What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2022-02-28 compared with 2021-02-24 · 162 added, 171 removed, 173 unchanged (66% of the section changed)

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• Cautionary Note Regarding Forward-Looking Statements

• Business Acquisitions

• Results of Operations

• Liquidity and Capital Resources

• Contractual Obligations and Commercial Commitments

• Off-Balance Sheet Arrangements

• Critical Accounting Estimates

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Unless otherwise required by applicable securities laws, we undertake no obligation or duty to update or revise any forward-looking statements contained herein to reflect subsequent events or circumstances or the occurrence of unanticipated events.

Business Acquisitions:

ECM Acquisition

On July 1, 2021, we acquired an 80% equity ownership interest in 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 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 Transport and MCS are reported in One-Way Truckload within our TTS segment.

We 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 our two lead banks.

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

NEHDS Acquisition

On November 22, 2021, we acquired 100% of the equity interests in NEHDS for a cash purchase price of $63.1 million after including the impacts of contingent consideration, net working capital changes and cash acquired.

We financed the transaction through a combination of cash on hand and existing credit facilities.

NEHDS achieved revenues of $71 million for the 12-month period ended September 2021 and produced an average annual revenues growth rate of 27% over the last three years.

NEHDS is a final mile residential delivery provider with access to a network of 400 final mile delivery trucks serving customers primarily in the Northeast and Midwest U.S.

Revenues generated by NEHDS are reported in Final Mile within our Werner Logistics segment.

Additional information regarding the ECM and NEHDS acquisitions is included in Note 2 in the Notes to Consolidated Financial Statements under Item 8 of Part II of this Form 10-K.

We have two reportable segments, 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 global delivery network and systems analysis to optimize transportation needs.

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.

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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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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.

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We fund these purchases with net cash from operations and financing available under our existing credit facilities, as management deems necessary.

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

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.

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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.

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.

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

At the end of 2021, we believe we are well positioned with a strong balance sheet and sufficient liquidity.

Our debt is at $428 million, or a net debt ratio o f 0.6 tim es earnings before interest, income taxes, depreciation and amortization for the year ended December 31, 2021.

We had available liquidity o f $169 mill ion, considering cash on hand and available credit facilities of $115 mi llion.

We also have sufficient cushion with our debt covenants.

We currently plan to continue paying our quarterly dividend,

which we have paid quarterly since 1987.

This cash outlay currently results in slightly less than $8 millio n per quarter.

Net capital expenditures (primarily revenue equipment) in 2022 currently are expected to b e in the range of $275 million to $325 million.

The COVID-19 pandemic continues to impact the U.S.

and global economies and has resulted in ongoing supply chain challenges.

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

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supply chain moving.

We are monitoring and reacting to the evolving nature of the pandemic, governmental responses, and their impacts on our business, including employee availability.

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

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

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

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

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

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

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

Revenues from our top 100 customers were 87% of our total revenues in 2020, and 64% of those revenues were from the discount retail, home improvement retail, food and beverage and consumer packaged goods verticals.

Our results in 2020 reflect lower freight demand in the first half of the year and strong freight market conditions in the second half of the year in a rapidly recovering economy and tight driver market.

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

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

services will be strong in 2021.

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

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

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

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

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

We also have sufficient cushion with our two debt covenants.

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

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

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

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

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

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

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

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

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 be strong in 2022.

Results of Operations:

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2021 2020 Percentage Change in Dollar Amounts

(Amounts in thousands) $ % $ % %

(in thousands) $ % $ % %

Operating revenues $ 2,734,372 100.0 $ 2,372,178 100.0 15.3

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Insurance and claims 98,658 3.6 109,816 4.6 (10.2)

Depreciation 263,286 11.1 249,527 10.1 5.5

Depreciation and amortization 267,700 9.8 263,286 11.1 1.7

Rent and purchased transportation 641,159 23.4 519,184 21.9 23.5

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Net income 261,478 9.6 169,078 7.1 54.6

Net income attributable to noncontrolling interest (2,426) (0.1) — — N/A

Net income attributable to Werner $ 259,052 9.5 $ 169,078 7.1 53.2

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

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

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

Trucking revenues, net of fuel surcharge $ 1,789,148 $ 1,667,394 7.3 %

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Average % change in revenues per total mile (1)

0.9 % (2.1) %

Average % change in total miles per tractor per week (8.2) % 1.6 %

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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.

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

The following tables set forth the Werner Logistics segment’s revenues, purchased transportation expense, other operating expenses (primarily salaries, wages and benefits expense), total operating expenses, and operating income, as well as certain statistical data regarding the Werner Logistics segment.

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

Operating revenues $ 622,461 100.0 $ 469,791 100.0 32.5 %

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

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

Operating expenses:

Purchased transportation expense 535,379 86.0 407,308 86.7 31.4 %

Other operating expenses 59,209 9.5 56,478 12.0 4.8 %

Total operating expenses 594,588 95.5 463,786 98.7 28.2 %

Operating income $ 27,873 4.5 $ 6,005 1.3 364.2 %

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Operating Revenues

Operating revenues decreased 3.7% in 2020 compared to 2019.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Operating revenues increased 15.3% in 2021 compared to 2020.

When comparing 2021 to 2020, TTS segment revenues increased $201.9 million, or 11.0%.

Revenues for the Werner Logistics segment increased $152.7 million or 32.5%.

Freight demand was strong throughout 2021 in our Dedicated and One-Way Truckload fleets.

Freight demand has continued to be strong during the first two months of 2022.

Trucking revenues, net of fuel surcharge, increased 7.3% in 2021 compared to 2020 due to a 4.3% increase in average revenues per tractor per week, net of fuel surcharge and a 2.9% increase 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, partially offset by a decline in miles per tractor caused by tractors down due to equipment parts shortages, more drivers unavailable to work due to COVID quarantine protocols, a 2% shorter average loaded length of haul for the TTS segment, and other factors.

We currently expect average revenues per total mile, net of fuel surcharge, for the One-Way Truckload fleet to remain strong for the first half of 2022 and to increase in a range of 16% to 19% when compared to the first half of 2021, and we expect Dedicated average revenues per tractor per week, net of fuel surcharge, to increase in a range of 3% to 5% in 2022 compared to 2021.

The average number of tractors in service in the TTS segment increased 2.9% to 7,982 in 2021 compared to 7,757 in 2020.

We ended 2021 with 8,340 tractors in the TTS segment, a year-over-year increase of 510 tractors, primarily resulting from the nearly 500 tractors acquired in the ECM acquisition.

Our Dedicated unit ended 2021 with 5,235 tractors (or 63% of our total TTS segment fleet) compared to 4,945 tractors at the end of 2020.

We currently expect our fleet size at the end of 2022 to be in a range of 2% to 5% higher when compared to the fleet size at the end of 2021, subject to driver availability and timing of delivery of new tractors from our equipment manufacturers.

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

If such a driver market shortage were to occur, it could result in a fleet size reduction, and our results of operations could be adversely affected.

Trucking fuel surcharge revenues decreased 32.3% to $158.6 million in 2020 from $234.4 million in 2019 because of lower average fuel prices in 2020.

Trucking fuel surcharge revenues increased 47.6% to $234.2 million in 2021 from $158.6 million in 2020 due primarily to higher average diesel fuel prices, partially offset by fewer miles in 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.

To lessen the effect of fluctuating fuel prices on our margins, we collect fuel surcharge revenues from our customers for the cost of diesel fuel and taxes in excess of specified base fuel price levels according to terms in our customer contracts.

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

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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.

The remaining portion is generally not recoverable because it results from empty and out-of-route miles (which are not billable to customers) and tractor 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 four operating units and exclude revenues for full truckload shipments transferred to the TTS segment, which are recorded as trucking revenues by the TTS segment.

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

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

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

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

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

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

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 $0.9 million in 2021 and $0.1 million in 2020 for movements performed by the TTS segment (also recorded as trucking revenue by the TTS segment), primarily related to Intermodal drayage, and these transactions between reporting segments are eliminated in consolidation.

Werner Logistics revenues increased 32.5% to $622.5 million in 2021 from $469.8 million in 2020 due primarily to higher pricing and volume growth in Truckload Logistics and Intermodal, and an $8.8 million increase in Final Mile revenues primarily due to the impact of NEHDS acquired in November 2021.

Truckload Logistics revenues (68% of total Logistics revenues) increased 58% due to 29% higher revenues per shipment and a 23% increase in volume.

Intermodal revenues (26% of total Logistics revenues) increased 37% due to 35% higher revenues per shipment and a 1% increase in volume.

Werner Logistics operating income increased to $27.9 million in 2021 compared to $6.0 million in 2020, due to revenue growth and a 320 basis point expansion of operating margin percentage in a strong freight market.

The Werner Logistics operating margin percentage increased to 4.5% in 2021 from 1.3% in 2020.

We expect Werner Logistics to achieve continued revenue and operating income growth in 2022.

Operating Expenses

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The tables on pages 17 through 19 show the consolidated statements of income in dollars and as a percentage of total operating revenues and the percentage increase or decrease in the dollar amounts of those items compared to the prior year, as well as the operating ratios, operating margins and certain statistical information for our two reportable segments, TTS and Werner Logistics.

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

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

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

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

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

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

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

The competitive driver recruiting market further intensified throughout 2020, as the improving freight market in the second half of the year caused increased competition for the finite number of experienced drivers that meet our hiring standards.

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

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

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

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

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

Salaries, wages and benefits increased $99.2 million or 12.5% in 2021 compared to 2020 and decreased 0.9% as a percentage of operating revenues.

The higher dollar amount of salaries, wages and benefits expense in 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 20.5 million fewer company tractor miles during 2021.

In January 2021, we implemented driver pay increases of approximately $10 million annually in our One-Way Truckload fleet, and 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 15% in 2021.

Non-driver salaries, wages and benefits in our non-trucking Werner Logistics segment increased 4.1%.

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 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 tractor and trailer fleet with the latest safety equipment and technology, investing and expanding 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 decreased $78.8 million or 33.4% in 2020 compared to 2019 and decreased 3.0% as a percentage of operating revenues due to lower average diesel fuel prices and approximately 4.5 million fewer company truck miles in 2020.

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

We continue to employ measures to improve our fuel mpg such as (i) limiting truck engine idle time, (ii) optimizing the speed, weight and specifications of our equipment and (iii) implementing mpg-enhancing equipment changes to our fleet including new trucks, more aerodynamic truck features, idle reduction systems, trailer tire inflation systems, trailer skirts and automated manual transmissions to reduce our fuel gallons purchased.

Fuel increased $88.7 million or 56.5% in 2021 compared to 2020 and increased 2.4% as a percentage of operating revenues due to higher average diesel fuel prices, partially offset by 20.5 million fewer company tractor miles in 2021.

Average diesel fuel prices, excluding fuel taxes, for the full year 2021 were 85 cents per gallon higher than the full year 2020, a 64% increase.

We continue to employ measures to improve our fuel mpg such as (i) limiting tractor 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 tractors, more aerodynamic tractor features, idle reduction systems, trailer tire inflation systems, trailer skirts and automated manual transmissions to reduce our fuel gallons purchased.

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

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The SmartWay Transport Partnership is a national voluntary program developed by the EPA and freight industry representatives to reduce greenhouse gases and air pollution and promote cleaner, more efficient ground freight transportation.

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

Through February 18, the average diesel fuel price per gallon in 2022 was approximately $1.03 higher than the average diesel fuel price per gallon in the same period of 2021 and approximately 88 cents higher than the average for first quarter 2021.

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

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As of December 31, 2021, we had no derivative financial instruments to reduce our exposure to fuel price fluctuations.

Supplies and maintenance decreased $7.1 million or 3.9% in 2020 compared to 2019 and was flat as a percentage of operating revenues.

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

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

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

Supplies and maintenance increased $30.9 million or 17.5% in 2021 compared to 2020 and increased 0.2% as a percentage of operating revenues.

The higher dollar amount of supplies and maintenance expense was due primarily to higher equipment 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 decreased $11.2 million or 10.2% in 2021 compared to 2020 and decreased 1.0% 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 $7.7 million.

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

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

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

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

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

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

We also incurred insurance and claims expense of $5.1 million and $4.9 million in 2021 and 2020, respectively, for accrued interest related to a previously-disclosed adverse jury verdict rendered on May 17, 2018, which we are appealing (see Note 12 in the Notes to Consolidated Financial Statements set forth in Part II of this Form 10-K).

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

The majority of our insurance and claims expense results from our claim experience and claim development under our self-insurance program;

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

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

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

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

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

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

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

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

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

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

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

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

Depreciation and amortization expense increased $4.4 million or 1.7% in 2021 compared to 2020 and decreased 1.3% as a percentage of operating revenues due primarily to depreciation and amortization on tangible and intangible assets recorded in the ECM and NEHDS acquisitions, partially offset by the impact of a change in accounting estimate that was made in the first quarter 2020, which increased depreciation expense by $9.6 million in 2020.

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

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

This change in accounting estimate had no effect on 2021.

The average age of our tractor fleet remains low by industry standards and w as 2.2 years as of December 31, 2021, and the average age of our trailers was 4.5 years.

We continued to invest in new tractors 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.

We currently intend to maintain the average age of our tractor and trailer fleet at or near current levels in 2022, subject to timing of delivery of new tractors and trailers from our equipment manufacturers.

Rent and purchased transportation expense increased $122.0 million or 23.5% in 2021 compared to 2020 and increased 1.5% as a percentage of operating revenues.

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

The payments to third-party capacity providers generally vary depending on changes in the volume of

services generated by the Werner Logistics segment.

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

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 purchased transportation expense increased $128.1 million as a result of higher logistics revenues, and decreased to 86.0% as a percentage of Werner Logistics revenues in 2021 from 86.7% in 2020.

Rent and purchased transportation expense for the TTS segment decreased $6.0 million in 2021 compared to 2020.

This decrease is due primarily to lower payments to independent contractors in 2021 compared to 2020, resulting from 22.6 million fewer independent contractor miles driven in 2021.

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

Higher average diesel fuel prices in 2021 also resulted in a higher per-mile settlement rate for independent contractors.

Independent contractor miles as a percentage of total miles were 5.8% in 2021 and 8.3% in 2020.

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

Other operating expenses increased $11.2 million in 2020 compared to 2019 and increased 0.5% 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 $11.3 million in 2020, compared to $21.6 million in 2019, including $3.4 million from sales of real estate in 2019.

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

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

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

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

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

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

Other operating expenses decreased $52.8 million in 2021 compared to 2020 and decreased 2.0% as a percentage of operating revenues.

Gains on sales of assets (primarily used tractors 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 $61.5 million in 2021, compared to $11.3 million in 2020.

In 2021, we sold fewer tractors and trailers than in 2020.

We realized substantially higher average gains per tractor and trailer sold in 2021 due to significantly improved pricing in the market for our used equipment, which we believe is a result of increased demand for previously used equipment because of production delays limiting availability of new equipment in the industry.

Other Expense (Income)

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

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

Other expense (income) decreased $39.6 million in 2021 compared to 2020 due primarily to a $40.3 million net unrealized gain recognized on our investments in equity securities (see Note 7 in the Notes to Consolidated Financial Statements set forth in Part II of this Form 10-K).

Income Tax Expense

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

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

Income tax expense increased $28.9 million in 2021 compared to 2020, due to higher pre-tax income, partially offset by a slightly lower effective income tax rate (income taxes expressed as a percentage of income before income taxes) in 2021 of 24.4% compared to 24.8% in 2020.

We currently estimate our full year 2022 effective income tax rate to be approximately 24.5% to 25.5%.

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Liquidity and Capital Resources:

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

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

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

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

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

We closely manage our liquidity and capital resources.

Our liquidity requirements depend on key variables, including the level of investment needed to support business strategies, the performance of the business, capital expenditures, borrowing arrangements, and working capital management.

Capital expenditures, stock repurchases, and dividend payments are components of our cash flow and capital management strategy, which to a large extent, can be adjusted in response to economic and other changes in the business environment.

Management’s approach to capital allocation focuses on investing in key priorities that support our business and growth strategies and providing shareholder returns, while funding ongoing operations.

Management believes our financial position at December 31, 2021 is strong.

As of December 31, 2021, we had $54.2 million of cash and cash equivalents and over $1.3 billion of stockholders’ equity.

Cash is invested primarily in government portfolio money market funds.

In addition, we have a $300.0 million and a $200.0 million credit facility, for which our total available borrowing capacity was $115.1 million as of December 31, 2021 (see Note 8 in the Notes to Consolidated Financial Statements under Item 8 of Part II of this Form 10-K for information regarding our credit agreements).

We believe our liquid assets, cash generated from operating activities, and borrowing capacity under our existing credit facilities will provide sufficient funds to meet our cash requirements and our planned shareholder returns for the foreseeable future.

Our material cash requirements include the following contractual and other obligations.

• Debt Obligations and Interest Payments – As of December 31, 2021, we had outstanding debt with an aggregate principal amount of $427.5 million, with $5.0 million payable within 12 months.

Future interest payments associated with our debt obligations are estimated to be $14.6 million through 2024, with $6.2 million payable within 12 months.

See Note 8 in the Notes to Consolidated Financial Statements under Item 8 of Part II of this Form 10-K for further detail of our debt and the timing of expected future principal payments.

• Operating Leases – We have entered into operating leases primarily for real estate.

As of December 31, 2021, we had fixed lease payment obligations of $32.1 million, with $7.0 million payable within 12 months.

See Note 5 in the Notes to

Consolidated Financial Statements under Item 8 of Part II of this Form 10-K for further detail of our lease obligations and the timing of expected future payments.

• Purchase Obligations – As of December 31, 2021, we have committed to property and equipment purchases of approximately $163.2 million within the next 12 months.

In addition to our cash requirements, the Board of Directors has authorized us to deliver value to shareholders through stock repurchases and quarterly cash dividends.

The stock repurchase program does not obligate the Company to acquire any specific number of shares.

We plan to continue paying a quarterly dividend, which currently results in a cash outlay of slightly less than $8 million per quarter.

We generated cash flow from operations of $332.8 million during 2021 compared to $445.9 million during 2020.

The decrease in net cash provided by operating activities was due primarily to working capital changes resulting from changes in accounts receivable, higher federal and state estimated income tax payments, and the deferral of 2020 employer payroll tax payments as permitted under the CARES Act.

Net cash used in investing activities was $397.3 million during 2021 compared to $263.3 million during 2020.

Net cash invested in our ECM and NEHDS acquisitions during 2021 was $201.8 million.

Net property additions (primarily revenue equipment) were $193.0 million for during 2021 compared to $266.2 million during 2020.

We currently estimate net capital expenditures (primarily revenue equipment) in 2022 to be in the range of $275 million to $325 million.

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

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

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

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

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

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

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

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

Net financing activities provided $89.7 million during 2021 and used $186.0 million during 2020.

We had net borrowings of $227.5 million during 2021, bringing our outstanding debt at December 31, 2021 to $427.5 million.

The proceeds were primarily used to finance our ECM and NEHDS acquisitions.

During 2020, we repaid $100.0 million of debt, net of borrowings.

We paid dividends of $29.1 million during 2021 and $24.9 million during 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 dividend paid in July 2021.

Financing activities for 2021 also included common stock repurchases of 2,297,911 shares at a cost of $104.4 million.

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

We repurchased 1,482,992 shares during 2020 at a cost of $56.5 million.

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

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

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

On November 9, 2021, our Board of Directors approved a new stock repurchase program under which the Company is authorized to repurchase up to 6,000,000 shares of its common stock.

On the same day, our Board of Directors withdrew the previous stock repurchase authorization, which had 1,496,983 shares remaining available for repurchase.

As of December 31, 2021, the Company had purchased 977,886 shares pursuant to the new authorization and had 5,022,114 shares remaining available for repurchase.

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

As of December 31, 2020, we had $29.3 million of cash and cash equivalents and nearly $1.2 billion of stockholders’ equity.

Cash is invested primarily in government portfolio money market funds.

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

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

The remaining $300.0 million of credit available under these facilities at December 31, 2020 is reduced by the $50.9 million in stand-by letters of credit under which we are obligated.

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

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

Contractual Obligations and Commercial Commitments:

The following table sets forth our contractual obligations and commercial commitments as of December 31, 2020.

Payments Due by Period

(Amounts in millions) Total Less than

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

years (After 2025) Period

Contractual Obligations

Unrecognized tax benefits $ 2.4 $ — $ — $ — $ — $ 2.4

Long-term debt, including current maturities 200.0 25.0 — 175.0 — —

Interest payments on debt 12.7 3.8 7.5 1.4 — —

Operating leases 11.1 3.7 4.5 2.4 0.5 —

Property and equipment purchase commitments 131.3 131.3 — — — —

Total contractual cash obligations $ 357.5 $ 163.8 $ 12.0 $ 178.8 $ 0.5 $ 2.4

Other Commercial Commitments

Unused lines of credit $ 249.1 $ — $ — $ 249.1 $ — $ —

Stand-by letters of credit 50.9 50.9 — — — —

Total commercial commitments $ 300.0 $ 50.9 $ — $ 249.1 $ — $ —

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

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

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

We are unable to reasonably determine when the $2.4 million categorized as “period unknown” will be settled.

Off-Balance Sheet Arrangements:

In 2020, we did not have any arrangements that meet the definition of an off-balance sheet arrangement.

Critical Accounting Estimates:

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The actual cost to settle our self-insured claim liabilities can differ from our reserve estimates because of a number of uncertainties, including the inherent difficulty in estimating the severity of a claim and the potential amount to defend and settle a claim.

Inflation may impact our operating costs.

A prolonged inflation period could cause rises in interest rates, fuel, wages and other costs.

These inflationary increases could adversely affect our results of operations unless freight rates could be increased correspondingly.

However, the effect of inflation has been minimal over the past three years.

We have not made any material changes in the accounting methodology or assumptions used to calculate our accrued liabilities for insurance and claims for bodily injury, property damage, and workers’ compensation during the past three years.

At December 31, 2021 and 2020, we had an accrual of $309.8 million and $308.6 million, respectively, for estimated insurance and claims for (i) cargo loss and damage, (ii) bodily injury and property damage, (iii) group health, and (iv) workers’ compensation claims not covered by insurance.

A 10% change in actuarial estimates at December 31, 2021, would have changed our insurance and claims accrual by approximately $29.3 million.

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What changed 10-K

Item 7. Management’s Discussion and Analysis