What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2024-05-09 compared with 2023-11-08 · 109 added, 156 removed, 179 unchanged (60% of the section changed)

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The MD&A should be read in conjunction with our 2023 Form 10-K.

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

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

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

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

As discussed further in the comparison of operating results for third quarter 2023 to third 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 first quarter 2024 to first quarter 2023, 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)

September 30, Nine Months Ended (9ME)

September 30, Percentage Change in Dollar Amounts

2023 2022 2023 2022 3ME 9ME

March 31, Percentage Change in Dollar Amounts

2024 2023 3ME

(in thousands) $ % $ % %

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Operating income 15,588 2.0 53,386 6.4 (70.8)

Total other expense (income), net 7,362 0.9 2,349 0.3 20,905 0.8 (9,103) (0.3) 213.4 (329.6)

Total other expense, net 6,273 0.8 6,452 0.8 (2.8)

Income before income taxes 9,315 1.2 46,934 5.6 (80.2)

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Three Months Ended

September 30, Nine Months Ended

September 30,

2023 2022 2023 2022

TTS segment (in thousands) $ % $ %

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Three Months Ended

September 30, Nine Months Ended

September 30,

TTS segment 2023 2022 % Change 2023 2022 % Change

TTS segment 2024 2023 % Change

Average tractors in service 7,935 8,561 (7.3) %

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Three Months Ended

September 30, Nine Months Ended

September 30,

2023 2022 2023 2022

Werner Logistics segment (in thousands) $ % $ %

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Total operating expenses 204,811 101.2 223,732 97.8

Operating income $ 2,012 0.9 $ 5,145 2.7 $ 11,304 1.7 $ 26,316 4.5

Operating income (loss) $ (2,329) (1.2) $ 4,937 2.2

Three Months Ended

September 30, Nine Months Ended

September 30,

Werner Logistics segment 2023 2022 % Change 2023 2022 % Change

Werner Logistics segment 2024 2023 % Change

Average tractors in service 26 39 (33.3) %

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Total trailers (at quarter end) 3,115 2,580 20.7 %

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

Three Months Ended March 31, 2024 Compared to Three Months Ended March 31, 2023

Operating Revenues

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 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 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.

Operating reve nues decreased 7.6% for the three months ended March 31, 2024, comp ared to the same period of the prior year.

When comparing first quarter 2024 to first quarter 2023, TTS segment reven ues decreased $37.2 million, or 6.3%, and Werner Logistics revenues decreased $26.2 million, or 11.5%.

Dedicated freight demand in first quarter 2024 was steady, absent isolated fleet losses, and the Dedicated pipeline of opportunities remains strong, but competitive.

One-Way Truckload and Werner Logistics volumes reflected normal seasonality while revenues and profitability were impacted by ongoing pricing pressure.

Inclement weather further negatively impacted One-Way and Werner Logistics in first quarter 2024.

We expect the challenging freight market to continue through second quarter and into the second half of 2024.

Trucking revenues, net of fuel surcha rge, decreased 4.7% in first quart er 2024 compared to first quarter 2023 due to a 7.3% decrease in the average number of tractors in service, partially offset by a 2.8% increase in averag e revenues per tractor per week, net of fuel surcharge .

During first quarter 2024, One-Way Truckload average revenues per total mile, net of fuel surcharg e, decreased 5.1%, as One-Way Truckload remained challenged by ongoing pricing pressure.

Dedicated average revenues per tractor per week, net of fuel surcharge, increased 1.3%, despite losing a few fleets to changes in the supply chain approach for select customers and isolated competitive pricing.

We continue to expect average revenues per total mile, net of fuel surcharge, for the One-Way Truckload fleet to decrease in a range of 6% to 3% in the first half of 2024 compared to first half of 2023.

We continue to expect Dedicated average revenues per tractor per week, net of fuel surcharge, to remain flat or increase up to 3% in 2024 compared to 2023, as Dedicated demand remains steady, and we anticipate the pipeline of opportunities in Dedicated to continue to be strong, but competitive.

The average number of tractors in service in the TTS segm ent decreased 7.3% to 7,935 in first qu arter 2024 from 8,561 in first quarter 2023 , as we decreased our fleet size to adjust to the challenging freight market conditions .

W e ended first quarter 2024 wi th 7,810 tractors in the TTS segment, a year-over-year decrease of 665 tractors compared to the e nd of first quarter 2023, and a sequenti al decrease of 190 tractors compared to the end of fourth quarter 2023.

Within TTS, our Dedicated unit ended first quarter 2024 with 5,080 tractors (or 65% of our total TTS segment fleet) compared to 5,345 tractors (or 63%) a year ago.

The Dedicated environment has become more competitive through this prolonged weak freight market.

We are receiving new business awards in our Dedicated unit to assist with backfilling lost business, and we foresee potential for growth in our Dedicated unit in the second half of the year;

although, we recognize the challenge and believe it is reasonable to lower our fleet size expectations at this time while we focus on maintaining price and margin discipline across our portfolio.

We currently expect our fleet size at the end of 2024 to decrease in a range of 6% to 3% when compared to the fleet size at the end of 2023.

We cannot predict whether future driver shortages, if any, would have a further adverse effect on our fleet size.

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

Trucking fuel surcharge revenues decreased 17.3% to $73.0 million in first quarter 2024 from $88.3 million in first quarter 2023.

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 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 $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.

Werner Logistics recorded revenue and brokered freight expense of $4.1 million in first quarter 2024 and $5.3 million in first quarter 2023 for certain 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 2024, Werner Logistics revenues decreased $26.2 million, or 11.5%.

Truckload Logistics revenues (76% of total Werner Logistics segment revenues) decreased 13% in first quarter 2024, driven by a decrease in shipments and a decline in revenue per shipment.

Final Mile revenues (12% of total Werner Logistics segment revenues) increased $1.1 million or 5% in first quarter 2024, despite a softer market for discretionary spending on big and bulky products.

Intermodal revenues (12% of total Werner Logistics segment revenues) decreased 15% in first quarter 2024, due to lower revenue per shipment, partially offset by an increase in shipments.

Werner Logistics had an operating loss of $2.3 million in first quarter 2024 compared to operating income of $4.9 million in first quarter 2023, and its operating margin percentage decreased to (1.2)% in first quarter 2024 from 2.2% in first quarter 2023.

Adverse weather combined with a competitive freight and rate market in first quarter 2024 impacted Werner Logistics revenue and profitability despite normal seasonality in volume and maintaining high client retention.

We expect Truckload Logistics margins will remain challenged in the near-term, but may improve later in the year through cost saving initiatives and further synergies realized from the integration of our acquired companies.

Operating Expenses

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.

Our operating ratio (operati ng expenses expressed as a percentage of ope rating revenues) was 98.0% for the three months ended March 31, 2024 and 93.6% for the three months ended March 31, 2023.

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

The tables on pages 19 through 21 show the consolidated statements of income in dollars and as a percentage of total operating revenues and the percentage increase or decrease in the dollar amounts of those items compared to the same 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 $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.

Salaries, wages and benefits decreased $2.9 million or 1.1% in first quarter 2024 compared to first quarter 2023 and increased 2.3% as a percentage of operating revenues to 34.5%.

The lower dollar amount of salaries, wages and benefits expense in the first quarter of 2024 was due primarily to decreased non-driver pay and the impact of 3.4 million fewer company tractor miles in the first quarter 2024, partially offset by higher benefit costs.

The decrease in non-driver pay was primarily due to a smaller average number of non-driver employees.

Non-driver salaries, wages and benefits in our non-trucking Werner Logistics segment decreased 7% in first quarter 2024 compared to first quarter 2023.

We renewed our workers’ compensation insurance coverage on April 1, 2024.

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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 2023 were flat compared to the previous policy year.

Our workers’ compensation insurance premiums for the policy year beginning April 2024 are $0.3 million higher than the previous policy year.

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.

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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 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.

If such a driver shortage were to occur and 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 $13.8 million or 15.1% in first quarter 2024 compared to first quarter 2023 and decreased 0.9% as a percentage of operating revenues to 10.1%, primarily due to lower average diesel fuel prices, and 3.4 million fewer company tractor miles in first quarter 2024.

Average diesel fuel prices were 31 cents per gallon lower in first quarter 2024 than in first quarter 2023 and were 20 cents per gallon lower than in fourth 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 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.

For April 2024, the average diesel fuel price per gallon was approximately 5 cents lower than the average diesel fuel price per gallon in April 2023 and approximately 10 cents higher than in second quarter 2023.

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, 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.

As of March 31, 2024, we had no derivative financial instruments to reduce our exposure to fuel price fluctuations.

Supplies and maintenance decreased $6.5 million or 9.5% in first quarter 2024 compared to first quarter 2023 and decreased 0.2% as a percentage of operating revenues.

Supplies and maintenance expense decreased due to the lower costs for over-the-road tractor and trailer maintenance and 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 $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.

Insurance and claims decreased $0.1 million or 0.3% in first quarter 2024 compared to first quarter 2023 and increased 0.3% as a percentage of operating revenues.

We had lower expense for small dollar liability claims, resulting from a lower amount of unfavorable reserve development, partially offset by higher expense for new claims due to an increasing cost per claim.

Our expense for large dollar liability claims was higher due primarily to unfavorable reserve development.

We also incurred insurance and claims expense of $0.5 million in first quarter 2024 and $1.5 million for first quarter 2023, for accrued interest related to a previously-disclosed adverse jury verdict rendered on May 17, 2018, which we are continuing to defend.

Interest is accrued at $0.5 million per month until such time as the outcome of the litigation is finalized, excluding months where the plaintiffs requested an extension of time to respond to our petition for review.

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

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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 $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.

Depreciation and amortization expense decreased $43 thousand or 0.1% in first quarter 2024 compared to first quarter 2023 and increased 0.8% as a percentage of operating revenues due primarily to a decrease in depreciation of furniture, office, and technology equipment as we continue to transition to more cloud-based technology solutions.

These decreases were mostly offset by more trailers in service, the higher cost of new tractors and trailers, and the addition of auxiliary power units.

The average age of our tractor fleet remains low by industry standards and was 2.1 years as of March 31, 2024, and the average age of our trailers was 5.0 years.

We are continuing to invest in new tractors and trailers and our terminals in 2024 to improve our driver experience, increase operational efficiency and more effectively manage our maintenance, safety and fuel costs.

During the remainder of 2024, we expect the average age of our tractor and trailer fleets to remain at or near current levels.

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.

Rent and purchased transportation expense decreased $16.3 million or 7.4% in first quarter 2024 compared to first quarter 2023, and increased 0.1% as a percentage of operating revenues.

Rent and purchased transportation expense consists mostly of payments to third-party capacity providers in the Werner Logistics segment and other non-trucking operations, payments to

independent contractors in the TTS segment, and cloud-based technology fees.

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 $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.

Werner Logistics purchased transportation expense decreased $16.0 million in first quarter 2024 as a result of lower logistics revenues, but increased to 85.2% as a percentage of Werner Logistics revenues in first quarter 2024 from 82.4% in first quarter 2023.

Rent and purchased transportation expense for the TTS segment decreased $1.4 million in first quarter 2024 compared to first quarter 2023 due primarily to fewer independent contractor miles and lower reimbursements to independent contractors because of lower average diesel fuel prices, partially offset by higher cloud-based technology fees.

Independent contractor miles decreased approximately 1.4 million miles in first quarter 2024 and as a percentage of total miles were 4.3% in first quarter 2024 compared to 4.9% in first quarter 2023.

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.

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

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Historically, we have been able to add company tractors and recruit additional company drivers to offset any decrease in the number of independent contractors.

If a shortage of independent contractors and company drivers were to occur, additional 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.

If a shortage of independent contractors and company drivers were to occur, 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 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 $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 $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 $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 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 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 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 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.

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 $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 $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 operating expenses increased $14.1 million in first quarter 2024 compared to first quarter 2023 and increased 1.8% as a percentage of operating revenues due to lower gains on sales of property and equipment (primarily used tractors and trailers).

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

Gains on sales of property and equipment were $3.6 million in first quarter 2024, compared to $18.3 million in first quarter 2023.

We sold fewer tractors and substantially more trailers in first quarter 2024 compared to first quarter 2023 and realized lower average gains per tractor and trailer due to lower pricing in the market for our used equipment.

Compared to 2023, we expect our gains on sales of property and equipment to be considerably lower in 2024, in a range between $10 million and $20 million for the year.

Other Expense (Income)

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.

Other expense, net of other income, decreased $0.2 million in first quarter 2024 compared to first quarter 2023.

Net interest expense decreased $0.1 million due to a decrease in average debt outstanding, mostly offset by higher interest rates for variable rate debt.

In July 2023 and April 2024, we entered into additional variable-for-fixed interest rate swap agreements for notional amounts of $130.0 million and $75.0 million, respectively, to further limit our exposure to increases in interest rates on a portion of our variable-rate indebtedness (see Note 7 and Note 11 in the Notes to Consolidated Financial Statements (Unaudited) set forth in Part I of this report for information regarding these interest rate swaps).

We continue to expect net interest expense for full-year 2024 to be an increase compared to 2023, primarily due to repricing of the BMO Term Loan that is maturing in May 2024 and the impact of two lower-priced interest rate swaps that are also expiring in May 2024.

Year-over-year variability in debt can also be a factor, which has been a favorable offset through the first quarter of 2024.

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 2023 and 2022.

Income tax expense decreased $8.3 million in first quarter 2024 compared to first quarter 2023, due primarily to lower pre-tax income, partially offset by an increase in the effective income tax rate.

Our effective income tax rate (income taxes expressed as a percentage of income before income taxes) was 32.9% in first quarter 2024 compared to 24.3% in first quarter 2023.

The higher income tax rate was attributed primarily to a higher amount of unfavorable discrete income tax items in first quarter 2024 related to prior year state income tax audits and the tax impact of equity compensation.

Liquidity and Capital Resources:

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Capital expenditures, business acquisitions, stock repurchases, and dividend payments are components of our cash flow and capital management strategy, which to a large extent, can be adjusted in response to economic and other changes in the business environment.

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

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.

Management’s approach to capital allocation focuses on

investing in key priorities that support our business and growth strategies and providing shareholder returns, while funding ongoing operations.

Management believes our financial position at March 31, 2024 is strong.

As of March 31, 2024, we had $60.3 million of cash and cash equivalents and over $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 $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.

In addition, we have a $1.075 billion credit facility, for which our total available borrowing capacity was $559.1 million as of March 31, 2024 (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).

After considering 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 2023 Form 10-K includes our disclosure of material cash requirements as of December 31, 2023.

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 $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.

There were no material changes in the nature of these items during the three months ended March 31, 2024.

During the three months ended March 31, 2024, we generated cash flow from operations of $88.6 million, a 46.9% or $78.3 million decrease in cash flows compared to the same three-month period a year ago.

The decrease in net cash provided by operating activities was due primarily to working capital changes and a decrease in net income for the three-month period ended March 31, 2024.

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

Net cash used in investing activities was $19.4 million for the three-month period ended March 31, 2024 compared to $129.2 million during the same period in 2023.

Net property and equipment additions (primarily revenue equipment) were $19.0 million for the three-month period ended March 31, 2024, compared to $102.7 million during the same period of 2023.

We currently estimate net capital expenditures (primarily revenue equipment) in 2024 to be in the range of $250 million to $300 million, compared to net capital expenditures in 2023 of $408.7 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 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 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.

As of March 31, 2024, we were committed to property and equipment purchases of approximately $188.3 million.

During the three-month period ended March 31, 2023, we purchased a $25.0 million subordinated promissory note from Mastery Logistics Systems, Inc.

with a maturity date of January 24, 2030.

Net financing activities used $70.8 million during the three months ended March 31, 2024, and used $16.2 million during the same period in 2023.

We had net repayments on our debt of $51.3 million during the three months ended March 31, 2024, decreasing our outstanding debt to $597.5 million at March 31, 2024.

We repaid $2.5 million on our debt during the three-month period ended March 31, 2023.

We paid dividends of $8.9 million during the three months ended March 31, 2024 and $8.2 million during the same period in 2023.

We currently plan to continue paying a quarterly dividend.

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.

Financing activities for the three months ended March 31, 2024, also included common stock repurchases of 167,818 shares at a cost of $6.5 million.

We did not repurchase any shares of common stock during the same period in 2023.

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, 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 March 31, 2024, the Company had purchased 3,856,008 shares pursuant to our current Board of Directors repurchase authorization and had 2,143,992 shares remaining available for repurchase.

Item 1 of Part I of our 2023 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 2023 Form 10-K.

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.

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.

In March 2024, U.S.

Environmental Protection Agency (“EPA”) released a Final Rule governing Greenhouse Gas (“GHG”) Emissions Standards for Heavy-Duty Vehicles - Phase 3, which requires more stringent greenhouse gas standards for heavy-duty vehicles and revises the “Phase 2” greenhouse gas standards established in 2016.

Short haul (day cab) and long haul (sleeper cab) tractor GHG standards under the Final Rule phase in starting with model years 2028 through 2032.

Werner continues to evaluate the Final Rule and any EPA-related developments impacting its fleet.

There have been no other material changes in the status of the proposed regulations previously disclosed in the 2023 Form 10-K.

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Information regarding our Critical Accounting Estimates can be found in our 2023 Form 10-K.

Estimates of accrued liabilities for insurance and claims for bodily injury, property damage and workers’ compensation is a critical accounting estimate that requires us to make significant judgments and estimates and affects our financial statements.

Estimates of accrued liabilities for insurance and claims for bodily injury and property damage is a critical accounting estimate that requires us to make significant judgments and estimates and affects our financial statements.

There have been no material changes to this critical accounting estimate from that discussed in our 2023 Form 10-K.

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