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 • Results of Operations • Liquidity and Capital Resources • Regulations • Critical Accounting Estimates The MD&A should be read in conjunction with our 2023 Form 10-K. Overview: We have two reportable segments, TTS and Werner Logistics, and we operate in the truckload and logistics sectors of the transportation industry. In the truckload sector, we focus on transporting consumer nondurable products that generally ship more consistently throughout the year. 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 additional fuel surcharge revenues from our customers 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 with respect to our TTS segment and qualified third-party capacity providers with respect to our Werner Logistics segment. 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 2024 to second quarter 2023, several industry-wide issues have caused, and could continue to cause, costs to increase in future periods. These issues include shortages of drivers or independent contractors, changing fuel prices, changing used truck and trailer pricing, compliance with new or proposed regulations and tightening of the commercial truck liability insurance market. 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 facility, as management deems necessary. 19 Table of Contents We provide non-trucking services primarily through the three operating units within our Werner Logistics segment (Truckload Logistics, Intermodal, 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, as well as depreciation and amortization, supplies and maintenance, and other general expenses. We evaluate the Werner Logistics segment’s financial performance by reviewing operating expenses and operating income expressed as a percentage of revenues. Purchased transportation expenses as a percentage of revenues 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. 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 2024 2023 2024 2023 3ME 6ME (in thousands) $ % $ % $ % $ % % % Operating revenues $ 760,798 100.0 $ 811,096 100.0 $ 1,529,878 100.0 $ 1,643,810 100.0 (6.2) (6.9) Operating expenses: Salaries, wages and benefits 259,754 34.1 266,373 32.9 525,157 34.3 534,688 32.5 (2.5) (1.8) Fuel 71,998 9.5 77,740 9.6 149,620 9.8 169,154 10.3 (7.4) (11.5) Supplies and maintenance 61,988 8.1 64,964 8.0 123,763 8.1 133,189 8.1 (4.6) (7.1) Taxes and licenses 25,494 3.3 25,408 3.1 50,658 3.3 50,833 3.1 0.3 (0.3) Insurance and claims 31,897 4.2 36,806 4.5 68,259 4.4 73,291 4.4 (13.3) (6.9) Depreciation and amortization 72,672 9.6 74,898 9.2 146,942 9.6 149,211 9.1 (3.0) (1.5) Rent and purchased transportation 210,417 27.7 217,086 26.8 414,342 27.1 437,310 26.6 (3.1) (5.3) Communications and utilities 4,127 0.5 4,669 0.6 8,833 0.6 9,402 0.6 (11.6) (6.1) Other 2,840 0.4 (4,046) (0.5) 7,105 0.5 (13,852) (0.8) (170.2) (151.3) Total operating expenses 741,187 97.4 763,898 94.2 1,494,679 97.7 1,543,226 93.9 (3.0) (3.1) Operating income 19,611 2.6 47,198 5.8 35,199 2.3 100,584 6.1 (58.4) (65.0) Total other expense, net 7,480 1.0 7,091 0.9 13,753 0.9 13,543 0.8 5.5 1.6 Income before income taxes 12,131 1.6 40,107 4.9 21,446 1.4 87,041 5.3 (69.8) (75.4) Income tax expense 2,931 0.4 10,087 1.2 5,998 0.4 21,487 1.3 (70.9) (72.1) Net income 9,200 1.2 30,020 3.7 15,448 1.0 65,554 4.0 (69.4) (76.4) Net loss (income) attributable to noncontrolling interest 265 — (139) — 329 — (449) — (290.6) (173.3) Net income attributable to Werner $ 9,465 1.2 $ 29,881 3.7 $ 15,777 1.0 $ 65,105 4.0 (68.3) (75.8) 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, 2024 2023 2024 2023 TTS segment (in thousands) $ % $ % $ % $ % Trucking revenues, net of fuel surcharge $ 458,140 $ 486,626 $ 928,019 $ 979,868 Trucking fuel surcharge revenues 69,966 76,677 142,949 164,978 Non-trucking and other operating revenues 8,963 6,889 17,227 13,676 Operating revenues 537,069 100.0 570,192 100.0 1,088,195 100.0 1,158,522 100.0 Operating expenses 516,071 96.1 525,033 92.1 1,046,357 96.2 1,062,377 91.7 Operating income $ 20,998 3.9 $ 45,159 7.9 $ 41,838 3.8 $ 96,145 8.3 Three Months Ended June 30, Six Months Ended June 30, TTS segment 2024 2023 % Change 2024 2023 % Change Average tractors in service 7,630 8,351 (8.6) % 7,783 8,456 (8.0) % Average revenues per tractor per week (1) $ 4,619 $ 4,483 3.0 % $ 4,586 $ 4,457 2.9 % Total tractors (at quarter end) Company 7,180 8,000 (10.3) % 7,180 8,000 (10.3) % Independent contractor 280 285 (1.8) % 280 285 (1.8) % Total tractors 7,460 8,285 (10.0) % 7,460 8,285 (10.0) % Total trailers (at quarter end) 26,965 27,110 (0.5) % 26,965 27,110 (0.5) % One-Way Truckload Trucking revenues, net of fuel surcharge (in 000’s) $ 169,283 $ 176,824 (4.3) % $ 338,120 $ 359,954 (6.1) % Average tractors in service 2,730 3,075 (11.2) % 2,758 3,133 (12.0) % Total tractors (at quarter end) 2,635 3,025 (12.9) % 2,635 3,025 (12.9) % Average percentage of empty miles 14.70 % 14.01 % 4.9 % 14.80 % 14.05 % 5.3 % Average revenues per tractor per week (1) $ 4,770 $ 4,423 7.8 % $ 4,716 $ 4,419 6.7 % Average % change in revenues per total mile (1) (2.7) % (5.2) % (4.0) % (4.2) % Average % change in total miles per tractor per week 10.8 % 0.1 % 11.1 % (1.3) % Average completed trip length in miles (loaded) 589 604 (2.5) % 590 612 (3.6) % Dedicated Trucking revenues, net of fuel surcharge (in 000’s) $ 288,857 $ 309,802 (6.8) % $ 589,899 $ 619,914 (4.8) % Average tractors in service 4,901 5,276 (7.1) % 5,025 5,323 (5.6) % Total tractors (at quarter end) 4,825 5,260 (8.3) % 4,825 5,260 (8.3) % Average revenues per tractor per week (1) $ 4,534 $ 4,517 0.4 % $ 4,516 $ 4,479 0.8 % (1) Net of fuel surcharge revenues. 21 Table of Contents The following tables set forth the Werner Logistics segment’s revenues, purchased transportation expense, other operating expenses (primarily salaries, wages and benefits expense), total operating expenses, and operating income, as well as certain statistical data regarding the Werner Logistics segment. Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 Werner Logistics segment (in thousands) $ % $ % $ % $ % Operating revenues $ 208,912 100.0 $ 224,549 100.0 $ 411,394 100.0 $ 453,218 100.0 Operating expenses: Purchased transportation expense 177,066 84.8 185,397 82.6 349,553 85.0 373,895 82.5 Other operating expenses 31,296 14.9 34,797 15.5 63,620 15.4 70,031 15.4 Total operating expenses 208,362 99.7 220,194 98.1 413,173 100.4 443,926 97.9 Operating income (loss) $ 550 0.3 $ 4,355 1.9 $ (1,779) (0.4) $ 9,292 2.1 Three Months Ended June 30, Six Months Ended June 30, Werner Logistics segment 2024 2023 % Change 2024 2023 % Change Average tractors in service 22 33 (33.3) % 24 36 (33.3) % Total tractors (at quarter end) 21 32 (34.4) % 21 32 (34.4) % Total trailers (at quarter end) 3,350 2,885 16.1 % 3,350 2,885 16.1 % Three Months Ended June 30, 2024 Compared to Three Months Ended June 30, 2023 Operating Revenues Operating reve nues decreased 6.2% for the three months ended June 30, 2024, comp ared to the same period of the prior year. When comparing second quarter 2024 to second quarter 2023, TTS segment reven ues decreased $33.1 million, or 5.8%, and Werner Logistics revenues decreased $15.6 million, or 7.0%. Dedicated freight demand remains steady and durable despite a continued challenging freight market, and the Dedicated pipeline of opportunities remains strong, but competitive. One-Way Truckload freight conditions improved midway through second quarter 2024 and continued into July. Werner Logistics revenues and profitability continue to be impacted by ongoing pricing pressure. Trucking revenues, net of fuel surcharge, decreased 5.9% in second quart er 2024 compared to second quarter 2023 due to an 8.6% decrease in the average number of tractors in service, partially offset by a 3.0% increase in average revenues per tractor per week, net of fuel surcharge. During second quarter 2024, One-Way Truckload average revenues per total mile, net of fuel surcharg e, decreased 2.7%, as One-Way Truckload remained challenged by ongoing pricing pressure. One-Way Truckload average tractors in service decreased 11.2%, offset with 10.8% higher average total miles per tractor per week in second quarter 2024. As a result, One-Way Truckload total miles were down only 1.6% compared to second quarter 2023. We expect average revenues per total mile, net of fuel surcharge, for the One-Way Truckload fleet to remain flat or decrease by no more than 3% in third quarter 2024 compared to third quarter 2023. Dedicated average revenues per tractor per week, net of fuel surcharge, increased 0.4%. We continue to expect Dedicated average revenues per tractor per week, net of fuel surcharge, to remain flat or increase up to 3% in 2024 compared to 2023, as we continue to maintain high customer retention and the pipeline of opportunities in Dedicated remains strong. The average number of tractors in service in the TTS segment decreased 8.6% to 7,630 in second qu arter 2024 from 8,351 in second quarter 2023. The prolonged weak freight market combined with the impact from certain fleet losses as a result of maintaining our pricing and operating margin discipline resulted in fewer tractors at the end of second quarter 2024. W e ended second quarter 2024 wi th 7,460 tractors in the TTS segment, a year-over-year decrease of 825 tractors compared to the e nd of second quarter 2023, and a sequenti al decrease of 350 tractors compared to the end of first quarter 2024. Within TTS, our Dedicated unit ended second quarter 2024 with 4,825 tractors (or 65% of our total TTS segment fleet) compared to 5,260 tractors (or 63%) a year ago. We currently expect our TTS segment fleet size at the end of 2024 to decrease in a range of 6% to 3% when compared to the fleet size at the end of 2023. We cannot predict whether future driver shortages, if any, would have a further adverse effect on our fleet size. If such a driver market shortage were to occur, it could result in further fleet size reductions, and our results of operations could be adversely affected. Trucking fuel surcharge revenues decreased 8.8% to $70.0 million in second quarter 2024 from $76.7 million in second quarter 2023. These revenues represent collections from customers for the increase in fuel and fuel-related expenses, including the fuel component of our independent contractor cost (recorded as rent and purchased transportation expense) and fuel taxes (recorded 22 Table of Contents 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 tractor 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. Werner Logistics recorded revenue and brokered freight expense of $3.3 million in second quarter 2024 and $3.5 million in second quarter 2023 for certain shipments performed by the TTS segment (also recorded as trucking revenue by the TTS segment), and these transactions between reporting segments are eliminated in consolidation. In second quarter 2024, Werner Logistics revenues decreased $15.6 million, or 7.0%, compared to second quarter 2023. Truckload Logistics revenues (75% of total Werner Logistics segment revenues) decreased $17.3 million, or 10%, in second quarter 2024, driven by a decrease in shipments and a decline in revenue per shipment. The Power Only solution, which utilizes third-party carriers who provide only a driver and a tractor, represented a growing portion of the Truckload Logistics volume in second quarter 2024, as Power Only volumes increased over 30% in second quarter 2024 compared to second quarter 2023. Intermodal revenues (13% of total Werner Logistics segment revenues) increased $4.1 million, or 17%, in second quarter 2024, due to an increase in shipments, partially offset by lower revenue per shipment. Final Mile revenues (12% of total Werner Logistics segment revenues) decreased $2.5 million, or 9%, in second quarter 2024. Werner Logistics operating income decreased to $0.5 million in second quarter 2024 from $4.4 million in second quarter 2023, and its operating margin percentage decreased to 0.3% in second quarter 2024 from 1.9% in second quarter 2023. The operating environment continues to be competitive, which is pressuring Werner Logistics operating margins in the short term. Operating Expenses Our operating ratio (operati ng expenses expressed as a percentage of ope rating revenues) was 97.4% in second quarter 2024 compared to 94.2% in second quarter 2023. 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 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 $6.6 million or 2.5% in second quarter 2024 compared to second quarter 2023 and increased 1.2% as a percentage of operating revenues to 34.1%. The lower dollar amount of salaries, wages and benefits expense in the second quarter of 2024 was due primarily to the impact of 6.5 million fewer company tractor miles and decreased non-driver pay in the second quarter 2024, partially offset by higher benefit costs. The decrease in non-driver pay was due primarily to a smaller average number of non-driver employees. Non-driver salaries, wages and benefits in our non-trucking Werner Logistics segment decreased 11% in second quarter 2024 compared to second quarter 2023. We renewed our workers’ compensation insurance coverage on April 1, 2024. 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 2024 are $0.3 million higher than the previous policy year. While we currently believe the driver recruiting and retention market may be less difficult in the near term, a competitive driver market presents labor challenges for customers and carriers alike. Several factors impacting the driver market include 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 competitive driver pay, providing a modern tractor 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 driver pay rate increases became necessary to attract and retain drivers, our results of operations would be negatively impacted to the extent that we could not obtain corresponding freight rate increases. Fuel decreased $5.7 million or 7.4% in second quarter 2024 compared to second quarter 2023 and decreased 0.1% as a percentage of operating revenues to 9.5%, due primarily to lower average diesel fuel prices, and 6.5 million fewer company tractor miles in second quarter 2024. Average diesel fuel prices were 6 cents per gallon lower in second quarter 2024 than in second quarter 2023 and were 15 cents per gallon lower than in first quarter 2024. 23 Table of Contents We continue to employ measures to improve our fuel mpg such as (i) limiting tractor engine idle time by installing auxiliary power units, (ii) optimizing the speed, weight and specifications of our equipment and (iii) implementing mpg-enhancing equipment changes to our fleet including new tractors, more aerodynamic tractor features, idle reduction systems, trailer tire inflation systems, trailer skirts and automated manual transmissions to reduce our fuel gallons purchased. 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 a U.S. Environmental Protection Agency (“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 2024, the average diesel fuel price per gallon was approximately 12 cents lower than the average diesel fuel price per gallon in July 2023 and approximately 54 cents lower than in third quarter 2023. Shortages of fuel, increases in fuel prices and petroleum product rationing can have a material adverse effect on our operations and profitability. We are unable to predict whether fuel price levels will increase or decrease in the future or the extent to which fuel surcharges will be collected from customers. As of June 30, 2024, we had no derivative financial instruments to reduce our exposure to fuel price fluctuations. Supplies and maintenance decreased $3.0 million or 4.6% in second quarter 2024 compared to second quarter 2023 and increased 0.1% as a percentage of operating revenues. Supplies and maintenance expense decreased due primarily to the lower costs for over-the-road tractor and trailer maintenance, the impact of 6.5 million fewer company tractor miles, and lower driver and placement driver-related costs such as driver advertising and lodging. We have taken steps to reduce repair and maintenance expense by growing our in-house maintenance capabilities throughout our terminal network. Insurance and claims decreased $4.9 million or 13.3% in second quarter 2024 compared to second quarter 2023 and decreased 0.3% as a percentage of operating revenues. We had lower expense for small dollar liability claims, resulting primarily from a higher amount of favorable reserve development. Our expense for large dollar liability claims was also lower due to a lower amount of unfavorable reserve development partially offset by higher new claims. We also incurred insurance and claims expense of $1.0 million in second quarter 2024 and $1.4 million for second quarter 2023, for accrued interest related to a previously-disclosed adverse jury verdict rendered on May 17, 2018, which we are continuing to defend. Interest is accrued at $0.5 million per month until such time as the outcome of the litigation is finalized, excluding months where the plaintiffs requested an extension of time to respond to our petition for review. For additional information related to this lawsuit, see Note 8 in the Notes to Consolidated Financial Statements (Unaudited) set forth in Part I of this report. 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, 2024, and are responsible for the first $15.0 million per claim on all claims with an annual $7.5 million aggregate for claims between $15.0 million and $20.0 million. For the policy year that began August 1, 2023, we were responsible for the first $10.0 million per claim on all claims with an annual $12.5 million aggregate for claims between $10.0 million and $20.0 million . We maintain liability insurance coverage with insurance carriers in excess of the $15.0 million per claim. Our liability insurance premiums for the policy year that began August 1, 2024 are lower than premiums for the previous policy year as a result of changes in our retention levels. Depreciation and amortization expense decreased $2.2 million or 3.0% in second quarter 2024 compared to second quarter 2023 and increased 0.4% as a percentage of operating revenues due primarily to decreases in depreciation of tractors as we had fewer average tractors in service, and technology equipment as we continue to transition to more cloud-based technology solutions. Depreciation of other service equipment also decreased due to certain assets becoming fully depreciated. These decreases were partially offset by the higher cost of new tractors and trailers. The average age of our tractor fleet remains low by industry standards and was 2.1 years as of June 30, 2024, and the average age of our trailers was 4.9 years. We are continuing to invest in new tractors and trailers, technology, and our terminal network in 2024 to improve our driver experience, increase operational efficiency and more effectively manage our maintenance, safety and fuel costs. During the remainder of 2024, we expect the average age of our tractor and trailer fleets to remain at or near current levels. Rent and purchased transportation expense decreased $6.7 million or 3.1% in second quarter 2024 compared to second quarter 2023, and increased 0.9% as a percentage of operating revenues. Rent and purchased transportation expense consists mostly of payments to third-party capacity providers in the Werner Logistics segment and other non-trucking operations, payments to independent contractors in the TTS segment, and cloud-based technology fees. The payments to third-party capacity providers generally vary depending on changes in the volume of services generated by the Werner Logistics segment. Werner Logistics 24 recorded revenue and brokered freight expense of $3.3 million in second quarter 2024 and $3.5 million in second quarter 2023 for certain shipments performed by the TTS segment (also recorded as trucking revenue by the TTS segment), and these transactions between reporting segments are eliminated in consolidation. Werner Logistics purchased transportation expense decreased $8.3 million in second quarter 2024 as a result of lower logistics revenues, but increased to 84.8% as a percentage of Werner Logistics revenues in second quarter 2024 from 82.6% in second quarter 2023 due to the competitive operating environment in 2024. Rent and purchased transportation expense for the TTS segment increased $1.1 million in second quarter 2024 compared to second quarter 2023 due primarily to higher independent contractor miles and cloud-based technology fees, partially offset by lower reimbursements to independent contractors because of lower average diesel fuel prices. Independent contractor miles increased approximately 0.2 million miles in second quarter 2024 and as a percentage of total miles were 4.8% in second quarter 2024 compared to 4.5% in second quarter 2023. Because independent contractors supply their own tractors and drivers and are responsible for their operating expenses, the increase in independent contractor miles as a percentage of total miles shifted costs from other expense categories, including (i) salaries, wages and benefits, (ii) fuel, (iii) depreciation, (iv) supplies and maintenance and (v) taxes and licenses to the rent and purchased transportation category. 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 were to occur, increases in per-mile settlement rates (for independent contractors) and driver pay rates (for company drivers) may become necessary to attract and retain these drivers. These increased expenses could negatively affect our results of operations to the extent that we would not be able to obtain corresponding freight rate increases. Other operating expenses increased $6.9 million in second quarter 2024 compared to second quarter 2023 and increased 0.9% as a percentage of operating revenues due to lower gains on sales of property and equipment (primarily used tractors and trailers), partially offset by decreased costs associated with professional technology services and decreased bad debt expense. Gains on sales of property and equipment are reflected as a reduction of other operating expenses and are reported net of sales-related expenses (which include costs to prepare the equipment for sale). Gains on sales of property and equipment were $2.7 million in second quarter 2024, including $1.8 million from sales of real estate, compared to $11.9 million in second quarter 2023. We sold fewer tractors and substantially more trailers in second quarter 2024 compared to second quarter 2023 and realized lower average gains per tractor and trailer due to lower pricing in the market for our used equipment. Compared to 2023, we expect our gains on sales of property and equipment to be considerably lower in 2024, in a range between $7 million and $13 million for the year as we expect lower pricing for our used equipment to continue. Other Expense (Income) Other expense, net of other income, increased $0.4 million in second quarter 2024 compared to second quarter 2023, due primarily to a $1.0 million increase in net interest expense, partially offset by a $0.7 million decrease in the amount of loss recognized from our equity method investment (see Note 6 in the Notes to Consolidated Financial Statements (Unaudited) set forth in Part I of this report for information regarding our equity method investment). Net interest expense increased due to higher interest rates for variable-rate debt and the impact of replacing lower-cost debt and interest rate swaps with higher-cost debt and interest rate swaps upon maturity, partially offset by a decrease in average debt outstanding. In May 2024, we repaid the remaining outstanding principal balance under the BMO Term Loan using proceeds from the 2022 Credit Agreement, and two variable-for-fixed interest rate swap agreements with an aggregate notional amount of $150.0 million matured. In second quarter 2024, we also entered into two variable-for-fixed interest rate swap agreements with an aggregate notional amount of $150.0 million to limit our exposure to increases in interest rates on a portion of our variable-rate indebtedness (see Note 7 in the Notes to Consolidated Financial Statements (Unaudited) set forth in Part I of this report for further information on our debt and interest rate swaps). We continue to expect net interest expense for full-year 2024 to be higher than 2023, primarily due to repricing of the BMO Term Loan that matured in May 2024 and the impact of two lower-priced interest rate swaps that matured in May 2024 as described above. Income Tax Expense Income tax expense decreased $7.2 million in second quarter 2024 compared to second quarter 2023, due primarily to lower pre-tax income. Our effective income tax rate (income taxes expressed as a percentage of income before income taxes) was 24.2% in second quarter 2024 compared to 25.2% in second quarter 2023. The lower effective income tax rate was attributed to differences in discrete income tax items. 25 Table of Contents Six Months Ended June 30, 2024 Compared to Six Months Ended June 30, 2023 Operating Revenues Operating revenues decreased 6.9% for the six months ended June 30, 2024, compared to the same period of the prior year. When comparing the first six months of 2024 to the first six months of 2023, TTS segment revenues decreased $70.3 million, or 6.1%, and Werner Logistics revenues decreased $41.8 million, or 9.2%. In the TTS segment, trucking revenues, net of fuel surcharge, decreased $51.8 million, due primarily to an 8.0% decrease in average tractors in service, partially offset by a 2.9% increase in average revenues per tractor per week, net of fuel surcharge. TTS segment fuel surcharge revenues for the six months ended June 30, 2024 decreased $22.0 million, or 13.4%, when compared to the same period of the prior year due to lower average diesel fuel prices in the 2024 period. The lower Logistics revenues resulted from continued pricing pressure. Operating Expenses Our operating ratio (operating expenses expressed as a percentage of operating revenues) was 97.7% for the six months ended June 30, 2024 and 93.9% for the six months ended June 30, 2023. 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 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 $9.5 million, or 1.8%, in the first six months of 2024 compared to the same period in 2023 and increased 1.8% as a percentage of operating revenues to 34.3%. The lower dollar amount of salaries, wages and benefits expense in the first six months of 2024 was due primarily to lower driver pay from 9.9 million fewer company tractor miles and decreased non-driver pay in the first six months of 2024, partially offset by higher benefit costs. The decrease in non-driver pay was due primarily to a smaller average number of non-driver employees. Non-driver salaries, wages and benefits in our non-trucking Werner Logistics segment decreased 9% in the first six months of 2024 compared to the same period in 2023. Fuel decreased $19.5 million, or 11.5%, in the first six months of 2024 compared to the same period in 2023 and decreased 0.5% as a percentage of operating revenues due to lower average diesel fuel prices and 9.9 million fewer company tractor miles in the first six months of 2024. Average diesel fuel prices were 19 cents per gallon lower in the first six months of 2024 than in same period in 2023. Supplies and maintenance decreased $9.4 million, or 7.1%, in the first six months of 2024 compared to the same period in 2023 and remained flat as a percentage of operating revenues. Supplies and maintenance expense decreased due primarily to lower costs for over-the-road repairs and tires, and the impact of 9.9 million fewer company tractor miles. We also had lower driver and placement driver-related costs such as driver advertising and lodging. These decreases were partially offset by higher costs for tolls. Insurance and claims decreased $5.0 million, or 6.9%, in the first six months of 2024 compared to the same period in 2023 and remained flat as a percentage of operating revenues. We had lower expense for small dollar liability claims, resulting from favorable reserve development in the first six months of 2024 compared to unfavorable reserve development for the same period in 2023, partially offset by higher expense for new claims. We had slightly higher expense for large dollar liability claims, resulting from a higher expense for new claims, mostly offset by unfavorable reserve development. Higher expense for new claims was impacted by increased cost per claim in the first six months of 2024 compared to the same period in 2023. Depreciation and amortization expense decreased $2.3 million, or 1.5%, in the first six months of 2024 compared to the same period in 2023 and increased 0.5% as a percentage of operating revenues due primarily to decreases in depreciation of tractors as we had fewer average tractors in service, and technology equipment as we continue to transition to more cloud-based technology solutions. Depreciation of other service equipment also decreased due to certain assets becoming fully depreciated. These decreases were partially offset by the higher cost of new tractors and trailers. Werner Logistics purchased transportation expense decreased $24.3 million in the first six months of 2024 as a result of lower logistics revenues, and increased 2.5% as a percentage of Werner Logistics revenues to 85.0% in the first six months of 2024 from 82.5% in the same period in 2023. Rent and purchased transportation expense for the TTS segment decreased $0.2 million in the first six months of 2024 compared to the same period in 2023 due primarily to fewer independent contractor miles and lower reimbursements to independent contractors because of lower average diesel fuel prices, partially offset by higher cloud-based technology fees in the first six months of 2024. Independent contractor miles decreased approximately 1.2 million miles in the first six months of 2024 and as a percentage of total miles were 4.5% in the first six months of 2024 compared to 4.7% in the first six months of 2023. 26 Table of Contents Other operating expenses increased $21.0 million in the first six months of 2024 compared to the same period in 2023 and increased 1.3% as a percentage of operating revenues due primarily to lower gains on sales of property and equipment, partially offset by decreased costs associated with professional technology services. Gains on sales of property and equipment were $6.2 million in the first six months of 2024, compared to $30.2 million in the same period in 2023. We sold fewer tractors and substantially more trailers in the first six months of 2024 compared to the same period in 2023 and realized lower average gains per tractor and trailer due to lower pricing in the market for our used equipment. Other Expense (Income) Other expense, net of inco me, increased $0.2 million in the first six months of 2024 compared to the same period in 2023 due primari ly to a $0.9 million increase in net interest expense, partially offset by a $0.6 million decrease in the amount of loss from our equity method investment (see Note 6 in the Notes to Consolidated Financial Statements (Unaudited) set forth in Part I of this report for information regarding our equity method investment). Net interest expense increased due to higher interest rates for variable-rate debt and the impact of replacing lower-cost debt and interest rate swaps with higher-cost debt and interest rate swaps upon maturity, partially offset by a decrease in average debt outstanding (see Note 7 in the Notes to Consolidated Financial Statements (Unaudited) set forth in Part I of this report for further information on our debt and interest rate swaps). Income Tax Expense Income tax expense decreased $15.5 million in the first six months of 2024 compared to the same period in 2023 , due primarily to lower pre-tax income, partially offset by an increase in the effective income tax rate. Our effective income tax rate (income taxes expressed as a percentage of income before income taxes) was 28.0% in the first six months of 2024 compared to 24.7% in the first six months of 2023 . The higher income tax rate was attributed primarily to differences in discrete income tax items in the first six months of 2024 primarily related to the tax impact of equity compensation. Liquidity and Capital Resources: We closely manage our liquidity and capital resources. Our liquidity requirements depend on key variables, including the level of investment needed to support business strategies, the performance of the business, capital expenditures, borrowing arrangements, and working capital management. Capital expenditures, business acquisitions, stock repurchases, and dividend payments are components of our cash flow and capital management strategy, which to a large extent, can be adjusted in response to economic and other changes in the business environment. Management’s approach to capital allocation focuses on investing in key priorities that support our business and growth strategies and providing shareholder returns, while funding ongoing operations. Management believes our financial position at June 30, 2024 is strong. As of June 30, 2024, we had $70.4 million of cash and cash equivalents and nearly $1.5 billion of stockholders’ equity. Cash is invested primarily in short-term money market funds. In addition, we have a $1.075 billion credit facility, for which our total available borrowing capacity was $399.1 million as of June 30, 2024 (see Note 7 in the Notes to Consolidated Financial Statements (Unaudited) set forth in Part I of this report for information regarding our credit agreements). After considering developments in the banking sector, we believe the six commercial banks in our $1.075 billion syndicated credit facility all have strong tier-one capital ratios and good loan-to-deposit ratios. We believe our liquid assets, cash generated from operating activities, and borrowing capacity under our existing credit facility will provide sufficient funds to meet our cash requirements and our planned shareholder returns for the foreseeable future. Item 7 of Part II of our 2023 Form 10-K includes our disclosure of material cash requirements as of December 31, 2023. There were no material changes in the nature of these items during the six months ended June 30, 2024. Cash Flows During the six months ended June 30, 2024, we generated cash flow from operations of $197.7 million, a 29.9% or $84.1 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 a decrease in net income for the six-month period ended June 30, 2024 and working capital changes. We were able to make net capital expenditures, repay debt, make strategic investments, pay dividends, and repurchase company stock with the net cash provided by operating activities and existing cash balances, supplemented by borrowings under our existing credit facility. Net cash used in investing activities was $119.4 million for the six-month period ended June 30, 2024 compared to $280.3 million during the same period in 2023. Net property and equipment additions (primarily revenue equipment) were $118.2 million for the six-month period ended June 30, 2024, compared to $254.2 million during the same period of 2023. We currently estimate net capital expenditures (primarily revenue equipment) in 2024 to be in the range of $225 million to $275 million, compared to net capital expenditures in 2023 of $408.7 million. We intend to fund these net capital expenditures through cash flows from operations and financing available under our existing credit facility, if necessary. As of June 30, 2024, 27 Table of Contents we were committed to property and equipment purchases of approximately $202.6 million. During the six-month period ended June 30, 2023, we purchased a $25.0 million subordinated promissory note from Mastery Logistics Systems, Inc. with a maturity date of January 24, 2030. Net financing activities used $67.8 million during the six months ended June 30, 2024 compared to $64.2 million during the same period in 2023. We had net borrowings on our debt of $21.3 million during the six months ended June 30, 2024, increasing our outstanding debt to $670.0 million at June 30, 2024. We repaid $53.8 million on our debt during the six months ended June 30, 2023. We paid dividends of $17.8 million during the six months ended June 30, 2024 and $16.5 million during the same period in 2023. We currently plan to continue paying a quarterly dividend. Financing activities for the six months ended June 30, 2024, also included common stock repurchases of 1,787,810 shares at a cost of $67.1 million. We did not repurchase any shares of common stock during the same period in 2023. The Company has repurchased, and may continue to repurchase, shares of the Company’s common stock. The timing and amount of such purchases depend upon economic and stock market conditions and other factors. On May 14, 2024, the Board of Directors approved a new stock repurchase program under which the Company is authorized to repurchase up to 5,000,000 shares of its common stock. Upon approval of the new program, the Board of Directors withdrew the previous stock repurchase authorization , which had 1,627,651 shares rem aining available for repurchase . As of June 30, 2024, the Company had purchased 1,103,651 shares pursuant to the new authorization and had 3,896,349 shares remaining available for repurchase. Regulations: Item 1 of Part I of our 2023 Form 10-K includes a discussion of pending proposed regulations that may have an effect on our operations if they become adopted and effective as proposed. The following is an update to the regulations set forth in our 2023 Form 10-K. In March 2024, U.S. Environmental Protection Agency (“EPA”) released a Final Rule governing Greenhouse Gas (“GHG”) Emissions Standards for Heavy-Duty Vehicles - Phase 3, which requires more stringent greenhouse gas standards for heavy-duty vehicles and revises the “Phase 2” greenhouse gas standards established in 2016. Short haul (day cab) and long haul (sleeper cab) tractor GHG standards under the Final Rule phase in starting with model years 2028 through 2032. Werner continues to evaluate the Final Rule and any EPA-related developments impacting its fleet. There have been no other material changes in the status of the proposed regulations previously disclosed in the 2023 Form 10-K. 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 2023 Form 10-K. Estimates of accrued liabilities for insurance and claims for bodily injury and property damage is a critical accounting estimate that requires us to make significant judgments and estimates and affects our financial statements. There have been no material changes to this critical accounting estimate from that discussed in our 2023 Form 10-K.