What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2021-02-24 compared with 2020-02-27 · 141 added, 130 removed, 203 unchanged (57% of the section changed)

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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 TTS segment) or obtain qualified third-party capacity at a reasonable price (with respect to our Werner Logistics segment).

Although our business volume is not highly concentrated, we may also be affected by our customers’ financial failures or loss of customer business.

We may also be affected by our customers’ financial failures or loss of customer business.

Revenues for our TTS segment operating units (Dedicated and One-Way Truckload) 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.

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As discussed further in the comparison of operating results for 2020 to 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, higher new truck and trailer purchase prices and compliance with new or proposed regulations.

These issues include shortages of drivers or independent contractors, changing fuel prices, compliance with new or proposed regulations and tightening of the commercial truck liability insurance market.

Our main fixed costs include depreciation expense for tractors and trailers and equipment licensing fees (included in taxes and licenses expense).

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We have a mix of contracted long-term rates and variable 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.

The COVID-19 pandemic, declared March 11, 2020, has profoundly impacted the U.S.

During the pandemic, the transportation industry has been designated by the U.S.

government as an essential industry for keeping the U.S.

supply chain moving.

We are working hard to stay healthy while safely delivering our customers’ freight on time.

Our leadership team meets frequently to address issues related to customers, freight, drivers, safety, staffing, human resources, and costs and provides regular updates to all our associates.

Throughout our offices and terminal network, we are closely following the safety guidelines set forth by the Centers for Disease Control and Prevention (CDC) and World Health Organization (WHO), including hygiene and social distancing.

We made and intend to continue making significant investments in personal protective products to keep our associates safe, and over half of our office associates continue working from home.

We introduced Werner-specific associate relief plans to provide rapid and needed assistance to those Werner associates affected by the virus.

Over the past several years, we have repositioned Werner to increase our ability to execute through different macroeconomic environments.

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 87% of our total revenues in 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 2020 reflect lower freight demand in the first half of the year and strong freight market conditions in the second half of the year in a rapidly recovering economy and tight driver market.

Despite the challenges created by COVID-19, we believe we proactively managed and adapted our fleet and cost structure without compromising service.

While there remain significant uncertainties related to COVID-19 and its effect on the economy, we believe that demand for our

services will be strong in 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 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 2020, we believe we are well positioned with a strong balance sheet and sufficient liquidity.

Our debt is low at $200 million, or a net debt ratio of 0.3 times earnings before interest, income taxes, depreciation and amortization for the year ended December 31, 2020.

We had available liquidity of $278 million, considering cash on hand and available credit facilities of $249 million.

We also have sufficient cushion with our two debt covenants.

We currently plan to continue paying our quarterly dividend, which we have paid quarterly since 1987.

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

Net capital expenditures in 2021 currently are expected to be in the range of $275 million to $300 million.

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 deferred payment of certain employer payroll taxes for 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.

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.

We do not currently expect these collective changes to have a material impact on our consolidated financial statements.

Results of Operations:

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Salaries, wages and benefits 795,847 33.6 818,487 33.2 (2.8)

Fuel 157,124 6.6 235,928 9.6 (33.4)

Supplies and maintenance 175,842 7.4 182,909 7.4 (3.9)

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Insurance and claims 109,816 4.6 88,913 3.6 23.5

Depreciation 263,286 11.1 249,527 10.1 5.5

Rent and purchased transportation 519,184 21.9 549,438 22.3 (5.5)

Communications and utilities 14,474 0.6 15,303 0.6 (5.4)

Other 13,421 0.6 2,199 0.1 510.3

Total operating expenses 2,144,740 90.4 2,238,229 90.8 (4.2)

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Income tax expense 55,616 2.4 54,962 2.2 1.2

Net income $ 169,078 7.1 $ 166,944 6.8 1.3

The following tables set forth the operating revenues, operating expenses and operating income for the TTS segment and certain statistical data regarding our TTS segment operations, as well as statistical data for the One-Way Truckload and Dedicated operating units within TTS.

TTS segment (amounts in thousands)

TTS segment (amounts in thousands) $ % $ % % Chg

Trucking revenues, net of fuel surcharge $ 1,667,394 $ 1,652,663 0.9 %

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Operating income $ 222,007 12.0 $ 202,660 10.6 9.5 %

TTS segment 2020 2019 % Chg

Average tractors in service 7,757 7,969 (2.7) %

Average revenues per tractor per week (1)

$ 4,134 $ 3,988 3.7 %

Total tractors (at year end)

Company 7,390 7,460 (0.9) %

Independent contractor 440 540 (18.5) %

Total tractors

7,830 8,000 (2.1) %

Total trailers (at year end) 23,125 22,700 1.9 %

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Average revenues per tractor per week (1)

$ 4,315 $ 4,207 2.6 %

Average % change in revenues per total mile (1)

0.9 % (2.1) %

Average % change in total miles per tractor per week 1.6 % (3.1) %

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Average revenues per tractor per week (1)

$ 4,012 $ 3,827 4.8 %

(1) Net of fuel surcharge revenues

The following tables set forth the Werner Logistics 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 Werner Logistics segment.

Werner Logistics segment (amounts in thousands)

Werner Logistics segment (amounts in thousands) $ % $ % % Chg

Operating revenues $ 469,791 100.0 $ 489,729 100.0 (4.1) %

Rent and purchased transportation expense 407,308 86.7 411,506 84.0 (1.0) %

Gross margin 62,483 13.3 78,223 16.0 (20.1) %

Other operating expenses 56,478 12.0 61,935 12.7 (8.8) %

Operating income $ 6,005 1.3 $ 16,288 3.3 (63.1) %

Werner Logistics segment

Werner Logistics segment 2020 2019 % Chg

Average tractors in service 31 36 (13.9) %

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Operating Revenues

Operating revenues increased 0.2% in 2019 compared to 2018.

When comparing 2019 to 2018, TTS segment revenues increased $28.5 million, or 1.5%.

Operating revenues decreased 3.7% in 2020 compared to 2019.

When comparing 2020 to 2019, TTS segment revenues decreased $66.6 million, or 3.5%.

Revenues for the Werner Logistics segment decreased $19.9 million or 4.1%.

2019 was a more difficult freight and rate year than 2018, due to slower growth in the domestic economy and increased truckload capacity, both of which led to lower freight volumes and less attractive pricing in our One-Way Truckload fleet.

Freight demand in our One-Way Truckload fleet was weaker than normal during much of 2019 and well below the unusually strong freight demand of 2018, which was aided by FMCSA’s ELD Final Rule and the Tax Cuts and Jobs Act of 2017, both of which occurred in December 2017.

So far in 2020, freight volumes in our One-Way Truckload unit have been seasonally normal and slightly lower than the same period in 2019.

Pricing remains challenging.

We expect shipment volumes to be negatively affected at U.S.

ports in late first quarter 2020 as a result of the impact of the coronavirus on factory production in China.

It is currently expected that shipment volumes at the U.S.

ports would increase in second quarter 2020 as factory production in China increases.

This is subject to swift containment of the coronavirus.

Trucking revenues, net of fuel surcharge, increased 4.1% in 2019 compared to 2018 due to an 4.6% increase in the average number of tractors in service, partially offset by a 0.5% decrease in average revenues per tractor per week, net of fuel surcharge.

We attribute the decline in average revenues per tractor per week to lower average miles per tractor, partially offset by higher average revenues per total mile.

The less robust freight market in 2019 and growth in our Dedicated fleet, which has lower miles per truck and a shorter length of haul, are the primary reasons for the decline in average miles per truck for the TTS segment.

Additionally, extended winter weather conditions early in 2019 and a truck GPS satellite communications service provider failure that occurred during four weeks in fourth quarter 2019 negatively impacted average miles per truck.

The increase in average revenues per total mile was due primarily to dedicated fleet expansion, higher contractual rates and lane mix changes, and the rate of improvement declined in the latter part of 2019 because of fewer project and surge freight opportunities with premium rates and significantly lower spot rates.

We currently expect average revenues per total mile for the One-Way Truckload fleet to remain difficult for the first half of 2020 and to decrease in a range of 5% to 7% when compared to the first half of 2019.

The average number of tractors in service in the TTS segment increased 4.6% to 7,969 in 2019 compared to 7,622 in 2018.

We ended 2019 with 8,000 tractors in the TTS segment, a year-over-year increase of 180 trucks.

During the first two months of 2020, freight demand in our One-Way Truckload fleet was seasonally normal and slightly below the same period in 2019.

We experienced short-lived strengthened demand immediately following the COVID-19 pandemic declaration by WHO on March 11, which weakened in early second quarter 2020 due to some customers temporarily closing or significantly curtailing their businesses.

In the second half of 2020, after businesses began to reopen, freight demand was strong and improved throughout the period.

In our Dedicated fleet, freight demand was strong throughout 2020, as approximately three-quarters of our Dedicated revenues are with essential products customers.

Freight demand in One-Way Truckload has continued to be stronger than normal so far in 2021.

Trucking revenues, net of fuel surcharge, increased 0.9% in 2020 compared to 2019 due to a 3.7% increase in average revenues per tractor per week, net of fuel surcharge, partially offset by a 2.7% decrease in the average number of tractors in service.

We attribute the increase in average revenues per tractor per week to higher average revenues per total mile.

The increase in average revenues per total mile was due to relative strength in Dedicated pricing and a stronger than expected peak season for the One-Way Truckload fleet.

We currently expect average revenues per total mile for the One-Way Truckload fleet to remain strong for the first half of 2021 and to increase in a range of 7% to 10% when compared to the first half of 2020, and we expect Dedicated average revenues per truck per week to increase in a range of 3% to 5% in the first half of 2021 compared to the first half of 2020.

The average number of tractors in service in the TTS segment decreased 2.7% to 7,757 in 2020 compared to 7,969 in 2019.

We ended 2020 with 7,830 tractors in the TTS segment, a year-over-year decrease of 170 trucks.

The decrease in the average number of tractors in service was anticipated during 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 COVID-19 social distancing requirements and state licensing cutbacks, which limits the number of placement drivers entering our career track program.

Our number of tractors in service increased during the second half of 2020 as (i) demand strengthened, (ii) Dedicated fleets were implemented, and (iii) driving schools adapted to operations during the pandemic.

Our Dedicated unit ended 2020 with 4,945 trucks (or 63% of our total TTS segment fleet) compared to 4,630 trucks at the end of 2019.

We currently expect our truck count at the end of 2020 to be in a range of a 3% lower to 1% higher when compared to the fleet size at year-end 2019, with flat to slightly lower truck count in the first half of 2020 due to current market conditions.

We currently expect our fleet size at the end of 2021 to be in a range of a 1% to 3% higher when compared to the fleet size at year-end 2020.

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

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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.

Conversely, when fuel prices decrease, fuel surcharge revenues

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.

Conversely, when fuel prices decrease, fuel surcharge revenues decrease.

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.

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Werner Logistics also recorded revenue and brokered freight expense of $0.1 million in 2020 and $0.2 million in 2019 for Intermodal drayage movements performed by the TTS segment (also recorded as trucking revenues by the TTS segment), and these transactions between reporting segments are eliminated in consolidation.

Werner Logistics revenues decreased 5.5% to $489.7 million in 2019 from $518.1 million in 2018 because of a softer freight market with increased competition.

Werner Logistics gross margin dollars decreased 4.4% to $78.2 million in 2019 from $81.9 million in 2018, and Werner Logistics gross margin percentage increased slightly to 16.0% in 2019 from 15.8% in 2018.

Werner Logistics operating income percentage decreased to 3.3% in 2019 from 3.9% in 2018.

The gross margin increase is due primarily to contractual pricing and improved capacity procurement in Truckload Logistics early in 2019, with gross margin declining as 2019 progressed due to fewer project freight opportunities and lower transactional spot pricing.

Our operating margin decreased as the percentage decline in gross profit exceeded the percentage decline in other operating expenses, although we began to gain efficiencies from our investments in decision-making technologies that optimize and automate freight and carrier selection.

Werner Logistics revenues decreased 4.1% to $469.8 million in 2020 from $489.7 million in 2019 due primarily to lower Truckload Logistics revenues (61% of total logistics revenues).

The Werner Logistics gross margin dollars decreased 20.1% to $62.5 million in 2020 from $78.2 million in 2019, and the Werner Logistics gross margin percentage decreased to 13.3% in 2020 from 16.0% in 2019.

The Werner Logistics operating income percentage decreased to 1.3% in 2020 from 3.3% in 2019, as the percentage decline in gross profit exceeded the percentage decline in other operating expenses.

The gross margin decrease was due primarily to a softer freight market in the first half of 2020 and the unprecedented large and rapid rise in spot truckload rates in the second half of 2020 which significantly increased the cost of capacity for contractual brokerage shipments.

During third quarter 2020, we addressed customer pricing for many of our contractual brokerage accounts, which resulted in sequential improvement from third quarter 2020 to fourth quarter 2020 in both our gross margin percentage and operating margin percentage.

Operating Expenses

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The tables on pages 16 through 18 show the Consolidated Statements of Income in dollars and as a percentage of total operating revenues and the percentage increase or decrease in the dollar amounts of those items compared to the prior year, as well as the operating ratios, operating margins and certain statistical information for our two reportable segments, TTS and Werner Logistics.

Salaries, wages and benefits increased $37.4 million or 4.8% in 2019 compared to 2018 and increased 1.4% as a percentage of operating revenues.

The higher dollar amount of salaries, wages and benefits expense was due primarily to higher driver pay rates and approximately 17 million more company truck miles in 2019 compared to 2018, both of which resulted in higher payroll taxes and other payroll-related fringe benefits, and increases in medical claims, prescription drugs, and other health insurance costs in 2019.

These increases were partially offset by lower non-driver pay in 2019 compared to 2018 related to our performance-based incentive compensation program.

When evaluated on the basis of company truck miles, driver pay increased by about 5% in 2019.

Salaries, wages and benefits decreased $22.6 million or 2.8% in 2020 compared to 2019 and increased 0.4% as a percentage of operating revenues.

The lower dollar amount of salaries, wages and benefits expense in 2020 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.

These decreases were partially offset by higher driver pay rates in 2020.

Non-driver salaries, wages and benefits in our non-trucking Werner Logistics segment decreased 11.6% from 2020 to 2019.

We renewed our workers’ compensation insurance coverage for the policy year beginning April 1, 2019.

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 premium rate for the policy year beginning April 2019 is 5% higher than the rate for the previous policy year.

The driver recruiting market is extremely competitive.

Several ongoing market factors persisted including a declining number of, and increased competition for, driver training school graduates, an historically low national unemployment rate, aging truck driver demographics and increased truck safety regulations including the regulation changes for electronic logging devices.

We continued to take significant actions to strengthen our driver recruiting and retention to make Werner the preferred choice for the best drivers, including raising driver pay, maintaining a new truck and trailer fleet, purchasing best-in-class safety and training features for all new trucks, investing in our driver training school network and collaborating with customers to improve or eliminate unproductive freight.

We renewed our workers’ compensation insurance coverage on April 1, 2020 and assumed additional risk exposure by increasing our self-insurance retention from $1.0 million to $2.0 million per claim as of April 1, 2020.

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 competitive driver recruiting market further intensified throughout 2020, as the improving freight market in the second half of the year 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.

We continued to take significant actions to strengthen our driver recruiting and retention to make Werner a preferred choice for the best drivers, including raising driver pay, maintaining a new truck and trailer fleet, purchasing best-in-class safety features for all new trucks, investing in our driver training school network and collaborating with customers to improve or eliminate unproductive freight.

These efforts continued to have positive results on our driver retention.

We are currently unable to predict whether we will experience future driver shortages or continue to maintain our current driver retention rates.

In January 2021, we implemented driver pay increases of approximately $10 million annually in our One-Way Truckload fleet, and we are implementing pay increases as needed in Dedicated.

We expect our total TTS driver pay increases to total $16 million to $18 million in 2021.

We are unable to predict whether we will experience future driver shortages or maintain our current driver retention rates.

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 $18.6 million or 7.3% in 2019 compared to 2018 and decreased 0.8% as a percentage of operating revenues due to lower average diesel fuel prices, partially offset by more company trucks and miles in 2019.

Average diesel fuel prices, excluding fuel taxes, for the full year 2019 were 17 cents per gallon lower than the full year 2018, an 8% decrease.

We continue to employ measures to improve our fuel mpg, including (i) limiting truck engine idle time, (ii) optimizing the speed, weight and specifications of our equipment and (iii) implementing mpg-enhancing equipment changes to our fleet including new

trucks, 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 $78.8 million or 33.4% in 2020 compared to 2019 and decreased 3.0% as a percentage of operating revenues due to lower average diesel fuel prices and approximately 4.5 million fewer company truck miles in 2020.

Average diesel fuel prices, excluding fuel taxes, for the full year 2020 were 69 cents per gallon lower than the full year 2019, a 34% 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 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.

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.

Through February 21, the average diesel fuel price per gallon in 2020 was approximately 7cents lower than the average diesel fuel price per gallon in the same period of 2019 and approximately 14 cents lower than the average for first quarter 2019.

Through February 19, the average diesel fuel price per gallon in 2021 was approximately 11 cents lower than the average diesel fuel price per gallon in the same period of 2020 and approximately 9 cents higher than the average for first quarter 2020.

Shortages of fuel, increases in fuel prices and petroleum product rationing can have a material adverse effect on our operations and profitability.

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As of December 31, 2020, we had no derivative financial instruments to reduce our exposure to fuel price fluctuations.

Supplies and maintenance decreased $2.2 million or 1.2% in 2019 compared to 2018 and decreased 0.1% as a percentage of operating revenues despite higher company miles driven in 2019 due primarily to lower driver recruiting and other driver-related costs in 2019.

Also contributing to the decrease was more effective management of winter weather conditions in 2019 that resulted in lower weather-related maintenance costs early in the year.

Taxes and licenses increased $8.2 million or 9.4% in 2019 compared to 2018 and increased 0.4% as a percentage of operating revenues.

During third quarter 2018, we reached a favorable settlement related to a property tax dispute that reduced taxes and licenses expense by $4.9 million for property taxes that were expensed and paid over a multi-year period.

In addition to this favorable item in 2018, the effect of having more company trucks and company truck miles in 2019 compared to 2018 and higher state fuel tax rates also added to the increased taxes and licenses.

Insurance and claims decreased $9.2 million or 9.4% in 2019 compared to 2018 and decreased 0.4% as a percentage of operating revenues.

In 2018, we incurred $15.2 million of insurance and claims expense (including interest and legal fees) related to a previously-disclosed adverse jury verdict rendered May 17, 2018, which we are appealing (see Note 8 in the Notes to Consolidated Financial Statements set forth in Part II of this Form 10-K).

In 2019, we incurred insurance and claims expense of $3.9 million for accrued interest related to this matter.

Supplies and maintenance decreased $7.1 million or 3.9% in 2020 compared to 2019 and was flat 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-related expenses.

Insurance and claims increased $20.9 million or 23.5% in 2020 compared to 2019 and increased 1.0% as a percentage of operating revenues, due primarily to higher expense for new large dollar claims and higher liability insurance premiums of $3.8 million.

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

We self-insure for the first $10.0 million of liability coverage for this policy period, and have appropriate excess liability coverage with insurance carriers above that amount.

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

We also incurred insurance and claims expense of $4.9 million in 2020 and $3.9 million in 2019 for accrued interest related to a previously-disclosed adverse jury verdict rendered on May 17, 2018, which we are appealing (see Note 9 in the Notes to Consolidated Financial Statements set forth in Part II of this Form 10-K).

Interest is accrued at $0.4 million per month, until such time as the outcome of our appeal is finalized, excluding the months of June and July 2019 when the plaintiffs requested an extension of time to respond to our appeal.

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the remainder results from insurance premiums for claims in excess of our self-insured limits.

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

We are still investigating the accident but it is probable that it will adversely impact first quarter 2020 earnings.

We self-insure for the first $10.0 million of liability coverage for this policy period and have appropriate excess liability insurance coverage with insurance carriers above this amount.

We renewed our liability insurance policies on August 1, 2019 with the same deductibles and aggregates as the August 1, 2018 renewal.

We continue to be responsible for the first $3.0 million per claim with an annual $6.0 million aggregate for claims between $3.0 million and $5.0 million.

We also have an additional $5.0 million deductible per claim for each claim between $5.0 million and $10.0 million.

As a result, we are responsible for the first $10.0 million per claim, until we meet the $6.0 million aggregate for claims between $3.0 million and $5.0 million.

We maintain liability insurance coverage with insurance carriers substantially in excess of the $10.0 million per claim.

Our liability insurance premiums for the policy year that began August 1, 2019 are 11% higher, or $0.7 million higher, than premiums for the previous policy year.

See Item 3 of Part I of this Form 10-K for information on our bodily injury and property damage coverage levels since August 1, 2016.

We renewed our liability insurance policies on August 1, 2020 and are now responsible for the first $10.0 million per claim on all claims with no annual aggregates.

For the policy year that began August 1, 2019, we were responsible for the first $3.0 million per claim with an annual $6.0 million aggregate for claims between $3.0 million and $5.0 million and an additional $5.0 million deductible per claim for each claim between $5.0 million and $10.0 million.

We maintain liability insurance coverage with insurance carriers in excess of the $10.0 million per claim.

Our liability insurance premiums for the policy year that began August 1, 2020 are $7.8 million higher than premiums for the previous policy year.

Depreciation increased $13.8 million or 5.5% in 2020 compared to 2019 and increased 1.0% as a percentage of operating revenues.

This expense increase is due primarily to (i) the higher cost of new revenue equipment, (ii) a larger company truck and trailer fleet, and (iii) information technology and communication infrastructure upgrades.

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

These trucks continued to depreciate at the same higher rate per truck until the trucks were sold.

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

Information technology and communication infrastructure upgrades also added to the higher depreciation expense in 2020.

The average age of our truck fleet remains low by industry standards and was 2.0 years as of December 31, 2020, and the average age of our trailers was 4.0 years.

We continued 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.

We currently intend to maintain the average age of our truck and trailer fleet at or near current levels.

The average age of our truck fleet remains low by industry standards and was 1.9 years as of December 31, 2019 , and the average age of our trailers was 4.0 years.

Rent and purchased transportation expense decreased $30.3 million or 5.5% in 2020 compared to 2019 and decreased 0.4% as a percentage of operating revenues.

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

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 $24.7 million as a result of lower logistics revenues and decreased to 84.0% of Werner Logistics revenues in 2019 from 84.2% in 2018.

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 $4.2 million as a result of lower logistics revenues and increased to 86.7% of Werner Logistics revenues in 2020 from 84.0% in 2019, due primarily to the unprecedented large and rapid rise in spot truckload rates in the second half of 2020, which significantly increased the cost of capacity for contractual brokerage shipments.

Rent and purchased transportation expense for the TTS segment decreased $26.1 million in 2020 compared to 2019.

This decrease is due primarily to lower payments to independent contractors in 2019 compared to 2018, resulting from a decrease in independent contractor miles driven in 2019.

Lower average diesel fuel prices in 2019 also resulted in lower reimbursement to independent contractors.

This decrease is due primarily to lower payments to independent contractors in 2020 compared to 2019, resulting from 15.1 million fewer independent contractor miles driven in 2020.

Lower average diesel fuel prices in 2020 also resulted in a lower per-mile settlement rate for independent contractors.

Independent contractor miles as a percentage of total miles were 8.3% in 2020 and 9.9% in 2019.

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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 $21.6 million in 2019, including $3.4 million from sales of real estate, compared to $24.9 million in 2018, including $5.9 million from sales of real estate.

In 2019, we sold fewer trucks and more trailers than in 2018.

We realized higher average gains per truck and lower average gains per trailer sold in 2019 compared to 2018.

Pricing in the market for our used trucks and trailers began to moderate in the latter part of second quarter 2019, and the used truck pricing decline accelerated in fourth quarter 2019 due to weaker demand.

We currently expect gains on sales of equipment in 2020 to continue to moderate due to the softer used equipment market and lower trailer sales and to be in the range of $6 million to $12 million.

Increased costs associated with professional and software consultant services and provision for doubtful accounts related to the driver training schools also contributed to the increase in other operating expenses from 2018 to 2019.

Gains on sales of assets were $11.3 million in 2020, compared to $21.6 million in 2019, including $3.4 million from sales of real estate in 2019.

In 2020, we sold more trucks and fewer trailers than in 2019.

We realized significantly lower average gains per truck and slightly lower average gains per trailer sold in 2020 compared to 2019.

We experienced low demand for our used equipment in the first half of 2020.

Pricing in the market for our used trucks began to improve in third quarter 2020 and continued to improve through the end of 2020.

We currently expect gains on sales of equipment in 2021 to improve and to be in the range of $12 million to $15 million.

Increased costs associated with software consultant services also contributed to the increase in other operating expenses from 2019 to 2020.

Other Expense (Income)

Other expense (income) increased $3.2 million in 2019 compared to 2018 .

Interest expense increased $4.2 million in 2019 compared to 2018 due to higher average outstanding debt and was partially offset by higher interest income.

Other expense (income) decreased $0.8 million in 2020 compared to 2019.

Interest expense decreased $2.6 million in 2020 compared to 2019 due to lower average outstanding debt and was partially offset by lower interest income due to lower variable interest rates in 2020.

Income Tax Expense

Income tax expense decreased $0.8 million in 2019 compared to 2018 , due to lower pre-tax income and a slightly lower effective income tax rate in 2019 of 24.8% compared to 24.9% in 2018.

Income tax expense increased $0.7 million in 2020 compared to 2019, due to slightly higher pre-tax income.

Our effective income tax rate was 24.8% for both 2020 and 2019.

We currently estimate our full year 2021 effective income tax rate to be approximately 24.5% to 25.5%.

2019 Compared to 2018

For a comparison of the Company’s results of operations for the fiscal years ended December 31, 2017 to the year ended December 31, 2018, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations , in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, which was filed with the U.S.

Securities and Exchange Commission on March 1, 2019.

For a comparison of the Company’s results of operations for the fiscal year ended December 31, 2019 to the fiscal year ended December 31, 2018, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations , in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, which was filed with the U.S.

Securities and Exchange Commission on February 27, 2020.

Liquidity and Capital Resources:

During the year ended December 31, 2020, we generated cash flow from operations of $445.9 million, compared to $426.6 million during the year ended December 31, 2019.

This increase in net cash provided by operating activities resulted primarily from increased cash flows from working capital items, primarily accounts receivable, and higher non-cash depreciation, partially offset by higher income tax payments.

We were able to make net capital expenditures, pay dividends, and repurchase stock with the net cash provided by operating activities and existing cash balances, supplemented by net borrowings under our existing credit facilities.

Net cash used in investing activities decreased from $331.4 million during 2018 to $272.3 million during 2019.

This increase in net cash provided by operating activities primarily resulted from deferring payment of 2020 employer payroll taxes totaling approximately $29.3 million as permitted under the CARES Act, partially offset by higher income tax payments.

We were able to make net capital expenditures, repay debt, pay dividends, and repurchase stock with the net cash provided by operating activities and existing cash balances, supplemented by short-term borrowings under our existing credit facilities.

Net cash used in investing activities decreased to $263.3 million during 2020 from $272.3 million during 2019.

Net property additions (primarily revenue equipment) were $266.2 million for the year ended December 31, 2020, compared to $283.9 million during the same period of 2019.

As of December 31, 2019, we were committed to property and equipment purchases of approximately $113.4 million.

We currently estimate net capital expenditures (primarily revenue equipment) in 2021 to be in the range of $275 million to $300 million.

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

As of December 31, 2020, we were committed to property and equipment purchases of approximately $131.3 million.

Net financing activities used $186.0 million in 2020 and used $155.2 million in 2019.

During the year ended December 31, 2019, we borrowed $275.0 million of long-term debt and repaid $100.0 million of long-term debt.

During the year ended December 31, 2020, we borrowed $40.0 million of short-term debt and repaid $140.0 million of debt.

Our outstanding debt at December 31, 2020 totaled $200.0 million.

During 2018, we borrowed $110.0 million and repaid $60.0 million of debt.

We paid dividends of $286.2 million in 2019, including the special dividend and quarterly dividends, and $23.0 million in 2018.

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

Beginning with the dividend paid in July 2018, we increased our quarterly dividend rate by $0.02 per share, or 29%, to the current rate of $0.09 per share.

During 2019, we borrowed $275.0 million and repaid $100.0 million of long-term debt.

We paid dividends of $24.9 million in 2020 and $286.2 million in 2019, including the $261.1 million ($3.75 per share) special dividend in 2019 and quarterly dividends in both years.

Financing activities for 2020 also included common stock repurchases of 1,482,992 shares at a cost of $56.5 million.

1,300,000 shares were repurchased in 2019 at a cost of $42.3 million.

From time to time, the Company has repurchased, and may continue to repurchase, shares of the Company’s common stock.

The timing and amount of such purchases depends on stock market conditions and other factors.

The Company has repurchased, and may continue to repurchase, shares of the Company’s common stock.

The timing and amount of such purchases depends upon economic and stock market conditions and other factors.

On May 14, 2019, the Board of Directors approved a new stock repurchase program under which the Company is authorized to repurchase up to 5,000,000 shares of its common stock.

On the same day, the Board of Directors withdrew the previous stock repurchase authorization, which had 2,035,608 shares remaining available for repurchase.

As of December 31, 2020, the Company had purchased 2,182,992 shares pursuant to the new authorization and had 2,817,008 shares remaining available for repurchase.

Management believes our financial position at December 31, 2020 is strong.

As of December 31, 2019, we had $26.4 million of cash and cash equivalents and over $1.1 billion of stockholders’ equity.

As of December 31, 2020, we had $29.3 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 December 31, 2019, we had a total of $575.0 million of borrowing capacity under three credit facilities (see Note 4 in the Notes to Consolidated Financial Statements under Item 8 of Part II of this Form 10-K for information regarding our credit agreements as of December 31, 2019), of which we had borrowed $300.0 million.

Subsequent to the end of the year, in February 2020, we repaid $50.0 million of debt using cash provided by working capital activities to-date in 2020.

As of December 31, 2020, we had a total of $500.0 million of borrowing capacity under two credit facilities (see Note 5 in the Notes to Consolidated Financial Statements under Item 8 of Part II of this Form 10-K for information regarding our credit agreements as of December 31, 2020), of which we had borrowed $200.0 million.

Subsequent to the end of the year, in January 2021, we repaid $25.0 million of debt.

The remaining $300.0 million of credit available under these facilities at December 31, 2020 is reduced by the $50.9 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.

We believe our liquid assets, cash generated from operating activities, and borrowing capacity under our three credit facilities will provide sufficient funds for our planned operating and capital needs for the foreseeable future.

We believe our liquid assets, cash generated from operating activities, and borrowing capacity under our credit facilities will provide sufficient funds for our planned operating and capital needs for the foreseeable future.

Contractual Obligations and Commercial Commitments:

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Payments Due by Period

(Amounts in millions)

1 year (2020)

1-3 years (2021-2022)

3-5 years (2023-2024)

years (After 2024)

(Amounts in millions) Total Less than

1 year (2021) 1-3 years (2022-2023) 3-5 years (2024-2025) More

years (After 2025) Period

Contractual Obligations

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Total obligations $ 657.5 $ 214.7 $ 12.0 $ 427.9 $ 0.5 $ 2.4

As of December 31, 2019, we had unsecured committed credit facilities with three banks.

On May 14, 2019, we entered into new five-year, unsecured revolving credit facilities with Wells Fargo Bank, N.A.

and BMO Harris Bank N.A., replacing the previous credit facilities with both lenders.

We replaced our previous $100.0 million credit facility and $75.0 million term commitment with Wells Fargo Bank, N.A.

with a $300.0 million credit facility which will expire on May 14, 2024 .

Also on May 14, 2019, we replaced our previous $75.0 million credit facility with BMO Harris Bank N.A.

with a $200.0 million credit facility which will expire on May 14, 2024 .

We also had an unsecured line of credit of $75.0 million credit facility with U.S.

Bank N.A., which will expire on July 13, 2020 .

Borrowings under these credit facilities bear variable interest based on the London Interbank Offered Rate (“LIBOR”).

On July 2, 2019, we (i) terminated our previous $75.0 million interest rate swap agreement with Wells Fargo Bank, N.A., (ii) entered into a new $75.0 million interest rate swap agreement with Wells Fargo Bank, N.A., and (iii) entered into a $75.0 million interest rate swap agreement with BMO Harris Bank N.A.

As of December 31, 2019, our outstanding debt totaled $300.0 million .

We had $150.0 million million outstanding under the credit facilities at a weighted average variable interest rate of 2.33% as of December 31, 2019.

We had (i) an additional $75.0 million outstanding under the Wells Fargo Bank, N.A.

credit facility at a variable rate of 2.39% as of December 31, 2019, which is effectively fixed at 2.32% with an interest rate swap agreement through May 14, 2024 and (ii) an additional $75.0 million outstanding under the BMO Harris Bank N.A.

credit facility at a variable rate of 2.40% as of December 31, 2019, which is effectively fixed at 2.36% with an interest rate swap agreement through May 14, 2024.

Interest payments on debt are based on the debt balance and interest rates at December 31, 2019.

The borrowing capacity under these credit facilities is further reduced by the amount of stand-by letters of credit under which we are obligated.

The stand-by letters of credit are primarily required for insurance policies.

The unused lines of credit are available to us in the event we need financing for the replacement of our fleet or for other significant capital expenditures.

Operating lease obligations represent the future monthly rental payments for facilities.

Property and equipment purchase commitments relate to committed equipment expenditures, primarily for revenue equipment.

See the Notes to Consolidated Financial Statements under Item 8 of Part II of this Form 10-K for information regarding our credit agreements (Note 5), our leasing arrangements (Note 3), and our purchase commitments (Note 9).

As of December 31, 2020, we had recorded a $2.4 million liability for unrecognized tax benefits.

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Estimates of accrued liabilities for insurance and claims for bodily injury, property damage and workers’ compensation is a critical accounting estimate that requires us to make significant judgments and estimates and affects our financial statements.

The accruals for bodily injury, property damage and workers’ compensation (current and non-current) are recorded at the estimated ultimate payment amounts and are based upon individual case estimates and actuarial estimates of incurred-but-not-reported losses using loss development factors based upon past experience.

In order to determine the loss development factors, we make judgments relating to the comparability of historical claims to current incurred-but-not-reported losses.

The accruals for bodily injury, property damage and workers’ compensation (current and non-current) are recorded at the estimated ultimate payment amounts and are based upon individual case estimates and actuarial estimates of loss development for reported losses and incurred-but-not-reported losses using loss development factors based upon past experience.

In order to determine the loss development factors, we make judgments relating to the comparability of historical claims to current claims.

These judgments consider the nature, frequency, severity, and age of claims, and industry, regulatory, and company-specific trends impacting the development of claims.

6 unchanged sentences

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-K

Item 7. Management’s Discussion and Analysis