What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-02-27 compared with 2022-02-28 · 106 added, 113 removed, 222 unchanged (50% of the section changed)

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Business Acquisitions:

ECM Acquisition

On July 1, 2021, we acquired an 80% equity ownership interest in ECM for a cash purchase price of $141.3 million after net working capital changes and net of cash acquired.

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

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

with low driver turnover.

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

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

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

NEHDS Acquisition

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

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

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

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

We recently acquired the following entities:

• 100% of ReedTMS on November 5, 2022.

Freight brokerage and truckload revenues generated by ReedTMS are reported in our Werner Logistics segment and in Dedicated within our TTS segment, respectively.

• 100% of Baylor on October 1, 2022.

Revenues generated by Baylor are reported in One-Way Truckload within our TTS segment.

• 100% of NEHDS on November 22, 2021.

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

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

• 80% of ECM on July 1, 2021.

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

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

We have two reportable segments, TTS and Werner Logistics, and we operate in the truckload and logistics sectors of the transportation industry.

In the truckload sector, we focus on transporting consumer nondurable products that generally ship more consistently throughout the year.

In the logistics sector, besides managing transportation requirements for individual

customers, we provide additional sources of truck capacity, alternative modes of transportation, a North American delivery network and systems analysis to optimize transportation needs.

In the logistics sector, besides managing transportation requirements for individual customers, we provide additional sources of truck capacity, alternative modes of transportation, a North American delivery network and systems analysis to optimize transportation needs.

Our success depends on our ability to efficiently and effectively manage our resources in the delivery of truckload transportation and logistics services to our customers.

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We may also be affected by our customers’ financial failures or loss of customer business.

Revenues for our TTS segment operating units (Dedicated and One-Way Truckload) are typically generated on a per-mile basis and also include revenues such as stop charges, loading and unloading charges, equipment detention charges and equipment repositioning charges.

repositioning charges.

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

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As discussed further in the comparison of operating results for 2022 to 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.

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

Our main fixed costs include depreciation expense for tractors and trailers and equipment licensing fees (included in taxes and licenses expense).

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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.

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

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, which assumed achievement of the full earnout.

At the end of the twelve month period following the completed sale of WGL, 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.

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At the end of 2022, we believe we are well positioned with a strong balance sheet and sufficient liquidity.

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

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

We also have sufficient cushion with our debt covenants.

We currently plan to continue paying our quarterly dividend,

which we have paid quarterly since 1987.

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

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

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

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

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

government as an essential industry for keeping the U.S.

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 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 be strong in 2022.

Our debt is at $694 million, or a net debt ratio (debt less cash) o f 1.0 tim es earnings before interest, income taxes, depreciation and amortization for the year ended December 31, 2022.

We had available liquidity of $523 million, considering cash on hand and available borrowing capacity of $416 million.

As of December 31, 2022, we were in compliance with our debt covenants and expect to continue to be in compliance in 2023.

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

This cash outlay currently results in slightly more than $8 million per quarter.

Net capital expenditures (primarily revenue equipment) in 2023 currently are expected to b e in the rang e of $350 million to $400 million.

Results of Operations:

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Operating income 323,076 9.8 309,146 11.3 4.5

Total other expense (income) (36,869) (1.4) 2,744 0.1 (1,443.6)

Total other income, net (1,710) (0.1) (36,869) (1.4) (95.4)

Income before income taxes 324,786 9.9 346,015 12.7 (6.1)

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Net income 245,580 7.5 261,478 9.6 (6.1)

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

Net income attributable to noncontrolling interest (4,324) (0.2) (2,426) (0.1) 78.2

Net income attributable to Werner $ 241,256 7.3 $ 259,052 9.5 (6.9)

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Revenues for the Werner Logistics segment increased $171.0 million or 27.5%.

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

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

Trucking revenues, net of fuel surcharge, increased 7.3% in 2021 compared to 2020 due to a 4.3% increase in average revenues per tractor per week, net of fuel surcharge and a 2.9% increase in the average number of tractors in service.

The increase in average revenues per tractor was due primarily to improved pricing in both Dedicated and One-Way Truckload, partially offset by a decline in miles per tractor caused by tractors down due to equipment parts shortages, more drivers unavailable to work due to COVID quarantine protocols, a 2% shorter average loaded length of haul for the TTS segment, and other factors.

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

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 compared to record high levels a year ago.

We expect that the 2023 freight market will be challenging in the first half of the year, and then gradually begin to show improvement in the second half of the year, as capacity exits the market and retail inventory resets to normalized levels.

Trucking revenues, net of fuel surcharge, increased 10.8% in 2022 compared to 2021 due to a 5.7% increase in the average number of tractors in service and a 4.8% increase in average revenues per tractor per week, net of fuel surcharge.

The increase in average revenues per tractor per week, net of fuel surcharge was due primarily to improved pricing in both Dedicated and One-Way Truckload, partially offset by a decline in miles per tractor.

The decline in miles per tractor resulted from several factors, including a lower length of haul due to freight mix, growth in Dedicated, the impact of our acquisitions which have a more regional footprint, and more tractor down time early in the year due to equipment parts shortages and COVID issues.

We expect total miles per tractor per week for the One-Way Truckload fleet in 2023 to be comparable to 2022, and we expect a gradually improving pricing environment during the second half of 2023.

Considering the freight market outlook, we expect average revenues per total mile, net of fuel surcharge, for the One-Way Truckload fleet to decline in a range of 3% to 6% in the first half of 2023 when compared to the first half of 2022, and we expect Dedicated average revenues per tractor per week, net of fuel surcharge, to increase in a range of 0% to 3% in 2023 compared to 2022.

The average number of tractors in service in the TTS segment increased 5.7% to 8,437 in 2022 compared to 7,982 in 2021.

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

We ended 2022 with 8,600 tractors in the TTS segment, a year-over-year increase of 260 tractors.

The increase in end of period tractors was due primarily to tractors acquired in the fourth quarter 2022 Baylor and ReedTMS acquisitions, which also contributed to the increase in the average number of tractors in service along with the full year impact in 2022 of the July 1, 2021 ECM acquisition.

Our Dedicated unit ended 2022 with 5,450 tractors (or 63% of our total TTS segment fleet) compared to 5,235 tractors at the end of 2021.

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

We currently expect our fleet size at the end of 2023 to be in a range of 1% to 4% higher when compared to the fleet size at the end of 2022, with the majority of the growth planned for our Dedicated unit in the second half of the year.

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

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

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

Trucking fuel surcharge revenues increased 79.0% to $419.2 million in 2022 from $234.2 million in 2021 due primarily to higher average diesel fuel prices, driven by impacts of the war in Ukraine early in the year.

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

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

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

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

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

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

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

Werner Logistics also recorded revenue and brokered freight expense of $5.2 million in 2022 and $0.9 million in 2021 for 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.

Werner Logistics revenues increased 27.5% to $793.5 million in 2022 from $622.5 million in 2021 due primarily to volume growth in Truckload Logistics, which includes eight weeks of the acquired ReedTMS business, a $74.8 million increase in Final Mile revenues primarily due to the impact of NEHDS acquired in November 2021, and higher pricing in Intermodal.

Truckload Logistics revenues (67% of total Logistics revenues), including ReedTMS, increased 24% due to a 20% increase in volume and a 4% increase in revenues per shipment.

Intermodal revenues (22% of total Logistics revenues) increased 6% due to a 23% increase in revenues per shipment, partially offset by a 17% decline in shipment volume.

Werner Logistics operating income increased to $36.2 million in 2022 compared to $27.9 million in 2021 and operating margin percentage increased to 4.6% in 2022 from 4.5% in 2021.

During 2022 we experienced fewer premium pop-up freight opportunities, Intermodal customer and market challenges, softening demand and start up costs in Final Mile.

Werner Logistics revenues were 24% of total operating revenues in 2022.

Including our recent acquisition of ReedTMS, we expect Werner Logistics revenues in 2023 will grow to over 30% of total operating revenues.

Operating Expenses

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Salaries, wages and benefits increased $125.6 million or 14.0% in 2022 compared to 2021 and decreased 1.7% as a percentage of operating revenues.

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

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

These increases were partially offset by 20.5 million fewer company tractor miles during 2021.

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

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

As a result, driver pay per company driver mile increased 15% in 2021.

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

The higher dollar amount of salaries, wages and benefits expense in 2022 was due primarily to increased driver pay, including driver pay rate increases and the impact of 18.0 million more company tractor miles in 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 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 58.4% as a result of more employees to support the 27.5% 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 severely constrained driver market is presenting labor challenges for customers and carriers alike and became more challenging in 2021, as the strong freight market caused increased competition for the finite number of experienced drivers that meet our hiring standards.

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

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

Fuel increased $191.4 million or 77.9% in 2022 compared to 2021 and increased 4.3% as a percentage of operating revenues due to higher average diesel fuel prices and 18.0 million more company tractor miles in 2022.

Average diesel fuel prices, excluding fuel taxes, for the full year 2022 were $1.55 higher than the full year 2021, a 71% increase.

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

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

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

Through February 17, the average diesel fuel price per gallon in 2023 was approximately 47 cents higher than the average diesel fuel price per gallon in the same period of 2022 and approximately 7 cents higher than the average for first quarter 2022.

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

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Supplies and maintenance increased $46.4 million or 22.4% in 2022 compared to 2021 and increased 0.1% as a percentage of operating revenues.

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

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

Insurance and claims decreased $11.2 million or 10.2% in 2021 compared to 2020 and decreased 1.0% as a percentage of operating revenues, due primarily to lower expense for new large dollar claims and a lower amount of unfavorable development on large dollar claims, partially offset by higher liability insurance premiums of $7.7 million.

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

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

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

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

The average age of our tractors and trailers increased by 0.1 years and 0.5 years at December 31, 2022 compared to December 31, 2021, respectively, primarily due to limited new equipment availability.

While it remains difficult to obtain new tractors and trailers, we anticipate that new tractor and trailer production will show modest improvement in 2023.

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

Insurance and claims increased $48.7 million or 49.4% in 2022 compared to 2021 and increased 0.9% 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 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 2022.

We also incurred insurance and claims expense of $5.4 million and $5.1 million in 2022 and 2021, respectively, for accrued interest related to a previously-disclosed adverse jury verdict rendered on May 17, 2018, which we are appealing (see Note 12 in the Notes to Consolidated Financial Statements set forth in Part II of this Form 10-K).

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

In 2022, we achieved our lowest DOT preventable accident rate per million miles in the last 10 years.

Over the longer term, we expect our accident per million miles performance will improve our insurance and claims experience.

While we cannot ignore the increasing trend of high dollar verdicts and settlements, we expect our 2023 insurance and claims expense to moderate from 2022.

We renewed our liability insurance policies on August 1, 2022 and are responsible for the first $10.0 million per claim on all claims with an annual $10.0 million aggregate for claims between $10.0 million and $20.0 million.

For the policy year that began August 1, 2020, we were responsible for the first $10.0 million per claim with no aggregates.

For the policy year that began August 1, 2021, we were responsible for the first $10.0 million per claim on all claims with an annual $10.0 million aggregate for claims between $10.0 million and $15.0 million.

We maintain liability insurance coverage with insurance carriers in excess of the $10.0 million per claim.

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

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

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

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

This change in accounting estimate had no effect on 2021.

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

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

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

Depreciation and amortization expense increased $12.2 million or 4.6% in 2022 compared to 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 our business acquisitions, partially offset by the impact of a change in accounting estimate effective January 1, 2022, due to the ongoing stronger used trailer market and the increasing cost of new trailers, which decreased trailer depreciation expense by $12.7 million in 2022.

The average age of our tractor fleet remains low by industry standards and was 2.3 years as of December 31, 2022, and the average age of our trailers was 5.0 years.

We continued 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.

In 2023, we expect to slightly lower the average age of our tractor fleet and maintain the average age of our trailer fleet.

Rent and purchased transportation expense increased $136.3 million or 21.3% in 2022 compared to 2021 and increased 0.2% as a percentage of operating revenues.

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

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

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

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

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

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

Werner Logistics purchased transportation expense increased $117.8 million as a result of higher logistics revenues, which includes 8 weeks of the acquired ReedTMS logistics business, and decreased to 82.3% as a percentage of Werner Logistics revenues in 2022 from 86.0% in 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 $17.5 million in 2022 compared to 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 2022.

Independent contractor miles decreased 10.0 million miles in 2022 and as a percentage of total miles were 4.5% in 2022 compared to 5.8% in 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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This could negatively affect our results of operations to the extent that we would not be able to obtain corresponding freight rate increases.

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

Gains on sales of assets (primarily used tractors and trailers) are reflected as a reduction of other operating expenses and are reported net of sales-related expenses (which include costs to prepare the equipment for sale).

Gains on sales of assets were $61.5 million in 2021, compared to $11.3 million in 2020.

Other operating expenses decreased $23.2 million in 2022 compared to 2021 and decreased 0.5% as a percentage of operating revenues due primarily to higher gains on sales of property and equipment (primarily used tractors and trailers) and a $2.5 million reversal of the contingent consideration recorded in the NEHDS acquisition because the financial performance goals in 2022 were not achieved, partially offset by the impact of a $1.0 million gain from the sale of WGL in first quarter 2021.

Gains on sales of property and equipment 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 property and equipment were $88.6 million in 2022, compared to $61.5 million in 2021.

In 2022, we sold fewer tractors and trailers than in 2021.

We realized substantially higher average gains per tractor and trailer sold in 2022 due to significantly improved pricing in the market for our used equipment, which we believe is a result of increased demand for previously used equipment because of production delays limiting availability of new equipment in the industry.

Other Expense (Income)

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

In 2023, we anticipate the used truck and trailer market will weaken, as we expect a greater number of small carriers to exit the trucking industry due to lower spot rates and much higher operating costs.

As a result, we expect our gains on sales of property and equipment in 2023 to decrease to between $30 million and $50 million.

Other Income, Net

Other income, net of expense, decreased $35.2 million in 2022 compared to 2021 due primarily to a $28.1 million decrease in the amount of unrealized net gains recognized on our investments in equity securities (see Note 7 in the Notes to Consolidated Financial Statements set forth in Part II of this Form 10-K) and a $7.4 million increase in interest expense.

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

In 2023, we expect interest expense will be higher than in 2022, primarily due to higher interest rates, as well as maintaining a higher debt level.

Income Tax Expense

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

Income tax expense decreased $5.3 million in 2022 compared to 2021, due to lower pre-tax income.

The effective income tax rate (income taxes expressed as a percentage of income before income taxes) was 24.4% in 2022 and 2021.

We currently estimate our full year 2023 effective income tax rate to be approximately 24.0% to 25.0%.

2021 Compared to 2020

For a comparison of the Company’s results of operations for the fiscal year ended December 31, 2020 to the fiscal year ended December 31, 2019, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations , in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the U.S.

For a comparison of the Company’s results of operations for the fiscal year ended December 31, 2021 to the fiscal year ended December 31, 2020, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations , in

the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, which was filed with the U.S.

Securities and Exchange Commission on February 28, 2022.

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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.

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.

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Cash is invested primarily in government portfolio money market funds.

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

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

In addition, we have a $1.075 billion credit facility, for which our total available borrowing capacity was $416.2 million as of December 31, 2022.

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

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

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As of December 31, 2022, we had fixed lease payment obligations of $46.6 million, with $10.6 million payable within 12 months.

See Note 5 in the Notes to

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

See Note 5 in the Notes to Consolidated Financial Statements under Item 8 of Part II of this Form 10-K for further detail of our lease obligations and the timing of expected future payments.

• Purchase Obligations – As of December 31, 2022, we have committed to property and equipment purchases of approximately $278.6 million within the next 12 months.

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

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

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

We generated cash flow from operations of $448.7 million during 2022 compared to $332.8 million during 2021.

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

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

The increase in net cash provided by operating activities was due primarily to working capital changes resulting from growth in accounts receivable during 2021.

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, supplemented by net borrowings under our credit facilities.

Net cash used in investing activities was $514.3 million during 2022 compared to $397.3 million during 2021.

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

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

Net cash invested in our business acquisitions was $184.1 million during 2022 compared to $201.8 million during 2021.

Net property and equipment additions (primarily revenue equipment) were $317.6 million during 2022 compared to $193.0 million during 2021.

We currently estimate net capital expenditures (primarily revenue equipment) in 2023 to be in the range of $350 million to $400 million.

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

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

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

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

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

Net cash provided by financing activities was $118.0 million during 2022 compared to $89.7 million during 2021.

We had net borrowings of $266.3 million during 2022, increasing our outstanding debt to $693.8 million at December 31, 2022.

A portion of the proceeds were used to finance our Baylor and ReedTMS acquisitions.

We had net borrowings of $227.5 million during 2021, which were primarily used to finance our ECM and NEHDS acquisitions.

We paid dividends of $32.2 million during 2022 and $29.1 million during 2021.

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

We increased our quarterly dividend rate by $0.01 per share, or 8%, beginning with the quarterly dividend paid in July 2022.

Financing activities for 2022 also included common stock repurchases of 2,710,304 shares at a cost of $110.4 million.

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

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

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

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

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

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

As of December 31, 2022, the Company had purchased 3,688,190 shares pursuant to this authorization and had 2,311,810 shares remaining available for repurchase.

Critical Accounting Estimates:

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the (i) reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and (ii) reported amounts of revenues and expenses during the reporting period.

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the (i) reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and (ii) reported amounts of revenues and expenses during the reporting period.

We evaluate these estimates on an ongoing basis as events and circumstances change, utilizing historical experience, consultation with experts and other methods considered reasonable in the particular circumstances.

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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-K

Item 7. Management’s Discussion and Analysis