-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HTH7nJFmF3KcbcSp5jyFxEJm8Ars7j4pn/E8r5RaP2LVtxBJzO8FyJ81x60UQwc8 uos74Nt0Q3y7RLdI3lNhXw== 0000793074-09-000035.txt : 20091102 0000793074-09-000035.hdr.sgml : 20091102 20091102160319 ACCESSION NUMBER: 0000793074-09-000035 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20090930 FILED AS OF DATE: 20091102 DATE AS OF CHANGE: 20091102 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WERNER ENTERPRISES INC CENTRAL INDEX KEY: 0000793074 STANDARD INDUSTRIAL CLASSIFICATION: TRUCKING (NO LOCAL) [4213] IRS NUMBER: 470648386 STATE OF INCORPORATION: NE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-14690 FILM NUMBER: 091151202 BUSINESS ADDRESS: STREET 1: 14507 FRONTIER ROAD CITY: OMAHA STATE: NE ZIP: 68138 BUSINESS PHONE: 4028956640 MAIL ADDRESS: STREET 1: P.O. BOX 45308 CITY: OMAHA STATE: NE ZIP: 68145 10-Q 1 wern10q3q09.txt WERNER ENTERPRISES, INC. 10-Q 9/30/09 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [Mark one] [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2009 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-14690 WERNER ENTERPRISES, INC. (Exact name of registrant as specified in its charter) NEBRASKA 47-0648386 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 14507 FRONTIER ROAD POST OFFICE BOX 45308 OMAHA, NEBRASKA 68145-0308 (Address of principal (Zip Code) executive offices) Registrant's telephone number, including area code: (402) 895-6640 _________________________________ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark whether the registrant 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 No --- --- Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large accelerated filer X Accelerated filer --- --- Non-accelerated filer Smaller reporting company --- (Do not check if a --- smaller reporting company) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No X --- --- As of October 29, 2009, 71,768,129 shares of the registrant's common stock, par value $.01 per share, were outstanding. 2 WERNER ENTERPRISES, INC. INDEX ----- PAGE ---- PART I - FINANCIAL INFORMATION Item 1. Financial Statements: 4 Consolidated Statements of Income for the Three Months Ended 5 September 30, 2009 and 2008 Consolidated Statements of Income for the Nine Months Ended 6 September 30, 2009 and 2008 Consolidated Condensed Balance Sheets as of September 30, 2009 7 and December 31, 2008 Consolidated Statements of Cash Flows for the Nine Months 8 Ended September 30, 2009 and 2008 Notes to Consolidated Financial Statements (Unaudited) as of 9 September 30, 2009 Item 2. Management's Discussion and Analysis of Financial Condition 14 and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk 31 Item 4. Controls and Procedures 32 PART II - OTHER INFORMATION Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 33 Item 6. Exhibits 33 3 PART I FINANCIAL INFORMATION Cautionary Note Regarding Forward-Looking Statements: This Quarterly Report on Form 10-Q contains historical information and forward-looking statements based on information currently available to our management. The forward-looking statements in this report, including those made in Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations," are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended. These safe harbor provisions encourage reporting companies to provide prospective information to investors. Forward-looking statements can be identified by the use of certain words, such as "anticipate," "believe," "estimate," "expect," "intend," "plan," "project" and other similar terms and language. We believe the forward-looking statements are reasonable based on currently available information. However, forward-looking statements involve risks, uncertainties and assumptions, whether known or unknown, that could cause 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 our Annual Report on Form 10-K for the year ended December 31, 2008 and in Item 1A ("Risk Factors") of our Form 10-Q for the quarterly period ended March 31, 2009. Readers should not unduly rely on the forward-looking statements included in this Form 10-Q because such statements speak only to the date they were made. Unless otherwise required by applicable securities laws, we 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. Item 1. Financial Statements. The interim consolidated financial statements contained herein reflect all adjustments which, in the opinion of management, are necessary for a fair statement of the financial condition, results of operations and cash flows for the periods presented. The interim consolidated financial statements have been prepared in accordance with the U.S. Securities and Exchange Commission (the "SEC") instructions to Form 10-Q and were also prepared without audit. The interim consolidated financial statements do not include all information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements; although in management's opinion, the disclosures are adequate so that the information presented is not misleading. Operating results for the three-month and nine-month periods ended September 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009. In the opinion of management, the information set forth in the accompanying consolidated condensed balance sheets is fairly stated in all material respects in relation to the consolidated balance sheets from which it has been derived. These interim consolidated financial statements and notes thereto should be read in conjunction with the financial statements and accompanying notes contained in our Annual Report on Form 10-K for the year ended December 31, 2008. 4 WERNER ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended (In thousands, except per share amounts) September 30, - --------------------------------------------------------------------------- 2009 2008 - --------------------------------------------------------------------------- (Unaudited) Operating revenues $ 429,273 $ 584,057 --------------------------- Operating expenses: Salaries, wages and benefits 130,885 150,616 Fuel 66,001 145,280 Supplies and maintenance 34,403 41,566 Taxes and licenses 23,665 26,733 Insurance and claims 20,016 28,727 Depreciation 37,708 41,653 Rent and purchased transportation 79,948 107,948 Communications and utilities 3,841 4,769 Other 1 (1,257) --------------------------- Total operating expenses 396,468 546,035 --------------------------- Operating income 32,805 38,022 --------------------------- Other expense (income): Interest expense 3 3 Interest income (418) (1,012) Other (100) 27 --------------------------- Total other expense (income) (515) (982) --------------------------- Income before income taxes 33,320 39,004 Income taxes 14,328 16,558 --------------------------- Net income $ 18,992 $ 22,446 =========================== Earnings per share: Basic $ 0.26 $ 0.32 =========================== Diluted $ 0.26 $ 0.31 =========================== Dividends declared per share $ 0.050 $ 0.050 =========================== Weighted-average common shares outstanding: Basic 71,701 70,864 =========================== Diluted 72,110 71,825 ===========================
See Notes to Consolidated Financial Statements (Unaudited). 5 WERNER ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF INCOME
Nine Months Ended (In thousands, except per share amounts) September 30, - --------------------------------------------------------------------------- 2009 2008 - --------------------------------------------------------------------------- (Unaudited) Operating revenues $ 1,226,832 $ 1,675,025 ---------------------------- Operating expenses: Salaries, wages and benefits 393,456 442,391 Fuel 174,777 424,079 Supplies and maintenance 105,627 123,336 Taxes and licenses 72,022 82,884 Insurance and claims 64,272 77,366 Depreciation 117,016 125,132 Rent and purchased transportation 220,276 307,631 Communications and utilities 12,232 14,828 Other 1,083 (4,930) ---------------------------- Total operating expenses 1,160,761 1,592,717 ---------------------------- Operating income 66,071 82,308 ---------------------------- Other expense (income): Interest expense 82 9 Interest income (1,344) (3,049) Other (352) 79 ---------------------------- Total other expense (income) (1,614) (2,961) ---------------------------- Income before income taxes 67,685 85,269 Income taxes 29,105 36,336 ---------------------------- Net income $ 38,580 $ 48,933 ============================ Earnings per share: Basic $ 0.54 $ 0.69 ============================ Diluted $ 0.54 $ 0.68 ============================ Dividends declared per sare $ 0.150 $ 0.150 ============================ Weighted-average common shares outstanding: Basic 71,619 70,574 ============================ Diluted 72,027 71,575 ============================
See Notes to Consolidated Financial Statements (Unaudited). 6 WERNER ENTERPRISES, INC. CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except share amounts) September 30, December 31, - ------------------------------------------------------------------------------- 2009 2008 - ------------------------------------------------------------------------------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 105,750 $ 48,624 Accounts receivable, trade, less allowance of $9,438 and $9,555, respectively 180,390 185,936 Other receivables 11,514 18,739 Inventories and supplies 12,486 10,644 Prepaid taxes, licenses and permits 6,544 16,493 Current deferred income taxes 33,343 30,789 Other current assets 18,730 20,659 ------------------------------- Total current assets 368,757 331,884 ------------------------------- Property and equipment 1,579,769 1,613,102 Less - accumulated depreciation 687,993 686,463 ------------------------------- Property and equipment, net 891,776 926,639 ------------------------------- Other non-current assets 16,167 16,795 ------------------------------- $1,276,700 $1,275,318 =============================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 48,122 $ 46,684 Current portion of long-term debt - 30,000 Insurance and claims accruals 76,297 79,830 Accrued payroll 27,838 25,850 Other current liabilities 22,603 19,006 ------------------------------- Total current liabilities 174,860 201,370 ------------------------------- Other long-term liabilities 8,199 7,406 Insurance and claims accruals, net of current portion 120,500 120,500 Deferred income taxes 196,739 200,512 Stockholders' equity: Common stock, $.01 par value, 200,000,000 shares authorized; 80,533,536 shares issued; 71,755,881 and 71,576,267 shares outstanding, respectively 805 805 Paid-in capital 92,897 93,343 Retained earnings 854,345 826,511 Accumulated other comprehensive income (loss) (7,149) (7,146) Treasury stock, at cost; 8,777,655 and 8,957,269 shares, respectively (164,496) (167,983) ------------------------------- Total stockholders' equity 776,402 745,530 ------------------------------- $1,276,700 $1,275,318 ===============================
See Notes to Consolidated Financial Statements (Unaudited). 7 WERNER ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended (In thousands) September 30, - --------------------------------------------------------------------------- 2009 2008 - --------------------------------------------------------------------------- (Unaudited) Cash flows from operating activities: Net income $ 38,580 $ 48,933 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 117,016 125,132 Deferred income taxes (6,451) (909) Gain on disposal of property and equipment (1,934) (8,768) Stock-based compensation 905 1,113 Other long-term assets (999) 640 Insurance claims accruals, net of current portion - 8,000 Other long-term liabilities 594 (63) Changes in certain working capital items: Accounts receivable, net 5,546 (18,435) Other current assets 17,261 7,482 Accounts payable (3,578) 8,352 Other current liabilities 2,366 17,735 ---------------------------- Net cash provided by operating activities 169,306 189,212 ---------------------------- Cash flows from investing activities: Additions to property and equipment (140,292) (145,656) Retirements of property and equipment 63,543 65,265 Decrease in notes receivable 3,200 4,397 ---------------------------- Net cash used in investing activities (73,549) (75,994) ---------------------------- Cash flows from financing activities: Repayments of short-term debt (30,000) - Dividends on common stock (10,737) (10,559) Repurchases of common stock - (4,486) Stock options exercised 1,431 8,245 Excess tax benefits from exercise of stock options 705 4,389 ---------------------------- Net cash used in financing activities (38,601) (2,411) ---------------------------- Effect of foreign exchange rate fluctuations on cash (30) 418 Net increase in cash and cash equivalents 57,126 111,225 Cash and cash equivalents, beginning of period 48,624 25,090 ---------------------------- Cash and cash equivalents, end of period $ 105,750 $ 136,315 ============================ Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 137 $ 9 Income taxes $ 24,508 $ 30,034 Supplemental schedule of non-cash investing activities: Notes receivable issued upon sale of revenue equipment $ 1,573 $ 2,194
See Notes to Consolidated Financial Statements (Unaudited). 8 WERNER ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) Comprehensive Income Other than our net income, our only other source of comprehensive income (loss) is foreign currency translation adjustments. Comprehensive income (loss) from foreign currency translation adjustments was a loss of $614,000 for the three-month period ended September 30, 2009 and $1,769,000 for the same period ended September 30, 2008. Such comprehensive income (loss) was a loss of $30,000 for the nine-month period ended September 30, 2009 and income of $418,000 for the same period ended September 30, 2008. (2) Long-Term Debt As of September 30, 2009, we have two committed credit facilities with banks totaling $225.0 million that mature in May 2011 ($175.0 million) and May 2012 ($50.0 million). Borrowings under these credit facilities bear variable interest based on the London Interbank Offered Rate ("LIBOR"). As of September 30, 2009, we had no borrowings outstanding under these credit facilities with banks. The $225.0 million of credit available under these facilities is reduced by $49.8 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 September 30, 2009, we were in compliance with these covenants. (3) Income Taxes For the three-month and nine-month periods ended September 30, 2009, there were no material changes to the total amount of unrecognized tax benefits. We accrued interest expense of $0.2 million during the three- month period and an interest benefit of $0.2 million during the nine-month period ended September 30, 2009. Our total gross liability for unrecognized tax benefits at September 30, 2009 is $7.3 million. If recognized, $4.1 million of unrecognized tax benefits would impact our effective tax rate. Interest of $3.5 million has been reflected as a component of the total liability. We do not expect any other significant increases or decreases for uncertain tax positions during the next twelve months. We file U.S. federal income tax returns, as well as income tax returns in various states and several foreign jurisdictions. The years 2006 through 2008 are open for examination by the Internal Revenue Service, and various years are open for examination by state and foreign tax authorities. State and foreign jurisdictional statutes of limitations generally range from three to four years. (4) Commitments and Contingencies As of September 30, 2009, we have committed to property and equipment purchases of approximately $31.8 million. We are involved in certain claims and pending litigation arising in the normal course of business. At this time, management believes the ultimate resolution of these matters will not materially affect our consolidated financial statements. 9 (5) Earnings Per Share Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options and stock awards. There are no differences in the numerators of our computations of basic and diluted earnings per share for any period presented. The computation of basic and diluted earnings per share is shown below (in thousands, except per share amounts).
Three Months Ended Nine Months Ended September 30, September 30, -------------------- -------------------- 2009 2008 2009 2008 -------------------- -------------------- Net income $ 18,992 $ 22,446 $ 38,580 $ 48,933 ==================== ==================== Weighted-average common shares outstanding 71,701 70,864 71,619 70,574 Dilutive effect of stock- based awards 409 961 408 1,001 -------------------- -------------------- Shares used in computing diluted earnings per share 72,110 71,825 72,027 71,575 ==================== ==================== Basic earnings per share $ 0.26 $ 0.32 $ 0.54 $ 0.69 ==================== ==================== Diluted earnings per share $ 0.26 $ 0.31 $ 0.54 $ 0.68 ==================== ====================
Options to purchase shares of common stock that were outstanding during the periods indicated above, but were excluded from the computation of diluted earnings per share because the option purchase price was greater than the average market price of the common shares during the period, were:
Three Months Ended Nine Months Ended September 30, September 30, ----------------------- ------------------------ 2009 2008 2009 2008 ----------------------- ------------------------ Number of options 614,969 - 904,469 5,000 Range of option purchase prices $18.33-$20.36 - $17.18-$20.36 $20.36
(6) Stock-Based Compensation Our Equity Plan provides for grants of nonqualified stock options, restricted stock and stock appreciation rights. The Board of Directors or the Compensation Committee of our Board of Directors determines the terms of each award, including type of award, recipients, number of shares subject to each award and vesting conditions of each award. Stock option and restricted stock awards are described below. No awards of stock appreciation rights have been issued to date. The maximum number of shares of common stock that may be awarded under the Equity Plan is 20,000,000 shares. The maximum aggregate number of shares that may be awarded to any one person under the Equity Plan is 2,562,500. As of September 30, 2009, there were 8,682,782 shares available for granting additional awards. We apply the fair value method of accounting for stock-based compensation awards granted under our Equity Plan. Stock-based employee compensation expense was $0.3 million for the three-month period ended September 30, 2009 and $0.4 million for the same period ended September 30, 2008, and was $0.9 million for the nine-month period ended September 30, 2009 and $1.1 million for the same period ended September 30, 2008. Stock- 10 based employee compensation expense is included in salaries, wages and benefits within the Consolidated Statements of Income. The total income tax benefit recognized in the Consolidated Statements of Income for stock-based compensation arrangements was $0.1 million for the three-month period ended September 30, 2009 and $0.2 million for the same period ended September 30, 2008, and was $0.4 million for the nine-month period ended September 30, 2009 and $0.5 million for the same period ended September 30, 2008. As of September 30, 2009, the total unrecognized compensation cost related to nonvested stock-based compensation awards was approximately $1.9 million and is expected to be recognized over a weighted average period of 1.6 years. We do not have a formal policy for issuing shares upon the exercise of stock options or vesting of restricted stock, so such shares are generally issued from treasury stock. From time to time, we repurchase shares of our common stock, the timing and amount of which depends on market and other factors. Historically, the shares acquired under these regular repurchase programs have provided us with sufficient quantities of stock to issue for stock-based compensation. Based on current treasury stock levels, we do not expect to repurchase additional shares specifically for stock-based compensation during 2009. Stock Options Stock options are granted at prices equal to the market value of the common stock on the date the option award is granted. Option awards currently outstanding become exercisable in installments from 24 to 72 months after the date of grant. The options are exercisable over a period not to exceed ten years and one day from the date of grant. The following table summarizes Equity Plan stock option activity for the nine months ended September 30, 2009:
Weighted Average Aggregate Number Weighted Remaining Intrinsic of Options Average Contractual Value (in Exercise Term (in thousands) Price ($) (Years) thousands) ---------------------------------------------------- Outstanding at beginning of period 2,264 $ 13.74 Options granted - $ - Options exercised (180) $ 7.97 Options forfeited (13) $ 17.97 Options expired - $ - ----------- Outstanding at end of period 2,071 $ 14.21 4.14 $ 9,186 =========== Exercisable at end of period 1,512 $ 13.08 3.12 $ 8,410 ===========
We did not grant any stock options during the three-month and nine- month periods ended September 30, 2009 and September 30, 2008. The fair value of stock option grants is estimated using a Black-Scholes valuation model. The total intrinsic value of share options exercised was $1.8 million and $9.1 million for the three-month periods ended September 30, 2009 and September 30, 2008 and $1.8 million and $11.8 million for the nine- month periods ended September 30, 2009 and September 30, 2008. Restricted Stock Restricted stock awards entitle the holder to shares of common stock when the award vests. The value of these shares may fluctuate according to market conditions and other factors. Restricted stock awards that have not 11 yet vested will vest sixty months from the grant date of the award. The restricted shares do not confer any voting or dividend rights to recipients until such shares fully vest and do not have any post-vesting sales restrictions. The following table summarizes restricted stock activity for the nine months ended September 30, 2009:
Number of Restricted Shares Weighted Average Grant Date (in thousands) Fair Value ($) (per share) ----------------------------------------------------------- Nonvested at beginning of period 35 $ 22.88 Shares granted - $ - Shares vested - $ - Shares forfeited - $ - ---------------------------- Nonvested at end of period 35 $ 22.88 ============================
We did not grant any shares of restricted stock during the three-month and nine-month periods ended September 30, 2009 and granted 35,000 shares of restricted stock during the three-month and nine-month periods ended September 30, 2008. We estimate the fair value of restricted stock awards based upon the market price of the underlying common stock on the date of grant, reduced by the present value of estimated future dividends because the awards are not entitled to receive dividends prior to vesting. Our estimate of future dividends is based on the most recent quarterly dividend rate at the time of grant, adjusted for any known future changes in the dividend rate. The present value of estimated future dividends for the 2008 award was calculated using the following assumptions: Dividends per share (quarterly amounts) $0.05 Risk-free interest rate 3.0% (7) Segment Information We have two reportable segments - Truckload Transportation Services ("Truckload") and Value Added Services ("VAS"). The Truckload segment consists of six operating fleets that are aggregated because they have similar economic characteristics and meet the other aggregation criteria described in the accounting guidance for segment reporting. The six operating fleets that comprise our Truckload segment are as follows: (i) dedicated services ("Dedicated") provides truckload services required by a specific customer, generally for a distribution center or manufacturing facility; (ii) the regional short-haul ("Regional") fleet transports a variety of consumer, nondurable products and other commodities in truckload quantities within five geographic regions across the United States using dry van trailers; (iii) the medium-to-long-haul van ("Van") fleet provides comparable truckload van service over irregular routes; (iv) the expedited ("Expedited") fleet provides time-sensitive truckload services utilizing driver teams; and, the (v) flatbed ("Flatbed") and (vi) temperature-controlled ("Temperature-Controlled") fleets provide truckload services for products with specialized trailers. Revenues for the Truckload segment include non-trucking revenues of $0.8 million and $2.5 million for the three-month periods ended September 30, 2009 and September 30, 2008 and $3.0 million and $6.3 million for the nine-month periods ended September 30, 2009 and September 30, 2008. These non-trucking revenues consist primarily of the portion of shipments delivered to or from Mexico where we utilize a third-party capacity provider. The VAS segment generates the majority of our non-trucking revenues through four operating units that provide non-trucking services to our customers. These four VAS operating units are as follows: (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 12 transportation; and (iv) Werner Global Logistics international ("International") provides complete management of global shipments from origin to destination using a combination of air, ocean, truck and rail transportation modes. We generate other revenues related to third-party equipment maintenance, equipment leasing and other business activities. None of these operations meets the quantitative reporting thresholds. As a result, these operations are grouped in "Other" in the tables below. "Corporate" includes revenues and expenses that are incidental to our activities and are not attributable to any of our operating segments. We do not prepare separate balance sheets by segment and, as a result, assets are not separately identifiable by segment. We have no significant intersegment sales or expense transactions that would require the elimination of revenue between our segments in the tables below. The following tables summarize our segment information (in thousands):
Revenues -------- Three Months Ended Nine Months Ended September 30, September 30, ---------------------- ----------------------- 2009 2008 2009 2008 ---------------------- ----------------------- Truckload Transportation Services $ 369,610 $ 505,489 $ 1,063,047 $ 1,456,872 Value Added Services 57,685 73,586 155,627 203,401 Other 930 4,218 5,760 12,177 Corporate 1,048 764 2,398 2,575 ---------------------- ----------------------- Total $ 429,273 $ 584,057 $ 1,226,832 $ 1,675,025 ====================== =======================
Operating Income ---------------- Three Months Ended Nine Months Ended September 30, September 30, ---------------------- ----------------------- 2009 2008 2009 2008 ---------------------- ----------------------- Truckload Transportation Services $ 30,299 $ 33,113 $ 58,006 $ 68,126 Value Added Services 3,805 4,319 8,329 11,670 Other (1,325) 333 (1,073) 2,315 Corporate 26 257 809 197 ---------------------- ----------------------- Total $ 32,805 $ 38,022 $ 66,071 $ 82,308 ====================== =======================
(8) Subsequent Events We performed an evaluation of Company activity and have concluded that as of November 2, 2009, the date these financial statements were issued, there are no material subsequent events requiring additional disclosure or recognition in these financial statements. 13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Management's Discussion and Analysis of Financial Condition and Results of Operations (the "MD&A") summarizes the financial statements from management's perspective with respect to our financial condition, results of operations, liquidity and other factors that may affect actual results. The MD&A is organized in the following sections: * Overview * Results of Operations * Liquidity and Capital Resources * Contractual Obligations and Commercial Commitments * Off-Balance Sheet Arrangements * Regulations * Critical Accounting Policies * Accounting Standards The MD&A should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2008. Overview: We operate in the truckload and logistics sectors of the transportation industry. In the truckload sector, we focus on transporting consumer nondurable products that 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 manage our resources in the delivery of truckload transportation and logistics services to our customers. Resource requirements vary with customer demand, which may be subject to seasonal or general economic conditions. Our ability to adapt to changes in customer transportation requirements is essential to efficiently deploy resources and make capital investments in tractors and trailers (with respect to our Truckload segment) or obtain qualified third-party capacity at a reasonable price (with respect to our VAS segment). Although our business volume is not highly concentrated, we may also be occasionally affected by our customers' financial failures or loss of customer business. Operating revenues reported in our operating statistics table under "Results of Operations" are categorized as (i) trucking revenues, net of fuel surcharge, (ii) trucking fuel surcharge revenues, (iii) non-trucking revenues, including VAS, and (iv) other operating revenues. Trucking revenues, net of fuel surcharge, and trucking fuel surcharge revenues are generated by the six operating fleets in the Truckload segment (Dedicated, Regional, Van, Expedited, Temperature-Controlled and Flatbed). Non-trucking revenues, including VAS, are generated primarily by the four operating units in our VAS segment (Brokerage, Freight Management, Intermodal and International), and a small amount is generated by the Truckload segment. Other operating revenues are generated from other business activities such as third-party equipment maintenance and equipment leasing. In third quarter 2009, trucking (net of fuel surcharge) and trucking fuel surcharge revenues accounted for 86% of total operating revenues, and non-trucking and other operating revenues accounted for 14% of total operating revenues. Trucking revenues, net of fuel surcharge, are typically generated on a per-mile basis and also include revenues such as stop charges, loading/unloading charges and equipment detention charges. Because fuel surcharge revenues fluctuate in response to changes in fuel costs, we identify them separately in the operating statistics table and exclude them from the statistical calculations to provide a more meaningful comparison 14 between periods. The key statistics used to evaluate trucking revenues, net of fuel surcharge, are (i) average revenues per tractor per week, (ii) average revenues per mile (total and loaded), (iii) average monthly miles per tractor, (iv) average percentage of empty miles (miles without trailer cargo), (v) average trip length (in loaded miles) and (vi) average number of tractors in service. General economic conditions, seasonal trucking industry freight patterns and industry capacity are important factors that impact these statistics. Our 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, owner- operators, tractors, trailers and equipment operating costs (such as fuel and related fuel taxes, driver pay, insurance and supplies and maintenance). To mitigate our risk to fuel price increases, we recover 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. Our financial results are also affected by company driver and owner-operator availability and the market for new and used revenue equipment. We are self-insured for a significant portion of bodily injury, property damage and cargo claims, workers' compensation benefits and health claims for our employees (supplemented by premium-based insurance coverage above certain dollar levels). For that reason, our financial results may also be affected by driver safety, medical costs, weather, legal and regulatory environments and insurance coverage costs to protect against catastrophic losses. The operating ratio is a common industry measure used to evaluate our profitability and that of our Truckload segment operating fleets. The operating ratio consists of operating expenses expressed as a percentage of operating revenues. The most significant variable expenses that impact the Truckload segment are driver salaries and benefits, fuel, fuel taxes (included in taxes and licenses expense), payments to owner-operators (included in rent and purchased transportation expense), supplies and maintenance and insurance and claims. These expenses generally vary based on the number of miles generated. We also evaluate these costs on a per- mile basis to adjust for the impact on the percentage of total operating revenues caused by changes in fuel surcharge revenues, per-mile rates charged to customers and non-trucking revenues. As discussed further in the comparison of operating results for third quarter 2009 to third quarter 2008, several industry-wide issues may cause costs to increase in future periods. These issues include a softer freight market, changing fuel prices, more stringent federal and state regulations governing engine emissions and fuel efficiency, higher new truck and trailer purchase prices and a weaker used equipment market. Our main fixed costs include depreciation expense for tractors and trailers and equipment licensing fees (included in taxes and licenses expense). The Truckload segment requires substantial cash expenditures for tractor and trailer purchases. We fund these purchases with net cash from operations and financing available under our existing credit facilities, as management deems necessary. We provide non-trucking services primarily through four operating units within our VAS segment. Unlike our Truckload segment, the VAS segment is less asset-intensive and is instead dependent upon qualified employees, information systems and qualified third-party capacity providers. The largest expense item related to the VAS segment is the cost of transportation we pay to third-party capacity providers. This expense item is recorded as rent and purchased transportation expense. Other operating expenses include salaries, wages and benefits and computer hardware and software depreciation. We evaluate VAS by reviewing the gross margin percentage (revenues less rent and purchased transportation expenses expressed as a percentage of revenues) and the operating income percentage. 15 Results of Operations: The following operating statistics table sets forth certain industry data regarding the freight revenues and operations for the periods indicated.
Three Months Ended Nine Months Ended September 30, % September 30, % ------------------- ----------------------- 2009 2008 Change 2009 2008 Change -------- -------- ------ ---------- ---------- ------ Trucking revenues, net of fuel surcharge (1) $319,291 $367,401 -13.1% $937,333 $1,084,402 -13.6% Trucking fuel surcharge revenues (1) 49,477 135,525 -63.5% 122,636 366,223 -66.5% Non-trucking revenues, including VAS (1) 58,499 76,070 -23.1% 158,614 209,699 -24.4% Other operating revenues (1) 2,006 5,061 -60.4% 8,249 14,701 -43.9% -------- -------- ---------- ---------- Total operating revenues (1) $429,273 $584,057 -26.5% $1,226,832 $1,675,025 -26.8% ======== ======== ========== ========== Operating ratio (consolidated) (2) 92.4% 93.5% 94.6% 95.1% Average monthly miles per tractor 10,184 10,306 -1.2% 9,866 10,189 -3.2% Average revenues per total mile (3) $1.440 $1.480 -2.7% $1.439 $1.466 -1.8% Average revenues per loaded mile (3) $1.637 $1.699 -3.6% $1.650 $1.691 -2.4% Average percentage of empty miles (4) 12.01% 12.88% -6.8% 12.76% 13.31% -4.1% Average trip length in miles (loaded) 463 539 -14.1% 463 540 -14.3% Total miles (loaded and empty) (1) 221,675 248,197 -10.7% 651,257 739,571 -11.9% Average tractors in service 7,256 8,028 -9.6% 7,334 8,065 -9.1% Average revenues per tractor per week (3) $3,385 $3,521 -3.9% $3,277 $3,448 -5.0% Total tractors (at quarter end) Company 6,635 7,335 6,635 7,335 Owner-operator 690 705 690 705 -------- -------- ---------- ---------- Total tractors 7,325 8,040 7,325 8,040 Total trailers (Truckload and Intermodal, at quarter end) 24,310 24,140 24,310 24,140 (1) Amounts in thousands. (2) Operating expenses expressed as a percentage of operating revenues. Operating ratio is a common measure in the trucking industry used to evaluate profitability. (3) Net of fuel surcharge revenues. (4) Empty refers to miles without trailer cargo.
16 The following table sets forth the total revenues, operating expenses and operating income for the Truckload segment. Revenues for the Truckload segment include non-trucking revenues of $0.8 million and $2.5 million for the three-month periods ended September 30, 2009 and September 30, 2008 and $3.0 million and $6.3 million for the nine-month periods ended September 30, 2009 and September 30, 2008, as described on page 12.
Three Months Ended Nine Months Ended September 30, September 30, ------------------------------ ---------------------------------- Truckload Transportation Services 2009 2008 2009 2008 -------------- -------------- ---------------- ---------------- (amounts in thousands) $ % $ % $ % $ % - -------------------------- -------------- -------------- ---------------- ---------------- Revenues $369,610 100.0 $505,489 100.0 $1,063,047 100.0 $1,456,872 100.0 Operating expenses 339,311 91.8 472,376 93.4 1,005,041 94.5 1,388,746 95.3 -------- -------- ---------- ---------- Operating income $ 30,299 8.2 $ 33,113 6.6 $ 58,006 5.5 $ 68,126 4.7 ======== ======== ========== ==========
Higher fuel prices and higher fuel surcharge revenues increase our consolidated operating ratio and the Truckload segment's operating ratio when fuel surcharges are reported on a gross basis as revenues versus netting against fuel expenses. Eliminating fuel surcharge revenues, which are generally a more volatile source of revenue, provides a more consistent basis for comparing the results of operations from period to period. The following table calculates the Truckload segment's operating ratio as if fuel surcharges are excluded from total revenues and instead reported as a reduction of operating expenses.
Three Months Ended Nine Months Ended September 30, September 30, ------------------------------ ---------------------------------- Truckload Transportation Services 2009 2008 2009 2008 -------------- -------------- ---------------- ---------------- (amounts in thousands) $ % $ % $ % $ % - -------------------------- -------------- -------------- ---------------- ---------------- Revenues $369,610 $505,489 $1,063,047 $1,456,872 Less: trucking fuel surcharge revenues 49,477 135,525 122,636 366,223 -------- -------- ---------- ---------- Revenues, net of fuel surcharges 320,133 100.0 369,964 100.0 940,411 100.0 1,090,649 100.0 -------- -------- ---------- ---------- Operating expenses 339,311 472,376 1,005,041 1,388,746 Less: trucking fuel surcharge revenues 49,477 135,525 122,636 366,223 -------- -------- ---------- ---------- Operating expenses, net of fuel surcharges 289,834 90.5 336,851 91.0 882,405 93.8 1,022,523 93.8 -------- -------- ---------- ---------- Operating income $ 30,299 9.5 $ 33,113 9.0 $ 58,006 6.2 $ 68,126 6.2 ======== ======== ========== ==========
The following table sets forth the VAS segment's non-trucking revenues, rent and purchased transportation expense, gross margin, other operating expenses and operating income. Other operating expenses for the VAS segment primarily consist of salaries, wages and benefits expense. VAS also incurs smaller expense amounts in the supplies and maintenance, depreciation, rent and purchased transportation (excluding third-party transportation costs), insurance, communications and utilities and other operating expense categories.
Three Months Ended Nine Months Ended September 30, September 30, ---------------------------- ------------------------------ Value Added Services 2009 2008 2009 2008 ------------- ------------- -------------- -------------- (amounts in thousands) $ % $ % $ % $ % - ----------------------- ------------- ------------- -------------- -------------- Revenues $57,685 100.0 $73,586 100.0 $155,627 100.0 $203,401 100.0 Rent and purchased transportation expense 47,840 82.9 62,838 85.4 129,119 83.0 173,358 85.2 ------- ------- -------- -------- Gross margin 9,845 17.1 10,748 14.6 26,508 17.0 30,043 14.8 Other operating expenses 6,040 10.5 6,429 8.7 18,179 11.7 18,373 9.1 ------- ------- -------- -------- Operating income $ 3,805 6.6 $ 4,319 5.9 $ 8,329 5.3 $ 11,670 5.7 ======= ======= ======== ========
17 Three Months Ended September 30, 2009 Compared to Three Months Ended - ---------------------------------------------------------------------------- September 30, 2008 - ------------------ Operating Revenues Operating revenues decreased 26.5% for the three months ended September 30, 2009, compared to the same period of the prior year. Excluding fuel surcharge revenues, trucking revenues decreased 13.1% due primarily to a 9.6% decrease in the average number of tractors in service. With respect to pricing and rates, revenue per total mile, excluding fuel surcharges, decreased by 2.7%. Productivity, as measured by average monthly miles per tractor, declined by 1.2%. The freight market continued to be challenging in third quarter 2009; however, we experienced some seasonal improvement in freight volumes as the quarter progressed. Shipper destocking of inventory that occurred earlier this year has slowed, which stabilized inventory levels and had a sequentially positive impact on our freight shipments. The freight market in October 2009 returned to lower levels more consistent with the freight demand levels prior to the end-of-quarter increase in September 2009; however, we continued to experience a year-over-year improvement in freight shipments due to the large decline in freight demand during fourth quarter 2008. Freight shipment trends for the remainder of fourth quarter 2009 will depend on the strength of consumer demand during the holiday season. We adapted to these challenging market conditions by reducing our fleet size. Fewer trucks and lower miles per truck reduced our total miles by 10.7% over this same period. Having fewer trucks in service also lowered our freight requirements and thereby reduced our need to book freight that is less profitable to keep our trucks and drivers productive. Based on current market conditions, we do not plan to make further significant reductions to our fleet, unless there is a significant decline in the freight market or a loss of customer business. The softer freight market during third quarter 2009, combined with the excess truck capacity in the market and a high level of customer bid activity in the first half of 2009, caused continued pressure on freight rates. These factors resulted in a 3.6% decrease in revenue per loaded mile, excluding fuel surcharge. Revenue per total mile decreased only 2.7%, as our average percentage of empty miles improved to 12.01% in third quarter 2009 from 12.88% in third quarter 2008. On a per trip basis, empty miles per trip declined 21% from 80 miles per trip in third quarter 2008 to 63 miles per trip in third quarter 2009. We expect the pressure on freight rates to continue until freight demand improves. Fuel surcharge revenues represent collections from customers for the higher cost of fuel. These revenues decreased 63.5% to $49.5 million in third quarter 2009 from $135.5 million in third quarter 2008 due to a decrease in average diesel fuel prices of $1.62 per gallon in third quarter 2009 compared to third quarter 2008. To lessen the effect of fluctuating fuel prices on our margins, we collect fuel surcharge revenues from our customers. Our fuel surcharge programs are designed to (i) recoup 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 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 miles (which are not billable to customers), out-of-route miles and truck idle time. Fuel prices that change rapidly in short time periods also impact our recovery because the surcharge rate in most fuel surcharge programs only changes once per week. In a rapidly rising fuel price market, there is generally a several week delay between the payment of higher fuel prices and surcharge recovery. In a rapidly declining fuel price market, the opposite generally occurs, and there is a temporary higher surcharge recovery compared to the price paid for fuel. We continue to diversify our business from the Van fleet to the Dedicated, Regional and Expedited fleets and North America cross-border service provided by the Truckload segment and the four operating units of the VAS segment. Our goal is to attain a more balanced portfolio comprised of one-way truckload (which includes Regional, Van and Expedited), dedicated 18 and logistics (which includes the VAS segment) services. This diversification should help soften the impact of a weaker freight market and enables us to provide expanded services to our customers. VAS revenues are generated by its four operating units and exclude revenues for VAS shipments transferred to the Truckload segment, which are recorded as trucking revenues by the Truckload segment. VAS revenues declined 21.6% to $57.7 million in third quarter 2009 from $73.6 million in third quarter 2008 due to three factors: (i) a 19% reduction in the average revenue per shipment due to lower fuel prices and customer rates; (ii) shifting significantly more shipments not committed to third-party capacity providers to our Truckload segment to help cushion the impact of a soft freight market; and (iii) a reduction in the number of industry freight shipments because of the weaker freight market and recessionary economy. VAS gross margin dollars decreased 8.4% to $9.8 million in third quarter 2009 from $10.7 million for the same period in 2008 on the lower revenue because of the reasons noted above. However, the VAS gross margin percentage improved from 14.6% in third quarter 2008 to 17.1% in third quarter 2009 due to a decline in fuel prices and a lower cost of carrier capacity. The following table shows the changes that are described above in shipment volume and average revenue (excluding logistics fee revenue) per shipment for all VAS shipments:
Three Months Ended September 30 ------------------- ---------- -------- 2009 2008 Difference % Change -------- -------- ---------- -------- Total VAS shipments 64,679 60,950 3,729 6% Less: Non-committed shipments to Truckload segment (25,290) (17,655) (7,635) 43% ------- ------- ------- Net VAS shipments 39,389 43,295 (3,906) (9%) ======= ======= ======= Average revenue per shipment $1,325 $1,642 ($317) (19%) ======= ======= =======
Compared to third quarter 2008, Brokerage revenues declined due to the factors described in the paragraph above; however, the Brokerage gross margin percentage improved by 160 basis points due to a decline in fuel prices and a lower cost of carrier capacity. Freight Management revenues declined due to reduced shipments with existing customers resulting from a decline in certain customers' overall shipment levels. Intermodal revenues and gross margins declined because of a weak and competitive intermodal market in third quarter 2009. International achieved meaningful revenue and profit improvement resulting from increased shipment volumes. Operating Expenses Our operating ratio (operating expenses expressed as a percentage of operating revenues) was 92.4% for the three months ended September 30, 2009, compared to 93.5% for the three months ended September 30, 2008. Expense items that impacted the overall operating ratio are described on the following pages. The tables on page 17 show the operating ratios and operating margins for our two reportable segments, Truckload and VAS. 19 The following table sets forth the cost per total mile of operating expense items for the Truckload segment for the periods indicated. We evaluate operating costs for this segment on a per-mile basis, which is a better measurement tool for comparing the results of operations from period to period.
Three Months Ended Increase Nine Months Ended Increase September 30, (Decrease) September 30, (Decrease) ------------------ ----------------- 2009 2008 per Mile 2009 2008 per Mile ----------------------------------------------------------- Salaries, wages and benefits $0.564 $0.582 $(0.018) $0.579 $0.575 $0.004 Fuel 0.297 0.584 (0.287) 0.267 0.571 (0.304) Supplies and maintenance 0.144 0.158 (0.014) 0.153 0.158 (0.005) Taxes and licenses 0.107 0.109 (0.002) 0.110 0.112 (0.002) Insurance and claims 0.090 0.115 (0.025) 0.098 0.104 (0.006) Depreciation 0.166 0.163 0.003 0.177 0.164 0.013 Rent and purchased transportation 0.144 0.181 (0.037) 0.139 0.181 (0.042) Communications and utilities 0.017 0.019 (0.002) 0.018 0.020 (0.002) Other 0.002 (0.008) 0.010 0.002 (0.007) 0.009
Owner-operator costs are included in rent and purchased transportation expense. Owner-operators are independent contractors who supply their own tractor and driver and are responsible for their operating expenses (including driver pay, fuel, supplies and maintenance and fuel taxes). Owner-operator miles as a percentage of total miles were 11.6% for both third quarter 2009 and third quarter 2008. Because owner-operator miles as a percentage of total miles were the same in both periods, essentially no shifting of costs occurred between the rent and purchased transportation category and other expense categories. Beginning in the latter months of 2008, we took steps to manage and reduce a variety of controllable costs and adapt to a smaller fleet. We continued by implementing numerous cost-saving programs throughout the first nine months of 2009. Examples of these cost-saving measures included improving our ratio of tractors to non-driver employees, reducing driver advertising, reducing driver lodging costs, restructuring discretionary driver pay programs, reducing truck sales location costs and decreasing the company-matching contribution percentage for our 401(k) plan. Salaries, wages and benefits in the Truckload segment decreased by 1.8 cents per mile on a total-mile basis in third quarter 2009 compared to third quarter 2008. Driver salaries and benefits decreased 3.8% on a total-mile basis due to restructuring discretionary driver pay programs. We improved our average tractor-to-non-driver ratio for the trucking operation by 9% for third quarter 2009 compared to third quarter 2008. We also incurred lower expense for workers' compensation claims. Non-driver salaries, wages and benefits in the non-trucking VAS segment were 4.1% lower in third quarter 2009 than in third quarter 2008. Although VAS revenues were 21.6% lower in third quarter 2009 than in third quarter 2008 because of the factors described on page 19, VAS handled 6% more shipments in third quarter 2009, including shipments VAS transferred to the Truckload segment. We renewed our workers' compensation insurance coverage for the policy year beginning April 1, 2009. 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 2009 are slightly lower than the previous policy year, due primarily to lower projected payroll. The qualified and student driver recruiting and retention markets improved in third quarter 2009 compared to third quarter 2008. The weakness in the construction and automotive industries, other trucking company failures and fleet reductions and the higher national unemployment rate contributed to an improved driver recruiting and retention market during 20 third quarter 2009. These factors resulted in limited employment options for drivers and consequently made more qualified and student drivers available for the workforce. We anticipate that availability of drivers will remain strong until economic conditions improve. When economic conditions improve, competition for qualified drivers will likely increase, and we cannot predict whether we will experience future driver shortages. If such a shortage were to occur and driver pay rate increases became necessary to attract and retain drivers, our results of operations would be negatively impacted to the extent that corresponding freight rate increases were not obtained. Fuel decreased 28.7 cents per total mile for the Truckload segment in third quarter 2009 compared to the same period in 2008 due to lower average diesel fuel prices following the rapid fuel price decline that occurred in the second half of 2008 and improved miles per gallon (see paragraph below). Although diesel fuel prices fluctuated during third quarter 2009, prices at quarter-end were similar to those at the beginning of the quarter. Average diesel fuel costs were $1.62 per gallon lower in third quarter 2009 than in third quarter 2008. During third quarter 2009, we continued to improve fuel miles per gallon ("mpg") through several initiatives to improve fuel efficiency. These initiatives have been ongoing since March 2008 and include (i) reducing truck idle time, (ii) lowering non-billable miles, (iii) increasing the percentage of aerodynamic, more fuel-efficient trucks in the company truck fleet and (iv) installing auxiliary power units ("APUs") in company trucks. APUs allow the driver to heat or cool the truck without idling the main engine and consume less diesel fuel than the engine. As of September 30, 2009, we installed APUs in approximately 60% of the company-owned truck fleet. As a result of these fuel savings initiatives, we improved our company truck average mpg by 3.3% in third quarter 2009 compared to third quarter 2008. This mpg improvement resulted in the purchase of 1.2 million fewer gallons of diesel fuel in third quarter 2009 than in third quarter 2008. This equates to a reduction of approximately 13,000 tons of carbon dioxide emissions. We intend to continue these and other environmentally conscious initiatives, including our active participation as a U.S. Environmental Protection Agency (the "EPA") SmartWay Transport Partner. The SmartWay Transport Partnership is a national voluntary program developed by EPA and freight industry representatives to reduce greenhouse gases and air pollution and promote cleaner, more efficient ground freight transportation. Fuel prices increased 32 cents per gallon from September 30, 2009 to October 30, 2009 and averaged 51 cents per gallon less in October 2009 than in the same period of 2008. During periods of rising fuel prices, a lag generally occurs between the timing of the fuel cost increases and the delayed recovery of fuel surcharge revenues. As noted in our prior filings, the large decline in diesel fuel prices in the second half of 2008 had a temporary favorable impact on net fuel costs (fuel expense, less fuel surcharge revenues) in third quarter 2008 and fourth quarter 2008. Shortages of fuel, increases in fuel prices and petroleum product rationing can have a materially adverse effect on our operations and profitability. We are unable to predict whether fuel price levels will increase or decrease in the future or the extent to which fuel surcharges will be collected from customers. As of September 30, 2009, we had no derivative financial instruments to reduce our exposure to fuel price fluctuations. One of our large fuel vendors declared bankruptcy in December 2008 and is continuing to operate its fuel stop locations post-bankruptcy, pending the proposed sale to another large fuel stop operator from which we also purchase fuel. If fuel stop locations were reduced or eliminated in the future, we believe we have the ability to obtain fuel from other vendors. Supplies and maintenance for the Truckload segment decreased 1.4 cents per total mile in third quarter 2009 compared to third quarter 2008. Through our cost-saving programs and improved driver retention, we realized decreases in driver-related costs such as advertising, motels and travel. 21 Taxes and licenses for the Truckload segment decreased 0.2 cents on a total-mile basis in third quarter 2009 compared to third quarter 2008. Fuel taxes decreased per mile as a result of the 3.3% improvement in the company truck mpg. An improved mpg results in fewer gallons of diesel fuel purchased and consequently lower fuel taxes. This decrease was partially offset by the effect of lower average miles per tractor on the fixed cost components (primarily equipment licensing fees) of this operating expense category. Insurance and claims for the Truckload segment decreased by 2.5 cents per total mile in third quarter 2009 from third quarter 2008. This per-mile decrease was the result of lower negative loss development on both smaller and large liability claims for accidents that occurred prior to the quarter. A substantial portion of our insurance and claims expense results from our claim experience and claim development (self-insurance). A small portion of our insurance and claims expense results from insurance premiums for high dollar claim coverage. We renewed our liability insurance policies on August 1, 2009 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. The annual aggregate for claims in excess of $5.0 million and less than $10.0 million increased from $4.0 million to $5.0 million. We maintain liability insurance coverage with insurance carriers substantially in excess of the $10.0 million per claim. Our liability insurance premium dollars for the policy year that began August 1, 2009 are slightly lower than the previous policy year but increased about 9% on a per-mile basis. Depreciation expense for the Truckload segment increased 0.3 cents per total mile in third quarter 2009 compared to third quarter 2008. This increase was due to an increase in the number of APUs installed on company trucks, a higher ratio of trailers to tractors resulting from the tractor fleet reductions, and the effect of lower average miles per tractor. While we incur depreciation expense on the APUs, we also incur lower fuel expense because tractors with APUs consume less fuel during periods of truck idling. Depreciation expense was historically affected by the engine emissions standards imposed by the EPA that became effective in October 2002 and applied to all new trucks purchased after that time, resulting in increased truck purchase costs. Depreciation expense is affected because in January 2007, a second set of more strict EPA engine emissions standards became effective for all newly manufactured truck engines. Compared to trucks with engines produced before 2007, the trucks with new engines manufactured under the 2007 standards have higher purchase prices. We began to take delivery of trucks with these 2007-standard engines in first quarter 2008 to replace older trucks in our fleet. As of September 30, 2009, 60% of the engines in our fleet of company-owned trucks were manufactured by Caterpillar. In January 2010, a final set of more rigorous EPA-mandated emissions standards will become effective for all new engines manufactured after that date. It is expected that these trucks will have a higher purchase price than trucks manufactured to meet the 2007 EPA engine emission standards but may be more fuel efficient. We are currently evaluating the options available to us to prepare for the upcoming 2010 standards. We have received a small number of engines that meet the 2010 standards and will be testing them during the remaining months of 2009. Rent and purchased transportation expense consists mainly of payments to third-party capacity providers in the VAS segment and other non-trucking operations and payments to owner-operators in the Truckload segment. The payments to third-party capacity providers generally vary depending on changes in the volume of services generated by the VAS segment. As a percentage of VAS revenues, VAS rent and purchased transportation expense decreased to 82.9% in third quarter 2009 from 85.4% in third quarter 2008. Rent and purchased transportation for the Truckload segment decreased 3.7 cents per total mile in third quarter 2009 due primarily to decreased fuel prices that resulted in lower reimbursements to owner-operators for fuel. Our customer fuel surcharge programs do not differentiate between miles generated by company-owned and owner-operator trucks. Challenging operating conditions continue to make owner-operator recruitment and 22 retention difficult. Such conditions include inflationary cost increases that are the responsibility of owner-operators and a shortage of financing for equipment. We have historically been able to add company-owned tractors and recruit additional company drivers to offset any decrease in the number of owner-operators. If a shortage of owner-operators and company drivers occurs, increases in per mile settlement rates (for owner-operators) and driver pay rates (for company drivers) may become necessary to attract and retain these drivers. These increases could negatively affect our results of operations to the extent that we would be unable to obtain corresponding freight rate increases. Other operating expenses for the Truckload segment increased 1.0 cent per total mile in third quarter 2009 compared to third quarter 2008. Gains on sales of assets (primarily trucks and trailers) are reflected as a reduction of other operating expenses and are reported net of sales-related expenses (which include costs to prepare the equipment for sale). Gains on sales of assets decreased to $0.9 million in third quarter 2009 from $2.8 million in third quarter 2008. In third quarter 2009, we realized lower average gains per truck and trailer sold. Buyer demand for used trucks and trailers remained low due to the weak freight market and recessionary economy. During the first six months of 2009, we closed eight lower volume Fleet Truck Sales offices and continue to operate in eight locations across the continental United States. We believe our wholly-owned subsidiary and used truck and trailer retail network, Fleet Truck Sales, is one of the largest Class 8 used truck and equipment retail entities in the United States. Fleet Truck Sales continues to be our resource for remarketing our used trucks and trailers, in addition to trading trucks to original equipment manufacturers when purchasing new trucks. Other Expense (Income) Our interest income was $0.4 million in third quarter 2009 compared to $1.0 million in third quarter 2008. Our average cash and cash equivalents balances were comparable for third quarter 2009 and third quarter 2008; however, the average interest rate earned on these funds was lower in third quarter 2009. Income Taxes Our effective income tax rate (income taxes expressed as a percentage of income before income taxes) increased slightly to 43.0% for third quarter 2009 from 42.5% for third quarter 2008. The higher income tax rate was due primarily to lower income before income taxes on an annualized basis, which caused non-deductible expenses such as driver per diem to comprise a larger percentage of our income before income taxes. Nine Months Ended September 30, 2009 Compared to Nine Months Ended September - ---------------------------------------------------------------------------- 30, 2008 - -------- Operating Revenues Operating revenues decreased 26.8% for the nine months ended September 30, 2009, compared to the same period of the prior year. Excluding fuel surcharge revenues, trucking revenues decreased 13.6% due primarily to a 9.1% decrease in the average number of tractors in service, a 3.2% decrease in average monthly miles per tractor and a 1.8% decrease in average revenues per total mile. Fuel surcharge revenues decreased 66.5% to $122.6 million in the 2009 year-to-date period from $366.2 million in the 2008 year-to-date period because of lower diesel fuel prices. VAS revenues decreased 23.5% due to the factors described on page 19. Operating Expenses Our operating ratio (operating expenses expressed as a percentage of operating revenues) was 94.6% for the nine months ended September 30, 2009, compared to 95.1% for the same period of 2008. Expense items that impacted 23 the overall operating ratio are described below. The tables on page 17 show the operating ratios and operating margins for our two reportable segments, Truckload and VAS. Owner-operator miles as a percentage of total miles were 11.5% for the nine months ended September 30, 2009 compared to 12.0% for the nine months ended September 30, 2008. This decrease in owner-operator miles as a percentage of total miles shifted costs from the rent and purchased transportation category to other expense categories. Due to this decrease, we estimate that rent and purchased transportation expense for the Truckload segment was lower by approximately 0.5 cents per total mile, and other expense categories had offsetting increases on a total-mile basis as follows: (i) salaries, wages and benefits, 0.2 cents; (ii) fuel, 0.1 cent; (iii) supplies and maintenance, 0.1 cent; and (iv) depreciation, 0.1 cent. Salaries, wages and benefits in the Truckload segment increased by 0.4 cents per mile in the 2009 year-to-date period. This increase is primarily attributed to the effect of 3.2% lower average miles per tractor (which has the effect of increasing costs of a fixed nature when evaluated on a per- mile basis) on the non-driver, student and fringe benefit components of this expense category. The shift from rent and purchased transportation expense to salaries, wages and benefits because of the decrease in owner-operator miles as a percentage of total miles also contributed to the increase. Although we improved our tractor-to-non-driver ratio for the trucking operation by 14% during the first nine months of 2009, the benefit was not fully realized until the second quarter of 2009. Driver salaries improved as the 2009 year-to-date period progressed following changes to some discretionary driver pay programs, resulting in lower expense per mile in the last few months of the nine-month period. Higher group health insurance costs were nearly offset by lower workers' compensation expense. Non-driver salaries, wages and benefits in the non-trucking VAS segment were essentially flat. Although VAS revenues were lower in the first nine months of 2009 than in the same period of 2008, the number of shipments handled by VAS in the 2009 period, including those transferred to the Truckload segment, was about 3% higher. Fuel decreased 30.4 cents per total mile for the Truckload segment in the first nine months of 2009 compared to the same period in 2008 due to the lower average fuel price per gallon and a 4.2% improvement in the company truck fleet mpg. Average diesel fuel prices were $1.73 per gallon lower in the first nine months of 2009 than in the same 2008 period. Supplies and maintenance costs for the Truckload segment were 0.5 cents lower on a per-mile basis in the 2009 year-to-date period when compared to the same period in 2008. Savings achieved in driver advertising, recruiting, motel and travel costs were partially offset by higher equipment maintenance costs. Taxes and licenses for the Truckload segment decreased 0.2 cents on a total-mile basis due to fuel tax savings resulting from the 4.2% mpg improvement in the first nine months of 2009 over the same period of 2008, offset partially by the effect of lower average miles per tractor on the fixed cost components of this operating expense category. Insurance and claims decreased 0.6 cents on a total-mile basis for the Truckload segment in the nine months ended September 30, 2009 versus the 2008 year-to-date period. This decrease resulted from lower expense for both small and large liability claims, offset partially by slightly higher cargo claims expense. These liability cost savings were achieved through net favorable development for small liability claims in the 2009 year-to- date period compared to net unfavorable development in the same period in 2008, and better experience and development on large claims in the 2009 period. Depreciation for the Truckload segment increased 1.3 cents per total mile in the 2009 year-to-date period compared to the same period in 2008. This increase resulted from the effect of lower average miles per tractor and, to a lesser extent, an increase in the number of APUs installed on company trucks and a higher ratio of trailers to tractors resulting from the tractor fleet reductions. 24 Rent and purchased transportation expense for the Truckload segment decreased 4.2 cents per total mile in the first nine months of 2009 compared to the same period in 2008 primarily because of a decrease in the fuel reimbursement paid to owner-operators (because of lower average diesel fuel prices) and the shift from rent and purchased transportation to salaries, wages and benefits because of the decrease in owner-operator miles as a percentage of total miles. Rent and purchased transportation expense for the VAS segment decreased in response to lower VAS revenues. As a percentage of VAS revenues, VAS rent and purchased transportation expense decreased to 83.0% in the 2009 year-to-date period from 85.2% in the 2008 year-to-date period. Other operating expenses for the Truckload segment increased 0.9 cents per total mile due to lower gains on sales of assets in the first nine months of 2009 compared to the same period in 2008. Gains on sales of assets decreased to $1.9 million in the nine months ended September 30, 2009 from $8.8 million in the nine months ended September 30, 2008. In the 2009 year-to-date period, we realized lower average gains per truck and trailer sold. Buyer demand for used trucks and trailers remained low because of the weak freight market and recessionary economy. Other Expense (Income) Our interest income was $1.3 million during the nine months ended September 30, 2009 compared to $3.0 million during the nine months ended September 30, 2008. Our average cash and cash equivalents balance was about 20% lower for the nine months ended September 30, 2009 than the same period in 2008, and the average interest rate earned on these funds was lower in the 2009 period. Income Taxes Our effective income tax rate (income taxes expressed as a percentage of income before income taxes) increased to 43.0% for the nine months ended September 30, 2009 from 42.6% for the same period in 2008. The higher income tax rate was due primarily to lower income before income taxes on an annualized basis, which caused non-deductible expenses such as driver per diem to comprise a larger percentage of our income before income taxes. Liquidity and Capital Resources: During the nine months ended September 30, 2009, net cash provided by operating activities decreased to $169.3 million, a 10.5% decrease ($19.9 million) compared to the same nine-month period one year ago. The decrease in net cash provided by operating activities resulted primarily from (i) a $21.7 million decrease in cash flows related to insurance and claims accruals (both current and long-term) due to settlements of claims, (ii) an $11.9 million decrease in cash flows related to accounts payable, due to the timing of payments and lower diesel fuel prices and (iii) lower net income of $10.4 million. The decrease in net cash provided by operating activities was offset partially by a lower accounts receivable balance in third quarter 2009 because of a decrease in fuel surcharge billings and lower revenues attributed to the smaller fleet size. We were able to make net capital expenditures, repay debt and pay dividends with the net cash provided by operating activities and existing cash balances as discussed below. Net cash used in investing activities decreased from $76.0 million for the nine-month period ended September 30, 2008 to $73.5 million for the nine-month period ended September 30, 2009. Net property additions (primarily revenue equipment) were $76.7 million for the nine-month period ended September 30, 2009, compared to $80.4 million during the same period of 2008. As of September 30, 2009, we committed to property and equipment purchases, net of trades, of approximately $31.8 million. We expect our net capital expenditures (primarily revenue equipment) to be in the range of 25 $100.0 million to $125.0 million in 2009. We intend to fund these net capital expenditures through cash flow from operations, existing cash balances and financing available under our existing credit facilities, as management deems necessary. Net financing activities used $38.6 million during the nine months ended September 30, 2009 and $2.4 million during the same period in 2008. The change from 2008 to 2009 included debt repayments of $30.0 million during the nine-month period ended September 30, 2009, and no debt repayments during the nine-month period ended September 30, 2008. We paid dividends of $10.7 million in the nine months ended September 30, 2009 compared to $10.6 million in the same period of 2008. Financing activities included no common stock repurchases for the nine-month period ended September 30, 2009 and $4.5 million in the same period of 2008. 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 market and other factors. As of September 30, 2009, the Company had purchased 1,041,200 shares pursuant to our current Board of Directors repurchase authorization and had 6,958,800 shares remaining available for repurchase. Management believes our financial position at September 30, 2009 is strong. As of September 30, 2009, we had $105.8 million of cash and cash equivalents and $776.4 million of stockholders' equity. Cash is invested primarily in government portfolio money market funds. We do not hold any investments in auction-rate securities. As of September 30, 2009, we had $225.0 million of available credit pursuant to credit facilities, of which we had no outstanding borrowings. The credit available under these facilities is reduced by the $49.8 million in stand-by letters of credit under which we are obligated. These letters of credit are primarily required as security for insurance policies. Management believes our financial position is strong and foresees no 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 September 30, 2009.
Payments Due by Period (in millions) Less More than 1 1-3 3-5 than 5 Period Total year years years years Unknown - -------------------------------------------------------------------------------------- Contractual Obligations Unrecognized tax benefits $ 7.3 $ 1.1 $ - $ - $ - $ 6.2 Equipment purchase commitments 31.8 31.8 - - - - ------- ------- ------- ------- ------- ------- Total contractual cash obligations $ 39.1 $ 32.9 $ - $ - $ - $ 6.2 ======= ======= ======= ======= ======= ======= Other Commercial Commitments Unused lines of credit $ 175.2 $ - $ 175.2 $ - $ - $ - Standby letters of credit 49.8 49.8 - - - - ------- ------- ------- ------- ------- ------- Total commercial commitments $ 225.0 $ 49.8 $ 175.2 $ - $ - $ - ======= ======= ======= ======= ======= ======= Total obligations $ 264.1 $ 82.7 $ 175.2 $ - $ - $ 6.2 ======= ======= ======= ======= ======= =======
26 We have committed credit facilities with two banks totaling $225.0 million, of which we had no outstanding borrowings at September 30, 2009. These credit facilities bear variable interest based on the London Interbank Offered Rate ("LIBOR"). The credit available under these facilities is reduced by the amount of standby letters of credit under which we are obligated. The unused lines of credit are available to us in the event we need financing for the replacement of our fleet or for other significant capital expenditures. The stand-by letters of credit are primarily required for insurance policies. Equipment purchase commitments relate to committed equipment expenditures. As of September 30, 2009, we have recorded a $7.3 million liability for unrecognized tax benefits. We expect $1.1 million to be settled within the next twelve months and are unable to reasonably determine when the $6.2 million categorized as "period unknown" will be settled. Off-Balance Sheet Arrangements: As of September 30, 2009, we did not have any non-cancelable revenue equipment operating leases or other arrangements that meet the definition of an off-balance sheet arrangement. Regulations: All truckload carriers are subject to the hours of service ("HOS") regulations (the "HOS Regulations") issued by the Federal Motor Carrier Safety Administration (the "FMCSA"). In November 2008, the FMCSA adopted and issued a final rule that amended the HOS Regulations to (i) allow drivers up to 11 hours of driving time within a 14-hour, non-extendable window from the start of the workday (this driving time must follow 10 consecutive hours of off-duty time) and (ii) restart calculations of the weekly on-duty time limits after the driver has at least 34 consecutive hours off duty. This final rule became effective on January 19, 2009 and made essentially no changes to the 11-hour driving limit and 34-hour restart rules that we had been following since the HOS Regulations were revised in October 2005. In March 2009, Public Citizen and other parties petitioned the Court for reconsideration of the FMCSA's final rule, asserting the rule is not stringent enough, and the American Trucking Associations then filed a motion to intervene in support of keeping the current FMCSA final rule in place. On October 26, 2009, the FMCSA, Public Citizen and the other petitioning parties entered into a settlement agreement that requires the FMCSA to submit a new proposed HOS rule within nine months of the settlement date and publish a final rule within 21 months of the settlement date. Pursuant to the settlement agreement, such parties also filed with the Court a joint motion requesting the Court to hold the proceedings in abeyance pending the FMCSA's issuance of the new proposed rule. Oral arguments on the joint motion are scheduled for January 15, 2010. If new HOS rules are adopted which change the allowable driving hours or on-duty time, our mileage productivity could be adversely affected. We will continue to monitor any developments. In January 2007, the FMCSA published a proposed rule regarding the trucking industry's use of Electronic On-Board Recorders ("EOBRs") for compliance with HOS rules. The proposed rule includes (i) performance specifications for EOBR technology for HOS compliance; (ii) incentives to encourage EOBR use by motor carriers; and (iii) requirements for EOBR use by operators with serious HOS compliance problems during at least two compliance reviews over any two-year period. In late 2008, the FMCSA's submitted proposed rule was not approved for publication before the end of the Bush Administration. On January 23, 2009, in accordance with instructions issued by the Obama Administration, the FMCSA withdrew the proposed rule for reconsideration and review by the Obama Administration. While we do not believe the rule, as proposed, would have a significant effect on our operations and profitability, we will continue to monitor future developments. In January 2007, more stringent EPA engine emissions standards became effective and applied to all newly manufactured truck engines. Compared to trucks with engines manufactured before 2007 and not subject to the new standards, trucks manufactured with the 2007-standard engines have higher purchase prices (approximately $5,000 to $10,000 more per truck). In January 2010, a final set of more rigorous EPA-mandated emissions standards will become effective for all new engines manufactured after that time. These regulations require a significant decrease in particulate matter (soot 27 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") and exhaust gas recirculation ("EGR") technologies to remove pollutants from exhaust gases exiting the combustion chamber. The SCR technology also requires the use of a urea-based diesel exhaust fluid. We are currently evaluating the options available to us to prepare for the upcoming 2010 standards. Several U.S. states, counties and cities have enacted legislation or ordinances restricting idling of trucks to short periods of time. This action is significant when it impacts the driver's ability to idle the truck for purposes of operating air conditioning and heating systems particularly while in the sleeper berth. Many of the statutes or ordinances recognize the need of the drivers to have a comfortable environment in which to sleep and include exceptions for those circumstances. California no longer has such an exemption. We have taken steps to address this issue in California, which include driver training, better scheduling and the installation and use of APUs. California has also enacted restrictions on transport refrigeration unit ("TRU") emissions that require companies to operate compliant TRUs in California. The California regulations apply not only to California intrastate carriers, but also to carriers based outside of California who wish to enter the state with TRUs. On January 9, 2009, the EPA enabled California to phase in its Low-Emission TRU In-Use Performance Standards over several years. The first compliance deadline is December 31, 2009 and it applies to model year 2002 and older TRU engines. Enforcement of California's in-use performance standards for these model year TRU engines will begin in January 2010. 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 are currently evaluating our options for meeting these requirements over the next several years as the regulations gradually become effective. Critical Accounting Policies: We operate in the truckload sector of the trucking industry and the logistics sector of the transportation industry. In the truckload sector, we focus on transporting consumer nondurable products that generally ship consistently throughout the year. In the logistics sector, besides managing transportation requirements for individual customers, we provide additional sources of truck capacity, alternative modes of transportation, a global delivery network and systems analysis to optimize transportation needs. Our success depends on our ability to efficiently manage our resources in the delivery of truckload transportation and logistics services to our customers. Resource requirements vary with customer demand and may be subject to seasonal or general economic conditions. Our ability to adapt to changes in customer transportation requirements is essential to efficient resource deployment, making capital investments in tractors and trailers or obtaining qualified third-party carrier capacity at a reasonable price. Although our business volume is not highly concentrated, we may also be occasionally affected by our customers' financial failures or loss of customer business. Our most significant resource requirements are company drivers, owner- operators, tractors, trailers and related equipment operating costs (such as fuel and related fuel taxes, driver pay, insurance and supplies and maintenance). To mitigate our risk to fuel price increases, we recover from our customers additional fuel surcharges that recoup a majority, but not all, of the increased fuel costs; however, we cannot assure that current recovery levels will continue in future periods. Our financial results are also affected by company driver and owner-operator availability and the new and used revenue equipment market. Because we are self-insured for a significant portion of bodily injury, property damage and cargo claims and for workers' compensation benefits and health claims for our employees (supplemented by premium-based insurance coverage above certain dollar levels), financial results may also be affected by driver safety, medical costs, weather, legal and regulatory environments and insurance coverage costs to protect against catastrophic losses. 28 The most significant accounting policies and estimates that affect our financial statements include the following: * Selections of estimated useful lives and salvage values for purposes of depreciating tractors and trailers. Depreciable lives of tractors and trailers range from 5 to 12 years. Estimates of salvage value at the expected date of trade-in or sale (for example, three years for tractors) are based on the expected market values of equipment at the time of disposal. Although our normal replacement cycle for tractors is three years, we calculate depreciation expense for financial reporting purposes using a five-year life and 25% salvage value. Depreciation expense calculated in this manner continues at the same straight-line rate (which approximates the continuing declining market value of the tractors) when a tractor is held beyond the normal three-year age. Calculating depreciation expense using a five-year life and 25% salvage value results in the same annual depreciation rate (15% of cost per year) and the same net book value at the normal three-year replacement date (55% of cost) as using a three-year life and 55% salvage value. We continually monitor the adequacy of the lives and salvage values used in calculating depreciation expense and adjust these assumptions appropriately when warranted. * Impairment of long-lived assets. We review our long-lived assets for impairment whenever events or circumstances indicate the carrying amount of a long-lived asset may not be recoverable. An impairment loss would be recognized if the carrying amount of the long-lived asset is not recoverable and the carrying amount exceeds its fair value. For long-lived assets classified as held and used, the carrying amount is not recoverable when the carrying value of the long-lived asset exceeds the sum of the future net cash flows. We do not separately identify assets by operating segment because tractors and trailers are routinely transferred from one operating fleet to another. As a result, none of our long-lived assets have identifiable cash flows from use that are largely independent of the cash flows of other assets and liabilities. Thus, the asset group used to assess impairment would include all of our assets. * Estimates of accrued liabilities for insurance and claims for liability and physical damage losses and workers' compensation. The insurance and claims accruals (current and noncurrent) are recorded at the estimated ultimate payment amounts and are based upon individual case estimates (including negative development) and estimates of incurred-but-not-reported losses using loss development factors based upon past experience. An actuary reviews our self- insurance reserves for bodily injury and property damage claims and workers' compensation claims every six months. * Policies for revenue recognition. Operating revenues (including fuel surcharge revenues) and related direct costs are recorded when the shipment is delivered. For shipments where a third-party capacity provider (including owner-operators under contract with us) is utilized to provide some or all of the service and we (i) are the primary obligor in regard to the shipment delivery, (ii) establish customer pricing separately from carrier rate negotiations, (iii) generally have discretion in carrier selection and/or (iv) have credit risk on the shipment, we record both revenues for the dollar value of services we bill to the customer and rent and purchased transportation expense for transportation costs we pay to the third- party provider upon the shipment's delivery. In the absence of the conditions listed above, we record revenues net of those expenses related to third-party providers. * Accounting for income taxes. Significant management judgment is required to determine (i) the provision for income taxes, (ii) whether deferred income taxes will be realized in full or in part and (iii) the liability for unrecognized tax benefits 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 29 consequently impact the likelihood of realizing the deferred income tax assets, we would need to apply management's judgment to determine the amount of valuation allowance required in any given period. * Allowance for doubtful accounts. The allowance for doubtful accounts is our estimate of the amount of probable credit losses in our existing accounts receivable. We review the financial condition of customers for granting credit and monitor changes in customers' financial conditions on an ongoing basis. We determine the allowance based on our historical write-off experience and national economic conditions. During the last year, numerous significant events affected the U.S. financial markets and resulted in significant reduction of credit availability and liquidity. Consequently, we believe some of our customers may be unable to obtain or retain adequate financing to support their businesses in the future. We anticipate that because of these combined factors, some of our customers may also be compelled to restructure their businesses or may be unable to pay amounts owed to us. We have formal policies in place to continually monitor credit extended to customers and to manage our credit risk. We maintain credit insurance for some customer accounts. We evaluate the adequacy of our allowance for doubtful accounts quarterly and believe our allowance for doubtful accounts is adequate based on information currently available. Management periodically re-evaluates these estimates as events and circumstances change. Together with the effects of the matters discussed above, these factors may significantly impact our results of operations from period to period. Accounting Standards: New Accounting Pronouncements Adopted - ------------------------------------- In June 2009, the Financial Accounting Standards Board (the "FASB") issued its final Statement of Financial Accounting Standards ("SFAS") No. 168, The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles - a replacement of FASB Statement No. 162 ("No. 168"). This statement establishes the FASB Accounting Standards CodificationTM (the "Codification") as the single source of authoritative U.S. generally accepted accounting principles ("GAAP") applied by nongovernmental entities, except for rules and interpretive releases of the SEC under the authority of federal securities laws, which are sources of authoritative accounting guidance for SEC registrants. The Codification did not change GAAP but reorganizes the literature. The Codification supersedes all existing non-SEC accounting and reporting standards. The provisions of SFAS No. 168 were effective for financial statements issued for interim and annual periods ending after September 15, 2009. Following SFAS No. 168, the Board will not issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts; instead, it will issue Accounting Standards Updates. The FASB will not consider Accounting Standards Updates as authoritative in their own right; these updates will serve only to update the Codification, provide background information about the guidance and provide the bases for conclusions on the changes in the Codification. In the description of "Accounting Standards Updates Not Yet Effective" that follows, references in quotations relate to Codification Topics and Subtopics, and their descriptive titles, as appropriate. 30 Accounting Standards Updates Not Yet Effective - ---------------------------------------------- In October 2009, an update was made to "Revenue Recognition - Multiple Deliverable Revenue Arrangements". This update removes the objective-and- reliable-evidence-of-fair-value criterion from the separation criteria used to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting, replaces references to "fair value" with "selling price" to distinguish from the fair value measurements required under the "Fair Value Measurements and Disclosures" guidance, provides a hierarchy that entities must use to estimate the selling price, eliminates the use of the residual method for allocation, and expands the ongoing disclosure requirements. This update is effective for the company beginning January 1, 2011 and can be applied prospectively or retrospectively. Management is currently evaluating the effect that adoption of this update will have, if any, on our consolidated financial position, results of operations and cash flows when it becomes effective in 2011. Other Accounting Standards Updates not effective until after September 30, 2009, are not expected to have a significant effect on our consolidated financial position, results of operations or cash flows. Item 3. Quantitative and Qualitative Disclosures About Market Risk. We are exposed to market risk from changes in commodity prices, foreign currency exchange rates and interest rates. Commodity Price Risk The price and availability of diesel fuel are subject to fluctuations attributed to changes in the level of global oil production, refining capacity, seasonality, weather and other market factors. Historically, we have recovered a majority, but not all, of fuel price increases from customers in the form of fuel surcharges. We implemented customer fuel surcharge programs with most of our customers to offset much of the higher fuel cost per gallon. However, we do not recover all of the fuel cost increase through these surcharge programs. We cannot predict the extent to which fuel prices will increase or decrease in the future or the extent to which fuel surcharges could be collected. As of September 30, 2009, 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 and China. 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 transaction 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 transaction losses were $0.6 million for third quarter 2009 and $1.8 million for third quarter 2008. Interest Rate Risk We had no debt outstanding at September 30, 2009. Interest rates on our unused credit facilities are based on the LIBOR. Increases in interest rates could impact our annual interest expense on future borrowings. As of September 30, 2009, we do not have any derivative financial instruments to reduce our exposure to interest rate increases. 31 Item 4. Controls and Procedures. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 15d-15(e) of the Securities Exchange Act of 1934 (the "Exchange Act"). Our disclosure controls and procedures are designed to provide reasonable assurance of achieving the desired control objectives. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in enabling us to record, process, summarize and report information required to be included in our periodic filings with the SEC within the required time period. Management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, concluded that no changes in our internal control over financial reporting occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We have confidence in our internal controls and procedures. Nevertheless, our management, including the Chief Executive Officer and Chief Financial Officer, does not expect that the internal controls or disclosure procedures and controls will prevent all errors or intentional fraud. An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of such internal controls are met. Further, the design of an internal control system must reflect that resource constraints exist, and the benefits of controls must be relative to their costs. Because of the inherent limitations in all internal control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been prevented or detected. 32 PART II OTHER INFORMATION Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. On October 15, 2007, we announced that on October 11, 2007 our Board of Directors approved an increase in the number of shares of our common stock that Werner Enterprises, Inc. (the "Company") is authorized to repurchase. Under this October 2007 authorization, the Company is permitted to repurchase an additional 8,000,000 shares. As of September 30, 2009, the Company had purchased 1,041,200 shares pursuant to this authorization and had 6,958,800 shares remaining available for repurchase. The Company may purchase shares from time to time depending on market, economic and other factors. The authorization will continue unless withdrawn by the Board of Directors. No shares of common stock were repurchased during the third quarter of 2009 by either the Company or any "affiliated purchaser," as defined by Rule 10b-18 of the Exchange Act. Item 6. Exhibits.
Exhibit No. Exhibit Incorporated by Reference to: ----------- ------- ----------------------------- 3(i) Restated Articles of Incorporation of Werner Exhibit 3(i) to the registrant's report Enterprises, Inc. on Form 10-Q for the quarter ended June 30, 2007 3(ii) Revised and Restated By-Laws of Werner Exhibit 3(ii) to the registrant's report Enterprises, Inc. on Form 10-Q for the quarter ended June 30, 2007 10.1 The Executive Nonqualified Excess Plan of Filed herewith Werner Enterprises, Inc., as amended 31.1 Certification of the Chief Executive Officer Filed herewith pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934 (Section 302 of the Sarbanes-Oxley Act of 2002) 31.2 Certification of the Chief Financial Officer Filed herewith pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934 (Section 302 of the Sarbanes-Oxley Act of 2002) 32.1 Certification of the Chief Executive Officer Filed herewith pursuant to 18 U.S.C. Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002) 32.2 Certification of the Chief Financial Officer Filed herewith pursuant to 18 U.S.C. Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002)
33 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. WERNER ENTERPRISES, INC. Date: November 2, 2009 By: /s/ John J. Steele ---------------------- --------------------------------------- John J. Steele Executive Vice President, Treasurer and Chief Financial Officer Date: November 2, 2009 By: /s/ James L. Johnson ---------------------- --------------------------------------- James L. Johnson Senior Vice President, Controller and Corporate Secretary 34 EX-10.1 2 wernexh1013q09.txt WERNER ENTERPRISES, INC. EXHIBIT 10.1 9/30/09 Exhibit 10.1 THE EXECUTIVE NONQUALIFIED EXCESS PLAN PLAN DOCUMENT THE EXECUTIVE NONQUALIFIED EXCESS PLAN Section 1. Purpose: --------- ------- By execution of the Adoption Agreement, the Employer has adopted the Plan set forth herein, and in the Adoption Agreement, to provide a means by which certain management Employees or Independent Contractors of the Employer may elect to defer receipt of current Compensation from the Employer in order to provide retirement and other benefits on behalf of such Employees or Independent Contractors of the Employer, as selected in the Adoption Agreement. The Plan is intended to be a nonqualified deferred compensation plan that complies with the provisions of Section 409A of the Internal Revenue Code (the "Code"). The Plan is also intended to be an unfunded plan maintained primarily for the purpose of providing deferred compensation benefits for a select group of management or highly compensated employees under Sections 201(2), 301(a)(3) and 401(a)(l) of the Employee Retirement Income Security Act of 1974 ("ERISA") and independent contractors. Notwithstanding any other provision of this Plan, this Plan shall be interpreted, operated and administered in a manner consistent with these intentions. Section 2. Definitions: --------- ----------- As used in the Plan, including this Section 2, references to one gender shall include the other, unless otherwise indicated by the context: 2.1 "Active Participant" means, with respect to any day or date, a Participant who is in Service on such day or date; provided, that a Participant shall cease to be an Active Participant (i) immediately upon a determination by the Committee that the Participant has ceased to be an Employee or Independent Contractor, or (ii) at the end of 1 the Plan Year that the Committee determines the Participant no longer meets the eligibility requirements of the Plan. 2.2 "Adoption Agreement" means the written agreement pursuant to which the Employer adopts the Plan. The Adoption Agreement is a part of the Plan as applied to the Employer. 2.3 "Beneficiary" means the person, persons, entity or entities designated or determined pursuant to the provisions of Section 13 of the Plan. 2.4 "Board" means the Board of Directors of the Company, if the Company is a corporation. If the Company is not a corporation, "Board" shall mean the Company. 2.5 "Change in Control Event" means an event described in Section 409A(a)(2)(A)(v) of the Code (or any successor provision thereto) and the regulations thereunder. 2.6 "Committee" means the persons or entity designated in the Adoption Agreement to administer the Plan. If the Committee designated in the Adoption Agreement is unable to serve, the Employer shall satisfy the duties of the Committee provided for in Section 9. 2.7 "Company" means the company designated in the Adoption Agreement as such. 2.8 "Compensation" shall have the meaning designated in the Adoption Agreement. 2.9 "Crediting Date" means the date designated in the Adoption Agreement for crediting the amount of any Participant Deferral Credits to the Deferred Compensation Account of a Participant. Employer Credits may be credited 2 to the Deferred Compensation Account of a Participant on any day that securities are traded on a national securities exchange. 2.10 "Deferred Compensation Account" means the account maintained with respect to each Participant under the Plan. The Deferred Compensation Account shall be credited with Participant Deferral Credits and Employer Credits, credited or debited for deemed investment gains or losses, and adjusted for payments in accordance with the rules and elections in effect under Section 8. The Deferred Compensation Account of a Participant shall include any In- Service or Education Account of the Participant, if applicable. 2.11 "Disabled" means Disabled within the meaning of Section 409A of the Code and the regulations thereunder. Generally, this means that the Participant is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, or is, by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than three months under an accident and health plan covering Employees of the Employer. 2.12 "Education Account" is an In-Service Account which will be used by the Participant for educational purposes. 2.13 "Effective Date" shall be the date designated in the Adoption Agreement. 2.14 "Employee" means an individual in the Service of the Employer if the relationship between the individual and the Employer is the legal relationship of employer and 3 employee. An individual shall cease to be an Employee upon the Employee's separation from Service. 2.15 "Employer" means the Company, as identified in the Adoption Agreement, and any Participating Employer which adopts this Plan. An Employer may be a corporation, a limited liability company, a partnership or sole proprietorship. 2.16 "Employer Credits" means the amounts credited to the Participant's Deferred Compensation Account by the Employer pursuant to the provisions of Section 4.2. 2.17 "Grandfathered Amounts" means, if applicable, the amounts that were deferred under the Plan and were earned and vested within the meaning of Section 409A of the Code and regulations thereunder as of December 31, 2004. Grandfathered Amounts shall be subject to the terms designated in the Adoption Agreement. 2.18 "Independent Contractor" means an individual in the Service of the Employer if the relationship between the individual and the Employer is not the legal relationship of employer and employee. An individual shall cease to be an Independent Contractor upon the termination of the Independent Contractor's Service. An Independent Contractor shall include a director of the Employer who is not an Employee. 2.19 "In-Service Account" means a separate account to be kept for each Participant that has elected to take in- service distributions as described in Section 5.4. The In- Service Account shall be adjusted in the same manner and at the same time as the Deferred Compensation Account under Section 8 and in accordance with the rules and elections in effect under Section 8. 4 2.20 "Normal Retirement Age" of a Participant means the age designated in the Adoption Agreement. 2.21 "Participant" means with respect to any Plan Year an Employee or Independent Contractor who has been designated by the Committee as a Participant and who has entered the Plan or who has a Deferred Compensation Account under the Plan; provided that if the Participant is an Employee, the individual must be a highly compensated or management employee of the Employer within the meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA. 2.22 "Participant Deferral Credits" means the amounts credited to the Participant's Deferred Compensation Account by the Employer pursuant to the provisions of Section 4.1. 2.23 "Participating Employer" means any trade or business (whether or not incorporated) which adopts this Plan with the consent of the Company identified in the Adoption Agreement. 2.24 "Participation Agreement" means a written agreement entered into between a Participant and the Employer pursuant to the provisions of Section 4.1 2.25 "Performance-Based Compensation" means compensation where the amount of, or entitlement to, the compensation is contingent on the satisfaction of preestablished organizational or individual performance criteria relating to a performance period of at least twelve months. Organizational or individual performance criteria are considered preestablished if established in writing within 90 days after the commencement of the period of service to which the criteria relates, provided that the outcome is substantially uncertain at the time the criteria are established. Performance-based compensation may include 5 payments based upon subjective performance criteria as provided in regulations and administrative guidance promulgated under Section 409A of the Code. 2.26 "Plan" means The Executive Nonqualified Excess Plan, as herein set out and as set out in the Adoption Agreement, or as duly amended. The name of the Plan as applied to the Employer shall be designated in the Adoption Agreement. 2.27 "Plan-Approved Domestic Relations Order" shall mean a judgment, decree, or order (including the approval of a settlement agreement) which is: 2.27.1 Issued pursuant to a State's domestic relations law; 2.27.2 Relates to the provision of child support, alimony payments or marital property rights to a Spouse, former Spouse, child or other dependent of the Participant; 2.27.3 Creates or recognizes the right of a Spouse, former Spouse, child or other dependent of the Participant to receive all or a portion of the Participant's benefits under the Plan; 2.27.4 Requires payment to such person of their interest in the Participant's benefits in an immediate lump payment; and 2.27.5 Meets such other requirements established by the Committee. 2.28 "Plan Year" means the twelve-month period ending on the last day of the month designated in the Adoption Agreement; provided that the initial Plan Year may have fewer than twelve months. 2.29 "Qualifying Distribution Event" means (i) the Separation from Service of the Participant, (ii) the date the Participant becomes Disabled, (iii) the death of the Participant, (iv) the time specified by the Participant for an In-Service or Education Distribution, (v) a Change in Control Event, or (vi) an Unforeseeable Emergency, each to the extent provided in Section 5. 6 2.30 "Seniority Date" shall have the meaning designated in the Adoption Agreement. 2.31 "Separation from Service" or "Separates from Service" means a "separation from service" within the meaning of Section 409A of the Code. 2.32 "Service" means employment by the Employer as an Employee. For purposes of the Plan, the employment relationship is treated as continuing intact while the Employee is on military leave, sick leave, or other bona fide leave of absence if the period of such leave does not exceed six months, or if longer, so long as the Employee's right to reemployment is provided either by statute or contract. If the Participant is an Independent Contractor, "Service" shall mean the period during which the contractual relationship exists between the Employer and the Participant. The contractual relationship is not terminated if the Participant anticipates a renewal of the contract or becomes an Employee. 2.33 "Service Bonus" means any bonus paid to a Participant by the Employer which is not Performance-Based Compensation. 2.34 "Specified Employee" means an employee who meets the requirements for key employee treatment under Section 416(i)(l)(A)(i), (ii) or (iii) of the Code (applied in accordance with the regulations thereunder and without regard to Section 416(i)(5) of the Code) at any time during the twelve month period ending on December 31 of each year (the "identification date"). Unless binding corporate action is taken to establish different rules for determining Specified Employees for all plans of the Company and its controlled group members that are subject to Section 409A of the Code, the foregoing rules and the other default rules under the regulations of Section 409A of the Code shall 7 apply. If the person is a key employee as of any identification date, the person is treated as a Specified Employee for the twelve-month period beginning on the first day of the fourth month following the identification date. 2.35 "Spouse" or ''Surviving Spouse" means, except as otherwise provided in the Plan, a person who is the legally married spouse or surviving spouse of a Participant. 2.36 "Unforeseeable Emergency" means an "unforeseeable emergency" within the meaning of Section 409A of the Code. 2.37 "Years of Service" means each Plan Year of Service completed by the Participant. For vesting purposes, Years of Service shall be calculated from the date designated in the Adoption Agreement and Service shall be based on service with the Company and all Participating Employers. Section 3. Participation: --------- ------------- The Committee in its discretion shall designate each Employee or Independent Contractor who is eligible to participate in the Plan. A Participant who separates from Service with the Employer and who later returns to Service will not be an Active Participant under the Plan except upon satisfaction of such terms and conditions as the Committee shall establish upon the Participant's return to Service, whether or not the Participant shall have a balance remaining in the Deferred Compensation Account under the Plan on the date of the return to Service. Section 4. Credits to Deferred Compensation Account: --------- ---------------------------------------- 4.1 Participant Deferral Credits. To the extent provided in the Adoption Agreement, each Active Participant may elect, by entering into a Participation Agreement with the Employer, to defer the receipt of Compensation from the 8 Employer by a dollar amount or percentage specified in the Participation Agreement. The amount of Compensation the Participant elects to defer, the Participant Deferral Credit, shall be credited by the Employer to the Deferred Compensation Account maintained for the Participant pursuant to Section 8. The following special provisions shall apply with respect to the Participant Deferral Credits of a Participant: 4.1.1 The Employer shall credit to the Participant's Deferred Compensation Account on each Crediting Date an amount equal to the total Participant Deferral Credit for the period ending on such Crediting Date. 4.1.2 An election pursuant to this Section 4.1 shall be made by the Participant by executing and delivering a Participation Agreement to the Committee. Except as otherwise provided in this Section 4.1, the Participation Agreement shall become effective with respect to such Participant as of the first day of January following the date such Participation Agreement is received by the Committee. A Participant's election may be changed at any time prior to the last permissible date for making the election as permitted in this Section 4.1, and shall thereafter be irrevocable. The election of a Participant shall continue in effect for subsequent years until modified by the Participant as permitted in this Section 4.1. 4.1.3 A Participant may execute and deliver a Participation Agreement to the Committee within 30 days after the date the Participant first becomes eligible to participate in the Plan to be effective as of the first payroll period next following the date the Participation Agreement is fully executed. Whether a Participant is treated as newly eligible for participation under this Section shall be determined in accordance with Section 409A of the Code and the regulations thereunder, including (i) rules that treat all elective deferral account balance plans as one plan, and (ii) rules that treat a previously eligible employee as newly eligible if his benefits had been previously distributed or if he has been ineligible for 24 months. For Compensation that is earned based upon a specified performance period (for example, an annual bonus), where a deferral election is made under this Section but after the beginning of the performance period, the election will only apply to the portion of the Compensation equal to the total amount of the Compensation for the service period multiplied by the ratio of the number of days remaining in the performance period after the election over the total number of days in the performance period. 4.1.4 A Participant may unilaterally modify a Participation Agreement (either to terminate, increase or decrease the portion of his future Compensation which is subject to deferral within the percentage limits set forth in Section 4.1 of the Adoption Agreement) by providing a written modification of the Participation Agreement to the Committee. The modification shall become effective as of the first day of January following the date such written modification is received by the Committee. 9 4.1.5 If the Participant performed services continuously from the later of the beginning of the performance period or the date upon which the performance criteria are established through the date upon which the Participant makes an initial deferral election, a Participation Agreement relating to the deferral of Performance-Based Compensation may be executed and delivered to the Committee no later than the date which is 6 months prior to the end of the performance period, provided that in no event may an election to defer Performance-Based Compensation be made after such Compensation has become readily ascertainable. 4.1.6 If the Employer has a fiscal year other than the calendar year, Compensation relating to Service in the fiscal year of the Employer (such as a bonus based on the fiscal year of the Employer), of which no amount is paid or payable during the fiscal year, may be deferred at the Participant's election if the election to defer is made not later than the close of the Employer's fiscal year next preceding the first fiscal year in which the Participant performs any services for which such Compensation is payable. 4.1.7 Compensation payable after the last day of the Participant's taxable year solely for services provided during the final payroll period containing the last day of the Participant's taxable year (i.e., December 31) is treated for purposes of this Section 4.1 as Compensation for services performed in the subsequent taxable year. 4.1.8 The Committee may from time to time establish policies or rules consistent with the requirements of Section 409A of the Code to govern the manner in which Participant Deferral Credits may be made. 4.1.9 If a Participant becomes Disabled or applies for and is eligible for a distribution on account of an Unforeseeable Emergency during a Plan Year, his deferral election for such Plan Year shall be cancelled. 4.2 Employer Credits. If designated by the Employer in the Adoption Agreement, the Employer shall cause the Committee to credit to the Deferred Compensation Account of each Active Participant an Employer Credit as determined in accordance with the Adoption Agreement. A Participant must make distribution elections with respect to any Employer Credits credited to his Deferred Compensation Account by the deadline that would apply under Section 4.1 for distribution elections with respect to Participant Deferral Credits credited at the same time, on a Participation Agreement that 10 is timely executed and delivered to the Committee pursuant to Section 4.1. 4.3 Deferred Compensation Account. All Participant Deferral Credits and Employer Credits shall be credited to the Deferred Compensation Account of the Participant as provided in Section 8. Section 5. Qualifying Distribution Events: --------- ------------------------------ 5.1 Separation from Service. If the Participant Separates from Service with the Employer, the vested balance in the Deferred Compensation Account shall be paid to the Participant by the Employer as provided in Section 7. Notwithstanding any other provisions under the Plan, no distribution shall be made earlier than six months after the date of Separation from Service (or, if earlier, the date of death) with respect to a Participant who as of the date of Separation from Service is a Specified Employee of a corporation the stock in which is traded on an established securities market or otherwise. 5.2 Disability. If the Employer designates in the Adoption Agreement that distributions are permitted under the Plan when a Participant becomes Disabled, and the Participant becomes Disabled while in Service, the vested balance in the Deferred Compensation Account shall be paid to the Participant by the Employer as provided in Section 7. 11 5.3 Death. If the Participant dies while in Service, the Employer shall pay a benefit to the Participant's Beneficiary in the amount designated in the Adoption Agreement. Payment of such benefit shall be made by the Employer as provided in Section 7. 5.4 In-Service or Education Distributions. If the Employer designates in the Adoption Agreement that in- service or education distributions are permitted under the Plan, a Participant may designate in the Participation Agreement to have a specified amount credited to the Participant's In-Service or Education Account for in-service or education distributions at the date specified by the Participant. In no event may an in-service or education distribution of an amount be made before the date that is two years after the first day of the year in which such amount was credited to the In-Service or Education Account. Notwithstanding the foregoing, if a Participant incurs a Qualifying Distribution Event prior to the date on which the entire balance in the In-Service or Education Account has been distributed, then the balance in the In-Service or Education Account on the date of the Qualifying Distribution Event shall be paid as provided under Section 7.1 for payments on such Qualifying Distribution Event. 5.5 Change in Control Event. If the Employer designates in the Adoption Agreement that distributions are permitted under the Plan upon the occurrence of a Change in Control Event, the Participant may designate in the Participation Agreement to have the vested balance in the Deferred Compensation Account paid to the Participant upon a Change in Control Event by the Employer as provided in Section 7. 5.6 Unforeseeable Emergency. If the Employer designates in the Adoption Agreement that distributions are permitted under the Plan upon the occurrence of an 12 Unforeseeable Emergency event, a distribution from the Deferred Compensation Account may be made to a Participant in the event of an Unforeseeable Emergency, subject to the following provisions: 5.6.1 A Participant may, at any time prior to his Separation from Service for any reason, make application to the Committee to receive a distribution in a lump sum of all or a portion of the vested balance in the Deferred Compensation Account (determined as of the date the distribution, if any, is made under this Section 5.6) because of an Unforeseeable Emergency. A distribution because of an Unforeseeable Emergency shall not exceed the amount required to satisfy the Unforeseeable Emergency plus amounts necessary to pay taxes reasonably anticipated as a result of such distribution, after taking into account the extent to which the Unforeseeable Emergency may be relieved through reimbursement or compensation by insurance or otherwise or by liquidation of the Participant's assets (to the extent the liquidation of such assets would not itself cause severe financial hardship) or by stopping current deferrals under the Plan pursuant to Section 4.1.9. 5.6.2 The Participant's request for a distribution on account of Unforeseeable Emergency must be made in writing to the Committee. The request must specify the nature of the financial hardship, the total amount requested to be distributed from the Deferred Compensation Account, and the total amount of the actual expense incurred or to be incurred on account of the Unforeseeable Emergency. 5.6.3 If a distribution under this Section 5.6 is approved by the Committee, such distribution will be made as soon as practicable following the date it is approved. The processing of the request shall be completed as soon as practicable from the date on which the Committee receives the properly completed written request for a distribution on account of an Unforeseeable Emergency. If a Participant's Separation from Service occurs after a request is approved in accordance with this Section 5.6.3, but prior to distribution of the full amount approved, the approval of the request shall be automatically null and void and the benefits which the Participant is entitled to receive under the Plan shall be distributed in accordance with the applicable distribution provisions of the Plan. 5.6.4 The Committee may from time to time adopt additional policies or rules consistent with the requirements of Section 409A of the Code to govern the manner in which such distributions may be made so that the Plan may be conveniently administered. Section 6. Vesting: --------- ------- A Participant shall be fully vested in the portion of his Deferred Compensation Account attributable to Participant 13 Deferral Credits, and all income, gains and losses attributable thereto. A Participant shall become fully vested in the portion of his Deferred Compensation Account attributable to Employer Credits, and income, gains and losses attributable thereto, in accordance with the vesting schedule and provisions designated by the Employer in the Adoption Agreement. If a Participant's Deferred Compensation Account is not fully vested upon Separation from Service, the portion of the Deferred Compensation Account that is not fully vested shall thereupon be forfeited. Section 7. Distribution Rules: --------- ------------------ 7.1 Payment Options. The Employer shall designate in the Adoption Agreement the payment options which may be elected by the Participant (lump sum, annual installments, or a combination of both). Different payment options may be made available for each Qualifying Distribution Event, and different payment options may be available for different types of Separations from Service, all as designated in the Adoption Agreement. The Participant shall elect in the Participation Agreement the method under which the vested balance in the Deferred Compensation Account will be distributed from among the designated payment options. The Participant may at such time elect a different method of payment for each Qualifying Distribution Event as specified in the Adoption Agreement. If the Participant is permitted by the Employer in the Adoption Agreement to elect different payment options and does not make a valid election, the vested balance in the Deferred Compensation Account will be distributed as a lump sum. 14 Notwithstanding the foregoing, if certain Qualifying Distribution Events occur prior to the date on which the vested balance of a Participant's Deferred Compensation Account is completely paid pursuant to this Section 7.1 following the occurrence of certain initial Qualifying Distribution Events, the following rules apply: 7.1.1 If the initial Qualifying Distribution Event is a Separation from Service or Disability, and the Participant subsequently dies, the remaining unpaid vested balance of a Participant's Deferred Compensation Account shall be paid as a lump sum. 7.1.2 If the initial Qualifying Distribution Event is a Change in Control Event, and any subsequent Qualifying Distribution Event occurs (except an In-Service or Education Distribution described in Section 2.29(iv)), the remaining unpaid vested balance of a Participant's Deferred Compensation Account shall be paid as provided under Section 7.1 for payments on such subsequent Qualifying Distribution Event. 7.2 Timing of Payments. Payment shall be made in the manner elected by the Participant and shall commence as soon as practicable after (but no later than 60 days after) the distribution date elected for the Qualifying Distribution Event. Notwithstanding the foregoing, if the Qualifying Distribution Event is Separation from Service as described in Section 5.1, payment shall be made in the manner elected by the Participant and no distribution shall be made earlier than 12 months after the date of Separation from Service (or, if earlier, the date of death), and payment must commence prior to 14 months after the date of Separation from Service. In the event the Participant fails to make a valid election of the payment method, the distribution will be made in a single lump sum payment. A payment may be further delayed to the extent permitted in accordance with regulations and guidance under Section 409A of the Code. 7.3 Installment Payments. If the Participant elects to receive installment payments upon a Qualifying Distribution Event, the payment of each annual installment shall be made on the anniversary of the date of the first installment payment, and the amount of the annual installment shall be adjusted on such anniversary for credits or debits to the Participant's account pursuant to Section 8 of the Plan. Such adjustment shall be made by dividing the balance in the Deferred Compensation Account on such date by the number of annual installments remaining to be paid hereunder; provided 15 that the last annual installment due under the Plan shall be the entire amount credited to the Participant's account on the date of payment. 7.4 De Minimis Amounts. Notwithstanding any payment election made by the Participant, if the Employer designates a pre-determined de minimis amount in the Adoption Agreement, the vested balance in the Deferred Compensation Account of the Participant will be distributed in a single lump sum payment if at the time of a permitted Qualifying Distribution Event the vested balance does not exceed such pre-determined de minimis amount; provided, however, that such distribution will be made only where the Qualifying Distribution Event is a Separation from Service, death, Disability (if applicable) or Change in Control Event (if applicable). Such payment shall be made on or before the later of (i) December 31 of the calendar year in which the Qualifying Distribution Event occurs, or (ii) the date that is 2-1/2 months after the Qualifying Distribution Event occurs. In addition, the Employer may distribute a Participant's vested balance at any time if the balance does not exceed the limit in Section 402(g)(1)(B) of the Code and results in the termination of the Participant's entire interest in the Plan as provided under Section 409A of the Code. 7.5 Subsequent Elections. With the consent of the Committee, a Participant may delay or change the method of payment of the Deferred Compensation Account subject to the following requirements: 7.5.1 The new election may not take effect until at least 12 months after the date on which the new election is made. 7.5.2 If the new election relates to a payment for a Qualifying Distribution Event other than the death of the Participant, the Participant becoming Disabled, or an Unforeseeable Emergency, the new election must provide for the deferral of the payment for a period of at least five years from the date such payment would otherwise have been made. 16 7.5.3 If the new election relates to a payment from the In-Service or Education Account, the new election must be made at least 12 months prior to the date of the first scheduled payment from such account. For purposes of this Section 7.5 and Section 7.6, a payment is each separately identified amount to which the Participant is entitled under the Plan; provided, that entitlement to a series of installment payments is treated as the entitlement to a single payment. 7.6 Acceleration Prohibited. The acceleration of the time or schedule of any payment due under the Plan is prohibited except as expressly provided in regulations and administrative guidance promulgated under Section 409A of the Code (such as accelerations for domestic relations orders and employment taxes). It is not an acceleration of the time or schedule of payment if the Employer waives or accelerates the vesting requirements applicable to a benefit under the Plan. Section 8. Accounts; Deemed Investment; Adjustments --------- ---------------------------------------- to Account: ---------- 8.1 Accounts. The Committee shall establish a book reserve account, entitled the "Deferred Compensation Account," on behalf of each Participant. The Committee shall also establish an In-Service or Education Account as a part of the Deferred Compensation Account of each Participant, if applicable. The amount credited to the Deferred Compensation Account shall be adjusted pursuant to the provisions of Section 8.3. 8.2 Deemed Investments. The Deferred Compensation Account of a Participant shall be credited with an investment return determined as if the account were invested in one or more investment funds made available by the Committee. The Participant shall elect the investment funds in which his Deferred Compensation Account shall be deemed to be invested. Such election shall be made in the manner prescribed by the Committee and shall take effect upon the 17 entry of the Participant into the Plan. The investment election of the Participant shall remain in effect until a new election is made by the Participant. In the event the Participant fails for any reason to make an effective election of the investment return to be credited to his account, the investment return shall be determined by the Committee. 8.3 Adjustments to Deferred Compensation Account. With respect to each Participant who has a Deferred Compensation Account under the Plan, the amount credited to such account shall be adjusted by the following debits and credits, at the times and in the order stated: 8.3.1 The Deferred Compensation Account shall be debited each business day with the total amount of any payments made from such account since the last preceding business day to him or for his benefit. 8.3.2 The Deferred Compensation Account shall be credited on each Crediting Date with the total amount of any Participant Deferral Credits and Employer Credits to such account since the last preceding Crediting Date. 8.3.3 The Deferred Compensation Account shall be credited or debited on each day securities are traded on a national stock exchange with the amount of deemed investment gain or loss resulting from the performance of the investment funds elected by the Participant in accordance with Section 8.2. The amount of such deemed investment gain or loss shall be determined by the Committee and such determination shall be final and conclusive upon all concerned. Section 9. Administration by Committee: --------- --------------------------- The Committee shall maintain records of its deliberations and decisions. The minutes of its proceedings shall be conclusive proof of the facts of the operation of the Plan. 9.1 Membership of Committee. If the Committee consists of individuals appointed by the Board, they will serve at the pleasure of the Board. Any member of the Committee may resign, and his successor, if any, shall be appointed by the Board. 9.2 General Administration. The Committee shall be responsible for the operation and administration of the Plan and for carrying out its provisions. The Committee shall have the full authority and discretion to make, amend, 18 interpret, and enforce all appropriate rules and regulations for the administration of this Plan and decide or resolve any and all questions, including interpretations of this Plan, as may arise in connection with this Plan. Any such action taken by the Committee shall be final and conclusive on any party. To the extent the Committee has been granted discretionary authority under the Plan, the Committee's prior exercise of such authority shall not obligate it to exercise its authority in a like fashion thereafter. The Committee shall be entitled to rely conclusively upon all tables, valuations, certificates, opinions and reports furnished by any actuary, accountant, controller, counsel or other person employed or engaged by the Employer with respect to the Plan. The Committee may, from time to time, employ agents and delegate to such agents, including employees of the Employer, such administrative or other duties as it sees fit. 9.3 Indemnification. To the extent not covered by insurance, the Employer shall indemnify the Committee, each employee, officer, director, and agent of the Employer, and all persons formerly serving in such capacities, against any and all liabilities or expenses, including all legal fees relating thereto, arising in connection with the exercise of their duties and responsibilities with respect to the Plan, provided however that the Employer shall not indemnify any person for liabilities or expenses due to that person's own gross negligence or willful misconduct Section 10. Contractual Liability: ---------- --------------------- 10.1 Contractual Liability. Unless otherwise elected in the Adoption Agreement, the Company shall be obligated to make all payments hereunder. This obligation shall constitute a contractual liability of the Company to the Participants, and such payments shall be made from the general funds of the Company. The Company shall not be required to establish 19 or maintain any special or separate fund, or otherwise to segregate assets to assure that such payments shall be made, and the Participants shall not have any interest in any particular assets of the Company by reason of its obligations hereunder. To the extent that any person acquires a right to receive payment from the Company, such right shall be no greater than the right of an unsecured creditor of the Company. 10.2 Trust. The Employer may establish a trust to assist it in meeting its obligations under the Plan. Any such trust shall conform to the requirements of a grantor trust under Revenue Procedures 92-64 and 92-65 and at all times during the continuance of the trust the principal and income of the trust shall be subject to claims of general creditors of the Employer under federal and state law. The establishment of such a trust would not be intended to cause Participants to realize current income on amounts contributed thereto, and the trust would be so interpreted and administered. Section 11. Allocation of Responsibilities: ---------- ------------------------------ The persons responsible for the Plan and the duties and responsibilities allocated to each are as follows: 11.1 Board. (i) To amend the Plan; (ii) To appoint and remove members of the Committee; and (iii) To terminate the Plan as permitted in Section 14 11.2 Committee. (i) To designate Participants; (ii) To interpret the provisions of the Plan and to determine the rights of the Participants under the Plan, except to the extent otherwise provided in Section 16 relating to claims procedure; 20 (iii) To administer the Plan in accordance with its terms, except to the extent powers to administer the Plan are specifically delegated to another person or persons as provided in the Plan; (iv) To account for the amount credited to the Deferred Compensation Account of a Participant; (v) To direct the Employer in the payment of benefits; (vi) To file such reports as may be required with the United States Department of Labor, the Internal Revenue Service and any other government agency to which reports may be required to be submitted from time to time; and (vii) To administer the claims procedure to the extent provided in Section 16. Section 12. Benefits Not Assignable; Facility of Payments: ---------- --------------------------------------------- 12.1 Benefits Not Assignable. No portion of any benefit credited or paid under the Plan with respect to any Participant shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge, and any attempt so to anticipate, alienate, sell, transfer, assign, pledge, encumber or charge the same shall be void, nor shall any portion of such benefit be in any manner payable to any assignee, receiver or any one trustee, or be liable for his debts, contracts, liabilities, engagements or torts. Notwithstanding the foregoing, in the event that all or any portion of the benefit of a Participant is transferred to the former Spouse of the Participant incident to a divorce, the Committee shall maintain such amount for the benefit of the former Spouse until distributed in the manner required by an order of any court having jurisdiction over the divorce, and the former Spouse shall be entitled to the same rights as the Participant with respect to such benefit. 12.2 Plan-Approved Domestic Relations Orders. The Committee shall establish procedures for determining whether an order directed to the Plan is a Plan-Approved Domestic Relations Order. If the Committee determines that an order 21 is a Plan-Approved Domestic Relations Order, the Committee shall cause the payment of amounts pursuant to or segregate a separate account as provided by (and to prevent any payment or act which might be inconsistent with) the Plan- Approved Domestic Relations Order. 12.3 Payments to Minors and Others. If any individual entitled to receive a payment under the Plan shall be physically, mentally or legally incapable of receiving or acknowledging receipt of such payment, the Committee, upon the receipt of satisfactory evidence of his incapacity and satisfactory evidence that another person or institution is maintaining him and that no guardian or committee has been appointed for him, may cause any payment otherwise payable to him to be made to such person or institution so maintaining him. Payment to such person or institution shall be in full satisfaction of all claims by or through the Participant to the extent of the amount thereof. Section 13. Beneficiary: ---------- ----------- The Participant's beneficiary shall be the person, persons, entity or entities designated by the Participant on the beneficiary designation form provided by and filed with the Committee or its designee. If the Participant does not designate a beneficiary, the beneficiary shall be his Surviving Spouse. If the Participant does not designate a beneficiary and has no Surviving Spouse, the beneficiary shall be the Participant's estate. The designation of a beneficiary may be changed or revoked only by filing a new beneficiary designation form with the Committee or its designee. If a beneficiary (the "primary beneficiary") is receiving or is entitled to receive payments under the Plan and dies before receiving all of the payments due him, the balance to which he is entitled shall be paid to the contingent beneficiary, if any, named in the Participant's 22 current beneficiary designation form. If there is no contingent beneficiary, the balance shall be paid to the estate of the primary beneficiary. Any beneficiary may disclaim all or any part of any benefit to which such beneficiary shall be entitled hereunder by filing a written disclaimer with the Committee before payment of such benefit is to be made. Such a disclaimer shall be made in a form satisfactory to the Committee and shall be irrevocable when filed. Any benefit disclaimed shall be payable from the Plan in the same manner as if the beneficiary who filed the disclaimer had predeceased the Participant. Section 14. Amendment and Termination of Plan: ---------- --------------------------------- The Company may amend any provision of the Plan or terminate the Plan at any time; provided, that in no event shall such amendment or termination reduce the balance in any Participant's Deferred Compensation Account as of the date of such amendment or termination, nor shall any such amendment affect the terms of the Plan relating to the payment of such Deferred Compensation Account. Notwithstanding the foregoing, the following special provisions shall apply: 14.1 Termination in the Discretion of the Employer. Except as otherwise provided in Sections 14.2, the Company in its discretion may terminate the Plan and distribute benefits to Participants subject to the following requirements and any others specified under Section 409A of the Code: 14.1.1 All arrangements sponsored by the Employer that would be aggregated with the Plan under Section 1.409A- l(c) of the Treasury Regulations are terminated. 14.1.2 No payments other than payments that would be payable under the terms of the Plan if the termination had not occurred are made within 12 months of the termination date. 14.1.3 All benefits under the Plan are paid within 14 months of the termination date. 23 14.1.4 The Employer does not adopt a new arrangement that would be aggregated with the Plan under Section 1.409A- 1(c) of the Treasury Regulations providing for the deferral of compensation at any time within 3 years following the date of termination of the Plan. 14.1.5 The termination does not occur proximate to a downturn in the financial health of the Employer. 14.2 Termination Upon Change in Control Event. If the Company terminates the Plan within thirty days preceding or twelve months following a Change in Control Event, the Deferred Compensation Account of each Participant shall become fully vested and payable to the Participant in a lump sum within twelve months following the date of termination, subject to the requirements of Section 409A of the Code. Section 15. Communication to Participants: ---------- ----------------------------- The Employer shall make a copy of the Plan available for inspection by Participants and their beneficiaries during reasonable hours at the principal office of the Employer. Section 16. Claims Procedure: ---------- ---------------- The following claims procedure shall apply with respect to the Plan: 16.1 Filing of a Claim for Benefits. If a Participant or Beneficiary (the "claimant") believes that he is entitled to benefits under the Plan which are not being paid to him or which are not being accrued for his benefit, he shall file a written claim therefore with the Committee. 16.2 Notification to Claimant of Decision. Within 90 days after receipt of a claim by the Committee (or within 180 days if special circumstances require an extension of time), the Committee shall notify the claimant of the decision with regard to the claim. In the event of such special circumstances requiring an extension of time, there 24 shall be furnished to the claimant prior to expiration of the initial 90-day period written notice of the extension, which notice shall set forth the special circumstances and the date by which the decision shall be furnished. If such claim shall be wholly or partially denied, notice thereof shall be in writing and worded in a manner calculated to be understood by the claimant, and shall set forth: (i) the specific reason or reasons for the denial; (ii) specific reference to pertinent provisions of the Plan on which the denial is based; (iii) a description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary; and (iv) an explanation of the procedure for review of the denial and the time limits applicable to such procedures, including a statement of the claimant's right to bring a civil action under ERISA following an adverse benefit determination on review. Notwithstanding the foregoing, if the claim relates to a disability determination, the Committee shall notify the claimant of the decision within 45 days (which may be extended for an additional 30 days if required by special circumstances). 16.3 Procedure for Review. Within 60 days following receipt by the claimant of notice denying his claim, in whole or in part, or, if such notice shall not be given, within 60 days following the latest date on which such notice could have been timely given, the claimant may appeal denial of the claim by filing a written application for review with the Committee. Following such request for review, the Committee shall fully and fairly review the decision denying the claim. Prior to the decision of the Committee, the claimant shall be given an opportunity to review pertinent documents and to submit issues and comments in writing. 25 16.4 Decision on Review. The decision on review of a claim denied in whole or in part by the Committee shall be made in the following manner: 16.4.1 Within 60 days following receipt by the Committee of the request for review (or within 120 days if special circumstances require an extension of time), the Committee shall notify the claimant in writing of its decision with regard to the claim. In the event of such special circumstances requiring an extension of time, written notice of the extension shall be furnished to the claimant prior to the commencement of the extension. Notwithstanding the foregoing, if the claim relates to a disability determination, the Committee shall notify the claimant of the decision within 45 days (which may be extended for an additional 45 days if required by special circumstances). 16.4.2 With respect to a claim that is denied in whole or in part, the decision on review shall set forth specific reasons for the decision, shall be written in a manner calculated to be understood by the claimant, and shall set forth: (i) the specific reason or reasons for the adverse determination; (ii) specific reference to pertinent Plan provisions on which the adverse determination is based; (iii) a statement that the claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to the claimant's claim for benefits; and (iv) a statement describing any voluntary appeal procedures offered by the Plan and the claimant's right to obtain the information about such procedures, as well as a statement of the claimant's right to bring an action under ERISA section 502(a). 16.4.3 The decision of the Committee shall be final and conclusive. 16.5 Action by Authorized Representative of Claimant. All actions set forth in this Section 16 to be taken by the claimant may likewise be taken by a representative of the claimant duly authorized by him to act in his behalf on such matters. The Committee may require such evidence as either may reasonably deem necessary or advisable of the authority to act of any such representative. Section 17. Miscellaneous Provisions: ---------- ------------------------ 26 17.1 Set off. Notwithstanding any other provision of this Plan, the Employer may reduce the amount of any payment otherwise payable to or on behalf of a Participant hereunder (net of any required withholdings) at the time payment is due by the amount of any loan, cash advance, extension of credit or other obligation of the Participant to the Employer that is then due and payable, and the Participant shall be deemed to have consented to such reduction. In addition, the Employer may at any time offset a Participant's Deferral Compensation Account by an amount up to $5,000 to collect any such amount in accordance with the requirements of Section 409A of the Code. 17.2 Notices. Each Participant who is not in Service and each Beneficiary shall be responsible for furnishing the Committee or its designee with his current address for the mailing of notices and benefit payments. Any notice required or permitted to be given to such Participant or Beneficiary shall be deemed given if directed to such address and mailed by regular United States mail, first class, postage prepaid. If any check mailed to such address is returned as undeliverable to the addressee, mailing of checks will be suspended until the Participant or Beneficiary furnishes the proper address. This provision shall not be construed as requiring the mailing of any notice or notification otherwise permitted to be given by posting or by other publication. 17.3 Lost Distributees. A benefit shall be deemed forfeited if the Committee is unable to locate the Participant or Beneficiary to whom payment is due on or before the fifth anniversary of the date payment is to be made or commence; provided, that the deemed investment rate of return pursuant to Section 8.2 shall cease to be applied to the Participant's account following the first anniversary of such date; provided further, however, that such benefit 27 shall be reinstated if a valid claim is made by or on behalf of the Participant or Beneficiary for all or part of the forfeited benefit. 17.4 Reliance on Data. The Employer and the Committee shall have the right to rely on any data provided by the Participant or by any Beneficiary. Representations of such data shall be binding upon any party seeking to claim a benefit through a Participant, and the Employer and the Committee shall have no obligation to inquire into the accuracy of any representation made at any time by a Participant or Beneficiary. 17.5 Receipt and Release for Payments. Subject to the provisions of Section 17.1, any payment made from the Plan to or with respect to any Participant or Beneficiary, or pursuant to a disclaimer by a Beneficiary, shall, to the extent thereof, be in full satisfaction of all claims hereunder against the Plan and the Employer with respect to the Plan. The recipient of any payment from the Plan may be required by the Committee, as a condition precedent to such payment, to execute a receipt and release with respect thereto in such form as shall be acceptable to the Committee. 17.6 Headings. The headings and subheadings of the Plan have been inserted for convenience of reference and are to be ignored in any construction of the provisions hereof. 17.7 Continuation of Employment. The establishment of the Plan shall not be construed as conferring any legal or other rights upon any Employee or any persons for continuation of employment, nor shall it interfere with the right of the Employer to discharge any Employee or to deal with him without regard to the effect thereof under the Plan. 28 17.8 Merger or Consolidation; Assumption of Plan. No Employer shall consolidate or merge into or with another corporation or entity, or transfer all or substantially all of its assets to another corporation, partnership, trust or other entity (a "Successor Entity") unless such Successor Entity shall assume the rights, obligations and liabilities of the Employer under the Plan and upon such assumption, the Successor Entity shall become obligated to perform the terms and conditions of the Plan. Nothing herein shall prohibit the assumption of the obligations and liabilities of the Employer under the Plan by any Successor Entity. 17.9 Construction. The Employer shall designate in the Adoption Agreement the state according to whose laws the provisions of the Plan shall be construed and enforced, except to the extent that such laws are superseded by ERISA and the applicable requirements of the Code. 17.10 Taxes. The Employer or other payor may withhold a benefit payment under the Plan or a Participant's wages, or the Employer may reduce a Participant's Account balance, in order to meet any federal, state, or local or employment tax withholding obligations with respect to Plan benefits, as permitted under Section 409A of the Code. The Employer or other payor shall report Plan payments and other Plan-related information to the appropriate governmental agencies as required under applicable laws. Section 18. Transition Rules: ---------- ---------------- This Section 18 does not apply to plans newly established on or after January 1, 2009. 18.1 2005 Election Termination. Notwithstanding Section 4.1.4, at any time during 2005, a Participant may terminate a Participation Agreement, or modify a Participation Agreement to reduce the amount of Compensation subject to the deferral election, so long as the Compensation subject to the terminated or modified Participation Agreement is includible in the income of the 29 Participant in 2005 or, if later, in the taxable year in which the amounts are earned and vested. 18.2 2005 Deferral Election. The requirements of Section 4.1.2 relating to the timing of the Participation Agreement shall not apply to any deferral elections made on or before March 15, 2005, provided that (a) the amounts to which the deferral election relate have not been paid or become payable at the time of the election, (b) the Plan was in existence on or before December 31, 2004, (c) the election to defer compensation is made in accordance with the terms of the Plan as in effect on December 31, 2005 (other than a requirement to make a deferral election after March 15, 2005), and (d) the Plan is otherwise operated in accordance with the requirements of Section 409A of the Code. 18.3 2005 Termination of Participation; Distribution. Notwithstanding anything in this Plan to the contrary, at any time during 2005, a Participant may terminate his or her participation in the Plan and receive a distribution of his Deferred Compensation Account balance on account of that termination, so long as the full amount of such distribution is includible in the Participant's income in 2005 or, if later, in the taxable year of the Participant in which the amount is earned and vested. 18.4 Payment Elections. Notwithstanding the provisions of Sections 7.1 or 7.5 of the Plan, a Participant may elect on or before December 31, 2008, the time or form of payment of amounts subject to Section 409A of the Code provided that such election applies only to amounts that would not otherwise be payable in the year of the election and does not cause an amount to paid in the year of the election that would not otherwise be payable in such year. 30 EX-31.1 3 wernexh31ceo3q09.txt WERNER ENTERPRISES, INC. CEO CERTIFICATION 9/30/09 EXHIBIT 31.1 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO RULES 13a-14(a) AND 15d-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934 (SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002) I, Gregory L. Werner, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Werner Enterprises, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a- 15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d- 15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide a reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 2, 2009 ------------------------------ /s/ Gregory L. Werner - ------------------------------------- Gregory L. Werner President and Chief Executive Officer EX-31.2 4 wernexh31cfo3q09.txt WERNER ENTERPRISES, INC. CFO CERTIFICATION 9/30/09 EXHIBIT 31.2 CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO RULES 13a-14(a) AND 15d-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934 (SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002) I, John J. Steele, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Werner Enterprises, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a- 15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d- 15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial r eporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 2, 2009 ----------------------------------- /s/ John J. Steele - ------------------------------------------ John J. Steele Executive Vice President, Treasurer and Chief Financial Officer EX-32.1 5 wernexh32ceo3q09.txt WERNER ENTERPRISES, INC. CEO CERTIFICATION 9/30/09 EXHIBIT 32.1 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 (SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002) In connection with the Quarterly Report of Werner Enterprises, Inc. (the "Company") on Form 10-Q for the period ending September 30, 2009 (the "Report"), filed with the Securities and Exchange Commission, I, Gregory L. Werner, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. November 2, 2009 /s/ Gregory L. Werner - ---------------- ------------------------------------- Gregory L. Werner President and Chief Executive Officer EX-32.2 6 wernexh32cfo3q09.txt WERNER ENTERPRISES, INC. CFO CERTIFICATION 9/30/09 EXHIBIT 32.2 CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 (SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002) In connection with the Quarterly Report of Werner Enterprises, Inc. (the "Company") on Form 10-Q for the period ending September 30, 2009 (the "Report"), filed with the Securities and Exchange Commission, I, John J. Steele, Executive Vice President, Treasurer and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. November 2, 2009 /s/ John J. Steele - ---------------- --------------------------------------- John J. Steele Executive Vice President, Treasurer and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----