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: • ECM Acquisition • 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 2020 Form 10-K. ECM Acquisition: On July 1, 2021, Werner acquired an 80% equity ownership interest in ECM Transport Group (“ECM”) for a cash purchase price of $142.4 million. ECM achieved revenues of $108 million in 2020 with an operating margin 19.8%. ECM consists of ECM Transport and Motor Carrier Service (MCS), which are regional truckload carriers that together operate nearly 500 trucks and 2,000 trailers in the Mid-Atlantic, Ohio and Northeast regions of the U.S. with low driver turnover. Future revenues generated by ECM and MCS will be reported in One-Way Truckload within our TTS segment. Werner financed the transaction through a combination of cash on hand, existing credit facilities and a new $100.0 million fixed-rate term loan maturing in May 2024 with BMO Harris Bank N.A., one of Werner’s two lead banks. The remaining 20% ownership interest in ECM will be retained by Ed Meier, founder and President of ECM. Werner Enterprises retains an exclusive option to buy the remaining 20% of ECM Transport Group after a period of five years. 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 North American 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). 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, 18 Table of Contents 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 2021 to second quarter 2020, 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 and tightening of the commercial truck liability insurance market. Our main fixed costs include depreciation expense for tractors and trailers and equipment licensing fees (included in taxes and licenses 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 three operating units within our Werner Logistics segment (Truckload Logistics, Intermodal, and Final Mile). In first quarter 2021, we completed the previously-announced sale of the WGL freight forwarding services for international ocean and air shipments to Scan Global Logistics Group. WGL had annual revenues of $53 million in 2020, and we realized a $1.0 million gain from the sale in first quarter 2021. 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. 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). Over half of our office associates continue working from home. 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, enabled us to more effectively manage through the difficult economic environment created by the pandemic. While there remain significant uncertainties related to COVID-19 and its effect on the economy, we believe that demand for our services will continue to be strong during the remainder of 2021. 19 Table of Contents 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 2021 2020 2021 2020 3ME 6ME (Amounts in thousands) $ % $ % $ % $ % % % Operating revenues $ 649,814 100.0 $ 568,959 100.0 $ 1,266,260 100.0 $ 1,161,662 100.0 14.2 9.0 Operating expenses: Salaries, wages and benefits 210,095 32.4 194,981 34.3 414,948 32.8 400,978 34.5 7.8 3.5 Fuel 58,503 9.0 30,677 5.4 109,341 8.6 79,448 6.8 90.7 37.6 Supplies and maintenance 49,414 7.6 43,343 7.6 95,561 7.5 89,064 7.7 14.0 7.3 Taxes and licenses 23,744 3.7 23,953 4.2 46,977 3.7 46,803 4.0 (0.9) 0.4 Insurance and claims 20,739 3.2 25,789 4.5 42,795 3.4 61,853 5.3 (19.6) (30.8) Depreciation 63,865 9.8 67,670 11.9 127,816 10.1 136,507 11.8 (5.6) (6.4) Rent and purchased transportation 150,920 23.2 120,704 21.2 297,413 23.5 247,146 21.3 25.0 20.3 Communications and utilities 3,333 0.5 3,536 0.6 6,355 0.5 7,344 0.6 (5.7) (13.5) Other (7,662) (1.2) 5,488 1.0 (14,280) (1.1) 8,635 0.8 (239.6) (265.4) Total operating expenses 572,951 88.2 516,141 90.7 1,126,926 89.0 1,077,778 92.8 11.0 4.6 Operating income 76,863 11.8 52,818 9.3 139,334 11.0 83,884 7.2 45.5 66.1 Total other expense (income) (19,770) (3.1) 807 0.1 (19,187) (1.5) 1,817 0.1 (2,549.8) (1,156.0) Income before income taxes 96,633 14.9 52,011 9.2 158,521 12.5 82,067 7.1 85.8 93.2 Income taxes 24,601 3.8 12,879 2.3 39,997 3.1 19,877 1.7 91.0 101.2 Net income $ 72,032 11.1 $ 39,132 6.9 $ 118,524 9.4 $ 62,190 5.4 84.1 90.6 20 Table of Contents The following tables set forth the operating revenues, operating expenses and operating income for the TTS segment and certain statistical data regarding our TTS segment operations, as well as statistical data for the One-Way Truckload and Dedicated operating units within TTS. Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Truckload Transportation Services segment (amounts in thousands) $ % $ % $ % $ % Trucking revenues, net of fuel surcharge $ 428,523 $ 406,834 $ 839,175 $ 815,932 Trucking fuel surcharge revenues 57,439 34,208 104,898 85,249 Non-trucking and other operating revenues 5,238 4,011 10,076 8,735 Operating revenues 491,200 100.0 445,053 100.0 954,149 100.0 909,916 100.0 Operating expenses 418,092 85.1 393,828 88.5 823,413 86.3 829,602 91.2 Operating income $ 73,108 14.9 $ 51,225 11.5 $ 130,736 13.7 $ 80,314 8.8 Three Months Ended June 30, Six Months Ended June 30, Truckload Transportation Services segment 2021 2020 % Change 2021 2020 % Change Average tractors in service 7,664 7,762 (1.3) % 7,727 7,812 (1.1) % Average revenues per tractor per week (1) $ 4,301 $ 4,032 6.7 % $ 4,177 $ 4,017 4.0 % Total tractors (at quarter end) Company 7,305 7,165 2.0 % 7,305 7,165 2.0 % Independent contractor 340 485 (29.9) % 340 485 (29.9) % Total tractors 7,645 7,650 (0.1) % 7,645 7,650 (0.1) % Total trailers (at quarter end) 23,090 21,820 5.8 % 23,090 21,820 5.8 % One-Way Truckload Trucking revenues, net of fuel surcharge (in 000’s) $ 166,171 $ 167,984 (1.1) % $ 323,010 $ 345,833 (6.6) % Average tractors in service 2,715 3,149 (13.8) % 2,785 3,210 (13.2) % Total tractors (at quarter end) 2,605 3,115 (16.4) % 2,605 3,115 (16.4) % Average percentage of empty miles 10.72 % 13.01 % (17.6) % 11.04 % 12.41 % (11.0) % Average revenues per tractor per week (1) $ 4,709 $ 4,103 14.8 % $ 4,461 $ 4,143 7.7 % Average % change in revenues per total mile (1) 16.7 % (1.9) % 13.1 % (2.7) % Average % change in total miles per tractor per week (1.7) % (0.3) % (4.8) % 2.3 % Average completed trip length in miles (loaded) 877 813 7.9 % 865 838 3.2 % Dedicated Trucking revenues, net of fuel surcharge (in 000’s) $ 262,352 $ 238,850 9.8 % $ 516,165 $ 470,099 9.8 % Average tractors in service 4,949 4,613 7.3 % 4,942 4,602 7.4 % Total tractors (at quarter end) 5,040 4,535 11.1 % 5,040 4,535 11.1 % Average revenues per tractor per week (1) $ 4,079 $ 3,983 2.4 % $ 4,018 $ 3,928 2.3 % (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, 2021 2020 2021 2020 Werner Logistics segment (amounts in thousands) $ % $ % $ % $ % Operating revenues $ 141,673 100.0 $ 110,163 100.0 $ 279,526 100.0 $ 222,327 100.0 Rent and purchased transportation expense 124,388 87.8 92,842 84.3 244,915 87.6 188,774 84.9 Gross margin 17,285 12.2 17,321 15.7 34,611 12.4 33,553 15.1 Other operating expenses 13,358 9.4 14,182 12.9 26,110 9.4 29,329 13.2 Operating income $ 3,927 2.8 $ 3,139 2.8 $ 8,501 3.0 $ 4,224 1.9 Three Months Ended June 30, Six Months Ended June 30, Werner Logistics segment 2021 2020 % Change 2021 2020 % Change Average tractors in service 34 31 9.7 % 36 32 12.5 % Total tractors (at quarter end) 41 30 36.7 % 41 30 36.7 % Total trailers (at quarter end) 1,325 1,635 (19.0) % 1,325 1,635 (19.0) % Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020 Operating Revenues Operating revenues increased 14.2% for the three months ended June 30, 2021, compared to the same period of the prior year. When comparing second quarter 2021 to second quarter 2020, TTS segment revenues increased $46.1 million, or 10.4%, and Werner Logistics revenues increased $31.5 million, or 28.6%. Our results in second quarter 2021 reflect strong freight market conditions in a strengthening economy and tight driver market. Freight demand in our One-Way Truckload fleet was strong. This trend has continued during third quarter to-date. In our Dedicated fleet, freight demand remained strong in second quarter 2021. Improving demand from a rapidly recovering economy, combined with several factors that are limiting capacity, resulted in a robust second quarter freight market. Trucking revenues, net of fuel surcharge, increased 5.3% in second quarter 2021 compared to second quarter 2020 due to a 6.7% increase in average revenues per tractor per week, net of fuel surcharge, partially offset by a 1.3% decrease in the average number of tractors in service. The increase in average revenues per tractor was due primarily to improved pricing in both Dedicated and One-Way Truckload, offset by a decline in miles per truck from an increased mix of Dedicated trucks to total trucks and fewer team drivers. We currently expect average revenues per total mile for the One-Way Truckload fleet for the second half of 2021 to increase in a range of 16% to 19% when compared to the same period in 2020, and we currently expect Dedicated average revenues per truck per week to increase in a range of 3% to 5% in 2021 compared to 2020. The average number of tractors in service in the TTS segment decreased 1.3% to 7,664 in second quarter 2021 from 7,762 in second quarter 2020, impacted by the extremely difficult driver recruiting market. We ended second quarter 2021 with 7,645 trucks in the TTS segment, a year-over-year decrease of 5 trucks compared to the end of second quarter 2020, and a sequential decrease of 90 trucks compared to the end of first quarter 2021. Within TTS, our Dedicated unit ended second quarter 2021 with 5,040 trucks (or 66% of our total TTS segment trucks) compared to 4,535 trucks (or 59%) a year ago. We currently expect truck growth in 2021 to be from our 500-truck acquisition of ECM and expect our truck count at the end of 2021 to be in the range of 1% to 4% higher when compared to the fleet size at year-end 2020. 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 67.9% to $57.4 million in second quarter 2021 from $34.2 million in second quarter 2020 due primarily to higher average diesel fuel prices, partially offset by fewer miles in second quarter 2021. 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 22 Table of Contents 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 three operating units, following the sale of its WGL freight forwarding services for international ocean and air shipments in first quarter 2021. Werner Logistics revenues exclude revenues for full truckload shipments transferred to the TTS segment, which are recorded as trucking revenues by the TTS segment. Werner Logistics also recorded revenue and brokered freight expense of $193 thousand in second quarter 2021 and $14 thousand in second quarter 2020 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 2021, Werner Logistics revenues increased $31.5 million, or 28.6%, due to higher pricing and volume growth in Truckload Logistics and Intermodal. Truckload Logistics revenues (69% of total Logistics revenues) increased by 49%. Truckload Logistics volume increased 10% in second quarter 2021, and revenues per shipment increased 37%. Intermodal revenues (29% of Logistics revenues) increased 52% in second quarter 2021, due to volume growth of 30% and 17% higher revenues per shipment. The Werner Logistics gross margin dollars remained flat at $17.3 million for second quarter 2021 and second quarter 2020. The Werner Logistics gross margin percentage in second quarter 2021 of 12.2% decreased from 15.7% in second quarter 2020 due to higher spot truckload and intermodal dray rates which significantly increased the cost of capacity for contractual brokerage shipments and Intermodal shipments in second quarter 2021. The Werner Logistics operating margin percentage of 2.8% in second quarter 2021 remained flat, while operating income increased 25% to $3.9 million as other operating expenses declined 6% due to improved automation and efficiency. Operating Expenses Our operating ratio (operating expenses expressed as a percentage of operating revenues) was 88.2% for the three months ended June 30, 2021 and 90.7% for the three months ended June 30, 2020. 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 increased $15.1 million or 7.8% in second quarter 2021 compared to second quarter 2020 and decreased 1.9% as a percentage of operating revenues to 32.4%. The higher dollar amount of salaries, wages and benefits expense in the second quarter of 2021 was due primarily to increased driver pay rates, partially offset by 6.8 million fewer company truck miles in second quarter 2021. In January 2021, we implemented driver pay increases of approximately $10 million annually in our One-Way Truckload fleet, and will implement another pay increase in August of approximately $11 million annually. Within Dedicated, we continue to implement pay increases as needed. As a result, driver pay per company driver mile increased nearly 11% in second quarter 2021. Non-driver salaries, wages and benefits in the non-trucking Werner Logistics segment decreased 8.2%, due primarily to increased automation and improved operational efficiency. We renewed our workers’ compensation insurance coverage on April 1, 2021. Our coverage levels are the same as the prior policy year. We continue to maintain a self-insurance retention of $2.0 million per claim. Our workers’ compensation insurance premiums for the policy year beginning April 2021 are $0.3 million higher than the premiums for the previous policy year. The rapidly recovering economy combined with a severely constrained driver market is presenting labor challenges for customers and carriers alike and became more challenging in second quarter 2021, as the improving freight market caused increased competition for the finite number of experienced drivers that meet our hiring standards. Several ongoing market factors persisted including a declining number of, and increased competition for, driver training school graduates, aging truck driver demographics and increased truck safety regulations. We continue to take significant actions to strengthen our driver recruiting and retention as we strive to be the truckload employer of choice, including raising driver pay, providing a modern truck and trailer fleet with the latest safety equipment and technology, investing in our driver training school network and offering a wide variety of driving positions including daily and weekly home time opportunities. We are unable to predict whether we will experience future driver shortages or maintain our current driver retention rates. If such a driver shortage were to occur and additional driver pay rate increases became necessary to attract and retain drivers, our results of operations would be negatively impacted to the extent that we could not obtain corresponding freight rate increases. Fuel increased $27.9 million or 90.7% in second quarter 2021 compared to second quarter 2020 and increased 3.6% as a percentage of operating revenues to 9.0% due to higher average diesel fuel prices, partially offset by approximately 6.8 million 23 Table of Contents fewer company truck miles in second quarter 2021. Average diesel fuel prices were $1.09 per gallon higher in second quarter 2021 than in second quarter 2020 and were 26 cents per gallon higher than in first quarter 2021. 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 2021, the average diesel fuel price per gallon was approximately 93 cents higher than the average diesel fuel price per gallon in July 2020 and approximately 95 cents higher than in third quarter 2020. 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 predict whether fuel price levels will increase or decrease in the future or the extent to which fuel surcharges will be collected from customers. As of June 30, 2021, we had no derivative financial instruments to reduce our exposure to fuel price fluctuations. Supplies and maintenance increased $6.1 million or 14.0% in second quarter 2021 compared to second quarter 2020 and remained flat as a percentage of operating revenues. The higher dollar amount of supplies and maintenance expense was due primarily to higher driver and placement driver-related costs such as driver lodging and advertising. Insurance and claims decreased $5.1 million or 19.6% in second quarter 2021 compared to second quarter 2020 and decreased 1.3% as a percentage of operating revenues due primarily to a lower amount of unfavorable reserve development on large dollar claims, partially offset by higher liability insurance premiums of $2.0 million. We also incurred insurance and claims expense of $1.3 million in second quarter 2021 and $1.2 million in second quarter 2020 for accrued interest related to a previously-disclosed adverse jury verdict rendered May 17, 2018, which we are appealing (see Note 6 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 ren ewed our liability insurance policies on August 1, 2021 and are responsible for the first $10.0 million per claim on all claims with an annual $10.0 million aggregate for claims between $10.0 million and $15.0 million. For the policy year that began August 1, 2020, we were responsible for the first $10.0 million per claim with no aggregates . 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, 2021 are $7.0 million higher than premiums for the previous policy year. Depreciation expense decreased $3.8 million or 5.6% in second quarter 2021 compared to second quarter 2020 and decreased 2.1% as a percentage of operating revenues. During first quarter 2020, we changed the estimated life of certain trucks to be sold in 2020 to more rapidly depreciate these truck to their estimated residual values due to the weak used truck market. These trucks continued to depreciate at the same higher rate per truck until all were sold in 2020. The effect of this change in accounting estimate increased second quarter 2020 depreciation expense by $3.7 million and had no effect on second quarter 2021. The average age of our truck fleet remains low by industry standards and was 2.0 years as of June 30, 2021, 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 2021 to improve our driver experience, increase operational efficiency and more effectively manage our maintenance, safety and fuel costs. During the remainder of 2021, we expect the average age of our truck and trailer fleet to remain at or near current levels. Rent and purchased transportation expense increased $30.2 million or 25.0% in second quarter 2021 compared to second quarter 2020 and increased 2.0% 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 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 increased $31.5 million, and as a percentage of Werner Logistics revenues increased to 87.8% 24 Table of Contents in second quarter 2021 from 84.3% in second quarter 2020, due primarily to higher spot truckload and intermodal dray rates which significantly increased the cost of capacity for contractual brokerage shipments and intermodal shipments in second quarter 2021. Rent and purchased transportation expense for the TTS segment decreased $1.0 million in second quarter 2021 compared to second quarter 2020. Independent contractor miles decreased approximately 5.5 million miles in second quarter 2021 and as a percentage of total miles were 6.2% in second quarter 2021 compared to 8.5% in second quarter 2020. The lower expense resulting from fewer independent contractor miles was partially offset by an increase in the per-mile settlement rate for certain independent contractors in first quarter 2021 and higher average 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 decreased $13.2 million in second quarter 2021 compared to second quarter 2020 and decreased 2.2% 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 $13.5 million in second quarter 2021, compared to $0.9 million in second quarter 2020. We realized substantially higher average gains per truck and trailer due to significantly improved pricing in the market for our used equipment, which we believe is a temporary result of increased demand for previously used equipment because of production delays limiting availability of new equipment in the industry. We sold more trucks and fewer trailers in second quarter 2021 than in second quarter 2020. Other Expense (Income) Other expense (income) decreased $20.6 million in second quarter 2021 compared to second quarter 2020. We recognized a $20.2 million unrealized gain on our minority equity investment in TuSimple, an autonomous technology company, in second quarter 2021. We record changes in the value of our investment based on the share price reported by Nasdaq (see Note 4 in the Notes to Consolidated Financial Statements (Unaudited) set forth in Part I of this report). Interest expense decreased $0.5 million in second quarter 2021 compared to second quarter 2020 due to lower average outstanding debt in the 2021 period. Income Taxes Our effective income tax rate (income taxes expressed as a percentage of income before income taxes) was 25.5% in second quarter 2021 compared to 24.8% in second quarter 2020. 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, 2021 Compared to Six Months Ended June 30, 2020 Operating Revenues Operating revenues increased 9.0% 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 $23.2 million, or 2.8%, due primarily to a 4.0% increase in average revenues per tractor per week, partially offset by a 1.1% decrease in average tractors in service. TTS segment fuel surcharge revenues for the six months ended June 30, 2021 increased $19.6 million or 23.0% when compared to the six months ended June 30, 2020 due to higher average diesel fuel prices in the 2021 period. When comparing the first six months of 2021 to the first six months of 2020, TTS segment revenues increased $44.2 million, or 4.9%, and Werner Logistics revenues increased $57.2 million, or 25.7%. Operating Expenses Our operating ratio (operating expenses expressed as a percentage of operating revenues) was 89.0% for the six months ended June 30, 2021 and 92.8% for the six months ended June 30, 2020. 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 25 Table of Contents 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 increased $14.0 million or 3.5% in the first six months of 2021 compared to first six months of 2020 and decreased 1.7% as a percentage of operating revenues to 32.8%. The higher dollar amount of salaries, wages and benefits expense was due primarily to increased driver pay rates, partially offset by 18.8 million fewer company truck miles in the first six months of 2021. As a result, driver pay per company driver mile increased nearly 9% in the first six months of 2021. Non-driver salaries, wages and benefits in the non-trucking Werner Logistics segment decreased 9.8%. Fuel increased $29.9 million or 37.6% in the first six months of 2021 compared to the same period in 2020 and increased 1.8% as a percentage of operating revenues due to higher average diesel fuel prices, partially offset by approximately 18.8 million fewer company truck miles in the first six months of 2021. Average diesel fuel prices were 66 cents per gallon higher in the first six months of 2021 than in the same 2020 period. Supplies and maintenance increased $6.5 million or 7.3% in the first six months of 2021 compared to same period in 2020 and decreased 0.2% as a percentage of operating revenues. The higher dollar amount of supplies and maintenance expense was due primarily to higher driver and placement driver-related costs such as driver lodging and advertising. Insurance and claims decreased $19.1 million or 30.8% in the first six months of 2021 compared to the same period in 2020 and decreased 1.9% as a percentage of operating revenues due primarily to lower expense for new large dollar claims and a lower amount of unfavorable development on large dollar claims, partially offset by higher liability insurance premiums of $4.0 million. 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 coverage with insurance carriers above that amount. As a result, we recorded $10.0 million of insurance and claims expense in first quarter 2020 for this accident. Depreciation expense decreased $8.7 million or 6.4% in the first six months of 2021 compared to the same period in 2020 and decreased 1.7% as a percentage of operating revenues. During first quarter 2020, we changed the estimated life of certain trucks to be sold in 2020 to more rapidly depreciate these truck to their estimated residual values due to the weak used truck market. These trucks continued to depreciate at the same higher rate per truck until all were sold in 2020. The effect of this change in accounting estimate increased the first six months of 2020 depreciation expense by $8.7 million and had no effect on 2021. Rent and purchased transportation expense for the TTS segment decreased $5.4 million in the first six months of 2021 compared to the same period in 2020. Independent contractor miles decreased approximately 11.3 million miles in the six months ended June 30, 2021. The lower expense resulting from fewer independent contractor miles was partially offset by an increase in the per-mile settlement rate for certain independent contractors in first quarter 2021 and higher average diesel fuel prices. Werner Logistics rent and purchased transportation expense increased $56.1 million as a result of higher logistics revenues and higher spot truckload and dray rates and increased to 87.6% as a percentage of Werner Logistics revenues in the 2021 period from 84.9% in the 2020 period. Other operating expenses decreased $22.9 million in the first six months of 2021 compared to the same period in 2020 and decreased 1.9% as a percentage of operating revenues. Gains on sales of assets were $25.0 million in the six months ended June 30, 2021, compared to $3.4 million in the six months ended June 30, 2020. We realized substantially higher average gains per truck and trailer due to improved pricing in the market for our used equipment. We sold more trucks and fewer trailers in the first six months of 2021 than in the same period in 2020. We also realized a $1.0 million gain from the sale of WGL in first quarter 2021. Other Expense (Income) Other expense (income) decreased $21.0 million in the first six months of 2021 compared to the same 2020 period due primarily to the aforementioned $20.2 million unrealized gain on our equity investment. Interest expense decreased $1.2 million in the first six months of 2021 compared to the first six months of 2020 due to lower average outstanding debt in the 2021 period. Income Taxes Our effective income tax rate (income taxes expressed as a percentage of income before income taxes) was 25.2% for the first six months of 2021 compared to 24.2% for the first six months of 2020. The higher income tax rate in the year-to-date 2021 period was attributed primarily to a lower amount of favorable discrete income tax items in the 2021 period. 26 Table of Contents Liquidity and Capital Resources: During the six months ended June 30, 2021, we generated cash flow from operations of $189.5 million, a 34.1% or $97.9 million decrease in cash flows compared to the same six-month period a year ago. The decrease in net cash provided by operating activities was due primarily to working capital changes resulting from the timing of federal and state estimated income tax payments and changes in accounts receivable, partially offset by higher net income. 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 was $104.6 million for the six-month period ended June 30, 2021 compared to $103.2 million for the six-month period ended June 30, 2020. Net property additions (primarily revenue equipment) were $102.9 million for the six-month period ended June 30, 2021, compared to $107.6 million during the same period of 2020. We currently estimate net capital expenditures (primarily revenue equipment) in 2021 to be in the range of $275 million to $300 million, compared to net capital expenditures in 2020 of $266.2 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 June 30, 2021, we were committed to property and equipment purchases of approximately $269.8 million. Net financing activities provided $77.8 million during the six months ended June 30, 2021, and used $150.2 million during the same period in 2020. We had net borrowings of $100.0 million during the six months ended June 30, 2021, bringing our outstanding debt at June 30, 2021 to $300.0 million. The proceeds were used to finance the July 1, 2021 purchase of ECM. We repaid $125.0 million of debt during the six months ended June 30, 2020. We paid dividends of $12.9 million in the six-month period ended June 30, 2021 and $12.5 million in the six-month period ended June 30, 2020. We increased our quarterly dividend rate by $0.01 per share, or 11% beginning with the quarterly dividend to be paid in May 2021, and we increased our quarterly dividend rate by $0.02 per share, or 20%, beginning with the quarterly dividend to be paid in July 2021. Financing activities for the six months ended June 30, 2021, also included common stock repurchases of 130,446 shares at a cost of $5.5 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, 2021, the Company had purchased 2,313,438 shares pursuant to our current Board of Directors repurchase authorization and had 2,686,562 shares remaining available for repurchase. Management believes our financial position at June 30, 2021 is strong. As of June 30, 2021, we had $192.1 million of cash and cash equivalents (prior to the July 1, 2021 closing payment for ECM) and nearly $1.3 billion of stockholders’ equity. Cash is invested primarily in government portfolio money market funds. As of June 30, 2021, we had a total borrowing capacity of $600.0 million under our credit facilities (see Note 5 in the Notes to Consolidated Financial Statements (Unaudited) under Item I of Part I of this Form 10-Q), of which we had borrowed $300.0 million. The remaining $300.0 million of credit available under the facilities at June 30, 2021 is reduced by the $50.9 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 2020 Form 10-K includes our disclosure of contractual obligations and commercial commitments as of December 31, 2020. Except for amending our existing debt agreements and entering into a new debt agreement with additional borrowings under such agreements, and the associated future interest expense, as disclosed in Note 5 in the Notes to Consolidated Financial Statements (Unaudited) under Item I of Part I of this Form 10-Q, there were no material changes in the nature of these items during the six months ended June 30, 2021. Regulations: Item 1 of Part I of our 2020 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. There have been no material changes in the status of the proposed regulations previously disclosed in the 2020 Form 10-K. 27 Table of Contents 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 2020 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 2020 Form 10-K.