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 (the “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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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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Critical Accounting Policies and Estimates
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The MD&A should be read in conjunction with our 2016 Form 10-K.
Overview:
We have two reportable segments, Truckload Transportation Services (“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, Dedicated and Temperature Controlled) 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. Independent contractors supply their own tractors and drivers and are responsible for their operating expenses. 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
third
quarter 2017 to
third
quarter 2016, 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 five operating units within our Werner Logistics segment (Brokerage, Freight Management, Intermodal, Werner Global Logistics international and Final Mile). 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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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Three Months Ended (3ME)
September 30,
|
|
Nine Months Ended (9ME)
September 30,
|
|
Percentage Change
in Dollar Amounts
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
3ME
|
9ME
|
(Amounts in thousands)
|
$
|
%
|
|
$
|
%
|
|
$
|
%
|
|
$
|
%
|
|
%
|
%
|
Operating revenues
|
$
|
528,643
|
|
100.0
|
|
|
$
|
508,676
|
|
100.0
|
|
|
$
|
1,549,372
|
|
100.0
|
|
|
$
|
1,490,159
|
|
100.0
|
|
|
3.9
|
%
|
4.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages and benefits
|
170,238
|
|
32.2
|
|
|
162,862
|
|
32.0
|
|
|
500,620
|
|
32.3
|
|
|
479,298
|
|
32.2
|
|
|
4.5
|
%
|
4.4
|
%
|
Fuel
|
50,266
|
|
9.5
|
|
|
40,638
|
|
8.0
|
|
|
140,551
|
|
9.1
|
|
|
112,034
|
|
7.5
|
|
|
23.7
|
%
|
25.5
|
%
|
Supplies and maintenance
|
41,986
|
|
7.9
|
|
|
41,027
|
|
8.1
|
|
|
120,276
|
|
7.8
|
|
|
130,559
|
|
8.8
|
|
|
2.3
|
%
|
(7.9
|
)%
|
Taxes and licenses
|
21,671
|
|
4.1
|
|
|
21,540
|
|
4.2
|
|
|
64,095
|
|
4.1
|
|
|
64,353
|
|
4.3
|
|
|
0.6
|
%
|
(0.4
|
)%
|
Insurance and claims
|
20,669
|
|
3.9
|
|
|
19,106
|
|
3.8
|
|
|
60,336
|
|
3.9
|
|
|
59,384
|
|
4.0
|
|
|
8.2
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%
|
1.6
|
%
|
Depreciation
|
53,578
|
|
10.1
|
|
|
51,781
|
|
10.2
|
|
|
162,619
|
|
10.5
|
|
|
152,849
|
|
10.3
|
|
|
3.5
|
%
|
6.4
|
%
|
Rent and purchased transportation
|
126,087
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|
23.9
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|
|
133,876
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|
26.3
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|
|
377,146
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|
24.3
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|
|
379,155
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|
25.4
|
|
|
(5.8
|
)%
|
(0.5
|
)%
|
Communications and utilities
|
4,199
|
|
0.8
|
|
|
4,206
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|
0.8
|
|
|
12,158
|
|
0.8
|
|
|
12,110
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|
0.8
|
|
|
(0.2
|
)%
|
0.4
|
%
|
Other
|
4,075
|
|
0.8
|
|
|
4,566
|
|
0.9
|
|
|
12,812
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|
0.8
|
|
|
9,303
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|
0.6
|
|
|
(10.8
|
)%
|
37.7
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%
|
Total operating expenses
|
492,769
|
|
93.2
|
|
|
479,602
|
|
94.3
|
|
|
1,450,613
|
|
93.6
|
|
|
1,399,045
|
|
93.9
|
|
|
2.7
|
%
|
3.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
35,874
|
|
6.8
|
|
|
29,074
|
|
5.7
|
|
|
98,759
|
|
6.4
|
|
|
91,114
|
|
6.1
|
|
|
23.4
|
%
|
8.4
|
%
|
Total other expense (income)
|
(186
|
)
|
—
|
|
|
(260
|
)
|
(0.1
|
)
|
|
(371
|
)
|
—
|
|
|
(1,167
|
)
|
(0.1
|
)
|
|
28.5
|
%
|
68.2
|
%
|
Income before income taxes
|
36,060
|
|
6.8
|
|
|
29,334
|
|
5.8
|
|
|
99,130
|
|
6.4
|
|
|
92,281
|
|
6.2
|
|
|
22.9
|
%
|
7.4
|
%
|
Income taxes
|
13,543
|
|
2.5
|
|
|
10,414
|
|
2.1
|
|
|
37,375
|
|
2.4
|
|
|
34,963
|
|
2.4
|
|
|
30.0
|
%
|
6.9
|
%
|
Net income
|
$
|
22,517
|
|
4.3
|
|
|
$
|
18,920
|
|
3.7
|
|
|
$
|
61,755
|
|
4.0
|
|
|
$
|
57,318
|
|
3.8
|
|
|
19.0
|
%
|
7.7
|
%
|
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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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Truckload Transportation Services (amounts in thousands)
|
$
|
|
%
|
|
$
|
|
%
|
|
$
|
|
%
|
|
$
|
|
%
|
Trucking revenues, net of fuel surcharge
|
$
|
351,114
|
|
|
|
|
$
|
336,673
|
|
|
|
|
$
|
1,029,036
|
|
|
|
|
$
|
1,008,738
|
|
|
|
Trucking fuel surcharge revenues
|
50,164
|
|
|
|
|
41,994
|
|
|
|
|
147,641
|
|
|
|
|
111,018
|
|
|
|
Non-trucking and other operating revenues
|
6,288
|
|
|
|
|
5,645
|
|
|
|
|
19,394
|
|
|
|
|
16,722
|
|
|
|
Operating revenues
|
407,566
|
|
|
100.0
|
|
384,312
|
|
|
100.0
|
|
1,196,071
|
|
|
100.0
|
|
1,136,478
|
|
|
100.0
|
Operating expenses
|
373,557
|
|
|
91.7
|
|
364,466
|
|
|
94.8
|
|
1,102,560
|
|
|
92.2
|
|
1,061,507
|
|
|
93.4
|
Operating income
|
$
|
34,009
|
|
|
8.3
|
|
$
|
19,846
|
|
|
5.2
|
|
$
|
93,511
|
|
|
7.8
|
|
$
|
74,971
|
|
|
6.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
|
Nine Months Ended
September 30,
|
|
|
Truckload Transportation Services
|
2017
|
|
2016
|
|
% Change
|
|
2017
|
|
2016
|
|
% Change
|
Operating ratio, net of fuel surcharge revenues
(1)
|
90.5
|
%
|
|
94.2
|
%
|
|
|
|
91.1
|
%
|
|
92.7
|
%
|
|
|
Average revenues per tractor per week
(2)
|
$
|
3,693
|
|
|
$
|
3,589
|
|
|
2.9
|
%
|
|
$
|
3,634
|
|
|
$
|
3,547
|
|
|
2.4
|
%
|
Average trip length in miles (loaded)
|
469
|
|
|
468
|
|
|
0.2
|
%
|
|
469
|
|
|
466
|
|
|
0.6
|
%
|
Average percentage of empty miles
(3)
|
12.53
|
%
|
|
12.55
|
%
|
|
(0.2
|
)%
|
|
12.40
|
%
|
|
13.08
|
%
|
|
(5.2
|
)%
|
Average tractors in service
|
7,314
|
|
|
7,216
|
|
|
1.4
|
%
|
|
7,261
|
|
|
7,291
|
|
|
(0.4
|
)%
|
Total trailers (at quarter end)
|
22,435
|
|
|
22,655
|
|
|
|
|
22,435
|
|
|
22,655
|
|
|
|
Total tractors (at quarter end):
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
6,700
|
|
|
6,355
|
|
|
|
|
6,700
|
|
|
6,355
|
|
|
|
Independent contractor
|
675
|
|
|
820
|
|
|
|
|
675
|
|
|
820
|
|
|
|
Total tractors
|
7,375
|
|
|
7,175
|
|
|
|
|
7,375
|
|
|
7,175
|
|
|
|
|
|
(1)
|
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.
|
|
|
(2)
|
Net of fuel surcharge revenues.
|
|
|
(3)
|
“Empty” refers to miles without trailer cargo.
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Werner Logistics (amounts in thousands)
|
$
|
|
%
|
|
$
|
|
%
|
|
$
|
|
%
|
|
$
|
|
%
|
Operating revenues
|
$
|
104,568
|
|
|
100.0
|
|
$
|
109,459
|
|
|
100.0
|
|
$
|
305,225
|
|
|
100.0
|
|
$
|
310,001
|
|
|
100.0
|
Rent and purchased transportation expense
|
89,507
|
|
|
85.6
|
|
91,695
|
|
|
83.8
|
|
259,277
|
|
|
84.9
|
|
255,954
|
|
|
82.6
|
Gross margin
|
15,061
|
|
|
14.4
|
|
17,764
|
|
|
16.2
|
|
45,948
|
|
|
15.1
|
|
54,047
|
|
|
17.4
|
Other operating expenses
|
13,743
|
|
|
13.1
|
|
12,870
|
|
|
11.7
|
|
39,296
|
|
|
12.9
|
|
37,545
|
|
|
12.1
|
Operating income
|
$
|
1,318
|
|
|
1.3
|
|
$
|
4,894
|
|
|
4.5
|
|
$
|
6,652
|
|
|
2.2
|
|
$
|
16,502
|
|
|
5.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
|
Nine Months Ended
September 30,
|
|
|
Werner Logistics
|
2017
|
|
2016
|
|
% Change
|
|
2017
|
|
2016
|
|
% Change
|
Average tractors in service
|
48
|
|
|
75
|
|
|
(36.0
|
)%
|
|
53
|
|
|
71
|
|
|
(25.4
|
)%
|
Total trailers (at quarter end)
|
1,655
|
|
|
1,590
|
|
|
4.1
|
%
|
|
1,655
|
|
|
1,590
|
|
|
4.1
|
%
|
Total tractors (at quarter end)
|
47
|
|
|
86
|
|
|
(45.3
|
)%
|
|
47
|
|
|
86
|
|
|
(45.3
|
)%
|
Three Months Ended
September 30, 2017
Compared to Three Months Ended
September 30, 2016
Operating Revenues
Operating revenues
increased
3.9%
for the three months ended
September 30, 2017
, compared to the same period of the prior year. When comparing
third
quarter
2017
to
third
quarter
2016
, Truckload segment revenues
increased
$23.3 million
or
6.1%
, and Werner Logistics revenues
decreased
$4.9 million
or
4.5%
.
Trucking revenues, net of fuel surcharge,
increased
4.3%
in
third
quarter
2017
compared to
third
quarter
2016
due to a 2.9% increase in average revenues per tractor per week and a 1.4% increase in average tractors in service. Our average revenues per total mile, net of fuel surcharge, increased by 3.4% in
third
quarter
2017
compared to
third
quarter
2016
and average miles per truck decreased by 0.5%.
Third quarter 2017 freight demand in our One-Way Truckload fleet improved throughout the quarter. In July and August 2017, freight trended better than normal and meaningfully better than the challenging freight market of third quarter 2016. As we moved into September, the freight market strengthened further due in part to the significant disruption caused by two major hurricanes in south Texas and Florida. These catastrophic weather events resulted in short-term costs in September due to out-of-route miles, higher fuel costs, equipment issues, and driver domicile issues; additionally, the multiple days of school closings at our Florida-based driving schools negatively impacted our driver hiring. At the same time, these events improved spot market pricing and further widened the positive gap between demand and capacity, which better positions the freight and contractual rate markets going forward. Freight volumes in October 2017 were seasonally better than normal.
Freight metrics have improved, and we have increasing confidence that contractual rates will strengthen over the next few quarters, particularly noting the improving freight market conditions and the expected tightening of supply when the electronic hours of service mandate for the trucking industry becomes effective on December 18, 2017.
The average number of tractors in service in the Truckload segment
increased
1.4%
to
7,314
in
third
quarter
2017
from
7,216
in
third
quarter
2016
. We ended
third
quarter
2017
with
7,375
trucks in the Truckload segment, a year-over-year increase of
200
trucks compared to the end of
third
quarter
2016
, and a sequential increase of 60 trucks compared to the end of second quarter 2017. We cannot predict whether future driver shortages, if any, will adversely affect our ability to maintain our fleet size. If such a driver 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
increased
19.5%
to
$50.2 million
in
third
quarter
2017
from
$42.0 million
in
third
quarter
2016
due to higher average fuel prices in the
2017
quarter. These 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. 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 five 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 $0.1 million in
third
quarter
2017
and $0.2 million in
third
quarter
2016
for Intermodal drayage movements performed by the Truckload segment (also recorded as trucking revenue by the Truckload segment), and these transactions between reporting segments are eliminated in consolidation. In
third
quarter
2017
, Werner Logistics revenues
decreased
$4.9 million
or
4.5%
, and operating income dollars
decreased
$3.6 million
or
73.1%
, compared to
third
quarter
2016
. The Werner Logistics gross margin percentage in
third
quarter
2017
of
14.4%
decreased from
16.2%
in
third
quarter
2016
. The Werner Logistics operating income percentage in third quarter 2017 of
1.3%
declined from
third
quarter 2016 of
4.5%
. Tighter carrier capacity in third quarter 2017 compared to third quarter 2016 resulted in higher purchased transportation costs causing the lower gross margin and operating income percentages.
In third quarter 2017, Werner Logistics achieved solid revenue growth year over year in our truck brokerage solution, while our intermodal and international solutions had lower revenues due to more challenging market conditions. As previously disclosed, a large Werner Logistics Freight Management customer (5.5% of Werner Logistics revenues in third quarter 2016) that was acquired
in 2015 transitioned to their parent company’s transportation platform mid-quarter during first quarter 2017. We continue to see strong customer acceptance of the value of the Werner Logistics portfolio of service offerings, particularly as the market strengthens and shippers tend to consolidate their logistics business with the stability of larger asset-backed logistics providers.
Operating Expenses
Our operating ratio (operating expenses expressed as a percentage of operating revenues) was
93.2%
for the three months ended
September 30, 2017
, compared to
94.3%
for the three months ended
September 30, 2016
. Expense items that impacted the overall operating ratio are described on the following pages. The tables on pages 16 and 17 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 same quarter of 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
$7.4 million
or
4.5%
in
third
quarter
2017
compared to
third
quarter
2016
and
increased
0.2%
as a percentage of operating revenues to
32.2%
. The higher dollar amount of salaries, wages and benefits expense in the 2017 third quarter was due primarily to increased company truck miles and higher driver and student pay rates. These increases were partially offset by lower workers’ compensation expense in third quarter 2017. When evaluated on a per-mile basis, driver salaries, wages and benefits also increased, which we primarily attribute to higher driver pay in third quarter 2017 compared to third quarter 2016. Non-driver salaries, wages and benefits in the non-trucking Werner Logistics segment increased 8.4%.
We renewed our workers’ compensation insurance coverage for the policy year beginning April 1, 2017. 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 2017 were similar to those for the previous policy year.
The driver recruiting market became more challenging in third quarter 2017. Several ongoing market factors persist including a declining number of, and increased competition for, driver training school graduates, an historically low national unemployment rate, aging truck driver demographics and increased truck safety regulations. We proactively took many significant actions in the last two years 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, investing in our driver training schools and collaborating with customers to improve or eliminate freight with unproductive operating characteristics that prevent our drivers from maximizing productivity. Our driver turnover rate once again improved, achieving the lowest third quarter rate in 19 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
increased
$9.6 million
or
23.7%
in
third
quarter
2017
compared to
third
quarter
2016
and
increased
1.5%
as a percentage of operating revenues due to higher average diesel fuel prices and increased company truck miles. Average diesel fuel prices were 26 cents per gallon higher in
third
quarter 2017 than in
third
quarter 2016 and were 15 cents per gallon higher than in second quarter 2017. The increase was partially offset by slightly improved miles per gallon (“mpg”).
We continue to employ measures to improve our fuel mpg such as (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 U.S. Environmental Protection Agency (the “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 offset by higher depreciation expense and the additional cost of diesel exhaust fluid (required in 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 October 2017, the average diesel fuel price per gallon was approximately 28 cents higher than the average diesel fuel price per gallon in October 2016 and approximately 32 cents higher than in fourth quarter 2016.
Shortages of fuel, increases in fuel prices and petroleum product rationing 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, 2017
, we had no derivative financial instruments to reduce our exposure to fuel price fluctuations.
Supplies and maintenance
increased
$1.0 million
or
2.3%
in
third
quarter
2017
compared to
third
quarter
2016
and
decreased
0.2%
as a percentage of operating revenues due primarily to higher company truck miles driven in third quarter 2017 compared to third quarter 2016, partially offset by our younger trailer fleet and the resulting lower equipment maintenance expense. We also incurred higher driver recruiting and other driver-related costs in the 2017 quarter.
Insurance and claims
increased
$1.6 million
or
8.2%
in
third
quarter
2017
compared to
third
quarter
2016
and
increased
0.1% as a percentage of operating revenues. The increase in
third
quarter 2017 expense compared to
third
quarter 2016 was primarily the result of unfavorable development on prior period claims. The majority 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, 2017 and took on additional risk exposure by increasing our self-insured retention and deductible levels. Effective on that date, we are responsible for the first $3.0 million per claim with an annual $6.0 million aggregate for claims between $3.0 million and $5.0 million. We also have an additional $5.0 million deductible per claim for each claim between $5.0 million and $10.0 million. As a result, we are responsible for the first $10.0 million per claim, until we meet the $6.0 million aggregate for claims between $3.0 million and $5.0 million. For the policy year that ended July 31, 2016, we were 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 between $5.0 million and $10.0 million. We maintain liability insurance coverage with insurance carriers substantially in excess of the $10.0 million per claim. As a result of the higher self-insured retention and deductible amounts under the new policies, our liability insurance premiums for the policy year that began August 1, 2017 are about $3.7 million lower than premiums for the previous policy year.
Depreciation expense
increased
$1.8 million
or
3.5%
in
third
quarter
2017
compared to
third
quarter
2016
and
decreased
0.1%
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 over the past 12 months and the purchase of new trailers over the past 12 months to replace older used trailers which were fully depreciated.
In 2015 and 2016, we invested nearly $1 billion of capital expenditures (before sales of equipment) primarily 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. We intend to maintain our newer fleet age of trucks and trailers. The average age of our company truck fleet was at 1.9 years as of September 30, 2017.
Rent and purchased transportation expense
decreased
$7.8 million
or
5.8%
in
third
quarter
2017
compared to
third
quarter
2016
and
decreased
2.4%
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 decreased $2.2 million, but as a percentage of Werner Logistics revenues increased to 85.6% in
third
quarter 2017 from 83.8% in
third
quarter 2016. Tighter industry-wide carrier capacity in third quarter 2017 compared to third quarter 2016 resulted in higher purchased transportation costs causing the lower gross margin percentage.
Rent and purchased transportation for the Truckload segment decreased $5.8 million in
third
quarter 2017 compared to
third
quarter 2016. This decrease is due primarily to lower payments to independent contractors due to fewer independent contractor trucks and miles during third quarter 2017 compared to third quarter 2016, partially offset by higher average fuel reimbursement per mile in the 2017 quarter. Independent contractor miles as a percentage of total miles were 11.8% in
third
quarter 2017 compared to 14.8% in
third
quarter 2016. Because independent contractors supply their own tractors and drivers and are responsible for their operating expenses, the decrease in independent contractor miles as a percentage of total miles shifted costs from the rent and purchased transportation category to 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. Historically we have 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.
Other operating expenses
decreased
$0.5 million
or 10.8% in
third
quarter
2017
compared to
third
quarter
2016
and
decreased
0.1% 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 $2.2 million in
third
quarter 2017 compared to $3.1 million in
third
quarter 2016, which included a $6.5 million real estate gain and $3.4 million of losses on equipment sales. In third quarter 2017, we sold fewer trucks and fewer trailers than in third quarter 2016. We realized average gains per truck in third quarter 2017 compared to average losses in third quarter 2016 and realized lower average gains per trailer in third quarter 2017 compared to third quarter 2016. The used truck pricing market remained difficult in third quarter 2017 due to a higher than normal supply of used trucks in the market and low buyer demand. Other operating expenses, primarily provision for doubtful accounts related to the driver training schools and professional and consulting fees, declined by $1.4 million in third quarter 2017 compared to third quarter 2016.
Other Expense (Income)
Other expense (income) increased $0.1 million and increased 0.1% as a percentage of operating revenues in
third
quarter
2017
compared to
third
quarter
2016
. Interest income was lower in the 2017 quarter due primarily to lower average outstanding notes receivable, and interest expense was lower as well.
Income Taxes
Our effective income tax rate (income taxes expressed as a percentage of income before income taxes) was 37.6% in
third
quarter 2017 and 35.5% in
third
quarter 2016. The higher income tax rate in 2017 is attributed primarily to a lower amount of favorable tax adjustments for the remeasurement of uncertain tax positions in third quarter 2017 compared to third quarter 2016 and the effect of applying a state tax rate increase to our deferred tax liabilities, partially offset by recognizing excess tax benefits related to share-based awards as a component of income tax expense.
Nine Months Ended
September 30, 2017
Compared to Nine Months Ended
September 30, 2016
Operating Revenues
Operating revenues increased 4.0% for the nine months ended
September 30, 2017
, compared to the same period of the prior year. In the Truckload segment, trucking revenues, net of fuel surcharge, increased 2.0% in the 2017 year-to-date period compared to the 2016 year-to-date period due primarily to a 2.4% increase in average revenues per tractor per week, partially offset by a 0.4% decrease in the average number of tractors in service. Average revenues per total mile, net of fuel surcharge, increased 2.3% in the first nine months of 2017 compared to the same period in 2016, and average monthly miles per tractor increased by 0.2%. Truckload segment fuel surcharge revenues for the nine months ended September 30, 2017 increased $36.6 million or 33.0% when compared to the nine months ended September 30, 2016 due to higher average fuel prices in the 2017 period. Werner Logistics revenues decreased to $305.2 million in the first nine months of 2017 compared to $310.0 million in the same 2016 period.
Operating Expenses
Our operating ratio (operating expenses expressed as a percentage of operating revenues) was 93.6% for the nine months ended September 30, 2017, compared to 93.9% for the nine months ended September 30, 2016. Expense items that impacted the overall operating ratio are described on the following pages. The tables on pages 16 and 17 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 same period of 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 $21.3 million or 4.4% in the first nine months of 2017 compared to the first nine months of 2016 and increased as a percentage of operating revenues to 32.3%. The higher dollar amount of salaries, wages and benefits expense was due primarily to higher driver and student pay rates, increased company truck miles and higher workers’ compensation expense in the 2017 period. When evaluated on a per-mile basis, driver salaries increased as well. Non-driver salaries, wages and benefits in the non-trucking Werner Logistics segment increased 9.8%.
Fuel increased $28.5 million or 25.5% in the first nine months of 2017 compared to the same period in 2016 and increased 1.6% as a percentage of operating revenues due primarily to higher average diesel fuel prices in 2017, partially offset by improved mpg. Average diesel fuel prices were 30 cents per gallon higher in the first nine months of 2017 than in the same 2016 period.
Supplies and maintenance decreased $10.3 million or 7.9% in the first nine months of 2017 compared to the same period in 2016 and decreased 1.0% as a percentage of operating revenues. Repairs and maintenance for our tractor and trailer fleets decreased in the year-to-date 2017 period despite higher company driver miles driven due to a newer fleet of tractors and trailers. These decreases were partially offset by higher driver recruiting and other driver-related costs in the 2017 period.
Insurance and claims expense increased $1.0 million or 1.6% in the first nine months of 2017 compared to the same period in 2016 but decreased 0.1% as a percentage of operating revenues. The higher expense in the 2017 year-to-date period was due primarily to higher liability insurance premiums related to the policy year that ended July 31, 2017.
Depreciation expense increased $9.8 million or 6.4% in the first nine months of 2017 compared to the same 2016 period and increased 0.2% as a percentage of operating revenues due primarily to 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, which resulted in additional depreciation expense of $3.4 million in 2017, and the higher cost of new trucks purchased versus used trucks that were sold. In addition, the purchase of new trailers over the past 12 months to replace older used trailers which were fully depreciated also contributed to the increase in depreciation expense.
Rent and purchased transportation expense decreased $2.0 million or 0.5% in the first nine months of 2017 compared to the same 2016 period and decreased 1.1% as a percentage of operating revenues. Rent and purchased transportation for the Truckload segment decreased $5.3 million in the first nine months of 2017 compared to the same 2016 period. This decrease is due primarily to fewer independent contractor miles driven in the first nine months of 2017 compared to the same period in 2016. Independent contractor miles as a percentage of total miles were 12.4% and 14.4% in the first nine months of 2017 and 2016, respectively. Werner Logistics rent and purchased transportation expense increased $3.3 million and as a percentage of Werner Logistics revenues increased to 84.9% in the 2017 period from 82.6% in the 2016 period. Tighter industry-wide carrier capacity in the 2017 period compared to the 2016 period resulted in higher purchased transportation costs causing the lower gross margin percentage.
Other operating expenses increased $3.5 million in the first nine months of 2017 compared to the same period in 2016 and increased 0.2% as a percentage of operating revenues. Gains on sales of assets (primarily used trucks and trailers) decreased to $6.0 million in the nine months ended September 30, 2017 from $13.3 million in the nine months ended September 30, 2016, which included gains of $10.5 million from sales of real estate. In the 2017 year-to-date period, we sold fewer trucks and trailers, realized average gains per truck compared to average losses and realized lower average gains per trailer sold when compared to same period of 2016. Provision for doubtful accounts related to our driver schools and professional and consulting fees were lower in the 2017 period.
Other Expense (Income)
Other expense (income) increased $0.8 million in the first nine months of 2017 compared to the same 2016 period and increased 0.1% as a percentage of operating revenues, due primarily to lower interest income. Interest income decreased due to lower average outstanding notes receivable in the first nine months of 2017 compared to the first nine months of 2016.
Income Taxes
Our effective income tax rate (income taxes expressed as a percentage of income before income taxes) decreased to 37.7% for the first nine months of 2017 from 37.9% for the first nine months of 2016. The lower income tax rate is attributed primarily to recognizing excess tax benefits related to share-based awards as a component of income tax expense, partially offset by a lower amount of favorable tax adjustments for the remeasurement of uncertain tax positions in the first nine months of 2017 compared to the same period of 2016.
Liquidity and Capital Resources:
During the
nine
months ended
September 30, 2017
, we generated cash flow from operations of $216.9 million, an 8% or $15.8 million increase in cash flows compared to the same
nine
-month period a year ago. The increase in net cash provided by operating activities resulted primarily from the effect of depreciation on net income, lower gain on disposal of operating equipment, and general working capital items, partially offset by a decrease from deferred income taxes. We were able to repay debt, make net capital expenditures and pay dividends with the net cash provided by operating activities and existing cash balances.
Net cash used in investing activities decreased to $110.5 million for the
nine
-month period ended
September 30, 2017
from $280.0 million for the
nine
-month period ended
September 30, 2016
. Net property additions (primarily revenue equipment) were $121.1 million for the
nine
-month period ended
September 30, 2017
, compared to $294.0 million during the same period of 2016. This decrease occurred as we completed a significant reinvestment in our fleet. As of
September 30, 2017
, we were committed to property and equipment purchases of approximately $95.2 million. We currently estimate net capital expenditures (primarily revenue equipment) in 2017 to be in the range of $175 million to $225 million, compared to net capital expenditures in 2016 of $429.6 million. We intend to fund these net capital expenditures through cash flow from operations and financing available under our existing credit facilities, if necessary.
Net financing activities used $113.3 million during the
nine
months ended
September 30, 2017
, and provided $61.2 million during the same period in 2016. During the nine months ended September 30, 2017, we repaid $105.0 million of debt; in the same 2016 period, we had borrowings of $135.0 million and repayments of $60.0 million. Our outstanding debt at
September 30, 2017
was $75.0 million. We paid dividends of $13.7 million in the
nine
-month period ended
September 30, 2017
and $13.0 million in the period ended September 30, 2016. We increased our quarterly dividend rate by $0.01 per share, or 17%, beginning with the dividend paid in July 2017. We did not repurchase any shares of common stock during the nine months ended September 30, 2017 or 2016. 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 depend upon stock market conditions and other factors. As of
September 30, 2017
, 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
September 30, 2017
is strong. As of
September 30, 2017
, we had $10.7 million of cash and cash equivalents and over $1 billion of stockholders’ equity. Cash is invested primarily in government portfolio money market funds. As of
September 30, 2017
, 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 1 of Part I of this Form 10-Q), of which we had borrowed $75.0 million. The remaining $250.0 million of credit available under these facilities at September 30, 2017 is reduced by the $28.7 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 tables set forth our contractual obligations and commercial commitments as of
September 30, 2017
.
Payments Due by Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in millions)
|
Total
|
|
Less than
1 year
|
|
1-3 years
|
|
3-5 years
|
|
More than
5 years
|
|
Period
Unknown
|
Contractual Obligations
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized tax benefits
|
$
|
4.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4.1
|
|
Long-term debt including current maturities
|
75.0
|
|
|
—
|
|
|
75.0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Interest payments on debt
|
3.7
|
|
|
1.9
|
|
|
1.8
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Property and equipment purchase commitments
|
95.2
|
|
|
95.2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total contractual cash obligations
|
$
|
178.0
|
|
|
$
|
97.1
|
|
|
$
|
76.8
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4.1
|
|
Other Commercial Commitments
|
|
|
|
|
|
|
|
|
|
|
|
Unused lines of credit
|
$
|
221.3
|
|
|
$
|
—
|
|
|
$
|
221.3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Stand-by letters of credit
|
28.7
|
|
|
28.7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total commercial commitments
|
$
|
250.0
|
|
|
$
|
28.7
|
|
|
$
|
221.3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total obligations
|
$
|
428.0
|
|
|
$
|
125.8
|
|
|
$
|
298.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4.1
|
|
As of
September 30, 2017
, 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 September 30, 2017, we had $75 million outstanding under the term commitment at a variable rate of 1.83%, which is effectively fixed at
2.5%
with an interest rate swap agreement. Interest payments on debt are based on the debt balance and interest rates at
September 30, 2017
. The borrowing capacity under these credit 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
September 30, 2017
, we had recorded a
$4.1 million
liability for unrecognized tax benefits. We expect none of it to be settled within the next twelve months and are unable to reasonably determine when the
$4.1 million
categorized as “period unknown” will be settled.
Regulations:
Item 1 of Part I of our 2016 Form 10-K includes a discussion of pending proposed regulations that may have an effect on our operations if they become adopted and effective as proposed. Except as described below, there have been no material changes in the status of these proposed regulations previously disclosed in the 2016 Form 10-K.
The Federal Motor Carrier Safety Administration (“FMCSA”) proposed to change the method for assigning a motor carrier’s Safety Fitness Determination (“SFD”) in January 2016, which would replace the three-tier federal rating system in place since 1982 with a single determination of “unfit.” FMCSA announced on March 23, 2017 that it has withdrawn the SFD proposed rule altogether, pending completion of a study of the agency’s Compliance, Safety, Accountability program.
Interstate carriers are subject to the FMCSA Hours of Service (“HOS”) regulations. FMCSA adopted a final rule in December 2011 that included provisions affecting restart periods, rest breaks, on-duty time, and penalties for violations, and we began dispatching drivers under the revised HOS rules effective July 1, 2013. The Consolidated Appropriations Act of 2016 was passed by Congress with HOS language to reduce negative effects of restricted hours and require the FMCSA study to demonstrate results with statistically significant improvements in safety and driver health, among other things, before the agency could reinstate restart rule restrictions that became effective in July 2013. In March 2017, FMCSA released the HOS Restart study report, which indicated that the restrictions do not improve safety; as a result, the pre-July 2013 restart rule continues to be in effect indefinitely.
In an effort to increase highway safety and improve compliance, Werner supports FMCSA’s electronic logging devices (“ELDs”) mandate. The final ELD rule was issued in December 2015 and becomes effective on December 18, 2017, when carriers must adopt and use compliant ELDs. In March 2016, a legal complaint was filed by the Owner-Operator Independent Drivers Association (“OOIDA”) to overturn the ELD mandate. OOIDA asked the U.S. 7th Circuit Court of Appeals to strike down the rule, arguing the rule is an unconstitutional violation of truckers’ rights and will do little to enhance safety. On October 31, 2016, OOIDA’s lawsuit was denied. OOIDA appealed the decision to the U.S. Supreme Court on April 11, 2017. On June 12, 2017, the U.S. Supreme Court denied OOIDA’s request to take on the issue, leaving in place the lower court’s ruling to uphold the mandate and its December 18, 2017 effective date.
FMCSA issued its final rule for Entry-Level Driver Training (“ELDT”) in December 2016. On December 27, 2016, four groups petitioned FMCSA to reconsider the final rule. The petition was denied by FMCSA on January 19, 2017. This final rule was slated to take effect February 6, 2017, with a compliance date of February 7, 2020; however, agencies were directed by the President in January 2017 to postpone for 60 days the effective date of rules published in the Federal Register but not yet effective. On May 23, 2017, the rule was delayed for a third time; as a result, the final rule became effective June 5, 2017. The compliance date is still set for February 7, 2020.
Critical Accounting Policies and Estimates:
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires us to make estimates and assumptions that affect the (i) reported amounts 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.
Information regarding our Critical Accounting Policies and Estimates can be found in our 2016 Form 10-K. 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.
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Estimates of accrued liabilities for insurance and claims for liability and physical damage losses and workers’ compensation.
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Accounting for income taxes.
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There have been no material changes to these critical accounting policies and estimates from those discussed in our 2016 Form 10-K.
Accounting Standards:
In the descriptions under “New Accounting Pronouncements Adopted” and “Accounting Standards Updates Not Yet Effective” that follow, references in quotations identify guidance and Accounting Standards Updates (“ASU”) relating to the topics and subtopics (and their descriptive titles, as appropriate) of the Accounting Standards Codification
™
of the Financial Accounting Standards Board (“FASB”).
New Accounting Pronouncements Adopted
We did not adopt any new accounting standards during third quarter 2017.
Accounting Standards Updates Not Yet Effective
On May 28, 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers,” which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The FASB has also issued additional guidance related to revenue recognition matters in subsequent ASUs, including a one-year deferral of the effective date of the new revenue recognition standard. As a result of the deferral, the new standard will become effective for us beginning January 1, 2018. The standard permits the use of either the full retrospective or modified retrospective (cumulative effect) transition method. We have established an implementation team which is evaluating the effect that adopting the standard will have on our consolidated financial statements and related disclosures and developing the necessary processes, reporting and controls to comply with the new requirements. We currently intend to adopt the standard using the modified retrospective transition approach. While we have not yet determined the quantitative impact on our consolidated financial statements, we currently expect the new standard to affect the timing of revenue recognition. Today we recognize revenue and related direct costs when the shipment is delivered. The new standard will require us to recognize revenue over time.
In February 2016, the FASB issued ASU No. 2016-02, “Leases,” to increase transparency and comparability by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The provisions of this update are effective for fiscal years beginning after December 15, 2018. We are evaluating the effect that ASU No. 2016-02 will have on our consolidated financial position, results of operations and cash flows.
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The provisions of this update are effective for fiscal years beginning after December 15, 2017. We are evaluating the effect that ASU No. 2016-15 will have on our consolidated cash flows.
In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash,” which requires an entity to include in its cash and cash-equivalent balances in the statement of cash flows those amounts that are deemed to be restricted cash and restricted cash equivalents. The provisions of this update are effective for fiscal years beginning after December 15, 2017. We are evaluating the effect ASU No. 2016-18 will have on our consolidated cash flows and related disclosures.
In May 2017, the FASB issued ASU No. 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting,” which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The provisions of this update are effective for fiscal years beginning after December 15, 2017. We are evaluating the effect that ASU No. 2017-09 will have on our financial position, results of operations and cash flows.
In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities,” with the objective of improving the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. The provisions of this update are effective for fiscal years beginning after December 15, 2018. We are evaluating the effect that ASU No. 2017-12 will have on our financial position, results of operations and cash flows.
Other ASUs not identified above and which are not effective until after
September 30, 2017
are not expected to have a material effect on our consolidated financial position, results of operations or cash flows.