What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-11-09 compared with 2021-08-05 · 142 added, 132 removed, 210 unchanged (57% of the section changed)

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ECM Acquisition:

On July 1, 2021, Werner acquired an 80% equity ownership interest in ECM Transport Group (“ECM”) for a cash purchase price of $142.4 million.

ECM achieved revenues of $108 million in 2020 with an operating margin 19.8%.

On July 1, 2021, Werner acquired an 80% equity ownership interest in ECM Transport Group (“ECM”) for a cash purchase price of $141.3 million after net working capital changes and net of cash acquired.

ECM achieved revenues of $108 million in 2020 with an operating margin of 19.8%.

ECM consists of ECM Transport and Motor Carrier Service (MCS), which are regional truckload carriers that together operate nearly 500 trucks and 2,000 trailers in the Mid-Atlantic, Ohio and Northeast regions of the U.S.

with low driver turnover.

Future revenues generated by ECM and MCS will be reported in One-Way Truckload within our TTS segment.

Werner financed the transaction through a combination of cash on hand, existing credit facilities and a new $100.0 million fixed-rate term loan maturing in May 2024 with BMO Harris Bank N.A., one of Werner’s two lead banks.

The remaining 20% ownership interest in ECM will be retained by Ed Meier, founder and President of ECM.

Werner Enterprises retains an exclusive option to buy the remaining 20% of ECM Transport Group after a period of five years.

Revenues generated by ECM and MCS are reported in One-Way Truckload within our TTS segment.

Werner financed the transaction through a combination of cash on hand, existing credit facilities and a new $100.0 million unsecured fixed-rate term loan maturing in May 2024 with BMO Harris Bank N.A., one of Werner’s two lead banks.

The remaining 20% ownership interest in ECM is retained by Ed Meier, founder and President of ECM.

We have two reportable segments, Truckload Transportation Services (“TTS”) and Werner Logistics, and we operate in the truckload and logistics sectors of the transportation industry.

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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.

To mitigate our risk to fuel price increases, we recover from our customers additional fuel surcharge revenues that generally recoup a majority of the increased fuel costs;

To mitigate our risk to fuel price increases, we recover additional fuel surcharge revenues from our customers that generally recoup a majority of the increased fuel costs;

however, we cannot assure that current recovery levels will continue in future periods.

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and associate health claims (supplemented by premium-based insurance coverage above certain dollar levels).

For that reason,

our financial results may also be affected by driver safety, medical costs, weather, legal and regulatory environments and insurance coverage costs to protect against catastrophic losses.

For that reason, our financial results may also be affected by driver safety, medical costs, weather, legal and regulatory environments and insurance coverage costs to protect against catastrophic losses.

The operating ratio is a common industry measure used to evaluate our profitability and that of our TTS segment operating fleets.

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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 2021 to second quarter 2020, 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 2021 to third quarter 2020, 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 and tightening of the commercial truck liability insurance market.

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We provide non-trucking services primarily through the three operating units within our Werner Logistics segment (Truckload Logistics, Intermodal, and Final Mile).

In first quarter 2021, we completed the previously-announced sale of the WGL freight forwarding services for international ocean and air shipments to Scan Global Logistics Group.

In first quarter 2021, we completed the previously-announced sale of the Werner Global Logistics (“WGL”) freight forwarding services for international ocean and air shipments to Scan Global Logistics Group.

WGL had annual revenues of $53 million in 2020, and we realized a $1.0 million gain from the sale in first quarter 2021.

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This expense item is recorded as rent and purchased transportation expense.

Other operating expenses consist primarily of salaries, wages and benefits.

We evaluate the Werner Logistics segment’s financial performance by reviewing the gross margin percentage (revenues less rent and purchased transportation expenses expressed as a percentage of revenues) and the operating income percentage.

The gross margin percentage can be impacted by the rates charged to customers and the costs of securing third-party capacity.

Other operating expenses consist primarily of salaries, wages and benefits as well as depreciation, supplies and maintenance and other general expenses.

We evaluate the Werner Logistics segment’s financial performance by reviewing operating expenses and operating income expressed as a percentage of revenues.

Rent and purchased transportation expenses as a percentage of revenues can be impacted by the rates charged to customers and the costs of securing third-party capacity.

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.

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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, enabled us to more effectively manage through the difficult economic environment created by the pandemic.

While there remain significant uncertainties related to COVID-19 and its effect on the economy, we believe that demand for our services will continue to be strong during the remainder of 2021.

While there remain significant uncertainties related to COVID-19 and its effect on the economy, we believe that demand for our services will continue to be strong during the remainder of 2021 and into 2022.

Results of Operations:

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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

2021 2020 2021 2020 3ME 9ME

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Insurance and claims 27,702 4.0 23,307 4.0 70,497 3.6 85,160 4.9 18.9 (17.2)

Depreciation 63,865 9.8 67,670 11.9 127,816 10.1 136,507 11.8 (5.6) (6.4)

Depreciation and amortization 68,615 9.8 62,980 10.7 196,431 10.0 199,487 11.4 8.9 (1.5)

Rent and purchased transportation 161,061 22.9 131,843 22.3 458,474 23.3 378,989 21.6 22.2 21.0

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Net income 65,089 9.3 46,332 7.9 183,613 9.3 108,522 6.2 40.5 69.2

Net income attributable to noncontrolling interest (1,328) (0.2) — — (1,328) — — — N/A N/A

Net income attributable to Werner $ 63,761 9.1 $ 46,332 7.9 $ 182,285 9.3 $ 108,522 6.2 37.6 68.0

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.

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2021 2020 2021 2020

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Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

Truckload Transportation Services segment 2021 2020 % Change 2021 2020 % Change

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(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.

The following tables set forth the Werner Logistics segment’s revenues, operating expenses and operating income (loss), as well as certain statistical data regarding the Werner Logistics segment.

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2021 2020 2021 2020

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Operating revenues $ 157,968 100.0 $ 117,351 100.0 $ 437,494 100.0 $ 339,678 100.0

Operating expenses:

Rent and purchased transportation expense 134,972 85.5 104,626 89.2 379,887 86.8 293,400 86.4

Gross margin 17,285 12.2 17,321 15.7 34,611 12.4 33,553 15.1

Other operating expenses 15,346 9.7 13,577 11.5 41,456 9.5 42,906 12.6

Operating income $ 3,927 2.8 $ 3,139 2.8 $ 8,501 3.0 $ 4,224 1.9

Total operating expenses 150,318 95.2 118,203 100.7 421,343 96.3 336,306 99.0

Operating income (loss) $ 7,650 4.8 $ (852) (0.7) $ 16,151 3.7 $ 3,372 1.0

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

Werner Logistics segment 2021 2020 % Change 2021 2020 % Change

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Total trailers (at quarter end) 1,515 1,325 14.3 % 1,515 1,325 14.3 %

Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020

Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020

Operating Revenues

Operating revenues increased 14.2% for the three months ended June 30, 2021, compared to the same period of the prior year.

When comparing second quarter 2021 to second quarter 2020, TTS segment revenues increased $46.1 million, or 10.4%, and Werner Logistics revenues increased $31.5 million, or 28.6%.

Our results in second quarter 2021 reflect strong freight market conditions in a strengthening economy and tight driver market.

Operating revenues increased 19.1% for the three months ended September 30, 2021, compared to the same period of the prior year.

When comparing third quarter 2021 to third quarter 2020, TTS segment revenues increased $69.4 million, or 15.2%, and Werner Logistics revenues increased $40.6 million, or 34.6%.

Our results in third quarter 2021 reflect strong freight market conditions in a very challenging driver market.

Freight demand in our One-Way Truckload fleet was strong.

This trend has continued during third quarter to-date.

In our Dedicated fleet, freight demand remained strong in second quarter 2021.

Improving demand from a rapidly recovering economy, combined with several factors that are limiting capacity, resulted in a robust second quarter freight market.

Trucking revenues, net of fuel surcharge, increased 5.3% in second quarter 2021 compared to second quarter 2020 due to a 6.7% increase in average revenues per tractor per week, net of fuel surcharge, partially offset by a 1.3% decrease in the average number of tractors in service.

The increase in average revenues per tractor was due primarily to improved pricing in both Dedicated and One-Way Truckload, offset by a decline in miles per truck from an increased mix of Dedicated trucks to total trucks and fewer team drivers.

We currently expect average revenues per total mile for the One-Way Truckload fleet for the second half of 2021 to increase in a range of 16% to 19% when compared to the same period in 2020, and we currently expect Dedicated average revenues per truck per week to increase in a range of 3% to 5% in 2021 compared to 2020.

The average number of tractors in service in the TTS segment decreased 1.3% to 7,664 in second quarter 2021 from 7,762 in second quarter 2020, impacted by the extremely difficult driver recruiting market.

We ended second quarter 2021 with 7,645 trucks in the TTS segment, a year-over-year decrease of 5 trucks compared to the end of second quarter 2020, and a sequential decrease of 90 trucks compared to the end of first quarter 2021.

Within TTS, our Dedicated unit ended second quarter 2021 with 5,040 trucks (or 66% of our total TTS segment trucks) compared to 4,535 trucks (or 59%) a year ago.

We currently expect truck growth in 2021 to be from our 500-truck acquisition of ECM and expect our truck count at the end of 2021 to be in the range of 1% to 4% higher when compared to the fleet size at year-end 2020.

This trend has continued during fourth quarter to-date.

In our Dedicated fleet, freight demand remained strong in third quarter 2021.

Strong consumer demand, combined with several factors that are limiting capacity, including an extremely competitive driver market and shortfalls in new truck builds, resulted in a robust third quarter freight market.

Trucking revenues, net of fuel surcharge, increased 10.6% in third quarter 2021 compared to third quarter 2020 due to a 7.2% increase in the average number of tractors in service and a 3.2% 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, offset by a decline in miles per truck caused by fleet mix changes, trucks down due to equipment parts shortages, more drivers unavailable to work due to COVID quarantine protocols and other factors.

We currently expect average revenues per total mile for the One-Way Truckload fleet for the fourth quarter 2021 to increase in a range of 17% to 19% when compared to fourth quarter 2020, and we currently expect Dedicated average revenues per truck per week to increase in a range of 1% to 2% in fourth quarter 2021 compared to fourth quarter 2020.

The average number of tractors in service in the TTS segment increased 7.2% to 8,161 in third quarter 2021 from 7,615 in third quarter 2020, primarily resulting from the 500 trucks acquired in the ECM acquisition.

We ended third quarter 2021 with 8,220 trucks in the TTS segment, a year-over-year increase of 510 trucks compared to the end of third quarter 2020, and a sequential increase of 575 trucks compared to the end of second quarter 2021.

Within TTS, our Dedicated unit ended third quarter 2021 with 5,120 trucks (or 62% of our total TTS segment trucks) compared to 4,715 trucks (or 61%) a year ago.

While we currently expect a flat to slightly lower truck count in fourth quarter 2021, we expect our truck count at the end of 2021 to be in a range of 3% to 5% 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.

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 increased 67.9% to $57.4 million in second quarter 2021 from $34.2 million in second quarter 2020 due primarily to higher average diesel fuel prices, partially offset by fewer miles in second quarter 2021.

Trucking fuel surcharge revenues increased 65.1% to $60.8 million in third quarter 2021 from $36.8 million in third quarter 2020 due primarily to higher average diesel fuel prices, partially offset by fewer miles in third quarter 2021.

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 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.

To lessen the effect of fluctuating fuel prices on our margins, we collect fuel surcharge revenues from our customers for the cost of

diesel fuel and taxes in excess of specified base fuel price levels according to terms in our customer contracts.

Fuel surcharge rates generally adjust weekly based on an independent U.S.

Department of Energy fuel price survey which is released every Monday.

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Werner Logistics revenues 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 $193 thousand in second quarter 2021 and $14 thousand in second quarter 2020 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 2021, Werner Logistics revenues increased $31.5 million, or 28.6%, due to higher pricing and volume growth in Truckload Logistics and Intermodal.

Truckload Logistics revenues (69% of total Logistics revenues) increased by 49%.

Truckload Logistics volume increased 10% in second quarter 2021, and revenues per shipment increased 37%.

Intermodal revenues (29% of Logistics revenues) increased 52% in second quarter 2021, due to volume growth of 30% and 17% higher revenues per shipment.

The Werner Logistics gross margin dollars remained flat at $17.3 million for second quarter 2021 and second quarter 2020.

The Werner Logistics gross margin percentage in second quarter 2021 of 12.2% decreased from 15.7% in second quarter 2020 due to higher spot truckload and intermodal dray rates which significantly increased the cost of capacity for contractual brokerage shipments and Intermodal shipments in second quarter 2021.

The Werner Logistics operating margin percentage of 2.8% in second quarter 2021 remained flat, while operating income increased 25% to $3.9 million as other operating expenses declined 6% due to improved automation and efficiency.

Werner Logistics also recorded revenue and brokered freight expense of $212 thousand in third quarter 2021 and $30 thousand in third quarter 2020 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 2021, Werner Logistics revenues increased $40.6 million, or 34.6%, due to higher pricing and volume growth in Truckload Logistics and higher pricing in Intermodal, partially offset by a decrease in Intermodal volume.

Truckload Logistics revenues (73% of total Logistics revenues) increased by 63% in third quarter 2021.

Truckload Logistics volume increased 23% in third quarter 2021, and revenues per shipment increased 33%.

Intermodal revenues (25% of Logistics revenues) increased 19% in third quarter 2021, due to 25% higher revenues per shipment, partially offset by a decrease in volume of 5% due primarily to a decline in rail velocity, chassis shortages and increased dwell throughout the rail and customer networks.

The Werner Logistics operating margin percentage of 4.8% in third quarter 2021 increased from (0.7)%, while operating income increased to $7.7 million.

We continue to expect our Werner Logistics segment to achieve inflated growth through this capacity-constrained period.

Operating Expenses

Our operating ratio (operating expenses expressed as a percentage of operating revenues) was 88.2% for the three months ended June 30, 2021 and 90.7% for the three months ended June 30, 2020.

Our operating ratio (operating expenses expressed as a percentage of operating revenues) was 89.9% for the three months ended September 30, 2021 and 89.5% for the three months ended September 30, 2020.

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

The tables on pages 24 through 26 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 increased $15.1 million or 7.8% in second quarter 2021 compared to second quarter 2020 and decreased 1.9% as a percentage of operating revenues to 32.4%.

The higher dollar amount of salaries, wages and benefits expense in the second quarter of 2021 was due primarily to increased driver pay rates, partially offset by 6.8 million fewer company truck miles in second quarter 2021.

In January 2021, we implemented driver pay increases of approximately $10 million annually in our One-Way Truckload fleet, and will implement another pay increase in August of approximately $11 million annually.

Within Dedicated, we continue to implement pay increases as needed.

As a result, driver pay per company driver mile increased nearly 11% in second quarter 2021.

Non-driver salaries, wages and benefits in the non-trucking Werner Logistics segment decreased 8.2%, due primarily to increased automation and improved operational efficiency.

Salaries, wages and benefits increased $37.1 million or 18.8% in third quarter 2021 compared to third quarter 2020 and decreased 0.1% as a percentage of operating revenues to 33.3%.

The higher dollar amount of salaries, wages and benefits expense in the third quarter of 2021 was due primarily to increased driver pay, including:

(i) driver pay rate increases, (ii) incentive recruiting bonuses, and (iii) minimum pay guarantees, and higher benefits expense, including group health insurance.

These increases were partially offset by 2.3 million fewer company truck miles in third quarter 2021.

In January 2021, we implemented driver pay increases of approximately $10 million annually in our One-Way Truckload fleet, and another driver pay increase in August 2021 of approximately $11 million annually.

Within Dedicated, we continue to implement driver pay increases as needed.

As a result, driver pay per company driver mile increased nearly 20% in third quarter 2021.

Non-driver salaries, wages and benefits in the non-trucking Werner Logistics segment increased 10.3%.

We renewed our workers’ compensation insurance coverage on April 1, 2021.

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Our workers’ compensation insurance premiums for the policy year beginning April 2021 are $0.3 million higher than the premiums for the previous policy year.

The rapidly recovering economy combined with a severely constrained driver market is presenting labor challenges for customers and carriers alike and became more challenging in second quarter 2021, as the improving freight market caused increased competition for the finite number of experienced drivers that meet our hiring standards.

Strong consumer demand combined with a severely constrained driver market is presenting labor challenges for customers and carriers alike and became more challenging in third quarter 2021, as the strong 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, 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 increased $27.9 million or 90.7% in second quarter 2021 compared to second quarter 2020 and increased 3.6% as a percentage of operating revenues to 9.0% due to higher average diesel fuel prices, partially offset by approximately 6.8 million

fewer company truck miles in second quarter 2021.

Average diesel fuel prices were $1.09 per gallon higher in second quarter 2021 than in second quarter 2020 and were 26 cents per gallon higher than in first quarter 2021.

Fuel increased $26.8 million or 70.5% in third quarter 2021 compared to third quarter 2020 and increased 2.8% as a percentage of operating revenues to 9.2% due to higher average diesel fuel prices, partially offset by approximately 2.3 million fewer

company truck miles in third quarter 2021.

Average diesel fuel prices were 96 cents per gallon higher in third quarter 2021 than in third quarter 2020 and were 12 cents per gallon higher than in second quarter 2021.

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.

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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 2021, the average diesel fuel price per gallon was approximately 93 cents higher than the average diesel fuel price per gallon in July 2020 and approximately 95 cents higher than in third quarter 2020.

For October 2021, the average diesel fuel price per gallon was approximately $ 1.34 highe r than the average diesel fuel price per gallon in October 2020 and approximately $1.21 hi gher than in fourth quarter 2020.

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

We are unable to predict whether fuel price levels will increase or decrease in the future or the extent to which fuel surcharges will be collected from customers.

As of June 30, 2021, we had no derivative financial instruments to reduce our exposure to fuel price fluctuations.

Supplies and maintenance increased $6.1 million or 14.0% in second quarter 2021 compared to second quarter 2020 and remained flat as a percentage of operating revenues.

The higher dollar amount of supplies and maintenance expense was due primarily to higher driver and placement driver-related costs such as driver lodging and advertising.

Insurance and claims decreased $5.1 million or 19.6% in second quarter 2021 compared to second quarter 2020 and decreased 1.3% as a percentage of operating revenues due primarily to a lower amount of unfavorable reserve development on large dollar claims, partially offset by higher liability insurance premiums of $2.0 million.

We also incurred insurance and claims expense of $1.3 million in second quarter 2021 and $1.2 million in second quarter 2020 for accrued interest related to a previously-disclosed adverse jury verdict rendered May 17, 2018, which we are appealing (see Note 6 in the Notes to Consolidated Financial Statements (Unaudited) set forth in Part I of this report).

As of September 30, 2021, we had no derivative financial instruments to reduce our exposure to fuel price fluctuations.

Supplies and maintenance increased $13.1 million or 29.7% in third quarter 2021 compared to third quarter 2020 and increased 0.6% as a percentage of operating revenues.

The higher dollar amount of supplies and maintenance expense was due primarily to higher maintenance costs, driver lodging expenses and driver sourcing costs.

Our driver sourcing costs were higher due to startup costs for our new and planned driving school location additions.

Insurance and claims increased $4.4 million or 18.9% in third quarter 2021 compared to third quarter 2020 and remained flat as a percentage of operating revenues due primarily to a higher amount of unfavorable reserve development on large dollar claims and higher liability insurance premiums of $1.9 million.

We also incurred insurance and claims expense of $1.3 million in third quarter 2021 and $1.2 million in third quarter 2020 for accrued interest 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 (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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Our liability insurance premiums for the policy year that began August 1, 2021 are $7.0 million higher than premiums for the previous policy year.

Depreciation expense decreased $3.8 million or 5.6% in second quarter 2021 compared to second quarter 2020 and decreased 2.1% as a percentage of operating revenues.

Depreciation and amortization expense increased $5.6 million or 8.9% in third quarter 2021 compared to third quarter 2020 and decreased 0.9% as a percentage of operating revenues due primarily to depreciation and amortization on assets recorded in the ECM acquisition, partially offset by the impact of a change in accounting estimate that was made in the first quarter 2020, which increased third quarter 2020 depreciation expense by $0.9 million.

During first quarter 2020, we changed the estimated life of certain trucks to be sold in 2020 to more rapidly depreciate these truck 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 all were sold in 2020.

The effect of this change in accounting estimate increased second quarter 2020 depreciation expense by $3.7 million and had no effect on second quarter 2021.

The average age of our truck fleet remains low by industry standards and was 2.0 years as of June 30, 2021, and the average age of our trailers was 4.1 years.

This change in accounting estimate had no effect on third quarter 2021.

The average age of our truck fleet remains low by industry standards and was 2.1 years as of September 30, 2021, and the average age of our trailers was 4.4 years.

We are continuing to invest in new trucks and trailers and our terminals in 2021 to improve our driver experience, increase operational efficiency and more effectively manage our maintenance, safety and fuel costs.

During the remainder of 2021, we expect the average age of our truck and trailer fleet to remain at or near current levels.

Rent and purchased transportation expense increased $30.2 million or 25.0% in second quarter 2021 compared to second quarter 2020 and increased 2.0% as a percentage of operating revenues.

During the remainder of 2021, we expect the average age of our truck and trailer fleet to remain at or near current levels, subject to potential delays in receiving new equipment.

Rent and purchased transportation expense increased $29.2 million or 22.2% in third quarter 2021 compared to third quarter 2020 and increased 0.6% 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 increased $31.5 million, and as a percentage of Werner Logistics revenues increased to 87.8%

in second quarter 2021 from 84.3% in second quarter 2020, due primarily to higher spot truckload and intermodal dray rates which significantly increased the cost of capacity for contractual brokerage shipments and intermodal shipments in second quarter 2021.

Rent and purchased transportation expense for the TTS segment decreased $1.0 million in second quarter 2021 compared to second quarter 2020.

Independent contractor miles decreased approximately 5.5 million miles in second quarter 2021 and as a percentage of total miles were 6.2% in second quarter 2021 compared to 8.5% in second quarter 2020.

The lower expense resulting from fewer independent contractor miles was partially offset by an increase in the per-mile settlement rate for certain independent contractors in first quarter 2021 and higher average diesel fuel prices.

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 increased $30.3 million, and as a percentage of Werner Logistics revenues decreased to 85.5% in third quarter 2021 from 89.2% in third quarter 2020.

Rent and purchased transportation expense for the TTS segment decreased $1.4 million in third quarter 2021 compared to third quarter 2020.

Independent contractor miles decreased approximately 5.9 million miles in third quarter 2021 and as a percentage of total miles were 5.5% in third quarter 2021 compared to 8.2% in third quarter 2020.

The lower expense resulting from fewer independent contractor miles was partially offset by an increase in the per-mile settlement rate for certain independent contractors effective in first quarter 2021 and higher average 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 decreased $13.2 million in second quarter 2021 compared to second quarter 2020 and decreased 2.2% as a percentage of operating revenues.

Other operating expenses decreased $12.9 million in third quarter 2021 compared to third quarter 2020 and decreased 1.9% 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 $13.5 million in second quarter 2021, compared to $0.9 million in second quarter 2020.

Gains on sales of assets were $15.3 million in third quarter 2021, compared to $3.9 million in third quarter 2020.

We realized substantially higher average gains per truck and trailer due to significantly improved pricing in the market for our used equipment, which we believe is a temporary result of increased demand for previously used equipment because of production delays limiting availability of new equipment in the industry.

We sold more trucks and fewer trailers in second quarter 2021 than in second quarter 2020.

We sold fewer trucks and trailers in third quarter 2021 than in third quarter 2020.

We expect gains on sales of assets to decrease to a range of $10 million to $12 million in fourth quarter 2021, as we anticipate selling fewer used trucks and trailers due to continued production delays lowering our new truck and trailer deliveries.

Other Expense (Income)

Other expense (income) decreased $20.6 million in second quarter 2021 compared to second quarter 2020.

We recognized a $20.2 million unrealized gain on our minority equity investment in TuSimple, an autonomous technology company, in second quarter 2021.

We record changes in the value of our investment based on the share price reported by Nasdaq (see Note 4 in the Notes to Consolidated Financial Statements (Unaudited) set forth in Part I of this report).

Interest expense decreased $0.5 million in second quarter 2021 compared to second quarter 2020 due to lower average outstanding debt in the 2021 period.

Our effective income tax rate (income taxes expressed as a percentage of income before income taxes) was 25.5% in second quarter 2021 compared to 24.8% in second quarter 2020.

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, 2021 Compared to Six Months Ended June 30, 2020

Other expense (income) decreased $15.7 million in third quarter 2021 compared to third quarter 2020 due primarily to a $16.1 million net unrealized gain recognized on our investments in Mastery Logistics Systems, Inc.

(“MLSI”), a transportation management systems company, and TuSimple, an autonomous technology company, in third quarter 2021 (see Note 6 in the Notes to Consolidated Financial Statements (Unaudited) set forth in Part I of this report).

Interest expense increased $0.4 million in third quarter 2021 compared to third quarter 2020 due to higher average outstanding debt in the 2021 period.

Our effective income tax rate (income taxes expressed as a percentage of income before income taxes) was 24.6% in both third quarter 2021 and third quarter 2020.

Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020

Operating Revenues

Operating revenues increased 9.0% for the six months ended June 30, 2020, compared to the same period of the prior year.

In the TTS segment, trucking revenues, net of fuel surcharge, increased $23.2 million, or 2.8%, due primarily to a 4.0% increase in average revenues per tractor per week, partially offset by a 1.1% decrease in average tractors in service.

TTS segment fuel surcharge revenues for the six months ended June 30, 2021 increased $19.6 million or 23.0% when compared to the six months ended June 30, 2020 due to higher average diesel fuel prices in the 2021 period.

When comparing the first six months of 2021 to the first six months of 2020, TTS segment revenues increased $44.2 million, or 4.9%, and Werner Logistics revenues increased $57.2 million, or 25.7%.

Operating revenues increased 12.4% for the nine months ended September 30, 2021, compared to the same period of the prior year.

When comparing the first nine months of 2021 to the first nine months of 2020, TTS segment revenues increased $113.7 million, or 8.3%, and Werner Logistics revenues increased $97.8 million, or 28.8%.

In the TTS segment, trucking revenues, net of fuel surcharge, increased $67.3 million, or 5.5%, due primarily to a 3.8% increase in average revenues per tractor per week and a 1.6% increase in average tractors in service.

TTS segment fuel surcharge revenues for the nine months ended September 30, 2021 increased $43.6 million or 35.7% when compared to the nine months ended September 30, 2020 due to higher average diesel fuel prices in the 2021 period.

Operating Expenses

Our operating ratio (operating expenses expressed as a percentage of operating revenues) was 89.0% for the six months ended June 30, 2021 and 92.8% for the six months ended June 30, 2020.

Our operating ratio (operating expenses expressed as a percentage of operating revenues) was 89.3% for the nine months ended September 30, 2021 and 91.7% for the nine months ended September 30, 2020.

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 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 increased $14.0 million or 3.5% in the first six months of 2021 compared to first six months of 2020 and decreased 1.7% as a percentage of operating revenues to 32.8%.

The higher dollar amount of salaries, wages and benefits expense was due primarily to increased driver pay rates, partially offset by 18.8 million fewer company truck miles in the first six months of 2021.

As a result, driver pay per company driver mile increased nearly 9% in the first six months of 2021.

The tables on pages 24 through 26 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 increased $51.1 million or 8.5% in the first nine months of 2021 compared to first nine months of 2020 and decreased 1.1% as a percentage of operating revenues to 33.0%.

The higher dollar amount of salaries, wages and benefits expense was due primarily to increased driver pay rates and higher benefits expense, partially offset by 21.1 million fewer company truck miles in the first nine months of 2021.

As a result, driver pay per company driver mile increased 12% in the first nine months of 2021.

Non-driver salaries, wages and benefits in the non-trucking Werner Logistics segment decreased 3.4%.

Fuel increased $29.9 million or 37.6% in the first six months of 2021 compared to the same period in 2020 and increased 1.8% as a percentage of operating revenues due to higher average diesel fuel prices, partially offset by approximately 18.8 million fewer company truck miles in the first six months of 2021.

Average diesel fuel prices were 66 cents per gallon higher in the first six months of 2021 than in the same 2020 period.

Supplies and maintenance increased $6.5 million or 7.3% in the first six months of 2021 compared to same period in 2020 and decreased 0.2% as a percentage of operating revenues.

Fuel increased $56.7 million or 48.3% in the first nine months of 2021 compared to the same period in 2020 and increased 2.1% as a percentage of operating revenues due to higher average diesel fuel prices, partially offset by approximately 21.1 million fewer company truck miles in the first nine months of 2021.

Average diesel fuel prices were 76 cents per gallon higher in the first nine months of 2021 than in the same 2020 period.

Supplies and maintenance increased $19.5 million or 14.7% in the first nine months of 2021 compared to same period in 2020 and increased 0.1% as a percentage of operating revenues.

The higher dollar amount of supplies and maintenance expense was due primarily to higher driver and placement driver-related costs such as driver lodging and advertising.

Insurance and claims decreased $19.1 million or 30.8% in the first six months of 2021 compared to the same period in 2020 and decreased 1.9% as a percentage of operating revenues due primarily to lower expense for new large dollar claims and a lower amount of unfavorable development on large dollar claims, partially offset by higher liability insurance premiums of $4.0 million.

Insurance and claims decreased $14.7 million or 17.2% in the first nine months of 2021 compared to the same period in 2020 and decreased 1.3% as a percentage of operating revenues due primarily to lower expense for new large dollar claims and a lower amount of unfavorable development on large dollar claims, partially offset by higher liability insurance premiums of $5.9 million.

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

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

Depreciation expense decreased $8.7 million or 6.4% in the first six months of 2021 compared to the same period in 2020 and decreased 1.7% as a percentage of operating revenues.

Depreciation and amortization expense decreased $3.1 million or 1.5% in the first nine months of 2021 compared to the same period in 2020 and decreased 1.4% as a percentage of operating revenues due primarily to the impact of a change in accounting estimate that was made in the first quarter 2020, which increased depreciation expense for the first nine months of 2020 by $9.6 million.

The impact of the prior year increase in depreciation was partially offset by depreciation and amortization on assets recorded in the ECM acquisition.

These trucks continued to depreciate at the same higher rate per truck until all were sold in 2020.

The effect of this change in accounting estimate increased the first six months of 2020 depreciation expense by $8.7 million and had no effect on 2021.

Rent and purchased transportation expense for the TTS segment decreased $5.4 million in the first six months of 2021 compared to the same period in 2020.

Independent contractor miles decreased approximately 11.3 million miles in the six months ended June 30, 2021.

This change in accounting estimate had no effect on the first nine months of 2021.

Rent and purchased transportation expense for the TTS segment decreased $6.8 million in the first nine months of 2021 compared to the same period in 2020.

Independent contractor miles decreased approximately 17.2 million miles in the nine months ended September 30, 2021.

Werner Logistics rent and purchased transportation expense increased $86.5 million as a result of higher logistics revenues and higher spot truckload and dray rates and increased to 86.8% as a percentage of Werner Logistics revenues in the 2021 period from 86.4% in the 2020 period.

Other operating expenses decreased $22.9 million in the first six months of 2021 compared to the same period in 2020 and decreased 1.9% as a percentage of operating revenues.

Gains on sales of assets were $25.0 million in the six months ended June 30, 2021, compared to $3.4 million in the six months ended June 30, 2020.

We realized substantially higher average gains per truck and trailer due to improved pricing in the market for our used equipment.

We sold more trucks and fewer trailers in the first six months of 2021 than in the same period in 2020.

Other operating expenses decreased $35.8 million in the first nine months of 2021 compared to the same period in 2020 and decreased 1.9% as a percentage of operating revenues.

Gains on sales of assets were $40.3 million in the nine months ended September 30, 2021, compared to $7.3 million in the nine months ended September 30, 2020.

We realized substantially higher average gains per truck and trailer due to improved pricing in the market for our used equipment, which we believe is a temporary result of increased demand for previously used equipment because of production delays limiting availability of new equipment in the industry.

We sold more trucks and fewer trailers in the first nine months of 2021 than in the same period in 2020.

We also realized a $1.0 million gain from the sale of WGL in first quarter 2021.

Other Expense (Income)

Other expense (income) decreased $21.0 million in the first six months of 2021 compared to the same 2020 period due primarily to the aforementioned $20.2 million unrealized gain on our equity investment.

Interest expense decreased $1.2 million in the first six months of 2021 compared to the first six months of 2020 due to lower average outstanding debt in the 2021 period.

Our effective income tax rate (income taxes expressed as a percentage of income before income taxes) was 25.2% for the first six months of 2021 compared to 24.2% for the first six months of 2020.

Other expense (income) decreased $36.7 million in the first nine months of 2021 compared to the same 2020 period due primarily to $36.3 million net unrealized gains recognized on our investments in MLSI and TuSimple in the first nine months of 2021.

Interest expense decreased $0.8 million in the first nine months of 2021 compared to the first nine months of 2020 due to a decrease in the average effective interest rate on our variable-rate debt in the 2021 period.

Our effective income tax rate (income taxes expressed as a percentage of income before income taxes) was 25.0% for the first nine months of 2021 compared to 24.4% for the first nine months of 2020.

The higher income tax rate in the year-to-date 2021 period was attributed primarily to a lower amount of favorable discrete income tax items in the 2021 period.

Liquidity and Capital Resources:

During the six months ended June 30, 2021, we generated cash flow from operations of $189.5 million, a 34.1% or $97.9 million decrease in cash flows compared to the same six-month period a year ago.

The decrease in net cash provided by operating activities was due primarily to working capital changes resulting from the timing of federal and state estimated income tax payments and changes in accounts receivable, partially offset by higher net income.

During the nine months ended September 30, 2021, we generated cash flow from operations of $253.3 million, a 26.9% or $93.1 million decrease in cash flows compared to the same nine-month period a year ago.

The decrease in net cash provided by operating activities was due primarily to working capital changes resulting from changes in accounts receivable and higher federal and state estimated income tax payments.

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 was $104.6 million for the six-month period ended June 30, 2021 compared to $103.2 million for the six-month period ended June 30, 2020.

Net property additions (primarily revenue equipment) were $102.9 million for the six-month period ended June 30, 2021, compared to $107.6 million during the same period of 2020.

Net cash used in investing activities was $308.9 million for the nine-month period ended September 30, 2021 compared to $181.0 million for the nine-month period ended September 30, 2020.

Net cash invested in our ECM acquisition was $141.3 million.

Net property additions (primarily revenue equipment) were $162.7 million for the nine-month period ended September 30, 2021, compared to $187.3 million during the same period of 2020.

We currently estimate net capital expenditures (primarily revenue equipment) in 2021 to be in the range of $250 million to $275 million, compared to net capital expenditures in 2020 of $266.2 million.

We expect to receive fewer new trucks and trailers in 2021 than originally planned, because of resource challenges experienced by our equipment manufacturers.

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 June 30, 2021, we were committed to property and equipment purchases of approximately $269.8 million.

Net financing activities provided $77.8 million during the six months ended June 30, 2021, and used $150.2 million during the same period in 2020.

We had net borrowings of $100.0 million during the six months ended June 30, 2021, bringing our outstanding debt at June 30, 2021 to $300.0 million.

As of September 30, 2021, we were committed to property and equipment purchases of approximately $109.7 million.

Net financing activities provided $71.9 million during the nine months ended September 30, 2021, and used $156.4 million during the same period in 2020.

We had net borrowings of $150.0 million during the nine months ended September 30, 2021, bringing our outstanding debt at September 30, 2021 to $350.0 million.

The proceeds were used to finance the July 1, 2021 purchase of ECM.

We repaid $125.0 million of debt during the six months ended June 30, 2020.

We paid dividends of $12.9 million in the six-month period ended June 30, 2021 and $12.5 million in the six-month period ended June 30, 2020.

We increased our quarterly dividend rate by $0.01 per share, or 11% beginning with the quarterly dividend to be paid in May 2021, and we increased our quarterly dividend rate by $0.02 per share, or 20%, beginning with the quarterly dividend to be paid in July 2021.

Financing activities for the six months ended June 30, 2021, also included common stock repurchases of 130,446 shares at a cost of $5.5 million.

We repaid $125.0 million of debt during the nine months ended September 30, 2020.

We paid dividends of $21.1 million in the nine-month period ended September 30, 2021 and $18.7 million in the nine-month period ended September 30, 2020.

We increased our quarterly dividend rate by $0.01 per share, or 11% beginning with the quarterly dividend paid in May 2021, and we increased our quarterly dividend rate by $0.02 per share, or 20%, beginning with the quarterly dividend paid in July 2021.

Financing activities for the nine months ended September 30, 2021, also included common stock repurchases of 1,179,566 shares at a cost of $53.3 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, 2021, the Company had purchased 2,313,438 shares pursuant to our current Board of Directors repurchase authorization and had 2,686,562 shares remaining available for repurchase.

Management believes our financial position at June 30, 2021 is strong.

As of June 30, 2021, we had $192.1 million of cash and cash equivalents (prior to the July 1, 2021 closing payment for ECM) and nearly $1.3 billion of stockholders’ equity.

As of September 30, 2021, the Company had purchased 3,362,558 shares pursuant to our current Board of Directors repurchase authorization and had 1,637,442 shares remaining available for repurchase.

Management believes our financial position at September 30, 2021 is strong.

As of September 30, 2021, we had $45.4 million of cash and cash equivalents and over $1.3 billion of stockholders’ equity.

Cash is invested primarily in government portfolio money market funds.

As of June 30, 2021, we had a total borrowing capacity of $600.0 million under our credit facilities (see Note 5 in the Notes to Consolidated Financial Statements (Unaudited) under Item I of Part I of this Form 10-Q), of which we had borrowed $300.0 million.

The remaining $300.0 million of credit available under the facilities at June 30, 2021 is reduced by the $50.9 million in stand-by letters of credit under which we are obligated.

As of September 30, 2021, we had a total borrowing capacity of $600.0 million under our credit facilities (see Note 7 in the Notes to Consolidated Financial Statements (Unaudited) under Item I of Part I of this Form 10-Q), of which we had borrowed $350.0 million.

Subsequent to the end of the quarter, in October 2021, we borrowed an additional $50 million under our credit facilities.

The remaining $250.0 million of credit available under the facilities at September 30, 2021 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.

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Item 7 of Part II of our 2020 Form 10-K includes our disclosure of contractual obligations and commercial commitments as of December 31, 2020.

Except for amending our existing debt agreements and entering into a new debt agreement with additional borrowings under such agreements, and the associated future interest expense, as disclosed in Note 5 in the Notes to Consolidated Financial Statements (Unaudited) under Item I of Part I of this Form 10-Q, there were no material changes in the nature of these items during the six months ended June 30, 2021.

Except for amending our existing debt agreements and entering into a new debt agreement with additional borrowings under such agreements, and the associated future interest expense, as disclosed in Note 7 in the Notes to Consolidated Financial Statements (Unaudited) under Item I of Part I of this Form 10-Q, there were no material changes in the nature of these items during the nine months ended September 30, 2021.

Item 1 of Part I of our 2020 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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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