What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-05-09 compared with 2021-11-09 · 118 added, 184 removed, 168 unchanged (64% of the section changed)

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The MD&A is organized in the following sections:

• ECM Acquisition

• Results of Operations

• Liquidity and Capital Resources

• Contractual Obligations and Commercial Commitments

• Regulations

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The MD&A should be read in conjunction with our 2021 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.

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

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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.

As discussed further in the comparison of operating results for first quarter 2022 to first quarter 2021, several industry-wide issues have caused, and could continue to cause, costs to increase in future periods.

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

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

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

In first quarter 2021, we completed the 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.

At the end of the twelve month period, the full earnout was achieved.

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 as well as depreciation, supplies and maintenance and other general expenses.

Other operating expenses consist primarily of salaries, wages and benefits, as well as depreciation and amortization, 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.

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.

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.

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.

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 2022.

Results of Operations:

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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) $ % $ % $ % $ % % %

March 31, Percentage Change in Dollar Amounts

2022 2021 3ME

(in thousands) $ % $ % %

Operating revenues $ 764,605 100.0 $ 616,446 100.0 24.0

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Operating income 83,511 10.9 62,471 10.1 33.7

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)

Total other expense, net 11,043 1.4 583 0.1 1,794.2

Income before income taxes 72,468 9.5 61,888 10.0 17.1

Income taxes 21,278 3.0 15,152 2.5 61,275 3.1 35,029 2.0 40.4 74.9

Income tax expense 17,433 2.3 15,396 2.5 13.2

Net income 55,035 7.2 46,492 7.5 18.4

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Three Months Ended

September 30, Nine Months Ended

September 30,

2021 2020 2021 2020

Truckload Transportation Services segment (amounts in thousands) $ % $ % $ % $ %

TTS segment (in thousands) $ % $ %

Trucking revenues, net of fuel surcharge $ 472,361 $ 410,652

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Three Months Ended

September 30, Nine Months Ended

September 30,

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

TTS segment 2022 2021 % Change

Average tractors in service 8,238 7,790 5.8 %

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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 (8.1) % (7.7) %

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(1) Net of fuel surcharge revenues.

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.

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.

Three Months Ended

September 30, Nine Months Ended

September 30,

2021 2020 2021 2020

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

Werner Logistics segment (in thousands) $ % $ %

Operating revenues $ 189,008 100.0 $ 137,853 100.0

Operating expenses:

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

Purchased transportation expense 157,521 83.3 120,527 87.4

Other operating expenses 22,806 12.1 12,752 9.3

Total operating expenses 180,327 95.4 133,279 96.7

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

Operating income $ 8,681 4.6 $ 4,574 3.3

Three Months Ended

September 30, Nine Months Ended

September 30,

Werner Logistics segment 2021 2020 % Change 2021 2020 % Change

Werner Logistics segment 2022 2021 % Change

Average tractors in service 53 39 35.9 %

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Total trailers (at quarter end) 1,605 1,440 11.5 %

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

Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021

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.

Operating revenues increased 24.0% for the three months ended March 31, 2022, compared to the same period of the prior year.

When comparing first quarter 2022 to first quarter 2021, TTS segment revenues increased $95.5 million, or 20.6%, and Werner Logistics revenues increased $51.2 million, or 37.1%.

Our results in first quarter 2022 reflect strong freight market conditions in a very challenging driver market.

Our One-Way Truckload fleet experienced strong freight demand in January and February, which then moderated in March from strong to very good, relative to March freight demand over the last five years.

In our Dedicated fleet, freight demand remained strong in first quarter 2022.

Strong consumer demand, combined with several factors that are limiting industry capacity, including a very competitive driver market and ongoing new tractor production delays, resulted in a robust first quarter freight market.

During April, Dedicated freight demand remained strong and One-Way Truckload demand remained very good.

Trucking revenues, net of fuel surcharge, increased 15.0% in first quarter 2022 compared to first quarter 2021 due to a 5.8% increase in the average number of tractors in service and an 8.8% 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 tractor caused by fleet mix changes, tractors 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, net of fuel surcharge, for the One-Way Truckload fleet for the second quarter 2022 to increase in a range of 14% to 17% when compared to second quarter 2021, and we currently expect Dedicated average revenues per tractor per week, net of fuel surcharge, to increase in a range of 4% to 6% in 2022 compared to 2021.

The average number of tractors in service in the TTS segment increased 5.8% to 8,238 in first quarter 2022 from 7,790 in first quarter 2021, primarily resulting from the nearly 500 tractors acquired in the ECM Associated, LLC (“ECM”) acquisition.

We ended first quarter 2022 with 8,225 tractors in the TTS segment, a year-over-year increase of 490 tractors compared to the end of first quarter 2021, and a sequential decrease of 115 tractors compared to the end of fourth quarter 2021.

Within TTS, our Dedicated unit ended first quarter 2022 with 5,185 tractors (or 63% of our total TTS segment tractors) compared to 4,920 tractors (or 64%) a year ago.

We expect our tractor count at the end of 2022 to be in a range of 2% to 5% higher when compared to the fleet size at year end 2021.

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

Trucking fuel surcharge revenues increased 68.2% to $79.8 million in first quarter 2022 from $47.5 million in first quarter 2021 due primarily to higher average diesel fuel prices in first quarter 2022.

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.

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Werner Logistics revenues exclude revenues for full truckload shipments transferred to the TTS segment, which are recorded as trucking revenues by the TTS segment.

Werner Logistics also recorded revenue and brokered freight expense of $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.

Werner Logistics also recorded revenue and brokered freight expense of $722 thousand in first quarter 2022 and $134 thousand in first quarter 2021 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 first quarter 2022, Werner Logistics revenues increased $51.2 million, or 37.1%.

Excluding WGL revenues from first quarter 2021, Logistics revenues in first quarter 2022 increased 55%.

Truckload Logistics revenues (67% of total Logistics revenues) increased by 46% in first quarter 2022.

Truckload Logistics volume increased 19% in first quarter 2022, and revenues per shipment increased 24%.

Intermodal revenues (23% of Logistics revenues) increased 29% in first quarter 2022, due to 37% higher revenues per shipment, partially offset by a decrease in volume of 6% due primarily to a decline in rail velocity, chassis shortages and increased dwell throughout the rail and customer networks.

Final Mile revenues (10% of total Logistics revenues) increased $18.1 million in first quarter 2022, primarily due to growth from the November 2021 acquisition of NEHDS Logistics, LLC (“NEHDS”).

The Werner Logistics operating margin percentage of 4.6% in first quarter 2022 increased from 3.3%, while operating income increased to $8.7 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.

Our operating ratio (operating expenses expressed as a percentage of operating revenues) was 89.1% for the three months ended March 31, 2022 and 89.9% for the three months ended March 31, 2021.

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

The tables on pages 19 through 21 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%.

Salaries, wages and benefits increased $37.1 million or 18.1% in first quarter 2022 compared to first quarter 2021 and decreased 1.6% as a percentage of operating revenues to 31.6%.

The higher dollar amount of salaries, wages and benefits expense in the first quarter of 2022 was due primarily to increased driver pay, including:

(i) driver pay rate increases, (ii) incentive recruiting bonuses, (iii) minimum pay guarantees, and (iv) the impact of 4.0 million more company tractor miles in the first quarter of 2022.

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 2021 of approximately $11 million annually.

We continue to implement driver pay increases as needed.

The increase in salaries, wages and benefits was also due to an increase in the number of non-driver employees and higher benefits.

Non-driver salaries, wages and benefits in our non-trucking Werner Logistics segment increased 47.3% as a result of increased employees to support the 37% growth of Logistics revenues and higher pay rates per employee.

We renewed our workers’ compensation insurance coverage on April 1, 2022.

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Our workers’ compensation insurance premiums for the policy year beginning April 2022 are $0.4 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.

Strong consumer demand combined with a severely constrained driver market is presenting labor challenges for customers and carriers alike and remained challenging in first quarter 2022, 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 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 increased $26.8 million or 70.5% in third quarter 2021 compared to third quarter 2020 and increased 2.8% as a percentage of operating revenues to 9.2% due to higher average diesel fuel prices, partially offset by approximately 2.3 million fewer

company truck miles in third quarter 2021.

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

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

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 $37.6 million or 73.9% in first quarter 2022 compared to first quarter 2021 and increased 3.4% as a percentage of operating revenues to 11.6% due to higher average diesel fuel prices and 4.0 million more company tractor miles in first quarter 2022.

Average diesel fuel prices were $1.27 per gallon higher in first quarter 2022 than in first quarter 2021 and were 64 cents per gallon higher than in fourth quarter 2021.

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.

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.

For April 2022, the average diesel fuel price per gallon was approximately $1.98 higher than the average diesel fuel price per gallon in April 2021 and approximately $1.85 higher than in second quarter 2021.

Shortages of fuel, increases in fuel prices and petroleum product rationing can have a material 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).

As of March 31, 2022, we had no derivative financial instruments to reduce our exposure to fuel price fluctuations.

Supplies and maintenance increased $10.9 million or 23.6% in first quarter 2022 compared to first quarter 2021 and remained flat as a percentage of operating revenues.

Supplies and maintenance expense increased due to increases in tractor and trailer parts and labor, tires, tolls, driving school costs, travel, and driver advertising.

Insurance and claims increased $5.4 million or 24.6% in first quarter 2022 compared to first quarter 2021 and remained flat as a percentage of operating revenues due primarily to a higher amount of unfavorable reserve development on small dollar claims, higher liability insurance premiums of $1.9 million, and increased claims.

We also incurred insurance and claims expense of $1.3 million in both first quarter 2022 and first quarter 2021 for accrued interest related to a previously-disclosed adverse jury verdict rendered May 17, 2018, which we are appealing (see Note 8 in the Notes to Consolidated Financial Statements (Unaudited) set forth in Part I of this report).

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

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Our liability insurance premiums for the policy year that began August 1, 2021 are $7.0 million higher than premiums for the previous policy year.

Depreciation 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

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.

Depreciation and amortization expense increased $3.3 million or 5.1% in first quarter 2022 compared to first quarter 2021 and decreased 1.6% 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 effective January 1, 2022, which decreased depreciation expense by $3.1 million in first quarter 2022.

During the first quarter of 2022, we increased the estimated salvage value of our trailers by $5,000 per trailer due to the ongoing stronger used trailer market and the increasing cost of new trailers.

The average age of our tractor fleet was 2.3 years as of March 31, 2022, and the average age of our trailers was 4.6 years.

We are continuing to invest in new tractors and trailers and our terminals in 2022 to improve our driver experience, increase operational efficiency and more effectively manage our maintenance, safety and fuel costs.

During the remainder of 2022, we expect the average age of our tractor and trailer fleet to remain at or near current levels, subject to potential delays in receiving new equipment.

Rent and purchased transportation expense increased $38.7 million or 26.4% in first quarter 2022 compared to first quarter 2021 and increased 0.4% as a percentage of operating revenues.

Rent and purchased transportation expense consists mostly of

payments to third-party capacity providers in the Werner Logistics segment and other non-trucking operations and payments to independent contractors in the TTS segment.

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

Werner Logistics rent and purchased transportation expense increased $37.0 million, and as a percentage of Werner Logistics revenues decreased to 83.3% in first quarter 2022 from 87.4% in first quarter 2021.

Rent and purchased transportation expense for the TTS segment increased $1.5 million in first quarter 2022 compared to first quarter 2021 due primarily to an increase in the per-mile settlement rate for certain independent contractors due to higher average diesel fuel prices.

The higher expense was mostly offset by fewer independent contractor miles in first quarter 2022.

Independent contractor miles decreased approximately 4.1 million miles in first quarter 2022 and as a percentage of total miles were 4.5% in first quarter 2022 compared to 6.7% in first quarter 2021.

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

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

Other operating expenses decreased $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.

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

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.

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.

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 operating expenses decreased $7.4 million in first quarter 2022 compared to first quarter 2021 and decreased 0.7% 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 $20.5 million in first quarter 2022, compared to $10.5 million in first quarter 2021.

We realized substantially higher average gains per tractor 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 tractors and trailers in first quarter 2022 than 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.

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.

Other net expenses increased $10.5 million in first quarter 2022 compared to first quarter 2021 due primarily to a $9.8 million unrealized loss recognized on our investments in equity securities (see Note 6 in the Notes to Consolidated Financial Statements (Unaudited) set forth in Part I of this report) and a $0.6 million increase in interest expense.

Interest expense increased due to higher average debt outstanding, partially offset by a decrease in the average effective interest rate incurred on our debt.

Income Tax Expense

Our effective income tax rate (income taxes expressed as a percentage of income before income taxes) was 24.1% in first quarter 2022 compared to 24.9% in first quarter 2021.

The lower income tax rate in first quarter 2022 was attributed primarily to a higher amount of favorable discrete income tax items in the first quarter 2022 and the income tax effect of the noncontrolling interest.

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 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 March 31, 2022 is strong.

As of March 31, 2022, we had $125.9 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 two $300.0 million revolving credit facilities, for which our total available borrowing capacity was $316.1 million as of March 31, 2022 (see Note 7 in the Notes to Consolidated Financial Statements (Unaudited) set forth in Part I of this report 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.

Item 7 of Part II of our 2021 Form 10-K includes our disclosure of material cash requirements as of December 31, 2021.

On March 25, 2022, we entered into a new credit agreement, replacing a previous credit agreement, and we amended an existing credit agreement.

These changes increased our borrowing capacity by $200.0 million.

See Note 7 in the Notes to Consolidated Financial Statements (Unaudited) set forth in Part I of this report for further details regarding our debt and the timing of expected future principal payments.

Except for the changes related to our credit agreements, there were no other material changes in the nature of these items during the three months ended March 31, 2022.

During the three months ended March 31, 2022, we generated cash flow from operations of $155.0 million, a 14.1% or $19.1 million increase in cash flows compared to the same three-month period a year ago.

The increase in net cash provided by operating activities was due primarily to increased cash flows from working capital and higher net income.

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

Net cash used in investing activities 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.

Net cash used in investing activities was $34.5 million for the three-month period ended March 31, 2022 compared to $41.3 million during the same period in 2021.

Net property additions (primarily revenue equipment) were $37.1 million for the three-month period ended March 31, 2022, compared to $37.9 million during the same period of 2021.

We currently estimate net capital expenditures (primarily revenue equipment) in 2022 to be in the range of $250 million to $300 million, compared to net capital expenditures in 2021 of $193.0 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.

As of March 31, 2022, we were committed to property and equipment purchases of approximately $182.3 million.

Net financing activities used $49.0 million during the three months ended March 31, 2022, compared to $40.4 million during the same period in 2021.

We had net repayments on our debt of $1.3 million during the three months ended March 31, 2022, reducing our outstanding debt at March 31, 2022 to $426.3 million, and repaid $25.0 million of debt during the same period in 2021.

We paid dividends of $7.9 million in the three-month period ended March 31, 2022 and $6.1 million during the same period in 2021.

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

Financing activities for the three months ended March 31, 2022, also included common stock repurchases of 845,100 shares at a cost of $36.2 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.

As of March 31, 2022, the Company had purchased 1,822,986 shares pursuant to our current Board of Directors repurchase authorization and had 4,177,014 shares remaining available for repurchase.

Item 1 of Part I of our 2021 Form 10-K includes a discussion of pending proposed regulations that may have an effect on our operations if they become adopted and effective as proposed.

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What changed 10-Q

Item 2. Management’s Discussion and Analysis