WERNER ENTERPRISES INC 10-Q

Item 3. Quantitative and Qualitative Disclosures About Market Risk. We are exposed to market risk from changes in commodity prices, foreign currency exchange rates and interest rates. Commodity Price Risk The price and availability of diesel fuel are subject to fluctuations attributed to changes in the level of global oil production, refining capacity, regulatory changes, seasonality, weather and other market factors. Historically, we have recovered a majority, but not all, of fuel price increases from customers in the form of fuel surcharges. We implemented customer fuel surcharge programs with most of our customers to offset much of the higher fuel cost per gallon. However, we do not recover all of the fuel cost increase through these surcharge programs. As of March 31, 2022, we had no derivative financial instruments to reduce our exposure to fuel price fluctuations. Foreign Currency Exchange Rate Risk We conduct business in foreign countries, primarily in Mexico. To date, most foreign revenues are denominated in U.S. Dollars, and we receive payment for foreign freight services primarily in U.S. Dollars to reduce direct foreign currency risk. Assets and liabilities maintained by a foreign subsidiary company in the local currency are subject to foreign exchange gains or losses. Foreign currency translation gains and losses primarily relate to changes in the value of revenue equipment owned by a subsidiary in Mexico, whose functional currency is the Peso. Foreign currency translation gains were $1.2 million for first quarter 2022 and foreign currency translation losses were $1.6 million for first quarter 2021. These were recorded in accumulated other comprehensive loss within stockholders’ equity in the consolidated condensed balance sheets. Interest Rate Risk We manage interest rate exposure through a mix of variable interest rate debt and interest rate swap agreements. We had $150 million of variable interest rate debt outstanding at March 31, 2022, for which the interest rate is effectively fixed at 2.34% through May 2024 with two interest rate swap agreements to reduce our exposure to interest rate increases. In addition, we had $180 million of variable interest rate debt outstanding at March 31, 2022. Interest rates on the variable rate debt and our unused credit facilities are based on the Secured Overnight Financing Rate (“SOFR”). See Note 7 in the Notes to Consolidated Financial Statements (Unaudited) set forth in Part I of this report for further detail of our debt. Assuming this level of borrowing, a hypothetical one-percentage point increase in the SOFR interest rate would increase our annual interest expense by approximately $1.8 million.