The following tables set forth the operating revenues, operating expenses and operating income for the TruckloadTTS segment, as well as certain statistical data regarding our TruckloadTTS segment operations for the periods indicated.
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| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
Truckload Transportation Services | 2017 | | 2016 | | % Change | | 2017 | | 2016 | | % Change |
Operating ratio, net of fuel surcharge revenues (1) | 90.5 | % | | 94.2 | % | | | | 91.1 | % | | 92.7 | % | | |
Average revenues per tractor per week (2) | $ | 3,693 |
| | $ | 3,589 |
| | 2.9 | % | | $ | 3,634 |
| | $ | 3,547 |
| | 2.4 | % |
Average trip length in miles (loaded) | 469 |
| | 468 |
| | 0.2 | % | | 469 |
| | 466 |
| | 0.6 | % |
Average percentage of empty miles (3) | 12.53 | % | | 12.55 | % | | (0.2 | )% | | 12.40 | % | | 13.08 | % | | (5.2 | )% |
Average tractors in service | 7,314 |
| | 7,216 |
| | 1.4 | % | | 7,261 |
| | 7,291 |
| | (0.4 | )% |
Total trailers (at quarter end) | 22,435 |
| | 22,655 |
| | | | 22,435 |
| | 22,655 |
| | |
Total tractors (at quarter end): | | | | | | | | | | | |
Company | 6,700 |
| | 6,355 |
| | | | 6,700 |
| | 6,355 |
| | |
Independent contractor | 675 |
| | 820 |
| | | | 675 |
| | 820 |
| | |
Total tractors | 7,375 |
| | 7,175 |
| | | | 7,375 |
| | 7,175 |
| | |
| |
(1)
| Calculated as if fuel surcharge revenues are excluded from total revenues and instead reported as a reduction of operating expenses, which provides a more consistent basis for comparing results of operations from period to period. |
| |
(2)
| Net of fuel surcharge revenues. |
| |
(3)
| “Empty” refers to miles without trailer cargo. |
The following tables set forth the Werner Logistics segment’s revenues, rent and purchased transportation expense, gross margin, other operating expenses (primarily salaries, wages and benefits expense) and operating income, as well as certain statistical data regarding the Werner Logistics segment.
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| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Werner Logistics segment (amounts in thousands) | $ | | % | | $ | | % | | $ | | % | | $ | | % |
Operating revenues | $ | 117,351 | | | 100.0 | | | $ | 121,331 | | | 100.0 | | | $ | 339,678 | | | 100.0 | | | $ | 369,584 | | | 100.0 | |
Rent and purchased transportation expense | 104,626 | | | 89.2 | | | 102,886 | | | 84.8 | | | 293,400 | | | 86.4 | | | 309,742 | | | 83.8 | |
Gross margin | 12,725 | | | 10.8 | | | 18,445 | | | 15.2 | | | 46,278 | | | 13.6 | | | 59,842 | | | 16.2 | |
Other operating expenses | 13,577 | | | 11.5 | | | 15,417 | | | 12.7 | | | 42,906 | | | 12.6 | | | 46,921 | | | 12.7 | |
Operating income | $ | (852) | | | (0.7) | | | $ | 3,028 | | | 2.5 | | | $ | 3,372 | | | 1.0 | | | $ | 12,921 | | | 3.5 | |
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| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Werner Logistics (amounts in thousands) | $ | | % | | $ | | % | | $ | | % | | $ | | % |
Operating revenues | $ | 104,568 |
| | 100.0 | | $ | 109,459 |
| | 100.0 | | $ | 305,225 |
| | 100.0 | | $ | 310,001 |
| | 100.0 |
Rent and purchased transportation expense | 89,507 |
| | 85.6 | | 91,695 |
| | 83.8 | | 259,277 |
| | 84.9 | | 255,954 |
| | 82.6 |
Gross margin | 15,061 |
| | 14.4 | | 17,764 |
| | 16.2 | | 45,948 |
| | 15.1 | | 54,047 |
| | 17.4 |
Other operating expenses | 13,743 |
| | 13.1 | | 12,870 |
| | 11.7 | | 39,296 |
| | 12.9 | | 37,545 |
| | 12.1 |
Operating income | $ | 1,318 |
| | 1.3 | | $ | 4,894 |
| | 4.5 | | $ | 6,652 |
| | 2.2 | | $ | 16,502 |
| | 5.3 |
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| Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
Werner Logistics segment | 2020 | | 2019 | | % Change | | 2020 | | 2019 | | % Change |
Average tractors in service | 31 | | | 33 | | | (6.1) | % | | 31 | | | 36 | | | (13.9) | % |
Total tractors (at quarter end) | 32 | | | 31 | | | 3.2 | % | | 32 | | | 31 | | | 3.2 | % |
Total trailers (at quarter end) | 1,325 | | | 1,580 | | | (16.1) | % | | 1,325 | | | 1,580 | | | (16.1) | % |
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| Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
Werner Logistics | 2017 | | 2016 | | % Change | | 2017 | | 2016 | | % Change |
Average tractors in service | 48 |
| | 75 |
| | (36.0 | )% | | 53 |
| | 71 |
| | (25.4 | )% |
Total trailers (at quarter end) | 1,655 |
| | 1,590 |
| | 4.1 | % | | 1,655 |
| | 1,590 |
| | 4.1 | % |
Total tractors (at quarter end) | 47 |
| | 86 |
| | (45.3 | )% | | 47 |
| | 86 |
| | (45.3 | )% |
Three Months Ended September 30, 20172020 Compared to Three Months Ended September 30, 20162019
Operating Revenues
Operating revenues increased 3.9%decreased 4.5% for the three months ended September 30, 2017,2020, compared to the same period of the prior year. When comparing third quarter 20172020 to third quarter 2016, Truckload2019, TTS segment revenues increased $23.3decreased $22.1 million, or 6.1%4.6%, and Werner Logistics revenues decreased $4.9$4.0 million, or 4.5%3.3%.
During third quarter 2020, freight demand in our One-Way Truckload fleet was strong and improved throughout the quarter. This trend has continued during fourth quarter to-date. In our Dedicated fleet, freight demand remained strong in third quarter 2020. Approximately three-quarters of our Dedicated revenues are with essential products customers, and their freight volumes were much better than normal during third quarter 2020. We added 180 Dedicated trucks during third quarter 2020.
Trucking revenues, net of fuel surcharge, increased 4.3%remained flat in third quarter 20172020 compared to third quarter 20162019 due to a 2.9%4.9% decrease in the average number of tractors in service, which was offset by a 5.0% increase in average revenues per tractor per week, and a 1.4%net of fuel surcharge. The increase in average tractorsrevenues per tractor was due primarily to improved pricing in service. Ourboth Dedicated and One-Way Truckload. We currently expect average revenues per total mile net of fuel surcharge, increased by 3.4% in third quarter 2017 compared to third quarter 2016 and average miles per truck decreased by 0.5%.
Third quarter 2017 freight demand in ourfor the One-Way Truckload fleet improved throughout the quarter. In July and August 2017, freight trended better than normal and meaningfully better than the challenging freight market of third quarter 2016. As we moved into September, the freight market strengthened further due in part to the significant disruption caused by two major hurricanes in south Texas and Florida. These catastrophic weather events resulted in short-term costs in September due to out-of-route miles, higher fuel costs, equipment issues, and driver domicile issues; additionally, the multiple days of school closings at our Florida-based driving schools negatively impacted our driver hiring. At the same time, these events improved spot market pricing and further widened the positive gap between demand and capacity, which better positions the freight and contractual rate markets going forward. Freight volumes in October 2017 were seasonally better than normal.
Freight metrics have improved, and we have increasing confidence that contractual rates will strengthen over the next few quarters, particularly noting the improving freight market conditions and the expected tightening of supply when the electronic hours of service mandate for the trucking industry becomes effective on December 18, 2017.fourth quarter 2020 to be in a range of 3% to 5% higher when compared to fourth quarter 2019.
The average number of tractors in service in the TruckloadTTS segment increased 1.4%decreased 4.9% to 7,3147,615 in third quarter 20172020 from 7,2168,010 in third quarter 2016.2019. We ended third quarter 20172020 with 7,3757,710 trucks in the TruckloadTTS segment, a year-over-year increasedecrease of 200345 trucks compared to the end of third quarter 2016,2019, and a sequential increase of 60 trucks compared to the end of second quarter 2017.2020. We added 180 Dedicated trucks during third quarter 2020, which we had anticipated following delayed implementations of Dedicated fleet start-ups. While we currently expect modest truck growth in fourth quarter 2020, we expect our truck count at the end of 2020 to be at the bottom end of the range of (3)% to (1)% lower when compared to the fleet size at year-end 2019. We cannot predict whether future driver shortages, if any, will adversely affect our ability to maintain our fleet size. If such a driver shortage were to occur, it could result in a fleet size reduction, and our results of operations could be adversely affected.
Trucking fuel surcharge revenues increased 19.5%decreased 35.6% to $50.2$36.8 million in third quarter 20172020 from $42.0$57.2 million in third quarter 20162019 due to higherlower average fuel prices in the 2017third 2020 quarter. These revenues represent collections from customers for the increase in fuel and fuel-related expenses, including the fuel component of our independent contractor cost (recorded as rent and purchased transportation expense) and fuel taxes (recorded in taxes and licenses expense), when diesel fuel prices rise. Conversely, when fuel prices decrease, fuel surcharge revenues decrease. To lessen the effect of fluctuating fuel prices on our margins, we collect fuel surcharge revenues from our customers for the cost of diesel fuel and taxes in excess of specified base fuel price levels according to terms in our customer contracts. Fuel surcharge rates generally adjust weekly based on an independent U.S. Department of Energy fuel price survey which is released every Monday. Our fuel surcharge programs are designed to (i) recoup higher fuel costs from customers when fuel prices rise and (ii) provide customers with the benefit of
lower fuel costs when fuel prices decline. These programs generally enable us to recover a majority, but not all, of the fuel price increases. The remaining portion is generally not recoverable because it results from empty and out-of-route miles (which are not billable to customers) and truck idle time. Fuel prices that change rapidly in short time periods also impact our recovery because the surcharge rate in most programs only changes once per week.
Werner Logistics revenues are generated by its fivefour operating units and exclude revenues for full truckload shipments transferred to the TruckloadTTS segment, which are recorded as trucking revenues by the TruckloadTTS segment. Werner Logistics also recorded revenue and brokered freight expense of $0.1 million$30 thousand in third quarter 20172020 and $0.2 million$1 thousand in third quarter 20162019 for Intermodal drayage movements performed by the TruckloadTTS segment (also recorded as trucking revenue by the TruckloadTTS segment), and these transactions between reporting segments are eliminated in consolidation. In third quarter 2017,2020, Werner Logistics revenues decreased $4.9$4.0 million, or 4.5%3.3%, and operating income dollars decreased $3.6 million or 73.1%, comparedprimarily due to lower Truckload Logistics revenues (60% of total Logistics revenues). Truckload Logistics volume declined 15% in third quarter 2016.2020, and revenue per load was unchanged. Intermodal revenues (28% of Logistics revenues) increased 31% in third quarter 2020, due to volume growth of 37% and 5% lower revenue per load from lower rates and fuel surcharges. The Werner Logistics gross margin percentage in third quarter 20172020 of 14.4%10.8% decreased from 16.2%15.2% in third quarter 2016.2019 due to the unprecedented large and rapid rise in spot truckload rates which significantly increased the cost of capacity for contractual brokerage shipments in third quarter 2020. The Werner Logistics operating income percentagemargin in third quarter 2017 of 1.3%2020 declined to (0.7)% from 2.5% as the 31.0% decline in gross profit exceeded the 11.9% decline in other operating expenses. During third quarter 20162020, we addressed customer pricing for many of 4.5%. Tighter carrier capacity in third quarter 2017 compared to third quarter 2016 resulted in higher purchased transportation costs causing the lower gross marginour contractual brokerage accounts, and operating income percentages.
In third quarter 2017,we currently expect that Werner Logistics achieved solid revenue growth year over yearwill be profitable in our truck brokerage solution, while our intermodal and international solutions had lower revenues due to more challenging market conditions. As previously disclosed, a large Werner Logistics Freight Management customer (5.5% of Werner Logistics revenues in thirdfourth quarter 2016) that was acquired2020.
in 2015 transitioned to their parent company’s transportation platform mid-quarter during first quarter 2017. We continue to see strong customer acceptance of the value of the Werner Logistics portfolio of service offerings, particularly as the market strengthens and shippers tend to consolidate their logistics business with the stability of larger asset-backed logistics providers.
Operating Expenses
Our operating ratio (operating expenses expressed as a percentage of operating revenues) was 93.2%89.5% for the three months ended September 30, 2017, compared to 94.3%2020 and 91.4% for the three months ended September 30, 2016.2019. Expense items that impacted the overall operating ratio are described on the following pages. The tables on pages 16 and 1721 through 23 show the Consolidated Statements of Income in dollars and as a percentage of total operating revenues and the percentage increase or decrease in the dollar amounts of those items compared to the same quarter of the prior year, as well as the operating ratios, operating margins, and certain statistical information for our two reportable segments, TruckloadTTS and Werner Logistics.
Salaries, wages and benefits increased $7.4decreased $12.4 million or 4.5%5.9% in third quarter 20172020 compared to third quarter 20162019 and increased 0.2%decreased 0.5% as a percentage of operating revenues to 32.2%33.4%. The higherlower dollar amount of salaries, wages and benefits expense in the 20172020 third quarter was due primarily to increased company truck mileslower fringe benefits and higher driver and student pay rates. These increaseshaving fewer placement drivers, both of which were partially offsetimpacted by lowerCOVID-19. Our workers’ compensation expense in third quarter 2017. When evaluated on a per-mile basis, driver salaries, wagescosts improved, and benefits also increased,we incurred lower group health insurance costs which we primarily attribute to higher driver pay in third quarter 2017 compared to third quarter 2016.believe is a temporary effect of COVID-19. Non-driver salaries, wages and benefits in the non-trucking Werner Logistics segment increased 8.4%decreased 14.6%.
We renewed our workers’ compensation insurance coverage for the policy year beginningon April 1, 2017. Our coverage levels are the same as the prior policy year. We continue to maintain a2020 and took on additional risk exposure by increasing our self-insurance retention offrom $1.0 million to $2.0 million per claim. Ourclaim as of April 1, 2020. As a result of the higher self-insured retention, our workers’ compensation insurance premiums for the policy year beginning April 2017 were similar to those2020 are $0.8 million lower than the premiums for the previous policy year.
The tight driver recruiting market became more challengingfurther intensified in third quarter 2017.2020, as the improving freight market caused increased competition for the finite number of experienced drivers that meet our hiring standards. Several ongoing market factors persistpersisted including a declining number of, and increased competition for, driver training school graduates, an historically low national unemployment rate,particularly considering COVID-19 constraints, aging truck driver demographics and increased truck safety regulations. We proactively took manycontinue to take significant actions in the last two years to strengthen our driver recruiting and retention to make Werner thea preferred choice for the best drivers, including raising driver pay, lowering the age of ourmaintaining a new truck and trailer fleet, installingpurchasing best-in-class safety and training features onfor all new trucks, investing in our driver training schoolsschool network and collaborating with customers to improve or eliminate freight with unproductive operating characteristics that preventfreight. These efforts continue to have positive results on our drivers from maximizing productivity. Our driver turnover rate once again improved, achieving the lowest third quarter rate in 19 years.retention. We are unable to predict whether we will experience future driver shortages.shortages or continue to maintain our current driver retention rates. If such a driver shortage were to occur and additional driver pay rate increases became necessary to attract and retain drivers, our results of operations would be negatively impacted to the extent that we could not obtain corresponding freight rate increases.
Fuel increased $9.6decreased $21.6 million or 23.7%36.3% in third quarter 20172020 compared to third quarter 20162019 and increased 1.5%decreased 3.2% as a percentage of operating revenues due to higherlower average diesel fuel prices and increasedapproximately 5.0 million fewer company truck miles.miles in third quarter 2020. Average diesel fuel prices were 26were 69 cents per gallon higherlower in third quarter 20172020 than in third quarter 20162019 and were 1525 cents per gallon higher than in second quarter 2017. The increase was partially offset by slightly improved miles per gallon (“mpg”).2020.
We continue to employ measures to improve our fuel mpg such as (i) limiting truck engine idle time, (ii) optimizing the speed, weight and specifications of our equipment and (iii) implementing mpg-enhancing equipment changes to our fleet including
new trucks, with U.S. Environmental Protection Agency (the “EPA”) 2010 compliant engines, more aerodynamic truck features, idle reduction systems, trailer tire inflation systems, trailer skirts and automated manual transmissions to reduce our fuel gallons purchased. However, fuel savings from mpg improvement is partially offset by higher depreciation expense and the additional cost of diesel exhaust fluid (required in tractors with engines that meet the 2010 EPA emission standards).fluid. Although our fuel management programs require significant capital investment and research and development, we intend to continue these and other environmentally conscious initiatives, including our active participation as an EPA SmartWay Transport Partner. 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 2017,2020, the average diesel fuel price per gallon was approximately 2878 cents higherlower than the average diesel fuel price per gallon in October 20162019 and approximately 3278 cents higherlower than in fourth quarter 2016.2019.
Shortages of fuel, increases in fuel prices and petroleum product rationing can have a materially adverse effect on our operations and profitability. We are unable to predictpredict 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, 2017,2020, we had no derivative financial instruments to reduce our exposure to fuel price fluctuations.
Supplies and maintenance increased $1.0decreased $2.9 million or 2.3%6.2% in third quarter 20172020 compared to third quarter 20162019 and decreased 0.2%0.1% as a percentage of operating revenues. The lower dollar amount of supplies and maintenance expense was due primarily to lower travel and entertainment costs resulting from COVID-19 restrictions.
Insurance and claims increased $1.4 million or 6.3% in third quarter 2020 compared to third quarter 2019 and increased 0.4% as a percentage of operating revenues due primarily to higher company truck miles drivenliability insurance premiums of $1.4 million and unfavorable reserve development on small dollar claims in the 2020 third quarter, partially offset by lower expense for large dollar claims. We also incurred insurance and claims expense of $1.2 million in third quarter 2017 compared to third quarter 2016, partially offset by our younger trailer fleet2020 and the resulting lower equipment maintenance expense. We also incurred higher driver recruiting and other driver-related costs in the 2017 quarter.
Insurance and claims increased $1.6$0.8 million or 8.2% in third quarter 2017 compared2019 for accrued interest related to third quarter 2016 and increased 0.1%a previously-disclosed adverse jury verdict rendered May 17, 2018, which we are appealing (see Note 5 in the Notes to Consolidated Financial Statements (Unaudited) set forth in Part I of this report). Interest is accrued at $0.4 million per month, until such time as a percentagethe outcome of operating revenues. The increase in third quarter 2017 expense compared to third quarter 2016 was primarily the result of unfavorable development on prior period claims.our appeal is finalized. The majority of our insurance and claims expense results from our claim experience and claim development under our self-insurance program; the remainder results from insurance premiums for claims in excess of our self-insured limits.
We renewed our liability insurance policies on August 1, 20172020 and tookare now responsible for the first $10.0 million per claim on additional risk exposure by increasing our self-insured retention and deductible levels. Effective onall claims with no annual aggregates.For the policy year that date,began August 1, 2019, we arewere responsible for the first $3.0 million per claim with an annual $6.0 million aggregate for claims between $3.0 million and $5.0 million. We also havemillion and an additional $5.0 million deductible per claim for each claim between $5.0 million and $10.0 million. As a result, we are responsible for the first $10.0 million per claim, until we meet the $6.0 million aggregate for claims between $3.0 million and $5.0 million. For the policy year that ended July 31, 2016, we were responsible for the first $2.0 million per claim with an annual $8.0 million aggregate for claims between $2.0 million and $5.0 million and an annual aggregate of $5.0 million for claims between $5.0 million and $10.0 million. We maintain liability insurance coverage with insurance carriers substantially in excess of the $10.0 million per claim. As a result of the higher self-insured retention and deductible amounts under the new policies, ourOur liability insurance premiums for the policy year that began August 1, 20172020 are about $3.7 $7.8million lowerhigher than premiums for the previous policy year.
Depreciation expense increased $1.8$0.4 million or 3.5%0.6% in third quarter 20172020 compared to third quarter 20162019 and decreased 0.1%increased 0.6% as a percentage of operating revenues. ThisDuring first quarter 2020, we changed the estimated life of certain trucks currently expected to be sold in 2020 to more rapidly depreciate these trucks to their estimated residual values due to the weak used truck market. The effect of this change in accounting estimate increased third quarter 2020 depreciation expense increase is due primarilyby $0.9 million. The remaining trucks will continue to depreciate at the same higher rate per truck until the trucks are sold. Information technology and communications infrastructure upgrades also added to the higher costdepreciation expense in third quarter 2020.
The average age of new trucks purchased compared to the costour truck fleet remains low by industry standards and was 2.0 years as of used trucks that were sold over the past 12 monthsSeptember 30, 2020, and the purchase of new trailers over the past 12 months to replace older used trailers which were fully depreciated.
In 2015 and 2016, we invested nearly $1 billion of capital expenditures (before sales of equipment) primarily to reduce the average age of our trucks and trailers. Our investmenttrailers was 4.0 years. We are continuing to invest in newernew trucks and trailers improvesand our terminals in 2020 to improve our driver experience, raisesincrease operational efficiency and helps us to bettermore effectively manage our maintenance, safety and fuel costs. We intend to maintain our newer fleet ageDuring the remainder of trucks and trailers. The2020, we expect the average age of our company truck and trailer fleet wasto remain at 1.9 years as of September 30, 2017.or near current levels.
Rent and purchased transportation expense decreased $7.8$3.0 million or 5.8%2.2% in third quarter 20172020 compared to third quarter 20162019 and decreased 2.4%increased 0.5% as a percentage of operating revenues. Rent and purchased transportation expense consists mostly of payments to third-party capacity providers in the Werner Logistics segment and other non-trucking operations and payments to independent contractors in the TruckloadTTS 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 rent and purchased transportation expense decreased $2.2increased $1.7 million butdespite lower logistics revenues, and as a percentage of Werner Logistics revenues increased to 85.6%89.2% in third quarter 20172020 from 83.8%84.8% in third quarter 2016. Tighter industry-wide carrier2019, due primarily to the unprecedented large and rapid rise in spot truckload rates which significantly increased the cost of capacity for contractual brokerage shipments in third quarter 2017 compared to third quarter 2016 resulted in higher purchased transportation costs causing the lower gross margin percentage.2020.
Rent and purchased transportation expense for the TruckloadTTS segment decreased $5.8$4.5 million in third quarter 20172020 compared to third quarter 2016. This decrease is due primarily to lower payments to independent contractors due to fewer independent2019. Independent contractor trucks and miles duringdecreased approximately 4.5 million miles in third quarter 2017 compared to third quarter 2016, partially offset by higher average fuel reimbursement per mile in the 2017 quarter. Independent contractor miles2020 and as a percentage of total miles were 11.8%8.2% in third quarter 20172020 compared to 14.8%9.9% in third quarter 2016.2019. The per-mile settlement rate for independent contractors also decreased in third quarter 2020 compared to third quarter 2019, due to lower diesel fuel prices. 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. Such conditions include inflationary cost increases that are the responsibility of independent contractors and a shortage of financing available to independent contractors for equipment purchases. 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 occurs, further increases in per-mile settlement rates (for independent contractors) and driver pay rates (for company drivers) may become necessary to attract and retain these drivers. ThisThese rate increases could negatively affect our results of operations to the extent that we would not be able to obtain corresponding freight rate increases.
Other operating expenses decreased $0.5increased $1.6 million or 10.8% in third quarter 20172020 compared to third quarter 20162019 and decreased 0.1%increased 0.3% as a percentage of operating revenues. Gains on sales of assets (primarily used trucks and trailers) are reflected as a reduction of other operating expenses and are reported net of sales-related expenses (which include costs to prepare the equipment for sale). Gains on sales of assets were $2.2$3.9 million in third quarter 20172020 compared to $3.1$4.1 million in third quarter 2016, which included a $6.5 million real estate gain2019. We realized significantly lower average gains per truck and $3.4 million of losses on equipment sales. In third quarter 2017, weslightly higher average gains per trailer and sold fewersubstantially more trucks and fewer trailers than in third quarter 2016. We realized average gains per truck in third quarter 2017 compared to average losses in third quarter 2016 and realized lower average gains per trailer in third quarter 20172020 compared to third quarter 2016. The2019. Pricing in the market for our used truck pricing market remained difficulttrucks began to improve in third quarter 2017 due to a higher than normal supply of used trucks in the market and low buyer demand. Other operating expenses, primarily provision2020. Higher expense for doubtful accounts relatedprofessional services also contributed to the driver training schools and professional and consulting fees, declined by $1.4 millionincrease in third quarter 2017 compared to third quarter 2016.other operating expense.
Other Expense (Income)
Other expense (income) increased $0.1decreased $1.1 million and increased 0.1% as a percentage of operating revenues in third quarter 20172020 compared to third quarter 2016. Interest income was2019. We had lower in the 2017 quarterinterest expense due primarily to lower average outstanding notes receivable,debt in third quarter 2020, and interest expense was lower as well.income also decreased in third quarter 2020 compared to third quarter 2019.
Income Taxes
Our effective income tax rate (income taxes expressed as a percentage of income before income taxes) was 37.6%24.6% in third quarter 2017 and 35.5%2020 compared to 24.4% in third quarter 2016.2019. The higher income tax rate in 2017 isthird quarter 2020 was attributed primarily to a lower amount of favorable discrete income tax adjustments for the remeasurement of uncertain tax positionsitems in third quarter 2017 compared to third quarter 2016 and the effect of applying a state tax rate increase to our deferred tax liabilities, partially offset by recognizing excess tax benefits related to share-based awards as a component of income tax expense.2020.
Nine Months Ended September 30, 20172020 Compared to Nine Months Ended September 30, 20162019
Operating Revenues
Operating revenues increased 4.0%decreased 4.9% for the nine months ended September 30, 2017,2020, compared to the same period of the prior year. In the TruckloadTTS segment, trucking revenues, net of fuel surcharge, increased 2.0% in the 2017 year-to-date period compared to the 2016 year-to-date period$6.2 million, or 0.5%, due primarily to a 2.4%3.1% increase in average revenues per tractor per week, partially offset by a 0.4%2.5% decrease in the average number of tractors in service. Average revenues per total mile, net of fuel surcharge, increased 2.3%2.4% in the first nine months of 20172020 compared to the same period in 2016,2019, and average monthly miles per tractor increased by 0.2%0.7%. TruckloadTTS segment fuel surcharge revenues for the nine months ended September 30, 2017 increased $36.62020 decreased $55.8 million or 33.0%31.4% when compared to the nine months ended September 30, 20162019 due to higherlower average fuel prices in the 20172020 period. Werner Logistics revenues decreased $29.9 million, or 8.1%, primarily due to $305.2 million in the first nine months of 2017 compared to $310.0 million in the same 2016 period.lower Truckload Logistics revenues.
Operating Expenses
Our operating ratio (operating expenses expressed as a percentage of operating revenues) was 93.6%91.7% for the nine months ended September 30, 2017,2020, compared to 93.9%91.3% for the nine months ended September 30, 2016.2019. Expense items that impacted the overall operating ratio are described on the following pages. The tables on pages 16 and 1721 through 23 show the Consolidated Statements of Income in dollars and as a percentage of total operating revenues and the percentage increase or decrease in the dollar amounts of those items compared to the same period of the prior year, as well as the operating ratios, operating margins, and certain statistical information for our two reportable segments, TruckloadTTS and Werner Logistics.
Salaries, wages and benefits increased $21.3decreased $20.3 million or 4.4%3.3% in the first nine months of 20172020 compared to the first nine months of 20162019 and increased 0.5% as a percentage of operating revenues to 32.3%34.1%. The higherlower dollar amount of salaries, wages and benefits expense was due primarily to lower fringe benefits and having fewer placement drivers, both of which were impacted
by COVID-19. We incurred lower group health insurance expense which we believe is a temporary effect of COVID-19, and our workers’ compensation costs improved. These decreases were partially offset by higher driver and student pay rates increased company truck miles and higher workers’ compensation expense in the 2017 period. When evaluated on a per-mile basis, driver salaries increased as well.first nine months of 2020. Non-driver salaries, wages and benefits in the non-trucking Werner Logistics segment increased 9.8%decreased 12.4%.
Fuel increased $28.5decreased $59.3 million or 25.5%33.6% in the first nine months of 20172020 compared to the same period in 20162019 and decreased 2.9% as a percentage of operating revenues due to lower average diesel fuel prices in 2020. Average diesel fuel prices were 70 cents per gallon lower in the first nine months of 2020 than in the same 2019 period.
Supplies and maintenance decreased $3.9 million or 2.8% in the first nine months of 2020 compared to the same period in 2019 and increased 1.6%0.2% as a percentage of operating revenues. The lower dollar amount of supplies and maintenance expense was due primarily to lower travel and entertainment costs resulting from COVID-19 restrictions, as well as lower driver and placement driver recruiting and other driver-related expenses. These decreases were partially offset by the increased costs related to COVID-19 safety items and increased tractor maintenance costs.
Insurance and claims increased $19.5 million or 29.8% in the first nine months of 2020 compared to the same period in 2019 and increased 1.3% as a percentage of operating revenues due primarily to higher average diesel fuel pricesexpense for new large dollar claims and unfavorable reserve development on large dollar claims. In January 2020, one of our trucks was involved in 2017, partially offset by improved mpg. Average diesel fuel prices were 30 cents per gallon higher ina serious accident. We self-insure for the first nine months$10.0 million of 2017 thanliability coverage for this policy period and have appropriate excess liability insurance coverage with insurance carriers above this amount. As a result, we accrued $10.0 million of insurance and claims expense in the same 2016 period.first quarter 2020 for this accident.
Supplies and maintenance decreased $10.3
Depreciation expense increased $14.7 million or 7.9% in the first nine months of 20172020 compared to the same2019 period in 2016 and decreased 1.0%increased 1.4% as a percentage of operating revenues. Repairs and maintenance for our tractor and trailer fleets decreased in the year-to-date 2017 period despite higher company driver miles driven due to a newer fleet of tractors and trailers. These decreases were partially offset by higher driver recruiting and other driver-related costs in the 2017 period.
Insurance and claims expense increased $1.0 million or 1.6% in theDuring first nine months of 2017 compared to the same period in 2016 but decreased 0.1% as a percentage of operating revenues. The higher expense in the 2017 year-to-date period was due primarily to higher liability insurance premiums related to the policy year that ended July 31, 2017.
Depreciation expense increased $9.8 million or 6.4% in the first nine months of 2017 compared to the same 2016 period and increased 0.2% as a percentage of operating revenues due primarily to a change during fourth quarter 2016 in2020, we changed the estimated life of certain trucks currently expected to be sold in 2020 to more rapidly depreciate thethese trucks to their estimated residual values due to the weak used truck market, which resultedmarket. The effect of this change in additionalaccounting estimate increased depreciation expense of $3.4by $9.6 million in 2017,the first nine months of 2020. These trucks will continue to depreciate at the same higher rate per truck until the trucks are sold. Information technology and communications infrastructure upgrades also added to the higher costdepreciation expense in the first nine months of new trucks purchased versus used trucks that were sold. In addition, the purchase of new trailers over the past 12 months to replace older used trailers which were fully depreciated also contributed to the increase in depreciation expense.2020.
Rent and purchased transportation expense decreased $2.0$34.8 million or 0.5%8.4% in the first nine months of 20172020 compared to the same 20162019 period and decreased 1.1%0.9% as a percentage of operating revenues. Rent and purchased transportation for the TruckloadTTS segment decreased $5.3$18.7 million in the first nine months of 20172020 compared to the same 2016 period. This decrease is2019 period due primarily to lower diesel fuel prices and having 10.3 million fewer independent contractor miles driven in the first nine months of 2017 compared to the same period in 2016. Independent contractor miles as a percentage of total miles were 12.4% and 14.4% in the first nine months of 2017 and 2016, respectively.ended September 30, 2020. Werner Logistics rent and purchased transportation expense increased $3.3decreased $16.3 million andas a result of lower logistics revenues, but as a percentage of Werner Logistics revenues increased to 84.9%86.4% in the 20172020 period from 82.6%83.8% in the 20162019 period. Tighter industry-wide carrier capacity in the 2017 period compared to the 2016 period resulted in higher purchased transportation costs causing the lower gross margin percentage.
Other operating expenses increased $3.5$8.5 million in the first nine months of 20172020 compared to the same period in 20162019 and increased 0.2%0.5% as a percentage of operating revenues. Gains on sales of assets (primarily used trucks and trailers) decreasedwere $7.3 million in the first nine months ended September 30, 2020 compared to $6.0$14.5 million in the nine months ended September 30, 2017 from $13.3 million in the nine months ended September 30, 2016, which included gains of $10.5 million from sales of real estate.2019. In the 20172020 year-to-date period, we sold fewer15% more trucks and 13% fewer trailers and realized significantly lower average gains per truck compared to average losses and realized lower average gains per trailer sold when compared to same period of 2016. Provision for doubtful accounts related to our driver schools and professional and consulting fees were lower in the 2017 period.trailer.
Other Expense (Income)
Other expense (income) increased $0.8$0.4 million in the first nine months of 20172020 compared to the same 2016 period and increased 0.1% as a percentage of operating revenues, due primarily to lower interest income.2019 period. Interest income decreased due to lower average outstanding notes receivable in the first nine months of 20172020 compared to the first nine months of 2016.2019 due to lower variable interest rates in the 2020 period. The decreased interest income was partially offset by lower interest expense due to lower average outstanding debt in the 2020 period.
Income Taxes
Our effective income tax rate (income taxes expressed as a percentage of income before income taxes) decreased to 37.7%was 24.4% for the first nine months of 2017 from 37.9%2020 compared to 24.9% for the first nine months of 2016.2019. The lower income tax rate isin the year-to-date 2020 period was attributed primarily to recognizing excess tax benefits related to share-based awards as a component of income tax expense, partially offset by a lowerhigher amount of favorable discrete income tax adjustments for the remeasurement of uncertain tax positionsitems in the first nine months of 2017 compared to the same period of 2016.2020 period.
Liquidity and Capital Resources:
During the nine months ended September 30, 2017,2020, we generated cash flow from operations of $216.9$346.4 million, an 8%a 4.3% or $15.8$14.2 million increase in cash flows compared to the same nine-month period a year ago. The increase in net cash provided by operating activities resulted primarily from deferring payment of certain 2020 employer payroll taxes under the effectCARES Act
and general working capital items,from higher non-cash depreciation, partially offset by a decrease from deferred income taxes.lower net income. We were able to repay debt, make net capital expenditures, andrepay debt, pay dividends and repurchase company stock with the net cash provided by operating activities and existing cash balances.
Net cash used in investing activities decreased to $110.5$181.0 million for the nine-month period ended September 30, 20172020 from $280.0$262.4 million for the nine-month period ended September 30, 2016.2019. Net property additions (primarily revenue equipment) were $121.1$187.3 million for the nine-month period ended September 30, 2017,2020, compared to $294.0$271.7 million during the same period of 2016. This2019. The decrease occurred as we completed a significant reinvestmentwas due in our fleet. Aspart to new truck delivery delays resulting from temporary closures of September 30, 2017, we were committed to property and equipment purchases of approximately $95.2 million.manufacturing plants. We currently estimate net capital expenditures (primarily revenue equipment) in 20172020 to be in the range of $175$275 million to $225$300 million, compared to net capital expenditures in 20162019 of $429.6$283.9 million. We intend to fund these net capital expenditures through cash flow from operations and financing available under our existing credit facilities, if necessary. As of September 30, 2020, we were committed to property and equipment purchases of approximately $133.6 million.
Net financing activities used $113.3$156.4 million during the nine months ended September 30, 2017,2020, and provided $61.2used $89.4 million during the same period in 2016. During2019. We repaid $125.0 million of debt during the nine months ended September 30, 2017, we repaid $105.0 million of debt; in the same 2016 period, we had borrowings of $135.0 million and repayments of $60.0 million. Our2020, bringing our outstanding debt at September 30, 2017 was $75.02020 to $175.0 million. We paid dividends of $13.7$18.7 million in the nine-month period ended September 30, 20172020 and $13.0$280.0 million in the nine-month period ended September 30, 2016. We increased our quarterly2019. In May 2019, we declared a special dividend rate by $0.01of $3.75 per share, or 17%, beginning with the dividend$261.1 million, which was paid in July 2017. We did not repurchase any shares of common stock duringon June 7, 2019. Financing activities for the nine months ended September 30, 2017 or 2016. From time to time,2020, also included common stock repurchases of 282,992 shares at a cost of $8.8 million. In the nine-month period ended September 30, 2019, we repurchased 1,300,000 shares at a cost of $42.3 million. The Company has repurchased, and may continue to repurchase, shares of the Company’s common stock. The timing and amount of such purchases depend upon economic and stock market conditions and other factors. As of September 30, 2017,2020, the Company had purchased 3,287,291982,992 shares pursuant to our current Board of Directors repurchase authorization and had 4,712,7094,017,008 shares remaining available for repurchase.
Management believes our financial position at September 30, 20172020 is strong. As of September 30, 2017,2020, we had $10.7$40.5 million of cash and cash equivalents and over $1nearly $1.2 billion of stockholders’ equity. Cash is invested primarily in government portfolio money market funds. As of September 30, 2017,2020, we had a total of $325.0$175.0 million of credit pursuant to threedebt outstanding. We had total borrowing capacity of $500.0 million under our two credit facilities that expire in May 2024 (see Note 24 in the Notes to Consolidated Financial Statements (Unaudited) under Item 1I of Part I of this Form 10-Q), of which we had borrowed $75.0 million. The remaining $250.0$280.4 million is available for future borrowing as of September 30, 2020, after considering the $175.0 million of credit available under these facilities at September 30, 2017 is reduced by the $28.7outstanding debt and $44.6 million in stand-by letters of credit under which we are obligated. These stand-by letters of credit are primarily required as security for insurance policies. Based onWe believe our strong financial position, management does not foresee any significant barriers to obtainingliquid assets, cash generated from operating activities, and borrowing capacity under our credit facilities will provide sufficient financing, if necessary.funds for our operating and capital needs for the foreseeable future.
Contractual Obligations and Commercial Commitments:
The following tables set forthItem 7 of Part II of our 2019 Form 10-K includes our disclosure of contractual obligations and commercial commitments as of September 30, 2017.
Payments Due by Period
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| | | | | | | | | | | | | | | | | | | | | | | |
(Amounts in millions) | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years | | Period Unknown |
Contractual Obligations | | | | | | | | | | | |
Unrecognized tax benefits | $ | 4.1 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 4.1 |
|
Long-term debt including current maturities | 75.0 |
| | — |
| | 75.0 |
| | — |
| | — |
| | — |
|
Interest payments on debt | 3.7 |
| | 1.9 |
| | 1.8 |
| | — |
| | — |
| | — |
|
Property and equipment purchase commitments | 95.2 |
| | 95.2 |
| | — |
| | — |
| | — |
| | — |
|
Total contractual cash obligations | $ | 178.0 |
| | $ | 97.1 |
| | $ | 76.8 |
| | $ | — |
| | $ | — |
| | $ | 4.1 |
|
Other Commercial Commitments | | | | | | | | | | | |
Unused lines of credit | $ | 221.3 |
| | $ | — |
| | $ | 221.3 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Stand-by letters of credit | 28.7 |
| | 28.7 |
| | — |
| | — |
| | — |
| | — |
|
Total commercial commitments | $ | 250.0 |
| | $ | 28.7 |
| | $ | 221.3 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Total obligations | $ | 428.0 |
| | $ | 125.8 |
| | $ | 298.1 |
| | $ | — |
| | $ | — |
| | $ | 4.1 |
|
AsDecember 31, 2019. Except for the expiration of September 30, 2017, we had unsecured committed credit facilities with three banks as well as a term commitment with one of these banks. We had with Wells Fargo Bank, N.A., a $100our $75.0 million credit facility which will expire on July 12, 2020, and a $75 million term commitment with principal due and payable on September 15, 2019. We had an unsecured line of credit of $75 million with U.S. Bank, N.A., which will expire on July 13, 2020. We also had a $75 million credit facility with BMO Harris Bank, N.A., which will expire on March 5, 2020. Borrowings under2020, there were no material changes in the nature of these credit facilities and term note bear variable interest based onitems during the London Interbank Offered Rate (“LIBOR”). As ofnine months ended September 30, 2017, we had $75 million outstanding under the term commitment at a variable rate of 1.83%, which is effectively fixed at 2.5% with an interest rate swap agreement. Interest payments on debt are based on the debt balance and interest rates at September 30, 2017. The borrowing capacity under these credit facilities is further reduced by the amount of stand-by letters of credit under which we are obligated. The stand-by letters of credit are primarily required for insurance policies. The unused lines of credit are available to us in the event we need financing for the replacement of our fleet or for other significant capital expenditures. Management believes our financial position is strong, and we therefore expect that we could obtain additional financing, if necessary. Property and equipment purchase commitments relate to committed equipment expenditures, primarily for revenue equipment. As of September 30, 2017, we had recorded a $4.1 million liability for unrecognized tax benefits. We expect none of it to be settled within the next twelve months and are unable to reasonably determine when the $4.1 million categorized as “period unknown” will be settled.2020.
Regulations:
Item 1 of Part I of our 20162019 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. Except as described below, there have been no material changes in the status of thesethe proposed regulations previously disclosed in the 20162019 Form 10-K.
TheOn June 1, 2020, the Federal Motor Carrier Safety Administration (“FMCSA”) proposedpublished revisions to change the method for assigning a motor carrier’s Safety Fitness Determination (“SFD”) in January 2016, which would replace the three-tier federal rating system in place since 1982 with a single determination of “unfit.” FMCSA announced on March 23, 2017 that it has withdrawn the SFD proposed rule altogether, pending completion of a study of the agency’s Compliance, Safety, Accountability program.
Interstate carriers are subject to the FMCSA Hours of Service (“HOS”) regulations. FMCSA adopted arequirements. The HOS final rule in December 2011 that included provisions affecting restart periods, rest breaks, on-duty time,increases driver flexibility and penalties for violations,introduces modifications to the existing rule set, including changes to the 30-minute break requirement, split sleeper berth, adverse driving conditions, and we began dispatching drivers under the revised HOS rules effective July 1, 2013. The Consolidated Appropriations Act of 2016 was passed by Congress with HOS language to reduce negative effects of restricted hours and require the FMCSA study to demonstrate results with statistically significant improvements in safety and driver health, among other things, before the agency could reinstate restart rule restrictions that became effective in July 2013. In March 2017, FMCSA released the HOS Restart study report, which indicated that the restrictions do not improve safety; as a result, the pre-July 2013 restart rule continues to be in effect indefinitely.
In an effort to increase highway safety and improve compliance, Werner supports FMCSA’s electronic logging devices (“ELDs”) mandate.short-haul exception. The final ELD rule compliance date was issued in December 2015 and becomes effective on December 18, 2017, when carriers must adopt and use compliant ELDs. In March 2016, a legal complaint was filed bySeptember 29, 2020.
All three countries ratified the Owner-Operator Independent Drivers AssociationUnited States-Mexico-Canada Agreement (“OOIDA”USMCA”) to overturnreplace the ELD mandate. OOIDA asked the U.S. 7th Circuit Court of Appeals to strike down the rule, arguing the rule is an unconstitutional violation of truckers’ rights and will do little to enhance safety. On October 31, 2016, OOIDA’s lawsuit was denied. OOIDA appealed the decision to the U.S. Supreme Court on April 11, 2017. On June 12, 2017, the U.S. Supreme Court denied OOIDA’s request to take on the issue, leaving in place the lower court’s ruling to uphold the mandate and its December 18, 2017 effective date.
FMCSA issued its final rule for Entry-Level Driver TrainingNorth American Free Trade Agreement (“ELDT”NAFTA”) in December 2016. On December 27, 2016, four groups petitioned FMCSA to reconsider the final rule.. The petition was denied by FMCSA on January 19, 2017. This final rule was slated to take effect February 6, 2017, with a compliance date of February 7, 2020; however, agencies were directed by the President in January 2017 to postpone for 60 days the effective date of rules published in the Federal Register but not yet effective. On May 23, 2017, the ruleUSMCA was delayed for a third time; as a result, the final rule became effective June 5, 2017. The compliance date is still set for February 7,July 1, 2020.
Critical Accounting Policies and Estimates:
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires us to make estimates and assumptions that affect the (i) reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and (ii) reported amounts of revenues and expenses during the reporting period. We evaluate these estimates on an ongoing basis as events and
circumstances change, utilizing historical experience, consultation with experts and other methods considered reasonable in the particular circumstances. Actual results could differ from those estimates and may significantly impact our results of operations from period to period. It is also possible that materially different amounts would be reported if we used different estimates or assumptions.
Information regarding our Critical Accounting Policies and Estimates can be found in our 20162019 Form 10-K. The most critical accounting policies and estimates that require us to make significant judgments and estimates and affect our financial statements include the following:
Depreciation and impairment of tractors and trailers.
Estimates of accrued liabilities for insurance and claims for liability and physicalbodily injury, property damage losses and workers’ compensation.compensation is a critical accounting estimate that requires us to make significant judgments and estimates and affects our financial statements.
Accounting for income taxes.
There have been no material changes to thesethis critical accounting policies and estimatesestimate from thosethat discussed in our 20162019 Form 10-K.
Accounting Standards:
In the descriptions under “New Accounting Pronouncements Adopted” and “Accounting Standards Updates Not Yet Effective” that follow, references in quotations identify guidance and Accounting Standards Updates (“ASU”) relating to the topics and subtopics (and their descriptive titles, as appropriate) of the Accounting Standards Codification™ of the Financial Accounting Standards Board (“FASB”).
New Accounting Pronouncements Adopted
We did not adopt any new accounting standards during third quarter 2017.
Accounting Standards Updates Not Yet Effective
On May 28, 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers,” which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The FASB has also issued additional guidance related to revenue recognition matters in subsequent ASUs, including a one-year deferral of the effective date of the new revenue recognition standard. As a result of the deferral, the new standard will become effective for us beginning January 1, 2018. The standard permits the use of either the full retrospective or modified retrospective (cumulative effect) transition method. We have established an implementation team which is evaluating the effect that adopting the standard will have on our consolidated financial statements and related disclosures and developing the necessary processes, reporting and controls to comply with the new requirements. We currently intend to adopt the standard using the modified retrospective transition approach. While we have not yet determined the quantitative impact on our consolidated financial statements, we currently expect the new standard to affect the timing of revenue recognition. Today we recognize revenue and related direct costs when the shipment is delivered. The new standard will require us to recognize revenue over time.
In February 2016, the FASB issued ASU No. 2016-02, “Leases,” to increase transparency and comparability by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The provisions of this update are effective for fiscal years beginning after December 15, 2018. We are evaluating the effect that ASU No. 2016-02 will have on our consolidated financial position, results of operations and cash flows.
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The provisions of this update are effective for fiscal years beginning after December 15, 2017. We are evaluating the effect that ASU No. 2016-15 will have on our consolidated cash flows.
In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash,” which requires an entity to include in its cash and cash-equivalent balances in the statement of cash flows those amounts that are deemed to be restricted cash and restricted cash equivalents. The provisions of this update are effective for fiscal years beginning after December 15, 2017. We are evaluating the effect ASU No. 2016-18 will have on our consolidated cash flows and related disclosures.
In May 2017, the FASB issued ASU No. 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting,” which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The provisions of this update are effective for fiscal years beginning after December 15, 2017. We are evaluating the effect that ASU No. 2017-09 will have on our financial position, results of operations and cash flows.
In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities,” with the objective of improving the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. The provisions of this update are effective for fiscal years beginning after December 15, 2018. We are evaluating the effect that ASU No. 2017-12 will have on our financial position, results of operations and cash flows.
Other ASUs not identified above and which are not effective until after September 30, 2017 are not expected to have a material effect on our consolidated financial position, results of operations or cash flows.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to market risk from changes in commodity prices, foreign currency exchange rates and interest rates.
Commodity Price Risk
The price and availability of diesel fuel are subject to fluctuations attributed to changes in the level of global oil production, refining capacity, seasonality, weather and other market factors. Historically, we have recovered a majority, but not all, of fuel price increases from customers in the form of fuel surcharges. We implemented customer fuel surcharge programs with most of our customers to offset much of the higher fuel cost per gallon. However, we do not recover all of the fuel cost increase through these surcharge programs. We cannot predict the extent to which fuel prices will increase or decrease in the future or the extent to which fuel surcharges could be collected. As of September 30, 2017, we had no derivative financial instruments to reduce our exposure to fuel price fluctuations.
Foreign Currency Exchange Rate Risk
We conduct business in several foreign countries, including Mexico, Canada, China and Australia.China. To date, most foreign revenues are denominated in U.S. Dollars, and we receive payment for foreign freight services primarily in U.S. Dollars to reduce direct foreign currency risk. Assets and liabilities maintained by a foreign subsidiary company in the local currency are subject to foreign exchange gains or losses. Foreign currency translation gains and losses primarily relate to changes in the value of revenue equipment owned by a subsidiary in Mexico, whose functional currency is the Peso. Foreign currency translation lossesgains were $0.6$0.8 million for third quarter 20172020 and $1.0 millionlosses were $1.1 million for third quarter 2016.2019. These were recorded in accumulated other comprehensive loss within stockholders’ equity in the Consolidated Balance Sheets.
Interest Rate Risk
We manage interest rate exposure through a mix of variable rate debt and interest rate swap agreements. We had $75$150 million of debt outstanding at September 30, 2017,2020, for which the interest rate is effectively fixed at 2.5%2.34% through September 2019May 2024 with antwo interest rate swap agreementagreements to reduce our exposure to interest rate increases. We had $25 million of variable rate debt outstanding at September 30, 2020. Interest rates on the variable rate debt and our unused credit facilities are based on the LIBOR. Assuming this level of borrowing, a hypothetical one-percentage point increase in the LIBOR (see Contractual Obligations and Commercial Commitments). Increases in interest rates could impactrate would increase our annual interest expense on future borrowings.by approximately $250,000.
Due to uncertainty surrounding the suitability and sustainability of LIBOR, central banks and global regulators have called for financial market participants to prepare for the discontinuation of LIBOR by the end of 2021. LIBOR is a widely-referenced benchmark rate, and our unsecured credit facilities are referenced to LIBOR. We are communicating with our banks regarding the eventual transition to a new benchmark rate.
Item 4. Controls and Procedures.
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”). Our disclosure controls and procedures are designed to provide reasonable assurance of achieving the desired control objectives. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective at a reasonable assurance level in enabling us to record, process, summarize and report information required to be included in our periodic filings with the SEC within the required time period and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Management, under the supervision of and with the participation of our Chief Executive Officer and Chief Financial Officer, concluded that no changes in our internal control over financial reporting occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
We have confidence in our internal controls and procedures. Nevertheless, our management, including the Chief Executive Officer and Chief Financial Officer, does not expect that the internal controls or disclosure procedures and controls will prevent all errors or intentional fraud. An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of such internal controls are met. Further, the design of an internal control system must reflect that resource constraints exist, and the benefits of controls must be evaluated relative to their costs. Because of the inherent limitations in all internal control systems, no evaluation of controls can provide absolute assurance that all control issues, misstatements and instances of fraud, if any, have been prevented or detected.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
Information regarding the May 17, 2018 adverse jury verdict and subsequent final judgment on July 30, 2018 in Harris County District Court in Houston, Texas, is incorporated by reference from Note 5 in our Notes to Consolidated Financial Statements (Unaudited) set forth in Part I of this report.
Item 1A. Risk Factors
Except as noted below, there have been no material changes to our risk factors as previously disclosed in Item 1A of Part I of our 2019 Form 10-K.
The COVID-19 pandemic has adversely impacted our business, as well as the operations of our customers and suppliers.
The COVID-19 pandemic has resulted in a slowdown of economic activity and a disruption in supply chains. Our business is sensitive to changes in overall economic conditions that impact customer shipping volumes, industry freight demand and industry truck capacity. Such conditions may also impact the financial condition of our customers, resulting in a greater risk of bad debt losses, and that of our suppliers, which may affect the availability or pricing of needed goods and services. We currently expect our fourth quarter and full year 2020 results could be further impacted by the disruptive effects of COVID-19, including but not limited to adverse effects on freight volumes and pricing. The degree of disruption is difficult to predict because of many factors, including the uncertainty surrounding the magnitude and duration of the pandemic, governmental actions that have been and may continue to be imposed, as well as the rate of economic recovery after the pandemic subsides. The unpredictable nature and uncertainty of the current COVID-19 pandemic could also magnify other risk factors that we disclosed in our 2019 Form 10-K and makes it impractical to identify all potential risks.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On October 15, 2007, we announced that on October 11, 2007May 14, 2019, our Board of Directors approved an increase in the number of shares of our commonand announced a new stock thatrepurchase program under which the Company is authorized to repurchase. Under this authorization, the Company is permittedrepurchase up to repurchase an additional 8,000,000 shares.5,000,000 shares of its common stock. As of September 30, 2017,2020, the Company had purchased 3,287,291982,992 shares pursuant to this authorization and had 4,712,709 shares4,017,008 shares remaining available for repurchase. The Company may purchase shares from time to time depending on market, economic and other factors. The authorization will continue unless withdrawn by the Board of Directors.
No shares of common stock were repurchased during the third quarter 20172020 by either the Company or any “affiliated purchaser,” as defined by Rule 10b-18 of the Exchange Act.
Item 6. Exhibits.
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101.INS101 | | XBRL Instance DocumentThe following unaudited financial information from Werner Enterprises’ Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, formatted in iXBRL (Inline Extensible Business Reporting Language) includes: (i) Consolidated Statements of Income for the three and nine months ended September 30, 2020 and September 30, 2019, (ii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2020 and September 30, 2019, (iii) Consolidated Condensed Balance Sheets as of September 30, 2020 and December 31, 2019, (iv) Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and September 30, 2019, (v) Consolidated Statements of Stockholders’ Equity for the three months ended September 30, 2020, June 30, 2020, March 31, 2020, September 30, 2019, June 30, 2019, and March 31, 2019, and (vi) the Notes to Consolidated Financial Statements (Unaudited) as of September 30, 2020. | | Filed herewith |
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101.SCH104 | | The cover page from this Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, formatted in Inline XBRL Taxonomy Extension Schema Document(included as Exhibit 101). | | Filed herewith |
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101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | Filed herewith |
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101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | | Filed herewith |
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101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | | Filed herewith |
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101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | Filed herewith |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| WERNER ENTERPRISES, INC. |
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Date: November 2, 20175, 2020 | By: | | /s/ John J. Steele |
| | | John J. Steele |
| | | Executive Vice President, Treasurer and Chief Financial Officer
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Date: November 2, 20175, 2020 | By: | | /s/ James L. Johnson |
| | | James L. Johnson |
| | | Executive Vice President, Chief Accounting Officer and Corporate Secretary
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