WERNER ENTERPRISES INC 10-Q

Item 1. Financial Statements. WERNER ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended September 30, Nine Months Ended September 30, (In thousands, except per share amounts) 2022 2021 2022 2021 Operating revenues $ 827,606 $ 702,891 $ 2,428,487 $ 1,969,151 Operating expenses: Salaries, wages and benefits 264,443 234,250 760,078 649,198 Fuel 111,985 64,692 325,852 174,033 Supplies and maintenance 68,009 57,067 187,690 152,628 Taxes and licenses 25,016 24,419 72,640 71,396 Insurance and claims 34,501 27,702 103,064 70,497 Depreciation and amortization 70,397 68,615 206,097 196,431 Rent and purchased transportation 187,449 161,061 569,802 458,474 Communications and utilities 3,720 3,598 11,427 9,953 Other ( 14,175 ) ( 9,837 ) ( 42,858 ) ( 24,117 ) Total operating expenses 751,345 631,567 2,193,792 1,758,493 Operating income 76,261 71,324 234,695 210,658 Other expense (income): Interest expense 2,778 1,284 6,004 2,823 Interest income ( 392 ) ( 287 ) ( 980 ) ( 918 ) Gain on investments in equity securities, net ( 114 ) ( 16,090 ) ( 14,403 ) ( 36,281 ) Other 77 50 276 146 Total other expense (income) 2,349 ( 15,043 ) ( 9,103 ) ( 34,230 ) Income before income taxes 73,912 86,367 243,798 244,888 Income tax expense 17,987 21,278 59,229 61,275 Net income 55,925 65,089 184,569 183,613 Net income attributable to noncontrolling interest ( 874 ) ( 1,328 ) ( 3,479 ) ( 1,328 ) Net income attributable to Werner $ 55,051 $ 63,761 $ 181,090 $ 182,285 Earnings per share: Basic $ 0.87 $ 0.94 $ 2.81 $ 2.69 Diluted $ 0.86 $ 0.94 $ 2.79 $ 2.68 Weighted-average common shares outstanding: Basic 63,386 67,475 64,433 67,776 Diluted 63,782 67,834 64,819 68,136 See Notes to Consolidated Financial Statements (Unaudited). 4 Table of Contents WERNER ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) Three Months Ended September 30, Nine Months Ended September 30, (In thousands) 2022 2021 2022 2021 Net income $ 55,925 $ 65,089 $ 184,569 $ 183,613 Other comprehensive income (loss): Foreign currency translation adjustments ( 708 ) ( 1,119 ) 398 ( 822 ) Change in fair value of interest rate swaps, net of tax 1,857 400 6,771 2,063 Other comprehensive income (loss) 1,149 ( 719 ) 7,169 1,241 Comprehensive income 57,074 64,370 191,738 184,854 Comprehensive income attributable to noncontrolling interest ( 874 ) ( 1,328 ) ( 3,479 ) ( 1,328 ) Comprehensive income attributable to Werner $ 56,200 $ 63,042 $ 188,259 $ 183,526 See Notes to Consolidated Financial Statements (Unaudited). 5 Table of Contents WERNER ENTERPRISES, INC. CONSOLIDATED CONDENSED BALANCE SHEETS (In thousands, except share amounts) September 30, 2022 December 31, 2021 (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 125,683 $ 54,196 Accounts receivable, trade, less allowance of $ 10,142 and $ 9,169 , respectively 493,139 460,518 Other receivables 24,480 24,449 Inventories and supplies 12,849 11,140 Prepaid taxes, licenses and permits 8,510 17,549 Other current assets 65,845 63,361 Total current assets 730,506 631,213 Property and equipment 2,780,691 2,557,825 Less – accumulated depreciation 1,061,578 944,582 Property and equipment, net 1,719,113 1,613,243 Goodwill 74,404 74,618 Intangible assets, net 51,238 55,315 Other non-current assets 283,868 229,324 Total assets $ 2,859,129 $ 2,603,713 LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 115,860 $ 93,987 Current portion of long-term debt 5,000 5,000 Insurance and claims accruals 77,663 72,594 Accrued payroll 47,619 44,333 Accrued expenses 31,553 28,758 Other current liabilities 24,939 24,011 Total current liabilities 302,634 268,683 Long-term debt, net of current portion 568,750 422,500 Other long-term liabilities 42,765 43,314 Insurance and claims accruals, net of current portion 238,689 237,220 Deferred income taxes 281,057 268,499 Total liabilities 1,433,895 1,240,216 Commitments and contingencies Temporary equity - redeemable noncontrolling interest 38,676 35,947 Stockholders’ equity: Common stock, $ 0.01 par value, 200,000,000 shares authorized; 80,533,536 shares issued; 63,202,053 and 65,790,112 shares outstanding, respectively 805 805 Paid-in capital 127,046 121,904 Retained earnings 1,823,927 1,667,104 Accumulated other comprehensive loss ( 13,435 ) ( 20,604 ) Treasury stock, at cost; 17,331,483 and 14,743,424 shares, respectively ( 551,785 ) ( 441,659 ) Total stockholders’ equity 1,386,558 1,327,550 Total liabilities, temporary equity and stockholders’ equity $ 2,859,129 $ 2,603,713 See Notes to Consolidated Financial Statements (Unaudited). 6 Table of Contents WERNER ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended September 30, (In thousands) 2022 2021 Cash flows from operating activities: Net income $ 184,569 $ 183,613 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 206,097 196,431 Deferred income taxes 10,262 14,756 Gain on disposal of property and equipment ( 62,659 ) ( 39,292 ) Non-cash equity compensation 9,120 7,999 Insurance and claims accruals, net of current portion 1,469 2,362 Other ( 5,056 ) ( 1,422 ) Gain on investments in equity securities, net ( 14,403 ) ( 36,281 ) Changes in certain working capital items: Accounts receivable, net ( 32,258 ) ( 69,072 ) Other current assets 3,922 ( 10,319 ) Accounts payable 21,061 17,236 Other current liabilities 10,592 ( 12,667 ) Net cash provided by operating activities 332,716 253,344 Cash flows from investing activities: Additions to property and equipment ( 379,902 ) ( 295,485 ) Proceeds from sales of property and equipment 125,830 132,755 Net cash invested in acquisition 705 ( 141,291 ) Investment in equity securities ( 20,250 ) ( 10,000 ) Decrease in notes receivable 4,870 5,114 Net cash used in investing activities ( 268,747 ) ( 308,907 ) Cash flows from financing activities: Repayments of short-term debt ( 3,750 ) ( 25,000 ) Proceeds from issuance of short-term debt — 5,000 Repayments of long-term debt ( 100,000 ) — Proceeds from issuance of long-term debt 250,000 170,000 Dividends on common stock ( 23,946 ) ( 21,057 ) Repurchases of common stock ( 110,400 ) ( 53,266 ) Tax withholding related to net share settlements of restricted stock awards ( 3,704 ) ( 3,773 ) Other cash flows from financing activities ( 750 ) ( 35 ) Net cash provided by financing activities 7,450 71,869 Effect of exchange rate fluctuations on cash 68 ( 212 ) Net increase in cash and cash equivalents 71,487 16,094 Cash and cash equivalents, beginning of period 54,196 29,334 Cash and cash equivalents, end of period $ 125,683 $ 45,428 Supplemental disclosures of cash flow information: Interest paid $ 5,664 $ 2,517 Income taxes paid 38,797 56,350 Supplemental schedule of non-cash investing and financing activities: Notes receivable issued upon sale of property and equipment $ 3,771 $ 4,252 Change in fair value of interest rate swaps 6,772 2,063 Property and equipment acquired included in accounts payable 7,143 3,666 Property and equipment disposed included in other receivables 190 — Dividends accrued but not yet paid at end of period 8,216 8,026 Redeemable noncontrolling interest associated with acquisition — 35,322 See Notes to Consolidated Financial Statements (Unaudited). 7 Table of Contents WERNER ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND TEMPORARY EQUITY - REDEEMABLE NONCONTROLLING INTEREST (Unaudited) Three Months Ended September 30, 2022 (In thousands, except share and per share amounts) Common Stock Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Treasury Stock Total Stockholders’ Equity Temporary Equity - Redeemable Noncontrolling Interest BALANCE, June 30, 2022 $ 805 $ 124,065 $ 1,777,092 $ ( 14,584 ) $ ( 543,506 ) $ 1,343,872 $ 38,552 Net income attributable to Werner — — 55,051 — — 55,051 — Net income attributable to noncontrolling interest — — — — — — 874 Other comprehensive income — — — 1,149 — 1,149 — Purchases of 215,204 shares of common stock — — — — ( 8,287 ) ( 8,287 ) — Dividends on common stock ($ 0.13 per share) — — ( 8,216 ) — — ( 8,216 ) — Equity compensation activity, 1,692 shares — ( 54 ) — — 8 ( 46 ) — Non-cash equity compensation expense — 3,035 — — — 3,035 — Distribution to noncontrolling interest — — — — — — ( 750 ) BALANCE, September 30, 2022 $ 805 $ 127,046 $ 1,823,927 $ ( 13,435 ) $ ( 551,785 ) $ 1,386,558 $ 38,676 Three Months Ended September 30, 2021 (In thousands, except share and per share amounts) Common Stock Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Treasury Stock Total Stockholders’ Equity Temporary Equity - Redeemable Noncontrolling Interest BALANCE, June 30, 2021 $ 805 $ 117,069 $ 1,542,497 $ ( 20,873 ) $ ( 342,915 ) $ 1,296,583 $ — Net income attributable to Werner — — 63,761 — — 63,761 — Net income attributable to noncontrolling interest — — — — — — 1,328 Other comprehensive loss — — — ( 719 ) — ( 719 ) — Purchases of 1,049,120 shares of common stock — — — — ( 47,759 ) ( 47,759 ) — Dividends on common stock ($ 0.12 per share) — — ( 8,026 ) — — ( 8,026 ) — Equity compensation activity, 1,498 shares — ( 43 ) — — 10 ( 33 ) — Non-cash equity compensation expense — 2,750 — — — 2,750 — Investment in noncontrolling interest — — — — — — 35,322 Distribution to noncontrolling interest — — — — — — ( 35 ) BALANCE, September 30, 2021 $ 805 $ 119,776 $ 1,598,232 $ ( 21,592 ) $ ( 390,664 ) $ 1,306,557 $ 36,615 See Notes to Consolidated Financial Statements (Unaudited). 8 Table of Contents WERNER ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND TEMPORARY EQUITY - REDEEMABLE NONCONTROLLING INTEREST (CONTINUED) (Unaudited) Nine Months Ended September 30, 2022 (In thousands, except share and per share amounts) Common Stock Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Treasury Stock Total Stockholders’ Equity Temporary Equity - Redeemable Noncontrolling Interest BALANCE, December 31, 2021 $ 805 $ 121,904 $ 1,667,104 $ ( 20,604 ) $ ( 441,659 ) $ 1,327,550 $ 35,947 Net income attributable to Werner — — 181,090 — — 181,090 — Net income attributable to noncontrolling interest — — — — — — 3,479 Other comprehensive income — — — 7,169 — 7,169 — Purchases of 2,710,304 shares of common stock — — — — ( 110,400 ) ( 110,400 ) — Dividends on common stock ($ 0.38 per share) — — ( 24,267 ) — — ( 24,267 ) — Equity compensation activity, 122,245 shares — ( 3,978 ) — — 274 ( 3,704 ) — Non-cash equity compensation expense — 9,120 — — — 9,120 — Distribution to noncontrolling interest — — — — — — ( 750 ) BALANCE, September 30, 2022 $ 805 $ 127,046 $ 1,823,927 $ ( 13,435 ) $ ( 551,785 ) $ 1,386,558 $ 38,676 Nine Months Ended September 30, 2021 (In thousands, except share and per share amounts) Common Stock Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Treasury Stock Total Stockholders’ Equity Temporary Equity - Redeemable Noncontrolling Interest BALANCE, December 31, 2020 $ 805 $ 116,039 $ 1,438,916 $ ( 22,833 ) $ ( 337,887 ) $ 1,195,040 $ — Net income attributable to Werner — — 182,285 — — 182,285 — Net income attributable to noncontrolling interest — — — — — — 1,328 Other comprehensive income — — — 1,241 — 1,241 — Purchases of 1,179,566 shares of common stock — — — — ( 53,266 ) ( 53,266 ) — Dividends on common stock ($ 0.34 per share) — — ( 22,969 ) — — ( 22,969 ) — Equity compensation activity, 132,091 shares — ( 4,262 ) — — 489 ( 3,773 ) — Non-cash equity compensation expense — 7,999 — — — 7,999 — Investment in noncontrolling interest — — — — — — 35,322 Distribution to noncontrolling interest — — — — — — ( 35 ) BALANCE, September 30, 2021 $ 805 $ 119,776 $ 1,598,232 $ ( 21,592 ) $ ( 390,664 ) $ 1,306,557 $ 36,615 See Notes to Consolidated Financial Statements (Unaudited). 9 Table of Contents WERNER ENTERPRISES, INC. 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 controlled 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 and nine months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31 , 2022. 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 2021 Form 10-K. New Accounting Pronouncements Adopted In first quarter 2022, we adopted Accounting Standards Update (“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 the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform. The adoption of the new guidance did not have a material impact on our consolidated financial statements. (2) Business Acquisitions On July 1, 2021, we acquired an 80 % ownership interest in ECM Associated, LLC ("ECM”) for a final purchase price of $ 141.3 million after net working capital changes and net of cash acquired. ECM, through its ECM Transport, LLC (“ECM Transport”) and Motor Carrier Service, LLC (“MCS”) subsidiaries, provides regional truckload carrier services in the Mid-Atlantic, Ohio, and Northeast regions of the United States. The results of operations for ECM are included in our consolidated financial statements beginning July 1, 2021, and the noncontrolling interest is presented as a separate component of the consolidated financial statements. On November 22, 2021, we acquired 100 % of the equity interests in NEHDS Logistics, LLC (“NEHDS”) for a final purchase price of $ 62.3 million after including the impacts of contingent consideration and net working capital changes. The purchase price allocation for NEHDS was considered final as of March 31, 2022. NEHDS is a final mile residential delivery provider 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. The results of operations for NEHDS are included in our consolidated financial statements beginning November 22, 2021. Amortization expense on intangible assets was $ 1.4 million and $ 4.1 million for the three and nine months ended September 30, 2022 . 10 Table of Contents (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 September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Truckload Transportation Services $ 621,866 $ 527,697 $ 1,793,899 $ 1,481,846 Werner Logistics 187,138 157,968 580,007 437,494 Inter-segment eliminations ( 402 ) ( 212 ) ( 1,749 ) ( 539 ) Transportation services 808,602 685,453 2,372,157 1,918,801 Other revenues 19,004 17,438 56,330 50,350 Total revenues $ 827,606 $ 702,891 $ 2,428,487 $ 1,969,151 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 September 30, Nine Months Ended September 30, 2022 2021 2022 2021 United States $ 765,559 $ 657,795 $ 2,247,307 $ 1,815,180 Mexico 50,681 38,187 145,433 116,268 Other 11,366 6,909 35,747 37,703 Total revenues $ 827,606 $ 702,891 $ 2,428,487 $ 1,969,151 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 September 30, 2022 and December 31, 2021, the accounts receivable, trade, net, balance was $ 493.1 million and $ 460.5 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 September 30, 2022 and December 31, 2021, the balance of contract assets was $ 9.3 million and $ 9.0 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. The balance of contract liabilities was $ 1.2 million at September 30, 2022 and December 31, 2021 . The amount of revenues recognized in the nine months ended September 30, 2022 that was included in the December 31, 2021 contract liability balance was $ 1.2 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 nine months ended September 30, 2022 and 2021, revenues recognized from performance obligations related to prior periods (for example, due to changes in transaction price) were not material. 11 Table of Contents (4) 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): September 30, 2022 December 31, 2021 Balance Sheet Classification Right-of-use assets (recorded in other non-current assets) $ 33,430 $ 28,458 Current lease liabilities (recorded in other current liabilities) $ 7,028 $ 6,380 Long-term lease liabilities (recorded in other long-term liabilities) 27,573 22,634 Total operating lease liabilities $ 34,601 $ 29,014 Other Information Weighted-average remaining lease term for operating leases 7.26 years 7.63 years Weighted-average discount rate for operating leases 2.6 % 2.7 % The following table presents the maturities of operating lease liabilities as of September 30, 2022 (in thousands): Maturity of Lease Liabilities 2022 (remaining) $ 2,086 2023 7,357 2024 6,412 2025 5,515 2026 4,518 Thereafter 12,130 Total undiscounted operating lease payments $ 38,018 Less: Imputed interest ( 3,417 ) Present value of operating lease liabilities $ 34,601 Cash Flows During the nine months ended September 30, 2022 and 2021, right-of-use assets of $ 12.4 million and $ 3.9 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 $ 5.9 million and $ 3.2 million for the nine months ended September 30, 2022 and 2021, respectively, and are included in operating cash flows. Operating Lease Expense Operating lease expense was $ 5.4 million and $ 15.8 million for the three and nine months ended September 30, 2022, respectively, and $ 4.2 million and $ 11.3 million for the three and nine months ended September 30, 2021, respectively. This expense included $ 2.2 million and $ 6.6 million for the three and nine months ended September 30, 2022, respectively, and $ 1.3 million and $ 3.3 million for the three and nine months ended September 30, 2021, respectively, for long-term operating leases, with the remainder for variable and short-term lease expense . 12 Table of Contents Lessor Operating Leases We are the lessor of tractors and trailers under operating leases with initial terms of 1 to 10 years. We recognize revenue for such leases on a straight-line basis over the term of the lease. Revenues were $ 3.3 million and $ 9.6 million for the three and nine months ended September 30, 2022, respectively, and $ 2.9 million and $ 9.0 million for the three and nine months ended September 30, 2021, respectively. The following table presents information about the maturities of these operating leases as of September 30, 2022 (in thousands): 2022 (remaining) $ 2,486 2023 5,366 2024 266 2025 273 2026 282 Thereafter 71 Total $ 8,744 (5) 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): Level in Fair Value Hierarchy Fair Value September 30, 2022 December 31, 2021 Other non-current assets: Equity securities (1) 1 $ 2,932 $ 17,166 (1) Represents our investments in autonomous technology companies. For additional information regarding the valuation of these equity securities, see Note 6 – Investments. We have no material liabilities measured at fair value on a recurring basis for the periods presented. 13 Table of Contents 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 6 – 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. 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). (6) 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 June 2022, we paid MLSI $ 20.0 million for additional shares of its preferred stock. This minority equity investment is being accounted for under ASC 321 using the measurement alternative, and is recorded in other noncurrent assets on the consolidated condensed balance sheets. As of September 30, 2022 and December 31, 2021, the value of our investment was $ 86.8 million and $ 38.2 million, respectively. 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 gain or loss on investments in equity securities on the consolidated statements of income. During second quarter 2022 and third quarter 2021, investments by third-parties resulted in the remeasurements of our investment in MLS, and in the nine months ended September 30, 2022 we recognized an unrealized gain of $ 28.6 million and in the three and nine months ended September 30, 2021 we recognized an unrealized gain of $ 28.2 million on our investment based upon the prices paid by third parties. No gains or losses were recognized in the three months ended September 30, 2022. At September 30, 2022, cumulative unrealized gains on our investment in MLSI 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 gain or loss on investments in equity securities on the consolidated statements of income. We recognized an unrealized gain of $ 0.1 million and an unrealized loss of $ 14.2 million on these investments for the three and nine months ended September 30, 2022, respectively. We recognized an unrealized loss of $ 12.1 million and an unrealized gain of $ 8.1 million on our investments for the three and nine months ended September 30, 2021, respectively. For additional information regarding the fair value of these equity investments, see Note 5 – Fair Value. (7) Debt and Credit Facilities On March 25, 2022, we entered into a new credit agreement (the “Wells Credit Agreement”) with Wells Fargo Bank, National Association ("Wells Fargo"), replacing our previous credit agreement with Wells Fargo dated May 14, 2019, as amended. The Wells Credit Agreement provides for a $ 300.0 million unsecured revolving line of credit ("Wells Line of Credit"), with a $ 75.0 million maximum limit for the aggregate amount of letters of credit issued, and expires on May 14, 2024 . The Wells Credit Agreement also provides for an unsecured term loan commitment not to exceed a principal amount of $ 100.0 million ("Wells Term Loan"), with the outstanding principal balance due and payable in full on May 14, 2024 . The proceeds of the Wells Line of Credit and Wells Term Loan may be used for the Company's general corporate purposes. Amounts drawn under the Wells Line of Credit and the outstanding principal balance of the Wells Term Loan bear interest either, at our option, (i) at a variable rate based on the daily Secured Overnight Financing Rate (" SOFR ") plus 0.10 % and a margin ranging between 0.675 % and 0.925 %, or (ii) at a fixed rate based on the Term SOFR in effect on the first day of an applicable interest period designated by us plus 0.10 % in the case of one month Term SOFR, 0.15 % in the case of three month Term SOFR, 0.25 % in the case of six month Term SOFR, and plus, in each case, a margin ranging between 0.675 % and 0.925 %, payable monthly. The margin rates are based on our ratio of total funded debt to earnings before interest, income taxes, depreciation and amortization (“EBITDA”). The Wells Credit Agreement also requires us to pay Wells Fargo (i) an annualized letter of credit fee based on the face amount of each letter of credit outstanding at rates ranging between 0.55 % and 0.80 % per annum and (ii) a nonrefundable commitment fee on the average daily unused amount of the Wells Line of Credit (after deducting undrawn letters of credit) at rates ranging between 0.11 % and 0.15 % per annum. The rates for the letter of credit and nonrefundable commitment fees are based on our ratio of total funded debt to EBITDA. 14 Table of Contents On March 25, 2022, we also entered into a second amendment to our existing unsecured revolving line of credit agreement, dated May 14, 2019, with BMO Harris Bank N.A. (“BMO Harris”), expiring May 14, 2024 (“BMO Line of Credit”). The second amendment increased our BMO Line of Credit from $ 200.0 million to $ 300.0 million and changed the variable interest rate calculation by replacing the LIBOR with the SOFR . Amounts drawn under the BMO Line of Credit bear interest, for a selected interest period, at a variable rate based on the SOFR plus 0.10 % and a margin ranging between 0.70 % and 1.50 %, based on our ratio of total funded debt to EBITDA, payable at the end of the applicable interest period. No changes were made to the annualized letter of credit fee, nonrefundable commitment fee, and financial covenants as a result of the second amendment. We also have a $ 100.0 million unsecured fixed-rate term loan commitment with BMO Harris, 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 ("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 September 30, 2022 and December 31, 2021, our outstanding debt totaled $ 573.8 million and $ 427.5 million, respectively. As of September 30, 2022, we had a total of $ 380.0 million outstanding under our revolving lines of credit, including (i) $ 230.0 million at a weighted average variable interest rate of 3.59 %; (ii) $ 75.0 million at a variable interest rate of 3.43 %, which is effectively fixed at 2.29 % with an interest rate swap agreement through May 14, 2024 ; and (iii) $ 75.0 million at a variable interest rate of 3.45 %, which is effectively fixed at 2.34 % with an interest rate swap agreement through May 14, 2024 . Subsequent to the end of the quarter, in October 2022, we borrowed an additional $ 10.0 million under our revolving lines of credit, which will be classified as long-term in the consolidated condensed balance sheets. The total borrowing capacity of $ 600.0 million under our revolving lines of credit at September 30, 2022, is further reduced by $ 58.4 million in stand-by letters of credit under which we are obligated. In addition, as of September 30, 2022, we had $ 100.0 million outstanding under the Wells Term Loan at a variable interest rate of 3.77 % and $ 93.8 million outstanding under the BMO Term Loan at a fixed interest rate of 1.28 %. Availability of such funds under the debt agreements is conditional upon various customary terms and covenants. Such covenants include, 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 September 30, 2022 we were in compliance with these covenants. At September 30, 2022, the aggregate future maturities of long-term debt by year are as follows (in thousands): 2022 (remaining) $ 1,250 2023 5,000 2024 567,500 2025 — 2026 — Total $ 573,750 (8) Commitments and Contingencies We have committed to property and equipment purchases of approximately $ 177.1 million at September 30, 2022 . 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 $ 32.7 million as of September 30, 2022, and $ 28.8 million as of December 31, 2021. 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 15 Table of Contents 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 September 30, 2022 and December 31, 2021. The Company is pursuing an appeal of this verdict. No assurances can be given regarding the outcome of any such appeal. As previously disclosed, in July 2022, the Hopkins County District Court in Sulphur Springs, Texas approved a $ 150.0 million settlement, voluntarily agreed to by the Company and its insurers, of a motor vehicle accident lawsuit in Texas arising from a May 24, 2020 accident between a Werner tractor-trailer and a passenger vehicle. 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 with premium-based coverage for the remainder of the settlement amount. As a result of this settlement, the Company recognized $ 9.5 million of insurance and claims expense for the nine months ended September 30, 2022, and had recorded a liability of $ 0.5 million as of December 31, 2021. The settlement was paid by the Company and its insurers during third quarter 2022. 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, and now the trial court is expected to determine whether the plaintiffs should be granted a new trial on the short break claim. As of September 30, 2022, 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. (9) 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 September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Net income attributable to Werner $ 55,051 $ 63,761 $ 181,090 $ 182,285 Weighted average common shares outstanding 63,386 67,475 64,433 67,776 Dilutive effect of stock-based awards 396 359 386 360 Shares used in computing diluted earnings per share 63,782 67,834 64,819 68,136 Basic earnings per share $ 0.87 $ 0.94 $ 2.81 $ 2.69 Diluted earnings per share $ 0.86 $ 0.94 $ 2.79 $ 2.68 16 Table of Contents (10) 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, 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 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 continues 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): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Revenues by Segment Truckload Transportation Services $ 621,866 $ 527,697 $ 1,793,899 $ 1,481,846 Werner Logistics 187,138 157,968 580,007 437,494 Other 18,469 17,004 54,928 49,128 Corporate 535 434 1,402 1,222 Subtotal 828,008 703,103 2,430,236 1,969,690 Inter-segment eliminations ( 402 ) ( 212 ) ( 1,749 ) ( 539 ) Total $ 827,606 $ 702,891 $ 2,428,487 $ 1,969,151 17 Table of Contents Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Operating Income (Loss) by Segment Truckload Transportation Services $ 74,117 $ 62,856 $ 214,214 $ 193,592 Werner Logistics 5,145 7,650 26,316 16,151 Other ( 1,091 ) 1,406 ( 185 ) 3,935 Corporate ( 1,910 ) ( 588 ) ( 5,650 ) ( 3,020 ) Total $ 76,261 $ 71,324 $ 234,695 $ 210,658 Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Depreciation and Amortization by Segment Truckload Transportation Services $ 64,579 $ 63,247 $ 189,283 $ 180,305 Werner Logistics 2,423 2,205 7,042 6,511 Other 2,875 2,675 8,347 8,165 Corporate 520 488 1,425 1,450 Total $ 70,397 $ 68,615 $ 206,097 $ 196,431 (11) Subsequent Event On October 1, 2022, we acquired 100 % of the equity interests in FAB9, Inc., doing business as Baylor Trucking, Inc. (“Baylor”), for a cash purchase price of $ 80.0 million, before including the impacts of working capital adjustments, cash acquired, and a contingent earnout payment of up to $ 15.0 million based on Baylor achieving certain financial performance goals over a three-year period. We financed the transaction through existing credit facilities. Baylor, based in Milan, Indiana, operates 200 trucks and 980 trailers in the east central and south central United States. The acquisition expands our terminal, fleet, and professional driver presence in these geographic truckload markets and adds two terminals to our network. The acquisition will be accounted for as a business combination using the acquisition method of accounting under GAAP. The results of operations for Baylor will be included in our consolidated financial statements, within our TTS segment, beginning October 1, 2022. Due to the recent timing of this transaction, the initial accounting for the acquisition is not complete. As a result, we are currently unable to provide purchase price allocation disclosures based on acquisition date fair values of assets acquired and liabilities assumed, as well as other related information. We plan to include these disclosures in our Annual Report on Form 10-K for the year ending December 31, 2022. 18 Table of Contents