Report of Independent Registered Public Accounting Firm

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Werner Enterprises, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Werner Enterprises, Inc. and subsidiaries (the Company) as of December 31, 2019 and 2018,
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, 2019, and the related notes and financial statement schedule II listed in the Index in Item 15(a)(2) (collectively, the consolidated financial
statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31,
2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2019, in conformity with
U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal
control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 27, 2020 expressed an unqualified opinion on the
effectiveness of the Company’s internal control over financial reporting.
Changes in Accounting Principles
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for leases as of January 1, 2019 due to the
adoption of ASC Topic 842, Leases.
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for revenues as of January 1, 2018 due to the
adoption of ASC Topic 606, Revenue from Contracts with Customers.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing
procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
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Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated
or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements
and (2) involved our especially challenging, subjective, or complex judgment. The communication of a critical audit matter does not alter in any way our opinion
on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on
the critical audit matter or on the accounts or disclosures to which it relates.
Evaluation of insurance and claims accruals
The insurance and claims accruals were $298,028,000 as of December 31, 2019. As described in note 1 to the consolidated financial statements, the Company
estimates the insurance and claims accruals related to bodily injury, property damage, workers’ compensation, cargo loss and group health. The accruals
specifically for bodily injury, property damage, and workers’ compensation (claims reserves) are based upon individual case estimates and actuarial estimates
of incurred-but-not-reported losses using loss development factors based upon past experience. In order to determine the loss development factors, the
Company makes judgments relating to the comparability of historical claims to current incurred-but-not-reported losses. These judgments consider the nature,
frequency, severity and age of claims, and industry, regulatory, and company-specific trends impacting the development of claims. The Company has an
independent actuary review their calculation of the undiscounted claims reserves.
We identified the evaluation of the Company’s insurance and claims accruals related to bodily injury, property damage, and workers’ compensation as a critical
audit matter. Specifically, evaluating the assumptions related to the determination of the loss development factors used to determine the incurred-but-notreported losses involved a high degree of complexity and subjectivity. Changes in the assumptions could have a significant impact on the amount accrued. In
addition, specialized skills were needed to evaluate the Company’s calculation of the undiscounted claims reserves.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s
claims reserves processes, including controls to determine loss development factors used to determine the incurred-but-not-reported loss accrual. We involved
actuarial professionals with specialized skills and knowledge who assisted in:
• assessing the calculations used by the Company to determine its incurred-but-not-reported losses for consistency with generally accepted
actuarial standards;
• assessing the determination of loss development factors used in the calculations for consistency with historical Company data and industry,
regulatory, and company-specific trends; and
• developing an independent expectation of the Company’s claims reserves and comparing to the Company’s estimate.
We tested historical claims paid and reported (not paid) used as an input to the calculations for consistency with data used in the prior year. We tested actual
claims paid and claims reported (not paid) for the current year used as an input to the calculations for consistency with the Company’s actual claims paid and
claims reported (not paid). We compared the Company’s prior period claims reserves to actual claims in the current period to assess the Company’s ability to
accurately estimate costs.
/s/ KPMG LLP
We have served as the Company’s auditor since 1999.
Omaha, Nebraska
February 27, 2020
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WERNER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
(In thousands, except per share amounts) 2019 2018 2017
Operating revenues $ 2,463,701 $ 2,457,914 $ 2,116,737
Operating expenses:
Salaries, wages and benefits 818,487 781,064 681,547
Fuel 235,928 254,564 198,745
Supplies and maintenance 182,909 185,074 164,325
Taxes and licenses 95,525 87,318 86,768
Insurance and claims 88,913 98,133 79,927
Depreciation 249,527 230,151 217,639
Rent and purchased transportation 549,438 589,002 509,573
Communications and utilities 15,303 16,063 16,105
Other 2,199 (7,670) 18,288
Total operating expenses 2,238,229 2,233,699 1,972,917
Operating income 225,472 224,215 143,820
Other expense (income):
Interest expense 6,854 2,695 2,243
Interest income (3,326) (2,737) (3,308)
Other 38 376 328
Total other expense (income) 3,566 334 (737)
Income before income taxes 221,906 223,881 144,557
Income tax expense (benefit) 54,962 55,733 (58,332)
Net income $ 166,944 $ 168,148 $ 202,889
Earnings per share:
Basic $ 2.40 $ 2.35 $ 2.81
Diluted $ 2.38 $ 2.33 $ 2.80
Weighted-average common shares outstanding:
Basic 69,567 71,694 72,270
Diluted 70,026 72,057 72,558
See Notes to Consolidated Financial Statements.
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WERNER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31,
(In thousands) 2019 2018 2017
Net income $ 166,944 $ 168,148 $ 202,889
Other comprehensive income (loss):
Foreign currency translation adjustments 1,996 (493) 483
Change in fair value of interest rate swaps, net of tax (651) 255 599
Other comprehensive income (loss) 1,345 (238) 1,082
Comprehensive income $ 168,289 $ 167,910 $ 203,971
See Notes to Consolidated Financial Statements.
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WERNER ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
(In thousands, except share amounts) 2019 2018
ASSETS
Current assets:
Cash and cash equivalents $ 26,418 $ 33,930
Accounts receivable, trade, less allowance of $7,921 and $8,613, respectively 322,846 337,927
Other receivables 52,221 26,545
Inventories and supplies 9,243 10,060
Prepaid taxes, licenses and permits 16,757 16,619
Other current assets 38,849 31,577
Total current assets 466,334 456,658
Property and equipment, at cost:
Land 63,244 59,103
Buildings and improvements 199,734 188,174
Revenue equipment 1,812,186 1,750,290
Service equipment and other 268,372 250,010
Total property and equipment 2,343,536 2,247,577
Less – accumulated depreciation 817,260 760,015
Property and equipment, net 1,526,276 1,487,562
Other non-current assets 151,254 139,284
Total assets $ 2,143,864 $ 2,083,504
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 94,634 $ 97,781
Current portion of long-term debt 75,000 75,000
Insurance and claims accruals 69,810 67,304
Accrued payroll 38,347 40,271
Other current liabilities 31,049 30,004
Total current liabilities 308,840 310,360
Long-term debt, net of current portion 225,000 50,000
Other long-term liabilities 21,129 10,911
Insurance and claims accruals, net of current portion 228,218 214,030
Deferred income taxes 249,669 233,450
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.01 par value, 200,000,000 shares authorized; 80,533,536 shares
issued; 69,244,525 and 70,441,973 shares outstanding, respectively 805 805
Paid-in capital 112,649 107,455
Retained earnings 1,294,608 1,413,746
Accumulated other comprehensive loss (14,728) (16,073)
Treasury stock, at cost; 11,289,011 and 10,091,563 shares, respectively (282,326) (241,180)
Total stockholders’ equity 1,111,008 1,264,753
Total liabilities and stockholders’ equity $ 2,143,864 $ 2,083,504
See Notes to Consolidated Financial Statements.
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WERNER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
(In thousands) 2019 2018 2017
Cash flows from operating activities:
Net income $ 166,944 $ 168,148 $ 202,889
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 249,527 230,151 217,639
Deferred income taxes 16,401 37,694 (100,948)
Gain on disposal of property and equipment (21,557) (24,898) (6,798)
Non-cash equity compensation 8,077 7,394 4,546
Insurance and claims accruals, net of current portion 14,188 26,570 (5,605)
Other (3,360) (4,774) (11,957)
Changes in certain working capital items:
Accounts receivable, net 15,081 (33,753) (42,802)
Other current assets 975 (9,979) 20,173
Accounts payable (7,537) 7,559 5,831
Other current liabilities (12,095) 14,047 (140)
Net cash provided by operating activities 426,644 418,159 282,828
Cash flows from investing activities:
Additions to property and equipment (420,748) (519,872) (316,343)
Proceeds from sales of property and equipment 136,873 170,900 117,498
Decrease in notes receivable 11,566 20,898 20,037
Issuance of notes receivable — (3,300) (5,000)
Net cash used in investing activities (272,309) (331,374) (183,808)
Cash flows from financing activities:
Repayments of short-term debt — (40,000) (45,000)
Proceeds from issuance of short-term debt — 40,000 —
Repayments of long-term debt (100,000) (20,000) (60,000)
Proceeds from issuance of long-term debt 275,000 70,000 —
Change in net checks issued in excess of cash balances — (21,539) 21,539
Dividends on common stock (286,190) (23,013) (18,784)
Repurchases of common stock (42,301) (72,165) —
Tax withholding related to net share settlements of restricted stock awards (1,899) (1,371) (1,632)
Stock options exercised 171 476 2,461
Net cash used in financing activities (155,219) (67,612) (101,416)
Effect of exchange rate fluctuations on cash 396 (374) 50
Net increase (decrease) in cash, cash equivalents and restricted cash (488) 18,799 (2,346)
Cash, cash equivalents and restricted cash, beginning of period 33,930 15,131 17,477
Cash, cash equivalents and restricted cash, end of period(1) $ 33,442 $ 33,930 $ 15,131
Supplemental disclosures of cash flow information:
Interest paid $ 6,441 $ 2,690 $ 2,491
Income taxes paid 49,599 11,355 22,088
Supplemental schedule of non-cash investing activities:
Notes receivable issued upon sale of property and equipment $ 6,764 $ 13,140 $ 5,816
Change in fair value of interest rate swaps (651) 255 599
Property and equipment acquired included in accounts payable 21,138 16,748 3,227
Property and equipment disposed included in other receivables 18,600 674 654
Dividends accrued but not yet paid at end of period 6,232 6,340 5,069
(1) The following table provides a reconciliation of cash, cash equivalents and restricted cash to amounts reported within the Consolidated Balance Sheets
Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents $ 26,418 $ 33,930 $ 13,626
Restricted cash included in other current assets 7,024 — 1,505
Total cash, cash equivalents and restricted cash $ 33,442 $ 33,930 $ 15,131
See Notes to Consolidated Financial Statements.
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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, 2016 $ 805 $ 101,035 $ 1,084,796 $ (16,917) $ (174,932) $ 994,787
Comprehensive income — — 202,889 1,082 — 203,971
Dividends on common stock ($0.27 per
share) — — (19,523) — — (19,523)
Equity compensation activity, 242,253
shares — (3,481) — — 4,310 829
Non-cash equity compensation expense — 4,546 — — — 4,546
Cumulative effect of accounting change — 463 (291) — — 172
BALANCE, December 31, 2017 805 102,563 1,267,871 (15,835) (170,622) 1,184,782
Comprehensive income — — 168,148 (238) — 167,910
Purchase of 2,077,101 shares of common
stock — — — — (72,165) (72,165)
Dividends on common stock ($0.34 cents
per share) — — (24,284) — — (24,284)
Equity compensation activity, 109,852
shares — (2,502) — — 1,607 (895)
Non-cash equity compensation expense — 7,394 — — — 7,394
Cumulative effect of accounting change — — 2,011 — — 2,011
BALANCE, December 31, 2018 805 107,455 1,413,746 (16,073) (241,180) 1,264,753
Comprehensive income — — 166,944 1,345 — 168,289
Purchase of 1,300,000 shares of common
stock — — — — (42,301) (42,301)
Dividends on common stock ($4.11 per
share) — — (286,082) — — (286,082)
Equity compensation activity, 102,552
shares — (2,883) — — 1,155 (1,728)
Non-cash equity compensation expense — 8,077 — — — 8,077
BALANCE, December 31, 2019 $ 805 $ 112,649 $ 1,294,608 $ (14,728) $ (282,326) $ 1,111,008
See Notes to Consolidated Financial Statements.
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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 years ended December 31, 2019, 2018 and 2017, our ten largest customers comprised 41%, 45% and 43%, respectively, of our revenues.
No single customer generated more than 9% of the Company’s total revenues in 2019, 2018, and 2017.
Principles of Consolidation: The accompanying consolidated financial statements include the accounts of Werner Enterprises, Inc. and our wholly-owned
subsidiaries. All significant intercompany accounts and transactions relating to these wholly-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 accrued liabilities for insurance and claims, useful lives and
salvage values of property and equipment, estimates for income 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 for potentially
uncollectible receivables. 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 offbalance-sheet credit exposure related to our customers.
Inventories and Supplies: Inventories and supplies are stated at the lower of average cost and net realizable value 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%
During fourth quarter 2016, due to the weak used truck market, we reduced the estimated life of certain trucks to more rapidly depreciate the trucks to their
residual values. The effect of this change in accounting estimate was to increase 2017 depreciation expense and decrease operating income by $3.4 million. We
completed the sale of these specific trucks in 2017.
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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. The accruals for bodily injury, property damage
and and workers’ compensation are based upon individual case estimates and actuarial estimates of incurred-but-not-reported losses using loss development
factors based upon past experience. In order to determine the loss development factors, we make judgments relating to the comparability of historical claims
to current incurred-but-not-reported losses. These judgments consider the nature, frequency, severity, and age of claims, and industry, regulatory, and
company-specific trends impacting the development of claims. Actual costs related to insurance and claims have not differed materially from estimated
accrued amounts for all years presented. An independent actuary reviews our calculation of the undiscounted self-insurance reserves for bodily injury and
property damage claims and workers’ compensation claims at year-end.
We renewed our liability insurance policies on August 1, 2019 with the same deductibles and aggregates that first became effective with the August 1, 2017
renewal. Our self-insured retention (“SIR”) and deductible amount continues to be $3.0 million, plus administrative expenses, for each occurrence involving
bodily injury or property damage. We also have an annual $6.0 million aggregate for claims between $3.0 million and $5.0 million and an
additional $5.0 million deductible per claim for each claim between $5.0 million and $10.0 million. Our SIR/deductible was $2.0 million for policy years from
August 1, 2004 through July 31, 2017, and we were also responsible for varying annual aggregate amounts of liability for claims in excess of the
SIR/deductible (see page 10). 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 $26.6 million bond for the State of Nebraska and a $10.4 million bond for our workers’ compensation insurance carrier.
Under these insurance arrangements, we maintained $32.7 million in letters of credit as of December 31, 2019.
Revenue Recognition: The Consolidated Statements of Income reflect recognition of operating revenues (including fuel surcharge revenues) and related
direct costs over time as control of the promised services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled
to in exchange for those services. 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, we evaluate whether we are the principal (i.e., report revenues on a gross basis) or agent (i.e., report revenues on a net
basis).
Foreign Currency Translation: Local currencies are generally considered the functional currencies outside the United States. Assets and liabilities are
translated at year-end exchange rates for operations in local currency environments. Foreign revenues and expense items denominated in the functional
currency are translated at the average rates of exchange prevailing during the year. Foreign currency translation adjustments reflect the changes in foreign
currency exchange rates applicable to the net assets of the foreign operations. Foreign currency translation adjustments are recorded in accumulated other
comprehensive loss within stockholders’ equity in the Consolidated Balance Sheets and as a separate component of comprehensive income in the
Consolidated Statements of Comprehensive Income.
Income Taxes: Deferred income 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 income 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. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
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
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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,
2019 2018 2017
Net income $ 166,944 $ 168,148 $ 202,889
Weighted average common shares outstanding 69,567 71,694 72,270
Dilutive effect of stock-based awards 459 363 288
Shares used in computing diluted earnings per share 70,026 72,057 72,558
Basic earnings per share $ 2.40 $ 2.35 $ 2.81
Diluted earnings per share $ 2.38 $ 2.33 $ 2.80
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 and units (“restricted
awards”), performance awards 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, 2019, 2018 and 2017, comprehensive income consists of net income, foreign currency translation adjustments and change in fair value of
interest rate swaps.
New Accounting Pronouncements Adopted: In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 Company adopted ASU 2014-09 and related amendments, which is also known as Accounting
Standards Codification (“ASC”) Topic 606, as of January 1, 2018 using the modified retrospective transition method. Results for periods beginning January 1,
2018 and later are presented under ASC Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with the
Company’s historical accounting policy for revenue recognition.
We recorded a $2.0 million net increase to the opening balance of retained earnings as of January 1, 2018, for the cumulative impact of adopting the new
guidance. The impact primarily related to the change in accounting for shipments in transit as of December 31, 2017. ASC Topic 606 requires us to recognize
revenue and related direct costs over time as the shipment is being delivered. Prior to adopting the new guidance, we recognized revenue and related direct
costs when the shipment was delivered.
Under the modified retrospective method of adoption, we are required to disclose the impact to our financial statements had we continued to follow our
accounting policies under the previous revenue recognition guidance. Had we continued to recognize revenues and direct costs upon delivery, our operating
revenues and operating expenses for the year ended December 31, 2019, would have been higher by approximately $1.4 million and $1.0 million, respectively,
and for the year ended December 31, 2018, would have been higher by approximately $0.5 million and $0.7 million, respectively. Additionally, under ASC
Topic 606, we recorded a $14.1 million reduction of revenues for the year ended December 31, 2019, and a $14.3 million reduction of revenues
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for the year ended December 31, 2018, related to our driver training schools that would have been reported as bad debt expense prior to the new standard.
In February 2016, the FASB issued ASU No. 2016-02, “Leases,” to increase transparency and comparability by recognizing a right-of-use asset and a lease
liability on the balance sheet and disclosing key information about leasing arrangements. On January 1, 2019, we adopted ASU No. 2016-02 and related
amendments, which is also known as ASC Topic 842, using the transition approach, which applies the provisions of the new guidance at the effective date
without adjusting the comparative periods presented.
We elected the following practical expedients upon adoption: not to reassess whether any existing contracts are or contain leases, not to reassess the lease
classification for any existing leases, not to reassess initial direct costs for any existing leases and not to separately identify lease and non-lease components
for all underlying classes of assets. Additionally, we made a short-term lease accounting policy election to not recognize right-of-use assets and liabilities for
leases with a term of 12 months or less. Adoption of the new standard resulted in recognition of right-of-use assets and corresponding lease liabilities
of $8.7 million as of January 1, 2019. The new standard did not have a significant impact on the consolidated statement of income.
In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities,” with
the objective of improving the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in
its financial statements. The Company adopted ASU 2017-12 as of January 1, 2019. Upon adoption, this update had no effect on our financial position, results
of operations and cash flows.
In February 2018, the FASB issued ASU No. 2018-02, “Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax
Effects from Accumulated Comprehensive Income,” which allows a reclassification from accumulated other comprehensive income to retained earnings for
stranded tax effects resulting from the Tax Cuts and Jobs Act. The Company adopted ASU 2018-02 as of January 1, 2019. Upon adoption, this update had no
effect on our financial position, results of operations and cash flows.
Accounting Standards Updates Not Yet Effective: In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Statements,” which requires measurement and recognition of expected versus incurred credit losses for financial
assets. The provisions of this update are effective for fiscal years beginning after December 15, 2019. Based on our evaluation, the adoption of this standard
will not have a material effect on our consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for
Fair Value Measurement,” which modifies the disclosure requirements on fair value measurements. As part of its disclosure framework project, the FASB has
eliminated, amended and added disclosure requirements for fair value measurements in Topic 820, Fair Value Measurement. The provisions of this update are
effective for fiscal years beginning after December 15, 2019. Based on our evaluation, the adoption of this standard will not have a material effect on our
consolidated financial statements because we do not currently disclose any fair value measurements subject to the amendments.
In August 2018, the FASB issued ASU No. 2018-15, “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for
Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force),” which
updates the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract to align with the requirements for
capitalizing implementation costs incurred to develop or obtain internal-use software. The provisions of this update are effective for fiscal years beginning
after December 15, 2019. Based on our evaluation, the adoption of this standard will not have a material effect on our consolidated financial statements.
In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,” which reduces complexity in
accounting for income taxes by removing certain exceptions to the general principles stated in Topic 740 and by clarifying and amending existing guidance to
improve consistent application of and simplify other areas of Topic 740. The provisions of this update are effective for fiscal years beginning after December
15, 2020. Although we are evaluating the impact of adopting ASU No. 2019-12 on our financial position, results of operations and cash flows, we do not expect
a material effect upon adoption.
34
(2) REVENUE
Revenue Recognition
Revenues are recognized over time as control of the promised services is transferred to our customers, in an amount that reflects the consideration we expect
to be entitled to in exchange for those services.
The following table presents our revenues disaggregated by revenue source (in thousands):
Years Ended December 31,
2019 2018 2017
Truckload Transportation Services $ 1,909,776 $ 1,881,323 $ 1,635,244
Werner Logistics 489,729 518,078 417,639
Inter-segment eliminations (243) (1,149) (829)
Transportation services 2,399,262 2,398,252 2,052,054
Other revenues 64,439 59,662 64,683
Total revenues $ 2,463,701 $ 2,457,914 $ 2,116,737
The following table presents our revenues disaggregated by geographic areas in which we conduct business (in thousands). Operating revenues for foreign
countries include revenues for (i) shipments with an origin or destination in that country and (ii) other services provided in that country. If both the origin
and destination are in a foreign country, the revenues are attributed to the country of origin.
Years Ended December 31,
2019 2018 2017
United States $ 2,191,560 $ 2,145,098 $ 1,837,525
Mexico 197,470 233,116 210,228
Other 74,671 79,700 68,984
Total revenues $ 2,463,701 $ 2,457,914 $ 2,116,737
Transportation Services
We generate nearly all of our revenues by transporting truckload freight shipments for our customers. Transportation services are carried out by our
Truckload Transportation Services (“TTS”) segment and our Werner Logistics (“Logistics”) segment. The TTS segment utilizes company-owned and
independent contractor trucks to deliver shipments, while the Logistics segment uses third-party capacity providers.
We generate revenues from billings for transportation services under contracts with customers, generally on a rate per mile or per shipment, based on origin
and destination of the shipment. Our performance obligation arises when we receive a shipment order to transport a customer’s freight and is satisfied upon
delivery of the shipment. The transaction price may be defined in a transportation services agreement or negotiated with the customer prior to accepting the
shipment order. A customer may submit several shipment orders for transportation services at various times throughout a service agreement term, but each
shipment represents a distinct service that is a separately identified performance obligation. We often provide additional or ancillary services as part of the
shipment (such as loading/unloading and stops in transit) which are not distinct or are not material in the context of the contract; therefore the revenues for
these services are recognized with the freight transaction price. The average transit time to complete a shipment is approximately 3 days. Invoices for
transportation services are typically generated soon after shipment delivery and, while payment terms and conditions vary by customer, are generally due
within 30 days after the invoice date.
The Consolidated Statements of Income reflect recognition of transportation revenues (including fuel surcharge revenues) and related direct costs over time
as the shipment is being delivered. We use distance shipped (for the TTS segment) and transit time (for the Logistics segment) to measure progress and the
amount of revenues recognized over time, as the customer simultaneously receives and consumes the benefit. Determining a measure of progress requires us
to make judgments that affect the timing of revenues recognized. We have determined that the methods described provide a faithful depiction of the transfer
of services to the customer.
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, we evaluate whether we are the principal (i.e., report revenues on a gross basis) or agent (i.e., report revenues on a net basis). Generally, we report
such revenues on a gross basis, that is, we recognize both revenues for the
35
service we bill to the customer and rent and purchased transportation expense for transportation costs we pay to the third-party provider. Where we are the
principal, we control the transportation service before it is provided to our customers, which is supported by us being primarily responsible for fulfilling the
shipment obligation to the customer and having a level of discretion in establishing pricing with the customer.
During 2019 and 2018, revenues recognized from performance obligations related to prior periods (for example, due to changes in transaction price) were
not material.
Other Revenues
Other revenues include revenues from our driver training schools, transportation-related activities such as third-party equipment maintenance and
equipment leasing, and other business activities. These revenues are generally recognized over time and accounted for 3% of our total revenues in 2019 and
2% of our total revenues in 2018. Revenues from our driver training schools require us to make judgments regarding price concessions in determining the
amount of revenues to recognize.
Contract Balances and Accounts Receivable
A receivable is an unconditional right to consideration and is recognized when shipments have been completed and the related performance obligation has
been fully satisfied. At December 31, 2019 and 2018, the accounts receivable, net, balance was $322.8 million and $337.9 million, respectively. Contract assets
represent a conditional right to consideration in exchange for goods or services, and are transferred to receivables when the rights become unconditional.
At December 31, 2019 and 2018, the balance of contract assets was $5.9 million and $7.4 million, respectively. We have recognized contract assets within the
other current assets financial statement caption on the balance sheet. These contract assets are considered current assets as they will be settled in less than
12 months.
Contract liabilities represent advance consideration received from customers and are recognized as revenues over time as the related performance obligation
is satisfied. At December 31, 2019 and 2018, the balance of contract liabilities was $1.3 million and $1.7 million, respectively. The amount of revenues
recognized in 2019 that was included in the December 31, 2018 contract liability balance was $1.7 million. We have recognized contract liabilities within the
accounts payable and other current liabilities financial statement captions on the balance sheet. These contract liabilities are considered current liabilities as
they will be settled in less than 12 months.
Performance Obligations
We have elected to apply the practical expedient in ASC Topic 606 to not disclose the value of remaining performance obligations for contracts with an
original expected length of one year or less. Remaining performance obligations represent the transaction price allocated to future reporting periods for
freight shipments started but not completed at the reporting date that we expect to recognize as revenues in the period subsequent to the reporting date;
transit times generally average approximately 3 days.
(3) LEASES
We have entered into operating leases primarily for real estate. The leases have terms which range from 1 year to 11 years, and some include options to
renew. Renewal terms are included in the lease term when it is reasonably certain that we will exercise the option to renew.
Operating leases are included in the other non-current assets, other current liabilities and other long-term liabilities on the consolidated condensed balance
sheets. These assets and liabilities are recognized based on the present value of future minimum lease payments over the lease term at commencement date,
using our incremental borrowing rate because the rate implicit in each lease in not readily determinable. We have certain contracts for real estate that may
contain lease and non-lease components which we have elected to treat as a single lease component. Lease expense for operating leases is recognized on a
straight-line basis over the lease term. Variable lease expense is recognized in the period in which the obligation for those payments is incurred. Lease
expense is reported in rent and purchase transportation on the consolidated statements of income.
36
The following table presents information about the amount, timing and uncertainty of cash flows arising from our operating leases as of December 31, 2019.
(In thousands) December 31, 2019
Maturity of Lease Liabilities
2020 $ 3,920
2021 3,063
2022 2,148
2023 1,225
2024 1,179
Thereafter 1,093
Total undiscounted operating lease payments $ 12,628
Less: Imputed interest (892)
Present value of operating lease liabilities $ 11,736
Balance Sheet Classification
Right-of-use assets (recorded in other non-current assets) $ 11,376
Current lease liabilities (recorded in other current liabilities) $ 3,583
Long-term lease liabilities (recorded in other long-term liabilities) 8,153
Total operating lease liabilities $ 11,736
Other Information
Weighted-average remaining lease term for operating leases 4.36 years
Weighted-average discount rate for operating leases 3.5%
Cash Flows
An initial right-of-use asset of $8.7 million was recognized as a non-cash asset addition with the adoption of the new lease accounting standard. Additional
right-of-use assets of $6.1 million were recognized as non-cash asset additions that resulted from new operating lease liabilities during the year
ended December 31, 2019. Cash paid for amounts included in the present value of operating lease liabilities was $3.8 million during the year
ended December 31, 2019, and is included in operating cash flows.
Operating Lease Expense
Operating lease expense was $8.5 million during the year ended December 31, 2019. This expense included $3.8 million for the year ended December 31,
2019 for long-term operating leases, with the remainder for variable and short-term lease expense.
Lessor Operating Leases
We are the lessor of tractors and trailers under operating leases with initial terms of 2 to 10 years. We recognize revenue for such leases on a straight-line
basis over the term of the lease, and revenues for the year ended December 31, 2019 were $13.9 million. The following table presents information about the
maturities of these operating leases as of December 31, 2019.
(In thousands) December 31, 2019
2020 $ 9,306
2021 715
2022 62
2023 —
2024 —
Thereafter —
Total $ 10,083
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(4) CREDIT FACILITIES
On May 14, 2019, we entered into new five-year, unsecured revolving credit facilities with Wells Fargo Bank, N.A. and BMO Harris Bank N.A., replacing the
previous credit facilities with both lenders. We replaced our previous $100.0 million credit facility and $75.0 million term commitment with Wells Fargo Bank,
N.A. with a $300.0 million credit facility which will expire on May 14, 2024. Also on May 14, 2019, we replaced our previous $75.0 million credit facility with
BMO Harris Bank N.A. with a $200.0 million credit facility which will expire on May 14, 2024. We also have an unsecured line of credit of $75.0 million credit
facility with U.S. Bank, N.A., which will expire on July 13, 2020. Borrowings under these credit facilities bear variable interest based on the London Interbank
Offered Rate (“LIBOR”). On July 2, 2019, we (i) terminated our previous $75.0 million interest rate swap agreement with Wells Fargo Bank, N.A., (ii) entered
into a new $75.0 million interest rate swap agreement with Wells Fargo Bank, N.A., and (iii) entered into a $75.0 million interest rate swap agreement with
BMO Harris Bank N.A.
As of December 31, 2019 and 2018, our outstanding debt totaled $300.0 million and $125.0 million, respectively. We had $150.0 million outstanding under
the credit facilities at a weighted average variable interest rate of 2.33% as of December 31, 2019. We had (i) an additional $75.0 million outstanding under
the Wells Fargo Bank, N.A. credit facility at a variable rate of 2.39% as of December 31, 2019, which is effectively fixed at 2.32% with an interest rate swap
agreement through May 14, 2024 and (ii) an additional $75.0 million outstanding under the BMO Harris Bank N.A. credit facility at a variable rate of 2.40% as
of December 31, 2019, which is effectively fixed at 2.36% with an interest rate swap agreement through May 14, 2024. Subsequent to the end of the year, in
February 2020, we repaid $50.0 million of debt using cash provided by working capital activities to-date in 2020. The $575.0 million of borrowing capacity
under our credit facilities at December 31, 2019, is further reduced by $32.7 million in stand-by letters of credit under which we are obligated. Each of the
debt agreements includes, among other things, financial covenants requiring us (i) to exceed a minimum ratio of earnings before interest, income taxes,
depreciation and amortization to interest expense 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, 2019, we were in compliance with these covenants.
At December 31, 2019, the aggregate future maturities of long-term debt by year are as follows (in thousands):
2020 $ 75,000
2021 —
2022 —
2023 —
2024 225,000
Total $ 300,000
The carrying amounts of our long-term debt approximate fair value due to the duration of the notes and the variable interest rates.
(5) NOTES RECEIVABLE
We provide financing to some individuals who want to become independent contractors by purchasing a tractor from us and leasing their services to us. We
maintain a primary security interest in the tractor until the independent contractor pays the note balance in full. Independent contractor 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,
2019 2018
Independent contractor notes receivable $ 15,011 $ 18,660
Other notes receivable 9,805 11,298
Notes receivable 24,816 29,958
Less current portion 5,695 7,563
Notes receivable – non-current $ 19,121 $ 22,395
38
We also provide financing to some individuals who attended our driver training schools. The student notes receivable are included in other receivables and
other non-current assets in the Consolidated Balance Sheets. At December 31, student notes receivable consisted of the following (in thousands):
December 31,
2019 2018
Student notes receivable $ 61,078 $ 53,025
Allowance for doubtful student notes receivable (21,317) (19,361)
Total student notes receivable, net of allowance 39,761 33,664
Less current portion, net of allowance 11,152 8,393
Student notes receivable – non-current $ 28,609 $ 25,271
(6) INCOME TAXES
The Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was enacted on December 22, 2017, and lowered the federal corporate income tax rate
to 21% from 35% effective January 1, 2018. In accounting for income taxes, deferred income 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 income 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. As a result of the reduction of the federal corporate income tax rate under the Tax Act,
the Company revalued its ending net deferred income tax liabilities at December 31, 2017 and recognized a provisional $110.5 million income tax benefit.
The SEC staff issued Staff Accounting Bulletin No. 118 to address the application of U.S. GAAP in situations when a registrant does not have the necessary
information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. The Company
recognized the provisional tax impact related to the revaluation of deferred income tax assets and liabilities and included the amount in its consolidated
financial statements for the year ended December 31, 2017. During third quarter 2018, the Company filed its 2017 Federal Income Tax Return which resulted
in an immaterial adjustment to the deferred tax liability and the tax expense. Accordingly, the Company’s accounting for the federal rate reduction under the
Tax Act was completed in 2018.
Income tax expense consisted of the following (in thousands):
Years Ended December 31,
2019 2018 2017
Current:
Federal $ 29,102 $ 7,428 $ 38,535
State 9,547 9,841 3,979
Foreign (88) 770 102
38,561 18,039 42,616
Deferred:
Federal 15,094 37,284 (104,573)
State 1,307 410 3,625
16,401 37,694 (100,948)
Total income tax expense (benefit) $ 54,962 $ 55,733 $ (58,332)
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The effective income tax rate differs from the federal corporate tax rate of 21% in 2019 and 2018 and 35% in 2017 as follows (in thousands):
Years Ended December 31,
2019 2018 2017
Tax at statutory rate $ 46,600 $ 47,015 $ 50,595
Change in federal income tax rate — — (110,508)
State income taxes, net of federal tax benefits 8,575 8,098 4,943
Non-deductible meals and entertainment 1,117 1,044 1,495
Income tax credits (1,600) (1,800) (1,780)
Equity compensation (207) (312) (820)
Other, net 477 1,688 (2,257)
Total income tax expense (benefit) $ 54,962 $ 55,733 $ (58,332)
At December 31, deferred income tax assets and liabilities consisted of the following (in thousands):
December 31,
2019 2018
Deferred income tax assets:
Insurance and claims accruals $ 48,537 $ 47,031
Compensation-related accruals 8,067 7,413
Allowance for uncollectible accounts 3,690 3,628
Other 1,863 1,896
Gross deferred income tax assets 62,157 59,968
Deferred income tax liabilities:
Property and equipment 305,575 287,061
Prepaid expenses 4,928 4,772
Other 1,323 1,585
Gross deferred income tax liabilities 311,826 293,418
Net deferred income tax liability $ 249,669 $ 233,450
Deferred income tax assets are more likely than not to be realized as a result of future taxable income and reversal of deferred income tax liabilities.
We recognized a $31 thousand decrease in the net liability for unrecognized tax benefits for the year ended December 31, 2019, and a $240 thousand decrease
for the year ended December 31, 2018. We accrued interest expense of $0.1 million during 2019 and 2018, excluding from both years the reversal of accrued
interest related to the adjustment of uncertain tax positions. If recognized, $2.0 million of unrecognized tax benefits as of December 31, 2019 and 2018 would
impact our effective tax rate. Interest of $0.4 million as of December 31, 2019 and 2018 has been reflected as a component of the total liability. We
expect no other significant increases or decreases for uncertain tax positions during the next twelve months. The reconciliations of beginning and ending
gross balances of unrecognized tax benefits for 2019 and 2018 are shown below (in thousands).
December 31,
2019 2018
Unrecognized tax benefits, beginning balance $ 2,577 $ 2,883
Gross increases – tax positions in prior period 127 106
Gross decreases – tax positions in prior period — —
Gross increases – current-period tax positions 222 444
Settlements (385) (856)
Unrecognized tax benefits, ending balance $ 2,541 $ 2,577
40
We file U.S. federal income tax returns, as well as income tax returns in various states and several foreign jurisdictions. The years 2016 and forward are open
for examination by the U.S. Internal Revenue Service (“IRS”), and various years are open for examination by state and foreign tax authorities. State and foreign
jurisdictional statutes of limitations generally range from three to four years.
(7) EQUITY COMPENSATION AND EMPLOYEE BENEFIT PLANS
Equity Plan
The Werner Enterprises, Inc. Amended and Restated Equity Plan (the “Equity Plan”), approved by the Company’s shareholders, provides for grants to
employees and non-employee directors of the Company in the form of nonqualified stock options, restricted stock and units (“restricted awards”),
performance awards and stock appreciation rights. The Board of Directors or the Compensation Committee of our Board of Directors determines the terms of
each award, including the type, recipients, number of shares subject to and vesting conditions of each award. No awards of stock appreciation rights have been
issued under the Equity Plan to date. The maximum number of shares of common stock that may be awarded under the Equity Plan is 20,000,000 shares. The
maximum aggregate number of shares that may be awarded to any one person in any one calendar year under the Equity Plan is 500,000. As of December 31,
2019, there were 6,795,967 shares available for granting additional awards.
Equity compensation expense is included in salaries, wages and benefits within the Consolidated Statements of Income. As of December 31, 2019, the total
unrecognized compensation cost related to non-vested equity compensation awards was approximately $8.8 million and is expected to be recognized over a
weighted average period of 1.8 years. The following table summarizes the equity compensation expense and related income tax benefit recognized in the
Consolidated Statements of Income (in thousands):
Years Ended December 31,
2019 2018 2017
Stock options:
Pre-tax compensation expense $ — $ — $ 6
Tax benefit — — 2
Stock option expense, net of tax $ — $ — $ 4
Restricted awards:
Pre-tax compensation expense $ 4,943 $ 4,143 $ 3,244
Tax benefit 1,258 1,056 1,265
Restricted stock expense, net of tax $ 3,685 $ 3,087 $ 1,979
Performance awards:
Pre-tax compensation expense $ 3,156 $ 3,152 $ 1,459
Tax benefit 803 804 569
Performance award expense, net of tax $ 2,353 $ 2,348 $ 890
We do not have a formal policy for issuing shares upon an exercise of stock options or vesting of restricted and performance awards. Such shares are generally
issued from treasury stock. From time to time, we repurchase shares of our common stock, the timing and amount of which depends on market and other
factors. Historically, the shares acquired from such repurchases have provided us with sufficient quantities of stock to issue for equity compensation. Based on
current treasury stock levels, we do not expect to repurchase additional shares specifically for equity compensation during 2020.
41
Stock Options
Stock options are granted at prices equal to the market value of the common stock on the date the option award is granted. Option awards exercised in 2019
became exercisable in installments from 24 to 72 months after the date of grant. The options were exercisable over a period not to exceed ten years and one
day from the date of grant. No stock options are outstanding as of December 31, 2019. The following table summarizes stock option activity for the year ended
December 31, 2019:
Number of
Options
(in thousands)
Weighted
Average
Exercise
Price ($)
Weighted
Average
Remaining
Contractual
Term
(Years)
Aggregate
Intrinsic Value
(in thousands)
Outstanding at beginning of period 9 $ 19.02
Granted — —
Exercised (9) 19.02
Forfeited — —
Expired — —
Outstanding at end of period — — 0.00 $ —
Exercisable at end of period — — 0.00 $ —
We did not grant any stock options during the years ended December 31, 2019, 2018 and 2017. The fair value of stock option grants is estimated using a
Black-Scholes valuation model. The total intrinsic value of stock options exercised was as follows (in thousands):
2019 $ 136
2018 484
2017 1,722
Restricted Awards
Restricted stock entitles the holder to shares of common stock when the award vests. Restricted stock units entitle the holder to a combination of cash or
stock equal to the value of common stock when the unit vests. The value of these shares may fluctuate according to market conditions and other factors.
Restricted awards currently outstanding vest over periods ranging from 12 to 60 months from the grant date of the award. The restricted awards do not
confer any voting or dividend rights to recipients until such shares vest and do not have any post-vesting sales restrictions. The following table summarizes
restricted award activity for the year ended December 31, 2019:
Number of
Restricted
Awards (in
thousands)
Weighted
Average Grant
Date Fair
Value ($)
Nonvested at beginning of period 326 $ 31.93
Granted 175 33.11
Vested (113) 30.84
Forfeited (19) 31.94
Nonvested at end of period 369 32.83
We estimate the fair value of restricted awards based upon the market price of the underlying common stock on the date of grant, reduced by the present
value of estimated future dividends because the awards are not entitled to receive dividends prior to vesting. Our estimate of future dividends is based on the
most recent quarterly dividend rate at the time of grant, adjusted for any known future changes in the dividend rate. Cash settled restricted stock units are
recorded as a liability within the Consolidated Balance Sheets and are adjusted to fair value each reporting period.
The total fair value of previously granted restricted awards vested during the years ended December 31, 2019, 2018, and 2017 was $4.0 million, $3.1 million,
and $4.4 million, respectively. We withheld shares based on the closing stock price on the vesting date to settle the employees’ statutory obligation for the
applicable income and other employment taxes. The shares withheld to satisfy the tax withholding obligations were recorded as treasury stock.
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Performance Awards
Performance awards entitle the recipient to shares of common stock upon attainment of performance objectives as pre-established by the Compensation
Committee. If the performance objectives are achieved, performance awards currently outstanding vest, subject to continued employment, over periods
ranging from 12 to 60 months from the grant date of the award. The performance awards do not confer any voting or dividend rights to recipients until such
shares vest and do not have any post-vesting sales restrictions. The following table summarizes performance award activity for the year ended December 31,
2019:
Number of
Performance Awards (in
thousands)
Weighted
Average Grant
Date Fair
Value ($)
Nonvested at beginning of period 207 $ 27.92
Granted 163 28.83
Vested (35) 27.07
Forfeited (8) 29.33
Nonvested at end of period 327 28.75
The 2019 performance awards are earned based upon the level of attainment by the Company of specified performance objectives related to cumulative
diluted earnings per share for the two-year period from January 1, 2019 to December 31, 2020. Shares earned based on cumulative diluted earnings per share
may be capped based on absolute total shareholder return during the three-year period ended December 31, 2021. The 2019 performance awards will vest in
one installment on the third anniversary from the grant date. The 2018 performance awards are earned based upon the level of attainment by the Company of
specified performance objectives related to cumulative diluted earnings per share for the two-year period from January 1, 2018 to December 31, 2019. Shares
earned based on cumulative diluted earnings per share may be capped based on absolute total shareholder return during the three-year period ended
December 31, 2020. The 2018 performance awards will vest in one installment on the third anniversary from the grant date. In January 2020, the
Compensation Committee determined the 2017 fiscal year performance objectives were achieved at a level above the target level, and the additional shares
earned above the target are included in the granted shares in the activity table above.
We estimate the fair value of performance awards based upon the market price of the underlying common stock on the date of grant, reduced by the present
value of estimated future dividends because the awards are not entitled to receive dividends prior to vesting. Our estimate of future dividends is based on the
most recent quarterly dividend rate at the time of grant, adjusted for any known future changes in the dividend rate.
The vesting date fair value of the performance awards vested during the years ended December 31, 2019, 2018 and 2017
was $1.2 million, $1.3 million and $1.0 million, respectively. We withheld shares based on the closing stock price on the vesting date to settle the employees’
statutory obligation for the applicable income and other employment taxes. The shares withheld to satisfy the tax withholding obligations are recorded as
treasury stock.
Employee Stock Purchase Plan
Employee associates that meet certain eligibility requirements may participate in our Employee Stock Purchase Plan (the “Purchase Plan”). Eligible
participants designate the amount of regular payroll deductions and/or a single annual payment (each subject to a yearly maximum amount) that is used to
purchase shares of our common stock on the over-the-counter market. The maximum annual contribution amount is currently $20,000. These purchases are
subject to the terms of the Purchase Plan. We contribute an amount equal to 15% of each participant’s contributions under the Purchase Plan. Interest accrues
on Purchase Plan contributions at a rate of 5.25% until the purchase is made. We pay the trading commissions and administrative charges related to
purchases of common stock under the Purchase Plan. Our contributions for the Purchase Plan were as follows (in thousands):
2019 $ 265
2018 239
2017 208
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401(k) Retirement Savings Plan
We have an Employees’ 401(k) Retirement Savings Plan (the “401(k) Plan”). Associates are eligible to participate in the 401(k) Plan if they have been
continuously employed with us or one of our subsidiaries for six months or more. We match a portion of each associate’s 401(k) Plan elective
deferrals. Salaries, wages and benefits expense in the accompanying Consolidated Statements of Income includes our 401(k) Plan contributions and
administrative expenses, which were as follows (in thousands):
2019 $ 4,414
2018 2,615
2017 2,357
Nonqualified Deferred Compensation Plan
The Executive Nonqualified Excess Plan (the “Excess Plan”) is our nonqualified deferred compensation plan for the benefit of eligible key managerial
associates whose 401(k) Plan contributions are limited because of IRS regulations affecting highly compensated associates. Under the terms of the Excess
Plan, participants may elect to defer compensation on a pre-tax basis within annual dollar limits we establish. At December 31, 2019, there
were 45 participants in the Excess Plan. Although our current intention is not to do so, we may also make matching credits and/or profit sharing credits to
participants’ accounts as we so determine each year. Each participant is fully vested in all deferred compensation and earnings; however, these amounts are
subject to general creditor claims until distributed to the participant. Under current federal tax law, we are not allowed a current income tax deduction for the
compensation deferred by participants, but we are allowed a tax deduction when a distribution payment is made to a participant from the Excess Plan. The
accumulated benefit obligation is included in other long-term liabilities in the Consolidated Balance Sheets. We purchased life insurance policies to fund the
future liability. The aggregate market value of the life insurance policies is included in other non-current assets in the Consolidated Balance Sheets.
The accumulated benefit obligation and aggregate market value of the life insurance policies were as follows (in thousands):
December 31,
2019 2018
Accumulated benefit obligation $ 9,588 $ 7,202
Aggregate market value 8,284 6,588
(8) COMMITMENTS AND CONTINGENCIES
We have committed to property and equipment purchases of approximately $113.4 million at December 31, 2019.
We are involved in certain claims and pending litigation, including those described herein, arising in the ordinary course of business. The majority of these
claims relate to bodily injury, property damage, cargo and workers’ compensation incurred in the transportation of freight, as well as certain class action
litigation related to personnel and employment matters. We accrue for the uninsured portion of contingent losses from these and other pending claims when
it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Based on the knowledge of the facts, management
believes the resolution of claims and pending litigation, taking into account existing reserves, will not have a material adverse effect on our consolidated
financial statements. Moreover, the results of complex legal proceedings are difficult to predict, and our view of these matters may change in the future as the
litigation and related events unfold.
On May 17, 2018, in Harris County District Court in Houston, Texas, a jury rendered an adverse verdict against Werner Enterprises, Inc. (the “Company”) in a
lawsuit arising from a December 30, 2014 accident between a Werner tractor-trailer and a passenger vehicle. On July 30, 2018, the court entered a final
judgment against Werner for $92.0 million, including pre-judgment interest.
The Company has premium-based liability insurance to cover the potential outcome from this jury verdict. Under the Company’s insurance policies in effect
on the date of this accident, the Company’s maximum liability for this accident is $10.0 million (plus pre-judgment and post-judgment interest) with premiumbased coverage that exceeds the jury verdict amount. As a result of this jury verdict, the Company had recorded a liability of $18.8 million as of December 31,
2019, and $15.2 million as of December 31, 2018. Under the terms of the Company’s insurance policies, the Company is the primary obligor of the verdict, and
as such, the Company has also recorded a $79.2 million receivable from its third-party insurance providers in other non-current assets and a corresponding
liability of the same amount in the long-term portion of insurance and claims accruals in the consolidated balance sheets as of December 31, 2019 and
December 31, 2018.
The Company is pursuing an appeal of this verdict. No assurances can be given regarding the outcome of any such appeal.
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We are involved in class action litigation in the U.S. District Court for the District of Nebraska, in which the plaintiffs allege that we owe drivers for unpaid
wages under the Fair Labor Standards Act (“FLSA”) and the Nebraska Wage Payment and Collection Act and that we failed to pay minimum wage per hour for
drivers in our Career Track Program, related to short break time and sleeper berth time. The period covered by this class action suit is August 2008 through
March 2014. The case was tried to a jury in May 2017, resulting in a verdict of $0.8 million in plaintiffs’ favor on the short break matter and a verdict in our
favor on the sleeper berth matter. As a result of various post-trial motions, the court awarded $0.5 million to the plaintiffs for attorney fees and costs. As of
December 31, 2019, we had accrued for the jury’s award, attorney fees and costs in the short break matter and had not accrued for the sleeper berth matter.
Plaintiffs appealed the post-verdict amounts awarded by the trial court for fees, costs and liquidated damages. The United States Court of Appeals for the
Eighth Circuit denied Plaintiffs’ appeal and granted Werner’s appeal, vacating the judgment in favor of the plaintiffs. The appellate court sent the case back to
the trial court for proceedings consistent with the appellate court’s opinion. The litigation of this matter will continue in the trial court.
We are also involved in certain class action litigation in which the plaintiffs allege claims for failure to provide meal and rest breaks, unpaid wages,
unauthorized deductions and other items. Based on the knowledge of the facts, management does not currently believe the outcome of these class actions is
likely to have a material adverse effect on our financial position or results of operations. However, the final disposition of these matters and the impact of such
final dispositions cannot be determined at this time.
(9) RELATED PARTY TRANSACTIONS
The Company leases land from a trust in which the Company’s principal stockholder is the sole trustee. The annual rent payments under this lease
are $1.00 per year. The Company is responsible for all real estate taxes and maintenance costs related to the property, which were $80,000 in
2019, $72,000 in 2018, and $72,000 in 2017 and are recorded as expenses in the Consolidated Statements of Income. The Company has made leasehold
improvements to the land for facilities used for business meetings and customer promotion. The cost of these improvements was approximately $7.0 million ,
and the net book value (cost less accumulated depreciation) at December 31, 2019 was approximately $2.6 million.
(10) SEGMENT INFORMATION
We have two reportable segments – Truckload Transportation Services (“TTS”) and Werner Logistics.
The TTS segment consists of two operating units, Dedicated and One-Way Truckload. These units are aggregated because they have similar economic
characteristics and meet the other aggregation criteria described in the accounting guidance for segment reporting. Dedicated provides truckload services
dedicated to a specific customer, generally for a retail distribution center or manufacturing facility, utilizing either dry van or specialized trailers. One-Way
Truckload is comprised of 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, including Mexico cross-border routes; (ii) the expedited
(“Expedited”) fleet provides time-sensitive truckload services utilizing driver teams; (iii) the regional short-haul (“Regional”) fleet provides comparable
truckload van service within geographic regions across the United States; and (iv) the Temperature Controlled fleet provides truckload services for
temperature sensitive products over irregular routes utilizing temperature-controlled trailers. Revenues for the TTS segment include a small amount of nontrucking revenues which consist primarily of the intra-Mexico portion of cross-border shipments delivered to or from Mexico where we utilize a third-party
capacity provider.
The Werner Logistics segment generates the majority of our non-trucking revenues through four operating units that provide non-trucking services to our
customers. These four Werner Logistics operating units are as follows: (i) Truckload Logistics, which uses contracted carriers to complete shipments for
brokerage customers and freight management customers for which we offer a full range of single-source logistics management services and solutions; (ii) the
intermodal (“Intermodal”) unit offers rail transportation through alliances with rail and drayage providers as an alternative to truck transportation; (iii)
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; and (iv) Werner Final Mile (“Final Mile”) offers home and business deliveries of large or heavy items using thirdparty agents with two associates operating a liftgate straight truck.
We generate other revenues from our driver training schools, transportation-related activities such as third-party equipment maintenance and equipment
leasing, and other business activities. None of these operations meets the quantitative reporting thresholds. As a result, these operations are grouped in
“Other” in the tables below. “Corporate” includes revenues and expenses that are incidental to our activities and are not attributable to any of our operating
segments, including gains and losses on sales of assets not attributable to our operating segments. We do not prepare separate balance sheets by segment and,
as a result, assets are not separately identifiable by segment. Inter-segment eliminations in the table below represent transactions between reporting
segments that are eliminated in consolidation.
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The following table summarizes our segment information (in thousands):
Years Ended December 31,
2019 2018 2017
Revenues
Truckload Transportation Services $ 1,909,776 $ 1,881,323 $ 1,635,244
Werner Logistics 489,729 518,078 417,639
Other 61,850 56,903 62,745
Corporate 2,589 2,759 1,938
Subtotal 2,463,944 2,459,063 2,117,566
Inter-segment eliminations (243) (1,149) (829)
Total $ 2,463,701 $ 2,457,914 $ 2,116,737
Operating Income
Truckload Transportation Services $ 202,660 $ 202,581 $ 138,059
Werner Logistics 16,288 20,378 8,683
Other 5,535 (453) 35
Corporate 989 1,709 (2,957)
Total $ 225,472 $ 224,215 $ 143,820
Information about the geographic areas in which we conduct business is summarized below (in thousands) as of and for the years ended December 31, 2019,
2018 and 2017. Operating revenues for foreign countries include revenues for (i) shipments with an origin or destination in that country and (ii) other
services provided in that country. If both the origin and destination are in a foreign country, the revenues are attributed to the country of origin.
2019 2018 2017
Revenues
United States $ 2,191,560 $ 2,145,098 $ 1,837,525
Foreign countries
Mexico 197,470 233,116 210,228
Other 74,671 79,700 68,984
Total foreign countries 272,141 312,816 279,212
Total $ 2,463,701 $ 2,457,914 $ 2,116,737
Long-lived Assets
United States $ 1,487,591 $ 1,452,532 $ 1,321,206
Foreign countries
Mexico 38,428 34,741 25,309
Other 257 289 348
Total foreign countries 38,685 35,030 25,657
Total $ 1,526,276 $ 1,487,562 $ 1,346,863
We generate substantially all of our revenues within the United States or from North American shipments with origins or destinations in the United States. No
customer generated more than 9% of our total revenues for 2019, 2018 and 2017.
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(11) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share amounts) First Quarter Second Quarter Third Quarter Fourth Quarter
2019:
Operating revenues $ 596,117 $ 627,533 $ 618,264 $ 621,787
Operating income 48,019 58,442 53,357 65,654
Net income 36,086 43,318 39,044 48,496
Basic earnings per share 0.51 0.62 0.56 0.70
Diluted earnings per share 0.51 0.62 0.56 0.70
(In thousands, except per share amounts) First Quarter Second Quarter Third Quarter Fourth Quarter
2018:
Operating revenues $ 562,684 $ 619,130 $ 629,735 $ 646,365
Operating income 35,115 50,783 63,386 74,931
Net income 27,807 38,264 47,514 54,563
Basic earnings per share 0.38 0.53 0.67 0.77
Diluted earnings per share 0.38 0.53 0.66 0.77