MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


Revenue Equipment
We operate a significant number of tractors, trucks, containers, chassis, and trailers in connection with our business. This equipment may be purchased or acquired under lease agreements. In addition, we may rent revenue equipment from various third parties under short-term rental arrangements. Purchased revenue equipment is depreciated on the straight-line method over the estimated useful life to an estimated salvage or trade-in value. We periodically review the useful lives and salvage values of our revenue equipment and evaluate our long-lived assets for impairment. We have not identified any impairment to these assets at December 31, 2024.

We have agreements with our primary tractor suppliers for residual or trade-in values for certain new equipment. We have utilized these trade-in values, as well as other operational information such as anticipated annual miles, in accounting for depreciation expense.

Revenue Recognition
We record revenues on the gross basis at amounts charged to our customers because we control and are primarily responsible for the fulfillment of promised services. Accordingly, we serve as a principal in the transaction. We invoice our customers, and we maintain discretion over pricing. Additionally, we are responsible for selection of third-party transportation providers to the extent used to satisfy customer freight requirements.

We recognize revenue from customer contracts based on relative transit time in each reporting period and as other performance obligations are provided, with related expenses recognized as incurred. Accordingly, a portion of the total revenue that will be billed to the customer is recognized in each reporting period based on the percentage of the freight pickup and delivery performance obligation that has been completed at the end of the reporting period.

Our trade accounts receivable includes accounts receivable reduced by an allowance for uncollectible accounts. Receivables are recorded at amounts billed to customers when loads are delivered or services are performed. The allowance for uncollectible accounts is calculated over the life of the underlying receivable and is based on historical experience; any known trends or uncertainties related to customer billing and account collectability; current economic conditions; and reasonable and supportable economic forecasts, each applied to segregated risk pools based on the business segment that generated the receivable. The adequacy of our allowance is reviewed quarterly.

Income Taxes
We account for income taxes under the liability method. Our deferred tax assets and liabilities represent items that will result in a tax deduction or taxable income in future years for which we have already recorded the related tax expense or benefit in our statement of earnings. Deferred tax accounts arise as a result of timing differences between when items are recognized in our Consolidated Financial Statements and when they are recognized in our tax returns. We assess the likelihood that deferred tax assets will be recovered from future taxable income or the reversal of temporary timing differences. To the extent we believe recovery does not meet the more likely than not threshold, a valuation allowance is established. To the extent we establish a valuation allowance, we include an expense as part of our income tax provision.

Significant judgment is required in determining and assessing the impact of complex tax laws and certain tax-related contingencies on our provision for income taxes. As part of our calculation of the provision for income taxes, we assess whether the benefits of our tax positions are at least more likely than not to be sustained upon audit based on the technical merits of the tax position. For tax positions that are not more likely than not to be sustained upon audit, we accrue the largest amount of the benefit that is not more likely than not to be sustained in our Consolidated Financial Statements. Such accruals require us to make estimates and judgments, whereby actual results could vary materially from these estimates. Further, a number of years may elapse before a particular matter for which we have established an accrual is audited and resolved. See Note 6, Income Taxes, in our Consolidated Financial Statements for a discussion of our current tax contingencies.

RESULTS OF OPERATIONS

Our total consolidated operating revenues decreased 5.8% to $12.09 billion in 2024, compared to $12.83 billion in 2023. This decrease was primarily due to lower volume within DCS, ICS and JBT, decreased revenue per load within JBI and JBT, and decreased revenue and stop counts in FMS. Fuel surcharge revenues decreased 17.4% to $1.53 billion in 2024, compared to $1.85 billion in 2023. Revenues, excluding fuel surcharge revenues, decreased 3.8% from 2023.

Consolidated Operating Expenses

Our 2024 consolidated operating expenses decreased 4.9% from 2023, while year-over-year revenue decreased 5.8%, resulting in a 2024 operating ratio of 93.1% compared to 92.3% in 2023.

Rents and purchased transportation costs decreased 8.4% in 2024, primarily due to a decrease in rail and truck carrier purchased transportation rates within JBI, ICS and JBT segments and decreased ICS and JBT load volume, which decreased services provided by third-party rail and truck carriers during the current year. Salaries, wages and employee benefit costs decreased 0.8% in 2024 from 2023. This decrease was primarily related to a decrease in employee headcounts, partially offset by an increase in group medical benefit expenses and wage increases.

Depreciation and amortization expense increased 3.1% in 2024, primarily due to the addition of tractors and trailing equipment within JBI and additional depreciation and amortization expense resulting from the recent business acquisition of BNSF Logistics, LLC (BNSFL), partially offset by the impact of the change in expected useful lives of our container fleet and equipment reductions within DCS.

Fuel and fuel taxes expense decreased 13.2% in 2024 compared with 2023, due primarily to a decrease in the price of fuel during 2024 and decreased road miles. We have fuel surcharge programs in place with the majority of our customers. These programs typically involve a specified computation based on the change in national, regional, or local fuel prices. While these programs may address fuel cost changes as frequently as weekly, most also reflect a specified miles-per-gallon factor and require a certain minimum change in fuel costs to trigger a change in fuel surcharge revenue. As a result, some of these programs have a time lag between when fuel costs change and when this change is reflected in revenues. Due to these programs, this lag negatively impacts operating income in times of rapidly increasing fuel costs and positively impacts operating income when fuel costs decrease rapidly. It is not meaningful to compare the amount of fuel surcharge revenue or the change in fuel surcharge revenue between reporting periods to fuel and fuel taxes expense, or the change of fuel expense between periods, as a significant portion of fuel cost is included in our payments to railroads, dray carriers and other third parties. These payments are classified as purchased transportation expense.

Operating supplies and expenses decreased 2.7% in 2024 compared with 2023, driven primarily by lower equipment maintenance costs, decreased towing expenses, lower tolls expense, and decreased other operating supply costs compared to 2023. Insurance and claims expense decreased 0.6% in 2024, primarily due to lower reserve expense for claims subject to insurance coverage-layer-specific aggregated limits and lower claim volume, partially offset by increased cost per claim and higher insurance policy premium expense. General and administrative expenses increased 11.6% from 2023, primarily due to an increase in building and yard rental expense, higher agent services expense, increased technology costs, and higher bad debt expense, partially offset by lower advertising costs and lower net losses from sale or disposal of assets. Net loss from sale or disposal of assets was $14.6 million in 2024, compared to a net loss from sale or disposal of assets of $27.8 million in 2023.

Net interest expense for 2024 increased by 23.0% compared with 2023, due primarily to an increase in effective interest rates on our debt and an increase in our average debt balance. Income tax expense decreased 8.7% in 2024, due primarily to decreased taxable earnings in 2024, partially offset by a higher effective income tax rate. Our effective income tax rate was 24.8% in 2024 and 22.1% in 2023. The increase in rate was primarily due to discrete tax items recorded in 2023 that were not incurred in 2024.

Our financing arrangements require us to maintain certain covenants and financial ratios. At December 31, 2024, we were in compliance with all covenants and financial ratios.

We are currently committed to spend approximately $677 million, net of proceeds from sales or trade-ins, during the years 2025 and 2026, as well as an additional $89 million thereafter. These expenditures will relate primarily to the acquisition of tractors, containers, chassis, and other trailing equipment. We had no other off-balance sheet arrangements as of December 31, 2024.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest rate risk can be quantified by measuring the financial impact of a near-term adverse increase in short-term interest rates on variable-rate debt outstanding. Our total long-term debt consists of both fixed and variable interest rate facilities. Our senior notes have a fixed interest rate of 3.875%. These fixed-rate facilities reduce the impact of changes to market interest rates on future interest expense. Our senior credit facility and term loan have variable interest rates, which are based on either SOFR or a Base Rate, depending upon the specific type of borrowing, plus an applicable margin and other fees. At December 31, 2024, the average interest rate under our senior credit facility and term loan was 5.48%. Our earnings would be affected by changes in these short-term variable interest rates. At our current level of borrowing, a one-percentage-point increase in our applicable rate would reduce annual pretax earnings by $7.8 million.

Although we conduct business in foreign countries, international operations are not material to our consolidated financial position, results of operations, or cash flows. Additionally, foreign currency transaction gains and losses were not material to our results of operations for the year ended December 31, 2024. Accordingly, we are not currently subject to material foreign currency exchange rate risks from the effects that exchange rate movements of foreign currencies would have on our future costs or on future cash flows we would receive from our foreign investment. To date, we have not entered into any foreign currency forward exchange contracts or other derivative financial instruments to hedge the effects of adverse fluctuations in foreign currency exchange rates.

The price and availability of diesel fuel are subject to fluctuations due to changes in the level of global oil production, seasonality, weather, and other market factors. Historically, we have been able to recover a majority of fuel-price increases from our customers in the form of fuel surcharges. We cannot predict the extent to which volatile fluctuations in fuel prices will continue in the future or the extent to which fuel surcharges could be collected to offset fuel-price increases. As of December 31, 2024, we had no derivative financial instruments to reduce our exposure to fuel-price fluctuations.

Below is an interim report on a portion of Zenith's Fourth Quarter covering 09-29-2025 to 10-29-2025. We commit around $30,000 per stock and do not compound investments so share alotments stay constant. Reports are made at odd intervals and trades closed out at as yet unpredetermined intervals, then given a fresh start each quarter with cumulative totals zeroed out.