901 HEARTLAND WAY | NORTH LIBERTY, IOWA 52317®20222022Annual ReportAnnual ReportHEARTLAND EXPRESSHEARTLAND EXPRESS INSERT MIKES ANNUAL LETTER PAGE 1
To Our Stockholders:
The year of 2022 may go down as one of the most impactful years in our company’s long history of success, and that is why I am extremely
proud of our drivers and our entire support team and what we have delivered together. In partnership with you, our stockholders, we
focused on delivering superior service to our customers, a safe working environment for our employees, and generated strong financial
results. But during 2022 we took things to new heights as we completed two large acquisitions that we expect will double our size as a
company and double our family of brands that you see running up and down America’s highways. We know there is great opportunity with
our latest two acquisitions that will take time to capitalize on. We are now a family that consists of Heartland Express, Millis Transfer,
Smith Transport, and Contract Freighters, Inc. (“CFI”), all stronger together. Not many companies that have been in business for 45 years
decide to take a challenge like that on, but we did it. It is truly inspiring to see our teamwork and discipline as a company that allows us
to take advantage of these growth opportunities when they present themselves. We thank you, our stockholders, for your continued support
of our drivers, and our supporting employees.
2022 was a significant year financially, as we delivered $968.0 million of operating revenues and stockholders’ equity of $855.5 million,
both all-time records in the history of our Company. At this time next year, we expect to be able to share with you a new all-time record
in excess of $1 billion of operating revenue, after a full twelve months of operations from Smith Transport and CFI are included in our
consolidated results. We remain committed to driving strong financial results that allow us to return value to you, our stockholders, in the
form of dividends and repurchases of our common stock. During 2022, we were able to return dividends of $0.08 per share or $6.3 million
through our regular quarterly dividends paid, that completes 78 consecutive quarters of regular dividends and we have also issued four
special dividends in 2007, 2010, 2012, and 2021. We did not repurchase any shares of our common stock in the current year, as a result
of the acquisitions of Smith Transport and CFI, but we have repurchased 4.7 million shares of our common stock for $82.8 million during
the last five years.
We delivered net income of $133.6 million, and also ended the year of 2022 with $1.7 billion total assets. We recorded an operating ratio
of 80.5% and 84.8% non-gaap operating ratio (operating expenses, net of fuel surcharge revenue and other adjustments for amortization
of intangible assets, acquisition-related costs, and a significant gain on sale of a terminal property, as a percentage of operating revenue
excluding fuel surcharge revenue). We have now accomplished 45 years in a row with an operating ratio in the 80’s or below.
Our long-term focus, continued cost controls, and the discipline to make the right investments at the right time, have made us successful
over the history of our company. Our operating model is built on a foundation that has been successful in good operating environments
and bad. This approach has allowed us to deliver efficient and consistent operating results no matter what we have faced.
We have now successfully improved the overall profitability of Millis Transfer to the expected levels of an 85% or lower operating ratio
within three years following the acquisition. We have continued to invest in their terminal locations, fleet of tractors and trailers, and
expanded the Millis Training Institute. We successfully opened our first Heartland Training Institute location in Phoenix, Arizona in 2022,
following the initial training school expansions in Carlisle, Pennsylvania, and Alvarado, Texas. We now look to work very hard and prove
to you that we can make improvements on a larger scale as we look to improve the profitability of Smith Transport and CFI over that same
three-year timeline.
Smith Transport joined our family on May 31, 2022, operating out of their Roaring Spring, Pennsylvania headquarters. They brought an
excellent group of drivers and employees and the customers of Smith Transport helped to further diversify our consolidated freight mix.
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CFI joined our family on August 31, 2022, operating out of their Joplin, Missouri headquarters. CFI brought with them an over-the-road full truckload fleet, temperature-controlled fleet, and logistics services and cross-border freight in Mexico. This is our first venture into international operations outside of a small amount of cross-border freight in Canada, and we intend to learn quickly from the experts that have been driving this business for many years. CFI is a company that is well known and respected across our industry, and they will help us build for the future. Together, we have many new opportunities to improve our freight network, help our drivers work more efficiently, and help us with better pricing from our customers and vendors across our combined operations.Growing our business through acquisitions has been, and continues to be, a key strategy for our company throughout our history. Acquisitions take a lot of work and a lot of money, but they help us to grow and build purchasing power to make us an even stronger and more competitive company together as a collective team. During 2022, the acquisition of CFI required us to take on debt because it was such an important opportunity. We typically pride ourselves on having a debt-free balance sheet, but this opportunity was the right fit. You can be assured we chose to make this major investment in our future after careful consideration. We are committed to relieving all the debt acquired through the Smith Transport acquisition and the debt needed to facilitate the CFI acquisition as quickly as we can. We will do this through teamwork and discipline, and we have the best team in the business to execute the plan and reach our goal.We now operate 35 terminal locations across the United States, including one location in Mexico, following the CFI acquisition. We also continue to pride ourselves on operating one of the youngest fleets of tractors and trailers in our industry. While the average age of our fleet has increased because of the recent acquisitions, we continue to remain well positioned in our industry and expect to improve the average age of our trailer fleet over time. The average age of our tractors was 2.0 years and the average age of our trailers was 6.3 years as of December, 31 2022.This past year we have once again received many hard-earned customer service and operational awards. Service for Success is our motto and our professional drivers and employees protect a core principal of customer service each day at Heartland Express. Collectively, these awards include:Further, I am proud to report that we were also named one of Newsweek’s “America’s Most Trustworthy Companies,” (#18 – Transport, Logistics, and Packaging) and CFI was named a Top Company for Women to Work for in Transportation during the year. We appreciate, applaud and thank our drivers and our committed team of employees who work hard each day to support them. These awards are hard-earned and are a direct reflection upon our outstanding group of employees and our focus on excellence in all areas of our business.Finally, I feel there are promising opportunities ahead and continue to believe in the American spirit and especially in the abilities of our organization. We are proud of our accomplishments in 2022 and we look forward to our future with you, our Stockholders. Thank you for your investment in Heartland Express and your continued support. Respectfully, Michael J. Gerdin, President, Chief Executive Officer, Chairman of the Board• FedEx Express Core Carrier of the Year (12 years in a row)• FedEx Express Platinum Award (99.98% On-Time Delivery)• United Sugars Carrier of the Year• Home Depot Carrier of the Year (CFI)• Schneider Logistics Carrier of the Year • DHL Truckload Carrier of the Year• Transplace National Truckload Carrier of the Year• Logistics Management Quest for Quality Award (our 18th award)• Wreaths Across America – Honor Fleet• Commercial Carrier Journal Top 250 Award (#45) CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report contains certain statements that may be considered forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended,
and such statements are subject to the safe harbor created by those sections and the Private Securities Litigation Reform Act of
1995, as amended. All statements, other than statements of historical or current fact, are statements that could be deemed
forward-looking statements, including without limitation: any projections of earnings, revenues, or other financial items; any
statement of plans, strategies, and objectives of management for future operations; any statements concerning proposed new
services or developments; any statements regarding future economic conditions or performance, including future inflation,
customer spending, supply chain conditions, and gross domestic product changes; and any statements of belief and any
statements of assumptions underlying any of the foregoing. In this Annual Report, statements relating to expected sources of
working capital, liquidity and funds for meeting equipment purchase obligations, expected capital expenditures and incurrence
of debt, repayments of debt, operating ratio goals, anticipated revenue equipment sales and purchases, including revenue
equipment gains, the used equipment market, and the availability of revenue equipment, future trucking capacity, expected
freight demand and volumes, future rates and prices, future growth and acquisitions, our ability to attract and retain drivers
and non-driver employees, future driver and employee compensation, including possible compensation increases, future
customer relationships, future pricing and terms from our vendors and suppliers, future depreciation and amortization, future
asset utilization, expected tractor and trailer count, expected fleet age, future driver market, expected independent contractor
usage, including the classification of our independent contractors, planned allocation of capital, future equipment costs, future
income tax rates and allowable deductions and expense, future insurance and claims expense, future interest rates, future
maintenance costs, future growth, future safety performance, expected regulatory action and the impact of regulatory changes,
future compliance with law and regulations, future litigation and our potential exposure for pending legal proceedings, future
goodwill impairment, future inflation, future share prices, dividends, and repurchases, if any, potential results of the testing of
covenants under the Credit Facilities, expected fuel expense and availability, including strategies for managing fuel costs,
reducing unnecessary or unproductive costs, expected functioning and effectiveness of our information systems and other
technologies we implement and our ability to safeguard such systems and technology, our ability to react to changing market
conditions, and future impact of the COVID-19 outbreak or other similar outbreaks, among others, are forward-looking
statements. Such statements may be identified by their use of terms or phrases such as “seek,” “expects,” “estimates,”
“anticipates,” “projects,” “believes,” “hopes,” “plans,” “goals,” “intends,” “may,” “might,” “likely,” “will,” “should,”
“would,” “could,” “potential,” “predict,” “continue,” “strategy,” “future,” “outlook,” derivations thereof, and similar terms
and phrases. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted
or quantified, which could cause future events and actual results to differ materially from those set forth in, contemplated by, or
underlying the forward-looking statements. Known factors that could cause or contribute to such differences include, but are
not limited to, those discussed in the section entitled “Risk Factors,” set forth below. Readers should review and consider the
factors discussed in “Risk Factors” of this Annual Report, along with various disclosures in our press releases, stockholder
reports, and other filings with the Securities and Exchange Commission.
All such forward-looking statements speak only as of the date of this Annual Report. You are cautioned not to place undue
reliance on such forward-looking statements. We expressly disclaim any obligation or undertaking to release publicly any
updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard
thereto or any change in the events, conditions, or circumstances on which any such statement is based.
References in this Annual Report to “we,” “us,” “our,” “Heartland,” or the “Company” or similar terms refer to Heartland
Express, Inc. and its subsidiaries.
Business
General
Heartland Express, Inc. is a holding company incorporated in Nevada, which directly or indirectly owns all of the stock of the
following active legal entities: Heartland Express, Inc. of Iowa, Heartland Express Services, Inc., Heartland Express
Maintenance Services, Inc. ("Heartland Express"), and Midwest Holding Group, LLC and Millis Transfer, LLC ("Millis
Transfer"), and Smith Transport, Inc., Smith Trucking, Inc., and Franklin Logistics, Inc. ("Smith Transport"), and
Transportation Resources, Inc. and Contract Freighters, Inc. (collectively with certain Mexican entities, "CFI"). On May 31,
2022, Heartland Express, Inc. of Iowa acquired Smith Transport, a truckload carrier headquartered in Roaring Spring,
Pennsylvania. On August 31, 2022, Heartland Express, Inc. of Iowa acquired CFI's non-dedicated U.S. dry van and
temperature-controlled truckload business located in Joplin, Missouri, and certain Mexican entities (collectively, "CFI
Logistica") operations located in Mexico. We, together with our subsidiaries, are a short, medium, and long-haul truckload
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carrier and transportation services provider. We primarily provide nationwide asset-based dry van truckload service for major
shippers across the United States, along with cross-border freight and other transportation services offered through third party
partnerships in Mexico.
We, together with our subsidiaries, historically have been a short-to-medium haul truckload carrier with approximately 99.9%
of our operating revenue was derived from shipments within the United States with the remainder being Canada and no
operations in Mexico. With the acquisition of CFI on August 31, 2022, we significantly expanded our scale and our
transportation services. We continue to provide nationwide asset-based dry van truckload service for major shippers from
across the U.S. and now including cross border freight to and from Mexico and our consolidated average length of haul has
increased to approximately 500 miles. We continue to focus on providing high quality service to targeted customers with a high
density of freight in our regional operating areas. We also offer truckload temperature-controlled transportation services and
Mexico logistics services, which are not significant to our consolidated operations. Through the acquisition of CFI, we now
provide transportation logistics services across Mexico for our customers and provide cross-border freight services for customer
loads moving from the United States into Mexico and loads originating from Mexico into the United States. We utilize third
party service providers for all miles run in Mexico and to move freight across the US-Mexico border while leveraging terminal
locations in the US and Mexico near the border to facilitate these moves. We generally earn revenue based on the number of
miles per load delivered and the revenue per mile or per load paid. We operate our consolidated operations under the brand
names of Heartland Express, Millis Transfer, Smith Transport, and CFI. We manage our business based on overall corporate
operating goals and objectives that are the same for all of our brands. Our Chief Operating Decision Maker (“CODM”), our
CEO, evaluates the operational efficiencies of our transportation services, operating performance and asset allocation on a
combined basis based on consolidated operating goals and objectives. We believe the keys to success are maintaining high
levels of customer service and safety, which are predicated on the availability of experienced drivers and late-model equipment.
We believe that our service standards, safety record, and equipment accessibility have made us a core carrier to many of our
major customers, as well as allowed us to build solid, long-term relationships with customers and brand ourselves as an industry
leader for on-time service.
Our headquarters is located in North Liberty, Iowa, in a lower-cost environment with ready access to a skilled, educated, and
industrious workforce. Our other terminals are located near major shipping corridors nationwide, affording proximity to
customer locations, driver domiciles, and distribution centers. Approximately 80% of our terminals are located within 200 miles
of the 30 largest metropolitan areas in the U.S. We believe our geographic reach and terminal locations assist us with driver
recruiting and retention, efficient fleet maintenance, and consistent customer engagement.
We were founded by Russell A. Gerdin in 1978 and became publicly traded in November 1986. Over the thirty-six years from
1986 to 2022, we have grown our revenues to $968.0 million from $21.6 million and our net income has increased to $133.6
million from $3.0 million. For the five year period 2018 through 2022 we had the highest net income, $429.3 million, and
highest revenue, $3.4 billion, of any previous five year period. Much of our growth has been attributable to expanding service
for existing customers, acquiring new customers, and continued expansion of our operating regions through new and existing
customers as well as strategic acquisitions. More information regarding our total assets, revenues and profits for the past three
years can be found in our “Consolidated Balance Sheets” and “Consolidated Statements of Comprehensive Income” that are
included in this report.
We continue to focus on providing quality service to targeted customers with a high density of freight in our regional operating
areas. Organic growth has become increasingly difficult for traditional over-the-road truckload carriers given a shortage of
qualified drivers in the industry and availability of revenue equipment assets. We have completed two recent strategic
acquisitions to combat these industry challenges. In addition, we continue to evaluate and explore different driving options and
offerings for our existing and potential new drivers across our unique mix of driver offerings across Heartland Express, Millis
Transfer, Smith Transport, and CFI.
In addition to past organic growth through the development of our regional operating areas, we have completed ten acquisitions
since 1986 with the most recent and our fifth acquisition within the last nine years, CFI, occurring on August 31, 2022
following the acquisition of Smith Transport on May 31, 2022. These ten acquisitions have enabled us to solidify our position
within existing regions, expand into new operating regions, expand service offerings to address longer length of haul needs
from customers, pursue new customer relationships in new markets, as well as expand business relationships with current
customers in new markets. We are highly selective about acquisitions, with our main criteria being (i) safe operations, (ii) high
quality professional truck drivers, (iii) fleet profile that is compatible with our philosophy or can be replaced economically, and
(iv) freight profile that will allow a path to a low-80s operating ratio upon full integration, application of our cost structure, and
freight optimization, including exiting certain business that fails to meet our operating profile. We have historically been a debt
free organization, with the acquisition of CFI we now have a significant amount of debt. We expect to continue to evaluate
acquisition candidates presented to us, however, we do not expect to make any significant acquisitions while we are paying
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down debt. We believe future growth depends upon several factors including the level of economic growth and the related
customer demand, the available capacity in the trucking industry, our ability to identify and consummate future acquisitions,
our ability to integrate operations of acquired companies to realize efficiencies, and our ability to attract and retain experienced
drivers that meet our hiring standards.
Operations
Our operations department focuses on the successful execution of customer expectations and providing consistent opportunities
for our drivers, in conjunction with maximizing equipment utilization. These objectives require a combined effort of marketing,
regional operations managers, and fleet management.
Our customer service department is responsible for maintaining the continuity between the customer’s needs and our ability to
meet those needs by communicating the customer’s expectations to the fleet management group. Collectively, the marketing
and operations groups (customer service and fleet management) are charged with developing customer relationships, ensuring
service standards, coordinating proper freight-to-capacity balancing, trailer asset management, and daily tactical decisions to
match customer demand with revenue equipment availability across our entire network. Fleet management assigns orders to
drivers based on well-defined criteria, such as United States Department of Transportation (the “DOT”) hours of service
("HOS") compliance, customer requirements, equipment utilization, driver “home time” and other driver needs, limiting non-
revenue miles, and equipment maintenance needs.
Fleet management employees are responsible for driver management, development, and retention. Additionally, they maximize
the capacity that is available to meet the service needs of our customers. Their responsibilities include meeting the needs of the
drivers within the standards that have been set by the organization and communicating the requirements of the customers to the
drivers on each order to ensure successful execution.
Serving the short-to-medium haul market permits us to use primarily single rather than team drivers and dispatch most loads
directly from origin to destination without an intermediate equipment change other than for driver scheduling purposes. During
2022, approximately 70% of our loads were less than 500 miles in length of haul. Substantially all of our revenue is, and for the
last three fiscal years has been, generated from within the U.S. with immaterial revenue derived from Mexico and Canada.
We operate thirty-three terminal facilities throughout the contiguous U.S. and one in Mexico, without driver fueling and
maintenance facilities, following the CFI acquisition, in addition to our terminal and corporate headquarters in North Liberty,
Iowa. These terminal locations are strategically located to concentrate on regional freight movements generally within a 500-
mile radius of the terminals. This allows us to meet the needs of our customers in those regions while allowing our drivers to
primarily stay within an operating region which provides them with more “home time.” This also allows us opportunities to
service and maintain revenue equipment across all subsidiaries, at our facilities on a frequent basis.
Personnel at the individual terminal locations manage these operations based on the overall corporate operating and
maintenance goals and objectives. Our CODM evaluates the operational efficiencies of the Company's transportation services
and operating performance of terminals on a combined basis based on consolidated operating ratio and reports detailing all of
the Company’s load movements, rate per mile, and non-revenue miles. Our reporting units operate centralized computer
networks within their respective operations and regular communication to achieve enterprise-wide load coordination. We are
actively working to better integrate computer networks across reporting units.
We emphasize customer satisfaction through on-time performance, dependable late-model equipment, and consistent equipment
availability to meet the volume requirements of our customers. We also maintain a trailer to tractor ratio that allows us to
position trailers at customer locations for convenient loading and unloading. The freight we transport is predominately non-
perishable and does not require driver handling. These factors help minimize waiting time, which increases tractor utilization
and promotes driver retention.
Customers, Marketing, Safety and Diversity
We seek to transport freight that will complement traffic in our existing service areas and remain consistent with our focus on
short-to-medium haul, regional distribution markets, and cross-border freight to and from Mexico. Management believes that
building lane density in our primary traffic lanes will minimize empty miles and enhance driver “home time.”
We target customers with multiple, time-sensitive shipments, including those utilizing “just-in-time” manufacturing and
inventory management. In seeking these customers, we have positioned our business as a provider of premium service at
compensatory rates, rather than competing solely on the basis of price. We believe our reputation for quality service, reliable
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equipment, and equipment availability makes us a core carrier for many of our customers. This past year we once again were
recognized for customer service by several of our customers as a testament to our service standards. These awards include:
• FedEx Express Core Carrier of the Year (12 years in a row)
• FedEx Express Platinum Service Level Award (99.98% On-Time Delivery)
• Home Depot Carrier of the Year (CFI)
• United Sugars Carrier of the Year
• Schneider Logistics Carrier of the Year
• Transplace National Truckload Carrier of the Year
• DHL Truckload Carrier of the Year
During 2022, we were also recognized with the following environmental, operational, safety, and community service awards:
• Newsweek's "America's Most Trustworthy Companies" (#18-Transport, Logistics, and Packaging)
• Top Company for Women to Work for in Transportation (CFI)
• Logistics Management Quest for Quality Award (18 out of the last 20 years)
• Commercial Carrier Journal Top 250 Award
• Wreaths Across America Honor Fleet
These awards are hard-earned and are a direct reflection upon our outstanding group of employees and our focus on excellence
in all areas of our business.
Our primary customers include retailers, manufacturers and parcel carriers. Our 25, 10, and 5 largest customers accounted for
approximately 61%, 41%, and 27% of our operating revenues, respectively, in 2022. Further diversification of customers was
the result of the Smith Transport and CFI acquisitions in 2022. During 2021, our 25, 10, and 5 largest customers were
approximately 75%, 52%, and 36%, of our operating revenues respectively. Our broad capacity network and customer base has
allowed us to remain appropriately diversified as no customer accounted for more than 10% of our operating revenues in 2022.
One customer accounted for more than 10% of our operating revenues in 2021 at 10.0%, while no customer accounted for more
than 10% of our 2020 operating revenues.
Environmental and Sustainability
We have adopted an "Environmental and Sustainability Mission". This document portrays our commitment to the environment
and sustainability through our long track record of successful business practices. Through equipment designs, equipment
replacement strategies, idle reduction techniques, solar energy and battery usage, and practices at each of our terminals, we are
focused on reducing waste and conserving energy. Heartland's sustainability efforts are endorsed and overseen by senior
management throughout the Company. Our efforts have been recognized by the US EPA SmartWay Excellence Award in seven
of the last nine years of award consideration.
Human Rights
We have adopted a "Human Rights Mission". This document portrays our commitment to human rights through diversity and
inclusion, workplace safety and health, and prohibitions on forced labor and human trafficking. Heartland's human rights efforts
are endorsed and overseen by senior management throughout the Company. The Company is a sponsor of the organization,
“Truckers Against Trafficking” (TAT). TAT exists to educate, equip, empower and mobilize members of the trucking, bus and
energy industries to combat human trafficking.
Seasonality
We operate in a cyclical industry, within any given year there is also seasonality to typical freight patterns. Our tractor
productivity decreases during the winter season because inclement weather impedes operations, and some shippers reduce their
shipments after the winter holiday season. Revenue can also be affected by bad weather, holidays, and the number of business
days that occur during a given period, since revenue is directly related to available working days of shippers. At the same time,
operating expenses increase and fuel efficiency declines because of engine idling in extreme weather conditions, while harsh
weather creates higher accident frequency, increased claims, and more equipment repairs. In addition, many of our customers,
particularly those in the retail industry where we have a large presence, demand additional capacity during the fourth quarter,
which limits our ability to take advantage of more attractive market rates that generally exist during such periods. Recently, the
duration of this increased period of demand in the fourth quarter has shortened, with certain customers requiring the same
volume of shipments over a more condensed timeframe, resulting in increased stress and demand on our network, people, and
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systems. If this trend continues, it could make satisfying our customers and maintaining the quality of our service during the
fourth quarter increasingly difficult. We may also suffer from natural disasters and weather-related events, such as tornadoes,
hurricanes, blizzards, ice storms, floods, and fires, which may increase in frequency and severity due to climate change, as well
as other man-made disasters. These events may disrupt fuel supplies, increase fuel costs, disrupt freight shipments or routes,
affect regional economies, destroy our assets, or adversely affect the business or financial condition of our customers.
Drivers, Independent Contractors, and Other Employees
We rely on our workforce in achieving our business objectives. During the year ended December 31, 2022, we employed an
average of approximately 4,710 people compared to approximately 3,180 people during the year ended December 31, 2021. As
of the end of February 2023 we employed approximately 6,500 employees. The increase in employees as of December 31, 2022
was predominantly due to the acquisitions of Smith Transport and CFI in May and August, respectively. We also contracted
with independent contractors to provide and operate tractors which provides us additional revenue equipment capacity, although
not material to our operations. Independent contractors own their own tractors and are responsible for all associated expenses,
including financing costs, fuel, maintenance, insurance, and highway use taxes. For the years ended December 31, 2022 and
2021, independent contractors accounted for approximately 2.7% and 0.7% of our total miles, respectively. The increase in
independent contractor miles is due to the CFI acquisition. We also utilize third party carriers to facilitate our Mexico logistics
operations, following the CFI acquisition. These expenses are presented as rent and purchased transportation costs.
The trucking industry has been faced with a qualified driver shortage. During 2021, increased freight demand, combined with
the COVID-19 pandemic, intensified an already challenging qualified driver market. Competition for qualified drivers
continued to be challenging in 2022 and is expected to be a challenge going forward due to the decreasing numbers of qualified
drivers in our industry. However, driver availability began to change late in 2022 and to date in 2023, as a result of the changing
freight and economic environments and we believe certain drivers have moved from smaller less financially stable carriers to
more financially stable carriers and from independent contractors to company drivers. Although there has been some increased
movement of drivers between companies in our industry, the issue of decreasing amount of qualified CDL drivers in our
industry continues. We continually explore new strategies to attract and retain qualified drivers with changes in market
conditions and demands. We hire the majority of our drivers with at least six months of over-the-road experience and safe
driving records. As discussed below, the Company's driver training program provides an additional source of future potential
professional drivers. In order to attract and retain experienced drivers who understand the importance of customer service, we
have sought to solidify our position as an industry leader in driver compensation in our operating markets and for the services
we provide. We have increased wages and enhanced the compensation for our drivers multiple times in the last three years.
Further, we have continued to get more creative in providing better pay, benefits, equipment, and facilities for our drivers. Our
comprehensive driver compensation and benefits program rewards drivers for years of service and safe operating mileage
benchmarks, which are critical to our operational and financial performance. Certain driver pay packages include minimum pay
protection provisions, future pay increases based on years of continued service with us, increased rates for accident-free miles
of operation, detention pay, and other pay programs to assist drivers with unproductive time associated with circumstances
outside of their control, such as inclement weather, equipment breakdowns, and customer issues. We believe that our driver
compensation and benefits package is consistently among the best in the industry. We are committed to investing in our drivers
and compensating them for safety as both are key to our operational and financial performance.
In response to the driver shortage in our industry, the Company continues to evaluate and pursue the expansion of driver
training schools. Millis Transfer has operated a driver training school program, Millis Training Institute, since 1989. Millis
Training Institute is a driver training program dedicated to identifying, training, and developing capable individuals into
obtaining their commercial driving license and becoming professional truck drivers. This driver training program currently
provides a source of qualified professional drivers for our Company. The driver training program offers an additional
opportunity to hire professional drivers other than the traditional approach of hiring only experienced over-the-road drivers.
During 2022, we rolled out the first Heartland Training Institute location in Phoenix, Arizona, modeled after the successful
program in place at Millis Transfer. We will continue to evaluate this training program for future expansion. Further, CFI has
partnered with training facilities as a source of driver trainees, but does not operate a driver training school program.
We are not a party to a collective bargaining agreement. We believe that we have good relationships with our employees.
Driver Compensation
Our comprehensive driver compensation program rewards drivers for years of service and safe operating mileage benchmarks,
which are critical to our operational and financial performance. Our driver pay package generally includes weekly base pay
minimums for mileage based drivers, future pay increases based on years of continued service with us, increased rates for
accident-free miles of operation, detention pay, and other pay programs to assist drivers with unproductive time. In addition to
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the scheduled pay increases based on years of continued service, we have increased the base pay package and enhanced the
compensation for our drivers multiple times during the last three years. We believe that our driver compensation package,
compared to others in our industry, is consistently among the best in the industry. We are committed to investing in our drivers
and compensating them for safety as both are key to our operational and financial performance. We also invest a significant
amount of capital in our terminal facilities as we strive to offer our driver employees up to date and convenient amenities
throughout our terminal network across the country while they are away from home.
Revenue Equipment
Our industry is very capital intensive as it relates to tractors and trailers. One of our core operating goals is to maintain a
modern fleet of tractor and trailer equipment. The overall performance and reliability of tractor equipment typically has
increased with each new model year of tractors that we have acquired in the last 5 years. By maintaining late model year
tractors, a low average age, we experience better operating performance. Our drivers, along with the Company, benefit from the
latest safety technologies and features that we choose to equip our tractors with. The modern fleet appeals to new drivers and
aids in the retention of current drivers. Deploying this core strategy, along with idle management and driver comfort
technology, also allows us to reduce our carbon footprint. This is evidenced by us being awarded the U.S. Environmental
Protection Agency SmartWay Excellence Award in seven of the last nine years of award consideration.
We have historically owned our tractors and trailers and do not lease revenue equipment, other than when we have acquired
companies that have utilized leases. Historically, we have paid cash for the acquisition of new revenue equipment. These
strategies allow us the flexibility to buy and sell tractors (and trailers) opportunistically to capitalize on new and used equipment
markets, size our fleet to the volume of attractive freight, and manage cash tax expense. One method we use to accomplish
these goals is to depreciate our new tractors (excludes assets acquired through an acquisition) for financial reporting purposes
using the 125% declining balance method, in which depreciation is higher in early periods and tapers off in later periods. We
believe this method more accurately reflects actual asset values and affords us the flexibility to sell tractors at most points
during their life cycle without experiencing losses. In addition, the decline in depreciation during later periods is typically offset
by increased repairs and maintenance expense as the tractors age, which keeps our total operating costs more uniform over the
operating life of the equipment. Trailers are depreciated using the straight-line method.
Revenue equipment acquired through acquisitions is generally revalued to current market values as of the acquisition date.
Assets obtained more than a year prior to the acquisition by the acquired company are depreciated on a straight-line basis
aligned with the remaining period of expected use, whereas those obtained less than a year prior are depreciated consistent with
newly purchased assets. As acquired equipment is replaced, our fleet returns to our base methods of declining balance
depreciation for tractors and straight-line depreciation for trailers. We believe our revenue equipment strategy is sound over the
long term. However, it can contribute to volatility in gain on sale of equipment and quarterly earnings per share.
At December 31, 2022, all of our operating tractor fleet was equipped with event recorders and accident avoidance technology.
All over-the-road tractors are equipped with mobile communication systems that comply with the latest ELD regulations. These
units are the base communication with our drivers. This technology allows for efficient communication with our drivers
regarding freight and safety (e.g. weather shutdowns), as well as fueling decisions, and provides the ability to manage the needs
of our customers based on real-time information on load status. Our mobile communication systems also allow us to obtain
information regarding equipment for better planning and efficient maintenance time as well as information regarding driver
performance and efficiency.
As of December 31, 2022 the average age of our tractor fleet was 2.0 years compared to 1.4 years at December 31, 2021. We
have historically operated the majority of our tractors while under warranty to minimize repair and maintenance cost and reduce
service interruptions caused by breakdowns. The average age of our trailer fleet was 6.3 years at December 31, 2022 compared
to 3.4 years at December 31, 2021. The average age of our tractor and trailer fleets was impacted by the inclusion of the Smith
Transport and CFI equipment obtained through our 2022 acquisitions.
We obtain a small portion of our tractor capacity through the use of independent contractors who own their own tractor
equipment, although our use of independent contractors is not material to our overall operations, the portion of independent
contractors has increased as a result of the CFI acquisition. Independent contractors are responsible for the maintenance of their
equipment.
The "Regulation" section in this Annual Report discusses in detail several regulations that have impacted and could continue to
affect our cost and use of revenue equipment.
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Fuel
We mainly purchase diesel fuel ("fuel") over-the-road through a network of fuel stops throughout the U.S. at which we have
negotiated price discounts. In addition, bulk fuel sites are maintained at twenty-five of our terminal locations. We strategically
manage fuel purchase decisions based on pricing of over-the-road fuel prices, bulk fuel prices, and the routing of equipment.
Both above ground and underground storage tanks are utilized at the bulk fuel sites. We believe exposure to environmental
cleanup costs is minimized by periodic inspection and monitoring of the tanks. We also have insurance policies in place for the
operation of our tanks located at terminal locations. Increases in fuel prices can have a significant adverse effect on the results
of operations given the amount of fuel we consume. We have fuel surcharge agreements with most customers that enable us to
pass through most long-term price increases. For the years ended December 31, 2022, and 2021, fuel expense was $194.6
million and $99.6 million, or 25.0% and 19.8%, respectively, of our total operating expenses. For the years ended December 31,
2022 and 2021, fuel surcharge revenues were $169.2 million and $76.1 million, respectively. Department of Energy (“DOE”)
average price of fuel increased 51.8% in 2022 compared to 2021, which had a corresponding negative impact on our net fuel
cost, before the impacts of improved fleet efficiency, for the year ended December 31, 2022 compared to 2021. Fuel consumed
by empty and out-of-route miles and by truck engine idling time is not recoverable and therefore any increases or decreases in
fuel costs related to empty and out-of-route miles and idling time will directly impact our operating results. During March 2022
DOE average fuel prices increased to over $5.00 per gallon. The DOE average fuel cost remained above this elevated threshold
for the period from March through December 31, 2022, although the DOE weekly average for the last four weeks of December
fell below $5.00 per gallon. The average DOE price was $4.99 for 2022, which is the highest annual average on record since
tracking began in 1994. The trend of fuel prices below the $5.00 per gallon threshold has continued through the first eight
weeks of 2023. While this is an improvement compared to the majority of 2022, the latest DOE diesel fuel price in February
2023 is up 6.0% compared to the same week of 2022.
Competition and Industry
The truckload industry is highly competitive and fragmented with thousands of carriers of varying sizes. We compete with
other truckload carriers; primarily those serving the regional, short-to-medium haul market. Logistics providers, railroads, less-
than-truckload carriers, and private fleets provide additional competition but to a lesser extent. The industry is highly
competitive based primarily upon freight rates, qualified drivers, service, and equipment availability. We specialize in time-
sensitive shipments, including "just-in-time" and similar types of freight. We provide premium service at compensatory rates,
rather than competing solely on the basis of price.
We operate in a cyclical industry. In early 2022, freight demand was initially strong, following an extended period of freight
demand at peak levels that began in mid 2020 and continued throughout 2021 and into 2022. Freight demand began to soften in
the back half of 2022. While the current levels are down compared against those unprecedented levels experienced during 2021,
overall we continue to have more opportunities to haul freight than we are able to cover with our existing fleet and available
drivers. We expect freight demand to remain challenged at lower demand levels in at least the first half of 2023 based upon the
freight demand experienced in January and February of 2023 and expected normal seasonal trends. However, continued supply
chain issues for tractors, trailers and related parts, general consumer product output and inventory volatility, consumer demand,
and disruption in oil and diesel markets all could create additional volatility regarding freight demand during 2023.
We continue to focus on providing quality service to targeted customers with a high density of freight in our regional operating
areas. Organic growth has become increasingly difficult for traditional over-the-road truckload carriers given a shortage of
qualified drivers in the industry and availability of revenue equipment assets. We have completed two recent strategic
acquisitions to combat these industry challenges. In addition, we continue to evaluate and explore different driving options and
offerings for our existing and potential new drivers across our unique mix of driver offerings at Heartland Express, Millis
Transfer, Smith Transport, and CFI.
The trucking industry has been faced with a qualified driver shortage. During 2021, increased freight demand, combined with
lingering effects of the COVID-19 pandemic, intensified an already challenging qualified driver market. Competition for
qualified drivers continued to be challenging in the first half of 2022 as freight demand remained strong. However, driver
availability began to change late in 2022 and to date in 2023, as a result of the changing freight and economic environments and
we believe certain drivers have moved from smaller less financially stable carriers to more financially stable carriers. Although
we expect driver availability and hiring to be a challenge going forward due to the decreasing numbers of qualified drivers in
our industry. We continually explore new strategies to attract and retain qualified drivers with changes in market conditions and
demands. We hire the majority of our drivers with at least three to six months of over-the-road experience and safe driving
records. The Company's driver training program provides an additional source of future potential professional drivers. In order
to attract and retain experienced drivers who understand the importance of customer service, we have sought to solidify our
position as an industry leader in driver compensation in our operating markets and for the services we provide. We have
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increased wages and enhanced the compensation for our drivers multiple times in the last three years. Further, we have
continued to get more creative in providing better pay, benefits, equipment, and facilities for our drivers. Our comprehensive
driver compensation and benefits program rewards drivers for years of service and safe operating mileage benchmarks, which
are critical to our operational and financial performance. Certain driver pay packages include minimum pay protection
provisions, future pay increases based on years of continued service with us, increased rates for accident-free miles of
operation, detention pay, and other pay programs to assist drivers with unproductive time associated with circumstances outside
of their control, such as inclement weather, equipment breakdowns, and customer issues. We believe that our driver
compensation and benefits package is consistently among the best in the industry. We are committed to investing in our drivers
and compensating them for safety as both are key to our operational and financial performance.
Safety and Risk Management
Our safety program is designed to minimize accidents and to conduct our business within governmental safety regulations. We
communicate safety issues with drivers on a regular basis and also emphasize safety through equipment specifications and
regularly scheduled maintenance intervals. Our drivers are compensated and recognized for achieving and maintaining a safe
driving record.
The primary risks associated with our business include cargo loss and physical damage, personal injury, property damage, and
workers’ compensation claims. We self-insure a portion of the exposure related to all of the aforementioned risks. Insurance
coverage, including self-insurance retention levels, is evaluated on an annual basis. We actively participate in the settlement of
each claim incurred.
We act as a self-insurer for auto liability, defined as including property damage, personal injury, or cargo. For Heartland
Express, Millis Transfer and CFI insurance coverage has retention of $2.0 million for any individual claim based on the insured
party, accident date, and circumstances of the loss event. There is an additional $1.0 million aggregate self-insurance corridor
for claims between $2.0 million and $3.0 million. Liabilities in excess of these deductibles are covered by insurance up to $60.0
million including retention of 50% of exposure from $5.0 million to $10.0 million. We retain any liability in excess of $60.0
million. Smith Transport has the same insurance coverage except with a lower retention of $0.5 million for any individual
claim. We act as a self-insurer for workers’ compensation based on defined insurance retention of $1.0 million. We act as a
self-insurer for property damage to our tractors and trailers. We maintain a general insurance coverage policy for our terminal
facilities with a $0.25 million deductible.
Regulation
Transportation Regulations
We are a common and contract motor carrier regulated by the DOT and various state and local agencies. We operate under
DOT authorities respective to our four individual operating brands. The DOT generally governs matters such as safety
requirements, registration to engage in motor carrier operations, insurance requirements, and periodic financial reporting. Our
Company drivers and independent contractors also must comply with the safety and fitness regulations of the DOT, including
those relating to drug and alcohol testing and HOS. Such matters as weight and equipment dimensions are also subject to U.S.
regulations. We also may become subject to new or more restrictive regulations relating to fuel emissions, drivers' HOS,
ergonomics, or other matters affecting safety or operating methods. Other agencies, such as the Environmental Protection
Agency ("EPA") and the Department of Homeland Security ("DHS") also regulate our equipment, operations, and drivers.
The DOT, through the Federal Motor Carrier Safety Administration (“FMCSA”), imposes safety and fitness regulations on us
and our drivers, including rules that restrict driver HOS. Changes to such HOS rules can negatively impact our productivity and
affect our operations and profitability by reducing the number of hours per day or week our drivers may operate and/or
disrupting our network. However, in August 2019, the FMCSA issued a proposal to make changes to its hours-of-service rules
that would allow truck drivers more flexibility with their 30-minute rest break and with dividing their time in the sleeper berth.
It also would extend by two hours the duty time for drivers encountering adverse weather and extend the shorthaul exemption
by lengthening the drivers’ maximum on-duty period from 12 hours to 14 hours. In June 2020, the FMCSA adopted a final rule
substantially as proposed, which became effective in September 2020. Certain industry groups have challenged these rules in
court, and while the FMCSA's final rule has been upheld, it remains unclear if industry or other groups will bring additional
challenges against the FMCSA's final rule. Since that time, we have seen a slight increase in the productivity of our drivers.
Any future changes to HOS rules could materially and adversely affect our operations and profitability.
There are two methods of evaluating the safety and fitness of carriers. The first method is the application of a safety rating that
is based on an onsite investigation and affects a carrier’s ability to operate in interstate commerce. We currently have a
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satisfactory DOT safety rating under this method, for each of our respective DOT authorities, which is the highest available
rating under the current safety rating scale. If we received a conditional or unsatisfactory DOT safety rating, it could adversely
affect our business, as some of our existing customer contracts require a satisfactory DOT safety rating. In January 2016, the
FMCSA published a Notice of Proposed Rulemaking outlining a revised safety rating measurement system which would
replace the current methodology. Under the proposed rule, the current three safety ratings of "satisfactory," "conditional," and
"unsatisfactory" would be replaced with a single safety rating of "unfit." Thus, a carrier with no rating would be deemed fit.
Moreover, data from roadside inspections and the results of all investigations would be used to determine a carrier’s fitness on
an ongoing basis. This would replace the current methodology of determining a carrier’s fitness based solely on infrequent
comprehensive onsite reviews. The proposed rule underwent a public comment period that ended in June 2016 and several
industry groups and lawmakers expressed their disagreement with the proposed rule, arguing that it violates the requirements of
the Fixing America's Surface Transportation Act (“FAST Act”) and that the FMCSA must first finalize its review of the
Compliance Safety Accountability program (“CSA”) scoring system, described in further detail below. Based on this feedback
and other concerns raised by industry stakeholders, in March 2017, the FMCSA withdrew the Notice of Proposed Rulemaking
related to the new safety rating system. In its notice of withdrawal, the FMCSA noted that a new rulemaking related to a similar
process may be initiated in the future. Therefore, it is uncertain if, when, or under what form any such rule could be
implemented. Additionally, the FMCSA is conducting a study on the causation of large-truck crashes, which is expected to
gather data through 2024. Although it remains unclear whether such study will ultimately be completed, the results of such
study could spur further proposed and/or final rules in regards to safety and fitness.
In addition to the safety rating system, the FMCSA has adopted the CSA program as an additional safety enforcement and
compliance model that evaluates and ranks fleets on certain safety-related standards. The CSA program analyzes data from
roadside inspections, moving violations, crash reports from the last two years, and investigation results. The data is organized
into seven categories. Carriers are grouped by category with other carriers that have a similar number of safety events (e.g.,
crashes, inspections, or violations) and carriers are ranked and assigned a rating percentile to prioritize them for interventions if
they are above a certain threshold. Generally, these scores do not have a direct impact on a carrier’s safety rating. However, the
occurrence of unfavorable scores in one or more categories may (i) affect driver recruiting and retention by causing high-quality
drivers to seek employment with other carriers, (ii) cause our customers to direct their business away from us and to carriers
with higher fleet rankings, (iii) subject us to an increase in compliance reviews and roadside inspections, (iv) cause us to incur
greater than expected expenses in our attempts to improve unfavorable scores or (v) increase our insurance costs, any of which
could adversely affect our results of operations and profitability.
Under CSA, these scores were initially made available to the public in five of the seven categories. However, pursuant to the
FAST Act which was signed into law in December 2015, the FMCSA was required to remove from public view the previously
available CSA scores while it reviews the reliability of the scoring system. During this period of review by the FMCSA, we will
continue to have access to our own scores and will still be subject to intervention by the FMCSA when such scores are above
the intervention thresholds. We will continue to monitor our CSA scores and compliance through results from roadside
inspections and other data available to detect positive or negative trends in compliance issues on an ongoing basis. A study was
conducted and delivered to the FMCSA in June 2017 with several recommendations to make the CSA program more fair,
accurate, and reliable. In June 2018, the FMCSA provided a report to Congress outlining the changes it may make to the CSA
program in response to the study. Such changes include the testing and possible adoption of a revised risk modeling theory,
potential collection and dissemination of additional carrier data and revised measures for intervention thresholds. The adoption
of such changes is contingent on the results of the new modeling theory and additional public feedback. Therefore, it is unclear
if, when and to what extent such changes to the CSA program will occur. However, any changes that increase the likelihood of
us receiving unfavorable scores could adversely affect our results of operations and profitability.
In May 2020 the FMCSA announced that effective immediately it is making permanent a pilot program that will not count a
crash in which a motor carrier was not at fault when calculating the carrier’s safety measurement profile, called the Crash
Preventability Demonstration Program (“CPDP”). The CPDP expands the types of eligible crashes, modify the Safety
Measurement System to exclude crashes with not preventable determinations from the prioritization algorithm and note the not
preventable determinations in the Pre-Employment Screening Program. Under the program, carriers with eligible crashes that
occurred on or after August 2019, may submit a Request for Data Review with the required police accident report and other
supporting documents, photos or videos through the FMCSA’s DataQs website. If the FMCSA determines the crash was not
preventable, it will be listed on the Safety Measurement System but not included when calculating a carrier’s Crash Indicator
Behavior Analysis and Safety Improvement Category measure in SMS. Additionally, any determinations of not preventable
crashes will be noted on a driver’s Pre-Employment Screening Program report.
The FMCSA published a final rule in December 2015 that required the use of ELDs or automatic onboard recording devices
(“AOBRs”) by nearly all carriers by December 2017 (the "2015 ELD Rule"). The use of AOBRs was permitted until December
2019, at which time the use of ELDs was required. We were compliant with both aspects of the 2015 ELD Rule within the
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requisite deadlines. We believe that more effective HOS enforcement under the 2015 ELD Rule may improve our competitive
position by causing all carriers to adhere more closely to HOS requirements and may further reduce industry capacity.
In December 2016, the FMCSA issued a final rule establishing a national clearinghouse for drug and alcohol testing results and
requiring motor carriers and medical review officers to provide records of violations by commercial drivers of FMCSA drug
and alcohol testing requirements. Motor carriers are required to query the clearinghouse to ensure drivers and driver applicants
do not have violations of federal drug and alcohol testing regulations that prohibit them from operating commercial motor
vehicles. The final rule became effective in January 2017, with a compliance date in January 2020. In December 2019,
however, the FMCSA announced a final rule extending by three years the date for state driver’s licensing agencies to comply
with certain Drug and Alcohol Clearinghouse requirements. The December 2016 commercial driver’s license rule required
states to request information from the Clearinghouse about individuals prior to issuing, renewing, upgrading, or transferring to a
CDL. This new action allowed states’ compliance with the requirement, which was set to begin January 2020, to be delayed
until January 2023. That being said, the FMCSA indicated it would allow states the option to voluntarily query Clearinghouse
information beginning January 2020. The compliance date of January 2020 remained in place for all other requirements set
forth in the Clearinghouse final rule, however. Upon implementation, the rule may reduce the number of available drivers in an
already constrained driver market. Pursuant to a new rule finalized by the FMCSA, beginning in November 2024, states will be
required to query the Clearinghouse when issuing, renewing, transferring, or upgrading a commercial driver's license and must
revoke a driver's commercial driving privileges if such driver is prohibited from driving a motor vehicle for one or more drug or
alcohol violations.
In September 2020, the Department of Health and Human Services (“DHHS”) announced proposed mandatory guidelines to
allow employers to drug test truck drivers and other federal workers for pre-employment and random testing using hair
specimens. However, the proposal also requires a second sample using either urine or an oral fluid test if a hair test is positive,
if a donor is unable to provide a sufficient amount of hair for faith-based or medical reasons, or due to an insufficient amount or
length of hair. The proposal specifically requires that the second test be done simultaneously at the collection event or when
directed by the medical review officer after review and verification of laboratory-reported results for the hair specimen. DHHS
indicated the two-test approach is intended to protect federal workers from issues that have been identified as limitations of hair
testing, and related legal deficiencies identified in two prior court cases. In 2022, an industry group known as the Trucking
Alliance sought an exemption from the FMCSA that would allow positive hair specimen tests to be uploaded into the FMCSA
Drug and Alcohol Clearinghouse. This request was denied by the FMCSA, however, noting they cannot act until the DHHS
finalizes these guidelines. Additionally, in February 2022 the DOT issued a Notice of Proposed Rulemaking that would include
oral fluid testing as an alternative to urine testing for purposes of the DOT’s drug testing program, with a goal of improving the
integrity and effectiveness of the drug testing program, along with potential cost savings to regulated parties. Public comment
on the proposed rule closed in April 2022, with industry participants generally being in favor. It is unclear if, and when, a final
rule may be put in place, however. Any final rule may reduce the number of available drivers. We currently perform urine
testing but are testing and monitoring the use of hair specimen testing at one of our subsidiaries. Finally, federal drug regulators
have announced a proposal to add fentanyl to a drug testing panel that would detect the use of such drug among safety-sensitive
federal employees, which would include truck drivers if adopted by the DOT. If the proposal is accepted, DHHS expects to add
fentanyl to the testing panel as early as the first quarter of 2023.
Other rules have been recently proposed or made final by the FMCSA, including: (i) a rule requiring the use of speed limiting
devices on heavy duty tractors to restrict maximum speeds, which was proposed in 2016, and (ii) a rule setting forth minimum
driver training standards for new drivers applying for commercial driver’s licenses for the first time and to experienced drivers
upgrading their licenses or seeking certain endorsements, including a hazardous materials endorsement, known as the Entry-
Level Driver Training regulations (the "ELDT Regulations"), which was made final in December 2016, with an initial
compliance date in February 2020. However, in May 2020, the FMCSA approved an interim rule delaying implementation of
the ELDT Regulations by two years, which extended the compliance date until February 2022. The ELDT Regulations, among
other things, unify driver training curriculum nationwide by mandating certain theory and behind-the-wheel training standards
prior to taking the skills test, and require commercial driving schools and other training programs (including ours) to implement
such curriculum and register with the FMCSA’s Training Provider Registry, certifying that their curriculum meets the new
standards. The rules generally do not apply retroactively, however, so current holders of commercial driver’s licenses will
largely be unaffected. That being said, these rules could result in a decrease in fleet production and driver availability, either of
which could adversely affect our business or operations. They may also result in an increase in the time and expense required to
operate or expand our driver training schools and programs, which could adversely affect our results and profitability. In
February 2023, the FMCSA issued a supplemental Notice of Proposed Rulemaking requesting additional information on
automated driving systems (“ADS”) and seeking comment on regulatory approaches that would enable it to obtain relevant
safety information and the current and anticipated size of the population of carriers operating ADS-equipped commercial motor
vehicles. Public comment on the supplemental notice will remain open until March 2023, and it remains to be seen, what, if
any, final rules will stem therefrom. Additionally, the FMCSA in conjunction with the National Highway Traffic Safety
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Administration ("NHTSA"), have announced their intention to propose a rule for performance standards and maintenance
requirements for automatic emergency braking on heavy trucks. Such proposal is anticipated as early as March 2023, but it
remains uncertain what exactly it may require, and whether a final rule will ultimately be put into place.
Our industry is also subject to a number of recently proposed rules which mandate the use of speed-limiting devices in certain
commercial motor vehicles. In July 2017, the DOT announced that it would no longer pursue a speed limiter rule but left open
the possibility that it could resume such a pursuit in the future. In May 2021, however, the Cullum Owings Large Truck Safe
Operating Speed Act was reintroduced into the U.S. House of Representatives and would require commercial motor vehicles
with a gross weight of more than 26,000 pounds to be equipped with a speed limiter that would limit the vehicle’s speed to no
more than 65 M.P.H. Furthermore, in April 2022, the FMCSA issued a notice of intent to propose a rule during 2023 that will
require certain commercial vehicles to be equipped with speed limiters. The effect of these rules, to the extent they become
effective, could result in a decrease in fleet production and driver availability, either of which could adversely affect our
business or operations.
Among other things, the Infrastructure Investment and Jobs Act (“IIJA”), signed into law by President Biden in November
2021, created an apprenticeship program for drivers aged 18 to 20 years old to eventually qualify to drive commercial trucks in
interstate commerce. The provision drew certain mechanics from the bills introduced in Congress in 2019 related to lowering
the age requirements for interstate commercial driving. The FMCSA announced the establishment of this apprenticeship
program in January 2022 in an effort to begin to help the industry’s ongoing driver shortage. This program, known as the Safe
Driver Apprenticeship Pilot Program, is open to 18 to 20-year-old drivers who already hold intrastate commercial driver's
licenses and sets a strict training regimen for participating drivers and carriers to comply with. Motor carriers interested in
participating must complete an application for participation and submit monthly data on an apprentice’s driver activity, safety
outcomes, and additional supporting information. The Safe Driver Pilot Apprenticeship Program is limited to 3,000 driver-
apprentices at any given time, with new driver-apprentices allowed into the program to replace those that leave or age out. It
remains unclear whether any regulatory changes will stem from the apprenticeship program.
The IIJA also required that the FMCSA clarify the differences between brokers, bona fide agents, and dispatch services, and to
further specify its interpretation of the definitions of “broker” and “bona fide agents.” As such, and in an attempt to rein in
companies engaging in brokerage services without proper FMCSA authority, the FMCSA issued interim guidelines in
November 2022, which, among other things, (i) contained a multitude of factors relevant to determining whether a dispatch
service actually requires brokerage authority, (ii) clarified that operating as an unauthorized broker carries civil penalties of up
to $10,000 per violation, and (iii) clarified that the handling of funds in shipper-motor carrier transactions is an important
consideration (pointing towards a broker designation) in the determination of whether someone is a broker or simply an agent.
The FMCSA also clarified, however, that any determination will be highly fact specific and will entail determining whether the
person or company is engaged in the allocation of traffic between motor carriers. Several of the Company’s subsidiaries
currently hold FMCSA brokerage authority, so while the impact of this guidance remains to be seen, the Company does not
currently anticipate an adverse impact on its operations. Additionally, in a January 2023 Notice of Proposed Rulemaking, the
FMCSA proposed more oversight of truck brokers, freight forwarders, and the surety bond and trust companies that back them.
The Notice of Proposed Rulemaking considers regulatory modifications in five areas: (i) assets readily available, (ii) immediate
suspension of broker/freight forwarder operating authority, (iii) surety or trust responsibilities, (iv) enforcement authority, and
(v) entities eligible to serve as BMC-85 trustees. Among other changes, the proposal would allow brokers or freight forwarders
to meet regulatory requirements to have “assets readily available” by maintaining trusts that meet certain criteria, including that
they can be liquidated within seven calendar days of an event that triggers a payment from the trust. The proposal also stipulates
that “available financial security” falls below $75,000 when there is a drawdown on the broker or freight forwarder’s surety
bond or trust fund. Adoption of these changes could negatively impact our business by increasing our compliance obligations,
operating costs, and related expenses.
In June 2022, the United States Supreme Court (the “Supreme Court”) declined to review a Ninth Circuit Court of Appeals
decision involving a personal injury suit alleging that a freight broker had liability for an accident because it breached its duty to
select a competent contractor to transport the load in question. In its petition to the Supreme Court, the broker unsuccessfully
argued that the Ninth Circuit’s decision improperly disallowed federal pre-emption, and would expose freight brokers to a
patchwork of state regulations across the United States. This development potentially calls into question freight brokers’ ability
to rely on federal agency standards in selecting motor carriers, given the carrier involved in the accident was allegedly in good
standing with the FMCSA when it was chosen to transport the load. It could also lead to primary (as opposed to contingent)
liability being imposed upon freight brokers, and increased insurance premiums for brokerage operations generally. Although
we are committed to selecting safe and secure motor carriers in carrying out our brokerage activities, if we are found to be
negligent in the motor carrier selection process it could lead to significant liabilities in the event of an accident, which could
have a materially adverse effect on our business and operating results.
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In September 2022, the FMCSA issued an advance Notice of Proposed Rulemaking that would require fleets and owner-
operators to equip their trucks with unique electronic identification systems designed to streamline roadside inspections and
provide transparency and accountability in day-to-day trucking operations. The petition was generally disfavored by
transportation industry participants, citing, among other things, the petition’s failure to address privacy and data security risks.
It remains to be seen what rules, if any, may stem from this notice.
In November 2022 Senate lawmakers introduced legislation that would set aside grant funds over four years to expand truck
parking across the United States. Such legislation would allow for the creation of new parking areas, the expansion of existing
facilities, and the approval of commercial parking at existing weigh stations, rest areas, and park-and-ride facilities. It would
also allow for truck parking expansion at commercial truck stops and travel plazas. Industry groups are generally in favor of the
bill, as a lack of available parking has negatively impacted the industry as a whole, including the Company and its subsidiaries.
In December 2018, the FMCSA granted a petition filed by the American Trucking Association and in doing so determined that
federal law does preempt California’s wage and hour laws, and interstate truck drivers are not subject to such laws. The
FMCSA’s decision has been appealed by labor groups and multiple lawsuits have been filed in federal courts seeking to
overturn the decision. In January 2021, the Ninth Circuit Court of Appeals upheld the FMCSA's determination that federal law
does preempt California's meal and rest break laws, as applied to drivers of property-carrying commercial motor vehicles. Other
current and future state and local laws, including laws related to employee meal breaks and rest periods, may also vary
significantly from federal law. Further, driver piece rate compensation, which is an industry standard, has been attacked as non-
compliant with state minimum wage laws and lawsuits have recently been filed and/or adjudicated against carriers demanding
compensation for sleeper berth time, layovers, rest breaks and pre-trip and post-trip inspections, the outcome of which could
have major implications for the treatment of time that drivers spend off-duty (whether in a truck’s sleeper berth or otherwise)
under applicable wage laws. Both of these issues are adversely impacting the Company and the industry as a whole, with
respect to the practical application of the laws, thereby resulting in additional cost. As a result, we, along with other companies
in the industry, could become subject to an uneven patchwork of laws throughout the United States. In the past, certain
legislators have proposed federal legislation to preempt certain state and local laws; however, passage of such legislation is
uncertain. If federal legislation is not passed, we will either need to comply with the most restrictive state and local laws across
our entire network or overhaul our management systems to comply with varying state and local laws. Either solution could
result in increased compliance and labor costs, driver turnover, decreased efficiency, and amplified legal exposure.
Tax and other regulatory authorities, as well as independent contractors themselves, have increasingly asserted that independent
contractor drivers in the trucking industry are employees rather than independent contractors, for a variety of purposes,
including income tax withholding, workers' compensation, wage and hour compensation, unemployment, and other issues.
Federal legislators have introduced legislation in the past to make it easier for tax and other authorities to reclassify independent
contractor drivers as employees, including legislation to increase the recordkeeping requirements for those that engage
independent contractor drivers and to heighten the penalties of companies who misclassify their employees and are found to
have violated employees' overtime and/or wage requirements. The most recent example being the Protecting the Rights to
Organize ("PRO") Act, which was passed by the U.S. House of Representatives and received by the Senate in March 2021 and
remains with the Senate's Committee on Health, Education, Labor, and Pensions. The PRO Act proposes to apply the "ABC
Test" for classifying workers under Federal Fair Labor Standards Act claims. Additionally, in October 2022, the Department of
Labor proposed a new rule regarding independent contractor classification, which if adopted, would evaluate an employer's
relationship with workers under six categories to determine whether such worker should be classified as an independent
contractor based on a totality of the circumstances and the economic realities of such relationship. It is unknown whether any of
the proposed legislation will become law or whether any industry-based exemptions from any resulting law will be granted.
Additionally, federal legislators have sought to abolish the current safe harbor allowing taxpayers meeting certain criteria to
treat individuals as independent contractors if they are following a long-standing, recognized practice, extend the Fair Labor
Standards Act to independent contractors, and impose notice requirements based upon employment or independent contractor
status and fines for failure to comply. Some states have put initiatives in place to increase their revenues from items such as
unemployment, workers' compensation, and income taxes, and a reclassification of independent contractor drivers as employees
would help states with these initiatives.
Recently, courts in certain states have issued decisions that could result in a greater likelihood that independent contractors
would be judicially classified as employees in such states. In September 2019, California enacted A.B. 5 (“AB5”), a new law
that changed the landscape of the state’s treatment of employees and independent contractors. AB5 provides that the three-
pronged “ABC Test” must be used to determine worker classification in wage-order claims. Under the ABC Test, a worker is
presumed to be an employee, and the burden to demonstrate their independent contractor status is on the hiring company
through satisfying all three of the following criteria:
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the worker is free from control and direction in the performance of services; and
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the worker is performing work outside the usual course of business of the hiring company; and
the worker is customarily engaged in an independently established trade, occupation, or business.
How AB5 will be enforced is still to be determined. In January 2021, however, the California Supreme Court ruled that the
ABC Test could apply retroactively to all cases not yet final as of the date the original decision was rendered, April 2018. While
AB5 was set to go into effect in January 2020, a federal judge in California issued a preliminary injunction barring the
enforcement of AB5 on the trucking industry while the California Trucking Association (“CTA”) went forward with its suit
seeking to invalidate AB5. The Ninth Circuit Court of Appeals rejected the reasoning behind the injunction in April 2021,
ruling that AB5 is not pre-empted by federal law, but granted a stay of the AB5 mandate in June 2021 (preventing its
application and temporarily continuing the injunction) while the CTA petitioned the Supreme Court to review the decision. In
November 2021, the Supreme Court requested that the U.S. solicitor general weigh in on the case. The injunction remained in
place until the Supreme Court declined to hear the matter. As a result, the injunction was lifted and retroactively placed AB5
into law as of January 2020. While the stay of the AB5 mandate provided temporary relief to the enforcement of AB5, the CTA
and other industry groups are continuing to bring challenges against AB5 and it remains unclear whether the CTA or other
industry groups will ultimately be successful in receiving future injunctions or in invalidating the law. It is also possible AB5
will spur similar legislation in states other than California, which could adversely affect our results of operations and
profitability.
Further, class actions and other lawsuits have been filed against certain members of our industry seeking to reclassify
independent contractors as employees for a variety of purposes, including workers' compensation and health care coverage. In
addition, companies that utilize lease-purchase independent contractor programs have been more susceptible to reclassification
lawsuits and several recent decisions have been made in favor of those seeking to classify as employees certain independent
contractors that participated in lease-purchase programs. Taxing and other regulatory authorities and courts apply a variety of
standards in their determination of independent contractor status. Our classification of independent contractors has been the
subject of audits by such authorities from time to time. While we have been successful in continuing to classify our independent
contractor drivers as independent contractors and not employees, we may be unsuccessful in defending that position in the
future. If our independent contractor drivers are determined to be our employees, we would incur additional exposure under
federal and state tax, workers' compensation, unemployment benefits, labor, employment, and tort laws, including for prior
periods, as well as potential liability for employee benefits and tax withholdings. Independent contractors currently represent a
small portion of our fleet.
Environmental Regulations
We are subject to various environmental laws and regulations dealing with the hauling and handling of hazardous materials,
fuel storage tanks, air emissions from our vehicles and facilities, engine idling, and discharge and retention of storm water. Our
truck terminals often are located in industrial areas where groundwater or other forms of environmental contamination could
occur. Our operations involve the risks of fuel spillage or seepage, environmental damage, and hazardous waste disposal,
among others. Certain facilities have waste oil, new oil, diesel exhaust fluid ("DEF"), or fuel storage tanks and fueling islands.
We do not know of any environmental regulations that would have a material effect on our capital expenditures, earnings or
competitive position. Additionally, increasing efforts to control emissions of greenhouse gases may have an adverse effect on
us. We maintain a young fleet age of tractors to ensure we are using the most up-to-date technology deployed by manufacturers
to reduce emissions. Although we have instituted programs to monitor and control environmental risks and promote compliance
with applicable environmental laws and regulations, if we are involved in a spill or other accident involving hazardous
substances, if there are releases of hazardous substances we transport, if soil or groundwater contamination is found at our
facilities or results from our operations, or if we are found to be in violation of applicable laws or regulations, we could be
subject to cleanup costs and liabilities, including substantial fines or penalties or civil and criminal liability, any of which could
have a materially adverse effect on our business and operating results.
In August 2011, the NHTSA and the EPA adopted final rules that established the first-ever fuel economy and greenhouse gas
standards for medium-and heavy-duty vehicles, including the tractors we employ (the "Phase 1 Standards"). The Phase 1
Standards apply to tractor model years 2014 to 2018 and require the achievement of an approximate 20 percent reduction in fuel
consumption by the 2018 model year, which equates to approximately four gallons of fuel for every 100 miles traveled. In
addition, in February 2014, President Obama announced that his administration would begin developing the next phase of
tighter fuel efficiency and greenhouse gas standards for medium-and heavy-duty tractors and trailers (the "Phase 2 Standards").
In October 2016, the EPA and NHTSA published the final rule mandating that the Phase 2 Standards will apply to trailers
beginning with model year 2018 and tractors beginning with model year 2021. The Phase 2 Standards require nine percent and
25 percent reductions in emissions and fuel consumption for trailers and tractors, respectively, by 2027. The final rule was
effective in December 2016, but has since faced challenges and delays. In October 2017, the EPA announced a proposal to
repeal the Phase 2 Standards as they relate to gliders (which mix refurbished older components, including transmissions and
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pre-emission-rule engines, with a new frame, cab, steer axle, wheels, and other standard equipment). The outcome of such
proposal is still undetermined. Additionally, implementation of the Phase 2 Standards as they relate to trailers has been
challenged in the U.S. Court of Appeals for the District of Columbia. In November 2021, a panel for the U.S. Court of Appeals
for the District of Columbia ruled in favor of the association challenging the standards and vacated all portions of the Phase 2
Standards that applied to trailers, and consequently, the Phase 2 Standards will only require reductions in emissions and fuel
consumption for tractors. The Company’s (or its subsidiaries', as applicable) new tractor purchases in 2022 complied with the
emission and fuel consumption reductions required by the Phase 2 Standards. Even though the trailer provisions of the Phase 2
standards have been removed, we will still need to ensure the majority of our fleet is compliant with the California Phase 2
standards (described in further detail below).
In January 2020, the EPA announced it is seeking input on reducing emissions of nitrogen oxides and other pollutants from
heavy-duty trucks. In March 2022, the EPA issued a proposed rule that included nitrogen oxide emission standards which are
more stringent than the Phase 2 Standards for certain heavy-duty motor vehicles. In December 2022, the EPA adopted a final
rule that reflected a compromise of the options previously proposed, with new emissions standards of nitrogen oxides for
heavy-duty motor vehicles beginning with model year 2027 being more than 80% stronger than current emission standards,
with the intent to reduce heavy-duty emissions by almost 50% from today’s levels by 2045. The EPA has indicated that the
December 2022 rule is the first part of a multi part plan focusing on greenhouse gas emissions, which is commonly referred to
as the “Cleaner Trucks Initiative,” or the “Clean Trucks Plan.” The EPA has indicated that it plans to release proposals for the
remaining steps in the Clean Trucks Plan by the end of March 2023 and is targeting 2027 for these new standards to take effect.
The EPA has also previously indicated it is working on enacting additional, more stringent, greenhouse gas emission standards
(beginning with model year 2030 vehicles) by the end of 2024. Compliance with these regulations could increase the cost of
new tractors and trailers, impair equipment productivity, and increase operating expenses. These effects, combined with the
uncertainty as to the operating results that will be produced by the newly designed diesel engines and the residual values of
these vehicles, could increase our costs or otherwise adversely affect our business or operations.
The California Air Resources Board ("CARB") also adopted emission control regulations that will be applicable to all heavy-
duty tractors that pull 53-foot or longer box-type trailers within the State of California. The tractors and trailers subject to these
CARB regulations must be either EPA SmartWay certified or equipped with low-rolling, resistance tires and retrofitted with
SmartWay-approved aerodynamic technologies. Enforcement of these CARB regulations for model year 2011 equipment began
in January 2010 and have been phased in over several years for older equipment. In addition, in February 2017 CARB proposed
California Phase 2 standards that would generally align with the federal Phase 2 Standards, with some minor additional
requirements, and as proposed would stay in place even if the federal Phase 2 Standards are affected. In February 2019, the
California Phase 2 standards became final. Thus, even though the trailer provisions of the Phase 2 Standards were removed, we
will still need to ensure the majority of our fleet is compliant with the California Phase 2 standards, which may result in
increased equipment costs and could adversely affect our operating results and profitability. CARB has also recently announced
intentions to adopt regulations ensuring that 100% of tractors operating in California are operating with battery or fuel cell-
electric engines in the future. Whether these regulations will ultimately be adopted remains unclear. Federal and state
lawmakers also have proposed a variety of other climate-change proposals, including those that contemplate regulatory limits
on carbon emissions and fuel consumption. Compliance with such regulations could increase the cost of new tractors and
trailers, impair equipment productivity, and increase operating expenses. These effects, combined with the uncertainty as to the
operating results that will be produced by the newly designed diesel engines and the residual values of these vehicles, could
increase our costs or otherwise adversely affect our business or operations. In June 2020 CARB also passed the Advanced
Clean Trucks (“ACT”) regulation, which became effective in March 2021 and generally requires original equipment
manufacturers to begin shifting towards greater production and sales of zero-emission heavy duty tractors starting in 2024.
Under ACT, by 2045, every new tractor sold in California will need to be zero-emission. The most aggressive ACT standards
apply to Class 4-8 trucks, which range from 14,000-33,000 pounds, by requiring that 9% of such trucks be zero emission
beginning in 2024 and increasing to 75% by 2035. Similar (albeit lower) increasing zero emission requirements apply to Class
2b-3 trucks, and Class 7-8 trucks between 2024 and 2035. Among other impacts, ACT could affect the cost and/or supply of
traditional diesel tractors. It has also led to similar legislation in other states, with Oregon, Washington, New York, New Jersey,
and Massachusetts already adopting ACT, and a number of other states either considering adoption of ACT or affirmatively
conducting a preliminary rulemaking process to that effect. CARB is also in the process of considering and finalizing what is
known as the Advanced Clean Fleets (“ACF”) regulation, also aimed at transitioning to zero emission vehicles beginning in
2024. ACF is a purchase requirement for medium and heavy-duty fleets to adopt an increasing percentage of zero emission
trucks, designed to complement the sell-side obligations of ACT. The proposed ACF regulations, generally set to begin in
January 2024, apply to three categories of fleet operators: (1) high priority fleets who meet certain thresholds of trucks or
revenue (including fleets that operate 50 or more trucks, or generate $50 million or more in gross annual revenue), (2) drayage
fleets, and (3) state and local government public fleets. For high priority fleets who meet the applicable thresholds, compliance
can be achieved by either (i) ensuring that all new vehicles added to the fleet be zero emission, and removing older vehicles
once their statutory useful life is reached, or (ii) meeting certain fleet composition requirements (e.g., percentage of zero
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emission vehicles in the fleet) by certain dates, with the percentage of zero emission vehicles increasing over time, and resulting
in 100% zero emission fleets by 2042 (or earlier for certain classes of vehicles). As with ACT, adoption and implementation of
ACF could materially and negatively impact our business by increasing our compliance obligations, operating costs, and related
expenses.
In order to reduce exhaust emissions, some states and municipalities have begun to restrict the locations and amount of time
where diesel-powered tractors may idle. These restrictions could force us to purchase on-board power units that do not require
the engine to idle or to alter our drivers' behavior, which could result in a decrease in productivity or increase in driver turnover.
In April 2016, the Food and Drug Administration (“FDA”) published a final rule establishing requirements for shippers,
loaders, carriers by motor vehicle and rail vehicle, and receivers engaged in the transportation of food, to use sanitary
transportation practices to ensure the safety of the food they transport as part of the Food Safety Modernization Act of 2011 (the
"FSMA"). This rule sets forth requirements related to (i) the design and maintenance of equipment used to transport food, (ii)
the measures taken during food transportation to ensure food safety, (iii) the training of carrier personnel in sanitary food
transportation practices, and (iv) maintenance and retention of records of written procedures, agreements, and training related to
the foregoing items. These requirements took effect for larger carriers in April 2017 and are applicable when performing as a
carrier or as a broker. We believe we are in compliance with these requirements. However, if we are found to be in violation of
applicable laws or regulations related to the FSMA or if we transport food or goods that are contaminated or are found to cause
illness and/or death, we could be subject to substantial fines, lawsuits, penalties and/or criminal and civil liability, any of which
could have a material adverse effect on our business, financial condition, and results of operations.
As the FDA continues its efforts to modernize food safety, it is likely additional food safety regulations will take effect in the
future. In July 2020, the FDA released its “New Era of Smarter Food Safety” blueprint, which creates a ten year roadmap to
create a more digital, traceable and safer food system. This blueprint builds on the work done under the FSMA, and while it is
still unclear what, if any, changes to the current governing framework may ultimately take effect, further regulation in this area
could negatively affect our business by increasing our compliance obligations and related expenses going forward.
Executive and Legislative Climate
In August 2022, the Inflation Reduction Act of 2022 was signed into law by President Biden. Amongst other considerations, the
Inflation Reduction Act contains provisions relating to energy, climate change, and tax reform. In particular, the Inflation
Reduction Act shifts timing for certain tax payments, imposes an excise tax on certain corporate stock buybacks, and creates a
15% corporate alternative minimum tax, which is generally applicable to corporations that reported over $1 billion in profits in
each of the three proceeding tax years. Tax changes in the Inflation Reduction Act, together with changes to any other U.S. tax
laws may have an adverse impact on our business and profitability. It is unclear what other legislative initiatives will be signed
into law and what changes they may undergo. However, adoption and implementation could negatively impact our business by
increasing our compliance obligations and related expenses.
The United States Mexico Canada Agreement (“USMCA”) was entered into effect in July 2020. The USMCA is designed to
modernize food and agriculture trade, advance rules of origin for automobiles and trucks, and enhance intellectual property
protections, among other matters, according to the Office of U.S. Trade Representative. It is difficult to predict at this stage
what could be the impact of the USMCA on the economy, including the transportation industry. However, given the amount of
North American trade that moves by truck, it could have a significant impact on supply and demand in the transportation
industry, and could adversely impact the amount, movement, and patterns of freight we transport.
The IIJA was signed into law by President Biden in November 2021. The roughly $1.2 trillion bill contains an estimated $550
billion in new spending, which will impact transportation. In particular, it dedicates more than $100 billion for surface
transportation networks and roughly $66 billion for freight and passenger rail operations. Provisions in the law specific to
trucking are discussed above. It otherwise remains unclear how the IIJA will be implemented into and effect our industry in the
long-term. The IIJA may result in increased compliance and implementation related expenses, which could have a negative
impact on our operations.
In January 2023, the Safer Highways and Increased Performance for Interstate Trucking Act (the “SHIP IT Act”) was
introduced into the U.S. House of Representatives. As proposed, the SHIP IT Act would allow states to issue special permits for
overweight vehicles and loads during emergencies, allow drivers to apply for Workforce Innovation and Opportunity Act
grants, attempt to recruit truck drivers to the industry through targeted and temporary tax credits, streamline the CDL process in
certain respects, and expand access to truck parking and rest areas for commercial drivers. It remains unclear whether the SHIP
IT Act will ultimately become law, however, and what changes it may undergo prior finalization.
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Given COVID-19’s considerable effect on our nation and industry, the FMCSA previously issued and/or extended various
temporary responsive measures in response to COVID-19 pandemic. However, as additional tools, protective equipment,
policies, practices, and medicines have been developed in response to COVID-19, in October 2022, the FMCSA ended the
hours of service waiver previously issued with respect to certain types of shipments, such as, livestock, medical supplies,
vaccines, groceries, and diesel fuel. Although to date these response measures have largely been enacted in order to assist
industry participants in operating under adverse circumstances, any further responsive measures or the lapsing of temporary
measures previously enacted, remain unclear and could have a negative impact on our operations.
In November 2021 the U.S. Department of Labor’s Occupational Safety and Health Administration (“OSHA”) published an
emergency temporary standard (the “Emergency Rule”) requiring all employers with at least 100 employees to ensure that their
employees are fully vaccinated or require any employees who remain unvaccinated to produce a negative COVID-19 test result
on at least a weekly basis before coming to work. The Emergency Rule has been blocked by the Supreme Court. This
Emergency Rule was subsequently withdrawn by OSHA in January 2022. However, any future vaccination, testing or mask
mandates that are allowed to go into effect, could, among other things, (i) cause our unvaccinated employees to go to smaller
employers, if such employers are not subject to future mandates, or leave us or the trucking industry, especially our
unvaccinated drivers, (ii) result in logistical issues, increased expenses, and operational issues from arranging for weekly tests
of our unvaccinated employees, especially our unvaccinated drivers, (iii) result in increased costs for recruiting and retention of
drivers, as well as the cost of weekly testing, and (iv) result in decreased revenue if we are unable to recruit and retain drivers.
Any future vaccination, testing or mask mandates that apply to drivers would significantly reduce the pool of drivers available
to us and our industry, which could further impact the ongoing extreme shortage of available drivers. Accordingly, any
vaccination, testing or mask mandates, if allowed to go into effect, could have a material adverse effect on our business,
financial condition, and results of operations.
For further discussion regarding laws and regulations, refer to the "Risk Factors" section of this Annual Report.
Available Information
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act of 1934, as amended, are available to the
public, free of charge, through our Internet website, at http://www.heartlandexpress.com, as soon as reasonably practicable after
we electronically file such material with, or furnish it to, the Securities and Exchange Commission ("SEC"). Information on our
website is not incorporated by reference into this Annual Report. You may also access and read our filings with the SEC
without charge through the SEC's website at www.sec.gov.
RISK FACTORS
Our future results may be affected by a number of factors over which we have little or no control. The following discussion of
risk factors contains forward-looking statements as discussed in "Cautionary Note Regarding Forward-Looking Statements"
above. The following issues, uncertainties, and risks, among others, should be considered in evaluating our business and growth
outlook. If any of the following risk factors, as well as other risks and uncertainties that are not currently known to us or that we
currently believe are not material, actually occur, our business, financial condition, and results of operations could be materially
adversely affected and you may lose all or a significant part of your investment.
STRATEGIC RISKS
Our business is subject to economic, credit, business, and regulatory factors affecting the trucking industry that are
largely out of our control, any of which could have a materially adverse effect on our operating results.
The truckload industry is highly cyclical, and our business is dependent on a number of factors that may have a materially
adverse effect on our results of operations, many of which are beyond our control. We believe that some of the most significant
of these factors are economic changes that affect supply and demand in transportation markets, such as:
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recessionary economic cycles, which are characterized by weak demand and downward pressure on freight rates;
downturns in customers’ business cycles, including as a result of declines in consumer spending;
changes in customers’ inventory levels and practices, including shrinking product/package size, and in the availability of
funding for their working capital;
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excess tractor and trailer capacity in the trucking industry in comparison with shipping demand;
changes in the way our customers choose to source or utilize our services;
the rate of unemployment and availability of and compensation for alternative jobs for truck drivers, which may exacerbate
driver shortages and increase driver compensation costs;
the availability and price of new revenue equipment and/or declines in the resale value of used revenue equipment;
the impact of the COVID-19 pandemic;
activity in key economic indicators such as manufacturing of automobiles and durable goods, and housing construction;
supply chain disruptions due to weather, pandemics, congestion, strikes, work stoppages, or work slowdowns at our
facilities, or at a customer, port, border crossing, or other shipping related facilities;
increases in interest rates, inflation, fuel taxes, insurance, tolls, and license and registration fees; and
rising costs of healthcare.
Economic conditions that decrease shipping demand and increase the supply of available tractors and trailers can exert
downward pressure on rates and equipment utilization, thereby decreasing asset productivity. The risks associated with these
factors are heightened when the U.S. economy is weakened. Some of the principal risks during such times are as follows:
• we may experience a reduction in overall freight levels, which may impair our asset utilization;
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certain of our customers may face credit issues and could experience cash flow problems that may lead to payment
delays, increased credit risk, bankruptcies and other financial hardships that could result in even lower freight demand
and may require us to increase our allowance for doubtful accounts;
freight patterns may change as supply chains are redesigned, resulting in an imbalance between our capacity and our
customers’ freight demand;
customers may solicit bids for freight from multiple trucking companies or select competitors that offer lower rates from
among existing choices in an attempt to lower their costs and we might be forced to lower our rates or lose freight;
• we may be forced to accept freight from freight brokers, where freight rates are typically lower, or may be forced to
incur more non-revenue miles to obtain loads; and
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the resale value of our equipment may decline, which could negatively impact our earnings and cash flows.
We also are subject to potential increases in various costs and other events that are outside of our control that could materially
reduce our profitability if we are unable to increase our rates sufficiently. Further, we may be unable to appropriately adjust our
costs and staffing levels to changing market demands.
In addition, events outside our control, such as deterioration of U.S. transportation infrastructure and reduced investment in
such infrastructure, further developments in the COVID-19 outbreak, strikes or other work stoppages at our facilities or at
customer, vendor, port, border or other shipping locations, armed conflicts, including the conflict in Ukraine, terrorist attacks,
efforts to combat terrorism, military action against a foreign state or group located in a foreign state or heightened security
requirements could lead to wear, tear and damage to our equipment, lack of availability of new equipment, driver
dissatisfaction, reduced economic demand and freight volumes, reduced availability of credit, increased prices for fuel, or
temporary closing of the shipping locations or U.S. borders. Such events or enhanced security measures in connection with such
events could impair our operating efficiency and productivity and result in higher operating costs.
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Our growth may not continue at historical rates, if at all, and any decrease in revenues or profits may impair our ability
to implement our business strategy, which could have a materially adverse effect on our results of operations.
Historically, we have experienced significant growth in revenue and profits, although there have been times, particularly after
acquisitions, when our revenue and/or profitability decreased. There can be no assurance that our business will grow in a
similar fashion in the future, or at all, or that we can effectively adapt our management, administrative, and operational systems
to respond to any future growth. Further, there can be no assurance that our operating margins will not be adversely affected by
future changes in and expansion of our business or by changes in economic conditions.
We have established terminals throughout the contiguous U.S. in order to serve markets in various regions. These regional
operations require the commitment of additional personnel and revenue equipment, as well as management resources, for future
development and establishing terminals and operations in new markets could require more time, resources or a more substantial
financial commitment than anticipated. Should the growth in our regional operations stagnate or decline, the results of our
operations could be adversely affected. If we seek to further expand, it may become more difficult to identify large cities that
can support a terminal and we may expand into smaller cities where there is insufficient economic activity, fewer opportunities
for growth and fewer drivers and non-driver personnel to support the terminal. We may encounter operating conditions in these
new markets, as well as our current markets, that differ substantially from our current operations and customer relationships and
appropriate freight rates in new markets could be challenging to attain. We may not be able to duplicate or sustain our operating
strategy and establishing service centers or terminals and operations in new markets could require more time or resources, or a
more substantial financial commitment than anticipated. These challenges may negatively impact our growth, which could have
a materially adverse effect on our ability to execute our business strategy and our results of operations.
We operate in a highly competitive and fragmented industry, and numerous competitive factors could impair our ability
to improve our profitability, limit growth opportunities, and could have a materially adverse effect on our results of
operations.
Numerous competitive factors present in our industry could impair our ability to maintain or improve our current profitability,
limit our prospects for growth, and could have a materially adverse effect on our results of operations. These factors include the
following:
• we compete with many other truckload carriers of varying sizes and, to a lesser extent, with less-than-truckload carriers,
railroads, intermodal companies, and other transportation and logistics companies, many of which have access to more
equipment and greater capital resources than we do;
• many of our competitors periodically reduce their freight rates to gain business, especially during times of reduced growth
rates in the economy, which may limit our ability to maintain or increase freight rates or to maintain or expand our
business or may require us to reduce our freight rates in order to maintain business and keep our equipment productive;
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some of our customers are other transportation companies or also operate their own private trucking fleets, and they may
decide to transport more of their own freight;
• we may increase the size of our fleet during periods of high freight demand during which our competitors also increase
their capacity, and we may experience losses in greater amounts than such competitors during subsequent cycles of
softened freight demand if we are required to dispose of assets at a loss to match reduced customer demand;
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a significant portion of our business is in the retail industry, which continues to undergo a shift away from the traditional
brick and mortar model towards e-commerce, and this shift could impact the manner in which our customers source or
utilize our services;
• many customers reduce the number of carriers they use by selecting so-called "core carriers" as approved service providers
or by engaging dedicated providers, and we may not be selected;
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the trend toward consolidation in the trucking industry may create large carriers with greater financial resources and other
competitive advantages relating to their size, and we may have difficulty competing with these larger carriers;
the market for qualified drivers is increasingly competitive, and our inability to attract and retain drivers could reduce our
equipment utilization or cause us to increase compensation to our drivers, both of which would adversely affect our
profitability;
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advances in technology may require us to increase investments in order to remain competitive, and our customers may not
be willing to accept higher freight rates to cover the cost of these investments;
competition from freight logistics and freight brokerage companies may adversely affect our customer relationships and
freight rates; and
the Heartland, Millis Transfer, Smith Transport, and CFI brand names are valuable assets that are subject to the risk of
adverse publicity (whether or not justified) which could result in the loss of value attributable to our brand and reduced
demand for our services.
We may not make acquisitions in the future, or if we do, we may not be successful in integrating the acquired company,
either of which could have a materially adverse effect on our business.
Historically, acquisitions have been a part of our growth. There is no assurance that we will be successful in identifying,
negotiating, or consummating any future acquisitions. If we fail to make any future acquisitions, our historical growth rate
could be materially and adversely affected. If we succeed in consummating future acquisitions, our business, financial condition
and results of operations, may be materially adversely affected because:
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some of the acquired businesses may not achieve anticipated revenue, earnings, or cash flows;
• we may assume liabilities that were not disclosed to us or otherwise exceed our estimates;
• we may be unable to integrate acquired businesses successfully, or at all, and realize anticipated economic, operational
and other benefits in a timely manner, which could result in substantial costs and delays or other operational, technical,
or financial problems;
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acquisitions could disrupt our ongoing business, distract our management, and divert our resources;
• we may experience difficulties operating in markets in which we have had no or only limited direct experience;
• we may incur transaction costs and acquisition-related integration costs;
• we could lose customers, employees, and drivers of any acquired company;
• we may experience potential future impairment charges, write-offs, write-downs, or restructuring charges; and
• we may issue dilutive equity securities, incur indebtedness, and/or incur large one-time expenses.
The conflict between Russia and Ukraine, expansion of such conflict to other areas or countries or similar conflicts
could adversely impact our business and financial results.
Although we do not have any direct operations in Russia, Belarus, or Ukraine, we may be affected by the broader consequences
of the Russia and Ukraine conflict or expansion of such conflict to other areas or countries or similar conflicts elsewhere, such
as, increased inflation, supply chain issues, including access to parts for our revenue equipment, embargoes, geopolitical shift,
access to diesel fuel, higher energy prices, potential retaliatory action by the Russian or other governments, including cyber-
attacks, and the extent of the conflict’s effect on the global economy. The magnitude of these risks cannot be predicted,
including the extent to which the conflict may heighten other risks disclosed herein. Ultimately, these or other factors could
materially and adversely affect our results of operations.
OPERATIONAL RISKS
Increases in driver compensation or difficulties in attracting and retaining qualified drivers, including independent
contractors, may have a materially adverse effect on our profitability and the ability to maintain or grow our fleet.
Like many truckload carriers, we experience substantial difficulty in attracting and retaining sufficient numbers of qualified
drivers which includes to a lesser extent, our engagement of independent contractors. Independent contractors currently
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represent a small portion of our fleet. The truckload industry is subject to a shortage of qualified drivers. Such shortage is
exacerbated during periods of economic expansion, in which alternative employment opportunities, such as those in the
construction and manufacturing industries, are more plentiful and freight demand increases. Furthermore, capacity at driving
schools may be limited by future outbreaks of COVID-19 or other similar outbreaks. Regulatory requirements, including those
related to safety ratings, ELDs and HOS changes, drug and alcohol testing national database, government imposed measures
related to future outbreaks of COVID-19 or other similar outbreaks, an improved economy, and aging of the driver workforce,
could further reduce the pool of eligible drivers or force us to increase driver compensation to attract and retain drivers. We
have seen evidence that CSA, the drug and alcohol clearing house, and stricter HOS regulations adopted by the DOT in the past
have tightened, and, to the extent new regulations are enacted, may continue to tighten, the market for eligible drivers. The lack
of adequate tractor parking along some U.S. highways and congestion caused by inadequate highway funding may make it
more difficult for drivers to comply with HOS regulations and cause added stress for drivers, further reducing the pool of
eligible drivers. Further, the compensation we offer our drivers is subject to market conditions, and we may find it necessary to
increase driver compensation in future periods.
In addition, we and many other truckload carriers suffer from a high turnover rate of drivers that is inherent within our industry.
This high turnover rate requires us to continually recruit a substantial number of drivers in order to operate existing revenue
equipment. We also employ driver hiring standards which we believe are more rigorous than the hiring standards employed in
general in our industry and could further reduce the pool of available drivers from which we would hire. If we are unable to
continue to attract and retain a sufficient number of drivers, we could be forced to, among other things, adjust our compensation
packages, increase the number of our tractors without drivers, or operate with fewer tractors and face difficulty meeting shipper
demands, any of which could adversely affect our profitability and results of operations.
We are highly dependent on a few major customers, the loss of one or more of which could have a materially adverse
effect on our business.
We generate a significant portion of our operating revenue from a small number of our major customers. Generally, we do not
have long-term contracts with our major customers. A substantial portion of our freight is from customers in the retail industry.
As such, our volumes are largely dependent on consumer spending and retail sales, and our results may be more susceptible to
trends in unemployment and retail sales than carriers that do not have this concentration. In addition, our major customers
engage in bid processes and other activities periodically (including currently) in an attempt to lower their costs of
transportation. We may not choose to participate in these bids or, if we participate, may not be awarded the freight, either of
which could result in a reduction of our freight volumes with these customers. In this event, we could be required to replace the
volumes elsewhere at uncertain rates and volumes, suffer reduced equipment utilization, or reduce the size of our fleet. In
addition, the size and market concentration of some of our customers may allow them to exert increased pressure on the prices,
margins and non-monetary terms of our contracts. Failure to retain our existing customers, or enter into relationships with new
customers, each on acceptable terms, could materially impact our business, financial condition, results of operations, and ability
to meet our current and long-term financial forecasts.
Our customers’ financial difficulties can negatively impact our results of operations and financial condition, especially if they
were to delay or default on payments to us. If any of our major customers experience financial hardship, the demand for our
services could decrease which could negatively affect our operating results. Further, if one or more of our major customers
were to seek protection under bankruptcy laws, we might not receive payment for a significant amount of services rendered
and, under certain circumstances, might have to return certain payments made by such customers, which may cause an adverse
impact on our profitability and operations. Generally, we do not have contractual relationships that guarantee any minimum
volumes with our customers, and we cannot assure you that our customer relationships will continue as presently in effect.
Certain services we provide customers are subject to longer term written contracts. However, certain of these contracts contain
cancellation clauses, including our “evergreen” contracts, which automatically renew for one year terms but that can be
terminated more easily. There is no assurance any of our customers, including those with longer term contracts, will continue to
utilize our services, renew our existing contracts, or continue at the same volume levels. Despite the existence of contractual
arrangements with our customers, certain of our customers may nonetheless engage in competitive bidding processes that could
negatively impact our contractual relationship. In addition, certain of our major customers may increasingly use their own
truckload and delivery fleets, which would reduce our freight volumes. A reduction in or termination of our services by one or
more of our major customers, including our customers with longer term contracts, could have a material adverse effect on our
business, financial condition and results of operations.
Our acquisition of CFI presents certain additional risks to our business and operations.
The acquisition of CFI is the largest acquisition we have made in our history. Given the nature and size of CFI, as well as the
structure of the acquisition as a carveout from the seller, the acquisition of CFI presents the following risks.
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Although we anticipate achieving synergies in connection with the acquisition of CFI, we also expect to incur costs to
implement such cost savings measures. Additionally, these synergies could be delayed and may not be achieved. The
integration could result in significant unexpected costs. Transaction costs and integration costs related to the acquisition of CFI
could adversely affect our results of operations in the period in which such charges are recorded. The acquisition of CFI
involves numerous risks, including:
• management’s attention may be diverted from other areas of the Company, especially given the size of CFI
and the complexity of integrating CFI into the Company;
• many services, including certain aspects of benefits, payroll, human resources, and information technology,
were shared among CFI and other divisions of the seller. Following the acquisition, CFI continues to provide
certain services to the seller and the seller continues to provide certain services to CFI until such services can
be transferred to the applicable party and our inability to provide or receive such transition services could
cause disruptions to our employees, drivers, business, and integration;
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prior to the acquisition, our management team had limited experience with temperature-controlled freight and
brokerage operations and no experience with Mexican operations and therefore may be challenged in
managing the temperature-controlled freight, brokerage operations, and Mexican operations, particularly if
there were a loss of the CFI management team;
potential adverse reactions or changes to business relationships, including with customers, employees, drivers,
and vendors, resulting from the completion of the acquisition;
increased risk of significant deficiencies or material weaknesses in internal controls over financial reporting
related to CFI’s internal controls;
the potential loss of professional drivers of CFI or our historical operations due to differences in pay, policies
or culture, or other factors, or an increase in costs of recruiting and retaining professional drivers;
the challenges and unanticipated costs associated with integrating complex organizations, systems, operating
procedures, information technology, compliance programs, technology, networks, and other assets;
the inability to successfully combine our respective businesses in a manner and on a timeline that permits us
to achieve the cost savings and other anticipated benefits from the acquisition;
the challenges associated with known and unknown legal or financial liabilities associated with the
acquisition, for which there is no escrow or representation and warranty insurance under the purchase
agreement;
the difficulties in retaining key management and other key employees; and
the challenge of managing the expanded operations of a larger and more complex company.
These disruptions and difficulties, if they occur, may cause us to fail to realize the cost savings, synergies, revenue
enhancements, and other benefits that we expect to result from integrating CFI and may cause material adverse short- and long-
term effects on our operating results, financial condition, and liquidity. Further, integrating Smith Transport, which was
acquired shortly before CFI, could cause further disruptions and difficulties on efforts to integrate CFI, or vice-versa.
Even if we are able to integrate CFI’s operations into our operations, we may not realize the full benefits of the cost savings,
synergies, revenue enhancements, or other benefits that we may have expected at the time of acquisition. Also, the cost savings
and other benefits from this acquisition may be offset by unexpected costs incurred in integrating CFI, increases in other
expenses, or problems in the business unrelated to this acquisition.
In addition, CFI’s Mexican operations subject us to general international business risks, including:
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changes in Mexico's economic strength;
difficulties in enforcing contractual obligations and intellectual property rights;
burdens of complying with a wide variety of international and US export, import, business procurement,
transparency, and corruption laws, including the US Foreign Corrupt Practices Act;
changes in trade agreements and US-Mexico relations;
theft or vandalism of our revenue equipment; and
social, political, and economic instability
If fuel prices increase significantly, our results of operations could be adversely affected.
Our operations are dependent upon fuel. Prices and availability of petroleum products are subject to political, economic and
geographic events, cyber attacks, global conflicts, and market factors, as well as weather-related events and other natural
disasters (foreign and domestic), which could increase in frequency and severity due to climate change, each of which are
outside our control and may lead to fluctuations in the cost and availability of fuel. Fuel prices also are affected by the rising
demand for fuel in developing countries, and could be materially adversely affected by the use of crude oil and oil reserves for
purposes other than fuel production and by diminished drilling activity. Such events may lead not only to increases in fuel
prices, but also to fuel shortages and disruptions in the fuel supply chain. In 2022, certain regions of the United States
experienced short-term shortages of diesel fuel. Fuel also is subject to regional pricing differences and is often more expensive
in certain areas where we operate.
Because our operations are dependent upon fuel, significant increases in fuel costs, as well as widespread or long-term fuel
shortages, rationings, or supply disruptions of diesel fuel could materially and adversely affect our results of operations and
financial condition, particularly if we are unable to pass increased costs on to customers through rate increases or fuel
surcharges. Even if we are able to pass some increased costs on to customers, fuel surcharge programs generally do not protect
us against all of the increases in fuel prices. Moreover, in times of rising fuel prices, the lag between purchasing the fuel, and
the billing for the surcharge (which typically is based on the prior week's average price), can negatively impact our earnings and
cash flows and lead to fluctuations in our levels of reimbursement, which have occurred in the past. In addition, the terms of
each customer's fuel surcharge agreement vary, and certain customers have sought to modify the terms of their fuel surcharge
agreements to minimize recoverability for fuel price increases. During periods of low freight volumes, customers may use their
negotiating leverage to impose fuel surcharge policies that provide a lower reimbursement of our fuel costs. There is no
assurance that our fuel surcharge programs can be maintained indefinitely or will be sufficiently effective. Our results of
operations would be negatively affected to the extent we cannot recover higher fuel costs or fail to improve our fuel price
protection through our fuel surcharge programs.
We depend on third-party providers for our brokerage services, and service instability from these providers could
increase our operating costs and reduce our ability to offer such services, which could adversely affect our revenue,
results of operations, and customer relationships.
Our brokerage operations are dependent upon the services of third-party capacity providers, including other truckload carriers.
For this business, we do not own or control the transportation assets that deliver our customers' freight, and we do not employ
the people directly involved in delivering the freight. This reliance could also cause delays in reporting certain events, including
recognizing revenue and claims. These third-party providers may seek other freight opportunities and may require increased
compensation in times of improved freight demand or tight truckload capacity. If we are unable to secure the services of these
third parties or if we become subject to increases in the prices we must pay to secure such services, our business, financial
condition, and results of operations may be materially adversely affected, and we may be unable to serve our customers on
competitive terms. Our ability to secure sufficient equipment or other transportation services may be affected by many risks
beyond our control, including equipment shortages increased equipment prices, interruptions in service due to labor disputes,
driver shortages, changes in regulations impacting transportation, and changes in transportation rates.
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We depend on the proper functioning and availability of our management information and communication systems and
other technology assets (and the data contained therein) and a system failure or unavailability, including those caused
by cybersecurity breaches, or an inability to effectively upgrade such systems and assets could cause a significant
disruption to our business and have a materially adverse effect on our results of operations.
Our business depends on the efficient and uninterrupted operation of our information and communications systems and other
technology assets, including the data contained therein and our communication system with our fleet of revenue equipment. We
currently use centralized computer networks within each operating company and regular communication to achieve system-
wide load coordination. We are actively working to further integrate our computer networks. Our operating systems are critical
to understanding customer demands, accepting and planning loads, dispatching equipment and drivers, and billing and
collecting for our services. Our financial reporting system is critical to producing accurate and timely financial statements and
analyzing business information to help us manage effectively. Furthermore, data privacy laws, which provide data privacy
rights for consumers and operational requirements for companies, may result in increased liability and amplified compliance
and monitoring costs, any of which could have a material adverse effect on our financial performance and business operations.
Our operations and those of our technology and communications service providers are vulnerable to interruption by natural
disasters, such as fires, storms, and floods, which may increase in frequency and severity due to climate change, as well as
power loss, telecommunications failure, terrorist attacks, cyberattacks, internet failures, computer viruses, deliberate attacks of
unauthorized access to systems, denial-of-service attacks on websites, and other events beyond our control. More sophisticated
and frequent cyberattacks in recent years have also increased security risks associated with information technology systems. We
also maintain information security policies to protect our systems, networks, and other information technology assets (and the
data contained therein) from cybersecurity breaches and threats, such as hackers, malware, and viruses; however, such policies
cannot ensure the protection of our systems, networks, and other information technology assets (and the data contained therein).
If any of our critical information systems fail or become otherwise unavailable, whether as a result of a system upgrade project
or otherwise, we would have to perform the functions manually, which could temporarily impact our ability to manage our fleet
efficiently, to respond to customers’ requests effectively, to maintain billing and other records reliably, and to bill for services
and prepare financial statements accurately or in a timely manner. We do not carry a corporate-wide cybersecurity insurance
policy. Any significant system failure, upgrade complication, security breach (including cyberattacks), or other system
disruption could interrupt or delay our operations, damage our reputation, cause us to lose customers, or impact our ability to
manage our operations and report our financial performance, any of which could have a materially adverse effect on our
business.
If we are unable to retain our key employees or find, develop and retain a core group of managers, our business,
financial condition, and results of operations could be materially adversely affected.
We are highly dependent upon the services of several executive officers and key management employees. The loss of any of
their services could have a negative impact on our operations and profitability. We currently do not have employment
agreements with any of our key employees or executive officers. Turnover, planned or otherwise, in these or other key
leadership positions may materially adversely affect our ability to manage our business efficiently and effectively, and such
turnover can be disruptive and distracting to management, may lead to additional departures of existing personnel, and could
have a material adverse effect on our operations and future profitability. We must continue to develop and retain a core group of
managers if we are to realize our goal of expanding our operations and continuing our growth. Failing to develop and retain a
core group of managers could have a materially adverse effect on our business.
Seasonality and the impact of weather and other catastrophic events affect our operations and profitability.
Weather and other seasonal events could adversely affect our operating results. Our tractor productivity decreases during the
winter season because inclement weather impedes operations, and some shippers reduce their shipments after the winter holiday
season. Revenue can also be affected by bad weather, holidays, and the number of business days that occur during a given
period, since revenue is directly related to available working days of shippers. At the same time, operating expenses increase
and fuel efficiency declines because of engine idling, while harsh weather creates higher accident frequency, increased claims,
and more equipment repairs. In addition, many of our customers, particularly those in the retail industry where we have a large
presence, demand additional capacity during the fourth quarter, which limits our ability to take advantage of more attractive
market rates that generally exist during such periods. Further, despite our efforts to meet such demands, we may fail to do so,
which may result in lost future business opportunities with such customers, which could have a materially adverse effect on our
operations. Recently, the duration of this increased period of demand in the fourth quarter has shortened, with certain customers
requiring the same volume of shipments over a more condensed timeframe, resulting in increased stress and demand on our
network, people, and systems. If this trend continues, it could make satisfying our customers and maintaining the quality of our
service during the fourth quarter increasingly difficult. We may also suffer from natural disasters and weather-related events,
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such as tornadoes, hurricanes, blizzards, ice storms, floods, and fires, which may increase in frequency and severity due to
climate change, as well as other man-made disasters. These events may disrupt fuel supplies, increase fuel costs, disrupt freight
shipments or routes, affect regional economies, destroy our assets, or adversely affect the business or financial condition of our
customers, any of which could have a materially adverse effect on our results of operations or make our results of operations
more volatile.
COMPLIANCE RISKS
We self-insure for a significant portion of our claims exposure, which could significantly increase the volatility of, and
decrease the amount of, our earnings.
Our future insurance and claims expense might exceed historical levels, which could reduce our earnings. Our business results
in a substantial number of claims and litigation related to workers’ compensation, auto liability, general liability, cargo and
property damage claims, personal injuries, and employment issues as well as employees’ health insurance. We self-insure for a
portion of our claims, which could increase the volatility of, and decrease the amount of, our earnings, and could have a
materially adverse effect on our results of operations. See Note 8 of the consolidated financial statements for more information
regarding our self-insured retention amounts. We are also responsible for our legal expenses relating to such claims. We reserve
currently for anticipated losses and related expenses. We periodically evaluate and adjust our claims reserves to reflect trends in
our own experience as well as industry trends. However, ultimate results may differ from our estimates due to a number of
uncertainties, including evaluation of severity, legal costs, and claims that have been incurred but not reported, which could
result in losses over our reserved amounts. Due to our high retained amounts, we have significant exposure to fluctuations in the
number and severity of claims. If we are required to reserve or pay additional amounts because our estimates are revised or the
claims ultimately prove to be more severe than originally assessed or if our self-insured retention levels change, our financial
condition and results of operations may be materially adversely affected.
We maintain insurance for most risks above the amounts for which we self-insure with licensed insurance carriers. We do not
currently maintain directors’ and officers’ insurance coverage, although we are obligated to indemnify them against certain
liabilities they may incur while serving in such capacities. If any claim is not covered by an insurance policy, exceeds our
coverage, or falls outside the aggregate coverage limit, we would bear the excess or uncovered amount, in addition to our other
self-insured amounts. Insurance carriers that provide excess insurance coverage to us currently and for past claim years have
encountered financial issues. In recent years there have been several insurance carriers that have exited the excess reinsurance
market. Insurance carriers have recently raised premiums and collateral requirements for many businesses, including trucking
companies. This trend is expected to continue. As a result, our insurance and claims expense could likely increase if we have a
similar experience at renewal, or we could find it necessary to raise our self-insured retention or decrease our aggregate
coverage limits when our policies are renewed or replaced. At our policy renewal in April 2020, we reduced our excess
insurance coverage. Should these expenses increase, we become unable to find excess coverage in amounts we deem sufficient,
we experience a claim in excess of our coverage limits, we experience a claim for which we do not have coverage, or we have
to increase our reserves or collateral, there could be a materially adverse effect on our results of operations and financial
condition.
We operate in a highly regulated industry, and changes in existing regulations or violations of existing or future
regulations could have a materially adverse effect on our operations and profitability.
We, our drivers, and our equipment are regulated by the DOT, the EPA, the DHS, and other agencies in the states in which we
operate. The sections of included in “Regulation” under "Business.” discuss several proposed, pending, suspended, and final
regulations that could materially impact our business and operations. Future laws and regulations may be more stringent and
require changes in our operating practices, influence the demand for transportation services, or require us to incur significant
additional costs. Higher costs incurred by us or by our suppliers who pass the costs on to us through higher prices could
adversely affect our results of operations.
If our independent contractors are deemed by regulators or judicial process to be employees, our business, financial
condition and results of operations could be adversely affected.
In connection with our acquisition of CFI, our use of independent contractors has increased, but they still represent a small
portion of our fleet. Tax and other regulatory authorities, as well as independent contractors themselves, have increasingly
asserted that independent contractors in the trucking industry are employees rather than independent contractors, for a variety of
purposes, including income tax withholding, workers' compensation, wage and hour compensation, unemployment, and other
issues. Federal legislators have introduced legislation in the past to make it easier for tax and other authorities to reclassify
independent contractor drivers as employees, including legislation to increase the recordkeeping requirements for those that
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engage independent contractor drivers and to heighten the penalties of companies who misclassify their employees and are
found to have violated employees' overtime and/or wage requirements. Additionally, federal legislators have sought to abolish
the current safe harbor allowing taxpayers meeting certain criteria to treat individuals as independent contractors if they are
following a long-standing, recognized practice, extend the Fair Labor Standards Act to independent contractors, and impose
notice requirements based upon employment or independent contractor status and fines for failure to comply. Some states have
put initiatives in place to increase their revenues from items such as unemployment, workers’ compensation, and income taxes,
and a reclassification of independent contractors as employees would help states with these initiatives. Additionally, courts in
certain states have issued recent decisions that could result in a greater likelihood that independent contractors would be
judicially classified as employees in such states. Further, class actions and other lawsuits have been filed against certain
members of our industry seeking to reclassify independent contractors as employees for a variety of purposes, including
workers’ compensation and health care coverage. Taxing and other regulatory authorities and courts apply a variety of
standards in their determination of independent contractor status. Our classification of independent contractors has been the
subject of audits by such authorities from time to time. While we have been successful in continuing to classify our independent
contractor drivers as independent contractors and not employees, we may be unsuccessful in defending that position in the
future. If our independent contractors are determined to be our employees, we would incur additional exposure under federal
and state tax, workers’ compensation, unemployment benefits, labor, employment, and tort laws, including for prior periods, as
well as potential liability for employee benefits and tax. For further discussion of the laws impacting the classification of
independent contractors, please see "Regulation" under “Business.”
Developments in labor and employment law and any unionizing efforts by employees could have a materially adverse
effect on our results of operations.
We face the risk that Congress, federal agencies, or one or more states could approve legislation or regulations significantly
affecting our businesses and our relationship with our employees, which would have substantially liberalized the procedures for
union organizations. None of our employees are currently covered by a collective bargaining agreement, but any attempt by our
employees to organize a labor union could result in increased legal and other associated costs. Additionally, given the National
Labor Relations Board’s “speedy election” rule, our ability to timely and effectively address any unionizing efforts would be
difficult. If we entered into a collective bargaining agreement with our domestic employees, the terms could materially
adversely affect our costs, efficiency, and ability to generate acceptable returns on the affected operations. Failure to comply
with existing or future labor and employment laws could have a materially adverse effect on our business and operating results.
For further discussion of the labor and employment laws, please see "Regulation" under “Business.”
The CSA program adopted by the FMCSA could adversely affect our profitability and operations, our ability to
maintain or grow our fleet, and our customer relationships.
Under CSA, fleets are evaluated and ranked against their peers based on certain safety-related standards. As a result, our fleet
could be ranked poorly as compared to peer carriers, which could have an adverse effect on our business, financial condition,
and results of operations. The occurrence of future deficiencies could affect driver recruitment by causing high-quality drivers
to seek employment with other carriers, limit the pool of available drivers, or could cause our customers to direct their business
away from us and to carriers with higher fleet safety rankings, either of which would adversely affect our results of operations.
Further, we may incur greater than expected expenses in our attempts to improve unfavorable scores.
We have in the past, and currently, exceeded the FMCSA's established intervention thresholds in certain of the seven CSA
safety-related categories among our respective operating authorities. Based on these unfavorable ratings, we may be prioritized
for an intervention action or roadside inspection, either of which could adversely affect our results of operations. In addition,
customers may be less likely to assign loads to us. We have put procedures in place in an attempt to address areas where we
have exceeded the thresholds. However, we cannot assure you these measures will be effective.
For further discussion of the CSA program, please see “Regulation” under “Business.” Insofar as any changes in the CSA
program increase the likelihood of the Company receiving unfavorable scores or mandate FMCSA to restore public access to
the scores, it could adversely affect our results of operation and profitability.
Receipt of an unfavorable DOT safety rating could have a materially adverse effect on our operations and profitability.
All of our motor carriers currently have satisfactory DOT ratings, which is the highest available rating under the current safety
rating scale. If any of our motor carriers were to receive a conditional or unsatisfactory DOT safety rating, it could materially
adversely affect our business, financial condition, and results of operations as customer contracts may require a satisfactory
DOT safety rating, and a conditional or unsatisfactory rating could materially adversely affect or restrict our operations.
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Furthermore, any changes to the DOT safety rating could make it more difficult for us to receive a satisfactory rating. For
further discussion of the DOT safety rating system, please see “Regulation” under “Business.”
Compliance with various environmental laws and regulations may increase our costs of operations and non-compliance
with such laws and regulations could result in substantial fines or penalties.
In addition to direct regulation under the DOT and related agencies, we are subject to various environmental laws and
regulations dealing with the hauling and handling of hazardous materials, waste oil, fuel storage tanks, air emissions from our
vehicles and facilities, engine idling, and discharge and retention of storm water. Our truck terminals often are located in
industrial areas where groundwater or other forms of environmental contamination may have occurred or could occur. Our
operations involve the risks of fuel spillage or seepage, environmental damage, and hazardous waste disposal, among others.
Certain of our facilities have waste oil or fuel storage tanks and fueling islands. A small percentage of our freight consists of
low-grade hazardous substances, which subjects us to a wide array of regulations. Although we have instituted programs to
monitor and control environmental risks and promote compliance with applicable environmental laws and regulations, if we are
involved in a spill or other accident involving hazardous substances, if there are releases of hazardous substances we transport,
if soil or groundwater contamination is found at our facilities or results from our operations, or if we are found to be in violation
of applicable laws or regulations, we could be subject to cleanup costs and liabilities, including substantial fines or penalties or
civil and criminal liability, any of which could have a materially adverse effect on our business and operating results. For
further discussion of environmental laws and regulations, please see "Regulation" under “Business.”
Governmental agencies continue to enact more stringent laws and regulations to reduce engine emissions. These laws and
regulations are applicable to engines used in our revenue equipment. We have incurred and continue to incur costs related to the
implementation of these more rigorous laws and regulations. Additionally, in certain locations governments have banned or
may in the future ban internal combustion engines for some types of vehicles. To the extent these bans affect our revenue
equipment, we may be forced to incur substantial expense to retrofit existing engines or make capital expenditures to update our
fleet. As a result, our business, results of operations, and financial condition could be negatively affected.
Changes to trade regulation, quotas, duties, or tariffs, caused by the changing U.S. and geopolitical environments or
otherwise, may increase our costs and materially adversely affect our business.
The imposition of additional tariffs or quotas or changes to certain trade agreements, including tariffs applied to goods traded
between the United States and China, could, among other things, increase the costs of the materials and decrease the availability
of certain materials used by our suppliers to produce new revenue equipment or increase the price of fuel. Such cost increases
for our revenue equipment suppliers would likely be passed on to us, and to the extent fuel prices increase, we may not be able
to fully recover such increases through rate increases or our fuel surcharge program, either of which could have a material
adverse effect on our business.
Litigation may adversely affect our business, financial condition, and results of operations.
Our business is subject to the risk of litigation by employees, independent contractors, customers, vendors, government
agencies, stockholders, and other parties through private actions, class actions, administrative proceedings, regulatory actions,
and other processes. Recently, trucking companies, including us, have been subject to lawsuits, including class action lawsuits,
alleging violations of various federal and state wage and hour laws regarding, among other things, employee meal breaks, rest
periods, overtime eligibility, and failure to pay for all hours worked. A number of these lawsuits have resulted in the payment of
substantial settlements or damages by the defendants.
The outcome of litigation, particularly class action lawsuits and regulatory actions, is difficult to assess or quantify, and the
magnitude of the potential loss relating to such lawsuits may remain unknown for substantial periods of time. The cost to
defend litigation may also be significant. Not all claims are covered by our insurance, and there can be no assurance that our
coverage limits will be adequate to cover all amounts in dispute. To the extent we experience claims that are uninsured, exceed
our coverage limits, involve significant aggregate use of our self-insured retention amounts, or cause increases in future
premiums, the resulting expenses could have a significant materially adverse effect on our business, results of operations,
financial condition, or cash flows.
In addition, we may be subject, and have been subject in the past, to litigation resulting from trucking accidents. The number
and severity of litigation claims may be worsened by distracted driving by both truck drivers and other motorists. These
lawsuits have resulted, and may result in the future, in the payment of substantial settlements or damages and rising risk of
higher insurance costs.
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Increasing attention on environmental, social and governance (“ESG”) matters may have a negative impact on our
business, impose additional costs on us, and expose us to additional risks.
Companies are facing increasing attention from stakeholders relating to ESG matters, including environmental stewardship,
social responsibility, and diversity and inclusion. Organizations that provide information to investors on corporate governance
and related matters have developed ratings processes for evaluating companies on their approach to ESG matters. Such ratings
are used by some investors to inform their investment and voting decisions. Unfavorable ESG ratings may lead to negative
investor sentiment toward the Company, which could have a negative impact on our stock price.
Our Environmental and Sustainability Mission and other disclosures regarding our environmental initiatives reflect some of our
initiatives and are not a guarantee that we will be able to achieve them. Our ability to successfully execute these initiatives and
accurately report our progress presents numerous operational, financial, legal, reputational and other risks, many of which are
outside our control, and all of which could have a material negative impact on our business. Additionally, the implementation of
these initiatives imposes additional costs on us. If our ESG initiatives fail to satisfy our stakeholders, then our reputation, our
ability to attract or retain employees, and our attractiveness as an investment and business partner could be negatively impacted.
Similarly, our failure, or perceived failure, to pursue or fulfill our goals, targets and objectives or to satisfy various reporting
standards within the timelines we announce, or at all, could also have similar negative impacts and expose us to government
enforcement actions and private litigation.
FINANCIAL RISKS
Our existing and future indebtedness could limit our flexibility in operating our business or adversely affect our
business and our liquidity position.
We have significant indebtedness following our acquisition of CFI and Smith Transport. Our indebtedness may fluctuate from
time to time in the future for various reasons, including fluctuations in results of operations, capital expenditures, and potential
acquisitions. Our current indebtedness, as well as any future indebtedness, could, among other things:
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require us to dedicate a substantial portion of our cash flow to payments on our debt, reducing our ability to
use our cash flow to fund capital expenditures and working capital and other general operational
requirements;
expose us to the risk of increased interest rates relating to any of our indebtedness at variable rates;
limit our flexibility to plan for and react to changes in our business and/or changing market conditions;
place us at a competitive disadvantage relative to some of our competitors that have less, or less restrictive,
debt than us;
limit our ability to pursue acquisitions or cause us to make non-strategic divestitures; and
increase our vulnerability to general adverse economic and industry conditions, including changes in interest
rates or a downturn in our business or the economy.
The occurrence of any one of these events could have a material adverse effect on our business, financial condition and results
of operations or cause a significant decrease in our liquidity and impair our ability to pay amounts due on our indebtedness. The
Credit Facilities contain usual and customary events of default and negative covenants for a facility of this nature including,
among other things, restrictions on our ability to incur certain additional indebtedness or issue guarantees, to create liens on our
assets, to make distributions on or redeem equity interests (subject to certain exceptions, including that (a) we may pay
regularly scheduled dividends on our common stock not to exceed $10.0 million during any fiscal year and (b) we may make
any other distributions so long as we maintain a net leverage ratio not greater than 2.50 to 1.00), to make investments and to
engage in mergers, consolidations, or acquisitions. In addition, the Credit Facilities contain usual and customary financial
covenants, including (i) a maximum net leverage ratio of 2.75 to 1.00, measured quarterly on a trailing twelve-month basis, and
(ii) a minimum interest coverage ratio of 3.00 to 1.00, measured quarterly on a trailing twelve-month basis.
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Our profitability may be materially adversely impacted if our capital investments do not match customer demand or if
there is a decline in the availability of funding sources for these investments.
Our operations require significant capital investments. The amount and timing of such investments depend on various factors,
including anticipated freight demand and the price and availability of assets. If anticipated demand differs materially from
actual usage, we may have too many or too few assets. Moreover, resource requirements vary based on customer demand,
which may be subject to seasonal or general economic conditions. During periods of decreased customer demand, our asset
utilization may suffer, and we may be forced to sell equipment on the open market or turn in equipment under certain
equipment leases, if any, in order to right size our fleet. This could cause us to incur losses on such sales or require payments in
connection with the return of such equipment, particularly during times of a softer used equipment market, either of which
could have a materially adverse effect on our profitability. Our ability to select profitable freight and adapt to changes in
customer transportation requirements is important to efficiently deploy resources and make capital investments in tractors and
trailers.
Our historical policy of operating newer equipment requires us to expend significant amounts annually to maintain a newer
average age for our fleet of revenue equipment. We expect to pay for projected capital expenditures with cash flows from
operations, proceeds from sales of equipment being replaced, and with proceeds of borrowings if necessary. If we are unable to
generate sufficient cash from operations, or proceeds from sales of equipment being replaced, or utilize borrowing capacity on
our Credit Facilities, we would need to seek alternative sources of capital, including additional financing, to meet our capital
requirements. In the event that we are unable to generate sufficient cash from operations or obtain additional financing on
favorable terms in the future, we may have to limit our fleet size, enter into less favorable financing arrangements, or operate
our revenue equipment for longer periods, any of which could have a materially adverse effect on our profitability.
Increased prices for new revenue equipment, design changes of new engines, decreased availability of new revenue
equipment, and decreased demand for and value of used equipment could have a materially adverse effect on our
business, financial condition, results of operations, and profitability.
We are subject to risk with respect to higher prices for new tractors and trailers. We have at times experienced an increase in
prices for new tractors and trailers, including significant increases in recent quarters, and the resale values of the tractors and
trailers have not always increased to the same extent. Prices have increased and may continue to increase, due to, among other
reasons, (i) increases in commodity prices, (ii) government regulations applicable to newly manufactured tractors, trailers, and
diesel engines, and (iii) the pricing discretion of equipment manufacturers. In addition, we have recently equipped our tractors
with safety, aerodynamic, and other options that increase the price of new equipment. Compliance with governmental
regulations has increased the cost of our new tractors, may increase the cost of new trailers, could impair equipment
productivity, in some cases, result in lower fuel mileage, and increase our operating expenses. Our business could be harmed if
we are unable to continue to obtain an adequate supply of new tractors and trailers for these or other reasons, and the future use
of autonomous tractors could increase the price of new tractors and decrease the value of used, non-autonomous tractors. As a
result, we expect to continue to pay increased prices for equipment and incur additional expenses for the foreseeable future. In
addition, reduced equipment efficiency may result from new engines designed to reduce emissions, thereby increasing our
operating expenses.
Tractor and trailer vendors may reduce their manufacturing output in response to lower demand for their products in economic
downturns or shortages of raw materials, other key components or labor. A decrease in vendor output may have a materially
adverse effect on our ability to purchase a quantity of new revenue equipment that is sufficient to sustain our desired growth
rate and to maintain a late-model fleet. Some tractor and trailer manufacturers are still experiencing shortages of certain
component parts and supplies, including semiconductor chips, forcing such manufacturers to curtail or suspend their
production. This could lead to a lower supply of tractors and trailers, higher prices, and lengthened trade cycles. An inability to
obtain an adequate supply of new tractors or trailers could have a materially adverse effect on our business, financial condition,
and results of operation, particularly our maintenance expense and driver retention.
The market for used equipment is cyclical and can be volatile, and any downturn in the market could negatively impact our
earnings and cash flows. During periods of higher used equipment values, we have recognized significant gains on the sale of
our used tractors and trailers, in part because of a strong used equipment market and our historical practice of capitalizing on
changes in the used equipment market. Conversely, during periods of lower used equipment values, we may generate lower
gains on sale, or even losses, or we may have to record impairments of the carrying value of our equipment, any of which
would reduce our earnings and cash flows, and could adversely impact our liquidity and financial condition. Alternatively, we
could decide, or be forced, to operate our equipment longer, which could negatively impact maintenance and repairs expense,
customer service, and driver satisfaction. If there is a deterioration of resale prices, it could have a material adverse effect on
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our business, financial condition, and results of operations. We have seen a slight softening of the used equipment market
recently.
We could determine that our goodwill and other intangible assets are impaired, thus recognizing a related loss.
As of December 31, 2022, we had goodwill of $320.7 million and other intangible assets of $103.7 million. We evaluate our
goodwill and other intangible assets for impairment. We could recognize impairments in the future, and we may never realize
the full value of our intangible assets. If these events occur, our profitability and financial condition will suffer.
Concentrated ownership of our stock can influence stockholder decisions, may discourage a change in control, and may
have an adverse effect on share price of our stock.
Investors who purchase our common stock may be subject to certain risks due to the concentrated ownership of our common
stock. The Gerdin family, our directors, and our executive officers, as a group, own or control approximately 41% of our
common stock, and their interests may conflict with the interests of our other stockholders. This ownership concentration may
have the effect of discouraging, delaying, or preventing a change in control, and may also have an adverse effect on the market
price of our shares. As a result of their ownership, the Gerdin family, the executive officers and directors, as a group, may have
the ability to influence the outcome of any matter submitted to our stockholders for approval, including the election of directors.
This concentration of ownership could limit the price that some investors might be willing to pay for our common stock, and
could allow the Gerdin family to prevent or could discourage or delay a change of control, which other stockholders may favor.
Further, our bylaws have been amended to “opt out” of the Nevada control share statute. Accordingly, an acquisition of more
than a majority of our common stock by the Gerdin family will not result in certain shares in excess of a majority losing their
voting rights and may enhance the Gerdin family's ability to exercise control over decisions affecting us. The interests of the
Gerdin family may conflict with the interests of other holders of our common stock, and they may take actions affecting us with
which other stockholders disagree.
The market price of our common stock may be volatile.
The price of our common stock may fluctuate widely, depending upon a number of factors, many of which are beyond our
control. In addition, stock markets generally experience significant price and volume volatility from time to time which may
adversely affect the market price of our common stock for reasons unrelated to our performance.
Changes in taxation could lead to an increase of our tax exposure and could affect the Company’s financial results.
President Biden has provided some informal guidance on what federal tax law changes he supports, such as an increase in the
corporate tax rate from its current top rate of 21%. If an increase in the corporate tax rate is passed by Congress and signed into
law, it could have a materially adverse effect on our financial results and financial position. At December 31, 2022, the
Company had a total deferred income tax liability of $207.5 million. The amount of deferred tax liability is determined by using
the enacted tax rates in effect for the year in which differences between the financial statement and tax basis of assets and
liabilities are expected to reverse. Accordingly, our net current tax liability has been determined based on the currently enacted
rate of 21%. If the current rate were increased due to legislation, it would have an immediate revaluation of our deferred tax
assets and liabilities in the year of enactment.
COVID-19 RISKS
We could be negatively impacted by the COVID-19 pandemic or other similar outbreaks.
We have experienced an increase in absences or terminations among our driver and non-driver personnel due to the outbreak of
COVID-19, including its variants, which have disrupted our operations. Furthermore, government vaccine, testing, and mask
mandates could increase our turnover and make recruiting more difficult, particularly among our driver personnel. Negative
financial results, operational disruptions, and a tightening of credit markets, caused by COVID-19, other similar outbreaks, or a
recession, could have a material adverse effect on our liquidity, adversely impact the financial position of our customers and
their ability to pay for our services, and adversely impact our ability to effectively meet our short- and long-term obligations.
The outbreak of COVID-19 has significantly increased uncertainty. Risks related to a slowdown or recession are described in
our risk factor titled “Our business is subject to economic, credit, business, and regulatory factors affecting the trucking
industry that are largely out of our control, any of which could have a materially adverse effect on our operating results.”
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Developments related to COVID-19 have been unpredictable and the extent to which further developments could impact our operations, financial condition, liquidity, results of operations, and cash flows is highly uncertain. Such developments may include the duration of the outbreak, variants of the virus, the distribution and availability of vaccines and treatments for the virus, the severity of the disease and the actions that may be taken by various governmental authorities and other third parties in response to the outbreak.PROPERTIESOur headquarters is located in North Liberty, Iowa which is located on Interstate 380 near the intersection of Interstates 380 and 80. The headquarters is located on 40 acres of land along the Cedar Rapids/Iowa City business corridor and includes a 65,000 square foot office building and a 32,600 square foot shop and maintenance building. The following table provides information regarding our terminal facilities with shop and maintenance, fueling services or other significant operations:Company LocationOfficeShopFuelOwned or LeasedAlbany, GeorgiaNoYesNoOwnedAlvarado, TexasYesYesYesOwnedAtlanta, GeorgiaYesYesYesOwnedBlack River Falls, WisconsinYesYesNoOwnedBoise, IdahoYesYesNoOwnedCanonsburg, PennsylvaniaYesNoYesLeasedCarlisle, PennsylvaniaYesYesYesOwnedCartersville, GeorgiaYesYesYesOwnedCarthage, MissouriYesYesNoLeasedChester, VirginiaYesYesYesOwnedColumbus, OhioYesYesYesOwnedEden, North CarolinaYesYesNoOwnedFrederick, ColoradoYesYesYesOwnedJacksonville, FloridaYesYesYesOwnedJoplin, MissouriYesYesYesOwnedKingsport, TennesseeYesYesYesOwnedLaredo, TexasYesYesYesOwnedLathrop, California YesYesYesOwnedMedford, OregonYesYesYesOwnedMt. Juliet, TennesseeYesYesYesOwnedNorth Liberty, Iowa (1)YesYesYesOwnedNuevo Laredo, MexicoYesNoNoOwnedOlive Branch, MississippiYesYesYesOwnedPhoenix, ArizonaYesYesYesOwnedPontoon Beach, Illinois YesYesNoOwnedRancho Cucamonga, California YesYesYesLeasedRichfield, WisconsinYesYesNoOwnedRidgeway, VirginiaYesNoYesOwnedRoaring Spring, PennsylvaniaYesYesYesOwnedSanford, FloridaYesNoNoOwnedSeagoville, TexasYesYesYesLeasedTacoma, WashingtonYesYesYesOwnedTaylor, MichiganYesNoNoOwnedTrenton, OhioYesYesYesOwnedWest Memphis, ArkansasYesNoYesOwned(1) Corporation headquarters. 32 LEGAL PROCEEDINGS
We are a party to ordinary, routine litigation and administrative proceedings incidental to our business. These proceedings
primarily involve claims for personal injury, property damage, cargo, and workers’ compensation incurred in connection with
the transportation of freight. We maintain insurance to cover liabilities arising from the transportation of freight for amounts in
excess of certain self-insured retentions.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER
PURCHASES OF EQUITY SECURITIES
Trading Symbol
Our common stock trades on The NASDAQ Global Select Market under the symbol HTLD.
As of February 24, 2023, we had 300 stockholders of record of our common stock. However, we estimate that we have a
significantly greater number of stockholders because a substantial number of our shares of record are held by brokers or dealers
for their customers in street names.
Dividend Policy
We currently intend to continue the quarterly cash dividend program. However, future payments of cash dividends will depend
upon our financial condition, results of operations and capital requirements, as well as other factors deemed relevant by the
Board of Directors.
During 2022 the Company paid regular quarterly dividends totaling $0.08 the year. During 2021 the Company paid a special
dividend of $0.50 per share on outstanding shares at the time of the special dividend declaration which was in addition to the
regular quarterly dividends declared totaling $0.08 for the year. The special dividend payment amounted to $39.5 million.
Stock Repurchase
We have a stock repurchase program with 6.6 million shares remaining authorized for repurchase as of December 31, 2022.
There were no shares repurchased in the open market during the year ended December 31, 2022 and 1.8 million shares
repurchased in 2021. Shares repurchased during 2021 were accounted for as treasury stock.
The specific timing and amount of future repurchases will be determined by market conditions, cash flow requirements,
securities law limitations, and other factors. Repurchases are expected to continue from time to time, as conditions permit, until
the number of shares authorized to be repurchased have been bought, or until the authorization to repurchase is terminated,
whichever occurs first. The share repurchase authorization is discretionary and has no expiration date. The repurchase program
may be suspended, modified, or discontinued at any time without prior notice.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read together with
“Business” of this Annual Report, as well as the consolidated financial statements and accompanying footnotes included in this
Annual Report. This discussion contains forward-looking statements as a result of many factors, including those set forth under
"Risk Factors” and "Cautionary Note Regarding Forward-looking Statements” of this Annual Report, and elsewhere in this
report. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual
results could differ materially from those discussed.
Overview
We, together with our subsidiaries, historically have been a short-to-medium haul truckload carrier with approximately 99.9%
of our operating revenue was derived from shipments within the United States with the remainder being Canada and no
operations in Mexico. With the acquisition of CFI on August 31, 2022, we significantly expanded our scale and our
transportation services. We continue to provide nationwide asset-based dry van truckload service for major shippers from
across the U.S. and now including cross border freight to and from Mexico and our consolidated average length of haul has
increased to approximately 500 miles. We continue to focus on providing high quality service to targeted customers with a high
density of freight in our regional operating areas. We also offer truckload temperature-controlled transportation services and
logistics services in Mexico, which are not significant to our consolidated operations. Through the acquisition of CFI, we now
provide transportation logistics services across Mexico for our customers and provide cross-border freight services for customer
loads moving from the United States into Mexico and loads originating from Mexico into the United States. We utilize third
party service providers for all miles run in Mexico and to move freight across the US-Mexico border while leveraging terminal
locations in the US and Mexico near the border to facilitate these moves. We generally earn revenue based on the number of
miles per load delivered and the revenue per mile or per load paid. We operate our consolidated operations under the brand
names of Heartland Express, Millis Transfer, Smith Transport, and CFI. We manage our business based on overall corporate
operating goals and objectives that are the same for all of our brands. Our Chief Operating Decision Maker (“CODM”), our
CEO, evaluates the operational efficiencies of our transportation services, operating performance and asset allocation on a
combined basis based on consolidated operating goals and objectives. We believe the keys to success are maintaining high
levels of customer service and safety, which are predicated on the availability of experienced drivers and late-model equipment.
We believe that our service standards, safety record, and equipment accessibility have made us a core carrier to many of our
major customers, as well as allowed us to build solid, long-term relationships with customers and brand ourselves as an industry
leader for on-time service.
Our headquarters is located in North Liberty, Iowa, in a lower-cost environment with ready access to a skilled, educated, and
industrious workforce. Our other terminals are located near major shipping corridors nationwide, affording proximity to
customer locations, driver domiciles, and distribution centers. Approximately 80% of our terminals are located within 200 miles
of the 30 largest metropolitan areas in the U.S. We believe our geographic reach and terminal locations assist us with driver
recruiting and retention, efficient fleet maintenance, and consistent customer engagement.
Our long-term objectives, which have not changed since we were founded in 1978, are to achieve significant growth, to operate
with a low-80s operating ratio (operating expenses as a percentage of operating revenue), and to maintain a debt-free balance
sheet. We maintain a disciplined approach to cost controls. We do this by scrutinizing all expenditures, prioritizing expenses
that improve our drivers' experience or our customer service, minimizing non-driving personnel through proven technology
when the cost of doing so is justified, and operating late-model tractors and trailers with sound warranty coverage and enhanced
fuel efficiency. With the two acquisitions of Smith Transport and CFI we now have debt. Also, our operating ratio has been
pressured by the operations of the two entities acquired as their operating ratios were in the 90's at the date of acquisition. We
anticipate getting back to debt free and low 80's operating ratio as we integrate the operations of these two entities.
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this document
generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021. Discussions of 2020 items and
year-to-year comparisons between 2021 and 2020 that are not included in this document can be found in “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report for the fiscal year ended
December 31, 2021.
Recent Developments
On May 31, 2022 we completed our fourth acquisition within nine years. We acquired all the outstanding equity of Smith
Transport. The Smith Transport acquisition added additional dry van truckload capacity to our core operations and this resulted
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in increased revenues and increased operating costs after May 31, 2022. Therefore, our financial results for 2022 only include Smith Transport activity from June 1, 2022 to December 31, 2022.On August 31, 2022 we completed our fifth acquisition within nine years. We acquired all the outstanding equity of CFI. The CFI acquisition added additional dry van truckload capacity to our core operations and this resulted in increased revenues and increased operating costs after August 31, 2022. Therefore, our financial results for 2022 only include CFI activity from September 1, 2022 to December 31, 2022. In 2022, we generated operating revenues of $968.0 million, including fuel surcharges, net income of $133.6 million, and basic net income per share of $1.69 on basic weighted average outstanding shares of 78.9 million. This compared to operating revenues of $607.3 million, including fuel surcharges, net income of $79.3 million, and basic net income per share of $1.00 on basic weighted average outstanding shares of 79.6 million in 2021. We posted an 80.5% operating ratio (which represents operating expenses as a percentage of operating revenues) for the year ended December 31, 2022, compared to 82.6% for the same period of 2021, and an 13.8% net margin (which represents net income as a percentage of operating revenues) for 2022, compared to 13.1% in the same period of 2021. We posted an 84.8% non-GAAP adjusted operating ratio(1) (operating expenses as a percentage of operating revenues, net of fuel surcharge) for the year ended December 31, 2022 compared to 79.7% for the same period of 2021. We had total assets of $1.7 billion and total stockholders' equity of $855.5 million at December 31, 2022. We achieved a return on assets of 9.8% and a return on equity of 16.4% over the year ended December 31, 2022, compared to 8.4% and 10.9% respectively, for 2021.(1)GAAP to Non-GAAP Reconciliation Schedule:Operating revenue, operating revenue excluding fuel surcharge revenue, fuel surcharge revenue, operating income, operating ratio, and adjusted operating ratio reconciliation (a)Twelve Months Ended December 31,20222021(in thousands)Operating revenue$ 967,996 $ 607,284 Less: Fuel surcharge revenue 169,173 76,116 Operating revenue excluding fuel surcharge revenue 798,823 531,168 Operating expenses 779,638 501,877 Less: Fuel surcharge revenue 169,173 76,116 Less: Amortization of intangibles 3,653 2,390 Less: Acquisition-related costs 2,254 — Less: Gain on sale of a terminal property (73,175) — Adjusted operating expenses 677,733 423,371 Operating income 188,358 105,407 Adjusted operating income$ 121,090 $ 107,797 Operating ratio 80.5 % 82.6 %Adjusted operating ratio 84.8 % 79.7 %(a) Operating revenue excluding fuel surcharge revenue, as reported in this annual report is based upon operating revenue minus fuel surcharge revenue. Adjusted operating income as reported in this annual report is based upon operating revenue excluding fuel surcharge revenue, less operating expenses, net of fuel surcharge revenue, non-cash amortization expense related to intangible assets, acquisition-related legal and professional fees, and the gain on sale of a terminal property. Adjusted operating ratio as reported in this annual report is based upon operating expenses, net of fuel surcharge revenue, amortization of 35 intangibles, acquisition-related costs, and the gain on sale of terminal property, as a percentage of operating revenue excluding
fuel surcharge revenue. We believe that operating revenue excluding fuel surcharge revenue, adjusted operating income, and
adjusted operating ratio are more representative of our underlying operations by excluding the volatility of fuel prices, which
we cannot control, and removes items resulting from acquisitions or one-time transactions that do not reflect our core operating
performance. Operating revenue excluding fuel surcharge revenue, adjusted operating income, and adjusted operating ratio are
not substitutes for operating revenue, operating income, or operating ratio measured in accordance with GAAP. There are
limitations to using non-GAAP financial measures. Although we believe that operating revenue excluding fuel surcharge
revenue, adjusted operating income, and adjusted operating ratio improve comparability in analyzing our period-to-period
performance, they could limit comparability to other companies in our industry if those companies define such measures
differently. Because of these limitations, operating revenue excluding fuel surcharge revenue, adjusted operating income, and
adjusted operating ratio should not be considered measures of income generated by our business or discretionary cash available
to us to invest in the growth of our business. Management compensates for these limitations by primarily relying on GAAP
results and using non-GAAP financial measures on a supplemental basis.
Our cash flow provided by operating activities for the twelve months ended December 31, 2022 was $194.7 million or 20.1% of
operating revenues, compared to $123.4 million or 20.3% of operating revenues in 2021. During 2022, we used $663.3 million
in net investing cash flows, which was primarily the result of $675.9 million net cash used for the acquisitions of Smith
Transport and CFI, partially offset by $12.2 million of cash provided by net proceeds of property and equipment. We used
$160.6 million to purchase property and equipment and received $172.8 million from the sales of property and equipment. We
had net cash of $359.3 million provided by financing activities including $447.3 million provided by issuance of long-term debt
partially offset by $81.5 million of repayments of finance leases and debt and $6.3 million used to pay dividends to our
shareholders. As a result, our cash, cash equivalents, and restricted cash decreased by $109.3 million during the year ended
December 31, 2022 to $64.5 million. Unrestricted cash and cash equivalents decreased $108.3 million to $49.5 million.
We operate in a cyclical industry. In early 2022, freight demand was initially strong, following an extended period of freight
demand at peak levels that began in mid 2020 and continued throughout 2021 and into 2022. Freight demand began to soften in
the back half of 2022. While the current levels are down compared against those unprecedented levels experienced during 2021,
overall we continue to have more opportunities to haul freight than we are able to cover with our existing fleet and available
drivers. We expect freight demand to remain challenged at lower demand levels in at least the first half of 2023 based upon the
freight demand experienced in January and February of 2023 and expected normal seasonal trends. However, continued supply
chain issues for tractors, trailers and related parts, general consumer product output and inventory volatility, consumer demand,
and disruption in oil and diesel markets all could create additional volatility regarding freight demand during 2023.
The trucking industry has been faced with a qualified driver shortage. During 2021, increased freight demand, combined with
the COVID-19 pandemic, intensified an already challenging qualified driver market. Competition for qualified drivers
continued to be challenging in 2022 and is expected to be a challenge going forward due to the decreasing numbers of qualified
drivers in our industry. However, driver availability began to change late in 2022 and to date in 2023, as a result of the changing
freight and economic environments and we believe certain drivers have moved from smaller less financially stable carriers to
more financially stable carriers and from independent contractors to company drivers. Although there has been some increased
movement of drivers between companies in our industry, the issue of decreasing amount of qualified CDL drivers in our
industry continues. We continually explore new strategies to attract and retain qualified drivers with changes in market
conditions and demands. We hire the majority of our drivers with at least six months of over-the-road experience and safe
driving records. As discussed below, the Company's driver training program provides an additional source of future potential
professional drivers. In order to attract and retain experienced drivers who understand the importance of customer service, we
have sought to solidify our position as an industry leader in driver compensation in our operating markets and for the services
we provide. We have increased wages and enhanced the compensation for our drivers multiple times in the last three years.
Further, we have continued to get more creative in providing better pay, benefits, equipment, and facilities for our drivers. Our
comprehensive driver compensation and benefits program rewards drivers for years of service and safe operating mileage
benchmarks, which are critical to our operational and financial performance. Certain driver pay packages include minimum pay
protection provisions, future pay increases based on years of continued service with us, increased rates for accident-free miles
of operation, detention pay, and other pay programs to assist drivers with unproductive time associated with circumstances
outside of their control, such as inclement weather, equipment breakdowns, and customer issues. We believe that our driver
compensation and benefits package is consistently among the best in the industry. We are committed to investing in our drivers
and compensating them for safety as both are key to our operational and financial performance.
Growth History and Capital Allocation
In addition to past organic growth through the development of our regional operating areas, we have completed ten acquisitions
since 1986 with the most recent and our fifth acquisition within the last nine years, CFI, occurring on August 31, 2022
36
following the acquisition of Smith Transport on May 31, 2022. These ten acquisitions have enabled us to solidify our position
within existing regions, expand into new operating regions, expand service offerings to address longer length of haul needs
from customers, pursue new customer relationships in new markets, as well as expand business relationships with current
customers in new markets. We are highly selective about acquisitions, with our main criteria being (i) safe operations, (ii) high
quality professional truck drivers, (iii) fleet profile that is compatible with our philosophy or can be replaced economically, and
(iv) freight profile that will allow a path to a low-80s operating ratio upon full integration, application of our cost structure, and
freight optimization, including exiting certain loads that fail to meet our operating profile. We expect to continue to evaluate
acquisition candidates presented to us, however, we do not expect to make any significant acquisitions while we are paying
down debt. We believe future growth depends upon several factors including the level of economic growth and the related
customer demand, the available capacity in the trucking industry, our ability to identify and consummate future acquisitions,
our ability to integrate operations of acquired companies to realize efficiencies, and our ability to attract and retain experienced
drivers that meet our hiring standards.
We manage our business primarily based on long-term cash flow generation prospects and return on equity, and we place less
emphasis on quarterly earnings per share or short-term revenue volatility. When we are experiencing or expect favorable freight
markets, we invest in fleet expansion internally, dependent on our ability to hire drivers that meet our qualifications, and
through acquisitions. When freight markets are less favorable, we concentrate our assets on customers offering the most
acceptable returns and are willing to shrink our fleet to maintain margins and limit net capital expenditures. We have also
deployed available cash opportunistically toward dividends and stock repurchases. However, we expect to focus on paying
down the debt resulting from our 2022 acquisitions in 2023. For the periods ended December 31, 2022, our operating cash
flows as a percentage of operating revenues five-year average was 23.0%, our three-year average was 22.4%, and most recently
for 2022 was 20.1%.
Tractor Strategy and Depreciation
Our CODM makes all revenue equipment purchasing and selling decisions on a combined basis based primarily on age,
condition, and current market conditions for the equipment regardless of which legacy fleet the equipment was associated with.
Our tractor strategy is important to our goals and differs from the practices of many of our peers. We strive to operate a
relatively new fleet to keep operating costs low, better driver comfort, and enhance dependability. We seek the flexibility to buy
and sell tractors (and trailers) opportunistically to capitalize on new and used equipment markets, size our fleet to the volume of
attractive freight, and manage cash tax expense. One method we use to accomplish these goals is to depreciate our new tractors
(excludes assets acquired through an acquisition) for financial reporting purposes using the 125% declining balance method, in
which depreciation is higher in early periods and tapers off in later periods. We believe this method more accurately reflects
actual asset values and affords us the flexibility to sell tractors at most points during their life cycle without experiencing losses.
In addition, the decline in depreciation during later periods is typically offset by increased repairs and maintenance expense as
the tractors age, which keeps our total operating costs more uniform over the operating life of the equipment. Trailers are
depreciated using the straight-line method.
Revenue equipment acquired through acquisitions is generally revalued to current market values as of the acquisition date.
Assets obtained more than a year prior to the acquisition by the acquired company are depreciated on a straight-line basis
aligned with the remaining period of expected use, whereas those obtained less than a year prior are depreciated consistent with
newly purchased assets. As acquired equipment is replaced, our fleet returns to our base methods of declining balance
depreciation for tractors and straight-line depreciation for trailers. We believe our revenue equipment strategy is sound over the
long term. However, it can contribute to volatility in gain on sale of equipment and quarterly earnings per share. At
December 31, 2022, our tractor fleet had an average age of 2.0 years and our trailer fleet had an average age of 6.3 years.
During 2023, we expect the age of both our tractor and trailer fleets to remain consistent with the average age at December 31,
2022, based on estimated net capital expenditures in 2023 due to our expectation of a shortage of reasonably priced new
revenue equipment available.
Fuel Costs
After salaries, wages, and benefits, fuel expense was our next highest operating cost in 2022. Containment of fuel cost
continues to be one of management's top priorities. Average DOE diesel fuel prices per gallon for 2022 and 2021 were $4.99
and $3.29, respectively. The average price per gallon in 2023, through February 20, 2023, was $4.55. During March 2022 the
DOE average fuel prices increased to over $5.00 per gallon. The DOE average fuel cost remained above this elevated threshold
for the period from March through December 31, 2022, although the DOE weekly average for the last four weeks of December
fell below $5.00 per gallon. The trend of fuel prices below the $5.00 per gallon threshold has continued in 2023 as the DOE
average through February 20, 2023 was $4.55. We are not able to pass through all fuel price increases through fuel surcharge
agreements with customers due to tractor idling time, along with empty and out-of-route miles. Therefore, our operating income
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is negatively impacted with increased net fuel costs (fuel expense less fuel surcharge revenue) in a rising fuel environment and is positively impacted in a declining fuel environment. We expect to continue to manage and implement fuel initiative strategies that we believe will effectively manage fuel costs. These initiatives include strategic fueling of our trucks, whether it be terminal fuel or over-the-road fuel, reducing tractor idle time, controlling out-of-route miles, controlling empty miles, utilizing on-board power units to minimize idling, educating drivers to save energy, trailer skirting, and increasing fuel economy through the purchase of newer, more fuel-efficient tractors.Results of OperationsThe following table sets forth the percentage relationships of expense items to total operating revenue for the periods indicated: Year Ended December 31, 20222021Operating revenue 100.0 % 100.0 %Operating expenses: Salaries, wages, and benefits 35.8 % 41.2 %Rent and purchased transportation 5.6 0.6 Fuel 20.1 16.4 Operations and maintenance 4.0 3.6 Operating taxes and licenses 1.7 2.3 Insurance and claims 3.6 3.4 Communications and utilities 0.7 0.7 Depreciation and amortization 13.7 17.1 Other operating expenses 5.3 3.5 Gain on disposal of property and equipment (10.0) (6.2) 80.5 % 82.6 %Operating income 19.5 % 17.4 %Interest income 0.1 % 0.1 %Interest expense (0.9) % 0.0 %Income before income taxes 18.7 % 17.5 %Income tax expense 4.9 4.4 Net income 13.8 % 13.1 %Year Ended December 31, 2022 Compared with the Year Ended December 31, 2021The Company acquired CFI on August 31, 2022 and Smith Transport on May 31, 2022, therefore the operating results of the Company for the year ended December 31, 2022 includes the operating results of CFI and Smith Transport for four month and seven months after acquisition, respectively. The acquisitions impacted the change in operating revenues, salaries, wages and benefits, rent and purchased transportation, fuel expense, operations and maintenance, insurance and claims, depreciation and amortization, other operating expenses, and interest expense in 2022 compared to 2021 as further explained below.Operating revenue increased $360.7 million (59.4%), to $968.0 million for the year ended December 31, 2022 from $607.3 million for the year ended December 31, 2021. The increase in revenue was driven by an increase in trucking and other revenues of $267.7 million and an increase in fuel surcharge revenue of $93.1 million. The increase in trucking and other revenues was primarily from the acquisitions of Smith Transport and CFI. The increased fuel surcharge revenue was the result of increased miles driven as a result of the acquisitions in addition to a 51.8% increase in average DOE fuel cost in 2022. Smith Transport and CFI contributed 34.9% of the operating revenues, for the year ended December 31, 2021, including Smith Transport which contributed 13.3% and CFI which contributed 21.6% of the operating revenues. Operating revenues (the total of trucking and fuel surcharge revenue) are primarily earned based on loaded miles driven in providing truckload services. The number of loaded miles is affected by general freight supply and demand trends and the number of tractors. The number of tractors is directly affected by the number of available drivers providing capacity to us. The increase in total miles was a result of the additional capacity acquired. The increase in freight rates, earned on miles driven, was generally due to strong market conditions and demand for our freight services. In early 2022, freight demand was initially strong, following an extended period of freight demand at peak levels in 2021. However, demand softened each quarter sequentially in 2022 as compared to 2021. While the current levels are down compared against those unprecedented levels experienced during 2021, we continued to have more opportunities to haul freight than we were able to cover with our existing fleet and available drivers. For 2023, we expect 38 freight demand to remain challenged at lower demand levels during the first half of 2023 or longer based-upon the freight
demand experienced in January and February of 2023 with expected normal seasonal trends. We expect our operating revenue
to grow, primarily from our Smith and CFI acquisitions, partially offset by a weaker freight market.
Our operating revenues are reviewed regularly by our CODM on a combined basis across the U.S. due to the similar nature of
our services offerings and related similar base pricing structure. The operating revenues increase was the net result of an
increase in loaded miles as a result of more drivers following our 2022 acquisitions along with an increase in the average rate
per loaded mile.
Fuel surcharge revenues represent fuel costs passed on to customers based on customer specific fuel surcharge recovery rates
and billed loaded miles. Fuel surcharge revenues increased $93.1 million primarily as a result of an increase in average DOE
diesel fuel prices of 51.8% during 2022 compared to 2021, as reported by the DOE, along with an increase of miles driven
following our 2022 acquisitions.
Rent and purchased transportation increased $50.5 million, to $54.3 million for the year ended December 31, 2022 from
$3.8 million for the same period of 2021. The significant increase resulted from the acquisition of CFI which included more
purchased transportation utilized throughout their operations, including independent contractors and other third party brokerage
relationships. Further contributing to the rent and purchased transportation increase is lease expense from the acquisition of
Smith Transport and their leases along with a terminal lease entered into in May 2022, following the sale of that property.
Salaries, wages, and benefits increased $96.3 million (38.5%), to $346.3 million for the year ended December 31, 2022 from
$250.0 million in the 2021 period. Salaries, wages, and benefits increased primarily due to the increase in the number of drivers
and support staff following our 2022 acquisitions. In response to current hiring and retention challenges in our industry, we
continue to get more creative in providing better pay, driving opportunities, benefits, equipment, and facilities for our drivers.
We expect the qualified driver shortage within the trucking industry to continue to be a challenge in the foreseeable future.
However, driver availability began to change late in 2022 and to date in 2023, as a result of the changing freight and economic
environments and we believe certain drivers have moved from smaller less financially stable carriers to more financially stable
carriers.
Fuel increased $95.0 million (95.4%), to $194.6 million for the year ended December 31, 2022 from $99.6 million for the same
period of 2021. The increase in fuel was primarily due to more miles driven following our 2022 acquisitions and higher average
diesel price per gallon (51.8%) as reported by the DOE. The average DOE diesel fuel prices per gallon for 2022 and 2021 were
$4.99 and $3.29, respectively. During March 2022 DOE average fuel prices increased to over $5.00 per gallon. The DOE
average fuel cost remained above this elevated threshold for the period from March through December 31, 2022, although the
DOE weekly average for the last four weeks of December fell below $5.00 per gallon. The trend of fuel prices below the $5.00
per gallon threshold has continued through the first seven weeks of DOE average fuel prices in 2023. While this is an
improvement compared to the majority of 2022, the latest DOE diesel fuel price in February 2023 is up 10.6% compared to the
same week of 2022. We cannot currently predict how long and how much the average diesel prices will remain elevated.
Depreciation and amortization increased $28.9 million (27.8%), to $133.0 million during the year ended December 31, 2022
from $104.1 million in the same period of 2021. The increase in depreciation and amortization is a result of ongoing fleet
replacement strategies and increase in depreciated units from the Smith Transport and CFI acquisitions. We expect depreciation
expense in 2023 to be approximately $200 million to $210 million.
Operating and maintenance expense increased $17.6 million (81.6%), to $39.1 million during the year ended December 31,
2022, from $21.5 million in the same period of 2021. Operating and maintenance costs increase is mainly attributable to an
increase in miles driven and increased costs of our expanded fleet of revenue equipment following our 2022 acquisitions along
with higher costs of parts and materials as a result of production shortages. Due to increased costs and limited availability of
new revenue equipment, which we expect to continue into early 2023, our revenue equipment trade activity in 2022 was
significantly below levels experienced in recent years. There was a 60.9% decrease in volume of trailers sold during 2022 as
compared to 2021, and a 49.1% decrease in the quantity of tractors sold. At December 31, 2022, the Company’s tractor fleet
had an average age of 2.0 years and the Company's trailer fleet had an average age of 6.3 years. The average age of our tractor
and trailer fleets was increased by the inclusion of the Smith Transport and CFI equipment obtained through our 2022
acquisitions.
Operating taxes and licenses expense increased $2.8 million (20.5%), to $16.4 million during the year ended December 31,
2022 from $13.6 million in 2021, due to an increase in number of revenue equipment units (tractors and trailers) licensed in
2022 as compared to 2021. The increase in number of revenue units licensed is the result of our 2022 acquisitions.
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Insurance and claims expense increased $13.6 million (65.4%), to $34.4 million during the year ended December 31, 2022 from
$20.8 million in 2021. There was an increase in severity and frequency of claims as well as an increase in risk exposure
resulting from more miles driven, along with an increase in insurance premiums in 2022 compared to 2021. In addition, the
overall cost to insure our revenue equipment, on a per unit basis, has increased year-over-year due to a lack of insurance
capacity across the transportation industry mainly as a result of the current legal environment. We expect that insurance
premiums will continue trending upward. In recent years we have modified our coverage to better match the benefit of
insurance coverage received to the insurance premiums charged. We will continue this evaluation with our 2023 insurance
renewal, which could result in a change to our coverage limits and insurance premium costs.
Other operating expenses increased $30.0 million (140.3%), to $51.4 million, during the year ended December 31, 2022 from
$21.4 million in 2021, due mainly to increased variable costs associated with the increase of revenue equipment units in our
fleet and miles driven as a result of our 2022 acquisitions.
Gains on the disposal of property and equipment increased $59.5 million (158.8%), to $96.9 million during the year ended
December 31, 2022, from $37.4 million in the same period of 2021. The increase was primarily due to a $73.2 million gain
from the sale of a terminal facility, partially offset by a $5.6 million decrease in gains on sales of trailer equipment and a $3.7
million decrease in gains on sales of tractor equipment, with the remaining $4.4 million decrease primarily due to the 2021 sale
of a terminal facility. The decrease in gains on trailer sales was primarily due to a 60.9% decrease in volume of trailers sold,
partially offset by a 79.6% increase in the gains per unit sold in 2022 as compared to 2021. Gains on tractor equipment sales
decreased as a result of a 49.1% decrease in the quantity of tractors sold partially offset by a 44.8% increase in gains per tractor
sold. We expect the used equipment market to remain relatively strong in 2023, although our participation may be limited by
production shortages and increased costs for new revenue equipment to replace sold units.
Interest expense increased by $8.6 million as we had no interest expense in 2021. The interest expense is made up of
$7.5 million from the Credit Facilities coinciding with the acquisition of CFI while the remaining $1.1 million is the result of
debt and financing leases assumed through the Smith Transport acquisition.
Our effective tax rate was 26.2% and 25.2% for the twelve months ended December 31, 2022 and 2021, respectively. The
increase in the effective tax rate is primarily the result of an increase in the accrual of tax for uncertain tax positions specific to
transactions occurring in 12 months ended December 31, 2022.
Inflation and Fuel Cost
Most of our operating expenses are inflation-sensitive, with inflation generally producing increased costs of operations. During
the past year there has been an inflation uptick. Significant price increases in original equipment manufacturer revenue
equipment has impacted the cost for us to acquire new equipment, while there has been a corresponding inflationary impact to
prices offered on the sale of our used equipment. The cost increases have also impacted the cost of parts for equipment repairs
and maintenance, inclusive of tires. The continued qualified driver shortage experienced by the trucking industry has had the
effect of increasing compensation paid to drivers. Significant inflation has been experienced in insurance and claims cost
related to health insurance and claims as well as auto liability insurance and claims. Further, innovations in equipment
technology, EPA mandated new engine emission requirements and driver comfort have also resulted in higher tractor prices.
We have the ability to limit new equipment purchases given our average age of revenue equipment, particularly our tractor
fleet, is in the top tier of our industry. We do not believe that extending our trade cycle in 2023 will significantly increase
operations and maintenance expense compared to the rest of the industry. We historically have limited the effects of inflation
through increases in freight rates and certain cost control efforts. Over the long term, general economic growth and industry
supply and demand conditions have allowed rate increases, although the rate increases received have significantly lagged the
increases in tractor prices and related depreciation expense.
In addition to inflation, significant fluctuations in fuel prices can adversely affect our operating results and profitability. We
have attempted to limit the effects of increases in fuel prices through certain cost control efforts and our fuel surcharge
program. We impose fuel surcharges on substantially all accounts. Although we historically have been able to pass through
most long-term increases in fuel prices and operating taxes to customers in the form of surcharges and higher rates, these
arrangements generally do not fully protect us from short-term fuel price increases or continued rising price environments like
we experienced throughout 2021 and 2022. These arrangements also may prevent us from receiving the full benefit of any fuel
price decreases. Additionally, we are not able to recover fuel surcharge on empty miles, out of route miles, or fuel used in
idling.
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Liquidity and Capital Resources
The growth of our business requires significant investments in new revenue equipment. Historically, except for acquisitions, we
have been debt-free, funding revenue equipment purchases with our primary sources of liquidity, cash flow provided by
operating activities and proceeds from sales of used equipment. In conjunction with the acquisition of CFI on August 31, 2022,
(the “CFI Closing Date”), Heartland entered into a $550.0 million unsecured credit facility which included a $100.0 million
revolving line of credit (“Revolving Facility”) and $450.0 million in term loans (“Term Facility” and, together with the
Revolving Facility, the “Credit Facilities”). The Credit Facilities includes a consortium of lenders, including joint bookrunners
JPMorgan Chase Bank, N.A. and Wells Fargo Bank, National Association (“Wells Fargo”).
The Credit Facilities replaced the previous credit arrangements in place for the Company which consisted of a November 2013
Credit Agreement with Wells Fargo, along with an asset-based credit facility with Citizens Bank of Pennsylvania that was
assumed as part of the acquisition of Smith Transport on May 31, 2022.
The full amount of the Term Facility was made in a single draw on August 31, 2022 and amounts borrowed under the Term
Facility that are repaid or prepaid may not be reborrowed. The Term Facility will amortize in quarterly installments beginning
in September 2023, at 5% per annum through June 2025 and 10% per annum from September 2025 through June 2027, with the
balance due on the date that is five years from the CFI Closing Date. Based on debt repayments made through February 28,
2023, required minimum payments have been covered through March 31, 2025.
The Revolving Facility consists of a five-year revolving credit facility with aggregate commitments in an amount equal to
$100.0 million, of which up to $50.0 million is available for the issuance of letters of credit, and including a swingline facility
in an amount equal to $20.0 million. The Revolver will mature and the commitments thereunder will terminate on the date that
is five years after the CFI Closing Date. Amounts repaid under the Revolving Facility may be reborrowed. The Credit Facilities
include an uncommitted accordion feature pursuant to which the Company may request up to $275.0 million in incremental
revolving or term loans, subject to lender approvals.
The indebtedness, obligations, and liabilities under the Credit Facilities are unconditionally guaranteed, jointly and severally, on
an unsecured basis by the Company, Borrower, and certain other subsidiaries of the Company. The Borrower may voluntarily
prepay outstanding loans under the Credit Facilities in whole or in part at any time without premium or penalty, subject to
payment of customary breakage costs in the case of SOFR rate loans.
The Credit Facilities contain usual and customary events of default and negative covenants for a facility of this nature
including, among other things, restrictions on the Company’s ability to incur certain additional indebtedness or issue
guarantees, to create liens on the Company’s assets, to make distributions on or redeem equity interests (subject to certain
exceptions, including that (a) the Company may pay regularly scheduled dividends on the Company’s common stock not to
exceed $10.0 million during any fiscal year and (b) the Company may make any other distributions so long as it maintains a net
leverage ratio not greater than 2.50 to 1.00), to make investments and to engage in mergers, consolidations, or acquisitions. The
Credit Facilities contain customary financial covenants, including (i) a maximum net leverage ratio of 2.75 to 1.00, measured
quarterly on a trailing twelve-month basis, and (ii) a minimum interest coverage ratio of 3.00 to 1.00, measured quarterly on a
trailing twelve-month basis.
Outstanding borrowings under the Credit Facilities will accrue interest, at the option of the Borrower, at a per annum rate of (i)
for an “ABR Loan”, the alternate base rate (defined as the interest rate per annum equal to the highest of (a) the variable rate of
interest announced by the administrative agent as its “prime rate”, (b) 0.50% above the Federal Funds Rate, (c) the Term SOFR
for an interest period of one-month plus 1.1%, or (d) 1.00%) plus the applicable margin or (ii) for a “SOFR Loan”, the Term
SOFR Rate for an interest period of one, three or six-months as selected by Company plus the applicable margin. The
applicable margin for ABR Loans ranges from 0.250% to 0.875% and the applicable margin for SOFR Loans ranges from
1.250% to 1.875%, depending on the Company’s net leverage ratio.
One of the nine consortium lenders is West Bank. Our CEO has served on the Board of Directors of West Bancorporation and
West Bank, a wholly owned subsidiary of West Bancorporation, Inc., the financial institution that holds a portion of our
deposits, since 2013. We have had a banking relationship with West Bank since 2003. West Bank's share of the Revolving
Facility is $8.2 million while the West Bank share of the initial Term Facility was $36.8 million.
We had $375.0 million outstanding on the Term Facility and no outstanding under the Revolving Facility at December 31,
2022. As of February 28, 2023 the outstanding balance on the Term Facility was $360.0 million. Outstanding letters of credit
associated with the Revolving Facility at December 31, 2022 were $13.9 million. As of December 31, 2022, the Revolving
Facility available for future borrowing was $86.1 million. As of December 31, 2022 the weighted average interest rate on
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outstanding borrowings under the Credit Facilities was 5.6%.
The May 31, 2022 acquisition of Smith Transport included the assumption of $46.8 million of debt and financing lease
obligations associated with the fleet of revenue equipment of which $40.3 million was outstanding at December 31, 2022, (the
"Smith Debt"). The Smith Debt has $9.7 million of outstanding principal and is made up of installment notes with a weighted
average interest rate of 4.4% at December 31, 2022, due in monthly installments with final maturities at various dates ranging
from November 2023 to January 2029, secured by related revenue equipment. The remaining Smith Debt of $30.6 million are
finance lease obligations with a weighted average interest rate of 3.9% at December 31, 2022, due in monthly installments with
final maturities at various dates ranging from July 2023 to April 2026 with the weighted average remaining lease term of 2.3
years.
At December 31, 2022, we had $49.5 million in cash and cash equivalents, $382.4 million in outstanding debt, $30.6 million in
finance lease liabilities, $21.0 million in operating lease obligations, and $86.1 million available borrowing capacity on the
Revolving Facility.
We intend to diligently pay down the debt we incurred and assumed to complete our most recent acquisitions, while
maintaining our regular quarterly dividends and funding our ongoing capital expenditure needs. While we are paying down the
debt, we do not currently expect to declare special dividends, repurchase shares of our common stock, or make significant
acquisitions, however we will remain flexible to ensure the best deployment of our capital.
Operating cash flow for 2022 was $194.7 million compared to $123.4 million for 2021. This increase was primarily due to a
$32.5 million increase in net income net of non-working capital adjustment items, along with $38.8 million more cash provided
by working capital items. Cash flow from operating activities was 20.1% of operating revenues for the year ended
December 31, 2022, compared to 20.3% for the same period of 2021.
Cash flows used in investing activities were $663.3 million during 2022, representing an increase in cash used of $660.6 million
compared to cash flows used in investing activities of $2.6 million during 2021. The increase in cash used in investing activities
was mainly the result of net cash used of $675.9 million for the acquisition of Smith Transport and CFI partially offset by
$14.6 million more of net cash provided by property and equipment in 2022, compared to net purchases of property and
equipment in 2021. The increase in net cash provided by property and equipment was primarily due to cash received from the
sale of a terminal property. We currently anticipate higher net capital expenditures for revenue equipment in 2023 compared to
2022 as a result of the larger fleet size following the acquisitions and efforts to refresh these fleets.
Cash flows provided by financing activities increased $437.4 million in 2022 compared to 2021. The $359.3 million provided
by financing activities during 2022 included $447.3 million from the issuance of long-term debt partially offset by $81.5
million of repayments of finance leases and debt and $6.3 million used to pay dividends to our shareholders. In 2021, $78.1
million was used in financing activities including $45.9 million to pay dividends, including a special dividend, and $32.0
million for repurchases of our common stock.
We have a stock repurchase program with 6.6 million shares remaining authorized for repurchase as of December 31, 2022 and
the program has no expiration date. There were no shares repurchased in the open market during the year ended December 31,
2022 and 1.8 million shares were repurchased in 2021. While we are paying down the debt, we do not currently expect to
repurchase shares of our common stock, however we will remain flexible to ensure the best deployment of our capital. Any
future repurchases will depend on market conditions, cash flow requirements, securities law limitations, and other factors. The
share repurchase authorization is discretionary and has no expiration date.
We had net payments of $44.0 million and $38.5 million for income taxes, net of refunds, in the twelve months ended
December 31, 2022 and 2021, respectively. The increase in net tax payments is the result of increased taxable income, partially
offset by taxes paid with returns filed in 2021 that was not applicable to returns filed in 2022 and tax treatment of fixed asset
transactions.
Management believes we have adequate liquidity to meet our current and projected needs in the foreseeable
future. Management believes we will continue to have significant capital requirements over the long-term, which we expect to
fund with current available cash, cash flows provided by operating activities, proceeds from the sale of used equipment and to a
lesser extent, available capacity on the Credit Facilities.
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Contractual Obligations and Commercial CommitmentsThe Company's material cash requirements include the following contractual obligations and commercial commitments at December 31, 2022. Payments due by period (in millions)Contractual ObligationsTotalLess than 1 year1–3 years3–5 yearsMore than 5 yearsPurchase obligation (1)$ 108.0 $ 108.0 $ — $ — $ — Obligations for unrecognized tax benefits (2) 6.5 — — — 6.5 $ 114.5 $ 108.0 $ — $ — $ 6.5 (1)Relates mainly to our commitment on revenue equipment purchases, net of estimated sale values of tractor equipment where we have contracted values for used equipment.(2)Obligations for unrecognized tax benefits represent potential liabilities and includes interest and penalties. We are unable to reasonably determine when these amounts will be settled. See below for a detailed discussion of our unrecognized tax benefits.At December 31, 2022, we had a total of $5.7 million in gross unrecognized tax benefits included in long-term income taxes payable in the consolidated balance sheets. Of this amount, $4.5 million represents the amount of unrecognized tax benefits that, if recognized, would impact our effective tax rate as of December 31, 2022. The total net amount of accrued interest and penalties for such unrecognized tax benefits was $0.7 million at December 31, 2022, and is included in long-term income taxes payable within the consolidated balance sheet. Income tax expense is increased each period for the accrual of interest on outstanding positions and penalties when the uncertain tax position is initially recorded. Income tax expense is reduced in periods by the amount of accrued interest and penalties associated with reversed uncertain tax positions due to lapse of applicable statute of limitations, when applicable, or when a position is settled. These unrecognized tax benefits relate to risks associated with state income tax filing positions for our corporate subsidiaries.A reconciliation of the obligations for unrecognized tax benefits is as follows:December 31, 2022(in thousands)Gross unrecognized tax benefits $ 5,744 Accrued penalties and interest associated with the unrecognized tax benefits (net of benefit of interest deduction) 722 Obligations for unrecognized tax benefits$ 6,466 A number of years may elapse before an uncertain tax position is audited and ultimately settled. It is difficult to predict the ultimate outcome or the timing of resolution for uncertain tax positions. It is reasonably possible that the amount of unrecognized tax benefits could significantly increase or decrease within the next twelve months. These changes could result from the expiration of the statute of limitations, examinations or other unforeseen circumstances. We do not have any outstanding litigation related to income tax matters. At this time, management’s best estimate of the reasonably possible change in the amount of gross unrecognized tax benefits is approximately no change to an increase of $1.0 million during the next twelve months, due to the net combination of estimated additions and expiration of certain statute of limitations. The federal statute of limitations remains open for the years 2019 and forward. Tax years 2012 and forward are subject to audit by state tax authorities depending on the tax code and administrative practice of each state.Critical Accounting Policies and EstimatesThe preparation of financial statements in conformity with U.S. generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Management routinely makes judgments and estimates about the effect of matters that are inherently uncertain. As the number of variables and assumptions affecting the probable future resolution of the uncertainties increase, these judgments become even more subjective and complex. We have identified certain accounting policies and estimates, described below, that are the most important to the portrayal of our current financial condition and results of operations.43 The most significant accounting policies and estimates that affect the financial statements include the following:
Revenue equipment estimated useful lives and salvage values
Over 97% of our total miles comes from company drivers operating the Company's revenue equipment. Management estimates
the useful lives of revenue equipment based on estimated period of use for the asset. It has been our historical practice to buy
new tractor and trailer equipment directly from manufacturers. Tractors and trailers are depreciated using the 125% declining
balance method for new tractors (excludes assets acquired in an acquisition) and straight-line method, respectively, over the
estimated useful life down to an estimated salvage value. Management believes this is the best matching of depreciation
expense with the decline in estimated tractor and trailer values based on the use of the tractor and trailers. Revenue equipment
acquired through acquisitions is generally revalued to current market values as of the acquisition date. Assets obtained more
than a year prior to the acquisition by the acquired company are depreciated on a straight-line basis aligned with the remaining
period of expected use, whereas those obtained less than a year prior are depreciated consistent with newly purchased assets. As
acquired equipment is replaced, our fleet returns to our base methods of declining balance depreciation for tractors and straight-
line depreciation for trailers. Depreciable lives of tractors and trailers are 5 and 7 years, respectively, when purchased new.
Management estimates the useful lives on tractors based on average miles per truck per year as well as manufacturer warranty
periods. We have not historically run tractors outside of manufacturer warranty periods. Management estimates the useful lives
of trailers based on manufacturer warranty periods as well as our internal maintenance programs. Estimates of salvage value are
based upon the expected market values of equipment at the end of the expected useful life. A key component to expected
market values of equipment is our historical maintenance programs which in management's opinion are critical to the resale
value of equipment. Management selects depreciation methods that it believes most accurately reflects the timing of benefit
received from the applicable assets. It is reasonably likely that changing revenue equipment markets could result in a change in
depreciable life or salvage value estimate. Management believes that a change in estimate will not significantly affect the long-
term financial condition of the Company or its ability to fund its continuing operations. A change in estimate would impact
depreciation and amortization in the consolidated statements of comprehensive income and revenue equipment in the
consolidated balance sheets. We have not had any material changes to our estimate methodology in the past three years.
Auto Liability and Workers’ Compensation Claims Reserve
The Company is self-insured for a portion of the risk related to auto liability and workers' compensation. Management estimates
accruals for the self-insured portion of pending accident liability and workers’ compensation claims by evaluating the nature
and severity of individual claims and by estimating future claims development based upon historical development trends,
utilizing the facts and circumstances known on the applicable balance sheet date. The accruals are made up of individual case
estimates, including reserve development, and estimates of incurred-but-not-reported losses based upon past experience. Auto
liability and workers' compensation unpaid liabilities are determined by projecting the estimated ultimate loss related to a claim,
less actual costs paid to date. Industry development as well as our historical case results are used to determine development of
individual case claims. The estimates rely on the assumption that historical claim patterns are an accurate representation for
future claims that have been incurred but not completely paid. The ultimate resolution of these claims may be for an amount
significantly different than the amount estimated by management and case reserves are continually adjusted as new or revised
information becomes available on the status of each claim. There is a high level of estimation uncertainty related to determining
the severity of these types of claims, as well as the inherent subjectivity in estimating the total costs to settle or for defense
against these claims. These liabilities are undiscounted and represent management's best estimate of our ultimate obligations.
The actual cost to settle self-insured claims liabilities may differ from the Company's reserve estimates due to legal costs,
claims and information on known claims that have been incurred but not reported as well as various other uncertainties. It is
reasonably likely that the ultimate outcome of settling all outstanding claims will be more or less than the estimated claims
liability at December 31, 2022. Management believes that the ultimate resolution of these claims will not significantly affect the
long-term financial condition of the Company or its ability to fund its continuing operations. A change in estimate could impact
salaries, wages and benefits (workers compensation) or insurance and claims (auto liability) in the consolidated statements of
comprehensive income and insurance accruals in the consolidated balance sheets. We have not had any material changes to our
estimate methodology in the past three years.
Business Combination Estimates
The purchase price of an acquired businesses is allocated to the estimated fair values of the assets acquired and liabilities
assumed as of the date of the acquisition. The calculations used to determine the fair value of the long-lived assets acquired,
including intangible assets, revenue equipment and properties can be complex and require significant judgment. For the
valuation of long-lived assets we weigh many factors when completing these estimates. We may also engage independent
valuation specialists to assist in the fair value calculations. During 2022 we engaged valuation specialists to assist us in
determining the fair value of intangible assets, revenue equipment and properties acquired through our acquisitions of Smith
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Transport and CFI. Goodwill is not amortized, but is subject to impairment testing on at least an annual basis and its valuation
is directly impacted by the valuation estimates of the other acquired long-lived assets. We are also required to determine if an
intangible asset has a finite or indefinite life. For intangible assets determined to have a finite life, we estimate the useful lives
of the acquired intangible assets, which determines the amount of acquisition-related amortization expense we will record in
future periods. While we use our best estimates and assumptions, our fair value estimates are inherently uncertain. During the
measurement period, which may be up to one year from the acquisition date, we may record adjustments to the assets acquired
and liabilities assumed, with the corresponding offset to goodwill. Any adjustments required after the one year measurement
period would be recorded in the consolidated statements of income. The judgments required in determining the estimated fair
values and expected useful lives assigned to each class of assets can significantly affect net income.
Income taxes
Significant management judgment is required to determine the provision for income taxes and to determine whether deferred
income taxes will be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which the temporary differences are expected to be recovered or settled. A valuation allowance is
required to be established for the amount of deferred income tax assets that are determined not to be realizable. We have not
recorded a valuation allowance against deferred tax assets as it is management's opinion that it is more likely than not we will
be able to utilize the remaining deferred tax assets based on our history of profitability and taxable income.
Management judgment is required in the accounting for uncertainty in income taxes recognized in the financial statements
based on recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. The unrecognized tax benefits relate to risks associated with state income
filing positions and not federal income tax filing positions. Measurement of uncertain income tax positions is based on statutes
of limitations, penalty rates, and interest rates on a state by state and year by year basis.
New Accounting Pronouncements
See Note 1 of the consolidated financial statements for a full description of recent accounting pronouncements and the
respective dates of adoption and effects on results of operations and financial position.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
General
We are exposed to market risk changes in interest rates during periods when we have outstanding borrowings and from changes
in commodity prices, primarily fuel and rubber. We do not currently use derivative financial instruments for risk management
purposes, although we have used instruments in the past for fuel price risk management, and do not use them for either
speculation or trading. Because substantially all of our operations are confined to the U.S., we are not directly subject to a
material foreign currency risk.
Interest Rate Risk
We had $382.4 million debt outstanding and $30.6 million in finance lease liabilities at December 31, 2022. Of the total
$413.0 million of debt and finance lease liabilities outstanding, $375.0 million is subject to variable interest rates and the
remainder is at fixed annual interest rates. Interest rates associated with borrowings under the Credit Facilities are based on the
Secured Overnight Financing Rate (“SOFR”) plus a spread based on the Company’s net leverage ratio. Increases in interest
rates would currently impact our interest expense given we have outstanding borrowings subject to variable interest rates. An
increase of 1.0% in the SOFR rate would drive an increase of $3.8 million in interest expense annually based on our current
amount of debt outstanding that is subject to variable interest rates.
Commodity Price Risk
We are subject to commodity price risk primarily with respect to purchases of fuel and rubber. We have fuel surcharge
agreements with most customers that enable us to pass through most long-term price increases therefore limiting our exposure
to commodity price risk. Fuel surcharges that can be collected do not always fully offset an increase in the cost of fuel as we are
not able to pass through fuel costs associated with out-of-route miles, empty miles, and tractor idle time. Based on our actual
fuel purchases for 2022, assuming miles driven, fuel surcharges as a percentage of revenue, percentage of unproductive miles,
and miles per gallon remained consistent with 2022 amounts, a $1.00 increase in the average price of fuel per gallon, year over
year, would decrease our income before income taxes by approximately $9.3 million. We use a significant amount of tires to
45
maintain our revenue equipment. We are not able to pass through 100% of price increases from tire suppliers due to the severity
and timing of increases and current rate environment. Historically, we have sought to minimize tire price increases through bulk
tire purchases from our suppliers. Based on our expected tire purchases for 2023, a 10% increase in the price of tires would
increase our tire purchase expense by $2.0 million, resulting in a corresponding decrease in income before income taxes.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The reports of Grant Thornton, LLP, our independent registered public accounting firm, our consolidated financial statements,
and the notes thereto, and the financial statement schedule are included beginning on page 49.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures – We have established disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act) to ensure that material information relating to us, including our
consolidated subsidiaries, is made known to the officers who certify our financial reports and to other members of senior
management and the Board of Directors.
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation
of our management, including the Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal
Accounting and Financial Officer), of the effectiveness of the design and operations of our disclosure controls and procedures.
Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and
procedures were effective as of December 31, 2022.
Management’s Annual Report on Internal Control Over Financial Reporting – Management is responsible for establishing
and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act). Management, including our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of
our internal control over financial reporting as of December 31, 2022. In making this assessment, our management used the
criteria for effective internal control over financial reporting described in “Internal Control-Integrated Framework (2013),”
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, we
have concluded that our internal control over financial reporting was effective as of December 31, 2022.
Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31,
2022 excluded Smith Transport, which was acquired on May 31, 2022, and CFI, which was acquired on August 31, 2022. The
results of Smith Transport and CFI have been included in our consolidated financial statements since May 31, 2022 and August
31, 2022, respectively. Smith Transport represented 12.3% of consolidated total assets as of December 31, 2022, and
represented 13.3% of operating revenue for the twelve months ended December 31, 2022. CFI represented 43.0% of
consolidated total assets as of December 31, 2022, and represented 21.6% of operating revenue for the twelve months ended
December 31, 2022. The exclusion of Smith Transport and CFI is in accordance with the SEC's general guidance that an
assessment of a recently acquired business may be omitted from the scope in the year of acquisition.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Accordingly, even effective internal control over financial reporting can only provide reasonable assurance of achieving its
control objectives.
The Company’s internal control over financial reporting as of December 31, 2022 has been audited by Grant Thornton LLP, an
independent registered public accounting firm as stated in its report which is included herein.
46
Changes in Internal Control Over Financial Reporting – Except for the acquisitions of Smith Transport and CFI noted above, there were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15 and 15d-15 under the Exchange Act) that occurred during the twelve months ended December 31, 2022 that have materially affected, or were reasonably likely to materially affect, the Company’s internal control over financial reporting.Corporate Governance We have adopted a Governance Structure and Polices document which communicates our corporate governance strategy. We make these charters and policies available on our website at www.heartlandexpress.com within our Leadership & Governance section (and in print to any shareholder who requests them, free of charge). Information on our website is not incorporated by reference into this Annual Report.Code of EthicsWe have adopted a code of ethics known as the “Code of Business Conduct and Ethics” that applies to our employees including the principal executive officer, principal financial officer, controller, and persons performing similar functions. In addition, we have adopted a code of ethics known as “Code of Ethics for Senior Financial Officers” that applies to our senior financial officers, including our chief executive officer, chief financial officer, treasurer, controller, and other senior financial officers performing similar functions who have been identified by the chief executive officer. We make these codes available on our website at www.heartlandexpress.com (and in print to any shareholder who requests them, free of charge). Information on our website is not incorporated by reference into this Annual Report.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT, AND RELATED STOCKHOLDER MATTERSIn July 2011, a Special Meeting of Stockholders of Heartland Express, Inc. was held, at which meeting the approval of the Heartland Express, Inc. 2011 Restricted Stock Award Plan (the “2011 Plan”) was ratified. The 2011 Plan authorized the issuance of up to 0.9 million shares and is administered by the Compensation Committee of our Board of Directors (the “Committee”). In accordance with and subject to the provisions of the 2011 Plan, the Committee has the authority to determine all provisions of awards of restricted stock, including, without limitation, the employees who will receive awards, the number of shares awarded to individual employees, the time or times when awards will be granted, restrictions and other conditions (including, for example, the lapse of time) to which the vesting of awards may be subject, and other terms and conditions and form of agreement to be entered into by us and employees subject to awards of restricted stock. Per the terms of the awards, employees receiving awards will have all of the rights of a stockholder with respect to the unvested restricted shares including, but not limited to, the right to receive such cash dividends, if any, as may be declared on such shares from time to time and the right to vote such shares at any meeting of our stockholders. The following table summarizes, as of December 31, 2022, information about the 2011 Plan:Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and RightsWeighted Average Stock Price of Outstanding Options, Warrants and RightsNumber of Securities Remaining Available for Future Issuance under Equity Compensation Plans (Excluding Securities Reflected in Column (a))(a)(b)(c)Equity compensation plan approved by stockholders 33,360 — — Total 33,360 — — Column (a) represents unvested restricted stock awards outstanding under the 2011 Plan as of December 31, 2022. The weighted average stock price on the date of grant for outstanding restricted stock awards was $16.24, which is not reflected in column (b), because restricted stock awards do not have an exercise price. Column (c) represents the maximum aggregate number of shares of restricted stock that can be issued under the 2011 Plan as of December 31, 2022.47 In May 2021, at the 2021 Annual Meeting of Stockholders, the approval of the Heartland Express, Inc. 2021 Restricted Stock Plan (the "2021 Plan") was ratified. The 2021 Plan made available up to 0.6 million shares for the purpose of making restricted stock grants to our eligible employees, directors and consultants.The following table summarizes, as of December 31, 2022, information about the 2021 Plan:Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and RightsWeighted Average Stock Price of Outstanding Options, Warrants and RightsNumber of Securities Remaining Available for Future Issuance under Equity Compensation Plans (Excluding Securities Reflected in Column (a))(a)(b)(c)Equity compensation plan approved by stockholders 6,720 — 579,866 Total 6,720 — 579,866 Column (a) represents unvested restricted stock awards outstanding under the 2021 Plan as of December 31, 2022. The weighted average stock price on the date of grant for outstanding restricted stock awards was $14.88, which is not reflected in column (b), because restricted stock awards do not have an exercise price. Column (c) represents the maximum aggregate number of shares of restricted stock that can be issued under the 2021 Plan as of December 31, 2022. We do not have any equity compensation plans that were not approved by stockholders.48 INSERT - FINANCIAL STATEMENT OPINION REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM - Page 1
GRANT THORNTON LLP
2431 E. 61st Street, Suite 500
Tulsa, OK 74136
D +1 918 877 0800
F +1 918 877 0805
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Heartland Express, Inc.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Heartland
Express, Inc. (a Nevada corporation) and subsidiaries (the “Company”) as of
December 31, 2022 and 2021, the related consolidated statements of comprehensive
income, stockholders’ equity, and cash flows for each of the three years in the period
ended December 31, 2022, and the related notes and financial statement schedule II
(collectively referred to as the “financial statements”). In our opinion, the financial
statements present fairly, in all material respects, the financial position of the
Company as of December 31, 2022 and 2021, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2022, in
conformity with accounting principles generally accepted in the United States
of America.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal
control over financial reporting as of December 31, 2022, based on criteria
established in the 2013 Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and
our report dated March 1, 2023 expressed an unqualified opinion.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on the Company’s financial statements based
on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those
standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement, whether due
to error or fraud. Our audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the
financial statements. Our audits also included evaluating the accounting principles
used and significant estimates made by management, as well as evaluating the
overall presentation of the financial statements. We believe that our audits provide a
reasonable basis for our opinion.
GT.COM
Grant Thornton LLP is the U.S. member firm of Grant Thornton International Ltd (GTIL). GTIL and each of its member firms
are separate legal entities and are not a worldwide partnership.
49
INSERT - FINANCIAL STATEMENT OPINION REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM - Page 2
Critical audit matters
The critical audit matters communicated below are matters arising from the current
period audit of the financial statements that were communicated or required to be
communicated to the audit committee and that: (1) relate to accounts or disclosures
that are material to the financial statements and (2) involved our especially
challenging, subjective, or complex judgments. The communication of critical audit
matters does not alter in any way our opinion on the financial statements, taken as a
whole, and we are not, by communicating the critical audit matters below, providing
separate opinions on the critical audit matters or on the accounts or disclosures to
which they relate.
Auto liability claims reserve accrual
As described further in the notes to the consolidated financial statements, the
Company is self-insured for a portion of its risk related to auto liability. Self-insurance
results when the Company insures itself by maintaining funds to cover possible losses
rather than by purchasing an insurance policy. The Company accrues for the cost of
the self-insured portion of unpaid claims by evaluating the nature and severity of
individual claims and by estimating future claims development based upon historical
development trends. The actual cost to settle self-insured claim liabilities may differ
from the Company’s reserve estimates due to legal costs, claims that have been
incurred but not reported, and various other uncertainties.
We identified the estimation of auto liability claims accruals subject to self-insurer
retention of $2.0 million as a critical audit matter. Auto liability unpaid claim liabilities
are determined by projecting the estimated ultimate loss related to a claim, less actual
costs paid to date. These estimates rely on the assumption that historical claim
patterns are an accurate representation of future claims that have been incurred but
not completely paid. The principal considerations for assessing auto liability claims as
a critical audit matter are the high level of estimation uncertainty related to
determining the severity of these types of claims, as well as the inherent subjectivity in
management’s judgement in estimating the total costs to settle or dispose of
these claims.
Our audit procedures related to the auto liability claims reserve accrual included the
following, among others.
We tested the effectiveness of controls over auto liability claims, including the
completeness and accuracy of claim expenses and payments.
We tested management’s process for determining the auto liability accrual,
including evaluating the reasonableness of the methods and assumptions used in
estimating the ultimate claim losses with the assistance of an actuarial specialist.
We tested management’s claim reserve estimates by inspecting source
documents to test key attributes of the claims data.
50
INSERT - FINANCIAL STATEMENT OPINION REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM - Page 3
Customer relationships acquired with the CFI acquisition
As described further in the footnotes to the consolidated financial statements, on
August 31, 2022, the Company acquired Transportation Resources, Inc. and Contract
Freighters, Inc., as well as the seller’s interest in the CFI Logistica entities (collectively
“CFI”). The total purchase price consideration was $558.6 million, which was allocated
$55.1 million to separately identified intangible assets, including customer
relationships of $31.6 million. The determination of the fair value of the customer
relationships requires management to make significant estimates and assumptions
related to forecasts of future revenues, expenses, and the discount rate applied.
Changes in these assumptions could materially affect the determination of the fair
value of the customer relationships. We identified the fair value assigned to the
customer relationships included on the opening balance sheet as a critical audit
matter. The principal considerations for our determination that the acquired customer
relationships are a critical audit matter is that management utilized significant
judgement when estimating the fair value assigned to the customer relationships. In
turn, auditing management’s judgements regarding the assigned fair value involved a
high degree of subjectivity due to the estimation uncertainty of management’s
significant judgements.
Our audit procedures related to the estimated fair value assigned to acquired
customer relationships included the following, among others.
We tested the operating effectiveness of controls relating to the identification of
the acquired customer relationships, including the determination of the fair value.
We tested management’s process for determining the fair value of the acquired
customer relationships. This included evaluating the appropriateness of the
valuation method and testing the completeness, accuracy, and relevance of data
used by management.
We evaluated the reasonableness of management’s significant assumptions,
which included forecasted revenues and operating expenses. We tested whether
these forecasts were reasonable and consistent with historical performance and
third-party market data.
We tested the reasonableness of the Company’s discount rate applied to the
present value of the estimated future cash flows model with the assistance of
valuation specialists.
We have served as the Company’s auditor since 2018.
Tulsa, Oklahoma
March 1, 2023
51
INSERT - INTERNAL CONTROL OPINION REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM - Page 1
GRANT THORNTON LLP
2431 E. 61st Street, Suite 500
Tulsa, OK 74136
D +1 918 877 0800
F +1 918 877 0805
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Heartland Express, Inc.
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of Heartland Express,
Inc. (a Nevada corporation) and subsidiaries (the “Company”) as of December 31,
2022, based on criteria established in the 2013 Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”). In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2022,
based on criteria established in the 2013 Internal Control—Integrated Framework
issued by COSO.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial
statements of the Company as of and for the year ended December 31, 2022, and our
report dated March 1, 2023 expressed an unqualified opinion on those financial
statements.
Basis for opinion
The Company’s management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying Management’s Annual Report
on Internal Control Over Financial Reporting (“Management’s Report”). Our
responsibility is to express an opinion on the Company’s internal control over financial
reporting based on our audit. We are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those
standards require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based on the
assessed risk, and performing such other procedures as we considered necessary in
the circumstances. We believe that our audit provides a reasonable basis for our
opinion.
GT.COM
Grant Thornton LLP is the U.S. member firm of Grant Thornton International Ltd (GTIL). GTIL and each of its member firms
are separate legal entities and are not a worldwide partnership.
52
INSERT - INTERNAL CONTROL OPINION REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM - Page 2
Our audit of, and opinion on, the Company’s internal control over financial reporting
does not include the internal control over financial reporting of Smith Transport, Inc.,
Smith Trucking, Inc., Franklin Logistics, Inc., Transportation Resources, Inc., Contract
Freighters, Inc., and the CFI Logistica entities whose financial statements reflect total
assets and revenues constituting 55.3 and 34.9 percent, respectively, of the related
consolidated financial statement amounts as of and for the year ended December 31,
2022. As indicated in Management’s Report, Smith Transport, Inc., Smith Trucking,
Inc., Franklin Logistics, Inc., Transportation Resources, Inc., Contract Freighters, Inc.,
and the CFI Logistica entities were acquired during 2022. Management’s assertion
on the effectiveness of the Company’s internal control over financial reporting
excluded internal control over financial reporting of Smith Transport, Inc., Smith
Trucking, Inc., Franklin Logistics, Inc., Transportation Resources, Inc., Contract
Freighters, Inc., and the CFI Logistica entities.
Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements
in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
Tulsa, Oklahoma
March 1, 2023
53
HEARTLAND EXPRESS, INC.AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(in thousands, except per share amounts)ASSETSDecember 31, 2022December 31, 2021CURRENT ASSETS Cash and cash equivalents$ 49,462 $ 157,742 Trade receivables, net 139,819 52,812 Prepaid tires 11,293 9,168 Other current assets 26,069 9,406 Income tax receivable 3,139 4,095 Total current assets 229,782 233,223 PROPERTY AND EQUIPMENT Land and land improvements 94,155 90,218 Buildings 143,899 95,305 Furniture and fixtures 6,946 5,365 Shop and service equipment 21,652 15,727 Revenue equipment 1,000,472 500,311 Construction in Progress 15,070 3,834 1,282,194 710,760 Less accumulated depreciation 308,936 222,845 Property and equipment, net 973,258 487,915 GOODWILL 320,675 168,295 OTHER INTANGIBLES, NET 103,701 22,355 DEFERRED INCOME TAXES, NET 1,224 — OTHER ASSETS 19,894 16,754 OPERATING LEASE RIGHT OF USE ASSETS 20,954 — $ 1,669,488 $ 928,542 LIABILITIES AND STOCKHOLDERS' EQUITYCURRENT LIABILITIES Accounts payable and accrued liabilities$ 62,712 $ 20,538 Compensation and benefits 30,972 21,411 Insurance accruals 18,490 15,677 Long-term debt and finance lease liabilities - current portion 13,946 — Operating lease liabilities - current portion 12,001 — Other accruals 18,636 13,968 Total current liabilities 156,757 71,594 LONG-TERM LIABILITIES Income taxes payable 6,466 5,491 Long-term debt and finance lease liabilities less current portion 399,062 — Operating lease liabilities less current portion 8,953 — Deferred income taxes, net 207,516 89,971 Accident and work comp accruals less current portion 35,257 34,384 Total long-term liabilities 657,254 129,846 COMMITMENTS AND CONTINGENCIES (Note 13)STOCKHOLDERS' EQUITY Preferred stock, par value $.01; authorized 5,000 shares; none issued — — Capital stock, common, $.01 par value; authorized 395,000 shares; issued 90,689 in 2022 and 2021; outstanding 78,984 and 78,923 in 2022 and 2021, respectively 907 907 Additional paid-in capital 4,165 4,141 Retained earnings 1,051,641 924,375 Treasury stock, at cost; 11,705 and 11,766 shares in 2022 and 2021, respectively (201,236) (202,321) 855,477 727,102 $ 1,669,488 $ 928,542 The accompanying notes are an integral part of these consolidated financial statements.54 HEARTLAND EXPRESS, INC.AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(in thousands, except per share amounts)Year Ended December 31, 202220212020OPERATING REVENUE$ 967,996 $ 607,284 $ 645,262 OPERATING EXPENSES Salaries, wages and benefits 346,271 250,035 269,482 Rent and purchased transportation 54,288 3,810 4,643 Fuel 194,608 99,597 86,094 Operations and maintenance 39,092 21,522 27,647 Operating taxes and licenses 16,387 13,595 14,962 Insurance and claims 34,436 20,826 22,229 Communications and utilities 6,995 4,447 5,281 Depreciation and amortization 133,047 104,083 109,937 Other operating expenses 51,420 21,400 26,398 Gain on disposal of property and equipment (96,906) (37,438) (14,830) 779,638 501,877 551,843 Operating income 188,358 105,407 93,419 Interest income 1,288 640 842 Interest expense (8,555) — — Income before income taxes 181,091 106,047 94,261 Federal and state income tax expense 47,507 26,770 23,455 Net income$ 133,584 $ 79,277 $ 70,806 Other comprehensive income, net of tax — — — Comprehensive income$ 133,584 $ 79,277 $ 70,806 Net income per shareBasic$ 1.69 $ 1.00 $ 0.87 Diluted$ 1.69 $ 1.00 $ 0.87 Weighted average shares outstandingBasic 78,941 79,573 81,388 Diluted 78,974 79,612 81,444 Dividends declared per share$ 0.08 $ 0.58 $ 0.08 The accompanying notes are an integral part of these consolidated financial statements.55 HEARTLAND EXPRESS, INC.AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY(in thousands, except per share amounts) CapitalAdditional Stock,Paid-InRetainedTreasury CommonCapitalEarningsStockTotalBalance, January 1, 2020$ 907 $ 4,141 $ 826,666 $ (147,055) $ 684,659 Net income — — 70,806 — 70,806 Dividends on common stock, $0.08 per share — — (6,502) — (6,502) Repurchases of common stock — — — (26,139) (26,139) Stock-based compensation, net of tax — 189 — 1,321 1,510 Balance, December 31, 2020 907 4,330 890,970 (171,873) 724,334 Net income — — 79,277 — 79,277 Dividends on common stock, $0.58 per share — — (45,872) — (45,872) Repurchases of common stock — — — (31,540) (31,540) Stock-based compensation, net of tax — (189) — 1,092 903 Balance, December 31, 2021 907 4,141 924,375 (202,321) 727,102 Net income — — 133,584 — 133,584 Dividends on common stock, $0.08 per share — — (6,318) — (6,318) Stock-based compensation, net of tax — 24 — 1,085 1,109 Balance, December 31, 2022$ 907 $ 4,165 $ 1,051,641 $ (201,236) $ 855,477 The accompanying notes are an integral part of these consolidated financial statements.56 HEARTLAND EXPRESS, INC.AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)Year Ended December 31,OPERATING ACTIVITIES202220212020Net income$ 133,584 $ 79,277 $ 70,806 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 133,047 104,232 110,381 Deferred income taxes 2,412 (5,869) 8,148 Stock-based compensation expense 1,399 1,150 2,092 Debt-related amortization 360 — — Gain on disposal of property and equipment (96,906) (37,438) (14,830) Changes in certain working capital items (net of acquisition):Trade receivables 20,033 2,765 1,176 Prepaid expenses and other current assets 845 3,657 (3,628) Accounts payable, accrued liabilities, and accrued expenses (1,227) (18,476) 3,062 Accrued income taxes 1,166 (5,880) 1,643 Net cash provided by operating activities 194,713 123,418 178,850 INVESTING ACTIVITIES Proceeds from sale of property and equipment 172,750 130,184 93,160 Purchases of property and equipment, net of trades (160,568) (132,640) (204,337) Acquisition of business, net of cash acquired (675,852) — — Change in other assets 411 (191) 129 Net cash used in investing activities (663,259) (2,647) (111,048) FINANCING ACTIVITIES Cash dividends paid (6,318) (45,872) (6,502) Proceeds from issuance of long-term debt 447,343 — — Shares withheld for employee taxes related to stock-based compensation (290) (247) (582) Repayments on finance leases and debt (81,478) — — Repurchases of common stock — (32,025) (25,654) Net cash provided by (used in) financing activities 359,257 (78,144) (32,738) Net increase (decrease) in cash and cash equivalents (109,289) 42,627 35,064 CASH, CASH EQUIVALENTS AND RESTRICTED CASH Beginning of period 173,767 131,140 96,076 End of period$ 64,478 $ 173,767 $ 131,140 SUPPLEMENTAL DISCLOSURES OF CASH FLOWINFORMATION Cash paid during the period for interest expense$ 6,384 $ — $ — Cash paid during the period for income taxes, net of refunds$ 44,010 $ 38,519 $ 13,664 Noncash investing and financing activities: Fair value of revenue equipment traded$ 428 $ — $ — Purchased property and equipment in accounts payable$ 11,938 $ 9,019 $ 2,172 Sold revenue equipment and property in other current assets$ 1,558 $ 1,512 $ 3,383 Treasury stock acquired in accounts payable$ — $ — $ 485 Right-of-use assets obtained in exchange for operating lease liabilities$ 3,345 $ — $ — 57 Year Ended December 31,RECONCILIATION OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH202220212020Cash and cash equivalents$ 49,462 $ 157,742 $ 113,852 Restricted cash included in other current assets$ 752 $ 928 $ 1,075 Restricted cash included in other assets$ 14,264 $ 15,097 $ 16,213 Total cash, cash equivalents and restricted cash$ 64,478 $ 173,767 $ 131,140 The accompanying notes are an integral part of these consolidated financial statements.58 HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
Nature of Business
Heartland Express, Inc. is a holding company incorporated in Nevada, which directly or indirectly owns all of the stock of the
following active legal entities: Heartland Express, Inc. of Iowa, Heartland Express Services, Inc., Heartland Express
Maintenance Services, Inc. ("Heartland Express"), and Midwest Holding Group, LLC and Millis Transfer, LLC ("Millis
Transfer"), and Smith Transport, Inc., Smith Trucking, Inc., and Franklin Logistics, Inc. ("Smith Transport"), and CFI entities,
Transportation Resources, Inc. and Contract Freighters, Inc. (collectively with certain Mexican entities, "CFI"). On May 31,
2022, Heartland Express, Inc. of Iowa acquired Smith Transport, a truckload carrier headquartered in Roaring Spring,
Pennsylvania. On August 31, 2022, Heartland Express, Inc. of Iowa acquired CFI's non-dedicated U.S. dry van and
temperature-controlled truckload business located in Joplin, Missouri, and certain Mexican entities (collectively "CFI
Logistica") operations located in Mexico. We, together with our subsidiaries, are a short, medium, and long-haul truckload
carrier and transportation services provider. We primarily provide nationwide asset-based dry van truckload service for major
shippers across the United States, along with cross-border freight and other transportation services offered through third party
partnerships in Mexico.
Principles of Consolidation
The accompanying consolidated financial statements include the parent company, Heartland Express, Inc., and its subsidiaries,
all of which are wholly owned. All material intercompany items and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles
(“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those estimates.
Segment Information
We provide truckload services across the United States (U.S.), Mexico, and parts of Canada. These truckload services are
primarily asset-based transportation services in the dry van truckload market, and we also offer truckload temperature-
controlled transportation services and Mexico logistics services, which are not significant to our operations. Our Chief
Operating Decision Maker oversees and manages all of our transportation services, on a combined basis, including previously
acquired entities. As a result of the foregoing, we have determined that we have one segment, consistent with the authoritative
accounting guidance on disclosures about segments of an enterprise and related information.
Cash and Cash Equivalents
Cash equivalents are short-term, highly liquid investments with insignificant interest rate risk and original maturities of three
months or less at acquisition. The Company has deposits that potentially subject it to concentration of credit risk consisting of
cash equivalents. Accounts at each institution are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to
$250,000. At December 31, 2022, the Company had $13.9 million in excess of the FDIC insured limit. At December 31, 2022
and 2021, restricted and designated cash and investments totaled $15.1 million and $16.0 million, respectively. At
December 31, 2022, $0.8 million was included in other current assets and $14.3 million was included in other non-current
assets in the consolidated balance sheets. At December 31, 2021, $0.9 million was included in other current assets and $15.1
million was included in other non-current assets in the consolidated balance sheets. The restricted and designated funds
represent deposits required by state agencies for self-insurance purposes and funds that are earmarked for a specific purpose and
not for general business use.
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Investments
Municipal bonds of $0.8 million and $1.5 million at December 31, 2022 and 2021, respectively, are stated at amortized cost, are
classified as held-to-maturity and are included in restricted cash in other assets presented as non-current. Investment income
received on held-to-maturity municipal bond investments is generally exempt from federal income taxes and is recognized as
earned.
Trade Receivables
The Company recognizes revenue 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 delivery of the shipment and
completion of the performance obligation allows for the collection of payment based on the credit terms for customer accounts
which are predominantly on a net 30 day basis. We use our write off history and our knowledge of uncollectible accounts in
estimating the allowance for bad debts. We review the adequacy of our allowance for doubtful accounts on a monthly basis. We
are aggressive in our collection efforts resulting in a low number of write-offs annually. Conditions that would lead an account
to be considered uncollectible include customers filing bankruptcy and the exhaustion of all practical collection efforts. We will
use the necessary legal recourse to recover as much of the receivable as is practical under the law. Allowance for doubtful
accounts was $3.3 million and $1.1 million at December 31, 2022 and 2021, respectively.
Prepaid Tires, Property, Equipment, and Depreciation
Property and equipment are reported at cost, net of accumulated depreciation. Maintenance and repairs are charged to
operations as incurred. Tires are capitalized separately from revenue equipment and are reported separately as “Prepaid tires” in
the consolidated balance sheets and amortized over two years. Depreciation for financial statement purposes is computed by the
straight-line method for all assets other than new tractors. We recognize depreciation expense on new tractors (excluded tractors
acquired through acquisition) at 125% declining balance method. New tractors are depreciated to salvage values of $15,000,
while new trailers are depreciated to salvage values of $4,000. Revenue equipment acquired through acquisitions is generally
revalued to current market values as of the acquisition date. Assets obtained more than a year prior to the acquisition by the
acquired company are depreciated on a straight-line basis aligned with the remaining period of expected use, whereas those
obtained less than a year prior are depreciated consistent with newly purchased assets. As acquired equipment is replaced, our
fleet returns to our base methods of declining balance depreciation for tractors and straight-line depreciation for trailers.
Lives of the assets are as follows:
Land improvements and buildings
Furniture and fixtures
Shop and service equipment
Revenue equipment
Impairment of Long-Lived Assets
Years
5-30
3-5
3-10
5-7
We periodically evaluate property and equipment and amortizable intangible assets for impairment upon the occurrence of
events or changes in circumstances that indicate the carrying amount of assets may not be recoverable. Recoverability of assets
to be held and used is evaluated by a comparison of the carrying amount of an asset group to future net undiscounted cash flows
expected to be generated by the group. If such assets are considered to be impaired, the impairment to be recognized is
measured by the amount over which the carrying amount of the assets exceeds the fair value of the assets. There were no
impairment charges recognized during the years ended December 31, 2022, 2021, and 2020.
Fair Value of Financial Instruments
The fair values of cash and cash equivalents, trade receivables, held-to-maturity investments and accounts payable, which are
recorded at cost, approximate fair value based on the short-term nature and high credit quality of these financial instruments.
60
Advertising Costs
We expense all advertising costs as incurred. Advertising costs are included in other operating expenses in the consolidated
statements of comprehensive income. Advertising expense was $4.8 million, $2.2 million, and $1.8 million for the years ended
December 31, 2022, 2021, and 2020, respectively.
Goodwill
Goodwill is not subject to amortization and is tested for impairment annually and whenever events or changes in circumstances
indicate that impairment may have occurred. The Company performs its annual impairment test as of September 30. The
Company first assesses qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than
50%) that the fair value of each reporting unit is less than its carrying amount, including goodwill. If, after assessing qualitative
factors, the Company determines that it is more likely than not that the fair value of each reporting unit is less than its carrying
amount, then the Company performs a full fair value assessment of identifiable net assets to identify potential goodwill
impairment and measure the amount of goodwill impairment loss to be recognized, if any. As of September 30, 2022, the
Company’s assessment of qualitative factors informed its conclusion that a goodwill impairment did not occur. The significant
qualitative factors considered include an increase in the Company’s earnings and continued strong cash flow. Our reporting
units had fair value in excess of their carrying value. Management determined that no impairment charge was required for the
years ended December 31, 2022, 2021, and 2020.
Other Intangibles, Net
Other intangibles, net consists of a tradename, covenants not to compete, and customer relationships. All intangible assets
determined to have finite lives are amortized over their estimated useful lives. The useful life of an intangible asset is the period
over which the asset is expected to contribute directly or indirectly to future cash flows. We periodically evaluate both finite
and indefinite lived intangible assets for impairment upon occurrence of events or changes in circumstances that indicate the
carrying amount of intangible assets may not be recoverable. Management determined that no intangible impairment charge
was required for the years ended December 31, 2022, 2021, and 2020. See Note 5 for additional information regarding
intangible assets.
Insurance Accruals
We are self-insured for auto liability, cargo loss and damage, bodily injury and property damage ("BI/PD"), and workers’
compensation. Insurance accruals reflect the estimated cost of claims, including estimated loss and loss adjustment expenses
incurred but not reported, and not covered by insurance. Accident and workers’ compensation accruals are based upon
individual case estimates, including reserve development, and estimates of incurred-but-not-reported losses based upon our own
historical experience and industry claim trends. Insurance accruals are not discounted. In addition to internally developed
reserves and estimates, we utilize an actuarial specialist to provide an independent annual assessment and quarterly monitoring
reports of the internally developed accident and workers' compensation accruals. The cost of cargo and BI/PD insurance and
claims are included in insurance and claims expense, while the costs of workers’ compensation insurance and claims are
included in salaries, wages, and benefits in the consolidated statements of comprehensive income. Insurance accruals are
presented as either current or non-current in the consolidated balance sheets based on our expectation of when payment will
occur.
Health insurance accruals reflect the estimated cost of health related claims, including estimated expenses incurred but not
reported. The cost of health insurance and claims are included in salaries, wages and benefits in the consolidated statements of
comprehensive income. Health insurance accruals of $10.0 million and $3.2 million are included in other accruals in the
consolidated balance sheets as of December 31, 2022 and 2021, respectively.
Revenue and Expense Recognition
The Company recognizes revenue 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 delivery of the shipment and
completion of the performance obligation allows for the collection of payment predominantly within 30 days after the delivery
date of the shipment for the majority of our customers.
The Company's operations are consistent with those in the trucking industry where freight is hauled twenty-four hours a day
and seven days a week, subject to hours of service rules. The Company’s average length of haul is approximately 500 miles per
trip and each individual shipment accepted by the Company is considered a separate contract with the performance obligation
61
being the delivery of the freight. Our average length of haul for each load of freight generally equals less than two days of continuous transit time. The Company estimates revenue for multiple-stop loads based on miles run and estimates revenue for single stop loads based on transit time, as the customer simultaneously receives and consumes the benefit provided. The Company hauls freight and earns revenue on a consistent basis throughout the periods presented. A corresponding contract asset existed for the estimated revenue of these in-process loads for $2.6 million and $1.3 million as of December 31, 2022 and 2021, respectively. Recorded contract assets are included in the accounts receivable line item of the balance sheet. Corresponding liabilities are recorded in the accounts payable and accrued liabilities and compensation and benefits line items for the estimated expenses on these same in-process loads. The Company had no contract liabilities associated with our operations as of December 31, 2022 and 2021.Stock-Based CompensationWe have stock-based compensation plans that provide for the grants of restricted stock awards to our employees, directors and consultants. We account for restricted stock awards using the fair value method of accounting for stock-based compensation. Issuances of stock upon vesting of restricted stock are made from treasury stock. Compensation expense for restricted stock grants is recognized over the requisite service period of each award and is included in salaries, wages and benefits in the consolidated statements of comprehensive income. Total compensation of $15.8 million related to all awards granted under the 2011 and 2021 Restricted Stock Award Plans has been amortized over the requisite service period for each separate vesting period as if the award is, in substance, multiple awards between 2011 and 2025.Earnings per ShareBasic earnings per share are based upon the weighted average common shares outstanding during each year. Diluted earnings per share is based on the basic weighted earnings per share with additional weighted common shares for common stock equivalents. During the years ended December 31, 2022, 2021, and 2020, we granted restricted shares of common stock to certain employees and Directors, under the Company's restricted stock award plans. A reconciliation of the numerator (net income) and denominator (weighted average number of shares outstanding) of the basic and diluted earnings per share (“EPS”) for 2022, 2021, and 2020 is as follows (in thousands, except per share data):2022Net Income (numerator)Shares (denominator)Per Share AmountBasic EPS$ 133,584 78,941 $ 1.69 Effect of restricted stock — 33 Diluted EPS$ 133,584 78,974 $ 1.69 2021Net Income (numerator)Shares (denominator)Per Share AmountBasic EPS$ 79,277 79,573 $ 1.00 Effect of restricted stock — 39 Diluted EPS$ 79,277 79,612 $ 1.00 2020Net Income (numerator)Shares (denominator)Per Share AmountBasic EPS$ 70,806 81,388 $ 0.87 Effect of restricted stock — 56 Diluted EPS$ 70,806 81,444 $ 0.87 Income TaxesWe use the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statements carrying amount of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or 62 settled. Such amounts are adjusted, as appropriate, to reflect changes in tax rates expected to be in effect when the temporary
differences reverse. The effect of a change in tax rates on deferred taxes is recognized in the period that the change is
enacted. We have not recorded a valuation allowance against any deferred tax assets at December 31, 2022 and 2021. In
management’s opinion, it is more likely than not that we will be able to utilize these deferred tax assets in future periods as a
result of our history of profitability, taxable income, and reversal of deferred tax liabilities.
Pursuant to the authoritative accounting guidance on income taxes, when establishing a valuation allowance, we consider future
sources of taxable income such as “future reversals of existing taxable temporary differences and carry-forwards” and “tax
planning strategies”. In the event we determine that the deferred tax assets will not be realized in the future, the valuation
adjustment to the deferred tax assets is charged to earnings or accumulated other comprehensive loss based on the nature of the
asset giving rise to the deferred tax asset and the facts and circumstances resulting in that conclusion.
We calculate our current and deferred tax provision based on estimates and assumptions that could differ from the actual results
reflected in income tax returns filed in subsequent years. Adjustments based on filed returns are recorded when identified.
We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized
income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in
recognition or measurement are reflected in the period in which the change in judgment occurs. We record interest and penalties
related to unrecognized tax benefits in income tax expense.
New Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-13, "Financial Instruments - Credit
Losses (Topic 326): Measurement of Credit Losses on Financial Instruments". This update requires measurement and
recognition of expected versus incurred credit losses for financial assets held. ASU 2016-13 is effective for annual periods
beginning after December 15, 2019, and interim periods therein. We have adopted this standard effective January 1, 2020 and
the impact of adoption of the standard did not have a material impact on our financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): “Simplifying the Accounting for Income
Taxes.” The ASU simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic
740. The ASU also clarifies and amends existing guidance to improve consistent application among reporting entities. This
ASU is effective for fiscal years beginning after December 15, 2020, including interim periods within that reporting period;
however, early adoption is permitted. We have adopted this standard effective January 1, 2021 and the impact of adoption of
the standard did not have a material impact on our financial statements.
Note 2. Concentrations of Credit Risk and Major Customers
Our major customers represent primarily the consumer goods, appliances, food products and automotive industries. Credit is
granted to customers on an unsecured basis. Our five largest customers accounted for approximately 27%, 36%, and 34% of
operating revenues for the years ended December 31, 2022, 2021, and 2020, respectively. Our five largest customers accounted
for approximately 23% and 33% of gross accounts receivable as of December 31, 2022 and 2021, respectively.
There were no customers that exceeded 10% of operating revenues for the years ended December 31, 2022 and December 31,
2020, respectively. During the year ended December 31, 2021 there was one single customer that accounted for 10% of
operating revenues. This customer had accounts receivable of $6.1 million as of December 31, 2021.
Note 3. Revenue Recognition
The Company recognizes revenue 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 delivery of the shipment and
completion of the performance obligation allows for the collection of payment predominantly within 30 days after the delivery
date of the shipment for the majority of our customers.
The Company's operations are consistent with those in the trucking industry where freight is hauled twenty-four hours a day
and seven days a week, subject to hours of service rules. The Company’s average length of haul is approximately 500 miles per
trip and each individual shipment accepted by the Company is considered a separate contract with the performance obligation
being the delivery of the freight. Our average length of haul for each load of freight generally equals less than one day of
continuous transit time. The Company estimates revenue for multiple-stop loads based on miles run and estimates revenue for
single stop loads based on transit time, as the customer simultaneously receives and consumes the benefit provided. The
63
Company hauls freight and earns revenue on a consistent basis throughout the periods presented. A corresponding contract asset existed for the estimated revenue of these in-process loads for $2.6 million and $1.3 million as of December 31, 2022 and 2021, respectively. Recorded contract assets are included in the accounts receivable line item of the balance sheet. Corresponding liabilities are recorded in the accounts payable and accrued liabilities and compensation and benefits line items for the estimated expenses on these same in-process loads. The Company had no contract liabilities associated with our operations as of December 31, 2022 and 2021.Total revenues recorded were $968.0 million, $607.3 million, and $645.3 million for the twelve months ended December 31, 2022, 2021, and 2020, respectively. Fuel surcharge revenues were $169.2 million, $76.1 million, and $61.7 million for the twelve months ended December 31, 2022, 2021, and 2020, respectively. As a result of the CFI acquisition we now outsource the transportation of certain loads to third-party carriers. The company is a principal in these arrangements resulting in revenue associated with these contracts being recorded on a gross basis. The primary responsibility to meet the customer's requirements is maintained by the Company as the party performing billing, collection and pricing negotiations with the customer. The company is also responsible for selecting third-party transportation providers that satisfy our premium customer service requirements. Accessorial, brokerage and other revenues recorded in the consolidated statements of comprehensive income collectively represented $50.7 million, $11.4 million, and $14.3 million for the twelve months ended December 31, 2022, 2021, and 2020, respectively.Note 4. AcquisitionsOn May 31, 2022, Heartland Express, Inc. of Iowa (the “Buyer”) and Heartland Express, Inc., as guarantor, entered into a Stock Purchase Agreement with Smith Transport. Smith Transport is a truckload carrier headquartered in Roaring Spring, Pennsylvania, providing asset-based dry van truckload transportation services, including local, regional, and dedicated services. Pursuant to the Smith Stock Purchase Agreement, the Buyer acquired all of Smith Transport’s outstanding equity (the “Smith Transaction”) under an Internal Revenue Code Section 338(h)(10) election. The Buyer's purchase price of $169.4 million includes total cash consideration and assumed indebtedness of Smith Transport subject to purchase accounting adjustments including final valuation of intangibles.Gross cash paid in the Smith Transaction was $140.6 million. Net cash paid was $122.0 million after consideration of $18.6 million of Smith Transport cash on the date of acquisition. Gross cash paid was funded out of the Company’s available cash. The Smith Transaction included the assumption of $46.8 million of Smith Transport's indebtedness, including finance leases, of which $40.3 million of the debt was outstanding at December 31, 2022. The Smith Stock Purchase Agreement contains customary representations, warranties, covenants, escrow, and indemnification provisions.The results of the Smith Transport acquired business have been included in the consolidated financial statements since the date of acquisition and represented 12.3% of consolidated total assets as of December 31, 2022, and represented 13.3% of operating revenue for the twelve months ended December 31, 2022.The following unaudited pro forma consolidated results of operations for the years ended December 31, 2021 and 2022 assume that the acquisition of Smith Transport occurred as of January 1, 2021.Year endedYear endedDecember 31, 2021December 31, 2022(in thousands)Operating revenue$810,459$1,060,718Net income$96,466$140,647These pro forma amounts do not purport to be indicative of the results that would have actually been obtained if the acquisition had occurred at the beginning of the periods presented or that may be obtained in the future.The allocation of the Smith Transport purchase price is detailed in the table below. The final purchase price allocation remains subject to other purchase accounting adjustments which may be identified, such as the final valuation of intangible assets, and therefore may differ materially from that reflected below. The goodwill recognized represents expected synergies from combining the operations of the Company with Smith Transport, as well as other intangible assets that did not meet the criteria for separate recognition. Goodwill and intangible assets recognized in the transaction are deductible for tax purposes. During 64 the three months ended December 31, 2022, the Smith Transport goodwill asset decreased by $1.8 million as a result of further valuation analysis of the intangible assets.The assets and liabilities associated with Smith Transport were recorded at their fair values as of the acquisition date and the amounts are as follows: (in thousands)Trade and other accounts receivable $ 32,300 Other current assets 6,238 Property and equipment 68,196 Operating lease right of use assets 26,661 Other non-current assets 4,079 Intangible assets 29,902 Goodwill 40,297 Total assets 207,673 Accounts payable and accrued expenses (7,917) Insurance accruals (4,263) Long-term debt (11,424) Finance lease liabilities (35,359) Operating lease liabilities (26,661) Net cash paid$ 122,049 On August 31, 2022, Buyer and Heartland Express, Inc., as guarantor, entered into a Stock Purchase Agreement to acquire Contract Freighters (CFI), and related entities, from a subsidiary of TFI International, Inc. (TFI). CFI is a truckload carrier headquartered in Joplin, Missouri, providing asset-based dry van and temperature-controlled truckload transportation services, and asset-light logistics services in Mexico.Pursuant to the CFI Stock Purchase Agreement, the Buyer acquired outstanding equity of CFI and related entities (the “CFI Transaction”). The Buyer's purchase price of $560.6 million includes total cash consideration and bank financing obtained for the purchase of CFI and to facilitate negotiated terms of the CFI Stock Purchase Agreement. These terms included the funding to eliminate risk associated with pre-acquisition accident and workers compensation claims, cash on hand at closing, and net working capital, subject to purchase accounting adjustments including final valuation of intangibles. The adjusted purchase price consideration was $558.6 million as a result of net adjustments for cash on hand, net working capital and valuation of pre-acquisition accident and workers compensation claims of $2.0 million.Gross cash paid in transaction was $560.6 million. Net cash paid was $553.8 million after consideration of $6.8 million of CFI cash on the date of acquisition. Gross cash paid was funded out of the Company’s available cash and bank financing obtained to facilitate the transaction. The CFI Stock Purchase Agreement contains customary representations, warranties, covenants, escrow, and indemnification provisions.The results of the CFI acquired business have been included in the consolidated financial statements since the date of acquisition and represented 43.0% of consolidated total assets as of December 31, 2022, and represented 21.6% of operating revenue for the twelve months ended December 31, 2022.65 The following unaudited pro forma consolidated results of operations for the year ended December 31, 2021 and 2022 assume that the acquisition of CFI occurred as of January 1, 2021.Year endedYear endedDecember 31, 2021December 31, 2022(in thousands)(in thousands)Operating Revenue$1,152,412$1,394,552Net Income$83,219$174,684These pro forma amounts do not purport to be indicative of the results that would have actually been obtained if the acquisition had occurred at the beginning of the periods presented or that may be obtained in the future.The allocation of the purchase price is detailed in the table below. The final purchase price allocation remains subject to other purchase accounting adjustments which may be identified, such as the final valuation of intangible assets, working capital adjustments, and income taxes, and therefore may differ materially from that reflected below. The goodwill recognized represents expected synergies from combining the operations of the Company with CFI, as well as other intangible assets that did not meet the criteria for separate recognition. Goodwill and intangible assets recognized in the transaction are deductible for tax purposes. During the three months ended December 31, 2022, the CFI goodwill asset increased by $5.7 million as a result of further valuation analysis, primarily associated with adjusted insurance reserves and deferred taxes net of the purchase price consideration adjustment for cash on hand, net working capital and valuation of pre-acquisition accident and workers compensation claims. The assets and liabilities associated with CFI were recorded at their fair values as of the acquisition date and the amounts are as follows: (in thousands)Trade and other accounts receivable $ 74,740 Other current assets 13,054 Property and equipment 461,147 Other non-current assets 306 Deferred income taxes 2,018 Intangible assets 55,097 Goodwill 112,083 Total assets 718,445 Accounts payable and accrued expenses (47,819) Insurance accruals (1,621) Income taxes payable (765) Deferred income taxes (116,506) Purchase consideration net of cash on hand 551,734 Purchase adjustment receivable from seller 2,069 Net cash paid$ 553,803 Acquisition related expenses of $2.3 million related to both the Smith Transport and CFI acquisitions are included in the consolidated statement of comprehensive income for the twelve months ended December 31, 2022. Note 5. Intangible Assets and GoodwillAs a result of the acquisitions of Smith Transport and CFI there was a $85.0 million increase in the gross intangible assets made up of $53.4 million finite lived intangible assets and $31.6 million of indefinite lived intangible assets during the twelve months ended December 31, 2022. The increase in gross indefinite lived intangible assets is associated with the Smith Transport and CFI trade names, while the intangible assets for customer relationships and covenants not to compete have finite lives. The majority of change in gross finite lived intangible assets is the $52.8 million of customer relationship intangible assets, including $21.2 million from Smith Transport and $31.6 million from CFI.66 Amortization expense of $3.7 million, $2.4 million and $2.4 million for the twelve months ended December 31, 2022, 2021 and 2020, respectively, was included in depreciation and amortization in the consolidated statements of comprehensive income. Intangible assets subject to amortization consisted of the following at December 31, 2022 and 2021:2022Amortization period (years)Gross AmountAccumulated AmortizationNet finite intangible assets(in thousands)Customer relationships15-20$ 75,836 $ 8,441 $ 67,395 Tradename0.5-10 12,900 9,700 3,200 Covenants not to compete1-10 5,839 4,357 1,482 $ 94,575 $ 22,498 $ 72,077 2021Amortization period (years)Gross AmountAccumulated AmortizationNet finite intangible assets(in thousands)Customer relationships15-20$ 23,000 $ 5,842 $ 17,158 Tradename0.5-10 12,900 9,220 3,680 Covenants not to compete1-10 5,300 3,783 1,517 $ 41,200 $ 18,845 $ 22,355 Change in carrying amount of goodwill:Goodwill(in thousands)Balance at December 31, 2021$ 168,295 Acquisition May 31, 2022 40,297 Acquisition August 31, 2022 112,083 Balance at December 31, 2022$ 320,675 Future amortization expense for intangible assets is estimated at $5.8 million for 2023, $5.5 million for 2024, $5.5 million for 2025, $5.5 million for 2026, and $5.5 million for 2027.Note 6. Long-Term DebtIn conjunction with the acquisition of CFI on August 31, 2022, (the “CFI Closing Date”), Heartland entered into a $550.0 million unsecured credit facility which included a $100.0 million revolving line of credit (“Revolving Facility”) and $450.0 million in term loans (“Term Facility” and, together with the Revolving Facility, the “Credit Facilities”). The Credit Facilities includes a consortium of lenders, including joint bookrunners JPMorgan Chase Bank, N.A. and Wells Fargo Bank, National Association (“Wells Fargo”). The Credit Facilities replaced the previous credit arrangements in place for the Company which consisted of a November 2013 Credit Agreement with Wells Fargo, along with an asset-based credit facility with Citizens Bank of Pennsylvania that was assumed as part of the acquisition of Smith Transport on May 31, 2022.The full amount of the Term Facility was made in a single draw on August 31, 2022 and amounts borrowed under the Term Facility that are repaid or prepaid may not be reborrowed. The Term Facility will amortize in quarterly installments beginning in September 2023, at 5% per annum through June 2025 and 10% per annum from September 2025 through June 2027, with the balance due on the date that is five years from the CFI Closing Date.67 The Revolving Facility consists of a five-year revolving credit facility with aggregate commitments in an amount equal to
$100.0 million, of which up to $50.0 million is available for the issuance of letters of credit, and including a swingline facility
in an amount equal to $20.0 million. The Revolver will mature and the commitments thereunder will terminate on the date that
is five years after the CFI Closing Date. Amounts repaid under the Revolving Facility may be reborrowed. The Credit Facilities
include an uncommitted accordion feature pursuant to which the Company may request up to $275.0 million in incremental
revolving or term loans, subject to lender approvals.
The indebtedness, obligations, and liabilities under the Credit Facilities are unconditionally guaranteed, jointly and severally, on
an unsecured basis by the Company, Borrower, and certain other subsidiaries of the Company. The Borrower may voluntarily
prepay outstanding loans under the Credit Facilities in whole or in part at any time without premium or penalty, subject to
payment of customary breakage costs in the case of SOFR rate loans.
The Credit Facilities contain usual and customary events of default and negative covenants for a facility of this nature
including, among other things, restrictions on the Company’s ability to incur certain additional indebtedness or issue
guarantees, to create liens on the Company’s assets, to make distributions on or redeem equity interests (subject to certain
exceptions, including that (a) the Company may pay regularly scheduled dividends on the Company’s common stock not to
exceed $10.0 million during any fiscal year and (b) the Company may make any other distributions so long as it maintains a net
leverage ratio not greater than 2.50 to 1.00), to make investments and to engage in mergers, consolidations, or acquisitions. The
Credit Facilities contain customary financial covenants, including (i) a maximum net leverage ratio of 2.75 to 1.00, measured
quarterly on a trailing twelve-month basis, and (ii) a minimum interest coverage ratio of 3.00 to 1.00, measured quarterly on a
trailing twelve-month basis.
Outstanding borrowings under the Credit Facilities will accrue interest, at the option of the Borrower, at a per annum rate of (i)
for an “ABR Loan”, the alternate base rate (defined as the interest rate per annum equal to the highest of (a) the variable rate of
interest announced by the administrative agent as its “prime rate”, (b) 0.50% above the Federal Funds Rate, (c) the Term SOFR
for an interest period of one-month plus 1.1%, or (d) 1.00%) plus the applicable margin or (ii) for a “SOFR Loan”, the Term
SOFR Rate for an interest period of one, three or six-months as selected by Company plus the applicable margin. The
applicable margin for ABR Loans ranges from 0.250% to 0.875% and the applicable margin for SOFR Loans ranges from
1.250% to 1.875%, depending on the Company’s net leverage ratio.
One of the nine consortium lenders is West Bank. Our CEO has served on the Board of Directors of West Bancorporation and
West Bank, a wholly owned subsidiary of West Bancorporation, Inc., the financial institution that holds a portion of our
deposits, since 2013. We have had a banking relationship with West Bank since 2003. West Bank's share of the Revolving
Facility is $8.2 million while the West Bank share of the initial Term Facility was $36.8 million.
We had $375.0 million outstanding on the Term Facility and no outstanding under the Revolving Facility at December 31,
2022. Outstanding letters of credit associated with the Revolving Facility at December 31, 2022 were $13.9 million. As of
December 31, 2022, the Revolving Facility available for future borrowing was $86.1 million. As of December 31, 2022 the
weighted average interest rate on outstanding borrowings under the Credit Facilities was 5.6%.
The May 31, 2022 acquisition of Smith Transport included the assumption of $46.8 million of debt and financing lease
obligations associated with the fleet of revenue equipment of which $40.3 million was outstanding at December 31, 2022, (the
"Smith Debt"). The Smith Debt has $9.7 million of outstanding principal and is made up of installment notes with a weighted
average interest rate of 4.4% at December 31, 2022, due in monthly installments with final maturities at various dates ranging
from November 2023 to January 2029, secured by related revenue equipment. The remaining Smith Debt of $30.6 million are
finance lease obligations with a weighted average interest rate of 3.9% at December 31, 2022, due in monthly installments with
final maturities at various dates ranging from July 2023 to April 2026 with the weighted average remaining lease term of 2.3
years.
68
The annual maturities of long term debt are as follows:(in thousands)2023$ 2,009 2024$ 10,550 2025$ 35,585 2026$ 46,919 2027$ 289,095 Thereafter$ 580 Total outstanding principle$ 384,738 Less: unamortized debt issuance costs$ (2,297) Less: amounts payable within one year$ (2,009) Total long-term debt$ 380,432 Note 7. Lease ObligationsIn May 2022, the Company completed a sale of an owned terminal property for a $73.2 million gain. In a separate transaction related to the sale, we entered into a lease agreement with a base term of two years plus a five-year renewal option with the purchaser. The right-of-use asset associated with the leased terminal facility is $3.3 million as of December 31, 2022.Smith Transport has revenue equipment operating lease right-of-use assets from leases entered into before the May 31, 2022 acquisition. These right-of-use operating lease assets have a total balance of $17.6 million as of December 31, 2022. The operating leases have a weighted average interest rate of 3.8% at December 31, 2022, due in monthly installments with final maturities at various dates ranging from February 2023 to March 2026 with the weighted average remaining lease term of 1.7 years. Smith Transport also has related party operating leases with the founder of Smith Transport, where Smith Transport is both a lessor and lessee of certain real estate properties. These leases represent an insignificant portion of the right-of-use lease assets discussed above. See Note 6. Long-Term Debt for additional details on the finance leases.Operating lease cost is recorded in rent and purchased transportation, finance lease interest expense is recorded in interest expense, and finance lease equipment depreciation is recorded in depreciation and amortization within the consolidated statements of comprehensive income. The components of the Company's lease cost were as follows:202220212020(in thousands)Operating lease cost$ 9,718 $ — $ — Finance lease interest expense 772 — — Finance lease equipment depreciation 4,733 — — Total finance lease cost$ 5,505 $ — $ — Total operating and finance lease cost$ 15,223 $ — $ — 69 Our future minimum lease payments as of December 31, 2022, are summarized as follows by lease category:(in thousands)OperatingFinance2023 12,498 12,961 2024 6,193 8,231 2025 3,008 7,511 2026 151 3,901 2027 — — Thereafter — — Total minimum lease payments$ 21,850 $ 32,604 Less: future payment amount for interest 896 2,037 Present value of minimum lease payments$ 20,954 $ 30,567 Less: current portion 12,001 11,937 Lease obligations, long-term$ 8,953 $ 18,630 Note 8. Auto Liability and Workers’ Compensation Insurance AccrualsWe act as a self-insurer for auto liability, defined as including property damage, personal injury, or cargo based on defined insurance retention of $0.1 million under our Millis policy prior to April 1, 2020 and $1.0 million from April 1, 2020 through April 1, 2022. Effective April 1, 2022 Millis is covered under the Heartland policy with retention of $2.0 million for any individual claim based on the insured party, accident date, and circumstances of the loss event. Within the Heartland policy, there is an additional $1.0 million aggregate self-insurance corridor for claims between $2.0 million and $3.0 million. For both Heartland and Millis claims, liabilities in excess of these deductibles are covered by insurance up to $60.0 million including retention of 50% of exposure from $5.0 million to $10.0 million. We retain any liability in excess of $60.0 million. We act as a self-insurer for property damage to our tractors and trailers. Prior to April 1, 2020, Heartland and Millis claims in excess of insurance retention had different coverage features. For the Heartland policy, claims in excess of the deductible are covered up to $60.0 million. For the Millis policy, claims subsequent to August 26, 2019 and prior to April 1, 2020, we retain liability between $3.0 million and $10.0 million, while liabilities in excess of these amounts are covered by insurance up to $60.0 million. For both policies prior to April 1, 2020, we retain any liability in excess of $60.0 million.The entities acquired during 2022 include features which limit pre-acquisition exposure for the Company. Prior to the acquisition and through June 30, 2022 Smith Transport was a member of a group captive insurance program with retention of $0.1 million. Coverage was moved from the group captive to our Smith policy with a $0.5 million retention. The Smith policy is covered by the Heartland policy excess insurance for liabilities in excesses of the Smith Policy deductible. The pre-acquisition claims from the CFI acquisition are retained by the seller while post acquisition claims are covered with the Heartland policy.We act as a self-insurer for workers’ compensation based on defined insurance retention of $1.0 million under our Heartland policy, which includes Millis, effective July 1, 2020 and entities acquired in 2022. Millis had defined insurance retention of $0.5 million from August 26, 2019 through July 1, 2020. Liabilities in excess of insurance retention limits are covered by insurance. The State of Iowa initially required us to deposit $0.7 million into a trust fund as part of the self-insurance program. As of December 31, 2022 and 2021 total deposits in this account were $0.8 million and $1.5 million, respectively. This deposit is in municipal bonds classified as held-to-maturity and is recorded in other non-current assets on the consolidated balance sheets.In addition, we have provided insurance carriers with letters of credit totaling $15.4 million in connection with our liability and workers’ compensation insurance arrangements and self-insurance requirements of the Federal Motor Carrier Safety Administration. There were no outstanding balances due on any letters of credit at December 31, 2022 or 2021.Accident and workers’ compensation accruals include the estimated settlements, settlement expenses and an estimate for claims incurred but not yet reported for property damage, personal injury and public liability losses from vehicle accidents and cargo losses as well as workers’ compensation claims for amounts not covered by insurance. Accident and workers’ compensation 70 accruals are based upon individual case estimates, including reserve development, and estimates of incurred-but-not-reported losses based upon our own historical experience and industry claim trends. Since the reported liability is an estimate, the ultimate liability may be more or less than reported. In addition to internally developed reserves and estimates, we utilize an actuarial specialist to provide an independent annual assessment of the internally developed accident and workers' compensation accruals. If adjustments to previously established accruals are required, such amounts are included in operating expenses in the current period. These accruals are recorded on an undiscounted basis. Estimated claim payments to be made within one year of the balance sheet date have been classified as insurance accruals within current liabilities as of December 31, 2022 and 2021.Note 9. Income TaxesDeferred tax assets and liabilities as of December 31 are as follows: 20222021Deferred income tax assets:(in thousands)Allowance for doubtful accounts$ 772 $ 261 Accrued expenses 6,383 5,452 Stock-based compensation 36 36 Insurance accruals 13,278 11,455 State net operating loss carryforward — 46 Indirect tax benefits of unrecognized tax benefits 1,206 981 Other 45 227 Total gross deferred tax assets 21,720 18,458 Less valuation allowance — — Net deferred tax assets 21,720 18,458 Deferred income tax liabilities: Property and equipment (188,999) (87,004) Goodwill and amortizable intangibles (34,396) (20,538) Prepaid expenses (4,617) (887) (228,012) (108,429) Net deferred tax liability$ (206,292) $ (89,971) The deferred tax amounts above have been classified in the accompanying consolidated balance sheets at December 31, 2022 and 2021 as follows: 20222021 (in thousands)Noncurrent assets, net$ 1,224 $ — Long-term liabilities, net (207,516) (89,971) $ (206,292) $ (89,971) We have not recorded a valuation allowance against any deferred tax assets at December 31, 2022 and 2021. In management’s opinion, it is more likely than not that we will be able to utilize these deferred tax assets in future periods as a result of our history of profitability, taxable income, and reversal of deferred tax liabilities.71 Income tax expense consists of the following: 202220212020 (in thousands)Current income taxes: Federal$ 31,951 $ 25,571 $ 10,835 State 9,657 7,068 4,472 Foreign 195 — — 41,803 32,639 15,307 Deferred income taxes: Federal 3,717 (4,392) 736 State 2,005 (1,477) 7,412 Foreign (18) — — 5,704 (5,869) 8,148 Total$ 47,507 $ 26,770 $ 23,455 The income tax provision differs from the amount determined by applying the U.S. federal tax rate as follows: 202220212020 (in thousands)Federal tax at statutory rate (21%)$ 38,029 $ 22,270 $ 19,795 State taxes, net of federal benefit 9,711 4,452 5,678 Permanent differences to return 449 (227) 446 Return to provision adjustment (203) 302 (2,615) Uncertain income tax penalties and interest, net (226) (266) (73) Foreign Rate Differential 58 — — Other (311) 239 224 $ 47,507 $ 26,770 $ 23,455 At December 31, 2022 and December 31, 2021, we had a total of $5.7 million and $4.7 million in gross unrecognized tax benefits, respectively, included in long-term income taxes payable in the consolidated balance sheets. Of this amount, $4.5 million and $3.7 million represents the amount of unrecognized tax benefits that, if recognized, would impact our effective tax rate as of December 31, 2022 and December 31, 2021, respectively. Unrecognized tax benefits were a net increase of $1.1 million and a net decrease of $0.2 million during the years ended December 31, 2022 and 2021, respectively. The increase in 2022 is the result of non-recurring transactions occurring in 2022 that did not occur in 2021 more than offsetting the reduction to the liability due to the expiration of certain statutes of limitation and reductions to prior year tax positions, net of current year additions with respective states. This had the effect of increasing the effective rate in 2022 and decreasing the effective rate in 2021. The total net amount of accrued interest and penalties for such unrecognized tax benefits was $0.7 million and $0.8 million at December 31, 2022 and December 31, 2021, respectively, and is included in income taxes payable in the consolidated balance sheets. Net interest and penalties included in income tax expense for the years ended December 31, 2022, 2021 and 2020 was an expense of approximately $0.1 million, zero, and a benefit of approximately $0.1 million, respectively. Income tax expense is increased each period for the accrual of interest on outstanding positions and penalties when the uncertain tax position is initially recorded. Income tax expense is reduced in periods by the amount of accrued interest and penalties associated with reversed uncertain tax positions due to lapse of applicable statute of limitations, when applicable or when a position is settled. Income tax expense was reduced during the years ended December 31, 2022, 2021 and 2020 due to reversals of interest and penalties due to lapse of applicable statute of limitations and settlements, net of additions for interest and penalty accruals during the same period. These unrecognized tax benefits relate to risks associated with state income tax filing positions for our corporate subsidiaries.72 A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:20222021 (in thousands)Balance at January 1, $ 4,671 $ 4,937 Additions based on tax positions related to current year 1,921 446 Additions for tax positions of prior years 131 — Reductions for tax positions of prior years — (179) Reductions due to lapse of applicable statute of limitations (771) (533) Settlements (208) — Balance at December 31,$ 5,744 $ 4,671 A number of years may elapse before an uncertain tax position is audited and ultimately settled. It is difficult to predict the ultimate outcome or the timing of resolution for uncertain tax positions. It is reasonably possible that the amount of unrecognized tax benefits could significantly increase or decrease within the next twelve months. These changes could result from the expiration of the statute of limitations, examinations or other unforeseen circumstances. We do not have any outstanding litigation related to tax matters. At this time, management’s best estimate of the reasonably possible change in the amount of gross unrecognized tax benefits is approximately no change to an increase of $1.0 million during the next twelve months, due to the combination of expiration of certain statute of limitations and estimated additions. The federal statute of limitations remains open for the years 2019 and forward. Tax years 2012 and forward are subject to audit by state tax authorities depending on the tax code and administrative practice of each state.Note 10. EquityWe have a stock repurchase program with 6.6 million shares remaining authorized for repurchase as of December 31, 2022, following the additional authorization of 3.0 million shares by our Board of Directors on August 20, 2021. There were no shares repurchased in the open market during the year ended December 31, 2022, 1.8 million in 2021, and 1.5 million in 2020. Repurchases are expected to continue from time to time, as determined by market conditions, cash flow requirements, securities law limitations, and other factors, until the number of shares authorized have been repurchased, or until the authorization is terminated. The share repurchase authorization is discretionary and has no expiration date.During the years ended December 31, 2022, 2021 and 2020 our Board of Directors declared dividends totaling $6.3 million, $45.9 million, and $6.5 million for each year, respectively. The 2021 dividends included a $0.50 per share special dividend totaling $39.5 million and regular quarterly dividends totaling $6.4 million, while the 2022 and 2020 dividends were regular quarterly dividends. Future payment of cash dividends and the amount of such dividends will depend upon our financial conditions, our results of operations, our cash requirements, our tax treatment, and certain corporate law requirements, as well as factors deemed relevant by our Board of Directors.Note 11. Stock-Based CompensationIn July 2011, a Special Meeting of Stockholders of Heartland Express, Inc. was held, at which meeting the approval of the Heartland Express, Inc. 2011 Restricted Stock Award Plan (the “2011 Plan”) was ratified. The 2011 Plan made available up to 0.9 million shares for the purpose of making restricted stock grants to our eligible officers and employees. The 2011 Plan has no shares that remain available for the purpose of making restricted stock grants at December 31, 2022. In May 2021, at the 2021 Annual Meeting of Stockholders, the approval of the Heartland Express, Inc. 2021 Restricted Stock Award Plan (the "2021 Plan") was ratified. The 2021 Plan made available up to 0.6 million shares for the purpose of making restricted stock grants to our eligible employees, directors and consultants. The 2021 Plan has 0.6 million shares that remain available for the purpose of making restricted stock grants at December 31, 2022.There were no shares granted during the period 2011 to 2019 that remain unvested at December 31, 2022. Shares granted in 2020 through 2022 have various vesting terms that range from immediate to four years from the date of grant and have share prices ranging between $14.01 and $22.10. Compensation expense associated with these awards is based on the market value of our stock on the grant date. Compensation expense associated with restricted stock awards to employees is included in salaries, wages and benefits while awards to directors or consultants is included in other operating expenses in the consolidated statements of comprehensive income. There were no significant assumptions made in determining fair value. Compensation expense associated with restricted stock awards was $1.4 million, $1.1 million, and $2.1 million for the years ended 73 December 31, 2022, 2021, and 2020, respectively. Unrecognized compensation expense was $0.4 million at December 31, 2022 which will be recognized over a weighted average period of 0.7 years. The following table summarizes our restricted stock award activity for the years ended December 31, 2022, 2021 and 2020. The vesting dates for the awards vested in 2022 occurred relatively evenly throughout the year ended December 31, 2022. The fair value of awards vested during 2022, 2021 and 2020 was $1.2 million, $1.5 million and $2.3 million, respectively. 2022Number of Restricted Stock Awards (in thousands)Weighted Average Grant Date Fair ValueUnvested at January 1 14.0 $ 19.70 Granted 106.0 15.19 Vested (79.9) 15.57 Forfeited — — Outstanding (unvested) at end of year 40.1 $ 16.01 2021Number of Restricted Stock Awards (in thousands)Weighted Average Grant Date Fair ValueUnvested at January 1 59.7 $ 20.29 Granted 32.1 17.92 Vested (77.8) 19.42 Forfeited — — Outstanding (unvested) at end of year 14.0 $ 19.70 2020Number of Restricted Stock Awards (in thousands)Weighted Average Grant Date Fair ValueUnvested at beginning of year 52.1 $ 20.55 Granted 119.9 20.24 Vested (111.8) 20.38 Forfeited (0.5) 19.32 Outstanding (unvested) at end of year 59.7 $ 20.29 Note 12. Profit Sharing Plan and Retirement PlanWe have retirement savings plans (the “Retirement Savings Plans”) for substantially all employees who have completed one year of service and are 19 years of age or older. Employees may make 401(k) contributions subject to Internal Revenue Code limitations. The Retirement Savings Plans provide for a discretionary profit sharing contribution to non-driver employees and a matching contribution of a discretionary percentage to driver employees ("Heartland Plan"). Acquired entities also have retirement savings plans that generally have the aforementioned characteristics of the Heartland Plan, but are for employees of the respective entities. Our contributions to the Retirement Savings Plans totaled approximately $2.2 million, $2.2 million, and $2.3 million, for the years ended December 31, 2022, 2021 and 2020, respectively. Note 13. Commitments and ContingenciesWe are a party to ordinary, routine litigation and administrative proceedings incidental to our business. In the opinion of management, our potential exposure under pending legal proceedings is adequately provided for in the accompanying consolidated financial statements. The total estimated purchase commitments for tractors (net of tractor sale commitments) and trailer equipment at December 31, 2022, was $108.0 million. 74 SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS AND RESERVES(In Thousands, Except Per Share Data)Column CColumn AColumn BCharges ToColumn DColumn E Balance AtCost Balance BeginningAndOther At EndDescriptionof PeriodExpenseAccountsDeductionsof PeriodAllowance for doubtful accounts: Year ended December 31, 2022$ 1,100 $ — $ 2,200 $ — $ 3,300 Year ended December 31, 2021 1,100 — — — 1,100 Year ended December 31, 2020 1,100 — — — 1,100 See accompanying Report of Independent Registered Public Accounting Firm. 75 HEARTLAND EXPRESS, INC.AND SUBSIDIARIESCORPORATE INFORMATIONDIRECTORSMichael J. Gerdin - Chairman of the Board, Chief Executive Officer and President, Heartland Express, Inc.Dr. Benjamin J. Allen - Retired President, University of Northern Iowa and Interim President of Iowa State University (May 2017 - November 2017)Larry J. Gordon - Chief Executive Officer, Gordon Truck Centers, Inc. and Founder, Gordon Trucking, Inc.David P. Millis - President, Millis Transfer, LLCBrenda S. Neville - Chief Executive Officer and President, Iowa Motor Truck AssociationJames G. Pratt - Retired Secretary and Treasurer, Hills BancorporationMichael J. Sullivan - Practicing CPA, Michael J. Sullivan CPAKEY EMPLOYEESMichael J. Gerdin - Chairman of the Board, Chief Executive Officer and President, Heartland Express, Inc.Siefke J. "JR" Bergman - Vice President, Maintenance, Heartland Express, Inc.Mark E. Crouse - Vice President, Western Operations, Heartland Express, Inc.K. Eric Eickman - Vice President, Information Technology, Heartland Express, Inc.Joshua S. Helmich - Vice President, Controller, and Secretary, Heartland Express, Inc.Brian J. Janssen - Vice President, Sales, Heartland Express, Inc.Thomas J. Kasenberg - Vice President, Eastern Operations, Heartland Express, Inc.Donald J. McGlaughlin - Vice President, Risk Management, Heartland Express, Inc.David P. Millis - President, Millis Transfer, LLCGregg L. Orr - President, Contract Freighters, Inc.Robert D. Peterson - Vice President, Northwest Operations, Heartland Express, Inc.Kent D. Rigdon - Chief Operating Officer, Heartland Express, Inc.Todd A. Smith - President, Smith Transport, Inc.Christopher A. Strain - Vice President of Finance, Treasurer, and Chief Financial Officer, Heartland Express, Inc.Todd A. Trimble - Vice President, Safety and Security, Heartland Express, Inc.CORPORATE HEADQUARTERSINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMHeartland Express, Inc.901 Heartland WayNorth Liberty, IA 52317Grant Thornton, LLP 2431 E. 61st Street, Suite 500Tulsa, OK 74136ANNUAL MEETINGCORPORATE COUNSELHeartland's Annual Meeting will be held at 8:00 a.m. local time on May 11, 2023. The Annual Meeting will be held in-person at our headquarters located at:901 Heartland Way, North Liberty, IA 52317Scudder Law Firm, P.C., L.L.O411 South 13th Street, Second FloorLincoln, NE 68508COMMON STOCKTRANSFER AGENT AND REGISTRARNASDAQ Global Select Market - HTLDEQ by Equinity 1110 Centre Point Curve #101Mendota Heights, MN 55120A copy of our Annual Report on Form 10-K, including exhibits thereto, for the year ended December 31, 2022, as filed with the Securities and Exchange Commission, may be obtained by stockholders of record without charge upon written request to Joshua S. Helmich, at the Corporate Headquarters.76 STOCK PERFORMANCE GRAPH
The following graph compares Heartland Express, Inc.’s annual percentage change in cumulative total return on common
shares over the past five years with the cumulative total return of companies comprising the NASDAQ US Benchmark TR
index and the SIC Code: 4213 index. This presentation assumes that $100 was invested in shares of the relevant issuers on
December 31, 2017, and that dividends received were immediately invested in additional shares. The graph plots the value
of the initial $100 investment at one-year intervals for the fiscal years shown.
INSERT STOCK PERFORMANCE GRAPH
Legend
Symbol
Total Returns Index For:
Dec-17
Dec-18
Dec-19
Dec-20
Dec-21
Dec-22
─────────
Heartland Express, Inc.
100.00
78.72
90.92
78.51
75.47
69.20
── ── ── ──
NASDAQ US Benchmark TR
100.00
94.56
124.03
150.41
189.36
152.00
-------------------
SIC Code: 4213
100.00
77.82
98.43
106.80
142.27
138.16
Notes:
A. The lines represent monthly index levels derived from compounded daily returns that include all dividends.
B. The indexes are reweighted daily, using the market capitalization on the previous trading day.
C.
D. The index level for all series was set to $100.00 on 12/31/2017.
If the monthly interval, based on the fiscal year-end, is not a trading day, the preceding trading day is used.
Peer group indices use beginning of period market capitalization weighting.
Prepared by Zacks Investment Research, Inc. Used with permission. All rights reserved. Copyright 1980-2023.
Index Data: Copyright NASDAQ OMX, Inc. Used with permission. All rights reserved.
77
901 HEARTLAND WAY | NORTH LIBERTY, IOWA 52317®20222022Annual ReportAnnual ReportHEARTLAND EXPRESSHEARTLAND EXPRESS