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
- --- SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20042006
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
- --- SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to __________
Commission File Number 0-14690
WERNER ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
NEBRASKA 47-0648386
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14507 FRONTIER ROAD 68145-0308
POST OFFICE BOX 45308 (Zip code)
OMAHA, NEBRASKA
(Address of principal
executive offices)
Registrant's telephone number, including area code: (402) 895-6640
Securities registered pursuant to Section 12(b) of the Act:
NONETitle of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
Common Stock, $.01 Par Value The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act:
COMMON
STOCK, $.01 PAR VALUETitle of Class
--------------
NONE
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
YES X NO
--- ---
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act.
YES NO X
--- ---
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of the registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
X
---
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer (as defined in Rule 12b-2 of the Act).
Large accelerated filer X Accelerated filer Non-accelerated filer
--- --- ---
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Act). YES NO X 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, 2004,2006, the last business day of the
Registrant's most recently completed second fiscal quarter, was
approximately $1.074$1.025 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, 79,396,1879, 2007, 75,350,132 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, 2005,8, 2007, are incorporated
in Part III of this report.
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business 1
Item 1A. Risk Factors 7
Item 1B. Unresolved Staff Comments 10
Item 2. Properties 610
Item 3. Legal Proceedings 711
Item 4. Submission of Matters to a Vote of Security Holders 811
PART II
Item 5. Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities 812
Item 6. Selected Financial Data 1014
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 1014
Item 7A. Quantitative and Qualitative Disclosures about
Market Risk 2629
Item 8. Financial Statements and Supplementary Data 2731
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 4550
Item 9A. Controls and Procedures 4550
Item 9B. Other Information 4752
PART III
Item 10. Directors, and Executive Officers of the Registrant 47and Corporate Governance 54
Item 11. Executive Compensation 4754
Item 12. Security Ownership of Certain Beneficial Owners and
Management 47and Related Stockholder Matters 54
Item 13. Certain Relationships and Related Transactions, 48and
Director Independence 54
Item 14. Principal AccountantAccounting Fees and Services 4855
PART IV
Item 15. Exhibits and Financial Statement Schedules 4855
PART I
ITEM 1. BUSINESS
General
Werner Enterprises, Inc. ("Werner" or the "Company") is a
transportation and logistics company engaged primarily in hauling
truckload shipments of general commodities in both interstate and
intrastate commerce as well as providing logistics services.services
through its Value Added Services ("VAS") division. 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 truckload
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 20042006 with a fleet of 8,6009,000 trucks, of which 7,6758,180
were owned by the Company and 925820 were owned and operated by
owner-operators (independent contractors).
The Company operateshas two reportable 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. The Company's
truckload fleets operate 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's VAS division is a non-asset based
transportation and logistics provider. VAS includes freight
management (single-source logistics), truck brokerage,
intermodal, and international freight forwarding. In July 2006,
the Company has two reportable segments-
Truckload Transportation Servicesformed Werner Global Logistics U.S., LLC ("WGL"), a
separate company that operates within the VAS segment, and
Value Added Services. Financial
information regarding these segments can be foundthrough its subsidiaries established its Wholly Owned Foreign
Entity ("WOFE") headquartered in the NotesShanghai, China. WGL and its
subsidiaries obtained business licenses to Consolidated Financial Statements under Item 8 of this Form 10-K.operate as an Ocean
Transport Intermediary (NVOCC and Ocean Freight Forwarder), U.S.
Customs Broker, Class A Freight Forwarder in China, and an
Indirect Air Carrier.
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, diversified truck and logistics
service offerings, equipment capacity, technology, customized
services, and flexibility available from a large, financially-stablefinancially-
stable carrier. These shippers are generally less sensitive to
rate levels, preferring to have their freight handled by a few
core carriers with whom they can establish service-based, long-termlong-
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). During the latter part of 2003 and
continuing through 2004, the Company expanded its brokerage and intermodal
service offerings by adding senior management and developing new computer
systems. Trucking revenues accounted for 89%86% of total
revenues, and non-
truckingnon-trucking and other operating revenues,
primarily brokerage revenues, accounted for 11%14% of total revenues
1
in 2004.2006. Werner's Value Added Services
("VAS")VAS division manages the transportation and
logistics requirements for individual customers. Thiscustomers, providing
customers with additional sources of capacity and access to
alternative modes of transportation. The VAS portfolio includes
freight management, truck brokerage, transportation
routing, transportation intermodal, load/mode selection, intermodal,and
network optimization, transloading, and other services. During 2005, VAS is expanding its service offerings to include
multimodal, which is a blend of truckThe new
product offering in China includes site selection analysis,
vendor and rail intermodal services.purchase order management, full container load
consolidation and warehousing, as well as door-to-door freight
forwarding and customs brokerage. Value Added Services is a non-asset-basednon-
asset-based business that is highly dependent on qualified
employees, information systems, and the services of qualified
employees.third-party capacity providers. Compared to trucking operations
which require a significant capital equipment investment, VAS's
operating margins are generallyincome percentage is lower and returnsreturn on assets are generallyis
substantially higher. Revenues generated by services accounting
for more than 10% of consolidated revenues, consisting of
Truckload Transportation Services and
1
Value Added Services, for
the last three years can be found under Item 7 of this Form 10-K.
Werner has a diversified freight base andbut is not dependent
on a small group of customers or a specific industry for a majoritysignificant portion of its
freight. During 2004,2006, the Company's largest 5, 10, 25, and 50
customers comprised 24%26%, 37%, 55%58%, and 68%72% of the Company's
revenues, respectively. The Company's largest customer, Dollar
General, accounted for 9%11% of the Company's revenues in 2004.2006, of
which approximately two-thirds is dedicated fleet business and
the remainder is primarily VAS. No other customer exceeded 5% of
revenues in 2004.2006. By industry group, the Company's top 50
customers consist of 47%46% retail and consumer products, 24%25%
grocery products, 20% manufacturing/industrial, 22% grocery
products, and 7%9% 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 one to three
years in length, and 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 used 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-approved pilot program to permanent status. The exemption
is to be renewed every two years. On September 7, 2006, the
FMCSA announced in the Federal Register its decision to renew for
two additional years the Company's exemption from the FMCSA's
requirement that drivers of commercial motor vehicles operating
in interstate commerce prepare handwritten records of duty status
(logs).
Seasonality
In the trucking industry, revenues generally show a seasonal
pattern 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
2
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, 2004,2006, the Company employed 11,05111,198
drivers, 8401,038 mechanics and maintenance personnel, 1,6201,796 office
personnel for the trucking operation, and 211294 personnel for the
VAS and other non-trucking operations. The Company also had 925820
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.
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 driver recruiting and retention market for recruitingremained
challenging, but was less difficult than the extremely
challenging driver market experienced drivers has tightened.earlier in the year. 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-operatorsowner-
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
fewseveral 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, 2004,2006, Werner operated 7,6758,180 company
tractors and had contracts for 925820 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 23,54025,200 trailers at December 31, 2004: 21,9252006:
23,340 dry vans; 622599 flatbeds; 965 temperature-controlled; and 28 other specialized
trailers.1,261 temperature-controlled.
Most of the Company's trailers arewere manufactured by Wabash
National Corporation. As of December 31, 2004,2006, 98% of the
3
Company's fleet of dry van trailers consisted of 53-foot
trailers, and 98%99% consisted of aluminum plate or composite
(duraplate)(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,Beginning in January 2007, all newly manufactured truck
engines must comply with a new set of more stringent engine
emission standards mandated by the Environmental Protection
Agency ("EPA"). All truck enginesTrucks manufactured prior to October
1, 2002 are not subject towith these new standards.engines are
expected to cost $5,000-$10,000 more per truck, have slightly
lower mpg, and higher maintenance costs. To delay the cost
and
business riskimpact of buying these new truck engines with inadequate testing
time prior to the October 1, 2002 effective date,emission standards, the Company significantly
increased the purchase of trucks with pre-October 2002 engines. As of
December 31, 2004, approximately 47% of the company-ownedkept its
truck fleet consisted of trucks with the post-October 2002 engines. The Company has
experienced an approximate 5% reduction in fuel efficiencynew relative to date,historical company and increased depreciation expense due to the higher cost of the new engines.industry
standards. The average age of the Company's truck fleet at
December 31, 20042006 is 1.61.34 years. A new set of more stringent
emissions standards mandated by the EPA will become effective for
newly manufactured trucks beginning in January 2007.2010. The
Company intendsCompany's capital expenditures for new trucks are expected to gradually reduce the average age of its truck
3
fleetbe
much lower 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.2007.
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 2004,2006, 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$54.2 million, while the
Company collected an additional $52.6$51.2 million in fuel surcharge
revenues to offset most of the fuel cost increase. Conversely, when fuel prices
decrease, fuel surcharges decrease. 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, 2004,2006, the
Company had no derivative financial instruments to reduce its
exposure to fuel price fluctuations.
During third quarter 2006, truckload carriers transitioned a
substantial portion of their diesel fuel consumption from low
sulfur diesel fuel to ultra-low sulfur diesel fuel ("ULSD") fuel,
as fuel refiners were required to meet the EPA-mandated 80% ULSD
threshold by the transition date of October 15, 2006.
Preliminary estimates were that ULSD would result in a 1-3%
degradation in miles per gallon ("mpg") for all trucks, due to
the lower energy content (btu) of ULSD. Based on the Company's
fuel mpg experience to date, these preliminary mpg degradation
estimates appear to be accurate.
The Company maintains aboveground and underground fuel
storage tanks at mostmany 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
4
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
changesEffective October 1, 2005, all truckload carriers became
subject to the regulations that govern truck drivers'revised hours of service ("HOS"). These new federal regulations. The
most significant change for the Company from the previous
regulations became effectiveis that drivers using the sleeper berth provision
must 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 sleeper
berth into two periods, provided neither period was less than two
hours. This more restrictive sleeper berth provision is
requiring some drivers to plan their time better and had a
negative impact on January 4,
2004. On July 16, 2004,mileage productivity. The greatest impact of
these HOS changes was lower mileage productivity for those
customers with multiple-stop shipments or those shipments with
pickup or delivery delays. The Owner-Operator Independent
Drivers Association ("OOIDA") filed a petition for review of the
current HOS regulations with the U.S. Circuit Court of Appeals foron January
23, 2006. On December 4, 2006, a three-judge panel heard
arguments from the DistrictOOIDA. The appeals court is expected to issue
its ruling in February or March of Columbia rejected these new hours of service rules for truck drivers
that had been in place since2007.
On January 2004 because it said18, 2007, the FMCSA had
failed to addresspublished a Notice of
Proposed Rulemaking ("NPRM") in the impact of the rulesFederal Register 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
recordersElectronic On-Board Recorders ("EOBRs") by the trucking
industry for compliance with HOS rules. The intent of this
proposed rule is to monitor driver compliance. On September 30, 2004,improve highway safety by fostering
development of new EOBR technology for HOS compliance,
encouraging its use by motor carriers through incentives, and
requiring its use by operators with serious and continuing HOS
compliance problems. Comments on the extensionNPRM must be received by
April 18, 2007. Over eight years ago, the Company became the
first, and only, trucking company in the United States to receive
authorization from the DOT to use a global positioning system
based paperless log system in place of the Federal highway bill signed into lawpaper logbooks
traditionally used by truck drivers to track their daily work
activities. While 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 toCompany does not believe the rule, if any, are necessary to respond to the concerns
raised by the court, and to provide data or studies thatas
proposed, would support
changes to, or continued use of, the 2003 rule. The Company cannot predict
what rule changes, if any, will result from the court's ruling, nor the
4
ultimate impact of any upcoming changes to the hours of service rules. Any
changes could have an adversea significant effect on theits operations and
profitability, of
the Company.it will continue to monitor future developments.
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.
Over the course of 2006, WGL and its subsidiaries obtained
business licenses to operate as an Ocean Transport Intermediary
(NVOCC and Ocean Freight Forwarder), U.S. Customs Broker, and
Class A Freight Forwarder in China. In addition, WGL recently
entered into the air freight forwarding business as a
Transportation Safety Administration ("TSA") approved Indirect
Air Carrier.
With respect to the Company's planned activities in the air
transportation industry in the United States, it is subject to
regulation by the TSA of the Department of Homeland Security as
an indirect air carrier. WGL has made application for a license
as an air freight forwarder by the International Air Transport
Association ("IATA") and each office in a foreign location will
be applying for an IATA license in their respective countries.
IATA is a voluntary association of airlines which prescribes
certain operating procedures for air freight forwarders acting as
agents for its members. The majority of the Company's air
freight forwarding business is expected to be conducted with
airlines which are IATA members.
The Company is licensed as a customs broker by Customs and
Border Protection ("CBP") of the Department of Homeland Security
in each U.S. customs district in which it does business. All
United States customs brokers are required to maintain prescribed
records and are subject to periodic audits by CBP. In other
jurisdictions in which the Company performs clearance services,
the Company is licensed by the appropriate governmental
authority.
5
The Company is registered as an Ocean Transportation
Intermediary by the Federal Maritime Commission ("FMC"). The FMC
has established certain qualifications for shipping agents,
including certain surety bonding requirements. The FMC also is
responsible for the economic regulation of Non-vessel Operating
Common Carrier ("NVOCC") activity originating or terminating in
the United States. To comply with these economic regulations,
vessel operators and NVOCCs are required to file tariffs
electronically which establish the rates to be charged for the
movement of specified commodities into and out of the United
States. The FMC has the power to enforce these regulations by
assessing penalties.
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 willcould 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-wideindustry based
on total operating revenues.
The significant industry-wide accelerated purchase of new
trucks in advance of the new 2007 emissions standards contributed
to excess truck capacity that partially disrupted the supply and
demand balance in the second half of 2006. The recent softness
in the housing and automotive sectors not principally served by
the Company caused carriers that depend on these freight markets
to more aggressively compete in other freight markets served by
the Company. Other demand-related factors that may have
contributed to lower freight demand in 2006 were inventory
tightening by some large retailers, some shippers shifting to
more intermodal intact container shipments for lower value
freight, and moderating economic growth. The softer freight
market and the softer truck sales market are making it more
difficult for marginal carriers to remain in business. As these
marginal carriers are facing significant funding requirements for
truck licensing in first quarter 2007, some trucks may not be
licensed which would tighten capacity. As a result of these
factors, the Company currently anticipates that the recent excess
truck capacity in the truckload sector is being limited
duemarket will gradually reverse, and capacity
may begin to a numbertighten as we move toward the fall peak season of
factors. An extremely challenging driver recruiting
market is causing most large truckload carriers to limit their fleet
additions. There are continuing cost issues and concerns with the new post-
October 2002 diesel engines. Trucking company failures in the last five
years are continuing at a pace higher than the previous fifteen years.
Some truckload carriers are having difficulty obtaining adequate trucking
insurance coverage at a reasonable price. Many truckload carriers,
including Werner, slowed their fleet growth in the last four years, and
some carriers have downsized their fleets to improve their operating
margins and returns.2007.
6
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 InformationITEM 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. Beginning in
2003 and continuing throughout 2005, general economic
improvements led to improved freight demand. Factors that may
have contributed to lower freight demand in the second half of
2006 were inventory tightening by some large retailers, some
shippers shifting to more intermodal intact container shipments
for lower value freight, and moderating economic growth. 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 through the first eight months
of 2006, averaging 51 cents a gallon higher than the same period
of 2005. However, in the last four months of 2006, fuel costs
averaged 17 cents a gallon lower than the same period of 2005,
principally due to the temporary spike in fuel prices that
occurred in October 2005 after Hurricanes Katrina and Rita. Fuel
prices subsequently declined from these record levels in November
2005. 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 has become more difficult over the last several years due
to changing workforce demographics and alternative job
opportunities in an improving economy. However, during fourth
quarter 2006, the driver recruiting and retention market was less
difficult than the extremely challenging market experienced
earlier in the year. 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 11% of the approximate $180
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
7
truckload carriers. Logistics companies, railroads, less-than-
truckload carriers, and private carriers also provide
competition, but to a lesser degree. Competition for the freight
transported by the 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 and may become subject to new or more comprehensive
regulations mandated by these agencies. These regulatory
authorities establish broad powers, generally governing
activities such as authorization to engage in motor carrier
operations, safety, financial reporting, and other matters. In
July 2006, the Company formed WGL, a separate company that
operates within the VAS segment, and through its subsidiaries
established its WOFE headquartered in Shanghai, China. WGL and
its subsidiaries obtained business licenses to operate as an
Ocean Transport Intermediary (NVOCC and Ocean Freight Forwarder),
U.S. Customs Broker, Class A Freight Forwarder in China, and an
Indirect Air Carrier. WGL has applied for status as an endorsed
IATA member and other offices in foreign locations will be
applying for status in their respective countries.
On January 18, 2007, the FMCSA published an NPRM in the
Federal Register on the use of EOBRs by the trucking industry for
compliance with HOS rules. Comments on the NPRM must be received
by April 18, 2007. While the Company does not believe the rule,
as proposed, would have a significant effect on operations and
profitability, it will continue to monitor future developments.
Beginning in January 2007, all newly manufactured truck
engines must comply with a new set of more stringent engine
emission standards mandated by the EPA. 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. A
third and final set of more stringent emissions standards
mandated by the EPA will become effective for newly manufactured
trucks beginning in January 2010.
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.
We depend on key customers, the loss of which or the financial
failure of which may have a material adverse effect on our
operations and profitability.
A significant portion of the Company's revenue is generated
from several key customers. During 2006, the Company's top 25,
10 and 5 customers accounted for 58%, 37% and 26% of revenues,
respectively. The Company's largest customer, Dollar General,
accounted for 11% of the Company's revenues in 2006. The Company
does not have long-term contractual relationships with many of
its key non-dedicated customers. The Company's contractual
relationships with its dedicated customers are typically one to
three years in length which are cancelable on 90 days notice
following the expiration of the initial term of the contract.
There can be no assurance that relationships with any key
customers will continue at the same levels. A reduction in or
termination of the Company's services by a key customer could
have a material adverse effect on the Company's business and
results of operations. The Company reviews the financial
condition of its customers prior to granting credit, monitors
changes in financial condition on an on-going basis, and reviews
individual past due balances and collection concerns. However
the financial failure of a customer may still have a negative
effect on the Company's results of operations.
8
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, less-than-truckload carriers, railroads,
ocean carriers, and airlines. Many of those providers face the
same economic challenges as the Company. The softer freight
market in the second half of 2006 made it somewhat easier to find
qualified truckload capacity to meet customer freight needs for
our truck brokerage operation. The Company currently anticipates
that the recent excess truck capacity in the market will
gradually reverse, and capacity may tighten as we move toward the
fall peak season of 2007. 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,
the costs of insurance premiums, or the availability of insurance
coverage could reduce the Company's earnings.
The Company self-insures for a significant portion of
liability resulting from personal injury, property damage, and
cargo loss as well as workers' compensation. This is
supplemented by premium insurance with licensed and highly-rated
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.
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. 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 has 18 Fleet Truck Sales locations throughout the United
States. During 2006, the Company began selling its oldest van
trailers that had reached the end of their depreciable life.
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 $28.4 million in 2006, $11.0 million in 2005, and
$9.3 million in 2004.
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, Gary L. Werner, and
Gregory 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-
9
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 2006 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, 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 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 Segment
- ------------------------------- --------------- ---------------------------------------------- -------------------------
Omaha, Nebraska Owned Corporate headquarters, maintenance Truckload, VAS, Corporate
Omaha, Nebraska Owned Disaster recovery, warehouse Corporate
Phoenix, Arizona Owned Office, maintenance Truckload
Fontana, California Owned Office, maintenance Truckload
Denver, Colorado Owned Office, maintenance Truckload
Atlanta, Georgia Owned Office, maintenance Truckload, VAS
Indianapolis, Indiana Leased Office, maintenance Truckload
Springfield, Ohio Owned Office, maintenance Truckload
Allentown, Pennsylvania Leased Office, maintenance Truckload
Dallas, Texas Owned Office, maintenance Truckload, VAS
Laredo, Texas Owned Office, maintenance, transloading Truckload, VAS
Lakeland, Florida Leased Office Truckload
Portland, Oregon Leased Office, maintenance Truckload
El Paso, Texas Leased Office, maintenance Truckload
Ardmore, Oklahoma Leased Maintenance Truckload, VAS
Indianola, Mississippi Leased Maintenance Truckload, VAS
Scottsville, Kentucky Leased Maintenance Truckload, VAS
Fulton, Missouri Leased Maintenance Truckload, VAS
Tomah, Wisconsin Leased Maintenance Truckload
Newbern, Tennessee Leased Maintenance Truckload
Chicago, Illinois Leased Maintenance Truckload
Alachua, Florida Leased Maintenance Truckload, VAS
South Boston, Virginia Leased Maintenance Truckload, VAS
The Company leases approximately 60 small sales and
brokerage offices and trailer parking yards in various locations
throughout the country,country; leases office space in Mexico, Canada,
and China; owns a 96-room motel located near the Company's
headquarters, ownsa 71-room private lodging facility at the Company's
Dallas terminal, four low-income housing apartment complexes in
the Omaha area, and a warehouse facility which also houses a
cargo salvage store; and has 50% ownership in a 125,000
square-foot warehouse located near the Company's headquarters.
Currently, the Company has 1618 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.
610
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.
The Company hashad 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, 2001:2003:
Primary Coverage
Coverage Period Primary Coverage SIR/deductible
- ------------------------------ ---------------- ----------------------------------
August 1, 2001 - July 31, 2002 $3.0 million $500,000 (1)
August 1, 2002 - July 31, 2003 $3.0 million $500,000 (2)
August 1, 2003 - July 31, 2004 $3.0 million $500,000 (3)$0.5 million (1)
August 1, 2004 - July 31, 2005 $5.0 million $2.0 million (4)(2)
August 1, 2005 - July 31, 2006 $5.0 million $2.0 million (3)
August 1, 2006 - July 31, 2007 $5.0 million $2.0 million (3)
(1) Subject to an additional $1.5 million self-insured aggregate amount in
the $0.5 to $1.0 million layer, a $1.0 million aggregate in the $1.0 to
$2.0 million layer, no aggregate (i.e., fully insured) in the $2.0 to $3.0
million layer, and a $2.0 million aggregate in the $3.0 to $4.0 million
layer.
(2) Subject to an additional $1.5 million aggregate in the $0.5 to $1.0
million layer, a $1.0 million aggregate in the $1.0 to $2.0 million layer,
no aggregate (i.e., fully insured) in the $2.0 to $3.0 million layer, and
self-insured in the $3.0 to $5.0 million layer.
(3) Subject to an additional $1.5 million aggregate in the $0.5
to $1.0 million layer, a $1.0 million aggregate in the $1.0 to
$2.0 million layer, no aggregate (i.e., fully insured) in the
$2.0 to $3.0 million layer, a $6.0 million aggregate in the $3.0
to $5.0 million layer, and a $5.0 million aggregate in the $5.0
to $10.0 million layer.
(4)(2) 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.
(3) 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 $25.7 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 2004,2006, no matters were submitted
to a vote of security holders.
11
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 NationalThe NASDAQ Global
Select Market tier of The NasdaqNASDAQ Stock Market under the symbol
"WERN". The following table sets forth for the quarters indicated
the high and low bid informationtrade prices per share of the Company's common
stock quoted on the Nasdaq NationalThe NASDAQ Global Select Market and the Company's
dividends declared per common share from January 1, 2003,2005, through
December 31, 2004, after giving retroactive effect for the
September 2003 stock split discussed below.2006.
Dividends
Declared Per
High Low Common Share
------ -------------- -------- ------------
20042006
Quarter ended:
March 31 $20.00 $17.65 $.025$ 21.84 $ 18.16 $.040
June 30 21.11 17.76 .03521.01 18.32 .045
September 30 21.19 17.55 .03520.89 17.16 .045
December 31 23.24 18.68 .03520.76 17.30 .045
Dividends
Declared Per
High Low Common Share
------ -------------- -------- ------------
20032005
Quarter ended:
March 31 $17.50 $13.98 $.016$ 22.91 $ 19.25 $.035
June 30 18.98 15.26 .02419.91 17.68 .040
September 30 21.93 16.73 .02520.62 15.78 .040
December 31 21.00 16.98 .02520.96 16.34 .040
As of February 10, 2005,7, 2007, the Company's common stock was held
by 227207 stockholders of record and approximately 7,9006,900
stockholders through nominee or street name accounts with
brokers. The high and low bidtrade prices per share of the
Company's common stock in the Nasdaq NationalThe NASDAQ Global Select Market as of
February 10, 20057, 2007 were $20.89$19.27 and $20.06,$19.05, 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,first payment in
July 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"Management and Related Stockholder
Matters".
12
Performance Graph
Comparison of Five-Year Cumulative Total Return
The following graph is not deemed to be "soliciting
material" or to be "filed" with the SEC or subject to the
liabilities of Section 18 of the Securities Exchange Act of 1934,
and the report shall not be deemed to be incorporated by
reference into any prior or subsequent filing by the Company
under the Securities Act of 1933 or the Securities Exchange Act
of 1934 except to the extent the Company specifically requests
that such information be incorporated by reference or treated as
soliciting material.
[PERFORMANCE GRAPH APPEARS HERE]
12/31/01 12/31/02 12/31/03 12/31/04 12/31/05 12/31/06
-------- -------- -------- -------- -------- --------
Werner Enterprises, Inc. (WERN) $ 100.00 $ 118.62 $ 134.84 $ 157.58 $ 138.20 $ 123.71
Standard & Poor's 500 $ 100.00 $ 77.90 $ 100.24 $ 111.15 $ 116.61 $ 135.03
Nasdaq Trucking Group (SIC Code 42) $ 100.00 $ 119.14 $ 154.43 $ 213.28 $ 206.72 $ 200.59
Assuming the investment of $100.00 on December 31, 2001, and
reinvestment of all dividends, the graph above compares the
cumulative total stockholder return on the Company's Common Stock
for the last five fiscal years with the cumulative total return
of the Standard & Poor's 500 Market Index and an index of other
companies that are in the trucking industry (Nasdaq Trucking
Group - Standard Industrial Classification ("SIC") Code 42) over
the same period. The Company's stock price was $17.48 as of
December 29, 2006. This was used for purposes of calculating the
total return on the Company's Common Stock for the year ended
December 31, 2006.
Purchases of Equity Securities by the Issuer and Affiliated
Purchasers
On December 29, 1997,April 14, 2006, 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 itsCompany's Board of Directors
approved an increase to its authorization for common stock
repurchases of 6,000,000 shares. The previous authorization,
announced on November 23, 2003, authorized the Company to
repurchase 3,965,838 shares for a total of 8,132,504 shares.and was completed in fourth quarter
2006. As of December 31, 2004,2006, the Company had purchased 4,335,704791,200
shares pursuant to thisthe April 2006 authorization and had 3,796,8005,208,800
shares remaining available for repurchase. The Company may
purchase shares from time to time depending on market, economic,
and other factors. The authorization will continue untilunless
withdrawn by the Board of Directors.
The Company did not repurchase any
shares offollowing table summarizes the Company's common stock
repurchases during the fourth quarter of 2004.
92006 made pursuant to
this authorization. No shares were purchased during the quarter
other than through this program, and all purchases were made by
13
or on behalf of the Company and not by any "affiliated
purchaser", as defined by Rule 10b-18 of the Securities Exchange
Act of 1934.
Issuer Purchases of Equity Securities
Maximum Number
(or Approximate
Total Number of Dollar Value) of
Shares (or Units) Shares (or Units) that
Purchased as Part of May Yet Be
Total Number of Shares Average Price Paid Publicly Announced Purchased Under the
Period (or Units) Purchased per Share (or Unit) Plans or Programs Plans or Programs
-----------------------------------------------------------------------------------------
October 1-31, 2006 786,900 $18.12 786,900 5,921,900
November 1-30, 2006 713,100 $18.90 713,100 5,208,800
December 1-31, 2006 - - - 5,208,800
---------------------- --------------------
Total 1,500,000 $18.49 1,500,000 5,208,800
====================== ====================
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in
conjunction with the consolidated financial statements and notes
under Item 8 of this Form 10-K.
(In thousands, except per share amounts)
2006 2005 2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Operating revenues $2,080,555 $1,971,847 $1,678,043 $1,457,766 $1,341,456
$1,270,519 $1,214,628
Net income 98,643 98,534 87,310 73,727 61,627 47,744 48,023
Diluted earnings per share* 1.25 1.22 1.08 0.90 0.76 0.60 0.61
Cash dividends declared per share* .175 .155 .130 .090 .064 .060 .060
Return on average stockholders' equity (1) 11.3% 12.1% 11.9% 10.9% 10.0% 8.5% 9.3%
Return on average total assets (2) 7.1% 7.6% 7.5% 6.7% 6.1% 5.1% 5.3%
Operating ratio (consolidated) (3) 92.1% 91.7% 91.6% 91.9% 92.6% 93.8% 93.2%
Book value per share* (4) 11.55 10.86 9.76 8.90 8.12
7.42 6.84
Total assets 1,478,173 1,385,762 1,225,775 1,121,527 1,062,878
964,014 927,207
Total debt (current and long-term)100,000 60,000 - - 20,000
50,000 105,000
Stockholders' equity 870,351 862,451 773,169 709,111 647,643 590,049 536,084
*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 this
Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," are made pursuant to the
safe harbor provisions of the Private Securities Litigation
Reform Act of 1995.1995, as amended. 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,
14
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-looking statements contained
herein to reflect events or circumstances after the date of this
report or to reflect the occurrence of unanticipated events.
Overview:
The Company operates in the truckload sector of the trucking
industry, with a focus on transporting consumer nondurable
products that ship more consistently throughout the year. The
Company's success depends on its ability to efficiently manage
its resources in the delivery of truckload transportation and
logistics services to its customers. Resource requirements vary
with customer demand, which may be subject to seasonal or general
economic conditions. The Company's ability to adapt to changes
in customer transportation requirements is a key element in
efficiently deploying resources and in making capital investments
in tractors and 10
trailers. Although the Company's business volume
is not highly concentrated, the Company may also be affected by
the financial failure of its customers or a loss of a customer's
business from time-to-time.
Operating revenues consist of trucking revenues generated by
the 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,capacity provider, and for a few of its
dedicated accounts where the services of third-party carrierscapacity
providers are used to meet customer capacity requirements. Non-truckingNon-
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%86% of total operating revenues
in 2004,2006, and non-trucking and other operating revenues accounted
for 11%14%.
Trucking services typically generate revenuerevenues on a per-mile
basis. Other sources of trucking revenuerevenues include fuel
surcharges and accessorial revenuerevenues 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 revenuenon-
trucking revenues 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
qualifiedcompany drivers, owner-operators, 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.revenue equipment. Because the Company
is self-insured for cargo,a significant portion of personal injury,
and property damage, and cargo 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.
15
A common industry measure used to evaluate the profitability
of the Company and its trucking operating fleets is the operating
ratio (operating expenses expressed as a percentage of operating
revenues). The most significant variable expenses that impact
the trucking operation are driver salaries and benefits, payments
to owner-operators (included in rent and purchased transportation
expense), fuel, fuel taxes (included in taxes and licenses
expense), supplies and maintenance, and insurance and claims.
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 20042006 to 2003,2005, several industry-wide issues, including
uncertainty regarding possible changes to the hours of service regulations,volatile 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. In addition,
beginning in January 2007, a new set of more stringent engine
emissions standards mandated by the EPA became effective for all
newly manufactured trucks. 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 trucking
operations require substantial cash expenditures for the purchase
of tractors and trailers. TheIn 2005 and 2006, the Company
has maintained aaccelerated its normal three-year replacement cycle for company-ownedcompany-
owned tractors. These purchases arewere funded by net cash from
operations and financing available under the Company's existing
credit facilities, as the Company repaid its last
remaining debtmanagement deemed necessary. Capital
expenditures for tractors in December 2003.2007 are expected to be
substantially lower.
Non-trucking services provided by the Company, primarily
through its VAS division, include freight management
(single-source logistics), truck brokerage, and intermodal, freight transportation
management, and other services. During 2005, VAS is expanding its service
offerings to include multimodal, which isas
well as a blend of truck and rail
intermodal services.newly expanded international product line, as discussed
further on page 19. Unlike the Company's trucking operations,
the non-
truckingnon-trucking operations are less asset-intensive and are
instead dependent upon qualified employees, information systems, qualified employees,
and the services of other third-
partyqualified third-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 expenseexpenses expressed as a percentage of
revenues) and the operating margin.income percentage. The operating
marginsincome percentage for the non-trucking business are generallyis lower than
those of the trucking operations, but the returnsreturn on assets areis
substantially higher.
16
Results of Operations
The following table sets forth certain industry data
regarding the freight revenues and operations of the Company for
the periods indicated.
2006 2005 2004 2003 2002
2001 2000
---------- ---------- ---------- ---------- --------------------- ----------- ----------- ----------- -----------
Trucking revenues, net of
fuel surcharge (1) $1,378,705 $1,286,674 $1,215,266 $1,150,361 $1,097,214$ 1,502,827 $ 1,493,826 $ 1,378,705 $ 1,286,674 $ 1,215,266
Trucking fuel surcharge
revenues (1) 286,843 235,690 114,135 61,571 29,060 46,157 51,437
Non-trucking revenues,
including VAS (1) 277,181 230,863 175,490 100,916 89,450 66,739 60,047
Other operating revenues (1) 13,704 11,468 9,713 8,605 7,680
7,262 5,930
---------- ---------- ---------- ---------- --------------------- ----------- ----------- ----------- -----------
Operating revenues (1) $1,678,043 $1,457,766 $1,341,456 $1,270,519 $1,214,628
========== ========== ========== ========== ==========$ 2,080,555 $ 1,971,847 $ 1,678,043 $ 1,457,766 $ 1,341,456
=========== =========== =========== =========== ===========
Operating ratio
(consolidated) (2) 92.1% 91.7% 91.6% 91.9% 92.6% 93.8% 93.2%
Average revenues per tractor
per week (3) $ 3,300 $ 3,286 $ 3,136 $ 2,988 $ 2,932
$ 2,874 $ 2,889
Average annual miles per
tractor 117,072 120,912 121,644 121,716 123,480 123,660 125,568
Average annual trips per
tractor 175 187 185 173 166
166 168
Average totaltrip length in
miles per trip(total) 668 647 657 703 746
744 746
Average loadedtrip length in
miles per trip(loaded) 581 568 583 627 674 670 672
Total miles (loaded and
empty) (1) 1,025,129 1,057,062 1,028,458 1,008,024 984,305 952,003 916,971
Average revenues per total
mile (3) $ 1.466 $ 1.413 $ 1.341 $ 1.277 $ 1.235 $ 1.208 $ 1.197
Average revenues per loaded
mile (3) $ 1.686 $ 1.609 $ 1.511 $ 1.431 $ 1.366
$ 1.342 $ 1.328
Average percentage of empty
miles (4) 13.1% 12.2% 11.3% 10.8% 9.6% 10.0% 9.9%
Average tractors in service 8,757 8,742 8,455 8,282 7,971 7,698 7,303
Total tractors (at year end):
Company 8,180 7,920 7,675 7,430 7,180
6,640 6,300
Owner-operator 820 830 925 920 1,020
1,135 1,175
---------- ---------- ---------- ---------- --------------------- ----------- ----------- ----------- -----------
Total tractors 9,000 8,750 8,600 8,350 8,200
7,775 7,475
========== ========== ========== ========== ===================== =========== =========== =========== ===========
Total trailers (at year end) 25,200 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
12
(4) Miles without trailer cargo. Dedicated fleets have a higher
empty mile percentage, and empty miles are generally priced in
the dedicated business.
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 $11.2 million, $12.2 million, and $14.4 million for 2006,
2005, and 2004, respectively, as described on page 15.
2006 2005 2004
2003 2002
----------------- ----------------- ----------------------------------- ------------------ ------------------
Truckload Transportation Services (amounts in 000's) $ % $ % $ %
- --------------------------------- ----------------- ----------------- --------------------------------------------------------------------- ------------------ ------------------ ------------------
Revenues $1,506,937$ 1,801,090 100.0 $1,358,428$ 1,741,828 100.0 $1,254,728$ 1,506,937 100.0
Operating expenses 1,644,581 91.3 1,585,706 91.0 1,371,109 91.0
1,240,282 91.3 1,155,890 92.1
---------- ---------- --------------------- ----------- -----------
Operating income $ 156,509 8.7 $ 156,122 9.0 $ 135,828 9.0
$ 118,146 8.7 $ 98,838 7.9
========== ========== ===================== =========== ===========
17
Higher fuel prices and higher fuel surcharge collections
have the effect of increasing the Company's consolidated
operating ratio and the Truckload Transportation Services segment's operating ratio. The following
table calculates the Truckload Transportation Servicestruckload segment's operating ratio using total operating expenses, net ofwhen
fuel surcharges are reported on a gross basis as revenues versus
netting against fuel expenses. Eliminating fuel surcharge
revenues, aswhich are generally a percentage of revenues, excluding fuel surcharges. Eliminating this
sometimesmore volatile source of revenue,
provides a more consistent basis for comparing the results of
operations from period to period. The following table calculates
the truckload segment's operating ratio as if fuel surcharges are
excluded from revenue and instead reported as a reduction of
operating expenses.
2006 2005 2004
2003 2002
----------------- ----------------- ----------------------------------- ------------------ ------------------
Truckload Transportation Services (amounts in 000's) $ % $ % $ %
- --------------------------------- ----------------- ----------------- --------------------------------------------------------------------- ------------------ ------------------ ------------------
Revenues $1,506,937 $1,358,428 $1,254,728$ 1,801,090 $ 1,741,828 $ 1,506,937
Less: trucking fuel surcharge revenues 286,843 235,690 114,135
61,571 29,060
---------- ---------- --------------------- ----------- -----------
Revenues, net of fuel surchargesurcharges 1,514,247 100.0 1,506,138 100.0 1,392,802 100.0
1,296,857 100.0 1,225,668 100.0
---------- ---------- --------------------- ----------- -----------
Operating expenses 1,644,581 1,585,706 1,371,109 1,240,282 1,155,890
Less: trucking fuel surcharge revenues 286,843 235,690 114,135
61,571 29,060
---------- ---------- --------------------- ----------- -----------
Operating expenses, net of fuel surchargesurcharges 1,357,738 89.7 1,350,016 89.6 1,256,974 90.2
1,178,711 90.9 1,126,830 91.9
---------- ---------- --------------------- ----------- -----------
Operating income $ 156,509 10.3 $ 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,
rent and purchased transportation and other 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.
2006 2005 2004
2003 2002
----------------- ----------------- ----------------------------------- ------------------ ------------------
Value Added Services (amounts in 000's) $ % $ % $ %
- --------------------------------- ----------------- ----------------- -------------------------------------------------------- ------------------ ------------------ ------------------
Revenues $ 161,111265,968 100.0 $ 89,742218,620 100.0 $ 80,012161,111 100.0
Rent and purchased transportation expense 240,800 90.5 196,972 90.1 145,474 90.3
83,387 92.9 74,635 93.3
---------- ---------- --------------------- ----------- -----------
Gross margin 25,168 9.5 21,648 9.9 15,637 9.7 6,355 7.1 5,377 6.7
Other operating expenses 17,747 6.7 13,203 6.0 10,006 6.2
5,901 6.6 4,046 5.0
---------- ---------- --------------------- ----------- -----------
Operating income $ 7,421 2.8 $ 8,445 3.9 $ 5,631 3.5
$ 454 0.5 $ 1,331 1.7
========== ========== ===================== =========== ===========
20042006 Compared to 20032005
- ---------------------
Operating Revenues
Operating revenues increased 15.1%5.5% in 20042006 compared to 2003.2005.
Excluding fuel surcharge revenues, trucking revenues increased
7.2%0.6% due primarily to a 5.0%3.8% increase in revenueaverage revenues per
total mile, excluding fuel surcharges, offset by a 3.2% decrease
in average annual miles per tractor. The truckload freight
market was softer during much of 2006, particularly from mid-
August through December when the normal peak seasonal increase in
freight volume did not occur. Additionally, the significant
industry-wide accelerated purchase of new trucks in advance of
the new 2007 emissions standards contributed to excess truck
capacity that partially disrupted the supply and a 2.1%demand balance
in the second half of 2006. The combination of these factors
resulted in the decrease in annual miles per tractor and also
negatively affected revenues per total mile. While revenues per
total mile increased 3.8% year-over-year, the percentage increase
over the comparable 2005 periods was lower in the last two
quarters of 2006 than in the first two quarters of 2006. Most of
the revenues per total mile increase is due to base rate
increases negotiated with customers, offset by an increase in the
average numberempty mile percentage.
A substantial portion of tractors in
service. Revenue per total mile, excluding fuel surcharges, increased due
to customer rate increases, an improvement in freight selection, and a 7.0%
decrease in the average loaded trip length due to growth in the Company's dedicated fleet. Part of the growth in the dedicated fleet was offset by a
decrease in the Company's medium-to-long-haul van fleet. Dedicated fleet
business tends to have lower miles per trip, a higher empty mile
percentage, a higher rate per loaded mile, and lower miles per truck. The
growth in dedicated business had a corresponding effect on these same
operating statistics, as reported above, for the entire Company. During
13
2004, the truckload freight environment continued to strengthen due to
ongoing truck capacity constraints and a steadily improving economy.
Beginning in August, the Company's sales and marketing team metbase is under
contract with customers to negotiateand provides for annual ratepricing
increases, to recoup the significant cost
increases in fuel, driver pay, equipment, and insurance and to improve
margins. Muchwith much of the Company's non-dedicated contractual
business renewedrenewing in the latter part of third quarter and fourth
quarter. As aThe challenging freight market in the second half of
2006 made it much more difficult for the Company to obtain base
rate increases at levels comparable to the 2005 and 2004 renewal
periods. There continue to be several inflationary cost
pressures that are impacting truckload carriers. They include:
driver pay and other driver-related costs, volatile diesel fuel
18
prices, conversion from low sulfur diesel fuel to ULSD, and new
engine emission requirements for newly manufactured trucks
beginning in January 2007 that are increasing the truck purchase
costs and lowering the mpg.
The average percentage of empty miles increased to 13.1% in
2006 from 12.2% in 2005. The increase in the empty mile
percentage is partially the result of these efforts, revenue per total mile, neta higher percentage of
fuel surcharges, rose seven
centsdedicated 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
or 5.3%without cargo in the trailer as an empty mile (i.e., sequentially from second quarter 2004deadhead
mile). Since dedicated fleets generally have a higher percentage
of miles without cargo in the trailer and since the Company has
been growing its dedicated fleet business, this contributed to fourth
quarter 2004.an
increase in the Company's reported average empty mile percentage.
Excluding the dedicated fleet, the average empty mile percentage
would be 10.8% in 2006 and 10.0% in 2005.
Fuel surcharge revenues, which represent collections from
customers for the higher cost of fuel, increased to $114.1$286.8
million in 20042006 from $61.6$235.7 million in 2003 due2005 in response to higher
average fuel prices in 2004.2006. To lessen the effect of fluctuating
fuel prices on the Company's margins, the Company collects fuel
surcharge revenues from its customers. TheseThe Company's fuel
surcharge programs which automatically adjust depending onare designed to recoup the higher cost of fuel
from customers when fuel prices rise and provide customers with
the benefit of lower costs when fuel prices decline. The
truckload industry's fuel surcharge standard is a one-cent per
mile increase in rate for every five-cent per gallon increase in
the DOE weekly retail on-
highwayon-highway diesel prices continued in effect throughout 2004. The Company'sthat are used for
most fuel surcharge program hasprograms. These programs have historically
enabled the Company to recover a
significant portionapproximately 70% to 90% of the
fuel price increases. Typical programs specify
a base price per gallon when surcharges can beginThe remaining 10% 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 costs30% is generally not
recoverable, 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 whenthe volatility in 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
fuelas prices change more frequently. Because collectionsrapidly in short periods 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.time.
VAS revenues increased 21.7% to $161.1$266.0 million in 20042006 from
$89.7$218.6 million in 2003, or 79.5%,2005, and gross margin increased 146.1%16.3% for the
same period. VAS revenues consist primarily of truck brokerage,
intermodal, freight management (single-source logistics), as well
as the newly expanded international product line described below.
Most of thisthe revenue growth came from the Company's brokerage groupand
intermodal divisions within VAS. Brokerage continued to grow
rapidly, achieving nearly $100 million of revenues in 2006.
Freight Management recently attracted several new single-source
customers that are being added during first quarter 2007. The
Company continues to focus on growing the volume of business in
this segment, which provides customers with additional sources of
capacity.
In July 2006, the Company formed WGL, a separate company
that operates within the VAS revenues consist primarily of freight brokerage, intermodal,
freight transportation management,segment, and other services. During 2004, the
expansionthrough its
subsidiaries established its WOFE headquartered in Shanghai,
China. Werner is one of the Company's VASfirst U.S. companies to receive a
combined approval to conduct comprehensive forwarding and
logistics business, nationwide import/export, and wholesale and
commission agency business. WGL and its subsidiaries obtained
business licenses to operate as an Ocean Transport Intermediary
(NVOCC and Ocean Freight Forwarder), U.S. Customs Broker, and
Class A Freight Forwarder in China. In addition, in first
quarter 2007 WGL entered into the air freight forwarding
business. Analysis and optimization work prepared for key
partner customers has resulted in multiple door-to-door business
awards being managed by the Company, primarily in the
Trans-Pacific trade lanes. Current service offerings within
China include site selection analysis, purchase order and vendor
management, origin consolidation, warehousing, freight forwarding
and customs brokerage. These services assisted customers by providing
needed capacity while driving cost outare being provided through
a combination of their freight network.strategic alliances with best in class providers
and company-owned assets. The Company expects WGL to continue to capitalize on the sophisticated service,
management, and technology advantages of its logistics solutionbe a more
meaningful revenue contributor 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.2007.
19
Operating Expenses
The Company's operating ratio (operating expenses expressed
as a percentage of operating revenues) was 91.6%92.1% in 20042006 versus
91.9%91.7% in 2003.2005. As explained on page 18, the significant increase
in fuel expense and recording the related fuel surcharge revenues
on a gross basis had the effect of increasing the operating
ratio. 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 20042006 compared to 2003 affected2005 also increased the Company's
overall operating ratio. As explained on page 13, the significant increase
in fuel expense and related fuel surcharge revenues also affected the
operating ratio. The tables on page 13pages 17 and 18 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 20032006 2005 per Mile
%
---------------------------------------------------------------
Salaries, wages and benefits $.519 $.502 $.017 3.4$.564 $.532 $.032
Fuel .211 .158 .053 33.5.377 .321 .056
Supplies and maintenance .130 .117 .013 11.1.145 .143 .002
Taxes and licenses .106 .103 .003 2.9.114 .112 .002
Insurance and claims .075 .072 .003 4.2.090 .083 .007
Depreciation .138 .132 .006 4.5.158 .149 .009
Rent and purchased transportation .140 .131 .009 6.9.150 .149 .001
Communications and utilities .018 .016 .002 12.5.019 .019 .000
Other (.003) (.001) (.002) (200.0)(.013) (.008) (.005)
Owner-operator costs are included in rent and purchased
transportation expense. Owner-operator miles as a percentage of
total miles were 12.7%11.8% in 20042006 compared to 12.6%12.5% in 2003. Owner-operators2005. 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 changeThis decrease in owner-operator miles as a percentage of
total miles was only minimal, there was essentially no shift inshifted costs todetermined on a total mile basis from
the rent and purchased transportation category fromto other expense
categories. OverThe Company estimates that rent and purchased
transportation expense for the past year, attracting and retaining owner-operator drivers continued to
be difficulttruckload segment was lower by
approximately 1.0 cent per total mile due to the challenging operating conditions.this decrease, and
other expense categories had offsetting increases on a total-mile
basis, as follows: salaries, wages and benefits (0.4 cents), fuel
(0.3 cents), supplies and maintenance (0.1 cent), taxes and
licenses (0.1 cent), and depreciation (0.1 cent).
Salaries, wages and benefits for non-drivers increased in
20042006 compared to 20032005 due to a larger number of employees
required to support the growth in the VAS segment. The increase
in salaries, wages and benefits per mile of 1.73.2 cents for the
Truckload
Transportation Servicestruckload segment is primarily the result ofdue to higher driver pay per mile. On August 1, 2004,mile
resulting from an increase in the percentage of company truck
miles versus owner-operator miles (see above), an increase in the
percentage of dedicated fleet trucks, additional amounts paid to
drivers to help offset the impact of lower miles in a softer
freight market, and higher group health insurance costs, offset
by a decrease in workers' compensation expense. Non-driver
salaries, wages and benefits increased due to an increase in the
number of equipment maintenance personnel and, as described
further below, $2.3 million of stock compensation expense related
to the Company's previously announced two
cent per mile pay raise becameadoption of Statement of Financial Accounting
Standards ("SFAS") No. 123R on January 1, 2006. See Note 5 to
the Notes to Consolidated Financial Statements for more
explanation of SFAS No. 123R.
Effective January 1, 2006, the Company adopted SFAS No. 123
(revised 2004), Share-Based Payment ("No. 123R"), using a
modified version of the prospective transition method. Under
this transition method, compensation cost is recognized on or
after the required effective date for company solo drivers in its
medium-to-long-haul van division, representing approximately 25% of total
drivers. The Company recovered a substantialthe portion of this pay raise
through its customer rate increase negotiations. As a resultoutstanding
awards for which the requisite service has not yet been rendered,
based on the grant-date fair value of those awards calculated
under SFAS No. 123 (as originally issued) for either recognition
20
or pro forma disclosures. Stock-based employee compensation
expense for the year ended December 31, 2006 was $2.3 million, or
1.7 cents per share net of taxes. There was no cumulative effect
of initially adopting SFAS No. 123R.
The driver recruiting and retention market remains
challenging. After two quarters of sequential decreases in
average tractors in service during the first half of 2006, the
Company's ongoing focus to lower driver turnover yielded positive
results in the second half of the new
hours of service regulations effective at the beginning of 2004, the
Company increased driver payyear. The improvements in the
non-dedicated fleets for multiple stop
shipments. Additional revenue from increased rates per stop offset mostlatter part of the increased driver pay. The increase in dedicated business as a
percentage of total trucking business also contributed toyear offset the increase in
driver pay per mile as dedicated drivers are usually compensated at a
higher rate per mile due todecreases experienced during
the lower average miles per truck. The
Company's dedicated fleets also typically have higher amounts of
loading/unloading pay and minimum pay.
In recent months, the market for recruiting experienced drivers has
tightened. The Company experienced initial improvement in driver turnover
after announcing the two-cent per mile pay raise that became effective in
August 2004; however, that improvement has been difficult to sustain in
recent months. Alternative jobs with an improving economy, weak population
demographics, and competitor pay raises are expected to keep the driver
market challenging. The Company is expanding its student-driver training
program to attract more drivers to the Company and the industry. The
Company is also offering an increasing percentage of driving jobs with more
frequent home time in its dedicated, regional, and network-optimization
fleets.
The Company instituted an optional per diem reimbursement program for
eligible company drivers (approximatelyfirst half of total non-student company
drivers) beginningthe year, resulting 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 higheressentially no change in
2004average tractors in 2006 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.2005. 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
were necessary to attract and
retain drivers, the Company's results of operations would be
negatively impacted to the extent that corresponding freight rate
increases were not obtained.
Fuel increased 5.35.6 cents per mile for the Truckload Transportation
Servicestruckload segment
due primarily to higher average diesel fuel prices. Average fuel
prices in 20042006 were 3028 cents a gallon, or 32%16%, higher than in
2003. Fuel expense, after considering the amounts collected from customers
through2005. Higher net fuel surcharge programs, net of reimbursement to owner-operators,costs had an eight-centa four-cent negative impact on
2004 earnings per share in 2006 compared to 20032005. The Company
includes all of the following items in the calculation of the
impact of fuel on earnings for both periods: (1) average fuel
price per share. In additiongallon, (2) fuel reimbursements paid to owner-operator
drivers, (3) lower mpg due to the year-over-year increase in fuel prices,
company data continues to indicate that the
fuel mile per gallon ("mpg")
degradation for truckspercentage of the company-owned truck fleet with post-October
2002 engines (47%and the mpg impact of ultra-low sulfur diesel fuel,
and (4) offsetting fuel surcharge revenues from customers.
During third quarter 2006, truckload carriers transitioned a
gradually increasing portion of their diesel fuel consumption
from low sulfur diesel fuel to ULSD fuel, as fuel refiners were
required to meet the company-
owned truck fleet asEPA-mandated 80% ULSD threshold by the
transition date of December 31, 2004) isOctober 15, 2006. Preliminary estimates were
that ULSD would result in a reduction of approximately
5%. As the Company continues to replace older1-3% degradation in mpg for all
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.energy content (btu) of ULSD. Based on
the Company's fuel mpg experience to date, these preliminary mpg
degradation estimates appear to be accurate.
Shortages of fuel, increases in fuel prices, or rationing of
petroleum products can have a materially adverse effect on the
operations and profitability of the Company. The Company is
unable to predict whether fuel price levels will continue to
increase or decrease in the future or the extent to which fuel
surcharges will be collected from customers. As of December 31,
2004,2006, the Company had no derivative financial instruments to
reduce its exposure to fuel price fluctuations.
Diesel fuel prices for the first six weeks of 2005 averaged 33 cents a
gallon, or 32% higher than average fuel prices for first quarter 2004.
Based on current fuel price trends for the first six weeks of 2005 and
assuming fuel prices remain at current levels for the remainder of first
quarter 2005, the Company expects that fuel will have a minimal impact on
first quarter 2005 earnings compared to first quarter 2004 earnings.
Supplies and maintenance for the Truckload Transportation Services
segment increased 1.3 cents on a per-mile basis in 2004 due primarily to
increases in the cost of over-the-road repairs and an increase in
maintenance on equipment sales related to a larger number of tractors sold
through the Company's Fleet Truck Sales subsidiary in 2004 versus 2003.
Over-the-road ("OTR") repairs increased as a result of the increase in
dedicated-fleet trucks, which typically do not have as much maintenance
performed at company terminals. The Company includes the higher cost of
OTR maintenance in its dedicated pricing models. Higher driver recruiting
costs (including driver advertising) and driver travel and lodging also
contributed to a small portion of the increase.
Insurance and claims for the Truckload Transportation Servicestruckload segment increased 0.30.7
cents on a per-mile basis, primarily related to higher negative
development on existing liability claims. Cargoinsurance claims expense was essentially flat on a per-mile basis
compared to 2003.and an
increase in larger claims. 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).2006. See Item 3 "Legal
Proceedings" for information on the Company's coverage levels for
personal injury and property damage since August 1, 2001.2003. The
increased Company retention from
$500,000 to $2.0 million is due to changes in the trucking insurance market
and is similar to increased claim retention levels experienced by other
truckload carriers. LiabilityCompany's liability insurance premiums for the policy year
beginning August 1, 2004 decreased approximately $0.4 million due to2006 were slightly higher than the higher retention level.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 Transportation Servicestruckload segment increased 0.60.9
cents on a per-mile basis in 20042006 due primarily to higher costs
of new tractors with the post-October 2002 engines.engines, the impact of
fewer average miles per truck, and a higher percentage of
company-owned trucks versus owner-operators. As of December 31,
2006, nearly 100% of the Company
continues to replace older trucks in itscompany-owned truck fleet withconsisted of
trucks with the post-
Octoberpost-October 2002 engines, depreciation expense is expectedcompared to increase.89% at
December 31, 2005.
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. As shown in the VAS statistics table under
the "Results of Operations" heading on page 18, rent and
purchased transportation expense for the VAS segment increased in
response to higher VAS revenues. These expenses generally vary
depending on changes in the volume of services generated by the
21
segment. As a percentage of VAS revenues, VAS rent and purchased
transportation expense increased to 90.5% in 2006 compared to
90.1% in 2005. Intermodal's gross profits and operating income
were lower due to a softer freight market and the impact of
higher fixed costs and repositioning costs. Several significant
changes to the intermodal operating strategy have been
implemented and are expected to help Intermodal achieve improved
results in 2007 compared to 2006.
Rent and purchased transportation for the Truckload Transportation Servicestruckload segment
increased 0.90.1 cents per total mile as higherin 2006. Higher fuel prices
necessitated higher 16
reimbursements to owner-operators for fuel.fuel
($32.7 million in 2006 compared to $26.6 million in 2005), which
resulted in an increase of 0.7 cents per total mile. The Company
also increased the van and regional over-the-road owner-
operators' settlement rate by two cents per mile effective May 1,
2006. These increases were offset by the decrease in the number
of owner-operator trucks and the corresponding decrease in owner-
operator miles. The Company's customer fuel surcharge programs
do not differentiate between miles generated by Company-
ownedCompany-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 pricescosts on earnings. The Company has experiencedcontinues to
experience difficulty recruiting and retaining owner-operators for over two yearsowner-operator
drivers because of challenging operating conditions. However,conditions including
inflationary cost increases that are the responsibility of the
owner-operators. The Company has historically been able to add
company-
ownedcompany-owned tractors and recruit additional company drivers to
offset any decreases in owner-operators. If a shortage of owner-operatorsowner-
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 0.2decreased by 0.1 cents ofper mile, partially offsetting the total per-mileoverall
increase for the Truckload Transportation Servicestruckload segment.
As shown in the VAS statistics table under the "Results of Operations"
heading on page 13, rent and purchased transportation expense for the VAS
segment increased in response to higher VAS revenues. These expenses
generally vary depending on changes in the volume of services generated by
the segment. As a percentage of VAS revenues, VAS rent and purchased
transportation expense decreased to 90.3% in 2004 compared to 92.9% in
2003, resulting in a higher gross margin in 2004. An improving truckload
freight environment in 2004 resulted in improved customer rates for the VAS
segment. Additionally, to support the ongoing growth within VAS, the group
has increased its number of approved third-party providers. This larger
carrier base allows VAS to more competitively match customer freight with
available capacity, resulting in improved margins.
Other operating expenses for the Truckload Transportation Servicestruckload segment decreased
0.20.5 cents per mile in 2004.2006. Gains on sales of revenue
equipment,assets, primarily
trucks and trailers, are reflected as a reduction of other
operating expenses and were $9.7are reported net of sales-related
expenses, including costs to prepare the equipment for sale.
Gains on sales of assets increased to $28.4 million in 2004 compared to $7.62006 from
$11.0 million in 2003. In 2004,2005. During 2006 the Company sold about three-fourthsbegan selling its
oldest van trailers that had reached the end 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. Gainstheir depreciable
life, which increased due to a largergains in 2006. The number of trucks sold
in 2004, with a lower2006 and the average gain per truck. In July 2004,truck sold (before costs to
prepare the equipment for sale) both decreased slightly in
comparison to 2005. The Company spent less on repairs per truck
sold in 2006 as compared to 2005, which also began recordingcontributed to the
improvement in 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.sale. The Company's wholly-owned used
truck retail network, Fleet Truck Sales, is one of the largest
class 8 truck sales entities in the United States, with 1618
locations, and has been in operation since 1992. Fleet Truck
Sales continues to be a resource for the Company to remarket its
used trucks. The Company expects gains on sales will be lower in
2007 compared to 2006 due to fewer trucks available for sale by
the Company. However, the Company expects to continue to realize
gains on the sale of its fully depreciated trailers in 2007.
Other operating expenses also include bad debt expense, which
included an additional $7.2 million of bad debt expense recorded
in first quarter 2006 related to the bankruptcy of one of the
Company's customers, APX Logistics, Inc., and professional
service fees.
The Company incurred approximately $0.7recorded $1.2 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 it2006 versus $0.7 million of interest expense in 2005. The
Company had $100.0 million of debt outstanding at December 31,
2006, which was incurred in the second half of 2006 for the
purchase of new trucks, and had $60.0 million of debt outstanding
at December 31, 2005. The Company repaid its last remainingthe $60.0 million of
debt in December 2003.first quarter 2006. Interest income for the Company
increased to $2.6$4.4 million in 20042006 from $1.7$3.4 million in 20032005 due
to higher averageimproved interest rates, partially offset by a declining cash
balances in 2004 compared to 2003.balance throughout 2006.
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,was
41.1% for 2006 versus 41.0% for 2005, 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-deductible expenses for tax
purposes related to the implementation of a per diem pay program for
student drivers in fourth quarter 2003 and a per diem pay program for
eligible company drivers in April 2004. The Company expects its effective
income tax rate in22
2005 to increase to 40.5% or higher.
17
2003 Compared to 20022004
- ---------------------
Operating Revenues
Operating revenues increased 8.7% over 2002,17.5% in 2005 compared to 2004.
Excluding fuel surcharge revenues, trucking revenues increased
8.3% due primarily to a 3.9%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. Additionally,
revenueservice, offset by a 0.6% decrease
in average annual miles per tractor. Average revenues per total
mile, excluding fuel surcharges, increased 3.4% primarily
due to customer rate
increases, and, betterto a lesser extent, a 2.6% decrease in the
average loaded trip length. The truckload freight mix. A better freight
market and tighteningenvironment
was solid during 2005 due to ongoing truck capacity contributedconstraints.
In comparison to 2004, demand in the improvement,
comparedmonths of March to August
2005 was not as strong as the weakerstrong freight market of 2002. Fuel surcharges, which
represent collections from customers2004, but
freight demand for the remaining months of the year was
comparable to the demand in the same periods of 2004.
The average percentage of empty miles increased to 12.2% in
2005 from 11.3% in 2004. The increase in the empty mile
percentage was partially the result of a higher costpercentage of
fuel,dedicated trucks in the fleet and a higher percentage of regional
shipments with a shorter length of haul. Over the past few
years, Werner has grown its dedicated fleets, arrangements in
which the Company provides trucks and/or trailers for the
exclusive use of a specific customer. Excluding the dedicated
fleet, the average empty mile percentage would have been
substantially lower for 2005 and 2004.
Fuel surcharge revenues increased from $29.1to $235.7 million in 2002 to $61.62005
from $114.1 million in 2003 due2004 in response to higher average fuel
prices during 2003 (see fuel explanation below). Excluding fuel
surcharge revenues, trucking revenues increased 5.9% over 2002.
The revenue increases described above were offset byin 2005, which enabled the Company to recover 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%significant portion of the fleet
at December 2002 to 46% of the fleet at December 2003.fuel price increases.
VAS revenues increased $9.735.7% to $218.6 million to $89.7in 2005 from
$161.1 million compared to 2002.
Duringin 2004, and gross margin increased 38.4% for the
latter partsame period. Most of 2003 and continuing into 2004, the Company
expanded itsrevenue growth came from the Company's
brokerage and intermodal service offerings by adding senior
management and developing new computer systems. These less asset-intensive
businesses generally have a lower operating margin and a higher return on
assets than the Company's truckload business.
Freight demand began to improve in March of 2003 as compared to the
same period in 2002, and continued to be consistently better for most of
the last ten months of 2003 compared to the corresponding period in 2002.
The Company believes much of the improvement was achieved by execution of
the Company's plan of limited fleet growth, maintenance of a diversified
freight base that emphasizes consumer nondurable goods, and the shift from
non-dedicated to dedicated trucks discussed below. The Company's empty
mile percentage increased from 9.6% to 10.8%, which is due in part to a
shorter length of haul and a change in the mix of trucks to the dedicated
fleet from the medium-to-long haul van fleet.
Werner's Dedicated Services fleet provides truckload services required
for a specific company, their plants, or their distribution centers.
Werner grew its dedicated fleet from about one-quarter of its total truck
fleet at the end of 2002 to about one-third of its total truck fleet at the
end of 2003, with much of this growth occurring in the fourth quarter of
2003. Since the Company's overall truck fleet grew 150 trucks, the 800-
truck growth in the dedicated fleet was offset by a reduction in the
Company's medium-to-long-haul van fleet. Dedicated fleet business tends to
have lower miles per trip, a higher empty mile percentage, a higher rate
per loaded mile, and lower miles per truck per month. The growth in
dedicated business has had a corresponding effect on these same operating
statistics for the entire Company.divisions within VAS.
Operating Expenses
The Company's operating ratio (operating expenses expressed as a
percentagewas 91.7% in 2005 versus 91.6%
in 2004. As explained on page 18, the significant increase in
fuel expense and related fuel surcharge revenues had the effect
of increasing the operating revenues) improved from 92.6% in 2002 to 91.9% in
2003. Conversely,ratio. Because the Company's VAS
business operates with a lower operating margin improved 9% from 7.4%than the trucking
business, the growth in 2002 to 8.1%VAS business 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 20032005 compared to 15.4% in
2002. This decrease in owner-operator miles as a percentage of total miles
shifted costs from2004
also increased the rentCompany's overall operating ratio. The tables
on pages 17 and purchased transportation category to other
expense categories. The Company estimates that rent18 show the operating ratios and purchased
transportation expenseoperating
margins for the Company's two reportable segments, Truckload
Transportation segment was lower
by approximately 2.6 cents per total mile due to this decrease,Services 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.
18Value Added Services.
23
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.
Increase
Increase
(Decrease)
(Decrease)
2003 20022005 2004 per Mile
%
---------------------------------------------------------------
Salaries, wages and benefits $.502 $.488 $.014 2.9$.532 $.519 $.013
Fuel .158 .127 .031 24.4.321 .211 .110
Supplies and maintenance .117 .115 .002 1.7.143 .130 .013
Taxes and licenses .103 .100 .003 3.0.112 .106 .006
Insurance and claims .072 .052 .020 38.5.083 .075 .008
Depreciation .132 .128 .004 3.1.149 .138 .011
Rent and purchased transportation .131 .146 (.015) (10.3).149 .140 .009
Communications and utilities .016 .015.019 .018 .001
6.7
Other (.001) .003 (.004) (133.3)(.008) (.003) (.005)
Owner-operator miles as a percentage of total miles were
12.5% in 2005 compared to 12.7% in 2004. Because the change in
owner-operator miles as a percentage of total miles was only
minimal, there was essentially no shift in costs from the rent
and purchased transportation category to other expense
categories. During 2005, attracting and retaining owner-operator
drivers was very difficult due to high fuel prices and other
factors.
Salaries, wages and benefits (including driver and non-driver costs)
for the Truckload Transportation Services segmentnon-drivers increased 1.4 cents per
mile due primarilyin
2005 compared to 2004 to support the growth in the percentageVAS segment.
The increase in salaries, wages and benefits per mile of company-owned trucks to
total trucks from 87.6% at1.3
cents for the endtruckload segment is primarily the result of
2002 to 89.0% at the end of 2003increased student driver pay, higher driver pay per mile, and an
increase in the number of salariedmaintenance employees. Because of the
challenging driver recruiting and retention market, discussed
below, the Company trained more student drivers as an alternative
source of drivers. On August 1, 2004, the Company's previously
announced two cent per mile pay raise became effective for
company solo drivers in its medium-to-long-haul van division,
representing approximately 25% of total company drivers. The
Company recovered this pay raise through its customer rate
increase negotiations, which occurred in third and fourth quarter
2004.
The driver recruiting and retention market for attracting
and retaining companyremained
extremely challenging during 2005. The supply of truck drivers
continued to be challengingconstrained due to alternative jobs to truck
driving and became even
more difficult ininadequate demographic growth for the fourth quarter of 2003. Whileindustry's
targeted driver base over the market for
recruiting qualified drivers tightened, thenext several years. The Company
continued to have
successfocus on driver quality of life issues such as
developing more driving jobs with more frequent home time,
providing drivers with newer trucks, and maximizing mileage
productivity within the federal hours of service regulations.
The Company also placed more emphasis on training drivers.
Improved driver recruiting has offset higher driver turnover.
The Company instituted an optional per diem reimbursement
program for eligible company drivers from driver training schools. Salaries, wages
and benefits includes expenses for workers' compensation benefits. The
related accrued claims for workers compensation are reflectedbeginning in Insurance
and Claims AccrualsApril 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 accompanying Consolidated Balance Sheets.
Effective July 2003,per diem program, driver pay per mile was slightly lower
before considering the Company changed its monthlyfactors above that increased driver pay
per mile, and the Company's effective income tax rate was higher
in 2005 compared to 2004. The program was designed to be cost-
neutral, because the combined driver pay rate per mile and per
diem reimbursement under the per diem program is about one cent
per mile lower than mileage bonus pay program for Van solo company drivers,without per diem reimbursement,
which represented approximately one-
thirdoffsets the Company's increased income taxes caused by the
nondeductible portion of the Company's total drivers.per diem. The goal was to increase driver
miles per truck by rewarding higher production from Van solo drivers with
higher pay. The monthly mileage bonusdiem program
increases a company driver's net pay increased by an average of
$93,000 per month during the last six months of 2003.mile, after taxes.
Fuel increased 3.111.0 cents per total mile for the Truckload
Transportation Servicestruckload segment
due primarily to higher average diesel fuel prices. The average
price per gallon of dieselAverage fuel
excluding fuel taxes, was approximately
$.17 perprices in 2005 were 56 cents a gallon, or 23%47%, higher than in
2003 versus 2002. The Company's
customer2004. Higher 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. Aftercosts, after considering the amounts collected
from customers through fuel surcharge programs netand the cost
impact of Companyowner-operator fuel reimbursements and lower fuel mpg
due to owner-operators, 2003truck engine emissions changes, had a ten-cent negative
impact on 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%2005 compared to 2004. As of
the Company's fleet consisted of trucks with the less fuel-efficient post-
October 2002 engines as of24
December 31, 2003. As of December 31, 2003,2005, the Company had no derivative financial
instruments to reduce its exposure to fuel price fluctuations.
Supplies and maintenance for the Truckload Transportation Servicestruckload segment increased
only 0.21.3 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 improved
managementthe effect of maintenance expenses, offset slightly by the growth in the
percentage offuel mpg
degradation for company-owned trucks to total 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 2.00.8
cents per total mile dueon a per-mile basis, primarily related to an
increase in the frequency and severity ofhigher negative
development on existing liability insurance claims. Cargo claims
increased retention
levels for claims,expense was essentially flat on a higher cost per claim, and higher premiums for
catastrophicper-mile basis compared to
2004. The Company renewed its 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 effectiveinsurance policies on
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.2005. See Item 3 "Legal Proceedings" for information on
the Company's coverage levels for personal injury and property
damage since August 1, 2001.2003. Liability insurance premiums for
the policy year beginning August 1, 2005 were approximately the
same as the previous policy year.
Depreciation expense for the truckload segment increased 1.1
cents on a per-mile basis in 2005 due primarily to higher costs
of new tractors with the post-October 2002 engines. As of
December 31, 2005, approximately 89% of the company-owned truck
fleet consisted of trucks with the post-October 2002 engines,
compared to 47% at December 31, 2004.
Rent and purchased transportation for the Truckload Transportation
Services segment decreased 1.5 cents per total mile in 2003 due to a
decrease inconsists mainly of
payments to owner-operators. The decreasethird-party capacity providers in the VAS and other
non-trucking operations and 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, astrucking operations. As shown in the VAS statistics table under
the "Results of Operations" heading on page 13.18, rent and
purchased transportation expense for the VAS segment increased in
response to higher VAS revenues. As a percentage of VAS
revenues, VAS rent and purchased transportation expense decreased
to 90.1% in 2005 compared to 90.3% in 2004, resulting in a higher
gross margin in 2005. As the truck capacity market tightened
during 2005, it became more difficult to find qualified truckload
capacity to meet VAS customer freight needs, especially in the
latter part of the year. However, the Company's marketing
efforts continued to successfully expand its VAS qualified
carrier base in a constrained capacity market, ending the year
with 3,600 qualified broker carriers. During fourth quarter
2005, VAS expanded its small, but growing, intermodal presence by
agreeing to manage a fleet of Union Pacific-owned containers for
intermodal freight shipments. The Company pays a daily fee per
container to Union Pacific ("UP") for any days that the
containers are not in transit in the UP network. As of December
2005, VAS Intermodal managed 400 UP containers.
Rent and purchased transportation for the truckload segment
increased 0.9 cents per total mile in 2005. Higher fuel prices
necessitated higher reimbursements to owner-operators for fuel,
which resulted in an increase of 1.1 cents per total mile. The
Company has experienced difficulty recruiting and retaining
owner-operators for over three years because of challenging
operating conditions. This resulted in a reduction in the number
of owner-operator tractors to 830 as of December 31, 2005 from
925 as of December 31, 2004. Payments to third-party capacity
providers used for portions of shipments delivered to or from
Mexico and by a few dedicated fleets in the truckload segment
decreased by 0.2 cents per mile, partially offsetting the overall
increase for the truckload segment.
Other operating expenses for the truckload segment decreased
0.40.5 cents per mile duein 2005. Gains on sales of assets, primarily
trucks, increased to an increase$11.0 million 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 2003,2005 from $9.3 million in
2004, due to a
higher averageincreased unit sales, price, and gain, per truck, the Company realized gainspartially offset by an
increased ratio of $7.6 million. Fortraded 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.to sold trucks. Other operating
expenses also include bad debt expense and professional service
fees. Interest expense for the Company decreased from $2.9 millionThe remaining decrease in 2002
to $1.1 millionother operating expenses in 20032005
was due primarily to a reduction in computer consulting fees as
25
consultants were hired by the Company's borrowings.
AverageCompany, 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 in 2002 was $35.0 million. In 2003, outstanding
debt totaled $20.0 million throughout most of the year, until2004. Interest income for
the Company repaid its only remaining debtincreased to $3.4 million in December 2003.2005 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 was 37.5%increased to 41.0%
in 2003 and 2002,
respectively,2005 from 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 2005 because of higher
non-deductible expenses for tax purposes related to the
implementation of a per diem pay program for student drivers in
fourth quarter 2003 and a per diem pay program for eligible
company drivers in April 2004.
Liquidity and Capital Resources
NetDuring the year ended December 31, 2006, the Company
generated cash provided by operating activities was $226.6flow from operations of $284.1 million, a 64.7%
increase ($111.6 million), in cash flow compared to the year
ended December 31, 2005. The increase in cash flow from
operations is due primarily to lower income tax payments during
2006, higher payables for revenue equipment of $17.1 million, and
improved collections of accounts receivable. In addition, the
Company wrote off a $7.2 million receivable related to the APX
Logistics, Inc. bankruptcy during 2006, resulting in a decrease
in net accounts receivable. Income taxes paid during 2006
totaled $68.9 million compared to $99.2 million in 2004,
$207.52005 and $42.9
million in 2003,2004. The higher tax payments in 2005 were related to
tax law changes that resulted in the reversal of certain tax
strategies implemented in 2001 and $226.3the effect of lower income tax
depreciation in 2005 due to the bonus tax depreciation provision
that expired on December 31, 2004. The Company made federal
income tax payments of $22.5 million related to the reversal of
the tax strategies in 2002.second quarter 2005. Cash flow from
operations decreased $18.8$54.1 million in 20032005 compared to 2002,2004, or
8.3%. This
decrease was23.9%, due to lower truck purchases in 2003, which caused higherthe larger federal income tax payments duein 2005 and
an increase in days sales in accounts receivable, offset by
higher depreciation expense for financial reporting purposes
related to lower 2003 tax depreciationthe higher cost of the post-October 2002 engines and
resulted in a smaller
payable for tractors received at year-end. Returning to a normal tractor
replacement cycle in 2004 resulted in increased cash flow from operations
of $19.1 million in 2004 over 2003, or 9.2%.higher net income. The cash flow from operations and existing
cash balances, supplemented by net borrowings under its existing
credit facilities, enabled the Company to make net capital
expenditures, repurchase stock, and repay debtpay dividends as discussed
below.
Net cash used in investing activities was $193.5decreased 19.7% ($58.0
million) to $236.2 million in 2004,
$101.52006 from $294.3 million in 2003, and $235.52005.
Net property additions, primarily revenue equipment, were $241.8
million in 2002.for the year ended December 31, 2006 versus $299.2
million during the same period of 2005. 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's accelerated purchases of
tractors with pre-October 2002 engines in the latter part of 2002 andCompany purchasing fewermore tractors in 2003. The engine emission standards that
20
became effective October 1, 2002 did not allow the Company sufficient time2005 as it
began to test a significant sample of the new engines. This prompted the Company
to purchase a large number of trucks with engines manufactured prior to
October 2002, which are not subject to the new engine emission standards,
in addition to the normal number of new trucks required for the Company's
three-year replacement cycle. This enabled the Company to delay the impact
of using trucks with new engines in its fleet by approximately one year and
allowed additional time for testing. The pre-buy trucks were gradually
placed in service throughout 2003, with the last group of these trucks
being placed into service during the third quarter of 2003. As of December
31, 2004, approximately 47% of the company-owned truck fleet consisted of
trucks with the new engines. The Company intends to gradually reduce the average age of theits truck fleet and purchasing
fewer tractors and selling more trailers in 2005. As such,2006. The $100.8
million, or 52.1%, increase in investing cash flows from 2004 to
2005 was also due to the larger number of tractors purchased.
The average age of the Company's truck fleet is 1.34 years at
December 31, 2006. The Company brought down the age of its truck
fleet to delay the cost impact of the federally-mandated engine
emission standards that became effective in January 2007. The
Company's net capital expenditures are expected to be highermuch lower
in 2005 compared2007, or between $50 million and $100 million. The Company
intends to 2004.fund these net capital expenditures through cash flow
from operations and financing available under the Company's
existing credit facilities, as management deems necessary. As of
December 31, 2004,2006, the Company has committed to property and
equipment purchases net of trades, of approximately $122.0$57.1 million. The
Company intends to fund these capital expenditure commitments through
existing cash on hand and cash flow from operations.
Net financing activities used $52.8 million, provided $48.9
million, and used $25.7 million in 2006, 2005, and 2004,
$33.8respectively. The change from 2005 to 2006 included repayment in
the first quarter of 2006 of the $60.0 million of debt incurred
during fourth quarter 2005, followed by borrowings of $100.0
million in 2003, and $35.2 million in 2002. In 2003 and 2002,the latter part of 2006 to fund a portion of the
Company's net capital expenditures. Through the date of this
report, the Company made net
repaymentshas repaid $10.0 million of the total $100.0
26
million of debt of $20.0 million and $30.0 million, respectively. The
Company repaid its last remaining debt inoutstanding at December 2003.31, 2006. The Company
paid dividends of $13.3 million in 2006, $11.9 million in 2005,
and $9.5 million in 2004, $6.5 million in 2003, and $5.0 million
in 2002.2004. The Company increased its quarterly
dividend rate by $0.01$.005 per share beginning with the dividend paid
in July 2004.2006 and the dividend paid in July 2005. Financing
activities also included common stock repurchases of $85.1
million in 2006, $1.6 million in 2005, and $21.6 million in 2004, $13.5
million in 2003, and $3.8 million in 2002.2004.
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. TheOn April
14, 2006, the Company's Board of Directors has authorized the repurchaseapproved its current
authorization for common stock repurchases of up to 8,132,5046,000,000 shares.
As of December 31, 2004,2006, the Company had purchased 4,335,704791,200 shares
pursuant to this authorization and had 3,796,8005,208,800 shares remaining
available for repurchase.
Management believes the Company's financial position at
December 31, 20042006 is strong. As of December 31, 2004,2006, the
Company had $108.8$31.6 million of cash and cash equivalents no debt, and $773.2$870.4
million of stockholders' equity. As of December 31, 2004,2006, the
Company had $275.0 million of credit pursuant to credit
facilities, of which it had borrowed $100.0 million. The
remaining $175.0 million of credit available under these
facilities is further reduced by the $39.2 million in letters of
credit the Company maintains. These letters of credit are
primarily required as security for insurance policies. As of
December 31, 2006, 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, 2004.2006.
Amount of Commitment Expiration PerPayments Due by Period
(in millions)
Over 5
Total
Other Commercial Amounts Less than 1-3 4-5 Over 5
Commitments Committed 1 year 1-3 years 4-5 years years
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Contractual Obligations
Long-term debt, including current
maturities $ 100.0 $ - $ 50.0 $ 50.0 $ -
Equipment purchase commitments 57.1 57.1 - - -
-------- -------- -------- -------- --------
Total contractual cash obligations $ 157.1 $ 57.1 $ 50.0 $ 50.0 $ -
======== ======== ======== ======== ========
Other Financing Commitments
Unused lines of credit $ 39.6135.8 $ 25.0 $14.650.0 $ - $ 85.8 $ -
Standby letters of credit 35.4 35.439.2 39.2 - - -
Other commercial-------- -------- -------- -------- --------
Total financing commitments 122.0 122.0 - - -
------ ------ ----- ---- ----
Total commercial commitments $197.0 $182.4 $14.6$ 175.0 $ 89.2 $ - $ 85.8 $ -
====== ====== ===== ==== ============ ======== ======== ======== ========
Total obligations $ 332.1 $ 146.3 $ 50.0 $ 135.8 $ -
======== ======== ======== ======== ========
The Company has twocommitted credit facilities with two banks
totaling $75.0$275.0 million, of which it had borrowed $100.0 million.
These credit facilities bear variable interest (5.8% at December
31, 2006) 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.
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 commercialequipment purchase 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.
27
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 cargo,a significant portion of
its personal injury, and
property damage, and cargo 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-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
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
28
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 (including
owner-operator drivers under contract with the Company) 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, commodity prices, and foreign currency exchange rates and commodity prices.rates.
Interest Rate Risk
The Company had no$100.0 million of variable rate debt
outstanding at December 31, 2004. Interest2006. The interest rates on the
Company's unused credit facilitiesvariable rate debt are based on the London
Interbank Offered Rate ("LIBOR"). IncreasesLIBOR. Assuming 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 $1,000,000. As of December 31, 2006, the Company has
no derivative financial instruments to reduce its exposure to
interest rate increases.
29
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 majoritysignificant portion of fuel price increases from
customers in the form of fuel surcharges. The Company has
implemented customer fuel surcharge programs with most of its
revenue base to offset much of the higher fuel cost per gallon.
The Company cannot predict the extent to which highhigher 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, 2004,2006, 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.Canada and is
beginning operations in Asia. Foreign currency transaction gains
and losses were not material to the Company's results of
operations for 20042006 and prior years. To date, virtually all
foreign revenues are denominated in U.S. dollars, and the Company
receives payment for foreign freight services primarily in U.S.
dollars to reduce direct foreign currency risk. Accordingly, the
Company is not currently subject to material foreign currency
exchange rate risks from the effects that exchange rate movements
of foreign currencies would have on the Company's future costs or
on future cash flows.
To date, all foreign
revenues are denominated in U.S. dollars, and the Company receives payment
for freight services performed in Mexico and Canada primarily in U.S.
dollars to reduce foreign currency risk.
2630
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders andThe Board of Directors and Stockholders
Werner Enterprises, Inc.:
We have audited the accompanying consolidated balance sheets
of Werner Enterprises, Inc. and subsidiaries as of December 31,
20042006 and 2003,2005, 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,
2004.2006. 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, 2004,2006, listed in Item 15(a)(2) of this Form
10-K. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with 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, 20042006 and 2003,2005, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2004,2006, 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, 2004,2006, 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, 20058, 2007
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
278, 2007
31
WERNER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Years Ended December 31,
----------------------------------------
2006 2005 2004 2003 2002
---------- ---------- ----------
Operating revenues $2,080,555 $1,971,847 $1,678,043 $1,457,766 $1,341,456
---------- ---------- ----------
Operating expenses:
Salaries, wages and benefits 594,783 574,893 544,424
513,551 486,315
Fuel 388,710 340,622 218,095 160,465 125,189
Supplies and maintenance 155,304 154,719 138,999 123,680 119,972
Taxes and licenses 117,570 118,853 109,720 104,392 98,741
Insurance and claims 92,580 88,595 76,991
73,032 51,192
Depreciation 167,516 162,462 144,535 135,168 121,702
Rent and purchased transportation 395,660 354,335 289,186 215,463 222,571
Communications and utilities 19,651 20,468 18,919
16,480 14,808
Other (15,720) (7,711) (4,154) (1,969) 1,512
---------- ---------- ----------
Total operating expenses 1,916,054 1,807,236 1,536,715 1,340,262 1,242,002
---------- ---------- ----------
Operating income 164,501 164,611 141,328 117,504 99,454
---------- ---------- ----------
Other expense (income):
Interest expense 1,196 672 13 1,099 2,857
Interest income (4,407) (3,381) (2,580)
(1,699) (2,340)
Other 319 261 198 128 333
---------- ---------- ----------
Total other expense (income)income (2,892) (2,448) (2,369) (472) 850
---------- ---------- ----------
Income before income taxes 167,393 167,059 143,697 117,976 98,604
Income taxes 68,750 68,525 56,387 44,249 36,977
---------- ---------- ----------
Net income $ 87,310 $ 73,727 $ 61,627$98,643 $98,534 $87,310
========== ========== ==========
Average common shares outstanding 79,224 79,828 79,705
========== ========== ==========Earnings per share:
Basic earnings per share $ 1.10 $ 0.92 $ 0.77$1.27 $1.24 $1.10
========== ========== ==========
Diluted $1.25 $1.22 $1.08
========== ========== ==========
Weighted-average common shares outstanding 80,868 81,668 81,522outstanding:
Basic 77,653 79,393 79,224
========== ========== ==========
Diluted earnings per share $ 1.08 $ 0.90 $ 0.7679,101 80,701 80,868
========== ========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
2832
WERNER ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
December 31,
------------------------------------------------
ASSETS 2004 20032006 2005
---------- ----------
Current assets:
Cash and cash equivalents $ 108,80731,613 $ 101,40936,583
Accounts receivable, trade, less allowance
of $8,189$9,417 and $6,043,$8,357, respectively 186,771 152,461232,794 240,224
Other receivables 11,832 8,89217,933 19,914
Inventories and supplies 9,658 9,87710,850 10,951
Prepaid taxes, licenses, and permits 15,292 14,95718,457 18,054
Current deferred income taxes 25,251 20,940
Other current assets 18,896 17,69124,143 20,966
---------- ----------
Total current assets 351,256 305,287361,041 367,632
---------- ----------
Property and equipment, at cost:
Land 25,008 21,42326,945 26,279
Buildings and improvements 105,493 96,787118,910 110,275
Revenue equipment 1,100,596 1,013,6451,372,768 1,262,112
Service equipment and other 143,552 129,397168,597 157,098
---------- ----------
Total property and equipment 1,374,649 1,261,2521,687,220 1,555,764
Less - accumulated depreciation 511,651 455,565590,880 553,157
---------- ----------
Property and equipment, net 862,998 805,6871,096,340 1,002,607
---------- ----------
Other non-current assets 11,521 10,55320,792 15,523
---------- ----------
$1,225,775 $1,121,527$1,478,173 $1,385,762
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 49,61875,821 $ 40,90352,387
Current portion of long-term debt - 60,000
Insurance and claims accruals 55,095 55,20173,782 62,418
Accrued payroll 19,579 15,828
Current deferred income taxes 15,569 15,15121,344 21,274
Other current liabilities 17,705 15,39219,963 21,838
---------- ----------
Total current liabilities 157,566 142,475190,910 217,917
---------- ----------
Long-term debt, net of current portion 100,000 -
Other long-term liabilities 999 526
Deferred income taxes 210,739 198,640216,413 209,868
Insurance and claims accruals, net of current
portion 84,301 71,30199,500 95,000
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, 200,000,000
shares authorized; 80,533,536
shares issued; 79,197,74775,339,297 and 79,714,27179,420,443
shares outstanding, respectively 805 805
Paid-in capital 106,695 108,706105,193 105,074
Retained earnings 691,035 614,011862,403 777,260
Accumulated other comprehensive loss (861) (837)(207) (259)
Treasury stock, at cost; 1,335,7895,194,239 and
819,2651,113,093 shares, respectively (24,505) (13,574)(97,843) (20,429)
---------- ----------
Total stockholders' equity 773,169 709,111870,351 862,451
---------- ----------
$1,225,775 $1,121,527$1,478,173 $1,385,762
========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
2933
WERNER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
-------------------------------------
2006 2005 2004
2003 2002
---------- ---------- ------------------- --------- ---------
Cash flows from operating activities:
Net income $ 87,31098,643 $ 73,72798,534 $ 61,62787,310
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation 167,516 162,462 144,535 135,168 121,702
Deferred income taxes 2,234 (37,380) 12,517 (5,480) 35,891
Gain on disposal of operating
equipment (28,393) (11,026) (9,735)
(7,557) (2,257)
Gain on sale of unconsolidated
affiliateStock based compensation 2,258 - - (1,809)
Equity in loss of unconsolidated
affiliate - - 2,105
Tax benefit from exercise of
stock options - 1,617 3,225 2,863 1,450
Other long-term assets (1,878) (795) 408
1,023 248
Insurance and claims and otheraccruals,
net of current portion 4,500 11,000 13,000
Other long-term accruals 13,000 23,500 9,000liabilities 473 225 -
Changes in certain working
capital items:
Accounts receivable, net 7,430 (53,453) (34,310) (20,572) (10,535)
Prepaid expenses and other
current assets (1,498) (14,207) (4,261) 6,358 (17,428)
Accounts payable 23,434 2,769 8,715 (9,643) 17,358
Accrued and other current
liabilities 9,346 12,746 5,178
8,087 8,919
---------- ---------- ------------------- --------- ---------
Net cash provided by operating
activities 284,065 172,492 226,582
207,474 226,271
---------- ---------- ------------------- --------- ---------
Cash flows from investing activities:
Additions to property and equipment (400,548) (414,112) (294,288) (158,351) (309,672)
Retirements of property and equipment 158,727 114,903 98,098
54,754 71,882
Sale of unconsolidated affiliate - - 3,364
(Increase) decreaseDecrease in notes receivable 5,574 4,957 2,703
2,052 (1,099)
---------- ---------- ------------------- --------- ---------
Net cash used in investing
activities (236,247) (294,252) (193,487)
(101,545) (235,525)
---------- ---------- ------------------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of long-termshort-term
debt - 60,000 -
10,000
RepaymentsProceeds from issuance of long-term
debt 100,000 - (20,000) (40,000)-
Repayments of short-term debt (60,000) - -
Dividends on common stock (13,287) (11,904) (9,506) (6,466) (5,019)
Payment of stock split fractional
shares - (9) (12)
Repurchases of common stock (85,132) (1,573) (21,591) (13,476) (3,766)
Stock options exercised 3,377 2,411 5,424
6,167 3,570
---------- ---------- ----------Excess tax benefits from exercise
of stock options 2,202 - -
--------- --------- ---------
Net cash used inprovided by (used in)
financing activities (52,840) 48,934 (25,673)
(33,784) (35,227)
---------- ---------- ------------------- --------- ---------
Effect of exchange rate fluctuations
on cash 52 602 (24) (621) -
Net increase (decrease) in cash and
cash equivalents:equivalents (4,970) (72,224) 7,398 71,524 (44,481)
Cash and cash equivalents, beginning
of year 36,583 108,807 101,409
29,885 74,366
---------- ---------- ------------------- --------- ---------
Cash and cash equivalents, end of year $ 31,613 $ 36,583 $ 108,807
$ 101,409 $ 29,885
========== ========== =================== ========= =========
Supplemental disclosures of cash flow
information:
Cash paid during year for:
Interest $ 13566 $ 1,148561 $ 3,08013
Income taxes 68,941 99,170 42,850 34,401 10,422
Supplemental disclosures of non-cash
investing activities:
Notes receivable issued upon sale
of revenue equipment $ 4,0798,965 $ 2,5668,164 $ 2,686
Notes receivable canceled upon
return of revenue equipment - - (1,279)4,079
The accompanying notes are an integral part of these consolidated
financial statements.
3034
WERNER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE
INCOME
(In thousands, except share and per share amounts)
Accumulated
Other Total
Common Paid-In Retained Comprehensive Treasury Stockholders'
StocKStock Capital Earnings LossIncome (Loss) Stock Equity
------------------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 20012003 $805 $105,897 $490,942 $ (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
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 - - 73,727 (621) - 73,106
----- -------- -------- ----------- --------- ----------
BALANCE, December 31, 2003 805 108,706 614,011 (837) (13,574) 709,111$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
($.155 per share) - - (12,309) - - (12,309)
Exercise of stock options,
310,696 shares, including
tax benefits - (1,621) - - 5,649 4,028
Comprehensive income (loss):
Net income - - 98,534 - - 98,534
Foreign currency translation
adjustments - - - 602 - 602
------- -------- -------- ----- -------- --------
Total comprehensive
income (loss) - - 98,534 602 - 99,136
------- -------- -------- ----- -------- --------
BALANCE, December 31, 2005 805 105,074 777,260 (259) (20,429) 862,451
Purchases of 4,500,000 shares
of common stock - - - - (85,132) (85,132)
Dividends on common stock
($.175 per share) - - (13,500) - - (13,500)
Exercise of stock options,
418,854 shares, including
excess tax benefits - (2,139) - - 7,718 5,579
Stock-based compensation
expense - 2,258 - - - 2,258
Comprehensive income (loss):
Net income - - 98,643 - - 98,643
Foreign currency translation
adjustments - - - 52 - 52
------- -------- -------- ----- -------- --------
Total comprehensive - - 98,643 52 - 98,695
income (loss) ------- -------- -------- ----- -------- --------
BALANCE, December 31, 2006 $805 $106,695 $691,035 $(861) $(24,505) $773,169$105,193 $862,403 $(207) $(97,843) $870,351
======= ======== ======== ===== ======== ======== =========== ========= ==========
The accompanying notes are an integral part of these consolidated
financial statements.
3135
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 customer orand is not dependent on 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 11%, 10%, and 9% of total revenues for 2006, 2005,
and 2004, 2003, and
2002.respectively.
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 reviewsevaluates the adequacy
of its allowance for doubtful accounts quarterly. Past due
balances over 90 days and overexceeding 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.
36
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%$1,000
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-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 itstheir 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)("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
37
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 hashad 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, 2001:2003:
Primary Coverage
Coverage Period Primary Coverage SIR/deductible
- ------------------------------ ---------------- ----------------------------------
August 1, 2001 - July 31, 2002 $3.0 million $500,000 (1)
August 1, 2002 - July 31, 2003 $3.0 million $500,000 (2)
August 1, 2003 - July 31, 2004 $3.0 million $500,000 (3)$0.5 million (1)
August 1, 2004 - July 31, 2005 $5.0 million $2.0 million (4)(2)
August 1, 2005 - July 31, 2006 $5.0 million $2.0 million (3)
August 1, 2006 - July 31, 2007 $5.0 million $2.0 million (3)
(1) Subject to an additional $1.5 million self-insured aggregate amount in
the $0.5 to $1.0 million layer, a $1.0 million aggregate in the $1.0 to
$2.0 million layer, no aggregate (i.e., fully insured) in the $2.0 to $3.0
million layer, and a $2.0 million aggregate in the $3.0 to $4.0 million
layer.
(2) Subject to an additional $1.5 million aggregate in the $0.5 to $1.0
million layer, a $1.0 million aggregate in the $1.0 to $2.0 million layer,
no aggregate (i.e., fully insured) in the $2.0 to $3.0 million layer, and
self-insured in the $3.0 to $5.0 million layer.
(3) Subject to an additional $1.5 million aggregate in the $0.5
to $1.0 million layer, a $1.0 million aggregate in the $1.0 to
$2.0 million layer, no aggregate (i.e., fully insured) in the
$2.0 to $3.0 million layer, a $6.0 million aggregate in the $3.0
to $5.0 million layer, and a $5.0 million aggregate in the $5.0
to $10.0 million layer.
(4)(2) 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.
(3) 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'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$25.7 million bond, and has
obtained insurance for individual claims above $1.0 million.
Under these insurance arrangements, the Company maintains
$35.4$39.2 million in letters of credit as of December 31, 2004.
34
2006.
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 (including owner-operator
drivers under contract with the Company) 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.
38
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,
2004, 2003,2006, 2005, and 2002.2004. 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, Accounting
for Income Taxes, in accounting for income taxes. Under this
method, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to temporary differences
between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using the enacted tax
rates 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. Stock Based Compensation
At December 31, 2004, the Company has a nonqualified stock option
plan, as described more fully in Note 6. The Company applies the intrinsic
value based methodcomputation of Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees,basic 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 anddiluted earnings per
share is shown below (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,
---------------------------------------------------------------
2006 2005 2004
2003 2002
------- ------- --------------- -------- --------
Net income as reported $87,310 $73,727 $61,627
Less: Total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related
tax effects 2,006 2,516 3,456
------- ------- -------
Pro forma net income $85,304 $71,211 $58,171
======= ======= =======
Earnings$ 98,643 $ 98,534 $ 87,310
======== ======== ========
Weighted-average common shares
outstanding 77,653 79,393 79,224
Common stock equivalents 1,448 1,308 1,644
-------- -------- --------
Shares used in computing
diluted earnings per share:share 79,101 80,701 80,868
======== ======== ========
Basic - as reportedearnings per share $ 1.27 $ 1.24 $ 1.10
======== ======== ========
Diluted earnings per share $ 0.921.25 $ 0.77
======= ======= =======
Basic - pro forma1.22 $ 1.08
======== ======== ========
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,
--------------------------------------
2006 2005 2004
------------ ------------ ------------
Number of shares under option 24,500 19,500 -
Option purchase price $19.84-20.36 $ 0.89 $ 0.73
======= ======= =======
Diluted19.84 - as reported $ 1.08 $ 0.90 $ 0.76
======= ======= =======
Diluted - pro forma $ 1.05 $ 0.87 $ 0.71
======= ======= =======
39
Comprehensive Income
Comprehensive income consists of net income and other
comprehensive income (loss). Other comprehensive income (loss)
refers to revenues, expenses, gains, and losses that are not
included in net income, but rather are recorded directly in
stockholders' equity. For the years ended December 31, 2004, 2003,2006,
2005, and 2002,2004, comprehensive income consists of net income and
foreign currency translation adjustments.
Accounting Standards
Effective January 1, 2006, the Company adopted SFAS No. 123
(revised 2004), Share-Based Payment ("No. 123R"), using a
modified version of the prospective transition method. Under
this transition method, compensation cost is recognized on or
after the required effective date for the portion of outstanding
awards for which the requisite service has not yet been rendered,
based on the grant-date fair value of those awards calculated
under SFAS No. 123 (as originally issued) for either recognition
or pro forma disclosures. Stock-based employee compensation
expense for the year ended December 31, 2006 was $2.3 million,
and is included in salaries, wages and benefits within the
consolidated statements of income. There was no cumulative
effect of initially adopting SFAS No. 123R.
In May 2005, the FASB issued SFAS No. 154, Accounting
Changes and Error Corrections. This Statement replaces APB
Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting
Accounting Changes in Interim Financial Statements, and changes
the requirements for the accounting for and reporting of all
voluntary changes in accounting principle and changes required by
an accounting pronouncement when the pronouncement does not
include specific transition provisions. This Statement requires
retrospective application to prior periods' financial statements
of changes in accounting principle, unless it is impracticable to
do so. The provisions of SFAS No. 154 are effective for
accounting changes and corrections of errors made in fiscal years
beginning after December 2003,15, 2005. Upon adoption, SFAS No. 154
had no effect on the financial position, results of operations,
and cash flows of the Company, but will affect future changes in
accounting principles.
In February 2006, the Financial Accounting Standards Board
("FASB") revisedissued SFAS No. 155, Accounting for Certain Hybrid
Financial Instruments-An Amendment of FASB Statements No. 133 and
140. This Statement amends FASB Statements No. 133, Accounting
for Derivative Instruments and Hedging Activities, and No. 140,
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities and eliminates the exemption from
applying Statement 133 to interests in securitized financial
assets so that similar items are accounted for in the same way.
The provisions of SFAS No. 155 are effective for all financial
instruments acquired or issued after the beginning of the first
fiscal year that begins after September 15, 2006. As of December
31, 2006, management believes that SFAS No. 155 will have no
effect on the financial position, results of operations, and cash
flows of the Company.
In March 2006, the FASB issued SFAS No. 156, Accounting for
Servicing of Financial Assets-An Amendment of FASB Statement No.
140. This Statement amends FASB Statement No. 140, Accounting
for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities and requires that all separately
recognized servicing assets and servicing liabilities be
initially measured at fair value, if practicable. The provisions
of SFAS No. 156 are effective as of the beginning of the first
fiscal year that begins after September 15, 2006. As of December
31, 2006, management believes that SFAS No. 156 will have no
effect on the financial position, results of operations, and cash
flows of the Company.
In July 2006, the FASB issued FASB Interpretation ("FIN") No. 46, Consolidation48
("FIN 48"), Accounting for Uncertainty in Income Taxes-an
Interpretation of Variable
Interest Entities. FINFASB Statement No. 46(R) addresses consolidation by business
enterprises of certain variable interest entities. For public entities
that are not small business issuers,109. This interpretation
prescribes a recognition threshold and measurement process for
recording in the financial statements uncertain tax positions
taken or expected to be taken in a tax return. Additionally,
this interpretation provides guidance on the derecognition,
classification, accounting in interim periods, and disclosure
requirements for uncertain tax positions. The provisions of FIN
No. 46(R)48 are effective no later than the endon January 1, 2007. As of the first reporting periodDecember 31, 2006,
40
management believes 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 did48 will not have anya material effect
on the financial position, results of operations, and cash flows
of the Company.
In December 2004,September 2006, the FASB issued SFAS No. 153, Exchanges of
Nonmonetary Assets.157, Fair Value
Measurements. This Statement amends the guidance in APB Opinion No.
29, Accounting for Nonmonetary Transactions. APB 29 provided an exception
to the basic measurement principle (fair value) for exchanges of similar
assets, requiring that some nonmonetary exchanges be recorded on a
carryover basis. SFAS 153 eliminates the exception todefines fair value, establishes a
framework for exchanges of similar productive assetsmeasuring fair value in generally accepted
accounting principles ("GAAP"), 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.expands disclosures about
fair value measurements. The provisions of SFAS 153No. 157 are
effective for exchangesas of nonmonetary assets occurring inthe beginning of the first fiscal periods beginningyear that
begins after JuneNovember 15, 2005.2007. As of December 31, 2004,2006,
management believes that SFAS 153No. 157 will have no significant effect on the
financial position, results of operations, and cash flows of the
Company.
In December 2004,September 2006, the FASB revisedissued SFAS No. 123 (revised 2004), Share-
Based Payments. SFAS 123(R) eliminates the alternative to use APB Opinion
25's intrinsic value method158, Employers'
Accounting for Defined Benefit Pension and Other Postretirement
Plans-an amendment of accounting (generally resulting in
recognition of no compensation cost)FASB Statements No. 87, 88, 106, and
instead132(R). This Statement requires a companyan employer to recognize the
overfunded or underfunded status of a defined benefit
postretirement plan (other than a multiemployer plan) as an asset
or liability in its statement of financial statementsposition and to
recognize changes in that funded status in the costyear in which the
changes occur through comprehensive income of employee services
received in exchange for valuable equity instruments issued, and
liabilities incurred,a business entity.
This Statement also requires an employer to employees in share-based payment transactions
(e.g., stock options). The cost will be based onmeasure the grant-date fair valuefunded
status of a plan as 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 do not file as small business issuers, thedate of its year-end statement of
financial position, with limited exceptions. The provisions of
SFAS No. 158 are effective as of the revised statement are to be applied prospectively for awards that are
granted, modified, or settled inend of the first interim or annual period
beginning after June 15, 2005. Additionally, public entities would
recognize compensation cost for any portion of awards granted or modifiedfiscal year
ending after December 15, 1994, that is not yet vested at the date the standard is
adopted, based2006. Upon adoption, SFAS No. 158 had
no effect on the grant-date fair valuefinancial position, results of those awards calculated
under SFAS 123 (as originally issued)operations, and
cash flows of the Company.
In September 2006, the Securities and Exchange Commission
published Staff Accounting Bulletin ("SAB") No. 108 (Topic 1N),
Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements.
SAB No. 108 requires registrants to quantify misstatements using
both the balance-sheet and income-statement approaches, with
adjustment required if either method results in a material error.
The provisions of SAB No. 108 are effective for either recognition or pro forma
disclosures. When the Company adopts the standard on July 1, 2005, it will
be required to report in itsannual financial
statements the share-based
compensation expense for the last six monthsfirst fiscal year ending after November 15,
2006. Upon adoption, SAB No. 108 had no effect on the financial
position, results of 2005operations, and may choose to usecash flows of the modified retrospective application method to restate results forCompany.
(2) LONG-TERM DEBT
Long-term debt consisted of the two earlier interim periods. As offollowing at December 31 2004, management believes
that adopting the new statement will have a negative impact of
approximately one cent per share (two cents per share if the modified
retrospective application method is used) for the year ending December 31,
2005, representing the expense(in
thousands):
2006 2005
-------- --------
Notes payable to banks under
committed credit facilities $100,000 $ 60,000
-------- --------
100,000 60,000
Less current portion - 60,000
-------- --------
Long-term debt, net $100,000 $ -
======== ========
The notes payable to be recognized from July 1, 2005 through
December 31, 2005 for the unvested portion of awards which were granted
prior to July 1, 2005.
(2) INVESTMENT IN UNCONSOLIDATED AFFILIATE
Effective June 30, 2000, the Company contributed its non-asset based
logistics business to Transplace ("TPC"), a joint venture of six large
transportation companies, in exchange for an equity interest in TPC of
approximately 15%. Through 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 to exercise
significant influence over operating and financial policies of TPC through
its representation on the TPC Board of Directors. On 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 twobanks under committed credit facilities with
banks totaling $75.0 million which expire May 16, 2006 and October 22, 2005
and
bear variable interest (5.8% at December 31, 2006) based on the
London Interbank Offered Rate ("LIBOR"), and these credit
facilities mature at various dates from May 2008 to May 2011.
During 2007, the Company repaid $10.0 million on which no borrowings were outstanding at December 31, 2004 or
December 31, 2003.these notes. As
of December 31, 2004,2006, the Company has an additional $175.0
million of available credit available pursuant
tounder these bank credit facilities with
banks, which is further reduced by $35.4$39.2 million in letters of
credit the Company maintains. Each of the debt agreements
require, among other things, that the Company maintainnot exceed a
minimum consolidated tangible net
worthmaximum ratio of total debt to total capitalization 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)2006.
41
The aggregate future maturities of long-term debt by year
consist of the following at December 31, 2006 (in thousands):
2007 $ -
2008 50,000
2009 -
2010 -
2011 50,000
--------
$100,000
========
The carrying amount of the Company's long-term debt
approximates fair value due to the duration of the notes and the
interest rates.
(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):
2004 2003
------- -------2006 2005
-------- --------
Owner-operator notes receivable $ 7,00613,298 $ 4,8669,627
TDR Transportes, S.A. de C.V. 3,600 3,758
Warehouse One, LLC 1,451 1,5253,600
Other notes receivable 500 -
------- -------
12,557 10,1494,786 3,746
-------- --------
21,684 16,973
Less current portion 2,753 1,722
------- -------5,283 3,962
-------- --------
Notes receivable - non-current $ 9,80416,401 $ 8,427
======= =======13,011
======== ========
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, 20042006 and 2003,2005, the Company had 221315 and 153246 notes
receivable totaling $7,006$13,298 and $4,866$9,627 (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, 20042006 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 2004.2005. 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.
3842
(5)(4) INCOME TAXES
Income tax expense consisted of the following (in
thousands):
2006 2005 2004
2003 2002
------- ------- --------------- -------- --------
Current:
Federal $38,206 $46,072 $ 95959,021 $ 93,715 $ 38,206
State 7,495 12,190 5,664
3,657 127
------- ------- --------------- -------- --------
66,516 105,905 43,870
49,729 1,086
------- ------- --------------- -------- --------
Deferred:
Federal 1,149 (32,910) 12,336
(6,159) 31,692
State 1,085 (4,470) 181
679 4,199
------- ------- --------------- -------- --------
2,234 (37,380) 12,517
(5,480) 35,891
------- ------- --------------- -------- --------
Total income tax expense $56,387 $44,249 $36,977
======= ======= =======$ 68,750 $ 68,525 $ 56,387
======== ======== ========
The effective income tax rate differs from the federal
corporate tax rate of 35% in 2004, 20032006, 2005 and 20022004 as follows (in
thousands):
2006 2005 2004
2003 2002
------- ------- --------------- -------- --------
Tax at statutory rate $50,294 $41,292 $34,511$ 58,588 $ 58,471 $ 50,294
State income taxes, net of
federal tax benefits 5,577 5,018 3,800 2,818 2,812
Non-deductible meals and
entertainment 4,329 4,340 2,670 172 117
Income tax credits (740) (895) (900) (900) (638)
Other, net 996 1,591 523
867 175
------- ------- -------
$56,387 $44,249 $36,977
======= ======= =======-------- -------- --------
$ 68,750 $ 68,525 $ 56,387
======== ======== ========
At December 31, deferred tax assets and liabilities
consisted of the following (in thousands):
2004 20032006 2005
-------- --------
Deferred tax assets:
Insurance and claims accruals $ 53,99467,432 $ 48,08159,870
Allowance for uncollectible accounts 3,813 3,0784,517 4,216
Other 4,584 3,7434,041 4,588
-------- --------
Gross deferred tax assets 62,391 54,90275,990 68,674
-------- --------
Deferred tax liabilities:
Property and equipment 242,139 219,849253,192 244,128
Prepaid expenses 42,517 42,1748,241 7,915
Other 4,043 6,6705,719 5,559
-------- --------
Gross deferred tax liabilities 288,699 268,693267,152 257,602
-------- --------
Net deferred tax liability $226,308 $213,791$191,162 $188,928
======== ========
These amounts (in thousands) are presented in the
accompanying Consolidated Balance Sheets as of December 31 as
follows:
2004 20032006 2005
-------- --------
Current deferred tax liabilityasset $ 15,56925,251 $ 15,15120,940
Noncurrent deferred tax liability 210,739 198,640216,413 209,868
-------- --------
Net deferred tax liability $226,308 $213,791$191,162 $188,928
======== ========
3943
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
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, 9,227,9762006, 8,890,551 shares were
available for granting additional options.
AtEffective January 1, 2006, the Company adopted SFAS No. 123R
using a modified version of the prospective transition method.
Under this transition method, compensation cost is recognized on
or after the required effective date for the portion of
outstanding awards for which the requisite service has not yet
been rendered, based on the grant-date fair value of those awards
calculated under SFAS No. 123 (as originally issued) for either
recognition or pro forma disclosures. Stock-based employee
compensation expense for the year 2006 was $2.3 million and is
included in salaries, wages and benefits within the consolidated
statements of income. The total income tax benefit recognized in
the income statement for stock-based compensation arrangements
was $0.9 million in 2006. There was no cumulative effect of
initially adopting SFAS No. 123R.
The Company granted 5,000, 415,500, and 787,000 stock
options during the years ended December 31, 2006, 2005, and 2004,
2003,respectively. The fair value of stock options granted was
estimated using a Black-Scholes valuation model with the
following weighted-average assumptions:
Years Ended December 31,
------------------------------
2006 2005 2004
-------- -------- --------
Risk-free interest rate 4.7% 4.1% 4.0%
Expected dividend yield 0.88% 0.94% 0.66%
Expected volatility 36% 36% 37%
Expected term (in years) 4.9 4.8 6.5
The risk-free interest rate assumptions were based on
average 5-year and 2002,10-year U.S. Treasury note yields. The
expected volatility was based on historical daily price changes
of the Company's stock since June 2001 for the options granted in
2006 and on historical monthly price changes of the Company's
stock since January 1990 for 2,485,582, 2,183,597,the options granted in 2005 and
1,598,594, shares with weighted2004. The expected term was the average number of years that the
Company estimated these options will be outstanding. The Company
considered groups of employees that have similar historical
exercise prices of $8.48, $8.45, and $8.18 were exercisable, respectively.behavior separately for valuation purposes.
44
The following table summarizes Stock Option Plan activity
for the three yearsyear ended December 31, 2004:2006:
Weighted
Number Weighted Average Aggregate
of Average Remaining Intrinsic
Options Outstanding
-----------------------------
Weighted-Average
Shares Exercise Contractual Value
(in 000's) 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
=========
40
The following table summarizes information about stock options
outstanding and exercisable at December 31, 2004:
Options Outstanding Options Exercisable
-------------------------------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- --------------------------------------------------------------------------------($) Term (Years) (in 000's)
----------------------------------------------------------
Outstanding at beginning of period 5,029 $ 6.28 to10.83
Options granted 5 $ 7.95 2,191,695 5.3 years20.36
Options exercised (419) $ 7.57 1,442,6338.06
Options forfeited (49) $ 7.5517.48
Options expired (1) $ 8.96 to7.35
----------
Outstanding at end of period 4,565 $ 9.77 1,933,003 6.2 years 9.75 1,001,647 9.73
$10.43 to $13.94 49,431 4.5 years 11.24 41,302 10.81
$18.33 783,000 9.4 years 18.33 0 0.00
--------- ---------
4,957,129 6.3 years 10.16 2,485,582 8.48
========= =========11.03 4.88 $ 30,144
==========
Exercisable at end of period 3,362 $ 9.23 4.02 $ 27,899
==========
The weighted-average grant date fair value of stock options
granted during the years ended December 31, 2006, 2005, and 2004
was $7.37, $5.86 and $7.60 per share, respectively. The total
intrinsic value of share options exercised during the years ended
December 31, 2006, 2005, and 2004 was $5.4 million, $3.9 million,
and $8.2 million, respectively. As of December 31, 2006, the
total unrecognized compensation cost related to nonvested stock
option awards was approximately $2.6 million and is expected to
be recognized over a weighted average period of 1.3 years.
In periods prior to January 1, 2006, the Company appliesapplied the
intrinsic value based method of APBAccounting Principles Board
("APB") Opinion No. 25, Accounting for Stock Issued to Employees,
and related interpretations in accounting for its Stock Option
Plan. SFAS No. 123, Accounting for Stock-Based Compensation requiresNo stock-based employee compensation cost was 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
disclosure of net income and
earnings per share (in thousands, except per share amounts) would
have been as indicated below had the estimated fair value of all
option grants on their grant date been charged to salaries, wages
and benefits. The fair value of the options granted during 2004 and 2002
was estimated using the Black-Scholes option-pricing model with the
following assumptions: risk-free interest rate of 4.0 percent in 2004 and
2002; dividend yield of 0.66 percent in 2004 and 0.40 percent in 2002;
expected life of 6.5 years in 2004 and 7.0 years in 2002; and volatility of
37 percent in 2004 and 38 percent in 2002. The weighted-average fair value
of options granted during 2004 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 accordance with SFAS No. 123, Accounting
for Stock-Based Compensation.
Years Ended December 31,
------------------------------------
2005 2004
------------ ------------
Net income, as reported $ 98,534 $ 87,310
Less: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects 1,758 2,006
--------- ---------
Net income, pro forma $ 96,776 $ 85,304
========= =========
Earnings per share:
Basic - as reported $ 1.24 $ 1.10
========= =========
Basic - pro forma $ 1.22 $ 1.08
========= =========
Diluted - as reported $ 1.22 $ 1.08
========= =========
Diluted - pro forma $ 1.20 $ 1.05
========= =========
Although the Consolidated StatementsCompany does not a have a formal policy for
issuing shares upon exercise of Income.stock options, such shares are
generally issued from treasury stock. From time to time, the
Company has repurchased shares of its common stock, the timing
and amount of which depends on market and other factors.
Historically, the shares acquired under these regular repurchase
programs have provided sufficient quantities of stock for
issuance upon exercise of stock options. Based on current
treasury stock levels, the Company does not expect the need to
repurchase additional shares specifically for stock option
exercises during 2007.
45
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 $170, $119, and $108 $102,for 2006, 2005, 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 $2,270, $2,268, and $2,043 $1,711,for 2006,
2005, and $1,5992004, respectively.
Nonqualified Deferred Compensation Plan
The Company has a nonqualified deferred compensation plan
for 2004, 2003,the benefit of eligible key managerial employees whose 401(k)
plan contributions are limited due to IRS regulations affecting
highly compensated employees. Under the terms of the plan,
participants may elect to defer compensation on a pre-tax basis
within annual dollar limits established by the Company. The
current annual limit is established such that a participant's
combined deferrals in both the nonqualified deferred compensation
plan and 2002, respectively.
(7)the 401(k) plan approximate the maximum annual deferral
amount available to non-highly compensated employees in the
401(k) plan. Although it is not the Company's current intention
to do so, the Company may also make matching credits and/or
profit sharing credits to the participants' accounts as
determined each year by the Company. Under current tax law, the
Company is not allowed a current income tax deduction for the
compensation deferred by participants, but is allowed a tax
deduction when a distribution payment is made to a participant
from the plan. The accumulated benefit obligation (in thousands)
was $698 and $225 as of December 31, 2006 and 2005, respectively,
and is included in other long-term liabilities in the
consolidated balance sheets. The Company has purchased life
insurance policies to fund the future liability. The life
insurance policies had an aggregate market value (in thousands)
of $688 and $222 as of December 31, 2006 and 2005, respectively,
and are included in other non-current assets in the consolidated
balance sheets.
(6) COMMITMENTS AND CONTINGENCIES
The Company has committed to property and equipment
purchases net of
trades, of approximately $122.0$57.1 million.
On July 29, 2004 and October 25, 2004,During first quarter 2006, in connection with an audit of
the Company's federal income tax returns for the years 1999 to
2002, the Company was served with
complaints naming itreceived a notice from the Internal Revenue
Service ("IRS") proposing to disallow a significant tax
deduction. This deduction is a timing difference between
financial reporting and others as defendantstax reporting and would not result in
two lawsuits stemming from
a multi-vehicle accident that occurredadditional income tax expense in February 2004. The lawsuits were
41
filedthe Company's financial
statements. This timing difference deduction reversed in Superior Court of the
State of California, County of San
Bernardino, Barstow District and seek an unspecified amount of compensatory
damages.Company's 2004 income tax return. The Company brokeredfiled a shipmentprotest in
this matter in April 2006, which is currently under review by an
IRS appeals officer. The initial conference with the appeals
officer is scheduled to occur in March 2007. The Company and its
tax advisors believe the Company has a strong position and,
therefore, at this time the Company has not recorded an independent carrier with a
satisfactory safety rating which was then involvedaccrual
for interest for this issue in the accident,
resulting in four fatalities and multiple personal injuries.financial statements. 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 ormay not ultimately prevail 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 notits position,
which may have a material impact on the Company's financial
46
condition. The Company estimates the accrued interest, net of
taxes, if the Company would not prevail in its position resultswith the
IRS to be approximately $6.5 million as of operations, and cash flows of the Company.
In addition to the litigation noted above, theDecember 31, 2006.
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 ownspreviously owned a one-third interest in an entity
that operates a motel located nearby one of the Company's
terminals with which the Company hashad 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 2004, 2003,2006, 2005, and 2002,2004, the Company paid (in
thousands) $840, $732,$264, $945, and $542,$840, respectively, for lodging
services for its drivers at this motel. In 2003,On June 30, 2005, the
Company sold .783 acres of land to this entity for approximately
$90 (in thousands), in accordance with the exercise of a purchase
option clause contained in a separate agreement entered into by
the Company and the entity in April 2000. The Company realized a
gain of approximately $35 (in thousands) on the transaction. On
April 10, 2006, the Company purchased 2.6 acres of land located adjacentthe remaining two-thirds
interest in the entity from the two owners unrelated to the
Company's disaster recovery center in Omaha, NebraskaCompany for $500,000 from
a partnership in which the principal stockholder$3.0 million. The purchase price was based on an
appraisal of the Company is the
general partner.property by an independent appraiser.
The brother and sister-in-law of the Company's principal
stockholder own an entity with a fleet of tractors that operates
as an owner-operator for the Company. During 2004, 2003,2006, 2005, and
2002,2004, the Company paid (in thousands) $7,271, $6,291, and $6,200,
$5,888,respectively, to this owner-operator for purchased transportation
services. This fleet is compensated using the same owner-
operator pay package as the Company's other comparable third-
party owner-operators. The Company also sells used revenue
equipment to this entity. During 2006, 2005, and $3,587,2004, these
sales (in thousands) totaled $789, $1,019, and $193,
respectively, and the Company recognized gains (in thousands) of
$68, $130, and $18 in 2006, 2005, and 2004, respectively. The
Company had 40 and 32 notes receivable from this entity related
to the revenue equipment sales (in thousands) totaling $1,381 and
$1,105 at December 31, 2006 and 2005, respectively.
The brother of the Company's principal stockholder has a 50%
ownership interest in an entity with a fleet of tractors that
operates as an owner-operator for the Company. During 2006,
2005, and 2004, the Company paid (in thousands) $161, $476, and
$453, respectively, to this owner-operator for purchased
transportation services. This fleet is compensated using the
same owner-operator pay package as the Company's other comparable
third-
partythird-party owner-operators. The Company also sells used revenue equipment to
this entity. During 2004, 2003, and 2002, these sales (in thousands)
totaled $193, $292, and $1,328, respectively, and the Company recognized
gains (in thousands) of $18, $55, and $6 in 2004, 2003, and 2002,
respectively. The Company had 35 and 46 notes receivable from this entity
related to the revenue equipment sales (in thousands) totaling $656 and
$1,030 at December 31, 2004 and 2003, respectively.
The Company and TDR transact business with each other for
certain of their purchased transportation needs. During 2004, 2003,2006,
2005, and 2002,2004, the Company recorded operating revenues (in
thousands) from TDR of approximately $168, $206,$308, $227, and $416,$168,
respectively, and recorded purchased
42
transportation expense (in
thousands) to TDR of approximately $631, $1,099,$870, $521, and $1,087,$631,
respectively. In addition, during 2004, 2003,2006, 2005, and 2002,2004, the
Company recorded operating revenues (in thousands) from TDR of
approximately $2,837, $1,495,$4,691, $3,582, and $72,$2,837, respectively, related
to the leasing of revenue equipment. The Company also sells used
revenue equipment to this entity. During 2006 and 2005, these
sales (in thousands) totaled $3,697 and $358, respectively, and
the Company recognized gains (in thousands) of $170 in 2006 and
$19 in 2005. As of December 31, 20042006 and 2003,2005, the Company had
receivables related to the equipment leases and revenue equipment
47
sales (in thousands) of $1,351$2,853 and $852,$2,389, respectively. 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 $2,300, $4,800, and $8,400 in 2006, 2005, and 2004,
respectively, and recorded purchased transportation expense (in
thousands) to TPC of approximately $0, $0, and $7 during 2006,
2005, and 2004, 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. 131.131, Disclosures about Segments of an Enterprise and Related
Information. 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-Haulshort-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. Revenues for the Truckload Transportation Services
segment include non-trucking revenues of $11.2 million, $12.2
million, and $14.4 million for 2006, 2005, and 2004,
respectively, representing the portion of shipments delivered to
or from Mexico where the Company utilizes a third-party capacity
provider and revenues generated in a few dedicated accounts where
the services of third-party capacity providers are used to meet
customer capacity requirements.
The Value Added Services segment, which generates the
majority of the Company's non-trucking revenues, provides freight
management (single-source logistics), truck brokerage, and
intermodal services, and freight transportation management. Value Added Services was
identifiedas well 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.newly expanded international
product line.
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.
"Corporate" includes revenues and expenses that are incidental to
the activities of the Company and are not attributable to any of
its operating segments. 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.
48
The following tables summarize the Company's segment
information (in thousands):
Revenues
----------
2006 2005 2004 2003 2002
---------- ---------- ----------
Truckload Transportation Services $1,801,090 $1,741,828 $1,506,937 $1,358,428 $1,254,728
Value Added Services 265,968 218,620 161,111
89,742 80,012
Other 10,536 7,777 6,424
5,287 4,057
Corporate 2,961 3,622 3,571 4,309 2,659
---------- ---------- ----------
Total $2,080,555 $1,971,847 $1,678,043 $1,457,766 $1,341,456
========== ========== ==========
Operating Income
----------------------------------
2006 2005 2004 2003 2002
---------- ---------- ----------
Truckload Transportation Services $ 135,828156,509 $ 118,146156,122 $ 98,838135,828
Value Added Services 7,421 8,445 5,631
454 1,331
Other 1,731 2,850 2,587
1,236 1,059
Corporate (1,160) (2,806) (2,718) (2,332) (1,774)
---------- ---------- ----------
Total $ 141,328164,501 $ 117,504164,611 $ 99,454141,328
========== ========== ==========
43
Information as to the Company's operations by geographic
area is summarized below (in thousands). Operating revenues for
Mexico and Canadaforeign countries include revenues for shipments with an origin
or destination in that country and other services provided in
that country. If both the origin and destination are in a
foreign country, the revenues are attributed to the country of
origin.
Operating Revenues
----------------------------
2006 2005 2004 2003 2002
---------- ---------- ----------
United States $1,872,775 $1,782,501 $1,537,745
$1,349,153 $1,260,957
Canada---------- ---------- ----------
Foreign countries
Mexico 168,846 145,678 104,934
Other 38,934 43,668 35,364 30,886 19,725
Mexico 104,934 77,727 60,774
---------- ---------- ----------
Total foreign countries 207,780 189,346 140,298
---------- ---------- ----------
Total $2,080,555 $1,971,847 $1,678,043 $1,457,766 $1,341,456
========== ========== ==========
Long-lived Assets
------------------------------------
2006 2005 2004 2003 2002
---------- ---------- ----------
United States $1,067,716 $ 990,439 $ 850,250
$ 796,627 $ 829,506
Canada---------- ---------- ----------
Foreign countries
Mexico 28,452 11,867 12,612
Other 172 301 136 142 49
Mexico 12,612 8,918 2,712
---------- ---------- ----------
Total foreign countries 28,624 12,168 12,748
---------- ---------- ----------
Total $1,096,340 $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 11% of the Company's total revenues.
(10) COMMON STOCK SPLITS
On September 2, 2003, the Company announced that its Boardrevenues for
2006, approximately 10% of Directors declared a five-for-four splittotal revenues for 2005, and
approximately 9% of the Company's common stock
effected in the form of a 25 percent stock dividend. The stock dividend
was paid on September 30, 2003, to stockholders of record at the close of
business on September 16, 2003. On February 11, 2002, the Company
announced that its Board of Directors declared a four-for-three split of
the Company's common stock effected in the form of a 33 1/3 percent stock
dividend. The stock dividend was 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 statementstotal revenues for all periods presented have been
adjusted to retroactively reflect the 2003 and 2002 stock splits.
442004.
49
(11)(9) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share amounts)
First Quarter Second Quarter Third Quarter Fourth Quarter
Quarter Quarter Quarter
--------------------------------------------------------------------------------------------------------------
2004:2006:
Operating revenues $386,280 $411,115 $425,409 $455,239$ 491,922 $ 528,889 $ 541,297 $ 518,447
Operating income 24,859 34,991 39,510 41,96836,822 46,351 40,686 40,642
Net income 15,568 21,620 24,299 25,82322,029 28,021 24,551 24,042
Basic earnings per share .20 .27 .31 .33.28 .36 .32 .32
Diluted earnings per share .19 .27 .30 .32.35 .31 .31
First Quarter Second Quarter Third Quarter Fourth Quarter
Quarter Quarter Quarter
-------------------------------------------
2003:-------------------------------------------------------------------
2005:
Operating revenues $347,208 $362,290 $368,034 $380,234$ 455,262 $ 485,789 $ 504,520 $ 526,276
Operating income 18,983 31,576 32,728 34,21732,837 42,128 41,138 48,508
Net income 11,839 19,859 20,516 21,51319,921 25,295 24,491 28,827
Basic earnings per share .15 .25 .26 .27.32 .31 .36
Diluted earnings per share .15 .24 .25 .26.31 .30 .36
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
No reportsdisclosure under this item havehas been required to be filed within the
twenty-four months prior totwo most recent fiscal years ended December 31, 2004,2006, or any
subsequent period, involving a change of accountants or
disagreements on accounting and financial disclosure.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, the
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.
50
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of 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,
2004,2006, 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
2006.
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 and Stockholders
Werner Enterprises, Inc.:
We have audited management's assessment, included in the
accompanying Management's Report on Internal Control over
Financial Reporting, that Werner Enterprises, Inc. maintained
effective internal control over financial reporting as of
December 31, 2004,2006, 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
51
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that Werner
Enterprises, Inc. maintained effective internal control over
financial reporting as of December 31, 2004,2006, is fairly stated, in
all material respects, based on COSO. Also, in our opinion,
Werner Enterprises, Inc. maintained, in all material respects,
effective internal control over financial reporting as of
December 31, 2004,2006, 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, 20042006 and 2003,2005, 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, 2004,2006, and our report dated
February 4, 2005,8, 2007, expressed an unqualified opinion on those
consolidated financial statements.
KPMG LLP
Omaha, Nebraska
February 4, 20058, 2007
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, 2004,2006, 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 disclosures are provided pursuant to Items
1.01 and 5.03 of Form 8-K.
On February 8, 2007, Werner Enterprises, Inc. (the
"Company") entered into a revised Lease Agreement, effective as
of the fourth quarter21st day of 2004, no informationMay 2002 (the "Lease Agreement"), and a
License Agreement (the "License Agreement") with Clarence L.
Werner, Trustee of the Clarence L. Werner Revocable Trust (the
"Trust"). Clarence L. Werner, Chairman of the Board of the
Company, is the sole trustee of the Trust. The Lease Agreement
and License Agreement were approved by the disinterested members
of the Board of Directors at the Board's February 8, 2007
meeting. The Lease Agreement was requiredoriginally entered into between
the parties as of May 21, 2002 with a 10-year lease term
commencing June 1, 2002 (the "2002 Lease Agreement").
The Lease Agreement covers the lease of land comprising
approximately 35 acres (referred to as the "Lodge Premises"),
with improvements consisting of lodging facilities and a sporting
clay range which are used by the Company for business meetings
and customer promotion. The 2002 Lease Agreement provided for a
non-exclusive license to use for hunting purposes a contiguous
portion of farmland comprising approximately 580 acres (referred
to as the "Farmland Premises"), which license rights were
deleted from the Lease Agreement and separated into the License
Agreement.
The Lease Agreement's current 10-year term expires May 31,
2012, and provides the Company the option to extend the lease for
two additional 5-year periods, through 2017 and 2022,
respectively. Under the Lease Agreement, the Company makes
annual rental payments of One Dollar ($1.00) per year, and is
responsible for the real estate taxes and maintenance costs on
the Lodge Premises, which totaled approximately $44 (in
thousands) for 2006.
Option to Purchase Rights: Under the Lease Agreement, at
any time during the lease or any extension thereof, the Company
has the option to purchase the Lodge Premises from the Trust at
its current market value, excluding the value of all leasehold
52
improvements made by the Company. The Company also has a right
of first refusal to purchase the Lodge Premises, or any part
thereof, if the Trust has an offer from an unrelated third party
to purchase the Lodge Premises. The Trust has the option at any
time during the lease to demand that the Company exercise its
option to purchase the Lodge Premises at its current market
value, excluding the value of all leasehold improvements made by
the Company. If the Company elects not to purchase the Lodge
Premises as demanded by the Trust, then the Company's option to
purchase at any time during the lease is forfeited; however, the
Company will still have the right of first refusal with respect
to a purchase offer from an unrelated third party. If the
Company terminates the Lease Agreement prior to the expiration of
the initial 10-year term and elects not to purchase the Lodge
Premises from the Trust, then the Trust agrees to pay the Company
the cost of all leasehold improvements, less accumulated
depreciation calculated on a straight-line basis over the term of
the Lease Agreement (10 years). If at the termination of the
initial 10-year lease term, or any of the two 5-year renewal
periods, the Company has not exercised its option to purchase the
Lodge Premises at its current market value, the leasehold
improvements become the property of the Trust. However, it is
the Company's current intention to exercise its option to
purchase the Lodge Premises at its current market value prior to
the completion of the initial 10-year lease period or any of the
two 5-year renewal periods. The Company has made leasehold
improvements to the Lodge Premises of approximately $6.1 million
since the inception of leasehold arrangements commencing in 1994.
The revisions to the Lease Agreement removed the provisions
relating to the Farmland Premises, as of the effective date of
the 2002 Lease Agreement, including the description of option to
purchase rights described above, from the agreement, and the
Company and the Trust entered into the separate License Agreement
defining their respective rights with respect to the Farmland
Premises. Under the License Agreement, the Company and its
invitees are granted a non-exclusive right to hunt and fish on
the Farmland Premises, for a term of one-year, which is
automatically renewable unless either party terminates not less
than 30 days prior to the end of the current annual term. The
Trust agrees to use its best efforts to maintain a Controlled
Shooting Area Permit on the Farmland Premises while the License
Agreement is in effect, and to maintain the land in a manner to
maximize hunting cover for game birds. In consideration of the
license to hunt and fish on the Farmland Premises, the Company
agrees to pay the Trust an amount equal to the real property
taxes and special assessments levied on the land, and the cost of
all fertilizer and seed used to maintain the hunting cover and
crops located on the land. Such costs were approximately $29 (in
thousands) for 2006.
Copies of the Lease Agreement and License Agreement are
filed as exhibits to this 10-K.
On February 8, 2007, the Board of Directors amended the
Company's by-laws, effective as of that date. A description of
the changes is set forth below.
* Section 7 of Article II was amended to reduce the notice
period for special meetings of the Board of Directors and
its committees from five (5) days to one (1) day and to
update the permitted methods used to provide notice to
directors of special meetings of the Board of Directors
and its committees. These methods include personal
delivery, mail, electronic mail, private carrier,
facsimile, and telephone.
* Sections 5 and 7 of Article III were amended to change the
definitions of the roles of "Chairman of the Board" and
"President", such that the President (and not the Chairman)
will be the Company's Chief Executive Officer.
* Sections 1 and 4 of Article V were amended to allow shares
of the Company to be disclosed in a report on Form 8-K, but not reported.either certificated or uncertificated
(book-entry) and to clarify that for transfers of
certificated shares only, the certificate for such shares
must be surrendered for cancellation.
The Revised and Restated By-laws are filed as an exhibit to
this 10-K.
53
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 REGISTRANTAND CORPORATE GOVERNANCE
The information required by this Item, with the exception of
the Code of Ethics discussed below, is incorporated herein by
reference to the Company's Proxy Statement.
Code of Ethics
The Company has adopted a code of ethics that applies to its
principal executive officer, principal financial officer,
principal accounting officer/controller, and all other officers,
employees, and directors. The code of ethics is available on the
Company's website, www.werner.com. The Company intends to post
on its website any material changes to, or waiver from, its code
of ethics, if any, within four business days of any such event.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein
by reference to the Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this Item, with the exception of
the equity compensation plan information presented below, is
incorporated herein by reference to the Company's Proxy
Statement.
47
Equity Compensation Plan Information
The following table summarizes, as of December 31, 2004,2006,
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 9,227,9764,565,004 $11.03 8,890,551
The Company does not have any equity compensation plans that
were not approved by security holders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
The information required by this Item is incorporated herein
by reference to the Company's Proxy Statement.
54
ITEM 14. PRINCIPAL ACCOUNTANTACCOUNTING FEES AND SERVICES
The information required by this Item is incorporated herein
by reference to the Company's Proxy Statement.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Financial Statements and Schedules.
(1) Financial Statements: See Part II, Item 8 hereof.
Page
----
Report of Independent Registered Public Accounting Firm 2731
Consolidated Statements of Income 2832
Consolidated Balance Sheets 2933
Consolidated Statements of Cash Flows 3034
Consolidated Statements of Stockholders' Equity and
Comprehensive Income 3135
Notes to Consolidated Financial Statements 3236
(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 5157
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)58).
4955
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 15th13th day of February, 2005.2007.
WERNER ENTERPRISES, INC.
By: /s/ Gregory L. Werner
------------------------------
Gregory L. Werner
President and 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 and in the capacities and on
the dates indicated.
Signature Position Date
--------- -------- ----
/s/ Clarence L. Werner Chairman of the Board Chief February 15, 200513, 2007
- ------------------------- Executive Officer and Director--------------------------
Clarence L. Werner
/s/ Gary L. Werner Vice Chairman and Director February 15, 200513, 2007
- ---------------------------------------------------
Gary L. Werner Director
/s/ Gregory L. Werner President, Chief OperatingExecutive Officer February 15, 200513, 2007
- ------------------------- 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, 2005
- -------------------------
Jeffrey G. Doll
/s/ Gerald H. Timmerman Director February 15, 200513, 2007
- ---------------------------------------------------
Gerald H. Timmerman
/s/ Michael L. Steinbach Director February 15, 200513, 2007
- ---------------------------------------------------
Michael L. Steinbach
/s/ Kenneth M. Bird Director February 15, 200513, 2007
- ---------------------------------------------------
Kenneth M. Bird
/s/ Patrick J. Jung Director February 15, 200513, 2007
- ---------------------------------------------------
Patrick J. Jung
/s/ Duane K. Sather Director February 13, 2007
- --------------------------
Duane K. Sather
5056
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, 2006:
Allowance for doubtful accounts $ 8,357 $ 8,767 $ 7,707 $ 9,417
======= ======= ======= =======
Year ended December 31, 2005:
Allowance for doubtful accounts $ 8,189 $ 962 $ 794 $ 8,357
======= ======= ======= =======
Year ended December 31, 2004:
Allowance for doubtful accounts $6,043 $2,255$ 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
====== ====== ====== ======8,189
======= ======= ======= =======
See report of independent registered public accounting firm.
5157
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 Exhibit 3(i)(A) to the Company's report on Form
S-1, Registration No. 33-5245
Incorporation 10-K for the year ended December 31, 2005
3(i)(B) Articles of Amendment to Articles of Filed herewith
Incorporation
3(i)(C) Articles of Amendment to Articles of Exhibit 3(i) to the Company's to Articles of report on Form 10-Q10-
Incorporation Q for the
Incorporation quarter ended May 31, 1994
3(i)(C)(D) Articles of Amendment to Articles of Exhibit 3(i)(C) to the Company's report to Articles of on Form
Incorporation 10-K for the year ended Incorporation December 31, 1998
3(ii) Revised and Amended3(i)(E) Articles of Amendment to Articles of Exhibit 3(ii)3(i)(D) to the Company's report By-Laws on Form
Incorporation 10-Q for the quarter ended June 30, 20042005
3(ii) Revised and Restated By-Laws Filed herewith
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 Filed herewith
of Werner Enterprises, Inc., as amended
10.4 Named Executive Officer Compensation Filed herewith
10.5 Lease Agreement, as amended February 8, Filed herewith
2007, between the Company and Clarence
L. Werner, Trustee of the Clarence L.
Werner Revocable Trust
10.6 License Agreement, dated February 8, Filed herewith
2007 between the Company and Clarence
L. Werner, Trustee of the Clarence L.
Werner Revocable Trust
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
58