Heartland Express(HTLD) - 2023 Q4 - Annual Report

PART I Overview of Heartland Express's business, operations, and regulatory environment, including risk factors ITEM 1. Business Heartland Express provides diverse truckload and transportation services, expanded through recent acquisitions - Heartland Express, Inc. operates as a short, medium, and long-haul asset-based dry van truckload carrier, expanding services to include cross-border freight to/from Mexico through 2022 acquisitions of Smith Transport and CFI[16][17][18] - The company's revenue grew from $21.6 million in 1986 to $1.2 billion in 2023, achieving its highest revenue of $4.0 billion and second-highest net income of $371.4 million for 2019-2023[20] - Heartland Express operates under the brand names Heartland Express, Millis Transfer, Smith Transport, and CFI, managing its business based on consolidated operating goals[18] General Business Overview Overview of Heartland Express's corporate structure, service offerings, growth strategy, and debt management - Heartland Express, Inc. is a Nevada-incorporated holding company owning several legal entities, providing short, medium, and long-haul asset-based dry van truckload services across the U.S., with expanded cross-border freight in Mexico following 2022 acquisitions[16][17][18] - The company's growth strategy involves expanding services for existing customers, acquiring new customers, and strategic acquisitions, with criteria including safe operations, high-quality drivers, and a path to a low-80s operating ratio[20][22] - Historically debt-free, the company incurred significant debt with the CFI acquisition but substantially lowered its debt balance from 2022 to 2023, prioritizing debt reduction[22][23] Operations Details on operational focus, terminal network, and customer satisfaction strategies - Operations focus on customer expectations, driver opportunities, and maximizing equipment utilization, with approximately 70% of loads in 2023 being less than 500 miles within the U.S.[24][25][27] - The company operates thirty-one terminal facilities across the contiguous U.S. and one in Mexico, strategically located for regional freight movements within a 500-mile radius[28] - Customer satisfaction is emphasized through on-time performance, dependable late-model equipment, and consistent availability, supported by a high trailer-to-tractor ratio to minimize waiting times[30] Customers, Marketing, Safety and Diversity Overview of customer targeting, revenue concentration, and commitment to safety and diversity - The company targets customers with multiple, time-sensitive shipments, positioning itself as a provider of premium service at compensatory rates[32] - Primary customers include retailers, manufacturers, and parcel carriers, with diversification improving in 2022 due to acquisitions, and no single customer exceeding 10% of operating revenues in 2023 or 2022[34] Customer Revenue Concentration | Customer Group | 2023 Operating Revenues (%) | 2022 Operating Revenues (%) | | :--------------- | :-------------------------- | :-------------------------- | | 25 largest customers | 56% | 61% | | 10 largest customers | 36% | 41% | | 5 largest customers | 22% | 27% | Environmental and Sustainability Heartland Express's commitment to environmental stewardship and energy conservation initiatives - Heartland Express's 'Environmental and Sustainability Mission' focuses on reducing waste and conserving energy through equipment designs, idle reduction, solar energy, and battery usage[35] - The company received the U.S. EPA SmartWay Excellence Award in seven of the last nine years and was a SmartWay High Performer seven times[35] Human Rights Heartland Express's commitment to human rights, diversity, and anti-trafficking initiatives - The company's 'Human Rights Mission' emphasizes diversity, inclusion, workplace safety, and prohibits forced labor and human trafficking, sponsoring 'Truckers Against Trafficking'[36] Seasonality Impact of cyclical and seasonal factors on trucking industry operations and demand - The trucking industry is cyclical and seasonal, with winter weather decreasing tractor productivity and increasing operating expenses due to idling and higher accident frequency[37][38] - Fourth-quarter demand, especially from retail customers, typically requires additional capacity, but can be muted during soft freight environments, as seen in the last two years[38] Drivers, Independent Contractors, and Other Employees Overview of employee and independent contractor data, driver shortage challenges, and retention strategies Employee and Independent Contractor Data | Metric | 2023 | 2022 | | :-------------------------------- | :----- | :----- | | Average Employees | 6,320 | 4,710 | | Independent Contractor Miles (% of total) | 5.0% | 2.7% | - The trucking industry faces a persistent shortage of qualified drivers, intensified by freight demand and the COVID-19 pandemic in 2021, though availability improved in late 2022 and 2023 due to a declining freight environment[40] - The company attracts and retains drivers through competitive compensation, benefits, modern equipment, and facilities, including pay protection programs, with Millis Training Institute and Heartland Training Institute providing new driver sources[40][41][43] Revenue Equipment Heartland Express's strategy for maintaining a modern fleet and equipment ownership practices - Heartland Express maintains a modern fleet of tractors and trailers for better operating performance, driver appeal, and reduced carbon footprint, evidenced by SmartWay awards[44] - The company primarily owns its revenue equipment, paying cash for new acquisitions, allowing flexibility in buying and selling, with tractors depreciated using the 125% declining balance method and trailers by the straight-line method[45] Average Fleet Age | Fleet Type | December 31, 2023 (Years) | December 31, 2022 (Years) | | :----------- | :------------------------ | :------------------------ | | Tractors | 2.2 | 2.0 | | Trailers | 6.4 | 6.3 | - The average age of both tractor and trailer fleets is expected to increase in 2024 due to estimated lower net capital expenditures[217] Fuel Management of fuel costs, impact of surcharges, and fuel price trends - Fuel is a significant operating cost, managed through discounted fuel stops and bulk sites, with surcharge agreements helping pass through long-term price increases, but not covering empty/out-of-route miles or idling costs[51] Fuel Expense and Surcharge Revenue | Metric | 2023 (Millions USD) | 2022 (Millions USD) | 2023 (% of Operating Expenses) | 2022 (% of Operating Expenses) | | :-------------------- | :------------------ | :------------------ | :----------------------------- | :----------------------------- | | Fuel Expense | $212.2 | $194.6 | 18.2% | 25.0% | | Fuel Surcharge Revenue | $173.8 | $169.2 | N/A | N/A | - The Department of Energy (DOE) average fuel price decreased by 15.5% in 2023 compared to 2022, positively impacting net fuel cost despite higher empty route miles due to soft freight demand[51] Competition and Industry Overview of the highly competitive and cyclical truckload industry and Heartland Express's growth strategies - The truckload industry is highly competitive and fragmented, with competition based on freight rates, drivers, service, and equipment, while Heartland specializes in time-sensitive shipments with premium service[52] - The industry is cyclical; freight demand softened in late 2022 and degraded throughout 2023, with challenges expected in the first half of 2024, prompting strategic changes to improve operational readiness[53] - Organic growth is difficult due to driver shortages and equipment availability, leading the company to pursue strategic acquisitions like Smith Transport and CFI to combat these challenges[54][55] Safety and Risk Management Heartland Express's safety program, compliance with regulations, and self-insurance practices - The company's safety program focuses on minimizing accidents and complying with governmental safety regulations, emphasizing communication, equipment specifications, maintenance, and driver compensation for safe driving[56] - Heartland Express self-insures a portion of risks related to cargo loss, physical damage, personal injury, property damage, and workers' compensation claims, with retention levels evaluated annually[57] - Effective April 2023, auto liability retention increased to $3.0 million per claim (with a $3.5 million corridor