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, 2004
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, 2004, the last
business day of the Registrant's most recently completed second fiscal
quarter, was approximately $1.074 billion (based on the closing sale price
of the Registrant's Common Stock on that date as reported by Nasdaq).
As of February 10, 2005, 79,396,187 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 10, 2005, 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 7
Item 4. Submission of Matters to a Vote of Security Holders 8
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities 8
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 26
Item 8. Financial Statements and Supplementary Data 27
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 45
Item 9A. Controls and Procedures 45
Item 9B. Other Information 47
PART III
Item 10. Directors and Executive Officers of the Registrant 47
Item 11. Executive Compensation 47
Item 12. Security Ownership of Certain Beneficial Owners and Management 47
Item 13. Certain Relationships and Related Transactions 48
Item 14. Principal Accountant Fees and Services 48
PART IV
Item 15. Exhibits and Financial Statement Schedules 48
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 2004 with a fleet of 8,600 trucks, of which 7,675 were
owned by the Company and 925 were owned and operated by owner-operators
(independent contractors).
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 and
throughout changes in the economy. The Company has two reportable segments-
Truckload Transportation Services and Value Added Services. Financial
information regarding these segments 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 through 2004, the Company expanded its brokerage and intermodal
service offerings by adding senior management and developing new computer
systems. Trucking revenues accounted for 89% of total revenues, and non-
trucking and other operating revenues, primarily brokerage revenues,
accounted for 11% of total revenues in 2004. Werner's Value Added Services
("VAS") division manages the transportation and logistics requirements for
individual customers. This includes truck brokerage, transportation
routing, transportation mode selection, intermodal, transloading, and other
services. During 2005, VAS is expanding its service offerings to include
multimodal, which is a blend of truck and rail intermodal 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, VAS's
operating margins are generally lower and returns on assets are generally
higher. Revenues generated by services accounting for more than 10% of
consolidated revenues, consisting of Truckload Transportation Services and
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Value Added Services, for the last three years can be found under Item 7 of
this Form 10-K.
Werner has a diversified freight base and is not dependent on a small
group of customers or a specific industry for a majority of its freight.
During 2004, the Company's largest 5, 10, 25, and 50 customers comprised
24%, 37%, 55%, and 68% of the Company's revenues, respectively. The
Company's largest customer, Dollar General, accounted for 9% of the
Company's revenues in 2004. No other customer exceeded 5% of revenues in
2004. By industry group, the Company's top 50 customers consist of 47%
retail and consumer products, 24% manufacturing/industrial, 22% grocery
products, and 7% logistics and other. Many of our customer contracts are
cancelable on 30 days notice, which is standard in the trucking industry.
Virtually all of Werner's company and owner-operator tractors are
equipped with satellite communications devices manufactured by Qualcomm
that enable the Company and drivers to conduct two-way communication using
standardized and freeform messages. This satellite technology, installed
in trucks beginning in 1992, also enables the Company to plan and monitor
the progress of shipments. The Company obtains specific data on the
location of all trucks in the fleet at least every hour of every day. Using
the real-time data obtained from the satellite devices, Werner has
developed advanced application systems to improve customer service and
driver service. Examples of such application systems include (1) the
Company's proprietary Paperless Log System to electronically preplan the
assignment of shipments to drivers based on real-time available driving
hours and to automatically keep track of truck movement and drivers' hours
of service, (2) software which preplans shipments that can be swapped by
drivers enroute to meet driver home time needs, without compromising on-
time delivery schedules, (3) automated "possible late load" tracking which
informs the operations department of trucks that may be operating behind
schedule, thereby allowing the Company to take preventive measures to avoid
a late delivery, and (4) automated engine diagnostics to continually
monitor mechanical fault tolerances. In June 1998, Werner became the
first, and only, trucking company in the United States to receive
authorization from the DOT, under a pilot program, to use a global
positioning system based paperless log system in place of the paper
logbooks traditionally used by truck drivers to track their daily work
activities. On September 21, 2004, the DOT's Federal Motor Carrier Safety
Administration ("FMCSA") agency approved the Company's exemption for its
paperless log system that moves this exemption from the FMCSA-approved
pilot program to permanent status. The exemption is to be renewed every
two years.
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, 2004, the Company employed 11,051 drivers, 840
mechanics and maintenance personnel, 1,620 office personnel for the
trucking operation, and 211 personnel for the VAS and other non-trucking
operations. The Company also had 925 contracts with owner-operators for
services that provide both a tractor and a qualified driver or drivers.
None of the Company's U.S. or Canadian employees are represented by a
collective bargaining unit, and the Company considers relations with 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
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increases with the drivers' length of service. Additional compensation may
be earned through a mileage bonus, an annual achievement bonus, and for
extra work associated with their job (loading and unloading, extra stops,
and shorter mileage trips, for example).
At times, there are shortages of drivers in the trucking industry.
The number of qualified drivers in the industry has decreased because of
changes in the demographic composition of the workforce, alternative jobs
to truck driving which become available in an improving economy, and
individual drivers' desire to be home more often. In recent months, the
market for recruiting experienced drivers has tightened. The Company
anticipates that the competition for qualified drivers will continue to be
high and cannot predict whether it will experience shortages in the future.
If such a shortage were to occur and 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 has
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, 2004, Werner operated 7,675 company tractors and
had contracts for 925 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 DOT. These tractors are then
periodically inspected, similar to company tractors, to monitor continued
compliance. The vehicle speed of company-owned trucks is regulated to a
maximum of 65 miles per hour to improve safety and fuel efficiency.
The Company operated 23,540 trailers at December 31, 2004: 21,925 dry
vans; 622 flatbeds; 965 temperature-controlled; and 28 other specialized
trailers. Most of the Company's trailers are manufactured by Wabash
National Corporation. As of December 31, 2004, 98% of the Company's fleet
of dry van trailers consisted of 53-foot trailers, and 98% consisted of
aluminum plate or composite (duraplate) trailers. Other trailer lengths
such as 48-foot and 57-foot are also provided by the Company to meet the
specialized needs of certain customers.
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 cost and
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. As of
December 31, 2004, approximately 47% of the company-owned truck fleet
consisted of trucks with the post-October 2002 engines. The Company has
experienced an approximate 5% reduction in fuel efficiency to date, and
increased depreciation expense due to the higher cost of the new engines.
The average age of the Company's truck fleet at December 31, 2004 is 1.6
years. A new set of more stringent emissions standards mandated by the EPA
will become effective for newly manufactured trucks beginning in January
2007. The Company intends to gradually reduce the average age of its truck
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fleet in advance of the new standards. The Company expects that the
engines produced under the 2007 standards will be less fuel-efficient and
have a higher cost than the current engines.
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 7 of the Company's
terminals and 4 dedicated locations.
Shortages of fuel, increases in fuel prices, or rationing of petroleum
products can have a materially adverse effect on the operations and
profitability of the Company. The Company's customer fuel surcharge
reimbursement programs have historically enabled the Company to recover
from its customers a significant portion of the higher fuel prices compared
to normalized average fuel prices. These fuel surcharges, which
automatically adjust depending on the Department of Energy ("DOE") weekly
retail on-highway diesel fuel prices, enable the Company to recoup much of
the higher cost of fuel when prices increase except for miles not billable
to customers, out-of-route miles, and truck engine idling. During 2004,
the Company's fuel expense and reimbursements to owner-operator drivers for
the higher cost of fuel resulted in an additional cost of $63.5 million,
while the Company collected an additional $52.6 million in fuel surcharge
revenues to offset the fuel cost increase. 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, 2004, 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
matters as weight and dimensions of equipment are also subject to federal,
state, and international regulations.
The FMCSA issued a final rule on April 24, 2003 that made several
changes to the regulations that govern truck drivers' hours of service
("HOS"). These new federal regulations became effective on January 4,
2004. On July 16, 2004, the U.S. Circuit Court of Appeals for the District
of Columbia rejected these new hours of service rules for truck drivers
that had been in place since January 2004 because it said the FMCSA had
failed to address the impact of the rules on the health of drivers as
required by Congress. In addition, the judge's ruling noted other areas of
concern including the increase in driving hours from 10 hours to 11 hours,
the exception that allows drivers in trucks with sleeper berths to split
their required rest periods, the new rule allowing drivers to reset their
70-hour clock to 0 hours after 34 consecutive hours off duty, and the
decision by the FMCSA not to require the use of electronic onboard
recorders to monitor driver compliance. On September 30, 2004, the
extension of the Federal highway bill signed into law by the President
extended the current hours of service rules for one year or whenever the
FMCSA develops a new set of regulations, whichever comes first. On January
24, 2005, the FMCSA re-proposed its April 2003 HOS rules, adding references
to how the rules would affect driver health, but making no changes to the
regulations. The FMCSA is seeking public comments by March 10, 2005 on
what changes to the rule, if any, are necessary to respond to the concerns
raised by the court, and to provide data or studies that would support
changes to, or continued use of, the 2003 rule. The Company cannot predict
what rule changes, if any, will result from the court's ruling, nor the
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ultimate impact of any upcoming changes to the hours of service rules. Any
changes could have an adverse effect on the operations and profitability of
the Company.
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") may alter the competitive environment for
shipping into and out of Mexico. It is not possible at this time to
predict when and to what extent that impact 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 9 "Segment Information" in the Notes to
Consolidated Financial Statements under Item 8 of this Form 10-K) and is
continuing to prepare for the various scenarios that may finally result.
The Company believes it is one of the five largest truckload carriers in
terms of the volume of freight shipments to and from the United States and
Mexico.
Competition
The trucking industry is highly competitive and includes thousands of
trucking companies. It is estimated that the annual revenue of domestic
trucking amounts to approximately $600 billion per year. The Company has a
small but growing share (estimated at approximately 1%) of the markets
targeted by the Company. The Company competes primarily with other
truckload carriers. 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. An extremely challenging driver recruiting
market is causing most large truckload carriers to limit their fleet
additions. There are continuing cost issues and concerns with the new post-
October 2002 diesel engines. Trucking company failures in the last five
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. Many truckload carriers,
including Werner, slowed their fleet growth in the last four 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
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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 Section 13(a) or 15(d) of the Exchange Act as soon as
reasonably practicable after it electronically files or furnishes such
materials to the SEC. Information on the Company's website is not
incorporated by reference into this annual report on Form 10-K.
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 Financial Condition and
Results of Operations."
ITEM 2. PROPERTIES
Werner's headquarters is located nearby Interstate 80 just west of
Omaha, Nebraska, on approximately 195 acres, 111 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,
consisting of office and/or maintenance facilities. The Company recently
added equipment maintenance body shops to its Dallas and Springfield
terminals and is currently constructing a body shop at its Atlanta
terminal. The Company's terminal locations are 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 16 locations in its Fleet Truck Sales network.
Fleet Truck Sales, a wholly owned subsidiary, is one of the largest
domestic class 8 truck sales entities in the U.S. and sells the Company's
used trucks and trailers.
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ITEM 3. LEGAL PROCEEDINGS
The Company is a party to routine litigation incidental to its
business, primarily involving claims for personal injury, property damage,
and workers' compensation incurred in the transportation of freight. The
Company has maintained a self-insurance program with a qualified department
of Risk Management professionals since 1988. These employees manage the
Company's property damage, cargo, liability, and workers' compensation
claims. The Company's self-insurance reserves are reviewed by an actuary
every six months.
The Company 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. For the policy year beginning
August 1, 2004, the Company increased its self-insured retention ("SIR")
amount to $2.0 million per occurrence. The Company is also responsible for
varying annual aggregate amounts of liability for claims in excess of the
self-insured retention. The following table reflects the self-insured
retention levels and aggregate amounts of liability for personal injury and
property damage claims since August 1, 2001:
Primary Coverage
Coverage Period Primary Coverage SIR/deductible
- ------------------------------ ---------------- ------------------
August 1, 2001 - July 31, 2002 $3.0 million $500,000 (1)
August 1, 2002 - July 31, 2003 $3.0 million $500,000 (2)
August 1, 2003 - July 31, 2004 $3.0 million $500,000 (3)
August 1, 2004 - July 31, 2005 $5.0 million $2.0 million (4)
(1) Subject to an additional $1.5 million self-insured aggregate amount in
the $0.5 to $1.0 million layer, a $1.0 million aggregate in the $1.0 to
$2.0 million layer, no aggregate (i.e., fully insured) in the $2.0 to $3.0
million layer, and a $2.0 million aggregate in the $3.0 to $4.0 million
layer.
(2) Subject to an additional $1.5 million aggregate in the $0.5 to $1.0
million layer, a $1.0 million aggregate in the $1.0 to $2.0 million layer,
no aggregate (i.e., fully insured) in the $2.0 to $3.0 million layer, and
self-insured in the $3.0 to $5.0 million layer.
(3) Subject to an additional $1.5 million aggregate in the $0.5 to $1.0
million layer, a $1.0 million aggregate in the $1.0 to $2.0 million layer,
no aggregate (i.e., fully insured) in the $2.0 to $3.0 million layer, a
$6.0 million aggregate in the $3.0 to $5.0 million layer, and a $5.0
million aggregate in the $5.0 to $10.0 million layer.
(4) Subject to an additional $3.0 million aggregate in the $2.0 to $3.0
million layer, no aggregate (i.e., fully insured) in the $3.0 to $5.0
million layer, and a $5.0 million aggregate in the $5.0 to $10.0 million
layer.
The Company's primary insurance covers the range of liability where
the Company expects most claims to occur. Liability claims substantially
in excess of coverage amounts listed in the table above, if they occur, are
covered under premium-based policies with reputable insurance companies to
coverage levels that management considers adequate. The Company is also
responsible for administrative expenses for each occurrence involving
personal injury or property damage. See also Note 1 "Insurance and Claims
Accruals" and Note 7 "Commitments and Contingencies" in the Notes to
Consolidated Financial Statements under Item 8 of this Form 10-K.
On July 29, 2004 and October 25, 2004, the Company was served with
complaints naming it and others as defendants in two lawsuits stemming from
a multi-vehicle accident that occurred in February 2004. The lawsuits were
filed in Superior Court of the State of California, County of San
Bernardino, Barstow District and seek an unspecified amount of compensatory
damages. The Company brokered a shipment to an independent carrier with a
satisfactory safety rating which was then involved in the accident,
resulting in four fatalities and multiple personal injuries. It is
possible that additional lawsuits may be filed by other parties involved in
the accident. The Company's Broker-Carrier Agreement with the independent
carrier provides for the carrier to indemnify and defend the Company for
any loss arising out of or in connection with the transportation of
property under the contract. The Company also has a certificate of
liability insurance from the carrier indicating that it has insurance
coverage of up to $2.0 million per occurrence. For the policy year ended
July 31, 2004, the Company's liability insurance policies for coverage
ranging up to $10.0 million per occurrence have various annual aggregate
levels of liability for all accidents totaling $9.0 million that is the
responsibility of the Company (see insurance aggregates in table above).
Amounts in excess of $10.0 million are covered under premium-based policies
to coverage levels that management considers adequate. As such, the
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potential exposure to the Company ranges from $0 to $9.0 million. The
lawsuits are currently in the discovery phase. The Company plans to
vigorously defend the suits, and the amount of any possible loss to the
Company cannot currently be estimated. However, the Company believes an
unfavorable outcome in these lawsuits, if it were to occur, would not have
a material impact on the financial position, results of operations, and
cash flows of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 2004, no matters were submitted to a vote
of security holders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Price Range of Common Stock
The Company's common stock trades on the Nasdaq 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 bid information per
share of the Company's common stock quoted on the Nasdaq National Market
and the Company's dividends declared per common share from January 1, 2003,
through December 31, 2004, after giving retroactive effect for the
September 2003 stock split discussed below.
Dividends
Declared Per
High Low Common Share
------ ------ ------------
2004
Quarter ended:
March 31 $20.00 $17.65 $.025
June 30 21.11 17.76 .035
September 30 21.19 17.55 .035
December 31 23.24 18.68 .035
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
As of February 10, 2005, the Company's common stock was held by 227
stockholders of record and approximately 7,900 stockholders through nominee
or street name accounts with brokers. The high and low bid prices per
share of the Company's common stock in the Nasdaq National Market as of
February 10, 2005 were $20.89 and $20.06, respectively.
8
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 currently intends to continue payment of dividends on a
quarterly basis and does not currently anticipate any restrictions on its
future ability to pay such dividends. However, no assurance can be given
that dividends will be paid in the future since they are dependent on
earnings, the financial condition of the Company, and other factors.
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 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".
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
On December 29, 1997, the Company announced that its Board of
Directors had authorized the Company to repurchase up to 4,166,666 shares
of its common stock. 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 for a total of 8,132,504 shares. As
of December 31, 2004, the Company had purchased 4,335,704 shares pursuant
to this authorization and had 3,796,800 shares remaining available for
repurchase. The Company may purchase shares from time to time depending on
market, economic, and other factors. The authorization will continue until
withdrawn by the Board of Directors. The Company did not repurchase any
shares of common stock during the fourth quarter of 2004.
9
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)
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Operating revenues $1,678,043 $1,457,766 $1,341,456 $1,270,519 $1,214,628
Net income 87,310 73,727 61,627 47,744 48,023
Diluted earnings per share* 1.08 0.90 0.76 0.60 0.61
Cash dividends declared per share* .130 .090 .064 .060 .060
Return on average stockholders'
equity (1) 11.9% 10.9% 10.0% 8.5% 9.3%
Return on average total assets (2) 7.5% 6.7% 6.1% 5.1% 5.3%
Operating ratio (consolidated) (3) 91.6% 91.9% 92.6% 93.8% 93.2%
Book value per share* (4) 9.76 8.90 8.12 7.42 6.84
Total assets 1,225,775 1,121,527 1,062,878 964,014 927,207
Total debt (current and long-term) - - 20,000 50,000 105,000
Stockholders' equity 773,169 709,111 647,643 590,049 536,084
*After giving retroactive effect for the September 2003 five-for-four stock
split and the March 2002 four-for-three stock split (all years presented).
(1) Net income expressed as a percentage of average stockholders' equity.
Return on equity is a measure of a corporation's profitability relative to
recorded shareholder investment.
(2) Net income expressed as a percentage of average total assets. Return on
assets is a measure of a corporation's profitability relative to recorded
assets.
(3) Operating expenses expressed as a percentage of operating revenues.
Operating ratio is a common measure in the trucking industry used to
evaluate profitability.
(4) Stockholders' equity divided by common shares outstanding as of the end
of the period. Book value per share indicates the dollar value remaining
for common shareholders if all assets were liquidated and all debts were
paid at the recorded amounts.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report contains historical information, as well as forward-
looking statements that are based on information currently available to the
Company's management. The forward-looking statements 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. These risks
include, but are not limited to, those discussed in the section of this
Item entitled "Forward-Looking Statements and Risk Factors". Caution
should be taken not to place undue reliance on forward-looking statements
made herein, since the statements speak only as of the date they are made.
The Company undertakes no obligation to publicly release any revisions to
any forward-looking statements contained herein to reflect events or
circumstances after the date of this report or to reflect the occurrence of
unanticipated events.
Overview:
The Company operates in the truckload sector of the trucking industry,
with a focus on transporting consumer nondurable products that ship more
consistently throughout the year. The Company's success depends on its
ability to efficiently manage its resources in the delivery of truckload
transportation and logistics services to its customers. Resource
requirements vary with customer demand, which may be subject to seasonal or
general economic conditions. The Company's ability to adapt to changes in
customer transportation requirements is a key element in efficiently
deploying resources and in making capital investments in tractors and
10
trailers. Although the Company's business volume is not highly
concentrated, the Company may also be affected by the financial failure of
its customers or a loss of a customer's business from time-to-time.
Operating revenues consist of trucking revenues generated by the five
operating fleets in the Truckload Transportation Services segment
(medium/long-haul van, dedicated, regional short-haul, flatbed, and
temperature-controlled) and non-trucking revenues generated primarily by
the Company's Value Added Services segment. The Company's Truckload
Transportation Services segment also includes a small amount of non-
trucking revenues for the portion of shipments delivered to or from Mexico
where it utilizes a third-party carrier, and for a few of its dedicated
accounts where the services of third-party carriers are used to meet
customer capacity requirements. Non-trucking revenues reported in the
operating statistics table include those revenues generated by the VAS
segment, as well as the non-trucking revenues generated by the Truckload
Transportation Services segment. Trucking revenues accounted for 89% of
total operating revenues in 2004, and non-trucking and other operating
revenues accounted for 11%.
Trucking services typically generate revenue on a per-mile basis.
Other sources of trucking revenue include fuel surcharges and accessorial
revenue such as stop charges, loading/unloading charges, and equipment
detention charges. Because fuel surcharge revenues fluctuate in response
to changes in the cost of fuel, these revenues are identified separately
within the operating statistics table and are excluded from the statistics
to provide a more meaningful comparison between periods. Non-trucking
revenues generated by a fleet whose operations are part of the Truckload
Transportation Services segment are included in non-trucking revenue in the
operating statistics table so that the revenue statistics in the table are
calculated using only the revenues generated by the Company's trucks. The
key statistics used to evaluate trucking revenues, excluding fuel
surcharges, are revenue per truck per week, the per-mile rates charged to
customers, the average monthly miles generated per tractor, the percentage
of empty miles, the average trip length, and the number of tractors in
service. General economic conditions, seasonal freight patterns in the
trucking industry, and industry capacity are key factors that impact these
statistics.
The Company's most significant resource requirements are 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; however, there is no assurance that current
recovery levels will continue in future periods. For example, during 2004
the Company's fuel expense and reimbursements to owner-operator drivers for
the higher cost of fuel resulted in an additional cost of $63.5 million.
During 2004, the Company collected an additional $52.6 million in fuel
surcharge revenues from its customers to offset the fuel cost increase.
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-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.
A common industry measure used to evaluate the profitability of the
Company and its trucking operating fleets is the operating ratio (operating
expenses expressed as a percentage of operating revenues). The most
significant variable expenses that impact the trucking operation are driver
salaries and benefits, payments to owner-operators (included in rent and
purchased transportation expense), fuel, fuel taxes (included in taxes and
licenses expense), supplies and maintenance, and insurance and claims.
These expenses generally vary based on the number of miles generated. As
such, the Company also evaluates these costs on a per-mile basis to adjust
for the impact on the percentage of total operating revenues caused by
changes in fuel surcharge revenues, per-mile rates charged to customers,
and non-trucking revenues. As discussed further in the comparison of
operating results for 2004 to 2003, several industry-wide issues, including
uncertainty regarding possible changes to the hours of service regulations,
a challenging driver recruiting market, and rising fuel prices, could cause
costs to increase in future periods. The Company's main fixed costs
11
include depreciation expense for tractors and trailers and equipment
licensing fees (included in taxes and licenses expense). Depreciation
expense has been affected by the new engine emission standards that became
effective in October 2002 for all newly purchased trucks, which have
increased truck purchase costs. The trucking operations require substantial
cash expenditures for tractors and trailers. The Company has maintained a
three-year replacement cycle for company-owned tractors. These purchases
are funded by net cash from operations, as the Company repaid its last
remaining debt in December 2003.
Non-trucking services provided by the Company, primarily through its
VAS division, include freight brokerage, intermodal, freight transportation
management, and other services. During 2005, VAS is expanding its service
offerings to include multimodal, which is a blend of truck and rail
intermodal services. Unlike the Company's trucking operations, the non-
trucking operations are less asset-intensive and are instead dependent upon
information systems, qualified employees, and the services of other third-
party providers. The most significant expense item related to these non-
trucking services is the cost of transportation paid by the Company to
third-party providers, which is recorded as rent and purchased
transportation expense. Other expenses include salaries, wages and
benefits and computer hardware and software depreciation. The Company
evaluates the non-trucking operations by reviewing the gross margin
percentage (revenues less rent and purchased transportation expense
expressed as a percentage of revenues) and the operating margin. The
operating margins for the non-trucking business are generally lower than
those of the trucking operations, but the returns on assets are
substantially higher.
Results of Operations
The following table sets forth certain industry data regarding the
freight revenues and operations of the Company for the periods indicated.
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Trucking revenues, net of
fuel surcharge (1) $1,378,705 $1,286,674 $1,215,266 $1,150,361 $1,097,214
Trucking fuel surcharge
revenues (1) 114,135 61,571 29,060 46,157 51,437
Non-trucking revenues,
including VAS (1) 175,490 100,916 89,450 66,739 60,047
Other operating revenues (1) 9,713 8,605 7,680 7,262 5,930
---------- ---------- ---------- ---------- ----------
Operating revenues (1) $1,678,043 $1,457,766 $1,341,456 $1,270,519 $1,214,628
========== ========== ========== ========== ==========
Operating ratio
(consolidated) (2) 91.6% 91.9% 92.6% 93.8% 93.2%
Average revenues per tractor
per week (3) $ 3,136 $ 2,988 $ 2,932 $ 2,874 $ 2,889
Average annual miles per
tractor 121,644 121,716 123,480 123,660 125,568
Average annual trips per
tractor 185 173 166 166 168
Average total miles per trip 657 703 746 744 746
Average loaded miles per trip 583 627 674 670 672
Total miles (loaded and
empty) (1) 1,028,458 1,008,024 984,305 952,003 916,971
Average revenues per total
mile (3) $ 1.341 $ 1.277 $ 1.235 $ 1.208 $ 1.197
Average revenues per loaded
mile (3) $ 1.511 $ 1.431 $ 1.366 $ 1.342 $ 1.328
Average percentage of empty
miles 11.3% 10.8% 9.6% 10.0% 9.9%
Average tractors in service 8,455 8,282 7,971 7,698 7,303
Total tractors (at year end):
Company 7,675 7,430 7,180 6,640 6,300
Owner-operator 925 920 1,020 1,135 1,175
---------- ---------- ---------- ---------- ----------
Total tractors 8,600 8,350 8,200 7,775 7,475
========== ========== ========== ========== ==========
Total trailers (at year end) 23,540 22,800 20,880 19,775 19,770
========== ========== ========== ========== ==========
(1) Amounts in thousands
(2) Operating expenses expressed as a percentage of operating revenues.
Operating ratio is a common measure in the trucking industry used to
evaluate profitability.
(3) Net of fuel surcharge revenues
12
The following table sets forth the revenues, operating expenses, and
operating income for the Truckload Transportation Services segment.
2004 2003 2002
----------------- ----------------- -----------------
Truckload Transportation Services
(amounts in 000's) $ % $ % $ %
- --------------------------------- ----------------- ----------------- -----------------
Revenues $1,506,937 100.0 $1,358,428 100.0 $1,254,728 100.0
Operating expenses 1,371,109 91.0 1,240,282 91.3 1,155,890 92.1
---------- ---------- ----------
Operating income $ 135,828 9.0 $ 118,146 8.7 $ 98,838 7.9
========== ========== ==========
Higher fuel prices and higher fuel surcharge collections have the
effect of increasing the Company's consolidated operating ratio and the
Truckload Transportation Services segment's operating ratio. The following
table calculates the Truckload Transportation Services segment's operating
ratio using total operating expenses, net of fuel surcharge revenues, as a
percentage of revenues, excluding fuel surcharges. Eliminating this
sometimes volatile source of revenue provides a more consistent basis for
comparing the results of operations from period to period.
2004 2003 2002
----------------- ----------------- -----------------
Truckload Transportation Services
(amounts in 000's) $ % $ % $ %
- --------------------------------- ----------------- ----------------- -----------------
Revenues $1,506,937 $1,358,428 $1,254,728
Less: trucking fuel surcharge
revenues 114,135 61,571 29,060
---------- ---------- ----------
Revenues, net of fuel surcharge 1,392,802 100.0 1,296,857 100.0 1,225,668 100.0
---------- ---------- ----------
Operating expenses 1,371,109 1,240,282 1,155,890
Less: trucking fuel surcharge
revenues 114,135 61,571 29,060
---------- ---------- ----------
Operating expenses, net of fuel
surcharge 1,256,974 90.2 1,178,711 90.9 1,126,830 91.9
---------- ---------- ----------
Operating income $ 135,828 9.8 $ 118,146 9.1 $ 98,838 8.1
========== ========== ==========
The following table sets forth the non-trucking revenues, operating
expenses, and operating income for the VAS segment. Other operating
expenses for the VAS segment primarily consist of salaries, wages and
benefits expense. VAS also incurs smaller expense amounts in the supplies
and maintenance, depreciation, rent and purchased transportation (excluding
third-party transportation costs), communications and utilities, and other
operating expense categories.
2004 2003 2002
----------------- ----------------- -----------------
Value Added Services (amounts
in 000's) $ % $ % $ %
- --------------------------------- ----------------- ----------------- -----------------
Revenues $ 161,111 100.0 $ 89,742 100.0 $ 80,012 100.0
Rent and purchased
transportation expense 145,474 90.3 83,387 92.9 74,635 93.3
---------- ---------- ----------
Gross margin 15,637 9.7 6,355 7.1 5,377 6.7
Other operating expenses 10,006 6.2 5,901 6.6 4,046 5.0
---------- ---------- ----------
Operating income $ 5,631 3.5 $ 454 0.5 $ 1,331 1.7
========== ========== ==========
2004 Compared to 2003
- ---------------------
Operating Revenues
Operating revenues increased 15.1% in 2004 compared to 2003.
Excluding fuel surcharge revenues, trucking revenues increased 7.2% due
primarily to a 5.0% increase in revenue per total mile, excluding fuel
surcharges, and a 2.1% increase in the average number of tractors in
service. Revenue per total mile, excluding fuel surcharges, increased due
to customer rate increases, an improvement in freight selection, and a 7.0%
decrease in the average loaded trip length due to growth in the Company's
dedicated fleet. Part of the growth in the dedicated fleet was offset by a
decrease 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. The
growth in dedicated business had a corresponding effect on these same
operating statistics, as reported above, for the entire Company. During
13
2004, the truckload freight environment continued to strengthen due to
ongoing truck capacity constraints and a steadily improving economy.
Beginning in August, the Company's sales and marketing team met with
customers to negotiate annual rate increases to recoup the significant cost
increases in fuel, driver pay, equipment, and insurance and to improve
margins. Much of the Company's non-dedicated contractual business renewed
in the latter part of third quarter and fourth quarter. As a result of
these efforts, revenue per total mile, net of fuel surcharges, rose seven
cents a mile, or 5.3%, sequentially from second quarter 2004 to fourth
quarter 2004.
Fuel surcharge revenues, which represent collections from customers
for the higher cost of fuel, increased to $114.1 million in 2004 from $61.6
million in 2003 due to higher average fuel prices in 2004. To lessen the
effect of fluctuating fuel prices on the Company's margins, the Company
collects fuel surcharge revenues from its customers. These surcharge
programs, which automatically adjust depending on the DOE weekly retail on-
highway diesel prices, continued in effect throughout 2004. The Company's
fuel surcharge program has historically enabled the Company to recover a
significant portion of the fuel price increases. Typical programs specify
a base price per gallon when surcharges can begin to be billed. Above this
price, the Company bills a surcharge rate per mile when the price per
gallon falls in a bracketed range of fuel prices. When fuel prices
increase, fuel surcharges recoup a lower percentage of the incrementally
higher costs due to the impact of inadequate recovery for empty miles not
billable to customers, out-of-route miles, truck idle time, and "bracket
creep". "Bracket creep" occurs when fuel prices approach the upper limit
of the bracketed range, but a higher surcharge rate per mile cannot be
billed until the fuel price per gallon reaches the next bracket. Also, the
DOE survey price used for surcharge contracts changes once a week while
fuel prices change more frequently. Because collections of fuel surcharges
typically trail fuel price changes, rapid fuel price increases cause a
temporarily unfavorable effect of fuel prices increasing more rapidly than
fuel surcharge revenues. This effect typically reverses when fuel prices
fall.
VAS revenues increased to $161.1 million in 2004 from $89.7 million in
2003, or 79.5%, and gross margin increased 146.1% for the same period.
Most of this revenue growth came from the Company's brokerage group within
VAS. VAS revenues consist primarily of freight brokerage, intermodal,
freight transportation management, and other services. During 2004, the
expansion of the Company's VAS services assisted customers by providing
needed capacity while driving cost out of their freight network. The
Company expects to continue to capitalize on the sophisticated service,
management, and technology advantages of its logistics solution in an
improving freight market. During 2005, VAS is expanding its service
offerings to include multimodal. Multimodal provides for the movement of
freight using a blending of truck and rail intermodal service solutions.
Operating Expenses
The Company's operating ratio was 91.6% in 2004 versus 91.9% in 2003.
Because the Company's VAS business operates with a lower operating margin
and a higher return on assets than the trucking business, the substantial
growth in VAS business in 2004 compared to 2003 affected the Company's
overall operating ratio. As explained on page 13, the significant increase
in fuel expense and related fuel surcharge revenues also affected the
operating ratio. The tables on page 13 show the operating ratios and
operating margins for the Company's two reportable segments, Truckload
Transportation Services and Value Added Services.
The following table sets forth the cost per total mile of operating
expense items for the Truckload Transportation Services segment for the
periods indicated. The Company evaluates operating costs for this segment
on a per-mile basis to adjust for the impact on the percentage of total
operating revenues caused by changes in fuel surcharge revenues and rate
per mile increases, which provides a more consistent basis for comparing
the results of operations from period to period.
14
Increase Increase
(Decrease) (Decrease)
2004 2003 per Mile %
------------------------------------
Salaries, wages and benefits $.519 $.502 $.017 3.4
Fuel .211 .158 .053 33.5
Supplies and maintenance .130 .117 .013 11.1
Taxes and licenses .106 .103 .003 2.9
Insurance and claims .075 .072 .003 4.2
Depreciation .138 .132 .006 4.5
Rent and purchased transportation .140 .131 .009 6.9
Communications and utilities .018 .016 .002 12.5
Other (.003) (.001) (.002) (200.0)
Owner-operator costs are included in rent and purchased transportation
expense. Owner-operator miles as a percentage of total miles were 12.7% in
2004 compared to 12.6% in 2003. 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. Because the change in owner-operator miles as a percentage of total
miles was only minimal, there was essentially no shift in costs to the rent
and purchased transportation category from other expense categories. Over
the past year, attracting and retaining owner-operator drivers continued to
be difficult due to the challenging operating conditions.
Salaries, wages and benefits for non-drivers increased in 2004
compared to 2003 to support the growth in the VAS segment. The increase in
salaries, wages and benefits per mile of 1.7 cents for the Truckload
Transportation Services segment is primarily the result of higher driver
pay per mile. On August 1, 2004, the Company's previously announced two
cent per mile pay raise became effective for company solo drivers in its
medium-to-long-haul van division, representing approximately 25% of total
drivers. The Company recovered a substantial portion of this pay raise
through its customer rate increase negotiations. As a result of the new
hours of service regulations effective at the beginning of 2004, the
Company increased driver pay in the non-dedicated fleets for multiple stop
shipments. Additional revenue from increased rates per stop offset most of
the increased driver pay. The increase in dedicated business as a
percentage of total trucking business also contributed to the increase in
driver pay per mile as dedicated drivers are usually compensated at a
higher rate per mile due to the lower average miles per truck. The
Company's dedicated fleets also typically have higher amounts of
loading/unloading pay and minimum pay.
In recent months, the market for recruiting experienced drivers has
tightened. The Company experienced initial improvement in driver turnover
after announcing the two-cent per mile pay raise that became effective in
August 2004; however, that improvement has been difficult to sustain in
recent months. Alternative jobs with an improving economy, weak population
demographics, and competitor pay raises are expected to keep the driver
market challenging. The Company is expanding its student-driver training
program to attract more drivers to the Company and the industry. The
Company is also offering an increasing percentage of driving jobs with more
frequent home time in its dedicated, regional, and network-optimization
fleets.
The Company instituted an optional per diem reimbursement program for
eligible company drivers (approximately half of total non-student company
drivers) beginning in April 2004. This program increases a company
driver's net pay per mile, after taxes. As a result, driver pay per mile
was slightly lower before considering the factors above that increased
driver pay per mile, and the Company's effective income tax rate was higher
in 2004 compared to 2003. The Company expects the cost of the per diem
program to be neutral, because the combined driver pay rate per mile and
per diem reimbursement under the per diem program is about one cent per
mile lower than mileage pay without per diem reimbursement, which offsets
the Company's increased income taxes caused by the nondeductible portion of
the per diem. The per diem program increases driver satisfaction through
higher net pay per mile, after taxes. The Company anticipates that the
competition for qualified drivers will continue to be high and cannot
predict whether it will experience shortages in the future. If such a
shortage were to occur and additional increases in driver pay rates became
15
necessary to attract and retain drivers, the Company's results of
operations would be negatively impacted to the extent that corresponding
freight rate increases were not obtained.
Fuel increased 5.3 cents per mile for the Truckload Transportation
Services segment due primarily to higher average diesel fuel prices.
Average fuel prices in 2004 were 30 cents a gallon, or 32%, higher than in
2003. Fuel expense, after considering the amounts collected from customers
through fuel surcharge programs, net of reimbursement to owner-operators,
had an eight-cent negative impact on 2004 earnings per share compared to
2003 earnings per share. In addition to the increase in fuel prices,
company data continues to indicate that the fuel mile per gallon ("mpg")
degradation for trucks with post-October 2002 engines (47% of the company-
owned truck fleet as of December 31, 2004) is a reduction of approximately
5%. As the Company continues to replace older trucks in its fleet with
trucks with the post-October 2002 engines, fuel cost per mile is expected
to increase due to the lower mpg. Shortages of fuel, increases in fuel
prices, or rationing of petroleum products can have a materially adverse
effect on the operations and profitability of the Company. The Company is
unable to predict whether fuel price levels will continue to increase or
decrease in the future or the extent to which fuel surcharges will be
collected from customers. As of December 31, 2004, the Company had no
derivative financial instruments to reduce its exposure to fuel price
fluctuations.
Diesel fuel prices for the first six weeks of 2005 averaged 33 cents a
gallon, or 32% higher than average fuel prices for first quarter 2004.
Based on current fuel price trends for the first six weeks of 2005 and
assuming fuel prices remain at current levels for the remainder of first
quarter 2005, the Company expects that fuel will have a minimal impact on
first quarter 2005 earnings compared to first quarter 2004 earnings.
Supplies and maintenance for the Truckload Transportation Services
segment increased 1.3 cents on a per-mile basis in 2004 due primarily to
increases in the cost of over-the-road repairs and an increase in
maintenance on equipment sales related to a larger number of tractors sold
through the Company's Fleet Truck Sales subsidiary in 2004 versus 2003.
Over-the-road ("OTR") repairs increased as a result of the increase in
dedicated-fleet trucks, which typically do not have as much maintenance
performed at company terminals. The Company includes the higher cost of
OTR maintenance in its dedicated pricing models. Higher driver recruiting
costs (including driver advertising) and driver travel and lodging also
contributed to a small portion of the increase.
Insurance and claims for the Truckload Transportation Services segment
increased 0.3 cents on a per-mile basis, primarily related to liability
claims. Cargo claims expense was essentially flat on a per-mile basis
compared to 2003.
The Company renewed its liability insurance policies for coverage up
to $10.0 million per claim on August 1, 2004. Effective August 1, 2004,
the Company became responsible for the first $2.0 million per claim
(previously $500,000 per claim). See Item 3 "Legal Proceedings" for
information on the Company's coverage levels for personal injury and
property damage since August 1, 2001. The increased Company retention from
$500,000 to $2.0 million is due to changes in the trucking insurance market
and is similar to increased claim retention levels experienced by other
truckload carriers. Liability insurance premiums for the policy year
beginning August 1, 2004 decreased approximately $0.4 million due to the
higher retention level. The Company is unable to predict whether the trend
of increasing insurance and claims expense will continue in the future.
Depreciation expense for the Truckload Transportation Services segment
increased 0.6 cents on a per-mile basis in 2004 due primarily to higher
costs of new tractors with the post-October 2002 engines. As the Company
continues to replace older trucks in its fleet with trucks with the post-
October 2002 engines, depreciation expense is expected to increase.
Rent and purchased transportation consists mainly of payments to third-
party carriers in the VAS and other non-trucking operations and payments to
owner-operators in the trucking operations. Rent and purchased
transportation for the Truckload Transportation Services segment increased
0.9 cents per total mile as higher fuel prices necessitated higher
16
reimbursements to owner-operators for fuel. The Company's customer fuel
surcharge programs do not differentiate between miles generated by Company-
owned trucks and miles generated by owner-operator trucks; thus, the
increase in owner-operator fuel reimbursements is included with Company
fuel expenses in calculating the per-share impact of higher fuel prices on
earnings. The Company has experienced difficulty recruiting and retaining
owner-operators for over two years because of challenging operating
conditions. However, the Company has historically been able to add company-
owned tractors and recruit additional company drivers to offset any
decreases in owner-operators. If a shortage of owner-operators and company
drivers were to occur and increases in per mile settlement rates became
necessary to attract and retain owner-operators, the Company's results of
operations would be negatively impacted to the extent that corresponding
freight rate increases were not obtained. Payments to third-party carriers
used for portions of shipments delivered to or from Mexico and by a few
dedicated fleets in the truckload segment contributed 0.2 cents of the
total per-mile increase for the Truckload Transportation Services segment.
As shown in the VAS statistics table under the "Results of Operations"
heading on page 13, rent and purchased transportation expense for the VAS
segment increased in response to higher VAS revenues. These expenses
generally vary depending on changes in the volume of services generated by
the segment. As a percentage of VAS revenues, VAS rent and purchased
transportation expense decreased to 90.3% in 2004 compared to 92.9% in
2003, resulting in a higher gross margin in 2004. An improving truckload
freight environment in 2004 resulted in improved customer rates for the VAS
segment. Additionally, to support the ongoing growth within VAS, the group
has increased its number of approved third-party providers. This larger
carrier base allows VAS to more competitively match customer freight with
available capacity, resulting in improved margins.
Other operating expenses for the Truckload Transportation Services
segment decreased 0.2 cents per mile in 2004. Gains on sales of revenue
equipment, primarily trucks, are reflected as a reduction of other
operating expenses and were $9.7 million in 2004 compared to $7.6 million
in 2003. In 2004, the Company sold about three-fourths of its used trucks
to third parties and traded about one-fourth. In 2003, the Company sold
about two-thirds of its used trucks and traded about one-third. Gains
increased due to a larger number of trucks sold in 2004, with a lower
average gain per truck. In July 2004, the Company also began recording
gains on certain tractor trades in accordance with EITF 86-29. In 2002,
2003, and the first six months of 2004, the excess of the trade price over
the net book value of the trucks exchanged reduced the cost basis of new
trucks. This change did not have a material impact on the Company's results
of operations. The Company's wholly-owned used truck retail network, Fleet
Truck Sales, is one of the largest class 8 truck sales entities in the
United States, with 16 locations, and has been in operation since 1992.
Fleet Truck Sales continues to be a resource for the Company to remarket
its used trucks. Other operating expenses also include bad debt expense
and professional service fees. The Company incurred approximately $0.7
million in professional fees in 2004 in connection with the implementation
of Section 404 of the Sarbanes-Oxley Act of 2002.
The Company recorded essentially no interest expense in 2004, as it
repaid its last remaining debt in December 2003. Interest income for the
Company increased to $2.6 million in 2004 from $1.7 million in 2003 due to
higher average cash balances in 2004 compared to 2003.
The Company's effective income tax rate (income taxes expressed as a
percentage of income before income taxes) increased from 37.5% in 2003 to
39.2% in 2004, as described in Note 5 of the Notes to Consolidated
Financial Statements under Item 8 of this Form 10-K. The income tax rate
increased in 2004 because of higher non-deductible expenses for tax
purposes related to the implementation of a per diem pay program for
student drivers in fourth quarter 2003 and a per diem pay program for
eligible company drivers in April 2004. The Company expects its effective
income tax rate in 2005 to increase to 40.5% or higher.
17
2003 Compared to 2002
- ---------------------
Operating Revenues
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. 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.
VAS revenues increased $9.7 million to $89.7 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. These less asset-intensive
businesses generally 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.
Operating Expenses
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, were 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 in owner-operator miles as a percentage of total miles
shifted costs from the rent and purchased transportation category to other
expense categories. The Company estimates that rent and purchased
transportation expense for the Truckload Transportation segment was lower
by approximately 2.6 cents per total mile due to this decrease, and other
expense categories had offsetting increases on a total-mile basis, as
follows: salaries, wages and benefits (1.2 cents), fuel (0.5 cents),
supplies and maintenance (0.2 cents), taxes and licenses (0.3 cents), and
depreciation (0.4 cents). During 2003, it continued to be difficult to
attract and retain owner-operator drivers due to challenging operating
conditions.
18
The following table sets forth the cost per total mile of operating
expense items for the Truckload Transportation Services segment for the
periods indicated. The Company evaluates operating costs for this segment
on a per-mile basis to adjust for the impact on the percentage of total
operating revenues caused by changes in fuel surcharge revenues and rate
per mile increases, which provides a more consistent basis for comparing
the results of operations from period to period.
Increase Increase
(Decrease) (Decrease)
2003 2002 per Mile %
------------------------------------
Salaries, wages and benefits $.502 $.488 $.014 2.9
Fuel .158 .127 .031 24.4
Supplies and maintenance .117 .115 .002 1.7
Taxes and licenses .103 .100 .003 3.0
Insurance and claims .072 .052 .020 38.5
Depreciation .132 .128 .004 3.1
Rent and purchased transportation .131 .146 (.015) (10.3)
Communications and utilities .016 .015 .001 6.7
Other (.001) .003 (.004) (133.3)
Salaries, wages and benefits (including driver and non-driver costs)
for the Truckload Transportation Services segment increased 1.4 cents per
mile due primarily to 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. The market for attracting
and retaining company drivers continued to be challenging and became even
more difficult in the fourth quarter of 2003. While the market for
recruiting qualified drivers tightened, the Company continued to have
success recruiting drivers from driver training schools. 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 represented 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.
Fuel increased 3.1 cents per total mile for the Truckload
Transportation Services segment 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. 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. Approximately 10% of
the Company's fleet consisted of trucks with the less fuel-efficient post-
October 2002 engines as of December 31, 2003. As of December 31, 2003, the
Company had no derivative financial instruments to reduce its exposure to
fuel price fluctuations.
Supplies and maintenance for the Truckload Transportation Services
segment increased only 0.2 cents per total mile due primarily to improved
management of maintenance expenses, offset slightly by the growth in the
percentage of company-owned trucks to total trucks.
Insurance and claims increased 2.0 cents per total mile 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 was fixed through July 31, 2004,
19
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. See Item 3 "Legal Proceedings" for information on the Company's
coverage levels for personal injury and property damage since August 1,
2001.
Rent and purchased transportation for the Truckload Transportation
Services segment decreased 1.5 cents per total mile in 2003 due to a
decrease in payments to owner-operators. 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 rent and purchased transportation for the VAS segment
corresponded to the higher non-trucking revenues, as shown in the VAS
statistics table under the "Results of Operations" heading on page 13.
Other operating expenses decreased 0.4 cents per mile 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 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. 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 for the Company decreased from $2.9 million in 2002
to $1.1 million in 2003 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 2003.
The Company's effective income tax rate 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.
Liquidity and Capital Resources
Net cash provided by operating activities was $226.6 million in 2004,
$207.5 million in 2003, and $226.3 million in 2002. Cash flow from
operations decreased $18.8 million in 2003 compared to 2002, or 8.3%. This
decrease was due to lower truck purchases in 2003, which caused higher tax
payments due to lower 2003 tax depreciation and resulted in a smaller
payable for tractors received at year-end. Returning to a normal tractor
replacement cycle in 2004 resulted in increased cash flow from operations
of $19.1 million in 2004 over 2003, or 9.2%. 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 $193.5 million in 2004,
$101.5 million in 2003, and $235.5 million in 2002. The 90.5% increase
($91.9 million) from 2003 to 2004 and 56.9% 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
20
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
allowed 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 of 2003. As of December
31, 2004, approximately 47% of the company-owned truck fleet consisted of
trucks with the new engines. The Company intends to gradually reduce the
average age of the truck fleet in 2005. As such, capital expenditures are
expected to be higher in 2005 compared to 2004.
As of December 31, 2004, the Company has committed to property and
equipment purchases, net of trades, of approximately $122.0 million. The
Company intends to fund these capital expenditure commitments through
existing cash on hand and cash flow from operations.
Net financing activities used $25.7 million in 2004, $33.8 million in
2003, and $35.2 million in 2002. In 2003 and 2002, the Company made net
repayments of debt of $20.0 million and $30.0 million, respectively. The
Company repaid its last remaining debt in December 2003. The Company paid
dividends of $9.5 million in 2004, $6.5 million in 2003, and $5.0 million
in 2002. The Company increased its quarterly dividend rate by $0.01 per
share beginning with the dividend paid in July 2004. Financing activities
also included common stock repurchases of $21.6 million in 2004, $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. As of December 31, 2004, the Company had purchased
4,335,704 shares pursuant to this authorization and had 3,796,800 shares
remaining available for repurchase.
Management believes the Company's financial position at December 31,
2004 is strong. As of December 31, 2004, the Company had $108.8 million of
cash and cash equivalents, no debt, and $773.2 million of stockholders'
equity. As of December 31, 2004, 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
As of December 31, 2004, the Company had no debt outstanding. The
following table sets forth the Company's credit facilities and purchase
commitments as of December 31, 2004.
Amount of Commitment Expiration Per Period
(in millions)
Total
Other Commercial Amounts Less than 1-3 4-5 Over 5
Commitments Committed 1 year years years years
- ----------------------------------------------------------------------------
Unused lines of credit $ 39.6 $ 25.0 $14.6 $ - $ -
Standby letters of credit 35.4 35.4 - - -
Other commercial commitments 122.0 122.0 - - -
------ ------ ----- ---- ----
Total commercial commitments $197.0 $182.4 $14.6 $ - $ -
====== ====== ===== ==== ====
The Company has two credit facilities with banks totaling $75.0
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.
21
Off-Balance Sheet Arrangements
The Company does not have any arrangements which meet the definition
of an off-balance sheet arrangement.
Critical Accounting Policies
The Company's success depends on its ability to efficiently manage its
resources in the delivery of truckload transportation and logistics
services to its customers. Resource requirements vary with customer
demand, which may be subject to seasonal or general economic conditions.
The Company's ability to adapt to changes in customer transportation
requirements is a key element in efficiently deploying resources and in
making capital investments in tractors and trailers. Although the
Company's business volume is not highly concentrated, the Company may also
be affected by the financial failure of its customers or a loss of a
customer's business from time-to-time.
The Company's most significant resource requirements are qualified
drivers, tractors, trailers, and related costs of operating its equipment
(such as fuel and related fuel taxes, driver pay, insurance, and supplies
and maintenance). The Company has historically been successful mitigating
its risk to increases in fuel prices by recovering additional fuel
surcharges from its customers. The Company's financial results are also
affected by availability of drivers and the market for new and used trucks.
Because the Company is self-insured for cargo, personal injury, and
property damage claims on its trucks and for workers' compensation benefits
for its employees (supplemented by premium-based coverage above certain
dollar levels), financial results may also be affected by driver safety,
medical costs, 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. Although the Company's current replacement
cycle for tractors is three years, the Company calculates
depreciation expense for financial reporting purposes using a five-
year life and 25% salvage value. Depreciation expense calculated
in this manner continues at the same straight-line rate, which
approximates the continuing declining market value of the tractors,
in those instances in which a tractor is held beyond the normal
three-year age. Calculating depreciation expense using a five-year
life and 25% salvage value results in the same annual depreciation
rate (15% of cost per year) and the same net book value at the
normal three-year replacement date (55% of cost) as using a three-
year life and 55% salvage value. The Company continually monitors
the adequacy of the lives and salvage values used in calculating
depreciation expense and adjusts these assumptions appropriately
when warranted.
* The Company reviews its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount
of a long-lived asset may not be recoverable. An impairment loss
would be recognized if the carrying amount of the long-lived asset
is not recoverable, and it exceeds its fair value. For long-lived
assets classified as held and used, if the carrying value of the
long-lived asset exceeds the sum of the future net cash flows, it is
not recoverable. The Company does not separately identify assets by
operating segment, as tractors and trailers are routinely
transferred from one operating fleet to another. As a result, none
of the Company's long-lived assets have identifiable cash flows from
use that are largely independent of the cash flows of other assets
and liabilities. Thus, the asset group used to assess impairment
would include all assets and liabilities of the Company. Long-lived
assets classified as held for sale are reported at the lower of
their carrying amount or fair value less costs to sell.
22
* Estimates of accrued liabilities for insurance and claims for
liability and physical damage losses and workers' compensation. The
insurance and claims accruals (current and long-term) are recorded
at the estimated ultimate payment amounts and are based upon
individual case estimates, including negative development, and
estimates of incurred-but-not-reported losses based upon past
experience. The Company's self-insurance reserves are reviewed by
an actuary every six months.
* Policies for revenue recognition. Operating revenues (including fuel
surcharge revenues) and related direct costs are recorded when the
shipment is delivered. For shipments where a third-party provider is
utilized to provide some or all of the service and the Company is
the primary obligor in regards to the delivery of the shipment,
establishes customer pricing separately from carrier rate
negotiations, generally has discretion in carrier selection, and/or
has credit risk on the shipment, the Company records both revenues
for the dollar value of services billed by the Company to the
customer and rent and purchased transportation expense for the costs
of transportation paid by the Company to the third-party provider
upon delivery of the shipment. In the absence of the conditions
listed above, the Company records revenues net of expenses related
to third-party providers.
* Accounting for income taxes. Significant management judgment is
required to determine the provision for income taxes and to
determine whether deferred income taxes will be realized in full or
in part. Deferred income tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be
recovered or settled. When it is more likely that all or some
portion of specific deferred income tax assets will not be realized,
a valuation allowance must be established for the amount of deferred
income tax assets that are determined not to be realizable. A
valuation allowance for deferred income tax assets has not been
deemed to be necessary due to the Company's profitable operations.
Accordingly, if the facts or financial circumstances were to change,
thereby impacting the likelihood of realizing the deferred income
tax assets, judgment would need to be applied to determine the
amount of valuation allowance required in any given period.
Management periodically re-evaluates these estimates as events and
circumstances change. Together with the effects of the matters discussed
above, these factors may significantly impact the Company's results of
operations from period-to-period.
Inflation
Inflation can be expected to have an impact on the Company's operating
costs. A prolonged period of inflation could cause interest rates, fuel,
wages, and other costs to increase and could adversely affect the Company's
results of operations unless freight rates could be increased
correspondingly. However, the effect of inflation has been minimal over
the past three years.
Forward-Looking Statements and Risk Factors
The following risks and uncertainties may cause actual results to
differ materially from those anticipated in the forward-looking statements
included in this Form 10-K:
The Company's business is 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
23
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
in 2001 and 2002 had a negative effect on freight volumes for truckload
carriers, including the Company. Beginning in 2003 and continuing
throughout 2004, general economic improvements lead to improved freight
demand for the Company year over year. As the unemployment rate increased
during 2001 and 2002, driver availability improved for the Company and the
industry but became more difficult beginning in fourth quarter 2003 and
continuing through 2004. 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. In 2004, fuel prices, excluding fuel taxes, climbed steadily
throughout most of the year, before decreasing in December 2004 to prices
about 40% higher than at the end of 2003. 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. The new hours of service regulations that became effective
on January 4, 2004 were vacated in their entirety by the United States
Circuit Court of Appeals for the District of Columbia and remanded to the
FMCSA for reconsideration. On September 30, 2004, the extension of the
Federal highway bill signed into law by the President extended the current
hours of service rules for one year or whenever the FMCSA develops a new
set of regulations, whichever comes first. On January 24, 2005, the FMCSA
re-proposed its April 2003 HOS rules, adding references to how the rules
would affect driver health, but making no changes to the regulations. The
FMCSA is seeking public comments by March 10, 2005 on what changes to the
rule, if any, are necessary to respond to the concerns raised by the court,
and to provide data or studies that would support changes to, or continued
use of, the 2003 rule. The Company cannot predict what rule changes, if
any, will result from the court's ruling, nor the ultimate impact of any
upcoming changes to the hours of service rules. Any 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 and continued throughout 2004. During the last several
years, it was more difficult to recruit and retain owner-operator drivers
due to challenging operating conditions, including high fuel prices. The
Company anticipates that the competition for company drivers and owner-
operator drivers will continue to be high and cannot predict whether it
will experience shortages in the future.
24
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 the Company were to experience a significant increase in the number
of claims, the cost per claim, or the costs of insurance premiums for
coverage in excess of its retention amounts, the Company's operating
results would be negatively affected. In 2004, the Company was named a
defendant in two lawsuits related to an accident involving a third-party
carrier that was transporting a shipment arranged by the Company's VAS
division, as described under Item 3 of this Form 10-K. To the extent the
Company were to experience more of these types of claims and the Company is
held responsible for liability for these types of claims, the Company's
results of operations could be negatively impacted.
Effective October 1, 2002, all newly manufactured truck engines must
comply with the engine emission standards mandated by the EPA. As of
December 31, 2004, approximately 47% of the company-owned truck fleet
consisted of trucks with the new post-October 2002 engines. The Company
has experienced an approximate 5% reduction in fuel efficiency to date and
increased depreciation expense due to the higher cost of the new engines.
The Company anticipates continued increases in these expense categories as
regular truck replacements increase the percentage of company-owned trucks
with n