UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[Mark one]
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2007
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-14690
WERNER ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
NEBRASKA 47-0648386
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
14507 FRONTIER ROAD
POST OFFICE BOX 45308
OMAHA, NEBRASKA 68145-0308
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (402) 895-6640
_________________________________
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the
Exchange Act. (Check one):
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 Exchange Act).
Yes No X
--- ---
As of April 26, 2007, 73,593,987 shares of the registrant's common
stock, par value $.01 per share, were outstanding.
INDEX TO FORM 10-Q
PAGE
PART I - FINANCIAL INFORMATION ----
Item 1. Financial Statements
Consolidated Statements of Income for the Three Months Ended
March 31, 2007 and 2006 3
Consolidated Condensed Balance Sheets as of March 31, 2007
and December 31, 2006 4
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2007 and 2006 5
Notes to Consolidated Financial Statements as of March 31,
2007 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24
Item 4. Controls and Procedures 25
PART II - OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 26
Item 6. Exhibits 27
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
The interim consolidated financial statements contained herein reflect
all adjustments, which in the opinion of management are necessary for a
fair statement of the financial condition, results of operations, and cash
flows for the periods presented. The interim consolidated financial
statements have been prepared in accordance with the instructions to Form
10-Q and do not include all the information and footnotes required by
accounting principles generally accepted in the United States of America
for complete financial statements.
Operating results for the three-month period ended March 31, 2007, are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2007. In the opinion of management, the information
set forth in the accompanying consolidated condensed balance sheets is
fairly stated in all material respects in relation to the consolidated
balance sheets from which it has been derived.
These interim consolidated financial statements should be read in
conjunction with the Werner Enterprises, Inc.'s ("Werner" or the "Company")
Annual Report on Form 10-K for the year ended December 31, 2006.
2
WERNER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
(In thousands, except per share amounts) March 31
---------------------------------------------------------------------------
2007 2006
---------------------------------------------------------------------------
(Unaudited)
Operating revenues $ 503,913 $ 491,922
---------------------------
Operating expenses:
Salaries, wages and benefits 150,521 146,613
Fuel 89,085 88,646
Supplies and maintenance 39,591 37,792
Taxes and licenses 30,163 29,469
Insurance and claims 24,205 19,195
Depreciation 42,557 41,101
Rent and purchased transportation 100,215 88,019
Communications and utilities 5,092 4,895
Other (4,782) (630)
---------------------------
Total operating expenses 476,647 455,100
---------------------------
Operating income 27,266 36,822
---------------------------
Other expense (income):
Interest expense 1,336 273
Interest income (1,051) (995)
Other 72 41
---------------------------
Total other expense (income) 357 (681)
---------------------------
Income before income taxes 26,909 37,503
Income taxes 11,241 15,474
---------------------------
Net income $ 15,668 $ 22,029
===========================
Earnings per share:
Basic $ .21 $ .28
===========================
Diluted $ .21 $ .27
===========================
Dividends declared per share $ .045 $ .040
===========================
Weighted-average common shares outstanding:
Basic 74,773 79,445
===========================
Diluted 76,216 80,963
===========================
3
WERNER ENTERPRISES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except share amounts) March 31 December 31
---------------------------------------------------------------------------
2007 2006
---------------------------------------------------------------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 17,575 $ 31,613
Accounts receivable, trade, less allowance
$9,299 and $9,417, respectively 230,459 232,794
Other receivables 14,294 17,933
Inventories and supplies 10,445 10,850
Prepaid taxes, licenses and permits 13,500 18,457
Current deferred income taxes 26,251 25,251
Other current assets 23,305 24,143
---------------------------
Total current assets 335,829 361,041
---------------------------
Property and equipment 1,690,835 1,687,220
Less - accumulated depreciation 602,288 590,880
---------------------------
Property and equipment, net 1,088,547 1,096,340
---------------------------
Other non-current assets 20,482 20,792
---------------------------
$1,444,858 $1,478,173
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 65,224 $ 75,821
Insurance and claims accruals 80,885 73,782
Accrued payroll 20,887 21,344
Other current liabilities 28,264 19,963
---------------------------
Total current liabilities 195,260 190,910
---------------------------
Long-term debt, net of current portion 80,000 100,000
Other long-term liabilities 6,607 999
Insurance and claims accruals, net of current
portion 99,500 99,500
Deferred income taxes 209,908 216,413
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, 200,000,000
shares authorized; 80,533,536 shares
issued; 73,900,461 and 75,339,297 shares
outstanding, respectively 805 805
Paid-in capital 105,342 105,193
Retained earnings 874,478 862,403
Accumulated other comprehensive loss (786) (207)
Treasury stock, at cost; 6,633,075 and
5,194,239 shares, respectively (126,256) (97,843)
---------------------------
Total stockholders' equity 853,583 870,351
---------------------------
$1,444,858 $1,478,173
===========================
4
WERNER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
(In thousands) March 31
---------------------------------------------------------------------------
2007 2006
---------------------------------------------------------------------------
(Unaudited)
Cash flows from operating activities:
Net income $ 15,668 $ 22,029
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 42,557 41,101
Deferred income taxes (2,435) 2,731
Gain on disposal of property and equipment (6,202) (8,829)
Stock based compensation 417 693
Other long-term assets 1,192 (1,399)
Insurance claims accruals, net of current
portion - 1,500
Other long-term liabilities 270 107
Changes in certain working capital items:
Accounts receivable, net 2,335 24,531
Other current assets 9,839 12,984
Accounts payable (10,597) 959
Other current liabilities 15,012 7,113
---------------------------
Net cash provided by operating activities 68,056 103,520
---------------------------
Cash flows from investing activities:
Additions to property and equipment (58,849) (56,246)
Retirements of property and equipment 27,285 48,376
Decrease in notes receivable 2,120 1,425
---------------------------
Net cash used in investing activities (29,444) (6,445)
---------------------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 10,000 -
Repayments of short-term debt - (60,000)
Repayments of long-term debt (30,000) -
Dividends on common stock (3,390) (3,177)
Repurchases of common stock (29,527) (19,825)
Stock options exercised 582 2,860
Excess tax benefits from exercise of stock
options 264 1,922
---------------------------
Net cash used in financing activities (52,071) (78,220)
---------------------------
Effect of exchange rate fluctuations on cash (579) (298)
Net increase (decrease) in cash and cash
equivalents (14,038) 18,557
Cash and cash equivalents, beginning of period 31,613 36,583
---------------------------
Cash and cash equivalents, end of period $ 17,575 $ 55,140
===========================
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest $ 1,691 $ 384
Income taxes $ 3,727 $ 7,108
Supplemental schedule of non-cash investing
activities:
Notes receivable issued upon sale of revenue
equipment $ 3,002 $ 1,417
5
WERNER ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Comprehensive Income
Other than its net income, the Company's only other source of
comprehensive income (loss) is foreign currency translation adjustments.
Other comprehensive income (loss) from foreign currency translation
adjustments was ($579) and ($298) (in thousands) for the three-month
periods ended March 31, 2007 and 2006, respectively.
(2) Long-Term Debt
Long-term debt consisted of the following (in thousands):
March 31 December 31
----------- -----------
2007 2006
----------- -----------
Notes payable to banks under committed
credit facilities $ 80,000 $ 100,000
Less current maturities - -
----------- -----------
Long-term debt, net $ 80,000 $ 100,000
=========== ===========
The notes payable to banks under committed credit facilities bear
variable interest (5.8% at March 31, 2007) based on the London Interbank
Offered Rate ("LIBOR") and mature at various dates from May 2008 to May
2011. As of March 31, 2007, the Company has an additional $170.0 million
of available credit under these credit facilities with two banks which is
further reduced by $39.2 million in letters of credit the Company
maintains. Subsequent to March 31, 2007, the Company repaid $10.0 million
on these notes. One credit facility contains a reduction clause, under
which the maximum facility amount decreases by $25.0 million on June 30,
2007. 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 March 31, 2007.
(3) Income Taxes
The Company adopted the provisions of FASB Interpretation No. 48 ("FIN
48"), Accounting for Uncertainty in Income Taxes, on January 1, 2007. As a
result of the adoption of FIN 48, the Company recognized an additional $0.3
million net liability for unrecognized tax benefits, which was accounted
for as a reduction to retained earnings. After recognizing the additional
liability, the Company had a total gross liability for unrecognized tax
benefits of $5.3 million as of the adoption date, which is included in
other long-term liabilities. If recognized, $3.4 million of unrecognized
tax benefits would impact the Company's effective tax rate. Interest of
$1.4 million has been reflected as a component of the total liability. It
is the Company's policy to recognize as additional income tax expense the
items of interest and penalties directly related to income taxes.
For the three month period ended March 31, 2007, there were no
material changes to the total amount of unrecognized tax benefits. The
Company does not expect any significant increases or decreases for
uncertain tax positions during the next 12 months, except for the potential
outcome of the matter discussed in Note 4.
6
The Company files income tax returns in the U.S. and various states as
well as several foreign jurisdictions. The Company has tax returns,
subject to examination, primarily for tax returns filed during 2003 through
2007 in addition to returns filed during 1999 through 2002 due to an
extension of the statute of limitations.
(4) Commitments and Contingencies
As of March 31, 2007, the Company has commitments for net capital
expenditures of approximately $15.6 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, if the
Company did not ultimately prevail, would result in interest charges, which
the Company records as a component of 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 occurred 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 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 $6.2 million as of
March 31, 2007.
(5) 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. The computation of basic and
diluted earnings per share is shown below (in thousands, except per share
amounts).
Three Months Ended
March 31
----------------------
2007 2006
----------------------
Net income $ 15,668 $ 22,029
======================
Weighted-average common shares outstanding 74,773 79,445
Common stock equivalents 1,443 1,518
----------------------
Shares used in computing diluted earnings
per share 76,216 80,963
======================
Basic earnings per share $ .21 $ .28
======================
Diluted earnings per share $ .21 $ .27
======================
7
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:
Three Months Ended
March 31
--------------------------
2007 2006
--------------------------
Number of shares under option 29,500 -
Range of option purchase prices $19.26 - $20.36 -
(6) Stock Based Compensation
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 March 31, 2007, 8,892,407 shares were available
for granting additional options.
Effective January 1, 2006, the Company adopted Statement of Financial
Accounting Standards ("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 for either
recognition or pro forma disclosures. Stock-based employee compensation
expense for the three months ended March 31, 2007 and 2006 was $0.4 million
and $0.7 million, respectively, 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 $0.2 million and $0.3 million for the three months ended
March 31, 2007 and 2006, respectively. There was no cumulative effect of
initially adopting SFAS No. 123R.
8
The following table summarizes Stock Option Plan activity for the
three months ended March 31, 2007:
Weighted
Average
Number Weighted Remaining Aggregate
of Average Contractual Intrinsic
Options Exercise Term Value
(in 000's) Price ($) (Years) (in 000's)
--------------------------------------------------------
Outstanding at beginning of period 4,565 $ 11.03
Options granted - $ -
Options exercised (61) $ 9.52
Options forfeited - $ -
Options expired (2) $ 7.35
----------
Outstanding at end of period 4,502 $ 11.05 4.68 $ 32,215
==========
Exercisable at end of period 3,304 $ 9.24 3.82 $ 29,542
==========
The Company granted no stock options during the three-month periods
ended March 31, 2007 and 2006. The fair value of stock option grants are
estimated using a Black-Scholes valuation model. The total intrinsic value
of share options exercised during the three months ended March 31, 2007 and
2006 was $0.6 million and $4.7 million, respectively. As of March 31, 2007,
the total unrecognized compensation cost related to nonvested stock option
awards was approximately $2.2 million and is expected to be recognized over
a weighted average period of 1.3 years.
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.
The Board has approved and adopted an amended and restated option plan
and renamed the amended plan the "Werner Enterprises, Inc. Equity Plan"
(the "Equity Plan"), pursuant to which it will, if the plan is approved by
the stockholders, be able to grant shares of restricted stock and grant
awards of stock options and stock appreciation rights to employees and non-
employee directors. The amended and restated Equity Plan is being proposed
for stockholder approval at the May 8, 2007 Annual Meeting of Stockholders.
If the proposed plan amendments are not approved by stockholders, the
current plan will continue in its current form.
(7) Segment Information
The Company has two reportable segments - Truckload Transportation
Services and Value Added Services ("VAS"). 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 Dedicated Services fleet provides
truckload services required by a specific customer, generally for a
distribution center or manufacturing facility. 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 Expedited fleet provides time-
sensitive truckload services utilizing driver teams. The Flatbed and
Temperature-Controlled fleets provide truckload services for products with
specialized trailers. Revenues for the Truckload Transportation Services
9
segment include non-trucking revenues of $3.1 million in first quarter 2007
and $2.8 million in first quarter 2006, which consist primarily of the
portion of shipments delivered to or from Mexico where the Company utilizes
a third-party capacity provider.
The VAS segment, which generates the majority of the Company's non-
trucking revenues, provides truck brokerage, intermodal, and freight
transportation management (single-source logistics), 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.
The following tables summarize the Company's segment information (in
thousands of dollars):
Revenues
--------
Three Months Ended
March 31
----------------------
2007 2006
----------------------
Truckload Transportation Services $ 429,807 $ 432,997
Value Added Services 69,877 56,171
Other 3,602 1,862
Corporate 627 892
----------------------
Total $ 503,913 $ 491,922
======================
Operating Income
----------------
Three Months Ended
March 31
----------------------
2007 2006
----------------------
Truckload Transportation Services $ 23,776 $ 35,083
Value Added Services 2,940 1,511
Other 829 463
Corporate (279) (235)
----------------------
Total $ 27,266 $ 36,822
======================
(8) Related Party Transactions
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-
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 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.
11
Copies of the Lease Agreement and License Agreement are filed as
exhibits to this 10-Q and are incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended December 31, 2006.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
This report contains historical information, as well as forward-
looking statements that are based on information currently available to the
Company's management. The forward-looking statements in this report,
including those made in this Item 2, "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, those
discussed in Item 1A, "Risk Factors", of the Company's Annual Report on
Form 10-K for the year ended December 31, 2006. 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-to-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, which consist primarily of the portion of
shipments delivered to or from Mexico where it utilizes a third-party
capacity provider. 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 approximately 85% of total operating
revenues in first quarter 2007, and non-trucking and other operating
revenues accounted for approximately 15%.
Trucking services typically generate revenue on a per-mile basis.
Other sources of trucking revenue include fuel surcharges and accessorial
revenue such as stop charges, loading/unloading charges, and equipment
detention charges. Because fuel surcharge revenues fluctuate in response
to changes in the cost of fuel, these revenues are identified separately
within the operating statistics table and are excluded from the statistics
to provide a more meaningful comparison between periods. Non-trucking
revenues generated by a fleet whose operations are part of the truckload
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 company-owned and owner-operator trucks. The key
12
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 average
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 company drivers and owner-operators
and the market for new and used revenue equipment. Because the Company is
self-insured for a significant portion of cargo, personal injury, and
property damage claims on its revenue equipment 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.
A common industry measure used to evaluate the profitability of the
Company and its trucking operating fleets is the operating ratio (operating
expenses expressed as a percentage of operating revenues). The most
significant variable expenses that impact the trucking operation are driver
salaries and benefits, payments to owner-operators (included in rent and
purchased transportation expense), fuel, fuel taxes (included in taxes and
licenses expense), supplies and maintenance, and insurance and claims.
These expenses generally vary based on the number of miles generated. As
such, the Company also evaluates these costs on a per-mile basis to adjust
for the impact on the percentage of total operating revenues caused by
changes in fuel surcharge revenues, per-mile rates charged to customers,
and non-trucking revenues. As discussed further in the comparison of
operating results for first quarter 2007 to first quarter 2006, several
industry-wide issues, including a softer freight market, 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 (phase 1) for all newly purchased trucks, which
have increased truck purchase costs. In addition, beginning in January
2007, a new set of more stringent engine emission standards mandated by the
Environmental Protection Agency ("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. The Company's new truck fleet
will allow it to delay purchases of trucks with the 2007 engines. 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 17. 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 expense expressed as a percentage of revenues) and the
13
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.
Results of Operations:
The following table sets forth certain industry data regarding the
freight revenues and operations of the Company for the periods indicated.
Three Months Ended
March 31 %
----------------------
2007 2006 Change
-----------------------------
Trucking revenues, net of fuel surcharge (1) $366,306 $368,256 -0.5%
Trucking fuel surcharge revenues (1) 60,383 61,888 -2.4%
Non-trucking revenues, including VAS (1) 72,951 58,980 23.7%
Other operating revenues (1) 4,273 2,798 52.7%
-------- --------
Operating revenues (1) $503,913 $491,922 2.4%
======== ========
Operating ratio (consolidated) (2) 94.6% 92.5%
Average monthly miles per tractor 9,519 9,834 -3.2%
Average revenues per total mile (3) $1.444 $1.448 -0.3%
Average revenues per loaded mile (3) $1.676 $1.663 0.8%
Average percentage of empty miles 13.84% 12.91%
Average trip length in miles (loaded) 572 585 -2.2%
Total miles (loaded and empty) (1) 253,714 254,317 -0.2%
Average tractors in service 8,884 8,620 3.1%
Average revenues per tractor per week (3) $3,172 $3,286 -3.5%
Total tractors (at quarter end)
Company 7,976 7,820
Owner-operator 824 830
-------- --------
Total tractors 8,800 8,650
Total trailers (truck and intermodal,
quarter end) 25,160 25,080
(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.
14
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 $3.1 million and $2.8 million for
the three-month periods ended March 31, 2007 and 2006, respectively, as
described on page 10.
Three Months Ended
March 31
---------------------------------------
2007 2006
------------------ ------------------
Truckload Transportation Services
(amounts in 000's) $ % $ %
--------------------------------- ------------------ ------------------
Revenues $ 429,807 100.0 $ 432,997 100.0
Operating expenses 406,031 94.5 397,914 91.9
------------ ------------
Operating income $ 23,776 5.5 $ 35,083 8.1
============ ============
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 were excluded
from revenue and instead reported as a reduction of operating expenses.
Three Months Ended
March 31
---------------------------------------
2007 2006
------------------ ------------------
Truckload Transportation Services
(amounts in 000's) $ % $ %
--------------------------------- ------------------ ------------------
Revenues $ 429,807 $ 432,997
Less: trucking fuel surcharge revenues 60,383 61,888
------------ ------------
Revenues, net of fuel surcharges 369,424 100.0 371,109 100.0
------------ ------------
Operating expenses 406,031 397,914
Less: trucking fuel surcharge revenues 60,383 61,888
------------ ------------
Operating expenses, net of fuel
surcharges 345,648 93.6 336,026 90.5
------------ ------------
Operating income $ 23,776 6.4 $ 35,083 9.5
============ ============
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.
Three Months Ended
March 31
---------------------------------------
2007 2006
------------------ ------------------
Value Added Services (amounts in 000's) $ % $ %
--------------------------------------- ------------------ ------------------
Revenues $ 69,877 100.0 $ 56,171 100.0
Rent and purchased transportation expense 61,929 88.6 50,891 90.6
------------ ------------
Gross margin 7,948 11.4 5,280 9.4
Other operating expenses 5,008 7.2 3,769 6.7
------------ ------------
Operating income $ 2,940 4.2 $ 1,511 2.7
============ ============
15
Three Months Ended March 31, 2007 Compared to Three Months Ended March 31,
---------------------------------------------------------------------------
2006
----
Operating Revenues
Operating revenues increased 2.4% for the three months ended March 31,
2007, compared to the same period of the prior year. Excluding fuel
surcharge revenues, trucking revenues decreased 0.5% due primarily to a
0.3% decrease in average revenues per total mile, excluding fuel
surcharges, and a 3.2% decrease in average monthly miles per tractor,
offset by a 3.1% increase in the average number of tractors in service.
The average percentage of empty miles increased to 13.8% in first quarter
2007 from 12.9% in first quarter 2006. Although average revenues per
loaded mile increased 0.8% in first quarter 2007 as compared to first
quarter 2006, the higher empty miles percentage was a contributing factor
in the decline in average revenue per mile on a total mile basis. A
significant portion of the increase in the empty mile percentage and the
decrease in average miles per truck are due to the softer freight market.
An increase in truck capacity and softness in freight demand made for
a continued challenging market in first quarter 2007. January 2007 began
with an unusually low level of freight demand. Freight bookings were lower
each week in first quarter 2007 compared to the same weeks in each of the
prior three years. However, Werner experienced the typical seasonal
improvement in freight demand as first quarter 2007 developed from January
to March. The softness in the housing and automotive sectors that are not
large markets for Werner caused carriers that serve these markets to
compete more aggressively in the consumer non-durable markets principally
served by the Company. In addition, moderating economic growth and
inventory tightening also contributed to lower freight volumes. These
factors and the significant increase in truck supply caused by the large
truck pre-buy in advance of the new January 2007 engine emission standards
led to a competitive environment in first quarter 2007.
The Company has historically served its partner customers by making
available a portion of its 3,000-truck Van solo driver fleet to meet their
flex and surge shipment needs, at contractually agreed terms and rates.
This fleet, which has the greatest exposure to the spot freight market,
faced the most operational challenges during the past several months. To
better match freight and trucks and to improve profitability, in March 2007
the Company began reducing its Van fleet by 250 trucks over a 60-day
period. Management has completed the initial 250 truck reduction and has
begun further reductions beyond the initial 250 trucks to achieve the
operational efficiencies and profitability expectations for this fleet. In
addition, the Company is meeting with its partner customers to explain the
Company's goal of committing 100% of Van capacity on a daily basis.
Depending on used truck and trailer market conditions and the Company's
equipment needs in its other truck fleets, the reduction in the Van fleet
may result in an increase in truck and trailer sales.
Fuel surcharge revenues, which represent collections from customers
for the higher cost of fuel, decreased to $60.4 million in first quarter
2007 from $61.9 million in first quarter 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 Department of Energy ("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 the fuel prices as prices
change rapidly in short periods of time.
VAS revenues increased 24.4% to $69.9 million for the three months
ended March 31, 2007 from $56.2 million for the three months ended March
31, 2006. VAS revenues consist primarily of truck brokerage, intermodal,
16
freight management (single-source logistics), as well as the newly expanded
international product line described below. Brokerage continued to produce
strong results with 32% revenue growth and $0.8 million of operating income
improvement. Brokerage is generating an annualized revenue run rate of
$115 million with a carrier base of approximately 5,000 qualified carriers.
Freight Management, the Company's single source logistics solution and
largest VAS service offering, produced 9% revenue growth and $0.3 million
of operating income improvement. Freight Management continues to secure new
VAS business that is generating growth across all Company business units.
Intermodal produced 46% revenue growth and $0.3 million of net operating
margin improvement, as the Company started benefiting from intermodal
strategy changes that were implemented during fourth quarter 2006 and first
quarter 2007.
Werner Global Logistics ("WGL"), VAS' international service offering,
is fully prepared to assist customers with innovative global supply chain
solutions. All necessary business licenses have been obtained to conduct
business in China and facilitate international freight shipments; an
experienced management team is fully staffed and trained in Shanghai,
Shenzen and Omaha; and WGL has successfully managed hundreds of
international container shipments to date. Customer development efforts
are actively in process and WGL is expected to be a positive operating
income contributor later this year. Werner, through its subsidiary
companies, is a licensed U.S. NVOCC, U.S. Customs Broker, Class A Freight
Forwarder in China, licensed China NVOCC and a TSA approved Indirect Air
Carrier.
Operating Expenses
Operating expenses, expressed as a percentage of operating revenues,
were 94.6% for the three months ended March 31, 2007, compared to 92.5% for
the three months ended March 31, 2006. Because the Company's VAS business
operates with a lower operating margin and a higher return on assets than
the trucking business, the growth in VAS business in first quarter 2007
compared to first quarter 2006 contributed to the increase in the Company's
overall operating ratio. Expense items that impacted the overall operating
ratio are described on the following pages. The tables on page 15 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,
which is a better measurement tool for comparing the results of operations
from period to period.
Three Months Ended Increase
March 31 (Decrease)
------------------
2007 2006 per Mile
------------------------------
Salaries, wages and benefits $0.574 $0.563 $0.011
Fuel 0.349 0.347 0.002
Supplies and maintenance 0.148 0.143 0.005
Taxes and licenses 0.118 0.115 0.003
Insurance and claims 0.095 0.075 0.020
Depreciation 0.161 0.157 0.004
Rent and purchased transportation 0.151 0.146 0.005
Communications and utilities 0.020 0.019 0.001
Other (0.016) 0.000 (0.016)
Owner-operator costs are included in rent and purchased transportation
expense. Owner-operator miles as a percentage of total miles were
unchanged at 11.8% for first quarter 2007 and first quarter 2006, which
17
resulted in essentially no shifting of costs between rent and purchased
transportation and other expense categories. 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.
Salaries, wages and benefits for non-drivers increased in first
quarter 2007 compared to first quarter 2006 due to an increase in personnel
to support the growth in the VAS segment that does not generate miles. The
increase in salaries, wages and benefits of 1.1 cents per mile for the
truckload segment is primarily the result of additional amounts paid to
drivers such as layover pay and other discretionary pay items used to
compensate drivers in the challenging freight environment, an increase in
the percentage of dedicated fleet trucks, and higher group health insurance
costs due to less favorable claims experience in first quarter 2007, offset
by decreases in workers' compensation expense and state unemployment taxes.
Non-driver salaries, wages and benefits for the truckload segment increased
on a per-mile basis due to the effect of the lower miles generated per
truck.
The Company renewed its workers' compensation insurance coverage, and
for the policy year beginning April 2007, the Company continues to maintain
a self-insurance retention of $1.0 million per claim and is no longer
responsible for an annual aggregate amount of $1.0 million for claims above
$1.0 million and below $2.0 million. The Company's workers' compensation
insurance premiums for the policy year beginning April 1, 2007 are slightly
higher than the previous policy year, but the Company expects to realize
cost savings from eliminating the aggregate between $1.0 million and $2.0
million.
The driver market remains challenging, but is less difficult than a
year ago. Normally going into the spring season, the driver market is very
difficult due to seasonal construction and housing jobs that become
available with improving weather conditions. The current weakness in these
industries and other factors are helping improve the Company's driver
availability. However, the Company anticipates that the competition for
qualified drivers will continue to be high and cannot predict whether it
will experience shortages in the future. If such a shortage 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 0.2 cents per mile for the truckload segment due to
higher average diesel fuel prices. Compared to the same month in the prior
year, fuel costs were 10 cents per gallon lower in January 2007, 5 cents
per gallon higher in February 2007, and 14 cents per gallon higher in March
2007. Fuel prices began to fall in the latter half of April, but still
averaged 4 cents per gallon higher in April 2007 than in April 2006. In
addition, the industry-wide adoption of ultra-low sulfur diesel beginning
in fourth quarter 2006 reduced miles per gallon. For first quarter 2007
compared to first quarter 2006, net fuel costs had a two-cent negative
impact on earnings per share. 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) miles per gallon, and (4) offsetting fuel
surcharge revenues from customers.
Shortages of fuel, increases in fuel prices, or rationing of petroleum
products can have a materially adverse effect on the operations and
profitability of the Company. The Company is unable to predict whether
fuel price levels will continue to increase or decrease in the future or
the extent to which fuel surcharges will be collected from customers. As
of March 31, 2007, the Company had no derivative financial instruments to
reduce its exposure to fuel price fluctuations.
Supplies and maintenance for the truckload segment increased 0.5 cents
on a per-mile basis in first quarter 2007 due primarily to increases in
over-the-road tractor repairs and the effect of lower miles per truck.
18
Taxes and licenses for the truckload segment increased 0.3 cents per
total mile due primarily to increases in state fuel tax rates and the
effect of lower miles per truck.
Insurance and claims for the truckload segment increased 2.0 cents on
a per-mile basis due primarily to an increase in the frequency of claims in
first quarter 2007 compared to first quarter 2006. For the policy year
that began August 1, 2006, the Company is responsible for the first $2.0
million per claim with an annual aggregate of $2.0 million for claims
between $2.0 million and $3.0 million, and the Company is fully insured
(i.e., no aggregate) for claims between $3.0 million and $5.0 million. For
claims in excess of $5.0 million and less than $10.0 million, the Company
is responsible for the first $5.0 million of claims in the policy year.
The Company maintains liability insurance coverage with reputable insurance
carriers substantially in excess of the $10.0 million per claim. The
Company's liability insurance premiums for the policy year beginning August
1, 2006 were slightly higher than the previous policy year.
Depreciation expense for the truckload segment increased 0.4 cents on
a per-mile basis in first quarter 2007 due primarily to higher costs of new
tractors with the post-October 2002 engines and the impact of lower miles
per truck.
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 on page 15, 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 segment. VAS lowered its rent and purchased
transportation expense as a percentage of VAS revenues to 88.6% in first
quarter 2007 compared to 90.6% in first quarter 2006.
Rent and purchased transportation for the truckload segment increased
0.5 cent per total mile in first quarter 2007 due primarily to an increase
of the van and regional over-the-road owner-operators' settlement rate by
two cents per mile effective May 1, 2006. To a lesser extent, higher fuel
prices necessitated higher reimbursements to owner-operators for fuel ($7.5
million for first quarter 2007 compared to $7.3 million for first quarter
2006). 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 prices on earnings.
The Company continues to experience difficulty attracting and
retaining owner-operator drivers due to the challenging operating
conditions including inflationary cost increases that are the
responsibility of the owner-operators. The number of owner-operators
decreased slightly to 824 as of March 31, 2007 from a total of 830 as of
March 31, 2006 (a 0.7% decrease). 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 additional 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.
Other operating expenses for the truckload segment decreased 1.6 cents
per mile in first quarter 2007. Gains on sales of assets (a reduction of
other operating expenses), primarily trucks and trailers, decreased to $6.2
million in first quarter 2007 compared to $8.8 million in first quarter
2006. As planned, in first quarter 2007 the Company sold fewer trucks but
continued to realize solid gains per truck sold, after considering the
impact of the softer freight market and higher fuel prices. In first
quarter 2007, the Company also continued to sell its oldest van trailers
that are fully depreciated and replace them with new trailers. These
trailer sales also contributed to equipment gains in both first quarter
2007 and first quarter 2006. The Company expects to continue to sell its
19
oldest van trailers during the remainder of 2007 and continue replacing
them with new trailers.
In March 2006, a long-standing customer, APX Logistics, Inc., filed
bankruptcy and is subsequently being liquidated with no significant amounts
expected to be paid to unsecured creditors. The Company recorded bad debt
expense in first quarter 2006 for the full amount owed of $7.2 million.
This was reflected as an expense in Other Operating Expenses in the
Company's income statement for first quarter 2006.
The Company's effective income tax rate (income taxes expressed as a
percentage of income before income taxes) increased slightly to 41.8% for
first quarter 2007 from 41.3% for first quarter 2006.
Liquidity and Capital Resources:
During the three months ended March 31, 2007, the Company generated
cash flow from operations of $68.1 million, a 34.3% decrease ($35.5
million) in cash flow compared to the same three-month period a year ago.
The decrease in cash flow from operations is due primarily to a slight
increase in days sales in accounts receivable in first quarter 2007
compared to a decrease in days sales in accounts receivable in first
quarter 2006 (principally due to reserving for the APX bankruptcy), an $0.8
million decrease in accounts payable for revenue equipment from December
2005 to March 2006 compared to an $8.8 million decrease in accounts payable
for revenue equipment from December 2006 to March 2007, and lower net
income in first quarter 2007. Cash flow from operations enabled the
Company to make net capital expenditures, make net repayments of debt, and
repurchase common stock as discussed below.
Net cash used in investing activities for the three-month period ended
March 31, 2007 increased by $23.0 million, from $6.4 million for the three-
month period ended March 31, 2006 to $29.4 million for the three-month
period ended March 31, 2007. Net property additions, primarily revenue
equipment, were $31.6 million for the three-month period ended March 31,
2007 versus $7.9 million during the same period of 2006. The increase was
due primarily to the Company purchasing more 2006-engine tractors in first
quarter 2007. The average age of the Company's truck fleet is 1.49 years
at March 31, 2007 compared to 1.25 years as of March 31, 2006. The new
fleet will allow the Company to delay purchases of trucks with the 2007
engines.
As of March 31, 2007, the Company has committed to property and
equipment purchases, net of trades, of approximately $15.6 million. The
Company intends to fund these net capital expenditures through cash flow
from operations and through financing available under its existing credit
facilities, as management deems necessary.
Net financing activities used $52.1 million and $78.2 million during
the three months ended March 31, 2007 and 2006, respectively. The change
from 2006 to 2007 included borrowings of $10.0 million and repayments of
outstanding debt totaling $30.0 million during the three-month period ended
March 31, 2007, compared to repayments of $60.0 million in first quarter
2006. The Company paid dividends of $3.4 million in the three-month period
ended March 31, 2007 and $3.2 million in the three-month period ended March
31, 2006. Financing activities also included common stock repurchases of
$29.5 million and $19.8 million in the three-month periods ended March 31,
2007 and 2006, respectively. 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. As of March 31, 2007, the Company had purchased 2,291,200 shares
pursuant to its current repurchase authorization and had 3,708,800 shares
remaining available for repurchase.
Management believes the Company's financial position at March 31, 2007
is strong. As of March 31, 2007, the Company had $17.6 million of cash and
cash equivalents and $853.6 million of stockholders' equity. As of March
20
31, 2007, the Company had $250.0 million of available credit pursuant to
credit facilities, of which it had borrowed $80.0 million. The 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. Based on the
Company's strong financial position, management foresees no significant
barriers to obtaining sufficient financing, if necessary.
Off-Balance Sheet Arrangements:
As of March 31, 2007, the Company had no non-cancelable revenue
equipment operating leases, and had no other arrangements that meet the
definition of an off-balance sheet arrangement.
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. 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") and Public Citizen filed petitions for review
of the current HOS regulations with the U.S. Court of Appeals. On December
4, 2006, a three-judge panel heard arguments from OOIDA and Public Citizen.
The appeals court is expected to issue its ruling in the near future.
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 were to 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.
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 estimated to cost $5,000-$10,000 more per truck, have
slightly lower miles per gallon ("mpg"), and have 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 Company's capital expenditures for new trucks are expected to be much
lower in 2007. A new set of more stringent emissions standards mandated by
the EPA will become effective for newly manufactured trucks beginning in
January 2010.
Several states, counties and cities have enacted legislation or
ordinances restricting idling of trucks to short periods of time. This is
significant when it impacts the ability of the driver to idle the truck for
purposes of operating air conditioning and heating systems particularly
while in the sleeper berth. Many of the statutes or ordinances,
recognizing the need of the drivers to have a comfortable environment in
which to sleep, have made exceptions for those circumstances. California
21
currently has such an exemption, however, the sleeper berth exemption will
no longer exist after January 1, 2008. We are currently working on plans
to address this issue in California. California has also enacted
restrictions on Transport Refrigeration Units ("TRUs") emissions, which are
scheduled to be phased in over several years beginning year-end 2008.
Although legal challenges may be mounted, if the law becomes effective as
scheduled it will require companies to operate only compliant TRUs in
California. There are several alternatives for meeting these requirements
which the Company is currently evaluating.
Critical Accounting Policies:
The most significant accounting policies and estimates that affect our
financial statements include the following:
* Selections of estimated useful lives and salvage values for purposes
of depreciating tractors and trailers. Depreciable lives of tractors
and trailers range from 5 to 12 years. Estimates of salvage value at
the expected date of trade-in or sale (for example, three years for
tractors) are based on the expected market values of equipment at
the time of disposal. Although the Company's current 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.
* 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 and liabilities 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 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
22
costs of transportation paid by the Company to the third-party
capacity 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 capacity providers.
* Accounting for income taxes. Significant management judgment is
required to determine the provision for income taxes, to determine
whether deferred income taxes will be realized in full or in part,
and to determine the liability for unrecognized tax benefits in
accordance with the provisions of the newly adopted FIN48. 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 evaluates these estimates and policies as
events and circumstances change. There have been no changes to these
policies that occurred during the Company's most recent fiscal quarter,
except for establishing policies to determine the liability for
unrecognized tax benefits upon adoption of FIN48. Together with the effects
of the matters discussed above, these factors may significantly impact the
Company's results of operations from period to period.
Accounting Standards:
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. Upon adoption, SFAS No. 155 had 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. Upon adoption, SFAS No. 156 had 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 Company adopted the provisions of FIN 48 on January 1,
2007, and as a result, recognized an additional $0.3 million liability for
unrecognized tax benefits, which was accounted for as a reduction to
retained earnings.
23
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 March 31, 2007,
management believes that SFAS No. 157 will not have a material effect on
the financial position, results of operations, and cash flows of the
Company.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities-Including an amendment of
FASB Statement No. 115. This statement permits entities to choose to
measure many financial instruments and certain other items at fair value.
The provisions of SFAS No. 159 are effective as of the beginning of an
entity's first fiscal year that begins after November 15, 2007. As of
March 31, 2007, management believes that SFAS No. 159 will not have a
material effect on the financial position, results of operations, and cash
flows of the Company.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company is exposed to market risk from changes in commodity
prices, foreign currency exchange rates, and interest rates.
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 March 31, 2007, 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 has begun
operations in Asia. Foreign currency transaction gains and losses were not
material to the Company's results of operations for first quarter 2007 and
prior periods. 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.
Interest Rate Risk
The Company had $80.0 million of debt outstanding at March 31, 2007.
The interest rates on the variable rate debt are based on the London
Interbank Offered Rate ("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 $800,000. The Company
has no derivative financial instruments to reduce its exposure to interest
rate increases.
24
Item 4. Controls and Procedures.
As of the end of the period covered by this report, the Company
carried out an evaluation, under the supervision and with the participation
of the Company's management, including the Company's Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures, as defined
in Exchange Act Rule 15d-15(e). The Company's disclosure controls and
procedures are designed to provide reasonable assurance of achieving the
desired control objectives. 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, under the supervision and with the participation of the
Company's Chief Executive Officer and Chief Financial Officer, concluded
that there have been no changes in the Company's internal control over
financial reporting that occurred during the Company's most recent fiscal
quarter that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
The Company has confidence in its internal controls and procedures.
Nevertheless, the Company's management, including the Chief Executive
Officer and Chief Financial Officer, does not expect that the internal
controls or disclosure procedures and controls will prevent all errors or
intentional fraud. An internal control system, no matter how well
conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of such internal controls are met. Further,
the design of an internal control system must reflect the fact that there
are resource constraints, and the benefits of controls must be relative to
their costs. Because of the inherent limitations in all internal control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the Company have been
detected.
25
PART II
OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On April 17, 2006, the Company announced that its Board of Directors
approved an increase to its authorization for common stock repurchases of
6,000,000 shares. As of March 31, 2007, the Company had purchased
2,291,200 shares pursuant to this authorization and had 3,708,800 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 first quarter of 2007 made pursuant to this authorization. No
shares were purchased during the quarter other than through this program,
and all purchases were made by 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
Total Number of Purchased as Part of May Yet Be
Shares (or Units) Average Price Paid Publicly Announced Purchased Under the
Period Purchased per Share (or Unit) Plans or Programs Plans or Programs
--------------------------------------------------------------------------------------
January 1-31, 2007 - - - 5,208,800
February 1-28, 2007 1,054,900 $19.93 1,054,900 4,153,900
March 1-31, 2007 445,100 $19.11 445,100 3,708,800
------------------ --------------------
Total 1,500,000 $19.68 1,500,000 3,708,800
================== ====================
26
Item 6. Exhibits.
Index of Exhibits
Exhibit 3(i)(A) Revised and Amended Articles of Incorporation
(Incorporated by reference to Exhibit 3(i) to the Company's report
on Form 10-K for the year ended December 31, 2005)
Exhibit 3(i)(B) Articles of Amendment to Articles of Incorporation
(Incorporated by reference to Exhibit 3(i)(B) to the Company's
report on Form 10-K for the year ended December 31, 2006)
Exhibit 3(i)(C) Articles of Amendment to Articles of Incorporation
(Incorporated by reference to Exhibit 3(i) to the Company's report
on Form 10-Q for the quarter ended May 31, 1994)
Exhibit 3(i)(D) Articles of Amendment to Articles of Incorporation
(Incorporated by reference to Exhibit 3(i)(C) to the Company's
report on Form 10-K for the year ended December 31, 1998)
Exhibit 3(i)(E) Articles of Amendment to Articles of Incorporation
(Incorporated by reference to Exhibit 3(i)(D) to the Company's
report on Form 10-Q for the quarter ended June 30, 2005)
Exhibit 3(ii) Revised and Restated By-Laws (Incorporated by reference to
Exhibit 3(ii) to the Company's report on Form 10-K for the year
ended December 31, 2006)
Exhibit 10.1 Lease Agreement, as amended February 8, 2007, between the
Company and Clarence L. Werner, Trustee of the Clarence L. Werner
Revocable Trust (Incorporated by reference to Exhibit 10.5 to the
Company's report on Form 10-K for the year ended December 31, 2006)
Exhibit 10.2 License Agreement, as amended February 8, 2007, between
the Company and Clarence L. Werner, Trustee of the Clarence L.
Werner Revocable Trust (Incorporated by reference to Exhibit 10.6 to
the Company's report on Form 10-K for the year ended December 31,
2006)
Exhibit 10.3 Named Executive Officer Compensation (filed herewith)
Exhibit 31.1 Rule 13a-14(a)/15d-14(a) Certification (filed herewith)
Exhibit 31.2 Rule 13a-14(a)/15d-14(a) Certification (filed herewith)
Exhibit 32.1 Section 1350 Certification (filed herewith)
Exhibit 32.2 Section 1350 Certification (filed herewith)
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
WERNER ENTERPRISES, INC.
Date: April 30, 2007 By: /s/ John J. Steele
-------------------- -------------------------------------
John J. Steele
Executive Vice President, Treasurer
and Chief Financial Officer
Date: April 30, 2007 By: /s/ James L. Johnson
-------------------- -------------------------------------
James L. Johnson
Senior Vice President, Controller and
Corporate Secretary