News Column

WERNER ENTERPRISES INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.

August 4, 2014

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

• Contractual Obligations and Commercial Commitments

• Off-Balance Sheet Arrangements

• Regulations

• Critical Accounting Policies

• Accounting Standards

The MD&A should be read in conjunction with our 2013 Form 10-K. Overview: We have two reportable segments, Truckload Transportation Services ("Truckload") and Value Added Services ("VAS"), and we operate in the truckload and logistics sectors of the transportation industry. In the truckload sector, we focus on transporting consumer nondurable products that generally ship more consistently throughout the year. In the logistics sector, besides managing transportation requirements for individual customers, we provide additional sources of truck capacity, alternative modes of transportation, a global delivery network and systems analysis to optimize transportation needs. Our success depends on our ability to efficiently and effectively manage our resources in the delivery of truckload transportation and logistics services to our customers. Resource requirements vary with customer demand, which may be subject to seasonal or general economic conditions. Our ability to adapt to changes in customer transportation requirements is essential to efficiently deploy resources and make capital investments in tractors and trailers (with respect to our Truckload segment) or obtain qualified third-party capacity at a reasonable price (with respect to our VAS segment). Although our business volume is not highly concentrated, we may also be affected by our customers' financial failures or loss of customer business. Revenues for our Truckload segment operating units (One-Way Truckload and Specialized Services) are typically generated on a per-mile basis and also include revenues such as stop charges, loading and unloading charges, equipment detention charges and equipment repositioning charges. To mitigate our risk to fuel price increases, we recover from our customers additional fuel surcharges that generally recoup a majority of the increased fuel costs; however, we cannot assure that current recovery levels will continue in future periods. Because fuel surcharge revenues fluctuate in response to changes in fuel costs, we identify them separately and exclude them from the statistical calculations to provide a more meaningful comparison between periods. The key statistics used to evaluate trucking revenues, net of fuel surcharge, are (i) average revenues per tractor per week, (ii) average percentage of empty miles (miles without trailer cargo), (iii) average trip length (in loaded miles) and (iv) average number of tractors in service. General economic conditions, seasonal trucking industry freight patterns and industry capacity are important factors that impact these statistics. Our Truckload segment also generates a small amount of revenues categorized as non-trucking revenues, related to shipments delivered to or from Mexico where the Truckload segment utilizes a third-party capacity provider. We exclude such revenues from the statistical calculations. Our most significant resource requirements are company drivers, independent contractors, tractors and trailers. Our financial results are affected by company driver and independent contractor availability and the markets for new and used revenue equipment. We are self-insured for a significant portion of bodily injury, property damage and cargo claims; workers' compensation claims; and associate health claims (supplemented by premium-based insurance coverage above certain dollar levels). For that reason, our financial results may also be affected by driver safety, medical costs, weather, legal and regulatory environments and insurance coverage costs to protect against catastrophic losses. The operating ratio is a common industry measure used to evaluate our profitability and that of our Truckload segment operating fleets. The operating ratio consists of operating expenses expressed as a percentage of operating revenues. The most significant variable expenses that impact the Truckload segment are driver salaries and benefits, fuel, fuel taxes (included in taxes and licenses expense), payments to independent contractors (included in rent and purchased transportation expense), supplies and maintenance and insurance and claims. As discussed further in the comparison of operating results for second quarter 2014 to second quarter 2013, 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, higher new truck and trailer purchase prices and compliance with new or proposed regulations. Our main fixed costs include depreciation expense for tractors and trailers and equipment licensing fees (included in taxes and licenses expense). The Truckload segment requires substantial cash expenditures for tractor and trailer purchases. We fund these purchases with net cash from operations and financing available under our existing credit facilities, as management deems necessary. 13



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We provide non-trucking services primarily through the four operating units within our VAS segment (Brokerage, Freight Management, Intermodal and WGL). Unlike our Truckload segment, the VAS segment is less asset-intensive and is instead dependent upon qualified associates, information systems and qualified third-party capacity providers. The largest expense item related to the VAS segment is the cost of purchased transportation we pay to third-party capacity providers. This expense item is recorded as rent and purchased transportation expense. Other operating expenses consist primarily of salaries, wages and benefits. We evaluate the VAS segment's financial performance by reviewing the gross margin percentage (revenues less rent and purchased transportation expenses expressed as a percentage of revenues) and the operating income percentage. The gross margin percentage can be impacted by the rates charged to customers and the costs of securing third-party capacity. We generally do not have contracted long-term rates for the cost of third-party capacity, and we cannot assure that our operating results will not be adversely impacted in the future if our ability to obtain qualified third-party capacity providers changes or the rates of such providers increase. Results of Operations: The following table sets forth the Consolidated Statements of Income in dollars and as a percentage of total operating revenues and the percentage increase or decrease in the dollar amounts of those items compared to the prior year. Three Months Ended (3ME) Six Months Ended (6ME) Percentage Change in June 30, June 30, Dollar Amounts 2014 2013 2014 2013 3ME 6ME (Amounts in thousands) $ % $ % $ % $ % % % Operating revenues $ 542,120 100.0 $ 506,648 100.0 $ 1,034,142



100.0 $ 999,535 100.0 7.0 % 3.5 %

Operating expenses: Salaries, wages and benefits 144,506 26.7 135,236 26.7 279,219 27.0 268,341 26.9 6.9 % 4.1 % Fuel 92,131 17.0 90,191 17.8 183,206 17.7 186,984 18.7 2.2 % (2.0 )% Supplies and maintenance 45,887 8.5 43,934 8.7 91,741



8.9 87,062 8.7 4.4 % 5.4 % Taxes and licenses 21,311 3.9 21,586 4.2 42,143

4.0 43,210 4.3 (1.3 )% (2.5 )% Insurance and claims 19,180 3.5 17,320 3.4 39,386 3.8 37,121 3.7 10.7 % 6.1 % Depreciation 44,573 8.2 42,367 8.4 87,696



8.5 84,698 8.5 5.2 % 3.5 % Rent and purchased transportation 128,239 23.7 115,060 22.7 239,885

23.2 221,378 22.2 11.5 % 8.4 % Communications and utilities

3,409 0.6 3,187 0.6 6,908



0.7 6,329 0.6 7.0 % 9.1 % Other

554 0.1 (4,594 ) (0.9 ) (1,813



) (0.2 ) (6,642 ) (0.7 ) 112.1 % 72.7 % Total operating expenses

499,790 92.2 464,287 91.6 968,371



93.6 928,481 92.9 7.6 % 4.3 %

Operating income 42,330 7.8 42,361 8.4 65,771

6.4 71,054 7.1 (0.1 )% (7.4 )% Total other expense (income) (569 ) (0.1 ) (526 ) (0.1 ) (1,126 ) (0.1 ) (897 ) (0.1 ) (8.2 )% (25.5 )% Income before income taxes 42,899 7.9 42,887 8.5 66,897 6.5 71,951 7.2 - % (7.0 )% Income taxes 17,267 3.2 17,047 3.4 26,926 2.6 28,600 2.9 1.3 % (5.9 )% Net income $ 25,632 4.7 $ 25,840 5.1 $ 39,971 3.9 $ 43,351 4.3 (0.8 )% (7.8 )% 14



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The following tables set forth the operating revenues, operating expenses and operating income for the Truckload segment, as well as certain statistical data regarding our Truckload segment operations for the periods indicated. Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 Truckload Transportation Services (amounts in thousands) $ % $ % $ % $ % Trucking revenues, net of fuel surcharge $ 332,025$ 320,000$ 643,547$ 633,400 Trucking fuel surcharge revenues 92,737 88,574 179,758 180,159 Non-trucking and other operating revenues 4,628 4,295 9,270 8,210 Operating revenues 429,390 100.0 412,869 100.0 832,575 100.0 821,769 100.0 Operating expenses 391,070 91.1 378,427 91.7 773,475 92.9 763,712 92.9 Operating income $ 38,320 8.9 $ 34,442 8.3 $ 59,100 7.1 $ 58,057 7.1 Three Months Ended Six Months Ended June 30, June 30, Truckload Transportation Services 2014 2013 % Change 2014 2013 % Change Operating ratio, net of fuel surcharge revenues 88.6 % 89.4 % 90.9 % 91.0 % Average revenues per tractor per week (1) $ 3,620$ 3,450 4.9 % $ 3,521$ 3,409 3.3 % Average trip length in miles (loaded) 466 441 5.7 % 466 453 2.9 % Average percentage of empty miles (2) 12.14 % 12.93 % (6.1 )% 12.06 % 12.98 % (7.1 )% Average tractors in service 7,055 7,134 (1.1 )% 7,029 7,146 (1.6 )% Total trailers (at quarter end) 21,865 22,005 21,865 22,005 Total tractors (at quarter end): Company 6,375 6,480 6,375 6,480 Independent contractor 660 670 660 670 Total tractors 7,035 7,150 7,035 7,150



(1) Net of fuel surcharge revenues.

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

The following tables set forth the VAS 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 VAS segment's shipments and average revenues (excluding logistics fee revenue) per shipment for the periods indicated. Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 Value Added Services (amounts in thousands) $ % $ % $ % $ % Operating revenues $ 100,501 100.0 $ 91,185 100.0 $ 185,655 100.0 $ 173,695 100.0 Rent and purchased transportation expense 87,209 86.8 76,255 83.6 159,763 86.1 145,452 83.7 Gross margin 13,292 13.2 14,930 16.4 25,892 13.9 28,243 16.3 Other operating expenses 11,037 11.0 10,441 11.5 21,782 11.7 20,141 11.6 Operating income $ 2,255 2.2 $ 4,489 4.9 $ 4,110 2.2 $ 8,102 4.7 15



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Table of Contents Three Months Ended Six Months Ended June 30, June 30, Value Added Services 2014 2013 % Change 2014 2013 % Change Total VAS shipments 74,660 70,383 6.1 % 136,952 134,749 1.6 % Less: Non-committed shipments to Truckload segment 20,163 19,411 3.9 % 36,660 39,357 (6.9 )% Net VAS shipments 54,497 50,972 6.9 %



100,292 95,392 5.1 % Average revenue per shipment $ 1,699$ 1,632 4.1 % $ 1,707$ 1,653 3.3 %

Average tractors in service 48 45 47 42 Total trailers (at quarter end) 1,730 1,755 1,730 1,755 Total tractors (at quarter end) 55 43 55 43 Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013 Operating Revenues Operating revenues increased 7.0% for the three months ended June 30, 2014, compared to the same period of the prior year. When comparing second quarter 2014 to second quarter 2013, Truckload segment revenues increased $16.5 million, or 4.0%, and VAS revenues increased $9.3 million, or 10.2%. Within the Truckload segment, positive freight demand trends continued from first quarter 2014 into second quarter 2014. Freight demand (as measured by our daily morning ratio of loads available to trucks available in our One-Way Truckload network) showed consistent strength, and we were overbooked (more available freight than available trucks at the start of each day) throughout second quarter 2014. A tight capacity market combined with a gradually firming economy were the primary contributing factors. This trend has continued through July 2014. Truck capacity is being constrained by an extremely challenging driver market, a larger number of trucking company failures in 2014 than 2013 and heightened regulatory cost increases for truck ownership and safety; thus, we expect this favorable freight trend will continue. Trucking revenues, net of fuel surcharge, increased 3.8% due to an increase in average revenues per tractor per week, partially offset by a decrease in the average number of tractors in service. Average revenues per tractor per week, net of fuel surcharge, increased 4.9% in second quarter 2014 compared to second quarter 2013. This increase resulted from planned network design changes that enabled us to increase our average trip length by 5.7% which improved average miles per truck, despite operating under the more restrictive hours of service rules that became effective July 1, 2013, and reduced empty miles. The increase in average trip length also produced an expected negative impact on revenue per mile. Even after these changes, average revenues per total mile, excluding fuel surcharge, rose 2.1% in second quarter 2014 compared to second quarter 2013. We have made good progress working with our customers on sustainable rate increases during second quarter 2014. We intend to continue these efforts as we move forward and work to recoup the cost increases associated with more expensive equipment, a shrinking supply of qualified drivers and an increasingly difficult regulatory environment. The average number of tractors in service in the Truckload segment decreased 1.1% to 7,055 in second quarter 2014 from 7,134 in second quarter 2013, a decrease of 79 tractors. We ended second quarter 2014 with 7,035 tractors in the Truckload segment, a decrease of 45 trucks from the end of first quarter 2014. We cannot predict whether future driver shortages, if any, will adversely affect our ability to maintain our fleet size. If such a driver market 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 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. These revenues increased 4.7% to $92.7 million in second quarter 2014 from $88.6 million in second quarter 2013 because of higher average fuel prices and higher miles in second quarter 2014. To lessen the effect of fluctuating fuel prices on our margins, we collect fuel surcharge revenues from our customers for the cost of diesel fuel and taxes in excess of specified base fuel price levels according to terms in our customer contracts. Fuel surcharge rates generally adjust weekly based on an independent U.S. Department of Energy fuel price survey which is released every Monday. Our fuel surcharge programs are designed to (i) recoup higher fuel costs from customers when fuel prices rise and (ii) provide customers with the benefit of lower fuel costs when fuel prices decline. These programs generally enable us to recover a majority, but not all, of the fuel price increases. The remaining portion is generally not recoverable because it results from empty and out-of-route miles (which are not billable to customers) and truck idle time. Fuel prices that change rapidly in short time periods also impact our recovery because the surcharge rate in most programs only changes once per week. 16



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We continue to diversify our business model with the goal of achieving a balanced portfolio of revenues comprised of one-way truckload, specialized and logistics (VAS) services by growing our logistics services revenues. Our Specialized Services unit, primarily Dedicated, ended the quarter with 3,515 trucks (or 50% of our total Truckload segment fleet). VAS revenues are generated by its four operating units and exclude revenues for full truckload shipments transferred to the Truckload segment, which are recorded as trucking revenues by the Truckload segment. VAS also recorded revenue and brokered freight expense of $0.9 million in second quarter 2014 and $0.5 million in second quarter 2013 for Intermodal drayage movements performed by the Truckload segment (also recorded as trucking revenue by the Truckload segment), and these transactions between reporting segments are eliminated in consolidation. VAS revenues increased 10.2% to $100.5 million in second quarter 2014 from $91.2 million in second quarter 2013, resulting from growth in Intermodal and Werner Global Logistics revenues. VAS gross margin dollars decreased 11.0% to $13.3 million in second quarter 2014 from $14.9 million for the same period in 2013, and its gross margin percentage declined to 13.2% in second quarter 2014 from 16.4% in second quarter 2013. Operating income was impacted by a lower gross margin percentage for contractual business due to rising third party carrier costs, as capacity was tighter during second quarter 2014 compared to second quarter 2013. Other operating expenses increased $0.6 million, or 5.7%, and VAS operating income decreased 49.8% to $2.3 million in second quarter 2014 from $4.5 million in second quarter 2013. The average number of tractors in service in the VAS segment (intermodal drayage trucks) increased to 48 in second quarter 2014 from 45 in second quarter 2013, an increase of 3 tractors. Operating Expenses Our operating ratio (operating expenses expressed as a percentage of operating revenues) was 92.2% for the three months ended June 30, 2014, compared to 91.6% for the three months ended June 30, 2013. Expense items that impacted the overall operating ratio are described on the following pages. The tables on pages 14 through 16 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, Truckload and VAS. Salaries, wages and benefits increased $9.3 million, or 6.9%, in second quarter 2014 compared to second quarter 2013 and remained at 26.7% as a percentage of operating revenues. The higher dollar amount of salaries, wages and benefits expense was due to higher driver and non-driver salaries and fringe benefits. When evaluated on a per-mile basis, driver and non-driver salaries, wages and benefits increased as well, which we attribute to (i) higher driver pay, including discretionary pay items, in a more competitive driver market, (ii) higher driver recruitment costs and (iii) higher health insurance costs during second quarter 2014. Non-driver salaries, wages and benefits in the non-trucking VAS segment decreased 2.6%, and net VAS shipments managed by VAS personnel increased by 6.9%. We renewed our workers' compensation insurance coverage for the policy year beginning April 1, 2014. Our coverage levels are the same as the prior policy year. We continue to maintain a self-insurance retention of $1.0 million per claim. Our workers' compensation insurance premiums for the policy year beginning April 2014 were similar to those for the previous policy year. The driver recruiting and retention market was extremely difficult in second quarter 2014. We believe that a declining number of, and increased competition for, driver training school graduates, a gradually declining national unemployment rate and job competition from the housing construction and hydraulic fracturing markets were all contributing factors. We expect that competition for drivers will further intensify as 2014 progresses. We are unable to predict whether we will experience future driver shortages. If such a shortage were to occur and driver pay rate increases became necessary to attract and retain drivers, our results of operations would be negatively impacted to the extent that we could not obtain corresponding freight rate increases. Fuel increased $1.9 million or 2.2% in second quarter 2014 compared to second quarter 2013 but decreased 0.8% as a percentage of operating revenues due to (i) higher company miles and (ii) higher average diesel fuel prices. Average diesel fuel prices were 5 cents per gallon higher in second quarter 2014 than in second quarter 2013. These increases were partially offset by improved miles per gallon ("mpg"). We continue to employ measures to improve our fuel mpg such as (i) limiting truck engine idle time, (ii) optimizing the speed, weight and specifications of our equipment and (iii) implementing mpg-enhancing equipment changes to our fleet including new trucks with U.S. Environmental Protection Agency (the "EPA") 2010 compliant engines, more aerodynamic truck features, idle reduction systems, tire inflation systems and trailer skirts to reduce our fuel gallons purchased. However, fuel savings from mpg improvement is offset by higher depreciation expense and the additional cost of diesel exhaust fluid (required in certain tractors with engines that meet the 2010 EPA emission standards). 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. 17



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For July 2014, the average diesel fuel price per gallon was approximately 10 cents lower than the average diesel fuel price per gallon in the same period of 2013 and approximately 15 cents lower than in third quarter 2013. 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, 2014, we had no derivative financial instruments to reduce our exposure to fuel price fluctuations. Supplies and maintenance increased $2.0 million or 4.4% in second quarter 2014 compared to second quarter 2013 but decreased 0.2% as a percentage of operating revenues. Increased driver advertising and other driver related expenses and higher company driver miles in second quarter 2014 compared to second quarter 2013 were primarily responsible for the increase in supplies and maintenance. The average age of our company truck fleet was 2.4 years at the end of second quarter 2014 and second quarter 2013 and was 2.5 years at the end of first quarter 2014. We plan to increase capital expenditures during the second half of 2014 to reduce the average age of our company truck fleet. Taxes and licenses decreased $0.3 million or 1.3% in second quarter 2014 compared to second quarter 2013 and decreased 0.3% as a percentage of operating revenues. The decrease resulted from improved mpg despite driving more miles in second quarter 2014 than in second quarter 2013. Insurance and claims increased $1.9 million or 10.7% in second quarter 2014 compared to second quarter 2013 and increased 0.1% as a percentage of operating revenues. The increase in second quarter 2014 compared to second quarter 2013 was primarily the result of a higher amount of reserve increases on high dollar liability claims that occurred in prior periods (unfavorable development). The majority of our insurance and claims expense results from our claim experience and claim development under our self-insurance program; the remainder results from insurance premiums for claims in excess of our self-insured limits. We renewed our liability insurance policies on August 1, 2014 and continue to be responsible for the first $2.0 million per claim with an annual $8.0 million aggregate for claims between $2.0 million and $5.0 million and an annual aggregate of $5.0 million for claims in excess of $5.0 million and less than $10.0 million. We maintain liability insurance coverage with insurance carriers substantially in excess of the $10.0 million per claim. Our liability and cargo insurance premiums for the policy year that began August 1, 2014 are slightly lower than premiums for the previous policy year on a per-mile basis. Depreciation expense increased $2.2 million or 5.2% in second quarter 2014 compared to second quarter 2013 but decreased 0.2% as a percentage of operating revenues. This increase was due primarily to the higher cost of new trucks purchased compared to the cost of used trucks that were sold over the past 12 months. In addition, the purchase of new trailers over the past 12 months to replace older used trailers which were fully depreciated also contributed to the increase in depreciation expense. These increases were partially offset by lower depreciation on auxiliary power units that were sold with the older used trucks and not replaced. Depreciation expense was historically affected by two changes to engine emissions standards imposed by the EPA that became effective in October 2002 and in January 2007, resulting in increased truck purchase costs. We began to take delivery of trucks with these 2007-standard engines in first quarter 2008 to replace older trucks in our fleet. A final set of more rigorous EPA-mandated emissions standards became effective for all new engines manufactured after January 1, 2010. Trucks with 2010-standard engines have a higher purchase price than trucks manufactured to meet the 2007 standards, but the 2010-standard engines are more fuel efficient. In 2014, we continue to purchase trucks with 2010-standard engines to replace older trucks that we sell or trade. By the end of 2014, we expect nearly all company trucks will have engines that comply with the 2010 emissions standards. Depreciation expense increased in second quarter 2014 due to higher prices for these new trucks and is expected to increase further as we continue to replace tractors with 2007-standard engines. Rent and purchased transportation expense increased $13.2 million or 11.5% in second quarter 2014 compared to second quarter 2013 and increased 1.0% as a percentage of operating revenues. Rent and purchased transportation expense consists mainly of payments to third-party capacity providers in the VAS segment and other non-trucking operations and payments to independent contractors in the Truckload segment. The payments to third-party capacity providers generally vary depending on changes in the volume of services generated by the VAS segment. VAS rent and purchased transportation expense increased $11.0 million and as a percentage of VAS revenues increased to 86.8% in second quarter 2014 from 83.6% in second quarter 2013. This increase was due primarily to higher third party carrier costs as capacity was tighter during second quarter 2014 compared to second quarter 2013. Rent and purchased transportation for the Truckload segment increased $2.0 million in second quarter 2014 compared to second quarter 2013. This increase is due primarily to the increase in independent contractor truck miles. Independent contractor miles as a percentage of total miles were 12.4% in second quarter 2014 compared to 12.2% in second quarter 2013. 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 18



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available to independent contractors for equipment purchases. We have historically 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, 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. This could negatively affect our results of operations to the extent that we would not be able to obtain corresponding freight rate increases. Communication and utilities increased $0.2 million or 7.0% in second quarter 2014 compared to second quarter 2013 and remained at 0.6% as a percentage of operating revenues. This slight increase is primarily due to use of a new driver navigation program, which helps to reduce out-of-route miles, beginning in 2013. Other operating expenses increased $5.1 million or 112.1% in second quarter 2014 compared to second quarter 2013 and increased 1.0% 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 decreased to $5.2 million in second quarter 2014, including a $1.6 million gain from the sale of real estate, from $6.5 million in second quarter 2013, which included a $1.1 million gain from the sale of real estate. This also compares to gains of $4.6 million in first quarter 2014. We sold more trucks and trailers in second quarter 2014 compared to second quarter 2013, and we realized lower average gains per truck sold but higher average gains per trailer sold in the 2014 quarter. Other Expense (Income) Other expense (income) decreased $0.1 million or 8.2% in second quarter 2014 compared to second quarter 2013 and did not change as a percentage of operating revenues. Interest income net of interest expense increased $0.1 million in second quarter 2014 compared to second quarter 2013. Income Taxes Our effective income tax rate (income taxes expressed as a percentage of income before income taxes) increased to 40.25% for second quarter 2014 from 39.75% for second quarter 2013. The higher income tax rate is attributed to lower projected employment tax credits in 2014. Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013 Operating Revenues Operating revenues increased 3.5% for the six months ended June 30, 2014, compared to the same period of the prior year. In the Truckload segment, trucking revenues, net of fuel surcharge, increased 1.6% due primarily to a 3.3% increase in average revenues per tractor per week, partially offset by a 1.6% decrease in the average number of tractors in service. Average revenues per total mile, net of fuel surcharge, increased 2.6% in the first half of 2014 compared to the same period in 2013, and average monthly miles per tractor increased by 0.7%. Fuel surcharge revenues for the Truckload segment decreased 0.2% from $180.2 million in the 2013 year-to-date period to $179.8 million in the 2014 year-to-date period because of lower miles. VAS revenues increased 6.9%, from $173.7 million in the first six months of 2013 to $185.7 million in the same 2014 period. The increases occurred in all VAS operating units. Operating Expenses Our operating ratio (operating expenses expressed as a percentage of operating revenues) was 93.6% for the six months ended June 30, 2014, compared to 92.9% for the same period of 2013. Expense items that impacted the overall operating ratio are described on the following pages. The tables on pages 14-16 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, Truckload and VAS. Salaries, wages and benefits increased $10.9 million or 4.1% in the 2014 year-to-date period and increased 0.1% as a percentage of operating revenues. The higher dollar amount of salaries, wages, and benefits expense was due primarily to (i) higher driver pay, including discretionary pay items, in a more competitive driver market, (ii) higher driver recruitment costs and (iii) higher health insurance costs in the first six month of 2014. Non-driver salaries, wages and benefits in the non-trucking VAS segment were flat. VAS handled 1.6% more shipments, including those transferred to the Truckload segment, and the net shipments retained by VAS increased by 5.1%. Fuel decreased $3.8 million or 2.0% in the first six months of 2014 compared to the same period in 2013 and decreased 1.0% as a percentage of operating revenues. The decrease resulted from (i) fewer company miles driven, including the effect of network 19



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design changes that reduced empty miles, (ii) improved mpg and (iii) a shift from this expense category to rent and purchased transportation expense because of the increase in independent contractor miles as a percentage of total miles. Average diesel fuel prices were the same for the first six months of 2014 and 2013. Supplies and maintenance expense increased $4.7 million or 5.4% in the 2014 year-to-date period compared to the same 2013 period and increased 0.2% as a percentage of operating revenues. Severe weather conditions in first quarter 2014 contributed to the increase in this expense category, causing higher tractor repair and towing costs. Driver advertising and other driver related expenses in 2014 compared to 2013 were also higher. These increases were partially offset by a shift from this expense category to rent and purchased transportation expense because of the increase in independent contractor miles as a percentage of total miles. Taxes and licenses decreased $1.1 million or 2.5% in the first six months of 2014 compared to the same period in 2013 and decreased 0.3% as a percentage of operating revenues. The decrease resulted from driving fewer miles and from improved fuel mpg in the year-to-date 2014 period and the resulting decrease in fuel taxes associated with fewer gallons purchased. Insurance and claims increased $2.3 million or 6.1% in the first six months of 2014 compared to the same period in 2013 and increased 0.1% as a percentage of operating revenues due primarily to higher expense on new claims resulting from severe winter weather in first quarter 2014, partially offset by a reduction in reserves for prior period claims (favorable development) in 2014 compared to unfavorable development in the 2013 period, both of which related to smaller dollar liability claims. Depreciation increased $3.0 million or 3.5% in the first six months of 2014 compared to the same period in 2013 but remained flat as a percentage of operating revenues. This increase was due primarily to higher tractor and trailer depreciation resulting from the higher cost of new equipment and replacing fully-depreciated trailers, offset partially by lower depreciation expense on auxiliary power units that were sold with the older used trucks and not replaced. Rent and purchased transportation expense increased $18.5 million or 8.4% in the first six months of 2014 compared to the same period in 2013 and increased 1.0% as a percentage of operating revenues. Rent and purchased transportation for the Truckload segment was $3.3 million higher because of the shift from salaries, wages and benefits expense and several other expense categories to rent and purchased transportation expense because of the increase in independent contractor miles as a percentage of total miles. Independent contractor miles as a percentage of total miles were 12.5% in the first six months of 2014 compared to 12.0% during the same period of 2013. VAS rent and purchased transportation expense increased $14.3 million and increased from 83.7% of VAS revenues in the 2013 period to 86.1% in the 2014 period. Rent and purchased transportation expense for the VAS segment increased in response to higher VAS revenues and was higher as a percentage of VAS revenues because third party capacity was tighter in the 2014 period. Communications and utilities expense increased $0.6 million or 9.1% in the first six months of 2014 compared to the same period in 2013 and increased 0.1% as a percentage of operating revenues because of using a new driver navigation program and higher telephone costs. Other operating expenses increased $4.8 million or 72.7% in the first six months of 2014 compared to the same period in 2013 and increased 0.5% as a percentage of operating revenues. Gains on sales of assets (primarily used trucks and trailers) decreased to $9.8 million in the six months ended June 30, 2014 from $10.0 million in the six months ended June 30, 2013. In the 2014 year-to-date period, we sold more trucks and trailers compared to the 2013 year-to-date period but realized lower average gains per truck sold. The 2014 year-to-date period also included a $1.6 million gain from the sale of real estate, while the 2013 year-to-date period included a $1.1 millions gain from the sale of real estate. Bad debt expense was higher in the 2014 year-to-date period, partially offset by lower legal fees and software expense when compared to the same 2013 period. Other Expense (Income) Other expense (income) decreased $0.2 million or 25.5% in the 2014 year-to-date period and did not change as a percentage of revenues. Interest income net of interest expense increased $0.3 million year over year. Income Taxes Our effective income tax rate (income taxes expressed as a percentage of income before income taxes) increased to 40.25% for the six months ended June 30, 2014 from 39.75% for the same period in 2013. The higher income tax rate in 2014 is attributed to lower projected employment tax credits. 20



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Liquidity and Capital Resources: During the six months ended June 30, 2014, we generated cash flow from operations of $90.5 million, an 18% decrease ($20.4 million) in cash flows compared to the same six-month period a year ago. The decrease in net cash provided by operating activities resulted primarily from a $16.8 million decrease in cash flows related to accounts receivable and a $3.4 million decrease in net income. We were able to make net capital expenditures, pay dividends and repurchase company stock with the net cash provided by operating activities and existing cash balances. Net cash used in investing activities increased to $58.1 million for the six-month period ended June 30, 2014 from $30.1 million for the six-month period ended June 30, 2013. Net property additions (primarily revenue equipment) were $62.8 million for the six-month period ended June 30, 2014, compared to $34.5 million during the same period of 2013. This increase occurred as we began to lower the average age of our tractor fleet in second quarter 2014. As of June 30, 2014, we were committed to property and equipment purchases of approximately $144.5 million. We currently expect our net capital expenditures (primarily revenue equipment) in 2014 to be in the range of $210.0 million to $230.0 million, compared to net capital expenditures in 2013 of $151.9 million. We intend to fund these net capital expenditures through cash flow from operations and financing available under our existing credit facilities, as management deems necessary. Net financing activities used $28.5 million during the six months ended June 30, 2014, and $71.8 million during the same period in 2013. During the six-month period ended June 30, 2014, we did not borrow additional debt or repay any principal of outstanding debt. Our outstanding debt at June 30, 2014, was $40.0 million. During the same period in 2013, we repaid short-term and long-term debt totaling $50.0 million. We paid dividends of $7.3 million in both the six month periods ended June 30, 2014 and 2013. Financing activities for the six months ended June 30, 2014, also included common stock repurchases of 1,000,000 shares at a cost of $25.6 million compared to 608,791 shares at a cost of $15.1 million for the six months ended June 30, 2013. From time to time, Werner Enterprises, Inc. (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 stock market conditions and other factors. As of June 30, 2014, the Company had purchased 2,862,291 shares pursuant to our current Board of Directors repurchase authorization and had 5,137,709 shares remaining available for repurchase. Management believes our financial position at June 30, 2014 is strong. As of June 30, 2014, we had $27.7 million of cash and cash equivalents and $787.0 million of stockholders' equity. Cash is invested primarily in government portfolio money market funds. As of June 30, 2014, we had a total of $250.0 million of credit available pursuant to two credit facilities, of which we had borrowed $40.0 million. The remaining $210.0 million of credit available under these facilities is reduced by the $32.7 million in stand-by letters of credit under which we are obligated. These stand-by letters of credit are primarily required as security for insurance policies. Based on our strong financial position, management does not foresee any significant barriers to obtaining sufficient financing, if necessary. 21



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Contractual Obligations and Commercial Commitments: The following tables set forth our contractual obligations and commercial commitments as of June 30, 2014.

Payments Due by Period Less than More than Period (Amounts in millions) Total 1 year 1-3 years 3-5 years 5 years Unknown Contractual Obligations Unrecognized tax benefits $ 8.9$ 0.1 $ - $ - $ - $ 8.8 Long-term debt, including current maturities 40.0 - 40.0 - - - Interest payments on debt 0.7 0.4 0.3 Property and equipment purchase commitments 144.5 144.5 - - - - Operating leases 1.4 1.4 - - - - Other obligations 6.2 3.1 3.1 - - - Total contractual cash obligations $ 201.7$ 149.5$ 43.4 $ - $ - $ 8.8 Other Commercial Commitments Unused lines of credit $ 177.3 $ - $ 177.3 $ - $ - $ - Stand-by letters of credit 32.7 32.7 - - - -



Total commercial commitments $ 210.0$ 32.7$ 177.3 $

- $ - $ - Total obligations $ 411.7$ 182.2$ 220.7 $ - $ - $ 8.8 We have committed credit facilities with two banks totaling $250.0 million that mature in May 2016 ($175.0 million) and May 2017 ($75.0 million). At June 30, 2014, we had borrowed $40.0 million under these facilities. Borrowings under these credit facilities bear variable interest (0.85% at June 30, 2014) based on the London Interbank Offered Rate ("LIBOR"). Interest payments on debt are based on the debt balance and interest rate at June 30, 2014. The credit available under these facilities is further reduced by the amount of stand-by letters of credit under which we are obligated. The stand-by letters of credit are primarily required for insurance policies. The unused lines of credit are available to us in the event we need financing for the replacement of our fleet or for other significant capital expenditures. Management believes our financial position is strong, and we therefore expect that we could obtain additional financing, if necessary. Property and equipment purchase commitments relate to committed equipment expenditures, primarily for revenue equipment. As of June 30, 2014, we had recorded an $8.9 million liability for unrecognized tax benefits. We expect $0.1 million to be settled within the next twelve months and are unable to reasonably determine when the $8.8 million categorized as "period unknown" will be settled. Off-Balance Sheet Arrangements: We began leasing certain tractors under non-cancelable operating leases in May 2011. Our future payment obligation under these leases at June 30, 2014 was approximately $1.4 million. Regulations: Item 1 of Part I of our 2013 Form 10-K includes a discussion of pending proposed regulations that may have an effect on our operations if they become adopted and effective as proposed. Except as described below, there have been no material changes in the status of these proposed regulations previously disclosed in the 2013 Form 10-K. InMarch 2014, the Federal Motor Carrier Safety Administration ("FMCSA") issued its formal proposal regarding the mandatory implementation and use of electronic logging devices ("ELDs") by nearly all carriers to enhance the monitoring and enforcement of the driver HOS rules. The comment period related to this proposal ended in June 2014, and a final rule is expected to be issued no later than January 2015. As proposed, the new regulations would become effective two years after the final rule is issued. We are the recognized industry leader for electronic logging of driver hours as we proactively adopted a paperless log system in 1996 that was subsequently approved for our use by the FMCSA in 1998. We believe the proposed rules will not have a significant effect on our operations and profitability. 22



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Critical Accounting Policies: The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") requires us to make estimates and assumptions that affect the (i) reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and (ii) reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Information regarding our Critical Accounting Policies can be found in our 2013 Form 10-K. Together with the effects of the matters described there, these factors may significantly impact our results of operations from period to period. The most significant accounting policies and estimates that affect our financial statements include the following:



• Selections of estimated useful lives and salvage values for purposes of

depreciating tractors and trailers.

• Impairment of long-lived assets.

• Estimates of accrued liabilities for insurance and claims for liability

and physical damage losses and workers' compensation.

• Policies for revenue recognition.

• Accounting for income taxes.

• Allowance for doubtful accounts.

We periodically evaluate these policies and estimates as events and circumstances change. There have been no material changes to these critical accounting policies and estimates from those discussed in our 2013 Form 10-K. Accounting Standards: In the descriptions under "New Accounting Pronouncements Adopted" and "Accounting Standards Updates Not Yet Effective" that follow, references in quotations identify guidance and Accounting Standards Updates ("ASU") relating to the topics and subtopics (and their descriptive titles, as appropriate) of the Accounting Standards Codification™ of the Financial Accounting Standards Board ("FASB"). New Accounting Pronouncements Adopted We did not adopt any new accounting standards during second quarter 2014. Accounting Standards Updates Not Yet Effective On May 28, 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers," which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for us on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures. Management has not yet selected a transition method nor has it determined the effect of the standard on our ongoing financial reporting.


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