What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2024-02-28 compared with 2023-03-01 · 117 added, 104 removed, 298 unchanged (43% of the section changed)

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Actual results could differ materially from those discussed.

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.

Prior to 2022 we, together with our subsidiaries, historically were a short-to-medium haul truckload carrier where 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.

and now including cross border freight to and from Mexico and our consolidated average length of haul is approximately 400 miles.

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

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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.

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

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

We believe that our service standards, safety record, and equipment accessibility have made us a core carrier to many of our major customers, as well as allowed us to build solid, long-term relationships with customers and brand ourselves as an industry leader for on-time service.

Our headquarters is located in North Liberty, Iowa, in a lower-cost environment with ready access to a skilled, educated, and industrious workforce.

Our corporate headquarters is located in North Liberty, Iowa, in a lower-cost environment with ready access to a skilled, educated, and industrious workforce.

Our other terminals are located near major shipping corridors nationwide, affording proximity to customer locations, driver domiciles, and distribution centers.

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We believe our geographic reach and terminal locations assist us with driver recruiting and retention, efficient fleet maintenance, and consistent customer engagement.

Our long-term objectives, which have not changed since we were founded in 1978, are to achieve significant growth, to operate with a low-80s operating ratio (operating expenses as a percentage of operating revenue), and to maintain a debt-free balance sheet.

Our long-term objectives, which have not generally changed since we were founded in 1978, are to achieve significant growth, to operate with a low-80s operating ratio (operating expenses as a percentage of operating revenue), and to maintain a debt-free balance sheet.

We maintain a disciplined approach to cost controls.

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

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

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

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

The challenging freight environment during 2023, combined with acquisitions of Smith Transport and CFI in 2022, have pressured our financial results to a level below our historical results and management expectations, and also resulted in the incurrence of debt.

However, the acquisitions have also allowed us to deliver $1.2 billion of operating revenues, an all-time record for our organization.

We believe this enhanced scale provides a better strategic position given the cyclical nature of the industry we operate in.

This enhanced scale has allowed us to increase capacity, enhance our customer offerings, and further diversify our customer base.

We anticipate getting back to debt free and low 80's operating ratio for our consolidated operations over the next two to three years as we integrate the operations of these two entities and the freight market improves.

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this document generally discusses 2023 and 2022 items and year-to-year comparisons between 2023 and 2022.

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Recent Developments

In 2023, we generated operating revenues of $1.2 billion, including fuel surcharges, net income of $14.8 million, and basic net income per share of $0.19 on basic weighted average outstanding shares of 79.0 million.

This compared to 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 in 2022.

We posted an 96.5% operating ratio (which represents operating expenses as a percentage of operating revenues) for the year ended December 31, 2023, compared to 80.5% for the same period of 2022, and an 1.2% net margin (which represents net income as a percentage of operating revenues) for 2023, compared to 13.8% in the same period of 2022.

We posted an 95.4% non-GAAP adjusted operating ratio (1) (operating expenses as a percentage of operating revenues, net of fuel surcharge) for the year ended December 31, 2023 compared to 84.8% for the same period of 2022.

We had total assets of $1.5 billion and total stockholders' equity of $865.3 million at December 31, 2023.

We achieved a return on assets of 0.9% and a return on equity of 1.7% over the year ended December 31, 2023, compared to 9.8% and 16.4% respectively, for 2022.

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.

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.

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

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

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

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

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

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

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

GAAP to Non-GAAP Reconciliation Schedule:

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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.

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.

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Our cash flow provided by operating activities for the twelve months ended December 31, 2023 was $165.3 million or 13.7% of operating revenues, compared to $194.7 million or 20.1% of operating revenues in 2022.

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.

During 2023, we used $67.9 million in net investing cash flows, which was primarily the result of $71.3 million of net cash used for the purchase of property and equipment.

We used $208.6 million to purchase property and equipment and received $137.3 million from the sales of property and equipment.

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

We had net cash of $120.7 million used by financing activities during 2023, including $114.1 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 $23.3 million during the year ended December 31, 2023 to $41.2 million.

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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.

Freight demand began to soften in the back half of 2022 and continued to degrade throughout all of 2023.

We expect freight demand to remain challenged at lower demand levels in at least the first half of 2024 based upon the freight demand experienced in January and February of 2024.

We expect the strategic changes that we have implemented during 2023 will improve our operational readiness ahead of future expected freight demand growth, which could happen as soon as mid to late 2024.

However, continued supply chain issues for tractors, trailers and related parts, general consumer product output and inventory volatility, consumer demand, the political landscape, foreign wars, and disruption in oil and diesel markets all could create additional volatility regarding freight demand during 2024.

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

Organic growth has become increasingly difficult for traditional over-the-road truckload carriers given a shortage of qualified drivers in the industry and availability of revenue equipment assets.

We have completed two recent strategic acquisitions to combat these industry challenges.

In addition, we continue to evaluate and explore different driving options and offerings for our existing and potential new drivers across our unique mix of driver offerings at Heartland Express, Millis Transfer, Smith Transport, and CFI.

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

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Competition for qualified drivers continued to be challenging in 2023 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.

However, driver availability began to change late in 2022 and into 2023, as a result of the degrading 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.

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

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

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

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

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

Our comprehensive driver compensation and benefits program rewards drivers for years of service and safe operating mileage

benchmarks, which are critical to our operational and financial performance.

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

As a result of the freight environment during 2023, we paid more through these programs, resulting in an increase of driver pay per mile and as a percentage of revenue.

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

We are committed to investing in our drivers and compensating them for safety as both are key to our operational and financial performance.

Currently over 10% of our driver employees, individually, have achieved 1.0 million safe miles.

Growth History and Capital Allocation

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

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

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 since 2013, 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 have historically been a debt free organization, although with the acquisition of CFI we now have a significant amount of debt.

We have also significantly lowered our debt balance from 2022 to 2023.

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.

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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.

However, we expect to focus primarily on paying down the debt resulting from our 2022 acquisitions in 2024.

For the periods ended December 31, 2023, our operating cash flows as a percentage of operating revenues five-year average was 20.1%, our three-year average was 17.4%, and most recently for 2023 was 13.7%.

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At December 31, 2023, our tractor fleet had an average age of 2.2 years and our trailer fleet had an average age of 6.4 years.

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

During 2024, we expect the age of both our tractor and trailer fleets to increase from the average age at December 31, 2023, based on estimated net capital expenditures in 2024.

After salaries, wages, and benefits, fuel expense was our next highest operating cost in 2023.

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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.

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

The trend of fuel prices below the $5.00 per gallon threshold has continued through 2023 and into 2024.

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, 2023 Compared with the Year Ended December 31, 2022

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 2023 as further explained below.

Operating revenue increased $239.5 million (24.7%), to $1,207.5 million for the year ended December 31, 2023 from $968.0 million for the year ended December 31, 2022.

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 revenue was driven by an increase in trucking and other

revenues of $234.8 million and an increase in fuel surcharge revenue of $4.6 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.

The increased fuel surcharge revenue was the result of increased miles driven as a result of the acquisitions, partially offset by lower average DOE diesel fuel prices in 2023.

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

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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.

The freight rates, earned on miles driven, were generally soft due to weak market conditions and demand for freight services in 2023 compared to early 2022 and 2021.

For 2024, we expect freight demand to remain challenged at lower demand levels during the first half of 2024 or longer based-upon the freight demand experienced in January and February of 2024.

Freight demand growth could happen as soon as mid to late 2024.

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

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

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

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

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

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

Fuel surcharge revenues increased $4.6 million primarily as a result of an increase of miles driven following our 2022 acquisitions, offset by a decrease in average DOE diesel fuel prices of 15.5% during 2023 compared to 2022, as reported by the DOE .

Rent and purchased transportation increased $58.4 million, to $112.7 million for the year ended December 31, 2023 from $54.3 million for the same period of 2022.

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.

Further contributing to the rent and purchased transportation increase is the lease expense from the equipment leases that came with the acquisition of Smith Transport along with terminal leases entered into after selling certain properties.

Salaries, wages, and benefits increased $128.5 million (37.1%), to $474.8 million for the year ended December 31, 2023 from $346.3 million in the 2022 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.

In response to 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.

Our pay protection programs assist drivers with unproductive time associated with circumstances outside of their control, such as inclement weather, equipment breakdowns, and customer issues.

As a result of the freight environment during 2023 we paid more through these programs, resulting in an increase of driver pay per mile.

These programs have helped with driver retention and we believe the increased driver pay is an investment in the future.

Fuel increased $17.6 million (9.1%), to $212.2 million for the year ended December 31, 2023 from $194.6 million for the same period of 2022.

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 increase in fuel was primarily due to more miles driven following our 2022 acquisitions, partially offset by lower average diesel price per gallon (15.5%) as reported by the DOE.

The average DOE diesel fuel prices per gallon for 2023 and 2022 were $4.21 and $4.99, respectively.

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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.

The trend of fuel prices below the $5.00 per gallon threshold has continued through December 31, 2023.

The average DOE diesel fuel price into February 2024 is down 7.5% compared to the 2023 DOE average price.

We cannot currently predict whether the trend of declining fuel prices from the historic highs experienced during 2022 will continue.

Depreciation and amortization increased $66.0 million (49.6%), to $199.0 million during the year ended December 31, 2023 from $133.0 million in the same period of 2022.

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.

The increase in depreciation and amortization is primarily due to an increase in quantity of depreciated equipment from the Smith Transport and CFI acquisitions.

We expect depreciation expense in 2024 to be approximately $180 million to $185 million.

Operating and maintenance expense increased $24.3 million (62.1%), to $63.4 million during the year ended December 31, 2023, from $39.1 million in the same period of 2022.

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.

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, including the operation of slightly older equipment.

Equipment selling activity further contributed to the increase as maintenance items are regularly identified during associated inspections.

There was an 122.2% increase in volume of trailers sold during 2023 as compared to 2022, and a 73.9% increase in the quantity of tractors sold.

The increase in sold equipment was primarily due to the increased fleet size as a result of our 2022 acquisitions.

At December 31, 2023, the Company’s tractor fleet had an average age of 2.2 years and the Company's trailer fleet had an average age of 6.4 years.

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

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 $5.4 million (33.1%), to $21.8 million during the year ended December 31, 2023 from $16.4 million in 2022, due to an increase in number of revenue equipment units (tractors and trailers) licensed in 2023 as compared to 2022.

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Insurance and claims expense increased $10.9 million (31.5%), to $45.3 million during the year ended December 31, 2023 from $34.4 million in 2022.

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

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

We expect that insurance premiums will continue trending upward.

In recent years we have modified our coverage to better match the benefit of insurance coverage received to the insurance premiums charged.

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

There was an increase in volume of claims associated with the increase in risk exposure resulting from more miles driven, along with an increase in insurance premiums in 2023 compared to 2022 as a result of the 2022 acquisitions.

The overall cost to insure revenue equipment, on a per unit basis, has increased in recent years due to a lack of insurance capacity across the transportation industry, mainly as a result of the current legal environment.

Certain insurance carriers that provide excess insurance coverage currently and for past claim years have encountered financial issues.

In recent years there have been several insurance carriers that have exited the excess reinsurance market.

Insurance carriers have raised premiums and collateral requirements for many businesses, including trucking companies.

In our April 2023 renewal we increased retained claim exposure in response to the premium increase trend, but also were able to increase our aggregate excess coverage.

Our premiums are subject to upward or downward adjustments based on claims experience with the opportunity for net savings if we have positive claims experience.

As a result, our insurance and claims expense could likely increase with unfavorable claims experience.

Other operating expenses increased $15.0 million (29.1%), to $66.4 million, during the year ended December 31, 2023 from $51.4 million in 2022, due mainly to increased variable costs associated with the increase of revenue equipment units in our fleet and miles driven as a result of our 2022 acquisitions.

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

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

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

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

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

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

Gains on the disposal of property and equipment decreased $55.8 million (57.6%), to $41.1 million during the year ended December 31, 2023, from $96.9 million in the same period of 2022.

The decrease was primarily due to a $47.5 million decrease from the sale of a terminal facilities, $6.6 million decrease in gains on sales of trailer equipment and a $1.6 million decrease in gains on sales of tractor equipment.

The decrease in gains on trailer sales was primarily due to a 77.2% decrease in the gains per unit sold in 2023 as compared to 2022.

Gains on tractor equipment sales decreased as a result of a 50.8% decrease in gains per tractor sold.

We currently expect lower capital investment and sale transactions for equipment in 2024 as a result of the current depressed used equipment market as compared to the cost of new tractors and trailers.

Based on currently agreed upon equipment deals we expect equipment transaction gains to be insignificant during 2024.

Interest expense increased $15.6 million (182.7%), to $24.2 million during the year December 31, 2023 from $8.6 million in 2022.

The interest expense is made up of $22.7 million from the Credit Facilities coinciding with the acquisition of CFI while the remaining $1.5 million is the result of debt and financing leases assumed through the Smith Transport acquisition.

Based on debt repayments made during 2023, along with projected debt paydowns in 2024, we expect interest expense to decrease in 2024.

Our effective tax rate was 25.6% and 26.2% for the twelve months ended December 31, 2023 and 2022, 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.

The decrease in the effective tax rate is primarily the result of favorable return to provision adjustments more than offsetting the unfavorable increase in permanent differences applicable in 2023 that were not in 2022.

Inflation and Fuel Cost

Most of our operating expenses are inflation-sensitive, with inflation generally producing increased costs of operations.

During the past year there has been an inflation uptick.

Significant price increases in original equipment manufacturer revenue equipment has impacted the cost for us to acquire new equipment, while there has been a corresponding inflationary impact to prices offered on the sale of our used equipment.

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

In recent years there has been an inflation uptick.

Significant price increases in original equipment manufacturer revenue equipment has impacted the cost for us to acquire new equipment.

While there was a corresponding inflationary impact to prices offered on the sale of our used equipment during prior years, the market for used equipment softened significantly during 2023.

Inflation has also impacted the cost of parts for equipment repairs and maintenance, inclusive of tires.

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

Our pay protection programs assist drivers with unproductive time associated with circumstances outside of their control, such as inclement weather, equipment breakdowns, and customer issues.

As a result of the freight environment during 2023 we paid more through these programs, resulting in an increase of driver pay per mile.

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

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We do not believe that extending our trade cycle in 2024 will significantly increase operations and maintenance expense compared to the rest of the industry.

We historically have limited the effects of inflation through increases in freight rates and certain cost control efforts.

We historically have limited the

effects of inflation through increases in freight rates and certain cost control efforts.

Over the long term, general economic growth and industry supply and demand conditions have allowed rate increases, although the rate increases received have significantly lagged the increases in tractor prices and related depreciation expense.

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Additionally, we are not able to recover fuel surcharge on empty miles, out of route miles, or fuel used in idling.

Empty miles, out of route miles and idling were all elevated in 2023 as a result of lower freight demand throughout the year.

Liquidity and Capital Resources

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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 Term Facility amortizes in quarterly installments which began 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 December 31, 2023, required minimum payments have been covered through March 31, 2027.

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.

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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.

We were in compliance with the respective financial covenants at December 31, 2023 and have been in compliance since the inception of the Credit Facilities.

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 $275.0 million outstanding on the Term Facility and no outstanding under the Revolving Facility at December 31, 2023.

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As of December 31, 2023, the Revolving Facility available for future borrowing was $88.0 million.

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

outstanding borrowings under the Credit Facilities was 5.6%.

As of December 31, 2023 the weighted average interest rate on outstanding borrowings under the Credit Facilities was 7.1%.

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 $26.2 million was outstanding at December 31, 2023, (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.

The Smith Debt has $7.7 million of outstanding principal and is made up of installment notes with a weighted average interest rate of 4.4% at December 31, 2023, due in monthly installments with final maturities at various dates ranging from March 2024 to January 2029, secured by related revenue equipment.

The remaining Smith Debt of $18.5 million are finance lease obligations with a weighted average interest rate of 3.9% at December 31, 2023, due in monthly installments with final maturities at various dates ranging from October 2024 to April 2026 with the weighted average remaining lease term of 1.7 years.

At December 31, 2023, we had $28.1 million in cash and cash equivalents, $281.5 million in outstanding debt, $18.5 million in finance lease liabilities, $17.4 million in operating lease obligations, and $88.0 million available borrowing capacity on the Revolving Facility.

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Operating cash flow for 2023 was $165.3 million compared to $194.7 million for 2022.

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.

This $29.4 million decrease was primarily due to a $16.5 million decrease in net income net of non-working capital adjustment items, along with $12.9 million less cash used in working capital items.

Cash flow from operating activities was 13.7% of operating revenues for the year ended December 31, 2023, compared to 20.1% for the same period of 2022.

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.

Cash flows used in investing activities were $67.9 million during 2023, representing a decrease in cash used of $595.4 million compared to cash flows used in investing activities of $663.3 million during 2022.

The decrease in cash used in investing activities was mainly the result of net cash of $675.9 million used in 2022 for the acquisitions of Smith Transport and CFI, partially offset by $83.5 million more net cash used by property and equipment in 2023, compared to net proceeds for property and equipment in 2022.

The net cash provided by property and equipment in 2022 was the result of the significant proceeds received from the sale of a terminal property.

We currently anticipate less net capital expenditures for revenue equipment in 2024 compared to 2023.

Cash flows used in financing activities increased $479.9 million in 2023 compared to 2022.

The $120.7 million used in financing activities during 2023 included $114.1 million of repayments of finance leases and debt and $6.3 million used to pay dividends to our shareholders.

In 2022, $359.3 million was provided by financing activities including $447.3 million proceeds from issuance of long-term debt for the purchase of CFI, offset by $81.5 million used for repayments of finance leases and debt along with $6.3 million to pay dividends.

We have a stock repurchase program with 6.6 million shares remaining authorized for repurchase as of December 31, 2023 and the program has no expiration date.

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

There were no shares repurchased in the open market during the years ended December 31, 2023 and 2022.

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.

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We had net payments of $30.1 million and $44.0 million for income taxes, net of refunds, in the twelve months ended December 31, 2023 and 2022, 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.

Tax payments year over year decreased for the twelve months ended December 31,

2023 due to a decrease in estimated tax liability primarily due to irregular tax gains realized in 2022 and the reduction in book taxable income in 2023.

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

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Management believes that the ultimate resolution of these claims will not significantly affect the long-term financial condition of the Company or its ability to fund its continuing operations.

A change in estimate could impact salaries, wages and benefits (workers compensation) or insurance and claims (auto liability) in the consolidated statements of comprehensive income and insurance accruals in the consolidated balance sheets.

A change in estimate could impact salaries, wages and benefits (workers compensation) or insurance and claims (auto liability) in the consolidated statements of

comprehensive income and insurance accruals in the consolidated balance sheets.

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

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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.

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.

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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