Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
FORM 10-Q
 
 
[Mark
one]
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2013
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-14690
 
WERNER ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
 
 
NEBRASKA
 
47-0648386
(State or other jurisdiction of
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)
 
 
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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  
Large accelerated filer
 
ý
  
Accelerated filer
 
¨
Non-accelerated filer
 
o   (Do not check if a smaller reporting company)
  
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
As of July 31, 2013, 72,719,858 shares of the registrant’s common stock, par value $0.01 per share, were outstanding.

Table of Contents

WERNER ENTERPRISES, INC.
INDEX
 
 
 
PAGE
 
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
Item 1.
Item 2.
Item 6.

2
Table of Contents

PART I
FINANCIAL INFORMATION
Cautionary Note Regarding Forward-Looking Statements:
This Quarterly Report on Form 10-Q contains historical information and forward-looking statements based on information currently available to our management. The forward-looking statements in this report, including those made in Item 2 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) of Part I, 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 our Annual Report on Form 10-K for the year ended December 31, 2012 (“2012 Form 10-K”). Readers should not unduly rely on the forward-looking statements included in this Form 10-Q because such statements speak only to the date they were made. Unless otherwise required by applicable securities laws, we undertake no obligation or duty to update or revise any forward-looking statements contained herein to reflect subsequent events or circumstances or the occurrence of unanticipated events.

Item 1. Financial Statements.
The interim consolidated financial statements contained herein reflect all adjustments which, in the opinion of management, are necessary for a fair statement of the financial condition, results of operations and cash flows for the periods presented. The interim consolidated financial statements have been prepared in accordance with the U.S. Securities and Exchange Commission (“SEC”) instructions to Form 10-Q and were also prepared without audit. The interim consolidated financial statements do not include all information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements; although in management’s opinion, the disclosures are adequate so that the information presented is not misleading.
Operating results for the three-month and six-month periods ended June 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. In the opinion of management, the information set forth in the accompanying consolidated condensed balance sheets is fairly stated in all material respects in relation to the consolidated balance sheets from which it has been derived.
These interim consolidated financial statements and notes thereto should be read in conjunction with the financial statements and accompanying notes contained in our 2012 Form 10-K.

3
Table of Contents

WERNER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME
 
   
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(In thousands, except per share amounts)
2013
 
2012
 
2013
 
2012
 
(Unaudited)
Operating revenues
$
506,648

 
$
521,812

 
$
999,535

 
$
1,020,188

Operating expenses:
 
 
 
 
 
 
 
Salaries, wages and benefits
135,236

 
138,512

 
268,341

 
272,360

Fuel
90,191

 
99,322

 
186,984

 
202,259

Supplies and maintenance
43,934

 
44,741

 
87,062

 
86,578

Taxes and licenses
21,586

 
22,967

 
43,210

 
45,499

Insurance and claims
17,320

 
15,103

 
37,121

 
34,327

Depreciation
42,367

 
41,506

 
84,698

 
82,177

Rent and purchased transportation
115,060

 
108,496

 
221,378

 
209,006

Communications and utilities
3,187

 
3,344

 
6,329

 
7,163

Other
(4,594
)
 
(3,292
)
 
(6,642
)
 
(5,696
)
Total operating expenses
464,287

 
470,699

 
928,481

 
933,673

Operating income
42,361

 
51,113

 
71,054

 
86,515

Other expense (income):
 
 
 
 
 
 
 
Interest expense
91

 
65

 
235

 
207

Interest income
(535
)
 
(433
)
 
(1,040
)
 
(855
)
Other
(82
)
 
(82
)
 
(92
)
 
(106
)
Total other income
(526
)
 
(450
)
 
(897
)
 
(754
)
Income before income taxes
42,887

 
51,563

 
71,951

 
87,269

Income taxes
17,047

 
20,883

 
28,600

 
35,344

Net income
$
25,840

 
$
30,680

 
$
43,351

 
$
51,925

Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.35

 
$
0.42

 
$
0.59

 
$
0.71

Diluted
$
0.35

 
$
0.42

 
$
0.59

 
$
0.71

Dividends declared per share
$
0.050

 
$
0.050

 
$
0.100

 
$
0.100

Weighted-average common shares outstanding:
 
 
 
 
 
 
 
Basic
73,022

 
72,859

 
73,140

 
72,857

Diluted
73,598

 
73,412

 
73,690

 
73,401

See Notes to Consolidated Financial Statements (Unaudited).

4
Table of Contents

WERNER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
   
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(In thousands)
2013
 
2012
 
2013
 
2012
 
(Unaudited)
Net income
$
25,840

 
$
30,680

 
$
43,351

 
$
51,925

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
(1,147
)
 
(819
)
 
(184
)
 
366

Other comprehensive income (loss)
(1,147
)
 
(819
)
 
(184
)
 
366

Comprehensive income
$
24,693

 
$
29,861

 
$
43,167

 
$
52,291

See Notes to Consolidated Financial Statements (Unaudited).

5
Table of Contents

WERNER ENTERPRISES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
 
(In thousands, except share amounts)
June 30,
2013
 
December 31,
2012
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
24,248

 
$
15,428

Accounts receivable, trade, less allowance of $10,540 and $10,528, respectively
223,990

 
211,133

Other receivables
10,453

 
8,004

Inventories and supplies
20,249

 
23,260

Prepaid taxes, licenses and permits
7,039

 
14,893

Current deferred income taxes
25,662

 
25,139

Other current assets
36,225

 
21,330

Total current assets
347,866

 
319,187

Property and equipment
1,671,280

 
1,690,490

Less – accumulated depreciation
721,800

 
696,647

Property and equipment, net
949,480

 
993,843

Other non-current assets
23,102

 
21,870

Total assets
$
1,320,448

 
$
1,334,900

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
69,339

 
$
56,397

Current portion of long-term debt
—

 
20,000

Insurance and claims accruals
57,543

 
57,679

Accrued payroll
24,023

 
21,134

Other current liabilities
18,394

 
20,983

Total current liabilities
169,299

 
176,193

Long-term debt, net of current portion
40,000

 
70,000

Other long-term liabilities
16,799

 
15,779

Insurance and claims accruals, net of current portion
127,400

 
125,500

Deferred income taxes
228,069

 
232,531

Commitments and contingencies

 

Stockholders’ equity:
 
 
 
Common stock, $0.01 par value, 200,000,000 shares authorized; 80,533,536 shares
 
 
 
issued; 72,692,730 and 73,246,598 shares outstanding, respectively
805

 
805

Paid-in capital
99,681

 
97,457

Retained earnings
794,669

 
758,617

Accumulated other comprehensive loss
(4,340
)
 
(4,156
)
Treasury stock, at cost; 7,840,806 and 7,286,938 shares, respectively
(151,934
)
 
(137,826
)
Total stockholders’ equity
738,881

 
714,897

Total liabilities and stockholders’ equity
$
1,320,448

 
$
1,334,900

See Notes to Consolidated Financial Statements (Unaudited).

6
Table of Contents

WERNER ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
   
Six Months Ended
June 30,
(In thousands)
2013
 
2012
 
(Unaudited)
Cash flows from operating activities:
 
 
 
Net income
$
43,351

 
$
51,925

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
84,698

 
82,177

Deferred income taxes
(4,458
)
 
(5,588
)
Gain on disposal of property and equipment
(10,046
)
 
(10,446
)
Stock-based compensation
2,590

 
2,233

Insurance and claims accruals, net of current portion
1,900

 
(300
)
Other
31

 
(449
)
Changes in certain working capital items:
 
 
 
Accounts receivable, net
(12,857
)
 
(923
)
Other current assets
(3,654
)
 
26,069

Accounts payable
9,165

 
(8,848
)
Other current liabilities
188

 
2,948

Net cash provided by operating activities
110,908

 
138,798

Cash flows from investing activities:
 
 
 
Additions to property and equipment
(64,865
)
 
(152,429
)
Retirements of property and equipment
30,336

 
30,503

Decrease in notes receivable
4,439

 
2,371

Net cash used in investing activities
(30,090
)
 
(119,555
)
Cash flows from financing activities:
 
 
 
Repayments of short-term debt
(20,000
)
 
(120,000
)
Proceeds from issuance of short-term debt
—

 
120,000

Repayments of long-term debt
(30,000
)
 
—

Change in net checks issued in excess of cash balances
—

 
(6,671
)
Dividends on common stock
(7,326
)
 
(7,285
)
Repurchases of common stock
(15,065
)
 
—

Tax withholding related to net share settlements of restricted stock awards
(166
)
 
—

Stock options exercised
733

 
379

Excess tax benefits from exercise of stock options
24

 
22

Net cash used in financing activities
(71,800
)
 
(13,555
)
Effect of exchange rate fluctuations on cash
(198
)
 
84

Net increase in cash and cash equivalents
8,820

 
5,772

Cash and cash equivalents, beginning of period
15,428

 
12,412

Cash and cash equivalents, end of period
$
24,248

 
$
18,184

Supplemental disclosures of cash flow information:
 
 
 
Interest paid
$
262

 
$
207

Income taxes paid
40,765

 
26,192

Supplemental schedule of non-cash investing activities:
 
 
 
Notes receivable issued upon sale of property and equipment
$
7,238

 
$
4,593

Property and equipment acquired included in accounts payable
3,886

 
9,541

Property and equipment disposed included in other receivables
1,104

 
587

See Notes to Consolidated Financial Statements (Unaudited).

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Table of Contents

WERNER ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
(1)
Credit Facilities
Long-term debt consisted of the following (in thousands):
 
June 30,
 
2013
 
2012
Notes payable to banks under committed credit facilities
$
40,000

 
$
—

Less current portion
—

 
—

Long-term debt, net
$
40,000

 
$
—


As of June 30, 2013, we have committed credit facilities with two banks. These include a $175 million four-year credit facility which will expire on May 31, 2016 and a $75 million five-year credit facility which will expire on May 31, 2017 . Borrowings under these credit facilities bear variable interest ( 0.85% at June 30, 2013) based on the London Interbank Offered Rate (“LIBOR”). As of June 30, 2013, we had $40 million outstanding under these credit facilities with banks. The $250 million of credit available under these facilities is further reduced by $33.7 million in standby letters of credit under which we are obligated. Each of the debt agreements includes, among other things, two financial covenants requiring us (i) not to exceed a maximum ratio of total debt to total capitalization and (ii) not to exceed a maximum ratio of total funded debt to earnings before interest, income taxes, depreciation and amortization (as such terms are defined in each credit facility). At June 30, 2013, we were in compliance with these covenants.
At June 30, 2013, the aggregate future maturities of long-term debt by year are as follows (in thousands):
2013
$
—

2014
—

2015
—

2016
40,000

Total
$
40,000


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

(2)
Income Taxes
For the three-month and six-month periods ended June 30, 2013, there were no material changes to the total amount of unrecognized tax benefits. We accrued interest of $86 thousand and $80 thousand during the three-month periods ended June 30, 2013 and June 30, 2012, respectively, and $165 thousand and $151 thousand during the six-month periods ended June 30, 2013 and June 30, 2012, respectively. Our total gross liability for unrecognized tax benefits at June 30, 2013 is $12.1 million . If recognized, $7.7 million of unrecognized tax benefits would impact our effective tax rate. Interest of $3.8 million 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.
We file U.S. federal income tax returns, as well as income tax returns in various states and several foreign jurisdictions. The years 2009 through 2012 are open for examination by the 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.
In May 2010, the IRS began an audit of our 2007 and 2008 federal income tax returns. During the second quarter of 2012, we received a notice of deficiency including proposed penalties related to our like-kind exchange program for tractors and trailers. The proposed tax deficiency relates to timing differences for recognition of gains on sales of equipment. The IRS position would subject us to interest charges, which we estimated as of March 31, 2013 to be approximately $2.1 million after considering the tax deductibility of the interest payments, plus proposed penalties. In July 2012, we filed a petition in the United States Tax Court to contest the notice of deficiency. The IRS responded to our petition in September 2012. Prior to holding a scheduled appeals conference in June 2013, the IRS appeals officer decided to no longer contest this issue based on the merits of our position.  In July 2013, we entered into a stipulation with the IRS that there are no deficiencies in federal income tax and no penalties due for

8

the tax years 2007 and 2008. The IRS decision has no impact on our financial condition, results of operations or income tax rate because we had not previously accrued a liability for any proposed interest or penalties related to this issue.
 
(3)
Commitments and Contingencies
As of June 30, 2013, we have committed to property and equipment purchases of approximately $100.1 million .
In November 2012, the IRS issued a Notice of Proposed Adjustment for tax years 2009 and 2010 related to an employment tax audit which focused on our driver per diem program. Under the program, eligible drivers may elect to receive a nontaxable reimbursement of certain expenses that are otherwise included in and contemplated as a portion of their compensation while away from home. The notice proposes that the nontaxable per diem payments are wages, resulting in additional FICA and FUTA taxes and federal income tax withholding obligations. If the IRS position is upheld, we estimate the additional expense for the 2009 and 2010 tax years to be approximately $16.5 million after considering the tax deductibility of the payments. We submitted a formal protest prior to the deadline of March 15, 2013. A pre-appeals conference is currently scheduled for August 2013. We believe our driver per diem program complies with applicable tax law, and we will vigorously defend against the IRS position. We have not accrued a liability because we believe we will ultimately prevail in this matter.
We are involved in certain claims and pending litigation arising in the ordinary course of business. At this time, management believes the ultimate resolution of these matters will not materially affect our consolidated financial statements.
 
(4)
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 period presented. The computation of basic and diluted earnings per share is shown below (in thousands, except per share amounts).
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2013
 
2012
 
2013
 
2012
Net income
$
25,840

 
$
30,680

 
$
43,351

 
$
51,925

Weighted average common shares outstanding
73,022

 
72,859

 
73,140

 
72,857

Dilutive effect of stock-based awards
576

 
553

 
550

 
544

Shares used in computing diluted earnings per share
73,598

 
73,412

 
73,690

 
73,401

Basic earnings per share
$
0.35

 
$
0.42

 
$
0.59

 
$
0.71

Diluted earnings per share
$
0.35

 
$
0.42

 
$
0.59

 
$
0.71

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.
 
(5)
Stock-Based Compensation
At the May 14, 2013 Annual Meeting of Stockholders, the stockholders approved and adopted an amended and restated Werner Enterprises, Inc. Equity Plan (the "Equity Plan). The Equity Plan amendments added specific requirements that must be followed when issuing qualified performance-based compensation; permitted grants of restricted stock units in addition to nonqualified stock options, restricted stock and stock appreciation rights; and replaced the provision that limited the number of shares granted to any one person to 2,562,500 over the term of the plan with an annual limit of 500,000 shares. A copy of the Equity Plan is filed as an exhibit to this 10-Q.
Our Equity Plan provides for grants of nonqualified stock options, restricted stock, restricted stock units 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. Stock option and restricted stock awards are described below. No awards of restricted stock units or 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.

9

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 June 30, 2013, there were 7,695,712 shares available for granting additional awards.
We apply the fair value method of accounting for stock-based compensation awards granted under our Equity Plan. Stock-based employee compensation expense is included in salaries, wages and benefits within the Consolidated Statements of Income. As of June 30, 2013, the total unrecognized compensation cost related to non-vested stock-based compensation awards was approximately $8.1 million and is expected to be recognized over a weighted average period of 2.6 years. The following table summarizes the stock-based compensation expense and related income tax benefit recognized in the Consolidated Statements of Income (in thousands):
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2013
 
2012
 
2013
 
2012
Stock options:
 
 
 
 
 
 
 
Pre-tax compensation expense
$
66

 
$
84

 
$
132

 
$
186

Tax benefit
26

 
34

 
52

 
75

Stock option expense, net of tax
$
40

 
$
50

 
$
80

 
$
111

Restricted stock:
 
 
 
 
 
 
 
Pre-tax compensation expense
$
1,223

 
$
1,027

 
$
2,458

 
$
2,047

Tax benefit
486

 
416

 
977

 
829

Restricted stock expense, net of tax
$
737

 
$
611

 
$
1,481

 
$
1,218

We do not have a formal policy for issuing shares upon an exercise of stock options or vesting of restricted stock, so such shares are generally issued from treasury stock. From time to time, we repurchase shares of our common stock, the timing and amount of which depends on market and other factors. Historically, the shares acquired from such repurchases have provided us with sufficient quantities of stock to issue for stock-based compensation. Based on current treasury stock levels, we do not expect to repurchase additional shares specifically for stock-based compensation during 2013.
Stock Options
Stock options are granted at prices equal to the market value of the common stock on the date the option award is granted. Option awards currently outstanding become exercisable in installments from 24 to 72 months after the date of grant. The options are exercisable over a period not to exceed ten years, one day from the date of grant.
The following table summarizes stock option activity for the six months ended June 30, 2013:
 
 
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
800

 
$
17.92

 

 

Options granted
—

 
$
—

 

 

Options exercised
(41
)
 
$
17.93

 

 

Options forfeited
(5
)
 
$
20.39

 

 

Options expired
—

 
$
—

 

 

Outstanding at end of period
754

 
$
17.90

 
3.54
 
$
4,727

Exercisable at end of period
571

 
$
17.60

 
2.75
 
$
3,750

We did not grant any stock options during the three-month and six-month periods ended June 30, 2013 and June 30, 2012. The fair value of stock option grants is estimated using a Black-Scholes valuation model. The total intrinsic value of stock options exercised was $0.2 million and $0.1 million for the three-month periods ended June 30, 2013 and June 30, 2012, respectively, and $0.3 million and $0.2 million for the six-month periods ended June 30, 2013 and June 30, 2012, respectively.

10

Restricted Stock
Restricted stock awards entitle the holder to shares of common stock when the award vests. The value of these shares may fluctuate according to market conditions and other factors. Restricted stock awards currently outstanding vest over periods ranging from 12 to 84 months from the grant date of the award. The restricted shares do not confer any voting or dividend rights to recipients until such shares fully vest and do not have any post-vesting sales restrictions.
The following table summarizes restricted stock activity for the six months ended June 30, 2013:
 
 
Number of
Restricted
Shares (in
thousands)
 
Weighted
Average Grant
Date Fair
Value ($)
Nonvested at beginning of period
815

 
$
20.69

Shares granted
—

 
$
—

Shares vested
(21
)
 
$
23.27

Shares forfeited
(1
)
 
$
20.64

Nonvested at end of period
793

 
$
20.62

We did not grant any shares of restricted stock during the three-month and six-month periods ended June 30, 2013 and granted 5,000 shares of restricted stock during the three-month and six-month periods ended June 30, 2012. We estimate the fair value of restricted stock awards based upon the market price of the underlying common stock on the date of grant, reduced by the present value of estimated future dividends because the awards are not entitled to receive dividends prior to vesting. Our estimate of future dividends is based on the most recent quarterly dividend rate at the time of grant, adjusted for any known future changes in the dividend rate. The present value of estimated future dividends for the 2012 grant was calculated using the following assumptions:
Dividends per share (quarterly amounts)
 
 
 
 
 
 
$
0.05

Risk-free interest rate
 
 
 
 
 
 
0.9
%

The total fair values of previously granted restricted stock awards vested during the three-month and six-month periods ended June 30, 2013 were $25 thousand and $503 thousand , respectively. No shares of restricted stock vested during the three-month and six-month periods ended June 30, 2012. We withheld shares based on the closing stock price on the vesting date to settle the employees' minimum statutory obligation for the applicable income and other employment taxes. Total cash remitted for the employees' tax obligations to the relevant taxing authorities was $9 thousand and $166 thousand for the three-month and six-month periods ended June 30, 2013 and is reflected as a financing activity within the Consolidated Statements of Cash Flows; the 6,952 shares withheld to satisfy the tax withholding obligations were recorded as treasury stock.

(6)
Segment Information
We have two reportable segments – Truckload Transportation Services (“Truckload”) and Value Added Services (“VAS”).
The Truckload segment consists of two operating units, One-Way Truckload and Specialized Services, that are aggregated because they have similar economic characteristics and meet the other aggregation criteria described in the accounting guidance for segment reporting. One-Way Truckload is comprised of the following operating fleets: (i) the regional short-haul (“Regional”) fleet transports a variety of consumer nondurable products and other commodities in truckload quantities within geographic regions across the United States using dry van trailers; (ii) the medium-to-long-haul van (“Van”) fleet provides comparable truckload van service over irregular routes; and (iii) the expedited (“Expedited”) fleet provides time-sensitive truckload services utilizing driver teams. Specialized Services provides truckload services dedicated to a specific customer, generally for a retail distribution center or manufacturing facility, including services for products requiring specialized trailers such as flatbed or temperature-controlled trailers. Revenues for the Truckload segment include a small amount of non-trucking revenues which consist primarily of the portion of shipments delivered to or from Mexico where we utilize a third-party capacity provider.
The VAS segment generates the majority of our non-trucking revenues through four operating units that provide non-trucking services to our customers. These four VAS operating units are as follows: (i) truck brokerage (“Brokerage”) uses contracted carriers to complete customer shipments; (ii) freight management (”Freight Management”) offers a full range of single-source logistics management services and solutions; (iii) the intermodal (“Intermodal”) unit offers rail transportation through alliances with rail and drayage providers as an alternative to truck transportation; and (iv) Werner Global Logistics international (“WGL”) provides

11

complete management of global shipments from origin to destination using a combination of air, ocean, truck and rail transportation modes.
We generate other revenues related to third-party equipment maintenance, equipment leasing and other business activities. None of these operations meets the quantitative reporting thresholds. As a result, these operations are grouped in “Other” in the tables below. “Corporate” includes revenues and expenses that are incidental to our activities and are not attributable to any of our operating segments. We do not prepare separate balance sheets by segment and, as a result, assets are not separately identifiable by segment. Inter-segment eliminations in the table below represent transactions between reporting segments that are eliminated in consolidation. VAS segment revenues for the three-month and six-month periods ended June 30, 2012 have been revised to conform with the current presentation.
The following table summarizes our segment information (in thousands):
 
 
Three Months Ended
 June 30,
 
Six Months Ended
 June 30,
 
2013
 
2012
 
2013
 
2012
Revenues
 
 
 
 
 
 
 
Truckload Transportation Services
$
412,869

 
$
432,888

 
$
821,769

 
$
850,378

Value Added Services
91,185

 
85,109

 
173,695

 
162,626

Other
2,083

 
3,481

 
4,127

 
6,538

Corporate
996

 
1,419

 
1,646

 
2,494

Subtotal
507,133

 
522,897

 
1,001,237

 
1,022,036

Inter-segment eliminations
(485
)
 
(1,085
)
 
(1,702
)
 
(1,848
)
Total
$
506,648

 
$
521,812

 
$
999,535

 
$
1,020,188

Operating Income
 
 
 
 
 
 
 
Truckload Transportation Services
$
34,442

 
$
45,074

 
$
58,057

 
$
76,438

Value Added Services
4,489

 
4,302

 
8,102

 
8,288

Other
1,623

 
855

 
2,528

 
1,359

Corporate
1,807

 
882

 
2,367

 
430

Total
$
42,361

 
$
51,113

 
$
71,054

 
$
86,515



12

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (the “MD&A”) summarizes the financial statements from management’s perspective with respect to our financial condition, results of operations, liquidity and other factors that may affect actual results. The MD&A is organized in the following sections:
•
Overview
•
Results of Operations
•
Liquidity and Capital Resources
•
Contractual Obligations and Commercial Commitments
•
Off-Balance Sheet Arrangements
•
Regulations
•
Critical Accounting Policies
•
Accounting Standards
The MD&A should be read in conjunction with our 2012 Form 10-K.
Overview:
We have two reportable segments, Truckload Transportation Services ("Truckload") and Value Added Services ("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 second quarter 2013 to second quarter 2012, 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

13
Table of Contents

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.

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.  
 
 
Three Months Ended (3ME) June 30,
 
Six Months Ended (6ME) June 30,
 
Percentage Change in Dollar Amounts
 
2013
 
2012
 
2013
 
2012
 
3ME
6ME
(Amounts in thousands)
$
%
 
$
%
 
$
%
 
$
%
 
%
%
Operating revenues
$
506,648

100.0

 
$
521,812

100.0

 
$
999,535

100.0

 
$
1,020,188

100.0

 
(2.9
)%
(2.0
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 


Salaries, wages and benefits
135,236

26.7

 
138,512

26.5

 
268,341

26.9

 
272,360

26.7

 
(2.4
)%
(1.5
)%
Fuel
90,191

17.8

 
99,322

19.0

 
186,984

18.7

 
202,259

19.8

 
(9.2
)%
(7.6
)%
Supplies and maintenance
43,934

8.7

 
44,741

8.6

 
87,062

8.7

 
86,578

8.5

 
(1.8
)%
0.6
 %
Taxes and licenses
21,586

4.2

 
22,967

4.4

 
43,210

4.3

 
45,499

4.5

 
(6.0
)%
(5.0
)%
Insurance and claims
17,320

3.4

 
15,103

2.9

 
37,121

3.7

 
34,327

3.4

 
14.7
 %
8.1
 %
Depreciation
42,367

8.4

 
41,506

8.0

 
84,698

8.5

 
82,177

8.0

 
2.1
 %
3.1
 %
Rent and purchased transportation
115,060

22.7

 
108,496

20.8

 
221,378

22.2

 
209,006

20.5

 
6.0
 %
5.9
 %
Communications and utilities
3,187

0.6

 
3,344

0.6

 
6,329

0.6

 
7,163

0.7

 
(4.7
)%
(11.6
)%
Other
(4,594
)
(0.9
)
 
(3,292
)
(0.6
)
 
(6,642
)
(0.7
)
 
(5,696
)
(0.6
)
 
(39.6
)%
(16.6
)%
Total operating expenses
464,287

91.6

 
470,699

90.2

 
928,481

92.9

 
933,673

91.5

 
(1.4
)%
(0.6
)%
 
 
 
 
 
 
 
 
 
 
 
 
 


Operating income
42,361

8.4

 
51,113

9.8

 
71,054

7.1

 
86,515

8.5

 
(17.1
)%
(17.9
)%
Total other expense (income)
(526
)
(0.1
)
 
(450
)
(0.1
)
 
(897
)
(0.1
)
 
(754
)
(0.1
)
 
(16.9
)%
(19.0
)%
Income before income taxes
42,887

8.5

 
51,563

9.9

 
71,951

7.2

 
87,269

8.6

 
(16.8
)%
(17.6
)%
Income taxes
17,047

3.4

 
20,883

4.0

 
28,600

2.9

 
35,344

3.5

 
(18.4
)%
(19.1
)%
Net income
$
25,840

5.1

 
$
30,680

5.9

 
$
43,351

4.3

 
$
51,925

5.1

 
(15.8
)%
(16.5
)%


14
Table of Contents

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.
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2013
 
2012
 
2013
 
2012
Truckload Transportation Services (amounts in thousands)
$
 
%
 
$
 
%
 
$
 
%
 
$
 
%
Trucking revenues, net of fuel surcharge
$
320,000

 
 
 
$
331,974

 
 
 
$
633,400

 
 
 
$
653,200

 
 
Trucking fuel surcharge revenues
88,574

 
 
 
97,389

 
 
 
180,159

 
 
 
190,596

 
 
Non-trucking and other operating revenues
4,295

 
 
 
3,525

 
 
 
8,210

 
 
 
6,582

 
 
Operating revenues
412,869

 
100.0
 
432,888

 
100.0
 
821,769

 
100.0
 
850,378

 
100.0
Operating expenses
378,427

 
91.7
 
387,814

 
89.6
 
763,712

 
92.9
 
773,940

 
91.0
Operating income
$
34,442

 
8.3
 
$
45,074

 
10.4
 
$
58,057

 
7.1
 
$
76,438

 
9.0

 
Three Months Ended
June 30,
 
 
 
Six Months Ended
June 30,
 
 
Truckload Transportation Services
2013
 
2012
 
% Change
 
2013
 
2012
 
% Change
Operating ratio, net of fuel surcharge revenues
89.4
%
 
86.6
%
 
 
 
91.0
%
 
88.4
%
 
 
Average revenues per tractor per week (1)
$
3,450

 
$
3,485

 
(1.0
)%
 
$
3,409

 
$
3,460

 
(1.5
)%
Average trip length in miles (loaded)
441

 
476

 
(7.4
)%
 
453

 
483

 
(6.2
)%
Average percentage of empty miles (2)
12.93
%
 
12.23
%
 
5.7
 %
 
12.98
%
 
12.06
%
 
7.6
 %
Average tractors in service
7,134

 
7,327

 
(2.6
)%
 
7,146

 
7,261

 
(1.6
)%
Total trailers (at quarter end)
22,005

 
22,355

 
 
 
22,005

 
22,355

 
 
Total tractors (at quarter end):
 
 
 
 
 
 
 
 
 
 
 
     Company
6,480

 
6,675

 
 
 
6,480

 
6,675

 
 
     Independent contractor
670

 
650

 
 
 
670

 
650

 
 
          Total tractors
7,150

 
7,325

 
 
 
7,150

 
7,325

 
 

(1)
Net of fuel surcharge revenues.
(2)  
“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.
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
  
2013
 
2012
 
2013
 
2012
Value Added Services (amounts in thousands)
$
 
%
 
$
 
%
 
$
 
%
 
$
 
%
Operating revenues
$
91,185

 
100.0
 
$
85,109

 
100.0
 
$
173,695

 
100.0
 
$
162,626

 
100.0
Rent and purchased transportation expense
76,255

 
83.6
 
72,239

 
84.9
 
145,452

 
83.7
 
138,265

 
85.0
Gross margin
14,930

 
16.4
 
12,870

 
15.1
 
28,243

 
16.3
 
24,361

 
15.0
Other operating expenses
10,441

 
11.5
 
8,568

 
10.0
 
20,141

 
11.6
 
16,073

 
9.9
Operating income
$
4,489

 
4.9
 
$
4,302

 
5.1
 
$
8,102

 
4.7
 
$
8,288

 
5.1

15
Table of Contents

 
Three Months Ended
June 30,
 
 
 
Six Months Ended
June 30,
 
 
Value Added Services
2013
 
2012
 
% Change
 
2013
 
2012
 
% Change
Total VAS shipments
70,383

 
68,376

 
2.9
%
 
134,749

 
135,196

 
(0.3
)%
Less: Non-committed shipments to Truckload segment
19,411

 
18,808

 
3.2
%
 
39,357

 
37,965

 
3.7
 %
Net VAS shipments
50,972

 
49,568

 
2.8
%
 
95,392

 
97,231

 
(1.9
)%
Average revenue per shipment
$
1,632

 
$
1,595

 
2.3
%
 
$
1,653

 
$
1,559

 
6.0
 %
 


 


 
 
 


 


 
 
Average tractors in service
45

 
17

 
 
 
42

 
14

 
 
Total trailers (at quarter end)
1,755

 
1,000

 
 
 
1,755

 
1,000

 
 
Total tractors (at quarter end)
43

 
17

 
 
 
43

 
17

 
 

Three Months Ended June 30, 2013 Compared to Three Months Ended June 30, 2012
Operating Revenues
Operating revenues decreased 2.9% for the three months ended June 30, 2013, compared to the same period of the prior year. Trucking revenues, net of fuel surcharge, decreased 3.6% due to a 1.0% decrease in average revenues per tractor per week and a 2.6% decrease in the average number of tractors in service.
Second quarter 2013 freight demand was softer in April 2013 than April 2012, due in part to unfavorable temperature and weather comparisons which negatively affected retail volumes. Freight demand improved and seasonally strengthened during May and June 2013 and was comparable to May and June 2012. In July 2013 freight demand was comparable to July 2012, with typical seasonal demand trends throughout the month.
Average revenues per tractor per week declined by 1.0% due to a 2.6% decrease in average miles per truck offset partially by a 1.6% increase in average revenue per total mile, net of fuel surcharge. The decrease in the average miles per truck in second quarter 2013 compared to second quarter 2012 was due primarily to the freight softness in April combined with truck mix changes (more Dedicated, less One-Way Truckload) and a 7.4% shorter length of haul. Average revenues per loaded mile, net of fuel surcharge, increased 2.5% in second quarter 2013 compared to second quarter 2012. Our average percentage of empty miles increased from 12.23% in second quarter 2012 to 12.93% in second quarter 2013; however, our empty miles decreased slightly when measured on a per-trip basis. Base rate increases showed modestly positive momentum as second quarter 2013 progressed. Spot market rates were lower in the second quarter 2013 than in second quarter 2012 due to lower transactional project business, particularly in the Midwest market.
The average number of tractors in service in the Truckload segment decreased 2.6%, from 7,327 in second quarter 2012 to 7,134 in second quarter 2013, a decrease of 193 tractors. We ended the quarter with 7,150 tractors in the Truckload segment, an increase of 60 trucks from the end of first quarter 2013. A difficult driver market is making it challenging to achieve our 7,300 truck goal for the Truckload segment. We cannot predict whether future driver shortages may occur, which if they did, could adversely affect our ability to maintain our fleet size or return our fleet to our goal of 7,300 trucks. 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 9.1% from $97.4 million in second quarter 2012 to $88.6 million in second quarter 2013 because of lower average fuel prices and lower miles in second quarter 2013. 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.
We continue to diversify our business model. Our goal is to attain a more balanced revenue portfolio comprised of one-way truckload, specialized and logistics (which includes the VAS segment) services by growing our logistics services revenues. Our

16
Table of Contents

Specialized Services unit, primarily Dedicated, ended second quarter 2013 with 3,620 tractors or 51% of our Truckload segment fleet (an increase of 125 from the end of second quarter 2012).
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 $0.5 million in second quarter 2013 and $1.1 million in second quarter 2012 for Intermodal drayage movements performed by the Truckload segment (also recorded as trucking revenue by the Truckload segment), and these transactions between reporting segments are eliminated in consolidation. VAS revenues increased 7.1% from $85.1 million in second quarter 2012 to $91.2 million in second quarter 2013, resulting from higher average revenues per VAS shipment and an increase in the number of VAS shipments. VAS gross margin dollars increased 16.0% from $12.9 million in second quarter 2012 to $14.9 million for the same period in 2013, and other operating expenses increased $1.9 million or 21.9%; these changes are partially attributed to Intermodal's development of its own drayage fleet, which had the effect of lowering rent and purchased transportation expense and increasing other operating expenses. The average number of tractors in service in the VAS segment (dray trucks) increased from 17 in second quarter 2012 to 45 in second quarter 2013, an increase of 28 tractors. VAS operating income increased 4.3% from $4.3 million in second quarter 2012 to $4.5 million in second quarter 2013.
    
Brokerage revenues in second quarter 2013 increased 10.6% compared to second quarter 2012 due to an increase in average revenue per shipment and a 3% increase in shipment volume. Brokerage gross margin percentage improved 28 basis points, and Brokerage operating income in second quarter 2013 was higher than in second quarter 2012. Intermodal revenues increased 10.7%, and Intermodal operating income was also higher comparing second quarter 2013 to second quarter 2012. WGL revenues and operating income decreased in second quarter 2013 compared to second quarter 2012.
Operating Expenses
Our operating ratio (operating expenses expressed as a percentage of operating revenues) was 91.6% for the three months ended June 30, 2013, compared to 90.2% for the three months ended June 30, 2012. Expense items that impacted the overall operating ratio are described on the following pages. The tables on pages 14-16 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 same quarter of the prior year, as well as the operating ratios, operating margins, and certain statistical information for our two reportable segments, Truckload and VAS.
Salaries, wages and benefits decreased $3.3 million or 2.4% in second quarter 2013 compared to second quarter 2012 but increased 0.2% as a percentage of operating revenues. The lower dollar amount of salaries, wages and benefits expense resulted from the lower average miles per truck and the shift from this expense category to rent and purchased transportation expense because of the increase in independent contractor miles as a percentage of total miles. However, when evaluated on a per-mile basis, salaries wages and benefits expense increased, which we attribute to (i) higher driver pay, including discretionary pay items in a more competitive driver market and driver pay related to new fleet startups, (ii) higher non-driver pay, and (iii) lower average miles per truck during second quarter 2013. Non-driver salaries, wages and benefits in the non-trucking VAS segment increased 4.2%, and net VAS shipments retained by VAS increased by 2.8%.
We renewed our workers' compensation insurance coverage for the policy year beginning April 1, 2013. Our coverage levels are the same as the prior policy year. We continue to maintain a self-insurance retention of $1.0 million per claim. Our workers’ compensation insurance premiums for the policy year beginning April 2013 were similar to those for the previous policy year.
The driver recruiting and retention market remained challenging in second quarter 2013 and was similar to first quarter 2013. We believe that a declining number of, and increased competition for, driver training school graduates, a gradually declining national unemployment rate and a strengthening housing construction market were all contributing factors. We were able to hire more drivers during second quarter 2013 compared to second quarter 2012, but the difficult driver market is making it challenging to achieve our 7,300 truck goal for the Truckload segment. However, we continue to believe our position in the current driver market is better than that of many competitors because over 70% of our driving jobs are in more attractive, shorter-haul Regional and Specialized Services fleet operations that enable us to return drivers to their homes on a more frequent and consistent basis. In the event the domestic economy strengthens, we anticipate the driver market could become even more challenging. We are unable to predict whether we will experience future driver shortages. If such a shortage were to occur and driver pay rate increases became necessary to attract and retain drivers, our results of operations would be negatively impacted to the extent that we could not obtain corresponding freight rate increases.
Fuel decreased $9.1 million or 9.2% in second quarter 2013 compared to second quarter 2012 and decreased 1.2% as a percentage of operating revenues due to (i) fewer miles, (ii) improved miles per gallon ("mpg"), (iii) lower average diesel fuel prices and (iv) a shift from this expense category to rent and purchased transportation expense because of the increase in independent

17
Table of Contents

contractor miles as a percentage of total miles. Average diesel fuel prices were 3 cents per gallon lower in second quarter 2013 than in second quarter 2012, a 1.1% decrease.
We continue to employ measures to improve our fuel mpg such as (i) limiting truck engine idle time, (ii) optimizing the speed, weight and specifications of our equipment and (iii) implementing mpg-enhancing equipment changes to our fleet such as new trucks with EPA 2010 compliant engines, more aerodynamic truck features, idle reduction systems, tire inflation systems and trailer skirts to reduce our fuel gallons purchased and improve our mpg. These measures resulted in an improvement in mpg in second quarter 2013 compared to second quarter 2012. However, fuel savings from the mpg improvement is partially offset by higher depreciation expense and the additional cost of diesel exhaust fluid (required in certain tractors with engines that meet the 2010 EPA emission standards). Although our fuel management programs require significant capital investment and research and development, we intend to continue these and other environmentally conscious initiatives, including our active participation as a U.S. Environmental Protection Agency (the “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 July 2013, the average diesel fuel price per gallon was approximately 11 cents higher than the average diesel fuel price per gallon in the same period of 2012 and approximately 11 cents lower than in third quarter 2012.
Shortages of fuel, increases in fuel prices and petroleum product rationing can have a materially adverse effect on our operations and profitability. We are unable to predict whether fuel price levels will increase or decrease in the future or the extent to which fuel surcharges will be collected from customers. As of June 30, 2013, we had no derivative financial instruments to reduce our exposure to fuel price fluctuations.
Supplies and maintenance decreased $0.8 million or 1.8% in second quarter 2013 compared to second quarter 2012 and increased 0.1% as a percentage of operating revenues. Increases in over the road tractor maintenance and toll expenses were offset by a shift from this expense category to rent and purchased transportation expense because of the increase in independent contractor miles as a percentage of total miles. The average age of our company truck fleet at the end of second quarter 2013 was 2.4 years (the same as at the end of first quarter 2013) and was 2.3 years at the end of second quarter 2012. Our goal is to maintain our average truck age at approximately this level during 2013.
Taxes and licenses decreased $1.4 million or 6.0% in second quarter 2013 compared to second quarter 2012 and decreased 0.2% as a percentage of operating revenues. The decrease resulted from fewer miles driven and the resulting decrease in fuel taxes associated with fewer gallons purchased. Improved company truck fuel mpg, which results in fewer gallons of diesel fuel purchased and consequently less fuel taxes paid, also contributed but to a lesser extent.
Insurance and claims increased $2.2 million or 14.7% in second quarter 2013 compared to second quarter 2012 and increased 0.5% as a percentage of operating revenues. The increase was the result of a higher average cost per claim and higher frequency of claims related to smaller dollar claims that occurred during the quarter and higher negative development of smaller dollar claims that occurred in prior quarters. The majority of our insurance and claims expense results from our claim experience and claim development under our self-insurance program; the remainder results from insurance premiums for claims in excess of our self-insured limits. We renewed our liability insurance policies on August 1, 2013 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. Our liability and cargo insurance premiums for the policy year that began August 1, 2013 are slightly higher than premiums for the previous policy year on a per-mile basis.
Depreciation expense increased $0.9 million or 2.1% in second quarter 2013 compared to second quarter 2012 and increased 0.4% as a percentage of operating revenues. This increase was due primarily to the higher cost of new trucks purchased compared to the cost of used trucks that were sold over the past 12 months. In addition, the purchase of new trailers to replace older used trailers which were fully depreciated also contributed to the increase in depreciation expense. These increases were partially offset by lower depreciation on auxiliary power units that were sold with the older used trucks and not replaced.
Depreciation expense was historically affected by two changes to engine emissions standards imposed by the EPA that became effective in October 2002 and in January 2007, resulting in increased truck purchase costs. We began to take delivery of trucks with these 2007-standard engines in first quarter 2008 to replace older trucks in our fleet. A final set of more rigorous EPA-mandated emissions standards became effective for all new engines manufactured after January 1, 2010. Trucks with 2010-standard engines have a higher purchase price than trucks manufactured to meet the 2007 standards, but the 2010-standard engines are more fuel efficient. In 2013, we continue to purchase trucks with 2010-standard engines to replace older trucks that we sell or trade, and as of June 30, 2013, approximately 65% of our company tractors had engines that comply with the 2010 emissions standards. Depreciation expense increased in second quarter 2013 due to higher prices for these new trucks and is expected to increase further as we continue to replace tractors with 2007-standard engines.

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Rent and purchased transportation expense increased $6.6 million or 6.0% in second quarter 2013 compared to second quarter 2012 and increased 1.9% as a percentage of operating revenues. Rent and purchased transportation expense consists mainly of payments to third-party capacity providers in the VAS segment and other non-trucking operations and payments to independent contractors in the Truckload segment. The payments to third-party capacity providers generally vary depending on changes in the volume of services generated by the VAS segment. VAS rent and purchased transportation expense increased $4.0 million but decreased from 84.9% of VAS revenues in second quarter 2012 to 83.6% of VAS revenues in second quarter 2013.
Rent and purchased transportation for the Truckload segment increased $1.9 million in second quarter 2013 compared to second quarter 2012. This increase was due primarily to a shift from salaries, wages and benefits and several other expense categories to rent and purchased transportation expense because of the increase in independent contractor truck miles as a percentage of total miles and increased rent and purchased transportation expense related to a higher volume of Truckload segment shipments delivered to or from Mexico utilizing a third-party capacity provider, partially offset by lower reimbursement rate to independent contractors for fuel due to decreased fuel prices. Independent contractor miles as a percentage of total miles were 12.2% in second quarter 2013 compared to 10.9% in second quarter 2012.
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, 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.
Communication and utilities decreased $0.2 million or 4.7% in second quarter 2013 compared to second quarter 2012 but did not change as a percentage of operating revenues. This decrease is due to the installation of Qualcomm MCP 200 units, which was started in early 2011 and substantially completed by mid-2012, that have a lower monthly service fee than the Qualcomm OmniTRACS units that were replaced.
Other operating expenses decreased $1.3 million or 39.6% in second quarter 2013 compared to second quarter 2012 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 $6.5 million in second quarter 2013, including a $1.1 million gain from the sale of real estate. This compares to gains of $5.7 million in second quarter 2012 and $3.5 million in first quarter 2013. We sold fewer trucks and trailers in second quarter 2013 compared to second quarter 2012 and realized higher average gains per truck. We expect to sell approximately the same number of trucks but fewer trailers in the second half of 2013 compared to the second half of 2012.
Other Expense (Income)
Other expense (income) decreased $0.1 million or 16.9% in second quarter 2013 compared to second quarter 2012 and didn't change as a percentage of operating revenues. Interest income net of interest expense increased $0.1 million in second quarter 2013 compared to second quarter 2012.
Income Taxes
Our effective income tax rate (income taxes expressed as a percentage of income before income taxes) decreased to 39.75% for second quarter 2013 from 40.50% for second quarter 2012. The lower income tax rate is attributed to lower non-deductible expenses, primarily driver per diem, and higher employment tax credits.

Six Months Ended June 30, 2013 Compared to Six Months Ended June 30, 2012
Operating Revenues
Operating revenues decreased 2.0% for the six months ended June 30, 2013, compared to the same period of the prior year. Trucking revenues, net of fuel surcharge, decreased 3.0% due primarily to decreases in average revenues per tractor per week and average number of tractors in service. Average revenues per total mile, net of fuel surcharge, increased 1.5% in the first half of 2013 compared to the same period in 2012, and average monthly miles per tractor declined by 2.9%. Fuel surcharge revenues decreased 5.5% from $190.6 million in the 2012 year-to-date period to $180.2 million in the 2013 year-to-date period because of lower miles and lower diesel fuel prices. VAS revenues increased 6.8%, from $162.6 million in the first six months of 2012 to $173.7 million in the same 2013 period. The increases occurred in Brokerage, Intermodal and WGL.

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Operating Expenses
Our operating ratio (operating expenses expressed as a percentage of operating revenues) was 92.9% for the six months ended June 30, 2013, compared to 91.5% for the same period of 2012. Expense items that impacted the overall operating ratio are described on the following pages. The tables on pages 14-16 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 same period of the prior year, as well as the operating ratios, operating margins, and certain statistical information for our two reportable segments, Truckload and VAS.
Salaries, wages and benefits decreased $4.0 million or 1.5% in the 2013 year-to-date period but increased 0.2% as a percentage of operating revenues. The lower dollar amount of salaries, wages, and benefits expense was due primarily to the lower average miles per truck and the shift from this expense category to rent and purchased transportation expense that occurred because of the increase in independent contractor miles as a percentage of total miles. However, when evaluated on a per-mile basis, salaries, wages and benefits increased, which we attribute primarily to higher driver pay, including discretionary pay items in a more competitive driver market and driver pay related to new fleet startups. Non-driver salaries, wages and benefits in the non-trucking VAS segment increased 12.8%. VAS handled 0.3% fewer shipments, including those transferred to the Truckload segment, and the net shipments retained by VAS decreased by 6.0%.
Fuel decreased $15.3 million or 7.6% in the first six months of 2013 compared to the same period in 2012 and decreased 1.1% as a percentage of operating revenues. The decrease resulted from (i) fewer miles, (ii) improved mpg, (iii) lower average diesel fuel prices, and (iv) a shift from this expense category to rent and purchased transportation expense because of the increase in independent contractor miles as a percentage of total miles. Average diesel fuel prices were 4 cents per gallon lower in the first six months of 2013 than in the same 2012 period.
Supplies and maintenance expense increased $0.5 million or 0.6% in the 2013 year-to-date period compared to the same 2012 period and increased 0.2% as a percentage of operating revenues. More severe winter weather in first quarter 2013 compared to unusually mild conditions in first quarter 2012 contributed to the higher expense as did increases in a combination of miscellaneous expenses including driver advertising and travel expenses.
Taxes and licenses decreased $2.3 million or 5.0% in the first six months of 2013 compared to the same period in 2012 and decreased 0.2% as a percentage of operating revenues. The decrease is primarily attributed to fewer miles driven and the resulting decrease in fuel taxes associated with fewer gallons purchased.
Insurance and claims increased $2.8 million or 8.1% in the first six months of 2013 compared to the same period in 2012 and increased 0.3% as a percentage of operating revenues due primarily to an increase in the reserve for prior period claims (unfavorable development) related to smaller liability claims.
Depreciation increased $2.5 million or 3.1% in the first six months of 2013 compared to the same period in 2012 and increased 0.5% as a percentage of operating revenues. This increase was due primarily to higher tractor and trailer depreciation resulting from the higher cost of new equipment and replacing fully-depreciated trailers, offset partially by lower depreciation expense on auxiliary power units that were sold with the older used trucks and not replaced.
Rent and purchased transportation expense increased $12.4 million or 5.9% in the first six months of 2013 compared to the same period in 2012 and increased 1.7% as a percentage of operating revenues. Rent and purchased transportation for the Truckload segment was $5.0 million higher because of the shift from salaries, wages and benefits expense and several other expense categories to rent and purchased transportation expense because of the increase in independent contractor miles as a percentage of total miles. Independent contractor miles as a percentage of total miles were 12.0% in the first six months of 2013 compared to 10.8% during the same period of 2012. Rent and purchased transportation expense for the VAS segment increased in response to higher VAS revenues. VAS rent and purchased transportation expense increased $7.2 million but decreased from 85.0% of VAS revenues in the 2012 period to 83.7% in the 2013 period.
Communications and utilities expense decreased $0.8 million or 11.6% in the first six months of 2013 compared to the same period in 2012 and increased 0.1% as a percentage of operating revenues because of lower monthly service fees on the new Qualcomm MCP200 units and lower telephone costs.
Other operating expenses decreased $0.9 million or 16.6% in the first six months of 2013 compared to the same period in 2012 and decreased 0.1% as a percentage of operating revenues. Gains on sales of assets (primarily used trucks and trailers) decreased to $10.0 million in the six months ended June 30, 2012 from $10.4 million in the six months ended June 30, 2012. In the 2013 year-to-date period, we sold fewer trucks and trailers compared to the 2012 year-to-date period and realized higher average gains per truck sold. The 2013 year-to-date period also included a $1.1 million gain from the sale of real estate. Bad debt expense was lower in the 2013 year-to-date period, partially offset by higher legal fees compared to the same 2012 period.

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Other Expense (Income)
Other expense (income) decreased $0.1 million or 19.0% in the 2013 year-to-date period and didn't change as a percentage of revenues. Interest income net of interest expense increased $0.2 million year over year.
Income Taxes
Our effective income tax rate (income taxes expressed as a percentage of income before income taxes) decreased to 39.75% for the six months ended June 30, 2013 from 40.5% for the same period in 2012. The lower income tax rate is attributed to lower projected non-deductible expenses, primarily driver per diem, and higher projected employment tax credits.

Liquidity and Capital Resources:
During the six months ended June 30, 2013, net cash provided by operating activities decreased to $110.9 million, a 20% decrease ($27.9 million) in cash flows compared to the same six-month period one year ago. The decrease in net cash provided by operating activities resulted primarily from a $29.7 million decrease in cash flows related to other current assets (including the portion attributable to higher income tax payments noted below) and an $11.9 million decrease in cash flows related to accounts receivable, partially offset by an $18.0 million increase in cash flows related to accounts payable. Income tax payments increased $14.6 million in the 2013 period compared to the 2012 period, and this increase is reflected in the net change in deferred income taxes, other current assets and other current liabilities on the consolidated statements of cash flows. We were able to make net capital expenditures and pay dividends with the net cash provided by operating activities and existing cash balances, supplemented by net short-term borrowings under our existing credit facilities.
Net cash used in investing activities decreased from $119.6 million for the six-month period ended June 30, 2012 to $30.1 million for the six-month period ended June 30, 2013. Net property additions (primarily revenue equipment) were $34.5 million for the six-month period ended June 30, 2013, compared to $121.9 million during the same period of 2012. This decrease occurred because our purchases of new trucks and trailers, net of dispositions, were significantly lower in the 2013 period than in the 2012 period.
As of June 30, 2013, we were committed to property and equipment purchases of approximately $100.1 million. We currently expect our net capital expenditures (primarily revenue equipment) in 2013 to be in the range of $150.0 million to $200.0 million, compared to net capital expenditures in 2012 of $224.9 million. Our estimate of capital expenditures for 2013 increased by $50.0 million as the market for our used equipment was better in second quarter 2013 than we anticipated. We intend to fund these net capital expenditures through cash flow from operations and financing available under our existing credit facilities, as management deems necessary.
Net financing activities used $71.8 million during the six months ended June 30, 2013 and $13.6 million during the same period in 2012. During the six-month period ended June 30, 2013, we repaid $50.0 million of short-term and long-term debt, and our outstanding debt at June 30, 2013 was $40.0 million. During the same period in 2012, we borrowed and repaid short-term debt totaling $120.0 million. We paid dividends of $7.3 million in both the six-month periods ended June 30, 2013 and 2012. Financing activities for the six months ended June 30, 2013 also included common stock repurchases of 608,791 shares at a cost of $15.1 million. From time to time, Werner Enterprises, Inc. (the "Company") has repurchased, and may continue to repurchase, shares of the Company’s common stock. The timing and amount of such purchases depend upon stock market conditions and other factors. As of June 30, 2013, the Company had purchased 1,649,991 shares pursuant to our current Board of Directors repurchase authorization and had 6,350,009 shares remaining available for repurchase.
Management believes our financial position at June 30, 2013 is strong. As of June 30, 2013, we had $24.2 million of cash and cash equivalents and $738.9 million of stockholders’ equity. Cash is invested primarily in government portfolio money market funds. As of June 30, 2013, we had a total of $250.0 million of credit pursuant to two credit facilities, of which we had borrowed $40.0 million. The remaining $210.0 million of credit available under these facilities is reduced by the $33.7 million in standby 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.

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Contractual Obligations and Commercial Commitments:
The following tables set forth our contractual obligations and commercial commitments as of June 30, 2013.
Payments Due by Period
 
(Amounts in millions)
Total
 
Less than
1 year
 
1-3 years
 
3-5 years
 
More than
5 years
 
Period
Unknown
Contractual Obligations
 
 
 
 
 
 
 
 
 
 
 
Unrecognized tax benefits
$
12.1

 
$
0.5

 
$
—

 
$
—

 
$
—

 
$
11.6

Long-term debt
40.0

 
—

 
40.0

 
—

 
—

 
—

Property and equipment purchase commitments
100.1

 
100.1

 
—

 
—

 
—

 
—

Operating leases
3.0

 
1.6

 
1.4

 
—

 
—

 
—

Total contractual cash obligations
$
155.2

 
$
102.2

 
$
41.4

 
$
—

 
$
—

 
$
11.6

Other Commercial Commitments
 
 
 
 
 
 
 
 
 
 
 
Unused lines of credit
$
176.3

 
$
—

 
$
101.3

 
$
75.0

 
$
—

 
$
—

Stand-by letters of credit
33.7

 
33.7

 
—

 
—

 
—

 
—

Total commercial commitments
$
210.0

 
$
33.7

 
$
101.3

 
$
75.0

 
$
—

 
$
—

Total obligations
$
365.2

 
$
135.9

 
$
142.7

 
$
75.0

 
$
—

 
$
11.6

    
We have committed credit facilities with two banks totaling $250.0 million that mature in May 2016 ($175.0 million) and May 2017 ($75.0 million). At June 30, 2013, we had borrowed $40.0 million under these facilities. Borrowings under these credit facilities bear variable interest (0.85% at June 30, 2013) based on the London Interbank Offered Rate (“LIBOR”). The credit available under these facilities is further reduced by the amount of standby letters of credit under which we are obligated. The standby 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 June 30, 2013, we have recorded a $12.1 million liability for unrecognized tax benefits. We expect $0.5 million to be settled within the next twelve months and are unable to reasonably determine when the $11.6 million categorized as “period unknown” will be settled.
Off-Balance Sheet Arrangements:
We began leasing certain tractors under non-cancelable operating leases in May 2011. Our future payment obligation under these leases at June 30, 2013 was approximately $3.0 million.
Regulations:
Item 1 of Part I of our 2012 Form 10-K includes a discussion of pending proposed regulations that may have an effect on our operations if they become adopted and effective as proposed. Except as described below, there have been no material changes in the status of these proposed regulations previously disclosed in the 2012 Form 10-K.
In December 2011, the Federal Motor Carrier Safety Administration ("FMCSA") adopted and issued a final rule that amended the driver hours of service ("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. It is too early to measure the ongoing impact of the HOS changes on driver and truck productivity. We are taking steps to attempt to minimize the impact of the HOS changes. However, government restrictions of available driving hours will negatively impact the productivity of some drivers and some fleets within our company. On August 2, 2013, the U.S. Court of Appeals for the D.C. Circuit issued its decision related to petitions of the rule changes by the trucking industry association and consumer advocate groups. The court generally affirmed the FMCSA's final rule and vacated only the application of the 30-minute rest break to short-haul drivers as defined in 49 CFR 395.1(e).


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Critical Accounting Policies:
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 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. Actual results could differ from those estimates.
Information regarding our Critical Accounting Policies can be found in our 2012 Form 10-K. Together with the effects of the matters described there, these factors may significantly impact our results of operations from period to period. The most significant accounting policies and estimates that affect our financial statements include the following:
•
Selections of estimated useful lives and salvage values for purposes of depreciating tractors and trailers.
•
Impairment of long-lived assets.
•
Estimates of accrued liabilities for insurance and claims for liability and physical damage losses and workers’ compensation.
•
Policies for revenue recognition.
•
Accounting for income taxes.
•
Allowance for doubtful accounts.
We periodically evaluate these policies and estimates as events and circumstances change. There have been no material changes to these critical accounting policies and estimates from those discussed in our 2012 Form 10-K.
Accounting Standards:
In the descriptions under “New Accounting Pronouncements Adopted” and “Accounting Standards Updates Not Yet Effective” that follow, references in quotations identify guidance and Accounting Standards Updates relating to the topics and subtopics (and their descriptive titles, as appropriate) of the Accounting Standards Codification ™ of the Financial Accounting Standards Board (“FASB”).
New Accounting Pronouncements Adopted
We did not adopt any new accounting standards during second quarter 2013.
Accounting Standards Updates Not Yet Effective
Accounting Standards Updates not effective until after June 30, 2013 are not expected to have a material effect on our consolidated financial position, results of operations or cash flows.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to market risk from changes in commodity prices, foreign currency exchange rates and interest rates.
Commodity Price Risk
The price and availability of diesel fuel are subject to fluctuations attributed to changes in the level of global oil production, refining capacity, seasonality, weather and other market factors. Historically, we have recovered a majority, but not all, of fuel price increases from customers in the form of fuel surcharges. We implemented customer fuel surcharge programs with most of our customers to offset much of the higher fuel cost per gallon. However, we do not recover all of the fuel cost increase through these surcharge programs. We cannot predict the extent to which fuel prices will increase or decrease in the future or the extent to which fuel surcharges could be collected. As of June 30, 2013, 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 $1.1 million for second quarter 2013 and $0.8 million for second quarter 2012 and were recorded in accumulated other comprehensive loss within stockholders’ equity in the Consolidated Balance Sheets.

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Interest Rate Risk
We had $40.0 million of variable rate debt outstanding at June 30, 2013. Interest rates on the variable rate debt and our unused credit facilities are based on the LIBOR. Increases in interest rates could impact our annual interest expense on future borrowings. Assuming this level of borrowings, a hypothetical one-percentage point increase in the LIBOR interest rate would increase our annual interest expense by $400,000. As of June 30, 2013, we had no derivative financial instruments to reduce our exposure to interest rate increases.

Item 4. Controls and Procedures.
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”). Our disclosure controls and procedures are designed to provide reasonable assurance of achieving the desired control objectives. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective at a reasonable assurance level in enabling us to record, process, summarize and report information required to be included in our periodic filings with the SEC within the required time period and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, concluded that no changes in our internal control over financial reporting occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
We have confidence in our internal controls and procedures. Nevertheless, our management, including the Chief Executive Officer and Chief Financial Officer, does not expect that the internal controls or disclosure procedures and controls will prevent all errors or intentional fraud. An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of such internal controls are met. Further, the design of an internal control system must reflect that resource constraints exist, and the benefits of controls must be evaluated relative to their costs. Because of the inherent limitations in all internal control systems, no evaluation of controls can provide absolute assurance that all control issues, misstatements and instances of fraud, if any, have been prevented or detected.


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PART II
OTHER INFORMATION

Item 1. Legal Proceedings.
Information regarding material pending legal proceedings is incorporated by reference from Note 2 and Note 3 to our Consolidated Financial Statements set forth in Part I of this report.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On October 15, 2007, we announced that on October 11, 2007 our Board of Directors approved an increase in the number of shares of our common stock that the Company is authorized to repurchase. Under this authorization, the Company is permitted to repurchase an additional 8,000,000 shares. As of June 30, 2013, the Company had purchased 1,649,991 shares pursuant to this authorization and had 6,350,009 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.
The following table summarizes our common stock repurchases during the second quarter of 2013 made pursuant to this authorization. The Company did not purchase any shares during the second quarter of 2013 other than pursuant to this authorization. All stock repurchases were made by the Company or on its behalf and not by any “affiliated purchaser,” as defined by Rule 10b-18 of the Exchange Act.
Issuer Purchases of Equity Securities
 
Period
Total Number of Shares (or Units) Purchased
Average Price Paid per Share (or Unit)
Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs
Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
April 1-30, 2013
—

—

—

6,958,800

May 1-31, 2013
547,969

$
24.72

547,969

6,410,831

June 1-30, 2013
60,822

$
24.96

60,822

6,350,009

Total
608,791

$
24.75

608,791

6,350,009



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Item 6. Exhibits.
 
Exhibit No.
  
Exhibit
  
Incorporated by Reference to:
3(i)
  
Restated Articles of Incorporation of Werner Enterprises, Inc.
  
Exhibit 3(i) to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007
 
 
 
3(ii)
  
Revised and Restated By-Laws of Werner Enterprises, Inc.
  
Exhibit 3(ii) to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007
 
 
 
 
 
10.1
 
Werner Enterprises, Inc. Amended and Restated Equity Plan
 
Filed herewith
 
 
 
 
 
11
 
Statement Re: Computation of Per Share Earnings
 
See Note 4 (Earnings Per Share) in the Notes to Consolidated Financial Statements (Unaudited) under Item 1 of Part I of this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2013
 
 
 
31.1
  
Certification of the Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934 (Section 302 of the Sarbanes-Oxley Act of 2002)
  
Filed herewith
 
 
 
31.2
  
Certification of the Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934 (Section 302 of the Sarbanes-Oxley Act of 2002)
  
Filed herewith
 
 
 
32.1
  
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002)
  
Furnished herewith
 
 
 
32.2
  
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002)
  
Furnished herewith
 
 
 
101.INS
  
XBRL Instance Document
  
Filed herewith
 
 
 
101.SCH
  
XBRL Taxonomy Extension Schema Document
  
Filed herewith
 
 
 
101.CAL
  
XBRL Taxonomy Extension Calculation Linkbase Document
  
Filed herewith
 
 
 
101.LAB
  
XBRL Taxonomy Extension Label Linkbase Document
  
Filed herewith
 
 
 
 
 
101.PRE
  
XBRL Taxonomy Extension Presentation Linkbase Document
  
Filed herewith
 
 
 
101.DEF
  
XBRL Taxonomy Extension Definition Linkbase Document
  
Filed herewith
 


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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
WERNER ENTERPRISES, INC.
 
 
 
Date: August 5, 2013
By:
 
/s/ John J. Steele
 
 
 
John J. Steele
 
 
 
Executive Vice President, Treasurer and
Chief Financial Officer
 
 
 
Date: August 5, 2013
By:
 
/s/ James L. Johnson
 
 
 
James L. Johnson
 
 
 
Executive Vice President, Chief Accounting
Officer and Corporate Secretary

27


Exhibit 10.1

WERNER ENTERPRISES, INC.
AMENDED AND RESTATED EQUITY PLAN

1. Background and History . Werner Enterprises, Inc. (the "Company") initially adopted the Werner Enterprises, Inc. Stock Option Plan in 1987, such plan being approved by the Company's shareholders on June 9, 1987 at the Company's annual meeting. The stock option plan was amended and restated in 1988, 1994, 2000, and 2004. The plan was last amended and restated in 2007, and renamed the Werner Enterprises, Inc. Equity Plan (the “Plan”). If approved by the Company's shareholders, the Company desires to again amend and restate the equity plan, the terms of which are set forth herein, to add restricted stock units to the types of awards eligible to be granted under the Plan and to list objective performance criteria intended to satisfy the criteria for “performance-based compensation” under Section 162(m) of the Internal Revenue Code.

2. Purpose. The purpose of the Plan is to advance the interests of the Company and its shareholders by attracting and retaining those individuals whose skill and initiative enhance the Company's continued success, growth and profitability. This Plan authorizes the Company to grant nonqualified stock options, stock appreciation rights, restricted stock, and restricted stock units (hereinafter defined as "Awards") to employees and non-employee directors. This Plan authorizes the grant of Awards in order to help attract and retain key employees and non-employee directors, by further aligning their financial interests with those of the Company's shareholders and by providing them with participatory rights in the future success and growth of the Company, without necessarily requiring a financial outlay by these individuals to ensure their participation in the Plan benefits.

3. Definitions. The following words shall have the following meaning:

(a)    "Affiliate" of the Company means any Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by, or is under common Control with the Company.

(b)    "Award" means a grant of one or more Options, one or more Stock Appreciation Rights, one of more shares of Restricted Stock, or one or more Restricted Stock Units.

(c)    "Award Agreement" means a written agreement or instrument between the Company and a Participant evidencing an Award.

(d)    "Board" means the Board of Directors of the Company.

(e)    "Cause" means unless otherwise defined in a Participant's employment agreement or change in control severance agreement with the Company, in which case such definition will apply, (i) the material misappropriation of any of the Company's funds or property; (ii) the conviction of, or the entering of a guilty plea or plea of no contest with respect to, a felony, or the equivalent thereof; (iii) commission of an act of willful damage, willful misrepresentation, willful dishonesty, or other willful conduct that can reasonably be expected to have a material adverse effect on the business, reputation, or financial situation of the Company; or (iv) gross negligence or willful misconduct in performance of a Participant's duties; provided, however, “cause” shall not exist under clause (iv), above, with respect to an act or failure to act unless (A) the Participant has been provided written notice describing in sufficient detail the acts or failure to act giving rise to the Company's assertion of such gross negligence or misconduct, (B) been provided a reasonable period to remedy any such occurrence and (C) failed to sufficiently remedy the occurrence.

(f)    "Change in Control" means the first to occur of the following events:

(1)    Any Person, other than a Member of the Werner Family, is or becomes the Beneficial Owner (within the meaning set forth in Rule 13d-3 under the 1934 Act), directly or indirectly, of securities of the Company (not including for this purpose any securities acquired directly from the Company or its Affiliates or held by an employee benefit plan of the Company) representing 50% or more of the combined voting power of the Company's then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clause (x) of paragraph (3) of this definition; or
(2)    The following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the Effective Date, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's shareholders was approved by a vote of at least two-thirds of the directors then still in

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office who either were directors on the Effective Date or whose appointment, election or nomination for election was previously so approved or recommended; or

(3)    There is consummated a merger or consolidation of the Company with any other corporation, OTHER THAN (x) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company, at least 50% of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (y) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including for this purpose any securities acquired directly from the Company or its Affiliates other than in connection with the acquisition by the Company or its Affiliates of a business) representing 50% or more of the combined voting power of the Company's then outstanding securities; or

(4)    The shareholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets, other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity, at least 50% of the combined voting power of the voting securities of which are owned by shareholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale.

Notwithstanding the foregoing, (A) a "Change in Control" shall not be deemed to have occurred by virtue of (i) the consummation of any transaction or series of integrated transactions immediately following which the record holders of the Common Stock immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the Company's assets immediately following such transaction or series of transactions or (ii) the acquisition of shares of Common Stock by the Company such that, by reducing the number of outstanding shares of Common Stock, the proportionate number of shares of Common Stock Beneficially Owned by a Person was increased, and, but for this sentenced resulted in a Change in Control; and (B) unless otherwise provided in the applicable Award Agreement, to the extent necessary to comply with the applicable provisions of Section 409A of the Code, “Change in Control” shall conform to the definition of change in control under Section 409A of the Code, and the Treasury Department or Internal Revenue Service regulations or guidance issued thereunder.

(g)    "Code" means the Internal Revenue Code of 1986, as amended from time to time.

(h)    "Company" means Werner Enterprises, Inc., a Nebraska corporation.

(i)    "Committee" means (A) the Board, or (B) one or more committees of the Board to whom the Board has delegated all or part of its authority under this Plan. Initially, the Committee shall be the Compensation Committee of the Board which is delegated all of the Board's authority under this Plan as contemplated by clause (B) in this definition.

(j)    "Common Stock" or "Stock" means the common stock of the Company, par value $.01 per share.

(k)    "Control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract or otherwise.

(l)    “Covered Employee(s)” means an employee who is a “Covered Employee” within the meaning of Section 162(m) of the Code.

(m)    "Effective Date" means May 14, 2013, such date being the date this amended and restated Plan was approved by the Company's shareholders.

(n)    “Exchange Act” means the Securities Exchange Act of 1934, as amended from time to time.

(o)    "Fair Market Value" means: (i) if the Stock is traded on a national securities exchange, the closing trading price of a share of Stock for composite transactions, as published by The Wall Street Journal for the date in question; or (ii) if the Stock is not traded on a national securities exchange, the value of the Stock determined in good faith by the Committee in its sole discretion.


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(p)    "Good Reason" means, without a Participant's written consent and unless otherwise defined in a Participant's employment agreement or change in control severance agreement with the Company (in which case such definition will apply), any of the following:

(1)    Any material and adverse reduction or material and adverse diminution in a Participant's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities held, exercised or assigned at any time during the 90-day period immediately preceding the Change in Control;

(2)    Any reduction in a Participant's annual base salary as in effect immediately preceding the Change in Control or as the same may be increased from time to time; or

(3)    A Participant being required by the Company to be based at any office or location that is more than 70 miles from the location where the Participant was employed immediately preceding the Change in Control.

Provided, however, notwithstanding the occurrence of any of the events set forth above in this definition, Good Reason shall not include for the purpose of this definition (1) an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Participant, or (2) any reduction in the Participant's base annual salary or reduction in benefits received by the Participant where such reduction is in connection with a company-wide reduction in salaries or benefits.

(q)    "Member of the Werner Family" means (i) Clarence L. Werner and any other person who shall be a lineal descendant, naturally or by legal adoption, of Clarence L. Werner (each such person being referred to as a "Werner Descendant"), (ii) a spouse of a Werner Descendant, and (iii) a trust, corporation, limited liability company or partnership under the terms of which the principal beneficiaries are Werner Descendants or persons included in clause (i) or (ii). For purposes of the foregoing, a person who is a spouse of a Werner Descendant at the time of the death of such Werner Descendant shall continue to be a Member of the Werner Family following such death only so long as there is living a Werner Descendant who is an issue (naturally or by legal adoption) from the marriage of such person and such deceased Werner Descendant.

(r)    "Option" means a right to purchase Common Stock, granted pursuant to Section 7 of the Plan. All Options granted under the Plan will be nonqualified stock options and not "Incentive Stock Options" under Section 422 of the Code.

(s)    "Option Price" means the purchase price for Common Stock under an Option, as determined in Section 7 below.

(t)    “Performance Award” means any Award granted pursuant to Section 11 of the Plan.

(u)    "Plan" means this Werner Enterprises, Inc. Amended and Restated Equity Plan, as amended from time to time.

(v)    "Participant" means an employee or non-employee director of the Company (or any of its subsidiaries) to whom an Award is granted under the Plan.

(w)    "Person" shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d) thereof, including "group" as defined in Section 13(d) thereof.

(x) “Performance Objectives” means the measurable performance objective or objectives established pursuant to this Plan for Participants who have received an Award, that is intended to satisfy the requirements for "performance-based compensation" under Section 162(m) of the Code. Performance Objectives may be described in terms of Company-wide objectives or objectives that are related to the performance of a joint venture, Subsidiary, business unit, division, department, business segment, region or function and/or that are related to the performance of the individual Participant. The Performance Objectives may be made relative to the performance of other companies or an index covering multiple companies. The Performance Objectives applicable to any Qualified Performance-Based Award will be based on specified levels of or growth in one or more of the following criteria: earnings per share; revenues; operating income; operating expense ratios; net income; return on stockholders' equity; return on assets; return on invested capital; cost of capital; return on revenues; gross margin; net operating margin; market share; cash flow; total shareholder return; common stock price; market capitalization; price to earnings ratio; financial return ratios; accounts receivable days outstanding; or any variation or combination of the foregoing. Performance Objectives need not be the same in respect for all Participants and may be established separately for the Company as a whole or for its various groups, divisions, subsidiaries and affiliates. Each of the Performance Objectives must be established in writing by the Committee prior to the commencement of the services to which the Performance Objectives relate, but no later than ninety (90) days after the commencement of the service period to which they relate, and while the outcome is substantially uncertain (i.e. before 25% of the Performance Period has elapsed).

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In connection with the establishment of Performance Objectives, except as otherwise required under Section 162(m) of the Code, the Committee may exclude the impact on performance of charges for restructuring, acquisitions, divestitures, discontinued operations, extraordinary items, and other unusual or non-recurring items and the cumulative effects of changes in tax law or accounting principles, as such are defined by generally accepted accounting principles or the Securities and Exchange Commission and as identified in the Company's audited financial statements, notes to such financial statements or management's discussion and analysis in the Company's annual report or other filings with the Securities and Exchange Commission; provided, that the Committee commits to make such adjustments consistently with the requirements of Section 162(m) of the Code.

(y) “Performance Period” means, in respect of an Award intended to satisfy the requirements for "performance-based compensation" under Section 162(m) of the Code, a period of time established within which the Performance Objectives relating to such Award is to be achieved.

(z) “Qualified Performance-Based Award” means any Award or portion of an Award that is intended to satisfy the requirements for “performance-based compensation” under Section 162(m) of the Code.

(aa) "Restricted Stock" means Stock granted under Section 9 that is subject to those restrictions set forth therein and the Award Agreement.

(ab) “Restricted Stock Unit” or “RSU” means a right to receive a share of Stock or cash value equal to a share of Stock granted under Section 10 that is subject to those restrictions set forth therein and the Award Agreement.

(ac) "Rule 16b-3" means Rule 16b-3 promulgated under the Exchange Act.

(ad) "Stock Appreciation Right" or "SAR" means a right to receive an amount equal to the appreciation in a share of Stock from the grant date to the exercise date and granted pursuant to Section 8 below.

4. Stock Subject to Plan; Award Limits.

(a)    Number of Shares. Subject to the provisions of Section 15 of the Plan, the maximum number of shares of Common Stock that may be issued under the Plan is 20,000,000 shares. Such shares may be treasury, or authorized but unissued, shares of Common Stock of the Company.

(b)    Award Limitation. Subject to adjustment pursuant to Section 15, Awards covering no more than 500,000 shares in the aggregate may be granted to one person in any one calendar year during the Plan's duration.

(c)    Unused and Forfeited Stock. Any shares of Common Stock that are subject to an Award under this Plan that are not used because the terms and conditions of the Award are not met, including any shares that are subject to an Award that expires or is terminated for any reason, any shares that relate to Awards that are settled in cash, any shares that are used for full or partial payment of the purchase price of shares with respect to which an Option is exercised and any shares retained by the Company pursuant to Section 20(b) shall automatically become available for use under the Plan.

5. Administration.

(a)    Composition. The Plan shall be administered by the Committee. To the extent the Board considers it desirable for transactions relating to Awards to be eligible to qualify for an exemption under Rule 16b-3, the Committee shall consist of two or more directors of the Company, all of whom qualify as "non-employee directors" within the meaning of Rule 16b-3. To the extent the Board considers it desirable for compensation delivered pursuant to Awards to be eligible to qualify for an exemption from the limit on tax deductibility of compensation under Section 162(m) of the Code, the Committee shall consist of two or more directors of the Company, all of whom shall qualify as "outside directors" within the meaning of Code Section 162(m).

(b)    Authority. Two members of the Committee shall constitute a quorum for the transaction of business. The Committee is granted the authority to determine the recipients of Awards, the number of shares subject to such Awards, if applicable, the date on which Awards are granted, become exercisable or vested, and any other terms of the Awards consistent with the terms of this Plan. The interpretation and construction of any provision of the Plan by the Committee shall be final, unless otherwise

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determined by a majority of the entire Board. No member of the Board or the Committee shall be liable for any action or determination made by him in good faith.

(c)    Delegation. Notwithstanding the general administrative powers discussed above, the Board may, by resolution, expressly delegate to a special committee consisting of two or more directors, who may also be officers of the Company, or to a senior executive officer of the Company, the authority, within specified parameters, to (i) grant employees Awards under the Plan, and (ii) determine the number of such Awards to be received by any such participants; provided, however, that if such delegation of duties and responsibilities is to officers of the Company or to directors who are not "non-employee directors" (within the meaning of Rule 16b-3 under the Exchange Act) and "outside directors" (within the meaning of Code Section 162(m)), such officers or directors may not grant, or otherwise administer, Awards to employees (a) who are subject to Section 16(a) of the Exchange Act at the time of grant, or (b) who, at the time of grant, are anticipated to become during the term of the Award, "covered employees" as defined in Code Section 162(m). The acts of such delegate(s) shall be within limits specifically prescribed by the Board, will be treated hereunder as acts of the Board and such delegate(s) shall report regularly to the Board and the Compensation Committee of the Board regarding the delegated duties and responsibilities and any Awards so granted.

6.     Eligibility. The Committee may grant Awards to any key employee (including an employee who is a director and/or an officer of the Company and its subsidiaries) and any non-employee director. Awards may be granted by the Committee at any time and may include or exclude new or previous Participants as the Committee shall determine. Awards granted need not contain similar provisions.

7.     Stock Options. The Committee may grant one or more Options to a Participant. Each Option will be evidenced by a written Award Agreement and entered into by the Company and the Participant to whom the Option is granted, such Award Agreement containing or being subject to the following terms and conditions:

(a)    Option Price. The purchase price of Common Stock under each Option shall be not less than 100 percent of the Fair Market Value of the Common Stock on the date the Option is granted. Except as permitted by the provisions of Section 15 hereof, the Committee shall not have the power to (i) amend the terms of previously granted Options to reduce the Option Price of such Options, or (ii) cancel such Options and grant substitute Options with a lower Option Price than the cancelled Options, in each case without the approval of the Company's stockholders.

(b)    Time and Method of Payment. The Option Price shall be paid in full at the time an Option is exercised under the Plan through a payment of cash or cashier's check or, if permitted by the Committee, (i) the surrender or attestation of previously acquired Stock, the payment through a broker in accordance with procedures permitted by Regulation T of the Federal Reserve Board, (ii) withholding shares (net-exercise) otherwise deliverable to the Participant pursuant to the Option having an aggregate Fair Market Value at the time of exercise equal to the total Option Price, or (iii) any other method permitted under applicable law. Exercise of an Option without concurrent payment in full of the Option Price shall be invalid and of no effect. Upon the exercise of an Option and the payment of the full Option Price, the Participant shall be entitled to the issuance of a stock certificate evidencing his ownership of such Common Stock (or an appropriate book entry shall be made) and, as of that date, the Participant shall have all the rights of a shareholder. No adjustment will be made for ordinary dividends or other rights for which the record date is prior to the date the Participant is entitled to the issuance of such Common Stock.

(c)    Number of Shares. Each Option shall state the total number of shares of Common Stock to which it pertains. The number of shares to which a Participant is entitled under an Option shall be reduced by the number of Stock Appreciation Rights (described in Section 8 below) related to the Option that have been previously exercised by the Participant.

(d)    Option Period and Limitations on Exercise of Options. The Committee may in its discretion provide that an Option may become exercisable only after the expiration of a period of time specified in the Option Award Agreement. Except as provided in the Option Award Agreement, Options shall not be exercisable until the expiration of six months from the date the Option is granted, and any Option may be exercised in whole or in part. No Option may be exercised after the expiration of ten years and one day from the date it is granted; provided, that an Award Agreement may provide that the period of time over which an Option (or SAR) may be exercised shall be automatically extended if on the scheduled expiration of such Award, the Participant's exercise of such Award would violate applicable securities law; provided further, that during the extended exercise period the Option or SAR may only be exercised to the extent such Award was exercisable in accordance with its terms immediately prior to such scheduled expiration date and such extended exercise period shall end not later than thirty (30) days after the exercise of such Option or SAR first would no longer violate such laws. Unless otherwise noted in the Option Award Agreement, no Option may be exercised for a fractional share of Common Stock.


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(e)    Limitations Upon Exercise of Options. If a Participant exercises an Option, the SARs to which the Option relates shall expire. Adjustment to the number of shares in the Plan and the price per share pursuant to Section 15 below shall also be made to any Options held by each Participant.

(f)    No Obligation To Exercise Option. The granting of an Option shall impose no obligation upon the Participant to exercise such Option.

8.     Stock Appreciation Rights. The Committee may grant one or more Stock Appreciation Rights at the same time as Participants are awarded Options under the Plan. Such Stock Appreciation Rights shall be evidenced by a written Award Agreement and entered into by the Company and the Participant to whom the SAR is granted, such Award Agreement containing or being subject to the following terms and conditions:

(a)    Grant. Each SAR shall relate to a specific Option under the Plan and shall be awarded to a Participant concurrently with the grant of such Option. The number of SARs granted to a Participant may be equal to the number of shares that the Participant is entitled to receive pursuant to the related Option. Except as permitted by the provisions of Section 15 hereof, the Committee shall not have the power to (i) amend the terms of previously granted SARs to reduce the grant price of such SARs, or (ii) cancel such SARs and grant substitute SARs with a lower grant price than the cancelled SARs, in each case without the approval of the Company's stockholders. The number of SARs held by a Participant shall be the number of SARs granted reduced by:

(1)    the number of SARs exercised for Common Stock or cash pursuant to the SARs Award Agreement; or

(2)    the number of shares of Common Stock purchased by such Participant pursuant to the related Option.

(b)    Manner of Exercise. A Participant shall exercise SARs by giving written notice of such exercise to the Company. The date on which such written notice is received by the Company shall be the exercise date for the SARs.

(c)    Appreciation Available. Each SAR shall entitle a Participant to the excess of the Fair Market Value of a share of Common Stock on the exercise date over the Option Price of the related Option.

(d)    Payment of Appreciation. The appreciation available to a Participant from an exercise of one or more SARs may, in the sole discretion of the Committee, be paid to the Participant either in cash or Common Stock. If paid in cash, the amount thereof shall be the amount of appreciation available (see (c) above). If paid in Common Stock, the number of shares that shall be issued pursuant to the exercise of SARs shall be determined by dividing the amount of appreciation by the Fair Market Value of a share of Common Stock on the exercise date of the SAR; provided, however, that no fractional shares shall be issued upon the exercise of SARs and any such fractional share shall be rounded up to a whole share.

(e)    Limitations Upon Exercise of SARs. If a Participant exercises a SAR for cash, the Option to which the SARs relates shall expire. SARs may be exercised only at such times and by such persons as may exercise Options under the Plan. Adjustment to the number of shares in the Plan and the price per share pursuant to Section 15 below shall also be made to any SARs held by each Participant.

(f)    No Obligation To Exercise SARs. The granting of one or more SARs shall impose no obligation upon the Participant to exercise such SARs

9.     Restricted Stock.     The Committee may grant one or more shares of Restricted Stock in such amounts as the Committee shall determine and subject to the terms and provisions of this Plan. Each Restricted Stock Award will be evidenced by a written Award Agreement and entered into by the Company and the Participant to whom the Restricted Stock is granted, such Award Agreement containing or being subject to the following terms and conditions:

(a)    Restrictions. A Participant's right to retain shares of Restricted Stock shall be subject to such a restriction that the Participant continue to perform as an employee or remain a non-employee director for a restriction period specified by the Committee and not less than one year nor more than ten years. The Committee may also require that a Participant's right to retain shares of Restricted Stock is subject to the attainment of specified Performance Objectives pursuant to Section 11. The Committee may, in its sole discretion, require different periods of service or different Performance Objectives with respect to (i) different Participants or (ii) separate, designated portions of the shares that are Restricted Stock.


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(b)    Privileges of a Shareholder, Transferability. Unless otherwise provided in the Award Agreement, a Participant shall not have voting, dividend, liquidation and other rights with respect to shares of Restricted Stock. If a Participant is granted in the Award Agreement any voting, dividend, liquidation or other rights on shares of Restricted Stock, such rights (1) shall accrue to the benefit of a Participant only with respect to shares of Restricted Stock held by, or for the benefit of, the Participant on the record date of any such dividend or voting date and (2) subject to the terms of the Award Agreement, any dividends paid on shares of Restricted Stock before such shares become vested may be held in escrow by the Company and subject to the same restrictions on transferability and forfeitability as the underlying shares of Restricted Stock. A Participant's right to sell, encumber or otherwise transfer such Restricted Stock shall, in addition to the restrictions otherwise provided for in the Award Agreement, be subject to the limitations of Section 9(b) hereof.

(c)    Enforcement of Restrictions. The Committee may, in its sole discretion, require one or more of the following methods of enforcing the restrictions referred to in Section 9(a) and (b):

(1)    placing a legend on the Stock certificates referring to restrictions;

(2)    requiring the Participant to keep the Stock certificates, duly endorsed, in the custody of the Company while the restrictions remain in effect;

(3)    requiring that the Stock certificates, duly endorsed, be held in the custody of a third party nominee selected by the Company who will hold such shares of Restricted Stock on behalf of the Participant while the restrictions remain in effect; or

(4)    issue the Stock in book entry in an account in the custody of a third party nominee selected by the Company who will hold such shares of Restricted Stock on behalf of the Participant while the restrictions remain in effect; or

(5)    inserting a provision into the Restricted Stock Award Agreement prohibiting assignment of such Award Agreement until the terms and conditions or restrictions contained therein have been satisfied or released, as applicable.

10.     Restricted Stock Unit. The Committee may grant one or more Restricted Stock Units in such amounts as the Committee shall determine and subject to the terms and provisions of this Plan. Each such grant of Restricted Stock Units will constitute the agreement by the Company to deliver shares of Common Stock or cash to the Participant in the future in consideration of the performance of services. Each Restricted Stock Unit Award will be evidenced by a written Award Agreement and entered into by the Company and the Participant to whom the Restricted Stock Unit is granted, such Award Agreement containing or being subject to the following terms and conditions:

(a)    Restrictions. A Participant's right to retain shares of Common Stock or cash value underlying Restricted Stock Units shall be subject to such a restriction that the Participant continue to perform as an employee or remain a non-employee director for a restriction period specified by the Committee and not less than one year nor more than ten years. The Committee may also require that a Participant's right to retain Restricted Stock Units is subject to the attainment of specified Performance Objectives pursuant to Section 11. The Committee may, in its sole discretion, require different periods of service or different Performance Objectives with respect to (i) different Participants or (ii) separate, designated portions of the Restricted Stock Units. Any grant of Restricted Stock Units shall contain terms such that the Award is either exempt from Code Section 409A or complies with such Section.

(b)    Privileges of a Shareholder, Transferability. A Participant shall not have voting, dividend, liquidation and other rights with respect to shares of Common Stock underlying such Restricted Stock Units during the restriction period referred to in Section 10(a). A Participant's right to sell, encumber or otherwise transfer such Restricted Stock Unit shall, in addition to the restrictions otherwise provided for in the Award Agreement, be subject to the limitations of Section 10(b) hereof.

(c) Payment. The payment available to a Participant from the vesting of one or more RSUs may, in the sole discretion of the Committee, be paid to the Participant either in cash or Common Stock. Settlement of RSUs shall occur at such times as set forth in the applicable Award Agreements. If paid in cash, the amount thereof shall be equal to the product of the number of units vesting and the Fair Market Value of a share of Common Stock on the vesting date of the RSU. If paid in Common Stock, the number of Restricted Stock Units vesting will be converted to Common Stock on a one-for-one basis on the vesting date of the RSU.

11.     Performance Awards. The Committee shall have sole and complete authority to determine the Participants who shall receive a Performance Award, which shall consist of a right that is (i) denominated either in cash or in Common Stock (including

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but not limited to Restricted Stock and Restricted Stock Units), (ii) valued, as determined by the Committee, in accordance with the achievement of such Performance Objectives during such Performance Periods as the Committee shall establish, and (iii) payable at such time and in such form as the Committee shall determine. Each Performance Award will be evidenced by a written Award Agreement and entered into by the Company and the Participant to whom the Performance Award is granted, such Award Agreement containing or being subject to the following terms and conditions:

(a)    Terms and Conditions. Subject to the terms of the Plan and any applicable Award Agreement, the Committee shall determine the Performance Objectives to be achieved during any Performance Period, the length of any Performance Period, the amount of any Performance Award and the amount and kind of any payment or transfer to be made pursuant to any Performance Award, and may amend specific provisions of the Performance Award; provided, however, that such amendment may not adversely affect existing Performance Awards made within a Performance Period commencing prior to implementation of the amendment.

(b)    Section 162(m). Notwithstanding anything in the Plan to the contrary, unless the Committee determines that a Performance Award to be granted to a Covered Employee should not qualify as “performance-based compensation” for purposes of Section 162(m) of the Code, Performance Awards granted to Covered Employees shall be subject to the terms and provisions of this Section 11(b). To the extent necessary to comply with Section 162(m), with respect to grants of Performance Awards, no later than 90 days following the commencement of each Performance Period (or such other time as may be required or permitted by Section 162(m) of the Code), the Committee shall, in writing, (i) select the Performance Objectives applicable to the Performance Period, (ii) establish the targets and bonus amounts which may be earned for such Performance Period, and (iii) specify the relationship among the Performance Objectives, the targets thereunder and the amounts to be earned by each Covered Employee for such Performance Period. Prior to the payment or settlement of any Performance Award, the Committee shall certify in writing whether the applicable Performance Objectives have been achieved and the amounts, if any, payable to Covered Employees for such Performance Period. In determining the amount earned by a Covered Employee for a given Performance Period, subject to any applicable Award Agreement, the Committee shall have the right to reduce (but not increase) the amount payable at a given level of performance to take into account additional factors that the Committee may deem relevant in its sole discretion to the assessment of individual or corporate performance for the Performance Period.

(c)    Maximum Payments. With respect to Performance Awards under this Section 11 that are denominated in Common Stock, the aggregate number of shares of Common Stock (including but not limited to Restricted Stock and Restricted Stock Units) that may be granted to any Covered Employee in any year shall not exceed 500,000. With respect to Performance Awards under this Section 11 that are denominated in cash, the maximum amount payable to any Covered Employee for any year is $5,000,000.

(d)    Unless otherwise expressly stated in the relevant Award Agreement, each Award granted to a Covered Employee under the Plan is intended to be “performance-based compensation” within the meaning of Section 162(m). Accordingly, unless otherwise determined by the Committee, if any provision of the Plan or any Award Agreement relating to such an Award does not comply or is inconsistent with Section 162(m), such provision shall be construed or deemed amended to the extent necessary to conform to such requirements, and no provision shall be deemed to confer upon the Committee discretion to increase the amount of compensation otherwise payable to a Covered Employee in connection with any such Award upon the attainment of the Performance Objectives established by the Committee.

12.     Recoupment. Any Performance Award granted pursuant to the Plan shall be subject to mandatory repayment by the Participant to the Company to the extent the Participant is, or in the future becomes, subject to (a) any Company “clawback” or recoupment policy that is adopted to comply with the requirements of any applicable law, rule or regulation, or (b) any law, rule or regulation which imposes mandatory recoupment under circumstances set forth in such law, rule or regulation.

13.     Effect of Termination of Employment on Outstanding Awards. The Committee shall determine in each case whether a termination of employment (including a termination due to disability) shall be considered voluntary or involuntary. In addition, the Committee shall determine, subject to applicable law, whether a leave of absence or similar circumstance shall constitute a termination of employment and the date upon which a termination resulting therefrom became effective. Any such determination of the Committee shall be final and conclusive, unless overruled by the entire Board at its next regular or special meeting. Except as otherwise provided by the Committee, the effect of a Participant's termination of employment (including a non-employee director ceasing to be a member of the Board) on outstanding Awards is as follows:

(a)    Employees.


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(1)    Involuntary Termination for Cause. If an employee's employment with the Company or a subsidiary thereof is involuntarily terminated by the Company or such subsidiary for Cause, all of the Options, SARs, shares of Restricted Stock, and Restricted Stock Units held by the employee will immediately terminate and be forfeited and his rights under the Award Agreement to exercise the Options or SARs, or become vested in the Restricted Shares or Restricted Stock Units, as the case may be, will immediately terminate.

(2)    Involuntary Termination by Company Other Than for Cause or Voluntary Resignation-Effect on Options and SARs. If the Company involuntarily terminates an employee's employment not for Cause or if an employee's employment with the Company or a subsidiary of the Company is voluntarily terminated by the employee, the employee may exercise his or her Options or SARs that are otherwise exercisable pursuant to this Plan on the date of such termination for up to and including one hundred and eighty (180) days after such termination of his or her employment, but in no event shall any Option or SAR be exercisable more than ten years and one day from the date it was granted. The Committee has the right to cancel an Option or SAR without notice during such 180 day period if the employee engages in employment or activities contrary, in the opinion of the Committee, to the best interests of the Company.

(3)    Voluntary Resignation-Effect on Shares of Restricted Stock and Restricted Stock Units. If an employee's employment with the Company or a subsidiary of the Company is voluntarily terminated by the employee, all unvested shares of Restricted Stock and Restricted Stock Units then held by the employee shall be forfeited and returned to the Company effective as of the date of the employee's termination.

(4)    Death.

(i)    If an employee dies while employed by the Company, or within one hundred and eighty (180) days after having retired or voluntarily terminated his or her employment, and at the time of death had unexercised Options or SARs, the executors or administrators, or legatees or heirs, of his estate shall have the right to exercise such Options and SARs within one year of the employee's death to the extent that such deceased employee was entitled to exercise the Options and SARs on the date of his death; provided, however, that in no event shall the Options or SARs be exercisable more than ten years and one day from the date they were granted. As a condition to any such exercise, the Committee may require any such executor, administrator, legatee or heir seeking to exercise such Options or SARs to provide evidence satisfactory to the Committee, in its sole discretion, of his or her authority to exercise such Options or SARs on behalf of the employee's estate.

(ii)    If the employee dies while holding shares of Restricted Stock or Restricted Stock Units which have not otherwise been forfeited, all service period restrictions applicable to the shares of Restricted Stock or Restricted Stock Units then held by him or her shall lapse, and such shares shall become fully vested and nonforfeitable. For Qualified Performance-Based Awards, the established Performance Objectives will be evaluated for actual performance to date and all service period restrictions applicable to the shares of Restricted Stock or Restricted Stock Units then held by him or her shall lapse, and such shares shall become fully vested and nonforfeitable.

(b)    Non-Employee Directors.

(1)    Removal for Misconduct. If a non-employee director is removed from the Board for misconduct (as determined by the Company's shareholders), all of the Options and SARs and all unvested shares of Restricted Stock and Restricted Stock Units held by the non-employee director will immediately terminate and be forfeited and his rights under the Award Agreement to exercise the Options or SARs, or become vested in the Restricted Stock or Restricted Stock Units, as the case may be, will immediately terminate.

(2)    Ceasing to be a Member of the Board Other Than for Misconduct. If a non-employee director ceases to be a member of the Board for any reason other than removal for misconduct as described in the immediately preceding paragraph (including but not limited to voluntary resignation, retirement, not standing for re-election, not being elected for a future term by the Company's shareholders, or death), on the date such non-employee director ceases to be a member of the Board, all of the Options and SARs held by the non-employee director shall immediately vest and become exercisable in full and all restrictions applicable to the shares of Restricted Stock or Restricted Stock Units then held by him or her shall lapse and such shares shall become fully vested and nonforfeitable. The non-employee director may exercise his or her Options or SARs for up to and including one hundred and eighty (180) days after such date that he or she ceases to be a member of the Board, but in no event shall any Option or SAR be exercisable more than ten years and one day from the date it was granted. The Committee has the right to cancel an Option or SAR without notice during such 180 day period if the non-employee director engages in activities contrary, in the opinion of the Committee, to the best interests of the Company. If a non-employee director dies within one hundred and eighty (180) days after ceasing to be a member

9


of the Board and at the time of death had unexercised Options or SARs, the executors or administrators, or legatees or heirs, of his estate shall have the right to exercise such Options and SARs within one year of the non-employee director's death to the extent that such deceased non-employee director was entitled to exercise the Options and SARs on the date of his death; provided, however, that in no event shall the Options or SARs be exercisable more than ten years and one day from the date they were granted. As a condition to any such exercise, the Committee may require any such executor, administrator, legatee or heir seeking to exercise such Options or SARs to provide evidence satisfactory to the Committee, in its sole discretion, of his or her authority to exercise such Options or SARs on behalf of the non-employee director's estate.

14.     Nonassignability.

(a)    General Rule. Except as provided below in Section 14(b), no Award may be assigned, alienated, pledged, hypothecated, attached or sold or otherwise transferred or encumbered by a Participant except by will or by the laws of descent and distribution, and any such purported assignment, alienation, pledge, attachment, sale, transfer or encumbrance shall be void and unenforceable against the Company. If the Participant attempts to alienate, assign, pledge, hypothecate or otherwise dispose of Participant's Award, the Board may terminate the Participant's Award by notice to him or her and such Award will thereupon become null and void.

(b)    Permitted Transfers. Pursuant to conditions and procedures established by the Committee from time to time, the Committee may permit Awards to be transferred to, exercised by and paid to certain persons or entities related to a Participant, including members of the Participant's immediate family, charitable institutions, or trusts or other entities whose beneficiaries or beneficial owners are members of the Participant's immediate family and/or charitable institutions (a "Permitted Transferee"). In the case of new Awards, at the request of the Participant, the Committee may permit the naming of the related person or entity as the Award recipient. Any permitted transfer shall be subject to the condition that the Committee receive evidence satisfactory to it that the transfer is being made for estate and/or tax planning purposes on a gratuitous or donative basis and without consideration (other than nominal consideration).

15.     Adjustments in Authorized Shares.

(a)    Without limiting the Committee's discretion as provided in Section 15 hereof, in the event that the Committee determines that any dividend or other distribution (whether in the form of cash, shares of Common Stock, other securities or other property, and other than a normal cash dividend), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase or exchange of shares or other securities of the Company, issuance of warrants or other rights to purchase shares or other securities of the Company, or other similar corporate transaction or event affects the shares, then the Committee shall, in an equitable and proportionate manner as deemed appropriate by the Committee (and, as applicable, in such manner as is consistent with Sections 162(m), 422 and 409A of the Code and the regulations thereunder) either: (i) adjust any or all of (1) the aggregate number of shares or other securities of the Company (or number and kind of other securities or property) with respect to which Awards may be granted under the Plan; (2) the number of shares or other securities of the Company (or number and kind of other securities or property) subject to outstanding Awards under the Plan; (3) the grant or exercise price with respect to any Award under the Plan, and (4) the limits on the number of shares or Awards that may be granted to Participants under the Plan in any calendar year; (ii) provide for an equivalent award in respect of securities of the surviving entity of any merger, consolidation or other transaction or event having a similar effect; or (iii) make provision for a cash payment to the holder of an outstanding Award. Any such adjustments to outstanding Awards shall be effected in a manner that precludes the material enlargement of rights and benefits under such Awards. If any adjustment or substitution provided for in this Section 15 shall result in the creation of a fractional share under any Award, such fractional share shall be rounded up to a whole share and no fractional share shall be issued.

16.     Reorganization, Change in Control or Liquidation.

(a)    Except as otherwise provided in an Award Agreement or other agreement approved by the Committee to which any Participant is a party, in the event that, within the period commencing on a Change in Control and ending on the second anniversary of the Change in Control, and except as the Committee may expressly provide otherwise prior to a Change in Control, a Participant's employment with the Company or one of its affiliates is terminated other than for Cause, or the Participant voluntarily resigns for Good Reason, then (i) all Options and SARs then outstanding shall become fully exercisable, and (ii) all restrictions (other than restrictions imposed by law), Performance Objectives and conditions on all Restricted Stock and Restricted Stock Unit Awards then outstanding shall be deemed satisfied as of the date of the Participant's termination of employment.


10


(b)    In addition to the foregoing, in the event the Company undergoes a Change in Control or in the event of a corporate merger or consolidation (other than a merger or consolidation in which the Company is the continuing corporation and that does not result in any reclassification or change of outstanding shares of Common Stock), major acquisition of property (or stock), separation, reorganization or liquidation in which the Company is a party and in which a Change in Control does not occur, the Committee, or the board of directors of any corporation assuming the obligations of the Company, shall have the full power and discretion to take any one or more of the following actions:

(1)    Without reducing the underlying economic value of any Award, amend the procedures and conditions for the exercise or settlement of any outstanding Awards granted hereunder;

(2)    Provide for the purchase by the Company of any Award, upon the Participant's request, for, with respect to an Option or SAR, an amount of cash equal to the positive amount, if any, that could have been attained upon the exercise of such Award or realization of the Participant's rights had such Award been currently exercisable, or, in the case of Restricted Stock or Restricted Stock Unit, the Fair Market Value of such shares of Stock;

(3)    Provide that Options or SARs granted hereunder must be exercised in connection with the closing of such transactions, and that if not so exercised such Options or SARs will expire;

(4)    Make such adjustment to any Award that is outstanding as the Committee or Board deems appropriate to reflect such Change in Control or corporate event; or

(5)    Cause any Award then outstanding to be assumed, or new rights of equivalent economic value substituted therefore, by the acquiring or surviving corporation;

(6)    In accordance with Section 409A, to the extent applicable, provide that (i) any outstanding Performance Awards relating to Performance Periods ending prior to the Change in Control or other event which have been earned but not paid shall become immediately payable, (ii) all then-in-progress Performance Periods for Performance Awards that are outstanding shall end, and either (A) any or all Participants shall be deemed to have earned an award equal to the relevant target award opportunity for the Performance Period in question, or (B) at the Committee's discretion, the Committee shall determine the extent to which Performance Objectives have been met with respect to each such Performance Award, if at all, or (iii) the Company shall cause to be paid to each Participant such partial or full Performance Awards, in cash, Common Stock or other property as determined by the Committee, within thirty (30) days of such Change in Control, based on the Change in Control consideration, which amount may be zero if applicable.

Any such determinations by the Committee may be made generally with respect to all Participants, or may be made on a case-by-case basis with respect to particular Participants, and shall in all events comply with any applicable requirements under Section 409A of the Code. Notwithstanding the foregoing, any transaction undertaken for the purpose of reincorporating the Company under the laws of another jurisdiction, if such transaction does not materially affect the beneficial ownership of the Company's capital stock, such transaction shall not constitute a merger, consolidation, major acquisition of property for stock, separation, reorganization, liquidation, or Change in Control.

17. Termination and Amendment. The Board, by resolution, may terminate the Plan with respect to any Awards that have not been granted. The Board or Committee may, at any time, amend or modify the Plan; provided, however, that no amendment or modification may become effective without approval of the amendment or modification by the shareholders if shareholder approval is required to enable the Plan to satisfy any applicable statutory or regulatory requirements, to comply with the requirements for listing on any exchange where the Stock is listed, or if the Company, on the advice of counsel, determines that shareholder approval is otherwise necessary or desirable. Notwithstanding any other provision of the Plan to the contrary (but subject to a Participant's employment being terminated for Cause), no termination, amendment or modification of the Plan shall adversely affect in any material way any Award previously granted under the Plan, without the written consent of the Participant of such Award.

18.     Agreement and Representation of Employees. As a condition to the receipt of any shares of Stock under the Plan, the Company may require the person receiving such shares to represent and warrant that the shares of Common Stock are being acquired only for investment and without any present intention to sell or distribute such shares, if, in the opinion of counsel for the Company, such a representation is required under the Securities Act of 1933 or any other applicable law, regulation or rule of any governmental agency.


11


19.     Reservation of Shares of Common Stock. The Company, during the term of the Plan, will at all times reserve and keep available the number of shares of Common Stock that shall be sufficient to satisfy the requirements of this Plan. The inability of the Company to obtain from any regulatory body having jurisdiction the authority deemed necessary by legal counsel for the Company for the lawful issuance and sale of its Common Stock hereunder shall relieve the Company of any liability in respect of the failure to issue or sell Common Stock as to which the requisite authority has not been obtained.

20.     Withholding.

(a)    Withholding Requirement. The Company's obligations to deliver shares upon the exercise of an Option, or upon the vesting of any other Award, shall be subject to the Participant's satisfaction of all applicable federal, state and local income and other tax withholding requirements.

(b)    Withholding with Stock. The Committee may, in its sole discretion, permit a Participant to pay all minimum required amounts of tax withholding, or any part thereof, by electing to transfer to the Company, or to have the Company withhold from the shares of Common Stock otherwise issuable to the Participant, shares of Common Stock having a value not to exceed the minimum amount required to be withheld under federal, state or local law or such lesser amount as may be elected by the Participant. The Committee may require that any shares transferred to the Company have been held or owned by the Participant for a minimum period of time. All elections shall be subject to the approval or disapproval of the Committee. The value of shares of Stock to be withheld shall be based on the Fair Market Value of the Stock on the date that the amount of tax to be withheld is to be determined (the "Tax Date”), as determined by the Committee. Any such elections by Participant to have shares withheld for this purpose will be subject to the following restrictions:

(1)    All elections must be made prior to the Tax Date;

(2)    All elections shall be irrevocable; and

(3)    If the Participant is an officer or director of the Company within the meaning of Section 16 of the 1934 Act ("Section 16"), the Participant must satisfy the requirements of such Section 16 and any applicable rules thereunder with respect to the use of Stock to satisfy such tax withholding obligation.

21.     Effective Date of Plan. The Plan was originally effective as of June 9, 1987 and this most recent amendment and restatement, if approved by the Company's shareholders, will be effective May 14, 2013.

22.     Code Section 409A. This Plan is intended to meet or to be exempt from the requirements of Section 409A of the Code, and shall be administered, construed and interpreted in a manner that is in accordance with and in furtherance of such intent. Any provision of this Plan that would cause an Award to fail to satisfy Section 409A of the Code or, if applicable, an exemption from the requirements of that Section, shall be amended (in a manner that as closely as practicable achieves the original intent of this Plan) to comply with Section 409A of the Code or any such exemption on a timely basis, which may be made on a retroactive basis, in accordance with regulations and other guidance issued under Section 409A of the Code.

23.     Termination Date of Plan. This Plan shall terminate and expire on the tenth anniversary of the Effective Date unless terminated prior thereto by action of the Board of Directors. No Award shall be granted pursuant to this Plan after such termination. Termination of this Plan shall not affect any Award granted during the term of this Plan.



12


EXHIBIT 31.1
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER
PURSUANT TO RULES 13a-14(a) AND 15d-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
(SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002)
I, Gregory L. Werner, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of Werner Enterprises, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: August 5, 2013
 
/s/ Gregory L. Werner
Gregory L. Werner
Vice Chairman and Chief Executive Officer




EXHIBIT 31.2
CERTIFICATION OF THE CHIEF FINANCIAL OFFICER
PURSUANT TO RULES 13a-14(a) AND 15d-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
(SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002)
I, John J. Steele, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of Werner Enterprises, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: August 5, 2013
 
/s/ John J. Steele
John J. Steele
Executive Vice President, Treasurer and Chief Financial Officer




EXHIBIT 32.1
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
(SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002)
In connection with the Quarterly Report of Werner Enterprises, Inc. (the “Company”) on Form 10-Q for the period ending June 30, 2013 (the “Report”), filed with the Securities and Exchange Commission, I, Gregory L. Werner, Vice Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
1.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
August 5, 2013
 
/s/ Gregory L. Werner
 
 
Gregory L. Werner
 
 
Vice Chairman and Chief Executive Officer




EXHIBIT 32.2
CERTIFICATION OF THE CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
(SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002)
In connection with the Quarterly Report of Werner Enterprises, Inc. (the “Company”) on Form 10-Q for the period ending June 30, 2013 (the “Report”), filed with the Securities and Exchange Commission, I, John J. Steele, Executive Vice President, Treasurer and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
1.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
August 5, 2013
 
/s/ John J. Steele
 
 
John J. Steele
 
 
Executive Vice President, Treasurer and
Chief Financial Officer