UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[Mark one]
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-14690
WERNER ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
NEBRASKA 47-0648386
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
14507 FRONTIER ROAD 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
_________________________________
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes X No
--- ---
As of April 30, 2005, 79,413,574 shares of the registrant's common
stock, par value $.01 per share, were outstanding.
INDEX TO FORM 10-Q
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income for the Three Months Ended
March 31, 2005 and 2004 3
Consolidated Condensed Balance Sheets as of March 31, 2005 and
December 31, 2004 4
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2005 and 2004 5
Notes to Consolidated Financial Statements as of March 31,
2005 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
Item 4. Controls and Procedures 24
PART II - OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 25
Item 5. Other Information 25
Item 6. Exhibits 26
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
The interim consolidated financial statements contained herein reflect
all adjustments which, in the opinion of management, are necessary for a
fair statement of the financial condition, results of operations, and cash
flows for the periods presented. The interim consolidated financial
statements have been prepared in accordance with the instructions to Form
10-Q and do not include all the information and footnotes required by
accounting principles generally accepted in the United States of America
for complete financial statements.
Operating results for the three-month period ended March 31, 2005, are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2005. In the opinion of management, the information
set forth in the accompanying consolidated condensed balance sheets is
fairly stated in all material respects in relation to the consolidated
balance sheets from which it has been derived.
These interim consolidated financial statements should be read in
conjunction with the Company's Annual Report on Form 10-K for the year
ended December 31, 2004.
2
WERNER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
(In thousands, except per share amounts) March 31
- ---------------------------------------------------------------------------
2005 2004
- ---------------------------------------------------------------------------
(Unaudited)
Operating revenues $ 455,262 $ 386,280
---------------------------
Operating expenses:
Salaries, wages and benefits 140,222 133,312
Fuel 67,628 45,752
Supplies and maintenance 36,754 32,894
Taxes and licenses 28,778 27,512
Insurance and claims 23,200 19,507
Depreciation 39,637 34,985
Rent and purchased transportation 82,567 63,150
Communications and utilities 5,442 4,548
Other (1,803) (239)
---------------------------
Total operating expenses 422,425 361,421
---------------------------
Operating income 32,837 24,859
---------------------------
Other expense (income):
Interest expense 4 2
Interest income (965) (535)
Other 27 37
---------------------------
Total other expense (income) (934) (496)
---------------------------
Income before income taxes 33,771 25,355
Income taxes 13,850 9,787
---------------------------
Net income $ 19,921 $ 15,568
===========================
Average common shares outstanding 79,351 79,594
===========================
Basic earnings per share $ .25 $ .20
===========================
Diluted shares outstanding 80,824 81,357
===========================
Diluted earnings per share $ .25 $ .19
===========================
Dividends declared per share $ .035 $ .025
===========================
3
WERNER ENTERPRISES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except share amounts) March 31 December 31
- ---------------------------------------------------------------------------
2005 2004
- ---------------------------------------------------------------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 96,058 $ 108,807
Accounts receivable, trade, less allowance of
$8,469 and $8,189, respectively 187,609 186,771
Other receivables 10,922 11,832
Inventories and supplies 10,146 9,658
Prepaid taxes, licenses and permits 11,988 15,292
Current deferred income taxes 17,538 -
Other current assets 19,791 18,896
---------------------------
Total current assets 354,052 351,256
---------------------------
Property and equipment 1,435,965 1,374,649
Less - accumulated depreciation 532,307 511,651
---------------------------
Property and equipment, net 903,658 862,998
---------------------------
Other non-current assets 13,415 11,521
---------------------------
$1,271,125 $1,225,775
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 47,349 $ 49,618
Insurance and claims accruals 61,191 55,095
Accrued payroll 18,215 19,579
Income taxes payable 40,200 475
Current deferred income taxes - 15,569
Other current liabilities 18,120 17,230
---------------------------
Total current liabilities 185,075 157,566
---------------------------
Insurance and claims accruals, net of current
portion 86,301 84,301
Deferred income taxes 206,746 210,739
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, 200,000,000
shares authorized; 80,533,536 shares
issued; 79,410,733 and 79,197,747 shares
outstanding, respectively 805 805
Paid-in capital 105,631 106,695
Retained earnings 708,176 691,035
Accumulated other comprehensive loss (910) (861)
Treasury stock, at cost; 1,122,803 and
1,335,789 shares, respectively (20,699) (24,505)
---------------------------
Total stockholders' equity 793,003 773,169
---------------------------
$1,271,125 $1,225,775
===========================
4
WERNER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
(In thousands) March 31
- ---------------------------------------------------------------------------
2005 2004
- ---------------------------------------------------------------------------
(Unaudited)
Cash flows from operating activities:
Net income $ 19,921 $ 15,568
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 39,637 34,985
Deferred income taxes (37,100) (2,845)
Gain on disposal of property and equipment (2,461) (2,000)
Tax benefit from exercise of stock options 1,201 369
Other long-term assets (1,236) (105)
Insurance claims accruals, net of current
portion 2,000 3,000
Changes in certain working capital items:
Accounts receivable, net (838) (1,655)
Other current assets 2,831 (706)
Accounts payable (2,269) (2,665)
Other current liabilities 45,339 15,562
---------------------------
Net cash provided by operating activities 67,025 59,508
---------------------------
Cash flows from investing activities:
Additions to property and equipment (101,852) (48,099)
Retirements of property and equipment 22,821 15,678
Decrease in notes receivable 537 880
---------------------------
Net cash used in investing activities (78,494) (31,541)
---------------------------
Cash flows from financing activities:
Dividends on common stock (2,772) (1,993)
Repurchases of common stock (263) (9,443)
Stock options exercised 1,804 645
---------------------------
Net cash used in financing activities (1,231) (10,791)
---------------------------
Effect of exchange rate fluctuations on cash (49) 95
Net increase (decrease) in cash and cash
equivalents (12,749) 17,271
Cash and cash equivalents, beginning of period 108,807 101,409
---------------------------
Cash and cash equivalents, end of period $ 96,058 $ 118,680
===========================
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest $ 4 $ 2
Income taxes $ 12,132 $ 4,705
Supplemental schedule of non-cash investing
activities:
Notes receivable issued upon sale of revenue
equipment $ 1,195 $ 968
5
WERNER ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Comprehensive Income
Other than its net income, the Company's only other source of
comprehensive income (loss) is foreign currency translation adjustments.
Other comprehensive income (loss) from foreign currency translation
adjustments was ($49) and $95 (in thousands) for the three-month periods
ended March 31, 2005 and 2004, respectively.
(2) Long-Term Debt
As of March 31, 2005, the Company has two credit facilities with banks
totaling $75.0 million which expire May 16, 2006 and October 22, 2005 and
bear variable interest based on the London Interbank Offered Rate
("LIBOR"), on which no borrowings were outstanding. As of March 31, 2005,
the credit available pursuant to these bank credit facilities is reduced by
$35.4 million in letters of credit the Company maintains. Each of the
debt agreements require, among other things, that the Company maintain a
minimum consolidated tangible net worth and not exceed a maximum ratio of
total funded debt to earnings before interest, income taxes, depreciation,
amortization and rentals payable as defined in the credit facility.
Although the Company had no borrowings pursuant to these credit facilities
as of March 31, 2005, the Company remained in compliance with these
covenants at March 31, 2005.
On April 29, 2005, the Company renewed the $50.0 million bank credit
facility, extending the maturity date from May 16, 2006 to May 16, 2007 and
increasing the amount of the consolidated tangible net worth requirement to
$500.0 million.
(3) Commitments
As of March 31, 2005, the Company has commitments for net capital
expenditures of approximately $99.1 million.
(4) Earnings Per Share
A reconciliation of the numerator and denominator of basic and diluted
earnings per share is shown below (in thousands, except per share amounts).
Common stock equivalents represent the dilutive effect of outstanding stock
options for all periods presented.
Three Months Ended
March 31
----------------------
2005 2004
----------------------
Net income $ 19,921 $ 15,568
======================
Average common shares outstanding 79,351 79,594
Common stock equivalents 1,473 1,763
----------------------
Diluted shares outstanding 80,824 81,357
======================
Basic earnings per share $ .25 $ .20
======================
Diluted earnings per share $ .25 $ .19
======================
6
There were no options to purchase shares of common stock which were
outstanding during the periods indicated above, but 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.
(5) Stock Based Compensation
At March 31, 2005, the Company has a nonqualified stock option plan.
The Company granted 19,500 stock options during the three-month period
ended March 31, 2005 and none during the three-month period ended March 31,
2004. The Company applies the intrinsic value based method of Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for its stock option
plan. No stock-based employee compensation cost is reflected in net
income, as all options granted under the plan had an exercise price equal
to the market value of the underlying common stock on the date of grant.
The Company's pro forma net income and earnings per share (in thousands,
except per share amounts) would have been as indicated below had the fair
value of all option grants been charged to salaries, wages, and benefits
expense in accordance with Statement of Financial Accounting Standards
("SFAS") No. 123, Accounting for Stock-Based Compensation.
Three Months Ended
March 31
----------------------
2005 2004
----------------------
Net income, as reported $ 19,921 $ 15,568
Less: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax
effects 448 354
----------------------
Net income, pro forma $ 19,473 $ 15,214
======================
Earnings per share:
Basic - as reported $ .25 $ .20
======================
Basic - pro forma $ .25 $ .19
======================
Diluted - as reported $ .25 $ .19
======================
Diluted - pro forma $ .24 $ .19
======================
The maximum number of shares of common stock that may be optioned
under the Stock Option Plan is 20,000,000 shares, and the maximum aggregate
number of options that may be granted to any one person is 2,562,500
options.
(6) Related Party Transactions
The Company's principal stockholder is the sole trustee of a trust
that owned a one-third interest in an entity that operates a motel located
nearby one of the Company's terminals with which the Company has committed
to rent a guaranteed number of rooms to be used by the Company's employees,
primarily its drivers. The trust also owned a one-third interest in a
separate entity that developed and built the motel. On February 28, 2005,
the trust assigned its one-third ownership interests in these two entities
to the Company for a payment of ten dollars ($10). The Company assumed
one-third ownership in this 71-room motel that has an appraised value of
$2.6 million and outstanding notes payable of $2.2 million. This motel had
positive net income in 2004, after all expenses, including depreciation and
interest expense. The Company has agreed to hold the trustee and the trust
harmless with respect to any guarantee of debt executed prior to the date
7
of assignment. The equity method of accounting is used for the Company's
investment in these two entities.
(7) Segment Information
The Company has two reportable segments - Truckload Transportation
Services and Value Added Services. The Truckload Transportation Services
segment consists of five operating fleets that have been aggregated since
they have similar economic characteristics and meet the other aggregation
criteria of SFAS No. 131. The medium-to-long haul Van fleet transports a
variety of consumer, non-durable products and other commodities in
truckload quantities over irregular routes using dry van trailers. The
Regional short-haul fleet provides comparable truckload van service within
five geographic areas. 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. Revenues for the Truckload
Transportation Services segment include non-trucking revenues of $3.5
million in first quarter 2005 and $2.9 million in first quarter 2004,
representing the portion of shipments delivered to or from Mexico where the
Company utilizes a third-party carrier and revenues generated in a few
dedicated accounts where the services of third-party carriers 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 brokerage, intermodal
services, and freight transportation management. Value Added Services was
identified as a new reportable segment as of June 30, 2004. The 2004
amounts shown in the following tables have been reclassified to account for
the change in composition of the Company's reportable segments.
The Company generates other revenues related to third-party equipment
maintenance, equipment leasing, and other business activities. None of
these operations meet the quantitative threshold reporting requirements of
SFAS No. 131. As a result, these operations are grouped in "Other" in the
tables 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.
The following tables summarize the Company's segment information (in
thousands of dollars):
Revenues
--------
Three Months Ended
March 31
-----------------------
2005 2004
-----------------------
Truckload Transportation Services $ 402,363 $ 350,660
Value Added Services 50,160 33,367
Other 1,899 1,555
Corporate 840 698
-----------------------
Total $ 455,262 $ 386,280
=======================
8
Operating Income
----------------
Three Months Ended
March 31
-----------------------
2005 2004
-----------------------
Truckload Transportation Services $ 31,184 $ 24,348
Value Added Services 1,993 929
Other 856 675
Corporate (1,196) (1,093)
-----------------------
Total $ 32,837 $ 24,859
=======================
9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
This report contains historical information, as well as forward-
looking statements that are based on information currently available to the
Company's management. The forward-looking statements are made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act
of 1995. The Company believes the assumptions underlying these forward-
looking statements are reasonable based on information currently available;
however, any of the assumptions could be inaccurate, and therefore, actual
results may differ materially from those anticipated in the forward-looking
statements as a result of certain risks and uncertainties. These risks
include, but are not limited to, those discussed in the section of this
Item entitled "Forward-Looking Statements and Risk Factors" and in Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", of the Company's Annual Report on Form 10-K for the year ended
December 31, 2004. 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
trailers. Although the Company's business volume is not highly
concentrated, the Company may also be affected by the financial failure of
its customers or a loss of a customer's business from time-to-time.
Operating revenues consist of trucking revenues generated by the five
operating fleets in the Truckload Transportation Services segment
(medium/long-haul van, dedicated, regional short-haul, flatbed, and
temperature-controlled) and non-trucking revenues generated primarily by
the Company's Value Added Services ("VAS") segment. The Company's
Truckload Transportation Services segment also includes a small amount of
non-trucking revenues for the portion of shipments delivered to or from
Mexico where it utilizes a third-party carrier, and for a few of its
dedicated accounts where the services of third-party carriers are used to
meet customer capacity requirements. Non-trucking revenues reported in the
operating statistics table include those revenues generated by the VAS
segment, as well as the non-trucking revenues generated by the Truckload
Transportation Services segment. Trucking revenues accounted for 88% of
total operating revenues in first quarter 2005, and non-trucking and other
operating revenues accounted for 12%.
Trucking services typically generate revenue on a per-mile basis.
Other sources of trucking revenue include fuel surcharges and accessorial
revenue such as stop charges, loading/unloading charges, and equipment
detention charges. Because fuel surcharge revenues fluctuate in response
to changes in the cost of fuel, these revenues are identified separately
within the operating statistics table and are excluded from the statistics
to provide a more meaningful comparison between periods. Non-trucking
revenues generated by a fleet whose operations are part of the Truckload
Transportation Services segment are included in non-trucking revenue in the
operating statistics table so that the revenue statistics in the table are
calculated using only the revenues generated by the Company's trucks. The
key statistics used to evaluate trucking revenues, excluding fuel
surcharges, are revenues per tractor per week, the per-mile rates charged
to customers, the average monthly miles generated per tractor, the
percentage of empty miles, the average trip length, and the number of
tractors in service. General economic conditions, seasonal freight
patterns in the trucking industry, and industry capacity are key factors
that impact these statistics.
10
The Company's most significant resource requirements are qualified
drivers, tractors, trailers, and related costs of operating its equipment
(such as fuel and related fuel taxes, driver pay, insurance, and supplies
and maintenance). The Company has historically been successful mitigating
its risk to increases in fuel prices by recovering additional fuel
surcharges from its customers; however, there is no assurance that current
recovery levels will continue in future periods. The Company's financial
results are also affected by availability of drivers and the market for new
and used trucks. Because the Company is self-insured for cargo, personal
injury, and property damage claims on its trucks and for workers'
compensation benefits for its employees (supplemented by premium-based
coverage above certain dollar levels), financial results may also be
affected by driver safety, medical costs, the weather, the legal and
regulatory environment, and the costs of insurance coverage to protect
against catastrophic losses.
A common industry measure used to evaluate the profitability of the
Company and its trucking operating fleets is the operating ratio (operating
expenses expressed as a percentage of operating revenues). The most
significant variable expenses that impact the trucking operation are driver
salaries and benefits, payments to owner-operators (included in rent and
purchased transportation expense), fuel, fuel taxes (included in taxes and
licenses expense), supplies and maintenance, and insurance and claims.
Generally, these expenses 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 first quarter 2005 to first quarter 2004, several
industry-wide issues, including high fuel prices, a challenging driver
recruiting market, and uncertainty regarding possible changes to the hours
of service regulations, could cause costs to increase in future periods.
The Company's main fixed costs include depreciation expense for tractors
and trailers and equipment licensing fees (included in taxes and licenses
expense). Depreciation expense has been affected by the new engine
emission standards that became effective in October 2002 for all newly
purchased trucks, which have increased truck purchase costs. The trucking
operations require substantial cash expenditures for tractors and trailers.
The Company has maintained a three-year replacement cycle for company-owned
tractors. These purchases are currently funded by net cash from
operations, as the Company repaid its last remaining debt in December 2003.
Non-trucking services provided by the Company, primarily through its
VAS division, include freight brokerage, intermodal, freight transportation
management, and other services. During 2005, VAS is expanding its service
offerings to include multimodal, which is a blend of truck and rail
intermodal services. Unlike the Company's trucking operations, the non-
trucking operations are less asset-intensive and are instead dependent upon
information systems, qualified employees, and the services of other third-
party providers. The most significant expense item related to these non-
trucking services is the cost of transportation paid by the Company to
third-party providers, which is recorded as rent and purchased
transportation expense. Other expenses include salaries, wages and
benefits and computer hardware and software depreciation. The Company
evaluates the non-trucking operations by reviewing the gross margin
percentage (revenues less rent and purchased transportation expense
expressed as a percentage of revenues) and the operating margin. The
operating margins for the non-trucking business are generally lower than
those of the trucking operations, but the returns on assets are
substantially higher.
11
Results of Operations:
The following table sets forth certain industry data regarding the
freight revenues and operations of the Company for the periods indicated.
Three Months Ended
March 31 %
--------------------
2005 2004 Change
----------------------------
Trucking revenues, net of fuel surcharge (1) $357,866 $329,733 8.5%
Trucking fuel surcharge revenues (1) 40,936 17,971 127.8%
Non-trucking revenues, including VAS (1) 53,677 36,253 48.1%
Other operating revenues (1) 2,783 2,323 19.8%
-------- --------
Operating revenues (1) $455,262 $386,280 17.9%
======== ========
Operating ratio (consolidated) (2) 92.8% 93.6% -0.9%
Average monthly miles per tractor 9,932 10,034 -1.0%
Average revenues per total mile (3) $1.393 $1.298 7.3%
Average revenues per loaded mile (3) $1.579 $1.470 7.4%
Average percentage of empty miles 11.77% 11.69% 0.7%
Average trip length in miles (loaded) 573 580 -1.2%
Total miles (loaded and empty) (1) 256,846 253,952 1.1%
Average tractors in service 8,620 8,436 2.2%
Average revenues per tractor per week (3) $3,193 $3,007 6.2%
Total tractors (at quarter end)
Company 7,720 7,495
Owner-operator 930 930
-------- --------
Total tractors 8,650 8,425
Total trailers (at quarter end) 23,710 22,960
(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.
The following table sets forth the revenues, operating expenses, and
operating income for the Truckload Transportation Services segment.
Three Months Ended
March 31
------------------------------
2005 2004
-------------- --------------
Truckload Transportation Services (amounts in 000's) $ % $ %
- ---------------------------------------------------- -------------- --------------
Revenues $402,363 100.0 $350,660 100.0
Operating expenses 371,179 92.2 326,312 93.1
-------- --------
Operating income $ 31,184 7.8 $ 24,348 6.9
======== ========
Higher fuel prices and higher fuel surcharge collections have the
effect of increasing the Company's consolidated operating ratio and the
Truckload Transportation Services segment's operating ratio. Eliminating
this sometimes 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 Transportation Services segment's
12
operating ratio using total operating expenses, net of fuel surcharge
revenues, as a percentage of revenues, excluding fuel surcharges.
Three Months Ended
March 31
------------------------------
2005 2004
-------------- --------------
Truckload Transportation Services (amounts in 000's) $ % $ %
- ---------------------------------------------------- -------------- --------------
Revenues $402,363 $350,660
Less: trucking fuel surcharge revenues 40,936 17,971
-------- --------
Revenues, net of fuel surcharge 361,427 100.0 332,689 100.0
-------- --------
Operating expenses 371,179 326,312
Less: trucking fuel surcharge revenues 40,936 17,971
-------- --------
Operating expenses, net of fuel surcharge 330,243 91.4 308,341 92.7
-------- --------
Operating income $ 31,184 8.6 $ 24,348 7.3
======== ========
The following table sets forth the non-trucking revenues, operating
expenses, and operating income for the VAS segment. Other operating
expenses for the VAS segment primarily consist of salaries, wages and
benefits expense. VAS also incurs smaller expense amounts in the supplies
and maintenance, depreciation, rent and purchased transportation (excluding
third-party transportation costs), communications and utilities, and other
operating expense categories.
Three Months Ended
March 31
------------------------------
2005 2004
-------------- --------------
Value Added Services (amounts in 000's) $ % $ %
- --------------------------------------- -------------- --------------
Revenues $ 50,160 100.0 $ 33,367 100.0
Rent and purchased transportation expense 45,166 90.0 30,241 90.6
-------- --------
Gross margin 4,994 10.0 3,126 9.4
Other operating expenses 3,001 6.0 2,197 6.6
-------- --------
Operating income $ 1,993 4.0 $ 929 2.8
======== ========
Three Months Ended March 31, 2005 Compared to Three Months Ended March 31,
- ---------------------------------------------------------------------------
2004
- ----
Operating Revenues
Operating revenues increased 17.9% for the three months ended March
31, 2005, compared to the same period of the prior year. Excluding fuel
surcharge revenues, trucking revenues increased 8.5% due primarily to a
7.3% increase in revenue per total mile, excluding fuel surcharges, and a
2.2% increase in the average number of tractors in service, offset by a
1.0% decrease in average monthly miles per tractor. Revenue per total
mile, excluding fuel surcharges, increased due to customer rate increases,
an improvement in freight selection, and a 1.2% decrease in the average
loaded trip length due to growth in the Company's dedicated and regional
fleets. The Company grew its dedicated fleet by 12% in first quarter 2005
compared to first quarter 2004. 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.
13
Historically, freight demand in first quarter is significantly weaker
than the previous fourth quarter due to the seasonal decline from the peak
retail season in fourth quarter. However, the decline from fourth quarter
2004 to first quarter 2005 was less significant due to the increasing
stability of the Company's freight base and the strength of its customer
relationships. For example, the dedicated fleet has grown to almost 40% of
the total truck fleet, which helps produce more consistent results. In
addition, the Value Added Services division generates additional freight
opportunities, which tends to level freight volumes from quarter to quarter
and soften the impact of seasonal fluctuations.
In the third and fourth quarter of 2004, the Company's sales and
marketing team met with customers to negotiate annual rate increases to
recoup the significant cost increases in fuel, driver pay, equipment, and
insurance and to improve margins. Much of the Company's non-dedicated
contractual business renews in the latter part of third quarter and fourth
quarter, and these contractual rate increases contributed to the pricing
improvement in first quarter 2005 compared to first quarter 2004.
Fuel surcharge revenues, which represent collections from customers
for the higher cost of fuel, increased to $40.9 million in first quarter
2005 from $18.0 million in first quarter 2004 due to higher average fuel
prices in first quarter 2005. The Company's fuel surcharge programs are
designed to recoup the higher cost of fuel from customers when fuel prices
rise and automatically provide customers with the benefit of lower costs
when fuel prices decline. These programs have historically enabled the
Company to recover a significant portion of the fuel price increases. As
discussed further under the "Operating Expenses" heading, the strength of
the Company's fuel surcharge programs helped to limit the impact of higher
fuel costs, including higher owner-operator fuel reimbursements and the
effect of fuel mile per gallon ("mpg") degradation for trucks with post
October-2002 engines, to just one cent per share in first quarter 2005.
These surcharge programs automatically adjust depending on the Department
of Energy ("DOE") weekly retail on-highway diesel prices. Typical programs
specify a base price per gallon when surcharges can begin to be billed.
Above this price, the Company bills a surcharge rate per mile when the
price per gallon falls in a bracketed range of fuel prices. When fuel
prices increase, fuel surcharges recoup a lower percentage of the
incrementally higher costs due to the impact of inadequate recovery for
empty miles not billable to customers, out-of-route miles, truck idle time,
and "bracket creep". "Bracket creep" occurs when fuel prices approach the
upper limit of the bracketed range, but a higher surcharge rate per mile
cannot be billed until the fuel price per gallon reaches the next bracket.
Also, the DOE survey price used for surcharge contracts changes once a week
while actual fuel prices change more frequently. Because collections of
fuel surcharges typically trail fuel price changes, rapid fuel price
increases cause a temporarily unfavorable effect of fuel costs increasing
more rapidly than fuel surcharge revenues. This effect typically reverses
if fuel prices fall.
VAS revenues increased to $50.2 million for the three months ended
March 31, 2005 from $33.4 million for the three months ended March 31,
2004, or 50.3%. VAS revenues consist primarily of freight brokerage,
intermodal, freight transportation management, and other services. The
Company expects to continue to capitalize on the sophisticated service,
management, and technology advantages of its logistics solution in an
improving freight market. During 2005, VAS began offering multimodal
services, which provide for the movement of freight using a combination of
truck and rail intermodal services.
Operating Expenses
Operating expenses, expressed as a percentage of operating revenues,
were 92.8% for the three months ended March 31, 2005, compared to 93.6% for
the three months ended March 31, 2004. Because the Company's VAS business
operates with a lower operating margin and a higher return on assets than
the trucking business, the growth in VAS business in first quarter 2005
compared to first quarter 2004 affected the Company's overall operating
ratio. As explained above, the significant increase in fuel expense and
related fuel surcharge revenues also affected the operating ratio. The
tables on pages 12 and 13 show the operating ratios and operating margins
14
for the Company's two reportable segments, Truckload Transportation
Services and Value Added Services.
The following table sets forth the cost per total mile of operating
expense items for the Truckload Transportation Services segment for the
periods indicated. The Company evaluates operating costs for this segment
on a per-mile basis to adjust for the impact on the percentage of total
operating revenues caused by changes in fuel surcharge revenues, which
provides a more consistent basis for comparing the results of operations
from period to period.
Three Months Ended Increase
March 31 (Decrease)
----------------------
2005 2004 per Mile
----------------------------------
Salaries, wages and benefits $.535 $.516 $.019
Fuel .262 .179 .083
Supplies and maintenance .139 .124 .015
Taxes and licenses .112 .108 .004
Insurance and claims .090 .077 .013
Depreciation .147 .133 .014
Rent and purchased transportation .145 .129 .016
Communications and utilities .021 .018 .003
Other (.006) .000 (.006)
Owner-operator costs are included in rent and purchased transportation
expense. Owner-operator miles as a percentage of total miles were 12.8% in
first quarter 2005 compared to 12.3% in first quarter 2004. Owner-
operators are independent contractors who supply their own tractor and
driver and are responsible for their operating expenses including fuel,
supplies and maintenance, and fuel taxes. This increase in owner-operator
miles as a percentage of total miles shifted costs to the rent and
purchased transportation category from other expense categories. The
Company estimates that rent and purchased transportation expense for the
Truckload Transportation segment was higher by approximately 0.6 cents per
total mile due to this increase, and other expense categories had
offsetting reductions on a total-mile basis, as follows: salaries, wages
and benefits (0.3 cents), fuel (0.2 cents), depreciation (0.1 cent), with
minimal reductions in supplies and maintenance and taxes and licenses.
Attracting and retaining owner-operator drivers has continued to be
difficult due to the challenging operating conditions.
Salaries, wages and benefits for non-drivers increased in first
quarter 2005 compared to first quarter 2004 to support the growth in the
VAS segment. The increase in salaries, wages and benefits per mile of 1.9
cents for the Truckload Transportation Services segment is primarily the
result of higher driver pay per mile, higher group health insurance, and a
higher number of maintenance employees, offset by more owner-operator miles
as a percentage of total miles, as discussed above, and lower workers'
compensation. 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 has recovered a substantial portion of this
pay raise through its customer rate increase negotiations, which occurred
in third and fourth quarter 2004. The increase in dedicated business as a
percentage of total trucking business also contributed to the increase in
driver pay per mile as dedicated drivers are usually compensated at a
higher rate per mile due to the lower average miles per truck and had the
effect of increasing non-driver salaries, wages and benefits on a per-mile
basis due to the lower average miles per truck. The Company renewed its
workers' compensation insurance coverage, and for the policy year beginning
April 2005, the Company continues to maintain a self-insurance retention of
$1.0 million per claim and is responsible for an annual aggregate amount of
$1.0 million for claims above $1.0 million and below $2.0 million. The
Company's premium rates for this coverage did not change from the prior
policy year.
15
The driver recruiting market continues to be extremely challenging.
By placing more emphasis on training drivers, increasing the frequency of
driver home time, providing drivers with a newer truck, and maximizing
driver productivity within the federal hours of service regulations, the
Company is obtaining an adequate number of drivers to maintain its current
fleet size. However, the supply of qualified truck drivers in the industry
remains visibly constrained due to alternative jobs that are becoming
available with an improved economy and stagnant demographic growth for the
industry's targeted driver base over the next several years. The Company
expects the tight driver market will make it very difficult to add
meaningful truck capacity in the near future.
The Company instituted an optional per diem reimbursement program for
eligible company drivers (approximately half of total non-student company
drivers) beginning in April 2004. This program increases a company
driver's net pay per mile, after taxes. As a result, driver pay per mile
was slightly lower before considering the factors above that increased
driver pay per mile, and the Company's effective income tax rate was higher
in first quarter 2005 compared to first quarter 2004. The Company expects
the cost of the per diem program to be neutral, because the combined driver
pay rate per mile and per diem reimbursement under the per diem program is
about one cent per mile lower than mileage pay without per diem
reimbursement, which offsets the Company's increased income taxes caused by
the nondeductible portion of the per diem. The per diem program increases
driver satisfaction through higher net pay per mile. The Company
anticipates that the competition for qualified drivers will continue to be
high and cannot predict whether it will experience shortages in the future.
If such a shortage was to occur and additional increases in driver pay
rates became necessary to attract and retain drivers, the Company's results
of operations would be negatively impacted to the extent that corresponding
freight rate increases were not obtained.
Fuel increased 8.3 cents per mile for the Truckload Transportation
Services segment due to higher average diesel fuel prices and more trucks
with post-October 2002 engines. Average fuel prices in first quarter 2005
were 45 cents a gallon, or 44%, higher than in first quarter 2004, and were
just two cents a gallon higher than in fourth quarter 2004. In fourth
quarter 2004, fuel prices were abnormally high in October and declined by
17% from October to December. In first quarter 2005, fuel prices were
lower in January but climbed 22% from January to March. Fuel expense,
after considering fuel surcharge collections and the cost impact of owner-
operator fuel reimbursements (which is included in rent and purchased
transportation expense) and lower miles per gallon due to the new truck
engines, had a one-cent negative impact on earnings per share in first
quarter 2005 compared to first quarter 2004. Company data continues to
indicate that the fuel mpg degradation for trucks with post-October 2002
engines (59% of the Company fleet as of March 31, 2005 compared to 15% as
of March 31, 2004) is a reduction of approximately 5%. As the Company
continues to replace older trucks in its fleet with trucks with the post-
October 2002 engines, fuel cost per mile is expected to increase further
due to the lower mpg. Shortages of fuel, increases in fuel prices, or
rationing of petroleum products can have a materially adverse effect on the
operations and profitability of the Company. The Company is unable to
predict whether fuel price levels will continue to increase or decrease in
the future or the extent to which fuel surcharges will be collected from
customers. As of March 31, 2005, the Company had no derivative financial
instruments to reduce its exposure to fuel price fluctuations.
Diesel fuel prices for the month of April 2005 averaged 54 cents a
gallon, or 48%, higher than average fuel prices for second quarter 2004.
Assuming fuel prices remain at current levels throughout the remainder of
second quarter 2005, the negative impact of fuel expense on earnings for
second quarter 2005 compared to second quarter 2004 is estimated to be in
the range of approximately two to three cents per share. This expected
earnings impact is lessened due to increasing fuel prices and a temporary
fuel price spike in the western United States occurring in second quarter
2004. Both of these items reduced second quarter 2004 earnings.
Supplies and maintenance for the Truckload Transportation Services
segment increased 1.5 cents on a per-mile basis in first quarter 2005 due
primarily to increases in the cost of over-the-road repairs. Over-the-road
16
("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
when establishing pricing for dedicated customers. Higher driver
recruiting costs (including driver advertising and driver travel and
lodging) and higher toll expense related to state toll rate increases also
contributed to a small portion of the increase.
Insurance and claims for the Truckload Transportation Services segment
increased 1.3 cents on a per-mile basis due to increased claim costs and
negative development on existing liability insurance claims. For the
policy year beginning August 1, 2004, the Company became responsible for
the first $2.0 million per claim with an annual aggregate of $3.0 million
for claims between $2.0 million and $3.0 million, and the Company became
fully insured (i.e., no aggregate) for claims between $3.0 million and $5.0
million. For claims in excess of $5.0 million and less than $10.0 million,
the Company is responsible for the first $5.0 million of claims. 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. The Company
maintains liability insurance coverage with reputable insurance carriers
substantially in excess of the $10.0 million per claim.
Depreciation expense for the Truckload Transportation Services segment
increased 1.4 cents on a per-mile basis in first quarter 2005 due primarily
to higher costs of new tractors with the post-October 2002 engines. As of
March 31, 2005, approximately 59% of the company-owned truck fleet
consisted of trucks with the post-October 2002 engines compared to 15% at
March 31, 2004. As the Company continues to replace older trucks in its
fleet with trucks with the post-October 2002 engines, depreciation expense
is expected to increase. The 1% lower miles generated per truck also
contributed to the increase in this fixed cost on a per-mile basis.
Rent and purchased transportation consists mainly of payments to
third-party carriers in the VAS and other non-trucking operations and
payments to owner-operators in the trucking operations. Rent and purchased
transportation for the Truckload Transportation Services segment increased
1.6 cents per total mile in first quarter 2005 as higher fuel prices
necessitated higher reimbursements to owner-operators for fuel and, to a
lesser extent, due to more owner-operator miles as a percentage of total
miles. The Company's customer fuel surcharge programs do not differentiate
between miles generated by Company-owned trucks and miles generated by
owner-operator trucks; thus, the increase in owner-operator fuel
reimbursements is included with Company fuel expenses in calculating the
per-share impact of higher fuel prices on earnings. The Company has
experienced difficulty recruiting and retaining owner-operators for over
two years because of challenging operating conditions. However, the Company
has historically been able to add company-owned tractors and recruit
additional company drivers to offset any decreases in owner-operators. If
a shortage of owner-operators and company drivers were to occur and
increases in per mile settlement rates became necessary to attract and
retain owner-operators, the Company's results of operations would be
negatively impacted to the extent that corresponding freight rate increases
were not obtained. Payments to third-party carriers used for portions of
shipments delivered to or from Mexico and by a few dedicated fleets in the
truckload segment contributed 0.2 cents of the total per-mile increase for
the Truckload Transportation Services segment.
As shown in the VAS statistics table 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 90.0%
in first quarter 2005 compared to 90.6% in first quarter 2004, resulting in
higher gross margin in first quarter 2005. An improving truckload freight
environment 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.
17
Other operating expenses for the Truckload Transportation Services
segment decreased 0.6 cents per mile in first quarter 2005. Gains on sales
of revenue equipment, primarily trucks, are reflected as a reduction of
other operating expenses and are reported net of pre-sale repairs and other
sales-related expenses. Gains on sales increased to $2.5 million in first
quarter 2005 from $1.6 million in first quarter 2004 due to increased unit
sales of trucks as the Company is attempting to keep its fleet as new as
possible. In the Company's first quarter 2005 earnings release issued
April 18, 2005, pre-sale repair expenses totaling approximately $2.0
million were reported in supplies and maintenance expense and have been
reclassified in this Form 10-Q to other operating expenses, as a reduction
of gains on sales of equipment, consistent with the reporting in prior
periods. The Company's wholly-owned subsidiary, Fleet Truck Sales, is one
of the largest domestic class 8 truck sales companies in the United States.
Fleet Truck Sales will be adding its 17th truck sales location during
second quarter 2005. The Company's goal is to sell a majority of its used
equipment through its Fleet Truck Sales network. Other operating expenses
also include bad debt expense and professional services fees. The
remaining decrease in other operating expenses in first quarter 2005 is due
primarily to a reduction in computer consulting fees.
The Company's effective income tax rate (income taxes expressed as a
percentage of income before income taxes) increased to 41.0% for the three-
month period ended March 31, 2005 from 38.5% for the three-month period
ended March 31, 2004 due to an increase in 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:
During the three months ended March 31, 2005, the Company generated
cash flow from operations of $67.0 million, a 12.6% increase ($7.5 million)
in cash flow compared to the same three-month period a year ago. The
increase in cash flow from operations is due primarily to higher net income
and higher depreciation expense for financial reporting purposes related to
the higher cost of the post-October 2002 engines. Deferred taxes decreased
by $37.1 million during the three months ended March 31, 2005 with an
offsetting increase to the current income tax liability, related to the
reversal of certain tax strategies implemented in 2001 due to recent tax
law changes and lower tax depreciation in 2005 due to the bonus
depreciation which expired on December 31, 2004. The higher current income
tax liability of $40.2 million at March 31, 2005 includes the effect of
these two items. In April 2005, the Company made federal income tax
payments of $22.5 million related to the tax strategies and $16.2 million
representing its first quarter 2005 estimated tax payment, and expects
income tax payments for the remaining three quarterly tax payment dates of
2005 to be higher than those in the comparable periods of 2004 due to the
reversal of deferred tax liabilities related to equipment depreciation.
The cash flow from operations enabled the Company to make net property
additions, primarily revenue equipment, of $79.0 million, repurchase common
stock of $0.3 million, and pay common stock dividends of $2.8 million.
Based on the Company's strong financial position, management foresees no
significant barriers to obtaining sufficient financing, if necessary.
Net cash used in investing activities for the three-month period ended
March 31, 2005 increased by $47.0 million, from $31.5 million for the
three-month period ended March 31, 2004 to $78.5 million for the three-
month period ended March 31, 2005. The large increase was due primarily to
the Company purchasing more tractors in first quarter 2005.
As of March 31, 2005, the Company has committed to property and
equipment purchases, net of trades, of approximately $99.1 million. The
average age of the Company's truck fleet is 1.54 years at March 31, 2005.
The Company intends to gradually reduce the average age of the truck fleet
in 2005. As such capital expenditures are expected to be higher throughout
the remainder of 2005 as compared to 2004. The Company intends to fund
these capital expenditure commitments through existing cash on hand and
cash flow from operations. Equipment may be purchased through financing if
18
management determines that financing is advantageous or necessary for the
Company.
Net financing activities used $1.2 million and $10.8 million during
the three months ended March 31, 2005 and 2004, respectively. The Company
paid dividends of $2.8 million in the three-month period ended March 31,
2005 and $2.0 million in the three-month period ended March 31, 2004. The
Company increased its quarterly dividend rate by $.01 per share beginning
with the dividend paid in July 2004. Financing activities also included
common stock repurchases of $0.3 million and $9.4 million in the three-
month periods ended March 31, 2005 and 2004, respectively. From time to
time, the Company has repurchased, and may continue to repurchase, shares
of its common stock. The timing and amount of such purchases depends on
market and other factors. The Company's Board of Directors has authorized
the repurchase of up to 8,132,504 shares. As of March 31, 2005, the
Company had purchased 4,348,704 shares pursuant to this authorization and
had 3,783,800 shares remaining available for repurchase.
Management believes the Company's financial position at March 31, 2005
is strong. As of March 31, 2005, the Company has $96.1 million of cash and
cash equivalents, no debt, and $793.0 million of stockholders' equity. As
of March 31, 2005, the Company has no equipment operating leases, and,
therefore has no off-balance sheet equipment debt. The Company maintains
$35.4 million in letters of credit as of March 31, 2005. These letters of
credit are primarily required as security for insurance policies. As of
March 31, 2005, the Company has $75.0 million of credit pursuant to credit
facilities, on which no borrowings were outstanding. The credit available
under these facilities is reduced by the $35.4 million in letters of
credit.
Off-Balance Sheet Arrangements:
The Company does not have arrangements which meet the definition of an
off-balance sheet arrangement.
Regulations:
The Federal Motor Carrier Safety Administration ("FMCSA") of the U.S.
Department of Transportation issued a final rule on April 24, 2003, that
made several changes to the regulations which govern truck drivers' hours
of service ("HOS"). The new rules became effective on January 4, 2004. On
July 16, 2004, the U.S. Circuit Court of Appeals for the District of
Columbia rejected the new hours of service rules for truck drivers, because
it said the FMCSA had failed to address the impact of the rules on the
health of drivers as required by Congress. In addition, the judge's ruling
noted other areas of concern including the increase in driving hours from
10 hours to 11 hours, the exception that allows drivers to split their
required rest periods, the new rule allowing drivers to reset their 70-hour
clock to 0 hours after 34 consecutive hours off duty, and the decision by
the FMCSA not to require the use of electronic onboard recorders to monitor
driver compliance. On September 30, 2004, the extension of the Federal
highway bill signed into law by the President extended the previously
vacated 2003 hours of service rules, effective immediately, 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 public comment period on what
changes to the rule, if any, are necessary to respond to the concerns
raised by the court, and for providing data or studies that would support
changes to, or continued use of, the 2003 rule ended on March 10, 2005.
No ruling on the FMCSA's proposal has been made as of the date of this
filing.
Beginning in January 2007, a new set of more stringent emissions
standards mandated by the Environmental Protection Agency ("EPA") will
become effective for newly manufactured trucks. The Company intends to
19
continue to keep its fleet as new as possible 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. In addition, all truckload carriers will be required to
use new ultra-low sulfur fuel for all of the existing trucks in their fleet
beginning in mid-2006. The price per gallon of the new ultra-low sulfur
fuel is expected to be higher compared to current fuel, and preliminary
estimates are that the new ultra-low sulfur fuel will cause an approximate
1% to 3% decline in fuel miles per gallon. To gain a better understanding
of the impact of these items, the Company recently received a few January
2007 compliant test engines that the Company will operate using the ultra-
low sulfur fuel.
Critical Accounting Policies:
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 current replacement cycle
for tractors is three years, the Company calculates depreciation
expense for financial reporting purposes using a five-year life and
25% salvage value. Depreciation expense calculated in this manner
continues at the same straight-line rate, which approximates the
continuing declining market value of the tractors, in those instances
in which a tractor is held beyond the normal three-year age.
Calculating depreciation expense using a five-year life and 25%
salvage value results in the same annual depreciation rate (15% of
cost per year) and the same net book value at the normal three-year
replacement date (55% of cost) as using a three-year life and 55%
salvage value. The Company continually monitors the adequacy of the
lives and salvage values used in calculating depreciation expense and
adjusts these assumptions appropriately when warranted.
* The Company reviews its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount
of a long-lived asset may not be recoverable. An impairment loss
would be recognized if the carrying amount of the long-lived asset is
not recoverable, and it exceeds its fair value. For long-lived assets
classified as held and used, if the carrying value of the long-lived
asset exceeds the sum of the future net cash flows, it is not
recoverable. The Company does not separately identify assets by
operating segment, as tractors and trailers are routinely transferred
from one operating fleet to another. As a result, none of the
Company's long-lived assets have identifiable cash flows from use that
are largely independent of the cash flows of other assets and
liabilities. Thus, the asset group used to assess impairment would
include all assets and liabilities of the Company. Long-lived assets
classified as held for sale are reported at the lower of their
carrying amount or fair value less costs to sell.
* Estimates of accrued liabilities for insurance and claims for
liability and physical damage losses and workers' compensation. The
insurance and claims accruals (current and long-term) are recorded at
the estimated ultimate payment amounts and are based upon individual
case estimates, including negative development, and estimates of
incurred-but-not-reported losses based upon past experience. The
Company's self-insurance reserves are reviewed by an actuary every six
months.
* Policies for revenue recognition. Operating revenues (including fuel
surcharge revenues) and related direct costs are recorded when the
shipment is delivered. For shipments where a third-party provider is
utilized to provide some or all of the service and the Company is the
primary obligor in regards to the delivery of the shipment,
establishes customer pricing separately from carrier rate
negotiations, generally has discretion in carrier selection, and/or
20
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 evaluates these estimates and policies 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.
Accounting Standards:
In December 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 153, Exchanges of Nonmonetary Assets. This Statement
amends the guidance in APB Opinion No. 29, Accounting for Nonmonetary
Transactions. APB Opinion No. 29 provided an exception to the basic
measurement principle (fair value) for exchanges of similar assets,
requiring that some nonmonetary exchanges be recorded on a carryover basis.
SFAS No. 153 eliminates the exception to fair value for exchanges of
similar productive assets and replaces it with a general exception for
exchange transactions that do not have commercial substance, that is,
transactions that are not expected to result in significant changes in the
cash flows of the reporting entity. The provisions of SFAS No. 153 are
effective for exchanges of nonmonetary assets occurring in fiscal periods
beginning after June 15, 2005. As of March 31, 2005, management believes
that SFAS No. 153 will have no significant effect on the financial
position, results of operations, and cash flows of the Company.
In December 2004, the FASB revised SFAS No. 123 (revised 2004), Share-
Based Payments. SFAS No. 123(R) eliminates the alternative to use APB
Opinion No. 25's intrinsic value method of accounting (generally resulting
in recognition of no compensation cost) and instead requires a company to
recognize in its financial statements the cost of employee services
received in exchange for valuable equity instruments issued, and
liabilities incurred, to employees in share-based payment transactions
(e.g., stock options). The cost will be based on the grant-date fair value
of the award and will be recognized over the period for which an employee
is required to provide service in exchange for the award. In April 2005,
the Securities and Exchange Commission ("SEC") adopted a rule amending the
compliance dates for SFAS No. 123(R). Under the new SEC rule, the
provisions of the revised statement are to be applied prospectively by the
Company for awards that are granted, modified, or settled in the first
fiscal year beginning after June 15, 2005. Additionally, the Company would
recognize compensation cost for any portion of awards granted or modified
after December 15, 1994, that is not yet vested at the date the standard is
adopted, based on the grant-date fair value of those awards calculated
under SFAS No. 123 (as originally issued) for either recognition or pro
forma disclosures. When the Company adopts the standard on January 1,
2006, it will be required to report in its financial statements the share-
based compensation expense for reporting periods in 2006. As of March 31,
21
2005, management believes that adopting the new statement will have a
negative impact of approximately one cent per share for the year ending
December 31, 2006, representing the expense to be recognized for the
unvested portion of awards which were granted prior to March 31, 2005, and
cannot predict the earnings impact of awards that may be granted after that
date. (See Note 5 of the Notes to Consolidated Financial Statements under
Part I, Item 1 of this Form 10-Q, which shows the pro forma effect of SFAS
No. 123.)
Forward-Looking Statements and Risk Factors:
The following risks and uncertainties, as well as those listed in Item
7 of the Company's Annual Report on Form 10-K for the year ended December
31, 2004, may cause actual results to differ materially from those
anticipated in the forward-looking statements included in this Form 10-Q:
The Company is sensitive to changes in overall economic conditions
that impact customer shipping volumes. Future weakness in the economy and
consumer demand could result in reduced freight demand, which, in turn,
would impact the Company's growth opportunities, revenues, and
profitability. Other economic conditions that may affect the Company
include employment levels, business conditions, fuel and energy costs,
interest rates, and tax rates.
At times, there have been shortages of drivers and owner-operators in
the trucking industry. Improvement in the general unemployment rate can
lead to further difficulty in recruiting and retention. The market for
recruiting drivers became more difficult in fourth quarter 2003 and has
continued through first quarter 2005. The Company anticipates that the
competition for company drivers and owner-operators will continue to be
high and cannot predict whether it will experience shortages in the future.
If such a shortage was to occur and additional increases in driver pay
rates and owner-operator settlement rates became necessary to attract and
retain 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.
Diesel fuel prices rose sharply in the latter part of February, and
higher prices have continued through April 2005. To the extent the Company
cannot recover the higher cost of fuel through general customer fuel
surcharge programs, the Company's results would be negatively impacted.
Shortages of fuel, further increases in fuel prices, or rationing of
petroleum products could have a materially adverse impact on the operations
and profitability of the Company.
As discussed above, the United States Circuit Court of Appeals for the
District of Columbia vacated the new hours of service regulations in their
entirety on July 16, 2004, and on September 30, 2004, the previously
vacated 2003 rules were extended for a one-year period or until the FMCSA
develops a new set of regulations. 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. No ruling
on the FMCSA's proposal has been made as of the date of this filing. The
Company cannot predict what rule changes, if any, will result from the
court's ruling, nor the extent of the proposed rule's effect on the
operations and profitability of the Company.
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-based insurance with licensed insurance
companies above the Company's self-insurance level for each type of
coverage. To the extent that 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
22
involving a third-party carrier that was transporting a shipment arranged
by the Company's VAS division. To the extent the Company were to
experience more of these types of claims and the Company were to be 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 March
31, 2005, approximately 59% of the company-owned truck fleet consisted of
trucks with 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 tractor replacements increase the percentage of company-owned
trucks with post-October 2002 engines. As discussed above, a new set of
more stringent emissions standards mandated by the EPA will become
effective for newly manufactured trucks beginning in January 2007, and all
truckload carriers will be required to use new ultra-low sulfur fuel for
all of the existing trucks in their fleet beginning in mid-2006. The price
per gallon of the new ultra-low sulfur fuel is expected to be higher
compared to current fuel, and preliminary estimates are that the new ultra-
low sulfur fuel will cause an approximate 1% to 3% decline in fuel miles
per gallon. The Company is unable to predict the ultimate impact these new
regulations will have on its operations, financial position, results of
operations, and cash flows.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company is exposed to market risk from changes in commodity
prices, foreign exchange rates, and interest rates.
Commodity Price Risk
The price and availability of diesel fuel are subject to fluctuations
due to changes in the level of global oil production, seasonality, weather,
and other market factors. Historically, the Company has been able to
recover a majority of fuel price increases from customers in the form of
fuel surcharges. The Company has implemented customer fuel surcharges
programs with most of its revenue base to offset most of the higher fuel
cost per gallon. The Company cannot predict the extent to which higher
fuel price levels will continue in the future or the extent to which fuel
surcharges could be collected to offset such increases. As of March 31,
2005, the Company had no derivative financial instruments to reduce its
exposure to fuel price fluctuations.
Foreign Exchange Rate Risk
The Company conducts business in Mexico and Canada. Foreign currency
transaction gains and losses were not material to the Company's results of
operations for first quarter 2005 and prior periods. 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. 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.
Interest Rate Risk
The Company had no debt outstanding at March 31, 2005. Interest rates
on the Company's unused credit facilities are based on the London Interbank
Offered Rate ("LIBOR"). Increases in interest rates could impact the
Company's annual interest expense on future borrowings.
23
Item 4. 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.
There have been no changes in the Company's internal control over
financial reporting that occurred during the Company's most recent fiscal
quarter that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
The Company has confidence in its internal controls and procedures.
Nevertheless, the Company's management, including the Chief Executive
Officer and Chief Financial Officer, does not expect that the internal
controls or disclosure procedures and controls will prevent all errors or
intentional fraud. An internal control system, no matter how well
conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of such internal controls are met. Further,
the design of an internal control system must reflect the fact that there
are resource constraints, and the benefits of controls must be relative to
their costs. Because of the inherent limitations in all internal control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the Company have been
detected.
24
PART II
OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On December 29, 1997, the Company announced that its Board of
Directors had authorized the Company to repurchase up to 4,166,666 shares
of its common stock. On November 24, 2003, the Company announced that its
Board of Directors approved an increase to its authorization for common
stock repurchases of 3,965,838 shares for a total of 8,132,504 shares. As
of March 31, 2005, the Company had purchased 4,348,704 shares pursuant to
this authorization and had 3,783,800 shares remaining available for
repurchase. The Company may purchase shares from time to time depending on
market, economic, and other factors. The authorization will continue until
withdrawn by the Board of Directors.
The following table summarizes the Company's common stock repurchases
during the first quarter of 2005 made pursuant to this authorization. No
shares were purchased during the quarter other than through this program,
and all purchases were made by or on behalf of the Company and not by any
"affiliated purchaser".
Issuer Purchases of Equity Securities
Maximum Number
(or Approximate
Total Number of Dollar Value) of
Shares (or Units) Shares (or Units) that
Total Number of Purchased as Part of May Yet Be
Shares (or Units) Average Price Paid Publicly Announced Purchased Under the
Period Purchased per Share (or Unit) Plans or Programs Plans or Programs
----------------------------------------------------------------------------------------
January 1-31, 2005 - - - 3,796,800
February 1-28, 2005 3,000 $19.5967 3,000 3,793,800
March 1-31, 2005 10,000 $20.4755 10,000 3,783,800
----------------- --------------------
Total 13,000 $20.2727 13,000 3,783,800
================= ====================
Item 5. Other Information.
The following disclosure is provided pursuant to Item 2.03 of Form
8-K. On April 29, 2005, the Company renewed its $50.0 million bank credit
facility with Wells Fargo Bank, National Association. This second
amendment to the original credit agreement dated May 16, 2003, as amended,
extends the maturity date from May 16, 2006 to May 16, 2007. The amendment
also increases the minimum consolidated tangible net worth requirement to
$500 million plus 50% of annual net income from $400 million plus 50% of
annual net income. Any amounts that may be borrowed pursuant to this
facility are due and payable in full on or before May 16, 2007. As of
April 29, 2005, the Company had no borrowings outstanding under this
facility, and the credit available is reduced by $35.4 million in letters
of credit the Company maintains.
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Item 6. Exhibits.
Exhibit 3(i)(A) Revised and Amended Articles of Incorporation
(Incorporated by reference to Exhibit 3 to Registration Statement on
Form S-1, Registration No. 33-5245)
Exhibit 3(i)(B) Articles of Amendment to Articles of Incorporation
(Incorporated by reference to Exhibit 3(i) to the Company's report
on Form 10-Q for the quarter ended May 31, 1994)
Exhibit 3(i)(C) Articles of Amendment to Articles of Incorporation
(Incorporated by reference to Exhibit 3(i) to the Company's report
on Form 10-K for the year ended December 31, 1998)
Exhibit 3(ii) Revised and Restated By-Laws (Incorporated by reference to
Exhibit 3(ii) to the Company's report on Form 10-Q for the quarter
ended June 30, 2004)
Exhibit 31(i)(A) Rule 13a-14(a)/15d-14(a) Certification
Exhibit 31(i)(B) Rule 13a-14(a)/15d-14(a) Certification
Exhibit 32.1 Section 1350 Certification
Exhibit 32.2 Section 1350 Certification
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
WERNER ENTERPRISES, INC.
Date: May 2, 2005 By: /s/ John J. Steele
----------------- -----------------------------------
John J. Steele
Senior Vice President, Treasurer and
Chief Financial Officer
Date: May 2, 2005 By: /s/ James L. Johnson
----------------- ------------------------------------
James L. Johnson
Vice President, Controller and
Corporate Secretary
27