Attached files
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to __________
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
incorporation or organization) Identification No.)
14507 FRONTIER ROAD 68145-0308
POST OFFICE BOX 45308 (Zip code)
OMAHA, NEBRASKA
(Address of principal executive offices)
Registrant's telephone number, including area code: (402) 895-6640
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
Common Stock, $.01 Par Value The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. YES X NO
--- ---
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act. YES NO X
--- ---
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 has submitted
electronically and posted on its corporate Website, if any, every
Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12
months (or for such shorter period that the registrant was
required to submit and post such files). YES NO
--- ---
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of the registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
---
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, non-accelerated filer,
or a smaller reporting company. See the definitions of "large
accelerated filer," "accelerated filer" and "smaller reporting
company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer X Accelerated filer
--- ---
Non-accelerated filer Smaller reporting company
--- ---
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Act). YES NO X
--- ---
The aggregate market value of the common equity held by non-
affiliates of the Registrant (assuming for these purposes that
all executive officers and Directors are "affiliates" of the
Registrant) as of June 30, 2009, the last business day of the
Registrant's most recently completed second fiscal quarter, was
approximately $791 million (based on the closing sale price of
the Registrant's Common Stock on that date as reported by
Nasdaq).
As of February 16, 2010, 72,039,212 shares of the registrant's
common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement of Registrant for the Annual
Meeting of Stockholders to be held May 10, 2010, are incorporated
in Part III of this report.
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business 1
Item 1A. Risk Factors 9
Item 1B. Unresolved Staff Comments 12
Item 2. Properties 13
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 14
PART II
Item 5. Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities 15
Item 6. Selected Financial Data 17
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
Item 7A. Quantitative and Qualitative Disclosures about
Market Risk 35
Item 8. Financial Statements and Supplementary Data 37
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 56
Item 9A. Controls and Procedures 56
Item 9B. Other Information 58
PART III
Item 10. Directors, Executive Officers and Corporate
Governance 59
Item 11. Executive Compensation 59
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters 59
Item 13. Certain Relationships and Related Transactions,
and Director Independence 59
Item 14. Principal Accounting Fees and Services 60
PART IV
Item 15. Exhibits and Financial Statement Schedules 60
This Annual Report on Form 10-K for the year ended December
31, 2009 (this "Form 10-K") and the documents incorporated herein
by reference contain forward-looking statements based on
expectations, estimates and projections as of the date of this
filing. Actual results may differ materially from those
expressed in such forward-looking statements. For further
guidance, see Item 1A of Part I and Item 7 of Part II of this
Form 10-K.
PART I
ITEM 1. BUSINESS
General
We are a transportation and logistics company engaged
primarily in hauling truckload shipments of general commodities
in both interstate and intrastate commerce. We also provide
logistics services through our Value Added Services ("VAS")
division. We are one of the five largest truckload carriers in
the United States (based on total operating revenues), and our
headquarters are located in Omaha, Nebraska, near the geographic
center of our truckload service area. We were founded in 1956 by
Clarence L. Werner, who started the business with one truck at
the age of 19 and is our Chairman. We were incorporated in the
State of Nebraska in September 1982 and completed our initial
public offering in June 1986 with a fleet of 632 trucks as of
February 1986. At the end of 2009, we had a fleet of 7,250
trucks, of which 6,575 were owned by us and 675 were owned and
operated by independent owner-operator drivers.
We have two reportable segments - Truckload Transportation
Services ("Truckload") and VAS. You can find financial
information regarding these segments and the geographic areas in
which we conduct business in the Notes to Consolidated Financial
Statements under Item 8 of this Form 10-K.
Our Truckload segment is comprised of the following six
operating fleets: (i) the dedicated services fleet ("Dedicated")
provides truckload services required by a specific customer,
generally for a distribution center or manufacturing facility;
(ii) the regional short-haul ("Regional") fleet transports a
variety of consumer nondurable products and other commodities in
truckload quantities within five geographic regions across the
United States using dry van trailers; (iii) the medium-to-long-
haul van ("Van") fleet provides comparable truckload van service
over irregular routes; (iv) the expedited ("Expedited") fleet
provides time-sensitive truckload services utilizing driver
teams; and the (v) flatbed ("Flatbed") and (vi) temperature-
controlled ("Temperature-Controlled") fleets provide truckload
services for products with specialized trailers. Our Truckload
fleets operate throughout the 48 contiguous U.S. states pursuant
to operating authority, both common and contract, granted by the
U.S. Department of Transportation ("DOT") and pursuant to
intrastate authority granted by various U.S. states. We also
have authority to operate in several provinces of Canada and to
provide through-trailer service into and out of Mexico. The
principal types of freight we transport include retail store
merchandise, consumer products, grocery products and manufactured
products. We focus on transporting consumer nondurable products
that generally ship more consistently throughout the year and
whose volumes are generally more stable during a slowdown in the
economy.
Our VAS segment is a non-asset-based transportation and
logistics provider. VAS is comprised of the following four
operating units that provide non-trucking services to our
customers: (i) truck brokerage ("Brokerage") uses contracted
carriers to complete customer shipments; (ii) freight management
("Freight Management") offers a full range of single-source
logistics management services and solutions; (iii) the intermodal
("Intermodal") unit offers rail transportation through alliances
with rail and drayage providers as an alternative to truck
transportation; and (iv) Werner Global Logistics international
("International") provides complete management of global
shipments from origin to destination using a combination of air,
ocean, truck and rail transportation modes. Our Brokerage unit
had transportation services contracts with over 5,800 carriers as
of December 31, 2009. In third quarter 2009, we formed Werner
Global Logistics Australia Pty. Ltd., a subsidiary that extends
our logistics services to the Australian domestic market by
offering freight forwarding, logistics, local transportation and
distribution services. Through our Werner Global Logistics
("WGL") subsidiaries, we are a licensed U.S. Non-Vessel Operating
Common Carrier ("NVOCC"), U.S. Customs Broker, Class A Freight
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Forwarder in China, licensed China NVOCC, U.S. Transportation
Security Administration ("TSA")-approved Indirect Air Carrier and
International Air Transport Association ("IATA") Accredited Cargo
Agent.
Marketing and Operations
Our business philosophy is to provide superior on-time
customer service at a competitive cost. To accomplish this, we
operate premium modern tractors and trailers. This equipment has
fewer mechanical and maintenance issues and helps attract and
retain qualified drivers. We have continually developed our
business processes and technology to improve customer service and
driver retention. We focus on shippers who value the broad
geographic coverage, diversified truck and logistics services,
equipment capacity, technology, customized services and
flexibility available from a large financially-stable
transportation and logistics provider.
We operate in the truckload and logistics sectors of the
transportation industry. Our Truckload segment provides
specialized services to customers based on (i) each customer's
trailer needs (such as van, flatbed and temperature-controlled
trailers), (ii) geographic area (Regional and Van, including
transport throughout Mexico and Canada), (iii) time-sensitive
shipments (Expedited) or (iv) the conversion of their private
fleet to us (Dedicated). In 2009, trucking revenues accounted
for 86% of our total revenues, and non-trucking and other
operating revenues (primarily VAS revenues) accounted for 14% of
our total revenues. Our VAS segment manages the transportation
and logistics requirements for individual customers, providing
customers with additional sources of truck capacity, alternative
modes of transportation, a global delivery network and systems
analysis to optimize transportation needs. VAS services include
(i) truck brokerage, (ii) freight management, (iii) intermodal
transport and (iv) international. The VAS international services
include (i) door-to-door freight forwarding, (ii) vendor and
purchase order management, (iii) full container load
consolidation and warehousing, (iv) customs brokerage and (v) air
freight services. Most VAS international services are provided
throughout North America, Asia and Australia. VAS is a
non-asset-based business that is highly dependent on qualified
employees, information systems and the services of qualified
third-party capacity providers. You can find the revenues
generated by services that accounted for more than 10% of our
consolidated revenues, consisting of Truckload and VAS, for the
last three years under Item 7 of this Form 10-K.
We have a diversified freight base but are dependent on a
relatively small number of customers for a significant portion of
our freight. During 2009, our largest 5, 10, 25 and 50 customers
comprised 26%, 41%, 61% and 76% of our revenues, respectively.
No single customer generated more than 10% of our revenues in
2009. By industry group, our top 50 customers consist of 46%
retail and consumer products, 29% grocery products, 18%
manufacturing/industrial and 7% logistics and other. Many of our
non-dedicated customer contracts may be terminated upon 30 days'
notice, which is standard in the trucking industry. Most of our
Dedicated customer contracts are one to three years in length and
may be terminated upon 90 days' notice following the expiration
of the contract's first year.
Virtually all of our company and owner-operator tractors are
equipped with satellite communication devices manufactured by
QualcommTM. These devices enable us and our drivers to conduct
two-way communication using standardized and freeform messages.
This satellite technology also allows us to plan and monitor
shipment progress. We obtain specific data on the location of all
trucks in the fleet at least every hour of every day. Using the
real-time data obtained from the satellite devices, we have
advanced application systems to improve customer and driver
service. Examples of such application systems include: (i) our
proprietary paperless log system used to electronically pre-plan
driver shipment assignments based on real-time available driving
hours and to automatically monitor truck movement and drivers'
hours of service; (ii) software that pre-plans shipments drivers
can trade enroute to meet driver home-time needs without
compromising on-time delivery schedules; (iii) automated
"possible late load" tracking that informs the operations
department of trucks possibly operating behind schedule, allowing
us to take preventive measures to avoid late deliveries; and (iv)
automated engine diagnostics that continually monitor mechanical
fault tolerances. In 1998, we began a successful pilot program
and subsequently became the first trucking company in the United
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States to receive an exemption from the DOT to use a global
positioning system-based paperless log system as an alternative
to the paper logbooks traditionally used by truck drivers to
track their daily work activities. In 2004, the Federal Motor
Carrier Safety Administration ("FMCSA") agency of the DOT
approved the exemption for our paperless log system and moved our
system from the FMCSA-approved pilot program to exemption status,
requiring that the exemption be renewed every two years. On
January 9, 2009, the FMCSA announced in the Federal Register its
determination that our paperless log system satisfies the FMCSA's
Automatic On-Board Recording Device requirements and that an
exemption is no longer required.
Seasonality
In the trucking industry, revenues generally follow a
seasonal pattern. Peak freight demand has historically occurred
in the months of September, October and November. We did not
experience this seasonal increase in demand during 2007 and 2008;
however, we experienced some seasonal improvement as third
quarter 2009 progressed, and freight volumes continued to
strengthen in fourth quarter 2009. After the December holiday
season and during the remaining winter months, our freight
volumes are typically lower because some customers reduce
shipment levels. Our operating expenses have historically been
higher in the winter months due primarily to decreased fuel
efficiency, increased cold weather-related maintenance costs of
revenue equipment and increased insurance and claims costs
attributed to adverse winter weather conditions. We attempt to
minimize the impact of seasonality through our marketing program
by seeking additional freight from certain customers during
traditionally slower shipping periods and focusing on
transporting consumer nondurable products. Revenue can also be
affected by bad weather, holidays and the number of business days
that occur during a quarterly period because revenue is directly
related to the available working days of shippers.
Employees and Owner-Operator Drivers
As of December 31, 2009, we employed 9,094 qualified and
student drivers; 626 mechanics and maintenance personnel for the
trucking operation; 1,168 office personnel for the trucking
operation; and 684 personnel for VAS, international and other
non-trucking operations. We also had 675 service contracts with
owner-operators who provide both a tractor and a qualified driver
or drivers. None of our U.S., Canadian, Chinese or Australian
employees are represented by a collective bargaining unit, and we
consider relations with our employees to be good.
We recognize that our professional driver workforce is one
of our most valuable assets. Most of our drivers are compensated
on a per-mile basis. For most company-employed drivers, the rate
per mile generally increases with the drivers' length of service.
Drivers may earn additional compensation through a safety bonus,
annual achievement bonus and for performing additional work
associated with their job (such as loading and unloading and
making extra stops and shorter mileage trips).
At times, there are driver shortages in the trucking
industry. Availability of qualified drivers can be affected by
(i) changes in the demographic composition of the workforce; (ii)
alternative employment opportunities other than truck driving
that become available in the economy; and (iii) individual
drivers' desire to be home more often. The driver recruiting and
retention market has improved from a year ago. The weakness in
the construction and automotive industries, other trucking
company failures and fleet reductions and the higher national
unemployment rate continue to positively affect our driver
availability and selectivity. In addition, our strong mileage
utilization and financial strength are attractive to drivers when
compared to other carriers. We anticipate that availability of
drivers will remain strong until current economic conditions
improve.
We utilize student drivers as a primary source of new
drivers. Student drivers have completed a training program at a
truck driving school and are further trained by Werner certified
trainer drivers for approximately 300 driving hours prior to that
driver becoming a solo driver with their own truck. The student
driver recruiting environment is currently good. The same
factors described above that have aided our qualified driver
recruiting efforts have also resulted in an adequate supply of
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student drivers. The availability of student drivers may be
negatively impacted in the future by the availability of
financing for student loans for driving schools, a potential
decrease in the number of driving schools, and proposed rule
changes regarding minimum requirements for entry-level driver
training (see below).
When economic conditions improve, competition for qualified
drivers and student drivers will likely increase. We cannot
predict whether we will experience future shortages in the
availability of qualified drivers or student drivers. If such a
shortage were to occur and driver pay rate increases were
necessary to attract and retain qualified drivers or student
drivers, our results of operations would be negatively impacted
to the extent that we could not obtain corresponding freight rate
increases.
In 2007, the FMCSA published a Notice of Proposed Rulemaking
("NPRM") in the Federal Register regarding minimum requirements
for entry level driver training. Under the proposed rule, a
commercial driver's license ("CDL") applicant would be required
to present a valid driver training certificate obtained from an
accredited institution or program. Entry-level drivers applying
for a Class A CDL would be required to complete a minimum of 120
hours of training, consisting of 76 classroom hours and 44
driving hours. The current regulations do not require a minimum
number of training hours and require only classroom education.
Drivers who obtain their first CDL during the three-year period
after the FMCSA issues a final rule would be exempt. In 2008,
the FMCSA published another NPRM that (i) establishes new minimum
standards to be met before states issue commercial learner's
permits; (ii) revises the CDL knowledge and skills testing
standards; and (iii) improves anti-fraud measures within the CDL
program. If one or both of these proposed rules is approved as
written, the final rules could materially impact the number of
potential new drivers entering the industry. The comment periods
for both NPRMs have expired. As of December 31, 2009, the FMCSA
has not published a final rule.
We also recognize that owner-operators complement our
company-employed drivers. Owner-operators are independent
contractors who supply their own tractor and qualified driver and
are responsible for their operating expenses. Because owner-
operators provide their own tractors, less financial capital is
required from us. Also, owner-operators provide us with another
source of drivers to support our fleet. We intend to maintain
our emphasis on owner-operator recruiting, in addition to company
driver recruitment. We, along with others in the trucking
industry, however, continue to experience owner-operator
recruitment and retention difficulties that have persisted over
the past several years. Challenging operating conditions,
including inflationary cost increases that are the responsibility
of owner-operators and tightened equipment financing standards
have made it difficult to recruit and retain owner-operators.
Revenue Equipment
As of December 31, 2009, we operated 6,575 company tractors
and had contracts for 675 tractors owned by owner-operators. The
company-owned tractors were manufactured by Freightliner (a
Daimler company), Peterbilt and Kenworth (divisions of PACCAR)
and International (a Navistar company). We adhere to a
comprehensive maintenance program for both company-owned tractors
and trailers. We inspect owner-operator tractors prior to
acceptance for compliance with Werner and DOT operational and
safety requirements. We periodically inspect these tractors, in
a manner similar to company tractor inspections, to monitor
continued compliance. We also regulate the vehicle speed of
company-owned trucks to a maximum of 65 miles per hour to improve
safety and fuel efficiency.
The average age of our truck fleet was 2.1 years at December
31, 2007, 2.5 years at December 31, 2008 and 2.6 years at
December 31, 2009. The higher average age of the truck fleet
generally results in more maintenance that is not covered by
warranty. Due to the weak used truck market and the ongoing cost
increases for new trucks due to the series of engine emission
changes, we are extending the replacement cycle for company-owned
tractors. As a result, we expect the average age of our company
tractor fleet may increase beyond current levels.
We operated 23,880 trailers at December 31, 2009. This
total is comprised of 22,515 dry vans; 400 flatbeds; 956
temperature-controlled trailers; and 9 specialized trailers.
Most of our trailers were manufactured by Wabash National
Corporation. As of December 31, 2009, of our dry van trailer
fleet, 99% consisted of 53-foot trailers, and 100% was comprised
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of aluminum plate or composite (DuraPlate) trailers. We also
provide other trailer lengths, such as 48-foot and 57-foot
trailers, to meet the specialized needs of certain customers.
Our wholly-owned subsidiary, Fleet Truck Sales, sells our
used trucks and trailers, and we believe it is one of the larger
domestic Class 8 truck and equipment retail entities in the
United States. Fleet Truck Sales has been in business since 1992
and operates in eight locations. During the first six months of
2009, we closed eight Fleet Truck Sales offices with low volume
sales. We believe fleet reductions have increased the supply of
used equipment for sale, while buyer demand for used trucks and
trailers remains weak.
The U.S. Environmental Protection Agency ("EPA") mandated a
new set of more stringent engine emissions standards for all
newly manufactured truck engines, which became effective in
January 2007. Compared to trucks with engines manufactured
before 2007 and not subject to the new standards, the trucks
manufactured with the 2007-standard engines had higher purchase
prices (approximately $5,000 to $10,000 more per truck). A final
set of more rigorous EPA-mandated emissions standards became
effective for all new engines manufactured after January 1, 2010.
These regulations require a significant decrease in particulate
matter (soot and ash) and nitrogen oxide emitted from on-road
diesel engines. Engine manufacturers responded to the 2010
standards by modifying engines to produce cleaner combustion with
selective catalytic reduction ("SCR") or exhaust gas
recirculation ("EGR") technologies to remove pollutants from
exhaust gases exiting the combustion chamber. The SCR technology
also requires the use of a urea-based diesel exhaust fluid. It
is expected that trucks with 2010-standard engines will have a
higher purchase price (approximately $5,000 to $10,000 more per
truck) than trucks manufactured to meet the 2007 standards but
may be more fuel efficient. In late 2009, we received a small
number of engines that meet the 2010 standards and are testing
them in 2010. We are currently evaluating the options available
to us to adapt to the 2010 standards. We do not currently expect
to purchase many new trucks with 2010 engines in 2010.
Fuel
In 2009, we purchased approximately 96% of our fuel from a
predetermined network of fuel stops throughout the United States.
Of this 96%, approximately 85% of our fuel was purchased from
three large fuel vendors. We negotiated discounted pricing based
on historical purchase volumes with these fuel stop vendors.
Bulk fueling facilities are maintained at seven of our terminals
and three Dedicated fleet locations.
One of our large fuel vendors declared bankruptcy in
December 2008 and is continuing to operate its fuel stop
locations post-bankruptcy, pending its proposed sale to another
large fuel vendor from which we also purchase fuel. If this
vendor were to reduce or eliminate truck stop locations in the
future, we currently believe we have the ability to obtain fuel
from other vendors at a comparable price.
Shortages of fuel, increases in fuel prices and rationing of
petroleum products can have a material adverse effect on our
operations and profitability. Our customer fuel surcharge
reimbursement programs have historically enabled us to recover
from our customers a majority, but not all, of higher fuel prices
compared to normalized average fuel prices. These fuel
surcharges, which automatically adjust depending on the U.S.
Department of Energy ("DOE") weekly retail on-highway diesel fuel
prices, enable us to recoup much of the higher cost of fuel when
prices increase. We do not generally recoup higher fuel costs
for miles not billable to customers, out-of-route miles and truck
engine idling. During 2009, our fuel expense and fuel
reimbursements to owner-operators decreased by $292.7 million
because of decreased fuel prices in the first ten months of the
year, fuel savings resulting from having 8% fewer active company-
owned tractors in service and our initiatives to improve fuel
efficiency. We cannot predict whether fuel prices will increase
or decrease in the future or the extent to which fuel surcharges
will be collected from customers. As of December 31, 2009, we
had no derivative financial instruments to reduce our exposure to
fuel price fluctuations.
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We maintain aboveground and underground fuel storage tanks
at many of our terminals. Leakage or damage to these facilities
could expose us to environmental clean-up costs. The tanks are
routinely inspected to help prevent and detect such problems.
Regulation
We are a motor carrier regulated by the DOT in the United
States and similar governmental transportation agencies in
foreign countries in which we operate. The DOT generally governs
matters such as safety requirements, registration to engage in
motor carrier operations, drivers' hours of service, certain
mergers, consolidations and acquisitions and periodic financial
reporting. We currently have and have always maintained a
satisfactory DOT safety rating, which is the highest available
rating, and continually take efforts to maintain our satisfactory
rating. A conditional or unsatisfactory DOT safety rating could
adversely affect us because some of our customer contracts
require a satisfactory rating. Equipment weight and dimensions
are also subject to federal, state and international regulations
with which we strive to comply.
All truckload carriers are subject to the hours of service
("HOS") regulations (the "HOS Regulations") issued by the Federal
Motor Carrier Safety Administration (the "FMCSA"). In November
2008, the FMCSA adopted and issued a final rule that amended the
HOS Regulations to (i) allow drivers up to 11 hours of driving
time within a 14-hour, non-extendable window from the start of
the workday (this driving time must follow 10 consecutive hours
of off-duty time) and (ii) restart calculations of the weekly on-
duty time limits after the driver has at least 34 consecutive
hours off duty. This final rule became effective on January 19,
2009 and made essentially no changes to the 11-hour driving limit
and 34-hour restart rules that we had been following since the
HOS Regulations were revised in October 2005. In March 2009,
Public Citizen and other parties petitioned the Court for
reconsideration of the FMCSA's final rule, asserting the rule is
not stringent enough, and the American Trucking Associations then
filed a motion to intervene in support of keeping the current
FMCSA final rule in place. On October 26, 2009, the FMCSA,
Public Citizen and the other petitioning parties entered into a
settlement agreement that requires the FMCSA to submit a new
proposed HOS rule within nine months of the settlement date and
publish a final rule within 21 months of the settlement date.
Pursuant to the settlement agreement, such parties also filed
with the Court a joint motion requesting the Court to hold the
proceedings in abeyance pending the FMCSA's issuance of the new
proposed rule. In January 2010, the FMCSA held a series of four
public listening sessions concerning the HOS rulemaking. If new
HOS rules are adopted which change the allowable driving hours or
on-duty time, our mileage productivity could be adversely
affected. We will continue to monitor any developments regarding
HOS regulations.
On January 18, 2007, the FMCSA published a proposed rule on
the trucking industry's use of Electronic On-Board Recorders
("EOBRs") for compliance with HOS rules. The proposed rule
includes (i) performance specifications for EOBR technology for
HOS compliance; (ii) incentives to encourage EOBR use by motor
carriers; and (iii) requirements for EOBR use by operators with
serious HOS compliance problems during at least two compliance
reviews over any two-year period. On January 23, 2009, the FMCSA
withdrew the proposed rule for reconsideration and review. While
we do not believe the rule, as proposed, would have a significant
effect on our operations and profitability, we will continue to
monitor future developments.
The FMCSA's new safety initiative, Comprehensive Safety
Analysis 2010 ("CSA 2010"), includes many significant changes
from the current safety measurement system it will replace.
Under CSA 2010, the FMCSA will monitor the safety performance of
both individual drivers and carriers using seven categories of
data, while the current system assesses only carriers using four
categories. CSA 2010 is currently being tested in several
states, and full implementation is expected to begin in the
second half of 2010. The implementation of CSA 2010 may result
in fewer eligible drivers and driver candidates, which may limit
our ability to attract and retain qualified drivers.
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Effective January 27, 2010, the FMCSA issued new regulatory
guidance that prohibits the use of electronic devices for texting
while driving a commercial motor vehicle on public roads in
interstate commerce. "Texting" is defined as the review of, or
preparation and transmission of, typed messages through any
handheld or other wireless electronic device brought into the
vehicle or the engagement in any form of electronic data
retrieval or electronic data communication through any such
device. The FMCSA stated the new regulatory guidance should not
be construed to prohibit the use of electronic dispatching tools
and fleet management systems, such as our Qualcomm communication
devices. We currently employ safety features that electronically
restrict solo drivers from sending and retrieving Qualcomm
messages while the truck is moving.
We have unlimited authority to carry general commodities in
interstate commerce throughout the 48 contiguous U.S. states. We
also have authority to carry freight on an intrastate basis in 43
states. The Federal Aviation Administration Authorization Act of
1994 (the "FAAA Act") amended sections of the Interstate Commerce
Act to prevent states from regulating motor carrier rates, routes
or service after January 1, 1995. The FAAA Act did not address
state oversight of motor carrier safety and financial
responsibility or state taxation of transportation. If a carrier
wishes to operate in intrastate commerce in a state where the
carrier did not previously have intrastate authority, the carrier
must, in most cases, still apply for authority in such state.
WGL and its subsidiaries have obtained business licenses to
operate as a U.S. NVOCC, U.S. Customs Broker, Class A Freight
Forwarder in China, licensed China NVOCC, TSA-approved Indirect
Air Carrier and IATA Accredited Cargo Agent.
With respect to our activities in the air transportation
industry, we are subject to regulation by the TSA of the U.S.
Department of Homeland Security as an Indirect Air Carrier and by
IATA as an Accredited Cargo Agent. IATA is a voluntary
association of airlines which prescribes certain operating
procedures for air freight forwarders acting as agents for its
members. A majority of our air freight forwarding business is
conducted with airlines that are IATA members.
We are licensed as a customs broker by Customs and Border
Protection ("CBP") of the U.S. Department of Homeland Security in
each U.S. customs district in which we conduct business. All
U.S. customs brokers are required to maintain prescribed records
and are subject to periodic audits by CBP. In other
jurisdictions in which we perform clearance services, we are
licensed by the appropriate governmental authority.
We are also registered as an Ocean Transportation
Intermediary by the U.S. Federal Maritime Commission (the "FMC").
The FMC has established certain qualifications for shipping
agents, including surety bonding requirements. The FMC is also
responsible for the economic regulation of NVOCC activity
originating or terminating in the United States. To comply with
these economic regulations, vessel operators and NVOCCs are
required to electronically file tariffs, and these tariffs
establish the rates charged for movement of specified commodities
into and out of the United States. The FMC may enforce these
regulations by assessing penalties.
Our operations are subject to various federal, state and
local environmental laws and regulations, many of which are
implemented by the EPA and similar state regulatory agencies.
These laws and regulations govern the management of hazardous
wastes, discharge of pollutants into the air and surface and
underground waters and disposal of certain substances. We do not
believe that compliance with these regulations has a material
effect on our capital expenditures, earnings and competitive
position.
Several U.S. states, counties and cities have enacted
legislation or ordinances restricting idling of trucks to short
periods of time. This action is significant when it impacts the
driver's ability to idle the truck for purposes of operating air
conditioning and heating systems particularly while in the
sleeper berth. Many of the statutes or ordinances recognize the
need of the drivers to have a comfortable sleeping environment
and include exceptions for those circumstances. California no
longer has such an exception. We have taken steps to address
this issue in California, which include driver training, better
scheduling and the installation and use of auxiliary power units
("APUs").
7
California has also enacted restrictions on transport
refrigeration unit ("TRU") emissions that require companies to
operate compliant TRUs in California. The California regulations
apply not only to California intrastate carriers, but also to
carriers outside of California who wish to enter the state with
TRUs. On January 9, 2009, the EPA enabled California to phase in
its Low-Emission TRU In-Use Performance Sandards over several
years. We have complied with the first compliance deadline of
December 31, 2009 that applied to model year 2002 and older TRU
engines. Enforcement of California's in-use performance
standards for these model year TRU engines began in January 2010.
California also required the registration of all California-based
TRUs by July 31, 2009. For compliance purposes, we completed the
California TRU registration process and are currently evaluating
our options for meeting these requirements over the next several
years as the regulations gradually become effective.
California has also adopted new regulations to improve the
fuel efficiency of heavy-duty tractors that pull 53-foot or
longer box-type trailers within its state. The tractors and
trailers subject to these regulations must use U.S. EPA SmartWay
certified tractors and trailers, or retrofit their existing fleet
with SmartWay verified technologies that have been demonstrated
to meet or exceed fuel savings percentages specified in the
regulations. Examples of these technologies include tractor and
trailer aerodynamics packages (such as tractor fairings and
trailer skirts) and the use of low-rolling resistance tires on
both tractors and trailers. Enforcement of these regulations for
2011 model year equipment began in January 2010 and will be
phased in over several years for older equipment. We are
currently evaluating our options for meeting these requirements.
Various provisions of the North American Free Trade
Agreement ("NAFTA") may alter the competitive environment for
shipping into and out of Mexico. We believe we are sufficiently
prepared to respond to the potential changes in cross-border
trucking if U.S. regulations on international trade and truck
transport became less restrictive with respect to the border
shared by the United States and Mexico. We conduct a substantial
amount of business in international freight shipments to and from
the United States and Mexico (see Note 8 in the Notes to
Consolidated Financial Statements under Item 8 of this Form 10-K)
and continue preparing for various scenarios that may result. We
believe we are one of the five largest truckload carriers in
terms of freight volume shipped to and from the United States and
Mexico.
Competition
The trucking industry is highly competitive and includes
thousands of trucking companies. Annual domestic trucking
revenue is estimated to be approximately $650 billion per year.
We have a small share (estimated at approximately 1%) of the
markets we target. Our Truckload segment competes primarily with
other truckload carriers. Logistics companies, intermodal
companies, railroads, less-than-truckload carriers and private
carriers also provide competition for both our Truckload and VAS
segments.
Competition for the freight we transport is based primarily
on service, efficiency, available capacity and, to some degree,
on freight rates alone. We believe that few other truckload
carriers have greater financial resources, own more equipment or
carry a larger volume of freight than ours. We are one of the
five largest carriers in the truckload transportation industry
based on total operating revenues.
The significant industry-wide accelerated purchase of new
trucks in advance of the January 2007 EPA emissions standards for
newly manufactured trucks contributed to excess truck capacity.
The weakness in the construction and automotive sectors in 2009
(each of which is not principally served by us) caused carriers
dependent on these freight markets to aggressively compete in
other freight markets that we serve. The recessionary economy
which began in the latter half of 2008 resulted in fewer industry
freight shipments and reduced freight demand. We believe these
factors, combined with the excess truck capacity and a high level
of customer bid activity in the first half of 2009, led to
increased price competition and pressure on freight rates.
During the same period in which truckload freight rates have been
depressed, inflationary and operational cost pressures have
challenged truckload carriers, particularly highly leveraged
private carriers. We believe that if recent weaker economic
8
conditions and tight financing market conditions continue,
additional trucking company failures may become more likely,
which could also help to balance the supply of trucks relative to
demand over time.
Internet Website
We maintain an Internet website where you can find
additional information regarding our business and operations.
The website address is www.werner.com. On the website, we make
certain investor information available free of charge, including
our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K, stock ownership reports filed under
Section 16 of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and any amendments to such reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Exchange Act.
This information is included on our website as soon as reasonably
practicable after we electronically file or furnish such
materials to the U.S. Securities and Exchange Commission ("SEC").
We also provide our corporate governance materials, such as Board
committee charters and our Code of Corporate Conduct, on our
website free of charge, and we may occasionally update these
materials when necessary to comply with SEC and NASDAQ rules or
to promote the effective and efficient governance of our company.
Information provided on our website is not incorporated by
reference into this Form 10-K.
ITEM 1A. RISK FACTORS
The following risks and uncertainties may cause our actual
results, business, financial condition and cash flows to
materially differ from those anticipated in the forward-looking
statements included in this Form 10-K. Caution should be taken
not to place undue reliance on forward-looking statements made
herein because such statements speak only to the date they were
made. Unless otherwise required by applicable securities laws,
we undertake no obligation or duty to revise or update any
forward-looking statements contained herein to reflect subsequent
events or circumstances or the occurrence of unanticipated
events. Also refer to the Cautionary Note Regarding Forward-
Looking Statements in Item 7 of Part II of this Form 10-K.
Our business is subject to overall economic conditions that could
have a material adverse effect on our results of operations.
We are sensitive to changes in overall economic conditions
that impact customer shipping volumes and industry freight
demand. We believe factors that may have contributed to lower
customer shipping volumes and flat-to-lower freight rates in 2008
and 2009 included (i) inventory tightening and reductions by
retailers and other customers, (ii) excess truck capacity and
(iii) weakness in the retail, construction and manufacturing
sectors. In 2009, the overall U.S. economy remained weak for
much of the year; however, our freight volumes began to improve
in third quarter 2009. Inventory destocking that occurred
earlier in 2009 slowed in the latter half of the year, which we
believe stabilized inventory levels. When shipping volumes
decline, freight pricing generally becomes more competitive as
carriers compete for loads to maintain truck productivity. We
may be negatively affected by future economic conditions
including employment levels, business conditions, fuel and energy
costs, interest rates and tax rates.
Increases in fuel prices and shortages of fuel can have a
material adverse effect on the results of operations and
profitability.
Average diesel fuel prices in 2009 were $1.29 per gallon
lower than in 2008. Prices declined in first quarter 2009,
climbed rapidly in the latter part of second quarter 2009, and
then remained flat to up slightly for the rest of 2009. When
fuel prices rise rapidly, a negative earnings lag occurs because
the cost of fuel rises immediately and the market indexes used to
determine fuel surcharges increase at a slower pace. In a period
of declining fuel prices, we generally experience a temporary
favorable earnings effect because fuel costs decline at a faster
pace than the market indexes used to determine fuel surcharge
collections. Although we experienced both trends in 2009 and in
2008, the negative effects in the first half of 2008 and the
favorable effects in the second half of 2008 were more dramatic
than in 2009. Fuel shortages, increases in fuel prices and
petroleum product rationing can have a material adverse impact on
our operations and profitability. We cannot predict whether fuel
prices will increase or decrease in the future or the extent to
9
which fuel surcharges will be collected from customers. To the
extent that we cannot recover the higher cost of fuel through
customer fuel surcharges, our financial results would be
negatively impacted.
Difficulty in recruiting and retaining qualified drivers, student
drivers and owner-operators could impact our results of
operations and limit growth opportunities.
At times, the trucking industry has experienced driver
shortages. Driver availability may be affected by changing
workforce demographics and alternative employment opportunities
in the economy. However, recent weakness in the construction and
automotive industries, other trucking company failures and fleet
reductions and the higher national unemployment rate continue to
positively affect our driver availability and selectivity.
Consequently, the driver recruiting and retention market has
improved from a year ago. In addition, we believe our high
average miles per truck and financial strength are attractive to
drivers when compared to other carriers. We anticipate that
availability of drivers will remain good until economic
conditions improve. When economic conditions improve,
competition for drivers will likely increase, and we cannot
predict whether we will experience future driver shortages. If
such a shortage were to occur and driver pay rate increases were
necessary to attract and retain drivers, our results of
operations would be negatively impacted to the extent that we
could not obtain corresponding freight rate increases.
We, along with others in the trucking industry, continue to
experience owner-operator recruitment and retention difficulties
that have persisted over the past several years. Challenging
operating conditions, including inflationary cost increases that
are the responsibility of owner-operators and tightened equipment
financing standards, have made it difficult to recruit and retain
owner-operators. We have historically been able to add company-
owned tractors and recruit additional company drivers to offset
any decrease in the number of owner-operators. If a shortage of
owner-operators occurs, increases in per mile settlement rates
(for owner-operators) and driver pay rates (for company drivers)
may become necessary to attract and retain a sufficient number of
drivers. This could negatively affect our results of operations
to the extent that we would be unable to obtain corresponding
freight rate increases.
We operate in a highly competitive industry, which may limit
growth opportunities and reduce profitability.
The trucking industry is highly competitive and includes
thousands of trucking companies. We estimate the ten largest
truckload carriers have about 9% of the approximate $160 billion
U.S. market we target. This competition could limit our growth
opportunities and reduce our profitability. We compete primarily
with other truckload carriers in our Truckload segment.
Logistics companies, intermodal companies, railroads, less-than-
truckload carriers and private carriers also provide a lesser
degree of competition in our Truckload segment, but such carriers
are more direct competitors in our VAS segment. Competition for
the freight we transport or manage is based primarily on service,
efficiency, available capacity and, to some degree, on freight
rates alone.
We operate in a highly regulated industry. Changes in existing
regulations or violations of existing or future regulations could
adversely affect our operations and profitability.
We are regulated by the DOT in the United States and similar
governmental transportation agencies in foreign countries in
which we operate. We are also regulated by agencies in certain
U.S. states. These regulatory agencies have the authority to
govern transportation-related activities, such as safety,
financial reporting, authorization to conduct motor carrier
operations and other matters. The Regulation section beginning
on page 6 of this Form 10-K describes several proposed and
pending regulations that may have a significant effect on our
operations. The subsidiaries of WGL have business licenses to
operate as a U.S. NVOCC, U.S. Customs Broker, Class A Freight
Forwarder in China, licensed China NVOCC, TSA-approved Indirect
Air Carrier and IATA Accredited Cargo Agent. The loss of any of
these business licenses could adversely impact the operations of
WGL.
The seasonal pattern generally experienced in the trucking
industry may affect our periodic results during traditionally
slower shipping periods and winter months.
In the trucking industry, revenues generally follow a
seasonal pattern. Peak freight demand has historically occurred
in the months of September, October and November; however, we did
not experience this seasonal increase in demand during 2007 and
2008. We experienced some seasonal improvement in freight
volumes as third quarter 2009 progressed, and freight volumes
continued to strengthen in fourth quarter 2009. After the
December holiday season and during the remaining winter months,
our freight volumes are typically lower because some customers
reduce shipment levels. Our operating expenses have historically
10
been higher in the winter months due primarily to decreased fuel
efficiency, increased cold weather-related maintenance costs of
revenue equipment and increased insurance and claims costs
attributed to adverse winter weather conditions. We attempt to
minimize the impact of seasonality through our marketing program
by seeking additional freight from certain customers during
traditionally slower shipping periods. Revenue can also be
affected by bad weather, holidays and the number of business days
during a quarterly period because revenue is directly related to
the available working days of shippers.
We depend on key customers, the loss or financial failure of
which may have a material adverse effect on our operations and
profitability.
A significant portion of our revenue is generated from key
customers. During 2009, our largest 5, 10 and 25 customers
accounted for 26%, 41% and 61% of revenues, respectively. No
single customer generated more than 10% of our revenues in 2009,
and our largest customer accounted for 7% of our revenues in
2009. We do not have long-term contractual relationships with
many of our key non-dedicated customers. Our contractual
relationships with our Dedicated customers are typically one to
three years in length and may be terminated upon 90 days' notice
following the expiration of the contract's first year. We cannot
provide any assurance that key customer relationships will
continue at the same levels. If a significant customer reduced
or terminated our services, it could have a material adverse
effect on our business and results of operations. We review our
customers' financial condition for granting credit, monitor
changes in customers' financial conditions on an ongoing basis,
review individual past-due balances and collection concerns and
maintain credit insurance for some customer accounts. However, a
key customer's financial failure may negatively affect our
results of operations.
We depend on the services of third-party capacity providers, the
availability of which could affect our profitability and limit
growth in our VAS segment.
Our VAS segment is highly dependent on the services of
third-party capacity providers, such as other truckload carriers,
less-than-truckload carriers, railroads, ocean carriers and
airlines. Many of those providers face the same economic
challenges as us and therefore are actively and competitively
soliciting business. The 2009 VAS gross margin percentage
increased compared to 2008 due to overall lower fuel prices and a
lower cost of third-party capacity, which we believe can be
partially attributed to the weaker economy and excess truck
capacity. If we are unable to secure the services of these
third-party capacity providers at reasonable rates, our results
of operations could be adversely affected.
Our earnings could be reduced by increases in the number of
insurance claims, cost per claim, costs of insurance premiums or
availability of insurance coverage.
We are self-insured for a significant portion of liability
resulting from bodily injury, property damage, cargo and employee
workers' compensation and health benefit claims. This is
supplemented by premium-based insurance with licensed insurance
companies above our self-insurance level for each type of
coverage. To the extent we experience a significant increase in
the number of claims, cost per claim or insurance premium costs
for coverage in excess of our retention amounts, our operating
results would be negatively affected. A portion of our insurance
coverage for the current and prior policy years is provided by
insurance companies that are subsidiaries of American
International Group, Inc. ("AIG"). These AIG insurance
subsidiaries are regulated by various state insurance
departments. We do not currently believe that financial issues
affecting AIG will impact our current or prior insurance coverage
or our ability to obtain coverage in the future.
Decreased demand for our used revenue equipment could result in
lower unit sales, resale values and gains on sales of assets.
We are sensitive to changes in used equipment prices and
demand, especially with respect to tractors. We have been in the
business of selling our company-owned trucks since 1992, when we
formed our wholly-owned subsidiary Fleet Truck Sales. During the
first six months of 2009, we closed eight Fleet Truck Sales
offices with low volume sales and continue to operate in eight
locations across the continental United States. We believe
carrier failures and company fleet reductions have increased the
supply of used equipment for sale, while buyer demand for used
trucks and trailers remained weak due to the soft freight market,
recessionary economy and a shortage of available financing.
Gains on sales of assets are reflected as a reduction of other
operating expenses in our income statement and are reported net
11
of sales-related expenses. Gains on sales of assets decreased to
$3.2 million in 2009 from $9.9 million in 2008 and $22.9 million
in 2007. If these used equipment market and demand conditions
continue or deteriorate further, our gains on sales of assets
could be further negatively affected.
Our operations are subject to various environmental laws and
regulations, the violation of which could result in substantial
fines or penalties.
In addition to direct regulation by the DOT, EPA and other
agencies, we are subject to various environmental laws and
regulations dealing with the handling of hazardous materials,
underground fuel storage tanks and discharge and retention of
storm-water. We operate in industrial areas, where truck
terminals and other industrial activities are located and where
groundwater or other forms of environmental contamination have
occurred. Our operations involve the risks of fuel spillage or
seepage, environmental damage and hazardous waste disposal, among
others. We also maintain bulk fuel storage at several of our
facilities. If we are involved in a spill or other accident
involving hazardous substances, or if we are found to be in
violation of applicable laws or regulations, it could have a
material adverse effect on our business and operating results. If
we fail to comply with applicable environmental regulations, we
could be subject to substantial fines or penalties and to civil
and criminal liability.
We rely on the services of key personnel, the loss of which could
impact our future success.
We are highly dependent on the services of key personnel
including Clarence L. Werner, Gary L. Werner, Gregory L. Werner
and other executive officers. Although we believe we have an
experienced and highly qualified management group, the loss of
the services of these executive officers could have a material
adverse impact on us and our future profitability.
Difficulty in obtaining goods and services from our vendors and
suppliers could adversely affect our business.
We are dependent on our vendors and suppliers. We believe
we have good vendor relationships and that we are generally able
to obtain attractive pricing and other terms from vendors and
suppliers. If we fail to maintain satisfactory relationships
with our vendors and suppliers or if our vendors and suppliers
experience significant financial problems, we could experience
difficulty in obtaining needed goods and services because of
production interruptions or other reasons. Consequently, our
business could be adversely affected. One of our large fuel
vendors declared bankruptcy in December 2008 and is continuing to
operate its fuel stop locations post-bankruptcy, pending its
proposed sale to another large fuel vendor from which we also
purchase fuel. If this vendor were to reduce or eliminate truck
stop locations in the future, we currently believe we have the
ability to obtain fuel from other vendors at a comparable price.
We use our information systems extensively for day-to-day
operations, and service disruptions could have an adverse impact
on our operations.
The efficient operation of our business is highly dependent
on our information systems. Much of our software was developed
internally or by adapting purchased software applications to suit
our needs. We purchased redundant computer hardware systems and
have our own off-site disaster recovery facility approximately
ten miles from our headquarters for use in the event of a
disaster. We took these steps to reduce the risk of disruption
to our business operation if a disaster occurred. We believe any
such disruption would be minimal or moderate; however, we cannot
predict the degree to which any disaster would affect our
information systems or disaster recovery facility.
ITEM 1B. UNRESOLVED STAFF COMMENTS
We have not received any written comments from SEC staff
regarding our periodic or current reports that were issued 180
days or more preceding the end of our 2009 fiscal year and that
remain unresolved.
12
ITEM 2. PROPERTIES
Our headquarters are located on approximately 197 acres near
U.S. Interstate 80 west of Omaha, Nebraska, 107 acres of which
are held for future expansion. Our headquarters office building
includes a computer center, drivers' lounges, cafeteria and
company store. The Omaha headquarters also includes a driver
training facility, equipment maintenance and repair facilities
and a sales office for selling used trucks and trailers. These
maintenance facilities contain a central parts warehouse, frame
straightening and alignment machine, truck and trailer wash
areas, equipment safety lanes, body shops for tractors and
trailers, paint booth and reclaim center. Our headquarter
facilities have suitable space available to accommodate planned
needs for at least the next three to five years.
We also have several terminals throughout the United States,
consisting of office and/or maintenance facilities. Our terminal
locations are described below:
Location Owned or Leased Description Segment
----------------------- --------------- ----------------------------------- -------------------------
Omaha, Nebraska Owned Corporate headquarters, maintenance Truckload, VAS, Corporate
Omaha, Nebraska Owned Disaster recovery, warehouse Corporate
Phoenix, Arizona Owned Office, maintenance Truckload
Fontana, California Owned Office, maintenance Truckload
Denver, Colorado Owned Office, maintenance Truckload
Atlanta, Georgia Owned Office, maintenance Truckload, VAS
Indianapolis, Indiana Leased Office, maintenance Truckload
Springfield, Ohio Owned Office, maintenance Truckload
Allentown, Pennsylvania Leased Office, maintenance Truckload
Dallas, Texas Owned Office, maintenance Truckload, VAS
Laredo, Texas Owned Office, maintenance, transloading Truckload, VAS
Lakeland, Florida Leased Office Truckload
El Paso, Texas Owned Office, maintenance Truckload
Ardmore, Oklahoma Leased Maintenance Truckload, VAS
Indianola, Mississipp Leased Maintenance Truckload, VAS
Scottsville, Kentucky Leased Maintenance Truckload, VAS
Fulton, Missouri Leased Maintenance Truckload, VAS
Tomah, Wisconsin Leased Maintenance Truckload
Newbern, Tennessee Leased Maintenance Truckload
Chicago, Illinois Leased Maintenance Truckload
Alachua, Florida Leased Maintenance Truckload, VAS
South Boston, Virginia Leased Maintenance Truckload, VAS
Garrett, Indiana Leased Maintenance Truckload
We currently lease (i) approximately 70 small sales offices,
Brokerage offices and trailer parking yards in various locations
throughout the United States and (ii) office space in Mexico,
Canada, China and Australia. We own (i) a 96-room motel located
near our Omaha headquarters; (ii) a 71-room private driver
lodging facility at our Dallas terminal; (iii) four low-income
housing apartment complexes in the Omaha area; (iv) a warehouse
facility in Omaha; and (v) a terminal facility in Queretaro,
Mexico, which we lease to a related party (see Note 7 in the
Notes to Consolidated Financial Statements under Item 8 of this
Form 10-K). We also have 50% ownership in a 125,000 square-foot
warehouse located near our headquarters in Omaha. The Fleet
Truck Sales network currently has eight locations, of which seven
are located in our terminals listed above and one is leased.
ITEM 3. LEGAL PROCEEDINGS
We are a party subject to routine litigation incidental to
our business, primarily involving claims for bodily injury,
property damage, cargo and workers' compensation incurred in the
transportation of freight. We have maintained a self-insurance
program with a qualified department of risk management
professionals since 1988. These employees manage our bodily
injury, property damage, cargo and workers' compensation claims.
An actuary reviews our self-insurance reserves for bodily injury,
property damage and workers' compensation claims every six
months.
13
We were responsible for liability claims up to $500,000,
plus administrative expenses, for each occurrence involving
bodily injury or property damage since August 1, 1992. For the
policy year beginning August 1, 2004, we increased our self-
insured retention ("SIR") and deductible amount to $2.0 million
per occurrence. We are also responsible for varying annual
aggregate amounts of liability for claims in excess of the
SIR/deductible. The following table reflects the SIR/deductible
levels and aggregate amounts of liability for bodily injury and
property damage claims since August 1, 2006:
Primary Coverage
Coverage Period Primary Coverage SIR/Deductible
------------------------------ ---------------- ----------------
August 1, 2006 - July 31, 2007 $5.0 million $2.0 million (1)
August 1, 2007 - July 31, 2008 $5.0 million $2.0 million (2)
August 1, 2008 - July 31, 2009 $5.0 million $2.0 million (3)
August 1, 2009 - July 31, 2010 $5.0 million $2.0 million (2)
(1) Subject to an additional $2.0 million aggregate in the $2.0
to $3.0 million layer, no aggregate (meaning that we were fully
insured) in the $3.0 to $5.0 million layer, and a $5.0 million
aggregate in the $5.0 to $10.0 million layer.
(2) Subject to an additional $8.0 million aggregate in the $2.0
to $5.0 million layer and a $5.0 million aggregate in the $5.0
to $10.0 million layer.
(3) Subject to an additional $8.0 million aggregate in the $2.0
to $5.0 million layer and a $4.0 million aggregate in the $5.0
to $10.0 million layer.
We are responsible for workers' compensation up to $1.0
million per claim. We also maintain a $26.7 million bond and
have insurance for individual claims above $1.0 million.
Our primary insurance covers the range of liability under
which we expect most claims to occur. If any liability claims
are substantially in excess of coverage amounts listed in the
table above, such claims are covered under premium-based policies
(issued by insurance companies) to coverage levels that our
management considers adequate. We are also responsible for
administrative expenses for each occurrence involving bodily
injury or property damage. See also Note 1 and Note 6 in the
Notes to Consolidated Financial Statements under Item 8 of this
Form 10-K.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 2009, no matters were submitted
to a vote of stockholders.
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Price Range of Common Stock
Our common stock trades on the NASDAQ Global Select MarketSM
tier of the NASDAQ Stock Market under the symbol "WERN". The
following table sets forth, for the quarters indicated from
January 1, 2008 through December 31, 2009, (i) the high and low
trade prices per share of our common stock quoted on the NASDAQ
Global Select MarketSM and (ii) our dividends declared per common
share.
Dividends
Declared Per
High Low Common Share
------- ------- ------------
2009
Quarter ended:
March 31 $ 18.12 $ 12.59 $ .050
June 30 20.05 14.66 .050
September 30 19.64 17.14 .050
December 31 21.40 17.89 1.300
Dividends
Declared Per
High Low Common Share
------- ------- ------------
2008
Quarter ended:
March 31 $ 20.51 $ 15.26 $ .050
June 30 21.12 17.54 .050
September 30 28.78 17.72 .050
December 31 22.34 14.92 2.150
As of February 16, 2010, our common stock was held by 182
stockholders of record. Because many of our shares of common
stock are held by brokers and other institutions on behalf of
stockholders, we are unable to estimate the total number of
stockholders represented by these record holders. The high and
low trade prices per share of our common stock in the NASDAQ
Global Select MarketSM as of February 16, 2010 were $19.96 and
$19.74, respectively.
Dividend Policy
We have paid cash dividends on our common stock following
each fiscal quarter since the first payment in July 1987. We
also paid special cash dividends in December 2008 and December
2009. On December 5, 2008, we paid a special cash dividend of
$2.10 per common share payable to stockholders of record at the
close of business on November 21, 2008, which totaled
approximately $150.3 million. On December 8, 2009, we paid a
special cash dividend of $1.25 per common share payable to
stockholders of record at the close of business on November 23,
2009. As a result of the 2009 special dividend, a total of
approximately $89.9 million was paid on our 71.9 million common
shares outstanding. We currently intend to continue paying a
regular quarterly dividend. We do not currently anticipate any
restrictions on our future ability to pay such dividends.
However, we cannot give any assurance that dividends will be paid
in the future or the amount of any such quarterly or special
dividends because they are dependent on our earnings, financial
condition and other factors.
15
Equity Compensation Plan Information
For information on our equity compensation plans, please
refer to Item 12 (Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters).
Performance Graph
Comparison of Five-Year Cumulative Total Return
The following graph is not deemed to be "soliciting
material" or to be "filed" with the SEC or subject to the
liabilities of Section 18 of the Exchange Act, and the report
shall not be deemed to be incorporated by reference into any
prior or subsequent filing by us under the Securities Act of 1933
or the Exchange Act except to the extent we specifically request
that such information be incorporated by reference or treated as
soliciting material.
[PERFORMANCE GRAPH APPEARS HERE]
12/31/04 12/31/05 12/31/06 12/31/07 12/31/08 12/31/09
-------- -------- -------- -------- -------- --------
Werner Enterprises, Inc. (WERN) $ 100 $ 88 $ 79 $ 77 $ 90 $ 111
Standard & Poor's 500 $ 100 $ 105 $ 121 $ 128 $ 81 $ 102
NASDAQ Trucking Group (SIC Code 42) $ 100 $ 93 $ 91 $ 88 $ 72 $ 79
Assuming the investment of $100 on December 31, 2004 and
reinvestment of all dividends, the graph above compares the
cumulative total stockholder return on our common stock for the
last five fiscal years with the cumulative total return of
Standard & Poor's 500 Market Index and an index of other
companies included in the trucking industry (NASDAQ Trucking
Group - Standard Industrial Classification Code 42) over the same
period. Our stock price was $19.80 as of December 31, 2009.
This price was used for purposes of calculating the total return
on our common stock for the year ended December 31, 2009.
Purchases of Equity Securities by the Issuer and Affiliated
Purchasers
Issuer Purchases of Equity Securities
-------------------------------------
On October 15, 2007, we announced that on October 11, 2007
our Board of Directors approved an increase in the number of
shares of our common stock that Werner Enterprises, Inc. (the
"Company") is authorized to repurchase. Under this October 2007
authorization, the Company is permitted to repurchase an
additional 8,000,000 shares. As of December 31, 2009, the
Company had purchased 1,041,200 shares pursuant to this
authorization and had 6,958,800 shares remaining available for
16
repurchase. The Company may purchase shares from time to time
depending on market, economic and other factors. The
authorization will continue unless withdrawn by the Board of
Directors.
No shares of common stock were repurchased during the fourth
quarter of 2009 by the Company.
Other Purchases of Equity Securities
------------------------------------
The following table summarizes the common stock purchases
during the fourth quarter of 2009 made by the Company's Chairman,
Clarence L. Werner, who is an "affiliated purchaser", as defined
by Rule 10b-18 of the Exchange Act. These shares were purchased
by Mr. Werner for his personal account and were not made pursuant
to the Company's repurchase authorization.
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 Average Price Paid Publicly Announced Purchased Under the
Period (or Units) Purchased per Share (or Unit) Plans or Programs Plans or Programs
------------------------------------------------------------------------------------------
October 1-31, 2009 - - N/A N/A
November 1-30, 2009 420,100 $19.59 N/A N/A
December 1-31, 2009 - - N/A N/A
--------------------
Total 420,100 $19.59 N/A N/A
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in
conjunction with the consolidated financial statements and notes
under Item 8 of this Form 10-K.
(In thousands, except per share amounts)
2009 2008 2007 2006 2005
----------- ----------- ----------- ----------- -----------
Operating revenues $ 1,666,470 $ 2,165,599 $ 2,071,187 $ 2,080,555 $ 1,971,847
Net income 56,584 67,580 75,357 98,643 98,534
Diluted earnings per share .79 .94 1.02 1.25 1.22
Cash dividends declared per share 1.450 2.300 .195 .175 .155
Return on average stockholders' equity (1) 7.5% 8.1% 8.8% 11.3% 12.1%
Return on average total assets (2) 4.5% 5.0% 5.4% 7.1% 7.6%
Operating ratio (consolidated) (3) 94.2% 94.8% 93.4% 92.1% 91.7%
Book value per share (4) 9.80 10.42 11.83 11.55 10.86
Total assets 1,173,009 1,275,318 1,321,408 1,478,173 1,385,762
Total debt - 30,000 - 100,000 60,000
Stockholders' equity 704,650 745,530 832,788 870,351 862,451
(1) Net income expressed as a percentage of average stockholders'
equity. Return on equity is a measure of a corporation's
profitability relative to recorded shareholder investment.
(2) Net income expressed as a percentage of average total assets.
Return on assets is a measure of a corporation's profitability
relative to recorded assets.
(3) Operating expenses expressed as a percentage of operating
revenues. Operating ratio is a common measure in the trucking
industry used to evaluate profitability.
(4) Stockholders' equity divided by common shares outstanding as
of the end of the period. Book value per share indicates the
dollar value remaining for common shareholders if all assets were
liquidated at recorded amounts and all debts were paid at the
recorded amounts.
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition
and Results of Operations ("MD&A") summarizes the financial
statements from management's perspective with respect to our
financial condition, results of operations, liquidity and other
factors that may affect actual results. The MD&A is organized in
the following sections:
* Cautionary Note Regarding Forward-Looking Statements
* Overview
* Results of Operations
* Liquidity and Capital Resources
* Contractual Obligations and Commercial Commitments
* Off-Balance Sheet Arrangements
* Critical Accounting Policies
* Inflation
Cautionary Note Regarding Forward-Looking Statements:
This annual report on Form 10-K contains historical
information and forward-looking statements based on information
currently available to our management. The forward-looking
statements in this report, including those made in this Item 7
(Management's Discussion and Analysis of Financial Condition and
Results of Operations), are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of
1995, as amended. These safe harbor provisions encourage
reporting companies to provide prospective information to
investors. Forward-looking statements can be identified by the
use of certain words, such as "anticipate," "believe,"
"estimate," "expect," "intend," "plan," "project" and other
similar terms and language. We believe the forward-looking
statements are reasonable based on currently available
information. However, forward-looking statements involve risks,
uncertainties and assumptions, whether known or unknown, that
could cause our actual results, business, financial condition and
cash flows to differ materially from those anticipated in the
forward-looking statements. A discussion of important factors
relating to forward-looking statements is included in Item 1A
(Risk Factors). Readers should not unduly rely on the forward-
looking statements included in this Form 10-K because such
statements speak only to the date they were made. Unless
otherwise required by applicable securities laws, we undertake no
obligation or duty to update or revise any forward-looking
statements contained herein to reflect subsequent events or
circumstances or the occurrence of unanticipated events.
Overview:
We operate in the truckload and logistics sectors of the
transportation industry. In the truckload sector, we focus on
transporting consumer nondurable products that generally ship
more consistently throughout the year. In the logistics sector,
besides managing transportation requirements for individual
customers, we provide additional sources of truck capacity,
alternative modes of transportation, a global delivery network
and systems analysis to optimize transportation needs. Our
success depends on our ability to efficiently manage our
resources in the delivery of truckload transportation and
logistics services to our customers. Resource requirements vary
with customer demand, which may be subject to seasonal or general
economic conditions. Our ability to adapt to changes in customer
transportation requirements is essential to efficiently deploy
resources and make capital investments in tractors and trailers
(with respect to our Truckload segment) or obtain qualified
third-party capacity at a reasonable price (with respect to our
VAS segment). Although our business volume is not highly
concentrated, we may also be affected by our customers' financial
failures or loss of customer business.
Operating revenues reported in our operating statistics
table under "Results of Operations" are categorized as (i)
trucking revenues, net of fuel surcharge, (ii) trucking fuel
surcharge revenues, (iii) non-trucking revenues, including VAS,
and (iv) other operating revenues. Trucking revenues, net of
fuel surcharge, and trucking fuel surcharge revenues are
generated by the six operating fleets in the Truckload segment
(Dedicated, Regional, Van, Expedited, Temperature-Controlled and
18
Flatbed). Non-trucking revenues, including VAS, are generated
primarily by the four operating units in our VAS segment
(Brokerage, Freight Management, Intermodal and International),
and a small amount is generated by the Truckload segment. Other
operating revenues are generated from other business activities
such as third-party equipment maintenance and equipment leasing.
In 2009, trucking (net of fuel surcharge) and trucking fuel
surcharge revenues accounted for 86% of total operating revenues,
and non-trucking and other operating revenues accounted for 14%
of total operating revenues.
Trucking revenues, net of fuel surcharge, are typically
generated on a per-mile basis and also include revenues such as
stop charges, loading/unloading charges and equipment detention
charges. Because fuel surcharge revenues fluctuate in response
to changes in fuel costs, we identify them separately in the
operating statistics table and exclude them from the statistical
calculations to provide a more meaningful comparison between
periods. The key statistics used to evaluate trucking revenues,
net of fuel surcharge, are (i) average revenues per tractor per
week, (ii) average revenues per mile (total and loaded), (iii)
average annual miles per tractor, (iv) average percentage of
empty miles (miles without trailer cargo), (v) average trip
length (in loaded miles) and (vi) average number of tractors in
service. General economic conditions, seasonal trucking industry
freight patterns and industry capacity are important factors that
impact these statistics. Our Truckload segment also generates a
small amount of revenues categorized as non-trucking revenues,
related to shipments delivered to or from Mexico where the
Truckload segment utilizes a third-party capacity provider. We
exclude such revenues from the statistical calculations.
Our most significant resource requirements are company
drivers, owner-operators, tractors, trailers and equipment
operating costs (such as fuel and related fuel taxes, driver pay,
insurance and supplies and maintenance). To mitigate our risk to
fuel price increases, we recover from our customers additional
fuel surcharges that generally recoup a majority of the increased
fuel costs; however, we cannot assure that current recovery
levels will continue in future periods. Our financial results
are also affected by company driver and owner-operator
availability and the market for new and used revenue equipment.
We are self-insured for a significant portion of bodily injury,
property damage and cargo claims, workers' compensation benefits
and health claims for our employees (supplemented by premium-
based insurance coverage above certain dollar levels). For that
reason, our financial results may also be affected by driver
safety, medical costs, weather, legal and regulatory environments
and insurance coverage costs to protect against catastrophic
losses.
The operating ratio is a common industry measure used to
evaluate our profitability and that of our Truckload segment
operating fleets. The operating ratio consists of operating
expenses expressed as a percentage of operating revenues. The
most significant variable expenses that impact the Truckload
segment are driver salaries and benefits, fuel, fuel taxes
(included in taxes and licenses expense), payments to owner-
operators (included in rent and purchased transportation
expense), supplies and maintenance and insurance and claims.
These expenses generally vary based on the number of miles
generated. We also evaluate these costs on a per-mile basis to
adjust for the impact on the percentage of total operating
revenues caused by changes in fuel surcharge revenues, per-mile
rates charged to customers and non-trucking revenues. As
discussed further in the comparison of operating results for 2009
to 2008, several industry-wide issues could cause costs to
increase in 2010. These issues include a soft freight market,
changing fuel prices, higher new truck and trailer purchase
prices and a weak used equipment market. Our main fixed costs
include depreciation expense for tractors and trailers and
equipment licensing fees (included in taxes and licenses
expense). The Truckload segment requires substantial cash
expenditures for tractor and trailer purchases. We fund these
purchases with net cash from operations and financing available
under our existing credit facilities, as management deems
necessary.
We provide non-trucking services primarily through the four
operating units within our VAS segment. Unlike our Truckload
segment, the VAS segment is not asset-intensive and is instead
dependent upon qualified employees, information systems and
qualified third-party capacity providers. The largest expense
item related to the VAS segment is the cost of purchased
transportation we pay to third-party capacity providers. This
expense item is recorded as rent and purchased transportation
expense. Other operating expenses include salaries, wages and
benefits and computer hardware and software depreciation. We
19
evaluate VAS's financial performance by reviewing the gross
margin percentage (revenues less rent and purchased
transportation expenses expressed as a percentage of revenues)
and the operating income percentage.
Results of Operations:
The following table sets forth certain industry data
regarding our freight revenues and operations for the periods
indicated.
2009 2008 2007 2006 2005
----------- ----------- ----------- ----------- -----------
Trucking revenues, net of
fuel surcharge (1) $ 1,256,355 $ 1,430,560 $ 1,483,164 $ 1,502,827 $ 1,493,826
Trucking fuel surcharge
revenues (1) 176,744 442,614 301,789 286,843 235,690
Non-trucking revenues,
including VAS (1) 222,159 273,896 268,388 277,181 230,863
Other operating revenues (1) 11,212 18,529 17,846 13,704 11,468
----------- ----------- ----------- ----------- -----------
Operating revenues (1) $ 1,666,470 $ 2,165,599 $ 2,071,187 $ 2,080,555 $ 1,971,847
=========== =========== =========== =========== ===========
Operating ratio
(consolidated) (2) 94.2% 94.8% 93.4% 92.1% 91.7%
Average revenues per tractor
per week (3) $ 3,300 $ 3,427 $ 3,341 $ 3,300 $ 3,286
Average annual miles per
tractor 119,226 121,974 118,656 117,072 120,912
Average annual trips per
tractor 225 197 184 175 187
Average trip length in
miles (loaded) 463 538 558 581 568
Total miles (loaded and
empty) (1) 872,856 979,211 1,012,964 1,025,129 1,057,062
Average revenues per total
mile (3) $ 1.439 $ 1.461 $ 1.464 $ 1.466 $ 1.413
Average revenues per loaded
mile (3) $ 1.645 $ 1.686 $ 1.692 $ 1.686 $ 1.609
Average percentage of empty
miles (4) 12.5% 13.3% 13.5% 13.1% 12.2%
Average tractors in service 7,321 8,028 8,537 8,757 8,742
Total tractors (at year end):
Company 6,575 7,000 7,470 8,180 7,920
Owner-operator 675 700 780 820 830
----------- ----------- ----------- ----------- -----------
Total tractors 7,250 7,700 8,250 9,000 8,750
=========== =========== =========== =========== ===========
Total trailers (Truckload and
Intermodal, at year end) 23,880 24,940 24,855 25,200 25,210
=========== =========== =========== =========== ===========
(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.
(4) "Empty" refers to miles without trailer cargo.
The following table sets forth the revenues, operating
expenses and operating income for the Truckload segment.
Revenues for the Truckload segment include non-trucking revenues
of $4.2 million in 2009, $8.6 million in 2008 and $10.0 million
in 2007, as described on page 19.
2009 2008 2007
----------------- ----------------- -----------------
Truckload Transportation Services (amounts in 000's) $ % $ % $ %
---------------------------------------------------- ----------------- ----------------- -----------------
Revenues $1,437,527 100.0 $1,881,803 100.0 $1,795,227 100.0
Operating expenses 1,353,003 94.1 1,786,789 95.0 1,673,619 93.2
---------- ---------- ----------
Operating income $ 84,524 5.9 $ 95,014 5.0 $ 121,608 6.8
========== ========== ==========
20
Higher fuel prices and higher fuel surcharge collections
increase our consolidated operating ratio and the Truckload
segment's operating ratio when fuel surcharges are reported on a
gross basis as revenues versus netting against fuel expenses.
Eliminating fuel surcharge revenues, which are generally a more
volatile source of revenue, provides a more consistent basis for
comparing the results of operations from period to period. The
following table calculates the Truckload segment's operating
ratio as if fuel surcharges are excluded from total revenues and
instead reported as a reduction of operating expenses.
2009 2008 2007
----------------- ----------------- -----------------
Truckload Transportation Services (amounts in 000's) $ % $ % $ %
---------------------------------------------------- ----------------- ----------------- -----------------
Revenues $1,437,527 $1,881,803 $1,795,227
Less: trucking fuel surcharge revenues 176,744 442,614 301,789
---------- ---------- ----------
Revenues, net of fuel surcharges 1,260,783 100.0 1,439,189 100.0 1,493,438 100.0
---------- ---------- ----------
Operating expenses 1,353,003 1,786,789 1,673,619
Less: trucking fuel surcharge revenues 176,744 442,614 301,789
---------- ---------- ----------
Operating expenses, net of fuel surcharges 1,176,259 93.3 1,344,175 93.4 1,371,830 91.9
---------- ---------- ----------
Operating income $ 84,524 6.7 $ 95,014 6.6 $ 121,608 8.1
========== ========== ==========
The following table sets forth the VAS segment's non-
trucking revenues, rent and purchased transportation expense,
gross margin, other operating expenses and operating income.
Other operating expenses for the VAS segment primarily consist of
salaries, wages and benefits expense. VAS also incurs smaller
expense amounts in the supplies and maintenance, depreciation,
rent and purchased transportation (excluding third-party
transportation costs), insurance, communications and utilities
and other operating expense categories.
2009 2008 2007
----------------- ----------------- -----------------
Value Added Services (amounts in 000's) $ % $ % $ %
--------------------------------------- ----------------- ----------------- -----------------
Revenues $ 217,942 100.0 $ 265,262 100.0 $ 258,433 100.0
Rent and purchased transportation expense 181,215 83.1 225,498 85.0 224,667 86.9
---------- ---------- ----------
Gross margin 36,727 16.9 39,764 15.0 33,766 13.1
Other operating expenses 24,377 11.2 25,194 9.5 21,348 8.3
---------- ---------- ----------
Operating income $ 12,350 5.7 $ 14,570 5.5 $ 12,418 4.8
========== ========== ==========
2009 Compared to 2008
---------------------
Operating Revenues
Operating revenues decreased 23% in 2009 compared to 2008.
Trucking revenues, excluding fuel surcharges, decreased 12% due
primarily to an 8.8% decrease in the average number of tractors
in service (as discussed further below), a 2.3% decrease in
average annual miles per tractor and a 1.5% decrease in average
revenues per total mile.
The truckload freight market, as measured by our overall
pre-booked percentage of loads to trucks ("pre-books") in our
one-way truckload business, continued to be challenging
throughout much of 2009. Weekly pre-books were lower than the
corresponding 2008 percentage in all but a few weeks during the
first nine months of 2009. Pre-books improved in mid-September
and continued to improve through the end of the year, and
pre-books for such period were also higher than the prior year.
In comparison, pre-books declined during fourth quarter 2008.
Freight volumes showed some seasonal improvement as third quarter
2009 progressed and continued to improve in fourth quarter 2009.
A portion of the improved pre-booked percentage is due to fewer
trucks, and a portion is due to more loads.
The average number of tractors in service decreased to 7,321
in 2009 from 8,028 in 2008. Freight demand softness caused by
the weak economy and excess truck capacity made for a challenging
freight market during much of 2008 and 2009. As a result, to
better match the volume of freight with the number of trucks and
improve profitability, we reduced the size of our Van fleet
during 2008 and 2009 to approximately 600 trucks at the end of
2009. This decrease in the Van fleet was partially offset by an
21
increase in the Regional fleet. Our Van fleet has the most
exposure to the spot freight market and faced the most
operational and competitive challenges in these difficult market
conditions.
The softer freight market during 2009, combined with excess
truck capacity in the market and a high level of customer bid
activity in the first half of 2009, caused continued pressure on
freight rates. These factors resulted in a 2.4% decrease in
revenue per loaded mile, excluding fuel surcharge, from $1.686 in
2008 to $1.645 in 2009. Revenue per total mile decreased only
1.5%, as our average percentage of empty miles improved. Much of
our pricing on committed business is available for review with
customers in the first half of 2010. We are planning for a
better relative freight pricing market and more freight
opportunities in 2010 compared to what transpired in the first
half of 2009.
The average percentage of empty miles improved by 80
percentage points from 13.3% in 2008 to 12.5% in 2009. On a per-
trip basis, empty miles declined 20% from 83 miles per trip in
2008 to 66 miles per trip in 2009. For freight management and
statistical reporting purposes, we classify a mile without cargo
in the trailer as an "empty mile" or "deadhead mile"; thus, empty
miles include those empty miles generated by our Dedicated
fleets, most of which are billable to our Dedicated customers.
The freight market in first quarter 2009 was the weakest we
had experienced in the last 20 years. Following the weak fourth
quarter 2008 holiday season, high retail inventory levels in
first quarter 2009 resulted in aggressive inventory destocking.
The recessionary economy combined with these inventory
corrections caused first quarter 2009 shipping volumes to be very
low. Thus far in first quarter 2010, pre-books in our one-way
truckload fleet are better than in first quarter 2009 primarily
because of (i) improved freight volumes, (ii) having 8% fewer
trucks and (iii) a lack of inventory destocking in first quarter
2010. Our pre-books in 2010 are more typical for January and
February, after considering our smaller truck fleet and improved
shipment volumes. We are currently optimistic that we will
experience gradual improvement in the freight market during 2010.
The colder weather conditions and significant winter storms that
occurred in January and February 2010 will have a negative effect
on our first quarter 2010 miles per truck, maintenance costs and
fuel mpg. In addition, the higher fuel prices discussed on page
25 will have a negative impact on earnings.
Fuel surcharge revenues represent collections from customers
for the higher cost of fuel. These revenues decreased to $176.7
million in 2009 from $442.6 million in 2008 in response to lower
average fuel prices in 2009. To lessen the effect of fluctuating
fuel prices on our margins, we collect fuel surcharge revenues
from our customers. Our fuel surcharge programs are designed to
(i) recoup higher fuel costs from customers when fuel prices rise
and (ii) provide customers with the benefit of lower fuel costs
when fuel prices decline. Our fuel surcharge standard is a one
(1.0) cent per mile rate increase for every five (5.0) cent per
gallon increase in the DOE weekly retail on-highway diesel
prices. This standard is used for many fuel surcharge programs.
Some customers also have their own fuel surcharge standard
program for carriers. These programs enable us to recover a
majority, but not all, of the fuel price increases. The
remaining portion is generally not recoverable because it results
from empty miles (which are not billable to customers), out-of-
route miles and truck idle time. Fuel prices that change rapidly
in short time periods also impact our recovery because the
surcharge rate in most programs only changes once per week. In a
rapidly rising fuel price market, there is generally a several
week delay between the payment of higher fuel prices and
surcharge recovery. In a rapidly declining fuel price market,
the opposite generally occurs, and there is a temporary higher
surcharge recovery compared to the price paid for fuel.
We continue to diversify our business from the Van fleet to
the Dedicated, Regional and Expedited fleets and North America
cross-border service provided by the Truckload segment and the
four operating units of the VAS segment. Our goal is to attain a
more balanced portfolio comprised of one-way truckload (which
includes Regional, Van and Expedited), dedicated and logistics
(which includes the VAS segment) services. This diversification
should help soften the impact of a weaker freight market and
enables us to provide expanded services to our customers.
VAS revenues are generated by its four operating units and
exclude revenues for VAS shipments transferred to the Truckload
segment, which are recorded as trucking revenues by the Truckload
segment. VAS revenues decreased 18% to $217.9 million in 2009
22
from $265.3 million in 2008 due to (i) a 16% reduction in the
average revenue per shipment due to lower fuel prices and
customer rates and (ii) shifting 32% more shipments not committed
to third-party capacity providers to our Truckload segment to
help cushion the impact of a soft freight market. These
decreases were partially offset by a 5% increase in the number of
VAS freight shipments. VAS gross margin dollars decreased 8% to
$36.7 million in 2009 from $39.8 million in 2008 on the lower
revenue because of the reasons noted above. However, the VAS
gross margin percentage improved from 15.0% in 2008 to 16.9% in
2009 due to a decline in fuel prices and a lower cost of third-
party capacity. The following table shows the changes that are
described above in shipment volume and average revenue (excluding
logistics fee revenue) per shipment for all VAS shipments:
%
2009 2008 Difference Change
------- ------- ---------- ------
Total VAS shipments 243,286 231,754 11,532 5%
Less: Non-committed shipments to
Truckload segment (93,825) (71,299) (22,526) 32%
------- ------- ----------
Net VAS shipments 149,461 160,455 (10,994) (7%)
======= ======= ==========
Average revenue per shipment $1,321 $1,576 ($255) (16%)
======= ======= ==========
Brokerage revenues decreased 20% in 2009 compared to 2008
because of the factors described in the paragraph above; however,
the Brokerage gross margin percentage improved by 70 basis points
due to a decline in fuel prices and a lower cost of third-party
capacity. Freight Management revenues declined 36% due to
reduced shipments with existing customers resulting from a
decline in certain customers' overall shipment levels.
Intermodal revenues decreased 24%, and its gross margin
percentage decreased by 320 basis points because of a weak and
competitive intermodal pricing market in 2009. International
revenues grew 42%, and it also achieved gross margin and
operating income improvement, resulting from increased shipment
volumes.
Operating Expenses
Our operating ratio (operating expenses expressed as a
percentage of operating revenues) was 94.2% in 2009 compared to
94.8% in 2008. Expense items that impacted the overall operating
ratio are described on the following pages. The tables on pages
20 and 21 show the operating ratios and operating margins for our
two reportable segments, Truckload and VAS.
The following table sets forth the cost per total mile of
operating expense items for the Truckload segment for the periods
indicated. We evaluate operating costs for this segment on a
per-mile basis, which is a better measurement tool for comparing
the results of operations from year to year.
Increase
(Decrease)
2009 2008 per Mile
------------------------------
Salaries, wages and benefits $.573 $.574 $(.001)
Fuel .283 .518 (.235)
Supplies and maintenance .153 .158 (.005)
Taxes and licenses .110 .112 (.002)
Insurance and claims .095 .106 (.011)
Depreciation .175 .166 .009
Rent and purchased transportation .142 .175 (.033)
Communications and utilities .017 .020 (.003)
Other .002 (.004) .006
Owner-operator costs are included in rent and purchased
transportation expense. Owner-operator miles as a percentage of
total miles were 11.6% in 2009 compared to 11.9% in 2008. Owner-
operators are independent contractors who supply their own
23
tractor and driver and are responsible for their operating
expenses (including driver pay, fuel, supplies and maintenance
and fuel taxes). This slight decrease in owner-operator miles as
a percentage of total miles shifted costs from the rent and
purchased transportation category to other expense categories.
Due to this decrease, we estimate that rent and purchased
transportation expense for the Truckload segment was lower by
approximately 0.3 cents per total mile, and other expense
categories had offsetting increases on a total-mile basis as
follows: (i) salaries, wages and benefits, 0.1 cent; (ii) fuel,
0.1 cent; and (iii) depreciation, 0.1 cent.
Beginning in the latter months of 2008, we took steps to
manage and reduce a variety of controllable costs and adapt to a
smaller fleet. We continued by implementing numerous cost-saving
programs throughout 2009. Examples of these cost-saving measures
included improving our ratio of tractors to non-driver employees,
reducing driver advertising, reducing driver lodging costs,
restructuring discretionary driver pay programs, reducing truck
sales location costs and decreasing the company-matching
contribution percentage for our 401(k) plan.
Salaries, wages and benefits in the Truckload segment
decreased 0.1 cent per mile on a total mile basis in 2009
compared to 2008. This decrease is primarily attributed to lower
driver and non-driver salaries, partially offset by higher group
health insurance costs. Also offsetting these cost reductions
was the effect of the 2.3% lower average miles per tractor (which
has the effect of increasing costs of a fixed nature when
evaluated on a per-mile basis) on the non-driver, student and
fringe benefit components of this expense category, as well as
the shift from rent and purchased transportation expense to
salaries, wages and benefits because of the decrease in owner-
operator miles as a percentage of total miles. Although we
improved our tractor-to-non-driver ratio for the trucking
operation by 13% during 2009, the benefit did not start to be
realized until the second quarter of 2009. Driver salaries
decreased as 2009 progressed and following changes to some
discretionary driver pay programs, resulted in lower expense per
mile in the last half of 2009. Higher group health insurance
costs, resulting from an approximate 10% increase in average
claims costs per participant, were partially offset by lower
workers' compensation expense. Non-driver salaries, wages and
benefits in the non-trucking VAS segment were essentially flat.
Although VAS revenues were lower during 2009, the number of
shipments handled by VAS in 2009 (including those transferred to
the Truckload segment) was approximately 5% higher.
We renewed our workers' compensation insurance coverage for
the policy year beginning April 1, 2009. Our coverage levels are
the same as the prior policy year. We continue to maintain a
self-insurance retention of $1.0 million per claim. Our workers'
compensation insurance premiums for the policy year beginning
April 2009 are slightly lower than the previous policy year, due
primarily to lower projected payroll.
Due to high unemployment levels, various states in which we
operate have significantly raised their required unemployment tax
contribution rates in 2010. As a result, we anticipate that our
unemployment tax expense will increase by approximately $2.6
million in 2010 compared to 2009, with over half of the increase
occurring in first quarter 2010 and the balance spread over the
last three quarters of the year.
The qualified and student driver recruiting and retention
markets improved in 2009 compared to 2008. The weakness in the
construction and automotive industries, other trucking company
failures and fleet reductions and the higher national
unemployment rate contributed to improved driver recruiting and
retention. These factors resulted in limited employment options
for drivers and consequently made more qualified and student
drivers available in the workforce. We anticipate that
availability of drivers will remain good until economic
conditions improve. When economic conditions improve,
competition for qualified drivers will likely increase, and we
cannot predict whether we will experience future driver
shortages. If such a shortage were to occur and driver pay rate
increases became necessary to attract and retain drivers, our
results of operations would be negatively impacted to the extent
that we could not obtain corresponding freight rate increases.
Fuel decreased 23.5 cents per mile for the Truckload segment
due primarily to lower average diesel fuel prices and fuel
efficiency improvements. Average diesel fuel prices in 2009 were
$1.29 per gallon lower than in 2008, a 42% decrease. Average
24
monthly fuel prices in 2009 were lower than those in the
comparable months of 2008 for the first ten months, only
exceeding 2008 levels late in the year when 2008 prices rapidly
declined.
During 2009, we continued to improve fuel miles per gallon
("mpg") through several initiatives to improve fuel efficiency.
We improved fuel mpg on a year-over-year basis for the eleventh
consecutive quarter in fouth quarter 2009. These initiatives
have been ongoing since March 2008 and include (i) reducing truck
engine idle time, (ii) lowering non-billable miles, (iii)
increasing the percentage of aerodynamic, more fuel efficient
trucks in the company truck fleet and (iv) installing APUs in
company trucks. Truck engine idle time percentages can be
affected by seasonal weather patterns (such as warm summer months
and cold winter months) that prompt drivers to idle the engine to
provide air conditioning or heating for comfort during non-
driving periods. Thus, engine idle time percentages for trucks
without APUs may be higher (and fuel mpg may be lower as a
result) during the summer and winter months as compared to
temperate spring and fall months. APUs allow the driver to heat
or cool the truck without idling the main engine and consume less
diesel fuel than the engine. As of December 31, 2009, we had
installed APUs in approximately 63% of the company-owned truck
fleet, compared to about 50% as of December 31, 2008. As a
result of these fuel saving initiatives, we improved our company
truck average mpg by 3.8% in 2009 compared to 2008. This mpg
improvement resulted in the purchase of 5.5 million fewer gallons
of diesel fuel in 2009 than in 2008. This equates to a reduction
of approximately 61,050 tons of carbon dioxide emissions. We
intend to continue these and other environmentally conscious
initiatives, including our active participation as an EPA
SmartWay Transport Partner. The SmartWay Transport Partnership
is a national voluntary program developed by the EPA and freight
industry representatives to reduce greenhouse gases and air
pollution and promote cleaner, more efficient ground freight
transportation.
We have historically been successful recouping a majority,
but not all, of fuel cost increases through our fuel surcharge
program. When fuel prices rise rapidly, a negative earnings lag
occurs because the cost of fuel rises immediately and the market
indexes used to determine fuel surcharges increase at a slower
pace. As a result, during these rising fuel price periods, the
negative impact of fuel on our financial results is more
significant. This was the trend during the first two quarters of
2008. In a period of declining fuel prices, we generally
experience a temporary favorable earnings effect because fuel
costs decline at a faster pace than the market indexes used to
determine fuel surcharge collections. This trend began during
third quarter 2008 as fuel prices began to decrease and continued
through most of first quarter 2009. This resulted in temporarily
lower net fuel expense that helped to offset uncompensated fuel
costs from truck idling, empty miles not billable to customers
and out-of-route miles. Fuel prices rose over 30% during second
quarter 2009 (most of the increase occurred during the second
half of the quarter) and then remained flat to slightly higher
for the remainder of 2009.
For January and February of 2010, the average diesel fuel
price per gallon was 65 cents higher than the average diesel fuel
price per gallon in the same period of 2009 and 68 cents higher
than the average for first quarter 2009. As described above,
periods of rising fuel prices result in a negative effect on our
financial results. In contrast, the lower fuel prices
experienced in the first half of 2009, which followed the rapid
fuel price decline in fourth quarter 2008, resulted in a
temporary favorable impact on net fuel costs and earnings in
first quarter 2009. As a result, these higher fuel prices in
first quarter 2010 will have a negative impact on earnings
compared to first quarter 2009.
Shortages of fuel, increases in fuel prices and petroleum
product rationing can have a materially adverse effect on our
operations and profitability. We are unable to predict whether
fuel price levels will increase or decrease in the future or the
extent to which fuel surcharges will be collected from customers.
As of December 31, 2009, we had no derivative financial
instruments to reduce our exposure to fuel price fluctuations.
Supplies and maintenance for the Truckload segment decreased
0.5 cents per total mile in 2009 compared to 2008. Through our
cost-savings programs and improved driver retention, we realized
decreases in driver-related costs such as driver advertising and
referral fees, motels and travel. These savings were partially
offset by a slight increase in the average age of our company
25
truck fleet from 2.5 years at December 31, 2008 to 2.6 years at
December 31, 2009, which contributes to higher maintenance costs
including maintenance that is not covered by warranty.
Taxes and licenses for the Truckload segment decreased 0.2
cents per total mile in 2009 compared to 2008 due to a decrease
in fuel taxes per mile resulting from the improvement in the
company truck mpg. An improved mpg results in fewer gallons of
diesel fuel purchased and consequently less fuel taxes paid.
This decrease was partially offset by the effect of lower average
miles per tractor on the fixed cost components (primarily
equipment licensing fees) of this operating expense category.
Insurance and claims for the Truckload segment decreased 1.1
cent per total mile in 2009 compared to 2008. For small
liability claims, in 2009 we experienced net favorable
development on claims that occurred in prior years compared to
net unfavorable development in 2008, which was partially offset
by slightly higher expense (on a per-mile) basis related to
claims incurred in the current year period. For large liability
claims, our expense for claims incurred in the current year
period was essentially flat from 2008 to 2009, and the amount we
recorded for net unfavorable development on prior year claims was
lower in 2009 than in 2008. We renewed our liability insurance
policies on August 1, 2009 and continue to be responsible for the
first $2.0 million per claim with an annual $8.0 million
aggregate for claims between $2.0 million and $5.0 million. The
annual aggregate for claims in excess of $5.0 million and less
than $10.0 million increased from $4.0 million to $5.0 million.
We maintain liability coverage with insurance carriers
substantially in excess of the $10.0 million per claim. See Item
3 (Legal Proceedings) for information on our bodily injury and
property damage coverage levels since August 1, 2006. Our
liability insurance premium dollars for the policy year that
began August 1, 2009 are slightly lower than the previous policy
year but increased about 9% on a per-mile basis.
Depreciation expense for the Truckload segment increased 0.9
cents per total mile in 2009 compared to 2008. Nearly half of
the increase resulted from the effect of the 2.3% lower average
miles per tractor on this fixed cost. The remainder of the
increase was due to depreciation of the APUs installed on more
company trucks and a higher ratio of trailers to tractors
resulting from the tractor fleet reductions. While we incur
depreciation expense on the APUs, we also incur lower fuel
expense because tractors with APUs consume much less fuel during
periods of truck idling.
Depreciation expense was historically affected by the engine
emissions standards imposed by the EPA that became effective in
October 2002 and applied to all new trucks purchased after that
time, resulting in increased truck purchase costs. Depreciation
expense is affected because in January 2007, a second set of more
strict EPA engine emissions standards became effective for all
newly manufactured truck engines. Compared to trucks with
engines produced before 2007, the trucks with new engines
manufactured under the 2007 standards had higher purchase prices.
We began to take delivery of trucks with these 2007-standard
engines in first quarter 2008 to replace older trucks in our
fleet. As of December 31, 2009, 58% of the engines in our fleet
of company-owned trucks were manufactured by Caterpillar. In
June 2008, Caterpillar announced it would not produce on-highway
engines for use in the United States that would comply with new
EPA engine emissions standards effective in January 2010 but
Caterpillar would continue to sell on-highway engines
internationally. Caterpillar also announced it is pursuing a
strategic alliance with Navistar. Approximately one million
trucks in the U.S. domestic market have Caterpillar heavy-duty
engines, and Caterpillar has stated it will fully support these
engines going forward.
In January 2010, a final set of more rigorous EPA-mandated
emissions standards became effective for all new engines
manufactured after that date. It is expected that these trucks
will have a higher purchase price than trucks manufactured to
meet the 2007 EPA engine emission standards but may be more fuel
efficient. In late 2009, we received a small number of engines
that meet the 2010 standards and are testing them in 2010. We
are currently evaluating the options available to us to adapt to
the 2010 standards. We do not currently expect to purchase many
new trucks with 2010 engines in 2010.
Rent and purchased transportation expense consists mainly of
payments to third-party capacity providers in the VAS segment and
other non-trucking operations and payments to owner-operators in
the Truckload segment. The payments to third-party capacity
26
providers generally vary depending on changes in the volume of
services generated by the segment. As a percentage of VAS
revenues, VAS rent and purchased transportation expense decreased
to 83.1% in 2009 compared to 85.0% in 2008.
Rent and purchased transportation expense for the Truckload
segment decreased 3.3 cents per total mile in 2009 due primarily
to (i) decreased fuel prices that resulted in lower
reimbursements to owner-operators for fuel during most of 2009
compared to 2008 and (ii) the shift from rent and purchased
transportation expense to salaries, wages and benefits expense
because of the decrease in owner-operator truck miles as a
percentage of total miles. Fuel reimbursements to owner-
operators amounted to $21.3 million in 2009 compared to $53.0
million in 2008. Our customer fuel surcharge programs do not
differentiate between miles generated by company-owned and owner-
operator trucks. Challenging operating conditions continue to
make owner-operator recruitment and retention difficult for us.
Such conditions include inflationary cost increases that are the
responsibility of owner-operators and a shortage of financing for
equipment. We have historically been able to add company-owned
tractors and recruit additional company drivers to offset any
decrease in the number of owner-operators. If a shortage of
owner-operators and company drivers occurs, increases in per mile
settlement rates (for owner-operators) and driver pay rates (for
company drivers) may become necessary to attract and retain these
drivers. This could negatively affect our results of operations
to the extent that we would be unable to obtain corresponding
freight rate increases.
Other operating expenses for the Truckload segment increased
0.6 cents per mile in 2009. Gains on sales of assets (primarily
trucks and trailers) are reflected as a reduction of other
operating expenses and are reported net of sales-related expenses
(which include costs to prepare the equipment for sale). Gains
on sales of assets decreased to $3.2 million in 2009 from $9.9
million in 2008. Buyer demand for used trucks and trailers
remained low due to the weak freight market and recessionary
economy. During the first half of 2009, we closed eight lower
volume Fleet Truck Sales offices and continue to operate in eight
locations across the continental United States. We believe our
wholly-owned subsidiary and used truck and trailer retail
network, Fleet Truck Sales, is one of the larger Class 8 truck
and equipment retail entities in the United States. Fleet Truck
Sales continues to be our resource for remarketing our used
trucks and trailers, in addition to trading trucks to original
equipment manufacturers when purchasing new trucks.
Other Expense (Income)
We recorded interest income of $1.8 million in 2009 compared
to $4.0 million in 2008. Our average cash and cash equivalents
balances were similar in both years, but the average interest
rate earned on these funds was considerably lower in 2009 due to
a decrease in market interest rates.
Income Taxes
Our effective income tax rate (income taxes expressed as a
percentage of income before income taxes) was 42.8% for 2009
versus 42.3% for 2008. The higher income tax rate can be
attributed to higher state taxes.
2008 Compared to 2007
---------------------
Operating Revenues
Operating revenues increased 4.6% in 2008 compared to 2007.
Excluding fuel surcharge revenues, trucking revenues decreased
3.5% due primarily to a 6.0% decrease in the average number of
tractors in service (as discussed further below), partially
offset by a 2.8% increase in average annual miles per tractor.
The truckload freight market, as measured by our overall
pre-booked percentage of loads to trucks, was softer during most
of 2008 compared to 2007. Freight demand was lower the first
five months of 2008 compared to the first five months of 2007.
In June 2008, freight volumes improved and exceeded those of June
2007 but were approximately the same in third quarter 2008
27
compared to third quarter 2007. During fourth quarter 2008,
freight volumes declined and were significantly lower than fourth
quarter 2007.
The industry-wide accelerated purchase of new trucks in
advance of the 2007 EPA engine emissions standards contributed to
excess truck capacity that partially disrupted the supply and
demand balance during early 2008. These excess trucks, along
with a weakening economy, resulted in lower freight volumes
during the first five months of 2008 compared to 2007. Fuel
prices increased significantly beginning in late February 2008
and peaked in July 2008, contributing to an increase in trucking
company failures. We believe these failures resulted in a more
even balance of truck supply to freight demand, which caused pre-
books in June 2008 to exceed those in June 2007 and pre-books
during third quarter 2008 to be flat compared to third quarter
2007. A very weak retail environment combined with extremely
soft construction and manufacturing markets resulted in fewer
available shipments during fourth quarter 2008 compared to fourth
quarter 2007. Fuel prices also decreased significantly during
fourth quarter 2008, resulting in fewer trucking company failures
during fourth quarter 2008.
Freight demand softness caused by the weak economy and
excess truck capacity made for a challenging freight market
during much of 2008. We believe these factors increased price
competition for freight in the spot market as carriers competed
for loads to maintain truck productivity. As a result, to better
match the volume of freight with the number of trucks and improve
profitability, we reduced the size of our Van fleet by 750 trucks
in 2008, including a reduction of 500 trucks during fourth
quarter 2008. This decrease in the Van fleet was partially
offset by an increase in trucks in the more profitable Regional
and Expedited fleets, as total trucks decreased by 550 during
2008. As freight demand deteriorated during fourth quarter 2008
and into January 2009, we reduced the Van fleet by an additional
150 trucks in January 2009. From March 2007 to January 2009, we
reduced the Van fleet from 3,000 trucks to about 1,350 trucks (a
reduction of 1,650 trucks).
The average percentage of empty miles decreased to 13.3% in
2008 from 13.5% in 2007. This decrease was the result of a
decrease in the average empty miles percentage related to the
Dedicated fleets. These fleets generally operate according to
arrangements under which we provide trucks and/or trailers for a
specific customer's exclusive use. Under nearly all of these
arrangements, Dedicated customers pay us on an all-mile basis
(regardless of whether trailers are loaded or empty) to obtain
guaranteed truck and/or trailer capacity. If we excluded the
Dedicated fleet, the average empty mile percentage would be 12.4%
in 2008 and 11.8% in 2007. This increase resulted from the
weaker freight market and more regional shipments with shorter
lengths of haul.
Fuel surcharge revenues increased to $442.6 million in 2008
from $301.8 million in 2007 in response to higher average fuel
prices in 2008.
VAS revenues increased 3% to $265.3 million in 2008 from
$258.4 million in 2007 due to an increase in Brokerage,
Intermodal and International revenues. This growth was partially
offset by a structural change to a customer's continuing third-
party carrier arrangement that became effective in July 2007.
Consequently, we began reporting VAS revenues for this customer
on a net basis (revenues net of purchased transportation expense)
rather than on a gross basis. This change affected the reporting
of VAS revenues and purchased transportation expenses for this
customer in third quarter 2007 and subsequent periods. This
reporting change resulted in a reduction in VAS revenues and VAS
rent and purchased transportation expense of $36.3 million
comparing 2008 to 2007. This reporting change had no impact on
the dollar amount of VAS gross margin or operating income.
Excluding the affected freight revenues for this customer from
2007 revenues, VAS revenues grew 19% in 2008 compared to 2007.
VAS gross margin dollars increased 18% during 2008 compared to
2007 due to an improvement in the gross margin percentage in the
Intermodal and International units offset by a decrease in the
Brokerage unit gross margin percentage.
Brokerage revenues increased 21% in 2008 compared to 2007,
but the Brokerage gross margin percentage and operating income
percentage declined. These declines were due to (i) fuel price
declines during the second half of 2008 and (ii) the tightening
of truckload capacity in the first half of 2008 due to increased
carrier failures, which made it more challenging for Brokerage to
obtain qualified third-party carriers at a comparable margin to
2007. Intermodal revenues increased by 21%, and its operating
28
income percentage also improved. International, formed in July
2006, revenues grew 86%, and it achieved an improved gross margin
percentage. Freight Management successfully distributed freight
to other operating divisions and continues to secure new customer
business awards that generate additional freight opportunities
across all company business units.
Operating Expenses
Our operating ratio was 94.8% in 2008 compared to 93.4% in
2007. Expense items that impacted the overall operating ratio
are described on the following pages. As explained on page 21,
the total company operating ratio for 2008 was 140 basis points
higher than 2007 due to the significant increase in fuel expense
and recording the related fuel surcharge revenues on a gross
basis. The tables on pages 20 and 21 show the operating ratios
and operating margins for our two reportable segments, Truckload
and VAS.
The following table sets forth the cost per total mile of
operating expense items for the Truckload segment for the periods
indicated.
Increase
(Decrease)
2008 2007 per Mile
--------------------------------
Salaries, wages and benefits $.574 $.571 $.003
Fuel .518 .401 .117
Supplies and maintenance .158 .150 .008
Taxes and licenses .112 .115 (.003)
Insurance and claims .106 .092 .014
Depreciation .166 .159 .007
Rent and purchased transportation .175 .160 .015
Communications and utilities .020 .020 .000
Other (.004) (.016) .012
Owner-operator miles as a percentage of total miles were
11.9% in 2008 compared to 12.3% in 2007. This decrease in owner-
operator miles as a percentage of total miles shifted costs from
the rent and purchased transportation category to other expense
categories. Due to this decrease, we estimate that rent and
purchased transportation expense for the Truckload segment was
lower by approximately 0.6 cents per total mile, and other
expense categories had offsetting increases on a total-mile basis
as follows: (i) salaries, wages and benefits, 0.2 cents; (ii)
fuel, 0.3 cents; and (iii) depreciation, 0.1 cent.
Salaries, wages and benefits in the Truckload segment
increased 0.3 cents per mile on a total mile basis in 2008
compared to 2007. This increase is primarily attributed to
higher student pay (average active trainer teams increased 13%),
higher workers' compensation expense and, as discussed above, the
shift from rent and purchased transportation to salaries, wages
and benefits because of the decrease in owner-operator miles as a
percentage of total miles. Within the Truckload segment, these
cost increases were offset partially by lower non-driver pay for
office and equipment maintenance personnel (due to efficiency and
cost-control improvements) and lower group health insurance
costs. Non-driver salaries, wages and benefits increased in the
non-trucking VAS segment due to growth in the VAS segment.
The qualified and student driver recruiting and retention
markets improved in 2008 compared to 2007. The weakness in the
construction and automotive industries, trucking company failures
and fleet reductions and a rising national unemployment rate
continued to positively affect our driver availability and
selectivity. In addition, we believe our strong mileage
utilization and financial strength are attractive to drivers when
compared to other carriers.
Fuel increased 11.7 cents per mile for the Truckload segment
due primarily to higher average diesel fuel prices offset
partially by fuel efficiency improvements. Average fuel prices
in 2008 were 76 cents per gallon higher than in 2007, a 34%
increase. Average monthly fuel prices in 2008 were higher than
those in the comparable months of 2007 for the first ten months,
29
with the amount of change over 2007 increasing steadily through
June 2008 ($1.70 per gallon higher than June 2007). Fuel prices
began to fall in July 2008 and fell below the 2007 levels in the
last two months of 2008 (December 2008 prices were $1.16 per
gallon lower than December 2007).
During 2008, we implemented numerous initiatives to improve
fuel efficiency and our fuel miles per gallon. These initiatives
include (i) reducing truck engine idle time, (ii) lowering non-
billable miles, (iii) increasing the percentage of aerodynamic,
more fuel efficient trucks in the company truck fleet and (iv)
installing APUs in company trucks. As of December 31, 2008, we
had installed APUs in approximately 50% of the company-owned
truck fleet. As a result of these initiatives, we improved our
company truck average mpg by 4.3% in 2008 compared to 2007. This
mpg improvement resulted in the purchase of 7.0 million fewer
gallons of diesel fuel in 2008 than in 2007. This equates to a
reduction of approximately 77,000 tons of carbon dioxide
emissions.
Supplies and maintenance for the Truckload segment increased
0.8 cents (5%) per total mile in 2008 compared to 2007. An
increase in the average age of our company truck fleet from 2.1
years at December 31, 2007 to 2.5 years at December 31, 2008
caused an increase in maintenance cost per mile. In addition to
the higher average truck age, a higher percentage of the repairs
was performed over-the-road as a result of the decrease in our
equipment maintenance personnel (see previous discussion of
salaries, wages and benefits). Over-the-road vendors also raised
their labor and parts rates during 2008, which contributed to the
increase in maintenance costs. The prices of some parts
purchased from over-the-road vendors, as well as those purchased
for use in our shops, increased in 2008 because of higher
commodity prices.
Taxes and licenses for the Truckload segment decreased 0.3
cents per total mile in 2008 compared to 2007 due to a decrease
in fuel taxes per mile resulting from the improvement in the
company truck mpg.
Insurance and claims for the Truckload segment increased
from 9.2 cents per total mile in 2007 to 10.6 cents per total
mile in 2008 (an increase of 1.4 cents per total mile). Of this
increase, 1.2 cents per total mile relates to unfavorable claims
development on larger claims that occurred in years prior to 2008
offset partially by lower large claims incurred in 2008. The
development of these prior year claims will limit further
negative development on other large claims in these same policy
years as we have now met our annual aggregates in some of these
older policy years. We renewed our liability insurance policies
on August 1, 2008 and continue to be responsible for the first
$2.0 million per claim with an annual $8.0 million aggregate for
claims between $2.0 million and $5.0 million. The annual
aggregate for claims between $5.0 million and $10.0 million was
lowered from $5.0 million to $4.0 million effective with the new
policy year beginning August 1, 2008. See Item 3 (Legal
Proceedings) for information on our bodily injury and property
damage coverage levels since August 1, 2006. Our liability
insurance premiums for the policy year beginning August 1, 2008
were slightly lower than the previous policy year.
Depreciation expense for the Truckload segment increased 0.7
cents per total mile in 2008 compared to 2007. This increase was
due primarily to depreciation of the APUs installed on company
trucks and, to a lesser extent, to higher costs of tractors
purchased during 2008 and a higher ratio of trailers to tractors
resulting from the reduction of our fleet. The APU depreciation
expense is offset by lower fuel costs because tractors with APUs
generally consume less fuel during periods of idle. Higher
average miles per tractor during 2008 compared to 2007 has the
effect of lowering this fixed cost when evaluated on a per-mile
basis and offset a portion of the increases discussed above.
Depreciation expense was historically affected by the engine
emissions standards imposed by the EPA that became effective in
October 2002 and applied to all new trucks purchased after that
time, resulting in increased truck purchase costs. Depreciation
expense is affected because in January 2007, a second set of more
strict EPA engine emissions standards became effective for all
newly manufactured truck engines. Compared to trucks with
engines produced before 2007, the trucks with new engines
manufactured under the 2007 standards had higher purchase prices.
We began to take delivery of trucks with these 2007-standard
engines in first quarter 2008 to replace older trucks in our
fleet. As of December 31, 2008, 78% of the engines in our fleet
of company-owned trucks were manufactured by Caterpillar.
30
As a percentage of VAS revenues, VAS rent and purchased
transportation expense decreased to 85.0% in 2008 compared to
86.9% in 2007. As discussed on page 28, the VAS segment's rent
and purchased transportation expense was affected by a structural
change to a large VAS customer's continuing third-party carrier
arrangement that became effective in July 2007. That change
resulted in a reduction in VAS revenues and VAS rent and
purchased transportation expense of $36.3 million from 2007 to
2008. Excluding the rent and purchased transportation expense
for this customer, the dollar amount of this expense increased
for the VAS segment by 20% compared to an increase in VAS
revenues of 19%.
Rent and purchased transportation for the Truckload segment
increased 1.5 cents per total mile in 2008 due primarily to
increased fuel prices that necessitated higher reimbursements to
owner-operators for fuel during most of 2008 compared to 2007,
offset slightly by a decrease in the percentage of owner-operator
truck miles versus company truck miles. Fuel reimbursements to
owner-operators amounted to $53.0 million in 2008 compared to
$36.0 million in 2007. These higher fuel reimbursements resulted
in an increase of 1.7 cents per total mile.
Other operating expenses for the Truckload segment increased
1.2 cents per mile in 2008. Gains on sales of assets decreased
to $9.9 million in 2008 from $22.9 million in 2007, or a
reduction of 1.2 cents per mile. We believe Fleet Truck Sales
demand softened during 2008 due to the softer freight market and
higher fuel prices. At the same time, carrier failures and
company fleet reductions increased the supply of used trucks for
sale. We continued to sell our oldest van trailers that are
fully depreciated.
Other Expense (Income)
We recorded $0.1 million of interest expense in 2008 versus
$3.0 million of interest expense in 2007. Our average
outstanding debt per month in 2007 was over $45 million, while in
2008 we had no outstanding debt until the end of November 2008.
We had $30.0 million of debt outstanding and cash and cash
equivalents of $48.6 million at December 31, 2008, for a net cash
position of $18.6 million. Our interest income was $4.0 million
in 2008 and 2007. Our average cash and cash equivalents balance
was higher in 2008 than in 2007, but the average interest rate
earned on these funds was lower in 2008.
Income Taxes
Our effective income tax rate was 42.3% for 2008 versus
45.1% for 2007. During fourth quarter 2007, we reached a
tentative settlement agreement with an Internal Revenue Service
("IRS") appeals officer regarding a significant tax deduction
based on a timing difference between financial reporting and tax
reporting for our 2000 to 2004 federal income tax returns.
During fourth quarter 2007, we accrued the estimated cumulative
interest charges, net of income taxes, of $4.0 million for the
anticipated settlement of this matter. The IRS finalized the
settlement during third quarter 2008, and we paid to the IRS the
federal accrued interest at the beginning of October 2008. We
filed amended state returns reporting the IRS settlement changes
to the states where required during fourth quarter 2008, many of
which were pending state review to settle our state interest
liabilities. Our total payments during 2008, before considering
the tax benefit from the deductibility of these payments, were
$4.9 million for federal and $0.4 million to various states. Our
policy is to recognize interest and penalties directly related to
income taxes as additional income tax expense. See also Note 4
of the Notes to Consolidated Financial Statements under Item 8 of
this Form 10-K.
Liquidity and Capital Resources:
During the year ended December 31, 2009, we generated cash
flow from operations of $194.4 million, a 25.0% decrease ($64.7
million), compared to the year ended December 31, 2008. This
decrease is attributed primarily to (i) a $34.8 million decrease
in cash flows related to insurance and claims accruals (both
current and long-term) due primarily to the settlement of some
larger claims, (ii) a $22.4 million decrease in cash flows
related to accounts receivable because of a decrease in fuel
surcharge billings at the end of 2008 due to lower fuel prices
and lower revenues attributed to the smaller fleet size in 2009
31
and (iii) a $12.4 million decrease in cash flows related to
accrued payroll. Cash flow from operations increased $31.1
million in 2008 compared to 2007, or 13.7%. The increase in cash
flow from operations in 2008 compared to 2007 was attributed to
(i) a $23.2 million change in cash flows related to accounts
payable, primarily due to the timing of payments, (ii) a lower
accounts receivable balance resulting from a decrease in the
average fuel surcharge billed per trip at the end of 2008 and
(iii) the effect of $13.0 million lower gains on disposal of
operating equipment, offset by (iv) lower net income of $7.8
million. We were able to make net capital expenditures,
repurchase common stock and pay dividends because of the cash
flow from operations and existing cash balances, supplemented by
net borrowings under our existing credit facilities.
Net cash used in investing activities decreased by $20.8
million to $94.6 million in 2009 from $115.4 million in 2008.
Net property additions (primarily revenue equipment) were $98.8
million for the year ended December 31, 2009 compared to $121.0
million during the same period of 2008. The decrease occurred
because we took delivery of substantially fewer new trailers in
2009 than in 2008. The $95.3 million increase in investing cash
flows from 2007 to 2008 occurred because we began to take
delivery of new trucks in 2008, while we took delivery of
substantially fewer new trucks during 2007 to delay purchases of
more expensive trucks with 2007-standard engines. As of December
31, 2009, we were committed to property and equipment purchases,
net of trades, of approximately $53.5 million. We currently
expect our estimated net capital expenditures (primarily revenue
equipment) to be in the range of $60.0 million to $100.0 million
in 2010. We intend to fund these net capital expenditures through
cash flow from operations and financing available under our
existing credit facilities, as management deems necessary.
Net financing activities used $130.3 million in 2009, $119.3
million in 2008 and $214.4 million in 2007. The increase from
2008 to 2009 included debt repayments (net of borrowings) of
$30.0 million in 2009 compared to net borrowings of $30.0 million
in 2008. We had net repayments of $100.0 million in 2007. We
paid dividends of $104.2 million in 2009, $164.4 million in 2008
and $14.0 million in 2007. The 2009 and 2008 dividends included
special dividends of $1.25 per share ($89.9 million total) paid
in December 2009 and $2.10 per share ($150.3 million total) paid
in December 2008. We increased our quarterly dividend rate by
$0.005 per share beginning with the dividend paid in July 2007.
Financing activities also included common stock repurchases of
$4.5 million in 2008 and $113.8 million in 2007. From time to
time, the Company has repurchased, and may continue to
repurchase, shares of the Company's common stock. The timing and
amount of such purchases depends on market and other factors. As
of December 31, 2009, the Company had purchased 1,041,200 shares
pursuant to our current Board of Directors repurchase
authorization and had 6,958,800 shares remaining available for
repurchase.
Management believes our financial position at December 31,
2009 is strong. As of December 31, 2009, we had $18.4 million of
cash and cash equivalents and $704.7 million of stockholders'
equity. Cash is invested primarily in government portfolio money
market funds. We do not hold any investments in auction-rate
securities. As of December 31, 2009, we had a total of $225.0
million of credit pursuant to two credit facilities, of which we
had no borrowings outstanding. The $225.0 million of credit
available under these facilities is further reduced by the $49.8
million in letters of credit under which we are obligated. These
letters of credit are primarily required as security for
insurance policies. As of December 31, 2009, we did not have any
non-cancelable revenue equipment operating leases and therefore
had no off-balance sheet revenue equipment debt. Based on our
strong financial position, management does not foresee any
significant barriers to obtaining sufficient financing, if
necessary.
32
Contractual Obligations and Commercial Commitments:
The following table sets forth our contractual obligations
and commercial commitments as of December 31, 2009.
Payments Due by Period
(in millions)
More
Less than than 5 Period
Total 1 year 1-3 years 3-5 years years Unknown
----------------------------------------------------------------------------------------------------
Contractual Obligations
Long-term debt, including
current maturities $ - $ - $ - $ - $ - $ -
Unrecognized tax benefits 7.5 0.9 - - - 6.6
Equipment purchase commitments 53.5 53.5 - - - -
------- ------- ------- ------- ------- -------
Total contractual cash obligations $ 61.0 $ 54.4 $ - $ - $ - $ 6.6
======= ======= ======= ======= ======= =======
Other Commercial Commitments
Unused lines of credit $ 175.2 $ - $ 175.2 $ - $ - $ -
Standby letters of credit 49.8 49.8 - - - -
------- ------- ------- ------- ------- -------
Total commercial commitments $ 225.0 $ 49.8 $ 175.2 $ - $ - $ -
======= ======= ======= ======= ======= =======
Total obligations $ 286.0 $ 104.2 $ 175.2 $ - $ - $ 6.6
======= ======= ======= ======= ======= =======
We have committed credit facilities with two banks totaling
$225.0 million that mature in May 2011 ($175.0 million) and May
2012 ($50.0 million). Borrowings under these credit facilities
bear variable interest based on the London Interbank Offered Rate
("LIBOR"). As of December 31, 2009, we had no borrowings
outstanding under these credit facilities with banks. The credit
available under these facilities is further reduced by the amount
of standby letters of credit under which we are obligated. The
unused lines of credit are available to us in the event we need
financing for the replacement of our fleet or for other
significant capital expenditures. Given our strong financial
position, we expect that we could obtain additional financing, if
necessary. The standby letters of credit are primarily required
for insurance policies. Equipment purchase commitments relate to
committed equipment expenditures. As of December 31, 2009, we
have recorded a $7.5 million liability for unrecognized tax
benefits. We expect $0.9 million to be settled within the next
twelve months and are unable to reasonably determine when the
$6.6 million categorized as "period unknown" will be settled.
Off-Balance Sheet Arrangements:
In 2009, we did not have any non-cancelable revenue
equipment operating leases or other arrangements that meet the
definition of an off-balance sheet arrangement.
Critical Accounting Policies:
We operate in the truckload and logistics sectors of the
transportation industry. In the truckload sector, we focus on
transporting consumer nondurable products that generally ship
consistently throughout the year. In the logistics sector,
besides managing transportation requirements for individual
customers, we provide additional sources of truck capacity,
alternative modes of transportation, a global delivery network
and systems analysis to optimize transportation needs. Our
success depends on our ability to efficiently manage our
resources in the delivery of truckload transportation and
logistics services to our customers. Resource requirements vary
with customer demand and may be subject to seasonal or general
economic conditions. Our ability to adapt to changes in customer
transportation requirements is essential to efficient resource
deployment, making capital investments in tractors and trailers
and obtaining qualified third-party capacity at a reasonable
price. Although our business volume is not highly concentrated,
33
we also may be occasionally affected by our customers' financial
failures or loss of customer business.
Our most significant resource requirements are company
drivers, owner-operators, tractors, trailers and related
equipment operating costs (such as fuel and related fuel taxes,
driver pay, insurance and supplies and maintenance). To mitigate
our risk to fuel price increases, we recover from our customers
additional fuel surcharges that recoup a majority, but not all,
of the increased fuel costs; however, we cannot assure that
current recovery levels will continue in future periods. Our
financial results are also affected by company driver and owner-
operator availability and the new and used revenue equipment
market. Because we are self-insured for a significant portion of
bodily injury, property damage and cargo claims and for workers'
compensation benefits and health claims for our employees
(supplemented by premium-based insurance coverage above certain
dollar levels), financial results may also be affected by driver
safety, medical costs, weather, legal and regulatory environments
and insurance coverage costs to protect against catastrophic
losses.
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. We continually monitor
the adequacy of the lives and salvage values used in
calculating depreciation expense and adjust these
assumptions appropriately when warranted.
* Impairment of long-lived assets. We review our long-lived
assets for impairment whenever events or circumstances
indicate 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 the carrying amount exceeds its fair
value. For long-lived assets classified as held and used,
the carrying amount is not recoverable when the carrying
value of the long-lived asset exceeds the sum of the
future net cash flows. We do not separately identify
assets by operating segment because tractors and trailers
are routinely transferred from one operating fleet to
another. As a result, none of our long-lived assets have
identifiable cash flows from use that are largely
independent of the cash flows of other assets and
liabilities. Thus, the asset group used to assess
impairment would include all of our assets.
* Estimates of accrued liabilities for insurance and claims
for liability and physical damage losses and workers'
compensation. The insurance and claims accruals (current
and noncurrent) are recorded at the estimated ultimate
payment amounts and are based upon individual case
estimates (including negative development) and estimates
of incurred-but-not-reported losses using loss development
factors based upon past experience. An actuary reviews
our self-insurance reserves for bodily injury and property
damage claims and workers' compensation claims every six
months.
* Policies for revenue recognition. Operating revenues
(including fuel surcharge revenues) and related direct
costs are recorded when the shipment is delivered. For
shipments where a third-party capacity provider (including
owner-operators under contract with us) is utilized to
provide some or all of the service and we (i) are the
primary obligor in regard to the shipment delivery, (ii)
establish customer pricing separately from carrier rate
negotiations, (iii) generally have discretion in carrier
selection and/or (iv) have credit risk on the shipment, we
record both revenues for the dollar value of services we
bill to the customer and rent and purchased transportation
expense for transportation costs we pay to the third-party
provider upon the shipment's delivery. In the absence of
the conditions listed above, we record revenues net of
those expenses related to third-party providers.
* Accounting for income taxes. Significant management
judgment is required to determine (i) the provision for
income taxes, (ii) whether deferred income taxes will be
realized in full or in part and (iii) the liability for
unrecognized tax benefits related to uncertain tax
positions. Deferred income tax assets and liabilities are
34
measured using enacted tax rates that are expected to
apply to taxable income in the years when those temporary
differences are expected to be recovered or settled. When
it is more likely that all or some portion of specific
deferred income tax assets will not be realized, a
valuation allowance must be established for the amount of
deferred income tax assets that are determined not to be
realizable. A valuation allowance for deferred income tax
assets has not been deemed necessary due to our profitable
operations. Accordingly, if facts or financial
circumstances change and consequently impact the
likelihood of realizing the deferred income tax assets, we
would need to apply management's judgment to determine the
amount of valuation allowance required in any given
period.
* Allowance for doubtful accounts. The allowance for
doubtful accounts is our estimate of the amount of
probable credit losses in our existing accounts
receivable. We review the financial condition of
customers for granting credit and monitor changes in
customers' financial conditions on an ongoing basis. We
determine the allowance based on analysis of individual
customers' financial condition, our historical write-off
experience and national economic conditions. During the
last two years, numerous significant events affected the
U.S. financial markets and resulted in significant
reduction of credit availability and liquidity.
Consequently, we believe some of our customers may be
unable to obtain or retain adequate financing to support
their businesses in the future. We anticipate that
because of these combined factors, some of our customers
may also be compelled to restructure their businesses or
may be unable to pay amounts owed to us. We have formal
policies in place to continually monitor credit extended
to customers and to manage our credit risk. We maintain
credit insurance for some customer accounts. We evaluate
the adequacy of our allowance for doubtful accounts
quarterly and believe our allowance for doubtful accounts
is adequate based on information currently available.
Management periodically re-evaluates these estimates as
events and circumstances change. Together with the effects of
the matters discussed above, these factors may significantly
impact our results of operations from period to period.
Inflation:
Inflation may impact our operating costs. A prolonged
inflation period could cause rises in interest rates, fuel, wages
and other costs. These inflationary increases could adversely
affect our results of operations unless freight rates could be
increased correspondingly. However, the effect of inflation has
been minimal over the past three years.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
We are exposed to market risk from changes in interest
rates, commodity prices and foreign currency exchange rates.
Interest Rate Risk
We had no debt outstanding at December 31, 2009. Interest
rates on our unused credit facilities are based on the LIBOR.
Increases in interest rates could impact our annual interest
expense on future borrowings. As of December 31, 2009, we do not
have any derivative financial instruments to reduce our exposure
to interest rate increases.
Commodity Price Risk
The price and availability of diesel fuel are subject to
fluctuations attributed to changes in the level of global oil
production, refining capacity, seasonality, weather and other
market factors. Historically, we have recovered a majority, but
not all, of fuel price increases from customers in the form of
fuel surcharges. We implemented customer fuel surcharge programs
with most of our customers to offset much of the higher fuel cost
per gallon. However, we do not recover all of the fuel cost
increase through these surcharge programs. We cannot predict the
extent to which fuel prices will increase or decrease in the
35
future or the extent to which fuel surcharges could be collected.
As of December 31, 2009, we had no derivative financial
instruments to reduce our exposure to fuel price fluctuations.
Foreign Currency Exchange Rate Risk
We conduct business in several foreign countries, including
Mexico, Canada, China and Australia. To date, most foreign
revenues are denominated in U.S. Dollars, and we receive payment
for foreign freight services primarily in U.S. Dollars to reduce
direct foreign currency risk. Assets and liabilities maintained
by a foreign subsidiary company in the local currency are subject
to foreign exchange gains or losses. Foreign currency
translation gains and losses primarily relate to changes in the
value of revenue equipment owned by a subsidiary in Mexico, whose
functional currency is the Peso. Foreign currency translation
gains were $1.6 million in 2009 and losses were $7.0 million for
2008 and were recorded in accumulated other comprehensive loss
within stockholders' equity in the Consolidated Balance Sheets.
Amounts of gains and losses for 2007 were not material. The
exchange rate between the Mexican Peso and the U.S. Dollar was
13.06 Pesos to $1.00 at December 31, 2009 compared to 13.54 Pesos
to $1.00 at December 31, 2008 and 10.87 Pesos to $1.00 at
December 31, 2007.
36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Werner Enterprises, Inc.:
We have audited the accompanying consolidated balance sheets
of Werner Enterprises, Inc. and subsidiaries (the Company) as of
December 31, 2009 and 2008, and the related consolidated
statements of income, stockholders' equity and comprehensive
income, and cash flows for each of the years in the three-year
period ended December 31, 2009. In connection with our audits of
the consolidated financial statements, we have also audited the
financial statement schedule listed in Item 15(a)(2) of this Form
10-K. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with the standards of
the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the
financial position of Werner Enterprises, Inc. and subsidiaries
as of December 31, 2009 and 2008, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2009, in conformity with
U.S. generally accepted accounting principles. Also in our
opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
We also have audited, in accordance with the standards of
the Public Company Accounting Oversight Board (United States),
Werner Enterprises, Inc.'s internal control over financial
reporting as of December 31, 2009, based on criteria established
in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO), and our report dated February 26, 2010 expressed an
unqualified opinion on the effectiveness of the Company's
internal control over financial reporting.
KPMG LLP
Omaha, Nebraska
February 26, 2010
37
WERNER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Years Ended December 31,
------------------------------------
2009 2008 2007
---------- ---------- ----------
Operating revenues $1,666,470 $2,165,599 $2,071,187
---------- ---------- ----------
Operating expenses:
Salaries, wages and benefits 522,962 586,035 598,837
Fuel 247,640 508,594 408,410
Supplies and maintenance 141,402 163,524 159,843
Taxes and licenses 96,406 109,443 117,170
Insurance and claims 83,458 104,349 93,769
Depreciation 155,315 167,435 166,994
Rent and purchased transportation 305,854 397,887 387,564
Communications and utilities 15,856 19,579 20,098
Other 886 (4,182) (18,015)
---------- ---------- ----------
Total operating expenses 1,569,779 2,052,664 1,934,670
---------- ---------- ----------
Operating income 96,691 112,935 136,517
---------- ---------- ----------
Other expense (income):
Interest expense 99 83 2,977
Interest income (1,779) (3,972) (3,989)
Other (466) (198) 247
---------- ---------- ----------
Total other income (2,146) (4,087) (765)
---------- ---------- ----------
Income before income taxes 98,837 117,022 137,282
Income taxes 42,253 49,442 61,925
---------- ---------- ----------
Net income $ 56,584 $ 67,580 $ 75,357
========== ========== ==========
Earnings per share:
Basic $ 0.79 $ 0.96 $ 1.03
========== ========== ==========
Diluted $ 0.79 $ 0.94 $ 1.02
========== ========== ==========
Weighted-average common shares outstanding:
Basic 71,672 70,752 72,858
========== ========== ==========
Diluted 72,075 71,658 74,114
========== ========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
38
WERNER ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
December 31,
-------------------------
ASSETS 2009 2008
---------- ----------
Current assets:
Cash and cash equivalents $ 18,430 $ 48,624
Accounts receivable, trade, less allowance
of $9,167 and $9,555, respectively 180,740 185,936
Other receivables 10,366 18,739
Inventories and supplies 12,725 10,644
Prepaid taxes, licenses, and permits 14,628 16,493
Current deferred income taxes 24,808 30,789
Other current assets 22,807 20,659
---------- ----------
Total current assets 284,504 331,884
---------- ----------
Property and equipment, at cost:
Land 28,689 28,643
Buildings and improvements 128,112 125,631
Revenue equipment 1,246,752 1,281,688
Service equipment and other 177,158 177,140
---------- ----------
Total property and equipment 1,580,711 1,613,102
Less - accumulated depreciation 708,809 686,463
---------- ----------
Property and equipment, net 871,902 926,639
---------- ----------
Other non-current assets 16,603 16,795
---------- ----------
$1,173,009 $1,275,318
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 47,056 $ 46,684
Current portion of long-term debt - 30,000
Insurance and claims accruals 65,667 79,830
Accrued payroll 17,567 25,850
Other current liabilities 16,451 19,006
---------- ----------
Total current liabilities 146,741 201,370
---------- ----------
Other long-term liabilities 8,760 7,406
Deferred income taxes 199,358 200,512
Insurance and claims accruals, net of current
portion 113,500 120,500
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value, 200,000,000
shares authorized; 80,533,536 shares
issued; 71,896,512 and 71,576,267 shares
outstanding, respectively 805 805
Paid-in capital 92,389 93,343
Retained earnings 778,890 826,511
Accumulated other comprehensive loss (5,556) (7,146)
Treasury stock, at cost; 8,637,024 and
8,957,269 shares, respectively (161,878) (167,983)
---------- ----------
Total stockholders' equity 704,650 745,530
---------- ----------
$1,173,009 $1,275,318
========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
39
WERNER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
-----------------------------------
2009 2008 2007
--------- --------- ---------
Cash flows from operating activities:
Net income $ 56,584 $ 67,580 $ 75,357
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation 155,315 167,435 166,994
Deferred income taxes 4,908 (5,685) (8,571)
Gain on disposal of operating
equipment (3,192) (9,896) (22,915)
Stock based compensation 1,243 1,455 1,878
Other long-term assets (1,958) 631 918
Insurance and claims accruals,
net of current portion (7,000) 10,000 11,000
Other long-term liabilities 798 (194) 571
Changes in certain working
capital items:
Accounts receivable, net 5,196 27,560 19,298
Prepaid expenses and other
current assets 7,535 (2,656) 7,504
Accounts payable (445) (2,968) (26,169)
Accrued and other current
liabilities (24,542) 5,868 2,120
--------- --------- ---------
Net cash provided by operating
activities 194,442 259,130 227,985
--------- --------- ---------
Cash flows from investing activities:
Additions to property and equipment (177,846) (206,305) (133,124)
Retirements of property and equipment 79,000 85,324 107,056
Decrease in notes receivable 4,286 5,615 5,962
--------- --------- ---------
Net cash used in investing
activities (94,560) (115,366) (20,106)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of short-term
debt 20,000 30,000 -
Proceeds from issuance of long-term
debt - - 10,000
Repayments of short-term debt (50,000) - (30,000)
Repayments of long-term debt - - (80,000)
Dividends on common stock (104,189) (164,420) (13,953)
Repurchases of common stock - (4,486) (113,821)
Stock options exercised 2,577 13,624 8,789
Excess tax benefits from exercise
of stock options 1,331 6,026 4,545
--------- --------- ---------
Net cash used in financing
activities (130,281) (119,256) (214,440)
--------- --------- ---------
Effect of exchange rate fluctuations
on cash 205 (974) 38
Net increase (decrease) in cash and
cash equivalents (30,194) 23,534 (6,523)
Cash and cash equivalents, beginning
of year 48,624 25,090 31,613
--------- --------- ---------
Cash and cash equivalents, end of
year $ 18,430 $ 48,624 $ 25,090
========= ========= =========
Supplemental disclosures of cash flow
information:
Cash paid during year for:
Interest $ 154 $ 28 $ 3,717
Income taxes 34,431 53,562 65,111
Supplemental disclosures of non-cash
investing activities:
Notes receivable issued upon sale
of revenue equipment $ 2,136 $ 2,741 $ 6,388
The accompanying notes are an integral part of these consolidated
financial statements.
40
WERNER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE
INCOME
(In thousands, except share and per share amounts)
Accumulated
Other Total
Common Paid-In Retained Comprehensive Treasury Stockholders'
Stock Capital Earnings Income (Loss) Stock Equity
----------------------------------------------------------------------
BALANCE, December 31, 2006 $805 $105,193 $862,403 $ (207) $ (97,843) $870,351
Purchases of 6,000,000 shares
of common stock - - - - (113,821) (113,821)
Dividends on common stock
($.195 per share) - - (14,081) - - (14,081)
Exercise of stock options,
1,033,892 shares,
including excess tax benefits - (6,047) - - 19,381 13,334
Stock-based compensation expense - 1,878 - - - 1,878
Adoption of FIN 48 - - (268) - - (268)
Comprehensive income (loss):
Net income - - 75,357 - - 75,357
Foreign currency
translation adjustments - - - 38 - 38
----- -------- -------- ------- --------- --------
Total comprehensive income (loss) - - 75,357 38 - 75,395
----- -------- -------- ------- --------- --------
BALANCE, December 31, 2007 805 101,024 923,411 (169) (192,283) 832,788
Purchases of 250,000 shares
of common stock - - - - (4,486) (4,486)
Dividends on common stock
($2.300 per share) - - (164,480) - - (164,480)
Exercise of stock options,
1,453,078 shares,
including excess tax benefits - (9,136) - - 28,786 19,650
Stock-based compensation expense - 1,455 - - - 1,455
Comprehensive income (loss):
Net income - - 67,580 - - 67,580
Foreign currency
translation adjustments - - - (6,977) - (6,977)
----- -------- -------- ------- --------- --------
Total comprehensive income (loss) - - 67,580 (6,977) - 60,603
----- -------- -------- ------- --------- --------
BALANCE, December 31, 2008 805 93,343 826,511 (7,146) (167,983) 745,530
Dividends on common stock
($1.450 per share) - - (104,205) - - (104,205)
Exercise of stock options,
320,245 shares,
including excess tax benefits - (2,197) - - 6,105 3,908
Stock-based compensation expense - 1,243 - - - 1,243
Comprehensive income (loss):
Net income - - 56,584 - - 56,584
Foreign currency
translation adjustments - - - 1,590 - 1,590
----- -------- -------- ------- --------- --------
Total comprehensive income (loss) - - 56,584 1,590 - 58,174
----- -------- -------- ------- --------- --------
BALANCE, December 31, 2009 $805 $ 92,389 $778,890 $(5,556) $(161,878) $704,650
===== ======== ======== ======= ========= ========
The accompanying notes are an integral part of these consolidated
financial statements.
41
WERNER ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Werner Enterprises, Inc. (the "Company") is a truckload
transportation and logistics company operating under the
jurisdiction of the U.S. Department of Transportation, similar
governmental transportation agencies in the foreign countries in
which we operate and various U.S. state regulatory authorities.
We maintain a diversified freight base and are not dependent on a
specific industry for a majority of our freight, which limits
concentrations of credit risk. No single customer generated more
than 10% of the Company's total revenues in 2009, 2008 and 2007.
Principles of Consolidation
The accompanying consolidated financial statements include
the accounts of Werner Enterprises, Inc. and our majority-owned
subsidiaries. All significant intercompany accounts and
transactions relating to these majority-owned entities have been
eliminated.
Use of Management Estimates
The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates
and assumptions that affect the (i) reported amounts of assets
and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements
and (ii) reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents
We consider all highly liquid investments, purchased with a
maturity of three months or less, to be cash equivalents.
Trade Accounts Receivable
We record trade accounts receivable at the invoiced amounts,
net of an allowance for doubtful accounts. The allowance for
doubtful accounts is our estimate of the amount of probable
credit losses in our existing accounts receivable. We review the
financial condition of customers for granting credit and
determine the allowance based on analysis of individual
customers' financial condition, historical write-off experience
and national economic conditions. We evaluate the adequacy of
our allowance for doubtful accounts quarterly. Past due balances
over 90 days and exceeding a specified amount are reviewed
individually for collectibility. Account balances are charged
off against the allowance after all means of collection have been
exhausted and the potential for recovery is considered remote.
We do not have any off-balance-sheet credit exposure related to
our customers.
Inventories and Supplies
Inventories and supplies are stated at the lower of average
cost or market and consist primarily of revenue equipment parts,
tires, fuel, supplies and company store merchandise. Tires
placed on new revenue equipment are capitalized as a part of the
equipment cost. Replacement tires are expensed when placed in
service.
42
Property, Equipment, and Depreciation
Additions and improvements to property and equipment are
capitalized at cost, while maintenance and repair expenditures
are charged to operations as incurred. Gains and losses on the
sale or exchange of equipment are recorded in other operating
expenses.
Depreciation is calculated based on the cost of the asset,
reduced by the asset's estimated salvage value, using the
straight-line method. Accelerated depreciation methods are used
for income tax purposes. The lives and salvage values assigned
to certain assets for financial reporting purposes are different
than for income tax purposes. For financial reporting purposes,
assets are depreciated using the following estimated useful lives
and salvage values:
Lives Salvage Values
------------ ----------------
Building and improvements 30 years 0%
Tractors 5 years 25%
Trailers 12 years $1,000
Service and other equipment 3-10 years 0%
Long-Lived Assets
We review our long-lived assets for impairment whenever
events or circumstances indicate 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 the carrying amount exceeds its fair value. For
long-lived assets classified as held and used, the carrying
amount is not recoverable when the carrying value of the long-
lived asset exceeds the sum of the future net cash flows. We do
not separately identify assets by operating segment because
tractors and trailers are routinely transferred from one
operating fleet to another. As a result, none of our long-lived
assets have identifiable cash flows from use that are largely
independent of the cash flows of other assets and liabilities.
Thus, the asset group used to assess impairment would include all
of our assets.
Insurance and Claims Accruals
Insurance and claims accruals (both current and noncurrent)
reflect the estimated cost (including estimated loss development
and loss adjustment expenses) for (i) cargo loss and damage, (ii)
bodily injury and property damage, (iii) group health and (iv)
workers' compensation claims not covered by insurance. The costs
for cargo, bodily injury and property damage insurance and claims
are included in insurance and claims expense in the Consolidated
Statements of Income; the costs of group health and workers'
compensation claims are included in salaries, wages and benefits
expense. The insurance and claims accruals are recorded at the
estimated ultimate payment amounts. Such insurance and claims
accruals are based upon individual case estimates (including
negative development) and estimates of incurred-but-not-reported
losses using loss development factors based upon past experience.
Actual costs related to insurance and claims have not differed
materially from estimated accrued amounts for all years
presented. An actuary reviews our self-insurance reserves for
bodily injury and property damage claims and workers'
compensation claims every six months.
43
We were responsible for liability claims up to $500,000,
plus administrative expenses, for each occurrence involving
bodily injury or property damage since August 1, 1992. For the
policy year beginning August 1, 2004, we increased our self-
insured retention ("SIR") and deductible amount to $2.0 million
per occurrence. We are also responsible for varying annual
aggregate amounts of liability for claims in excess of the
SIR/deductible. The following table reflects the SIR/deductible
levels and aggregate amounts of liability for bodily injury and
property damage claims since August 1, 2006:
Primary Coverage
Coverage Period Primary Coverage SIR/Deductible
------------------------------ ---------------- ----------------
August 1, 2006 - July 31, 2007 $5.0 million $2.0 million (1)
August 1, 2007 - July 31, 2008 $5.0 million $2.0 million (2)
August 1, 2008 - July 31, 2009 $5.0 million $2.0 million (3)
August 1, 2009 - July 31, 2010 $5.0 million $2.0 million (2)
(1) Subject to an additional $2.0 million aggregate in the $2.0
to $3.0 million layer, no aggregate (meaning that we were fully
insured) in the $3.0 to $5.0 million layer, and a $5.0 million
aggregate in the $5.0 to $10.0 million layer.
(2) Subject to an additional $8.0 million aggregate in the $2.0
to $5.0 million layer and a $5.0 million aggregate in the $5.0
to $10.0 million layer.
(3) Subject to an additional $8.0 million aggregate in the $2.0
to $5.0 million layer and a $4.0 million aggregate in the $5.0
to $10.0 million layer.
Our primary insurance covers the range of liability under
which we expect most claims to occur. If any liability claims
are substantially in excess of coverage amounts listed in the
table above, such claims are covered under premium-based policies
(issued by insurance companies) to coverage levels that our
management considers adequate. We are also responsible for
administrative expenses for each occurrence involving bodily
injury or property damage.
We are responsible for workers' compensation up to $1.0
million per claim. We also maintain a $26.7 million bond and
have insurance for individual claims above $1.0 million.
Under these insurance arrangements, we maintained $49.8
million in letters of credit as of December 31, 2009.
Revenue Recognition
The Consolidated Statements of Income reflect recognition of
operating revenues (including fuel surcharge revenues) and
related direct costs when the shipment is delivered. For
shipments where a third-party capacity provider (including owner-
operators under contract with us) is utilized to provide some or
all of the service and we (i) are the primary obligor in regard
to the shipment delivery, (ii) establish customer pricing
separately from carrier rate negotiations, (iii) generally have
discretion in carrier selection and/or (iv) have credit risk on
the shipment, we record both revenues for the dollar value of
services we bill to the customer and rent and purchased
transportation expense for transportation costs we pay to the
third-party provider upon the shipment's delivery. In the
absence of the conditions listed above, we record revenues net of
those expenses related to third-party providers.
Foreign Currency Translation
Local currencies are generally considered the functional
currencies outside the United States. Assets and liabilities are
translated at year-end exchange rates for operations in local
currency environments. Most foreign revenues are denominated in
U.S. Dollars. Expense items are translated at the average rates
of exchange prevailing during the year. Foreign currency
translation adjustments reflect the changes in foreign currency
exchange rates applicable to the net assets of the foreign
operations. Foreign currency translation gains were $1.6 million
for 2009 and losses were $7.0 million for 2008 and are recorded
in accumulated other comprehensive loss within stockholders'
equity in the Consolidated Balance Sheets. Amounts for 2007 were
not material.
44
Income Taxes
We use the asset and liability method in accounting for
income taxes. Under this method, deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities
are measured using the enacted tax rates that are expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.
In accounting for uncertain tax positions, we recognize the
tax benefit from an uncertain tax position only if it is more
likely than not that the tax position will be sustained on
examination by the taxing authorities, based on the technical
merits of the position. The tax benefits recognized in the
financial statements from such a position are measured based on
the largest benefit that has a greater than 50% likelihood of
being realized upon ultimate settlement. We recognize interest
and penalties directly related to income tax matters in income
tax expense.
Common Stock and Earnings Per Share
Basic earnings per share is computed by dividing net income
by the weighted average number of common shares outstanding
during the period. Diluted earnings per share is computed by
dividing net income by the weighted average number of common
shares plus the effect of dilutive potential common shares
outstanding during the period using the treasury stock method.
Dilutive potential common shares include outstanding stock
options and stock awards. There are no differences in the
numerators of our computations of basic and diluted earnings per
share for any periods presented. The computation of basic and
diluted earnings per share is shown below (in thousands, except
per share amounts).
Years Ended December 31,
--------------------------------
2009 2008 2007
-------- -------- --------
Net income $ 56,584 $ 67,580 $ 75,357
======== ======== ========
Weighted average common
shares outstanding 71,672 70,752 72,858
Dilutive effect of stock-based
awards 403 906 1,256
-------- -------- --------
Shares used in computing
diluted earnings per share 72,075 71,658 74,114
======== ======== ========
Basic earnings per share $ .79 $ .96 $ 1.03
======== ======== ========
Diluted earnings per share $ .79 $ .94 $ 1.02
======== ======== ========
Options to purchase shares of common stock that were
outstanding during the periods indicated above, but were 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 during the period, were:
Years Ended December 31,
------------------------------------------
2009 2008 2007
------------ ------------ ------------
Number of options 755,494 23,600 29,500
Ranges of option purchase prices $18.33-20.36 $19.84-20.36 $19.26-20.36
Comprehensive Income
Comprehensive income consists of net income and other
comprehensive income (loss). Other comprehensive income (loss)
refers to revenues, expenses, gains and losses that are not
included in net income, but rather are recorded directly in
stockholders' equity. For the years ended December 31, 2009,
2008 and 2007, comprehensive income consists of net income and
foreign currency translation adjustments.
45
Accounting Standards
New Accounting Pronouncements Adopted
-------------------------------------
In September 2006, the Financial Accounting Standards Board
("FASB") issued authoritative guidance which defines fair value,
establishes a framework for measuring fair value in generally
accepted accounting principles and expands disclosures about fair
value measurements. The new guidance did not require any new
fair value measurements but rather eliminated inconsistencies in
guidance found in various prior accounting pronouncements and was
effective for fiscal years beginning after November 15, 2007.
Subsequent pronouncements delayed the effective date of the new
guidance for all nonfinancial assets and nonfinancial
liabilities, except those that are recognized or disclosed at
fair value in the financial statements on a recurring basis (at
least annually), until fiscal years beginning after November 15,
2008 and interim periods within those fiscal years. These
nonfinancial items include assets and liabilities such as
reporting units measured at a fair value in a goodwill impairment
test and nonfinancial assets acquired and liabilities assumed in
a business combination. Effective January 1, 2008, we adopted
the provisions for financial assets and liabilities recognized at
fair value on a recurring basis, and we fully adopted the
guidance on January 1, 2009. The adoption had no effect on our
financial position, results of operations and cash flows.
In December 2007, the FASB issued authoritative guidance
related to business combinations. This guidance establishes
requirements for (i) recognizing and measuring in an acquiring
company's financial statements the identifiable assets acquired,
the liabilities assumed and any noncontrolling interest in the
acquiree, (ii) recognizing and measuring the goodwill acquired in
the business combination or a gain from a bargain purchase and
(iii) determining what information to disclose to enable users of
the financial statements to evaluate the nature and financial
effects of the business combination. The new provisions were
effective for business combinations for which the acquisition
date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. The adoption of
this guidance had no effect on our financial position, results of
operations and cash flows.
In December 2007, the FASB issued authoritative guidance
that amends previously issued guidance concerning noncontrolling
interests in consolidated financial statements. This guidance
established accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. The guidance was effective for
fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. The adoption of this
guidance had no effect on our financial position, results of
operations and cash flows.
In March 2008, the FASB issued authoritative guidance which
requires enhanced disclosures about an entity's derivative
instruments and hedging activities. The guidance was effective
for fiscal years, and interim periods within those fiscal years,
beginning on or after November 15, 2008. The adoption of this
guidance had no effect on our financial position, results of
operations and cash flows.
In May 2009, the FASB issued authoritative guidance which
establishes general standards of accounting for and disclosure of
events that occur after the balance sheet date but before
financial statements are issued or are available to be issued.
The new guidance sets forth (i) the period after the balance
sheet date during which management should evaluate events or
transactions that may occur for potential recognition or
disclosure in the financial statements; (ii) the circumstances
under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial
statements; and (iii) the disclosures that an entity should make
about events or transactions that occurred after the balance
sheet date. The new provisions became effective for interim or
annual financial periods ending after June 15, 2009. The
adoption of this guidance had no effect on our financial
position, results of operations and cash flows.
In June 2009, the FASB issued its final Statement of
Financial Accounting Standards which established the FASB
Accounting Standards CodificationTM (the "Codification") as the
single source of authoritative U.S. generally accepted accounting
46
principles ("GAAP") applied by nongovernmental entities, except
for rules and interpretive releases of the U.S. Securities and
Exchange Commission (the "SEC") under the authority of federal
securities laws, which are sources of authoritative accounting
guidance for SEC registrants. The Codification did not change
GAAP but reorganizes the literature. The Codification supersedes
all existing non-SEC accounting and reporting standards. These
provisions were effective for financial statements issued for
interim and annual periods ending after September 15, 2009. The
FASB will not issue new standards in the form of Statements, FASB
Staff Positions, or Emerging Issues Task Force Abstracts;
instead, it will issue Accounting Standards Updates. The FASB
will not consider Accounting Standards Updates as authoritative
in their own right; these updates will serve only to update the
Codification, provide background information about the guidance
and provide the bases for conclusions on the changes in the
Codification. In the description of "Accounting Standards
Updates Not Yet Effective" that follows, references in quotations
relate to Codification Topics and Subtopics, and their
descriptive titles, as appropriate.
Accounting Standards Updates Not Yet Effective
----------------------------------------------
In October 2009, an update was made to "Revenue Recognition-
Multiple Deliverable Revenue Arrangements." This update (i)
removes the objective-and-reliable-evidence-of-fair-value
criterion from the separation criteria used to determine whether
an arrangement involving multiple deliverables contains more than
one unit of accounting, (ii) replaces references to "fair value"
with "selling price" to distinguish from the fair value
measurements required under the "Fair Value Measurements and
Disclosures" guidance, (iii) provides a hierarchy that entities
must use to estimate the selling price, (iv) eliminates the use
of the residual method for allocation and (v) expands the ongoing
disclosure requirements. This update is effective for us
beginning January 1, 2011 and can be applied prospectively or
retrospectively. Management is currently evaluating the effect
that adoption of this update will have, if any, on our
consolidated financial position, results of operations and cash
flows when it becomes effective in 2011.
Other Accounting Standards Updates not effective until after
December 31, 2009, are not expected to have a significant effect
on our consolidated financial position, results of operations or
cash flows.
(2) CREDIT FACILITIES
Debt consisted of the following at December 31 (in
thousands):
2009 2008
-------- --------
Notes payable to banks under
committed credit facilities $ - $ 30,000
-------- --------
- 30,000
Less current portion - 30,000
-------- --------
Long-term debt, net $ - $ -
======== ========
As of December 31, 2009, we have committed credit facilities
with two banks totaling $225.0 million that mature in May 2011
($175.0 million) and May 2012 ($50.0 million). Borrowings under
these credit facilities bear variable interest based on the
London Interbank Offered Rate ("LIBOR"). As of December 31,
2009, we had no borrowings outstanding under these credit
facilities with banks. In January 2010, we borrowed $10.0
million, which we repaid in February 2010. The $225.0 million of
credit available under these facilities is further reduced by
$49.8 million in letters of credit under which we are obligated.
Each of the debt agreements includes, among other things, two
financial covenants requiring us (i) not to exceed a maximum
ratio of total debt to total capitalization and (ii) not to
exceed a maximum ratio of total funded debt to earnings before
interest, income taxes, depreciation and amortization (as such
terms are defined in each credit facility). We were in
compliance with these covenants at December 31, 2009.
The carrying amounts of our long-term debt approximates fair
value due to the duration of the notes and the interest rates.
47
(3) NOTES RECEIVABLE
Notes receivable are included in other current assets and
other non-current assets in the Consolidated Balance Sheets. At
December 31, notes receivable consisted of the following (in
thousands):
2009 2008
-------- --------
Owner-operator notes receivable $ 6,756 $ 9,392
TDR Transportes, S.A. de C.V. 3,600 3,600
Other notes receivable 4,851 5,046
-------- --------
15,207 18,038
Less current portion 3,404 4,085
-------- --------
Notes receivable - non-current $ 11,803 $ 13,953
======== ========
We provide financing to some independent contractors who
want to become owner-operators by purchasing a tractor from us
and leasing their services to us. At December 31, 2009, we had
187 notes receivable from these owner-operators and at December
31, 2008, we had 232 such notes receivable. See Note 7 for
information regarding notes from related parties. We maintain a
primary security interest in the tractor until the owner-operator
pays the note balance in full. We also retain recourse exposure
related to owner-operators who purchased tractors from us with
third-party financing we arranged.
During 2002, we loaned $3.6 million to TDR Transportes, S.A.
de C.V. ("TDR"), a truckload carrier in the Republic of Mexico.
The loan has a nine-year term with principal payable at the end
of the term. Such loan (i) is subject to acceleration if certain
conditions are met, (ii) bears interest at a rate of 5% per annum
(which is payable quarterly), (iii) contains certain financial
and other covenants and (iv) is collateralized by the assets of
TDR. As of December 31, 2009, TDR had prepaid interest on this
note through January 31, 2010, and we had a receivable for
interest of $31,000 as of December 31, 2008. See Note 7 for
information regarding related party transactions.
(4) INCOME TAXES
Income tax expense consisted of the following (in
thousands):
2009 2008 2007
-------- -------- --------
Current:
Federal $ 31,267 $ 47,575 $ 62,026
State 6,078 7,552 8,470
-------- -------- --------
37,345 55,127 70,496
-------- -------- --------
Deferred:
Federal 5,605 (3,735) (6,698)
State (697) (1,950) (1,873)
-------- -------- --------
4,908 (5,685) (8,571)
-------- -------- --------
Total income tax expense $ 42,253 $ 49,442 $ 61,925
======== ======== ========
The effective income tax rate differs from the federal
corporate tax rate of 35% in 2009, 2008 and 2007 as follows (in
thousands):
2009 2008 2007
-------- -------- --------
Tax at statutory rate $ 34,593 $ 40,958 $ 48,049
State income taxes, net of
federal tax benefits 3,498 3,641 4,288
Non-deductible meals and
entertainment 3,558 4,158 4,799
Income tax settlement - - 4,000
Income tax credits (480) (752) (790)
Other, net 1,084 1,437 1,579
-------- -------- --------
$ 42,253 $ 49,442 $ 61,925
======== ======== ========
48
At December 31, deferred tax assets and liabilities
consisted of the following (in thousands):
2009 2008
--------- ---------
Deferred tax assets:
Insurance and claims accruals $ 70,322 $ 78,901
Allowance for uncollectible
accounts 5,087 5,175
Other 7,285 8,280
--------- ---------
Gross deferred tax assets 82,694 92,356
--------- ---------
Deferred tax liabilities:
Property and equipment 248,078 252,609
Prepaid expenses 6,533 7,290
Other 2,633 2,180
--------- ---------
Gross deferred tax liabilities 257,244 262,079
--------- ---------
Net deferred tax liability $ 174,550 $ 169,723
========= =========
These amounts (in thousands) are presented in the
accompanying Consolidated Balance Sheets as of December 31 as
follows:
2009 2008
--------- ---------
Current deferred tax asset $ 24,808 $ 30,789
Noncurrent deferred tax
liability 199,358 200,512
--------- ---------
Net deferred tax liability $ 174,550 $ 169,723
========= =========
We have not recorded a valuation allowance because we
believe that all deferred tax assets are more likely than not to
be realized as a result of our historical profitability, taxable
income and reversal of deferred tax liabilities.
During first quarter 2006, in connection with an audit of
our federal income tax returns for the years 1999 to 2002, we
received a notice from the Internal Revenue Service ("IRS")
proposing to disallow a significant tax deduction. This
deduction was based on a timing difference between financial
reporting and tax reporting and would result in interest charges,
which we record as a component of income tax expense in the
Consolidated Statements of Income. This timing difference
deduction reversed in our 2004 income tax return. We formally
protested this matter in April 2006. During fourth quarter 2007,
we reached a tentative settlement agreement with an IRS appeals
officer. During fourth quarter 2007, we also accrued in income
tax expense in our Consolidated Statements of Income the
estimated cumulative interest charges for the anticipated
settlement of this matter, net of income taxes, which amounted to
$4.0 million, or $0.05 per share. During second quarter 2008,
the appeals officer received the concurrence of the Joint
Committee of Taxation with regard to the recommended basis of
settlement. The IRS finalized the settlement during third
quarter 2008, and we paid the federal accrued interest at the
beginning of October 2008. We filed amended state returns
reporting the IRS settlement changes to the states where required
during fourth quarter 2008. Our total payments during 2008,
before considering the tax benefit from the deductibility of
these payments, were $4.9 million for federal and $0.4 million to
various states. Our net payments to various states during 2009
were $0.7 million. We expect to pay an additional $0.3 million
to settle the remaining state liabilities.
We recognized a $0.5 million increase in the net liability
for unrecognized tax benefits for the year ended December 31,
2009 and a $3.8 million decrease in the net liability for the
year ended December 31, 2008. The 2008 decrease is due to the
settlement with the IRS and related payment of interest and taxes
for tax years 1999 through 2002, as discussed above. We accrued
an interest benefit of $0.4 million during 2009 and $4.9 million
during 2008. Our total gross liability for unrecognized tax
benefits at December 31, 2009 is $7.5 million and at December 31,
2008 was $7.4 million. If recognized, $4.5 million of
unrecognized tax benefits as of December 31, 2009 and $4.0
million as of December 31, 2008 would impact our effective tax
rate. Interest of $3.2 million as of December 31, 2009 and $3.7
49
million as of December 31, 2008 has been reflected as a component
of the total liability. We do not expect any other significant
increases or decreases for uncertain tax positions during the
next twelve months.
The reconciliations of beginning and ending gross balances
of unrecognized tax benefits for 2009 and 2008 are shown below
(in thousands).
2009 2008
-------- --------
Unrecognized tax benefits, opening balance $ 7,450 $ 12,594
Gross increases - tax positions in prior period 477 635
Gross decreases - tax positions in prior period - -
Gross increases - current-period tax positions 296 -
Settlements (692) (5,779)
Lapse of statute of limitations - -
-------- --------
Unrecognized tax benefits, ending balance $ 7,531 $ 7,450
======== ========
We file U.S. federal income tax returns, as well as income
tax returns in various states and several foreign jurisdictions.
The IRS has completed its audits for tax years through 2005, and
all resulting adjustments as discussed above have been settled.
The IRS completed its audit of our 2005 federal income tax return
and in 2008, issued a "no change letter" for tax year 2005, under
which the IRS did not propose any adjustment to the tax return.
The years 2006 through 2009 are open for examination by the IRS,
and various years are open for examination by state and foreign
tax authorities. State and foreign jurisdictional statutes of
limitations generally range from three to four years.
(5) STOCK-BASED COMPENSATION AND EMPLOYEE BENEFIT PLANS
Equity Plan
Our Equity Plan provides for grants of nonqualified stock
options, restricted stock and stock appreciation rights. The
Board of Directors or the Compensation Committee of our Board of
Directors determine the terms of each award, including type of
award, recipients, number of shares subject to each award and
vesting conditions of each award. Stock option and restricted
stock awards are described below. No awards of stock
appreciation rights have been issued to date. The maximum number
of shares of common stock that may be awarded under the Equity
Plan is 20,000,000 shares. The maximum aggregate number of
shares that may be awarded to any one person under the Equity
Plan is 2,562,500. As of December 31, 2009, there were 8,307,657
shares available for granting additional awards.
We apply the fair value method of accounting for stock-based
compensation awards granted under our Equity Plan. Stock-based
employee compensation expense was $1.2 million in 2009, $1.5
million in 2008 and $1.9 million in 2007. Stock-based employee
compensation expense is included in salaries, wages and benefits
within the Consolidated Statements of Income. The total income
tax benefit recognized in the Consolidated Statements of Income
for stock-based compensation arrangements was $0.5 million in
2009, $0.6 million in 2008 and $0.8 million in 2007. As of
December 31, 2009, the total unrecognized compensation cost
related to nonvested stock-based compensation awards was
approximately $6.5 million and is expected to be recognized over
a weighted average period of 2.3 years.
We do not a have a formal policy for issuing shares upon
exercise of stock options or vesting of restricted stock, so such
shares are generally issued from treasury stock. From time to
time, we repurchase shares of our common stock, the timing and
amount of which depends on market and other factors.
Historically, the shares acquired under these regular repurchase
programs have provided us with sufficient quantities of stock to
issue for stock-based compensation. Based on current treasury
stock levels, we do not expect to repurchase additional shares
specifically for stock-based compensation during 2010.
50
Stock Options
Stock options are granted at prices equal to the market
value of the common stock on the date the option award is
granted. Option awards currently outstanding become exercisable
in installments from twenty-four to seventy-two months after the
date of grant. The options are exercisable over a period not to
exceed ten years and one day from the date of grant.
The following table summarizes stock option activity for the
year ended December 31, 2009:
Weighted Aggregate
Number of Weighted Average Intrinsic
Options Average Remaining Value
(in Exercise Contractual (in
thousands) Price ($) Term (Years) thousands)
--------------------------------------------------
Outstanding at beginning of period 2,264 $13.74
Options granted 144 $19.02
Options exercised (320) $ 8.05
Options forfeited (17) $17.77
Options expired (2) $18.33
-------
Outstanding at end of period 2,069 $14.95 4.52 $10,045
=======
Exercisable at end of period 1,475 $13.82 3.34 $8,826
=======
We granted 144,000 stock options during the year ended
December 31, 2009, did not grant any stock options in 2008 and
granted 329,500 stock options in 2007. The fair value of stock
option grants is estimated using a Black-Scholes valuation model
with the following weighted-average assumptions:
Years Ended December 31,
----------------------------
2009 2007
------------ ------------
Risk-free interest rate 2.4% 4.3%
Expected dividend yield 1.05% 1.16%
Expected volatility 37% 34%
Expected term (in years) 7.5 6.5
Grant-date fair value $7.36 $6.44
The risk-free interest rate assumptions were based on
average five-year U.S. Treasury note yields. We calculated
expected volatility using historical daily price changes of our
common stock for the period immediately preceding the grant date
and equivalent in duration to the expected term of the stock
option grant. The expected term was the average number of years
we estimated these options will be outstanding. We considered
groups of employees having similar historical exercise behavior
separately for valuation purposes.
The total intrinsic value of stock options exercised during
2009 was $3.4 million, $15.8 million in 2008 and $11.0 million in
2007.
Restricted Stock
Restricted stock awards entitle the holder to shares of
common stock when the award vests. The value of these shares may
fluctuate according to market conditions and other factors.
Restricted stock awards granted in 2008 vest sixty months from
the grant date of the award. Restricted stock awards granted in
2009 vest in installments from thirty-six to eighty-four months
from the grant date of the award. The restricted shares do not
confer any voting or dividend rights to recipients until such
shares fully vest and do not have any post-vesting sales
restrictions.
51
The following table summarizes restricted stock activity for
year ended December 31, 2009:
Number of Weighted
Restricted Average
Shares (in Grant Date
thousands) Fair Value ($)
---------- --------------
Nonvested at beginning of period 35 $ 22.88
Shares granted 237 $ 18.10
Shares vested - $ -
Shares forfeited - $ -
----------
Nonvested at end of period 272 $ 18.72
==========
We granted 236,500 shares of restricted stock during the
year ended December 31, 2009, 35,000 shares of restricted stock
during 2008 and did not grant any shares of restricted stock
during 2007. We estimate the fair value of restricted stock
awards based upon the market price of the underlying common stock
on the date of grant, reduced by the present value of estimated
future dividends because the awards are not entitled to receive
dividends prior to vesting. Our estimate of future dividends is
based on the most recent quarterly dividend rate at the time of
grant, adjusted for any known future changes in the dividend
rate. The present value of estimated future dividends was
calculated using the following assumptions:
Years Ended December 31,
------------------------
2009 2008
---------- ----------
Dividends per share (quarterly amounts) $0.05 $0.05
Risk-free interest rate 2.9% 3.0%
Employee Stock Purchase Plan
Employees that meet certain eligibility requirements may
participate in our Employee Stock Purchase Plan (the "Purchase
Plan"). Eligible participants designate the amount of regular
payroll deductions and/or a single annual payment (each subject
to a yearly maximum amount) that is used to purchase shares of
our common stock on the over-the-counter market. Effective
January 1, 2010, we increased the annual contribution maximum
amount to $10,000 from $5,000. These purchases are subject to
the terms of the Purchase Plan. We contribute an amount equal to
15% of each participant's contributions under the Purchase Plan.
Our contributions for the Purchase Plan were $131,000 for 2009,
$139,000 for 2008 and $162,000 for 2007. Interest accrues on
Purchase Plan contributions at a rate of 5.25% until the purchase
is made. We pay the broker's commissions and administrative
charges related to purchases of common stock under the Purchase
Plan.
401(k) Retirement Savings Plan
We have an Employees' 401(k) Retirement Savings Plan (the
"401(k) Plan"). Employees are eligible to participate in the
401(k) Plan if they have been continuously employed with us or
one of our subsidiaries for six months or more. We match a
portion of each employee's 401(k) Plan elective deferrals.
Beginning April 1, 2009, we decreased our matching contribution
by half. We may, at our discretion, make an additional annual
contribution for employees so that our total annual contribution
for employees could equal up to 2.5% of net income (exclusive of
extraordinary items). Salaries, wages and benefits expense in the
accompanying Consolidated Statements of Income includes our
401(k) Plan contributions and administrative expenses, which were
a total of $862,000 for 2009, $1,663,000 for 2008 and $1,364,000
for 2007.
Nonqualified Deferred Compensation Plan
The Executive Nonqualified Excess Plan (the "Excess Plan")
is our nonqualified deferred compensation plan for the benefit of
eligible key managerial employees whose 401(k) Plan contributions
are limited because of IRS regulations affecting highly
52
compensated employees. Under the terms of the Excess Plan,
participants may elect to defer compensation on a pre-tax basis
within annual dollar limits we establish. At December 31, 2009,
there were 64 participants in the Excess Plan. Through December
31, 2008, the annual limit was determined so that a participant's
combined deferrals in both the Excess Plan and the 401(k) Plan
approximated the maximum annual deferral amount available to non-
highly compensated employees in the 401(k) Plan. Beginning
January 1, 2009, certain participants were allowed to defer
combined amounts that exceed the maximum 401(k) deferral limits
for non-highly compensated employees. The maximum deferral
limits were increased as of January 1, 2010, and beginning in
2010, participants will be permitted to defer amounts from
performance-based compensation. Although our current intention
is not to do so, we may also make matching credits and/or profit
sharing credits to participants' accounts as we so determine each
year. Each participant is fully vested in all deferred
compensation and earnings; however, these amounts are subject to
general creditor claims until distributed to the participant.
Beginning January 1, 2010, the timing of distributions for
participants who separate from service (as described in the plan)
was increased from 6 months to 12 months after the separation
date. Under current federal tax law, we are not allowed a current
income tax deduction for the compensation deferred by
participants, but we are allowed a tax deduction when a
distribution payment is made to a participant from the Excess
Plan. The accumulated benefit obligation was $1,874,000 as of
December 31, 2009 and $1,076,000 as of December 31, 2008. This
accumulated benefit obligation is included in other long-term
liabilities in the Consolidated Balance Sheets. We purchased
life insurance policies to fund the future liability. The life
insurance policies had an aggregate market value of $1,734,000 as
of December 31, 2009 and $1,049,000 as of December 31, 2008.
These policy amounts are included in other non-current assets in
the Consolidated Balance Sheets.
(6) COMMITMENTS AND CONTINGENCIES
We have committed to property and equipment purchases of
approximately $53.5 million at December 31, 2009.
We are involved in certain claims and pending litigation
arising in the normal course of business. Management believes
the ultimate resolution of these matters will not materially
affect our consolidated financial statements.
(7) RELATED PARTY TRANSACTIONS
The Company leases land from a trust in which the Company's
principal stockholder is the sole trustee. The annual rent
payments under this lease are $1.00 per year. The Company is
responsible for all real estate taxes and maintenance costs
related to the property, which were $40,000 in 2009 and are
recorded as expenses in the Consolidated Statements of Income.
The Company has made leasehold improvements to the land totaling
approximately $6.2 million for facilities used for business
meetings and customer promotion.
The brother and former sister-in-law of the Company's
principal stockholder owned an entity with a fleet of tractors
that operates as an owner-operator. The brother's ownership
interest in this entity ceased during 2009. The Company paid
this owner-operator $6,142,000 in 2009, $7,601,000 in 2008 and
$7,502,000 in 2007. The Company also sells used revenue
equipment to this entity. These sales totaled $219,000 in 2009,
$415,000 in 2008 and $622,000 in 2007. The Company recognized
gains of $39,000 in 2009, $103,000 in 2008 and $88,000 in 2007.
From this entity, the Company also had notes receivable related
to the revenue equipment sales totaling (i) $916,000 at December
31, 2009 for 38 such notes and (ii) $1,237,000 at December 31,
2008 for 37 such notes. This fleet is compensated using the same
owner-operator pay package as the Company's other comparable
third-party owner-operators. The Company believes the terms of
the note agreements and the tractor sales prices are no less
favorable to the Company than those that could be obtained from
unrelated third parties, on an arm's length basis.
The brother of the Company's principal stockholder is the
sole owner of an entity with a fleet of tractors that operates as
an owner-operator. The Company paid this owner-operator $918,000
in 2009, $1,004,000 in 2008 and $425,000 in 2007 for purchased
transportation services. The Company also sells used revenue
equipment to this entity. These sales totaled $61,000 in 2009,
$111,000 in 2008 and $219,000 in 2007. The Company recognized
53
gains of $18,000 in 2009, $19,000 in 2008 and $23,000 in 2007.
The Company has no notes receivable related to these revenue
equipment sales. This fleet is compensated using the same owner-
operator pay package as our other comparable third-party owner-
operators. The Company believes the tractor sales prices are no
less favorable to the Company than those that could be obtained
from unrelated third parties, on an arm's length basis.
The Company transacts business with TDR for certain
purchased transportation needs. The Company recorded trucking
revenues from TDR of approximately $19,000 in 2009, $134,000 in
2008 and $107,000 in 2007. The Company recorded purchased
transportation expense to TDR of approximately $284,000 in 2009,
$437,000 in 2008 and $1,052,000 in 2007. In addition, the
Company recorded other operating revenues from TDR of
approximately $2,094,000 in 2009, $8,048,000 in 2008 and
$7,768,000 in 2007 related primarily to revenue equipment
leasing. These leasing revenues include $301,000 in 2009,
$297,000 in 2008 and $274,000 in 2007 for leasing a terminal
building in Queretaro, Mexico. The Company also sells used
revenue equipment to this entity. These sales totaled $170,000
in 2009, $1,334,000 in 2008 and $1,145,000 in 2007, and the
Company recognized net gains of $51,000 in 2009, $90,000 in 2008,
and net losses of $28,000 in 2007. The Company had receivables
related to the equipment leases and revenue equipment sales of
$5,153,000 at December 31, 2009 and $6,791,000 at December 31,
2008. See Note 3 for information regarding the note receivable
from TDR.
At December 31, 2009, the Company had a 5% ownership
interest in Transplace, Inc. ("TPC"), a logistics joint venture
of five large transportation companies. In December 2009, the
operating assets of TPC were sold to an unrelated entity.
Although the Company still maintains an ownership interest in the
TPC holding company, the Company no longer considers the TPC
operating entity to be a related party after the sale date. The
Company entered into transactions with TPC for certain purchased
transportation needs. The Company recorded operating revenue
from TPC of approximately $2,512,000 in 2009, $1,483,000 in 2008
and $826,000 in 2007. The Company did not record any purchased
transportation expense to TPC in 2009, 2008 or 2007.
The Company believes these transactions are on terms no less
favorable to the Company than those that could be obtained from
unrelated third parties on an arm's length basis.
(8) SEGMENT INFORMATION
We have two reportable segments - Truckload Transportation
Services ("Truckload") and Value Added Services ("VAS").
The Truckload segment consists of six operating fleets that
are aggregated because they have similar economic characteristics
and meet the other aggregation criteria described in the
accounting guidance for segment reporting. The six operating
fleets that comprise our Truckload segment are as follows: (i)
dedicated services ("Dedicated") provides truckload services
required by a specific customer, generally for a distribution
center or manufacturing facility; (ii) the regional short-haul
("Regional") fleet transports a variety of consumer, nondurable
products and other commodities in truckload quantities within
five geographic regions across the United States using dry van
trailers; (iii) the medium-to-long-haul van ("Van") fleet
provides comparable truckload van service over irregular routes;
(iv) the expedited ("Expedited") fleet provides time-sensitive
truckload services utilizing driver teams; and the (v) flatbed
("Flatbed") and (vi) temperature-controlled ("Temperature-
Controlled") fleets provide truckload services for products with
specialized trailers. Revenues for the Truckload segment include
non-trucking revenues of $4.2 million for 2009, $8.6 million for
2008 and $10.0 million for 2007. These non-trucking revenues
consist primarily of the portion of shipments delivered to or
from Mexico where we utilize a third-party capacity provider.
The VAS segment generates the majority of our non-trucking
revenues through four operating units that provide non-trucking
services to our customers. These four VAS operating units are as
follows: (i) truck brokerage ("Brokerage") uses contracted
carriers to complete customer shipments; (ii) freight management
("Freight Management") offers a full range of single-source
logistics management services and solutions; (iii) the intermodal
("Intermodal") unit offers rail transportation through alliances
with rail and drayage providers as an alternative to truck
54
transportation; and (iv) Werner Global Logistics international
("International") provides complete management of global
shipments from origin to destination using a combination of air,
ocean, truck and rail transportation modes.
We generate other revenues related to third-party equipment
maintenance, equipment leasing and other business activities.
None of these operations meets the quantitative reporting
thresholds. As a result, these operations are grouped in "Other"
in the tables below. "Corporate" includes revenues and expenses
that are incidental to our activities and are not attributable to
any of our operating segments. We do not prepare separate
balance sheets by segment and, as a result, assets are not
separately identifiable by segment. We have no significant
intersegment sales or expense transactions that would require the
elimination of revenue between our segments in the tables below.
The following tables summarize our segment information (in
thousands):
Revenues
--------
2009 2008 2007
---------- ---------- ----------
Truckload Transportation Services $1,437,527 $1,881,803 $1,795,227
Value Added Services 217,942 265,262 258,433
Other 7,995 15,306 15,303
Corporate 3,006 3,228 2,224
---------- ---------- ----------
Total $1,666,470 $2,165,599 $2,071,187
========== ========== ==========
Operating Income
----------------
2009 2008 2007
---------- ---------- ----------
Truckload Transportation Services $ 84,524 $ 95,014 $ 121,608
Value Added Services 12,350 14,570 12,418
Other (913) 2,803 3,644
Corporate 730 548 (1,153)
---------- ---------- ----------
Total $ 96,691 $ 112,935 $ 136,517
========== ========== ==========
Information about the geographic areas in which we conduct
business is summarized below (in thousands). Operating revenues
for foreign countries include revenues for (i) shipments with an
origin or destination in that country and (ii) other services
provided in that country. If both the origin and destination are
in a foreign country, the revenues are attributed to the country
of origin.
Revenues
--------
2009 2008 2007
---------- ---------- ----------
United States $1,509,560 $1,951,222 $1,855,686
---------- ---------- ----------
Foreign countries
Mexico 84,441 142,860 160,988
Other 72,469 71,517 54,513
---------- ---------- ----------
Total foreign countries 156,910 214,377 215,501
---------- ---------- ----------
Total $1,666,470 $2,165,599 $2,071,187
========== ========== ==========
Long-lived Assets
-----------------
2009 2008 2007
---------- ---------- ----------
United States $ 853,802 $ 903,506 $ 935,883
---------- ---------- ----------
Foreign countries
Mexico 17,871 22,853 35,776
Other 229 280 282
---------- ---------- ----------
Total foreign countries 18,100 23,133 36,058
---------- ---------- ----------
Total $ 871,902 $ 926,639 $ 971,941
========== ========== ==========
55
We generate substantially all of our revenues within the
United States or from North American shipments with origins or
destinations in the United States. No customer generated more
than 10% of our total revenues for 2009, 2008 and 2007.
(9) SUBSEQUENT EVENTS
We performed an evaluation of Company activity and have
concluded that as of the date these financial statements were
issued there are no material subsequent events requiring
additional disclosure or recognition in these financial
statements.
(10) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share amounts)
First Quarter Second Quarter Third Quarter Fourth Quarter
---------------------------------------------------------------
2009:
Operating revenues $ 394,508 $ 403,051 $ 429,273 $ 439,638
Operating income 11,256 22,010 32,805 30,620
Net income 6,896 12,692 18,992 18,004
Basic earnings per share .10 .18 .26 .25
Diluted earnings per share .10 .18 .26 .25
First Quarter Second Quarter Third Quarter Fourth Quarter
---------------------------------------------------------------
2008:
Operating revenues $ 512,787 $ 578,181 $ 584,057 $ 490,574
Operating income 13,418 30,868 38,022 30,627
Net income 8,375 18,112 22,446 18,647
Basic earnings per share .12 .26 .32 .26
Diluted earnings per share .12 .25 .31 .26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
No disclosure under this item was required within the two
most recent fiscal years ended December 31, 2009, or any
subsequent period, involving a change of accountants or
disagreements on accounting and financial disclosure.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, we
carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures,
as defined in Exchange Act Rule 15d-15(e). Our disclosure
controls and procedures are designed to provide reasonable
assurance of achieving the desired control objectives. Based
upon that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and
procedures are effective in enabling us to record, process,
summarize and report information required to be included in our
periodic filings with the SEC within the required time period.
We have confidence in our internal controls and procedures.
Nevertheless, our management, including the Chief Executive
Officer and Chief Financial Officer, does not expect that the
internal controls or disclosure procedures and controls will
prevent all errors or intentional fraud. An internal control
system, no matter how well conceived and operated, can provide
56
only reasonable, not absolute, assurance that the objectives of
such internal controls are met. Further, the design of an
internal control system must reflect that resource constraints
exist, and the benefits of controls must be evaluated relative to
their costs. Because of the inherent limitations in all internal
control systems, no evaluation of controls can provide absolute
assurance that all control issues, misstatements and instances of
fraud, if any, have been prevented or detected.
Management's Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining
adequate internal control over our financial reporting. Internal
control over financial reporting is a process designed to provide
reasonable assurance to our management and Board of Directors
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with U.S. generally accepted accounting principles.
Internal control over financial reporting includes (i)
maintaining records that in reasonable detail accurately and
fairly reflect our transactions; (ii) providing reasonable
assurance that transactions are recorded as necessary for
preparation of our financial statements; (iii) providing
reasonable assurance that receipts and expenditures of company
assets are made in accordance with management authorization; and
(iv) providing reasonable assurance that unauthorized
acquisition, use or disposition of company assets that could have
a material effect on our financial statements would be prevented
or detected on a timely basis.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because (i) changes in conditions may occur or (ii)
the degree of compliance with the policies or procedures may
deteriorate.
Management assessed the effectiveness of our internal
control over financial reporting as of December 31, 2009. This
assessment is based on the criteria for effective internal
control described in Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on its assessment, management
concluded that our internal control over financial reporting was
effective as of December 31, 2009.
Management has engaged KPMG LLP ("KPMG"), the independent
registered public accounting firm that audited the consolidated
financial statements included in this Form 10-K, to attest to and
report on the effectiveness of our internal control over
financial reporting. KPMG's report is included herein.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Werner Enterprises, Inc.:
We have audited Werner Enterprises, Inc.'s internal control
over financial reporting as of December 31, 2009, based on
criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Werner Enterprises, Inc.'s
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting,
included in the accompanying Management's Report on Internal
Control over Financial Reporting. Our responsibility is to
express an opinion on the Company's internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of
the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the
57
design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that,
in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and
that receipts and expenditures of the company are being made only
in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use,
or disposition of the company's assets that could have a material
effect on the financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Werner Enterprises, Inc. maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2009 based on criteria established
in Internal Control - Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of
the Public Company Accounting Oversight Board (United States),
the consolidated balance sheets of Werner Enterprises, Inc. and
subsidiaries as of December 31, 2009 and 2008, and the related
consolidated statements of income, stockholders' equity and
comprehensive income, and cash flows for each of the years in the
three-year period ended December 31, 2009, and our report dated
February 26, 2010, expressed an unqualified opinion on those
consolidated financial statements.
KPMG LLP
Omaha, Nebraska
February 26, 2010
Changes in Internal Control over Financial Reporting
Management, under the supervision and with the participation
of our Chief Executive Officer and Chief Financial Officer,
concluded that no changes in our internal control over financial
reporting occurred during the quarter ended December 31, 2009
that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
During fourth quarter 2009, no information was required to
be disclosed in a report on Form 8-K, but not reported.
PART III
Certain information required by Part III is omitted from
this Form 10-K because we will file a definitive proxy statement
pursuant to Regulation 14A (the "Proxy Statement") not later than
120 days after the end of the fiscal year covered by this Form
58
10-K, and certain information included therein is incorporated
herein by reference. Only those sections of the Proxy Statement
which specifically address the items set forth herein are
incorporated by reference.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item, with the exception of
the Code of Corporate Conduct discussed below, is incorporated
herein by reference to our Proxy Statement.
Code of Corporate Conduct
We adopted our Code of Corporate Conduct, which is our code
of ethics, that applies to our principal executive officer,
principal financial officer, principal accounting
officer/controller and all other officers, employees and
directors. The Code of Corporate Conduct is available on our
website, www.werner.com under the "Investor Information" tab. We
will post on our website any amendment to, or waiver from, any
provision of our Code of Corporate Conduct that applies to our
Chief Executive Officer, Chief Financial Officer or Controller
(if any) within four business days of any such event.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein
by reference to our Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this Item, with the exception of
the equity compensation plan information presented below, is
incorporated herein by reference to our Proxy Statement.
Equity Compensation Plan Information
The following table summarizes, as of December 31, 2009,
information about compensation plans under which our equity
securities are authorized for issuance:
Number of Securities
Remaining Available for
Future Issuance under
Number of Securities to Weighted-Average Equity Compensation
be Issued upon Exercise Exercise Price of Plans (Excluding
of Outstanding Options, Outstanding Options, Securities Reflected in
Warrants and Rights Warrants and Rights Column (a))
Plan Category (a) (b) (c)
------------- ----------------------- -------------------- -----------------------
Equity compensation
plans approved by
stockholders 2,340,683 (1) $14.95 (2) 8,307,657
(1) Includes 271,500 shares to be issued upon vesting of
outstanding restricted stock awards.
(2) The weighted-average exercise price does not take into
account the shares to be issued upon vesting of outstanding
restricted stock awards, which have no exercise price.
We do not have any equity compensation plans that were not
approved by stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
The information required by this Item is incorporated herein
by reference to our Proxy Statement.
59
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item is incorporated herein
by reference to our Proxy Statement.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Financial Statements and Schedules.
(1) Financial Statements: See Part II, Item 8 hereof.
Page
----
Report of Independent Registered Public Accounting Firm 37
Consolidated Statements of Income 38
Consolidated Balance Sheets 39
Consolidated Statements of Cash Flows 40
Consolidated Statements of Stockholders' Equity and
Comprehensive Income 41
Notes to Consolidated Financial Statements 42
(2) Financial Statement Schedules: The consolidated
financial statement schedule set forth under the following
caption is included herein. The page reference is to the
consecutively numbered pages of this report on Form 10-K.
Page
----
Schedule II - Valuation and Qualifying Accounts 62
Schedules not listed above have been omitted because
they are not applicable or are not required or the information
required to be set forth therein is included in the Consolidated
Financial Statements or Notes thereto.
(3) Exhibits: The response to this portion of Item 15 is
submitted as a separate section of this Form 10-K (see Exhibit
Index on page 63).
60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on the 26th day of February, 2010.
WERNER ENTERPRISES, INC.
By: /s/ Gregory L. Werner
-----------------------------
Gregory L. Werner
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signature Position Date
--------- -------- ----
/s/ Clarence L. Werner Chairman and Director February 26, 2010
------------------------
Clarence L. Werner
/s/ Gary L. Werner Vice Chairman and February 26, 2010
------------------------ Director
Gary L. Werner
/s/ Gregory L. Werner President, Chief Executive Officer February 26, 2010
------------------------ and Director (Principal Executive Officer)
Gregory L. Werner
/s/ Gerald H. Timmerman Director February 26, 2010
------------------------
Gerald H. Timmerman
/s/ Michael L. Steinbach Director February 26, 2010
------------------------
Michael L. Steinbach
/s/ Kenneth M. Bird Director February 26, 2010
------------------------
Kenneth M. Bird
/s/ Patrick J. Jung Director February 26, 2010
------------------------
Patrick J. Jung
/s/ Duane K. Sather Director February 26, 2010
------------------------
Duane K. Sather
/s/ John J. Steele Executive Vice President, February 26, 2010
------------------------ Treasurer and Chief Financial
John J. Steele Officer (Principal Financial Officer)
/s/ James L. Johnson Senior Vice President, Controller February 26, 2010
------------------------ and Corporate Secretary (Principal
James L. Johnson Accounting Officer)
61
SCHEDULE II
WERNER ENTERPRISES, INC.
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Balance at Charged to Write-off Balance at
Beginning of Costs and of Doubtful End of
Period Expenses Accounts Period
------------ ---------- ----------- ----------
Year ended December 31, 2009:
Allowance for doubtful accounts $ 9,555 $899 $ 1,287 $ 9,167
======= ==== ======= =======
Year ended December 31, 2008:
Allowance for doubtful accounts $ 9,765 $864 $ 1,074 $ 9,555
======= ==== ======= =======
Year ended December 31, 2007:
Allowance for doubtful accounts $ 9,417 $552 $ 204 $ 9,765
======= ==== ======= =======
See report of independent registered public accounting firm.
62
EXHIBIT INDEX
Exhibit
Number Description Page Number or Incorporated by Reference to
------- ----------- -------------------------------------------
3(i) Restated Articles of Incorporation Exhibit 3(i) to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2007
3(ii) Revised and Restated By-Laws Exhibit 3(ii) to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2007
10.1 Werner Enterprises, Inc. Equity Plan Exhibit 99.1 to the Company's Current Report on
Form 8-K dated May 8, 2007
10.2 Non-Employee Director Compensation Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30,
2007
10.3 The Executive Nonqualified Excess Plan Exhibit 10.1 to the Company's Quarterly Report
of Werner Enterprises, Inc., as amended on Form 10-Q for the quarter ended September 30,
2009
10.4 Named Executive Officer Compensation Filed herewith
10.5 Lease Agreement, as amended February 8, Exhibit 10.5 to the Company's Annual Report on
2007, between the Company and Clarence Form 10-K for the year ended December 31, 2006
L. Werner, Trustee of the Clarence L.
Werner Revocable Trust
10.6 License Agreement, dated February 8, Exhibit 10.6 to the Company's Annual Report on
2007 between the Company and Clarence Form 10-K for the year ended December 31, 2006
L. Werner, Trustee of the Clarence L.
Werner Revocable Trust
10.7 Form of Notice of Grant of Nonqualified Exhibit 10.1 to the Company's Current Report on
Stock Option Form 8-K dated November 29, 2007
10.8 Form of Restricted Stock Award Exhibit 10.1 to the Company's Current Report on
Agreement for recipients under the Werner Form 8-K dated December 1, 2009
Enterprises, Inc. Equity Plan
11 Statement Re: Computation of Per Share See Note 1 (Common Stock and Earnings Per
Earnings Share) in the Notes to Consolidated Financial
Statements under Item 8
21 Subsidiaries of the Registrant Filed herewith
23.1 Consent of KPMG LLP Filed herewith
31.1 Rule 13a-14(a)/15d-14(a) Certification Filed herewith
31.2 Rule 13a-14(a)/15d-14(a) Certification Filed herewith
32.1 Section 1350 Certification Filed herewith
32.2 Section 1350 Certification Filed herewith
6
