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, 2006
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:
Title of Class
--------------
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 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, or a non-accelerated
filer (as defined in Rule 12b-2 of the Act).
Large accelerated filer X Accelerated filer Non-accelerated filer
--- --- ---
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, 2006, the last business day of the
Registrant's most recently completed second fiscal quarter, was
approximately $1.025 billion (based on the closing sale price of
the Registrant's Common Stock on that date as reported by
Nasdaq).
As of February 9, 2007, 75,350,132 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 8, 2007, are incorporated
in Part III of this report.
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business 1
Item 1A. Risk Factors 7
Item 1B. Unresolved Staff Comments 10
Item 2. Properties 10
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
PART II
Item 5. Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities 12
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 7A. Quantitative and Qualitative Disclosures about
Market Risk 29
Item 8. Financial Statements and Supplementary Data 31
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 50
Item 9A. Controls and Procedures 50
Item 9B. Other Information 52
PART III
Item 10. Directors, Executive Officers and Corporate Governance 54
Item 11. Executive Compensation 54
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 54
Item 13. Certain Relationships and Related Transactions, and
Director Independence 54
Item 14. Principal Accounting Fees and Services 55
PART IV
Item 15. Exhibits and Financial Statement Schedules 55
PART I
ITEM 1. BUSINESS
General
Werner Enterprises, Inc. ("Werner" or the "Company") is a
transportation and logistics company engaged primarily in hauling
truckload shipments of general commodities in both interstate and
intrastate commerce as well as providing logistics services
through its Value Added Services ("VAS") division. Werner is one
of the five largest truckload carriers in the United States based
on total operating revenues and maintains its headquarters in
Omaha, Nebraska, near the geographic center of its truckload
service area. Werner was founded in 1956 by Chairman,
Clarence L. Werner, who started the business with one truck at
the age of 19 and was incorporated in the state of Nebraska on
September 14, 1982. Werner completed its initial public offering
in June 1986 with a fleet of 632 trucks as of February 28, 1986.
Werner ended 2006 with a fleet of 9,000 trucks, of which 8,180
were owned by the Company and 820 were owned and operated by
owner-operators (independent contractors).
The Company has two reportable segments - Truckload
Transportation Services and Value Added Services. Financial
information regarding these segments and the Company's geographic
areas can be found in the Notes to Consolidated Financial
Statements under Item 8 of this Form 10-K. The Company's
truckload fleets operate throughout the 48 contiguous states
pursuant to operating authority, both common and contract,
granted by the United States Department of Transportation ("DOT")
and pursuant to intrastate authority granted by various states.
The Company also has authority to operate in the ten provinces of
Canada and provides through trailer service in and out of Mexico.
The principal types of freight transported by the Company include
retail store merchandise, consumer products, manufactured
products, and grocery products. The Company's emphasis is to
transport consumer nondurable products that ship more
consistently throughout the year and throughout changes in the
economy.
The Company's VAS division is a non-asset based
transportation and logistics provider. VAS includes freight
management (single-source logistics), truck brokerage,
intermodal, and international freight forwarding. In July 2006,
the Company formed Werner Global Logistics U.S., LLC ("WGL"), a
separate company that operates within the VAS segment, and
through its subsidiaries established its Wholly Owned Foreign
Entity ("WOFE") headquartered in Shanghai, China. WGL and its
subsidiaries obtained business licenses to operate as an Ocean
Transport Intermediary (NVOCC and Ocean Freight Forwarder), U.S.
Customs Broker, Class A Freight Forwarder in China, and an
Indirect Air Carrier.
Marketing and Operations
Werner's business philosophy is to provide superior on-time
service to its customers at a competitive cost. To accomplish
this, Werner operates premium, modern tractors and trailers.
This equipment has a lower frequency of breakdowns and helps
attract and retain qualified drivers. Werner has continually
developed technology to improve service to customers and improve
retention of drivers. Werner focuses on shippers that value the
broad geographic coverage, diversified truck and logistics
service offerings, equipment capacity, technology, customized
services, and flexibility available from a large, financially-
stable carrier. These shippers are generally less sensitive to
rate levels, preferring to have their freight handled by a few
core carriers with whom they can establish service-based, long-
term relationships.
Werner operates in the truckload segment of the trucking
industry. Within the truckload segment, Werner provides
specialized services to customers based on their trailer needs
(van, flatbed, temperature-controlled), geographic area (medium
to long haul throughout the 48 contiguous states, Mexico, and
Canada; regional), time-sensitive nature of shipments
(expedited), or conversion of their private fleet to Werner
(dedicated). Trucking revenues accounted for 86% of total
revenues, and non-trucking and other operating revenues,
primarily brokerage revenues, accounted for 14% of total revenues
1
in 2006. Werner's VAS division manages the transportation and
logistics requirements for individual customers, providing
customers with additional sources of capacity and access to
alternative modes of transportation. The VAS portfolio includes
freight management, truck brokerage, intermodal, load/mode and
network optimization, transloading, and other services. The new
product offering in China includes site selection analysis,
vendor and purchase order management, full container load
consolidation and warehousing, as well as door-to-door freight
forwarding and customs brokerage. Value Added Services is a non-
asset-based business that is highly dependent on qualified
employees, information systems, and the services of qualified
third-party capacity providers. Compared to trucking operations
which require a significant capital equipment investment, VAS's
operating income percentage is lower and return on assets is
substantially higher. Revenues generated by services accounting
for more than 10% of consolidated revenues, consisting of
Truckload Transportation Services and Value Added Services, for
the last three years can be found under Item 7 of this Form 10-K.
Werner has a diversified freight base but is dependent
on a small group of customers for a significant portion of its
freight. During 2006, the Company's largest 5, 10, 25, and 50
customers comprised 26%, 37%, 58%, and 72% of the Company's
revenues, respectively. The Company's largest customer, Dollar
General, accounted for 11% of the Company's revenues in 2006, of
which approximately two-thirds is dedicated fleet business and
the remainder is primarily VAS. No other customer exceeded 5% of
revenues in 2006. By industry group, the Company's top 50
customers consist of 46% retail and consumer products, 25%
grocery products, 20% manufacturing/industrial, and 9% logistics
and other. Many of our non-dedicated customer contracts are
cancelable on 30 days notice, which is standard in the trucking
industry. Most dedicated customer contracts are one to three
years in length, and are cancelable on 90 days notice following
the expiration of the initial term of the contract.
Virtually all of Werner's company and owner-operator
tractors are equipped with satellite communications devices
manufactured by Qualcomm that enable the Company and drivers to
conduct two-way communication using standardized and freeform
messages. This satellite technology, installed in trucks
beginning in 1992, also enables the Company to plan and monitor
the progress of shipments. The Company obtains 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, Werner has developed advanced application systems to
improve customer service and driver service. Examples of such
application systems include (1) the Company's proprietary
Paperless Log System used to electronically preplan the
assignment of shipments to drivers based on real-time available
driving hours and to automatically keep track of truck movement
and drivers' hours of service, (2) software which preplans
shipments that can be swapped by drivers enroute to meet driver
home time needs, without compromising on-time delivery schedules,
(3) automated "possible late load" tracking which informs the
operations department of trucks that may be operating behind
schedule, thereby allowing the Company to take preventive
measures to avoid a late delivery, and (4) automated engine
diagnostics to continually monitor mechanical fault tolerances.
In June 1998, Werner became the first, and only, trucking company
in the United States to receive authorization from the DOT, under
a pilot program, to use a global positioning system based
paperless log system in place of the paper logbooks traditionally
used by truck drivers to track their daily work activities. On
September 21, 2004, the DOT's Federal Motor Carrier Safety
Administration ("FMCSA") agency approved the Company's exemption
for its paperless log system that moves this exemption from the
FMCSA-approved pilot program to permanent status. The exemption
is to be renewed every two years. On September 7, 2006, the
FMCSA announced in the Federal Register its decision to renew for
two additional years the Company's exemption from the FMCSA's
requirement that drivers of commercial motor vehicles operating
in interstate commerce prepare handwritten records of duty status
(logs).
Seasonality
In the trucking industry, revenues generally show a seasonal
pattern as some customers reduce shipments during and after the
winter holiday season. The Company's operating expenses have
historically been higher in the winter months due primarily to
decreased fuel efficiency, increased maintenance costs of revenue
equipment in colder weather, and increased insurance and claims
2
costs due to adverse winter weather conditions. The Company
attempts to minimize the impact of seasonality through its
marketing program that seeks additional freight from certain
customers during traditionally slower shipping periods. Revenue
can also be affected by bad weather and holidays, since revenue
is directly related to available working days of shippers.
Employees and Owner-Operator Drivers
As of December 31, 2006, the Company employed 11,198
drivers, 1,038 mechanics and maintenance personnel, 1,796 office
personnel for the trucking operation, and 294 personnel for the
VAS and other non-trucking operations. The Company also had 820
contracts with owner-operators for services that provide both a
tractor and a qualified driver or drivers. None of the Company's
U.S. or Canadian employees are represented by a collective
bargaining unit, and the Company considers relations with all of
its employees to be good.
The Company recognizes that its professional driver
workforce is one of its most valuable assets. Most of Werner's
drivers are compensated based upon miles driven. For company-
employed drivers, the rate per mile generally increases with the
drivers' length of service. Additional compensation may be earned
through a mileage bonus, an annual achievement bonus, and for
extra work associated with their job (loading and unloading,
extra stops, and shorter mileage trips, for example).
At times, there are shortages of drivers in the trucking
industry. The number of qualified drivers in the industry has
not kept pace with freight growth because of changes in the
demographic composition of the workforce, alternative jobs to
truck driving which become available in an improving economy, and
individual drivers' desire to be home more often. In recent
months, the driver recruiting and retention market remained
challenging, but was less difficult than the extremely
challenging driver market experienced earlier in the year. The
Company anticipates that the competition for drivers will
continue to be very high and cannot predict whether it will
experience shortages in the future. If such a shortage were to
occur and increases in driver pay rates became necessary to
attract and retain drivers, the Company's results of operations
would be negatively impacted to the extent that corresponding
freight rate increases were not obtained.
The Company also recognizes that carefully selected owner-
operators complement its company-employed drivers. Owner-
operators are independent contractors that supply their own
tractor and driver and are responsible for their operating
expenses. Because owner-operators provide their own tractors,
less financial capital is required from the Company. Also, owner-
operators provide the Company with another source of drivers to
support its fleet. The Company intends to continue its emphasis
on recruiting owner-operators, as well as company drivers.
However, it has continued to be difficult for the Company and the
industry to recruit and retain owner-operators over the past
several years due to factors including high fuel prices,
tightening of equipment financing standards, and declining values
for older used trucks.
Revenue Equipment
As of December 31, 2006, Werner operated 8,180 company
tractors and had contracts for 820 tractors owned by owner-
operators. The company tractors were manufactured by
Freightliner, a subsidiary of DaimlerChrysler, and Peterbilt and
Kenworth, divisions of PACCAR. This standardization of the
company tractor fleet decreases downtime by simplifying
maintenance. The Company adheres to a comprehensive maintenance
program for both tractors and trailers. Owner-operator tractors
are inspected prior to acceptance by the Company for compliance
with operational and safety requirements of the Company and the
DOT. These tractors are then periodically inspected, similar to
company tractors, to monitor continued compliance. The vehicle
speed of company-owned trucks is regulated to a maximum of 65
miles per hour to improve safety and fuel efficiency.
The Company operated 25,200 trailers at December 31, 2006:
23,340 dry vans; 599 flatbeds; and 1,261 temperature-controlled.
Most of the Company's trailers were manufactured by Wabash
National Corporation. As of December 31, 2006, 98% of the
3
Company's fleet of dry van trailers consisted of 53-foot
trailers, and 99% consisted of aluminum plate or composite
(DuraPlate) trailers. Other trailer lengths such as 48-foot and
57-foot are also provided by the Company to meet the specialized
needs of certain customers.
Beginning in January 2007, all newly manufactured truck
engines must comply with a new set of more stringent engine
emission standards mandated by the Environmental Protection
Agency ("EPA"). Trucks manufactured with these new engines are
expected to cost $5,000-$10,000 more per truck, have slightly
lower mpg, and higher maintenance costs. To delay the cost
impact of these new emission standards, the Company kept its
truck fleet new relative to historical company and industry
standards. The average age of the Company's truck fleet at
December 31, 2006 is 1.34 years. A new set of more stringent
emissions standards mandated by the EPA will become effective for
newly manufactured trucks beginning in January 2010. The
Company's capital expenditures for new trucks are expected to be
much lower in 2007.
Fuel
The Company purchases approximately 95% of its fuel through
a network of fuel stops throughout the United States. The
Company has negotiated discounted pricing based on certain volume
commitments with these fuel stops. Bulk fueling facilities are
maintained at seven of the Company's terminals and four dedicated
fleet locations.
Shortages of fuel, increases in fuel prices, or rationing of
petroleum products can have a materially adverse effect on the
operations and profitability of the Company. The Company's
customer fuel surcharge reimbursement programs have historically
enabled the Company to recover from its customers a significant
portion of the higher fuel prices compared to normalized average
fuel prices. These fuel surcharges, which automatically adjust
depending on the Department of Energy ("DOE") weekly retail on-
highway diesel fuel prices, enable the Company to recoup much of
the higher cost of fuel when prices increase except for miles not
billable to customers, out-of-route miles, and truck engine
idling. During 2006, the Company's fuel expense and
reimbursements to owner-operator drivers for the higher cost of
fuel resulted in an additional cost of $54.2 million, while the
Company collected an additional $51.2 million in fuel surcharge
revenues to offset most of the fuel cost increase. The Company
cannot predict whether fuel prices will increase or will decrease
in the future or the extent to which fuel surcharges will be
collected to offset such increases. As of December 31, 2006, the
Company had no derivative financial instruments to reduce its
exposure to fuel price fluctuations.
During third quarter 2006, truckload carriers transitioned a
substantial portion of their diesel fuel consumption from low
sulfur diesel fuel to ultra-low sulfur diesel fuel ("ULSD") fuel,
as fuel refiners were required to meet the EPA-mandated 80% ULSD
threshold by the transition date of October 15, 2006.
Preliminary estimates were that ULSD would result in a 1-3%
degradation in miles per gallon ("mpg") for all trucks, due to
the lower energy content (btu) of ULSD. Based on the Company's
fuel mpg experience to date, these preliminary mpg degradation
estimates appear to be accurate.
The Company maintains aboveground and underground fuel
storage tanks at many of its terminals. Leakage or damage to
these facilities could expose the Company to environmental clean-
up costs. The tanks are routinely inspected to help prevent and
detect such problems.
Regulation
The Company is a motor carrier regulated by the DOT, the
Federal and Provincial Transportation Departments in Canada, and
the Secretary of Communication and Transportation ("SCT") in
Mexico. The DOT generally governs matters such as safety
requirements, registration to engage in motor carrier operations,
accounting systems, certain mergers, consolidations,
acquisitions, and periodic financial reporting. The Company
currently has a satisfactory DOT safety rating, which is the
highest available rating. A conditional or unsatisfactory DOT
safety rating could have an adverse effect on the Company, as
4
some of the Company's contracts with customers require a
satisfactory rating. Such matters as weight and dimensions of
equipment are also subject to federal, state, and international
regulations.
Effective October 1, 2005, all truckload carriers became
subject to revised hours of service ("HOS") regulations. The
most significant change for the Company from the previous
regulations is that drivers using the sleeper berth provision
must take at least eight consecutive hours in the sleeper berth
during their ten hours off-duty. Previously, drivers were
allowed to split their ten hour off-duty time in the sleeper
berth into two periods, provided neither period was less than two
hours. This more restrictive sleeper berth provision is
requiring some drivers to plan their time better and had a
negative impact on mileage productivity. The greatest impact of
these HOS changes was lower mileage productivity for those
customers with multiple-stop shipments or those shipments with
pickup or delivery delays. The Owner-Operator Independent
Drivers Association ("OOIDA") filed a petition for review of the
current HOS regulations with the U.S. Court of Appeals on January
23, 2006. On December 4, 2006, a three-judge panel heard
arguments from the OOIDA. The appeals court is expected to issue
its ruling in February or March of 2007.
On January 18, 2007, the FMCSA published a Notice of
Proposed Rulemaking ("NPRM") in the Federal Register on the use
of Electronic On-Board Recorders ("EOBRs") by the trucking
industry for compliance with HOS rules. The intent of this
proposed rule is to improve highway safety by fostering
development of new EOBR technology for HOS compliance,
encouraging its use by motor carriers through incentives, and
requiring its use by operators with serious and continuing HOS
compliance problems. Comments on the NPRM must be received by
April 18, 2007. Over eight years ago, the Company became the
first, and only, trucking company in the United States to receive
authorization from the DOT to use a global positioning system
based paperless log system in place of the paper logbooks
traditionally used by truck drivers to track their daily work
activities. While the Company does not believe the rule, as
proposed, would have a significant effect on its operations and
profitability, it will continue to monitor future developments.
The Company has unlimited authority to carry general
commodities in interstate commerce throughout the 48 contiguous
states. The Company has 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 rates, routes, or service of motor carriers 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 it did not previously have
intrastate authority, it must, in most cases, still apply for
authority.
Over the course of 2006, WGL and its subsidiaries obtained
business licenses to operate as an Ocean Transport Intermediary
(NVOCC and Ocean Freight Forwarder), U.S. Customs Broker, and
Class A Freight Forwarder in China. In addition, WGL recently
entered into the air freight forwarding business as a
Transportation Safety Administration ("TSA") approved Indirect
Air Carrier.
With respect to the Company's planned activities in the air
transportation industry in the United States, it is subject to
regulation by the TSA of the Department of Homeland Security as
an indirect air carrier. WGL has made application for a license
as an air freight forwarder by the International Air Transport
Association ("IATA") and each office in a foreign location will
be applying for an IATA license in their respective countries.
IATA is a voluntary association of airlines which prescribes
certain operating procedures for air freight forwarders acting as
agents for its members. The majority of the Company's air
freight forwarding business is expected to be conducted with
airlines which are IATA members.
The Company is licensed as a customs broker by Customs and
Border Protection ("CBP") of the Department of Homeland Security
in each U.S. customs district in which it does business. All
United States customs brokers are required to maintain prescribed
records and are subject to periodic audits by CBP. In other
jurisdictions in which the Company performs clearance services,
the Company is licensed by the appropriate governmental
authority.
5
The Company is registered as an Ocean Transportation
Intermediary by the Federal Maritime Commission ("FMC"). The FMC
has established certain qualifications for shipping agents,
including certain surety bonding requirements. The FMC also is
responsible for the economic regulation of Non-vessel Operating
Common Carrier ("NVOCC") activity originating or terminating in
the United States. To comply with these economic regulations,
vessel operators and NVOCCs are required to file tariffs
electronically which establish the rates to be charged for the
movement of specified commodities into and out of the United
States. The FMC has the power to enforce these regulations by
assessing penalties.
The Company's operations are subject to various federal,
state, and local environmental laws and regulations, implemented
principally by the EPA and similar state regulatory agencies,
governing the management of hazardous wastes, other discharge of
pollutants into the air and surface and underground waters, and
the disposal of certain substances. The Company does not believe
that compliance with these regulations has a material effect on
its capital expenditures, earnings, and competitive position.
The implementation of various provisions of the North
American Free Trade Agreement ("NAFTA") may alter the competitive
environment for shipping into and out of Mexico. It is not
possible at this time to predict when and to what extent that
impact could be felt by companies transporting goods into and out
of Mexico. The Company does a substantial amount of business in
international freight shipments to and from the United States and
Mexico (see Note 8 "Segment Information" in the Notes to
Consolidated Financial Statements under Item 8 of this Form 10-K)
and is continuing to prepare for the various scenarios that may
finally result. The Company believes it is one of the five
largest truckload carriers in terms of the volume of freight
shipments to and from the United States and Mexico.
Competition
The trucking industry is highly competitive and includes
thousands of trucking companies. It is estimated that the annual
revenue of domestic trucking amounts to approximately $600
billion per year. The Company has a small but growing share
(estimated at approximately 1%) of the markets targeted by the
Company. The Company competes primarily with other truckload
carriers. Logistics companies, railroads, less-than-truckload
carriers, and private carriers also provide competition, but to a
lesser degree.
Competition for the freight transported by the Company is
based primarily on service and efficiency and, to some degree, on
freight rates alone. Few other truckload carriers have greater
financial resources, own more equipment, or carry a larger volume
of freight than the Company. The Company is 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 new 2007 emissions standards contributed
to excess truck capacity that partially disrupted the supply and
demand balance in the second half of 2006. The recent softness
in the housing and automotive sectors not principally served by
the Company caused carriers that depend on these freight markets
to more aggressively compete in other freight markets served by
the Company. Other demand-related factors that may have
contributed to lower freight demand in 2006 were inventory
tightening by some large retailers, some shippers shifting to
more intermodal intact container shipments for lower value
freight, and moderating economic growth. The softer freight
market and the softer truck sales market are making it more
difficult for marginal carriers to remain in business. As these
marginal carriers are facing significant funding requirements for
truck licensing in first quarter 2007, some trucks may not be
licensed which would tighten capacity. As a result of these
factors, the Company currently anticipates that the recent excess
truck capacity in the market will gradually reverse, and capacity
may begin to tighten as we move toward the fall peak season of
2007.
6
Internet Website
The Company maintains a website where additional information
concerning its business can be found. The address of that
website is www.werner.com. The Company makes available free of
charge on its Internet website its annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act as soon as reasonably
practicable after it electronically files or furnishes such
materials to the SEC. Information on the Company's website is not
incorporated by reference into this annual report on Form 10-K.
ITEM 1A. RISK FACTORS
The following risks and uncertainties may cause actual
results to differ materially from those anticipated in the
forward-looking statements included in this Form 10-K:
The Company's business is subject to overall economic conditions
that could have a material adverse effect on the results of
operations of the Company.
The Company is sensitive to changes in overall economic
conditions that impact customer shipping volumes. Beginning in
2003 and continuing throughout 2005, general economic
improvements led to improved freight demand. Factors that may
have contributed to lower freight demand in the second half of
2006 were inventory tightening by some large retailers, some
shippers shifting to more intermodal intact container shipments
for lower value freight, and moderating economic growth. Future
economic conditions that may affect the Company include
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 of the Company.
Fuel prices climbed steadily through the first eight months
of 2006, averaging 51 cents a gallon higher than the same period
of 2005. However, in the last four months of 2006, fuel costs
averaged 17 cents a gallon lower than the same period of 2005,
principally due to the temporary spike in fuel prices that
occurred in October 2005 after Hurricanes Katrina and Rita. Fuel
prices subsequently declined from these record levels in November
2005. Shortages of fuel, increases in fuel prices, or rationing
of petroleum products can have a materially adverse impact on the
operations and profitability of the Company. To the extent that
the Company cannot recover the higher cost of fuel through
customer fuel surcharges, the Company's financial results would
be negatively impacted.
Difficulty in recruiting and retaining drivers and owner-
operators could impact the Company's results of operations and
limit growth opportunities.
At times, there have been shortages of drivers in the
trucking industry. The market for recruiting and retaining
drivers has become more difficult over the last several years due
to changing workforce demographics and alternative job
opportunities in an improving economy. However, during fourth
quarter 2006, the driver recruiting and retention market was less
difficult than the extremely challenging market experienced
earlier in the year. During the last several years, it was more
difficult to recruit and retain owner-operator drivers due to
challenging operating conditions, including high fuel prices.
The Company anticipates that the competition for company drivers
and owner-operator drivers will continue to be high and cannot
predict whether it will experience shortages in the future. If a
shortage of company drivers and owner-operators were to occur and
increases in driver pay rates and owner-operator settlement rates
became necessary to attract drivers and owner-operators, the
Company's results of operations would be negatively impacted to
the extent that corresponding freight rate increases were not
obtained. Additionally, the Company expects the tight driver
market will make it very difficult to add truck capacity in the
near future.
The Company operates 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. The Company estimates the ten
largest truckload carriers have about 11% of the approximate $180
billion market targeted by the Company. This competition could
limit the Company's growth opportunities and reduce its
profitability. The Company competes primarily with other
7
truckload carriers. Logistics companies, railroads, less-than-
truckload carriers, and private carriers also provide
competition, but to a lesser degree. Competition for the freight
transported by the Company is based primarily on service and
efficiency and, to some degree, on freight rates alone.
The Company operates in a highly regulated industry. Changes in
existing regulations or violations of existing or future
regulations could have an adverse effect on the operations and
profitability of the Company.
The Company is regulated by the DOT, the Federal and
Provincial Transportation Departments in Canada, and the SCT in
Mexico and may become subject to new or more comprehensive
regulations mandated by these agencies. These regulatory
authorities establish broad powers, generally governing
activities such as authorization to engage in motor carrier
operations, safety, financial reporting, and other matters. In
July 2006, the Company formed WGL, a separate company that
operates within the VAS segment, and through its subsidiaries
established its WOFE headquartered in Shanghai, China. WGL and
its subsidiaries obtained business licenses to operate as an
Ocean Transport Intermediary (NVOCC and Ocean Freight Forwarder),
U.S. Customs Broker, Class A Freight Forwarder in China, and an
Indirect Air Carrier. WGL has applied for status as an endorsed
IATA member and other offices in foreign locations will be
applying for status in their respective countries.
On January 18, 2007, the FMCSA published an NPRM in the
Federal Register on the use of EOBRs by the trucking industry for
compliance with HOS rules. Comments on the NPRM must be received
by April 18, 2007. While the Company does not believe the rule,
as proposed, would have a significant effect on operations and
profitability, it will continue to monitor future developments.
Beginning in January 2007, all newly manufactured truck
engines must comply with a new set of more stringent engine
emission standards mandated by the EPA. The Company expects that
the engines produced under the 2007 standards will be less fuel-
efficient and have a higher cost than the current engines. A
third and final set of more stringent emissions standards
mandated by the EPA will become effective for newly manufactured
trucks beginning in January 2010.
The seasonal pattern generally experienced in the trucking
industry may affect the Company's periodic results during
traditionally slower shipping periods and during the winter
months.
The Company's business is modestly seasonal with peak
freight demand occurring generally in the months of September,
October, and November. After the Christmas holiday season,
during the remaining winter months, the Company's freight volumes
are typically lower as some customers have lower shipment levels.
The Company's operating expenses have historically been higher in
winter months primarily due to decreased fuel efficiency,
increased maintenance costs of revenue equipment in colder
weather, and increased insurance and claims costs due to adverse
winter weather conditions. The Company attempts to minimize the
impact of seasonality through its marketing program by seeking
additional freight from certain customers during traditionally
slower shipping periods. Bad weather, holidays, and the number of
business days during the period can also affect revenue, since
revenue is directly related to available working days of
shippers.
We depend on key customers, the loss of which or the financial
failure of which may have a material adverse effect on our
operations and profitability.
A significant portion of the Company's revenue is generated
from several key customers. During 2006, the Company's top 25,
10 and 5 customers accounted for 58%, 37% and 26% of revenues,
respectively. The Company's largest customer, Dollar General,
accounted for 11% of the Company's revenues in 2006. The Company
does not have long-term contractual relationships with many of
its key non-dedicated customers. The Company's contractual
relationships with its dedicated customers are typically one to
three years in length which are cancelable on 90 days notice
following the expiration of the initial term of the contract.
There can be no assurance that relationships with any key
customers will continue at the same levels. A reduction in or
termination of the Company's services by a key customer could
have a material adverse effect on the Company's business and
results of operations. The Company reviews the financial
condition of its customers prior to granting credit, monitors
changes in financial condition on an on-going basis, and reviews
individual past due balances and collection concerns. However
the financial failure of a customer may still have a negative
effect on the Company's results of operations.
8
The Company depends on the services of third-party capacity
providers, the availability of which could affect the Company's
profitability and limit growth in its VAS division.
The Company's VAS division is highly dependent on the
services of third-party capacity providers, including other
truckload carriers, less-than-truckload carriers, railroads,
ocean carriers, and airlines. Many of those providers face the
same economic challenges as the Company. The softer freight
market in the second half of 2006 made it somewhat easier to find
qualified truckload capacity to meet customer freight needs for
our truck brokerage operation. The Company currently anticipates
that the recent excess truck capacity in the market will
gradually reverse, and capacity may tighten as we move toward the
fall peak season of 2007. If the Company were unable to secure
the services of these third-party capacity providers, its results
of operations could be adversely affected.
Increases in the number of insurance claims, the cost per claim,
the costs of insurance premiums, or the availability of insurance
coverage could reduce the Company's earnings.
The Company self-insures for a significant portion of
liability resulting from personal injury, property damage, and
cargo loss as well as workers' compensation. This is
supplemented by premium insurance with licensed and highly-rated
insurance companies above the Company's self-insurance level for
each type of coverage. To the extent the Company were to
experience a significant increase in the number of claims, the
cost per claim, or the costs of insurance premiums for coverage
in excess of its retention amounts, the Company's operating
results would be negatively affected.
Decreased demand for the Company's used revenue equipment could
result in lower unit sales, lower resale values, and lower gains
on sales of assets.
The Company is sensitive to changes in used equipment
prices, especially tractors. The Company has been in the
business of selling its Company-owned trucks since 1992, when it
formed its wholly-owned subsidiary Fleet Truck Sales. The
Company has 18 Fleet Truck Sales locations throughout the United
States. During 2006, the Company began selling its oldest van
trailers that had reached the end of their depreciable life.
Gains on sales of assets are reflected as a reduction of other
operating expenses in the Company's income statement and amounted
to gains of $28.4 million in 2006, $11.0 million in 2005, and
$9.3 million in 2004.
The Company relies on the services of key personnel, the loss of
which could impact the future success of the Company.
The Company is highly dependent on the services of key
personnel including Clarence L. Werner, Gary L. Werner, and
Gregory L. Werner, and other executive officers. Although the
Company believes it has an experienced and highly qualified
management group, the loss of the services of these executive
officers could have a material adverse impact on the Company and
its future profitability.
Difficulty in obtaining goods and services from the Company's
vendors and suppliers could adversely affect the Company's
business.
The Company is dependent on its vendors and suppliers. The
Company believes it has good relationships with its vendors and
that it is generally able to obtain attractive pricing and other
terms from vendors and suppliers. If the Company fails to
maintain good relationships with its vendors and suppliers or if
its vendors and suppliers experience significant financial
problems, the Company could face difficulty in obtaining needed
goods and services because of interruptions of production or for
other reasons, which could adversely affect the Company's
business.
The Company uses its information systems extensively for day-to-
day operations, and service disruptions could have an adverse
impact on the Company's operations.
The efficient operation of the Company's business is highly
dependent on its information systems. Much of the Company's
software has been developed internally or by adapting purchased
software applications to the Company's needs. The Company has
purchased redundant computer hardware systems and has its own
off-site disaster recovery facility approximately ten miles from
the Company's offices to use in the event of a disaster. The
Company has taken these steps to reduce the risk of disruption to
its business operation if a disaster were to occur.
Caution should be taken not to place undue reliance on
forward-looking statements made herein, since the statements
speak only as of the date they are made. The Company undertakes
no obligation to publicly release any revisions to any forward-
9
looking statements contained herein to reflect events or
circumstances after the date of this report or to reflect the
occurrence of unanticipated events.
ITEM 1B. UNRESOLVED STAFF COMMENTS
The Company has received no written comments regarding its
periodic or current reports from the staff of the Securities and
Exchange Commission that were issued 180 days or more preceding
the end of its 2006 fiscal year and that remain unresolved.
ITEM 2. PROPERTIES
Werner's headquarters is located nearby Interstate 80 just
west of Omaha, Nebraska, on approximately 195 acres, 105 of which
are held for future expansion. The Company's headquarters office
building includes a computer center, drivers' lounge areas, a
drivers' orientation section, a cafeteria, and a Company store.
The Omaha headquarters also consists of a driver training
facility and equipment maintenance and repair facilities
containing a central parts warehouse, frame straightening and
alignment machine, truck and trailer wash areas, equipment safety
lanes, body shops for tractors and trailers, a paint booth, and a
reclaim center. The Company's headquarters facilities have
suitable space available to accommodate planned needs for the
next 3 to 5 years.
The Company also has several terminals throughout the United
States, consisting of office and/or maintenance facilities. The
Company's 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
Portland, Oregon Leased Office, maintenance Truckload
El Paso, Texas Leased Office, maintenance Truckload
Ardmore, Oklahoma Leased Maintenance Truckload, VAS
Indianola, Mississippi 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
The Company leases approximately 60 small sales and
brokerage offices and trailer parking yards in various locations
throughout the country; leases office space in Mexico, Canada,
and China; owns a 96-room motel located near the Company's
headquarters, a 71-room private lodging facility at the Company's
Dallas terminal, four low-income housing apartment complexes in
the Omaha area, and a warehouse facility which also houses a
cargo salvage store; and has 50% ownership in a 125,000
square-foot warehouse located near the Company's headquarters.
Currently, the Company has 18 locations in its Fleet Truck Sales
network. Fleet Truck Sales, a wholly owned subsidiary, is one of
the largest domestic class 8 truck sales entities in the U.S. and
sells the Company's used trucks and trailers.
10
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to routine litigation incidental to
its business, primarily involving claims for personal injury,
property damage, and workers' compensation incurred in the
transportation of freight. The Company has maintained a self-
insurance program with a qualified department of Risk Management
professionals since 1988. These employees manage the Company's
property damage, cargo, liability, and workers' compensation
claims. The Company's self-insurance reserves are reviewed by an
actuary every six months.
The Company had been responsible for liability claims up to
$500,000, plus administrative expenses, for each occurrence
involving personal injury or property damage since August 1,
1992. For the policy year beginning August 1, 2004, the Company
increased its self-insured retention ("SIR") amount to $2.0
million per occurrence. The Company is also responsible for
varying annual aggregate amounts of liability for claims in
excess of the self-insured retention. The following table
reflects the self-insured retention levels and aggregate amounts
of liability for personal injury and property damage claims since
August 1, 2003:
Primary Coverage
Coverage Period Primary Coverage SIR/deductible
------------------------------ ---------------- ----------------
August 1, 2003 - July 31, 2004 $3.0 million $0.5 million (1)
August 1, 2004 - July 31, 2005 $5.0 million $2.0 million (2)
August 1, 2005 - July 31, 2006 $5.0 million $2.0 million (3)
August 1, 2006 - July 31, 2007 $5.0 million $2.0 million (3)
(1) Subject to an additional $1.5 million aggregate in the $0.5
to $1.0 million layer, a $1.0 million aggregate in the $1.0 to
$2.0 million layer, no aggregate (i.e., fully insured) in the
$2.0 to $3.0 million layer, a $6.0 million aggregate 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 $3.0 million aggregate in the $2.0
to $3.0 million layer, no aggregate (i.e., 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.
(3) Subject to an additional $2.0 million aggregate in the $2.0
to $3.0 million layer, no aggregate (i.e., 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.
The Company has assumed responsibility for workers'
compensation up to $1.0 million per claim, subject to an
additional $1.0 million aggregate for claims between $1.0 million
and $2.0 million, maintains a $25.7 million bond, and has
obtained insurance for individual claims above $1.0 million.
The Company's primary insurance covers the range of
liability where the Company expects most claims to occur.
Liability claims substantially in excess of coverage amounts
listed in the table above, if they occur, are covered under
premium-based policies with reputable insurance companies to
coverage levels that management considers adequate. The Company
is also responsible for administrative expenses for each
occurrence involving personal injury or property damage. See
also Note 1 "Insurance and Claims Accruals" and Note 6
"Commitments and Contingencies" 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 2006, no matters were submitted
to a vote of security holders.
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Price Range of Common Stock
The Company's common stock trades on The NASDAQ Global
Select Market tier of The NASDAQ Stock Market under the symbol
"WERN". The following table sets forth for the quarters indicated
the high and low trade prices per share of the Company's common
stock quoted on The NASDAQ Global Select Market and the Company's
dividends declared per common share from January 1, 2005, through
December 31, 2006.
Dividends
Declared Per
High Low Common Share
-------- -------- ------------
2006
Quarter ended:
March 31 $ 21.84 $ 18.16 $.040
June 30 21.01 18.32 .045
September 30 20.89 17.16 .045
December 31 20.76 17.30 .045
Dividends
Declared Per
High Low Common Share
-------- -------- ------------
2005
Quarter ended:
March 31 $ 22.91 $ 19.25 $.035
June 30 19.91 17.68 .040
September 30 20.62 15.78 .040
December 31 20.96 16.34 .040
As of February 7, 2007, the Company's common stock was held
by 207 stockholders of record and approximately 6,900
stockholders through nominee or street name accounts with
brokers. The high and low trade prices per share of the
Company's common stock in The NASDAQ Global Select Market as of
February 7, 2007 were $19.27 and $19.05, respectively.
Dividend Policy
The Company has been paying cash dividends on its common
stock following each of its quarters since the first payment in
July 1987. The Company currently intends to continue payment of
dividends on a quarterly basis and does not currently anticipate
any restrictions on its future ability to pay such dividends.
However, no assurance can be given that dividends will be paid in
the future since they are dependent on earnings, the financial
condition of the Company, and other factors.
Equity Compensation Plan Information
For information on the Company's equity compensation plans,
please refer to Item 12, "Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder
Matters".
12
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 Securities Exchange Act of 1934,
and the report shall not be deemed to be incorporated by
reference into any prior or subsequent filing by the Company
under the Securities Act of 1933 or the Securities Exchange Act
of 1934 except to the extent the Company specifically requests
that such information be incorporated by reference or treated as
soliciting material.
[PERFORMANCE GRAPH APPEARS HERE]
12/31/01 12/31/02 12/31/03 12/31/04 12/31/05 12/31/06
-------- -------- -------- -------- -------- --------
Werner Enterprises, Inc. (WERN) $ 100.00 $ 118.62 $ 134.84 $ 157.58 $ 138.20 $ 123.71
Standard & Poor's 500 $ 100.00 $ 77.90 $ 100.24 $ 111.15 $ 116.61 $ 135.03
Nasdaq Trucking Group (SIC Code 42) $ 100.00 $ 119.14 $ 154.43 $ 213.28 $ 206.72 $ 200.59
Assuming the investment of $100.00 on December 31, 2001, and
reinvestment of all dividends, the graph above compares the
cumulative total stockholder return on the Company's Common Stock
for the last five fiscal years with the cumulative total return
of the Standard & Poor's 500 Market Index and an index of other
companies that are in the trucking industry (Nasdaq Trucking
Group - Standard Industrial Classification ("SIC") Code 42) over
the same period. The Company's stock price was $17.48 as of
December 29, 2006. This was used for purposes of calculating the
total return on the Company's Common Stock for the year ended
December 31, 2006.
Purchases of Equity Securities by the Issuer and Affiliated
Purchasers
On April 14, 2006, the Company's Board of Directors
approved an increase to its authorization for common stock
repurchases of 6,000,000 shares. The previous authorization,
announced on November 23, 2003, authorized the Company to
repurchase 3,965,838 shares and was completed in fourth quarter
2006. As of December 31, 2006, the Company had purchased 791,200
shares pursuant to the April 2006 authorization and had 5,208,800
shares remaining available for repurchase. The Company may
purchase shares from time to time depending on market, economic,
and other factors. The authorization will continue unless
withdrawn by the Board of Directors.
The following table summarizes the Company's common stock
repurchases during the fourth quarter of 2006 made pursuant to
this authorization. No shares were purchased during the quarter
other than through this program, and all purchases were made by
13
or on behalf of the Company and not by any "affiliated
purchaser", as defined by Rule 10b-18 of the Securities Exchange
Act of 1934.
Issuer Purchases of Equity Securities
Maximum Number
(or Approximate
Total Number of Dollar Value) of
Shares (or Units) Shares (or Units) that
Purchased as Part of May Yet Be
Total Number of 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, 2006 786,900 $18.12 786,900 5,921,900
November 1-30, 2006 713,100 $18.90 713,100 5,208,800
December 1-31, 2006 - - - 5,208,800
---------------------- --------------------
Total 1,500,000 $18.49 1,500,000 5,208,800
====================== ====================
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)
2006 2005 2004 2003 2002
---------- ---------- ---------- ---------- ----------
Operating revenues $2,080,555 $1,971,847 $1,678,043 $1,457,766 $1,341,456
Net income 98,643 98,534 87,310 73,727 61,627
Diluted earnings per share* 1.25 1.22 1.08 0.90 0.76
Cash dividends declared per share* .175 .155 .130 .090 .064
Return on average stockholders' equity (1) 11.3% 12.1% 11.9% 10.9% 10.0%
Return on average total assets (2) 7.1% 7.6% 7.5% 6.7% 6.1%
Operating ratio (consolidated) (3) 92.1% 91.7% 91.6% 91.9% 92.6%
Book value per share* (4) 11.55 10.86 9.76 8.90 8.12
Total assets 1,478,173 1,385,762 1,225,775 1,121,527 1,062,878
Total debt 100,000 60,000 - - 20,000
Stockholders' equity 870,351 862,451 773,169 709,111 647,643
*After giving retroactive effect for the September 30, 2003 five-
for-four stock split and the March 14, 2002 four-for-three stock
split (all years presented).
(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 and all debts were paid at the recorded amounts.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This report contains historical information, as well as
forward-looking statements that are based on information
currently available to the Company's management. The forward-
looking statements 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. The Company believes the
assumptions underlying these forward-looking statements are
reasonable based on information currently available; however, any
of the assumptions could be inaccurate, and therefore, actual
results may differ materially from those anticipated in the
forward-looking statements as a result of certain risks and
uncertainties. These risks include, but are not limited to,
14
those discussed in Item 1A "Risk Factors". Caution should be
taken not to place undue reliance on forward-looking statements
made herein, since the statements speak only as of the date they
are made. The Company undertakes no obligation to publicly
release any revisions to any forward-looking statements contained
herein to reflect events or circumstances after the date of this
report or to reflect the occurrence of unanticipated events.
Overview:
The Company operates in the truckload sector of the trucking
industry, with a focus on transporting consumer nondurable
products that ship more consistently throughout the year. The
Company's success depends on its ability to efficiently manage
its resources in the delivery of truckload transportation and
logistics services to its customers. Resource requirements vary
with customer demand, which may be subject to seasonal or general
economic conditions. The Company's ability to adapt to changes
in customer transportation requirements is a key element in
efficiently deploying resources and in making capital investments
in tractors and trailers. Although the Company's business volume
is not highly concentrated, the Company may also be affected by
the financial failure of its customers or a loss of a customer's
business from time-to-time.
Operating revenues consist of trucking revenues generated by
the six operating fleets in the Truckload Transportation Services
segment (dedicated, medium/long-haul van, regional short-haul,
expedited, flatbed, and temperature-controlled) and non-trucking
revenues generated primarily by the Company's VAS segment. The
Company's Truckload Transportation Services segment ("truckload
segment") also includes a small amount of non-trucking revenues
for the portion of shipments delivered to or from Mexico where it
utilizes a third-party capacity provider, and for a few of its
dedicated accounts where the services of third-party capacity
providers are used to meet customer capacity requirements. Non-
trucking revenues reported in the operating statistics table
include those revenues generated by the VAS segment, as well as
the non-trucking revenues generated by the truckload segment.
Trucking revenues accounted for 86% of total operating revenues
in 2006, and non-trucking and other operating revenues accounted
for 14%.
Trucking services typically generate revenues on a per-mile
basis. Other sources of trucking revenues include fuel
surcharges and accessorial revenues such as stop charges,
loading/unloading charges, and equipment detention charges.
Because fuel surcharge revenues fluctuate in response to changes
in the cost of fuel, these revenues are identified separately
within the operating statistics table and are excluded from the
statistics to provide a more meaningful comparison between
periods. Non-trucking revenues generated by a fleet whose
operations are part of the truckload segment are included in non-
trucking revenues in the operating statistics table so that the
revenue statistics in the table are calculated using only the
revenues generated by the company-owned and owner-operator
trucks. The key statistics used to evaluate trucking revenues,
excluding fuel surcharges, are average revenues per tractor per
week, the per-mile rates charged to customers, the average
monthly miles generated per tractor, the percentage of empty
miles, the average trip length, and the average number of
tractors in service. General economic conditions, seasonal
freight patterns in the trucking industry, and industry capacity
are key factors that impact these statistics.
The Company's most significant resource requirements are
company drivers, owner-operators, tractors, trailers, and related
costs of operating its equipment (such as fuel and related fuel
taxes, driver pay, insurance, and supplies and maintenance). The
Company has historically been successful mitigating its risk to
increases in fuel prices by recovering additional fuel surcharges
from its customers that recoup a majority of the increased fuel
costs; however, there is no assurance that current recovery
levels will continue in future periods. The Company's financial
results are also affected by availability of drivers and the
market for new and used revenue equipment. Because the Company
is self-insured for a significant portion of personal injury,
property damage, and cargo claims and for workers' compensation
benefits for its employees (supplemented by premium-based
coverage above certain dollar levels), financial results may also
be affected by driver safety, medical costs, weather, the legal
and regulatory environment, and the costs of insurance coverage
to protect against catastrophic losses.
15
A common industry measure used to evaluate the profitability
of the Company and its trucking operating fleets is the operating
ratio (operating expenses expressed as a percentage of operating
revenues). The most significant variable expenses that impact
the trucking operation are driver salaries and benefits, payments
to owner-operators (included in rent and purchased transportation
expense), fuel, fuel taxes (included in taxes and licenses
expense), supplies and maintenance, and insurance and claims.
Generally, these expenses vary based on the number of miles
generated. As such, the Company also evaluates these costs on a
per-mile basis to adjust for the impact on the percentage of
total operating revenues caused by changes in fuel surcharge
revenues, per-mile rates charged to customers, and non-trucking
revenues. As discussed further in the comparison of operating
results for 2006 to 2005, several industry-wide issues, including
volatile fuel prices and a challenging driver recruiting and
retention market, could cause costs to increase in future
periods. The Company's main fixed costs include depreciation
expense for tractors and trailers and equipment licensing fees
(included in taxes and licenses expense). Depreciation expense
has been affected by the new engine emission standards that
became effective in October 2002 for all newly purchased trucks,
which have increased truck purchase costs. In addition,
beginning in January 2007, a new set of more stringent engine
emissions standards mandated by the EPA became effective for all
newly manufactured trucks. The Company expects that the engines
produced under the 2007 standards will be less fuel-efficient and
have a higher cost than the current engines. The trucking
operations require substantial cash expenditures for the purchase
of tractors and trailers. In 2005 and 2006, the Company
accelerated its normal three-year replacement cycle for company-
owned tractors. These purchases were funded by net cash from
operations and financing available under the Company's existing
credit facilities, as management deemed necessary. Capital
expenditures for tractors in 2007 are expected to be
substantially lower.
Non-trucking services provided by the Company, primarily
through its VAS division, include freight management
(single-source logistics), truck brokerage, and intermodal, as
well as a newly expanded international product line, as discussed
further on page 19. Unlike the Company's trucking operations,
the non-trucking operations are less asset-intensive and are
instead dependent upon qualified employees, information systems,
and the services of qualified third-party capacity providers.
The most significant expense item related to these non-trucking
services is the cost of transportation paid by the Company to
third-party capacity providers, which is recorded as rent and
purchased transportation expense. Other expenses include
salaries, wages and benefits and computer hardware and software
depreciation. The Company evaluates the non-trucking operations
by reviewing the gross margin percentage (revenues less rent and
purchased transportation expenses expressed as a percentage of
revenues) and the operating income percentage. The operating
income percentage for the non-trucking business is lower than
those of the trucking operations, but the return on assets is
substantially higher.
16
Results of Operations
The following table sets forth certain industry data
regarding the freight revenues and operations of the Company for
the periods indicated.
2006 2005 2004 2003 2002
----------- ----------- ----------- ----------- -----------
Trucking revenues, net of
fuel surcharge (1) $ 1,502,827 $ 1,493,826 $ 1,378,705 $ 1,286,674 $ 1,215,266
Trucking fuel surcharge
revenues (1) 286,843 235,690 114,135 61,571 29,060
Non-trucking revenues,
including VAS (1) 277,181 230,863 175,490 100,916 89,450
Other operating revenues (1) 13,704 11,468 9,713 8,605 7,680
----------- ----------- ----------- ----------- -----------
Operating revenues (1) $ 2,080,555 $ 1,971,847 $ 1,678,043 $ 1,457,766 $ 1,341,456
=========== =========== =========== =========== ===========
Operating ratio
(consolidated) (2) 92.1% 91.7% 91.6% 91.9% 92.6%
Average revenues per tractor
per week (3) $ 3,300 $ 3,286 $ 3,136 $ 2,988 $ 2,932
Average annual miles per
tractor 117,072 120,912 121,644 121,716 123,480
Average annual trips per
tractor 175 187 185 173 166
Average trip length in
miles (total) 668 647 657 703 746
Average trip length in
miles (loaded) 581 568 583 627 674
Total miles (loaded and
empty) (1) 1,025,129 1,057,062 1,028,458 1,008,024 984,305
Average revenues per total
mile (3) $ 1.466 $ 1.413 $ 1.341 $ 1.277 $ 1.235
Average revenues per loaded
mile (3) $ 1.686 $ 1.609 $ 1.511 $ 1.431 $ 1.366
Average percentage of empty
miles (4) 13.1% 12.2% 11.3% 10.8% 9.6%
Average tractors in service 8,757 8,742 8,455 8,282 7,971
Total tractors (at year end):
Company 8,180 7,920 7,675 7,430 7,180
Owner-operator 820 830 925 920 1,020
----------- ----------- ----------- ----------- -----------
Total tractors 9,000 8,750 8,600 8,350 8,200
=========== =========== =========== =========== ===========
Total trailers (at year end) 25,200 25,210 23,540 22,800 20,880
=========== =========== =========== =========== ===========
(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) Miles without trailer cargo. Dedicated fleets have a higher
empty mile percentage, and empty miles are generally priced in
the dedicated business.
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 $11.2 million, $12.2 million, and $14.4 million for 2006,
2005, and 2004, respectively, as described on page 15.
2006 2005 2004
------------------ ------------------ ------------------
Truckload Transportation Services (amounts in 000's) $ % $ % $ %
---------------------------------------------------- ------------------ ------------------ ------------------
Revenues $ 1,801,090 100.0 $ 1,741,828 100.0 $ 1,506,937 100.0
Operating expenses 1,644,581 91.3 1,585,706 91.0 1,371,109 91.0
----------- ----------- -----------
Operating income $ 156,509 8.7 $ 156,122 9.0 $ 135,828 9.0
=========== =========== ===========
17
Higher fuel prices and higher fuel surcharge collections
have the effect of increasing the Company's 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 revenue and instead reported as a reduction of
operating expenses.
2006 2005 2004
------------------ ------------------ ------------------
Truckload Transportation Services (amounts in 000's) $ % $ % $ %
---------------------------------------------------- ------------------ ------------------ ------------------
Revenues $ 1,801,090 $ 1,741,828 $ 1,506,937
Less: trucking fuel surcharge revenues 286,843 235,690 114,135
----------- ----------- -----------
Revenues, net of fuel surcharges 1,514,247 100.0 1,506,138 100.0 1,392,802 100.0
----------- ----------- -----------
Operating expenses 1,644,581 1,585,706 1,371,109
Less: trucking fuel surcharge revenues 286,843 235,690 114,135
----------- ----------- -----------
Operating expenses, net of fuel surcharges 1,357,738 89.7 1,350,016 89.6 1,256,974 90.2
----------- ----------- -----------
Operating income $ 156,509 10.3 $ 156,122 10.4 $ 135,828 9.8
=========== =========== ===========
The following table sets forth the non-trucking revenues,
rent and purchased transportation and other operating expenses,
and operating income for the VAS segment. 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),
communications and utilities, and other operating expense
categories.
2006 2005 2004
------------------ ------------------ ------------------
Value Added Services (amounts in 000's) $ % $ % $ %
--------------------------------------- ------------------ ------------------ ------------------
Revenues $ 265,968 100.0 $ 218,620 100.0 $ 161,111 100.0
Rent and purchased transportation expense 240,800 90.5 196,972 90.1 145,474 90.3
----------- ----------- -----------
Gross margin 25,168 9.5 21,648 9.9 15,637 9.7
Other operating expenses 17,747 6.7 13,203 6.0 10,006 6.2
----------- ----------- -----------
Operating income $ 7,421 2.8 $ 8,445 3.9 $ 5,631 3.5
=========== =========== ===========
2006 Compared to 2005
---------------------
Operating Revenues
Operating revenues increased 5.5% in 2006 compared to 2005.
Excluding fuel surcharge revenues, trucking revenues increased
0.6% due primarily to a 3.8% increase in average revenues per
total mile, excluding fuel surcharges, offset by a 3.2% decrease
in average annual miles per tractor. The truckload freight
market was softer during much of 2006, particularly from mid-
August through December when the normal peak seasonal increase in
freight volume did not occur. Additionally, the significant
industry-wide accelerated purchase of new trucks in advance of
the new 2007 emissions standards contributed to excess truck
capacity that partially disrupted the supply and demand balance
in the second half of 2006. The combination of these factors
resulted in the decrease in annual miles per tractor and also
negatively affected revenues per total mile. While revenues per
total mile increased 3.8% year-over-year, the percentage increase
over the comparable 2005 periods was lower in the last two
quarters of 2006 than in the first two quarters of 2006. Most of
the revenues per total mile increase is due to base rate
increases negotiated with customers, offset by an increase in the
empty mile percentage.
A substantial portion of the Company's freight base is under
contract with customers and provides for annual pricing
increases, with much of the Company's non-dedicated contractual
business renewing in the latter part of third quarter and fourth
quarter. The challenging freight market in the second half of
2006 made it much more difficult for the Company to obtain base
rate increases at levels comparable to the 2005 and 2004 renewal
periods. There continue to be several inflationary cost
pressures that are impacting truckload carriers. They include:
driver pay and other driver-related costs, volatile diesel fuel
18
prices, conversion from low sulfur diesel fuel to ULSD, and new
engine emission requirements for newly manufactured trucks
beginning in January 2007 that are increasing the truck purchase
costs and lowering the mpg.
The average percentage of empty miles increased to 13.1% in
2006 from 12.2% in 2005. The increase in the empty mile
percentage is partially the result of a higher percentage of
dedicated trucks in the fleet and a higher percentage of regional
shipments with a shorter length of haul. Over the past few
years, Werner has grown its dedicated fleets, arrangements in
which the Company provides trucks and/or trailers for the
exclusive use of a specific customer. For almost all the
Company's dedicated fleet arrangements, dedicated customers pay
the Company on an all-miles basis (loaded or empty) to obtain
guaranteed truck and/or trailer capacity. For freight management
and statistical reporting purposes, Werner classifies a mile
without cargo in the trailer as an empty mile (i.e., deadhead
mile). Since dedicated fleets generally have a higher percentage
of miles without cargo in the trailer and since the Company has
been growing its dedicated fleet business, this contributed to an
increase in the Company's reported average empty mile percentage.
Excluding the dedicated fleet, the average empty mile percentage
would be 10.8% in 2006 and 10.0% in 2005.
Fuel surcharge revenues, which represent collections from
customers for the higher cost of fuel, increased to $286.8
million in 2006 from $235.7 million in 2005 in response to higher
average fuel prices in 2006. To lessen the effect of fluctuating
fuel prices on the Company's margins, the Company collects fuel
surcharge revenues from its customers. The Company's fuel
surcharge programs are designed to recoup the higher cost of fuel
from customers when fuel prices rise and provide customers with
the benefit of lower costs when fuel prices decline. The
truckload industry's fuel surcharge standard is a one-cent per
mile increase in rate for every five-cent per gallon increase in
the DOE weekly retail on-highway diesel prices that are used for
most fuel surcharge programs. These programs have historically
enabled the Company to recover approximately 70% to 90% of the
fuel price increases. The remaining 10% to 30% is generally not
recoverable, due to empty miles not billable to customers,
out-of-route miles, truck idle time, and the volatility in fuel
prices as prices change rapidly in short periods of time.
VAS revenues increased 21.7% to $266.0 million in 2006 from
$218.6 million in 2005, and gross margin increased 16.3% for the
same period. VAS revenues consist primarily of truck brokerage,
intermodal, freight management (single-source logistics), as well
as the newly expanded international product line described below.
Most of the revenue growth came from the Company's brokerage and
intermodal divisions within VAS. Brokerage continued to grow
rapidly, achieving nearly $100 million of revenues in 2006.
Freight Management recently attracted several new single-source
customers that are being added during first quarter 2007. The
Company continues to focus on growing the volume of business in
this segment, which provides customers with additional sources of
capacity.
In July 2006, the Company formed WGL, a separate company
that operates within the VAS segment, and through its
subsidiaries established its WOFE headquartered in Shanghai,
China. Werner is one of the first U.S. companies to receive a
combined approval to conduct comprehensive forwarding and
logistics business, nationwide import/export, and wholesale and
commission agency business. WGL and its subsidiaries obtained
business licenses to operate as an Ocean Transport Intermediary
(NVOCC and Ocean Freight Forwarder), U.S. Customs Broker, and
Class A Freight Forwarder in China. In addition, in first
quarter 2007 WGL entered into the air freight forwarding
business. Analysis and optimization work prepared for key
partner customers has resulted in multiple door-to-door business
awards being managed by the Company, primarily in the
Trans-Pacific trade lanes. Current service offerings within
China include site selection analysis, purchase order and vendor
management, origin consolidation, warehousing, freight forwarding
and customs brokerage. These services are being provided through
a combination of strategic alliances with best in class providers
and company-owned assets. The Company expects WGL to be a more
meaningful revenue contributor in 2007.
19
Operating Expenses
The Company's operating ratio (operating expenses expressed
as a percentage of operating revenues) was 92.1% in 2006 versus
91.7% in 2005. As explained on page 18, the significant increase
in fuel expense and recording the related fuel surcharge revenues
on a gross basis had the effect of increasing the operating
ratio. Because the Company's VAS business operates with a lower
operating margin than the trucking business, the growth in VAS
business in 2006 compared to 2005 also increased the Company's
overall operating ratio. The tables on pages 17 and 18 show the
operating ratios and operating margins for the Company's two
reportable segments, Truckload Transportation Services and Value
Added Services.
The following table sets forth the cost per total mile of
operating expense items for the truckload segment for the periods
indicated. The Company evaluates operating costs for this
segment on a per-mile basis to adjust for the impact on the
percentage of total operating revenues caused by changes in fuel
surcharge revenues and rate per mile increases, which provides a
more consistent basis for comparing the results of operations
from period to period.
Increase
(Decrease)
2006 2005 per Mile
---------------------------
Salaries, wages and benefits $.564 $.532 $.032
Fuel .377 .321 .056
Supplies and maintenance .145 .143 .002
Taxes and licenses .114 .112 .002
Insurance and claims .090 .083 .007
Depreciation .158 .149 .009
Rent and purchased transportation .150 .149 .001
Communications and utilities .019 .019 .000
Other (.013) (.008) (.005)
Owner-operator costs are included in rent and purchased
transportation expense. Owner-operator miles as a percentage of
total miles were 11.8% in 2006 compared to 12.5% in 2005. Owner-
operators are independent contractors who supply their own
tractor and driver and are responsible for their operating
expenses including fuel, supplies and maintenance, and fuel
taxes. This decrease in owner-operator miles as a percentage of
total miles shifted costs determined on a total mile basis from
the rent and purchased transportation category to other expense
categories. The Company estimates that rent and purchased
transportation expense for the truckload segment was lower by
approximately 1.0 cent per total mile due to this decrease, and
other expense categories had offsetting increases on a total-mile
basis, as follows: salaries, wages and benefits (0.4 cents), fuel
(0.3 cents), supplies and maintenance (0.1 cent), taxes and
licenses (0.1 cent), and depreciation (0.1 cent).
Salaries, wages and benefits for non-drivers increased in
2006 compared to 2005 due to a larger number of employees
required to support the growth in the VAS segment. The increase
in salaries, wages and benefits per mile of 3.2 cents for the
truckload segment is primarily due to higher driver pay per mile
resulting from an increase in the percentage of company truck
miles versus owner-operator miles (see above), an increase in the
percentage of dedicated fleet trucks, additional amounts paid to
drivers to help offset the impact of lower miles in a softer
freight market, and higher group health insurance costs, offset
by a decrease in workers' compensation expense. Non-driver
salaries, wages and benefits increased due to an increase in the
number of equipment maintenance personnel and, as described
further below, $2.3 million of stock compensation expense related
to the Company's adoption of Statement of Financial Accounting
Standards ("SFAS") No. 123R on January 1, 2006. See Note 5 to
the Notes to Consolidated Financial Statements for more
explanation of SFAS No. 123R.
Effective January 1, 2006, the Company adopted SFAS No. 123
(revised 2004), Share-Based Payment ("No. 123R"), using a
modified version of the prospective transition method. Under
this transition method, compensation cost is recognized on or
after the required effective date for the portion of outstanding
awards for which the requisite service has not yet been rendered,
based on the grant-date fair value of those awards calculated
under SFAS No. 123 (as originally issued) for either recognition
20
or pro forma disclosures. Stock-based employee compensation
expense for the year ended December 31, 2006 was $2.3 million, or
1.7 cents per share net of taxes. There was no cumulative effect
of initially adopting SFAS No. 123R.
The driver recruiting and retention market remains
challenging. After two quarters of sequential decreases in
average tractors in service during the first half of 2006, the
Company's ongoing focus to lower driver turnover yielded positive
results in the second half of the year. The improvements in the
latter part of the year offset the decreases experienced during
the first half of the year, resulting in essentially no change in
average tractors in 2006 compared to 2005. The Company
anticipates that the competition for drivers will continue to be
high and cannot predict whether it will experience shortages in
the future. If such a shortage were to occur and additional
increases in driver pay rates were necessary to attract and
retain drivers, the Company's results of operations would be
negatively impacted to the extent that corresponding freight rate
increases were not obtained.
Fuel increased 5.6 cents per mile for the truckload segment
due primarily to higher average diesel fuel prices. Average fuel
prices in 2006 were 28 cents a gallon, or 16%, higher than in
2005. Higher net fuel costs had a four-cent negative impact on
earnings per share in 2006 compared to 2005. The Company
includes all of the following items in the calculation of the
impact of fuel on earnings for both periods: (1) average fuel
price per gallon, (2) fuel reimbursements paid to owner-operator
drivers, (3) lower mpg due to the year-over-year increase in the
percentage of the company-owned truck fleet with post-October
2002 engines and the mpg impact of ultra-low sulfur diesel fuel,
and (4) offsetting fuel surcharge revenues from customers.
During third quarter 2006, truckload carriers transitioned a
gradually increasing portion of their diesel fuel consumption
from low sulfur diesel fuel to ULSD fuel, as fuel refiners were
required to meet the EPA-mandated 80% ULSD threshold by the
transition date of October 15, 2006. Preliminary estimates were
that ULSD would result in a 1-3% degradation in mpg for all
trucks, due to the lower energy content (btu) of ULSD. Based on
the Company's fuel mpg experience to date, these preliminary mpg
degradation estimates appear to be accurate.
Shortages of fuel, increases in fuel prices, or rationing of
petroleum products can have a materially adverse effect on the
operations and profitability of the Company. The Company is
unable to predict whether fuel price levels will continue to
increase or decrease in the future or the extent to which fuel
surcharges will be collected from customers. As of December 31,
2006, the Company had no derivative financial instruments to
reduce its exposure to fuel price fluctuations.
Insurance and claims for the truckload segment increased 0.7
cents on a per-mile basis, primarily related to higher negative
development on existing liability insurance claims and an
increase in larger claims. The Company renewed its liability
insurance policies on August 1, 2006. See Item 3 "Legal
Proceedings" for information on the Company's coverage levels for
personal injury and property damage since August 1, 2003. The
Company's liability insurance premiums for the policy year
beginning August 1, 2006 were slightly higher than the previous
policy year. The Company is unable to predict whether the trend
of increasing insurance and claims expense will continue in the
future.
Depreciation expense for the truckload segment increased 0.9
cents on a per-mile basis in 2006 due primarily to higher costs
of new tractors with the post-October 2002 engines, the impact of
fewer average miles per truck, and a higher percentage of
company-owned trucks versus owner-operators. As of December 31,
2006, nearly 100% of the company-owned truck fleet consisted of
trucks with the post-October 2002 engines, compared to 89% at
December 31, 2005.
Rent and purchased transportation consists mainly of
payments to third-party capacity providers in the VAS and other
non-trucking operations and payments to owner-operators in the
trucking operations. As shown in the VAS statistics table under
the "Results of Operations" heading on page 18, rent and
purchased transportation expense for the VAS segment increased in
response to higher VAS revenues. These expenses generally vary
depending on changes in the volume of services generated by the
21
segment. As a percentage of VAS revenues, VAS rent and purchased
transportation expense increased to 90.5% in 2006 compared to
90.1% in 2005. Intermodal's gross profits and operating income
were lower due to a softer freight market and the impact of
higher fixed costs and repositioning costs. Several significant
changes to the intermodal operating strategy have been
implemented and are expected to help Intermodal achieve improved
results in 2007 compared to 2006.
Rent and purchased transportation for the truckload segment
increased 0.1 cents per total mile in 2006. Higher fuel prices
necessitated higher reimbursements to owner-operators for fuel
($32.7 million in 2006 compared to $26.6 million in 2005), which
resulted in an increase of 0.7 cents per total mile. The Company
also increased the van and regional over-the-road owner-
operators' settlement rate by two cents per mile effective May 1,
2006. These increases were offset by the decrease in the number
of owner-operator trucks and the corresponding decrease in owner-
operator miles. The Company's customer fuel surcharge programs
do not differentiate between miles generated by Company-owned
trucks and miles generated by owner-operator trucks; thus, the
increase in owner-operator fuel reimbursements is included with
Company fuel expenses in calculating the per-share impact of
higher fuel costs on earnings. The Company continues to
experience difficulty recruiting and retaining owner-operator
drivers because of challenging operating conditions including
inflationary cost increases that are the responsibility of the
owner-operators. The Company has historically been able to add
company-owned tractors and recruit additional company drivers to
offset any decreases in owner-operators. If a shortage of owner-
operators and company drivers were to occur and increases in per
mile settlement rates became necessary to attract and retain
owner-operators, the Company's results of operations would be
negatively impacted to the extent that corresponding freight rate
increases were not obtained. Payments to third-party capacity
providers used for portions of shipments delivered to or from
Mexico and by a few dedicated fleets in the truckload segment
decreased by 0.1 cents per mile, partially offsetting the overall
increase for the truckload segment.
Other operating expenses for the truckload segment decreased
0.5 cents per mile in 2006. 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, including costs to prepare the equipment for sale.
Gains on sales of assets increased to $28.4 million in 2006 from
$11.0 million in 2005. During 2006 the Company began selling its
oldest van trailers that had reached the end of their depreciable
life, which increased gains in 2006. The number of trucks sold
in 2006 and the average gain per truck sold (before costs to
prepare the equipment for sale) both decreased slightly in
comparison to 2005. The Company spent less on repairs per truck
sold in 2006 as compared to 2005, which also contributed to the
improvement in gains on sale. The Company's wholly-owned used
truck retail network, Fleet Truck Sales, is one of the largest
class 8 truck sales entities in the United States, with 18
locations, and has been in operation since 1992. Fleet Truck
Sales continues to be a resource for the Company to remarket its
used trucks. The Company expects gains on sales will be lower in
2007 compared to 2006 due to fewer trucks available for sale by
the Company. However, the Company expects to continue to realize
gains on the sale of its fully depreciated trailers in 2007.
Other operating expenses also include bad debt expense, which
included an additional $7.2 million of bad debt expense recorded
in first quarter 2006 related to the bankruptcy of one of the
Company's customers, APX Logistics, Inc., and professional
service fees.
The Company recorded $1.2 million of interest expense in
2006 versus $0.7 million of interest expense in 2005. The
Company had $100.0 million of debt outstanding at December 31,
2006, which was incurred in the second half of 2006 for the
purchase of new trucks, and had $60.0 million of debt outstanding
at December 31, 2005. The Company repaid the $60.0 million of
debt in first quarter 2006. Interest income for the Company
increased to $4.4 million in 2006 from $3.4 million in 2005 due
to improved interest rates, partially offset by a declining cash
balance throughout 2006.
The Company's effective income tax rate (income taxes
expressed as a percentage of income before income taxes) was
41.1% for 2006 versus 41.0% for 2005, as described in Note 4 of
the Notes to Consolidated Financial Statements under Item 8 of
this Form 10-K.
22
2005 Compared to 2004
---------------------
Operating Revenues
Operating revenues increased 17.5% in 2005 compared to 2004.
Excluding fuel surcharge revenues, trucking revenues increased
8.3% due primarily to a 5.4% increase in average revenues per
total mile, excluding fuel surcharges, and a 3.4% increase in the
average number of tractors in service, offset by a 0.6% decrease
in average annual miles per tractor. Average revenues per total
mile, excluding fuel surcharges, increased due to customer rate
increases, and, to a lesser extent, a 2.6% decrease in the
average loaded trip length. The truckload freight environment
was solid during 2005 due to ongoing truck capacity constraints.
In comparison to 2004, demand in the months of March to August
2005 was not as strong as the strong freight market of 2004, but
freight demand for the remaining months of the year was
comparable to the demand in the same periods of 2004.
The average percentage of empty miles increased to 12.2% in
2005 from 11.3% in 2004. The increase in the empty mile
percentage was partially the result of a higher percentage of
dedicated trucks in the fleet and a higher percentage of regional
shipments with a shorter length of haul. Over the past few
years, Werner has grown its dedicated fleets, arrangements in
which the Company provides trucks and/or trailers for the
exclusive use of a specific customer. Excluding the dedicated
fleet, the average empty mile percentage would have been
substantially lower for 2005 and 2004.
Fuel surcharge revenues increased to $235.7 million in 2005
from $114.1 million in 2004 in response to higher average fuel
prices in 2005, which enabled the Company to recover a
significant portion of the fuel price increases.
VAS revenues increased 35.7% to $218.6 million in 2005 from
$161.1 million in 2004, and gross margin increased 38.4% for the
same period. Most of the revenue growth came from the Company's
brokerage and intermodal divisions within VAS.
Operating Expenses
The Company's operating ratio was 91.7% in 2005 versus 91.6%
in 2004. As explained on page 18, the significant increase in
fuel expense and related fuel surcharge revenues had the effect
of increasing the operating ratio. Because the Company's VAS
business operates with a lower operating margin than the trucking
business, the growth in VAS business in 2005 compared to 2004
also increased the Company's overall operating ratio. The tables
on pages 17 and 18 show the operating ratios and operating
margins for the Company's two reportable segments, Truckload
Transportation Services and Value Added Services.
23
The following table sets forth the cost per total mile of
operating expense items for the truckload segment for the periods
indicated. The Company evaluates operating costs for this
segment on a per-mile basis to adjust for the impact on the
percentage of total operating revenues caused by changes in fuel
surcharge revenues and rate per mile increases, which provides a
more consistent basis for comparing the results of operations
from period to period.
Increase
(Decrease)
2005 2004 per Mile
---------------------------
Salaries, wages and benefits $.532 $.519 $.013
Fuel .321 .211 .110
Supplies and maintenance .143 .130 .013
Taxes and licenses .112 .106 .006
Insurance and claims .083 .075 .008
Depreciation .149 .138 .011
Rent and purchased transportation .149 .140 .009
Communications and utilities .019 .018 .001
Other (.008) (.003) (.005)
Owner-operator miles as a percentage of total miles were
12.5% in 2005 compared to 12.7% in 2004. Because the change in
owner-operator miles as a percentage of total miles was only
minimal, there was essentially no shift in costs from the rent
and purchased transportation category to other expense
categories. During 2005, attracting and retaining owner-operator
drivers was very difficult due to high fuel prices and other
factors.
Salaries, wages and benefits for non-drivers increased in
2005 compared to 2004 to support the growth in the VAS segment.
The increase in salaries, wages and benefits per mile of 1.3
cents for the truckload segment is primarily the result of
increased student driver pay, higher driver pay per mile, and an
increase in the number of maintenance employees. Because of the
challenging driver recruiting and retention market, discussed
below, the Company trained more student drivers as an alternative
source of drivers. On August 1, 2004, the Company's previously
announced two cent per mile pay raise became effective for
company solo drivers in its medium-to-long-haul van division,
representing approximately 25% of total company drivers. The
Company recovered this pay raise through its customer rate
increase negotiations, which occurred in third and fourth quarter
2004.
The driver recruiting and retention market remained
extremely challenging during 2005. The supply of truck drivers
continued to be constrained due to alternative jobs to truck
driving and inadequate demographic growth for the industry's
targeted driver base over the next several years. The Company
continued to focus on driver quality of life issues such as
developing more driving jobs with more frequent home time,
providing drivers with newer trucks, and maximizing mileage
productivity within the federal hours of service regulations.
The Company also placed more emphasis on training drivers.
Improved driver recruiting has offset higher driver turnover.
The Company instituted an optional per diem reimbursement
program for eligible company drivers beginning in April 2004.
This program increases a company driver's net pay per mile, after
taxes. As a result of more drivers electing to participate in
the per diem program, driver pay per mile was slightly lower
before considering the factors above that increased driver pay
per mile, and the Company's effective income tax rate was higher
in 2005 compared to 2004. The program was designed to be cost-
neutral, because the combined driver pay rate per mile and per
diem reimbursement under the per diem program is about one cent
per mile lower than mileage pay without per diem reimbursement,
which offsets the Company's increased income taxes caused by the
nondeductible portion of the per diem. The per diem program
increases a company driver's net pay per mile, after taxes.
Fuel increased 11.0 cents per mile for the truckload segment
due primarily to higher average diesel fuel prices. Average fuel
prices in 2005 were 56 cents a gallon, or 47%, higher than in
2004. Higher fuel costs, after considering the amounts collected
from customers through fuel surcharge programs and the cost
impact of owner-operator fuel reimbursements and lower fuel mpg
due to truck engine emissions changes, had a ten-cent negative
impact on earnings per share in 2005 compared to 2004. As of
24
December 31, 2005, the Company had no derivative financial
instruments to reduce its exposure to fuel price fluctuations.
Supplies and maintenance for the truckload segment increased
1.3 cents on a per-mile basis in 2005 due primarily to increases
in repair expenses for an increased number of trucks sold by the
Company's Fleet Truck Sales subsidiary and higher costs to
maintain the Company's trailer fleet. Higher driver recruiting
costs (including driver advertising, transportation and lodging)
and higher toll expense related to state toll rate increases also
contributed to a smaller portion of the increase.
Taxes and licenses for the truckload segment increased 0.6
cents per total mile due primarily to the effect of the fuel mpg
degradation for company-owned trucks with post-October 2002
engines on the per-mile cost of federal and state diesel fuel
taxes, as well as increases in some state tax rates.
Insurance and claims for the truckload segment increased 0.8
cents on a per-mile basis, primarily related to higher negative
development on existing liability insurance claims. Cargo claims
expense was essentially flat on a per-mile basis compared to
2004. The Company renewed its liability insurance policies on
August 1, 2005. See Item 3 "Legal Proceedings" for information on
the Company's coverage levels for personal injury and property
damage since August 1, 2003. Liability insurance premiums for
the policy year beginning August 1, 2005 were approximately the
same as the previous policy year.
Depreciation expense for the truckload segment increased 1.1
cents on a per-mile basis in 2005 due primarily to higher costs
of new tractors with the post-October 2002 engines. As of
December 31, 2005, approximately 89% of the company-owned truck
fleet consisted of trucks with the post-October 2002 engines,
compared to 47% at December 31, 2004.
Rent and purchased transportation consists mainly of
payments to third-party capacity providers in the VAS and other
non-trucking operations and payments to owner-operators in the
trucking operations. As shown in the VAS statistics table under
the "Results of Operations" heading on page 18, rent and
purchased transportation expense for the VAS segment increased in
response to higher VAS revenues. As a percentage of VAS
revenues, VAS rent and purchased transportation expense decreased
to 90.1% in 2005 compared to 90.3% in 2004, resulting in a higher
gross margin in 2005. As the truck capacity market tightened
during 2005, it became more difficult to find qualified truckload
capacity to meet VAS customer freight needs, especially in the
latter part of the year. However, the Company's marketing
efforts continued to successfully expand its VAS qualified
carrier base in a constrained capacity market, ending the year
with 3,600 qualified broker carriers. During fourth quarter
2005, VAS expanded its small, but growing, intermodal presence by
agreeing to manage a fleet of Union Pacific-owned containers for
intermodal freight shipments. The Company pays a daily fee per
container to Union Pacific ("UP") for any days that the
containers are not in transit in the UP network. As of December
2005, VAS Intermodal managed 400 UP containers.
Rent and purchased transportation for the truckload segment
increased 0.9 cents per total mile in 2005. Higher fuel prices
necessitated higher reimbursements to owner-operators for fuel,
which resulted in an increase of 1.1 cents per total mile. The
Company has experienced difficulty recruiting and retaining
owner-operators for over three years because of challenging
operating conditions. This resulted in a reduction in the number
of owner-operator tractors to 830 as of December 31, 2005 from
925 as of December 31, 2004. Payments to third-party capacity
providers used for portions of shipments delivered to or from
Mexico and by a few dedicated fleets in the truckload segment
decreased by 0.2 cents per mile, partially offsetting the overall
increase for the truckload segment.
Other operating expenses for the truckload segment decreased
0.5 cents per mile in 2005. Gains on sales of assets, primarily
trucks, increased to $11.0 million in 2005 from $9.3 million in
2004, due to increased unit sales, partially offset by an
increased ratio of traded trucks to sold trucks. Other operating
expenses also include bad debt expense and professional service
fees. The remaining decrease in other operating expenses in 2005
was due primarily to a reduction in computer consulting fees as
25
consultants were hired by the Company, resulting in a reduction
in other operating expense, but an increase in salaries, wages
and benefits expense.
The Company recorded $0.7 million of interest expense in
2005 versus virtually no interest expense in 2004. The Company
incurred debt of $60.0 million during the fourth quarter of 2005
and had no debt outstanding throughout 2004. Interest income for
the Company increased to $3.4 million in 2005 from $2.6 million
in 2004 due to improved interest rates, partially offset by a
declining cash balance throughout 2005.
The Company's effective income tax rate increased to 41.0%
in 2005 from 39.2% in 2004, as described in Note 4 of the Notes
to Consolidated Financial Statements under Item 8 of this Form
10-K. The income tax rate increased in 2005 because of higher
non-deductible expenses for tax purposes related to the
implementation of a per diem pay program for student drivers in
fourth quarter 2003 and a per diem pay program for eligible
company drivers in April 2004.
Liquidity and Capital Resources
During the year ended December 31, 2006, the Company
generated cash flow from operations of $284.1 million, a 64.7%
increase ($111.6 million), in cash flow compared to the year
ended December 31, 2005. The increase in cash flow from
operations is due primarily to lower income tax payments during
2006, higher payables for revenue equipment of $17.1 million, and
improved collections of accounts receivable. In addition, the
Company wrote off a $7.2 million receivable related to the APX
Logistics, Inc. bankruptcy during 2006, resulting in a decrease
in net accounts receivable. Income taxes paid during 2006
totaled $68.9 million compared to $99.2 million in 2005 and $42.9
million in 2004. The higher tax payments in 2005 were related to
tax law changes that resulted in the reversal of certain tax
strategies implemented in 2001 and the effect of lower income tax
depreciation in 2005 due to the bonus tax depreciation provision
that expired on December 31, 2004. The Company made federal
income tax payments of $22.5 million related to the reversal of
the tax strategies in second quarter 2005. Cash flow from
operations decreased $54.1 million in 2005 compared to 2004, or
23.9%, due to the larger federal income tax payments in 2005 and
an increase in days sales in accounts receivable, offset by
higher depreciation expense for financial reporting purposes
related to the higher cost of the post-October 2002 engines and
higher net income. The cash flow from operations and existing
cash balances, supplemented by net borrowings under its existing
credit facilities, enabled the Company to make net capital
expenditures, repurchase stock, and pay dividends as discussed
below.
Net cash used in investing activities decreased 19.7% ($58.0
million) to $236.2 million in 2006 from $294.3 million in 2005.
Net property additions, primarily revenue equipment, were $241.8
million for the year ended December 31, 2006 versus $299.2
million during the same period of 2005. The decrease was due
primarily to the Company purchasing more tractors in 2005 as it
began to reduce the average age of its truck fleet and purchasing
fewer tractors and selling more trailers in 2006. The $100.8
million, or 52.1%, increase in investing cash flows from 2004 to
2005 was also due to the larger number of tractors purchased.
The average age of the Company's truck fleet is 1.34 years at
December 31, 2006. The Company brought down the age of its truck
fleet to delay the cost impact of the federally-mandated engine
emission standards that became effective in January 2007. The
Company's net capital expenditures are expected to be much lower
in 2007, or between $50 million and $100 million. The Company
intends to fund these net capital expenditures through cash flow
from operations and financing available under the Company's
existing credit facilities, as management deems necessary. As of
December 31, 2006, the Company has committed to property and
equipment purchases of approximately $57.1 million.
Net financing activities used $52.8 million, provided $48.9
million, and used $25.7 million in 2006, 2005, and 2004,
respectively. The change from 2005 to 2006 included repayment in
the first quarter of 2006 of the $60.0 million of debt incurred
during fourth quarter 2005, followed by borrowings of $100.0
million in the latter part of 2006 to fund a portion of the
Company's net capital expenditures. Through the date of this
report, the Company has repaid $10.0 million of the total $100.0
26
million of debt outstanding at December 31, 2006. The Company
paid dividends of $13.3 million in 2006, $11.9 million in 2005,
and $9.5 million in 2004. The Company increased its quarterly
dividend rate by $.005 per share beginning with the dividend paid
in July 2006 and the dividend paid in July 2005. Financing
activities also included common stock repurchases of $85.1
million in 2006, $1.6 million in 2005, and $21.6 million in 2004.
From time to time, the Company has repurchased, and may continue
to repurchase, shares of its common stock. The timing and amount
of such purchases depends on market and other factors. On April
14, 2006, the Company's Board of Directors approved its current
authorization for common stock repurchases of 6,000,000 shares.
As of December 31, 2006, the Company had purchased 791,200 shares
pursuant to this authorization and had 5,208,800 shares remaining
available for repurchase.
Management believes the Company's financial position at
December 31, 2006 is strong. As of December 31, 2006, the
Company had $31.6 million of cash and cash equivalents and $870.4
million of stockholders' equity. As of December 31, 2006, the
Company had $275.0 million of credit pursuant to credit
facilities, of which it had borrowed $100.0 million. The
remaining $175.0 million of credit available under these
facilities is further reduced by the $39.2 million in letters of
credit the Company maintains. These letters of credit are
primarily required as security for insurance policies. As of
December 31, 2006, the Company had no non-cancelable revenue
equipment operating leases, and therefore, had no off-balance
sheet revenue equipment debt. Based on the Company's strong
financial position, management foresees no significant barriers
to obtaining sufficient financing, if necessary.
Contractual Obligations and Commercial Commitments
The following tables set forth the Company's contractual
obligations and commercial commitments as of December 31, 2006.
Payments Due by Period
(in millions)
Over 5
Total Less than 1 year 1-3 years 4-5 years years
------------------------------------------------------------------------------------------------
Contractual Obligations
Long-term debt, including current
maturities $ 100.0 $ - $ 50.0 $ 50.0 $ -
Equipment purchase commitments 57.1 57.1 - - -
-------- -------- -------- -------- --------
Total contractual cash obligations $ 157.1 $ 57.1 $ 50.0 $ 50.0 $ -
======== ======== ======== ======== ========
Other Financing Commitments
Unused lines of credit $ 135.8 $ 50.0 $ - $ 85.8 $ -
Standby letters of credit 39.2 39.2 - - -
-------- -------- -------- -------- --------
Total financing commitments $ 175.0 $ 89.2 $ - $ 85.8 $ -
======== ======== ======== ======== ========
Total obligations $ 332.1 $ 146.3 $ 50.0 $ 135.8 $ -
======== ======== ======== ======== ========
The Company has committed credit facilities with two banks
totaling $275.0 million, of which it had borrowed $100.0 million.
These credit facilities bear variable interest (5.8% at December
31, 2006) based on the London Interbank Offered Rate ("LIBOR").
The credit available under these facilities is further reduced by
the amount of standby letters of credit the Company maintains.
The unused lines of credit are available to the Company in the
event the Company needs financing for the growth of its fleet.
With the Company's strong financial position, the Company expects
it could obtain additional financing, if necessary, at favorable
terms. The standby letters of credit are primarily required for
insurance policies. The equipment purchase commitments relate to
committed equipment expenditures.
Off-Balance Sheet Arrangements
The Company does not have arrangements that meet the
definition of an off-balance sheet arrangement.
27
Critical Accounting Policies
The Company's success depends on its ability to efficiently
manage its resources in the delivery of truckload transportation
and logistics services to its customers. Resource requirements
vary with customer demand, which may be subject to seasonal or
general economic conditions. The Company's ability to adapt to
changes in customer transportation requirements is a key element
in efficiently deploying resources and in making capital
investments in tractors and trailers. Although the Company's
business volume is not highly concentrated, the Company may also
be affected by the financial failure of its customers or a loss
of a customer's business from time-to-time.
The Company's most significant resource requirements are
qualified drivers, tractors, trailers, and related costs of
operating its equipment (such as fuel and related fuel taxes,
driver pay, insurance, and supplies and maintenance). The Company
has historically been successful mitigating its risk to increases
in fuel prices by recovering additional fuel surcharges from its
customers. The Company's financial results are also affected by
availability of drivers and the market for new and used trucks.
Because the Company is self-insured for a significant portion of
its personal injury, property damage, and cargo claims and for
workers' compensation benefits for its employees (supplemented by
premium-based coverage above certain dollar levels), financial
results may also be affected by driver safety, medical costs,
weather, the legal and regulatory environment, and the costs of
insurance coverage 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. Although the Company's
normal replacement cycle for tractors is three years, the
Company calculates depreciation expense for financial
reporting purposes using a five-year life and 25% salvage
value. Depreciation expense calculated in this manner
continues at the same straight-line rate, which
approximates the continuing declining market value of the
tractors, in those instances in which a tractor is held
beyond the normal three-year age. Calculating
depreciation expense using a five-year life and 25%
salvage value results in the same annual depreciation rate
(15% of cost per year) and the same net book value at the
normal three-year replacement date (55% of cost) as using
a three-year life and 55% salvage value. The Company
continually monitors the adequacy of the lives and salvage
values used in calculating depreciation expense and
adjusts these assumptions appropriately when warranted.
* Impairment of long-lived assets. The Company reviews its
long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount
of a long-lived asset may not be recoverable. An
impairment loss would be recognized if the carrying amount
of the long-lived asset is not recoverable, and it exceeds
its fair value. For long-lived assets classified as held
and used, if the carrying value of the long-lived asset
exceeds the sum of the future net cash flows, it is not
recoverable. The Company does not separately identify
assets by operating segment, as tractors and trailers are
routinely transferred from one operating fleet to another.
As a result, none of the Company's 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 assets of the Company.
Long-lived assets classified as held for sale are reported
at the lower of their carrying amount or fair value less
costs to sell.
* Estimates of accrued liabilities for insurance and claims
for liability and physical damage losses and workers'
compensation. The insurance and claims accruals (current
and long-term) are recorded at the estimated ultimate
payment amounts and are based upon individual case
estimates, including negative development, and estimates
28
of incurred-but-not-reported losses based upon past
experience. The Company's self-insurance reserves are
reviewed by an actuary 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-operator drivers under contract with the Company) is
utilized to provide some or all of the service and the
Company is the primary obligor in regards to the delivery
of the shipment, establishes customer pricing separately
from carrier rate negotiations, generally has discretion
in carrier selection, and/or has credit risk on the
shipment, the Company records both revenues for the dollar
value of services billed by the Company to the customer
and rent and purchased transportation expense for the
costs of transportation paid by the Company to the
third-party provider upon delivery of the shipment. In
the absence of the conditions listed above, the Company
records revenues net of expenses related to third-party
providers.
* Accounting for income taxes. Significant management
judgment is required to determine the provision for income
taxes and to determine whether deferred income taxes will
be realized in full or in part. Deferred income tax assets
and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which
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 to be
necessary due to the Company's profitable operations.
Accordingly, if the facts or financial circumstances were
to change, thereby impacting the likelihood of realizing
the deferred income tax assets, judgment would need to be
applied to determine the amount of valuation allowance
required in any given period.
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 the Company's results of operations from period-to-period.
Inflation
Inflation can be expected to have an impact on the Company's
operating costs. A prolonged period of inflation could cause
interest rates, fuel, wages, and other costs to increase and
could adversely affect the Company's 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
The Company is exposed to market risk from changes in
interest, commodity prices, and foreign currency exchange rates.
Interest Rate Risk
The Company had $100.0 million of variable rate debt
outstanding at December 31, 2006. The interest rates on the
variable rate debt are based on the LIBOR. Assuming this level of
borrowings, a hypothetical one-percentage point increase in the
LIBOR interest rate would increase the Company's annual interest
expense by $1,000,000. As of December 31, 2006, the Company has
no derivative financial instruments to reduce its exposure to
interest rate increases.
29
Commodity Price Risk
The price and availability of diesel fuel are subject to
fluctuations due to changes in the level of global oil
production, refining capacity, seasonality, weather, and other
market factors. Historically, the Company has been able to
recover a significant portion of fuel price increases from
customers in the form of fuel surcharges. The Company has
implemented customer fuel surcharge programs with most of its
revenue base to offset much of the higher fuel cost per gallon.
The Company cannot predict the extent to which higher fuel price
levels will continue in the future or the extent to which fuel
surcharges could be collected to offset such increases. As of
December 31, 2006, the Company had no derivative financial
instruments to reduce its exposure to fuel price fluctuations.
Foreign Currency Exchange Rate Risk
The Company conducts business in Mexico and Canada and is
beginning operations in Asia. Foreign currency transaction gains
and losses were not material to the Company's results of
operations for 2006 and prior years. To date, virtually all
foreign revenues are denominated in U.S. dollars, and the Company
receives payment for foreign freight services primarily in U.S.
dollars to reduce direct foreign currency risk. Accordingly, the
Company is not currently subject to material foreign currency
exchange rate risks from the effects that exchange rate movements
of foreign currencies would have on the Company's future costs or
on future cash flows.
30
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 as of December 31,
2006 and 2005, 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,
2006. In connection with our audits of the consolidated
financial statements, we have also audited the financial
statement schedule for each of the years in the three-year period
ended December 31, 2006, 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, 2006 and 2005, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2006, in conformity with
U.S. generally accepted accounting principles. In addition, in
our opinion, the financial statement schedule referred to above,
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),
the effectiveness of Werner Enterprises, Inc.'s internal control
over financial reporting as of December 31, 2006, 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 8, 2007
expressed an unqualified opinion on management's assessment of,
and the effective operation of, internal control over financial
reporting.
KPMG LLP
Omaha, Nebraska
February 8, 2007
31
WERNER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Years Ended December 31,
----------------------------------------
2006 2005 2004
---------- ---------- ----------
Operating revenues $2,080,555 $1,971,847 $1,678,043
---------- ---------- ----------
Operating expenses:
Salaries, wages and benefits 594,783 574,893 544,424
Fuel 388,710 340,622 218,095
Supplies and maintenance 155,304 154,719 138,999
Taxes and licenses 117,570 118,853 109,720
Insurance and claims 92,580 88,595 76,991
Depreciation 167,516 162,462 144,535
Rent and purchased transportation 395,660 354,335 289,186
Communications and utilities 19,651 20,468 18,919
Other (15,720) (7,711) (4,154)
---------- ---------- ----------
Total operating expenses 1,916,054 1,807,236 1,536,715
---------- ---------- ----------
Operating income 164,501 164,611 141,328
---------- ---------- ----------
Other expense (income):
Interest expense 1,196 672 13
Interest income (4,407) (3,381) (2,580)
Other 319 261 198
---------- ---------- ----------
Total other income (2,892) (2,448) (2,369)
---------- ---------- ----------
Income before income taxes 167,393 167,059 143,697
Income taxes 68,750 68,525 56,387
---------- ---------- ----------
Net income $98,643 $98,534 $87,310
========== ========== ==========
Earnings per share:
Basic $1.27 $1.24 $1.10
========== ========== ==========
Diluted $1.25 $1.22 $1.08
========== ========== ==========
Weighted-average common shares outstanding:
Basic 77,653 79,393 79,224
========== ========== ==========
Diluted 79,101 80,701 80,868
========== ========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
32
WERNER ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
December 31,
-------------------------
ASSETS 2006 2005
---------- ----------
Current assets:
Cash and cash equivalents $ 31,613 $ 36,583
Accounts receivable, trade, less allowance
of $9,417 and $8,357, respectively 232,794 240,224
Other receivables 17,933 19,914
Inventories and supplies 10,850 10,951
Prepaid taxes, licenses, and permits 18,457 18,054
Current deferred income taxes 25,251 20,940
Other current assets 24,143 20,966
---------- ----------
Total current assets 361,041 367,632
---------- ----------
Property and equipment, at cost:
Land 26,945 26,279
Buildings and improvements 118,910 110,275
Revenue equipment 1,372,768 1,262,112
Service equipment and other 168,597 157,098
---------- ----------
Total property and equipment 1,687,220 1,555,764
Less - accumulated depreciation 590,880 553,157
---------- ----------
Property and equipment, net 1,096,340 1,002,607
---------- ----------
Other non-current assets 20,792 15,523
---------- ----------
$1,478,173 $1,385,762
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 75,821 $ 52,387
Current portion of long-term debt - 60,000
Insurance and claims accruals 73,782 62,418
Accrued payroll 21,344 21,274
Other current liabilities 19,963 21,838
---------- ----------
Total current liabilities 190,910 217,917
---------- ----------
Long-term debt, net of current portion 100,000 -
Other long-term liabilities 999 526
Deferred income taxes 216,413 209,868
Insurance and claims accruals, net of current
portion 99,500 95,000
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, 200,000,000
shares authorized; 80,533,536
shares issued; 75,339,297 and 79,420,443
shares outstanding, respectively 805 805
Paid-in capital 105,193 105,074
Retained earnings 862,403 777,260
Accumulated other comprehensive loss (207) (259)
Treasury stock, at cost; 5,194,239 and
1,113,093 shares, respectively (97,843) (20,429)
---------- ----------
Total stockholders' equity 870,351 862,451
---------- ----------
$1,478,173 $1,385,762
========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
33
WERNER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
-------------------------------------
2006 2005 2004
--------- --------- ---------
Cash flows from operating activities:
Net income $ 98,643 $ 98,534 $ 87,310
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation 167,516 162,462 144,535
Deferred income taxes 2,234 (37,380) 12,517
Gain on disposal of operating
equipment (28,393) (11,026) (9,735)
Stock based compensation 2,258 - -
Tax benefit from exercise of
stock options - 1,617 3,225
Other long-term assets (1,878) (795) 408
Insurance and claims accruals,
net of current portion 4,500 11,000 13,000
Other long-term liabilities 473 225 -
Changes in certain working
capital items:
Accounts receivable, net 7,430 (53,453) (34,310)
Prepaid expenses and other
current assets (1,498) (14,207) (4,261)
Accounts payable 23,434 2,769 8,715
Accrued and other current
liabilities 9,346 12,746 5,178
--------- --------- ---------
Net cash provided by operating
activities 284,065 172,492 226,582
--------- --------- ---------
Cash flows from investing activities:
Additions to property and equipment (400,548) (414,112) (294,288)
Retirements of property and equipment 158,727 114,903 98,098
Decrease in notes receivable 5,574 4,957 2,703
--------- --------- ---------
Net cash used in investing
activities (236,247) (294,252) (193,487)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of short-term
debt - 60,000 -
Proceeds from issuance of long-term
debt 100,000 - -
Repayments of short-term debt (60,000) - -
Dividends on common stock (13,287) (11,904) (9,506)
Repurchases of common stock (85,132) (1,573) (21,591)
Stock options exercised 3,377 2,411 5,424
Excess tax benefits from exercise
of stock options 2,202 - -
--------- --------- ---------
Net cash provided by (used in)
financing activities (52,840) 48,934 (25,673)
--------- --------- ---------
Effect of exchange rate fluctuations
on cash 52 602 (24)
Net increase (decrease) in cash and
cash equivalents (4,970) (72,224) 7,398
Cash and cash equivalents, beginning
of year 36,583 108,807 101,409
--------- --------- ---------
Cash and cash equivalents, end of year $ 31,613 $ 36,583 $ 108,807
========= ========= =========
Supplemental disclosures of cash flow
information:
Cash paid during year for:
Interest $ 566 $ 561 $ 13
Income taxes 68,941 99,170 42,850
Supplemental disclosures of non-cash
investing activities:
Notes receivable issued upon sale
of revenue equipment $ 8,965 $ 8,164 $ 4,079
The accompanying notes are an integral part of these consolidated
financial statements.
34
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, 2003 $805 $108,706 $614,011 $(837) $(13,574) $709,111
Purchases of 1,173,200 shares
of common stock - - - - (21,591) (21,591)
Dividends on common stock
($.130 per share) - - (10,286) - - (10,286)
Exercise of stock options,
656,676 shares, including
tax benefits - (2,011) - - 10,660 8,649
Comprehensive income (loss):
Net income - - 87,310 - - 87,310
Foreign currency translation
adjustments - - - (24) - (24)
------- -------- -------- ----- -------- --------
Total comprehensive
income (loss) - - 87,310 (24) - 87,286
------- -------- -------- ----- -------- --------
BALANCE, December 31, 2004 805 106,695 691,035 (861) (24,505) 773,169
Purchases of 88,000 shares
of common stock - - - - (1,573) (1,573)
Dividends on common stock
($.155 per share) - - (12,309) - - (12,309)
Exercise of stock options,
310,696 shares, including
tax benefits - (1,621) - - 5,649 4,028
Comprehensive income (loss):
Net income - - 98,534 - - 98,534
Foreign currency translation
adjustments - - - 602 - 602
------- -------- -------- ----- -------- --------
Total comprehensive
income (loss) - - 98,534 602 - 99,136
------- -------- -------- ----- -------- --------
BALANCE, December 31, 2005 805 105,074 777,260 (259) (20,429) 862,451
Purchases of 4,500,000 shares
of common stock - - - - (85,132) (85,132)
Dividends on common stock
($.175 per share) - - (13,500) - - (13,500)
Exercise of stock options,
418,854 shares, including
excess tax benefits - (2,139) - - 7,718 5,579
Stock-based compensation
expense - 2,258 - - - 2,258
Comprehensive income (loss):
Net income - - 98,643 - - 98,643
Foreign currency translation
adjustments - - - 52 - 52
------- -------- -------- ----- -------- --------
Total comprehensive - - 98,643 52 - 98,695
income (loss) ------- -------- -------- ----- -------- --------
BALANCE, December 31, 2006 $805 $105,193 $862,403 $(207) $(97,843) $870,351
======= ======== ======== ===== ======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
35
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, the
Federal and Provincial Transportation Departments in Canada, the
Secretary of Communication and Transportation in Mexico, and
various state regulatory commissions. The Company maintains a
diversified freight base and is not dependent on a specific
industry for a majority of its freight, which limits
concentrations of credit risk. One customer generated
approximately 11%, 10%, and 9% of total revenues for 2006, 2005,
and 2004, respectively.
Principles of Consolidation
The accompanying consolidated financial statements include
the accounts of Werner Enterprises, Inc. and its 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 reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the consolidated financial statements, and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments,
purchased with a maturity of three months or less, to be cash
equivalents.
Trade Accounts Receivable
Trade accounts receivable are recorded at the invoiced
amounts, net of an allowance for doubtful accounts. The
allowance for doubtful accounts is the Company's best estimate of
the amount of probable credit losses in the Company's existing
accounts receivable. The financial condition of customers is
reviewed by the Company prior to granting credit. The Company
determines the allowance based on historical write-off experience
and national economic data. The Company evaluates the adequacy
of its 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. The Company does not have any off-balance-sheet credit
exposure related to its customers.
Inventories and Supplies
Inventories and supplies consist primarily of revenue
equipment parts, tires, fuel, supplies, and company store
merchandise and are stated at average cost. Tires placed on new
revenue equipment are capitalized as a part of the equipment
cost. Replacement tires are expensed when placed in service.
36
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. Prior to July 1, 2005, if equipment was traded rather
than sold and cash involved in the exchange was less than 25% of
the fair value of the exchange, the cost of new equipment was
recorded at an amount equal to the lower of the monetary
consideration paid plus the net book value of the traded property
or the fair value of the new equipment.
Depreciation is calculated based on the cost of the asset,
reduced by its 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%
Although the Company's normal replacement cycle for tractors
is three years, the Company calculates depreciation expense for
financial reporting purposes using a five-year life and 25%
salvage value. Depreciation expense calculated in this manner
continues at the same straight-line rate, which approximates the
continuing declining value of the tractors, in those instances in
which a tractor is held beyond the normal three-year age.
Calculating depreciation expense using a five-year life and 25%
salvage value results in the same annual depreciation rate (15%
of cost per year) and the same net book value at the normal
three-year replacement date (55% of cost) as using a three-year
life and 55% salvage value. As a result, there is no difference
in recorded depreciation expense on a quarterly or annual basis
with the Company's five-year life, 25% salvage value as compared
to a three-year life, 55% salvage value.
Long-Lived Assets
The Company reviews its long-lived assets for impairment
whenever events or changes in circumstances indicate that the
carrying amount of a long-lived asset may not be recoverable. An
impairment loss would be recognized if the carrying amount of the
long-lived asset is not recoverable, and it exceeds its fair
value. For long-lived assets classified as held and used, if the
carrying value of the long-lived asset exceeds the sum of the
future net cash flows, it is not recoverable. The Company does
not separately identify assets by operating segment, as tractors
and trailers are routinely transferred from one operating fleet
to another. As a result, none of the Company's 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
assets of the Company. Long-lived assets classified as held for
sale are reported at the lower of their carrying amount or fair
value less costs to sell.
Insurance and Claims Accruals
Insurance and claims accruals, both current and noncurrent,
reflect the estimated cost for cargo loss and damage, bodily
injury and property damage ("BI/PD"), group health, and workers'
compensation claims, including estimated loss development and
loss adjustment expenses, not covered by insurance. The costs for
cargo and BI/PD insurance and claims are included in insurance
and claims expense, while the costs of group health and workers'
compensation claims are included in salaries, wages and benefits
expense in the Consolidated Statements of Income. The insurance
and claims accruals are recorded at the estimated ultimate
payment amounts and are based upon individual case estimates and
estimates of incurred-but-not-reported losses based upon past
experience. Actual costs related to insurance and claims have
37
not differed materially from estimated accrued amounts for all
years presented. The Company's insurance and claims accruals are
reviewed by an actuary every six months.
The Company had been responsible for liability claims up to
$500,000, plus administrative expenses, for each occurrence
involving personal injury or property damage since August 1,
1992. For the policy year beginning August 1, 2004, the Company
increased its self-insured retention ("SIR") amount to $2.0
million per occurrence. The Company is also responsible for
varying annual aggregate amounts of liability for claims in
excess of the self-insured retention. The following table
reflects the self-insured retention levels and aggregate amounts
of liability for personal injury and property damage claims since
August 1, 2003:
Primary Coverage
Coverage Period Primary Coverage SIR/deductible
------------------------------ ---------------- ----------------
August 1, 2003 - July 31, 2004 $3.0 million $0.5 million (1)
August 1, 2004 - July 31, 2005 $5.0 million $2.0 million (2)
August 1, 2005 - July 31, 2006 $5.0 million $2.0 million (3)
August 1, 2006 - July 31, 2007 $5.0 million $2.0 million (3)
(1) Subject to an additional $1.5 million aggregate in the $0.5
to $1.0 million layer, a $1.0 million aggregate in the $1.0 to
$2.0 million layer, no aggregate (i.e., fully insured) in the
$2.0 to $3.0 million layer, a $6.0 million aggregate 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 $3.0 million aggregate in the $2.0
to $3.0 million layer, no aggregate (i.e., 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.
(3) Subject to an additional $2.0 million aggregate in the $2.0
to $3.0 million layer, no aggregate (i.e., 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.
The Company's primary insurance covers the range of
liability where the Company expects most claims to occur.
Liability claims substantially in excess of coverage amounts
listed in the table above, if they occur, are covered under
premium-based policies with reputable insurance companies to
coverage levels that management considers adequate. The Company
is also responsible for administrative expenses for each
occurrence involving personal injury or property damage.
The Company has assumed responsibility for workers'
compensation up to $1.0 million per claim, subject to an
additional $1.0 million aggregate for claims between $1.0 million
and $2.0 million, maintains a $25.7 million bond, and has
obtained insurance for individual claims above $1.0 million.
Under these insurance arrangements, the Company maintains
$39.2 million in letters of credit as of December 31, 2006.
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 provider (including owner-operator
drivers under contract with the Company) is utilized to provide
some or all of the service and the Company is the primary obligor
in regards to the delivery of the shipment, establishes customer
pricing separately from carrier rate negotiations, generally has
discretion in carrier selection, and/or has credit risk on the
shipment, the Company records both revenues for the dollar value
of services billed by the Company to the customer and rent and
purchased transportation expense for the costs of transportation
paid by the Company to the third-party provider upon delivery of
the shipment. In the absence of the conditions listed above, the
Company records revenues net of expenses related to third-party
providers.
38
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. Virtually all foreign revenues are
denominated in U.S. dollars. Expense items are translated at
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
Mexican and Canadian operations for the years ended December 31,
2006, 2005, and 2004. The amounts of such translation adjustments
were not significant for all years presented (see the
Consolidated Statements of Stockholders' Equity and Comprehensive
Income).
Income Taxes
The Company uses the asset and liability method of Statement
of Financial Accounting Standards ("SFAS") No. 109, Accounting
for Income Taxes, 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 expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or
settled.
Common Stock and Earnings Per Share
The Company computes and presents earnings per share ("EPS")
in accordance with SFAS No. 128, 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. The difference between basic and diluted earnings per
share for all periods presented is due to the common stock
equivalents that are assumed to be issued upon the exercise of
stock options. There are no differences in the numerator of the
Company's computations of basic and diluted EPS for any period
presented. The computation of basic and diluted earnings per
share is shown below (in thousands, except per share amounts).
Years Ended December 31,
----------------------------------
2006 2005 2004
-------- -------- --------
Net income $ 98,643 $ 98,534 $ 87,310
======== ======== ========
Weighted-average common shares
outstanding 77,653 79,393 79,224
Common stock equivalents 1,448 1,308 1,644
-------- -------- --------
Shares used in computing
diluted earnings per share 79,101 80,701 80,868
======== ======== ========
Basic earnings per share $ 1.27 $ 1.24 $ 1.10
======== ======== ========
Diluted earnings per share $ 1.25 $ 1.22 $ 1.08
======== ======== ========
Options to purchase shares of common stock which 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, were:
Years Ended December 31,
--------------------------------------
2006 2005 2004
------------ ------------ ------------
Number of shares under option 24,500 19,500 -
Option purchase price $19.84-20.36 $ 19.84 -
39
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, 2006,
2005, and 2004, comprehensive income consists of net income and
foreign currency translation adjustments.
Accounting Standards
Effective January 1, 2006, the Company adopted SFAS No. 123
(revised 2004), Share-Based Payment ("No. 123R"), using a
modified version of the prospective transition method. Under
this transition method, compensation cost is recognized on or
after the required effective date for the portion of outstanding
awards for which the requisite service has not yet been rendered,
based on the grant-date fair value of those awards calculated
under SFAS No. 123 (as originally issued) for either recognition
or pro forma disclosures. Stock-based employee compensation
expense for the year ended December 31, 2006 was $2.3 million,
and is included in salaries, wages and benefits within the
consolidated statements of income. There was no cumulative
effect of initially adopting SFAS No. 123R.
In May 2005, the FASB issued SFAS No. 154, Accounting
Changes and Error Corrections. This Statement replaces APB
Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting
Accounting Changes in Interim Financial Statements, and changes
the requirements for the accounting for and reporting of all
voluntary changes in accounting principle and changes required by
an accounting pronouncement when the pronouncement does not
include specific transition provisions. This Statement requires
retrospective application to prior periods' financial statements
of changes in accounting principle, unless it is impracticable to
do so. The provisions of SFAS No. 154 are effective for
accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. Upon adoption, SFAS No. 154
had no effect on the financial position, results of operations,
and cash flows of the Company, but will affect future changes in
accounting principles.
In February 2006, the Financial Accounting Standards Board
("FASB") issued SFAS No. 155, Accounting for Certain Hybrid
Financial Instruments-An Amendment of FASB Statements No. 133 and
140. This Statement amends FASB Statements No. 133, Accounting
for Derivative Instruments and Hedging Activities, and No. 140,
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities and eliminates the exemption from
applying Statement 133 to interests in securitized financial
assets so that similar items are accounted for in the same way.
The provisions of SFAS No. 155 are effective for all financial
instruments acquired or issued after the beginning of the first
fiscal year that begins after September 15, 2006. As of December
31, 2006, management believes that SFAS No. 155 will have no
effect on the financial position, results of operations, and cash
flows of the Company.
In March 2006, the FASB issued SFAS No. 156, Accounting for
Servicing of Financial Assets-An Amendment of FASB Statement No.
140. This Statement amends FASB Statement No. 140, Accounting
for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities and requires that all separately
recognized servicing assets and servicing liabilities be
initially measured at fair value, if practicable. The provisions
of SFAS No. 156 are effective as of the beginning of the first
fiscal year that begins after September 15, 2006. As of December
31, 2006, management believes that SFAS No. 156 will have no
effect on the financial position, results of operations, and cash
flows of the Company.
In July 2006, the FASB issued FASB Interpretation No. 48
("FIN 48"), Accounting for Uncertainty in Income Taxes-an
Interpretation of FASB Statement No. 109. This interpretation
prescribes a recognition threshold and measurement process for
recording in the financial statements uncertain tax positions
taken or expected to be taken in a tax return. Additionally,
this interpretation provides guidance on the derecognition,
classification, accounting in interim periods, and disclosure
requirements for uncertain tax positions. The provisions of FIN
48 are effective on January 1, 2007. As of December 31, 2006,
40
management believes that FIN 48 will not have a material effect
on the financial position, results of operations, and cash flows
of the Company.
In September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements. This Statement defines fair value, establishes a
framework for measuring fair value in generally accepted
accounting principles ("GAAP"), and expands disclosures about
fair value measurements. The provisions of SFAS No. 157 are
effective as of the beginning of the first fiscal year that
begins after November 15, 2007. As of December 31, 2006,
management believes that SFAS No. 157 will have no effect on the
financial position, results of operations, and cash flows of the
Company.
In September 2006, the FASB issued SFAS No. 158, Employers'
Accounting for Defined Benefit Pension and Other Postretirement
Plans-an amendment of FASB Statements No. 87, 88, 106, and
132(R). This Statement requires an employer to recognize the
overfunded or underfunded status of a defined benefit
postretirement plan (other than a multiemployer plan) as an asset
or liability in its statement of financial position and to
recognize changes in that funded status in the year in which the
changes occur through comprehensive income of a business entity.
This Statement also requires an employer to measure the funded
status of a plan as of the date of its year-end statement of
financial position, with limited exceptions. The provisions of
SFAS No. 158 are effective as of the end of the fiscal year
ending after December 15, 2006. Upon adoption, SFAS No. 158 had
no effect on the financial position, results of operations, and
cash flows of the Company.
In September 2006, the Securities and Exchange Commission
published Staff Accounting Bulletin ("SAB") No. 108 (Topic 1N),
Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements.
SAB No. 108 requires registrants to quantify misstatements using
both the balance-sheet and income-statement approaches, with
adjustment required if either method results in a material error.
The provisions of SAB No. 108 are effective for annual financial
statements for the first fiscal year ending after November 15,
2006. Upon adoption, SAB No. 108 had no effect on the financial
position, results of operations, and cash flows of the Company.
(2) LONG-TERM DEBT
Long-term debt consisted of the following at December 31 (in
thousands):
2006 2005
-------- --------
Notes payable to banks under
committed credit facilities $100,000 $ 60,000
-------- --------
100,000 60,000
Less current portion - 60,000
-------- --------
Long-term debt, net $100,000 $ -
======== ========
The notes payable to banks under committed credit facilities
bear variable interest (5.8% at December 31, 2006) based on the
London Interbank Offered Rate ("LIBOR"), and these credit
facilities mature at various dates from May 2008 to May 2011.
During 2007, the Company repaid $10.0 million on these notes. As
of December 31, 2006, the Company has an additional $175.0
million of available credit under these credit facilities with
banks, which is further reduced by $39.2 million in letters of
credit the Company maintains. Each of the debt agreements
require, among other things, that the Company not exceed a
maximum ratio of total debt to total capitalization and not
exceed a maximum ratio of total funded debt to earnings before
interest, income taxes, depreciation, amortization and rentals
payable as defined in the credit facility. The Company was in
compliance with these covenants at December 31, 2006.
41
The aggregate future maturities of long-term debt by year
consist of the following at December 31, 2006 (in thousands):
2007 $ -
2008 50,000
2009 -
2010 -
2011 50,000
--------
$100,000
========
The carrying amount of the Company's long-term debt
approximates fair value due to the duration of the notes and the
interest rates.
(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):
2006 2005
-------- --------
Owner-operator notes receivable $ 13,298 $ 9,627
TDR Transportes, S.A. de C.V. 3,600 3,600
Other notes receivable 4,786 3,746
-------- --------
21,684 16,973
Less current portion 5,283 3,962
-------- --------
Notes receivable - non-current $ 16,401 $ 13,011
======== ========
The Company provides financing to some independent
contractors who want to become owner-operators by purchasing a
tractor from the Company and leasing their truck to the Company.
At December 31, 2006 and 2005, the Company had 315 and 246 notes
receivable totaling $13,298 and $9,627 (in thousands),
respectively, from these owner-operators. See Note 7 for
information regarding notes from related parties. The Company
maintains a first security interest in the tractor until the
owner-operator has paid the note balance in full. The Company
also retains recourse exposure related to owner-operators who
have purchased tractors from the Company with third-party
financing arranged by the Company.
During 2002, the Company loaned $3,600 (in thousands) 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, is subject to acceleration if
certain conditions are met, bears interest at a rate of five
percent per annum which is payable quarterly, contains certain
financial and other covenants, and is collateralized by the
assets of TDR. The Company had a receivable for interest on this
note of $31 (in thousands) as of December 31, 2006 and 2005. See
Note 7 for information regarding related party transactions.
42
(4) INCOME TAXES
Income tax expense consisted of the following (in
thousands):
2006 2005 2004
-------- -------- --------
Current:
Federal $ 59,021 $ 93,715 $ 38,206
State 7,495 12,190 5,664
-------- -------- --------
66,516 105,905 43,870
-------- -------- --------
Deferred:
Federal 1,149 (32,910) 12,336
State 1,085 (4,470) 181
-------- -------- --------
2,234 (37,380) 12,517
-------- -------- --------
Total income tax expense $ 68,750 $ 68,525 $ 56,387
======== ======== ========
The effective income tax rate differs from the federal
corporate tax rate of 35% in 2006, 2005 and 2004 as follows (in
thousands):
2006 2005 2004
-------- -------- --------
Tax at statutory rate $ 58,588 $ 58,471 $ 50,294
State income taxes, net of
federal tax benefits 5,577 5,018 3,800
Non-deductible meals and
entertainment 4,329 4,340 2,670
Income tax credits (740) (895) (900)
Other, net 996 1,591 523
-------- -------- --------
$ 68,750 $ 68,525 $ 56,387
======== ======== ========
At December 31, deferred tax assets and liabilities
consisted of the following (in thousands):
2006 2005
-------- --------
Deferred tax assets:
Insurance and claims accruals $ 67,432 $ 59,870
Allowance for uncollectible accounts 4,517 4,216
Other 4,041 4,588
-------- --------
Gross deferred tax assets 75,990 68,674
-------- --------
Deferred tax liabilities:
Property and equipment 253,192 244,128
Prepaid expenses 8,241 7,915
Other 5,719 5,559
-------- --------
Gross deferred tax liabilities 267,152 257,602
-------- --------
Net deferred tax liability $191,162 $188,928
======== ========
These amounts (in thousands) are presented in the
accompanying Consolidated Balance Sheets as of December 31 as
follows:
2006 2005
-------- --------
Current deferred tax asset $ 25,251 $ 20,940
Noncurrent deferred tax liability 216,413 209,868
-------- --------
Net deferred tax liability $191,162 $188,928
======== ========
43
The Company has not recorded a valuation allowance as it
believes that all deferred tax assets are more likely than not to
be realized as a result of the Company's history of
profitability, taxable income and reversal of deferred tax
liabilities.
(5) STOCK OPTION AND EMPLOYEE BENEFIT PLANS
Stock Option Plan
The Company's Stock Option Plan (the "Stock Option Plan") is
a nonqualified plan that provides for the grant of options to
management employees. Options are granted at prices equal to the
market value of the common stock on the date the option is
granted.
Options granted become exercisable in installments from six
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 maximum number of shares of common
stock that may be optioned under the Stock Option Plan is
20,000,000 shares. The maximum aggregate number of options that
may be granted to any one person under the Stock Option Plan is
2,562,500 options. At December 31, 2006, 8,890,551 shares were
available for granting additional options.
Effective January 1, 2006, the Company adopted SFAS No. 123R
using a modified version of the prospective transition method.
Under this transition method, compensation cost is recognized on
or after the required effective date for the portion of
outstanding awards for which the requisite service has not yet
been rendered, based on the grant-date fair value of those awards
calculated under SFAS No. 123 (as originally issued) for either
recognition or pro forma disclosures. Stock-based employee
compensation expense for the year 2006 was $2.3 million and is
included in salaries, wages and benefits within the consolidated
statements of income. The total income tax benefit recognized in
the income statement for stock-based compensation arrangements
was $0.9 million in 2006. There was no cumulative effect of
initially adopting SFAS No. 123R.
The Company granted 5,000, 415,500, and 787,000 stock
options during the years ended December 31, 2006, 2005, and 2004,
respectively. The fair value of stock options granted was
estimated using a Black-Scholes valuation model with the
following weighted-average assumptions:
Years Ended December 31,
------------------------------
2006 2005 2004
-------- -------- --------
Risk-free interest rate 4.7% 4.1% 4.0%
Expected dividend yield 0.88% 0.94% 0.66%
Expected volatility 36% 36% 37%
Expected term (in years) 4.9 4.8 6.5
The risk-free interest rate assumptions were based on
average 5-year and 10-year U.S. Treasury note yields. The
expected volatility was based on historical daily price changes
of the Company's stock since June 2001 for the options granted in
2006 and on historical monthly price changes of the Company's
stock since January 1990 for the options granted in 2005 and
2004. The expected term was the average number of years that the
Company estimated these options will be outstanding. The Company
considered groups of employees that have similar historical
exercise behavior separately for valuation purposes.
44
The following table summarizes Stock Option Plan activity
for the year ended December 31, 2006:
Weighted
Number Weighted Average Aggregate
of Average Remaining Intrinsic
Options Exercise Contractual Value
(in 000's) Price ($) Term (Years) (in 000's)
----------------------------------------------------------
Outstanding at beginning of period 5,029 $ 10.83
Options granted 5 $ 20.36
Options exercised (419) $ 8.06
Options forfeited (49) $ 17.48
Options expired (1) $ 7.35
----------
Outstanding at end of period 4,565 $ 11.03 4.88 $ 30,144
==========
Exercisable at end of period 3,362 $ 9.23 4.02 $ 27,899
==========
The weighted-average grant date fair value of stock options
granted during the years ended December 31, 2006, 2005, and 2004
was $7.37, $5.86 and $7.60 per share, respectively. The total
intrinsic value of share options exercised during the years ended
December 31, 2006, 2005, and 2004 was $5.4 million, $3.9 million,
and $8.2 million, respectively. As of December 31, 2006, the
total unrecognized compensation cost related to nonvested stock
option awards was approximately $2.6 million and is expected to
be recognized over a weighted average period of 1.3 years.
In periods prior to January 1, 2006, the Company applied the
intrinsic value based method of Accounting Principles Board
("APB") Opinion No. 25, Accounting for Stock Issued to Employees,
and related interpretations in accounting for its Stock Option
Plan. No stock-based employee compensation cost was reflected in
net income, as all options granted under the plan had an exercise
price equal to the market value of the underlying common stock on
the date of grant. The Company's pro forma net income and
earnings per share (in thousands, except per share amounts) would
have been as indicated below had the estimated fair value of all
option grants on their grant date been charged to salaries, wages
and benefits expense in accordance with SFAS No. 123, Accounting
for Stock-Based Compensation.
Years Ended December 31,
------------------------------------
2005 2004
------------ ------------
Net income, as reported $ 98,534 $ 87,310
Less: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects 1,758 2,006
--------- ---------
Net income, pro forma $ 96,776 $ 85,304
========= =========
Earnings per share:
Basic - as reported $ 1.24 $ 1.10
========= =========
Basic - pro forma $ 1.22 $ 1.08
========= =========
Diluted - as reported $ 1.22 $ 1.08
========= =========
Diluted - pro forma $ 1.20 $ 1.05
========= =========
Although the Company does not a have a formal policy for
issuing shares upon exercise of stock options, such shares are
generally issued from treasury stock. From time to time, the
Company has repurchased shares of its 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 sufficient quantities of stock for
issuance upon exercise of stock options. Based on current
treasury stock levels, the Company does not expect the need to
repurchase additional shares specifically for stock option
exercises during 2007.
45
Employee Stock Purchase Plan
Employees meeting certain eligibility requirements may
participate in the Company's Employee Stock Purchase Plan (the
"Purchase Plan"). Eligible participants designate the amount of
regular payroll deductions and/or single annual payment, subject
to a yearly maximum amount, that is used to purchase shares of
the Company's common stock on the Over-The-Counter Market subject
to the terms of the Purchase Plan. The Company contributes an
amount equal to 15% of each participant's contributions under the
Purchase Plan. Company contributions for the Purchase Plan (in
thousands) were $170, $119, and $108 for 2006, 2005, and 2004,
respectively. Interest accrues on Purchase Plan contributions at
a rate of 5.25%. The broker's commissions and administrative
charges related to purchases of common stock under the Purchase
Plan are paid by the Company.
401(k) Retirement Savings Plan
The Company has 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 the
Company or its subsidiaries for six months or more. The Company
matches a portion of the amount each employee contributes to the
401(k) Plan. It is the Company's intention, but not its
obligation, that the Company's total annual contribution for
employees will equal at least 2 1/2 percent of net income
(exclusive of extraordinary items). Salaries, wages and benefits
expense in the accompanying Consolidated Statements of Income
includes Company 401(k) Plan contributions and administrative
expenses (in thousands) of $2,270, $2,268, and $2,043 for 2006,
2005, and 2004, respectively.
Nonqualified Deferred Compensation Plan
The Company has a nonqualified deferred compensation plan
for the benefit of eligible key managerial employees whose 401(k)
plan contributions are limited due to IRS regulations affecting
highly compensated employees. Under the terms of the plan,
participants may elect to defer compensation on a pre-tax basis
within annual dollar limits established by the Company. The
current annual limit is established such that a participant's
combined deferrals in both the nonqualified deferred compensation
plan and the 401(k) plan approximate the maximum annual deferral
amount available to non-highly compensated employees in the
401(k) plan. Although it is not the Company's current intention
to do so, the Company may also make matching credits and/or
profit sharing credits to the participants' accounts as
determined each year by the Company. Under current tax law, the
Company is not allowed a current income tax deduction for the
compensation deferred by participants, but is allowed a tax
deduction when a distribution payment is made to a participant
from the plan. The accumulated benefit obligation (in thousands)
was $698 and $225 as of December 31, 2006 and 2005, respectively,
and is included in other long-term liabilities in the
consolidated balance sheets. The Company has purchased life
insurance policies to fund the future liability. The life
insurance policies had an aggregate market value (in thousands)
of $688 and $222 as of December 31, 2006 and 2005, respectively,
and are included in other non-current assets in the consolidated
balance sheets.
(6) COMMITMENTS AND CONTINGENCIES
The Company has committed to property and equipment
purchases of approximately $57.1 million.
During first quarter 2006, in connection with an audit of
the Company's federal income tax returns for the years 1999 to
2002, the Company received a notice from the Internal Revenue
Service ("IRS") proposing to disallow a significant tax
deduction. This deduction is a timing difference between
financial reporting and tax reporting and would not result in
additional income tax expense in the Company's financial
statements. This timing difference deduction reversed in the
Company's 2004 income tax return. The Company filed a protest in
this matter in April 2006, which is currently under review by an
IRS appeals officer. The initial conference with the appeals
officer is scheduled to occur in March 2007. The Company and its
tax advisors believe the Company has a strong position and,
therefore, at this time the Company has not recorded an accrual
for interest for this issue in the financial statements. It is
possible the Company may not ultimately prevail in its position,
which may have a material impact on the Company's financial
46
condition. The Company estimates the accrued interest, net of
taxes, if the Company would not prevail in its position with the
IRS to be approximately $6.5 million as of December 31, 2006.
The Company is involved in certain claims and pending
litigation arising in the normal course of business. Management
believes the ultimate resolution of these matters will not have a
material effect on the consolidated financial statements of the
Company.
(7) RELATED PARTY TRANSACTIONS
The Company leases land from a trust in which the Company's
principal stockholder is the sole trustee, with annual rent
payments of $1 per year. The Company is responsible for all real
estate taxes and maintenance costs related to the property, which
are recorded as expenses in the Company's Consolidated Statements
of Income. The Company has made leasehold improvements to the
land totaling approximately $6.1 million for facilities used for
business meetings and customer promotion.
The Company's principal stockholder was the sole trustee of
a trust that previously owned a one-third interest in an entity
that operates a motel located nearby one of the Company's
terminals with which the Company had committed to rent a
guaranteed number of rooms. The trust assigned its one-third
interest in this entity to the Company at a nominal cost in
February 2005. During 2006, 2005, and 2004, the Company paid (in
thousands) $264, $945, and $840, respectively, for lodging
services for its drivers at this motel. On June 30, 2005, the
Company sold .783 acres of land to this entity for approximately
$90 (in thousands), in accordance with the exercise of a purchase
option clause contained in a separate agreement entered into by
the Company and the entity in April 2000. The Company realized a
gain of approximately $35 (in thousands) on the transaction. On
April 10, 2006, the Company purchased the remaining two-thirds
interest in the entity from the two owners unrelated to the
Company for $3.0 million. The purchase price was based on an
appraisal of the property by an independent appraiser.
The brother and sister-in-law of the Company's principal
stockholder own an entity with a fleet of tractors that operates
as an owner-operator for the Company. During 2006, 2005, and
2004, the Company paid (in thousands) $7,271, $6,291, and $6,200,
respectively, to this owner-operator for purchased transportation
services. This fleet is compensated using the same owner-
operator pay package as the Company's other comparable third-
party owner-operators. The Company also sells used revenue
equipment to this entity. During 2006, 2005, and 2004, these
sales (in thousands) totaled $789, $1,019, and $193,
respectively, and the Company recognized gains (in thousands) of
$68, $130, and $18 in 2006, 2005, and 2004, respectively. The
Company had 40 and 32 notes receivable from this entity related
to the revenue equipment sales (in thousands) totaling $1,381 and
$1,105 at December 31, 2006 and 2005, respectively.
The brother of the Company's principal stockholder has a 50%
ownership interest in an entity with a fleet of tractors that
operates as an owner-operator for the Company. During 2006,
2005, and 2004, the Company paid (in thousands) $161, $476, and
$453, respectively, to this owner-operator for purchased
transportation services. This fleet is compensated using the
same owner-operator pay package as the Company's other comparable
third-party owner-operators.
The Company and TDR transact business with each other for
certain of their purchased transportation needs. During 2006,
2005, and 2004, the Company recorded operating revenues (in
thousands) from TDR of approximately $308, $227, and $168,
respectively, and recorded purchased transportation expense (in
thousands) to TDR of approximately $870, $521, and $631,
respectively. In addition, during 2006, 2005, and 2004, the
Company recorded operating revenues (in thousands) from TDR of
approximately $4,691, $3,582, and $2,837, respectively, related
to the leasing of revenue equipment. The Company also sells used
revenue equipment to this entity. During 2006 and 2005, these
sales (in thousands) totaled $3,697 and $358, respectively, and
the Company recognized gains (in thousands) of $170 in 2006 and
$19 in 2005. As of December 31, 2006 and 2005, the Company had
receivables related to the equipment leases and revenue equipment
47
sales (in thousands) of $2,853 and $2,389, respectively. See
Note 3 for information regarding the note receivable from TDR.
The Company has a 5% ownership interest in Transplace
("TPC"), a logistics joint venture of five large transportation
companies. The Company and TPC enter into transactions with each
other for certain of their purchased transportation needs. The
Company recorded operating revenue (in thousands) from TPC of
approximately $2,300, $4,800, and $8,400 in 2006, 2005, and 2004,
respectively, and recorded purchased transportation expense (in
thousands) to TPC of approximately $0, $0, and $7 during 2006,
2005, and 2004, respectively.
The Company believes that 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
The Company has two reportable segments - Truckload
Transportation Services and Value Added Services. The Truckload
Transportation Services segment consists of six operating fleets
that have been aggregated since they have similar economic
characteristics and meet the other aggregation criteria of SFAS
No. 131, Disclosures about Segments of an Enterprise and Related
Information. The medium-to-long-haul Van fleet transports a
variety of consumer, nondurable products and other commodities in
truckload quantities over irregular routes using dry van
trailers. The Regional short-haul fleet provides comparable
truckload van service within five geographic regions. The
Dedicated Services fleet provides truckload services required by
a specific company, plant, or distribution center. The Flatbed
and Temperature-Controlled fleets provide truckload services for
products with specialized trailers. The Expedited fleet
provides time-sensitive truckload services utilizing driver
teams. Revenues for the Truckload Transportation Services
segment include non-trucking revenues of $11.2 million, $12.2
million, and $14.4 million for 2006, 2005, and 2004,
respectively, representing the portion of shipments delivered to
or from Mexico where the Company utilizes a third-party capacity
provider and revenues generated in a few dedicated accounts where
the services of third-party capacity providers are used to meet
customer capacity requirements.
The Value Added Services segment, which generates the
majority of the Company's non-trucking revenues, provides freight
management (single-source logistics), truck brokerage, and
intermodal services, as well as a newly expanded international
product line.
The Company generates other revenues related to third-party
equipment maintenance, equipment leasing, and other business
activities. None of these operations meet the quantitative
threshold reporting requirements of SFAS No. 131. As a result,
these operations are grouped in "Other" in the table below.
"Corporate" includes revenues and expenses that are incidental to
the activities of the Company and are not attributable to any of
its operating segments. The Company does not prepare separate
balance sheets by segment and, as a result, assets are not
separately identifiable by segment. The Company has no
significant intersegment sales or expense transactions that would
result in adjustments necessary to eliminate amounts between the
Company's segments.
48
The following tables summarize the Company's segment
information (in thousands):
Revenues
----------
2006 2005 2004
---------- ---------- ----------
Truckload Transportation Services $1,801,090 $1,741,828 $1,506,937
Value Added Services 265,968 218,620 161,111
Other 10,536 7,777 6,424
Corporate 2,961 3,622 3,571
---------- ---------- ----------
Total $2,080,555 $1,971,847 $1,678,043
========== ========== ==========
Operating Income
------------------
2006 2005 2004
---------- ---------- ----------
Truckload Transportation Services $ 156,509 $ 156,122 $ 135,828
Value Added Services 7,421 8,445 5,631
Other 1,731 2,850 2,587
Corporate (1,160) (2,806) (2,718)
---------- ---------- ----------
Total $ 164,501 $ 164,611 $ 141,328
========== ========== ==========
Information as to the Company's operations by geographic
area is summarized below (in thousands). Operating revenues for
foreign countries include revenues for shipments with an origin
or destination in that country and 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
----------
2006 2005 2004
---------- ---------- ----------
United States $1,872,775 $1,782,501 $1,537,745
---------- ---------- ----------
Foreign countries
Mexico 168,846 145,678 104,934
Other 38,934 43,668 35,364
---------- ---------- ----------
Total foreign countries 207,780 189,346 140,298
---------- ---------- ----------
Total $2,080,555 $1,971,847 $1,678,043
========== ========== ==========
Long-lived Assets
-------------------
2006 2005 2004
---------- ---------- ----------
United States $1,067,716 $ 990,439 $ 850,250
---------- ---------- ----------
Foreign countries
Mexico 28,452 11,867 12,612
Other 172 301 136
---------- ---------- ----------
Total foreign countries 28,624 12,168 12,748
---------- ---------- ----------
Total $1,096,340 $1,002,607 $ 862,998
========== ========== ==========
Substantially all of the Company's revenues are generated
within the United States or from North American shipments with
origins or destinations in the United States. One customer
generated approximately 11% of the Company's total revenues for
2006, approximately 10% of total revenues for 2005, and
approximately 9% of total revenues for 2004.
49
(9) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share amounts)
First Quarter Second Quarter Third Quarter Fourth Quarter
-------------------------------------------------------------------
2006:
Operating revenues $ 491,922 $ 528,889 $ 541,297 $ 518,447
Operating income 36,822 46,351 40,686 40,642
Net income 22,029 28,021 24,551 24,042
Basic earnings per share .28 .36 .32 .32
Diluted earnings per share .27 .35 .31 .31
First Quarter Second Quarter Third Quarter Fourth Quarter
-------------------------------------------------------------------
2005:
Operating revenues $ 455,262 $ 485,789 $ 504,520 $ 526,276
Operating income 32,837 42,128 41,138 48,508
Net income 19,921 25,295 24,491 28,827
Basic earnings per share .25 .32 .31 .36
Diluted earnings per share .25 .31 .30 .36
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
No disclosure under this item has been required within the
two most recent fiscal years ended December 31, 2006, 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, the
Company carried out an evaluation, under the supervision and with
the participation of the Company's management, including the
Company's Chief Executive Officer and Chief Financial Officer, of
the effectiveness of the design and operation of the Company's
disclosure controls and procedures, as defined in Exchange Act
Rule 15d-15(e). Based upon that evaluation, the Company's Chief
Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures are effective in
enabling the Company to record, process, summarize and report
information required to be included in the Company's periodic SEC
filings within the required time period.
Management's Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining
adequate internal control over financial reporting for the
Company. Internal control over financial reporting is a process
designed to provide reasonable assurance to the Company's
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 maintaining records that in reasonable detail accurately
and fairly reflect the Company's transactions; providing
reasonable assurance that transactions are recorded as necessary
for preparation of our financial statements; providing reasonable
assurance that receipts and expenditures of company assets are
made in accordance with management authorization; and providing
reasonable assurance that unauthorized acquisition, use or
disposition of the company assets that could have a material
effect on the Company's financial statements would be prevented
or detected on a timely basis.
50
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.
Management has assessed the effectiveness of the Company's
internal control over financial reporting as of December 31,
2006, 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
the Company's internal control over financial reporting was
effective as of December 31, 2006.
Management has engaged KPMG LLP, the independent registered
public accounting firm that audited the consolidated financial
statements included in this Annual Report on Form 10-K, to attest
to and report on management's evaluation of the Company's
internal control over financial reporting. Its report is
included herein.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Werner Enterprises, Inc.:
We have audited management's assessment, included in the
accompanying Management's Report on Internal Control over
Financial Reporting, that Werner Enterprises, Inc. maintained
effective internal control over financial reporting as of
December 31, 2006, 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. Our responsibility is to express an
opinion on management's assessment and an opinion on the
effectiveness of 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, evaluating
management's assessment, testing and evaluating the design and
operating effectiveness of internal control, and 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
51
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that Werner
Enterprises, Inc. maintained effective internal control over
financial reporting as of December 31, 2006, is fairly stated, in
all material respects, based on COSO. Also, in our opinion,
Werner Enterprises, Inc. maintained, in all material respects,
effective internal control over financial reporting as of
December 31, 2006, based on 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, 2006 and 2005, 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, 2006, and our report dated
February 8, 2007, expressed an unqualified opinion on those
consolidated financial statements.
KPMG LLP
Omaha, Nebraska
February 8, 2007
Changes in Internal Control over Financial Reporting
There were no changes in the Company's internal controls
over financial reporting that occurred during the quarter ended
December 31, 2006, that have materially affected, or are
reasonably likely to materially affect, the Company's internal
control over financial reporting.
ITEM 9B. OTHER INFORMATION
The following disclosures are provided pursuant to Items
1.01 and 5.03 of Form 8-K.
On February 8, 2007, Werner Enterprises, Inc. (the
"Company") entered into a revised Lease Agreement, effective as
of the 21st day of May 2002 (the "Lease Agreement"), and a
License Agreement (the "License Agreement") with Clarence L.
Werner, Trustee of the Clarence L. Werner Revocable Trust (the
"Trust"). Clarence L. Werner, Chairman of the Board of the
Company, is the sole trustee of the Trust. The Lease Agreement
and License Agreement were approved by the disinterested members
of the Board of Directors at the Board's February 8, 2007
meeting. The Lease Agreement was originally entered into between
the parties as of May 21, 2002 with a 10-year lease term
commencing June 1, 2002 (the "2002 Lease Agreement").
The Lease Agreement covers the lease of land comprising
approximately 35 acres (referred to as the "Lodge Premises"),
with improvements consisting of lodging facilities and a sporting
clay range which are used by the Company for business meetings
and customer promotion. The 2002 Lease Agreement provided for a
non-exclusive license to use for hunting purposes a contiguous
portion of farmland comprising approximately 580 acres (referred
to as the "Farmland Premises"), which license rights were
deleted from the Lease Agreement and separated into the License
Agreement.
The Lease Agreement's current 10-year term expires May 31,
2012, and provides the Company the option to extend the lease for
two additional 5-year periods, through 2017 and 2022,
respectively. Under the Lease Agreement, the Company makes
annual rental payments of One Dollar ($1.00) per year, and is
responsible for the real estate taxes and maintenance costs on
the Lodge Premises, which totaled approximately $44 (in
thousands) for 2006.
Option to Purchase Rights: Under the Lease Agreement, at
any time during the lease or any extension thereof, the Company
has the option to purchase the Lodge Premises from the Trust at
its current market value, excluding the value of all leasehold
52
improvements made by the Company. The Company also has a right
of first refusal to purchase the Lodge Premises, or any part
thereof, if the Trust has an offer from an unrelated third party
to purchase the Lodge Premises. The Trust has the option at any
time during the lease to demand that the Company exercise its
option to purchase the Lodge Premises at its current market
value, excluding the value of all leasehold improvements made by
the Company. If the Company elects not to purchase the Lodge
Premises as demanded by the Trust, then the Company's option to
purchase at any time during the lease is forfeited; however, the
Company will still have the right of first refusal with respect
to a purchase offer from an unrelated third party. If the
Company terminates the Lease Agreement prior to the expiration of
the initial 10-year term and elects not to purchase the Lodge
Premises from the Trust, then the Trust agrees to pay the Company
the cost of all leasehold improvements, less accumulated
depreciation calculated on a straight-line basis over the term of
the Lease Agreement (10 years). If at the termination of the
initial 10-year lease term, or any of the two 5-year renewal
periods, the Company has not exercised its option to purchase the
Lodge Premises at its current market value, the leasehold
improvements become the property of the Trust. However, it is
the Company's current intention to exercise its option to
purchase the Lodge Premises at its current market value prior to
the completion of the initial 10-year lease period or any of the
two 5-year renewal periods. The Company has made leasehold
improvements to the Lodge Premises of approximately $6.1 million
since the inception of leasehold arrangements commencing in 1994.
The revisions to the Lease Agreement removed the provisions
relating to the Farmland Premises, as of the effective date of
the 2002 Lease Agreement, including the description of option to
purchase rights described above, from the agreement, and the
Company and the Trust entered into the separate License Agreement
defining their respective rights with respect to the Farmland
Premises. Under the License Agreement, the Company and its
invitees are granted a non-exclusive right to hunt and fish on
the Farmland Premises, for a term of one-year, which is
automatically renewable unless either party terminates not less
than 30 days prior to the end of the current annual term. The
Trust agrees to use its best efforts to maintain a Controlled
Shooting Area Permit on the Farmland Premises while the License
Agreement is in effect, and to maintain the land in a manner to
maximize hunting cover for game birds. In consideration of the
license to hunt and fish on the Farmland Premises, the Company
agrees to pay the Trust an amount equal to the real property
taxes and special assessments levied on the land, and the cost of
all fertilizer and seed used to maintain the hunting cover and
crops located on the land. Such costs were approximately $29 (in
thousands) for 2006.
Copies of the Lease Agreement and License Agreement are
filed as exhibits to this 10-K.
On February 8, 2007, the Board of Directors amended the
Company's by-laws, effective as of that date. A description of
the changes is set forth below.
* Section 7 of Article II was amended to reduce the notice
period for special meetings of the Board of Directors and
its committees from five (5) days to one (1) day and to
update the permitted methods used to provide notice to
directors of special meetings of the Board of Directors
and its committees. These methods include personal
delivery, mail, electronic mail, private carrier,
facsimile, and telephone.
* Sections 5 and 7 of Article III were amended to change the
definitions of the roles of "Chairman of the Board" and
"President", such that the President (and not the Chairman)
will be the Company's Chief Executive Officer.
* Sections 1 and 4 of Article V were amended to allow shares
of the Company to be either certificated or uncertificated
(book-entry) and to clarify that for transfers of
certificated shares only, the certificate for such shares
must be surrendered for cancellation.
The Revised and Restated By-laws are filed as an exhibit to
this 10-K.
53
PART III
Certain information required by Part III is omitted from
this report on Form 10-K in that the Company will file a
definitive proxy statement pursuant to Regulation 14A ("Proxy
Statement") not later than 120 days after the end of the fiscal
year covered by this report on Form 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 Ethics discussed below, is incorporated herein by
reference to the Company's Proxy Statement.
Code of Ethics
The Company has adopted a code of ethics that applies to its
principal executive officer, principal financial officer,
principal accounting officer/controller, and all other officers,
employees, and directors. The code of ethics is available on the
Company's website, www.werner.com. The Company intends to post
on its website any material changes to, or waiver from, its code
of ethics, 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 the Company's 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 the Company's Proxy
Statement.
Equity Compensation Plan Information
The following table summarizes, as of December 31, 2006,
information about compensation plans under which equity
securities of the Company 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
security holders 4,565,004 $11.03 8,890,551
The Company does not have any equity compensation plans that
were not approved by security holders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
The information required by this Item is incorporated herein
by reference to the Company's Proxy Statement.
54
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item is incorporated herein
by reference to the Company's 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 31
Consolidated Statements of Income 32
Consolidated Balance Sheets 33
Consolidated Statements of Cash Flows 34
Consolidated Statements of Stockholders' Equity and
Comprehensive Income 35
Notes to Consolidated Financial Statements 36
(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 57
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 report on Form 10-K (see
Exhibit Index on page 58).
55
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 13th day of February, 2007.
WERNER ENTERPRISES, INC.
By: /s/ Gregory L. Werner
------------------------------
Gregory L. Werner
President and Chief Executive Officer
By: /s/ John J. Steele
------------------------------
John J. Steele
Executive Vice President, Treasurer
and Chief Financial Officer
By: /s/ James L. Johnson
------------------------------
James L. Johnson
Senior Vice President, Controller
and Corporate Secretary
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 of the Board February 13, 2007
--------------------------
Clarence L. Werner
/s/ Gary L. Werner Vice Chairman and February 13, 2007
--------------------------
Gary L. Werner Director
/s/ Gregory L. Werner President, Chief Executive Officer February 13, 2007
--------------------------
Gregory L. Werner and Director
/s/ Gerald H. Timmerman Director February 13, 2007
--------------------------
Gerald H. Timmerman
/s/ Michael L. Steinbach Director February 13, 2007
--------------------------
Michael L. Steinbach
/s/ Kenneth M. Bird Director February 13, 2007
--------------------------
Kenneth M. Bird
/s/ Patrick J. Jung Director February 13, 2007
--------------------------
Patrick J. Jung
/s/ Duane K. Sather Director February 13, 2007
--------------------------
Duane K. Sather
56
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, 2006:
Allowance for doubtful accounts $ 8,357 $ 8,767 $ 7,707 $ 9,417
======= ======= ======= =======
Year ended December 31, 2005:
Allowance for doubtful accounts $ 8,189 $ 962 $ 794 $ 8,357
======= ======= ======= =======
Year ended December 31, 2004:
Allowance for doubtful accounts $ 6,043 $ 2,255 $ 109 $ 8,189
======= ======= ======= =======
See report of independent registered public accounting firm.
57
EXHIBIT INDEX
Exhibit
Number Description Page Number or Incorporated by Reference to
------- ----------- -------------------------------------------
3(i)(A) Revised and Amended Articles of Exhibit 3(i)(A) to the Company's report on Form
Incorporation 10-K for the year ended December 31, 2005
3(i)(B) Articles of Amendment to Articles of Filed herewith
Incorporation
3(i)(C) Articles of Amendment to Articles of Exhibit 3(i) to the Company's report on Form 10-
Incorporation Q for the quarter ended May 31, 1994
3(i)(D) Articles of Amendment to Articles of Exhibit 3(i)(C) to the Company's report on Form
Incorporation 10-K for the year ended December 31, 1998
3(i)(E) Articles of Amendment to Articles of Exhibit 3(i)(D) to the Company's report on Form
Incorporation 10-Q for the quarter ended June 30, 2005
3(ii) Revised and Restated By-Laws Filed herewith
10.1 Amended and Restated Stock Option Plan Exhibit 10.1 to the Company's report on Form 10-
Q for the quarter ended June 30, 2004
10.2 Non-Employee Director Compensation Exhibit 10.1 to the Company's report on Form 10-
Q for the quarter ended June 30, 2005
10.3 The Executive Nonqualified Excess Plan Filed herewith
of Werner Enterprises, Inc., as amended
10.4 Named Executive Officer Compensation Filed herewith
10.5 Lease Agreement, as amended February 8, Filed herewith
2007, between the Company and Clarence
L. Werner, Trustee of the Clarence L.
Werner Revocable Trust
10.6 License Agreement, dated February 8, Filed herewith
2007 between the Company and Clarence
L. Werner, Trustee of the Clarence L.
Werner Revocable Trust
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
58