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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 September 30, 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 October 31, 2004, 78,867,861 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, 2004 and 2003 3
Consolidated Statements of Income for the Nine Months Ended
September 30, 2004 and 2003 4
Consolidated Condensed Balance Sheets as of September 30, 2004
and December 31, 2003 5
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2004 and 2003 6
Notes to Consolidated Financial Statements as of September 30,
2004 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
Item 4. Controls and Procedures 23
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 24
Items 3 and 4. Not applicable
Item 5. Other Information 25
Item 6. Exhibits 26
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
The interim consolidated financial statements contained herein reflect
all adjustments which, in the opinion of management, are necessary for a
fair statement of the financial condition, results of operations, and cash
flows for the periods presented. The interim consolidated financial
statements have been prepared in accordance with the instructions to Form
10-Q and do not include all the information and footnotes required by
accounting principles generally accepted in the United States of America
for complete financial statements.
Operating results for the three-month and nine-month periods ended
September 30, 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) September 30
- ---------------------------------------------------------------------------
2004 2003
- ---------------------------------------------------------------------------
(Unaudited)
Operating revenues $ 425,409 $ 368,034
--------------------------
Operating expenses:
Salaries, wages and benefits 136,977 131,094
Fuel 55,245 38,119
Supplies and maintenance 33,564 32,568
Taxes and licenses 26,699 25,806
Insurance and claims 17,663 18,446
Depreciation 36,514 33,708
Rent and purchased transportation 74,617 52,396
Communications and utilities 4,863 4,340
Other (243) (1,171)
--------------------------
Total operating expenses 385,899 335,306
--------------------------
Operating income 39,510 32,728
--------------------------
Other expense (income):
Interest expense 5 279
Interest income (710) (430)
Other 45 47
--------------------------
Total other expense (income) (660) (104)
--------------------------
Income before income taxes 40,170 32,832
Income taxes 15,871 12,316
--------------------------
Net income $ 24,299 $ 20,516
==========================
Average common shares outstanding 79,044 80,012
==========================
Basic earnings per share $ .31 $ .26
==========================
Diluted shares outstanding 80,573 81,932
==========================
Diluted earnings per share $ .30 $ .25
==========================
Dividends declared per share $ .035 $ .025
==========================
3
WERNER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Nine Months Ended
(In thousands, except per share amounts) September 30
- ---------------------------------------------------------------------------
2004 2003
- ---------------------------------------------------------------------------
(Unaudited)
Operating revenues $1,222,804 $1,077,532
--------------------------
Operating expenses:
Salaries, wages and benefits 404,585 382,042
Fuel 151,102 120,252
Supplies and maintenance 101,260 91,036
Taxes and licenses 81,639 77,362
Insurance and claims 57,192 55,468
Depreciation 107,143 99,410
Rent and purchased transportation 208,968 157,439
Communications and utilities 13,861 12,315
Other (2,306) (1,079)
--------------------------
Total operating expenses 1,123,444 994,245
--------------------------
Operating income 99,360 83,287
--------------------------
Other expense (income):
Interest expense 11 867
Interest income (1,796) (1,212)
Other 139 84
--------------------------
Total other expense (income) (1,646) (261)
--------------------------
Income before income taxes 101,006 83,548
Income taxes 39,519 31,334
--------------------------
Net income $ 61,487 $ 52,214
==========================
Average common shares outstanding 79,290 79,849
==========================
Basic earnings per share $ .78 $ .65
==========================
Diluted shares outstanding 80,939 81,703
==========================
Diluted earnings per share $ .76 $ .64
==========================
Dividends declared per share $ .095 $ .065
==========================
4
WERNER ENTERPRISES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except share amounts) September 30 December 31
- ---------------------------------------------------------------------------
2004 2003
- ---------------------------------------------------------------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 105,489 $ 101,409
Accounts receivable, trade, less allowance of
$7,893 and $6,043, respectively 182,014 152,461
Other receivables 13,446 8,892
Inventories and supplies 9,347 9,877
Prepaid taxes, licenses and permits 4,093 14,957
Other current assets 24,751 17,691
--------------------------
Total current assets 339,140 305,287
--------------------------
Property and equipment 1,336,606 1,261,252
Less - accumulated depreciation 500,011 455,565
--------------------------
Property and equipment, net 836,595 805,687
--------------------------
Other non-current assets 10,839 10,553
--------------------------
$1,186,574 $1,121,527
==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 44,793 $ 40,903
Insurance and claims accruals 57,960 55,201
Accrued payroll 19,217 15,828
Current deferred income taxes 15,826 15,151
Other current liabilities 18,389 15,392
--------------------------
Total current liabilities 156,185 142,475
--------------------------
Insurance and claims accruals, net of current
portion 81,301 71,301
Deferred income taxes 203,756 198,640
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, 200,000,000
shares authorized; 80,533,536 shares
issued; 78,854,525 and 79,714,271 shares
outstanding, respectively 805 805
Paid-in capital 108,563 108,706
Retained earnings 667,984 614,011
Accumulated other comprehensive loss (1,028) (837)
Treasury stock, at cost; 1,679,011 and 819,265
shares, respectively (30,992) (13,574)
--------------------------
Total stockholders' equity 745,332 709,111
--------------------------
$1,186,574 $1,121,527
==========================
5
WERNER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
(In thousands) September 30
- ---------------------------------------------------------------------------
2004 2003
- ---------------------------------------------------------------------------
(Unaudited)
Cash flows from operating activities:
Net income $ 61,487 $ 52,214
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 107,143 99,410
Deferred income taxes 5,791 (2,170)
Gain on disposal of property and equipment (7,067) (4,958)
Tax benefit from exercise of stock options 1,368 2,678
Other long-term assets 453 (299)
Insurance claims accruals, net of current
portion 10,000 15,500
Changes in certain working capital items:
Accounts receivable, net (29,553) (18,240)
Other current assets (220) 8,421
Accounts payable 3,890 (12,640)
Other current liabilities 8,377 17,831
-------------------------
Net cash provided by operating activities 161,669 157,747
-------------------------
Cash flows from investing activities:
Additions to property and equipment (206,143) (94,261)
Retirements of property and equipment 71,949 38,608
Decrease in notes receivable 2,471 1,324
-------------------------
Net cash used in investing activities (131,723) (54,329)
-------------------------
Cash flows from financing activities:
Dividends on common stock (6,746) (4,467)
Payment of stock split fractional shares - (9)
Repurchases of common stock (21,591) (8,518)
Stock options exercised 2,662 5,839
-------------------------
Net cash used in financing activities (25,675) (7,155)
-------------------------
Effect of exchange rate fluctuations on cash (191) (324)
Net increase in cash and cash equivalents 4,080 95,939
Cash and cash equivalents, beginning of period 101,409 29,885
-------------------------
Cash and cash equivalents, end of period $ 105,489 $125,824
=========================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 11 $ 867
Income taxes $ 33,854 $ 20,732
Supplemental schedule of non-cash investing
activities:
Notes receivable issued upon sale of revenue
equipment $ 3,210 $ 1,388
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 ($13) and ($376) (in thousands) for the three-month periods
and ($191) and ($324) (in thousands) for the nine-month periods ended
September 30, 2004 and 2003, respectively.
(2) Long-Term Debt
As of September 30, 2004, the Company has two credit facilities with
banks totaling $75 million which expire May 16, 2006 and October 22, 2005
and bear variable interest based on the London Interbank Offered Rate
(LIBOR), on which no borrowings were outstanding. As of September 30,
2004, the credit available pursuant to these bank credit facilities is
reduced by $32.4 million in letters of credit the Company maintains. Each
of the debt agreements require, among other things, that the Company
maintain a minimum consolidated tangible net worth and not exceed a maximum
ratio of total funded debt to earnings before interest, income taxes,
depreciation, amortization and rentals payable as defined in the credit
facility. While the Company had no borrowings pursuant to these credit
facilities as of September 30, 2004, the Company was in compliance with
these covenants at September 30, 2004.
(3) Commitments and Contingencies
As of September 30, 2004, the Company has commitments for net capital
expenditures of approximately $113 million.
On July 29, 2004 and October 25, 2004, the Company was served with
complaints naming it and others as defendants in two lawsuits stemming from
a multi-vehicle accident that occurred in February 2004. The lawsuits were
filed in Superior Court of the State of California, County of San
Bernardino, Barstow District and seek an unspecified amount of compensatory
damages. The Company brokered a shipment to an independent carrier with a
satisfactory safety rating which was then involved in the accident,
resulting in four fatalities and multiple personal injuries. It is
possible that additional lawsuits may be filed by other parties involved in
the accident. The Company's Broker-Carrier Agreement with the independent
carrier provides for the carrier to indemnify the Company for any loss
arising out of or in connection with the transportation of property under
the contract. The Company also has a certificate of liability insurance
from the carrier indicating that it has insurance coverage of up to $2
million per occurrence. For the policy year ended August 1, 2004, the
Company's primary liability insurance policies for coverage ranging up to
$10 million per occurrence have various annual aggregate levels of
liability for all accidents totaling $9 million that is the responsibility
of the Company (see discussion of insurance aggregates on page 17 under
Part I, Item 2 of this Form 10-Q). Amounts in excess of $10 million are
covered under premium-based policies to coverage levels that management
considers adequate. As such, the potential exposure to the Company ranges
from $0 to $9 million. The lawsuits are currently in the discovery phase.
The Company plans to vigorously defend the suits, and the amount of any
possible loss to the Company cannot currently be estimated. However, the
Company believes an unfavorable outcome in these lawsuits, if it were to
occur, would not have a material impact on the Company's financial
position.
7
In addition to the litigation noted above, the Company is engaged in
routine litigation in the ordinary course of its business operations, none
of which is expected to have a material adverse impact on the results of
operations or financial condition of the Company.
(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
--------------------- ---------------------
2004 2003 2004 2003
--------------------- ---------------------
Net income $ 24,299 $ 20,516 $ 61,487 $ 52,214
===================== =====================
Average common shares
outstanding 79,044 80,012 79,290 79,849
Common stock equivalents 1,529 1,920 1,649 1,854
--------------------- ---------------------
Diluted shares outstanding 80,573 81,932 80,939 81,703
===================== =====================
Basic earnings per share $ .31 $ .26 $ .78 $ .65
===================== =====================
Diluted earnings per share $ .30 $ .25 $ .76 $ .64
===================== =====================
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 September 30, 2004, the Company has a nonqualified stock option
plan. The Company did not grant any stock options during the three-month
periods ended September 30, 2004 and 2003. The Company granted 787,000
stock options during the nine-month period ended September 30, 2004 and
none during the nine-month period ended September 30, 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.
8
(in thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30 September 30
--------------------- ---------------------
2004 2003 2004 2003
--------------------- ---------------------
Net income, as reported $ 24,299 $ 20,516 $ 61,487 $ 52,214
Less: Total stock-based
employee compensation
expense determined under
fair value based method
for all awards, net of
related tax effects 595 629 1,506 1,887
--------------------- ---------------------
Net income, pro forma $ 23,704 $ 19,887 $ 59,981 $ 50,327
===================== =====================
Earnings per share:
Basic - as reported $ .31 $ .26 $ .78 $ .65
===================== =====================
Basic - pro forma $ .30 $ .25 $ .76 $ .63
===================== =====================
Diluted - as reported $ .30 $ .25 $ .76 $ .64
===================== =====================
Diluted - pro forma $ .29 $ .24 $ .74 $ .62
===================== =====================
The maximum number of shares of common stock that may be optioned
under the Stock Option Plan is 20,000,000 shares, and the maximum aggregate
number of options that may be granted to any one person is 2,562,500
options.
(6) Segment Information
The Company has two reportable segments - Truckload Transportation
Services and Value Added Services. The Truckload Transportation Services
segment consists of five operating fleets that have been aggregated since
they have similar economic characteristics and meet the other aggregation
criteria of SFAS No. 131. The medium-to-long haul Van fleet transports a
variety of consumer, non-durable products and other commodities in
truckload quantities over irregular routes using dry van trailers. The
Regional short-haul fleet provides comparable truckload van service within
five geographic areas. The 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. Revenues for the Truckload
Transportation Services segment include a small amount of non-trucking
revenues, representing the portion of shipments delivered to or from Mexico
where the Company utilizes a third-party carrier and revenues generated in
a few dedicated accounts where the services of third-party carriers are
used to meet customer capacity requirements.
The Value Added Services segment, which generates the majority of the
Company's non-trucking revenues, provides freight brokerage, intermodal
services, and freight transportation management. Value Added Services was
identified as a new reportable segment as of June 30, 2004. The 2003 and
2004 amounts shown in the following table have been reclassified to account
for the change in composition of the Company's reportable segments.
The Company generates other revenue related to third-party equipment
maintenance, equipment leasing, and other business activities. None of
these operations meet the quantitative threshold reporting requirements of
SFAS No. 131. As a result, these operations are grouped in "Other" in the
table below. The Company does not prepare separate balance sheets by
segment and, as a result, assets are not separately identifiable by
segment. The Company has no significant intersegment sales or expense
9
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
---------------------- -----------------------
2004 2003 2004 2003
---------------------- -----------------------
Truckload Transportation
Services $ 381,620 $ 342,843 $ 1,101,844 $ 1,009,319
Value Added Services 41,174 22,129 113,527 60,837
Other 1,624 1,387 4,684 3,758
Corporate 991 1,675 2,749 3,618
---------------------- -----------------------
Total $ 425,409 $ 368,034 $ 1,222,804 $ 1,077,532
====================== =======================
Operating Income
----------------
Three Months Ended Nine Months Ended
September 30 September 30
---------------------- -----------------------
2004 2003 2004 2003
---------------------- -----------------------
Truckload Transportation
Services $ 38,059 $ 32,663 $ 96,393 $ 82,710
Value Added Services 1,310 68 3,408 227
Other 572 161 1,821 694
Corporate (431) (164) (2,262) (344)
---------------------- -----------------------
Total $ 39,510 $ 32,728 $ 99,360 $ 83,287
====================== =======================
10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
This report contains historical information, as well as forward-
looking statements that are based on information currently available to the
Company's management. The forward-looking statements are made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act
of 1995. The Company believes the assumptions underlying these forward-
looking statements are reasonable based on information currently available;
however any of the assumptions could be inaccurate, and therefore, actual
results may differ materially from those anticipated in the forward-looking
statements as a result of certain risks and uncertainties. These risks
include, but are not limited to, those discussed in the section of this
Item entitled "Forward-Looking Statements and Risk Factors" and in Item 7,
"Management's Discussion and Analysis of Results of Operations and
Financial Condition", of the Company's Annual Report on Form 10-K for the
year ended December 31, 2003. Caution should be taken not to place undue
reliance on forward-looking statements made herein, since the statements
speak only as of the date they are made. The Company undertakes no
obligation to publicly release any revisions to any forward-looking
statements contained herein to reflect events or circumstances after the
date of this report or to reflect the occurrence of unanticipated events.
Overview:
The Company operates in the truckload sector of the trucking industry,
with a focus on transporting consumer nondurable products that ship more
consistently throughout the year. The Company's success depends on its
ability to efficiently manage its resources in the delivery of truckload
transportation and logistics services to its customers. Resource
requirements vary with customer demand, which may be subject to seasonal or
general economic conditions. The Company's ability to adapt to changes in
customer transportation requirements is a key element in efficiently
deploying resources and in making capital investments in tractors and
trailers. Although the Company's business volume is not highly
concentrated, the Company may also be affected by the financial failure of
its customers or a loss of a customer's business from time-to-time.
Operating revenues consist of trucking revenues generated by the five
operating fleets in the Truckload Transportation Services segment
(medium/long-haul van, dedicated, regional short-haul, flatbed, and
temperature-controlled) and non-trucking revenues generated primarily by
the Company's Value Added Services (VAS) segment. The Company's Truckload
Transportation Services segment also includes a small amount of non-
trucking revenues for the portion of shipments delivered to or from Mexico
where it utilizes a third-party carrier, and for a few of its dedicated
accounts where the services of third-party carriers are used to meet
customer capacity requirements. Non-trucking revenues reported in the
operating statistics table include those revenues generated by the VAS
segment, as well as the non-trucking revenues generated by the Truckload
Transportation Services segment. Trucking revenues accounted for 89% of
total operating revenues in third quarter 2004, and non-trucking and other
operating revenues accounted for 11%.
Trucking services typically generate revenue on a per-mile basis.
Other sources of trucking revenue include fuel surcharges and accessorial
revenue such as stop charges, loading/unloading charges, and equipment
detention charges. Because fuel surcharge revenues fluctuate in response
to changes in the cost of fuel, these revenues are identified separately
within the operating statistics table and are excluded from the statistics
to provide a more meaningful comparison between periods. Non-trucking
revenues generated by a fleet whose operations are part of the Truckload
Transportation Services segment are included in non-trucking revenue in the
operating statistics table so that the revenue statistics in the table are
calculated using only the revenues generated by the Company's trucks. The
key statistics used to evaluate trucking revenues, excluding fuel
surcharges, are 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.
11
The Company's greatest resource requirements include qualified
drivers, tractors, trailers, and related costs of operating its equipment
(such as fuel and related fuel taxes, driver pay, insurance, and supplies
and maintenance). The Company has historically been successful mitigating
its risk to increases in fuel prices by recovering additional fuel
surcharges from its customers, however, there is no assurance that current
recovery levels will continue in future periods. Assuming prices remain at
current levels for the remainder of fourth quarter 2004, the negative
impact of changing fuel prices on earnings for fourth quarter 2004 compared
to fourth quarter 2003 is estimated to be approximately five cents to seven
cents per share. The Company's financial results are also affected by
availability of drivers and the market for new and used trucks. Because the
Company is self-insured for cargo, personal injury, and property damage
claims on its trucks and for workers' compensation benefits for its
employees (supplemented by premium-based coverage above certain dollar
levels), financial results may also be affected by driver safety, medical
costs, the weather, the legal and regulatory environment, and the costs of
insurance coverage to protect against catastrophic losses.
A common industry measure used to evaluate the profitability of the
Company and its trucking operating fleets is the operating ratio (operating
expenses expressed as a percentage of operating revenues). The most
significant variable expenses that impact the trucking operation are driver
salaries and benefits, payments to owner-operators (included in rent and
purchased transportation expense), fuel, fuel taxes (included in taxes and
licenses expense), supplies and maintenance, and insurance and claims.
These expenses generally vary based on the number of miles generated. As
such, the Company also evaluates these costs on a per-mile basis to adjust
for the impact on the percentage of total operating revenues caused by
changes in fuel surcharge revenues and non-trucking revenues. As discussed
further in the comparison of operating results for third quarter 2004 to
third 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 and equipment licensing fees (included in taxes and licenses
expense). Depreciation expense has been affected by the new engine
emission standards that became effective in October 2002 for all newly
purchased trucks which have increased truck purchase costs over the last
two 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, primarily through its
VAS division, include freight brokerage, intermodal, freight transportation
management, and other services. Unlike the Company's trucking operations,
the non-trucking operations are less asset-intensive and instead are
dependent upon information systems, qualified employees, and the services
of other third-party providers. The most significant expense item related
to these non-trucking services is the cost of transportation paid by the
Company to third-party providers, which is recorded as rent and purchased
transportation expense. Other expenses include salaries, wages and
benefits and systems-related depreciation. The Company evaluates the non-
trucking operations by reviewing the gross margin percentage (revenues less
rent and purchased transportation expense expressed as a percentage of
revenues) and the operating ratio. 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 higher.
12
Results of Operations:
The following table sets forth certain industry data regarding the
freight revenues and operations of the Company for the periods indicated.
Three Months Ended Nine Months Ended
September 30 % September 30 %
------------------- ----------------------
2004 2003 Change 2004 2003 Change
------------------------------------------------------------
Trucking revenues, net of
fuel surcharge (1) $348,408 $327,071 6.5% $1,020,107 $955,004 6.8%
Trucking fuel surcharge
revenues (1) 29,625 13,608 117.7% 71,612 47,108 52.0%
Non-trucking revenues,
including VAS (1) 45,051 25,028 80.0% 123,944 69,031 79.5%
Other operating revenues (1) 2,325 2,327 (0.1%) 7,141 6,389 11.8%
--------- -------- ---------- ----------
Operating revenues (1) $425,409 $368,034 15.6% $1,222,804 $1,077,532 13.5%
========= ======== ========== ==========
Operating ratio
(consolidated) (2) 90.7% 91.1% (0.4%) 91.9% 92.3% (0.4%)
Average monthly miles per
tractor 10,186 10,288 (1.0%) 10,158 10,148 0.1%
Average revenues per total
mile (3) $1.357 $1.281 5.9% $1.325 $1.267 4.6%
Average revenues per loaded
mile (3) $1.528 $1.436 6.4% $1.494 $1.418 5.4%
Average percentage of empty
miles 11.20% 10.82% 3.5% 11.30% 10.65% 6.1%
Average trip length in
miles (loaded) 580 612 (5.2%) 583 638 (8.6%)
Total miles (loaded and
empty) (1) 256,726 255,382 0.5% 770,063 754,100 2.1%
Average tractors in service 8,401 8,275 1.5% 8,423 8,257 2.0%
Average revenues per truck
per week (3) $3,190 $3,041 4.9% $3,105 $2,966 4.7%
Total tractors (at quarter
end)
Company 7,535 7,400 7,535 7,400
Owner-operator 940 925 940 925
--------- -------- ---------- ----------
Total tractors 8,475 8,325 8,475 8,325
Total trailers (at quarter
end) 22,950 22,110 22,950 22,110
(1) Amounts in thousands.
(2) Operating expenses expressed as a percentage of operating revenues.
Operating ratio is a common measure in the trucking industry used to
evaluate profitability.
(3) Net of fuel surcharge revenues.
The following table sets forth the non-trucking revenues, operating
expenses, and operating income for the VAS segment. Other operating
expenses in the table for the VAS segment primarily consist of salaries,
wages and benefits expense. VAS also incurs smaller expense amounts in the
supplies and maintenance, depreciation, rent and purchased transportation
(excluding third-party transportation costs), communications and utilities,
and other operating expense categories.
Three Months Ended Nine Months Ended
September 30 September 30
---------------------- ---------------------
2004 2003 2004 2003
---------------------- ---------------------
Value Added Services (amounts
in 000's)
- -----------------------------
Revenues $ 41,174 $ 22,129 $ 113,527 $ 60,837
Rent and purchased
transportation expense 37,318 20,548 102,877 56,516
---------------------- ---------------------
Gross margin 3,856 1,581 10,650 4,321
Other operating expenses 2,546 1,513 7,242 4,094
---------------------- ---------------------
Operating income $ 1,310 $ 68 $ 3,408 $ 227
====================== =====================
13
Three Months Ended September 30, 2004 Compared to Three Months Ended
- ---------------------------------------------------------------------------
September 30, 2003
- ------------------
Operating Revenues
Operating revenues increased 15.6% for the three months ended
September 30, 2004, compared to the same period of the prior year.
Excluding fuel surcharge revenues, trucking revenues increased 6.5% due
primarily to a 5.9% increase in revenue per total mile, excluding fuel
surcharges, and a 1.5% increase in the average number of tractors in
service, offset by a 1.0% decrease in average monthly miles per tractor.
Revenue per total mile, excluding fuel surcharges, increased due to
customer rate increases, an improvement in freight selection, and a 5.2%
decrease in the average loaded trip length due to growth in the Company's
dedicated and regional fleets. The Company grew its dedicated fleet by 750
trucks, from about one-quarter of the total truck fleet in third quarter
2003 to over one-third of the total truck fleet in third 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, as reported above, for the entire Company. During third
quarter 2004, the truckload freight economy continued to strengthen due to
ongoing truck capacity constraints.
Beginning in August, the Company's sales and marketing team met with
customers to negotiate annual rate increases to recoup the significant cost
increases in fuel, driver pay, equipment, and insurance and to improve
margins. Much of the Company's contractual business renews in the latter
part of third quarter and fourth quarter. As a result of these efforts,
revenue per total mile, net of fuel surcharges, rose almost four cents a
mile, or 3%, sequentially from second quarter 2004 to third quarter 2004.
Fuel surcharge revenues, which represent collections from customers
for the higher cost of fuel, increased from $13.6 million in third quarter
2003 to $29.6 million in third quarter 2004 due to higher average fuel
prices in third quarter 2004. 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 as fuel prices change,
continued to be in effect during third quarter 2004. The Company's fuel
surcharge program has historically enabled the Company to recover a
significant portion of the fuel price increases. Typical programs specify
a base price per gallon when surcharges can begin to be billed. Above this
price, the Company bills a surcharge rate per mile when the price per
gallon falls in a bracketed range of fuel prices. When fuel prices
increase, fuel surcharges recoup a lower percentage of the incrementally
higher costs due to the impact of inadequate recovery for empty miles not
billable to customers, out-of-route miles, truck idle time, and "bracket
creep". "Bracket creep" occurs when fuel prices approach the upper limit
of the bracketed range, but a higher surcharge rate per mile cannot be
billed until the fuel price per gallon reaches the next bracket. Also, the
DOE survey price used for surcharge contracts changes once a week while
fuel prices change more frequently. Because collections of fuel surcharges
typically trail fuel price changes, rapid fuel price increases cause a
temporarily unfavorable effect of fuel prices increasing more rapidly than
fuel surcharge revenues. This effect typically reverses if fuel prices
fall.
VAS revenues increased by 86.1% for the three months ended September
30, 2004, compared to the same period of the prior year. In addition, VAS
revenues grew 5.6% sequentially from second quarter 2004 to third quarter
2004. Most of this revenue growth came from the Company's brokerage group
within VAS. VAS revenues consist primarily of freight brokerage,
intermodal, freight transportation management, and other services. The
Company expects to continue to capitalize on the sophisticated service,
management, and technology advantages of its logistics solution in an
improving freight market. During fourth quarter 2004, the Company expects
to add several hundred trailers to support trailer capacity needs and offer
tracking and tracing to customers in its growing intermodal operation.
14
Operating Expenses
Operating expenses, expressed as a percentage of operating revenues,
were 90.7% for the three months ended September 30, 2004, compared to 91.1%
for the three months ended September 30, 2003. Because the Company's VAS
business operates with a lower operating margin and a higher return on
assets than the trucking business, the substantial growth in VAS business
in third quarter 2004 compared to third quarter 2003 affected the Company's
overall operating ratio. The significant increase in fuel expense and
related fuel surcharge revenues also affected the operating ratio. If VAS
rent and purchased transportation expenses are offset against VAS revenues
and fuel surcharge revenues are offset against fuel expense, the Company's
operating ratio would be 170 basis points lower in third quarter 2004 and
90 basis points lower in third quarter 2003.
The following table sets forth the cost per total mile of operating
expense items for the Truckload Transportation Services segment for the
periods indicated. The Company evaluates operating costs for this segment
on a per-mile basis to adjust for the impact on the percentage of total
operating revenues caused by changes in fuel surcharge revenues, which
provides a more consistent basis for comparing the results of operations
from period to period.
Three Months Ended Increase Nine Months Ended Increase
September 30 (Decrease) September 30 (Decrease)
-------------------- -------------------
2004 2003 per Mile 2004 2003 per Mile
-----------------------------------------------------------
Salaries, wages and
benefits $0.523 $0.506 $.017 $0.515 $0.499 $.016
Fuel 0.214 0.148 .066 0.195 0.159 .036
Supplies and maintenance 0.126 0.119 .007 0.126 0.115 .011
Taxes and licenses 0.104 0.101 .003 0.106 0.102 .004
Insurance and claims 0.069 0.072 (.003) 0.074 0.073 .001
Depreciation 0.140 0.131 .009 0.136 0.131 .005
Rent and purchased
transportation 0.145 0.125 .020 0.138 0.134 .004
Communications and
utilities 0.019 0.017 .002 0.018 0.016 .002
Other 0.000 (0.004) .004 (0.002) 0.000 (.002)
Owner-operator costs are included in rent and purchased transportation
expense. Owner-operator miles as a percentage of total miles were 13.2% in
third quarter 2004 compared to 12.2% in third 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. This increase in owner-operator
miles as a percentage of total miles shifted costs to the rent and
purchased transportation category from other expense categories. The
Company estimates that rent and purchased transportation expense for the
Truckload Transportation segment was higher by approximately 1.0 cent per
total mile due to this increase, and other expense categories had
offsetting reductions on a total-mile basis, as follows: salaries, wages
and benefits (0.5 cents), fuel (0.2 cents), supplies and maintenance (0.1
cent), taxes and licenses (0.1 cent), and depreciation (0.1 cent). Over
the past year, attracting and retaining owner-operator drivers continued to
be difficult due to the challenging operating conditions.
Salaries, wages and benefits for non-drivers increased in third
quarter 2004 compared to third quarter 2003 to support the growth in the
VAS segment. The increase in salaries, wages and benefits per mile of 1.7
cents for the Truckload Transportation Services segment is primarily the
result of higher driver pay per mile and higher group health insurance,
offset by lower workers' compensation and more owner-operator miles as a
percentage of total miles, as discussed above. On August 1, the Company's
previously announced two cent per mile pay raise became effective for
company solo drivers in its medium-to-long-haul Van division. This
increased the pay of approximately one quarter of the Company's drivers and
increased salaries, wages and benefits expense per total mile by 0.3 cents.
15
The Company expects to recover a substantial portion of this pay raise
through its customer rate increase negotiations, currently in process. As
a result of the new hours of service (HOS) regulations effective at the
beginning of 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. The increase in
dedicated business as a percentage of total trucking business also
contributed to the increase in driver pay per mile as dedicated drivers are
usually compensated at a higher rate per mile due to the lower average
miles per truck and had the effect of increasing non-driver salaries, wages
and benefits on a per-mile basis due to the lower average miles per truck.
In recent months, the market for recruiting experienced drivers
tightened. The Company experienced an improvement in driver turnover since
announcing the two cent per mile pay raise described above, however, the
market for recruiting drivers continued to be difficult in third quarter
2004. The Company instituted an optional per diem reimbursement program
for eligible company drivers (approximately half of total non-student
company drivers) beginning in April 2004. This program increases a company
driver's net pay per mile, after taxes. As a result, salaries, wages, and
benefits were slightly lower, and the Company's effective income tax rate
was higher in third quarter 2004 compared to the first two quarters of
2004. The Company expects the cost of the per diem program to be neutral,
because the combined driver pay rate per mile and per diem reimbursement
under the per diem program is about one cent per mile lower than mileage
pay without per diem reimbursement, which offsets the Company's increased
income taxes caused by the nondeductible portion of the per diem. The per
diem program increases driver satisfaction through higher net pay per mile.
The Company anticipates that the competition for qualified drivers will
continue to be high and cannot predict whether it will experience shortages
in the future. If such a shortage was to occur and additional increases in
driver pay rates became necessary to attract and retain drivers, the
Company's results of operations would be negatively impacted to the extent
that corresponding freight rate increases were not obtained.
Fuel increased 6.6 cents per mile for the Truckload Transportation
Services segment due to higher average diesel fuel prices. Average fuel
prices in third quarter 2004 were 40 cents a gallon, or 46%, higher than
third quarter 2003, and were 13 cents a gallon, or 12%, higher than second
quarter 2004. Prices increased 37 cents a gallon from the beginning to the
end of third quarter 2004, including a 10-cent per gallon spike in the last
full week of the quarter. Fuel expense, after considering the amounts
collected from customers through fuel surcharge programs, net of
reimbursement to owner-operators, had a three-cent negative impact on third
quarter 2004 earnings per share compared to third quarter 2003 earnings per
share. In addition to the increase in fuel prices, company data continues
to indicate that the fuel mile per gallon (mpg) degradation for trucks with
post-October 2002 engines (35% of the Company fleet as of September 30,
2004) is a reduction of approximately 0.3 mpg to 0.5 mpg, or a 6% to 9%
reduction in fuel efficiency. 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 September 30, 2004, the Company had no derivative
financial instruments to reduce its exposure to fuel price fluctuations.
Diesel fuel prices for the month of October 2004 averaged 67 cents a
gallon, or 74% higher than average fuel prices for fourth quarter 2003.
Assuming prices remain at current levels for the remainder of fourth
quarter 2004, the negative impact of changing fuel prices on earnings for
fourth quarter 2004 compared to fourth quarter 2003 is estimated to be
approximately five cents to seven cents per share.
Supplies and maintenance increased 0.7 cents on a per-mile basis in
third quarter 2004 due primarily to increases in the cost of over-the-road
repairs and higher driver recruiting costs (including driver advertising),
driver travel and lodging, and other costs.
16
Taxes and licenses increased 0.3 cents on a per-mile basis in third
quarter 2004 due in part to the effect of lower miles per truck on the
fixed portion of licensing costs.
Insurance and claims decreased 0.3 cents on a per-mile basis due
primarily to better overall claims experience (lower average cost per
claim) in the current quarter.
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 was responsible 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 was
responsible for the first $5.0 million of claims. 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 up to $10.0 million per claim renewed on
August 1, 2004.
Effective August 1, 2004, the Company became responsible for the
first $2.0 million per claim with an annual aggregate of $3.0 million for
claims between $2.0 million and $3.0 million, and the Company became fully
insured (i.e., no aggregate) for claims between $3.0 million and $5.0
million. For claims in excess of $5.0 million and less than $10.0 million,
the Company is responsible for the first $5.0 million of claims. The
increased Company retention from $500,000 to $2.0 million is due to changes
in the trucking insurance market and is similar to increased claim
retention levels experienced by other truckload carriers. The Company
maintains liability insurance coverage with reputable insurance carriers
substantially in excess of the $10 million per claim. Liability insurance
premiums for the policy year beginning August 1, 2004 decreased
approximately $0.4 million on the higher retention level.
Depreciation expense for the Truckload Transportation Services segment
increased 0.9 cents on a per-mile basis in third quarter 2004 due primarily
to higher costs of new tractors with the post-October 2002 engines. The 1%
lower miles generated per truck also contributed to the increase in this
fixed cost on a per-mile basis.
Rent and purchased transportation consists mainly of payments to
owner-operators in the trucking operations and payments to third-party
carriers in the VAS and other non-trucking operations. Rent and purchased
transportation for the Truckload Transportation Services segment increased
2.0 cents per total mile as higher fuel prices necessitated higher
reimbursements to owner-operators for fuel and, to a lesser extent, due to
more owner-operator miles as a percentage of total miles. The Company's
customer fuel surcharge programs do not differentiate between miles
generated by Company-owned trucks and miles generated by owner-operator
trucks; thus, the increase in owner-operator fuel reimbursements are
included with Company fuel expenses in calculating the per-share impact of
higher fuel prices on earnings. The Company has experienced difficulty
recruiting and retaining owner-operators for over two years because of
challenging operating conditions. However, the Company has historically
been able to add company-owned tractors and recruit additional company
drivers to offset any decreases in owner-operators. If a shortage of
owner-operators and company drivers was to occur and increases in per mile
settlement rates became necessary to attract and retain owner-operators,
the Company's results of operations would be negatively impacted to the
extent that corresponding freight rate increases were not obtained.
Payments to third-party carriers used for portions of shipments delivered
17
to or from Mexico and by a few dedicated fleets in the truckload segment
contributed 0.3 cents of the total per-mile increase.
As shown in the VAS statistics table at the beginning of this section,
rent and purchased transportation expense for the VAS segment increased in
response to higher VAS revenues. These expenses vary directly with changes
in the volume of services generated by the segment.
Other operating expenses increased 0.4 cents per mile in third quarter
2004. Gains on sales of revenue equipment, primarily trucks, are reflected
as a reduction of other operating expenses and were $1.7 million in third
quarter 2004 compared to $2.3 million in third quarter 2003. Gains
decreased slightly due to higher costs to prepare the equipment for sale.
The Company's wholly-owned subsidiary, Fleet Truck Sales, has 16 truck
sales locations throughout the United States.
The Company's effective income tax rate (income taxes expressed as a
percentage of income before income taxes) increased from 37.5% for the
three-month period ended September 30, 2003 to 39.5% for the three-month
period ended September 30, 2004 due to an increase in non-deductible
expenses for tax purposes related to the implementation of a per diem pay
program for student drivers in fourth quarter 2003 and a per diem pay
program for eligible company drivers in April 2004.
Nine Months Ended September 30, 2004 Compared to Nine Months Ended
- ---------------------------------------------------------------------------
September 30, 2003
- ------------------
Operating revenues increased by 13.5% for the nine months ended
September 30, 2004, compared to the same period of the previous year.
Excluding fuel surcharge revenues, trucking revenues increased 6.8%, due
primarily to a 4.6% increase in revenue per total mile excluding fuel
surcharges, a 2.0% increase in the average number of tractors in service,
and a 0.1% increase in miles per truck. VAS revenues increased by $52.7
million (86.6%), and fuel surcharge revenues increased by $24.5 million
(52.0%).
Operating expenses, expressed as a percentage of operating revenues,
were 91.9% for the nine months ended September 30, 2004, compared to 92.3%
for the same period of the previous year. The Company's overall operating
ratio was negatively affected to a greater extent in the first nine months
of 2004 compared to the first nine months of 2003 by higher non-trucking
revenues and higher fuel surcharge revenues. If VAS rent and purchased
transportation expenses are offset against VAS revenues and fuel surcharge
revenues are offset against fuel expense, the Company's operating ratio
would be 140 basis points lower in the nine months ended September 30, 2004
and 80 basis points lower in the nine months ended September 30, 2003.
Salaries, wages and benefits for non-drivers increased to support the
growth in the VAS segment. Salaries, wages and benefits for the Truckload
Transportation Services segment increased 1.6 cents on a per-mile basis due
to higher driver accessorial and bonus pay and an increase in dedicated
business as dedicated drivers are usually compensated at a higher rate per
mile due to the lower average miles per truck. Fuel increased 3.6 cents
per mile due to higher fuel prices. Average fuel prices for the first nine
months of 2004 were 22 cents a gallon, or 24%, higher than the first nine
months of 2003. Supplies and maintenance increased 1.1 cents per mile due
to increases in the cost of over-the-road repairs and higher driver
recruiting costs (including driver advertising), driver travel and lodging,
and other costs. Depreciation increased 0.5 cents per mile due to higher
costs of new tractors as the Company replaces tractors with pre-October
2002 engines with tractors that have the new EPA-compliant engines at a
higher cost. Rent and purchased transportation for the Truckload
Transportation Services segment increased 0.4 cents per mile as higher fuel
prices necessitated higher reimbursements to owner-operators for fuel. Rent
and purchased transportation expense for the VAS segment increased in
response to higher VAS revenues. Other operating expenses decreased 0.2
cents per mile due to the Company selling more used trucks to third parties
and recognizing additional gains, net of increased expenses to prepare the
equipment for sale. The Company's effective income tax rate was 37.5% for
the nine months ended September 30, 2003. The rate increased to 39.1% for
18
the nine months ended September 30, 2004 (38.5% for first quarter 2004,
39.1% for second quarter 2004, and 39.5% for third quarter 2004) related to
the implementation of per diem pay programs for student drivers and
eligible company drivers.
Financial Condition:
During the nine months ended September 30, 2004, the Company generated
cash flow from operations of $161.7 million, a 2.5% increase ($3.9 million)
in cash flow compared to the same nine-month period a year ago. The
increase in cash flow from operations is due primarily to a $17.2 decrease
in the accounts payable for revenue equipment from December 2002 to
September 2003 compared to a $0.1 million decrease in the accounts payable
for revenue equipment from December 2003 to September 2004, offset by an
increase in accounts receivable caused by higher revenue rates per mile and
fuel surcharge reimbursement and an increase in days sales in accounts
receivable (primarily current receivables). The accounts payable 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 $17.1 million, and the increased accounts receivable reduced
cash flow from operations by $11.3 million. The cash flow from operations
enabled the Company to make net property additions, primarily revenue
equipment, of $134.2 million, repurchase common stock of $21.6 million, and
pay common stock dividends of $6.7 million. Based on the Company's strong
financial position, management foresees no significant barriers to
obtaining sufficient financing, if necessary.
Net cash used in investing activities for the nine-month period ended
September 30, 2004 increased by $77.4 million from $54.3 million for the
nine-month period ended September 30, 2003 to $131.7 million for the nine-
month period ended September 30, 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 the first nine months. 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 increased cost of using trucks with
new engines in its fleet by approximately one year and provided for
additional testing time. The last group of pre-buy trucks were placed into
service during the third quarter of 2003, resulting in increased purchases
in subsequent quarters. As of September 30, 2004, approximately 35% of the
company-owned truck fleet consisted of trucks with new EPA-compliant
engines compared to 10% at December 31, 2003. Company data continues to
indicate that the fuel mile per gallon (mpg) degradation is a reduction of
approximately 0.3 mpg to 0.5 mpg, or a 6% to 9% reduction in fuel
efficiency. Also, depreciation expense is increasing due to the higher
cost of the new engines. The average age of the Company's truck fleet is
1.6 years at September 30, 2004. The Company anticipates the average age
of its truck fleet will continue to decrease in the last half of 2004 and
intends to fund the new truck purchases through existing cash on hand and
cash flow from operations.
Management believes the Company's financial position at September 30,
2004 is strong. As of September 30, 2004, the Company has $105.5 million
of cash and cash equivalents, no debt, and $745.3 million of stockholders'
equity. As of September 30, 2004, the Company has no equipment operating
leases, and, therefore has no off-balance sheet equipment debt. The
Company maintains $32.4 million in letters of credit as of September 30,
2004. These letters of credit are primarily required as security for
insurance policies. As of September 30, 2004, the Company has $75.0
million of credit pursuant to credit facilities, on which no borrowings
were outstanding. The credit available under these facilities is reduced
by the $32.4 million in letters of credit.
19
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 in 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.
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. On July 16, 2004, the U.S. Circuit
Court of Appeals for the District of Columbia rejected the new hours of
service rules for truck drivers, because it said the FMCSA had failed to
address the impact of the rules on the health of drivers as required by
Congress. In addition, the judge's ruling noted other areas of concern
including the increase in driving hours from 10 hours to 11 hours, the
exception that allows drivers to split their required rest periods, the new
rule allowing drivers to reset their 70-hour clock to 0 hours after 34
consecutive hours off duty, and the decision by the FMCSA not to require
the use of electronic onboard recorders to monitor driver compliance.
On September 30, 2004, the extension of the Federal highway bill
signed into law by the President extended the current hours of service
rules for one year or whenever the FMCSA develops a new set of regulations,
whichever comes first.
On September 21, 2004, the FMCSA approved Werner's exemption for its
paperless log system (electronic hours of service system) that moves this
exemption from the FMCSA-approved pilot program that began in 1998 to
permanent status. The exemption is to be renewed every two years. Werner
is the only truckload carrier with an approved electronic hours of service
system utilizing global positioning system technology.
Critical Accounting Policies:
The most significant accounting policies and estimates that affect our
financial statements include the following:
* Selections of estimated useful lives and salvage values for purposes
of depreciating tractors and trailers. Depreciable lives of tractors
and trailers range from 5 to 12 years. Estimates of salvage value at
the expected date of trade-in or sale (for example, three years for
tractors) are based on the expected market values of equipment at the
time of disposal. The Company reviews its long-lived assets for
impairment whenever events or changes in circumstances indicate that
the carrying amount of a long-lived asset may not be recoverable. An
impairment loss would be recognized if the carrying amount of the
long-lived asset is not recoverable, and it exceeds its fair value.
For long-lived assets classified as held and used, if the carrying
value of the long-lived asset exceeds the sum of the future net cash
flows, it is not recoverable. Long-lived assets classified as held
for sale are reported at the lower of its carrying amount or fair
value less costs to sell.
* Estimates of accrued liabilities for insurance and claims for
liability and physical damage losses and workers' compensation. The
insurance and claims accruals (current and long-term) are recorded at
the estimated ultimate payment amounts and are based upon individual
case estimates, including negative development, and estimates of
20
incurred-but-not-reported losses based upon past experience. An
actuary reviews the Company's self-insurance reserves twice each year.
* Policies for revenue recognition. Operating revenues (including fuel
surcharge revenues) and related direct costs are recorded when the
shipment is delivered. For shipments where a third-party provider is
utilized to provide some or all of the service and the Company is the
primary obligor in regards to the delivery of the shipment,
establishes customer pricing separately from carrier rate
negotiations, generally has discretion in carrier selection, and/or
has credit risk on the shipment, the Company records both revenues for
the dollar value of services billed by the Company to the customer and
the costs of transportation paid by the Company to the third-party
provider as rent and purchased transportation expense upon delivery of
the shipment. In the absence of the conditions listed above, the
Company records revenues net of expenses related to third-party
providers.
Management periodically evaluates these estimates and policies as
events and circumstances change. Together with the effects of the matters
discussed above, these factors may significantly impact the Company's
results of operations from period to period.
Accounting Standards:
The Financial Accounting Standards Board (FASB) issued an exposure
draft on March 31, 2004 addressing accounting for share-based payments with
the final statement expected to be issued in the fourth quarter of 2004.
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
(e.g., stock options). For public entities, the proposed statement would
be applied prospectively for awards that are granted, modified, or settled
in any interim or annual period beginning after June 15, 2005.
Additionally, public entities would recognize compensation cost for any
portion of awards granted or modified after December 15, 1994, that is not
yet vested at the date the standard is adopted. If the Company adopts the
standard on July 1, 2005, it would be required to report in its financial
statements the share-based compensation expense for the last six months of
2005 and may choose to use the modified retrospective application method to
restate results for the two earlier interim periods. The FASB is
encouraging companies to adopt the proposed statement early and begin
recognizing expense in the first quarter of 2005. 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
(two cents per share if the modified retrospective application method is
used) for the year ending December 31, 2005, representing the expense to be
recognized from July 1, 2005 through December 31, 2005 for the unvested
portion of awards which were granted prior to July 1, 2005.
Forward-Looking Statements and Risk Factors:
The following risks and uncertainties, as well as those listed in Item
7 of the Company's Annual Report on Form 10-K for the year ended December
31, 2003, may cause actual results to differ materially from those
anticipated in the forward-looking statements included in this Form 10-Q:
The Company is sensitive to changes in overall economic conditions
that impact customer shipping volumes. Future weakness in the economy and
consumer demand could result in reduced freight demand, which, in turn,
would impact the Company's growth opportunities, revenues and
profitability. The Company is currently seeking pricing increases from its
customers to recoup the significant cost increases in fuel, driver pay,
21
equipment and insurance and to improve margins. To the extent these rate
increases are not obtained, the Company's revenues and earnings would be
negatively affected.
At times, there have been shortages of drivers and owner-operators in
the trucking industry. Improvement in the general unemployment rate can
lead to further difficulty in recruiting and retention. The Company
anticipates that the competition for drivers and owner-operators will
continue to be high and cannot predict whether it will experience shortages
in the future. If such a shortage was to occur and additional increases in
driver pay rates and owner-operator settlement rates became necessary to
attract and retain drivers and owner-operators, the Company's results of
operations would be negatively impacted to the extent that corresponding
freight rate increases were not obtained.
Diesel fuel prices rose rapidly in second quarter 2004 and continued
to increase throughout third quarter 2004. Prices have risen further in
October 2004. To the extent the Company cannot recover the higher cost of
fuel through general customer fuel surcharge programs, the Company's
results would be negatively impacted. Shortages of fuel, further increases
in fuel prices, or rationing of petroleum products could have a materially
adverse impact on the operations and profitability of the Company.
As discussed above, the United States Circuit Court of Appeals for the
District of Columbia vacated the new hours of service regulations in their
entirety on July 16, 2004, and on September 30, 2004, the current rules
were extended for a one-year period or until the FMCSA develops a new set
of regulations. The Company cannot predict what rule changes will result
from the court's ruling, nor the extent of their effect on the operations
and profitability of the Company.
The Company self-insures for liability resulting from cargo loss,
personal injury, and property damage as well as workers' compensation.
This is supplemented by premium-based insurance with licensed insurance
companies above the Company's self-insurance level for each type of
coverage. To the extent that the Company was to experience a significant
increase in the number of claims, the cost per claim, or the costs of
insurance premiums for coverage in excess of its retention amounts, the
Company's operating results would be negatively affected. In 2004, the
Company was named a defendant in two lawsuits related to an accident
involving a third-party carrier that was transporting a shipment arranged
by the Company's VAS division (see footnote (3) Commitments and
Contingencies in the Notes to Consolidated Financial Statements under Item
1 of this Form 10-Q). To the extent the Company was to experience more of
these types of claims and the Company is held responsible for liability for
these types of claims, the Company's results of operations could be
negatively impacted.
Effective October 1, 2002, all newly manufactured truck engines must
comply with the engine emission standards mandated by the Environmental
Protection Agency (EPA). As of September 30, 2004, approximately 35% of
the company-owned truck fleet consisted of trucks with new EPA-compliant
engines. The Company has experienced an average 6% to 9% reduction in fuel
efficiency to date and increased depreciation expense due to the higher
cost of the new engines. The Company anticipates continued increases in
these expense categories as regular tractor replacements increase the
percentage of company-owned trucks with new EPA-compliant engines. A new
set of standards mandated by the EPA will become effective in 2007. The
Company is unable to predict the impact these new regulations will have on
its operations, financial position, results of operations, and cash flows.
22
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, 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 third quarter 2004 and prior periods. To date, all foreign
revenues are denominated in U.S. dollars, and the Company receives payment
for freight services performed in Mexico and Canada primarily in U.S.
dollars to reduce foreign currency risk. Accordingly, the Company is not
currently subject to material foreign currency exchange rate risks from the
effects that exchange rate movements of foreign currencies would have on
the Company's future costs or on future cash flows.
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.
23
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
On July 29, 2004 and October 25, 2004, the Company was served with
complaints naming it and others as defendants in two lawsuits stemming from
a multi-vehicle accident that occurred in February 2004. The lawsuits were
filed in Superior Court of the State of California, County of San
Bernardino, Barstow District and seek an unspecified amount of compensatory
damages. The Company brokered a shipment to an independent carrier with a
satisfactory safety rating which was then involved in the accident,
resulting in four fatalities and multiple personal injuries. It is
possible that additional lawsuits may be filed by other parties involved in
the accident. The Company's Broker-Carrier Agreement with the independent
carrier provides for the carrier to indemnify the Company for any loss
arising out of or in connection with the transportation of property under
the contract. The Company also has a certificate of liability insurance
from the carrier indicating that it has insurance coverage of up to $2
million per occurrence. For the policy year ended August 1, 2004, the
Company's primary liability insurance policies for coverage ranging up to
$10 million per occurrence have various annual aggregate levels of
liability for all accidents totaling $9 million that is the responsibility
of the Company (see discussion of insurance aggregates on page 17 under
Part I, Item 2 of this Form 10-Q). Amounts in excess of $10 million are
covered under premium-based policies to coverage levels that management
considers adequate. As such, the potential exposure to the Company ranges
from $0 to $9 million. The lawsuits are currently in the discovery phase.
The Company plans to vigorously defend the suits, and the amount of any
possible loss to the Company cannot currently be estimated. However, the
Company believes an unfavorable outcome in these lawsuits, if it were to
occur, would not have a material impact on the Company's financial
position.
In addition to the litigation noted above, the Company is engaged in
routine litigation in the ordinary course of its business operations, none
of which is expected to have a material adverse impact on the results of
operations or financial condition of the Company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On December 29, 1997, the Company announced that its Board of
Directors had authorized the Company to repurchase up to 4,166,666 shares
of its common stock. On November 24, 2003, the Company announced that its
Board of Directors approved an increase to its authorization for common
stock repurchases of 3,965,838 shares for a total of 8,132,504 shares. As
of September 30, 2004, the Company had purchased 4,335,704 shares pursuant
to this authorization and had 3,796,800 shares remaining available for
repurchase. The Company may purchase shares from time to time depending on
market, economic, and other factors. The authorization will continue until
withdrawn by the Board of Directors.
24
The following table summarizes the Company's common stock repurchases
during the third 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
-------------------------------------------------------------------------------------
July 1-31, 2004 - - - 4,198,800
August 1-31, 2004 390,500 $18.4488 390,500 3,808,300
September 1-30, 2004 11,500 $18.1972 11,500 3,796,800
------------------ ------------------
Total 402,000 $18.4416 402,000 3,796,800
================== ==================
Item 5. Other Information.
Stockholder Nominees for Director
On August 18, 2004, the Company's Board of Directors adopted new
policies for director recommendations by stockholders and directorship
selection guidelines. Under the new policy for director recommendations by
stockholders, the Company will consider candidates recommended by one or
more stockholders that have individually or as a group owned beneficially
at least two percent of the Company's issued and outstanding stock for at
least one year. Stockholder recommendations must be submitted in writing
with the required proof of compliance with stock ownership requirements,
background information, and qualifications of the nominee to the Secretary
of the Company not less than 120 days prior to the first anniversary of the
date of the proxy statement relating to the Company's previous annual
meeting (by December 8, 2004 for the 2005 Annual Meeting of Stockholders)
in order for the candidate to be evaluated and considered as a prospective
nominee. The new directorship selection guidelines establish general
guidelines and criteria to be used by the nominating committee of the Board
of Directors in evaluating prospective candidates for director positions.
The full text of the newly-adopted policies, including a list of
information required to be submitted with the nomination by the
recommending stockholder, may be found on the Company's website,
www.werner.com. Stockholders may also request a copy of the policies by
writing to: Werner Enterprises, Inc., Attention: Corporate Secretary, P.O.
Box 45308, Omaha, NE 68145.
25
Item 6. Exhibits.
Exhibit 3(i)(A) Revised and Amended Articles of Incorporation
(Incorporated by reference to Exhibit 3 to Registration Statement on
Form S-1, Registration No. 33-5245)
Exhibit 3(i)(B) Articles of Amendment to Articles of Incorporation
(Incorporated by reference to Exhibit 3(i) to the Company's report
on Form 10-Q for the quarter ended May 31, 1994)
Exhibit 3(i)(C) Articles of Amendment to Articles of Incorporation
(Incorporated by reference to Exhibit 3(i) to the Company's report
on Form 10-K for the year ended December 31, 1998)
Exhibit 3(ii) Revised and Restated By-Laws (Incorporated by reference to
Exhibit 3(ii) to the Company's report on Form 10-Q for the quarter
ended June 30, 2004)
Exhibit 10.1 Amended and Restated Stock Option Plan (Incorporated by
reference to Exhibit 10.1 to the Company's report on Form 10-Q for
the quarter ended June 30, 2004)
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
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
WERNER ENTERPRISES, INC.
Date: November 1, 2004 By: /s/ John J. Steele
---------------------- ------------------------------------
John J. Steele
Senior Vice President, Treasurer and
Chief Financial Officer
Date: November 1, 2004 By: /s/ James L. Johnson
---------------------- ------------------------------------
James L. Johnson
Vice President, Controller and
Corporate Secretary
27