WERNER ENTERPRISES INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Management’s Discussion and Analysis of Financial Condition and Results of Operations (the “MD&A”) summarizes the financial statements from management’s perspective with respect to our financial condition, results of operations, liquidity and other factors that may affect actual results. The MD&A is organized in the following sections: • Overview • Results of Operations • Liquidity and Capital Resources • Regulations • Critical Accounting Estimates The MD&A should be read in conjunction with our 2022 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 additional fuel surcharge revenues from our customers that generally recoup a majority of the increased fuel costs; however, we cannot assure that current recovery levels will continue in future periods. Because fuel surcharge revenues fluctuate in response to changes in fuel costs, we identify them separately and exclude them from the statistical calculations to provide a more meaningful comparison between periods. The key statistics used to evaluate trucking revenues, net of fuel surcharge, are (i) average revenues per tractor per week, (ii) average percentage of empty miles (miles without trailer cargo), (iii) average trip length (in loaded miles) and (iv) average number of tractors in service. General economic conditions, seasonal trucking industry freight patterns and industry capacity are important factors that impact these statistics. Our TTS segment also generates a small amount of revenues categorized as non-trucking revenues, which consist primarily of the intra-Mexico portion of cross-border shipments delivered to or from Mexico where the TTS segment utilizes a third-party capacity provider. We exclude such revenues from the statistical calculations. Our most significant resource requirements are company drivers, independent contractors, tractors, and trailers with respect to our TTS segment and qualified third-party capacity providers with respect to our Werner Logistics segment. Independent contractors supply their own tractors and drivers and are responsible for their operating expenses. Our financial results are affected by company driver and independent contractor availability and the markets for new and used revenue equipment. We are self-insured for a significant portion of bodily injury, property damage and cargo claims; workers’ compensation claims; and associate health claims (supplemented by premium-based insurance coverage above certain dollar levels). For that reason, our financial results may also be affected by driver safety, medical costs, weather, legal and regulatory environments and insurance coverage costs to protect against catastrophic losses. The operating ratio is a common industry measure used to evaluate our profitability and that of our TTS segment operating fleets. The operating ratio consists of operating expenses expressed as a percentage of operating revenues. The most significant variable expenses that impact the TTS segment are driver salaries and benefits, fuel, fuel taxes (included in taxes and licenses expense), payments to independent contractors (included in rent and purchased transportation expense), supplies and maintenance and insurance and claims. As discussed further in the comparison of operating results for first quarter 2023 to first quarter 2022, several industry-wide issues have caused, and could continue to cause, costs to increase in future periods. These issues include shortages of drivers or independent contractors, changing fuel prices, changing used truck and trailer pricing, compliance with new or proposed regulations and tightening of the commercial truck liability insurance market. Our main fixed costs include depreciation expense for tractors and trailers and equipment licensing fees (included in taxes and licenses expense). The TTS segment requires substantial cash expenditures for tractor and trailer purchases. We fund these purchases with net cash from operations and financing available under our existing credit facility, as management deems necessary. 20 Table of Contents We provide non-trucking services primarily through the three operating units within our Werner Logistics segment (Truckload Logistics, Intermodal, and Final Mile). Unlike our TTS segment, the Werner Logistics segment is less asset-intensive and is instead dependent upon qualified associates, information systems and qualified third-party capacity providers. The largest expense item related to the Werner Logistics segment is the cost of purchased transportation we pay to third-party capacity providers. This expense item is recorded as rent and purchased transportation expense. Other operating expenses consist primarily of salaries, wages and benefits, as well as depreciation and amortization, supplies and maintenance, and other general expenses. We evaluate the Werner Logistics segment’s financial performance by reviewing operating expenses and operating income expressed as a percentage of revenues. Purchased transportation expenses as a percentage of revenues can be impacted by the rates charged to customers and the costs of securing third-party capacity. We have a mix of contracted long-term rates and variable rates for the cost of third-party capacity, and we cannot assure that our operating results will not be adversely impacted in the future if our ability to obtain qualified third-party capacity providers changes or the rates of such providers increase. Results of Operations: The following table sets forth the consolidated statements of income in dollars and as a percentage of total operating revenues and the percentage increase or decrease in the dollar amounts of those items compared to the prior year. Three Months Ended (3ME) March 31, Percentage Change in Dollar Amounts 2023 2022 3ME (in thousands) $ % $ % % Operating revenues $ 832,714 100.0 $ 764,605 100.0 8.9 Operating expenses: Salaries, wages and benefits 268,315 32.2 241,996 31.6 10.9 Fuel 91,414 11.0 88,421 11.6 3.4 Supplies and maintenance 68,225 8.2 57,025 7.5 19.6 Taxes and licenses 25,425 3.1 23,833 3.1 6.7 Insurance and claims 36,485 4.4 27,492 3.6 32.7 Depreciation and amortization 74,313 8.9 67,229 8.8 10.5 Rent and purchased transportation 220,224 26.4 185,237 24.2 18.9 Communications and utilities 4,733 0.6 3,926 0.5 20.6 Other (9,806) (1.2) (14,065) (1.8) (30.3) Total operating expenses 779,328 93.6 681,094 89.1 14.4 Operating income 53,386 6.4 83,511 10.9 (36.1) Total other expense, net 6,452 0.8 11,043 1.4 (41.6) Income before income taxes 46,934 5.6 72,468 9.5 (35.2) Income tax expense 11,400 1.3 17,433 2.3 (34.6) Net income 35,534 4.3 55,035 7.2 (35.4) Net income attributable to noncontrolling interest (310) (0.1) (1,286) (0.2) (75.9) Net income attributable to Werner $ 35,224 4.2 $ 53,749 7.0 (34.5) 21 Table of Contents The following tables set forth the operating revenues, operating expenses and operating income for the TTS segment and certain statistical data regarding our TTS segment operations, as well as statistical data for the One-Way Truckload and Dedicated operating units within TTS. Three Months Ended March 31, 2023 2022 TTS segment (in thousands) $ % $ % Trucking revenues, net of fuel surcharge $ 493,242 $ 472,361 Trucking fuel surcharge revenues 88,301 79,815 Non-trucking and other operating revenues 6,787 6,241 Operating revenues 588,330 100.0 558,417 100.0 Operating expenses 537,344 91.3 482,324 86.4 Operating income $ 50,986 8.7 $ 76,093 13.6 Three Months Ended March 31, TTS segment 2023 2022 % Change Average tractors in service 8,561 8,238 3.9 % Average revenues per tractor per week (1) $ 4,432 $ 4,411 0.5 % Total tractors (at quarter end) Company 8,170 7,960 2.6 % Independent contractor 305 265 15.1 % Total tractors 8,475 8,225 3.0 % Total trailers (at quarter end) 27,440 26,185 4.8 % One-Way Truckload Trucking revenues, net of fuel surcharge (in 000’s) $ 183,130 $ 186,760 (1.9) % Average tractors in service 3,191 3,064 4.1 % Total tractors (at quarter end) 3,130 3,040 3.0 % Average percentage of empty miles 14.09 % 11.75 % 19.9 % Average revenues per tractor per week (1) $ 4,414 $ 4,690 (5.9) % Average % change in revenues per total mile (1) (3.2) % 20.8 % Average % change in total miles per tractor per week (2.8) % (8.1) % Average completed trip length in miles (loaded) 620 716 (13.4) % Dedicated Trucking revenues, net of fuel surcharge (in 000’s) $ 310,112 $ 285,601 8.6 % Average tractors in service 5,370 5,174 3.8 % Total tractors (at quarter end) 5,345 5,185 3.1 % Average revenues per tractor per week (1) $ 4,441 $ 4,247 4.6 % (1) Net of fuel surcharge revenues. 22 Table of Contents The following tables set forth the Werner Logistics segment’s revenues, purchased transportation expense, other operating expenses (primarily salaries, wages and benefits expense), total operating expenses, and operating income, as well as certain statistical data regarding the Werner Logistics segment. Three Months Ended March 31, 2023 2022 Werner Logistics segment (in thousands) $ % $ % Operating revenues $ 228,669 100.0 $ 189,008 100.0 Operating expenses: Purchased transportation expense 188,498 82.4 157,521 83.3 Other operating expenses 35,234 15.4 22,806 12.1 Total operating expenses 223,732 97.8 180,327 95.4 Operating income $ 4,937 2.2 $ 8,681 4.6 Three Months Ended March 31, Werner Logistics segment 2023 2022 % Change Average tractors in service 39 53 (26.4) % Total tractors (at quarter end) 32 54 (40.7) % Total trailers (at quarter end) 2,580 1,605 60.7 % Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022 Operating Revenues Operating reve nues increased 8.9% for the three months ended March 31, 2023, comp ared to the same period of the prior year. When comparing first quarter 2023 to first quarter 2022, TTS segment revenue s increased $29.9 million, or 5.4%, and Werner Logistics revenues increased $39.7 million, or 21.0%. Dedicated freight demand in first qu arter 2023 was solid and steady. One-Way Truckload and Logistics were challenged by overall market conditions with seasonally less freight available than normal and increased price competition. This was in contrast to first quarter a year ago, when we benefited from a seasonally strong freight market. In first quarter 2022, freight was unusually strong for both One-Way Truckload and Logistics, as we benefited from a strong pricing environment and numerous project and pop-up freight opportunities that typically do not occur during first quarter. The freight market and spot rates in One-Way Truckload and Logistics did not experience the typical seasonal improvement in March 2023 and in fact, declined. Freight demand in April 2023 remains challenging and consistent with March 2023. Trucking revenues, net of fuel surchar ge, increased 4.4% in first quarter 2023 compared to first quarter 2022 due to a 3.9% increase in the average number of tractors in service and a 0.5% increase in average revenues per tractor per week, net of fuel surcharge . During first quarter 2023, Dedicated average revenues per tractor per week, net of fuel surcharge increased 4.6%, slightly ahead of our full year guidance range, partially offset by a 3.2% decrease in One-Way Truckload average revenues per total mile, net of fuel surcharge due to lower rates in a much softer freight market. We continue to expect Dedicated average revenues per tractor per week, net of fuel surcharge, to remain flat or increase up to 3% in 2023 compared to 2022 . We continue to expect average revenues per total mile, net of fuel surcharge, for the One-Way Truckload fleet to decline in a range of 3% to 6% in the first half of 2023 when compared to first half of 2022 . We expect the One-Way freight market to be weak in second and third quarters 2023, then improve in fourth quarter 2023. The average number of tractors in service in the TTS segm ent increased 3.9% to 8,561 in first qu arter 2023 from 8,238 in first quarter 2022 , due primarily to the Baylor Trucking, Inc. (“Baylor”) acquisition on October 1, 2022 and the ReedTMS Logistics (“ReedTMS”) acquisition on November 5, 2022. W e ended first quarter 2023 wit h 8,475 tractors in the TTS segment, a year-over-year increase of 250 tractors compared t o the end of first quarter 2022, and a sequentia l decrease of 125 tractors compared to the end of fourth quarter 2022. During first quarter 2023, our tractor fleet declined 1%, as we decreased our fleet size to adjust to freight market conditions. We do not plan to grow our fleet in second quarter 2023, but assuming the freight market begins to show improvement during the second half of 2023, we expect a small amount of growth in our Dedicated tractor fleet in 2023 compared to 2022. Within TTS, our Dedicated unit ended first quarter 2023 with 5,345 tractors (or 63% of our total TTS segment tractors) compared to 5,185 tractors (or 63%) a year ago. We currently expect our fleet size at the end of 2023 to be in a range of a decrease of 2% to an increase of 1% when compared to the fleet size at the end of 2022. 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. 23 Table of Contents Trucking fuel surcharge revenues increased 10.6% to $88.3 million in first quarter 2023 from $79.8 million in first quarter 2022 due primarily to a 3.9% increase in the a verage number of tractors in service in the TTS segm ent. 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 tractor idle time. Fuel prices that change rapidly in short time periods also impact our recovery because the surcharge rate in most programs only changes once per week. Werner Logistics revenues are generated by its three operating units. Werner Logistics 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 $5.3 million in first quarter 2023 and $0.7 million in first quarter 2022 for shipments performed by the TTS segment (also recorded as trucking revenue by the TTS segment), and these transactions between reporting segments are eliminated in consolidation. In first quarter 2023, Werner Logistics revenues increased $39.7 million, or 21.0%, as growth from the ReedTMS acquisition offset lower brokerage pricing and Intermodal revenues. Truckload Logistics revenues (78% of Logistics revenues) increased by 41% in first quarter 2023, driven by an increase in shipments due to the ReedTMS acquisition and growth in our organic shipments, partially offset by a decline in revenues per shipment. Intermodal revenues (12% of Logistics revenues) decreased 33% in first quarter 2023, due primarily to a decrease in shipments. Final Mile revenues (10% of Logistics revenues) increased $2.4 million in first quarter 2023. The Werner Logistics operating income decreased to $4.9 million in first quarter 2023 from $8.7 million in first quarter 2022, due to a seasonally weak freight market in first quarter 2023 compared to a seasonally strong freight market in first quarter 2022. Operating Expenses Our operating ratio (operating expenses expressed as a percentage of ope rating revenues) was 93.6% for the three months ended March 31, 2023 and 89.1% for the three months ended March 31, 2022. We experienced a more direct impact from inflation on multiple expense items in first quarter 2023 compared to first quarter 2022. Expense items that impacted the overall operating ratio are described on the following pages. The tables on pages 21 through 23 show the consolidated statements of income in dollars and as a percentage of total operating revenues and the percentage increase or decrease in the dollar amounts of those items compared to the same period of the prior year, as well as the operating ratios, operating margins, and certain statistical information for our two reportable segments, TTS and Werner Logistics. Salaries, wages and benefits increased $26.3 million or 10.9% in first quarter 2023 compared to first quarter 2022 and increased 0.6% as a percentage of operating revenues to 32.2%. The higher dollar amount of salaries, wages and benefits expense in the first quarter of 2023 was due primarily to increased non-driver and driver pay and the impact of 6.5 million more company tractor miles in the first quarter of 2023. The increase in non-driver pay was primarily due to a larger number of non-driver employees, including the impact from our ReedTMS and Baylor acquisitions. Non-driver salaries, wages and benefits in our non-trucking Werner Logistics segment increased 66% in first quarter 2023 compared to first quarter 2022, primarily as a result of the ReedTMS acquisition. We renewed our workers’ compensation insurance coverage on April 1, 2023. 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 2023 were flat compared to the previous policy year. While inflationary cost pressures continue to be challenging, particularly for labor, equipment maintenance and insurance, we have begun to see some easing in the competitive driver recruiting and retention markets. A competitive driver market presents labor challenges for customers and carriers alike. Several ongoing market factors persisted including a declining number of, and increased competition for, driver training school graduates, aging truck driver demographics and increased truck safety regulations. We continue to take significant actions to strengthen our driver recruiting and retention as we strive to be the truckload employer of choice, including competitive driver pay, providing a modern tractor and trailer fleet with the latest safety equipment and technology, investing in our driver training school network and offering a wide variety of driving positions including daily and weekly home time opportunities. We are unable to predict whether we will experience future driver shortages or maintain our current driver retention rates. If such a driver shortage were to occur and 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. 24 Table of Contents Fuel increased $3.0 million or 3.4% in first quarter 2023 compared to first quarter 2022 and decreased 0.6% as a percentage of operating revenues to 11.0%, primarily due to 6.5 million more company tractor miles in first quarter 2023, partially offset by slightly lower average diesel fuel prices. Average diesel fuel prices were nine cents per gallon lower in first quarter 2023 than in first quarter 2022 and were 70 cents per gallon lower than in fourth quarter 2022. We continue to employ measures to improve our fuel mpg such as (i) limiting tractor engine idle time by installing auxiliary power units, (ii) optimizing the speed, weight and specifications of our equipment and (iii) implementing mpg-enhancing equipment changes to our fleet including new tractors, more aerodynamic tractor features, idle reduction systems, trailer tire inflation systems, trailer skirts and automated manual transmissions to reduce our fuel gallons purchased. However, fuel savings from mpg improvement is partially offset by higher depreciation expense and the additional cost of diesel exhaust fluid. Although our fuel management programs require significant capital investment and research and development, we intend to continue these and other environmentally conscious initiatives, including our active participation as a U.S. Environmental Protection Agency (“EPA”) SmartWay Transport Partner. The SmartWay Transport Partnership is a national voluntary program developed by the EPA and freight industry representatives to reduce greenhouse gases and air pollution and promote cleaner, more efficient ground freight transportation. For April 2023, the average diesel fuel price per gallon was approximately $1.17 lower than the average diesel fuel price per gallon in April 2022 and approximately $1.53 lower than in second quarter 2022. Shortages of fuel, increases in fuel prices and petroleum product rationing can have a material adverse effect on our operations and profitability. We are unable to predict whether fuel price levels will increase or decrease in the future or the extent to which fuel surcharges will be collected from customers. As of March 31, 2023, we had no derivative financial instruments to reduce our exposure to fuel price fluctuations. Supplies and maintenance increased $11.2 million or 19.6% in first quarter 2023 compared to first quarter 2022 and increased 0.7% as a percentage of operating revenues. Supplies and maintenance expense increased due to the higher costs for over-the-road tractor and trailer maintenance and tires resulting from inflationary cost increases and the impact of 6.5 million more company tractor miles. Insurance and claims increased $9.0 million or 32.7% in first quarter 2023 compared to first quarter 2022 and increased 0.8% as a percentage of operating revenues due primarily to a higher amount of unfavorable reserve development resulting from an increasing cost-per-claim. We also incurred insurance and claims expense of $1.4 million and $1.3 million in first quarter 2023 and first quarter 2022, respectively, for accrued interest related to a previously-disclosed adverse jury verdict rendered May 17, 2018, which we are appealing. Interest will continue to accrue monthly until such time as the outcome of our appeal is finalized. For additional information related to this lawsuit, see Note 10 in the Notes to Consolidated Financial Statements (Unaudited) set forth in Part I of this report. The majority of our insurance and claims expense results from our claim experience and claim development under our self-insurance program; the remainder results from insurance premiums for claims in excess of our self-insured limits. We ren ewed our liability insurance policies on August 1, 2022 and are responsible for the first $10.0 million per claim on all claims with an annual $10.0 million aggregate for claims between $10.0 million and $20.0 million. For the policy year that began August 1, 2021, we were responsible for the first $10.0 million per claim on all claims with an annual $10.0 million aggregate for claims between $10.0 million and $15.0 million . 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, 2022 are $1.9 million higher than premiums for the previous policy year. Depreciation and amortization expense increased $7.1 million or 10.5% in first quarter 2023 compared to first quarter 2022 and increased 0.1% as a percentage of operating revenues due primarily to depreciation and amortization on tangible and intangible assets recorded in the ReedTMS and Baylor acquisitions and the higher cost of new tractors and trailers. The average age of our tractor fleet remains low by industry standards and was 2.2 years as of March 31, 2023, and the average age of our trailers was 5.1 years. We are continuing to invest in new tractors and trailers and our terminals in 2023 to improve our driver experience, increase operational efficiency and more effectively manage our maintenance, safety and fuel costs. During the remainder of 2023, we expect the average age of our tractor and trailer fleets to remain at or near current levels. Rent and purchased transportation expense increased $35.0 million or 18.9% in first quarter 2023 compared to first quarter 2022 and increased 2.2% as a percentage of operating revenues. Werner Logistics recorded brokered freight expense of $5.3 million in first quarter 2023 and $0.7 million in first quarter 2022 for shipments performed by the TTS segment, which is eliminated in consolidation. 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 25 Table of Contents generated by the Werner Logistics segment. Werner Logistics purchased transportation expense increased $31.0 million primarily due to the ReedTMS acquisition and decreased as a percentage of Werner Logistics revenues to 82.4% in first quarter 2023 from 83.3% in first quarter 2022. Rent and purchased transportation expense for the TTS segment increased $7.5 million in first quarter 2023 compared to first quarter 2022 due primarily to the Baylor acquisition and more independent contractor miles in first quarter 2023. Independent contractor miles increased approximately 1.1 million miles in first quarter 2023 and as a percentage of total miles were 4.9% in first quarter 2023 compared to 4.5% in first quarter 2022. Because independent contractors supply their own tractors and drivers and are responsible for their operating expenses, the increase in independent contractor miles as a percentage of total miles shifted costs from other expense categories, including (i) salaries, wages and benefits, (ii) fuel, (iii) depreciation, (iv) supplies and maintenance and (v) taxes and licenses to the rent and purchased transportation category. Challenging operating conditions continue to make independent contractor recruitment and retention difficult. Such conditions include inflationary cost increases that are the responsibility of independent contractors and a shortage of financing available to independent contractors for equipment purchases. Historically we have been able to add company tractors and recruit additional company drivers to offset any decrease in the number of independent contractors. If a shortage of independent contractors and company drivers 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. This could negatively affect our results of operations to the extent that we would not be able to obtain corresponding freight rate increases. Other operating expenses increased $4.3 million in first quarter 2023 compared to first quarter 2022 and increased 0.6% as a percentage of operating revenues due primarily to a decrease in gains on the sales of property and equipment, and increased costs associated with professional technology services. Gains on sales of property and equipment (primarily used tractors 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 property and equipment were $18.3 million in first quarter 2023, compared to $20.5 million in first quarter 2022. We sold significantly more tractors and trailers in first quarter 2023 compared to first quarter 2022 and realized substantially lower average gains per tractor and trailer due to lower pricing in the market for our used equipment, which we believe is due to a greater number of small carriers exiting the trucking industry due to lower spot rates and higher operating costs. For the used tractor market, we expect gradually declining customer demand in a difficult freight and financing market, which should moderate pricing and equipment gains as the year progresses. We continue to expect our gains on sales of property and equipment in 2023 to decrease to between $30 million and $50 million for the full year. Other Expense (Income) Other expense, net of income, decreased $4.6 million in first quarter 2023 compared to first quarter 2022 due primarily to a $9.7 million decrease in the amount of unrealized losses recognized on our investments in equity securities in first quarter 2023 compared to first quarter 2022 (see Note 7 in the Notes to Consolidated Financial Statements (Unaudited) set forth in Part I of this report), partially offset by a $5.2 million increase in net interest expense. Net interest expense increased primarily due to higher interest rates for variable rate debt and an increase in average debt outstanding. Income Tax Expense Our effective income tax rate (income taxes expressed as a percentage of income before income taxes) was 24.3% in first quarter 2023 compared to 24.1% in first quarter 2022. Liquidity and Capital Resources: We closely manage our liquidity and capital resources. Our liquidity requirements depend on key variables, including the level of investment needed to support business strategies, the performance of the business, capital expenditures, borrowing arrangements, and working capital management. Capital expenditures, business acquisitions, stock repurchases, and dividend payments are components of our cash flow and capital management strategy, which to a large extent, can be adjusted in response to economic and other changes in the business environment. Management’s approach to capital allocation focuses on investing in key priorities that support our business and growth strategies and providing shareholder returns, while funding ongoing operations. Management believes our financial position at March 31, 2023 is strong. As of March 31, 2023, we had $129.6 million of cash and cash equivalents and over $1.4 billion of stockholders’ equity. Cash is invested primarily in short-term money market funds. In addition, we have a $1.075 billion credit facility, for which our total available borrowing capacity was $414.6 million as of March 31, 2023 (see Note 9 in the Notes to Consolidated Financial Statements (Unaudited) set forth in Part I of this report for information regarding our credit agreements). After considering recent developments in the banking sector, we believe the six commercial banks in our $1.075 billion syndicated credit facility all have strong tier-one capital ratios and good loan-to-deposit ratios. We believe our liquid assets, cash generated from operating activities, and borrowing capacity under our existing 26 Table of Contents credit facility will provide sufficient funds to meet our cash requirements and our planned shareholder returns for the foreseeable future. Item 7 of Part II of our 2022 Form 10-K includes our disclosure of material cash requirements as of December 31, 2022. There were no material changes in the nature of these items during the three months ended March 31, 2023. Cash Flows During the three months ended March 31, 2023, we generated cash flow from operations of $166.8 million, a 7.7% or $11.9 million increase in cash flows compared to the same three-month period a year ago. The increase in net cash provided by operating activities was due primarily to working capital changes, including a decrease in accounts receivable days sales outstanding during first quarter 2023, partially offset by a decrease in net income for the three-month period ended March 31, 2023 compared to the same period in 2022. We were able to make net capital expenditures, make a strategic loan and investment, and pay dividends with the net cash provided by operating activities and existing cash balances. Net cash used in investing activities was $129.2 million for the three-month period ended March 31, 2023 compared to $34.5 million during the same period in 2022. Net property and equipment additions (primarily revenue equipment) were $102.7 million for the three-month period ended March 31, 2023, compared to $37.1 million during the same period of 2022. We currently estimate net capital expenditures (primarily revenue equipment) in 2023 to be in the range of $350 million to $400 million, compared to net capital expenditures in 2022 of $317.6 million. We intend to fund these net capital expenditures through cash flows from operations and financing available under our existing credit facility, if necessary. As of March 31, 2023, we were committed to property and equipment purchases of approximately $271.4 million. We also purchased a $25.0 million subordinated promissory note from MLSI on January 24, 2023, with a maturity date of January 24, 2030 (see Note 8 in the Notes to Consolidated Financial Statements (Unaudited) set forth in Part I of this report for information regarding our notes receivable). Net cash used in financing activities was $16.2 million during the three months ended March 31, 2023 compared to $49.0 million during the same period in 2022. We repaid $2.5 million on our debt during the three months ended March 31, 2023, decreasing our outstanding debt to $691.3 million at March 31, 2023, and had net repayments on our debt of $1.3 million during the same period in 2022. We paid dividends of $8.2 million during the three months ended March 31, 2023 and $7.9 million during the same period in 2022. We currently plan to continue paying a quarterly dividend. We did not repurchase any shares of common stock during the three months ended March 31, 2023. Financing activities for the same period in 2022 included common stock repurchase of 845,100 shares at a cost of $36.2 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, 2023, the Company had purchased 3,688,190 shares pursuant to our current Board of Directors repurchase authorization and had 2,311,810 shares remaining available for repurchase. Regulations: Item 1 of Part I of our 2022 Form 10-K includes a discussion of pending proposed regulations that may have an effect on our operations if they become adopted and effective as proposed. The following is an update to the regulations set forth in our 2022 Form 10-K. California’s ongoing emissions reduction goals have significantly impacted the industry. The California Air Resources Board regulations apply not only to California intrastate carriers, but also to carriers outside of California who own or dispatch equipment in the state. In March 2023, the EPA granted California the authority to enforce environmental rules that are more strict than current EPA requirements. These rules would apply to vehicles beginning with the 2024 model year. Werner continues to structure our fleet plans to operate compliant equipment in California. Approximately 4% of our truck miles in 2022 were in the state of California. There have been no other material changes in the status of the proposed regulations previously disclosed in the 2022 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 27 Table of Contents 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 2022 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 2022 Form 10-K.