UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2019
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-15087
HEARTLAND EXPRESS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Nevada | 93-0926999 | |||||||
(State or Other Jurisdiction | (I.R.S. Employer | |||||||
of Incorporation or organization) | Identification No.) | |||||||
901 North Kansas Avenue, North Liberty, Iowa | 52317 | |||||||
(Address of Principal Executive Offices) | (Zip Code) |
319-626-3600
(Registrant’s telephone number, including area code)
Securities Registered Pursuant to section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Common Stock, $0.01 par value | HTLD | NASDAQ |
Securities Registered Pursuant to section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [X] | No [ ] |
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 of Section 15(d) of the Act.
Yes [ ] | No [X] |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [ X ] | No [ ] |
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes [ X ] | No [ ] |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [X] | Accelerated filer [ ] | Non-accelerated filer [ ] | Smaller reporting company [ ] | ||||||||
Emerging growth company [ ] |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] | No [ X ] |
The aggregate market value of voting common stock held by non-affiliates of the registrant as of June 30, 2019 was $0.8 billion. In making this calculation the registrant has assumed, without admitting for any purpose, that the Gerdin family, our directors, and our executive officers, as a group, and no other persons, are affiliates. As of February 17, 2020 there were 82,054,510 shares of the Company’s common stock ($0.01 par value) outstanding, excluding 86,275 shares of unvested restricted stock.
Explanatory Note
This Amendment No. 1 on Form 10-K/A (this “Amendment”) amends the Annual Report on Form 10-K of Heartland Express, Inc. (the “Company”) for the fiscal year ended December 31, 2019, as filed with the Securities and Exchange Commission (“SEC”) on February 25, 2020 (the “Form 10-K”). In the Form 10-K, the Company presented a report on the Company's consolidated financial statements (the “Financial Statement Audit Report”) and a report on the Company's internal control over financial reporting (the "Internal Control Audit Report") of its prior auditors (KPMG LLP) for the fiscal year ended December 31, 2017. The Company is replacing the Financial Statement Audit Report as filed in the Form 10-K with the updated report of KPMG LLP on the Company's consolidated financial statements included in this Amendment, which removes portions of the Financial Statement Audit Report relating to financial statements not included in this Form 10-K and portions that are otherwise not required to be included in the Form 10-K. The Company is also removing the Internal Control Audit Report.
This Form 10-K/A is being filed solely to include the updated report of KPMG LLP on the Company’s consolidated financial statements and to remove the Internal Control Audit Report. No other changes were made to the Form 10-K. The consolidated financial statements and notes to consolidated financial statements have remained the same as that previously filed in the Form 10-K.
This Amendment reflects information as of the filing date of the Form 10-K, does not reflect events occurring after that date and does not modify or update in any way disclosures made in the Form 10-K, except as specifically noted above.
In accordance with Rule 12b-15 of the Securities Exchange Act of 1934, as amended, this Amendment includes new certifications required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002, as amended, dated as of the filing date of this Amendment.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The reports of Grant Thornton, LLP (2019 and 2018) and KPMG LLP (2017), respectively, our independent registered public accounting firms, our consolidated financial statements, and the notes thereto, and the financial statement schedule are included beginning on page F-1.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) 1. Financial Statements and Schedules.
2. Financial Statements Schedule
Schedules not listed have been omitted because they are not applicable or are not required or the information required to be set forth therein is included in the Consolidated Financial Statements or Notes thereto.
3. Exhibits–The exhibits required by Item 601 of Regulation S-K are listed at paragraph (b) below.
(b) Exhibits. The following exhibits are filed with this Form 10-K or incorporated herein by reference to the document set forth next to the exhibit listed below:
EXHIBIT INDEX
Stock Purchase Agreement, dated July 6, 2017, by and among Saltchuk Resources, Inc., Interstate Distributor Co., Heartland Express, Inc. of Iowa, and Heartland Express, Inc., in its capacity as guarantor. Incorporated by reference to Exhibit 2.1 to the Company’s Form 10-Q, for the quarter ended September 30, 2017. | ||||||||||||||
Acquisition and Merger Agreement, dated August 26, 2019, by and among, Midwest Holding Group, Inc., Millis Real Estate Leasing, LLC, the members of Millis Real Estate Leasing, LLC, Heartland Trucking, Inc., Heartland Express Inc. of Iowa, Heartland Express, Inc., in its capacity as guarantor, and David P. Millis, in his capacity as Sellers’ Representative. Incorporated by reference to Exhibit 2.1 to the Company’s Form 10-Q for the quarter ended September 30, 2019. | ||||||||||||||
Articles of Incorporation, as amended. Incorporated by reference to Exhibit 3.1 to the Company’s Form 10-Q, for the quarter ended September 30, 2017. | ||||||||||||||
Amended and Restated Bylaws. Incorporated by reference to Exhibit 3.2 to the Company’s Form 10-Q, for the quarter ended September 30, 2017. | ||||||||||||||
4.1** | Description of the Registrant's securities registered pursuant to Section 12 of the Securities Exchange Act of 1934. | |||||||||||||
10.1* | Heartland Express, Inc. 2011 Restricted Stock Award Plan. Incorporated by reference to Appendix A to the Company’s Schedule 14-A filed June 13, 2011. | |||||||||||||
10.2* | Nonqualified Deferred Compensation Plan. Incorporated by reference to Exhibit 10.3 to the Company’s Form 10-K for the year ended December 31, 2006. | |||||||||||||
10.3* | Form Award Notice under the 2011 Restricted Stock Award Plan. Incorporated by reference to Exhibit 10.3 to the Company's Form 10-K for the year ended December 31, 2011. | |||||||||||||
Credit Agreement, dated November 11, 2013, by and between Wells Fargo Bank, National Association and Heartland Express, Inc. of Iowa, Heartland Express, Inc., A&M Express, Inc., Heartland Express, Maintenance Services, Inc., Heartland Express Services, Inc., and Gordon Trucking Inc. Incorporated by reference to Exhibit 10.4 to the Company’s Form 10-K for the year ended December 31, 2013. | ||||||||||||||
First Amendment to Credit Agreement, dated August 31, 2018, by and between Wells Fargo Bank, National Association and Heartland Express, Inc. of Iowa, Heartland Express, Inc., A&M Express, Inc., Heartland Express, Maintenance Services, Inc., and Heartland Express Services, Inc. Incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q, for the quarter ended September 30, 2018. | ||||||||||||||
21** | Subsidiaries of the Registrant. | |||||||||||||
31.1*** | Certification of Principal Executive Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended. | |||||||||||||
31.2*** | Certification of Principal Financial Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended. | |||||||||||||
32.1**** | Certification of Chief Executive Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |||||||||||||
32.2**** | Certification of the Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |||||||||||||
101.INS | XBRL Instance Document - the instance document does not appear in the interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |||||||||||||
101.SCH | XBRL Taxonomy Extension Schema Document | |||||||||||||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |||||||||||||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |||||||||||||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |||||||||||||
104 | Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101) |
* Management contract or compensatory plan or arrangement.
** Filed as an exhibit to the Form 10-K.
*** Filed herewith.
**** Furnished herewith.
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused the report to be signed on its behalf by the undersigned thereunto duly authorized.
HEARTLAND EXPRESS, INC. | ||||||||
Date: | July 21, 2020 | By: /s/ Christopher A. Strain | ||||||
Christopher A. Strain | ||||||||
Vice President of Finance, Treasurer, | ||||||||
and Chief Financial Officer | ||||||||
(Principal Accounting and Financial Officer) | ||||||||
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, 2019 and 2018, the related consolidated statements of comprehensive income, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2019, 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, 2019 and 2018, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2019, 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, 2019, 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 February 25, 2020 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 supporting 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.
Critical audit matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the 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 matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Auto Liability and Workers’ Compensation Claims Reserve Accrual
As described further in Notes 1 and 7 to the consolidated financial statements, the Company is self-insured for a portion of its risk related to auto liability and workers’ compensation. 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 and workers’ compensation claims accruals subject to self-insurer insurance retention of $2.0 million and $1.0 million, respectively, as a critical audit matter. Auto liability and workers’ compensation 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 for future claims that have been incurred but not completely paid. The principal considerations for assessing auto liability and workers’ compensation 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 judgment in estimating the total costs to settle or dispose of these claims.
Our audit procedures related to this critical audit matter included the following, among others:
•We tested the effectiveness of controls over auto liability and workers’ compensation claims, including the completeness and accuracy of claim expenses and payments.
F-1
•We tested management’s process for determining the auto liability and workers’ compensation 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 the claims data used in the actuarial calculation by selecting samples of historical claims data and inspecting source documents to test key attributes of the claims data.
We have served as the Company’s auditor since 2018.
/s/ GRANT THORNTON LLP
Tulsa, Oklahoma
February 25, 2020
F-2
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, 2019, 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, 2019, 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, 2019, and our report dated February 25, 2020 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.
Our audit of, and opinion on, the Company’s internal control over financial reporting does not include the internal control over financial reporting of Midwest Holding Group, Inc. and Millis Real Estate Leasing, LLC, wholly-owned subsidiaries, whose financial statements reflect total assets and revenues constituting 21.1% and 8.8%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2019. As indicated in Management’s Report, Midwest Holding Group, Inc. and Millis Real Estate Leasing, LLC were acquired during 2019. Management’s assertion on the effectiveness of the Company’s internal control over financial reporting excluded internal control over financial reporting of Midwest Holding Group, Inc. and Millis Real Estate Leasing, LLC.
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.
/s/ GRANT THORNTON LLP
Tulsa, Oklahoma
February 25, 2020
F-3
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Heartland Express, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statements of comprehensive income, stockholders’ equity and cash flows of Heartland Express, Inc. and subsidiaries (the Company) for the year ended December 31, 2017, and the related notes and financial statement schedule II (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the results of its operations and its cash flows for the year ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (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 the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the consolidated 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 consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ KPMG LLP
We served as the Company’s auditor from 2002-2018.
Des Moines, Iowa
March 1, 2018
F-4
HEARTLAND EXPRESS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts) | ||||||||||||||||||||||||||
ASSETS | December 31, 2019 | December 31, 2018 | ||||||||||||||||||||||||
CURRENT ASSETS | ||||||||||||||||||||||||||
Cash and cash equivalents | $ | 76,684 | $ | 161,448 | ||||||||||||||||||||||
Trade receivables, net | 56,753 | 48,955 | ||||||||||||||||||||||||
Prepaid tires | 9,107 | 9,378 | ||||||||||||||||||||||||
Other current assets | 8,947 | 12,551 | ||||||||||||||||||||||||
Income tax receivable | 323 | 170 | ||||||||||||||||||||||||
Total current assets | 151,814 | 232,502 | ||||||||||||||||||||||||
PROPERTY AND EQUIPMENT | ||||||||||||||||||||||||||
Land and land improvements | 60,637 | 46,095 | ||||||||||||||||||||||||
Buildings | 70,603 | 57,505 | ||||||||||||||||||||||||
Leasehold improvements | 437 | 437 | ||||||||||||||||||||||||
Furniture and fixtures | 4,255 | 3,057 | ||||||||||||||||||||||||
Shop and service equipment | 13,726 | 10,968 | ||||||||||||||||||||||||
Revenue equipment | 583,134 | 479,068 | ||||||||||||||||||||||||
Construction in progress | 6,351 | 6,540 | ||||||||||||||||||||||||
739,143 | 603,670 | |||||||||||||||||||||||||
Less accumulated depreciation | 212,856 | 200,550 | ||||||||||||||||||||||||
Property and equipment, net | 526,287 | 403,120 | ||||||||||||||||||||||||
GOODWILL | 168,295 | 132,410 | ||||||||||||||||||||||||
OTHER INTANGIBLES, NET | 27,136 | 14,494 | ||||||||||||||||||||||||
DEFERRED INCOME TAXES, NET | 6,006 | 4,535 | ||||||||||||||||||||||||
OTHER ASSETS | 19,393 | 19,152 | ||||||||||||||||||||||||
$ | 898,931 | $ | 806,213 | |||||||||||||||||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||||||||||||||||
CURRENT LIABILITIES | ||||||||||||||||||||||||||
Accounts payable and accrued liabilities | $ | 11,060 | $ | 10,552 | ||||||||||||||||||||||
Compensation and benefits | 24,712 | 22,558 | ||||||||||||||||||||||||
Insurance accruals | 17,584 | 22,130 | ||||||||||||||||||||||||
Other accruals | 10,051 | 9,449 | ||||||||||||||||||||||||
Total current liabilities | 63,407 | 64,689 | ||||||||||||||||||||||||
LONG-TERM LIABILITIES | ||||||||||||||||||||||||||
Income taxes payable | 5,956 | 5,577 | ||||||||||||||||||||||||
Deferred income taxes, net | 93,698 | 71,041 | ||||||||||||||||||||||||
Insurance accruals less current portion | 51,211 | 48,934 | ||||||||||||||||||||||||
Total long-term liabilities | 150,865 | 125,552 | ||||||||||||||||||||||||
COMMITMENTS AND CONTINGENCIES (Note 14) | ||||||||||||||||||||||||||
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 2019 and 2018; outstanding 82,028 and 81,930 in 2019 and 2018, respectively | 907 | 907 | ||||||||||||||||||||||||
Additional paid-in capital | 4,141 | 3,454 | ||||||||||||||||||||||||
Retained earnings | 826,666 | 760,262 | ||||||||||||||||||||||||
Treasury stock, at cost; 8,661 and 8,759 shares in 2019 and 2018, respectively | (147,055) | (148,651) | ||||||||||||||||||||||||
684,659 | 615,972 | |||||||||||||||||||||||||
$ | 898,931 | $ | 806,213 |
The accompanying notes are an integral part of these consolidated financial statements.
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HEARTLAND EXPRESS, INC. | ||||||||||||||||||||||||||||||||||||||||||||
AND SUBSIDIARIES | ||||||||||||||||||||||||||||||||||||||||||||
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | ||||||||||||||||||||||||||||||||||||||||||||
(in thousands, except per share amounts) | ||||||||||||||||||||||||||||||||||||||||||||
Year Ended December 31, | ||||||||||||||||||||||||||||||||||||||||||||
2019 | 2018 | 2017 | ||||||||||||||||||||||||||||||||||||||||||
OPERATING REVENUE | $ | 596,815 | $ | 610,803 | $ | 607,336 | ||||||||||||||||||||||||||||||||||||||
OPERATING EXPENSES | ||||||||||||||||||||||||||||||||||||||||||||
Salaries, wages and benefits | 240,139 | 227,872 | 236,872 | |||||||||||||||||||||||||||||||||||||||||
Rent and purchased transportation | 7,984 | 18,700 | 30,002 | |||||||||||||||||||||||||||||||||||||||||
Fuel | 101,871 | 110,536 | 104,381 | |||||||||||||||||||||||||||||||||||||||||
Operations and maintenance | 24,479 | 27,143 | 29,609 | |||||||||||||||||||||||||||||||||||||||||
Operating taxes and licenses | 14,459 | 16,390 | 16,615 | |||||||||||||||||||||||||||||||||||||||||
Insurance and claims | 17,003 | 17,227 | 18,850 | |||||||||||||||||||||||||||||||||||||||||
Communications and utilities | 4,953 | 6,086 | 5,781 | |||||||||||||||||||||||||||||||||||||||||
Depreciation and amortization | 100,212 | 100,519 | 103,690 | |||||||||||||||||||||||||||||||||||||||||
Other operating expenses | 22,781 | 21,506 | 24,666 | |||||||||||||||||||||||||||||||||||||||||
Gain on disposal of property and equipment | (31,341) | (24,963) | (26,674) | |||||||||||||||||||||||||||||||||||||||||
502,540 | 521,016 | 543,792 | ||||||||||||||||||||||||||||||||||||||||||
Operating income | 94,275 | 89,787 | 63,544 | |||||||||||||||||||||||||||||||||||||||||
Interest income | 3,955 | 2,130 | 1,129 | |||||||||||||||||||||||||||||||||||||||||
Interest expense | (1,052) | — | (175) | |||||||||||||||||||||||||||||||||||||||||
Income before income taxes | 97,178 | 91,917 | 64,498 | |||||||||||||||||||||||||||||||||||||||||
Federal and state income tax (benefit) expense | 24,211 | 19,240 | (10,675) | |||||||||||||||||||||||||||||||||||||||||
Net income | $ | 72,967 | $ | 72,677 | $ | 75,173 | ||||||||||||||||||||||||||||||||||||||
Other comprehensive income, net of tax | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Comprehensive income | $ | 72,967 | $ | 72,677 | $ | 75,173 | ||||||||||||||||||||||||||||||||||||||
Net income per share | ||||||||||||||||||||||||||||||||||||||||||||
Basic | $ | 0.89 | $ | 0.88 | $ | 0.90 | ||||||||||||||||||||||||||||||||||||||
Diluted | $ | 0.89 | $ | 0.88 | $ | 0.90 | ||||||||||||||||||||||||||||||||||||||
Weighted average shares outstanding | ||||||||||||||||||||||||||||||||||||||||||||
Basic | 81,980 | 82,378 | 83,298 | |||||||||||||||||||||||||||||||||||||||||
Diluted | 82,024 | 82,410 | 83,336 | |||||||||||||||||||||||||||||||||||||||||
Dividends declared per share | $ | 0.08 | $ | 0.08 | $ | 0.08 |
The accompanying notes are an integral part of these consolidated financial statements.
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HEARTLAND EXPRESS, INC. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
AND SUBSIDIARIES | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(in thousands, except per share amounts) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Capital | Additional | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock, | Paid-In | Retained | Treasury | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Common | Capital | Earnings | Stock | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, January 1, 2017 | $ | 907 | $ | 3,433 | $ | 625,668 | $ | (124,182) | $ | 505,826 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income | — | — | 75,173 | — | 75,173 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends on common stock, $0.08 per share | — | — | (6,667) | — | (6,667) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation, net of tax | — | 85 | — | 228 | 313 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2017 | 907 | 3,518 | 694,174 | (123,954) | 574,645 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income | — | — | 72,677 | — | 72,677 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends on common stock, $0.08 per share | — | — | (6,589) | — | (6,589) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Repurchases of common stock | — | — | — | (25,087) | (25,087) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation, net of tax | — | (64) | — | 390 | 326 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2018 | 907 | 3,454 | 760,262 | (148,651) | 615,972 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income | — | — | 72,967 | — | 72,967 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends on common stock, $0.08 per share | — | — | (6,563) | — | (6,563) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock for acquisition | — | 113 | — | 637 | 750 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation, net of tax | — | 574 | — | 959 | 1,533 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2019 | $ | 907 | $ | 4,141 | $ | 826,666 | $ | (147,055) | $ | 684,659 |
The accompanying notes are an integral part of these consolidated financial statements.
F-7
HEARTLAND EXPRESS, INC. | ||||||||||||||||||||||||||||||||||||||
AND SUBSIDIARIES | ||||||||||||||||||||||||||||||||||||||
CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||||||||||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||||||||
Year Ended December 31, | ||||||||||||||||||||||||||||||||||||||
OPERATING ACTIVITIES | 2019 | 2018 | 2017 | |||||||||||||||||||||||||||||||||||
Net income | $ | 72,967 | $ | 72,677 | $ | 75,173 | ||||||||||||||||||||||||||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||||||||||||||||||||||||
Depreciation and amortization | 100,932 | 101,329 | 103,905 | |||||||||||||||||||||||||||||||||||
Deferred income taxes | 4,699 | 2,755 | (27,121) | |||||||||||||||||||||||||||||||||||
Stock-based compensation expense | 2,065 | 539 | 511 | |||||||||||||||||||||||||||||||||||
Gain on disposal of property and equipment | (31,341) | (24,963) | (26,674) | |||||||||||||||||||||||||||||||||||
Changes in certain working capital items (net of acquisition): | ||||||||||||||||||||||||||||||||||||||
Trade receivables | 6,676 | 15,338 | 15,239 | |||||||||||||||||||||||||||||||||||
Prepaid expenses and other current assets | 509 | 1,227 | 860 | |||||||||||||||||||||||||||||||||||
Accounts payable, accrued liabilities, and accrued expenses | (10,758) | (26,012) | (26,893) | |||||||||||||||||||||||||||||||||||
Accrued income taxes | 623 | 3,653 | (5,462) | |||||||||||||||||||||||||||||||||||
Net cash provided by operating activities | 146,372 | 146,543 | 109,538 | |||||||||||||||||||||||||||||||||||
INVESTING ACTIVITIES | ||||||||||||||||||||||||||||||||||||||
Proceeds from sale of property and equipment | 92,942 | 130,752 | 147,578 | |||||||||||||||||||||||||||||||||||
Purchases of property and equipment, net of trades | (163,780) | (169,276) | (184,114) | |||||||||||||||||||||||||||||||||||
Acquisition of business, net of cash acquired | (61,927) | — | (86,728) | |||||||||||||||||||||||||||||||||||
Change in other assets | (26) | 710 | (233) | |||||||||||||||||||||||||||||||||||
Net cash used in investing activities | (132,791) | (37,814) | (123,497) | |||||||||||||||||||||||||||||||||||
FINANCING ACTIVITIES | ||||||||||||||||||||||||||||||||||||||
Cash dividends paid | (6,563) | (6,589) | (6,667) | |||||||||||||||||||||||||||||||||||
Shares withheld for employee taxes related to stock-based compensation | (532) | (213) | (198) | |||||||||||||||||||||||||||||||||||
Repayments on acquired debt | (93,348) | — | (23,303) | |||||||||||||||||||||||||||||||||||
Repurchases of common stock | — | (25,087) | — | |||||||||||||||||||||||||||||||||||
Net cash used in financing activities | (100,443) | (31,889) | (30,168) | |||||||||||||||||||||||||||||||||||
Net increase (decrease) in cash, cash equivalents and restricted cash | (86,862) | 76,840 | (44,127) | |||||||||||||||||||||||||||||||||||
CASH, CASH EQUIVALENTS AND RESTRICTED CASH | ||||||||||||||||||||||||||||||||||||||
Beginning of period | 182,938 | 106,098 | 150,225 | |||||||||||||||||||||||||||||||||||
End of period | $ | 96,076 | $ | 182,938 | $ | 106,098 | ||||||||||||||||||||||||||||||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | ||||||||||||||||||||||||||||||||||||||
Interest paid | $ | 929 | $ | — | $ | 153 | ||||||||||||||||||||||||||||||||
Cash paid during the period for income taxes, net of refunds | $ | 18,888 | $ | 12,832 | $ | 21,909 | ||||||||||||||||||||||||||||||||
Noncash investing and financing activities: | ||||||||||||||||||||||||||||||||||||||
Purchased property and equipment in accounts payable | $ | 1,476 | $ | 1,944 | $ | 3,387 | ||||||||||||||||||||||||||||||||
Sold revenue equipment in other current assets | $ | 1,282 | $ | 3,783 | $ | 869 | ||||||||||||||||||||||||||||||||
F-8
Year Ended December 31, | ||||||||||||||||||||||||||||||||
RECONCILIATION OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH | 2019 | 2018 | 2017 | |||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 76,684 | $ | 161,448 | $ | 75,378 | ||||||||||||||||||||||||||
Restricted cash included in other current assets | $ | 1,594 | $ | 3,105 | $ | 7,936 | ||||||||||||||||||||||||||
Restricted cash included in other assets | $ | 17,798 | $ | 18,385 | $ | 22,784 | ||||||||||||||||||||||||||
Total cash, cash equivalents and restricted cash | $ | 96,076 | $ | 182,938 | $ | 106,098 | ||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-9
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 owns all of the stock of Heartland Express, Inc. of Iowa, Heartland Express Services, Inc., Heartland Express Maintenance Services, Inc., Midwest Holding Group, LLC and Millis Transfer, LLC. On July 6, 2017, Heartland Express, Inc. of Iowa acquired Interstate Distributor Co. ("IDC"), which was subsequently merged into Heartland Express, Inc. of Iowa effective October 1, 2017. On December 31, 2018, A & M Express, Inc. was merged into Heartland Express, Inc. of Iowa. On August 26, 2019, Heartland Express, Inc. of Iowa acquired Midwest Holding Group, Inc. and Millis Real Estate Leasing, LLC (together, "Millis Transfer"), a truckload carrier headquartered in Black River Falls, Wisconsin. Effective December 31, 2019, Millis Transfer, Inc. and Midwest Holding Group, Inc. were converted to Millis Transfer, LLC and Midwest Holding Group, LLC, respectively. Further, effective December 31, 2019, Millis Real Estate Leasing, LLC, Rivera Real Estate, LLC, and Great River Leasing, LLC were merged into Millis Transfer, LLC. We, together with our subsidiaries, are a short-to-medium haul truckload carrier (predominately 500 miles or less per load). We primarily provide nationwide asset-based dry van truckload service for major shippers from Washington to Florida and New England to California.
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.) 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 to select dedicated customers, which are not significant to our operations. We exited our non-asset-based freight brokerage business in the first quarter of 2017, however due to the acquisition of IDC we acquired and again operated a non-asset-based freight brokerage business from the date of acquisition until the termination of this business during the fourth quarter of 2017. During 2018 and 2019 we did not operate a non-asset-based freight brokerage business. 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 1 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. At December 31, 2019 and 2018, restricted and designated cash and investments totaled $19.4 million and $21.5 million, respectively. At December 31, 2019, $1.6 million was included in other current assets and $17.8 million was included in other non-current assets in the consolidated balance sheets. At December 31, 2018 $3.1 million was included in other current assets and $18.4 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.
Investments
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Municipal bonds of $1.5 million at December 31, 2019 and 2018, are stated at amortized cost, are classified as held-to-maturity and are included in restricted cash in other non-current assets. Investment income received on held-to-maturity municipal bond investments is generally exempt from federal income taxes and is recognized as earned.
Trade Receivables and Allowance for Doubtful Accounts
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 generally on a net 30 day basis or less. 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 $1.1 million and $0.9 million at December 31, 2019 and 2018, 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 expense of $0.7 million and $0.8 million for the years ended December 31, 2019 and 2018, respectively, has been included in communications and utilities in the consolidated statements of comprehensive income. 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. These acquired assets are depreciated on a straight-line basis aligned with the remaining period of expected use. 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: | |||||
Years | |||||
Land improvements and buildings | 5-30 | ||||
Leasehold improvements | 5-25 | ||||
Furniture and fixtures | 3-5 | ||||
Shop and service equipment | 3-10 | ||||
Revenue equipment | 5-7 |
Impairment of Long-Lived Assets
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 0 impairment charges recognized during the years ended December 31, 2019, 2018, and 2017.
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.
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 $1.9 million, $1.8 million, and $2.0 million for the years ended December 31, 2019, 2018, and 2017, respectively.
F-11
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 our 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 our 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, 2019, 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 share price and continued strong cash flow. Our reporting unit had fair value significantly in excess of its carrying value. Management determined that 0 impairment charge was required for the years ended December 31, 2019, 2018, and 2017.
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 amortizable 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 0 intangible impairment charge was required for the years ended December 31, 2019, 2018, and 2017. 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 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 $6.0 million and $4.9 million are included in other accruals in the consolidated balance sheets as of December 31, 2019 and 2018, 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 generally 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 400-500 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 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 $1.2 million and $1.1 million as of December 31, 2019 and 2018, 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
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these same in-process loads. The Company had no contract liabilities associated with our operations as of December 31, 2019 and 2018.
Stock-Based Compensation
We have a stock-based compensation plan that provides for the grants of restricted stock awards to our employees. 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 $11.2 million related to all awards granted under the program 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 2022.
Earnings per Share
Basic 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, 2019, 2018, and 2017, we granted restricted shares of common stock to certain of our employees under the Company's 2011 Restricted Stock Award Plan. 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 2019, 2018, and 2017 is as follows (in thousands, except per share data):
2019 | |||||||||||||||||||||||||||||
Net Income (numerator) | Shares (denominator) | Per Share Amount | |||||||||||||||||||||||||||
Basic EPS | $ | 72,967 | 81,980 | $ | 0.89 | ||||||||||||||||||||||||
Effect of restricted stock | — | 44 | |||||||||||||||||||||||||||
Diluted EPS | $ | 72,967 | 82,024 | $ | 0.89 |
2018 | |||||||||||||||||||||||||||||
Net Income (numerator) | Shares (denominator) | Per Share Amount | |||||||||||||||||||||||||||
Basic EPS | $ | 72,677 | 82,378 | $ | 0.88 | ||||||||||||||||||||||||
Effect of restricted stock | — | 32 | |||||||||||||||||||||||||||
Diluted EPS | $ | 72,677 | 82,410 | $ | 0.88 |
2017 | |||||||||||||||||||||||||||||
Net Income (numerator) | Shares (denominator) | Per Share Amount | |||||||||||||||||||||||||||
Basic EPS | $ | 75,173 | 83,298 | $ | 0.90 | ||||||||||||||||||||||||
Effect of restricted stock | — | 38 | |||||||||||||||||||||||||||
Diluted EPS | $ | 75,173 | 83,336 | $ | 0.90 |
Income Taxes
We 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 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, 2019 and 2018. In
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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 January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment,” which continues to require an entity to review indicators for impairment, perform qualitative assessments, and analyze the fair value of a reporting unit as compared to the carrying value of goodwill for potential impairment, but eliminates or replaces additional tests and assessments within the prior guidance. The provisions of this update are effective for fiscal years beginning after December 15, 2019, with early adoption permitted for impairment measurement tests occurring after January 1, 2017. We adopted the provisions of this standard in 2019 as part of our annual impairment test that occurred in September 2019. The adoption of this standard did not have material impact on our impairment analysis.
In June 2016, the 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 February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)". This update seeks to increase the transparency and comparability among entities by requiring public entities to recognize lease assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements. To satisfy the standard’s objective, a lessee will recognize a right-of-use asset representing its right to use the underlying asset for the lease term and a lease liability for the obligation to make lease payments. Both the right-of-use asset and lease liability will initially be measured at the present value of the lease payments, with subsequent measurement dependent on the classification of the lease as either a finance or an operating lease. For leases with a term of twelve months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term.
In July 2018, the FASB issued ASU 2018-10, "Leases (Topic 842) - Codification Improvements" which contains several FASB Codification improvements for ASC Topic 842, including several implementation issues and ASU 2018-11, "Leases (Topic 842) - Targeted Improvements" which provides entities with an additional transition method for implementing ASC Topic 842. Entities have the option to apply the new standard at the adoption date, recognizing a cumulative-effect adjustment to the opening balance of retained earnings along with the modified retrospective approach previously identified, both of which include a number of practical expedients that companies may elect to apply. Under the cumulative-effect adjustment comparative periods would not be restated, and would instead be presented under the legacy ASC Topic 840 guidance. Under the modified retrospective approach leases are recognized and measured under the noted guidance at the beginning of the earliest period presented. The new standard is effective for public companies for annual periods beginning after December 15, 2018, and interim periods within those years, with early adoption permitted. We have adopted this guidance as of January 1, 2019 and the effect of the adoption was not material to 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;
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however, early adoption is permitted. We are currently evaluating the impact of this standard on our consolidated 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 5 largest customers accounted for approximately 36%, 37%, and 38% of operating revenues for the years ended December 31, 2019, 2018, and 2017, respectively. Our 5 largest customers accounted for approximately 30% and 36% of gross accounts receivable as of December 31, 2019 and 2018, respectively.
There was 1 customer that accounted for more than 10% of operating revenues for the year ended December 31, 2019 at 10.9%. This customer had accounts receivable of $5.8 million and $6.7 million as of December 31, 2019 and 2018, respectively. NaN customer accounted for more than 10% of operating revenues at 12.5% and 12.6% for the same periods ended 2018 and 2017, respectively.
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 generally 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 400-500 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 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 $1.2 million and $1.1 million as of December 31, 2019 and 2018, 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, 2019 and 2018.
Total revenues recorded were $596.8 million, $610.8 million, and $607.3 million for the twelve months ended December 31, 2019, 2018, and 2017, respectively. Fuel surcharge revenues were $75.0 million, $85.3 million, and $72.5 million for the twelve months ended December 31, 2019, 2018, and 2017, respectively. Accessorial and other revenues recorded in the consolidated statements of comprehensive income collectively represented $13.5 million, $14.9 million, and $24.3 million for the twelve months ended December 31, 2019, 2018, and 2017, respectively.
Note 4. Acquisitions of Millis Transfer and Interstate Distributor Co.
On August 26, 2019, Heartland Express, Inc. of Iowa (the “Buyer”) and Heartland Express, Inc., as guarantor, entered into an Acquisition and Merger Agreement with Millis Transfer. Millis Transfer is a truckload carrier headquartered in Black River Falls, Wisconsin, providing asset-based dry van truckload transportation services, including local, regional, and dedicated services.
On July 6, 2017, Heartland Express Inc., of Iowa, (the "Buyer"), a wholly owned subsidiary of the "Company”, acquired IDC, a Washington corporation. In accordance with Internal Revenue Code Section 1361(b)(3)(C)(ii)(I) and (II), the transaction was treated for tax purposes as a sale of the assets of IDC by the seller to the Buyer, immediately followed by the Buyer’s contribution of such assets to IDC under Internal Revenue Code Section 351. The Stock Purchase Agreement contains customary representations, warranties, covenants, and indemnification provisions. IDC was subsequently merged into the Buyer effective October 1, 2017.
Pursuant to the Acquisition and Merger Agreement of the Millis Transfer acquisition, the Buyer acquired all of Millis Transfer’s outstanding equity (the “Transaction”). The Buyer paid $156.0 million of total consideration, including cash (net of working capital adjustment), restricted shares of the Company's common stock, and assumed indebtedness of Millis Transfer.
F-15
With the Millis Transfer acquisition, total cash paid, net of working capital adjustment, and common stock issued of $62.7 million was funded out of the Company’s available cash and restricted shares of the Company's common stock issued from treasury stock. The transaction included the assumption of $93.3 million of Millis Transfer's indebtedness, of which 0 debt was outstanding at December 31, 2019. The Acquisition and Merger Agreement contains customary representations, warranties, covenants, escrow, and indemnification provisions.
Pursuant to the acquisition of IDC in July of 2017, the company paid $93.0 million in cash, net of approximately $6.3 million of cash acquired.
The following unaudited pro forma financial information for the years ended December 31, 2018 and December 31, 2019, assume that the acquisition of Millis occurred as of January 1, 2018. Pro forma adjustments reflected in the financial information below relate to accounting policy changes, such as changes in depreciation expense of revenue equipment, amortization of intangible assets, and accounting for certain operations and maintenance costs, along with other adjustments for terminal rent expense to align Millis results with those of the Company and income tax effects for the periods presented. The net effect of these pro forma adjustments increased net income by $3.0 million and $3.6 million for the periods ended December 31, 2019 and 2018, respectively.
Year ended | Year ended | ||||||||||||||||
December 31, 2019 | December 31, 2018 | ||||||||||||||||
(in thousands) | |||||||||||||||||
Operating revenue | $694,672 | $760,917 | |||||||||||||||
Net income | $75,951 | $76,259 |
The Millis 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 following unaudited pro forma financial information for the year ended December 31, 2017, assumes that the acquisition of IDC occurred as of January 1, 2017. Pro forma adjustments reflected in the financial information below relate to accounting policy changes such as changes in depreciation expense of revenue equipment, amortization of intangible assets, and accounting for certain operations and maintenance costs, along with other adjustments for terminal rent expense to align IDC results with those of the Company and income tax effects for the periods presented. The net effect of these pro forma adjustments increased net income by $5.7 million for the year ended December 31, 2017.
Year ended | |||||
December 31, 2017 | |||||
(in thousands) | |||||
Operating revenue | $ | 756,498 | |||
Net income | $ | 72,752 |
The IDC 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 results of the acquired businesses have been included in the consolidated financial statements since the date of acquisition. Millis represented 21.1% of consolidated total assets as of December 31, 2019, and represented 8.8% of operating revenue for the twelve months ended December 31, 2019. Millis acquisition related expenses of $0.5 million are included in the consolidated statement of comprehensive income within the other operating expenses line item for the twelve months ended December 31, 2019. IDC acquisition related expenses of $0.9 million are included in the consolidated statement of comprehensive income for the year ended December 31, 2017.
The allocation of the Millis purchase price is detailed in the tables 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 Millis Transfer, as well as other intangible assets that did not meet the criteria for separate recognition. Goodwill and intangible assets recognized in the transaction are not deductible for tax purposes.
F-16
The assets and liabilities associated with Millis Transfer were recorded at their fair values as of the acquisition date and the amounts are as follows:
MILLIS TRANSFER ACQUISITION DATE FAIR MARKET VALUES | (in thousands) | ||||
Trade and other accounts receivable | $ | 14,474 | |||
Other current assets | 1,656 | ||||
Property and equipment | 117,060 | ||||
Other non-current assets | 802 | ||||
Intangible assets | 15,300 | ||||
Goodwill | 35,885 | ||||
Total assets | 185,177 | ||||
Accounts payable, accrued expenses, and current portion of long-term debt | (31,737) | ||||
Insurance accruals | (4,371) | ||||
Long-term debt | (70,191) | ||||
Deferred taxes | (16,201) | ||||
Total cash paid and common stock issued | $ | 62,677 |
MILLIS TRANSFER TOTAL PURCHASE PRICE CONSIDERATION | (in thousands) | ||||
Cash paid pursuant to Stock Purchase Agreement | $ | 61,927 | |||
Common stock issued pursuant to the Acquisition and Merger Agreement | 750 | ||||
Total cash paid and common stock issued | $ | 62,677 |
Note 5. Intangible Assets and Goodwill
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. There was a $15.3 million change in the gross amount of identifiable intangible assets during the twelve months ended December 31, 2019, related to the acquisition of Millis Transfer. Amortization expense of $2.7 million, $2.5 million and $2.9 million for the twelve months ended December 31, 2019, 2018 and 2017, 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, 2019 and 2018:
2019 | |||||||||||||||||||||||||||||||||||||||||
Amortization period (years) | Gross Amount | Accumulated Amortization | Net intangible assets | ||||||||||||||||||||||||||||||||||||||
(in thousands) | |||||||||||||||||||||||||||||||||||||||||
Customer relationships | 15-20 | $ | 23,000 | $ | 3,221 | $ | 19,779 | ||||||||||||||||||||||||||||||||||
Tradename | 0.5-10 | 12,900 | 8,260 | 4,640 | |||||||||||||||||||||||||||||||||||||
Covenants not to compete | 1-10 | 5,300 | 2,583 | 2,717 | |||||||||||||||||||||||||||||||||||||
$ | 41,200 | $ | 14,064 | $ | 27,136 |
F-17
2018 | |||||||||||||||||||||||||||||||||||||||||
Amortization period (years) | Gross Amount | Accumulated Amortization | Net intangible assets | ||||||||||||||||||||||||||||||||||||||
(in thousands) | |||||||||||||||||||||||||||||||||||||||||
Customer relationships | 20 | $ | 13,600 | $ | 2,329 | $ | 11,271 | ||||||||||||||||||||||||||||||||||
Tradename | 0.5-6 | 8,100 | 7,021 | 1,079 | |||||||||||||||||||||||||||||||||||||
Covenants not to compete | 1-10 | 4,200 | 2,056 | 2,144 | |||||||||||||||||||||||||||||||||||||
$ | 25,900 | $ | 11,406 | $ | 14,494 |
Future amortization expense for intangible assets is estimated at $2.4 million for 2020, $2.4 million for 2021, $2.3 million for 2022, $2.2 million for 2023, and $1.9 million for 2024.
Changes in carrying amount of goodwill during the twelve months ended December 31, 2019 and December 31, 2018 were as follows:
(in thousands) | |||||
Balance at December 31, 2017 | $ | 132,410 | |||
Acquisition | — | ||||
Balance at December 31, 2018 | $ | 132,410 | |||
Acquisition | 35,885 | ||||
Balance at December 31, 2019 | $ | 168,295 |
Note 6. Long-Term Debt
In November 2013, Heartland Express, Inc. of Iowa, (the "Borrower"), a wholly owned subsidiary of the Company, entered into a Credit Agreement with Wells Fargo Bank, National Association, (the “Bank”). Pursuant to the Credit Agreement, the Bank provided a five-year, $250.0 million unsecured revolving line of credit, which was used to assist in the repayment of all debt acquired at the time of acquisition, and which may be used for future working capital, equipment financing, and general corporate purposes. The Bank's original commitment decreased to $175.0 million on November 1, 2016 through October 31, 2018. However, on August 31, 2018, Borrower and the Bank entered into the First Amendment to this Credit Agreement. The First Amendment (i) provides for a $100.0 million unsecured revolving line of credit (the “Revolver”), which may be used for working capital, equipment financing, permitted acquisitions, and general corporate purposes, (ii) provides an uncommitted accordion feature, which allows the Company a one-time request, at the discretion of the Bank, to increase the Revolver by up to an additional $100.0 million, (iii) increases the letter of credit subfeature of the Credit Agreement from $20.0 million to $30.0 million, and (iv) extends the maturity of the Credit Agreement to August 31, 2021, subject to the Borrower’s ability to terminate the commitment at any time at no additional cost to the Borrower.
The Credit Agreement is unsecured, with a negative pledge against all assets of our consolidated group, except for debt associated with permitted acquisitions, new purchase-money debt and capital lease obligations as described in the Credit Agreement. Borrowings under the Credit Agreement can either be, at the Borrower's election, (i) one-month or three-month LIBOR (Index) plus a spread between 0.700% and 0.900% per annum, based on the Company's consolidated funded debt to adjusted EBITDA ratio or (ii) Prime (Index) plus 0.0%. The weighted average variable annual percentage rate is not calculated since no amounts were borrowed and outstanding at December 31, 2019. There is a commitment fee on the unused portion of the Revolver between 0.0725% and 0.1750% per annum, based on the Company's consolidated funded debt to adjusted EBITDA ratio.
The Credit Agreement contains customary financial covenants including, but not limited to, (i) a maximum adjusted leverage ratio of 2:1, measured quarterly on a trailing twelve month basis, (ii) a minimum net income requirement of $1.00, measured quarterly on a trailing twelve month basis, (iii) a minimum tangible net worth of $250.0 million requirement, measured quarterly, and (iv) limitations on other indebtedness and liens. The Credit Agreement also includes customary events of default, covenants, representations and warranties, and indemnification provisions. We were in compliance with the respective financial covenants as of and for the year ended December 31, 2019 and December 31, 2018.
F-18
We had 0 long term debt outstanding at December 31, 2019 or 2018. Outstanding letters of credit associated with the revolving line of credit at December 31, 2019 were $11.3 million compared to $10.7 million at December 31, 2018. As of December 31, 2019, availability for future borrowing under the Credit Agreement was $88.7 million compared to $89.3 million at December 31, 2018.
Note 7. Auto Liability and Workers’ Compensation Insurance Accruals
We 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 or $2.0 million under our Heartland policy, 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 the Heartland policy claims, liabilities in excess of these amounts are covered by insurance up to $100.0 million. For the Millis policy claims, we retain liability for claims between $3.0 million and $10.0 million, while liabilities in excess of these amounts are covered by insurance up to $100.0 million. We retain any liability in excess of $100.0 million. We act as a self-insurer for property damage to our tractors and trailers.
We act as a self-insurer for workers’ compensation liability of $0.5 million or $1.0 million for any individual claim based on the insured party, accident date, and circumstances of the loss event. Liabilities in excess of this amount 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. Earnings on this account become part of the required deposit and as of December 31, 2019 and 2018 total deposits in this account were $1.5 million. 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 approximately $12.8 million in connection with our liability and workers’ compensation insurance arrangements and self-insurance requirements of the Federal Motor Carrier Safety Administration. There were 0 outstanding balances due on any letters of credit at December 31, 2019 or 2018.
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 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, 2019 and 2018.
Note 8. Income Taxes
On December 22, 2017, the US Congress enacted the Tax Act, which made significant changes to U.S. federal income tax law, including a reduction in the federal corporate tax rate from 35.0% to 21.0% effective January 1, 2018. Management has evaluated the relevant provisions of the Tax Act to the Company and accounted for the federal and state impacts in the financial statements and have therefore finalized the accounting for the tax effects of the Tax Act in 2018.
Deferred tax assets and liabilities as of December 31 are as follows:
F-19
2019 | 2018 | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||
Deferred income tax assets: | ||||||||||||||||||||
Allowance for doubtful accounts | $ | 262 | $ | 224 | ||||||||||||||||
Accrued expenses | 3,892 | 3,179 | ||||||||||||||||||
Stock-based compensation | 178 | 92 | ||||||||||||||||||
Insurance accruals | 15,054 | 15,415 | ||||||||||||||||||
State net operating loss carryforward | 2,618 | — | ||||||||||||||||||
Federal net operating loss carryover and credits | 8,793 | — | ||||||||||||||||||
Indirect tax benefits of unrecognized tax benefits | 1,052 | 963 | ||||||||||||||||||
Other | 3 | 2 | ||||||||||||||||||
Total gross deferred tax assets | 31,852 | 19,875 | ||||||||||||||||||
Less valuation allowance | — | — | ||||||||||||||||||
Net deferred tax assets | 31,852 | 19,875 | ||||||||||||||||||
Deferred income tax liabilities: | ||||||||||||||||||||
Property and equipment | (101,843) | (74,794) | ||||||||||||||||||
Goodwill and amortizable intangibles | (15,939) | (10,319) | ||||||||||||||||||
Prepaid expenses | (1,762) | (1,268) | ||||||||||||||||||
(119,544) | (86,381) | |||||||||||||||||||
Net deferred tax liability | $ | (87,692) | $ | (66,506) |
The deferred tax amounts above have been classified in the accompanying consolidated balance sheets at December 31, 2019 and 2018 as follows:
2019 | 2018 | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||
Noncurrent assets, net | $ | 6,006 | $ | 4,535 | ||||||||||||||||
Long-term liabilities, net | (93,698) | (71,041) | ||||||||||||||||||
$ | (87,692) | $ | (66,506) |
We have not recorded a valuation allowance against any deferred tax assets at December 31, 2019 and 2018. 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.
Income tax expense consists of the following:
2019 | 2018 | 2017 | ||||||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||
Current income taxes: | ||||||||||||||||||||||||||||||||
Federal | $ | 14,122 | $ | 11,985 | $ | 17,997 | ||||||||||||||||||||||||||
State | 5,698 | 4,498 | (1,495) | |||||||||||||||||||||||||||||
19,820 | 16,483 | 16,502 | ||||||||||||||||||||||||||||||
Deferred income taxes: | ||||||||||||||||||||||||||||||||
Federal | 5,595 | 5,537 | (28,020) | |||||||||||||||||||||||||||||
State | (1,204) | (2,780) | 843 | |||||||||||||||||||||||||||||
4,391 | 2,757 | (27,177) | ||||||||||||||||||||||||||||||
Total | $ | 24,211 | $ | 19,240 | $ | (10,675) |
The income tax provision differs from the amount determined by applying the U.S. federal tax rate as follows:
F-20
2019 | 2018 | 2017 | ||||||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||
Federal tax at statutory rate (21%, 21%, 35% respectively) | $ | 20,406 | $ | 19,302 | $ | 22,574 | ||||||||||||||||||||||||||
State taxes, net of federal benefit | 3,561 | 2,200 | 178 | |||||||||||||||||||||||||||||
Permanent differences to return | 540 | 408 | 309 | |||||||||||||||||||||||||||||
Return to provision adjustment | (392) | (1,327) | (325) | |||||||||||||||||||||||||||||
Uncertain income tax penalties and interest, net | 289 | (1,067) | (1,208) | |||||||||||||||||||||||||||||
Enacted federal tax rate change | — | — | (32,789) | |||||||||||||||||||||||||||||
Other | (193) | (276) | 586 | |||||||||||||||||||||||||||||
$ | 24,211 | $ | 19,240 | $ | (10,675) |
At December 31, 2019 and December 31, 2018, we had a total of $5.0 million and $4.6 million in gross unrecognized tax benefits, respectively, included in long-term income taxes payable in the consolidated balance sheets. Of this amount, $4.0 million and $3.6 million represents the amount of unrecognized tax benefits that, if recognized, would impact our effective tax rate as of December 31, 2019 and December 31, 2018, respectively. Unrecognized tax benefits were a net increase of $0.4 million and a net decrease of $1.3 million during the years ended December 31, 2019 and 2018, respectively, due mainly to the expiration of certain statutes of limitation net of additions and settlements with respective states. This had the effect of increasing the effective state tax rate in 2019 and reducing the effective state rate during 2018. The total net amount of accrued interest and penalties for such unrecognized tax benefits was $0.9 million and $1.0 million at December 31, 2019 and December 31, 2018, 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, 2019, 2018 and 2017 was approximately 0, a benefit of $1.4 million, and a benefit of $0.9 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, 2019, 2018 and 2017 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.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
2019 | 2018 | ||||||||||||||||
(in thousands) | |||||||||||||||||
Balance at January 1, | $ | 4,585 | $ | 5,839 | |||||||||||||
Additions based on tax positions related to current year | 1,138 | 700 | |||||||||||||||
Additions for tax positions of prior years | 124 | — | |||||||||||||||
Reductions due to lapse of applicable statute of limitations | (701) | (1,954) | |||||||||||||||
Settlements | (136) | — | |||||||||||||||
Balance at December 31, | $ | 5,010 | $ | 4,585 |
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 0 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 2016 and forward. Tax years 2009 and forward are subject to audit by state tax authorities depending on the tax code and administrative practice of each state.
Note 9. Operating Leases
F-21
We had operating leases for certain revenue equipment during the periods presented related to the IDC acquisition. Rent expense for these leases, including lease termination payments, was $0.3 million, $5.0 million, and $8.0 million, for the years ended December 31, 2019, 2018, and 2017, respectively, and were included in rent and purchased transportation in the consolidated statements of comprehensive income. The last remaining leases from the acquisition were terminated March 31, 2019. These expenses were included in rent and purchased transportation in the consolidated statements of comprehensive income.
We lease certain terminal facilities under operating leases. Historically, a portion of these leases were with limited liability companies, whose members included one of our board members, and a commercial tractor dealership whose owners included one of our board members. The related-party rental payments were entered into as a result of a previous acquisition and these leases ended in 2018. Rent expense for terminal facilities was $2.5 million (including 0 related-party rental expense) for the year ended December 31, 2019 and expected to be reduced further upon completion of the purchase of the Tacoma, WA terminal facility which is expected to be completed in 2020. Rent expense for terminal facilities was $4.8 million, and $3.9 million, (including related-party rental expense totaling $0.8 million, and $1.6 million), for the years ended December 31, 2018, and 2017, respectively, and was included in rent and purchased transportation in the consolidated statements of comprehensive income. The various leases remaining are month-to-month or expire in 2020. We are responsible for all taxes, insurance, and utilities related to the terminal leases.
See Note 13 for additional information regarding related party transactions.
Note 10. Equity
We have a stock repurchase program with 6.9 million shares remaining authorized for repurchase as of December 31, 2019. There were 0 shares repurchased in the open market during the year ended December 31, 2019, 1.4 million in 2018, and NaN in 2017. 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, 2019, 2018 and 2017 our Board of Directors declared regular quarterly dividends totaling $6.6 million, $6.6 million, and $6.7 million for each year, respectively. 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 Compensation
In 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 “Plan”) was ratified. The Plan made available up to 0.9 million shares for the purpose of making restricted stock grants to our eligible officers and employees. The Plan has 0.2 million shares that remain available for the purpose of making restricted stock grants at December 31, 2019. Shares granted in 2017 through 2019 have various vesting terms that range from immediate to four years from the date of grant and have share prices ranging between $18.12 and $23.37. 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 is included in salaries, wages and benefits 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 $2.1 million, $0.5 million, and $0.5 million for the years ended December 31, 2019, 2018, and 2017, respectively. Unrecognized compensation expense was $0.4 million at December 31, 2019 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, 2019, 2018 and 2017. The vesting dates for the awards vested in 2019 occurred relatively evenly throughout the year ended December 31, 2019. The fair value of awards vested during 2019, 2018 and 2017 was $1.8 million, $0.8 million and $0.6 million, respectively.
F-22
2019 | |||||||||||||||||
Number of Restricted Stock Awards ( in thousands) | Weighted Average Grant Date Fair Value | ||||||||||||||||
Unvested at January 1 | 26.5 | $ | 21.31 | ||||||||||||||
Granted | 114.0 | 19.88 | |||||||||||||||
Vested | (87.9) | 19.93 | |||||||||||||||
Forfeited | (0.5) | 17.11 | |||||||||||||||
Outstanding (unvested) at end of year | 52.1 | $ | 20.55 |
2018 | |||||||||||||||||
Number of Restricted Stock Awards ( in thousands) | Weighted Average Grant Date Fair Value | ||||||||||||||||
Unvested at January 1 | 53.7 | $ | 21.82 | ||||||||||||||
Granted | 10.0 | 18.58 | |||||||||||||||
Vested | (35.7) | 21.48 | |||||||||||||||
Forfeited | (1.5) | 17.11 | |||||||||||||||
Outstanding (unvested) at end of year | 26.5 | $ | 21.31 |
2017 | |||||||||||||||||
Number of Restricted Stock Awards (in thousands) | Weighted Average Grant Date Fair Value | ||||||||||||||||
Unvested at beginning of year | 53.0 | $ | 21.53 | ||||||||||||||
Granted | 27.0 | 22.98 | |||||||||||||||
Vested | (25.3) | 22.07 | |||||||||||||||
Forfeited | (1.0) | 17.11 | |||||||||||||||
Outstanding (unvested) at end of year | 53.7 | $ | 21.82 |
Note 12. Profit Sharing Plan and Retirement Plan
We 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"). Following the acquisition of Millis Transfer on August 26, 2019 a retirement savings plan ("Millis Transfer Plan") was created. The Millis Transfer Plan has the aforementioned characteristics of the Heartland Plan, but is for Millis Transfer employees. Also, we acquired the Retirement Saving Plan providing for discretionary matching contributions to driver and non-driver employees in our acquisition of IDC ("IDC Plan"). The IDC Plan was merged into the Heartland Plan on January 1, 2018. Our profit sharing contributions to the Retirement Savings Plans totaled approximately $1.6 million, $1.0 million, and $1.8 million, for the years ended December 31, 2019, 2018 and 2017, respectively.
Note 13. Related Party Transactions
We historically leased terminal facilities for operations under operating leases from certain limited liability companies, whose members include one of our board members, and a commercial tractor dealership whose owners include one of our board members until the leases ended in November 2018.
We purchased parts and services from the commercial tractor dealership noted above. We owed this commercial tractor dealership 0 and $0.1 million, included in accounts payable and accrued liabilities in the consolidated balance sheet at December 31, 2019 and 2018, respectively.
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The payments (receipts) with related parties for the years ended December 31, 2019, 2018, and 2017 were as follows:
2019 | 2018 | 2017 | |||||||||||||||||||||||||||
(in thousands) | |||||||||||||||||||||||||||||
Receipts for trailer sales | $ | — | $ | — | $ | (12) | |||||||||||||||||||||||
Payments for parts and services | 310 | 551 | 650 | ||||||||||||||||||||||||||
Terminal lease payments | — | 713 | 1,625 | ||||||||||||||||||||||||||
$ | 310 | $ | 1,264 | $ | 2,263 |
Note 14. Commitments and Contingencies
We 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), trailer equipment and an exercised terminal purchase option at December 31, 2019, was $113.3 million.
Note 15. Quarterly Financial Information (Unaudited)
First | Second | Third | Fourth | |||||||||||||||||||||||||||||||||||||||||
(In Thousands, Except Per Share Data) | ||||||||||||||||||||||||||||||||||||||||||||
Year ended December 31, 2019 | ||||||||||||||||||||||||||||||||||||||||||||
Operating revenue | $ | 139,536 | $ | 142,144 | $ | 147,908 | $ | 167,227 | ||||||||||||||||||||||||||||||||||||
Operating income | 20,843 | 29,030 | 26,739 | 17,663 | ||||||||||||||||||||||||||||||||||||||||
Income before income taxes | 21,988 | 30,259 | 27,415 | 17,516 | ||||||||||||||||||||||||||||||||||||||||
Net income | 17,318 | 22,361 | 20,501 | 12,787 | ||||||||||||||||||||||||||||||||||||||||
Net income per share, basic | 0.21 | 0.27 | 0.25 | 0.16 | ||||||||||||||||||||||||||||||||||||||||
Net income per share, diluted | 0.21 | 0.27 | 0.25 | 0.16 | ||||||||||||||||||||||||||||||||||||||||
Year ended December 31, 2018 | ||||||||||||||||||||||||||||||||||||||||||||
Operating revenue | $ | 156,695 | $ | 155,826 | $ | 151,279 | $ | 147,003 | ||||||||||||||||||||||||||||||||||||
Operating income | 12,948 | 22,147 | 25,132 | 29,560 | ||||||||||||||||||||||||||||||||||||||||
Income before income taxes | 13,290 | 22,570 | 25,718 | 30,339 | ||||||||||||||||||||||||||||||||||||||||
Net income | 13,378 | 17,803 | 19,056 | 22,440 | ||||||||||||||||||||||||||||||||||||||||
Net income per share, basic | 0.16 | 0.22 | 0.23 | 0.27 | ||||||||||||||||||||||||||||||||||||||||
Net income per share, diluted | 0.16 | 0.22 | 0.23 | 0.27 |
Note 16. Subsequent Events
No events occurred requiring additional disclosure.
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SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (In Thousands, Except Per Share Data) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Column C | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Column A | Column B | Charges To | Column D | Column E | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance At | Cost | Balance | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Beginning | And | Other | At End | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Description | of Period | Expense | Accounts | Deductions | of Period | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Allowance for doubtful accounts: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Year ended December 31, 2019 | $ | 900 | $ | 200 | $ | — | $ | — | $ | 1,100 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Year ended December 31, 2018 | 1,475 | — | — | 575 | 900 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Year ended December 31, 2017 | 1,475 | — | — | — | 1,475 |
See accompanying Report of Independent Registered Public Accounting Firm.
S-1