SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For quarter ended September 30, 2004 Commission File No. 0-15087
HEARTLAND EXPRESS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Nevada 93-0926999
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
2777 Heartland Drive, Coralville, Iowa 52241
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code (319)545-2728
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
At September 30, 2004, there were 75,000,000 shares of the Company's $.01 par
value common stock outstanding.
PART I
FINANCIAL INFORMATION
Page
Number
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets
September 30, 2004 and
December 31, 2003 1-2
Consolidated Statements of Income
for the Three and Nine Months
Ended September 30, 2004 and 2003 3
Consolidated Statements of Cash Flows
for the Nine Months Ended
September 30, 2004 and 2003 4
Notes to Consolidated Financial Statements 5-6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 6-12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
Item 4. Controls and Procedures 12
PART II
OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of 13
Security Holders
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13-17
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS September 30, December 31,
2004 2003
(Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 6,587,179 $ 38,618,430
Investments 232,910,514 163,812,725
Trade receivables, less allowance of
$775,000 and $675,000 39,552,428 36,836,728
Prepaid tires 2,927,590 2,529,580
Deferred income taxes 24,894,000 21,308,000
Other current assets 1,685,726 673,101
------------ -------------
Total current assets 308,557,437 263,778,564
------------ -------------
PROPERTY AND EQUIPMENT
Land and land improvements 9,536,271 9,440,329
Buildings 17,494,255 17,006,260
Furniture and fixtures 1,210,424 1,210,424
Shop and service equipment 2,550,616 2,287,172
Revenue equipment 220,500,129 202,706,807
------------ -------------
251,291,695 232,650,992
Less accumulated depreciation 63,802,426 56,951,186
------------ -------------
Property and equipment, net 187,489,269 175,699,806
------------ -------------
OTHER ASSETS 9,016,455 8,928,186
------------ -------------
$505,063,161 $448,406,556
============ =============
The accompanying notes are an integral part of these consolidated financial
statements.
1
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, December 31,
2004 2003
(Unaudited)
CURRENT LIABILITIES
Accounts payable & accrued liabilities .... $ 16,762,333 $ 15,684,826
Compensation & benefits ................... 13,457,667 10,704,329
Income taxes payable ...................... 5,747,683 7,720,875
Insurance accruals ......................... 42,525,515 37,125,109
Other ..................................... 6,984,476 5,895,502
------------- -------------
Total current liabilities ............... 85,477,674 77,130,641
------------- -------------
DEFERRED INCOME TAXES ........................ 45,393,000 39,760,000
------------- -------------
CONTINGENCIES
STOCKHOLDERS' EQUITY
Capital Stock:
Preferred, $.01 par value; authorized
5,000,000 share; none issued ........... -- --
Common, $.01 par value; authorized
395,000,000 shares; issued and
outstanding 75,000,000 in 2004
and 50,000,000 in 2003 ............... 750,000 500,000
Additional paid-in capital .............. 8,510,305 8,510,305
Retained earnings ....................... 365,851,547 323,710,296
------------- -------------
375,111,852 332,720,601
Less: unearned compensation ............. (919,365) (1,204,686)
------------- -------------
374,192,487 331,515,915
------------- -------------
$505,063,161 $448,406,556
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
2
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
2004 2003 2004 2003
OPERATING REVENUE .......................... $ 117,299,278 $ 104,460,615 $ 337,647,731 $ 302,100,139
------------- ------------- ------------- -------------
OPERATING EXPENSES:
Salaries, wages, and benefits ........... $ 40,305,667 $ 34,949,275 $ 119,163,588 $ 102,452,186
Rent and purchased transportation ....... 8,578,807 12,090,171 28,620,347 39,194,285
Operations and maintenance .............. 25,297,575 19,094,695 68,954,053 56,546,521
Taxes and licenses ...................... 2,143,218 2,265,221 6,638,458 6,263,920
Insurance and claims .................... 2,562,377 3,384,300 10,454,595 9,919,671
Communications and utilities ............ 886,416 946,331 2,828,948 2,763,214
Depreciation ............................ 7,842,781 7,139,016 21,214,242 19,433,000
Other operating expenses ................ 4,020,431 3,080,052 10,935,875 9,185,983
(Gain) loss on disposal of fixed assets . 2,085 23,802 (99,804) (6,969)
------------- ------------- ------------- -------------
91,639,357 82,972,863 268,710,302 245,751,811
------------- ------------- ------------- -------------
Operating income ............. 25,659,921 21,487,752 68,937,429 56,348,328
Interest income ......................... 805,135 470,972 2,024,522 1,501,993
------------- ------------- ------------- -------------
Income before income taxes ........... 26,465,056 21,958,724 70,961,951 57,850,321
Income taxes ............................ 9,395,071 7,465,967 25,070,700 19,669,108
------------- ------------- ------------- --------------
Net income ........................... $ 17,069,985 $ 14,492,757 $ 45,891,251 $ 38,181,213
============= ============= ============= ==============
Earnings per common share:
Basic earnings per share ............ $ 0.23 $ 0.19 $ 0.61 $ 0.51
============= ============= ============= ==============
Basic weighted average shares outstanding 75,000,000 75,000,000 75,000,000 75,000,000
============= ============= ============= ==============
Dividends declared per share ............ $ 0.020 $ 0.013 $ 0.047 $ 0.013
============= ============= ============= ==============
The accompanying notes are an integral part of these consolidated financial
statements.
3
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended
September 30,
2004 2003
------------- --------------
OPERATING ACTIVITIES
Net income ................................ $ 45,891,251 $ 38,181,213
Adjustments to reconcile to net cash
provided by operating activities:
Depreciation and amortization .......... 21,229,245 19,448,003
Deferred income taxes .................. 2,047,000 3,626,000
Unearned compensation .................. 285,321 299,339
(Gain) on disposal of fixed assets ...... (99,804) (6,969)
Changes in certain working capital items:
Trade receivables ................... (2,715,700) (4,586,735)
Other current assets ................ (1,012,625) (2,184,865)
Prepaid expenses .................... (477,930) 1,867,040
Accounts payable and accrued expenses 9,712,699 11,265,120
Accrued income taxes ................ (1,973,192) 5,906,814
------------- --------------
Net cash provided by operating activities 72,886,265 73,814,960
------------- --------------
INVESTING ACTIVITIES
Proceeds from sale of property and equipment 166,955 116,974
Capital additions ...................... (32,885,937) (40,672,757)
Net purchases of municipal bonds ....... (69,097,789) (34,097,992)
Change in other assets ................. (103,272) (623,526)
------------- --------------
Net cash used in investing activities .. (101,920,043) (75,277,301)
------------- --------------
FINANCING ACTIVITIES, cash dividend .......... (2,997,473) --
------------- --------------
Net decrease in cash and cash equivalents (32,031,251) (1,462,341)
CASH AND CASH EQUIVALENTS
Beginning of period .................... 38,618,430 14,806,758
------------- --------------
End of period .......................... $ 6,587,179 $ 13,344,417
============= ==============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the period for:
Income taxes,net .................... $ 24,996,892 $ 10,136,294
Noncash investing activities:
Book value of revenue equipment traded $ 16,295,082 $ 1,686,114
The accompanying notes are an integral part of these consolidated financial
statements.
4
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Heartland
Express, Inc. (the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
normal, recurring adjustments considered necessary for a fair presentation have
been included. The financial statements should be read in conjunction with the
audited consolidated financial statements for the year ended December 31, 2003
included in the Annual Report on Form 10-K of the Company filed with the
Securities and Exchange Commission. Interim results of operations are not
necessarily indicative of the results to be expected for the full year or any
other interim periods.
Note 2. Reclassifications
Certain reclassifications have been made in the financial statements to
conform to the current year's presentation.
Note 3. Segment Information
The Company has nine operating divisions; however, it has determined that
it has one reportable segment. All of the divisions are managed based on similar
economic characteristics. Each of the regional operating divisions provides
short-to-medium haul truckload carrier services of general commodities to a
similar class of customers. In addition, each division exhibits similar
financial performance, including average revenue per mile and operating ratio.
As a result of the foregoing, the Company has determined that it is appropriate
to aggregate its operating divisions into one reportable segment consistent with
the guidance in SFAS No. 131. Accordingly, the Company has not presented
separate financial information for each of its operating divisions as the
Company's consolidated financial statements present its one reportable segment.
Note 4. Investments
Investments primarily include municipal bonds with interest reset
provisions and short-term municipal bonds. The cost approximates the fair value
due to the nature of the investments. Therefore, accumulated other comprehensive
income (loss) has not been recognized as a separate component of stockholders'
equity.
Note 5. Cash and Cash Equivalents
The Company previously reported municipal bonds with a reset provision of
three months or less as cash equivalents. The Company is now classifying all
municipal bonds based upon their original maturity date without respect to any
reset provisions. Reclassifications have been completed on all prior periods
reported herein to be consistent with this change.
Note 6. Commitments and Contingencies
The Company is party to ordinary, routine litigation and administrative
proceedings incidental to its business. In the opinion of management, the
Company's potential exposure under pending legal proceedings is adequately
provided for in the accompanying consolidated financial statements.
5
The Company has commitments at September 30, 2004 to acquire revenue
equipment for approximately $13.2 million in 2004, $45.0 million in 2005, and
$45.4 million in 2006. These commitments are expected to be financed from
existing cash and investment balances and cash flows from operations.
Note 7. Property, Equipment, and Depreciation
The Company's tractor fleet has historically been depreciated by the 125%
declining balance method applied to cost, net of salvage value. Tractors
purchased beginning in June, 2004 are being depreciated by the 125% declining
balance method applied to the book value of the asset at the beginning of each
period. The salvage value is no longer being deducted from the book value each
period when computing the depreciation base used to calculate the declining
balance depreciation and resulted in additional depreciation of $455,625 in the
third quarter of 2004, while for the nine months ended September 30, 2004,
depreciation has increased by $515,625.
Effective April 1, 2003 the Company reduced the salvage value on its
trailer fleet from $6,000 to $4,000 per trailer. This change in accounting
estimate increased depreciation expense during the nine months ended September
30, 2003 by approximately $1.1 million. Total depreciation expense for 2003 was
increased by approximately $1.7 million due to the reduction in salvage value.
Note 8. Stock Split
On July 21, 2004, the Board of Directors approved a three-for-two stock
split, affected in the form of a fifty percent stock dividend. The stock split
occurred on August 20, 2004, to shareholders of record as of August 9, 2004.
This stock split increased the number of outstanding shares to 75.0 million from
50.0 million. The number of common shares issued and outstanding and all per
share amounts have been adjusted to reflect the stock split for all periods
presented.
Note 9. Stock Based Compensation
At September 30, 2004 the Company has a restricted stock award plan. The
plan shares are being amortized over a five year period as compensation expense.
Amortized compensation expense of $285,320 and $299,339 for the nine months
ended September 30 2004 and 2003, respectively, is recorded in salaries, wages,
and benefits on the statement of operations. The unamortized portion of the
stock awards is recorded in stockholders' equity as unearned compensation. All
unvested shares are included in the Company's 75.0 million outstanding shares.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward Looking Statements
Except for certain historical information contained herein, this Quarterly
Report on Form 10-Q contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. Forward-looking statements
involve risks, assumptions and uncertainties which are difficult to predict. All
statements, other than statements of historical fact, are statements that could
be deemed forward-looking statements, including any projections of earnings,
revenues, or other financial items; any statements of plans, strategies, and
objectives of management for future operations; any statements concerning
proposed new strategies or developments; any statements regarding future
economic conditions or performance; any statements of belief and any statement
of assumptions underlying any of the foregoing. Words such as "believe," "may,"
"could," "expects," "anticipates," and "likely," and variations of these words
or similar expressions, are intended to identify such forward-looking
statements. The Company's actual results could differ materially from those
discussed in the section entitled "Factors That May Affect Future Results,"
included in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" set forth in the Company's Annual report on Form 10-K,
which is by this reference incorporated herein.
6
The Company does not assume, and specifically disclaims, any obligation to
update any forward-looking statements contained in this Quarterly report.
Overview
Heartland Express, Inc. is a short-to-medium haul truckload carrier. The
Company transports freight for major shippers and generally earns revenue based
on the number of miles per load delivered. During the first nine months of 2004,
freight revenue before fuel surcharge increased 10.0% to $319.4 million from
$290.3 million in the first nine months of 2003.
The Company takes pride in the quality of the service that it provides to
its customers. The keys to maintaining a high level of service are experienced
drivers, reliable equipment and equipment availability. Heartland has one of the
newest fleets in the industry with an average tractor age of 19 months and
trailer age of 31 months. During April of 2004, the Company entered into an
agreement to replace its entire tractor fleet by December 2006. The Company
started taking delivery of the new tractors during June 2004. The Company
expects future revenue equipment purchases to be financed using current cash and
investment balances and cash flow provided by operations.
The Company continues to work with shippers and drivers to minimize the
impact of the revised DOT hours-of-service regulations that took effect on
January 4, 2004. These revised regulations have had minimal effect on our
operations to date primarily due to proper planning and customer cooperation.
Fleet utilization is up slightly over the prior year. On July 16, 2004, the U.
S. Court of Appeals for the District of Columbia issued a decision vacating the
new hours-of-service regulations because of concerns for driver health and
safety. On September 30, 2004 the extension of the Federal highway bill signed
into law by the President extended the current hours of service rules for one
year or whenever the FMCSA develops a new set of regulations, whichever comes
first. The Federal Motor Carrier Safety Administration (FMCSA) will continue to
enforce the new hours-of-service regulations during this period. The course of
action by the FMCSA is unknown at this time.
In addition to the revised hours-of-service regulations, the trucking
industry is experiencing a shortage of qualified drivers. In order to attract
and retain experienced drivers, the Company increased pay for all drivers $0.03
per mile during the first quarter of 2004. Effective October 2, 2004, the
company began paying all drivers an additional $0.07 per mile for miles driven
in the upper Northeastern United States. Management believes that the Company
continues to offer one of the highest pay packages in the industry. This pay
package along with increased recruiting efforts should allow the Company to
attract additional qualified drivers; however, a long term shortage of drivers
could hinder growth.
Effective October 1, 2002, all newly manufactured truck engines must comply
with the engine emission standards mandated by the Environmental Protection
Agency (EPA). The new engines have resulted in a significant increase in the
cost of new tractors and testing results indicate lower fuel efficiency and
higher maintenance costs. All 2004 and future tractor purchases by the Company
will include engines that conform to the new standards. As a result of these
purchases, the operating costs associated with tractors are expected to
increase.
7
Results of Operations:
The following table sets forth the percentage relationship of expense items
to operating revenue for the periods indicated.
Three Months Nine Months
Ended Ended
September 30, September 30,
2004 2003 2004 2003
------ ------ ------ ------
Operating revenue 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------
Operating expenses:
Salaries, wages, and benefits 34.3% 33.5% 35.3% 33.9%
Rent and purchased transportation 7.3 11.6 8.5 13.0
Operations and maintenance 21.6 18.3 20.4 18.7
Taxes and licenses 1.8 2.2 2.0 2.1
Insurance and claims 2.2 3.2 3.1 3.3
Communications and utilities 0.8 0.9 0.8 0.9
Depreciation 6.7 6.8 6.3 6.4
Other operating expenses 3.4 2.9 3.2 3.0
(Gain) loss on disposal of fixed
assets - - - -
------ ------ ------ ------
Total operating expenses 78.1% 79.4% 79.6% 81.3%
------ ------ ------ ------
Operating income 21.9% 20.6% 20.4% 18.7%
Interest income 0.7 0.4 0.6 0.4
------ ------ ------ ------
Income before income taxes 22.6% 21.0% 21.0% 19.1%
Federal and state income taxes 8.0 7.1 7.4 6.5
------ ------ ------ ------
Net income 14.6% 13.9% 13.6% 12.6%
====== ====== ====== ======
The following is a discussion of the results of operations of the three and
nine month periods ended September 30, 2004 compared with the same periods in
2003, and the changes in financial condition through the third quarter of 2004.
Three Months Ended September 30, 2004 and 2003
Operating revenue increased $12.8 million (12.3%), to $117.3 million in the
third quarter of 2004 from $104.5 million in the third quarter of 2003. The
increase in revenue resulted from additional business from existing customers,
growth of our customer base, rate increases, effective management of traffic
lanes, and accessorial charges for fuel surcharge and equipment detention. Fuel
surcharge revenue increased $3.9 million to $7.4 million in the third quarter of
2004 from $3.5 million in the third quarter of 2003.
Salaries, wages, and benefits increased $5.4 million (15.3%), to $40.3
million in the third quarter of 2004 from $34.9 million in the third quarter of
2003. These increases were primarily the result of increased reliance on
employee drivers due to a decrease in the number of independent contractors
utilized by the Company and a driver pay increase. During the third quarter of
2004, employee drivers accounted for 89% and independent contractors 11% of the
total fleet miles, compared with 83% and 17%, respectively, in the third quarter
of 2003. The Company also increased pay for all drivers $0.03 per mile during
the first quarter of 2004. During the third quarter of 2004, the Company
experienced an increase in workers' compensation expense due to an increase in
the frequency and severity of claims.
Rent and purchased transportation decreased $3.5 million (29.0%), to $8.6
million in the third quarter of 2004 from $12.1 million in the third quarter of
8
2003. This reflects the Company's decreased reliance upon independent
contractors. Rent and purchased transportation for both periods includes amounts
paid to independent contractors under the Company's fuel stability program.
Operations and maintenance increased $6.2 million (32.5%) to $25.3 million
in the third quarter of 2004 from $19.1 million in the third quarter of 2003.
The increase in operations and maintenance is attributable to increased fuel
costs due to the increased percentage of fleet miles driven by employee drivers
and record high fuel prices during the third quarter of 2004. Fuel expense
increased $6.5 million (42.9%) in the third quarter of 2004 as compared to the
same period in 2003.
Insurance and claims decreased $0.8 million (24.3%), to $2.6 million in the
third quarter of 2004 from $3.4 million in the third quarter of 2003. Insurance
and claims expense will vary as a percentage of operating revenue from period to
period based on the frequency and severity of claims incurred in a given period
as well as changes in claims development trends. The company experienced an
improvement in frequency and severity of claims during the quarter.
Depreciation increased $0.7 million (9.9%) to $7.8 million during the third
quarter of 2004 from $7.1 million in the third quarter of 2003. Depreciation
expense increased for the quarter due to the addition of new revenue equipment
to the fleet and the change in depreciation methodology as discussed in Note 7
of these financial statements.
Other operating expenses increased $0.9 million (30.5%) to $4.0 million
during the third quarter of 2004 from $3.1 million during the third quarter of
2003. Other operating expenses consist primarily of costs incurred for freight
handling, highway tolls, driver recruiting expenses, and administrative costs.
For the period, freight handling increased by $0.4 million over the compared
2003 period.
The Company's effective tax rate was 35.5% and 34.0% for the third quarter
of 2004 and 2003, respectively. Income taxes have been provided at the statutory
federal and state rates, adjusted for certain permanent differences between
financial statement income and income for tax reporting. The Company has
experienced a slight increase in the overall state tax rates.
As a result of the foregoing, the Company's operating ratio (operating
expenses as a percentage of operating revenue) was 78.1% during the third
quarter of 2004 compared with 79.4% during the third quarter of 2003. Net income
increased $2.6 million (17.8%), to $17.1 million during the third quarter of
2004 from $14.5 million during the third quarter of 2003.
Nine Months Ended September 30, 2004 and 2003
Operating revenue increased $35.5 million (11.8%), to $337.6 million in the
nine months ended September 30, 2004 from $302.1 million in the 2003 period. The
increase in revenue resulted from additional business from existing customers,
growth of our customer base, rate increases, effective management of traffic
lanes, and accessorial charges for fuel surcharge and equipment detention. Fuel
surcharge revenue increased $6.5 million to $18.3 million for the nine months
ended September 30, 2004 from $11.8 million in the compared 2003 period.
Salaries, wages, and benefits increased $16.7 million (16.3%), to $119.2
million in the nine months ended September 30, 2004 from $102.5 million in the
2003 period. These increases were a result of increased reliance on employee
drivers due to a decrease in the number of independent contractors utilized by
the Company and a driver pay increase. During the first nine months of 2004,
employee drivers accounted for 87% and independent contractors 13% of the total
fleet miles, compared with 81% and 19%, respectively, in the compared 2003
period. The Company also increased pay for all drivers $0.03 per mile during the
first quarter of 2004. In addition, the Company incurred increased workers'
compensation costs during the nine month period of 2004 due to an increase in
the frequency and severity of workers' compensation claims during the 2004
period.
9
Rent and purchased transportation decreased $10.6 million (27.0%), to $28.6
million in the first nine months of 2004 from $39.2 million in the 2003 period.
This reflects the Company's decreased reliance upon independent contractors.
Rent and purchased transportation for both periods includes amounts paid to
independent contractors under the Company's fuel stability program.
Operations and maintenance increased $12.4 million (21.9%) to $69.0 million
in the nine months ended September 30, 2004 from $56.6 million in the 2003
period. The increase in operations and maintenance is attributable to increased
fuel costs due to the increased percentage of fleet miles driven by employee
drivers and record high fuel prices during the first nine months of 2004. Fuel
costs increased by $12.6 million (27.1%) in the nine months ended September 30,
2004 as compared to the 2003 period.
Insurance and claims increased $0.5 million (5.4%), to $10.5 million in the
first nine months of 2004 from $10.0 million in the compared 2003 period.
Insurance and claims expense will vary as a percentage of operating revenue from
period to period based on the frequency and severity of claims incurred in a
given period as well as changes in claims development trends.
Depreciation increased $1.8 million (9.2%) to $21.2 million during the
first nine months of 2004 from $19.4 million in the compared 2003 period.
Effective April 1, 2003, the Company decreased the salvage value on all trailers
to $4,000 from $6,000. The reduction of salvage value increased depreciation
expense by approximately $1.1 million on a comparative basis. The change in
depreciation methodology as discussed in Note 7 of these financial statements
resulted additional depreciation expense for the 2004 period.
Other operating expenses increased $1.7 million (19.0%) to $10.9 million
during the first nine months 2004 from $9.2 million during the compared 2003
period. Other operating expenses consist primarily of freight handling, highway
tolls, drivers recruiting expenses, and administrative costs. Freight handling
expenses increased $1.0 million while advertising and toll expenses increased by
a combined $0.5 million over the compared 2003 period.
The Company's effective tax rate was 35.3% and 34.0% for the nine months
ended September 30, 2004 and 2003, respectively. Income taxes have been provided
at the statutory federal and state rates, adjusted for certain permanent
differences between financial statement income and income for tax reporting. The
Company has experienced a slight increase in the overall state tax rates.
As a result of the foregoing, the Company's operating ratio (operating
expenses as a percentage of operating revenue) was 79.6% during the first nine
months of 2004 compared with 81.3% during the first nine months of 2003. Net
income increased $7.7 million (20.2%), to $45.9 million during the first nine
months of 2004 from $38.2 million during the compared 2003 period.
Liquidity and Capital Resources
The growth of the Company's business has required significant investments
in new revenue equipment. Historically the Company has been debt-free, funding
revenue equipment purchases with cash flow provided by operations. The Company
also obtains tractor capacity by utilizing independent contractors, who provide
a tractor and bear all associated operating and financing expenses. The
Company's primary source of liquidity for the nine months ended September 30,
2004, was net cash provided by operating activities of $72.9 million compared to
$73.8 million in the corresponding 2003 period.
Capital expenditures for property and equipment, primarily revenue
equipment net of trade-ins, totaled $32.9 million for the first nine months of
2004 compared to $40.7 million for the same period in 2003. Capital expenditures
for the third quarter of 2004 of $17.8 million were primarily related to the
current replacement of the Company's tractor fleet scheduled to be completed in
2006.
10
Net cash paid for income taxes increased to $25.0 million during the nine
months ended September 30, 2004 from $10.1 million in the 2003 nine month
period. The increase was primarily related to an increase in Federal estimated
tax payments due to a decline in federal bonus depreciation during this year's
estimate computation period.
Management believes the Company has adequate liquidity to meet its current
and projected needs. The Company will continue to have significant capital
requirements over the long term. Future capital expenditures are expected to be
funded by cash flow provided by operations and from existing cash, cash
equivalents, and investments. The Company ended the quarter with $239.5 million
in cash, cash equivalents, and investments and no debt. Based on the Company's
strong financial position, management believes outside financing could be
obtained, if necessary, to fund capital expenditures.
Factors That May Affect Future Results
The Company's future results may be affected by a number of factors over
which the Company has little or no control. Fuel prices, insurance and claims
costs, liability claims, interest rates, the availability of qualified drivers,
fluctuations in the resale value of revenue equipment, economic and customer
business cycles and shipping demands are economic factors over which the Company
has little or no control. In addition to the economic factor, regulatory and
other governmental factors such as the hours-of-service regulation Significant
increases or rapid fluctuations in fuel prices, interest rates or insurance and
claims costs, to the extent not offset by increases in freight rates, and the
resale value of revenue equipment could reduce the Company's profitability.
Weakness in the general economy, including a weakness in consumer demand
for goods and services, could adversely affect the Company's customers and the
Company's growth and revenues, if customers reduce their demand for
transportation services. Customers encountering adverse economic conditions
represent a greater potential for loss, and the Company may be required to
increase its reserve for bad debt losses. Weakness in customer demand for the
Company's services or in the general rate environment may also restrain the
Company's ability to increase rates or obtain fuel surcharges.
Effective October 1, 2002, EPA emissions control regulations require that
newly manufactured diesel engines must satisfy considerably more restrictive
emissions standards. Additional changes to engine design requirements will take
effect in 2007. The costs of compliance with the EPA engine design requirements
have significantly increased new equipment prices and further increases may
result in connection with the implementation of the 2007 standards. In addition,
the EPA compliant engines are less fuel efficient. To the extent we are unable
to offset increased expenses associated with the EPA mandate with rate increases
or cost savings, our results of operations could be adversely affected.
Inflation and Fuel Cost
Most of the Company's operating expenses are inflation-sensitive, with
inflation generally producing increased costs of operations. During the past
three years, the most significant effects of inflation have been on revenue
equipment prices and the compensation paid to the drivers. Innovations in
equipment technology and comfort have resulted in higher tractor prices, and
there has been an industry-wide increase in wages paid to attract and retain
qualified drivers. The Company historically has limited the effects of inflation
through increases in freight rates and certain cost control efforts.
In addition to inflation, fluctuations in fuel prices can affect
profitability. Fuel prices have fluctuated widely during recent years and are
currently at record high levels. Most of the Company's contracts with customers
contain fuel surcharge provisions. Although the Company historically has been
able to pass through most long-term increases in fuel prices and fuel taxes to
customers in the form of surcharges and higher rates, short-term increases are
not fully recovered. Competitive conditions in the transportation industry, such
as lower demand for transportation services, could affect the Company's ability
to obtain rate increases or fuel surcharges. The Company currently does not have
11
any long-term fuel purchase contracts and we have not entered into any other
hedging arrangements that protect us against fuel price increases. The Company
has not experienced difficulties in maintaining necessary fuel supplies.
Seasonality
The nature of the Company's primary traffic (appliances, automotive parts,
paper products, retail goods, and packages foodstuffs) causes it to be
distributed with relative uniformity throughout the year. However, seasonal
variations during and after the winter holiday season have historically resulted
in reduced shipments by several industries served. In addition, the Company's
operating expenses historically have been higher during the winter months due to
increased operating costs and higher fuel consumption in colder weather.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company purchases only high quality, liquid investments. Primarily all
investments as of September 30, 2004 have an original maturity or interest reset
date of twelve months or less. Due to the short term nature of the investments,
the Company is exposed to minimal market risk related to its cash equivalents
and investments.
The Company has no debt outstanding as of September 30, 2004 and therefore,
has no market risk related to debt.
As of September 30, 2004, the Company has no derivative financial
instruments to reduce its exposure to fuel price fluctuations.
Item 4. Controls and Procedures
As of the end of the period covered by this report, the Company carried out
an evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operations of the Company's
disclosure controls and procedures, and as defined in Exchange Act Rule
15d-15(e). Based upon that evaluation, the Company's Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective in enabling the Company to record, process, summarize
and report information required to be included in the Company's periodic SEC
filings within the required time period. There have been no changes in the
Company's internal controls over financial reporting that occurred during the
Company's most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
12
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a party to ordinary, routine litigation and administrative
proceedings incidental to its business. None of the claims would materially
impact net income or financial position. These proceedings primarily
involve claims for personal injury and property damage incurred in
connection with the transportation of freight. The Company maintains
insurance to cover liabilities arising from the transportation of freight
for amounts in excess of certain self-insured retentions.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 31.1 Certification of Chief Executive Officer Pursuant to Rule
13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as
amended. 31.2 Certification of Chief Financial Officer Pursuant to
Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as
amended. 32 Certification of Chief Executive Officer and Chief
Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
1. Report on Form 8-K, dated July 22, 2004, announcing the Company's
financial results for the quarter ended June 30, 2004.
2. Report on Form 8-K, dated July 27, 2004, announcing the a
three-for-two stock split in the form of a 50% stock dividend to
e paid on August 20, 2004 to stockholder's of record as of August
9, 2004.
3. Report on Form 8-K, dated September 9, 2004, announcing the
declaration of a quarterly cash dividend.
No other information is required to be filed under Part II of the form.
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEARTLAND EXPRESS, INC.
Date: November 5, 2004 BY: /s/ John P. Cosaert
John P. Cosaert
Executive Vice President-Finance,
Chief Financial Officer and Treasurer
(principal accounting and financial
officer)
14
Exhibit No. 31.1
Certification
I, Russell A. Gerdin, Chairman, President and Chief Executive Officer of
Heartland Express, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Heartland
Express, Inc. (the "Registrant");
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and 15d-15(e))
and internal control over financial reporting (as defined in Exchange
Act Rule 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or cause
such disclosure controls and procedures to be designed under our
supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the controls and
procedures, as of the end of the period covered by this report
based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls: and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: November 5, 2004 BY: /s/ Russell A. Gerdin
Russell A. Gerdin
Chairman, President and
Chief Executive Officer
15
Exhibit No. 31.2
Certification
I, John P. Cosaert, Executive Vice President, Chief Financial Officer and
Treasurer of Heartland Express, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Heartland
Express, Inc. (the "Registrant");
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rule
13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this quarterly report is being prepared;
b) Designed such internal control over financial reporting, or cause
such disclosure controls and procedures to be designed under our
supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the controls and
procedures, as of the end of the period covered by this report
based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls: and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: November 5, 2004 BY: /s/ John P. Cosaert
John P. Cosaert
Executive Vice President-Finance
Chief Financial Officer and
Treasurer
(principal accounting and financial
officer)
16
Exhibit No. 32
CERTIFICATION OF
CHIEF EXECUTIVE OFFICER
AND
CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Russell A. Gerdin, certify, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the
Quarterly Report of Heartland Express, Inc., on Form 10-Q for the period ended
September 30, 2004 fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended, and that information
contained in such Quarterly Report on Form 10-Q fairly presents in all material
respects the financial condition and results of operations of Heartland Express,
Inc.
Dated: November 5, 2004 By: /s/ Russell A. Gerdin
Russell A. Gerdin
Chairman, President and
Chief Executive Officer
I, John P. Cosaert, certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly
Report of Heartland Express, Inc., on Form 10-Q for the period ended September
30, 2004 fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended, and that information contained in
such Quarterly Report on Form 10-Q fairly presents in all material respects the
financial condition and results of operations of Heartland Express, Inc.
Dated: November 5, 2004 By:/s/ John P. Cosaert
John P. Cosaert
Executive Vice President
and Chief Financial Officer
17
END OF REPORT