WERNER ENTERPRISES INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Management’s Discussion and Analysis of Financial Condition and Results of Operations (the “MD&A”) summarizes the financial statements from management’s perspective with respect to our financial condition, results of operations, liquidity and other factors that may affect actual results. The MD&A is organized in the following sections: • ECM Acquisition • Overview • COVID-19 • Results of Operations • Liquidity and Capital Resources • Contractual Obligations and Commercial Commitments • Regulations • Critical Accounting Estimates The MD&A should be read in conjunction with our 2020 Form 10-K. ECM Acquisition: 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. 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. Overview: 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. In the truckload sector, we focus on transporting consumer nondurable products that generally ship more consistently throughout the year. In the logistics sector, besides managing transportation requirements for individual customers, we provide additional sources of truck capacity, alternative modes of transportation, a North American delivery network and systems analysis to optimize transportation needs. Our success depends on our ability to efficiently and effectively manage our resources in the delivery of truckload transportation and logistics services to our customers. Resource requirements vary with customer demand, which may be subject to seasonal or general economic conditions. Our ability to adapt to changes in customer transportation requirements is essential to efficiently deploy resources and make capital investments in tractors and trailers (with respect to our TTS segment) or obtain qualified third-party capacity at a reasonable price (with respect to our Werner Logistics segment). 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. 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. Because fuel surcharge revenues fluctuate in response to changes in fuel costs, we identify them separately and exclude them from the statistical calculations to provide a more meaningful comparison between periods. The key statistics used to evaluate trucking revenues, net of fuel surcharge, are (i) average revenues per tractor per week, (ii) average percentage of empty miles (miles without trailer cargo), (iii) average trip length (in loaded miles) and (iv) average number of tractors in service. General economic conditions, seasonal trucking industry freight patterns and industry capacity are important factors that impact these statistics. Our TTS segment also generates a small amount of revenues categorized as non-trucking revenues, which consist primarily of the intra-Mexico portion of cross-border shipments delivered to or from Mexico where the TTS segment utilizes a third-party capacity provider. We exclude such revenues from the statistical calculations. Our most significant resource requirements are company drivers, independent contractors, tractors and trailers. Independent contractors supply their own tractors and drivers and are responsible for their operating expenses. Our financial results are affected by company driver and independent contractor availability and the markets for new and used revenue equipment. We are self-insured for a significant portion of bodily injury, property damage and cargo claims; workers’ compensation claims; 22 Table of Contents and associate health claims (supplemented by premium-based insurance coverage above certain dollar levels). For that reason, our financial results may also be affected by driver safety, medical costs, weather, legal and regulatory environments and insurance coverage costs to protect against catastrophic losses. The operating ratio is a common industry measure used to evaluate our profitability and that of our TTS segment operating fleets. The operating ratio consists of operating expenses expressed as a percentage of operating revenues. The most significant variable expenses that impact the 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 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. Our main fixed costs include depreciation expense for tractors and trailers and equipment licensing fees (included in taxes and licenses expense). The TTS segment requires substantial cash expenditures for tractor and trailer purchases. We fund these purchases with net cash from operations and financing available under our existing credit facilities, as management deems necessary. We provide non-trucking services primarily through the 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 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. Unlike our TTS segment, the Werner Logistics segment is less asset-intensive and is instead dependent upon qualified associates, information systems and qualified third-party capacity providers. The largest expense item related to the Werner Logistics segment is the cost of purchased transportation we pay to third-party capacity providers. This expense item is recorded as rent and purchased transportation expense. Other operating expenses consist primarily of salaries, wages and benefits 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. COVID-19: The COVID-19 pandemic, declared March 11, 2020, has profoundly impacted the U.S. economy. 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. 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). Over half of our office associates continue working from home. 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, 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 and into 2022. 23 Table of Contents Results of Operations: The following table sets forth the consolidated statements of income in dollars and as a percentage of total operating revenues and the percentage increase or decrease in the dollar amounts of those items compared to the prior year. Three Months Ended (3ME) September 30, Nine Months Ended (9ME) September 30, Percentage Change in Dollar Amounts 2021 2020 2021 2020 3ME 9ME (Amounts in thousands) $ % $ % $ % $ % % % Operating revenues $ 702,891 100.0 $ 590,214 100.0 $ 1,969,151 100.0 $ 1,751,876 100.0 19.1 12.4 Operating expenses: Salaries, wages and benefits 234,250 33.3 197,151 33.4 649,198 33.0 598,129 34.1 18.8 8.5 Fuel 64,692 9.2 37,933 6.4 174,033 8.8 117,381 6.7 70.5 48.3 Supplies and maintenance 57,067 8.1 44,015 7.5 152,628 7.7 133,079 7.6 29.7 14.7 Taxes and licenses 24,419 3.5 24,032 4.1 71,396 3.6 70,835 4.1 1.6 0.8 Insurance and claims 27,702 4.0 23,307 4.0 70,497 3.6 85,160 4.9 18.9 (17.2) 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 Communications and utilities 3,598 0.5 3,797 0.6 9,953 0.5 11,141 0.6 (5.2) (10.7) Other (9,837) (1.4) 3,053 0.5 (24,117) (1.2) 11,688 0.7 (422.2) (306.3) Total operating expenses 631,567 89.9 528,111 89.5 1,758,493 89.3 1,605,889 91.7 19.6 9.5 Operating income 71,324 10.1 62,103 10.5 210,658 10.7 145,987 8.3 14.8 44.3 Total other expense (income) (15,043) (2.2) 619 0.1 (34,230) (1.7) 2,436 0.1 (2,530.2) (1,505.2) Income before income taxes 86,367 12.3 61,484 10.4 244,888 12.4 143,551 8.2 40.5 70.6 Income taxes 21,278 3.0 15,152 2.5 61,275 3.1 35,029 2.0 40.4 74.9 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 24 Table of Contents 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 September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Truckload Transportation Services segment (amounts in thousands) $ % $ % $ % $ % Trucking revenues, net of fuel surcharge $ 461,380 $ 417,335 $ 1,300,555 $ 1,233,267 Trucking fuel surcharge revenues 60,765 36,799 165,663 122,048 Non-trucking and other operating revenues 5,552 4,122 15,628 12,857 Operating revenues 527,697 100.0 458,256 100.0 1,481,846 100.0 1,368,172 100.0 Operating expenses 464,841 88.1 395,176 86.2 1,288,254 86.9 1,224,778 89.5 Operating income $ 62,856 11.9 $ 63,080 13.8 $ 193,592 13.1 $ 143,394 10.5 Three Months Ended September 30, Nine Months Ended September 30, Truckload Transportation Services segment 2021 2020 % Change 2021 2020 % Change Average tractors in service 8,161 7,615 7.2 % 7,872 7,746 1.6 % Average revenues per tractor per week (1) $ 4,349 $ 4,216 3.2 % $ 4,236 $ 4,082 3.8 % Total tractors (at quarter end) Company 7,905 7,245 9.1 % 7,905 7,245 9.1 % Independent contractor 315 465 (32.3) % 315 465 (32.3) % Total tractors 8,220 7,710 6.6 % 8,220 7,710 6.6 % Total trailers (at quarter end) 25,245 22,350 13.0 % 25,245 22,350 13.0 % One-Way Truckload Trucking revenues, net of fuel surcharge (in 000’s) $ 190,314 $ 173,021 10.0 % $ 513,324 $ 518,854 (1.1) % Average tractors in service 3,110 3,048 2.0 % 2,894 3,156 (8.3) % Total tractors (at quarter end) 3,100 2,995 3.5 % 3,100 2,995 3.5 % Average percentage of empty miles 11.17 % 11.70 % (4.5) % 11.08 % 12.18 % (9.0) % Average revenues per tractor per week (1) $ 4,708 $ 4,366 7.8 % $ 4,549 $ 4,215 7.9 % Average % change in revenues per total mile (1) 21.8 % 2.9 % 16.2 % (0.9) % Average % change in total miles per tractor per week (11.4) % 1.4 % (7.2) % 2.0 % Average completed trip length in miles (loaded) 731 866 (15.6) % 814 847 (3.9) % Dedicated Trucking revenues, net of fuel surcharge (in 000’s) $ 271,066 $ 244,314 10.9 % $ 787,231 $ 714,413 10.2 % Average tractors in service 5,051 4,567 10.6 % 4,978 4,590 8.5 % Total tractors (at quarter end) 5,120 4,715 8.6 % 5,120 4,715 8.6 % Average revenues per tractor per week (1) $ 4,129 $ 4,115 0.3 % $ 4,055 $ 3,990 1.6 % (1) Net of fuel surcharge revenues. 25 Table of Contents 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 September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Werner Logistics segment (amounts in thousands) $ % $ % $ % $ % 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 Other operating expenses 15,346 9.7 13,577 11.5 41,456 9.5 42,906 12.6 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 September 30, Nine Months Ended September 30, Werner Logistics segment 2021 2020 % Change 2021 2020 % Change Average tractors in service 41 31 32.3 % 38 31 22.6 % Total tractors (at quarter end) 50 32 56.3 % 50 32 56.3 % Total trailers (at quarter end) 1,515 1,325 14.3 % 1,515 1,325 14.3 % Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020 Operating Revenues 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 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 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 26 Table of Contents diesel fuel and taxes in excess of specified base fuel price levels according to terms in our customer contracts. Fuel surcharge rates generally adjust weekly based on an independent U.S. Department of Energy fuel price survey which is released every Monday. Our fuel surcharge programs are designed to (i) recoup higher fuel costs from customers when fuel prices rise and (ii) provide customers with the benefit of lower fuel costs when fuel prices decline. These programs generally enable us to recover a majority, but not all, of the fuel price increases. The remaining portion is generally not recoverable because it results from empty and out-of-route miles (which are not billable to customers) and truck idle time. Fuel prices that change rapidly in short time periods also impact our recovery because the surcharge rate in most programs only changes once per week. Werner Logistics revenues are generated by its three operating units, following the sale of its WGL freight forwarding services for international ocean and air shipments in first quarter 2021. 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 $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 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 $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. Our coverage levels are the same as the prior policy year. We continue to maintain a self-insurance retention of $2.0 million per claim. 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. 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. We continue to take significant actions to strengthen our driver recruiting and retention as we strive to be the truckload employer of choice, including raising driver pay, providing a modern truck and trailer fleet with the latest safety equipment and technology, investing in our driver training school network and offering a wide variety of driving positions including daily and weekly home time opportunities. 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 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 27 Table of Contents 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. However, fuel savings from mpg improvement is partially offset by higher depreciation expense and the additional cost of diesel exhaust fluid. Although our fuel management programs require significant capital investment and research and development, we intend to continue these and other environmentally conscious initiatives, including our active participation as an EPA SmartWay Transport Partner. The SmartWay Transport Partnership is a national voluntary program developed by the EPA and freight industry representatives to reduce greenhouse gases and air pollution and promote cleaner, more efficient ground freight transportation. For 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 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. The majority of our insurance and claims expense results from our claim experience and claim development under our self-insurance program; the remainder results from insurance premiums for claims in excess of our self-insured limits. We ren ewed our liability insurance policies on August 1, 2021 and are responsible for the first $10.0 million per claim on all claims with an annual $10.0 million aggregate for claims between $10.0 million and $15.0 million. For the policy year that began August 1, 2020, we were responsible for the first $10.0 million per claim with no aggregates . 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, 2021 are $7.0 million higher than premiums for the previous policy year. 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. 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, 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 28 Table of Contents 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. Challenging operating conditions continue to make independent contractor recruitment and retention difficult. Such conditions include inflationary cost increases that are the responsibility of independent contractors and a shortage of financing available to independent contractors for equipment purchases. Historically we have been able to add company tractors and recruit additional company drivers to offset any decrease in the number of independent contractors. If a shortage of independent contractors and company drivers occurs, further increases in per-mile settlement rates (for independent contractors) and driver pay rates (for company drivers) may become necessary to attract and retain these drivers. 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 $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 $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 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 $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. Income Taxes 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 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 89.3% 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 24 through 26 show the consolidated statements of 29 Table of Contents 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 $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 $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. 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 first quarter 2020 for this accident. 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. 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. 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. 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. 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 $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 $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. 30 Table of Contents Income Taxes 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 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 $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 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 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 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 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. We believe our liquid assets, cash generated from operating activities, and borrowing capacity under our credit facilities will provide sufficient funds for our operating and capital needs for the foreseeable future. Contractual Obligations and Commercial Commitments: 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 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. Regulations: 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. There have been no material changes in the status of the proposed regulations previously disclosed in the 2020 Form 10-K. 31 Table of Contents Critical Accounting Estimates: The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the (i) reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and (ii) reported amounts of revenues and expenses during the reporting period. We evaluate these estimates on an ongoing basis as events and circumstances change, utilizing historical experience, consultation with experts and other methods considered reasonable in the particular circumstances. Actual results could differ from those estimates and may significantly impact our results of operations from period to period. It is also possible that materially different amounts would be reported if we used different estimates or assumptions. Information regarding our Critical Accounting Estimates can be found in our 2020 Form 10-K. 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. There have been no material changes to this critical accounting estimate from that discussed in our 2020 Form 10-K.