transportation for the truckload segment
increased 0.9 cents per total mile in 2005. Higher fuel prices
necessitated higher reimbursements to owner-operators for fuel,
which resulted in an increase of 1.1 cents per total mile. The
Company's customer fuel surcharge programs do not differentiate
between miles generated by Company-owned trucks and miles
generated by owner-operator trucks; thus, the increase in owner-
operator fuel reimbursements is included with Company fuel
expenses in calculating the per-share impact of higher fuel costs
on earnings. The Company has experienced difficulty recruiting
and retaining owner-operators for over three years because of
challenging operating conditions. This has resulted in a
reduction in the number of owner-operator tractors to 830 as of
December 31, 2005 from 925 as of December 31, 2004. 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 capacity providers used for
portions of shipments delivered to or from Mexico and by a few
dedicated fleets in the truckload segment decreased by 0.2 cents
per mile, partially offsetting the overall increase for the
truckload segment.
Other operating expenses for the truckload segment decreased
0.5 cents per mile in 2005. Gains on sales of assets, primarily
trucks, are reflected as a reduction of other operating expenses
and are reported net of sales-related expenses, including costs
to prepare the equipment for sale. Gains on sales of assets
increased to $11.0 million in 2005 from $9.3 million in 2004, due
to increased unit sales, partially offset by an increased ratio
of traded trucks to sold trucks. 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 17
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 remaining decrease in
other operating expenses in 2005 is due primarily to a reduction
19
in computer consulting fees as consultants were hired by the
Company, resulting in a reduction in other operating expense, but
an increase in salaries, wages and benefits expense.
The Company recorded $0.7 million of interest expense in
2005 versus virtually no interest expense in 2004. The Company
incurred debt of $60.0 million during the fourth quarter of 2005
and had no debt outstanding throughout 2004. The Company repaid
$35.0 million of its debt in January 2006 and expects to pay down
the remaining debt during the first half of 2006, due to expected
lower net capital expenditures. Interest income for the Company
increased to $3.4 million in 2005 from $2.6 million in 2004 due
to improved interest rates, partially offset by a declining cash
balance throughout 2005.
The Company's effective income tax rate (income taxes
expressed as a percentage of income before income taxes)
increased to 41.0% in 2005 from 39.2% in 2004, as described in
Note 4 of the Notes to Consolidated Financial Statements under
Item 8 of this Form 10-K. The income tax rate increased in 2005
because of higher non-deductible expenses for tax purposes
related to the implementation of a per diem pay program for
student drivers in fourth quarter 2003 and a per diem pay program
for eligible company drivers in April 2004. The Company does not
expect its effective income tax rate to increase in 2006.
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 revenueaverage revenues per
total mile, excluding fuel surcharges, and a 2.1% increase in the
average number of tractors in service. RevenueAverage revenues 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-haulmedium-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 strengthenstrengthened due to
ongoing truck capacity constraints and a steadily improving
economy.
Beginning in August 2004, 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, revenueaverage revenues 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-
highwayon-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.
20
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 13,15, the significant increase in fuel expense
and related fuel surcharge revenues also affected the operating
ratio. The tables on page 1315 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 Servicestruckload 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 % Change
------------------------------------
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)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,During 2004, attracting and retaining owner-operator drivers continued to
bewas
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 Servicestruckload 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,During the last quarter of 2003, 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.sustain. Alternative jobs
with an improving economy, weak population demographics, and
competitor pay raises are expected to keep the driver market
challenging. TheIn 2004, the Company is expandingexpanded its student-driver
21
training program to attract more drivers to the Company and the
industry. The Company is also offeringoffered 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
Servicestruckload 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 indicateindicated
that the fuel mile per gallon ("mpg")mpg degradation for trucks with post-October 2002
engines (47% of the company-
ownedcompany-owned truck fleet as of December 31,
2004) iswas 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 Servicestruckload 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 Servicestruckload 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, 2001.2002. The increased Company
retention from $500,000 to $2.0 million iswas due to changes in the
trucking insurance market and iswas 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 Servicestruckload 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 carriersthird-party capacity providers 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 Servicestruckload 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
carrierscapacity providers 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 Servicestruckload segment.
As shown in the VAS statistics table under the "Results of
Operations" heading on page 13,15, 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
22
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 Servicestruckload segment decreased
0.2 cents per mile in 2004. Gains on sales of revenue
equipment,assets, primarily
trucks, are reflected as a reduction of other
operating expenses and were $9.7$9.3 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 54 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-deductiblenon-
deductible expenses for tax purposes related to the
implementation of a per diem pay program for student drivers in
fourth quarter 2003 and a per diem pay program for eligible
company drivers in April 2004.
Liquidity and Capital Resources
During the year ended December 31, 2005, the Company
generated cash flow from operations of $172.5 million, a 23.9%
decrease ($54.1 million) in cash flow compared to the year ended
December 31, 2004. The Company expects its effective
income tax ratedecrease in 2005 to increase to 40.5% or higher.
17
2003 Compared to 2002
- ---------------------
Operating Revenues
Operating revenues increased 8.7% over 2002,cash flow from operations is
due primarily to a 3.9%larger federal income tax payments in 2005 and
an increase in the average number of tractorsdays sales in service. Additionally,
revenue per total mile, excluding fuel surcharges, increased 3.4% primarily
dueaccounts receivable, offset by
higher depreciation expense for financial reporting purposes
related 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 inthe post-October 2002 to $61.6 million in 2003 due toengines and
higher average
fuel pricesnet income. Income taxes paid 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 $89.72005 totaled $99.2
million compared to 2002.
During$42.9 million in 2004. This increase was
related to recent tax law changes resulting in the latter partreversal of
2003certain tax strategies implemented in 2001 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 improveincome tax
depreciation in March of 2003 as compared2005 due to the same period in 2002, and continuedbonus tax depreciation provision
that expired on December 31, 2004. The Company made federal
income tax payments of $22.5 million related to be consistently better for mostthe reversal of
the last ten months of 2003 compared to the corresponding periodtax strategies 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 fourthsecond 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 2002.2005. Cash flow from
operations decreased $18.8increased $19.1 million in 20032004 compared to 2002,2003, 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. Returning9.2%, as the Company returned to a normal tractor replacement
cycle in 2004 resultedafter purchasing fewer trucks in increased cash flow from operations
of $19.1 million in 2004 over 2003, or 9.2%.2003. The cash
flow from operations and existing cash balances, supplemented by
borrowings under its existing credit facilities, enabled the
Company to make net capital expenditures and repay debtpay dividends as
discussed below.
Net cash used in investing activities wasincreased 52.1%
($100.8 million) to $294.3 million in 2005 from $193.5 million in
2004,
$101.5 million2004. The large increase was due primarily to the Company
purchasing more new tractors in 2003, and $235.5 million2005 to reduce the average age of
its truck fleet, as compared to a more normal tractor replacement
cycle in 2002.2004. The 90.5% increase ($91.9 million) from 2003 to
2004 and 56.9% decrease ($134.0 million) from
2002 to 2003 werewas due primarily to the Company'sCompany purchasing fewer new
tractors in 2003 following its 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 sampleadvance 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 numberfirst phase 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.EPA engine emissions standards.
As of December 31, 2004,2005, approximately 47%89% of the company-owned
truck fleet consisted of trucks with the new engines. The Company intends to gradually reduceengines, and the
average age of the Company's truck fleet in 2005. As such,was 1.23 years. The
Company's goal is to keep its fleet as new as possible during
2006. Net capital expenditures in 2006 are expected to be higherreturn to
more normal levels, with lower than normal expected truck
purchases in 2005 compared to 2004.the first half of 2006.
23
As of December 31, 2004,2005, the Company has committed to
property and equipment purchases, net of trades, of approximately
$122.0$33.1 million. The Company intends to fund these net capital
expenditure commitments through
existing cash on hand and cash flow from operations.
Net financing activities provided $48.9 million in 2005 and
used $25.7 million in 2004,and $33.8 million in 2004 and 2003,
and $35.2respectively. The change from 2004 to 2005 resulted from
borrowings of $60.0 million in 2002. In 2003 and 2002,the fourth quarter of 2005 to fund
a portion of the Company's net capital expenditures, as described
above. Through the date of this report, the Company made net
repaymentshas repaid
$35.0 million of the total $60.0 million of debt outstanding on
December 31, 2005 and expects to repay the remaining $25.0
million during the first half of $20.0 million and $30.0 million, respectively. The
Company repaid its last remaining debt in December 2003.2006. The Company paid
dividends of $11.9 million in 2005, $9.5 million in 2004, and
$6.5 million in 2003, and $5.0 million
in 2002.2003. The Company increased its quarterly
dividend rate by $.005 per share beginning with the dividend paid
in July 2005, and by $0.01 per share beginning with the dividend
paid in July 2004. Financing activities also included common
stock repurchases of $1.6 million in 2005, $21.6 million in 2004,
and $13.5 million in 2003, and $3.8 million in 2002.2003. 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 8,132,5043,965,838 shares. As of
December 31, 2004,2005, the Company had purchased 4,335,704257,038 shares
pursuant to this authorization and had 3,796,8003,708,800 shares remaining
available for repurchase.
Management believes the Company's financial position at
December 31, 20042005 is strong. As of December 31, 2004,2005, the
Company had $108.8$36.6 million of cash and cash equivalents no debt, and $773.2$862.5
million of stockholders' equity. As of December 31, 2004,2005, the
Company had $125.0 million of credit pursuant to credit
facilities, of which it had borrowed $60.0 million. The
remaining $65.0 million of credit available under these
facilities is further reduced by the $37.2 million in letters of
credit the Company maintains. These letters of credit are
primarily required as security for insurance policies. As of
December 31, 2005, the Company had no non-cancelable revenue
equipment operating leases, and therefore, had no off-balance
sheet revenue 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 setstables set forth the Company's credit facilitiescontractual
obligations and purchasecommercial commitments as of December 31, 2004.2005.
Payments Due by Period
(in millions)
Less than 1-3 4-5 Over 5
Contractual Obligations Total 1 year years years years
- ----------------------------------------------------------------------------------
Long-term debt, including
current maturities $ 60.0 $ 60.0 $ - $ - $ -
------- ------- ----- ----- -----
Total contractual cash
obligations $ 60.0 $ 60.0 $ - $ - $ -
======= ======= ===== ===== =====
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 $ 39.627.8 $ 25.0 $14.6$ 2.8 $ - $ -
Standby letters of credit 35.4 35.437.2 37.2 - - -
Other commercial commitments 122.0 122.033.1 33.1 - - -
------ ------------- ------- ----- ---- --------- -----
Total commercial commitments $197.0 $182.4 $14.6$ 98.1 $ 95.3 $ 2.8 $ - $ -
====== ============= ======= ===== ==== ========= =====
The Company has twocommitted credit facilities with two banks
totaling $75.0$125.0 million, of which it had borrowed $60.0 million.
These credit facilities bear variable interest (4.8% at December
31, 2005) based on which no borrowings were outstanding.the London Interbank Offered Rate ("LIBOR").
The credit available under these facilities is further reduced by
the amount of standby letters of credit the Company maintains.
24
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 whichthat 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 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. 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 a significant portion of
its 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.
The most significant accounting policies and estimates that
affect our financial statements include the following:
* Selections of estimated useful lives and salvage values
for purposes of depreciating tractors and trailers.
Depreciable lives of tractors and trailers range from 5 to
12 years. Estimates of salvage value at the expected date
of trade-in or sale (for example, three years for
tractors) are based on the expected market values of
equipment at the time of disposal. Although the Company's
currentnormal replacement cycle for tractors is three years, the
Company calculates depreciation expense for financial
reporting purposes using a five-
yearfive-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-yearthree-
year replacement date (55% of cost) as using a three-
yearthree-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.
* Impairment of long-lived assets. 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
25
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 based upon individual case
estimates, including negative development, and estimates
of incurred-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 capacity 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.
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.
Forward-Looking Statements and Risk Factors
The following risks and uncertainties may cause actual results to
differ materially from those anticipated in the forward-looking statements
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 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
in 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 but became more difficult beginning in fourth quarter 2003 and
continuing through 2004. Due to pending concerns in the Middle East and
other 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 end of 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 DOT and the Federal and Provincial
Transportation Departments in Canada. These regulatory authorities
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, EPA, or the Federal and
Provincial Transportation Departments in Canada. For example, new engine
emissions standards became effective for truck engine manufacturers in
October 2002. The new hours 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 an
adverse effect on the operations and profitability of the Company.
At times, there have been shortages of drivers in the trucking
industry. The market for recruiting drivers became more difficult in
fourth quarter 2003 and continued throughout 2004. During the last several
years, it was more difficult to recruit and retain owner-operator drivers
due to challenging operating conditions, including high fuel prices. The
Company anticipates that the competition for company drivers and owner-
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 companies
above the Company's self-insurance level for each type of coverage. To the
extent the Company were to experience a significant increase in the number
of claims, 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
has 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 higher cost than the current engines. The
Company is unable to predict the impact these new regulations will have on
its operations, financial position, results of operations, and cash flows.
The Company is sensitive to changes in used equipment prices,
especially tractors. Because of truckload carrier concerns with new truck
engines and lower industry production of new trucks over the last several
years, the resale value of Werner's premium used trucks improved from the
historically low values of 2001. Gains on sales of equipment are reflected
as a reduction of other operating expenses in the Company's income
statement and amounted to gains of $9.7 million in 2004, $7.6 million in
2003, and $2.3 million in 2002.
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.
25
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The Company is exposed to market risk from changes in
interest and foreign currency exchange rates and commodity
prices.
26
Interest Rate Risk
The Company had no$60.0 million of variable rate debt
outstanding at December 31, 2004. Interest2005. The interest rates on the
Company's unused credit facilitiesvariable rate debt are based on the London Interbank Offered Rate
("LIBOR"). IncreasesAssuming this level of borrowings, a hypothetical one-
percentage point increase in the LIBOR interest rates could impactrate would
increase the Company's annual interest expense on future borrowings.by $600,000. The
Company has no derivative financial instruments to reduce its
exposure to interest rate increases.
Commodity Price Risk
The price and availability of diesel fuel are subject to
fluctuations due to changes in the level of global oil
production, refining capacity, 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 continue in the future or
the extent to which fuel surcharges could be collected to offset
such increases. As of December 31, 2004,2005, 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 20042005 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,
virtually 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 direct
foreign currency risk.
2627
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING 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,
20042005 and 2003,2004, 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,
2004.2005. 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, 2004,2005, listed in Item 15(a)(2) of this Form 10-K.10-
K. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with the standards of
the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the
financial position of Werner Enterprises, Inc. and subsidiaries
as of December 31, 20042005 and 2003,2004, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2004,2005, in conformity with
U.S. generally accepted 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 set forth therein.
We also have audited, in accordance with the standards of
the Public Company Accounting Oversight Board (United States),
the effectiveness of Werner Enterprises, Inc.'s internal control
over financial reporting as of December 31, 2004,2005, 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, 20051, 2006
expressed an unqualified opinion on management's assessment of,
and the effective operation of, internal control over financial
reporting.
KPMG LLP
Omaha, Nebraska
February 4, 2005
271, 2006
28
WERNER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Years Ended December 31,
--------------------------------
2005 2004 2003 2002
---------- ---------- ----------
Operating revenues $1,971,847 $1,678,043 $1,457,766 $1,341,456
---------- ---------- ----------
Operating expenses:
Salaries, wages and benefits 574,893 544,424 513,551
486,315
Fuel 340,622 218,095 160,465 125,189
Supplies and maintenance 154,719 138,999 123,680 119,972
Taxes and licenses 118,853 109,720 104,392 98,741
Insurance and claims 88,595 76,991 73,032
51,192
Depreciation 162,462 144,535 135,168 121,702
Rent and purchased transportation 354,335 289,186 215,463 222,571
Communications and utilities 20,468 18,919 16,480
14,808
Other (7,711) (4,154) (1,969) 1,512
---------- ---------- ----------
Total operating expenses 1,807,236 1,536,715 1,340,262 1,242,002
---------- ---------- ----------
Operating income 164,611 141,328 117,504 99,454
---------- ---------- ----------
Other expense (income):
Interest expense 672 13 1,099
2,857
Interest income (3,381) (2,580) (1,699)
(2,340)
Other 261 198 128 333
---------- ---------- ----------
Total other expense (income)income (2,448) (2,369) (472) 850
---------- ---------- ----------
Income before income taxes 167,059 143,697 117,976
98,604
Income taxes 68,525 56,387 44,249 36,977
---------- ---------- ----------
Net income $ 98,534 $ 87,310 $ 73,727
$ 61,627
========== ========== ==========
Average common shares outstanding 79,224 79,828 79,705
========== ========== ==========Earnings per share:
Basic earnings per share$ 1.24 $ 1.10 $ 0.92
$ 0.77
========== ========== ==========
Diluted $ 1.22 $ 1.08 $ 0.90
========== ========== ==========
Weighted-average common shares
outstanding 80,868 81,668 81,522outstanding:
Basic 79,393 79,224 79,828
========== ========== ==========
Diluted earnings per share $ 1.08 $ 0.90 $ 0.7680,701 80,868 81,668
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
28
WERNER ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
December 31
-----------------------
ASSETS 2004 2003
---------- ----------
Current assets:
Cash and cash equivalents $ 108,807 $ 101,409
Accounts receivable, trade, less allowance
of $8,189 and $6,043, respectively 186,771 152,461
Other receivables 11,832 8,892
Inventories and supplies 9,658 9,877
Prepaid taxes, licenses, and permits 15,292 14,957
Other current assets 18,896 17,691
---------- ----------
Total current assets 351,256 305,287
---------- ----------
Property and equipment, at cost:
Land 25,008 21,423
Buildings and improvements 105,493 96,787
Revenue equipment 1,100,596 1,013,645
Service equipment and other 143,552 129,397
---------- ----------
Total property and equipment 1,374,649 1,261,252
Less - accumulated depreciation 511,651 455,565
---------- ----------
Property and equipment, net 862,998 805,687
---------- ----------
Other non-current assets 11,521 10,553
---------- ----------
$1,225,775 $1,121,527
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 49,618 $ 40,903
Insurance and claims accruals 55,095 55,201
Accrued payroll 19,579 15,828
Current deferred income taxes 15,569 15,151
Other current liabilities 17,705 15,392
---------- ----------
Total current liabilities 157,566 142,475
---------- ----------
Deferred income taxes 210,739 198,640
Insurance and claims accruals, net of
current portion 84,301 71,301
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, 200,000,000
shares authorized; 80,533,536 shares
issued; 79,197,747 and 79,714,271
shares outstanding, respectively 805 805
Paid-in capital 106,695 108,706
Retained earnings 691,035 614,011
Accumulated other comprehensive loss (861) (837)
Treasury stock, at cost; 1,335,789 and
819,265 shares, respectively (24,505) (13,574)
---------- ----------
Total stockholders' equity 773,169 709,111
---------- ----------
$1,225,775 $1,121,527 ========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
29
WERNER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWSBALANCE SHEETS
(In thousands)thousands, except share amounts)
December 31,
--------------------------
ASSETS 2005 2004 2003 2002
----------
---------- ----------
Cash flows from operating activities:
Net income $ 87,310 $ 73,727 $ 61,627
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation 144,535 135,168 121,702
Deferred income taxes 12,517 (5,480) 35,891
Gain on disposal of operating
equipment (9,735) (7,557) (2,257)
Gain on sale of unconsolidated
affiliate - - (1,809)
Equity in loss of unconsolidated
affiliate - - 2,105
Tax benefit from exercise of
stock options 3,225 2,863 1,450
Other long-term assets 408 1,023 248
Insurance, claims and other
long-term accruals 13,000 23,500 9,000
Changes in certain working
capital items:
Accounts receivable, net (34,310) (20,572) (10,535)
Prepaid expenses and other
current assets (4,261) 6,358 (17,428)
Accounts payable 8,715 (9,643) 17,358
Accrued and other current
liabilities 5,178 8,087 8,919
---------- ---------- ----------
Net cash provided by operating
activities 226,582 207,474 226,271
---------- ---------- ----------
Cash flows from investing activities:
Additions to property and equipment (294,288) (158,351) (309,672)
Retirements of property and equipment 98,098 54,754 71,882
Sale of unconsolidated affiliate - - 3,364
(Increase) decrease in notes
receivable 2,703 2,052 (1,099)
---------- ---------- ----------
Net cash used in investing
activities (193,487) (101,545) (235,525)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from issuance of long-term
debt - - 10,000
Repayments of long-term debt - (20,000) (40,000)
Dividends on common stock (9,506) (6,466) (5,019)
Payment of stock split fractional
shares - (9) (12)
Repurchases of common stock (21,591) (13,476) (3,766)
Stock options exercised 5,424 6,167 3,570
---------- ---------- ----------
Net cash used in financing
activities (25,673) (33,784) (35,227)
---------- ---------- ----------
Effect of exchange rate fluctuations
on cash (24) (621) -
Net increase (decrease) in cash and
cash equivalents: 7,398 71,524 (44,481)Current assets:
Cash and cash equivalents beginning$ 36,583 $ 108,807
Accounts receivable, trade, less allowance
of year 101,409 29,885 74,366$8,357 and $8,189, respectively 240,224 186,771
Other receivables 19,914 11,832
Inventories and supplies 10,951 9,658
Prepaid taxes, licenses, and permits 18,054 15,292
Current deferred income taxes 20,940 -
Other current assets 20,966 18,896
---------- ----------
Total current assets 367,632 351,256
---------- Cash----------
Property and cash equivalents, end of
year $ 108,807 $ 101,409 $ 29,885equipment, at cost:
Land 26,279 25,008
Buildings and improvements 110,275 105,493
Revenue equipment 1,262,112 1,100,596
Service equipment and other 157,098 143,552
---------- ----------
Total property and equipment 1,555,764 1,374,649
Less - accumulated depreciation 553,157 511,651
---------- ----------
Property and equipment, net 1,002,607 862,998
---------- ----------
Other non-current assets 15,523 11,521
---------- ----------
$1,385,762 $1,225,775
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 52,387 $ 49,618
Current portion of long-term debt 60,000 -
Insurance and claims accruals 62,418 55,095
Accrued payroll 21,274 19,579
Current deferred income taxes - 15,569
Other current liabilities 21,838 17,705
---------- ----------
Total current liabilities 217,917 157,566
---------- ----------
Other long-term liabilities 526 301
Deferred income taxes 209,868 210,739
Insurance and claims accruals, net of current
portion 95,000 84,000
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, 200,000,000
shares authorized; 80,533,536 shares
issued; 79,420,443 and 79,197,747
shares outstanding, respectively 805 805
Paid-in capital 105,074 106,695
Retained earnings 777,260 691,035
Accumulated other comprehensive loss (259) (861)
Treasury stock, at cost; 1,113,093 and
1,335,789 shares, respectively (20,429) (24,505)
---------- ----------
Total stockholders' equity 862,451 773,169
---------- ----------
$1,385,762 $1,225,775
========== Supplemental disclosures of cash flow
information:
Cash paid during year for:
Interest $ 13 $ 1,148 $ 3,080
Income taxes 42,850 34,401 10,422
Supplemental disclosures of non-cash
investing activities:
Notes receivable issued upon sale
of revenue equipment $ 4,079 $ 2,566 $ 2,686
Notes receivable canceled upon
return of revenue equipment - - (1,279)==========
The accompanying notes are an integral part of these consolidated
financial statements.
30
WERNER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
--------------------------------
2005 2004 2003
---------- ---------- ----------
Cash flows from operating activities:
Net income $ 98,534 $ 87,310 $ 73,727
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation 162,462 144,535 135,168
Deferred income taxes (37,380) 12,517 (5,480)
Gain on disposal of operating
equipment (11,026) (9,735) (7,557)
Tax benefit from exercise of
stock options 1,617 3,225 2,863
Other long-term assets (795) 408 1,023
Insurance and claims accruals,
net of current portion 11,000 13,000 23,500
Other long-term liabilities 225 - -
Changes in certain working
capital items:
Accounts receivable, net (53,453) (34,310) (20,572)
Prepaid expenses and other
current assets (14,207) (4,261) 6,358
Accounts payable 2,769 8,715 (9,643)
Accrued and other current
liabilities 12,746 5,178 8,087
---------- ---------- ----------
Net cash provided by operating
activities 172,492 226,582 207,474
---------- ---------- ----------
Cash flows from investing activities:
Additions to property and equipment (414,112) (294,288) (158,351)
Retirements of property and
equipment 114,903 98,098 54,754
Decrease in notes receivable 4,957 2,703 2,052
---------- ---------- ----------
Net cash used in investing
activities (294,252) (193,487) (101,545)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from issuance of short-
term debt 60,000 - -
Repayments of long-term debt - - (20,000)
Dividends on common stock (11,904) (9,506) (6,466)
Payment of stock split fractional
shares - - (9)
Repurchases of common stock (1,573) (21,591) (13,476)
Stock options exercised 2,411 5,424 6,167
---------- ---------- ----------
Net cash provided by (used in)
financing activities 48,934 (25,673) (33,784)
---------- ---------- ----------
Effect of exchange rate fluctuations
on cash 602 (24) (621)
Net increase (decrease) in cash and
cash equivalents: (72,224) 7,398 71,524
Cash and cash equivalents, beginning
of year 108,807 101,409 29,885
---------- ---------- ----------
Cash and cash equivalents, end of
year $ 36,583 $108,807 $101,409
========== ========== ==========
Supplemental disclosures of cash flow
information:
Cash paid during year for:
Interest $ 561 $ 13 $ 1,148
Income taxes 99,170 42,850 34,401
Supplemental disclosures of non-cash
investing activities:
Notes receivable issued upon sale
of revenue equipment $ 8,164 $ 4,079 $ 2,566
The accompanying notes are an integral part of these consolidated
financial statements.
31
WERNER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
INCOME
(In thousands, except share and per share amounts)
Accumulated
Other Total
Common Paid-In Retained Comprehensive Treasury Stockholders'
StocKStock Capital Earnings LossIncome (Loss) Stock Equity
--------------------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 20012002 $805 $105,897 $490,942$107,366 $547,467 $(216) $ (43) $ (7,552) $590,049
Purchases of 267,125 shares
of common stock - - - - (3,766) (3,766)
Dividends on common stock
($.064 per share) - - (5,102) - - (5,102)
Payment of stock split
fractional shares - (12) - - - (12)
Exercise of stock options,
448,508 shares, including
tax benefits - 1,481 - - 3,539 5,020
Comprehensive income (loss):
Net income - - 61,627 - - 61,627
Foreign currency translation
adjustments - - - (173) - (173)
----- -------- -------- ----------- --------- ----------
Total comprehensive income - - 61,627 (173) - 61,454
----- -------- -------- ----------- --------- ----------
BALANCE, December 31, 2002 805 107,366 547,467 (216) (7,779) 647,643$647,643
Purchases of 764,500 shares
of common stock - - - - (13,476) (13,476)
Dividends on common stock
($.090 per share) - - (7,183) - - (7,183)
Payment of stock split
fractional shares - (9) - - - (9)
Exercise of stock options,
752,591 shares, including
tax benefits - 1,349 - - 7,681 9,030
Comprehensive income (loss):
Net income - - 73,727 - - 73,727
Foreign currency translation
adjustments - - - (621) - (621)
---- -------- -------- ----- -------- --------
----------- --------- ----------
Total comprehensive income
(loss) - - 73,727 (621) - 73,106
---- -------- -------- ----- -------- -------- ----------- --------- ----------
BALANCE, December 31, 2003 805 108,706 614,011 (837) (13,574) 709,111
Purchases of 1,173,200 shares
of common stock - - - - (21,591) (21,591)
Dividends on common stock
($.130 per share) - - (10,286) - - (10,286)
Exercise of stock options,
656,676 shares, including
tax benefits - (2,011) - - 10,660 8,649
Comprehensive income (loss):
Net income - - 87,310 - - 87,310
Foreign currency translation
adjustments - - - (24) - (24)
---- -------- -------- ----- -------- --------
----------- --------- ----------
Total comprehensive income
(loss) - - 87,310 (24) - 87,286
---- -------- -------- ----- -------- -------- ----------- --------- ----------
BALANCE, December 31, 2004 805 106,695 691,035 (861) (24,505) 773,169
Purchases of 88,000 shares
of common stock - - - - (1,573) (1,573)
Dividends on common stock
($.155 per share) - - (12,309) - - (12,309)
Exercise of stock options,
310,696 shares, including
tax benefits - (1,621) - - 5,649 4,028
Comprehensive income (loss):
Net income - - 98,534 - - 98,534
Foreign currency translation
adjustments - - - 602 - 602
---- -------- -------- ----- -------- --------
Total comprehensive income
(loss) - - 98,534 602 - 99,136
---- -------- -------- ----- -------- --------
BALANCE, December 31, 2005 $805 $106,695 $691,035 $(861) $(24,505) $773,169$105,074 $777,260 $(259) $(20,429) $862,451
==== ======== ======== ===== ======== ======== =========== ========= ==========
The accompanying notes are an integral part of these consolidated
financial statements.
3132
WERNER ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Werner Enterprises, Inc. (the "Company") is a truckload
transportation and logistics company operating under the
jurisdiction of the U.S. Department of Transportation, the
Federal and Provincial Transportation Departments in Canada, the
Secretary of Communication and Transportation in Mexico, and
various state regulatory commissions. The Company maintains a
diversified freight base with no one customerand is not dependent on a small group of
customers or a specific industry making upfor a significant percentagemajority of the Company's receivables or
revenues.its freight,
which limits concentrations of credit risk. One customer
generated approximately 10% of total revenues for 2005 and
approximately 9% of total revenues for 2004 2003, and 2002.2003.
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. Through December 31, 2002,
the Company recorded its investment in Transplace using the equity method
of accounting until the Company 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 in 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 company 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.
33
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. IfGains and losses on the
sale or exchange of equipment isare recorded in other operating
expenses. Prior to July 1, 2005, if equipment was traded rather
than sold and cash involved in the exchange iswas less than 25% of
the fair value of the exchange, the cost of new equipment iswas
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 using the following estimated useful lives and
salvage values:
Lives Salvage Values
------------ ------------------------ ----------------
Building and improvements 30 years 0%
Tractors 5 years 25%
Trailers 12 years 0%
Service and other equipment 3-10 years 0%
Although the Company's currentnormal 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 the tractors, in
those instances in which a tractor is held beyond the normal
three-year age. Calculating depreciation expense using a five-yearfive-
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 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 its carrying amount or fair
value less costs to 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 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
34
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 in
excess of the 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, 2001:2002:
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)(1)
August 1, 2003 - July 31, 2004 $3.0 million $500,000 (3)(2)
August 1, 2004 - July 31, 2005 $5.0 million $2.0 million (3)
August 1, 2005 - July 31, 2006 $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)(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, 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.
(3) 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.
(4) Subject to an additional $3.0$2.0 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
is also responsible for 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 up to $1.0 million per claim, subject to an
additional $1.0 million aggregate for claims between $1.0 million
and $2.0 million, maintains a $27.3$27.5 million bond, and has
obtained insurance for individual claims above $1.0 million.
Under these insurance arrangements, the Company maintains
$35.4$37.2 million in letters of credit as of December 31, 2004.
34
2005.
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-
partythird-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.
35
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. AllVirtually all 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,
2005, 2004, 2003, and 2002.2003. The amounts of such translation adjustments
were not significant for all years presented (see the
Consolidated Statements of Stockholders' Equity and Comprehensive
Income).
Income Taxes
The Company uses the asset and liability method of Statement
of Financial Accounting Standards ("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")
in accordance with SFAS No. 128, Earnings per Share. Basic
earnings per share is computed by dividing net income by the
weighted-average number of common shares outstanding during the
period. The difference between the Company's weighted average shares outstandingbasic and diluted shares
outstandingearnings per
share for all periods presented is due to the dilutive effectcommon stock
equivalents that are assumed to be issued upon the exercise of
stock options for all periods
presented.options. There are no differences in the numerator of the
Company's computations of basic and diluted EPS for any period
presented. The computation of basic and diluted earnings per
share is shown below (in thousands, except per share amounts).
Years Ended December 31,
----------------------------
2005 2004 2003
-------- -------- --------
Net income $ 98,534 $ 87,310 $ 73,727
======== ======== ========
Weighted-average common shares
outstanding 79,393 79,224 79,828
Common stock equivalents 1,308 1,644 1,840
-------- -------- --------
Shares used in computing 80,701 80,868 81,668
diluted earnings per share ======== ======== ========
Basic earnings per share $ 1.24 $ 1.10 $ 0.92
======== ======== ========
Diluted earnings per share $ 1.22 $ 1.08 $ 0.90
======== ======== ========
Options to purchase shares of common stock which were
outstanding during the periods indicated above, but were excluded
from the computation of diluted earnings per share because the
option purchase price was greater than the average market price
of the common shares, were:
Years Ended December 31,
----------------------------
2005 2004 2003
-------- -------- --------
Number of shares under option 19,500 - -
Option purchase price $ 19.84 - -
36
Stock Based Compensation
At December 31, 2004,2005, the Company has a nonqualified stock
option plan, as described more fully in Note 6.5. 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
YearYears Ended December 31,
---------------------------------------------------------
2005 2004 2003
2002
------- ------- --------------- -------- --------
Net income, as reported $87,310 $73,727 $61,627$ 98,534 $ 87,310 $ 73,727
Less: Total stock-based
employee compensation
expense determined under
fair value based method for
all awards, net of related
tax effects 1,758 2,006 2,516
3,456
------- ------- --------------- -------- --------
Pro forma net income $85,304 $71,211 $58,171
======= ======= =======$ 96,776 $ 85,304 $ 71,211
======== ======== ========
Earnings per share:
Basic - as reported $ 1.24 $ 1.10 $ 0.92
$ 0.77
======= ======= =============== ======== ========
Basic - pro forma $ 1.22 $ 1.08 $ 0.89
$ 0.73
======= ======= =============== ======== ========
Diluted - as reported $ 1.22 $ 1.08 $ 0.90
$ 0.76
======= ======= =============== ======== ========
Diluted - pro forma $ 1.20 $ 1.05 $ 0.87
$ 0.71
======= ======= =============== ======== ========
As discussed under "Accounting Standards", the Company
adopted SFAS 123(R) on January 1, 2006.
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, 2005,
2004, 2003, and 2002,2003, comprehensive income consists of net income and
foreign currency translation adjustments.
Accounting Standards
In December 2003,2004, the Financial Accounting Standards Board
("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. 153, Exchanges of Nonmonetary Assets.
This Statement amends the guidance in APB Opinion No. 29,
Accounting for Nonmonetary Transactions. APB Opinion No. 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 No.
153 eliminates the exception to fair value for exchanges of
similar productive assets and 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 No. 153 are effective for exchanges of
nonmonetary assets occurring in fiscal periods beginning after
June 15, 2005. AsManagement has determined that adoption of December 31, 2004, management
believes that SFAS 153 willthis
standard did not have no significantany material effect on the financial
position, results of operations, and cash flows of the Company.
In December 2004, the FASB revised SFAS No. 123 (revised
2004), Share-
BasedShare-Based Payments. SFAS No. 123(R) eliminates the
alternative to use APB Opinion No. 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
37
exchange for valuable equity instruments issued, and liabilities
incurred, to employees in share-based payment transactions (e.g.,
stock options). The cost will be based on the grant-date fair
value of the award and will be recognized over the period for
which an employee 36
is required to provide service in exchange for
the award. For public
entities that doIn March 2005, the Securities and Exchange Commission
("SEC") issued Staff Accounting Bulletin ("SAB") 107, Share-Based
Payment, which includes recognition, measurement and disclosure
guidance as companies begin to implement SFAS No. 123(R). SAB
107 does not file as small business issuers, the provisionsmodify any of the revised statement arerequirements of SFAS No. 123(R).
In April 2005, the SEC adopted a rule deferring the compliance
date for SFAS No. 123(R) to be applied prospectively for awards that are
granted, modified, or settled in the first interim or annual reporting period
beginningthat begins after June 15, 2005. Additionally, public entitiesOn adoption, the Company would
recognize compensation cost for anythe unvested 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-dategrant-
date fair value of those awards calculated under SFAS No. 123 (as
originally issued) for either recognition or pro forma
disclosures. When thedisclosures and for awards granted, modified, or settled after
adoption. The Company adopts theadopted this standard on JulyJanuary 1, 2005,2006,
and it will be required tonow report in its financial statements the share-basedshare-
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.reporting periods beginning in
2006. As of December 31, 2004,the date of this filing, management believes that
adopting the new statementstandard will have a negative impact of
approximately one cent per share (twotwo cents per share if the modified
retrospective application method is used) for the year ending December
31, 2005,2006, representing the expense to be recognized from July 1, 2005 through
December 31, 2005 for the
unvested portion of awards which were granted to date, and cannot predict
the earnings impact of awards that may be granted in the future.
In May 2005, the FASB issued SFAS No. 154, Accounting
Changes and Error Corrections. This Statement replaces APB
Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting
Accounting Changes in Interim Financial Statements, and changes
the requirements for the accounting for and reporting of all
voluntary changes in accounting principle and changes required by
an accounting pronouncement when the pronouncement does not
include specific transition provisions. This Statement requires
retrospective application to prior periods' financial statements
of changes in accounting principle, unless it is impracticable to
July 1,do so. The provisions of SFAS No. 154 are effective for
accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. (2) INVESTMENT IN UNCONSOLIDATED AFFILIATE
Effective June 30, 2000,SFAS No. 154 will have no
effect on the financial position, results of operations, and cash
flows of the Company contributed its non-asset based
logistics business to Transplace ("TPC"), a joint ventureupon adoption, but would affect future
changes in accounting principles.
(2) LONG-TERM DEBT
Long-term debt consisted of six large
transportation companies, in exchange for an equity interest in TPC of
approximately 15%. Throughthe following at December 31 2002, the Company accounted for
its investment in TPC using the equity method. Management believes this
method was appropriate because the Company had the ability(in
thousands):
2005 2004
-------- --------
Notes payable to banks under
committed credit facilities $ 60,000 $ -
-------- --------
60,000 -
Less current portion 60,000 -
-------- --------
Long-term debt, net $ - $ -
======== ========
The notes payable to exercise
significant influence over operating and financial policies of TPC through
its representation on the TPC Board of Directors. Onbanks under committed credit facilities
bear variable interest (4.8% at December 31, 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 on the cost method and no longer accrues its percentage share of
TPC's earnings or losses. The Company's recorded investment in TPC is $0
as of December 31, 2004 and December 31, 2003. The Company is not
responsible for the debt of Transplace.
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 $8,400, $16,800,
and $25,000 in 2004, 2003, and 2002, respectively, and recorded purchased
transportation expense (in thousands) to TPC of approximately $7, $711, and
$13,300 during 2004, 2003, and 2002, respectively.
During 2002, the Company also provided 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 $123 during 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
As of December 31, 2004, the Company has two credit facilities with
banks totaling $75.0 million which expire May 16, 2006 and October 22, 2005
and bear variable interest2005) based on the
London Interbank Offered Rate ("LIBOR"), and these credit
facilities mature at various dates from October 2006 to October
2007. During January 2006, the Company repaid $35.0 million on
which no borrowings were outstanding at December 31, 2004 or
December 31, 2003.these notes. As of December 31, 2004,2005, the Company has an
additional $65.0 million of available credit available pursuant
tounder these bank credit
facilities with banks, which is further reduced by $35.4$37.2 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 total funded debt to earnings before interest,
income taxes, depreciation, amortization and rentals payable as
defined in the credit facility. Although theThe Company had no
borrowings pursuant to these credit facilities as of December 31, 2004, the
Company remainedwas in compliance
with these covenants at December 31, 2004.
(4)2005.
38
(3) NOTES RECEIVABLE
Notes receivable are included in other current assets and
other non-
currentnon-current assets in the Consolidated Balance Sheets. At
December 31, notes receivable consisted of the following (in
thousands):
2005 2004
2003
------- --------------- --------
Owner-operator notes receivable $ 7,0069,627 $ 4,8667,006
TDR Transportes, S.A. de C.V. 3,600 3,758
Warehouse One, LLC 1,451 1,5253,600
Other notes receivable 500 -
------- -------3,746 1,951
-------- --------
16,973 12,557 10,149
Less current portion 3,962 2,753
1,722
------- --------------- --------
Notes receivable - non-current $ 13,011 $ 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, 20042005 and 2003,2004, the Company had 221246 and 153221 notes
receivable totaling $7,006$9,627 and $4,866$7,006 (in thousands),
respectively, from these owner-operators. See Note 87 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, 20042005 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 87 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)(4) INCOME TAXES
Income tax expense consisted of the following (in
thousands):
2005 2004 2003
2002
------- ------- --------------- -------- --------
Current:
Federal $38,206 $46,072 $ 95993,715 $ 38,206 $ 46,072
State 12,190 5,664 3,657
127
------- ------- --------------- -------- --------
105,905 43,870 49,729
1,086
------- ------- --------------- -------- --------
Deferred:
Federal (32,910) 12,336 (6,159)
31,692
State (4,470) 181 679
4,199
------- ------- --------------- -------- --------
(37,380) 12,517 (5,480)
35,891
------- ------- --------------- -------- --------
Total income tax expense $56,387 $44,249 $36,977
======= ======= =======$ 68,525 $ 56,387 $ 44,249
======== ======== ========
39
The effective income tax rate differs from the federal
corporate tax rate of 35% in 2005, 2004 2003 and 20022003 as follows (in
thousands):
2005 2004 2003
2002
------- ------- --------------- -------- --------
Tax at statutory rate $50,294 $41,292 $34,511$ 58,471 $ 50,294 $ 41,292
State income taxes, net of
federal tax benefits 5,018 3,800 2,818 2,812
Non-deductible meals and
entertainment 4,340 2,670 172 117
Income tax credits (895) (900) (900)
(638)
Other, net 1,591 523 867
175
------- ------- -------
$56,387 $44,249 $36,977
======= ======= =======-------- -------- --------
$ 68,525 $ 56,387 $ 44,249
======== ======== ========
At December 31, deferred tax assets and liabilities
consisted of the following (in thousands):
2005 2004 2003
-------- --------
Deferred tax assets:
Insurance and claims accruals $ 53,99459,870 $ 48,08153,994
Allowance for uncollectible accounts 4,216 3,813
3,078
Other 4,588 4,584 3,743
-------- --------
Gross deferred tax assets 68,674 62,391 54,902
-------- --------
Deferred tax liabilities:
Property and equipment 244,128 242,139 219,849
Prepaid expenses 7,915 42,517
42,174
Other 5,559 4,043 6,670
-------- --------
Gross deferred tax liabilities 257,602 288,699 268,693
-------- --------
Net deferred tax liability $188,928 $226,308 $213,791
======== ========
These amounts (in thousands) are presented in the
accompanying Consolidated Balance Sheets as of December 31 as
follows:
2005 2004 2003
-------- --------
Current deferred tax asset $ 20,940 $ -
Current deferred tax liability $- 15,569 $ 15,151
Noncurrent deferred tax liability 209,868 210,739 198,640
-------- --------
Net deferred tax liability $188,928 $226,308 $213,791
======== ========
39
The Company has not recorded a valuation allowance as it
believes that all deferred tax assets are more likely than not to
be realized as a result of the Company's history of
profitability, taxable income and reversal of deferred tax
liabilities.
(6)(5) STOCK OPTION AND EMPLOYEE BENEFIT PLANS
Stock Option Plan
The Company's Stock Option Plan (the "Stock Option 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
40
stock that may be optioned under the Stock Option Plan is
20,000,000 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 tois
2,562,500 options.
At December 31, 2004, 9,227,9762005, 8,845,861 shares were available for
granting additional options. At December 31, 2005, 2004, 2003, and
2002,2003, options for 3,026,532, 2,485,582, 2,183,597, and 1,598,594,2,183,597, shares
with weighted average exercise prices of $8.55, $8.48, $8.45, and $8.18$8.45
were exercisable, respectively.
The following table summarizes Stock Option Plan activity
for the three years ended December 31, 2004:2005:
Options Outstanding
---------------------------------------------------------
Weighted-Average
Shares Exercise Price
---------------------------------------------------------
Balance, December 31, 2001 6,714,076 $ 8.46
Options granted 8,333 13.94
Options exercised (448,508) 7.96
Options canceled (136,441) 7.47
---------
Balance, December 31, 2002 6,137,460 $ 8.52
Options granted - -
Options exercised (752,591) 8.19
Options canceled (110,022) 7.84
---------
Balance, December 31, 2003 5,274,847 8.58
Options granted 787,000 18.33
Options exercised (656,676) 8.26
Options canceled (448,042) 8.79
---------
Balance, December 31, 2004 4,957,129 10.16
Options granted 415,500 16.95
Options exercised (310,696) 7.76
Options canceled (33,385) 14.80
---------
Balance, December 31, 2005 5,028,548 10.83
=========
40
The following table summarizes information about stock
options outstanding and exercisable at December 31, 2004:2005:
Options Outstanding Options Exercisable
-------------------------------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average---------------------------------------------------------------
Weighted-Average Weighted-Average Weighted-Average
Range of Number ContractualRemaining Exercise Number Exercise
Exercise Prices Outstanding Contractual Life Price Exercisable Price
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
$ 6.28 to $ 7.95 2,191,695 5.31,916,182 4.3 years $ 7.57 1,442,6337.59 1,687,428 $ 7.557.57
$ 8.96 to $ 9.77 1,933,003 6.21,889,645 5.3 years 9.75 1,001,647 9.731,296,967 9.74
$10.43 to $13.94 49,431 4.546,721 3.5 years 11.24 41,302 10.81
$18.33 783,000 9.411.28 42,137 10.99
$16.68 to $19.84 1,176,000 8.9 years 18.33 0 0.00
--------- ---------
4,957,129 6.317.84 - -
---------- ----------
5,028,548 5.7 years 10.16 2,485,582 8.48
========= =========10.83 3,026,532 8.55
========== ==========
The Company applies the intrinsic value based method of 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 20042005 and 20022004 was
estimated using the Black-Scholes option-pricing model with the
following assumptions: risk-free interest rate of 4.1 percent in
2005 and 4.0 percent in 2004 and
2002;2004; dividend yield of 0.94 percent in
2005 and 0.66 percent in 2004 and 0.40 percent in 2002;2004; expected life of 4.8 years in 2005
and 6.5 years in 2004 and 7.0 years in 2002;2004; and volatility of 36 percent in 2005 and
37 percent in 2004 and 38 percent in 2002.2004. The weighted-average fair value of options
granted during 2005 and 2004 was $5.86 and 2002 was $7.60 and $6.28 per share,
respectively. The table in Note 1 illustrates the effect on net
income and earnings per share had the fair value of option grants
been charged to salaries, wages and benefits expense in the
accompanying Consolidated Statements of Income.
41
Employee Stock Purchase Plan
Employees meeting certain eligibility requirements may
participate in the Company's Employee Stock Purchase Plan (the
Purchase Plan)"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 $119, $108, and $102 for 2005, 2004, and $106 for 2004, 2003, and 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"). 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 $2,268, $2,043, and $1,711 for 2005,
2004, and $1,599 for 2004, 2003, and 2002, respectively.
(7)(6) COMMITMENTS AND CONTINGENCIES
The Company has committed to property and equipment
purchases, net of trades, of approximately $122.0$33.1 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 liability 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 material impact on the financial position,
results of operations, 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)(7) 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 iswas the sole trustee of
a trust that ownsowned 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. The trust assigned its one-third interest in this
entity to the Company at a nominal cost in February 2005. During
2005, 2004, 2003, and 2002,2003, the Company paid (in thousands) $945, $840,
$732, and $542,$732, respectively, for lodging services for its drivers at
this motel. In 2003,On June 30, 2005, the Company purchased 2.6sold .783 acres of
land located adjacent to this entity for approximately $90 (in thousands), in
accordance with the Company's disaster recovery centerexercise of a purchase option clause
contained in Omaha, Nebraska for $500,000 from
a partnership in which the principal stockholder ofseparate agreement entered into by the Company isand
the general partner.entity in April 2000. The Company realized a gain of
approximately $35 (in thousands) on the transaction.
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 2005, 2004, 2003, and
2002,2003, the Company paid (in thousands) $6,291, $6,200, $5,888, and $3,587,$5,888,
respectively, to this owner-operator for purchased transportation
services. This fleet is compensated using the same owner-operatorowner-
operator pay package as the Company's other comparable third-
party owner-operators. The Company also sells used revenue
42
equipment to this entity. During 2005, 2004, 2003, and 2002,2003, these
sales (in thousands) totaled $1,019, $193, $292, and $1,328,$292,
respectively, and the Company recognized gains (in thousands) of
$130, $18, and $55 in 2005, 2004, and $6 in 2004, 2003, and 2002, respectively. The
Company had 3532 and 4635 notes receivable from this entity related
to the revenue equipment sales (in thousands) totaling $656$1,105 and
$1,030$656 at December 31, 2005 and 2004, respectively.
The brother of the Company's principal stockholder has a 50%
ownership interest in an entity with a fleet of tractors that
operates as an owner-operator for the Company. During 2005 and
2003, respectively.2004, the Company paid (in thousands) $476 and $453,
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 and TDR transact business with each other for
certain of their purchased transportation needs. During 2005,
2004, 2003, and 2002,2003, the Company recorded operating revenues (in
thousands) from TDR of approximately $227, $168, $206, and $416,$206,
respectively, and recorded purchased
42
transportation expense (in
thousands) to TDR of approximately $521, $631, $1,099,
and $1,087,$1,099,
respectively. In addition, during 2005, 2004, 2003, and 2002,2003, the
Company recorded operating revenues (in thousands) from TDR of
approximately $3,582, $2,837, $1,495, and $72,$1,495, respectively, related
to the leasing of revenue equipment. As of December 31, 20042005 and
2003,2004, the Company had receivables related to the equipment leases
(in thousands) of $2,389 and $1,351, respectively. The Company
also sells used revenue equipment to this entity. During 2005,
these sales (in thousands) totaled $358, and $852,
respectively.the Company
recognized gains (in thousands) of $19 in 2005. See Note 43 for
information regarding notesthe note receivable from TDR.
The Company has a 5% ownership interest in Transplace
("TPC"), a logistics joint venture of five large transportation
companies. 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 $4,800, $8,400, and $16,800 in 2005, 2004, and
2003, respectively, and recorded purchased transportation expense
(in thousands) to TPC of approximately $0, $7, and $711 during
2005, 2004, and 2003, respectively.
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)(8) SEGMENT INFORMATION
The Company has two reportable segments - Truckload
Transportation Services and Value Added Services. The Truckload
Transportation Services segment consists of fivesix 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-haul Van fleet transports a variety
of consumer, nondurable products and other commodities in
truckload quantities over irregular routes using dry van
trailers. The Regional Short-Haul fleet provides comparable
truckload van service within five geographic regions. 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 Expedited fleet provides
time-sensitive truckload services utilizing driver teams.
The Value Added Services segment, which generates the
majority of the Company's non-trucking revenues, provides freight
brokerage, intermodal services, multimodal 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 other revenues related to third-party
equipment maintenance, equipment leasing, and other business
activities. None of these operations meet the quantitative
threshold reporting requirements of SFAS No. 131. As a result,
these operations are grouped in "Other" in the table below. The
Company does not prepare separate balance sheets by segment 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.
43
The following tables summarize the Company's segment
information (in thousands):
Revenues
------------------
2005 2004 2003 2002
---------- ---------- ----------
Truckload Transportation Services $1,741,828 $1,506,937 $1,358,428 $1,254,728
Value Added Services 218,620 161,111 89,742
80,012
Other 7,777 6,424 5,287
4,057
Corporate 3,622 3,571 4,309 2,659
---------- ---------- ----------
Total $1,971,847 $1,678,043 $1,457,766 $1,341,456
========== ========== ==========
Operating Income
----------------
2005 2004 2003 2002
---------- ---------- ----------
Truckload Transportation Services $ 156,122 $ 135,828 $ 118,146
$ 98,838
Value Added Services 8,445 5,631 454
1,331
Other 2,850 2,587 1,236
1,059
Corporate (2,806) (2,718) (2,332) (1,774)
---------- ---------- ----------
Total $ 164,611 $ 141,328 $ 117,504 $ 99,454
========== ========== ==========
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 other services provided in
that country.
Operating Revenues
--------------------------
2005 2004 2003 2002
---------- ---------- ----------
United States $1,782,501 $1,537,745 $1,349,153
$1,260,957---------- ---------- ----------
Foreign countries
Canada 43,668 35,364 30,886
19,725
Mexico 145,678 104,934 77,727 60,774
---------- ---------- ----------
Total foreign countries 189,346 140,298 108,613
---------- ---------- ----------
Total $1,971,847 $1,678,043 $1,457,766 $1,341,456
========== ========== ==========
Long-lived Assets
-----------------
2005 2004 2003 2002
---------- ---------- ----------
United States $ 990,439 $ 850,250 $ 796,627
$ 829,506---------- ---------- ----------
Foreign countries
Canada 301 136 142
49
Mexico 11,867 12,612 8,918 2,712
---------- ---------- ----------
Total foreign countries 12,168 12,748 9,060
---------- ---------- ----------
Total $1,002,607 $ 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 oneOne customer
accounts for more than 9%generated approximately 10% of the Company's total revenues.
(10) COMMON STOCK SPLITS
On September 2, 2003, the Company announced that its Boardrevenues for
2005 and approximately 9% 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,total revenues for 2004 and 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 paid 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 splits. Stockholders entitled to fractional shares received a
proportional cash payment based on the closing price of a share of common
stock on 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 splits.
44
(11)(9) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share amounts)
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------------------------------------------2005: ------------------------------------------------
2004:
Operating revenues $386,280 $411,115 $425,409 $455,239$ 455,262 $ 485,789 $ 504,520 $ 526,276
Operating income 32,837 42,128 41,138 48,508
Net income 19,921 25,295 24,491 28,827
Basic earnings per share .25 .32 .31 .36
Diluted earnings per share .25 .31 .30 .36
First Second Third Fourth
Quarter Quarter Quarter Quarter
2004: ------------------------------------------------
Operating revenues $ 386,280 $ 411,115 $ 425,409 $ 455,239
Operating income 24,859 34,991 39,510 41,968
Net income 15,568 21,620 24,299 25,823
Basic earnings per share .20 .27 .31 .33
Diluted earnings per share .19 .27 .30 .32
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------------------------------------------
2003:
Operating revenues $347,208 $362,290 $368,034 $380,234
Operating income 18,983 31,576 32,728 34,217
Net income 11,839 19,859 20,516 21,513
Basic earnings per share .15 .25 .26 .27
Diluted earnings per share .15 .24 .25 .26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
No reports under this item have been required to be filed
within the twenty-four months prior totwo most recent fiscal years ended December 31, 2004,2005,
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
internalInternal control system wasover financial reporting is a process
designed to provide reasonable assurance to the Company's
management and board of directors regarding the reliability of
financial reporting and the preparation of financial statements
for external purposes in accordance with U.S. generally accepted
accounting principles. Internal control over financial reporting
includes maintaining records that in reasonable detail accurately
and fair presentationfairly reflect the Company's transactions; providing
reasonable assurance that transactions are recorded as necessary
for preparation of publishedour financial statements.statements; providing reasonable
assurance that receipts and expenditures of company assets are
made in accordance with management authorization; and providing
reasonable assurance that unauthorized acquisition, use or
disposition of the company assets that could have a material
effect on the Company's financial statements would be prevented
or detected on a timely basis.
45
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.
Management has assessed the effectiveness of the Company's
internal control over financial reporting as of December 31,
2004,2005, 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
2005.
Management has engaged KPMG LLP, the independent registered
public accounting firm that audited the consolidated financial
statements included in this Annual Report on Form 10-K, to attest
to and report on management's 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, 2004,2005, 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
46
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, 2004,2005, 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, 2004,2005, 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, 20042005 and 2003,2004, 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, 2004,2005, and our report dated
February 4, 2005,1, 2006, expressed an unqualified opinion on those
consolidated financial statements.
KPMG LLP
Omaha, Nebraska
February 4, 20051, 2006
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, 2004,2005, that have materially affected, or are
reasonably likely to materially affect, the Company's internal
control over financial reporting.
ITEM 9B. OTHER INFORMATION
DuringThe following disclosure is provided pursuant to Item 5.02
of Form 8-K. On February 9, 2006, Mr. Jeffrey G. Doll notified
the fourth quarterBoard of 2004, no information was requiredDirectors (the "Board") of Werner Enterprises, Inc.
(the "Company") of his intention to be
disclosed innot stand for re-election at
the 2006 Annual Meeting of Stockholders on May 9, 2006. Mr. Doll
will remain on the Board through the expiration of his current
term at the 2006 Annual Meeting. Mr. Doll is the Lead Outside
Director and also serves on the Audit Committee, Option
Committee, Executive Compensation Committee, and Nominating
Committee. The Board intends to submit a report on Form 8-K, but not reported.qualified candidate for
election at the 2006 Annual Meeting of Stockholders to fill this
vacancy.
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") 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.
47
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, 2004,2005,
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 9,227,9765,028,548 $10.83 8,845,861
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.
48
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Financial Statements and Schedules.
(1) Financial Statements: See Part II, Item 8 hereof.
Page
----
Report of Independent Registered Public Accounting Firm 2728
Consolidated Statements of Income 2829
Consolidated Balance Sheets 2930
Consolidated Statements of Cash Flows 3031
Consolidated Statements of Stockholders' Equity and
Comprehensive Income 3132
Notes to Consolidated Financial Statements 3233
(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 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 15 is
submitted as a separate section of this report on Form 10-K (see
Exhibit Index on page 52).
49
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 15th14th day of February, 2005.2006.
WERNER ENTERPRISES, INC.
By: /s/ Clarence L. Werner
-----------------------------------
Clarence L. Werner
Chief Executive Officer
By: /s/ John J. Steele
-------------------------------------------------------------------
John J. Steele
SeniorExecutive Vice President, Treasurer
and Chief Financial Officer
By: /s/ James L. Johnson
-----------------------------------
James L. Johnson
Senior Vice President, Controller
and Corporate Secretary
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the registrant in the capacities and on the
dates indicated.
Signature Position Date
--------- -------- ----
/s/ Clarence L. Werner Chairman of the Board, Chief February 15, 200514, 2006
- ------------------------- Executive Officer and Director
Clarence L. Werner
/s/ Gary L. Werner Vice Chairman and Director February 15, 200514, 2006
- ------------------------- Director
Gary L. Werner
/s/ Gregory L. Werner President, Chief Operating February 15, 200514, 2006
- ------------------------- Officer and Director
Gregory L. Werner
/s/ John J. Steele Senior Vice President, Treasurer February 15, 2005
- ------------------------- and Chief Financial Officer
John J. Steele
/s/ James L. Johnson Vice President, Controller February 15, 2005
- ------------------------- and Corporate Secretary
James L. Johnson
/s/ Jeffrey G. Doll Lead Outside Director February 15, 200514, 2006
- -------------------------
Jeffrey G. Doll
/s/ Gerald H. Timmerman Director February 15, 200514, 2006
- -------------------------
Gerald H. Timmerman
/s/ Michael L. Steinbach Director February 15, 200514, 2006
- -------------------------
Michael L. Steinbach
/s/ Kenneth M. Bird Director February 15, 200514, 2006
- -------------------------
Kenneth M. Bird
/s/ Patrick J. Jung Director February 15, 200514, 2006
- -------------------------
Patrick J. Jung
50
SCHEDULE II
WERNER ENTERPRISES, INC.
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Balance at Charged to Write-off Balance at
Beginning of Costs and of Doubtful End of
Period Expenses Accounts Period
------------ ---------- ----------- ----------
Year ended December 31, 2005:
Allowance for doubtful accounts $8,189 $ 962 $ 794 $8,357
============ ========== =========== ==========
Year ended December 31, 2004:
Allowance for doubtful accounts $6,043 $2,255 $ 109 $8,189
====== ====== ====== ================== ========== =========== ==========
Year ended December 31, 2003:
Allowance for doubtful accounts $4,459 $1,914 $ 330 $6,043
====== ====== ====== ======
Year ended December 31, 2002:
Allowance for doubtful accounts $4,966 $1,175 $1,682 $4,459
====== ====== ====== ================== ========== =========== ==========
See report of independent registered public accounting firm.
51
EXHIBIT INDEX
Exhibit
Number Description 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. 33-5245Filed herewith
Incorporation
3(i)(B) Articles of Amendment to Articles of Exhibit 3(i) to the Company's to Articles of report on Form 10-Q10-
Incorporation Q for the
Incorporation quarter ended May 31, 1994
3(i)(C) Articles of Amendment to Articles of Exhibit 3(i) to the Company's report to Articles of on Form 10-K10-
Incorporation K for the year ended Incorporation December 31, 1998
3(i)(D) Articles of Amendment to Articles of Exhibit 3(i)(D) to the Company's report on Form
Incorporation 10-Q for the quarter ended June 30, 2005
3(ii) Revised and Amended By-Laws Exhibit 3(ii) to the Company's report By-Laws on Form 10-Q10-
Q for the quarter ended June 30, 2004
10.1 Amended and Restated Stock Option Plan Exhibit 10.1 to the Company's report Stock Option Plan on 10-QForm 10-
Q for the quarter ended June 30, 2004
10.2 Non-Employee Director Compensation Exhibit 10.1 to the Company's report on Form 10-
Q for the quarter ended June 30, 2005
10.3 The Executive Nonqualified Excess Plan Exhibit 10.1 to the Company's report on Form 10-
of Werner Enterprises, Inc. Q for the quarter ended September 30, 2005
10.4 Named Executive Officer Compensation Filed herewith
11 Statement Re: Filed herewith Computation of Per Share See Note 1 "Common Stock and Earnings Per
Earnings Share" in the Notes to Consolidated Financial
Statements under Item 8
21 Subsidiaries of the Registrant Filed herewith
Registrant
23.1 Consent of KPMG LLP Filed herewith
31.1 Rule 13a-14(a)/15d-15d-14(a) Certification Filed herewith
14(a) Certification
31.2 Rule 13a-14(a)/15d-15d-14(a) Certification Filed herewith
14(a) Certification
32.1 Section 1350 Certification Filed herewith
Certification
32.2 Section 1350 Certification Filed herewith
Certification
52