What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-05-09 compared with 2022-11-04 · 115 added, 180 removed, 169 unchanged (64% of the section changed)

2 unchanged sentences

The MD&A is organized in the following sections:

• Baylor Acquisition

• Results of Operations

3 unchanged sentences

The MD&A should be read in conjunction with our 2022 Form 10-K.

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.

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

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

12 unchanged sentences

We exclude such revenues from the statistical calculations.

Our most significant resource requirements are company drivers, independent contractors, tractors and trailers.

Our most significant resource requirements are company drivers, independent contractors, tractors, and trailers with respect to our TTS segment and qualified third-party capacity providers with respect to our Werner Logistics segment.

Independent contractors supply their own tractors and drivers and are responsible for their operating expenses.

7 unchanged sentences

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

As discussed further in the comparison of operating results for third quarter 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.

As discussed further in the comparison of operating results for first quarter 2023 to first quarter 2022, 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, 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).

The TTS segment requires substantial cash expenditures for tractor and trailer purchases.

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

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

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

In first quarter 2021, we completed the 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.

5 unchanged sentences

We have a mix of contracted long-term rates and variable rates for the cost of third-party capacity, and we cannot assure that our operating results will not be adversely impacted in the future if our ability to obtain qualified third-party capacity providers changes or the rates of such providers increase.

The COVID-19 pandemic 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 continue to moderate during the remainder of 2022.

Results of Operations:

1 unchanged sentence

Three Months Ended (3ME)

September 30, Nine Months Ended (9ME)

September 30, Percentage Change in Dollar Amounts

2022 2021 2022 2021 3ME 9ME

March 31, Percentage Change in Dollar Amounts

2023 2022 3ME

(in thousands) $ % $ % %

12 unchanged sentences

Operating income 53,386 6.4 83,511 10.9 (36.1)

Total other expense (income), net 2,349 0.3 (15,043) (2.2) (9,103) (0.3) (34,230) (1.7) (115.6) (73.4)

Total other expense, net 6,452 0.8 11,043 1.4 (41.6)

Income before income taxes 46,934 5.6 72,468 9.5 (35.2)

5 unchanged sentences

Three Months Ended

September 30, Nine Months Ended

September 30,

2022 2021 2022 2021

TTS segment (in thousands) $ % $ %

6 unchanged sentences

Three Months Ended

September 30, Nine Months Ended

September 30,

TTS segment 2022 2021 % Change 2022 2021 % Change

TTS segment 2023 2022 % Change

Average tractors in service 8,561 8,238 3.9 %

25 unchanged sentences

Three Months Ended

September 30, Nine Months Ended

September 30,

2022 2021 2022 2021

Werner Logistics segment (in thousands) $ % $ %

6 unchanged sentences

Three Months Ended

September 30, Nine Months Ended

September 30,

Werner Logistics segment 2022 2021 % Change 2022 2021 % Change

Werner Logistics segment 2023 2022 % Change

Average tractors in service 39 53 (26.4) %

1 unchanged sentence

Total trailers (at quarter end) 2,580 1,605 60.7 %

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

Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022

Operating Revenues

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 .

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 growth in Dedicated.

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 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.

Operating reve nues increased 8.9% for the three months ended March 31, 2023, comp ared to the same period of the prior year.

When comparing first quarter 2023 to first quarter 2022, TTS segment revenue s increased $29.9 million, or 5.4%, and Werner Logistics revenues increased $39.7 million, or 21.0%.

Dedicated freight demand in first qu arter 2023 was solid and steady.

One-Way Truckload and Logistics were challenged by overall market conditions with seasonally less freight available than normal and increased price competition.

This was in contrast to first quarter a year ago, when we benefited from a seasonally strong freight market.

In first quarter 2022, freight was unusually strong for both One-Way Truckload and Logistics, as we benefited from a strong pricing environment and numerous project and pop-up freight opportunities that typically do not occur during first quarter.

The freight market and spot rates in One-Way Truckload and Logistics did not experience the typical seasonal improvement in March 2023 and in fact, declined.

Freight demand in April 2023 remains challenging and consistent with March 2023.

Trucking revenues, net of fuel surchar ge, increased 4.4% in first quarter 2023 compared to first quarter 2022 due to a 3.9% increase in the average number of tractors in service and a 0.5% increase in average revenues per tractor per week, net of fuel surcharge .

During first quarter 2023, Dedicated average revenues per tractor per week, net of fuel surcharge increased 4.6%, slightly ahead of our full year guidance range, partially offset by a 3.2% decrease in One-Way Truckload average revenues per total mile, net of fuel surcharge due to lower rates in a much softer freight market.

We continue to expect Dedicated average revenues per tractor per week, net of fuel surcharge, to remain flat or increase up to 3% in 2023 compared to 2022 .

We continue to 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 first half of 2022 .

We expect the One-Way freight market to be weak in second and third quarters 2023, then improve in fourth quarter 2023.

The average number of tractors in service in the TTS segm ent increased 3.9% to 8,561 in first qu arter 2023 from 8,238 in first quarter 2022 , due primarily to the Baylor Trucking, Inc.

(“Baylor”) acquisition on October 1, 2022 and the ReedTMS Logistics (“ReedTMS”) acquisition on November 5, 2022.

W e ended first quarter 2023 wit h 8,475 tractors in the TTS segment, a year-over-year increase of 250 tractors compared t o the end of first quarter 2022, and a sequentia l decrease of 125 tractors compared to the end of fourth quarter 2022.

During first quarter 2023, our tractor fleet declined 1%, as we decreased our fleet size to adjust to freight market conditions.

We do not plan to grow our fleet in second quarter 2023, but assuming the freight market begins to show improvement during the second half of 2023, we expect a small amount of growth in our Dedicated tractor fleet in 2023 compared to 2022.

Within TTS, our Dedicated unit ended first quarter 2023 with 5,345 tractors (or 63% of our total TTS segment tractors) compared to 5,185 tractors (or 63%) a year ago.

We currently expect our fleet size at the end of 2023 to be in a range of a decrease of 2% to an increase of 1% when compared to the fleet size at the end of 2022.

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 10.6% to $88.3 million in first quarter 2023 from $79.8 million in first quarter 2022 due primarily to a 3.9% increase in the a verage number of tractors in service in the TTS segm ent.

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.

4 unchanged sentences

Fuel prices that change rapidly in short time periods also impact our recovery because the surcharge rate in most programs only changes once per week.

Werner Logistics revenues are generated by its three operating units, following the sale of its WGL freight forwarding services for international ocean and air shipments in first quarter 2021.

Werner Logistics revenues are generated by its three operating units.

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 $0.4 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.

Werner Logistics also recorded revenue and brokered freight expense of $5.3 million in first quarter 2023 and $0.7 million in first quarter 2022 for shipments performed by the TTS segment (also recorded as trucking revenue by the TTS segment), and these transactions between reporting segments are eliminated in consolidation.

In first quarter 2023, Werner Logistics revenues increased $39.7 million, or 21.0%, as growth from the ReedTMS acquisition offset lower brokerage pricing and Intermodal revenues.

Truckload Logistics revenues (78% of Logistics revenues) increased by 41% in first quarter 2023, driven by an increase in shipments due to the ReedTMS acquisition and growth in our organic shipments, partially offset by a decline in revenues per shipment.

Intermodal revenues (12% of Logistics revenues) decreased 33% in first quarter 2023, due primarily to a decrease in shipments.

Final Mile revenues (10% of Logistics revenues) increased $2.4 million in first quarter 2023.

The Werner Logistics operating income decreased to $4.9 million in first quarter 2023 from $8.7 million in first quarter 2022, due to a seasonally weak freight market in first quarter 2023 compared to a seasonally strong freight market in first quarter 2022.

Operating Expenses

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.

Our operating ratio (operating expenses expressed as a percentage of ope rating revenues) was 93.6% for the three months ended March 31, 2023 and 89.1% for the three months ended March 31, 2022.

We experienced a more direct impact from inflation on multiple expense items in first quarter 2023 compared to first quarter 2022.

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 $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 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.

Salaries, wages and benefits increased $26.3 million or 10.9% in first quarter 2023 compared to first quarter 2022 and increased 0.6% as a percentage of operating revenues to 32.2%.

The higher dollar amount of salaries, wages and benefits expense in the first quarter of 2023 was due primarily to increased non-driver and driver pay and the impact of 6.5 million more company tractor miles in the first quarter of 2023.

The increase in non-driver pay was primarily due to a larger number of non-driver employees, including the impact from our ReedTMS and Baylor acquisitions.

Non-driver salaries, wages and benefits in our non-trucking Werner Logistics segment increased 66% in first quarter 2023 compared to first quarter 2022, primarily as a result of the ReedTMS acquisition.

We renewed our workers’ compensation insurance coverage on April 1, 2023.

1 unchanged sentence

We continue to maintain a self-insurance retention of $2.0 million per claim.

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

Our workers’ compensation insurance premiums for the policy year beginning April 2023 were flat compared to the previous policy year.

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.

1 unchanged sentence

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

We continue to take significant actions to strengthen our driver recruiting and retention as we strive to be the truckload employer of choice, including raising driver pay, providing a modern tractor and trailer fleet with the latest safety equipment and technology, investing and expanding our driver training school network and offering a wide variety of driving positions including daily and weekly home time opportunities.

We continue to take significant actions to strengthen our driver recruiting and retention as we strive to be the truckload employer of choice, including competitive driver pay, providing a modern tractor and trailer fleet with the latest safety equipment and technology, investing in our driver training school network and offering a wide variety of driving positions including daily and weekly home time opportunities.

We are unable to predict whether we will experience future driver shortages or maintain our current driver retention rates.

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

Fuel increased $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.

Fuel increased $3.0 million or 3.4% in first quarter 2023 compared to first quarter 2022 and decreased 0.6% as a percentage of operating revenues to 11.0%, primarily due to 6.5 million more company tractor miles in first quarter 2023, partially offset by slightly lower average diesel fuel prices.

Average diesel fuel prices were nine cents per gallon lower in first quarter 2023 than in first quarter 2022 and were 70 cents per gallon lower than in fourth quarter 2022.

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

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

Although our fuel management programs require significant capital investment and research and development, we intend to continue these and other environmentally conscious initiatives, including our active participation as an EPA SmartWay Transport Partner.

Environmental Protection Agency (“EPA”) SmartWay Transport Partner.

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

For October 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.

For April 2023, the average diesel fuel price per gallon was approximately $1.17 lower than the average diesel fuel price per gallon in April 2022 and approximately $1.53 lower than in second quarter 2022.

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

We are unable to predict whether fuel price levels will increase or decrease in the future or the extent to which fuel surcharges will be collected from customers.

As of September 30, 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 $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.

As of March 31, 2023, we had no derivative financial instruments to reduce our exposure to fuel price fluctuations.

Supplies and maintenance increased $11.2 million or 19.6% in first quarter 2023 compared to first quarter 2022 and increased 0.7% as a percentage of operating revenues.

Supplies and maintenance expense increased due to the higher costs for over-the-road tractor and trailer maintenance and tires resulting from inflationary cost increases and the impact of 6.5 million more company tractor miles.

Insurance and claims increased $9.0 million or 32.7% in first quarter 2023 compared to first quarter 2022 and increased 0.8% as a percentage of operating revenues due primarily to a higher amount of unfavorable reserve development resulting from an increasing cost-per-claim.

We also incurred insurance and claims expense of $1.4 million and $1.3 million in first quarter 2023 and first quarter 2022, 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.

6 unchanged sentences

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 $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 September 30, 2022, and the average age of our trailers was 4.8 years.

Depreciation and amortization expense increased $7.1 million or 10.5% in first quarter 2023 compared to first quarter 2022 and increased 0.1% as a percentage of operating revenues due primarily to depreciation and amortization on tangible and intangible assets recorded in the ReedTMS and Baylor acquisitions and the higher cost of new tractors and trailers.

The average age of our tractor fleet remains low by industry standards and was 2.2 years as of March 31, 2023, and the average age of our trailers was 5.1 years.

We are continuing to invest in new tractors and trailers and our terminals in 2023 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 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.

During the remainder of 2023, we expect the average age of our tractor and trailer fleets to remain at or near current levels.

Rent and purchased transportation expense increased $35.0 million or 18.9% in first quarter 2023 compared to first quarter 2022 and increased 2.2% as a percentage of operating revenues.

Werner Logistics recorded brokered freight expense of $5.3 million in first quarter 2023 and $0.7 million in first quarter 2022 for shipments performed by the TTS segment, which is eliminated in consolidation.

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 $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.

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 $31.0 million primarily due to the ReedTMS acquisition and decreased as a percentage of Werner Logistics revenues to 82.4% in first quarter 2023 from 83.3% in first quarter 2022.

Rent and purchased transportation expense for the TTS segment increased $7.5 million in first quarter 2023 compared to first quarter 2022 due primarily to the Baylor acquisition and more independent contractor miles in first quarter 2023.

Independent contractor miles increased approximately 1.1 million miles in first quarter 2023 and as a percentage of total miles were 4.9% in first quarter 2023 compared to 4.5% in first quarter 2022.

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

Challenging operating conditions continue to make independent contractor recruitment and retention difficult.

2 unchanged sentences

If a shortage of independent contractors and company drivers occurs, further increases in per-mile settlement rates (for independent contractors) and driver pay rates (for company drivers) may become necessary to attract and retain these drivers.

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

Other operating expenses decreased $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 $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 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 24.3% 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 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 90.3% 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 $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 $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.

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

Other operating expenses increased $4.3 million in first quarter 2023 compared to first quarter 2022 and increased 0.6% as a percentage of operating revenues due primarily to a decrease in gains on the sales of property and equipment, and increased costs associated with professional technology services.

Gains on sales of property and equipment (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 property and equipment were $18.3 million in first quarter 2023, compared to $20.5 million in first quarter 2022.

We sold significantly more tractors and trailers in first quarter 2023 compared to first quarter 2022 and realized substantially lower average gains per tractor and trailer due to lower pricing in the market for our used equipment, which we believe is due to a greater number of small carriers exiting the trucking industry due to lower spot rates and higher operating costs.

For the used tractor market, we expect gradually declining customer demand in a difficult freight and financing market, which should moderate pricing and equipment gains as the year progresses.

We continue to expect our gains on sales of property and equipment in 2023 to decrease to between $30 million and $50 million for the full year.

Other Expense (Income)

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.

Other expense, net of income, decreased $4.6 million in first quarter 2023 compared to first quarter 2022 due primarily to a $9.7 million decrease in the amount of unrealized losses recognized on our investments in equity securities in first quarter 2023 compared to first quarter 2022 (see Note 7 in the Notes to Consolidated Financial Statements (Unaudited) set forth in Part I of this report), partially offset by a $5.2 million increase in net interest expense.

Net interest expense increased primarily due to higher interest rates for variable rate debt and an increase in average debt outstanding.

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 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.

Our effective income tax rate (income taxes expressed as a percentage of income before income taxes) was 24.3% in first quarter 2023 compared to 24.1% in first quarter 2022.

Liquidity and Capital Resources:

2 unchanged sentences

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 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 $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.

Management believes our financial position at March 31, 2023 is strong.

As of March 31, 2023, we had $129.6 million of cash and cash equivalents and over $1.4 billion of stockholders’ equity.

Cash is invested primarily in short-term money market funds.

In addition, we have a $1.075 billion credit facility, for which our total available borrowing capacity was $414.6 million as of March 31, 2023 (see Note 9 in the Notes to Consolidated Financial Statements (Unaudited) set forth in Part I of this report for information regarding our credit agreements).

After considering recent developments in the banking sector, we believe the six commercial banks in our $1.075 billion syndicated credit facility all have strong tier-one capital ratios and good loan-to-deposit ratios.

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.

Item 7 of Part II of our 2022 Form 10-K includes our disclosure of material cash requirements as of December 31, 2022.

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

These changes increased our borrowing capacity by $200.0 million.

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

Except for the changes related to our credit agreements, there were no other material changes in the nature of these items during the 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, supplemented by net borrowings under our credit facilities.

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.

There were no material changes in the nature of these items during the three months ended March 31, 2023.

During the three months ended March 31, 2023, we generated cash flow from operations of $166.8 million, a 7.7% or $11.9 million increase in cash flows compared to the same three-month period a year ago.

The increase in net cash provided by operating activities was due primarily to working capital changes, including a decrease in accounts receivable days sales outstanding during first quarter 2023, partially offset by a decrease in net income for the three-month period ended March 31, 2023 compared to the same period in 2022.

We were able to make net capital expenditures, make a strategic loan and investment, and pay dividends with the net cash provided by operating activities and existing cash balances.

Net cash used in investing activities was $129.2 million for the three-month period ended March 31, 2023 compared to $34.5 million during the same period in 2022.

Net property and equipment additions (primarily revenue equipment) were $102.7 million for the three-month period ended March 31, 2023, compared to $37.1 million during the same period of 2022.

We currently estimate net capital expenditures (primarily revenue equipment) in 2023 to be in the range of $350 million to $400 million, compared to net capital expenditures in 2022 of $317.6 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 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 nine months ended September 30, 2022, also included common stock repurchases of 2,710,304 shares at a cost of $110.4 million.

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

As of March 31, 2023, we were committed to property and equipment purchases of approximately $271.4 million.

We also purchased a $25.0 million subordinated promissory note from MLSI on January 24, 2023, with a maturity date of January 24, 2030 (see Note 8 in the Notes to Consolidated Financial Statements (Unaudited) set forth in Part I of this report for information regarding our notes receivable).

Net cash used in financing activities was $16.2 million during the three months ended March 31, 2023 compared to $49.0 million during the same period in 2022.

We repaid $2.5 million on our debt during the three months ended March 31, 2023, decreasing our outstanding debt to $691.3 million at March 31, 2023, and had net repayments on our debt of $1.3 million during the same period in 2022.

We paid dividends of $8.2 million during the three months ended March 31, 2023 and $7.9 million during the same period in 2022.

We currently plan to continue paying a quarterly dividend.

We did not repurchase any shares of common stock during the three months ended March 31, 2023.

Financing activities for the same period in 2022 included common stock repurchase of 845,100 shares at a cost of $36.2 million.

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

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

As of September 30, 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.

As of March 31, 2023, 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 2022 Form 10-K includes a discussion of pending proposed regulations that may have an effect on our operations if they become adopted and effective as proposed.

There have been no material changes in the status of the proposed regulations previously disclosed in the 2021 Form 10-K.

The following is an update to the regulations set forth in our 2022 Form 10-K.

California’s ongoing emissions reduction goals have significantly impacted the industry.

The California Air Resources Board regulations apply not only to California intrastate carriers, but also to carriers outside of California who own or dispatch equipment in the state.

In March 2023, the EPA granted California the authority to enforce environmental rules that are more strict than current EPA requirements.

These rules would apply to vehicles beginning with the 2024 model year.

Werner continues to structure our fleet plans to operate compliant equipment in California.

Approximately 4% of our truck miles in 2022 were in the state of California.

There have been no other material changes in the status of the proposed regulations previously disclosed in the 2022 Form 10-K.

Critical Accounting Estimates:

1 unchanged sentence

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

Actual results could differ from those estimates and may significantly impact our results of operations from period to period.

Actual results could differ from those estimates and may significantly impact our results of operations

from period to period.

It is also possible that materially different amounts would be reported if we used different estimates or assumptions.

3 unchanged sentences

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