WERNER ENTERPRISES INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Management’s Discussion and Analysis of Financial Condition and Results of Operations (the “MD&A”) summarizes the financial statements from management’s perspective with respect to our financial condition, results of operations, liquidity and other factors that may affect actual results. The MD&A is organized in the following sections: • Overview • Results of Operations • Liquidity and Capital Resources • Regulations • Critical Accounting Estimates The MD&A should be read in conjunction with our 2023 Form 10-K. Overview: We have two reportable segments, TTS and Werner Logistics, and we operate in the truckload and logistics sectors of the transportation industry. In the truckload sector, we focus on transporting consumer nondurable products that generally ship more consistently throughout the year. In the logistics sector, besides managing transportation requirements for individual customers, we provide additional sources of truck capacity, alternative modes of transportation, a North American delivery network and systems analysis to optimize transportation needs. Our success depends on our ability to efficiently and effectively manage our resources in the delivery of truckload transportation and logistics services to our customers. Resource requirements vary with customer demand, which may be subject to seasonal or general economic conditions. Our ability to adapt to changes in customer transportation requirements is essential to efficiently deploy resources and make capital investments in tractors and trailers (with respect to our TTS segment) or obtain qualified third-party capacity at a reasonable price (with respect to our Werner Logistics segment). We may also be affected by our customers’ financial failures or loss of customer business. Revenues for our TTS segment operating units (Dedicated and One-Way Truckload) are typically generated on a per-mile basis and also include revenues such as stop charges, loading and unloading charges, equipment detention charges and equipment repositioning charges. To mitigate our risk to fuel price increases, we recover additional fuel surcharge revenues from our customers that generally recoup a majority of the increased fuel costs; however, we cannot assure that current recovery levels will continue in future periods. Because fuel surcharge revenues fluctuate in response to changes in fuel costs, we identify them separately and exclude them from the statistical calculations to provide a more meaningful comparison between periods. The key statistics used to evaluate trucking revenues, net of fuel surcharge, are (i) average revenues per tractor per week, (ii) average percentage of empty miles (miles without trailer cargo), (iii) average trip length (in loaded miles) and (iv) average number of tractors in service. General economic conditions, seasonal trucking industry freight patterns and industry capacity are important factors that impact these statistics. Our TTS segment also generates a small amount of revenues categorized as non-trucking revenues, which consist primarily of the intra-Mexico portion of cross-border shipments delivered to or from Mexico where the TTS segment utilizes a third-party capacity provider. We exclude such revenues from the statistical calculations. Our most significant resource requirements are company drivers, independent contractors, tractors, and trailers with respect to our TTS segment and qualified third-party capacity providers with respect to our Werner Logistics segment. Independent contractors supply their own tractors and drivers and are responsible for their operating expenses. Our financial results are affected by company driver and independent contractor availability and the markets for new and used revenue equipment. We are self-insured for a significant portion of bodily injury, property damage and cargo claims; workers’ compensation claims; and associate health claims (supplemented by premium-based insurance coverage above certain dollar levels). For that reason, our financial results may also be affected by driver safety, medical costs, weather, legal and regulatory environments and insurance coverage costs to protect against catastrophic losses. The operating ratio is a common industry measure used to evaluate our profitability and that of our TTS segment operating fleets. The operating ratio consists of operating expenses expressed as a percentage of operating revenues. The most significant variable expenses that impact the TTS segment are driver salaries and benefits, fuel, fuel taxes (included in taxes and licenses expense), payments to independent contractors (included in rent and purchased transportation expense), supplies and maintenance and insurance and claims. As discussed further in the comparison of operating results for first quarter 2024 to first quarter 2023, several industry-wide issues have caused, and could continue to cause, costs to increase in future periods. These issues include shortages of drivers or independent contractors, changing fuel prices, changing used truck and trailer pricing, compliance with new or proposed regulations and tightening of the commercial truck liability insurance market. Our main fixed costs include depreciation expense for tractors and trailers and equipment licensing fees (included in taxes and licenses expense). The TTS segment requires substantial cash expenditures for tractor and trailer purchases. We fund these purchases with net cash from operations and financing available under our existing credit facility, as management deems necessary. 18 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 2024 2023 3ME (in thousands) $ % $ % % Operating revenues $ 769,080 100.0 $ 832,714 100.0 (7.6) Operating expenses: Salaries, wages and benefits 265,403 34.5 268,315 32.2 (1.1) Fuel 77,622 10.1 91,414 11.0 (15.1) Supplies and maintenance 61,775 8.0 68,225 8.2 (9.5) Taxes and licenses 25,164 3.3 25,425 3.1 (1.0) Insurance and claims 36,362 4.7 36,485 4.4 (0.3) Depreciation and amortization 74,270 9.7 74,313 8.9 (0.1) Rent and purchased transportation 203,925 26.5 220,224 26.4 (7.4) Communications and utilities 4,706 0.6 4,733 0.6 (0.6) Other 4,265 0.6 (9,806) (1.2) (143.5) Total operating expenses 753,492 98.0 779,328 93.6 (3.3) Operating income 15,588 2.0 53,386 6.4 (70.8) Total other expense, net 6,273 0.8 6,452 0.8 (2.8) Income before income taxes 9,315 1.2 46,934 5.6 (80.2) Income tax expense 3,067 0.4 11,400 1.3 (73.1) Net income 6,248 0.8 35,534 4.3 (82.4) Net loss (income) attributable to noncontrolling interest 64 — (310) (0.1) (120.6) Net income attributable to Werner $ 6,312 0.8 $ 35,224 4.2 (82.1) 19 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, 2024 2023 TTS segment (in thousands) $ % $ % Trucking revenues, net of fuel surcharge $ 469,879 $ 493,242 Trucking fuel surcharge revenues 72,983 88,301 Non-trucking and other operating revenues 8,264 6,787 Operating revenues 551,126 100.0 588,330 100.0 Operating expenses 530,286 96.2 537,344 91.3 Operating income $ 20,840 3.8 $ 50,986 8.7 Three Months Ended March 31, TTS segment 2024 2023 % Change Average tractors in service 7,935 8,561 (7.3) % Average revenues per tractor per week (1) $ 4,555 $ 4,432 2.8 % Total tractors (at quarter end) Company 7,535 8,170 (7.8) % Independent contractor 275 305 (9.8) % Total tractors 7,810 8,475 (7.8) % Total trailers (at quarter end) 27,650 27,440 0.8 % One-Way Truckload Trucking revenues, net of fuel surcharge (in 000’s) $ 168,837 $ 183,130 (7.8) % Average tractors in service 2,786 3,191 (12.7) % Total tractors (at quarter end) 2,730 3,130 (12.8) % Average percentage of empty miles 14.90 % 14.09 % 5.7 % Average revenues per tractor per week (1) $ 4,661 $ 4,414 5.6 % Average % change in revenues per total mile (1) (5.1) % (3.2) % Average % change in total miles per tractor per week 11.3 % (2.8) % Average completed trip length in miles (loaded) 591 620 (4.7) % Dedicated Trucking revenues, net of fuel surcharge (in 000’s) $ 301,042 $ 310,112 (2.9) % Average tractors in service 5,149 5,370 (4.1) % Total tractors (at quarter end) 5,080 5,345 (5.0) % Average revenues per tractor per week (1) $ 4,497 $ 4,441 1.3 % (1) Net of fuel surcharge revenues. 20 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, 2024 2023 Werner Logistics segment (in thousands) $ % $ % Operating revenues $ 202,482 100.0 $ 228,669 100.0 Operating expenses: Purchased transportation expense 172,487 85.2 188,498 82.4 Other operating expenses 32,324 16.0 35,234 15.4 Total operating expenses 204,811 101.2 223,732 97.8 Operating income (loss) $ (2,329) (1.2) $ 4,937 2.2 Three Months Ended March 31, Werner Logistics segment 2024 2023 % Change Average tractors in service 26 39 (33.3) % Total tractors (at quarter end) 21 32 (34.4) % Total trailers (at quarter end) 3,115 2,580 20.7 % Three Months Ended March 31, 2024 Compared to Three Months Ended March 31, 2023 Operating Revenues Operating reve nues decreased 7.6% for the three months ended March 31, 2024, comp ared to the same period of the prior year. When comparing first quarter 2024 to first quarter 2023, TTS segment reven ues decreased $37.2 million, or 6.3%, and Werner Logistics revenues decreased $26.2 million, or 11.5%. Dedicated freight demand in first quarter 2024 was steady, absent isolated fleet losses, and the Dedicated pipeline of opportunities remains strong, but competitive. One-Way Truckload and Werner Logistics volumes reflected normal seasonality while revenues and profitability were impacted by ongoing pricing pressure. Inclement weather further negatively impacted One-Way and Werner Logistics in first quarter 2024. We expect the challenging freight market to continue through second quarter and into the second half of 2024. Trucking revenues, net of fuel surcha rge, decreased 4.7% in first quart er 2024 compared to first quarter 2023 due to a 7.3% decrease in the average number of tractors in service, partially offset by a 2.8% increase in averag e revenues per tractor per week, net of fuel surcharge . During first quarter 2024, One-Way Truckload average revenues per total mile, net of fuel surcharg e, decreased 5.1%, as One-Way Truckload remained challenged by ongoing pricing pressure. Dedicated average revenues per tractor per week, net of fuel surcharge, increased 1.3%, despite losing a few fleets to changes in the supply chain approach for select customers and isolated competitive pricing. We continue to expect average revenues per total mile, net of fuel surcharge, for the One-Way Truckload fleet to decrease in a range of 6% to 3% in the first half of 2024 compared to first half of 2023. We continue to expect Dedicated average revenues per tractor per week, net of fuel surcharge, to remain flat or increase up to 3% in 2024 compared to 2023, as Dedicated demand remains steady, and we anticipate the pipeline of opportunities in Dedicated to continue to be strong, but competitive. The average number of tractors in service in the TTS segm ent decreased 7.3% to 7,935 in first qu arter 2024 from 8,561 in first quarter 2023 , as we decreased our fleet size to adjust to the challenging freight market conditions . W e ended first quarter 2024 wi th 7,810 tractors in the TTS segment, a year-over-year decrease of 665 tractors compared to the e nd of first quarter 2023, and a sequenti al decrease of 190 tractors compared to the end of fourth quarter 2023. Within TTS, our Dedicated unit ended first quarter 2024 with 5,080 tractors (or 65% of our total TTS segment fleet) compared to 5,345 tractors (or 63%) a year ago. The Dedicated environment has become more competitive through this prolonged weak freight market. We are receiving new business awards in our Dedicated unit to assist with backfilling lost business, and we foresee potential for growth in our Dedicated unit in the second half of the year; although, we recognize the challenge and believe it is reasonable to lower our fleet size expectations at this time while we focus on maintaining price and margin discipline across our portfolio. We currently expect our fleet size at the end of 2024 to decrease in a range of 6% to 3% when compared to the fleet size at the end of 2023. We cannot predict whether future driver shortages, if any, would have a further adverse effect on our fleet size. If such a driver market shortage were to occur, it could result in further fleet size reductions, and our results of operations could be adversely affected. 21 Table of Contents Trucking fuel surcharge revenues decreased 17.3% to $73.0 million in first quarter 2024 from $88.3 million in first quarter 2023. These revenues represent collections from customers for the increase in fuel and fuel-related expenses, including the fuel component of our independent contractor cost (recorded as rent and purchased transportation expense) and fuel taxes (recorded in taxes and licenses expense), when diesel fuel prices rise. Conversely, when fuel prices decrease, fuel surcharge revenues decrease. To lessen the effect of fluctuating fuel prices on our margins, we collect fuel surcharge revenues from our customers for the cost of diesel fuel and taxes in excess of specified base fuel price levels according to terms in our customer contracts. Fuel surcharge rates generally adjust weekly based on an independent U.S. Department of Energy fuel price survey which is released every Monday. Our fuel surcharge programs are designed to (i) recoup higher fuel costs from customers when fuel prices rise and (ii) provide customers with the benefit of lower fuel costs when fuel prices decline. These programs generally enable us to recover a majority, but not all, of the fuel price increases. The remaining portion is generally not recoverable because it results from empty and out-of-route miles (which are not billable to customers) and tractor idle time. Fuel prices that change rapidly in short time periods also impact our recovery because the surcharge rate in most programs only changes once per week. Werner Logistics revenues are generated by its three operating units. Werner Logistics recorded revenue and brokered freight expense of $4.1 million in first quarter 2024 and $5.3 million in first quarter 2023 for certain shipments performed by the TTS segment (also recorded as trucking revenue by the TTS segment), and these transactions between reporting segments are eliminated in consolidation. In first quarter 2024, Werner Logistics revenues decreased $26.2 million, or 11.5%. Truckload Logistics revenues (76% of total Werner Logistics segment revenues) decreased 13% in first quarter 2024, driven by a decrease in shipments and a decline in revenue per shipment. Final Mile revenues (12% of total Werner Logistics segment revenues) increased $1.1 million or 5% in first quarter 2024, despite a softer market for discretionary spending on big and bulky products. Intermodal revenues (12% of total Werner Logistics segment revenues) decreased 15% in first quarter 2024, due to lower revenue per shipment, partially offset by an increase in shipments. Werner Logistics had an operating loss of $2.3 million in first quarter 2024 compared to operating income of $4.9 million in first quarter 2023, and its operating margin percentage decreased to (1.2)% in first quarter 2024 from 2.2% in first quarter 2023. Adverse weather combined with a competitive freight and rate market in first quarter 2024 impacted Werner Logistics revenue and profitability despite normal seasonality in volume and maintaining high client retention. We expect Truckload Logistics margins will remain challenged in the near-term, but may improve later in the year through cost saving initiatives and further synergies realized from the integration of our acquired companies. Operating Expenses Our operating ratio (operati ng expenses expressed as a percentage of ope rating revenues) was 98.0% for the three months ended March 31, 2024 and 93.6% for the three months ended March 31, 2023. Expense items that impacted the overall operating ratio are described on the following pages. The tables on pages 19 through 21 show the consolidated statements of income in dollars and as a percentage of total operating revenues and the percentage increase or decrease in the dollar amounts of those items compared to the same period of the prior year, as well as the operating ratios, operating margins, and certain statistical information for our two reportable segments, TTS and Werner Logistics. Salaries, wages and benefits decreased $2.9 million or 1.1% in first quarter 2024 compared to first quarter 2023 and increased 2.3% as a percentage of operating revenues to 34.5%. The lower dollar amount of salaries, wages and benefits expense in the first quarter of 2024 was due primarily to decreased non-driver pay and the impact of 3.4 million fewer company tractor miles in the first quarter 2024, partially offset by higher benefit costs. The decrease in non-driver pay was primarily due to a smaller average number of non-driver employees. Non-driver salaries, wages and benefits in our non-trucking Werner Logistics segment decreased 7% in first quarter 2024 compared to first quarter 2023. We renewed our workers’ compensation insurance coverage on April 1, 2024. Our coverage levels are the same as the prior policy year. We continue to maintain a self-insurance retention of $2.0 million per claim. Our workers’ compensation insurance premiums for the policy year beginning April 2024 are $0.3 million higher than the previous policy year. While we currently believe the driver recruiting and retention market may be less difficult in the near term, a competitive driver market presents labor challenges for customers and carriers alike. Several factors impacting the driver market include a declining number of, and increased competition for, driver training school graduates, aging truck driver demographics and increased truck safety regulations. We continue to take significant actions to strengthen our driver recruiting and retention as we strive to be the truckload employer of choice, including competitive driver pay, providing a modern tractor and trailer fleet with the latest safety equipment and technology, investing in our driver training school network and offering a wide variety of driving positions including daily and weekly home time opportunities. We are unable to predict whether we will experience future driver shortages or maintain our current driver retention rates. If such a driver shortage were to occur and driver pay rate increases became necessary to attract and retain drivers, our results of operations would be negatively impacted to the extent that we could not obtain corresponding freight rate increases. 22 Table of Contents Fuel decreased $13.8 million or 15.1% in first quarter 2024 compared to first quarter 2023 and decreased 0.9% as a percentage of operating revenues to 10.1%, primarily due to lower average diesel fuel prices, and 3.4 million fewer company tractor miles in first quarter 2024. Average diesel fuel prices were 31 cents per gallon lower in first quarter 2024 than in first quarter 2023 and were 20 cents per gallon lower than in fourth quarter 2023. 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 2024, the average diesel fuel price per gallon was approximately 5 cents lower than the average diesel fuel price per gallon in April 2023 and approximately 10 cents higher than in second quarter 2023. Shortages of fuel, increases in fuel prices and petroleum product rationing can have a material adverse effect on our operations and profitability. We are unable to predict whether fuel price levels will increase or decrease in the future or the extent to which fuel surcharges will be collected from customers. As of March 31, 2024, we had no derivative financial instruments to reduce our exposure to fuel price fluctuations. Supplies and maintenance decreased $6.5 million or 9.5% in first quarter 2024 compared to first quarter 2023 and decreased 0.2% as a percentage of operating revenues. Supplies and maintenance expense decreased due to the lower costs for over-the-road tractor and trailer maintenance and tires, and the impact of 3.4 million fewer company tractor miles. We have taken steps to reduce repair and maintenance expense by growing our in-house maintenance capabilities throughout our terminal network. Insurance and claims decreased $0.1 million or 0.3% in first quarter 2024 compared to first quarter 2023 and increased 0.3% as a percentage of operating revenues. We had lower expense for small dollar liability claims, resulting from a lower amount of unfavorable reserve development, partially offset by higher expense for new claims due to an increasing cost per claim. Our expense for large dollar liability claims was higher due primarily to unfavorable reserve development. We also incurred insurance and claims expense of $0.5 million in first quarter 2024 and $1.5 million for first quarter 2023, for accrued interest related to a previously-disclosed adverse jury verdict rendered on May 17, 2018, which we are continuing to defend. Interest is accrued at $0.5 million per month until such time as the outcome of the litigation is finalized, excluding months where the plaintiffs requested an extension of time to respond to our petition for review. For additional information related to this lawsuit, see Note 8 in the Notes to Consolidated Financial Statements (Unaudited) set forth in Part I of this report. The majority of our insurance and claims expense results from our claim experience and claim development under our self-insurance program; the remainder results from insurance premiums for claims in excess of our self-insured limits. We ren ewed our liability insurance policies on August 1, 2023 and are responsible for the first $10.0 million per claim on all claims with an annual $12.5 million aggregate for claims between $10.0 million and $20.0 million. For the policy year that began August 1, 2022, 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 $20.0 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, 2023 are $1.0 million higher than premiums for the previous policy year. Depreciation and amortization expense decreased $43 thousand or 0.1% in first quarter 2024 compared to first quarter 2023 and increased 0.8% as a percentage of operating revenues due primarily to a decrease in depreciation of furniture, office, and technology equipment as we continue to transition to more cloud-based technology solutions. These decreases were mostly offset by more trailers in service, the higher cost of new tractors and trailers, and the addition of auxiliary power units. The average age of our tractor fleet remains low by industry standards and was 2.1 years as of March 31, 2024, and the average age of our trailers was 5.0 years. We are continuing to invest in new tractors and trailers and our terminals in 2024 to improve our driver experience, increase operational efficiency and more effectively manage our maintenance, safety and fuel costs. During the remainder of 2024, we expect the average age of our tractor and trailer fleets to remain at or near current levels. Rent and purchased transportation expense decreased $16.3 million or 7.4% in first quarter 2024 compared to first quarter 2023, and increased 0.1% as a percentage of operating revenues. Rent and purchased transportation expense consists mostly of payments to third-party capacity providers in the Werner Logistics segment and other non-trucking operations, payments to 23 independent contractors in the TTS segment, and cloud-based technology fees. The payments to third-party capacity providers generally vary depending on changes in the volume of services generated by the Werner Logistics segment. Werner Logistics recorded revenue and brokered freight expense of $4.1 million in first quarter 2024 and $5.3 million in first quarter 2023 for certain shipments performed by the TTS segment (also recorded as trucking revenue by the TTS segment), and these transactions between reporting segments are eliminated in consolidation. Werner Logistics purchased transportation expense decreased $16.0 million in first quarter 2024 as a result of lower logistics revenues, but increased to 85.2% as a percentage of Werner Logistics revenues in first quarter 2024 from 82.4% in first quarter 2023. Rent and purchased transportation expense for the TTS segment decreased $1.4 million in first quarter 2024 compared to first quarter 2023 due primarily to fewer independent contractor miles and lower reimbursements to independent contractors because of lower average diesel fuel prices, partially offset by higher cloud-based technology fees. Independent contractor miles decreased approximately 1.4 million miles in first quarter 2024 and as a percentage of total miles were 4.3% in first quarter 2024 compared to 4.9% in first quarter 2023. 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 were to occur, increases in per-mile settlement rates (for independent contractors) and driver pay rates (for company drivers) may become necessary to attract and retain these drivers. These increased expenses could negatively affect our results of operations to the extent that we would not be able to obtain corresponding freight rate increases. Other operating expenses increased $14.1 million in first quarter 2024 compared to first quarter 2023 and increased 1.8% as a percentage of operating revenues due to lower gains on sales of property and equipment (primarily used tractors and trailers). Gains on sales of property and equipment are reflected as a reduction of other operating expenses and are reported net of sales-related expenses (which include costs to prepare the equipment for sale). Gains on sales of property and equipment were $3.6 million in first quarter 2024, compared to $18.3 million in first quarter 2023. We sold fewer tractors and substantially more trailers in first quarter 2024 compared to first quarter 2023 and realized lower average gains per tractor and trailer due to lower pricing in the market for our used equipment. Compared to 2023, we expect our gains on sales of property and equipment to be considerably lower in 2024, in a range between $10 million and $20 million for the year. Other Expense (Income) Other expense, net of other income, decreased $0.2 million in first quarter 2024 compared to first quarter 2023. Net interest expense decreased $0.1 million due to a decrease in average debt outstanding, mostly offset by higher interest rates for variable rate debt. In July 2023 and April 2024, we entered into additional variable-for-fixed interest rate swap agreements for notional amounts of $130.0 million and $75.0 million, respectively, to further limit our exposure to increases in interest rates on a portion of our variable-rate indebtedness (see Note 7 and Note 11 in the Notes to Consolidated Financial Statements (Unaudited) set forth in Part I of this report for information regarding these interest rate swaps). We continue to expect net interest expense for full-year 2024 to be an increase compared to 2023, primarily due to repricing of the BMO Term Loan that is maturing in May 2024 and the impact of two lower-priced interest rate swaps that are also expiring in May 2024. Year-over-year variability in debt can also be a factor, which has been a favorable offset through the first quarter of 2024. Income Tax Expense Income tax expense decreased $8.3 million in first quarter 2024 compared to first quarter 2023, due primarily to lower pre-tax income, partially offset by an increase in the effective income tax rate. Our effective income tax rate (income taxes expressed as a percentage of income before income taxes) was 32.9% in first quarter 2024 compared to 24.3% in first quarter 2023. The higher income tax rate was attributed primarily to a higher amount of unfavorable discrete income tax items in first quarter 2024 related to prior year state income tax audits and the tax impact of equity compensation. Liquidity and Capital Resources: We closely manage our liquidity and capital resources. Our liquidity requirements depend on key variables, including the level of investment needed to support business strategies, the performance of the business, capital expenditures, borrowing arrangements, and working capital management. Capital expenditures, business acquisitions, stock repurchases, and dividend payments are components of our cash flow and capital management strategy, which to a large extent, can be adjusted in response to economic and other changes in the business environment. Management’s approach to capital allocation focuses on 24 Table of Contents 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, 2024 is strong. As of March 31, 2024, we had $60.3 million of cash and cash equivalents and over $1.5 billion of stockholders’ equity. Cash is invested primarily in short-term money market funds. In addition, we have a $1.075 billion credit facility, for which our total available borrowing capacity was $559.1 million as of March 31, 2024 (see Note 7 in the Notes to Consolidated Financial Statements (Unaudited) set forth in Part I of this report for information regarding our credit agreements). After considering developments in the banking sector, we believe the six commercial banks in our $1.075 billion syndicated credit facility all have strong tier-one capital ratios and good loan-to-deposit ratios. We believe our liquid assets, cash generated from operating activities, and borrowing capacity under our existing credit facility will provide sufficient funds to meet our cash requirements and our planned shareholder returns for the foreseeable future. Item 7 of Part II of our 2023 Form 10-K includes our disclosure of material cash requirements as of December 31, 2023. There were no material changes in the nature of these items during the three months ended March 31, 2024. Cash Flows During the three months ended March 31, 2024, we generated cash flow from operations of $88.6 million, a 46.9% or $78.3 million decrease in cash flows compared to the same three-month period a year ago. The decrease in net cash provided by operating activities was due primarily to working capital changes and a decrease in net income for the three-month period ended March 31, 2024. We were able to make net capital expenditures, repay debt, make strategic investments, pay dividends, and repurchase company stock with the net cash provided by operating activities and existing cash balances. Net cash used in investing activities was $19.4 million for the three-month period ended March 31, 2024 compared to $129.2 million during the same period in 2023. Net property and equipment additions (primarily revenue equipment) were $19.0 million for the three-month period ended March 31, 2024, compared to $102.7 million during the same period of 2023. We currently estimate net capital expenditures (primarily revenue equipment) in 2024 to be in the range of $250 million to $300 million, compared to net capital expenditures in 2023 of $408.7 million. We intend to fund these net capital expenditures through cash flows from operations and financing available under our existing credit facility, if necessary. As of March 31, 2024, we were committed to property and equipment purchases of approximately $188.3 million. During the three-month period ended March 31, 2023, we purchased a $25.0 million subordinated promissory note from Mastery Logistics Systems, Inc. with a maturity date of January 24, 2030. Net financing activities used $70.8 million during the three months ended March 31, 2024, and used $16.2 million during the same period in 2023. We had net repayments on our debt of $51.3 million during the three months ended March 31, 2024, decreasing our outstanding debt to $597.5 million at March 31, 2024. We repaid $2.5 million on our debt during the three-month period ended March 31, 2023. We paid dividends of $8.9 million during the three months ended March 31, 2024 and $8.2 million during the same period in 2023. We currently plan to continue paying a quarterly dividend. Financing activities for the three months ended March 31, 2024, also included common stock repurchases of 167,818 shares at a cost of $6.5 million. We did not repurchase any shares of common stock during the same period in 2023. The Company has repurchased, and may continue to repurchase, shares of the Company’s common stock. The timing and amount of such purchases depend upon economic and stock market conditions and other factors. As of March 31, 2024, the Company had purchased 3,856,008 shares pursuant to our current Board of Directors repurchase authorization and had 2,143,992 shares remaining available for repurchase. Regulations: Item 1 of Part I of our 2023 Form 10-K includes a discussion of pending proposed regulations that may have an effect on our operations if they become adopted and effective as proposed. The following is an update to the regulations set forth in our 2023 Form 10-K. In March 2024, U.S. Environmental Protection Agency (“EPA”) released a Final Rule governing Greenhouse Gas (“GHG”) Emissions Standards for Heavy-Duty Vehicles - Phase 3, which requires more stringent greenhouse gas standards for heavy-duty vehicles and revises the “Phase 2” greenhouse gas standards established in 2016. Short haul (day cab) and long haul (sleeper cab) tractor GHG standards under the Final Rule phase in starting with model years 2028 through 2032. Werner continues to evaluate the Final Rule and any EPA-related developments impacting its fleet. There have been no other material changes in the status of the proposed regulations previously disclosed in the 2023 Form 10-K. 25 Table of Contents Critical Accounting Estimates: The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the (i) reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and (ii) reported amounts of revenues and expenses during the reporting period. We evaluate these estimates on an ongoing basis as events and circumstances change, utilizing historical experience, consultation with experts and other methods considered reasonable in the particular circumstances. Actual results could differ from those estimates and may significantly impact our results of operations from period to period. It is also possible that materially different amounts would be reported if we used different estimates or assumptions. Information regarding our Critical Accounting Estimates can be found in our 2023 Form 10-K. Estimates of accrued liabilities for insurance and claims for bodily injury and property damage is a critical accounting estimate that requires us to make significant judgments and estimates and affects our financial statements. There have been no material changes to this critical accounting estimate from that discussed in our 2023 Form 10-K.