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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-14690
WERNER ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
NEBRASKA 47-0648386
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
14507 FRONTIER ROAD
POST OFFICE BOX 45308
OMAHA, NEBRASKA 68145-0308 (402) 895-6640
(Address of principal (Zip Code) (Registrant's telephone number,
executive offices) including area code)
_________________________________
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 July 31, 2003, 63,924,274 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
June 30, 2003 and 2002 3
Consolidated Statements of Income for the Six Months Ended
June 30, 2003 and 2002 4
Consolidated Condensed Balance Sheets as of June 30, 2003 and
December 31, 2002 5
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2003 and 2002 6
Notes to Consolidated Financial Statements as of June 30, 2003 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
Item 4. Controls and Procedures 16
PART II - OTHER INFORMATION
Items 1, 2, 3, and 5. Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 18
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 and six-month periods ended June
30, 2003, are not necessarily indicative of the results that may be
expected for the year ending December 31, 2003. 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, 2002.
2
WERNER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
(In thousands, except per share amounts) June 30
- -------------------------------------------------------------------------
2003 2002
- -------------------------------------------------------------------------
(Unaudited)
Operating revenues $362,290 $340,405
----------------------
Operating expenses:
Salaries, wages and benefits 127,821 122,417
Fuel 37,188 30,401
Supplies and maintenance 29,709 31,112
Taxes and licenses 25,836 24,723
Insurance and claims 17,881 12,793
Depreciation 32,981 29,521
Rent and purchased transportation 54,961 57,852
Communications and utilities 3,980 3,644
Other 357 804
----------------------
Total operating expenses 330,714 313,267
----------------------
Operating income 31,576 27,138
----------------------
Other expense (income):
Interest expense 283 801
Interest income (508) (602)
Other 28 419
----------------------
Total other expense (income) (197) 618
----------------------
Income before income taxes 31,773 26,520
Income taxes 11,914 9,945
----------------------
Net income $ 19,859 $ 16,575
======================
Average common shares outstanding 63,865 63,801
======================
Basic earnings per share $ .31 $ .26
======================
Diluted shares outstanding 65,344 65,192
======================
Diluted earnings per share $ .30 $ .25
======================
Dividends declared per share $ .03 $ .02
======================
3
WERNER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Six Months Ended
(In thousands, except per share amounts) June 30
- -------------------------------------------------------------------------
2003 2002
- -------------------------------------------------------------------------
(Unaudited)
Operating revenues $709,498 $652,980
----------------------
Operating expenses:
Salaries, wages and benefits 250,948 237,919
Fuel 82,133 55,462
Supplies and maintenance 58,468 61,168
Taxes and licenses 51,556 48,605
Insurance and claims 37,022 24,399
Depreciation 65,702 58,723
Rent and purchased transportation 105,043 113,267
Communications and utilities 7,975 7,361
Other 92 1,653
----------------------
Total operating expenses 658,939 608,557
----------------------
Operating income 50,559 44,423
----------------------
Other expense (income):
Interest expense 588 1,559
Interest income (782) (1,276)
Other 37 631
----------------------
Total other expense (income) (157) 914
----------------------
Income before income taxes 50,716 43,509
Income taxes 19,018 16,316
----------------------
Net income $ 31,698 $ 27,193
======================
Average common shares outstanding 63,813 63,802
======================
Basic earnings per share $ .50 $ .43
======================
Diluted shares outstanding 65,249 65,250
======================
Diluted earnings per share $ .49 $ .42
======================
Dividends declared per share $ .05 $ .04
======================
4
WERNER ENTERPRISES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except share amounts) June 30 December 31
- --------------------------------------------------------------------------
2003 2002
- --------------------------------------------------------------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 101,814 $ 29,885
Accounts receivable, trade, less allowance of
$5,585 and $4,459, respectively 143,836 131,889
Other receivables 13,858 10,335
Inventories and supplies 9,184 9,777
Prepaid taxes, licenses and permits 7,387 13,535
Income taxes receivable - 9,811
Other current assets 14,641 14,317
------------------------
Total current assets 290,720 219,549
------------------------
Property and equipment 1,208,569 1,212,488
Less - accumulated depreciation 415,416 380,221
------------------------
Property and equipment, net 793,153 832,267
------------------------
Other non-current assets 10,698 11,062
------------------------
$1,094,571 $1,062,878
========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 39,265 $ 50,546
Current portion of long-term debt 20,000 20,000
Insurance and claims accruals 56,987 47,358
Accrued payroll 20,487 18,374
Current deferred income taxes 17,710 17,710
Other current liabilities 13,563 11,885
------------------------
Total current liabilities 168,012 165,873
------------------------
Insurance and claims accruals, net of current
portion 56,301 47,801
Deferred income taxes 193,924 201,561
Stockholders' equity:
Common stock, $.01 par value, 200,000,000
shares authorized; 64,427,173 shares issued;
63,862,875 and 63,781,288 shares
outstanding, respectively 644 644
Paid-in capital 108,892 107,527
Retained earnings 575,973 547,467
Accumulated other comprehensive loss (164) (216)
Treasury stock, at cost; 564,298 and 645,885
shares, respectively (9,011) (7,779)
------------------------
Total stockholders' equity 676,334 647,643
------------------------
$1,094,571 $1,062,878
========================
5
WERNER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
(In thousands) June 30
- --------------------------------------------------------------------------
2003 2002
- --------------------------------------------------------------------------
(Unaudited)
Cash flows from operating activities:
Net income $ 31,698 $ 27,193
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 65,702 58,723
Deferred income taxes (7,637) 6,962
(Gain) loss on disposal of property and
equipment (2,641) 61
Equity in loss of unconsolidated affiliate - 637
Tax benefit from exercise of stock options 1,232 995
Other long-term assets 61 (83)
Insurance claims accruals, net of current
portion 8,500 3,500
Changes in certain working capital items:
Accounts receivable, net (11,947) (6,449)
Other current assets 12,705 (213)
Accounts payable (11,281) 1,718
Other current liabilities 12,779 7,207
----------------------
Net cash provided by operating activities 99,171 100,251
----------------------
Cash flows from investing activities:
Additions to property and equipment (48,194) (117,359)
Retirements of property and equipment 23,754 32,646
Decrease (increase) in notes receivable 796 (3,040)
----------------------
Net cash used in investing activities (23,644) (87,753)
----------------------
Cash flows from financing activities:
Dividends on common stock (2,551) (2,470)
Payment of stock split fractional shares - (12)
Repurchases of common stock (3,997) (1,556)
Stock options exercised 2,898 2,388
----------------------
Net cash used in financing activities (3,650) (1,650)
----------------------
Effect of exchange rate fluctuations on cash 52 -
Net increase in cash and cash equivalents 71,929 10,848
Cash and cash equivalents, beginning of period 29,885 74,366
----------------------
Cash and cash equivalents, end of period $101,814 $85,214
======================
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest $ 588 $ 1,559
Income taxes $ 15,408 $ 9,881
Supplemental schedule of non-cash investing
activities:
Notes receivable issued upon sale of revenue
equipment $ 493 $ 49
6
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 $139 and ($35) (in thousands) for the three-month periods
and $52 and ($38) (in thousands) for the six-month periods ended June 30,
2003 and 2002, respectively.
(2) Long-Term Debt
As of June 30, 2003, the Company has two credit facilities with banks
totaling $75 million which expire May 16, 2005 and October 22, 2005 and
bear variable interest based on the London Interbank Offered Rate (LIBOR),
on which no borrowings were outstanding. As of June 30, 2003, the credit
available pursuant to these bank credit facilities is reduced by $15.8
million in letters of credit the Company maintains. In addition, $8.6
million of letters of credit issued by a third bank will be transferred to
these credit facilities in the near future, further reducing the available
credit. 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 EBITDAR. The Company was in
compliance with these covenants at June 30, 2003.
As referred to above, on April 22, 2003, the Company established a new
bank credit facility totaling $25 million which will expire on October 22,
2005. This credit facility is in addition to the credit facilities that
existed at March 31, 2003. As referred to above, on May 16, 2003, the
Company renewed a bank credit facility and increased the credit facility to
$50 million. This facility will expire on May 16, 2005. This credit
facility replaces the $25 million credit facility available at March 31,
2003 that was scheduled to expire on August 31, 2004. The Company also had
a $20 million credit facility with another bank that expired on May 18,
2003.
(3) Commitments
As of June 30, 2003, the Company has commitments for net capital
expenditures of approximately $56 million.
7
(4) Earnings Per Share
A reconciliation of the numerator and denominator of basic and diluted
earnings per share is shown below. Common stock equivalents represent the
dilutive effect of outstanding stock options for all periods presented.
(in thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30 June 30
-------------------- --------------------
2003 2002 2003 2002
-------------------- --------------------
Net income $ 19,859 $ 16,575 $ 31,698 $ 27,193
==================== ====================
Average common shares
outstanding 63,865 63,801 63,813 63,802
Common stock equivalents 1,479 1,391 1,436 1,448
-------------------- --------------------
Diluted shares outstanding 65,344 65,192 65,249 65,250
==================== ====================
Basic earnings per share $ .31 $ .26 $ .50 $ .43
==================== ====================
Diluted earnings per
share $ .30 $ .25 $ .49 $ .42
==================== ====================
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 June 30, 2003, the Company has a nonqualified stock option plan.
The Company did not grant any stock options during the three-month or six-
month periods ended June 30, 2003 and 2002. 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 would have been as indicated below had
the fair value of all option grants been charged to salaries, wages, and
benefits in accordance with SFAS No. 123, Accounting for Stock-Based
Compensation:
(in thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30 June 30
-------------------- --------------------
2003 2002 2003 2002
-------------------- --------------------
Net income, as reported $ 19,859 $ 16,575 $ 31,698 $ 27,193
Less: Total stock-based
employee compensation
expense determined under
fair value based method
for all awards, net of
related tax effects 629 865 1,258 1,727
-------------------- --------------------
Net income, pro forma $ 19,230 $ 15,710 $ 30,440 $ 25,466
==================== ====================
Earnings per share:
Basic - as reported $ .31 $ .26 $ .50 $ .43
==================== ====================
Basic - pro forma $ .30 $ .25 $ .48 $ .40
==================== ====================
Diluted - as reported $ .30 $ .25 $ .49 $ .42
==================== ====================
Diluted - pro forma $ .29 $ .24 $ .47 $ .39
==================== ====================
8
(6) Segment Information
The Company has one reportable segment - Truckload Transportation
Services. This 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 Flatbed and Temperature-
Controlled fleets provide truckload services for products with specialized
trailers. The Dedicated Services fleet provides truckload services
required by a specific company, plant, or distribution center.
The Company generates non-trucking revenues related to freight
brokerage, freight transportation management, third-party equipment
maintenance, and other business activities. None of these operations meet
the quantitative threshold reporting requirements of SFAS No. 131. As a
result, these operations are grouped in "Other" in the table below. The
Company does not prepare separate balance sheets by segments 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 Six Months Ended
June 30 June 30
-------------------- --------------------
2003 2002 2003 2002
-------------------- --------------------
Truckload Transportation
Services $336,352 $316,432 $661,433 $607,464
Other 25,938 23,973 48,065 45,516
-------------------- --------------------
Total $362,290 $340,405 $709,498 $652,980
==================== ====================
Operating Income
----------------
Three Months Ended Six Months Ended
June 30 June 30
-------------------- --------------------
2003 2002 2003 2002
-------------------- --------------------
Truckload Transportation
Services $31,473 $26,887 $50,036 $43,599
Other 103 251 523 824
-------------------- --------------------
Total $31,576 $27,138 $50,559 $44,423
==================== ====================
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
This report contains forward-looking statements which are based on
information currently available to the Company's management. Actual
results could differ materially from those anticipated in forward-looking
statements as a result of a number of factors, including, but not limited
to, those discussed in Item 7, "Management's Discussion and Analysis of
Results of Operations and Financial Condition", of the Company's Annual
Report on Form 10-K for the year ended December 31, 2002. The Company
assumes no obligation to update any forward-looking statement to the extent
it becomes aware that it will not be achieved for any reason.
9
Financial Condition:
During the six months ended June 30, 2003, the Company generated cash
flow from operations of $99.2 million, a 1.1% decrease ($1.1 million) in
cash flow compared to the same six-month period a year ago. The cash flow
from operations enabled the Company to make net property additions,
primarily revenue equipment, of $24.4 million, repurchase common stock of
$4.0 million, and pay common stock dividends of $2.6 million. Based on the
Company's strong financial position, management foresees no significant
barriers to obtaining sufficient financing, if necessary.
Effective October 1, 2002 all newly manufactured truck engines must
comply with the engine emission standards mandated by the Environmental
Protection Agency (EPA). All truck engines manufactured prior to October
1, 2002 are not subject to these standards. To delay the business risk of
buying these new truck engines with inadequate testing time prior to the
October 1, 2002 effective date, the Company significantly increased the
purchase of trucks with pre-October engines. During second quarter, the
Company continued to bring new trucks with pre-October engines into service
to replace trucks that were reaching the Company's normal three-year
trade/sale age. The average age of the Company's truck fleet at June 30,
2003 is 1.4 years. The Company will take delivery of approximately 325
model year 2004 trucks with the new engines in third quarter 2003 and plans
to purchase more tractors with the new engines in fourth quarter 2003. The
Company intends to fund the new truck purchases through existing cash on
hand and cash flow from operations.
The Company's debt to equity ratio at June 30, 2003 was 3.0%, compared
with 3.1% at December 31, 2002. The Company's only debt of $20.0 million
matures in December 2003 and is expected to be paid in full at that time.
The Company's debt to total capitalization ratio (total capitalization
equals total debt plus total stockholders' equity) was 2.9% at June 30,
2003 compared with 3.0% at December 31, 2002. As of June 30, 2003, the
Company has no equipment operating leases, and, therefore has no off-
balance sheet equipment debt. The Company maintains $24.4 million in
letters of credit as of June 30, 2003. These letters of credit are
primarily required for insurance policies. As of June 30, 2003, the
Company has $75 million of credit pursuant to credit facilities, on which
no borrowings were outstanding. The credit available under these
facilities is reduced by $15.8 million of the total $24.4 million in
letters of credit.
10
Results of Operations:
The following table sets forth the percentage relationship of income
and expense items to operating revenues for the periods indicated.
Three Months Ended Six Months Ended
June 30 June 30
2003 2002 2003 2002
-----------------------------------------
Operating revenues 100.0% 100.0% 100.0% 100.0%
-----------------------------------------
Operating expenses:
Salaries, wages and
benefits 35.3 36.0 35.4 36.4
Fuel 10.3 8.9 11.6 8.5
Supplies and maintenance 8.2 9.1 8.2 9.4
Taxes and licenses 7.1 7.3 7.3 7.4
Insurance and claims 4.9 3.7 5.2 3.7
Depreciation 9.1 8.7 9.3 9.0
Rent and purchased
transportation 15.2 17.0 14.8 17.4
Communications and
utilities 1.1 1.1 1.1 1.1
Other 0.1 0.2 0.0 0.3
-----------------------------------------
Total operating
expenses 91.3 92.0 92.9 93.2
-----------------------------------------
Operating income 8.7 8.0 7.1 6.8
Net interest expense and other (0.1) 0.2 (0.1) 0.1
-----------------------------------------
Income before income taxes 8.8 7.8 7.2 6.7
Income taxes 3.3 2.9 2.7 2.5
-----------------------------------------
Net income 5.5% 4.9% 4.5% 4.2%
=========================================
The following table sets forth certain data regarding the freight
revenues and operations of the Company.
Three Months Ended Six Months Ended
June 30 % June 30 %
2003 2002 Change 2003 2002 Change
--------------------------------------------------
Trucking revenue, net of
fuel surcharge $321,418 $309,848 3.7% $627,933 $598,754 4.9%
Trucking fuel surcharge
revenue 14,934 6,584 126.8% 33,500 8,710 284.6%
Other non-trucking revenue 25,938 23,973 8.2% 48,065 45,516 5.6%
------- ------- ------- -------
Operating revenue $362,290 $340,405 6.4% $709,498 $652,980 8.7%
======= ======= ======= =======
Average monthly miles per
tractor 10,249 10,550 (2.9%) 10,078 10,320 (2.3%)
Average revenues per total
mile (1) $1.271 $1.228 3.5% $1.259 $1.220 3.2%
Average revenues per loaded
mile (1) $1.420 $1.354 4.9% $1.408 $1.350 4.3%
Average percentage of empty
miles 10.52% 9.31% 13.0% 10.55% 9.64% 9.4%
Average tractors in service 8,228 7,973 3.2% 8,248 7,928 4.0%
Average revenues per truck
per week (1) $3,005 $2,989 0.5% $2,929 $2,905 0.8%
Total tractors (at quarter
end)
Company 7,225 6,800 7,225 6,800
Owner-operator 925 1,150 925 1,150
------- ------- ------- -------
Total tractors 8,150 7,950 8,150 7,950
Total trailers (at quarter
end) 21,355 19,855 21,355 19,855
(1) Net of fuel surcharge revenues.
11
Three Months Ended June 30, 2003 Compared to Three Months Ended June 30,
- ---------------------------------------------------------------------------
2002
- ----
Operating revenues increased 6.4% for the three months ended June 30,
2003, compared to the same period of the prior year, due in part to a 3.2%
increase in the average number of tractors in service. Revenue per total
mile, excluding fuel surcharges, increased 3.5%, and revenue per total
mile, including fuel surcharges, increased 6.0% compared to second quarter
2002. Revenue per total mile, excluding fuel surcharges, increased due to
customer rate increases, an improvement in freight selection, and a shorter
average length of haul due to growth in the Company's regional and
dedicated fleets. Fuel surcharges, which represent collections from
customers for the higher cost of fuel, increased from $6.6 million in
second quarter 2002 to $14.9 million in second quarter 2003 due to higher
average fuel prices (see fuel explanation below). Excluding fuel surcharge
revenues, trucking revenues increased 3.7% for the three months ended June
30, 2003, compared to the same period of the prior year. These increases
were offset by a 2.9% decrease in miles per truck compared to second
quarter 2002.
Freight demand in the beginning of April was slightly higher than the
same period a year ago but returned to about the same level as a year ago
for the latter part of April and the month of May. The Company experienced
some modest improvement in June that has continued into July. The
Company's empty mile percentage increased from 9.31% in second quarter 2002
to 10.52% in second quarter 2003 due primarily to a shorter average length
of haul caused by a greater percentage of dedicated and regional shipments,
less than stellar freight demand, and the impact of pricing increases on
overall freight volume.
Non-trucking revenues increased by 8.2% for the three months ended
June 30, 2003, compared to the same period of the prior year, due to
increased volumes with existing customers and new customer projects in the
Company's Value Added Services division which provides logistics services
to customers.
Operating expenses, expressed as a percentage of operating revenues,
were 91.3% for the three months ended June 30, 2003, compared to 92.0% for
the three months ended June 30, 2002. Higher fuel prices increased the
Company's operating ratio in second quarter 2003 due to the effect of
significantly higher fuel expense and higher fuel surcharge revenues.
Other expense items, when expressed as a percentage of total revenue,
appear lower in second quarter 2003 versus second quarter 2002 because of
the additional fuel surcharge revenue per mile as well as the higher
revenue per mile. Owner-operator miles as a percentage of total miles were
12.9% in second quarter 2003 compared to 16.2% in second quarter 2002.
Owner-operators are independent contractors who supply their own tractor
and driver and are responsible for their operating expenses including fuel,
supplies and maintenance, and fuel taxes. Over the past year, it has been
more difficult to attract and retain owner-operator drivers due to the
challenging operating conditions.
Salaries, wages and benefits decreased from 36.0% to 35.3% of revenues
due primarily to the effect of the increase in revenue per mile, including
fuel surcharge, offset by the growth in the percentage of company-owned
trucks to total trucks from 85% in second quarter 2002 to 89% in second
quarter 2003. On a cost per mile basis, salaries, wages and benefits
increased slightly from 48.6 cents a mile to 50.6 cents a mile. The market
for attracting company drivers tightened during second quarter, and company
driver turnover increased. It appears as though the driver market is
becoming more challenging, and 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 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.
Effective July 2003, the Company changed its monthly mileage bonus pay
program for Van solo drivers, affecting approximately 34% of total drivers.
The goal is to increase driver miles per truck by rewarding higher
12
production from Van solo drivers with higher pay. The annual cost of this
bonus pay increase, if mile production remains the same as current levels,
is approximately $1.5 million per year.
Fuel increased from 8.9% to 10.3% of revenues due to higher fuel
prices. Diesel prices, excluding fuel taxes, averaged 14 cents per gallon,
or 19% higher, in second quarter 2003 compared to second quarter 2002. To
lessen the effect of fluctuating fuel prices on the Company's margins, the
Company collects fuel surcharge revenues from its customers. These
surcharge programs, which automatically adjust weekly through fuel
surcharge price brackets, continued to be in effect during second quarter
2003. Average fuel prices declined from the twenty-year high levels of
first quarter 2003 by 19 cents per gallon. In this period of declining
prices, the Company realized a temporary short-term benefit for the lag
effect of collecting surcharge revenues while fuel costs were declining.
After considering the amounts collected from customers through fuel
surcharge programs, net of reimbursement to owner-operators, there was a
$.02 per share positive impact on second quarter 2003 earnings per share
compared to second quarter 2002 earnings per share due to this temporary
lag effect. 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 increase or decrease in the future or the extent to
which fuel surcharges will be collected from customers. As of June 30,
2003, the Company had no derivative financial instruments to reduce its
exposure to fuel price fluctuations.
Supplies and maintenance decreased from 9.1% to 8.2% of revenues due
primarily to the decrease in the cost of maintenance on tractors that were
sold or traded as fewer units were sold/traded during second quarter 2003,
improved management of maintenance expenses, and a newer company truck
fleet.
Insurance and claims increased from 3.7% to 4.9% of revenues due
primarily to the frequency and severity of claims (particularly a few large
claims that occurred in the last half of June) and negative loss
development on existing claims. The Company is continuing to make progress
refining its safety program and has instituted several enhancements
developed by its Risk Management Loss Prevention team. The Company has
substantial experience for over 10 years managing a majority of its claims
as a self-insured carrier.
The Company's premium rate for liability coverage up to $3.0 million
per claim is fixed through August 1, 2004, while coverage levels above $3.0
million per claim were renewed effective August 1, 2003 for a one-year
period. For the policy year beginning August 2003, the Company's total
premiums for liability insurance increased by approximately $1.3 million.
This increase includes premiums for terrorism coverage. For the policy
year beginning August 2003, the Company is self-insured for claims in
excess of $3.0 million and less than $5.0 million, subject to an annual
maximum aggregate of $6.0 million if several claims were to occur in this
layer. 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 in this
layer. Liability claims in excess of $10.0 million per claim, if they
occur, are covered under premium-based policies with reputable insurance
companies.
Rent and purchased transportation decreased from 17.0% to 15.2% of
revenues due primarily to the reduction in owner-operator miles as a
percentage of total miles and the Company purchasing tractors that were
formerly financed through operating leases, offset partially by an increase
in brokered freight expense related to the Company's increase in non-
trucking revenues. On a per-mile basis, payments to owner-operators
increased due to higher reimbursements for fuel to owner-operators
resulting from higher fuel prices. The Company and other competitors in
the truckload industry have experienced difficulty recruiting and retaining
owner-operators because of high fuel prices, increased cost and reduced
coverage for truck insurance, and other factors. This has resulted in a
reduction of the number of owner-operator tractors from 1,150 as of June
30, 2002, to 925 as of June 30, 2003.
13
Other operating expenses decreased from 0.2% to 0.1% of revenues due
to a higher average sales price, and gain, per truck sold in second quarter
2003. In second quarter 2003, the Company realized gains of $1.3 million
on sales of used equipment, primarily trucks, to third parties through its
Fleet Truck Sales retail network compared to gains of $0.1 million in
second quarter 2002. The reduction of other operating expenses due to the
gains on sales of equipment was offset partially by an increase in the
Company's provision for uncollectible accounts receivable.
Net interest expense and other decreased from 0.2% to (0.1)% of
revenues. Interest expense decreased from $0.8 million in second quarter
2002 to $0.3 million in second quarter 2003 due to a reduction in the
Company's borrowings. Average debt outstanding in second quarter 2003 was
$20.0 million versus $50.0 million in second quarter 2002. During second
quarter 2002, the Company recorded its approximate 15% ownership investment
in Transplace using the equity method of accounting and accrued its
percentage share of Transplace's cumulative losses as other non-operating
expense. In second quarter 2002, the Company recorded losses of
approximately $0.4 million as its percentage share of estimated Transplace
losses. On December 31, 2002, the Company sold a portion of its ownership
interest in Transplace, reducing the Company's ownership stake in
Transplace from 15% to 5%. 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 effective income tax rate (income taxes as a percentage
of income before income taxes) was 37.5% for the three-month periods ended
June 30, 2003 and 2002.
Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002
- -------------------------------------------------------------------------
Operating revenues increased by 8.7% for the six months ended June 30,
2003, compared to the same period of the previous year, primarily due to a
4.0% increase in the average number of tractors in service. Revenue per
total mile, excluding fuel surcharges, increased 3.2%, and fuel surcharge
revenues increased by $24.8 million. These increases were offset by a 2.3%
decrease in miles per truck.
Operating expenses, expressed as a percentage of operating revenues,
were 92.9% for the six months ended June 30, 2003, compared to 93.2% for
the same period of the previous year. Higher fuel prices increased the
Company's operating ratio in the first six months of 2003 due to the effect
of significantly higher fuel expense and higher fuel surcharge revenues.
Other expense items, when expressed as a percentage of total revenue,
appear lower in the first six months of 2003 versus the first six months of
2002 because of the additional fuel surcharge revenue per mile as well as
the higher revenue per mile.
Salaries, wages and benefits decreased from 36.4% to 35.4% of revenues
due primarily to the effect of the increase in revenue per mile including
fuel surcharge. Fuel increased from 8.5% to 11.6% of revenues due to higher
fuel prices. Supplies and maintenance decreased from 9.4% to 8.2% of
revenues due to improved management of maintenance expenses for repairs
performed at over-the-road facilities, decreased maintenance costs on
tractors sold or traded, and a newer company truck fleet. Insurance and
claims increased from 3.7% to 5.2% of revenues primarily due to the
increased frequency of claims and a higher cost per claim. Rent and
purchased transportation decreased from 17.4% to 14.8% due primarily to a
reduction in owner-operator miles as a percentage of total miles and the
Company purchasing tractors that were formerly financed through operating
leases, offset partially by higher fuel reimbursements to owner-operators
and increased brokered freight expenses. Other operating expenses
decreased from 0.3% to 0.0% of revenues as the Company realized gains of
$2.6 million on sales of used trucks to third parties for the six months
ended June 30, 2003 compared to losses of $0.1 million in the same 2002
period.
14
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. For all non-local trucking companies, this is the most
significant change to the hours-of-service rules in over 60 years.
Previously, drivers were allowed to drive 10 hours after 8 hours off-duty.
The new rules will allow drivers to drive 11 hours after 10 hours off-duty.
In addition to this, drivers may not drive after 14 consecutive hours on-
duty, following 10 hours off-duty as opposed to 15 hours on-duty, following
8 hours off-duty. There have been no changes in the rules that limit a
driver to a maximum of 70 hours in eight consecutive days. A new rule will
allow a driver who takes at least 34 consecutive hours off-duty to restart
his or her on-duty cycle for the 70 hour rule. A driver's 15 hour daily
work cycle in the current system is considered cumulative, not consecutive,
and does not take into account off-duty time during the 15 hour period.
Under the new rules, a driver's 14 hour daily work cycle is considered
consecutive, and off-duty time will count against the 14 hour period.
Therefore, loading/unloading delays and shipments that require multiple
stop deliveries may be affected by the new rules as this may limit drivers'
available hours. The new rules become effective on January 4, 2004. The
Company is continuing to evaluate the new rules to determine the effect
they may have on the Company's operations.
Accounting Standards:
In April 2003, the Financial Accounting Standards Board (FASB) issued
SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and
Hedging Activities. This statement amends and clarifies financial
accounting and reporting for derivative instruments and for hedging
activities under SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. The provisions of this statement are effective for
contracts entered into or modified after June 30, 2003. As of June 30,
2003, management believes that SFAS No. 149 will have no significant effect
on the financial position, results of operations, and cash flows of the
Company.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity.
This statement requires that an issuer classify a financial instrument that
is within its scope as a liability. The provisions of this statement are
effective for financial instruments entered into or modified after May 31,
2003. As of June 30, 2003, management believes that SFAS No. 150 will have
no significant effect on the financial position, results of operations, and
cash flows of the Company.
In January 2003, the FASB issued FASB Interpretation No. 46,
Consolidation of Variable Interest Entities. FIN No. 46 addresses
consolidation by business enterprises of certain variable interest
entities. The provisions of FIN No. 46 are effective immediately for
variable interest entities created after January 31, 2003 and for variable
interest entities in which an enterprise obtains an interest after that
date. The provisions are effective in the first fiscal year or interim
period beginning after June 15, 2003, for variable interest entities in
which an enterprise holds a variable interest that it acquired before
February 1, 2003. The Company is currently evaluating FIN No. 46 to
determine if there will be any effect on the financial position, results of
operations, and cash flows of the Company.
In May 2003, the Emerging Issues Task Force (EITF) issued EITF Issue
No. 00-21, Revenue Arrangements with Multiple Deliverables. Issue No. 00-
21 addresses certain aspects of the accounting by a vendor for arrangements
under which it will perform multiple revenue-generating activities. The
provisions are effective for revenue arrangements entered into in reporting
periods beginning after June 15, 2003. As of June 30, 2003, management
believes that Issue No. 00-21 will have no significant effect on the
financial position, results of operations, and cash flows of the Company.
15
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company is exposed to market risk from changes in commodity
prices.
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 June 30,
2003, the Company had no derivative financial instruments to reduce its
exposure to fuel price fluctuations.
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 second quarter 2003 and prior periods. To date, 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.
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 controls over
financial reporting that occurred during the Company's most recent fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.
16
PART II
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of Stockholders of Werner Enterprises, Inc. was
held on May 13, 2003 for the purpose of electing three directors for three-
year terms and considering a stockholder proposal regarding diversity on
the Board of Directors. Proxies for the meeting were solicited pursuant to
Section 14(a) of the Securities Exchange Act of 1934, and there was no
solicitation in opposition to management's nominees. Each of management's
nominees for director as listed in the Proxy Statement was elected. Of the
63,764,800 shares entitled to vote, stockholders representing 60,893,640
shares (95.5%) were present in person or by proxy. The voting tabulation
was as follows:
Shares Shares
Voted Voted
"FOR" "ABSTAIN"
---------- ----------
Clarence L. Werner 50,867,946 10,025,694
Jeffrey G. Doll 59,688,171 1,205,469
Patrick J. Jung 60,355,599 538,041
The stockholders voted against the stockholder proposal regarding
diversity on the Board of Directors. The voting tabulation was as follows:
Shares Shares Shares
Voted Voted Voted
"FOR" "AGAINST" "ABSTAIN"
---------- ---------- ---------
Diversity on the Board
of Directors 15,436,937 40,465,149 1,302,902
17
Item 6. Exhibits and Reports on Form 8-K.
(a) 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 Amended By-Laws (Incorporated by reference
to Exhibit 3(ii) to the Company's report on Form 10-K for the year
ended December 31, 1994)
Exhibit 31.1 Rule 13a-14(a)/15d-14(a) Certification
Exhibit 31.2 Rule 13a-14(a)/15d-14(a) Certification
Exhibit 32.1 Section 1350 Certification
Exhibit 32.2 Section 1350 Certification
(b) Reports on Form 8-K.
(i) A report on Form 8-K, filed April 18, 2003, regarding a news
release on April 15, 2003, announcing the Company's operating
revenues and earnings for the first quarter ended March 31, 2003.
18
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: August 5, 2003 By: /s/ John J. Steele
-------------- ------------------------------
John J. Steele
Vice President, Treasurer and
Chief Financial Officer
Date: August 5, 2003 By: /s/ James L. Johnson
-------------- ------------------------------
James L. Johnson
Vice President, Controller and
Corporate Secretary
19