WERNER ENTERPRISES INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Management’s Discussion and Analysis of Financial Condition and Results of Operations (the “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: • Overview • COVID-19 • Results of Operations • Liquidity and Capital Resources • Contractual Obligations and Commercial Commitments • Regulations • Critical Accounting Estimates The MD&A should be read in conjunction with our 2019 Form 10-K. Overview: We have two reportable segments, Truckload Transportation Services (“TTS”) and Werner Logistics, and we operate in the truckload and logistics sectors of the transportation industry. In the truckload sector, we focus on transporting consumer nondurable products that generally ship more consistently throughout the year. 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 TTS segment) or obtain qualified third-party capacity at a reasonable price (with respect to our Werner Logistics segment). Although our business volume is not highly concentrated, we may also be affected by our customers’ financial failures or loss of customer business. Revenues for our TTS segment operating units (Dedicated and One-Way Truckload) 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 surcharge revenues 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 TTS segment also generates a small amount of revenues categorized as non-trucking revenues, which consist primarily of the intra-Mexico portion of cross-border shipments delivered to or from Mexico where the TTS 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. Independent contractors supply their own tractors and drivers and are responsible for their operating expenses. 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 TTS 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 TTS segment are driver salaries and benefits, fuel, fuel taxes (included in taxes and licenses expense), payments to independent contractors (included in rent and purchased transportation expense), supplies and maintenance and insurance and claims. As discussed further in the comparison of operating results for second quarter 2020 to second quarter 2019, several industry-wide issues have caused, and could continue to cause, costs to increase in future periods. These issues include shortages of drivers or independent contractors, changing fuel prices, compliance with new or proposed regulations, tightening of the commercial trucking liability insurance market and a weak used equipment market. Our main fixed costs include depreciation expense for tractors and trailers and equipment licensing fees (included in taxes and licenses 18 Table of Contents expense). The TTS segment requires substantial cash expenditures for tractor and trailer purchases. We fund these purchases with net cash from operations and financing available under our existing credit facilities, as management deems necessary. We provide non-trucking services primarily through the four operating units within our Werner Logistics segment (Truckload Logistics, Intermodal, WGL and Final Mile). Unlike our TTS segment, the Werner Logistics segment is less asset-intensive and is instead dependent upon qualified associates, information systems and qualified third-party capacity providers. The largest expense item related to the Werner Logistics 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 Werner Logistics 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 have a mix of contracted long-term rates and variable rates for the cost of third-party capacity, and we cannot assure that our operating results will not be adversely impacted in the future if our ability to obtain qualified third-party capacity providers changes or the rates of such providers increase. COVID-19: The COVID-19 pandemic, declared March 11, 2020, has profoundly impacted the U.S. economy. During the pandemic, the transportation industry has been designated by the U.S. government as an essential industry for keeping the U.S. supply chain moving. We are working hard to stay healthy while safely delivering our customers’ freight on time. Our leadership team meets frequently to address issues related to customers, freight, drivers, safety, staffing, human resources, and costs, and provides regular updates to all our associates. Throughout our offices and terminal network, we are closely following the safety guidelines set forth by the Centers for Disease Control and Prevention (CDC) and World Health Organization (WHO), including hygiene and distancing. We made significant investments in personal protective products to keep our associates safe, and over half of our office associates continue working from home. We introduced Werner-specific associate relief plans to provide rapid and needed assistance to those Werner associates affected by the virus. Over the past several years, we have repositioned Werner to increase our ability to execute through different macroeconomic environments. We believe our freight base, which is heavily weighted toward customers delivering essential products that are continually being restocked in today’s economy, is enabling us to more effectively manage through the difficult economic environment created by the pandemic. Revenues from our top 100 customers were 86% of our total revenues in the first half of 2020, and 64% of those revenues were from the discount retail, home improvement retail, food and beverage and consumer packaged goods verticals. Our results in second quarter 2020 reflect freight demand that was lower than the same period a year ago. In April 2020, the impact of some customers closing or significantly curtailing their businesses caused a weakness in freight volumes. By mid-May and into June, many of these customers began to reopen their businesses which improved freight volumes as the quarter progressed. We believe we proactively managed and adapted our fleet and cost structure without compromising service. These actions enabled us to minimize the impact of the softer freight market on our results. Our third quarter and 2020 results could be further impacted by the disruptive effects of COVID-19, although the degree of disruption is difficult to predict. Freight demand in our One-Way Truckload unit in July 2020 was relatively strong and higher than July 2019. Our Dedicated truck count temporarily declined by 150 trucks from first quarter 2020 to second quarter 2020 due to customers impacted by COVID-19, a lack of new business implementations in second quarter 2020 and lower driver availability. We currently expect Dedicated new business implementations to begin to pick up in third quarter 2020 as businesses reopen. We continue to address discretionary controllable costs wherever possible, including voluntary pay reductions for all members of the executive team for second quarter 2020 and the independent members of the Board of Directors for the second half of 2020 and implementing hiring freezes for nearly all non-driver open positions. We performed a customer industry and financial risk assessment on our 100 largest customers shortly after the pandemic declaration. While our financial risk has clearly increased since the pandemic began, we believe we have a relatively lower level of financial risk with the predominance of financially stronger companies in our customer base as well as a lower overall industry risk due to our focus on industries delivering essential products. At the end of second quarter 2020, we believe we are well positioned with a strong balance sheet and sufficient liquidity. We paid off $75 million of debt in the second quarter under a line of credit that subsequently expired on July 13, 2020. Our debt is low at $175 million, or a net debt ratio o f 0.2 times earnings before interest, income taxes, depreciation and amortization for the last twelve months. We had available liquidity of $345 million, considering cash on hand and available credit o f $280.4 million under our two facilities that expire in May 2024. We also have sufficient cushion with our two debt covenants. We currently plan to continue paying our quarterly dividend, which we have paid for 34 consecutive years. This capital outlay currently 19 Table of Contents results in slightly more than $6 million per quarter. Net capital expenditures in 2020 currently are expected to be in the rang e of $260 million to $300 million. We continue to expect free cash flow (net cash provided by operating activities less net cash used for capital expenditures) to excee d $150 million in 2020. We do not currently expect the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), enacted in March 2020, to have a material impact on our consolidated financial statements. Under the CARES Act, we are deferring payment of certain employer payroll taxes for the remainder of 2020, with 50% due December 31, 2021 and 50% due December 31, 2022. We also expect to utilize a provision allowing accelerated income tax depreciation for certain assets, which will not impact our effective tax rate. There have been a number of regulatory actions and waivers related to the COVID-19 pandemic, in an effort to keep the supply chain moving. We do not currently expect these collective changes to have a material impact on our consolidated financial statements. 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. Three Months Ended (3ME) June 30, Six Months Ended (6ME) June 30, Percentage Change in Dollar Amounts 2020 2019 2020 2019 3ME 6ME (Amounts in thousands) $ % $ % $ % $ % % % Operating revenues $ 568,959 100.0 $ 627,533 100.0 $ 1,161,662 100.0 $ 1,223,650 100.0 (9.3) (5.1) Operating expenses: Salaries, wages and benefits 194,981 34.3 206,001 32.8 400,978 34.5 408,800 33.4 (5.3) (1.9) Fuel 30,677 5.4 61,064 9.7 79,448 6.8 117,202 9.6 (49.8) (32.2) Supplies and maintenance 43,343 7.6 44,371 7.1 89,064 7.7 90,056 7.4 (2.3) (1.1) Taxes and licenses 23,953 4.2 23,643 3.8 46,803 4.0 46,544 3.8 1.3 0.6 Insurance and claims 25,789 4.5 20,992 3.4 61,853 5.3 43,701 3.6 22.9 41.5 Depreciation 67,670 11.9 61,437 9.8 136,507 11.8 122,196 10.0 10.1 11.7 Rent and purchased transportation 120,704 21.2 146,176 23.3 247,146 21.3 279,012 22.8 (17.4) (11.4) Communications and utilities 3,536 0.6 3,903 0.6 7,344 0.6 7,914 0.6 (9.4) (7.2) Other 5,488 1.0 1,504 0.2 8,635 0.8 1,764 0.1 264.9 389.5 Total operating expenses 516,141 90.7 569,091 90.7 1,077,778 92.8 1,117,189 91.3 (9.3) (3.5) Operating income 52,818 9.3 58,442 9.3 83,884 7.2 106,461 8.7 (9.6) (21.2) Total other expense (income) 807 0.1 498 0.1 1,817 0.1 337 — 62.0 439.2 Income before income taxes 52,011 9.2 57,944 9.2 82,067 7.1 106,124 8.7 (10.2) (22.7) Income taxes 12,879 2.3 14,626 2.3 19,877 1.7 26,720 2.2 (11.9) (25.6) Net income $ 39,132 6.9 $ 43,318 6.9 $ 62,190 5.4 $ 79,404 6.5 (9.7) (21.7) 20 Table of Contents The following tables set forth the operating revenues, operating expenses and operating income for the TTS segment, as well as certain statistical data regarding our TTS segment operations for the periods indicated. Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Truckload Transportation Services segment (amounts in thousands) $ % $ % $ % $ % Trucking revenues, net of fuel surcharge $ 406,834 $ 411,460 $ 815,932 $ 809,151 Trucking fuel surcharge revenues 34,208 62,533 85,249 120,710 Non-trucking and other operating revenues 4,011 5,966 8,735 12,989 Operating revenues 445,053 100.0 479,959 100.0 909,916 100.0 942,850 100.0 Operating expenses 393,828 88.5 428,294 89.2 829,602 91.2 848,232 90.0 Operating income $ 51,225 11.5 $ 51,665 10.8 $ 80,314 8.8 $ 94,618 10.0 Three Months Ended June 30, Six Months Ended June 30, Truckload Transportation Services segment 2020 2019 % Change 2020 2019 % Change Average tractors in service 7,762 7,937 (2.2) % 7,812 7,912 (1.3) % Average revenues per tractor per week (1) $ 4,032 $ 3,988 1.1 % $ 4,017 $ 3,934 2.1 % Total tractors (at quarter end) Company 7,165 7,350 (2.5) % 7,165 7,350 (2.5) % Independent contractor 485 585 (17.1) % 485 585 (17.1) % Total tractors 7,650 7,935 (3.6) % 7,650 7,935 (3.6) % Total trailers (at quarter end) 21,820 23,235 (6.1) % 21,820 23,235 (6.1) % One-Way Truckload Trucking revenues, net of fuel surcharge (in 000’s) $ 167,984 $ 184,279 (8.8) % $ 345,833 $ 364,413 (5.1) % Average tractors in service 3,149 3,379 (6.8) % 3,210 3,368 (4.7) % Total tractors (at quarter end) 3,115 3,355 (7.2) % 3,115 3,355 (7.2) % Average percentage of empty miles 13.01 % 12.18 % 6.8 % 12.41 % 11.90 % 4.3 % Average revenues per tractor per week (1) $ 4,103 $ 4,195 (2.2) % $ 4,143 $ 4,161 (0.4) % Average % change in revenues per total mile (1) (1.9) % (2.7) % (2.7) % 1.8 % Average % change in total miles per tractor per week (0.3) % (3.4) % 2.3 % (3.4) % Average completed trip length in miles (loaded) 813 834 (2.5) % 838 844 (0.7) % Dedicated Trucking revenues, net of fuel surcharge (in 000’s) $ 238,850 $ 227,181 5.1 % $ 470,099 $ 444,738 5.7 % Average tractors in service 4,613 4,558 1.2 % 4,602 4,544 1.3 % Total tractors (at quarter end) 4,535 4,580 (1.0) % 4,535 4,580 (1.0) % Average revenues per tractor per week (1) $ 3,983 $ 3,833 3.9 % $ 3,928 $ 3,764 4.4 % (1) Net of fuel surcharge revenues. 21 Table of Contents 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. Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Werner Logistics segment (amounts in thousands) $ % $ % $ % $ % Operating revenues $ 110,163 100.0 $ 130,883 100.0 $ 222,327 100.0 $ 248,253 100.0 Rent and purchased transportation expense 92,842 84.3 109,836 83.9 188,774 84.9 206,856 83.3 Gross margin 17,321 15.7 21,047 16.1 33,553 15.1 41,397 16.7 Other operating expenses 14,182 12.9 15,865 12.1 29,329 13.2 31,504 12.7 Operating income $ 3,139 2.8 $ 5,182 4.0 $ 4,224 1.9 $ 9,893 4.0 Three Months Ended June 30, Six Months Ended June 30, Werner Logistics segment 2020 2019 % Change 2020 2019 % Change Average tractors in service 31 37 (16.2) % 32 38 (15.8) % Total tractors (at quarter end) 30 35 (14.3) % 30 35 (14.3) % Total trailers (at quarter end) 1,635 1,670 (2.1) % 1,635 1,670 (2.1) % Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019 Operating Revenues Operating revenues decreased 9.3% for the three months ended June 30, 2020, compared to the same period of the prior year. When comparing second quarter 2020 to second quarter 2019, TTS segment revenues decreased $34.9 million, or 7.3%, and Werner Logistics revenues decreased $20.7 million, or 15.8%. During second quarter 2020, freight demand in our One-Way Truckload was lower than the same period a year ago. In April 2020, the impact of some customers closing or significantly curtailing their businesses caused a weakness in freight volumes. By mid-May and into June, many of these customers began to reopen their businesses which improved freight volumes as the quarter progressed. Freight demand in our One-Way Truckload unit in July 2020 was relatively strong and higher than July 2019. In our Dedicated fleet, freight demand remained strong in second quarter 2020. Approximately three-quarters of our Dedicated revenues are with essential products customers, and their freight volumes were generally strong during second quarter 2020. A few Dedicated customers were more significantly impacted by COVID-19 and had lower volumes. Trucking revenues, net of fuel surcharge, decreased 1.1% in second quarter 2020 compared to second quarter 2019 due to a 2.2% decrease in the average number of tractors in service, partially offset by a 1.1% increase in average revenues per tractor per week, net of fuel surcharge. The increase in average revenues per tractor was due primarily to an increase in average revenues per total mile, partially offset by a decline in average miles per tractor. The increase in average revenues per total mile was due primarily to relative strength in Dedicated pricing, mostly offset by a 1.9% decrease in One-Way Truckload pricing. The percentage decrease in One-Way Truckload average revenues per total mile was lower than anticipated due to the improving freight market in May and June 2020. We currently expect average revenues per total mile for the One-Way Truckload fleet for the second half of 2020 to be in a range of 1% lower to 2% higher when compared to the second half of 2019. The average number of tractors in service in the TTS segment decreased 2.2% to 7,762 in second quarter 2020 from 7,937 in second quarter 2019. We ended second quarter 2020 with 7,650 trucks in the TTS segment, a year-over-year decrease of 285 trucks compared to the end of second quarter 2019, and a sequential decrease of 185 trucks compared to the end of first quarter 2020. The sequential fleet decline was anticipated in the early stages of COVID-19 as (i) we aligned our fleet to adjust to reduced demand, (ii) we had delayed implementations of Dedicated fleet start-ups, and (iii) we expected lower numbers of students at driving schools due to social distancing requirements and state licensing agency closings and cutbacks of services, which limits the number of placement drivers entering our career track program. We currently expect our truck count at the end of 2020 to decrease in a range of 1% to 3% when compared to the fleet size at year-end 2019. We expect to begin growing our Dedicated fleet in third quarter, based on anticipated start-ups. 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. 22 Table of Contents Trucking fuel surcharge revenues decreased 45.3% to $34.2 million in second quarter 2020 from $62.5 million in second quarter 2019 due to lower average fuel prices in the second 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 four operating units and exclude revenues for full truckload shipments transferred to the TTS segment, which are recorded as trucking revenues by the TTS segment. Werner Logistics also recorded revenue and brokered freight expense of $14 thousand in second quarter 2020 and $34 thousand in second quarter 2019 for Intermodal drayage movements performed by the TTS segment (also recorded as trucking revenue by the TTS segment), and these transactions between reporting segments are eliminated in consolidation. In second quarter 2020, Werner Logistics revenues decreased $20.7 million, or 15.8%, primarily due to lower Truckload Logistics revenues (60% of total Logistics revenues) in a softer freight market, which reduced volumes by 9%. Lower rates and lower fuel prices reduced all-in Truckload Logistics revenue per load by 15%. Intermodal revenues declined 10%, and International revenues increased 20%. In July 2020, the Truckload Logistics gross margin percentage was lower due to the higher capacity costs, and volumes were also lower year-over-year. The Werner Logistics gross margin percentage in second quarter 2020 of 15.7% decreased from 16.1% in second quarter 2019 due primarily to a softer freight market and contractual brokerage sustaining a rising cost of capacity in May and June 2020. The Werner Logistics operating margin in second quarter 2020 declined to 2.8% from 4.0% as the 18% decline in gross profit exceeded the 11% decline in other operating expenses. Operating Expenses Our operating ratio (operating expenses expressed as a percentage of operating revenues) was 90.7% for both the three months ended June 30, 2020 and June 30, 2019. Expense items that impacted the overall operating ratio are described on the following pages. The tables on pages 20 through 22 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, TTS and Werner Logistics. Salaries, wages and benefits decreased $11.0 million or 5.3% in second quarter 2020 compared to second quarter 2019 and increased 1.5% as a percentage of operating revenues to 34.3%. The lower dollar amount of salaries, wages and benefits expense in the 2020 second quarter was due primarily to lower fringe benefits and having fewer placement drivers, both of which were impacted by COVID-19. Our workers’ compensation costs improved, and we incurred lower group health insurance costs which we believe is a temporary effect of COVID-19. Non-driver salaries, wages and benefits in the non-trucking Werner Logistics segment decreased 13.4%. We renewed our workers’ compensation insurance coverage on April 1, 2020 and took on additional risk exposure by increasing our self-insurance retention from $1.0 million to $2.0 million per claim 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 2020 are $0.8 million lower than the premiums for the previous policy year. The driver recruiting market is extremely competitive. Several ongoing market factors persisted including a declining number of, and increased competition for, driver training school graduates, particularly considering COVID-19 constraints, aging truck driver demographics and increased truck safety regulations. We continue to take significant actions to strengthen our driver recruiting and retention to make Werner a preferred choice for the best drivers, including raising driver pay, maintaining a new truck and trailer fleet, purchasing best-in-class safety features for all new trucks, investing in our driver training school network and collaborating with customers to improve or eliminate unproductive freight. These efforts continue to have positive results on our driver retention. We are unable to predict whether we will experience future driver 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. 23 Table of Contents Fuel decreased $30.4 million or 49.8% in second quarter 2020 compared to second quarter 2019 and decreased 4.3% as a percentage of operating revenues due to lower average diesel fuel prices and approximately 2.5 million fewer company truck miles in second quarter 2020. Average diesel fuel prices we re $1.05 per gallon lower in second quarter 2020 than in second quarter 2019 and were 60 cents per gallon lower than in first quarter 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, 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. 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 July 2020, the average diesel fuel price per gallon was approximately 69 cents lower than the average diesel fuel price per gallon in July 2019 and approximately 68 cents lower than in third quarter 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 pred ict whether fuel price levels will increase or decrease in the future or the extent to which fuel surcharges will be collected from customers. As of June 30, 2020, we had no derivative financial instruments to reduce our exposure to fuel price fluctuations. Supplies and maintenance decreased $1.0 million or 2.3% in second quarter 2020 compared to second quarter 2019 and increased 0.5% 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 costs. These decreases were partially offset by the increased costs relating to COVID-19 safety items. Insurance and claims increased $4.8 million or 22.9% in second quarter 2020 compared to second quarter 2019 and increased 1.1% as a percentage of operating revenues due primarily to unfavorable reserve development on large dollar claims in the 2020 second quarter. We also incurred insurance and claims expense of $1.2 million in second quarter 2020 and $0.8 million in second quarter 2019 for accrued interest related to 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 the outcome of 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, 2020 and are now responsible for the first $10.0 million per claim on all claims with no annual aggregates. For the policy year that began August 1, 2019 , we were 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 and an additional $5.0 million deductible per claim for each claim between $5.0 million and $10.0 million. We maintain liability insurance coverage with insurance carriers in excess of the $10.0 million per claim. Our liability insurance premiums for the policy year that began August 1, 2020 are $7. 8 million higher than premiums for the previous policy year. Depreciation expense increased $6.2 million or 10.1% in second quarter 2020 compared to second quarter 2019 and increased 2.1% as a percentage of operating revenues. During 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 second quarter 2020 depreciation expense by $3.7 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 depreciation expense in second quarter 2020. The average age of our truck fleet remains low by industry standards and was 2.0 years as of June 30, 2020, and the average age of our trailers was 4.1 years. We are continuing to invest in new trucks and trailers and our terminals in 2020 to improve our driver experience, increase operational efficiency and more effectively manage our maintenance, safety and fuel costs. During the remainder of 2020, we expect the average age of our truck and trailer fleet to remain at or near current levels. Rent and purchased transportation expense decreased $25.5 million or 17.4% in second quarter 2020 compared to second quarter 2019 and decreased 2.1% as a percentage of operating revenues. Rent and purchased transportation expense consists mostly of payments to third-party capacity providers in the Werner Logistics segment and other non-trucking operations and 24 Table of Contents payments to independent contractors in the TTS segment. The payments to third-party capacity providers generally vary depending on changes in the volume of services generated by the Werner Logistics segment. Werner Logistics rent and purchased transportation expense decreased $17.0 million as a result of lower logistics revenues, but as a percentage of Werner Logistics revenues increased to 84.3% in second quarter 2020 from 83.9% in second quarter 2019, due primarily to a softer freight market and contractual brokerage sustaining an increasing cost of capacity as the freight market began to improve in May and June 2020. Rent and purchased transportation expense for the TTS segment decreased $8.6 million in second quarter 2020 compared to second quarter 2019. Independent contractor miles decreased approximately 3.9 million miles in second quarter 2020 and as a percentage of total miles were 8.5% in second quarter 2020 compared to 10.0% in second quarter 2019. The per-mile settlement rate for independent contractors also decreased in second quarter 2020 compared to second 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. These rate increases could negatively affect our results of operations to the extent that we would not be able to obtain corresponding freight rate increases. Other operating expenses increased $4.0 million in second quarter 2020 compared to second quarter 2019 and increased 0.8% 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 $0.9 million in second quarter 2020 compared to $4.5 million in second quarter 2019. We realized significantly lower average gains per truck and slightly lower average gains per trailer in second quarter 2020 compared to second quarter 2019 and sold 20% fewer trucks and 23% fewer trailers. Pricing in the market for our used trucks and trailers was weak in second quarter 2020 due to low demand. Other Expense (Income) Other expense (income) increased $0.3 million in second quarter 2020 compared to second quarter 2019. Interest income decreased in second quarter 2020 compared to second quarter 2019, and we had lower interest expense due to lower average outstanding debt in second quarter 2020. Income Taxes Our effective income tax rate (income taxes expressed as a percentage of income before income taxes) was 24.8% in second quarter 2020 compared to 25.2% in second quarter 2019. The lower income tax rate in second quarter 2020 was attributed primarily to favorable discrete income tax items in second quarter 2020. Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019 Operating Revenues Operating revenues decreased 5.1% for the six months ended June 30, 2020, compared to the same period of the prior year. In the TTS segment, trucking revenues, net of fuel surcharge, increased $6.8 million, or 0.8%, due primarily to a 2.1% increase in average revenues per tractor per week partially offset by a 1.3% decrease in average tractors in service. Average revenues per total mile, net of fuel surcharge, increased 1.3% in the first six months of 2020 compared to the same period in 2019. TTS segment fuel surcharge revenues for the six months ended June 30, 2020 decreased $35.5 million or 29.4% when compared to the six months ended June 30, 2019 due to lower average fuel prices in the 2020 period. Werner Logistics revenues decreased $25.9 million, or 10.4%, primarily due to lower Truckload Logistics revenues in a softer freight market. Operating Expenses Our operating ratio (operating expenses expressed as a percentage of operating revenues) was 92.8% for the six months ended June 30, 2020, compared to 91.3% for the six months ended June 30, 2019. Expense items that impacted the overall operating ratio are described on the following pages. The tables on pages 20 through 22 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 25 Table of Contents items compared to the same period of the prior year, as well as the operating ratios, operating margins, and certain statistical information for our two reportable segments, TTS and Werner Logistics. Salaries, wages and benefits decreased $7.8 million or 1.9% in the first six months of 2020 compared to the first six months of 2019 and increased 1.1% as a percentage of operating revenues to 34.5%. The lower 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 cost improved. These decreases were partially offset by higher company miles and higher driver pay rates in the first six months of 2020. Non-driver salaries, wages and benefits in the non-trucking Werner Logistics segment decreased 11.3% compared to 10.4% lower revenues. Fuel decreased $37.8 million or 32.2% in the first six months of 2020 compared to the same period in 2019 and decreased 2.8% as a percentage of operating revenues due to lower average diesel fuel prices in 2020, partially offset by approximately 3.9 million more company truck miles. Average diesel fuel prices were 70 cents per gallon lower in the first six months of 2020 than in the same 2019 period. Supplies and maintenance decreased $1.0 million or 1.1% in the first six months of 2020 compared to the same period in 2019 and increased 0.3% 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, higher company truck miles in 2020 and increased tractor maintenance costs. Insurance and claims increased $18.2 million or 41.5% in the first six months of 2020 compared to the same period in 2019 and increased 1.7% as a percentage of operating revenues due primarily to higher expense for new large dollar claims and unfavorable reserve development on large dollar claims. In January 2020, one of our trucks was involved in a serious accident. We self-insure for the first $10.0 million of liability 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 first quarter 2020 for this accident. Depreciation expense increased $14.3 million or 11.7% in the first six months of 2020 compared to the 2019 period and increased 1.8% as a percentage of operating revenues. During 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 depreciation expense by $8.7 million in the first six 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 depreciation expense in the first half of 2020. Rent and purchased transportation expense decreased $31.9 million or 11.4% in the first six months of 2020 compared the same 2019 period and decreased 1.5% as a percentage of operating revenues. Rent and purchased transportation for the TTS segment decreased $14.2 million in the first six months of 2020 compared to the same 2019 period due to lower diesel fuel prices and having 5.8 million fewer independent contractor miles in the six months ended June 30, 2020. Werner Logistics rent and purchased transportation expense decreased $18.1 million as a result of lower logistics revenues, but as a percentage of Werner Logistics revenues increased to 84.9% in the 2020 period from 83.3% in the 2019 period. Other operating expenses increased $6.9 million in the first six months of 2020 compared to the same period in 2019 and increased 0.7% as a percentage of operating revenues. Gains on sales of assets were $3.4 million in the first six months ended June 30, 2020 compared to $10.4 million in the six months ended June 30, 2019. In the 2020 year-to-date period, we sold 31% fewer trucks and 13% fewer trailers and realized significantly lower average gains per truck and lower average gains per trailer. Other Expense (Income) Other expense (income) increased $1.5 million in the first six months of 2020 compared to the same 2019 period. Interest income decreased in the first six months of 2020 compared to the first six months of 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 first half of 2020. 26 Table of Contents Income Taxes Our effective income tax rate (income taxes expressed as a percentage of income before income taxes) was 24.2% for the first six months of 2020 compared to 25.2% for the first six months of 2019. The lower income tax rate in the year-to-date 2020 period was attributed primarily to favorable discrete income tax items in the 2020 period. Liquidity and Capital Resources: During the six months ended June 30, 2020, we generated cash flow from operations of $287.3 million, a 30.4% or $67.0 million increase in cash flows compared to the same six-month period a year ago. The increase in net cash provided by operating activities resulted primarily from an improvement in certain working capital items. The improvements in working capital included accounts receivable and $33.8 million related to the temporary deferral of federal and state income tax payments for the first half of 2020, which were paid in third quarter 2020. We were able to make net capital expenditures, repay 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 $103.2 million for the six-month period ended June 30, 2020 from $155.8 million for the six-month period ended June 30, 2019. Net property additions (primarily revenue equipment) were $107.6 million for the six-month period ended June 30, 2020, compared to $162.4 million during the same period of 2019. The decrease was due in part to new truck delivery delays resulting from temporary closures of manufacturing plants. As of June 30, 2020, we were committed to property and equipment purchases of approximately $214.7 million. We currently estimate net capital expenditures (primarily revenue equipment) in 2020 to be in the range of $260 million to $300 million, compared to net capital expenditures in 2019 of $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. Net financing activities used $150.2 million during the six months ended June 30, 2020, and used $52.2 million during the same period in 2019. We repaid $125.0 million of debt during the six months ended June 30, 2020, bringing our outstanding debt at June 30, 2020 to $175.0 million. We paid dividends of $12.5 million in the six-month period ended June 30, 2020 and $273.7 million in the six-month period ended June 30, 2019. In May 2019, we declared a special dividend of $3.75 per share, or $261.1 million, which was paid on June 7, 2019. Financing activities for the six months ended June 30, 2020, also included common stock repurchases of 282,992 shares at a cost of $8.8 million. In the six-month period ended June 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 June 30, 2020, the Company had purchased 982,992 shares pursuant to our current Board of Directors repurchase authorization and had 4,017,008 shares remaining available for repurchase. Management believes our financial position at June 30, 2020 is strong. As of June 30, 2020, we had $65.4 million of cash and cash equivalents and over $1.1 billion of stockholders’ equity. Cash is invested primarily in government portfolio money market funds. As of June 30, 2020, we had $175.0 million of debt outstanding, after repaying $75.0 million of debt in second quarter 2020 under a line of credit that subsequently expired on July 13, 2020. We had total borrowing capacity of $500.0 million under our two remaining credit facilities that expire in May 2024 (see Note 4 in the Notes to Consolidated Financial Statements (Unaudited) under Item I of Part I of this Form 10-Q) of which $280.4 million is available for future borrowing as of June 30, 2020, after considering the $175.0 million of outstanding 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. We believe our liquid assets, cash generated from operating activities, and borrowing capacity under our credit facilities will provide sufficient funds for our operating and capital needs for the foreseeable future. Contractual Obligations and Commercial Commitments: Item 7 of Part II of our 2019 Form 10-K includes our disclosure of contractual obligations and commercial commitments as of December 31, 2019. There were no material changes in the nature of these items during the six months ended June 30, 2020. Regulations: Item 1 of Part I of our 2019 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 the proposed regulations previously disclosed in the 2019 Form 10-K. On June 1, 2020, the Federal Motor Carrier Safety Administration published revisions to the Hours of Service (“HOS”) requirements. The HOS final rule increases driver flexibility and introduces modifications to the existing rule set, including 27 Table of Contents changes to the 30-minute break requirement, split sleeper berth, adverse driving conditions, and the short-haul exception. The final rule compliance date is September 29, 2020. All three countries ratified the United States-Mexico-Canada Agreement (“USMCA”) to replace the North American Free Trade Agreement (“NAFTA”). The effective date of USMCA is July 1, 2020. Critical Accounting Estimates: The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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 Estimates can be found in our 2019 Form 10-K. Estimates of accrued liabilities for insurance and claims for bodily injury, property damage and workers’ compensation is a critical accounting estimate that requires us to make significant judgments and estimates and affects our financial statements. There have been no material changes to this critical accounting estimate from that discussed in our 2019 Form 10-K.