What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2023-03-01 compared with 2022-02-25 · 196 added, 135 removed, 206 unchanged (62% of the section changed)

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Actual results could differ materially from those discussed.

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.

We focus on providing quality service to targeted customers with a high density of freight in our regional operating areas.

We also offer temperature-controlled truckload services, which are not significant to our operations and have been reduced to serving select dedicated customers since 2019.

We generally earn revenue based on the number of miles per load delivered and the revenue per mile paid.

We operate our consolidated operations under the brand names of Heartland Express and Millis Transfer.

We manage our business based on overall corporate operating goals and objectives that are the same for both brands.

Our Chief Operating Decision Maker, our CEO, evaluates the operational efficiencies of our transportation services, operating performance and asset allocation on a combined basis based on consolidated operating goals and objectives.

We, together with our subsidiaries, historically have been a short-to-medium haul truckload carrier with approximately 99.9% of our operating revenue was derived from shipments within the United States with the remainder being Canada and no operations in Mexico.

With the acquisition of CFI on August 31, 2022, we significantly expanded our scale and our transportation services.

We continue to provide nationwide asset-based dry van truckload service for major shippers from across the U.S.

and now including cross border freight to and from Mexico and our consolidated average length of haul has increased to approximately 500 miles.

We continue to focus on providing high quality service to targeted customers with a high density of freight in our regional operating areas.

We also offer truckload temperature-controlled transportation services and logistics services in Mexico, which are not significant to our consolidated operations.

Through the acquisition of CFI, we now provide transportation logistics services across Mexico for our customers and provide cross-border freight services for customer loads moving from the United States into Mexico and loads originating from Mexico into the United States.

We utilize third party service providers for all miles run in Mexico and to move freight across the US-Mexico border while leveraging terminal locations in the US and Mexico near the border to facilitate these moves.

We generally earn revenue based on the number of miles per load delivered and the revenue per mile or per load paid.

We operate our consolidated operations under the brand names of Heartland Express, Millis Transfer, Smith Transport, and CFI.

We manage our business based on overall corporate operating goals and objectives that are the same for all of our brands.

Our Chief Operating Decision Maker (“CODM”), our CEO, evaluates the operational efficiencies of our transportation services, operating performance and asset allocation on a combined basis based on consolidated operating goals and objectives.

We believe the keys to success are maintaining high levels of customer service and safety, which are predicated on the availability of experienced drivers and late-model equipment.

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We do this by scrutinizing all expenditures, prioritizing expenses that improve our drivers' experience or our customer service, minimizing non-driving personnel through proven technology when the cost of doing so is justified, and operating late-model tractors and trailers with sound warranty coverage and enhanced fuel efficiency.

With the two acquisitions of Smith Transport and CFI we now have debt.

Also, our operating ratio has been pressured by the operations of the two entities acquired as their operating ratios were in the 90's at the date of acquisition.

We anticipate getting back to debt free and low 80's operating ratio as we integrate the operations of these two entities.

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this document generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021.

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Recent Developments

On August 26, 2019 we completed our third acquisition within eight years.

We acquired all the outstanding equity of Millis Transfer.

The Millis Transfer acquisition added additional dry van truckload capacity to our core operations and this resulted in increased revenues and increased operating costs after August 26, 2019.

Therefore, our financial results for 2019, only include Millis Transfer activity from August 26, 2019 to December 31, 2019.

On May 31, 2022 we completed our fourth acquisition within nine years.

We acquired all the outstanding equity of Smith Transport.

The Smith Transport acquisition added additional dry van truckload capacity to our core operations and this resulted

in increased revenues and increased operating costs after May 31, 2022.

Therefore, our financial results for 2022 only include Smith Transport activity from June 1, 2022 to December 31, 2022.

On August 31, 2022 we completed our fifth acquisition within nine years.

We acquired all the outstanding equity of CFI.

The CFI acquisition added additional dry van truckload capacity to our core operations and this resulted in increased revenues and increased operating costs after August 31, 2022.

Therefore, our financial results for 2022 only include CFI activity from September 1, 2022 to December 31, 2022.

In 2022, we generated operating revenues of $968.0 million, including fuel surcharges, net income of $133.6 million, and basic net income per share of $1.69 on basic weighted average outstanding shares of 78.9 million.

This compared to operating revenues of $607.3 million, including fuel surcharges, net income of $79.3 million, and basic net income per share of $1.00 on basic weighted average outstanding shares of 79.6 million in 2021.

We posted an 82.6% operating ratio (which represents operating expenses as a percentage of operating revenues) for the year ended December 31, 2021, compared to 85.5% for the

same period of 2020, and an 13.1% net margin (which represents net income as a percentage of operating revenues) for 2021, compared to 11.0% in the same period of 2020.

We posted an 80.5% operating ratio (which represents operating expenses as a percentage of operating revenues) for the year ended December 31, 2022, compared to 82.6% for the same period of 2021, and an 13.8% net margin (which represents net income as a percentage of operating revenues) for 2022, compared to 13.1% in the same period of 2021.

We posted an 84.8% non-GAAP adjusted operating ratio (1) (operating expenses as a percentage of operating revenues, net of fuel surcharge) for the year ended December 31, 2022 compared to 79.7% for the same period of 2021.

We had total assets of $928.5 million and total stockholders' equity of $727.1 million at December 31, 2021.

We had total assets of $1.7 billion and total stockholders' equity of $855.5 million at December 31, 2022.

We achieved a return on assets of 9.8% and a return on equity of 16.4% over the year ended December 31, 2022, compared to 8.4% and 10.9% respectively, for 2021.

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Operating revenue $ 967,996 $ 607,284

Fuel surcharge revenue (non-GAAP) 76,116 61,725

Fuel surcharge revenue 169,173 76,116

Operating revenue excluding fuel surcharge revenue 798,823 531,168

Operating expenses 779,638 501,877

Fuel surcharge revenue (non-GAAP) 76,116 61,725

Fuel surcharge revenue 169,173 76,116

Amortization of intangibles 3,653 2,390

Acquisition-related costs 2,254 —

Gain on sale of a terminal property (73,175) —

Adjusted operating expenses 677,733 423,371

Operating income 188,358 105,407

Adjusted operating income $ 121,090 $ 107,797

Operating ratio 80.5 % 82.6 %

Adjusted operating ratio (non-GAAP) 80.2 % 84.0 %

(a) Adjusted operating ratio as reported in this annual report is based upon operating expenses, net of fuel surcharge revenue, as a percentage of operating revenue excluding fuel surcharge revenue.

We believe that adjusted operating ratio is more representative of our underlying operations by excluding the volatility of fuel prices, which we cannot control.

Adjusted operating ratio is not a substitute for operating ratio measured in accordance with GAAP.

Adjusted operating ratio 84.8 % 79.7 %

(a) Operating revenue excluding fuel surcharge revenue, as reported in this annual report is based upon operating revenue minus fuel surcharge revenue.

Adjusted operating income as reported in this annual report is based upon operating revenue excluding fuel surcharge revenue, less operating expenses, net of fuel surcharge revenue, non-cash amortization expense related to intangible assets, acquisition-related legal and professional fees, and the gain on sale of a terminal property.

Adjusted operating ratio as reported in this annual report is based upon operating expenses, net of fuel surcharge revenue, amortization of

intangibles, acquisition-related costs, and the gain on sale of terminal property, as a percentage of operating revenue excluding fuel surcharge revenue.

We believe that operating revenue excluding fuel surcharge revenue, adjusted operating income, and adjusted operating ratio are more representative of our underlying operations by excluding the volatility of fuel prices, which we cannot control, and removes items resulting from acquisitions or one-time transactions that do not reflect our core operating performance.

Operating revenue excluding fuel surcharge revenue, adjusted operating income, and adjusted operating ratio are not substitutes for operating revenue, operating income, or operating ratio measured in accordance with GAAP.

There are limitations to using non-GAAP financial measures.

Although we believe that adjusted operating ratio improves comparability in analyzing our period-to-period performance, it could limit comparability to other companies in our industry if those companies define adjusted operating ratio differently.

Because of these limitations, adjusted operating ratio should not be considered a measure of income generated by our business or discretionary cash available to us to invest in the growth of our business.

Although we believe that operating revenue excluding fuel surcharge revenue, adjusted operating income, and adjusted operating ratio improve comparability in analyzing our period-to-period performance, they could limit comparability to other companies in our industry if those companies define such measures differently.

Because of these limitations, operating revenue excluding fuel surcharge revenue, adjusted operating income, and adjusted operating ratio should not be considered measures of income generated by our business or discretionary cash available to us to invest in the growth of our business.

Management compensates for these limitations by primarily relying on GAAP results and using non-GAAP financial measures on a supplemental basis.

Our cash flow from operating activities for the twelve months ended December 31, 2021 was $123.4 million or 20.3% of operating revenues, compared to $178.9 million or 27.7% of operating revenues in 2020.

During 2021, we used $2.6 million in net investing cash flows, which was primarily used for $2.5 million of net purchases of revenue equipment.

Our cash flow provided by operating activities for the twelve months ended December 31, 2022 was $194.7 million or 20.1% of operating revenues, compared to $123.4 million or 20.3% of operating revenues in 2021.

During 2022, we used $663.3 million in net investing cash flows, which was primarily the result of $675.9 million net cash used for the acquisitions of Smith Transport and CFI, partially offset by $12.2 million of cash provided by net proceeds of property and equipment.

We used $160.6 million to purchase property and equipment and received $172.8 million from the sales of property and equipment.

We used $78.1 million in financing activities including $45.9 million used to pay regular and special dividends to our shareholders and $32.0 million for stock repurchases during 2021.

As a result, our cash, cash equivalents, and restricted cash increased by $42.6 million during the year ended December 31, 2021 to $173.8 million, with no outstanding debt.

Unrestricted cash and cash equivalents increased $43.8 million to $157.7 million.

We had net cash of $359.3 million provided by financing activities including $447.3 million provided by issuance of long-term debt partially offset by $81.5 million of repayments of finance leases and debt and $6.3 million used to pay dividends to our shareholders.

As a result, our cash, cash equivalents, and restricted cash decreased by $109.3 million during the year ended December 31, 2022 to $64.5 million.

Unrestricted cash and cash equivalents decreased $108.3 million to $49.5 million.

We operate in a cyclical industry.

Throughout 2019, the general demand for freight services was at a level much lower than what has been experienced since.

During 2020, the demand for freight services was volatile.

Freight volumes in early 2020 were comparative to seasonal volumes of the first quarter of 2019.

Then in March 2020 the demand for freight services dramatically increased as concerns over the COVID-19 pandemic escalated.

In response to the outbreak of COVID-19, there

was a short term drop in the demand for freight services in early second quarter of 2020, due to many businesses temporarily shutting down or scaling back operations with much of the working population of the United States working from home.

By the end of the second quarter of 2020, demand for freight services began to improve as most businesses implemented their respective responses and protections against the pandemic which continued to build throughout the back half of 2020 and throughout 2021.

This led to an overall increase in freight demand and favorable pricing environment as freight rates increased throughout the second half of 2020 and continued to be strong throughout 2021.

We expect freight demand to continue to be strong well into 2022.

The trucking industry has been faced with a qualified driver shortage with more qualified drivers leaving the industry than joining.

The pandemic events of 2020-2021 intensified an already challenging qualified driver market.

Further, the pandemic events of 2020-2021 limited the capacity and output of driver training schools that bring new drivers to the industry.

Competition for drivers, which has historically been intense, escalates during periods of increased freight demand which intensified during the second half of 2020 and continued throughout 2021.

Competition for qualified drivers will continue to be challenging going forward due to the decreasing numbers of qualified drivers in our industry.

In early 2022, freight demand was initially strong, following an extended period of freight demand at peak levels that began in mid 2020 and continued throughout 2021 and into 2022.

Freight demand began to soften in the back half of 2022.

While the current levels are down compared against those unprecedented levels experienced during 2021, overall we continue to have more opportunities to haul freight than we are able to cover with our existing fleet and available drivers.

We expect freight demand to remain challenged at lower demand levels in at least the first half of 2023 based upon the freight demand experienced in January and February of 2023 and expected normal seasonal trends.

However, continued supply chain issues for tractors, trailers and related parts, general consumer product output and inventory volatility, consumer demand, and disruption in oil and diesel markets all could create additional volatility regarding freight demand during 2023.

The trucking industry has been faced with a qualified driver shortage.

During 2021, increased freight demand, combined with the COVID-19 pandemic, intensified an already challenging qualified driver market.

Competition for qualified drivers continued to be challenging in 2022 and is expected to be a challenge going forward due to the decreasing numbers of qualified drivers in our industry.

However, driver availability began to change late in 2022 and to date in 2023, as a result of the changing freight and economic environments and we believe certain drivers have moved from smaller less financially stable carriers to more financially stable carriers and from independent contractors to company drivers.

Although there has been some increased movement of drivers between companies in our industry, the issue of decreasing amount of qualified CDL drivers in our industry continues.

We continually explore new strategies to attract and retain qualified drivers with changes in market conditions and demands.

We hire the majority of our drivers with at least six months of over-the-road experience and safe driving records.

As previously discussed, our driver training program will provide an additional source of future potential professional drivers.

In order to attract and retain experienced drivers who understand the importance of customer service, we have sought to solidify our position as an industry leader in driver compensation in our operating markets.

In addition to the scheduled pay increases based on years of continued service, we have increased the base pay package and enhanced the compensation for our drivers multiple times during the last three years and anticipate further enhancements in 2022.

As discussed below, the Company's driver training program provides an additional source of future potential professional drivers.

We have increased wages and enhanced the compensation for our drivers multiple times in the last three years.

Further, we have continued to get more creative in providing better pay, benefits, equipment, and facilities for our drivers.

Our comprehensive driver compensation and benefits program rewards drivers for years of service and safe operating mileage benchmarks, which are critical to our operational and financial performance.

Our driver pay package includes future pay increases based on years of continued service with us, increased rates for accident-free miles of operation, detention pay, and other pay programs to assist drivers with unproductive time associated with circumstances outside of their control, such as inclement weather and equipment breakdowns.

Certain driver pay packages include minimum pay protection provisions, future pay increases based on years of continued service with us, increased rates for accident-free miles of operation, detention pay, and other pay programs to assist drivers with unproductive time associated with circumstances outside of their control, such as inclement weather, equipment breakdowns, and customer issues.

We believe that our driver compensation and benefits package is consistently among the best in the industry.

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Growth History and Capital Allocation

In addition to organic growth through the development of our regional operating areas, we have completed eight acquisitions since 1986, with the most recent and our third acquisition within the last eight years, Millis Transfer, occurring on August 26, 2019.

These eight acquisitions have enabled us to solidify our position within existing regions, expand into new operating regions, pursue new customer relationships in new markets, as well as expand business relationships with current customers in new markets.

In addition to past organic growth through the development of our regional operating areas, we have completed ten acquisitions since 1986 with the most recent and our fifth acquisition within the last nine years, CFI, occurring on August 31, 2022

following the acquisition of Smith Transport on May 31, 2022.

These ten acquisitions have enabled us to solidify our position within existing regions, expand into new operating regions, expand service offerings to address longer length of haul needs from customers, pursue new customer relationships in new markets, as well as expand business relationships with current customers in new markets.

We are highly selective about acquisitions, with our main criteria being (i) safe operations, (ii) high quality professional truck drivers, (iii) fleet profile that is compatible with our philosophy or can be replaced economically, and (iv) freight profile that will allow a path to a low-80s operating ratio upon full integration, application of our cost structure, and freight optimization, including exiting certain loads that fail to meet our operating profile.

We expect to continue to evaluate acquisition candidates presented to us.

We expect to continue to evaluate acquisition candidates presented to us, however, we do not expect to make any significant acquisitions while we are paying down debt.

We believe future growth depends upon several factors including the level of economic growth and the related customer demand, the available capacity in the trucking industry, our ability to identify and consummate future acquisitions, our ability to integrate operations of acquired companies to realize efficiencies, and our ability to attract and retain experienced drivers that meet our hiring standards.

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We have also deployed available cash opportunistically toward dividends and stock repurchases.

However, we expect to focus on paying down the debt resulting from our 2022 acquisitions in 2023.

For the periods ended December 31, 2022, our operating cash flows as a percentage of operating revenues five-year average was 23.0%, our three-year average was 22.4%, and most recently for 2022 was 20.1%.

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We strive to operate a relatively new fleet to keep operating costs low, better driver comfort, and enhance dependability.

We seek the flexibility to buy and sell tractors (and trailers) opportunistically to capitalize on new and used equipment markets, size our fleet to the volume of

attractive freight, and manage cash tax expense.

We seek the flexibility to buy and sell tractors (and trailers) opportunistically to capitalize on new and used equipment markets, size our fleet to the volume of attractive freight, and manage cash tax expense.

One method we use to accomplish these goals is to depreciate our new tractors (excludes assets acquired through an acquisition) for financial reporting purposes using the 125% declining balance method, in which depreciation is higher in early periods and tapers off in later periods.

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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.

Assets obtained more than a year prior to the acquisition by the acquired company are depreciated on a straight-line basis aligned with the remaining period of expected use, whereas those obtained less than a year prior are depreciated consistent with newly purchased assets.

As acquired equipment is replaced, our fleet returns to our base methods of declining balance depreciation for tractors and straight-line depreciation for trailers.

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At December 31, 2022, our tractor fleet had an average age of 2.0 years and our trailer fleet had an average age of 6.3 years.

During 2022, we expect the age of both our tractor and trailer fleets to increase compared to 2021, based on estimated net capital expenditures in 2022 due to our expectation of a shortage of reasonably priced new revenue equipment available in 2022.

After salaries, wages, and benefits, and depreciation expense, fuel expense is our next highest operating cost.

During 2023, we expect the age of both our tractor and trailer fleets to remain consistent with the average age at December 31, 2022, based on estimated net capital expenditures in 2023 due to our expectation of a shortage of reasonably priced new revenue equipment available.

After salaries, wages, and benefits, fuel expense was our next highest operating cost in 2022.

Containment of fuel cost continues to be one of management's top priorities.

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The average price per gallon in 2023, through February 20, 2023, was $4.55.

Fuel prices steadily increased throughout 2021 compared to 2020.

This trend has continued into 2022.

We cannot predict what fuel prices will be throughout 2022, but fuel expense has become the second highest expense behind salaries, wages and benefits in 2022 thus far.

During March 2022 the DOE average fuel prices increased to over $5.00 per gallon.

The DOE average fuel cost remained above this elevated threshold for the period from March through December 31, 2022, although the DOE weekly average for the last four weeks of December fell below $5.00 per gallon.

The trend of fuel prices below the $5.00 per gallon threshold has continued in 2023 as the DOE average through February 20, 2023 was $4.55.

We are not able to pass through all fuel price increases through fuel surcharge agreements with customers due to tractor idling time, along with empty and out-of-route miles.

Therefore, our operating income is negatively impacted with increased net fuel costs (fuel expense less fuel surcharge revenue) in a rising fuel environment and is positively impacted in a declining fuel environment.

Therefore, our operating income

is negatively impacted with increased net fuel costs (fuel expense less fuel surcharge revenue) in a rising fuel environment and is positively impacted in a declining fuel environment.

We expect to continue to manage and implement fuel initiative strategies that we believe will effectively manage fuel costs.

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Year Ended December 31, 2022 Compared with the Year Ended December 31, 2021

Operating revenue decreased $38.0 million (5.9%), to $607.3 million for the year ended December 31, 2021 from $645.3 million for the year ended December 31, 2020.

The decrease in revenue was the net result of a decrease in trucking and other revenues of $52.4 million partially offset by an increase in fuel surcharge revenue of $14.4 million.

Millis Transfer contributed approximately 24.8% of the operating revenues, for the year ended December 31, 2021.

The Company acquired CFI on August 31, 2022 and Smith Transport on May 31, 2022, therefore the operating results of the Company for the year ended December 31, 2022 includes the operating results of CFI and Smith Transport for four month and seven months after acquisition, respectively.

The acquisitions impacted the change in operating revenues, salaries, wages and benefits, rent and purchased transportation, fuel expense, operations and maintenance, insurance and claims, depreciation and amortization, other operating expenses, and interest expense in 2022 compared to 2021 as further explained below.

Operating revenue increased $360.7 million (59.4%), to $968.0 million for the year ended December 31, 2022 from $607.3 million for the year ended December 31, 2021.

The increase in revenue was driven by an increase in trucking and other revenues of $267.7 million and an increase in fuel surcharge revenue of $93.1 million.

The increase in trucking and other revenues was primarily from the acquisitions of Smith Transport and CFI.

The increased fuel surcharge revenue was the result of increased miles driven as a result of the acquisitions in addition to a 51.8% increase in average DOE fuel cost in 2022.

Smith Transport and CFI contributed 34.9% of the operating revenues, for the year ended December 31, 2021, including Smith Transport which contributed 13.3% and CFI which contributed 21.6% of the operating revenues.

Operating revenues (the total of trucking and fuel surcharge revenue) are primarily earned based on loaded miles driven in providing truckload services.

The number of loaded miles is affected by general freight supply and demand trends and the number of tractors.

The number of tractors is directly affected by the number of available company drivers and independent contractors providing capacity to us.

For 2022, we expect the industry trends experienced in 2020 and 2021 will likely continue.

We expect the driver shortage within our industry will continue to impact recruiting and retention efforts during 2022.

The number of tractors is directly affected by the number of available drivers providing capacity to us.

The increase in total miles was a result of the additional capacity acquired.

The increase in freight rates, earned on miles driven, was generally due to strong market conditions and demand for our freight services.

In early 2022, freight demand was initially strong, following an extended period of freight demand at peak levels in 2021.

However, demand softened each quarter sequentially in 2022 as compared to 2021.

While the current levels are down compared against those unprecedented levels experienced during 2021, we continued to have more opportunities to haul freight than we were able to cover with our existing fleet and available drivers.

For 2023, we expect

freight demand to remain challenged at lower demand levels during the first half of 2023 or longer based-upon the freight demand experienced in January and February of 2023 with expected normal seasonal trends.

We expect our operating revenue to grow, primarily from our Smith and CFI acquisitions, partially offset by a weaker freight market.

Our operating revenues are reviewed regularly by our CODM on a combined basis across the U.S.

due to the similar nature of our services offerings and related similar base pricing structure.

The operating revenues decrease was the net result of a decrease in loaded miles as a result of fewer drivers partially offset by an increase in the average rate per loaded mile along with increased driver utilization.

The operating revenues increase was the net result of an increase in loaded miles as a result of more drivers following our 2022 acquisitions along with an increase in the average rate per loaded mile.

Fuel surcharge revenues represent fuel costs passed on to customers based on customer specific fuel surcharge recovery rates and billed loaded miles.

Fuel surcharge revenues increased primarily as a result of an increase in average DOE diesel fuel prices of 28.9% during 2021 compared to 2020, as reported by the DOE, which was partially offset by decreased miles driven.

Salaries, wages, and benefits decreased $19.5 million (7.2%), to $250.0 million for the year ended December 31, 2021 from $269.5 million in the 2020 period.

Salaries, wages, and benefits decreased primarily due to the decrease in the number of drivers partially offset by increased driver and support staff wages.

In response to current hiring and retention challenges in our industry we have increased wages and enhanced the compensation for our drivers multiple times in the last twelve months.

Further, we have continued to get more creative in providing better pay, benefits, equipment, and facilities for our drivers.

Fuel surcharge revenues increased $93.1 million primarily as a result of an increase in average DOE diesel fuel prices of 51.8% during 2022 compared to 2021, as reported by the DOE, along with an increase of miles driven following our 2022 acquisitions.

Rent and purchased transportation increased $50.5 million, to $54.3 million for the year ended December 31, 2022 from $3.8 million for the same period of 2021.

The significant increase resulted from the acquisition of CFI which included more purchased transportation utilized throughout their operations, including independent contractors and other third party brokerage relationships.

Further contributing to the rent and purchased transportation increase is lease expense from the acquisition of Smith Transport and their leases along with a terminal lease entered into in May 2022, following the sale of that property.

Salaries, wages, and benefits increased $96.3 million (38.5%), to $346.3 million for the year ended December 31, 2022 from $250.0 million in the 2021 period.

Salaries, wages, and benefits increased primarily due to the increase in the number of drivers and support staff following our 2022 acquisitions.

In response to current hiring and retention challenges in our industry, we continue to get more creative in providing better pay, driving opportunities, benefits, equipment, and facilities for our drivers.

We expect the qualified driver shortage within the trucking industry to continue to be a challenge in the foreseeable future.

Fuel increased $95.0 million (95.4%), to $194.6 million for the year ended December 31, 2022 from $99.6 million for the same period of 2021.

The increase in fuel was primarily due to higher average diesel price per gallon (28.9%) as reported by the

DOE, partially offset by decreased miles driven.

Throughout the twelve months ended December 31, 2021, we were in a rising fuel price environment, while during most of 2020 we were in a declining fuel price environment.

The difference in the lowest DOE price in 2020 (November) to the highest DOE price in 2021 (November) was $1.36 per gallon or a 57.4% increase.

The trend of fuel price increases has continued through February 2022.

The latest DOE diesel fuel price in February 2022 is up 12.2% compared to the end of 2021, is up 23.4% compared to the 2021 yearly average, and is up 42.4% to the February 2021 average.

We cannot currently predict how long and how much the average diesel prices will continue to increase.

Depreciation and amortization decreased $5.8 million (5.3%), to $104.1 million during the year ended December 31, 2021 from $109.9 million in the same period of 2020.

The decrease in depreciation and amortization is attributable to ongoing fleet replacement strategies and adjusting our fleet to our driver base expectation.

The increase in fuel was primarily due to more miles driven following our 2022 acquisitions and higher average diesel price per gallon (51.8%) as reported by the DOE.

The average DOE diesel fuel prices per gallon for 2022 and 2021 were $4.99 and $3.29, respectively.

During March 2022 DOE average fuel prices increased to over $5.00 per gallon.

The trend of fuel prices below the $5.00 per gallon threshold has continued through the first seven weeks of DOE average fuel prices in 2023.

While this is an improvement compared to the majority of 2022, the latest DOE diesel fuel price in February 2023 is up 10.6% compared to the same week of 2022.

We cannot currently predict how long and how much the average diesel prices will remain elevated.

Depreciation and amortization increased $28.9 million (27.8%), to $133.0 million during the year ended December 31, 2022 from $104.1 million in the same period of 2021.

The increase in depreciation and amortization is a result of ongoing fleet replacement strategies and increase in depreciated units from the Smith Transport and CFI acquisitions.

We expect depreciation expense in 2023 to be approximately $200 million to $210 million.

Operating and maintenance expense decreased $6.1 million (22.2%), to $21.5 million during the year ended December 31, 2021, from $27.6 million in the same period of 2020.

Operating and maintenance costs decreased mainly due to a reduction in miles driven partially offset by increased costs associated with an increase in equipment sales volume.

There was a 132.8% increase in volume of trailers sold during 2021 as compared to 2020, partially offset by a 3.4% decrease in the quantity of tractors sold.

We believe that new equipment price inflation and the lack of availability of new revenue equipment will continue throughout 2022.

As a result of manufacturer production shortages and increased costs for new revenue equipment, our trade activity in 2022 is anticipated to be significantly below levels experienced in recent years.

Operating and maintenance expense increased $17.6 million (81.6%), to $39.1 million during the year ended December 31, 2022, from $21.5 million in the same period of 2021.

Operating and maintenance costs increase is mainly attributable to an increase in miles driven and increased costs of our expanded fleet of revenue equipment following our 2022 acquisitions along with higher costs of parts and materials as a result of production shortages.

Due to increased costs and limited availability of new revenue equipment, which we expect to continue into early 2023, our revenue equipment trade activity in 2022 was significantly below levels experienced in recent years.

There was a 60.9% decrease in volume of trailers sold during 2022 as compared to 2021, and a 49.1% decrease in the quantity of tractors sold.

At December 31, 2022, the Company’s tractor fleet had an average age of 2.0 years and the Company's trailer fleet had an average age of 6.3 years.

Given our average age of revenue equipment is in the top tier of our industry, we do not believe that extending our trade cycle in 2022 will significantly increase operations and maintenance expense compared to the rest of the industry.

Operating taxes and licenses expense decreased $1.4 million (9.1%), to $13.6 million during the year ended December 31, 2021 from $15.0 million in 2020, due to a lower number of revenue equipment units (tractors and trailers) licensed in 2021 as compared to 2020.

Insurance and claims expense decreased $1.4 million (6.3%), to $20.8 million during the year ended December 31, 2021 from $22.2 million in 2020.

There was a decrease in severity and frequency of claims as well as a reduction in risk exposure resulting from less miles driven, partially offset by an increase in insurance premiums in 2021 compared to 2020.

The average age of our tractor and trailer fleets was increased by the inclusion of the Smith Transport and CFI equipment obtained through our 2022 acquisitions.

Operating taxes and licenses expense increased $2.8 million (20.5%), to $16.4 million during the year ended December 31, 2022 from $13.6 million in 2021, due to an increase in number of revenue equipment units (tractors and trailers) licensed in 2022 as compared to 2021.

The increase in number of revenue units licensed is the result of our 2022 acquisitions.

Insurance and claims expense increased $13.6 million (65.4%), to $34.4 million during the year ended December 31, 2022 from $20.8 million in 2021.

There was an increase in severity and frequency of claims as well as an increase in risk exposure resulting from more miles driven, along with an increase in insurance premiums in 2022 compared to 2021.

In addition, the overall cost to insure our revenue equipment, on a per unit basis, has increased year-over-year due to a lack of insurance capacity across the transportation industry mainly as a result of the current legal environment.

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We will continue this evaluation with our 2023 insurance renewal, which could result in a change to our coverage limits and insurance premium costs.

Other operating expenses decreased $5.0 million (18.9%), to $21.4 million, during the year ended December 31, 2021 from $26.4 million in 2020, due mainly to decreased variable costs associated with the reduction of revenue equipment units in our fleet.

Other operating expenses increased $30.0 million (140.3%), to $51.4 million, during the year ended December 31, 2022 from $21.4 million in 2021, due mainly to increased variable costs associated with the increase of revenue equipment units in our fleet and miles driven as a result of our 2022 acquisitions.

Gains on the disposal of property and equipment increased $59.5 million (158.8%), to $96.9 million during the year ended December 31, 2022, from $37.4 million in the same period of 2021.

The increase was due to a $13.3 million increase in gains on sales of trailer equipment.

The increase in gains on trailer sales was due to a 44.2% increase in gains per unit sold in 2021 as compared to 2020 as well as a 132.8% increase in volume of trailers sold.

Gains on tractor equipment sales increased by $5.1 million during 2021 compared to 2020 as a result of a 61.2% increase in gains per tractor sold partially offset by a 3.4% decrease in the quantity of tractors sold.

The remaining $4.2 million gain was primarily due to the sale of a terminal facility.

We expect the used equipment market to remain strong in 2022, although our participation may be limited by production shortages and increased costs for new revenue equipment to replace sold units.

Our effective tax rate was 25.2% and 24.9% for years ended December 31, 2021 and 2020, respectively.

The increase in the effective tax rate is due to non-recurring favorable adjustments realized in 2020.

The increase was primarily due to a $73.2 million gain from the sale of a terminal facility, partially offset by a $5.6 million decrease in gains on sales of trailer equipment and a $3.7 million decrease in gains on sales of tractor equipment, with the remaining $4.4 million decrease primarily due to the 2021 sale of a terminal facility.

The decrease in gains on trailer sales was primarily due to a 60.9% decrease in volume of trailers sold, partially offset by a 79.6% increase in the gains per unit sold in 2022 as compared to 2021.

Gains on tractor equipment sales decreased as a result of a 49.1% decrease in the quantity of tractors sold partially offset by a 44.8% increase in gains per tractor sold.

We expect the used equipment market to remain relatively strong in 2023, although our participation may be limited by production shortages and increased costs for new revenue equipment to replace sold units.

Interest expense increased by $8.6 million as we had no interest expense in 2021.

The interest expense is made up of $7.5 million from the Credit Facilities coinciding with the acquisition of CFI while the remaining $1.1 million is the result of debt and financing leases assumed through the Smith Transport acquisition.

Our effective tax rate was 26.2% and 25.2% for the twelve months ended December 31, 2022 and 2021, respectively.

The increase in the effective tax rate is primarily the result of an increase in the accrual of tax for uncertain tax positions specific to transactions occurring in 12 months ended December 31, 2022.

Inflation and Fuel Cost

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The cost increases have also impacted the cost of parts for equipment repairs and maintenance, inclusive of tires.

The qualified driver shortage experienced by the trucking industry has had the affect of

increasing compensation paid to drivers.

The continued qualified driver shortage experienced by the trucking industry has had the effect of increasing compensation paid to drivers.

Significant inflation has been experienced in insurance and claims cost related to health insurance and claims as well as auto liability insurance and claims.

Further, innovations in equipment technology, EPA mandated new engine emission requirements and driver comfort have also resulted in higher tractor prices.

We have the ability to limit new equipment purchases given our average age of revenue equipment is in the top tier of our industry.

We have the ability to limit new equipment purchases given our average age of revenue equipment, particularly our tractor fleet, is in the top tier of our industry.

We do not believe that extending our trade cycle in 2023 will significantly increase operations and maintenance expense compared to the rest of the industry.

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We impose fuel surcharges on substantially all accounts.

Although we historically have been able to pass through most long-term increases in fuel prices and operating taxes to customers in the form of surcharges and higher rates, these arrangements generally do not fully protect us from short-term fuel price increases or continued rising price environments like we experienced throughout 2021.

These arrangements also may prevent us from receiving the full benefit of any fuel price decreases.

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The growth of our business requires significant investments in new revenue equipment.

Historically, except for acquisitions, we have been debt-free, funding revenue equipment purchases with cash flow provided by operating activities and sales of equipment.

Our primary source of liquidity is cash flow provided by operating activities.

We entered into a line of credit during the fourth quarter of 2013, described below, to partially finance an acquisition, including the payoff of debt we assumed.

Our primary source of liquidity during 2021 and 2020 was cash flow generated from operating activities.

During 2019, we were able to fund the acquisition of Millis Transfer, including pay off of acquired debt, and revenue equipment purchases with cash on hand and cash flows provided by operating activities and sales of equipment.

We believe we have adequate liquidity to meet our current and projected needs in the foreseeable future.

We expect to have significant capital requirements over the long-term, which we expect to fund with cash flows provided by operating activities, proceeds from the sale of used equipment, and available capacity on the line of credit.

At December 31, 2021, we had $157.7 million in cash and cash equivalents, no outstanding debt, and $16.5 million available borrowing capacity on the line of credit.

Historically, except for acquisitions, we have been debt-free, funding revenue equipment purchases with our primary sources of liquidity, cash flow provided by operating activities and proceeds from sales of used equipment.

In conjunction with the acquisition of CFI on August 31, 2022, (the “CFI Closing Date”), Heartland entered into a $550.0 million unsecured credit facility which included a $100.0 million revolving line of credit (“Revolving Facility”) and $450.0 million in term loans (“Term Facility” and, together with the Revolving Facility, the “Credit Facilities”).

The Credit Facilities includes a consortium of lenders, including joint bookrunners JPMorgan Chase Bank, N.A.

and Wells Fargo Bank, National Association (“Wells Fargo”).

The Credit Facilities replaced the previous credit arrangements in place for the Company which consisted of a November 2013 Credit Agreement with Wells Fargo, along with an asset-based credit facility with Citizens Bank of Pennsylvania that was assumed as part of the acquisition of Smith Transport on May 31, 2022.

The full amount of the Term Facility was made in a single draw on August 31, 2022 and amounts borrowed under the Term Facility that are repaid or prepaid may not be reborrowed.

The Term Facility will amortize in quarterly installments beginning in September 2023, at 5% per annum through June 2025 and 10% per annum from September 2025 through June 2027, with the balance due on the date that is five years from the CFI Closing Date.

Based on debt repayments made through February 28, 2023, required minimum payments have been covered through March 31, 2025.

The Revolving Facility consists of a five-year revolving credit facility with aggregate commitments in an amount equal to $100.0 million, of which up to $50.0 million is available for the issuance of letters of credit, and including a swingline facility in an amount equal to $20.0 million.

The Revolver will mature and the commitments thereunder will terminate on the date that is five years after the CFI Closing Date.

Amounts repaid under the Revolving Facility may be reborrowed.

The Credit Facilities include an uncommitted accordion feature pursuant to which the Company may request up to $275.0 million in incremental revolving or term loans, subject to lender approvals.

The indebtedness, obligations, and liabilities under the Credit Facilities are unconditionally guaranteed, jointly and severally, on an unsecured basis by the Company, Borrower, and certain other subsidiaries of the Company.

The Borrower may voluntarily prepay outstanding loans under the Credit Facilities in whole or in part at any time without premium or penalty, subject to payment of customary breakage costs in the case of SOFR rate loans.

The Credit Facilities contain usual and customary events of default and negative covenants for a facility of this nature including, among other things, restrictions on the Company’s ability to incur certain additional indebtedness or issue guarantees, to create liens on the Company’s assets, to make distributions on or redeem equity interests (subject to certain exceptions, including that (a) the Company may pay regularly scheduled dividends on the Company’s common stock not to exceed $10.0 million during any fiscal year and (b) the Company may make any other distributions so long as it maintains a net leverage ratio not greater than 2.50 to 1.00), to make investments and to engage in mergers, consolidations, or acquisitions.

The Credit Facilities contain customary financial covenants, including (i) a maximum net leverage ratio of 2.75 to 1.00, measured quarterly on a trailing twelve-month basis, and (ii) a minimum interest coverage ratio of 3.00 to 1.00, measured quarterly on a trailing twelve-month basis.

Outstanding borrowings under the Credit Facilities will accrue interest, at the option of the Borrower, at a per annum rate of (i) for an “ABR Loan”, the alternate base rate (defined as the interest rate per annum equal to the highest of (a) the variable rate of interest announced by the administrative agent as its “prime rate”, (b) 0.50% above the Federal Funds Rate, (c) the Term SOFR for an interest period of one-month plus 1.1%, or (d) 1.00%) plus the applicable margin or (ii) for a “SOFR Loan”, the Term SOFR Rate for an interest period of one, three or six-months as selected by Company plus the applicable margin.

The applicable margin for ABR Loans ranges from 0.250% to 0.875% and the applicable margin for SOFR Loans ranges from 1.250% to 1.875%, depending on the Company’s net leverage ratio.

One of the nine consortium lenders is West Bank.

Our CEO has served on the Board of Directors of West Bancorporation and West Bank, a wholly owned subsidiary of West Bancorporation, Inc., the financial institution that holds a portion of our deposits, since 2013.

We have had a banking relationship with West Bank since 2003.

West Bank's share of the Revolving Facility is $8.2 million while the West Bank share of the initial Term Facility was $36.8 million.

We had $375.0 million outstanding on the Term Facility and no outstanding under the Revolving Facility at December 31, 2022.

As of February 28, 2023 the outstanding balance on the Term Facility was $360.0 million.

Outstanding letters of credit associated with the Revolving Facility at December 31, 2022 were $13.9 million.

As of December 31, 2022, the Revolving Facility available for future borrowing was $86.1 million.

As of December 31, 2022 the weighted average interest rate on

outstanding borrowings under the Credit Facilities was 5.6%.

The May 31, 2022 acquisition of Smith Transport included the assumption of $46.8 million of debt and financing lease obligations associated with the fleet of revenue equipment of which $40.3 million was outstanding at December 31, 2022, (the "Smith Debt").

The Smith Debt has $9.7 million of outstanding principal and is made up of installment notes with a weighted average interest rate of 4.4% at December 31, 2022, due in monthly installments with final maturities at various dates ranging from November 2023 to January 2029, secured by related revenue equipment.

The remaining Smith Debt of $30.6 million are finance lease obligations with a weighted average interest rate of 3.9% at December 31, 2022, due in monthly installments with final maturities at various dates ranging from July 2023 to April 2026 with the weighted average remaining lease term of 2.3 years.

At December 31, 2022, we had $49.5 million in cash and cash equivalents, $382.4 million in outstanding debt, $30.6 million in finance lease liabilities, $21.0 million in operating lease obligations, and $86.1 million available borrowing capacity on the Revolving Facility.

We intend to diligently pay down the debt we incurred and assumed to complete our most recent acquisitions, while maintaining our regular quarterly dividends and funding our ongoing capital expenditure needs.

While we are paying down the debt, we do not currently expect to declare special dividends, repurchase shares of our common stock, or make significant acquisitions, however we will remain flexible to ensure the best deployment of our capital.

Operating cash flow for 2022 was $194.7 million compared to $123.4 million for 2021.

This increase was primarily due to a $32.5 million increase in net income net of non-working capital adjustment items, along with $38.8 million more cash provided by working capital items.

Cash flow from operating activities was 20.1% of operating revenues for the year ended December 31, 2022, compared to 20.3% for the same period of 2021.

The change predominantly relates to increased cash paid for income taxes and other payroll taxes as further described below.

The CARES Act allowed employers to defer the deposit and payment of the employer's share of Social Security taxes.

As a result, during 2020 we deferred remitting payroll taxes normally paid on a weekly basis until the end of 2021 when the first half of the deferred tax payments were paid and 2022 when the second half of the deferred tax payments are due.

The CARES Act deferred federal payroll taxes as of December 31, 2021 was $4.7 million.

Cash flows used in investing activities were $2.6 million during 2021, representing a decrease in cash used of $108.4 million compared to cash flows used in investing activities of $111.0 million during 2020.

The decrease in cash used in investing activities was mainly the result of $108.7 million less of net purchases of property and equipment in 2021, compared to net purchases of property and equipment in 2020.

We currently anticipate higher net capital expenditures for revenue equipment in 2022 compared to 2021, despite a lower number of new equipment units anticipated to be purchased, as a result of a reduced volume of units anticipated to be sold in 2022 compared to 2021.

Cash flows used in financing activities increased $45.4 million in 2021 compared to 2020.

This was primarily due to a special dividend paid of $39.5 million in 2021 and $32.0 million cash used for repurchases of our common stock during 2021, as compared to $25.7 million cash used for repurchases of our common stock during 2020.

There were no repayments of debt during 2021 and 2020, as we had no indebtedness.

Cash flows used in investing activities were $663.3 million during 2022, representing an increase in cash used of $660.6 million compared to cash flows used in investing activities of $2.6 million during 2021.

The increase in cash used in investing activities was mainly the result of net cash used of $675.9 million for the acquisition of Smith Transport and CFI partially offset by $14.6 million more of net cash provided by property and equipment in 2022, compared to net purchases of property and equipment in 2021.

The increase in net cash provided by property and equipment was primarily due to cash received from the sale of a terminal property.

We currently anticipate higher net capital expenditures for revenue equipment in 2023 compared to 2022 as a result of the larger fleet size following the acquisitions and efforts to refresh these fleets.

Cash flows provided by financing activities increased $437.4 million in 2022 compared to 2021.

The $359.3 million provided by financing activities during 2022 included $447.3 million from the issuance of long-term debt partially offset by $81.5 million of repayments of finance leases and debt and $6.3 million used to pay dividends to our shareholders.

In 2021, $78.1 million was used in financing activities including $45.9 million to pay dividends, including a special dividend, and $32.0 million for repurchases of our common stock.

We have a stock repurchase program with 6.6 million shares remaining authorized for repurchase as of December 31, 2022 and the program has no expiration date.

There were 1.8 million shares repurchased in the open market during the year ended December 31, 2021 and 1.5 million shares were repurchased in 2020.

Repurchases are expected to continue from time to time, as determined by market conditions, cash flow requirements, securities law limitations, and other factors, until the number of shares authorized have been repurchased, or until the authorization is terminated.

There were no shares repurchased in the open market during the year ended December 31, 2022 and 1.8 million shares were repurchased in 2021.

While we are paying down the debt, we do not currently expect to repurchase shares of our common stock, however we will remain flexible to ensure the best deployment of our capital.

Any future repurchases will depend on market conditions, cash flow requirements, securities law limitations, and other factors.

The share repurchase authorization is discretionary and has no expiration date.

We paid income taxes, net of refunds, of $38.5 million in 2021, compared with $13.7 million during 2020.

The increase in net tax payments is due to a federal refund received in 2020 compared to 2021 and increased current year tax liability associated with the recognition of increased tax gains on revenue equipment sales and less accelerated depreciation deductions in 2021 compared to 2020.

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”).

On August 31, 2021, the Borrower and the Bank entered into the Second Amendment to this Credit Agreement.

The Second Amendment (i) provides for a $25.0 million 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) decreases the letter of credit subfeature of the Credit Agreement from $30.0 million to $20.0 million, and (iv) extends the maturity of the Existing Credit Agreement to August 31, 2023, 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.

Interest on outstanding indebtedness under the Second Amendment is based on the Secured Overnight Financing Rate (“SOFR”) plus a spread based on the Company’s consolidated funded debt to adjusted EBITDA ratio.

A non-usage fee is payable on the unused portion of the Revolver 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 years ended December 31, 2021 and December 31, 2020.

We had net payments of $44.0 million and $38.5 million for income taxes, net of refunds, in the twelve months ended December 31, 2022 and 2021, respectively.

The increase in net tax payments is the result of increased taxable income, partially offset by taxes paid with returns filed in 2021 that was not applicable to returns filed in 2022 and tax treatment of fixed asset transactions.

Management believes we have adequate liquidity to meet our current and projected needs in the foreseeable future.

Management believes we will continue to have significant capital requirements over the long-term, which we expect to fund with current available cash, cash flows provided by operating activities, proceeds from the sale of used equipment and to a lesser extent, available capacity on the Credit Facilities.

Contractual Obligations and Commercial Commitments

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Of this amount, $4.5 million represents the amount of unrecognized tax benefits that, if recognized, would impact our effective tax rate as of December 31, 2022.

The total net amount of accrued interest and penalties for such unrecognized tax benefits was $0.8 million at December 31, 2021, and is included in income taxes payable within the consolidated balance sheet.

The total net amount of accrued interest and penalties for such unrecognized tax benefits was $0.7 million at December 31, 2022, and is included in long-term income taxes payable within the consolidated balance sheet.

Income tax expense is increased each period for the accrual of interest on outstanding positions and penalties when the uncertain tax position is initially recorded.

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We do not have any outstanding litigation related to income tax matters.

At this time, management’s best estimate of the reasonably possible change in the amount of gross unrecognized tax benefits is approximately no change to an increase of $1.0 million during the next twelve months, due to the combination of expiration of certain statute of limitations and estimated additions.

At this time, management’s best estimate of the reasonably possible change in the amount of gross unrecognized tax benefits is approximately no change to an increase of $1.0 million during the next twelve months, due to the net combination of estimated additions and expiration of certain statute of limitations.

The federal statute of limitations remains open for the years 2019 and forward.

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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.

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We have not had any material changes to our estimate methodology in the past three years.

Business Combination Estimates

The purchase price of an acquired businesses is allocated to the estimated fair values of the assets acquired and liabilities assumed as of the date of the acquisition.

The calculations used to determine the fair value of the long-lived assets acquired, including intangible assets, revenue equipment and properties can be complex and require significant judgment.

For the valuation of long-lived assets we weigh many factors when completing these estimates.

We may also engage independent valuation specialists to assist in the fair value calculations.

During 2022 we engaged valuation specialists to assist us in determining the fair value of intangible assets, revenue equipment and properties acquired through our acquisitions of Smith

Transport and CFI.

Goodwill is not amortized, but is subject to impairment testing on at least an annual basis and its valuation is directly impacted by the valuation estimates of the other acquired long-lived assets.

We are also required to determine if an intangible asset has a finite or indefinite life.

For intangible assets determined to have a finite life, we estimate the useful lives of the acquired intangible assets, which determines the amount of acquisition-related amortization expense we will record in future periods.

While we use our best estimates and assumptions, our fair value estimates are inherently uncertain.

During the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill.

Any adjustments required after the one year measurement period would be recorded in the consolidated statements of income.

The judgments required in determining the estimated fair values and expected useful lives assigned to each class of assets can significantly affect net income.

Significant management judgment is required to determine the provision for income taxes and to determine whether deferred income taxes will be realized.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis