UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[Mark one]
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2010
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)
(402) 895-6640
(Registrant's telephone number, including area code)
_________________________________
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark whether the registrant 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 April 30, 2010, 72,340,121 shares of the registrant's common
stock, par value $.01 per share, were outstanding.
WERNER ENTERPRISES, INC.
INDEX
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements: 3
Consolidated Statements of Income for the Three Months Ended 4
March 31, 2010 and 2009
Consolidated Condensed Balance Sheets as of March 31, 2010 and 5
December 31, 2009
Consolidated Statements of Cash Flows for the Three Months 6
Ended March 31, 2010 and 2009
Notes to Consolidated Financial Statements (Unaudited) as of 7
March 31, 2010
Item 2. Management's Discussion and Analysis of Financial Condition 11
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 26
Item 4. Controls and Procedures 27
PART II - OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 28
Item 6. Exhibits 29
2
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 Part I of our Annual Report on Form
10-K for the year ended December 31, 2009 (the "2009 Form 10-K"). 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 period ended March 31, 2010 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2010. 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 2009 Form 10-K.
3
WERNER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
(In thousands, except per share amounts) March 31,
---------------------------------------------------------------------------
2010 2009
---------------------------------------------------------------------------
(Unaudited)
Operating revenues $ 425,075 $ 394,508
---------------------------
Operating expenses:
Salaries, wages and benefits 128,334 134,186
Fuel 73,881 51,610
Supplies and maintenance 37,676 37,897
Taxes and licenses 23,457 24,395
Insurance and claims 16,838 21,665
Depreciation 38,285 40,094
Rent and purchased transportation 84,685 68,593
Communications and utilities 3,749 4,402
Other (94) 410
---------------------------
Total operating expenses 406,811 383,252
---------------------------
Operating income 18,264 11,256
---------------------------
Other expense (income):
Interest expense 9 76
Interest income (337) (489)
Other (11) (272)
---------------------------
Total other expense (income) (339) (685)
---------------------------
Income before income taxes 18,603 11,941
Income taxes 7,767 5,045
---------------------------
Net income $ 10,836 $ 6,896
===========================
Earnings per share:
Basic $ 0.15 $ 0.10
===========================
Diluted $ 0.15 $ 0.10
===========================
Dividends declared per share $ 0.050 $ 0.050
===========================
Weighted-average common shares outstanding:
Basic 72,001 71,576
===========================
Diluted 72,545 71,944
===========================
See Notes to Consolidated Financial Statements (Unaudited).
4
WERNER ENTERPRISES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except share amounts) March 31, December 31,
-----------------------------------------------------------------------------
2010 2009
-----------------------------------------------------------------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 73,059 $ 18,430
Accounts receivable, trade, less allowance of
$9,330 and $9,167, respectively 184,102 180,740
Other receivables 22,668 10,366
Inventories and supplies 12,832 12,725
Prepaid taxes, licenses and permits 11,319 14,628
Current deferred income taxes 24,869 24,808
Other current assets 22,906 22,807
----------------------------
Total current assets 351,755 284,504
----------------------------
Property and equipment 1,542,422 1,580,711
Less - accumulated depreciation 707,946 708,809
----------------------------
Property and equipment, net 834,476 871,902
----------------------------
Other non-current assets 16,585 16,603
----------------------------
$1,202,816 $1,173,009
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 51,813 $ 47,056
Insurance and claims accruals 66,502 65,667
Accrued payroll 24,602 17,567
Income taxes payable 11,912 -
Other current liabilities 18,192 16,451
----------------------------
Total current liabilities 173,021 146,741
----------------------------
Other long-term liabilities 9,053 8,760
Insurance and claims accruals, net of current
portion 114,500 113,500
Deferred income taxes 190,137 199,358
Stockholders' equity:
Common stock, $0.01 par value, 200,000,000
shares authorized; 80,533,536 shares issued;
72,073,121 and 71,896,512 shares outstanding,
respectively 805 805
Paid-in capital 92,222 92,389
Retained earnings 786,123 778,890
Accumulated other comprehensive loss (4,378) (5,556)
Treasury stock, at cost; 8,460,415 and
8,637,024 shares, respectively (158,667) (161,878)
----------------------------
Total stockholders' equity 716,105 704,650
----------------------------
$1,202,816 $1,173,009
============================
See Notes to Consolidated Financial Statements (Unaudited).
5
WERNER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
(In thousands) March 31,
--------------------------------------------------------------------------
2010 2009
--------------------------------------------------------------------------
(Unaudited)
Cash flows from operating activities:
Net income $ 10,836 $ 6,896
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 38,285 40,094
Deferred income taxes (9,465) (3,958)
Gain on disposal of property and equipment (1,111) (730)
Stock-based compensation 484 327
Other long-term assets (394) (151)
Insurance claims accruals, net of current
portion 1,000 (2,000)
Other long-term liabilities 230 4
Changes in certain working capital items:
Accounts receivable, net (3,362) 29,289
Other current assets 1,525 9,883
Accounts payable 5,173 (2,994)
Other current liabilities 21,761 (55)
-------------------------
Net cash provided by operating activities 64,962 76,605
-------------------------
Cash flows from investing activities:
Additions to property and equipment (16,656) (68,151)
Retirements of property and equipment 5,782 24,559
Decrease in notes receivable 1,226 1,136
-------------------------
Net cash used in investing activities (9,648) (42,456)
-------------------------
Cash flows from financing activities:
Repayments of short-term debt (10,000) (30,000)
Proceeds from issuance of short-term debt 10,000 -
Dividends on common stock (3,595) (3,579)
Stock options exercised 1,948 1
Excess tax benefits from exercise of stock
options 612 -
-------------------------
Net cash used in financing activities (1,035) (33,578)
-------------------------
Effect of foreign exchange rate fluctuations on
cash 350 (312)
Net increase in cash and cash equivalents 54,629 259
Cash and cash equivalents, beginning of period 18,430 48,624
-------------------------
Cash and cash equivalents, end of period $ 73,059 $ 48,883
=========================
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest $ 9 $ 131
Income taxes $ 1,140 $ 1,924
Supplemental schedule of non-cash investing
activities:
Notes receivable issued upon sale of revenue
equipment $ 814 $ 539
See Notes to Consolidated Financial Statements (Unaudited).
6
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 income of
$1,178,000 for the three-month period ended March 31, 2010, and loss of
$1,587,000 for the three-month period ended March 31, 2009.
(2) Credit Facilities
As of March 31, 2010, we have committed credit facilities with two
banks totaling $225.0 million that mature in May 2011 ($175.0 million) and
May 2012 ($50.0 million). Borrowings under these credit facilities bear
variable interest based on the London Interbank Offered Rate ("LIBOR"). As
of March 31, 2010, we had no borrowings outstanding under these credit
facilities with banks. In January 2010, we borrowed $10.0 million, which
we fully repaid in February 2010. The $225.0 million of credit available
under these facilities is reduced by $40.8 million in letters of credit
under which we are obligated. Each of the debt agreements includes, among
other things, two financial covenants requiring us (i) not to exceed a
maximum ratio of total debt to total capitalization and (ii) not to exceed
a maximum ratio of total funded debt to earnings before interest, income
taxes, depreciation and amortization (as such terms are defined in each
credit facility). At March 31, 2010, we were in compliance with these
covenants.
(3) Income Taxes
For the three-month period ended March 31, 2010, there were no
material changes to the total amount of unrecognized tax benefits. We
accrued an interest benefit of $0.1 million during the three-month period
ended March 31, 2010. Our total gross liability for unrecognized tax
benefits at March 31, 2010 is $7.3 million. If recognized, $4.4 million of
unrecognized tax benefits would impact our effective tax rate. Interest of
$3.2 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 2009 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 March 31, 2010, we have committed to property and equipment
purchases of approximately $70.5 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.
7
(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 outstanding 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
March 31,
----------------------
2010 2009
----------------------
Net income $ 10,836 $ 6,896
======================
Weighted average common shares
outstanding 72,001 71,576
Dilutive effect of stock-based
awards 544 368
----------------------
Shares used in computing diluted
earnings per share 72,545 71,944
======================
Basic earnings per share $ 0.15 $ 0.10
======================
Diluted earnings per share $ 0.15 $ 0.10
======================
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
March 31,
-------------------------------
2010 2009
-------------------------------
Number of options - 1,215,819
Range of option purchase prices - $16.68 - $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 the 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 under the Equity Plan 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 March 31, 2010, there were 8,310,257 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 $0.5 million for the three months ended March 31,
2010 and $0.3 million for the three months ended March 31, 2009. Stock-
based employee compensation expense is included in salaries, wages and
8
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 $0.2 million for the three months ended
March 31, 2010 and $0.1 million for the three months ended March 31, 2009.
As of March 31, 2010, the total unrecognized compensation cost related to
nonvested stock-based compensation awards was approximately $6.0 million
and is expected to be recognized over a weighted average period of 2.2
years.
We do not have a formal policy for issuing shares upon an exercise of
stock options or vesting of restricted stock, so such shares are generally
issued from treasury stock. From time to time, we repurchase shares of our
common stock, the timing and amount of which depends on market and other
factors. Historically, the shares acquired under our regular repurchase
program have provided us with sufficient quantities of stock to issue for
stock-based compensation. Based on current treasury stock levels, we do
not expect to repurchase additional shares specifically for stock-based
compensation during 2010.
Stock Options
Stock options are granted at prices equal to the market value of the
common stock on the date the option award is granted. Option awards
currently outstanding become exercisable in installments from 24 to 72
months after the date of grant. The options are exercisable over a period
not to exceed ten years and one day from the date of grant.
The following table summarizes stock option activity for the three
months ended March 31, 2010:
Weighted
Average
Weighted Remaining
Number of Average Contractual Aggregate
Options Exercise Term Intrinsic Value
(in thousands) Price ($) (Years) (in thousands)
--------------------------------------------------------------
Outstanding at beginning of period 2,069 $14.95
Options granted - $ -
Options exercised (177) $11.03
Options forfeited - $ -
Options expired (2) $20.36
----------------
Outstanding at end of period 1,890 $15.31 4.48 $14,864
================
Exercisable at end of period 1,299 $14.20 3.24 $11,655
================
We did not grant any stock options during the three-month periods
ended March 31, 2010 and 2009. The fair value of stock option grants is
estimated using a Black-Scholes valuation model. The total intrinsic value
of stock options exercised was $1.7 million and $1 thousand for the three-
month periods ended March 31, 2010 and March 31, 2009, respectively.
Restricted Stock
Restricted stock awards entitle the holder to shares of common stock
when the award vests. The value of these shares may fluctuate according to
market conditions and other factors. Restricted stock awards granted in
2008 vest 60 months from the grant date of the award. Restricted stock
awards granted in 2009 vest in installments from 36 to 84 months from the
grant date of the award. The restricted shares do not confer any voting or
dividend rights to recipients until such shares fully vest and do not have
any post-vesting sales restrictions.
9
The following table summarizes restricted stock activity for the three
months ended March 31, 2010:
Number of Weighted
Restricted Average
Shares (in Grant Date
thousands) Fair Value ($)
---------- --------------
Nonvested at beginning of period 272 $ 18.72
Shares granted - $ -
Shares vested - $ -
Shares forfeited - $ -
----------
Nonvested at end of period 272 $ 18.72
==========
We did not grant any shares of restricted stock during the three-month
periods ended March 31, 2010 and 2009. 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.
(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) the dedicated services ("Dedicated") fleet 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 four 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 requiring
specialized trailers. Revenues for the Truckload segment include
non-trucking revenues of $1.8 million and $1.2 million for the three-month
periods ended March 31, 2010 and March 31, 2009. 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
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"
10
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
March 31,
-----------------------
2010 2009
-----------------------
Truckload Transportation Services $ 360,543 $ 343,857
Value Added Services 61,400 47,473
Other 2,312 2,516
Corporate 820 662
-----------------------
Total $ 425,075 $ 394,508
=======================
Operating Income
----------------
Three Months Ended
March 31,
-----------------------
2010 2009
-----------------------
Truckload Transportation Services $ 14,548 $ 8,861
Value Added Services 3,084 1,733
Other 116 283
Corporate 516 379
-----------------------
Total $ 18,264 $ 11,256
=======================
(8) Subsequent Events
We performed an evaluation of Werner Enterprises, Inc. (the "Company")
activity and have concluded that as of the date these financial statements
were issued, there are no material subsequent events requiring additional
disclosure or recognition in these financial statements.
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
11
* Critical Accounting Policies
* Accounting Standards
The MD&A should be read in conjunction with our 2009 Form 10-K.
Overview:
We operate in the truckload and logistics sectors of the
transportation industry. In the truckload sector, we focus on transporting
consumer nondurable products that generally ship more consistently
throughout the year. In the logistics sector, besides managing
transportation requirements for individual customers, we provide additional
sources of truck capacity, alternative modes of transportation, a global
delivery network and systems analysis to optimize transportation needs.
Our success depends on our ability to efficiently and effectively manage
our resources in the delivery of truckload transportation and logistics
services to our customers. Resource requirements vary with customer
demand, which may be subject to seasonal or general economic conditions.
Our ability to adapt to changes in customer transportation requirements is
essential to efficiently deploy resources and make capital investments in
tractors and trailers (with respect to our Truckload segment) or obtain
qualified third-party capacity at a reasonable price (with respect to our
VAS segment). Although our business volume is not highly concentrated, we
may also be affected by our customers' financial failures or loss of
customer business.
Operating revenues reported in our operating statistics table under
"Results of Operations" are categorized as (i) trucking revenues, net of
fuel surcharge, (ii) trucking fuel surcharge revenues, (iii) non-trucking
revenues, including VAS, and (iv) other operating revenues. Trucking
revenues, net of fuel surcharge, and trucking fuel surcharge revenues are
generated by the six operating fleets in the Truckload segment (Dedicated,
Regional, Van, Expedited, Temperature-Controlled and 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 first quarter 2010, trucking revenues (net of fuel surcharge)
and trucking fuel surcharge revenues accounted for 84% of total operating
revenues, and non-trucking and other operating revenues accounted for 16%
of total operating revenues.
Trucking revenues, net of fuel surcharge, are typically generated on a
per-mile basis and also include revenues such as stop charges,
loading/unloading charges and equipment detention charges. Because fuel
surcharge revenues fluctuate in response to changes in fuel costs, we
identify them separately in the operating statistics table and exclude them
from the statistical calculations to provide a more meaningful comparison
between periods. The key statistics used to evaluate trucking revenues,
net of fuel surcharge, are (i) average revenues per tractor per week, (ii)
average revenues per mile (total and loaded), (iii) average 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,
independent contractors, 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 independent contractor
12
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 independent
contractors (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 first quarter
2010 to first quarter 2009, several industry-wide issues could cause costs
to increase in future periods. These issues include increasing state
unemployment tax rates, changing fuel prices, higher new truck and trailer
purchase prices, compliance with new or proposed regulations and a weak
used equipment market. Our main fixed costs include depreciation expense
for tractors and trailers and equipment licensing fees (included in taxes
and licenses expense). The Truckload segment requires substantial cash
expenditures for tractor and trailer purchases. We fund these purchases
with net cash from operations and financing available under our existing
credit facilities, as management deems necessary.
We provide non-trucking services primarily through the four operating
units within our VAS segment. Unlike our Truckload segment, the VAS
segment is 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 purchased transportation we pay to third-party capacity providers. This
expense item is recorded as rent and purchased transportation expense.
Other operating expenses include salaries, wages and benefits and computer
hardware and software depreciation. We evaluate VAS's financial
performance by reviewing the gross margin percentage (revenues less rent
and purchased transportation expenses expressed as a percentage of
revenues) and the operating income percentage.
13
Results of Operations:
The following operating statistics table sets forth certain industry
data regarding our freight revenues and operations for the periods
indicated.
Three Months Ended
March 31, %
---------------------
2010 2009 Change
-------------------------------
Trucking revenues, net of fuel surcharge (1) $303,668 $307,976 -1.4%
Trucking fuel surcharge revenues (1) 55,059 34,653 58.9%
Non-trucking revenues, including VAS (1) 63,188 48,669 29.8%
Other operating revenues (1) 3,160 3,210 -1.6%
--------- ---------
Total operating revenues (1) $425,075 $394,508 7.7%
========= =========
Operating ratio (consolidated) (2) 95.7% 97.1%
Average monthly miles per tractor 9,769 9,550 2.3%
Average revenues per total mile (3) $1.437 $1.438 -0.1%
Average revenues per loaded mile (3) $1.629 $1.662 -2.0%
Average percentage of empty miles (4) 11.80% 13.50% -12.6%
Average trip length in miles (loaded) 456 469 -2.8%
Total miles (loaded and empty) (1) 211,315 214,170 -1.3%
Average tractors in service 7,211 7,475 -3.5%
Average revenues per tractor per week (3) $3,239 $3,169 2.2%
Total tractors (at quarter end)
Company 6,575 6,675
Independent contractor 675 700
--------- ---------
Total tractors 7,250 7,375
Total trailers (Truckload and Intermodal, at
quarter end) 23,730 24,885
(1) Amounts in thousands.
(2) Operating expenses expressed as a percentage of operating revenues.
Operating ratio is a common measure in the trucking industry used to
evaluate profitability.
(3) Net of fuel surcharge revenues.
(4) "Empty" refers to miles without trailer cargo.
The following table sets forth the revenues, operating expenses and
operating income for the Truckload segment. Revenues for the Truckload
segment include non-trucking revenues of $1.8 million for the three-month
period ended March 31, 2010 and $1.2 million for the three-month period
ended March 31, 2009, as described on page 10.
Three Months Ended
March 31,
---------------------------------------
2010 2009
------------------- -------------------
Truckload Transportation Services (amounts in thousands) $ % $ %
-------------------------------------------------------- ------------------- -------------------
Revenues $ 360,543 100.0 $ 343,857 100.0
Operating expenses 345,995 96.0 334,996 97.4
---------- ----------
Operating income $ 14,548 4.0 $ 8,861 2.6
========== ==========
14
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 revenue and instead reported as a
reduction of operating expenses.
Three Months Ended
March 31,
---------------------------------------
2010 2009
------------------- -------------------
Truckload Transportation Services (amounts in thousands) $ % $ %
-------------------------------------------------------- ------------------- -------------------
Revenues $ 360,543 $ 343,857
Less: trucking fuel surcharge revenues 55,059 34,653
---------- ----------
Revenues, net of fuel surcharges 305,484 100.0 309,204 100.0
---------- ----------
Operating expenses 345,995 334,996
Less: trucking fuel surcharge revenues 55,059 34,653
---------- ----------
Operating expenses, net of fuel surcharges 290,936 95.2 300,343 97.1
---------- ----------
Operating income $ 14,548 4.8 $ 8,861 2.9
========== ==========
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
March 31,
---------------------------------------
2010 2009
------------------- -------------------
Value Added Services (amounts in thousands) $ % $ %
------------------------------------------- ------------------- -------------------
Revenues $ 61,400 100.0 $ 47,473 100.0
Rent and purchased transportation expense 51,949 84.6 39,438 83.1
---------- ---------
Gross margin 9,451 15.4 8,035 16.9
Other operating expenses 6,367 10.4 6,302 13.3
---------- ---------
Operating income $ 3,084 5.0 $ 1,733 3.6
========== =========
Three Months Ended March 31, 2010 Compared to Three Months Ended March 31,
---------------------------------------------------------------------------
2009
----
Operating Revenues
Operating revenues increased 7.7% for the three months ended March 31,
2010, compared to the same period of the prior year. Trucking revenues,
excluding fuel surcharges, decreased 1.4% due primarily to a 3.5% decrease
in the average number of tractors in service partially offset by a 2.3%
increase in average monthly miles per tractor. With respect to pricing and
rates, revenue per total mile, excluding fuel surcharges, decreased only
0.1%.
Truckload freight market conditions, as measured by the pre-booked
percentage of loads to trucks ("pre-books") in our one-way truckload
fleets, improved in first quarter 2010 compared to first quarter 2009.
These daily pre-books were significantly better than those in first quarter
15
2009, which was one of the weakest freight quarters in the last twenty
years. Our daily number of accepted loads in first quarter 2010 was also
better than first quarter 2009, 2008, and 2007 and trended similar to first
quarter 2006. In April 2010, pre-books in our one-way truckload fleets
continued to improve over the prior year and were slightly better than
those in March 2010.
In first quarter 2009, we reduced the size of our Van fleet to adapt
to the challenging freight market conditions. This resulted in us having
fewer average tractors in service in first quarter 2010. Despite the
severe winter storms that occurred in January and February 2010 and having
fewer trainer teams, both of which negatively impacted our miles per
tractor, having more loads and 3.5% fewer tractors in service resulted in a
2.3% increase in average monthly miles per tractor. We intend to keep our
fleet size constant at approximately 7,300 trucks for the foreseeable
future.
Average revenues per loaded mile, excluding fuel surcharge, decreased
2.0% from $1.662 in first quarter 2009 to $1.629 in first quarter 2010.
Average revenues per total mile, excluding fuel surcharges, decreased only
0.1%, as our average percentage of empty miles improved from 13.5% in first
quarter 2009 to 11.8% in first quarter 2010. We attribute the lower
revenue per mile to the weak freight market conditions in 2009 and related
increased customer bid activity in the first half of 2009. Pricing for
contractual business, which comprises a large percentage of our revenue
base, remains competitive but is beginning to improve. Pricing for our
spot market business in one-way truckload, which makes up a small
percentage of our revenue base, improved significantly during first quarter
2010 and continued to improve in April 2010. We are in the early stages of
upgrading our freight mix and are becoming more selective with our freight
choices. We believe that more of the recent improvement in the freight
market can be attributed to the decreasing supply of available carriers,
rather than rising freight demand, although gradually improving freight
demand is also helping.
Fuel surcharge revenues represent collections from customers for the
higher cost of fuel. These revenues increased 58.9% to $55.1 million in
first quarter 2010 from $34.7 million in first quarter 2009 because of
higher average fuel prices in first quarter 2010. 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 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 model. Our goal is to attain a
more balanced portfolio comprised of one-way truckload (which includes
Regional, Van and Expedited), dedicated (which includes Dedicated, Flatbed
and Temperature-Controlled) and logistics (which includes the VAS segment)
services.
16
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
increased 29.3% to $61.4 million in first quarter 2010 from $47.5 million
in first quarter 2009 because of an increased number of shipments,
primarily in the Brokerage and International units. VAS gross margin
dollars increased 17.6% to $9.5 million in first quarter 2010 from $8.0
million for the same period in 2009. VAS operating income increased 78.0%
to $3.1 million in first quarter 2010 from $1.7 million in first quarter
2009. The following table shows the changes in VAS shipment volume and
average revenue (excluding logistics fee revenue) per shipment for all VAS
shipments:
Three Months Ended
March 31,
-------------------- ------------ ----------
2010 2009 Difference % Change
--------- --------- ------------ ----------
Total VAS shipments 66,825 54,515 12,310 23%
Less: Non-committed shipments to
Truckload segment (26,311) (19,637) (6,674) 34%
--------- --------- ------------
Net VAS shipments 40,514 34,878 5,636 16%
========= ========= ============
Average revenue per shipment $1,309 $1,279 $30 2%
========= ========= ============
In first quarter 2010, Brokerage revenues increased 28.1% due to an
increased number of shipments, while gross margin dollars grew at a lower
percentage rate due to the higher cost of third party carrier capacity.
Brokerage operating income increased 48.2% because of increased
productivity in the brokerage network. Intermodal revenues increased, the
gross margin percentage did not change and operating results improved.
International revenues and operating income increased significantly while
the gross margin percentage decreased slightly. International's higher
revenues and operating income are due to an increase in the number of
international shipments related to a specific international project.
Operating Expenses
Our operating ratio (operating expenses expressed as a percentage of
operating revenues) was 95.7% for the three months ended March 31, 2010,
compared to 97.1% for the three months ended March 31, 2009. Expense items
that impacted the overall operating ratio are described on the following
pages. The tables on pages 14 and 15 show the operating ratios and
operating margins for our two reportable segments, Truckload and VAS.
17
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
March 31, (Decrease)
--------------------
2010 2009 per Mile
-------------------------------
Salaries, wages and benefits $0.578 $0.599 $(0.021)
Fuel 0.349 0.240 0.109
Supplies and maintenance 0.167 0.169 (0.002)
Taxes and licenses 0.111 0.114 (0.003)
Insurance and claims 0.079 0.100 (0.021)
Depreciation 0.179 0.185 (0.006)
Rent and purchased transportation 0.156 0.135 0.021
Communications and utilities 0.017 0.020 (0.003)
Other 0.001 0.002 (0.001)
Independent contractor costs are included in rent and purchased
transportation expense. Independent contractors supply their own tractor
and driver and are responsible for their operating expenses (including
driver pay, fuel, supplies and maintenance and fuel taxes). Independent
contractor miles as a percentage of total miles were 11.9% for first
quarter 2010 compared to 11.6% for first quarter 2009. This increase in
independent contractor miles as a percentage of total miles shifted costs
from other expense categories to the rent and purchased transportation
category. Due to this increase, we estimate that rent and purchased
transportation expense for the Truckload segment was higher by
approximately 0.3 cents per total mile, and other expense categories had
offsetting decreases on a total-mile basis as follows: (i) salaries, wages
and benefits, 0.1 cent; (ii) fuel, 0.1 cent; and (iii) depreciation, 0.1
cent.
Beginning in the latter months of 2008, we took steps to manage and
reduce a variety of controllable costs and adapt to a smaller fleet. We
continued by implementing numerous cost-saving programs throughout 2009,
which resulted in lower costs (excluding fuel expenses) in first quarter
2010 when compared on a year-over-year basis. Examples of these cost-
saving measures included improving our ratio of tractors to non-driver
employees, reducing driver advertising and 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 2.1
cents per mile on a total-mile basis in first quarter 2010 compared to
first quarter 2009. Student driver pay was lower because we decreased the
average number of active trainer teams by 36%. Driver salaries declined
following changes to discretionary driver pay programs. We improved our
average tractor-to-non-driver ratio for the trucking operation by 8% for
first quarter 2010 compared to first quarter 2009, which resulted in lower
non-driver salaries per mile. The lower cost per mile of salaries, wages
and benefits expense was also brought about by (i) the 2.3% increase in
average miles per tractor (which has the effect of decreasing fixed costs
when evaluated on a per-mile basis) on the non-driver, student and fringe
benefits components of this expense category and (ii) the shift from this
expense category to rent and purchased transportation expense because of
the increase in independent contractor miles as a percentage of total
miles. Our unemployment tax expense was approximately $1.4 million, or
176%, higher in first quarter 2010 than in first quarter 2009 because
various states in which we operate significantly raised their required
unemployment tax contribution rates in 2010. These higher taxes reduced
our earnings by one cent per share in first quarter 2010 compared to first
quarter 2009. Over half of the expected annual unemployment taxes increase
occurred in first quarter 2010, and we currently anticipate the remaining
18
additional expense increase of approximately $1.1 million spread over the
last three quarters of 2010. Non-driver salaries, wages and benefits in the
non-trucking VAS segment increased 1.2%. VAS handled 23% more shipments in
first quarter 2010, including those transferred to the Truckload segment,
with only a 1.2% increase in personnel costs.
We renewed our workers' compensation insurance coverage for the policy
year beginning April 1, 2010. 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 2010 are slightly lower than the previous
policy year, due primarily to a lower premium rate per payroll dollar.
The qualified and student driver recruiting and retention markets were
generally good in first quarter 2010, but slightly more challenging than
the market in first quarter 2009. Generally going into the spring season,
the driver market becomes more difficult due to seasonal construction jobs
that become available with improved weather conditions. The weakness in
the construction and automotive industries, other trucking company failures
and fleet reductions, and the higher national unemployment rate have aided
our driver recruiting and retention efforts. These factors resulted in
limited employment options for drivers and consequently improved qualified
and student drivers availability in the workforce. As economic conditions
improve, however, competition for qualified drivers will likely increase,
and we are unable to predict the timing of when we will experience future
driver shortages. If such a shortage were to occur and driver pay rate
increases became necessary to attract and retain drivers, our results of
operations would be negatively impacted to the extent that we could not
obtain corresponding freight rate increases.
In March 2010, the United States Congress passed health care reform
legislation known as the Patient Protection and Affordable Care Act and the
Health Care and Education Reconciliation Act. The legislation largely
maintains employer-based health care systems, maintains Employee Retirement
Income Security Act ("ERISA") protections, and maintains state regulation
under the federal framework of rules for insured businesses. A portion of
the key provisions of the legislation become effective beginning in 2011
(such as expanded dependent coverage, no pre-existing conditions for
children, etc.), and other provisions become effective beginning in 2014.
We have been working with our primary health care provider, Blue Cross Blue
Shield of Nebraska, to understand, prepare for, and comply with the
legislated changes. Many detailed aspects of the legislation are yet to be
determined. At this time, it is difficult to estimate the cost impact to
us of the recent legislation; however, we expect that our health care costs
will increase in 2011 as a result of this legislation.
Fuel increased 10.9 cents per total mile for the Truckload segment due
to higher average diesel fuel prices, partially offset by fuel efficiency
improvements, as further discussed below. Average diesel fuel prices were
72 cents per gallon higher in first quarter 2010 than in first quarter
2009. We experienced lower fuel prices in the first half of 2009 following
the rapid fuel price decline that occurred in fourth quarter 2008, which
resulted in a temporary favorable impact on net fuel costs and earnings in
first quarter 2009. When fuel prices rise rapidly, a negative earnings lag
occurs because the cost of fuel rises immediately and the market indexes
used to determine fuel surcharges increase at a slower pace. In a period
of declining fuel prices, we generally experience a temporary favorable
earnings effect because fuel costs decline at a faster pace than the market
indexes used to determine fuel surcharges.
During first quarter 2010, we continued to improve fuel miles per
gallon ("mpg") through several initiatives to improve fuel efficiency,
despite challenging winter weather conditions for part of the quarter that
resulted in lower mpg because of increased engine idling. These
initiatives have been ongoing since March 2008 and include (i) reducing
truck engine idle time, (ii) lowering non-billable miles, (iii) increasing
the percentage of aerodynamic, more fuel-efficient trucks in the company
truck fleet and (iv) installing auxiliary power units ("APUs") in company
trucks. As of March 31, 2010, we had installed APUs in approximately 63%
19
of the company-owned truck fleet. As a result of these fuel savings
initiatives, we improved our company truck average mpg by 2.6% in first
quarter 2010 compared to first quarter 2009. This mpg improvement resulted
in the purchase of 0.9 million fewer gallons of diesel fuel in first
quarter 2010 than in first quarter 2009. This equates to a reduction of
approximately 10,000 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 the EPA and freight industry
representatives to reduce greenhouse gases and air pollution and promote
cleaner, more efficient ground freight transportation.
For April 2010, the average diesel fuel price per gallon was 87 cents
higher than the average diesel fuel price per gallon in the same period of
2009 and 71 cents higher than in second quarter 2009.
Shortages of fuel, increases in fuel prices and petroleum product
rationing can have a materially adverse effect on our operations and
profitability. We are unable to predict whether fuel price levels will
increase or decrease in the future or the extent to which fuel surcharges
will be collected from customers. As of March 31, 2010, 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 its proposed sale to another large fuel vendor from
which we also purchase fuel. If this vendor were to reduce or eliminate
truck stop locations in the future, we currently believe we have the
ability to obtain fuel from other vendors at a competitive price.
Supplies and maintenance for the Truckload segment decreased 0.2 cents
per total mile in first quarter 2010 compared to first quarter 2009.
Through our cost-savings programs, we realized decreases in driver lodging
and travel costs and, to a lesser extent, driver advertising and referral
fees. These savings were partially offset by higher maintenance costs
resulting from an increase in the average age of our company truck fleet
from 2.5 years at March 31, 2009 to 2.7 years at March 31, 2010 and an
increase in the average age of our trailers. The increased average age
results in higher maintenance costs, including maintenance that is not
covered by warranty. The colder weather conditions and severe winter
storms that occurred in January and February 2010 also contributed to
higher maintenance costs.
Taxes and licenses for the Truckload segment decreased 0.3 cents on a
total-mile basis in first quarter 2010 compared to first quarter 2009 due
to a decrease in fuel taxes per mile resulting from the 2.6% improvement in
the company truck mpg. An improved mpg results in fewer gallons of diesel
fuel purchased and consequently lower fuel taxes. The effect of the higher
average miles per tractor on the fixed cost components (primarily equipment
licensing fees) of this operating expense category also contributed to the
per-mile expense improvement.
Insurance and claims for the Truckload segment decreased by 2.1 cents
per total mile in first quarter 2010 compared to first quarter 2009. We
experienced both a lower frequency and severity of claims and improved loss
development on older liability claims in first quarter 2010 compared to
first quarter 2009. The larger portion of our insurance and claims expense
results from our claim experience and claim development under our self-
insurance program; the smaller portion 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 premiums 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.
20
Depreciation expense for the Truckload segment decreased 0.6 cents per
total mile in first quarter 2010 compared to first quarter 2009. This
decrease was due to higher average miles per tractor (which has the effect
of decreasing this fixed cost when evaluated on a per-mile basis) and a
lower ratio of trailers to tractors, offset partially by an increase in the
number of APUs installed on company trucks. 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 had higher purchase prices. We began to take
delivery of trucks with these 2007-standard engines in first quarter 2008
to replace older trucks in our fleet. A final set of more rigorous EPA-
mandated emissions standards became effective for all new engines
manufactured after January 1, 2010. It is expected that trucks with 2010-
standard engines will have a higher purchase price (approximately $5,000 to
$10,000 more per truck) than trucks manufactured to meet the 2007 standards
but may be more fuel efficient. In late 2009, we received a small number
of engines that meet the 2010 standards and began testing them in 2010. We
continue testing 2010-standard engines and are evaluating available options
that enable us to adapt to the 2010 standards. We currently do not expect
to purchase many new trucks with 2010-standard engines in 2010. Because of
the ongoing cost increases for new trucks and the weak used truck market,
we are extending the replacement cycle for company-owned tractors. As a
result, we expect the average age of our company tractor fleet may increase
beyond current levels.
As of March 31, 2010, 55% of the engines in our fleet of company-owned
trucks were manufactured by Caterpillar. In June 2008, Caterpillar
announced it would not produce on-highway engines for use in the United
States that would comply with new 2010 EPA engine emissions standards but
Caterpillar would continue to sell on-highway engines internationally.
Approximately one million trucks in the U.S. domestic market have
Caterpillar heavy-duty engines, and Caterpillar has stated it will fully
support these engines going forward.
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 independent contractors 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 increased to 84.6% in first quarter 2010 compared to
83.1% in first quarter 2009 due to the higher cost of third-party carrier
capacity.
Rent and purchased transportation for the Truckload segment increased
2.1 cents per total mile in first quarter 2010 due primarily to increased
fuel prices that resulted in higher reimbursements to independent
contractors for fuel, and a shift to rent and purchased transportation
expense from salaries, wages and benefits expense because of the increase
in independent contractor truck miles as a percentage of total miles. Our
customer fuel surcharge programs do not differentiate between miles
generated by company-owned and independent contractor trucks. Challenging
operating conditions continue to make independent contractor recruitment
and retention difficult. Such conditions include inflationary cost
increases that are the responsibility of independent contractors and a
shortage of financing available to independent contractors 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
independent contractors. If a shortage of independent contractors and
company drivers occurs, increases in per mile settlement rates (for
independent contractors) and driver pay rates (for company drivers) may
become necessary to attract and retain these drivers. This could
21
negatively affect our results of operations to the extent that we would not
be able to obtain corresponding freight rate increases.
Other operating expenses for the Truckload segment decreased 0.1 cent
per total mile in first quarter 2010 compared to first quarter 2009. Gains
on sales of assets (primarily trucks and trailers) are reflected as a
reduction of other operating expenses and are reported net of sales-related
expenses (which include costs to prepare the equipment for sale). Gains on
sales of assets increased to $1.1 million in first quarter 2010 from $0.7
million in first quarter 2009. In first quarter 2010, we realized lower
average gains per truck and trailer sold. We sold fewer trucks and sold
more trailers in first quarter 2010 than in first quarter 2009. Buyer
demand for used trucks remains low, but we believe the market has
stabilized. We believe our wholly-owned subsidiary and used truck and
trailer retail network, Fleet Truck Sales, is one of the larger 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 used trucks to original equipment
manufacturers when purchasing new trucks.
Other Expense (Income)
We recorded interest income of $0.3 million in first quarter 2010
compared to $0.5 million in first quarter 2009. Our average cash and cash
equivalents balances were lower in first quarter 2010 than in first quarter
2009, and the average interest rate earned on these funds was also lower in
first quarter 2010 compared to first quarter 2009.
Income Taxes
Our effective income tax rate (income taxes expressed as a percentage
of income before income taxes) decreased to 41.8% for first quarter 2010
from 42.2% for first quarter 2009. The lower income tax rate was due
primarily to higher projected income before income taxes on an annualized
basis, which caused non-deductible expenses, such as driver per diem, to
comprise a smaller percentage of our income before income taxes.
Liquidity and Capital Resources:
During the three months ended March 31, 2010, net cash provided by
operating activities decreased to $65.0 million, a 15.2% decrease ($11.6
million) in cash flows compared to the same three-month period one year
ago. The decrease in net cash provided by operating activities resulted
primarily from a $32.6 million decrease in cash flows related to accounts
receivable due to shipment growth and higher fuel surcharges in March 2010,
compared to declining shipments and lower fuel surcharges in March 2009.
This decrease in net cash provided by operating activities was offset
partially by (i) a $9.9 million increase in cash flows related to current
income taxes payable and (ii) a $7.5 million increase in cash flows related
to accrued payroll. We were able to make net capital expenditures and pay
dividends with the net cash provided by operating activities and existing
cash balances, supplemented by net short-term borrowings under our existing
credit facilities.
Net cash used in investing activities for the three-month period ended
March 31, 2010 decreased by 77.3%, from $42.5 million for the three-month
period ended March 31, 2009 to $9.6 million for the three-month period
ended March 31, 2010. Net property additions (primarily revenue equipment)
were $10.9 million for the three-month period ended March 31, 2010,
compared to $43.6 million during the same period of 2009. This decrease
occurred because we took delivery of substantially fewer new trucks in the
2010 period than in the 2009 period.
As of March 31, 2010, we were committed to property and equipment
purchases, net of trades, of approximately $70.5 million. We currently
expect our net capital expenditures (primarily revenue equipment) to be in
22
the range of $60.0 million to $100.0 million in 2010. We intend to fund
these net capital expenditures through existing cash balances, cash flow
from operations and financing available under our existing credit
facilities, as management deems necessary.
Net financing activities used $1.0 million during the three months
ended March 31, 2010 and $33.6 million during the same period in 2009.
During the three-month period ended March 31, 2010, we borrowed and repaid
$10.0 million of short-term debt, and during the same period in 2009 we
repaid short-term debt totaling $30.0 million. We paid dividends of $3.6
million in both the three-month periods ended March 31, 2010 and 2009, and
we did not purchase any common stock during either period. 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 upon stock market conditions and other factors. As of March 31,
2010, 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 March 31, 2010 is
strong. As of March 31, 2010, we had $73.1 million of cash and cash
equivalents and $716.1 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 March 31, 2010, we had a
total of $225.0 million of credit pursuant to two credit facilities, of
which we had no outstanding borrowings. The $225.0 million of credit
available under these facilities is reduced by the $40.8 million in letters
of credit under which we are obligated. These letters of credit are
primarily required as security for insurance policies. Based on our strong
financial position, management does not foresee any significant barriers to
obtaining sufficient financing, if necessary.
Contractual Obligations and Commercial Commitments:
The following tables set forth our contractual obligations and
commercial commitments as of March 31, 2010.
Payments Due by Period
(in millions)
Less than More than Period
Total 1 year 1-3 years 3-5 years 5 years Unknown
--------------------------------------------------------------------------------------------
Contractual Obligations
Unrecognized tax benefits $ 7.3 $ 0.7 $ - $ - $ - $ 6.6
Equipment purchase
commitments 70.5 70.5 - - - -
------- ------- ------- ------- ------- -------
Total contractual cash
obligations $ 77.8 $ 71.2 $ - $ - $ - $ 6.6
======= ======= ======= ======= ======= =======
Other Commercial
Commitments
Unused lines of credit $184.2 $ - $184.2 $ - $ - $ -
Standby letters of credit 40.8 40.8 - - - -
------- ------- ------- ------- ------- -------
Total commercial
commitments $225.0 $ 40.8 $184.2 $ - $ - $ -
======= ======= ======= ======= ======= =======
Total obligations $302.8 $112.0 $184.2 $ - $ - $ 6.6
======= ======= ======= ======= ======= =======
23
We have committed credit facilities with two banks totaling $225.0
million that mature in May 2011 ($175.0 million) and May 2012 ($50.0
million). Borrowings under these credit facilities bear variable interest
based on the London Interbank Offered Rate ("LIBOR"). As of March 31,
2010, we had no borrowings outstanding under these credit facilities with
banks. The credit available under these facilities is reduced by the
amount of standby letters of credit under which we are obligated. The
standby letters of credit are primarily required for insurance policies.
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. Management believes our financial position is strong, and we
therefore expect that we could obtain additional financing, if necessary.
Equipment purchase commitments relate to committed equipment expenditures.
As of March 31, 2010, we have recorded a $7.3 million liability for
unrecognized tax benefits. We expect $0.7 million to be settled within the
next twelve months and are unable to reasonably determine when the $6.6
million categorized as "period unknown" will be settled.
Off-Balance Sheet Arrangements:
As of March 31, 2010, 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:
Item 1 of Part I our 2009 Form 10-K includes a discussion of pending
proposed regulations that may have an effect on our operations if they
become effective as proposed. Except as described below, there have been
no material changes in the status of these proposed regulations previously
disclosed in the 2009 Form 10-K.
In first quarter 2010, the Federal Motor Carrier Safety Administration
(the "FMCSA") approved a new final rule regarding the trucking industry's
use of Electronic On-Board Recorders ("EOBRs") for hours of service ("HOS")
regulatory compliance. Such rule was published in the Federal Register on
April 5, 2010, and the compliance date is June 4, 2012. The final rule
includes (i) performance requirements for EOBRs used to monitor drivers'
HOS recording devices, (ii) incentives for voluntary EOBR use by motor
carriers and (iii) remedial directives requiring EOBR installation,
maintenance and use by motor carriers with serious HOS noncompliance. The
final rule applies to carriers who, during an FMCSA compliance review, were
found to have a demonstrated record of poor HOS compliance and threshold
HOS regulatory violations or who choose to voluntarily use compliant EOBRs.
Such noncompliant carriers will be ordered to install and use EOBRs for HOS
recording within sixty (60) days of receiving notice from the FMCSA. Our
paperless log system satisfies the current automatic on-board recording
device regulations, and we are therefore permitted under the final rule to
continue using our system on our commercial motor vehicles manufactured
prior to June 4, 2012. We are comparing our current system to the final
rule's technical EOBR requirements to determine whether changes to such
system will be necessary to comply with the regulations after June 4, 2012.
We do not believe the final rule will significantly affect our operations
and profitability, and we will continue monitoring such rule's impact on
our operations.
The FMCSA introduced a new safety initiative, Comprehensive Safety
Analysis 2010 ("CSA 2010"), which includes many significant changes from
the current safety measurement system it will replace. Under CSA 2010, the
FMCSA will monitor the safety performance of both individual drivers and
carriers using seven categories of data, while the current system assesses
only carriers using four categories. CSA 2010 is currently being tested in
several states. The FMCSA recently announced that it will begin
implementing CSA 2010 on November 30, 2010 and full implementation will not
be completed until spring or summer of 2011. The implementation of CSA
24
2010 may result in fewer eligible drivers and driver candidates, which may
limit our ability to attract and retain qualified drivers. It may also
have an adverse effect on our safety rating.
Critical Accounting Policies:
The preparation of consolidated financial statements in conformity
with accounting principles generally accepted in the United States of
America requires us to make estimates and assumptions that affect the (i)
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated financial statements
and (ii) reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Information regarding our Critical Accounting Policies can be found in
our 2009 Form 10-K. Together with the effects of the matters described
there, these factors may significantly impact our results of operations
from period to period. 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.
* Impairment of long-lived assets.
* Estimates of accrued liabilities for insurance and claims for
liability and physical damage losses and workers' compensation.
* Policies for revenue recognition.
* Accounting for income taxes.
* Allowance for doubtful accounts.
We periodically evaluate these policies and estimates as events and
circumstances change. There have been no material changes to these
critical accounting policies and estimates from those discussed in our 2009
Form 10-K.
Accounting Standards:
In the descriptions under "New Accounting Pronouncements Adopted" and
"Accounting Standards Updates Not Yet Effective" that follow, references in
quotations identify guidance and Accounting Standards Updates relating to
the topics and subtopics (and their descriptive titles, as appropriate) of
the Accounting Standards CodificationTM of the Financial Accounting
Standards Board.
New Accounting Pronouncements Adopted
-------------------------------------
In February 2010, an update was made to "Subsequent Events" because
the topic's requirement to disclose the date that financial statements are
issued may conflict with SEC guidance. This update removes the requirement
for an SEC filer to disclose a date in both issued and revised financial
statements. This update became effective for us upon its issuance in
February 2010 and, upon adoption, had no effect on our financial position,
results of operations and cash flows.
Accounting Standards Updates Not Yet Effective
----------------------------------------------
In October 2009, an update was made to "Revenue Recognition - Multiple
Deliverable Revenue Arrangements." This update (i) removes the objective-
and-reliable-evidence-of-fair-value criterion from the separation criteria
used to determine whether an arrangement involving multiple deliverables
contains more than one unit of accounting, (ii) replaces references to
25
"fair value" with "selling price" to distinguish from the fair value
measurements required under the "Fair Value Measurements and Disclosures"
guidance, (iii) provides a hierarchy that entities must use to estimate the
selling price, (iv) eliminates the use of the residual method for
allocation and (v) expands the ongoing disclosure requirements. This
update is effective for us beginning January 1, 2011 and can be applied
prospectively or retrospectively. Management is currently evaluating the
effect that adoption of this update will have, if any, on our consolidated
financial position, results of operations and cash flows when it becomes
effective in 2011.
Other Accounting Standards Updates not effective until after March 31,
2010 are not expected to have a material 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 March 31, 2010, we had no
derivative financial instruments to reduce our exposure to fuel price
fluctuations.
Foreign Currency Exchange Rate Risk
We conduct business in several foreign countries, including Mexico,
Canada, China and Australia. To date, most foreign revenues are
denominated in U.S. Dollars, and we receive payment for foreign freight
services primarily in U.S. Dollars to reduce direct foreign currency risk.
Assets and liabilities maintained by a foreign subsidiary company in the
local currency are subject to foreign exchange income or losses. Foreign
currency translation income and losses primarily relate to changes in the
value of revenue equipment owned by a subsidiary in Mexico, whose
functional currency is the Peso. Foreign currency translation income was
$1.2 million for first quarter 2010 and losses were $1.6 million for first
quarter 2009 and were recorded in accumulated other comprehensive loss
within stockholders' equity in the Consolidated Balance Sheets.
Interest Rate Risk
We had no debt outstanding at March 31, 2010. 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
March 31, 2010, we do not have any derivative financial instruments to
reduce our exposure to interest rate increases.
26
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 evaluated relative to their costs.
Because of the inherent limitations in all internal control systems, no
evaluation of controls can provide absolute assurance that all control
issues, misstatements and instances of fraud, if any, have been prevented
or detected.
27
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 authorization, the Company is permitted to
repurchase an additional 8,000,000 shares. As of March 31, 2010, 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 first quarter of
2010 by either the Company or any "affiliated purchaser," as defined by
Rule 10b-18 of the Exchange Act.
28
Item 6. Exhibits.
Exhibit No. Exhibit Incorporated by Reference to:
----------- ------- -----------------------------
3(i) Restated Articles of Incorporation of Werner Exhibit 3(i) to the Company's
Enterprises, Inc. Quarterly Report 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 Company's
Enterprises, Inc. Quarterly Report on Form 10-Q for
the quarter ended June 30, 2007
10.1 Named Executive Officer Compensation Exhibit 10.4 to the Company's
Annual Report of Form 10-K for the
year ended December 31, 2009
11 Statement Re: Computation of Per Share See Note 5 (Earnings Per Share) in
Earnings the Notes to Consolidated Financial
Statements (Unaudited) under Item 1
of Part I of this Quarterly Report on
Form 10-Q for the quarterly period
ended March 31, 2010
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)
29
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: May 4, 2010 By: /s/ John J. Steele
------------------- ---------------------------------------
John J. Steele
Executive Vice President, Treasurer and
Chief Financial Officer
Date: May 4, 2010 By: /s/ James L. Johnson
------------------- ---------------------------------------
James L. Johnson
Senior Vice President, Controller and
Corporate Secretary
30