UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[Mark one]
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2009
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 has submitted
electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule
405 of Regulation S-T (232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to
submit and post such files).
Yes No
--- ---
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated
filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer X Accelerated filer
--- ---
Non-accelerated filer Smaller reporting company
--- (Do not check if a ---
smaller reporting
company)
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 October 29, 2009, 71,768,129 shares of the registrant's common
stock, par value $.01 per share, were outstanding.
2
WERNER ENTERPRISES, INC.
INDEX
-----
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements: 4
Consolidated Statements of Income for the Three Months Ended 5
September 30, 2009 and 2008
Consolidated Statements of Income for the Nine Months Ended 6
September 30, 2009 and 2008
Consolidated Condensed Balance Sheets as of September 30, 2009 7
and December 31, 2008
Consolidated Statements of Cash Flows for the Nine Months 8
Ended September 30, 2009 and 2008
Notes to Consolidated Financial Statements (Unaudited) as of 9
September 30, 2009
Item 2. Management's Discussion and Analysis of Financial Condition 14
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 31
Item 4. Controls and Procedures 32
PART II - OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 33
Item 6. Exhibits 33
3
PART I
FINANCIAL INFORMATION
Cautionary Note Regarding Forward-Looking Statements:
This Quarterly Report on Form 10-Q contains historical information and
forward-looking statements based on information currently available to our
management. The forward-looking statements in this report, including those
made in 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. These
safe harbor provisions encourage reporting companies to provide prospective
information to investors. Forward-looking statements can be identified by
the use of certain words, such as "anticipate," "believe," "estimate,"
"expect," "intend," "plan," "project" and other similar terms and language.
We believe the forward-looking statements are reasonable based on currently
available information. However, forward-looking statements involve risks,
uncertainties and assumptions, whether known or unknown, that could cause
our actual results, business, financial condition and cash flows to differ
materially from those anticipated in the forward-looking statements. A
discussion of important factors relating to forward-looking statements is
included in Item 1A ("Risk Factors") of our Annual Report on Form 10-K for
the year ended December 31, 2008 and in Item 1A ("Risk Factors") of our Form
10-Q for the quarterly period ended March 31, 2009. Readers should not
unduly rely on the forward-looking statements included in this Form 10-Q
because such statements speak only to the date they were made. Unless
otherwise required by applicable securities laws, we undertake no obligation
or duty to update or revise any forward-looking statements contained herein
to reflect subsequent events or circumstances or the occurrence of
unanticipated events.
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 U.S. Securities and
Exchange Commission (the "SEC") instructions to Form 10-Q and were also
prepared without audit. The interim consolidated financial statements do
not include all information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial
statements; although in management's opinion, the disclosures are adequate
so that the information presented is not misleading.
Operating results for the three-month and nine-month periods ended
September 30, 2009 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2009. 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 and notes thereto
should be read in conjunction with the financial statements and accompanying
notes contained in our Annual Report on Form 10-K for the year ended
December 31, 2008.
4
WERNER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
(In thousands, except per share amounts) September 30,
---------------------------------------------------------------------------
2009 2008
---------------------------------------------------------------------------
(Unaudited)
Operating revenues $ 429,273 $ 584,057
---------------------------
Operating expenses:
Salaries, wages and benefits 130,885 150,616
Fuel 66,001 145,280
Supplies and maintenance 34,403 41,566
Taxes and licenses 23,665 26,733
Insurance and claims 20,016 28,727
Depreciation 37,708 41,653
Rent and purchased transportation 79,948 107,948
Communications and utilities 3,841 4,769
Other 1 (1,257)
---------------------------
Total operating expenses 396,468 546,035
---------------------------
Operating income 32,805 38,022
---------------------------
Other expense (income):
Interest expense 3 3
Interest income (418) (1,012)
Other (100) 27
---------------------------
Total other expense (income) (515) (982)
---------------------------
Income before income taxes 33,320 39,004
Income taxes 14,328 16,558
---------------------------
Net income $ 18,992 $ 22,446
===========================
Earnings per share:
Basic $ 0.26 $ 0.32
===========================
Diluted $ 0.26 $ 0.31
===========================
Dividends declared per share $ 0.050 $ 0.050
===========================
Weighted-average common shares outstanding:
Basic 71,701 70,864
===========================
Diluted 72,110 71,825
===========================
See Notes to Consolidated Financial Statements (Unaudited).
5
WERNER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Nine Months Ended
(In thousands, except per share amounts) September 30,
---------------------------------------------------------------------------
2009 2008
---------------------------------------------------------------------------
(Unaudited)
Operating revenues $ 1,226,832 $ 1,675,025
----------------------------
Operating expenses:
Salaries, wages and benefits 393,456 442,391
Fuel 174,777 424,079
Supplies and maintenance 105,627 123,336
Taxes and licenses 72,022 82,884
Insurance and claims 64,272 77,366
Depreciation 117,016 125,132
Rent and purchased transportation 220,276 307,631
Communications and utilities 12,232 14,828
Other 1,083 (4,930)
----------------------------
Total operating expenses 1,160,761 1,592,717
----------------------------
Operating income 66,071 82,308
----------------------------
Other expense (income):
Interest expense 82 9
Interest income (1,344) (3,049)
Other (352) 79
----------------------------
Total other expense (income) (1,614) (2,961)
----------------------------
Income before income taxes 67,685 85,269
Income taxes 29,105 36,336
----------------------------
Net income $ 38,580 $ 48,933
============================
Earnings per share:
Basic $ 0.54 $ 0.69
============================
Diluted $ 0.54 $ 0.68
============================
Dividends declared per sare $ 0.150 $ 0.150
============================
Weighted-average common shares outstanding:
Basic 71,619 70,574
============================
Diluted 72,027 71,575
============================
See Notes to Consolidated Financial Statements (Unaudited).
6
WERNER ENTERPRISES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except share amounts) September 30, December 31,
-------------------------------------------------------------------------------
2009 2008
-------------------------------------------------------------------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 105,750 $ 48,624
Accounts receivable, trade, less allowance of
$9,438 and $9,555, respectively 180,390 185,936
Other receivables 11,514 18,739
Inventories and supplies 12,486 10,644
Prepaid taxes, licenses and permits 6,544 16,493
Current deferred income taxes 33,343 30,789
Other current assets 18,730 20,659
-------------------------------
Total current assets 368,757 331,884
-------------------------------
Property and equipment 1,579,769 1,613,102
Less - accumulated depreciation 687,993 686,463
-------------------------------
Property and equipment, net 891,776 926,639
-------------------------------
Other non-current assets 16,167 16,795
-------------------------------
$1,276,700 $1,275,318
===============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 48,122 $ 46,684
Current portion of long-term debt - 30,000
Insurance and claims accruals 76,297 79,830
Accrued payroll 27,838 25,850
Other current liabilities 22,603 19,006
-------------------------------
Total current liabilities 174,860 201,370
-------------------------------
Other long-term liabilities 8,199 7,406
Insurance and claims accruals, net of current
portion 120,500 120,500
Deferred income taxes 196,739 200,512
Stockholders' equity:
Common stock, $.01 par value, 200,000,000
shares authorized; 80,533,536 shares issued;
71,755,881 and 71,576,267 shares outstanding,
respectively 805 805
Paid-in capital 92,897 93,343
Retained earnings 854,345 826,511
Accumulated other comprehensive income (loss) (7,149) (7,146)
Treasury stock, at cost; 8,777,655 and
8,957,269 shares, respectively (164,496) (167,983)
-------------------------------
Total stockholders' equity 776,402 745,530
-------------------------------
$1,276,700 $1,275,318
===============================
See Notes to Consolidated Financial Statements (Unaudited).
7
WERNER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
(In thousands) September 30,
---------------------------------------------------------------------------
2009 2008
---------------------------------------------------------------------------
(Unaudited)
Cash flows from operating activities:
Net income $ 38,580 $ 48,933
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 117,016 125,132
Deferred income taxes (6,451) (909)
Gain on disposal of property and equipment (1,934) (8,768)
Stock-based compensation 905 1,113
Other long-term assets (999) 640
Insurance claims accruals, net of current
portion - 8,000
Other long-term liabilities 594 (63)
Changes in certain working capital items:
Accounts receivable, net 5,546 (18,435)
Other current assets 17,261 7,482
Accounts payable (3,578) 8,352
Other current liabilities 2,366 17,735
----------------------------
Net cash provided by operating activities 169,306 189,212
----------------------------
Cash flows from investing activities:
Additions to property and equipment (140,292) (145,656)
Retirements of property and equipment 63,543 65,265
Decrease in notes receivable 3,200 4,397
----------------------------
Net cash used in investing activities (73,549) (75,994)
----------------------------
Cash flows from financing activities:
Repayments of short-term debt (30,000) -
Dividends on common stock (10,737) (10,559)
Repurchases of common stock - (4,486)
Stock options exercised 1,431 8,245
Excess tax benefits from exercise of stock
options 705 4,389
----------------------------
Net cash used in financing activities (38,601) (2,411)
----------------------------
Effect of foreign exchange rate fluctuations on
cash (30) 418
Net increase in cash and cash equivalents 57,126 111,225
Cash and cash equivalents, beginning of period 48,624 25,090
----------------------------
Cash and cash equivalents, end of period $ 105,750 $ 136,315
============================
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest $ 137 $ 9
Income taxes $ 24,508 $ 30,034
Supplemental schedule of non-cash investing
activities:
Notes receivable issued upon sale of revenue
equipment $ 1,573 $ 2,194
See Notes to Consolidated Financial Statements (Unaudited).
8
WERNER ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) Comprehensive Income
Other than our net income, our only other source of comprehensive
income (loss) is foreign currency translation adjustments. Comprehensive
income (loss) from foreign currency translation adjustments was a loss of
$614,000 for the three-month period ended September 30, 2009 and $1,769,000
for the same period ended September 30, 2008. Such comprehensive income
(loss) was a loss of $30,000 for the nine-month period ended September 30,
2009 and income of $418,000 for the same period ended September 30, 2008.
(2) Long-Term Debt
As of September 30, 2009, we have two committed credit facilities with
banks totaling $225.0 million that mature in May 2011 ($175.0 million) and
May 2012 ($50.0 million). Borrowings under these credit facilities bear
variable interest based on the London Interbank Offered Rate ("LIBOR"). As
of September 30, 2009, we had no borrowings outstanding under these credit
facilities with banks. The $225.0 million of credit available under these
facilities is reduced by $49.8 million in stand-by letters of credit under
which we are obligated. Each of the debt agreements includes, among other
things, two financial covenants requiring us (i) not to exceed a maximum
ratio of total debt to total capitalization and (ii) not to exceed a maximum
ratio of total funded debt to earnings before interest, income taxes,
depreciation, and amortization (as such terms are defined in each credit
facility). At September 30, 2009, we were in compliance with these
covenants.
(3) Income Taxes
For the three-month and nine-month periods ended September 30, 2009,
there were no material changes to the total amount of unrecognized tax
benefits. We accrued interest expense of $0.2 million during the three-
month period and an interest benefit of $0.2 million during the nine-month
period ended September 30, 2009. Our total gross liability for unrecognized
tax benefits at September 30, 2009 is $7.3 million. If recognized, $4.1
million of unrecognized tax benefits would impact our effective tax rate.
Interest of $3.5 million has been reflected as a component of the total
liability. We do not expect any other significant increases or decreases
for uncertain tax positions during the next twelve months.
We file U.S. federal income tax returns, as well as income tax returns
in various states and several foreign jurisdictions. The years 2006 through
2008 are open for examination by the Internal Revenue Service, and various
years are open for examination by state and foreign tax authorities. State
and foreign jurisdictional statutes of limitations generally range from
three to four years.
(4) Commitments and Contingencies
As of September 30, 2009, we have committed to property and equipment
purchases of approximately $31.8 million.
We are involved in certain claims and pending litigation arising in the
normal course of business. At this time, management believes the ultimate
resolution of these matters will not materially affect our consolidated
financial statements.
9
(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.
Diluted earnings per share is computed by dividing net income by the
weighted average number of common shares plus the effect of dilutive
potential common shares outstanding during the period using the treasury
stock method. Dilutive potential common shares include outstanding stock
options and stock awards. There are no differences in the numerators of our
computations of basic and diluted earnings per share for any period
presented. The computation of basic and diluted earnings per share is shown
below (in thousands, except per share amounts).
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2009 2008 2009 2008
-------------------- --------------------
Net income $ 18,992 $ 22,446 $ 38,580 $ 48,933
==================== ====================
Weighted-average common
shares outstanding 71,701 70,864 71,619 70,574
Dilutive effect of stock-
based awards 409 961 408 1,001
-------------------- --------------------
Shares used in computing
diluted earnings per share 72,110 71,825 72,027 71,575
==================== ====================
Basic earnings per share $ 0.26 $ 0.32 $ 0.54 $ 0.69
==================== ====================
Diluted earnings per share $ 0.26 $ 0.31 $ 0.54 $ 0.68
==================== ====================
Options to purchase shares of common stock that were outstanding during
the periods indicated above, but were excluded from the computation of
diluted earnings per share because the option purchase price was greater
than the average market price of the common shares during the period, were:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ------------------------
2009 2008 2009 2008
----------------------- ------------------------
Number of options 614,969 - 904,469 5,000
Range of option purchase prices $18.33-$20.36 - $17.18-$20.36 $20.36
(6) Stock-Based Compensation
Our Equity Plan provides for grants of nonqualified stock options,
restricted stock and stock appreciation rights. The Board of Directors or
the Compensation Committee of our Board of Directors determines the terms of
each award, including type of award, recipients, number of shares subject to
each award and vesting conditions of each award. Stock option and
restricted stock awards are described below. No awards of stock
appreciation rights have been issued to date. The maximum number of shares
of common stock that may be awarded under the Equity Plan is 20,000,000
shares. The maximum aggregate number of shares that may be awarded to any
one person under the Equity Plan is 2,562,500. As of September 30, 2009,
there were 8,682,782 shares available for granting additional awards.
We apply the fair value method of accounting for stock-based
compensation awards granted under our Equity Plan. Stock-based employee
compensation expense was $0.3 million for the three-month period ended
September 30, 2009 and $0.4 million for the same period ended September 30,
2008, and was $0.9 million for the nine-month period ended September 30,
2009 and $1.1 million for the same period ended September 30, 2008. Stock-
10
based employee compensation expense is included in salaries, wages and
benefits within the Consolidated Statements of Income. The total income tax
benefit recognized in the Consolidated Statements of Income for stock-based
compensation arrangements was $0.1 million for the three-month period ended
September 30, 2009 and $0.2 million for the same period ended September 30,
2008, and was $0.4 million for the nine-month period ended September 30,
2009 and $0.5 million for the same period ended September 30, 2008. As of
September 30, 2009, the total unrecognized compensation cost related to
nonvested stock-based compensation awards was approximately $1.9 million and
is expected to be recognized over a weighted average period of 1.6 years.
We do not have a formal policy for issuing shares upon the exercise of
stock options or vesting of restricted stock, so such shares are generally
issued from treasury stock. From time to time, we repurchase shares of our
common stock, the timing and amount of which depends on market and other
factors. Historically, the shares acquired under these regular repurchase
programs have provided us with sufficient quantities of stock to issue for
stock-based compensation. Based on current treasury stock levels, we do not
expect to repurchase additional shares specifically for stock-based
compensation during 2009.
Stock Options
Stock options are granted at prices equal to the market value of the
common stock on the date the option award is granted. Option awards
currently outstanding become exercisable in installments from 24 to 72
months after the date of grant. The options are exercisable over a period
not to exceed ten years and one day from the date of grant.
The following table summarizes Equity Plan stock option activity for
the nine months ended September 30, 2009:
Weighted
Average Aggregate
Number Weighted Remaining Intrinsic
of Options Average Contractual Value
(in Exercise Term (in
thousands) Price ($) (Years) thousands)
----------------------------------------------------
Outstanding at beginning of period 2,264 $ 13.74
Options granted - $ -
Options exercised (180) $ 7.97
Options forfeited (13) $ 17.97
Options expired - $ -
-----------
Outstanding at end of period 2,071 $ 14.21 4.14 $ 9,186
===========
Exercisable at end of period 1,512 $ 13.08 3.12 $ 8,410
===========
We did not grant any stock options during the three-month and nine-
month periods ended September 30, 2009 and September 30, 2008. The fair
value of stock option grants is estimated using a Black-Scholes valuation
model. The total intrinsic value of share options exercised was $1.8
million and $9.1 million for the three-month periods ended September 30,
2009 and September 30, 2008 and $1.8 million and $11.8 million for the nine-
month periods ended September 30, 2009 and September 30, 2008.
Restricted Stock
Restricted stock awards entitle the holder to shares of common stock
when the award vests. The value of these shares may fluctuate according to
market conditions and other factors. Restricted stock awards that have not
11
yet vested will vest sixty months from the grant date of the award. The
restricted shares do not confer any voting or dividend rights to recipients
until such shares fully vest and do not have any post-vesting sales
restrictions.
The following table summarizes restricted stock activity for the nine
months ended September 30, 2009:
Number of Restricted Shares Weighted Average Grant Date
(in thousands) Fair Value ($) (per share)
-----------------------------------------------------------
Nonvested at beginning of period 35 $ 22.88
Shares granted - $ -
Shares vested - $ -
Shares forfeited - $ -
----------------------------
Nonvested at end of period 35 $ 22.88
============================
We did not grant any shares of restricted stock during the three-month
and nine-month periods ended September 30, 2009 and granted 35,000 shares of
restricted stock during the three-month and nine-month periods ended
September 30, 2008. We estimate the fair value of restricted stock awards
based upon the market price of the underlying common stock on the date of
grant, reduced by the present value of estimated future dividends because
the awards are not entitled to receive dividends prior to vesting. Our
estimate of future dividends is based on the most recent quarterly dividend
rate at the time of grant, adjusted for any known future changes in the
dividend rate. The present value of estimated future dividends for the
2008 award was calculated using the following assumptions:
Dividends per share (quarterly amounts) $0.05
Risk-free interest rate 3.0%
(7) Segment Information
We have two reportable segments - Truckload Transportation Services
("Truckload") and Value Added Services ("VAS").
The Truckload segment consists of six operating fleets that are
aggregated because they have similar economic characteristics and meet the
other aggregation criteria described in the accounting guidance for segment
reporting. The six operating fleets that comprise our Truckload segment are
as follows: (i) dedicated services ("Dedicated") provides truckload
services required by a specific customer, generally for a distribution
center or manufacturing facility; (ii) the regional short-haul ("Regional")
fleet transports a variety of consumer, nondurable products and other
commodities in truckload quantities within five geographic regions across
the United States using dry van trailers; (iii) the medium-to-long-haul van
("Van") fleet provides comparable truckload van service over irregular
routes; (iv) the expedited ("Expedited") fleet provides time-sensitive
truckload services utilizing driver teams; and, the (v) flatbed ("Flatbed")
and (vi) temperature-controlled ("Temperature-Controlled") fleets provide
truckload services for products with specialized trailers. Revenues for the
Truckload segment include non-trucking revenues of $0.8 million and $2.5
million for the three-month periods ended September 30, 2009 and September
30, 2008 and $3.0 million and $6.3 million for the nine-month periods ended
September 30, 2009 and September 30, 2008. These non-trucking revenues
consist primarily of the portion of shipments delivered to or from Mexico
where we utilize a third-party capacity provider.
The VAS segment generates the majority of our non-trucking revenues
through four operating units that provide non-trucking services to our
customers. These four VAS operating units are as follows: (i) truck
brokerage ("Brokerage") uses contracted carriers to complete customer
shipments; (ii) freight management ("Freight Management") offers a full
range of single-source logistics management services and solutions; (iii)
the intermodal ("Intermodal") unit offers rail transportation through
alliances with rail and drayage providers as an alternative to truck
12
transportation; and (iv) Werner Global Logistics international
("International") provides complete management of global shipments from
origin to destination using a combination of air, ocean, truck and rail
transportation modes.
We generate other revenues related to third-party equipment
maintenance, equipment leasing and other business activities. None of these
operations meets the quantitative reporting thresholds. As a result, these
operations are grouped in "Other" in the tables below. "Corporate" includes
revenues and expenses that are incidental to our activities and are not
attributable to any of our operating segments. We do not prepare separate
balance sheets by segment and, as a result, assets are not separately
identifiable by segment. We have no significant intersegment sales or
expense transactions that would require the elimination of revenue between
our segments in the tables below.
The following tables summarize our segment information (in thousands):
Revenues
--------
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- -----------------------
2009 2008 2009 2008
---------------------- -----------------------
Truckload Transportation Services $ 369,610 $ 505,489 $ 1,063,047 $ 1,456,872
Value Added Services 57,685 73,586 155,627 203,401
Other 930 4,218 5,760 12,177
Corporate 1,048 764 2,398 2,575
---------------------- -----------------------
Total $ 429,273 $ 584,057 $ 1,226,832 $ 1,675,025
====================== =======================
Operating Income
----------------
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- -----------------------
2009 2008 2009 2008
---------------------- -----------------------
Truckload Transportation Services $ 30,299 $ 33,113 $ 58,006 $ 68,126
Value Added Services 3,805 4,319 8,329 11,670
Other (1,325) 333 (1,073) 2,315
Corporate 26 257 809 197
---------------------- -----------------------
Total $ 32,805 $ 38,022 $ 66,071 $ 82,308
====================== =======================
(8) Subsequent Events
We performed an evaluation of Company activity and have concluded that
as of November 2, 2009, the date these financial statements were issued,
there are no material subsequent events requiring additional disclosure or
recognition in these financial statements.
13
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Management's Discussion and Analysis of Financial Condition and Results
of Operations (the "MD&A") summarizes the financial statements from
management's perspective with respect to our financial condition, results of
operations, liquidity and other factors that may affect actual results. The
MD&A is organized in the following sections:
* Overview
* Results of Operations
* Liquidity and Capital Resources
* Contractual Obligations and Commercial Commitments
* Off-Balance Sheet Arrangements
* Regulations
* Critical Accounting Policies
* Accounting Standards
The MD&A should be read in conjunction with our Annual Report on Form
10-K for the year ended December 31, 2008.
Overview:
We operate in the truckload and logistics sectors of the transportation
industry. In the truckload sector, we focus on transporting consumer
nondurable products that ship more consistently throughout the year. In the
logistics sector, besides managing transportation requirements for
individual customers, we provide additional sources of truck capacity,
alternative modes of transportation, a global delivery network and systems
analysis to optimize transportation needs. Our success depends on our
ability to efficiently manage our resources in the delivery of truckload
transportation and logistics services to our customers. Resource
requirements vary with customer demand, which may be subject to seasonal or
general economic conditions. Our ability to adapt to changes in customer
transportation requirements is essential to efficiently deploy resources and
make capital investments in tractors and trailers (with respect to our
Truckload segment) or obtain qualified third-party capacity at a reasonable
price (with respect to our VAS segment). Although our business volume is
not highly concentrated, we may also be occasionally affected by our
customers' financial failures or loss of customer business.
Operating revenues reported in our operating statistics table under
"Results of Operations" are categorized as (i) trucking revenues, net of
fuel surcharge, (ii) trucking fuel surcharge revenues, (iii) non-trucking
revenues, including VAS, and (iv) other operating revenues. Trucking
revenues, net of fuel surcharge, and trucking fuel surcharge revenues are
generated by the six operating fleets in the Truckload segment (Dedicated,
Regional, Van, Expedited, Temperature-Controlled and Flatbed). Non-trucking
revenues, including VAS, are generated primarily by the four operating units
in our VAS segment (Brokerage, Freight Management, Intermodal and
International), and a small amount is generated by the Truckload segment.
Other operating revenues are generated from other business activities such
as third-party equipment maintenance and equipment leasing. In third
quarter 2009, trucking (net of fuel surcharge) and trucking fuel surcharge
revenues accounted for 86% of total operating revenues, and non-trucking and
other operating revenues accounted for 14% of total operating revenues.
Trucking revenues, net of fuel surcharge, are typically generated on a
per-mile basis and also include revenues such as stop charges,
loading/unloading charges and equipment detention charges. Because fuel
surcharge revenues fluctuate in response to changes in fuel costs, we
identify them separately in the operating statistics table and exclude them
from the statistical calculations to provide a more meaningful comparison
14
between periods. The key statistics used to evaluate trucking revenues, net
of fuel surcharge, are (i) average revenues per tractor per week, (ii)
average revenues per mile (total and loaded), (iii) average monthly miles
per tractor, (iv) average percentage of empty miles (miles without trailer
cargo), (v) average trip length (in loaded miles) and (vi) average number of
tractors in service. General economic conditions, seasonal trucking
industry freight patterns and industry capacity are important factors that
impact these statistics. Our Truckload segment also generates a small
amount of revenues categorized as non-trucking revenues, related to
shipments delivered to or from Mexico where the Truckload segment utilizes a
third-party capacity provider. We exclude such revenues from the
statistical calculations.
Our most significant resource requirements are company drivers, owner-
operators, tractors, trailers and equipment operating costs (such as fuel
and related fuel taxes, driver pay, insurance and supplies and maintenance).
To mitigate our risk to fuel price increases, we recover from our customers
additional fuel surcharges that generally recoup a majority of the increased
fuel costs; however, we cannot assure that current recovery levels will
continue in future periods. Our financial results are also affected by
company driver and owner-operator availability and the market for new and
used revenue equipment. We are self-insured for a significant portion of
bodily injury, property damage and cargo claims, workers' compensation
benefits and health claims for our employees (supplemented by premium-based
insurance coverage above certain dollar levels). For that reason, our
financial results may also be affected by driver safety, medical costs,
weather, legal and regulatory environments and insurance coverage costs to
protect against catastrophic losses.
The operating ratio is a common industry measure used to evaluate our
profitability and that of our Truckload segment operating fleets. The
operating ratio consists of operating expenses expressed as a percentage of
operating revenues. The most significant variable expenses that impact the
Truckload segment are driver salaries and benefits, fuel, fuel taxes
(included in taxes and licenses expense), payments to owner-operators
(included in rent and purchased transportation expense), supplies and
maintenance and insurance and claims. These expenses generally vary based
on the number of miles generated. We also evaluate these costs on a per-
mile basis to adjust for the impact on the percentage of total operating
revenues caused by changes in fuel surcharge revenues, per-mile rates
charged to customers and non-trucking revenues. As discussed further in the
comparison of operating results for third quarter 2009 to third quarter
2008, several industry-wide issues may cause costs to increase in future
periods. These issues include a softer freight market, changing fuel
prices, more stringent federal and state regulations governing engine
emissions and fuel efficiency, higher new truck and trailer purchase prices
and a weaker used equipment market. Our main fixed costs include
depreciation expense for tractors and trailers and equipment licensing fees
(included in taxes and licenses expense). The Truckload segment requires
substantial cash expenditures for tractor and trailer purchases. We fund
these purchases with net cash from operations and financing available under
our existing credit facilities, as management deems necessary.
We provide non-trucking services primarily through four operating units
within our VAS segment. Unlike our Truckload segment, the VAS segment is
less asset-intensive and is instead dependent upon qualified employees,
information systems and qualified third-party capacity providers. The
largest expense item related to the VAS segment is the cost of
transportation we pay to third-party capacity providers. This expense item
is recorded as rent and purchased transportation expense. Other operating
expenses include salaries, wages and benefits and computer hardware and
software depreciation. We evaluate VAS by reviewing the gross margin
percentage (revenues less rent and purchased transportation expenses
expressed as a percentage of revenues) and the operating income percentage.
15
Results of Operations:
The following operating statistics table sets forth certain industry
data regarding the freight revenues and operations for the periods
indicated.
Three Months Ended Nine Months Ended
September 30, % September 30, %
------------------- -----------------------
2009 2008 Change 2009 2008 Change
-------- -------- ------ ---------- ---------- ------
Trucking revenues, net of
fuel surcharge (1) $319,291 $367,401 -13.1% $937,333 $1,084,402 -13.6%
Trucking fuel surcharge
revenues (1) 49,477 135,525 -63.5% 122,636 366,223 -66.5%
Non-trucking revenues,
including VAS (1) 58,499 76,070 -23.1% 158,614 209,699 -24.4%
Other operating revenues (1) 2,006 5,061 -60.4% 8,249 14,701 -43.9%
-------- -------- ---------- ----------
Total operating revenues (1) $429,273 $584,057 -26.5% $1,226,832 $1,675,025 -26.8%
======== ======== ========== ==========
Operating ratio
(consolidated) (2) 92.4% 93.5% 94.6% 95.1%
Average monthly miles per
tractor 10,184 10,306 -1.2% 9,866 10,189 -3.2%
Average revenues per
total mile (3) $1.440 $1.480 -2.7% $1.439 $1.466 -1.8%
Average revenues per
loaded mile (3) $1.637 $1.699 -3.6% $1.650 $1.691 -2.4%
Average percentage of
empty miles (4) 12.01% 12.88% -6.8% 12.76% 13.31% -4.1%
Average trip length in
miles (loaded) 463 539 -14.1% 463 540 -14.3%
Total miles (loaded and
empty) (1) 221,675 248,197 -10.7% 651,257 739,571 -11.9%
Average tractors in service 7,256 8,028 -9.6% 7,334 8,065 -9.1%
Average revenues per tractor
per week (3) $3,385 $3,521 -3.9% $3,277 $3,448 -5.0%
Total tractors (at quarter end)
Company 6,635 7,335 6,635 7,335
Owner-operator 690 705 690 705
-------- -------- ---------- ----------
Total tractors 7,325 8,040 7,325 8,040
Total trailers (Truckload and
Intermodal, at quarter end) 24,310 24,140 24,310 24,140
(1) Amounts in thousands.
(2) Operating expenses expressed as a percentage of operating revenues.
Operating ratio is a common measure in the trucking industry used to
evaluate profitability.
(3) Net of fuel surcharge revenues.
(4) Empty refers to miles without trailer cargo.
16
The following table sets forth the total revenues, operating expenses
and operating income for the Truckload segment. Revenues for the Truckload
segment include non-trucking revenues of $0.8 million and $2.5 million for
the three-month periods ended September 30, 2009 and September 30, 2008 and
$3.0 million and $6.3 million for the nine-month periods ended September 30,
2009 and September 30, 2008, as described on page 12.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ----------------------------------
Truckload Transportation Services 2009 2008 2009 2008
-------------- -------------- ---------------- ----------------
(amounts in thousands) $ % $ % $ % $ %
-------------------------- -------------- -------------- ---------------- ----------------
Revenues $369,610 100.0 $505,489 100.0 $1,063,047 100.0 $1,456,872 100.0
Operating expenses 339,311 91.8 472,376 93.4 1,005,041 94.5 1,388,746 95.3
-------- -------- ---------- ----------
Operating income $ 30,299 8.2 $ 33,113 6.6 $ 58,006 5.5 $ 68,126 4.7
======== ======== ========== ==========
Higher fuel prices and higher fuel surcharge revenues increase our
consolidated operating ratio and the Truckload segment's operating ratio
when fuel surcharges are reported on a gross basis as revenues versus
netting against fuel expenses. Eliminating fuel surcharge revenues, which
are generally a more volatile source of revenue, provides a more consistent
basis for comparing the results of operations from period to period. The
following table calculates the Truckload segment's operating ratio as if
fuel surcharges are excluded from total revenues and instead reported as a
reduction of operating expenses.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ----------------------------------
Truckload Transportation Services 2009 2008 2009 2008
-------------- -------------- ---------------- ----------------
(amounts in thousands) $ % $ % $ % $ %
-------------------------- -------------- -------------- ---------------- ----------------
Revenues $369,610 $505,489 $1,063,047 $1,456,872
Less: trucking fuel surcharge
revenues 49,477 135,525 122,636 366,223
-------- -------- ---------- ----------
Revenues, net of fuel surcharges 320,133 100.0 369,964 100.0 940,411 100.0 1,090,649 100.0
-------- -------- ---------- ----------
Operating expenses 339,311 472,376 1,005,041 1,388,746
Less: trucking fuel surcharge
revenues 49,477 135,525 122,636 366,223
-------- -------- ---------- ----------
Operating expenses, net of
fuel surcharges 289,834 90.5 336,851 91.0 882,405 93.8 1,022,523 93.8
-------- -------- ---------- ----------
Operating income $ 30,299 9.5 $ 33,113 9.0 $ 58,006 6.2 $ 68,126 6.2
======== ======== ========== ==========
The following table sets forth the VAS segment's non-trucking revenues,
rent and purchased transportation expense, gross margin, other operating
expenses and operating income. Other operating expenses for the VAS segment
primarily consist of salaries, wages and benefits expense. VAS also incurs
smaller expense amounts in the supplies and maintenance, depreciation, rent
and purchased transportation (excluding third-party transportation costs),
insurance, communications and utilities and other operating expense
categories.
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ------------------------------
Value Added Services 2009 2008 2009 2008
------------- ------------- -------------- --------------
(amounts in thousands) $ % $ % $ % $ %
----------------------- ------------- ------------- -------------- --------------
Revenues $57,685 100.0 $73,586 100.0 $155,627 100.0 $203,401 100.0
Rent and purchased
transportation expense 47,840 82.9 62,838 85.4 129,119 83.0 173,358 85.2
------- ------- -------- --------
Gross margin 9,845 17.1 10,748 14.6 26,508 17.0 30,043 14.8
Other operating expenses 6,040 10.5 6,429 8.7 18,179 11.7 18,373 9.1
------- ------- -------- --------
Operating income $ 3,805 6.6 $ 4,319 5.9 $ 8,329 5.3 $ 11,670 5.7
======= ======= ======== ========
17
Three Months Ended September 30, 2009 Compared to Three Months Ended
----------------------------------------------------------------------------
September 30, 2008
------------------
Operating Revenues
Operating revenues decreased 26.5% for the three months ended September
30, 2009, compared to the same period of the prior year. Excluding fuel
surcharge revenues, trucking revenues decreased 13.1% due primarily to a
9.6% decrease in the average number of tractors in service. With respect to
pricing and rates, revenue per total mile, excluding fuel surcharges,
decreased by 2.7%. Productivity, as measured by average monthly miles per
tractor, declined by 1.2%.
The freight market continued to be challenging in third quarter 2009;
however, we experienced some seasonal improvement in freight volumes as the
quarter progressed. Shipper destocking of inventory that occurred earlier
this year has slowed, which stabilized inventory levels and had a
sequentially positive impact on our freight shipments. The freight market
in October 2009 returned to lower levels more consistent with the freight
demand levels prior to the end-of-quarter increase in September 2009;
however, we continued to experience a year-over-year improvement in freight
shipments due to the large decline in freight demand during fourth quarter
2008. Freight shipment trends for the remainder of fourth quarter 2009 will
depend on the strength of consumer demand during the holiday season.
We adapted to these challenging market conditions by reducing our fleet
size. Fewer trucks and lower miles per truck reduced our total miles by
10.7% over this same period. Having fewer trucks in service also lowered
our freight requirements and thereby reduced our need to book freight that
is less profitable to keep our trucks and drivers productive. Based on
current market conditions, we do not plan to make further significant
reductions to our fleet, unless there is a significant decline in the
freight market or a loss of customer business.
The softer freight market during third quarter 2009, combined with the
excess truck capacity in the market and a high level of customer bid
activity in the first half of 2009, caused continued pressure on freight
rates. These factors resulted in a 3.6% decrease in revenue per loaded
mile, excluding fuel surcharge. Revenue per total mile decreased only 2.7%,
as our average percentage of empty miles improved to 12.01% in third quarter
2009 from 12.88% in third quarter 2008. On a per trip basis, empty miles
per trip declined 21% from 80 miles per trip in third quarter 2008 to 63
miles per trip in third quarter 2009. We expect the pressure on freight
rates to continue until freight demand improves.
Fuel surcharge revenues represent collections from customers for the
higher cost of fuel. These revenues decreased 63.5% to $49.5 million in
third quarter 2009 from $135.5 million in third quarter 2008 due to a
decrease in average diesel fuel prices of $1.62 per gallon in third quarter
2009 compared to third quarter 2008. To lessen the effect of fluctuating
fuel prices on our margins, we collect fuel surcharge revenues from our
customers. Our fuel surcharge programs are designed to (i) recoup higher
fuel costs from customers when fuel prices rise and (ii) provide customers
with the benefit of lower fuel costs when fuel prices decline. These
programs enable us to recover a majority, but not all, of the fuel price
increases. The remaining portion is generally not recoverable because it
results from empty miles (which are not billable to customers), out-of-route
miles and truck idle time. Fuel prices that change rapidly in short time
periods also impact our recovery because the surcharge rate in most fuel
surcharge programs only changes once per week. In a rapidly rising fuel
price market, there is generally a several week delay between the payment of
higher fuel prices and surcharge recovery. In a rapidly declining fuel
price market, the opposite generally occurs, and there is a temporary higher
surcharge recovery compared to the price paid for fuel.
We continue to diversify our business from the Van fleet to the
Dedicated, Regional and Expedited fleets and North America cross-border
service provided by the Truckload segment and the four operating units of
the VAS segment. Our goal is to attain a more balanced portfolio comprised
of one-way truckload (which includes Regional, Van and Expedited), dedicated
18
and logistics (which includes the VAS segment) services. This
diversification should help soften the impact of a weaker freight market and
enables us to provide expanded services to our customers.
VAS revenues are generated by its four operating units and exclude
revenues for VAS shipments transferred to the Truckload segment, which are
recorded as trucking revenues by the Truckload segment. VAS revenues
declined 21.6% to $57.7 million in third quarter 2009 from $73.6 million in
third quarter 2008 due to three factors: (i) a 19% reduction in the average
revenue per shipment due to lower fuel prices and customer rates; (ii)
shifting significantly more shipments not committed to third-party capacity
providers to our Truckload segment to help cushion the impact of a soft
freight market; and (iii) a reduction in the number of industry freight
shipments because of the weaker freight market and recessionary economy.
VAS gross margin dollars decreased 8.4% to $9.8 million in third quarter
2009 from $10.7 million for the same period in 2008 on the lower revenue
because of the reasons noted above. However, the VAS gross margin
percentage improved from 14.6% in third quarter 2008 to 17.1% in third
quarter 2009 due to a decline in fuel prices and a lower cost of carrier
capacity. The following table shows the changes that are described above in
shipment volume and average revenue (excluding logistics fee revenue) per
shipment for all VAS shipments:
Three Months Ended
September 30
------------------- ---------- --------
2009 2008 Difference % Change
-------- -------- ---------- --------
Total VAS shipments 64,679 60,950 3,729 6%
Less: Non-committed shipments to
Truckload segment (25,290) (17,655) (7,635) 43%
------- ------- -------
Net VAS shipments 39,389 43,295 (3,906) (9%)
======= ======= =======
Average revenue per shipment $1,325 $1,642 ($317) (19%)
======= ======= =======
Compared to third quarter 2008, Brokerage revenues declined due to the
factors described in the paragraph above; however, the Brokerage gross
margin percentage improved by 160 basis points due to a decline in fuel
prices and a lower cost of carrier capacity. Freight Management revenues
declined due to reduced shipments with existing customers resulting from a
decline in certain customers' overall shipment levels. Intermodal revenues
and gross margins declined because of a weak and competitive intermodal
market in third quarter 2009. International achieved meaningful revenue and
profit improvement resulting from increased shipment volumes.
Operating Expenses
Our operating ratio (operating expenses expressed as a percentage of
operating revenues) was 92.4% for the three months ended September 30, 2009,
compared to 93.5% for the three months ended September 30, 2008. Expense
items that impacted the overall operating ratio are described on the
following pages. The tables on page 17 show the operating ratios and
operating margins for our two reportable segments, Truckload and VAS.
19
The following table sets forth the cost per total mile of operating
expense items for the Truckload segment for the periods indicated. We
evaluate operating costs for this segment on a per-mile basis, which is a
better measurement tool for comparing the results of operations from period
to period.
Three Months Ended Increase Nine Months Ended Increase
September 30, (Decrease) September 30, (Decrease)
------------------ -----------------
2009 2008 per Mile 2009 2008 per Mile
-----------------------------------------------------------
Salaries, wages and benefits $0.564 $0.582 $(0.018) $0.579 $0.575 $0.004
Fuel 0.297 0.584 (0.287) 0.267 0.571 (0.304)
Supplies and maintenance 0.144 0.158 (0.014) 0.153 0.158 (0.005)
Taxes and licenses 0.107 0.109 (0.002) 0.110 0.112 (0.002)
Insurance and claims 0.090 0.115 (0.025) 0.098 0.104 (0.006)
Depreciation 0.166 0.163 0.003 0.177 0.164 0.013
Rent and purchased transportation 0.144 0.181 (0.037) 0.139 0.181 (0.042)
Communications and utilities 0.017 0.019 (0.002) 0.018 0.020 (0.002)
Other 0.002 (0.008) 0.010 0.002 (0.007) 0.009
Owner-operator costs are included in rent and purchased transportation
expense. Owner-operators are independent contractors who supply their own
tractor and driver and are responsible for their operating expenses
(including driver pay, fuel, supplies and maintenance and fuel taxes).
Owner-operator miles as a percentage of total miles were 11.6% for both
third quarter 2009 and third quarter 2008. Because owner-operator miles as
a percentage of total miles were the same in both periods, essentially no
shifting of costs occurred between the rent and purchased transportation
category and other expense categories.
Beginning in the latter months of 2008, we took steps to manage and
reduce a variety of controllable costs and adapt to a smaller fleet. We
continued by implementing numerous cost-saving programs throughout the first
nine months of 2009. Examples of these cost-saving measures included
improving our ratio of tractors to non-driver employees, reducing driver
advertising, reducing driver lodging costs, restructuring discretionary
driver pay programs, reducing truck sales location costs and decreasing the
company-matching contribution percentage for our 401(k) plan.
Salaries, wages and benefits in the Truckload segment decreased by 1.8
cents per mile on a total-mile basis in third quarter 2009 compared to third
quarter 2008. Driver salaries and benefits decreased 3.8% on a total-mile
basis due to restructuring discretionary driver pay programs. We improved
our average tractor-to-non-driver ratio for the trucking operation by 9% for
third quarter 2009 compared to third quarter 2008. We also incurred lower
expense for workers' compensation claims. Non-driver salaries, wages and
benefits in the non-trucking VAS segment were 4.1% lower in third quarter
2009 than in third quarter 2008. Although VAS revenues were 21.6% lower in
third quarter 2009 than in third quarter 2008 because of the factors
described on page 19, VAS handled 6% more shipments in third quarter 2009,
including shipments VAS transferred to the Truckload segment.
We renewed our workers' compensation insurance coverage for the policy
year beginning April 1, 2009. Our coverage levels are the same as the prior
policy year. We continue to maintain a self-insurance retention of $1.0
million per claim. Our workers' compensation insurance premiums for the
policy year beginning April 2009 are slightly lower than the previous policy
year, due primarily to lower projected payroll.
The qualified and student driver recruiting and retention markets
improved in third quarter 2009 compared to third quarter 2008. The weakness
in the construction and automotive industries, other trucking company
failures and fleet reductions and the higher national unemployment rate
contributed to an improved driver recruiting and retention market during
20
third quarter 2009. These factors resulted in limited employment options
for drivers and consequently made more qualified and student drivers
available for the workforce. We anticipate that availability of drivers
will remain strong until economic conditions improve. When economic
conditions improve, competition for qualified drivers will likely increase,
and we cannot predict whether we will experience future driver shortages.
If such a shortage were to occur and driver pay rate increases became
necessary to attract and retain drivers, our results of operations would be
negatively impacted to the extent that corresponding freight rate increases
were not obtained.
Fuel decreased 28.7 cents per total mile for the Truckload segment in
third quarter 2009 compared to the same period in 2008 due to lower average
diesel fuel prices following the rapid fuel price decline that occurred in
the second half of 2008 and improved miles per gallon (see paragraph below).
Although diesel fuel prices fluctuated during third quarter 2009, prices at
quarter-end were similar to those at the beginning of the quarter. Average
diesel fuel costs were $1.62 per gallon lower in third quarter 2009 than in
third quarter 2008.
During third quarter 2009, we continued to improve fuel miles per
gallon ("mpg") through several initiatives to improve fuel efficiency.
These initiatives have been ongoing since March 2008 and include (i)
reducing truck idle time, (ii) lowering non-billable miles, (iii) increasing
the percentage of aerodynamic, more fuel-efficient trucks in the company
truck fleet and (iv) installing auxiliary power units ("APUs") in company
trucks. APUs allow the driver to heat or cool the truck without idling the
main engine and consume less diesel fuel than the engine. As of September
30, 2009, we installed APUs in approximately 60% of the company-owned truck
fleet. As a result of these fuel savings initiatives, we improved our
company truck average mpg by 3.3% in third quarter 2009 compared to third
quarter 2008. This mpg improvement resulted in the purchase of 1.2 million
fewer gallons of diesel fuel in third quarter 2009 than in third quarter
2008. This equates to a reduction of approximately 13,000 tons of carbon
dioxide emissions. We intend to continue these and other environmentally
conscious initiatives, including our active participation as a U.S.
Environmental Protection Agency (the "EPA") SmartWay Transport Partner. The
SmartWay Transport Partnership is a national voluntary program developed by
EPA and freight industry representatives to reduce greenhouse gases and air
pollution and promote cleaner, more efficient ground freight transportation.
Fuel prices increased 32 cents per gallon from September 30, 2009 to
October 30, 2009 and averaged 51 cents per gallon less in October 2009 than
in the same period of 2008. During periods of rising fuel prices, a lag
generally occurs between the timing of the fuel cost increases and the
delayed recovery of fuel surcharge revenues. As noted in our prior filings,
the large decline in diesel fuel prices in the second half of 2008 had a
temporary favorable impact on net fuel costs (fuel expense, less fuel
surcharge revenues) in third quarter 2008 and fourth quarter 2008.
Shortages of fuel, increases in fuel prices and petroleum product
rationing can have a materially adverse effect on our operations and
profitability. We are unable to predict whether fuel price levels will
increase or decrease in the future or the extent to which fuel surcharges
will be collected from customers. As of September 30, 2009, we had no
derivative financial instruments to reduce our exposure to fuel price
fluctuations. One of our large fuel vendors declared bankruptcy in December
2008 and is continuing to operate its fuel stop locations post-bankruptcy,
pending the proposed sale to another large fuel stop operator from which we
also purchase fuel. If fuel stop locations were reduced or eliminated in
the future, we believe we have the ability to obtain fuel from other
vendors.
Supplies and maintenance for the Truckload segment decreased 1.4 cents
per total mile in third quarter 2009 compared to third quarter 2008.
Through our cost-saving programs and improved driver retention, we realized
decreases in driver-related costs such as advertising, motels and travel.
21
Taxes and licenses for the Truckload segment decreased 0.2 cents on a
total-mile basis in third quarter 2009 compared to third quarter 2008. Fuel
taxes decreased per mile as a result of the 3.3% improvement in the company
truck mpg. An improved mpg results in fewer gallons of diesel fuel
purchased and consequently lower fuel taxes. This decrease was partially
offset by the effect of lower average miles per tractor on the fixed cost
components (primarily equipment licensing fees) of this operating expense
category.
Insurance and claims for the Truckload segment decreased by 2.5 cents
per total mile in third quarter 2009 from third quarter 2008. This per-mile
decrease was the result of lower negative loss development on both smaller
and large liability claims for accidents that occurred prior to the quarter.
A substantial portion of our insurance and claims expense results from our
claim experience and claim development (self-insurance). A small portion of
our insurance and claims expense results from insurance premiums for high
dollar claim coverage. We renewed our liability insurance policies on
August 1, 2009 and continue to be responsible for the first $2.0 million per
claim with an annual $8.0 million aggregate for claims between $2.0 million
and $5.0 million. The annual aggregate for claims in excess of $5.0 million
and less than $10.0 million increased from $4.0 million to $5.0 million. We
maintain liability insurance coverage with insurance carriers substantially
in excess of the $10.0 million per claim. Our liability insurance premium
dollars for the policy year that began August 1, 2009 are slightly lower
than the previous policy year but increased about 9% on a per-mile basis.
Depreciation expense for the Truckload segment increased 0.3 cents per
total mile in third quarter 2009 compared to third quarter 2008. This
increase was due to an increase in the number of APUs installed on company
trucks, a higher ratio of trailers to tractors resulting from the tractor
fleet reductions, and the effect of lower average miles per tractor. While
we incur depreciation expense on the APUs, we also incur lower fuel expense
because tractors with APUs consume less fuel during periods of truck idling.
Depreciation expense was historically affected by the engine emissions
standards imposed by the EPA that became effective in October 2002 and
applied to all new trucks purchased after that time, resulting in increased
truck purchase costs. Depreciation expense is affected because in January
2007, a second set of more strict EPA engine emissions standards became
effective for all newly manufactured truck engines. Compared to trucks with
engines produced before 2007, the trucks with new engines manufactured under
the 2007 standards have higher purchase prices. We began to take delivery
of trucks with these 2007-standard engines in first quarter 2008 to replace
older trucks in our fleet. As of September 30, 2009, 60% of the engines in
our fleet of company-owned trucks were manufactured by Caterpillar.
In January 2010, a final set of more rigorous EPA-mandated emissions
standards will become effective for all new engines manufactured after that
date. It is expected that these trucks will have a higher purchase price
than trucks manufactured to meet the 2007 EPA engine emission standards but
may be more fuel efficient. We are currently evaluating the options
available to us to prepare for the upcoming 2010 standards. We have
received a small number of engines that meet the 2010 standards and will be
testing them during the remaining months of 2009.
Rent and purchased transportation expense consists mainly of payments
to third-party capacity providers in the VAS segment and other non-trucking
operations and payments to owner-operators in the Truckload segment. The
payments to third-party capacity providers generally vary depending on
changes in the volume of services generated by the VAS segment. As a
percentage of VAS revenues, VAS rent and purchased transportation expense
decreased to 82.9% in third quarter 2009 from 85.4% in third quarter 2008.
Rent and purchased transportation for the Truckload segment decreased
3.7 cents per total mile in third quarter 2009 due primarily to decreased
fuel prices that resulted in lower reimbursements to owner-operators for
fuel. Our customer fuel surcharge programs do not differentiate between
miles generated by company-owned and owner-operator trucks. Challenging
operating conditions continue to make owner-operator recruitment and
22
retention difficult. Such conditions include inflationary cost increases
that are the responsibility of owner-operators and a shortage of financing
for equipment. We have historically been able to add company-owned tractors
and recruit additional company drivers to offset any decrease in the number
of owner-operators. If a shortage of owner-operators and company drivers
occurs, increases in per mile settlement rates (for owner-operators) and
driver pay rates (for company drivers) may become necessary to attract and
retain these drivers. These increases could negatively affect our results
of operations to the extent that we would be unable to obtain corresponding
freight rate increases.
Other operating expenses for the Truckload segment increased 1.0 cent
per total mile in third quarter 2009 compared to third quarter 2008. Gains
on sales of assets (primarily trucks and trailers) are reflected as a
reduction of other operating expenses and are reported net of sales-related
expenses (which include costs to prepare the equipment for sale). Gains on
sales of assets decreased to $0.9 million in third quarter 2009 from $2.8
million in third quarter 2008. In third quarter 2009, we realized lower
average gains per truck and trailer sold. Buyer demand for used trucks and
trailers remained low due to the weak freight market and recessionary
economy. During the first six months of 2009, we closed eight lower volume
Fleet Truck Sales offices and continue to operate in eight locations across
the continental United States. We believe our wholly-owned subsidiary and
used truck and trailer retail network, Fleet Truck Sales, is one of the
largest Class 8 used truck and equipment retail entities in the United
States. Fleet Truck Sales continues to be our resource for remarketing our
used trucks and trailers, in addition to trading trucks to original
equipment manufacturers when purchasing new trucks.
Other Expense (Income)
Our interest income was $0.4 million in third quarter 2009 compared to
$1.0 million in third quarter 2008. Our average cash and cash equivalents
balances were comparable for third quarter 2009 and third quarter 2008;
however, the average interest rate earned on these funds was lower in third
quarter 2009.
Income Taxes
Our effective income tax rate (income taxes expressed as a percentage
of income before income taxes) increased slightly to 43.0% for third quarter
2009 from 42.5% for third quarter 2008. The higher income tax rate was due
primarily to lower income before income taxes on an annualized basis, which
caused non-deductible expenses such as driver per diem to comprise a larger
percentage of our income before income taxes.
Nine Months Ended September 30, 2009 Compared to Nine Months Ended September
----------------------------------------------------------------------------
30, 2008
--------
Operating Revenues
Operating revenues decreased 26.8% for the nine months ended September
30, 2009, compared to the same period of the prior year. Excluding fuel
surcharge revenues, trucking revenues decreased 13.6% due primarily to a
9.1% decrease in the average number of tractors in service, a 3.2% decrease
in average monthly miles per tractor and a 1.8% decrease in average revenues
per total mile. Fuel surcharge revenues decreased 66.5% to $122.6 million
in the 2009 year-to-date period from $366.2 million in the 2008 year-to-date
period because of lower diesel fuel prices. VAS revenues decreased 23.5%
due to the factors described on page 19.
Operating Expenses
Our operating ratio (operating expenses expressed as a percentage of
operating revenues) was 94.6% for the nine months ended September 30, 2009,
compared to 95.1% for the same period of 2008. Expense items that impacted
23
the overall operating ratio are described below. The tables on page 17 show
the operating ratios and operating margins for our two reportable segments,
Truckload and VAS.
Owner-operator miles as a percentage of total miles were 11.5% for the
nine months ended September 30, 2009 compared to 12.0% for the nine months
ended September 30, 2008. This decrease in owner-operator miles as a
percentage of total miles shifted costs from the rent and purchased
transportation category to other expense categories. Due to this decrease,
we estimate that rent and purchased transportation expense for the Truckload
segment was lower by approximately 0.5 cents per total mile, and other
expense categories had offsetting increases on a total-mile basis as
follows: (i) salaries, wages and benefits, 0.2 cents; (ii) fuel, 0.1 cent;
(iii) supplies and maintenance, 0.1 cent; and (iv) depreciation, 0.1 cent.
Salaries, wages and benefits in the Truckload segment increased by 0.4
cents per mile in the 2009 year-to-date period. This increase is primarily
attributed to the effect of 3.2% lower average miles per tractor (which has
the effect of increasing costs of a fixed nature when evaluated on a per-
mile basis) on the non-driver, student and fringe benefit components of this
expense category. The shift from rent and purchased transportation expense
to salaries, wages and benefits because of the decrease in owner-operator
miles as a percentage of total miles also contributed to the increase.
Although we improved our tractor-to-non-driver ratio for the trucking
operation by 14% during the first nine months of 2009, the benefit was not
fully realized until the second quarter of 2009. Driver salaries improved
as the 2009 year-to-date period progressed following changes to some
discretionary driver pay programs, resulting in lower expense per mile in
the last few months of the nine-month period. Higher group health insurance
costs were nearly offset by lower workers' compensation expense. Non-driver
salaries, wages and benefits in the non-trucking VAS segment were
essentially flat. Although VAS revenues were lower in the first nine months
of 2009 than in the same period of 2008, the number of shipments handled by
VAS in the 2009 period, including those transferred to the Truckload
segment, was about 3% higher.
Fuel decreased 30.4 cents per total mile for the Truckload segment in
the first nine months of 2009 compared to the same period in 2008 due to the
lower average fuel price per gallon and a 4.2% improvement in the company
truck fleet mpg. Average diesel fuel prices were $1.73 per gallon lower in
the first nine months of 2009 than in the same 2008 period.
Supplies and maintenance costs for the Truckload segment were 0.5 cents
lower on a per-mile basis in the 2009 year-to-date period when compared to
the same period in 2008. Savings achieved in driver advertising,
recruiting, motel and travel costs were partially offset by higher equipment
maintenance costs.
Taxes and licenses for the Truckload segment decreased 0.2 cents on a
total-mile basis due to fuel tax savings resulting from the 4.2% mpg
improvement in the first nine months of 2009 over the same period of 2008,
offset partially by the effect of lower average miles per tractor on the
fixed cost components of this operating expense category.
Insurance and claims decreased 0.6 cents on a total-mile basis for the
Truckload segment in the nine months ended September 30, 2009 versus the
2008 year-to-date period. This decrease resulted from lower expense for
both small and large liability claims, offset partially by slightly higher
cargo claims expense. These liability cost savings were achieved through
net favorable development for small liability claims in the 2009 year-to-
date period compared to net unfavorable development in the same period in
2008, and better experience and development on large claims in the 2009
period.
Depreciation for the Truckload segment increased 1.3 cents per total
mile in the 2009 year-to-date period compared to the same period in 2008.
This increase resulted from the effect of lower average miles per tractor
and, to a lesser extent, an increase in the number of APUs installed on
company trucks and a higher ratio of trailers to tractors resulting from the
tractor fleet reductions.
24
Rent and purchased transportation expense for the Truckload segment
decreased 4.2 cents per total mile in the first nine months of 2009 compared
to the same period in 2008 primarily because of a decrease in the fuel
reimbursement paid to owner-operators (because of lower average diesel fuel
prices) and the shift from rent and purchased transportation to salaries,
wages and benefits because of the decrease in owner-operator miles as a
percentage of total miles. Rent and purchased transportation expense for
the VAS segment decreased in response to lower VAS revenues. As a percentage
of VAS revenues, VAS rent and purchased transportation expense decreased to
83.0% in the 2009 year-to-date period from 85.2% in the 2008 year-to-date
period.
Other operating expenses for the Truckload segment increased 0.9 cents
per total mile due to lower gains on sales of assets in the first nine
months of 2009 compared to the same period in 2008. Gains on sales of
assets decreased to $1.9 million in the nine months ended September 30, 2009
from $8.8 million in the nine months ended September 30, 2008. In the 2009
year-to-date period, we realized lower average gains per truck and trailer
sold. Buyer demand for used trucks and trailers remained low because of the
weak freight market and recessionary economy.
Other Expense (Income)
Our interest income was $1.3 million during the nine months ended
September 30, 2009 compared to $3.0 million during the nine months ended
September 30, 2008. Our average cash and cash equivalents balance was about
20% lower for the nine months ended September 30, 2009 than the same period
in 2008, and the average interest rate earned on these funds was lower in
the 2009 period.
Income Taxes
Our effective income tax rate (income taxes expressed as a percentage
of income before income taxes) increased to 43.0% for the nine months ended
September 30, 2009 from 42.6% for the same period in 2008. The higher
income tax rate was due primarily to lower income before income taxes on an
annualized basis, which caused non-deductible expenses such as driver per
diem to comprise a larger percentage of our income before income taxes.
Liquidity and Capital Resources:
During the nine months ended September 30, 2009, net cash provided by
operating activities decreased to $169.3 million, a 10.5% decrease ($19.9
million) compared to the same nine-month period one year ago. The decrease
in net cash provided by operating activities resulted primarily from (i) a
$21.7 million decrease in cash flows related to insurance and claims
accruals (both current and long-term) due to settlements of claims, (ii) an
$11.9 million decrease in cash flows related to accounts payable, due to the
timing of payments and lower diesel fuel prices and (iii) lower net income
of $10.4 million. The decrease in net cash provided by operating activities
was offset partially by a lower accounts receivable balance in third quarter
2009 because of a decrease in fuel surcharge billings and lower revenues
attributed to the smaller fleet size. We were able to make net capital
expenditures, repay debt and pay dividends with the net cash provided by
operating activities and existing cash balances as discussed below.
Net cash used in investing activities decreased from $76.0 million for
the nine-month period ended September 30, 2008 to $73.5 million for the
nine-month period ended September 30, 2009. Net property additions
(primarily revenue equipment) were $76.7 million for the nine-month period
ended September 30, 2009, compared to $80.4 million during the same period
of 2008.
As of September 30, 2009, we committed to property and equipment
purchases, net of trades, of approximately $31.8 million. We expect our net
capital expenditures (primarily revenue equipment) to be in the range of
25
$100.0 million to $125.0 million in 2009. We intend to fund these net
capital expenditures through cash flow from operations, existing cash
balances and financing available under our existing credit facilities, as
management deems necessary.
Net financing activities used $38.6 million during the nine months
ended September 30, 2009 and $2.4 million during the same period in 2008.
The change from 2008 to 2009 included debt repayments of $30.0 million
during the nine-month period ended September 30, 2009, and no debt
repayments during the nine-month period ended September 30, 2008. We paid
dividends of $10.7 million in the nine months ended September 30, 2009
compared to $10.6 million in the same period of 2008. Financing activities
included no common stock repurchases for the nine-month period ended
September 30, 2009 and $4.5 million in the same period of 2008. From time
to time, the Company has repurchased, and may continue to repurchase, shares
of the Company's common stock. The timing and amount of such purchases
depends on market and other factors. As of September 30, 2009, the Company
had purchased 1,041,200 shares pursuant to our current Board of Directors
repurchase authorization and had 6,958,800 shares remaining available for
repurchase.
Management believes our financial position at September 30, 2009 is
strong. As of September 30, 2009, we had $105.8 million of cash and cash
equivalents and $776.4 million of stockholders' equity. Cash is invested
primarily in government portfolio money market funds. We do not hold any
investments in auction-rate securities. As of September 30, 2009, we had
$225.0 million of available credit pursuant to credit facilities, of which
we had no outstanding borrowings. The credit available under these
facilities is reduced by the $49.8 million in stand-by letters of credit
under which we are obligated. These letters of credit are primarily
required as security for insurance policies. Management believes our
financial position is strong and foresees no significant barriers to
obtaining sufficient financing, if necessary.
Contractual Obligations and Commercial Commitments:
The following table sets forth our contractual obligations and
commercial commitments as of September 30, 2009.
Payments Due by Period
(in millions)
Less More
than 1 1-3 3-5 than 5 Period
Total year years years years Unknown
--------------------------------------------------------------------------------------
Contractual Obligations
Unrecognized tax benefits $ 7.3 $ 1.1 $ - $ - $ - $ 6.2
Equipment purchase
commitments 31.8 31.8 - - - -
------- ------- ------- ------- ------- -------
Total contractual cash
obligations $ 39.1 $ 32.9 $ - $ - $ - $ 6.2
======= ======= ======= ======= ======= =======
Other Commercial
Commitments
Unused lines of credit $ 175.2 $ - $ 175.2 $ - $ - $ -
Standby letters of credit 49.8 49.8 - - - -
------- ------- ------- ------- ------- -------
Total commercial
commitments $ 225.0 $ 49.8 $ 175.2 $ - $ - $ -
======= ======= ======= ======= ======= =======
Total obligations $ 264.1 $ 82.7 $ 175.2 $ - $ - $ 6.2
======= ======= ======= ======= ======= =======
26
We have committed credit facilities with two banks totaling $225.0
million, of which we had no outstanding borrowings at September 30, 2009.
These credit facilities bear variable interest based on the London Interbank
Offered Rate ("LIBOR"). The credit available under these facilities is
reduced by the amount of standby letters of credit under which we are
obligated. The unused lines of credit are available to us in the event we
need financing for the replacement of our fleet or for other significant
capital expenditures. The stand-by letters of credit are primarily required
for insurance policies. Equipment purchase commitments relate to committed
equipment expenditures. As of September 30, 2009, we have recorded a $7.3
million liability for unrecognized tax benefits. We expect $1.1 million to
be settled within the next twelve months and are unable to reasonably
determine when the $6.2 million categorized as "period unknown" will be
settled.
Off-Balance Sheet Arrangements:
As of September 30, 2009, we did not have any non-cancelable revenue
equipment operating leases or other arrangements that meet the definition of
an off-balance sheet arrangement.
Regulations:
All truckload carriers are subject to the hours of service ("HOS")
regulations (the "HOS Regulations") issued by the Federal Motor Carrier
Safety Administration (the "FMCSA"). In November 2008, the FMCSA adopted
and issued a final rule that amended the HOS Regulations to (i) allow
drivers up to 11 hours of driving time within a 14-hour, non-extendable
window from the start of the workday (this driving time must follow 10
consecutive hours of off-duty time) and (ii) restart calculations of the
weekly on-duty time limits after the driver has at least 34 consecutive
hours off duty. This final rule became effective on January 19, 2009 and
made essentially no changes to the 11-hour driving limit and 34-hour restart
rules that we had been following since the HOS Regulations were revised in
October 2005. In March 2009, Public Citizen and other parties petitioned
the Court for reconsideration of the FMCSA's final rule, asserting the rule
is not stringent enough, and the American Trucking Associations then filed a
motion to intervene in support of keeping the current FMCSA final rule in
place. On October 26, 2009, the FMCSA, Public Citizen and the other
petitioning parties entered into a settlement agreement that requires the
FMCSA to submit a new proposed HOS rule within nine months of the settlement
date and publish a final rule within 21 months of the settlement date.
Pursuant to the settlement agreement, such parties also filed with the Court
a joint motion requesting the Court to hold the proceedings in abeyance
pending the FMCSA's issuance of the new proposed rule. Oral arguments on
the joint motion are scheduled for January 15, 2010. If new HOS rules are
adopted which change the allowable driving hours or on-duty time, our
mileage productivity could be adversely affected. We will continue to
monitor any developments.
In January 2007, the FMCSA published a proposed rule regarding the
trucking industry's use of Electronic On-Board Recorders ("EOBRs") for
compliance with HOS rules. The proposed rule includes (i) performance
specifications for EOBR technology for HOS compliance; (ii) incentives to
encourage EOBR use by motor carriers; and (iii) requirements for EOBR use by
operators with serious HOS compliance problems during at least two
compliance reviews over any two-year period. In late 2008, the FMCSA's
submitted proposed rule was not approved for publication before the end of
the Bush Administration. On January 23, 2009, in accordance with
instructions issued by the Obama Administration, the FMCSA withdrew the
proposed rule for reconsideration and review by the Obama Administration.
While we do not believe the rule, as proposed, would have a significant
effect on our operations and profitability, we will continue to monitor
future developments.
In January 2007, more stringent EPA engine emissions standards became
effective and applied to all newly manufactured truck engines. Compared to
trucks with engines manufactured before 2007 and not subject to the new
standards, trucks manufactured with the 2007-standard engines have higher
purchase prices (approximately $5,000 to $10,000 more per truck). In
January 2010, a final set of more rigorous EPA-mandated emissions standards
will become effective for all new engines manufactured after that time.
These regulations require a significant decrease in particulate matter (soot
27
and ash) and nitrogen oxide emitted from on-road diesel engines. Engine
manufacturers responded to the 2010 standards by modifying engines to
produce cleaner combustion with selective catalytic reduction ("SCR") and
exhaust gas recirculation ("EGR") technologies to remove pollutants from
exhaust gases exiting the combustion chamber. The SCR technology also
requires the use of a urea-based diesel exhaust fluid. We are currently
evaluating the options available to us to prepare for the upcoming 2010
standards.
Several U.S. states, counties and cities have enacted legislation or
ordinances restricting idling of trucks to short periods of time. This
action is significant when it impacts the driver's ability to idle the truck
for purposes of operating air conditioning and heating systems particularly
while in the sleeper berth. Many of the statutes or ordinances recognize
the need of the drivers to have a comfortable environment in which to sleep
and include exceptions for those circumstances. California no longer has
such an exemption. We have taken steps to address this issue in California,
which include driver training, better scheduling and the installation and
use of APUs.
California has also enacted restrictions on transport refrigeration
unit ("TRU") emissions that require companies to operate compliant TRUs in
California. The California regulations apply not only to California
intrastate carriers, but also to carriers based outside of California who
wish to enter the state with TRUs. On January 9, 2009, the EPA enabled
California to phase in its Low-Emission TRU In-Use Performance Standards
over several years. The first compliance deadline is December 31, 2009 and
it applies to model year 2002 and older TRU engines. Enforcement of
California's in-use performance standards for these model year TRU engines
will begin in January 2010. California also required the registration of
all California-based TRUs by July 31, 2009. For compliance purposes, we
completed the California TRU registration process and are currently
evaluating our options for meeting these requirements over the next several
years as the regulations gradually become effective.
Critical Accounting Policies:
We operate in the truckload sector of the trucking industry and the
logistics sector of the transportation industry. In the truckload sector,
we focus on transporting consumer nondurable products that generally ship
consistently throughout the year. In the logistics sector, besides managing
transportation requirements for individual customers, we provide additional
sources of truck capacity, alternative modes of transportation, a global
delivery network and systems analysis to optimize transportation needs. Our
success depends on our ability to efficiently manage our resources in the
delivery of truckload transportation and logistics services to our
customers. Resource requirements vary with customer demand and may be
subject to seasonal or general economic conditions. Our ability to adapt to
changes in customer transportation requirements is essential to efficient
resource deployment, making capital investments in tractors and trailers or
obtaining qualified third-party carrier capacity at a reasonable price.
Although our business volume is not highly concentrated, we may also be
occasionally affected by our customers' financial failures or loss of
customer business.
Our most significant resource requirements are company drivers, owner-
operators, tractors, trailers and related equipment operating costs (such as
fuel and related fuel taxes, driver pay, insurance and supplies and
maintenance). To mitigate our risk to fuel price increases, we recover from
our customers additional fuel surcharges that recoup a majority, but not
all, of the increased fuel costs; however, we cannot assure that current
recovery levels will continue in future periods. Our financial results are
also affected by company driver and owner-operator availability and the new
and used revenue equipment market. Because we are self-insured for a
significant portion of bodily injury, property damage and cargo claims and
for workers' compensation benefits and health claims for our employees
(supplemented by premium-based insurance coverage above certain dollar
levels), financial results may also be affected by driver safety, medical
costs, weather, legal and regulatory environments and insurance coverage
costs to protect against catastrophic losses.
28
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 our normal replacement
cycle for tractors is three years, we calculate 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) when 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. We
continually monitor the adequacy of the lives and salvage values
used in calculating depreciation expense and adjust these
assumptions appropriately when warranted.
* Impairment of long-lived assets. We review our long-lived assets
for impairment whenever events or circumstances indicate the
carrying amount of a long-lived asset may not be recoverable. An
impairment loss would be recognized if the carrying amount of the
long-lived asset is not recoverable and the carrying amount exceeds
its fair value. For long-lived assets classified as held and used,
the carrying amount is not recoverable when the carrying value of
the long-lived asset exceeds the sum of the future net cash flows.
We do not separately identify assets by operating segment because
tractors and trailers are routinely transferred from one operating
fleet to another. As a result, none of our long-lived assets have
identifiable cash flows from use that are largely independent of the
cash flows of other assets and liabilities. Thus, the asset group
used to assess impairment would include all of our assets.
* Estimates of accrued liabilities for insurance and claims for
liability and physical damage losses and workers' compensation. The
insurance and claims accruals (current and noncurrent) are recorded
at the estimated ultimate payment amounts and are based upon
individual case estimates (including negative development) and
estimates of incurred-but-not-reported losses using loss development
factors based upon past experience. An actuary reviews our self-
insurance reserves for bodily injury and property damage claims and
workers' compensation claims every six months.
* Policies for revenue recognition. Operating revenues (including
fuel surcharge revenues) and related direct costs are recorded when
the shipment is delivered. For shipments where a third-party
capacity provider (including owner-operators under contract with us)
is utilized to provide some or all of the service and we (i) are the
primary obligor in regard to the shipment delivery, (ii) establish
customer pricing separately from carrier rate negotiations, (iii)
generally have discretion in carrier selection and/or (iv) have
credit risk on the shipment, we record both revenues for the dollar
value of services we bill to the customer and rent and purchased
transportation expense for transportation costs we pay to the third-
party provider upon the shipment's delivery. In the absence of the
conditions listed above, we record revenues net of those expenses
related to third-party providers.
* Accounting for income taxes. Significant management judgment is
required to determine (i) the provision for income taxes, (ii)
whether deferred income taxes will be realized in full or in part
and (iii) the liability for unrecognized tax benefits related to
uncertain tax positions. Deferred income tax assets and liabilities
are measured using enacted tax rates that are expected to apply to
taxable income in the years when those temporary differences are
expected to be recovered or settled. When it is more likely that
all or some portion of specific deferred income tax assets will not
be realized, a valuation allowance must be established for the
amount of deferred income tax assets that are determined not to be
realizable. A valuation allowance for deferred income tax assets
has not been deemed necessary due to our profitable operations.
Accordingly, if facts or financial circumstances change and
29
consequently impact the likelihood of realizing the deferred income
tax assets, we would need to apply management's judgment to
determine the amount of valuation allowance required in any given
period.
* Allowance for doubtful accounts. The allowance for doubtful
accounts is our estimate of the amount of probable credit losses in
our existing accounts receivable. We review the financial condition
of customers for granting credit and monitor changes in customers'
financial conditions on an ongoing basis. We determine the
allowance based on our historical write-off experience and national
economic conditions. During the last year, numerous significant
events affected the U.S. financial markets and resulted in
significant reduction of credit availability and liquidity.
Consequently, we believe some of our customers may be unable to
obtain or retain adequate financing to support their businesses in
the future. We anticipate that because of these combined factors,
some of our customers may also be compelled to restructure their
businesses or may be unable to pay amounts owed to us. We have
formal policies in place to continually monitor credit extended to
customers and to manage our credit risk. We maintain credit
insurance for some customer accounts. We evaluate the adequacy of
our allowance for doubtful accounts quarterly and believe our
allowance for doubtful accounts is adequate based on information
currently available.
Management periodically re-evaluates these estimates as events and
circumstances change. Together with the effects of the matters discussed
above, these factors may significantly impact our results of operations from
period to period.
Accounting Standards:
New Accounting Pronouncements Adopted
-------------------------------------
In June 2009, the Financial Accounting Standards Board (the "FASB")
issued its final Statement of Financial Accounting Standards ("SFAS") No.
168, The FASB Accounting Standards CodificationTM and the Hierarchy of
Generally Accepted Accounting Principles - a replacement of FASB Statement
No. 162 ("No. 168"). This statement establishes the FASB Accounting
Standards CodificationTM (the "Codification") as the single source of
authoritative U.S. generally accepted accounting principles ("GAAP") applied
by nongovernmental entities, except for rules and interpretive releases of
the SEC under the authority of federal securities laws, which are sources of
authoritative accounting guidance for SEC registrants. The Codification did
not change GAAP but reorganizes the literature. The Codification supersedes
all existing non-SEC accounting and reporting standards. The provisions of
SFAS No. 168 were effective for financial statements issued for interim and
annual periods ending after September 15, 2009. Following SFAS No. 168, the
Board will not issue new standards in the form of Statements, FASB Staff
Positions, or Emerging Issues Task Force Abstracts; instead, it will issue
Accounting Standards Updates. The FASB will not consider Accounting
Standards Updates as authoritative in their own right; these updates will
serve only to update the Codification, provide background information about
the guidance and provide the bases for conclusions on the changes in the
Codification. In the description of "Accounting Standards Updates Not Yet
Effective" that follows, references in quotations relate to Codification
Topics and Subtopics, and their descriptive titles, as appropriate.
30
Accounting Standards Updates Not Yet Effective
----------------------------------------------
In October 2009, an update was made to "Revenue Recognition - Multiple
Deliverable Revenue Arrangements". This update removes the objective-and-
reliable-evidence-of-fair-value criterion from the separation criteria used
to determine whether an arrangement involving multiple deliverables contains
more than one unit of accounting, replaces references to "fair value" with
"selling price" to distinguish from the fair value measurements required
under the "Fair Value Measurements and Disclosures" guidance, provides a
hierarchy that entities must use to estimate the selling price, eliminates
the use of the residual method for allocation, and expands the ongoing
disclosure requirements. This update is effective for the company beginning
January 1, 2011 and can be applied prospectively or retrospectively.
Management is currently evaluating the effect that adoption of this update
will have, if any, on our consolidated financial position, results of
operations and cash flows when it becomes effective in 2011.
Other Accounting Standards Updates not effective until after September
30, 2009, are not expected to have a significant effect on our consolidated
financial position, results of operations or cash flows.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are 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
attributed to changes in the level of global oil production, refining
capacity, seasonality, weather and other market factors. Historically, we
have recovered a majority, but not all, of fuel price increases from
customers in the form of fuel surcharges. We implemented customer fuel
surcharge programs with most of our customers to offset much of the higher
fuel cost per gallon. However, we do not recover all of the fuel cost
increase through these surcharge programs. We cannot predict the extent to
which fuel prices will increase or decrease in the future or the extent to
which fuel surcharges could be collected. As of September 30, 2009, we had
no derivative financial instruments to reduce our exposure to fuel price
fluctuations.
Foreign Currency Exchange Rate Risk
We conduct business in several foreign countries, including Mexico,
Canada and China. To date, most foreign revenues are denominated in U.S.
Dollars, and we receive payment for foreign freight services primarily in
U.S. Dollars to reduce direct foreign currency risk. Assets and liabilities
maintained by a foreign subsidiary company in the local currency are subject
to foreign exchange gains or losses. Foreign currency transaction gains and
losses primarily relate to changes in the value of revenue equipment owned
by a subsidiary in Mexico, whose functional currency is the Peso. Foreign
currency transaction losses were $0.6 million for third quarter 2009 and
$1.8 million for third quarter 2008.
Interest Rate Risk
We had no debt outstanding at September 30, 2009. Interest rates on
our unused credit facilities are based on the LIBOR. Increases in interest
rates could impact our annual interest expense on future borrowings. As of
September 30, 2009, we do not have any derivative financial instruments to
reduce our exposure to interest rate increases.
31
Item 4. Controls and Procedures.
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rule 15d-15(e) of the Securities
Exchange Act of 1934 (the "Exchange Act"). Our disclosure controls and
procedures are designed to provide reasonable assurance of achieving the
desired control objectives. Based upon that evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls
and procedures are effective in enabling us to record, process, summarize
and report information required to be included in our periodic filings with
the SEC within the required time period.
Management, under the supervision and with the participation of our
Chief Executive Officer and Chief Financial Officer, concluded that no
changes in our internal control over financial reporting occurred during our
most recent fiscal quarter that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
We have confidence in our internal controls and procedures.
Nevertheless, our management, including the Chief Executive Officer and
Chief Financial Officer, does not expect that the internal controls or
disclosure procedures and controls will prevent all errors or intentional
fraud. An internal control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of such internal controls are met. Further, the design of an
internal control system must reflect that resource constraints exist, and
the benefits of controls must be 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, have been prevented or detected.
32
PART II
OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On October 15, 2007, we announced that on October 11, 2007 our Board of
Directors approved an increase in the number of shares of our common stock
that Werner Enterprises, Inc. (the "Company") is authorized to repurchase.
Under this October 2007 authorization, the Company is permitted to
repurchase an additional 8,000,000 shares. As of September 30, 2009, the
Company had purchased 1,041,200 shares pursuant to this authorization and
had 6,958,800 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.
No shares of common stock were repurchased during the third quarter of
2009 by either the Company or any "affiliated purchaser," as defined by Rule
10b-18 of the Exchange Act.
Item 6. Exhibits.
Exhibit No. Exhibit Incorporated by Reference to:
----------- ------- -----------------------------
3(i) Restated Articles of Incorporation of Werner Exhibit 3(i) to the registrant's report
Enterprises, Inc. on Form 10-Q for the quarter ended
June 30, 2007
3(ii) Revised and Restated By-Laws of Werner Exhibit 3(ii) to the registrant's report
Enterprises, Inc. on Form 10-Q for the quarter ended
June 30, 2007
10.1 The Executive Nonqualified Excess Plan of Filed herewith
Werner Enterprises, Inc., as amended
31.1 Certification of the Chief Executive Officer Filed herewith
pursuant to Rules 13a-14(a) and 15d-14(a) of
the Securities Exchange Act of 1934 (Section
302 of the Sarbanes-Oxley Act of 2002)
31.2 Certification of the Chief Financial Officer Filed herewith
pursuant to Rules 13a-14(a) and 15d-14(a) of
the Securities Exchange Act of 1934 (Section
302 of the Sarbanes-Oxley Act of 2002)
32.1 Certification of the Chief Executive Officer Filed herewith
pursuant to 18 U.S.C. Section 1350 (Section 906
of the Sarbanes-Oxley Act of 2002)
32.2 Certification of the Chief Financial Officer Filed herewith
pursuant to 18 U.S.C. Section 1350 (Section 906
of the Sarbanes-Oxley Act of 2002)
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WERNER ENTERPRISES, INC.
Date: November 2, 2009 By: /s/ John J. Steele
---------------------- ---------------------------------------
John J. Steele
Executive Vice President, Treasurer and
Chief Financial Officer
Date: November 2, 2009 By: /s/ James L. Johnson
---------------------- ---------------------------------------
James L. Johnson
Senior Vice President, Controller and
Corporate Secretary
34