NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) Basis of Presentation and Recent Accounting Pronouncements
Basis of Presentation
The accompanying unaudited interim consolidated financial statements include the accounts of Werner Enterprises, Inc. and its subsidiaries (collectively, the “Company” or “Werner”). Noncontrolling interest on the consolidated condensed balance sheets represents the portion of a consolidated entity in which we do not have a direct equity ownership. In these notes, the terms “we,” “us,” or “our” refer to Werner Enterprises, Inc. and its subsidiaries. All significant intercompany accounts and transactions relating to these entities have been eliminated.
These consolidated financial statements have been prepared in accordance with the U.S. Securities and Exchange Commission (SEC) instructions to Form 10-Q and, in the opinion of management, reflect all adjustments, which are all of normal recurring nature, necessary to present fairly the financial condition, results of operations and cash flows for the periods presented in conformity with U.S. generally accepted accounting principles (“GAAP”). These consolidated financial statements do not include all information and footnotes required by GAAP for complete financial statements; although in management’s opinion, the disclosures are adequate so that the information presented is not misleading.
Operating results for the three months ended March 31, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023. In the opinion of management, the information set forth in the accompanying consolidated condensed balance sheets is fairly stated in all material respects in relation to the consolidated balance sheets from which it has been derived.
These consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and accompanying notes contained in our 2022 Form 10-K.
(2) Business Acquisitions
Developments during the three months ended March 31, 2023 related to our 2022 business acquisitions are discussed below.
ReedTMS
On November 5, 2022, we acquired 100% of the equity interests in Reed Transport Services, Inc. and RTS-TMS, Inc., doing business as ReedTMS Logistics (“ReedTMS”), for a total purchase price of $108.6 million after including the impacts of working capital adjustments, cash acquired, net present value of future insurance payments, and contingent consideration. ReedTMS is an asset-light logistics provider and dedicated truckload carrier that offers a comprehensive suite of freight brokerage and truckload solutions to a diverse customer base. The results of operations for ReedTMS are included in our consolidated financial statements beginning November 5, 2022. Pro forma information for this acquisition is not provided as it did not have a material impact on our consolidated operating results.
The following table summarizes the provisional purchase price allocation for ReedTMS, including any adjustments during the three months ended March 31, 2023 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| November 5, 2022 Opening Balance sheet as Reported at December 31, 2022 | | Adjustments (1) | | November 5, 2022 Opening Balance sheet as Reported at March 31, 2023 | |
Purchase Price | | | | | | |
Cash consideration paid | $ | 116,989 | | | $ | — | | | $ | 116,989 | | (2) |
Cash and cash equivalents acquired | (12,120) | | | — | | | (12,120) | | |
Contingent consideration arrangement | 5,000 | | | (800) | | | 4,200 | | (3) |
Working capital surplus (deficiency) | (689) | | | 188 | | | (501) | | |
Total purchase price (fair value of consideration) | 109,180 | | | (612) | | | 108,568 | | |
Purchase Price Allocation | | | | | | |
Current assets | 52,531 | | | 49 | | | 52,580 | | |
Property and equipment | 35,000 | | | (12,485) | | | 22,515 | | |
Intangible assets | 12,000 | | | 15,300 | | | 27,300 | | |
Other non-current assets | 7,927 | | | (1) | | | 7,926 | | |
Total assets acquired | 107,458 | | | 2,863 | | | 110,321 | | |
Current liabilities | (45,497) | | | (389) | | | (45,886) | | |
Other long-term liabilities | (5,622) | | | 527 | | | (5,095) | | |
Total liabilities assumed | (51,119) | | | 138 | | | (50,981) | | |
Goodwill | $ | 52,841 | | | $ | (3,613) | | | $ | 49,228 | | |
(1) No material statement of income effects were identified with these adjustments.
(2) Includes $0.9 million related to the net present value of future insurance payments. At closing, $11.5 million of the cash consideration was placed in escrow to secure certain indemnification obligations of the sellers and to cover post-closing adjustments. During the three months ended March 31, 2023, we received $2.1 million from escrow for post-closing adjustments. The remaining balance of the escrow, except for $0.5 million, was returned to the sellers. In exchange, the sellers obtained a $10.0 million Standby Letter of Credit with the Company named as beneficiary.
(3) The contingent earnout liability is recorded in other long-term liabilities on the consolidated condensed balance sheets as of March 31, 2023 and December 31, 2022. For additional information regarding the valuation of the contingent liability, see Note 6 – Fair Value.
Baylor
On October 1, 2022, we acquired 100% of the equity interests in FAB9, Inc., doing business as Baylor Trucking, Inc. (“Baylor”), for a total purchase price of $89.0 million after including the impacts of working capital adjustments, cash acquired, and contingent consideration. Baylor operates in the east central and south central United States. The results of operations for Baylor are included in our consolidated financial statements beginning October 1, 2022. Pro forma information for this acquisition is not provided as it did not have a material impact on our consolidated operating results. No measurement period adjustments were recorded during the three months ended March 31, 2023.
Purchase Price Allocations
We accounted for the ReedTMS and Baylor purchases using the acquisition method of accounting under GAAP. The purchase price of each acquisition has been allocated to the assets acquired and liabilities assumed using market data and valuation techniques. The estimated fair values of the assets acquired and liabilities assumed are considered provisional for ReedTMS and Baylor, pending the completion of acquired tangible assets valuations, independent valuations of certain acquired intangible assets, and calculations 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 ReedTMS and Baylor acquisitions; however, these provisional estimates may be adjusted upon the availability of new information regarding facts and circumstances which existed at the acquisition dates, and such adjustments may impact future earnings. We expect to finalize the valuation of assets and liabilities for ReedTMS and Baylor as soon as practicable, but not later than one year from the respective acquisition dates. Any adjustments to the initial estimates of the fair value of the
acquired assets and liabilities assumed in the ReedTMS and Baylor acquisitions will be recorded as adjustments to the respective assets and liabilities, with the residual amounts allocated to goodwill.
(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):
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
Truckload Transportation Services | $ | 588,330 | | | $ | 558,417 | | | | | |
Werner Logistics | 228,669 | | | 189,008 | | | | | |
Inter-segment eliminations | (5,261) | | | (722) | | | | | |
Transportation services | 811,738 | | | 746,703 | | | | | |
Other revenues | 20,976 | | | 17,902 | | | | | |
Total revenues | $ | 832,714 | | | $ | 764,605 | | | | | |
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.
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
United States | $ | 782,293 | | | $ | 710,904 | | | | | |
Mexico | 41,813 | | | 43,291 | | | | | |
Other | 8,608 | | | 10,410 | | | | | |
Total revenues | $ | 832,714 | | | $ | 764,605 | | | | | |
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 March 31, 2023 and December 31, 2022, the accounts receivable, trade, net, balance was $461.0 million and $518.8 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 March 31, 2023 and December 31, 2022, the balance of contract assets was $7.3 million and $8.9 million, respectively. We have recognized contract assets within the other current assets financial statement caption on the consolidated condensed 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 March 31, 2023 and December 31, 2022, the balance of contract liabilities was $1.2 million and $0.9 million, respectively. The amount of revenues recognized in the three months ended March 31, 2023 that was included in the December 31, 2022 contract liability balance was $0.9 million. We have recognized contract liabilities within the accounts payable and other current liabilities financial statement captions on the consolidated condensed 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.
During the three months ended March 31, 2023 and 2022, revenues recognized from performance obligations related to prior periods (for example, due to changes in transaction price) were not material.
(4) Goodwill and Intangible Assets
Goodwill represents the excess of cost over the fair value of net identifiable tangible and intangible assets acquired in business combinations. The following table summarizes changes in the carrying amount of goodwill by segment for the three months ended March 31, 2023 (in thousands):
| | | | | | | | | | | | | | | | | |
| TTS | | Werner Logistics | | Total |
Balance as of December 31, 2022 | $ | 53,897 | | | $ | 78,820 | | | $ | 132,717 | |
Purchase accounting adjustments (1) | (7,841) | | | 4,228 | | | (3,613) | |
Balance as of March 31, 2023 | $ | 46,056 | | | $ | 83,048 | | | $ | 129,104 | |
(1) The purchase accounting adjustments consist of post-closing adjustments related to net assets assumed in the acquisition of ReedTMS. For additional information regarding these purchase accounting adjustments, see Note 2.
The following table presents acquired intangible assets (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Customer relationships | $ | 80,200 | | | $ | (7,974) | | | $ | 72,226 | | | $ | 64,900 | | | $ | (5,714) | | | $ | 59,186 | |
Trade names | 24,600 | | | (2,796) | | | 21,804 | | | 24,600 | | | (2,284) | | | 22,316 | |
Total intangible assets | $ | 104,800 | | | $ | (10,770) | | | $ | 94,030 | | | $ | 89,500 | | | $ | (7,998) | | | $ | 81,502 | |
Amortization expense on intangible assets was $2.8 million and $1.4 million for the three months ended March 31, 2023 and 2022, respectively, and is reported in depreciation and amortization on the consolidated statements of income. As of March 31, 2023, we estimate future amortization expense for intangible assets will be $7.6 million for the remainder of 2023, and $10.1 million for each of the five succeeding fiscal years.
(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 condensed 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):
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
Balance Sheet Classification | | | |
Right-of-use assets (recorded in other non-current assets) | $ | 39,805 | | | $ | 40,963 | |
| | | |
Current lease liabilities (recorded in other current liabilities) | $ | 9,388 | | | $ | 9,396 | |
Long-term lease liabilities (recorded in other long-term liabilities) | 31,827 | | | 32,897 | |
Total operating lease liabilities | $ | 41,215 | | | $ | 42,293 | |
| | | |
Other Information | | | |
Weighted-average remaining lease term for operating leases | 6.29 years | | 6.43 years |
Weighted-average discount rate for operating leases | 3.4 | % | | 3.3 | % |
The following table presents the maturities of operating lease liabilities as of March 31, 2023 (in thousands):
| | | | | |
Maturity of Lease Liabilities | |
2023 (remaining) | $ | 8,040 | |
2024 | 9,950 | |
2025 | 7,853 | |
2026 | 5,937 | |
2027 | 3,997 | |
Thereafter | 9,548 | |
Total undiscounted operating lease payments | $ | 45,325 | |
Less: Imputed interest | (4,110) | |
Present value of operating lease liabilities | $ | 41,215 | |
Cash Flows
During the three months ended March 31, 2023 and 2022, right-of-use assets of $1.5 million and $10.2 million, respectively, were recognized as non-cash asset additions that resulted from new operating lease liabilities. Cash paid for amounts included in the present value of operating lease liabilities was $2.9 million and $1.8 million for the three months ended March 31, 2023 and 2022, respectively, and are included in operating cash flows.
Operating Lease Expense
Operating lease expense was $6.2 million and $5.1 million for the three months ended March 31, 2023 and 2022, respectively. This expense included $3.0 million and $2.1 million for long-term operating leases for the three months ended March 31, 2023 and 2022, respectively, 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 were $2.7 million and $3.2 million for the three months ended March 31, 2023 and 2022, respectively. The following table presents information about the maturities of these operating leases as of March 31, 2023 (in thousands):
| | | | | |
2023 (remaining) | $ | 6,907 | |
2024 | 1,875 | |
2025 | 307 | |
2026 | 316 | |
2027 | 80 | |
Thereafter | — | |
Total | $ | 9,485 | |
(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 fair value hierarchy for our assets and liabilities measured at fair value on a recurring basis (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Level in Fair Value Hierarchy | | Fair Value |
| | | March 31, 2023 | | December 31, 2022 |
Assets: | | | | | | |
Other non-current assets: | | | | | | |
Equity securities (1) | | 1 | | $ | 642 | | | $ | 723 | |
Liabilities: | | | | | | |
Other long-term liabilities: | | | | | | |
Contingent consideration associated with acquisitions | | 3 | | $ | 12,877 | | | $ | 13,400 | |
(1) Represents our investments in autonomous technology companies. For additional information regarding the valuation of these equity securities, see Note 7 – Investments.
The following table presents changes in the fair value of our contingent earnout liabilities (in thousands):
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2023 | | 2022 |
Balance at beginning of period | | $ | 13,400 | | | $ | 2,500 | |
Measurement period adjustment associated with the acquisition of ReedTMS (1) | | (800) | | | — | |
Change in fair value | | 277 | | | — | |
Balance at end of period | | $ | 12,877 | | | $ | 2,500 | |
(1) The measurement period adjustment was recorded in goodwill on the consolidated condensed balance sheet.
The estimated fair values of our contingent consideration arrangements are based upon probability-adjusted inputs for each acquired entity. Additionally, as the liability is stated at present value, the passage of time alone will increase the estimated fair value of the liability each reporting period. Any changes in fair value will be recorded in other operating expenses on the consolidated statements of income.
Our ownership interests in Mastery Logistics Systems, Inc. (“MLSI”) and Fleet Defender, Inc. do not have readily determinable fair values and are accounted for using the measurement alternative in ASC 321, Investments - Equity Securities. Our ownership interest in Autotech Fund III, L.P. (“Autotech Fund III”) is accounted for under ASC 323, “Investments - Equity Method and Joint Ventures.” For additional information regarding the valuation of these investments, see Note 7 – Investments.
Fair Value of Financial Instruments Not Recorded at Fair Value
Cash and cash equivalents, accounts receivable trade, and accounts payable are short-term in nature and accordingly are carried at amounts that approximate fair value.
The carrying amount of our fixed-rate debt not measured at fair value on a recurring basis was $91.3 million and $93.8 million as of March 31, 2023 and December 31, 2022, respectively. The estimated fair value of our fixed-rate debt using the income approach, based on its net present value, discounted at our current borrowing rate, was $85.9 million and $87.2 million as of March 31, 2023 and December 31, 2022, respectively (categorized as Level 2 of the fair value hierarchy). The carrying amount
of our variable-rate long-term debt approximates fair value due to the duration of our credit arrangement and the variable interest rate (categorized as Level 2 of the fair value hierarchy).
(7) Investments
Equity Investments without Readily Determinable Fair Values
Our strategic equity investments without readily determinable fair values include MLSI, a transportation management systems company, and Fleet Defender, Inc., a platform cybersecurity company for fleet owners. MLSI is developing a cloud-based transportation management system using MLSI's SaaS technology which we have agreed to license. These investments are being accounted for under ASC 321 using the measurement alternative and are recorded in other noncurrent assets on the consolidated condensed balance sheets. We record changes in the values of these investments based on events that occur that would indicate the values have changed, in loss (gain) on investments in equity securities on the consolidated statements of income. As of March 31, 2023 and December 31, 2022, the value of our investment in MLSI was $86.8 million and the value of our investment in Fleet Defender, Inc. was $250 thousand. There was no activity related to our equity investments without readily determinable fair values during the three months ended March 31, 2023 and 2022. As of March 31, 2023, cumulative upward adjustments on our equity securities without readily determinable fair values totaled $56.8 million.
Equity Investments with Readily Determinable Fair Values
We own 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 condensed balance sheets. We record changes in the value of these investments, based on the share prices reported by Nasdaq, in loss (gain) on investments in equity securities on the consolidated statements of income. As of March 31, 2023 and December 31, 2022, the value of these investments was $0.6 million and $0.7 million, respectively. We recognized an unrealized loss of $0.1 million and $9.8 million on these investments for the three months ended March 31, 2023 and 2022, respectively. For additional information regarding the fair value of these equity investments, see Note 6 – Fair Value.
Equity Method Investment
In January 2023, we committed to make a $20.0 million investment in Autotech Fund III pursuant to a limited partnership agreement. Autotech Fund III is managed by Autotech Ventures, a venture capital firm focused on ground transportation technology. Our interest, which represents an ownership percentage of less than 20%, is being accounted for under ASC 323, “Investments - Equity Method and Joint Ventures.” As a limited partner, we will make periodic capital contributions toward this total commitment amount. As of March 31, 2023, our cumulative investment in Autotech Fund III was $2.1 million, which we contributed during the three months ended March 31, 2023. As of March 31, 2023, the value of our investment in Autotech Fund III was $2.1 million and is recorded in other noncurrent assets on the consolidated condensed balance sheets. We will record earnings and losses attributed to the fund in loss (earnings) from equity method investment on the consolidated statements of income. No earnings or losses were recognized for the three months ended March 31, 2023. The carrying amount of Autotech Fund III as of March 31, 2023 approximates its fair value, as this is the most recent information available to us at this time.
(8) 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. On January 24, 2023, we purchased a $25.0 million subordinated promissory note from MLSI with a maturity date of January 24, 2030. The proceeds of the promissory note may be used by MLSI for working capital and general business purposes, including a limited amount for possible repayment of certain advances. There are no scheduled principal payments due on the MLSI promissory note until the maturity date, and interest accrues at 7.5% compounded annually, with the first accrued interest payment due on January 24, 2028, and at the end of each calendar year thereafter. The independent contractor notes receivable, MLSI subordinated promissory note, and other notes receivable are included in other current assets and other non-current assets in the consolidated balance sheets.
The following table presents our notes receivable (in thousands):
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
Independent contractor notes receivable | $ | 8,080 | | | $ | 8,287 | |
MLSI subordinated promissory note | 25,000 | | | — | |
Other notes receivable | 8,058 | |
| 7,921 | |
Notes receivable | 41,138 | | | 16,208 | |
Less current portion | 2,654 | | | 2,691 | |
Notes receivable – non-current | $ | 38,484 | | | $ | 13,517 | |
We also provide financing to some individuals who attended our driver training schools. The student notes receivable is included in other receivables and other non-current assets in the consolidated balance sheets. The following table presents our student notes receivable (in thousands):
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
Student notes receivable | $ | 62,971 | | | $ | 63,351 | |
Allowance for doubtful student notes receivable | (22,885) | | | (23,491) | |
Total student notes receivable, net of allowance | 40,086 | | | 39,860 | |
Less current portion, net of allowance | 13,194 | | | 12,574 | |
Student notes receivable – non-current | $ | 26,892 | | | $ | 27,286 | |
(9) Debt and Credit Facilities
On December 20, 2022, we entered into a $1.075 billion unsecured credit facility with a group of lenders (the “2022 Credit Agreement”), replacing our previous unsecured credit facility with BMO Harris Bank N.A. (“BMO Harris”), dated May 14, 2019, as amended, and the credit agreement with Wells Fargo Bank, National Association, dated March 25, 2022. The 2022 Credit Agreement is scheduled to mature on December 20, 2027 and has a $100.0 million maximum limit for the aggregate amount of letters of credit issued.
Revolving credit loans drawn under the 2022 Credit Agreement bear interest, at our option, at (i) the Base Rate (the highest of (a) the Prime Rate, (b) the Federal Funds Rate plus 0.50%, or (c) the one-month Term SOFR plus 1.10%), plus a margin ranging between 0.125% and 0.750%, or (ii) Term SOFR plus 0.10% and a margin ranging between 1.125% and 1.750%. Swingline loans drawn under the 2022 Credit Agreement bear interest at the Base Rate, as defined above, plus a margin ranging between 0.125% and 0.750%. The 2022 Credit Agreement also requires us to pay quarterly (i) a letter of credit commission on the daily amount available to be drawn under such standby letters of credit at rates ranging between 1.125% and 1.750% per annum and (ii) a nonrefundable commitment fee on the average daily unused amount of the commitment at rates ranging between 0.125% and 0.250% per annum. The margin, letter of credit commission, and commitment fee rates are based on our ratio of net funded debt to earnings before interest, income taxes, depreciation and amortization (“EBITDA”). There are no scheduled principal payments due on the 2022 Credit Agreement until the maturity date, and interest is payable in arrears at periodic intervals not to exceed three months.
On June 30, 2021, we entered into a $100.0 million unsecured fixed-rate term loan commitment with BMO Harris, with quarterly principal payments of $1.25 million and a final payment of principal and interest due and payable on May 14, 2024 ("BMO Term Loan"). The outstanding principal balance of the BMO Term Loan bears interest at a fixed rate of 1.28%, payable quarterly in arrears.
As of March 31, 2023 and December 31, 2022, our outstanding debt totaled $691.3 million and $693.8 million, respectively. As of March 31, 2023, we had an outstanding revolving credit loan balance of $600.0 million under the 2022 Credit Agreement, including (i) $450.0 million at a variable interest rate of 6.11% and (ii) $150.0 million which is effectively fixed at 2.88% with two interest rate swap agreements through May 14, 2024. In addition, as of March 31, 2023, we had $91.3 million outstanding under the BMO Term Loan at a fixed interest rate of 1.28%. The $1.075 billion of borrowing capacity under our 2022 Credit Agreement at March 31, 2023, is further reduced by $60.4 million in stand-by letters of credit under which we are obligated. Availability of such funds under the current debt agreements is conditional upon various customary terms and covenants. Such covenants include, among other things, two financial covenants requiring us (i) not to exceed a maximum ratio of net funded debt to EBITDA and (ii) to exceed a minimum ratio of EBITDA to interest expense. As of March 31, 2023, we were in compliance with these covenants.
At March 31, 2023, the aggregate future maturities of long-term debt by year are as follows (in thousands):
| | | | | |
2023 (remaining) | $ | 3,750 | |
2024 | 87,500 | |
2025 | — | |
2026 | — | |
2027 | 600,000 | |
Total | $ | 691,250 | |
(10) Commitments and Contingencies
We have committed to property and equipment purchases of approximately $271.4 million at March 31, 2023.
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 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 $35.5 million as of March 31, 2023, and $34.1 million as of December 31, 2022. 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 condensed balance sheets as of March 31, 2023 and December 31, 2022.
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. On August 3, 2022, the Eighth Circuit Court of Appeals vacated the district court’s judgment and remanded the case, for the trial court to determine whether the plaintiffs should be granted a new trial on the short break claim. On January 10, 2023, the trial court denied Plaintiff’s motion for a new trial and entered judgment in Werner’s favor on all claims. As of March 31, 2023, 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.
(11) Earnings Per Share
Basic earnings per share is computed by dividing net income attributable to Werner by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income attributable to Werner 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 restricted stock awards. Performance awards are excluded from the calculation of dilutive potential common shares until the threshold performance conditions have been satisfied. 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).
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
Net income attributable to Werner | $ | 35,224 | | | $ | 53,749 | | | | | |
Weighted average common shares outstanding | 63,306 | | | 65,543 | | | | | |
Dilutive effect of stock-based awards | 389 | | | 335 | | | | | |
Shares used in computing diluted earnings per share | 63,695 | | | 65,878 | | | | | |
Basic earnings per share | $ | 0.56 | | | $ | 0.82 | | | | | |
Diluted earnings per share | $ | 0.55 | | | $ | 0.82 | | | | | |
(12) Segment Information
We have two reportable segments – Truckload Transportation Services (“TTS”) 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 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 is a non-asset based transportation and logistics provider. Werner Logistics provides services throughout North America and generates the majority of our non-trucking revenues through three operating units. 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”) 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.
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 property and equipment 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):
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
Revenues by Segment | | | | | | | |
Truckload Transportation Services | $ | 588,330 | | | $ | 558,417 | | | | | |
Werner Logistics | 228,669 | | | 189,008 | | | | | |
Other | 20,501 | | | 17,513 | | | | | |
Corporate | 475 | | | 389 | | | | | |
Subtotal | 837,975 | | | 765,327 | | | | | |
Inter-segment eliminations | (5,261) | | | (722) | | | | | |
Total | $ | 832,714 | | | $ | 764,605 | | | | | |
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
Operating Income (Loss) by Segment | | | | | | | |
Truckload Transportation Services | $ | 50,986 | | | $ | 76,093 | | | | | |
Werner Logistics | 4,937 | | | 8,681 | | | | | |
Other | 549 | | | 445 | | | | | |
Corporate | (3,086) | | | (1,708) | | | | | |
Total | $ | 53,386 | | | $ | 83,511 | | | | | |
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
Depreciation and Amortization by Segment | | | | | | | |
Truckload Transportation Services | $ | 66,843 | | | $ | 61,837 | | | | | |
Werner Logistics | 4,059 | | | 2,268 | | | | | |
Other | 2,873 | | | 2,681 | | | | | |
Corporate | 538 | | | 443 | | | | | |
Total | $ | 74,313 | | | $ | 67,229 | | | | | |