NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The accompanying consolidated financial statements include the accounts of Werner Enterprises, Inc. and its subsidiaries (collectively, the “Company”). All significant intercompany accounts and transactions relating to these entities have been eliminated.
Nature of Business: The Company is a truckload transportation and logistics provider operating under the jurisdiction of the U.S. Department of Transportation, similar governmental transportation agencies in the foreign countries in which we operate and various U.S. state regulatory authorities. Our ten largest customers comprised 49% of our revenues for the years ended December 31, 2021 and 2020, and 41% for the year ended December 31, 2019. Our largest customer, Dollar General, accounted for 14% and 12% of our total revenues in 2021 and 2020, respectively. Revenues generated by Dollar General are reported in both of our reportable operating segments. No single customer generated more than 9% of our total revenues in 2019.
Use of Management Estimates: The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management 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. The most significant estimates that affect our financial statements include the accrued liabilities for insurance and claims, useful lives and salvage values of property and equipment, estimates for income taxes and the allowance for doubtful accounts. Actual results could differ from those estimates.
Cash and Cash Equivalents: We consider all highly liquid investments, purchased with a maturity of three months or less, to be cash equivalents. Accounts at banks with an aggregate excess of the amount of checks issued over cash balances are included in current liabilities in the consolidated balance sheets, and changes in such accounts are reported as a financing activity in the consolidated statements of cash flows.
Trade Accounts Receivable: We record trade accounts receivable at the invoiced amounts, net of an allowance for doubtful accounts for potentially uncollectible receivables. We review the financial condition of customers for granting credit and determine the allowance based on analysis of individual customers’ financial condition, historical write-off experience and national economic conditions. We evaluate the adequacy of our allowance for doubtful accounts quarterly. Past due balances over 90 days and exceeding a specified amount are reviewed individually for collectibility. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. We do not have any off-balance-sheet credit exposure related to our customers.
Inventories and Supplies: Inventories and supplies are stated at the lower of average cost and net realizable value and consist primarily of revenue equipment parts, tires, fuel and supplies. Tires placed on new revenue equipment are capitalized as a part of the equipment cost. Replacement tires are expensed when placed in service.
Property, Equipment, and Depreciation: Additions and improvements to property and equipment are capitalized at cost, while maintenance and repair expenditures are charged to operations as incurred. Gains and losses on the sale or exchange of equipment are recorded in other operating expenses.
Depreciation is calculated based on the cost of the asset, reduced by the asset’s estimated salvage value, using the straight-line method. Accelerated depreciation methods are used for income tax purposes. The lives and salvage values assigned to certain assets for financial reporting purposes are different than for income tax purposes. For financial reporting purposes, assets are generally depreciated using the following estimated useful lives and salvage values:
| | | | | | | | | | | | | | |
| | | Lives | | Salvage Values |
| Building and improvements | | 30 years | | 0% |
| Tractors | | 80 months | | $0 - $10,000 |
| Trailers | | 12 years | | $1,000 - $6,000 |
| Service and other equipment | | 3-10 years | | 0% |
During first quarter 2020, we changed the estimated life of certain trucks expected to be sold in 2020 to more rapidly depreciate the trucks to their estimated residual values due to the weak used truck market. The effect of this change in accounting estimate
was a $9.6 million increase to 2020 depreciation expense. These trucks continued to depreciate at the same higher rate per truck, until all were sold in 2020.
Goodwill: Goodwill represents the excess of cost over the fair value of net identifiable tangible and intangible assets acquired in a business combination and is allocated to reporting units that are expected to benefit from the combination. Goodwill is not amortized, but rather is tested for impairment annually in October, or more frequently if indicators of a potential impairment exist. Impairment exists when the carrying amount of a reporting unit that includes goodwill exceeds its fair value, resulting in an impairment charge for the excess up to the amount of goodwill allocated to the reporting unit. To test goodwill for impairment, we have the option to first perform a qualitative assessment to determine if it is more likely than not that the carrying amount of a reporting unit exceeds its fair value. If a qualitative test indicates a potential for impairment, a quantitative impairment test must be performed. Alternatively, we may bypass the qualitative assessment and perform a quantitative impairment test. A qualitative assessment considers relevant events and circumstances such as macroeconomic, industry, and market conditions; legal, regulatory, and competitive environments; and overall financial performance. For a quantitative impairment test, we estimate the fair values of the goodwill reporting units and compare it to their carrying values. The estimated fair values of the reporting units are established using a combination of the income and market approaches. Our first annual goodwill impairment test is scheduled to be performed in October 2022. As of December 31, 2021, there were no indications of goodwill impairment.
Amortization of Intangible Assets: Intangible assets with finite lives are amortized on a straight-line basis over their estimated useful lives, ranging from ten to 12 years.
Long-Lived Assets and Intangible Assets: We review our long-lived assets and finite-lived intangible assets for impairment whenever events or circumstances indicate the carrying amount of such assets may not be recoverable. If based on that review, changes in circumstances indicate that the carrying amount of such assets may not be recoverable, we evaluate recoverability by comparing the undiscounted cash flows associated with the asset to the asset's carrying amount. We also evaluate the remaining useful lives of intangible assets to determine if events or trends warrant a revision to the remaining period of amortization. An impairment loss would be recognized if the carrying amount of the long-lived asset or intangible asset is not recoverable and the carrying amount exceeds its fair value. For long-lived assets classified as held and used, the carrying amount is not recoverable when the carrying value of the long-lived asset exceeds the sum of the future net cash flows. We do not separately identify assets by operating segment because tractors and trailers are routinely transferred from one operating fleet to another. As a result, none of our long-lived assets have identifiable cash flows from use that are largely independent of the cash flows of other assets and liabilities. Thus, the asset group used to assess impairment would include all of our assets.
Insurance and Claims Accruals: Insurance and claims accruals (both current and non-current) reflect the estimated cost (including estimated loss development, incurred-but-not-reported losses and loss adjustment expenses) for (i) cargo loss and damage, (ii) bodily injury and property damage, (iii) group health and (iv) workers’ compensation claims not covered by insurance. The costs for cargo, bodily injury and property damage insurance and claims are included in insurance and claims expense in the consolidated statements of income; the costs of group health and workers’ compensation claims are included in salaries, wages and benefits expense. The insurance and claims accruals are recorded at the estimated ultimate payment amounts. The accruals for bodily injury, property damage and workers’ compensation are based upon individual case estimates and actuarial estimates of loss development for reported losses and incurred-but-not-reported losses using loss development factors based upon past experience. In order to determine the loss development factors, we make judgments relating to the comparability of historical claims to current claims. These judgments consider the nature, frequency, severity, and age of claims, and industry, regulatory, and company-specific trends impacting the development of claims. Actual costs related to insurance and claims have not differed materially from estimated accrued amounts for all years presented. An independent actuary reviews our calculation of the undiscounted self-insurance reserves for bodily injury and property damage claims and workers’ compensation claims at year-end.
We renewed our liability insurance policies on August 1, 2021 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 $15.0 million. For the policy year that began August 1, 2020, we were responsible for the first $10.0 million per claim with no aggregates. Our self-insured retention (“SIR”) and deductible amount was $3.0 million, with an additional $5.0 million deductible per claim for each claim between 5.0 million and $10.0 million, for policy years from August 1, 2017 through July 31, 2020, and we were also responsible for annual aggregate amounts of liability for claims in excess of the SIR/ deductible. We maintain liability insurance coverage with insurance carriers in excess of the $10.0 million per claim. We are also responsible for administrative expenses for each occurrence involving bodily injury or property damage.
Our SIR for workers’ compensation claims is $2.0 million per claim, with premium-based coverage (issued by insurance companies) for claims exceeding this amount. Our SIR for workers’ compensation claims increased from $1.0 million to $2.0
million per claim on April 1, 2020. We also maintain a $25.6 million bond for the State of Nebraska and a $13.4 million bond for our workers’ compensation insurance carrier.
Under these insurance arrangements, we maintained $43.0 million in letters of credit as of December 31, 2021.
Revenue Recognition: The consolidated statements of income reflect recognition of operating revenues (including fuel surcharge revenues) and related direct costs over time as control of the promised services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those services. For shipments where a third-party capacity provider (including independent contractors under contract with us) is utilized to provide some or all of the service, we evaluate whether we are the principal (i.e., report revenues on a gross basis) or agent (i.e., report revenues on a net basis).
Foreign Currency Translation: Local currencies are generally considered the functional currencies outside the United States. Assets and liabilities are translated at year-end exchange rates for operations in local currency environments. Foreign revenues and expense items denominated in the functional currency are translated at the average rates of exchange prevailing during the year. Foreign currency translation adjustments reflect the changes in foreign currency exchange rates applicable to the net assets of the foreign operations. Foreign currency translation adjustments are recorded in accumulated other comprehensive loss within stockholders’ equity in the consolidated balance sheets and as a separate component of comprehensive income in the consolidated statements of comprehensive income.
Income Taxes: Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using the enacted tax rates that are expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
In accounting for uncertain tax positions, we recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. We recognize interest and penalties directly related to income tax matters in income tax expense.
Common Stock and Earnings Per Share: Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares outstanding plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options and restricted stock awards. There are no differences in the numerators of our computations of basic and diluted earnings per share for any periods presented. The computation of basic and diluted earnings per share is shown below (in thousands, except per share amounts).
| | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Net income attributable to Werner | $ | 259,052 | | | $ | 169,078 | | | $ | 166,944 | |
| Weighted average common shares outstanding | 67,434 | | | 69,018 | | | 69,567 | |
| Dilutive effect of stock-based awards | 421 | | | 409 | | | 459 | |
| Shares used in computing diluted earnings per share | 67,855 | | | 69,427 | | | 70,026 | |
| Basic earnings per share | $ | 3.84 | | | $ | 2.45 | | | $ | 2.40 | |
| Diluted earnings per share | $ | 3.82 | | | $ | 2.44 | | | $ | 2.38 | |
There were no options to purchase shares of common stock that were outstanding during the periods indicated above that were excluded from the computation of diluted earnings per share because the option purchase price was greater than the average market price of the common shares during the period. Performance awards are excluded from the calculation of dilutive potential common shares until the threshold performance conditions have been satisfied.
Equity Compensation: We have an equity compensation plan that provides for grants of non-qualified stock options, restricted stock and units (“restricted awards”), performance awards and stock appreciation rights to our associates and directors. We apply the fair value method of accounting for equity compensation awards. Issuances of stock upon an exercise of stock options or vesting of restricted stock are made from treasury stock; shares reacquired to satisfy tax withholding obligations upon vesting of restricted stock are recorded as treasury stock. Grants of stock options, restricted stock, and performance awards vest in
increments, and we recognize compensation expense over the requisite service period of each award. We accrue compensation expense for performance awards for the estimated number of shares expected to be issued using the most current information available at the date of the financial statements. If the performance objectives are not met, no compensation expense will be recognized, and any previously recognized compensation expense will be reversed. We account for forfeitures in the period in which they occur.
Comprehensive Income: Comprehensive income consists of net income and other comprehensive income (loss). Other comprehensive income (loss) refers to revenues, expenses, gains and losses that are not included in net income, but rather are recorded directly in stockholders’ equity. For the years ended December 31, 2021, 2020 and 2019, comprehensive income consists of net income, foreign currency translation adjustments and change in fair value of interest rate swaps. The components of accumulated other comprehensive loss reported in the consolidated balance sheets as of December 31, 2021 and 2020, consisted of foreign currency translation adjustments of $18.6 million and $17.2 million, respectively, and changes in fair value of interest rate swaps, net of tax, of $2.0 million and $5.6 million, respectively.
New Accounting Pronouncements Adopted: In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,” which reduces complexity in accounting for income taxes by removing certain exceptions to the general principles stated in Topic 740 and by clarifying and amending existing guidance to improve consistent application of and simplify other areas of Topic 740. The Company adopted ASU 2019-12 as of January 1, 2021. Upon adoption, this update had no effect on our financial position, results of operations, and cash flows.
Accounting Standards Updates Not Yet Effective: In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848)” which provides optional guidance for a limited period of time to ease the potential burden in accounting for reference rate reform on financial reporting. The provisions of this update are effective for all entities as of March 12, 2020 through December 31, 2022 and apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. We are evaluating the impact of the optional expedients in this update and their applicability to modifications of our existing credit facilities and hedging relationships that reference LIBOR.
(2) BUSINESS ACQUISITIONS
ECM Acquisition
On July 1, 2021, pursuant to a Unit Purchase Agreement, we acquired an 80% ownership interest in ECM Associated, LLC ("ECM”), based in Cheswick, Pennsylvania, for $141.3 million after net working capital changes and net of cash acquired. We have an exclusive option to purchase the remaining 20% ownership interest in ECM upon the occurrence of certain events or after a period of five years following transaction close, based on a fixed multiple of ECM’s average annual adjusted earnings before interest, taxes, depreciation and amortization. The noncontrolling interest holder also has an option to put the remaining 20% ownership interest to us on the same terms. We record the 20% remaining interest in temporary equity – redeemable noncontrolling interest in the consolidated balance sheets.
ECM, through its ECM Transport, LLC (“ECM Transport”) and Motor Carrier Service (“MCS”) subsidiaries, provides regional truckload carrier services in the Mid-Atlantic, Ohio, and Northeast regions of the U.S. and operates nearly 500 trucks and 2,000 trailers in its network of eight operational facilities and 18 drop yards. The primary reason for this acquisition was to expand our fleet size, operational facilities, geographic market presence, and short-haul expertise in a segment in which consumer demand and supply chain needs are growing.
We financed the cash transaction through a combination of cash on hand, existing credit facilities, and the addition of a $100.0 million unsecured fixed-rate term loan commitment with BMO Harris Bank N.A. on June 30, 2021. For more information regarding our debt, see Note 8 – Debt and Credit Facilities.
The results of operations for ECM are included in our consolidated financial statements beginning July 1, 2021. Revenues generated by ECM are reported in our Truckload Transportation Services (“TTS”) segment. We incurred transaction costs related to the acquisition, such as legal and professional fees, of $1.0 million for the year ended December 31, 2021, which is included in other operating expenses on the consolidated statements of income.
NEHDS Acquisition
On November 22, 2021, we acquired 100% of the equity interests in NEHDS Logistics, LLC (“NEHDS”), based in Monroe, Connecticut, for a cash purchase price of $63.1 million after including the impacts of contingent consideration, net working capital changes and cash acquired. We financed the transaction through a combination of cash on hand and existing credit facilities. NEHDS is a final mile residential delivery provider with access to a network of 400 final mile delivery trucks serving
customers primarily in the Northeast and Midwest U.S. markets. NEHDS delivers primarily big and bulky products (primarily furniture and appliances) using 2-person delivery teams performing residential and commercial deliveries through a network of 19 cross dock, warehouse, and customer facilities.
The results of operations for NEHDS are included in our consolidated financial statements beginning November 22, 2021. Revenues generated by NEHDS are reported in Final Mile within our Werner Logistics segment. We incurred transaction costs related to the acquisition, such as legal and professional fees, of $0.6 million for the year ended December 31, 2021, which is included in other operating expenses on the consolidated statements of income.
Purchase Price Allocations
We accounted for the purchases of ECM and NEHDS using the acquisition method of accounting under U.S. generally accepted accounting principles (GAAP). The purchase price of each acquisition has been allocated to the assets acquired and liabilities assumed using market data and valuation techniques. The purchase price allocation for ECM is considered final. The estimated fair values of the assets acquired and liabilities assumed are considered provisional for NEHDS, pending the completion of the valuation of acquired tangible assets, an independent valuation of certain acquired intangible assets, and the calculation of deferred taxes based upon the underlying tax basis of assets acquired and liabilities assumed. The determination of estimated fair values requires management to make significant estimates and assumptions. We believe that the information available provides a reasonable basis for estimating the values of assets acquired and liabilities assumed in the NEHDS acquisition; however, these provisional estimates may be adjusted upon the availability of new information regarding facts and circumstances which existed at the acquisition date, and such adjustments may impact future earnings. We expect to finalize the valuation of assets and liabilities for NEHDS as soon as practicable, but not later than one year from the acquisition date. Any adjustments to the initial estimates of the fair value of the acquired assets and liabilities assumed in the NEHDS acquisition will be recorded as adjustments to the respective assets and liabilities, with the residual amounts allocated to goodwill.
The purchase price allocations for ECM and NEHDS as of December 31, 2021 are summarized as follows (in thousands):
| | | | | | | | | | | | | | |
| ECM | | NEHDS | |
| Purchase Price | | | | |
| Cash consideration paid | 155,686 | | (1) | 60,332 | | (2) |
| Cash and cash equivalents acquired | (13,327) | | | (332) | | |
| Contingent consideration arrangement | — | | | 2,500 | | (3) |
| Working capital surplus (deficiency) | (1,068) | | | 554 | | |
| Total purchase price (fair value of consideration) | 141,291 | | | 63,054 | | |
| | | | |
| Provisional Purchase Price Allocation | | | | |
| Current assets | 17,468 | | | 3,508 | | |
| Property and equipment | 88,632 | | | 5,420 | | |
| Intangible assets | 37,200 | | | 20,000 | | |
| Other non-current assets | 3,644 | | | 12,122 | | |
| Total assets acquired | 146,944 | | | 41,050 | | |
| | | | |
| Current liabilities | (7,721) | | | (4,014) | | |
| Other long-term liabilities | (2,460) | | | (10,516) | | |
| Total liabilities assumed | (10,181) | | | (14,530) | | |
| Temporary equity - redeemable noncontrolling interest in ECM | (33,556) | | | — | | |
| Goodwill | $ | 38,084 | | | $ | 36,534 | | |
(1) At closing, $1.5 million of the cash consideration was placed in escrow to cover post-closing adjustments and to secure certain indemnification obligations of the sellers.
(2) At closing, $3.1 million of the cash consideration was placed in escrow to cover post-closing adjustments and to secure certain indemnification obligations of the sellers.
(3) The contingent consideration arrangement, also referred to as earnout, requires us to pay the former owners of NEHDS additional amounts in cash if certain levels of gross profit and revenues are earned during calendar year 2022. The potential undiscounted amount of all future earnout payments that we could be required to make is between $0 and $4.0 million. The fair value of the contingent consideration arrangement of $2.5 million was estimated by management.
Goodwill and Intangible Assets
Goodwill associated with the ECM and NEHDS acquisitions was primarily attributable to acquiring and retaining each of the companies’ existing networks and the anticipated synergies from combining the operations of the Company and the acquired companies. The goodwill associated with the acquisitions above is expected to be deductible for income tax purposes.
We have allocated a total of $57.2 million of the purchase prices above to finite-lived intangible assets, consisting of customer relationships and trade names. The estimated fair values of the intangible assets were determined, with the assistance of an independent third-party valuation firm, using the multi-period excess earnings method for customer relationships and the relief-from-royalty method for trade names. All methods are forms of the income approach, which require a forecast of all the expected future cash flows.
The following table summarizes the major classes of intangible assets and the respective weighted-average estimated amortization periods:
| | | | | | | | | | | |
| Estimated Fair Value
(in thousands) | | Weighted-Average Estimated
Amortization Period
(Years) |
| Customer relationships | $ | 40,200 | | | 10 |
| Trade names | 17,000 | | | 12 |
| Total intangible assets | $ | 57,200 | | | |
(3) REVENUE
Revenue Recognition
Revenues are recognized over time as control of the promised services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those services.
The following table presents our revenues disaggregated by revenue source (in thousands):
| | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| Truckload Transportation Services | $ | 2,045,073 | | | $ | 1,843,209 | | | $ | 1,909,776 | |
| Werner Logistics | 622,461 | | | 469,791 | | | 489,729 | |
| Inter-segment eliminations | (899) | | | (107) | | | (243) | |
| Transportation services | 2,666,635 | | | 2,312,893 | | | 2,399,262 | |
| Other revenues | 67,737 | | | 59,285 | | | 64,439 | |
| Total revenues | $ | 2,734,372 | | | $ | 2,372,178 | | | $ | 2,463,701 | |
The following table presents our revenues disaggregated by geographic areas in which we conduct business (in thousands). Operating revenues for foreign countries include revenues for (i) shipments with an origin or destination in that country and (ii) other services provided in that country. If both the origin and destination are in a foreign country, the revenues are attributed to the country of origin.
| | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| United States | $ | 2,532,720 | | | $ | 2,144,105 | | | $ | 2,191,560 | |
| Mexico | 156,405 | | | 149,438 | | | 197,470 | |
| Other | 45,247 | | | 78,635 | | | 74,671 | |
| Total revenues | $ | 2,734,372 | | | $ | 2,372,178 | | | $ | 2,463,701 | |
Transportation Services
We generate nearly all of our revenues by transporting truckload freight shipments for our customers. Transportation services are carried out by our Truckload Transportation Services (“TTS”) segment and our Werner Logistics (“Logistics”) segment. The TTS segment utilizes company-owned and independent contractor trucks to deliver shipments, while the Logistics segment uses third-party capacity providers.
We generate revenues from billings for transportation services under contracts with customers, generally on a rate per mile or per shipment, based on origin and destination of the shipment. Our performance obligation arises when we receive a shipment order to transport a customer’s freight and is satisfied upon delivery of the shipment. The transaction price may be defined in a
transportation services agreement or negotiated with the customer prior to accepting the shipment order. A customer may submit several shipment orders for transportation services at various times throughout a service agreement term, but each shipment represents a distinct service that is a separately identified performance obligation. We often provide additional or ancillary services as part of the shipment (such as loading/unloading and stops in transit) which are not distinct or are not material in the context of the contract; therefore, the revenues for these services are recognized with the freight transaction price. The average transit time to complete a shipment is approximately 3 days. Invoices for transportation services are typically generated soon after shipment delivery and, while payment terms and conditions vary by customer, are generally due within 30 days after the invoice date.
The consolidated statements of income reflect recognition of transportation revenues (including fuel surcharge revenues) and related direct costs over time as the shipment is being delivered. We use distance shipped (for the TTS segment) and transit time (for the Logistics segment) to measure progress and the amount of revenues recognized over time, as the customer simultaneously receives and consumes the benefit. Determining a measure of progress requires us to make judgments that affect the timing of revenues recognized. We have determined that the methods described provide a faithful depiction of the transfer of services to the customer.
For shipments where a third-party capacity provider (including independent contractors under contract with us) is utilized to provide some or all of the service, we evaluate whether we are the principal (i.e., report revenues on a gross basis) or agent (i.e., report revenues on a net basis). Generally, we report such revenues on a gross basis, that is, we recognize both revenues for the service we bill to the customer and rent and purchased transportation expense for transportation costs we pay to the third-party provider. Where we are the principal, we control the transportation service before it is provided to our customers, which is supported by us being primarily responsible for fulfilling the shipment obligation to the customer and having a level of discretion in establishing pricing with the customer.
During 2021, 2020, and 2019, revenues recognized from performance obligations related to prior periods (for example, due to changes in transaction price) were not material.
Other Revenues
Other revenues include revenues from our driver training schools, transportation-related activities such as third-party equipment maintenance and equipment leasing, and other business activities. These revenues are generally recognized over time and accounted for 2% of our total revenues in both 2021 and 2020, and 3% of our total revenues in 2019. Revenues from our driver training schools require us to make judgments regarding price concessions in determining the amount of revenues to recognize.
Contract Balances and Accounts Receivable
A receivable is an unconditional right to consideration and is recognized when shipments have been completed and the related performance obligation has been fully satisfied. At December 31, 2021 and 2020, the accounts receivable, trade, net, balance was $460.5 million and $341.1 million, respectively. Contract assets represent a conditional right to consideration in exchange for goods or services and are transferred to receivables when the rights become unconditional. At December 31, 2021 and 2020, the balance of contract assets was $9.0 million and $6.9 million, respectively. We have recognized contract assets within the other current assets financial statement caption on the consolidated balance sheets. These contract assets are considered current assets as they will be settled in less than 12 months.
Contract liabilities represent advance consideration received from customers and are recognized as revenues over time as the related performance obligation is satisfied. At December 31, 2021 and 2020, the balance of contract liabilities was $1.2 million and $1.5 million, respectively. The amount of revenues recognized in 2021 that was included in the December 31, 2020 contract liability balance was $1.5 million. We have recognized contract liabilities within the accounts payable and other current liabilities financial statement captions on the consolidated balance sheets. These contract liabilities are considered current liabilities as they will be settled in less than 12 months.
Performance Obligations
We have elected to apply the practical expedient in Accounting Standards Codification (“ASC”) Topic 606, Revenue From Contracts With Customers, to not disclose the value of remaining performance obligations for contracts with an original expected length of one year or less. Remaining performance obligations represent the transaction price allocated to future reporting periods for freight shipments started but not completed at the reporting date that we expect to recognize as revenue in the period subsequent to the reporting date; transit times generally average approximately 3 days.
(4) GOODWILL AND INTANGIBLE ASSETS
The following table summarizes changes in the carrying amount of goodwill by segment for the year ended December 31, 2021 (in thousands):
| | | | | | | | | | | | | | | | | |
| TTS | | Werner Logistics | | Total |
| Balance as of December 31, 2020 | $ | — | | | $ | — | | | $ | — | |
| Goodwill recorded in acquisition of ECM | 44,710 | | | — | | | 44,710 | |
| Goodwill recorded in acquisition of NEHDS | — | | | 36,534 | | | 36,534 | |
Purchase accounting adjustments (1) | (6,626) | | | — | | | (6,626) | |
| Balance as of December 31, 2021 | $ | 38,084 | | | $ | 36,534 | | | $ | 74,618 | |
(1) The purchase accounting adjustments are primarily attributable to post-closing adjustments related to assets assumed in, and the redeemable noncontrolling interest associated with, the acquisition of ECM.
Acquired intangible assets consists of the following as of December 31, 2021 (in thousands):
| | | | | | | | | | | | | | | | | |
| Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Carrying
Amount |
| Customer relationships | $ | 40,200 | | | $ | (1,177) | | | $ | 39,023 | |
| Trade names | 17,000 | | | (708) | | | 16,292 | |
| Total intangible assets | $ | 57,200 | | | $ | (1,885) | | | $ | 55,315 | |
No acquired intangible assets were recorded on the consolidated balance sheet as of December 31, 2020. Amortization expense on intangible assets was $1.9 million for the year ended December 31, 2021. As of December 31, 2021, the estimated future amortization expense for intangible assets by year is as follows (in thousands):
| | | | | |
| Estimated
Amortization
Expense |
| 2022 | $ | 5,437 | |
| 2023 | 5,437 | |
| 2024 | 5,437 | |
| 2025 | 5,437 | |
| 2026 | 5,437 | |
| Thereafter (to 2033) | 28,130 | |
| Total | $ | 55,315 | |
(5) LEASES
We have entered into operating leases primarily for real estate. The leases have terms which range from 1 year to 18 years, and some include options to renew. Renewal terms are included in the lease term when it is reasonably certain that we will exercise the option to renew.
Operating leases are included in other non-current assets, other current liabilities and other long-term liabilities on the consolidated balance sheets. These assets and liabilities are recognized based on the present value of future minimum lease payments over the lease term at commencement date, using our incremental borrowing rate because the rate implicit in each lease is not readily determinable. We have certain contracts for real estate that may contain lease and non-lease components which we have elected to treat as a single lease component. Lease expense for operating leases is recognized on a straight-line basis over the lease term. Variable lease expense is recognized in the period in which the obligation for those payments is incurred. Lease expense is reported in rent and purchased transportation on the consolidated statements of income.
The following table presents balance sheet and other operating lease information (dollars in thousands):
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| Balance Sheet Classification | | | |
| Right-of-use assets (recorded in other non-current assets) | $ | 28,458 | | | $ | 9,951 | |
| | | |
| Current lease liabilities (recorded in other current liabilities) | $ | 6,380 | | | $ | 3,421 | |
| Long-term lease liabilities (recorded in other long-term liabilities) | 22,634 | | | 6,949 | |
| Total operating lease liabilities | $ | 29,014 | | | $ | 10,370 | |
| | | |
| Other Information | | | |
| Weighted-average remaining lease term for operating leases | 7.63 years | | 3.82 years |
| Weighted-average discount rate for operating leases | 2.7 | % | | 3.3 | % |
The following table presents the maturities of operating lease liabilities as of December 31, 2021 (in thousands):
| | | | | |
| Maturity of Lease Liabilities | |
| 2022 | $ | 7,048 | |
| 2023 | 5,638 | |
| 2024 | 4,681 | |
| 2025 | 3,882 | |
| 2026 | 2,739 | |
| Thereafter | 8,077 | |
| Total undiscounted operating lease payments | $ | 32,065 | |
| Less: Imputed interest | (3,051) | |
| Present value of operating lease liabilities | $ | 29,014 | |
Cash Flows
An initial right-of-use asset of $8.7 million was recognized as a non-cash asset addition with the adoption of the new lease accounting standard on January 1, 2019. During the years ended December 31, 2021, 2020, and 2019, additional right-of-use assets of $8.2 million, $2.8 million, and $6.1 million, respectively, were recognized as non-cash asset additions that resulted from new operating lease liabilities, and we acquired right-of-use assets of $15.6 million as a result of our business acquisitions during the year ended December 31, 2021. Cash paid for amounts included in the present value of operating lease liabilities was $4.6 million, $3.9 million, and $3.8 million during the years ended December 31, 2021, 2020, and 2019, respectively, and are included in operating cash flows.
Operating Lease Expense
Operating lease expense was $15.7 million, $10.1 million, and $8.5 million during the years ended December 31, 2021, 2020, and 2019, respectively. This expense included $4.8 million for long-term operating leases for the year ended December 31, 2021 and $3.8 million for both years ended December 31, 2020 and 2019, with the remainder for variable and short-term lease expense.
Lessor Operating Leases
We are the lessor of tractors and trailers under operating leases with initial terms of 2 to 10 years. We recognize revenue for such leases on a straight-line basis over the term of the lease. Revenues for the years ended December 31, 2021, 2020, and 2019 were $11.7 million, $12.6 million, and $13.9 million, respectively. The following table presents information about the maturities of these operating leases as of December 31, 2021 (in thousands):
| | | | | |
| 2022 | $ | 7,468 | |
| 2023 | 358 | |
| 2024 | — | |
| 2025 | — | |
| 2026 | — | |
| Thereafter | — | |
| Total | $ | 7,826 | |
(6) FAIR VALUE
Fair Value Measurement — Definition and Hierarchy
ASC 820-10, Fair Value Measurement, defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date.
ASC 820-10 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability, developed based on market data obtained from sources independent of the Company. Unobservable inputs reflect our own assumptions about the assumptions market participants would use in pricing the asset or liability, developed based on the best information available in the circumstances.
The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels, as follows:
Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access.
Level 2 — Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Such inputs include quoted prices in markets that are not active, quoted prices for similar assets and liabilities in active and inactive markets, inputs other than quoted prices that are observable for the asset or liability and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 — Unobservable inputs for the asset or liability, where there is little, if any, observable market activity or data for the asset or liability.
In general, and where applicable, we use quoted prices in active markets for identical assets or liabilities to determine fair value. This pricing methodology applies to our Level 1 assets and liabilities. If quoted prices in active markets for identical assets and liabilities are not available to determine fair value, then we use quoted prices for similar assets and liabilities or inputs other than the quoted prices that are observable, either directly or indirectly. This pricing methodology would apply to Level 2 assets and liabilities.
The following table presents the Company's fair value hierarchy for assets measured at fair value on a recurring basis (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value |
| | Level in Fair | | December 31, |
| | Value Hierarchy | | 2021 | | 2020 |
| Other non-current assets: | | | | | |
| Equity securities (1) | 1 | | $ | 17,166 | | | N/A |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
(1) Represents our investments in autonomous technology companies. For additional information regarding the valuation of these equity securities, see Note 7 – Investments.
We have no material liabilities measured at fair value on a recurring basis as of December 31, 2021 and 2020.
Our ownership interest in Mastery Logistics Systems, Inc. (“MLSI”) does not have a readily determinable fair value and is accounted for using the measurement alternative in ASC 321, Investments - Equity Securities. For additional information regarding the valuation of our investment in MLSI, see Note 7 – Investments.
Fair Value of Financial Instruments Not Recorded at Fair Value
Cash, accounts receivable trade, and accounts payable are short-term in nature and accordingly are carried at amounts that approximate fair value. These financial instruments are recorded at or near their respective transaction prices and historically have been settled or converted to cash at approximately that value (categorized as Level 2 of the fair value hierarchy).
The carrying amounts of our long-term debt approximate fair value due to the duration of our credit arrangements and the variable interest rates (categorized as Level 2 of the fair value hierarchy).
(7) INVESTMENTS
Equity Investments without Readily Determinable Fair Values
In 2020, we entered into a strategic partnership with MLSI, a transportation management systems company. We are collaborating with MLSI to develop a cloud-based transportation management system using MLSI's SaaS technology which we have agreed to license. In both November 2020 and September 2021, we paid MLSI $5.0 million for shares of its preferred stock. As of December 31, 2021, our ownership percentage in MLSI was approximately 9.8%. This investment is being accounted for under ASC 321 using the measurement alternative, and is recorded in other noncurrent assets on the consolidated balance sheets. We record changes in the value of this investment, based on events that occur that would indicate the value of our investment in MLSI has changed, in other expense (income) on the consolidated statements of income. During 2021, an investment by a third-party resulted in the remeasurement of our investment in MLSI and we recognized a $28.2 million unrealized gain on our investment based upon the price paid by the third party. As of December 31, 2021 and 2020, the value of our investment was $38.2 million and $5.0 million, respectively.
Equity Investments with Readily Determinable Fair Values
During 2021, we acquired strategic minority equity investments in autonomous technology companies, which are being accounted for under ASC 321 and are recorded in other noncurrent assets on the consolidated balance sheets. We record changes in the value of these investments, based on the share prices reported by Nasdaq, in other expense (income) on the consolidated statements of income. We recognized a $12.1 million net unrealized gain on these investments for the year ended December 31, 2021. For additional information regarding the fair value of these equity investments, see Note 6 – Fair Value.
(8) DEBT AND CREDIT FACILITIES
On June 30, 2021, we amended our existing credit agreement, dated May 14, 2019, with BMO Harris Bank N.A. The amendment added an unsecured fixed-rate term loan commitment not to exceed a principal amount of $100.0 million and increased our borrowing capacity with BMO Harris Bank N.A. from $200.0 million to $300.0 million. The outstanding principal balance of the term loan bears interest at a fixed rate of 1.28%.
As of December 31, 2021, we had a $300.0 million and a $200.0 million unsecured committed credit facility with Wells Fargo Bank, N.A. and BMO Harris Bank N.A. (together, the “Credit Facilities”), respectively, which will expire on May 14, 2024. Borrowings under the Credit Facilities bear variable interest based on the London Interbank Offered Rate (“LIBOR”). In addition, we had a $100.0 million unsecured fixed-rate term loan commitment with BMO Harris Bank N.A., as described above, with quarterly principal payments of $1.25 million, which began on September 30, 2021, and a final payment of principal and interest due and payable on May 14, 2024.
As of December 31, 2021 and 2020, our outstanding debt totaled $427.5 million and $200.0 million, respectively. As of December 31, 2021, we had $330.0 million outstanding under the Credit Facilities, including (i) $180.0 million at a weighted average variable interest rate of 0.78%; (ii) $75.0 million at a variable interest rate of 0.78%, which is effectively fixed at 2.32% with an interest rate swap agreement through May 14, 2024; and (iii) $75.0 million at a variable interest rate of 0.80%, which is effectively fixed at 2.36% with an interest rate swap agreement through May 14, 2024. In addition, as of December 31, 2021, we had $97.5 million outstanding under the term loan at a fixed interest rate of 1.28%. The $500.0 million of borrowing capacity under our Credit Facilities at December 31, 2021, is further reduced by $54.9 million in stand-by letters of credit under which we are obligated. Each of the debt agreements includes, among other things, financial covenants requiring us (i) to exceed a minimum ratio of earnings before interest, income taxes, depreciation and amortization to interest expense and/or (ii) not to exceed a maximum ratio of total funded debt to earnings before interest, income taxes, depreciation and amortization (as such terms are defined in each credit facility). As of December 31, 2021, we were in compliance with these covenants.
At December 31, 2021, the aggregate future maturities of long-term debt by year are as follows (in thousands):
| | | | | |
| 2022 | $ | 5,000 | |
| 2023 | 5,000 | |
| 2024 | 417,500 | |
| 2025 | — | |
| 2026 | — | |
| Total | $ | 427,500 | |
(9) NOTES RECEIVABLE
We provide financing to some individuals who want to become independent contractors by purchasing a tractor from us and leasing their services to us. We maintain a primary security interest in the tractor until the independent contractor pays the note balance in full. Independent contractor notes receivable are included in other current assets and other non-current assets in the consolidated balance sheets. At December 31, notes receivable consisted of the following (in thousands):
| | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 |
| Independent contractor notes receivable | $ | 7,358 | | | $ | 10,335 | |
| Other notes receivable | 10,665 | | | 9,425 | |
| Notes receivable | 18,023 | | | 19,760 | |
| Less current portion | 3,386 | | | 3,807 | |
| Notes receivable – non-current | $ | 14,637 | | | $ | 15,953 | |
We also provide financing to some individuals who attended our driver training schools. The student notes receivable are included in other receivables and other non-current assets in the consolidated balance sheets. At December 31, student notes receivable consisted of the following (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| Student notes receivable | $ | 62,791 | | | $ | 60,081 | |
| Allowance for doubtful student notes receivable | (22,911) | | | (19,448) | |
| Total student notes receivable, net of allowance | 39,880 | | | 40,633 | |
| Less current portion, net of allowance | 13,416 | | | 12,216 | |
| Student notes receivable – non-current | $ | 26,464 | | | $ | 28,417 | |
(10) INCOME TAXES
Income tax expense consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| Current: | | | | | |
| Federal | $ | 42,049 | | | $ | 53,297 | | | $ | 29,102 | |
| State | 12,787 | | | 12,106 | | | 9,547 | |
| Foreign | 213 | | | 446 | | | (88) | |
| 55,049 | | | 65,849 | | | 38,561 | |
| Deferred: | | | | | |
| Federal | 27,593 | | | (8,988) | | | 15,094 | |
| State | 1,895 | | | (1,245) | | | 1,307 | |
| 29,488 | | | (10,233) | | | 16,401 | |
| Total income tax expense | $ | 84,537 | | | $ | 55,616 | | | $ | 54,962 | |
The effective income tax rate differs from the federal corporate tax rate of 21% in 2021, 2020, and 2019 as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| Tax at statutory rate | $ | 72,663 | | | $ | 47,186 | | | $ | 46,600 | |
| State income taxes, net of federal tax benefits | 11,599 | | | 8,580 | | | 8,575 | |
Other, net (1) | 275 | | | (150) | | | (213) | |
| Total income tax expense | $ | 84,537 | | | $ | 55,616 | | | $ | 54,962 | |
(1) Prior year amounts within the table have been reclassified to conform to current year presentation.
At December 31, deferred income tax assets and liabilities consisted of the following (in thousands):
| | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 |
| Deferred income tax assets: | | | |
| Insurance and claims accruals | $ | 55,233 | | | $ | 54,913 | |
| Compensation-related accruals | 12,203 | | | 16,054 | |
| Allowance for uncollectible accounts | 3,958 | | | 4,070 | |
Operating lease liabilities (1) | 7,033 | | | 2,530 | |
Other (1) | 1,644 | | | 2,844 | |
| Gross deferred income tax assets | 80,071 | | | 80,411 | |
| Deferred income tax liabilities: | | | |
| Property and equipment | 305,002 | | | 308,145 | |
| Investments in equity securities | 10,985 | | | — | |
| Prepaid expenses | 7,269 | | | 6,333 | |
Operating lease right-of-use assets (1) | 6,955 | | | 2,485 | |
| Investment in partnership | 17,076 | | | — | |
Other (1) | 1,283 | | | 1,318 | |
| Gross deferred income tax liabilities | 348,570 | | | 318,281 | |
| Net deferred income tax liability | $ | 268,499 | | | $ | 237,870 | |
(1) Prior year amounts within the table have been reclassified to conform to current year presentation.
Deferred income tax assets are more likely than not to be realized as a result of future taxable income and reversal of deferred income tax liabilities.
We recognized a $49 thousand increase in the net liability for unrecognized tax benefits for the year ended December 31, 2021, and a $141 thousand decrease for the year ended December 31, 2020. We accrued interest expense of $0.1 million during 2021 and 2020, excluding from both years the reversal of accrued interest related to the adjustment of uncertain tax positions. If recognized, $1.9 million and $1.8 million of unrecognized tax benefits as of December 31, 2021 and 2020, respectively, would impact our effective tax rate. Interest of $0.4 million as of December 31, 2021 and 2020 has been reflected as a component of the total liability. We expect no other significant increases or decreases for uncertain tax positions during the next 12 months. The reconciliations of beginning and ending gross balances of unrecognized tax benefits for 2021 and 2020 are shown below (in thousands).
| | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 |
| Unrecognized tax benefits, beginning balance | $ | 2,363 | | | $ | 2,541 | |
| Gross increases – tax positions in prior period | 65 | | | 92 | |
| Gross increases – current period tax positions | 320 | | | 220 | |
| Settlements | (323) | | | (490) | |
| Unrecognized tax benefits, ending balance | $ | 2,425 | | | $ | 2,363 | |
We file U.S. federal income tax returns, as well as income tax returns in various states and several foreign jurisdictions. The years 2018 and forward are open for examination by the U.S. Internal Revenue Service (“IRS”), and various years are open for examination by state and foreign tax authorities. State and foreign jurisdictional statutes of limitations generally range from three to four years.
(11) EQUITY COMPENSATION AND EMPLOYEE BENEFIT PLANS
Equity Compensation Plan
The Werner Enterprises, Inc. Amended and Restated Equity Plan (the “Equity Plan”), approved by the Company’s shareholders in 2013, provides for grants to employees and non-employee directors of the Company in the form of nonqualified stock options, restricted stock and units (“restricted awards”), performance awards, and stock appreciation rights. The Board of Directors or the Compensation Committee of our Board of Directors determines the terms of each award, including the type, recipients, number of shares subject to and vesting conditions of each award. No awards of stock appreciation rights have been issued under the Equity Plan to date. The maximum number of shares of common stock that may be awarded under the Equity Plan is 20,000,000 shares. The maximum aggregate number of shares that may be awarded to any one person in any one calendar year under the Equity Plan is 500,000. As of December 31, 2021, there were 6,508,744 shares available for granting additional awards.
Equity compensation expense is included in salaries, wages and benefits within the consolidated statements of income. As of December 31, 2021, the total unrecognized compensation cost related to non-vested equity compensation awards was approximately $11.8 million and is expected to be recognized over a weighted average period of 1.6 years. The following table summarizes the equity compensation expense and related income tax benefit recognized in the consolidated statements of income (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | 2021 | | 2020 | | 2019 |
| Restricted awards: | | | | | | |
| Pre-tax compensation expense | | $ | 6,349 | | | $ | 5,409 | | | $ | 4,943 | |
| Tax benefit | | 1,587 | | | 1,379 | | | 1,258 | |
| Restricted stock expense, net of tax | | $ | 4,762 | | | $ | 4,030 | | | $ | 3,685 | |
| Performance awards: | | | | | | |
| Pre-tax compensation expense | | $ | 4,452 | | | $ | 3,503 | | | $ | 3,156 | |
| Tax benefit | | 1,113 | | | 893 | | | 803 | |
| Performance award expense, net of tax | | $ | 3,339 | | | $ | 2,610 | | | $ | 2,353 | |
We do not have a formal policy for issuing shares upon vesting of restricted and performance awards. Such shares are generally issued from treasury stock. From time to time, we repurchase shares of our common stock, the timing and amount of which depends on market and other factors. Historically, the shares acquired from such repurchases have provided us with sufficient quantities of stock to issue for equity compensation. Based on current treasury stock levels, we do not expect to repurchase additional shares specifically for equity compensation during 2022.
Stock Options
Stock options are granted at prices equal to the market value of the common stock on the date the option award is granted. No stock option awards were outstanding as of December 31, 2021 or 2020, and there were no stock option awards granted or exercised during the years ended December 31, 2021 or 2020. No stock options were granted during the year ended December 31, 2019, and the total intrinsic value of stock options exercised during the year ended December 31, 2019 was $136 thousand.
Restricted Awards
Restricted stock entitles the holder to shares of common stock when the award vests. Restricted stock units entitle the holder to a combination of cash or stock equal to the value of common stock when the unit vests. The value of these shares may fluctuate according to market conditions and other factors. Restricted awards currently outstanding vest over periods ranging from 12 to 60 months from the grant date of the award. The restricted awards do not confer any voting or dividend rights to recipients until such shares vest and do not have any post-vesting sales restrictions. The following table summarizes restricted award activity for the year ended December 31, 2021:
| | | | | | | | | | | |
| Number of
Restricted
Awards (in
thousands) | | Weighted
Average Grant
Date Fair
Value ($) |
| Nonvested at beginning of period | 367 | | | $ | 35.78 | |
| Granted | 160 | | | 42.69 | |
| Vested | (158) | | | 34.82 | |
| Forfeited | (13) | | | 36.88 | |
| Nonvested at end of period | 356 | | | 39.27 | |
We estimate the fair value of restricted awards based upon the market price of the underlying common stock on the date of grant, reduced by the present value of estimated future dividends because the awards are not entitled to receive dividends prior to vesting. Our estimate of future dividends is based on the most recent quarterly dividend rate at the time of grant, adjusted for any known future changes in the dividend rate. Cash settled restricted stock units are recorded as a liability within the consolidated balance sheets and are adjusted to fair value each reporting period.
The total fair value of previously granted restricted awards vested during the years ended December 31, 2021, 2020, and 2019 was $6.8 million, $5.4 million, and $4.0 million, respectively. We withheld shares based on the closing stock price on the vesting date to settle the employees’ statutory obligation for the applicable income and other employment taxes. The shares withheld to satisfy the tax withholding obligations were recorded as treasury stock.
Performance Awards
Performance awards entitle the recipient to shares of common stock upon attainment of performance objectives as pre-established by the Compensation Committee. If the performance objectives are achieved, performance awards currently outstanding vest, subject to continued employment, 36 months after the grant date of the award. The performance awards do not confer any voting or dividend rights to recipients until such shares vest and do not have any post-vesting sales restrictions. The following table summarizes performance award activity for the year ended December 31, 2021:
| | | | | | | | | | | |
| Number of
Performance Awards (in
thousands) | | Weighted
Average Grant
Date Fair
Value ($) |
| Nonvested at beginning of period | 262 | | | $ | 32.96 | |
| Granted | 77 | | | 38.48 | |
| Vested | (100) | | | 33.04 | |
| Forfeited | (10) | | | 32.88 | |
| Nonvested at end of period | 229 | | | 34.77 | |
The 2021 performance awards are earned based upon the level of attainment by the Company of specified performance objectives related to cumulative diluted earnings per share for the two-year period from January 1, 2021 to December 31, 2022. Shares earned based on cumulative diluted earnings per share may be capped based on the Company’s total shareholder return during the three-year period ended December 31, 2023, relative to the total shareholder return of a peer group of companies for the same period. The 2021 performance awards will vest in one installment on the third anniversary from the grant date. The 2020 performance awards are earned based upon the level of attainment by the Company of specified performance objectives related to cumulative diluted earnings per share for the two-year period from January 1, 2020 to December 31, 2021. Shares earned based on cumulative diluted earnings per share may be capped based on the absolute total shareholder return during the three-year period ended December 31, 2022. The 2020 performance awards will vest in one installment on the third anniversary from the grant date. In January 2022, the Compensation Committee determined the 2019 fiscal year performance objectives were achieved at a level above the threshold level but below the target level, and the amount of shares earned below the target are included in the forfeited shares in the activity table above.
We estimate the fair value of performance awards based upon the market price of the underlying common stock on the date of grant, reduced by the present value of estimated future dividends because the awards are not entitled to receive dividends prior to vesting. Our estimate of future dividends is based on the most recent quarterly dividend rate at the time of grant, adjusted for any known future changes in the dividend rate.
The vesting date fair value of performance awards that vested during the years ended December 31, 2021, 2020 and 2019 was $4.1 million, $5.8 million and $1.2 million, respectively. We withheld shares based on the closing stock price on the vesting date to settle the employees’ statutory obligation for the applicable income and other employment taxes. The shares withheld to satisfy the tax withholding obligations were recorded as treasury stock.
Employee Stock Purchase Plan
Employee associates that meet certain eligibility requirements may participate in our Employee Stock Purchase Plan (the “Purchase Plan”). Eligible participants designate the amount of regular payroll deductions and/or a single annual payment (each subject to a yearly maximum amount) that is used to purchase shares of our common stock on the over-the-counter market. The maximum annual contribution amount is currently $20,000. These purchases are subject to the terms of the Purchase Plan. We contribute an amount equal to 15% of each participant’s contributions under the Purchase Plan. Interest accrues on Purchase Plan contributions at a rate of 5.25% until the purchase is made. We pay the trading commissions and administrative charges related to purchases of common stock under the Purchase Plan. Our contributions for the Purchase Plan were as follows (in thousands):
401(k) Retirement Savings Plan
We have an Employees’ 401(k) Retirement Savings Plan (the “401(k) Plan”). Associates are eligible to participate in the 401(k) Plan if they have been continuously employed with us or one of our subsidiaries for six months or more. We match a portion of each associate’s 401(k) Plan elective deferrals. Salaries, wages and benefits expense in the accompanying consolidated statements of income includes our 401(k) Plan contributions and administrative expenses, which were as follows (in thousands):
| | | | | |
| 2021 | $ | 4,904 | |
| 2020 | 4,748 | |
| 2019 | 4,414 | |
Nonqualified Deferred Compensation Plan
The Executive Nonqualified Excess Plan (the “Excess Plan”) is our nonqualified deferred compensation plan for the benefit of eligible key managerial associates whose 401(k) Plan contributions are limited because of IRS regulations affecting highly compensated associates. Under the terms of the Excess Plan, participants may elect to defer compensation on a pre-tax basis within annual dollar limits we establish. At December 31, 2021, there were 45 participants in the Excess Plan. Although our current intention is not to do so, we may also make matching credits and/or profit sharing credits to participants’ accounts as we so determine each year. Each participant is fully vested in all deferred compensation and earnings; however, these amounts are subject to general creditor claims until distributed to the participant. Under current federal tax law, we are not allowed a current income tax deduction for the compensation deferred by participants, but we are allowed a tax deduction when a distribution payment is made to a participant from the Excess Plan. The accumulated benefit obligation is included in other long-term liabilities in the consolidated balance sheets. We purchased life insurance policies to fund the future liability. The aggregate market value of the life insurance policies is included in other non-current assets in the consolidated balance sheets.
The accumulated benefit obligation and aggregate market value of the life insurance policies were as follows (in thousands):
| | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 |
| Accumulated benefit obligation | $ | 12,755 | | | $ | 11,321 | |
| Aggregate market value | 10,621 | | | 9,104 | |
(12) COMMITMENTS AND CONTINGENCIES
We have committed to property and equipment purchases of approximately $163.2 million at December 31, 2021.
We are involved in certain claims and pending litigation, including those described herein, arising in the ordinary course of business. The majority of these claims relate to bodily injury, property damage, cargo and workers’ compensation incurred in the transportation of freight, as well as certain class action litigation related to personnel and employment matters. We accrue for the uninsured portion of contingent losses from these and other pending claims when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Based on the knowledge of the facts, management believes the resolution of claims and pending litigation, taking into account existing reserves, will not have a material adverse effect on our consolidated financial statements. Moreover, the results of complex legal proceedings are difficult to predict, and our view of these matters may change in the future as the litigation and related events unfold.
On May 17, 2018, in Harris County District Court in Houston, Texas, a jury rendered an adverse verdict against Werner Enterprises, Inc. (the “Company”) in a lawsuit arising from a December 30, 2014 accident between a Werner tractor-trailer and a passenger vehicle. On July 30, 2018, the court entered a final judgment against Werner for $92.0 million, including pre-judgment interest.
The Company has premium-based liability insurance to cover the potential outcome from this jury verdict. Under the Company’s insurance policies in effect on the date of this accident, the Company’s maximum liability for this accident is $10.0 million (plus pre-judgment and post-judgment interest) with premium-based coverage that exceeds the jury verdict amount. As a result of this jury verdict, the Company had recorded a liability of $28.8 million and $23.6 million as of December 31, 2021 and 2020, respectively. Under the terms of the Company’s insurance policies, the Company is the primary obligor of the verdict, and as such, the Company has also recorded a $79.2 million receivable from its third-party insurance providers in other non-current assets and a corresponding liability of the same amount in the long-term portion of insurance and claims accruals in the consolidated balance sheets as of December 31, 2021 and 2020.
The Company is pursuing an appeal of this verdict. No assurances can be given regarding the outcome of any such appeal.
We have been involved in class action litigation in the U.S. District Court for the District of Nebraska, in which the plaintiffs allege that we owe drivers for unpaid wages under the Fair Labor Standards Act (“FLSA”) and the Nebraska Wage Payment and Collection Act and that we failed to pay minimum wage per hour for drivers in our Career Track Program, related to short break time and sleeper berth time. The period covered by this class action suit is August 2008 through March 2014. The case was tried to a jury in May 2017, resulting in a verdict of $0.8 million in plaintiffs’ favor on the short break matter and a verdict in our favor on the sleeper berth matter. As a result of various post-trial motions, the court awarded $0.5 million to the plaintiffs for attorney fees and costs. Plaintiffs appealed the post-verdict amounts awarded by the trial court for fees, costs and liquidated damages, and the Company filed a cross appeal on the verdict that was in plaintiffs’ favor. The United States Court of Appeals for the Eighth Circuit denied Plaintiffs’ appeal and granted Werner’s appeal, vacating the judgment in favor of the plaintiffs. The appellate court sent the case back to the trial court for proceedings consistent with the appellate court’s opinion. On June 22, 2020, the trial court denied Plaintiffs’ request for a new trial and entered judgment in favor of the Company, dismissing the case with prejudice. On July 21, 2020, Plaintiffs’ counsel filed a notice of appeal of that dismissal, and that appeal remains pending. As of December 31, 2021, we have an accrual for the jury’s award, attorney fees and costs in the short break matter and had not accrued for the sleeper berth matter.
We are also involved in certain class action litigation in which the plaintiffs allege claims for failure to provide meal and rest breaks, unpaid wages, unauthorized deductions and other items. Based on the knowledge of the facts, management does not currently believe the outcome of these class actions is likely to have a material adverse effect on our financial position or results of operations. However, the final disposition of these matters and the impact of such final dispositions cannot be determined at this time.
(13) RELATED PARTY TRANSACTIONS
The Company leases land from a trust in which the Company’s Chairman Emeritus is the sole trustee. The annual rent payments under this lease are $1.00 per year. The Company is responsible for all real estate taxes and maintenance costs related to the property, which are recorded as expenses in the consolidated statements of income. The Company has made leasehold improvements to the land for facilities used for business meetings and customer promotion. The cost of these improvements was approximately $7.1 million, and the net book value (cost less accumulated depreciation) at December 31, 2021 was approximately $2.2 million.
(14) SEGMENT INFORMATION
We have two reportable segments – Truckload Transportation Services and Werner Logistics.
The TTS segment consists of two operating units, Dedicated and One-Way Truckload. These units are aggregated because they have similar economic characteristics and meet the other aggregation criteria described in the accounting guidance for segment reporting. Dedicated provides truckload services dedicated to a specific customer, generally for a retail distribution center or manufacturing facility, utilizing either dry van or specialized trailers. One-Way Truckload is comprised of the following operating fleets: (i) the medium-to-long-haul van (“Van”) fleet transports a variety of consumer nondurable products and other commodities in truckload quantities over irregular routes using dry van trailers, including Mexico cross-border routes; (ii) the expedited (“Expedited”) fleet provides time-sensitive truckload services utilizing driver teams; (iii) the regional short-haul (“Regional”) fleet, including ECM, provides comparable truckload van service within geographic regions across the United States; and (iv) the Temperature Controlled fleet provides truckload services for temperature sensitive products over irregular routes utilizing temperature-controlled trailers. Revenues for the TTS segment include a small amount of non-trucking revenues which consist primarily of the intra-Mexico portion of cross-border shipments delivered to or from Mexico where we utilize a third-party capacity provider.
The Werner Logistics segment generates the majority of our non-trucking revenues through three operating units that provide non-trucking services to our customers. These three Werner Logistics operating units are as follows: (i) Truckload Logistics, which uses contracted carriers to complete shipments for brokerage customers and freight management customers for which we offer a full range of single-source logistics management services and solutions; (ii) the intermodal (“Intermodal”) unit offers rail transportation through alliances with rail and drayage providers as an alternative to truck transportation; and (iii) Werner Final Mile (“Final Mile”), including NEHDS, offers residential and commercial deliveries of large or heavy items using third-party agents, independent contractors, and Company employees with two-person delivery teams operating a liftgate straight truck. In first quarter 2021, we completed the previously-announced sale of the Werner Global Logistics (“WGL”) freight forwarding services for international ocean and air shipments to Scan Global Logistics Group, and we realized a $1.0 million gain when the transaction closed on February 26, 2021. Werner Logistics will continue to provide North American truck brokerage, freight management, intermodal and final mile services.
We generate other revenues from our driver training schools, transportation-related activities such as third-party equipment maintenance and equipment leasing, and other business activities. None of these operations meets the quantitative reporting thresholds. As a result, these operations are grouped in “Other” in the tables below. “Corporate” includes revenues and expenses that are incidental to our activities and are not attributable to any of our operating segments, including gains and losses on sales of assets not attributable to our operating segments.
We do not prepare separate balance sheets by segment and, as a result, assets are not separately identifiable by segment. Based on our operations, certain revenue-generating assets (primarily tractors and trailers) are interchangeable between segments. Depreciation for these interchangeable assets is allocated to segments based on the actual number of units utilized by the segment during the period. Other depreciation and amortization is allocated to segments based on specific identification or as a percentage of a metric such as average number of tractors. Inter-segment eliminations represent transactions between reporting segments that are eliminated in consolidation.
The following tables summarize our segment information (in thousands):
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| Revenues by Segment | | | | | |
| Truckload Transportation Services | $ | 2,045,073 | | | $ | 1,843,209 | | | $ | 1,909,776 | |
| Werner Logistics | 622,461 | | | 469,791 | | | 489,729 | |
| Other | 66,108 | | | 57,276 | | | 61,850 | |
| Corporate | 1,629 | | | 2,009 | | | 2,589 | |
| Subtotal | 2,735,271 | | | 2,372,285 | | | 2,463,944 | |
| Inter-segment eliminations | (899) | | | (107) | | | (243) | |
| Total | $ | 2,734,372 | | | $ | 2,372,178 | | | $ | 2,463,701 | |
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| Operating Income (loss) by Segment | | | | | |
| Truckload Transportation Services | $ | 281,823 | | | $ | 222,007 | | | $ | 202,660 | |
| Werner Logistics | 27,873 | | | 6,005 | | | 16,288 | |
| Other | 4,947 | | | 3,839 | | | 5,535 | |
| Corporate | (5,497) | | | (4,413) | | | 989 | |
| Total | $ | 309,146 | | | $ | 227,438 | | | $ | 225,472 | |
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Depreciation and Amortization by Segment | | | | | |
| Truckload Transportation Services | $ | 245,169 | | | $ | 239,858 | | | $ | 228,768 | |
| Werner Logistics | 8,833 | | | 7,712 | | | 7,182 | |
| Other | 10,786 | | | 11,705 | | | 10,980 | |
| Corporate | 2,912 | | | 4,011 | | | 2,597 | |
| Total | $ | 267,700 | | | $ | 263,286 | | | $ | 249,527 | |
Information about the geographic areas in which we conduct business is summarized below (in thousands) as of and for the years ended December 31, 2021, 2020 and 2019. Operating revenues for foreign countries include revenues for (i) shipments with an origin or destination in that country and (ii) other services provided in that country. If both the origin and destination are in a foreign country, the revenues are attributed to the country of origin.
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| Revenues | | | | | |
| United States | $ | 2,532,720 | | | $ | 2,144,105 | | | $ | 2,191,560 | |
| Foreign countries | | | | | |
| Mexico | 156,405 | | | 149,438 | | | 197,470 | |
| Other | 45,247 | | | 78,635 | | | 74,671 | |
| Total foreign countries | 201,652 | | | 228,073 | | | 272,141 | |
| Total | $ | 2,734,372 | | | $ | 2,372,178 | | | $ | 2,463,701 | |
| | | | | |
| Long-lived Assets |
| United States | $ | 1,583,766 | | | $ | 1,506,862 | | | $ | 1,487,591 | |
| Foreign countries | | | | | |
| Mexico | 29,421 | | | 36,222 | | | 38,428 | |
| Other | 56 | | | 174 | | | 257 | |
| Total foreign countries | 29,477 | | | 36,396 | | | 38,685 | |
| Total | $ | 1,613,243 | | | $ | 1,543,258 | | | $ | 1,526,276 | |
We generate substantially all of our revenues within the United States or from North American shipments with origins or destinations in the United States. Our largest customer, Dollar General, accounted for 14% and 12% of our total revenues in 2021 and 2020, respectively. Revenues generated by Dollar General are reported in both of our reportable operating segments. No single customer generated more than 9% of our total revenues in 2019.