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ITEM 7.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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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:
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•
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Cautionary Note Regarding Forward-Looking Statements
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•
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Liquidity and Capital Resources
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•
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Contractual Obligations and Commercial Commitments
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•
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Off-Balance Sheet Arrangements
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•
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Critical Accounting Policies and Estimates
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Cautionary Note Regarding Forward-Looking Statements:
This Annual Report on Form 10-K 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 this Item 7 (Management’s Discussion and Analysis of Financial Condition and Results of Operations), are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended. These safe harbor provisions encourage reporting companies to provide prospective information to investors. Forward-looking statements can be identified by the use of certain words, such as
“anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project” and other similar terms and language. We believe the forward-looking statements are reasonable based on currently available information. However, forward-looking statements involve risks, uncertainties and assumptions, whether known or unknown, that could cause our actual results, business, financial condition and cash flows to differ materially from those anticipated in the forward-looking statements. A discussion of important factors relating to forward-looking statements is included in Item 1A (Risk Factors) of Part I of this Form 10-K. Readers should not unduly rely on the forward-looking statements included in this Form 10-K because such statements speak only to the date they were made. Unless otherwise required by applicable securities laws, we undertake no obligation or duty to update or revise any forward-looking statements contained herein to reflect subsequent events or circumstances or the occurrence of unanticipated events.
Overview:
We have two reportable segments, Truckload and Werner Logistics, and we operate in the truckload and logistics sectors of the transportation industry. In the truckload sector, we focus on transporting consumer nondurable products that generally ship more consistently throughout the year. In the logistics sector, besides managing transportation requirements for individual customers, we provide additional sources of truck capacity, alternative modes of transportation, a global delivery network and systems analysis to optimize transportation needs. Our success depends on our ability to efficiently and effectively manage our resources in the delivery of truckload transportation and logistics services to our customers. Resource requirements vary with customer demand, which may be subject to seasonal or general economic conditions. Our ability to adapt to changes in customer transportation requirements is essential to efficiently deploy resources and make capital investments in tractors and trailers (with respect to our Truckload segment) or obtain qualified third-party capacity at a reasonable price (with respect to our Werner Logistics segment). Although our business volume is not highly concentrated, we may also be affected by our customers’ financial failures or loss of customer business.
Revenues for our Truckload segment operating units (One-Way Truckload and Specialized Services) are typically generated on a per-mile basis and also include revenues such as stop charges, loading and unloading charges, equipment detention charges and equipment repositioning charges. To mitigate our risk to fuel price increases, we recover from our customers additional fuel surcharges that generally recoup a majority of the increased fuel costs; however, we cannot assure that current recovery levels will continue in future periods. Because fuel surcharge revenues fluctuate in response to changes in fuel costs, we identify them separately and exclude them from the statistical calculations to provide a more meaningful comparison between periods. The key statistics used to evaluate trucking revenues, net of fuel surcharge, are (i) average revenues per tractor per week, (ii) average percentage of empty miles (miles without trailer cargo), (iii) average trip length (in loaded miles) and (iv) average number of tractors in service. General economic conditions, seasonal trucking industry freight patterns and industry capacity are important factors that impact these statistics. Our Truckload segment also generates a small amount of revenues categorized as non-trucking revenues, which consist primarily of the intra-Mexico portion of cross-border shipments delivered to or from Mexico where the Truckload segment utilizes a third-party capacity provider. We exclude such revenues from the statistical calculations.
Our most significant resource requirements are company drivers, independent contractors, tractors and trailers. Our financial results are affected by company driver and independent contractor availability and the markets for new and used revenue equipment. We are self-insured for a significant portion of bodily injury, property damage and cargo claims; workers’ compensation claims; and associate health claims (supplemented by premium-based insurance coverage above certain dollar levels). For that reason, our financial results may also be affected by driver safety, medical costs, weather, legal and regulatory environments and insurance coverage costs to protect against catastrophic losses.
The operating ratio is a common industry measure used to evaluate our profitability and that of our Truckload segment operating fleets. The operating ratio consists of operating expenses expressed as a percentage of operating revenues. The most significant variable expenses that impact the Truckload segment are driver salaries and benefits, fuel, fuel taxes (included in taxes and licenses expense), payments to independent contractors (included in rent and purchased transportation expense), supplies and maintenance and insurance and claims. As discussed further in the comparison of operating results for 2016 to 2015, several industry-wide issues have caused, and could continue to cause, costs to increase in future periods. These issues include shortages of drivers or independent contractors, changing fuel prices, higher new truck and trailer purchase prices and compliance with new or proposed regulations. Our main fixed costs include depreciation expense for tractors and trailers and equipment licensing fees (included in taxes and licenses expense). The Truckload segment requires substantial cash expenditures for tractor and trailer purchases. We fund these purchases with net cash from operations and financing available under our existing credit facilities, as management deems necessary.
We provide non-trucking services primarily through the four operating units within our Werner Logistics segment (Brokerage, Freight Management, Intermodal and WGL). Unlike our Truckload segment, the Werner Logistics segment is less asset-intensive and is instead dependent upon qualified associates, information systems and qualified third-party capacity providers. The largest expense item related to the Werner Logistics segment is the cost of purchased transportation we pay to third-party capacity providers. This expense item is recorded as rent and purchased transportation expense. Other operating expenses consist primarily of salaries,
wages and benefits. We evaluate the Werner Logistics segment’s financial performance by reviewing the gross margin percentage (revenues less rent and purchased transportation expenses expressed as a percentage of revenues) and the operating income percentage. The gross margin percentage can be impacted by the rates charged to customers and the costs of securing third-party capacity. We have a mix of contracted long-term rates and variable rates for the cost of third-party capacity, and we cannot assure that our operating results will not be adversely impacted in the future if our ability to obtain qualified third-party capacity providers changes or the rates of such providers increase.
Results of Operations:
The following table sets forth the Consolidated Statements of Income in dollars and as a percentage of total operating revenues and the percentage increase or decrease in the dollar amounts of those items compared to the prior year.
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2016
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2015
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2014
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Percentage Change in Dollar Amounts
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(Amounts in thousands)
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$
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%
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$
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%
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$
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%
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2016 to 2015 (%)
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2015 to 2014 (%)
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Operating revenues
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$
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2,008,991
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100.0
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$
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2,093,529
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100.0
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$
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2,139,289
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100.0
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(4.0
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)
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(2.1
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)
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Operating expenses:
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Salaries, wages and benefits
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636,112
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31.7
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639,908
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30.6
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584,006
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27.3
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(0.6
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)
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9.6
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Fuel
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155,042
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7.7
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204,583
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9.8
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346,058
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16.2
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(24.2
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)
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(40.9
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)
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Supplies and maintenance
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171,397
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8.5
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190,114
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9.1
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188,437
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8.8
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(9.8
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)
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0.9
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Taxes and licenses
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85,547
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4.3
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89,646
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4.3
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85,468
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4.0
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(4.6
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)
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4.9
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Insurance and claims
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83,866
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4.2
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80,848
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3.9
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80,375
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3.7
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3.7
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0.6
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Depreciation
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209,728
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10.4
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193,209
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9.2
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176,984
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8.3
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8.5
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9.2
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Rent and purchased transportation
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512,296
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25.5
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480,624
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22.9
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498,782
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23.3
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6.6
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(3.6
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)
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Communications and utilities
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16,106
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0.8
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15,121
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0.7
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14,220
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0.7
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6.5
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6.3
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Other
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12,827
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0.6
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(980
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)
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(0.1
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)
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4,871
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0.2
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1,408.9
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(120.1
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)
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Total operating expenses
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1,882,921
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93.7
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1,893,073
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90.4
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1,979,201
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92.5
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(0.5
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)
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(4.4
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)
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Operating income
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126,070
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6.3
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200,456
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9.6
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160,088
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7.5
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(37.1
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)
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25.2
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Total other expense (income)
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(1,390
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)
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—
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(705
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)
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—
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(1,686
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)
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(0.1
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)
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(97.2
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)
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58.2
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Income before income taxes
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127,460
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6.3
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201,161
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9.6
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161,774
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7.6
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(36.6
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)
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24.3
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Income taxes
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48,331
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2.4
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77,447
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3.7
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63,124
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3.0
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(37.6
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)
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22.7
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Net income
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$
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79,129
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3.9
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$
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123,714
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5.9
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$
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98,650
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4.6
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(36.0
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)
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25.4
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The following tables set forth the operating revenues, operating expenses and operating income for the Truckload segment, as well as certain statistical data regarding our Truckload segment operations for the periods indicated.
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2016
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2015
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2014
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Truckload Transportation Services (amounts in thousands)
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$
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%
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$
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%
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$
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%
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Trucking revenues, net of fuel surcharge
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$
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1,356,284
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$
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1,411,099
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$
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1,332,879
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Trucking fuel surcharge revenues
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155,293
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212,489
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349,763
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Non-trucking and other operating revenues
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22,404
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|
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21,286
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|
|
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|
19,495
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Operating revenues
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1,533,981
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|
100.0
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1,644,874
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100.0
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1,702,137
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100.0
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Operating expenses
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1,426,268
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|
|
93.0
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1,455,024
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|
|
88.5
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1,549,145
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|
|
91.0
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Operating income
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107,713
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|
7.0
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|
189,850
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|
|
11.5
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|
152,992
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|
|
9.0
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Truckload Transportation Services
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2016
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2015
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2014
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Operating ratio, net of fuel surcharge revenues
(1)
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92.2
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%
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|
86.7
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%
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|
88.7
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%
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Average revenues per tractor per week
(2)
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$
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3,591
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|
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$
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3,732
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|
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$
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3,655
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Average trip length in miles (loaded)
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468
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|
|
482
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|
|
473
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Average percentage of empty miles
(3)
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12.96
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%
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12.39
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%
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|
12.06
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%
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Average tractors in service
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7,263
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|
7,271
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|
7,013
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Total trailers (at year end)
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22,725
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|
22,630
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|
|
22,305
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Total tractors (at year end):
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Company
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6,305
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|
6,635
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|
6,400
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Independent contractor
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795
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|
815
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|
650
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Total tractors
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7,100
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|
7,450
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|
|
7,050
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(1)
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Calculated as if fuel surcharge revenues are excluded from total revenues and instead reported as a reduction of operating expenses, which provides a more consistent basis for comparing results of operations from period to period.
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(2)
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Net of fuel surcharge revenues.
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(3)
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“Empty” refers to miles without trailer cargo.
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The following tables set forth the Werner Logistics segment’s revenues, rent and purchased transportation expense, gross margin, other operating expenses (primarily salaries, wages and benefits expense) and operating income, as well as certain statistical data regarding the Werner Logistics segment.
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2016
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2015
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2014
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Werner Logistics (amounts in thousands)
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$
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%
|
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$
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%
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|
$
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%
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Operating revenues
|
$
|
417,172
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|
|
100.0
|
|
|
$
|
393,174
|
|
|
100.0
|
|
|
$
|
390,645
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|
|
100.0
|
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Rent and purchased transportation expense
|
345,790
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|
|
82.9
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|
|
332,168
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|
|
84.5
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|
338,625
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|
|
86.7
|
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Gross margin
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71,382
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|
17.1
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|
|
61,006
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|
|
15.5
|
|
|
52,020
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|
|
13.3
|
|
Other operating expenses
|
50,648
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|
|
12.1
|
|
|
44,108
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|
|
11.2
|
|
|
44,485
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|
|
11.4
|
|
Operating income
|
$
|
20,734
|
|
|
5.0
|
|
|
$
|
16,898
|
|
|
4.3
|
|
|
$
|
7,535
|
|
|
1.9
|
|
|
|
|
|
|
|
|
|
|
|
Werner Logistics
|
2016
|
|
2015
|
|
2014
|
Average tractors in service
|
73
|
|
|
56
|
|
|
50
|
|
Total trailers (at year end)
|
1,625
|
|
|
1,460
|
|
|
1,670
|
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Total tractors (at year end)
|
74
|
|
|
62
|
|
|
55
|
|
2016 Compared to 2015
Operating Revenues
Operating revenues decreased 4.0% in 2016 compared to 2015. When comparing 2016 to 2015, the Truckload segment revenues decreased $110.9 million, or 6.7%, and revenues for the Werner Logistics segment increased $24.0 million, or 6.1%. The lower fuel prices in 2016 compared to 2015 resulted in lower fuel surcharge revenues in the Truckload segment.
2016 was a very challenging freight and rate year for our truckload and logistics business segments. Freight demand in the first half of 2016 was softer than the same periods of 2015 and 2014, but began to show sequential and seasonal improvement in the second half of the year. We believe part of this improvement was industry specific and part was company specific. During June 2016, to take advantage of the strengthening Dedicated market, we moved 150 trucks from One-Way Truckload into Dedicated, lessening the need to find freight for their trucks in the more challenged one-way truckload market. In September 2016, we moved an additional 100 trucks from One-Way Truckload into Dedicated. Freight demand thus far in 2017 in One-Way Truckload has been softer than the same period of 2016.
The contractual rate market was very challenging in the first half of 2016, particularly in One-Way Truckload. An excess supply of industry trucks relative to sluggish freight demand created a market in which some customers pushed hard and obtained contractual rate decreases. At that time, we chose to exit from certain contractual business that would have required mid-to-high single digit contractual rate decreases for the next year, since we believed that this pricing was not sustainable. Market conditions and competition, however, necessitated agreeing to some flat to slightly lower contractual rates which became effective in the second half of 2016. Gradual improvement in freight volumes and transactional (non-contract) spot market rates in the second
half of 2016 began to validate our pricing strategy, and in fourth quarter 2016 contract rates began to stabilize for new contracts. Expectations are rising for improved pricing in 2017, based on a more positive economic outlook, rationalizing industry truck supply, normalized current customer inventory levels and the supply-constricting December 2017 ELD regulatory mandate, although there can be no assurance that these factors will occur.
Trucking revenues, net of fuel surcharge, decreased 3.9% in 2016 compared to 2015 due to a 3.8% decrease in average revenues per tractor per week, net of fuel surcharge revenues. The average number of tractors in service remained about the same in both years. Average miles per truck declined by 3.2% in 2016 compared to 2015, and average revenues per total mile, net of fuel surcharge revenues, decreased 0.6%.
The average number of tractors in service in the Truckload segment remained flat at 7,263 in 2016 compared to 7,271 in 2015. We ended 2016 with 7,100 tractors in the Truckload segment, a year-over-year decrease of 350 trucks. Our Specialized Services unit, primarily Dedicated, ended 2016 with 3,760 trucks (or 53% of our total Truckload segment fleet compared to 49% at the end of 2015), and One-Way Truckload ended the year with 3,340 trucks. We cannot predict whether future driver shortages, if any, will adversely affect our ability to maintain our fleet size. If such a driver market shortage were to occur, it could result in a fleet size reduction, and our results of operations could be adversely affected.
Trucking fuel surcharge revenues represent collections from customers for the increase in fuel and fuel-related expenses, including the fuel component of our independent contractor cost (recorded as rent and purchased transportation expense) and fuel taxes (recorded in taxes and licenses expense), when diesel fuel prices rise. Conversely, when fuel prices decrease, fuel surcharge revenues decrease. These revenues decreased 26.9% to $155.3 million in 2016 from $212.5 million in 2015 because of lower average fuel prices in 2016. To lessen the effect of fluctuating fuel prices on our margins, we collect fuel surcharge revenues from our customers for the cost of diesel fuel and taxes in excess of specified base fuel price levels according to terms in our customer contracts. Fuel surcharge rates generally adjust weekly based on an independent U.S. Department of Energy fuel price survey which is released every Monday. Our fuel surcharge programs are designed to (i) recoup higher fuel costs from customers when fuel prices rise and (ii) provide customers with the benefit of lower fuel costs when fuel prices decline. These programs generally enable us to recover a majority, but not all, of the fuel price increases. The remaining portion is generally not recoverable because it results from empty and out-of-route miles (which are not billable to customers) and truck idle time. Fuel prices that change rapidly in short time periods also impact our recovery because the surcharge rate in most programs only changes once per week.
Werner Logistics revenues are generated by its four operating units and exclude revenues for full truckload shipments transferred to the Truckload segment, which are recorded as trucking revenues by the Truckload segment. Werner Logistics also recorded revenue and brokered freight expense of $1.0 million in 2016 and $1.3 million in 2015 for Intermodal drayage movements performed by the Truckload segment (also recorded as trucking revenues by the Truckload segment), and these transactions between reporting segments are eliminated in consolidation. Werner Logistics revenues increased 6.1% to $417.2 million in 2016 from $393.2 million in 2015. The Werner Logistics gross margin dollars increased 17.0% to $71.4 million in 2016 from $61.0 million in 2015, and the Werner Logistics gross margin percentage improved to 17.1% in 2016 from 15.5% in 2015. The Werner Logistics operating income percentage improved to 5.0% in 2016 from 4.3% in 2015. In 2016, Werner Logistics achieved growth in our truck brokerage and intermodal solutions despite the challenged logistics freight market. A large Werner Logistics Freight Management customer was acquired in 2015, and their logistics solution will transition to the acquirer’s transportation platform in first quarter 2017. The loss of this customer will slow revenue growth in the near term.
Operating Expenses
Our operating ratio (operating expenses expressed as a percentage of operating revenues) was 93.7% in 2016 compared to 90.4% in 2015. Expense items that impacted the overall operating ratio are described on the following pages. The tables on pages 15 through 16 show the Consolidated Statements of Income in dollars and as a percentage of total operating revenues and the percentage increase or decrease in the dollar amounts of those items compared to the prior year, as well as the operating ratios, operating margins and certain statistical information for our two reportable segments, Truckload and Werner Logistics.
Salaries, wages and benefits decreased $3.8 million or 0.6% in 2016 compared to 2016 but increased 1.1% as a percentage of operating revenues. The lower dollar amount of salaries, wages and benefits expense was due primarily to fewer company trucks and miles in 2016 compared to 2015, partially offset by higher driver mileage pay rates (including a pay increase effective January 1, 2016, for approximately 20% of our company drivers and prior driver pay increases in multiple Dedicated fleets). When evaluated on a per-mile basis, driver and non-driver salaries, wages and benefits increased, which we attribute primarily to 7% higher driver pay per company truck mile in 2016. Non-driver salaries, wages and benefits in the non-trucking Werner Logistics segment increased 20.3% in 2016 compared to 2015.
We renewed our workers’ compensation insurance coverage for the policy year beginning April 1, 2016. Our coverage levels are the same as the prior policy year. We continue to maintain a self-insurance retention of $1.0 million per claim. Our workers’ compensation insurance premiums for the policy year beginning April 2016 were similar to those for the previous policy year.
The driver recruiting market remained challenging in 2016. Several ongoing market factors persisted including a declining number of, and increased competition for, driver training school graduates, a low national unemployment rate, aging truck driver demographics and increased truck safety regulations. We took many significant actions in 2016 to strengthen our driver recruiting and retention to make Werner the preferred choice for the best drivers, including raising driver pay, lowering the age of our truck fleet, installing safety and training features on all new trucks, tightening our driver hiring standards and investing in our driver training schools. In 2016, we achieved our lowest driver turnover rate in 17 years. We are unable to predict whether we will experience future driver shortages. If such a shortage were to occur and additional driver pay rate increases became necessary to attract and retain drivers, our results of operations would be negatively impacted to the extent that we could not obtain corresponding freight rate increases.
Fuel decreased $49.5 million or 24.2% in 2016 compared to 2015 and decreased 2.1% as a percentage of operating revenues due to (i) lower average diesel fuel prices, (ii) fewer company trucks and miles and (iii) improved miles per gallon (“mpg”). Average diesel fuel prices in 2016 were 29 cents per gallon lower than in 2015, a 17% decrease.
We continue to employ measures to improve our fuel mpg, including (i) limiting truck engine idle time, (ii) optimizing the speed, weight and specifications of our equipment and (iii) implementing mpg-enhancing equipment changes to our fleet including new trucks with EPA 2010 compliant engines, more aerodynamic truck features, idle reduction systems, trailer tire inflation systems, trailer skirts and automated manual transmissions to reduce our fuel gallons purchased. However, fuel savings from mpg improvement is partially offset by higher depreciation expense and the additional cost of diesel exhaust fluid (required in certain tractors with engines that meet the 2010 EPA emission standards). Although our fuel management programs require significant capital investment and research and development, we intend to continue these and other environmentally conscious initiatives, including our active participation as an EPA SmartWay Transport Partner. The SmartWay Transport Partnership is a national voluntary program developed by the EPA and freight industry representatives to reduce greenhouse gases and air pollution and promote cleaner, more efficient ground freight transportation.
For the first seven weeks of 2017, the average diesel fuel price per gallon was approximately 61 cents higher than the average diesel fuel price per gallon in the same period of 2016 and approximately 54 cents higher than the average for first quarter 2016.
Shortages of fuel, increases in fuel prices and petroleum product rationing can have a material 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 December 31, 2016, we had no derivative financial instruments to reduce our exposure to fuel price fluctuations.
Supplies and maintenance decreased $18.7 million or 9.8% in 2016 compared to 2015 and decreased 0.6% as a percentage of operating revenues. Repairs and maintenance decreased in 2016 compared to 2015 due to our younger tractor and trailer fleet and fewer company driver miles driven in 2016.
Taxes and licenses decreased $4.1 million or 4.6% in 2016 compared to 2015 and did not change as a percentage of operating revenues. Federal and state diesel fuel taxes were lower in 2016 than in 2015 because of fewer company driver miles and a higher mpg in 2016. An improved mpg results in fewer gallons of diesel fuel purchased and consequently less fuel taxes paid.
Insurance and claims increased $3.0 million or 3.7% in 2016 compared to 2015 and increased 0.3% as a percentage of operating revenues. The increase in 2016 compared to 2015 is primarily the result of unfavorable loss development on prior period large dollar claims. Most of our insurance and claims expense results from our claim experience and claim development under our self-insurance program; the remainder results from insurance premiums for claims in excess of our self-insured limits. We renewed our liability insurance policies on August 1, 2016, and continued to be responsible for the first $2.0 million per claim with an annual $8.0 million aggregate for claims between $2.0 million and $5.0 million and an annual aggregate of $5.0 million for claims in excess of $5.0 million and less than $10.0 million. We maintain liability insurance coverage with insurance carriers substantially in excess of the $10.0 million per claim. See Item 3 of Part I of this Form 10-K for information on our bodily injury and property damage coverage levels since August 1, 2013. Our liability and cargo insurance premiums for the policy year that began August 1, 2016 are about $3.5 million higher than premiums for the previous policy year. The market for excess trucking liability is extremely difficult, as insurance carriers have either exited the market or increased premium rates due to increasing plaintiff awards in the industry.
Depreciation increased $16.5 million or 8.5% in 2016 compared to 2015 and increased 1.2% as a percentage of operating revenues. This expense increase is due primarily to (i) the higher cost of new trucks purchased compared to the cost of used trucks that were sold over the past 12 months, (ii) the purchase of new trailers over the past 12 months to replace older used trailers which were fully depreciated and (iii) a change during fourth quarter 2016 in the estimated life of certain trucks to more rapidly depreciate the trucks to their residual values due to the weak used truck market. The effect of this change in accounting estimate was to increase 2016 depreciation expense by $4.1 million. We expect depreciation expense for these trucks to continue at a similar higher level in first quarter 2017 and then gradually decline as these trucks are sold in the first few quarters of 2017.
We are nearing completion of a significant reinvestment in our fleet over the last two years to reduce the average age of our trucks and trailers. Our investment in newer trucks and trailers improves our driver experience, raises operational efficiency and helps us to better manage our maintenance, safety and fuel costs.
Rent and purchased transportation expense increased $31.7 million or 6.6% in 2016 compared to 2015 and increased 2.6% as a percentage of operating revenues. Rent and purchased transportation expense consists mostly of payments to third-party capacity providers in the Werner Logistics segment and other non-trucking operations and payments to independent contractors in the Truckload segment. The payments to third-party capacity providers generally vary depending on changes in the volume of services generated by the Werner Logistics segment. Werner Logistics rent and purchased transportation expense increased $13.6 million, which corresponds to the higher Werner Logistics revenues, but decreased to 82.9% of Werner Logistics revenues in 2016 from 84.5% in 2015. The improved gross margin percentage is the result of on-going efforts to match contractual customer consistent freight with our strategic carrier partners’ capacity and then utilize the available capacity in the market to cover transactional volume.
Rent and purchased transportation expense for the Truckload segment increased $18.3 million in 2016 compared to 2015. This increase is due primarily to higher payments to independent contractors in 2016 compared to 2015, resulting from a November 2015 increase in the per-mile settlement rate for certain independent contractors. This increase was partially offset by lower average diesel fuel prices in 2016, which resulted in lower reimbursement to independent contractors for fuel. Independent contractor miles as a percentage of total miles were 14.4% in 2016 and 11.9% in 2015. Because independent contractors supply their own tractors and drivers and are responsible for their operating expenses, the increase in independent contractor miles as a percentage of total miles also shifted costs to the rent and purchased transportation category from other expense categories, including (i) salaries, wages and benefits, (ii) fuel, (iii) depreciation, (iv) supplies and maintenance and (v) taxes and licenses.
Challenging operating conditions continue to make independent contractor recruitment and retention difficult. Such conditions include inflationary cost increases that are the responsibility of independent contractors and a shortage of financing available to independent contractors for equipment purchases. We have historically been able to add company tractors and recruit additional company drivers to offset any decrease in the number of independent contractors. If a shortage of independent contractors and company drivers occurs, further increases in per-mile settlement rates (for independent contractors) and driver pay rates (for company drivers) may become necessary to attract and retain these drivers. This could negatively affect our results of operations to the extent that we would not be able to obtain corresponding freight rate increases.
Communications and utilities increased $1.0 million or 6.5% in 2016 compared to 2015 and increased 0.1% as a percentage of operating revenues. The increase is due to higher equipment tracking expenses and higher communication costs in 2016.
Other operating expenses increased $13.8 million in 2016 compared to 2015 and increased 0.7% as a percentage of operating revenues. Gains on sales of assets (primarily used trucks and trailers) are reflected as a reduction of other operating expenses and are reported net of sales-related expenses (which include costs to prepare the equipment for sale). Gains on sales of assets were $16.4 million in 2016, including $10.5 million from sales of real estate, compared to $23.2 million in 2015, which included $0.9 million in real estate gains. In 2016, we sold fewer trucks and more trailers than in 2015 and realized average losses per truck and higher average gains per trailer sold. The used truck pricing market became increasingly difficult as 2016 progressed due to a higher than normal supply of used trucks in the market and low buyer demand. We expect the difficult used truck market conditions will persist in 2017. Other operating expenses, primarily provision for doubtful accounts related to the driver training schools and professional and consulting fees, were $7.0 million higher in 2016 than in 2015.
Other Expense (Income)
Other expense (income) decreased $0.7 million in 2016 compared to 2015 and remained flat as a percentage of operating revenues due primarily to higher interest income on notes receivable. Interest expense was higher in 2016 compared to 2015 due to higher average outstanding debt.
Income Taxes
Our effective income tax rate (income taxes expressed as a percentage of income before income taxes) decreased to 37.9% for 2016 from 38.5% in 2015. The lower income tax rate in 2016 is primarily attributed to favorable tax adjustments for the remeasurement of uncertain tax positions in 2016.
2015 Compared to 2014
Operating Revenues
Operating revenues decreased 2.1% in 2015 compared to 2014. When comparing 2015 to 2014, the Truckload segment revenues decreased $57.3 million, or 3.4%, and the Werner Logistics segment revenues increased $2.5 million, or 0.6%. The significantly lower fuel prices in 2015 compared to 2014 resulted in lower fuel surcharge revenues in the Truckload segment and lower revenues in the Werner Logistics segment.
Assessing freight demand within the Truckload segment, 2014 and 2015 were cyclically contrasting years. 2014 provided the benefits of gradually improving demand from a strengthening economy and constrained supply due to a tight driver market and increasing safety regulations. Freight demand in 2015 did not strengthen as the year progressed, as the rate of economic growth slowed. The truckload sector also experienced supply increases in 2015 as small carrier confidence rose as a result of better rates in 2014 and much lower fuel prices beginning in late 2014. Finally, as 2015 ended, truckload supply began to stabilize as truck orders declined significantly and safety regulators finalized the electronic logging device regulations.
Trucking revenues, net of fuel surcharge, increased 5.9% in 2015 compared to 2014 due to a 3.7% increase in average number of tractors in service and a 2.1% increase in average revenues per tractor per week, net of fuel surcharge revenues. Average revenues per total mile, net of fuel surcharge revenues, increased 2.6% and average miles per truck declined by 0.5% in 2015 compared to 2014.
We continued to make progress implementing sustainable rate increases with our customers during 2015. These efforts worked to recoup the cost increases associated with more expensive equipment, a shrinking supply of qualified drivers and an increasingly challenging regulatory environment.
The average number of tractors in service in the Truckload segment increased 3.7% to 7,271 in 2015 from 7,013 in 2014, an increase of 258 tractors. Following an ongoing and intense company-wide focus to improve our driver recruiting and retention, we ended 2015 with 7,450 tractors in the Truckload segment (3,675 in our Specialized Services unit and 3,775 in our One-Way Truckload unit).
Trucking fuel surcharge revenues decreased 39.2% to $212.5 million in 2015 from $349.8 million in 2014 because of lower average fuel prices in 2015.
Werner Logistics revenues are generated by its four operating units and exclude revenues for full truckload shipments transferred to the Truckload segment, which are recorded as trucking revenues by the Truckload segment. Werner Logistics also recorded revenue and brokered freight expense of $1.3 million in 2015 and $2.9 million in 2014 for Intermodal drayage movements performed by the Truckload segment (also recorded as trucking revenues by the Truckload segment), and these transactions between reporting segments are eliminated in consolidation. Werner Logistics revenues increased 0.6% to $393.2 million in 2015 from $390.6 million in 2014. Werner Logistics gross margin dollars increased 17.3% to $61.0 million in 2015 from $52.0 million in 2014, and the Werner Logistics gross margin percentage improved to 15.5% in 2015 from 13.3% in 2014. Werner Logistics results for 2014 were negatively impacted by lower gross margin percentages for contractual business due to rising third-party carrier costs in a tight capacity market as well as regional capacity issues related to the second quarter 2014 start-up of a large Werner Logistics customer. We addressed several customer pricing, contractual and operational issues within Werner Logistics in fourth quarter 2014 which resulted in improved Werner Logistics financial performance in 2015. The Werner Logistics operating income percentage improved to 4.3% in 2015 from 1.9% in 2014.
Operating Expenses
Our operating ratio was 90.4% in 2015 compared to 92.5% in 2014. Expense items that impacted the overall operating ratio are described on the following pages. The tables on pages 15 through 16 show the Consolidated Statements of Income in dollars and as a percentage of total operating revenues and the percentage increase or decrease in the dollar amounts of those items compared to the prior year, as well as the operating ratios, operating margins and certain statistical information for our two reportable segments, Truckload and Werner Logistics.
Salaries, wages and benefits increased $55.9 million or 9.6% in 2015 compared to 2014 and increased 3.3% as a percentage of operating revenues. The higher dollar amount of salaries, wages and benefits expense was due primarily to higher driver salaries and payroll related fringe benefits due to higher driver pay rates and more company trucks and miles in 2015. We also recorded a total of $3.9 million of expense in 2015 related to a class action suit involving an employment related claim and a separation agreement for an executive resignation. When evaluated on a per-mile basis, driver and non-driver salaries, wages and benefits increased as well, which we attribute primarily to higher driver pay. In mid-August 2014, we increased pay by varying percentage amounts for many drivers within our One-Way Truckload unit. We also increased driver pay in multiple Dedicated fleets in 2014
and 2015. On a per-mile basis, non-driver salaries, wages and benefits in the non-trucking Werner Logistics segment decreased 1.6% in 2015 compared to 2014.
We renewed our workers’ compensation insurance coverage for the policy year beginning April 1, 2015. Our coverage levels are the same as the prior policy year. We continue to maintain a self-insurance retention of $1.0 million per claim. Our workers’ compensation insurance premiums for the policy year beginning April 2015 were similar to those for the previous policy year.
The driver recruiting market remained challenging in 2015. Several difficult market factors persisted, including a declining number of, and increased competition for, driver training school graduates, a gradually declining national unemployment rate, aging truck driver demographics and increased truck safety regulations. Following our mid-August 2014 pay changes and an ongoing and intense company-wide focus to improve our driver recruiting and retention, our driver retention metrics improved. During fourth quarter 2015, we announced strategic and targeted company driver and independent contractor per-mile increases in our One-Way Truckload business unit, totaling slightly more than $10 million on an annualized basis to nearly 20% of our drivers. Most of these increases became effective January 2016.
Fuel decreased $141.5 million or 40.9% in 2015 compared to 2014 and decreased 6.4% as a percentage of operating revenues due to (i) lower average diesel fuel prices and (ii) improved miles per gallon (“mpg”). Average diesel fuel prices in 2015 were $1.18 per gallon lower than in 2014, a 41% decrease. These decreases were partially offset by higher company truck miles in 2015.
During 2015, we continued to employ measures to improve our fuel mpg and invest in fuel saving equipment solutions, which were also intended to lessen environmental impact. These measures resulted in an improvement in mpg in 2015 compared to 2014, however, fuel savings from the mpg improvement is partially offset by higher depreciation expense and the additional cost of diesel exhaust fluid
Supplies and maintenance increased $1.7 million or 0.9% in 2015 compared to 2014 and increased 0.3% as a percentage of operating revenues. Driver advertising and other driver related expenses were higher in 2015 than in 2014. These increases were partially offset by lower tractor maintenance costs in 2015 due to a lower average age of company trucks in 2015 when compared to 2014.
Taxes and licenses increased $4.2 million or 4.9% in 2015 compared to 2014 and increased 0.3% as a percentage of operating revenues due to more miles in 2015 than in 2014, resulting from an increase in the average tractors in service, and an increase in property taxes. These increases were partially offset by a higher mpg in 2015 compared to 2014. An improved mpg results in fewer gallons of diesel fuel purchased and consequently less fuel taxes paid.
Insurance and claims increased $0.5 million or 0.6% in 2015 compared to 2014 and increased 0.2% as a percentage of operating revenues. The increase in 2015 compared to 2014 is primarily the result of higher expense on large dollar liability claims, partially offset by a decrease in expense related to cargo claims. We renewed our liability insurance policies on August 1, 2015, and continued to be responsible for the first $2.0 million per claim with an annual $8.0 million aggregate for claims between $2.0 million and $5.0 million and an annual aggregate of $5.0 million for claims in excess of $5.0 million and less than $10.0 million. Our liability and cargo insurance premiums for the policy year that began August 1, 2015, are slightly lower than premiums for the previous policy year on a per-mile basis.
Depreciation increased $16.2 million or 9.2% in 2015 compared to 2014 and increased 0.9% as a percentage of operating revenues. This expense increase is due primarily to the higher cost of new trucks purchased compared to the cost of used trucks that were sold, as well as the growth in the number of company trucks. In addition, the purchase of new trailers to replace older used trailers which were fully depreciated also contributed to the increase in depreciation expense.
Rent and purchased transportation expense decreased $18.2 million or 3.6% in 2015 compared to 2014 and decreased 0.4% as a percentage of operating revenues. Werner Logistics rent and purchased transportation expense decreased $6.5 million, despite higher Werner Logistics revenues, and decreased to 84.5% of Werner Logistics revenues in 2015 from 86.7% in 2014. This decrease was due primarily to our efforts to address customer pricing, contractual and operational issues within Werner Logistics.
Rent and purchased transportation expense for the Truckload segment decreased $13.0 million in 2015 compared to 2014. This decrease is due primarily to lower fuel prices that resulted in lower reimbursement to independent contractors for fuel and a higher average independent contractor settlement rate per mile in 2015 compared to 2014. In mid-August 2014 and in November 2015, we increased the per-mile settlement rate for certain independent contractors. Independent contractor miles as a percentage of total miles were 11.9% in 2015 and 12.1% in 2014.
Communications and utilities increased $0.9 million or 6.3% in 2015 compared to 2014 but did not change as a percentage of operating revenues. The increase is due to higher equipment tracking expenses and higher communication costs.
Other operating expenses decreased $5.9 million in 2015 compared to 2014 and decreased 0.3% as a percentage of operating revenues. Gains on sales of assets increased to $23.2 million in 2015 from $19.3 million in 2014, a $3.9 million increase. In 2015,
we sold more trucks and trailers than in 2014. We realized higher average gains per trailer sold, while average gains per truck sold were flat due to the used truck market weakening in fourth quarter 2015, causing lower pricing. We also realized $0.9 million in gains from the sale of real estate in 2015 compared to $1.6 million in 2014. Other operating expenses were lower in 2015 than in 2014.
Other Expense (Income)
Other expense (income) increased $1.0 million in 2015 compared to 2014 and increased 0.1% as a percentage of operating revenues. Interest expense was higher in 2015 compared to 2014 because we recorded a full year of interest expense in 2015 after entering into an interest rate swap agreement in September 2014 that effectively fixed our interest rate at 2.5% for five years on debt of $75 million.
Income Taxes
Our effective income tax rate (income taxes expressed as a percentage of income before income taxes) decreased to 38.5% for 2015 from 39.0% in 2014. The lower income tax rate in 2015 is primarily attributed to favorable tax adjustments for the remeasurement of uncertain tax positions in 2015 and the effect of higher pre-tax income which caused non-deductible expenses to comprise a lower percentage.
Liquidity and Capital Resources:
During the year ended December 31, 2016, we generated cash flow from operations of $312.4 million, a 15.7% decrease ($58.0 million), compared to the year ended December 31, 2015. This decrease in net cash provided by operating activities is attributed primarily to a $44.6 million decrease in net income and a $15.4 million decrease from general working capital activities (including accounts receivable and accounts payable). Cash flow from operations increased $163.8 million in 2015 from 2014, or 79.3%. This increase is attributed primarily to a $76.6 million increase from general working capital activities (including a $50.8 million increase in cash flows related to accounts receivable due to the timing of customer payments) and a $25.1 million increase in net income. Our income tax payments were also $41.6 million lower in 2015 due to the timing of enacting tax regulation changes at the end of 2014 and 2015. We were able to make net capital expenditures and pay dividends with the net cash provided by operating activities and existing cash balances, supplemented by net borrowings under our existing credit facilities.
Net cash used in investing activities increased by $74.7 million to $410.3 million in 2016 from $335.5 million in 2015 and increased by $132.0 million in 2015 from $203.5 million in 2014. Net property additions (primarily revenue equipment) were $429.6 million for the year ended December 31, 2016, compared to $351.5 million during the same period of 2015 and $212.3 million during 2014. Net property additions were higher in 2016 and 2015 than in 2014 because starting in the second half of 2014, we increased our capital expenditures to lower the average age of our truck fleet. As of December 31, 2016, we were committed to property and equipment purchases of approximately $83.8 million. We currently estimate net capital expenditures (primarily revenue equipment) in 2017 to be in the range of $225.0 million to $275.0 million. We intend to fund these net capital expenditures in 2017 through cash flow from operations and financing available under our existing credit facilities, as management deems necessary.
Net financing activities provided $83.4 million in 2016 and used $25.0 million in 2015 and $3.7 million in 2014. During the year ended December 31, 2016, we borrowed $165.0 million of debt and repaid $60.0 million of debt. Our outstanding debt at December 31, 2016 totaled $180.0 million. During 2015, we borrowed and repaid $10.0 million of debt, and in 2014 we borrowed $85.0 million and repaid $50.0 million. We also made a $3.1 million note payment in both 2016 and 2015. We paid quarterly dividends of $17.3 million in 2016, $15.1 million in 2015 and $14.4 million in 2014. We increased our quarterly dividend rate by $0.01 per share, or 20%, beginning with the dividend paid in October 2015. We did not repurchase any common stock in 2016; however, financing activities for 2015 included common stock repurchases of 225,000 shares at a cost of $6.4 million, compared to $30.6 million in 2014 (1,200,000 shares). From time to time, the Company has repurchased, and may continue to repurchase, shares of the Company’s common stock. The timing and amount of such purchases depends on stock market conditions and other factors. As of December 31, 2016, the Company had purchased 3,287,291 shares pursuant to our current Board of Directors repurchase authorization and had 4,712,709 shares remaining available for repurchase.
Management believes our financial position at December 31, 2016 is strong. As of December 31, 2016, we had $17.0 million of cash and cash equivalents and $994.8 million of stockholders’ equity. Cash is invested primarily in government portfolio money market funds. As of December 31, 2016, we had a total of $325.0 million of credit pursuant to three credit facilities (see Note 2 in the Notes to Consolidated Financial Statements under Item 8 of Part II of this Form 10-K for information regarding our credit agreements as of December 31, 2016), of which we had borrowed $180.0 million. Subsequent to the end of the year, in January 2017, we repaid $20.0 million of debt. The remaining $145.0 million of credit available under these facilities at December 31, 2016 is reduced by the $25.8 million in stand-by letters of credit under which we are obligated. These stand-by letters of credit
are primarily required as security for insurance policies. Based on our strong financial position, management does not foresee any significant barriers to obtaining sufficient financing, if necessary.
Contractual Obligations and Commercial Commitments:
The following table sets forth our contractual obligations and commercial commitments as of December 31, 2016.
Payments Due by Period
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in millions)
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|
Total
|
|
Less than
1 year (2017)
|
|
1-3 years (2018-2019)
|
|
3-5 years (2020-2021)
|
|
More
than 5
years (After 2021)
|
|
Period
Unknown
|
Contractual Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized tax benefits
|
|
$
|
6.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6.1
|
|
Long-term debt, including current maturities
|
|
180.0
|
|
|
20.0
|
|
|
75.0
|
|
|
85.0
|
|
|
—
|
|
|
—
|
|
Interest payments on debt
|
|
9.9
|
|
|
3.3
|
|
|
5.9
|
|
|
0.7
|
|
|
—
|
|
|
—
|
|
Property and equipment purchase commitments
|
|
83.8
|
|
|
83.8
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total contractual cash obligations
|
|
$
|
279.8
|
|
|
$
|
107.1
|
|
|
$
|
80.9
|
|
|
$
|
85.7
|
|
|
$
|
—
|
|
|
$
|
6.1
|
|
Other Commercial Commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
Unused lines of credit
|
|
$
|
119.2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
119.2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Stand-by letters of credit
|
|
25.8
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|
|
25.8
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|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total commercial commitments
|
|
$
|
145.0
|
|
|
$
|
25.8
|
|
|
$
|
—
|
|
|
$
|
119.2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total obligations
|
|
$
|
424.8
|
|
|
$
|
132.9
|
|
|
$
|
80.9
|
|
|
$
|
204.9
|
|
|
$
|
—
|
|
|
$
|
6.1
|
|
As of December 31, 2016, we had unsecured committed credit facilities with three banks as well as a term commitment with one of these banks. We had with Wells Fargo Bank, N.A., a
$100 million
credit facility which will expire on
July 12, 2020
, and a
$75 million
term commitment with principal due and payable on
September 15, 2019
. We had an unsecured line of credit of $75 million with U.S. Bank, N.A., which will expire on July 13, 2020. We also had a $75 million credit facility with BMO Harris Bank, N.A., which will expire on March 5, 2020. Borrowings under these credit facilities and term note bear variable interest based on the London Interbank Offered Rate (“LIBOR”). As of December 31, 2016, we had $75 million outstanding under the term commitment at a variable rate of 1.30%, which is effectively fixed at 2.5% with an interest rate swap agreement, and we had an additional $105 million outstanding under the credit facilities at a weighted average interest rate of 1.30%. Interest payments on debt are based on the debt balance and interest rate at December 31, 2016. The credit available under these facilities is further reduced by the amount of stand-by letters of credit under which we are obligated. The stand-by letters of credit are primarily required for insurance policies. The unused lines of credit are available to us in the event we need financing for the replacement of our fleet or for other significant capital expenditures. Management believes our financial position is strong, and we therefore expect that we could obtain additional financing, if necessary. Property and equipment purchase commitments relate to committed equipment expenditures, primarily for revenue equipment. As of December 31, 2016, we had recorded a $6.1 million liability for unrecognized tax benefits. We are unable to reasonably determine when the $6.1 million categorized as “period unknown” will be settled.
Off-Balance Sheet Arrangements:
In 2016, we did not have any non-cancelable revenue equipment operating leases or other arrangements that meet the definition of an off-balance sheet arrangement.
Critical Accounting Policies and Estimates:
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the (i) reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and (ii) reported amounts of revenues and expenses during the reporting period. We evaluate these estimates on an ongoing basis as events and circumstances change, utilizing historical experience, consultation with experts and other methods considered reasonable in the particular circumstances. Actual results could differ from those estimates and may significantly impact our results of operations from period to period. It is also possible that materially different amounts would be reported if we used different estimates or assumptions.
The most critical accounting policies and estimates that require us to make significant judgments and estimates and affect our financial statements include the following:
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•
|
Depreciation and impairment of tractors and trailers.
We operate a significant number of tractors and trailers in connection with our business and must select estimated useful lives and salvage values for calculating depreciation. Depreciable lives of tractors and trailers range from 80 months to 12 years. Estimates of salvage value at the expected date of trade-in or sale are based on the expected market values of equipment at the time of disposal. We consider our experience with similar assets, conditions in the used revenue equipment market and operational information such as average annual miles. We believe that these methods properly spread the costs over the useful life of the assets. We continually monitor the adequacy of the lives and salvage values used in calculating depreciation expense and adjust these assumptions appropriately when warranted. 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.
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|
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•
|
Estimates of accrued liabilities for insurance and claims for liability and physical damage losses and workers’ compensation.
The insurance and claims accruals (current and non-current) 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 undiscounted self-insurance reserves for bodily injury and property damage claims and workers’ compensation claims at year-end. The actual cost to settle our self-insured claim liabilities can differ from our reserve estimates because of a number of uncertainties, including the inherent difficulty in estimating the severity of a claim and the potential amount to defend and settle a claim.
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|
|
•
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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 related to uncertain tax positions. 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. We believe that we have adequately provided for our future tax consequences based upon current facts and circumstances and current tax law. However, should our positions be challenged, different outcomes could result and have a significant impact on our results of operations.
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Inflation:
Inflation may impact our operating costs. A prolonged inflation period could cause rises in interest rates, fuel, wages and other costs. These inflationary increases could adversely affect our results of operations unless freight rates could be increased correspondingly. However, the effect of inflation has been minimal over the past three years.
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ITEM 9A.
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CONTROLS AND PROCEDURES
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Evaluation of Disclosure 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 Exchange Act Rule 15d-15(e). 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 at a reasonable assurance level 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 and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
We have confidence in our internal controls and procedures. Nevertheless, our management, including the Chief Executive Officer and Chief Financial Officer, does not expect that the internal controls or disclosure procedures and controls will prevent all errors or intentional fraud. An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of such internal controls are met. Further, the design of an internal control system must reflect that resource constraints exist, and the benefits of controls must be evaluated relative to their costs. Because of the inherent limitations in all internal control systems, no evaluation of controls can provide absolute assurance that all control issues, misstatements and instances of fraud, if any, have been prevented or detected.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over our financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance to our management and Board of Directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Internal control over financial reporting includes (i) maintaining records that in reasonable detail accurately and fairly reflect our transactions; (ii) providing reasonable assurance that transactions are recorded as necessary for preparation of our financial statements; (iii) providing reasonable assurance that receipts and expenditures of company assets are made in accordance with management authorization; and (iv) providing reasonable assurance that unauthorized
acquisition, use or disposition of company assets that could have a material effect on our financial statements would be prevented or detected on a timely basis.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because (i) changes in conditions may occur or (ii) the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2016. This assessment is based on the criteria for effective internal control described in
Internal Control – Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its assessment, management concluded that our internal control over financial reporting was effective as of December 31, 2016.
Management has engaged KPMG LLP (“KPMG”), the independent registered public accounting firm that audited the consolidated financial statements included in this Form 10-K, to attest to and report on the effectiveness of our internal control over financial reporting. KPMG’s report is included herein.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Werner Enterprises, Inc.:
We have audited Werner Enterprises, Inc.’s internal control over financial reporting as of December 31, 2016, based on criteria established in
Internal Control – Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
.
Werner Enterprises, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Management’s Report on Internal Control over Financial Reporting
. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Werner Enterprises, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016 based on criteria established in
Internal Control – Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Werner Enterprises, Inc. and subsidiaries as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2016, and our report dated February 23, 2017, expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Omaha, Nebraska
February 23, 2017
Changes in Internal Control over Financial Reporting
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 the quarter ended December 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.