UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[Mark one]
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-14690
WERNER ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
NEBRASKA 47-0648386
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
14507 FRONTIER ROAD
POST OFFICE BOX 45308
OMAHA, NEBRASKA 68145-0308
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (402) 895-6640
_________________________________
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer X Accelerated filer Non-accelerated filer
--- --- ---
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
--- ---
As of April 27, 2006, 78,459,035 shares of the registrant's common
stock, par value $.01 per share, were outstanding.
INDEX TO FORM 10-Q
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income for the Three Months Ended
March 31, 2006 and 2005 3
Consolidated Condensed Balance Sheets as of March 31, 2006 and
December 31, 2005 4
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2006 and 2005 5
Notes to Consolidated Financial Statements as of March 31,
2006 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
Item 4. Controls and Procedures 24
PART II - OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 25
Item 6. Exhibits 26
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
The interim consolidated financial statements contained herein reflect
all adjustments, which in the opinion of management are necessary for a
fair statement of the financial condition, results of operations, and cash
flows for the periods presented. The interim consolidated financial
statements have been prepared in accordance with the instructions to Form
10-Q and do not include all the information and footnotes required by
accounting principles generally accepted in the United States of America
for complete financial statements.
Operating results for the three-month period ended March 31, 2006, are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2006. In the opinion of management, the information
set forth in the accompanying consolidated condensed balance sheets is
fairly stated in all material respects in relation to the consolidated
balance sheets from which it has been derived.
These interim consolidated financial statements should be read in
conjunction with the Company's Annual Report on Form 10-K for the year
ended December 31, 2005.
2
WERNER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
(In thousands, except per share amounts) March 31
----------------------------------------------------------------------------
2006 2005
----------------------------------------------------------------------------
(Unaudited)
Operating revenues $ 491,922 $ 455,262
-------------------------
Operating expenses:
Salaries, wages and benefits 146,613 140,222
Fuel 88,646 67,628
Supplies and maintenance 37,792 36,754
Taxes and licenses 29,469 28,778
Insurance and claims 19,195 23,200
Depreciation 41,101 39,637
Rent and purchased transportation 88,019 82,567
Communications and utilities 4,895 5,442
Other (630) (1,803)
-------------------------
Total operating expenses 455,100 422,425
-------------------------
Operating income 36,822 32,837
-------------------------
Other expense (income):
Interest expense 273 4
Interest income (995) (965)
Other 41 27
-------------------------
Total other expense (income) (681) (934)
-------------------------
Income before income taxes 37,503 33,771
Income taxes 15,474 13,850
-------------------------
Net income $ 22,029 $ 19,921
=========================
Earnings per share:
Basic $ .28 $ .25
=========================
Diluted $ .27 $ .25
=========================
Dividends declared per share $ .040 $ .035
=========================
Weighted-average common shares outstanding:
Basic 79,445 79,351
=========================
Diluted 80,963 80,824
=========================
3
WERNER ENTERPRISES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except share amounts) March 31 December 31
----------------------------------------------------------------------------
2006 2005
----------------------------------------------------------------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 55,140 $ 36,583
Accounts receivable, trade, less allowance of
$15,536 and $8,357, respectively 215,693 240,224
Other receivables 15,105 19,914
Inventories and supplies 10,936 10,951
Prepaid taxes, licenses and permits 13,439 18,054
Current deferred income taxes 21,414 20,940
Other current assets 17,421 20,966
-------------------------
Total current assets 349,148 367,632
-------------------------
Property and equipment 1,531,811 1,555,764
Less - accumulated depreciation 555,023 553,157
-------------------------
Property and equipment, net 976,788 1,002,607
-------------------------
Other non-current assets 16,914 15,523
-------------------------
$1,342,850 $1,385,762
=========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 53,346 $ 52,387
Current portion of long-term debt - 60,000
Insurance and claims accruals 66,442 62,418
Accrued payroll 20,353 21,274
Income taxes payable 8,050 4,443
Other current liabilities 17,772 17,395
-------------------------
Total current liabilities 165,963 217,917
-------------------------
Other long-term liabilities 633 526
Insurance and claims accruals, net of current
portion 96,500 95,000
Deferred income taxes 213,073 209,868
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, 200,000,000
shares authorized; 80,533,536 shares issued;
78,777,924 and 79,420,443 shares outstanding,
respectively 805 805
Paid-in capital 103,951 105,074
Retained earnings 796,138 777,260
Accumulated other comprehensive loss (557) (259)
Treasury stock, at cost; 1,755,612 and
1,113,093 shares, respectively (33,656) (20,429)
-------------------------
Total stockholders' equity 866,681 862,451
-------------------------
$1,342,850 $1,385,762
=========================
4
WERNER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
(In thousands) March 31
----------------------------------------------------------------------------
2006 2005
----------------------------------------------------------------------------
(Unaudited)
Cash flows from operating activities:
Net income $ 22,029 $ 19,921
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 41,101 39,637
Deferred income taxes 2,731 (37,100)
Gain on disposal of property and equipment (8,829) (2,461)
Stock based compensation 693 -
Tax benefit from exercise of stock options - 1,201
Other long-term assets (1,399) (1,236)
Insurance claims accruals, net of current
portion 1,500 2,000
Other long-term liabilities 107 -
Changes in certain working capital items:
Accounts receivable, net 24,531 (838)
Other current assets 12,984 2,831
Accounts payable 959 (2,269)
Other current liabilities 7,113 45,339
-------------------------
Net cash provided by operating activities 103,520 67,025
-------------------------
Cash flows from investing activities:
Additions to property and equipment (56,246) (101,852)
Retirements of property and equipment 48,376 22,821
Decrease in notes receivable 1,425 537
-------------------------
Net cash used in investing activities (6,445) (78,494)
-------------------------
Cash flows from financing activities:
Repayments of short-term debt (60,000) -
Dividends on common stock (3,177) (2,772)
Repurchases of common stock (19,825) (263)
Stock options exercised 2,860 1,804
Excess tax benefits from exercise of stock
options 1,922 -
-------------------------
Net cash used in financing activities (78,220) (1,231)
-------------------------
Effect of exchange rate fluctuations on cash (298) (49)
Net increase (decrease) in cash and cash
equivalents 18,557 (12,749)
Cash and cash equivalents, beginning of period 36,583 108,807
-------------------------
Cash and cash equivalents, end of period $ 55,140 $ 96,058
Supplemental disclosures of cash flow =========================
information:
Cash paid during the period for:
Interest $ 384 $ 4
Income taxes $ 7,108 $ 12,132
Supplemental schedule of non-cash investing
activities:
Notes receivable issued upon sale of revenue
equipment $ 1,417 $ 1,195
5
WERNER ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Comprehensive Income
Other than its net income, the Company's only other source of
comprehensive income (loss) is foreign currency translation adjustments.
Other comprehensive income (loss) from foreign currency translation
adjustments was ($298) and ($49) (in thousands) for the three-month periods
ended March 31, 2006 and 2005, respectively.
(2) Long-Term Debt
As of March 31, 2006, the Company has credit facilities with two banks
totaling $125 million which mature at various dates from October 2006 to
October 2007 and bear variable interest based on the London Interbank
Offered Rate ("LIBOR"), on which no borrowings were outstanding. The
Company repaid the $60 million of outstanding debt as of December 31, 2005
in first quarter 2006. As of March 31, 2006, the credit available pursuant
to these bank credit facilities is reduced by $37.2 million in letters of
credit the Company maintains. Each of the debt agreements require, among
other things, that the Company maintain a minimum consolidated tangible net
worth and not exceed a maximum ratio of total funded debt to earnings
before interest, income taxes, depreciation, amortization and rentals
payable as defined in the credit facility. While the Company had no
borrowings outstanding under these credit facilities as of March 31, 2006,
the Company remained in compliance with these covenants at March 31, 2006.
(3) Commitments and Contingencies
As of March 31, 2006, the Company has commitments for net capital
expenditures of approximately $71.8 million.
During first quarter 2006, in connection with an audit of the
Company's federal income tax returns for the years 1999 to 2002, the
Company received a notice from the Internal Revenue Service ("IRS")
proposing to disallow a significant tax deduction. This deduction is a
timing difference between financial reporting and tax reporting and would
not result in additional income tax expense in the Company's financial
statements. This timing difference deduction reversed in the Company's
2004 income tax return. The Company filed a protest in this matter in
April 2006, which will be reviewed by an IRS appeals officer. The Company
and its tax advisors believe the Company has a strong position and,
therefore, at this time the Company has not recorded an accrual for
interest for this issue in the financial statements. It is possible the
Company may not ultimately prevail in its position, which may have a
material impact on the Company's financial condition. The Company
estimates the accrued interest, net of taxes, if the Company would not
prevail in its position with the IRS to be approximately $6.0 million as of
March 31, 2006.
6
(4) Earnings Per Share
Basic earnings per share is computed by dividing net income by the
weighted-average number of common shares outstanding during the period.
The difference between basic and diluted earnings per share for all periods
presented is due to the common stock equivalents that are assumed to be
issued upon the exercise of stock options. The computation of basic and
diluted earnings per share is shown below (in thousands, except per share
amounts).
Three Months Ended
March 31
------------------------
2006 2005
------------------------
Net income $ 22,029 $ 19,921
========================
Weighted-average common shares outstanding 79,445 79,351
Common stock equivalents 1,518 1,473
------------------------
Shares used in computing diluted earnings per
share 80,963 80,824
========================
Basic earnings per share $ .28 $ .25
========================
Diluted earnings per share $ .27 $ .25
========================
There were no options to purchase shares of common stock outstanding
during the periods indicated above that were excluded from the computation
of diluted earnings per share because the option purchase price was greater
than the average market price of the common shares.
(5) Stock Based Compensation
The Company's Stock Option Plan (the "Stock Option Plan") is a
nonqualified plan that provides for the grant of options to management
employees. Options are granted at prices equal to the market value of the
common stock on the date the option is granted.
Options granted become exercisable in installments from six to
seventy-two months after the date of grant. The options are exercisable
over a period not to exceed ten years and one day from the date of grant.
The maximum number of shares of common stock that may be optioned under the
Stock Option Plan is 20,000,000 shares. The maximum aggregate number of
options that may be granted to any one person under the Stock Option Plan
is 2,562,500 options. At March 31, 2006, 8,866,174 shares were available
for granting additional options.
Effective January 1, 2006, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 123 (revised 2004), Share-Based Payment
("No. 123R") using a modified version of the prospective transition method.
Under this transition method, compensation cost is recognized on or after
the required effective date for the portion of outstanding awards for which
the requisite service has not yet been rendered, based on the grant-date
fair value of those awards calculated under SFAS No. 123 for either
recognition or pro forma disclosures. Stock-based employee compensation
expense for the three months ended March 31, 2006 was $0.7 million and is
included in Salaries, wages and benefits within the consolidated statements
of income. There was no cumulative effect of initially adopting SFAS No.
123R.
7
The Company granted no stock options during the three-month period
ended March 31, 2006 and granted 19,500 stock options during the three-
month period ended March 31, 2005. The fair value of stock options granted
was estimated using a Black-Scholes valuation model with the following
assumptions:
Three Months Ended
March 31
------------------------
2006 2005
------------------------
Risk-free interest rate N/A 4.0%
Expected dividend yield N/A 0.72%
Expected volatility N/A 37%
Expected term (in years) N/A 4.5
The risk-free interest rate assumptions were based on average 5-year
and 10-year U.S. Treasury note yields. The expected volatility was based
on historical monthly price changes of the Company's stock since January
1990. The expected term was the average number of years that the Company
estimated that options will be outstanding. The Company considered groups
of employees that have similar historical exercise behavior separately for
valuation purposes.
The following table summarizes Stock Option Plan activity for the
three months ended March 31, 2006:
Weighted
Average
Number Weighted Remaining Aggregate
of Average Contractual Intrinsic
Options Exercise Term Value
(in 000's) Price ($) (Years) (in 000's)
-----------------------------------------------------
Outstanding at beginning of
period 5,029 $ 10.83
Options granted 0 $ -
Options exercised (358) $ 8.00
Options forfeited (19) $ 18.36
Options expired (1) $ 7.35
---------
Outstanding at end of
period 4,651 $ 11.02 5.63 $ 34,209
=========
Exercisable at end of
period 2,668 $ 8.62 4.48 $ 26,005
=========
The weighted-average grant date fair value of stock options granted
during the three months ended March 31, 2005 was $6.87 per share. The
total intrinsic value of share options exercised during the three months
ended March 31, 2006 and 2005 was $4.7 million and $3.0 million,
respectively. As of March 31, 2006, the total unrecognized compensation
cost related to nonvested stock option awards was approximately $4.1
million and is expected to be recognized over a weighted average period of
1.5 years.
The Company granted no stock options during the three-month period
ended March 31, 2006 and granted 19,500 stock options during the three-
month period ended March 31, 2005.
In periods prior to January 1, 2006, the Company applied the intrinsic
value based method of Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations in
accounting for its Stock Option Plan. No stock-based employee compensation
cost was reflected in net income, as all options granted under the plan had
an exercise price equal to the market value of the underlying common stock
on the date of grant. The Company's pro forma net income and earnings per
share (in thousands, except per share amounts) would have been as indicated
below had the estimated fair value of all option grants on their grant date
8
been charged to salaries, wages and benefits expense in accordance with
SFAS No. 123, Accounting for Stock-Based Compensation.
Three Months
Ended
March 31, 2005
------------------
Net income, as reported $ 19,921
Less: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects 448
------------------
Net income, pro forma $ 19,473
==================
Earnings per share:
Basic - as reported $ .25
==================
Basic - pro forma $ .25
==================
Diluted - as reported $ .25
==================
Diluted - pro forma $ .24
==================
Although the Company does not a have a formal policy for issuing
shares upon exercise of stock options, such shares are generally issued
from treasury stock. From time to time, the Company has repurchased shares
of its common stock, the timing and amount of which depends on market and
other factors. Historically, the shares acquired under these regular
repurchase programs have provided sufficient quantities of stock for
issuance upon exercise of stock options. Based on current treasury stock
levels, the Company does not expect the need to repurchase additional
shares specifically for stock option exercises during 2006.
(6) Segment Information
The Company has two reportable segments - Truckload Transportation
Services and Value Added Services. The Truckload Transportation Services
segment consists of six operating fleets that have been aggregated since
they have similar economic characteristics and meet the other aggregation
criteria of SFAS No. 131, Disclosures about Segments of an Enterprise and
Related Information. The medium-to-long-haul Van fleet transports a
variety of consumer, nondurable products and other commodities in truckload
quantities over irregular routes using dry van trailers. The Regional
short-haul fleet provides comparable truckload van service within five
geographic regions. The Dedicated Services fleet provides truckload
services required by a specific company, plant, or distribution center.
The Flatbed and Temperature-Controlled fleets provide truckload services
for products with specialized trailers. The Expedited fleet provides time-
sensitive truckload services utilizing driver teams. Revenues for the
Truckload Transportation Services segment include non-trucking revenues of
$2.8 million in first quarter 2006 and $3.5 million in first quarter 2005,
representing the portion of shipments delivered to or from Mexico where the
Company utilizes a third-party capacity provider and revenues generated in
a few dedicated accounts where the services of third-party capacity
providers are used to meet customer capacity requirements. The Value Added
Services segment, which generates the majority of the Company's non-
trucking revenues, provides freight brokerage, intermodal, multimodal,
freight transportation management and other services.
The Company generates other revenues related to third-party equipment
maintenance, equipment leasing, and other business activities. None of
these operations meet the quantitative threshold reporting requirements of
SFAS No. 131. As a result, these operations are grouped in "Other" in the
table below. "Corporate" includes revenues and expenses that are
incidental to the activities of the Company and are not attributable to any
9
of its operating segments. The Company does not prepare separate balance
sheets by segment and, as a result, assets are not separately identifiable
by segment. The Company has no significant intersegment sales or expense
transactions that would result in adjustments necessary to eliminate
amounts between the Company's segments.
The following tables summarize the Company's segment information (in
thousands of dollars):
Revenues
--------
Three Months Ended
March 31
------------------------
2006 2005
------------------------
Truckload Transportation Services $ 432,997 $ 402,363
Value Added Services 56,171 50,160
Other 1,862 1,899
Corporate 892 840
------------------------
Total $ 491,922 $ 455,262
========================
Operating Income
----------------
Three Months Ended
March 31
------------------------
2006 2005
------------------------
Truckload Transportation Services $ 35,083 $ 31,184
Value Added Services 1,511 1,993
Other 463 856
Corporate (235) (1,196)
------------------------
Total $ 36,822 $ 32,837
========================
10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
This report contains historical information, as well as forward-
looking statements that are based on information currently available to the
Company's management. The forward-looking statements in this report,
including those made in this Item 2, "Management's Discussion and Analysis
of Financial Condition and Results of Operations", are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of
1995. The Company believes the assumptions underlying these forward-
looking statements are reasonable based on information currently available;
however, any of the assumptions could be inaccurate, and therefore, actual
results may differ materially from those anticipated in the forward-looking
statements as a result of certain risks and uncertainties. These risks
include, but are not limited to, those discussed in Item 1A, "Risk
Factors", of the Company's Annual Report on Form 10-K for the year ended
December 31, 2005. Caution should be taken not to place undue reliance on
forward-looking statements made herein, since the statements speak only as
of the date they are made. The Company undertakes no obligation to
publicly release any revisions to any forward-looking statements contained
herein to reflect events or circumstances after the date of this report or
to reflect the occurrence of unanticipated events.
Overview:
The Company operates in the truckload sector of the trucking industry,
with a focus on transporting consumer nondurable products that ship more
consistently throughout the year. The Company's success depends on its
ability to efficiently manage its resources in the delivery of truckload
transportation and logistics services to its customers. Resource
requirements vary with customer demand, which may be subject to seasonal or
general economic conditions. The Company's ability to adapt to changes in
customer transportation requirements is a key element in efficiently
deploying resources and in making capital investments in tractors and
trailers. Although the Company's business volume is not highly
concentrated, the Company may also be affected by the financial failure of
its customers or a loss of a customer's business from time-to-time.
Operating revenues consist of trucking revenues generated by the six
operating fleets in the Truckload Transportation Services segment
(dedicated, medium/long-haul van, regional short-haul, expedited, flatbed,
and temperature-controlled) and non-trucking revenues generated primarily
by the Company's Value Added Services ("VAS") segment. The Company's
Truckload Transportation Services segment ("truckload 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
capacity provider, and for a few of its dedicated accounts where the
services of third-party capacity providers 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 segment.
Trucking revenues accounted for 87% of total operating revenues in first
quarter 2006, and non-trucking and other operating revenues accounted for
13%.
Trucking services typically generate revenue on a per-mile basis.
Other sources of trucking revenue include fuel surcharges and accessorial
revenue such as stop charges, loading/unloading charges, and equipment
detention charges. Because fuel surcharge revenues fluctuate in response
to changes in the cost of fuel, these revenues are identified separately
within the operating statistics table and are excluded from the statistics
to provide a more meaningful comparison between periods. Non-trucking
revenues generated by a fleet whose operations are part of the truckload
segment are included in non-trucking revenue in the operating statistics
table so that the revenue statistics in the table are calculated using only
the revenues generated by company-owned and owner-operator trucks. The key
statistics used to evaluate trucking revenues, excluding fuel surcharges,
are average revenues per tractor per week, the per-mile rates charged to
customers, the average monthly miles generated per tractor, the average
percentage of empty miles, the average trip length, and the average number
of tractors in service. General economic conditions, seasonal freight
patterns in the trucking industry, and industry capacity are key factors
that impact these statistics.
11
The Company's most significant resource requirements are company
drivers, owner-operators, tractors, trailers, and related costs of
operating its equipment (such as fuel and related fuel taxes, driver pay,
insurance, and supplies and maintenance). The Company has historically been
successful mitigating its risk to increases in fuel prices by recovering
additional fuel surcharges from its customers that recoup a majority of the
increased fuel costs; however, there is no assurance that current recovery
levels will continue in future periods. The Company's financial results
are also affected by availability of company drivers and owner-operators
and the market for new and used revenue equipment. Because the Company is
self-insured for a significant portion of cargo, personal injury, and
property damage claims on its revenue equipment and for workers'
compensation benefits for its employees (supplemented by premium-based
coverage above certain dollar levels), financial results may also be
affected by driver safety, medical costs, weather, the legal and regulatory
environment, and the costs of insurance coverage to protect against
catastrophic losses.
A common industry measure used to evaluate the profitability of the
Company and its trucking operating fleets is the operating ratio (operating
expenses expressed as a percentage of operating revenues). The most
significant variable expenses that impact the trucking operation are driver
salaries and benefits, payments to owner-operators (included in rent and
purchased transportation expense), fuel, fuel taxes (included in taxes and
licenses expense), supplies and maintenance, and insurance and claims.
These expenses generally vary based on the number of miles generated. As
such, the Company also evaluates these costs on a per-mile basis to adjust
for the impact on the percentage of total operating revenues caused by
changes in fuel surcharge revenues, per-mile rates charged to customers,
and non-trucking revenues. As discussed further in the comparison of
operating results for first quarter 2006 to first quarter 2005, several
industry-wide issues, including high fuel prices and a challenging driver
recruiting and retention market, could cause costs to increase in future
periods. The Company's main fixed costs include depreciation expense for
tractors and trailers and equipment licensing fees (included in taxes and
licenses expense). Depreciation expense has been affected by the new
engine emission standards that became effective in October 2002 for all
newly purchased trucks, which have increased truck purchase costs. In
addition, beginning in January 2007, a new set of more stringent engine
emissions standards mandated by the Environmental Protection Agency ("EPA")
will become effective for all newly manufactured trucks. The Company
intends to continue to keep its fleet as new as possible 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. The trucking operations require substantial cash
expenditures for the purchase of tractors and trailers. The Company has
accelerated its normal three-year replacement cycle for company-owned
tractors. These purchases are funded by net cash from operations and when
necessary, by borrowings from the Company's credit facilities.
Non-trucking services provided by the Company, primarily through its
VAS division, include freight brokerage, intermodal, multimodal, freight
transportation management, and other 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 capacity providers. The most
significant expense item related to these non-trucking services is the cost
of transportation paid by the Company to third-party capacity providers,
which is recorded as rent and purchased transportation expense. Other
expenses include salaries, wages and benefits and computer hardware and
software depreciation. The Company evaluates the non-trucking operations
by reviewing the gross margin percentage (revenues less rent and purchased
transportation expense expressed as a percentage of revenues) and the
operating ratio. The operating margin for the non-trucking business is
lower than those of the trucking operations, but the return on assets is
substantially higher.
12
Results of Operations:
The following table sets forth certain industry data regarding the
freight revenues and operations of the Company for the periods indicated.
Three Months Ended
March 31 %
--------------------
2006 2005 Change
-----------------------------
Trucking revenues, net of fuel surcharge (1) $368,256 $357,866 2.9%
Trucking fuel surcharge revenues (1) 61,888 40,936 51.2%
Non-trucking revenues, including VAS (1) 58,980 53,677 9.9%
Other operating revenues (1) 2,798 2,783 0.5%
-------- --------
Operating revenues (1) $491,922 $455,262 8.1%
======== ========
Operating ratio (consolidated) (2) 92.5% 92.8% -0.3%
Average monthly miles per tractor 9,834 9,932 -1.0%
Average revenues per total mile (3) $1.448 $1.393 3.9%
Average revenues per loaded mile (3) $1.663 $1.579 5.3%
Average percentage of empty miles 12.91% 11.77% 9.7%
Average trip length in miles (loaded) 585 573 2.1%
Total miles (loaded and empty) (1) 254,317 256,846 -1.0%
Average tractors in service 8,620 8,620 0.0%
Average revenues per tractor per week (3) $3,286 $3,193 2.9%
Total tractors (at quarter end)
Company 7,820 7,720
Owner-operator 830 930
-------- --------
Total tractors 8,650 8,650
Total trailers (at quarter end) 25,080 23,710
(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.
The following table sets forth the revenues, operating expenses, and
operating income for the truckload segment. Revenues for the truckload
segment include non-trucking revenues of $2.8 million and $3.5 million for
the three-month periods ended March 31, 2006 and 2005, respectively, as
described on page 9.
Three Months Ended
March 31
----------------------------------
2006 2005
---------------- ----------------
Truckload Transportation Services (amounts in 000's) $ % $ %
---------------------------------------------------- ---------------- ----------------
Revenues $ 432,997 100.0 $ 402,363 100.0
Operating Expenses 397,914 91.9 371,179 92.2
--------- ---------
Operating income $ 35,083 8.1 $ 31,184 7.8
========= =========
Higher fuel prices and higher fuel surcharge collections have the
effect of increasing the Company's consolidated operating ratio and the
truckload segment's operating ratio. Eliminating this sometimes volatile
source of revenue provides a more consistent basis for comparing the
results of operations from period to period. The following table
calculates the truckload segment's operation ratio using total operating
expenses, net of fuel surcharge revenues, as a percentage of revenues,
excluding fuel surcharges.
13
Three Months Ended
March 31
----------------------------------
2006 2005
---------------- ----------------
Truckload Transportation Services (amounts in 000's) $ % $ %
---------------------------------------------------- ---------------- ----------------
Revenues $ 432,997 $ 402,363
Less: trucking fuel surcharge revenues 61,888 40,936
--------- ---------
Revenues, net of fuel surcharges 371,109 100.0 361,427 100.0
--------- ---------
Operating expenses 397,914 371,179
Less: trucking fuel surcharge revenues 61,888 40,936
--------- ---------
Operating expenses, net of fuel surcharges 336,026 90.5 330,243 91.4
--------- ---------
Operating income $ 35,083 9.5 $ 31,184 8.6
========= =========
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.
Three Months Ended
March 31
----------------------------------
2006 2005
---------------- ----------------
Value Added Services (amounts in 000's) $ % $ %
--------------------------------------- ---------------- ----------------
Revenues $ 56,171 100.0 $ 50,160 100.0
Rent and purchased transportation expense 50,891 90.6 45,166 90.0
--------- ---------
Gross margin 5,280 9.4 4,994 10.0
Other operating expenses 3,769 6.7 3,001 6.0
--------- ---------
Operating income $ 1,511 2.7 $ 1,993 4.0
========= =========
Three Months Ended March 31, 2006 Compared to Three Months Ended March 31,
---------------------------------------------------------------------------
2005
----
Operating Revenues
Operating revenues increased 8.1% for the three months ended March 31,
2006, compared to the same period of the prior year. Excluding fuel
surcharge revenues, trucking revenues increased 2.9% due primarily to a
3.9% increase in average revenues per total mile, excluding fuel
surcharges, offset by a 1.0% decrease in average monthly miles per tractor.
The average percentage of empty miles increased to 12.9% in first quarter
2006 from 11.8% in first quarter 2005. The empty mile percentage in the
Company's dedicated fleet operation (approximately 40% of the total truck
fleet) is substantially higher than the other truck fleets and empty miles
in the dedicated fleets are almost always billed to customers. Average
revenues per total mile, excluding fuel surcharges, increased due to
customer rate increases.
During third and fourth quarter 2005, the Company's sales and
marketing team renewed customer contracts and obtained annual base rate
increases for a substantial portion of the Company's non-dedicated fleet
business that renewed in the second half of 2005. Although the Company has
taken steps to minimize or delay certain controllable cost increases, base
rate increases continue to be necessary to recoup several inflationary cost
increases including driver pay and benefits, truck engine emission costs,
and toll increases and to improve the Company's return on assets. The
Company met its goals for these base rate increases in the 2005 renewal
14
period. The Company has also been successful at obtaining base rate
increases related to its dedicated fleet business to recoup these same cost
increases.
Freight demand was slightly softer in January and February 2006
compared to a stronger freight market in January and February 2005.
Freight demand continued to show softness in March 2006 but was about the
same as March 2005, due principally to an easier comparison caused by a
decline in seasonally adjusted freight demand from February 2005 to March
2005. For much of first quarter 2006, freight demand was geographically
weaker in the western United States. As first quarter 2006 progressed, the
Company experienced the typical seasonal improvement in freight demand from
January to March.
The Company is benefiting from actions taken during the last few years
to lessen the impact of freight market fluctuations, particularly during
first quarter that is historically the most challenging quarter of the year
in terms of freight demand. These actions included managing more freight
due to the expansion of the Company's VAS division, increasing high-service
multimodal freight that gives the Company the flexibility to use either
truck or truck/rail service options, and reducing the percentage of the
fleet that has one-way freight shipments.
Fuel surcharge revenues, which represent collections from customers
for the higher cost of fuel, increased from $40.9 million in first quarter
2005 to $61.9 million in first quarter 2006 due to higher average fuel
prices in first quarter 2006. To lessen the effect of fluctuating fuel
prices on the Company's margins, the Company collects fuel surcharge
revenues from its customers. The Company's fuel surcharge programs are
designed to recoup the higher cost of fuel from customers when fuel prices
rise and provide customers with the benefit of lower costs when fuel prices
decline. The truckload industry's fuel surcharge standard is a one-cent
per mile increase in rate for every five-cent per gallon increase in the
Department of Energy ("DOE") weekly retail on-highway diesel prices that
are used for most fuel surcharge programs. These programs have
historically enabled the Company to recover a significant portion of the
fuel price increases. However, the five-cent per gallon brackets only
recoup approximately 80% to 85% of the actual increase in the cost of fuel,
due to empty miles not billable to customers, out-of-route miles, truck
idle time, and the volatility in the fuel prices as prices change rapidly
in short periods of time.
VAS revenues increased 12.0% to $56.2 million for the three months
ended March 31, 2006 from $50.2 million for the three months ended March
31, 2005 while gross margin dollars increased 5.7% for the same period.
VAS revenues consist primarily of freight brokerage, intermodal,
multimodal, freight transportation management, and other services. The
revenue growth was the result of an increase in brokerage revenue offset
partially by the loss of a freight management customer in second quarter
2005 and the flexibility to provide freight to the Company's truckload
division during more challenging periods of freight demand as discussed
above. The VAS gross margin and operating income were negatively impacted
by start-up costs incurred related to its intermodal container program as
discussed further on page 18. The Company continues to focus on growing
the volume of business in the VAS segment, which provides customers with
additional sources of capacity.
Operating Expenses
Operating expenses, expressed as a percentage of operating revenues,
were 92.5% for the three months ended March 31, 2006, compared to 92.8% for
the three months ended March 31, 2005. As explained above, the significant
increase in fuel expense and related fuel surcharge revenues had the effect
of increasing the operating ratio. Because the Company's VAS business
operates with a lower operating margin and a higher return on assets than
the trucking business, the growth in VAS business in first quarter 2006
compared to first quarter 2005 also increased the Company's overall
operating ratio. The tables on pages 13 and 14 show the operating ratios
15
and operating margins for the Company's two reportable segments, Truckload
Transportation Services and Value Added Services.
The following table sets forth the cost per total mile of operating
expense items for the truckload segment for the periods indicated. The
Company evaluates operating costs for this segment on a per-mile basis to
adjust for the impact on the percentage of total operating revenues caused
by changes in fuel surcharge revenues, which provides a more consistent
basis for comparing the results of operations from period to period.
Three Months Ended Increase
March 31 (Decrease)
----------------------
2006 2005 per Mile
----------------------------------
Salaries, wages and benefits $0.563 $0.535 $.028
Fuel 0.347 0.262 .085
Supplies and maintenance 0.143 0.139 .004
Taxes and licenses 0.115 0.112 .003
Insurance and claims 0.075 0.090 (.015)
Depreciation 0.157 0.147 .010
Rent and purchased transportation 0.146 0.145 .001
Communications and utilities 0.019 0.021 (.002)
Other 0.000 (0.006) .006
Owner-operator costs are included in rent and purchased transportation
expense. Owner-operator miles as a percentage of total miles were 11.8% in
first quarter 2006 compared to 12.8% in first quarter 2005. 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. 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
segment was lower by approximately 1.2 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 (0.4 cents), fuel (0.4
cents), supplies and maintenance (0.1 cent), taxes and licenses (0.1 cent),
and depreciation (0.2 cent).
Salaries, wages and benefits for non-drivers increased in first
quarter 2006 compared to first quarter 2005 due to a larger number of
personnel to support the growth in VAS. The increase in salaries, wages
and benefits of 2.8 cents per mile for the truckload segment is primarily
the result of higher driver pay per mile resulting from an increase in the
percentage of company truck miles versus owner-operator miles (see above)
and driver pay increases for some dedicated fleets. Non-driver salaries,
wages and benefits increased due to a larger number of personnel to support
the growth in VAS, an increase in the number of equipment maintenance
personnel, an increase in the Company's group health insurance costs due to
higher claims experience in first quarter 2006, and approximately $0.7
million of stock compensation expense related to the Company's adoption of
Statement of Financial Accounting Standards ("SFAS") No. 123R on January 1,
2006. See footnote 5 to the Notes to Consolidated Financial Statements for
more explanation of SFAS No. 123R.
The driver recruiting and retention market is extremely challenging.
The supply of qualified truck drivers continues to be constrained due to
alternative jobs to truck driving that are available in today's economy.
Also, the competitive market among truckload carriers for recruiting
experienced drivers, student drivers, and owner-operator drivers has
intensified. The Company continues to focus on driver quality of life
issues such as developing more driving jobs with more frequent home time,
providing drivers with newer trucks, and maximizing mileage productivity
within the federal hours of service regulations. The Company continues to
place increased emphasis on developing newly certified drivers through its
student driver training program. The number of company trucks decreased
16
from 7,920 at December 31, 2005 to 7,820 at March 31, 2006 due to the tight
driver market. The Company anticipates that the competition for qualified
drivers will continue to be high and cannot predict whether it will
experience shortages in the future. If such a shortage were to occur and
additional increases in driver pay rates were necessary to attract and
retain drivers, the Company's results of operations would be negatively
impacted to the extent that corresponding freight rate increases were not
obtained.
Fuel increased 8.5 cents per mile for the truckload segment due to
higher average diesel fuel prices. Average fuel prices in first quarter
2006 were 42 cents a gallon, or 29%, higher than first quarter 2005. In
its Form 10-K filing with the Securities and Exchange Commission ("SEC") on
February 15, 2006, the Company estimated the negative impact of higher fuel
costs on first quarter 2006 earnings compared to first quarter 2005
earnings to be three cents to four cents per share, assuming diesel fuel
prices for the last seven weeks of first quarter 2006 remained at the
average price for the first six weeks of 2006. Diesel fuel prices were
relatively stable during this seven-week period, but the Company's average
miles per gallon ("mpg") was better than expected, resulting in a two-cent
per share negative impact on first quarter 2006 earnings compared to first
quarter 2005 earnings. The Company includes the following items in the
calculation of the estimated impact of higher fuel costs on earnings for
both periods: fuel pricing, fuel reimbursement to owner-operator drivers,
lower mpg due to the increasing percentage of company-owned trucks with
post-October 2002 engines, and anticipated fuel surcharge reimbursement.
Company data continues to indicate that the fuel mpg degradation for
trucks with post-October 2002 engines is approximately a 5% reduction in
fuel efficiency. The percentage of the Company's truck fleet with post-
October 2002 engines (EPA phase one) increased to 95% as of March 31, 2006
from 59% as of March 31, 2005. Shortages of fuel, increases in fuel
prices, or rationing of petroleum products can have a materially adverse
effect on the operations and profitability of the Company. The Company is
unable to predict whether fuel price levels will continue to increase or
decrease in the future or the extent to which fuel surcharges will be
collected from customers. As of March 31, 2006, the Company had no
derivative financial instruments to reduce its exposure to fuel price
fluctuations.
Diesel fuel prices for the month of April 2006 averaged 50 cents per
gallon, or 30%, higher than April 2005. If diesel fuel prices throughout
the remainder of second quarter 2006 remain at the average price for April
2006, the Company estimates that fuel will have a negative impact on second
quarter 2006 earnings compared to second quarter 2005 of four cents to six
cents per share. It is difficult to estimate the impact of higher fuel
costs on earnings because of changing fuel pricing trends, the temporary
lag effect of rapidly changing fuel prices on fuel surcharge revenues, and
other factors. The actual impact of fuel expense on earnings could be
higher or lower than estimated due to those factors.
Supplies and maintenance for the truckload segment increased 0.4 cents
on a per-mile basis in first quarter 2006 due primarily to increases in
repair expenses to maintain the Company's trailer fleet.
Taxes and licenses for the truckload segment increased 0.3 cents per
total mile due primarily to a slight decrease in the company truck mpg that
impacts the per-mile cost of federal and state diesel fuel taxes, as well
as increases in some state fuel tax rates.
Insurance and claims for the truckload segment decreased 1.5 cents on
a per-mile basis due primarily to better claims experience in first quarter
2006 compared to first quarter 2005. For the policy year that began August
1, 2005, the Company is responsible for the first $2.0 million per claim
with an annual aggregate of $2.0 million for claims between $2.0 million
and $3.0 million, and the Company is fully insured (i.e., no aggregate) for
claims between $3.0 million and $5.0 million. For claims in excess of $5.0
million and less than $10.0 million, the Company is responsible for the
first $5.0 million of claims. The Company maintains liability insurance
17
coverage with reputable insurance carriers substantially in excess of the
$10.0 million per claim. The Company's liability insurance premiums for
the policy year beginning August 1, 2005 were approximately the same as the
previous policy year.
Depreciation expense for the truckload segment increased 1.0 cent on a
per-mile basis in first quarter 2006 due primarily to higher costs of new
tractors with the post-October 2002 engines. As of March 31, 2006,
approximately 95% of the company-owned truck fleet consisted of trucks with
the post-October 2002 engines compared to 59% at March 31, 2005. The
Company has replaced substantially all of its company-owned fleet with
trucks with the post-October 2002 engines.
Rent and purchased transportation consists mainly of payments to
third-party capacity providers in the VAS and other non-trucking operations
and payments to owner-operators in the trucking operations. As shown in the
VAS statistics table on page 14, 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 increased to 90.6% in first quarter 2006
compared to 90.0% in first quarter 2005. This increase was primarily the
result of start-up costs related to the VAS Intermodal container program.
During fourth quarter 2005, VAS entered into an agreement with Union
Pacific ("UP") to manage UP-owned containers for intermodal freight
shipments. During first quarter 2006, VAS Intermodal was managing 400 of
these containers. VAS Intermodal has the option to, and expects to,
increase the number of UP containers in 2006 as it further develops its
intermodal freight program. Additional start-up costs will be incurred as
this container program continues to expand in 2006.
Rent and purchased transportation for the truckload segment increased
0.1 cent per total mile in first quarter 2006. Higher fuel prices
necessitated higher reimbursements to owner-operators for fuel ($7.3
million for first quarter 2006 compared to $4.7 million for first quarter
2005), which resulted in a 1.0 cent per total mile increase. This increase
in owner-operator fuel reimbursement was offset by the decrease in the
number of owner-operator trucks and the decrease in corresponding owner-
operator miles. 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.
Over the past year, attracting and retaining owner-operator drivers
became more difficult due to the increasingly challenging operating
conditions including inflationary cost increases that are the
responsibility of the owner-operators. The number of owner-operators
decreased to 830 as of March 31, 2006 from a total of 930 as of March 31,
2005 (an 11% decrease). The Company increased the van and regional over-
the-road owner-operators' settlement rate by two cents per mile effective
May 1, 2006. This increase applies to 84% of the Company's owner-operators
and is expected to cost approximately $0.2 million per month. The Company
has historically been able to add company-owned tractors and recruit
additional company drivers to offset any decreases in owner-operators. If
a shortage of owner-operators and company drivers were to occur and
additional increases in per mile settlement rates became necessary to
attract and retain owner-operators, the Company's results of operations
would be negatively impacted to the extent that corresponding freight rate
increases were not obtained.
Other operating expenses for the truckload segment increased 0.6 cents
per mile in first quarter 2006. Gains on sales of assets, primarily trucks
and trailers, increased to $8.8 million in first quarter 2006 compared to
$2.5 million in first quarter 2005. In first quarter 2006, the Company
sold more trucks, realized higher gains per truck, and spent less on
repairs per truck sold. In first quarter 2006, the Company began selling
its oldest van trailers that have already reached the end of their
depreciable life, and these trailer sales also resulted in equipment gains.
The Company expects to continue to sell its oldest trailers during the
remainder of 2006 as it replaces them with new trailers. Fuel prices have
18
begun to rise in recent weeks, and this is beginning to have a negative
impact on used truck pricing and unit sales of trucks. With the rapid rise
in fuel prices in September and October 2005, the Company experienced a
temporary decline in truck sales and pricing while fuel remained high. As
fuel prices declined, unit sales and pricing improved. The number of the
Company's trucks planned for sale for each of the remaining three quarters
of 2006 should be approximately the same as the number of trucks sold in
first quarter 2006; however, the number of trucks planned for sale during
each quarter of 2007 is expected to be significantly lower.
On March 17, 2006, the Company filed a Form 8-K with the SEC
disclosing that a customer, APX Logistics, Inc., declared bankruptcy owing
the Company $7.2 million. Due to the significant uncertainty of collection
of the amount owed by this customer, the Company recorded additional bad
debt expense in the amount of $7.2 million in first quarter 2006. This is
reflected as an expense in Other Operating Expenses in the Company's income
statement.
The Company's effective income tax rate (income taxes expressed as a
percentage of income before income taxes) increased slightly to 41.3% for
first quarter 2006 from 41.0% for first quarter 2005.
Liquidity and Capital Resources:
During the three months ended March 31, 2006, the Company generated
cash flow from operations of $103.5 million, a 54.4% increase ($36.5
million) in cash flow compared to the same three-month period a year ago.
The increase in cash flow from operations is due primarily to better
collections of accounts receivable. Deferred taxes decreased by $37.1
million during the three months ended March 31, 2005 with an offsetting
increase to the current income tax liability, related to tax law changes
resulting in the reversal of certain tax strategies implemented in 2001 and
lower income tax depreciation in 2005 due to the bonus tax depreciation
provision that expired on December 31, 2004. The Company made federal
income tax payments of $22.5 million in second quarter 2005 related to the
reversal of the tax strategies. The cash flow from operations enabled the
Company to make net capital expenditures, repay debt, and repurchase common
stock as discussed below.
Net cash used in investing activities for the three-month period ended
March 31, 2006 decreased by $72.0 million, from $78.5 million for the
three-month period ended March 31, 2005 to $6.5 million for the three-month
period ended March 31, 2006. Net property additions, primarily revenue
equipment were $7.9 million for the three-month period ended March 31, 2006
versus $79.0 million during the same period of 2005. The large decrease
was due primarily to the Company purchasing more tractors in first quarter
2005 to reduce the average age of its truck fleet and selling more tractors
and trailers in first quarter 2006. The average age of the Company's truck
fleet is 1.25 years at March 31, 2006 compared to 1.54 years as of March
31, 2005. The Company intends to continue to keep its truck fleet as new
as possible during 2006, in advance of phase two of the federally mandated
engine emission standards that will become effective in January 2007. Net
capital expenditures are expected to continue at a lower than normal rate
for the remainder of the first half of 2006, and then are expected to
return to higher than normal levels for the second half of 2006.
As of March 31, 2006, the Company has committed to property and
equipment purchases, net of trades, of approximately $71.8 million. The
Company intends to fund these net capital expenditures through cash flow
from operations.
Net financing activities used $78.2 million and $1.2 million during
the three months ended March 31, 2006 and 2005, respectively. The Company
repaid outstanding debt totaling $60.0 million during the three-month
period ended March 31, 2006. These funds were originally borrowed in the
fourth quarter of 2005 to fund a portion of the Company's net capital
expenditures. The Company paid dividends of $3.2 million in the three-
19
month period ended March 31, 2006 and $2.8 million in the three-month
period ended March 31, 2005. The Company increased its quarterly dividend
rate by $.005 per share beginning with the dividend paid in July 2005.
Financing activities also included common stock repurchases of $19.8
million and $0.3 million in the three-month periods ended March 31, 2006
and 2005, respectively. From time to time, the Company has repurchased,
and may continue to repurchase, shares of its common stock. The timing and
amount of such purchases depends on market and other factors. On April 14,
2006, the Company's Board of Directors approved an increase to its
authorization for common stock repurchases of 6,000,000 shares. The
previous authorization announced on November 23, 2003, authorized the
Company to repurchase 3,965,838 shares. As of March 31, 2006, the Company
had purchased 1,257,038 shares pursuant to this authorization and had
8,708,800 shares remaining available for repurchase.
Management believes the Company's financial position at March 31, 2006
is strong. As of March 31, 2006, the Company had $55.1 million of cash and
cash equivalents, no debt, and $866.7 million of stockholders' equity. As
of March 31, 2006, the Company had $125.0 million of available credit
pursuant to credit facilities, on which no borrowings were outstanding.
The credit available under these facilities is reduced by the $37.2 million
in letters of credit the Company maintains. These letters of credit are
primarily required as security for insurance policies. As of March 31,
2006, the Company had no non-cancelable revenue equipment operating leases,
and, therefore had no off-balance sheet revenue equipment debt. Based on
the Company's strong financial position, management foresees no significant
barriers to obtaining sufficient financing, if necessary.
Off-Balance Sheet Arrangements:
The Company does not have arrangements that meet the definition of an
off-balance sheet arrangement.
Regulations:
Effective October 1, 2005, all truckload carriers became subject to
revised hours of service ("HOS") regulations. The only significant change
from the previous regulations is that a driver using the sleeper berth
provision must take at least eight consecutive hours in the sleeper berth
during their ten hours off-duty. Previously, drivers were allowed to split
their ten hour off-duty time in the sleeper berth into two periods,
provided neither period was less than two hours. This more restrictive
sleeper berth provision is requiring some drivers to plan their time better
and had a negative impact on mileage productivity. The greatest impact was
for those customers with multiple-stop shipments or those shipments with
pickup or delivery delays.
In June 1998, the Company became the first, and only, trucking company
in the United States to receive authorization from the U.S. Department of
Transportation ("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 Federal Motor Carrier Safety Administration
("FMCSA") 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. The
Company has applied for its two-year renewal of the paperless log program.
Beginning in January 2007, a new set of more stringent engine
emissions standards mandated by the Environmental Protection Agency ("EPA")
will become effective for all newly manufactured trucks. The Company has
already reduced the average age of its truck fleet to 1.25 years 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. On June 1, 2006, 80 percent of diesel fuel for on-
road use which is produced by U.S. refineries must meet the new ultra-low
sulfur fuel guidelines. The EPA has extended the deadline for this fuel to
be available at distribution terminals to September 1, 2006 and at retail
facilities to October 15, 2006. When this becomes effective, the Company
20
estimates an additional 1% to 3% decrease in fuel mpg because of the new
fuel.
Critical Accounting Policies:
The most significant accounting policies and estimates that affect our
financial statements include the following:
* Selections of estimated useful lives and salvage values for purposes
of depreciating tractors and trailers. Depreciable lives of tractors
and trailers range from 5 to 12 years. Estimates of salvage value
at the expected date of trade-in or sale (for example, three years
for tractors) are based on the expected market values of equipment
at the time of disposal. Although the Company's current replacement
cycle for tractors is three years, the Company calculates
depreciation expense for financial reporting purposes using a
five-year life and 25% salvage value. Depreciation expense
calculated in this manner continues at the same straight-line rate,
which approximates the continuing declining market value of the
tractors, in those instances in which a tractor is held beyond
the normal three-year age. Calculating depreciation expense using a
five-year life and 25% salvage value results in the same annual
depreciation rate (15% of cost per year) and the same net book value
at the normal three-year replacement date (55% of cost) as using a
three-year life and 55% salvage value. The Company continually
monitors the adequacy of the lives and salvage values used in
calculating depreciation expense and adjusts these assumptions
appropriately when warranted.
* The Company reviews its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount
of a long-lived asset may not be recoverable. An impairment loss
would be recognized if the carrying amount of the long-lived asset
is not recoverable, and it exceeds its fair value. For long-lived
assets classified as held and used, if the carrying value of the
long-lived asset exceeds the sum of the future net cash flows, it is
not recoverable. The Company does not separately identify assets by
operating segment, as tractors and trailers are routinely
transferred from one operating fleet to another. As a result, none
of the Company's long-lived assets have identifiable cash flows from
use that are largely independent of the cash flows of other assets
and liabilities. Thus, the asset group used to assess impairment
would include all assets and liabilities of the Company. Long-lived
assets classified as held for sale are reported at the lower of
their carrying amount or fair value less costs to sell.
* Estimates of accrued liabilities for insurance and claims for
liability and physical damage losses and workers' compensation. The
insurance and claims accruals (current and long-term) are recorded
at the estimated ultimate payment amounts and are based upon
individual case estimates, including negative development, and
estimates of incurred-but-not-reported losses based upon past
experience. The Company's self-insurance reserves are reviewed by
an actuary every six months.
* Policies for revenue recognition. Operating revenues (including fuel
surcharge revenues) and related direct costs are recorded when the
shipment is delivered. For shipments where a third-party capacity
provider 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 capacity
provider upon delivery of the shipment. In the absence of the
conditions listed above, the Company records revenues net of
expenses related to third-party capacity providers.
21
* 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 evaluates these estimates and policies as
events and circumstances change. There have been no changes to these
policies that occurred during the Company's most recent fiscal quarter.
Together with the effects of the matters discussed above, these factors may
significantly impact the Company's results of operations from period to
period.
Accounting Standards:
In December 2004, the Financial Accounting Standards Board ("FASB")
revised SFAS No. 123 (revised 2004), Share-Based Payments ("No. 123R").
SFAS No. 123R eliminates the alternative to use APB Opinion No. 25's
intrinsic value method of accounting (generally resulting in recognition of
no compensation cost) and instead requires a company to recognize in its
financial statements the cost of employee services received in exchange for
valuable equity instruments issued, and liabilities incurred, to employees
in share-based payment transactions (e.g., stock options). Effective
January 1, 2006, the Company adopted SFAS No. 123R using a modified version
of the prospective transition method. Under this transition method,
compensation cost is recognized on or after the required effective date for
the portion of outstanding awards for which the requisite service has not
yet been rendered, based on the grant-date fair value of those awards
calculated under SFAS No. 123 for either recognition or pro forma
disclosures. Stock-based employee compensation expense for the three
months ended March 31, 2006 was $0.7 million. There was no cumulative
effect of initially adopting SFAS No. 123R. As of the date of this filing,
management estimates the impact of this new accounting standard to be
approximately two cents per share for the year ending December 31, 2006,
representing the expense to be recognized for the unvested portion of
awards granted to date, and cannot predict the earnings impact of awards
that may be granted in the future.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and
Error Corrections. This Statement replaces APB Opinion No. 20, Accounting
Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial
Statements, and changes the requirements for the accounting for and
reporting of all voluntary changes in accounting principle and changes
required by an accounting pronouncement when the pronouncement does not
include specific transition provisions. This Statement requires
retrospective application to prior periods' financial statements of changes
in accounting principle, unless it is impracticable to do so. The
provisions of SFAS No. 154 are effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15,
2005. Upon adoption, SFAS No. 154 had no effect on the financial position,
results of operations, and cash flows of the Company, but will affect
future changes in accounting principles.
In February 2006, the FASB issued SFAS No. 155, Accounting for
Certain Hybrid Financial Instruments-An Amendment of FASB Statements No.
133 and 140. This Statement amends FASB Statements No. 133, Accounting for
Derivative Instruments and Hedging Activities, and No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
22
Liabilities and eliminates the exemption from applying Statement 133 to
interests in securitized financial assets so that similar items are
accounted for in the same way. The provisions of SFAS No.155 are effective
for all financial instruments acquired or issued after the beginning of the
first fiscal year that begins after September 15, 2006. As of March 31,
2006, management believes that SFAS No. 155 will have no effect on the
financial position, results of operations, and cash flows of the Company.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing
of Financial Assets-An Amendment of FASB Statement No. 140. This Statement
amends FASB Statement No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities and requires that all
separately recognized servicing assets and servicing liabilities be
initially measured at fair value, if practicable. The provisions of SFAS
No. 156 are effective as of the beginning of the first fiscal year that
begins after September 15, 2006. As of March 31, 2006, management
believes that SFAS No. 156 will have no effect on the financial position,
results of operations, and cash flows of the Company.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company is exposed to market risk from changes in commodity
prices, foreign exchange rates, and interest rates.
Commodity Price Risk
The price and availability of diesel fuel are subject to fluctuations
due to changes in the level of global oil production, refining capacity,
seasonality, weather, and other market factors. Historically, the Company
has been able to recover a majority of fuel price increases from customers
in the form of fuel surcharges. The Company has implemented customer fuel
surcharges programs with most of its revenue base to offset most of the
higher fuel cost per gallon. The Company cannot predict the extent to
which higher fuel price levels will continue in the future or the extent to
which fuel surcharges could be collected to offset such increases. As of
March 31, 2006, the Company had no derivative financial instruments to
reduce its exposure to fuel price fluctuations.
Foreign Currency Exchange Rate Risk
The Company conducts business in Mexico and Canada. Foreign currency
transaction gains and losses were not material to the Company's results of
operations for first quarter 2006 and prior periods. To date, almost all
foreign revenues are denominated in U.S. dollars, and the Company receives
payment for freight services performed in Mexico and Canada primarily in
U.S. dollars to reduce direct foreign currency risk. Accordingly, the
Company is not currently subject to material foreign currency exchange rate
risks from the effects that exchange rate movements of foreign currencies
would have on the Company's future costs or on future cash flows.
Interest Rate Risk
The Company had no debt outstanding at March 31, 2006. Interest rates
on the Company's unused credit facilities are based on the London Interbank
Offered Rate ("LIBOR"). Increases in interest rates could impact the
Company's annual interest expense on future borrowings.
23
Item 4. Controls and Procedures.
As of the end of the period covered by this report, the Company
carried out an evaluation, under the supervision and with the participation
of the Company's management, including the Company's Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures, as defined
in Exchange Act Rule 15d-15(e). Based upon that evaluation, the Company's
Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures are effective in enabling the
Company to record, process, summarize and report information required to be
included in the Company's periodic SEC filings within the required time
period.
Management, under the supervision and with the participation of the
Company's Chief Executive Officer and Chief Financial Officer, concluded
that there have been no changes in the Company's internal control over
financial reporting that occurred during the Company's most recent fiscal
quarter that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
The Company has confidence in its internal controls and procedures.
Nevertheless, the Company's management, including the Chief Executive
Officer and Chief Financial Officer, does not expect that the internal
controls or disclosure procedures and controls will prevent all errors or
intentional fraud. An internal control system, no matter how well
conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of such internal controls are met. Further,
the design of an internal control system must reflect the fact that there
are resource constraints, and the benefits of controls must be relative to
their costs. Because of the inherent limitations in all internal control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the Company have been
detected.
24
PART II
OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
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. As of March 31, 2006, the Company had
purchased 1,257,038 shares pursuant to this authorization and had 2,708,800
shares remaining available for repurchase. The Company may purchase shares
from time to time depending on market, economic, and other factors. The
authorization will continue until withdrawn by the Board of Directors.
The following table summarizes the Company's common stock repurchases
during the first quarter of 2006 made pursuant to this authorization. No
shares were purchased during the quarter other than through this program,
and all purchases were made by or on behalf of the Company and not by any
"affiliated purchaser".
Issuer Purchases of Equity Securities
Maximum Number
(or Approximate
Total Number of Dollar Value) of
Shares (or Units) Shares (or Units) that
Total Number of Purchased as Part of May Yet Be
Shares (or Units) Average Price Paid Publicly Announced Purchased Under the
Period Purchased per Share (or Unit) Plans or Programs Plans or Programs
------------------------------------------------------------------------------------
January 1-31, 2006 - - - 3,708,800
February 1-28, 2006 164,000 $19.8257 164,000 3,544,800
March 1-31, 2006 836,000 $19.8248 836,000 2,708,800
----------------- -----------------
Total 1,000,000 $19.8250 1,000,000 2,708,800
================= =================
On April 14, 2006, the Company's Board of Directors approved an
increase to its authorization for repurchases of common stock pursuant to
its previously announced stock repurchase program. The Company is
authorized to repurchase an additional 6 million shares, in addition to the
2,708,800 remaining shares available for repurchase pursuant to the Board's
previous authorization announced on November 24, 2003.
25
Item 6. Exhibits.
Index of Exhibits
Exhibit 3(i)(A) Revised and Amended Articles of Incorporation
(Incorporated by reference to Exhibit 3(i) to the Company's report
on Form 10-K for the year ended December 31, 2005)
Exhibit 3(i)(B) Articles of Amendment to Articles of Incorporation
(Incorporated by reference to Exhibit 3(i) to the Company's report
on Form 10-Q for the quarter ended May 31, 1994)
Exhibit 3(i)(C) Articles of Amendment to Articles of Incorporation
(Incorporated by reference to Exhibit 3(i) to the Company's report
on Form 10-K for the year ended December 31, 1998)
Exhibit 3(i)(D) Articles of Amendment to Articles of Incorporation
(Incorporated by reference to Exhibit 3(i)(D) to the Company's
report on Form 10-Q for the quarter ended June 30, 2005)
Exhibit 3(ii) Revised and Restated By-Laws (Incorporated by reference
to Exhibit 3(ii) to the Company's report on Form 10-Q for the
quarter ended June 30, 2004)
Exhibit 31.1 Rule 13a-14(a)/15d-14(a) Certification (filed herewith)
Exhibit 31.2 Rule 13a-14(a)/15d-14(a) Certification (filed herewith)
Exhibit 32.1 Section 1350 Certification (filed herewith)
Exhibit 32.2 Section 1350 Certification (filed herewith)
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
WERNER ENTERPRISES, INC.
Date: May 1, 2006 By: /s/ John J. Steele
------------------- -------------------------------------
John J. Steele
Executive Vice President, Treasurer
and Chief Financial Officer
Date: May 1, 2006 By: /s/ James L. Johnson
-------------------- -------------------------------------
James L. Johnson
Senior Vice President, Controller and
Corporate Secretary
27