Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") summarizes the financial statements from management's perspective with respect to our financial condition, results of operations, liquidity and other factors that may affect actual results. The MD&A is organized in the following sections:
• Cautionary Note Regarding Forward-Looking Statements

• Overview

• Results of Operations

• Liquidity and Capital Resources

• Contractual Obligations and Commercial Commitments

• Off-Balance Sheet Arrangements

• Critical Accounting Policies

• Inflation

Cautionary Note Regarding Forward-Looking Statements:
This Annual Report on Form 10-K contains historical information and forward-looking statements based on information currently available to our management. The forward-looking statements in this report, including those made in this Item 7

(Management's Discussion and Analysis of Financial Condition and Results of Operations), are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended. These safe harbor provisions encourage reporting companies to provide prospective information to investors. Forward-looking statements can be identified by the use of certain words, such as "anticipate," "believe," "estimate," "expect," "intend," "plan," "project" and other similar terms and language. We believe the forward-looking statements are reasonable based on currently available information. However, forward-looking statements involve risks, uncertainties and assumptions, whether known or unknown, that could cause our actual results, business, financial condition and cash flows to differ materially from those anticipated in the forward-looking statements. A discussion of important factors relating to forward-looking statements is included in Item 1A (Risk Factors) of Part I of this Form 10-K. Readers should not unduly rely on the forward-looking statements included in this Form 10-K because such statements speak only to the date they were made. Unless otherwise required by applicable securities laws, we undertake no obligation or duty to update or revise any forward-looking statements contained herein to reflect subsequent events or circumstances or the occurrence of unanticipated events.
Overview:
We operate in the truckload and logistics sectors of the transportation industry. In the truckload sector, we focus on transporting consumer nondurable products that generally ship more consistently throughout the year. In the logistics sector, besides managing transportation requirements for individual customers, we provide additional sources of truck capacity, alternative modes of transportation, a global delivery network and systems analysis to optimize transportation needs. Our success depends on our ability to efficiently and effectively manage our resources in the delivery of truckload transportation and logistics services to our customers. Resource requirements vary with customer demand, which may be subject to seasonal or general economic conditions. Our ability to adapt to changes in customer transportation requirements is essential to efficiently deploy resources and make capital investments in tractors and trailers (with respect to our Truckload segment) or obtain qualified third-party capacity at a reasonable price (with respect to our VAS segment). Although our business volume is not highly concentrated, we may also be affected by our customers' financial failures or loss of customer business.
Operating revenues reported under "Results of Operations" are categorized as
(i) trucking revenues, net of fuel surcharge, (ii) trucking fuel surcharge revenues, (iii) non-trucking revenues, including VAS, and (iv) other operating revenues. Trucking revenues, net of fuel surcharge, and trucking fuel surcharge revenues are generated by the operating units in the Truckload segment (One-Way Truckload and Specialized Services). Non-trucking revenues, including VAS, are generated primarily by the four operating units in our VAS segment (Brokerage, Freight Management, Intermodal and WGL), and a small amount is generated by the Truckload segment. Other operating revenues are generated from other business activities such as third-party equipment maintenance and equipment leasing. In 2012, trucking revenues (net of fuel surcharge) and trucking fuel surcharge revenues accounted for 83% of total operating revenues, and non-trucking and other operating revenues accounted for 17% of total operating revenues. Trucking revenues, net of fuel surcharge, are typically generated on a per-mile basis and also include revenues such as stop charges, loading and unloading charges, equipment detention charges, and equipment repositioning charges. To mitigate our risk to fuel price increases, we recover from our customers additional fuel surcharges that generally recoup a majority of the increased fuel costs; however, we cannot assure that current recovery levels will continue in future periods. Because fuel surcharge revenues fluctuate in response to changes in fuel costs, we identify them separately and exclude them from the statistical calculations to provide a more meaningful comparison between periods. The key statistics used to evaluate trucking revenues, net of fuel surcharge, are (i) average revenues per tractor per week, (ii) average percentage of empty miles (miles without trailer cargo), (iii) average trip length (in loaded miles) and (iv) average number of tractors in service. General economic conditions, seasonal trucking industry freight patterns and industry capacity are important factors that impact these statistics. Our Truckload segment also generates a small amount of revenues categorized as non-trucking revenues, related to shipments delivered to or from Mexico where the Truckload segment utilizes a third-party capacity provider. We exclude such revenues from the statistical calculations. Our most significant resource requirements are company drivers, independent contractors, tractors and trailers. Our financial results are affected by company driver and independent contractor availability and the markets for new and used revenue equipment. We are self-insured for a significant portion of bodily injury, property damage and cargo claims; workers' compensation claims; and associate health claims (supplemented by premium-based insurance coverage above certain dollar levels). For that reason, our financial results may also be affected by driver safety, medical costs, weather, legal and regulatory environments and insurance coverage costs to protect against catastrophic losses. The operating ratio is a common industry measure used to evaluate our profitability and that of our Truckload segment operating fleets. The operating ratio consists of operating expenses expressed as a percentage of operating revenues. The most significant variable expenses that impact the Truckload 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 2012 to 2011, several

industry-wide issues could cause costs to increase in 2013. These issues include shortages of drivers or independent contractors, changing fuel prices, higher new truck and trailer purchase prices and compliance with new or proposed regulations. Our main fixed costs include depreciation expense for tractors and trailers and equipment licensing fees (included in taxes and licenses expense). The Truckload segment requires substantial cash expenditures for tractor and trailer purchases. We fund these purchases with net cash from operations and financing available under our existing credit facilities, as management deems necessary.
We provide non-trucking services primarily through the four operating units within our VAS segment. Unlike our Truckload segment, the VAS segment is less asset-intensive and is instead dependent upon qualified associates, information systems and qualified third-party capacity providers. The largest expense item related to the VAS segment is the cost of purchased transportation we pay to third-party capacity providers. This expense item is recorded as rent and purchased transportation expense. Other operating expenses consist primarily of salaries, wages and benefits. We evaluate the VAS segment's financial performance by reviewing the gross margin percentage (revenues less rent and purchased transportation expenses expressed as a percentage of revenues) and the operating income percentage. The gross margin percentage can be impacted by the rates charged to customers and the costs of securing third-party capacity. We generally do not have contracted long-term rates for the cost of third-party capacity, and we cannot assure that our operating results will not be adversely impacted in the future if our ability to obtain qualified third-party capacity providers changes or the rates of such providers increase. Results of Operations:
The following table sets forth 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 prior year.

                                                                                               Percentage Change in
                              2012                    2011                    2010                Dollar Amounts
(Amounts in                                                                                     2012 to    2011 to
thousands)                  $          %            $          %            $          %       2011 (%)    2010 (%)
Trucking revenues,
net of fuel surcharge $ 1,309,503    64.3     $ 1,310,612    65.4     $ 1,287,068    70.9        (0.1 )        1.8
Trucking fuel
surcharge revenues        376,104    18.5         373,384    18.6         254,764    14.0         0.7         46.6
Non-trucking
revenues, including
VAS                       334,534    16.4         301,772    15.1         259,628    14.3        10.9         16.2
Other operating
revenues                   16,245     0.8          17,082     0.9          13,560     0.8        (4.9 )       26.0
Operating revenues      2,036,386   100.0       2,002,850   100.0       1,815,020   100.0         1.7         10.3

Operating expenses:
Salaries, wages and
benefits                  544,322    26.7         536,509    26.8         527,576    29.1         1.5          1.7
Fuel                      401,417    19.7         412,905    20.6         313,518    17.3        (2.8 )       31.7
Supplies and
maintenance               172,505     8.5         169,386     8.5         155,943     8.6         1.8          8.6
Taxes and licenses         90,002     4.4          92,917     4.6          94,018     5.2        (3.1 )       (1.2 )
Insurance and claims       65,593     3.2          67,523     3.4          69,991     3.8        (2.9 )       (3.5 )
Depreciation              166,957     8.2         158,634     7.9         152,242     8.4         5.2          4.2
Rent and purchased
transportation            420,480    20.7         387,472    19.3         352,648    19.4         8.5          9.9
Communications and
utilities                  13,745     0.7          15,181     0.8          15,123     0.8        (9.5 )        0.4
Other                     (10,079 )  (0.5 )       (11,351 )  (0.6 )          (621 )     -        11.2     (1,727.9 )
Total operating
expenses                1,864,942    91.6       1,829,176    91.3       1,680,438    92.6         2.0          8.9

Operating income          171,444     8.4         173,674     8.7         134,582     7.4        (1.3 )       29.0
Total other expense
(income)                   (1,722 )  (0.1 )        (1,232 )   0.0          (1,655 )  (0.1 )     (39.8 )       25.6
Income before income
taxes                     173,166     8.5         174,906     8.7         136,237     7.5        (1.0 )       28.4
Income taxes               70,132     3.4          72,149     3.6          56,198     3.1        (2.8 )       28.4
Net income            $   103,034     5.1     $   102,757     5.1     $    80,039     4.4         0.3         28.4

The following table sets forth certain statistical data regarding our operations for the periods indicated.

                                                         2012        2011        2010
Average revenues per tractor per week (1)              $ 3,486     $ 3,480     $ 3,413
Average trip length in miles (loaded) (2)                  481         493         481
Average percentage of empty miles (3)                     12.3 %      11.7 %      11.4 %
Average tractors in service                              7,225       7,242       7,252
Total trailers (Truckload and Intermodal, at year end)  23,380      23,045      23,850
Total tractors (at year end):
Company                                                  6,505       6,600       6,595
Independent contractor                                     645         600         680
Total tractors                                           7,150       7,200       7,275

(1) Net of fuel surcharge revenues.

(2) Average trip length in miles (loaded) corrected for all periods prior to 2012. See www.werner.com ("Investors" tab under "Featured Documents") for correction of prior quarterly and annual average trip length data. The average trip length correction had no impact on the prior annual reporting of any other operating statistic.

(3) "Empty" refers to miles without trailer cargo.

The following table sets forth the revenues, operating expenses and operating income for the Truckload segment. Operating revenues for the Truckload segment are primarily categorized as trucking revenues, net of fuel surcharge, and trucking fuel surcharge revenues but also include a small amount of non-trucking revenues as described on page 14. These non-trucking revenues were $13.6 million in 2012, $10.5 million in 2011 and $8.6 million in 2010.

                                        2012                       2011                       2010
Truckload Transportation
Services (amounts in
thousands)                          $            %             $            %             $            %
Revenues                      $ 1,699,349      100.0     $ 1,694,965      100.0     $ 1,550,601      100.0
Operating expenses              1,546,207       91.0       1,537,361       90.7       1,428,393       92.1
Operating income              $   153,142        9.0     $   157,604        9.3     $   122,208        7.9

Higher fuel prices and higher fuel surcharge revenues increase our consolidated operating ratio and the Truckload segment's operating ratio when fuel surcharges are reported on a gross basis as revenues versus netting against fuel expenses. Eliminating fuel surcharge revenues, which are generally a more volatile source of revenue, provides a more consistent basis for comparing the results of operations from period to period. The following table calculates the Truckload segment's operating ratio as if fuel surcharges are excluded from total revenues and instead reported as a reduction of operating expenses.

                                        2012                       2011                       2010
Truckload Transportation
Services (amounts in
thousands)                          $            %             $            %             $            %
Revenues                      $ 1,699,349                $ 1,694,965                $ 1,550,601
Less: trucking fuel surcharge
revenues                          376,104                    373,384                    254,764
Revenues, net of fuel
surcharges                      1,323,245      100.0       1,321,581      100.0       1,295,837      100.0
Operating expenses              1,546,207                  1,537,361                  1,428,393
Less: trucking fuel surcharge
revenues                          376,104                    373,384                    254,764
Operating expenses, net of

The following table sets forth the VAS segment's non-trucking revenues, rent and purchased transportation expense, gross margin, other operating expenses and operating income. Other operating expenses for the VAS segment primarily consist of salaries, wages and benefits expense.

                                        2012                     2011                     2010
Value Added Services (amounts
in thousands)                       $           %            $           %            $           %
Revenues                       $ 320,933      100.0     $ 291,109      100.0     $ 250,983      100.0
Rent and purchased
transportation expense           271,104       84.5       244,194       83.9       213,567       85.1
Gross margin                      49,829       15.5        46,915       16.1        37,416       14.9
Other operating expenses          33,830       10.5        29,879       10.2        26,411       10.5
Operating income               $  15,999        5.0     $  17,036        5.9     $  11,005        4.4


2012 Compared to 2011
Operating Revenues

of VAS freight shipments and a 4.8% increase in the average revenue per shipment. The revenue increase was nearly evenly split among the Brokerage, Intermodal and International operating units. VAS gross margin dollars increased 6.2% to $49.8 million in 2012 from $46.9 million in 2011. The VAS gross margin percentage decreased from 16.1% in 2011 to 15.5% in 2012 because of the higher cost of third-party capacity and growth in the lower margin Intermodal and WGL operating units. VAS operating income decreased 6.1% to $16.0 million in 2012 from $17.0 million in 2011. The following table shows the changes that are described above in VAS shipment volume and average revenue (excluding logistics fee revenue) per shipment for all VAS shipments:

                                         2012            2011          Difference        % Change
Total VAS shipments                      265,411         256,116             9,295           3.6 %
Less: Non-committed shipments to
Truckload segment                         79,025          78,842               183           0.2 %
Net VAS shipments                        186,386         177,274             9,112           5.1 %
Average revenue per shipment         $     1,602     $     1,529     $          73           4.8 %

Brokerage revenues increased 6% in 2012 compared to 2011 due to a 5% increase in average revenue per shipment and a 1% increase in number of shipments. Brokerage gross margin and operating income dollars both increased 3% year over year; however, the gross margin percentage and operating income percentage both decreased. In terms of 2012 revenues, Brokerage is the largest logistics operating unit, followed by Intermodal and WGL. Intermodal revenues increased 16%, and its operating income improved by a slightly lower percentage. WGL revenues grew 22% while the gross margin and operating income declined. VAS received a new customer award involving all four VAS operating units and began managing shipments in January 2013. We continue to focus on expanding this area of our business.
Operating Expenses
Our operating ratio (operating expenses expressed as a percentage of operating revenues) was 91.6% in 2012 compared to 91.3% in 2011. Expense items that impacted the overall operating ratio are described on the following pages. The tables on pages 15 through 17 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 prior year, as well as the operating ratios and operating margins for our two reportable segments, Truckload and VAS.
Salaries, wages and benefits increased $7.8 million or 1.5% in 2012 compared to 2011 and decreased 0.1% as a percentage of operating revenues. The higher salaries, wages and benefits expense was attributed to (i) higher non-driver salaries, (ii) higher stock-based compensation expense, (iii) higher driver pay, as we made certain pay adjustments in the first half of 2012 to attract and retain drivers for specific fleets, and (iv) higher healthcare expense. These increases were partially offset by (i) lower workers' compensation expense, (ii) lower state unemployment expense, and (iii) the minimal shift from this expense category to rent and purchased transportation expense because of the increase in independent contractor miles as a percentage of total miles. Salaries, wages and benefits in the non-trucking VAS segment increased 11.8% in 2012 compared to 2011. VAS handled 3.6% more shipments in 2012 compared to 2011, including those transferred to the Truckload segment, and the net shipments retained by VAS increased by 5.1%.
We renewed our workers' compensation insurance coverage for the policy year beginning April 1, 2012. Our coverage levels are the same as the prior policy year. We continue to maintain a self-insurance retention of $1.0 million per claim. Our workers' compensation insurance premiums for the policy year beginning April 2012 are slightly lower than those for the previous policy year. The driver recruiting and retention market was more challenging in 2012 compared to 2011. We believe that driver pay increases by our competitors, a slightly lower number of and increased competition for truck driving school graduates, an improved housing construction market and changing industry safety regulations were all contributing factors. However, we continue to believe our position in the current market is better than that of many competitors because over 70% of our driving jobs are in more attractive, shorter-haul Regional and Dedicated fleet operations that enable us to return drivers to their homes on a more frequent and consistent basis. Assuming the domestic economy strengthens in 2013, we anticipate the driver market could become even more challenging in 2013. We are unable to predict whether we will experience future driver shortages. If such a 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 $11.5 million or 2.8% in 2012 compared to 2011 and decreased 0.9% as a percentage of operating revenues due to improved miles per gallon ("mpg"), a shift from this expense category to rent and purchased transportation expense . . .