Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (the “MD&A”) summarizes the financial statements from management’s perspective with respect to our financial condition, results of operations, liquidity and other factors that may affect actual results. The MD&A is organized in the following sections:
• Overview
• COVID-19
• Results of Operations
• Liquidity and Capital Resources
• Contractual Obligations and Commercial Commitments
• Regulations
• Critical Accounting Estimates
The MD&A should be read in conjunction with our 2020 Form 10-K.
Overview:
We have two reportable segments, Truckload Transportation Services (“TTS”) and Werner Logistics, and we operate in the truckload and logistics sectors of the transportation industry. In the truckload sector, we focus on transporting consumer nondurable products that generally ship more consistently throughout the year. In the logistics sector, besides managing transportation requirements for individual customers, we provide additional sources of truck capacity, alternative modes of transportation, a North American delivery network and systems analysis to optimize transportation needs. Our success depends on our ability to efficiently and effectively manage our resources in the delivery of truckload transportation and logistics services to our customers. Resource requirements vary with customer demand, which may be subject to seasonal or general economic conditions. Our ability to adapt to changes in customer transportation requirements is essential to efficiently deploy resources and make capital investments in tractors and trailers (with respect to our TTS segment) or obtain qualified third-party capacity at a reasonable price (with respect to our Werner Logistics segment). We may also be affected by our customers’ financial failures or loss of customer business.
Revenues for our TTS segment operating units (Dedicated and One-Way Truckload) are typically generated on a per-mile basis and also include revenues such as stop charges, loading and unloading charges, equipment detention charges and equipment repositioning charges. To mitigate our risk to fuel price increases, we recover from our customers additional fuel surcharge revenues that generally recoup a majority of the increased fuel costs; however, we cannot assure that current recovery levels will continue in future periods. Because fuel surcharge revenues fluctuate in response to changes in fuel costs, we identify them separately and exclude them from the statistical calculations to provide a more meaningful comparison between periods. The key statistics used to evaluate trucking revenues, net of fuel surcharge, are (i) average revenues per tractor per week, (ii) average percentage of empty miles (miles without trailer cargo), (iii) average trip length (in loaded miles) and (iv) average number of tractors in service. General economic conditions, seasonal trucking industry freight patterns and industry capacity are important factors that impact these statistics. Our TTS segment also generates a small amount of revenues categorized as non-trucking revenues, which consist primarily of the intra-Mexico portion of cross-border shipments delivered to or from Mexico where the TTS segment utilizes a third-party capacity provider. We exclude such revenues from the statistical calculations.
Our most significant resource requirements are company drivers, independent contractors, tractors and trailers. Independent contractors supply their own tractors and drivers and are responsible for their operating expenses. Our financial results are affected by company driver and independent contractor availability and the markets for new and used revenue equipment. We are self-insured for a significant portion of bodily injury, property damage and cargo claims; workers’ compensation claims; and associate health claims (supplemented by premium-based insurance coverage above certain dollar levels). For that reason, 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 first quarter 2021 to first quarter 2020, several industry-wide issues have caused, and could continue to cause, costs to increase in future periods. These issues include shortages of drivers or independent contractors, changing fuel prices, compliance with new or proposed regulations and tightening of the commercial truck liability insurance market. Our main fixed costs include depreciation expense for tractors and trailers and equipment licensing fees (included in taxes and licenses expense). The TTS segment
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requires substantial cash expenditures for tractor and trailer purchases. We fund these purchases with net cash from operations and financing available under our existing credit facilities, as management deems necessary.
We provide non-trucking services primarily through the three operating units within our Werner Logistics segment (Truckload Logistics, Intermodal, and Final Mile). In first quarter 2021, we completed the previously-announced sale of the WGL freight forwarding services for international ocean and air shipments to Scan Global Logistics Group. WGL had annual revenues of $53 million in 2020, and we realized a $1.0 million gain from the sale in first quarter 2021. Unlike our TTS segment, the Werner Logistics segment is less asset-intensive and is instead dependent upon qualified associates, information systems and qualified third-party capacity providers. The largest expense item related to the Werner Logistics segment is the cost of purchased transportation we pay to third-party capacity providers. This expense item is recorded as rent and purchased transportation expense. Other operating expenses consist primarily of salaries, wages and benefits. We evaluate the Werner Logistics segment’s financial performance by reviewing the gross margin percentage (revenues less rent and purchased transportation expenses expressed as a percentage of revenues) and the operating income percentage. The gross margin percentage can be impacted by the rates charged to customers and the costs of securing third-party capacity. We have a mix of contracted long-term rates and variable rates for the cost of third-party capacity, and we cannot assure that our operating results will not be adversely impacted in the future if our ability to obtain qualified third-party capacity providers changes or the rates of such providers increase.
COVID-19:
The COVID-19 pandemic, declared March 11, 2020, has profoundly impacted the U.S. economy. During the pandemic, the transportation industry has been designated by the U.S. government as an essential industry for keeping the U.S. supply chain moving. We are working hard to stay healthy while safely delivering our customers’ freight on time. Our leadership team meets frequently to address issues related to customers, freight, drivers, safety, staffing, human resources, and costs and provides regular updates to all our associates. Throughout our offices and terminal network, we are closely following the safety guidelines set forth by the Centers for Disease Control and Prevention (CDC) and World Health Organization (WHO), including hygiene and social distancing. We made and intend to continue to make significant investments in personal protective products to keep our associates safe, and we are helping to get our associates access to the vaccine. Over half of our office associates continue working from home. We introduced Werner-specific associate relief plans to provide rapid and needed assistance to those Werner associates affected by the virus.
Over the past several years, we have repositioned Werner to increase our ability to execute through different macroeconomic environments. We believe our freight base, which is heavily weighted toward customers delivering essential products that are continually being restocked in today’s economy, is enabling us to more effectively manage through the difficult economic environment created by the pandemic.
Our results in first quarter 2021 reflect seasonally strong freight market conditions in a strengthening economy and tight driver market. Freight demand in our One-Way Truckload fleet was strong and gained momentum in first quarter, and Dedicated freight demand remained strong during the quarter. We believe we proactively managed and adapted our fleet and cost structure without compromising service.
While there remain significant uncertainties related to COVID-19 and its effect on the economy, we believe that demand for our services will continue to be strong during the remainder of 2021. We performed a customer industry and financial risk assessment on our 100 largest customers shortly after the pandemic declaration. While our financial risk has clearly increased since the pandemic began, we believe we have a relatively lower level of financial risk with the predominance of financially stronger companies in our customer base as well as a lower overall industry risk due to our focus on industries delivering essential products.
At the end of first quarter 2021, we believe we are well positioned with a strong balance sheet and sufficient liquidity. Our debt is low at $175 million, or a net debt ratio of 0.2 times earnings before interest, income taxes, depreciation and amortization for the last twelve months. We had available liquidity of $357 million, considering cash on hand and available credit facilities of $274 million. We also have sufficient cushion with our two debt covenants. We currently plan to continue paying our quarterly dividend, which we have paid quarterly since 1987. This cash outlay currently results in slightly less than $7 million per quarter. Net capital expenditures in 2021 currently are expected to be in the range of $275 million to $300 million.
We do not currently expect the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), enacted in March 2020, to have a material impact on our consolidated financial statements. Under the CARES Act, we deferred payment of certain employer payroll taxes for 2020, with 50% due December 31, 2021 and 50% due December 31, 2022. We also expect to utilized a provision allowing accelerated income tax depreciation for certain assets, which did not impact our effective tax rate.
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There have been a number of regulatory actions and waivers related to the COVID-19 pandemic, in an effort to keep the supply chain moving. We do not currently expect these collective changes to have a material impact on our consolidated financial statements.
Results of Operations:
The following table sets forth the Consolidated Statements of Income in dollars and as a percentage of total operating revenues and the percentage increase or decrease in the dollar amounts of those items compared to the prior year.
Three Months Ended (3ME)
March 31, Percentage Change in Dollar Amounts
2021 2020 3ME
(Amounts in thousands) $ % $ % %
Operating revenues $ 616,446 100.0 $ 592,703 100.0 4.0
Operating expenses:
Salaries, wages and benefits 204,853 33.2 205,997 34.8 (0.6)
Fuel 50,838 8.2 48,771 8.2 4.2
Supplies and maintenance 46,147 7.5 45,721 7.7 0.9
Taxes and licenses 23,233 3.8 22,850 3.9 1.7
Insurance and claims 22,056 3.6 36,064 6.1 (38.8)
Depreciation 63,951 10.4 68,837 11.6 (7.1)
Rent and purchased transportation 146,493 23.8 126,442 21.3 15.9
Communications and utilities 3,022 0.5 3,808 0.7 (20.6)
Other (6,618) (1.1) 3,147 0.5 (310.3)
Total operating expenses 553,975 89.9 561,637 94.8 (1.4)
Operating income 62,471 10.1 31,066 5.2 101.1
Total other expense (income) 583 0.1 1,010 0.1 (42.3)
Income before income taxes 61,888 10.0 30,056 5.1 105.9
Income taxes 15,396 2.5 6,998 1.2 120.0
Net income $ 46,492 7.5 $ 23,058 3.9 101.6
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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
March 31,
2021 2020
Truckload Transportation Services segment (amounts in thousands) $ % $ %
Trucking revenues, net of fuel surcharge $ 410,652 $ 409,098
Trucking fuel surcharge revenues 47,459 51,041
Non-trucking and other operating revenues 4,838 4,724
Operating revenues 462,949 100.0 464,863 100.0
Operating expenses 405,321 87.6 435,774 93.7
Operating income $ 57,628 12.4 $ 29,089 6.3
Three Months Ended
March 31,
Truckload Transportation Services segment 2021 2020 % Change
Average tractors in service 7,790 7,862 (0.9) %
Average revenues per tractor per week (1)
$ 4,055 $ 4,003 1.3 %
Total tractors (at quarter end)
Company 7,360 7,350 0.1 %
Independent contractor 375 485 (22.7) %
Total tractors 7,735 7,835 (1.3) %
Total trailers (at quarter end) 22,710 21,910 3.7 %
One-Way Truckload
Trucking revenues, net of fuel surcharge (in 000’s) $ 156,839 $ 177,849 (11.8) %
Average tractors in service 2,856 3,271 (12.7) %
Total tractors (at quarter end) 2,815 3,150 (10.6) %
Average percentage of empty miles 11.35 % 11.83 % (4.1) %
Average revenues per tractor per week (1)
$ 4,224 $ 4,182 1.0 %
Average % change in revenues per total mile (1)
9.5 % (3.7) %
Average % change in total miles per tractor per week (7.7) % 5.1 %
Average completed trip length in miles (loaded) 853 863 (1.2) %
Dedicated
Trucking revenues, net of fuel surcharge (in 000’s) $ 253,813 $ 231,249 9.8 %
Average tractors in service 4,934 4,591 7.5 %
Total tractors (at quarter end) 4,920 4,685 5.0 %
Average revenues per tractor per week (1)
$ 3,957 $ 3,874 2.1 %
(1) Net of fuel surcharge revenues.
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The following tables set forth the Werner Logistics segment’s revenues, rent and purchased transportation expense, gross margin, other operating expenses (primarily salaries, wages and benefits expense) and operating income, as well as certain statistical data regarding the Werner Logistics segment.
Three Months Ended
March 31,
2021 2020
Werner Logistics segment (amounts in thousands) $ % $ %
Operating revenues $ 137,853 100.0 $ 112,164 100.0
Rent and purchased transportation expense 120,527 87.4 95,932 85.5
Gross margin 17,326 12.6 16,232 14.5
Other operating expenses 12,752 9.3 15,147 13.5
Operating income $ 4,574 3.3 $ 1,085 1.0
Three Months Ended
March 31,
Werner Logistics segment 2021 2020 % Change
Average tractors in service 39 32 21.9 %
Total tractors (at quarter end) 39 30 30.0 %
Total trailers (at quarter end) 1,440 1,625 (11.4) %
Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020
Operating Revenues
Operating revenues increased 4.0% for the three months ended March 31, 2021, compared to the same period of the prior year. When comparing first quarter 2021 to first quarter 2020, TTS segment revenues decreased $1.9 million, or 0.4%, and Werner Logistics revenues increased $25.7 million, or 22.9%.
During first quarter 2021, freight demand in our One-Way Truckload fleet was seasonally strong. This trend has continued during second quarter to-date. In our Dedicated fleet, freight demand remained strong in first quarter 2021. Improving demand from a strengthening economy, combined with several factors that are limiting capacity, resulted in a very good first quarter freight market.
The abnormally severe winter weather events in February and March 2021 were disruptive to operations. As each event developed, we made safety the highest priority by working with our drivers to park their trucks until it was safe to resume operations. These actions lowered our miles per truck, and we experienced increased weather-related maintenance, driver pay and other costs. However, we were pleased that our safety-first focus resulted in a decline in our chargeable DOT reportable accident rate in first quarter 2021. The unusually cold mid-February weather and resulting power outages also temporarily closed certain of our driving schools and terminal locations.
Trucking revenues, net of fuel surcharge, increased 0.4% in first quarter 2021 compared to first quarter 2020 due to a 1.3% increase in average revenues per tractor per week, net of fuel surcharge, partially offset by a 0.9% decrease in the average number of tractors in service. The increase in average revenues per tractor was due primarily to improved pricing in both Dedicated and One-Way Truckload, offset by a decline in miles per truck caused by adverse winter weather, fewer driver teams, and an increased mix of Dedicated. We currently expect average revenues per total mile for the One-Way Truckload fleet for second quarter 2021 to increase in a range of 13% to 16% when compared to the same period in 2020, and we currently expect Dedicated average revenues per truck per week to increase in a range of 3% to 5% in 2021 compared to 2020.
The average number of tractors in service in the TTS segment decreased 0.9% to 7,790 in first quarter 2021 from 7,862 in first quarter 2020. We ended first quarter 2021 with 7,735 trucks in the TTS segment, a year-over-year decrease of 100 trucks compared to the end of first quarter 2020, and a sequential decrease of 95 trucks compared to the end of fourth quarter 2020. Within TTS, our Dedicated unit ended first quarter 2021 with 4,920 trucks (or 64% of our total TTS segment trucks) compared to 4,685 trucks (or 60%) a year ago. We currently expect modest truck growth in 2021 and expect our truck count at the end of 2021 to be in the range of 1% to 3% higher when compared to the fleet size at year-end 2020. We cannot predict whether future driver shortages, if any, will adversely affect our ability to maintain our fleet size. If such a driver shortage were to occur, it could result in a fleet size reduction, and our results of operations could be adversely affected.
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Trucking fuel surcharge revenues decreased 7.0% to $47.5 million in first quarter 2021 from $51.0 million in first quarter 2020 due to fewer miles in first quarter 2021, despite higher average diesel fuel prices. These revenues represent collections from customers for the increase in fuel and fuel-related expenses, including the fuel component of our independent contractor cost (recorded as rent and purchased transportation expense) and fuel taxes (recorded in taxes and licenses expense), when diesel fuel prices rise. Conversely, when fuel prices decrease, fuel surcharge revenues decrease. To lessen the effect of fluctuating fuel prices on our margins, we collect fuel surcharge revenues from our customers for the cost of diesel fuel and taxes in excess of specified base fuel price levels according to terms in our customer contracts. Fuel surcharge rates generally adjust weekly based on an independent U.S. Department of Energy fuel price survey which is released every Monday. Our fuel surcharge programs are designed to (i) recoup higher fuel costs from customers when fuel prices rise and (ii) provide customers with the benefit of lower fuel costs when fuel prices decline. These programs generally enable us to recover a majority, but not all, of the fuel price increases. The remaining portion is generally not recoverable because it results from empty and out-of-route miles (which are not billable to customers) and truck idle time. Fuel prices that change rapidly in short time periods also impact our recovery because the surcharge rate in most programs only changes once per week.
Werner Logistics revenues are generated by its three operating units, following the sale of its WGL freight forwarding services for international ocean and air shipments in first quarter 2021. Werner Logistics revenues exclude revenues for full truckload shipments transferred to the TTS segment, which are recorded as trucking revenues by the TTS segment. Werner Logistics also recorded revenue and brokered freight expense of $134 thousand in first quarter 2021 and $11 thousand in first quarter 2020 for Intermodal drayage movements performed by the TTS segment (also recorded as trucking revenue by the TTS segment), and these transactions between reporting segments are eliminated in consolidation. In first quarter 2021, Werner Logistics revenues increased $25.7 million, or 22.9%, primarily due to higher pricing in Truckload Logistics and Intermodal. Truckload Logistics revenues (63% of total Logistics revenues) increased by 20%. Truckload Logistics volume decreased 1% in first quarter 2021, and revenues per load increased 22%. Intermodal revenues (24% of Logistics revenues) increased 30% in first quarter 2021, due to volume growth of 23% and 6% higher revenues per load. The Werner Logistics gross margin dollars increased 6.7% to $17.3 million in first quarter 2021 from $16.2 million in first quarter 2020 on the higher revenues, despite a lower gross margin percentage. The Werner Logistics gross margin percentage in first quarter 2021 of 12.6% decreased from 14.5% in first quarter 2020 due to higher spot truckload and dray rates which significantly increased the cost of capacity for contractual brokerage shipments and intermodal shipments in first quarter 2021. The Werner Logistics operating margin in first quarter 2021 increased to 3.3% from 1.0% because of the increase in gross profit, lower operating expenses and the $1.0 million gain on the WGL sale.
Operating Expenses
Our operating ratio (operating expenses expressed as a percentage of operating revenues) was 89.9% for the three months ended March 31, 2021 and 94.8% for the three months ended March 31, 2020. Expense items that impacted the overall operating ratio are described on the following pages. The tables on pages 20 through 22 show the Consolidated Statements of Income in dollars and as a percentage of total operating revenues and the percentage increase or decrease in the dollar amounts of those items compared to the same quarter of the prior year, as well as the operating ratios, operating margins, and certain statistical information for our two reportable segments, TTS and Werner Logistics.
Salaries, wages and benefits decreased $1.1 million or 0.6% in first quarter 2021 compared to first quarter 2020 and decreased 1.6% as a percentage of operating revenues to 33.2%. The lower dollar amount of salaries, wages and benefits expense in the first quarter of 2021 was due primarily to approximately 12.0 million fewer company truck miles and improved workers’ compensation costs, partially offset by increased driver pay rates. In January 2021, we implemented driver pay increases of approximately $10 million annually in our One-Way Truckload fleet, and we are implementing pay increases as needed in Dedicated. As a result, driver pay per company driver mile increased nearly 7% in first quarter 2021. Non-driver salaries, wages and benefits in the non-trucking Werner Logistics segment decreased 10.6%.
We renewed our workers’ compensation insurance coverage on April 1, 2021. Our coverage levels are the same as the prior policy year. We continue to maintain a self-insurance retention of $2.0 million per claim. Our workers’ compensation insurance premiums for the policy year beginning April 2021 are $0.3 million higher than the premiums for the previous policy year.
The tight driver recruiting market further intensified in first quarter 2021, as the improving freight market caused increased competition for the finite number of experienced drivers that meet our hiring standards. Several ongoing market factors persisted including a declining number of, and increased competition for, driver training school graduates, particularly considering COVID-19 constraints, aging truck driver demographics and increased truck safety regulations. We continue to take significant actions to strengthen our driver recruiting and retention as we strive to be the truckload employer of choice, including raising driver pay, providing a modern truck and trailer fleet with the latest safety equipment and technology, investing in our driver training school network and offering a wide variety of driving positions including daily and weekly home time opportunities. These efforts continue to have positive results on our driver retention. We are unable to predict
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whether we will experience future driver shortages or maintain our current driver retention rates. If such a driver shortage were to occur and additional driver pay rate increases became necessary to attract and retain drivers, our results of operations would be negatively impacted to the extent that we could not obtain corresponding freight rate increases.
Fuel increased $2.1 million or 4.2% in first quarter 2021 compared to first quarter 2020 and remained flat as a percentage of operating revenues due to higher average diesel fuel prices, partially offset by approximately 12.0 million fewer company truck miles in first quarter 2021. Average diesel fuel prices were 23 cents per gallon higher in first quarter 2021 than in first quarter 2020 and were 47 cents per gallon higher than in fourth quarter 2020.
We continue to employ measures to improve our fuel mpg such as (i) limiting truck engine idle time, (ii) optimizing the speed, weight and specifications of our equipment and (iii) implementing mpg-enhancing equipment changes to our fleet including new trucks, more aerodynamic truck features, idle reduction systems, trailer tire inflation systems, trailer skirts and automated manual transmissions to reduce our fuel gallons purchased. However, fuel savings from mpg improvement is partially offset by higher depreciation expense and the additional cost of diesel exhaust fluid. Although our fuel management programs require significant capital investment and research and development, we intend to continue these and other environmentally conscious initiatives, including our active participation as an EPA SmartWay Transport Partner. The SmartWay Transport Partnership is a national voluntary program developed by the EPA and freight industry representatives to reduce greenhouse gases and air pollution and promote cleaner, more efficient ground freight transportation.
For April 2021, the average diesel fuel price per gallon was approximately $1.04 higher than the average diesel fuel price per gallon in April 2020 and approximately 96 cents higher than in second quarter 2020.
Shortages of fuel, increases in fuel prices and petroleum product rationing can have a materially adverse effect on our operations and profitability. We are unable to predict whether fuel price levels will increase or decrease in the future or the extent to which fuel surcharges will be collected from customers. As of March 31, 2021, we had no derivative financial instruments to reduce our exposure to fuel price fluctuations.
Supplies and maintenance increased $0.4 million or 0.9% in first quarter 2021 compared to first quarter 2020 and decreased 0.2% as a percentage of operating revenues. The higher dollar amount of supplies and maintenance expense was due primarily to higher driver and placement driver-related costs such as driver lodging and advertising.
Insurance and claims decreased $14.0 million or 38.8% in first quarter 2021 compared to first quarter 2020 and decreased 2.5% as a percentage of operating revenues due primarily to lower expense for new large dollar claims, partially offset by higher liability insurance premiums of $2.0 million. In January 2020, one of our trucks was involved in a serious accident. We self-insure for the first $10.0 million of liability coverage for this policy period and have appropriate excess liability coverage with insurance carriers above that amount. As a result, we recorded $10.0 million of insurance and claims expense in first quarter 2020 for this accident. We also incurred insurance and claims expense of $1.3 million in first quarter 2021 and $1.2 million in first quarter 2020 for accrued interest related to a previously-disclosed adverse jury verdict rendered May 17, 2018, which we are appealing (see Note 6 in the Notes to Consolidated Financial Statements (Unaudited) set forth in Part I of this report). Interest is accrued at $0.4 million per month, until such time as the outcome of our appeal is finalized. The majority of our insurance and claims expense results from our claim experience and claim development under our self-insurance program; the remainder results from insurance premiums for claims in excess of our self-insured limits.
We ren ewed our liability insurance policies on August 1, 2020 and are now responsible for the first $10.0 million per claim on all claims with no annual aggregates. For the policy year that began August 1, 2019, we were responsible for the first $3.0 million per claim with an annual $6.0 million aggregate for claims between $3.0 million and $5.0 million and an additional $5.0 million deduc tible per claim for each claim between $5.0 million and $10.0 million. We maintain liability insurance coverage with insurance carriers in excess of the $10.0 million per claim. Our liability insurance premiums for the policy year that began August 1, 2020 are $7.8 million higher than premiums for the previous policy year.
Depreciation expense decreased $4.9 million or 7.1% in first quarter 2021 compared to first quarter 2020 and decreased 1.2% as a percentage of operating revenues. During first quarter 2020, we changed the estimated life of certain trucks to be sold in 2020 to more rapidly depreciate these truck to their estimated residual values due to the weak used truck market. These trucks continued to depreciate at the same higher rate per truck until all were sold in 2020. The effect of this change in accounting estimate increased first quarter 2020 depreciation expense by $5.0 million and had no effect on first quarter 2021.
The average age of our truck fleet remains low by industry standards and was 2.0 years as of March 31, 2021, and the average age of our trailers was 4.0 years. We are continuing to invest in new trucks and trailers and our terminals in 2021 to improve our driver experience, increase operational efficiency and more effectively manage our maintenance, safety and fuel costs. During the remainder of 2021, we expect the average age of our truck and trailer fleet to remain at or near current levels.
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Rent and purchased transportation expense increased $20.1 million or 15.9% in first quarter 2021 compared to first quarter 2020 and increased 2.5% as a percentage of operating revenues. Rent and purchased transportation expense consists mostly of payments to third-party capacity providers in the Werner Logistics segment and other non-trucking operations and payments to independent contractors in the TTS segment. The payments to third-party capacity providers generally vary depending on changes in the volume of services generated by the Werner Logistics segment. Werner Logistics rent and purchased transportation expense increased $24.6 million, and as a percentage of Werner Logistics revenues increased to 87.4% in first quarter 2021 from 85.5% in first quarter 2020, due primarily to higher spot truckload and dray rates which significantly increased the cost of capacity for contractual brokerage shipments and intermodal shipments in first quarter 2021.
Rent and purchased transportation expense for the TTS segment decreased $4.4 million in first quarter 2021 compared to first quarter 2020. Independent contractor miles decreased approximately 5.8 million miles in first quarter 2021 and as a percentage of total miles were 6.7% in first quarter 2021 compared to 8.9% in first quarter 2020. The lower expense resulting from fewer independent contractor miles was partially offset by an increase in the per-mile settlement rate for certain independent contractors in first quarter 2021 and higher average diesel fuel prices. Because independent contractors supply their own tractors and drivers and are responsible for their operating expenses, the decrease in independent contractor miles as a percentage of total miles shifted costs from the rent and purchased transportation category to other expense categories, including (i) salaries, wages and benefits, (ii) fuel, (iii) depreciation, (iv) supplies and maintenance and (v) taxes and licenses.
Challenging operating conditions continue to make independent contractor recruitment and retention difficult. Such conditions include inflationary cost increases that are the responsibility of independent contractors and a shortage of financing available to independent contractors for equipment purchases. Historically we have been able to add company tractors and recruit additional company drivers to offset any decrease in the number of independent contractors. If a shortage of independent contractors and company drivers occurs, further increases in per-mile settlement rates (for independent contractors) and driver pay rates (for company drivers) may become necessary to attract and retain these drivers. These rate increases could negatively affect our results of operations to the extent that we would not be able to obtain corresponding freight rate increases.
Other operating expenses decreased $9.8 million in first quarter 2021 compared to first quarter 2020 and decreased 1.6% 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 equipment were $10.5 million in first quarter 2021, compared to $2.5 million in first quarter 2020. We realized substantially higher average gains per truck and trailer due to improved pricing in the market for our used equipment. We sold significantly more trucks and more trailers in first quarter 2021 than in first quarter 2020. We also realized a $1.0 million gain from the sale of WGL in first quarter 2021.
Other Expense (Income)
Other expense (income) decreased $0.4 million in first quarter 2021 compared to first quarter 2020. Interest expense decreased $0.8 million in first quarter 2021 compared to first quarter 2020 due to lower average outstanding debt in the 2021 period. The lower interest expense was partially offset by lower interest income in first quarter 2021 compared to first quarter 2020.
Income Taxes
Our effective income tax rate (income taxes expressed as a percentage of income before income taxes) was 24.9% in first quarter 2021 compared to 23.3% in first quarter 2020. The higher income tax rate in first quarter 2021 was attributed primarily to a lower amount of favorable discrete income tax items in first quarter 2021.
Liquidity and Capital Resources:
During the three months ended March 31, 2021, we generated cash flow from operations of $135.9 million, a 1.9% or $2.5 million increase in cash flows compared to the same three-month period a year ago. The increase in net cash provided by operating activities resulted primarily from higher net income partially offset by higher gain on disposal of property and equipment, lower non-cash depreciation and decreased cash flows from working capital. We were able to make net capital expenditures, repay debt, pay dividends and repurchase company stock with the net cash provided by operating activities and existing cash balances.
Net cash used in investing activities increased to $41.3 million for the three-month period ended March 31, 2021 from $16.5 million for the three-month period ended March 31, 2020. Net property additions (primarily revenue equipment) were $37.9 million for the three-month period ended March 31, 2021, compared to $18.8 million during the same period of 2020. The increase was due primarily to delays in receiving new trucks and trailers from our manufacturers in the first three months of 2020. We currently estimate net capital expenditures (primarily revenue equipment) in 2021 to be in the range of $275 million
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to $300 million, compared to net capital expenditures in 2020 of $266.2 million. We intend to fund these net capital expenditures through cash flow from operations and financing available under our existing credit facilities, if necessary. As of March 31, 2021, we were committed to property and equipment purchases of approximately $164.4 million.
Net financing activities used $40.4 million during the three months ended March 31, 2021, and used $69.0 million during the same period in 2020. We repaid $25.0 million of debt during the three months ended March 31, 2021, reducing our outstanding debt at March 31, 2021 to $175.0 million, and repaid $50.0 million of debt during the three months ended March 31, 2020. We paid dividends of $6.1 million in the three-month period ended March 31, 2021 and $6.2 million in the three-month period ended March 31, 2020. We increased our quarterly dividend rate by $0.01 per share, or 11%, beginning with the quarterly dividend to be paid in May 2021. Financing activities for the three months ended March 31, 2021, also included common stock repurchases of 130,446 shares at a cost of $5.5 million. The Company has repurchased, and may continue to repurchase, shares of the Company’s common stock. The timing and amount of such purchases depend upon economic and stock market conditions and other factors. As of March 31, 2021, the Company had purchased 2,313,438 shares pursuant to our current Board of Directors repurchase authorization and had 2,686,562 shares remaining available for repurchase.
Management believes our financial position at March 31, 2021 is strong. As of March 31, 2021, we had $83.1 million of cash and cash equivalents and over $1.2 billion of stockholders’ equity. Cash is invested primarily in government portfolio money market funds. As of March 31, 2021, we had a total borrowing capacity of $500.0 million under our two credit facilities (see Note 5 in the Notes to Consolidated Financial Statements (Unaudited) under Item I of Part I of this Form 10-Q), of which we had borrowed $175.0 million. The remaining $325.0 million of credit available under the facilities at March 31, 2021 is reduced by the $50.9 million in stand-by letters of credit under which we are obligated. These stand-by letters of credit are primarily required as security for insurance policies. We believe our liquid assets, cash generated from operating activities, and borrowing capacity under our credit facilities will provide sufficient funds for our operating and capital needs for the foreseeable future.
Contractual Obligations and Commercial Commitments:
Item 7 of Part II of our 2020 Form 10-K includes our disclosure of contractual obligations and commercial commitments as of December 31, 2020. There were no material changes in the nature of these items during the three months ended March 31, 2021.
Regulations:
Item 1 of Part I of our 2020 Form 10-K includes a discussion of pending proposed regulations that may have an effect on our operations if they become adopted and effective as proposed. There have been no material changes in the status of the proposed regulations previously disclosed in the 2020 Form 10-K.
Critical Accounting Estimates:
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the (i) reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and (ii) reported amounts of revenues and expenses during the reporting period. We evaluate these estimates on an ongoing basis as events and circumstances change, utilizing historical experience, consultation with experts and other methods considered reasonable in the particular circumstances. Actual results could differ from those estimates and may significantly impact our results of operations from period to period. It is also possible that materially different amounts would be reported if we used different estimates or assumptions.
Information regarding our Critical Accounting Estimates can be found in our 2020 Form 10-K. Estimates of accrued liabilities for insurance and claims for bodily injury, property damage and workers’ compensation is a critical accounting estimate that requires us to make significant judgments and estimates and affects our financial statements.
There have been no material changes to this critical accounting estimate from that discussed in our 2020 Form 10-K.
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