10-K 1 wern-20141231x10k.htm 10-K WERN-2014.12.31-10K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
FORM 10-K
 
 
[Mark one]
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to __________
Commission File Number: 0-14690
 
WERNER ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
 
 
NEBRASKA
 
47-0648386
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
14507 FRONTIER ROAD
POST OFFICE BOX 45308
OMAHA, NEBRASKA
 
68145-0308
(Address of principal executive offices)
 
(Zip Code)
(402) 895-6640
(Registrant’s telephone number, including area code)
 
 
Securities registered pursuant to Section 12(b) of the Act:
 Title of Each Class
 
Name of Each Exchange on Which Registered
Common Stock, $0.01 Par Value
 
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  ý    No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  ¨    No  ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
ý
 
Accelerated filer
o  
 
Non-accelerated filer
o  
 
Smaller reporting company
o  
 
 
 
  
 
 
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
The aggregate market value of the common equity held by non-affiliates of the Registrant (assuming for these purposes that all executive officers and Directors are “affiliates” of the Registrant) as of June 30, 2014, the last business day of the Registrant's most recently completed second fiscal quarter, was approximately $1.197 billion (based on the closing sale price of the Registrant's Common Stock on that date as reported by Nasdaq).
As of February 19, 2015, 72,087,926 shares of the registrant’s common stock, par value $0.01 per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement of Registrant for the Annual Meeting of Stockholders to be held May 12, 2015, are incorporated in Part III of this report.



WERNER ENTERPRISES, INC.
INDEX
 
 
 
PAGE
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.





This Annual Report on Form 10-K for the year ended December 31, 2014 (this “Form 10-K”) and the documents incorporated herein by reference contain forward-looking statements based on expectations, estimates and projections as of the date of this filing. Actual results may differ materially from those expressed in such forward-looking statements. For further guidance, see Item 1A of Part I and Item 7 of Part II of this Form 10-K.
PART I
ITEM 1.
BUSINESS
General
We are a transportation and logistics company engaged primarily in transporting truckload shipments of general commodities in both interstate and intrastate commerce. We also provide logistics services through our Value Added Services (“VAS”) division. We believe we are one of the largest truckload carriers in the United States (based on total operating revenues), and our headquarters are located in Omaha, Nebraska, near the geographic center of our truckload service area. We were founded in 1956 by Clarence L. Werner, who started the business with one truck at the age of 19 and currently serves as our Chairman Emeritus. We were incorporated in the State of Nebraska in September 1982 and completed our initial public offering in June 1986 with a fleet of 632 trucks as of February 1986. At the end of 2014, we had a fleet of 7,050 trucks, of which 6,400 were company-operated and 650 were owned and operated by independent contractors. Our VAS division operated an additional 55 intermodal drayage trucks at the end of 2014.
We have two reportable segments – Truckload Transportation Services (“Truckload”) and VAS. You can find financial information regarding these segments and the geographic areas in which we conduct business in the Notes to Consolidated Financial Statements under Item 8 of this Form 10-K.
Our Truckload segment is comprised of the One-Way Truckload and Specialized Services units. One-Way Truckload includes the following operating fleets: (i) the regional short-haul (“Regional”) fleet transports a variety of consumer nondurable products and other commodities in truckload quantities within geographic regions across the United States using dry van trailers; (ii) the medium-to-long-haul van (“Van”) fleet provides comparable truckload van service over irregular routes; and (iii) the expedited (“Expedited”) fleet provides time-sensitive truckload services utilizing driver teams. Specialized Services provides truckload services dedicated to a specific customer, generally for a retail distribution center or manufacturing facility, including services for products requiring specialized trailers such as flatbed or temperature-controlled trailers. Our Truckload fleets operate throughout the 48 contiguous U.S. states pursuant to operating authority, both common and contract, granted by the U.S. Department of Transportation (“DOT”) and pursuant to intrastate authority granted by various U.S. states. We also have authority to operate in several provinces of Canada and to provide through-trailer service into and out of Mexico. The principal types of freight we transport include retail store merchandise, consumer products, grocery products and manufactured products. We focus on transporting consumer nondurable products that generally ship more consistently throughout the year and whose volumes are generally more stable during a slowdown in the economy.
Our VAS segment is a non-asset-based transportation and logistics provider. VAS is comprised of the following four operating units that provide non-trucking services to our customers: (i) truck brokerage (“Brokerage”) uses contracted carriers to complete customer shipments; (ii) freight management (“Freight Management”) offers a full range of single-source logistics management services and solutions; (iii) the intermodal (“Intermodal”) unit offers rail transportation through alliances with rail and drayage providers as an alternative to truck transportation; and (iv) Werner Global Logistics international (“WGL”) provides complete management of global shipments from origin to destination using a combination of air, ocean, truck and rail transportation modes. Our Brokerage unit had transportation services contracts with approximately 10,900 carriers as of December 31, 2014.
Marketing and Operations
Our business philosophy is to provide superior on-time customer service at a significant value for our customers. To accomplish this, we operate premium modern tractors and trailers. This equipment has fewer mechanical and maintenance issues and helps attract and retain experienced drivers. We continually develop our business processes and technology to improve customer service and driver retention. We focus on customers who value the broad geographic coverage, diversified truck and logistics services, equipment capacity, technology, customized services and flexibility available from a large financially-stable transportation and logistics provider.
We operate in the truckload and logistics sectors of the transportation industry. Our Truckload segment provides specialized services to customers based on (i) each customer’s trailer needs (such as van, flatbed and temperature-controlled trailers), (ii) geographic area (regional and medium-to-long-haul van, including transport throughout Mexico and Canada), (iii) time-sensitive shipments (expedited) or (iv) conversion of their private fleet to us (dedicated). In 2014, trucking revenues (net of fuel

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surcharge) and trucking fuel surcharge revenues accounted for 79% of total operating revenues, and non-trucking and other operating revenues (primarily VAS revenues) accounted for 21% of total operating revenues. Our VAS segment manages the transportation and logistics requirements for customers, providing customers with additional sources of truck capacity, alternative modes of transportation, a global delivery network and systems analysis to optimize transportation needs. VAS services include (i) truck brokerage, (ii) freight management, (iii) intermodal transport and (iv) international. The VAS international services are provided through our domestic and global subsidiary companies and include (i) ocean, air and ground transportation services, (ii) door-to-door freight forwarding and (iii) customs brokerage. Most VAS international services are provided throughout North America and Asia with additional coverage throughout Australia, Europe, South America and Africa. VAS is a non-asset-based transportation and logistics provider that is highly dependent on qualified associates, information systems and the services of qualified third-party capacity providers. You can find the revenues generated by services that accounted for more than 10% of our consolidated revenues, consisting of Truckload and VAS, for the last three years under Item 7 of Part II of this Form 10-K.
We have a diversified freight base but are dependent on a relatively small number of customers for a significant portion of our freight. During 2014, our largest 5, 10, 25 and 50 customers comprised 25%, 41%, 60% and 74% of our revenues, respectively. No single customer generated more than 10% of our revenues in 2014. The industry groups of our top 50 customers are 44% retail and consumer products, 27% grocery products, 15% manufacturing/industrial and 14% logistics and other. Many of our One-Way Truckload customer contracts may be terminated upon 30 days’ notice, which is common in the truckload industry. Most of our Specialized Services customer contracts are one to three years in length and may be terminated by either party upon 30 to 90 days’ notice following the expiration of the contract’s first year, and we review rates in these contracts annually.
Virtually all of our company and independent contractor tractors are equipped with communication devices. These devices enable us and our drivers to conduct two-way communication using standardized and freeform messages. This technology also allows us to plan and monitor shipment progress. We automatically monitor truck movement and obtain specific data on the location of all trucks in the fleet every 15 minutes. Using the real-time data obtained from the devices, we have advanced application systems to improve customer and driver service. Examples of such application systems include: (i) an electronic logging system which records and monitors drivers’ hours of service and integrates with our information systems to pre-plan driver shipment assignments based on real-time available driving hours; (ii) software that pre-plans shipments drivers can trade enroute to meet driver home-time needs without compromising on-time delivery schedules; and (iii) automated “possible late load” tracking that informs the operations department of trucks possibly operating behind schedule, allowing us to take preventive measures to avoid late deliveries. In 1998, we began a successful pilot program and subsequently became the first trucking company in the United States to receive an exemption from DOT to use a global positioning system-based paperless log system as an alternative to the paper logbooks traditionally used by truck drivers to track their daily work activities. We have used electronic logging devices ("ELDs") to monitor and enforce drivers' hours of service since 1996.
Seasonality
In the trucking industry, revenues generally follow a seasonal pattern. Peak freight demand has historically occurred in the months of September, October and November. After the December holiday season and during the remaining winter months, our freight volumes are typically lower because some customers reduce shipment levels. Our operating expenses have historically been higher in the winter months due primarily to decreased fuel efficiency, increased cold weather-related maintenance costs of revenue equipment and increased insurance and claims costs attributed to adverse winter weather conditions. We attempt to minimize the impact of seasonality through our marketing program by seeking additional freight from certain customers during traditionally slower shipping periods and focusing on transporting consumer nondurable products. Revenue can also be affected by adverse weather conditions, holidays and the number of business days that occur during a given period because revenue is directly related to the available working days of shippers.
Employee Associates and Independent Contractors
As of December 31, 2014, we employed 9,091 drivers; 666 mechanics and maintenance associates for the trucking operation; 1,229 office associates for the trucking operation; and 1,192 associates for VAS, international and other non-trucking operations. We also had 650 independent contractors who provide both a tractor and a driver or drivers. None of our U.S., Canadian or Chinese associates are represented by a collective bargaining unit, and we consider relations with our associates to be good.
We recognize that our professional driver workforce is one of our most valuable assets. Most of our professional drivers are compensated on a per-mile basis. For most company-employed drivers, the rate per mile generally increases with the drivers’ length of service. Professional drivers may earn additional compensation through incentive performance pay programs and for performing additional work associated with their job (such as loading and unloading freight and making extra stops and shorter mileage trips).

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At times, there are driver shortages in the trucking industry. Availability of experienced drivers can be affected by (i) changes in the demographic composition of the workforce; (ii) alternative employment opportunities other than truck driving that become available in the economy; and (iii) individual drivers’ desire to be home more frequently. The driver market was more challenging in 2014 compared to 2013, and the supply of recent driver training school graduates continues to tighten. We believe that a declining number of, and increased competition for, driver training school graduates, a gradually declining national unemployment rate, increased job competition from the strengthening housing construction and manufacturing industries, and changing industry safety regulations are tightening driver supply. We believe our strong mileage utilization, financial strength and safety record are attractive to drivers when compared to many other carriers. Additionally, we believe our large percentage of driving jobs in shorter-haul operations (such as Dedicated and Regional) that allow drivers to return home more often is attractive to drivers.
We utilize recent driver training school graduates as a significant source of new drivers. These drivers have completed a training program at a driver training school, hold a commercial driver’s license (“CDL”) and are further trained by Werner-certified trainer drivers for approximately 275 driving hours prior to that driver becoming a solo driver with their own truck. As mentioned above, the recruiting environment for recent driver training school graduates remained challenging in 2014. The availability of these drivers has been negatively impacted by the decreased availability of student loan financing for driver training schools.
As economic conditions improve, competition for experienced drivers and recent driver training school graduates may increase and could become more challenging in 2015. We cannot predict whether we will experience future shortages in the availability of experienced drivers or driver training school graduates. If such a shortage were to occur and additional driver pay rate increases became necessary to attract and retain experienced drivers or driver training school graduates, our results of operations would be negatively impacted to the extent that we could not obtain corresponding freight rate increases.
We also recognize that independent contractors complement our company-employed drivers. Independent contractors supply their own tractors and drivers and are responsible for their operating expenses. Because independent contractors provide their own tractors, less financial capital is required from us. Independent contractors also provide us with another source of drivers to support our fleet. We intend to maintain our emphasis on independent contractor recruiting, in addition to company driver recruitment. We, along with others in the trucking industry, however, continue to experience independent contractor recruitment and retention difficulties that have persisted over the past several years. Challenging operating conditions, including inflationary cost increases that are the responsibility of independent contractors and a shortage of financing available to independent contractors for equipment purchases, continue to make it difficult to recruit and retain independent contractors. If a shortage of independent contractors occurs, additional increases in per mile settlement rates (for independent contractors) and driver pay rates (for company drivers) may become necessary to attract and retain a sufficient number of drivers. This could negatively affect our results of operations to the extent that we could not obtain corresponding freight rate increases.
Revenue Equipment
As of December 31, 2014, we operated 6,400 company tractors and 650 tractors owned by independent contractors in our Truckload segment. Our VAS segment operated an additional 55 company tractors at the end of 2014. The company tractors were manufactured by Freightliner (a Daimler company), Peterbilt and Kenworth (both divisions of PACCAR), Volvo and International (a Navistar company). We adhere to a comprehensive maintenance program for both company tractors and trailers. We inspect independent contractor tractors prior to acceptance for compliance with Werner and DOT operational and safety requirements. We periodically inspect these tractors, in a manner similar to company tractor inspections, to monitor continued compliance. We also regulate the vehicle speed of company trucks to improve safety and fuel efficiency, and we have them set to not exceed 65 miles per hour.
The average age of our company truck fleet was 2.2 years at December 31, 2014, compared to 2.4 years at December 31, 2013. We increased our capital expenditures in the second half of 2014 to lower the average age of our truck fleet, and we currently expect to reduce our average truck age to under two years during 2015. As of December 31, 2014, nearly all of our company tractors have engines that comply with the U.S. Environmental Protection Agency (“EPA”) engine emissions standards that became effective for newly manufactured engines beginning in January 2010.
We operated 23,975 company-owned trailers at December 31, 2014. This total is comprised of 22,585 dry vans; 209 flatbeds; 1,159 temperature-controlled trailers; and 22 specialized trailers. Most of our trailers were manufactured by Wabash National Corporation. As of December 31, 2014, nearly all of our dry van trailer fleet consisted of 53-foot composite (DuraPlate®) trailers. We also provide other trailer lengths, such as 48-foot and 57-foot trailers, to meet the specialized needs of certain customers.
Our wholly-owned subsidiary, Fleet Truck Sales, sells our used trucks and trailers. Fleet Truck Sales has been in business since 1992 and operates in six locations. We may also trade used trucks to original equipment manufacturers when purchasing new trucks.

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Fuel
In 2014, we purchased approximately 97% of our fuel from a predetermined network of fuel stops throughout the United States. Of this 97%, approximately 95% was purchased from three large fuel stop vendors. We negotiate discounted pricing based on historical purchase volumes with these fuel stop vendors. Bulk fueling facilities are maintained at seven of our terminals and one dedicated customer location.
Shortages of fuel, increases in fuel prices and rationing of petroleum products can have a material adverse effect on our operations and profitability. Our customer fuel surcharge reimbursement programs generally enable us to recover from our customers a majority, but not all, of higher fuel prices compared to normalized average fuel prices. These fuel surcharges, which automatically adjust depending on the U.S. Department of Energy (“DOE”) weekly retail on-highway diesel fuel prices, enable us to recoup much of the higher cost of fuel when prices increase and provide customers with the benefit of lower fuel costs when fuel prices decline. We do not generally recoup higher fuel costs for empty and out-of-route miles (which are not billable to customers) and truck idle time. We cannot predict whether fuel prices will increase or decrease in the future or the extent to which fuel surcharges will be collected from customers. As of December 31, 2014, we had no derivative financial instruments to reduce our exposure to fuel price fluctuations.
We maintain aboveground and underground fuel storage tanks at many of our terminals. Leakage or damage to these facilities could expose us to environmental clean-up costs. The tanks are routinely inspected to help prevent and detect such problems.
Regulations
We are a motor carrier regulated by DOT in the United States and similar governmental transportation agencies in foreign countries in which we operate. DOT generally governs matters such as safety requirements, registration to engage in motor carrier operations, drivers’ hours of service and certain mergers, consolidations and acquisitions. We currently have, and have always maintained, a satisfactory DOT safety rating, which is the highest available rating, and we continually take efforts to maintain our satisfactory rating. A conditional or unsatisfactory DOT safety rating could adversely affect us because some of our customer contracts require a satisfactory rating. Equipment weight and dimensions are also subject to federal, state and international regulations with which we are required to comply.
The Federal Motor Carrier Safety Administration's (“FMCSA”) Compliance, Safety, Accountability, (“CSA”) safety initiative monitors the safety performance of both individual drivers and carriers. In December 2010, FMCSA made public on its website the Safety Measurement System (“SMS”), which includes monthly reports of specific safety rating measurement and percentile ranking scores for over 500,000 trucking companies. Through the SMS, the public can access carrier scores and data (including a carrier’s roadside safety inspection, out-of-service and moving violation histories) for five Behavior Analysis and Safety Improvement Categories (“BASICs”). As carriers, shippers, brokers, vendors and others review, evaluate and make operational and business decisions using CSA data, we anticipate that drivers and trucking companies will leave the market, although it is difficult to predict the duration and extent to which this may occur and the extent to which this could affect our business. This may limit our ability to attract and retain experienced drivers. We will continue to monitor any CSA developments and continue our CSA compliance efforts.
All truckload carriers are subject to the hours of service (“HOS”) regulations issued by FMCSA. In December 2011, FMCSA adopted and issued a final rule that amended the driver HOS regulations, which became effective July 1, 2013. The rule includes provisions which affect restart periods, rest breaks, on-duty time and penalties for violations. We modified and tested our electronic HOS system and began dispatching drivers under the revised HOS rules effective July 1, 2013. The Company believes these HOS changes negatively impacted miles per truck by two to three percent. We have taken steps to minimize the financial impact of the HOS changes. However, government restrictions of available driving hours will continue to negatively impact the productivity of some drivers and some fleets within our company. On August 2, 2013, the U.S. Court of Appeals for the D.C. Circuit issued its decision related to petitions of the rule changes by the trucking industry association and consumer advocate groups. The court generally affirmed the FMCSA's final rule and vacated only the application of the 30-minute rest break to short-haul drivers as defined in 49 CFR 395.1(e). On December 13, 2014, Congress passed the Consolidated and Further Continuing Appropriations Act of 2015 (the "Act"), which for one year temporarily suspends the requirement that all qualifying restarts contain two consecutive periods of time between 1:00 a.m. and 5:00 a.m. and that it can only be used once every 168 hours (or seven days). In addition, the Act requires FMCSA to study the safety impact caused by the restart rule which became effective on July 1, 2013. The restart rule reverts back to the simple 34-hour restart in effect from 2003 to June 30, 2013. We believe this will reduce the negative impact of the July 1, 2013 HOS changes during the one year suspension period.
On January 31, 2011, FMCSA issued proposed rules regarding the required installation and use of ELDs by nearly all carriers to enhance the monitoring and enforcement of the driver HOS rules. Federal legislation required DOT to promulgate rules and regulations mandating the use of ELDs by July 2013 with full adoption for all trucking companies by no later than July 2015. However, FMCSA does not currently expect a final ELD rule to be published until November 2015. It is expected that there will

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be a two year implementation period following the publishing of the final ELD rule. We are the recognized industry leader for electronic logging of driver hours as we proactively adopted a paperless log system in 1996 that was subsequently approved for our use by FMCSA in 1998. In order to improve compliance, and by extension safety performance and leveling the field upon which carriers compete, Werner supports a broad-based mandate for ELDs.
In May 2011, FMCSA published a final rule that (i) sets new standards that must be met before states issue commercial learner’s permits (“CLP”), (ii) revises the knowledge and skills testing standards that must be met to obtain both a CLP and a CDL, and (iii) improves anti-fraud measures with the CDL program. States must be in compliance with the new requirements by July 8, 2015. In September 2013, FMCSA withdrew its proposed rule regarding minimum requirements for entry-level driver training programs and plans to initiate new rulemaking. FMCSA is establishing an Entry-Level Driver Training Advisory Committee ("ELDTAC") to conduct a negotiated rulemaking ("Reg Neg") to implement the entry-level driver training provisions in the Moving Ahead for Progress in the 21st Century Act ("MAP-21"). Either of these rules could materially impact the number of potential new drivers entering the industry, and we currently cannot predict how the adoption of such rules would affect our driver recruitment and the overall driver market.
We have unlimited authority to carry general commodities in interstate commerce throughout the 48 contiguous states. We also have authority to carry freight on an intrastate basis in 46 states. The Federal Aviation Administration Authorization Act of 1994 (the “FAAA Act”) amended sections of the Interstate Commerce Act to prevent states from regulating motor carrier rates, routes or service after January 1, 1995. The FAAA Act did not address state oversight of motor carrier safety and financial responsibility or state taxation of transportation. If a carrier wishes to operate in intrastate commerce in a state where the carrier did not previously have intrastate authority, the carrier must, in most cases, still apply for authority in such state.
WGL, through its domestic and global subsidiary companies, holds a variety of licenses required to carry out its international services. These licenses permit us to provide services as a Non-Vessel Operating Common Carrier (“NVOCC”), customs broker, freight forwarder, indirect air carrier, accredited cargo agent and others. These international services subject us to regulation by the Transportation Security Administration (“TSA”) and Customs and Borders Protection (“CBP”) agencies of the U.S. Department of Homeland Security, the U.S. Federal Maritime Commission (“FMC”), the International Air Transport Association (“IATA”), as well as similar regulatory agencies in foreign jurisdictions.
Our operations are subject to various federal, state and local environmental laws and regulations, many of which are implemented by the EPA and similar state regulatory agencies. These laws and regulations govern the management of hazardous wastes, discharge of pollutants into the air and surface and underground waters and disposal of certain substances. We do not believe that compliance with these regulations has a material effect on our capital expenditures, earnings and competitive position.
The EPA mandated a series of stringent engine emissions standards for all newly manufactured truck engines, which became effective in October 2002, January 2007 and January 2010, resulting in increases in the costs of new trucks. The 2010 regulations required a significant decrease in particulate matter (soot and ash) and nitrogen oxide emitted from on-road diesel engines. Engine manufacturers responded to the 2010 standards by modifying engines to produce cleaner combustion with selective catalytic reduction (“SCR”) technologies to remove pollutants from exhaust gases exiting the combustion chamber. The SCR technology also requires the ongoing periodic use of a urea-based diesel exhaust fluid. Trucks with 2010-standard engines have a higher purchase price than trucks manufactured to meet the 2007 standards but are more fuel efficient. In 2014, we continued to purchase new trucks with the 2010-standard engines to replace older trucks we sell or trade, and as of December 31, 2014, nearly all of our company tractors had engines that comply with the 2010 emission standards.
The State of California enacted restrictions on transport refrigeration unit (“TRU”) emissions that require companies to operate compliant TRUs in California. The California regulations apply not only to California intrastate carriers, but also to carriers outside of California who wish to enter the state with TRUs. In January 2009, the EPA enabled California to phase in its Low-Emission TRU In-Use Performance Standards over several years. Enforcement of California’s in-use performance standards for TRU engines began in January 2010 for 2002 and older TRUs and will be phased in annually for later model years. We have complied with all compliance deadlines through December 31, 2014 that applied to model year 2007 and older TRU engines. California also required the registration of all California-based TRUs by July 31, 2009. For compliance purposes, we completed the California TRU registration process and continue to structure our plan to operate compliant TRUs over the next several years as the regulations gradually become effective.
California also adopted regulations to improve the fuel efficiency of heavy-duty tractors that pull 53-foot or longer box-type trailers within the state. The tractors and trailers subject to these regulations must either use EPA SmartWay-certified tractors and trailers or retrofit their existing fleet with SmartWay-verified technologies that have been demonstrated to meet or exceed fuel savings percentages specified in the regulations. Examples of these technologies include tractor and trailer aerodynamics packages (such as tractor fairings and trailer skirts) and the use of low-rolling resistance tires on both tractors and trailers. Enforcement of these regulations for 2011 model year equipment began in January 2010 and is being phased in over several years for older

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equipment. In order to comply with the California Air Resources Board’s (“CARB”) fuel efficiency regulations, we submitted a large fleet compliance plan to CARB on June 30, 2010, to install skirting on our dry van trailers by certain deadlines through 2016. We will continue monitoring our compliance with these CARB regulations.
Various provisions of the North American Free Trade Agreement (“NAFTA”) may alter the competitive environment for shipping into and out of Mexico. In July 2011, a portion of NAFTA was implemented allowing U.S. and Mexican carriers to travel beyond the border to transport cargo within one another's countries. We currently believe we are well prepared to respond to any changes that may result from this agreement. We conduct a substantial amount of business in international freight shipments to and from the United States and Mexico (see Note 10 in the Notes to Consolidated Financial Statements under Item 8 of Part II of this Form 10-K), and we believe we are one of the largest truckload carriers in terms of freight volume shipped to and from the United States and Mexico.
Competition
The freight transportation industry is highly competitive and includes thousands of trucking and non-asset-based logistics companies. We have a small share of the markets we target. Our Truckload segment competes primarily with other truckload carriers. Logistics companies, intermodal companies, railroads, less-than-truckload carriers and private carriers provide competition for both our Truckload and VAS segments. Our VAS segment also competes for the services of third-party capacity providers.
Competition for the freight we transport or manage is based primarily on service, efficiency, available capacity and, to some degree, on freight rates alone. We believe that few other truckload carriers have greater financial resources, own more equipment or carry a larger volume of freight than us. We believe we are one of the largest carriers in the truckload transportation industry based on total operating revenues.
Internet Website
We maintain an Internet website where you can find additional information regarding our business and operations. The website address is www.werner.com. On the website, we make certain investor information available free of charge, including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, stock ownership reports filed under Section 16 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and any amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. This information is included on our website as soon as reasonably practicable after we electronically file or furnish such materials to the U.S. Securities and Exchange Commission (“SEC”). The website also includes Interactive Data Files required to be posted pursuant to Rule 405 of SEC Regulation S-T. We also provide our corporate governance materials, such as Board committee charters and our Code of Corporate Conduct, on our website free of charge, and we may occasionally update these materials when necessary to comply with SEC and NASDAQ rules or to promote the effective and efficient governance of our company. Information provided on our website is not incorporated by reference into this Form 10-K.
ITEM 1A.
RISK FACTORS
The following risks and uncertainties may cause our actual results, business, financial condition and cash flows to materially differ from those anticipated in the forward-looking statements included in this Form 10-K. Caution should be taken not to place undue reliance on forward-looking statements made herein 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 revise or update any forward-looking statements contained herein to reflect subsequent events or circumstances or the occurrence of unanticipated events. Also refer to the Cautionary Note Regarding Forward-Looking Statements in Item 7 of Part II of this Form 10-K.
Our business is subject to overall economic conditions that could have a material adverse effect on our results of operations.
We are sensitive to changes in overall economic conditions that impact customer shipping volumes, industry freight demand and industry truck capacity. When shipping volumes decline or available truck capacity increases, freight pricing generally becomes more competitive as carriers compete for loads to maintain truck productivity. We may be negatively affected by future economic conditions including employment levels, business conditions, fuel and energy costs, interest rates and tax rates. Economic conditions may also impact the financial condition of our customers, resulting in a greater risk of bad debt losses, and that of our suppliers, which may affect negotiated pricing or availability of needed goods and services.

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Difficulty in recruiting and retaining experienced drivers, recent driver training school graduates and independent contractors could impact our results of operations and limit growth opportunities.
At times, the trucking industry has experienced driver shortages. Driver availability may be affected by changing workforce demographics, alternative employment opportunities (i.e., housing construction and manufacturing industries), national unemployment rates, freight market conditions, availability of financial aid for driver training schools and changing industry regulations. If such a shortage were to occur and additional driver pay rate increases were 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. Additionally, a shortage of drivers could result in idled equipment, which could affect our profitability.
Independent contractor availability may also be affected by both inflationary cost increases that are the responsibility of independent contractors and the availability of equipment financing. If a shortage of independent contractors occurs, additional increases in per mile settlement rates (for independent contractors) and driver pay rates (for company drivers) may become necessary to attract and retain a sufficient number of drivers. This could negatively affect our results of operations to the extent that we would be unable to obtain corresponding freight rate increases.
Increases in fuel prices and shortages of fuel can have a material adverse effect on the results of operations and profitability.
To lessen the effect of fluctuating fuel prices on our margins, we have fuel surcharge programs with our customers. 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. Fuel shortages, increases in fuel prices and petroleum product rationing could have a material adverse impact on our operations and profitability. To the extent that we cannot recover the higher cost of fuel through customer fuel surcharges, our financial results would be negatively impacted. As of December 31, 2014, we had no derivative financial instruments to reduce our exposure to fuel price fluctuations.
We operate in a highly competitive industry, which may limit growth opportunities and reduce profitability.
The freight transportation industry is highly competitive and includes thousands of trucking and non-asset-based logistics companies. We compete primarily with other truckload carriers in our Truckload segment. Logistics companies, intermodal companies, railroads, less-than-truckload carriers and private carriers also provide a lesser degree of competition in our Truckload segment, but such providers are more direct competitors in our VAS segment. Competition for the freight we transport or manage is based primarily on service, efficiency, available capacity and, to some degree, on freight rates alone. This competition could have an adverse effect on either the number of shipments we transport or the freight rates we receive, which could limit our growth opportunities and reduce our profitability.
We operate in a highly regulated industry. Changes in existing regulations or violations of existing or future regulations could adversely affect our operations and profitability.
We are regulated by the DOT in the United States and similar governmental transportation agencies in foreign countries in which we operate. We are also regulated by agencies in certain U.S. states. These regulatory agencies have the authority to govern transportation-related activities, such as safety, authorization to conduct motor carrier operations and other matters. The Regulation subsection in Item 1 of Part I of this Form 10-K describes several proposed and pending regulations that may have a significant effect on our operations including our productivity, driver recruitment and retention and capital expenditures. The subsidiaries of WGL hold a variety of licenses required to carry out its international services, and the loss of any of these licenses could adversely impact the operations of WGL.
The seasonal pattern generally experienced in the trucking industry may affect our periodic results during traditionally slower shipping periods and winter months.
In the trucking industry, revenues generally follow a seasonal pattern which may affect our results of operations. After the December holiday season and during the remaining winter months, our freight volumes are typically lower because some customers reduce shipment levels. Our operating expenses have historically been higher in the winter months because of cold temperatures and other adverse winter weather conditions which result in decreased fuel efficiency, increased cold weather-related maintenance costs of revenue equipment and increased insurance and claims costs. Revenue can also be affected by adverse weather conditions, holidays and the number of business days during a given period because revenue is directly related to the available working days of shippers.



7


We depend on key customers, the loss or financial failure of which may have a material adverse effect on our operations and profitability.
A significant portion of our revenue is generated from key customers. During 2014, our largest 5, 10 and 25 customers accounted for 25%, 41% and 60% of revenues, respectively. No single customer generated more than 10% of our revenues in 2014, and our largest customer accounted for 6% of our revenues in 2014. We do not have long-term contractual relationships with many of our key One-Way Truckload customers. Our contractual relationships with our Specialized Services customers are typically one to three years in length and may be terminated by either party upon 30 to 90 days’ notice following the expiration of the contract’s first year, and we review rates in these contracts annually. We cannot provide any assurance that key customer relationships will continue at the same levels. If a key customer substantially reduced or terminated our services, it could have a material adverse effect on our business and results of operations. We review our customers’ financial conditions for granting credit, monitor changes in customers’ financial conditions on an ongoing basis, and review individual past-due balances and collection concerns. However, a key customer’s financial failure may negatively affect our results of operations.
We depend on the services of third-party capacity providers, the availability of which could affect our profitability and limit growth in our VAS segment.
Our VAS segment is highly dependent on the services of third-party capacity providers, such as other truckload carriers, less-than-truckload carriers, railroads, ocean carriers and airlines. Many of those providers face the same economic challenges as we do and therefore are actively and competitively soliciting business. These economic conditions may have an adverse effect on the availability and cost of third-party capacity. If we are unable to secure the services of these third-party capacity providers at reasonable rates, our results of operations could be adversely affected.
If we cannot effectively manage the challenges associated with doing business internationally, our revenues and profitability may suffer.
Our results are affected by the success of our operations in Mexico, China and other foreign countries in which we operate. We are subject to risks of doing business internationally, including fluctuations in foreign currencies, changes in the economic strength of the countries in which we do business, difficulties in enforcing contractual obligations and intellectual property rights, burdens of complying with a wide variety of international and United States export and import laws, and social, political, and economic instability. Additional risks associated with our foreign operations, including restrictive trade policies and imposition of duties, taxes, or government royalties by foreign governments, are present but largely mitigated by the terms of NAFTA for Mexico and Canada. The agreement permitting cross border movements for both United States and Mexican based carriers into the United States and Mexico presents additional risks in the form of potential increased competition and the potential for increased congestion on the cross border lanes between countries.
Our earnings could be reduced by increases in the number of insurance claims, cost per claim, costs of insurance premiums or availability of insurance coverage.
We are self-insured for a significant portion of liability resulting from bodily injury, property damage, cargo and associate workers’ compensation and health benefit claims. This is supplemented by premium-based insurance with licensed insurance companies above our self-insurance level for each type of coverage. To the extent we experience a significant increase in the number of claims, cost per claim or insurance premium costs for coverage in excess of our retention amounts, our operating results would be negatively affected. Healthcare legislation and inflationary cost increases could also have a negative effect on our results.
Decreased demand for our used revenue equipment could result in lower unit sales, resale values and gains on sales of assets.
We are sensitive to changes in used equipment prices and demand, especially with respect to tractors. We have been in the business of selling our company-owned trucks since 1992, when we formed our wholly-owned subsidiary Fleet Truck Sales. Reduced demand for used equipment could result in a lower volume of sales or lower sales prices, either of which could negatively affect our gains on sales of assets.
Our operations are subject to various environmental laws and regulations, the violation of which could result in substantial fines or penalties.
In addition to direct regulation by DOT, EPA and other federal, state, and local agencies, we are subject to various environmental laws and regulations dealing with the handling of hazardous materials, aboveground and underground fuel storage tanks, discharge and retention of storm-water, and emissions from our vehicles. We operate in industrial areas, where truck terminals and other industrial activities are located and where groundwater or other forms of environmental contamination have occurred. Our operations involve the risks of fuel spillage or seepage, environmental damage and hazardous waste disposal, among others. We also maintain bulk fuel storage at several of our facilities. If we are involved in a spill or other accident involving hazardous

8


substances, or if we are found to be in violation of applicable laws or regulations, it could have a material adverse effect on our business and operating results. If we fail to comply with applicable environmental regulations, we could be subject to substantial fines or penalties and to civil and criminal liability. Tractors and trailers used in our daily operations have been affected by regulatory changes related to air emissions and fuel efficiency, and may be adversely affected in the future by new regulatory actions.
We rely on the services of key personnel, the loss of which could impact our future success.
We are highly dependent on the services of key personnel, including our executive officers. Although we believe we have an experienced and highly qualified management team, the loss of the services of these key personnel could have a significant adverse impact on us and our future profitability.
Difficulty in obtaining goods and services from our vendors and suppliers could adversely affect our business.
We are dependent on our vendors and suppliers. We believe we have good vendor relationships and that we are generally able to obtain favorable pricing and other terms from vendors and suppliers. If we fail to maintain satisfactory relationships with our vendors and suppliers, or if our vendors and suppliers experience significant financial problems, we could experience difficulty in obtaining needed goods and services because of production interruptions or other reasons. Consequently, our business could be adversely affected.
We use our information systems extensively for day-to-day operations, and service disruptions could have an adverse impact on our operations.
The efficient operation of our business is highly dependent on our information systems. Much of our software was developed internally or by adapting purchased software applications to suit our needs. Our information systems are used for receiving and planning loads, dispatching drivers and other capacity providers, billing customers and providing financial reports. If any of our critical information systems fail or become unavailable, we would have to perform certain functions manually, which could temporarily affect our ability to efficiently manage our operations. We maintain information security policies to protect our systems and data from cyber security events and threats. We purchased redundant computer hardware systems and have our own off-site disaster recovery facility approximately ten miles from our headquarters for use in the event of a disaster. We took these steps to reduce the risk of disruption to our business operation if a disaster occurred. We believe any such disruption would be minimal or moderate; however, we cannot predict the degree to which any disaster would affect our information systems or disaster recovery facility. Any system failure, disruption, or security breach could interrupt or delay our operations, damage our reputation, cause us to lose customers, or impact our ability to manage our operations, any of which could have an adverse effect on our operations.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
We have not received any written comments from SEC staff regarding our periodic or current reports that were issued 180 days or more preceding the end of our 2014 fiscal year and that remain unresolved.
ITEM 2.
PROPERTIES
Our headquarters are located on approximately 197 acres near U.S. Interstate 80 west of Omaha, Nebraska, 107 acres of which are held for future expansion. Our headquarters office building includes a computer center, drivers’ lounges, cafeteria and company store. The Omaha headquarters also includes a driver training facility, equipment maintenance and repair facilities and a sales office for selling used trucks and trailers. These maintenance facilities contain a central parts warehouse, frame straightening and alignment machine, truck and trailer wash areas, equipment safety lanes, body shops for tractors and trailers, two paint booths and a reclaim center. Our headquarter facilities have suitable space available to accommodate planned needs for at least the next three to five years.

9


We also have several terminals throughout the United States, consisting of office and/or maintenance facilities. Our terminal locations are described below:

 
Location
  
Owned or Leased
  
Description
 
Segment
Omaha, Nebraska
  
Owned
  
Corporate headquarters, maintenance
 
Truckload, VAS, Corporate
Omaha, Nebraska
  
Owned
  
Disaster recovery, warehouse
 
Corporate
Phoenix, Arizona
  
Owned
  
Office, maintenance
 
Truckload
Fontana, California
  
Owned
  
Office, maintenance
 
Truckload
Denver, Colorado
  
Owned
  
Office, maintenance
 
Truckload
Atlanta, Georgia
  
Owned
  
Office, maintenance
 
Truckload, VAS
Indianapolis, Indiana
  
Leased
  
Office, maintenance
 
Truckload
Springfield, Ohio
  
Owned
  
Office, maintenance
 
Truckload
Allentown, Pennsylvania
  
Leased
  
Office, maintenance
 
Truckload
Dallas, Texas
  
Owned
  
Office, maintenance
 
Truckload, VAS
Laredo, Texas
  
Owned
  
Office, maintenance, transloading
 
Truckload, VAS
Lakeland, Florida
  
Leased
  
Office
 
Truckload
El Paso, Texas
  
Owned
  
Office, maintenance
 
Truckload
Brownstown, Michigan
  
Owned
  
Maintenance
 
Truckload
Tomah, Wisconsin
  
Leased
  
Maintenance
 
Truckload
Newbern, Tennessee
  
Leased
  
Maintenance
 
Truckload
Chicago, Illinois
  
Leased
  
Maintenance
 
Truckload

We currently lease (i) small sales offices, brokerage offices and trailer parking yards in various locations throughout the United States and (ii) office space in Mexico, Canada, China and Australia. We own (i) a 96-room motel located near our Omaha headquarters; (ii) a 71-room private driver lodging facility at our Dallas terminal; (iii) a warehouse facility in Omaha; and (iv) a terminal facility in Queretaro, Mexico, which we lease to a related party (see Note 9 in the Notes to Consolidated Financial Statements under Item 8 of Part II of this Form 10-K). We also have 50% ownership in a 125,000 square-foot warehouse located near our headquarters in Omaha. The Fleet Truck Sales network currently has six locations, which are located in certain of our terminals listed above.
ITEM 3.
LEGAL PROCEEDINGS
We are a party subject to routine litigation incidental to our business, primarily involving claims for bodily injury, property damage, cargo and workers’ compensation incurred in the transportation of freight. We have maintained a self-insurance program with a qualified department of risk management professionals since 1988. These associates manage our bodily injury, property damage, cargo and workers’ compensation claims. An actuary reviews our undiscounted self-insurance reserves for bodily injury, property damage and workers’ compensation claims at year-end.
Since August 1, 2004, our self-insured retention ("SIR") and deductible amount for liability claims has been $2.0 million, plus administrative expenses, for each occurrence involving bodily injury or property damage. We are also responsible for varying annual aggregate amounts of liability for claims in excess of the SIR/deductible. The following table reflects the SIR/deductible levels and aggregate amounts of liability for bodily injury and property damage claims since August 1, 2011: 

Coverage Period
  
Primary Coverage
  
Primary  Coverage
SIR/Deductible
August 1, 2011 – July 31, 2012
  
$5.0 million
  
$2.0 million  (1)
August 1, 2012 – July 31, 2014
  
$5.0 million
  
$2.0 million  (1)
August 1, 2013 – July 31, 2014
  
$5.0 million
  
$2.0 million  (1)
August 1, 2014 – July 31, 2015
  
$5.0 million
  
$2.0 million  (1)

(1)
Subject to an additional $8.0 million aggregate in the $2.0 to $5.0 million layer.

10


Our primary insurance covers the range of liability under which we expect most claims to occur. If any liability claims are in excess of coverage amounts listed in the table above, such claims are covered under premium-based policies (issued by insurance companies) to coverage levels that our management considers adequate. For claims in excess of $5.0 million and less than $10.0 million, we are responsible for the first $5.0 million of claims in this layer. We are also responsible for administrative expenses for each occurrence involving bodily injury or property damage. See also Note 1 and Note 8 in the Notes to Consolidated Financial Statements under Item 8 of Part II of this Form 10-K.
We are responsible for workers’ compensation claims up to $1.0 million per claim and have premium-based insurance coverage for individual claims above $1.0 million. We also maintain a $32.6 million bond for the State of Nebraska and a $6.9 million bond for our workers’ compensation insurance carrier.
Information regarding material pending legal proceedings is incorporated by reference from Note 5 and Note 8 in the Notes to Consolidated Financial Statements under Item 8 of Part II of this Form 10-K.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable
PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Price Range of Common Stock
Our common stock trades on the NASDAQ Global Select MarketSM tier of the NASDAQ Stock Market under the symbol “WERN”. The following table sets forth, for the quarters indicated from January 1, 2013 through December 31, 2014, (i) the high and low trade prices per share of our common stock quoted on the NASDAQ Global Select MarketSM and (ii) our dividends declared per common share.
 
2014
 
2013
 
High
 
Low
 
Dividends
Declared Per
Common Share
 
High
 
Low
 
Dividends
Declared Per
Common Share
Quarter Ended:
 
 
 
 
 
 
 
 
 
 
 
March 31
$26.87
 
$24.26
 
$0.05
 
$25.02
 
$22.02
 
$0.05
June 30
27.01
 
24.72
 
0.05
 
25.44
 
21.80
 
0.05
September 30
27.04
 
24.31
 
0.05
 
25.33
 
22.61
 
0.05
December 31
31.71
 
23.50
 
0.05
 
25.24
 
22.86
 
0.05
 
As of February 19, 2015, our common stock was held by 242 stockholders of record. Because many of our shares of common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders. The high and low trade prices per share of our common stock in the NASDAQ Global Select MarketSM as of February 19, 2015 were $32.15 and $31.26, respectively.
Dividend Policy
We have paid cash dividends on our common stock following each fiscal quarter since the first payment in July 1987. We currently intend to continue paying a regular quarterly dividend. We do not currently anticipate any restrictions on our future ability to pay such dividends. However, we cannot give any assurance that dividends will be paid in the future or of the amount of any such quarterly or special dividends because they are dependent on our earnings, financial condition and other factors.
Equity Compensation Plan Information
For information on our equity compensation plans, please refer to Item 12 of Part III of this Form 10-K.




11


Performance Graph
Comparison of Five-Year Cumulative Total Return
The following graph is not deemed to be “soliciting material” or to be “filed” with the SEC or subject to the liabilities of Section 18 of the Exchange Act, and the report shall not be deemed to be incorporated by reference into any prior or subsequent filing by us under the Securities Act of 1933 or the Exchange Act except to the extent we specifically request that such information be incorporated by reference or treated as soliciting material.
 
 

 
 
12/31/2009
 
12/31/2010
 
12/31/2011
 
12/31/2012
 
12/31/2013
 
12/31/2014
Werner Enterprises, Inc. (WERN)
 
$
100

 
$
114

 
$
122

 
$
109

 
$
125

 
$
157

Standard & Poor’s 500
 
$
100

 
$
115

 
$
117

 
$
136

 
$
180

 
$
205

NASDAQ Trucking Group (SIC Code 42)
 
$
100

 
$
128

 
$
136

 
$
166

 
$
239

 
$
299

Assuming the investment of $100 on December 31, 2009, and reinvestment of all dividends, the graph above compares the cumulative total stockholder return on our common stock for the last five fiscal years with the cumulative total return of Standard & Poor’s 500 Market Index and an index of other companies included in the trucking industry (NASDAQ Trucking Group – Standard Industrial Classification Code 42) over the same period. Our stock price was $31.15 as of December 31, 2014. This price was used for purposes of calculating the total return on our common stock for the year ended December 31, 2014.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
On October 15, 2007, we announced that on October 11, 2007 our Board of Directors approved an increase in the number of shares of our common stock that Werner Enterprises, Inc. (the “Company”) is authorized to repurchase. Under this authorization, the Company is permitted to repurchase an additional 8,000,000 shares. As of December 31, 2014, the Company had purchased 3,062,291 shares pursuant to this authorization and had 4,937,709 shares remaining available for repurchase. The Company may purchase shares from time to time depending on market, economic and other factors. The authorization will continue unless withdrawn by the Board of Directors.
No shares of common stock were repurchased during the fourth quarter of 2014 by either the Company or any “affiliated purchaser”, as defined by Rule 10b-18 of the Exchange Act.

12


ITEM 6.
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the consolidated financial statements and notes under Item 8 of Part II of this Form 10-K.
(In thousands, except per share amounts)
2014
 
2013
 
2012
 
2011
 
2010
Operating revenues
$
2,139,289

 
$
2,029,183

 
$
2,036,386

 
$
2,002,850

 
$
1,815,020

Net income
98,650

 
86,785

 
103,034

 
102,757

 
80,039

Diluted earnings per share
1.36

 
1.18

 
1.40

 
1.40

 
1.10

Cash dividends declared per share
0.20

 
0.20

 
1.70

 
0.70

 
1.80

Total assets
1,480,462

 
1,354,097

 
1,334,900

 
1,302,416

 
1,151,552

Total debt
75,000

 
40,000

 
90,000

 

 

Stockholders’ equity
833,860

 
772,519

 
714,897

 
725,147

 
668,975

Book value per share (1)
11.58

 
10.62

 
9.76

 
9.95

 
9.21

Return on average stockholders’ equity (2)
12.4
%
 
11.7
%
 
13.6
%
 
14.5
%
 
11.1
%
Return on average total assets (3)
7.0
%
 
6.5
%
 
7.7
%
 
8.3
%
 
6.6
%
Operating ratio (consolidated) (4)
92.5
%
 
93.1
%
 
91.6
%
 
91.3
%
 
92.6
%
(1)
Stockholders’ equity divided by common shares outstanding as of the end of the period. Book value per share indicates the dollar value remaining for common shareholders if all assets were liquidated at recorded amounts and all debts were paid at recorded amounts.
(2)
Net income expressed as a percentage of average stockholders’ equity. Return on equity is a measure of a corporation’s profitability relative to recorded shareholder investment.
(3)
Net income expressed as a percentage of average total assets. Return on assets is a measure of a corporation’s profitability relative to recorded assets.
(4)
Operating expenses expressed as a percentage of operating revenues. Operating ratio is a common measure used in the trucking industry to evaluate profitability.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) summarizes the financial statements from management’s perspective with respect to our financial condition, results of operations, liquidity and other factors that may affect actual results. The MD&A is organized in the following sections:
Cautionary Note Regarding Forward-Looking Statements
Overview
Results of Operations
Liquidity and Capital Resources
Contractual Obligations and Commercial Commitments
Off-Balance Sheet Arrangements
Critical Accounting Policies and Estimates
Inflation
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.

13


Overview:
We have two reportable segments, Truckload and VAS, 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 VAS 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, related to 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 2014 to 2013, 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 VAS segment (Brokerage, Freight Management, Intermodal and WGL). Unlike our Truckload segment, the VAS 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 VAS 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 VAS 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 generally do not have contracted long-term 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.

14


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.
 
2014
 
2013
 
2012
 
Percentage Change in Dollar Amounts
(Amounts in thousands)
$
 
%
 
$
 
%
 
$
 
%
 
2014 to 2013 (%)
 
2013 to 2012 (%)
Operating revenues
$
2,139,289

 
100.0

 
$
2,029,183

 
100.0

 
$
2,036,386

 
100.0

 
5.4

 
(0.4
)
 
 
 
 
 
 
 
 
 
 
 
 
 


 
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 


 
 
Salaries, wages and benefits
584,006

 
27.3

 
545,419

 
26.9

 
544,322

 
26.7

 
7.1

 
0.2

Fuel
346,058

 
16.2

 
371,789

 
18.3

 
401,417

 
19.7

 
(6.9
)
 
(7.4
)
Supplies and maintenance
188,437

 
8.8

 
179,172

 
8.8

 
172,505

 
8.5

 
5.2

 
3.9

Taxes and licenses
85,468

 
4.0

 
86,686

 
4.3

 
90,002

 
4.4

 
(1.4
)
 
(3.7
)
Insurance and claims
80,375

 
3.7

 
71,177

 
3.5

 
65,593

 
3.2

 
12.9

 
8.5

Depreciation
176,984

 
8.3

 
173,019

 
8.5

 
166,957

 
8.2

 
2.3

 
3.6

Rent and purchased transportation
498,782

 
23.3

 
456,885

 
22.5

 
420,480

 
20.7

 
9.2

 
8.7

Communications and utilities
14,220

 
0.7

 
13,506

 
0.7

 
13,745

 
0.7

 
5.3

 
(1.7
)
Other
4,871

 
0.2

 
(8,196
)
 
(0.4
)
 
(10,079
)
 
(0.5
)
 
159.4

 
18.7

Total operating expenses
1,979,201

 
92.5

 
1,889,457

 
93.1

 
1,864,942

 
91.6

 
4.7

 
1.3

 
 
 
 
 
 
 
 
 
 
 
 
 


 
 
Operating income
160,088

 
7.5

 
139,726

 
6.9

 
171,444

 
8.4

 
14.6

 
(18.5
)
Total other expense (income)
(1,686
)
 
(0.1
)
 
(1,985
)
 
(0.1
)
 
(1,722
)
 
(0.1
)
 
15.1

 
(15.3
)
Income before income taxes
161,774

 
7.6

 
141,711

 
7.0

 
173,166

 
8.5

 
14.2

 
(18.2
)
Income taxes
63,124

 
3.0

 
54,926

 
2.7

 
70,132

 
3.4

 
14.9

 
(21.7
)
Net income
$
98,650

 
4.6

 
$
86,785

 
4.3

 
$
103,034

 
5.1

 
13.7

 
(15.8
)

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.
 
2014
 
2013
 
2012
Truckload Transportation Services (amounts in thousands)
$
 
%
 
$
 
%
 
$
 
%
Trucking revenues, net of fuel surcharge
$
1,332,879

 
 
 
$
1,287,656

 
 
 
$
1,309,503

 
 
Trucking fuel surcharge revenues
349,763

 
 
 
354,616

 
 
 
376,104

 
 
Non-trucking and other operating revenues
19,495

 

 
15,582

 
 
 
13,742

 
 
Operating revenues
1,702,137

 
100.0
 
1,657,854

 
100.0
 
1,699,349

 
100.0
Operating expenses
1,549,145

 
91.0
 
1,538,257

 
92.8
 
1,546,207

 
91.0
Operating income
152,992

 
9.0
 
119,597

 
7.2
 
153,142

 
9.0

15


Truckload Transportation Services
2014
 
2013
 
2012
Operating ratio, net of fuel surcharge revenues (1)
88.7
%
 
90.8
%
 
88.4
%
Average revenues per tractor per week (2)
$
3,655

 
$
3,457

 
$
3,486

Average trip length in miles (loaded)
473

 
453

 
481

Average percentage of empty miles (3)
12.1
%
 
12.5
%
 
12.3
%
Average tractors in service
7,013

 
7,162

 
7,225

Total trailers (at year end)
22,305

 
21,980

 
22,415

Total tractors (at year end):
 
 
 
 
 
Company
6,400

 
6,380

 
6,505

Independent contractor
650

 
670

 
645

Total tractors
7,050

 
7,050

 
7,150


(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 VAS 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 VAS segment's shipments and average revenues (excluding logistics fee revenue) per shipment for the periods indicated.
 
2014
 
2013
 
2012
Value Added Services (amounts in thousands)
$
 
%
 
$
 
%
 
$
 
%
Operating revenues
$
390,645

 
100.0

 
$
361,384

 
100.0

 
$
324,155

 
100.0

Rent and purchased transportation expense
338,625

 
86.7

 
305,582

 
84.6

 
274,326

 
84.6

Gross margin
52,020

 
13.3

 
55,802

 
15.4

 
49,829

 
15.4

Other operating expenses
44,485

 
11.4

 
41,138

 
11.3

 
33,830

 
10.5

Operating income
$
7,535

 
1.9

 
$
14,664

 
4.1

 
$
15,999

 
4.9

 
 
 
 
 
 
 
Percentage Change
Value Added Services
2014
 
2013
 
2012
 
2014 to 2013
 
2013 to 2012
Total VAS shipments
285,153

 
277,430

 
265,411

 
2.8
 %
 
4.5
 %
Less: Non-committed shipments to Truckload segment
71,963

 
75,852

 
79,025

 
(5.1
)%
 
(4.0
)%
Net VAS shipments
213,190

 
201,578

 
186,386

 
5.8
 %
 
8.2
 %
Average revenue per shipment
$
1,696

 
$
1,627

 
$
1,602

 
4.2
 %
 
1.6
 %
 


 


 


 
 
 
 
Average tractors in service
50

 
45

 
22

 


 
 
Total trailers (at year end)
1,670

 
1,725

 
965

 


 
 
Total tractors (at year end)
55

 
49

 
39

 


 
 
2014 Compared to 2013
Operating Revenues
Operating revenues increased 5.4% in 2014 compared to 2013. When comparing 2014 to 2013, the Truckload segment revenues increased $44.3 million, or 2.7%, and the VAS segment revenues increased $29.3 million, or 8.1%.
Within the Truckload segment, freight demand was strong in 2014. Freight demand (as measured by our daily morning ratio of loads available to trucks available in our One-Way Truckload network) showed consistent strength throughout the year, and we were overbooked (more available freight than available trucks at the beginning of each business day) nearly every week of 2014. The improved freight market dynamics began showing year-over-year improvement for Werner in mid-November 2013, and that favorable trend continued through 2014. A tight capacity market in 2014 combined with a gradually firming economy as 2014 progressed were the primary contributing factors. We believe that truck capacity is being challenged by an increasingly competitive driver market and heightened regulatory cost increases for truck ownership and compliance with safety regulations; thus, we expect

16


this favorable demand trend relative to constrained supply will continue. Freight demand thus far in 2015 has been stronger than a normal first quarter and has followed typical seasonal patterns.
Trucking revenues, net of fuel surcharge, increased 3.5% in 2014 compared to 2013 due to a 5.7% increase in average revenues per tractor per week, net of fuel surcharge, partially offset by a 2.1% decrease in the average number of tractors in service. We continue to focus on securing driver friendly, highly productive freight and improved freight selection by using our proprietary freight optimization system, which enabled us to raise our average miles per truck by 2.7% and further reduce our empty miles percentage by 3.1% compared to 2013. Average revenues per total mile, net of fuel surcharge, increased 3.0% in 2014 compared to 2013. Several factors had a positive impact on our average revenues per tractor per week and profitability, while at the same time reduced the percentage increase in our revenue per total mile. Our average trip length increased by 4.4% in 2014 compared to 2013, and longer length of haul shipments generally have a lower rate per mile due to productivity benefits. Noting the improved freight market in 2014 compared to 2013, during 2014 we accepted less brokerage freight (in which rates are inclusive of fuel) and instead supported our customers with additional capacity priced with a base rate per mile and a fuel surcharge per mile. Finally, customer changes in fuel surcharge programs had a neutral impact on profitability but an adverse effect on revenue per total mile, net of fuel surcharge. A few large customers modified their fuel surcharge programs to "zero peg" in the past 12 months, which shifted revenues from base rates to fuel surcharges. A zero peg fuel surcharge program starts with a base fuel price per gallon (the minimum price for fuel, above which a customer pays fuel surcharge) of zero rather than a base fuel price per gallon more commonly ranging from $1.10 to $1.20.
We believe that we made good progress implementing sustainable rate increases with our customers during 2014. These efforts are on-going as we move forward in 2015 and work 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 decreased 2.1% to 7,013 in 2014 from 7,162 in 2013, a decrease of 149 tractors. We ended 2014 with 7,050 tractors in the Truckload segment (3,690 in our Specialized Services unit and 3,360 in our One-Way Truckload unit). In mid-August 2014, we increased pay by varying percentage amounts for many drivers in certain fleets within our One-Way Truckload unit. After these driver pay changes, our driver and truck count recovered and increased from July 2014 levels. Additionally, over the last several months, we increased driver pay in multiple Dedicated fleets, most of which were funded by customer rate increases to ensure capacity. 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 1.4% to $349.8 million in 2014 from $354.6 million in 2013 because of lower average fuel prices in 2014, which more than offset the impact of the less brokerage freight and zero peg fuel surcharge items described above and the effect of higher miles. If fuel prices remain at current levels following the significant decline that occurred in fourth quarter 2014, we expect fuel surcharge revenues (and total revenues) to be lower in 2015 than in 2014. 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. In periods of rapidly rising fuel prices, our earnings have been negatively impacted by the lag effect that occurs because the cost of fuel rises immediately but the market indexes used to determine fuel surcharges increase at a slower pace and only once per week. During periods of rapidly declining fuel prices, we generally experience a temporary favorable earnings lag effect, since fuel costs decline at a faster pace than the market indexes used to determine fuel surcharges.
VAS 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. VAS also recorded revenue and brokered freight expense of $2.9 million in 2014 and $4.5 million in 2013 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. VAS revenues increased 8.1% to $390.6 million in 2014 from $361.4 million in 2013. VAS gross margin dollars decreased 6.8% to $52.0 million in 2014 from $55.8 million in 2013, and other operating expenses increased $3.3 million or 8.1%. VAS results for 2014 (especially mid-year) 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

17


the second quarter 2014 start-up of a large VAS customer. We addressed several customer pricing, contractual and operational issues within VAS in fourth quarter 2014 with the goal of gradually improving VAS financial performance in 2015.
Operating Expenses
Our operating ratio (operating expenses expressed as a percentage of operating revenues) was 92.5% in 2014 compared to 93.1% in 2013. 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 VAS.
Salaries, wages and benefits increased $38.6 million or 7.1% in 2014 compared to 2013 and increased 0.4% as a percentage of operating revenues. The higher dollar amount of salaries, wages and benefits expense was due primarily to higher driver and non-driver salaries. 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. Additionally, over the last several months, we increased driver pay in multiple Dedicated fleets, most of which were funded by customer rate increases to ensure capacity. Non-driver salaries, wages and benefits in the non-trucking VAS segment decreased 0.3% in 2014 compared to 2013, and net VAS shipments managed by VAS personnel increased by 5.8%.
We renewed our workers' compensation insurance coverage for the policy year beginning April 1, 2014. 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 2014 were similar to those for the previous policy year.
The driver recruiting and retention market was more challenging in 2014 compared to 2013. We hired 3.4% fewer drivers in 2014 compared to 2013, and the difficult driver market is making it challenging to achieve our truck goal for the Truckload segment. We believe that a declining number of, and increased competition for, driver training school graduates, a gradually declining national unemployment rate and job competition from the housing construction and manufacturing industries were all contributing factors. Following our mid-August pay changes, our driver retention metrics improved. However, we expect that competition for drivers will remain high in the coming months. 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 $25.7 million or 6.9% in 2014 compared to 2013 and decreased 2.1% as a percentage of operating revenues due to (i) lower average diesel fuel prices and (ii) slightly improved miles per gallon ("mpg"). Average diesel fuel prices in 2014 were 19 cents per gallon lower than in 2013, a 6% decrease. These decreases were partially offset by higher company truck miles.
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, tire inflation systems and trailer skirts to reduce our fuel gallons purchased. These measures resulted in an improvement in mpg in 2014 compared to 2013. However, fuel savings from the 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 eight weeks of 2015, the average diesel fuel price per gallon was approximately $1.33 lower than the average diesel fuel price per gallon in the same period of 2014 and approximately $1.35 lower than the average for first quarter 2014. If fuel prices remain at current levels following the significant decline that occurred in fourth quarter 2014, we expect fuel expenses (including the fuel component of our independent contractor costs) to be lower in 2015 than in 2014.
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, 2014, we had no derivative financial instruments to reduce our exposure to fuel price fluctuations.
Supplies and maintenance increased $9.3 million or 5.2% in 2014 compared to 2013 but did not change as a percentage of operating revenues. Driver advertising and other driver related expenses were higher in 2014 than in 2013. Increased over the road

18


tractor and trailer maintenance also contributed to the increase in this expense category, some of which can be attributed to severe weather conditions in first quarter 2014.
Taxes and licenses decreased $1.2 million or 1.4% in 2014 compared to 2013 and decreased 0.3% as a percentage of operating revenues due to improvement in the company truck fuel mpg, despite driving more miles in 2014. An improved mpg results in fewer gallons of diesel fuel purchased and consequently less fuel taxes paid.
Insurance and claims increased $9.2 million or 12.9% in 2014 compared to 2013 and increased 0.2% as a percentage of operating revenues. The increase in 2014 compared to 2013 is primarily the result of an increase in the reserves for prior period claims (unfavorable development) related to large dollar liability claims. Higher expense on new smaller dollar liability claims was nearly offset by better development on small claims (favorable development in 2014 compared to unfavorable development in 2013). 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, 2014, and continue 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, 2011. Our liability and cargo insurance premiums for the policy year that began August 1, 2014, are slightly lower than premiums for the previous policy year on a per-mile basis.
Depreciation increased $4.0 million or 2.3% in 2014 compared to 2013 but decreased 0.2% 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. In addition, the purchase of new trailers to replace older used trailers which were fully depreciated also contributed to the increase in depreciation expense. These increases were partially offset by lower depreciation on auxiliary power units that were sold with the older used trucks and not replaced.
Depreciation expense has been historically affected by a series of changes to engine emissions standards imposed by the EPA that became effective in October 2002, January 2007 and January 2010, resulting in increased truck purchase costs. Trucks with 2010-standard engines have a higher purchase price than trucks manufactured to meet the 2007 standards, but the 2010-standard engines are more fuel efficient. In 2014, we continued to purchase trucks with 2010-standard engines to replace older trucks that we sold or traded, and as of December 31, 2014, nearly all of our company tractors had engines that comply with the 2010 emissions standards.
Rent and purchased transportation expense increased $41.9 million or 9.2% in 2014 compared to 2013 and increased 0.8% as a percentage of operating revenues. Rent and purchased transportation expense consists mainly of payments to third-party capacity providers in the VAS segment and other non-trucking operations and payments to 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 VAS segment. VAS rent and purchased transportation expense increased $33.0 million and increased to 86.7% of VAS revenues in 2014 from 84.6% in 2013. This increase was due primarily 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 VAS customer. We addressed several customer pricing, contractual and operational issues within VAS in fourth quarter 2014 with the goal of gradually improving VAS financial performance in 2015.
Rent and purchased transportation expense for the Truckload segment increased $5.3 million in 2014 compared to 2013. This increase is due primarily to higher third-party capacity provider costs for shipments delivered to or from Mexico because of volume increases and a higher average independent contractor pay per mile in 2014 compared to 2013. In mid-August, we increased the per-mile settlement rate for certain owner-operators. Independent contractor miles as a percentage of total miles were 12.1% in 2014 and 12.2% in 2013.
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 $0.7 million or 5.3% in 2014 compared to 2013 but did not change as a percentage of operating revenues. The increase is due to using a new driver route navigation program and higher other communication costs.

19


Other operating expenses increased $13.1 million or 159.4% in 2014 compared to 2013 and increased 0.6% 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 increased to $19.3 million in 2014 from $16.4 million in 2013, a $2.9 million increase. In 2014, we realized lower average gains per truck sold, higher average gains per trailer sold and sold more trucks and trailers than in 2013. We also realized $1.6 million in gains from the sale of real estate in 2014 compared to $1.8 million in 2013. Other operating expenses were higher in 2014 than in 2013.
Other Expense (Income)
Other expense (income) increased $0.3 million or 15.1% in 2014 compared to 2013 and did not change as a percentage of operating revenues. Interest expense was higher in 2014 compared to 2013 because we had a higher amount of average debt outstanding, and we entered into an interest rate swap agreement in September 2014 that effectively fixed our interest rate at 2.5%.
Income Taxes
Our effective income tax rate (income taxes expressed as a percentage of income before income taxes) increased to 39.0% for 2014 from 38.8% in 2013. The higher income tax rate is primarily attributed to a smaller amount of favorable tax adjustments for the remeasurement of uncertain tax positions in 2014 than in 2013, partially offset by the benefit of prior year state income tax refunds received in 2014.
2013 Compared to 2012
Operating Revenues
Operating revenues decreased 0.4% in 2013 compared to 2012 due to lower revenues in the Truckload segment, partially offset by higher VAS revenues.
Truckload segment revenues declined $41.5 million, or 2.4%, in 2013 compared to 2012. The truckload freight market during 2013 was comparable to 2012. The average weekly pre-booked percentage of loads to trucks (“pre-books”) for the One-Way Truckload fleets in 2013 was slightly higher than 2012. In the first half of 2013, we saw similar freight demand and typical seasonal trends. The second half of 2013 also demonstrated normal season improvement with periods of stronger freight demand when compared with the same periods of 2012. We attribute this to slightly tighter industry capacity resulting from the July 1, 2013, HOS rule changes, slightly improved customer demand in comparison to economic uncertainty in the second half of 2012, and the compressed retail holiday selling period in 2013.
Trucking revenues, net of fuel surcharge, decreased 1.7%, due to a 0.8% decrease in average revenues per tractor per week and a 0.9% decrease in the average number of tractors in service. Average revenues per tractor per week reflect the combined effects of average revenues per total mile, net of fuel surcharge, and average miles per tractor. Average revenues per total mile, net of fuel surcharge, increased 2.1% in 2013 compared to 2012. Average monthly miles per tractor decreased 2.9% in 2013 compared to 2012, resulting from (i) a 5.8% shorter length of haul, (ii) an estimated two to three percent decrease due to the revised HOS rules effective July 1, 2013, and (iii) a truck mix change (more Dedicated, less One-Way Truckload).
The average number of tractors in service in the Truckload segment decreased to 7,162 in 2013 from 7,225 in 2012, a decrease of 63 tractors. We ended 2013 with 7,050 tractors, a decrease of 100 tractors from the end of 2012.
Trucking fuel surcharge revenues decreased 5.7% to $354.6 million in 2013 from $376.1 million in 2012 because of lower average fuel prices and lower miles in 2013.
VAS 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. VAS also recorded revenue and brokered freight expense of $4.5 million in 2013 and $3.2 million in 2012 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. VAS revenues increased 11.5% to $361.4 million in 2013 from $324.2 million in 2012, resulting from an increase in Brokerage and Intermodal shipments and a 1.6% increase in the average revenue per shipment. VAS gross margin dollars increased 12.0% to $55.8 million in 2013 from $49.8 million in 2012, and other operating expenses increased $7.3 million or 21.6%; these changes are partially attributed to Intermodal's development of its own drayage fleet, which had the effect of lowering rent and purchased transportation expense and increasing other operating expenses. The average number of tractors in service in the VAS segment (intermodal drayage trucks) increased by 23, from 22 in 2012 to 45 in 2013. The VAS gross margin percentage remained flat at 15.4% in 2013 and 2012 and was negatively impacted by higher third-party carrier rates as capacity

20


tightened and competition increased in the second half of 2013. As a result, VAS operating income decreased 8.3% to $14.7 million in 2013 from $16.0 million in 2012.
Operating Expenses
Our operating ratio was 93.1% in 2013 compared to 91.6% in 2012. 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 VAS.
Salaries, wages and benefits increased $1.1 million or 0.2% in 2013 compared to 2012 and increased 0.2% as a percentage of operating revenues. The higher dollar amount of salaries, wages and benefits expense was due primarily to higher non-driver and student driver salaries. These increases were partially offset by lower workers' compensation expense and a lower dollar amount of driver salaries because of fewer total miles driven, including the shift from this expense category to rent and purchased transportation expense that occurred because of the increase in independent contractor miles as a percentage of total miles. However, when evaluated on a per-mile basis, salaries, wages and benefits increased, which we attribute primarily to higher driver pay, including discretionary and incentive performance pay items in a more competitive driver market, student driver pay as noted above, and higher driver pay during the startup of new Dedicated fleets. Non-driver salaries, wages and benefits in the non-trucking VAS segment increased 7.5% in 2013 compared to 2012. VAS handled 4.5% more shipments in 2013 compared to 2012, including those transferred to the Truckload segment, and the net shipments retained by VAS increased 8.2%.
We renewed our workers' compensation insurance coverage for the policy year beginning April 1, 2013. 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 2013 were similar to those for the previous policy year.
The driver recruiting and retention market was more challenging in 2013 compared to 2012. We believe that a declining number of, and increased competition for, driver training school graduates, a declining national unemployment rate and increased job competition from the strengthening housing construction and hydraulic fracturing industries were all contributing factors. We hired 0.2% fewer drivers in 2013 compared to 2012.
Fuel decreased $29.6 million or 7.4% in 2013 compared to 2012 and decreased 1.4% as a percentage of operating revenues due to (i) fewer miles, (ii) slightly improved mpg, (iii) a shift from this expense category to rent and purchased transportation expense because of the increase in independent contractor miles as a percentage of total miles and (iv) lower average diesel fuel prices. Average diesel fuel prices in 2013 were 7 cents per gallon lower than in 2012, a 2% decrease.
During 2013, we continued to employ fuel-saving measures and invest in fuel saving equipment solutions, which were also intended to lessen environmental impact. These measures resulted in an improvement in mpg in 2013 compared to 2012. 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 $6.7 million or 3.9% in 2013 compared to 2012 and increased 0.3% as a percentage of operating revenues. The higher maintenance costs resulted primarily from increases in over the road tractor maintenance and tire expense and smaller increases in a combination of expenses including driver advertising, driver lodging and other driver related costs. These increases were partially offset by a shift from this expense category to rent and purchased transportation expense because of the increase in independent contractor miles as a percentage of total miles.
Taxes and licenses decreased $3.3 million or 3.7% in 2013 compared to 2012 and decreased 0.1% as a percentage of operating revenues due primarily to driving fewer miles and the resulting decrease in fuel taxes associated with fewer gallons of diesel fuel purchased.
Insurance and claims increased $5.6 million or 8.5% in 2013 compared to 2012 and increased 0.3% as a percentage of operating revenues. The increase is primarily the result of an increase in the reserves for prior period claims (unfavorable development) and higher expense on new claims, both of which related primarily to smaller dollar liability claims. The increases were partially offset by a lower amount of unfavorable development on large claims. We renewed our liability insurance policies on August 1, 2013, 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, 2013, are slightly higher than premiums for the previous policy year on a per mile basis.

21


Depreciation increased $6.1 million or 3.6% in 2013 compared to 2012 and increased 0.3% as a percentage of operating revenues. This increase is due primarily to the higher cost of new trucks purchased compared to the cost of used trucks that were sold. In 2013, we continued to purchase trucks with 2010-standard engines to replace older trucks that we sold or traded, and as of December 31, 2013, over 76% of our company tractors had engines that comply with the 2010 emissions standards. Depreciation expense increased in 2013 due to higher prices for these new trucks. In addition, the purchase of new trailers to replace older used trailers which are fully depreciated also contributed to the increase in depreciation expense. These increases were partially offset by lower depreciation on auxiliary power units that were sold with the older used trucks and not replaced.
Rent and purchased transportation expense increased $36.4 million or 8.7% in 2013 compared to 2012 and increased 1.8% as a percentage of operating revenues. VAS rent and purchased transportation expense increased $31.3 million but as a percentage of VAS revenues was 84.6% in both 2013 and 2012.
Rent and purchased transportation expense for the Truckload segment increased $6.0 million in 2013 compared to 2012. This increase is due primarily to a shift from salaries, wages and benefits and several other expense categories to rent and purchased transportation expense because of the increase in independent contractor truck miles as a percentage of total miles, offset partially by lower fuel prices that resulted in lower reimbursements to independent contractors for fuel. Independent contractor miles as a percentage of total miles were 12.2% in 2013 compared to 11.1% in 2012.
Communications and utilities decreased $0.2 million or 1.7% in 2013 compared to 2012 but did not change as a percentage of operating revenues. This decrease is due to the installation of Omnitracs MCP200 communication devices, which started in early 2011 and completed in mid-2012, that have a lower monthly service fee than the units that were replaced.
Other operating expenses increased $1.9 million or 18.7% in 2013 compared to 2012 and increased 0.1% as a percentage of operating revenues. Gains on sales of assets decreased to $16.4 million in 2013 from $20.5 million in 2012, a $4.1 million decrease. In 2013, we realized lower average gains per truck and trailer sold, and we sold fewer trucks and trailers than in 2012. The lower gains on tractor and trailer sales in 2013 were partially offset by gains of $1.8 million from the sale of real estate.
Other Expense (Income)
Other expense (income) decreased $0.3 million or 15.3% in 2013 compared to 2012 and did not change as a percentage of operating revenues. Interest income net of interest expense increased $0.3 million in 2013 compared to 2012.
Income Taxes
Our effective income tax rate decreased to 38.8% for 2013 from 40.5% in 2012. The lower income tax rate is primarily attributed to favorable tax adjustments for the remeasurement of uncertain tax positions.
Liquidity and Capital Resources:

During the year ended December 31, 2014, we generated cash flow from operations of $206.6 million, an 11.1% decrease ($25.9 million), compared to the year ended December 31, 2013. This decrease in net cash provided by operating activities is attributed primarily to a $14.6 million decrease in cash flows related to accounts receivable and a $10.8 million increase in income tax payments. Cash flow from operations decreased $22.6 million in 2013 from 2012, or 8.9%. This decrease is attributed primarily to a $16.2 million decrease in net income and $19.3 million decrease in working capital items, namely accounts receivable ($28.1 million decrease) and other current assets ($14.2 million decrease), partially offset by accounts payable ($23.0 million increase). We were able to make net capital expenditures, pay dividends and repurchase company stock 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 $63.2 million to $203.5 million in 2014 from $140.3 million in 2013 and decreased by $76.5 million in 2013 from 2012. Net property additions (primarily revenue equipment) were $212.3 million for the year ended December 31, 2014 compared to $151.9 million during the same period of 2013 and $224.9 million during 2012. The increase between 2014 and 2013 occurred because we increased our capital expenditures in the second half of 2014 to lower the average age of our truck fleet, which we reduced from 2.4 years to 2.2 years. The decrease between 2013 and 2012 occurred because our purchases of new trucks and trailers, net of dispositions, were lower in the 2013 period than in the 2012 period. As of December 31, 2014, we were committed to property and equipment purchases of approximately $131.0 million. We currently estimate net capital expenditures (primarily revenue equipment) in 2015 to be in the range of $275 million to $325 million, which we expect will enable us to further reduce the average age of our truck fleet to under two years. We intend to fund these net capital expenditures in 2015 through cash flow from operations and financing available under our existing credit facilities, as management deems necessary.

22


Net financing activities used $3.7 million in 2014, $83.5 million in 2013 and $35.6 million in 2012. During the year ended December 31, 2014, our borrowings totaled $85.0 million, and we repaid $50.0 million of debt. Our outstanding debt at December 31, 2014 totaled $75.0 million. During 2013, we borrowed $10.0 million and repaid $60.0 million, and in 2012 we borrowed $250.0 million and repaid $160.0 million. We paid quarterly dividends of $14.4 million in 2014 and $14.6 million in 2013. Our dividend payments in 2012 totaled $124.4 million and included a special dividend of $1.50 per share ($109.8 million total) paid in December 2012. Financing activities for the year ended December 31, 2014, also included common stock repurchases of 1,200,000 shares at a cost of $30.6 million, compared to $20.1 million in 2013 (821,091 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, 2014, the Company had purchased 3,062,291 shares pursuant to our current Board of Directors repurchase authorization and had 4,937,709 shares remaining available for repurchase.
Management believes our financial position at December 31, 2014 is strong. As of December 31, 2014, we had $22.6 million of cash and cash equivalents and $833.9 million of stockholders’ equity. Cash is invested primarily in government portfolio money market funds. On September 15, 2014, we amended our existing credit agreement with Wells Fargo Bank, N.A., to add an unsecured five-year term commitment not to exceed a principal amount of $75.0 million, which increased our total borrowing capacity with Wells Fargo from $175.0 million to $250.0 million. As of December 31, 2014, we had a total of $325.0 million of credit pursuant to two credit facilities, of which we had borrowed $75.0 million. The remaining $250.0 million of credit available under these facilities is reduced by the $32.7 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 table sets forth our contractual obligations and commercial commitments as of December 31, 2014.
Payments Due by Period
(Amounts in millions)
 
Total
 
Less than
1 year (2015)
 
1-3 years (2016-2017)
 
3-5 years (2018-2019)
 
More
than 5
years (After 2019)
 
Period
Unknown
Contractual Obligations
 
 
 
 
 
 
 
 
 
 
 
 
Unrecognized tax benefits
 
$
8.6

 
$

 
$

 
$

 
$

 
$
8.6

Long-term debt, including current maturities
 
75.0

 

 

 
75.0

 

 

Interest payments on debt
 
8.9

 
1.9

 
3.8

 
3.2

 
 
 

Property and equipment purchase commitments
 
131.0

 
131.0

 

 

 

 

Operating leases
 
0.6

 
0.6

 

 

 

 

Total contractual cash obligations
 
$
224.1

 
$
133.5

 
$
3.8

 
$
78.2

 
$

 
$
8.6

Other Commercial Commitments
 
 
 
 
 
 
 
 
 
 
 
 
Unused lines of credit
 
$
217.3

 
$

 
$
217.3

 
$

 
$

 
$

Stand-by letters of credit
 
32.7

 
32.7

 

 

 

 

Total commercial commitments
 
$
250.0

 
$
32.7

 
$
217.3

 
$

 
$

 
$

Total obligations
 
$
474.1

 
$
166.2

 
$
221.1

 
$
78.2

 
$

 
$
8.6

We have unsecured committed credit facilities with two banks. On September 15, 2014, we entered into an amendment to our existing credit agreement with Wells Fargo Bank, N.A. The amended agreement includes a $175.0 million four-year credit facility which will expire on May 31, 2016, and a $75.0 million term commitment with principal due and payable on September 15, 2019. We borrowed $75.0 million under the term note on September 15, 2014, and repaid the $40.0 million that was outstanding under the credit facility. We also have a $75.0 million five-year credit facility with BMO Harris Bank N.A. which will expire May 31, 2017. Borrowings under the credit facilities and term note bear variable interest (0.76% at December 31, 2014) based on the London Interbank Offered Rate (“LIBOR”), with interest on the five-year term note effectively fixed at 2.5% with an interest rate swap agreement. Interest payments on debt are based on the debt balance and interest rate at December 31, 2014. 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, 2014, we had

23


recorded an $8.6 million liability for unrecognized tax benefits. We are unable to reasonably determine when the $8.6 million categorized as “period unknown” will be settled.
Off-Balance Sheet Arrangements:
We began leasing certain tractors under non-cancelable operating leases in May 2011. Our future payment obligation under these leases at December 31, 2014 was approximately $0.6 million.
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:
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.
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.
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. A valuation allowance for deferred income tax assets has not been deemed necessary due to our profitable operations. Accordingly, if facts or financial circumstances change and consequently impact the likelihood of realizing the deferred income tax assets, we would need to apply management’s judgment to determine the amount of valuation allowance required in any given period. 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.
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.

24


ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates, commodity prices and foreign currency exchange rates.
Commodity Price Risk
The price and availability of diesel fuel are subject to fluctuations attributed to changes in the level of global oil production, refining capacity, seasonality, weather and other market factors. Historically, we have recovered a majority, but not all, of fuel price increases from customers in the form of fuel surcharges. We implemented customer fuel surcharge programs with most of our customers to offset much of the higher fuel cost per gallon. However, we do not recover all of the fuel cost increase through these surcharge programs. We cannot predict the extent to which fuel prices will increase or decrease in the future or the extent to which fuel surcharges could be collected. As of December 31, 2014, we had no derivative financial instruments to reduce our exposure to fuel price fluctuations.
Foreign Currency Exchange Rate Risk
We conduct business in several foreign countries, including Mexico, Canada, China and Australia. To date, most foreign revenues are denominated in U.S. Dollars, and we receive payment for foreign freight services primarily in U.S. Dollars to reduce direct foreign currency risk. Assets and liabilities maintained by a foreign subsidiary company in the local currency are subject to foreign exchange gains or losses. Foreign currency translation gains and losses primarily relate to changes in the value of revenue equipment owned by a subsidiary in Mexico, whose functional currency is the Peso. Foreign currency translation losses were $3.6 million in 2014 and $0.5 million in 2013, and gains were $1.0 million in 2012 and were recorded in accumulated other comprehensive loss within stockholders’ equity in the Consolidated Balance Sheets. The exchange rate between the Mexican Peso and the U.S. Dollar was 14.72 Pesos to $1.00 at December 31, 2014 compared to 13.08 Pesos to $1.00 at December 31, 2013 and 13.01 Pesos to $1.00 at December 31, 2012.

Interest Rate Risk
We manage interest rate exposure through a mix of variable rate debt and interest rate swap agreements. We had $75.0 million of debt outstanding at December 31, 2014, for which the interest rate is effectively fixed at 2.5% through September 2019 with an interest rate swap agreement. Interest rates on our unused credit facilities are based on the LIBOR. Increases in interest rates could impact our annual interest expense on future borrowings. As of December 31, 2014, we had one effective interest rate swap agreement with a notional amount of $75.0 million to reduce our exposure to interest rate increases.


25


ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Werner Enterprises, Inc.:
We have audited the accompanying consolidated balance sheets of Werner Enterprises, Inc. and subsidiaries (the Company) as of December 31, 2014 and 2013, 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, 2014. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule listed in Item 15(a)(2) of this Form 10-K. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audits.
We conducted our audits 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 the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Werner Enterprises, Inc. and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Werner Enterprises, Inc.’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 25, 2015 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
KPMG LLP
Omaha, Nebraska
February 25, 2015



26


WERNER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME
 
  
Years Ended December 31,
(In thousands, except per share amounts)
2014
 
2013
 
2012
Operating revenues
$
2,139,289

 
$
2,029,183

 
$
2,036,386

Operating expenses:
 
 
 
 
 
Salaries, wages and benefits
584,006

 
545,419

 
544,322

Fuel
346,058

 
371,789

 
401,417

Supplies and maintenance
188,437

 
179,172

 
172,505

Taxes and licenses
85,468

 
86,686

 
90,002

Insurance and claims
80,375

 
71,177

 
65,593

Depreciation
176,984

 
173,019

 
166,957

Rent and purchased transportation
498,782

 
456,885

 
420,480

Communications and utilities
14,220

 
13,506

 
13,745

Other
4,871

 
(8,196
)
 
(10,079
)
Total operating expenses
1,979,201

 
1,889,457

 
1,864,942

Operating income
160,088

 
139,726

 
171,444

Other expense (income):
 
 
 
 
 
Interest expense
881

 
454

 
288

Interest income
(2,538
)
 
(2,269
)
 
(1,837
)
Other
(29
)
 
(170
)
 
(173
)
Total other income
(1,686
)
 
(1,985
)
 
(1,722
)
Income before income taxes
161,774

 
141,711

 
173,166

Income taxes
63,124

 
54,926

 
70,132

Net income
$
98,650

 
$
86,785

 
$
103,034

Earnings per share:
 
 
 
 
 
Basic
$
1.37

 
$
1.19

 
$
1.41

Diluted
$
1.36

 
$
1.18

 
$
1.40

Weighted-average common shares outstanding:
 
 
 
 
 
Basic
72,122

 
72,866

 
72,909

Diluted
72,738

 
73,428

 
73,453

See Notes to Consolidated Financial Statements.

27


WERNER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
  
Years Ended December 31,
(In thousands)
2014
 
2013
 
2012
Net income
$
98,650

 
$
86,785

 
$
103,034

Other comprehensive income (loss):
 
 
 
 
 
Foreign currency translation adjustments
(3,564
)
 
(475
)
 
1,014

Change in fair value of interest rate swap
(1,180
)
 

 

Other comprehensive income (loss)
(4,744
)
 
(475
)
 
1,014

Comprehensive income
$
93,906

 
$
86,310

 
$
104,048

See Notes to Consolidated Financial Statements.

28


WERNER ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
 
 
December 31,
(In thousands, except share amounts)
2014
 
2013
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
22,604

 
$
23,678

Accounts receivable, trade, less allowance of $10,017 and $9,939, respectively
266,727

 
231,647

Other receivables
20,316

 
10,769

Inventories and supplies
17,824

 
15,743

Prepaid taxes, licenses and permits
14,914

 
15,064

Current deferred income taxes
34,066

 
25,315

Income taxes receivable
23,435

 
3,346

Other current assets
26,458

 
24,099

Total current assets
426,344

 
349,661

Property and equipment, at cost:
 
 
 
Land
32,213

 
31,445

Buildings and improvements
130,618

 
132,023

Revenue equipment
1,413,178

 
1,364,064

Service equipment and other
210,220

 
200,205

Total property and equipment
1,786,229

 
1,727,737

Less – accumulated depreciation
772,447

 
750,219

Property and equipment, net
1,013,782

 
977,518

Other non-current assets
40,336

 
26,918

Total assets
$
1,480,462

 
$
1,354,097

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
64,827

 
$
66,678

Insurance and claims accruals
73,814

 
59,811

Accrued payroll
28,121

 
22,785

Other current liabilities
19,768

 
18,457

Total current liabilities
186,530

 
167,731

Long-term debt, net of current portion
75,000

 
40,000

Other long-term liabilities
20,021

 
14,710

Insurance and claims accruals, net of current portion
123,445

 
131,900

Deferred income taxes
241,606

 
227,237

Commitments and contingencies

 

Stockholders’ equity:
 
 
 
Common stock, $0.01 par value, 200,000,000 shares authorized; 80,533,536 shares
 
 
 
issued; 72,038,368 and 72,713,920 shares outstanding, respectively
805

 
805

Paid-in capital
101,803

 
98,534

Retained earnings
915,085

 
830,842

Accumulated other comprehensive loss
(9,375
)
 
(4,631
)
Treasury stock, at cost; 8,495,168 and 7,819,616 shares, respectively
(174,458
)
 
(153,031
)
Total stockholders’ equity
833,860

 
772,519

Total liabilities and stockholders’ equity
$
1,480,462

 
$
1,354,097

See Notes to Consolidated Financial Statements.

29


WERNER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
  
Years Ended December 31,
(In thousands)
2014
 
2013
 
2012
Cash flows from operating activities:
 
 
 
 
 
Net income
$
98,650

 
$
86,785

 
$
103,034

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
Depreciation
176,984

 
173,019

 
166,957

Deferred income taxes
5,038

 
(8,389
)
 
(9,068
)
Gain on disposal of property and equipment
(19,260
)
 
(16,408
)
 
(20,533
)
Non-cash equity compensation
6,070

 
4,809

 
4,602

Insurance and claims accruals, net of current portion
(8,455
)
 
6,400

 
4,250

Other
1,107

 
(541
)
 
(237
)
Changes in certain working capital items:
 
 
 
 

Accounts receivable, net
(35,080
)
 
(20,514
)
 
7,579

Other current assets
(25,926
)
 
3,398

 
17,581

Accounts payable
(1,497
)
 
2,793

 
(20,172
)
Other current liabilities
8,934

 
1,105

 
1,103

Net cash provided by operating activities
206,565

 
232,457

 
255,096

Cash flows from investing activities:
 
 
 
 
 
Additions to property and equipment
(296,649
)
 
(211,329
)
 
(284,942
)
Retirements of property and equipment
84,355

 
59,413

 
60,015

Decrease in notes receivable
14,390

 
10,679

 
8,122

Other
(5,583
)
 
979

 

Net cash used in investing activities
(203,487
)
 
(140,258
)
 
(216,805
)
Cash flows from financing activities:
 
 
 
 
 
Repayments of short-term debt
(10,000
)
 
(20,000
)
 
(160,000
)
Proceeds from issuance of short-term debt
10,000

 

 
180,000

Repayments of long-term debt
(40,000
)
 
(40,000
)
 

Proceeds from issuance of long-term debt
75,000

 
10,000

 
70,000

Change in net checks issued in excess of cash balances

 

 
(6,671
)
Dividends on common stock
(14,440
)
 
(14,587
)
 
(124,391
)
Repurchases of common stock
(30,587
)
 
(20,060
)
 

Tax withholding related to net share settlements of restricted stock awards
(1,977
)
 
(1,804
)
 
(674
)
Stock options exercised
7,012

 
2,548

 
6,035

Excess tax benefits from equity compensation
1,324

 
379

 
150

Net cash used in financing activities
(3,668
)
 
(83,524
)
 
(35,551
)
Effect of exchange rate fluctuations on cash
(484
)
 
(425
)
 
276

Net increase (decrease) in cash and cash equivalents
(1,074
)
 
8,250

 
3,016

Cash and cash equivalents, beginning of period
23,678

 
15,428

 
12,412

Cash and cash equivalents, end of period
$
22,604

 
$
23,678

 
$
15,428

Supplemental disclosures of cash flow information:
 
 
 
 
 
Interest paid
$
820

 
$
466

 
$
245

Income taxes paid
76,849

 
66,032

 
67,968

Supplemental schedule of non-cash investing activities:
 
 
 
 

Notes receivable issued upon sale of property and equipment
$
14,385

 
$
17,110

 
$
10,564

Issuance of notes payable
6,233

 

 

Change in fair value of interest rate swap
(1,180
)
 

 

Property and equipment acquired included in accounts payable
2,067

 
5,403

 
109

Property and equipment disposed included in other receivables

 
434

 
311

See Notes to Consolidated Financial Statements.

30


WERNER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 
(In thousands, except share and per share amounts)
Common
Stock
 
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Treasury
Stock
 
Total
Stockholders’
Equity
BALANCE, December 31, 2011
$
805

 
$
94,396

 
$
779,994

 
$
(5,170
)
 
$
(144,878
)
 
$
725,147

Comprehensive income

 

 
103,034

 
1,014

 

 
104,048

Dividends on common stock ($1.70 per share)

 

 
(124,411
)
 

 

 
(124,411
)
Equity compensation activity, 399,022 shares, including excess tax benefits

 
(1,541
)
 

 

 
7,052

 
5,511

Non-cash equity compensation expense

 
4,602

 

 

 

 
4,602

BALANCE, December 31, 2012
805

 
97,457

 
758,617

 
(4,156
)
 
(137,826
)
 
714,897

Comprehensive income

 

 
86,785

 
(475
)
 

 
86,310

Purchases of 821,091 shares of common stock

 

 

 

 
(20,060
)
 
(20,060
)
Dividends on common stock ($0.20 per share)

 

 
(14,560
)
 

 

 
(14,560
)
Equity compensation activity, 288,413 shares, including excess tax benefits

 
(3,732
)
 

 

 
4,855

 
1,123

Non-cash equity compensation expense

 
4,809

 

 

 

 
4,809

BALANCE, December 31, 2013
805

 
98,534

 
830,842

 
(4,631
)
 
(153,031
)
 
772,519

Comprehensive income

 

 
98,650

 
(4,744
)
 

 
93,906

Purchases of 1,200,000 shares of common stock

 

 

 

 
(30,587
)
 
(30,587
)
Dividends on common stock ($0.20 per share)

 

 
(14,407
)
 

 

 
(14,407
)
Equity compensation activity, 524,448 shares, including excess tax benefits

 
(2,801
)
 

 

 
9,160

 
6,359

Non-cash equity compensation expense

 
6,070

 

 

 

 
6,070

BALANCE, December 31, 2014
$
805

 
$
101,803

 
$
915,085

 
$
(9,375
)
 
$
(174,458
)
 
$
833,860

See Notes to Consolidated Financial Statements.

31



WERNER ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business: Werner Enterprises, Inc. (the “Company”) is a truckload transportation and logistics company operating under the jurisdiction of the U.S. Department of Transportation, similar governmental transportation agencies in the foreign countries in which we operate and various U.S. state regulatory authorities. For the year ended December 31, 2014, our ten largest customers comprised 41% of our revenues. For the years ended December 31, 2013 and 2012, our ten largest customers comprised 40% of our revenues. No single customer generated more than 10% of the Company’s total revenues in 2014, 2013, and 2012.
Principles of Consolidation: The accompanying consolidated financial statements include the accounts of Werner Enterprises, Inc. and our majority-owned subsidiaries. All significant intercompany accounts and transactions relating to these majority-owned entities have been eliminated.
Use of Management Estimates: The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management 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. The most significant estimates that affect our financial statements include the useful lives and salvage values of property and equipment, accrued liabilities for insurance and claims, estimates for incomes taxes and the allowance for doubtful accounts. Actual results could differ from those estimates.
Cash and Cash Equivalents: We consider all highly liquid investments, purchased with a maturity of three months or less, to be cash equivalents. Accounts at banks with an aggregate excess of the amount of checks issued over cash balances are included in current liabilities in the Consolidated Balance Sheets, and changes in such accounts are reported as a financing activity in the Consolidated Statements of Cash Flows.
Trade Accounts Receivable: We record trade accounts receivable at the invoiced amounts, net of an allowance for doubtful accounts. The allowance for doubtful accounts is our estimate of the amount of probable credit losses and revenue adjustments in our existing accounts receivable. We review the financial condition of customers for granting credit and determine the allowance based on analysis of individual customers’ financial condition, historical write-off experience and national economic conditions. We evaluate the adequacy of our allowance for doubtful accounts quarterly. Past due balances over 90 days and exceeding a specified amount are reviewed individually for collectibility. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. We do not have any off-balance-sheet credit exposure related to our customers.
Inventories and Supplies: Inventories and supplies are stated at the lower of average cost or market and consist primarily of revenue equipment parts, tires, fuel and supplies. Tires placed on new revenue equipment are capitalized as a part of the equipment cost. Replacement tires are expensed when placed in service.
Property, Equipment, and Depreciation: Additions and improvements to property and equipment are capitalized at cost, while maintenance and repair expenditures are charged to operations as incurred. Gains and losses on the sale or exchange of equipment are recorded in other operating expenses.
Depreciation is calculated based on the cost of the asset, reduced by the asset’s estimated salvage value, using the straight-line method. Accelerated depreciation methods are used for income tax purposes. The lives and salvage values assigned to certain assets for financial reporting purposes are different than for income tax purposes. For financial reporting purposes, assets are generally depreciated using the following estimated useful lives and salvage values:
 
  
Lives
  
Salvage Values
Building and improvements
  
30 years
  
0%
Tractors
  
80 months
  
0%
Trailers
  
12 years
  
$1,000
Service and other equipment
  
3-10 years
  
0%
Long-Lived Assets: We review our long-lived assets for impairment whenever events or circumstances indicate the carrying amount of a long-lived asset may not be recoverable. An impairment loss would be recognized if the carrying amount of the long-lived asset is not recoverable and the carrying amount exceeds its fair value. For long-lived assets classified as held and used, the carrying amount is not recoverable when the carrying value of the long-lived asset exceeds the sum of the future net cash flows.

32


We do not separately identify assets by operating segment because tractors and trailers are routinely transferred from one operating fleet to another. As a result, none of our long-lived assets have identifiable cash flows from use that are largely independent of the cash flows of other assets and liabilities. Thus, the asset group used to assess impairment would include all of our assets.
Insurance and Claims Accruals: Insurance and claims accruals (both current and non-current) reflect the estimated cost (including estimated loss development and loss adjustment expenses) for (i) cargo loss and damage, (ii) bodily injury and property damage, (iii) group health and (iv) workers’ compensation claims not covered by insurance. The costs for cargo, bodily injury and property damage insurance and claims are included in insurance and claims expense in the Consolidated Statements of Income; the costs of group health and workers’ compensation claims are included in salaries, wages and benefits expense. The insurance and claims accruals are recorded at the estimated ultimate payment amounts. Such insurance and claims accruals 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. Actual costs related to insurance and claims have not differed materially from estimated accrued amounts for all years presented. An actuary reviews our undiscounted self-insurance reserves for bodily injury and property damage claims and workers’ compensation claims at year-end.
For the years ended December 31, 2014, 2013, and 2012 our self-insured retention ("SIR") and deductible amount for liability claims is $2.0 million plus administrative expenses, for each occurrence involving bodily injury or property damage. We are also responsible for varying annual aggregate amounts of liability for claims in excess of the SIR/deductible. Liability claims in excess of these aggregates are covered under premium-based policies (issued by insurance companies) to coverage levels that our management considers adequate. We are also responsible for administrative expenses for each occurrence involving bodily injury or property damage.
Our SIR for workers’ compensation claims is $1.0 million per claim, with premium-based insurance coverage for claims exceeding this amount. We also maintain a $32.6 million bond for the State of Nebraska and a $6.9 million bond for our workers’ compensation insurance carrier.
Under these insurance arrangements, we maintained $32.7 million in letters of credit as of December 31, 2014.
Revenue Recognition: The Consolidated Statements of Income reflect recognition of operating revenues (including fuel surcharge revenues) and related direct costs when the shipment is delivered. For shipments where a third-party capacity provider (including independent contractors under contract with us) is utilized to provide some or all of the service and we (i) are the primary obligor in regard to the shipment delivery, (ii) establish customer pricing separately from carrier rate negotiations, (iii) generally have discretion in carrier selection and/or (iv) have credit risk on the shipment, we record both revenues for the dollar value of services we bill to the customer and rent and purchased transportation expense for transportation costs we pay to the third-party provider upon the shipment’s delivery. In the absence of the conditions listed above, we record revenues net of those expenses related to third-party providers.
Derivative Financial Instrument: We manage our interest rate risk through an interest rate swap. The derivative financial instrument is recognized in the Consolidated Balance Sheets at fair value. The effect on earnings from recognizing the fair value of this derivative financial instrument depends on its intended use, its hedge designation, and its effectiveness in offsetting changes in the fair value of the exposure it is hedging. Changes in the fair value of the instrument designated to reduce or eliminate adverse fluctuations in the fair values of recognized assets and liabilities and unrecognized firm commitments are reported currently in earnings along with changes in the fair values of the hedged items. Changes in the effective portion of the fair value of the instrument used to reduce or eliminate adverse fluctuations in cash flows of anticipated or forecasted transactions is reported in equity as a component of accumulated other comprehensive income (loss), net of income tax effects. Amounts in accumulated other comprehensive income (loss) are reclassified to earnings when the related hedged items affect earnings or the anticipated transactions are no longer probable. Amounts reported in earnings are classified consistent with the item being hedged.
Foreign Currency Translation: Local currencies are generally considered the functional currencies outside the United States. Assets and liabilities are translated at year-end exchange rates for operations in local currency environments. Foreign revenues and expense items denominated in the functional currency are translated at the average rates of exchange prevailing during the year. Foreign currency translation adjustments reflect the changes in foreign currency exchange rates applicable to the net assets of the foreign operations. Foreign currency translation adjustments are recorded in accumulated other comprehensive loss within stockholders’ equity in the Consolidated Balance Sheets and as a separate component of comprehensive income in the Consolidated Statements of Comprehensive Income.
Income Taxes: We use the asset and liability method in accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted tax rates that are expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

33


In accounting for uncertain tax positions, we recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. We recognize interest and penalties directly related to income tax matters in income tax expense.
Common Stock and Earnings Per Share: Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares outstanding plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options and restricted stock awards. There are no differences in the numerators of our computations of basic and diluted earnings per share for any periods presented. The computation of basic and diluted earnings per share is shown below (in thousands, except per share amounts).
 
Years Ended December 31,
 
2014
 
2013
 
2012
Net income
$
98,650

 
$
86,785

 
$
103,034

Weighted average common shares outstanding
72,122

 
72,866

 
72,909

Dilutive effect of stock-based awards
616

 
562

 
544

Shares used in computing diluted earnings per share
72,738

 
73,428

 
73,453

Basic earnings per share
$
1.37

 
$
1.19

 
$
1.41

Diluted earnings per share
$
1.36

 
$
1.18

 
$
1.40


There were no options to purchase shares of common stock that were outstanding during the periods indicated above that were excluded from the computation of diluted earnings per share because the option purchase price was greater than the average market price of the common shares during the period. Performance awards are excluded from the calculation of dilutive potential common shares until the threshold performance conditions have been satisfied.
Equity Compensation: We have an equity compensation plan that provides for grants of non-qualified stock options, restricted stock, restricted stock units and stock appreciation rights to our associates and directors. We apply the fair value method of accounting for equity compensation awards. Issuances of stock upon an exercise of stock options or vesting of restricted stock are made from treasury stock; shares reacquired to satisfy tax withholding obligations upon vesting of restricted stock are recorded as treasury stock. Grants of stock options, restricted stock, and performance awards vest in increments, and we recognize compensation expense over the requisite service period of each award. We accrue compensation expense for performance awards for the estimated number of shares expected to be issued using the most current information available at the date of the financial statements. If the performance objectives are not met, no compensation expense will be recognized, and any previously recognized compensation expense will be reversed.
Comprehensive Income: Comprehensive income consists of net income and other comprehensive income (loss). Other comprehensive income (loss) refers to revenues, expenses, gains and losses that are not included in net income, but rather are recorded directly in stockholders’ equity. For the year ended December 31, 2014, comprehensive income consists of net income, foreign currency translation adjustments and change in fair value of interest rate swap. For the years ended December 31, 2013 and 2012, comprehensive income consists of net income and foreign currency translation adjustments.
New Accounting Pronouncements Adopted: We did not adopt any new accounting standards during 2014.
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 new standard is effective for us on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures. Management has not yet selected a transition method nor has it determined the effect of the standard on our ongoing financial reporting.

34


(2)CREDIT FACILITIES
As of December 31, 2014, we have unsecured committed credit facilities with two banks. On September 15, 2014, we entered into an amendment to our existing credit agreements with Wells Fargo Bank, N.A. The amended agreement includes a $175.0 million credit facility which will expire on May 31, 2016 and a $75.0 million term commitment with principal due and payable on September 15, 2019. We borrowed $75.0 million under the term note, and repaid the $40.0 million that was outstanding under the credit facility on September 15, 2014. We also have a $75.0 million credit facility with BMO Harris Bank N.A. which will expire on May 31, 2017. Borrowings under these credit facilities and term note bear variable interest (0.76% at December 31, 2014) based on the London Interbank Offered Rate (“LIBOR”), with interest on the five-year term note effectively fixed at 2.5% with an interest rate swap agreement.
As of December 31, 2014 and 2013, we had $75.0 million and $40.0 million outstanding under these credit facilities with banks, respectively. The $325.0 million of credit available under these facilities is further reduced by $32.7 million in stand-by letters of credit under which we are obligated. Each of the debt agreements includes, among other things, two financial covenants requiring us (i) not to exceed a maximum ratio of total debt to total capitalization and (ii) not to exceed a maximum ratio of total funded debt to earnings before interest, income taxes, depreciation and amortization (as such terms are defined in each credit facility). At December 31, 2014, we were in compliance with these covenants.
At December 31, 2014, the aggregate future maturities of long-term debt by year are as follows (in thousands):
2015
$

2016

2017

2018

2019
75,000

Total
$
75,000

The carrying amounts of our long-term debt approximate fair value due to the duration of the notes and the variable interest rates.

(3) NOTES RECEIVABLE
Notes receivable are included in other current assets and other non-current assets in the Consolidated Balance Sheets. At December 31, notes receivable consisted of the following (in thousands):
 
December 31,
 
2014
 
2013
Independent contractor notes receivable
$
19,021

 
$
18,475

Other notes receivable
6,780

 
7,331

 
25,801

 
25,806

Less current portion
8,464

 
8,895

Notes receivable – non-current
$
17,337

 
$
16,911

We provide financing to some individuals who want to become independent contractors by purchasing a tractor from us and leasing their services to us. At December 31, 2014, we had 472 notes receivable from these independent contractors and at December 31, 2013, we had 466 such notes receivable. We maintain a primary security interest in the tractor until the independent contractor pays the note balance in full.



35


(4) LEASES
In 2011, we entered into leases of certain tractors under operating leases which expire in 2015. Rental expense for these leases is included in rent and purchased transportation expense within the Consolidated Statements of Income. At December 31, 2014, the future minimum lease payments under non-cancelable revenue equipment operating leases are as follows (in thousands):
2015
$
578

Total
$
578

Rental expense under these non-cancelable revenue equipment operating leases for the years ended December 31, 2014, 2013, and 2012 was as follows (in thousands):
 
2014
$
1,565

2013
1,593

2012
1,620


(5) INCOME TAXES
Income tax expense consisted of the following (in thousands):
 
Years Ended December 31,
 
2014
 
2013
 
2012
Current:
 
 
 
 
 
Federal
$
51,260

 
$
55,227

 
$
69,590

State
6,606

 
6,616

 
10,088

Foreign
220

 
1,472

 
(478
)
 
58,086

 
63,315

 
79,200

Deferred:
 
 
 
 
 
Federal
4,503

 
(9,668
)
 
(8,630
)
State
535

 
1,279

 
(438
)
 
5,038

 
(8,389
)
 
(9,068
)
Total income tax expense
$
63,124

 
$
54,926

 
$
70,132

The effective income tax rate differs from the federal corporate tax rate of 35% in 2014, 2013 and 2012 as follows (in thousands):
 
Years Ended December 31,
 
2014
 
2013
 
2012
Tax at statutory rate
$
56,621

 
$
49,599

 
$
60,608