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Acquisition of Gordon Trucking, Inc. Acquisition of Gordon Trucking, Inc. | 12 Months Ended
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Dec. 31, 2014
Acquisition of Gordon Trucking, Inc. [Abstract] |
Acquisition of Gordon Trucking, Inc. | Acquisition of Gordon Trucking, Inc. On November 11, 2013, Heartland Express, Inc. of Iowa (the “Buyer”), our wholly owned subsidiary, entered into a Stock Purchase Agreement, dated November 11, 2013 (the “Stock Purchase Agreement”), with GTI, the stockholders of GTI (the “Sellers”), and Mr. Larry Gordon, in his capacity as Sellers' Representative. GTI is a truckload carrier headquartered near Seattle, Washington, offering primarily asset-based transportation services in the dry van truckload market. Pursuant to the Stock Purchase Agreement, the Buyer purchased 100% of GTI's issued and outstanding common stock (the “Transaction”). The Buyer paid $285.0 million of total consideration, for the issued and outstanding common stock of GTI, which was paid in cash, restricted shares of our common stock, and the assumption of certain indebtedness of GTI. The purchase price was adjusted in the first quarter of 2014 when a post-closing true-up of working capital that was finalized. Up to an additional $20.0 million is payable in an earn-out for performance through 2017 with certain maximum amounts payable each year, as described below. The Stock Purchase Agreement included an election under Internal Revenue Code Section 338(h)(10). In addition, the Buyer purchased the personal goodwill of Mr. Gordon for $15.0 million pursuant to an Asset Purchase Agreement. The Stock Purchase Agreement contains customary representations, warranties, covenants, and indemnification provisions. At closing, $24.0 million of the purchase price in the form of our common stock was placed in escrow to secure payment of any post-closing adjustments to the purchase price and to secure the Sellers' indemnification obligations to the Buyer, and $6.0 million of the purchase price in cash was placed in escrow to secure the post-closing working capital adjustment, which was released when the post-closing working capital adjustment was finalized in the first quarter of 2014. The funds to pay the cash consideration payable to the Sellers and Mr. Gordon were funded out of our available cash at the time of the acquisition. The shares issued as part of the purchase price were issued from treasury shares. In connection with the Transaction, the Buyer, as the borrower, as well as the Company, GTI, and the other members of our consolidated group entered into an unsecured revolving credit facility, initially in the amount of up to $250.0 million (the “Financing”). Proceeds of the Financing were used in part to repay all of GTI's debt assumed in the Transaction. See Note 5 for further details of the Financing. GTI's results have been included in the consolidated financial statements since the date of acquisition and represented 48.6% of consolidated total assets as of December 31, 2013 and 9.6% of operating revenue for 2013. Acquisition related expenses of $2.2 million are included in the consolidated statement of comprehensive income for the year ended December 31, 2013. The following unaudited pro forma consolidated results of operations for the years ended December 31, 2013 and 2012 assume that the acquisition of GTI occurred as of January 1, 2012.
| Year ended
| December 31, 2013 |  |  | December 31, 2012
| (in thousands)
Operating revenue | $ | 961,525 |  |  | $ | 972,340 |
Net income | 90,821 |  |  | 64,769 |
These pro forma amounts do not purport to be indicative of the results that would have actually been obtained if the acquisition had occurred at the beginning of the periods presented or that may be obtained in the future. The allocation of the purchase price is detailed in the tables below. The goodwill recognized represents expected synergies from combining our operations with those of GTI, as well as other intangible assets that did not meet the criteria for separate recognition. All tax goodwill recognized in the Transaction is deductible for tax purposes over 15 years.
ALLOCATION OF PURCHASE PRICE | (in thousands)
Cash paid (before netting $20 million cash acquired) |  | $ | 130,900 |
Value of common stock issued (2.86 million shares) |  | 41,100 |
Total fair value of consideration transferred (before netting $20 million cash acquired), excluding debt assumed |  | 172,000 |
Allocated to: |  |
Historical book value of GTI's assets and liabilities | $ | 92,125 |  |
Adjustments to recognize assets and liabilities at acquisition-date fair value: |  |
Property, plant, and equipment | (17,912 | ) |
Other assets | 3,450 |  |
Liabilities | (18,576 | ) |
Fair value of tangible net assets acquired |  | 59,087 |
Identifiable intangibles at acquisition-date fair value |  | 19,042 |
Excess of consideration transferred over the net amount of assets and liabilities recognized, including $13.6 million attributable to the fair value of a potential earn-out obligation (goodwill) |  | $ | 93,871 |
Excess of consideration transferred over the net amount of assets and liabilities recognized, (goodwill), was still subject to final purchase price consideration related to post closing working capital adjustment as of December 31, 2013. The post-closing net working capital amount was finalized in the first quarter of 2014, see Note 4 for further discussion. The assets and liabilities associated with GTI were recorded at their fair values as of the acquisition date and the amounts are as follows:
| (in thousands)
Cash and cash equivalents | $ | 21,485 |
Accounts receivable | 45,679 |
Other current assets | 14,371 |
Property and equipment | 189,409 |
Other non-current assets | 3,916 |
Intangible assets | 19,042 |
Goodwill | 93,871 |
Total assets | 387,773 |
Accounts payable and accrued expenses | (29,165 | )
Insurance accruals | (23,821 | )
Long-term debt | (147,942 | )
Other accruals | (14,845 | )
Total consideration transferred | $ | 172,000 |
TOTAL PURCHASE PRICE CONSIDERATION | (in thousands)
Cash paid pursuant to Stock Purchase Agreement | $ | 115,900 |
Cash paid pursuant to an Asset Purchase Agreement | 15,000 |
Cash acquired included in historical book value of GTI assets and liabilities | (20,000 | )
Net cash paid at closing | $ | 110,900 |
Common stock issued (par value of $0.01) | $ | 41,100 |
Debt assumption | 148,000 |
| $ | 300,000 |
Included in adjustments to recognize assets and liabilities at acquisition-date fair values was a liability of $1.5 million, which was included in accounts payable and accrued liabilities as of December 31, 2013, and which represented a working capital adjustment for additional amounts owed to the Sellers for the amount by which the cash balance actually delivered at closing exceeded the estimated cash balance of $20.0 million to be paid at closing and the amount by which the debt balance actually delivered at closing was less than the estimated debt balance of $148.0 million used in calculating the total purchase price consideration paid at closing. As part of the Stock Purchase Agreement, we entered into a contingent consideration agreement with certain stockholders of the Sellers. The contingent consideration agreement includes various earn-out targets tied to certain operational metrics of GTI as well as consolidated operational performance over the period of 2014 through 2017. The total potential earn-out is $20.0 million with maximum amounts payable each year as follows:
| (in thousands)
2014 |  | $ | 6,000 |
2015 |  | 6,000 |
2016-2017 |  | 8,000 |
| $ | 20,000 |
Per the terms of the Stock Purchase Agreement, the Sellers will be entitled to any unearned earn-out amounts for 2014 and 2015 if the maximum earn-out target is achieved in either the 2016 or 2017 earn-out period, but in no event will the earn-out exceed $20.0 million in the aggregate for all earn-out periods. The contingent liability was estimated as of the acquisition date and has been included in the adjustments to liabilities at acquisition-date fair value recorded. Estimated fair value of this contingent liability as of the acquisition date was calculated using unobservable, Level 3 inputs, due to lack of observable market inputs. The original valuation of the contingent liability was generated by third party valuation personnel using a Monte Carlo, assuming Geometric Brownian Motion, simulation model to hypothetically replicate our future performance, which model was based on techniques that use significant assumptions not observable in the market including our estimated future operating performance, a risk-free rate, volatility rate, and the underlying time period. As such, the fair value of the contingent liability is subject to change based on actual results of GTI and us in future years. We may be required to record an operating expense in a future period for any difference in the recorded liability, at December 31, 2014, and the potential earn-out maximum payment of $20.0 million based on actual results. At December 31, 2014, the Company estimated the potential earn-out of $13.6 million, of which $2.3 million was included in other current liabilities and $11.3 million was included in other long-term liabilities at December 31, 2014. At December 31, 2013, the liability for the potential earn-out was $13.6 million, all of which were included in other long-term liabilities.

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- Definition The entire disclosure for a business combination (or series of individually immaterial business combinations) completed during the period, including background, timing, and recognized assets and liabilities. The disclosure may include leverage buyout transactions (as applicable). + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=25497992&loc=d3e1383-128463 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 30 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=35744584&loc=d3e6996-128479 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 20 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=39739317&loc=d3e4922-128472 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 20 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=39739317&loc=d3e4934-128472 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 20 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=39739317&loc=d3e4926-128472 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 30 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=35744584&loc=d3e7000-128479 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=25497992&loc=d3e1392-128463 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=25497992&loc=d3e1486-128463 Reference 9: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 30 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=35744584&loc=d3e6927-128479 Reference 10: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 5 -URI http://asc.fasb.org/extlink&oid=25497992&loc=d3e1497-128463 Reference 11: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=25497992&loc=d3e1490-128463 Reference 12: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 30 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=35744584&loc=d3e7008-128479 Reference 13: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 20 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=39739317&loc=d3e4845-128472 Reference 14: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 6 -URI http://asc.fasb.org/extlink&oid=25497992&loc=d3e1500-128463 Reference 15: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 7 -URI http://asc.fasb.org/extlink&oid=25497992&loc=d3e1524-128463 + Details
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