UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[Mark one]
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2008
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, a non-accelerated filer or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated
filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer X Accelerated filer
--- ---
Non-accelerated filer Smaller reporting company
--- (Do not check if a ---
smaller reporting
company)
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
--- ---
As of October 30, 2008, 71,025,892 shares of the registrant's common
stock, par value $.01 per share, were outstanding.
WERNER ENTERPRISES, INC.
INDEX
----- PAGE
PART I - FINANCIAL INFORMATION ----
Item 1. Financial Statements:
Consolidated Statements of Income for the Three Months Ended
September 30, 2008 and 2007 4
Consolidated Statements of Income for the Nine Months Ended
September 30, 2008 and 2007 5
Consolidated Condensed Balance Sheets as of September 30, 2008
and December 31, 2007 6
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2008 and 2007 7
Notes to Consolidated Financial Statements (Unaudited) as of
September 30, 2008 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 31
Item 4. Controls and Procedures 32
PART II - OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 33
Item 6. Exhibits 34
PART I
FINANCIAL INFORMATION
Cautionary Note Regarding Forward-Looking Statements:
This Quarterly Report on Form 10-Q contains historical information and
forward-looking statements based on information currently available to our
management. The forward-looking statements in this report, including those
made in Item 2, "Management's Discussion and Analysis of Financial Condition
and Results of Operations," are made pursuant to the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995, as amended. These
safe harbor provisions encourage reporting companies to provide prospective
information to investors. Forward-looking statements can be identified by
the use of certain words, such as "anticipate," "believe," "estimate,"
"expect," "intend," "plan," "project" and other similar terms and language.
We believe the forward-looking statements are reasonable based on currently
available information. However, forward-looking statements involve risks,
uncertainties and assumptions, whether known or unknown, that could cause
actual results to differ materially from the anticipated results expressed
in the forward-looking statements. A discussion of important factors
relating to forward-looking statements is included in Item 1A, "Risk
Factors," of our Annual Report on Form 10-K for the year ended December 31,
2007. Readers should not unduly rely on the forward-looking statements
included in this Form 10-Q because such statements speak only to the date
they were made. Unless otherwise required by applicable securities laws, we
assume no obligation or duty to update or revise forward-looking statements
to reflect subsequent events or circumstances.
2
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 were also prepared without audit. The interim consolidated
financial statements do not include all information and footnotes required
by accounting principles generally accepted in the United States of America
for complete financial statements; although in management's opinion, the
disclosures are adequate so that the information presented is not
misleading.
Operating results for the three-month and nine-month periods ended
September 30, 2008 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2008. In the opinion of
management, the information set forth in the accompanying consolidated
condensed balance sheets is fairly stated in all material respects in
relation to the consolidated balance sheets from which it has been derived.
These interim consolidated financial statements and notes thereto
should be read in conjunction with the financial statements and accompanying
notes contained in our Annual Report on Form 10-K for the year ended
December 31, 2007.
3
WERNER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
(In thousands, except per share amounts) September 30,
---------------------------------------------------------------------------
2008 2007
---------------------------------------------------------------------------
(Unaudited)
Operating revenues $ 584,057 $ 510,260
--------------------------
Operating expenses:
Salaries, wages and benefits 150,616 150,789
Fuel 145,280 101,859
Supplies and maintenance 41,566 40,698
Taxes and licenses 26,733 28,796
Insurance and claims 28,727 22,001
Depreciation 41,653 41,087
Rent and purchased transportation 107,948 87,537
Communications and utilities 4,769 4,978
Other (1,257) (4,549)
--------------------------
Total operating expenses 546,035 473,196
--------------------------
Operating income 38,022 37,064
--------------------------
Other expense (income):
Interest expense 3 527
Interest income (1,012) (1,015)
Other 27 54
--------------------------
Total other expense (income) (982) (434)
--------------------------
Income before income taxes 39,004 37,498
Income taxes 16,558 15,648
--------------------------
Net income $ 22,446 $ 21,850
==========================
Earnings per share:
Basic $ .32 $ .30
==========================
Diluted $ .31 $ .30
==========================
Dividends declared per share $ .050 $ .050
==========================
Weighted average common shares outstanding:
Basic 70,864 72,305
==========================
Diluted 71,825 73,501
==========================
See Notes to Consolidated Financial Statements (Unaudited).
4
WERNER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Nine Months Ended
(In thousands, except per share amounts) September 30,
---------------------------------------------------------------------------
2008 2007
---------------------------------------------------------------------------
(Unaudited)
Operating revenues $ 1,675,025 $ 1,545,459
---------------------------
Operating expenses:
Salaries, wages and benefits 442,391 451,645
Fuel 424,079 290,862
Supplies and maintenance 123,336 120,366
Taxes and licenses 82,884 88,276
Insurance and claims 77,366 70,128
Depreciation 125,132 125,273
Rent and purchased transportation 307,631 296,655
Communications and utilities 14,828 15,252
Other (4,930) (15,714)
---------------------------
Total operating expenses 1,592,717 1,442,743
---------------------------
Operating income 82,308 102,716
---------------------------
Other expense (income):
Interest expense 9 2,920
Interest income (3,049) (2,989)
Other 79 172
---------------------------
Total other expense (income) (2,961) 103
---------------------------
Income before income taxes 85,269 102,613
Income taxes 36,336 42,841
---------------------------
Net income $ 48,933 $ 59,772
===========================
Earnings per share:
Basic $ .69 $ .81
===========================
Diluted $ .68 $ .80
===========================
Dividends declared per share $ .150 $ .145
===========================
Weighted average common shares outstanding:
Basic 70,574 73,482
===========================
Diluted 71,575 74,810
===========================
See Notes to Consolidated Financial Statements (Unaudited).
5
WERNER ENTERPRISES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except share amounts) September 30, December 31,
---------------------------------------------------------------------------------
2008 2007
---------------------------------------------------------------------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 136,315 $ 25,090
Accounts receivable, trade, less allowance of
$9,921 and $9,765, respectively 231,931 213,496
Other receivables 15,512 14,587
Inventories and supplies 10,048 10,747
Prepaid taxes, licenses and permits 7,266 17,045
Current deferred income taxes 31,433 26,702
Other current assets 23,571 21,500
---------------------------------
Total current assets 456,076 329,167
---------------------------------
Property and equipment 1,608,906 1,605,445
Less - accumulated depreciation 675,132 633,504
---------------------------------
Property and equipment, net 933,774 971,941
---------------------------------
Other non-current assets 17,457 20,300
---------------------------------
$ 1,407,307 $ 1,321,408
=================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 58,004 $ 49,652
Insurance and claims accruals 86,360 76,189
Accrued payroll 28,336 21,753
Other current liabilities 27,454 19,395
---------------------------------
Total current liabilities 200,154 166,989
---------------------------------
Other long-term liabilities 7,447 14,165
Insurance and claims accruals, net of current
portion 118,500 110,500
Deferred income taxes 200,398 196,966
Stockholders' equity:
Common stock, $.01 par value, 200,000,000
shares authorized; 80,533,536 shares
issued; 71,025,892 and 70,373,189 shares
outstanding, respectively 805 805
Paid-in capital 96,757 101,024
Retained earnings 961,752 923,411
Accumulated other comprehensive income (loss) 249 (169)
Treasury stock, at cost; 9,507,644 and
10,160,347 shares, respectively (178,755) (192,283)
---------------------------------
Total stockholders' equity 880,808 832,788
---------------------------------
$ 1,407,307 $ 1,321,408
=================================
See Notes to Consolidated Financial Statements (Unaudited).
6
WERNER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
(In thousands) September 30,
---------------------------------------------------------------------------
2008 2007
---------------------------------------------------------------------------
(Unaudited)
Cash flows from operating activities:
Net income $ 48,933 $ 59,772
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 125,132 125,273
Deferred income taxes (909) (8,930)
Gain on disposal of property and equipment (8,768) (19,300)
Stock-based compensation 1,113 1,192
Other long-term assets 640 1,580
Insurance claims accruals, net of current
portion 8,000 5,000
Other long-term liabilities (63) 848
Changes in certain working capital items:
Accounts receivable, net (18,435) 14,700
Other current assets 7,482 12,743
Accounts payable 8,352 (11,567)
Other current liabilities 17,735 5,875
------------------------
Net cash provided by operating activities 189,212 187,186
------------------------
Cash flows from investing activities:
Additions to property and equipment (145,656) (111,899)
Retirements of property and equipment 65,265 84,621
Decrease in notes receivable 4,397 4,418
------------------------
Net cash used in investing activities (75,994) (22,860)
------------------------
Cash flows from financing activities:
Repayment of short-term debt - (30,000)
Proceeds from issuance of long-term debt - 10,000
Repayments of long-term debt - (70,000)
Dividends on common stock (10,559) (10,363)
Repurchases of common stock (4,486) (87,052)
Stock options exercised 8,245 8,178
Excess tax benefits from exercise of stock
options 4,389 4,280
------------------------
Net cash used in financing activities (2,411) (174,957)
------------------------
Effect of foreign exchange rate fluctuations on
cash 418 (132)
Net increase in cash and cash equivalents 111,225 (10,763)
Cash and cash equivalents, beginning of period 25,090 31,613
------------------------
Cash and cash equivalents, end of period $ 136,315 $ 20,850
========================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 9 $ 3,606
Income taxes $ 30,034 $ 47,574
Supplemental schedule of non-cash investing
activities:
Notes receivable issued upon sale of revenue
equipment $ 2,194 $ 4,846
See Notes to Consolidated Financial Statements (Unaudited).
7
WERNER ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) Comprehensive Income
Other than our net income, our only other source of comprehensive
income (loss) is foreign currency translation adjustments. Comprehensive
income (loss) from foreign currency translation adjustments was a loss of
$1,769,000 for the three-month period ended September 30, 2008 and a loss of
$445,000 for the same period ended September 30, 2007. Such comprehensive
income (loss) was income of $418,000 for the nine-month period ended
September 30, 2008 and a loss of $132,000 for the same period ended
September 30, 2007.
(2) Long-Term Debt
As of September 30, 2008, we have two committed credit facilities with
banks totaling $225.0 million that mature in May 2009 ($50.0 million) and
May 2011 ($175.0 million). Borrowings under these credit facilities bear
variable interest based on the London Interbank Offered Rate ("LIBOR"). As
of September 30, 2008, we had no borrowings outstanding under these credit
facilities with banks. The $225.0 million of credit available under these
facilities is further reduced by $39.5 million in letters of credit under
which we are obligated. Each of the debt agreements includes, among other
things, two financial covenants requiring us (i) not to exceed a maximum
ratio of total debt to total capitalization and (ii) not to exceed a maximum
ratio of total funded debt to earnings before interest, income taxes,
depreciation, amortization and rentals payable (as defined in each credit
facility). At September 30, 2008, we were in compliance with these
covenants.
(3) Income Taxes
During first quarter 2006, in connection with an audit of our federal
income tax returns for the years 1999 to 2002, we received a notice from the
Internal Revenue Service ("IRS") proposing to disallow a significant tax
deduction. This deduction was based on a timing difference between
financial reporting and tax reporting and would result in interest charges,
which we record as a component of income tax expense in the Consolidated
Statements of Income. This timing difference deduction reversed in our 2004
income tax return. We formally protested this matter in April 2006. During
fourth quarter 2007, we reached a tentative settlement agreement with an IRS
appeals officer. During fourth quarter 2007, we also accrued in income
taxes expense in our Consolidated Statements of Income the estimated
cumulative interest charges for the anticipated settlement of this matter,
net of income taxes, which amounted to $4.0 million, or $0.05 per share.
During second quarter 2008, the appeals officer received the concurrence of
the Joint Committee of Taxation with regard to the recommended basis of
settlement. The IRS finalized the settlement during third quarter 2008, and
we paid the federal accrued interest at the beginning of October 2008.
For the three-month and nine-month periods ended September 30, 2008,
there were no material changes to the total amount of unrecognized tax
benefits. We reclassified $6.8 million of our total liability for
unrecognized tax benefits from long-term to current during the nine-month
period ended September 30, 2008. This reclassification is due to the
settlement agreement with the IRS for tax years 1999 through 2002, as
discussed above. We accrued interest of $0.2 million during the three-month
period and $0.6 million during the nine-month period ended September 30,
2008. Our total gross liability for unrecognized tax benefits at September
30, 2008 is $13.0 million. If recognized, $8.0 million of unrecognized tax
benefits would impact our effective tax rate. Interest of $9.2 million has
been reflected as a component of the total liability. We do not expect any
other significant increases or decreases for uncertain tax positions during
the next twelve months.
8
We file U.S. federal income tax returns, as well as income tax returns
in various states and several foreign jurisdictions. The years 2004 through
2007 are open for examination by the IRS, and various years are open for
examination by state and foreign tax authorities. The IRS completed an
audit of our 2005 federal income tax return and issued a "no change letter"
during second quarter 2008, under which the IRS did not propose any
adjustment to the tax return.
(4) Commitments and Contingencies
As of September 30, 2008, we have committed to property and equipment
purchases of approximately $47.0 million.
We are involved in certain claims and pending litigation arising in the
normal course of business. Management believes the ultimate resolution of
these matters will not materially affect our consolidated financial
statements.
(5) Earnings Per Share
We compute and present earnings per share in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 128, Earnings per Share.
Basic earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding during the period. Diluted
earnings per share is computed by dividing net income by the weighted
average number of common shares plus the effect of dilutive potential common
shares outstanding during the period using the treasury stock method.
Dilutive potential common shares include outstanding stock options and stock
awards. There are no differences in the numerators of our computations of
basic and diluted earnings per share for any periods presented. The
computation of basic and diluted earnings per share is shown below (in
thousands, except per share amounts).
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ----------------------
2008 2007 2008 2007
--------------------- ----------------------
Net income $ 22,446 $ 21,850 $ 48,933 $ 59,772
===================== ======================
Weighted average common shares
outstanding 70,864 72,305 70,574 73,482
Common stock equivalents 961 1,196 1,001 1,328
--------------------- ----------------------
Shares used in computing diluted
earnings per share 71,825 73,501 71,575 74,810
===================== ======================
Basic earnings per share $ .32 $ .30 $ .69 $ .81
===================== ======================
Diluted earnings per share $ .31 $ .30 $ .68 $ .80
===================== ======================
9
Options to purchase shares of common stock that were outstanding during
the periods indicated above, but were excluded from the computation of
diluted earnings per share because the option purchase price was greater
than the average market price of the common shares, were:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2008 2007 2008 2007
----------------------- -----------------------
Number of options - 24,500 5,000 29,500
Range of option
purchase prices - $19.84-$20.36 $20.36 $19.26-$20.36
(6) Stock-Based Compensation
Our Equity Plan provides for grants of nonqualified stock options,
restricted stock and stock appreciation rights. The Board of Directors or
the Compensation Committee of our Board of Directors determine the terms of
each award, including type of award, recipients, number of shares subject to
each award and vesting conditions of each award. Stock option and
restricted stock awards are described below. No awards of stock
appreciation rights have been issued to date. The maximum number of shares
of common stock that may be awarded under the Equity Plan is 20,000,000
shares. The maximum aggregate number of shares that may be awarded to any
one person under the Equity Plan is 2,562,500. As of September 30, 2008,
there were 8,665,182 shares available for granting additional awards.
Effective January 1, 2006, we adopted 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 January 1, 2006 for (i) the portion of
outstanding awards that were not vested as of January 1, 2006, based on the
grant-date fair value of those awards calculated under SFAS No. 123,
Accounting for Stock-Based Compensation (as originally issued), for either
recognition or pro forma disclosures and (ii) all share-based payments
granted on or after January 1, 2006, based on the grant-date fair value of
those awards calculated under SFAS No. 123R. Stock-based employee
compensation expense was $0.4 million for each of the three-month periods
ended September 30, 2008 and September 30, 2007, $1.1 million for the nine-
month period ended September 30, 2008 and $1.2 million for the nine-month
period ended September 30, 2007. Stock-based employee compensation expense
is included in salaries, wages and benefits within the Consolidated
Statements of Income. The total income tax benefit recognized in the
Consolidated Statements of Income for stock-based compensation arrangements
was $0.2 million for each of the three-month periods ended September 30,
2008 and September 30, 2007 and $0.5 million for each of the nine-month
periods ended September 30, 2008 and September 30, 2007. As of September
30, 2008, the total unrecognized compensation cost related to nonvested
stock-based compensation awards was approximately $3.1 million and is
expected to be recognized over a weighted average period of 1.8 years.
We do not a have a formal policy for issuing shares upon exercise of
stock options or vesting of restricted stock, so such shares are generally
issued from treasury stock. From time to time, we repurchase shares of our
common stock, the timing and amount of which depends on market and other
factors. Historically, the shares acquired under these regular repurchase
programs have provided us with sufficient quantities of stock to issue for
stock-based compensation. Based on current treasury stock levels, we do not
expect to repurchase additional shares specifically for stock-based
compensation during 2008.
Stock Options
Stock options are granted at prices equal to the market value of the
common stock on the date the option award is granted. Option awards
currently outstanding become exercisable in installments from twenty-four to
10
seventy-two months after the date of grant. The options are exercisable
over a period not to exceed ten years and one day from the date of grant.
The following table summarizes stock option activity for the nine
months ended September 30, 2008:
Weighted
Average Aggregate
Number Weighted Remaining Intrinsic
of Options Average Contractual Value
(in Exercise Term (in
thousands) Price ($) (Years) thousands)
-------------------------------------------------
Outstanding at beginning of period 3,854 $ 12.23
Options granted - $ -
Options exercised (903) $ 9.13
Options forfeited (132) $ 17.56
Options expired - $ -
--------
Outstanding at end of period 2,819 $ 12.97 4.52 $ 24,642
========
Exercisable at end of period 2,055 $ 11.31 3.43 $ 21,362
========
We did not grant any stock options during the three-month and nine-
month periods ended September 30, 2008 and September 30, 2007. The fair
value of stock option grants is estimated using a Black-Scholes valuation
model. The total intrinsic value of stock options exercised was $9.1
million and $3.7 million for the three-month periods ended September 30,
2008 and September 30, 2007 and $11.8 million and $10.4 million for the
nine-month periods ended September 30, 2008 and September 30, 2007.
Restricted Stock
Restricted stock awards entitle the holder to shares of common stock
when the award vests. The value of these shares may fluctuate according to
market conditions and other factors. During third quarter 2008, the
Compensation Committee awarded 35,000 shares of restricted stock. These
restricted shares will vest sixty months from the grant date of the award.
The restricted shares do not confer any voting or dividend rights to
recipients until such shares fully vest and do not have any post-vesting
sales restrictions.
The following table summarizes restricted stock activity for the nine
months ended September 30, 2008:
Number of Restricted Shares Weighted Average Grant
(in thousands) Date Fair Value ($)
----------------------------------------------------
Nonvested at beginning of period - $ -
Shares granted 35 $ 22.88
Shares vested - $ -
Shares forfeited - $ -
--------------------------- ----------------------
Nonvested at end of period 35 $ 22.88
=========================== ======================
We granted 35,000 shares of restricted stock during the three-month and
nine-month periods ended September 30, 2008 and did not grant any shares of
restricted stock during the three-month and nine-month periods ended
September 30, 2007. We estimate the fair value of restricted stock awards
based upon the market price of the underlying common stock on the date of
grant, reduced by the present value of estimated future dividends because
the awards are not entitled to receive dividends prior to vesting. The
present value of estimated future dividends was calculated using the
following assumptions:
11
Dividends per share (quarterly amounts) $0.05
Risk-free interest rate 3.0%
(7) Segment Information
We have two reportable segments - Truckload Transportation Services
("Truckload") and Value Added Services ("VAS").
The Truckload segment consists of six operating fleets that are
aggregated because they have similar economic characteristics and meet the
other aggregation criteria of SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information ("No. 131"). The six operating fleets
that comprise our Truckload segment are as follows: (i) dedicated services
("Dedicated") provides truckload services required by a specific customer,
generally for a distribution center or manufacturing facility; (ii) the
medium-to-long-haul van ("Van") fleet transports a variety of consumer,
nondurable products and other commodities in truckload quantities over
irregular routes using dry van trailers; (iii) the regional short-haul
("Regional") fleet provides comparable truckload van service within five
geographic regions across the United States; (iv) the expedited
("Expedited") fleet provides time-sensitive truckload services utilizing
driver teams; and the (v) flatbed ("Flatbed") and (vi) temperature-
controlled ("Temperature-Controlled") fleets provide truckload services for
products with specialized trailers. Revenues for the Truckload segment
include non-trucking revenues of $2.5 million and $2.2 million for the
three-month periods ended September 30, 2008 and September 30, 2007 and $6.3
million and $7.6 million for the nine-month periods ended September 30, 2008
and September 30, 2007. These revenues consist primarily of the portion of
shipments delivered to or from Mexico where we utilize a third-party
capacity provider.
The VAS segment generates the majority of our non-trucking revenues
through four operating units that provide non-trucking services to our
customers. These four VAS operating units are (i) truck brokerage
("Brokerage"), (ii) freight management (single-source logistics) ("Freight
Management"), (iii) intermodal services ("Intermodal") and (iv) Werner
Global Logistics international services ("International").
We generate other revenues related to third-party equipment
maintenance, equipment leasing and other business activities. None of these
operations meets the quantitative threshold reporting requirements of SFAS
No. 131. As a result, these operations are grouped in "Other" in the tables
below. "Corporate" includes revenues and expenses that are incidental to
our activities and are not attributable to any of our operating segments.
We do not prepare separate balance sheets by segment and, as a result,
assets are not separately identifiable by segment. We have no significant
intersegment sales or expense transactions that would require the
elimination of revenue between our segments in the tables below.
12
The following tables summarize our segment information (in thousands):
Revenues
--------
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2008 2007 2008 2007
----------------------- -----------------------
Truckload Transportation Services $ 505,489 $ 451,272 $1,456,872 $1,332,148
Value Added Services 73,586 54,517 203,401 200,243
Other 4,218 3,781 12,177 11,178
Corporate 764 690 2,575 1,890
----------------------- -----------------------
Total $ 584,057 $ 510,260 $1,675,025 $1,545,459
======================= =======================
Operating Income
----------------
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2008 2007 2008 2007
----------------------- -----------------------
Truckload Transportation Services $ 33,113 $ 33,066 $ 68,126 $ 91,474
Value Added Services 4,319 3,181 11,670 9,578
Other 333 864 2,315 2,507
Corporate 257 (47) 197 (843)
----------------------- -----------------------
Total $ 38,022 $ 37,064 $ 82,308 $ 102,716
======================= =======================
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Management's Discussion and Analysis of Financial Condition and Results
of Operations ("MD&A") summarizes the financial statements from management's
perspective with respect to our financial condition, results of operations,
liquidity and other factors that may affect actual results. The MD&A is
organized in the following sections:
* Overview
* Results of Operations
* Liquidity and Capital Resources
* Contractual Obligations and Commercial Commitments
* Off-Balance Sheet Arrangements
* Regulations
* Critical Accounting Policies
* Accounting Standards
The MD&A should be read in conjunction with our Annual Report on Form
10-K for the year ended December 31, 2007.
Overview:
We operate in the truckload sector of the trucking industry and the
logistics sector of the transportation industry. In the truckload sector,
we focus on transporting consumer nondurable products that ship consistently
13
throughout the year. In the logistics sector, besides managing
transportation requirements for individual customers, we provide additional
sources of truck capacity, alternative modes of transportation, a global
delivery network and systems analysis to optimize transportation needs. Our
success depends on our ability to efficiently manage our resources in the
delivery of truckload transportation and logistics services to our
customers. Resource requirements vary with customer demand, which may be
subject to seasonal or general economic conditions. Our ability to adapt to
changes in customer transportation requirements is essential to efficiently
deploy resources and make capital investments in tractors and trailers (with
respect to our Truckload segment) or obtain qualified third-party capacity
at a reasonable price (with respect to our VAS segment). Although our
business volume is not highly concentrated, we may also be occasionally
affected by our customers' financial failures or loss of customer business.
Operating revenues consist of (i) trucking revenues generated by the
six operating fleets in the Truckload segment (Dedicated, Van, Regional,
Expedited, Temperature-Controlled and Flatbed) and (ii) non-trucking
revenues generated primarily by the four operating units in our VAS segment
(Brokerage, Freight Management, Intermodal and International). Our
Truckload segment also includes a small amount of non-trucking revenues,
consisting primarily of the portion of shipments delivered to or from Mexico
where the Truckload segment utilizes a third-party capacity provider. Non-
trucking revenues reported in the operating statistics table include those
revenues generated by the VAS and Truckload segments. Trucking revenues
accounted for 86% of total operating revenues in third quarter 2008, and
non-trucking and other operating revenues accounted for 14% of total
operating revenues.
Trucking services typically generate revenues on a per-mile basis.
Other sources of trucking revenues include fuel surcharges and accessorial
revenues (such as stop charges, loading/unloading charges and equipment
detention charges). Because fuel surcharge revenues fluctuate in response
to changes in fuel costs, these revenues are identified separately within
the operating statistics table and are excluded from the statistics to
provide a more meaningful comparison between periods. The non-trucking
revenues in the operating statistics table include such revenues generated
by a fleet whose operations fall within the Truckload segment. We do this
so that we can calculate the revenue statistics in the operating statistics
table using only the revenue generated by company-owned and owner-operator
trucks. The key statistics used to evaluate trucking revenues (excluding
fuel surcharges) are (i) average revenues per tractor per week, (ii) per-
mile rates charged to customers, (iii) average monthly miles generated per
tractor, (iv) average percentage of empty miles (miles without trailer
cargo), (v) average trip length (in loaded miles) and (vi) average number of
tractors in service. General economic conditions, seasonal trucking
industry freight patterns and industry capacity are important factors that
impact these statistics.
Our most significant resource requirements are company drivers, owner-
operators, tractors, trailers and equipment operating costs (such as fuel
and related fuel taxes, driver pay, insurance and supplies and maintenance).
To mitigate our risk to fuel price increases, we recover additional fuel
surcharges from our customers that recoup a majority, but not all, of the
increased fuel costs; however, we cannot assure that current recovery levels
will continue in future periods. Our financial results are also affected by
company driver and owner-operator availability and the market for new and
used revenue equipment. We are self-insured for a significant portion of
bodily injury, property damage and cargo claims and for workers'
compensation benefits and health claims for our employees (supplemented by
premium-based insurance coverage above certain dollar levels). For that
reason, our financial results may also be affected by driver safety, medical
costs, weather, legal and regulatory environments and insurance coverage
costs to protect against catastrophic losses.
The operating ratio is a common industry measure used to evaluate our
profitability and that of our Truckload segment operating fleets. The
operating ratio consists of operating expenses expressed as a percentage of
operating revenues. The most significant variable expenses that impact the
Truckload segment are driver salaries and benefits, fuel, fuel taxes
(included in taxes and licenses expense), payments to owner-operators
14
(included in rent and purchased transportation expense), supplies and
maintenance and insurance and claims. These expenses generally vary based
on the number of miles generated. We also evaluate these costs on a per-
mile basis to adjust for the impact on the percentage of total operating
revenues caused by changes in fuel surcharge revenues, per-mile rates
charged to customers and non-trucking revenues. As discussed further in the
comparison of operating results for third quarter 2008 to third quarter
2007, several industry-wide issues could cause costs to increase in future
periods. These issues include a softer freight market, changing fuel
prices, higher new truck and trailer purchase prices and a weaker used
equipment market. Our main fixed costs include depreciation expense for
tractors and trailers and equipment licensing fees (included in taxes and
licenses expense). The Truckload segment requires substantial cash
expenditures for tractor and trailer purchases. We fund these purchases
with net cash from operations and financing available under our existing
credit facilities, as management deems necessary.
We provide non-trucking services primarily through four operating units
within our VAS segment. These operating units include Brokerage, Freight
Management, Intermodal and International. Unlike our Truckload segment, the
VAS segment is less asset-intensive and is instead dependent upon qualified
employees, information systems and qualified third-party capacity providers.
The largest expense item related to the VAS segment is the cost of
transportation we pay to third-party capacity providers. This expense item
is recorded as rent and purchased transportation expense. Other operating
expenses include salaries, wages and benefits and computer hardware and
software depreciation. We evaluate VAS by reviewing the gross margin
percentage (revenues less rent and purchased transportation expenses
expressed as a percentage of revenues) and the operating income percentage.
15
Results of Operations:
The following table sets forth certain industry data regarding the
freight revenues and operations for the periods indicated.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- % ----------------------- %
2008 2007 Change 2008 2007 Change
-------- -------- ------ ---------- ---------- ------
Trucking revenues, net of fuel
surcharge (1) $367,401 $371,746 -1.2% $1,084,402 $1,113,221 -2.6%
Trucking fuel surcharge
revenues (1) 135,525 77,286 75.4% 366,223 211,072 73.5%
Non-trucking revenues, including
VAS (1) 76,070 56,725 34.1% 209,699 207,860 0.9%
Other operating revenues (1) 5,061 4,503 12.4% 14,701 13,306 10.5%
-------- -------- ---------- ----------
Total operating revenues (1) $584,057 $510,260 14.5% $1,675,025 $1,545,459 8.4%
======== ======== ========== ==========
Operating ratio
(consolidated) (2) 93.5% 92.7% 95.1% 93.4%
Average monthly miles per
tractor 10,306 9,956 3.5% 10,189 9,846 3.5%
Average revenues per total
mile (3) $1.480 $1.474 0.4% $1.466 $1.460 0.4%
Average revenues per loaded
mile (3) $1.699 $1.702 -0.2% $1.691 $1.688 0.2%
Average percentage of empty
miles (4) 12.88% 13.38% -3.7% 13.31% 13.47% -1.2%
Average trip length in miles
(loaded) 539 550 -2.0% 540 561 -3.7%
Total miles (loaded and
empty) (1) 248,197 252,128 -1.6% 739,571 762,327 -3.0%
Average tractors in service 8,028 8,441 -4.9% 8,065 8,603 -6.3%
Average revenues per tractor
per week (3) $3,521 $3,388 3.9% $3,448 $3,318 3.9%
Total tractors (at quarter end)
Company 7,335 7,620 7,335 7,620
Owner-operator 705 810 705 810
-------- -------- ---------- ----------
Total tractors 8,040 8,430 8,040 8,430
Total trailers (Truckload and
Intermodal, at quarter end) 24,140 24,765 24,140 24,765
(1) Amounts in thousands.
(2) Operating expenses expressed as a percentage of operating revenues.
Operating ratio is a common measure in the trucking industry used to
evaluate profitability.
(3) Net of fuel surcharge revenues.
(4) Miles without trailer cargo.
16
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 $2.5 million and $2.2 million for
the three-month periods ended September 30, 2008 and September 30, 2007 and
$6.3 million and $7.6 million for the nine-month periods ended September 30,
2008 and September 30, 2007, as described on page 12.
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- ------------------------------------
Truckload Transportation Services 2008 2007 2008 2007
--------------- --------------- ----------------- -----------------
(amounts in thousands) $ % $ % $ % $ %
-------------------------- --------------- --------------- ----------------- -----------------
Revenues $505,489 100.0 $451,272 100.0 $1,456,872 100.0 $1,332,148 100.0
Operating expenses 472,376 93.4 418,206 92.7 1,388,746 95.3 1,240,674 93.1
-------- -------- ---------- ----------
Operating income $ 33,113 6.6 $ 33,066 7.3 $ 68,126 4.7 $ 91,474 6.9
======== ======== ========== ==========
Higher fuel prices and higher fuel surcharge revenues increase our
consolidated operating ratio and the Truckload segment's operating ratio
when fuel surcharges are reported on a gross basis as revenues versus
netting against fuel expenses. Eliminating fuel surcharge revenues, which
are generally a more volatile source of revenue, provides a more consistent
basis for comparing the results of operations from period to period. The
following table calculates the Truckload segment's operating ratio as if
fuel surcharges are excluded from revenue and instead reported as a
reduction of operating expenses.
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- ------------------------------------
Truckload Transportation Services 2008 2007 2008 2007
--------------- --------------- ----------------- -----------------
(amounts in thousands) $ % $ % $ % $ %
-------------------------- --------------- --------------- ----------------- -----------------
Revenues $505,489 $451,272 $1,456,872 $1,332,148
Less: trucking fuel surcharge
revenues 135,525 77,286 366,223 211,072
-------- -------- ---------- ----------
Revenues, net of fuel surcharges 369,964 100.0 373,986 100.0 1,090,649 100.0 1,121,076 100.0
-------- -------- ---------- ----------
Operating expenses 472,376 418,206 1,388,746 1,240,674
Less: trucking fuel surcharge
revenues 135,525 77,286 366,223 211,072
-------- -------- ---------- ----------
Operating expenses, net of fuel
surcharges 336,851 91.0 340,920 91.2 1,022,523 93.8 1,029,602 91.8
-------- -------- ---------- ----------
Operating income $ 33,113 9.0 $ 33,066 8.8 $ 68,126 6.2 $ 91,474 8.2
======== ======== ========== ==========
The following table sets forth the VAS segment's non-trucking revenues,
rent and purchased transportation expense, other operating expenses and
operating income. Other operating expenses for the VAS segment primarily
consist of salaries, wages and benefits expense. VAS also incurs smaller
expense amounts in the supplies and maintenance, depreciation, rent and
purchased transportation (excluding third-party transportation costs),
insurance, communications and utilities and other operating expense
categories.
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- ------------------------------------
Value Added Services 2008 2007 2008 2007
--------------- --------------- ----------------- -----------------
(amounts in thousands) $ % $ % $ % $ %
-------------------------- --------------- --------------- ----------------- -----------------
Revenues $ 73,586 100.0 $ 54,517 100.0 $203,401 100.0 $200,243 100.0
Rent and purchased transportation
expense 62,838 85.4 45,963 84.3 173,358 85.2 175,200 87.5
-------- -------- ---------- ----------
Gross margin 10,748 14.6 8,554 15.7 30,043 14.8 25,043 12.5
Other operating expenses 6,429 8.7 5,373 9.9 18,373 9.1 15,465 7.7
-------- -------- ---------- ----------
Operating income $ 4,319 5.9 $ 3,181 5.8 $ 11,670 5.7 $ 9,578 4.8
======== ======== ========== ==========
17
Three Months Ended September 30, 2008 Compared to Three Months Ended
----------------------------------------------------------------------------
September 30, 2007
------------------
Operating Revenues
Operating revenues increased 14.5% for the three months ended September
30, 2008, compared to the same period of the prior year. Excluding fuel
surcharge revenues, trucking revenues decreased 1.2% due primarily to a 4.9%
decrease in the average number of tractors in service, partially offset by a
3.5% increase in average monthly miles per tractor. In mid-March 2007, we
began reducing the Van fleet to better match declining load volumes with
fewer trucks. This proactive decision helped us improve performance by
increasing average miles per tractor and improving revenue per total mile
slightly in third quarter 2008 compared to third quarter 2007. With respect
to pricing and rates, revenue per total mile, excluding fuel surcharges,
increased by 0.4%.
Freight demand for the nearly 4,700 trucks in our Regional, Expedited
and Van fleets (collectively the "Van Network"), as measured by the
percentages of loads to trucks (pre-books), in July, August and September
2008 was approximately the same as July, August and September 2007. The
strengthening of demand we experienced in June 2008 did not continue into
third quarter 2008. However, third quarter 2008 pre-books were relatively
stable year over year, compared to weaker year-over-year pre-books
experienced during the first five months of 2008. We believe that as a
result of increased carrier financial failures that occurred during the
first half of 2008, industry capacity remained more balanced with freight
demand in third quarter 2008, compared to the excess capacity at the
beginning of 2008.
Freight demand during the latter part of third quarter 2008 and the
month of October 2008 has been disappointing but not unexpected, considering
the turbulence and uncertainty in the financial markets. During October, we
experienced weaker year-over-year pre-books. We believe consumer spending
is being affected by the current lack of confidence in the credit market and
the stock market. We are planning based on the assumption that this trend
will continue. We currently expect this trend will result in lackluster
shipping volumes this peak freight season.
Fuel surcharge revenues represent collections from customers for the
higher cost of fuel. These revenues increased 75.4% to $135.5 million in
third quarter 2008 from $77.3 million in third quarter 2007 due to an
average increase in diesel fuel costs of $1.19 per gallon in third quarter
2008 compared to third quarter 2007. To lessen the effect of fluctuating
fuel prices on our margins, we collect fuel surcharge revenues from our
customers. Our fuel surcharge programs are designed to (i) recoup high fuel
costs from customers when fuel prices rise and (ii) provide customers with
the benefit of lower costs when fuel prices decline. These programs enable
us to recover a majority, but not all, of the fuel price increases. Each
year in the past four years, rising fuel costs (net of fuel surcharge
collections) had a negative impact on our operating income when compared to
the previous year. The total negative impact on our operating income due to
fuel expense, net of fuel surcharge collections, during 2004 through 2007
was $61 million.
When fuel prices rise rapidly, a negative earnings lag occurs because
the cost of fuel rises immediately and the market indexes used to determine
fuel surcharges increase at a slower pace. As a result, during these rising
fuel price periods, the negative impact of fuel on our financial results is
more significant. The fuel price trend in third quarter 2008 was unusual
because fuel prices declined for most weeks during the quarter. In a period
of declining fuel prices, we generally experience a temporary favorable
earnings effect because fuel costs decline at a faster pace than the fuel
surcharge collections that are determined by the market indexes. This
occurred during third quarter 2008, enabling us to temporarily have lower
net fuel expense, which helped to offset uncompensated fuel costs from truck
idling, empty miles not billable to customers and out-of-route miles. All
of these uncompensated fuel costs were higher in third quarter 2008 than
third quarter 2007 due to the higher average fuel prices in third quarter
18
2008. Once fuel prices stabilize, we do not expect the temporary favorable
trend to continue.
In the past, we negotiated higher rates with customers to recover the
fuel expense shortfall in base rates per mile. However, given the softer
freight market experienced during the past two years, we have not been able
to recover the fuel expense shortfall in base rates. As a result, increases
in fuel costs may continue to negatively impact our earnings per share until
freight market conditions may allow us to recover this shortfall from
customers.
We continue diversifying our services from the one-way Van fleet to our
Dedicated, Regional and Expedited fleets and North America cross-border
services within the Truckload segment and to the logistics units and
services within the VAS segment. This ongoing diversification helped lessen
the impact of a lackluster freight market in third quarter 2008. Customer
response to these growing services continues to be very positive. We intend
to continue expanding and developing these services.
To provide shippers with additional sources of managed capacity and
network analysis, as well as a more global footprint, we continue growing
our non-asset based VAS segment. In third quarter 2008, VAS began
implementing new business, which began to generate additional revenues
across all of our business units and fleets. Our diverse portfolio of
logistics services, backed by our asset-based fleets, has become an
attractive option to customers who want to ensure they have a competitive
and seamless supply chain solution.
VAS revenues are generated by its four operating units: Brokerage,
Freight Management, Intermodal and International. VAS revenues increased
35% to $73.6 million in third quarter 2008 from $54.5 million in third
quarter 2007 due to an increase in Brokerage, Intermodal and International
revenues. The gross margin percentage declined to 14.6% in third quarter
2008 compared to 15.7% in third quarter 2007, although gross margin dollars
grew 26% on the higher revenues. The operating income percentage increased
to 5.9% in third quarter 2008 compared to 5.8% in third quarter 2007.
Brokerage continued to produce strong results with 41% revenue growth
but experienced a decline in its gross margin percentage. The tightening of
truckload capacity due to increased carrier financial failures has made it
more challenging for Brokerage to obtain qualified third party carriers at a
comparable cost to prior quarters. Intermodal revenues grew 47%, and its
operating margin percentage also improved. International continues to
generate increased revenues and improve its operating margin.
Operating Expenses
Our operating ratio (operating expenses expressed as a percentage of
operating revenues) was 93.5% for the three months ended September 30, 2008,
compared to 92.7% for the three months ended September 30, 2007. Expense
items that impacted the overall operating ratio are described on the
following pages. The tables on page 17 show the operating ratios and
operating margins for our two reportable segments, Truckload and VAS.
19
The following table sets forth the cost per total mile of operating
expense items for the Truckload segment for the periods indicated. We
evaluate operating costs for this segment on a per-mile basis, which is a
better measurement tool for comparing the results of operations from period
to period.
Three Months Ended Increase Nine Months Ended Increase
September 30, (Decrease) September 30, (Decrease)
------------------ -----------------
2008 2007 per Mile 2008 2007 per Mile
-------------------------------------------------------------
Salaries, wages and benefits $0.582 $0.578 $0.004 $0.575 $0.573 $0.002
Fuel 0.584 0.402 0.182 0.571 0.379 0.192
Supplies and maintenance 0.158 0.153 0.005 0.158 0.149 0.009
Taxes and licenses 0.109 0.114 (0.005) 0.112 0.115 (0.003)
Insurance and claims 0.115 0.087 0.028 0.104 0.092 0.012
Depreciation 0.163 0.157 0.006 0.164 0.158 0.006
Rent and purchased transportation 0.181 0.165 0.016 0.181 0.159 0.022
Communications and utilities 0.019 0.019 0.000 0.020 0.020 0.000
Other (0.008) (0.016) 0.008 (0.007) (0.018) 0.011
-------------------------------------------------------------
Total $1.903 $1.659 $0.244 $1.878 $1.627 $0.251
=============================================================
Owner-operator costs are included in rent and purchased transportation
expense. Owner-operator miles as a percentage of total miles were 11.6% for
third quarter 2008 compared to 12.7% for third quarter 2007. Owner-
operators are independent contractors who supply their own tractor and
driver and are responsible for their operating expenses (including driver
pay, fuel, supplies and maintenance and fuel taxes). This decrease in
owner-operator miles as a percentage of total miles shifted costs from the
rent and purchased transportation category to other expense categories. Due
to this decrease, we estimate that rent and purchased transportation expense
for the Truckload segment was lower by approximately 1.6 cents per total
mile, and other expense categories had offsetting increases on a total-mile
basis as follows: (i) fuel, 0.7 cents; (ii) salaries, wages and benefits,
0.5 cents; (iii) depreciation, 0.2 cents; (iv) supplies and maintenance, 0.1
cents; and (v) taxes and licenses, 0.1 cents.
Salaries, wages and benefits in the Truckload segment increased
slightly on a total mile basis in third quarter 2008 compared to third
quarter 2007. This increase is primarily attributed to higher workers'
compensation expense and, as discussed above, the shift from rent and
purchased transportation to salaries, wages and benefits because of the
decrease in owner-operator miles as a percentage of total miles. Within the
Truckload segment, these cost increases were offset partially by a small
decrease in average pay per mile for company drivers and lower non-driver
pay for office and equipment maintenance personnel in the Truckload segment
(due to efficiency and cost control improvements). The growing non-trucking
VAS segment experienced higher non-driver salaries in third quarter 2008
compared to third quarter 2007.
We renewed our workers' compensation insurance coverage for the policy
year beginning April 1, 2008. Our coverage levels are the same as the prior
policy year. We continue to maintain a self-insurance retention of $1.0
million per claim and have no annual aggregate retention amount for claims
above $1.0 million. Our workers' compensation insurance premiums for the
policy year beginning April 2008 are slightly lower than the previous policy
year.
The driver recruiting and retention market remained less difficult than
a year ago. The weakness in the construction and automotive industries and
a rising national unemployment rate continue to positively affect our driver
availability and selectivity. In addition, we believe our strong mileage
utilization and financial strength are attractive to drivers when compared
to many other carriers. We anticipate that competition for qualified
drivers will remain high and cannot predict whether we will experience
future shortages. If such a shortage were to occur and driver pay rate
20
increases were necessary to attract and retain drivers, our results of
operations would be negatively impacted to the extent that corresponding
freight rate increases were not obtained.
Fuel increased 18.2 cents per total mile for the Truckload segment due
primarily to higher average diesel fuel prices. Compared to unprecedented
high diesel fuel prices in second quarter 2008, diesel fuel prices declined
during third quarter 2008 but remained higher than diesel fuel prices in
third quarter 2007. Compared to the same month in 2007, diesel fuel costs
were $1.62 per gallon higher in July 2008, $1.12 per gallon higher in August
2008 and $0.82 per gallon higher in September 2008. Fuel prices averaged
only 5 cents per gallon higher in October 2008 compared to October 2007.
Fuel expense increased $43.4 million and rent and purchased transportation
expense paid to owner-operator drivers (which increased due to the higher
fuel reimbursement to owner-operators) increased $5.9 million, when
comparing third quarter 2008 to third quarter 2007.
During third quarter 2008, we continued to improve our fuel miles per
gallon ("mpg") through numerous initiatives to improve fuel efficiency.
These initiatives include (i) reducing truck idle time, (ii) lowering non-
billable miles, (iii) continuing to increase the percentage of aerodynamic,
more fuel-efficient trucks in the company truck fleet and (iv) installing
auxiliary power units ("APUs") in company trucks. Truck idle time
percentages can be affected by seasonal weather patterns (such as warm
summer months and cold winter months) that prompt drivers to idle the engine
to provide air conditioning or heating for comfort during non-driving
periods. Thus, idle time percentages for trucks without APUs may be higher
(and fuel mpg may be lower as a result) during the summer and winter months
as compared to temperate spring and fall months. APUs provide an alternate
source to power heating and air conditioning systems when the main engine is
not operating, and APUs consume significantly less diesel fuel than idling
the main engine. As of September 30, 2008, we had installed APUs in
approximately 40% of the company-owned truck fleet, and we intend to
continue increasing the percentage of trucks with APUs as we purchase new
tractors. The average mpg of company trucks improved in third quarter 2008
compared to third quarter 2007. Due strictly to these mpg improvements, we
purchased nearly 2.6 million fewer gallons of fuel in third quarter 2008
than in third quarter 2007. This equates to a reduction of approximately
29,000 tons of carbon dioxide emissions. As we purchase new trucks, we
intend to continue installing APUs and taking part in other environmentally
conscious initiatives, such as our active participation in the SmartWay
Transport Partnership program of the U.S. Environmental Protection Agency
("EPA").
Shortages of fuel, increases in fuel prices or rationing of petroleum
products can have a materially adverse effect on our operations and
profitability. We are unable to predict whether fuel price levels will
increase or decrease in the future or the extent to which fuel surcharges
will be collected from customers. As of September 30, 2008, we had no
derivative financial instruments to reduce our exposure to fuel price
fluctuations.
Supplies and maintenance for the Truckload segment increased 0.5 cents
on a total mile basis in third quarter 2008 compared to third quarter 2007.
Over-the-road repair costs increased due to rising parts and labor costs
assessed by over-the-road vendors (partially due to higher commodity costs
that increase the costs of parts and tires) and the performance of more
over-the-road repairs resulting from a decrease in our equipment maintenance
personnel. The increased average age of the truck fleet also contributed to
higher truck maintenance repairs.
Taxes and licenses for the Truckload segment decreased in third quarter
2008 by 0.5 cents on a total mile basis from third quarter 2007 due to a
decrease in fuel taxes per mile resulting from the improvement in the
company truck mpg.
Insurance and claims for the Truckload segment increased by 2.8 cents
on a total mile basis in third quarter 2008 from third quarter 2007. This
increase was the result of net unfavorable claims development on large
claims and, to a lesser extent, on smaller claims for accidents that
occurred prior to third quarter 2008. We renewed our liability insurance
policies on August 1, 2008 and retained the annual $8.0 million aggregate
for claims between $2.0 million and $5.0 million. For claims in excess of
21
$5.0 million and less than $10.0 million, we are responsible for an
aggregate of $4.0 million of claims in the policy year, which decreased from
an aggregate of $5.0 million in the policy year that began August 1, 2007.
We maintain liability insurance coverage with insurance carriers
substantially in excess of the $10.0 million per claim. Our liability
insurance premiums for the policy year that began August 1, 2008 are
slightly lower than the previous policy year. A portion of our insurance
coverage for the current and prior policy years is provided by insurance
companies that are subsidiaries of American International Group, Inc.
("AIG"). These AIG insurance subsidiaries are regulated by various state
insurance departments. We do not currently believe that financial issues
affecting AIG will impact our current or prior insurance coverage or our
ability to obtain coverage in the future.
Depreciation expense for the Truckload segment increased 0.6 cents per
total mile in third quarter 2008 compared to third quarter 2007. This
increase was due primarily to depreciation of the APUs installed on company
trucks. The APU depreciation expense is offset by lower fuel costs because
tractors with APUs generally consume less fuel during periods of idle. The
higher average miles per tractor also has the effect of lowering this fixed
cost when evaluated on a per-mile basis.
Depreciation expense was historically affected by the engine emissions
standards imposed by the EPA that became effective in October 2002 and
applied to all new trucks purchased after that time, resulting in increased
truck purchase costs. Depreciation expense is affected because in January
2007, a second set of more strict EPA engine emissions standards became
effective for all newly manufactured truck engines. Compared to trucks with
engines produced before 2007, the trucks with new engines manufactured under
the 2007 standards have higher purchase prices. We began to take delivery
of trucks with these 2007-standard engines in first quarter 2008 to replace
older trucks in our fleet. The engines in our fleet of company-owned trucks
as of September 30, 2008 consist of 82% Caterpillar (nearly all are pre-2007
standard engines), 12% Detroit Diesel and 6% Mercedes Benz. In June 2008,
Caterpillar announced it will not produce on-highway engines for use in the
United States that will comply with new EPA engine emissions standards that
become effective in January 2010 but will continue to sell on-highway
engines internationally. Caterpillar also announced it is pursuing a
strategic alliance with Navistar. To date, we have not experienced a
reduction in value of our company-owned trucks with Caterpillar engines in
the used equipment market due to this announcement. Approximately one
million trucks in the U.S. domestic market have Caterpillar heavy-duty
engines, and Caterpillar has stated it will fully support these engines
going forward.
Rent and purchased transportation expense consists mainly of payments
to third-party capacity providers in the VAS segment and other non-trucking
operations and payments to owner-operators in the Truckload segment. These
expenses generally vary depending on changes in the volume of services
generated by the VAS segment. As a percentage of VAS revenues, VAS rent and
purchased transportation expense increased to 85.4% in third quarter 2008
compared to 84.3% in third quarter 2007. The tightening of truckload
carrier capacity due to increased carrier financial failures has made it
more challenging for VAS's Brokerage unit to obtain qualified third party
carriers at a cost comparable to prior quarters.
Rent and purchased transportation expense for the Truckload segment
increased 1.6 cents per total mile in third quarter 2008 primarily because
of increased fuel prices that necessitated higher reimbursements to owner-
operators for fuel (increased $5.9 million) offset partially by a decrease
in the number of owner-operators. Our customer fuel surcharge programs do
not differentiate between miles generated by company-owned and owner-
operator trucks. Challenging operating conditions, including inflationary
cost increases that are the responsibility of owner-operators and higher
fuel prices, have made it difficult for owner-operators to stay in business.
These challenging operating conditions have made owner-operator recruitment
and retention difficult. We have historically been able to add company-
owned tractors and recruit additional company drivers to offset any owner-
operator decreases. If a shortage of owner-operators and company drivers
occurs, increases in per mile settlement rates (for owner-operators) and
driver pay rates (for company drivers) may become necessary to attract and
22
retain these drivers. This could negatively affect our results of
operations to the extent that we do not obtain corresponding freight rate
increases.
Other operating expenses for the Truckload segment increased 0.8 cents
per total mile in third quarter 2008. Gains on sales of assets (primarily
trucks and trailers) are reflected as a reduction of other operating
expenses and are reported net of sales-related expenses, including costs to
prepare the equipment for sale. Gains on sales of assets decreased to $2.8
million in third quarter 2008 from $5.5 million in third quarter 2007. As
noted in our second quarter 2008 Quarterly Report on Form 10-Q filed with
the U.S. Securities and Exchange Commission ("SEC") on August 4, 2008, we
anticipated lower gains on sales of equipment in third quarter 2008 than in
second quarter 2008 if the freight market and high fuel price conditions did
not improve. Gains in third quarter 2008 were $0.6 million higher than
gains in second quarter 2008, which we attribute to the effect of lower fuel
prices during the third quarter. The used equipment sales market remains
challenging due to carrier failures and company fleet reductions increasing
the number of trucks for sale while buyer demand for the purchase of used
trucks remains lackluster. Our wholly-owned subsidiary, Fleet Truck Sales,
is one of the largest Class 8 used truck and equipment retail entities in
the United States. Fleet Truck Sales continues to be our resource for
remarketing our used trucks and trailers.
Other Expense (Income)
We recorded minimal interest expense in third quarter 2008 versus $0.5
million of interest expense in third quarter 2007. We had no debt
outstanding at September 30, 2008 or during third quarter 2008 compared to
$10.0 million debt outstanding at September 30, 2007 and average outstanding
debt of $30.0 million during third quarter 2007.
Income Taxes
Our effective income tax rate (income taxes expressed as a percentage
of income before income taxes) increased slightly to 42.5% for third quarter
2008 from 41.7% for third quarter 2007. The higher income tax rate was due
primarily to lower income before income taxes on an annualized basis, which
caused non-deductible expenses such as driver per diem to comprise a larger
percentage of our income before income taxes.
Nine Months Ended September 30, 2008 Compared to Nine Months Ended September
----------------------------------------------------------------------------
30, 2007
--------
Operating Revenues
Operating revenues increased by 8.4% for the nine months ended
September 30, 2008, compared to the same period of the prior year.
Excluding fuel surcharge revenues, trucking revenues decreased 2.6% due
primarily to a 6.3% decrease in the average number of tractors in service,
partially offset by a 3.5% increase in average monthly miles per tractor and
a 0.4% increase in average revenues per total mile. Fuel surcharge revenues
increased 73.5% to $366.2 million in the 2008 year-to-date period from
$211.1 million in the 2007 year-to-date period because of higher diesel fuel
prices. VAS revenues increased 2% due to growth in Brokerage, International
and Intermodal. This growth was offset by a structural change to a
customer's continuing arrangement related to third party carriers that
became effective in third quarter 2007. Consequently, we began reporting
VAS revenues for this customer on a net basis (revenues net of purchased
transportation expense) rather than on a gross basis. This change affected
the reporting of VAS revenues and resulted in a reduction of VAS revenues
and VAS purchased transportation expense for this customer in third quarter
2007 and subsequent periods. This reporting change reduced VAS revenues and
VAS rent and purchased transportation expense by $36.3 million from the nine
months ended September 30, 2007 to the same period of 2008. Excluding the
affected revenues for this customer, VAS revenues grew 24% during the nine
months ended September 30, 2008 compared to the same period in 2007.
23
Operating Expenses
Our operating ratio (operating expenses expressed as a percentage of
operating revenues) was 95.1% for the nine months ended September 30, 2008,
compared to 93.4% for the same period of the previous year. Expense items
that impacted the overall operating ratio are described below. The tables
on page 17 show the operating ratios and operating margins for our two
reportable segments, Truckload and VAS.
Owner-operator miles as a percentage of total miles were 12.0% for the
nine months ended September 30, 2008 compared to 12.3% for the nine months
ended September 30, 2007. This small decrease in owner-operator miles as a
percentage of total miles shifted costs from the rent and purchased
transportation category to other expense categories. Due to this decrease,
we estimate that rent and purchased transportation expense for the Truckload
segment was lower by approximately 0.4 cents per total mile, and other
expense categories had offsetting increases on a total-mile basis as
follows: (i) fuel, 0.2 cents; (ii) salaries, wages and benefits, 0.1 cents;
and (iii) depreciation, 0.1 cents.
Salaries, wages and benefits for non-drivers decreased as a result of
the reduction in office and equipment maintenance personnel in the Truckload
segment (due to cost control initiatives), offset partially by an increase
in VAS personnel to support the VAS segment growth. Salaries, wages and
benefits for the Truckload segment increased slightly because of an increase
in student driver pay resulting from a higher average number of student
trainer teams offset by the lower non-driver pay related to office and
equipment maintenance personnel. Fuel increased 19.2 cents per total mile
due to the higher fuel expense per gallon offset partially by mpg
improvements in the company truck fleet. Supplies and maintenance increased
0.9 cents per total mile because of increases in over-the-road tractor
repairs and related parts and labor costs. The higher average age of the
company truck fleet also contributed to higher truck maintenance repairs.
Taxes and licenses were 0.3 cents per mile lower during the first nine
months of 2008 than in the same period of 2007 due to the effect of improved
company truck mpg on fuel taxes. Insurance increased 1.2 cents on a total
mile basis due primarily to net unfavorable claims development on large
claims, partially offset by a reduction in the average number of liability
claims and fewer new larger dollar claims. Depreciation increased 0.6 cents
per total mile because of a higher trailer-to-tractor ratio and depreciation
expense on APUs. Rent and purchased transportation for the Truckload
segment increased 2.2 cents per total mile primarily because of an increase
in the fuel reimbursement paid to owner-operators. Rent and purchased
transportation expense for the VAS segment decreased slightly, although VAS
revenues increased slightly. As a percentage of VAS revenues, VAS rent and
purchased transportation expense decreased to 85.2% for the nine-month
period ended September 30, 2008 compared to 87.5% during the same period of
2007. Excluding the affected VAS revenues and purchased transportation
expense from the 2007 period related to the structural change of a
customer's continuing arrangement (described above), VAS rent and purchased
transportation expense would have been 84.7% of revenues in the 2007 period.
Other operating expenses increased 1.1 cents per total mile due to lower
gains on sales of assets in the 2008 nine-month period.
Other Expense (Income)
We recorded minimal interest expense during the nine months ended
September 30, 2008 versus $2.9 million of interest expense during the nine
months ended September 30, 2007. We had no debt outstanding during the
first nine months of 2008, compared to $10.0 million debt outstanding at
September 30, 2007 after debt repayments (net of borrowings) of $90.0
million were made during the nine-month period ended September 30, 2007.
The average debt outstanding during the nine months ended September 30, 2007
was $55.0 million.
24
Income Taxes
Our effective income tax rate was 42.6% for the nine months ended
September 30, 2008 and 41.8% for the same period in 2007. The higher income
tax rate was due primarily to lower income before income taxes on an
annualized basis, which caused non-deductible expenses such as driver per
diem to be a larger percentage of our income before income taxes.
Liquidity and Capital Resources:
During the nine months ended September 30, 2008, we generated cash flow
from operations of $189.2 million, a 1.1% ($2.0 million) increase in cash
flow compared to the same nine-month period one year ago. The change in
operating cash flows results primarily from changes in the timing of
collections of trade accounts receivable, payments to vendors and increases
in insurance and claims accruals. We were able to make net capital
expenditures, repurchase common stock and pay dividends (discussed below)
because of the cash flow from operations and existing cash balances.
Net cash used in investing activities for the nine-month period ended
September 30, 2008 increased by 232.4% ($53.1 million), from $22.9 million
for the nine-month period ended September 30, 2007 to $76.0 million for the
nine-month period ended September 30, 2008. Net property additions
(primarily revenue equipment) were $80.4 million for the nine-month period
ended September 30, 2008, compared to $27.3 million during the same period
of 2007.
As of September 30, 2008, we committed to property and equipment
purchases, net of trades, of approximately $47.0 million. We expect our net
capital expenditures (primarily revenue equipment) to be in the range of
$115.0 million to $140.0 million in 2008 and $75.0 million to $150.0 million
in 2009. We intend to fund these net capital expenditures through cash flow
from operations, existing cash balances and financing available under our
existing credit facilities, as management deems necessary. In 2009, we plan
to purchase only enough new trucks to replace the number of used trucks that
we can sell, which will affect our net capital expenditures. Other
carriers' financial failures and fleet reductions have increased the supply
of used trucks for sale, while buyer demand for the purchase of used
trucks remains lackluster. Based on these current used truck market
conditions, we may be unable to sell enough used trucks to maintain the
current 2.4 year average age of our company tractor fleet.
Net financing activities used $2.4 million during the nine months ended
September 30, 2008 and $175.0 million during the same period in 2007. The
change included debt repayments (net of borrowings) of $90.0 million during
the nine-month period ended September 30, 2007, compared to no debt
repayments during the nine-month period ended September 30, 2008. We paid
dividends of $10.6 million in the nine months ended September 30, 2008
compared to $10.4 million in the same period of 2007. Our common stock
repurchases totaled $87.1 million during the nine-month period ended
September 30, 2007 compared to $4.5 million during the same period of 2008.
From time to time, we have repurchased, and may continue to repurchase,
shares of our common stock. The timing and amount of such purchases depends
on market and other factors. As of September 30, 2008, we had purchased
1,041,200 shares pursuant to our current Board of Directors repurchase
authorization and had 6,958,800 shares remaining available for repurchase.
Management believes our financial position at September 30, 2008 is
strong. As of September 30, 2008, we had $136.3 million of cash and cash
equivalents and $880.8 million of stockholders' equity. Cash is invested in
government portfolio money market funds. We do not hold any investments in
auction-rate securities. As of September 30, 2008, we had $225.0 million of
available credit pursuant to credit facilities, of which we had no
outstanding borrowings. The credit available under these facilities is
further reduced by the $39.5 million in letters of credit we maintain.
These letters of credit are primarily required as security for insurance
policies. Based on our strong financial position, management foresees no
25
significant barriers to obtaining sufficient financing, if necessary.
Contractual Obligations and Commercial Commitments:
The following tables set forth our contractual obligations and
commercial commitments as of September 30, 2008.
Payments Due by Period
(in millions)
Less
than 1 1-3 4-5 Over 5 Period
Total year years years years Unknown
---------------------------------------------------------------------------------------
Contractual Obligations
Unrecognized tax benefits $ 13.0 $ 7.1 $ - $ - $ - $ 5.9
Equipment purchase
commitments 47.0 47.0 - - - -
------- ------- ------- ------- ------- -------
Total contractual cash
obligations $ 60.0 $ 54.1 $ - $ - $ - $ 5.9
======= ======= ======= ======= ======= =======
Other Commercial Commitments
Unused lines of credit $ 185.5 $ 50.0 $ 135.5 $ - $ - $ -
Standby letters of credit 39.5 39.5 - - - -
------- ------- ------- ------- ------- -------
Total commercial commitments
$ 225.0 $ 89.5 $ 135.5 $ - $ - $ -
======= ======= ======= ======= ======= =======
Total obligations $ 285.0 $ 143.6 $ 135.5 $ - $ - $ 5.9
======= ======= ======= ======= ======= =======
On January 1, 2007, we adopted Financial Accounting Standards Board
("FASB") Interpretation No. 48, Accounting for Uncertainty in Income Taxes-
an Interpretation of FASB Statement No. 109 ("FIN 48"). As of September 30,
2008, we have recorded $13.0 million of unrecognized tax benefits. We made
payments totaling $4.9 million subsequent to September 30, 2008 which will
reduce the $7.1 million in the "less than 1 year" category, and we expect
the remaining $2.2 million to be settled within the next 12 months. We are
unable to reasonably determine when the $5.9 million categorized as "period
unknown" will be settled. The equipment purchase commitments relate to
committed equipment expenditures (primarily revenue equipment). We have
committed credit facilities with two banks totaling $225.0 million, of which
we had no outstanding borrowings at September 30, 2008. These credit
facilities bear variable interest based on the LIBOR. The credit available
under these facilities is further reduced by the amount of standby letters
of credit under which we are obligated. The unused lines of credit are
available to us in the event we need financing for the replacement of our
fleet or for other significant capital expenditures. The standby letters of
credit are primarily required for insurance policies.
Off-Balance Sheet Arrangements:
As of September 30, 2008, we did not have any non-cancelable revenue
equipment operating leases or other arrangements that meet the definition of
an off-balance sheet arrangement.
Regulations:
Effective October 1, 2005, all truckload carriers became subject to
revised hours of service ("HOS") regulations issued by the Federal Motor
Carrier Safety Administration ("FMCSA") ("2005 HOS Regulations"). The most
26
significant change for us from the previous regulations is that now,
pursuant to the 2005 HOS Regulations, drivers using the sleeper berth must
take at least eight consecutive hours off-duty in the sleeper berth during
their ten hours off-duty. Previously, drivers using a sleeper berth were
allowed to split their ten-hour off-duty time into two periods, provided
neither period was less than two hours. The more restrictive sleeper berth
regulations are requiring some drivers to plan their time better. The 2005
HOS Regulations also had a negative impact on our mileage efficiency,
resulting in lower mileage productivity for those customers with multiple-
stop shipments or those shipments with pick-up or delivery delays.
Effective December 27, 2007, the FMCSA issued an interim final rule
that amended the 2005 HOS Regulations to (i) allow drivers up to 11 hours of
driving time within a 14-hour, non-extendable window from the start of the
workday (this driving time must follow ten consecutive hours of off-duty
time) and (ii) restart calculations of the weekly on-duty time limits after
the driver has at least 34 consecutive hours off-duty. This interim rule
made essentially no changes to the 11-hour driving limit and 34-hour restart
rules. In 2006 and 2007, the U.S. Court of Appeals for the District of
Columbia also considered the 2005 HOS Regulations and heard arguments on the
various petitions for review, one of which was submitted by Public Citizen
(a consumer safety organization). On January 23, 2008, the Court denied
Public Citizen's motion to invalidate the interim final rule. The FMCSA
solicited comments on the interim final rule until February 15, 2008 and
intends to issue a final rule in 2008 that addresses the issues identified
by the Court. As of September 30, 2008, the FMCSA has not published a final
rule.
On January 18, 2007, the FMCSA published a Notice of Proposed
Rulemaking ("NPRM") in the Federal Register on the trucking industry's use
of Electronic On-Board Recorders ("EOBRs") for compliance with HOS rules.
The intent of this proposed rule is to (i) improve highway safety by
fostering development of new EOBR technology for HOS compliance; (ii)
encourage EOBR use by motor carriers through incentives; and (iii) require
EOBR use by operators with serious and continuing HOS compliance problems.
Comments on the NPRM were to be received by April 18, 2007. While we do not
believe the rule, as proposed, would have a significant effect on our
operations and profitability, we will continue to monitor future
developments. As of September 30, 2008, the FMCSA has not published a final
rule.
In 1998, we became the first trucking company in the United States to
receive a U.S. Department of Transportation exemption to use a global
positioning system-based paperless log system as an alternative to the paper
logbooks traditionally used by truck drivers to track their daily work
activities. On September 21, 2004, the FMCSA approved the exemption for our
paperless log system and moved this exemption from the FMCSA-approved pilot
program to permanent status. The exemption is to be renewed every two
years. On September 7, 2006, the FMCSA announced in the Federal Register
its decision to renew for two additional years our exemption from the
FMCSA's requirement that drivers of commercial motor vehicles operating in
interstate commerce prepare handwritten records of duty status (logs). In
July 2008, we again applied for the two-year renewal of our paperless log
exemption. The FMCSA has determined that our paperless log system satisfies
the FMCSA's Automatic On-Board Recording Device requirements and that an
exemption is no longer required.
On December 26, 2007, the FMCSA published an NPRM in the Federal
Register regarding minimum requirements for entry-level driver training.
Under the proposed rule, a commercial driver's license ("CDL") applicant
would be required to present a valid driver training certificate obtained
from an accredited institution or program. Entry-level drivers applying for
a Class A CDL would be required to complete a minimum of 120 hours of
training, consisting of 76 classroom hours and 44 driving hours. The
current regulations do not require a minimum number of training hours and
require only classroom education. Drivers who obtain their first CDL during
the three-year period after the FMCSA issues a final rule would be exempt.
The FMCSA extended the NPRM comment period until July 2008. On April 9,
2008, the FMCSA published another NPRM that (i) establishes new minimum
standards to be met before states issue commercial learner's permits
("CLPs"); (ii) revises the CDL knowledge and skills testing standards; and
(iii) improves anti-fraud measures within the CDL program. If one or both
27
of these proposed rules is approved as written, the final rules could
materially impact the number of potential new drivers entering the industry.
As of September 30, 2008, the FMCSA has not published a final rule.
The EPA mandated a new set of more stringent engine emissions standards
for all newly manufactured truck engines. These standards became effective
in January 2007. Compared to trucks with engines manufactured before 2007
and not subject to the new standards, the trucks manufactured with the new
engines have higher purchase prices (approximately $5,000 to $10,000 more
per truck). To delay the cost impact of these new emissions standards, in
2005 and 2006 we purchased significantly more new trucks than we normally
buy each year, and we maintained a newer truck fleet relative to historical
company and industry standards. Our newer truck fleet allowed us to delay
purchases of trucks with the new 2007-standard engines until first quarter
2008, when we began to take delivery of trucks with 2007-standard engines.
In January 2010, a final set of more rigorous EPA-mandated emissions
standards will become effective for all new engines manufactured after that
date. We are currently evaluating the options available to us to prepare
for the upcoming 2010 standards.
Several U.S. states, counties and cities have enacted legislation or
ordinances restricting idling of trucks to short periods of time. This
action is significant when it impacts the driver's ability to idle the truck
for purposes of operating air conditioning and heating systems particularly
while in the sleeper berth. Many of the statutes or ordinances recognize
the need of the drivers to have a comfortable environment in which to sleep
and include exceptions for those circumstances. California had such an
exemption; however, since January 1, 2008, the California sleeper berth
exemption no longer exists. We have taken steps to address this issue in
California, which include driver training, better scheduling, and the
installation and use of APUs. California has also enacted restrictions on
transport refrigeration unit ("TRU") emissions, which are to be phased in
over several years beginning at the end of 2008, provided the EPA issues a
waiver of preemption to California. If the law becomes effective as
scheduled, it will require companies to operate only compliant TRUs in
California. There are several alternatives for meeting these requirements
that we are currently evaluating.
Critical Accounting Policies:
We operate in the truckload sector of the trucking industry and the
logistics sector of the transportation industry. In the truckload sector,
we focus on transporting consumer nondurable products that ship consistently
throughout the year. In the logistics sector, besides managing
transportation requirements for individual customers, we provide additional
sources of truck capacity, alternative modes of transportation, a global
delivery network and systems analysis to optimize transportation needs. Our
success depends on our ability to efficiently manage our resources in the
delivery of truckload transportation and logistics services to our
customers. Resource requirements vary with customer demand and may be
subject to seasonal or general economic conditions. Our ability to adapt to
changes in customer transportation requirements is essential to efficient
resource deployment, making capital investments in tractors and trailers or
obtaining qualified third-party carrier capacity at a reasonable price.
Although our business volume is not highly concentrated, we may also be
occasionally affected by our customers' financial failures or loss of
customer business.
Our most significant resource requirements are company drivers, owner-
operators, tractors, trailers and related equipment operating costs (such as
fuel and related fuel taxes, driver pay, insurance and supplies and
maintenance). To mitigate our risk to fuel price increases, we recover
additional fuel surcharges from our customers that recoup a majority, but
not all, of the increased fuel costs; however, we cannot assure that current
recovery levels will continue in future periods. Our financial results are
also affected by company driver and owner-operator availability and the new
and used revenue equipment market. Because we are self-insured for a
significant portion of bodily injury, property damage and cargo claims and
for workers' compensation benefits and health claims for our employees
(supplemented by premium-based insurance coverage above certain dollar
28
levels), financial results may also be affected by driver safety, medical
costs, weather, legal and regulatory environments and insurance coverage
costs to protect against catastrophic losses.
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 five to 12 years. Estimates of
salvage value at the expected date of trade-in or sale (for example,
three years for tractors) are based on the expected market values of
equipment at the time of disposal. Although our normal replacement
cycle for tractors is three years, we calculate depreciation expense
for financial reporting purposes using a five-year life and 25%
salvage value. Depreciation expense calculated in this manner
continues at the same straight-line rate (which approximates the
continuing declining market value of the tractors) when a tractor is
held beyond the normal three-year age. Calculating depreciation
expense using a five-year life and 25% salvage value results in the
same annual depreciation rate (15% of cost per year) and the same
net book value at the normal three-year replacement date (55% of
cost) as using a three-year life and 55% salvage value. We
continually monitor the adequacy of the lives and salvage values
used in calculating depreciation expense and adjust these
assumptions appropriately when warranted.
* Impairment of long-lived assets. We review our long-lived assets
for impairment whenever events or circumstances indicate the
carrying amount of a long-lived asset may not be recoverable. An
impairment loss would be recognized if the carrying amount of the
long-lived asset is not recoverable and the carrying amount exceeds
its fair value. For long-lived assets classified as held and used,
the carrying amount is not recoverable when the carrying value of
the long-lived asset exceeds the sum of the future net cash flows.
We do not separately identify assets by operating segment because
tractors and trailers are routinely transferred from one operating
fleet to another. As a result, none of our long-lived assets have
identifiable cash flows from use that are largely independent of the
cash flows of other assets and liabilities. Thus, the asset group
used to assess impairment would include all of our assets. 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 noncurrent) are recorded
at the estimated ultimate payment amounts and are based upon
individual case estimates (including negative development) and
estimates of incurred-but-not-reported losses using loss development
factors based upon past experience. An actuary reviews our self-
insurance reserves for bodily injury and property damage claims and
workers' compensation claims every six months.
* Policies for revenue recognition. Operating revenues (including
fuel surcharge revenues) and related direct costs are recorded when
the shipment is delivered. For shipments where a third-party
capacity provider (including owner-operators under contract with us)
is utilized to provide some or all of the service and we (i) are the
primary obligor in regard to the shipment delivery, (ii) establish
customer pricing separately from carrier rate negotiations, (iii)
generally have discretion in carrier selection and/or (iv) have
credit risk on the shipment, we record both revenues for the dollar
value of services we bill to the customer and rent and purchased
transportation expense for transportation costs we pay to the third-
party provider upon the shipment's delivery. In the absence of the
conditions listed above, we record revenues net of those expenses
related to third-party providers.
* Accounting for income taxes. Significant management judgment is
required to determine (i) the provision for income taxes, (ii)
whether deferred income taxes will be realized in full or in part
and (iii) the liability for unrecognized tax benefits in accordance
29
with the provisions of FIN 48. Deferred income tax assets and
liabilities are measured using enacted tax rates that are expected
to apply to taxable income in the years when those temporary
differences are expected to be recovered or settled. When it is
more likely that all or some portion of specific deferred income tax
assets will not be realized, a valuation allowance must be
established for the amount of deferred income tax assets that are
determined not to be realizable. A valuation allowance for deferred
income tax assets has not been deemed necessary due to our
profitable operations. Accordingly, if facts or financial
circumstances change and consequently impact the likelihood of
realizing the deferred income tax assets, we would need to apply
management's judgment to determine the amount of valuation allowance
required in any given period.
* Allowance for doubtful accounts. The allowance for doubtful
accounts is our estimate of the amount of probable credit losses in
our existing accounts receivable. We review the financial condition
of customers prior to granting credit. We determine the allowance
based on our historical write-off experience and national economic
conditions. During third quarter 2008, numerous significant events
affected the U.S. financial markets and resulted in a significant
reduction of credit availability and liquidity. Current economic
data also indicates the U.S. economy will soon be experiencing a
recession. Consequently, we believe some of our customers may be
unable to obtain or retain adequate financing to support their
businesses in the future. We anticipate that because of these
combined factors, some of our customers may also be compelled to
restructure their businesses or may be unable to pay amounts owed to
us. We have formal policies in place to continually monitor credit
extended to customers and to manage our credit risk. We evaluate
the adequacy of our allowance for doubtful accounts quarterly and
believe our allowance for doubtful accounts is adequate based on
information currently available.
Management periodically re-evaluates these estimates as events and
circumstances change. Together with the effects of the matters discussed
above, these factors may significantly impact our results of operations from
period to period.
Accounting Standards:
In September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements ("No. 157"). This statement defines fair value, establishes a
framework for measuring fair value in generally accepted accounting
principles and expands disclosures about fair value measurements. SFAS No.
157 does not require any new fair value measurements but rather eliminates
inconsistencies in guidance found in various prior accounting pronouncements
and is effective for fiscal years beginning after November 15, 2007. In
February 2008, the FASB issued FASB Staff Position No. 157-2 ("FSP No. 157-
2"). FSP No. 157-2 delays the effective date of SFAS No. 157 for all
nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually), until fiscal years beginning after
November 15, 2008 and interim periods within those fiscal years. These
nonfinancial items include assets and liabilities such as reporting units
measured at a fair value in a goodwill impairment test and nonfinancial
assets acquired and liabilities assumed in a business combination.
Effective January 1, 2008, we adopted SFAS No. 157 for financial assets and
liabilities recognized at fair value on a recurring basis. The partial
adoption of SFAS No. 157 for financial assets and liabilities had no effect
on our financial position, results of operations and cash flows. As of
September 30, 2008, management believes that fully adopting SFAS No. 157
will not have a material effect on our financial position, results of
operations and cash flows.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business
Combinations ("No. 141R"). This statement establishes requirements for (i)
recognizing and measuring in an acquiring company's financial statements the
30
identifiable assets acquired, the liabilities assumed and any noncontrolling
interest in the acquiree, (ii) recognizing and measuring the goodwill
acquired in the business combination or a gain from a bargain purchase and
(iii) determining what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination. The provisions of SFAS No. 141R are effective for
business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after
December 15, 2008. As of September 30, 2008, management believes that SFAS
No. 141R will not have a material effect on our financial position, results
of operations and cash flows.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling
Interests in Consolidated Financial Statements-an amendment of ARB No. 51
("No. 160"). This statement amends Accounting Research Bulletin No. 51 to
establish accounting and reporting standards for the noncontrolling interest
in a subsidiary and for the deconsolidation of a subsidiary. The provisions
of SFAS No. 160 are effective for fiscal years, and interim periods within
those fiscal years, beginning on or after December 15, 2008. As of
September 30, 2008, management believes that SFAS No. 160 will not have a
material effect on our financial position, results of operations and cash
flows.
In March 2008, the FASB issued SFAS No. 161, Disclosures about
Derivative Instruments and Hedging Activities-an amendment of FASB Statement
No. 133 ("No. 161"). This statement amends FASB Statement No. 133 to
require enhanced disclosures about an entity's derivative and hedging
activities. The provisions of SFAS No. 161 are effective for fiscal years,
and interim periods within those fiscal years, beginning on or after
November 15, 2008. As of September 30, 2008, management believes that SFAS
No. 161 will not have a material effect on our financial position, results
of operations and cash flows.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally
Accepted Accounting Principles ("No. 162"). This statement identifies the
sources of and framework for selecting the accounting principles to be used
in the preparation of financial statements of nongovernmental entities that
are presented in conformity with generally accepted accounting principles
("GAAP") in the United States ("GAAP hierarchy"). Because the current GAAP
hierarchy is set forth in the American Institute of Certified Public
Accountants Statement on Auditing Standards No. 69, it is directed to the
auditor rather than to the entity responsible for selecting accounting
principles for financial statements presented in conformity with GAAP.
Accordingly, the FASB concluded the GAAP hierarchy should reside in the
accounting literature established by the FASB and issued this statement to
achieve that result. The provisions of SFAS No. 162 will become effective
on November 15, 2008, which is 60 days following the SEC's approval of the
Public Company Accounting Oversight Board amendments to AU Section 411, The
Meaning of Present Fairly in Conformity with Generally Accepted Accounting
Principles. As of September 30, 2008, management believes that SFAS No. 162
will not have any effect on our current accounting practices or on our
financial position, results of operations and cash flows.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to market risk from changes in commodity prices, foreign
currency exchange rates and interest rates.
Commodity Price Risk
The price and availability of diesel fuel are subject to fluctuations
attributed to changes in the level of global oil production, refining
capacity, seasonality, weather and other market factors. Historically, we
have recovered a majority, but not all, of fuel price increases from
customers in the form of fuel surcharges. We implemented customer fuel
surcharge programs with most of our customers to offset much of the higher
fuel cost per gallon. However, we do not recover all of the fuel cost
increase through these surcharge programs. We cannot predict the extent to
which fuel prices will increase or decrease in the future or the extent to
which fuel surcharges could be collected. As of September 30, 2008, we had
31
no derivative financial instruments to reduce our exposure to fuel price
fluctuations.
Foreign Currency Exchange Rate Risk
We conduct business in several foreign countries, including Mexico,
Canada and China. Foreign currency transaction gains and losses were not
material to our results of operations for third quarter 2008 and prior
periods. To date, most foreign revenues are denominated in U.S. Dollars,
and we receive payment for foreign freight services primarily in U.S.
Dollars to reduce direct foreign currency risk. Accordingly, we are not
currently subject to material risks involving any foreign currency exchange
rate and the effects that such exchange rate movements would have on our
future costs or future cash flows.
Interest Rate Risk
We had no debt outstanding at September 30, 2008. Interest rates on
our unused credit facilities are based on the LIBOR. Increases in interest
rates could impact our annual interest expense on future borrowings. As of
September 30, 2008, we do not have any derivative financial instruments to
reduce our exposure to interest rate increases.
Item 4. Controls and Procedures.
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rule 15d-15(e) of the Securities
Exchange Act of 1934 ("Exchange Act"). Our disclosure controls and
procedures are designed to provide reasonable assurance of achieving the
desired control objectives. Based upon that evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls
and procedures are effective in enabling us to record, process, summarize
and report information required to be included in our periodic filings with
the SEC within the required time period.
Management, under the supervision and with the participation of our
Chief Executive Officer and Chief Financial Officer, concluded that no
changes in our internal control over financial reporting occurred during our
most recent fiscal quarter that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
We have confidence in our internal controls and procedures.
Nevertheless, our management, including the Chief Executive Officer and
Chief Financial Officer, does not expect that the internal controls or
disclosure procedures and controls will prevent all errors or intentional
fraud. An internal control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of such internal controls are met. Further, the design of an
internal control system must reflect that resource constraints exist, and
the benefits of controls must be relative to their costs. Because of the
inherent limitations in all internal control systems, no evaluation of
controls can provide absolute assurance that all control issues and
instances of fraud, if any, have been detected.
32
PART II
OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On October 15, 2007, we announced that on October 11, 2007 our Board of
Directors approved an increase in the number of shares of our common stock
that Werner Enterprises, Inc. (the "Company") is authorized to repurchase.
Under this new authorization, the Company is permitted to repurchase an
additional 8,000,000 shares. As of September 30, 2008, the Company had
purchased 1,041,200 shares pursuant to this authorization and had 6,958,800
shares remaining available for repurchase. The Company may purchase shares
from time to time depending on market, economic and other factors. The
authorization will continue unless withdrawn by the Board of Directors.
No shares of common stock were repurchased during the third quarter of
2008 by either the Company or any "affiliated purchaser," as defined by Rule
10b-18 of the Exchange Act.
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Item 6. Exhibits.
Exhibit No. Exhibit Incorporated by Reference to:
----------- ------- -----------------------------
3(i) Restated Articles of Incorporation of Werner Exhibit 3(i) to the registrant's report
Enterprises, Inc. on Form 10-Q for the quarter ended
June 30, 2007
3(ii) Revised and Restated By-Laws of Werner Exhibit 3(ii) to the registrant's report
Enterprises, Inc. on Form 10-Q for the quarter ended
June 30, 2007
10.1 Form of Restricted Stock Award Agreement for Filed herewith
recipients under the Werner Enterprises, Inc.
Equity Plan
10.2 The Executive Nonqualified Excess Plan of Filed herewith
Werner Enterprises, Inc., as amended
31.1 Certification of the Chief Executive Officer Filed herewith
pursuant to Rules 13a-14(a) and 15d-14(a) of
the Securities Exchange Act of 1934 (Section
302 of the Sarbanes-Oxley Act of 2002)
31.2 Certification of the Chief Financial Officer Filed herewith
pursuant to Rules 13a-14(a) and 15d-14(a) of
the Securities Exchange Act of 1934 (Section
302 of the Sarbanes-Oxley Act of 2002)
32.1 Certification of the Chief Executive Officer Filed herewith
pursuant to 18 U.S.C. Section 1350 (Section
906 of the Sarbanes-Oxley Act of 2002)
32.2 Certification of the Chief Financial Officer Filed herewith
pursuant to 18 U.S.C. Section 1350 (Section
906 of the Sarbanes-Oxley Act of 2002)
34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WERNER ENTERPRISES, INC.
Date: November 3, 2008 By: /s/ John J. Steele
--------------------- ---------------------------------------
John J. Steele
Executive Vice President, Treasurer and
Chief Financial Officer
Date: November 3, 2008 By: /s/ James L. Johnson
--------------------- ---------------------------------------
James L. Johnson
Senior Vice President, Controller and
Corporate Secretary
35