10-K 1 wern-20151231x10k.htm 10-K 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
FORM 10-K
 
 
[Mark one]
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to __________
Commission File Number: 0-14690
 
WERNER ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
 
 
NEBRASKA
 
47-0648386
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
14507 FRONTIER ROAD
POST OFFICE BOX 45308
OMAHA, NEBRASKA
 
68145-0308
(Address of principal executive offices)
 
(Zip Code)
(402) 895-6640
(Registrant’s telephone number, including area code)
 
 
Securities registered pursuant to Section 12(b) of the Act:
 Title of Each Class
 
Name of Each Exchange on Which Registered
Common Stock, $0.01 Par Value
 
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  ý    No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  ¨    No  ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý   No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
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
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Accelerated filer
o  
 
Non-accelerated filer
o  
 
Smaller reporting company
o  
 
 
 
  
 
 
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
The aggregate market value of the common equity held by non-affiliates of the Registrant (assuming for these purposes that all executive officers and Directors are “affiliates” of the Registrant) as of June 30, 2015, the last business day of the Registrant's most recently completed second fiscal quarter, was approximately $1.186 billion (based on the closing sale price of the Registrant's Common Stock on that date as reported by Nasdaq).
As of February 18, 2016, 72,042,271 shares of the registrant’s common stock, par value $0.01 per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement of Registrant for the Annual Meeting of Stockholders to be held May 10, 2016, are incorporated in Part III of this report.



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





This Annual Report on Form 10-K for the year ended December 31, 2015 (this “Form 10-K”) and the documents incorporated herein by reference contain forward-looking statements based on expectations, estimates and projections as of the date of this filing. Actual results may differ materially from those expressed in such forward-looking statements. For further guidance, see Item 1A of Part I and Item 7 of Part II of this Form 10-K.
PART I
ITEM 1.
BUSINESS
General
We are a transportation and logistics company engaged primarily in transporting truckload shipments of general commodities in both interstate and intrastate commerce. We also provide logistics services through our Value Added Services (“VAS”) division. We believe we are one of the largest truckload carriers in the United States (based on total operating revenues), and our headquarters are located in Omaha, Nebraska, near the geographic center of our truckload service area. We were founded in 1956 by Clarence L. Werner, who started the business with one truck at the age of 19 and serves as our Chairman and Chief Executive Officer. We were incorporated in the State of Nebraska in September 1982 and completed our initial public offering in June 1986 with a fleet of 632 trucks as of February 1986. At the end of 2015, we had a fleet of 7,450 trucks, of which 6,635 were company-operated and 815 were owned and operated by independent contractors. Our VAS division operated an additional 62 intermodal drayage trucks at the end of 2015.
We have two reportable segments – Truckload Transportation Services (“Truckload”) and VAS. You can find financial information regarding these segments and the geographic areas in which we conduct business in the Notes to Consolidated Financial Statements under Item 8 of this Form 10-K.
Our Truckload segment is comprised of the One-Way Truckload and Specialized Services units. One-Way Truckload includes the following operating fleets: (i) the medium-to-long-haul van (“Van”) fleet transports a variety of consumer nondurable products and other commodities in truckload quantities over irregular routes using dry van trailers; (ii) the expedited (“Expedited”) fleet provides time-sensitive truckload services utilizing driver teams; and (iii) the regional short-haul (“Regional”) fleet provides comparable truckload van service within geographic regions across the United States. Specialized Services provides truckload services dedicated to a specific customer, generally for a retail distribution center or manufacturing facility, including services for products requiring specialized trailers such as flatbed or temperature-controlled trailers. Our Truckload fleets operate throughout the 48 contiguous U.S. states pursuant to operating authority, both common and contract, granted by the U.S. Department of Transportation (“DOT”) and pursuant to intrastate authority granted by various U.S. states. We also have authority to operate in several provinces of Canada and to provide through-trailer service into and out of Mexico. The principal types of freight we transport include retail store merchandise, consumer products, grocery products and manufactured products. We focus on transporting consumer nondurable products that generally ship more consistently throughout the year and whose volumes are generally more stable during a slowdown in the economy.
Our VAS segment is a non-asset-based transportation and logistics provider. VAS is comprised of the following four operating units that provide non-trucking services to our customers: (i) truck brokerage (“Brokerage”) uses contracted carriers to complete customer shipments; (ii) freight management (“Freight Management”) offers a full range of single-source logistics management services and solutions; (iii) the intermodal (“Intermodal”) unit offers rail transportation through alliances with rail and drayage providers as an alternative to truck transportation; and (iv) Werner Global Logistics international (“WGL”) provides complete management of global shipments from origin to destination using a combination of air, ocean, truck and rail transportation modes. Our Brokerage unit had transportation services contracts with approximately 12,920 carriers as of December 31, 2015.
Marketing and Operations
Our business philosophy is to provide superior on-time customer service at a significant value for our customers. To accomplish this, we operate premium modern tractors and trailers. This equipment has fewer mechanical and maintenance issues and helps attract and retain experienced drivers. We continually develop our business processes and technology to improve customer service and driver retention. We focus on customers who value the broad geographic coverage, diversified truck and logistics services, equipment capacity, technology, customized services and flexibility available from a large financially-stable transportation and logistics provider.
We operate in the truckload and logistics sectors of the transportation industry. Our Truckload segment provides specialized services to customers based on (i) each customer’s trailer needs (such as van, flatbed and temperature-controlled trailers), (ii) geographic area (regional and medium-to-long-haul van, including transport throughout Mexico and Canada), (iii) time-sensitive shipments (expedited) or (iv) conversion of their private fleet to us (dedicated). In 2015, trucking revenues (net of fuel

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surcharge) and trucking fuel surcharge revenues accounted for 78% of total operating revenues, and non-trucking and other operating revenues (primarily VAS revenues) accounted for 22% of total operating revenues. Our VAS segment manages the transportation and logistics requirements for customers, providing customers with additional sources of truck capacity, alternative modes of transportation, a global delivery network and systems analysis to optimize transportation needs. VAS services include (i) truck brokerage, (ii) freight management, (iii) intermodal transport and (iv) international. The VAS international services are provided through our domestic and global subsidiary companies and include (i) ocean, air and ground transportation services, (ii) door-to-door freight forwarding and (iii) customs brokerage. Most VAS international services are provided throughout North America and Asia with additional coverage throughout Australia, Europe, South America and Africa. VAS is a non-asset-based transportation and logistics provider that is highly dependent on qualified associates, information systems and the services of qualified third-party capacity providers. You can find the revenues generated by services that accounted for more than 10% of our consolidated revenues, consisting of Truckload and VAS, for the last three years under Item 7 of Part II of this Form 10-K.
We have a diversified freight base but are dependent on a relatively small number of customers for a significant portion of our freight. During 2015, our largest 5, 10, 25 and 50 customers comprised 27%, 45%, 63% and 76% of our revenues, respectively. No single customer generated more than 10% of our revenues in 2015. The industry groups of our top 50 customers are 44% retail and consumer products, 28% grocery products, 13% manufacturing/industrial and 15% logistics and other. Many of our One-Way Truckload customer contracts may be terminated upon 30 days’ notice, which is common in the truckload industry. Most of our Specialized Services customer contracts are one to three years in length and may be terminated by either party upon 30 to 90 days’ notice following the expiration of the contract’s first year, and we review rates in these contracts annually.
Virtually all of our company and independent contractor tractors are equipped with communication devices. These devices enable us and our drivers to conduct two-way communication using standardized and freeform messages. This technology also allows us to plan and monitor shipment progress. We automatically monitor truck movement and obtain specific data on the location of all trucks in the fleet every 15 minutes. Using the real-time global positioning data obtained from the devices, we have advanced application systems to improve customer and driver service. Examples of such application systems include: (i) an electronic logging system which records and monitors drivers’ hours of service and integrates with our information systems to pre-plan driver shipment assignments based on real-time available driving hours; (ii) software that pre-plans shipments drivers can trade enroute to meet driver home-time needs without compromising on-time delivery schedules; and (iii) automated “possible late load” tracking that informs the operations department of trucks possibly operating behind schedule, allowing us to take preventive measures to avoid late deliveries. In 1998, we began a successful pilot program and subsequently became the first trucking company in the United States to receive an exemption from DOT to use a global positioning system-based paperless log system as an alternative to the paper logbooks traditionally used by truck drivers to track their daily work activities. We have used electronic logging devices (“ELDs”) to monitor and enforce drivers' hours of service since 1996.
Seasonality
In the trucking industry, revenues generally follow a seasonal pattern. Peak freight demand has historically occurred in the months of September, October and November. After the December holiday season and during the remaining winter months, our freight volumes are typically lower because some customers reduce shipment levels. Our operating expenses have historically been higher in the winter months due primarily to decreased fuel efficiency, increased cold weather-related maintenance costs of revenue equipment and increased insurance and claims costs attributed to adverse winter weather conditions. We attempt to minimize the impact of seasonality through our marketing program by seeking additional freight from certain customers during traditionally slower shipping periods and focusing on transporting consumer nondurable products. Revenue can also be affected by adverse weather conditions, holidays and the number of business days that occur during a given period because revenue is directly related to the available working days of shippers.
Employee Associates and Independent Contractors
As of December 31, 2015, we employed 9,192 drivers; 664 mechanics and maintenance associates for the trucking operation; 1,306 office associates for the trucking operation; and 1,163 associates for VAS, international and other non-trucking operations. We also had 815 independent contractors who provide both a tractor and a driver or drivers. None of our U.S., Canadian or Chinese associates are represented by a collective bargaining unit, and we consider relations with our associates to be good.
We recognize that our professional driver workforce is one of our most valuable assets. Most of our professional drivers are compensated on a per-mile basis. For most company-employed drivers, the rate per mile generally increases with the drivers’ length of service. Professional drivers may earn additional compensation through incentive performance pay programs and for performing additional work associated with their job (such as loading and unloading freight and making extra stops and shorter mileage trips).

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At times, there are driver shortages in the trucking industry. Availability of experienced drivers can be affected by (i) changes in the demographic composition of the workforce; (ii) alternative employment opportunities other than truck driving that become available in the economy; and (iii) individual drivers’ desire to be home more frequently. The driver market remained very challenging in 2015, and the supply of recent driver training school graduates continues to tighten. We believe that a declining number of, and increased competition for, driver training school graduates, a gradually declining national unemployment rate, aging truck driver demographics and increased truck safety regulations are tightening driver supply. We believe our strong mileage utilization, financial strength and safety record are attractive to drivers when compared to many other carriers. Additionally, we believe our large percentage of driving jobs in shorter-haul operations (such as Dedicated and Regional) that allow drivers to return home more often is attractive to drivers.
We utilize recent driver training school graduates as a significant source of new drivers. These drivers have completed a training program at a driver training school, hold a commercial driver’s license (“CDL”) and are further trained by Werner-certified trainer drivers prior to that driver becoming a solo driver with their own truck. As mentioned above, the recruiting environment for recent driver training school graduates remained challenging in 2015. The availability of these drivers has been negatively impacted by the decreased availability of student loan financing for driver training schools. We own two driver training schools that operate a total of 15 driver training locations to assist with the training and development of drivers for our company and the industry.
As economic conditions improve, competition for experienced drivers and recent driver training school graduates may increase and could become more challenging in 2016. We cannot predict whether we will experience future shortages in the availability of experienced drivers or driver training school graduates. If such a shortage were to occur and additional driver pay rate increases became necessary to attract and retain experienced drivers or driver training school graduates, our results of operations would be negatively impacted to the extent that we could not obtain corresponding freight rate increases.
We also recognize that independent contractors complement our company-employed drivers. Independent contractors supply their own tractors and drivers and are responsible for their operating expenses. Independent contractors also provide us with another source of drivers to support our fleet. We intend to maintain our emphasis on independent contractor recruiting, in addition to company driver recruitment. We, along with others in the trucking industry, however, continue to experience independent contractor recruitment and retention difficulties that have persisted over the past several years. Challenging operating conditions, including inflationary cost increases that are the responsibility of independent contractors and a shortage of financing available to independent contractors for equipment purchases, continue to make it difficult to recruit and retain independent contractors. If a shortage of independent contractors occurs, additional increases in per mile settlement rates (for independent contractors) and driver pay rates (for company drivers) may become necessary to attract and retain a sufficient number of drivers. These increases could negatively affect our results of operations to the extent that we could not obtain corresponding freight rate increases.
Revenue Equipment
As of December 31, 2015, we operated 6,635 company tractors and 815 tractors owned by independent contractors in our Truckload segment. Our VAS segment operated an additional 62 company tractors at the end of 2015. The company tractors were manufactured by Freightliner (a Daimler company), Peterbilt and Kenworth (both divisions of PACCAR) and Volvo. We adhere to a comprehensive maintenance program for both company tractors and trailers. We inspect independent contractor tractors prior to acceptance for compliance with Werner and DOT operational and safety requirements. We periodically inspect these tractors, in a manner similar to company tractor inspections, to monitor continued compliance. We also regulate the vehicle speed of company trucks to improve safety and fuel efficiency, and we have them set to not exceed 65 miles per hour.
The average age of our company truck fleet was 1.9 years at December 31, 2015, compared to 2.2 years at December 31, 2014. We increased our capital expenditures in 2015 to lower the average age of our truck fleet, and we currently expect to reduce our average truck age to approximately 1.5 years during 2016. As of December 31, 2015, nearly all of our company tractors had engines that comply with the U.S. Environmental Protection Agency (“EPA”) engine emissions standards that became effective for newly manufactured engines beginning in January 2010. All of our trucks are equipped with satellite tracking devices. Most of our new trucks purchased in 2015 have collision mitigation safety systems and a majority of new trucks purchased in 2015 have automatic manual transmissions.
We operated 24,090 company-owned trailers at December 31, 2015. This total is comprised of 22,560 dry vans; 184 flatbeds; 1,308 temperature-controlled trailers; and 38 specialized trailers. Most of our trailers were manufactured by Wabash National Corporation. As of December 31, 2015, nearly all of our dry van trailer fleet consisted of 53-foot composite (DuraPlate®) trailers. We also provide other trailer lengths, such as 48-foot and 57-foot trailers, to meet the specialized needs of certain customers. Approximately one third of our trailer fleet has satellite tracking; this is expected to grow to two thirds of our trailer fleet by the end of 2016.

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Our wholly-owned subsidiary, Fleet Truck Sales, sells our used trucks and trailers. Fleet Truck Sales has been in business since 1992 and operates in six locations. We may also trade used trucks to original equipment manufacturers when purchasing new trucks.
Fuel
In 2015, we purchased approximately 98% of our fuel from a predetermined network of fuel stops throughout the United States. Of this 98%, approximately 96% was purchased from three large fuel stop vendors. We negotiate discounted pricing based on historical purchase volumes with these fuel stop vendors. Bulk fueling facilities are maintained at seven of our terminals and one dedicated customer location.
Shortages of fuel, increases in fuel prices and rationing of petroleum products can have a material adverse effect on our operations and profitability. Our customer fuel surcharge reimbursement programs generally enable us to recover from our customers a majority, but not all, of higher fuel prices compared to normalized average fuel prices. These fuel surcharges, which automatically adjust depending on the U.S. Department of Energy (“DOE”) weekly retail on-highway diesel fuel prices, enable us to recoup much of the higher cost of fuel when prices increase and provide customers with the benefit of lower fuel costs when fuel prices decline. We do not generally recoup higher fuel costs for empty and out-of-route miles (which are not billable to customers) and truck idle time. We cannot predict whether fuel prices will increase or decrease in the future or the extent to which fuel surcharges will be collected from customers. As of December 31, 2015, we had no derivative financial instruments to reduce our exposure to fuel price fluctuations.
We maintain aboveground and underground fuel storage tanks at many of our terminals. Leakage or damage to these facilities could expose us to environmental clean-up costs. The tanks are routinely inspected to help prevent and detect such problems.
Regulations
We are a motor carrier regulated by DOT in the United States and similar governmental transportation agencies in foreign countries in which we operate. DOT generally governs matters such as safety requirements, registration to engage in motor carrier operations, drivers’ hours of service and certain mergers, consolidations and acquisitions. We currently have, and have always maintained, a satisfactory DOT safety rating, which is the highest available rating, and we continually take efforts to maintain our satisfactory rating. A conditional or unsatisfactory DOT safety rating could adversely affect us because some of our customer contracts require a satisfactory rating. Equipment weight and dimensions are also subject to federal, state and international regulations with which we are required to comply.
The Federal Motor Carrier Safety Administration's (“FMCSA”) Compliance, Safety, Accountability, (“CSA”) safety initiative monitors the safety performance of both individual drivers and carriers. In December 2010, FMCSA made public on its website the Safety Measurement System (“SMS”), which includes monthly reports of specific safety rating measurement and percentile ranking scores for over 500,000 trucking companies. Through the SMS, the public could access carrier scores and data (including a carrier’s roadside safety inspection, out-of-service and moving violation histories) for five Behavior Analysis and Safety Improvement Categories (“BASICs”). On December 3, 2015, Congress passed a multi-year surface transportation reauthorization, the Fixing America's Surface Transportation (“FAST”) Act. Within the bill was a provision instructing FMCSA to commission a Transportation Research Board study of the accuracy of CSA SMS in identifying high risk carriers and predicting future crash risk and severity. FMCSA must submit the study to Congress and issue a corrective action plan to address the deficiencies identified in the study. Beginning the day after enactment of the FAST Act, information regarding carrier alerts or percentile ranks (i.e., scores) was removed from public view until FMCSA completes the corrective action plan. We will continue to monitor any CSA developments and continue our CSA compliance efforts.
On January 15, 2016, FMCSA released a proposal to change the method for assigning motor carriers' safety fitness determination (“SFD”). The proposed methodology would determine when a carrier is not fit to operate commercial motor vehicles in or affecting interstate commerce based on (i) the carrier's performance in relation to a fixed failure threshold established in the rule for five CSA categories; (ii) an investigation; or (iii) a combination of on-road safety data and investigation information. Currently, the assignment of an SFD follows the completion of a labor-intensive compliance review conducted at the carrier's place of business. These audits are primarily an assessment of paper records instead of on-road safety performance. The proposed SFD rule would replace the current three-tier federal rating system which assigns a rating of either “satisfactory”,“conditional”, or “unsatisfactory” to federally regulated commercial motor carriers (in place since 1982) with a single determination of “unfit,” which would require the carrier to either improve its operations or cease operations.
All truckload carriers are subject to the hours of service (“HOS”) regulations issued by FMCSA. In December 2011, FMCSA adopted and issued a final rule that amended the driver HOS regulations, which became effective July 1, 2013. The rule includes provisions which affect restart periods, rest breaks, on-duty time and penalties for violations. We modified and tested our electronic HOS system and began dispatching drivers under the revised HOS rules effective July 1, 2013. The Company believes these HOS

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changes negatively impacted miles per truck by two to three percent. We have taken steps to minimize the financial impact of the HOS changes. However, government restrictions of available driving hours will continue to negatively impact the productivity of some drivers and some fleets within our company. On August 2, 2013, the U.S. Court of Appeals for the D.C. Circuit issued its decision related to petitions of the rule changes by the trucking industry association and consumer advocate groups. The court generally affirmed FMCSA's final rule and vacated only the application of the 30-minute rest break to short-haul drivers as defined in 49 CFR 395.1(e). On December 13, 2014, Congress passed the Consolidated and Further Continuing Appropriations Act of 2015 which for one year temporarily suspended the requirement that all qualifying restarts contain two consecutive periods of time between 1:00 a.m. and 5:00 a.m. and that it can only be used once every 168 hours (or seven days). In addition, FMCSA was required to study the safety impact caused by the restart rule which became effective on July 1, 2013. The restart rule reverted back to the simple 34-hour restart in effect from 2003 to June 30, 2013. We believe this has reduced the negative impact of the July 1, 2013 HOS changes during the one year suspension period. On December 18, 2015, the Consolidated Appropriations Act of 2016 was passed by Congress with HOS language that was intended to provide additional certainty for the industry. The language was to require the FMCSA study to demonstrate results with statistically significant improvements in safety and driver health, among other things, before the agency could reinstate the 34-hour restart rule including the restrictions that became effective in July 2013. Unfortunately, the new legislation did not include language specifically stipulating that the industry would continue to operate under the old 2003 restart rules if the study does not conclude that the restrictions offer significant improvements. Due to this oversight, there is now a risk of the restart provisions being eliminated unless the error is corrected, or the restart provisions could be changed from the current rule.
On January 31, 2011, FMCSA issued proposed rules regarding the required installation and use of electronic logging devices (“ELDs”) by nearly all carriers to enhance the monitoring and enforcement of the driver HOS rules. Federal legislation required DOT to promulgate rules and regulations mandating the use of ELDs by July 2013 with full adoption for all trucking companies by no later than July 2015. However, FMCSA did not issue the final rule until December 10, 2015, and carriers have until December 2017 to adopt and use compliant ELDs. We are the recognized industry leader for electronic logging of driver hours as we proactively adopted a paperless log system in 1996 that was subsequently approved for our use by FMCSA in 1998. In order to improve compliance, and by extension safety performance and leveling the field upon which carriers compete, Werner supports a broad-based mandate for ELDs.
In May 2011, FMCSA published a final rule that (i) sets new standards that must be met before states issue commercial learner’s permits (“CLP”), (ii) revises the knowledge and skills testing standards that must be met to obtain both a CLP and a CDL, and (iii) improves anti-fraud measures with the CDL program. States were expected to comply with and start enforcing the new requirements as of July 8, 2015. In September 2013, FMCSA withdrew its proposed rule regarding minimum requirements for entry-level driver training programs and later formed the Entry-Level Driver Training Advisory Committee (“ELDTAC”) to conduct negotiated rulemaking to implement entry-level driver training provisions. In June 2015, the ELDTAC reached a consensus and forwarded its recommendations to FMCSA. FMCSA has not yet taken action on the ELDTAC's recommendations as the proposed rule has yet to published. This rule could materially impact the number of potential new drivers entering the industry, and we currently cannot predict how the adoption of such rules would affect our driver recruitment and the overall driver market.
WGL, through its domestic and global subsidiary companies, holds a variety of licenses required to carry out its international services. These licenses permit us to provide services as a Non-Vessel Operating Common Carrier (“NVOCC”), customs broker, freight forwarder, indirect air carrier, accredited cargo agent and others. These international services subject us to regulation by the Transportation Security Administration (“TSA”) and Customs and Borders Protection (“CBP”) agencies of the U.S. Department of Homeland Security, the U.S. Federal Maritime Commission (“FMC”), the International Air Transport Association (“IATA”), as well as similar regulatory agencies in foreign jurisdictions.
Our operations are subject to various federal, state and local environmental laws and regulations, many of which are implemented by the EPA and similar state regulatory agencies. These laws and regulations govern the management of hazardous wastes, discharge of pollutants into the air and surface and underground waters and disposal of certain substances. We do not believe that compliance with these regulations has a material effect on our capital expenditures, earnings and competitive position.
The EPA mandated a series of stringent engine emissions standards for all newly manufactured truck engines, which became effective in October 2002, January 2007 and January 2010, resulting in increases in the costs of new trucks. The 2010 regulations required a significant decrease in particulate matter (soot and ash) and nitrogen oxide emitted from on-road diesel engines. Engine manufacturers responded to the 2010 standards by modifying engines to produce cleaner combustion with selective catalytic reduction (“SCR”) technologies to remove pollutants from exhaust gases exiting the combustion chamber. The SCR technology also requires the ongoing periodic use of a urea-based diesel exhaust fluid. Trucks with 2010-standard engines have a higher purchase price than trucks manufactured to meet the 2007 standards but are more fuel efficient. As of December 31, 2015, nearly all of our company tractors had engines that comply with the 2010 emission standards.


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The State of California enacted restrictions on transport refrigeration unit (“TRU”) emissions that require companies to operate compliant TRUs in California. The California regulations apply not only to California intrastate carriers, but also to carriers outside of California who wish to enter the state with TRUs. In January 2009, the EPA enabled California to phase in its Low-Emission TRU In-Use Performance Standards over several years. Enforcement of California’s in-use performance standards for TRU engines began in January 2010 for 2002 and older TRUs and will be phased in annually for later model years. We have complied with all compliance deadlines through December 31, 2015 that applied to model year 2008 and older TRU engines. California also required the registration of all California-based TRUs by July 31, 2009. For compliance purposes, we completed the California TRU registration process and continue to structure our plan to operate compliant TRUs over the next several years as the regulations apply to newer model years.
California also adopted regulations to improve the fuel efficiency of heavy-duty tractors that pull 53-foot or longer box-type trailers within the state. The tractors and trailers subject to these regulations must either use EPA SmartWay-certified tractors and trailers or retrofit their existing fleet with SmartWay-verified technologies that have been demonstrated to meet or exceed fuel savings percentages specified in the regulations. Examples of these technologies include tractor and trailer aerodynamics packages (such as tractor fairings and trailer skirts) and the use of low-rolling resistance tires on both tractors and trailers. Enforcement of these regulations for 2011 model year equipment began in January 2010 and is being phased in over several years for older equipment. In order to comply with the California Air Resources Board’s (“CARB”) fuel efficiency regulations, we submitted a large fleet compliance plan to CARB on June 30, 2010, to install skirting on our dry van trailers by certain deadlines through 2016. We will continue monitoring our compliance with these CARB regulations.
Various provisions of the North American Free Trade Agreement (“NAFTA”) may alter the competitive environment for shipping into and out of Mexico. We currently believe we are well prepared to respond to any changes that may result from this agreement. We conduct a substantial amount of business in international freight shipments to and from the United States and Mexico (see Note 10 in the Notes to Consolidated Financial Statements under Item 8 of Part II of this Form 10-K), and we believe we are one of the largest truckload carriers in terms of freight volume shipped to and from the United States and Mexico.
Competition
The freight transportation industry is highly competitive and includes thousands of trucking and non-asset-based logistics companies. We have a small share of the markets we target. Our Truckload segment competes primarily with other truckload carriers. Logistics companies, intermodal companies, railroads, less-than-truckload carriers and private carriers provide competition for both our Truckload and VAS segments. Our VAS segment also competes for the services of third-party capacity providers.
Competition for the freight we transport or manage is based primarily on service, efficiency, available capacity and, to some degree, on freight rates alone. We believe that few other truckload carriers have greater financial resources, own more equipment or carry a larger volume of freight than us. We believe we are one of the largest carriers in the truckload transportation industry based on total operating revenues.
Internet Website
We maintain an Internet website where you can find additional information regarding our business and operations. The website address is www.werner.com. On the website, we make certain investor information available free of charge, including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, stock ownership reports filed under Section 16 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and any amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. This information is included on our website as soon as reasonably practicable after we electronically file or furnish such materials to the U.S. Securities and Exchange Commission (“SEC”). The website also includes Interactive Data Files required to be posted pursuant to Rule 405 of SEC Regulation S-T. We also provide our corporate governance materials, such as Board committee charters and our Code of Corporate Conduct, on our website free of charge, and we may occasionally update these materials when necessary to comply with SEC and NASDAQ rules or to promote the effective and efficient governance of our company. Information provided on our website is not incorporated by reference into this Form 10-K.
ITEM 1A.
RISK FACTORS
The following risks and uncertainties may cause our actual results, business, financial condition and cash flows to materially differ from those anticipated in the forward-looking statements included in this Form 10-K. Caution should be taken not to place undue reliance on forward-looking statements made herein because such statements speak only to the date they were made. Unless otherwise required by applicable securities laws, we undertake no obligation or duty to revise or update any forward-looking

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statements contained herein to reflect subsequent events or circumstances or the occurrence of unanticipated events. Also refer to the Cautionary Note Regarding Forward-Looking Statements in Item 7 of Part II of this Form 10-K.
Our business is subject to overall economic conditions that could have a material adverse effect on our results of operations.
We are sensitive to changes in overall economic conditions that impact customer shipping volumes, industry freight demand and industry truck capacity. When shipping volumes decline or available truck capacity increases, freight pricing generally becomes more competitive as carriers compete for loads to maintain truck productivity. We may be negatively affected by future economic conditions including employment levels, business conditions, fuel and energy costs, interest rates and tax rates. Economic conditions may also impact the financial condition of our customers, resulting in a greater risk of bad debt losses, and that of our suppliers, which may affect negotiated pricing or availability of needed goods and services.
Difficulty in recruiting and retaining experienced drivers, recent driver training school graduates and independent contractors could impact our results of operations and limit growth opportunities.
At times, the trucking industry has experienced driver shortages. Driver availability may be affected by changing workforce demographics, alternative employment opportunities, national unemployment rates, freight market conditions, availability of financial aid for driver training schools and changing industry regulations. If such a shortage were to occur and additional driver pay rate increases were necessary to attract and retain drivers, our results of operations would be negatively impacted to the extent that we could not obtain corresponding freight rate increases. Additionally, a shortage of drivers could result in idled equipment, which could affect our profitability.
Independent contractor availability may also be affected by both inflationary cost increases that are the responsibility of independent contractors and the availability of equipment financing. If a shortage of independent contractors occurs, additional increases in per mile settlement rates (for independent contractors) and driver pay rates (for company drivers) may become necessary to attract and retain a sufficient number of drivers. These increases could negatively affect our results of operations to the extent that we would be unable to obtain corresponding freight rate increases.
Increases in fuel prices and shortages of fuel can have a material adverse effect on the results of operations and profitability.
To lessen the effect of fluctuating fuel prices on our margins, we have fuel surcharge programs with our customers. These programs generally enable us to recover a majority, but not all, of the fuel price increases. The remaining portion is generally not recoverable because it results from empty and out-of-route miles (which are not billable to customers) and truck idle time. Fuel prices that change rapidly in short time periods also impact our recovery because the surcharge rate in most programs only changes once per week. Fuel shortages, increases in fuel prices and petroleum product rationing could have a material adverse impact on our operations and profitability. To the extent that we cannot recover the higher cost of fuel through customer fuel surcharges, our financial results would be negatively impacted. As of December 31, 2015, we had no derivative financial instruments to reduce our exposure to fuel price fluctuations.
We operate in a highly competitive industry, which may limit growth opportunities and reduce profitability.
The freight transportation industry is highly competitive and includes thousands of trucking and non-asset-based logistics companies. We compete primarily with other truckload carriers in our Truckload segment. Logistics companies, intermodal companies, railroads, less-than-truckload carriers and private carriers also provide a lesser degree of competition in our Truckload segment, but such providers are more direct competitors in our VAS segment. Competition for the freight we transport or manage is based primarily on service, efficiency, available capacity and, to some degree, on freight rates alone. This competition could have an adverse effect on either the number of shipments we transport or the freight rates we receive, which could limit our growth opportunities and reduce our profitability.
We operate in a highly regulated industry. Changes in existing regulations or violations of existing or future regulations could adversely affect our operations and profitability.
We are regulated by the DOT in the United States and similar governmental transportation agencies in foreign countries in which we operate. We are also regulated by agencies in certain U.S. states. These regulatory agencies have the authority to govern transportation-related activities, such as safety, authorization to conduct motor carrier operations and other matters. The Regulation subsection in Item 1 of Part I of this Form 10-K describes several proposed and pending regulations that may have a significant effect on our operations including our productivity, driver recruitment and retention and capital expenditures. The subsidiaries of WGL hold a variety of licenses required to carry out its international services, and the loss of any of these licenses could adversely impact the operations of WGL.

7


The seasonal pattern generally experienced in the trucking industry may affect our periodic results during traditionally slower shipping periods and winter months.
In the trucking industry, revenues generally follow a seasonal pattern which may affect our results of operations. After the December holiday season and during the remaining winter months, our freight volumes are typically lower because some customers reduce shipment levels. Our operating expenses have historically been higher in the winter months because of cold temperatures and other adverse winter weather conditions which result in decreased fuel efficiency, increased cold weather-related maintenance costs of revenue equipment and increased insurance and claims costs. Revenue can also be affected by adverse weather conditions, holidays and the number of business days during a given period because revenue is directly related to the available working days of shippers.
We depend on key customers, the loss or financial failure of which may have a material adverse effect on our operations and profitability.
A significant portion of our revenue is generated from key customers. During 2015, our largest 5, 10 and 25 customers accounted for 27%, 45% and 63% of revenues, respectively. No single customer generated more than 10% of our revenues in 2015, and our largest customer accounted for 7% of our revenues in 2015. We do not have long-term contractual relationships with many of our key One-Way Truckload customers. Our contractual relationships with our Specialized Services customers are typically one to three years in length and may be terminated by either party upon 30 to 90 days’ notice following the expiration of the contract’s first year, and we review rates in these contracts annually. We cannot provide any assurance that key customer relationships will continue at the same levels. If a key customer substantially reduced or terminated our services, it could have a material adverse effect on our business and results of operations. We review our customers’ financial conditions for granting credit, monitor changes in customers’ financial conditions on an ongoing basis and review individual past-due balances and collection concerns. However, a key customer’s financial failure may negatively affect our results of operations.
We depend on the services of third-party capacity providers, the availability of which could affect our profitability and limit growth in our VAS segment.
Our VAS segment is highly dependent on the services of third-party capacity providers, such as other truckload carriers, less-than-truckload carriers, railroads, ocean carriers and airlines. Many of those providers face the same economic challenges as we do and therefore are actively and competitively soliciting business. These economic conditions may have an adverse effect on the availability and cost of third-party capacity. If we are unable to secure the services of these third-party capacity providers at reasonable rates, our results of operations could be adversely affected.
If we cannot effectively manage the challenges associated with doing business internationally, our revenues and profitability may suffer.
Our results are affected by the success of our operations in Mexico, China and other foreign countries in which we operate. We are subject to risks of doing business internationally, including fluctuations in foreign currencies, changes in the economic strength of the countries in which we do business, difficulties in enforcing contractual obligations and intellectual property rights, burdens of complying with a wide variety of international and United States export and import laws, and social, political, and economic instability. Additional risks associated with our foreign operations, including restrictive trade policies and imposition of duties, taxes, or government royalties by foreign governments, are present but largely mitigated by the terms of NAFTA for Mexico and Canada. The agreement permitting cross border movements for both United States and Mexican based carriers into the United States and Mexico presents additional risks in the form of potential increased competition and the potential for increased congestion on the cross border lanes between countries.
Our earnings could be reduced by increases in the number of insurance claims, cost per claim, costs of insurance premiums or availability of insurance coverage.
We are self-insured for a significant portion of liability resulting from bodily injury, property damage, cargo and associate workers’ compensation and health benefit claims. This is supplemented by premium-based insurance with licensed insurance companies above our self-insurance level for each type of coverage. To the extent we experience a significant increase in the number of claims, cost per claim or insurance premium costs for coverage in excess of our retention amounts, our operating results would be negatively affected. Healthcare legislation and inflationary cost increases could also have a negative effect on our results.
Decreased demand for our used revenue equipment could result in lower unit sales, resale values and gains on sales of assets.
We are sensitive to changes in used equipment prices and demand, especially with respect to tractors. We have been in the business of selling our company-owned trucks since 1992, when we formed our wholly-owned subsidiary Fleet Truck Sales.

8


Reduced demand for used equipment could result in a lower volume of sales or lower sales prices, either of which could negatively affect our gains on sales of assets.
Our operations are subject to various environmental laws and regulations, the violation of which could result in substantial fines or penalties.
In addition to direct regulation by DOT, EPA and other federal, state, and local agencies, we are subject to various environmental laws and regulations dealing with the handling of hazardous materials, aboveground and underground fuel storage tanks, discharge and retention of storm-water, and emissions from our vehicles. We operate in industrial areas, where truck terminals and other industrial activities are located and where groundwater or other forms of environmental contamination have occurred. Our operations involve the risks of fuel spillage or seepage, environmental damage and hazardous waste disposal, among others. We also maintain bulk fuel storage at several of our facilities. If we are involved in a spill or other accident involving hazardous substances, or if we are found to be in violation of applicable laws or regulations, it could have a material adverse effect on our business and operating results. If we fail to comply with applicable environmental regulations, we could be subject to substantial fines or penalties and to civil and criminal liability. Tractors and trailers used in our daily operations have been affected by regulatory changes related to air emissions and fuel efficiency, and may be adversely affected in the future by new regulatory actions.
We rely on the services of key personnel, the loss of which could impact our future success.
We are highly dependent on the services of key personnel, including our executive officers. Although we believe we have an experienced and highly qualified management team, the loss of the services of these key personnel could have a significant adverse impact on us and our future profitability.
Difficulty in obtaining goods and services from our vendors and suppliers could adversely affect our business.
We are dependent on our vendors and suppliers. We believe we have good vendor relationships and that we are generally able to obtain favorable pricing and other terms from vendors and suppliers. If we fail to maintain satisfactory relationships with our vendors and suppliers, or if our vendors and suppliers experience significant financial problems, we could experience difficulty in obtaining needed goods and services because of production interruptions or other reasons. Consequently, our business could be adversely affected.
We use our information systems extensively for day-to-day operations, and service disruptions could have an adverse impact on our operations.
The efficient operation of our business is highly dependent on our information systems. Much of our software was developed internally or by adapting purchased software applications to suit our needs. Our information systems are used for receiving and planning loads, dispatching drivers and other capacity providers, billing customers and providing financial reports. If any of our critical information systems fail or become unavailable, we would have to perform certain functions manually, which could temporarily affect our ability to efficiently manage our operations. We maintain information security policies to protect our systems and data from cyber security events and threats. We purchased redundant computer hardware systems and have our own off-site disaster recovery facility approximately ten miles from our headquarters for use in the event of a disaster. We took these steps to reduce the risk of disruption to our business operation if a disaster occurred. We believe any such disruption would be minimal or moderate; however, we cannot predict the degree to which any disaster would affect our information systems or disaster recovery facility. Any system failure, disruption, or security breach could interrupt or delay our operations, damage our reputation, cause us to lose customers, or impact our ability to manage our operations, any of which could have an adverse effect on our operations.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
We have not received any written comments from SEC staff regarding our periodic or current reports that were issued 180 days or more preceding the end of our 2015 fiscal year and that remain unresolved.
ITEM 2.
PROPERTIES
Our headquarters are located on approximately 197 acres near U.S. Interstate 80 west of Omaha, Nebraska, 107 acres of which are undeveloped. Our headquarters office building includes a computer center, drivers’ lounges, cafeteria and company store. The Omaha headquarters also includes a driver training facility, equipment maintenance and repair facilities and a sales office for selling used trucks and trailers. These maintenance facilities contain a central parts warehouse, frame straightening and alignment machine, truck and trailer wash areas, equipment safety lanes, body shops for tractors and trailers, two paint booths and a reclaim center. Our headquarter facilities have suitable space available to accommodate planned needs for at least the next three to five years.

9


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

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

We currently lease (i) small sales offices, brokerage offices and trailer parking yards in various locations throughout the United States and (ii) office space in Mexico, Canada and China. We own (i) a 96-room motel located near our Omaha headquarters; (ii) a 71-room private driver lodging facility at our Dallas terminal; (iii) a warehouse facility in Omaha; and (iv) a terminal facility in Queretaro, Mexico, which we lease to a related party (see Note 9 in the Notes to Consolidated Financial Statements under Item 8 of Part II of this Form 10-K). We also have 50% ownership in a 125,000 square-foot warehouse located near our headquarters in Omaha. The Fleet Truck Sales network currently has six locations, which are located in certain of our terminals listed above. Our driver training schools currently operate in 15 locations.
ITEM 3.
LEGAL PROCEEDINGS
We are a party subject to routine litigation incidental to our business, primarily involving claims for bodily injury, property damage, cargo and workers’ compensation incurred in the transportation of freight. We have maintained a self-insurance program with a qualified department of risk management professionals since 1988. These associates manage our bodily injury, property damage, cargo and workers’ compensation claims. An actuary reviews our undiscounted self-insurance reserves for bodily injury, property damage and workers’ compensation claims at year-end.
Since August 1, 2004, our self-insured retention (“SIR”) and deductible amount for liability claims has been $2.0 million, plus administrative expenses, for each occurrence involving bodily injury or property damage. We are also responsible for varying annual aggregate amounts of liability for claims in excess of the SIR/deductible. The following table reflects the SIR/deductible levels and aggregate amounts of liability for bodily injury and property damage claims since August 1, 2012: 

Coverage Period
  
Primary Coverage
  
Primary  Coverage
SIR/Deductible
August 1, 2012 – July 31, 2013
  
$5.0 million
  
$2.0 million  (1)
August 1, 2013 – July 31, 2014
  
$5.0 million
  
$2.0 million  (1)
August 1, 2014 – July 31, 2015
  
$5.0 million
  
$2.0 million  (1)
August 1, 2015 – July 31, 2016
  
$5.0 million
  
$2.0 million  (1)

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

10


Our primary insurance covers the range of liability under which we expect most claims to occur. If any liability claims are in excess of coverage amounts listed in the table above, such claims are covered under premium-based policies (issued by insurance companies) to coverage levels that our management considers adequate. For claims in excess of $5.0 million and less than $10.0 million, we are responsible for the first $5.0 million of claims in this layer. We are also responsible for administrative expenses for each occurrence involving bodily injury or property damage. See also Note 1 and Note 8 in the Notes to Consolidated Financial Statements under Item 8 of Part II of this Form 10-K.
We are responsible for workers’ compensation claims up to $1.0 million per claim and have premium-based insurance coverage for individual claims above $1.0 million. We also maintain a $29.8 million bond for the State of Nebraska and a $6.9 million bond for our workers’ compensation insurance carrier.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable
PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Price Range of Common Stock
Our common stock trades on the NASDAQ Global Select MarketSM tier of the NASDAQ Stock Market under the symbol “WERN”. The following table sets forth, for the quarters indicated from January 1, 2014 through December 31, 2015, (i) the high and low trade prices per share of our common stock quoted on the NASDAQ Global Select MarketSM and (ii) our dividends declared per common share.
 
2015
 
2014
 
High
 
Low
 
Dividends
Declared Per
Common Share
 
High
 
Low
 
Dividends
Declared Per
Common Share
Quarter Ended:
 
 
 
 
 
 
 
 
 
 
 
March 31
$33.42
 
$28.08
 
$0.05
 
$26.87
 
$24.26
 
$0.05
June 30
31.70
 
25.78
 
0.05
 
27.01
 
24.72
 
0.05
September 30
29.34
 
25.08
 
0.06
 
27.04
 
24.31
 
0.05
December 31
28.29
 
22.45
 
0.06
 
31.71
 
23.50
 
0.05
 
As of February 18, 2016, our common stock was held by 261 stockholders of record. Because many of our shares of common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders. The high and low trade prices per share of our common stock in the NASDAQ Global Select MarketSM as of February 18, 2016 were $27.06 and $26.56, respectively.
Dividend Policy
We have paid cash dividends on our common stock following each fiscal quarter since the first payment in July 1987. We currently intend to continue paying a regular quarterly dividend. We do not currently anticipate any restrictions on our future ability to pay such dividends. However, we cannot give any assurance that dividends will be paid in the future or of the amount of any such quarterly or special dividends because they are dependent on our earnings, financial condition and other factors.
Equity Compensation Plan Information
For information on our equity compensation plans, please refer to Item 12 of Part III of this Form 10-K.

11


Performance Graph
Comparison of Five-Year Cumulative Total Return
The following graph is not deemed to be “soliciting material” or to be “filed” with the SEC or subject to the liabilities of Section 18 of the Exchange Act, and the report shall not be deemed to be incorporated by reference into any prior or subsequent filing by us under the Securities Act of 1933 or the Exchange Act except to the extent we specifically request that such information be incorporated by reference or treated as soliciting material.
 
 
 
12/31/2010
 
12/31/2011
 
12/31/2012
 
12/31/2013
 
12/31/2014
 
12/31/2015
Werner Enterprises, Inc. (WERN)
 
$
100

 
$
110

 
$
107

 
$
123

 
$
156

 
$
118

Standard & Poor’s 500
 
$
100

 
$
102

 
$
118

 
$
157

 
$
178

 
$
181

NASDAQ Trucking Group (SIC Code 42)
 
$
100

 
$
103

 
$
112

 
$
160

 
$
183

 
$
158

Assuming the investment of $100 on December 31, 2010, and reinvestment of all dividends, the graph above compares the cumulative total stockholder return on our common stock for the last five fiscal years with the cumulative total return of Standard & Poor’s 500 Market Index and an index of other companies included in the trucking industry (NASDAQ Trucking Group – Standard Industrial Classification Code 42) over the same period. Our stock price was $23.39 as of December 31, 2015. This price was used for purposes of calculating the total return on our common stock for the year ended December 31, 2015.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
On October 15, 2007, we announced that on October 11, 2007 our Board of Directors approved an increase in the number of shares of our common stock that Werner Enterprises, Inc. (the “Company”) is authorized to repurchase. Under this authorization, the Company is permitted to repurchase an additional 8,000,000 shares. As of December 31, 2015, the Company had purchased 3,287,291 shares pursuant to this authorization and had 4,712,709 shares remaining available for repurchase. The Company may purchase shares from time to time depending on market, economic and other factors. The authorization will continue unless withdrawn by the Board of Directors.
No shares of common stock were repurchased during the fourth quarter of 2015 by either the Company or any “affiliated purchaser”, as defined by Rule 10b-18 of the Exchange Act.

12


ITEM 6.
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the consolidated financial statements and notes under Item 8 of Part II of this Form 10-K.
(In thousands, except per share amounts)
2015
 
2014
 
2013
 
2012
 
2011
Operating revenues
$
2,093,529

 
$
2,139,289

 
$
2,029,183

 
$
2,036,386

 
$
2,002,850

Net income
123,714

 
98,650

 
86,785

 
103,034

 
102,757

Diluted earnings per share
1.71

 
1.36

 
1.18

 
1.40

 
1.40

Cash dividends declared per share
0.22

 
0.20

 
0.20

 
1.70

 
0.70

Total assets
1,613,684

 
1,480,462

 
1,354,097

 
1,334,900

 
1,302,416

Total debt
75,000

 
75,000

 
40,000

 
90,000

 

Stockholders’ equity
935,654

 
833,860

 
772,519

 
714,897

 
725,147

Book value per share (1)
13.00

 
11.58

 
10.62

 
9.76

 
9.95

Return on average stockholders’ equity (2)
14.1
%
 
12.4
%
 
11.7
%
 
13.6
%
 
14.5
%
Return on average total assets (3)
8.0
%
 
7.0
%
 
6.5
%
 
7.7
%
 
8.3
%
Operating ratio (consolidated) (4)
90.4
%
 
92.5
%
 
93.1
%
 
91.6
%
 
91.3
%
(1)
Stockholders’ equity divided by common shares outstanding as of the end of the period. Book value per share indicates the dollar value remaining for common shareholders if all assets were liquidated at recorded amounts and all debts were paid at recorded amounts.
(2)
Net income expressed as a percentage of average stockholders’ equity. Return on equity is a measure of a corporation’s profitability relative to recorded shareholder investment.
(3)
Net income expressed as a percentage of average total assets. Return on assets is a measure of a corporation’s profitability relative to recorded assets.
(4)
Operating expenses expressed as a percentage of operating revenues. Operating ratio is a common measure used in the trucking industry to evaluate profitability.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) summarizes the financial statements from management’s perspective with respect to our financial condition, results of operations, liquidity and other factors that may affect actual results. The MD&A is organized in the following sections:
Cautionary Note Regarding Forward-Looking Statements
Overview
Results of Operations
Liquidity and Capital Resources
Contractual Obligations and Commercial Commitments
Off-Balance Sheet Arrangements
Critical Accounting Policies and Estimates
Inflation
Cautionary Note Regarding Forward-Looking Statements:
This Annual Report on Form 10-K contains historical information and forward-looking statements based on information currently available to our management. The forward-looking statements in this report, including those made in this Item 7 (Management’s Discussion and Analysis of Financial Condition and Results of Operations), are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended. These safe harbor provisions encourage reporting companies to provide prospective information to investors. Forward-looking statements can be identified by the use of certain words, such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project” and other similar terms and language. We believe the forward-looking statements are reasonable based on currently available information. However, forward-looking statements involve risks, uncertainties and assumptions, whether known or unknown, that could cause our actual results, business, financial condition and cash flows to differ materially from those anticipated in the forward-looking statements. A discussion of important factors relating to forward-looking statements is included in Item 1A (Risk Factors) of Part I of this Form 10-K. Readers should not unduly rely on the forward-looking statements included in this Form 10-K because such statements speak only to the date they were made. Unless otherwise required by applicable securities laws, we undertake no obligation or duty to update or revise any forward-looking statements contained herein to reflect subsequent events or circumstances or the occurrence of unanticipated events.

13


Overview:
We have two reportable segments, Truckload and VAS, and we operate in the truckload and logistics sectors of the transportation industry. In the truckload sector, we focus on transporting consumer nondurable products that generally ship more consistently throughout the year. In the logistics sector, besides managing transportation requirements for individual customers, we provide additional sources of truck capacity, alternative modes of transportation, a global delivery network and systems analysis to optimize transportation needs. Our success depends on our ability to efficiently and effectively manage our resources in the delivery of truckload transportation and logistics services to our customers. Resource requirements vary with customer demand, which may be subject to seasonal or general economic conditions. Our ability to adapt to changes in customer transportation requirements is essential to efficiently deploy resources and make capital investments in tractors and trailers (with respect to our Truckload segment) or obtain qualified third-party capacity at a reasonable price (with respect to our VAS segment). Although our business volume is not highly concentrated, we may also be affected by our customers’ financial failures or loss of customer business.
Revenues for our Truckload segment operating units (One-Way Truckload and Specialized Services) are typically generated on a per-mile basis and also include revenues such as stop charges, loading and unloading charges, equipment detention charges and equipment repositioning charges. To mitigate our risk to fuel price increases, we recover from our customers additional fuel surcharges that generally recoup a majority of the increased fuel costs; however, we cannot assure that current recovery levels will continue in future periods. Because fuel surcharge revenues fluctuate in response to changes in fuel costs, we identify them separately and exclude them from the statistical calculations to provide a more meaningful comparison between periods. The key statistics used to evaluate trucking revenues, net of fuel surcharge, are (i) average revenues per tractor per week, (ii) average percentage of empty miles (miles without trailer cargo), (iii) average trip length (in loaded miles) and (iv) average number of tractors in service. General economic conditions, seasonal trucking industry freight patterns and industry capacity are important factors that impact these statistics. Our Truckload segment also generates a small amount of revenues categorized as non-trucking revenues, related to shipments delivered to or from Mexico where the Truckload segment utilizes a third-party capacity provider. We exclude such revenues from the statistical calculations.
Our most significant resource requirements are company drivers, independent contractors, tractors and trailers. Our financial results are affected by company driver and independent contractor availability and the markets for new and used revenue equipment. We are self-insured for a significant portion of bodily injury, property damage and cargo claims; workers’ compensation claims; and associate health claims (supplemented by premium-based insurance coverage above certain dollar levels). For that reason, our financial results may also be affected by driver safety, medical costs, weather, legal and regulatory environments and insurance coverage costs to protect against catastrophic losses.
The operating ratio is a common industry measure used to evaluate our profitability and that of our Truckload segment operating fleets. The operating ratio consists of operating expenses expressed as a percentage of operating revenues. The most significant variable expenses that impact the Truckload segment are driver salaries and benefits, fuel, fuel taxes (included in taxes and licenses expense), payments to independent contractors (included in rent and purchased transportation expense), supplies and maintenance and insurance and claims. As discussed further in the comparison of operating results for 2015 to 2014, several industry-wide issues have caused, and could continue to cause, costs to increase in future periods. These issues include shortages of drivers or independent contractors, changing fuel prices, higher new truck and trailer purchase prices and compliance with new or proposed regulations. Our main fixed costs include depreciation expense for tractors and trailers and equipment licensing fees (included in taxes and licenses expense). The Truckload segment requires substantial cash expenditures for tractor and trailer purchases. We fund these purchases with net cash from operations and financing available under our existing credit facilities, as management deems necessary.
We provide non-trucking services primarily through the four operating units within our VAS segment (Brokerage, Freight Management, Intermodal and WGL). Unlike our Truckload segment, the VAS segment is less asset-intensive and is instead dependent upon qualified associates, information systems and qualified third-party capacity providers. The largest expense item related to the VAS segment is the cost of purchased transportation we pay to third-party capacity providers. This expense item is recorded as rent and purchased transportation expense. Other operating expenses consist primarily of salaries, wages and benefits. We evaluate the VAS segment's financial performance by reviewing the gross margin percentage (revenues less rent and purchased transportation expenses expressed as a percentage of revenues) and the operating income percentage. The gross margin percentage can be impacted by the rates charged to customers and the costs of securing third-party capacity. We generally do not have contracted long-term rates for the cost of third-party capacity, and we cannot assure that our operating results will not be adversely impacted in the future if our ability to obtain qualified third-party capacity providers changes or the rates of such providers increase.

14


Results of Operations:
The following table sets forth the Consolidated Statements of Income in dollars and as a percentage of total operating revenues and the percentage increase or decrease in the dollar amounts of those items compared to the prior year.
 
2015
 
2014
 
2013
 
Percentage Change in Dollar Amounts
(Amounts in thousands)
$
 
%
 
$
 
%
 
$
 
%
 
2015 to 2014 (%)
 
2014 to 2013 (%)
Operating revenues
$
2,093,529

 
100.0

 
$
2,139,289

 
100.0

 
$
2,029,183

 
100.0

 
(2.1
)
 
5.4

 
 
 
 
 
 
 
 
 
 
 
 
 


 
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 


 
 
Salaries, wages and benefits
639,908

 
30.6

 
584,006

 
27.3

 
545,419

 
26.9

 
9.6

 
7.1

Fuel
204,583

 
9.8

 
346,058

 
16.2

 
371,789

 
18.3

 
(40.9
)
 
(6.9
)
Supplies and maintenance
190,114

 
9.1

 
188,437

 
8.8

 
179,172

 
8.8

 
0.9

 
5.2

Taxes and licenses
89,646

 
4.3

 
85,468

 
4.0

 
86,686

 
4.3

 
4.9

 
(1.4
)
Insurance and claims
80,848

 
3.9

 
80,375

 
3.7

 
71,177

 
3.5

 
0.6

 
12.9

Depreciation
193,209

 
9.2

 
176,984

 
8.3

 
173,019

 
8.5

 
9.2

 
2.3

Rent and purchased transportation
480,624

 
22.9

 
498,782

 
23.3

 
456,885

 
22.5

 
(3.6
)
 
9.2

Communications and utilities
15,121

 
0.7

 
14,220

 
0.7

 
13,506

 
0.7

 
6.3

 
5.3

Other
(980
)
 
(0.1
)
 
4,871

 
0.2

 
(8,196
)
 
(0.4
)
 
(120.1
)
 
159.4

Total operating expenses
1,893,073

 
90.4

 
1,979,201

 
92.5

 
1,889,457

 
93.1

 
(4.4
)
 
4.7

 
 
 
 
 
 
 
 
 
 
 
 
 


 
 
Operating income
200,456

 
9.6

 
160,088

 
7.5

 
139,726

 
6.9

 
25.2

 
14.6

Total other expense (income)
(705
)
 

 
(1,686
)
 
(0.1
)
 
(1,985
)
 
(0.1
)
 
58.2

 
15.1

Income before income taxes
201,161

 
9.6

 
161,774

 
7.6

 
141,711

 
7.0

 
24.3

 
14.2

Income taxes
77,447

 
3.7

 
63,124

 
3.0

 
54,926

 
2.7

 
22.7

 
14.9

Net income
$
123,714

 
5.9

 
$
98,650

 
4.6

 
$
86,785

 
4.3

 
25.4

 
13.7


The following tables set forth the operating revenues, operating expenses and operating income for the Truckload segment, as well as certain statistical data regarding our Truckload segment operations for the periods indicated.
 
2015
 
2014
 
2013
Truckload Transportation Services (amounts in thousands)
$
 
%
 
$
 
%
 
$
 
%
Trucking revenues, net of fuel surcharge
$
1,411,099

 
 
 
$
1,332,879

 
 
 
$
1,287,656

 
 
Trucking fuel surcharge revenues
212,489

 
 
 
349,763

 
 
 
354,616

 
 
Non-trucking and other operating revenues
21,286

 

 
19,495

 
 
 
15,582

 
 
Operating revenues
1,644,874

 
100.0
 
1,702,137

 
100.0
 
1,657,854

 
100.0
Operating expenses
1,455,024

 
88.5
 
1,549,145

 
91.0
 
1,538,257

 
92.8
Operating income
189,850

 
11.5
 
152,992

 
9.0
 
119,597

 
7.2

15


Truckload Transportation Services
2015
 
2014
 
2013
Operating ratio, net of fuel surcharge revenues (1)
86.7
%
 
88.7
%
 
90.8
%
Average revenues per tractor per week (2)
$
3,732

 
$
3,655

 
$
3,457

Average trip length in miles (loaded)
482

 
473

 
453

Average percentage of empty miles (3)
12.4
%
 
12.1
%
 
12.5
%
Average tractors in service
7,271

 
7,013

 
7,162

Total trailers (at year end)
22,630

 
22,305

 
21,980

Total tractors (at year end):
 
 
 
 
 
Company
6,635

 
6,400

 
6,380

Independent contractor
815

 
650

 
670

Total tractors
7,450

 
7,050

 
7,050


(1)
Calculated as if fuel surcharge revenues are excluded from total revenues and instead reported as a reduction of operating expenses, which provides a more consistent basis for comparing results of operations from period to period.
(2)
Net of fuel surcharge revenues.
(3)
"Empty" refers to miles without trailer cargo.
The following tables set forth the VAS segment’s revenues, rent and purchased transportation expense, gross margin, other operating expenses (primarily salaries, wages and benefits expense) and operating income, as well as certain statistical data regarding the VAS segment's shipments and average revenues (excluding logistics fee revenue) per shipment for the periods indicated.
 
2015
 
2014
 
2013
Value Added Services (amounts in thousands)
$
 
%
 
$
 
%
 
$
 
%
Operating revenues
$
393,174

 
100.0

 
$
390,645

 
100.0

 
$
361,384

 
100.0

Rent and purchased transportation expense
332,168

 
84.5

 
338,625

 
86.7

 
305,582

 
84.6

Gross margin
61,006

 
15.5

 
52,020

 
13.3

 
55,802

 
15.4

Other operating expenses
44,108

 
11.2

 
44,485

 
11.4

 
41,138

 
11.3

Operating income
$
16,898

 
4.3

 
$
7,535

 
1.9

 
$
14,664

 
4.1

Value Added Services
2015
 
2014
 
2013
Average tractors in service
56

 
50

 
45

Total trailers (at year end)
1,460

 
1,670

 
1,725

Total tractors (at year end)
62

 
55

 
49

2015 Compared to 2014
Operating Revenues
Operating revenues decreased 2.1% in 2015 compared to 2014. When comparing 2015 to 2014, the Truckload segment revenues decreased $57.3 million, or 3.4%, and the VAS segment revenues increased $2.5 million, or 0.6%. The significantly lower fuel prices in 2015 compared to 2014 resulted in lower fuel surcharge revenues in the Truckload segment and lower revenues in the VAS segment.
Assessing freight demand within the Truckload segment, 2014 and 2015 were cyclically contrasting years. 2014 provided the benefits of gradually improving demand from a strengthening economy and constrained supply due to a tight driver market and increasing safety regulations. Freight demand in 2015 did not strengthen as the year progressed, as the rate of economic growth slowed. The truckload sector also experienced supply increases in 2015 as small carrier confidence rose as a result of better rates in 2014 and much lower fuel prices beginning in late 2014. Finally, as 2015 ended, truckload supply began to stabilize as truck orders declined significantly and safety regulators finalized the electronic logging device regulations. Freight demand thus far in 2016 has been seasonally consistent with the same periods of 2013, 2012, 2011. Compared to the same periods in 2015 and 2014, freight demand was not as strong.
Trucking revenues, net of fuel surcharge, increased 5.9% in 2015 compared to 2014 due to a 3.7% increase in average number of tractors in service and a 2.1% increase in average revenues per tractor per week, net of fuel surcharge revenues. Average revenues per total mile, net of fuel surcharge revenues, increased 2.6% and average miles per truck declined by 0.5% in 2015 compared to 2014.

16


We continue to make progress implementing sustainable rate increases with our customers during 2015. These efforts are on-going as we move forward in 2016 and work to recoup the cost increases associated with more expensive equipment, a shrinking supply of qualified drivers and an increasingly challenging regulatory environment.
The average number of tractors in service in the Truckload segment increased 3.7% to 7,271 in 2015 from 7,013 in 2014, an increase of 258 tractors. Following an ongoing and intense company-wide focus to improve our driver recruiting and retention, we ended 2015 with 7,450 tractors in the Truckload segment (3,675 in our Specialized Services unit and 3,775 in our One-Way Truckload unit). We cannot predict whether future driver shortages, if any, will adversely affect our ability to maintain our fleet size. If such a driver market shortage were to occur, it could result in a fleet size reduction, and our results of operations could be adversely affected.
Trucking fuel surcharge revenues represent collections from customers for the increase in fuel and fuel-related expenses, including the fuel component of our independent contractor cost (recorded as rent and purchased transportation expense) and fuel taxes (recorded in taxes and licenses expense), when diesel fuel prices rise. Conversely, when fuel prices decrease, fuel surcharge revenues decrease. These revenues decreased 39.2% to $212.5 million in 2015 from $349.8 million in 2014 because of lower average fuel prices in 2015. To lessen the effect of fluctuating fuel prices on our margins, we collect fuel surcharge revenues from our customers for the cost of diesel fuel and taxes in excess of specified base fuel price levels according to terms in our customer contracts. Fuel surcharge rates generally adjust weekly based on an independent U.S. Department of Energy fuel price survey which is released every Monday. Our fuel surcharge programs are designed to (i) recoup higher fuel costs from customers when fuel prices rise and (ii) provide customers with the benefit of lower fuel costs when fuel prices decline. These programs generally enable us to recover a majority, but not all, of the fuel price increases. The remaining portion is generally not recoverable because it results from empty and out-of-route miles (which are not billable to customers) and truck idle time. Fuel prices that change rapidly in short time periods also impact our recovery because the surcharge rate in most programs only changes once per week.
VAS revenues are generated by its four operating units and exclude revenues for full truckload shipments transferred to the Truckload segment, which are recorded as trucking revenues by the Truckload segment. VAS also recorded revenue and brokered freight expense of $1.3 million in 2015 and $2.9 million in 2014 for Intermodal drayage movements performed by the Truckload segment (also recorded as trucking revenues by the Truckload segment), and these transactions between reporting segments are eliminated in consolidation. VAS revenues increased 0.6% to $393.2 million in 2015 from $390.6 million in 2014. VAS gross margin dollars increased 17.3% to $61.0 million in 2015 from $52.0 million in 2014, and the VAS gross margin percentage improved to 15.5% in 2015 from 13.3% in 2014. VAS results for 2014 were negatively impacted by lower gross margin percentages for contractual business due to rising third-party carrier costs in a tight capacity market as well as regional capacity issues related to the second quarter 2014 start-up of a large VAS customer. We addressed several customer pricing, contractual and operational issues within VAS in fourth quarter 2014 which resulted in improved VAS financial performance in 2015. The VAS operating income percentage improved to 4.3% in 2015 from 1.9% in 2014.
Operating Expenses
Our operating ratio (operating expenses expressed as a percentage of operating revenues) was 90.4% in 2015 compared to 92.5% in 2014. Expense items that impacted the overall operating ratio are described on the following pages. The tables on pages 15 through 16 show the Consolidated Statements of Income in dollars and as a percentage of total operating revenues and the percentage increase or decrease in the dollar amounts of those items compared to the prior year, as well as the operating ratios, operating margins and certain statistical information for our two reportable segments, Truckload and VAS.
Salaries, wages and benefits increased $55.9 million or 9.6% in 2015 compared to 2014 and increased 3.3% as a percentage of operating revenues. The higher dollar amount of salaries, wages and benefits expense was due primarily to higher driver salaries and payroll related fringe benefits due to higher driver pay rates and more company trucks and miles in 2015. We also recorded a total of $3.9 million of expense in 2015 related to a class action suit involving an employment related claim and a separation agreement for an executive resignation. When evaluated on a per-mile basis, driver and non-driver salaries, wages and benefits increased as well, which we attribute primarily to higher driver pay. In mid-August 2014, we increased pay by varying percentage amounts for many drivers within our One-Way Truckload unit. We also increased driver pay in multiple Dedicated fleets in 2014 and 2015. Non-driver salaries, wages and benefits in the non-trucking VAS segment decreased 1.6% in 2015 compared to 2014.
We renewed our workers' compensation insurance coverage for the policy year beginning April 1, 2015. Our coverage levels are the same as the prior policy year. We continue to maintain a self-insurance retention of $1.0 million per claim. Our workers' compensation insurance premiums for the policy year beginning April 2015 were similar to those for the previous policy year.
The driver recruiting market remained very challenging in 2015. Several difficult market factors persisted, including a declining number of, and increased competition for, driver training school graduates, a gradually declining national unemployment rate, aging truck driver demographics and increased truck safety regulations. Following our mid-August 2014 pay changes and an ongoing and intense company-wide focus to improve our driver and retention, our driver retention metrics improved. During fourth

17


quarter 2015, we announced strategic and targeted company driver and independent contractor per-mile increases in our One-Way Truckload business unit, totaling slightly more than $10 million on an annualized basis to nearly 20% of our drivers. Most of these increases became effective January 2016. We are unable to predict whether we will experience future driver shortages. If such a shortage were to occur and additional driver pay rate increases became necessary to attract and retain drivers, our results of operations would be negatively impacted to the extent that we could not obtain corresponding freight rate increases.
Fuel decreased $141.5 million or 40.9% in 2015 compared to 2014 and decreased 6.4% as a percentage of operating revenues due to (i) lower average diesel fuel prices and (ii) improved miles per gallon ("mpg"). Average diesel fuel prices in 2015 were $1.18 per gallon lower than in 2014, a 41% decrease. These decreases were partially offset by higher company truck miles in 2015.
We continue to employ measures to improve our fuel mpg, including (i) limiting truck engine idle time, (ii) optimizing the speed, weight and specifications of our equipment and (iii) implementing mpg-enhancing equipment changes to our fleet including new trucks with EPA 2010 compliant engines, more aerodynamic truck features, idle reduction systems, trailer tire inflation systems, trailer skirts and automated manual transmissions to reduce our fuel gallons purchased. However, fuel savings from mpg improvement is partially offset by higher depreciation expense and the additional cost of diesel exhaust fluid (required in certain tractors with engines that meet the 2010 EPA emission standards). Although our fuel management programs require significant capital investment and research and development, we intend to continue these and other environmentally conscious initiatives, including our active participation as an EPA SmartWay Transport Partner. The SmartWay Transport Partnership is a national voluntary program developed by the EPA and freight industry representatives to reduce greenhouse gases and air pollution and promote cleaner, more efficient ground freight transportation.
For the first eight weeks of 2016, the average diesel fuel price per gallon was approximately $0.71 lower than the average diesel fuel price per gallon in the same period of 2015 and approximately $0.75 lower than the average for first quarter 2015.
Shortages of fuel, increases in fuel prices and petroleum product rationing can have a material adverse effect on our operations and profitability. We are unable to predict whether fuel price levels will increase or decrease in the future or the extent to which fuel surcharges will be collected from customers. As of December 31, 2015, we had no derivative financial instruments to reduce our exposure to fuel price fluctuations.
Supplies and maintenance increased $1.7 million or 0.9% in 2015 compared to 2014 and increased 0.3% as a percentage of operating revenues. Driver advertising and other driver related expenses were higher in 2015 than in 2014. These increases were partially offset by lower tractor maintenance costs in 2015 due to a lower average age of company trucks in 2015 when compared to 2014.
Taxes and licenses increased $4.2 million or 4.9% in 2015 compared to 2014 and increased 0.3% as a percentage of operating revenues due to more miles in 2015 than in 2014, resulting from an increase in the average tractors in service, and an increase in property taxes. These increases were partially offset by a higher mpg in 2015 compared to 2014. An improved mpg results in fewer gallons of diesel fuel purchased and consequently less fuel taxes paid.
Insurance and claims increased $0.5 million or 0.6% in 2015 compared to 2014 and increased 0.2% as a percentage of operating revenues. The increase in 2015 compared to 2014 is primarily the result of higher expense on large dollar liability claims, partially offset by a decrease in expense related to cargo claims. Most of our insurance and claims expense results from our claim experience and claim development under our self-insurance program; the remainder results from insurance premiums for claims in excess of our self-insured limits. We renewed our liability insurance policies on August 1, 2015, and continue to be responsible for the first $2.0 million per claim with an annual $8.0 million aggregate for claims between $2.0 million and $5.0 million and an annual aggregate of $5.0 million for claims in excess of $5.0 million and less than $10.0 million. We maintain liability insurance coverage with insurance carriers substantially in excess of the $10.0 million per claim. See Item 3 of Part I of this Form 10-K for information on our bodily injury and property damage coverage levels since August 1, 2012. Our liability and cargo insurance premiums for the policy year that began August 1, 2015, are slightly lower than premiums for the previous policy year on a per-mile basis.
Depreciation increased $16.2 million or 9.2% in 2015 compared to 2014 and increased 0.9% as a percentage of operating revenues. This expense increase is due primarily to the higher cost of new trucks purchased compared to the cost of used trucks that were sold, as well as the growth in the number of company trucks. In addition, the purchase of new trailers to replace older used trailers which were fully depreciated also contributed to the increase in depreciation expense.
Depreciation expense has been historically affected by a series of changes to engine emissions standards imposed by the EPA that became effective in October 2002, January 2007 and January 2010, resulting in increased truck purchase costs. Trucks with 2010-standard engines have a higher purchase price than trucks manufactured to meet the 2007 standards, but the 2010-standard engines are more fuel efficient. As of December 31, 2015, nearly all of our company tractors had engines that comply with the 2010 emissions standards.

18


Rent and purchased transportation expense decreased $18.2 million or 3.6% in 2015 compared to 2014 and decreased 0.4% as a percentage of operating revenues. Rent and purchased transportation expense consists mostly of payments to third-party capacity providers in the VAS segment and other non-trucking operations and payments to independent contractors in the Truckload segment. The payments to third-party capacity providers generally vary depending on changes in the volume of services generated by the VAS segment. VAS rent and purchased transportation expense decreased $6.5 million, despite higher VAS revenues, and decreased to 84.5% of VAS revenues in 2015 from 86.7% in 2014. This decrease was due primarily to our ongoing efforts to address customer pricing, contractual and operational issues within VAS.
Rent and purchased transportation expense for the Truckload segment decreased $13.0 million in 2015 compared to 2014. This decrease is due primarily to lower fuel prices that resulted in lower reimbursement to independent contractors for fuel and a higher average independent contractor settlement rate per mile in 2015 compared to 2014. In mid-August 2014 and in November 2015, we increased the per-mile settlement rate for certain independent contractors. Independent contractor miles as a percentage of total miles were 11.9% in 2015 and 12.1% in 2014.
Challenging operating conditions continue to make independent contractor recruitment and retention difficult. Such conditions include inflationary cost increases that are the responsibility of independent contractors and a shortage of financing available to independent contractors for equipment purchases. We have historically been able to add company tractors and recruit additional company drivers to offset any decrease in the number of independent contractors. If a shortage of independent contractors and company drivers occurs, further increases in per-mile settlement rates (for independent contractors) and driver pay rates (for company drivers) may become necessary to attract and retain these drivers. This could negatively affect our results of operations to the extent that we would not be able to obtain corresponding freight rate increases.
Communications and utilities increased $0.9 million or 6.3% in 2015 compared to 2014 but did not change as a percentage of operating revenues. The increase is due to higher equipment tracking expenses and higher communication costs.
Other operating expenses decreased $5.9 million in 2015 compared to 2014 and decreased 0.3% as a percentage of operating revenues. Gains on sales of assets (primarily used trucks and trailers) are reflected as a reduction of other operating expenses and are reported net of sales-related expenses (which include costs to prepare the equipment for sale). Gains on sales of assets increased to $23.2 million in 2015 from $19.3 million in 2014, a $3.9 million increase. In 2015, we sold more trucks and trailers than in 2014. We realized higher average gains per trailer sold, while average gains per truck sold were flat. The used truck market weakened in fourth quarter 2015, causing lower pricing. We expect this trend to continue in 2016. We also realized $0.7 million in gains from the sale of real estate in 2015 compared to $1.6 million in 2014. Other operating expenses were lower in 2015 than in 2014.
Other Expense (Income)
Other expense (income) increased $1.0 million in 2015 compared to 2014 and increased 0.1% as a percentage of operating revenues. Interest expense was higher in 2015 compared to 2014 because we recorded a full year of interest expense in 2015 after entering into an interest rate swap agreement in September 2014 that effectively fixed our interest rate at 2.5% for five years on debt of $75 million.
Income Taxes
Our effective income tax rate (income taxes expressed as a percentage of income before income taxes) decreased to 38.5% for 2015 from 39.0% in 2014. The lower income tax rate in 2015 is primarily attributed to favorable tax adjustments for the remeasurement of uncertain tax positions in 2015 and the effect of higher pre-tax income which caused non-deductible expenses to comprise a lower percentage.
2014 Compared to 2013
Operating Revenues
Operating revenues increased 5.4% in 2014 compared to 2013. When comparing 2014 to 2013, the Truckload segment revenues increased $44.3 million, or 2.7%, and the VAS segment revenues increased $29.3 million, or 8.1%.
Within the Truckload segment, freight demand was strong in 2014. Freight demand (as measured by our daily morning ratio of loads available to trucks available in our One-Way Truckload network) showed consistent strength throughout the year, and we were overbooked (more available freight than available trucks at the beginning of each business day) nearly every week of 2014. The improved freight market dynamics began showing year-over-year improvement for Werner in mid-November 2013, and that favorable trend continued through 2014. A tight capacity market in 2014 combined with a gradually firming economy as 2014 progressed were the primary contributing factors.

19


Trucking revenues, net of fuel surcharge, increased 3.5% in 2014 compared to 2013 due to a 5.7% increase in average revenues per tractor per week, net of fuel surcharge, partially offset by a 2.1% decrease in the average number of tractors in service. Average miles per truck improved by 2.7% and our empty mile percentage was 3.1% lower in 2014 than in 2013. Average revenues per total mile, net of fuel surcharge, increased 3.0% in 2014 compared to 2013. Several factors had a positive impact on our average revenues per tractor per week and profitability, while at the same time reduced the percentage increase in our revenue per total mile. Our average trip length increased by 4.4% in 2014 compared to 2013, and longer length of haul shipments generally have a lower rate per mile due to productivity benefits. Noting the improved freight market in 2014 compared to 2013, during 2014 we accepted less brokerage freight (in which rates are inclusive of fuel) and instead supported our customers with additional capacity priced with a base rate per mile and a fuel surcharge per mile. Finally, customer changes in fuel surcharge programs had a neutral impact on profitability but an adverse effect on revenue per total mile, net of fuel surcharge. A few large customers modified their fuel surcharge programs to "zero peg" in the past 12 months, which shifted revenues from base rates to fuel surcharges. A zero peg fuel surcharge program starts with a base fuel price per gallon (the minimum price for fuel, above which a customer pays fuel surcharge) of zero rather than a base fuel price per gallon more commonly ranging from $1.10 to $1.20.
The average number of tractors in service in the Truckload segment decreased 2.1% to 7,013 in 2014 from 7,162 in 2013, a decrease of 149 tractors. We ended 2014 with 7,050 tractors in the Truckload segment (3,690 in our Specialized Services unit and 3,360 in our One-Way Truckload unit). In mid-August 2014, we increased pay by varying percentage amounts for many drivers in certain fleets within our One-Way Truckload unit. After these driver pay changes, our driver and truck count recovered and increased from July 2014 levels.
Trucking fuel surcharge revenues decreased 1.4% to $349.8 million in 2014 from $354.6 million in 2013 because of lower average fuel prices in 2014, which more than offset the impact of the less brokerage freight and zero peg fuel surcharge items described above and the effect of higher miles.
VAS revenues are generated by its four operating units and exclude revenues for full truckload shipments transferred to the Truckload segment, which are recorded as trucking revenues by the Truckload segment. VAS also recorded revenue and brokered freight expense of $2.9 million in 2014 and $4.5 million in 2013 for Intermodal drayage movements performed by the Truckload segment (also recorded as trucking revenues by the Truckload segment), and these transactions between reporting segments are eliminated in consolidation. VAS revenues increased 8.1% to $390.6 million in 2014 from $361.4 million in 2013. VAS gross margin dollars decreased 6.8% to $52.0 million in 2014 from $55.8 million in 2013, and other operating expenses increased $3.3 million or 8.1%. VAS results for 2014 (especially mid-year) were negatively impacted by lower gross margin percentages for contractual business due to rising third-party carrier costs in a tight capacity market as well as regional capacity issues related to the second quarter 2014 start-up of a large VAS customer.
Operating Expenses
Our operating ratio was 92.5% in 2014 compared to 93.1% in 2013. Expense items that impacted the overall operating ratio are described on the following pages. The tables on pages 15 through 16 show the Consolidated Statements of Income in dollars and as a percentage of total operating revenues and the percentage increase or decrease in the dollar amounts of those items compared to the prior year, as well as the operating ratios, operating margins, and certain statistical information for our two reportable segments, Truckload and VAS.
Salaries, wages and benefits increased $38.6 million or 7.1% in 2014 compared to 2013 and increased 0.4% as a percentage of operating revenues. The higher dollar amount of salaries, wages and benefits expense was due primarily to higher driver and non-driver salaries. When evaluated on a per-mile basis, driver and non-driver salaries, wages and benefits increased as well, which we attribute primarily to higher driver pay. In mid-August 2014, we increased pay by varying percentage amounts for many drivers within our One-Way Truckload unit. In 2014, we also increased driver pay in multiple Dedicated fleets, most of which were funded by customer rate increases to ensure capacity. Non-driver salaries, wages and benefits in the non-trucking VAS segment decreased 0.3% in 2014 compared to 2013.
We renewed our workers' compensation insurance coverage for the policy year beginning April 1, 2014. Our coverage levels were the same as the prior policy year. We continued to maintain a self-insurance retention of $1.0 million per claim. Our workers' compensation insurance premiums for the policy year beginning April 2014 were similar to those for the previous policy year.
The driver recruiting and retention market was more challenging in 2014 compared to 2013. We hired 3.4% fewer drivers in 2014 compared to 2013, and the difficult driver market made it challenging to achieve our truck goal for the Truckload segment. We believe that a declining number of, and increased competition for, driver training school graduates, a gradually declining national unemployment rate and job competition from the housing construction and manufacturing industries were all contributing factors. Following our mid-August pay changes, our driver retention metrics improved.

20


Fuel decreased $25.7 million or 6.9% in 2014 compared to 2013 and decreased 2.1% as a percentage of operating revenues due to (i) lower average diesel fuel prices and (ii) slightly improved miles per gallon ("mpg"). Average diesel fuel prices in 2014 were 19 cents per gallon lower than in 2013, a 6% decrease. These decreases were partially offset by higher company truck miles.
During 2014, we continued to employ measures to improve our fuel mpg and invest in fuel saving equipment solutions, which were also intended to lessen environmental impact. These measures resulted in an improvement in mpg in 2014 compared to 2013. However, fuel savings from the mpg improvement is partially offset by higher depreciation expense and the additional cost of diesel exhaust fluid.
Supplies and maintenance increased $9.3 million or 5.2% in 2014 compared to 2013 but did not change as a percentage of operating revenues. Driver advertising and other driver related expenses were higher in 2014 than in 2013. Increased over the road tractor and trailer maintenance also contributed to the increase in this expense category, some of which can be attributed to severe weather conditions in first quarter 2014.
Taxes and licenses decreased $1.2 million or 1.4% in 2014 compared to 2013 and decreased 0.3% as a percentage of operating revenues due to improvement in the company truck fuel mpg, despite driving more miles in 2014. An improved mpg results in fewer gallons of diesel fuel purchased and consequently less fuel taxes paid.
Insurance and claims increased $9.2 million or 12.9% in 2014 compared to 2013 and increased 0.2% as a percentage of operating revenues. The increase in 2014 compared to 2013 is primarily the result of an increase in the reserves for prior period claims (unfavorable development) related to large dollar liability claims. Higher expense on new smaller dollar liability claims was nearly offset by better development on small claims (favorable development in 2014 compared to unfavorable development in 2013). We renewed our liability insurance policies on August 1, 2014, and continued to be responsible for the first $2.0 million per claim with an annual $8.0 million aggregate for claims between $2.0 million and $5.0 million and an annual aggregate of $5.0 million for claims in excess of $5.0 million and less than $10.0 million. Our liability and cargo insurance premiums for the policy year that began August 1, 2014, are slightly lower than premiums for the previous policy year on a per-mile basis.
Depreciation increased $4.0 million or 2.3% in 2014 compared to 2013 but decreased 0.2% as a percentage of operating revenues. This expense increase is due primarily to the higher cost of new trucks purchased compared to the cost of used trucks that were sold. In addition, the purchase of new trailers to replace older used trailers which were fully depreciated also contributed to the increase in depreciation expense. These increases were partially offset by lower depreciation on auxiliary power units that were sold with the older used trucks and not replaced.
Rent and purchased transportation expense increased $41.9 million or 9.2% in 2014 compared to 2013 and increased 0.8% as a percentage of operating revenues. VAS rent and purchased transportation expense increased $33.0 million and increased to 86.7% of VAS revenues in 2014 from 84.6% in 2013. This increase was due primarily to rising third-party carrier costs in a tight capacity market as well as regional capacity issues related to the second quarter 2014 start-up of a large VAS customer.
Rent and purchased transportation expense for the Truckload segment increased $5.3 million in 2014 compared to 2013. This increase is due primarily to higher third-party capacity provider costs for shipments delivered to or from Mexico because of volume increases and a higher average independent contractor pay per mile in 2014 compared to 2013. In August 2014, we increased the per-mile settlement rate for certain owner-operators. Independent contractor miles as a percentage of total miles were 12.1% in 2014 and 12.2% in 2013.
Communications and utilities increased $0.7 million or 5.3% in 2014 compared to 2013 but did not change as a percentage of operating revenues. The increase is due to using a new driver route navigation program and higher other communication costs.
Other operating expenses increased $13.1 million or 159.4% in 2014 compared to 2013 and increased 0.6% as a percentage of operating revenues. Gains on sales of assets increased to $19.3 million in 2014 from $16.4 million in 2013, a $2.9 million increase. In 2014, we realized lower average gains per truck sold, higher average gains per trailer sold and sold more trucks and trailers than in 2013. We also realized $1.6 million in gains from the sale of real estate in 2014 compared to $1.8 million in 2013. Other operating expenses were higher in 2014 than in 2013.
Other Expense (Income)
Other expense (income) increased $0.3 million or 15.1% in 2014 compared to 2013 and did not change as a percentage of operating revenues. Interest expense was higher in 2014 compared to 2013 because we had a higher amount of average debt outstanding, and we entered into an interest rate swap agreement in September 2014 that effectively fixed our interest rate at 2.5%.


21


Income Taxes
Our effective income tax rate (income taxes expressed as a percentage of income before income taxes) increased to 39.0% for 2014 from 38.8% in 2013. The higher income tax rate is primarily attributed to a smaller amount of favorable tax adjustments for the remeasurement of uncertain tax positions in 2014 than in 2013, partially offset by the benefit of prior year state income tax refunds received in 2014.
Liquidity and Capital Resources:

During the year ended December 31, 2015, we generated cash flow from operations of $370.4 million, a 79.3% increase ($163.8 million), compared to the year ended December 31, 2014. This increase in net cash provided by operating activities is attributed primarily to a $76.6 million increase from general working capital activities (including a $50.8 million increase in cash flows related to accounts receivable due to the timing of customer payments) and a $25.1 million increase in net income. Our income tax payments were also $41.6 million lower in 2015 due to the timing of enacting tax regulation changes at the end of 2014 and 2015. Cash flow from operations decreased $25.9 million in 2014 from 2013, or 11.1%. This decrease is attributed primarily to a $14.6 million decrease in cash flows related to accounts receivable and a $10.8 million increase in income tax payments. We were able to make net capital expenditures, pay dividends and repurchase company stock with the net cash provided by operating activities and existing cash balances, supplemented by net borrowings under our existing credit facilities.
Net cash used in investing activities increased by $132.0 million to $335.5 million in 2015 from $203.5 million in 2014 and increased by $63.2 million from $140.3 million in 2013. Net property additions (primarily revenue equipment) were $351.5 million for the year ended December 31, 2015 compared to $212.3 million during the same period of 2014 and $151.9 million during 2013. Net property additions were higher in 2015 and 2014 than in 2013 because starting in the second half of 2014, we increased our capital expenditures to lower the average age of our truck fleet. As of December 31, 2015, we were committed to property and equipment purchases of approximately $112.0 million. We currently estimate net capital expenditures (primarily revenue equipment) in 2016 to be in the range of $400 million to $450 million, which we expect will enable us to further reduce the average age of our truck fleet. If the freight market shows significant weakness during 2016, we will consider adjusting our capital expenditures accordingly. We intend to fund these net capital expenditures in 2016 through cash flow from operations and financing available under our existing credit facilities, as management deems necessary.
Net financing activities used $25.0 million in 2015, $3.7 million in 2014 and $83.5 million in 2013. During the year ended December 31, 2015, we borrowed and repaid $10.0 million of debt. Our outstanding debt at December 31, 2015 totaled $75.0 million. During 2014, we borrowed $85.0 million and repaid $50.0 million of debt, and in 2013 we borrowed $10.0 million and repaid $60.0 million. We also made a $3.1 million note payment in 2015. We paid quarterly dividends of $15.1 million in 2015, $14.4 million in 2014 and $14.6 million in 2013. We increased our quarterly dividend rate by $0.01 per share, or 20%, beginning with the dividend paid in October 2015. Financing activities for the year ended December 31, 2015, also included common stock repurchases of 225,000 shares at a cost of $6.4 million, compared to $30.6 million in 2014 (1,200,000 shares) and $20.1 million in 2013 (821,091 shares). From time to time, the Company has repurchased, and may continue to repurchase, shares of the Company’s common stock. The timing and amount of such purchases depends on stock market conditions and other factors. As of December 31, 2015, the Company had purchased 3,287,291 shares pursuant to our current Board of Directors repurchase authorization and had 4,712,709 shares remaining available for repurchase.
Management believes our financial position at December 31, 2015 is strong. As of December 31, 2015, we had $31.8 million of cash and cash equivalents and $935.7 million of stockholders’ equity. Cash is invested primarily in government portfolio money market funds. As of December 31, 2015, we had a total of $325.0 million of credit pursuant to three credit facilities (see Note 2 in the Notes to Consolidated Financial Statements under Item 8 of Part II of this Form 10-K for information regarding our credit agreements as of December 31, 2015), of which we had borrowed $75.0 million. The remaining $250.0 million of credit available under these facilities is reduced by the $31.0 million in stand-by letters of credit under which we are obligated. These stand-by letters of credit are primarily required as security for insurance policies. Based on our strong financial position, management does not foresee any significant barriers to obtaining sufficient financing, if necessary.

22


Contractual Obligations and Commercial Commitments:
The following table sets forth our contractual obligations and commercial commitments as of December 31, 2015.
Payments Due by Period
(Amounts in millions)
 
Total
 
Less than
1 year (2016)
 
1-3 years (2017-2018)
 
3-5 years (2019-2020)
 
More
than 5
years (After 2020)
 
Period
Unknown
Contractual Obligations
 
 
 
 
 
 
 
 
 
 
 
 
Unrecognized tax benefits
 
$
7.7

 
$

 
$

 
$

 
$

 
$
7.7

Long-term debt, including current maturities
 
75.0

 

 

 
75.0

 

 

Interest payments on debt
 
7.0

 
1.9

 
3.8

 
1.3

 

 

Property and equipment purchase commitments
 
112.0

 
112.0

 

 

 

 

Total contractual cash obligations
 
$
201.7

 
$
113.9

 
$
3.8

 
$
76.3

 
$

 
$
7.7

Other Commercial Commitments
 
 
 
 
 
 
 
 
 
 
 
 
Unused lines of credit
 
$
219.0

 
$

 
$

 
$
219.0

 
$

 
$

Stand-by letters of credit
 
31.0

 
31.0

 

 

 

 

Total commercial commitments
 
$
250.0

 
$
31.0

 
$

 
$
219.0

 
$

 
$

Total obligations
 
$
451.7

 
$
144.9

 
$
3.8

 
$
295.3

 
$

 
$
7.7

As of December 31, 2015, we had unsecured committed credit facilities with three banks as well as a term commitment with one of these banks. We had with Wells Fargo Bank, N.A., a $100 million credit facility which will expire on July 12, 2020, and a $75 million term commitment with principal due and payable on September 15, 2019. On July 13, 2015, we amended our existing credit agreement, dated June 1, 2012, as previously amended, with Wells Fargo Bank, N.A. This amendment lowered the maximum principal amount of the unsecured line of credit to $100 million from $175 million and extended the term of the credit agreement to July 12, 2020. Also on July 13, 2015, we entered into a new credit agreement with U.S. Bank, N.A. The new credit agreement is an unsecured line of credit of $75 million and expires on July 13, 2020. On March 5, 2015, we replaced our existing $75 million credit agreement with BMO Harris Bank, N.A., with a new credit agreement. The new BMO Harris Bank, N.A., agreement includes a $75 million credit facility which will expire on March 5, 2020. Borrowings under these credit facilities and term note bear variable interest (0.93% at December 31, 2015) based on the London Interbank Offered Rate (“LIBOR”), with interest on the term note effectively fixed at 2.5% with an interest rate swap agreement. Interest payments on debt are based on the debt balance and interest rate at December 31, 2015. The credit available under these facilities is further reduced by the amount of stand-by letters of credit under which we are obligated. The stand-by letters of credit are primarily required for insurance policies. The unused lines of credit are available to us in the event we need financing for the replacement of our fleet or for other significant capital expenditures. Management believes our financial position is strong, and we therefore expect that we could obtain additional financing, if necessary. Property and equipment purchase commitments relate to committed equipment expenditures, primarily for revenue equipment. As of December 31, 2015, we had recorded a $7.7 million liability for unrecognized tax benefits. We are unable to reasonably determine when the $7.7 million categorized as “period unknown” will be settled.
Off-Balance Sheet Arrangements:
We began leasing certain tractors under non-cancelable operating leases in May 2011. During second quarter 2015, we satisfied all lease agreements and have no future payment obligation under these leases at December 31, 2015.
Critical Accounting Policies and Estimates:
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the (i) reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and (ii) reported amounts of revenues and expenses during the reporting period. We evaluate these estimates on an ongoing basis as events and circumstances change, utilizing historical experience, consultation with experts and other methods considered reasonable in the particular circumstances. Actual results could differ from those estimates and may significantly impact our results of operations from period to period. It is also possible that materially different amounts would be reported if we used different estimates or assumptions.

23


The most critical accounting policies and estimates that require us to make significant judgments and estimates and affect our financial statements include the following:
Depreciation and impairment of tractors and trailers. We operate a significant number of tractors and trailers in connection with our business and must select estimated useful lives and salvage values for calculating depreciation. Depreciable lives of tractors and trailers range from 80 months to 12 years. Estimates of salvage value at the expected date of trade-in or sale are based on the expected market values of equipment at the time of disposal. We consider our experience with similar assets, conditions in the used revenue equipment market and operational information such as average annual miles. We believe that these methods properly spread the costs over the useful life of the assets. We continually monitor the adequacy of the lives and salvage values used in calculating depreciation expense and adjust these assumptions appropriately when warranted. We review our long-lived assets for impairment whenever events or circumstances indicate the carrying amount of a long-lived asset may not be recoverable. An impairment loss would be recognized if the carrying amount of the long-lived asset is not recoverable and the carrying amount exceeds its fair value.
Estimates of accrued liabilities for insurance and claims for liability and physical damage losses and workers’ compensation. The insurance and claims accruals (current and non-current) are recorded at the estimated ultimate payment amounts and are based upon individual case estimates (including negative development) and estimates of incurred-but-not-reported losses using loss development factors based upon past experience. An actuary reviews our undiscounted self-insurance reserves for bodily injury and property damage claims and workers’ compensation claims at year-end. The actual cost to settle our self-insured claim liabilities can differ from our reserve estimates because of a number of uncertainties, including the inherent difficulty in estimating the severity of a claim and the potential amount to defend and settle a claim.
Accounting for income taxes. Significant management judgment is required to determine (i) the provision for income taxes, (ii) whether deferred income taxes will be realized in full or in part and (iii) the liability for unrecognized tax benefits related to uncertain tax positions. Deferred income tax assets and liabilities are measured using enacted tax rates that are expected to apply to taxable income in the years when those temporary differences are expected to be recovered or settled. When it is more likely that all or some portion of specific deferred income tax assets will not be realized, a valuation allowance must be established for the amount of deferred income tax assets that are determined not to be realizable. A valuation allowance for deferred income tax assets has not been deemed necessary due to our profitable operations. Accordingly, if facts or financial circumstances change and consequently impact the likelihood of realizing the deferred income tax assets, we would need to apply management’s judgment to determine the amount of valuation allowance required in any given period. We believe that we have adequately provided for our future tax consequences based upon current facts and circumstances and current tax law. However, should our positions be challenged, different outcomes could result and have a significant impact on our results of operations.
Inflation:
Inflation may impact our operating costs. A prolonged inflation period could cause rises in interest rates, fuel, wages and other costs. These inflationary increases could adversely affect our results of operations unless freight rates could be increased correspondingly. However, the effect of inflation has been minimal over the past three years.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates, commodity prices and foreign currency exchange rates.
Commodity Price Risk
The price and availability of diesel fuel are subject to fluctuations attributed to changes in the level of global oil production, refining capacity, seasonality, weather and other market factors. Historically, we have recovered a majority, but not all, of fuel price increases from customers in the form of fuel surcharges. We implemented customer fuel surcharge programs with most of our customers to offset much of the higher fuel cost per gallon. However, we do not recover all of the fuel cost increase through these surcharge programs. We cannot predict the extent to which fuel prices will increase or decrease in the future or the extent to which fuel surcharges could be collected. As of December 31, 2015, we had no derivative financial instruments to reduce our exposure to fuel price fluctuations.
Foreign Currency Exchange Rate Risk
We conduct business in several foreign countries, including Mexico, Canada, China and Australia. To date, most foreign revenues are denominated in U.S. Dollars, and we receive payment for foreign freight services primarily in U.S. Dollars to reduce direct foreign currency risk. Assets and liabilities maintained by a foreign subsidiary company in the local currency are subject to foreign exchange gains or losses. Foreign currency translation gains and losses primarily relate to changes in the value of revenue equipment owned by a subsidiary in Mexico, whose functional currency is the Peso. Foreign currency translation losses were $3.9

24


million in 2015, $3.6 million in 2014, and $0.5 million in 2013 and were recorded in accumulated other comprehensive loss within stockholders’ equity in the Consolidated Balance Sheets. The exchange rate between the Mexican Peso and the U.S. Dollar was 17.21 Pesos to $1.00 at December 31, 2015 compared to 14.72 Pesos to $1.00 at December 31, 2014 and 13.08 Pesos to $1.00 at December 31, 2013.

Interest Rate Risk
We manage interest rate exposure through a mix of variable rate debt and interest rate swap agreements. We had $75.0 million of debt outstanding at December 31, 2015, for which the interest rate is effectively fixed at 2.5% through September 2019 with an interest rate swap agreement. Interest rates on our unused credit facilities are based on the LIBOR. Increases in interest rates could impact our annual interest expense on future borrowings. As of December 31, 2015, we had one effective interest rate swap agreement with a notional amount of $75.0 million to reduce our exposure to interest rate increases.


25


ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Werner Enterprises, Inc.:
We have audited the accompanying consolidated balance sheets of Werner Enterprises, Inc. and subsidiaries (the Company) as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2015. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule listed in Item 15(a)(2) of this Form 10-K. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Werner Enterprises, Inc. and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Werner Enterprises, Inc.’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 26, 2016 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ KPMG LLP
Omaha, Nebraska
February 26, 2016



26


WERNER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME
 
  
Years Ended December 31,
(In thousands, except per share amounts)
2015
 
2014
 
2013
Operating revenues
$
2,093,529

 
$
2,139,289

 
$
2,029,183

Operating expenses:
 
 
 
 
 
Salaries, wages and benefits
639,908

 
584,006

 
545,419

Fuel
204,583

 
346,058

 
371,789

Supplies and maintenance
190,114

 
188,437

 
179,172

Taxes and licenses
89,646

 
85,468

 
86,686

Insurance and claims
80,848

 
80,375

 
71,177

Depreciation
193,209

 
176,984

 
173,019

Rent and purchased transportation
480,624

 
498,782

 
456,885

Communications and utilities
15,121

 
14,220

 
13,506

Other
(980
)
 
4,871

 
(8,196
)
Total operating expenses
1,893,073

 
1,979,201

 
1,889,457

Operating income
200,456

 
160,088

 
139,726

Other expense (income):
 
 
 
 
 
Interest expense
1,974

 
881

 
454

Interest income
(2,875
)
 
(2,538
)
 
(2,269
)
Other
196

 
(29
)
 
(170
)
Total other income
(705
)
 
(1,686
)
 
(1,985
)
Income before income taxes
201,161

 
161,774

 
141,711

Income taxes
77,447

 
63,124

 
54,926

Net income
$
123,714

 
$
98,650

 
$
86,785

Earnings per share:
 
 
 
 
 
Basic
$
1.72

 
$
1.37

 
$
1.19

Diluted
$
1.71

 
$
1.36

 
$
1.18

Weighted-average common shares outstanding:
 
 
 
 
 
Basic
71,957

 
72,122

 
72,866

Diluted
72,556

 
72,738

 
73,428

See Notes to Consolidated Financial Statements.

27


WERNER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
  
Years Ended December 31,
(In thousands)
2015
 
2014
 
2013
Net income
$
123,714

 
$
98,650

 
$
86,785

Other comprehensive income (loss):
 
 
 
 
 
Foreign currency translation adjustments
(3,930
)
 
(3,564
)
 
(475
)
Change in fair value of interest rate swap
242

 
(1,180
)
 

Other comprehensive income (loss)
(3,688
)
 
(4,744
)
 
(475
)
Comprehensive income
$
120,026

 
$
93,906

 
$
86,310

See Notes to Consolidated Financial Statements.

28


WERNER ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
 
 
December 31,
(In thousands, except share amounts)
2015
 
2014
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
31,833

 
$
22,604

Accounts receivable, trade, less allowance of $10,298 and $10,017, respectively
251,023

 
266,727

Other receivables
17,241

 
20,316

Inventories and supplies
16,415

 
17,824

Prepaid taxes, licenses and permits
15,657

 
14,914

Current deferred income taxes
28,037

 
34,066

Income taxes receivable
20,052

 
23,435

Other current assets
27,281

 
26,458

Total current assets
407,539

 
426,344

Property and equipment, at cost:
 
 
 
Land
34,356

 
32,213

Buildings and improvements
134,595

 
130,618

Revenue equipment
1,530,617

 
1,413,178

Service equipment and other
209,032

 
210,220

Total property and equipment
1,908,600

 
1,786,229

Less – accumulated depreciation
754,130

 
772,447

Property and equipment, net
1,154,470

 
1,013,782

Other non-current assets
51,675

 
40,336

Total assets
$
1,613,684

 
$
1,480,462

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
70,643

 
$
64,827

Insurance and claims accruals
64,106

 
73,814

Accrued payroll
25,233

 
28,121

Other current liabilities
23,720

 
19,768

Total current liabilities
183,702

 
186,530

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

 
75,000

Other long-term liabilities
19,832

 
20,021

Insurance and claims accruals, net of current portion
125,195

 
123,445

Deferred income taxes
274,301

 
241,606

Commitments and contingencies

 

Stockholders’ equity:
 
 
 
Common stock, $0.01 par value, 200,000,000 shares authorized; 80,533,536 shares
 
 
 
issued; 71,998,750 and 72,038,368 shares outstanding, respectively
805

 
805

Paid-in capital
102,734

 
101,803

Retained earnings
1,022,966

 
915,085

Accumulated other comprehensive loss
(13,063
)
 
(9,375
)
Treasury stock, at cost; 8,534,786 and 8,495,168 shares, respectively
(177,788
)
 
(174,458
)
Total stockholders’ equity
935,654

 
833,860

Total liabilities and stockholders’ equity
$
1,613,684

 
$
1,480,462

See Notes to Consolidated Financial Statements.

29


WERNER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
  
Years Ended December 31,
(In thousands)
2015
 
2014
 
2013
Cash flows from operating activities:
 
 
 
 
 
Net income
$
123,714

 
$
98,650

 
$
86,785

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
Depreciation
193,209

 
176,984

 
173,019

Deferred income taxes
38,442

 
5,038

 
(8,389
)
Gain on disposal of property and equipment
(23,240
)
 
(19,260
)
 
(16,408
)
Non-cash equity compensation
4,361

 
6,070

 
4,809

Insurance and claims accruals, net of current portion
1,750

 
(8,455
)
 
6,400

Other
9,103

 
1,107

 
(541
)
Changes in certain working capital items:
 
 
 
 

Accounts receivable, net
15,704

 
(35,080
)
 
(20,514
)
Other current assets
9,455

 
(25,926
)
 
3,398

Accounts payable
7,256

 
(1,497
)
 
2,793

Other current liabilities
(9,362
)
 
8,934

 
1,105

Net cash provided by operating activities
370,392

 
206,565

 
232,457

Cash flows from investing activities:
 
 
 
 
 
Additions to property and equipment
(454,097
)
 
(296,649
)
 
(211,329
)
Proceeds from sales of property and equipment
102,614

 
84,355

 
59,413

Decrease in notes receivable
19,517

 
14,390

 
10,679

Other
(3,580
)
 
(5,583
)
 
979

Net cash used in investing activities
(335,546
)
 
(203,487
)
 
(140,258
)
Cash flows from financing activities:
 
 
 
 
 
Repayments of short-term debt
(10,000
)
 
(10,000
)
 
(20,000
)
Proceeds from issuance of short-term debt
10,000

 
10,000

 

Repayments of long-term debt

 
(40,000
)
 
(40,000
)
Proceeds from issuance of long-term debt

 
75,000

 
10,000

Payment of notes payable
(3,117
)
 

 

Dividends on common stock
(15,115
)
 
(14,440
)
 
(14,587
)
Repurchases of common stock
(6,438
)
 
(30,587
)
 
(20,060
)
Tax withholding related to net share settlements of restricted stock awards
(1,724
)
 
(1,977
)
 
(1,804
)
Stock options exercised
846

 
7,012

 
2,548

Excess tax benefits from equity compensation
556

 
1,324

 
379

Net cash used in financing activities
(24,992
)
 
(3,668
)
 
(83,524
)
Effect of exchange rate fluctuations on cash
(625
)
 
(484
)
 
(425
)
Net increase (decrease) in cash and cash equivalents
9,229

 
(1,074
)
 
8,250

Cash and cash equivalents, beginning of period
22,604

 
23,678

 
15,428

Cash and cash equivalents, end of period
$
31,833

 
$
22,604

 
$
23,678

Supplemental disclosures of cash flow information:
 
 
 
 
 
Interest paid
$
1,978

 
$
820

 
$
466

Income taxes paid
35,205

 
76,849

 
66,032

Supplemental schedule of non-cash investing activities:
 
 
 
 

Notes receivable issued upon sale of property and equipment
$
36,060

 
$
14,385

 
$
17,110

Issuance of notes payable

 
6,233

 

Change in fair value of interest rate swap
242

 
(1,180
)
 

Property and equipment acquired included in accounts payable
627

 
2,067

 
5,403

Property and equipment disposed included in other receivables
21

 

 
434

See Notes to Consolidated Financial Statements.

30


WERNER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 
(In thousands, except share and per share amounts)
Common
Stock
 
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Treasury
Stock
 
Total
Stockholders’
Equity
BALANCE, December 31, 2012
$
805

 
$
97,457

 
$
758,617

 
$
(4,156
)
 
$
(137,826
)
 
$
714,897

Comprehensive income

 

 
86,785

 
(475
)
 

 
86,310

Purchases of 821,091 shares of common stock

 

 

 

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

 

 
(14,560
)
 

 

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

 
(3,732
)
 

 

 
4,855

 
1,123

Non-cash equity compensation expense

 
4,809

 

 

 

 
4,809

BALANCE, December 31, 2013
805

 
98,534

 
830,842

 
(4,631
)
 
(153,031
)
 
772,519

Comprehensive income

 

 
98,650

 
(4,744
)
 

 
93,906

Purchases of 1,200,000 shares of common stock

 

 

 

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

 

 
(14,407
)
 

 

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

 
(2,801
)
 

 

 
9,160

 
6,359

Non-cash equity compensation expense

 
6,070

 

 

 

 
6,070

BALANCE, December 31, 2014
805

 
101,803

 
915,085

 
(9,375
)
 
(174,458
)
 
833,860

Comprehensive income

 

 
123,714

 
(3,688
)
 

 
120,026

Purchases of 225,000 shares of common stock

 

 

 

 
(6,438
)
 
(6,438
)
Dividends on common stock ($0.22 per share)

 

 
(15,833
)
 

 

 
(15,833
)
Equity compensation activity, 185,382 shares, including excess tax benefits

 
(3,430
)
 

 

 
3,108

 
(322
)
Non-cash equity compensation expense

 
4,361

 

 

 

 
4,361

BALANCE, December 31, 2015
$
805

 
$
102,734

 
$
1,022,966

 
$
(13,063
)
 
$
(177,788
)
 
$
935,654

See Notes to Consolidated Financial Statements.

31



WERNER ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business: Werner Enterprises, Inc. (the “Company”) is a truckload transportation and logistics company operating under the jurisdiction of the U.S. Department of Transportation, similar governmental transportation agencies in the foreign countries in which we operate and various U.S. state regulatory authorities. For the year ended December 31, 2015, our ten largest customers comprised 45% of our revenues. For the years ended December 31, 2014 and 2013, our ten largest customers comprised 41% and 40%, respectively, of our revenues. No single customer generated more than 10% of the Company’s total revenues in 2015, 2014, and 2013.
Principles of Consolidation: The accompanying consolidated financial statements include the accounts of Werner Enterprises, Inc. and our majority-owned subsidiaries. All significant intercompany accounts and transactions relating to these majority-owned entities have been eliminated.
Use of Management Estimates: The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the (i) reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and (ii) reported amounts of revenues and expenses during the reporting period. The most significant estimates that affect our financial statements include the useful lives and salvage values of property and equipment, accrued liabilities for insurance and claims, estimates for incomes taxes and the allowance for doubtful accounts. Actual results could differ from those estimates.
Cash and Cash Equivalents: We consider all highly liquid investments, purchased with a maturity of three months or less, to be cash equivalents. Accounts at banks with an aggregate excess of the amount of checks issued over cash balances are included in current liabilities in the Consolidated Balance Sheets, and changes in such accounts are reported as a financing activity in the Consolidated Statements of Cash Flows.
Trade Accounts Receivable: We record trade accounts receivable at the invoiced amounts, net of an allowance for doubtful accounts. The allowance for doubtful accounts is our estimate of the amount of probable credit losses and revenue adjustments in our existing accounts receivable. We review the financial condition of customers for granting credit and determine the allowance based on analysis of individual customers’ financial condition, historical write-off experience and national economic conditions. We evaluate the adequacy of our allowance for doubtful accounts quarterly. Past due balances over 90 days and exceeding a specified amount are reviewed individually for collectibility. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. We do not have any off-balance-sheet credit exposure related to our customers.
Inventories and Supplies: Inventories and supplies are stated at the lower of average cost or market and consist primarily of revenue equipment parts, tires, fuel and supplies. Tires placed on new revenue equipment are capitalized as a part of the equipment cost. Replacement tires are expensed when placed in service.
Property, Equipment, and Depreciation: Additions and improvements to property and equipment are capitalized at cost, while maintenance and repair expenditures are charged to operations as incurred. Gains and losses on the sale or exchange of equipment are recorded in other operating expenses.
Depreciation is calculated based on the cost of the asset, reduced by the asset’s estimated salvage value, using the straight-line method. Accelerated depreciation methods are used for income tax purposes. The lives and salvage values assigned to certain assets for financial reporting purposes are different than for income tax purposes. For financial reporting purposes, assets are generally depreciated using the following estimated useful lives and salvage values:
 
  
Lives
  
Salvage Values
Building and improvements
  
30 years
  
0%
Tractors
  
80 months
  
0%
Trailers
  
12 years
  
$1,000
Service and other equipment
  
3-10 years
  
0%

32


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.
Insurance and Claims Accruals: Insurance and claims accruals (both current and non-current) reflect the estimated cost (including estimated loss development and loss adjustment expenses) for (i) cargo loss and damage, (ii) bodily injury and property damage, (iii) group health and (iv) workers’ compensation claims not covered by insurance. The costs for cargo, bodily injury and property damage insurance and claims are included in insurance and claims expense in the Consolidated Statements of Income; the costs of group health and workers’ compensation claims are included in salaries, wages and benefits expense. The insurance and claims accruals are recorded at the estimated ultimate payment amounts. Such insurance and claims accruals are based upon individual case estimates (including negative development) and estimates of incurred-but-not-reported losses using loss development factors based upon past experience. Actual costs related to insurance and claims have not differed materially from estimated accrued amounts for all years presented. An actuary reviews our undiscounted self-insurance reserves for bodily injury and property damage claims and workers’ compensation claims at year-end.
For the years ended December 31, 2015, 2014, and 2013 our self-insured retention (“SIR”) and deductible amount for liability claims is $2.0 million plus administrative expenses, for each occurrence involving bodily injury or property damage. We are also responsible for varying annual aggregate amounts of liability for claims in excess of the SIR/deductible. Liability claims in excess of these aggregates are covered under premium-based policies (issued by insurance companies) to coverage levels that our management considers adequate. We are also responsible for administrative expenses for each occurrence involving bodily injury or property damage.
Our SIR for workers’ compensation claims is $1.0 million per claim, with premium-based insurance coverage for claims exceeding this amount. We also maintain a $29.8 million bond for the State of Nebraska and a $6.9 million bond for our workers’ compensation insurance carrier.
Under these insurance arrangements, we maintained $31.0 million in letters of credit as of December 31, 2015.
Revenue Recognition: The Consolidated Statements of Income reflect recognition of operating revenues (including fuel surcharge revenues) and related direct costs when the shipment is delivered. For shipments where a third-party capacity provider (including independent contractors under contract with us) is utilized to provide some or all of the service and we (i) are the primary obligor in regard to the shipment delivery, (ii) establish customer pricing separately from carrier rate negotiations, (iii) generally have discretion in carrier selection and/or (iv) have credit risk on the shipment, we record both revenues for the dollar value of services we bill to the customer and rent and purchased transportation expense for transportation costs we pay to the third-party provider upon the shipment’s delivery. In the absence of the conditions listed above, we record revenues net of those expenses related to third-party providers.
Derivative Financial Instrument: We manage our interest rate risk through an interest rate swap. The derivative financial instrument is recognized in the Consolidated Balance Sheets at fair value. The effect on earnings from recognizing the fair value of this derivative financial instrument depends on its intended use, its hedge designation, and its effectiveness in offsetting changes in the fair value of the exposure it is hedging. Changes in the fair value of the instrument designated to reduce or eliminate adverse fluctuations in the fair values of recognized assets and liabilities and unrecognized firm commitments are reported currently in earnings along with changes in the fair values of the hedged items. Changes in the effective portion of the fair value of the instrument used to reduce or eliminate adverse fluctuations in cash flows of anticipated or forecasted transactions is reported in equity as a component of accumulated other comprehensive income (loss), net of income tax effects. Amounts in accumulated other comprehensive income (loss) are reclassified to earnings when the related hedged items affect earnings or the anticipated transactions are no longer probable. Amounts reported in earnings are classified consistent with the item being hedged.
Foreign Currency Translation: Local currencies are generally considered the functional currencies outside the United States. Assets and liabilities are translated at year-end exchange rates for operations in local currency environments. Foreign revenues and expense items denominated in the functional currency are translated at the average rates of exchange prevailing during the year. Foreign currency translation adjustments reflect the changes in foreign currency exchange rates applicable to the net assets of the foreign operations. Foreign currency translation adjustments are recorded in accumulated other comprehensive loss within stockholders’ equity in the Consolidated Balance Sheets and as a separate component of comprehensive income in the Consolidated Statements of Comprehensive Income.

33


Income Taxes: We use the asset and liability method in accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted tax rates that are expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
In accounting for uncertain tax positions, we recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. We recognize interest and penalties directly related to income tax matters in income tax expense.
Common Stock and Earnings Per Share: Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares outstanding plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options and restricted stock awards. There are no differences in the numerators of our computations of basic and diluted earnings per share for any periods presented. The computation of basic and diluted earnings per share is shown below (in thousands, except per share amounts).
 
Years Ended December 31,
 
2015
 
2014
 
2013
Net income
$
123,714

 
$
98,650

 
$
86,785

Weighted average common shares outstanding
71,957

 
72,122

 
72,866

Dilutive effect of stock-based awards
599

 
616

 
562

Shares used in computing diluted earnings per share
72,556

 
72,738

 
73,428

Basic earnings per share
$
1.72

 
$
1.37

 
$
1.19

Diluted earnings per share
$
1.71

 
$
1.36

 
$
1.18


There were no options to purchase shares of common stock that were outstanding during the periods indicated above that were excluded from the computation of diluted earnings per share because the option purchase price was greater than the average market price of the common shares during the period. Performance awards are excluded from the calculation of dilutive potential common shares until the threshold performance conditions have been satisfied.
Equity Compensation: We have an equity compensation plan that provides for grants of non-qualified stock options, restricted stock, restricted stock units and stock appreciation rights to our associates and directors. We apply the fair value method of accounting for equity compensation awards. Issuances of stock upon an exercise of stock options or vesting of restricted stock are made from treasury stock; shares reacquired to satisfy tax withholding obligations upon vesting of restricted stock are recorded as treasury stock. Grants of stock options, restricted stock, and performance awards vest in increments, and we recognize compensation expense over the requisite service period of each award. We accrue compensation expense for performance awards for the estimated number of shares expected to be issued using the most current information available at the date of the financial statements. If the performance objectives are not met, no compensation expense will be recognized, and any previously recognized compensation expense will be reversed.
Comprehensive Income: Comprehensive income consists of net income and other comprehensive income (loss). Other comprehensive income (loss) refers to revenues, expenses, gains and losses that are not included in net income, but rather are recorded directly in stockholders’ equity. For the years ended December 31, 2015 and 2014, comprehensive income consists of net income, foreign currency translation adjustments and change in fair value of interest rate swap. For the year ended December 31, 2013, comprehensive income consists of net income and foreign currency translation adjustments.
New Accounting Pronouncements Adopted: We did not adopt any new accounting standards during 2015.
Accounting Standards Updates Not Yet Effective: On May 28, 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers,” which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In July 2015, the FASB voted to approve a one-year deferral of the effective date of the new revenue recognition standard and to permit early adoption but no earlier than the original effective date (annual periods beginning after December 15, 2016); such decisions were documented in the FASB's ASU No. 2015-14 “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date.” As a result of the deferral, the new standard will become effective for us beginning January 1, 2018, unless we choose to adopt early on January 1, 2017. The standard permits the use of either the

34


retrospective or cumulative effect transition method. We are evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures and have not yet selected a transition method.
In April 2015, the FASB issued ASU No. 2015-3, “Interest - Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs,” which requires debt issuance costs to be recorded as a direct reduction of the debt liability on the balance sheet rather than as an asset. The provisions of this update are effective as of January 1, 2016, and are not expected to have a material effect on our consolidated financial position, results of operations or cash flows.
In July 2015, the FASB issued ASU No. 2015-11, “Inventory: Simplifying the Measurement of Inventory,” which requires inventory to be recorded at the lower of cost and net realizable value. The provisions of this update are effective as of January 1, 2017, and are not expected to have a material effect on our consolidated financial position, results of operations or cash flows.
In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes: Balance Sheet Classification of Deferred Taxes,” which requires presentation of deferred tax assets and liabilities as non-current in the balance sheet. The provisions of this update are effective as of January 1, 2017, and early adoption is permitted as of the beginning of an interim or annual reporting period. The amendments in the update are not expected to have a material effect on our consolidated financial position, results from operations or cash flows.
Other ASUs not identified above and which are not effective until after December 31, 2015 are not expected to have a material effect on our consolidated financial position, results of operations or cash flows.

(2) CREDIT FACILITIES
As of December 31, 2015, we had unsecured committed credit facilities with three banks as well as a term commitment with one of these banks. We had with Wells Fargo Bank, N.A., a $100.0 million credit facility which will expire on July 12, 2020, and a $75.0 million term commitment with principal due and payable on September 15, 2019. On July 13, 2015, we amended our existing credit agreement, dated June 1, 2012, as previously amended, with Wells Fargo Bank, N.A. This amendment lowered the maximum principal amount of the unsecured line of credit to $100.0 million from $175.0 million and extended the term of the credit agreement to July 12, 2020 from May 31, 2016. Also on July 13, 2015, we entered into a new credit agreement with U.S. Bank, N.A. The new credit agreement is an unsecured line of credit of $75.0 million and expires on July 13, 2020. We also had a $75.0 million credit facility with BMO Harris Bank, N.A., which will expire on March 5, 2020. On March 5, 2015, we replaced our existing $75.0 million credit agreement with BMO Harris Bank, N.A., with a new credit agreement. The new BMO Harris Bank, N.A., agreement includes a $75.0 million credit facility which will expire on March 5, 2020. Borrowings under these credit facilities and term note bear variable interest (0.9305% at December 31, 2015) based on the London Interbank Offered Rate (“LIBOR”), with interest on the term note effectively fixed at 2.5% with an interest rate swap agreement.
As of December 31, 2015 and 2014, our outstanding debt totaled $75.0 million. The $325.0 million of credit available under these facilities is further reduced by $31.0 million in stand-by letters of credit under which we are obligated. Each of the debt agreements includes, among other things, financial covenants requiring us (i) not to exceed a maximum ratio of total debt to total capitalization and/or (ii) not to exceed a maximum ratio of total funded debt to earnings before interest, income taxes, depreciation and amortization (as such terms are defined in each credit facility). At December 31, 2015, we were in compliance with these covenants.
At December 31, 2015, the aggregate future maturities of long-term debt by year are as follows (in thousands):
2016
$

2017

2018

2019
75,000

2020

Total
$
75,000

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


35


(3) NOTES RECEIVABLE
Notes receivable are included in other current assets and other non-current assets in the Consolidated Balance Sheets. At December 31, notes receivable consisted of the following (in thousands):
 
December 31,
 
2015
 
2014
Independent contractor notes receivable
$
38,450

 
$
19,021

Other notes receivable
7,474

 
6,780

 
45,924

 
25,801

Less current portion
11,597

 
8,464

Notes receivable – non-current
$
34,327

 
$
17,337

We provide financing to some individuals who want to become independent contractors by purchasing a tractor from us and leasing their services to us. At December 31, 2015, we had 682 notes receivable from these independent contractors and at December 31, 2014, we had 472 such notes receivable. We maintain a primary security interest in the tractor until the independent contractor pays the note balance in full.

(4) LEASES
In 2011, we entered into leases of certain tractors under operating leases which expired in 2015. Rental expense for these leases was included in rent and purchased transportation expense within the Consolidated Statements of Income. At December 31, 2015, we had no future lease payments under non-cancelable revenue equipment operating leases.
Rental expense under these non-cancelable revenue equipment operating leases for the years ended December 31, 2015, 2014, and 2013 was as follows (in thousands):
 
2015
$
584

2014
1,565

2013
1,593


(5) INCOME TAXES
Income tax expense consisted of the following (in thousands):
 
Years Ended December 31,
 
2015
 
2014
 
2013
Current:
 
 
 
 
 
Federal
$
32,090

 
$
51,260

 
$
55,227

State
5,665

 
6,606

 
6,616

Foreign
1,250

 
220

 
1,472

 
39,005

 
58,086

 
63,315

Deferred:
 
 
 
 
 
Federal
33,912

 
4,503

 
(9,668
)
State
4,530

 
535

 
1,279

 
38,442

 
5,038

 
(8,389
)
Total income tax expense
$
77,447

 
$
63,124

 
$
54,926


36


The effective income tax rate differs from the federal corporate tax rate of 35% in 2015, 2014 and 2013 as follows (in thousands):
 
Years Ended December 31,
 
2015
 
2014
 
2013
Tax at statutory rate
$
70,406

 
$
56,621

 
$
49,599

State income taxes, net of federal tax benefits
6,627

 
4,641

 
5,132

Non-deductible meals and entertainment
1,687

 
1,497

 
1,577

Income tax credits
(1,700
)
 
(1,600
)
 
(1,574
)
Other, net
427

 
1,965

 
192

Total income tax expense
$
77,447

 
$
63,124

 
$
54,926


At December 31, deferred tax assets and liabilities consisted of the following (in thousands):
 
December 31,
 
2015
 
2014
Deferred tax assets:
 
 
 
Insurance and claims accruals
$
71,285

 
$
74,651

Allowance for uncollectible accounts
6,138

 
8,260

Other
16,478

 
14,724

Gross deferred tax assets
93,901

 
97,635

Deferred tax liabilities:
 
 
 
Property and equipment