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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[Mark one]
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
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 April 30, 2004, 79,379,771 shares of the registrant's common
stock, par value $.01 per share, were outstanding.
INDEX TO FORM 10-Q
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income for the Three Months Ended
March 31, 2004 and 2003 3
Consolidated Condensed Balance Sheets as of March 31, 2004 and
December 31, 2003 4
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2004 and 2003 5
Notes to Consolidated Financial Statements as of March 31,
2004 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Item 4. Controls and Procedures 17
PART II - OTHER INFORMATION
Items 1, 3, 4, and 5. Not Applicable
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities 18
Item 6. Exhibits and Reports on Form 8-K 19
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
The interim consolidated financial statements contained herein reflect
all adjustments which, in the opinion of management, are necessary for a
fair statement of the financial condition, results of operations, and cash
flows for the periods presented. The interim consolidated financial
statements have been prepared in accordance with the instructions to Form
10-Q and do not include all the information and footnotes required by
accounting principles generally accepted in the United States of America
for complete financial statements.
Operating results for the three-month period ended March 31, 2004, are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2004. 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, 2003.
2
WERNER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
(In thousands, except per share amounts) March 31
- ---------------------------------------------------------------------------
2004 2003
- ---------------------------------------------------------------------------
(Unaudited)
Operating revenues $ 386,280 $ 347,208
---------------------------
Operating expenses:
Salaries, wages and benefits 133,312 123,127
Fuel 45,752 44,945
Supplies and maintenance 32,894 28,759
Taxes and licenses 27,512 25,720
Insurance and claims 19,507 19,141
Depreciation 34,985 32,721
Rent and purchased transportation 63,150 50,082
Communications and utilities 4,548 3,995
Other (239) (265)
---------------------------
Total operating expenses 361,421 328,225
---------------------------
Operating income 24,859 18,983
---------------------------
Other expense (income):
Interest expense 2 305
Interest income (535) (274)
Other 37 9
---------------------------
Total other expense (income) (496) 40
---------------------------
Income before income taxes 25,355 18,943
Income taxes 9,787 7,104
---------------------------
Net income $ 15,568 $ 11,839
===========================
Average common shares outstanding 79,594 79,701
===========================
Basic earnings per share $ .20 $ .15
===========================
Diluted shares outstanding 81,357 81,423
===========================
Diluted earnings per share $ .19 $ .15
===========================
Dividends declared per share $ .025 $ .016
===========================
3
WERNER ENTERPRISES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except share amounts) March 31 December 31
- ---------------------------------------------------------------------------
2004 2003
- ---------------------------------------------------------------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 118,680 $ 101,409
Accounts receivable, trade, less allowance of
$7,224 and $6,043, respectively 154,116 152,461
Other receivables 11,592 8,892
Inventories and supplies 9,458 9,877
Prepaid taxes, licenses and permits 11,677 14,957
Other current assets 19,396 17,691
---------------------------
Total current assets 324,919 305,287
---------------------------
Property and equipment 1,277,995 1,261,252
Less - accumulated depreciation 473,840 455,565
---------------------------
Property and equipment, net 804,155 805,687
---------------------------
Other non-current assets 10,746 10,553
---------------------------
$1,139,820 $1,121,527
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 38,238 $ 40,903
Insurance and claims accruals 58,908 55,201
Accrued payroll 18,441 15,828
Income taxes payable 9,709 2,288
Current deferred income taxes 15,151 15,151
Other current liabilities 14,915 13,104
---------------------------
Total current liabilities 155,362 142,475
---------------------------
Insurance and claims accruals, net of current
portion 74,301 71,301
Deferred income taxes 195,795 198,640
Stockholders' equity:
Common stock, $.01 par value, 200,000,000
shares authorized; 80,533,536 shares
issued; 79,287,257 and 79,714,271 shares
outstanding, respectively 805 805
Paid-in capital 108,211 108,706
Retained earnings 627,596 614,011
Accumulated other comprehensive loss (790) (837)
Treasury stock, at cost; 1,246,279 and
819,265 shares, respectively (21,460) (13,574)
---------------------------
Total stockholders' equity 714,362 709,111
---------------------------
$1,139,820 $1,121,527
===========================
4
WERNER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
(In thousands) March 31
- ---------------------------------------------------------------------------
2004 2003
- ---------------------------------------------------------------------------
(Unaudited)
Cash flows from operating activities:
Net income $ 15,568 $ 11,839
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 34,985 32,721
Deferred income taxes (2,845) 3,031
Gain on disposal of property and equipment (2,000) (1,355)
Tax benefit from exercise of stock options 369 359
Other long-term assets (105) 28
Insurance claims accruals, net of current
portion 3,000 5,500
Changes in certain working capital items:
Accounts receivable, net (1,655) (4,989)
Other current assets (706) 4,120
Accounts payable (2,665) (16,994)
Other current liabilities 15,562 6,002
---------------------------
Net cash provided by operating activities 59,508 40,262
---------------------------
Cash flows from investing activities:
Additions to property and equipment (48,099) (20,738)
Retirements of property and equipment 15,678 10,682
Decrease in notes receivable 880 357
---------------------------
Net cash used in investing activities (31,541) (9,699)
---------------------------
Cash flows from financing activities:
Dividends on common stock (1,993) (1,275)
Repurchases of common stock (9,443) (1,993)
Stock options exercised 645 838
---------------------------
Net cash used in financing activities (10,791) (2,430)
---------------------------
Effect of exchange rate fluctuations on cash 95 -
Net increase in cash and cash equivalents 17,271 28,133
Cash and cash equivalents, beginning of period 101,409 29,885
---------------------------
Cash and cash equivalents, end of period $118,680 $ 58,018
===========================
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest $ 2 $ 305
Income taxes $ 4,705 $ 78
Supplemental schedule of non-cash investing
activities:
Notes receivable issued upon sale of revenue
equipment $ 968 $ 54
5
WERNER ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Comprehensive Income
Other than its net income, the Company's only other source of
comprehensive income (loss) is foreign currency translation adjustments.
Other comprehensive income (loss) from foreign currency translation
adjustments was $95 and ($87) (in thousands) for the three-month periods
ended March 31, 2004 and 2003, respectively.
(2) Long-Term Debt
As of March 31, 2004, 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 March 31, 2004, the credit
available pursuant to these bank credit facilities is reduced by $29.1
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. While the Company had no borrowings pursuant to these credit
facilities as of March 31, 2004, the Company was in compliance with these
covenants at March 31, 2004.
(3) Commitments
As of March 31, 2004, the Company has commitments for net capital
expenditures of approximately $117 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
March 31
-------------------------------
2004 2003
-------------------------------
Net income $ 15,568 $ 11,839
===============================
Average common shares outstanding 79,594 79,701
Common stock equivalents 1,763 1,722
-------------------------------
Diluted shares outstanding 81,357 81,423
===============================
Basic earnings per share $ .20 $ .15
===============================
Diluted earnings per share $ .19 $ .15
===============================
6
There were no options to purchase shares of common stock which were
outstanding during the periods indicated above, but excluded from the
computation of diluted earnings per share because the option purchase price
was greater than the average market price of the common shares.
(5) Stock Based Compensation
At March 31, 2004, the Company has a nonqualified stock option plan.
The Company did not grant any stock options during the three-month periods
ended March 31, 2004 and 2003. 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
March 31
-------------------------------
2004 2003
-------------------------------
Net income, as reported $ 15,568 $ 11,839
Less: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects 354 629
-------------------------------
Net income, pro forma $ 15,214 $ 11,210
===============================
Earnings per share:
Basic - as reported $ .20 $ .15
===============================
Basic - pro forma $ .19 $ .14
===============================
Diluted - as reported $ .19 $ .15
===============================
Diluted - pro forma $ .19 $ .14
===============================
The maximum number of shares of common stock that may be optioned
under the Stock Option Plan is 14,583,334 shares, and the maximum aggregate
number of options that may be granted to any one person is 1,562,500
options. The Board of Directors has unanimously approved and recommended
that the stockholders consider and approve an amendment to increase the
maximum number of shares that may be optioned or sold under the Stock
Option Plan by 5,416,666 shares and an amendment to increase the maximum
aggregate number of options that may be granted to any one person under the
Plan by 1,000,000. If a quorum exists at the May 11, 2004 Annual Meeting
of Stockholders, and if the votes cast favoring the Plan Amendments exceed
the votes cast opposing the Plan Amendments, the maximum number of shares
that may be optioned or sold under the Stock Option Plan will be increased
to 20,000,000 and the maximum aggregate number of options that may be
granted to any one person under the Plan will be increased to 2,562,500.
7
(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 "Non-trucking and 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
March 31
----------------------
2004 2003
----------------------
Truckload Transportation Services $347,704 $325,081
Non-trucking and other 38,576 22,127
----------------------
Total $386,280 $347,208
======================
Operating Income
----------------
Three Months Ended
March 31
----------------------
2004 2003
----------------------
Truckload Transportation Services $24,034 $18,322
Non-trucking 1,923 788
Corporate and other (1,098) (127)
----------------------
Total $24,859 $18,983
======================
The 2003 amounts of Truckload Transportation Services and Non-trucking
and Corporate and other operating income have been reclassified to account
for a change in the way the operations are grouped.
8
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, 2003. 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.
Overview:
The Company operates in the truckload segment of the trucking
industry, with a focus on transporting consumer nondurable products that
ship more consistently throughout the year. Operating revenues consist of
trucking revenues generated by the Company's five trucking fleets
(medium/long-haul van, dedicated, regional short-haul, flatbed, and
temperature-controlled) and non-trucking revenues generated primarily by
the Company's Value Added Services division. Trucking revenues accounted
for 91% of total operating revenues in first quarter 2004, and non-trucking
and other operating revenues accounted for 9%.
Trucking services typically generate revenue on a per-mile basis.
Other sources of trucking revenue include fuel surcharges and accessorial
revenue such as stop charges, loading/unloading charges, and equipment
detention charges. Because fuel surcharge revenues fluctuate in response
to changes in the cost of fuel, these revenues are identified separately
within the operating statistics table and are excluded from the statistics
to provide a more meaningful comparison between periods. The key
statistics used to evaluate trucking revenues, excluding fuel surcharges,
are revenue per truck per week, the per-mile rates charged to customers,
the average monthly miles generated per tractor, the percentage of empty
miles, the average trip length, and the number of tractors in service.
General economic conditions, seasonal freight patterns in the trucking
industry, and industry capacity are key factors that impact these
statistics.
The primary industry measure used to evaluate the profitability of the
Company and its trucking operating fleets is the operating ratio (operating
expenses as a percentage of operating revenues). The most significant
variable expenses that impact the trucking operation are driver salaries
and benefits, payments to owner-operators (included in rent and purchased
transportation expense), fuel, fuel taxes (included in taxes and licenses
expense), supplies and maintenance, and insurance and claims. These
expenses generally vary based on the number of miles generated. As such,
the Company also evaluates these costs on a per-mile basis to adjust for
the possible distortion of the percentage of total operating revenues
caused by changes in fuel surcharge revenues and non-trucking revenues. As
discussed further in the comparison of operating results for first quarter
2004 to first quarter 2003, several industry-wide issues, including the new
hours of service regulations, a challenging driver recruiting market, and
rising fuel prices, could cause costs to increase in future periods. The
Company's main fixed costs include depreciation expense for tractors and
trailers, equipment licensing fees (included in taxes and licenses
expense), and the fixed component of insurance and claims expense
representing cargo and liability insurance premiums. These costs have been
affected by the new engine emission standards that became effective in
October 2002 and are increasing truck purchase costs and the increases in
insurance premiums over the last few years. The trucking operations
require substantial cash expenditures for tractors and trailers. The
Company has maintained a three-year replacement cycle for company-owned
tractors. These purchases are funded by net cash from operations, as the
Company repaid its last remaining debt in December 2003.
Non-trucking services provided by the Company include freight
brokerage, freight transportation management, intermodal, and other
services. Unlike the Company's trucking operations, the non-trucking
operation is a non-asset-based business dependent upon information systems,
qualified employees, and the services of other third-party freight
9
providers. For shipments where a third-party provider is utilized to
provide some or all of the service, the Company records revenue for the
shipment for the dollar value of services billed by the Company to the
customer, and records the costs of transportation paid by the Company to
the third-party provider as rent and purchased transportation expense.
Other expenses include salaries and benefits and system-related
depreciation. The Company evaluates the non-trucking operations by
reviewing the gross margin (non-trucking revenues less non-trucking rent
and purchased transportation expense) and the operating ratios. The
operating ratios for the non-trucking business are generally higher than
those of the trucking operations resulting in lower operating margins, but
the returns on assets are generally higher.
Financial Condition:
During the three months ended March 31, 2004, the Company generated
cash flow from operations of $59.5 million, a 47.8% increase ($19.2
million) in cash flow compared to the same three-month period a year ago.
This increase was primarily due to a $17.9 million decrease in the accounts
payable for revenue equipment from December 2002 to March 2003 compared to
a $2.7 million decrease in the accounts payable for revenue equipment from
December 2003 to March 2004. These changes were primarily 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 an
increase in cash flow from operations between periods of $15.2 million.
The cash flow from operations enabled the Company to make net property
additions, primarily revenue equipment, of $32.4 million, repurchase common
stock of $9.4 million, and pay common stock dividends of $2.0 million.
Based on the Company's strong financial position, management foresees no
significant barriers to obtaining sufficient financing, if necessary.
Net cash used in investing activities in first quarter 2004 increased
by $21.8 million from $9.7 million in the first quarter 2003 to $31.5
million in first quarter 2004. The large increase was due primarily to the
Company's accelerated purchases of tractors with pre-October 2002 engines
in the latter part of 2002 and purchasing fewer tractors in 2003, including
first quarter. The Environmental Protection Agency (EPA) required all
truck engines manufactured after October 1, 2002 to comply with new engine
emission standards. In 2002, the Company purchased a significant number 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. During first quarter 2004 the
Company increased the percentage of its fleet that consisted of trucks with
new EPA-compliant engines to approximately 15% at March 31, 2004 from
approximately 10% at December 31, 2003. To date, the Company's testing
indicates that the fuel mile per gallon (mpg) degradation with the new
engines is a reduction of approximately 0.3 mpg to 0.5 mpg. Also,
depreciation expense is increasing due to the higher cost of the new
engines. The average age of the Company's truck fleet was 1.7 years at
March 31, 2004. The Company now plans to maintain its three-year
sale/trade cycle for tractors and does not expect the age of its truck
fleet to increase significantly during 2004.
Management believes the Company's financial position at March 31, 2004
is strong. As of March 31, 2004, the Company had $118.7 million of cash
and cash equivalents, no debt, and $714.4 million of stockholders' equity.
As of March 31, 2004, the Company has no equipment operating leases, and,
therefore has no off-balance sheet equipment debt. The Company maintains
$29.1 million in letters of credit as of March 31, 2004. These letters of
credit are primarily required as security for insurance policies. As of
March 31, 2004, 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 $29.1 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
March 31
------------------------
2004 2003
------------------------
Operating revenues 100.0% 100.0%
------------------------
Operating expenses:
Salaries, wages and benefits 34.5 35.5
Fuel 11.9 12.9
Supplies and maintenance 8.5 8.3
Taxes and licenses 7.1 7.4
Insurance and claims 5.0 5.5
Depreciation 9.1 9.4
Rent and purchased transportation 16.4 14.4
Communications and utilities 1.2 1.2
Other (0.1) (0.1)
------------------------
Total operating expenses 93.6 94.5
------------------------
Operating income 6.4 5.5
Total other expense (income) (0.1) 0.0
------------------------
Income before income taxes 6.5 5.5
Income taxes 2.5 2.1
------------------------
Net income 4.0% 3.4%
========================
11
The following table sets forth certain industry data regarding the
freight revenues and operations of the Company.
Three Months Ended
March 31 %
2004 2003 Change
-----------------------------
Trucking revenues, net of fuel surcharge (1) $329,733 $306,514 7.6%
Trucking fuel surcharge revenues (1) 17,971 18,567 (3.2%)
Non-trucking revenues (1) 36,253 20,149 79.9%
Other operating revenues (1) 2,323 1,978 17.4%
-------- --------
Operating revenues (1) $386,280 $347,208 11.3%
======== ========
Average monthly miles per tractor 10,034 9,908 1.3%
Average revenues per total mile (2) $1.298 $1.247 4.1%
Average revenues per loaded mile (2) $1.470 $1.395 5.4%
Average percentage of empty miles 11.69% 10.59% 10.4%
Average trip length in miles (loaded) 580 663 (12.5%)
Average tractors in service 8,436 8,268 2.0%
Average revenues per truck per week (2) $3,007 $2,852 5.4%
Total tractors (at quarter end)
Company 7,495 7,275
Owner-operator 930 1,000
-------- --------
Total tractors 8,425 8,275
Total trailers (at quarter end) 22,960 21,040
(1) Amounts in thousands.
(2) Net of fuel surcharge revenues.
Three Months Ended March 31, 2004 Compared to Three Months Ended March 31,
- ---------------------------------------------------------------------------
2003
- ----
Operating revenues increased 11.3% for the three months ended March
31, 2004, compared to the same period of the prior year. Excluding fuel
surcharge revenues, trucking revenues increased 7.6% due primarily to a
4.1% increase in revenue per total mile, excluding fuel surcharges, a 2.0%
increase in the average number of tractors in service, and a 1.3% increase
in average miles per tractor. Revenue per total mile, excluding fuel
surcharges, increased due to customer rate increases, an improvement in
freight selection, and a 12.5% decrease in the average loaded trip length
due to growth in the Company's regional and dedicated fleets. The Company
grew its dedicated fleet by 850 trucks, from almost one-quarter of the
total truck fleet in first quarter 2003 to over one-third of the total
truck fleet in first quarter 2004. The majority of the growth in the
dedicated fleet was offset by a decrease in the Company's medium-to-long
haul van fleet. Dedicated fleet business tends to have lower miles per
trip, a higher empty mile percentage, a higher rate per loaded mile, and
lower miles per truck. The growth in dedicated business had a
corresponding effect on these same operating statistics for the entire
Company, as reported on the previous page. Freight demand in first quarter
2004 was stronger than the weaker demand of first quarter 2003. Typically
freight volumes weaken in first quarter from the seasonally strong fourth
quarter and then begin improving near the end of the quarter. However, in
first quarter 2004, the normal seasonal freight decline was much lower. As
the quarter progressed, freight volumes continued their expected seasonal
improvement which continued into the month of April 2004.
On January 4, 2004, new hours of service (HOS) regulations became
effective for the trucking industry. The Company anticipated that the new
regulations could have an overall negative impact on our average miles per
tractor due to operational changes, primarily resulting from the new 14-
hour on-duty rule. However, for first quarter 2004 compared to first
12
quarter 2003, average miles per tractor increased 1.3%, even after
considering the 12.5% decline in average trip length. This increase is
attributable to the Company's extensive HOS planning and driver training,
effective utilization of its paperless log software, improved freight
demand, better throughput at customer shipping and receiving facilities,
the new 34-hour restart driving rule, and one more business day in first
quarter 2004 compared to first quarter 2003 (64 business days compared to
63 business days).
Fuel surcharge revenues, which represent collections from customers
for the higher cost of fuel, decreased from $18.6 million in first quarter
2003 to $18.0 million in first quarter 2004 due to lower average fuel
prices in first quarter 2004 (see fuel explanation below).
Non-trucking revenues increased by 79.9% for the three months ended
March 31, 2004, compared to the same period of the prior year. Most of
this revenue growth came from the Company's brokerage group. Non-trucking
revenue consists of freight brokerage, freight transportation management,
and intermodal services. During the latter part of 2003 and continuing
into 2004, the Company expanded its brokerage and intermodal service
offerings by adding senior management and developing new computer systems.
The following table details the non-trucking revenue and the related rent
and purchased transportation expense:
Three Months Ended
March 31
Non-trucking operations 2004 2003
- ----------------------- ------ ------
Revenues $ 36,253 $ 20,149
Rent and purchased transportation expense 32,954 18,691
------ ------
Gross margin $ 3,299 $ 1,458
====== ======
Operating expenses, expressed as a percentage of operating revenues,
were 93.6% for the three months ended March 31, 2004, compared to 94.5% for
the three months ended March 31, 2003. Other expense items, when expressed
as a percentage of total revenues, appear lower in first quarter 2004
versus first quarter 2003 because of the additional non-trucking revenue as
well as the higher revenue per mile. Owner-operator miles as a percentage
of total miles were 12.3% in first quarter 2004 compared to 13.3% in first
quarter 2003. Owner-operators are independent contractors who supply their
own tractor and driver and are responsible for their operating expenses
including fuel, supplies and maintenance, and fuel taxes. 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 35.5% to 34.5% of
revenues due primarily to the effect of the increases in non-trucking
revenue and revenue per mile, partially offset by the growth in the
percentage of company-owned trucks to total trucks from 87.9% in first
quarter 2003 to 89.0% in first quarter 2004. On a cost per total mile
basis, salaries, wages and benefits increased from 50.1 cents per mile to
52.5 cents per mile. The increase on a cost per mile basis is primarily
the result of higher non-driver salaries, wages, and benefits related to
the non-trucking operations and higher driver pay per mile. As a result of
the new hours of service (HOS) regulations effective at the beginning of
first quarter 2004, the Company increased driver pay in the non-dedicated
fleets for multiple stop shipments. Additional revenue from increased
rates per stop offset most of the increased driver pay. In addition,
effective July 2003, the Company changed its monthly mileage bonus pay
program for Van solo drivers. The monthly mileage bonus pay increased from
$0.8 million in first quarter 2003 to $1.3 million in first quarter 2004.
The increase in dedicated business as a percentage of total trucking
business also contributed to the increase in driver pay per mile as
dedicated drivers are usually compensated at a higher rate per mile due to
the lower average miles per truck. The Company renewed its workers'
compensation insurance coverage, and for the policy year beginning April
2004, the Company continues to maintain a self-insurance retention of $1.0
million per claim and is now responsible for an annual aggregate amount of
$1.0 million for claims above $1.0 million and below $2.0 million. The
13
Company's premiums for this coverage decreased slightly over the premiums
from the prior policy year.
The market for recruiting drivers became increasingly challenging in
first quarter 2004. For over two years, the owner-operator driver market
has been difficult. In recent months, the market for recruiting
experienced drivers tightened. While also challenging, the Company
continues to have success recruiting drivers from driver training schools.
In addition to the driver stop pay and detention pay changes and increased
mileage bonus pay for Van solo drivers described above, the Company also
instituted an optional per diem reimbursement program for eligible company
drivers beginning in April 2004. This program is expected to increase a
company driver's net pay per mile, after taxes. The tax benefits of this
per diem program are going to the Company's drivers. As a result, it is
expected that salaries, wages, and benefits will be slightly lower, and the
Company's effective income tax rate will be higher beginning in second
quarter 2004 than in first quarter 2004. The per diem program is expected
to be cost neutral to the Company and increase driver satisfaction through
higher net pay per mile. The Company anticipates that the competition for
qualified drivers will continue to be high and cannot predict whether it
will experience shortages in the future. If such a shortage was to occur
and additional increases in driver pay rates became necessary to attract
and retain drivers, the Company's results of operations would be negatively
impacted to the extent that corresponding freight rate increases were not
obtained.
Fuel decreased from 12.9% to 11.9% of revenues due primarily to lower
fuel prices and the effect of the increases in non-trucking revenue and
revenue per mile, partially offset by the growth in the percentage of
company-owned trucks to total trucks from 87.9% in first quarter 2003 to
89.0% in first quarter 2004. Average fuel prices in first quarter 2004
were three cents a gallon, or 3%, lower than the record-high fuel prices of
first quarter 2003. Fuel prices in first quarter 2004 were significantly
higher than historical price levels and were thirty-three cents a gallon
higher than average prices during the first quarters of the four years
prior to 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
first quarter 2004. The Company's fuel surcharge program recoups much of
the higher cost of fuel, except for miles not billable to customers, out of
route miles, and truck engine idling. Fuel expense, after considering the
amounts collected from customers through fuel surcharge programs, net of
reimbursement to owner-operators, had no positive or negative impact on
first quarter 2004 earnings per share compared to first quarter 2003
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 continue to increase or decrease in
the future or the extent to which fuel surcharges will be collected from
customers. As of March 31, 2004, the Company had no derivative financial
instruments to reduce its exposure to fuel price fluctuations.
Fuel prices for the month of April 2004 were 22 cents a gallon, or
24%, higher than the same period in April 2003. Fuel prices declined in
the latter part of March 2003 after the beginning of the war in Iraq. As
disclosed previously by the Company, during second quarter 2003 earnings
per share were positively impacted by two cents a share compared to second
quarter 2002 due to the temporary lag benefit of fuel surcharge revenues.
Assuming that current fuel price levels as of April 30 continue through the
remainder of second quarter 2004, the Company anticipates that fuel will
have a negative impact of approximately five cents per share in second
quarter 2004 compared to second quarter 2003.
In April 2004, the price of diesel fuel in the Western United States,
particularly California, spiked well above the national average. As of
April 26, 2004, the Department of Energy (DOE) weekly survey price per
gallon for diesel fuel (which includes fuel taxes) was $2.103 per gallon in
the Western five states (PADD 5), $2.247 in California, and $1.718 for the
National Average. Most shipper/carrier contracts use the DOE National
14
Average fuel price to determine the weekly fuel surcharge rate per mile.
Since the Company's trucks have historically yielded about six miles per
gallon, before considering the mpg degradation related to the new engines,
each six-cent per gallon increase in the cost of fuel increases the
Company's cost per mile by about one cent per mile. Approximately 10% of
the Company's miles during first quarter 2004 were in the Western five
states (PADD 5). Management is currently meeting with its larger customers
that have a significant amount of miles in these Western states to discuss
the recent rapid increase in fuel pricing in the West. Management is also
negotiating changes to its fuel surcharge contracts for certain of these
customers, with the goal to recover as much of the Western fuel price
increase as possible.
Insurance and claims decreased from 5.5% to 5.0% of revenues due
primarily to decreases in both the number of claims and cost per claim,
primarily offset by an increase in the cost of catastrophic claims and
negative reserve development on certain significant claims during first
quarter 2004. The increases in non-trucking revenue and revenue per mile
also contributed to the decrease as the percentage of revenue. 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. The Company has been responsible
for liability claims up to $500,000, plus administrative expenses, for each
occurrence involving personal injury or property damage since August 1,
1992. The Company is also responsible for varying annual aggregate amounts
of liability for claims above $500,000 and below $10.0 million. For the
policy year beginning August 1, 2003, these annual aggregate amounts total
$13.5 million. For the policy year beginning August 1, 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 to coverage levels that management
considers adequate. The Company's primary liability insurance policies for
coverage ranging from $500,000 per claim to $10,000,000 per claim renew on
August 1, 2004. Based on current insurance market conditions, the Company
expects the annual premium cost for renewing the insurance coverage for the
$500,000 - $3,000,000 layer it has maintained for the last six years (which
is currently less than 5% of total insurance and claims expense) may be
substantially higher. As a result, the Company may elect to increase its
self-insurance retention amount from $500,000 per claim to a higher amount
per claim in August 2004.
Rent and purchased transportation increased from 14.4% to 16.4% of
revenues due primarily to the increase in non-trucking revenues and the
corresponding increase in purchased transportation expense related to this
business, as described above, offset partially by a decrease in the number
of owner-operator tractors. The Company has experienced difficulty
recruiting and retaining owner-operators because of challenging operating
conditions. This has resulted in a reduction of the number of owner-
operator tractors from 1,000 as of March 31, 2003, to 930 as of March 31,
2004.
Other operating expenses were (0.1)% of revenues in first quarter 2003
and first quarter 2004. In first quarter 2004, the Company realized gains
of $1.6 million on sales of used revenue equipment, primarily trucks, to
third parties through its Fleet Truck Sales retail network, compared to
gains of $1.4 million in first quarter 2003. The gains increased primarily
due to an increase in the number of trucks sold in first quarter 2004.
The Company's effective income tax rate (income taxes as a percentage
of income before income taxes) increased from 37.5% for the three-month
period ended March 31, 2003 to 38.5% for the three-month period ended March
31, 2004 due to an increase in non-deductible expenses for tax purposes
related to the implementation of a per diem pay program for student drivers
in fourth quarter 2003. The implementation of an additional per diem pay
program for eligible company drivers in April 2004 is expected to further
increase the Company's effective income tax rate in second quarter 2004
15
from the 38.5% effective income tax rate reported in first quarter 2004.
Regulations:
The Federal Motor Carrier Safety Administration (FMCSA) of the U.S.
Department of Transportation issued a final rule on April 24, 2003 that
made several changes to the regulations which govern truck drivers' hours
of service (HOS). The new rules became effective on January 4, 2004.
Beginning October 2003, Werner Enterprises started testing the HOS with its
drivers using its proprietary Paperless Log System software, modified for
the new HOS rules. This testing, combined with a comprehensive driver-
training program, helped to prepare the Company for the HOS changes. The
Company anticipated that the new regulations could have an overall negative
impact on its average miles per tractor due to operational changes;
however, average miles per tractor were essentially flat when comparing
first quarter 2004 to first quarter 2003, after adjusting for the one
additional business day in first quarter 2004. Effective January 2004, the
Company increased its accessorial charges to customers for multiple stop
shipments and its rates for tractor detention. Werner also raised its
driver pay for multiple stop shipments and unanticipated delays.
On April 13, 2004, oral arguments were heard before the United States
Circuit Court of Appeals for the District of Columbia on a lawsuit filed by
Public Citizen challenging the revised hours-of-service regulations that
went into effect on January 4, 2004. The American Trucking Associations
and several other motor carrier organizations filed briefs supporting the
new hours-of-service. A ruling is expected within two to six months and
could be as early as June or July.
The Court has several options that range from making no changes to the
existing regulations, to sending the regulations back to the federal
government for further justification, to throwing out the new regulations
entirely.
Accounting Standards:
In December 2003, the Financial Accounting Standards Board (FASB)
revised FASB Interpretation (FIN) No. 46, Consolidation of Variable
Interest Entities. FIN No. 46(R) addresses consolidation by business
enterprises of certain variable interest entities. For public entities
that are not small business issuers, the provisions of FIN No. 46(R) are
effective no later than the end of the first reporting period that ends
after March 15, 2004. If the variable interest entity is considered to be
a special-purpose entity, FIN No. 46(R) shall be applied no later than the
first reporting period that ends after December 15, 2003. As of March 31,
2004, management has determined that adoption of this interpretation did
not have any material effect on the financial position, results of
operations, and cash flows of the Company.
The FASB issued an exposure draft on March 31, 2004 addressing
accounting for share-based payments. The objective of this proposed
statement is to make one accounting standard available for share-based
payments that would require a company to recognize in its financial
statements the cost of employee services received in exchange for valuable
equity instruments issued, and liabilities incurred, to employees in share-
based payment transactions. For public entities, the proposed statement
would be applied prospectively for awards that are granted, modified, or
settled in fiscal years beginning after December 15, 2004. Additionally,
public entities would apply the provisions of the proposed statement in
recognizing compensation cost for any portion of awards granted or modified
after December 15, 1994, that is not yet vested at the date the standard is
adopted. If the final statement is issued as proposed, management
anticipates that adopting the new statement will have a negative impact of
approximately one cent per share for the year ending December 31, 2005,
representing the expense to be recognized for the unvested portion of
awards which were granted prior to January 1, 2005.
16
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 March 31,
2004, 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 first quarter 2004 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.
17
PART II
OTHER INFORMATION
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities.
On December 29, 1997, the Company announced that its Board of
Directors had authorized the Company to repurchase up to 4,166,666 shares
of its common stock. On November 24, 2003, the Company announced that its
Board of Directors approved an increase to its authorization for common
stock repurchases of 3,965,838 shares for a total of 8,132,504 shares. As
of March 31, 2004, the Company had purchased 3,674,104 shares pursuant to
this authorization and had 4,458,400 shares remaining available for
repurchase. The Company may purchase shares from time to time depending on
market, economic, and other factors. The authorization will continue until
withdrawn by the Board of Directors.
The following tables summarize the Company's common stock repurchases
during the first quarter of 2004 made pursuant to this authorization. No
shares were purchased during the quarter other than through this program.
Issuer Purchases of Equity Securities
Maximum Number
(or Approximate
Total Number of Dollar Value) of
Shares (or Units) Shares (or Units) that
Total Number of Purchased as Part of May Yet Be
Shares (or Units) Average Price Paid Publicly Announced Purchased Under the
Period Purchased per Share (or Unit) Plans or Programs Plans or Programs
---------------------------------------------------------------------------------------
January 1-31, 2004 - - - 4,970,000
February 1-29, 2004 224,700 $18.5937 224,700 4,745,300
March 1-31, 2004 286,900 $18.3533 286,900 4,458,400
------------------ --------------------
Total 511,600 $18.4589 511,600 4,458,400
================== ====================
18
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
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 January 28, 2004, regarding a news
release on January 22, 2004, announcing the Company's operating
revenues and earnings for the fourth quarter and year ended
December 31, 2003.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
WERNER ENTERPRISES, INC.
Date: May 3, 2004 By: /s/ John J. Steele
-------------------- -----------------------------------
John J. Steele
Vice President, Treasurer and
Chief Financial Officer
Date: May 3, 2004 By: /s/ James L. Johnson
-------------------- -----------------------------------
James L. Johnson
Vice President, Controller and
Corporate Secretary
20