UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the transition period from ___________ to __________
Commission File Number 0-14690
WERNER ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
NEBRASKA 47-0648386
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
14507 FRONTIER ROAD 68145-0308
POST OFFICE BOX 45308 (Zip code)
OMAHA, NEBRASKA
(Address of principal executive offices)
Registrant's telephone number, including area code: (402) 895-6640
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON
STOCK, $.01 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. X
---
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). YES X NO
--- ---
The aggregate market value of the common equity held by non-affiliates
of the Registrant (assuming for these purposes that all executive
officers and Directors are "affiliates" of the Registrant) as of June
30, 2003, the last business day of the Registrant's most recently
completed second fiscal quarter, was approximately $826 million (based
on the closing sale price of the Registrant's Common Stock on that
date as reported by Nasdaq).
As of February 29, 2004, 79,544,652 shares of the registrant's common
stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement of Registrant for the Annual Meeting
of Stockholders to be held May 11, 2004, are incorporated in Part III
of this report.
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business 1
Item 2. Properties 6
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of Security Holders 7
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 8
Item 6. Selected Financial Data 9
Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition 9
Item 7A. Quantitative and Qualitative Disclosures about
Market Risk 19
Item 8. Financial Statements and Supplementary Data 21
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 37
Item 9A. Controls and Procedures 37
PART III
Item 10. Directors and Executive Officers of the Registrant 38
Item 11. Executive Compensation 38
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 38
Item 13. Certain Relationships and Related Transactions 39
Item 14. Principal Accounting Fees and Services 39
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 39
PART I
ITEM 1. BUSINESS
General
Werner Enterprises, Inc. ("Werner" or the "Company") is a
transportation company engaged primarily in hauling truckload
shipments of general commodities in both interstate and
intrastate commerce as well as providing logistics services.
Werner is one of the five largest truckload carriers in the
United States and maintains its headquarters in Omaha, Nebraska,
near the geographic center of its service area. Werner was
founded in 1956 by Chairman and Chief Executive Officer,
Clarence L. Werner, who started the business with one truck at
the age of 19. Werner completed its initial public offering in
April 1986 with a fleet of 630 trucks. Werner ended 2003 with a
fleet of 8,350 trucks.
The Company operates throughout the 48 contiguous states
pursuant to operating authority, both common and contract,
granted by the United States Department of Transportation (DOT)
and pursuant to intrastate authority granted by various states.
The Company also has authority to operate in the ten provinces of
Canada and provides through trailer service in and out of Mexico.
The principal types of freight transported by the Company include
retail store merchandise, consumer products, manufactured
products, and grocery products. The Company's emphasis is to
transport consumer nondurable products that ship more
consistently throughout the year. The Company has one reportable
segment - Truckload Transportation Services. Financial
information regarding this segment can be found in the Notes to
Consolidated Financial Statements under Item 8 of this Form 10-K.
Marketing and Operations
Werner's business philosophy is to provide superior on-time
service to its customers at a competitive cost. To accomplish
this, Werner operates premium, modern tractors and trailers.
This equipment has a lower frequency of breakdowns and helps
attract and retain qualified drivers. Werner has continually
developed technology to improve service to customers and improve
retention of drivers. Werner focuses on shippers that value the
broad geographic coverage, equipment capacity, technology,
customized services, and flexibility available from a large,
financially-stable carrier. These shippers are generally less
sensitive to rate levels, preferring to have their freight
handled by a few core carriers with whom they can establish
service-based, long-term relationships.
Werner operates in the truckload segment of the trucking
industry. Within the truckload segment, Werner provides
specialized services to customers based on their trailer needs
(van, flatbed, temperature-controlled), geographic area (medium
to long haul throughout the 48 contiguous states, Mexico, and
Canada; regional), or conversion of their private fleet to Werner
(dedicated). During the latter part of 2003 and continuing into
2004, the Company expanded its brokerage and intermodal service
offerings by adding senior management and developing new computer
systems. Trucking revenues accounted for 92% of total revenues,
and non-trucking revenues, primarily brokerage revenues,
accounted for 8% of total revenues in 2003. Werner's Value Added
Services division manages the transportation and logistics
requirements for individual customers. This includes truck
brokerage, transportation routing, transportation mode selection,
intermodal, transloading, and other services. Value Added
Services is a non-asset-based business that is highly dependent
on information systems and qualified employees. Compared to
trucking operations which require a significant capital equipment
investment, its operating margins are generally lower and returns
on assets are generally higher. The growth in brokerage and
intermodal is expected to increase the Company's non-trucking
revenues in 2004.
Werner has a diversified freight base and is not dependent
on a small group of customers or a specific industry for a
majority of its freight. During 2003, the Company's largest 5,
10, 25, and 50 customers comprised 24%, 34%, 51%, and 64% of the
Company's revenues, respectively. The Company's largest
customer, Dollar General, accounted for 9% of the Company's
revenues in 2003. No other customer exceeded 5% of revenues in
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2003. By industry group, the Company's top 50 customers consist
of 48% retail and consumer products, 22% grocery products, 23%
manufacturing/industrial, and 7% logistics and other. Many of
our customer contracts are cancelable on 30 days notice.
Virtually all of Werner's company and owner-operator
tractors are equipped with satellite communications devices
manufactured by Qualcomm that enable the Company and drivers to
conduct two-way communication using standardized and freeform
messages. This satellite technology, installed in all trucks
beginning in 1992, also enables the Company to plan and monitor
the progress of shipments. The Company obtains specific data on
the location of all trucks in the fleet at least every hour of
every day. Using the real-time data obtained from the satellite
devices, Werner has developed advanced application systems to
improve customer service and driver service. Examples of such
application systems include (1) the Company's proprietary
Paperless Log System to electronically preplan the assignment of
shipments to drivers based on real-time available driving hours
and to automatically keep track of truck movement and drivers'
hours of service, (2) software which preplans shipments that can
be swapped by drivers enroute to meet driver home time needs,
without compromising on-time delivery schedules, (3) automated
"possible late load" tracking which informs the operations
department of trucks that may be operating behind schedule,
thereby allowing the Company to take preventive measures to avoid
a late delivery, and (4) automated engine diagnostics to
continually monitor mechanical fault tolerances. In June 1998,
Werner became the first, and only, trucking company in the United
States to receive authorization from the DOT, under a continuing
pilot program to use a paperless log system in place of the paper
logbooks traditionally used by truck drivers to track their daily
work activities. The DOT published its proposal to grant an
exemption to Werner on December 11, 2003. The public comment
period ended on January 12, 2004.
The Federal Motor Carrier Safety Administration (FMCSA) of
the U.S. Department of Transportation issued a final rule on
April 24, 2003 that made several changes to the regulations which
govern truck drivers' hours of service (HOS). For all non-local
trucking companies, this was the most significant change to the
hours-of-service rules in over 60 years. Previously, drivers
were allowed to drive 10 hours after 8 hours off-duty. The new
rules allow drivers to drive 11 hours after 10 hours off-duty.
In addition to this, drivers may not drive after 14 consecutive
hours on-duty, following 10 hours off-duty as opposed to 15 hours
on-duty, following 8 hours off-duty. There have been no changes
in the rules that limit a driver to a maximum of 70 hours in
eight consecutive days. A new rule allows a driver who takes at
least 34 consecutive hours off duty to restart his or her on-duty
cycle for the 70 hour rule. A driver's 15 hour daily work cycle
in the old system is considered cumulative, not consecutive, and
does not take into account off-duty time during the 15 hour
period. Under the new rules, a driver's 14 hour daily work cycle
is considered consecutive, and off-duty time counts against the
14 hour period. Therefore, loading/unloading delays, shipments
that require multiple stop deliveries, and other non-driving
activities may limit drivers' available hours. On January 4,
2004, the new federal regulations that govern driver HOS became
effective. Beginning October 2003, Werner Enterprises started
testing the HOS with its drivers using its proprietary Paperless
Log System software, modified for the new HOS rules. This
testing, combined with a comprehensive driver-training program,
helped to prepare the Company for the HOS changes. Measuring the
overall impact of the HOS changes is preliminary at this time
since the new regulations have been effective for only eight
weeks. The Company's initial data suggests that the average
miles per truck for the first eight weeks of 2004 compared to the
same eight weeks a year ago may be slightly lower due to the HOS
changes. A stronger freight market in the 2004 period compared
to the 2003 period is helping to minimize the negative impact on
miles per truck. The Company believes it is minimizing the
impact on miles per truck through proactive planning using its
Paperless Log System and by working closely with customers to
reduce delay time. However, the Company is unable to predict the
ultimate impact of the new hours of service rules. These changes
could have an adverse effect on the operations and profitability
of the Company. Effective January 2004, the Company increased
its accessorial charges to customers for multiple stop shipments
and its rates for equipment detention. Werner also raised its
driver stop pay and is implementing pay changes to drivers for
delay time due to equipment detention.
2
Seasonality
In the trucking industry, revenues generally show a seasonal
pattern as some customers reduce shipments during and after the
winter holiday season. The Company's operating expenses have
historically been higher in the winter months due primarily to
decreased fuel efficiency, increased maintenance costs of revenue
equipment in colder weather, and increased insurance and claims
costs due to adverse winter weather conditions. The Company
attempts to minimize the impact of seasonality through its
marketing program that seeks additional freight from certain
customers during traditionally slower shipping periods. Revenue
can also be affected by bad weather and holidays, since revenue
is directly related to available working days of shippers.
Employees and Owner-Operator Drivers
As of December 31, 2003, the Company employed 10,003
drivers, 714 mechanics and maintenance personnel, 1,406 office
personnel for the trucking operation, and 246 personnel for the
non-trucking operations. The Company also had 920 contracts with
independent contractors (owner-operators) for services that
provide both a tractor and a qualified driver or drivers. None of
the Company's U.S. or Canadian employees are represented by a
collective bargaining unit, and the Company considers relations
with its employees to be good.
The Company recognizes that its professional driver
workforce is one of its most valuable assets. Most of Werner's
drivers are compensated based upon miles driven. For company-
employed drivers, the rate per mile increases with the drivers'
length of service. Additional compensation may be earned through
a fuel efficiency bonus, a mileage bonus, an annual achievement
bonus, and for extra work associated with their job (loading and
unloading, extra stops, and shorter mileage trips, for example).
At times, there are shortages of drivers in the trucking
industry. In prior years, the number of qualified drivers in the
industry was reduced because of the elimination of federal
funding for driving schools, changes in the demographic
composition of the workforce, and individual drivers' desire to
be home more often. The market for recruiting drivers became
more difficult in fourth quarter 2003. In recent months, the
market for recruiting qualified drivers tightened. However, the
Company continues to have success recruiting drivers from driver
training schools. The Company anticipates that the competition
for qualified drivers will continue to be high and cannot predict
whether it will experience shortages in the future. If such a
shortage was to occur and increases in driver pay rates became
necessary to attract and retain drivers, the Company's results of
operations would be negatively impacted to the extent that
corresponding freight rate increases were not obtained.
The Company also recognizes that carefully selected owner-
operators complement its company-employed drivers. Owner-
operators are independent contractors that supply their own
tractor and driver and are responsible for their operating
expenses. Because owner-operators provide their own tractors,
less financial capital is required from the Company for growth.
Also, owner-operators provide the Company with another source of
drivers to support its growth. The Company intends to continue
its emphasis on recruiting owner-operators, as well as company
drivers. However, it continued to be difficult for the Company
and the industry to recruit and retain owner-operators over the
past few years due to several factors including high fuel prices,
tightening of equipment financing standards, and declining values
for older used trucks.
Revenue Equipment
As of December 31, 2003, Werner operated 7,430 company
tractors and had contracts for 920 tractors owned by owner-
operators. A majority of the company tractors are manufactured by
Freightliner, a subsidiary of DaimlerChrysler. Most of the
remaining company tractors are manufactured by either Peterbilt
or Kenworth, divisions of PACCAR. This standardization of the
company tractor fleet decreases downtime by simplifying
maintenance. The Company adheres to a comprehensive maintenance
program for both tractors and trailers. Owner-operator tractors
are inspected prior to acceptance by the Company for compliance
with operational and safety requirements of the Company and the
3
DOT. These tractors are then periodically inspected, similar to
company tractors, to monitor continued compliance. The vehicle
speed of company-owned trucks is regulated to improve safety and
fuel efficiency.
The Company operated 22,800 trailers at December 31, 2003:
21,231 dry vans; 677 flatbeds; 827 temperature-controlled; and 65
other specialized trailers. Most of the Company's trailers are
manufactured by Wabash National Corporation. As of December 31,
2003, 98% of the Company's fleet of dry van trailers consisted of
53-foot trailers, and 97% consisted of aluminum plate or
composite (duraplate) trailers. Other trailer lengths such as
48-foot and 57-foot are also provided by the Company to meet the
specialized needs of customers.
Effective October 1, 2002, all newly manufactured truck
engines must comply with new engine emission standards mandated
by the Environmental Protection Agency (EPA). All truck engines
manufactured prior to October 1, 2002 are not subject to these
new standards. To delay the business risk of buying these new
truck engines with inadequate testing time prior to the October
1, 2002 effective date, the Company significantly increased the
purchase of trucks with pre-October 2002 engines. During 2003,
the Company placed these new trucks with pre-October 2002 engines
into service to replace trucks that were reaching the Company's
normal three-year trade/sale age. As of December 31, 2003,
approximately 10% of the Company's fleet consisted of trucks with
the new engines. The Company is continuing ongoing testing of
the new truck engines, in particular, the Caterpillar ACERT
engines and the Detroit Diesel EGR engines. To date, the
Company's testing indicates that the fuel mile per gallon (mpg)
degradation is a reduction of approximately 0.3 mpg to 0.5 mpg.
Depreciation expense is increasing due to the higher cost of the
new engines. The average age of the Company's truck fleet at
December 31, 2003 is 1.6 years. To allow time for continued
testing of the new trucks with EPA-compliant engines, the Company
has decided to extend the age of a portion of its trucks
scheduled to be sold or traded during 2004.
Fuel
The Company purchases approximately 90% of its fuel through
a network of fuel stops throughout the United States. The
Company has negotiated discounted pricing based on certain volume
commitments with these fuel stops. Bulk fueling facilities are
maintained at the Company's terminals.
Shortages of fuel, increases in fuel prices, or rationing of
petroleum products can have a materially adverse effect on the
operations and profitability of the Company. The Company's
customer fuel surcharge reimbursement programs have historically
enabled the Company to recover from its customers a significant
portion of the higher fuel prices compared to normalized average
fuel prices. These fuel surcharges, which automatically adjust
depending on the cost of fuel, enable the Company to recoup much
of the higher cost of fuel when prices increase except for miles
not billable to customers, out-of-route miles, and truck engine
idling. Conversely, when fuel prices decrease, fuel surcharges
decrease. The Company cannot predict whether high fuel prices
will continue to increase or will decrease in the future or the
extent to which fuel surcharges will be collected to offset such
increases. As of December 31, 2003, the Company had no
derivative financial instruments to reduce its exposure to fuel
price fluctuations.
The Company maintains aboveground and underground fuel
storage tanks at most of its terminals. Leakage or damage to
these facilities could expose the Company to environmental clean-
up costs. The tanks are routinely inspected to help prevent and
detect such problems.
Regulation
The Company is a motor carrier regulated by the DOT and the
Federal and Provincial Transportation Departments in Canada. The
DOT generally governs matters such as safety requirements,
registration to engage in motor carrier operations, accounting
systems, certain mergers, consolidations, acquisitions, and
periodic financial reporting. The Company currently has a
satisfactory DOT safety rating, which is the highest available
rating. A conditional or unsatisfactory DOT safety rating could
have an adverse effect on the Company, as some of the Company's
contracts with customers require a satisfactory rating. Such
4
matters as weight and dimensions of equipment are also subject to
federal, state, and international regulations.
The Company has unlimited authority to carry general
commodities in interstate commerce throughout the 48 contiguous
states. The Company has authority to carry freight on an
intrastate basis in 43 states. The Federal Aviation
Administration Authorization Act of 1994 (the FAAA Act) amended
sections of the Interstate Commerce Act to prevent states from
regulating rates, routes, or service of motor carriers after
January 1, 1995. The FAAA Act did not address state oversight of
motor carrier safety and financial responsibility or state
taxation of transportation. If a carrier wishes to operate in
intrastate commerce in a state where it did not previously have
intrastate authority, it must, in most cases, still apply for
authority.
The Company's operations are subject to various federal,
state, and local environmental laws and regulations, implemented
principally by the EPA and similar state regulatory agencies,
governing the management of hazardous wastes, other discharge of
pollutants into the air and surface and underground waters, and
the disposal of certain substances. The Company does not believe
that compliance with these regulations has a material effect on
its capital expenditures, earnings, and competitive position.
The implementation of various provisions of the North
American Free Trade Agreement (NAFTA) will alter the competitive
environment for shipping into and out of Mexico. It is not
possible at this time to predict when and to what extent that
impact will be felt by companies transporting goods into and out
of Mexico. The Company does a substantial amount of business in
international freight shipments to and from the United States and
Mexico (see Note 8 "Segment Information" in the Notes to
Consolidated Financial Statements under Item 8 of this Form 10-K)
and is continuing to prepare for the various scenarios that may
finally result. The Company believes it is one of the five
largest truckload carriers transporting freight shipments to and
from the United States and Mexico.
Competition
The trucking industry is highly competitive and includes
thousands of trucking companies. It is estimated that the annual
revenue of domestic trucking amounts to approximately $600
billion per year. The Company has a small but growing share
(estimated at approximately 1%) of the markets targeted by the
Company. The Company competes primarily with other truckload
carriers. Railroads, less-than-truckload carriers, and private
carriers also provide competition, but to a much lesser degree.
Competition for the freight transported by the Company is
based primarily on service and efficiency and, to some degree, on
freight rates alone. Few other truckload carriers have greater
financial resources, own more equipment, or carry a larger volume
of freight than the Company. The Company is one of the five
largest carriers in the truckload transportation industry.
Industry-wide truck capacity in the truckload sector is
being limited due to a number of factors. There are continuing
cost issues and concerns with the new EPA-compliant diesel
engines and the new hours of service regulations. Trucking
company failures in the last four years are continuing at a pace
higher than the previous fifteen years. Some truckload carriers
are having difficulty obtaining adequate trucking insurance
coverage at a reasonable price. Equipment lenders have tightened
their credit policies for truck financing. Many truckload
carriers, including Werner, slowed their fleet growth in the last
three years, and some carriers have downsized their fleets to
improve their operating margins and returns.
Internet Web Site
The Company maintains a web site where additional
information concerning its business can be found. The address of
that web site is www.werner.com. The Company makes available
free of charge on its Internet web site its annual report on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-
K, and amendments to those reports filed or furnished pursuant to
5
Section 13(a) or 15(d) of the Exchange Act as soon as reasonably
practicable after it electronically files or furnishes such
materials to the SEC.
Forward-Looking Information
The forward-looking statements in this report, which reflect
management's best judgment based on factors currently known,
involve risks and uncertainties. Actual results could differ
materially from those anticipated in the forward-looking
statements included herein as a result of a number of factors,
including, but not limited to, those discussed in Item 7,
"Management's Discussion and Analysis of Results of Operations
and Financial Condition."
ITEM 2. PROPERTIES
Werner's headquarters is located nearby Interstate 80 just
west of Omaha, Nebraska, on approximately 197 acres, 147 of which
are held for future expansion. The Company's headquarters office
building includes a computer center, drivers' lounge areas, a
drivers' orientation section, a cafeteria, and a Company store.
The Omaha headquarters also consists of a driver training
facility and equipment maintenance and repair facilities
containing a central parts warehouse, frame straightening and
alignment machine, truck and trailer wash areas, equipment safety
lanes, body shops for tractors and trailers, and a paint booth.
The Company's headquarters facilities have suitable space
available to accommodate planned needs for the next 3 to 5 years.
The Company also has several terminals throughout the United
States, as described below:
Location Owned or Leased Description
- -------- --------------- -----------
Omaha, Nebraska Owned Corporate headquarters,
maintenance
Omaha, Nebraska Owned Disaster recovery,
warehouse
Phoenix, Arizona Owned Office, maintenance
Fontana, California Owned Office, maintenance
Denver, Colorado Owned Office, maintenance
Atlanta, Georgia Owned Office, maintenance
Indianapolis, Indiana Leased Office, maintenance
Springfield, Ohio Owned Office, maintenance
Allentown, Pennsylvania Leased Office, maintenance
Dallas, Texas Owned Office, maintenance
Laredo, Texas Owned Office, maintenance,
transloading
Lakeland, Florida Leased Office
Portland, Oregon Leased Office
Ardmore, Oklahoma Leased Maintenance
Indianola, Mississippi Leased Maintenance
Scottsville, Kentucky Leased Maintenance
Fulton, Missouri Leased Maintenance
Tomah, Wisconsin Leased Maintenance
Newbern, Tennessee Leased Maintenance
The Company leases approximately 60 small sales offices and
trailer parking yards in various locations throughout the
country, owns a 96-room motel located near the Company's
headquarters, owns four low-income housing apartment complexes in
the Omaha area, and has 50% ownership in a 125,000 square-foot
warehouse located near the Company's headquarters. Currently the
Company has 15 locations in its Fleet Truck Sales network. Fleet
Truck Sales, a wholly-owned subsidiary, is one of the largest
class 8 truck sales entities in the U.S. and sells the Company's
used trucks and trailers. During first quarter 2004, the Company
is expanding its Fleet Truck Sales network from 15 locations to
16 locations.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to routine litigation incidental to
its business, primarily involving claims for personal injury,
property damage, and workers' compensation incurred in the
transportation of freight. The Company has maintained a self-
6
insurance program with a qualified department of Risk Management
professionals since 1988. These employees manage the Company's
property damage, cargo, liability, and workers' compensation
claims. The Company has assumed liability for claims up to
$500,000, plus administrative expenses, for each occurrence
involving personal injury or property damage. The Company is
also responsible for varying annual aggregate amounts of
liability for claims above $500,000 and below $4,000,000. For
the policy year ended August 1, 2003, these annual aggregate
amounts totaled $2,500,000. For the policy year which began
August 2003, the Company is self-insured for claims in excess of
$3.0 million and less than $5.0 million, subject to an annual
maximum aggregate of $6.0 million if several claims were to occur
in this layer. For claims in excess of $5.0 million and less
than $10.0 million, the Company is responsible for the first $5.0
million of claims in this layer. Liability claims in excess of
$10.0 million per claim, if they occur, are covered under premium-
based policies with reputable insurance companies to coverage
levels that management considers adequate. The Company's primary
liability insurance policies for coverage ranging from $500,000
per claim to $10,000,000 per claim renew on August 1, 2004.
Based on current insurance market conditions, the Company expects
the annual premium cost for renewing the insurance coverage for
the $500,000 - $3,000,000 layer it has maintained for the last
six years (which is currently less than 5% of total insurance and
claims expense) will be substantially higher. As a result, the
Company may elect to increase its self-insurance retention amount
from $500,000 per claim to a higher amount per claim in August
2004. See also Note (1) "Insurance and Claims Accruals" and Note
(7) "Commitments and Contingencies" in the Notes to Consolidated
Financial Statements under Item 8 of this Form 10-K.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 2003, no matters were submitted
to a vote of security holders.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Price Range of Common Stock
The Company's common stock trades on the Nasdaq National
Market tier of The Nasdaq Stock Market under the symbol WERN. The
following table sets forth for the quarters indicated the high
and low sale prices per share of the Company's common stock in
the Nasdaq National Market and the Company's dividends declared
per common share from January 1, 2002, through December 31, 2003,
after giving retroactive effect for the September 2003 stock
split discussed below.
Dividends
Declared Per
High Low Common Share
------ ------ ------------
2003
Quarter ended:
March 31 $17.50 $13.98 $.016
June 30 18.98 15.26 .024
September 30 21.93 16.73 .025
December 31 21.00 16.98 .025
Dividends
Declared Per
High Low Common Share
------ ------ ------------
2002
Quarter ended:
March 31 $17.74 $14.17 $.016
June 30 17.40 13.36 .016
September 30 17.04 13.88 .016
December 31 18.21 13.85 .016
As of February 23, 2004, the Company's common stock was held
by 226 stockholders of record and approximately 7,300
stockholders through nominee or street name accounts with
brokers.
Dividend Policy
The Company has been paying cash dividends on its common
stock following each of its quarters since the fiscal quarter
ended May 31, 1987. The Company does not currently intend to
discontinue payment of dividends on a quarterly basis and does
not currently anticipate any restrictions on its future ability
to pay such dividends. However, no assurance can be given that
dividends will be paid in the future since they are dependent on
earnings, the financial condition of the Company, and other
factors.
Common Stock Split
On September 2, 2003, the Company announced that its Board
of Directors declared a five-for-four split of the Company's
common stock effected in the form of a 25 percent stock dividend.
The stock dividend was paid on September 30, 2003, to
stockholders of record at the close of business on September 16,
2003. No fractional shares of common stock were issued in
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connection with the stock split. Stockholders entitled to
fractional shares received a proportional cash payment based on
the closing price of a share of common stock on September 16,
2003.
All share and per-share information included in this Form
10-K, including in the accompanying consolidated financial
statements, for all periods presented have been adjusted to
retroactively reflect the stock split.
Equity Compensation Plan Information
For information on the Company's equity compensation plans,
please refer to Item 12, "Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder
Matters".
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in
conjunction with the consolidated financial statements and notes
under Item 8 of this Form 10-K.
(In thousands, except per share amounts)
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
Operating revenues $1,457,766 $1,341,456 $1,270,519 $1,214,628 $1,052,333
Net income 73,727 61,627 47,744 48,023 60,011
Diluted earnings per share* 0.90 0.76 0.60 0.61 0.76
Cash flow from operations 207,474 226,271 226,920 170,147 131,977
Cash dividends declared per share* .090 .064 .060 .060 .060
Return on average stockholders' equity 10.9% 10.0% 8.5% 9.3% 12.8%
Operating ratio 91.9% 92.6% 93.8% 93.2% 90.3%
Book value per share* 8.90 8.12 7.42 6.84 6.29
Total assets 1,121,527 1,062,878 964,014 927,207 896,879
Total debt (current and long-term) - 20,000 50,000 105,000 145,000
Stockholders' equity 709,111 647,643 590,049 536,084 494,772
*After giving retroactive effect for the September 2003 five-for-
four stock split (all years presented).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Critical Accounting Policies
The Company's success depends on its ability to efficiently
manage its resources in the delivery of truckload transportation
and logistics services to its customers. Resource requirements
vary with customer demand, which may be subject to seasonal or
general economic conditions. The Company's ability to adapt to
changes in customer transportation requirements is a key element
in efficiently deploying resources and in making capital
investments in tractors and trailers. Although the Company's
business volume is not highly concentrated, the Company may also
be affected by the financial failure of its customers or a loss
of a customer's business from time-to-time.
The Company's greatest resource requirements include
qualified drivers, tractors, trailers, and related costs of
operating its equipment (such as fuel and related fuel taxes,
driver pay, insurance, and supplies and maintenance). The Company
has historically been successful mitigating its risk to increases
in fuel prices by recovering additional fuel surcharges from its
customers. The Company's financial results are also affected by
availability of drivers and the market for new and used trucks.
Because the Company is self-insured for cargo, personal injury,
and property damage claims on its trucks and for workers'
compensation benefits for its employees (supplemented by premium-
9
based coverage above certain dollar levels), financial results
may also be affected by driver safety, medical costs, the
weather, the legal and regulatory environment, and the costs of
insurance coverage to protect against catastrophic losses.
The most significant accounting policies and estimates that
affect our financial statements include the following:
* Selections of estimated useful lives and salvage values
for purposes of depreciating tractors and trailers.
Depreciable lives of tractors and trailers range from 5 to
12 years. Estimates of salvage value at the expected date
of trade-in or sale (for example, three years for
tractors) are based on the expected market values of
equipment at the time of disposal.
* Estimates of accrued liabilities for insurance and claims
for liability and physical damage losses and workers'
compensation. The insurance and claims accruals (current
and long-term) are recorded at the estimated ultimate
payment amounts and are based upon individual case
estimates, including negative development, and estimates
of incurred-but-not-reported losses based upon past
experience. The Company's self-insurance reserves are
reviewed by an actuary at least annually.
Management periodically re-evaluates these estimates as
events and circumstances change. Together with the effects of
the matters discussed above, these factors may significantly
impact the Company's results of operations from period-to-period.
Results of Operations
The following table sets forth the percentage relationship
of income and expense items to operating revenues for the years
indicated.
2003 2002 2001
------ ------ ------
Operating revenues 100.0% 100.0% 100.0%
------ ------ ------
Operating expenses
Salaries, wages and benefits 35.2 36.3 36.0
Fuel 11.0 9.3 10.3
Supplies and maintenance 8.5 8.9 9.3
Taxes and licenses 7.2 7.4 7.4
Insurance and claims 5.0 3.8 3.3
Depreciation 9.3 9.1 9.2
Rent and purchased transportation 14.8 16.6 16.9
Communications and utilities 1.1 1.1 1.1
Other (0.2) 0.1 0.3
------ ------ ------
Total operating expenses 91.9 92.6 93.8
------ ------ ------
Operating income 8.1 7.4 6.2
Net interest expense and other 0.0 0.0 0.2
------ ------ ------
Income before income taxes 8.1 7.4 6.0
Income taxes 3.0 2.8 2.2
------ ------ ------
Net income 5.1% 4.6% 3.8%
====== ====== ======
10
The following table sets forth certain industry data
regarding the freight revenues and operations of the Company.
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
Operating ratio 91.9% 92.6% 93.8% 93.2% 90.3%
Average revenues per tractor per week (1) $ 2,988 $ 2,932 $ 2,874 $ 2,889 $ 2,813
Average annual miles per tractor 121,716 123,480 123,660 125,568 125,856
Average annual trips per tractor 173 166 166 168 171
Average total miles per trip 703 746 744 746 734
Average loaded miles per trip 627 674 670 672 663
Average revenues per total mile (1) $ 1.277 $ 1.235 $ 1.208 $ 1.197 $ 1.162
Average revenues per loaded mile (1) $ 1.431 $ 1.366 $ 1.342 $ 1.328 $ 1.287
Average percentage of empty miles 10.8% 9.6% 10.0% 9.9% 9.7%
Non-trucking revenues (in thousands) $109,521 $ 97,130 $ 74,001 $ 65,977 $ 60,379
Average tractors in service 8,282 7,971 7,698 7,303 6,769
Total tractors (at year end):
Company 7,430 7,180 6,640 6,300 5,895
Owner-operator 920 1,020 1,135 1,175 1,230
-------- -------- -------- -------- --------
Total tractors 8,350 8,200 7,775 7,475 7,125
======== ======== ======== ======== ========
Total trailers (at year end) 22,800 20,880 19,775 19,770 18,900
======== ======== ======== ======== ========
(1) Net of fuel surcharge revenues
2003 Compared to 2002
- ---------------------
Operating revenues increased 8.7% over 2002, due primarily
to a 3.9% increase in the average number of tractors in service.
Additionally, revenue per total mile, excluding fuel surcharges,
increased 3.4% primarily due to customer rate increases and
better freight mix. A better freight market and tightening truck
capacity contributed to the improvement, compared to the weaker
freight market of 2002. Both truckload industry and Company
margins, while improving, are below levels management considers
acceptable for the investment and risk of operating in this
industry. Effective January 2004, in response to changes in the
driver hours of service regulations, the Company increased its
accessorial charges to customers for multiple stop shipments and
its rates for equipment detention. Increases in operating
expenses for driver stop pay and driver pay for delay time due to
equipment detention are expected to offset this additional
revenue in 2004. Revenue per total mile, including fuel
surcharges, increased 5.9% compared to 2002. Fuel surcharges,
which represent collections from customers for the higher cost of
fuel, increased from $29.1 million in 2002 to $61.6 million in
2003 due to higher average fuel prices during 2003 (see fuel
explanation below). Excluding fuel surcharge revenues, trucking
revenues increased 5.9% over 2002.
The revenue increases described above were offset by a 1.4%
decline in average miles per tractor and a shorter average length
of haul due to growth in the Company's regional and dedicated
fleets from 37% of the fleet at December 2002 to 46% of the fleet
at December 2003. The new hours of service regulations may
further reduce average miles per tractor in 2004. Initial data
compiled during the first eight weeks that the rules have been
effective in 2004 compared to the same eight weeks of 2003
suggests a slight reduction in average miles per tractor due to
the rule changes. A stronger freight market in 2004 compared to
the same period in 2003 is helping to offset the negative impact
of the hours of service rule changes. The Company believes it is
minimizing the impact on miles per tractor through proactive
planning using its Paperless Log System and by working with
customers to reduce delay time.
Revenue from non-trucking services increased $12.4 million
to $109.5 million compared to 2002. During the latter part of
2003 and continuing into 2004, the Company expanded its brokerage
and intermodal service offerings by adding senior management and
developing new computer systems. The growth in brokerage and
intermodal is expected to help increase the Company's non-
trucking revenues in 2004. These less asset-intensive businesses
11
are expected to have a lower operating margin and a higher return
on assets than the Company's truckload business.
Freight demand began to improve in March of 2003 as compared
to the same period in 2002, and continued to be consistently
better for most of the last ten months of 2003 compared to the
corresponding period in 2002. The Company believes much of the
improvement was achieved by execution of the Company's plan of
limited fleet growth, maintenance of a diversified freight base
that emphasizes consumer nondurable goods, and the shift from
non-dedicated to dedicated trucks discussed below. The Company's
empty mile percentage increased from 9.6% to 10.8%, which is due
in part to a shorter length of haul and a change in the mix of
trucks to the dedicated fleet from the medium-to-long haul van
fleet.
Werner's Dedicated Services fleet provides truckload
services required for a specific company, their plants, or their
distribution centers. Werner grew its dedicated fleet from about
one-quarter of its total truck fleet at the end of 2002 to about
one-third of its total truck fleet at the end of 2003, with much
of this growth occurring in the fourth quarter of 2003. Since
the Company's overall truck fleet grew 150 trucks, the 800 truck
growth in the dedicated fleet was offset by a reduction in the
Company's medium-to-long haul van fleet. Dedicated fleet
business tends to have lower miles per trip, a higher empty mile
percentage, a higher rate per loaded mile, and lower miles per
truck per month. The growth in dedicated business has had a
corresponding effect on these same operating statistics for the
entire Company.
The Company's operating ratio (operating expenses expressed
as a percentage of operating revenues) improved from 92.6% in
2002 to 91.9% in 2003. Conversely, the Company's operating
margin improved 9% from 7.4% in 2002 to 8.1% in 2003. Operating
expenses, when expressed as a percentage of total revenues, are
lower in 2003 versus 2002 because of the higher revenue per mile
and fuel surcharge revenue per mile. Owner-operator miles as a
percentage of total miles were 12.6% in 2003 compared to 15.4% in
2002. This decrease contributed to a shift in costs from the
rent and purchased transportation expense category as described
on the following pages. Owner-operators are independent
contractors who supply their own tractor and driver and are
responsible for their operating expenses including fuel, supplies
and maintenance, and fuel taxes. Over the past year, it has
continued to be difficult to attract and retain owner-operator
drivers due to challenging operating conditions.
Salaries, wages and benefits decreased from 36.3% to 35.2%
of revenues due primarily to the effect of the increase in
revenue per mile, including fuel surcharge, offset by the growth
in the percentage of company-owned trucks to total trucks from
87.6% at the end of 2002 to 89.0% at the end of 2003 and an
increase in the number of salaried drivers. On a cost per total
mile basis, total salaries, wages and benefits (including driver
and non-driver costs) increased from 49.4 cents per mile to 50.9
cents per mile. The market for attracting and retaining company
drivers continues to be challenging and became even more
difficult in the fourth quarter of 2003. While the market for
recruiting qualified drivers has tightened, the Company continues
to have success recruiting drivers from driver training schools.
The Company anticipates that the competition for qualified
drivers will continue to be high and cannot predict whether it
will experience shortages in the future. If such a shortage was
to occur and increases in driver pay rates became necessary to
attract and retain drivers, the Company's results of operations
would be negatively impacted to the extent that corresponding
freight rate increases were not obtained. Salaries, wages and
benefits includes expenses for workers' compensation benefits.
The related accrued claims for workers compensation are reflected
in Insurance and Claims Accruals in the accompanying Consolidated
Balance Sheets.
Effective July 2003, the Company changed its monthly mileage
bonus pay program for Van solo company drivers, which represents
approximately one-third of the Company's total drivers. The goal
was to increase driver miles per truck by rewarding higher
production from Van solo drivers with higher pay. The monthly
mileage bonus pay increased by an average of $93,000 per month
during the last six months of 2003. Additionally, as described
above, the Company raised its driver stop pay in January 2004 in
response to the new hours of service regulations and is
implementing pay changes to drivers for delay time due to
equipment detention.
12
Fuel increased from 9.3% to 11.0% of revenues due to higher
fuel prices. The average price per gallon of diesel fuel,
excluding fuel taxes, was approximately $.17 per gallon, or 23%,
higher in 2003 versus 2002. The Company's customer fuel
surcharge reimbursement programs have historically enabled the
Company to recover from its customers much of the higher fuel
prices compared to normalized average fuel prices. These fuel
surcharges automatically adjust weekly through fuel surcharge
price brackets. Conversely, when fuel prices decrease, fuel
surcharges decrease. After considering the amounts collected
from customers through fuel surcharge programs, net of Company
reimbursements to owner-operators, 2003 earnings per share were
not impacted by the higher fuel expense. Earnings per share were
negatively impacted by $.03 per share in first quarter 2003,
positively impacted by $.02 and $.01 per share in the second and
third quarters 2003, respectively, and not impacted in fourth
quarter 2003. To date, the Company's ongoing testing of the EPA-
compliant truck engines indicates that the fuel mile per gallon
(mpg) degradation is a reduction of approximately 0.3 mpg to 0.5
mpg. Approximately 10% of the Company's fleet consists of EPA-
compliant engines as of December 31, 2003. As the Company adds
more trucks with EPA-compliant engines to its fleet, fuel cost
per mile is expected to increase. Shortages of fuel, increases
in fuel prices, or rationing of petroleum products can have a
materially adverse effect on the operations and profitability of
the Company. The Company is unable to predict whether fuel
prices will continue to increase or will decrease in the future
or the extent to which fuel surcharges will be collected from
customers. As of December 31, 2003, the Company had no
derivative financial instruments to reduce its exposure to fuel
price fluctuations.
Supplies and maintenance decreased from 8.9% to 8.5% of
revenues due primarily to the effect of the increase in revenue
per mile, including fuel surcharges, and improved management of
maintenance expenses, offset slightly by the growth in the
percentage of company-owned trucks to total trucks.
Insurance and claims increased from 3.8% to 5.0% of revenues
due to an increase in the frequency and severity of claims,
increased retention levels for claims, a higher cost per claim,
and higher premiums for catastrophic liability coverage. The
Company's premium rate for liability coverage up to $3.0 million
per claim is fixed through August 1, 2004, while coverage levels
above $3.0 million per claim were renewed effective August 1,
2003 for a one-year period. For the policy year beginning August
2003, the Company's total premiums for liability insurance
increased by approximately $1.3 million. This increase includes
premiums for terrorism coverage. For the policy year beginning
August 2003, the Company is self-insured for claims in excess of
$3.0 million and less than $5.0 million, subject to an annual
maximum aggregate of $6.0 million if several claims were to occur
in this layer. For claims in excess of $5.0 million and less
than $10.0 million, the Company is responsible for the first $5.0
million of claims in this layer. Liability claims in excess of
$10.0 million per claim, if they occur, are covered under
premium-based policies with reputable insurance companies to
coverage levels that management considers adequate. The Company
is unable to predict whether the three-year trend of increasing
insurance and claims expense as a percentage of revenues will
continue in the future.
Rent and purchased transportation decreased from 16.6% to
14.8% of revenues due to a decrease in payments to owner-
operators (9.8% of revenues in 2002 compared to 7.9% in 2003),
offset by an increase in purchased transportation for non-
trucking services. The decrease in payments to owner-operators
resulted from the decrease in owner-operator miles as a
percentage of total Company miles as discussed previously, offset
by higher fuel surcharge reimbursements paid to owner-operators
due to higher average fuel prices. The Company has experienced
difficulty recruiting and retaining owner-operators because of
challenging operating conditions. This has resulted in a
reduction in the number of owner-operator tractors from 1,020 as
of December 31, 2002, to 920 as of December 31, 2003. The
Company reimburses owner-operators for the higher cost of fuel
based on fuel surcharge reimbursements collected from customers.
The increase in purchased transportation for non-trucking
services corresponded to the higher non-trucking revenues. If
the Company grows its brokerage and intermodal services in 2004,
rent and purchased transportation costs for payments to third
party providers are expected to rise accordingly.
Other operating expenses decreased from 0.1% to (0.2)% of
revenues due primarily to an increase in the resale value of the
13
Company's used trucks. Because of truckload carrier concerns
with new truck engines and lower industry production of new
trucks, the resale value of the Company's premium used trucks
improved. In 2002, the Company traded about one-half of its used
trucks and sold about one-half of its used trucks and realized
gains of $2.3 million. In 2003, the Company traded about one-
third of its used trucks and sold about two-thirds to third
parties. In 2003, due to a higher average sales price, and gain,
per truck, the Company realized gains of $7.6 million. The
Company's used truck retail network, Fleet Truck Sales, is one of
the largest class 8 truck sales entities in the United States and
has been in operation since 1992. During first quarter 2004, the
Company is expanding its network from 15 locations to 16
locations. Fleet Truck Sales continues to be a resource for the
Company to remarket its used trucks. As discussed earlier, the
Company plans to extend the age of a portion of its trucks
scheduled to be sold or traded during 2004 to allow for continued
testing of the new trucks with EPA-compliant engines. To the
extent the Company has fewer trucks available for sale, gains
realized in 2004 could be lower than 2003 levels. For trucks
traded, the excess of the trade price over the net book value of
the trucks reduces the cost basis of new trucks, and therefore
results in lower depreciation expense over the life of the asset.
Other operating expenses also include bad debt expense and
professional service fees.
Interest expense decreased to 0.1% from 0.2% of revenues due
to a reduction in the Company's borrowings. Average debt
outstanding in 2002 was $35.0 million. In 2003, outstanding debt
totaled $20.0 million throughout most of the year, until the
Company repaid its only remaining debt in December.
The Company's effective income tax rate (income taxes as a
percentage of income before income taxes) was 37.5% in 2003 and
2002, respectively, as described in Note 5 of the Notes to
Consolidated Financial Statements under Item 8 of this Form 10-K.
The Company expects the income tax rate to increase in 2004 to
38.5% due to an increase in non-deductible expenses for tax
purposes related to the implementation of a per diem pay program
for student drivers in fourth quarter 2003.
2002 Compared to 2001
- ---------------------
Operating revenues increased 5.6% over 2001, due primarily
to a 3.5% increase in the average number of tractors in service.
Revenue per total mile, excluding fuel surcharges, increased 2.2%
primarily due to customer rate increases and better freight mix.
A better freight market and tightening truck capacity contributed
to the improvement, compared to the weaker freight market of
2001. Revenue per total mile, including fuel surcharges,
increased 0.6% compared to 2001. Fuel surcharges, which
represent collections from customers for the higher cost of fuel,
decreased from $46.2 million in 2001 to $29.1 million in 2002 due
to lower average fuel prices during 2002 (see fuel explanation
below). Excluding fuel surcharge revenues, trucking revenues
increased 5.6% over 2001. Revenue from non-trucking services
increased $23.1 million compared to 2001.
Freight demand began to improve in mid-April of 2002 as
compared to the same date in 2001, and continued to be
consistently better for the last eight and one half months of
2002 compared to the corresponding period in 2001. The Company's
empty mile percentage decreased from 10.0% to 9.6%. The Company
believes much of the improvement was achieved by execution of the
Company's plan of limited fleet growth and maintenance of a
diversified freight base that emphasizes consumer nondurable
goods.
The Company's operating ratio improved from 93.8% in 2001 to
92.6% in 2002. Conversely, the Company's operating margin
improved 19% from 6.2% in 2001 to 7.4% in 2002.
Owner-operator miles as a percentage of total miles were
15.4% in 2002 compared to 16.6% in 2001. This decrease
contributed to a shift in costs from the rent and purchased
transportation expense category as described on the following
pages.
Salaries, wages and benefits increased from 36.0% to 36.3%
of revenues due in part to an increase in the cost of workers'
compensation claims, higher workers' compensation excess
insurance premiums, and higher weekly state workers' compensation
14
payments. The Company renewed its workers' compensation insurance
coverage, and for the policy year beginning April 2002, the
Company increased its self-insurance retention from $0.5 million
to $1.0 million per claim and has premium-based coverage with a
reputable insurance company for claims above this amount. The
Company's premiums for this reduced coverage increased by
approximately $1.3 million over the premiums from the prior
policy year. In addition, the Company added about 100 employees
in its maintenance department to reduce the higher cost of over-
the-road repairs (which are reflected in Supplies and Maintenance
expenses). These increases were partially offset by an
improvement in health insurance expense.
Fuel decreased from 10.3% to 9.3% of revenues due to lower
fuel prices. The average price per gallon of diesel fuel,
excluding fuel taxes, was approximately $.07 per gallon, or 9%,
lower in 2002 versus 2001. However, as diesel fuel prices
gradually declined during fourth quarter 2001, prices rose during
fourth quarter 2002 and averaged about $.20 per gallon, or 33%,
higher. After considering the amounts collected from customers
through fuel surcharge programs, net of Company reimbursements to
owner-operators, 2002 earnings per share decreased by
approximately $.03 compared to 2001, with most of the decrease
occurring in fourth quarter 2002. As of December 31, 2002, the
Company had no derivative financial instruments to reduce its
exposure to fuel price fluctuations.
Supplies and maintenance decreased from 9.3% to 8.9% of
revenues due to improved management of maintenance expenses,
including performing more maintenance at company facilities
versus higher-cost over-the-road maintenance. The increase in
the amount of maintenance being performed at company facilities
required the hiring of additional maintenance personnel,
resulting in a slight shift in expenses from the supplies and
maintenance expense category to salaries, wages and benefits (see
salaries, wages and benefits explanation above).
Insurance and claims increased from 3.3% to 3.8% of revenues
due to less favorable claims experience in 2002 and higher excess
insurance premiums. The Company renewed its annual liability
insurance coverage for coverage in excess of $0.5 million per
claim effective August 1, 2002. For the policy year beginning
August 1, 2002, the Company's total premiums for liability
insurance remained almost the same as the prior policy year while
the Company assumed liability for claims above $3.0 million and
below $5.0 million per claim. Liability claims in excess of $5.0
million per claim, if they occur, are covered under premium-based
policies with reputable insurance companies to coverage levels
that management considers adequate.
Rent and purchased transportation expense decreased from
16.9% to 16.6% of revenues due to a decrease in payments to owner-
operators (9.8% of revenues in 2002 compared to 11.0% in 2001),
offset by an increase in purchased transportation for non-
trucking services. The decrease in payments to owner-operators
resulted from the decrease in owner-operator miles as a
percentage of total Company miles as discussed previously and
lower fuel surcharge reimbursements paid to owner-operators due
to lower average fuel prices. The Company has experienced
difficulty recruiting and retaining owner-operators because of
challenging operating conditions. This has resulted in a
reduction in the number of owner-operator tractors from 1,135 as
of December 31, 2001, to 1,020 as of December 31, 2002.
Other operating expenses decreased from 0.3% to 0.1% of
revenues due primarily to an increase in the resale value of the
Company's used trucks. Because of truckload carrier concerns
with new truck engines and lower industry production of new
trucks, the resale value of the Company's premium used trucks has
improved. In 2002, the Company traded about half of its used
trucks and sold about half of its used trucks and realized gains
of $2.3 million. In 2001, the Company traded about two-thirds of
its used trucks and sold about one-third to third parties. In
2001, due to a lower average sale price per truck, the Company
realized losses of $0.7 million. For trucks traded, the excess
of the trade price over the net book value of the trucks reduced
the cost basis of new trucks, and therefore resulted in lower
depreciation expense over the life of the asset. Other operating
expenses also include bad debt expenses and professional service
fees.
Net interest expense and other decreased from 0.2% to 0.0%
of revenues due primarily to the Company's gain on sale of a
portion of its ownership in Transplace in fourth quarter 2002.
On December 31, 2002, the Company finalized the sale, which
15
reduced the Company's ownership stake in Transplace from 15% to
5%. The Company realized earnings of approximately $.01 per
share during fourth quarter 2002, representing the Company's gain
on sale of a portion of its ownership in Transplace, net of
losses recorded on its investment in Transplace during the
quarter. Werner relinquished its seat on the Transplace Board of
Directors. Transplace agreed to release Werner from certain
restrictions on competition within the transportation logistics
marketplace. The Company's gain on sale of a portion of its
ownership in Transplace, net of losses recorded on its investment
in Transplace, is recorded as non-operating income in the
Company's income statement. Interest expense decreased to 0.2%
from 0.3% of revenues due to a reduction in the Company's
borrowings. Average debt outstanding in 2002 was $35.0 million
versus $77.5 million in 2001.
The Company's effective income tax rate (income taxes as a
percentage of income before income taxes) was 37.5% in 2002 and
2001, respectively, as described in Note 5 of the Notes to
Consolidated Financial Statements under Item 8 of this Form 10-K.
Liquidity and Capital Resources
Net cash provided by operating activities was $207.5 million
in 2003, $226.3 million in 2002, and $226.9 million in 2001. Cash
flow from operations decreased $18.8 million in 2003 over 2002,
or 8.3%. This decrease was due to lower truck purchases in 2003.
This caused higher tax payments due to lower 2003 tax
depreciation and a smaller payable for trucks received at year-
end. These two items related to lower truck purchases reduced
cash flow from operations by $64.4 million in 2003 compared to
2002. The cash flow from operations enabled the Company to make
capital expenditures and repay debt as discussed below.
Net cash used in investing activities was $101.5 million in
2003, $235.5 million in 2002, and $126.9 million in 2001. The 86%
increase ($108.6 million) from 2001 to 2002 and 57% decrease
($134.0 million) from 2002 to 2003 were due primarily to the
Company's accelerated purchases of tractors with pre-October 2002
engines in the latter part of 2002 and purchasing fewer tractors
in 2003. The engine emission standards that became effective
October 1, 2002 did not allow the Company sufficient time to test
a significant sample of the new engines. This prompted the
Company to purchase a large number of trucks with engines
manufactured prior to October 2002, which are not subject to the
new engine emission standards, in addition to the normal number
of new trucks required for the Company's three-year replacement
cycle. This enabled the Company to delay the impact of using
trucks with new engines in its fleet by approximately one year
and allow additional time for testing. The pre-buy trucks were
gradually placed in service throughout 2003, with the last group
of these trucks being placed into service during the third
quarter. As of December 31, 2003, approximately 10% of the
Company's fleet consisted of trucks with the new engines. To
allow time for continued testing of the new trucks with EPA-
compliant engines, the Company has decided to extend the age of a
portion of its trucks scheduled to be sold or traded during 2004.
As of December 31, 2003, the Company has committed to
approximately $40.3 million of net capital expenditures. The
Company intends to fund these commitments through existing cash
on hand and cash flow from operations.
Net financing activities used $33.8 million in 2003, $35.2
million in 2002, and $51.1 million in 2001. In 2003, 2002, and
2001, the Company made net repayments of debt of $20.0 million,
$30.0 million, and $55.0 million, respectively. The Company paid
dividends of $6.5 million in 2003, $5.0 million in 2002, and $4.7
million in 2001. Financing activities also included common
stock repurchases of $13.5 million in 2003 and $3.8 million in
2002. From time to time, the Company has repurchased, and may
continue to repurchase, shares of its common stock. The timing
and amount of such purchases depends on market and other factors.
The Company's Board of Directors has authorized the repurchase of
up to 8,132,504 shares. On November 24, 2003, the Company
announced that its Board of Directors approved an increase to its
authorization for common stock repurchases of 3,965,838 shares.
The previous authorization announced on December 29, 1997,
authorized the Company to repurchase 4,166,666 shares. As of
16
December 31, 2003, the Company had purchased 3,162,504 shares
pursuant to this authorization and had 4,970,000 shares remaining
available for repurchase.
Management believes the Company's financial position at
December 31, 2003 is strong. As of December 31, 2003, the
Company had $101.4 million of cash and cash equivalents, no debt,
and $709.1 million of stockholders' equity. As of December 31,
2003, the Company had no equipment operating leases, and
therefore, had no off-balance sheet equipment debt. Based on the
Company's strong financial position, management foresees no
significant barriers to obtaining sufficient financing, if
necessary.
Contractual Obligations and Commercial Commitments
The following table sets forth the Company's contractual
obligations and commercial commitments as of December 31, 2003.
As of December 31, 2003, the Company had no debt outstanding.
Below is a table of credit facilities and purchase commitments as
of December 31, 2003.
Amount of Commitment Expiration Per Period
(in millions)
Total
Other Commercial Amounts
Commitments Committed Less than 1 year 1-3 years 4-5 years Over 5 years
- --------------------------------------------------------------------------------------------
Unused lines of credit $ 45.9 $ - $ 45.9 $ - $ -
Standby letters of credit 29.1 29.1 - - -
Other commercial commitments 40.3 40.3 - - -
------ ------ ------ ------ ------
Total commercial commitments $115.3 $ 69.4 $ 45.9 $ - $ -
====== ====== ====== ====== ======
The Company has two credit facilities with banks totaling
$75 million on which no borrowings were outstanding. The credit
available under these facilities is reduced by the amount of
standby letters of credit the Company maintains. The unused
lines of credit are available to the Company in the event the
Company needs financing for the growth of its fleet. With the
Company's strong financial position, the Company expects it could
obtain additional financing, if necessary, at favorable terms.
The standby letters of credit are primarily required for
insurance policies. The other commercial commitments relate to
committed equipment expenditures.
Off-balance Sheet Arrangements
The Company does not have any arrangements which meet the
definition of an off-balance sheet arrangement.
Inflation
Inflation can be expected to have an impact on the Company's
operating costs. A prolonged period of inflation could cause
interest rates, fuel, wages, and other costs to increase and
could adversely affect the Company's results of operations unless
freight rates could be increased correspondingly. However, the
effect of inflation has been minimal over the past three years.
Forward-Looking Statements and Risk Factors
This discussion and analysis contains historical and forward-
looking information. The forward-looking statements are made
pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. The Company believes the
assumptions underlying these forward-looking statements are
reasonable based on information currently available, however any
of the assumptions could be inaccurate, and therefore, actual
results may differ materially from those anticipated in the
forward-looking statements as a result of certain risks and
uncertainties. Those risks include, but are not limited to, the
following:
17
The Company's business is modestly seasonal with peak
freight demand occurring generally in the months of September,
October, and November. During the winter months, the Company's
freight volumes are typically lower as some customers have lower
shipment levels after the Christmas holiday season. The
Company's operating expenses have historically been higher in
winter months primarily due to decreased fuel efficiency,
increased maintenance costs of revenue equipment in colder
weather, and increased insurance and claims costs due to adverse
winter weather conditions. The Company attempts to minimize the
impact of seasonality through its marketing program by seeking
additional freight from certain customers during traditionally
slower shipping periods. Bad weather, holidays, and the number
of business days during the period can also affect revenue, since
revenue is directly related to available working days of
shippers.
The trucking industry is highly competitive and includes
thousands of trucking companies. The Company estimates the ten
largest truckload carriers have less than ten percent of the
approximate $150 billion market targeted by the Company. This
competition could limit the Company's growth opportunities and
reduce its profitability. The Company competes primarily with
other truckload carriers. Railroads, less-than-truckload
carriers, and private carriers also provide competition, but to a
much lesser degree. Competition for the freight transported by
the Company is based primarily on service and efficiency and, to
some degree, on freight rates alone.
The Company is sensitive to changes in overall economic
conditions that impact customer shipping volumes. The general
slowdown in the economy since 2001 had a negative effect on
freight volumes for truckload carriers, including the Company.
During 2003, freight demand for the Company during the last ten
months was consistently better than 2002. As the unemployment
rate increased during 2001 and 2002, driver availability improved
for the Company and the industry but became more difficult in
fourth quarter 2003. Fuel prices increased beginning in fourth
quarter 1999 and were high through 2000 and 2001 before
decreasing in the latter part of 2001. Due to pending concerns in
the Middle East and other factors, fuel prices began to rise in
the second quarter of 2002, continued to increase throughout the
second half of 2002, and increased further in the first part of
2003. In the last nine months of 2003, prices decreased again,
ending 2003 at prices slightly higher than at the end of 2002.
Shortages of fuel, increases in fuel prices, or rationing of
petroleum products can have a materially adverse impact on the
operations and profitability of the Company. To the extent that
the Company cannot recover the higher cost of fuel through
customer fuel surcharges, the Company's results would be
negatively impacted. Future economic conditions that may affect
the Company include employment levels, business conditions, fuel
and energy costs, interest rates, and tax rates.
The Company is regulated by the DOT and the Federal and
Provincial Transportation Departments in Canada. These
regulatory authorities establish broad powers, generally
governing activities such as authorization to engage in motor
carrier operations, safety, financial reporting, and other
matters. The Company may become subject to new or more
comprehensive regulations relating to fuel emissions, driver
hours of service, or other issues mandated by the DOT, EPA, or
the Federal and Provincial Transportation Departments in Canada.
For example, new engine emissions standards became effective for
truck engine manufacturers in October 2002 and new hours of
service regulations became effective on January 4, 2004. The
Company believes it is minimizing the impact of the new hours of
service regulations on miles per truck through proactive planning
using its Paperless Log System and by working closely with
customers to reduce delay time. However, the Company is unable
to predict the ultimate impact of the new hours of service rules.
These changes could have an adverse effect on the operations and
profitability of the Company.
At times, there have been shortages of drivers in the
trucking industry. The market for recruiting drivers became more
difficult in fourth quarter 2003. The Company anticipates that
the competition for company drivers will continue to be high.
During 2001, 2002, and 2003, it was more difficult to recruit and
retain owner-operator drivers due to challenging operating
conditions, including high fuel prices. The Company anticipates
that the competition for company drivers and owner-operator
drivers will continue to be high and cannot predict whether it
will experience shortages in the future.
18
The Company is highly dependent on the services of key
personnel including Clarence L. Werner and other executive
officers. Although the Company believes it has an experienced
and highly qualified management group, the loss of the services
of these executive officers could have a material adverse impact
on the Company and its future profitability.
The Company is dependent on its vendors and suppliers. The
Company believes it has good relationships with its vendors and
that it is generally able to obtain attractive pricing and other
terms from vendors and suppliers. If the Company fails to
maintain good relationships with its vendors and suppliers or if
its vendors and suppliers experience significant financial
problems, the Company could face difficulty in obtaining needed
goods and services because of interruptions of production or for
other reasons, which could adversely affect the Company's
business.
The efficient operation of the Company's business is highly
dependent on its information systems. Much of the Company's
software has been developed internally or by adapting purchased
software applications to the Company's needs. The Company has
purchased redundant computer hardware systems and has its own off-
site disaster recovery facility approximately ten miles from the
Company's offices to use in the event of a disaster. The Company
has taken these steps to reduce the risk of disruption to its
business operation if a disaster were to occur.
The Company self-insures for liability resulting from cargo
loss, personal injury, and property damage as well as workers'
compensation. This is supplemented by premium insurance with
licensed insurance companies above the Company's self-insurance
level for each type of coverage. To the extent that the Company
was to experience a significant increase in the number of claims
or the cost per claim, the Company's operating results would be
negatively affected.
Effective October 1, 2002, all newly manufactured truck
engines must comply with the engine emission standards mandated
by the Environmental Protection Agency (EPA). All truck engines
manufactured prior to October 1, 2002 were not subject to these
new standards. The Company is continuing ongoing testing of the
EPA-compliant truck engines, in particular the Caterpillar ACERT
engines and the Detroit Diesel EGR engines. Approximately 10% of
the Company's fleet consisted of trucks with post-October 2002
engines at December 31, 2003. To date, the Company's testing
indicates that the fuel mile per gallon (mpg) degradation is a
reduction of approximately 0.3 mpg to 0.5 mpg with either engine
type. Depreciation expense is increasing due to the higher cost
of the new engines. The average age of the Company's truck fleet
is 1.6 years as of December 31, 2003. To allow time for
continued testing of the new trucks with EPA-compliant engines,
the Company has decided to extend the age of a portion of its
trucks scheduled to be sold or traded during 2004.
Because of truckload carrier concerns with new truck engines
and lower industry production of new trucks over the last three
years, the resale value of Werner's premium used trucks has
improved from the historically low values of 2001. Gains on
sales of equipment are reflected as a reduction of other
operating expenses in the Company's income statement and amounted
to gains of $7.6 million in 2003 and $2.3 million in 2002,
compared to a loss of $0.7 million in 2001. Extending the ages
of a portion of the Company's truck fleet in 2004 may reduce the
number of trucks available for sales to third parties or trades
to the manufacturers. Thus, the extent of the Company's sales of
used trucks in 2004 will depend on the ongoing testing of the new
engines, freight demand, driver availability, and used truck
pricing.
Caution should be taken not to place undue reliance on
forward-looking statements made herein, since the statements
speak only as of the date they are made. The Company undertakes
no obligation to publicly release any revisions to any forward-
looking statements contained herein to reflect events or
circumstances after the date of this report or to reflect the
occurrence of unanticipated events.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The Company is exposed to market risk from changes in
interest rates and commodity prices.
19
Interest Rate Risk
The Company had no debt outstanding at December 31, 2003.
Interest rates on the Company's unused credit facilities are
based on the London Interbank Offered Rate (LIBOR). Increases in
interest rates could impact the Company's annual interest expense
on future borrowings.
Commodity Price Risk
The price and availability of diesel fuel are subject to
fluctuations due to changes in the level of global oil
production, seasonality, weather, and other market factors.
Historically, the Company has been able to recover a majority of
fuel price increases from customers in the form of fuel
surcharges. The Company cannot predict the extent to which high
fuel price levels will continue in the future or the extent to
which fuel surcharges could be collected to offset such
increases. As of December 31, 2003, the Company had no
derivative financial instruments to reduce its exposure to fuel
price fluctuations.
The Company conducts business in Mexico and Canada. Foreign
currency transaction gains and losses were not material to the
Company's results of operations for 2003 and prior years.
Accordingly, the Company is not currently subject to material
foreign currency exchange rate risks from the effects that
exchange rate movements of foreign currencies would have on the
Company's future costs or on future cash flows. To date, the
Company receives payment for freight services performed in Mexico
and Canada primarily in U.S. dollars to reduce foreign currency
risk.
20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors
Werner Enterprises, Inc.:
We have audited the accompanying consolidated balance sheets
of Werner Enterprises, Inc. and subsidiaries as of December 31,
2003 and 2002, and the related consolidated statements of income,
stockholders' equity and comprehensive income, and cash flows for
each of the years in the three-year period ended December 31,
2003. In connection with our audits of the consolidated
financial statements, we have also audited the financial
statement schedule for each of the years in the three-year period
ended December 31, 2003, listed in Item 15(a)(2) of this Form 10-
K. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing
standards generally accepted in the United States of America.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the
financial position of Werner Enterprises, Inc. and subsidiaries
as of December 31, 2003 and 2002, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2003, in conformity with
accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement
schedule referred to above, when considered in relation to the
basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set
forth therein.
KPMG LLP
Omaha, Nebraska
January 22, 2004
21
WERNER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
2003 2002 2001
---------- ---------- ----------
Operating revenues $1,457,766 $1,341,456 $1,270,519
---------- ---------- ----------
Operating expenses:
Salaries, wages and benefits 513,551 486,315 457,433
Fuel 160,465 125,189 131,498
Supplies and maintenance 123,680 119,972 117,882
Taxes and licenses 104,392 98,741 93,628
Insurance and claims 73,032 51,192 41,946
Depreciation 135,168 121,702 116,043
Rent and purchased transportation 215,463 222,571 214,336
Communications and utilities 16,480 14,808 14,365
Other (1,969) 1,512 4,059
---------- ---------- ----------
Total operating expenses 1,340,262 1,242,002 1,191,190
---------- ---------- ----------
Operating income 117,504 99,454 79,329
---------- ---------- ----------
Other expense (income):
Interest expense 1,099 2,857 3,775
Interest income (1,699) (2,340) (2,628)
Other 128 333 1,791
---------- ---------- ----------
Total other expense (income) (472) 850 2,938
---------- ---------- ----------
Income before income taxes 117,976 98,604 76,391
Income taxes 44,249 36,977 28,647
---------- ---------- ----------
Net income $ 73,727 $ 61,627 $ 47,744
========== ========== ==========
Average common shares outstanding 79,828 79,705 78,933
========== ========== ==========
Basic earnings per share $ 0.92 $ 0.77 $ 0.60
========== ========== ==========
Diluted shares outstanding 81,668 81,522 80,183
========== ========== ==========
Diluted earnings per share $ 0.90 $ 0.76 $ 0.60
========== ========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
22
WERNER ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
December 31
----------------------
2003 2002
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 101,409 $ 29,885
Accounts receivable, trade, less allowance
of $6,043 and $4,459, respectively 152,461 131,889
Other receivables 8,892 10,335
Inventories and supplies 9,877 9,777
Prepaid taxes, licenses, and permits 14,957 13,535
Income taxes receivable - 9,811
Other current assets 17,691 14,317
---------- ----------
Total current assets 305,287 219,549
---------- ----------
Property and equipment, at cost:
Land 21,423 19,357
Buildings and improvements 96,787 89,231
Revenue equipment 1,013,645 996,694
Service equipment and other 129,397 107,206
---------- ----------
Total property and equipment 1,261,252 1,212,488
Less - accumulated depreciation 455,565 380,221
---------- ----------
Property and equipment, net 805,687 832,267
---------- ----------
Other non-current assets 10,553 11,062
---------- ----------
$1,121,527 $1,062,878
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 40,903 $ 50,546
Current portion of long-term debt - 20,000
Insurance and claims accruals 55,201 47,358
Accrued payroll 15,828 18,374
Current deferred income taxes 15,151 17,710
Other current liabilities 15,392 11,885
---------- ----------
Total current liabilities 142,475 165,873
---------- ----------
Deferred income taxes 198,640 201,561
Insurance and claims accruals, net of
current portion 71,301 47,801
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, 200,000,000
shares authorized; 80,533,536 shares
issued; 79,714,271 and 79,726,180
shares outstanding, respectively 805 805
Paid-in capital 108,706 107,366
Retained earnings 614,011 547,467
Accumulated other comprehensive loss (837) (216)
Treasury stock, at cost; 819,265 and
807,356 shares, respectively (13,574) (7,779)
---------- ----------
Total stockholders' equity 709,111 647,643
---------- ----------
$1,121,527 $1,062,878
========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
23
WERNER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
2003 2002 2001
---------- ---------- ----------
Cash flows from operating activities:
Net income $ 73,727 $ 61,627 $ 47,744
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation 135,168 121,702 116,043
Deferred income taxes (5,480) 35,891 42,529
(Gain) loss on disposal of
operating equipment (7,557) (2,257) 740
Gain on sale of
unconsolidated affiliate - (1,809) -
Equity in loss of
unconsolidated affiliate - 2,105 1,664
Tax benefit from exercise of
stock options 2,863 1,450 2,384
Other long-term assets 1,023 248 938
Insurance, claims and other
long-term accruals 23,500 9,000 6,500
Changes in certain working
capital items:
Accounts receivable, net (20,572) (10,535) 2,164
Prepaid expenses and
other current assets 6,358 (17,428) 5,875
Accounts payable (9,643) 17,358 2,478
Accrued and other current
liabilities 8,087 8,919 (2,139)
---------- ---------- ----------
Net cash provided by
operating activities 207,474 226,271 226,920
---------- ---------- ----------
Cash flows from investing activities:
Additions to property and
equipment (158,351) (309,672) (170,862)
Retirements of property and
equipment 54,754 71,882 44,710
Sale of unconsolidated affiliate - 3,364 -
(Increase) decrease in notes
receivable 2,052 (1,099) (750)
---------- ---------- ----------
Net cash used in investing
activities (101,545) (235,525) (126,902)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from issuance of
long-term debt - 10,000 5,000
Repayments of long-term debt (20,000) (40,000) (60,000)
Dividends on common stock (6,466) (5,019) (4,728)
Payment of stock split fractional
shares (9) (12) -
Repurchases of common stock (13,476) (3,766) -
Stock options exercised 6,167 3,570 8,591
---------- ---------- ----------
Net cash used in financing
activities (33,784) (35,227) (51,137)
---------- ---------- ----------
Effect of exchange rate fluctuations
on cash (621) - -
Net (decrease) increase in cash and
cash equivalents: 71,524 (44,481) 48,881
Cash and cash equivalents, beginning
of year 29,885 74,366 25,485
---------- ---------- ----------
Cash and cash equivalents, end of
year $ 101,409 $ 29,885 $ 74,366
========== ========== ==========
Supplemental disclosures of cash
flow information:
Cash paid (received) during year
for:
Interest $ 1,148 $ 3,080 $ 4,315
Income taxes 34,401 10,422 (9,540)
Supplemental disclosures of non-cash
investing activities:
Notes receivable issued upon sale
of revenue equipment $ 2,566 $ 2,686 $ 238
Notes receivable canceled upon
return of revenue equipment - (1,279) -
Warehouse assets contributed to
LLC - - 1,446
The accompanying notes are an integral part of these consolidated
financial statements.
24
WERNER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE
INCOME
(In thousands, except share and per share amounts)
Accumulated
Other Total
Common Paid-In Retained Comprehensive Treasury Stockholders'
Stock Capital Earnings Loss Stock Equity
------ -------- -------- ------------- --------- -------------
BALANCE, December 31, 2000 $805 $105,522 $447,943 $ (34) $(18,152) $536,084
Dividends on common stock
($.060 per share) - - (4,745) - - (4,745)
Exercise of stock options,
1,147,213 shares, including
tax benefits - 375 - - 10,600 10,975
Comprehensive income (loss):
Net income - - 47,744 - - 47,744
Foreign currency translation
adjustments - - - (9) - (9)
------ -------- -------- ------------- --------- -------------
Total comprehensive income - - 47,744 (9) - 47,735
------ -------- -------- ------------- --------- -------------
BALANCE, December 31, 2001 805 105,897 490,942 (43) (7,552) 590,049
Purchases of 267,125 shares
of common stock - - - - (3,766) (3,766)
Dividends on common stock
($.064 per share) - - (5,102) - - (5,102)
Payment of stock split
fractional shares - (12) - - - (12)
Exercise of stock options,
448,508 shares, including
tax benefits - 1,481 - - 3,539 5,020
Comprehensive income (loss):
Net income - - 61,627 - - 61,627
Foreign currency translation
adjustments - - - (173) - (173)
------ -------- -------- ------------- --------- -------------
Total comprehensive income - - 61,627 (173) - 61,454
------ -------- -------- ------------- --------- -------------
BALANCE, December 31, 2002 805 107,366 547,467 (216) (7,779) 647,643
Purchases of 764,500 shares
of common stock - - - - (13,476) (13,476)
Dividends on common stock
($.090 per share) - - (7,183) - - (7,183)
Payment of stock split
fractional shares - (9) - - - (9)
Exercise of stock options,
752,591 shares, including
tax benefits - 1,349 - - 7,681 9,030
Comprehensive income (loss):
Net income - - 73,727 - - 73,727
Foreign currency translation
adjustments - - - (621) - (621)
------ -------- -------- ------------- --------- -------------
Total comprehensive income - - 73,727 (621) - 73,106
------ -------- -------- ------------- --------- -------------
BALANCE, December 31, 2003 $805 $108,706 $614,011 $(837) $(13,574) $709,111
====== ======== ======== ============= ========= =============
The accompanying notes are an integral part of these consolidated
financial statements.
25
WERNER ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Werner Enterprises, Inc. (the Company) is a truckload
transportation and logistics company operating under the
jurisdiction of the U.S. Department of Transportation, the
Federal and Provincial Transportation Departments in Canada, and
various state regulatory commissions. The Company maintains a
diversified freight base with no one customer or industry making
up a significant percentage of the Company's receivables or
revenues. The largest single customer generated 9% of revenues
for 2003, 2002, and 2001.
Principles of Consolidation
The accompanying consolidated financial statements include
the accounts of Werner Enterprises, Inc. and its majority-owned
subsidiaries. All significant intercompany accounts and
transactions relating to these majority-owned entities have been
eliminated. Through December 31, 2002, the Company recorded its
investment in Transplace using the equity method of accounting
until the Company reduced its ownership percentage (see Note 2).
On January 1, 2003, the Company began accounting for this
investment using the cost method.
Use of Management Estimates
The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the consolidated financial statements, and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments,
purchased with a maturity of three months or less, to be cash
equivalents.
Trade Accounts Receivable
Trade accounts receivable are recorded at the invoiced
amounts, net of an allowance for doubtful accounts. The
allowance for doubtful accounts is the Company's best estimate of
the amount of probable credit losses in the Company's existing
accounts receivable. The financial condition of customers is
reviewed by the Company prior to granting credit. The Company
determines the allowance based on historical write-off experience
and national economic data. The Company reviews the adequacy of
its allowance for doubtful accounts monthly. Past due balances
over 90 days and over a specified amount are reviewed
individually for collectibility. Account balances are charged
off against the allowance after all means of collection have been
exhausted and the potential for recovery is considered remote.
The Company does not have any off-balance-sheet credit exposure
related to its customers.
Inventories and Supplies
Inventories and supplies consist primarily of revenue
equipment parts, tires, fuel, supplies, and company store
merchandise and are stated at average cost. Tires placed on new
revenue equipment are capitalized as a part of the equipment
cost. Replacement tires are expensed when placed in service.
26
Property, Equipment, and Depreciation
Additions and improvements to property and equipment are
capitalized at cost, while maintenance and repair expenditures
are charged to operations as incurred. If equipment is traded
rather than sold, the cost of new equipment is recorded at an
amount equal to the lower of the monetary consideration paid plus
the net book value of the traded property or the fair value of
the new equipment.
Depreciation is calculated based on the cost of the asset,
reduced by its estimated salvage value, using the straight-line
method. Accelerated depreciation methods are used for income tax
purposes. The lives and salvage values assigned to certain assets
for financial reporting purposes are different than for income
tax purposes. For financial reporting purposes, assets are
depreciated using the following estimated useful lives and
salvage values:
Lives Salvage Values
------------- --------------
Building and improvements 30 years 0%
Tractors 5 years 25%
Trailers 12 years 0%
Service and other equipment 3-10 years 0%
Long-Lived Assets
The Company reviews its long-lived assets for impairment
whenever events or changes in circumstances indicate that the
carrying amount of a long-lived asset may not be recoverable. An
impairment loss would be recognized if the carrying amount of the
long-lived asset is not recoverable, and it exceeds its fair
value. For long-lived assets classified as held and used, if the
carrying value of the long-lived asset exceeds the sum of the
future net cash flows, it is not recoverable. Long-lived assets
classified as held for sale are reported at the lower of its
carrying amount or fair value less costs to sell.
Insurance and Claims Accruals
Insurance and claims accruals, both current and noncurrent,
reflect the estimated cost for cargo loss and damage, bodily
injury and property damage (BI/PD), group health, and workers'
compensation claims, including estimated loss development and
loss adjustment expenses, not covered by insurance. The costs for
cargo and BI/PD insurance and claims are included in insurance
and claims expense, while the costs of group health and workers'
compensation claims are included in salaries, wages and benefits
expense in the Consolidated Statements of Income. The insurance
and claims accruals are recorded at the estimated ultimate
payment amounts and are based upon individual case estimates and
estimates of incurred-but-not-reported losses based upon past
experience. The Company's insurance and claims accruals are
reviewed by an actuary at least annually.
The Company has been responsible for liability claims up to
$500,000, plus administrative expenses, for each occurrence
involving personal injury or property damage since August 1,
1992. The Company is also responsible for varying annual
aggregate amounts of liability for claims above $500,000 and
below $10,000,000. For the policy year beginning August 1, 2003,
these annual aggregate amounts total $13,500,000. For the policy
year beginning August 1, 2003, the Company is self-insured for
claims in excess of $3.0 million and less than $5.0 million,
subject to an annual maximum aggregate of $6.0 million if several
claims were to occur in this layer. For claims in excess of $5.0
million and less than $10.0 million, the Company is responsible
for the first $5.0 million of claims in this layer. Liability
claims in excess of $10.0 million per claim, if they occur, are
covered under premium-based policies with reputable insurance
companies to coverage levels that management considers adequate.
The Company's premium rates for liability coverage are fixed
through August 1, 2004.
The Company has assumed responsibility for workers'
compensation, maintains a $26,500,000 bond, and has obtained
insurance for individual claims above $1,000,000.
27
Under these insurance arrangements, the Company maintains
$29,100,000 in letters of credit, as of December 31, 2003.
Revenue Recognition
The Consolidated Statements of Income reflect recognition of
operating revenues and related direct costs when the shipment is
delivered. For shipments where a third party is utilized to
provide some or all of the service, the Company records revenue
for the shipment for the dollar value of the services billed by
the Company to the customer when the shipment is delivered. The
costs of transportation paid by the Company to the third party is
recorded as rent and purchased transportation expense.
Foreign Currency Translation
Local currencies are generally considered the functional
currencies outside the United States. Assets and liabilities are
translated at year-end exchange rates for operations in local
currency environments. Income and expense items are translated
at average rates of exchange prevailing during the year. Foreign
currency translation adjustments reflect the changes in foreign
currency exchange rates applicable to the net assets of the
Mexican and Canadian operations for the years ended December 31,
2003, 2002, and 2001. The amounts of such translation
adjustments were not significant for all years presented (see the
Consolidated Statements of Stockholders' Equity and Comprehensive
Income).
Income Taxes
The Company uses the asset and liability method of Statement
of Financial Accounting Standards (SFAS) No. 109 in accounting
for income taxes. Under this method, deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities
are measured using the enacted tax rates expected to apply to
taxable income in the years in which those temporary differences
are expected to be recovered or settled.
Common Stock and Earnings Per Share
The Company computes and presents earnings per share (EPS)
in accordance with SFAS No. 128, Earnings per Share. The
difference between the Company's weighted average shares
outstanding and diluted shares outstanding is due to the dilutive
effect of stock options for all periods presented. There are no
differences in the numerator of the Company's computations of
basic and diluted EPS for any period presented.
Stock Based Compensation
At December 31, 2003, the Company has a nonqualified stock
option plan, as described more fully in Note 6. The Company
applies the intrinsic value based method of Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for its
stock option plan. No stock-based employee compensation cost is
reflected in net income, as all options granted under the plan
had an exercise price equal to the market value of the underlying
common stock on the date of grant. The Company's pro forma net
income and earnings per share would have been as indicated below
had the fair value of option grants been charged to salaries,
wages, and benefits in accordance with SFAS No. 123, Accounting
for Stock-Based Compensation:
28
Year Ended December 31
--------------------------------
2003 2002 2001
-------- -------- --------
Net income (in thousands), as
reported $ 73,727 $ 61,627 $ 47,744
Less: Total stock-based employee
compensation expense
determined under fair value
based method for all awards,
net of related tax effects 2,516 3,456 3,155
-------- -------- --------
Pro forma net income $ 71,211 $ 58,171 $ 44,589
======== ======== ========
Earnings per share:
Basic - as reported $ 0.92 $ 0.77 $ 0.60
======== ======== ========
Basic - pro forma $ 0.89 $ 0.73 $ 0.56
======== ======== ========
Diluted - as reported $ 0.90 $ 0.76 $ 0.60
======== ======== ========
Diluted - pro forma $ 0.87 $ 0.71 $ 0.56
======== ======== ========
Comprehensive Income
Comprehensive income consists of net income and other
comprehensive income (loss). Other comprehensive income (loss)
refers to revenues, expenses, gains, and losses that are not
included in net income, but rather are recorded directly in
stockholders' equity. For the years ended December 31, 2003,
2002, and 2001, comprehensive income consists of net income and
foreign currency translation adjustments.
Accounting Standards
During June 2001, the Financial Accounting Standards Board
(FASB) issued SFAS No. 143 (SFAS 143), Accounting for Asset
Retirement Obligations. This Statement addresses financial
accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset
retirement costs. SFAS 143 requires an enterprise to record the
fair value of an asset retirement obligation as a liability in
the period in which it incurs a legal obligation associated with
the retirement of a tangible long-lived asset. SFAS 143 is
effective for fiscal years beginning after June 15, 2002.
Management has determined that adoption of this statement as of
January 1, 2003 did not have any effect on the financial
position, results of operations, and cash flows of the Company
during 2003.
In June 2002, the FASB issued SFAS No. 146 (SFAS 146),
Accounting for Costs Associated with Exit or Disposal Activities.
The provisions of this statement are effective for exit or
disposal activities that are initiated after December 31, 2002.
Management has determined that adoption of this statement as of
January 1, 2003 did not have any effect on the financial
position, results of operations, and cash flows of the Company
during 2003.
In April 2003, the FASB issued SFAS No. 149, (SFAS 149)
Amendment of Statement 133 on Derivative Instruments and Hedging
Activities. This statement amends and clarifies financial
accounting and reporting for derivative instruments and for
hedging activities under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. The provisions of this
statement are effective for contracts entered into or modified
after June 30, 2003. Management has determined that adoption of
this statement as of July 1, 2003 did not have any effect on the
financial position, results of operations, and cash flows of the
Company during 2003.
In May 2003, the FASB issued SFAS No. 150 (SFAS 150),
Accounting for Certain Financial Instruments with Characteristics
of both Liabilities and Equity. This statement requires that an
issuer classify a financial instrument that is within its scope
as a liability. The provisions of this statement are effective
for financial instruments entered into or modified after May 31,
2003. Management has determined that adoption of this statement
as of June 1, 2003 did not have any effect on the financial
position, results of operations, and cash flows of the Company
during 2003.
29
In December 2003, the Financial Accounting Standards Board
(FASB) revised SFAS No. 132 (SFAS 132) Employers' Disclosures
about Pensions and Other Postretirement Benefits-an amendment of
FASB Statements No. 87, 88, and 106. This statement revises
employers' disclosures about pension plans and other
postretirement benefit plans. The provisions of this statement
are effective for financial statements with fiscal years ending
after December 15, 2003. As of December 31, 2003, management has
determined that adoption of this statement did not have any
effect on the financial position, results of operations, and cash
flows of the Company.
The Financial Accounting Standards Board (FASB) is working
on a project related to the accounting for equity-based
compensation. The objective of this project is to make one
accounting standard available for equity-based compensation. The
new standard is expected to require companies to expense the fair
value of stock options as of the beginning of the first fiscal
year beginning after December 15, 2004. The FASB is expected to
issue an Exposure Draft in the first quarter of 2004, after which
management can begin to evaluate the impact on the financial
position, results of operations, and cash flows of the Company.
In May 2003, the Emerging Issues Task Force (EITF) issued
EITF Issue No. 00-21, Revenue Arrangements with Multiple
Deliverables. Issue No. 00-21 addresses certain aspects of the
accounting by a vendor for arrangements under which it will
perform multiple revenue-generating activities. The provisions
are effective for revenue arrangements entered into in reporting
periods beginning after June 15, 2003. Management has determined
that adoption of this statement did not have any effect on the
financial position, results of operations, and cash flows of the
Company during 2003.
In December 2003, the FASB revised FASB Interpretation (FIN)
No. 46, Consolidation of Variable Interest Entities. FIN No.
46(R) addresses consolidation by business enterprises of certain
variable interest entities. For public entities that are not
small business issuers, the provisions of FIN No. 46(R) are
effective no later than the end of the first reporting period
that ends after March 15, 2004. If the variable interest entity
is considered to be a special-purpose entity, FIN No. 46(R) shall
be applied no later than the first reporting period that ends
after December 15, 2003. As of December 31, 2003, management
believes that FIN No. 46(R) will have no significant effect on
the financial position, results of operations, and cash flows of
the Company.
(2) INVESTMENT IN UNCONSOLIDATED AFFILIATE
Effective June 30, 2000, the Company contributed its non-
asset based logistics business to Transplace (TPC), a joint
venture of six large transportation companies, in exchange for an
equity interest in TPC of approximately 15%. Through December
31, 2002, the Company accounted for its investment in TPC using
the equity method. Management believes this method was
appropriate because the Company had the ability to exercise
significant influence over operating and financial policies of
TPC through its representation on the TPC Board of Directors. On
December 31, 2002, the Company sold a portion of its ownership
interest in TPC, reducing the Company's ownership stake in TPC
from 15% to 5%. The Company relinquished its seat on the TPC
Board of Directors, and TPC agreed to release the Company from
certain restrictions on competition within the transportation
logistics marketplace. The Company realized net losses of less
than one cent per share during 2002, consisting of the Company's
gain on sale of a portion of its ownership in TPC in fourth
quarter 2002, net of the Company's equity in net losses of TPC
during the year. These items are recorded as non-operating
expense in the Company's Consolidated Statements of Income.
Beginning January 1, 2003, the Company began accounting for its
investment on the cost method and no longer accrues its
percentage share of TPC's earnings or losses. The Company is not
responsible for the debt of Transplace.
In October 2000, the Company provided funds (in thousands)
of $3,200 to TPC in the form of a short-term note with an
interest rate of eight percent per annum. The Company recorded
interest income on the note from TPC (in thousands) of
approximately $26 during 2001. The note was repaid in full in
February 2001.
30
The Company and TPC enter into transactions with each other
for certain of their purchased transportation needs. The Company
recorded operating revenue (in thousands) from TPC of
approximately $16,800, $25,000, and $30,600 in 2003, 2002, and
2001, respectively, and recorded purchased transportation expense
(in thousands) to TPC of approximately $711, $13,300, and
$10,500, during 2003, 2002, and 2001, respectively.
During 2002 and 2001, the Company also provided certain
administrative functions to TPC as well as providing office
space, supplies, and communications. The allocation from the
Company for these services (in thousands) was approximately $123
and $407 during 2002 and 2001, respectively. The allocations for
rent are recorded in the Consolidated Statements of Income as
miscellaneous revenue, and the remaining amounts are recorded as
a reduction of the respective operating expenses. The Company
stopped providing these services in 2003.
The Company believes that the transactions with TPC are on
terms no less favorable to the Company than those that could be
obtained from unaffiliated third parties, on an arm's length
basis.
(3) LONG-TERM DEBT
Long-term debt consisted of the following at December 31 (in
thousands):
2003 2002
-------- --------
5.52% Series C Senior Notes, due December 2003 $ - $ 20,000
-------- --------
- 20,000
Less current portion - 20,000
-------- --------
Long-term debt, net $ - $ -
======== ========
As of December 31, 2003, the Company has two credit
facilities with banks totaling $75 million which expire May 16,
2005 and October 22, 2005 and bear variable interest based on
LIBOR, on which no borrowings were outstanding at December 31,
2003. As of December 31, 2003, the credit available pursuant to
these bank credit facilities is reduced by $29.1 million in
letters of credit the Company maintains. Each of the debt
agreements require, among other things, that the Company maintain
a minimum consolidated tangible net worth and not exceed a
maximum ratio of total funded debt to earnings before interest,
income taxes, depreciation, amortization and rentals payable
(EBITDAR) as defined in the credit facility. While the Company
had no borrowings pursuant to these credit facilities as of
December 31, 2003, the Company was in compliance with these
covenants at December 31, 2003.
The carrying amount of the Company's long-term debt as of
December 31, 2002 approximates fair value due to the duration of
the notes and their interest rates.
(4) NOTES RECEIVABLE
Notes receivable are included in other current assets and
other non-current assets in the Consolidated Balance Sheets. At
December 31, notes receivable consisted of the following (in
thousands):
2003 2002
-------- --------
Owner-operator notes receivable $ 4,866 $ 3,890
TDR Transportes, S.A. de C.V. 3,758 3,600
Warehouse One, LLC 1,525 1,602
-------- --------
10,149 9,092
Less current portion 1,722 1,179
-------- --------
Notes receivable - non-current $ 8,427 $ 7,913
======== ========
31
The Company provides financing to some independent
contractors who want to become owner-operators by purchasing a
tractor from the Company and leasing their truck to the Company.
At December 31, 2003 and 2002, the Company had 153 and 112 notes
receivable totaling $4,866 and $3,890 (in thousands),
respectively, from these owner-operators. See Note (8) for
information regarding notes from related parties. The Company
maintains a first security interest in the tractor until the
owner-operator has paid the note balance in full.
During 2002, the Company loaned $3,600 (in thousands) to TDR
Transportes, S.A. de C.V. (TDR), a truckload carrier in the
Republic of Mexico. The loan has a nine-year term with principal
payable at the end of the term, is subject to acceleration if
certain conditions are met, bears interest at a rate of five
percent per annum which is payable quarterly, contains certain
financial and other covenants, and is collateralized by the
assets of TDR. As of December 31, 2003, the Company had a
receivable for interest on this note of $31. During 2003, the
Company loaned an additional $158 to TDR for the purchase of
revenue equipment. The Company and TDR transact business with
each other for certain of their purchased transportation needs.
During 2003 and 2002, the Company recorded operating revenues
from TDR of approximately $206 and $416, respectively, and
recorded purchased transportation expense to TDR of approximately
$1,099 and $1,087, respectively. In addition, during 2003 and
2002, the Company recorded operating revenues from TDR of
approximately $1,495 and $72, respectively, related to the
leasing of revenue equipment.
The Company has a 50% ownership interest in a 125,000 square-
foot warehouse (Warehouse One, LLC) located near the Company's
headquarters. The Company has a note receivable from the owner
of the other 50% interest in the warehouse with a principal
balance (in thousands) of $1,525 and $1,602 as of December 31,
2003 and 2002, respectively. The note bears interest at a
variable rate based on the prime rate and is adjusted annually.
The note is secured by the borrower's 50% ownership interest in
the warehouse. The Company's 50% ownership interest in the
warehouse of $1,364 and $1,401 as of December 31, 2003 and 2002,
respectively, is included in other non-current assets.
(5) INCOME TAXES
Income tax expense consisted of the following (in
thousands):
2003 2002 2001
-------- -------- --------
Current:
Federal $ 46,072 $ 959 $(12,194)
State 3,657 127 (1,688)
-------- -------- --------
49,729 1,086 (13,882)
-------- -------- --------
Deferred:
Federal (6,159) 31,692 37,358
State 679 4,199 5,171
-------- -------- --------
(5,480) 35,891 42,529
-------- -------- --------
Total income tax expense $ 44,249 $ 36,977 $ 28,647
======== ======== ========
The effective income tax rate differs from the federal
corporate tax rate of 35% in 2003, 2002 and 2001 as follows
(in thousands):
2003 2002 2001
-------- -------- --------
Tax at statutory rate $ 41,292 $ 34,511 $ 26,737
State income taxes, net
of federal tax benefits 2,818 2,812 2,264
Income tax credits (900) (638) (638)
Other, net 1,039 292 284
-------- -------- --------
$ 44,249 $ 36,977 $ 28,647
======== ======== ========
32
At December 31, deferred tax assets and liabilities
consisted of the following (in thousands):
2003 2002
-------- --------
Deferred tax assets:
Insurance and claims accruals $ 48,081 $ 34,914
Allowance for uncollectible accounts 3,078 2,364
Other 3,743 3,358
-------- --------
Gross deferred tax assets 54,902 40,636
-------- --------
Deferred tax liabilities:
Property and equipment 219,849 211,135
Prepaid expenses 42,174 38,763
Other 6,670 10,009
-------- --------
Gross deferred tax liabilities 268,693 259,907
-------- --------
Net deferred tax liability $213,791 $219,271
======== ========
These amounts (in thousands) are presented in the
accompanying Consolidated Balance Sheets as of December 31 as
follows:
2003 2002
-------- --------
Current deferred tax liability $ 15,151 $ 17,710
Noncurrent deferred tax liability 198,640 201,561
-------- --------
Net deferred tax liability $213,791 $219,271
======== ========
The Company has not recorded a valuation allowance as it
believes that all deferred tax assets are likely to be realized
as a result of the Company's history of profitability, taxable
income and reversal of deferred tax liabilities.
(6) STOCK OPTION AND EMPLOYEE BENEFIT PLANS
Stock Option Plan
The Company's Stock Option Plan (the Stock Option Plan) is a
nonqualified plan that provides for the grant of options to
management employees. Options are granted at prices equal to the
market value of the common stock on the date the option is
granted.
Options granted become exercisable in installments from six
to seventy-two months after the date of grant. The options are
exercisable over a period not to exceed ten years and one day
from the date of grant. The maximum number of shares of common
stock that may be optioned under the Stock Option Plan is
14,583,334 shares. The Board of Directors has unanimously
approved and recommended that the stockholders consider and
approve an amendment to increase the maximum number of shares
that may be optioned or sold under the Stock Option Plan by
5,416,666 shares. If a quorum exists at the May 11, 2004 Annual
Meeting of Stockholders, and if the votes cast favoring the Plan
Amendment exceed the votes cast opposing the Plan Amendment, the
maximum number of shares that may be optioned or sold under the
Stock Option Plan will be increased to 20,000,000.
At December 31, 2003, 4,150,268 shares were available for
granting additional options. At December 31, 2003, 2002, and
2001, options for 2,183,597, 1,598,594, and 1,036,064 shares with
weighted average exercise prices of $8.45, $8.18, and $8.25 were
exercisable, respectively.
33
The following table summarizes Stock Option Plan activity
for the three years ended December 31, 2003:
Options Outstanding
-----------------------------
Weighted-Average
Shares Exercise Price
-----------------------------
Balance, December 31, 2000 5,983,230 $ 7.82
Options granted 1,997,500 9.78
Options exercised (1,147,213) 7.49
Options canceled (119,441) 7.68
----------
Balance, December 31, 2001 6,714,076 8.46
Options granted 8,333 13.94
Options exercised (448,508) 7.96
Options canceled (136,441) 7.47
----------
Balance, December 31, 2002 6,137,460 8.52
Options granted - -
Options exercised (752,591) 8.19
Options canceled (110,022) 7.84
----------
Balance, December 31, 2003 5,274,847 8.58
==========
The following table summarizes information about stock
options outstanding and exercisable at December 31, 2003:
Options Outstanding Options Exercisable
-----------------------------------------------------------------
Weighted-Average Weighted-Average Weighted-Average
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding Contractual Life Price Exercisable Price
- ------------------------------------------------------------------------------------------------
$ 6.28 to $ 7.95 2,841,241 6.3 years $ 7.56 1,269,600 $ 7.52
$ 8.96 to $ 9.77 2,370,606 7.1 years 9.74 868,083 9.70
$10.43 to $13.94 63,000 5.3 years 11.12 45,914 10.60
--------- ---------
5,274,847 6.6 years 8.58 2,183,597 8.45
========= =========
The Company applies the intrinsic value based method of
Accounting Principles Board (APB) Opinion No. 25 and related
interpretations in accounting for its Stock Option Plan. SFAS No.
123, Accounting for Stock-Based Compensation requires pro forma
disclosure of net income and earnings per share had the estimated
fair value of option grants on their grant date been charged to
salaries, wages and benefits. The fair value of the options
granted during 2002 and 2001 was estimated using the Black-
Scholes option-pricing model with the following assumptions: risk-
free interest rate of 4.0 percent in 2002 and 5.0 percent in
2001; dividend yield of 0.4 percent in 2002 and 2001; expected
life of 7.0 years in 2002 and 8.0 years in 2001; and volatility
of 38 percent in 2002 and 2001. The weighted-average fair value
of options granted during 2002 and 2001 was $6.28 and $4.90 per
share, respectively. The table in Note 1 illustrates the effect
on net income and earnings per share had the fair value of option
grants been charged to salaries, wages, and benefits expense in
the Consolidated Statements of Income.
Employee Stock Purchase Plan
Employees meeting certain eligibility requirements may
participate in the Company's Employee Stock Purchase Plan (the
Purchase Plan). Eligible participants designate the amount of
regular payroll deductions and/or single annual payment, subject
to a yearly maximum amount, that is used to purchase shares of
the Company's common stock on the Over-The-Counter Market subject
to the terms of the Purchase Plan. The Company contributes an
amount equal to 15% of each participant's contributions under the
Purchase Plan. Company contributions for the Purchase Plan (in
34
thousands) were $102, $106, and $108 for 2003, 2002, and 2001,
respectively. Interest accrues on Purchase Plan contributions at
a rate of 5.25%. The broker's commissions and administrative
charges related to purchases of common stock under the Purchase
Plan are paid by the Company.
401(k) Retirement Savings Plan
The Company has an Employees' 401(k) Retirement Savings Plan
(the 401(k) Plan). Employees are eligible to participate in the
401(k) Plan if they have been continuously employed with the
Company or its subsidiaries for six months or more. The Company
matches a portion of the amount each employee contributes to the
401(k) Plan. It is the Company's intention, but not its
obligation, that the Company's total annual contribution for
employees will equal at least 2 1/2 percent of net income
(exclusive of extraordinary items). Salaries, wages and benefits
expense in the accompanying Consolidated Statements of Income
includes Company 401(k) Plan contributions and administrative
expenses (in thousands) of $1,711, $1,599, and $1,574 for 2003,
2002, and 2001, respectively.
(7) COMMITMENTS AND CONTINGENCIES
The Company has committed to approximately $40 million of
net capital expenditures.
The Company is involved in certain claims and pending
litigation arising in the normal course of business. Management
believes the ultimate resolution of these matters will not have a
material effect on the consolidated financial statements of the
Company.
(8) RELATED PARTY TRANSACTIONS
The Company leases land from a trust in which the Company's
principal stockholder is the sole trustee, with annual rent
payments of $1 per year. The Company has made leasehold
improvements to the land totaling approximately $6.1 million for
facilities used for business meetings and customer promotion.
The Company's principal stockholder is the sole trustee of a
trust that owns a one-third interest in an entity that operates a
motel located nearby one of the Company's terminals with which
the Company has committed to rent a guaranteed number of rooms.
During 2003, 2002, and 2001, the Company paid $732,000, $542,000,
and $145,000 for lodging services for its drivers at this motel.
In 2003, the Company purchased 2.6 acres of land located
adjacent to the Company's disaster recovery center in Omaha,
Nebraska for $500,000 from a partnership in which the principal
stockholder of the Company is the general partner.
The brother and sister-in-law of the Company's principal
stockholder own an entity with a fleet of tractors that operates
as an owner-operator for the Company. During 2003, 2002, and
2001, the Company paid $5,888,000, $3,587,000, and $1,901,000 to
this owner-operator for purchased transportation services. This
fleet is compensated using the same owner-operator pay package as
the Company's other third-party owner-operators. The Company also
sells used revenue equipment to this entity. During 2003, 2002,
and 2001, these sales totaled $292,000, $1,328,000, and $206,000,
respectively, and the Company recognized gains of $55,000 and
$6,000 in 2003 and 2002, respectively, and no gains or losses in
2001. The Company had 46 and 45 notes receivable from this
entity related to the revenue equipment sales totaling $1,030,000
and $1,303,000 at December 31, 2003 and 2002, respectively.
The Company believes that these transactions are on terms no
less favorable to the Company than those that could be obtained
from unrelated third parties on an arm's length basis.
35
(9) SEGMENT INFORMATION
The Company has one reportable segment - Truckload
Transportation Services. This segment consists of five operating
fleets that have been aggregated since they have similar economic
characteristics and meet the other aggregation criteria of SFAS
No. 131. The Medium- to Long-Haul Van fleet transports a variety
of consumer, nondurable products and other commodities in
truckload quantities over irregular routes using dry van
trailers. The Dedicated Services fleet provides truckload
services required for a specific company, their plant, or their
distribution center. The Regional Short-Haul fleet provides
comparable truckload van service within five geographic regions.
The Flatbed and Temperature-Controlled fleets provide truckload
services for products with specialized trailers.
The Company generates non-trucking revenues related to
freight brokerage, freight transportation management, third-party
equipment maintenance, and other business activities. None of
these operations meet the quantitative threshold reporting
requirements of SFAS No. 131. As a result, these operations are
grouped in "Non-trucking" in the table below. The Company does
not prepare separate balance sheets by segments and, as a result,
assets are not separately identifiable by segment. The Company
has no significant intersegment sales or expense transactions
that would result in adjustments necessary to eliminate amounts
between the Company's segments.
The following tables summarize the Company's segment
information (in thousands):
Revenues
----------
2003 2002 2001
---------- ---------- ----------
Truckload Transportation Services $1,348,245 $1,244,326 $1,196,518
Non-trucking 109,521 97,130 74,001
---------- ---------- ----------
Total $1,457,766 $1,341,456 $1,270,519
========== ========== ==========
Operating Income
----------------
2003 2002 2001
---------- ---------- ----------
Truckload Transportation Services $ 117,848 $ 98,058 $ 78,807
Non-trucking 1,691 2,392 580
Corporate and other (2,035) (996) (58)
---------- ---------- ----------
Total $ 117,504 $ 99,454 $ 79,329
========== ========== ==========
Information as to the Company's operations by geographic
area is summarized below (in thousands). Operating revenues for
Mexico and Canada include revenues for shipments with an origin
or destination in that country and services provided in that
country.
Operating Revenues
------------------
2003 2002 2001
---------- ---------- ----------
United States $1,349,153 $1,260,957 $1,224,942
Canada 30,886 19,725 5,637
Mexico 77,727 60,774 39,940
---------- ---------- ----------
Total $1,457,766 $1,341,456 $1,270,519
========== ========== ==========
Long-lived Assets
-----------------
2003 2002 2001
---------- ---------- ----------
United States $ 796,627 $ 829,506 $ 715,321
Canada 142 49 53
Mexico 8,918 2,712 109
---------- ---------- ----------
Total $ 805,687 $ 832,267 $ 715,483
========== ========== ==========
36
Substantially all of the Company's revenues are generated
within the United States or from North American shipments with
origins or destinations in the United States. No one customer
accounts for more than 9% of the Company's revenues.
(10) COMMON STOCK SPLITS
On September 2, 2003, the Company announced that its Board
of Directors declared a five-for-four split of the Company's
common stock effected in the form of a 25 percent stock dividend.
The stock dividend was paid on September 30, 2003, to
stockholders of record at the close of business on September 16,
2003. On February 11, 2002, the Company announced that its Board
of Directors declared a four-for-three split of the Company's
common stock effected in the form of a 33 1/3 percent stock
dividend. The stock dividend was paid on March 14, 2002, to
stockholders of record at the close of business on February 25,
2002. No fractional shares of common stock were issued in
connection with the 2003 and 2002 stock splits. Stockholders
entitled to fractional shares received a proportional cash
payment based on the closing price of a share of common stock on
the record dates.
All share and per-share information included in the
accompanying consolidated financial statements for all periods
presented have been adjusted to retroactively reflect the 2003
and 2002 stock splits.
(11) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share amounts)
First Quarter Second Quarter Third Quarter Fourth Quarter
---------------------------------------------------------------
2003:
Operating revenues $ 347,208 $ 362,290 $ 368,034 $ 380,234
Operating income 18,983 31,576 32,728 34,217
Net income 11,839 19,859 20,516 21,513
Basic earnings per share .15 .25 .26 .27
Diluted earnings per share .15 .24 .25 .26
First Quarter Second Quarter Third Quarter Fourth Quarter
---------------------------------------------------------------
2002:
Operating revenues $ 312,575 $ 340,405 $ 336,096 $ 352,380
Operating income 17,285 27,138 27,156 27,875
Net income 10,618 16,575 16,795 17,639
Basic earnings per share .13 .21 .21 .22
Diluted earnings per share .13 .20 .21 .22
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
No reports on Form 8-K have been required to be filed within
the twenty-four months prior to December 31, 2003, involving a
change of accountants or disagreements on accounting and
financial disclosure.
ITEM 9A. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the
Company carried out an evaluation, under the supervision and with
the participation of the Company's management, including the
Company's Chief Executive Officer and Chief Financial Officer, of
the effectiveness of the design and operation of the Company's
disclosure controls and procedures, as defined in Exchange Act
Rule 15d-15(e). Based upon that evaluation, the Company's Chief
Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures are effective in
37
enabling the Company to record, process, summarize and report
information required to be included in the Company's periodic SEC
filings within the required time period. There have been no
changes in the Company's internal controls over financial
reporting that occurred during the Company's most recent fiscal
quarter that have materially affected, or are reasonably likely
to materially affect, the Company's internal control over
financial reporting.
PART III
Certain information required by Part III is omitted from
this report on Form 10-K in that the Company will file a
definitive proxy statement pursuant to Regulation 14A (Proxy
Statement) not later than 120 days after the end of the fiscal
year covered by this report on Form 10-K, and certain information
included therein is incorporated herein by reference. Only those
sections of the Proxy Statement which specifically address the
items set forth herein are incorporated by reference. Such
incorporation does not include the Compensation Committee Report
or the Performance Graph included in the Proxy Statement.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item, with the exception of
the Code of Ethics discussed below, is incorporated herein by
reference to the Company's Proxy Statement.
Code of Ethics
The Company has adopted a code of ethics that applies to its
principal executive officer, principal financial officer, and
principal accounting officer/controller. The code of ethics is
available on the Company's website, www.werner.com. The Company
intends to post on its website any material changes to, or waiver
from, its code of ethics, if any, within five business days of
any such event.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein
by reference to the Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this Item, with the exception of
the equity compensation plan information presented below, is
incorporated herein by reference to the Company's Proxy
Statement.
38
Equity Compensation Plan Information
The following table summarizes, as of December 31, 2003,
information about compensation plans under which equity
securities of the Company are authorized for issuance:
Number of Securities
Remaining Available for
Future Issuance under
Number of Securities to Weighted-Average Equity Compensation
be Issued upon Exercise Exercise Price of Plans (Excluding
of Outstanding Options, Outstanding Options, Securities Reflected in
Warrants and Rights Warrants and Rights Column (a))
Plan Category (a) (b) (c)
----------------- ----------------------- -------------------- -----------------------
Equity compensation
plans approved by
security holders 5,274,847 $8.58 4,150,268
The Company does not have any equity compensation plans that
were not approved by security holders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein
by reference to the Company's Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item is incorporated herein
by reference to the Company's Proxy Statement.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) Financial Statements and Schedules.
(1) Financial Statements: See Part II, Item 8 hereof.
Page
----
Report of Independent Public Accountants 21
Consolidated Statements of Income 22
Consolidated Balance Sheets 23
Consolidated Statements of Cash Flows 24
Consolidated Statements of Stockholders' Equity and
Comprehensive Income 25
Notes to Consolidated Financial Statements 26
(2) Financial Statement Schedules: The consolidated
financial statement schedule set forth under the following
caption is included herein. The page reference is to the
consecutively numbered pages of this report on Form 10-K.
Page
----
Schedule II - Valuation and Qualifying Accounts 42
Schedules not listed above have been omitted because
they are not applicable or are not required or the information
required to be set forth therein is included in the Consolidated
Financial Statements or Notes thereto.
39
(3) Exhibits: The response to this portion of Item 15 is
submitted as a separate section of this report on Form 10-K (see
Exhibit Index on page 43).
(b) Reports on Form 8-K:
A report on Form 8-K, filed October 16, 2003, regarding a
news release on October 15, 2003, announcing the Company's
operating revenues and earnings for the third quarter ended
September 30, 2003.
40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on the 1st day of March, 2004.
WERNER ENTERPRISES, INC.
By: /s/ John J. Steele
-----------------------------
John J. Steele
Vice President, Treasurer and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the registrant in the capacities and on the
dates indicated.
Signature Position Date
--------- -------- ----
/s/ Clarence L. Werner Chairman of the Board, Chief March 1, 2004
- ------------------------- Executive Officer and Director
Clarence L. Werner
/s/ Gary L. Werner Vice Chairman and March 1, 2004
- ------------------------- Director
Gary L. Werner
/s/ Curtis G. Werner Vice Chairman - Corporate March 1, 2004
- ------------------------- Development and Director
Curtis G. Werner
/s/ Gregory L. Werner President, Chief Operating March 1, 2004
- ------------------------- Officer and Director
Gregory L. Werner
/s/ John J. Steele Vice President, Treasurer and March 1, 2004
- ------------------------- Chief Financial Officer
John J. Steele
/s/ James L. Johnson Vice President, Controller March 1, 2004
- ------------------------- and Corporate Secretary
James L. Johnson
/s/ Jeffrey G. Doll Lead Outside Director March 1, 2004
- -------------------------
Jeffrey G. Doll
/s/ Gerald H. Timmerman Director March 1, 2004
- -------------------------
Gerald H. Timmerman
/s/ Michael L. Steinbach Director March 1, 2004
- -------------------------
Michael L. Steinbach
/s/ Kenneth M. Bird Director March 1, 2004
- -------------------------
Kenneth M. Bird
/s/ Patrick J. Jung Director March 1, 2004
- -------------------------
Patrick J. Jung
41
SCHEDULE II
WERNER ENTERPRISES, INC.
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Balance at Charged to Write-Off Balance at
Beginning of Costs and of Doubtful End of
Period Expenses Accounts Period
------------ ---------- ----------- ----------
Year ended December 31, 2003:
Allowance for doubtful accounts $ 4,459 $ 1,914 $ 330 $ 6,043
======= ======= ======= =======
Year ended December 31, 2002:
Allowance for doubtful accounts $ 4,966 $ 1,175 $ 1,682 $ 4,459
======= ======= ======= =======
Year ended December 31, 2001:
Allowance for doubtful accounts $ 3,994 $ 2,057 $ 1,085 $ 4,966
======= ======= ======= =======
See independent auditors' report.
42
EXHIBIT INDEX
Exhibit Page Number or Incorporated
Number Description by Reference to
------- ----------- ---------------------------
3(i)(A) Revised and Amended Articles of Exhibit 3 to Registration
Incorporation Statement on Form S-1,
Registration No. 33-5245
3(i)(B) Articles of Amendment to Exhibit 3(i) to the
Articles of Incorporation Company's report on
Form 10-Q for the
quarter ended May 31, 1994
3(i)(C) Articles of Amendment to Exhibit 3(i) to the
Articles of Incorporation Company's report on Form 10-
K for the year ended
December 31, 1998
3(ii) Revised and Amended Exhibit 3(ii) to the
By-Laws Company's report on Form 10-
K for the year ended
December 31, 1994
10.1 Amended and Restated Exhibit 4.3 to Registration
Stock Option Plan Statement on Form S-8,
Registration No. 333-103467
11 Statement Re: Computation of Filed herewith
Per Share Earnings
21 Subsidiaries of the Filed herewith
Registrant
23.1 Consent of KPMG LLP Filed herewith
31.1 Rule 13a-14(a)/15d-14(a) Filed herewith
Certification
31.2 Rule 13a-14(a)/15d-14(a) Filed herewith
Certification
32.1 Section 1350 Certification Filed herewith
32.2 Section 1350 Certification Filed herewith
43