What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-11-04 compared with 2022-08-08 · 132 added, 114 removed, 217 unchanged (53% of the section changed)

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The MD&A is organized in the following sections:

• Baylor Acquisition

• Results of Operations

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The MD&A should be read in conjunction with our 2021 Form 10-K.

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.

Baylor Acquisition:

On October 1, 2022, we acquired 100% of the equity interests in FAB9, Inc., doing business as Baylor Trucking, Inc.

(“Baylor”), for a cash purchase price of $80.0 million, before including the impacts of working capital adjustments, cash acquired, and a contingent earnout payment of up to $15 million based on Baylor achieving certain financial performance goals over a three-year period.

Baylor, based in Milan, Indiana, operates 200 trucks and 980 trailers in the east central and south central United States.

The acquisition expands our terminal, fleet, and professional driver presence in these geographic truckload markets and adds two terminals to our network.

Future revenues generated by Baylor will be reported in One-Way Truckload within our Truckload Transportation Services (“TTS”) segment.

We financed the transaction through existing credit facilities.

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.

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The most significant variable expenses that impact the TTS segment are driver salaries and benefits, fuel, fuel taxes (included in taxes and licenses expense), payments to independent contractors (included in rent and purchased transportation expense), supplies and maintenance and insurance and claims.

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

As discussed further in the comparison of operating results for third quarter 2022 to third 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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Three Months Ended (3ME)

June 30, Six Months Ended (6ME)

June 30, Percentage Change in Dollar Amounts

September 30, Nine Months Ended (9ME)

September 30, Percentage Change in Dollar Amounts

2022 2021 2022 2021 3ME 9ME

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Net income 55,925 6.8 65,089 9.3 184,569 7.6 183,613 9.3 (14.1) 0.5

Net income attributable to noncontrolling interest (1,319) (0.2) — — (2,605) (0.1) — — N/A N/A

Net income attributable to noncontrolling interest (874) (0.1) (1,328) (0.2) (3,479) (0.1) (1,328) — (34.2) 162.0

Net income attributable to Werner $ 55,051 6.7 $ 63,761 9.1 $ 181,090 7.5 $ 182,285 9.3 (13.7) (0.7)

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Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2022 2021 2022 2021

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Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

TTS segment 2022 2021 % Change 2022 2021 % Change

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Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2022 2021 2022 2021

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Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

Werner Logistics segment 2022 2021 % Change 2022 2021 % Change

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Total trailers (at quarter end) 2,045 1,515 35.0 % 2,045 1,515 35.0 %

Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021

Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021

Operating Revenues

Operating revenues increased 28.7% for the three months ended June 30, 2022, compared to the same period of the prior year.

When comparing second quarter 2022 to second quarter 2021, TTS segment revenues increased $122.4 million, or 24.9%, and Werner Logistics revenues increased $62.2 million, or 43.9%.

Our results in second quarter 2022 reflect strong freight market conditions.

Our One-Way Truckload fleet freight demand in second quarter moderated from very good levels in April to seasonally normal levels by the end of June, while our Dedicated fleet freight demand remained strong and steady in second quarter 2022.

For the remainder of 2022, we expect industry truckload freight demand to continue to moderate, more for discretionary goods and less for consumer staples.

This may impact our One-Way Truckload fleet more than our Dedicated fleet or Logistics segment.

Trucking revenues, net of fuel surcharge, increased 13.9% in second quarter 2022 compared to second quarter 2021 due to an 8.1% increase in the average number of tractors in service and a 5.4% 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, partially offset by a decline in miles per tractor caused by lower length of haul due to the ECM Associated, LLC (“ECM”) acquisition, growth in Dedicated, and fewer team drivers.

We currently expect average revenues per total mile, net of fuel surcharge, for the One-Way Truckload fleet for the third quarter 2022 to increase in a range of 2% to 5% when compared to third quarter 2021, and we currently expect Dedicated average revenues per tractor per week, net of fuel surcharge, to increase in a range of 6% to 8% in 2022 compared to 2021.

The average number of tractors in service in the TTS segment increased 8.1% to 8,286 in second quarter 2022 from 7,664 in second quarter 2021, primarily resulting from the nearly 500 tractors acquired in the ECM acquisition.

We ended second quarter 2022 with 8,400 tractors in the TTS segment, a year-over-year increase of 755 tractors compared to the end of second quarter 2021, and a sequential increase of 175 tractors compared to the end of first quarter 2022.

Within TTS, our Dedicated unit ended second quarter 2022 with 5,320 tractors (or 63% of our total TTS segment tractors) compared to 5,040 tractors (or 66%) 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, subject to the availability of drivers and new equipment.

Operating revenue s increased 17.7% for the three months ended September 30, 2022, comp ared to the same period of the prior year.

When comparing third quarter 2022 to third quarter 2021, TTS segment revenue s increased $94.2 million, or 17.8%, and Werner Logistics revenues increased $29.2 million, or 18.5%.

Dedicated continues to experience strong demand from the majority of our long-term customers, and our Dedicated pipeline of new opportunities remains strong.

In the current freight market, there are fewer project and surge freight opportunities in One-Way Truckload and Logistics.

Peak season freight opportunities in One-Way Truckload and Logistics are more subdued in fourth quarter 2022, compared to a record freight market during peak season in fourth quarter 2021.

Trucking revenues, net of fuel surcharge, increased 9.2% in third quarter 2022 compared to third quarter 2021 due to a 4.3% increase in the average number of tractors in service and a 4.6% increase in average revenues per tractor per week, net of fuel surcharge .

We currently expect average revenues per total mile, net of fuel surcharge, for the One-Way Truckload fleet for the fourth quarter 2022 to be in a range of negative 3% to flat when compared to fourth quarter 2021.

This expected decrease is due to the moderating One-Way freight market with much fewer premium pricing opportunities in fourth quarter 2022 compared to fourth quarter 2021.

We currently expect Dedicated average revenues per tractor per week, net of fuel surcharge, to increase in a range of 6% to 8% in fourth quarter 2022 compared to fourth quarter 2021.

The average number of tractors in service in the TTS segment increased 4.3% to 8,513 in third quarter 2022 from 8,161 in third quarter 2021, due primarily to planned growth in our Dedicated fleet.

W e ended third quarter 2022 wit h 8,580 tractors in the TTS segment, a year-over-year increase of 360 tractors compared t o the end of third quarter 2021, and a sequentia l increase of 180 tractors compared to the end of second quarter 2022.

Within TTS, our Dedicated unit ended third quarter 2022 with 5,430 tractors (or 63% of our total TTS segment tractors) compared to 5,120 tractors (or 62%) a year ago.

We expect our tractor count at the end of 2022 to be in a range of 3% to 5% higher when compared to the fleet size at year end 2021.

The expected tractor count at the end of 2022 includes 200 tractors acquired in the Baylor acquisition on October 1, 2022.

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 106.6% to $118.6 million in second quarter 2022 from $57.4 million in second quarter 2021 due primarily to higher average diesel fuel prices in second quarter 2022.

Trucking fuel surcharge revenues increased 83.0% to $111.2 million in third quarter 2022 from $60.8 million in third quarter 2021 due primarily to higher average diesel fuel prices in third 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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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 $625 thousand in second quarter 2022 and $193 thousand in second 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 second quarter 2022, Werner Logistics revenues increased $62.2 million, or 43.9%.

Truckload Logistics revenues (65% of total Logistics revenues) increased by 36% in second quarter 2022.

Truckload Logistics volume increased 16% in second quarter 2022, and revenues per shipment increased 17%.

Intermodal revenues (23% of Logistics revenues) increased 18% in second quarter 2022, due to 35% higher revenues per shipment, partially offset by a decrease in volume of 13%.

Final Mile revenues (12% of total Logistics revenues) increased $21.1 million in second quarter 2022, primarily due to growth from the November 2021 acquisition of NEHDS Logistics, LLC (“NEHDS”) and continued growth from our national final mile agent network.

The Werner Logistics operating income increased to $12.5 million in second quarter 2022 from $3.9 million in second quarter 2021, due to revenue growth and an improved operating margin percentage when compared to the 2021 quarter when we experienced a significant increase in the cost of capacity for contractual brokerage shipments and intermodal shipments.

Werner Logistics also recorded revenue and brokered freight expense of $0.4 million in third quarter 2022 and $0.2 million in third 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 third quarter 2022, Werner Logistics revenues increased $29.2 million, or 18.5%.

Truckload Logistics revenues (64% of Logistics revenues) increased by 4% in third quarter 2022.

Truckload Logistics volume increased 6% in third quarter 2022, partially of set by a 3% decrease in revenues per shipment.

Intermodal revenues (23% of Logistics revenues) increased 10% in third quarter 2022, due to 37% higher revenues per shipment, partially offset by a decrease in volume of 23%.

Final Mile revenues (13% of Logistics revenues) increased $21.0 million in third quarter 2022, due to growth from the November 2021 acquisition of NEHDS Logistics, LLC (“NEHDS”) and continued growth from our national final mile agent network.

The Werner Logistics operating income decreased to $5.1 million in third quarter 2022 from $7.7 million in third quarter 2021, due to fewer premium pop-up freight opportunities, Intermodal customer and market challenges, and softening demand and start up costs in Final Mile.

The decline in pop-up freight opportunities is expected to have a larger impact on Logistics revenues and operating income in fourth quarter 2022 compared to third quarter 2022.

Operating Expenses

Our operating ratio (operating expenses expressed as a percentage of operating revenues) was 91.0% for the three months ended June 30, 2022 and 88.2% for the three months ended June 30, 2021.

Our operating ratio (operating expenses expressed as a percentage of operating revenues) wa s 90.8% for th e three months ended September 30, 2022 and 89.9% for the three months ended September 30, 2021.

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

The tables on pages 21 through 23 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 period 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 $43.5 million or 20.7% in second quarter 2022 compared to second quarter 2021 and decreased 2.1% as a percentage of operating revenues to 30.3%.

The higher dollar amount of salaries, wages and benefits expense in the second quarter of 2022 was due primarily to increased driver pay, including driver pay rate increases and the impact of 3.9 million more company tractor miles in the second quarter of 2022.

Salaries, wages and benefits increased $30.2 million or 12.9% in third quarter 2022 compared to third quarter 2021 and decreased 1.3% as a percentage of operating revenues to 32.0%.

The higher dollar amount of salaries, wages and benefits expense in the third quarter of 2022 was due primarily to increased driver pay and associated payroll taxes, including driver pay rate increases and the impact of 5.1 million more company tractor miles in the third quarter of 2022.

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

Within Dedicated, 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 65.5% as a result of increased employees to support the 44% growth of Logistics revenues and higher pay rates per employee.

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

Non-driver salaries, wages and benefits in our non-trucking Werner Logistics segment increased 56.5% as a result of more employees to support the 18% growth of Logistics revenues.

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 very competitive driver market is presenting labor challenges for customers and carriers alike.

The driver market remained challenging in second quarter 2022, as the strong freight market caused increased competition for the finite number of experienced drivers that meet our hiring standards.

While inflationary cost pressures continue to be challenging, particularly for labor, equipment maintenance and insurance, we have begun to see some easing in the competitive driver recruiting and retention markets.

A competitive driver market presents labor challenges for customers and carriers alike.

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

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If such a driver shortage were to occur and additional driver pay rate increases became necessary to attract and retain drivers, our results of operations would be negatively impacted to the extent that we could not obtain corresponding freight rate increases.

Fuel increased $66.9 million or 114.4% in second quarter 2022 compared to second quarter 2021 and increased 6.0% as a percentage of operating revenues to 15.0% due to higher average diesel fuel prices and 3.9 million more company tractor miles in second quarter 2022.

Average diesel fuel prices were $2.21 per gallon higher in second quarter 2022 than in second quarter 2021 and were $1.20 per gallon higher than in first quarter 2022.

Fuel increased $47.3 million or 73.1% in third quarter 2022 compared to third quarter 2021 and increased 4.3% as a percentage of operating revenues to 13.5% due to higher average diesel fuel prices and 5.1 million more company tractor miles in third quarter 2022.

Average diesel fuel prices were $1.47 per gallon higher in third quarter 2022 than in third quarter 2021 but were 61 cents per gallon lower than in second quarter 2022.

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.

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

For July 2022, the average diesel fuel price per gallon was approximately $1.64 higher than the average diesel fuel price per gallon in July 2021 and approximately $1.63 higher than in third quarter 2021.

For October 2022, the average diesel fuel price per gallon was approximately $1.55 higher than the average diesel fuel price per gallon in October 2021 and approximately $1.65 higher than in fourth 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 June 30, 2022, we had no derivative financial instruments to reduce our exposure to fuel price fluctuations.

Supplies and maintenance increased $13.2 million or 26.8% in second quarter 2022 compared to second quarter 2021 and decreased 0.1% as a percentage of operating revenues.

Supplies and maintenance expense increased due to increases in tractor and trailer parts and labor, over-the-road repairs, tires, and tolls.

The average age of our tractors and trailers increased by 0.3 years and 0.6 years, respectively, in second quarter 2022 compared to second quarter 2021, primarily due to ongoing delays in receiving new equipment.

As of September 30, 2022, we had no derivative financial instruments to reduce our exposure to fuel price fluctuations.

Supplies and maintenance increased $10.9 million or 19.2% in third quarter 2022 compared to third quarter 2021 and increased 0.1% as a percentage of operating revenues.

Supplies and maintenance expense increased due to the higher costs for tractor and trailer parts, over-the-road repairs, and tires resulting from inflationary cost increases.

The average age of our tractors and trailers increased by 0.2 years and 0.4 years, respectively, in third quarter 2022 compared to third quarter 2021, primarily due limited new equipment availability.

While it remains difficult to obtain new tractors and trailers, our deliveries of new tractors showed improvement during third quarter 2022.

Operating older equipment has a direct impact on our supplies and maintenance costs.

Insurance and claims increased $20.3 million or 98.0% in second quarter 2022 compared to second quarter 2021 and increased 1.7% as a percentage of operating revenues due primarily to a higher amount of unfavorable reserve development on large claims, higher expense for small dollar liability claims resulting from unfavorable reserve development and higher new claims, and higher liability insurance premiums.

The majority of the higher unfavorable reserve development related to recent unexpected and unfortunate legal developments for two prior year motor vehicle accidents that have been settled, including a settlement of a lawsuit in Texas arising from a May 24, 2020 accident for which we recognized $9.5 million of insurance and claims expense in second quarter 2022.

We also incurred insurance and claims expense of $1.3 million in both second quarter 2022 and second quarter 2021 for accrued interest related to a previously-disclosed adverse jury verdict rendered May 17, 2018, which we are appealing.

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

For additional information related to these lawsuits, see Note 8 in the Notes to Consolidated Financial Statements (Unaudited) set forth in Part I of this report.

Insurance and claims increased $6.8 million or 24.5% in third quarter 2022 compared to third quarter 2021 and increased 0.2% as a percentage of operating revenues due primarily to a higher amount of unfavorable reserve development, higher expense for new claims, and higher liability insurance premiums.

We also incurred insurance and claims expense of $1.4 million and $1.3 million in third quarter 2022 and third quarter 2021, respectively, for accrued interest related to a previously-disclosed adverse jury verdict rendered May 17, 2018, which we are appealing.

Interest will continue to accrue monthly until such time as the outcome of our appeal is finalized.

For additional information related to this lawsuit, see Note 8 in the Notes to Consolidated Financial Statements (Unaudited) set forth in Part I of this report.

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

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Our liability insurance premiums for the policy year that began August 1, 2022 are $1.9 million higher than premiums for the previous policy year.

Depreciation and amortization expense increased $4.6 million or 7.2% in second quarter 2022 compared to second 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 $3.2 million in second quarter 2022.

Depreciation and amortization expense increased $1.8 million or 2.6% in third quarter 2022 compared to third quarter 2021 and decreased 1.3% as a percentage of operating revenues due primarily to higher tractor depreciation on a larger company tractor fleet and depreciation and amortization on tangible and intangible assets recorded in the NEHDS acquisition, partially offset by the impact of a change in accounting estimate effective January 1, 2022, which decreased depreciation expense by $3.2 million in third 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 June 30, 2022, and the average age of our trailers was 4.7 years.

The average age of our tractor fleet was 2.3 years as of September 30, 2022, and the average age of our trailers was 4.8 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 $46.2 million or 30.6% in second quarter 2022 compared to second quarter 2021 and increased 0.4% as a percentage of operating revenues.

During the remainder of 2022, we expect the average age of our tractor fleet to remain at or near current levels and our trailer fleet to increase to 5.0 years, subject to availability of new equipment.

Rent and purchased transportation expense increased $26.4 million or 16.4% in third quarter 2022 compared to third quarter 2021 and decreased 0.3% 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 purchased transportation expense increased $41.9 million as a result of higher logistics revenues, and decreased as a percentage of Werner Logistics revenues to 81.5% in second quarter 2022 from 87.8% in second quarter 2021 due to improved pricing and the effect of the NEHDS acquisition, as NEHDS utilizes both employees and contracted drive teams.

Rent and purchased transportation expense for the TTS segment increased $3.5 million in second quarter 2022 compared to second quarter 2021 due primarily to higher reimbursements to independent contractors due to higher average diesel fuel prices.

The higher expense was partially offset by fewer independent contractor miles in second quarter 2022.

Independent contractor miles decreased approximately 3.4 million miles in second quarter 2022 and as a percentage of total miles were 4.4% in second quarter 2022 compared to 6.2% in second quarter 2021.

Werner Logistics purchased transportation expense increased $20.0 million as a result of higher logistics revenues, and decreased as a percentage of Werner Logistics revenues to 82.8% in third quarter 2022 from 85.5% in third quarter 2021 due to improved pricing and the effect of the NEHDS acquisition, as NEHDS utilizes both employees and contracted drive teams.

Rent and purchased transportation expense for the TTS segment increased $5.1 million in third quarter 2022 compared to third quarter 2021 due primarily to higher reimbursements to independent contractors because of significantly higher average diesel fuel prices.

The higher expense was partially offset by fewer independent contractor miles in third quarter 2022.

Independent contractor miles decreased approximately 2.4 million miles in third quarter 2022 and as a percentage of total miles were 4.2% in third quarter 2022 compared to 5.5% in third 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 $7.0 million in second quarter 2022 compared to second quarter 2021 and decreased 0.5% as a percentage of operating revenues.

Other operating expenses decreased $4.3 million in third quarter 2022 compared to third quarter 2021 and decreased 0.3% 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 $20.7 million in second quarter 2022, compared to $13.5 million in second 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 second quarter 2022 than in second quarter 2021.

Gains on sales of assets were $21.5 million in third quarter 2022, compared to $15.3 million in third quarter 2021.

We sold more tractors and a similar number of trailers in third quarter 2022 compared to third quarter 2021 and realized higher average gains per tractor and trailer.

Other Expense (Income)

Other income, net of expense, increased $2.7 million in second quarter 2022 compared to second quarter 2021 due primarily to a $3.9 million increase in the amount of unrealized net gains recognized on our investments in equity securities in second quarter 2022 compared to second quarter 2021 (see Note 6 in the Notes to Consolidated Financial Statements (Unaudited) set forth in Part I of this report), partially offset by a $1.1 million increase in interest expense.

Interest expense increased primarily due to higher average debt outstanding.

Other expense, net of income, increased $17.4 million in third quarter 2022 compared to third quarter 2021 due primarily to a $16.0 million decrease in the amount of unrealized net gains recognized on our investments in equity securities in third quarter 2022 compared to third quarter 2021 (see Note 6 in the Notes to Consolidated Financial Statements (Unaudited) set forth in Part I of this report) and a $1.5 million increase in interest expense.

Interest expense increased primarily due to higher average debt outstanding and higher interest rates.

Income Tax Expense

Our effective income tax rate (income taxes expressed as a percentage of income before income taxes) was 24.4% in second quarter 2022 compared to 25.5% in second quarter 2021.

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

Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021

Our effective income tax rate (income taxes expressed as a percentage of income before income taxes) was 24.3% in third quarter 2022 compared to 24.6% in third quarter 2021.

Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021

Operating Revenues

Operating revenues increased 26.4% for the six months ended June 30, 2022, compared to the same period of the prior year.

When comparing the first six months of 2022 to the first six months of 2021, TTS segment revenues increased $217.9 million, or 22.8%, and Werner Logistics revenues increased $113.3 million, or 40.5%, due primarily to pricing and volume increases and the acquisition of NEHDS.

In the TTS segment, trucking revenues, net of fuel surcharge, increased $121.4 million, or 14.5%, due primarily to a 7.1% increase in average revenues per tractor per week and a 6.9% increase in average tractors in

TTS segment fuel surcharge revenues for the six months ended June 30, 2022 increased $93.6 million or 89.2% when compared to the same period of the prior year due to higher average diesel fuel prices in the 2022 period.

Operating revenues increased 23.3% for the nine months ended September 30, 2022, compared to the same period of the prior year.

When comparing the first nine months of 2022 to the first nine months of 2021, TTS segment revenues increased $312.1 million, or 21.1%, and Werner Logistics revenues increased $142.5 million, or 32.6%.

The higher Logistics revenues resulted from pricing and volume increases and the acquisition of NEHDS.

In the TTS segment, trucking revenues, net of fuel surcharge, increased $163.7 million, or 12.6%, due primarily to a 6.2% increase in average revenues per tractor per week and a 6.0% increase in average tractors in service.

TTS segment fuel surcharge revenues for the nine months ended September 30, 2022 increased $144.0 million or 86.9% when compared to the same period of the prior year due to higher average diesel fuel prices in the 2022 period.

Operating Expenses

Our operating ratio (operating expenses expressed as a percentage of operating revenues) was 90.1% for the six months ended June 30, 2022 and 89.0% for the six months ended June 30, 2021.

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

Our operating ratio (operating expenses expressed as a percentage of operating revenues) was 90.3% for the nine months ended September 30, 2022 and 89.3% for the nine months ended September 30, 2021.

Expense items that impacted the overall

operating ratio are described on the following pages.

Salaries, wages and benefits increased $80.7 million or 19.4% in the first six months of 2022 compared to the same period in 2021 and decreased 1.8% as a percentage of operating revenues to 31.0%.

The higher dollar amount of salaries, wages and benefits expense in the first six months of 2022 was due primarily to increased driver pay, including driver pay rate increases and the impact of 8.0 million more company tractor miles in the first six months of 2022.

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 56.2% as a result of increased employees to support the 41% growth of Logistics revenues and higher pay rates per employee.

Fuel increased $104.5 million or 95.6% in the first six months of 2022 compared to the same period in 2021 and increased 4.7% as a percentage of operating revenues due to higher average diesel fuel prices and 8.0 million more company tractor miles in the first six months of 2022.

Average diesel fuel prices were $1.74 per gallon higher in the first six months of 2022 than in same period in 2021.

Supplies and maintenance increased $24.1 million or 25.2% in the first six months of 2022 compared to the same period in 2021 and decreased 0.1% as a percentage of operating revenues.

Supplies and maintenance expense increased due to increases in tractor and trailer parts and labor, over-the-road repairs, tires, tolls, travel, and driver advertising.

Insurance and claims increased $25.8 million or 60.2% in the first six months of 2022 compared to the same period in 2021 and increased 0.9% as a percentage of operating revenues due primarily to a higher amount of unfavorable reserve development on large claims, higher expense for small dollar liability claims resulting from unfavorable reserve development and higher new claims, and higher liability insurance premiums.

Depreciation and amortization expense increased $7.9 million or 6.2% in the first six months of 2022 compared to the same period in 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 $6.3 million in first six months of 2022.

Salaries, wages and benefits increased $110.9 million or 17.1% in the first nine months of 2022 compared to the same period in 2021 and decreased 1.7% as a percentage of operating revenues to 31.3%.

The higher dollar amount of salaries, wages and benefits expense in the first nine months of 2022 was due primarily to increased driver pay, including driver pay rate increases and the impact of 13.1 million more company tractor miles in the first nine months of 2022.

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

Non-driver salaries, wages and benefits in our non-trucking Werner Logistics segment increased 56.4% as a result of more employees to support the 41% growth of Logistics revenues.

Fuel increased $151.8 million or 87.2% in the first nine months of 2022 compared to the same period in 2021 and increased 4.6% as a percentage of operating revenues due to higher average diesel fuel prices and 13.1 million more company tractor miles in the first nine months of 2022.

Average diesel fuel prices were $1.65 per gallon higher in the first nine months of 2022 than in same period in 2021.

Supplies and maintenance increased $35.1 million or 23.0% in the first nine months of 2022 compared to the same period in 2021 and remained flat as a percentage of operating revenues.

Supplies and maintenance expense increased due to higher costs for tractor and trailer parts, over-the-road repairs, tires, tolls, and travel.

Insurance and claims increased $32.6 million or 46.2% in the first nine months of 2022 compared to the same period in 2021 and increased 0.6% as a percentage of operating revenues due primarily to a higher amount of unfavorable reserve development, higher expense for new claims, and higher liability insurance premiums.

The majority of the higher unfavorable reserve development related to unexpected and unfortunate legal developments for two prior year motor vehicle accidents that have been settled, including a settlement of a lawsuit in Texas arising from a May 24, 2020 accident for which we recognized $9.5 million of insurance and claims expense in second quarter 2022.

Depreciation and amortization expense increased $9.7 million or 4.9% in the first nine months of 2022 compared to the same period in 2021 and decreased 1.5% as a percentage of operating revenues due primarily to higher tractor depreciation on a larger company tractor fleet and depreciation and amortization on tangible and intangible assets recorded in the ECM Associated, LLC (“ECM”) and NEHDS acquisitions, partially offset by the impact of a change in accounting estimate effective January 1, 2022, which decreased depreciation expense by $9.5 million in first nine months of 2022.

Rent and purchased transportation expense for the TTS segment increased $5.0 million in the first six months of 2022 compared to the same period in 2021 due primarily to higher reimbursements to independent contractors due to higher average diesel fuel prices.

The higher expense was partially offset by fewer independent contractor miles in the first six months of 2022.

Independent contractor miles decreased approximately 7.5 million miles in the first six months of 2022 and as a percentage of total miles were 4.4% in the first six months of 2022 compared to 6.4% in the first six months of 2021.

Werner Logistics purchased transportation expense increased $78.8 million in the first six months of 2022 as a result of higher logistics revenues and decreased as a percentage of Werner Logistics revenues to 82.4% in the first six months of 2022 from 87.6% in the same period in 2021 due to improved pricing and the effect of the NEHDS acquisition, as NEHDS utilizes both employees and contracted drive teams.

Other operating expenses decreased $14.4 million in the first six months of 2022 compared to the same period in 2021 and decreased 0.7% as a percentage of operating revenues due primarily to higher gains on the sales of assets in the first six months of 2022, partially offset by the impact of a $1.0 million gain from the sale of WGL in first quarter 2021.

Gains on sales of assets were $41.1 million in the first six months of 2022, compared to $25.0 million in the same period in 2021.

We sold fewer tractors and trailers in the first six months of 2022 than in the same period in 2021.

Rent and purchased transportation expense for the TTS segment increased $10.1 million in the first nine months of 2022 compared to the same period in 2021 due primarily to higher reimbursements to independent contractors because of significantly higher average diesel fuel prices.

The higher expense was partially offset by fewer independent contractor miles in the first nine months of 2022.

Independent contractor miles decreased approximately 9.9 million miles in the first nine months of 2022 and as a percentage of total miles were 4.4% in the first nine months of 2022 compared to 6.1% in the first nine months of 2021.

Werner Logistics purchased transportation expense increased $98.8 million in the first nine months of 2022 as a result of higher logistics revenues and decreased as a percentage of Werner Logistics revenues to 82.6% in the first nine months of 2022 from 86.8% in the same period in 2021 due to improved pricing and the effect of the NEHDS acquisition, as NEHDS utilizes both employees and contracted drive teams.

Other operating expenses decreased $18.7 million in the first nine months of 2022 compared to the same period in 2021 and decreased 0.6% as a percentage of operating revenues due primarily to higher gains on the sales of assets in the first nine months of 2022, partially offset by the impact of a $1.0 million gain from the sale of WGL in first quarter 2021.

Gains on sales of assets were $62.7 million in the first nine months of 2022, compared to $40.3 million in the same period in 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 used equipment because of production delays limiting availability of new equipment in the industry.

We sold fewer tractors and trailers in the first nine months of 2022 than in the same period in 2021.

Other Expense (Income)

Other income, net of expense, decreased $7.7 million in the first six months of 2022 compared to the same period in 2021 due primarily to a $5.9 million decrease in the amount of unrealized net gains 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 $1.7 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.

Other income, net of expense , decreased $25.1 million i n the first nine months of 2022 compared to the same period in 2021 due primarily to a $21.9 million decrease in the amount of unrealized net gains 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 $3.2 million increase in interest expense.

Interest expense increased due to higher average debt outstanding and higher interest rates.

Income Tax Expense

Our effective income tax rate (income taxes expressed as a percentage of income before income taxes) was 24.3% for the first six months of 2022 compared to 25.2% in the same period in 2021.

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

Our effective income tax rate (income taxes expressed as a percentage of income before income taxes) was 24.3% for the first nine months of 2022 compared to 25.0% in the same period in 2021.

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

Liquidity and Capital Resources:

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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.

Capital expenditures, business acquisitions, 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.

We remain open to considering acquisitions in North America truckload and logistics companies that are both additive to our business and accretive to our earnings.

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 June 30, 2022 is strong.

As of June 30, 2022, we had $54.4 million of cash and cash equivalents and over $1.3 billion of stockholders’ equity.

Management believes our financial position at September 30, 2022 is strong.

As of September 30, 2022, we had $125.7 million of cash and cash equivalents, prior to the closing payment for Baylor on October 3, 2022, and nearly $1.4 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 $291.6 million as of June 30, 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).

In addition, we have two $300.0 million revolving credit facilities, for which our total available borrowing capacity was $161.5 million as of September 30, 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.

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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 six months ended June 30, 2022.

During the six months ended June 30, 2022, we generated cash flow from operations of $267.5 million, a 41.2% or $78.1 million increase in cash flows compared to the same six-month period a year ago.

Except for the changes related to our credit agreements, there were no other material changes in the nature of these items during the nine months ended September 30, 2022.

During the nine months ended September 30, 2022, we generated cash flow from operations of $332.7 million, a 31.3% or $79.4 million increase in cash flows compared to the same nine-month period a year ago.

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

We were able to make net capital expenditures, make additional strategic investments, 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 $169.7 million for the six-month period ended June 30, 2022 compared to $104.6 million during the same period in 2021.

Net property additions (primarily revenue equipment) were $153.4 million for the six-month period ended June 30, 2022, compared to $102.9 million during the same period of 2021.

Net cash used in investing activities was $268.7 million for the nine-month period ended September 30, 2022 compared to $308.9 million during the same period in 2021.

Net property additions (primarily revenue equipment) were $254.1 million for the nine-month period ended September 30, 2022, compared to $162.7 million during the same period of 2021.

We currently estimate net capital expenditures (primarily revenue equipment) in 2022 to be in the range of $300 million to $325 million, compared to net capital expenditures in 2021 of $193.0 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 June 30, 2022, we were committed to property and equipment purchases of approximately $182.4 million.

Net financing activities used $97.9 million during the six months ended June 30, 2022, and provided $77.8 million during the same period in 2021.

We had net borrowings on our debt of $17.5 million during the six months ended June 30, 2022, increasing our outstanding debt to $445.0 million at June 30, 2022.

We had net borrowings of $100.0 million during the six months ended June 30, 2021, which we used to finance the July 1, 2021 purchase of ECM.

We paid dividends of $15.7 million in the six-month period ended June 30, 2022 and $12.9 million during the same period in 2021.

As of September 30, 2022, we were committed to property and equipment purchases of approximately $177.1 million.

Net financing activities provided $7.5 million during the nine months ended September 30, 2022, and provided $71.9 million during the same period in 2021.

We had net borrowings on our debt of $146.3 million during the nine months ended September 30, 2022, increasing our outstanding debt to $573.8 million at September 30, 2022.

A portion of the proceeds were used to finance the October 1, 2022 purchase of Baylor.

We had net borrowings of $150.0 million during the nine months ended September 30, 2021, which we used to finance the July 1, 2021 purchase of ECM.

We paid dividends of $23.9 million in the nine-month period ended September 30, 2022 and $21.1 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 six months ended June 30, 2022, also included common stock repurchases of 2,495,100 shares at a cost of $102.1 million.

Financing activities for the nine months ended September 30, 2022, also included common stock repurchases of 2,710,304 shares at a cost of $110.4 million.

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

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

As of June 30, 2022, the Company had purchased 3,472,986 shares pursuant to our current Board of Directors repurchase authorization and had 2,527,014 shares remaining available for repurchase.

As of September 30, 2022, the Company had purchased 3,688,190 shares pursuant to our current Board of Directors repurchase authorization and had 2,311,810 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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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis