What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2020-11-05 compared with 2020-08-06 · 135 added, 142 removed, 224 unchanged (55% of the section changed)

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The most significant variable expenses that impact the TTS 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 2020 to second quarter 2019, several industry-wide issues have caused, and could continue to cause, costs to increase in future periods.

As discussed further in the comparison of operating results for third quarter 2020 to third quarter 2019, 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, compliance with new or proposed regulations, tightening of the commercial trucking liability insurance market and a weak used equipment market.

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We believe our freight base, which is heavily weighted toward customers delivering essential products that are continually being restocked in today’s economy, is enabling us to more effectively manage through the difficult economic environment created by the pandemic.

Revenues from our top 100 customers were 86% of our total revenues in the first half of 2020, and 64% of those revenues were from the discount retail, home improvement retail, food and beverage and consumer packaged goods verticals.

Our results in second quarter 2020 reflect freight demand that was lower than the same period a year ago.

In April 2020, the impact of some customers closing or significantly curtailing their businesses caused a weakness in freight volumes.

By mid-May and into June, many of these customers began to reopen their businesses which improved freight volumes as the quarter progressed.

Revenues from our top 100 customers were 86% of our total revenues in the first nine months of 2020, and 65% of those revenues were from the discount retail, home improvement retail, food and beverage and consumer packaged goods verticals.

Our results in third quarter 2020 reflect strong freight market conditions in a rapidly recovering economy and tight driver market.

Freight demand in our One-Way Truckload fleet was strong and gained momentum in third quarter, and Dedicated freight demand remained strong during the quarter.

We believe we proactively managed and adapted our fleet and cost structure without compromising service.

These actions enabled us to minimize the impact of the softer freight market on our results.

Our third quarter and 2020 results could be further impacted by the disruptive effects of COVID-19, although the degree of disruption is difficult to predict.

Freight demand in our One-Way Truckload unit in July 2020 was relatively strong and higher than July 2019.

Our Dedicated truck count temporarily declined by 150 trucks from first quarter 2020 to second quarter 2020 due to customers impacted by COVID-19, a lack of new business implementations in second quarter 2020 and lower driver availability.

We currently expect Dedicated new business implementations to begin to pick up in third quarter 2020 as businesses reopen.

We continue to address discretionary controllable costs wherever possible, including voluntary pay reductions for all members of the executive team for second quarter 2020 and the independent members of the Board of Directors for the second half of 2020 and implementing hiring freezes for nearly all non-driver open positions.

While there remain significant uncertainties related to COVID-19 and its effect on the economy, we believe that demand for our services will remain strong for the fourth quarter and continuing into 2021.

We performed a customer industry and financial risk assessment on our 100 largest customers shortly after the pandemic declaration.

While our financial risk has clearly increased since the pandemic began, we believe we have a relatively lower level of financial risk with the predominance of financially stronger companies in our customer base as well as a lower overall industry risk due to our focus on industries delivering essential products.

At the end of second quarter 2020, we believe we are well positioned with a strong balance sheet and sufficient liquidity.

We paid off $75 million of debt in the second quarter under a line of credit that subsequently expired on July 13, 2020.

Our debt is low at $175 million, or a net debt ratio o f 0.2 times earnings before interest, income taxes, depreciation and amortization for the last twelve months.

We had available liquidity of $345 million, considering cash on hand and available credit o f $280.4 million under our two facilities that expire in May 2024.

At the end of third quarter 2020, we believe we are well positioned with a strong balance sheet and sufficient liquidity.

Our debt is low at $175 million, or a net debt ratio of 0.3 times earnings before interest, income taxes, depreciation and amortization for the last twelve months.

We had available liquidity of $320 million, considering cash on hand and available credit of $280.4 million under our two facilities that expire in May 2024.

We also have sufficient cushion with our two debt covenants.

We currently plan to continue paying our quarterly dividend, which we have paid for 34 consecutive years.

This capital outlay currently

results in slightly more than $6 million per quarter.

Net capital expenditures in 2020 currently are expected to be in the rang e of $260 million to $300 million.

We continue to expect free cash flow (net cash provided by operating activities less net cash used for capital expenditures) to excee d $150 million in 2020.

We currently plan to continue paying our quarterly dividend, which we have paid quarterly for 34 consecutive years.

This cash outlay currently results in slightly more than $6 million per quarter.

Net capital expenditures in 2020 currently are expected to be in the range of $275 million to $300 million.

We continue to expect free cash flow (net cash provided by operating activities less net cash used for capital expenditures) to exceed $150 million in 2020.

We do not currently expect the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), enacted in March 2020, to have a material impact on our consolidated financial statements.

Under the CARES Act, we are deferring payment of certain employer payroll taxes for the remainder of 2020, with 50% due December 31, 2021 and 50% due December 31, 2022.

We also expect to utilize a provision allowing accelerated income tax depreciation for certain assets, which will not impact our effective tax rate.

We also expect to utilize a provision allowing accelerated income tax depreciation for certain assets, which will not impact our

effective tax rate.

There have been a number of regulatory actions and waivers related to the COVID-19 pandemic, in an effort to keep the supply chain moving.

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Three Months Ended (3ME)

June 30, Six Months Ended (6ME)

June 30, Percentage Change in Dollar Amounts

September 30, Nine Months Ended (9ME)

September 30, Percentage Change in Dollar Amounts

2020 2019 2020 2019 3ME 9ME

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Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

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Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

Truckload Transportation Services segment 2020 2019 % Change 2020 2019 % Change

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Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

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Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

Werner Logistics segment 2020 2019 % Change 2020 2019 % Change

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Total trailers (at quarter end) 1,325 1,580 (16.1) % 1,325 1,580 (16.1) %

Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019

Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019

Operating Revenues

Operating revenues decreased 9.3% for the three months ended June 30, 2020, compared to the same period of the prior year.

When comparing second quarter 2020 to second quarter 2019, TTS segment revenues decreased $34.9 million, or 7.3%, and Werner Logistics revenues decreased $20.7 million, or 15.8%.

During second quarter 2020, freight demand in our One-Way Truckload was lower than the same period a year ago.

In April 2020, the impact of some customers closing or significantly curtailing their businesses caused a weakness in freight volumes.

By mid-May and into June, many of these customers began to reopen their businesses which improved freight volumes as the quarter progressed.

Freight demand in our One-Way Truckload unit in July 2020 was relatively strong and higher than July 2019.

In our Dedicated fleet, freight demand remained strong in second quarter 2020.

Approximately three-quarters of our Dedicated revenues are with essential products customers, and their freight volumes were generally strong during second quarter 2020.

A few Dedicated customers were more significantly impacted by COVID-19 and had lower volumes.

Trucking revenues, net of fuel surcharge, decreased 1.1% in second quarter 2020 compared to second quarter 2019 due to a 2.2% decrease in the average number of tractors in service, partially offset by a 1.1% increase in average revenues per tractor per week, net of fuel surcharge.

The increase in average revenues per tractor was due primarily to an increase in average revenues per total mile, partially offset by a decline in average miles per tractor.

The increase in average revenues per total mile was due primarily to relative strength in Dedicated pricing, mostly offset by a 1.9% decrease in One-Way Truckload pricing.

The percentage decrease in One-Way Truckload average revenues per total mile was lower than anticipated due to the improving freight market in May and June 2020.

We currently expect average revenues per total mile for the One-Way Truckload fleet for the second half of 2020 to be in a range of 1% lower to 2% higher when compared to the second half of 2019.

The average number of tractors in service in the TTS segment decreased 2.2% to 7,762 in second quarter 2020 from 7,937 in second quarter 2019.

We ended second quarter 2020 with 7,650 trucks in the TTS segment, a year-over-year decrease of 285 trucks compared to the end of second quarter 2019, and a sequential decrease of 185 trucks compared to the end of first quarter 2020.

The sequential fleet decline was anticipated in the early stages of COVID-19 as (i) we aligned our fleet to adjust to reduced demand, (ii) we had delayed implementations of Dedicated fleet start-ups, and (iii) we expected lower numbers of students at driving schools due to social distancing requirements and state licensing agency closings and cutbacks of services, which limits the number of placement drivers entering our career track program.

We currently expect our truck count at the end of 2020 to decrease in a range of 1% to 3% when compared to the fleet size at year-end 2019.

We expect to begin growing our Dedicated fleet in third quarter, based on anticipated start-ups.

Operating revenues decreased 4.5% for the three months ended September 30, 2020, compared to the same period of the prior year.

When comparing third quarter 2020 to third quarter 2019, TTS segment revenues decreased $22.1 million, or 4.6%, and Werner Logistics revenues decreased $4.0 million, or 3.3%.

During third quarter 2020, freight demand in our One-Way Truckload fleet was strong and improved throughout the quarter.

This trend has continued during fourth quarter to-date.

In our Dedicated fleet, freight demand remained strong in third quarter 2020.

Approximately three-quarters of our Dedicated revenues are with essential products customers, and their freight volumes were much better than normal during third quarter 2020.

We added 180 Dedicated trucks during third quarter 2020.

Trucking revenues, net of fuel surcharge, remained flat in third quarter 2020 compared to third quarter 2019 due to a 4.9% decrease in the average number of tractors in service, which was offset by a 5.0% increase in average revenues per tractor per week, net of fuel surcharge.

The increase in average revenues per tractor was due primarily to improved pricing in both Dedicated and One-Way Truckload.

We currently expect average revenues per total mile for the One-Way Truckload fleet for the fourth quarter 2020 to be in a range of 3% to 5% higher when compared to fourth quarter 2019.

The average number of tractors in service in the TTS segment decreased 4.9% to 7,615 in third quarter 2020 from 8,010 in third quarter 2019.

We ended third quarter 2020 with 7,710 trucks in the TTS segment, a year-over-year decrease of 345 trucks compared to the end of third quarter 2019, and a sequential increase of 60 trucks compared to the end of second quarter 2020.

We added 180 Dedicated trucks during third quarter 2020, which we had anticipated following delayed implementations of Dedicated fleet start-ups.

While we currently expect modest truck growth in fourth quarter 2020, we expect our truck count at the end of 2020 to be at the bottom end of the range of (3)% to (1)% lower when compared to the fleet size at year-end 2019.

We cannot predict whether future driver shortages, if any, will adversely affect our ability to maintain our fleet size.

If such a driver 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 decreased 45.3% to $34.2 million in second quarter 2020 from $62.5 million in second quarter 2019 due to lower average fuel prices in the second 2020 quarter.

Trucking fuel surcharge revenues decreased 35.6% to $36.8 million in third quarter 2020 from $57.2 million in third quarter 2019 due to lower average fuel prices in the third 2020 quarter.

These 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.

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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.

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.

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Werner Logistics revenues are generated by its four operating units and exclude revenues for full truckload shipments transferred to the TTS segment, which are recorded as trucking revenues by the TTS segment.

Werner Logistics also recorded revenue and brokered freight expense of $14 thousand in second quarter 2020 and $34 thousand in second quarter 2019 for Intermodal drayage movements performed by the TTS segment (also recorded as trucking revenue by the TTS segment), and these transactions between reporting segments are eliminated in consolidation.

In second quarter 2020, Werner Logistics revenues decreased $20.7 million, or 15.8%, primarily due to lower Truckload Logistics revenues (60% of total Logistics revenues) in a softer freight market, which reduced volumes by 9%.

Lower rates and lower fuel prices reduced all-in Truckload Logistics revenue per load by 15%.

Intermodal revenues declined 10%, and International revenues increased 20%.

In July 2020, the Truckload Logistics gross margin percentage was lower due to the higher capacity costs, and volumes were also lower year-over-year.

The Werner Logistics gross margin percentage in second quarter 2020 of 15.7% decreased from 16.1% in second quarter 2019 due primarily to a softer freight market and contractual brokerage sustaining a rising cost of capacity in May and June 2020.

The Werner Logistics operating margin in second quarter 2020 declined to 2.8% from 4.0% as the 18% decline in gross profit exceeded the 11% decline in other operating expenses.

Werner Logistics also recorded revenue and brokered freight expense of $30 thousand in third quarter 2020 and $1 thousand in third quarter 2019 for Intermodal drayage movements performed by the TTS segment (also recorded as trucking revenue by the TTS segment), and these transactions between reporting segments are eliminated in consolidation.

In third quarter 2020, Werner Logistics revenues decreased $4.0 million, or 3.3%, primarily due to lower Truckload Logistics revenues (60% of total Logistics revenues).

Truckload Logistics volume declined 15% in third quarter 2020, and revenue per load was unchanged.

Intermodal revenues (28% of Logistics revenues) increased 31% in third quarter 2020, due to volume growth of 37% and 5% lower revenue per load from lower rates and fuel surcharges.

The Werner Logistics gross margin percentage in third quarter 2020 of 10.8% decreased from 15.2% in third quarter 2019 due to the unprecedented large and rapid rise in spot truckload rates which significantly increased the cost of capacity for contractual brokerage shipments in third quarter 2020.

The Werner Logistics operating margin in third quarter 2020 declined to (0.7)% from 2.5% as the 31.0% decline in gross profit exceeded the 11.9% decline in other operating expenses.

During third quarter 2020, we addressed customer pricing for many of our contractual brokerage accounts, and we currently expect that Werner Logistics will be profitable in fourth quarter 2020.

Operating Expenses

Our operating ratio (operating expenses expressed as a percentage of operating revenues) was 90.7% for both the three months ended June 30, 2020 and June 30, 2019.

Our operating ratio (operating expenses expressed as a percentage of operating revenues) was 89.5% for the three months ended September 30, 2020 and 91.4% for the three months ended September 30, 2019.

Expense items that impacted the overall operating ratio are described on the following pages.

The tables on pages 21 through 23 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, TTS and Werner Logistics.

Salaries, wages and benefits decreased $11.0 million or 5.3% in second quarter 2020 compared to second quarter 2019 and increased 1.5% as a percentage of operating revenues to 34.3%.

The lower dollar amount of salaries, wages and benefits expense in the 2020 second quarter was due primarily to lower fringe benefits and having fewer placement drivers, both of which were impacted by COVID-19.

Salaries, wages and benefits decreased $12.4 million or 5.9% in third quarter 2020 compared to third quarter 2019 and decreased 0.5% as a percentage of operating revenues to 33.4%.

The lower dollar amount of salaries, wages and benefits expense in the 2020 third quarter was due primarily to lower fringe benefits and having fewer placement drivers, both of which were impacted by COVID-19.

Our workers’ compensation costs improved, and we incurred lower group health insurance costs which we believe is a temporary effect of COVID-19.

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As a result of the higher self-insured retention, our workers’ compensation insurance premiums for the policy year beginning April 2020 are $0.8 million lower than the premiums for the previous policy year.

The driver recruiting market is extremely competitive.

The tight driver recruiting market further intensified in third quarter 2020, as the improving freight market caused increased competition for the finite number of experienced drivers that meet our hiring standards.

Several ongoing market factors persisted including a declining number of, and increased competition for, driver training school graduates, particularly considering COVID-19 constraints, aging truck driver demographics and increased truck safety regulations.

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If such a driver shortage were to occur and additional driver pay rate increases became necessary to attract and retain drivers, our results of operations would be negatively impacted to the extent that we could not obtain corresponding freight rate increases.

Fuel decreased $30.4 million or 49.8% in second quarter 2020 compared to second quarter 2019 and decreased 4.3% as a percentage of operating revenues due to lower average diesel fuel prices and approximately 2.5 million fewer company truck miles in second quarter 2020.

Average diesel fuel prices we re $1.05 per gallon lower in second quarter 2020 than in second quarter 2019 and were 60 cents per gallon lower than in first quarter 2020.

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 including new trucks, more aerodynamic truck features, idle reduction systems, trailer tire inflation systems, trailer skirts and automated manual transmissions to reduce our fuel gallons purchased.

Fuel decreased $21.6 million or 36.3% in third quarter 2020 compared to third quarter 2019 and decreased 3.2% as a percentage of operating revenues due to lower average diesel fuel prices and approximately 5.0 million fewer company truck miles in third quarter 2020.

Average diesel fuel prices we r e 69 cents per gallon lower in third quarter 2020 than in third quarter 2019 and were 25 cents per gallon higher than in second quarter 2020.

new trucks, more aerodynamic truck features, idle reduction systems, trailer tire inflation systems, trailer skirts and automated manual transmissions to reduce our fuel gallons purchased.

However, fuel savings from mpg improvement is partially offset by higher depreciation expense and the additional cost of diesel exhaust fluid.

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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 2020, the average diesel fuel price per gallon was approximately 69 cents lower than the average diesel fuel price per gallon in July 2019 and approximately 68 cents lower than in third quarter 2019.

For October 2020, the average diesel fuel price per gallon was approximately 78 cents lower than the average diesel fuel price per gallon in October 2019 and approximately 78 cents lower than in fourth quarter 2019.

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 pred ict 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, 2020, we had no derivative financial instruments to reduce our exposure to fuel price fluctuations.

Supplies and maintenance decreased $1.0 million or 2.3% in second quarter 2020 compared to second quarter 2019 and increased 0.5% as a percentage of operating revenues.

The lower dollar amount of supplies and maintenance expense was due primarily to lower travel and entertainment costs resulting from COVID-19 restrictions as well as lower driver and placement driver recruiting costs.

These decreases were partially offset by the increased costs relating to COVID-19 safety items.

Insurance and claims increased $4.8 million or 22.9% in second quarter 2020 compared to second quarter 2019 and increased 1.1% as a percentage of operating revenues due primarily to unfavorable reserve development on large dollar claims in the 2020 second quarter.

We also incurred insurance and claims expense of $1.2 million in second quarter 2020 and $0.8 million in second quarter 2019 for accrued interest related to a previously-disclosed adverse jury verdict rendered May 17, 2018, which we are appealing (see Note 5 in the Notes to Consolidated Financial Statements (Unaudited) set forth in Part I of this report).

As of September 30, 2020, we had no derivative financial instruments to reduce our exposure to fuel price fluctuations.

Supplies and maintenance decreased $2.9 million or 6.2% in third quarter 2020 compared to third quarter 2019 and decreased 0.1% as a percentage of operating revenues.

The lower dollar amount of supplies and maintenance expense was due primarily to lower travel and entertainment costs resulting from COVID-19 restrictions.

Insurance and claims increased $1.4 million or 6.3% in third quarter 2020 compared to third quarter 2019 and increased 0.4% as a percentage of operating revenues due primarily to higher liability insurance premiums of $1.4 million and unfavorable reserve development on small dollar claims in the 2020 third quarter, partially offset by lower expense for large dollar claims.

We also incurred insurance and claims expense of $1.2 million in third quarter 2020 and $0.8 million in third quarter 2019 for accrued interest related to a previously-disclosed adverse jury verdict rendered May 17, 2018, which we are appealing (see Note 5 in the Notes to Consolidated Financial Statements (Unaudited) set forth in Part I of this report).

Interest is accrued at $0.4 million per month, until such time as the outcome of our appeal is finalized.

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8 million higher than premiums for the previous policy year.

Depreciation expense increased $6.2 million or 10.1% in second quarter 2020 compared to second quarter 2019 and increased 2.1% as a percentage of operating revenues.

Depreciation expense increased $0.4 million or 0.6% in third quarter 2020 compared to third quarter 2019 and increased 0.6% as a percentage of operating revenues.

During first quarter 2020, we changed the estimated life of certain trucks currently expected to be sold in 2020 to more rapidly depreciate these trucks to their estimated residual values due to the weak used truck market.

The effect of this change in accounting estimate increased second quarter 2020 depreciation expense by $3.7 million.

The effect of this change in accounting estimate increased third quarter 2020 depreciation expense by $0.9 million.

The remaining trucks will continue to depreciate at the same higher rate per truck until the trucks are sold.

Information technology and communications infrastructure upgrades also added to the higher depreciation expense in second quarter 2020.

The average age of our truck fleet remains low by industry standards and was 2.0 years as of June 30, 2020, and the average age of our trailers was 4.1 years.

Information technology and communications infrastructure upgrades also added to the higher depreciation expense in third quarter 2020.

The average age of our truck fleet remains low by industry standards and was 2.0 years as of September 30, 2020, and the average age of our trailers was 4.0 years.

We are continuing to invest in new trucks and trailers and our terminals in 2020 to improve our driver experience, increase operational efficiency and more effectively manage our maintenance, safety and fuel costs.

During the remainder of 2020, we expect the average age of our truck and trailer fleet to remain at or near current levels.

Rent and purchased transportation expense decreased $25.5 million or 17.4% in second quarter 2020 compared to second quarter 2019 and decreased 2.1% as a percentage of operating revenues.

Rent and purchased transportation expense consists mostly of payments to third-party capacity providers in the Werner Logistics segment and other non-trucking operations and

payments to independent contractors in the TTS segment.

Rent and purchased transportation expense decreased $3.0 million or 2.2% in third quarter 2020 compared to third quarter 2019 and increased 0.5% as a percentage of operating revenues.

Rent and purchased transportation expense consists mostly of payments to third-party capacity providers in the Werner Logistics segment and other non-trucking operations and payments to independent contractors in the TTS segment.

The payments to third-party capacity providers generally vary depending on changes in the volume of services generated by the Werner Logistics segment.

Werner Logistics rent and purchased transportation expense decreased $17.0 million as a result of lower logistics revenues, but as a percentage of Werner Logistics revenues increased to 84.3% in second quarter 2020 from 83.9% in second quarter 2019, due primarily to a softer freight market and contractual brokerage sustaining an increasing cost of capacity as the freight market began to improve in May and June 2020.

Rent and purchased transportation expense for the TTS segment decreased $8.6 million in second quarter 2020 compared to second quarter 2019.

Independent contractor miles decreased approximately 3.9 million miles in second quarter 2020 and as a percentage of total miles were 8.5% in second quarter 2020 compared to 10.0% in second quarter 2019.

The per-mile settlement rate for independent contractors also decreased in second quarter 2020 compared to second quarter 2019, due to lower diesel fuel prices.

Werner Logistics rent and purchased transportation expense increased $1.7 million despite lower logistics revenues, and as a percentage of Werner Logistics revenues increased to 89.2% in third quarter 2020 from 84.8% in third quarter 2019, due primarily to the unprecedented large and rapid rise in spot truckload rates which significantly increased the cost of capacity for contractual brokerage shipments in third quarter 2020.

Rent and purchased transportation expense for the TTS segment decreased $4.5 million in third quarter 2020 compared to third quarter 2019.

Independent contractor miles decreased approximately 4.5 million miles in third quarter 2020 and as a percentage of total miles were 8.2% in third quarter 2020 compared to 9.9% in third quarter 2019.

The per-mile settlement rate for independent contractors also decreased in third quarter 2020 compared to third quarter 2019, due to lower diesel fuel prices.

Because independent contractors supply their own tractors and drivers and are responsible for their operating expenses, the decrease in independent contractor miles as a percentage of total miles shifted costs from the rent and purchased transportation category to other expense categories, including (i) salaries, wages and benefits, (ii) fuel, (iii) depreciation, (iv) supplies and maintenance and (v) taxes and licenses.

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These rate increases could negatively affect our results of operations to the extent that we would not be able to obtain corresponding freight rate increases.

Other operating expenses increased $4.0 million in second quarter 2020 compared to second quarter 2019 and increased 0.8% as a percentage of operating revenues.

Other operating expenses increased $1.6 million in third quarter 2020 compared to third quarter 2019 and increased 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 were $0.9 million in second quarter 2020 compared to $4.5 million in second quarter 2019.

We realized significantly lower average gains per truck and slightly lower average gains per trailer in second quarter 2020 compared to second quarter 2019 and sold 20% fewer trucks and 23% fewer trailers.

Pricing in the market for our used trucks and trailers was weak in second quarter 2020 due to low demand.

Gains on sales of assets were $3.9 million in third quarter 2020 compared to $4.1 million in third quarter 2019.

We realized significantly lower average gains per truck and slightly higher average gains per trailer and sold substantially more trucks and fewer trailers in third quarter 2020 compared to third quarter 2019.

Pricing in the market for our used trucks began to improve in third quarter 2020.

Higher expense for professional services also contributed to the increase in other operating expense.

Other Expense (Income)

Other expense (income) increased $0.3 million in second quarter 2020 compared to second quarter 2019.

Interest income decreased in second quarter 2020 compared to second quarter 2019, and we had lower interest expense due to lower average outstanding debt in second quarter 2020.

Our effective income tax rate (income taxes expressed as a percentage of income before income taxes) was 24.8% in second quarter 2020 compared to 25.2% in second quarter 2019.

The lower income tax rate in second quarter 2020 was attributed primarily to favorable discrete income tax items in second quarter 2020.

Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019

Other expense (income) decreased $1.1 million in third quarter 2020 compared to third quarter 2019.

We had lower interest expense due to lower average outstanding debt in third quarter 2020, and interest income also decreased in third quarter 2020 compared to third quarter 2019.

Our effective income tax rate (income taxes expressed as a percentage of income before income taxes) was 24.6% in third quarter 2020 compared to 24.4% in third quarter 2019.

The higher income tax rate in third quarter 2020 was attributed primarily to a lower amount of favorable discrete income tax items in third quarter 2020.

Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019

Operating Revenues

Operating revenues decreased 5.1% for the six months ended June 30, 2020, compared to the same period of the prior year.

Operating revenues decreased 4.9% for the nine months ended September 30, 2020, compared to the same period of the prior year.

In the TTS segment, trucking revenues, net of fuel surcharge, increased $6.2 million, or 0.5%, due primarily to a 3.1% increase in average revenues per tractor per week, partially offset by a 2.5% decrease in average tractors in service.

Average revenues per total mile, net of fuel surcharge, increased 1.3% in the first six months of 2020 compared to the same period in 2019.

TTS segment fuel surcharge revenues for the six months ended June 30, 2020 decreased $35.5 million or 29.4% when compared to the six months ended June 30, 2019 due to lower average fuel prices in the 2020 period.

Werner Logistics revenues decreased $25.9 million, or 10.4%, primarily due to lower Truckload Logistics revenues in a softer freight market.

Average revenues per total mile, net of fuel surcharge, increased 2.4% in the first nine months of 2020 compared to the same period in 2019, and average monthly miles per tractor increased by 0.7%.

TTS segment fuel surcharge revenues for the nine months ended September 30, 2020 decreased $55.8 million or 31.4% when compared to the nine months ended September 30, 2019 due to lower average fuel prices in the 2020 period.

Werner Logistics revenues decreased $29.9 million, or 8.1%, primarily due to lower Truckload Logistics revenues.

Operating Expenses

Our operating ratio (operating expenses expressed as a percentage of operating revenues) was 92.8% for the six months ended June 30, 2020, compared to 91.3% for the six months ended June 30, 2019.

Our operating ratio (operating expenses expressed as a percentage of operating revenues) was 91.7% for the nine months ended September 30, 2020, compared to 91.3% for the nine months ended September 30, 2019.

Expense items that impacted the overall operating ratio are described on the following pages.

The tables on pages 20 through 22 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, TTS and Werner Logistics.

Salaries, wages and benefits decreased $7.8 million or 1.9% in the first six months of 2020 compared to the first six months of 2019 and increased 1.1% as a percentage of operating revenues to 34.5%.

The lower dollar amount of salaries, wages and benefits expense was due primarily to lower fringe benefits, and having fewer placement drivers, both of which were impacted by COVID-19.

We incurred lower group health insurance expense which we believe is a temporary effect of COVID-19, and our workers’ compensation cost improved.

These decreases were partially offset by higher company miles and higher driver pay rates in the first six months of 2020.

Non-driver salaries, wages and benefits in the non-trucking Werner Logistics segment decreased 11.3% compared to 10.4% lower revenues.

Fuel decreased $37.8 million or 32.2% in the first six months of 2020 compared to the same period in 2019 and decreased 2.8% as a percentage of operating revenues due to lower average diesel fuel prices in 2020, partially offset by approximately 3.9 million more company truck miles.

Average diesel fuel prices were 70 cents per gallon lower in the first six months of 2020 than in the same 2019 period.

Supplies and maintenance decreased $1.0 million or 1.1% in the first six months of 2020 compared to the same period in 2019 and increased 0.3% as a percentage of operating revenues.

The tables on pages 21 through 23 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, TTS and Werner Logistics.

Salaries, wages and benefits decreased $20.3 million or 3.3% in the first nine months of 2020 compared to the first nine months of 2019 and increased 0.5% as a percentage of operating revenues to 34.1%.

The lower dollar amount of salaries, wages and benefits expense was due primarily to lower fringe benefits and having fewer placement drivers, both of which were impacted

We incurred lower group health insurance expense which we believe is a temporary effect of COVID-19, and our workers’ compensation costs improved.

These decreases were partially offset by higher driver pay rates in the first nine months of 2020.

Non-driver salaries, wages and benefits in the non-trucking Werner Logistics segment decreased 12.4%.

Fuel decreased $59.3 million or 33.6% in the first nine months of 2020 compared to the same period in 2019 and decreased 2.9% as a percentage of operating revenues due to lower average diesel fuel prices in 2020.

Average diesel fuel prices were 70 cents per gallon lower in the first nine months of 2020 than in the same 2019 period.

Supplies and maintenance decreased $3.9 million or 2.8% in the first nine months of 2020 compared to the same period in 2019 and increased 0.2% as a percentage of operating revenues.

The lower dollar amount of supplies and maintenance expense was due primarily to lower travel and entertainment costs resulting from COVID-19 restrictions, as well as lower driver and placement driver recruiting and other driver-related expenses.

These decreases were partially offset by the increased costs related to COVID-19 safety items, higher company truck miles in 2020 and increased tractor maintenance costs.

Insurance and claims increased $18.2 million or 41.5% in the first six months of 2020 compared to the same period in 2019 and increased 1.7% as a percentage of operating revenues due primarily to higher expense for new large dollar claims and unfavorable reserve development on large dollar claims.

These decreases were partially offset by the increased costs related to COVID-19 safety items and increased tractor maintenance costs.

Insurance and claims increased $19.5 million or 29.8% in the first nine months of 2020 compared to the same period in 2019 and increased 1.3% as a percentage of operating revenues due primarily to higher expense for new large dollar claims and unfavorable reserve development on large dollar claims.

In January 2020, one of our trucks was involved in a serious accident.

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As a result, we accrued $10.0 million of insurance and claims expense in first quarter 2020 for this accident.

Depreciation expense increased $14.3 million or 11.7% in the first six months of 2020 compared to the 2019 period and increased 1.8% as a percentage of operating revenues.

Depreciation expense increased $14.7 million or 7.9% in the first nine months of 2020 compared to the 2019 period and increased 1.4% as a percentage of operating revenues.

The effect of this change in accounting estimate increased depreciation expense by $8.7 million in the first six months of 2020.

The effect of this change in accounting estimate increased depreciation expense by $9.6 million in the first nine months of 2020.

These trucks will continue to depreciate at the same higher rate per truck until the trucks are sold.

Information technology and communications infrastructure upgrades also added to the higher depreciation expense in the first half of 2020.

Rent and purchased transportation expense decreased $31.9 million or 11.4% in the first six months of 2020 compared the same 2019 period and decreased 1.5% as a percentage of operating revenues.

Rent and purchased transportation for the TTS segment decreased $14.2 million in the first six months of 2020 compared to the same 2019 period due to lower diesel fuel prices and having 5.8 million fewer independent contractor miles in the six months ended June 30, 2020.

Information technology and communications infrastructure upgrades also added to the higher depreciation expense in the first nine months of 2020.

Rent and purchased transportation expense decreased $34.8 million or 8.4% in the first nine months of 2020 compared the same 2019 period and decreased 0.9% as a percentage of operating revenues.

Rent and purchased transportation for the TTS segment decreased $18.7 million in the first nine months of 2020 compared to the same 2019 period due to lower diesel fuel prices and having 10.3 million fewer independent contractor miles in the nine months ended September 30, 2020.

Werner Logistics rent and purchased transportation expense decreased $16.3 million as a result of lower logistics revenues, but as a percentage of Werner Logistics revenues increased to 86.4% in the 2020 period from 83.8% in the 2019 period.

Other operating expenses increased $6.9 million in the first six months of 2020 compared to the same period in 2019 and increased 0.7% as a percentage of operating revenues.

Gains on sales of assets were $3.4 million in the first six months ended June 30, 2020 compared to $10.4 million in the six months ended June 30, 2019.

In the 2020 year-to-date period, we sold 31% fewer trucks and 13% fewer trailers and realized significantly lower average gains per truck and lower average gains per trailer.

Other operating expenses increased $8.5 million in the first nine months of 2020 compared to the same period in 2019 and increased 0.5% as a percentage of operating revenues.

Gains on sales of assets were $7.3 million in the first nine months ended September 30, 2020 compared to $14.5 million in the nine months ended September 30, 2019.

In the 2020 year-to-date period, we sold 15% more trucks and 13% fewer trailers and realized significantly lower average gains per truck and lower average gains per trailer.

Other Expense (Income)

Other expense (income) increased $1.5 million in the first six months of 2020 compared to the same 2019 period.

Interest income decreased in the first six months of 2020 compared to the first six months of 2019 due to lower variable interest rates in the 2020 period.

The decreased interest income was partially offset by lower interest expense due to lower average outstanding debt in the first half of 2020.

Our effective income tax rate (income taxes expressed as a percentage of income before income taxes) was 24.2% for the first six months of 2020 compared to 25.2% for the first six months of 2019.

The lower income tax rate in the year-to-date 2020 period was attributed primarily to favorable discrete income tax items in the 2020 period.

Other expense (income) increased $0.4 million in the first nine months of 2020 compared to the same 2019 period.

Interest income decreased in the first nine months of 2020 compared to the first nine months of 2019 due to lower variable interest rates in the 2020 period.

The decreased interest income was partially offset by lower interest expense due to lower average outstanding debt in the 2020 period.

Our effective income tax rate (income taxes expressed as a percentage of income before income taxes) was 24.4% for the first nine months of 2020 compared to 24.9% for the first nine months of 2019.

The lower income tax rate in the year-to-date 2020 period was attributed primarily to a higher amount of favorable discrete income tax items in the 2020 period.

Liquidity and Capital Resources:

During the six months ended June 30, 2020, we generated cash flow from operations of $287.3 million, a 30.4% or $67.0 million increase in cash flows compared to the same six-month period a year ago.

The increase in net cash provided by operating activities resulted primarily from an improvement in certain working capital items.

The improvements in working capital included accounts receivable and $33.8 million related to the temporary deferral of federal and state income tax payments for the first half of 2020, which were paid in third quarter 2020.

During the nine months ended September 30, 2020, we generated cash flow from operations of $346.4 million, a 4.3% or $14.2 million increase in cash flows compared to the same nine-month period a year ago.

The increase in net cash provided by operating activities resulted primarily from deferring payment of certain 2020 employer payroll taxes under the CARES Act

and from higher non-cash depreciation, partially offset by lower net income.

We were able to make net capital expenditures, repay debt, pay dividends and repurchase company stock with the net cash provided by operating activities and existing cash balances.

Net cash used in investing activities decreased to $103.2 million for the six-month period ended June 30, 2020 from $155.8 million for the six-month period ended June 30, 2019.

Net property additions (primarily revenue equipment) were $107.6 million for the six-month period ended June 30, 2020, compared to $162.4 million during the same period of 2019.

Net cash used in investing activities decreased to $181.0 million for the nine-month period ended September 30, 2020 from $262.4 million for the nine-month period ended September 30, 2019.

Net property additions (primarily revenue equipment) were $187.3 million for the nine-month period ended September 30, 2020, compared to $271.7 million during the same period of 2019.

The decrease was due in part to new truck delivery delays resulting from temporary closures of manufacturing plants.

As of June 30, 2020, we were committed to property and equipment purchases of approximately $214.7 million.

We currently estimate net capital expenditures (primarily revenue equipment) in 2020 to be in the range of $275 million to $300 million, compared to net capital expenditures in 2019 of $283.9 million.

We intend to fund these net capital expenditures through cash flow from operations and financing available under our existing credit facilities, if necessary.

Net financing activities used $150.2 million during the six months ended June 30, 2020, and used $52.2 million during the same period in 2019.

We repaid $125.0 million of debt during the six months ended June 30, 2020, bringing our outstanding debt at June 30, 2020 to $175.0 million.

We paid dividends of $12.5 million in the six-month period ended June 30, 2020 and $273.7 million in the six-month period ended June 30, 2019.

As of September 30, 2020, we were committed to property and equipment purchases of approximately $133.6 million.

Net financing activities used $156.4 million during the nine months ended September 30, 2020, and used $89.4 million during the same period in 2019.

We repaid $125.0 million of debt during the nine months ended September 30, 2020, bringing our outstanding debt at September 30, 2020 to $175.0 million.

We paid dividends of $18.7 million in the nine-month period ended September 30, 2020 and $280.0 million in the nine-month period ended September 30, 2019.

In May 2019, we declared a special dividend of $3.75 per share, or $261.1 million, which was paid on June 7, 2019.

Financing activities for the six months ended June 30, 2020, also included common stock repurchases of 282,992 shares at a cost of $8.8 million.

In the six-month period ended June 30, 2019, we repurchased 1,300,000 shares at a cost of $42.3 million.

Financing activities for the nine months ended September 30, 2020, also included common stock repurchases of 282,992 shares at a cost of $8.8 million.

In the nine-month period ended September 30, 2019, we repurchased 1,300,000 shares at a cost of $42.3 million.

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 economic and stock market conditions and other factors.

As of June 30, 2020, the Company had purchased 982,992 shares pursuant to our current Board of Directors repurchase authorization and had 4,017,008 shares remaining available for repurchase.

Management believes our financial position at June 30, 2020 is strong.

As of June 30, 2020, we had $65.4 million of cash and cash equivalents and over $1.1 billion of stockholders’ equity.

As of September 30, 2020, the Company had purchased 982,992 shares pursuant to our current Board of Directors repurchase authorization and had 4,017,008 shares remaining available for repurchase.

Management believes our financial position at September 30, 2020 is strong.

As of September 30, 2020, we had $40.5 million of cash and cash equivalents and nearly $1.2 billion of stockholders’ equity.

Cash is invested primarily in government portfolio money market funds.

As of June 30, 2020, we had $175.0 million of debt outstanding, after repaying $75.0 million of debt in second quarter 2020 under a line of credit that subsequently expired on July 13, 2020.

We had total borrowing capacity of $500.0 million under our two remaining credit facilities that expire in May 2024 (see Note 4 in the Notes to Consolidated Financial Statements (Unaudited) under Item I of Part I of this Form 10-Q) of which $280.4 million is available for future borrowing as of June 30, 2020, after considering the $175.0 million of outstanding debt and $44.6 million in stand-by letters of credit under which we are obligated.

As of September 30, 2020, we had $175.0 million of debt outstanding.

We had total borrowing capacity of $500.0 million under our two credit facilities that expire in May 2024 (see Note 4 in the Notes to Consolidated Financial Statements (Unaudited) under Item I of Part I of this Form 10-Q) of which $280.4 million is available for future borrowing as of September 30, 2020, after considering the $175.0 million of outstanding debt and $44.6 million in stand-by letters of credit under which we are obligated.

These stand-by letters of credit are primarily required as security for insurance policies.

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Item 7 of Part II of our 2019 Form 10-K includes our disclosure of contractual obligations and commercial commitments as of December 31, 2019.

There were no material changes in the nature of these items during the six months ended June 30, 2020.

Except for the expiration of our $75.0 million unsecured line of credit with U.S.

on July 13, 2020, there were no material changes in the nature of these items during the nine months ended September 30, 2020.

Item 1 of Part I of our 2019 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.

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On June 1, 2020, the Federal Motor Carrier Safety Administration published revisions to the Hours of Service (“HOS”) requirements.

The HOS final rule increases driver flexibility and introduces modifications to the existing rule set, including

changes to the 30-minute break requirement, split sleeper berth, adverse driving conditions, and the short-haul exception.

The final rule compliance date is September 29, 2020.

The HOS final rule increases driver flexibility and introduces modifications to the existing rule set, including changes to the 30-minute break requirement, split sleeper berth, adverse driving conditions, and the short-haul exception.

The final rule compliance date was September 29, 2020.

All three countries ratified the United States-Mexico-Canada Agreement (“USMCA”) to replace the North American Free Trade Agreement (“NAFTA”).

The effective date of USMCA is July 1, 2020.

The effective date of USMCA was July 1, 2020.

Critical Accounting Estimates:

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the (i) reported 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.

We evaluate these estimates on an ongoing basis as events and circumstances change, utilizing historical experience, consultation with experts and other methods considered reasonable in the particular circumstances.

We evaluate these estimates on an ongoing basis as events and

circumstances change, utilizing historical experience, consultation with experts and other methods considered reasonable in the particular circumstances.

Actual results could differ from those estimates and may significantly impact our results of operations from period to period.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis