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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 September 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 October 31, 2003, 79,753,525 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
September 30, 2003 and 2002 3
Consolidated Statements of Income for the Nine Months Ended
September 30, 2003 and 2002 4
Consolidated Condensed Balance Sheets as of September 30, 2003
and December 31, 2002 5
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2003 and 2002 6
Notes to Consolidated Financial Statements as of September 30,
2003 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
Item 4. Controls and Procedures 16
PART II - OTHER INFORMATION
Items 1, 2, 3, 4, and 5. Not Applicable
Item 6. Exhibits and Reports on Form 8-K 17
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 nine-month periods ended
September 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) September 30
- -------------------------------------------------------------------------
2003 2002
- -------------------------------------------------------------------------
(Unaudited)
Operating revenues $368,034 $336,096
----------------------
Operating expenses:
Salaries, wages and benefits 131,094 120,303
Fuel 38,119 32,321
Supplies and maintenance 32,568 28,798
Taxes and licenses 25,806 24,348
Insurance and claims 18,446 13,233
Depreciation 33,708 30,632
Rent and purchased transportation 52,396 55,285
Communications and utilities 4,340 3,610
Other (1,171) 410
----------------------
Total operating expenses 335,306 308,940
----------------------
Operating income 32,728 27,156
----------------------
Other expense (income):
Interest expense 279 757
Interest income (430) (628)
Other 47 156
----------------------
Total other expense (income) (104) 285
----------------------
Income before income taxes 32,832 26,871
Income taxes 12,316 10,076
----------------------
Net income $ 20,516 $ 16,795
======================
Average common shares outstanding 80,012 79,656
======================
Basic earnings per share $ .26 $ .21
======================
Diluted shares outstanding 81,932 81,410
======================
Diluted earnings per share $ .25 $ .21
======================
Dividends declared per share $ .025 $ .016
======================
3
WERNER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Nine Months Ended
(In thousands, except per share amounts) September 30
- -------------------------------------------------------------------------
2003 2002
- -------------------------------------------------------------------------
(Unaudited)
Operating revenues $1,077,532 $989,076
------------------------
Operating expenses:
Salaries, wages and benefits 382,042 358,222
Fuel 120,252 87,783
Supplies and maintenance 91,036 89,966
Taxes and licenses 77,362 72,953
Insurance and claims 55,468 37,632
Depreciation 99,410 89,355
Rent and purchased transportation 157,439 168,552
Communications and utilities 12,315 10,971
Other (1,079) 2,063
------------------------
Total operating expenses 994,245 917,497
------------------------
Operating income 83,287 71,579
------------------------
Other expense (income):
Interest expense 867 2,316
Interest income (1,212) (1,904)
Other 84 787
------------------------
Total other expense (income) (261) 1,199
------------------------
Income before income taxes 83,548 70,380
Income taxes 31,334 26,392
------------------------
Net income $ 52,214 $ 43,988
========================
Average common shares outstanding 79,849 79,720
========================
Basic earnings per share $ .65 $ .55
========================
Diluted shares outstanding 81,703 81,511
========================
Diluted earnings per share $ .64 $ .54
========================
Dividends declared per share $ .065 $ .048
========================
4
WERNER ENTERPRISES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except share amounts) September 30 December 31
- ---------------------------------------------------------------------------
2003 2002
- ---------------------------------------------------------------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 125,824 $ 29,885
Accounts receivable, trade, less allowance of
$5,754 and $4,459, respectively 150,129 131,889
Other receivables 14,725 10,335
Inventories and supplies 9,147 9,777
Prepaid taxes, licenses and permits 3,798 13,535
Income taxes receivable - 9,811
Other current assets 21,684 14,317
-----------------------
Total current assets 325,307 219,549
-----------------------
Property and equipment 1,225,607 1,212,488
Less - accumulated depreciation 433,527 380,221
-----------------------
Property and equipment, net 792,080 832,267
-----------------------
Other non-current assets 11,425 11,062
-----------------------
$1,128,812 $1,062,878
=======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 37,906 $ 50,546
Current portion of long-term debt 20,000 20,000
Insurance and claims accruals 58,216 47,358
Accrued payroll 24,189 18,374
Current deferred income taxes 17,710 17,710
Other current liabilities 13,766 11,885
-----------------------
Total current liabilities 171,787 165,873
-----------------------
Insurance and claims accruals, net of current
portion 63,301 47,801
Deferred income taxes 199,391 201,561
Stockholders' equity:
Common stock, $.01 par value, 200,000,000
shares authorized; 80,533,536 shares issued;
79,951,650 and 79,726,180 shares
outstanding, respectively 805 805
Paid-in capital 108,970 107,366
Retained earnings 594,491 547,467
Accumulated other comprehensive loss (540) (216)
Treasury stock, at cost; 581,886 and 807,356
shares, respectively (9,393) (7,779)
-----------------------
Total stockholders' equity 694,333 647,643
-----------------------
$1,128,812 $1,062,878
=======================
5
WERNER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
(In thousands) September 30
- ---------------------------------------------------------------------------
2003 2002
- ---------------------------------------------------------------------------
(Unaudited)
Cash flows from operating activities:
Net income $ 52,214 $ 43,988
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 99,410 89,355
Deferred income taxes (2,170) 11,261
Gain on disposal of property and equipment (4,958) (567)
Equity in loss of unconsolidated affiliate - 763
Tax benefit from exercise of stock options 2,678 1,032
Other long-term assets (299) 580
Insurance claims accruals, net of current
portion 15,500 7,000
Changes in certain working capital items:
Accounts receivable, net (18,240) (5,371)
Other current assets 8,421 1,184
Accounts payable (12,640) 13,345
Other current liabilities 17,831 15,222
----------------------
Net cash provided by operating activities 157,747 177,792
----------------------
Cash flows from investing activities:
Additions to property and equipment (94,261) (201,972)
Retirements of property and equipment 38,608 48,473
Decrease (increase) in notes receivable 1,324 (1,892)
----------------------
Net cash used in investing activities (54,329) (155,391)
----------------------
Cash flows from financing activities:
Dividends on common stock (4,467) (3,746)
Payment of stock split fractional shares (9) (12)
Repurchases of common stock (8,518) (3,766)
Stock options exercised 5,839 2,496
----------------------
Net cash used in financing activities (7,155) (5,028)
----------------------
Effect of exchange rate fluctuations on cash (324) -
Net increase in cash and cash equivalents 95,939 17,373
Cash and cash equivalents, beginning of period 29,885 74,366
----------------------
Cash and cash equivalents, end of period $125,824 $ 91,739
======================
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest $ 867 $ 2,043
Income taxes $ 20,732 $ 10,483
Supplemental schedule of non-cash investing
activities:
Notes receivable issued upon sale of revenue
equipment $ 1,388 $ 1,197
Notes receivable cancelled upon turn in of
revenue equipment $ - $ (910)
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 ($376) and ($20) (in thousands) for the three-month periods
and ($324) and ($58) (in thousands) for the nine-month periods ended
September 30, 2003 and 2002, respectively.
(2) Long-Term Debt
As of September 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 September 30,
2003, the credit available pursuant to these bank credit facilities is
reduced by $24.1 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 (EBITDAR) as defined in the
credit facility. The Company was in compliance with these covenants at
September 30, 2003.
(3) Commitments
As of September 30, 2003, the Company has commitments for net capital
expenditures of approximately $58 million.
(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 Nine Months Ended
September 30 September 30
-------------------- --------------------
2003 2002 2003 2002
-------------------- --------------------
Net income $ 20,516 $ 16,795 $ 52,214 $ 43,988
==================== ====================
Average common shares
outstanding 80,012 79,656 79,849 79,720
Common stock equivalents 1,920 1,754 1,854 1,791
-------------------- --------------------
Diluted shares outstanding 81,932 81,410 81,703 81,511
==================== ====================
Basic earnings per share $ .26 $ .21 $ .65 $ .55
==================== ====================
Diluted earnings per
share $ .25 $ .21 $ .64 $ .54
==================== ====================
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.
7
(5) Stock Based Compensation
At September 30, 2003, the Company has a nonqualified stock option
plan. The Company did not grant any stock options during the three-month
or nine-month periods ended September 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 Nine Months Ended
September 30 September 30
-------------------- --------------------
2003 2002 2003 2002
-------------------- --------------------
Net income, as reported $ 20,516 $ 16,795 $ 52,214 $ 43,988
Less: Total stock-based
employee compensation
expense determined under
fair value based method
for all awards, net of
related tax effects 629 865 1,887 2,592
-------------------- --------------------
Net income, pro forma $ 19,887 $ 15,930 $ 50,327 $ 41,396
==================== ====================
Earnings per share:
Basic - as reported $ .26 $ .21 $ .65 $ .55
==================== ====================
Basic - pro forma $ .25 $ .20 $ .63 $ .52
==================== ====================
Diluted - as reported $ .25 $ .21 $ .64 $ .54
==================== ====================
Diluted - pro forma $ .24 $ .20 $ .62 $ .51
==================== ====================
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 Nine Months Ended
September 30 September 30
-------------------- --------------------
2003 2002 2003 2002
-------------------- --------------------
Truckload Transportation
Services $340,679 $310,304 $1,002,112 $917,768
Other 27,355 25,792 75,420 71,308
-------------------- --------------------
Total $368,034 $336,096 $1,077,532 $989,076
==================== ====================
Operating Income
----------------
Three Months Ended Nine Months Ended
September 30 September 30
-------------------- --------------------
2003 2002 2003 2002
-------------------- --------------------
Truckload Transportation
Services $32,865 $26,847 $82,901 $70,446
Other (137) 309 386 1,133
-------------------- --------------------
Total $32,728 $27,156 $83,287 $71,579
==================== ====================
(7) Common Stock Split
On September 2, 2003, the Company announced that its Board of
Directors declared a five-for-four split of the Company's common stock
effected in the form of a 25 percent stock dividend. The stock dividend
was distributed on September 30, 2003, to stockholders of record at the
close of business on September 16, 2003. No fractional shares of common
stock were issued in connection with the stock split. Stockholders
entitled to fractional shares received a proportional cash payment based on
the closing price of a share of common stock on September 16, 2003.
All share and per-share information included in this Form 10-Q,
including in the accompanying consolidated financial statements, for all
periods presented have been adjusted to retroactively reflect the stock
split.
9
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.
Financial Condition:
During the nine months ended September 30, 2003, the Company generated
cash flow from operations of $157.7 million, an 11.3% decrease ($20.0
million) in cash flow compared to the same nine-month period a year ago.
This decrease was primarily due to a $9.2 million increase in the accounts
payable for revenue equipment from December 2001 to September 2002 compared
to a $17.2 million decrease in the accounts payable for revenue equipment
from December 2002 to September 2003. These changes were the result of the
Company pre-buying tractors beginning in third quarter 2002 (as explained
in the next paragraph) which were paid by the end of first quarter 2003 and
purchasing fewer tractors during 2003 as a result of the pre-buy. These
changes in the accounts payable for revenue equipment resulted in a
decrease in cash flow from operations between periods of $26.4 million.
The cash flow from operations enabled the Company to make net property
additions, primarily revenue equipment, of $55.7 million, repurchase common
stock of $8.5 million, and pay common stock dividends of $4.5 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). In 2002, the Company purchased a significant
amount of new trucks with engines manufactured prior to October 2002, in
addition to the normal number of new trucks required for the Company's
three-year replacement cycle. This pre-buy enabled the Company to delay
the impact of using trucks with new engines in its fleet by approximately
one year and provided for additional testing time. The pre-buy trucks have
been gradually placed in service over the past year, with the last group of
these trucks being placed into service during the current quarter. The
average age of the Company's truck fleet at September 30, 2003 is 1.6
years. The Company took delivery of approximately 325 model year 2004
trucks with the new engines in third quarter 2003 and plans to take
delivery of approximately 500 new trucks 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 September 30, 2003 was 2.9%,
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 2.8%
at September 30, 2003 compared with 3.0% at December 31, 2002. As of
September 30, 2003, the Company has no equipment operating leases, and,
therefore has no off-balance sheet equipment debt. The Company maintains
$24.1 million in letters of credit as of September 30, 2003. These letters
of credit are primarily required as security for insurance policies. As of
September 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 the $24.1 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 Nine Months Ended
September 30 September 30
2003 2002 2003 2002
-----------------------------------------
Operating revenues 100.0% 100.0% 100.0% 100.0%
-----------------------------------------
Operating expenses:
Salaries, wages and
benefits 35.6 35.8 35.5 36.2
Fuel 10.4 9.6 11.2 8.9
Supplies and maintenance 8.8 8.6 8.4 9.1
Taxes and licenses 7.0 7.3 7.2 7.4
Insurance and claims 5.0 3.9 5.2 3.8
Depreciation 9.2 9.1 9.2 9.0
Rent and purchased
transportation 14.2 16.4 14.6 17.1
Communications and
utilities 1.2 1.1 1.1 1.1
Other (0.3) 0.1 (0.1) 0.2
-----------------------------------------
Total operating
expenses 91.1 91.9 92.3 92.8
-----------------------------------------
Operating income 8.9 8.1 7.7 7.2
Net interest expense and other 0.0 0.1 0.0 0.1
-----------------------------------------
Income before income taxes 8.9 8.0 7.7 7.1
Income taxes 3.3 3.0 2.9 2.7
-----------------------------------------
Net income 5.6% 5.0% 4.8% 4.4%
=========================================
The following table sets forth certain data regarding the freight
revenues and operations of the Company.
Three Months Ended Nine Months Ended
September 30 % September 30 %
2003 2002 Change 2003 2002 Change
---------------------------------------------------------
Trucking revenue, net of
fuel surcharge $327,071 $302,087 8.3% $955,004 $900,841 6.0%
Trucking fuel surcharge
revenue 13,608 8,217 65.6% 47,108 16,927 178.3%
Other non-trucking revenue 27,355 25,792 6.1% 75,420 71,308 5.8%
-------- -------- ---------- --------
Operating revenue $368,034 $336,096 9.5% $1,077,532 $989,076 8.9%
======== ======== ========== ========
Average monthly miles per
tractor 10,288 10,283 0.0% 10,148 10,308 (1.6%)
Average revenues per total
mile (1) $1.281 $1.242 3.1% $1.267 $1.227 3.3%
Average revenues per loaded
mile (1) $1.436 $1.372 4.7% $1.418 $1.357 4.5%
Average percentage of empty
miles 10.82% 9.52% 13.7% 10.65% 9.60% 10.9%
Average tractors in service 8,275 7,885 4.9% 8,257 7,914 4.3%
Average revenues per truck
per week (1) $3,041 $2,947 3.2% $2,966 $2,919 1.6%
Total tractors (at quarter
end)
Company 7,400 6,900 7,400 6,900
Owner-operator 925 1,050 925 1,050
-------- -------- --------- --------
Total tractors 8,325 7,950 8,325 7,950
Total trailers (at quarter
end) 22,110 20,200 22,110 20,200
(1) Net of fuel surcharge revenues.
11
Three Months Ended September 30, 2003 Compared to Three Months Ended
- ---------------------------------------------------------------------------
September 30, 2002
- ------------------
Operating revenues increased 9.5% for the three months ended September
30, 2003, compared to the same period of the prior year. Excluding fuel
surcharge revenues, trucking revenues increased 8.3% due in part to a 4.9%
increase in the average number of tractors in service and a 3.1% increase
in revenue per total mile, excluding fuel surcharges. 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 $8.2 million in third quarter 2002 to $13.6 million
in third quarter 2003 due to higher average fuel prices (see fuel
explanation below).
Freight demand was a little better in third quarter 2003 compared to
third quarter 2002. The Company experienced a slight improvement in the
freight of its diversified group of retail and consumer products customers,
while manufacturing and industrial freight was flat. Average total miles
per truck for the third quarter 2003 did not change significantly from
third quarter 2002.
Non-trucking revenues increased by 6.1% for the three months ended
September 30, 2003, compared to the same period of the prior year, due to
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 91.1% for the three months ended September 30, 2003, compared to 91.9%
for the three months ended September 30, 2002. Other expense items, when
expressed as a percentage of total revenues, appear lower in third quarter
2003 versus third 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 12.2% in third quarter 2003
compared to 14.7% in third 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 35.8% to 35.6% 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 86.8% in third quarter 2002 to 88.9% in third
quarter 2003. On a cost per total mile basis, salaries, wages and benefits
increased from 49.5 cents a mile to 51.3 cents a mile. During the quarter
the Company made progress by lowering driver turnover in a difficult driver
recruiting and retention market. 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
production from Van solo drivers with higher pay. The monthly mileage
bonus pay increased from $1.0 million in third quarter 2002 to $1.2 million
in third quarter 2003.
Fuel increased from 9.6% to 10.4% of revenues due to higher fuel
prices. Average fuel prices in third quarter 2003 were 7 cents a gallon, or
9%, higher than third quarter 2002 and about the same as second quarter
2003. 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 third quarter
2003. After considering the amounts collected from customers through fuel
12
surcharge programs, net of reimbursement to owner-operators, there was a
$.01 per share positive impact on third quarter 2003 earnings per share
compared to third quarter 2002 earnings per share. 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 September 30, 2003, the Company
had no derivative financial instruments to reduce its exposure to fuel
price fluctuations.
Insurance and claims increased from 3.9% to 5.0% of revenues due to an
increase in the severity of claims, increased retention levels for claims,
and higher premiums for catastrophic liability coverage.
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 16.4% to 14.2% of
revenues due primarily to the reduction in owner-operator miles as a
percentage of total miles and the Company purchasing tractors that were
financed through operating leases in the prior year. 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 1,050 as of September 30, 2002, to 925 as of September 30, 2003.
Other operating expenses decreased from 0.1% to (0.3)% of revenues due
to higher gains on sale of equipment, primarily trucks, in third quarter
2003. In third quarter 2003, the Company realized gains of $2.3 million on
sales of used equipment to third parties through its Fleet Truck Sales
retail network compared to gains of $0.6 million in third quarter 2002.
The gains increased due to a higher average sales price, and gain, per
truck in third quarter 2003.
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
September 30, 2003 and 2002.
Nine Months Ended September 30, 2003 Compared to Nine Months Ended
- ---------------------------------------------------------------------------
September 30, 2002
- ------------------
Operating revenues increased by 8.9% for the nine months ended
September 30, 2003, compared to the same period of the previous year,
primarily due to a 4.3% increase in the average number of tractors in
service, a 3.3% increase in revenue per total mile, excluding fuel
surcharges, and a $30.2 million increase in fuel surcharge revenues. These
increases were offset by a 1.6% decrease in miles per truck.
Operating expenses, expressed as a percentage of operating revenues,
were 92.3% for the nine months ended September 30, 2003, compared to 92.8%
for the same period of the previous year. Higher fuel prices increased the
Company's operating ratio in the first nine 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
13
revenue, appear lower in the first nine months of 2003 versus the first
nine 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 36.2% to 35.5% of revenues
due primarily to the effect of the increase in revenue per mile including
fuel surcharge. Fuel increased from 8.9% to 11.2% of revenues due to higher
fuel prices. Supplies and maintenance decreased from 9.1% to 8.4% 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 3.8% 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 17.1% to 14.6% 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 0.2% to (0.1)% of revenues as the Company realized gains of
$5.0 million on sales of used trucks to third parties for the nine months
ended September 30, 2003 compared to gains of $0.6 million in the same 2002
period. The reduction of other operating expenses due to the gains on
sales of equipment was partially offset by an increase in the Company's
provision for uncollectible accounts receivable.
Regulations:
Effective January 4, 2004, the federal regulations that govern driver
hours of service are changing. These are clearly the most significant
changes to the hours of service regulations in over 60 years.
There are several hours of service changes that may have a positive or
negative effect on driver hours (and miles) once the new rules are
implemented. The new rules will allow drivers to drive up to 11 hours
instead of the current 10 hours, subject to the new 14-hour on-duty maximum
described below. The rules will require a driver's off-duty period to be
10 hours, compared to 8 hours currently. In general, drivers may not drive
beyond 14 hours in a 24-hour period, compared to 15 hours in a 24-hour
period currently. During the new 14-hour consecutive on-duty period, the
only way to extend the on-duty period is by the use of a sleeper berth
period of at least two hours that is later coupled with a second sleeper
berth break to equal 10 hours. Under existing rules, during the 15-hour on-
duty period, drivers are allowed to take multiple breaks of varying lengths
of time, which can be either off-duty time or sleeper berth time, that do
not count against the 15-hour period. There is no change to the rule that
limits drivers to a maximum of 70 on-duty hours in 8 consecutive days.
However, under the new rules, drivers can "restart" their 8-day clock at
zero hours by taking at least 34 consecutive hours off duty.
While the Company believes the 11-hour and the 34-hour restart rules
may have a slight positive effect on driving hours, management believes the
15-hour to 14-hour rule change could have a more significant negative
impact on driving hours for the truckload industry. The existing 15-hour
rule works like a stopwatch and allows drivers to stop and start their on-
duty time as they choose. The new 14-hour rule is like a running clock.
Once the driver goes on-duty and the clock starts, the driver is limited to
one timeout, or else the clock keeps running. As a result of this
change, issues that cause driver delays such as multiple stop shipments,
unloading/loading delays, and equipment maintenance could result in a
reduction in driver miles. Most truckload carriers pay drivers by the
mile, so a reduction in driver miles would result in a reduction in driver
pay. Since the annual driver turnover rate in the truckload industry
exceeds 100% per year, the competitive market would likely require carriers
to raise the rate of pay per mile to drivers if miles decline.
Werner Enterprises is currently testing a sample of its drivers using
the new hours of service rules that can be tested at this time (i.e.,
increasing off-duty time from 8 hours to 10 hours and implementing the 14-
hour consecutive rule). While the Company is unable to predict the
ultimate impact of the new hours of service rules because it cannot yet
14
test the positive aspects of the new rules (i.e., 11 hours driving time vs.
10, and the 34 hour restart), management expects that the Company's
Paperless Log System and its proactive management of driver hours will help
the Company minimize any negative impact of the new rules, as compared to
other truckload carriers. However, the Company expects the initial impact
of the new rules will reduce its average miles per truck. As time goes on
and the Company and its drivers gain more experience with the new rules,
the Company expects to gradually reduce the expected decline in average
miles per truck.
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. Management has
determined that adoption of this statement as of July 1, 2003 did not have
any effect on the financial position, results of operations and cash flows
of the Company during the third quarter 2003 and expects no significant
effect on future periods.
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. Management has determined that adoption of this statement as of June
1, 2003 did not have any effect on the financial position, results of
operations and cash flows of the Company during the third quarter 2003 and
expects no significant effect on future periods.
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. Management has determined that
adoption of this statement as of June 16, 2003 did not have any effect on
the financial position, results of operations and cash flows of the Company
during the third quarter 2003 and expects no significant effect on future
periods.
In January 2003, the FASB issued FASB Interpretation (FIN) 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. On October 10, 2003 the FASB issued FASB Staff Position (FSP) FIN 46-
6, which extends the effective date to the first fiscal year or interim
period beginning after December 15, 2003, for variable interest entities in
which a public entity holds a variable interest that it acquired before
February 1, 2003. As of September 30, 2003, management believes that FIN
No. 46 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 September
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 third 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 have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
16
PART II
OTHER INFORMATION
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 July 17, 2003, regarding a news
release on July 16, 2003, announcing the Company's operating
revenues and earnings for the second quarter ended June 30, 2003.
(ii) A report on Form 8-K, filed July 24, 2003, regarding a news
release on July 23, 2003, announcing the resignation of Curt
Werner, an Officer and Vice-Chairman of the Company.
(iii) A report on Form 8-K, filed September 2, 2003, regarding a news
release on September 2, 2003, announcing a five-for-four split of
the Company's common stock effected in the form of a 25% stock
dividend and a quarterly cash dividend.
17
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: November 4, 2003 By: /s/ John J. Steele
---------------- ------------------------------
John J. Steele
Vice President, Treasurer and
Chief Financial Officer
Date: November 4, 2003 By: /s/ James L. Johnson
---------------- ------------------------------
James L. Johnson
Vice President, Controller and
Corporate Secretary
18