What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-08 compared with 2023-08-08 · 120 added, 116 removed, 215 unchanged (52% of the section changed)

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

As discussed further in the comparison of operating results for second quarter 2023 to second quarter 2022, several industry-wide issues have caused, and could continue to cause, costs to increase in future periods.

As discussed further in the comparison of operating results for third quarter 2023 to third 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.

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Three Months Ended (3ME)

June 30, Six Months Ended (6ME)

June 30, Percentage Change in Dollar Amounts

September 30, Nine Months Ended (9ME)

September 30, Percentage Change in Dollar Amounts

2023 2022 2023 2022 3ME 9ME

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Net income 23,504 2.9 55,925 6.8 89,058 3.6 184,569 7.6 (58.0) (51.7)

Net income attributable to noncontrolling interest (139) — (1,319) (0.2) (449) — (2,605) (0.1) (89.5) (82.8)

Net loss (income) attributable to noncontrolling interest 200 — (874) (0.1) (249) — (3,479) (0.1) (122.9) (92.8)

Net income attributable to Werner $ 23,704 2.9 $ 55,051 6.7 $ 88,809 3.6 $ 181,090 7.5 (56.9) (51.0)

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Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2023 2022 2023 2022

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Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

TTS segment 2023 2022 % Change 2023 2022 % Change

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Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2023 2022 2023 2022

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Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

Werner Logistics segment 2023 2022 % Change 2023 2022 % Change

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Total trailers (at quarter end) 2,865 2,045 40.1 % 2,865 2,045 40.1 %

Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022

Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022

Operating Revenues

Operating reve nues decreased 3.0% for the three months ended June 30, 2023, comp ared to the same period of the prior year.

When comparing second quarter 2023 to second quarter 2022, TTS segment revenue s decreased $43.4 million, or 7.1%, and Werner Logistics revenues increased $20.7 million, or 10.1%.

Dedicated freight demand in second quarter 2023 was generally steady and in-line with our expectations and One-Way Truckload was challenged by overall market conditions with less freight available, elevated exposure to transactional spot rates, and significant pricing pressure.

Logistics volume and revenues remained strong in second quarter 2023.

During July 2023, Dedicated demand remains steady.

Despite a very competitive marketplace and low-rate environment, we expect solid volume and margin pressure to continue in Logistics.

Trucking revenues, net of fuel surcha rge, decreased 0.3% in second quarter 2023 compared to second quarter 2022 due to a 1.1% decrease in averag e revenues per tractor per week, net of fuel surcharge, partially offset by a 0.8% increase in the average number of tractors in service.

During second quarter 2023, One-Way Truckload average revenues per total mile, net of fuel surcharge decreased 5.2% due to lower rates in a much softer freight market, partially offset by a 1.5% increase in Dedicated average revenues per tractor per week, net of fuel surcharge.

We expect average revenues per total mile, net of fuel surcharge, for the One-Way Truckload fleet to be in a range of a decrease of 7% to a decrease of 4% in third quarter 2023 compared to third quarter 2022.

We expect the One-Way freight market to stabilize in third quarter 2023, then show modest seasonal improvement in fourth quarter 2023.

Operating reve nues decreased 1.2% for the three months ended September 30, 2023, comp ared to the same period of the prior year.

When comparing third quarter 2023 to third quarter 2022, TTS segment revenue s decreased $49.7 million, or 8.0%, and Werner Logistics revenues increased $43.1 million, or 23.0%.

The freight market remained challenging in third quarter and into October 2023.

Dedicated freight demand in third quarter 2023 remained steady, and we anticipate a pipeline of opportunities that we can capitalize on.

One-Way Truckload continued to be challenged by overall market conditions with less freight available, elevated exposure to transactional spot rates, significant pricing pressure, and rapidly rising fuel prices in third quarter 2023.

Logistics volume and revenues continued to perform well in third quarter 2023.

Despite a very competitive marketplace, we expect continued solid volume in Logistics.

Trucking revenues, net of fuel surcha rge, decreased 4.3% in third quarter 2023 compared to third quarter 2022 due to a 3.4% decrease in the average number of tractors in service and a 0.9% decrease in averag e revenues per tractor per week, net of fuel surcharge .

During third quarter 2023, One-Way Truckload average revenues per total mile, net of fuel surcharge decreased 4.8%, as One-Way Truckload remained challenged by elevated transactional spot exposure and ongoing pricing pressure.

Dedicated average revenues per tractor per week, net of fuel surcharge, decreased 0.4%, as third quarter 2023 was negatively impacted by one less business day.

We expect average revenues per total mile, net of fuel surcharge, for the One-Way Truckload fleet to be down in a range of a decrease of 9% to a decrease of 7% in fourth quarter 2023 compared to fourth quarter 2022, as we expect a more muted peak season.

We expect the One-Way freight market to stabilize in fourth quarter 2023, with minimal impact from the peak season.

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, as Dedicated demand remains steady, and we anticipate a pipeline of opportunities that we can capitalize on.

The average number of tractors in service in the TTS segm ent increased 0.8% to 8,351 in second qu arter 2023 from 8,286 in second 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 second quarter 2023 wi th 8,285 tractors in the TTS segment, a year-over-year decrease of 115 tractors compared t o the end of second quarter 2022, and a sequentia l increase of 190 tractors compared to the end of first quarter 2023.

During second quarter 2023, our fleet declined 1.4%, as we decreased our fleet size to adjust to the challenging freight market conditions.

Within TTS, our Dedicated unit ended second quarter 2023 with 5,260 tractors (or 63% of our total TTS segment tractors) compared to 5,320 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 4% to a decrease of 2% when compared to the fleet size at the end of 2022 to adapt to a softer freight market.

The average number of tractors in service in the TTS segm ent decreased 3.4% to 8,226 in third qu arter 2023 from 8,513 in third quarter 2022 , as we decreased our fleet size to adjust to the challenging freight market conditions .

W e ended third quarter 2023 wi th 8,170 tractors in the TTS segment, a year-over-year decrease of 410 tractors compared to the e nd of third quarter 2022, and a sequentia l decrease of 115 tractors compared to the end of second quarter 2023.

Within TTS, our Dedicated unit ended third quarter 2023 with 5,260 tractors (or 64% of our total TTS segment tractors) compared to 5,430 tractors (or 63%) a year ago.

We currently expect our fleet size at the end of 2023 to be lower by 3% to 5% when compared to the fleet size at the end of 2022 to adapt to a softer freight market.

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

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

Trucking fuel surcharge revenues decreased 35.4% to $76.7 million in second quarter 2023 from $118.6 million in second quarter 2022 due primarily to much lower average diesel fuel prices.

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.

Trucking fuel surcharge revenues decreased 25.6% to $82.7 million in third quarter 2023 from $111.2 million in third quarter 2022.

While diesel fuel prices rose rapidly during third quarter 2023, average diesel fuel prices in third quarter 2023 were much lower than in third quarter 2022.

These revenues represent collections from customers for the increase in fuel and fuel-related

expenses, including the fuel component of our independent contractor cost (recorded as rent and purchased transportation expense) and fuel taxes (recorded in taxes and licenses expense), when diesel fuel prices rise.

Conversely, when fuel prices decrease, fuel surcharge revenues decrease.

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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 $3.5 million in second quarter 2023 and $0.6 million in second 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 second quarter 2023, Werner Logistics revenues increased $20.7 million, or 10.1%, primarily due to growth from the ReedTMS acquisition.

Truckload Logistics revenues (77% of Logistics revenues) increased by 30% in second quarter 2023, driven by an increase in shipments due to the ReedTMS acquisition and strong performance from our organic business, partially offset by a decline in revenues per shipment.

Final Mile revenues (12% of Logistics revenues) increased $3.5 million or 15% in second quarter 2023.

Intermodal revenues (11% of Logistics revenues) decreased 49% in second quarter 2023, due to a decline in shipments and lower revenues per shipment.

The Werner Logistics operating income decreased to $4.4 million in second quarter 2023 from $12.5 million in second quarter 2022, due to a seasonally soft and competitive freight and rate market in second quarter 2023 compared to a seasonally strong freight market in second quarter 2022.

Werner Logistics also recorded revenue and brokered freight expense of $4.4 million in third quarter 2023 and $0.4 million in third 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 third quarter 2023, Werner Logistics revenues increased $43.1 million, or 23.0%, primarily due to growth from the ReedTMS acquisition.

Truckload Logistics revenues (77% of Logistics revenues) increased by 48% in third quarter 2023, driven by an increase in shipments due to the ReedTMS acquisition, partially offset by a decline in revenues per shipment.

Final Mile revenues (12% of Logistics revenues) increased $3.7 million or 16% in third quarter 2023.

Intermodal revenues (11% of Logistics revenues) decreased 40% in third quarter 2023, due to a modest decline in shipments and lower revenues per shipment.

The Werner Logistics operating income decreased to $2.0 million in third quarter 2023 from $5.1 million in third quarter 2022, due to rate compression, new business implementations, and higher operating expenses.

We expect challenges to the Logistics operating income to continue in the near term.

Operating Expenses

Our operating ratio (operati ng expenses expressed as a percentage of ope rating revenues) was 94.2% for the three months ended June 30, 2023 and 91.0% for the three months ended June 30, 2022.

We continued to experience ongoing year-over-year inflationary pressure on multiple expense items in second quarter 2023 compared to second quarter 2022.

Our operating ratio (operati ng expenses expressed as a percentage of ope rating revenues) was 95.4% for the three months ended September 30, 2023 and 90.8% for the three months ended September 30, 2022, primarily due to lower gains on sales of property and equipment and continued inflationary pressure in third quarter 2023 compared to third quarter 2022.

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

The tables on pages 22 through 24 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 $12.7 million or 5.0% in second quarter 2023 compared to second quarter 2022 and increased 2.6% as a percentage of operating revenues to 32.9%.

The higher dollar amount of salaries, wages and benefits expense in the second quarter of 2023 was due primarily to increased non-driver pay and the impact of 2.4 million more company tractor miles, partially offset by lower benefit costs.

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 53% in second quarter 2023 compared to second quarter 2022, primarily as a result of the ReedTMS acquisition.

Salaries, wages and benefits increased $3.6 million or 1.4% in third quarter 2023 compared to third quarter 2022 and increased 0.8% as a percentage of operating revenues to 32.8%.

The higher dollar amount of salaries, wages and benefits expense in the third quarter of 2023 was due primarily to increased non-driver pay, partially offset by lower benefit costs.

The increase in non-driver pay was primarily due to a larger average 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 38% in third quarter 2023 compared to third quarter 2022, primarily as a result of the ReedTMS acquisition.

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

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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.

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.

While we currently believe the driver recruiting and retention market may be less difficult in the near term, a competitive driver market presents labor challenges for customers and carriers alike.

Several factors impacting the driver market include 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 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.

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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 decreased $47.7 million or 38.0% in second quarter 2023 compared to second quarter 2022 and decreased 5.4% as a percentage of operating revenues to 9.6%, primarily due to much lower average diesel fuel prices, slightly offset by 2.4 million more company tractor miles in second quarter 2023.

Average diesel fuel prices were $1.69 per gallon lower in second quarter 2023 than in second quarter 2022 and were 40 cents per gallon lower than in first quarter 2023.

Fuel decreased $21.6 million or 19.3% in third quarter 2023 compared to third quarter 2022 and decreased 2.5% as a percentage of operating revenues to 11.0%, primarily due to much lower average diesel fuel prices, and 3.4 million fewer company tractor

miles in third quarter 2023.

Average diesel fuel prices were 61 cents per gallon lower in third quarter 2023 than in third quarter 2022 and were 47 cents per gallon higher than in second quarter 2023.

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.

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

For July 2023, the average diesel fuel price per gallon was approximately $1.18 lower than the average diesel fuel price per gallon in July 2022 and approximately $1.03 lower than in third quarter 2022.

For October 2023, the average diesel fuel price per gallon was approximately 94 cents lower than the average diesel fuel price per gallon in October 2022 and approximately 53 cents lower than in fourth 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 June 30, 2023, we had no derivative financial instruments to reduce our exposure to fuel price fluctuations.

Supplies and maintenance increased $2.3 million or 3.7% in second quarter 2023 compared to second quarter 2022 and increased 0.5% 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 2.4 million more company tractor miles.

We are actively taking steps to reduce repair and maintenance expense by growing our in-house maintenance capabilities throughout our terminal network.

As of September 30, 2023, we had no derivative financial instruments to reduce our exposure to fuel price fluctuations.

Supplies and maintenance decreased $7.8 million or 11.5% in third quarter 2023 compared to third quarter 2022 and decreased 0.8% as a percentage of operating revenues.

Supplies and maintenance expense decreased due to the lower costs for over-the-road tractor maintenance, tires, and the impact of 3.4 million fewer company tractor miles.

We have taken steps to reduce repair and maintenance expense by growing our in-house maintenance capabilities throughout our terminal network.

We are also developing digital solutions to further optimize the routing and scheduling of tractors and trailers for preventive maintenance.

Insurance and claims decreased $4.3 million or 10.4% in second quarter 2023 compared to second quarter 2022 and decreased 0.4% as a percentage of operating revenues due primarily to a lower amount of unfavorable reserve development on large claims, partially offset by higher expense for new claims resulting from an increasing cost-per-claim.

The majority of the higher unfavorable reserve development in second quarter 2022 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.

We also incurred insurance and claims expense of $1.4 million and $1.3 million in second quarter 2023 and second quarter 2022, respectively, for accrued interest related to a previously-disclosed adverse jury verdict rendered May 17, 2018, which we are appealing.

Insurance and claims decreased $3.2 million or 9.4% in third quarter 2023 compared to third quarter 2022 and decreased 0.4% as a percentage of operating revenues due primarily to a favorable reserve development on small dollar claims in third quarter 2023 compared to unfavorable reserve development in third quarter 2022, partially offset by higher expense for new claims resulting from an increasing cost-per-claim.

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

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Our liability insurance premiums for the policy year that began August 1, 2023 are $1.0 million higher than premiums for the previous policy year.

Depreciation and amortization expense increased $6.4 million or 9.4% in second quarter 2023 compared to second quarter 2022 and increased 1.0% as a percentage of operating revenues due primarily to the higher cost of new tractors and trailers, and depreciation and amortization on tangible and intangible assets recorded in the ReedTMS and Baylor acquisitions.

The average age of our tractor fleet remains low by industry standards and was 2.1 years as of June 30, 2023, and the average age of our trailers was 5.1 years.

Depreciation and amortization expense increased $4.2 million or 6.0% in third quarter 2023 compared to third quarter 2022 and increased 0.6% as a percentage of operating revenues due primarily to the higher cost of new tractors and trailers, a larger company trailer fleet, and depreciation and amortization on tangible and intangible assets recorded in the ReedTMS and Baylor acquisitions.

The average age of our tractor fleet remains low by industry standards and was 2.0 years as of September 30, 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 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 $20.0 million or 10.1% in second quarter 2023 compared to second quarter 2022 and increased 3.2% as a percentage of operating revenues.

Werner Logistics recorded brokered freight expense of $3.5 million in second quarter 2023 and $0.6 million in second 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.

Rent and purchased transportation expense increased $37.1 million or 19.8% in third quarter 2023 compared to third quarter 2022, primarily due to the ReedTMS acquisition, and increased 4.9% as a percentage of operating revenues.

Werner Logistics recorded brokered freight expense of $4.4 million in third quarter 2023 and $0.4 million in third 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 $19.2 million in second quarter 2023, primarily due to the ReedTMS acquisition, and increased as a percentage of Werner Logistics revenues to 82.6% in second quarter 2023 from 81.5% in second quarter 2022.

Rent and purchased transportation expense for the TTS segment increased $3.5 million in second quarter 2023 compared to second quarter 2022 due primarily to the Baylor acquisition and more independent contractor miles in second quarter 2023, partially offset by lower reimbursements to independent contractors because of significantly lower average diesel fuel prices.

Independent contractor miles increased approximately 0.4 million miles in second quarter 2023 and as a percentage of total miles were 4.5% in second quarter 2023 compared to 4.4% in second quarter 2022.

Werner Logistics purchased transportation expense increased $40.0 million in third quarter 2023, primarily due to the ReedTMS acquisition, and increased as a percentage of Werner Logistics revenues to 84.7% in third quarter 2023 from 82.8% in third quarter 2022.

Rent and purchased transportation expense for the TTS segment increased $1.2 million in third quarter 2023 compared to third quarter 2022 due primarily to the Baylor acquisition and more independent contractor miles in third quarter 2023, partially offset by lower reimbursements to independent contractors because of lower average diesel fuel prices.

Independent contractor miles increased approximately 0.7 million miles in third quarter 2023 and as a percentage of total miles were 4.6% in third quarter 2023 compared to 4.2% in third 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.

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These increased expenses 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 $10.6 million in second quarter 2023 compared to second quarter 2022 and increased 1.2% as a percentage of operating revenues due primarily to a decrease in gains on sales of property and equipment, and increased costs associated with professional technology services.

Other operating expenses increased $14.6 million in third quarter 2023 compared to third quarter 2022 and increased 1.7% as a percentage of operating revenues due primarily to a decrease in gains on sales of property and equipment, and increased costs associated with professional technology services related to our multi-year technology and innovation strategy.

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 $11.9 million in second quarter 2023, compared to $20.7 million in second quarter 2022.

We sold significantly more tractors and trailers in second quarter 2023 compared to second 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 decreased demand for our used equipment because of a greater number of small carriers exiting the trucking industry and an increase in the availability of new equipment in second quarter 2023 due to fewer production delays compared to the second quarter 2022.

We weighted our property and equipment sales more heavily in the first six months of 2023, as we expect a gradual decline in customer demand for the used tractor market, with moderating pricing and equipment gains as the year progresses.

Gains on sales of property and equipment were $9.1 million in third quarter 2023, compared to $21.5 million in third quarter 2022.

We sold substantially more tractors and trailers in third quarter 2023 compared to third quarter 2022 and realized significantly lower average gains per tractor and trailer due to lower pricing in the market for our used equipment, which we believe is due to decreased demand for our used equipment because of carriers increasingly exiting the trucking industry due to the challenging freight market and an increase in the availability of new equipment in third quarter 2023 due to fewer production delays compared to the third quarter 2022.

We expect demand and pricing for our used equipment to continue to moderate as bank lending practices are more restrictive and more carriers exit the trucking industry.

We expect our gains on sales of property and equipment in 2023 to range between $42 million and $47 million for the full year.

Other Expense (Income)

Other expense, net of income, increased $29.6 million in second quarter 2023 compared to second quarter 2022 due primarily to a $24.0 million decrease in the amount of unrealized net gains recognized on our investments in equity securities, a $4.8 million increase in net interest expense, and a loss from our equity method investment of $0.8 million (see Note 7 in the Notes to Consolidated Financial Statements (Unaudited) set forth in Part I of this report for information regarding our investments).

Other expense, net of income, increased $5.0 million in third quarter 2023 compared to third quarter 2022 due primarily to a $4.5 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.

In July 2023, we entered into four additional variable-for-fixed interest rate swap agreements for a notional amount of $130.0 million to further limit our exposure to increases in interest rates on a portion of our variable-rate indebtedness (see Note 13 in the Notes to Consolidated Financial Statements (Unaudited) set forth in Part I of this report for information regarding these interest rate swap agreements).

In July 2023, we entered into four additional variable-for-fixed interest rate swap agreements for a notional amount of $130.0 million to further limit our exposure to increases in interest rates on a portion of our variable-rate indebtedness (see Note 9 in the Notes to Consolidated Financial Statements (Unaudited) set forth in Part I of this report for information regarding these interest rate swaps).

Income Tax Expense

Our effective income tax rate (income taxes expressed as a percentage of income before income taxes) was 25.2% in second quarter 2023 compared to 24.4% in second quarter 2022.

The higher income tax rate in second quarter 2023 was attributed primarily to a lower amount of favorable discrete income tax items in second quarter 2023 and the income tax effect of the noncontrolling interest.

Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022

Our effective income tax rate (income taxes expressed as a percentage of income before income taxes) was 23.0% in third quarter 2023 compared to 24.3% in third quarter 2022.

The lower income tax rate in third quarter 2023 was attributed primarily to a higher amount of favorable discrete income tax items in third quarter 2023.

Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022

Operating Revenues

Operating revenues increased 2.7% for the six months ended June 30, 2023, compared to the same period of the prior year.

When comparing the first six months of 2023 to the first six months of 2022, TTS segment revenues decreased $13.5 million, or 1.2%, and Werner Logistics revenues increased $60.3 million, or 15.4%.

The higher Logistics revenues resulted from growth from the ReedTMS acquisition.

In the TTS segment, trucking revenues, net of fuel surcharge, increased $19.3 million, or 2.0%, due primarily to a 2.3% increase in average tractors in service, partially offset by a 0.3% decrease in average revenues per tractor per week.

TTS segment fuel surcharge revenues for the six months ended June 30, 2023 decreased $33.5 million or 16.9% when compared to the same period of the prior year due to lower average diesel fuel prices in the 2023 period.

Operating revenues increased 1.4% for the nine months ended September 30, 2023, compared to the same period of the prior year.

When comparing the first nine months of 2023 to the first nine months of 2022, TTS segment revenues decreased $63.2 million, or 3.5%, and Werner Logistics revenues increased $103.5 million, or 17.8%.

The higher Logistics revenues resulted from the ReedTMS acquisition and organic growth.

In the TTS segment, trucking revenues, net of fuel surcharge, decreased $2.2 million, due primarily to a 0.6% decrease in average revenues per tractor per week, partially offset by a 0.4% increase in

average tractors in service.

TTS segment fuel surcharge revenues for the nine months ended September 30, 2023 decreased $61.9 million or 20.0% when compared to the same period of the prior year due to much lower average diesel fuel prices in the 2023 period.

Operating Expenses

Our operating ratio (operating expenses expressed as a percentage of operating revenues) was 93.9% for the six months ended June 30, 2023 and 90.1% for the six months ended June 30, 2022.

Our operating ratio (operating expenses expressed as a percentage of operating revenues) was 94.4% for the nine months ended September 30, 2023 and 90.3% for the nine months ended September 30, 2022.

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

Salaries, wages and benefits increased $39.1 million or 7.9% in the first six months of 2023 compared to the same period in 2022 and increased 1.5% as a percentage of operating revenues to 32.5%.

The higher dollar amount of salaries, wages and benefits expense in the first six months of 2023 was due primarily to increased non-driver pay and the impact of 8.9 million more company tractor miles, partially offset by lower benefit costs.

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 59% in the first six months of 2023 compared to the same period in 2022, primarily as a result of the ReedTMS acquisition.

Fuel decreased $44.7 million or 20.9% in the first six months of 2023 compared to the same period in 2022 and decreased 3.0% as a percentage of operating revenues due to lower average diesel fuel prices, partially offset by 8.9 million more company tractor miles in the first six months of 2023.

Average diesel fuel prices were 89 cents per gallon lower in the first six months of 2023 than in same period in 2022.

Supplies and maintenance increased $13.5 million or 11.3% in the first six months of 2023 compared to the same period in 2022 and increased 0.7% as a percentage of operating revenues.

Salaries, wages and benefits increased $42.7 million or 5.6% in the first nine months of 2023 compared to the same period in 2022 and increased 1.3% as a percentage of operating revenues to 32.6%.

The higher dollar amount of salaries, wages and benefits expense in the first nine months of 2023 was due primarily to increased non-driver pay and higher driver pay from 5.5 million more company tractor miles, partially offset by lower benefit costs.

The increase in non-driver pay was primarily due to a larger average 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 51% in the first nine months of 2023 compared to the same period in 2022, primarily as a result of the ReedTMS acquisition.

Fuel decreased $66.3 million or 20.4% in the first nine months of 2023 compared to the same period in 2022 and decreased 2.9% as a percentage of operating revenues due to much lower average diesel fuel prices, partially offset by 5.5 million more company tractor miles in the first nine months of 2023.

Average diesel fuel prices were 80 cents per gallon lower in the first nine months of 2023 than in same period in 2022.

Supplies and maintenance increased $5.7 million or 3.0% in the first nine months of 2023 compared to the same period in 2022 and increased 0.2% as a percentage of operating revenues.

Supplies and maintenance expense increased due to higher costs for over-the-road repairs and tires.

Insurance and claims increased $4.7 million or 6.9% in the first six months of 2023 compared to the same period in 2022 and increased 0.1% as a percentage of operating revenues due primarily to higher expense for new claims resulting from an increasing cost-per-claim and increased cost for repairs.

These increases were partially offset by a lower amount of unfavorable reserve development in the first six months of 2023 compared to the same period in 2022.

Depreciation and amortization expense increased $13.5 million or 10.0% in the first six months of 2023 compared to the same period in 2022 and increased 0.6% as a percentage of operating revenues due primarily to the higher cost of new tractors and trailers, and depreciation and amortization on tangible and intangible assets recorded in the ReedTMS and Baylor acquisitions.

Rent and purchased transportation expense for the TTS segment increased $11.0 million in the first six months of 2023 compared to the same period in 2022 due primarily to the Baylor acquisition and more independent contractor miles in the first six months of 2023, partially offset by lower reimbursements to independent contractors because of lower average diesel fuel prices.

Independent contractor miles increased approximately 1.6 million miles in the first six months of 2023 and as a percentage of total miles were 4.7% in the first six months of 2023 compared to 4.4% in the first six months of 2022.

Werner Logistics purchased transportation expense increased $50.1 million in the first six months of 2023, primarily due to the ReedTMS acquisition, and increased slightly as a percentage of Werner Logistics revenues to 82.5% in the first six months of 2023 from 82.4% in the same period in 2022.

Other operating expenses increased $14.8 million in the first six months of 2023 compared to the same period in 2022 and increased 1.0% as a percentage of operating revenues due primarily to lower gains on sales of property and equipment, and increased costs associated with professional technology services.

Gains on sales of property and equipment were $30.2 million in the first six months of 2023, compared to $41.1 million in the same period in 2022.

We sold significantly more tractors and trailers in the first six months of 2023 compared to the same period in 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 decreased demand for

our used equipment because of a greater number of small carriers exiting the trucking industry and an increase in the availability of new equipment in the first six months of 2023 due to fewer production delays compared to the same period in 2022.

Insurance and claims increased $1.5 million or 1.4% in the first nine months of 2023 compared to the same period in 2022 and remained flat as a percentage of operating revenues due primarily to higher expense for new claims resulting from an increasing cost-per-claim and increased cost for repairs.

These increases were mostly offset by a lower amount of unfavorable reserve development in the first nine months of 2023 compared to the same period in 2022.

The majority of the higher unfavorable reserve development in the first nine months of 2022 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 the first nine months of 2022.

Depreciation and amortization expense increased $17.7 million or 8.6% in the first nine months of 2023 compared to the same period in 2022 and increased 0.6% as a percentage of operating revenues due primarily to the higher cost of new tractors and trailers, a larger company trailer fleet, and depreciation and amortization on tangible and intangible assets recorded in the ReedTMS and Baylor acquisitions.

Werner Logistics purchased transportation expense increased $90.1 million in the first nine months of 2023, primarily due to the ReedTMS acquisition, and increased 0.6% as a percentage of Werner Logistics revenues to 83.2% in the first nine months of 2023 from 82.6% in the same period in 2022.

Rent and purchased transportation expense for the TTS segment increased $12.2 million in the first nine months of 2023 compared to the same period in 2022 due primarily to the Baylor acquisition and more independent contractor miles in the first nine months of 2023, partially offset by lower reimbursements to independent contractors because of lower average diesel fuel prices.

Independent contractor miles increased approximately 2.2 million miles in the first nine months of 2023 and as a percentage of total miles were 4.7% in the first nine months of 2023 compared to 4.4% in the first nine months of 2022.

Other operating expenses increased $29.4 million in the first nine months of 2023 compared to the same period in 2022 and increased 1.3% as a percentage of operating revenues due primarily to lower gains on sales of property and equipment, and increased costs associated with professional technology services related to our multi-year technology and innovation strategy.

Gains on sales of property and equipment were $39.3 million in the first nine months of 2023, compared to $62.7 million in the same period in 2022.

We sold significantly more tractors and trailers in the first nine months of 2023 compared to the same period in 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 decreased demand for our used equipment because of carriers increasingly exiting the trucking industry due to the challenging freight market and an increase in the availability of new equipment in the first nine months of 2023 due to fewer production delays compared to the same period in 2022.

Other Expense (Income)

Other expense, net of income , increased $25.0 million in the first six months of 2023 compared to the same period in 2022 due primari ly to a $14.3 million decrease in the amount of unrealized net gains recognized on our investments in equity securities, a $10.0 million increase in net interest expense, and a loss from our equity method investment of $0.8 million (see Note 7 in the Notes to Consolidated Financial Statements (Unaudited) set forth in Part I of this report for information regarding our investments).

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

Other expense, net of inco me, increased $30.0 million in the first nine months of 2023 compared to the same period in 2022 due primari ly to a $14.5 million increase in net interest expense, a $14.4 million decrease in the amount of unrealized net gains recognized on our investments in equity securities, and a loss from our equity method investment of $1.0 million (see Note 7 in the Notes to Consolidated Financial Statements (Unaudited) set forth in Part I of this report for information regarding our investments).

Net interest expense increased 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 24.7% for the first six months of 2023 compared to 24.3% in the same period in 2022.

The higher income tax rate in the first six months of 2023 was attributed primarily to the income tax effect of the noncontrolling interest and a lower amount of favorable discrete income tax items in the first six months of 2023.

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 2023 and 2022.

Liquidity and Capital Resources:

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

Management believes our financial position at June 30, 2023 is strong.

As of June 30, 2023, we had $46.5 million of cash and cash equivalents and $1.5 billion of stockholders’ equity.

Management believes our financial position at September 30, 2023 is strong.

As of September 30, 2023, we had $42.8 million of cash and cash equivalents and $1.5 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 $476.4 million as of June 30, 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).

In addition, we have a $1.075 billion credit facility, for which our total available borrowing capacity was $424.0 million as of September 30, 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.

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

There were no material changes in the nature of these items during the six months ended June 30, 2023.

During the six months ended June 30, 2023, we generated cash flow from operations of $281.8 million, a 5.3% or $14.3 million increase in cash flows compared to the same six-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, higher depreciation, lower gains on our investments in equity securities, and lower gains on the disposal of property and equipment during the six-month period ended June 30, 2023.

These increases were partially offset by a decrease in net income for the six-month period ended June 30, 2023 compared to the same period in 2022.

There were no material changes in the nature of these items during the nine months ended September 30, 2023.

During the nine months ended September 30, 2023, we generated cash flow from operations of $356.0 million, a 7.0% or $23.3 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 working capital changes, including a decrease in accounts receivable days sales outstanding, partially offset by a decrease in net income for the nine-month period ended September 30, 2023.

We were able to make net capital expenditures, repay debt, 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 $280.3 million for the six-month period ended June 30, 2023 compared to $169.7 million during the same period in 2022.

Net property and equipment additions (primarily revenue equipment) were $254.2 million for the six-month period ended June 30, 2023, compared to $153.4 million during the same period of 2022.

Net cash used in investing activities was $402.1 million for the nine-month period ended September 30, 2023 compared to $268.7 million during the same period in 2022.

Net property and equipment additions (primarily revenue equipment) were $374.2 million for the nine-month period ended September 30, 2023, compared to $254.1 million during the same period of 2022.

We currently estimate net capital expenditures (primarily revenue equipment) in 2023 to be in the range of $425 million to $450 million, compared to net capital expenditures in 2022 of $317.6 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 June 30, 2023, we were committed to property and equipment purchases of approximately $247.5 million.

As of September 30, 2023, we were committed to property and equipment purchases of approximately $94.6 million.

We also purchased a $25.0 million subordinated promissory note from Mastery Logistics Systems, Inc.

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 $64.2 million during the six months ended June 30, 2023 compared to $97.9 million during the same period in 2022.

We repaid $53.8 million on our debt during the six months ended June 30, 2023, decreasing our outstanding debt to $640.0 million at June 30, 2023, and had net borrowings on our debt of $17.5 million during the same period in 2022.

Subsequent to the end of the quarter, in July 2023, we borrowed an additional $50 million under our 2022 Credit Agreement (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).

We paid dividends of $16.5 million during the six months ended June 30, 2023 and $15.7 million during the same period in 2022.

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 financing activities used $20.0 million during the nine months ended September 30, 2023, and provided $7.5 million during the same period in 2022.

We had net repayments on our debt of $3.8 million during the nine months ended September 30, 2023, decreasing our outstanding debt to $690.0 million at September 30, 2023.

We had net borrowings on our debt of $146.3 million during the nine months ended 2022, of which a portion of the proceeds were used to finance the October 1, 2022 purchase of Baylor Trucking, Inc.

We paid dividends of $25.3 million during the nine months ended September 30, 2023 and $23.9 million

during the same period in 2022.

We increased our quarterly dividend rate by $0.01 per share, or 8%, beginning with the quarterly dividend paid in July 2023.

We currently plan to continue paying a quarterly dividend.

We did not repurchase any shares of common stock during the six months ended June 30, 2023.

We did not repurchase any shares of common stock during the nine months ended September 30, 2023.

Financing activities for the same period in 2022 included common stock repurchase of 2,710,304 shares at a cost of $110.4 million.

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

As of June 30, 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.

As of September 30, 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.

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.

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

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis